Fundamental Problem

With all of the AIG drama about bonus payments taking the brunt of attention this week. One thing that no one is talking about is the revelation that AIG used Treasury money to shore up Goldman Sachs, Merrill Lynch, and other financial institutions.

I agree these bonuses are distasteful, but Congress should look at how and why tens of billions of dollars in government funds intended to bail out AIG actually went to shore up Goldman Sachs, Merrill Lynch, and other banks who were AIG's counter parties in complex derivatives transactions. These payments were far in excess of the actual collateral that needed to be posted

Essentially, the financials institutions that were paid by AIG weren't just protected against AIG's almost certain collapse, but they were totally protected against any losses what so ever. This doesn't really surprise me as AIG CEO Edward Liddy is a former high ranking official at Goldman Sachs. He was put in that position by former Goldman CEO and former Treasury Secretary Hank Paulson to specifically protect Goldman's interests.

Goldman and the others were compensated in full for their exposure, despite the risk they had taken on in their investments and those derivatives deals, despite the fact that the investments had plunged in value. These payments have cost the treasury and the tax payer an obscene amount of money. But whats at the heart of the problem is the suggestion and mentality on the part of both the banks and the government that big financial institutions have to be not just protected in a crisis, but have to be made whole, without any losses, at any cost to normal Americans.

How does this work when the inevitability of buying toxic assets from the banks is almost certain? The banks want mark to market suspended, so they can put a phony valuations on them, then saddle the Taxpayer with this crap for decades.

The Fundamental Problem facing the country.

The way I see it, The Treasury shielded the banks not only from the risk they bore from AIG's problems, but from the risk inherent in the market. They made bad investments but, thanks to the government, and the taxpayers, they aren't suffering. How does this work? This is the sweetest deal I have ever seen, to bad others who have suffered from the market's declines, such as foreclosed homeowners, and common shareholders in just about any company you can imagine aren't so lucky to be graced with this type of privilege.

Like I said, this sets a bad precedent when the government starts buying these bad assets from the banks. There is close to $600 Billion in Level 3 Assets on bank balance sheets, these are the crappiest of securities that cant be priced at all. The banks are very used to just getting there own way, will demand that the government pay almost full price for these. Why would they demand anything less? The attitude that Bank CEO's have is very simple- Losses! We cant have those! When the tax payer is willing to hold a bigger and bigger bag, the Tax Payer just needs to bend over with Geithner administrating the steal rod.

How many Americans have had enough? Is this the type of change that was promised to us when Obama was elected? Geithner needs to be fired as soon as possible.

Random Thoughts-

Watch the move in Gold....Looks like 1000 is going to happen. Maybe a stealth move to 1500 by year end. Not a good omen.

I see crude oil rallying to at least $55-$60. This is entirely a weak dollar play as Crude Oil is denominated in US Dollars.

I would be a buyer of the Euro on any weakness. I know I was positive on the US Dollar, but what essentially the FED has stated is, we will continue to print money. Cant keep on devaluing your currency with no regards to monetary policy.

The last few days, the inflation trade is in full effect. Treasuries rallied on the news that the Fed will keep a Bid in for the time being, but sooner or later the Treasury Bond Market will have to correct, as yields are too low compared to where the dollar is trading.

The banks collapsed about 8% today. The sellers are back! Repeat! The Sellers are back! The rally is over.

Did you notice the NASDAQ has outperformed the market as a whole? Today the drop in the COMP was 3x less then the loss in the SPX? This is going to continue.

Oracle posted another strong quarter, see above NASDAQ comment. There is more earnings leverage in the 4 letter names.

IBM is looking to buy Sun Microsystems? Why? SunW is like Yahoo, its a dead company. The Java people should just take the offer and call it a day.

Apple is above 100 bucks. If it stays above that level, it bodes well for tech.

Nice move in the Energy Sector on the back of Crude Oil. I still think that there is more gains in store in this area. Remember...Rotation...Rotation....Rotation.