I've just come back from a three week break in Canada. I interrupted it to spend two days in New York meeting specialists from Ned Davis Research and Mike Williams who manages Richmond Core. The Ned Davis lads flew in from Atlanta, Florida, and California and with Mike we had expertise representing a wide section of the US. In New York, streets were packed, traffic was flowing, not a seat to be had in top restaurants, and shops were doing a brisk trade night and day. No sign of recession there then!


The idea all of the blame for the credit crunch is down to fat cat bankers on Wall Street is widespread. It's even reached us. But while it's true there are some greedy souls who made more than a few bob packaging toxic loans and selling them on, the roots of this crisis lie in bad Government policies, stupid laws, and ineffectual regulators. Let me explain.


Back in the days of President Carter in the US a law was passed called the Community Reinvestment Act which forced banks including Fanny Mae and Freddie Mac to give loans out to low credit, no hope families. Sensible bank lending policies were called racist and discriminatory.


More recently, President Clinton added further teeth to that legislation, and banks were judged on how much they gave away in these NINJA loans (no income, no job, or assets). Legislation by Democrats also created ACORN (the Association of Community Organisations for Reform Now). ACORN, backed by this law, were activists intimidating lenders judged not to be giving sufficient loans to low credit, no hope families (sub prime). In the late 1990s, a leading light of ACORN was Barack Obama.


Bad as that sounds, it gets worse. Following the collapse of Enron, Western Governments forced through new accounting practices known as mark to market. Under this directive Banks must base their profits not on how much income they expect to receive in future, but on how much money they can raise immediately if they sold all their loans in the marketplace at the best price they could fetch at the time. In the current wildly volatile conditions of the last 12 months, it's estimated this artificial accounting method has contributed 70% to the current crisis. Currently, banks are forced to evaluate their loan books on a fire sale basis. This leads to a spiral of credit unworthiness driving loan book values down close to zero. Hence the run on the Banks, their shares, leading to the present crisis.


It gets even worse. It's widely reported the $700 billion bail out is about US taxpayers saving the skins of greedy bankers and Wall Street fat cats. But it's far from that. One of the world's most respected Bond managers, Bill Gross of PIMCO, makes it clear it's actually a great deal for the US taxpayer. The plan is to buy up the loan books from Banks, freeing up liquidity and allowing the economy to grow again. Because the US taxpayers can buy at significant discount currently, he's estimated over the next two years taxpayers could earn, including income and profits, somewhere in the region of $200 billion.

We cannot deny all of this misunderstanding has led to panic in world stockmarkets. But we can tell you, in our discussions with leading fund managers in the last fortnight, none are selling and all are buying. You have to ask yourself who should you follow - the thousands trying to rush through the exits, or Warren Buffett who quietly went through a separate door and snapped up $5 billion worth of an investment bank in the US at a bargain discount price?


Warren - no relation to Jimmy, the Country and Western singer - makes calls like this every time there's a financial crisis. He's done it successfully for the last 50 years, and he's the only one to become the richest person in the world by investing in shares. Think about it. Please rest assured - tough as it is - we will continue to have your best interests at heart and promise to keep you informed of important information like this ignored by much of the media.




Alan Steel
Alan Steel Asset Management Ltd is authorised and regulated by the Financial Conduct Authority

The Financial Conduct Authority does not regulate tax advice

This article is the personal view of Alan Steel. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.