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They are reducing leverage. They care more about their stock prices. What is true though is narrowing spreads and recovering bond prices mean all the financial institutions will see mark down pressure evaporate. This was already in the cards in November - it was clear in the late November to mid December period that corporate bond prices had already bottomed. The stocks went down for another quarter because it takes that long for the price recovery to show up in earnings. But nobody should be surprised when B of A et al announce they are profitable again, shortly.

The spread between corporates and treasuries simply was and is the crisis. If the Fed wanted to address it directly they'd just arb that spread directly. Instead they continue to do it indirectly, wanting private actors to take the lead. That is delaying things, but sooner or later it turns.

The original losses have all been written off long since. All the big banks have been cash flow positive throughout - the "losses" are all marks and additions to loss reserves, not cash going out the door.

I will wait for the treasury market to reflect your confidence in this scheme. If the Chinese start to buy 10+ year treasuries, then they must have analyzed the toxic asset plan and came to the same conclusion that you have, it will work, thus the US will be able to back their treasuries and eventually pay their debts. On the other hand if they do not, we got problems.

They are reducing leverage overall, as they should, but they are increasing their profit using as much leverage on these short term (sort of) "arbitrage" trades as they can. It's [almost] a sure thing, and very cheaply financed currently

Also true is that credit thaw started right after TARP liquidity injection (despite all the political theatre) and had nothing to do with latter developments or lack thereof. Market prices also had reacted to clear anti-business bias and huge deficit spending of incoming Obama administration.

All the big banks have been cash flow positive throughout - the "losses" are all marks and additions to loss reserves, not cash going out the door.

Also correct. Most people don't distinguish between cash flow, free cash flow, operating losses and non-cash goodwill / write-offs losses, especially of the "kitchen sink" variety. All they see are more scary headlines with the largest losses ever. Media (including financial media) is only too happy to amplify it without understanding or explaining any of it to the public, which erodes confidence and creates or amplifies panic. It's a negative feedback loop, which only plays into the hands of politicians who crave the crisis - to exploit for their own purposes.