Amazingly, markets on Friday are shrugging off the bailout disarray. The equity market is down just 1%, a normal day, as the solons of DC bicker. No Armageddon in sight. (If markets do drop, this will be more to do with the ban on short-selling as anything else. The ban has sapped liquidity and will prevent short covering should it be needed.) Meanwhile Washington Mutual failed and the market was able to deal with the problem without a taxpayer bailout. Bankrupt Lehman’s employees are being snapped up by Barclays and Nomura without government funds. Watch the politicians rush to enact the bailout anyway, in order to prove their relevance.
Source link: http://archive.mises.org/8618/markets-fail-to-crash-as-predicted-by-financial-socialists/
Markets fail to crash as predicted by financial socialists
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Well-stated.
Amazing? The WM failure was already anticipated, thus little reaction from Wall Street. Additionally, investors have been on the sidelines during the last several days awaiting agreement on the bailout package.
The WaMu buyout occurred after a government seizure, and no doubt on terms that JP Morgan couldn’t have achieved without that seizure. Lehman operates under government-granted bankruptcy protection, the only thing which forestalled the complete draining of the company’s treasury by creditors and investors.
The overt bailout isn’t the only form of market manipulation in play. Shouting “yay, the market!” here is inappropriate at best.
Excellent post. No savvy market player believes government is going to do a darn bit of good here.
“The WaMu buyout occurred after a government seizure, and no doubt on terms that JP Morgan couldn’t have achieved without that seizure.”
To add to that.
If JPM had bought WaMu without government help, it would have had to acquire all the assets and liabilities of WaMu. Liabilities include what the bank owed to depositors and bond holders.
Essentially, FDIC carved the bondholders out of the equation. FDIC seized all the assets of WaMu, but only some of the liabilities (the deposits). Then it sold this carved off chunk to JPM, leaving bondholders swinging in the wind with no claims on WaMu’s assets.
By doing so FDIC rendered an otherwise uneconomic deal to JPM economic since JPM doesn’t have to pay off bondholders as they would have had to in a non-government brokered transaction. Morgan must be masters at finessing the system.
The point is that no additional funds or bailouts were needed for Wamu.
As accidentally noted on CNBC this morning by Steve Leesman (who was trying to undermine Mark Haines’ ridicule of the bailout) the only thing keeping the whole mess afloat to date is the Fed’s $1.5 T in “loans.”
Haines then proceeded to body-slam Leesman (if only!), by asking him how an additional $700B (with DC strings) on top of the $1.5 T could be seen as being the magic fix that “has to be done.” Just what difference would the bailout make, if the Fed was already what kept it going up until now? Leesman actually gave up trying to answer, and deferred to a guest from CITI (a better speaker, Leesman claimed) who was also there to promote the bailout.
Lew noted on his blog that he hasn’t seen anyone on CNBC defend the free-market. Well, Mark Haines may not wear the label of anarcho-capitalist, but he has not one single good word to say about any solution emanating from DC.
Better yet, is he is actually starting to ridicule those that do, as well as openly disagree with their logic/assumptions.
I almost feel like I watching the next Howard Beale!
“The equity market is down just 1%, a normal day, as the solons of DC bicker”
J. Henderson, where are you getting that from?
S&P500 now flat on the day. DJIA is slightly positive. (3:27PM)
Bloomberg News: Stocks Rise on speculation Congress Is Near Bailout Plan.
Of course, the spin of financial journalists are often wrong, but in this case I think it is right, as both Republican and Democratic leaders have stated throughout the day that some deal will be reached. Given the prestige involved after having said something like that, it seems highly likely that they will eventually agree to something.
And there is every reason for stocks to rise in anticipation of this. After all, the point of the bailout is to transfer taxpayer’s money to stockholders so why wouldn’t stocks rise because of increased probability of that?
Everything the FDIC is doing, particularly combined with the bailouts, is transfering wealth (after making taxpayers pick up the losses) to fewer and fewer large firms (who can’t lose on these deals, because even if things go bad, it is better to be bigger in order to ensure a bailout).
“Morgan must be masters at finessing the system.”
Their CEO is on the NY Fed Board of Governors, so that helps.
Bear Stearns, Washington Mutual…what else will JP Morgan own by the time it’s over? And how few competitors will it have left?
Stefan Karlsson shows a nuanced understanding in his comment.
J. Henderson comes across as dogmatic and lacking in sort of real reflection about the issue.
Thanks Stefan- I read this blog for insights, not comments that deny reality to make a point.
Stefan Karlsson shows a nuanced understanding in his comment.
J. Henderson comes across as dogmatic and lacking in sort of real reflection about the issue.
Thanks Stefan- I read this blog for insights, not comments that deny reality to make a point.
Oops- the second sentence should read “…and lacking in *any* sort of real reflection about the issue.”
Also, I apologize for the double post.
Stefan,
The headline is an oversimplification of the market that, upon careful analysis, is easily shown to be incorrect.
There are many reasons investors may have purchased or sold shares on Friday, none having anything to do with the bailout. After all, most firms in the broad market index are not financials anyway.
Consider the following:
1) The bailout is only $700B. This is smaller than the amount of the total transfer, as the government intends to make a profit on the bailout, which is only possible if the government underpays banks for the illiquid assets.
2) Investors know that any subsidy paid to the financial sector will result in taxpayers having less money to spend, which translates into reduced sales for companies in the overall market.
3) Investors are aware that bailouts produce compacency on the part of recipients, meaning that their performance will be less than it would have been in a competitive environment.
4) The bailout requires banks to give the government an equity stake, diluting the returns to shareholders and reducing further the headline figure of the subsidy.
5) The bailout provisions require bank executives to be compensated below market values, meaning that the banks will be deprived of top flight management talent on top of their other problems which include having to satisfy public sector overseers.
6) The bailout as crafted would include cramdown provisions, enabling the government to change mortgage contracts and reducing the values banks are entitled to receive from defaulted mortgages. This is bearish for all lenders.
7) I believe many investors indeed did buy shares upon hearing initial news of the bailout plan. However, these were largely hot money hedge funds seeking to sell in a few days to a greater fool. Most retail investors and long term investors were on the sidelines after several weeks of unusual volatility, as witnessed by the huge surge in buying of short term government paper (flight to quality buying).
8) At no point in the last 1-2 weeks have stock market indices ever traded above August levels, even when the bailout was viewed as 90% certain according to Intrade (early in the week)? I suggest this is because the savviest investors do not really view the bailout as positively as the news media would have us believe. Hot money was just looking for a short term pop.
9) Even a clean transfer of $700B is a drop in the bucket compared to the impacts of the recession, which will be worsened by government policy errors. A change in investor perceptions of the recession, and their discounting of reduced cash flows to firms, could swing their valuation of market equities by far more than $700B.
I could list more arguments, but lets leave it at that. The bottom line is, from an Austrian viewpoint I doubt the collapse of the bailout will cause a stock market collapse. Rather the series of failed bailouts already conducted will be the cause of any market weakness or volatility.
Many posters misunderstood my argument to mean that I connect Friday’s market movements completely to prospects of the bailout failing. I didnt mean that. I was only remarking that the socialists had been falsely predicting a Friday crash if the bailout wasnt approved on Thursday. None of these socialists are able to understand how the market works, let alone forecast the direction of prices.
J
Please watch this video — September 29th was predicted as a turning point: http://www.youtube.com/watch?v=Yul0nnilILw
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