"It is a popular myth that financial markets are based on principles of capitalism," observes Ron Rowland in his All Star Investor newsletter, adding, "but the opposite is closer to the truth."
Assessing what he calls the Federal Reserve's moves to "buy Wall Street," he offers a straight-forward overview of the current situation and a "peek behind the curtain" of free markets and Wall Street.
"Banks, brokers and insurance companies are assisted and protected by a wide variety of governmental mechanisms.
"Wall Street propagates the myth of 'free markets' because it serves to obscure the truth, which is that their profits are earned at the expense of those with less sophisticated and well-funded Washington lobbying operations. You are now getting a peek behind the curtain.
"Yes, it is true that Lehman Brothers (NYSE: LEH) was denied government assistance and is being allowed to fail. In fact, Lehman is now serving as a kind of scapegoat that allows those in power to appear firm in their resolve not to put taxpayers at risk.
"If it were more than mere appearance this would be good news, given that taxpayers have already taken on plenty of risk with Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). The reality, however, is that the bailouts are continuing through other, less obvious means.
"On Sunday the Federal Reserve announced a number of modifications to its lending policies. Two changes are particularly disturbing.
"First, the Fed will now allow investment banks to post equities as collateral in the Primary Dealer Credit Facility.
"Now the purpose of collateral is to give the lender something to hold which is of known and reasonably stable value. Equities do not fit that definition. Ben Bernanke knows this full well but obviously doesn't care.
"The second Fed action is more alarming: banks are now allowed to use depositor's money to fund the operations of their non-bank affiliates.
"Your savings account is being used to prop up the trading operations of your bank's parent company, which not coincidentally is the source of the huge losses the industry has racked up this year.
"And what happens when that deposit money goes up in smoke? Ah, yes, FDIC steps in and protects depositors. And who protects FDIC? Good question. Look in the mirror and you'll see the answer.
"Yet we are told that taxpayers aren't bailing out anyone. This action is arguably illegal, but at this point the Fed clearly is not concerned with what is legal or not. It is now a law unto itself.
"In a related development, Merrill Lynch (NYSE: MER) is being taken out by Bank of America (NYSE: BAC) at what appears to be a bargain price. Had BAC waited a day or two they might have got a much better deal, but we suspect this merger was forced on both firms by the powers-that-be.
"Merrill Lynch exemplifies the small investor, and its failure - more than most firms - could have sparked widespread panic. Hence the hastily-arranged shotgun wedding.
"More ominously, insurance giant American International Group (NYSE: AIG) is in dire need of capital and the traditional sources have slammed the door shut. There are rumors this morning that Warren Buffett might come to the rescue; if true, we suspect Buffett will drive a hard bargain.
"A collapse of AIG presents a systemic threat in a way that Lehman, Merrill and even Bear Stearns did not. It is a very dangerous situation. Given turbulent market conditions, we will avoid making any new investments for now and hold on to our cash allocation, which is roughly 54%."
Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.
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Reader Comments (Page 1 of 1)
9-15-2008 @ 5:05PM
brian said...
just the begining , GM , ford ,credit card companys .. next ! and lets not forget the holidays!
9-15-2008 @ 8:14PM
Graham said...
Really?...no comments since 5:00 today?
9-15-2008 @ 8:57PM
Lorraine Paz said...
Would this affect Leehman Bros. in Tokyo as well??
9-16-2008 @ 8:26AM
al coholic said...
If our system is so crash prone that one private entity (The Fed) has to be lurking around and can do what it wants to with taxpayer money to solve whatever problem it unilaterally decides is the most important maybe we'd better take a good look at the system.
9-16-2008 @ 1:59PM
PainfullyAware said...
The Doom Approaches. Band Aids and Bubble Gum Will No Longer Hold The Charade.
Wish More People Would Have Debated Ron Paul Rather Than Dismissed Him.
Debate Is The Distillation Of Reality.
The Presidents Working Group On Financial Markets Is In Full Effect. When The Election Is Over Things Will Be Allowed To Unravel.
It Seems That We And The Markets Are No Longer Free.
9-22-2008 @ 8:44AM
odendin said...
"(a) Authority to Purchase.—The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States."
This, at first blush, would seem to indicate that only American firms would be covered. Nothing is further from the truth. If the Chinese wish to unload some of their purchased toxic sludge they merely sell it to, oh, Goldman Sachs for 40 cents on the dollar and then Goldman sells it to the Treasury for 50. This, under the black letter of the law here, is perfectly legal, which means that one must assume that Paulson will in fact foist off all the bad paper on world markets that was originally based on a mortgage in the United States, while allowing his banker buddies here to loot the taxpayer by acting as an intermediary in the transaction!
"(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;"
Contracts can (and presumably will) be "no bid, no solicitation" and given to whomever Secretary Paulson favors, without regard to the public interest or normal competitive bidding processes. Must be nice to be a "Friend of Hank."
"In exercising the authorities granted in this Act, the Secretary shall take into consideration means for—
(1) providing stability or preventing disruption to the financial markets or banking system; and
(2) protecting the taxpayer."
Notice which comes first.
"(c) Sale of Mortgage-Related Assets.—The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act."
Having bought these securities for any price Mr. Paulson would like (and he can compel institutions to sell at his demanded price as noted above!) he can then sell those assets at any price he wishes, to anyone he wishes. It certainly is nice to be a "Friend of Hank", and it most certainly sucks if you're not.
"The Secretarys authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time"
This is clever and nobody in the mainstream media has figured it out.
If you think the cost of this bill is $700 billion, you're wrong. The cost is actually infinite and the entire bill constitutes a giant money-laundering scheme.
Paulson can (and presumably will) buy up to $700 billion of these "assets", then sell them. Let's say he decides to buy them at 60 cents on the dollar and sell them for 10. You, the taxpayer, will eat the fifty cents, for an immediate cost of $350 billion dollars.
Having done so, he is then authorized to do so again, since the $700 billion is no longer on the government's balance sheet.