Free market is giving the government boot!! Free market needs to be rescued.  Anybody who saw senate debate should have felt jittery about the ignorance of senators and fraudsters who are bilking American public. That is why stock market crashed yesterday. Today it is up not because of the hope of bailout as mainstream media would like to report but becauce of boot out Wells Fargo is giving to Bank raiders sitting in Washington!!!

There are two types of banks. Commercial ( Main street ) and Investment ( Wall Street )banks. Commercial banks borrow money from you and me( savings or checking accounts or CDS) and lend money to you and me( loans) and make a profit in doing so. There are safeguards that prevent from excessive lending. The funds that bank lends out is less than the total funds it has borrowed and also bank has to maintain certain free cash to service all those people who want to pull out money. The bank runs do not happen because of this free cash maintained

Investment bank on the other hand does not accept cash from you and me directly ( There is a law enacted in the after math of the great depression that prohibits them from dabbling in commercial  banking ) Investment banking is arcane. These banks hold the securities and trade in them to get a return. Wall street firms are investment banks.

Initially Investment banks dabbled in fortunes of stock indices and things were going fine. However the greed set in because of the big salaries promised to top honchoes of the investment bank. They decided to play a ponzi scheme.

Main street at that time was busy with another price gauging. They artificially drove people to go for sub prime mortgages by gambling on the theory that real estate prices would go up forever. They did not and foreclosure tanked the sub prime mortgages. Just as the real estate market showed signs of cooling Main street banks panicked and ran to Wall Street Banks for solutions. Wall street banks introduced the main street banks to the ponzi scheme. Wall street banks will buy the loans from Main street banks and then securitize them and pass them on to their own clients as highly secure investment bonds.  Once the mortgage was securitized the wall street banks started buying and selling these as part of their portfolio.  However what followed greed was fear. The wall street banks feared that underlying mortgages may go for foreclosures and bond would be worthless. The wall street then invented another vehicle called Credit Default Swap or CDS. In plain words it is a bet that mortgages wont go into foreclosure and a promise to pay the mortgage amount in the event of foreclosure. The wall street banks transferred the credit default risk among themselves using this paper. Insurance companies too got sucked in. People started writing insurance on mortages to start with. Now the greed revisited these firms. They found that no one was watching them after slicing and dicing mortgages into various bonds the traceability between bonds and underlying mortgages was lost. Now effectively wall street could cook up bonds at their whims and then seek insurance for default on those bonds. The insurers only bothered about the insurance premium and did not maintain any claim reserve for servicing bonds. The relaxed atitude of the insurance companies is understandable. They already insure the house against casualities and they felt foreclosure is much less riskier event. Further the bonds could not be properly evaluated because of the slicing and dicing done by wall street crooks. These bonds were pushed into what are known as level 3 assets. These assets did not show up on the balance sheets. No one was watching them and if these assets went bust no investor would ever come to know, No SEC to report, No analyst to please!!!. The party continued.

Final nail on the coffin was writing CDS with no insurable interest or no asset to back the claims!!!. The ponzi scheme played so well that very soon Wall Street firms were trading in 55 trillion dollar worth of toxic paper called CDS based on house mortages. The total value of the mortages at foreclosure risk may only be 1 percent of that figure. The toxic paper ballooned to this high value because Wall street firms had stopped to look for insurable interest or stopped to provide for claim reserves.

Market started punishing these investment banker crooks. The stock value of these firms got hammered . Very soon shorting started on these firms. Lehman dropped to $10 from $90. Overnight the investment banks found that it was difficult to borrow because everyone stopped trusting these crooks. Earlier Lehman could have pledged some of its equity as collateral but not anymore. That made life difficult for these firms and they wrote more CDS with no asset backing and pocketed the fees to bankroll themselves for another quarter. Market screwed these wall stret firms and they again got shorted.

Wall Street ran to the Mama and told shorting is causing them problem . Government banned shorting… but share prices of these firms still went down.. Investment bankers should have listened to the market and bolted out in their undergarments. But they had no one to fear. The person who invented the ponzi scheme was their buddy in the Government sitting with big moolah of our tax money.

Now they have run to the Government asking for that pot of Money saying that if that money is not given the whole system will come down.

Bull shit.. There are much better ways to avert this crisis.

1) Cancel all the CDS which could not backed with assets- 54 trillion of 55 trillion debt will evaporate in no time as many economists have pointed out

2) In remaining the CDS ask the firms to demonstrate insurable interest in the mortgages they hold.  Since they are telling now that slicing and dicing makes it very difficult to supervise– I am sure they won’t be able to show any insurable interest and all the rest of the claims will go away

Now come back to Main street banks..These do not bail out any way because they always can press the amount from loan holders. Worst of Worst some assets will become non performing and get purged. But it is cost of doing business.

Now come to home owners. Home owners who bought two homes only to speculate do not bail out. Homeowners who have already sent keys to banks do not bail out . Only people who need bail out are poor people living in a home which they could not have afforded in the first place.

Federal government can take over those loans from the banks through a vehicle similar to one done in response to S&L crisis. The cost will be minimal.

Bailout as envisaged now does not take any of this logic. It simply throws money at Fat cats who should have been in Jail!!!

Call your congressman now and educate him on the sham Wall street is playing on America.

Jail no bail out. Tell him you will fire him if he votes again for the bailout!!

Wall street bailout is most absurd plan to throw money at gamblers who should have been jailed at first place. There is a better plan. We have to do three things

1) Create a mortgage corporation that can takeover failing mortgages and ensure that loans are not defaulted. This will in turn protect the securities backed by mortgages.

2) Ask the wall street firms that wrote CDS to show the assets to back up amounts they guaranteed in the event of mortgage defaults.  As per contract law one can not enter into agreements that can not be implemented. If a firm has written CDS with no apparent assets to support cancel such CDS and allow law suits on such firms and CEOs. Then see how the claim of $ 55 trillion worth debt at risk evaporate in thin air. Walll street has concocted that figure with no apparent asset base. Only when they are forced to show assets they will get exposed.

3) Once the Ponzi scheme of Wall Street is exposed, jail the CEOs of those firms big time. Then automatically wall street will fire on all cylinders.

Should I bail them out!!! Or should I jail them?

You tell me