Wednesday, September 17, 2008

Another Historic Day

Here are some random thoughts I have on what happened today in the financial markets.

- Another disastrous day as the markets digested the FED bailout of AIG. They had to do it because they were simply too big to fail. People have asked why not Lehman? Because they believed that the market could take it, and that their balance sheet was such a disaster there was no hope. They had to save powder for AIG.
- GS and Morgan Stanley – What a smart man pointed out to me is that GS is still trading above book and the market is taking prices down below that. I have no idea what the right price is for GS or any other financial institution for that matter. We have no idea what balance sheets looks like right now. None. People are telling me that MS has to merge, soon, or else… I cannot believe it but ..
- I do not understand why the Fed did not cut yesterday. I think in time that will prove a big mistake. If they go now they are reacting. I think they thought that the bail out of AIG would be enough, and it is not.
- This deleveraging is gaining momentum and I am not sure where it stops. We have heard little from and about the hedge funds but I believe it is a complete mess. There are all these trades outstanding of massive size and it is not clear at all who will make good on what. It is that house of cards that BILL GROSS wrote about earlier the year and I wrote about on this blog. Scroll back to read about it.
- The lack of availability of credit and capital will have deep ripple effects – banks balance sheets are shrinking, they will not/can not lend, if you cannot get money, you do now grow your business, buy equipment, buy a home …….
- Globally stocks are down a lot more then here in the US. Hard to believe but true.
- The US balance sheet is a big mess. Not only do we have the age old twin deficit problems, but now we have hundreds and hundreds of billions of new stuff, including AIG's whole credit derivative portfolio added on to trillions of residential mortgage product thanks to the Fannie and Freddie rescue. Do not forget that the discount window is open to bascially anything that the banks or I-Banks have on their books.

- Right now the dollar is held up because of this flight to quality, but are US treasury bonds yielding nothing a safe place to be? Problem is where do you go? My husband would say, as he has been saying for a while, GOLD. There is no safe place right now which is really scary.
- Money market funds – some funds broke the buck today due to Lehman exposure and there is a huge flight to quality. You cannot blame people for moving money, but moving money is causing huge problems. The proverbial run on the banks.
- Financial institutions that are perceived as ‘safe’ are seeing massive inflows as they should.
- The dislocation in credit instruments is just massive. I would have to guess there is massive dislocation between where a companies debt and equity are trading.


To end on a positive note – I am sure that if you buy quality stocks right now, and hold them for the long term you will be happy you did. The market needs capitulation to get back on solid ground but it seems like it is happening quickly, though i am not sure how long the recovery will be.

I would LOVE your comments - please feel free to post them.


I was suppose to be in an Instiutional Investor Conference all day called Women and Wealth - but I had to leave needless to say. More on that to follow .....

3 comments:

Kathy LeMay said...

J,

So glad you're here to help make sense of it all. My questions:

1. How similar or dissimilar are these bailouts to the 1980-1990's savings & loans crisis?

2. Did insiders see these collapses coming? I find it unbelievable that we quickly fault people who took subprime loans for their mistakes (i.e. counting on making more money by the time the interest rate increased) and those folks have lost their homes. No bailout there. Is there even a comparison here or is this parallel out in left field?

3. What would you say are the three conditions/ variables that led to this crisis? For how long has this been building to this point?

Thanks for your wisdom,
Kathy

Frank said...

1. The chapter on this "bailout" hasn't been written yet, but it will likely be much uglier due to the amount of de-levering that still must happen.
2. Insider didn't see it as much as they likely knew the gravy-train couldn't last. Everyone in the chain should take some blame - from the homeowner, to the mtg company, to the Invensment Bank to the rating agency to the end buyer.
3. a) easy, cheap and available credit. b) little to no accountability and oversight. c) desire for greater profits, and the need for more yield.

Jacki Zehner said...

wow Frank... you said it. He is right on.