The New Rules of Government Capitalism

To My Fellow Citizens:

Please be advised that effective immediately (i) the economic system heretofore known as "Capitalism" in the United States of America shall now be known as "Government Capitalism", and (ii) the following rules, to the extent not already in effect, shall be implemented immediately.

1. Any person who purchased a home or other real property without sufficient income to afford the mortgage payments and/or without sufficient documentation of his income, and/or who was advised by a mortgage broker or lender that his mortgage could be refinanced in the future because real estate values always go up in value (and without question accepted such assumption as valid because of greed, stupidity or ignorance), shall be entitled to a modification of his mortgage to the extent necessary to ensure that the owner will not only be able to make the modified loan payments based on a reduced principal amount, but also will be entitled to realize all of the profit generated from a future sale of the property without having to repay the amount of the reduction of the mortgage. The cost of the mortgage reduction shall be absorbed by such person's neighbors and other taxpayers, who have continued to pay their mortgages without government assistance and who only purchased properties they could actually afford based on their incomes.

2. All banks and other financial institutions that failed to properly manage their risk and instead sought to increase their profits by use of excessive leverage that was based on a continued increase in the value of real estate, and whose failure would cause "systemic risk", as arbitrarily defined by the Treasury Department and the Federal Reserve (since no written definition thereof exists, or if it does nobody knows how to apply it except arbitrarily), shall be entitled to billions if not trillions of dollars of government bailouts to create the artifice of solvency. The U.S. Government will increase the deficit by up to or exceeding $2 trillion in the next fiscal year (and trillions more in subsequent fiscal years) by borrowing money from the OPEC nations, China and Japan and other countries that currently maintain massive trade surpluses with the U.S.

3. In addition to U.S. Government borrowings, the Federal Reserve will print money to the extent necessary to fund any shortfall from the aforesaid borrowings. In addition, the Federal Reserve shall continue to loan trillions of dollars to the mismanaged financial institutions to guarantee that they make profits in the future at the expense of the American taxpayers and of retirees and other individuals who prudently saved money ("Risk-Averse Investors") on which they were anticipating a reasonable rate of return to fund their ongoing living expenses without having to deplete their principal balances.

4. Any financial institution that was insolvent based on FASB mark-to-market accounting rules in effect until FASB buckled under political pressure and quickly changed them, and which received U.S. Government and Federal Reserve assistance shall remain in existence. Shareholders whose interests were actually worth nothing and were not entitled to retain an ownership stake in such insolvent institutions without infusion of additional capital from them, will nevertheless continue to own their shares in such institution on a diluted basis. Such dilution shall be as little as possible even though private investors in such institutions received or would receive a much higher percentage ownership of in exchange for the same level government assistance in such institutions, whether in the form of bailouts or continuing policies to funnel money to such institutions by the manipulation of interest rates by the Federal Reserve at the expense of, among others, the Risk-Averse Investors.

5. If a federally-chartered bank is sufficiently large so as to possibly cause said systemic risk, the FDIC will not declare the bank insolvent under any circumstances. The U.S. Government via the Treasury Department, in conjunction with the Federal Reserve and and the FDIC will devise a plan to manipulate the bond market and the stock market to benefit those parties who are the least deserving of assistance.

6. In accordance with Rule 5 above and as alluded to elsewhere above, the U.S. will never wipe out shareholders and become the 100% owner of in an insolvent bank because to do so would require the exercise of honest judgment and transparent economic policies and equal treatment amongst all banks.

7. Any secured lender of an automotive company filing for bankruptcy protection such as Chrysler or General Motors, shall not be entitled to a greater return as a result of its secured position as compared to unsecured lenders or trade unions possessing unsecured claims. In fact, such a secured creditor requesting a greater return on account of its secured interest shall be ostracized by the Federal Government and shall be treated as a scapegoat by an over-reaching Executive Branch.

8. Any automotive company filing for bankruptcy due, in part, to rising health care costs, exorbitant union benefits as compared to non-bankrupt automotive companies and excessive corporate taxes, all of which costs impede the ability of U.S. car manufacturers to compete effectively in the global market, shall be entitled to sell all of their viable assets via a government-sponsored sale, the end result of which will ensure either majority control of the reorganized entity by the U.S. Government or the United Auto Workers or some combination of both.

9. Any government-sponsored bankruptcy sale in an automotive bankruptcy case shall not be required to distribute the proceeds thereof or such other value obtained for the bankrupt's assets pursuant to the the various contracts and agreements of the subject automotive company or the priorities established by the Bankruptcy Code and longstanding legal precedent unless the government, in its sole discretion, decides to abide by the law.

10. Any Risk-Averse Investor or responsible banking institution shall be required to bear the cost of the foregoing policies along with the American taxpayers. No Wall Street executive or other highly-compensated individual of those institutions shall be required to disgorge any bonus payments made with respect to highly speculative transactions which ultimately contributed to the insolvency of those institutions absent government bailouts.

11. In addition to the recent change of the FASB mark-to-market accounting rules that required an institution to write-down the value of real estate to the best estimate of its current market value based on actual real estate transactions occurring in the marketplace, all new accounting rules and regulations by FASB shall permit irresponsible banks to reflect real estate assets on their books based upon a fantasy model of the value of such assets in the future and the assumptions underlying such fantasy valuations shall remain within the sole discretion of such financial institutions that were unable to manage their risk properly in the first place.

12. The term "Generally Accepted Accounting Principles" shall be changed to "Sometimes We Feel Like A Nut And Sometimes We Don't Accepted Accounting Principles. The organization called the Financial Accounting Standards Board or FASB, as referred to above, shall hereafter be referred to as the Insipid Financial Board of Standards or "IF-B.S.".

13. This is just a preliminary list of the rules of new Government Capitalism that will go into effect. Additional rules will be adopted and implemented if and when any of either the U.S. Government, Treasury Department, Federal Reserve or FDIC have a wild hair up their respective posterior.

We welcome suggestions for further changes to the previous system of Capitalism in order to conform more closely with the principles and philosophical foundations of Government Capitalism. We look forward to working with you to develop as many regulations as possible so as to undermine the principles of Capitalism that have led to the unprecedented and unequalled economic success of the U.S. since its formation.

Good luck on surviving the new Government Capitalism without filing for bankruptcy, losing your job or the value of a substantial portion of your net worth due to massive inflation in the coming years,

Uncle Sam

Consumer Confidence Perception v. Economic Reality

Funny how economic statistics sometimes mean something and sometimes don't -- even when released on the same day and appearing to be somewhat inconsistent. But apparently perception is more important that reality because the Consumer Confidence Index (a simplistic measure of consumer sentiment and perception) rose to 54.9% in April from 40.8% in May whereas the S&P/Case-Shiller National Home Price Index fell at a record annual pace of 19.1%. Stated simply, home prices continue to decline at the fastest rate in history with no relief in sight. We have perception unsupported by behavior, on the one hand, versus a report detailing actual, not supposed or possible behavior, on the other hand. Stock market reaction: positive perception sounds better than negative reality ... let's rally on karma.

Aside from slumping real estate values, consumer credit continues to shrink and unemployment is expected to crest somewhere over 10% but not until next year. Sounds like eroding buying power to me, but I tend to prefer economic indicators based on facts, not unrealized fantasy. So how can consumer confidence rise so dramatically when home prices are falling so dramatically? A very good question but I doubt they asked it to the 5,000 households comprising the Consumer Confidence Index.

But let's try to look at this dispassionately. Where is consumer buying power going to come from as credit card debt limits contract and new credit card debt will likely carry higher interest rates at least once the just passed Credit Card Bill of Rights goes into effect. Moreover, home equity lines are no longer available at anywhere near the dollar level (we're talking trillions here) before the current financial crisis as 30% of the homes in this country already are underwater on their mortgages. So, who is going to fund the recovery when the statistical recession ends. The increasing number of unemployed and those who fear for loss of their jobs as well? Or others without access to credit?

Have you seen the empty stores lining the malls, at least in the malls that are not yet shuttered? Apparently, that doesn't matter to the bulls either because unemployment and lost real estate values are already factored into the the stock market. The bulls say, "it can't get much worse." Does that Orwellian thinking equate to additional dollars at the cash register or make you feel "confident"?

The market, say the perma-bulls explicitly or by implicaton, is discounting all of the actual negative news because there are people saying that they are more confident about the economy. I don't buy that Twitteresque status report. Rather, I think this rally is nothing more that a "ponzi" scheme of sorts. The Wall Street gang keeps telling everyone that the sky isn't falling so the retail investor, directly or indirectly through increased inflows to mutual funds, will buy stock even though there is very little, if any, real reason to do so. Finally, when the over $1 trillion of bonds supported by cratering real estate craters, the stock market will follow suit.

Have we learned nothing in the last year? Inflated real estate values, coupled with egregious underwriting standards and ill-conceived governmental policy, led to the real estate bubble. Now, the same robber-barons that levered us into this mess are trying to suck everybody back into the game. And the Obama Administration and the Federal Reserve are all adding to this frenzy. The FED is printing money with reckless abandon and buying back the Treasury Bonds it issues to finance the debt. In other words, the FED is buying back the debt it issued with phony money. The debt that the Chinese and the OPEC countries no longer want to purchase without assurances that their investment won't be flushed down the toilet with all the toilet paper being manufactured by the FED.

We are issuing debt in this country as if we don't have to pay it back or with the assumption that people will buy it and agree to be paid back with dollars that are worth less in the future. We are headed for inflation armageddon unless we can somehow snooker foreign investors back to the casino where they lose no matter how they play. What do I mean by that? If they continue to finance the U.S. debt unabated, they will surely lose value on their investment as the dollar is devalued due to gargantuan future U.S. debt obligations. If they stop buying U.S. debt, the FED still continues to crank out bogus money now (as opposed to later to pay back debt in the former scenario), thereby destroying the value of current debtholders' investments in U.S. bonds and currency.

But everything is rip-roaringly fine according to the same characters who didn't think they could lose with 30 or 40 to 1 leverage. Yet, they did. How's that consumer confidence going for you now?

Ken Lewis Should Be Fired as CEO of Bank of America

Ken Lewis should be fired as CEO of Bank of America (BAC). At best, he is a distraction. At a minimum, he is no longer a trusted leader. At worst, he is an incompetent, self-aggrandizing buffoon for nearly singlehandedly bankrupting one of the most venerable companies in American history due to his unbounded arrogance divorced from even the most basic risk-management assessment.

For whatever excuses and explanations he can now muster, the fact is that BAC, at Lewis' urging, should never have purchased Merrill Lynch for the price it offered (after only two days of due diligence!) and Lewis relented to government pressure to close the deal even after BAC learned of almost $16 billion of losses that were not factored into the closing price and which should have nixed the deal. Instead, not only did Lewis and the BAC Board bow to pressure and close the deal but they didn't even present the new findings of such losses to shareholders prior to the vote -- information that clearly would have had a material effect on shareholder consent to the deal at the original price. In a nutshell, the entire corporate governance of BAC, designed to protect shareholder value, was trampled for as yet inexplicable reasons, but certainly having nothing to do with what was in the best interest of shareholders.

Reports have surfaced that Lewis was effectively coerced to do the deal lest he be possibly ousted by the Government from his role as either Chairman of the Board of BAC and/or its CEO. But, even if Lewis was put in that awkward position, the right thing to do -- the lawful and obligatory thing to do -- would have been to honor his fiduciary duty to shareholders, disclose the additional Merrill losses to them and let the chips fall where they may concerning his continuing personal role. That the Board of BAC aided and abetted Lewis' action reflects poorly on its members and its ability to exercise independent judgment in the best interest of shareholders.

But now that the facts are out, in part, who is taking responsibility? Has Lewis apologized or resigned? Has any Board member convincingly explained how his actions in supporting Lewis and the Merrill transaction served shareholders' interest or why shareholders were kept in the dark about material information concerning that transaction? Regrettably, the answer is no. Hence, BAC is now in the position of having to defend the indefensible behavior of its leaders thereby diverting attention away from righting its tattered image and business.

The legality of the actions of Lewis and the Board will undoubtedly play out in courtrooms over the next few years. Regardless of the legal niceties, it is unquestionable that Lewis can no longer be trusted by shareholders to serve their interest. Moreover, the Board can no longer be trusted to act as a check on management actions or to ensure that such actions are in the best interest of shareholders.

While the Board was just re-elected to another term, that vote is tainted because the truth still hasn't come out as to the Board's role in reviewing the Merrill transaction and the related non-disclosure of material losses. When it does, a shareholder vote of confidence or no confidence would be more meaningful and valid. Having said that, the shareholders still sought fit to oust Lewis from his role as Chairman, an act virtually unthinkable less than a year ago.

While some might argue that the same result would have befallen BAC even if the Chairman and CEO roles had been separate, the era of cavalierness of board of director conduct seems nearing an end. A board is not supposed to rubber-stamp the conduct of management. And it should possess more than a healthy degree of skepticism, particularly when the very existence of the company hangs in balance by any transaction sought to be approved by management. For the fact is the BAC would have failed but for unprecedented action by the Federal Reserve and the U.S. Treasury. Consequently, neither Lewis nor the Board should be congratulated for the survival BAC. Instead, they should all be cast aside as unworthy and incompetent to serve in their respective positions starting with the most culpable, Ken Lewis.