Calling All Government: Remove Fear of Unknown, Propel Growth
I can't get behind a plan that forced private companies to make the gov't a partner when they actually do not need it. Remember, this is just weeks after the gov't had said that injecting capital directly into banks would appear to be a sign of "failure." During the discussion, the most animated response came from Wells Fargo (WFC) Chairman Richard Kovacevich, say people present. Why was this necessary? he asked. Why did the government need to buy stakes in these banks? Morgan Stanley (MS) Chief Executive John Mack, whose company was among the most vulnerable in the group to the swirling financial crisis, quickly signed. Bank of America's (BAC) Kenneth Lewis acknowledged the obvious, that everyone at the table would participate. "Any one of us who doesn't have a healthy fear of the unknown isn't paying attention," he said.
It continues: Mr. Paulson said the public had lost confidence in the banking system. "The system needs more money, and all of you will be better off if there's more capital in the system," Mr. Paulson told the bankers. After Mr. Kovacevich voiced his concerns, Mr. Paulson described the deal starkly. He told the Wells Fargo chairman he could accept the government's money or risk going without the infusion. If the company found it needed capital later and Mr. Kovacevich couldn't raise money privately, Mr. Paulson promised the government wouldn't be so generous the second time around.
Essentially this is like Don Corleone "making the banks an offer they can't refuse." The message was "make me your partner now, if you don't and need me down the road, we will crush you."
I can't get behind this and shame on both Barack Obama and John McCain for blessing it based on a one day stock market reaction. Their blanket acceptance of it means that one not ought to expect significant improvement when either takes office. Remember, they both backed the previous plan also. These plans are polar opposites of each other, I would think one ought to have a preference.
Now, are there bank who this will save? Yes. Are there banks for whom this is necessary? Yes. They ought to have access to it. But to in no uncertain terms should they threaten a bank (Wells Fargo) that just took the gov't off the hook for Wachovia (WB) with what, based on all accounts, was an AIG (AIG) action should their help be needed down the road, is wrong.
Let's not forget that that the people running the show in Washington (both parties) ran Fannie Mae (FNM) and Freddie Mac (FRE), both of whom are at the epicenter of this whole mess. I am hesitant to say they know what is best.
We keep hearing that the "world is flush with liquidity." So, if that is actually true, why hasn't it worked so far? It isn't a question of needing more. It is the fear of the unknown that is seizing markets. Giving banks more money does not eliminate these fears. What is does do is let them sit back more comfortably. Now, if your goal is to just allow them to feel good, then this will work.
But, if your goal is to have them go out and lend and take a certain level of risk, it won't. The current environment is too risk adverse. If you want that behavior, then you must reduce the fear of the unknown by removing as much if it as possible.
Then, the banks will begin to loan again.
Disclosure ("none" means no position): Long WFC, none.
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This article has 3 comments:
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aarc
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69 Comments
Oct 15 06:52 PMGuarantee is only applicable if the company they bought stocks with goes bankcrupt. That way the govt don't exposed itself too much.
How many companies will go bankcrupt in a vibrant economy anyway? At the rate things are going, everybody, including the govt will be bankcrupt one way or another.
Investors will make or break the economy. No investor confidence, no economy to speak of.
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The hand
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773 Comments
My Website
Oct 15 09:02 PMwe are in the land of the living dead. until the leverage is unwound, and the bubbles completely we will remain in this land.
we are doing nothing to stop the death spiral into a depression. we are randomly attacking the symptoms of the economic downturn and not the base problem.
until we do we are screwed.
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aarc
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69 Comments
Oct 15 11:40 PMWith fear; research and planning goes out the window, act first then ask questions later. When done exessively, confidence is lost.
That is what they are doing these days.
Economist say that the total loss from subrime deliquencies was less than $100B. Assuming the housing meltdown is halfway thru, then another $100B should be priced in for the future. Yet $8 trillion or more of market capital has been evaporated so far.
Regarding the CDOs, MBAs, and CDSs; some economists say the government can order them to be resetted with minimal loss of capital to the involved parties since they are based more on confidence rather than hard assets, like a computer being reset and those temporary memory in RAM got erased. The original data which are the original mortgage loans remains in the harddisk. If they want to re-create another MBSs out of those loans, they can do so only with manageable leverage.