Agora Financial’s Rude Awakening

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Dubai, UAE

• Lehman files Chapter 11,
  
• Merrill bites the dust,
  
• Wall Street’s Black Sunday

Joel Bowman, reporting from Dubai in the Persian Gulf…

Lehman goes kaput! Merrill kyboshed! Mac and Mae kapowed!

This morning’s financial news reads like a comic book action sequence, complete with Kazaams! Kabooms! and Gadzooks! The kryptonite-infused housing market debacle and the ensuing credit crunch claimed a few more Wall Street superheroes on what the press are already calling “Black Sunday.”

Futures on the Dow collapsed 370 points in pre-trading this morning. Over in Europe, London’s FTSE is down 4% while Germany and France’s measures are nursing losses of similar magnitude. Asian markets are closed for holidays.

Gone are the days when your editor could ease into the week with a few Monday morning anecdotes and a brief crack about the weather. Well, let’s get to it, shall we?

Lehman was forced to ink a Chapter 11 petition after potential buyers scrapped the idea of providing emergency funding to the beleaguered bank and the Fed, perhaps running out of fingers to plug the many dykes up and down the street, declined to bail them out.

Those hoping the Fed would provide backstops for the likes of Washington Mutual and American International Group (AIG) will be sorely disappointed by the it’s reluctance to step in. Conversely, those who prefer the “too stupid to succeed” motto over “too big to fail” will be delighted, provided they invested accordingly.

Then, as if the collapse of the nation’s fourth-largest investment bank was not enough to roil the markets, the world’s largest brokerage firm also fell to its knees. Merrill Lynch was sold to Bank of America for the relatively meager sum of $50 billion (it was worth more than double that within the last 12 months).

In what will surely come as no surprise to readers of these humble pages, the kneejerk mob dumped financials en masse and rushed for the safety of…wait for it…U.S. Treasuries. This represents the “full faith and credit,” mind you, of the world’s largest debtor; a government that just inhaled $5.3 trillion in liabilities thanks to the Fred and Fan “conservatorship.”

Let’s just call it a popular “flight to debt.”

Meanwhile gold, an asset conspicuously devoid of debt and which represents the liability of nobody, fell ten dollars.

We’ll call that a “flight from safety.”

We wonder, in this joyous season of financial conundrums and meltdowns, what the candidates vying for leader of the “free-market” world think of all this. After all, it will be up to them to perpetuate the lies and statistics of yore and, no doubt, add a few more platitudes of their own to assuage fears in the crumbling empire.

Politics is not our bent here, but with an epic financial crisis looming and top spot in the world’s largest economy up for grabs, one has to ask the question: What happens when financial and political scams collide? In his column of that title below, Bill Bonner offers a few insights…

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When Scams Collide
By Bill Bonner

The dewy Democrat rolled along smartly in his new “change-mobile.” Then, under pressure from the knuckleheads in his own party, he reversed to pick up that babbling hack, Joe Biden, as his running mate – and ran right into his own fraud. Biden is to Obama what Monica Lewinsky’s blue dress was to Bill Clinton – the dumb thing that reveals the spoken lie.

Biden demolished his own presidential campaign in 1987 by pretending to be British Labor politician Neil Kinnock. Not only did he recite Kinnock’s lines about being the first in his family to go to university, he also stole his identity, claiming that his father had worked in the coalmines. His own father was actually a polo-playing car salesman from Baltimore. But if the media hadn’t stopped him, he probably be collecting Kinnock’s pension by now.

Apparently, the better you know Biden, the less you like him. In his home state, 97% of voters refused to back him in the presidential primary. But that was Biden in the ’80s. In the ’00s, Biden is, supposedly, on the ticket because he knows who Saakashvili is. In truth, he’s there because the old nags in the Democratic Party wanted someone they could trust on the ticket – a real go-along, get-along backslapper. They turned to Biden, in other words, not for change, but to avoid it. And now, Obama and Biden are trailing in the polls. Americans don’t mind a liar in high office; but they’re suspicious of one who can’t keep his lies straight.

Meanwhile, over in the Republican camp, that tough old salt, McCain, has come about smartly, outmaneuvering the Dems by choosing a baroque woman from Alaska as his #2. But here too, he’s run into his own humbug. If military experience were so important to the nation’s top office, you’d think he – at 72 years old – would want a serious chief mate to take command if he were struck down. Ms. Palin’s military experience is limited to 22 months as captain of the Alaska National Guard. Then again, she might be an improvement over McCain anyway.

His right to rule, McCain says, comes from his superior command of the military situation. But the claim looks counterfeit. During his tour of duty McCain, lost five U.S. Navy aircraft, four in accidents, one in combat. The first one went down in Corpus Christi Bay when he was practicing landings. The second crash occurred over Spain, when he was flying too low. He took out some power lines and bailed out. Number three was wrecked when he was flying into Philadelphia for an Army-Navy football game. The fourth one, at least, was not his fault. An accidentally-fired rocket hit his plane when he was waiting to take off. The resulting explosion killed 134 sailors, destroyed 20 aircraft and nearly sank the ship. Finally, in 1967, he got shot down, roughed up…and then, by his own admission, collaborated with the enemy in order to save his skin. Maybe getting shot down was just bad luck too, but sailors are a superstitious lot. They’d probably give the heave-ho to this right Jonah rather than set sail with him as captain.

Of course, the financial world too is full of mountebanks, cads, and imposters. Who can forget Alan Greenspan’s famous remark that a nationwide decline in housing prices was “most unlikely?” Or Ben Bernanke’s suggestion a year ago that subprime losses wouldn’t exceed $100 billion (they’re now about $500 billion, and still growing)? Or bond appraisers’ Triple A ratings for what turned out to be junk debt?

“I have enormous confidence in BSAM [Bear Stearns Asset Management] and the ability of our talented professionals… You can count on us to deliver,” wrote James E. Cayne, CEO of Bear Stearns to his customers a year ago. The talented professionals on Wall Street did make good work of it, taking the bumpers off portfolios all over the world.

But it is where the scam of government – that every citizen can live at the expense of everyone else – meets the scam of finance – that we can all get rich without working, saving, or taking any risk – that the biggest wrecks occur. Last Sunday, we heard the rubber squeal: the U.S. government took control of Fannie Mae and Freddie Mac – America’s government sponsored mortgage backers. The Financial Times dutifully reported that this nationalization – the biggest in history – will cost the government $200 billion. USA Today reported only that it put the taxpayers on the hook for “trillions.” Asked the question by a reporter, Mr. Paulson, Secretary of the Treasury and the man who should know, replied: “We didn’t sit there and figure this out with a calculator.”

Thus did he drive the nation into the most dangerous intersection in economics – blindfolded. But did bond investors cover their eyes – aghast at the accident that is about to happen? No, they bought the government’s paper! Yields fell. Did the taxpayers cringe and howl, in pain and outrage, at the huge new burthen placed upon them on Sunday night? No again. Of course, a nation that robs Peter to pay Paul won’t get a whine out of Paul. But what did they think? That they were all Peters? That they would never have to pony up a cent? But there is the point of collision right there. The taxpayers believe the credit of the United States is an unstoppable force. Investors believe the dollar is an immoveable object. Both believe the United States is crash-proof…and that no one will ever have to pay for its bailouts, its bamboozles, and its busted-up humbugs.

Check your airbags.

[Rude Endnote: Bill Bonner is the founder and editor of The Daily Reckoning . He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis .

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now by clicking here: Mobs, Messiahs and Markets

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Rude Endnote: If you’re off to pound the pavement in search of a new job this morning, make sure you get out there early. Between them, Lehman and Merrill had some 85,000 employees. Sobering thoughts…

Until tomorrow…

Cheers,

Joel Bowman

The Rude Awakening