Bailout & Economy

Got out just in time...
Wachovia Bank will fail today and will follow in the footsteps of many others such as Bear Stearns and WAMU. This is really only the beginning of the bottom and we still have a ways to go. Bank of America, JP Morgan Chase, Wells Fargo, and Citigroup will probably be the only one's to survive.

Why am I blogging about finances - especially when i am no longer connected to Wall St? Good question... I am not sure either - but I feel that I have to. I am passionate about the world, about how it works, and unfortunately most everything in the world works through money.

Here I sit at Royal Meridien National Hotel - staring at the spires in Red Square. Watching the street as thousands of faces pass by in front of me. I watch the Mercedes, the Audi, BMW, and Masseratti drive by - I see the designer cloths of Dior, Prada, Zara, and Hugo Boss. The Russians have an amazing life... and many are living what we (as Americans) would call "The American Dream". Russia's new found wealth is the result of the fall of the Soviet Union and the creation of the Russian Federation. Capitalism and a free market are the keys to financial success and increased standards of living the world over. BUT... all of this comes at a cost. The fallacy of money and what money truly is. How it is measured? How is it valued? How is it maintained? And most importantly - how is it transferred from Wall St to Main St?

The answer... Leverage. Nothing in life comes for free... everything has a price. In economics we call this Opportunity Cost. If you want to be in love - you will sacrifice some of your freedom. If you want reap the fruit of financial success you will compromise your time and work long hours. The danger in leverage... there will always come a point in which it is realized, materialized, and collateralized. That point in the US economy is now. And the point is a sharp one and it is going to hurt. And once we get the point... history is certain to repeat itself.

The interesting part about economics is called the invisible hand... which is really the psychology that drives the market. The US goverment, federal reserve, and treasury is attempting to sway the psychology by investing huge amounts of capital into the us economy to stave off a depression or recession. In my opinion, it will not work. Banks, by law, are allowed to leverage themselves at a 10:1 ratio. Meaning that 90 % of everything a bank does is credit - with your money or the money of someone else (usually an overseas investor).

Now.. there is no more money. We have 2 options.. we print more money (which is horrible - because it will cause a huge spike in inflation). We borrow more money (which is how we got into this mess in the first place). We cannot borrow any more money - in the banking world reputation is everything. If you overpromise and underdeliver - you are through. And the US has done just that.

The Bail Out
So... the US government is going to give 700 Billion dollars. We - the US taxpayers will ultimately pay for this and suffer a lower quality of life and much more difficult and restrained credit experience as a result. Moreoever, the bailout will only work for a time.. it is a short term sollution to a very long term problem.

Things that really need to be known
FDIC needs to be bailed out - when banks fail - FDIC is on the hook for deposits
Two large investment banks becoming banks (Goldman Sachs and Morgan Stanley) means that the people invested there were protected to 500 thousand and now only get 100,000 protection. Also... keep in mind Paulson used to be big boy at Goldman Sachs.. he is saving their reputation... they are in far worse shape than anyone knows.

And the housing debacle... check out these statistics...
20 Billion dollars in default debt in the state of California. Per Month
50 Billion dollars in default debt across the rest of the US. Per month.
Expected default in the us of 1 trillion dollars in the next 2 years.
It is estimated that 10 million + homes have negative equity or are upside down.
This is expected to hit about 12.7 million by next summer.
The state of California accounts for about 40 % of the dollar volume for the enture USA

There are potentially 7 trillion dollars in alt a / questionable loans that are outstanding. The bailout package is for 700 billion. A weeeee bi short.
Most of these loans will not be modified and even those loans that are modified - about 30-40 % eventually end up in default again.

We can throw all of the money in the world at this problem - but in the end - banks will take care of themselves, their assets, and their shareholders. The bailout goes to Wall St - beacuase if Wall St fails... the World fails.