All about investment

By: Contrarian Profits

– Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS), the two last major investment banks left standing after the carnage Wall Street, have ended the era of investment banking by changing their status to bank holding companies. The change means the two firms can now create commercial banks that will be able to take deposits.

– The move marks a sea change on Wall Street 75 years since the Glass-Steagall Act that separated them from deposit-taking banks. The Federal Reserve will now take over from the Securities Exchange Commission as regulator of the two banks.

– "The decision marks the end of Wall Street as we have known it," said William Isaac, a former chairman of the FDIC. "It’s too bad."

– Concern is growing that Hank Paulson’s vast rescue plan for Wall Street may "crush" the dollar. According to Bloomberg: "The combination of spending $700 billion on soured mortgage-related assets and providing $400 billion to guarantee money-market mutual funds will boost US borrowing as much as $1 trillion […] While the rescue may restore investor confidence to battered financial markets, traders will again focus on the twin budget and current-account deficits and negative real US interest rates."

– For investors who want to bet against the buck, on Friday Taipan Daily editor Justice Litle recommended four real assets set to profit from the death of the dollar.

– Worries are also mounting over the fate of hedge funds. "Hedge Funds Face Chaos," warned The New York Times on Sunday.

Hedge funds usually thrive when markets turn volatile. But Even these fast-money investors are struggling to cope with the wild swings in the markets, raising concerns that some may not survive.

Even before the Bush administration proposed its vast bailout for financial institutions, the hedge funds - those secretive, sometimes volatile investment vehicles for the rich - were on course for their worst year on record. The average fund is down nearly 5 percent so far this year.

– According to the fine print of the administration’s statement on its latest bailout, which will receive intense scrutiny this week, Uncle Sam will buy toxic debt from foreign-based banks with large US operations. Hank Paulson confirmed this on ABC’s This Week program, saying that coverage of foreign-based banks is "a distinction without a difference to the American people."

– The $700 billion figure Paulson has put out as the cost of his latest bailout measure is just $100 billion shy of the $800 billion price tag of the Iraq war so far.

– As the reality of the proposed bailout sets in US stock futures are pointing down. According to MarketWatch this morning: "S&P 500 futures fell 6.9 points to 1,239.10 and Nasdaq 100 futures dropped 10 points to 1,729.50. Dow industrial futures fell 78 points."

– Paulson also echoed John McCain’s much-derided view that the "fundamentals of the US economy are strong." Paulson told NBC’s Meet the Press: "I wouldn’t bet against the long-term fundamentals of this country." Although he didn’t specify whether he meant fundamentals such as inflation, jobless rate house prices or the hardworking American people, as John McCain later said he was referring to in his own statement.

– Paulson’s boss, President Bush, however struck a far more alarmist tone. After earlier calling the meltdown on Wall Street an "adjustment," the Commander in Chief said officials in his administration finally realized that "the house of cards was much bigger" than just the mortgage-finance system, or even Wall Street and that they worried about "the whole deck going down."

– The next card could well be the $62 trillion market for credit-default swaps, says Shah Gilani in Money Morning. The derivative instruments - which offer insurance against default - are neither transparent nor regulated. But they are all at risk. And they are already causing huge writedowns in the banking sector…

– Amid all the talk of bailouts, writedowns, credit-default swaps, subpime mortgages and the liquidity crisis, it’s easy to forget the reason for the current economic mess, says The Big Picture blogger, Barry Ritholz: the breakdown in the reason for ledning money in the first place…

Here is an oddly interesting observation: Over the entire history of human finance, the underlying premise of all credit transactions — loans, mortgages, and all debt instrument — has been the borrower’s ability to repay.

From 1 million B.C. up until the present, repayment ability was the dominant factor.

This goes as far back as when Og lent the guy in the next cave a few dozen clamshells in order to go and purchase that newfangled wheel. If Og didn’t think his neighbor would be able to repay him those clamshells, he never would’ve entered into what we can describe as the first commercial loan.

Since real estate loans are at the bottom of all of our current credit woes, let’s take mortgages as an example. The historical basis for making a loan for a home purchase was several simple factors: Employment history, Income, down payment, credit rating, assets, loan-to-value ratio of the property, and debt servicing ability. But for some crazy reason, those factors went away during the housing boom.

– Krugman in The New York Times points out the government’s latest bailout plan simply be to throw taxpayers’ money at distressed banks to convince Mr. Market that "everything’s OK" without ensuring that the taxpayer gets something of value in return…

The Treasury plan […] looks like an attempt to restore confidence in the financial system - that is, convince creditors of troubled institutions that everything’s OK - simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem - which seems doubtful - or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world.

And there’s no quid pro quo here - nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.

Contrarian Profits is a contrarian investing news and opinion hub, providing market-beating ideas from the world’s top investment gurus.

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