$700B Bailout Passage Keeps The Hangman Away, For Now

The $700 billion bailout bill passed the House after its failure early this week.  The Senate has already approved this new package which contained many more add-ons than the prior bill.  The magic number was 218 YES needed to win.  Our image to the right was taken when the vote was still going as it appears the final tally was 263 to 171 in favor.   There are two issues at stake here.  The economy was toast without this package.  That is first and foremost.  But the economy is still likely going to suffer and enter into a recession.  People who bought too much house or that were duped into bad mortgages are still facing foreclosures.  Credit card defaults are still rising.  Loan loss reserves are increasing.  Jobs are still being lost.  Manufacturing is slowing.  This is still an unfinished chapter in the history books.

This bill may not be enough and it may already be too late.  Those twoissues are already believed by many people.  At some point we all have to beresponsible for our actions and it is important to have a plan that isnot reliant on Uncle Sam. 

Wilbur Ross predicted 1,000 bank failures.  Warren Buffett said we areat the edge of the abyss of something "terrible, terrible, terrible."Bill Gross and Jeff Immelt have already shown how the access to thecapital markets has been altered greatly.  Triple-AAA rated debtissuers have now been forced to pay 300 to 400 basis points higher thantreasuries and junk bond issuers are forced to pay rates that look like loan shark usury rates.  The worst case may have been taken out.  Butthere are still very cautious times ahead for the near future and thenew president is going to be walking into very difficult times.

The timing in which this TARP bailout package was approved is amazing.The Patriot Act took roughly six weeks to pass into law after September11 as it was signed into law by President Bush on October 26, 2001.This will havetaken less than three weeks from start to finish to pass.

This bailout package may help banks start lending to each other.  Itmight not.  It is our belief that the FDIC insurance limit should havebeen taken up to $500,000 rather than the new $250,000 limit.  One thing is for sure, that $100,000 limit was very old and hadnot been updated in most of our lifetimes.  The banks are still goingto be very cautious in lending to customers.  If you are stillfinancially leveraged at this point then it isn’t going to be a smoothroad ahead.

There are still many bank mergers coming that will prevent failureswhere the strong will get to pick up the weak for pennies.  There arealso going to be more bank failures and there is likely to be moreturbulence.  But this bailout passage will at least help some.  Howthis plays out is yet unknown. As we said, this chapter is not finishedin the history books. 

The process and the levels at which these mortgage derivativesecurities is yet to be an assured outcome.  It may turn out that thebanks cannot afford to sell the assets at even an inflated value intothis buyout pool.  It may turn out that the amount the banks want tosell back to Uncle Sam is so great that the package cannot handle thetotal problem.

We calculated the cost of $700 billion on a "per tax filer basis" and it is going to beheaped on the nation’s debt pile for us and for generations to come.We can hope and pray that this package is enough, but experience shouldbring the reminder that hoping and praying are very poor coreinvestment strategies.

Stay tuned.  You know we will.

Jon C. Ogg
October 3, 2008