Spero Consulting

A few days ago we read an arti­cle – it was likely in The Wall Street Jour­nal–where a trader from Chicago com­plained about a ques­tion that Ohio Sen­a­tor Sher­rod Brown asked of either Mr. Paul­son or Mr. Bernanke; we don’t recall to whom it was directed.

Sen­a­tor Brown had asked some­thing to the effect of: at what price will these secu­ri­ties sell, i.e., be pur­chased by the Trea­sury? The trader com­plained that it was a stu­pid ques­tion because Sen­a­tor Brown should know that no one knows the price. We chuck­led. We know noth­ing about Sen­a­tor Brown, other than he is from Ohio and is prob­a­bly a Demo­c­rat, but we thought: dear trader, that is EXACTLY why he asked the ques­tion so that appointee would have to pub­licly admit as much.

In that spirit, yes­ter­day we asked, Could a “Bailout” Pro­long the Finan­cial Cri­sis? because the prospect of sell­ing mortgage-​related secu­ri­ties to the gov­ern­ment intro­duces addi­tional uncer­tainty into pos­si­ble val­u­a­tions (and there­fore into the “mar­ket­place”). Uncer­tainty that could be par­tially elim­i­nated – at least for the com­mer­cial banks – via their third quar­ter marks next week.

More­over, this afternoon’s news that Con­gress has agreed – not voted, yet, but agreed – to pro­vide the funds in stages will not help mat­ters and, per our think­ing, should worsen them. Such a long, drawn-​out process will cre­ate addi­tional uncer­tainty and dis­trust among lenders – not to indus­trial firms or con­sumers but to each other – so, expect more pan­icky days and mini-​runs and Chicken Littles.

In today’s (Sep­tem­ber 25) The Wall Street Jour­nal, we see that Peter Eavis and David Reilly make a sim­i­lar point about uncer­tainty in the Heard on the Street Finan­cial Analy­sis and Com­men­tary Sec­tion: Bailout’s Flaw of Large Num­bers.

In addi­tion, they make the same point that we have made about the nature of the bailout. If it is a fair exchange, the banks are only mar­gin­ally better-​off because they have a more liq­uid asset – cash – rather than one of those thin­gies (that most board mem­bers can’t explain). If it is an unfair exchange, the banks may be bet­ter cap­i­tal­ized, but then the gov­ern­ment is over­pay­ing: see last night’s post in response to the President’s speech: Sorry Mr. Bush, We Respect­fully Dis­agree. As they note, the banks need pri­vate cap­i­tal, and as we note it is not in short sup­ply: look at Mr. Buf­fet, pri­vate equity’s inter­est in com­mer­cial banks, hedge funds, etc., and also look at the low lev­els of Trea­sury yields. (Yeah, we know about flights to “qual­ity,” too.)

Lastly, in any num­ber of posts, we’ve dis­cussed how the losses in this cri­sis seem to be highly con­cen­trated within cer­tain seg­ments of the finan­cial indus­try. Two other columns in today’s issue pro­vide fur­ther sup­port for our conjecture.

In the same Heard on the Street sec­tion, Liam Den­ning writes in Earn­ings Reports: The Audac­ity of Hope that con­sen­sus, expected growth of cumu­la­tive S&P 500 earn­ings will be flat for 2008 (over 2007) and 25% higher in 2009. In fact, ana­lysts esti­mate that finan­cial sec­tor should make more next year than in 2007, which wasn’t a bad year. (Of course, we know that these ana­lyst esti­mates needs to be taken with a grain of salt the size of Lot’s wife.)

On the edi­to­r­ial page, Andy Kessler makes a sim­i­lar point about the con­cen­tra­tion in his essay, The Paul­son Plan Will Make Money for Tax­pay­ers: “Even­tu­ally and stu­pidly, these insti­tu­tions owned them for them­selves – lots of them, often at 30-​to-​1 lever­age.” That’s the prob­lem with hubris. Some­times you can’t help falling in love with your­self, eh, Nar­cis­sus. (Of course, we don’t care that on a time-​value of money basis, the plan makes money for tax­pay­ers. If that is true, it could make money for pri­vate investors, too, who are more will­ing than even the democ­rats to extract a proper pound of flesh, er, we mean a dilu­tion in own­er­ship (per Gold­man and War­ren Buffett.)