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September 30, 2008
Juncture 228-205
Juncture 228-205, disembark here for a free fall experience that will rock your life.
If we were to put a title around this month`s outcome, it would have to be 228-205; the straw that breaks the camel`s back if you want a different cliche.
There are many topics I would like to write a journal on but none seems so pertinent as the current state of the financial sector, equity markets and general liquidity, or well lack of it. If anyone perused the financial times weekend edition it is evident that they have a similar view. From their Doom and Boom to the Great Wall St of China, HSBC / KEB, toxic assets, time for bail out ... In fact the whole paper consisted of nothing more than a pessimistic focus on current state of the, well not a sub-prime lending crisis anymore or a credit crunch but a complete financial liquidity failure and asset write down disaster.
Let me just flick my eyes onto the Bloomberg screen for a moment (yes we still have internet connection and news feed): Nikkei down 544 bps at one point in the day, DOW down 778 points (its biggest drop ever in existence as the best part of over 1.2 trillion in market value is incinerated), S&P down 881bps (that is the biggest one day loss since 1987 crash), Nasdaq down 914, FTSE down 530, China escapes as it is on holidays but the rest of the screen is flashing red arrows. From Brazil to Taiwan it`s finding the floor and starting to dig.
228 205, that is there are 228 blind folk and 23 votes short of a green arrows and blue skies, well theoretically, the problems are more systemic than this. Ladies and Gentlemen you have to suffer some form of myopia or been sitting on a beach drinking pena-collada for weeks not to see the ramifications of your actions. It has taken 158 years to build Lehman`s the cotton picking banker (they started off trading cotton, interesting history and worth a read) and then I suppose just a few days to dissolve it.
What about Bear Stearns, quite a distance away if time is measured in units of bankruptcy or Merrill Lynch which has had a tumultuous year dating everyone from Temasek to General Electric before marrying its sweetheart BOA. Then the Freddie Fannie ugly twins; now that was always a disaster from inception. But it doesn't stop there, we have Wachovia, HBOS, AIG; the queues on this one went out the door and round the block in Singapore when AIG put its hand up for federal reserve liquidity support. It`s endless. It`s mayhem and it needs a solution.
Bloomberg article
Bloomberg:``On the worst day in global financial markets in 21 years, investors who have seen it all were left shaken. Sept. 30 (Bloomberg) Australian Prime Minister Kevin Rudd joined U.K. counterpart Gordon Brown in urging U.S. lawmakers to pass a financial rescue package and pledged to provide liquidity and take whatever action is necessary to ensure stability.``
The congress argument for rejection of the bailout package, there are many starting with;
If the US government becomes lender of last resort it is moving itself to a state owned institution of commercial debt, picked up by the tax payer and that might be deemed as communist, OH WOW. Surely any kind of centrally controlled regulation system (the current one is broken) could be classified as having some semblance of Marxism, I am sure we could draw parallels if we took enough cartesian twists and turns. The alternative package devised by congress was an insurance contract which would be instantly exercised and thus can`t be priced as it is a ``so deep in the money American put option``.
Let`s sit on this for a second the markets are falling out backwards so what is the cost of another second. In reality forget pointing fingers or fat cats, the regulatory system itself has failed and it is thus at least partially responsible for a rescue package. An insurance scheme for a house that is already on fire is unlikely to be suitable at this point-in-time, we have that already in the credit markets.
Posted by CausalEvents at September 30, 2008 04:36 PM
Hello. This has been a good read! But, I'd like to add that I do not think the house is on fire, although it is hot in some kitchens (of our rather spacious home). The markets represent votes, not always value. Blame and executive compensation are irrelevant. But, if there is going to be a recalibration of the financial and regulatory system, to scale, let that come from a long and healthy due diligence and not from a 72 hour study cram ... We have more options than we currently realize, let us have the fortitude and patience to arrive at them. What we need now is creative cooperation, not compromise!
Posted by: Odette Gregory at October 1, 2008 10:13 AM
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Well the new bill is out for everyone to see, watched over by both presidential candidates. Theoretically the government is moving much closer to being able to appropriate funds for the purchase of ``troubled assets``
There are some interesting bits `n` bobs in the details though and such things often shape the ability of programs like TARP to truly deliver:
1) An increase in the limit on federal bank deposit insurance. This inevitably will raise origination costs in the long term but probably brings a better proportion of mid-sized consumer accounts under cover.
Some of the other alterations however are a little more thorny:
2) The authority of securities regulators has been expanded to allow them to suspend asset valuing rules. This one could have incredible side effects and directly contradicts many other accounting practices that are in place. The implementation of this rule is actually quite complex and is going to need a little more than a couple of days of thought. While the world accepts that asset write down has exacerbated the outcome of the credit crisis you do have to consider whether such an approach is opening a loop hole for unfair exploitation or simply accidental misappropriation and eventual argument. Throw out the asset valuing rules, what do you put in its place? For how long? Which assets again?
3) There will also be a set of tax breaks thrown in and benefits for companies that produce alternative energy which is also concerning. Placing all problems in the same bucket dilutes the fundamental purpose of the bill and makes for difficult work when measuring the effectiveness of the program. In short this only complicates and widens the scope for implementation.
I find it bizarre that someone has to throw in marginal inducements when the devaluation of the assets of pension funds for those that vote should have been a big enough stimulus.
Posted by: Martin Davies at October 2, 2008 10:24 PM
Excellent Read and great insights
Events have moved on since you posted but the nonsense continues.
Interestingly, the Free Marketeers cheered when Lehman's were let go. That may turn out to be the biggest mistake amongst a bucket of bloopers. As customers line up to berate Standard Chartered for selling them equity linked products originated by Lehman's the 'reputation contagion' grows. Bankers are going to regret that one of the weakest links in the markets chain was let break.
How well will 'principal protected' products linked to equity markets hold up under the onslaught - not well I predict. And, mis-selling is an operational risk, watch for the losses hitting the loss event databases
Keep up the good work
Posted by: Pat Mc Connell at October 10, 2008 10:01 AM
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