If you took my advice on the week-end to purchase short term puts on Monday, I trust that you were able to cash out quickly. The idea was to buy short term puts on some of the financials for a quick trade.

But that was then, and this is now! What next?

I note with interest the new disclosure rules proposed by the US Securities and Exchange Commission (SEC). They were designed to provide more disclosure as to the metrics used by Credit Rating Agencies (CRAs) that issue ratings on corporate debt. Moodys. Fitch, S&P and Dominion Bond Rating Service being the major players. The idea is to provide more disclosure as to what goes into AAA ratings, and are there varying degrees of ratings within a category.

The logic behind these new disclosure rules are subtle and, on the surface, seem to be designed to provide readers with greater clarity. But beneath the surface, it may have more to do with posturing than with clarity.

Consider that the SEC issued new rules around CRA disclosure less than a year ago. The new rules set out a week ago, were introduced without giving much time for the initial set of rule changes to be absorbed. Let alone to know if the previous changes had the desired affect. Beyond more paperwork and questionable beneficial disclosure from CRAs, what is the point?

The point may be another step forward in setting the stage for the US Federal Reserve (FED) to become the buyer of last resort for the worthless paper currently in circulation.

Recall in my discussion back in the March 15th (It Is All About Liquidity) Blog, I talked about the FED swapping high quality Treasury securities for “high quality” mortgage backed debt. In that sense, the Fed was becoming the lender of last resort to a financial industry in dire straits.

Becoming the buyer of last resort means that the Fed (read the US taxpayer) absorbs the “high quality” mortgage debt, and removes it from the books of financial institutions. As you can imagine there is an enormous moral hazard if the Fed takes this step. Essentially the Fed is saying that it – read the US taxpayer – will be there with a pot of gold at the end of every speculative rainbow that the financial industry may design.

That will not sit well with US taxpayers. Certainly it won’t past muster if the Fed does not lay an attractive enough foundation before taking this step. And the only way the Fed can do that, is if authorities take appropriate steps beforehand, that allows them to state with reasonable certainty, that such a situation will not happen again.

US Treasury Secretary Paulson took some of the initial steps when he talked about giving the Fed more authority to regulate US chartered banks and US investment banks. Moves by the way, that will take eight to nine years to implement… just long enough for a new two term President to come and go.

The new SEC disclosure rules may simply be another bit of political icing on a very toxic cake. Presentation being everything.

If you doubt the logic of this, take note of comments made to the Senate banking committee last week, by Fed vice-chairman Donald Kohn. He suggested, without mentioning any names, that the Fed would stand ready to implement another bailout if necessary to protect the financial system. Read that to mean Lehman Brothers.

What made his testimony interesting was that it came after the Fed had already taken so much flak – from both inside and outside its walls – for ramping up the moral hazard quotient in bailing out Bear Stearns.

That such commentary was forthcoming supports a long standing truism of moral suasion; economic necessities always trump political agendas. In this case, probably trumping lame duck President Bush’s posturing that the Fed should not become the buyer, because of the attendant moral hazard.

If another bailout becomes necessary, to protect the integrity of the financial system, it will likely set the balls in motion to becoming the buyer of last resort. Because the distance from a bailout to becoming the buyer of last resort, to protect the integrity of the financial system, is a very short one.

On the positive side, if this move is successful, it will set the stage for a serious longer term rally in the equity markets. A rally that will be lead by financial stocks.

Of course there are attendant risks. Beyond moral hazard, the buyer of last resort bullet is the last of the ammunition in the Fed shotgun. It had better work!

Longer term, the risk is more serious. Just as no stock rises to infinity, the depth of the Fed’s pocketbook is not without borders. If it saves the system this time, what will it do the next time the industry cries wolf?