Wednesday, October 29, 2008

Blown Bailout Bucks

Congress has begun exercising its oversight of the financial bailout. Our leaders are becoming alarmed that the almost $350B spent so far is supporting M&A transactions and executive bonuses instead of asset writedowns, so promised by Paulson & Co.:

In a letter today, House Speaker Nancy Pelosi of California and Senate Majority Leader Harry Reid of Nevada urged Paulson to put tougher restrictions on severance pay, or so-called ``golden- parachute'' payments, for executives at participating banks.

In addition to executive pay, the Treasury also came under fire from lawmakers for letting banks use their capital injections to make acquisitions, like PNC Financial Services Group Inc.'s Oct. 24 takeover of National City Corp. in Cleveland after receiving $7.7 billion from the government.

If they didn't know already, our elected leaders are getting a lesson in how Wall Street operates. Greed rules, to put it simply. Brokerages hoodwink clients and investors by overpromising and underdelivering. When caught, they spew weasel-words to make clients think that they asked to be deceived all along. This is why I stated my opposition to the bailout weeks ago. I knew exactly what would happen.

I also think I know what will happen "going forward." (Don't you hate that term? It's gained currency in business reporting in recent years.) Congress will posture in an attempt to assuage popular anger over the misuse of bailout money but will quietly approve as even more money is spent. Goldman Sachs alumni are in charge of all aspects of this bailout, and what Goldman wants, Goldman gets. Brokerage executives will collect their multibillion-dollar bonuses on schedule as a reward for running their overleveraged business models into the ground. The stock market will decline further as Great Depression 2.0 gathers steam, stoking popular anger that the next administration will use to launch a massive fiscal stimulus (infrastructure spending).

Most importantly, the same banks and brokerages receiving bailout money will line up to finance this infrastructure spending with federally-guaranteed credit facilities to the firms involved (construction, engineering, energy, etc.).

Lesson for investors: choose your sector rotation strategy accordingly. Just follow the money.