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John Wayne's Holster: It's Harvest Time... on Wall Street
John Wayne's Holster
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Monday, September 15, 2008

It's Harvest Time... on Wall Street

I stopped at the bank during my lunch break today. While waiting in line for a teller, I was watching the news on the flat screen TV mounted on the wall. I was hoping to catch-up on the latest develeopments in the on-going meltdown on Wall Street. To my suprise, that news was trumped by an (apparently) even BIGGER story.

O.J. is on trial!

Is this what we have come to in this country? On the heels on the largest bail-out in the history of the United States, two of Wall Streets most storied companies implode, and CNN decides to air gavel to gavel coverage of another O.J. trial. What the...

In case you missed it, one of the nations oldest investment banks - Lehman Brothers - filed for Chapter 11 bankruptcy protection Monday morning. It's the largers bankruptcy filing in US history. The firm crumpled under the weight of $60 billion in bad real estate deals.

Merrill Lynch also got caught-up in the sub-prime mortgage mess, and was bought out by Bank of America for pennies on the dollar. reports that Merrill Lynch suffered "$52.2 billion in losses and writedowns from subprime- mortgage-contaminated securities". As a result, their stock value has dropped more than 80% since January, 2007.

As if this news were not bad enough, there is more sub-prime-related trouble on Wall Street. AIG, the nations largest insurer, is scrounging for about $40 billion in capital to meet its day-to-day operating costs. CNN-Money reports that AIG has lost "nearly $18.5 billion in the past three quarters - primarily due to a plunge in the value of credit default swaps tied to subprime mortgages". Now Goldman Sachs and JP Morgan appear to be stepping forward to lend AIG money to keep them afloat.

All three of these companies are ranked by Fortune 500. In addition, AIG is a Dow Jones company. It's losses can only serve to drive the Dow further down into bear-market territory. Surely, these are reasons for investors to be worried.

However, not everyone is worried. The banks tied-in with the Fed (BofA, JPMorgan, GoldmanSachs) are dancing in the streets. For them, it's harvest time!

Not to be a conspiracy nut, but it seems odd to me that the big banks tied to the Fed have not suffered much during the sub-prime mess. It's begging to look like the unfolding of a grand scheme. Back in 2001, the Fed lowered its funding rate to 1%. The goal being to increase the money supply and encourage lending. Lending, in turn, encourages spending. This was all supposed to spark a post-9/11 boost which the country sorely needed.

With so much money now available to lend, bankers were not too picky on who they actually lent the it to - thus the sub-prime loans. The Fed-linked banks knew these loans were risky, due to the higher probability of default. They then packaged the risky loans with a few good loans and sold them off as asset-backed securities (ABS) - transferring the risk in the process. These loans were also repackaged and sold to Wall Street, who in turn sold them to investors. It was a trickled-down scheme that would have made Jack Kemp do a double-take.

As we all know by know, the bottom dropped out of the sub-prime lending scheme when the original borrower began defaulting in mass. The losses retraced their way back up the lending chain, leaving bankruptcies in its wake. Of course, the banks linked to the Fed were off the hook. They already took their money and ran. The losses suffered by other lenders, such and Freddie & Fannies, were transferred to the public in the form of tax-funded bail-outs and devaluation of the dollar. Those companies that haven't quite breathed their last, but are having trouble meeting operating costs are being bought-out at fire sale prices.

After all, it's harvest time!


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