Keith Fitz-Gerald

The Fed Will Drown Swimming Against the Tide

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General Motors (GM) and Ford (F) lost their investment-grade debt status years ago. But for other companies embroiled in the derivatives markets and the subprime mess, this is an uncomfortably new phenomenon. And that's why their leaders are "shocked" to find that normal financial channels are no longer open to them.

No wonder so may CEOs are sitting behind their finely turned mahogany desks, feeling the waves of panic rising inside themselves as they realize the bond markets are telling them that they won't be around long enough to collect on their gilt-edged retirement plans. (Ironically, however, the same signals may be telling those same CEOs that it's increasingly likely they'll be collecting on their "golden parachute.")

Obviously, there are two sides to the story here.

He Said, He Said

On one hand, U.S. Federal Reserve Chairman Ben Bernanke, and now U.S. Treasury Secretary Henry Paulson have literally pulled out all the stops to keep this from happening. Clearly, this "Dynamic Duo" believes that by saving individual companies via their "bailouts for (almost) all" strategy, they will save the entire economy.

So what they've done is to make it possible for firms that are in such deep trouble that they can't obtain loans anywhere else to borrow from the federal government -- and on very favorable terms.

Ostensibly, this is a very good thing -- or, at least, the feds would have us believe it is.

But a super-close inspection suggests the opposite is true.

Of course, in the process, the Fed Bailout Brigade has put every U.S. taxpayer in the recovery business to the tune of $10 trillion (or more) -- but that's another story for another time.

The scramble to save American International Group (AIG) has resulted in an $85 billion bailout package with terms so onerous that one analyst likened it to a "controlled bankruptcy."

And where there's smoke, there's fire. As the assets of Lehman Brothers (LEHMQ) and AIG are both sold into a depressed market, the net effect will be a spread of this contagion to the rest of the financial services sector -- which includes investment banks, thrifts and hedge funds holding similar assets. That will further pressure the already-skittish markets.

Unfortunately, history shows that, more often than not, when the Fed has squared off against the markets, the Fed ends up as the loser. That's why we've been such vocal critics of the central bank's moves since this crisis began, stating that its unprecedented interventions would do nothing more than delay the inevitable pain.

We wish the opposite were true.

Keith Fitz-Gerald is the Investment Director for Money Morning/The Money Map Report. For more information on Keith, read his bio here.