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Wednesday, September 17, 2008

Dumb Luck Investing Update

These are some of the most exciting, interesting, and educational economic times during which we could ever expect to live. I hope that every schoolteacher dwells with every student on the events we have seen thus far, and the events that have yet to play out.

The finest minds in our country, perhaps the finest minds in the world, run the financial industry in the USA. Armed with the best educations money can buy, these experts led each of the now failing corporate giants down the alleyway to ruin. All of these experts have disgraced their credentials; they have all failed. My granddaughter’s first grade class would never have made the fundamental mistakes that spawned the debacle to which we have been witness to, or unwilling participants in. What we have before us is a total failure of fiscal discipline and responsibility. This is greed and stupidity running amok. Our “house of cards economy” has not only collapsed, the cards are burning under our feet.

I don’t want to see these companies trying to survive by furloughing people from the ground up. I want to see well-publicized wholesale firings from the top down! Begin with the CEOs and fire the living hell out of every executive that sowed the seeds of this disaster. GUILTY GUILTY GUILTY! Where are the newspaper headlines of the executive resignations? When will the subpoenas start arriving? Let’s see some serious jail time here! How can the experts say that they could not foresee all of this? No expert can use the defense that he is nothing more than a “village idiot.” They were in positions of great power, they knew the risks, and they pocketed their rewards long before the sludge hit the fan. It is high time for some very public punitive actions.

This is much more than just a housing industry meltdown. The defaults from the bad mortgage loans were only the start. Normal corporate investment diversity, loan insurance, and cash reserves should have been enough to weather that meltdown. However, bad mortgage debt was often bundled and sold with other debt. Hey geniuses, that is a bad combination! When a number of people cannot afford their mortgages, an even greater number of people will also default on their credit card debt and on everything else! AIG insured much of this bad debt and they now are dancing buck naked in public. Nobody is sure how much exotic debt is ready to fail. What else went wrong? The same firms that lost their asses with bad mortgage debts tried to hedge their losses by buying commodities. When the oil futures recently tanked, these corporate giants sank even further into the slime. Did they make any more dumb moves? My guess is that the financial giants all held stock in each other's corporations, some kind of bizarre circle-jerk investment strategy. Owning hundreds of thousands of shares in a competing company that goes from $50 per share to $2 per share is more than a crisis when everything else you own has failed, including the price of your corporation’s stock. Were there any other financial crunches? Sure, when credit became tight, leveraged corporations suffered margin calls and had to unload securities and other assets at fire sale prices.

This purging of our financial industry will be a long, difficult road, but look for a much better system if rebuilt correctly. Taxpayers, as always, will pay for most of the repairs. Trillions, baby! Swing with that thought in your head, trillions of your dollars will fix all of this, and you won’t even get a kiss.

James A. Zachary Jr.

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