Nationalization, Whoa!
Investment Research for Online Investors

by John Dalt

02/20/09

I made a mistake in yesterday’s letter. I said the SP500 closed at its lowest level since March 1997 It did close lower since then on 11/20/08 it closed at 752. Pardon the transgression. Monthly Charts are not my normal read. Phil Gramm, former Senator from Texas had a good article in the Wall Street Journal today. He gives a little perspective on the present mortgage crises. Was it caused by ‘lack’ of regulation, or too much? You can read it here.

The word on everyone’s lips today is ‘Nationalization’.  Rumors are swirling that Citi (C) and/or Bank of America (BAC) could be taken over by the government.  I wrote yesterday, the administration needed to watch what they said.  Words move markets!

Today Chris Dodd (Chairman of the Senate Banking Committee) got into the act, telling CNBC that ‘nationalization is a real possibility”.  A loose cannon would cause less damage.  Dodd caused a run on a bank last fall, after a briefing from Treasury.  He is like a kid with a secret.  The White House came out two hours later with a statement affirming ‘private banks’, the financial markets rallied 20% in 30 minutes.  A subscriber sent an article from Motley Fool that explains the problem that occurred when the FDIC seized Washington Mutual.  They screwed the bondholders by turning assets to J.P. Morgan and left the bondholders in bankruptcy court.  This action led bondholders to freeze the bond market.  After reading this article, my friend was shopping his bonds in BAC that mature next month!  You can read the article here.

I received a copy of a timeline of the financial meltdown from a treasury insider’s perspective.  It is unsigned, I have asked for attribution, but have not received it yet.  I will add it when available.  You might want to read it, here.

The Dow set a new low, but the SP500 held up to stay above last fall’s low.  The market tried to close in positive territory, with a rally after the White House statement affirming private banks.  It clawed back to even from down 225 but succumbed to sellers to close down for the day.  The dollar dipped this morning but the soft stock market forced investors to seek safety in bonds causing interest rates to decline.

Friends were over for a candle lit Valentine dinner last Saturday night.  One of my dear friends was very angry at banks that are now in trouble.  I cannot remember all of the conversation (wine was very, very good), but I respect her very much.  She worked in foreign affairs for 18 years in Washington.  Her father was an executive at a large statewide bank, and she is one of the smartest people I know.  I politely pointed out that the banks only did what Washington and Acorn told them they should and had to do.  I mentioned the The Community Reinvestment Act, threats to banks if they could be found guilty of ‘Redlining’, which forced them to search for loans in low-income areas.  How congress wanted home ownership expanded to lower income citizens.  We ended this discussion shortly to maintain a pleasant demeanor.  This conversation has haunted me this week.  On reflection of the banks actions, I come back to one conclusion, they did nothing wrong!  Let me explain:

In my former construction business, every job was “guaranteed” by a surety bond. This bond guaranteed the satisfactory completion of the job. The buyer of my services approved underwriters of bonds. If they were not satisfied with my surety company, they would not accept their guarantee. Which leads to the question, “Where was the due diligence of buyers of the bonds?” It was their money they were spending, they should have been more careful. They happily bought bonds that paid high interest rates to juice their portfolio, they should take the loss. The government should not guarantee returns to bondholders that buy risky investments without due diligence. There were too many winks and nods and not enough questions asked. Would you buy a used car without asking any questions? Who owned it? How has it been driven? Does it use oil? Has a mechanic checked the motor to verify all is ok? How many loans are 30 days in arrears? Where are the properties located? How many loans are zero down? Adjustable?

The other unstated problem I have with the financial and real estate bailout is that they tax the citizens of 35 red states for the stupidity that went on in a few blue states. Federalism requires that state governments that screw up pay for it. Florida, Arizona, California, Nevada, Michigan, New York; sorry you guys enjoyed the real estate boom, now figure it out. Most of the states do not have a problem; we never priced new houses more than it cost to build them plus a fair profit for the builder. Our homes are holding value just fine, since you cannot build a new one for less. You rubbed our noses in the dirt for being backward when the go-go years were underway. Oh, and by the way, have you noticed that Democrats and unions dominate all the states that are in trouble? So now, the state’s citizens that did not participate in the party have to pay for the clean up!

The real losers in all the bailouts are retired people with homes paid off and savings.  They are going to be slaughtered.  They have to help pay off other people’s homes, bonds, and banks with higher taxes.  Their savings that pay 1% are going to be rendered virtually worthless by the inflation that the government is causing by printing so much money.  The end result is; we rescue Wall Street, China, Japan, South Korea, borrowers that can’t read contracts, and Democratic states.  We destroy our parents savings, and pile on debt that we can never repay, except by inflation.

Have a great weekend!  

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future. 

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