Now Boarding at Gate C14: Capital Flight Airlines

by John Galt

June 10, 2009

Ah a beautiful picture of a commercial airliner flying off into the sunset. Except this particular flight is only symbolic of a new phase in the financial crisis which had many a blogger and most people with any sense of sanity deeply concerned:

Capital Flight

I have been warning since last year about the dangers of this happening. I have been screaming that government meddling in the economy, the distortions created by the actions with Bear Stearns, Fannie and Freddie, the banks and now the automobile companies would finally shatter the full faith and confidence of foreign bond and equity holders in our system. Yet the sheeple just graze on their American Idol peanuts like a bunch of ignorant fools while the financial industry says to Uncle Sam “just save me and the hell with the rest of the country” allowing illegal and unconstitutional interventions which distort the true nature of free markets. This dangerous precedent started under that buffoon Bush with the talk up then forced merger of Bear Stearns, an event most have forgotten about because the markets did not experience the ultimate plunge at that time. If one looks at the volume numbers though you could see that everyone, domestic and international institutions alike, were disturbed at the process used to incinerate the equity holders of BSC, and worse, the Federal Reserve’s blatant intervention into the management of the company’s assets which is still reflected in their holdings in Maiden Lane, LLC. that has proven to be a losing proposition thus far.

Fast forward now to the summer of 2008 where Fannie Mae and Freddie Mac were taken over by the government, then AIG, then Citigroup, etc., etc. In each case the corporation’s bondholders were made somewhat whole yet that process is still ongoing due to the complicated nature of some of the derivative contracts and other instruments this same government allowed to be created without any supervision or regulatory clue as to the impact on the financial system as a whole. When you have a bureaucrat with taxpayer dollars to guarantee horrid decisions made by private industries, aka “socializing losses, privatizing profits”, then you have distorted the true nature of capitalism and introduced doubt into the functionality and openness of our markets. The first major action last fall to validate the level of distortions started with Hank Paulson’s false bravado about the necessity of the creation of TARP which has turned into what many of us feared, a taxpayer backed slush fund to allow government takeovers of private corporations without due process. That was followed up with the folly of banning short sales on “financial” companies by the SEC which was a joke as many manufacturers were included in the original list and that accomplished zero, zilch, nada with regards to any stabilization of the system and in fact truly induced some foreign institutions and hedge funds to say “goodbye” to the American markets as open and free participation was now a government controlled function and not a function of the natural activity of markets.

That was under Bush, when the dangerous precedents were set. Let’s fast forward to the current day and age several months later when a Socialist President Obama has usurped not just the rule of law, but the basic foundations for the establishment of capitalist markets and our system of finance.

To state that the events of the last ninety days are profound is an understatement. I wish to provide an example that most at home can relate to and will exhibit the audacity of hope, change and fascism we are witnessing on a national scale. Imagine you are living happily at home but due to some job problems at your wife’s place of work her pay is cut in half due to the scaling back of hours thanks to the economy. Your pay is also cut back but not to that degree and your household starts to have problems paying its bills. After paying your mortgage payment late a few months, your local bank representative urges you to attend a meeting to discuss this problem to prevent any action of foreclosure against you if you miss another payment. The bank rep says that only one of you need attend so you elect to go so your wife can work that day. You arrive at the bank and sit down with the head of the home loan division and he has a huge file in front of him that contains all of your mortgage paperwork, payment history, etc. The discussion begins about the problems you are having at home and you explain the troubles you are having. The manager looks you in the eyes and says “Well, it would appear to me the solution is obvious. You will have to divorce your wife if you wish to remain in your home. If you do not within the next fourteen days, we will begin foreclosure proceedings.”

That fictional scenario is exactly what happened when Obama fired the CEO of General Motors. The independent Chief Executive Officer was terminated by a non-member of the Board of Directors, a non-shareholding interest who’s only action was to act as a loan source for company operations. That direct and illegal action should have been (and you were warned by these pages) your first hint that that “damned piece of paper” as Bush called it was no longer relevant. The other aspect one had best consider is that the takeover using taxpayer dollars of AIG, Citigroup and other institutions gave the government trading desks to command and the power to order purchases of various instruments to influence the direction of bond and equity markets. Yet few believed in the PPT and write it off as fluffernuttery; however, how can it be dismissed now when Smith Barney/Morgan Stanley’s trading desk along with AIG’s are now under the thumb of government oversight and this administration has demonstrated openly that regulatory oversight and free markets are irrelevant to their activity and desired goals. It can not now nor ever. The non-shareholder forced bankruptcy by the government with imposed redistribution of assets in the 363 filings for Chrysler and General Motors should prove that beyond the shadow of a doubt.

That being said, last night’s Supreme Court decision and lack of intervention has opened the door to a flight of critical proportions. With contract law now essentially up to the whim of a bureaucrat and not the private agreement between two individuals or corporations, there is no viable guarantee that investment dollars via bonds, preferred shares or common shares hold any validity. They now are as viable as a casino chip and to say that I am overstating this is foolishness on your part. Judge Andrew Napalitano on Glenn Beck’s program Monday evening on the Fox News Channel warned that if this case is not heard and the request for a full hearing denied, it would be almost impossible for any contract law to be worth the paper it was printed on as the Federal government, not the rule of law, would be the determining factor in the validity of any aspect of said contract.

The implications of this are obvious as we are now no different than the Russian Mafia run corporations that defaulted on foreign investors on a regular basis in the 1990’s, where the Russian government took over corporations and seized shareholder and bondholders interests without even batting an eyelash. Foreign capital has yet to return to the Republic of Russia with any volume or voracity and thus one has to ask the question:

Are we really that different?

The answer is obviously a resounding “NO” as any guarantee and faith that backed the rule of law behind our investing instruments is now null and void if the Obama administration feels the empathy to say so otherwise. The result will be a quiet, and I do mean very quiet, exodus out of dollar denominated assets and investments by foreign investors, including sovereign wealth funds and banks. As that exit accelerates and becomes more obvious it will be reflected in the TIC report and US Dollar index first and foremost. Once the US Dollar index drops below the 72 level again, the capital flight will become obvious to all parties involved in our nation and the destruction of our financial system will accelerate as the Federal Reserve will be forced to intervene by monetizing the debt at an accelerated pace to offset the selloff of our Treasuries and to prevent a further collapse of the real estate industry domestically. The problem is now set in place for this problem to feed on itself and there is no exit since the politically unpalatable choice of allowing the natural flow of business, bankruptcy and rebirth, to occur. Thus I look for the remainder of this year to be the most politically unstable period of time in modern American history, and for the world to exit our nation financially to preserve their systems to the best of their ability.

Please put your trays and seats in the upright position. Turbulence is ahead.

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