It’s hard not to feel sympathy for elderly investors who have been sold down the river by financial advisors. This story brings a shudder with one old lady investing $242,000 into ING Funds which were invested in CDOs and CLOs in the main.

There will certainly be some investigation into how financial products have been marketed and sold especially to novice investors or those towards the end of their lives where only conservative investments should be considered.

“safe as a bank” they were told. famous last words.

Thanks to Christoph for this story. Jim Rogers has been on the wires lambasting the Fed for pumping out cash left, right and center. He has called the bailing out of investment bank Bear Stearns as “socialism for the rich“.

I like that. He calls for the Fed to be abolished. Now we’re talking.

Let’s face it, market rally or not, the $ is still in serious trouble and banks are still going to be under severe pressure. Watch for the lawsuits to come flying out now. Charles Schwab is being sued for “untrue” statements regarding the diversification of certain funds. We are going to see this more and more as people start to take a closer look at the way investment products have been sold.

You could say this is an outcome of an asset bubble bursting. People rush round looking for someone to blame when they lose all their money. “Caveat Emptor”  is conveniently forgotten and another investment generation is left to learn the lessons that previous ones failed to pass on or more likely were ignored in their attempt to do so.

How do people feel out there? I know 95% of my readers are from the US so maybe you have had some first hand experience you would like to share.

After a chaotic few days the market has calmed as it awaits the next round of soothing medicine from the Fed. 100bps is expected now and anything less could see a major sell 0ff. So perhaps its time to recap on what’s happened:

- Global expansion of the money supply by the banking system abetted by loose regulation.

- Financial assets treated as investments.

- Trading on a leverage basis whether in the markets or in property.

- Reliance on capital gain to pay off debts.

- Creation of an asset bubble in property and stocks.

- New financial products promising spectacular gains.

A quick recap:

- Asset prices can go no higher as the mathematics of compound interest and cashflow catches up.

- The first domino falls as the sub-prime market starts to fall.

- Property finally turns and heads south in the US.

- Debts over run equity in houses.

- Spirals into derivative products causing a more widespread reaction.

- First reaction from Fed.

- Banks start to revalue (mark to market) loans.

- First run on a bank: Northern Rock fails.

- UK nationalises Northern Rock.

- General deleveraging starts as contagion spreads.

- Banks review lending and fringe financing companies fail.

- Rogue traders appear.

- Central banks provide copious amounts of liquidity.

- Fed cuts rates heavily and provides open lending to all.

- $ collapses and commodities explode as safe haven.

- Second run on an investment bank: Bear Stearns fails.

- Fed sort of nationalises Bear Stearns but gives it to JP Morgan under guarantee.

- Financial system on the verge of complete collapse.

So what now?

Well the Fed has studied the 1930s depression very carefully and realises that systemic bank failure is simply not an option. Yes shareholders will lose most of their money but that’s the risk with equity. The lines of credit and liquidity must be kept open and depositors must be kept afloat. If necessary banks in trouble will be taken over or have to merge.

It’s safe to say they will do whatever it takes, regardless of the cost. The clean up can come later but for now this is mainly about preserving confidence in the system.

How it pans out is impossible to predict but i wouldn’t want to own any banking stocks.

So JPMorgan picks up Bear Stearns for $2…..yes $2…not $20 as on Friday. The fed cuts the discount rate 0.25% which actually is neither here nor there.

The markets rallied initially on some short covering but the market is now in full blown meltdown.

Even Goldman Sachs has reported a write down. Only $3bln which is chump change for them but it shows how this contagion is spreading far and wide.

This is like a game of dominoes now and the central bankers globally need to pull every trick out of the bag to prevent a complete collapse in global banking stocks and general equities.

I would imagine there will be some concerted intervention either in currency markets or in the interest rate markets. This isn’t just a US problem because it will start spreading soon.

This is a very serious situation.

With rumours continuing to circle around main street financial institutions in trouble, the Fed along with other central banks piled in another $200bln worth of liquidity in a vain hope to stem the tide. It certainly worked sparking a massive rally in the US market which was looking very weak indeed.

I wrote 6 weeks ago that the Fed would have no option other than to underwrite the whole financial system. This is exactly what they are doing. The worrying aspect of this approach is that it leads the market to depend on continuing liquidity to provide confidence and prevent what would be happening without intervention, namely a full scale rout with several institutions going under.

This creates extreme moral hazard. Even though many financial institutions have clearly acted irresponsibly and in some cases in other ways, they will not be allowed to fail unless a “deal” is worked out where they will be “acquired” quietly for a nominal sum and so the system stays solidly in place and the illusion is maintained.

F.William Engdahl lays out his thoughts on the origins of this mess. It’s focus is the US over the last 100 years and is interesting to read though he makes some strong accusations about the actions of certain people.  The extent to which small cliques have organised and run the financial system is open to questions but there is no doubt that the US prevailed at Bretton Woods on the strength of pure self-interest.

So what now? Well I would say more of the same. But gravity is a powerful force and its hard to imagine these markets not falling further and more de-leveraging taking place in credit and carry trades. I’ll discuss shortly what a new global currency system might look like because the current one is about to explode.

As the credit crunch continues to spreads its woes my inbox is filling up with offers from NZ banks (all Australian owned by the way) to buy various types of debt with fabulous names:

- Perpetual non-cumulative preference shares

- Perpetual callable sub-ordinated bonds

All offering north of 10%. A no brainer for bank debt surely?

Well yes it is. Let’s face it if the bank goes belly up we’re all stuffed. How much is deposit insurance worth these days? Probably not much. But the reason behind this rush of issuance is more interesting.

Banks have plenty of cash on the books, known to us as our deposits, but recorded as unsecured liabilities in the bank’s balance sheet. Yes we are not really depositors but merely unsecured creditors.

So why do banks need to raise more debt or more to the point equity dressed up as debt? Well their balance sheets are under severe pressure and they need to meet the requirements laid out in Basel II which means they need more equity on the balance sheet in order to lend out all this cash.

This is not good news at all. It means banks are constantly trying to tidy up their financial position which is tenuous at best.

In the US mortgage backed bonds, normally AAA, are trading at their widest against US treasuries since 1986. There is some serious de-leveraging going on even in the most liquid and traditionally safe markets. This is a harbinger of further losses to come. Many players are now starting to realise that the financial system is in structural distress.

Suddenly owning a few dairy cows seems like a sensible investment.