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Jeff Saut: It's a Buyout, Not a Bailout


Necessary - but it won't prevent recession.

"Never eat at a restaurant named Mom's.
Never play cards with a man named Doc.
Never get involved with a woman that has more troubles than you.

And never, never ever, believe politicians have a clue as to the entrails of a problem."
Anonymous, and Jeffrey Saut

I was sitting in the studio last week, waiting for the producer of CNBC's "The Closing Bell" to segue to me, when I heard the congressman from Pennsylvania say to Hank Paulson, "You talk about this $700 billion bailout package having to be passed because it is far superior to the alternative. So explain to us, Secretary Paulson, what is the unspeakable alternative?"

While the esteemed Secretary's response was much more subdued than what flashed through my subconscious, here's where my brain went: Recall the 1981 movie Rollover, starring Jane Fonda and Kris Kristofferson, in which Jane played Lee Winters, the widow of the Chairman and primary stockholder of Winterchem Enterprises. Mrs. Winters is attempting to finance the purchase of a processing plant in Spain - and find out why her husband was murdered.

She finds that the late Mr. Winters discovered some damning information about a secret slush fund involving asset transfers. Noted financier Hubbell Smith (Kris Kristofferson) takes over as president of Boro National Bank in order to determine the bank's real financial status.

Smith discovers that money belonging to the Arabs is being moved into the slush fund and converted into gold as a safe haven against potential losses if the dollar collapsed. The Arabs know that if anyone finds out, their assets will vanish in a public panic, and American currency will become worthless. Word of the secret account, and the asset transfers, leaks out, and a monetary crisis --and worldwide riot -- does occur.

In the final scene, gold tracks-out over $2,000 per ounce and lines of depositors are left lining the streets of New York attempting to get their money out of various financial institutions.

Overstated? You bet - but for the past 2 years, one of my firm's biggest worries has centered on increased government intervention and regulation. Our elected officials have repeatedly "dropped the ball."

The current crisis finds its roots in the Community Reinvestment Act of 1977 (CRA). The CRA was liberalized under the Clinton administration, whereby such "silly" questions as, "Does your income allow you to pay this proposed mortgage?" were considered discriminatory and were therefore eliminated.

In subsequent years, lending standards became laxer, interest rates fell, housing prices rose, mortgages grew "fancier," and our elected officials promoted a sort of financial carpe diem based on the idea that everyone should own a house - even if they couldn't afford it.
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