Well it was obvious that it had to happen, and it has.  The last two major investment banks are converting to commercial banks.  Commercial banks on a worldwide basis maintain about 8% capital to assets ratio, which means that they can only borrow at a rate of about 12 to 1.  The traditional investment bank leverage of 25-30 to 1 became intolerable to the U.S. Government, and I have no doubt that government precipitated the move that hit the newswires last night.

Now, as entities regulated by the Federal Reserve, their leverage will now be limited to 12 to 1, and their profitability will be much lower.  We said this was going to happen over a year ago.  It’s obvious that the world can no longer tolerate the undisciplined use of leverage and speculative activity by investment banks (along with many commercial banks, investment companies, and insurance companies…for example, AIG’s insurance subsidiaries were more conservatively managed, while the holding company was speculating) and the ignorance/derivatives they spread.  People in a rush to keep up with each other, and driven by greed, did extremely unwise things in the mortgage bond market and in over the counter derivatives market.  So now, the world is paying the price.

Taxpayers in U.S., Europe, Australia and many other countries, as well as many others around the world will bear the brunt of this.  As a wise friend put it “about a decade ago the goat was left in charge of the garden”…and we all know how the goat behaved.  Now, that much of the garden has been eaten, we are all much poorer for our lack of wisdom in allowing the goat of mortgage bond and derivative madness to run unfettered.

This is not the end of the global deleveraging story.  The great majority of over the counter (OTC) derivatives still remains as a sword of Damocles over the world financial markets.

We will have more on that in our next memo late today or tomorrow.

In summary, we believe more than ever in our themes of inflation, a weak U.S. dollar long-term, gold, and China.

Thank you for listening.

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