What The New Bailout Bill Won't Fix

If Monday’s rejection of the president’s bailout bill means one thing, this is it: You must take action to protect yourself from the next 777-point collapse because it’s abundantly clear that Congress won’t. Today’s 300-point decline that comes on the back of the Senate’s new bill proves what I mean.

Congress’s bungling of the bailout bill out has me shaking in my boots. But not because of another impending disaster. I’m shaking because the no vote and today’s sell-off isn’t the end of the line for America—it’s actually the beginning of a better deal for taxpayers and investors.

Hard to believe? You bet. But not when you see what will happen when a new and improved bailout bill passes. As you’ll see…

The market will reverse its 777-point decline as the U.S. financial markets—and the whole world—sighs a breath of relief. Just look at how the market jumped 450-points higher on Tuesday hopes a new improved plan is in the works!

Mark my words—the same thing will happen again Monday when Congress votes to approve compromise legislation on Friday! The chain reaction will result in more stable and responsible financial .

What’s more, the strong companies will get stronger. You needn’t take my word. Just look at Bank of America’s takeover of Merrill Lynch, JP Morgan’s takeover of Washington Mutual and Citibank’s take over of Wachovia, and you’ll see what’s headed your way.

MOST IMPORTANT: Cash will be king on Wall Street again as banks no longer pass out credit like pancakes at a fireman’s picnic. Despite what the Feds want you to believe, the NEW and IMPROVED bailout bill that’s ultimately passed will not only make credit tougher for individuals to get, but also tougher for businesses, as well.

Supplemental Insurance for Banks: A Myth?

Don't many banks and funds have supplemental insurance to protect themselves? Tons of it. Insurers have written $62 trillion worth of credit-default swaps. Banks have private deposit insurance. But you have to understand: These seeming guarantees have been part of the problem, because they have given speculators a false sense of security. Insurers wrote them when they believed the system was risk-free. CDSs became speculative vehicles, and the liabilities at this point are way too big to cover. Additionally, many of the deals are complex and nearly opaque as to who owes what to whom.

Insurance is always available when there is nothing to fear, but it goes away when big trouble looms. A subsidiary of Warren Buffett's Berkshire Hathaway company just announced (9/10) that it will stop offering supplemental deposit insurance to the 1500 banks it was covering. As you can see, it offered the insurance to make money, not to protect banks. Now that banks need protection, there is no more insurance.

Still, one can hardly blame an insurance company for getting out of the business. Insurance is supposed to provide a way for prudent people voluntarily to socialize their risks. But when profligacy puts everyone at risk, insurance is impossible. In a depression, insurance companies stop insuring because they fail. Washington Mutual bank, reportedly in trouble, is 7.5 times as big as the biggest bank that's ever failed in the U.S. Buffet is just acting ahead of the disaster. The government never acts ahead of disaster, so when the FDIC stops providing insurance, it will be because it has no choice.

Who Wants To Be The D-e-p-r-e-s-s-i-o-n President? Obama or McCain?

What a load of bull! The worst isn’t over – not by a long shot. We’re going to see runs on small-town banks, as people steamroll each other to get their money out while they still can. We’re going to see more “safe” money markets worth under a buck a share. And mark my words, we’re going to see several more big names go belly-up, as the politicians finally realize they can’t stop this panic with smoke and mirrors.

The truth about the economy is so bad that Barack Obama and John McCain might be changing their minds right about now. I’m betting neither one of them is looking forward to being tagged as the next Depression President. That’s right. D-e-p-r-e-s-s-i-o-n.

Even just typing the word makes me shudder. But at this point, the Americans would be foolish not to own up to the very real possibility. Wall Street understands. Year-to-date, Lehman Brothers is down 99%. American International Group is down 95%. Washington Mutual, Fannie Mae and Freddie Mac, down 94%, 98% and 99%, respectively.

These are not sniggering little companies. These are giants. These are some of the very pillars of American finance. Throw in Merrill Lynch, Citigroup and Bank of America, and it’s very plain that the foundation of U.S economy is crumbling. And as far as the average Joe or Jane is concerned, the economy is already in shambles.

And it’s going to get a whole lot worse. Worse? Yes, unemployment soared to 6.1% in August. That came as a surprise to economists. Home prices are down some 16% year over year. The magnitude of the drop surprised economists. Retail sales fell 0.3% in August. They were revised down 0.5% for July. Both numbers came as a surprise to economists.

Are you starting to see a trend here? All the eggheads and government wonks have consistently underestimated the depth and breadth of economic troubles. They said the housing problems would be “short-lived.” They said their financial system was “resilient and strong.” They said the stock market would “recover by the end of the year.” None of that is happening. And if you hold your breath waiting, it just might be the last breath you ever take. 2009 is going to be a devastating year for Main Street and Wall Street.