Agora Financial’s Rude Awakening

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Anytown, USA

· Your thoughts on Paulson’s $700 billion financial battle plan,

· Why Buffett is really interested in Goldman,

· Gold ebbs back into “discount” territory and plenty more…

Joel Bowman, reporting from Dubai in the Persian Gulf…

Living abroad, your editor did not have the dubious pleasure of hearing George W. Bush address the nation last night with regards to the state of the economy. Still, we’ll take for granted that he did so with the comedic oratory imprecision we have all now grown accustomed to.

In lieu of the live entertainment, we had to rely on a transcript of the speech (provided here, if you are interested), which we read through this morning. Living without a television is, we reasoned, no excuse to miss out on a good laugh.

You can imagine then our surprise then when we read sentences similar to – and including – the following:

· “Easy credit — combined with the faulty assumption that home values would continue to rise — led to excesses and bad decisions.”

· “Many investors assumed these [mortgage-backed] securities were trustworthy, and asked few questions about their actual value.”

· “Because these companies [Fannie Mae and Freddie Mac] were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk.”

If only President Bush (or, at least his speechwriters) had the forethought to pen these kind of observations four or five years ago, some of those “fringy” goldbug newsletters might have considered running his material. Alas, he handed in his assignment a few years after the deadline for submission…at a time when the history written by his atrociously misguided administration had already provided the CliffsNotes.

If our relatively modest life experience has taught us anything, it is the value of a true contrarian indicator…and there seems to exist no truer such indicator than a government’s willingness to wage war. In other words, if Paulson’s $700 billion dollar emergency bailout plan ($2,333.33 for every man, woman and child in America) is to be considered the financial equivalent of a declaration of war, we can bet the outcome will be similar to those of the War on Poverty, War on Drugs, War on Illiteracy, War on Terror et al. The results of such calamitous initiatives proved as common as they were predictable in that the very people they set out to protect – ostensibly the “free” citizens of the Empire – got hoodwinked at the benefit of the very enemies the plan sought to conquer.

Will Hank Paulson’s War on Finance be any different?

Investors, having seen the deployment of infantry over the weekend, were skeptical that the plan could restore confidence in the flailing economy. If anything, they saw it as their cue to evacuate the battlefield. The Dow has sold off every day so far this week, including a 370-point dip on Monday, immediately after troops were mobilized. And, now that short selling financials has been outlawed, the frontline doesn’t even have a short covering rally to fall back on if they suffer massive casualties when first blood is drawn.

[Ed. Note: If you missed any of the commentary your editors have provided regarding Paulson’s battle plan, the following columns published this past week may be of interest to you:

· A Violation of Public Trust – By Tim McCormack

· Velkom to Amerika – By Joel Bowman

· Bonus Envy – By Eric Fry

· Investment Landfill – By Paul Tustain]

As many keen Rude readers wrote in to tell us over the last few days, giving carte blanche authority over the bailout plan to a man with $500 million in Goldman profits lining his pockets is tantamount to “putting the fox in charge of the henhouse.”

Yesterday’s guest Rude columnist, Tim McCormack, posed a very worthy question at the end of his fantastic article “A Violation of Public Trust.” Tim wrote:

“Rather than getting an honest explanation about what has just occurred, the American people are now being sold a story manufactured by government officials who have been complicit in this irresponsible behavior. The open question remains: Are the American people gullible enough to buy it?”

Dozens of astute readers immediately began firing off emails with some very interesting thoughts on the whole debacle. Always glad to feature the thoughts of the greater Rude community, we’ve included a selection of these responses below. Please enjoy…

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First up, some thoughts from David Myhre reporting from, Stuart, FL…

Same message, different story. We MUST pass the Patriot Act NOW. Saddam has WMD – we MUST act NOW to protect America. The financial markets are falling – we MUST act NOW to save America. All I can say is, the town that heard the “WOLF !!” cry only took two fake calls to realize they were being conned. What about us and our “leaders” in DC ?? How many of these BS scares will it take to realize they’re blowing smoke again ? The Empire of George II falls back to its most successful ploy – act now or be destroyed. And anybody opposed is anti-American.

Answer me this, Hank and Ben – if Congress throws a couple trillion dollars after the stupid losses financial institutions have blown, will you GUARANTEE it will fix the problem ? Will you sign over your personal wealth to the US government to help pay for your plan’s failure ? The two most important questions are:

If we don’t accept your proposal, is a crash certain ?

Will this plan fix the problem and avert a crash ?

And therein lies the true question. Nobody that I know has said a crash is certain whether or not a “bailout plan” is carried out. Similarly, nobody I know of has certified that a “bailout” plan would fix the problem. It all boils down to credibility. And the administration of George II has none. Paulson in my book, who was head of Goldman Sachs during its massive increase of leverage, has none. And clearly, Bernanke’s opening of the Fed discount window has averted nothing and perhaps aggravated the situation.

Let the mismanaged financials fail and their assets get bought up by more ethical competitors. Let the fools who bought overpriced real estate using idiotic mortgage plans rent. Let the law of logical consequences solve this problem. Sure, some of Hank and Ben’s country club buddies may have to sell the house in the Hamptons, but hey, fair is fair. Bailouts aren’t.

In fact, it is not a slap in the face to people like me – it’s a right cross and a low blow by people who are in positions of trust who cannot be trusted. I worked hard, saved, invested wisely, never bought a new car, paid my bills and lived within my means. How dare you spoiled Wall Street brats tell me I should be responsible for scalawags such as you ? Millions of RESPONSIBLE Americans are NOT losing our homes to foreclosure because we bought homes we could afford. How dare you swindle us into paying for the irresponsible people who wrote loans to people who you KNEW couldn’t pay and the ignorant ones who bought more house than they could afford.

This plan in every aspect is UNAMERICAN. The FAIR way to solve this mess would be to sieze the assets of the offending financial institutions and use the proceeds to protect responsible Americans from the ill effects of the greedy financiers who caused this mess. The FAIR way to ensure it never happens again is to ban the officers and directors of the companies that created this mess from ever working in a financial company again.

But hey, socialists have never really cared what’s fair. Or Capitalists, for that matter. And former capitalists who want to socialize losses after pocketing profits couldn’t care less about the poor shmucks they con into paying for their irresponsible behavior.

I do not believe one word Paulson or Bernanke say. I believe a shakeout is the only thing that will scour the scum out of a largely dysfunctional financial sector that operates without ethics and is more casino gambling than responsible investing.

In 1930, the perps jumped out of windows. In 2008, the perps get a golden parachute. We’ve come a long way, baby, and it isn’t all for the better.

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And this, from Marc Abramsky, a sympathetic Canadian...

Always interesting reading your eletter. Very informative with a nice tidbit of useful information daily.

I am Canadian and I agree strongly with your take on Paulson and the way in which he Fed is acting in bailing out their rich buddies.

I think people have long understood this double standard but never before has it been so blatantly waved in front of the public’s face. I simply can’t fathom how this debacle has been allowed to take place. That the clear minority should be able to exercise this appalling act without so much as a peep from the tax payer and general populace. Even here in Canada (where we are deemed very conservative compared to our southern North American’s) this would cause a minor revolution. Especially in Quebec. These greedy, self-serving, ego centric, morons, should be herded up and thrown in jail. Nothing less. This is a crime scene, no different than Enron or any other scandal where greedy executives have deliberately taken the public’s money.

In fact thieves might be better here, at least they are anonymous unseen faces until they are caught. These jokers are supposed to be leaders. The whole world watches now with complete disgust as liars, cheats, thieves and crooks are rewarded for their crimes.

What a sad place the USA has become. What was once a worldly icon of freedom, opportunity and integrity has become a sham. A place where white collar crime flourishes.

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And finally, – from Michael Shon, a NYS tax payer and Agora Reserve member…

We don’t want to tolerate this, but our methods of recourse are limited and time is short.

May we send copies of these messages (e.g. “A Violation of Public Trust”) to our congress-people ?

They state the problem very well.

Rude: Forward away…then repeat as needed.

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Did You Notice? – Why is Buffett buying Goldman?
By Eric J. Fry

It’s probably nothing at all…but the timing and speed of Warren Buffett’s investment in Goldman Sachs seems a bit curious.

A well-known cynical New York short-seller observes: “This morning, Mr. Buffett referred to the ‘economic Pearl Harbor’ that would occur if the Federal government did nothing. Well…given that Mr. Buffett’s Berkshire Hathaway has written almost $40 BILLION in equity puts…one Pearl Harbor would certainly arrive in Omaha!”

According to Berkshire Hathaway’s June 2008 10-Q, the company’s balance sheet contained $8.8 billion in notional value of Credit Default Obligations – UP 88% from 12/31/07. The balance sheet also contained $39.9 billion in notional of equity index put options, which is up 14% from 12/31/07. In other words, a falling stock market would be very bad news for Berkshire Hathaway.

“I am betting on the Congress doing the right thing for the American public and passing this bill,” Buffett told CNBC. If we may read between the lines, the “right thing” would be anything that boosts the stock market.

“What I found most interesting in the Warren Buffet interview on CNBC was the fairly apparent lack of due diligence he seems to have done with regards to Goldman,” the New York shortseller continued. “Mr. Buffet claimed that he had looked at the Lehman ‘marks’ for certain assets last spring and was somewhat concerned, but ‘he felt very comfortable with how Goldman was marking its assets.’ This statement seemed in conflict with Warren’s later claim that he got a call from Goldman and pulled a deal together in a rapid fashion, simply based on the favorable terms of the investment and his general comfort/faith in Goldman from decades of doing business with them. Warren even went so far as to admit that he did not even tell Charlie Munger about the deal until it was finalized…not exactly the type of rigorous process that one would expect for a $5 billion investment!”

Hmmm…maybe Mr. Buffett hopes his Goldman investment will produce the sort of headlines that will jumpstart the stock market. Stocks don’t have to rally for a long time, just long enough for the puts he wrote to harmlessly expire with no value.

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Rude Endnote: Given the amount of email we receive on a daily basis (for which we are very grateful) we do our best to provide a balanced perspective when presenting reader comments. That said, today’s edition may appear to be slanted heavily against Paulson’s plan. The explanation for this is simple: Of the dozens and dozens of emails we read through last night and this morning, NOT ONE was in favor of the plan.

If you would like to defend Paulson’s bailout, please write to us. We would love to hear a well-reasoned argument for it. (That includes you too, Hanky & Bernanke.)

Until tomorrow…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com