There Goes the Neighborhood

The dance going on in Washington is like an army general strategizing with his advisors about how to attack the enemy. They argue whether attack from the air, to take out small targets with a sharpshooter and consider the dreaded nuclear option. Meanwhile, the troops on the ground grow restless and those on the front-lines continue to suffer. Wall Street is growing restless and the borrowers on the front-lines searching for loans are suffering. The precision shots at Bear Stearns and the Treasury Auction Securities Lending facility have done little to resolve the pain of the borrower with too much debt. The air drops of a stimulus package provided needed supplies and a boost for Wal-Mart (WMT) but proved to only be a band aid on a nasty wound of leverage.

Why is there such a strong opposition to a bailout of nuclear proportions? Bottom line: What is good for one is not good for all and what is good for all is not good for one. This paradox works both ways. An American that is current on their mortgage with savings in the bank has little personal interest in helping their neighbor even if it is at a small cost. Collectively, if all Americans chip in the entire neighborhood is a better place to live. Meanwhile, those needing assistance can't take the pain any longer. Their foolishness is making the neighborhood a dreadfully depressing place. Individual decisions can only go so far but working together can actually be good for all.

How much will this cost? In truth nobody knows. However, there is a place to look. Why not take a look at the value of recent Government purchases? They own 79.9% of Fannie (FNM), Freddie (FRE) and AIG (AIG). Since announcing the bailout, the stocks of each institution have rallied. The benchmark Fannie Mae preferred shares have more than doubled from their lows! The market is indicating possible recovery value to these institutions beyond the funds committed by the US Treasury. In reality, the common shares are almost certainly worthless as they are last in line to get paid.

This gives a whole new meaning to talking your book, the age old method of buying a stock pumping it up and selling it to the fools that listen to you. The government now gets to legislate their way to profits. They were bullied into stakes in three firms and now are attempting to make them more valuable. They don't need to worry about moving the market. They are the market and yes there will be considerable pain suffered by Wall Street for years to come as banks sell assets at distressed levels.

To those who complain about bailing out the fools, count yourself among those fools. Your government is attempting to make an investment that could reap considerable rewards. If it doesn't get approved, it will only get bigger then next time. We could wait until the investment is cheaper but the neighborhood is going to go downhill pretty fast in the meantime.

Disclosure: Long WMT, FNM, FRE, and AIG.