The next day he drove up and said, “Sorry son, but I have some bad news, the donkey died.”

Bob replied, “Well, then just give me my money back.” The farmer said, “Can’t do that. I went and spent it already.” Bob said, “Ok, then, just bring me the dead donkey.”

The farmer asked, “What you going to do with him?” Bob said, “I’m going to raffle him off.”

The farmer said, “You can’t raffle off a dead donkey!” Bob said, “Sure I can. Watch me. I just won’t tell anybody he’s dead.”

A month later, the farmer met up with Bob and asked, “What happened with that dead donkey?” Bob said, “I raffled him off. I sold 500 tickets at two dollars a piece and made a profit of $998.00.”

The farmer said, “Didn’t anyone complain?” Bob said, “Just the guy who won. So I gave him his $2 back.”

Last September, as the financial markets skidded out of control, Merrill Lynch CEO John Thain sought to keep his firm from going the way of rival Lehman Brothers by selling out to Bank of America (BAC). At the time, B of A chief Ken Lewis was touted as a shrewd opportunist who seized upon a desperate rival.

Now, it appears, Lewis is the one groping for a helping hand.

According to the Wall Street Journal, the Treasury Department is preparing to offer up billions of dollars to help Bank of America complete the transaction. As in Citigroup’s (C) recent bailout, where the federal government assumed the risk for a pool of distressed assets, taxpayers are about to buy Merrill’s book of truly toxic debt.

Bank of America approached the Treasury Department in December, claiming it might have trouble closing the sale after learning Merrill’s fourth-quarter losses would be larger than expected. Fearing the deal’s collapse could inflict irreparable damage on the already wounded financial system, the Treasury is continuing to spend TARP money it doesn’t have. With the first $350 billion already allocated, Treasury Secretary Hank Paulson is dipping into funds earmarked for a second round of capital allocation that hasn’t yet been authorized.

The fact that Bank of America needs yet more money — on top of the $25 billion it received just last October — is evidence that, once again, regulators and bank executives have underestimated the scope of the debt crisis gripping the country’s financial system. Deleveraging is underway – and it’s gaining momentum. Nevertheless, lawmakers and regulators alike insist on using taxpayer money to try and slow down the accelerating juggernaut of bad debt.

To quote a recent op-ed in the Journal, which likened the government response to the current financial crisis to the circumstances described in Ayn Rand’s Atlas Shrugged:

“Politicians invariably respond to crises — that in most cases they themselves created — by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.”

I hate to break it to you but the Federal Reserve and U.S. Treasury really don’t like you. They view most Americans as hamsters that serve only one purpose, to shop and consume. You will never hear them trying to push an agenda that would encourage Americans to be savers or manage their money wisely. How can they? They don’t do it so for them to say this would be hypocritical. In fact, their policy actions including dropping rates to near zero put us in a perilous situation that now is looking more and more like Japan’s lost decade. We have Ben Bernanke saying this to an audience in London:

“In my view … fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system,” Bernanke said.”

This guy. He has already taken on over $2 trillion onto the books of the Federal Reserve with questionable assets and he is still asking for more. These are the actions of a monetary policy ideologue. He is going to have a tough time admitting that monetary policy is simply not helping anyone aside from his masters in the crony capitalist regime. The banks have done so well, that we even have Citi and Morgan Stanley merging brokerages. While people are being laid off left and right, we have a $2.7 billion deal going down. And make no mistake, Morgan Stanley is only doing this because the Fed and other government institutions are back stopping $306 billion in toxic assets. Bernanke then gives us another nugget of wisdom:

“Financial markets remain frozen partly because a “large quantity of troubled, hard-to-value assets” is still on institutions’ balance sheets, Bernanke said.

There are several ways to solve this problem, he said, all involving public funds.

The government could simply buy the troubled assets, or it could give asset guarantees and agree to absorb part of the prospective losses, he said.

“Yet another approach would be to set up and capitalize so-called ‘bad banks,’ which would purchase assets from financial institutions in exchange for cash and equity in the bad bank,” Bernanke said.”

Well, no matter what you do in your professional life, you are the owner/manager of your personal investment business. And that being the case, your start to 2009 means reflecting on a lousy 2008, which should lead you to one simple question:

Should I fire my mutual-fund manager?

Under most market conditions, a 40% annual decline would be horrible performance that is immediate cause for dismissal. In 2008, that kind of loss was average for equity funds. And while an equity manager who lost 30% or 35% clearly was “above average,” it’s hard to feel really good about those results.

When investments go down 40% to 50% and the market delivers a harsh reminder that diversification doesn’t work well in cyclical bear markets, human nature wants to blame someone for what went wrong. That puts every fund manager who delivered poor results — relative or absolute — on the chopping block.

And yet investors are clearly in deer-in-headlights mode, unable to escape this problem or solve it. The market is providing no real safe havens, and even past heroes and old standbys were taken for fools by this crisis. Top long-term managers like Dodge & Cox, American Funds, Fidelity Investments and many others got gassed in 2008; they were every bit as horrible and miserable as the rest of the crowd.

There weren’t any new heroes, either. Plenty of middle-aged investors can recall 1987 and remind you that Elaine Garzarelli — working for what was then Shearson Lehman — called the valuation bubble that mushroomed into Black Monday. Never mind that Garzarelli never proved to be more than a mediocre fund manager when she tried her hand at it — she was a bright light in a dark time, and investors found solace and profits in her advice before, during and after the crisis.

Today, it looks to the casual observer like Wall Street’s emperors are naked; you’ll have a hard time finding a Garzarelli-like figure, someone who earned stardom by getting 2008 right. Some perma-bears and newsletter editors helped a small-scale audience, but most Wall Street luminaries got 2008 wrong, which makes it hard to believe in them now.

Which brings us back to the question of whether you should fire your fund manager?

Traditionally, the most crucial question for evaluating a fund has been “Would you buy it again today?” Alas, market conditions actually pollute that query, since it is pretty hard to honestly answer that you’d repurchase a fund that just lost one-quarter of your money, even if that result was above average.