Britannia Radio

The Daily Reckoning Weekend Edition Saturday, January 30, 2010 Taipei, Taiwan --------------------------------------------------------------- Bernanke reinstated at the Fed...and disqualified from this year's Financial Darwin Awards, The biggest corporate extinctions of the financial crisis thus far, And the entire week's reckonings, neatly archived for your perusal... Joel Bowman, reporting from a subtropical island, off the coast of China... "It is interesting to contemplate an entangled bank, clothed with many plants of many kinds, with birds singing on the bushes, with various insects flitting about, and with worms crawling through the damp earth, and to reflect that these elaborately constructed forms, so different from each other, and dependent on each other in so complex a manner, have all been produced by laws acting around us." - Charles Darwin, On the Origin of Species by Means of Natural Selection When Sir Charles Darwin first penned these words, he was not referring, of course, to Wall Street's investment banks. Rather, his was describing the world of natural science, where a vast array of animal and plant life struggles daily in what biologist Richard Dawkins calls an "evolutionary arms race." As with the free markets of capitalism, the natural wilderness is a hostile, unforgiving environment. Mistakes are punished; successes rewarded. Only the fastest cheetahs and the most evasive impalas, for instance, survive long enough to pass their genes on to the next generation. The faster a cheetah runs, the more adept its prey becomes at avoiding capture. Weak individuals, and indeed entire species, die out. Over time, this "natural selection" produces increasingly agile, adaptive and advanced mechanisms for survival. In the natural world, such a phenomenon is often referred to as the "survival of the fittest." Harsh as it may sound, it is precisely this process that ensures each generation is more advanced than that of its predecessors. Birds of prey continuously refine their sense of sight. Fish swim faster and for longer. And, given the vast expanse of geological time, a primordial soup flowers into the complex, awe-inspiring diversity that Darwin himself sought to describe and comprehend. But it is not Darwin's entangled banks with which we concern ourselves today. Rather, it is the many species of banks populating the modern day economy, and all those that feed on their slowly decaying ecosystems, that pique our interest. We are here, fellow Reckoners, to discuss this year's Daily Reckoning Financial Darwin Awards - when we duly recognize those institutions that vanish from the corporate gene pool through unbridled acts of profligacy or simply their own inability to adapt to a changing environment. Readers wrote in with nominations as wild and varied as the Galapagos finches. One Reckoner raised a hand for "Arnie Schwarzen- begger"...while another voted for the terminator's entire state of California. Utah and Alaska also received state dishonors, as did Arizona, Florida and a host of others. And then... "My vote goes to the US Government and the 'man of the year' helicopter Ben," opined another reader. "Though to be fair, he didn't do it alone. No man could have. It took Alan and Henry and Tim and countless other arrogant men to get to that place in time where you could financially cripple a whole world." On a sheer vote count, Ben Bernanke won hands down. Alas! We regret to inform that he must be disqualified from this particular competition. Remember, we are here to praise the extinct. But Bernanke is not extinct; he is thriving...like a cockroach in the fallout of nuclear blast. His prognostications might have been way off the mark...he might have forecast a period of "Great Moderation" during the bubbliest decade in history...and he also did more to rescue hideously mutated financial species from extinction than any central banker in history. However, Bernanke was just ushered in for his second term. In Darwinian terms, he is adapting to the Big Government era, toxic as it is, as well, if not better, than just about anyone else in the ecosystem. Nor can we bestow this year's Financial Darwin Awards on any of the financial mutations or extinctions that occurred in 2008 and before. So, as much as we empathize with the fellow who wrote in to raise a hand for "the year 1913, for spawning the Fed," we simply must impose some parameters. Indeed, by the time evolutionary biologists were celebrating the 150th anniversary of Darwin's "Origins" - last year - Wall Street's cumbersome, risk-laden investment banks had all but ceased to exist. Bear Stearns went the way of the dodo in 2008. Lehman Bros. followed into the giant, corporate tar pit later that same year and Merrill Lynch found its way into the stomach of Bank of America shortly thereafter. By September, Goldman Sachs and Morgan Stanley, the remaining two of the original "Big 5" investment banks, had swapped genes with the Federal Reserve and agreed to become bank holding companies, an arrangement that supposedly subjected them to closer regulation and cash requirements, in exchange for easier access to capital. There were plenty of votes for AIG too, but we reckon that the world's largest insurer ceased to be, in its previous form, back in 2008, when it mated with the Federal Reserve and swapped 79.9% of its equity DNA for a cool $85 billion. Sure, it subsequently grabbed another $182 billion in credit lines and assorted other gifts from its love struck admirers over at the Fed and Treasury. But by then it was under the care of C.E.Obama and, without their consent, the taxpaying American public. How about the mutant twins, Fannie Mae and Freddie Mac? Again, although it may seem like only yesterday that the tides of good fortune receded from these giant mortgage lenders and exposed their naked balance sheets, Fannie and Freddie went into "official" conservatorship in 2008. In any case, it might well be argued that these government sponsored enterprises (GSE) were, and still are, what Darwin would have called an anathema to nature from the start. It may be years before they actually "go extinct". In the meantime, they eke out a fruitless existence as parasites in the intestinal workings of the American economy, right down there in Washington DC. [Note to government: Private and public enterprises are different species. You can cross a common ass with a thoroughbred mare if you like, but you still only get a mule. And male mules, as a matter of evolutionary interest, are always sterile, as are most females. Asses.] So...who's left in the running? What and who ceased to be in 2009? The list of banks that ended in the FDIC's arms is longer for last year than in 2008, even though their total combined assets were far less (Washington Mutual, which collapsed in 2008, is still the largest bank failure in United States history, with some $327 billion in assets at time of extinction). Don't worry, though; there was still some tough competition out there this past year... One hundred and forty banks bit the dust in 2009...as did the FDIC itself, before it stuck its elongated, purpose-built snout back in to the government funding trough. In total, the assets of these collapsed institutions amounted to some $170 billion. The largest failures by assets were, in order: Colonial Bank ($25 billion), Guarantee Bank ($13 billion), BankUnited ($12.8 billion), AmTrust Bank ($12 billion) and United Commercial Bank ($11.2 billion). That's pretty impressive. But c'mon! This is a depression. We can do better than that... How about CIT Group, Inc. the commercial and consumer finance company, founded in 1908, which became the fifth-largest bankruptcy in United States history last year? The institution only became a bank holding company in 2008, in order to qualify for, and ultimately receive, $2.3 billion in Troubled Asset Relief Program (TARP) funds. By July it had blown through that (your) cash and was back begging for more. It was denied...and died on the bankruptcy floor in the eleventh month. Again, the fifth largest bankruptcy in US history is nothing to be sneezed at...but that's not where our story ends. Unfortunately, we've run out of space here in this weekender, so we'll have to reveal the ultimate "winner" in Monday's issue. (Sorry to be a tease.) In the meantime, our congratulations go to everyone who signed up for our Financial Darwin Awards Strategic Short Report $1 Trial Offer. As you may recall, Dan's investment service actually seeks to profit when foolish and/or negligent corporations come clean with the kind of "creative accounting" that got so many of the above nominations in trouble. When we first presented the offer, back at the start of this year's Financial Darwin Awards, we noted that Dan had his eyes on a trucking company that had "expanded too aggressively during the bubble years." Dan instructed his readers to buy put options on the company...a play he then told them to exit last week...for a cool 92% gain. Not bad for a buck, eh? Right now, Dan is helping his readers to bet against an overleveraged hotel company. "I'm sure you've stayed in one of their rooms in the past," he reveals, "and you'll be shocked to see what they're hiding in their balance sheet. Act now and you could see gains as high as 100% by Mid-February." Since we're not announcing the Financial Darwin Award winner until Monday, we thought it only fair to extend the $1 offer to Dan's Strategic Short Report until then too. Here's a quick sign-up sheet if you want in. --------------------------------------------------------------- ALSO THIS WEEK in The Daily Reckoning... The Scary Budget Numbers By David Walker New York, New York The recession and attendant financial shock appear to be easing as I write this. But in Washington, financial imprudence is part of the fabric of government. You can see that in a single document that gets updated every year: the US budget. In putting together the budget, the president and Congress set our national priorities and allocate resources among them. The results have been pretty consistent. Over the forty years ending in 2008, revenues have averaged about 18.3 percent of our economy and spending has averaged over 20.6 percent, resulting in an average deficit of about 2.4 percent. Buy Oil Stocks... No Matter What By Chris Mayer Gaithersburg, Maryland We really don't know as much about the oil market as we think we do. There are many numbers out there, but most of these involve a lot of guesswork. For example, we really don't know just how much oil the world will need. The US Department of Energy says we'll need 106.6 million barrels a day by 2030, but how does it know? It can't know. The DOE can't know what the world will look like in 2030. Global Markets Out Past Chinese Lending Curfew By Eric Fry Laguna Beach, California In eras past, investors who hoped to get an early read on the economic trends that influence equity markets would monitor data like US factory orders or the Baltic Dry Freight Index. But today, all eyes are on China. Even though the Chinese economy is only the world's fourth largest, it is the first largest influence on stock market trends. Accordingly, the Chinese stock market tends to lead all the other stock markets of the world...for better or worse. Dow 10,300: Mimicking the Bounce After the Crash of '29 By Eric Fry Laguna Beach, California Let's call it a victory. Despite spending most of yesterday's trading session in the red, the Dow Jones Industrial Average staged a late-day rally to eke out a 42-point gain. Nevertheless, the selloff that started early last week has erased all of the Dow's progress since November 9, 2009 - a day on which headlines gushed that the Group of 20 nations would continue to save the world by maintaining their economic stimulus efforts. Investors celebrated that news by rallying the Dow 203 points to 10,227 - a fresh 13-month high. The Descent of Money By Bill Bonner Paris, France Science and technology have produced many wondrous breakthroughs. But there are some things it cannot improve. A kiss from natural lips is still the lover's choice. Baby formula proved no match for the real thing. Ersatz money is a flop too. That last item is not so much a fact as a prediction. The first modern competition between gold and paper money ended like the pre-modern ones. Gold won. Herewith, a short summary: The Weekly Endnote: While millions of American's were tuned in to the President's cheerleading, State of the Union Address Wednesday night, our own Ian Mathias headed over to hear Ron Paul speak in Baltimore. What did Ian find? "He didn't take any questions after his presentation, but Paul did sign a few copies of End the Fed. With my fancy press pass and press seating, I was able to get one of the first cracks at him, before the 'commoners.' As such, your editor foolishly expected he might gain Dr. Paul's audience for a few seconds - maybe even a question or two - instead of the customary handshake and autograph. Given my publisher's history with Dr. Paul, I thought I had a good shot. Heh, wrong." You can check out the rest of Ian's Ron Paul write up here. And that about wraps it up for this week. We'll be back Monday with this year's actual Daily Reckoning Financial Darwin Award victor. (Promise!) In the meantime, don't hesitate to grab a spot on Dan's $1 Strategic Short Report trial offer list. That deal closes Monday, too. Until then... Cheers, Joel Bowman Managing Editor, The Daily Reckoning   The Daily Reckoning - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.