A DEAL IS DONE

A bail out bill has been negotiated. The bill is being put on paper by staff during the night. Assuming the writing matches what each side believes was negotiated, an announcement should be made later today.


It has not been revealed to what extent the bill (TARP) includes the two features that have been pushed by house republicans:


1) That there be tax deduction limits on executive pay. Salaries in excess of $400,000 per year would not be tax deductible and there would also be limits to Golden Parachutes allowed under the tax code.


2) That the biggest of financial firms are to contribute to a Stabilization Fund, similar to FDIC or a reinsurance pool. By using the pool to insure a portion of the mortgages, the house hopes to reduce the size of the program to $500 Billion.


In regard to item one, as is typical, government regulation has lead to the need for additional regulation. Dan Ariely, author of "Predictably Irrational", tells the story well. In 1993, the government required companies to divulge top executive pay. At the time the average CEO made 131 times the average worker. Since then the average has climbed to 369 times! After the forced disclosure, being paid the most became the ultimate status symbol and pay packages were driven up. One of the Ten Commandments says "Neither shall you desire your neighbor's house or field, or male or female slave, or donkey or anything that belongs to your neighbor." But the government invited each top executive to check to see how his income stacked up against the other top executives. It is human nature to believe it fair to be paid as much as the next fellow. Back when no one knew what others made, 131 times average was enough, today even 369 times average is not enough. The new top executive at WM was paid $20 Million for 17 days on the job. The problem is that if we cap pay at an artificial rate, there will be unintended consequences. The amount owners are willing to pay their employees should be a private matter, however, there is rational to making excessive pay not tax deductible. The cap has to be put in because members of congress need cover for voting for this monstrosity. Oh what a tangled web!


Another thing not known is if the "affordable housing pork" was stripped out of the bill. As usual, pork was quickly inserted. In this case, the pork was supposed to go to slush funds controlled by city mayors, predominately democrats. Instead of using the proceeds from the sale of the bonds to pay back the borrowed funds, democrats prefer to add funds to the coffers of housing aid slush funds while increasing the national debt. House republicans are in revolt. Sooner or later, we must stop asking every tax payer to subsidize the politically well placed.


ARE HOUSE REPUBLICANS RELEVANT?


The bill has bipartisan support in the Senate. Democrats hold the majority in the house, where the right of filibuster does not exist. Theoretically, democrats do not need any republican votes to pass this bill. However, the American people are justifiably angry. If the congress were to pass this bill with few republican votes, democrats know that republicans would use the bill as a hammer every day between now and the election. Therefore, democrats will not vote for the bill unless there is a guarantee of a certain number of republican votes.


On the other hand, do house republicans dare to block the bill? If they did, Paulson would put another bank out of business by Monday morning. House members would be blamed for all the economic problems every day between now and the election.


Under the circumstances, house republicans must go along, but they must win at least a couple of concessions. The lower the total cost, the better the election prospects for house republicans and for John McCain. Proposals to cap executive pay have been made by McCain and Obama, so the path of least resistance is to include such restrictions in the plan.


THE SENSE OF URGENCY


The sense of urgency is because the "push to put banks out of business" feeds on itself. Banks, knowing that the auction may force them to book additional losses as they mark their securities down even more, are in a mad rush to swap securities at the FED Discount Window. Even though the FED Funds rate is only 2.25%, banks are paying the FED 3.75% to swap mortgage backed securities for t-bills. They believe that they will not be forced to revalue notes that are being held by the FED.


By the same token, banks are in a scramble to increase deposits. Yesterday, at least one bank was offering 4.06% for 90 day CDs, while the 90 day t-bill discount rate was .62%! From an earlier message, we know that European Banks are backing their loans with about 75% less capital than US Banks. Under the circumstances, this bail out bill is not necessary, US regulators could ease off on capital requirements in exchange for additional premiums to the FDIC. The problem could be solved by giving incentives to home buyers, without forcing bank consolidation. CitiBank is already a 2 Trillion Dollar Bank but it is going to get a lot bigger. Investors must realize that they should not attempt to fight a battleship with a row boat. The smart investor will hitch his boat to the battleship and go along for the ride. The safest plays include buying shares in the biggest of banks or buying shares in financial exchange traded funds. If you are good or lucky at picking winners, you can make a ton of money buying individual smaller banks.


GERONIMO -- ONE WHO YAWNS


After listening to the first presidential debate, it is appropriate to talk about Geronimo which means "one who yawns". Geronimo became a bitter man in 1851. While Geronimo and his friends were hunting for food, Mexican soldiers came to his home and massacred his mother, wife and children. For the next 35 years, he fought wars with Mexico and the USA. The massacre happened just after the Mexican American War, just after gold was discovered in California and just before the Gasden Purchase.


Geronimo comes to mind because Obama never tires of saying that we took our eye off Osam bin Landen by entering the battle in Iraq. In Obama's mind, the war on terror will be over as soon as we have killed or captured Osama bin Laden. Geronimo was just one of 75,000 Indians in his neighborhood. He was the toughest of foes but he was one of many. Osama is just one of 167 million Islamist in Pakistan. Obama's solution is to threaten the Pakistanis if they do not capture Osama for us. This strategy would have been like telling Santa Anna that he had to catch Geronimo or we would resume the Mexican-American war.


The unofficial name for the war on terror is "The Long War". There are millions of Islamofascist who would like to wipe out America. These groups have been winning through intimidation for 1,400 years. America did not lose the respect of these people after Bush invaded Iraq. Iranians have been calling us nasty names for as long as I can remember. The UN security council votes have tended to be 15 to 0 or 14 to 0 to 1. France is once again one of our strongest allies. Obama is simply wrong about the status of the US in the world.


Around 1852, as part of a deal to build a canal, the US agreed to spend 12 million dollars to protect Mexico from American Indians. The negotiators thought $12 million would be enough but US Generals estimated that $60 million would be needed. Wars always cost more than we think they will. A partial solution was reached by negotiating the Gasden Purchase. The USA agreed to buy 39,000 square miles of what is now parts of New Mexico and Arizona for $15 Million, provided we would no longer be required to protect Mexico. Mexico agreed! What a deal! Instead of spending $60 million to fight Indians, we would spend $15,000 to buy 39,000 square miles. The vote in Congress was two votes short. The deal was renegotiated. Mexico was in financial hurt. We could buy more than 1/3rd of Mexico for $50 million or we could buy 30,000 square miles for $10 million. We made a big mistake and bought just the 30,000 square miles. This was one of those times when the government should have gone into debt. We could have owned billions of barrels of oil and the land above for only a few dollars per acre.


A US Fort was built in 1856 in order to protect the area while railroads were built. Geronimo just kept on raiding Mexican and US forces. He hid out in the Robledo Mountains in New Mexico. He was once surrounded in a cave but he never came out. When he was spotted miles away, the soldiers searched for the back entrance. It has never been found. Osama is hiding in a little old range of mountains called the Himalayas. He is not very far from K2, the second highest mountain the world. Caves hide outs and networks were established in these mountains thousands of years ago. Obama cannot send in the mod squad and come out with Osama.


When Geronimo was caught, in 1886, it was a psychological win, but his capture was a tiny part of the total war. I could care less if we get Osama, provided we bring the war on terror to a successful conclusion.


It sounds alarmist, but, if Obama becomes President, the risk of WWIII will increase. The best way to prevent war is to walk softly while carrying a big stick. Osama wants to pull out of Iraq so the "savings" can be spent on domestic programs. Bill Clinton practiced a similar strategy. He whittled down our stick in order to enjoy more domestic programs. We enjoyed such great wealth during his term that it seemed reasonable to "give" every renter a home. The structure was put in place to force banks to lend the full asking price to the least credit worthy individuals. We are paying a price that is many times more than the $700 Billion TARP. Had the money spent on subsidized housing been spent to keep our intelligence and military strong, 9/11 would have probably never have happened.


Pakistan is allowing the USA to fire on known targets in Pakistan. They cannot admit that they have given permission but it is folly for Obama to make it sound as if he has the easy answer.


A DEAL IS DONE and it is time for change. It is time to reduce the size of government. It is time to talk Iran and Iraq into going to war against terrorist in Afghanistan, Pakistan and Somalia. In the years ahead, Iraq and Afghanistan and Pakistan will be major allies in the Long War. The package of benefits available and sanctions on Iran could ultimately swing Iran to our side. The $10 Billion from the USA and similar amounts from the Saudis given to Pakistan to fight the terrorist has been money well spent. Scores of al Qaeda leaders have been killed.


There are 157 known al Qaeda training camps in Pakistan. Obama makes it sound like a piece of cake to flush Obama out. He talks about building respect and relationships but he implies that he would invade Pakistan. Obama should note that the UN has not declared that Pakistan is in violation of international law. Had Geronimo hid out in Mexico, it would have been correct for the US to work with Mexico but in the absence of a deal, it would have been correct to let him be.