“Loans simply cannot be sold today at rational prices or in sufficient size – if at all.”

Here's a terribly important story from the FT about the market for Distressed Assets ( How many names are there for these assets: Toxic, at least ):

"When Citigroup wrote to investors this week to say it was unwinding one of its hedge funds, the bank highlighted the fundamental problem facing financial companies as they try to shrink their balance sheets – an almost complete lack of buyers for distressed assets".

This has been a huge part of Citi's , and other banks and financial institutions, problems. Namely, there is no market for these assets. How then is John Paulson buying some? There seems to a pattern that I'm discerning that I'm claiming is not rational:

1) Because of a downgrade or drop in stock price, a company must come up with some extra capital
2) When they go to sell these Distressed Assets, there's no buyer

Now, why is there no buyer? Is it because:
1) They can't be priced
2) Buyers are terrified of risk in this environment, and won't buy assets that they would under other more normal circumstances

Now, I'm interested in Human Agency. So, I'm going to posit that, at this point in time, it's 2. Why? Because Paulson is managing to buy some. Also, I'm as skeptical about these ratings and stock prices on the way down as on the way up. So, I'm wondering if, just as fundamentals were ignored going up, they're now being ignored going down.

"The Corporate Special Opportunities (CSO) fund, which once had $4.2bn (€3.3bn, £2.8bn) in assets, specialised in buying loans backing buy-out deals, particularly in Europe, but ran into trouble as it tried to sell such assets to meet margin calls from its lenders.'

This is the pattern I just mentioned, which I'm claiming is being driven by fear, not analysis.

“Asset values continue to be battered at a time when the fund is seeing a substantial increase in the required margin amounts called for, due to dramatic and unprecedented increases in margin haircuts,” the fund said in a letter on Tuesday. “Loans simply cannot be sold today at rational prices or in sufficient size – if at all.”

Now, granted, he has a personal stake in the answer, but, so do I. Namely, my theory. So, I'm suggesting that he is correct. Even rational, appropriately discounted prices, are being ignored out of fear and aversion to risk.

"Market participants say financial companies have all been trying to do the same thing – reduce their debt by shedding assets.

In recent weeks, there had been some buying interest from investors hoping they could flip distressed securities to the federal government’s troubled asset relief programme (Tarp).

But last week’s announcement by Hank Paulson, Treasury secretary, that the US administration had decided against using Tarp to buy toxic assets has helped to derail such strategies."

Now, this is why I was wondering what Paulson was up to. Remember, I asked if he was buying for the long term, when he could sell these assests at a profit in the distant future, or the short term, merely hoping to trade them off in a spike when the government changed its mind and intervened.

"One US regulator said: “All these assets are now calcified, whether they are good or not.” As a result, the regulator said, investors were inclined to sell almost anything short, betting that assets will fall in value.'

I'm saying that this Calcification is being driven not by fundamentals, but an irrational fear and aversion to risk. That's what we need to fight, by the way.

“Everyone is trying to get to zero leverage,” said Marc Freed, a managing director with Lyster Watson, a company investing in hedge funds. “[But] there are lots of things for which there is no bid at all.”

From highly leveraged, to zero leverage, in 5 easy steps.

"The situation has become particularly dire in the markets for securities backed by residential and commercial mortgages. This week, prices for residential mortgage securities have fallen to record lows. The spread between interest rates on commercial mortgage-backed securities and comparable Treasuries has widened nearly 500 basis points to a record 855bp.

“Even if the Treasury had only bought a small number of mortgage-backed securities, it would have allowed banks to value their other holdings at those levels,” said Gary Jenkins, analyst at Evolution. “Now that it is clear there is no buyer, valuations have to fall.”

Here's the argument that I haven't been willing to accept. Namely, that the government needs to buy some of these assets before anyone else does. That the government buying will set the price. The only argument I can give for this view is the government can overcome the fear and aversion to risk because it's not spending its own money, so to speak. It can afford to roll the dice in a badly rigged game. Once the government buys, everyone else will. But what if everyone thinks that the government paid too much? Or what if everyone waits for the government to buy more? And, as I said, John Paulson is buying. I can't help but suspect that this is a ruse to get the government to intervene and overpay for these assets, as I feel that the holders and servicers of bundled assets and mortgages are doing. I'm sorry if I'm being unkind, but that's how I see it.

"As credit markets deteriorated, Citi tried to support the CSO fund in various ways, including taking some of its troubled assets on to its balance sheet. The group reimbursed investors for $159m losses in January, a month after CSO committed to buy $500m of the debt of ProSiebenSat, a German media company.

The bank also subsidised investors to reduce their losses during earlier difficulties at Citi hedge funds, according to insiders.

CSO investors are expected to receive about 10 cents on the dollar, according to insiders. Investors have not been allowed to withdraw money from the fund since January."

Here's my fear. TARP helped calcify the Distressed Asset Market by giving investors a whiff of government intervention, which they are now bewitched by. From my perspective, it's done more harm than good.