Heaven Help Us Without a Bank Bailout

By Markos N. Kaminis - Economy and Markets:

"Heaven help us" were the words spoken by Warren Buffet on Friday regarding the divine intervention required if Congress failed to pass the bailout proposal.

(Article interests: AMEX: DIA, AMEX: SPY, Nasdaq: QQQQ, NYSE: NYX, AMEX: DOG, AMEX: SDS, AMEX: QLD, AMEX: XLF, AMEX: IWM, AMEX: TWM, AMEX: IWD, AMEX: SDK)

Indeed, "The Greek" agrees with history's greatest investor. In fact, I will go so far as to say that if Congress develops and passes into law a politically perverted version of the bailout, we could still see the stock market crash this coming week, and certainly more bank failures.

Fortunately, House Finance Committee Chief Barney Frank predicted Congress would have a plan worked out by Sunday, and that this bill would be based on the Paulson plan. Congress stayed in session for this all-important effort, and remained cloistered in Washington over the weekend, working diligently to save the economy and stock market, or to seal its demise, depending on what exactly the bumbling group works out.

Please take my sound advice, and if you have more than $100,000 in an individual bank or financial institution of some sort, split it up among institutions so that no one institution holds more than $100K of your money. Your dear government only insures your deposits up to $100,000, and banks are failing before our eyes.

In short time, we've now witnessed the failures of Lehman Brothers (NYSE: LEH), AIG (NYSE: AIG) and Washington Mutual (NYSE: WM). Fear is spreading, and now has depositors making a run on Wachovia (NYSE: WB), which could be nonexistent by Monday morning depending on how far panic spreads. When depositors withdraw their money en masse, a.k.a. a "run on the bank," the institution can quickly fall below capital requirements and as a result find itself forced under. But, your deposits are safe as long as they're short of $100K. Your shares in these institutions, however, aren't worth the paper they’re printed on.

What Could Go Wrong

Because of the Administration's early denials and harmonious cheerleading of positive economic claims, Congress has lost confidence in the group. More recently, though, the feds have been forced to come clean, as they have dealt with one financial emergency after another. Treasury Secretary Paulson now presents himself like the boy who cried wolf, which is appropriate considering that he might be fed to the wolves soon.

I openly criticized Paulson and Bernanke around this time last year for not acting with the intensity I thought the coming predicament called for. In fact, I advised Wall Street Greek readers to sell and sell short the shares of IndyMac, Washington Mutual (NYSE: WM, NYSE: JPM) and Wachovia (NYSE: WB) when their shares traded in multiples of ten. Two are now bankrupt and one is close to it. I offered my feelings on these three failures several times, one of which can be seen here: "Sometimes Bad Gets Worse." I suspect you'll also find this interesting reading: "The Most Important Article You’ll Ever Read."

Congress is rightfully frustrated, after faithfully signing off on previously failed efforts. However, now that they have least reason to believe, they need to listen more than ever; and if they do not, they risk sending our economy into depression and the stock market into ruin. Senator Schumer's suggestion that Paulson take increments of $150 billion at a time to buy the illiquid assets of institutions would be ill-received by the market, as at least $700 billion is needed in my view to show an earnest effort. More importantly, it would instill a note of uncertainty into the message, and the market hates uncertainty. Congressional attempts to alter the proposal to include funds for the direct aid of distressed homeowners, while noble on the face of things, could restrict funding for financial institutions, the primary focus of need.

At this time more than ever, we need to restore confidence in our financial institutions. The President softened things up until now to prevent national panic, but now that we stand on the brink of catastrophe, he expresses extreme concern at the urging of Congress in order to get the bill passed. I am disgusted by the politics we see at play in Congress, but I appreciate the President's obvious advising of the Presidential Candidates to tone down their political pretense on this subject during their debate. The last thing we needed Friday night was Obama and McCain stirring the nation into panic.

However, if Monday comes to pass without the arrival of a bill powerful enough to quell concerns about the banks, you really should head for the hills; because, otherwise, over the weekend, word will spread via the media, and panic will consume America. In that case, truly, heaven help us!

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