(New) Deal, or No Deal?

NO DEAL!!!

I am hopping mad, and scared as heck. I am ready to cash out my 401(k), take the IRS hit, convert it to a relatively safe currency, like ... gold bullion, move to Africa where I can live out the rest of my life on my current kitty, and do mission work.

This year thus far, we've bailed out Bear Stearns ($29B), Fannie/Freddie ($200-300B), and now AIG ($85B). Plus, we've shored up the FHA's lending powers to the tune of some $300B, and now we're going to give interest-free loans to Detroit automakers to re-tool their plants to build the fuel-efficient cars they should have been building in the first place, and for which they'll take their subsidy, build the cars, and charge you and me sticker-plus for them when gas hits $4/gallon again.

And the Fed - which has opened its coffers to anybody and everybody like a Bunny Ranch hooker at Christmas - is now accepting stocks and junk bonds as collateral from banks feeding at the TAF trough. What happens if they can't pay back the loans? The Fed owns stocks and junk bonds. What happens when the Fed takes losses on that crap?

You guessed it - we cover. The taxpayer.

Yesterday, the Fed - for the first time ever - basically had to borrow money. Do you get that? The Federal Reserve is tapped out. Helicopter Ben had to ask his pal Hank "Bungalow Bill" Paulson to hold not one, but two (thus far) special Treasury auctions, just to raise money for the Fed. (Too bad they can't get Barbra Streisand to do a concert.)

Do you know how serious this is? The Fed is borrowing money to bail out insurance companies and brokerage firms.

The projected 2009 fiscal year deficit is already $482B, and that doesn't include the Fan/Fred or AIG bailouts, nor the automakers' corporate welfare initiative.

Now, Chuck Schumer wants the equivalent of the New Deal-era Reconstruction Finance Company, and his cross-state pal Hillary wants the equivalent of the New Deal's Home Owners' Loan Corporation.

Folks, the New Deal was a bad deal. It exacerbated the Great Depression. The only thing that brought our economy from the brink of permanent disaster was World War II. Do we really want policy that will require another world war to revive us from?

Worse, some of the New Deal's programs were the earliest seeds of the current housing crisis, exacerbated along the way by other legislation that paved the way for rampant speculation in lending and securitization, including the Depository Institution Deregulation and Monetary Control Act of 1980 and the Tax Reform Act of 1986 - both generally okay pieces of legislation that contained components which have proven disastrous.

Others have called for something akin to the Resolution Trust Corporation "solution." I lived through that "solution," having worked for a solvent S&L that was taken over by the RTC as a "pre-emptive strike" (can you say "takings clause"?), then run into the ground, eroding nearly $400 million of positive net worth, and ultimately costing taxpayers millions.

I worked with these RTC idiots. The guy placed in charge of the thrift sat in a meeting for an hour, talking about defeasing some zero-coupon bonds we'd issued, to which we kept referring as "the zeroes." At that point, the new head honcho asked, "So what's the coupon on these bonds?" Talk about zeroes.

The RTC ultimately prolonged and exacerbated the S&L crisis - much as the New Deal did the Great Depression - and ultimately jacked up the cost to taxpayers tremendously, adding to the then-record deficits of the early 1990s, which more than doubled from pre-RTC levels.

Well, people, if we add the current and planned bailouts to the projected '09 deficit, we're pushing three-quarters of a trillion dollars. Double that, and, guess what?

You'd better know more Chinese than "moo goo gai pan."

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A few other tidbits:

1. Nobody knows what the exposure to Fannie/Freddie credit default swaps (CDS) is. The takeover was a credit event, meaning the swaps now have to be unwound. Whoever's on the wrong side of the trade loses. We don't know who that is. But it's likely the same big banks and investment firms that are already posting record losses. The result will be more failures.

2. Ditto AIG, but the CDS exposure there is even greater. And both are global.

3. We don't know yet the full extent of exposure of other financials to Lehman bonds. But we know that at Wells Fargo, it's big. And others will report additional exposure. And they'll take more write-downs.

4. Alt-A mortgages are the next shoe to drop, and the exposures are huge. Fan/Fred cover about half the Alt-A loans in the US, so those losses will accrue to the taxpayer. Alt-A delinquencies are running close to subprime delinquencies. As the foreclosures mount, home prices will fall further.

5. Traditional mom-and-pop financial institutions are starting to buckle under the strain of defaults on other types of credit - cards, home equity lines and car loans. Mergers are increasing, and failures will too.

6. Fewer remaining institutions mean fewer lenders. Fewer lenders mean fewer loans. Fewer loans mean fewer refinancing opportunities for subprime, option ARM, and Alt-A borrowers facing resets. Which means more defaults. Which means lower home prices. Which means more defaults. Which means lower home prices. Which means more ...

7. More defaults means more credit card, HELOC and auto loan defaults. Which means more bank failures. Which means fewer lenders. Which means - ah, just re-read #6, then loop it and #7 over again and again until you throw up on your keyboard.

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I leave you with this sign of the times. A friend of mine who's a private wealth manager called me a couple weeks ago to ask if I thought Fannie preferred stock was a decent gamble. Seems he had a few clients thinking about taking a flier with some "play money."

I told him, as long as the play money clearly says "Monopoly" on it, they'd be fine. I explained that everyone fully expects the taxpayer to take it in the shorts on this deal, and the common shareholders will bear the first loss, with the preferred holders close behind.

If John Q. Public takes a hickey, that means that the common and preferred shareholders both got wiped out. It's like Hurricane Katrina hitting Bay St. Louis. The common holders had the beachfront homes, and the preferred holders were one lot back. The taxpayer was five miles inland.

So the taxpayer will take on water, and have to muck out and rebuild. The common and preferred holders got swamped, and are left with firewood.

(Self-congratulatory note: today I read that the market for preferred stock issued by financials - once a key funding source for them - has dried up in the Fannie/Freddie aftermath. I give good advice, huh? Oh, by the way, given that yet another funding source for banks has petered out, and given how bad they need funding, add this point to my list of armageddon indicators above.)

Back to the story. My friend (who, by the way, is an astute money manager and didn't come up with the idea for his clients, they pitched it to him, he was skeptical and called me to affirm what he already suspected) then gave me this sign of the times:

"Some of our clients are basically looking at four or five bad ideas to throw money at and see if one of them pans out."

This is what we've come to in the investment world: nothing but bad ideas to throw money at, hoping one of them pays off.

Hey, guys, you want to throw some money at a bad idea? I'm brimming with them. Some worse than others. Actually, with all the infrastructure investment that the Middle East and guys like Chris Gardner are throwing at resource-rich Africa, that's not a bad play. And I'm wanting to head over there and teach orphan kids, so why not fund me?

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Okay, so I'm not quite ready to leave you yet. I made a funny, I have to share.

After the news came out that KKR and some other buyout firms had shunned Lehman before it collapsed, I made the following observation:

There's no money left for those firms to play with - they can't borrow any more to fund their acquisitions, a key reason why M&A activity has ground to a ghost-town-like halt (which will crimp Wall Street revenues further - add another item to the hit list above). So there's no leverage left in the leveraged buy out game.

And if you take the "L" out of "LBO," you're left with nothing but "BO."