Shouting “Fire!” in the Middle of a Conflagration

Amazing! Jon Friedman of MarketWatch believes the press has been too prudent in describing the financial meltdown. In his commentary, Media shouldn’t shy away from explosive language, he accuses journalists of “hedging their bets and falling back on imprecise, sugar-coated language.” Friedman would “prefer bluntness and brutal truth.” He wants to call a meltdown a meltdown. “Bloodbath” would be even better, in his opinion.

You can call me a cockeyed optimist, but all I want to know is where has this guy been all this time? The U.S. government is proposing a $700 BILLION bailout. A number of economists have been quoted as saying that this is “the worst financial crisis since the Great Depression.” Do we really need stronger adjectives to describe the financial meltdown more clearly? I don’t think so.

I’ve been saving the front page of The Wall Street Journal all this week, I guess for posterity. Almost every day there have been large font headlines which have included the words Crisis and Failure. Depending on Congress, we may see Panic added to that any day now.

Aside from the headlines, the stories have made reference to “credit freezing,” “backstopping Money Market Mutual funds,” and “banks being afraid to lend to each other.” Do journalists really need to dramatize these events more? Once again, the answer is no.

We’ve had several large financial institutions disappearing over the last couple of months. Companies that are being bought under pressure, going bankrupt, taken over, or “saved” by the U.S. government include: AIG, Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers and now, Washington Mutual. Have I left any out? Well I guess you could include Merrill Lynch on the “sick but saved” list, just without the help of the federal government.

Just today, CNN.com had an article assuring us that there would NOT be another Great Depression. Even six weeks ago, who would have imagined that such reassurances would be necessary?

So PLEEZE, don’t talk to me about the press being too “prudent and proper.”

photo credit: megananne

U.S. Government Fights Credit Crisis

“Desperate times call for desperate measures.” – Proverb.

This week has been among the most volatile on record for Wall Street and financial markets around the world. We came as close to a financial meltdown as I ever hope to see.

In today’s New York Times, the headline story, Vast Bailout by U.S. Proposed in Bid to Stem Financial Crisis described a “financial crisis that Fed and Treasury officials say is the worst they have ever seen.”

The Wall Street Journal said

“The federal government is working on a sweeping series of programs that would represent perhaps the biggest intervention in financial markets since the 1930s, embracing the need for a comprehensive approach to the financial crisis after a series of ad hoc rescues.

At the center of the potential plan is a mechanism that would take bad assets off the balance sheets of financial companies, said people familiar with the matter, a device that echoes similar moves taken in past financial crises. The size of the entity could reach hundreds of billions of dollars, one person said.”

How did we get here?

A previous post discussed one factor, the lack of risk management at various investment banks. In addition, we had lurched from one ad hoc case-by-case “solution” to another – from Bear Stearn’s forced buyout a few months ago, to the U.S. government’s take over of Fannie Mae and Freddie Mac to Lehman’s bankruptcy.

One of the world’s largest insurance company, AIG, was the next corporate giant to run out of money or the time to raise it. The cumulative effect of all of these unfavorable events was just too much for people to handle rationally.

According to the New York Times, by Thursday September 18th there was so much panic that “the Federal Reserve poured almost $300 billion into global credit markets and barely put a dent in the level of alarm.”

Buried deep within the Times article is this very upsetting quote:

“None of those actions, however, brought much catharsis or relief, with banks around the world remaining too frightened to lend to each other, much less to their customers.”

Banks afraid of lending to each other! Now, that’s a panic to remember.

Money Market Funds

And there’s more. Investors were worried about the safety of the $3.4 trillion invested in Money Market Funds. So much so, that the Feds have stepped in to reassure investors that these instruments remain ultra safe. Who ever thought that such reassurance would be necessary? (This totally unexpected concern resulted from one Money Market Fund suffering losses due to holding Lehman Brothers commercial paper.)

Short Selling Ban

And, finally, according to CNN.com:

“The U.S. Securities and Exchange Commission took what it called ‘emergency action’ Friday and temporarily banned investors from short-selling 799 financial companies.

The temporary ban, aimed at helping restore falling stock prices that have shattered confidence in the financial markets, takes effect immediately.

“This will absolutely make a difference,” said Peter Cardillo, chief market economists at Avalon Partners. “Short sellers are going to have to cover their positions very heavily.”

Granted, banning short selling is a controversial policy. Whether it will have a long term effect remains to be seen.

Finally, a Comprehensive Plan

This certainly seems like a comprehensive approach to all of the fear that has been present. The Feds to the rescue! Confidence has been restored. Democrats and Republicans actually working together! Without a doubt, “desperate times call for desperate measures.”

Orthodox free-market conservatives might argue that the markets would have (eventually) sorted all this out without government intervention. I, however, don’t think so.

Conclusion

How this will all play out remains to be seen. We are certainly seeing one of the strongest stock market rallies ever. Will this continue? Have we seen the bottom? No one knows, but it is a strong possibility.

In any event, we continue to recommend well-diversified, properly structured portfolios and a long-term buy-and-hold philosophy. No one we know was smart enough to have bought at precisely 1 PM on Thursday, September 18, 2008, the exact bottom of the decline.