Wednesday, September 17, 2008

The Bigger Picture

Well, I'm sure you've heard the headlines:

-Fannie and Freddie Nationalized ($6 Trillion in obligations)
-Merrill Lynch buys Bank of America
-Lehman Brothers Bankrupt
-AIG Nationalized ($1 Trillion balance sheet)

You've heard the panic on the streets about major bank failings. You saw that the Dow dropped 500 points on Monday, which was its biggest one day drop since 9/11. You hear that all these bank employees are losing their jobs, and the stockholders are getting wiped out. And you hear that things are very, very, bad right now.

I've been talking about these things happening for about a year now, so it's important that you understand that as bad as things are being portrayed in the news, they are much, much worse.

Let's start with Bank of America. I think this was a brilliant move over the weekend by BofA. What the bankers have realized is that the Fed will step in and bail you out only if you will bring systemic risk to the market. So what should the goal of every bank be right now? That's right, put as much horrible risk on your balance sheet as possible.

They started this with the acquisition of Countrywide months ago, and they sealed the deal this weekend with the ridiculous purchase of Merrill Lynch at $29 a share. Merrill most likely would either be bankrupt right now or bailed out as we speak if they had not stepped in. So what did Bank of America do? They took all of Merrill's toxic balance sheet and combined it with their own horrible balance sheet. This now makes them too big to fail and will force the Fed to bail them out if they get in trouble. Of course, you won't hear this on the news, but that's what happened.

Letting Lehman go bankrupt was a great move by the Fed. This allowed the public to perceive they were taking a "strong" stand by not allowing everyone to fail. Then Monday morning to start the day, they dumped 70 BILLION DOLLARS into the market! In combination with this, they opened up their discount window not only to take toxic mortgage securities, but just about any kind of toxic debt banks want to get off their books! Unbelievable. For people that understand, this is actually worse than letting them fail and bailing them out.

24 hours later, the Fed had a chance to show its muscle and its new "no bailout" stance with the AIG troubles. What did they decide to do? Bail them out to the tune of $85 Billion. Helicopter Ben has finally lived up to his name and we are now at the point where he is literally dumping money from helicopters.

What would have happened if these companies were allowed to fail? We would be in a worldwide financial meltdown. It would be absolutely horrible right now. The Dow most likely would be down 4-5000 points, the dollar would be plummeting, and the yields on bonds would be surging as people around the world dumped American assets. With these bailouts the government has postponed that outcome to a future date and made the problem much, much worse. If they would just allow the inevitable collapse to run its course in the free market, they could tell the world that there will be a very tough period, but that they stand behind the value of our currency.

If we continue on the course we are on now the value of the dollar is not going to fall drastically, it's going to fall to zero. We are full steam ahead on the course to hyperinflation. Anyone holding dollar denominated assets such as stocks, bonds, or cash is going to get destroyed. Annihilated. This is not some sky is falling scenario. I've been talking about these bank failures for a long time and when I started a year ago they seemed absurd. So please listen to me while you have the opportunity: IF YOU ARE HOLDING DOLLAR DENOMINATED ASSETS, YOU ARE GOING TO BE WIPED OUT.

I can't tell you when it's going to happen or how long the government can continue to pull their smoke and mirrors game; but when the world wakes up to the con that's being played and they realize that they do not need to send 2.5 Billion dollars every day to a bankrupt country that will never pay them back, it's going to be a blood bath. It'll be a game of musical chairs and a rush to the exits. The last person with dollars in their hands is going to be holding monopoly money and unfortunately that's going to be the American public who have no idea what's being done to them right now.

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