Bailing out Wall Street or Main Street ?

(This articles was taken from an editor at Optionetics. We have no affiliation to them, we only find their articles interesting and worth repeating it here for readers to consume.)

There is a HUGE misconception by the public that the purposed bailout is to rescue Wall Street, when in fact the real winners of a bailout are Joe Q. Public and Main Street. In fact, those investing in the markets are the real losers and this may forever keep people out of the stock markets for a generation, like my grandmother''s generation who refused to ever buy stocks again after 1929.

As a matter of fact, the stock market did not reach the old 1929 highs again until 1954. It took 25 years without adjusting for inflation for the markets to even get back to breakeven. The interesting analogy is that the markets began the new millennium with the Dow and Nasdaq (NDX) closing the last day of 1999 at 11,497.12 and 3707.83 respectively. With the same instruments closing at 10,854.17 and 1,665.94 on September 23, 2008 we are enduring a 5.6% and a 55.1% decline in those respective markets over the past 9 (approximately) years.

The manner in which the government is handling this "bailout," "rescue," or whatever semantics you want to place on this socialist maneuver is atrocious for the markets. One only needs to look at how Bear Sterns, Freddie Mac, Fannie Mae and most recently Washington Mutual were handled to realize Wall Street is the one bearing the load. In each case the secret and shady midnight behind closed doors deals were done at the expense of the shareholders of the common.

The latest sickening "bailout" of WaMu benefited NO ONE other than the FDIC and J.P. Morgan. The FDIC is responsible for putting money into the system to ensure banks have adequate capital to avoid runs and to insure depositors. Today the FDIC is $1.9 Billion dollars wealthier as a result of the pennies on the dollar sale price of WaMu. Shouldn''t the shareholders and bond holders get that money? Even FDIC Chairman and John Reich, Director of Office of Thrift Supervision, stated that the "demise of WaMU was the result of a huge real estate downturn." This was not Wall Street; it was the 1.54 million Americans who bought homes they couldn't afford who caused this.

When one owns shares to invest in their future and plan for retirement, knowing full well that leaving their future''s financial security to the politicians to be good stewards of the Social Security system is a certain recipe for poverty, and then stocks in AAA rated companies are wiped out overnight does not lend itself to confidence in the system. Those who had money in Fanny, Bear Stearns and Washington Mutual are looking at a portfolio that is down perhaps over 95% (depending on the weighting) in months. Yet the assets of those companies were simply shifted to friends and family in DC. To steal a line from Michael Moore, "Will they ever trust us (Wall Street and DC) again?"

The markets need recessions to get rid of the inefficient, reckless speculators, unsavvy investors and to correct a bubble in the economy. In this case the recession is caused NOT by Wall Street but by Washington, real estate speculators and YOU. I will explain a perfect paradigm of the problems that we face, who is at fault and why this occurred. Months ago I wrote that the economic downturn was the direct result of people using their homes as cash stations, but what I forgot to mention was that the government had their hand in this. After all, when you give idiots money they treat the money like you would expect from an idiot.

I have a friend that to say I am disappointed in would be an understatement. Forrest (quite possibly not his real name) moved out to California a few years ago and decided he wanted his slice, and a big one at that, of the American Dream. The interesting thing that has to be noted here is that the most obtuse of us can differentiate between the term "dream" and "entitlement." I only state this to show the vacuous in DC and 1.5 million Americans need to revisit their Hooked on Phonics DVDs as congress put pressure on banks make loans available to those who obviously could not afford it – Forrest being one of the benefactors.

Fearful that minorities (who could vote them in or out of their Pact money laden offices) were being discriminated against, they unofficially legislated the American Entitlement of homeownership. Those responsible for pushing the homeowner entitlement should be indicted for breech of fiduciary responsibility to the tax payer. An office in DC should have been created and coined, "Political Department OF Homeowner Entitlements", or "PaiD-OFf-HOEs." Most of them (DC as a whole) took a piece of the $200 million Fannie Mae "donated" in campaign contributions nonetheless.

Our elected officials, even though only 20% of the eligible people vote, are there to make better decisions than the average American could. They should all be indicted for breech of their fiduciary responsibility to the American people as even a 7-year-old could tell you that one should not give a loan to people who can''t afford to pay it back. If I borrow $5 from my adolescent, he will hound me several times a day if I don''t pay him back on time and will not lend to me again. The most endangered species in DC is a politician with common sense and a dedication to public service instead of personal service.

Forrest decided he wanted a $450,000 home despite only qualifying for a $275,000 home. What is one to do? He deserves such a luxury as life is hard and everyone else is making free money in frivolous lawsuits, scams, kickbacks at work, etc., so why not him? The solution? A mortgage that requires no money down, low payments for 2 years so that he can qualify for those payments, a balloon at the end, and a few other tricks purposely designed to get him in a home that he cannot afford.

A few years later, and I could not make this up, the house appreciates (on paper) and he is strapped for money. Again, what is a person to do? LIGHTBULB!!! REFINANCE!

So Forrest calls a mortgage broker and explains the situation. Now the mortgage broker only gets paid if he generates a commission, so he is more than happy to take Forrest''s business and get him a $850,000 loan. The appraisers also gets paid on a commission and will not get work in the future from the broker unless his loans qualify. The appraiser, not being as dumb but just as greedy as our politicians, asks Forrest, "How much do you need?" He doesn''t even look at the house, and surprisingly the house is appraised at $870,000—ample room for approval.

Isn''t it amazing how smooth the process works? You can tell the Feds are not directly involved as a democrat and republican were not appraising the home, arguing back and forth, trying to ascertain if the home is worth $880,000 or $880,001. Besides, then they would also be arguing over if the fee they "earned" was capital gains or ordinary income and it would take 5 years to get the loan.

Forrest then takes the family on vacation, purchases two luxury vehicles, refurnishes his house and fritters away $100,000+ on McDonald''s, dinners, magazines, smokes, and liquor. Sounds like Forrest is qualified to run for congress! But wait – the fun is just beginning!

It goes without saying that the special mortgage he got had a few caveats in there that Forrest didn''t read or understand when signing the papers. His $1,900 a month mortgage screamed to over $5,000 a month. Given that Forrest was simply a hand on a shrimp boat making less than $100,000 a year, there is no way he could make the principle and interest payments. The banks no longer want to refinance Forrest''s home as he doesn''t qualify for any loan, no matter how ridiculous the terms, so Forrest has to either short sale the home or move out in the dead of the night like a TV televangelist repairing a flat tire outside a cheap motel.

The home could not be sold anywhere near what the note was worth. It was a surprise to Forrest that the home would only fetch roughly $600,000 on the open market and that he would have to bring a check for $250,000 to the closing for him to get out. Solution?

Forrest elected to sell his home short at roughly $600,000, thus straddling the bank with roughly $250,000 in bad debt to write off. As amusing as the story is to the casual reader, there are over 1.5 million shrimp boat captains out there. The American tax payer is now straddled with the burden of having to pick up the tab for automobiles they can''t drive, vacations they didn''t take, plasma televisions they can''t view. Banks, at the behest of politicians, gave out those loans without doing their due diligence. If you or I purchase a bum stock we have to eat the loss and are told, "We should have known better."

What has me and most educated Americans (I being the exception to the term ''educated American'') livid is that the bankers who made the bad loans are still cashing their paychecks. The mortgage bankers who originated the loans were often making as much as $300,000 a year to throw clients through the economic meat grinding system knowing full well they couldn''t pay for the home. The bank CEOs are getting golden parachutes of millions of dollars and dumping their garbage on the government, and the government who accepts no liability in this mess and is not giving back all the money they received from Freddie and Fannie are dumping the steaming load on our children.

Government takes upon itself the responsibility of ensuring social and economic Darwinism doesn''t work. We give money to those only intelligent enough to abuse the system and pump out children for profit, spend millions resuscitating welfare neonatal children who 20 years ago would not have survived, and now allowing people to spend in the same fashion the government spends – that is buy whatever they want regardless of if they can afford it. We are now in an age of forced socialism where the government steals from the rich and gives to themselves and the poor.

So what happens on Monday? Deal or no deal, the landscape in the markets have changed forever. If you invest in a financial institution, be it a bank, brokerage company, etc., and they run the company as if the government would, chances are eventually they (the government) will. If you are a shareholder you will find your stock worth NOTHING overnight and all the assets that were guaranteeing the value of the stock in another company the next day. And don''t be surprised if your politician is cashing a contribution check from JP Morgan the following year. If you or I orchestrated this scheme we would be in jail, but because it is DC doing this it is called "good government." But do not worry about the banks, American greed or the government... we not have the no-short-sale rule of stocks, which will save all of this!

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