By Michael Markowski
October 7, 2008

The announcement that it would take 30 to 45 days for the US Treasury department to begin to spend the $700 billion passed by Congress spoke volumes to the stock market. The result was that major indices such as the NASDAQ, Dow Jones and S&P 500 have already declined by over 5% since the bailout was passed by the US Congress. Yesterday the Dow Jones Industrial breached the 10,000 barrier for the first time in four years. The lack of follow through by the major market indices on the announced bailout underscored the fact that Paulson and Bernanke had not engineered a bailout after all. This is because they knew good and well that there are just too many holes in the ship. Instead the $700 billion package was really intended to provide lifeboats for those who are in luck because they are to big too fail.

I suspect that Bernanke, who is a student of the Great Depression, knew that the wheels had begun to come off of the economy. That it was only a matter of time before the stock market would make a significant downward correction that would result in even more pressure on the global banking system and the economy. By arranging for and getting a carte blanche for Paulson of $700 Billion, Bernanke knew that certain large and well known financial institutions could be spared. That would be important after the death and destruction was over and the dust settled. Bernanke also figured out that a bailout of this magnitude by the Federal Reserve Bank could have seriously compromised the banks’ credibility with the World’s other Central banks. This is why he and Paulson approached the US Congress.

Goldman Sach’s impromptu sale of $5 billion of its preferred shares to Buffet and its sale of $5 billion of its common shares to the public only a few days after it had announced that it did not need any additional capital now makes perfect sense. Goldman via its relationship with its ex CEO Paulson was privy to the deteriorating state of the banking system and economy. This would also explain why Goldman solicited Buffet for General Electric’s cash infusion on the day that General Electric shares hit a 10 year low. Given my logic or theory it would not surprise me to find out that Goldman used the $10 billion that it raised to short the stock market.

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