Free market capitalism: A 'peek behind the curtain'
Posted Sep 15th 2008
"It is a popular myth that financial markets are based on principles of capitalism," observes Ron Rowland in his All Star Investor newsletter, adding, "but the opposite is closer to the truth."
Assessing what he calls the Federal Reserve's moves to "buy Wall Street," he offers a straight-forward overview of the current situation and a "peek behind the curtain" of free markets and Wall Street.
"Banks, brokers and insurance companies are assisted and protected by a wide variety of governmental mechanisms.
"Wall Street propagates the myth of 'free markets' because it serves to obscure the truth, which is that their profits are earned at the expense of those with less sophisticated and well-funded Washington lobbying operations. You are now getting a peek behind the curtain.
"Yes, it is true that Lehman Brothers (NYSE: LEH) was denied government assistance and is being allowed to fail. In fact, Lehman is now serving as a kind of scapegoat that allows those in power to appear firm in their resolve not to put taxpayers at risk.
"If it were more than mere appearance this would be good news, given that taxpayers have already taken on plenty of risk with Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). The reality, however, is that the bailouts are continuing through other, less obvious means.
"On Sunday the Federal Reserve announced a number of modifications to its lending policies. Two changes are particularly disturbing.
"First, the Fed will now allow investment banks to post equities as collateral in the Primary Dealer Credit Facility.
"Now the purpose of collateral is to give the lender something to hold which is of known and reasonably stable value. Equities do not fit that definition. Ben Bernanke knows this full well but obviously doesn't care.
"The second Fed action is more alarming: banks are now allowed to use depositor's money to fund the operations of their non-bank affiliates.
"Your savings account is being used to prop up the trading operations of your bank's parent company, which not coincidentally is the source of the huge losses the industry has racked up this year.
"And what happens when that deposit money goes up in smoke? Ah, yes, FDIC steps in and protects depositors. And who protects FDIC? Good question. Look in the mirror and you'll see the answer.
"Yet we are told that taxpayers aren't bailing out anyone. This action is arguably illegal, but at this point the Fed clearly is not concerned with what is legal or not. It is now a law unto itself.
"In a related development, Merrill Lynch (NYSE: MER) is being taken out by Bank of America (NYSE: BAC) at what appears to be a bargain price. Had BAC waited a day or two they might have got a much better deal, but we suspect this merger was forced on both firms by the powers-that-be.
"Merrill Lynch exemplifies the small investor, and its failure - more than most firms - could have sparked widespread panic. Hence the hastily-arranged shotgun wedding.
"More ominously, insurance giant American International Group (NYSE: AIG) is in dire need of capital and the traditional sources have slammed the door shut. There are rumors this morning that Warren Buffett might come to the rescue; if true, we suspect Buffett will drive a hard bargain.
"A collapse of AIG presents a systemic threat in a way that Lehman, Merrill and even Bear Stearns did not. It is a very dangerous situation. Given turbulent market conditions, we will avoid making any new investments for now and hold on to our cash allocation, which is roughly 54%."
Posted Sep 15th 2008
"It is a popular myth that financial markets are based on principles of capitalism," observes Ron Rowland in his All Star Investor newsletter, adding, "but the opposite is closer to the truth."
Assessing what he calls the Federal Reserve's moves to "buy Wall Street," he offers a straight-forward overview of the current situation and a "peek behind the curtain" of free markets and Wall Street.
"Banks, brokers and insurance companies are assisted and protected by a wide variety of governmental mechanisms.
"Wall Street propagates the myth of 'free markets' because it serves to obscure the truth, which is that their profits are earned at the expense of those with less sophisticated and well-funded Washington lobbying operations. You are now getting a peek behind the curtain.
"Yes, it is true that Lehman Brothers (NYSE: LEH) was denied government assistance and is being allowed to fail. In fact, Lehman is now serving as a kind of scapegoat that allows those in power to appear firm in their resolve not to put taxpayers at risk.
"If it were more than mere appearance this would be good news, given that taxpayers have already taken on plenty of risk with Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). The reality, however, is that the bailouts are continuing through other, less obvious means.
"On Sunday the Federal Reserve announced a number of modifications to its lending policies. Two changes are particularly disturbing.
"First, the Fed will now allow investment banks to post equities as collateral in the Primary Dealer Credit Facility.
"Now the purpose of collateral is to give the lender something to hold which is of known and reasonably stable value. Equities do not fit that definition. Ben Bernanke knows this full well but obviously doesn't care.
"The second Fed action is more alarming: banks are now allowed to use depositor's money to fund the operations of their non-bank affiliates.
"Your savings account is being used to prop up the trading operations of your bank's parent company, which not coincidentally is the source of the huge losses the industry has racked up this year.
"And what happens when that deposit money goes up in smoke? Ah, yes, FDIC steps in and protects depositors. And who protects FDIC? Good question. Look in the mirror and you'll see the answer.
"Yet we are told that taxpayers aren't bailing out anyone. This action is arguably illegal, but at this point the Fed clearly is not concerned with what is legal or not. It is now a law unto itself.
"In a related development, Merrill Lynch (NYSE: MER) is being taken out by Bank of America (NYSE: BAC) at what appears to be a bargain price. Had BAC waited a day or two they might have got a much better deal, but we suspect this merger was forced on both firms by the powers-that-be.
"Merrill Lynch exemplifies the small investor, and its failure - more than most firms - could have sparked widespread panic. Hence the hastily-arranged shotgun wedding.
"More ominously, insurance giant American International Group (NYSE: AIG) is in dire need of capital and the traditional sources have slammed the door shut. There are rumors this morning that Warren Buffett might come to the rescue; if true, we suspect Buffett will drive a hard bargain.
"A collapse of AIG presents a systemic threat in a way that Lehman, Merrill and even Bear Stearns did not. It is a very dangerous situation. Given turbulent market conditions, we will avoid making any new investments for now and hold on to our cash allocation, which is roughly 54%."
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