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  • We are witnessing financial history in the making — right here, right now.
  • A newly proposed ‘blueprint’ represents the most sweeping change since the Great Depression.
  • For the Fed, it all goes back to a quiet meeting on Jekyll Island… where the whole thing first began.

The Fourth Branch of Power: How the Fed Is Set to Become More Powerful Than the White House

Ladies and gentlemen, we are witnessing financial history in the making. This is not exaggeration. No, this is what history feels like. Right here. Right now. And, let me tell you, it is breathtaking to behold.

Remember the Bear Stearns rescue as “the day the dream of global free-market capitalism died.”

Wall Street historian Charles Geisst feels it, too: “We have to realize that central banking now takes into its orbit everything in the financial system in one way or another,” Geisst says. “Whether we like it or not, [the Fed has] recreated the financial universe.”

Four Branches of Government

Like me, you probably studied high school civics. And if your textbooks were like mine, they taught that there are three branches of American government: the executive, the judicial, and the legislative.

As it turns out, those textbooks were wrong.

There are actually four branches of government. One of them has simply been wreathed in shadows all this time. And now, from the smoking wreckage of the “shadow banking system,” the fourth branch is set to overtake the other three.

To get a handle on the topic, let’s start with money… a subject Mayer Rothschild, founder of the immortal Rothschild empire, knew a thing or two about.

“Give me control of a nation’s money and I care not who makes her laws,” Rothschild said.

Rothschild knew the power of the golden rule: “He who has the gold makes the rules.” Except today, in an age of digital currency, that saying might better serve as, “He who runs the printing press makes the rules.”

Of course, a printing press isn’t much good if you can’t get people to accept what it prints. If what you print happens to be the world’s reserve currency, however — and the global financial system is bloated with your scrip — then truly awesome power can be yours.

There is just that little matter of taking the reins firmly in hand. Getting around the bother and headache of elections, putting the other branches of government in their place, that sort of thing. Such endeavors take some doing, and more than a little back-room planning.

It helps to have a long-term time horizon, too. In this case, nearly a hundred years long at that.

Paulson’s New Financial Order

Okay, okay, you say. What’s all this “financial history in the making” stuff? Why the breathless rhetoric?

Well you see, over the weekend — while America took a breather from the markets — Treasury Secretary Hank Paulson revealed his sweeping new “blueprint” for financial regulation. (That blueprint is set to be officially released today, March 31.)

In a word, this news is big. Very big.

In fact, Paulson’s blueprint proposes the biggest Wall Street shake-up in 80 years. It calls for the broadest, most sweeping changes to financial legislation since the Great Depression…. since FDR and the New Deal… since the 1929 market crash.

As Paulson told the WSJ, dealing with the current disaster offers an opportunity to “start over” in terms of regulation. The blueprint is what he calls an “optimal financial regulatory model,” and “an aspirational model which can only be achieved after many years.”

Here Comes Supercop

One big Paulson suggestion is to merge the SEC (Securities and Exchange Commission) with the CFTC (Commodity Futures Trading Commission).

That thought in itself should be enough to make traders spit coffee all over their screens. (And newsletter publishers, too.)

Another suggestion is to create something called the “Mortgage Origination Commission.” Who knows just what that outfit is supposed to do?

But the proposal we’re concerned with today (as you might have guessed) is the one that deals with the Federal Reserve. Paulson wants to turn the Fed into a kind of “supercop.” The Wall Street Journal offers more detail:

Over the long term, Mr. Paulson advocates a new, and instantly controversial, role for the Federal Reserve. Mr. Paulson sees the central bank eventually taking on the role of a “market stability” sheriff. This would move the Fed away from direct bank supervision, something the central bank has always argued is vitally important. A new entity would take that over. Instead, the Fed would use a broad authority to monitor any company or any business line that could destabilize financial markets.

Paulson adds, “[The Fed] would have broad powers so that they could go anywhere in the system they needed to go.”

Hmm. Broad powers, eh? Anywhere in the system they needed to go? Presumably to do whatever they needed to do upon arrival? Thirty billion here, 200 billion there and so on?

That sounds powerful indeed. It’s a good thing the Fed is a highly responsible entity, instead of some quasi-private institution run by unelected officials with plenty of back-room connections and no true accountability to the public. Oh, wait.

So far, Paulson’s proposals are just that — mere proposals. There is no telling how much of the blueprint will be accepted, or what ultimate form it will take. But, from a bigger-picture perspective, the details don’t really matter. The key thing is, change is coming. Major change.

Opportunity Knocks

You can expect lots of debate in the coming days. There will be plenty of back and forth over the merits of the Paulson blueprint; over the challenges and risks of expanding the Fed’s power; over the ins and outs of how the changes might take place and what they might mean.

In the midst of all this, it will be good to remember at least three things: First, that the surface level aspects of the debate won’t matter all that much; second, that most pundits won’t really know what they’re talking about; and third, that the really big wheels are already in motion. They’ve been in motion for a long, long time.

Confusion creates opportunity for those who know how to take advantage. The money men — i.e., the Federal Reserve and those insiders connected to it — will exploit that confusion to its fullest.

Take the current crop of presidential candidates, for example. None of them — Republican, Democrat or Independent — has the foggiest notion of how the Federal Reserve works on a nuts-and-bolts level. Nor does the current White House occupant.

When it comes to regulating and managing the vast and unwieldy “shadow banking system,” as bond fund manager Bill Gross calls it, the nation’s commander in chief is clueless. His successor will be equally clueless, in terms of not knowing where the important levers are, not knowing how to throw them, and not knowing who to trust.

Thus, barring some divine miracle in which Ron Paul gets elected, the money men will soon gain total control of America’s financial system… and thus the dollar-driven global financial system by default.

The next president will talk tough, craft authoritative sound bites for the masses, and then, in regard to the nation’s balance sheet, simply do what he (or she) is told. Congress and the Supreme Court will be equally impotent here. After all, what do they know of structured finance? What role could they possibly play in saving the system from itself?

In a time of crisis and turmoil, the money men will argue, this sweeping arrangement will prove necessary. As Paulson has said, implementing the new model in full will take “many years.” That kind of talk is akin to giving a plumber a blank check and letting him disappear into your basement. Who knows what’s really going on down there? Who could have any idea?

The true dirty work will continue to take place where it always has –behind closed doors. None the less, the sheer boldness of this financial power grab is quite the spectacle. It has all the grit and guts of a train robbery in broad daylight.

And for all the hemming and hawing about crisis management and the need for better financial regulation, what’s truly happening here is plain as day once the blinders are removed. As George Orwell said, “Sometimes the first duty of intelligent men is the restatement of the obvious.”

Jekyll Island Redux

And why would the Fed’s new bid for dominance come from the Treasury, by the way, instead of from within the Fed itself? Partly for the sake of appearances, no doubt, but also because of who happens to be Treasury Secretary.

“Hammerin’ Hank,” as the Treasury Secretary is sometimes known, is an alumnus of the most powerful investment bank on Wall Street. Mr. Paulson was CEO of Goldman Sachs when the White House tapped him for the job in 2006. (The appointment also enabled Paulson to cash out $700 million worth of Goldman Sachs stock tax deferred — quite a neat trick.)

How fitting, then, for a new era of Fed power to be ushered in by a connected investment banker. After all, that’s pretty much how it happened the first time around.

The Federal Reserve, as market historians will recall, was born under cover of darkness. The institution’s origins can be traced to the Jekyll Island Hunting Club, a most curious club in that no birds were actually hunted.

Instead, the “duck hunters” were some of the world’s wealthiest men: investment bankers, oil barons, powerful politicians and the like. They all met, in great secrecy and seclusion, for a series of meetings in a private hunting lodge on Jekyll Island in 1910.

The lodge, and the island itself, were owned by J.P. Morgan at the time. (Jekyll Island sits off the coast of Brunswick, Georgia. It’s a resort destination today.) Morgan was at that fateful meeting in November of 1910 that led to the Fed’s creation three years later. Rockefeller was there, too.

Many strings have been pulled, and many favors traded, from that day to this. Now, almost a full century later, the Federal Reserve is about to experience its greatest ascent, rising to new heights of power as the dollar fades into twilight. For the money men, this day was a long time coming.

Consequences, Concerns

But what does it all mean? Not just in regard to the health of the dollar or the fate of the U.S. financial system, but in regard to you and me?

In terms of volatility and wild market moves, the fun has only just begun. There will be clear and sharp consequences to this turn of events; that means significant opportunity, and significant dangers too.

I’ll do my best to keep you up to date on what’s happening, and you better believe I’m watching closely. (Reading about what just transpired, I nearly fell out of my chair.)

Bridges to Hope Foundation Newsletter and Blog

www.BTHF.org

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The Credit Collapse of 2008 has begun.

The place is every home, business and government.

The time is now.

The credit collapse is not just an ordinary recession that repeats itself with each new business cycle of the 21st century. Nor is it the Great Depression returning to haunt us from the depths of the 1930s.

The credit collapse is a sudden surge in debt defaults by borrowers … and an equally sudden disappearance of new loans by lenders.

It’s an unprecedented surge in home foreclosures … and an equally unprecedented cutback in new home mortgages.

It’s causing unexpected corporate bankruptcies … plus equally unexpected demands by banks to put up more collateral.

It’s threatening to sink businesses, paralyze local governments and gut the investment portfolios of millions of Americans.

It’s even starting to sabotage the best laid plans of government — neutralizing the Fed’s interest rate cuts … pre-empting Congress’ economic stimulus plan … and threatening to strip Washington of its traditional powers to fight a recession.

And I’m not the only one who sees this.

Yesterday’s New York Times reports …

  • that the government’s usual fiscal and monetary policy tools are failing
  • that this failure is raising questions about what more the Fed can do, and …
  • that its actions so far have done little to counter sinking housing prices, the falling stock market and disappearing jobs.

“The Fed’s main weapons against a downturn,” says The Times, “are ill-suited to a crisis that stems from collapsing confidence about credit quality.”

Meanwhile, economist Edward Yardeni, formerly still holding to the theory that the economy was OK, has now reversed course. Ditto for economists at JPMorgan Chase and Lehman Brothers.

They don’t yet call it the Credit Collapse of 2008, as I do. But they see it just the same — and they are beginning to recognize how serious its consequences really are.

What they may not yet recognize is that the Credit Collapse of 2008 could attack everyone and everything that depends on debt, including, ultimately, the U.S. government.

And it’s moving fast!

Just in the past three months, we’ve seen the Credit Collapse of 2008 drive a dagger into the markets for prime home mortgages, commercial mortgages, business loans, student loans, credit cards and municipal bonds.

We’ve seen the credit collapse rip apart little-known-but-important “structured” securities — Residential Mortgage-Backed Securities (RMBS), Commercial Mortgage-Backed Securities (CMBS), Collateralized Debt Obligations (CDOs), Collateralized Loan Obligations (CLOs), Auction Rate Securities (ARS), Credit Default Swaps (CDS), Structured Investment Vehicles (SIVs) and Variable Interest Entities (VIEs).

And just last week, to the shock of federal authorities, the credit collapse struck bonds issued by Fannie Mae and Freddie Mac. Although not backed by the full faith and credit of the U.S. government, these bonds were thought to be immune from the crisis because of their special status as government “sponsored” agencies. But they weren’t.

The New York Times puts it this way: “If investors lose confidence in Fannie Mae and Freddie Mac, which have become the only major remaining source of mortgage financing in recent months, Fed officials fear that homes sales and housing prices could plunge further and foreclosures could climb even higher than they already have.”

Plus, there’s still another, unspoken fear:

If the Credit Collapse of 2008 can slam into the market for government-sponsored bonds, could it not do the same to government agency bonds like Ginnie Maes, which are backed by the full faith and credit of the U.S. government?

Further, if the Credit Collapse of 2008 can hit agency bonds, then, at some point, could it even bring down long-term U.S. Treasury bonds?

Fed officials are afraid to give an answer. They’re even afraid to ask the question. But on Friday of last week, March 7 …

They Could Wait No Longer.
They Were Frightened.
And They Panicked.

In a desperate attempt to avert a full-scale collapse of credit markets, the Federal Reserve declared it would offer …

  • An unprecedented $100 billion in long-term loans, accepting virtually any kind of debt instruments as collateral — including bad paper that’s at the core of the credit collapse.
  • An equally unprecedented $100 billion in short-term loans, accepting Fannie Mae and Freddie Mac bonds as collateral.
  • Plus, as much additional funding as needed to ease the pain for the next victims of the credit collapse, whomever those may be.

That’s a heck of lot of new paper money flooding into the banking system — especially considering that it stems from economic weakness, not strength … and that it comes in the form of devalued paper, not wealth.

U.S. Dollar's Free-Fall Is Now Virtually Unstoppable!

As a direct result …

The U.S. Dollar, Already
Beaten Down to Its
Lowest Level in History,
Was Hammered Again!

The dollar dropped for a fourth straight week of consecutive all-time lows against the euro … plunged to an eight-year low versus the Japanese yen … and even fell against most Third World currencies.

Last year, we told you this was going to happen and we gave you the script that is now unfolding act by act.

  • We warned you about a watershed event — a bust in the dollar below its all-time lows reached in 1992. And that event took place.
  • Next, we told you the dollar would sink into a virtually unstoppable free-fall. And it did.
  • Plus, we explained that the dollar plunge would drive commodities through the roof. And it has done just that:
Dollar plunge driving world commodities through the roof!

Gold has surged to within a hairline of $1,000 per ounce.

Crude oil skyrocketed on Friday to a new, all-time high of $106.54 per barrel, nearly triple its previous all- time high … even higher than its inflation-adjusted all-time peak!

Gasoline and heating oil … copper and silver … corn and wheat … plus every commodity under the sun has gone through the roof, all driven higher by the plunging dollar.

Last year, Money and Markets editors Larry Edelson and Sean Brodrick told you this explosion was coming. And now it’s here.

But no matter how much we may like to brag about our foresight, the fact is that anyone with some Main Street common sense — and without Wall Street’s rose-colored glasses — could have seen it coming.

All you had to do was connect the dots:

Dot #1. The credit crunch was threatening to hurt the U.S. economy. Everyone knew that; it was all over the news.

Mr. Magoo

Dot #2. The threat to the U.S. economy was prompting the Fed to print money and trash the value of the U.S. dollar. That was also obvious; even hopelessly near-sighted Mr. Magoo could not have missed it. Plus …

Dot #3. The falling value of the dollar would naturally help drive gold, oil and nearly all commodities through the roof. You didn’t need 20-20 vision to see that either.

So are you surprised that the dollar is in a free-fall and commodities are exploding higher? You shouldn’t be.

Nor should you be surprised if these same forces gather speed and momentum in the weeks ahead.

How do you know? Just connect the dots again …

Dot #1. The Credit Crunch of 2007 has now turned into the Credit Collapse of 2008.

As I showed you a moment ago, the credit crisis is broader, deeper and hitting with greater speed.

It’s not just a future threat to the U.S. economy. It’s already shutting down credit markets, erasing tens of thousands of jobs per month, and driving hundreds of thousands out of the labor force entirely.

Dot #2. The Fed isn’t just printing more money like it did last year. It has deployed entirely new kinds of money creation machines to flood the economy with dollars in far greater volume than ever before.

Dot #3. Commodities aren’t just hopping along. They’re flying into the stratosphere.

No, they won’t go up in a straight line; they will suffer corrections, and those corrections could be even sharper than last year’s. But as our entire Money and Markets team has shown you, the big tend is your friend — and this one could be among the biggest of all.

My recommendations:

1. Sell vulnerable stocks and bonds immediately.

2. Get your money to safety.

3. Your best defense is a prudent offense — buying investments that are designed, from the ground up, to help average investors profit in this unusual environment …

  • Inverse ETF’s that go up when weak stock sectors fall …
  • Currency ETFs that let you profit from surging foreign currencies, and now …
  • The brand new and diverse universe of commodity ETFs to ride the superboom in gold, oil, silver, copper and more.

Bridges to Hope Foundation Newsletter and Blog

http://www.BTHF.org

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3/3/2008 

Billionaire investor Warren Buffet discussed the U.S. economy Monday, telling CNBC that it is in recession and, at the same time, “stocks are not cheap.”

Buffett also announced that he has rescinded his offer to bail out floundering bond insurers AmbacFinancial Group Inc. (ABK), MBIA Inc. (MBI), and Financial Guarantee Insurance Co. In mid-February he offered to reinsure some $800 billion in municipal bonds backed by those top three bond insurers.

The offer is “not on the table,” he told CNBC. It had been rejected by some of the bond insurers.

As far as the state of the economy, Buffett told CNBC, “From a common-sense standpoint right now, we`re in a recession .” This came despite the fact that the U.S. economy has not yet registered one quarter of negative GDP, much less the two consecutive needed to qualify for a recession.

Buffett stopped short of comparing the current situation, with its dangerous combination of a slowing economy and rising inflation, to the stagflation-filled 1970s. He did not, however, rule out the possibility. The environment is “nothing like `73 or `74 yet,” he said. Buffett added that things may get worse before they get better, telling investors that a significant economic downturn is a possibility.


Bridges to Hope Foundation Newsletter and Blog

WWW.BTHF.ORG

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The last time the dollar was this low, Jimi Hendrix was on tour.
— Barry Ritholtz, Director of Equity Research, Fusion IQ

You can’t make this stuff up, folks.

The U.S. dollar is now at its weakest point in more than 40 years. Inflation is at highest level in 26 years. And according to a recent Pew Research Center survey, “58% of the public says that their incomes are falling behind the rising cost of living.”

In other words, for almost six out of 10 Americans, cost-of-living inflation is a real problem. The rising cost of food and energy is thus a real problem.

One would think that, in an environment like this, the Fed would be deeply concerned about a falling dollar, which only makes the problem worse. But one would be wrong.

Fed Chairman Ben Bernanke went to Capitol Hill a few days ago, to deliver the first of two days of testimony to Congress. What he had to say opened up a trap door beneath the dollar’s feet.

U.S. Dollar Index Futures, Weekly

On word of the Fed’s commitment to more stimulus — and seeming lack of concern regarding inflation — the greenback broke sharply to the downside, carving out new multidecade lows. In contrast, a newly strong euro shattered the $1.50 ceiling for the first time.

Inflation Investment Oppotunities: Precious Metals Shine

Gold and silver saw a Bernanke boost, too. As of this writing, the yellow metal is just under $960 per ounce. With average daily volatility in the range of $20, gold is a mere two trading days from the thousand-dollar mark.

Inflation Investment Oppotunities: Monsters Under the Bed

In his speech to Congress, Bernanke paid ample lip service to inflation. He simply emphasized the “downside risks to growth” even more. In other words, more interest rate cuts are coming.

The surface-level explanation for more cuts is a need to shore up the housing market. (New home sales have fallen to their lowest pace in 13 years.) But home prices are just the start. To get a feel for what keeps the Fed awake at night, consider this excerpt from a WSJ piece titled “FDIC to Add Staff as Bank Failures Loom”: “The FDIC is looking to bring back 25 retirees from its division of resolutions and receiverships. Many of these agency veterans likely worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis.”

The letters “FDIC,” if you’ll recall, stand for Federal Deposit Insurance Corporation. They are the government agency that guarantees the first $100,000 in your bank account. When Small Town Bank goes belly up, the FDIC gets you your money back.

Every storm begins with a gentle breeze. The FDIC has only had to deal with four bank failures in the past year; in the next 12 to 24 months, they are expecting “well over 100.” That gentle breeze could soon become a gale.

Inflation Investment Oppotunities: A Cure Worse Than the Disease

For the Federal Reserve, the very real fear is that Wall Street’s credit woes could seize up the entire U.S. economy — at a time when low-income households are more vulnerable than ever before.

According to new data from the Pew Research Center, 74% of Americans with incomes below $20,000 a year have difficulty affording gasoline. Nearly two-thirds struggle with their heating and electricity bills. Half have problems paying for food.

It’s a sad irony that, in the aftermath of the great housing bubble bust, the cure is looking worse than the disease. As the Fed destroys the dollar in an effort to contain “downside risks,” life grows more expensive for Americans already struggling. It’s going to get worse, too. People will get angry, politicians will pander… and still prices will rise.

Inflation Investment Oppotunities: How to Fight Back

What to do in times like these? First of all, safeguard your assets. Second of all, find ways to profit. The two goals are actually linked. Protecting wealth in an inflationary environment is like rowing a boat upstream; if you aren’t moving forward, you’re moving backward.

Or think about it like this. If you put $100,000 in a bank account and came back 20 years later to find only $50,000 there, you would scream bloody murder. The loss would count as outright theft.

What many fail to realize is that, when a government goes to town with the printing press, the theft is harder to spot but no less real. Printing up new dollars reduces the value of dollars in circulation… the same dollars that you and I hold. That day-to-day erosion of purchasing power is like draining money out of the bank account, just a little at a time.

And the way to fight back? Find ways to create new wealth at a faster pace than purchasing power is destroyed. Row upstream with high-quality investing and trading opportunities.

I asked Christian DeHaemer of Crisis Trader for his take on Bernanke’s testimony and the dollar breakdown. “Let’s hope the currency gods are riding with Ben,” he said. “But either way, real assets like gold, silver, oil and food will be increasing in value. And that’s where I’m putting my investment dollars.”

That’s where DeHaemer’s Crisis Trader subscribers are putting their dollars, too. One Crisis Trader gold play saw 88% gains in a month, with more expected to come. Other short-term Crisis Trader gains include 88% on XAU, 114% on Dragon Oil and 150% on Oracle.

It’s wild out there, and things are set to get wilder. The Fed will print dollars into oblivion, banana republic-style, before they let the U.S. economy implode. That simple truth has serious consequences, but it also means opportunities galore.

Bridges To Hope Foundation Newsletter and Blog

WWW.BTHF.ORG

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Greenspan in 1996 | Bernanke yesterday

Years ago, when Alan Greenspan warned of “irrational exuberance,” he did so with fire and brimstone. People paid attention. The stock market fell.

But yesterday, when Ben Bernanke issued a much broader warning — with far graver consequences — most folks on Wall Street didn’t seem to care.

Reason: They heard only what they wanted to hear — that Bernanke is virtually promising to cut rates.

So take a closer look at what else he talked about, as summed up by this morning’s Los Angeles Times

Triple threat: He predicted a weaker economy and financial market freeze-ups and rising inflation all at the same time — precisely what we warned you in our recent presentation at the World Money Show.

Housing: Suffering a “continuing contraction” despite the fact that sales and construction are already down to less than half their peak levels.

Consumer spending: “Slowing significantly” due to rising energy prices and falling home prices (both of which are much worse today than they were when the Fed last had data).

Business investment: “Subdued” with plant and office construction “likely to decelerate sharply.”

Extremely serious: The combination of the stumbling economy and breakdowns in the financial markets are so serious that Bernanke says he will cut interest rates even if inflation continues to rise.

U.S. Dollar in Free Fall! Again!

Now Here’s What
Bernanke Didn’t Tell You

Bernanke didn’t tell you about the dramatic impact on the U.S. dollar, which is in a free fall! Again!

He didn’t mention that the U.S. Dollar Index has just plunged to a brand new historic low, while foreign currencies soar!

Nor did he mention that the widely-watched CRB index is now at a new record high … oil has busted clean through the $100-barrier … gold is within a stone’s throw of $1,000 per ounce … silver is rising even faster … wheat is at a new record high … corn is soaring … soybeans are nearing $15 a bushel.

These are major dangers. But they’re also generating massive profit opportunities.

That’s why, next week we’re issuing a blockbuster new Safe Money Report with a complete model portfolio of investment picks to help you accomplish three things immediately:

Check Get a large chunk of your money to safety!

Check Protect yourself against further real estate declines!

Check And go for extraordinary profits as choice alternative investments soar!

Bridges to Hope Foundation Newsletter and Blog

www.bthf.org

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The U.S. credit markets, the giant growth engine that powers the American economy, are collapsing … with few credit sectors spared from damage, few investors escaping losses, and little hope of federal action that’s quick or strong enough to make a major difference.

Here’s what’s happening …

First and Foremost, the Fall of
The Nation’s Three Largest
Bond Insurers Is Accelerating

This is the “Great Ratings Debacle” I highlighted last year.

And now, the critical watershed event that I said would trigger the next phase — the collapse of the bond insurers’ triple-A ratings — is here in aces and spades.

Without the triple-A rating, their whole reason to exist falls by the wayside: They cannot enhance the credit of bond issuers. They cannot do more business. They may as well close their doors and go home.

The facts:

  • Financial Guarantee Insurance Co. (FGIC), the nation’s third largest, just lost its triple-A rating last week. Moody’s literally gutted its rating by a full six notches in one fell swoop.

  • At the same time, Moody’s warned that unless FGIC can raise the needed capital, it’s ready to cut FGIC’s rating to a hair above junk.

  • To underscore that it means business, Moody’s has already downgraded FGIC’s senior debt to junk, threatening to drop it to deeper junk.

  • Ambac’s triple-A rating was zapped by all three major rating agencies in late January.

  • Next, MBIA is on the chopping block, slated to lose its triple-A rating within a matter of days.

All three of the largest bond insurers are engulfed in the mess. And all three are trapped between two major business lines — their traditional business of insuring municipal bonds against default, which is supposedly still stable … and their newer business of insuring mortgage- and debt-backed securities, which is in total disarray.

Meanwhile, the nation’s banks and other big investors — the last hope for bond insurers — have so far failed to come forward with the needed capital.

So, in a surprise announcement on Friday, New York Governor Eliot Spitzer threatened to intervene with massive, radical action. He said he would …

  • take over the two bond insurers which are regulated by New York State — MBIA and Ambac …

  • strip out all their supposedly good assets (insurance policies covering municipal securities) …

  • pack away those assets in newly formed separate companies, and …

  • leave behind strictly the bad assets (polices covering the disaster-plagued mortgage and debt sectors).

The bankers were shocked and dismayed. Instead of being the first to hear the news as part of their intense, ongoing discussions with New York State regulators, they heard about it on CNBC. And instead of responding with fear and remorse, their primary reaction is anger and rebellion.

What’s next? Follow along with me, and you’ll see that, like four different pathways engulfed by the same forest fire, all four likely scenarios lead to essentially the same result: Credit collapse.

Scenario A
Bank Rescue

Despite their instincts not to get dragged into the morass, bankers and other investors come through with 11th-hour capital infusions for the bond insurers.

Consequences: The banks take a big step closer to insolvency, creating an even broader threat to the financial system.

Reason: The true liabilities of the bond insurers are incalculable. The potential exposure to losses is virtually unlimited. And before the bond insurance crisis, the banks were already buckling under their subprime mortgage losses.

Scenario B
No Rescues, No Takeovers

The banks stay out. But despite his warnings, Spitzer fails to move forward promptly to take over the bond insurers.

Consequences:The current downward spiral of the bond insurers continues unabated. MBIA, the last of the Big Three to be downgraded, loses its triple-A rating. FGIC is downgraded to junk; Ambac, to near junk. The $2.6 trillion municipal bond market virtually dies.

Reason: When the bond insurers are downgraded, the hundreds of thousands of municipal bonds they cover are automatically downgraded — a ratings collapse that’s so massive, it can shut off the credit spigot to all city and state governments, whether insured or not.

Scenario C
New York State Takes Over

Spitzer acts this week to take over MBIA and Ambac, promptly splitting them in half and creating new companies for each. According to plan, the pre-existing bond insurers are stuck holding the sick insurance business; the new companies get the supposedly healthy insurance business.

Consequences: The existing bond insurers are immediately downgraded to deep junk, and that’s generous. By all reasonable measures, they are insolvent from day one. And any floating ships still remaining in the market for mortgage- and debt-backed securities are sunk.

Meanwhile, local governments are the winners. But it’s a pyrrhic victory.

Reason: The municipal bond market isn’t in trouble just because of what’s happening to the bond insurers. It’s also in trouble because municipal governments all over the country are suffering falling property values — and falling property tax revenues.

By sacrificing mortgage securities for the sake of protecting municipal securities, Spitzer doesn’t do local governments any long-term favors. They depend on a healthy mortgage and real estate market to sustain their own finances. When mortgages and real estate go down, so do they.

Scenario D
Federal Bailout

The federal government steps in to bail out the bond insurers — either with or without the plan Spitzer’s proposing. The hope is that the good credit of the U.S. Treasury uplifts the bad credit of the insurers.

Consequences: Precisely the opposite happens. The bad credit of the bond insurers — and their boundless exposure to defaulting mortgages — drags down the good credit of the U.S. Treasury.

Treasury notes and bonds fall in price, while their yields rise. And since 10-year Treasury-note yields are closely tied to the rates on 30-year fixed mortgages, rather than supporting the housing market, the federal government inadvertently drives it into a deeper hole with a spike in interest rates.

Reason: The sheer volume of mortgages outstanding in America is far bigger than the volume of U.S. Treasuries.

Moreover, with $150 billion being spent on the economic stimulus package, with inevitably huge federal deficits in a recession, and with looming seas of red ink in Medicare … the U.S. Treasury Department’s long-term credit is not exactly fool-proof.

Bottom line: There’s no scenario that ends in a soft landing for the bond insurers. The underlying assets are rotten. The credit markets are sour. And no type of bailout — public or private — can cover up the stench.

Meanwhile …

At Least Five More
Credit Market Sectors

Are Now Collapsing

You’ve no doubt heard about the disasters in subprime mortgages, Alt-A (intermediate quality) mortgages, prime mortgages, credit cards, auto loans and student loans.

Now, brace yourself for five more credit sectors that are falling victim to collapse:

  • The nation’s largest mortgage insurers — responsible for protecting lenders and investors from defaults on millions of homes — are being ravaged by losses. MGIC Investment Corp., swamped with claims, just posted a $1.47 billion loss. Triad Guaranty, a much smaller mortgage insurer, reported a $75 million loss.

  • Municipalities, public hospitals and other institutions have been slammed by the failure of nearly 1,000 auctions for their “auction-rate” securities. Their borrowing costs have tripled and quadrupled — to 15%, 20%, even 30%. Survival money is drying up.

  • Low-rated corporate bonds, which had fueled a wave of leveraged corporate buyouts in recent years, are being abandoned by investors. Their prices are plunging to the lowest levels in history. Property and casualty insurers, among those loaded with corporate bonds, are taking it on the chin.

  • More hedge funds are getting slammed. CSO Partners, for example, has lost so much money and suffered such a massive run on its assets, its manager (Citigroup) was recently forced to shut the hedge fund’s doors to further withdrawals by investors.

  • Commercial real estate credit is collapsing. Regional and super-regional banks are taking big hits. Life and health insurance companies will get smacked.

Even some sectors of the short-term money markets are affected. Treasury-only money funds are safe. But beware of money funds that put your money in commercial paper, CDs and other non-Treasury instruments.

The End of an Era

This is no longer just one institution in trouble — like Long Term Credit Management, which threatened to shatter the financial markets in 1998.

Nor is it just a crisis in one corner of the credit markets — like the near collapse of Penn Central Railroad and Chrysler in 1970 … the collapse of Franklin National Bank in 1974 … the junk bond debacle of 1989-90, the S&L crisis of the 1980s or the insurance company failures of the early 1990s.

No. This has all the earmarks of a sweeping and devastating credit paralysis that threatens to end decades of U.S. economic expansion.

We will survive. It is not the end of the world. And there are practical, prudent strategies immediately available to protect yourself.

But for most Americans, the credit collapse will bring about a rapid transition that is both terrifying and traumatic — a shocking shift from growth to contraction … reckless spending to forced thrift … wealth to poverty.

My mission is to make sure you’re not among them; to help you join a growing minority of foresighted individuals who are building their wealth through the worst of times, keeping it safe, and preparing for the future day when they can invest it in some of the greatest bargains of our time.

Your goal: To do well, but also to do good — to be one of the few who can accumulate a treasure-trove of liquid resources for yourself … and also join those with the courage and means to pick up the pieces later, trigger a lasting rally from the bottom, and ultimately help lead the nation on the path to a true recovery.

Take These Urgent Steps! It
Could Be Your Last Chance!

Step 1. Get up to speed:

Step 2. Get rid of bonds and mortgages: Don’t wait for the next shoe to drop in the credit markets. Get out of all fixed instruments that could be seriously impacted, including …

  • Mortgages and mortgage-backed securities, regardless of duration and rating

  • Corporate bonds, whether rated “junk” and already collapsing … or investment grade on the verge of becoming junk

  • Tax-exempt municipal and state securities, whether high grade or low grade, short term or long term, insured or not

  • Money market funds that invest in bank deposits, banker’s acceptances, commercial paper, or short-term tax-exempt securities

  • Any other instrument invested in the now-uncertain future of the U.S. credit markets

Step 3. Sell real estate: Don’t get stuck with sinking properties just because you can’t get the price you hoped for.

  • If you’re selling your home, price it like you mean it. Instead of cutting your price in dribs and drabs and always trailing the market, cut it aggressively now.

  • If you’re looking for a new home, rent for now if possible. If that’s not a viable alternative and you must buy now on credit, favor a 30-year fixed-rate loan. But make sure you have enough cash for a decent down payment.

  • If you invest in commercial property, get out now while the market is still not far from its peak. Commercial property valuations got nutty during the recent boom, while capitalization rates plunged sharply. It’s going to take a sizable drop in property values to get the cap rates back up to anything near normal.

  • Sell REITs. The recession will drive vacancy rates up and absorption rates down, while keeping a lid on rents, especially in the office and retail sectors.

  • If you are still exposed to the risk of falling real estate — whether residential or commercial — seriously consider a protective hedge, using the UltraShort Real Estate ProShares.

Step 4. Get out of bank, brokerage and insurance company stocks: Use any Fed-inspired rally to sell. Don’t let big names lull you into complacency. Stocks like Merrill Lynch, Capital One Financial, Washington Mutual and AIG could actually be among the most vulnerable.

If you cannot sell, at least consider buying some protection with an inverse ETF that’s tied to the financial industry, such as the UltraShort Financials ProShares.

Step 5. Unload other stocks: Use rallies to sell retail stocks, semiconductors, transportation stocks, Dow stocks and most S&P stocks.

Some investors protest: “Martin, I can’t sell now. I can’t afford to take the loss.” My answer: If your stock portfolio is in the red, you’ve already taken the loss. Remember — the value of your brokerage account is marked to market every day. It doesn’t distinguish between paper losses and realized losses, and you shouldn’t either.

Other investors say: “But, Martin, I can’t sell now.I can’t afford to take the profit and pay the taxes.” My answer: Your true net worth is always after taxes. So avoiding taking profits now buys you little. Better to write a big check to Uncle Sam on your profits than to write no check due to losses.

Step 6. Build cash: As you do this, park it in the one place that is still the single safest in the world — 3-month Treasury bills or Treasury-only money market funds.

Step 7. Buy hedges against inflation: To the degree that the Fed and Congress throw more money at the credit collapse, inflation will be a continuing — and growing — danger. So stick with your inflation hedges.

And above all, stay safe!

Good luck and God bless,

Bridges to Hope Foundation Newsletter and Blog

www.bthf.org

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Bridges to Hope Foundation will host the weekly Celebrating Recovery Meeting in the Inland Empire in Riverside on Thursday nights at 7 pm.

Come before meeting at 6:15pm, we will feed the hungry.

 Speaker will be Jesse Mendez

Location is on campus, RCC church behind the Children’s Discovery Center. Call us for details.

Bring a friend. We are all friendly. See you there.

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