Does the Solution Prevent a Redux?

I agree that the government had to step in. Allowing a potential depression when there are the means to prevent it is not acceptible. But does the solution of public bailouts and buying bad assets prevent this from happening again?

A somewhat similar solution, the Resolution Trust Corp., was used in the early 1990's to clean up the bad assets of the Savings and Loan companies that failed in the 80's. The new plan appears to be a little different. The government will buy bad assets on the cheap from banks that want to get them off of it's books. This provides liquidity that is needed to function. The bailout for AIG is really just an expensive loan that allows the company to liquidate in an orderly fashion. The solutions themselves are not terrible ideas. The companies at fault are being punished, the government is just preventing a frenzied free-for-all asset auction while they are largely dismantled.

To consider the case closed, there will have to be stricter regulations on these "creative" loans and securities. Finance has to be a conservative undertaking.

What Does All This Mean for Magic Formula Investors?

This is a site about finding the best Magic Formula stocks, and while I've gone off on a tangent here, there is a coorelation. First of all, we are lucky - the Magic Formula by definition avoids traditional and investment banks as well as insurance companies. That's a huge break. Just being a MFI investor in the first place has kept you out of Bear Stearns, Freddie and Fannie, AIG, and Lehman Brothers (not to mention all other financial institutions which have been roundly pummeled). Regardless of strategy doctrine, there are plenty of reasons that banks are difficult investments and should be avoided.

MagicDiligence picks are always financially healthy and sport great management teams. This helps to avoid investing into the greed of managements who are in it for themselves. Do you think the CEOs of Fannie and Freddie care much about the shareholders that collectively lost billions? With strong financial health, the Top Buys can easily survive economic downturns, and come out stronger on the other side. Finally, with durable competitive advantages, they can maintain sales and profits better through a downturn than MFI stocks that rely on sales that can disappear overnight.

Most importantly for investors, DON'T PANIC! Those that sold en masse early in the week missed the big gains towards the end. If you are holding good stocks, continue to hold them. If you have the cash, now is a good time to go shopping. This has always been the successful investor's way, and it will continue to be going forward.