The End Game

Just a month after our trusted leaders in Washington told us that the debt crisis was over …

Just a week after Wall Street was still rejoicing with a great “Obama rally”…

And only hours before the new president takes the oath of office …

A larger, more menacing banking disaster has burst onto the scene.

Why? The fundamental reason is obvious:

Back in September, when Wall Street’s largest firms were feared to be sick or dying, the financial epidemic was largely limited to Wall Street. Most of the broader economy was still holding up. Except for housing and mortgages, the contagion had not yet hit Main Street.

Now, just four months later, all that has changed. Unemployment has gone through the roof in almost every industry. Nonfinancial firms are failing in large numbers. The entire economy has tanked.

Back in September, the big losses at major banks and Wall Street firms were limited primarily to mortgages and mortgage-backed derivatives. That was bad enough. But it was just the beginning.

Now, due to the sinking economy, the stated value of virtually every asset on the books of every bank in America is highly questionable. Whether you call this a severe recession, a depression or just an economic free-fall, the value of almost every bank asset is greatly overstated.

Even back in September, it was virtually impossible for any government, even ours, to muster sufficient resources to save the nation’s megabanks. The banks were simply too big. There were too many of them in trouble. Their losses were too large; their capital deficits too deep.

Now, with the losses spreading and mounting, the idea that, somehow, the government can save them all has been carried beyond the threshold of absurdity. Now, we are near the end game — and the government is likely to lose.

Ask yourself these basic questions:

Can the U.S. government save two of the nation’s three largest megabanks — Citigroup and Bank of America — despite the worst asset quality in their history and the worst economic collapse in a half century?
Can the U.S. government save these two banks while nearly every major investment bank, including Merrill Lynch, has already collapsed?
Can it pull it off even as thousands of large and small retail companies, air transport firms, auto companies and others file for Chapter 11?
Can it engineer this feat even as Europe and Asia sink into an abyss?

If your answer to these questions is “no,” you’re at odds with virtually the entire Washington and Wall Street establishment, whether Republican or Democrat, whether in the old administration or the new one.

Strangely, though, if your answer is “yes,” you’re out of synch with a reality that’s abundantly obvious to any objective observer.

Think about it. Just one year ago, if you had posed these questions to any established economist, the response would have been something like this:

“The notion that the U.S. government might even contemplate such a Herculean task is so naive and so preposterous, it doesn’t even rise to the level of B-grade science fiction.”

Yet, they’re not just contemplating it. They’re actually trying to DO it:

With the threat of a Wall Street meltdown last September, Congress passed the $700 billion TARP package and released $350 billion to buy up bad bank assets.
Just a few weeks later, Treasury Secretary Paulson abandoned that plan and decided instead to dump the $350 billion into bad bank stocks, funneling the capital directly to the banks.
Now, according to a just-released report by the Congressional Budget Office (CBO), taxpayers have already lost at least $64 billion on that investment.
Despite these sudden and huge losses, Congress has lunged forward, approving the second $350 billion, a big chunk of which was poured into the Citigroup and Bank of America bailouts just last week.
Even while the Treasury was abandoning its plan to buy up bad bank assets, the Federal Reserve was plowing ahead with a $500 billion program that does precisely that.
Now the Fed is proposing a massive “bad bank,” which could multiply those $500 billion several times over. Or, it says, it’ll create a massive entity that acts like a giant insurance company, picking up most or all of the tab for bank losses.

All this! And nothing is working!

The entire TARP program is a financial disaster and a bureaucratic nightmare.

The Federal Reserve has exhausted its hoard of Treasuries and is drowning in toxic paper on its books.

The Treasury Department is creating, almost instantly, the largest federal deficit of all time.

And yet, despite all these efforts, the economy is still collapsing, the banks are still sinking and officials are still running around like headless chickens looking for “creative solutions.”

The solution is staring them in the face: If a bank is bankrupt, regulators must step in and pro-actively shut it down.

If the bank’s so sick that it can’t be rehabilitated, its assets must be liquidated. If it wants to avoid liquidation, it needs to prove it can meet minimal capital standards. This is not rocket science. It’s Banking 101.

As long as the government is pursuing this folly, you cannot expect a recovery. Quite the contrary, you must expect that each new incarnation of the debt crisis will be a bigger threat to your wealth and your income.

Fortunately, we have a practical, real-world solution for you and your family. It’s easy. And it’s readily accessible to all investors. Click here for more information.

Good luck and God bless!

Martin

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