Let’s say you were in Congress and decided to implement tougher laws for sexual assault crimes. What resources would you consult to help your committee make the best possible decision? Perhaps a victim or a victim’s family member. Perhaps a prosecutor or an SVU officer. What if instead of asking any of those people, you only decided to ask a panel of rapists how they would feel about tougher laws? And then decided to move forward with the legislation based on what a group of child molesters thought was fair? That course of action would appear insane. Yet that is what Congress is doing to legislate Wall Street.

An excellent Harper’s piece is out discussing the inability of Congress to deliver necessary and substantial reforms in just one area of Wall Street – the derivatives market. The report is called “An Object Lesson in Governmental Failure: Derivatives Reform,” and it basically highlights our worst fears – you can buy the law.

Congressman Barney Frank’s committee invited guest panelists to help them determine necessary reforms. Who was on the panel? Oh, someone from Morgan Stanley and all his buddies. The only man offering an alternative viewpoint (“I believe that I represent a third group that comes to the table, which is the taxpayers, the working people of the United States,” he said) was given only a few minutes to testify and the records of his talk were lost amid “technical difficulties” that never really got resolved.

It’s certainly frustrating and makes me feel like the game is rigged. It makes me remember my anger as a 10 year old, giving my allowance money to a fast talking carnival worker to throw softballs into milk jars. It’s not that I thought I could make easy money, but I thought I had as a fair a shot as making a free throw, I didn’t think the set up would be deliberately rigged against me and my allowance. But as more and more reporters bring stories like this to our attention, the less faith I have in the market.

Maybe it doesn’t matter, if Dr. Marc Faber’s prediction is right, “I could envision a time when gold will sell for at least two or three times the value of the S&P 500.”

Why are companies holding more cash than they have at any time in the last 40 years?

The Wall Street Journal reported today that 500 of the largest nonfinancial US firms are hoarding cash, but big mega-banks are also stashing huge amounts.

“The four largest U.S. banks by assets — Bank of America Corp., JPMorgan, Citigroup and Wells Fargo & Co. — have increased their combined liquidity by 67 percent to $1.53 trillion as of Sept. 30 from $914.2 billion in June 2008, before Lehman’s collapse, according to the companies’ third-quarter reports. The amount equals 21 percent of the banks’ total assets, up from 15 percent.”

In the last 40 years, we have experienced the oil embargo, the Iranian hostage situation, Watergate, the end of the Vietnam War, Richard Nixon’s resignation, stagflation, Reaganomics, the Iran contra scandal, the fall of the Berlin Wall, the dismantling of the Soviet Union, two Iraq wars, 9/11, and the worst recession since the Great Depression. Okay, I better stop before this turns into a Billy Joel song.

What’s different this time? Why, since the recession was proclaimed to be over last week, are companies terrified enough to be stockpiling cash?

It’s because they know the worst isn’t behind us yet. It’s because they know that the worst is yet to come.

One analyst was quoted in Bloomberg about Citigroup’s holdings (which are 5 times that of Buffet’s Berkshire Hathaway). “In my 44 years in the business, I have never seen a company with remotely as much cash as this,” said Richard X. Bove, an analyst at Rochdale Securities in Lutz, Florida.

So what can you do?

Take a lesson from JP Morgan’s playbook with their “fortress balance sheet.” Save your money! Save it in a safe place. We have lost 115 banks already this year. If you are not comfortable with your bank’s security, find one where you are comfortable. Maybe you are worried about inflation. Buy gold to prepare for the worst. At least make sure you have diversified a portion of your wealth into precious metals. The banks could be holding cash because they don’t trust the market, maybe you should follow their lead, they must know something.

Allan Sloan’s piece in Time today sure sums things up:

“Are you furious? If not, you should be. The giant financial institutions that make up Wall Street have been bailed out, thanks to trillions of dollars of our money, and are on track to hand out record-breaking multibillion-dollar bonuses while millions of regular folks are hurting.”

The article brought back some memories to me of when I first decided to buy gold. It was 2001 and I had a great stock, a real winner, whose shares were valued at $90. I thought it might even go up to $140! But in a few short months, it all unraveled, and the stock was worth pennies. The press got involved and the whole ugly story was unveiled, ending in bankruptcy and disgrace.

Yes, I was an Enron shareholder. I was so angry that I had put my money in the hands of crooks! I never wanted to make a mistake like that again. As I started doing research in different financial asset classes, I thought about precious metals. Sure, gold wouldn’t pay interest or dividends, but it wouldn’t be at risk for default or racketeering or running a Ponzi scheme. Gold wouldn’t rob its shareholders or manipulate its business partners or rip off its employees. Gold was simply worth what it was worth, and offered protection unlike any other asset class. After that epiphany, I was hooked.

Have you taken Time’s poll yet on who to blame for the financial meltdown? My favorite part is the photoshopped police lineup of all 25 major financial players who are directly related to our economy’s near collapse. They cover everyone from Alan Greenspan to Bernie Madoff to Bill Clinton to the American consumer and the worst of the worst on Wall Street. And now Treasury Secretary Timothy Geithner is asking for more bailout money, to fund a program that Rep Brad Sherman calls “TARP on steroids. You’ve got permanent unlimited bailout authority.” Geithner drafted a proposal that is supposed to grant the government the ability to wind down a firm once it fails. I am a little confused as to why a firm will need money for its own bankruptcy proceedings, but as the Congressional interviews continue today, hopefully there will more comprehensive information reported.

I know, guys, I know...

When asked by the host of a BBC news show about the “visceral public reaction” to the Wall Street bonuses, Warren Buffet responded

“It’s infuriating to people to see their friends losing their jobs… having their homes foreclosed… And, nobody going to jail. It was one thing in Enron. At least you had Skilling and Ken Lay, or WorldCom or those things. Society at least felt there was a little bit of vengeance taking place. But here nobody’s going to jail. In fact, a lot of them are walking off with tons of money which they got, in many cases, with preferential tax terms. So the American public’s exasperation of this is very understandable…”

This is in line with our earlier post about the trust that is required between an investor and the company they are investing in. Large gains can be attainable in any asset class, but it shouldn’t prevent you from diversifying. No matter how small your savings or your emergency fund or 401K is, safety comes in the form of diversification. Even if it’s just a matter of purchasing a single gold coin, you may have peace of mind knowing all your eggs aren’t in one basket.