"In Politics, What Begins in Fear Usually Ends in Folly." (S.T. Coleridge:Table-Talk, Oct 10, 1830)

As a non-practicing CPA and Economist, I was astonished at the so called $700 Billion Bail-Out (Actually the bill past by Congress is $850 Billion thanks to “pork” additions like giving tax credits to makers of Puerto Rican Rums, and subsidizing manufactures of wooden arrows used in children’s toys). I was astonished as a CPA because to buy worthless Mortgages, the Government (us) must buy the Mortgages in excess of real value to create any benefit to the holder of toxic assets. To illustrate this simple accounting concept, assume Bank “A” below sells their bad assets on their books at $5 for $2 (not zero) to the Government:



Now Bank “A” is bankrupt by definition. The shortfall of protection on the Debt & Equity side of the balance sheet is what causes the run on the bank. The “before” balance sheet debt to equity ratio is 32.33 times (which is typical of most banks). By selling the worthless bad assets at any price below the “book value ($5 in this case) will not improve anything. Our Governments plan to buy bad assets must price these assets in excess of “carrying value”($5) to have any benefit to the bank and its creditors. This so called plan provides no profit to the taxpayers. It is interesting to note that the valuation process for “finding a fair market value” for Mortgages and Mortgage Pools is to be run by “Consultants” not the Feds. It just so happens that our Treasury Secretary was the CEO of Goldman Sachs, and surprisingly, Goldman Sachs is hired to run this scam.

This plan coupled with past and future bail outs will cost us close to an estimated $1.5 Trillion Dollars. The 2009 Federal Deficit could be close to $2 Trillion or 12.50% of our Gross Developed Product (GDP), more than twice the record of 6% set in 1983. The National Debt when the Bail-Out is finished will be equal to the annual GDP of the US which is $13 Trillion.

Warren Buffett showed us the proper way for the Fed’s to bail out Financial Institutions in his helping hand at Goldman Sachs. His company Berkshire Hathaway acquired a new issue of Preferred Stock yielding 10% into perpetuity, exchangeable into common stock at a discounted price. The taxpayers could make money on this sort of scheme. Friday the Government has talked about using this type of scheme. We all hope so! Also, Senator Shelby of Alabama(my new idol) who voted against the 1st bail out had a great idea. He proposed that the Fed’s should guarantee all bank deposits (the Government ended up guaranteeing only $250,000 in bank deposits.)

The stock market (as of 10/10/2008) has lost about $7.50 Trillion from the market high in 10/9/07. This loss exceeds the GDP of China and Japan and is 75% of our current National Debt (10.3 Trillion as of 10/12/08). This has got to hurt! I’m hanging onto Gold. To watch the clock on our National Debt go to the web site, http://www.zfacts.com/p/461/html. Your kids and grandkids will love it. They will love watching this more than “SpongeBob Square Pants.”

Several unintended consequence arose with the current panic cures. Among them, the Government guarantees of money market funds. After this was announced, investors flocked into money market funds by taking their money out of Banks. Aren’t we out to help Banks? To the extent that each Government action causes and equal (and seemingly negative) market reaction, you have to wonder what policy makers will do for an encore. Haven’t we seen this movie before-“The Fed’s create easy money, which inflates asset bubbles, then the Fed’s tighten money supply, which bursts the bubble, then the Feds run another easy money policy to offset the effects of the burst bubble, only to create another asset bubble.

Ladies and Gentlemen, make no mistake as to what just happened. We are abandoning Capitalism by Nationalizing the Banking and Financial System. Who’s to blame? Congress, the Federal Reserve and the President for encouraging no down payment, low interest rate mortgages. The people that bought houses with easy money mortgages they knew they could not pay. Wall Street, who smelled a kill and bundled this crap to sell to investors. The rating agencies that issued “Triple A” Ratings on this junk, and the American Population who spent money like there was no tomorrow. When you point your finger at someone you have three fingers pointing back at yourself. We all are to blame. The market in the short run will have some selling opportunities with “soda pop” rallies, only to be followed by new lows. I suspect the recession could last well into 2010.

In the interim I will stay in Gold and US Treasuries. Now is not the time to panic. Things will get better. Stay liquid, be safe, preserve Capital, stay out of debt, be nice to your family and friends, Vote on Tuesday, and wake me up when the DOW gets to 7500 (it closed Friday, 10/1008 at 8451.19).