Bailout Nation

by Larry Levin

The U.S. financial system is crumbling. The Big-3 Automakers have gone to Washington , hat in hand, begging for their BAILOUT: Hey brother, can you spare a dime? I'm sorry; I meant $25-billion? I predicted it would happen, and as of today it has. Who are next, the airlines?

I hate to say this, but it's true: the USA is a pathetic financial shadow of its former self. But its former self doesn't look so hot from this new vantage point. As we look back on the super-bull of 1983-2007 what do we see? How did it happen? Oh sure, there were many reasons, but it's clear now that the #1 reason was easy money. Now, sadly, it looks like it was little more than a fraud, a shame, a ponzi-scheme of loose credit and wild borrowing - plus inflation.

The Wall Street Journal reported this morning that lobbyists for the U.S. automakers-General Motos, Ford Motor and Chrysler-briefed White House officials, as well as U.S. Rep. John Dingell and other Michigan Democrats, on their idea of a bailout plan. According to the report, the automakers will unveil their proposal after Labor Day. WHAT? Their f*^$#! proposal? As this was written in the WSJ, it sounds like the automakers have already decided they will get what others are getting, and they will lay out the ground rules, not you taxpayers. Holy crap - this is getting out of control!

In a letter to U.S. Senate Majority Leader Harry Reid and House of Representatives Speaker Nancy Pelosi, the Democratic Michigan congressmen seeks up to $25 billion in low-interest credit for U.S. automakers and parts suppliers from the federal government. The interest rate will be as low as only 4.5%.

In the letter, Rep. John Dingell says, This incentive program will make it more economically feasible for U.S. auto manufacturers and part suppliers to retool their facilities by providing low-interest credit. The federal government must be a strong partner in the investment in the advanced technologies.

Did you catch that last part? Is this the USSR ? The federal government must be a strong partner in the investment in the advanced technologies. Now Comrade Dingell knows which companies the federal government should support. Does he think we're so stupid as to not see that this is simply a ploy to help his own state? Or is it just a coincidence that Dingell's from Michigan ?

Hey Dingell, you do know that Chrysler is a private company now - right?

The possibility of the loans raises several questions, the most important of which is what will happen to the holders of common stock in the two public car companies. If the plan allows them to hold their shares without penalty, don't you think holders of Fannie Mae (FNM) and Freddie Mac (FRE) shares will be a little pissed off?

I think it's appropriate to give you all a few comments from men that agree with what I have been writing for a while now - that this whole bailout nation is just sickening.

Ron Paul, in mid-May, described the situation in his usual straightforward fashion:

Lending standards were relaxed, or even abandoned altogether, creating an exaggerated pool of homebuyers that led to ballooning home prices that many, especially real estate investors, expected to continue forever. Now that the bubble has burst, the losses are staggering.

However, many in Washington fail to realize it was government intervention that brought on the current economic malaise in the first place. The Federal Reserve's artificially low interest rates created the loose, easy credit that ignited a voracious appetite in the banks for borrowers. People made these lending and buying decisions based on market conditions that were wildly manipulated by government. But part of sound financial management should be recognizing untenable or falsified economic conditions and adjusting risk accordingly. Many banks failed to do that and are now looking to taxpayers to pick up the pieces. This is wrong-headed and unfair, but Congress is attempting to do it anyway. These housing bills address the crisis in exactly the wrong way, by seeking to hide the problem with more disastrous government bail-outs and interventions.

The last Federal Reserve Chairman with any guts, Paul Volcker, had this to say about the Bear Stearns intervention by Comrade Bernanke:

The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central banking principles and practices. What appears to be in substance a direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in time of crisis: lend freely at high rates against good collateral; test it to the point of no return.

Ron Paul again:

The net effect of all this new funding has been to pump hundreds of billions of dollars into the financial system and bail out banks whose poor decision making should have caused them to go out of business. Instead of being forced to learn their lesson, these poor-performing banks are being rewarded for their financial mismanagement, and the ultimate cost of this bailout will fall on the American taxpayers. Already this new money flowing into the system is spurring talk of the next speculative bubble, possibly this time in commodities.

Worst of all, the Treasury Department has recently proposed that the Federal Reserve, which was responsible for the housing bubble and subprime crisis in the first place, be rewarded for all its intervention by being turned into a super-regulator. The Treasury foresees the Fed as the guarantor of market stability, with oversight over any financial institution that could pose a threat to the financial system. Rewarding poor-performing financial institutions is bad enough, but rewarding the institution that enabled the current economic crisis is unconscionable.

Jim Rogers, famous investor said the following about the FNM & FRE bailouts:

They're ruining what has been one of the greatest economies in the world. Bernanke and Paulson are bailing out their friends on Wall Street but there are 300 million Americans that are going to have to pay for this.

So who's next folks? What the hell - let's bail everybody out. I say it will be one of the major airlines. Or perhaps it will be a large insurance company like Allstate or AIG? What do you think? Give me some ideas.

Real Time Trading Signals*for

Trade Date: 8/22/08

E-Mini S&P Trades*
(before fees and commissions):

1) B/away buy @ 8:30am at 1284.50 = +2.25 (1 lot)

2) PP sell @ 9:15am at 1292.00 = b/e*2

3) Algorithm positions (6)...combined total...+4.75


ZB (30 Year Bond) Trades*
(before fees and commissions):

1) Buy @ 7:49am at 117.200 = -2.5*3

2) Sell @ 9:43am at 117.095 = +2.0, +1.5, -2.5...combined total...-6.5


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