Throw the Crooks in Jail! (brk, aig, blk, gs, lz)

Another nice day for stocks has pushed the S&P 500 right to resistance at 1,335 as the first quarter winds down. If funds are buying stocks and "window dressing", as I suggested yesterday, then we may see them dump those stocks during the first couple of days of the second quarter.

Over the past couple of years, the first day of the month has usually been an up day. But with the S&P 500 up against resistance, and earnings season right around the corner, I'd say a moderate decline is warranted.

The stock market has been amazingly strong essentially since August. Even the events in Japan and the Middle East only resulted in a minor correction. But let's not get complacent: the end of QE2 in June has the potential to bring a more serious stock market correction.

Recent comments from Fed governors suggest that the Fed is prepared to stand down on its liquidity-producing operations and see if the U.S. economy can stand on its own strengths. There are enough question marks about U.S. economic growth in the absence of stimulus that we should expect a correction.

However, the Fed will likely be ready to unleash QE3 at a moment's notice. And fund managers and institutional investors know the Fed will backstop the stock market, so any weakness as we move through the end of QE2 will be a buying opportunity. Make a note of this to start looking around then.

*****Speaking of the Fed, it has apparently turned down an offer by AIG AIG to buy back some of the toxic assets the Fed holds as a result of TARP.

This is an incredibly ironic situation.

Back in 2008, the Fed lent money, guaranteed existing loans and took on toxic assets to help improve banks' balance sheets and stabilize the financial system. We should also remember the TALF program that was supposed to create a market for toxic assets. The program failed, because banks believed these toxic assets were more valuable than the prevailing "mark to market" prices indicated.

Now, the Fed recently announced it would be selling some of the toxic assets it holds. Institutional investors, including PIMCO and Blackrock BLK, have raised cash to buy toxic assets. And AIG wants in on the action.

AIG received $182 billion in loans and guarantees from the U.S. government and the Fed during the financial crisis. Some of that money went right out the back door as cash payments to Goldman Sachs GS and other banks with which AIG had entered into credit default swaps.

AIG is now 92% owned by the government. Yes, you read that correctly: 92% owned by the government, or you, the taxpayer. And it wants to spend $15 billion to buy back some of the very same toxic assets that brought about its downfall. The Fed has denied AIG's offer, and rightfully so. AIG would essentially be using government to buy government owned assets.

I suppose the proposed transaction would help AIG repay its debt. But it is high time for the Fed (and Treasury) to stop aiding financial companies with favorable treatment, particularly when they're trying to make the same mistakes that got them into trouble, and us into debt, the first time.

*****Warren Buffett and PIMCO's Bill Gross: the U.S. dollar will continue to lose value so long as the U.S. government refuses to deal with $75 trillion of outstanding debt and liabilities (Medicare, Medicaid and Social Security). 

Gross says we are "...out-Greeking the Greeks..." and that Treasury bonds "have little value."

Buffett is quoted as saying: “I would recommend against buying long-term fixed-dollar investments...If you ask me if the U.S. dollar is going to hold its purchasing power fully at the level of 2011, 5 years, 10 years or 20 years from now, I would tell you it will not.”

In the context of falling value of the U.S. dollar, it is essential for us all to grow the number of dollars we have though our investments. Investors should own precious metals like gold and silver. Investors should also own stocks that pay solid dividends.

You can find some of my top dividend ideas HERE.

*****And speaking of Warren Buffett, one of his top executives, David Sokol, has resigned on accusations of insider trading. Apparently, Sokol bought $10 million worth of Lubrizol LZ before he suggested a Berkshire-Hathaway buyout of the company to Buffett.

Lubrizol stock jumped nearly 30% on the news that Berkshire would acquire the company. Sokol made nearly $3 million on the deal. And he is insisting that he did nothing wrong.

I'll say this: if Sokol didn't break the letter of the law, he violated its spirit. And this is exactly what's wrong with Wall Street and securities law enforcement.

We all have the sense that Wall Street insiders can use their advantage to line their pockets. This Sokol story is a perfect example.

And what's worse, it takes a violation as egregious as Madoff before anyone actually goes to jail. (And yes, I recall when Martha Stewart was jailed for insider trading. She acted on another's advice to sell Imclone stock. In my opinion, what Sokol did was worse, because he had influence over the deal.)

It's time there are actual consequences for wrongdoing on Wall Street and in the Boardroom. Bankers who mislead regulators and investors and plunged the banking system into chaos should be doing time. Same goes for regulators that turned a blind eye and ratings agencies that perpetuated the lies.

What do you think?

Should these crooks, or “banksters”, as my colleague Kevin McElroy from Resource Prospector calls them, be doing time in the Big House? Are regulators doing their job or are they asleep at the switch? I'd love to hear from you. Write me at ianwyatt@wyattresearch.com.