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Ignore the Bailout Drama

Posted on September 24, 2008

On the subject of the continuing bailout saga, I offer the following quick thought: Ignore the Drama. It will soon pass, once the robbery of key financial assets, by connected billionaires, is complete. What’s happening now in the US, used to happen routinely in third-world countries, like Brazil. As such, the history of the financial markets during government induced panics in those countries, should provide a good framework for developing a profitable investment strategy during the current US panic.

The way to make money off of Paulson’s Panic and Plan, is simply not to panic and stick with companies with strong balance sheets and good growth prospects. Let the billionaires battle it out for who will ultimately gain control of the massive US hedge fund.

As I’ve stated in previous posts, any thinking person can clearly see that the events of this month and the current bailout scheme, led by Paulson and Bernanke duo (and now famed investor, Warren Buffett), represent one of the greatest financial frauds of all time.

I offer these two additional insights for thinking investors:

1. Everything Paulson’s plan is seeking to save hardly existed in the economy 10 to 15 years ago and more importantly does not need to exist for an economy to function properly and grow. Specifically, there is absolutely no need for complicated mortgage-backed securities in order for any real estate market to function and flourish. Actually, you don’t even need mortgages to support a healthy real estate market. There is also no need whatsoever for complicated credit default swaps, which have brought down AIG. As such, if these assets completely disappeared from the financial world, as they should, there would be absolutely no long-term fallout or depression in the US or the world. Yes, there may be a slowdown for a few quarters in the US and world economy, as traditional banks rebuild their capital, but over time, the economy would pick up again, as it always does.

2. But what about banks failing, you may ask? A simple mathematical analysis would prove that traditional banks, taken as a whole, do not need to be bailed out, even if they suffer $1 trillion in cumulative losses. Non-traditional or shadow banks, such as hedge funds, are another story, but then again these institutions contribute nothing to the real economy and hence can disappear with no long term effects (though again there will surely be short-term effects as the economy adjusts to what was previously a normal economy, as opposed to a ponzi scheme economy).

The reason why most traditional banks do not need to be bailed out is simply because they can lend off of their deposit base. So to the extent that most people in the US continue to work providing needed products and services, the economy will grow over time, and the deposit base of banks will also grow. As deposit bases are rebuilt, in due time lending will also pick up steam. Yes, many banks may have to curtail lending significantly for some time, as balance sheets are strengthened and the deposit base is allowed to build back up, but again that is merely a timing issue of at most a year or so ($1 trillion dollars is only 10% or so of US GDP, so it’s not a big number when you take into consideration the entire working population of the US). Over time, banks would rebuild their capital, and the economy would pick up again, as it always does.

So, although we cannot avert a recession as banks balance sheets are rebuilt, there is obviously no need for a bailout. So why the Paulson Panic and Plan? It’s a simple way for Paulson, Goldman and others to seize a huge amounts of financial assets which will generate astronomical income fees and profits for years to come. In addition, Paulson is looking to save the giant financial Ponzi scheme which he helped to develop over the last decade or so.

The only people who need to panic in the current market are those Wall Street billionaires who have for one reason or another somehow personally slighted Paulson in the past. Clearly, Paulson disliked Fuld and Greenberg, and hence bankrupted LEH and sent AIG reeling.

Goldman, of course, survived, and Buffett’s investment in Goldman is probably simply a case of Buffett trying to get into good graces with Paulson, before the $700 billion in spoils is divided following the bailout. What’s interesting about Buffett is that it’s simply amazing how he survived this whole crisis without any damage to his reputation, despite the fact that he owns big stakes in the rating agencies which were key players in precipitating the financial crisis. It’s also interesting to ponder the ties of Buffett to AIG and Greenberg (i.e. isn’t Buffett a competitor of AIG and Greenberg).

What was said for Buffett applies to Bill Gross of Pimco, as well. Check out his ludicrous rationalizations for the bailout here: http://biz.yahoo.com/rb/080924/business_us_financial_bailout_pimcobiz.html . Bill Gross is also angling for a piece of the bailout spoils, so it’s understandable that he is in favor of the bailout.

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