that make it? Well, let's see: $29 billion for Bear Stearns,
somewhere between $1 billion and $100 billion each for Fannie and
Freddie (a nice narrow range), $85 billion for AIG, a couple of
hundred billion to keep stray banks, brokers and their errant kin
from asphyxiating themselves by swallowing toxic paper. And then
there's the proposed reincarnation of the Resolution Trust Corp.,
which all by itself may mean shelling out $800 billion, perhaps even
as much as $1 trillion.
we're at it, we might as well include the $400 billion with which
the Paulson-Bernanke grand plan envisages endowing the Federal
Deposit Insurance Corp. so it can insure money-market funds.
please, understand those mind-boggling sums in no way, shape or form
are to be construed as designed to aid and abet a bailout. Instead,
they are merely the essential ingredients of an "intervention,"
or, if you prefer, a "rescue" -- just about anything, in
other words, that's semantically sweeter than bailout, with its ugly
connotation of a sinking ship.
we have it on the best authority that none of this largess will cost
the taxpayer a cent over the long run, which, if nothing else,
speaks volumes about what constitutes the best authority these days.
The reasoning is simple (or perhaps simple-minded is more accurate),
namely that deep-pockets Uncle Sam can sell off the assets of the
foundering companies on which he has bestowed that bounty and come
they jest. For a heap of those so-called assets might easily be
confused with liabilities since even those that can be sold will
likely fetch a feeble fraction of what their possessors now claim
not to say that until the powers-that-be pounded the panic button
last week, the billions they had already thrown at the problem as
well as taking a big step further and making the wretched companies
soaking up those billion de facto vassals of the government were
completely in vain. They undeniably had an instant impact.
Unfortunately, an instant was about as long as the impact lasted,
and it failed miserably to becalm the frantic credit markets or
rekindle investor confidence.
truth is that just about every one of Messrs. Paulson and Bernanke's
previous brainstorms -- and they seemed to come with increasing
frequency as Hank and Ben's agitation mounted -- touched off a brief
spasm of exhilaration among investors, only to evaporate in very
short order as the credit crisis resolutely morphed into a credit
calamity. Or, to change the metaphor, what had been a slow-motion
train wreck picked up demonic speed.
little chart that adorns these gray columns offers an eloquent
description of how bad things had gotten until the clouds parted and
the sun finally came out as the week wore down. It depicts the yield
on three-month Treasury bills going back to 1930. On last Wednesday,
investors were so gripped with fear and desperate for a haven that
they poured into the bills even though the yield was nonexistent. In
effect, they were willing to pay the government for keeping their
money safe. As a glance at the chart shows, that hasn't happened
since the Depression.
everything changed, at least for now. And the soaring rise in the
stock market that began Thursday afternoon and extended through the
final bell on Friday had Ben and Hank whooping with joy, exchanging
high fives and just venting their pleasure with
cat-that-swallowed-the-canary smiles, a welcome change from the
funereal faces they had donned for the past few months.
we're in a generous mood, we might as well add Christopher Cox to
the cheerful circle of celebrants. The SEC chief has been the target
of a steady stream of slings and arrows directed his way by John
McCain, which rather than nailing Cox's inadequacies (and they're
bountiful) once again demonstrated that McCain and his advisers
haven't much of a clue how markets work.
Cox, in any case, deserves some of the credit for the smashing rally
that boosted the Dow comfortably nearly 800 points in two sessions.
For he proudly announced a ban on shorting 799 financial stocks and
sparked talk of banning short selling entirely, and that scared the
dickens out of the shorts who en masse rushed to cover. The
resulting buying burst, we haven't a scintilla of doubt, played a
significant role in the great market lift-off.
it seems to us, Cox, in taking out after the shorts -- whom nobody
loves except their immediate families (and we're not even sure about
them) -- was more interested in covering his derrière than in
protecting investors. As an early-warning sounder, keeping markets
reasonably honest and offering a way to hedge against the inevitable
mistakes or bad luck that investors are prey to -- short selling
serves a valuable function, and messing with it is apt to yield a
lot more harm than good.
And we say
that fully aware short selling has its quota of bad guys who do
wicked things, but also aware that there are rules and regulations
aplenty to curb untoward practices, if somebody would only enforce
if regulators hadn't been asleep, banks probably would have had real
trouble finding ways to go belly-up, those innovative weapons of
mass destruction called derivatives might have been defused long
before they blew up, and those speculative bubbles, as in housing,
might not have made the Guinness Book of Records for sheer size.
of all the fun we'd have missed.
THE GRAND PLAN WORK? Will piling on all those billions on
billions atop a budget deficit that's already a cinch to shoot up to
over half a trillion next fiscal year allow the badly winded economy
to start a sustainable recovery?
remember, vowed to use helicopters to drop money from the sky, but
now he seems to be gearing up to use 747s. Can the Fed run its
printing machine full-time to churn out all those billions without a
substantial infusion from increasingly pinched taxpayers? And won't
priming the pump like mad drive the dollar back into the pits and
force interest rates higher?
in all its extravagance, seems to have been thrown together on the
fly, and once Congress gets a whack at it in the waning days before
the lawmakers scurry off to the hustings, it may bear only passing
resemblance, for better but probably for worse, to Paulson and
the unknowns greatly outweigh the knowns, which make those and
myriad other questions tough or downright impossible to answer.
willing to concede that some forceful action was necessary, if only
so the Fed can pay penance for its critical part in creating the
incredible credit-cum-housing disaster.
Lynch's David Rosenberg observes, the fact that the government is
suddenly so aggressive in coming to grips with an epic credit
collapse is eloquent testimony to how the Fed and the Treasury "have
consistently underestimated the severity of that collapse from the
us, moreover, that the original Resolution Trust Corp. was strictly
about buying bad mortgages. So he wonders whether the new
incarnation will also undertake the purchase of Level 3 assets,
whose value is extremely problematic and, in any case, more than a
little difficult to gauge, and which are a sizable and not
particularly desirable presence in many banks' portfolios. And will
the new RTC also buy credit-card debt, commercial real estate,
leveraged loans "or the other mountains of bad debts out
cautions that the entire credit collapse to date has "reflected
the unwind of the largest bubble of all time -- residential real
estate. Meanwhile, a consumer-led recession is taking hold this very
quarter for the first time in 17 years, and every consumer recession
in the past was followed by a negative credit cycle of its own."
As to the
euphoric market reaction, he thinks it's a bit much. In their
stampede to buy, investors seem to be ignoring the depressing fact
that what prompted such drastic action was the sorry state of the
financial system, which isn't likely to change overnight no matter
how vigorous the government exertion.
RTC was set up in 1989, he notes, it took two years for the economy
to turn around, three years for housing to recover and a year for
the stock market to bottom.