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You would think that there are no clear winners with this bailout. But history has shown that these recessions and panics actually have created a select number of shrewd winners, whose deep pockets are rewarded by coming to the rescue.

In fact, the panic of 1907, which was suggested by some to be cleverly coordinated by JP Morgan through a series well-placed false rumors on questionable bank liquidity, caused a great number of smaller banks to go belly up when they couldn’t pay demanding crowds with little reserves they held. Yet, this incident helped larger, more stable banking institutions, like JP Morgan’s bank, to benefit. Furthermore, the panic of 1907 also led to the creation of the Federal Reserve, which, in turn, helped provide an extra safety net to those financial institutions who survived.

The Winners

A little more than a hundred years later, the same opportunity is being created for more stable banks like Citibank, Chase, Bank of America and Wells Fargo, as they gobble up smaller banks and brokers, like Bear Stearns, Merrill Lynch, Lehman, Washington Mutual, Wachovia and others, for cheap. Sure, these companies had problems, but the larger banks are not making these deals because they are nice. They are purchasing these weaker institutions at pennies on the dollar using the financial help of the Federal Reserve to make it happen.

These acquisitions not only help the long term strategic development of the more stable banks, but these moves will shrink competition across the banking field. With less competition, we may expect to see less competitive CD rates, fewer services or higher ATM fees, especially with the majority of ATMs controlled by top tier banks.

Other winners

In addition to the more stable banks gaining a stronger foothold on the future, there are other winners. For instance, Warren Buffett’s investment in Goldman, Sachs offers a savvy long term investment in an investment bank. Also, the US government has recently said that it was taking ownership in some of these banks. While I understand the confidence builder behind making such investments, the government still stands to reap significant profits. In addition, I am not sure if having the government hold influential power over people’s finances is a good thing. 

Government Conspiracy?

Before you start yelling mega government conspiracy, you should also realize that the faltering banks are in trouble because they put themselves in that position. They are the ones that underwrote the bad real estate loans and took the risks. No one made them do it.

But on the other hand, recent accounting regulations of how these mortgages are to be recorded has made it tougher for these faltering banks to gain the liquidity margins necessary to make a recovery without getting help from other banks and the Federal Reserve.

The Losers

The primary loser is the US taxpayer. The fallout from a $700+ billion bailout has to come from somewhere. Since we already have a deficit, any new funds, like these, automatically flow directly to our debt. As we incur more debt, we have to pay additional interest payments for every dollar of debt we incur. This eventually hurts taxpayers because the government has to collect from the same limited tax base. If we want to reduce our debt, the government has to either raise taxes or offer fewer government services.

Otherwise, the US dollar will begin to fall in value the longer this scenario is not addressed through balancing our budget. If you think about it, giving more money to someone who keeps getting more and more into debt doesn’t make sense. We would see our FICO score fall. Except in this instance, the government’s FICO score is the US dollar. And as the US dollar falls, the government must increase rates to attract investors for new government debt, causing prices to inflate. For the time being, the government has been able sell their debt at lower rates. But that may not last.

How you can benefit too!

There are potential situations you may want to consider when market volatility has subsided. For one thing, our debt and therefore our dollar may continue to spiral out of control if the next presidential administration doesn’t address balancing the budget. Diversifying towards more stable currencies should provide some protection on your assets against a falling dollar. This can be as simple as interest bearing Eurodollars (similar to T-bills) or broad based international ETFs. A good discount broker will have such options to look at.

Another option is to diversify towards assets that hold their value. While some suggest commodities, investing in metals or petroleum products can be less appealing if those commodities prices as based on disposable consumer demands. For instance, if fewer homes and cars are built because fewer people are buying them, demand for their respective commodities drop as well.

And while alternative investment ideas like consumer staples (food and toiletries), US global corporations or hot pockets of domestic growth sound enticing, finding safe, cash rich countries with stable currencies may become your best investment for an uncertain future.

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