The Solution?

The solution to pollution is dilution.

That used to be the underlying principal when dealing with water pollution. Get the stuff out to the ocean and we’ll be rid of it. But environmental engineers didn’t bank on food chains and concentration. Now, we need to watch out for mercury in our tuna, even though they come from the open ocean.

Dilution seems to be the expected solution to the financial crisis. Got a loss? Dilute your shareholders. Merrill just diluted its owners another 30% to shore up its capital in the wake of over $10 billion in losses. Naturally, the shares have skidded this year.

But is dilution the answer? It seems to me that we need some sort of financial Superfund, something that will buy up the toxic waste and detoxify it. It could be funded by mandatory capital assessments, similar to the way the Federal Reserve is funded now. Want access to the Fed window? Ante up!

Diluting our way to success doesn’t seem to be working. It’s not enough to wash the sludge down the drain. We need to find some way to clean it up.

Douglas R. Tengdin, CFA
Chief Investment Officer
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