Monday, September 29, 2008

Failed Bailout Vote!

Failed Bailout Vote! It was never certain that the vote on the bailout would pass. With five weeks to go until election day, and with a large segment of the population mad at the idea of bailing out big business, it was a tough call for the House members. What would have happened if the bill had passed? We don't know. My guess is that, with passage, the value of mortgage loans would rise because the Federal Government would be a ready buyer. As the purchases occurred, cash would flow back into the banking system. If the bailout did not pass, I would expect to see the value of the mortgage loans drop even farther, the stock market retreat because of the unknown, and greater amounts of money flying to US Treasury bills and notes, reducing the interest paid on these instruments to an insignificant amount. For the vast majority of our clients, we have a very heavy position in cash. On September 19, 2008 the Federal Reserve guaranteed these accounts for the full amount in the accounts, both taxable and tax exempt. As I indicated in a recent newsletter, the bonds in our accounts seem good, are paying interest and are paying back the principal when the bonds mature. I believe we have taken a defensive posture that we should maintain even while it appears there are buying opportunities in this market. I am not sanguine about what is happening. I believe that what we have witnessed in the past several weeks is a lack of leadership in Congress and the business community. Usually at times like this the Executive Branch provides the needed leadership, but this administration has lost its credibility for many and must rely on others to move the process along.