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.)
