Allow me to set the stage:

Last winter as the world was falling apart Bernanke and Geither had three options:

Nationalize the largest banks which represented systemic risk ($C, $BAC, $WFC), sell off their assets piece by piece, and put the full weight of the United States balance sheet behind the financial system in a transparent way.  Take our medicine as a country and allow asset prices to find an equilibrium.

Let it all go to hell.

Or what eventually happened.  Bernanke and Geithner shoved aside the original TARP program meant to buy the frozen assets as they realized it would have cost about 2-3 trillion dollars to do so, money that congress wasn’t going to fork over.  Instead, they decided to rig the largest insider trading scheme of all time.  Bernanke lowered rates to zero and pumped an enormous amount of money into the system.  The treasury directly told the banks to go out and buy assets, all assets, any assets.  The plan was to crush the dollar so hard and pump so much liquidity into the system that asset prices would have to rise as investors became so scared of the dollar devaluation that they needed a ton of yield.  The banks took the TARP cash and levered up again to buy high yield bonds and crap equities.  Short sellers covered en mass as the treasury even told pension funds like CALPERS to stop lending out stock to short.  I know this first hand as I was told by my broker, after having been short certain financials for some time, that I would be bought in because the stock I had shorted could no longer be located.

It worked.  We’ve seen the $USDX get crushed, a monster 60%+ equity rally, emerging market equities and corporate bonds skyrocket, and the banks make a ton of money.  How much of their balance sheets have they really repaired, ahhh well that is this the ultimate question now isn’t it.  Frankly I don’t think anyone from Roubini to Whitney to Rosenberg knows where the bank balance sheets sit at this point.

That brings us to today when Bank of America announced that it will raise 18 billion in common equity, sell 20 something billion in liquid assets, and repay the 45 billion in TARP.

I’ve got a few questions and a few comments, please feel free to answer or argue any of them in the comments section of the post.

Where the hell is all of this liquidity to sell 18 billion dollars in fresh stock coming from?  If you’re an institutional investor and haven’t taken your cash off the sidelines at this point with the destruction in the US Dollar, what the hell have you been waiting for?  Were you saving it for this oh so amazing opportunity to buy a way too large bank with unknown ability to succeed when, and there will be a when, the fed starts to raise rates?

I hate being a cynic, bearish, or whatever other negative badge you want to paint me with.  But I can’t deny the feeling that $BAC, $C, and $WFC will end up repaying TARP at the top of the market as they realize their profits.

Any way you look at it Bernanke and Geithner won.  They reflated the world, there was no complete economic and social meltdown, and America gets its money back.

So what now boys?  Let’s say the banks pay their TARP back.  Where’s the liquidity exit strategy?  How are you going to let the air out of the balloon without ruining the party?  You’ve saved us from Armageddon, but all markets must find their equilibrium eventually, you can’t put it off forever.