Retiring President’s parting gift to Paulson

Buy Rotten Eggs for $700 Billion in 36 days

The first mistake the Americans made 8 years ago was when they forgot to get the incoming
President’s head examined. There is always an intense debate for the suitability of any candidate for
the coveted post of the President. More emphasis is always given how the next Commander-In-Chief
would act in case of exigencies. No one asked them of their basic knowledge of economics except
how much taxes would he reduce.

Visit any Forex traders or option trader’s website – they give you $ 1 million to play a demo game.
Never before any presidential candidate was asked to play such demo game. Never before any
presidential candidate was asked what will you buy if you were given $700 billion of Taxpayer’s
money?

However, on the historic Sunday, 28th September 2008 to be precise, a bipartisan agreement was
arrived at to authorize the President Bush to succumb to the wishes of the Treasury Secretary Hank
Paulson to spend $700 Billions of tax payers’ money to buy rotten eggs lying in the vaults of Banks
and Brokers in his last 36 days!

When a person is dying, his last wishes are asked for by the relatives circling on him just to listen how
much he would get if that fellow dies. When a criminal is condemned to death, his last wishes are
asked for before his head is shaven off in preparation for his journey to the death. Hank Paulson did
not have to have his head shaven off. His wish was $700 Billions – and America’s most retarded
President in the history granted the wish to spend $700 Billion in 36 days! He was joined by the
chorus of congressmen/women to tell their Commander in Chief – Yes Sir. The President said – I did
not hear you! The congressmen raised their pitch – Yes Sir, Yes Sir, Yes Sir.

Ask any businessmen or any person of ordinary prudence – would he give his departing employee
even $700,000 of authority when he has already resigned and counting his last 30 notice days? Of
course No, then how come the President of United States hands over blank checkbook to his
Treasury Secretary with unchecked power of $700 billion when he is counting his last 36 days?. If
something goes wrong later – Mr. Paulson would say” I have right to remain silent.” Look at the bill
you have passed in the Congressm – No questions to be asked. Period.

Only a few months ago, the President Bush with great fanfare distributed Tax Rebate checks to
American citizens amounting to $106 billions only to withdraw $ 700 billions from their and their future
generations’ pocket on today (28 Sept 08) like a conman. During his presidency, over 4000 soldiers
lost lives in Iraq, 1000 more in Afghanistan, over a million innocent people died in Iraq, Twin towers of
World Trade Centers were destroyed, billions of dollars of budget surplus was converted into
whopping deficits, US Dollar dropped by 40%, hurricanes destroyed several cities, wildfires raged in
and tons of mud sided in California, millions lost jobs and homes, oil prices rose from low 30s to high
145, and industries collapsed one by one – from Auto, airlines, healthcare, Medicare, insurance,
brokers, investment banks, and banks for only one reason. He was thoroughly incompetent.

Now, let us consign all events until today’s night into history, and focus what will or could happen
from now on to the financial markets around the world. Here are the posers and possibilities.

Q: Is it a done deal? Will it become a law?

A: Preliminary agreement is struck. While leaders have agreed, it is not known whether the rank
and file senators will vote for the bill. They have been getting angry response from their
constituencies to vote against, There have been street protests in California, Anger is building up
which may become violent. US is heading towards unrest and then civil war in a few months.
Q: What will happen to the market?
A: Paulson wanted to get the bill signed by the President before the world market opens tomorrow.
He expects the market to give solid response. However, the market is always an unpredictable
beast. World markets do not act on themselves. They wait until the US market opens. Further,
the market movement depends on the major brokers. As you are aware, most of the leading
 Investment banks like Bears Stearns, Lehman Brothers and Merrill Lynch are either in the coffin
or ICU. The credit crunch is so much that most of the brokers do not have money to pump into
the market and take their proprietary position.

However, Goldman Sach and Morgan Stanley, now being banks, will be given billions of dollars
to buy into overseas markets, especially near day close, if the market do not move up strongly in
the morning trades.
Q: Will the bank start lending and reduce the liquidity freeze?
A: Doubtful. Most banks from Citibank to UBS have raised capital from the market in the form of
High coupon (9% to 11%) preference shares in billions of dollars. They will be forced to retire
high cost debt, leaving little in their coffer.

Further, more and more debts are being generated in the market due to sub prime default that
makes more and more derivatives doubtful. The banks will be forced to pay to the counterparty
in respect of future obligations. It can not plead that it does not have money. The creditors may
sue the banks to either pay or file bankruptcy. There is no chapter 11 for banks, only Chapter 7
and 13 that compulsorily wind up the company.

The mistrust has been built into the market so much that the counterparty risk has risen to the
highest level. Under these circumstances, the interbank transactions will remain low. The
collapsing banks in USA, UK, and rumors of failures in centers like Hong Kong, will continue to
make the market difficult to lending.

Corporate lending may take a while. The commercial paper market has become like a junk bond
market with interest rates running in high single digit to low double digits even for blue chip
customers. The real interest rates are perking up.
Q: What happens to the Equity markets?
A: They will open high but then retrace after 2 hours, again peaking up near the close due to US
funds buying with billions of dollars in blank checks.

The real rally may come only after the reaction of the US market. Tuesday may be stronger than
Monday, provided no negative news emerges on deal front.
Q: How the markets may react?
A: • Dollar block country may do best – Hong Kong, Singapore, Taiwan, Korea may choke
3% to 5% gain initially, go down by 3% in correction, to peak up gain near close by
another 3% to close at 8% maximum.
• Japan may gain by 3% to 5%.
• Sensex may gain 600 points initially, depending on how the Asian markets have reacted,
to lose 300 pts, to make up morning losses as soon as London market opens strongly. If
London is lower, due to another bank failure, the Sensex may lose steam. US brokers
may not be that active in India market. They need more money at home than park them
overseas.
• Dow Jones may chalk up over 400 pts gain because of massive short covering of Index
weighted financial shares. If the bill is passed into law on following day in the congress,
then all financials will rally.
o It is possible that the Banks and Brokers may start reporting profits due to write
back of excess provisions caused by higher market value manipulations
o If in the meanwhile Mark to Market rule is abolished, the bonds may be re valued
to par value on HTM or Hold Till Maturity principle. (In this case, ICICI Bank may
also benefit in India)
o Some large hedge funds may fold up due to changing of short selling shares in
middle of a game. The losses may run into billions of dollars. If they save the
banks, the hedge funds get busted. Will Paulson plan save them too?
o There could be thousand of law suits in UK and USA against authorities from
hedge funds, pension funds for losing money due to sudden changing of short
selling rules in middle of the game.
• Bond market may behave differently, Initial rally may fizzle out. The collapse of banking
 system has just started. British banks, once considered safe may come into more
problems. The bank failures are spreading to every where. From USA to across Atlantic –
UK, Germany, Belgium (Benelux countries), Hong Kong and more will follow in Asia and
Japan. Many have not shown yet where do they stand. Almost all Asian and Japanese
banks are saddled with the American Cods, CDS, and Lehman Bonds that run into
billions. When Lehman owed over $600 billions, the question arises – to whom? Those
who are trying to buy Lehman because by buying them out, the cross entries will be
eliminated.
• The British banks like HSBC may have more losses. If you look at their balance sheets
in Yahoo, there are hundreds of billions or even trillions of dollars of transfer between
various assets –
o long term assets were reduced by 800 billions and short term liabilities rose by
$1.2 trillions, ($1200 Billions)
o Long term Investments rose by $ 1 trillions.($1000 Billions)
o Cash resources depleted by $300 billions.
o Its capital is just $88 billions against total liabilities of $2.2 trillions or just 3%.
o In other words, all off balance sheet assets and liabilities of off shore centers have
been brought into the main balance sheets. How much of such trillions of dollars
is good, we do not know. See the following link...
http://finance.yahoo.com/q/bs?s=hbc&annual
o In short the balance sheet severely deteriorated. This applies to almost all banks
who have tied up with USA and who bought US banks or brokers 3 to 5 years ago
amid lots of fanfare.
• The dollar index may gain initially.
• Commodity price may see fall. Metal stocks may fall worldwide again.
• Gold too may fall initially by 6% to 8% in 2 or 3 sessions. However, the gold is having lot
of real strength. After initial euphoria, it may rise again.
• Oil Prices may fall due to shorting of futures against buying of $ index. The oil prices are
bearing the stamp of Rupert Rubin, ex-Goldman Sach Vice President and former
Treasury Secretary and now top executive of Citigroup. With blank checkbook in the
hands of Paulson, some billions may be given to old colleague to short the oil and
strengthen the dollars
o It may be noted that recent spike in oil price by $25 in single day was due to short
covering of oil contracts ahead of settlement on Nynex. Under the current rules,
the settlement is subject to physical delivery. So the short sellers have to either
buy back the contracts or deliver millions of barrels of oil physically that they do
not have.
o This scenario may be repeated in November. While buying back the September
contracts at huge premium, they shorted the November contracts again in roll
over exercise. If the oil prices remain strong, expect another major spike in oil
prices in November. Oil is now most manipulated market with the use of
derivatives.
o There are all signs that another Enron is in the making, this time, 20 times larger.
Which company is used now, is not known.
• Interest Rates will go much higher and you should not be surprised, if they get into high
double digits in less than 6 months. The lower credit rating of US governments by Fitch
and others in oveseas countries (Moodys and S&P will not change their loyalty) may
again push up the rates. If the rates does go to even 12%, the US government will have
to service their debt of over $13 trillions @ $ 1.5 trillion per year of repeat expenses.
Q: Does it mean that USA is on recovery path?
A: Absolutely not. The manipulative effect does not last longer, especially when the trillion dollar
scale is considered. The States and Local government who need over $200 billions to manage
their state, may raise their ugly head and demand payment when 3 times more money is given
to bankrupt banks. USA is receding into civic interest and Civil war slowly and surely.
Q: Is there severe discontent among Americans at the current Bail Out plans
A: Americans are damn angry. They are losing jobs, homes, healthcare, Medicare every thing…
They have now converging on the streets with big banners. If the bill is passed into law, they will
 flare up, and the anger will spread across the nation like a Californian wild fire. Since guns are
freely licensed in USA, there is likely to be mayhem and the ordinary civic unrest will escalate
into full scale Civil War.

This may happen swiftly, even before election. We should be very happy that it does not happen;
In fact it should not happen or should not be allowed to happen. For the first time, US
Administration will have to use bullets on their own soil to kill the American themselves instead of
killing of millions of peoples abroad in self engineered war of massive scale.
Q: What should an Investor do now?
A: This is pet line of CNBC in its advertisement for which they never reply. The present scenario is
very unstable, and changes from moment to moment. It is more akin to war. Deal with it as it
comes. No planning is going to work, except holding some portion in gold.
Q: Is there any solution to the present mess?
A: Of course, yes. The trouble right now is that no one knows what has suddenly happened and
why so swiftly. Watch for my book “Sub Prime Resolved”: that contains complete solution and
also wait for my next article here – How we got here? Legalizing Parallel Economy”
Q: Are we to worry about every thing?
A: No the problem will take care of itself. For every problem, there are 10 solutions, One has to find
it. I have found them, and sent out a letter to appropriate authorities who received them by
FEDEX on 25th August, 2008, but they did not reply. Who is by the way Kalidas? Never heard of
him.

Kalidas, Hong Kong

29/5/2008