Financial Watergate

It’s taken 3 years for us to uncover the details of what should go down as one of the most disturbing periods of government action since Watergate.

In 2008, as the financial world stared at the precipice, our government acted as follows:

Hank Paulson – Secretary of the Treasury at the time, was providing hedge fund managers (many of them Goldman Sachs alumni $GS) with non-public information about how bad the crisis might become and how the Treasury would likely wipe out the common and preferred stocks of Fannie Mae and Freddie Mac.

The Federal Reserve – was secretly lending a total of $7.77 trillion to banks around the world with the vast majority going to the largest US Banks. These below market-rate loans provided the recipent banks with an estimated $13 billion in profits and again raise questions about how the Fed chose who would survive and who would fail during the crisis. The fact that the Federal Reserve and large banks fought against this disclosure for more than two years was likely a move to prevent this new information of exactly how bad off the banks were from being incorporated into the already passed Dodd-Frank reform bill.

Congress – Rep. Spencer Bachus, a ranking member of the House Financial Services Committe attended a highly secretive evening briefing with Ben Bernanke and Hank Paulson where they described how the global financial system was close to meltdown. The next morning he use options to establish a short position on the Nasdaq 100.

Any of these acts individually have to deeply shake the average citizen’s already low confidence in our government and the fairness of financial markets. Combined, they are a devastating blow that may significantly damage the value of the financial services industry for years to come.

Retail trading is especially vulnerable to a reduction in the public’s perception of the market. The charts of $SCHW, $AMTD and $ETFC look  like no one is expecting the public to return in great numbers to the market any time soon. Given what they now know, who could blame them?

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