Mr. Bearbull
Paulson’s $700-B bailout
By Ron Nathan
Philippine Daily Inquirer
First Posted 01:11:00 09/23/2008
Filed Under: Economy, Business & Finance
It was the most volatile week on Wall Street with a swing of 2,800 points ending flat. I thought the bailout of Fannie and Freddie with $200 billion was the end of it, but it was only the beginning. On Monday, American International Group was bailed out because it was considered too large to fail.
AIG is the 18th-largest company in the US, with 106,000 employees in 130 countries. It was a Dow component with $1 trillion in assets and it insured just about every kind of bond imaginable, including James Bond. It was replaced by Kraft because investors were cheesed off.
Next day, we heard that Lehman Brothers was in dire straits. The company has been in existence since 1850, before I was born, and was a leader in equity and fixed-income investments, research, asset and private equity management and was No. 1 in performance from 2003 to 2007. Bank of America was in discussions to save it, but when it heard that Merrill Lynch also needed a white knight, it abandoned the talks and bought Merrill Lynch through a share swap. As a result, Lehman was forced to file for bankruptcy.
Merrill is the world’s biggest stockbroker and is known as The Thundering Herd. Formed in 1914 — I was not yet born — it has 60,000 employees in 40 countries. Only last month, it transacted 100 million shares in one day in Europe, an entry for the Guinness Book of Records. It specialized in wealth management and had numerous clients with assets of $1.6 trillion. Bank of America bought it for a mere $50 billion, a snip. It added 16,000 financial advisers to its own 20,000. It will save $7 billion in tax and by 2010, the acquisition should add to earnings.
The situation of Morgan Stanley is as yet unresolved. It is rumored to be talking to Wachovia, the third largest broker, with 120,000 employees, 15,000 offices and 5,100 online customers. It has 3,300 financial centers and has been around since 1879, my parents were not yet born. It offers a complete banking service and owns ATMs. As far as I can make out, it is only in the US.
Morgan Stanley has a Global Management Wealth Group and specializes in equities and fixed-income stocks as well as derivatives. It has 600 offices and is situated in 35 countries and had $736 billion of assets under management. It is the new boy on the block, born in 1935, I was 5 years old. They have received an offer from China Investment Corp. to buy 19 percent and 9 percent has already been bought in the market. CIC certainly has the money but the sticking point was that all Morgan Stanley employees would have to learn Mandarin.
Another bank in limbo is Washington Mutual. A 12th bank failed, Americabank, but was rescued by the Federal Deposit Insurance Corp. There are only 116 banks more to go, according to the Federal Reserve watch-list.
US Treasury Secretary Henry Paulson appeared with Federal Reserve Chairman Ben Bernanke and Securities and Exchange Commission Chairman Cox, and stated that the US financial system was not in danger of collapse. He admitted, however, that he had put the Statue of Liberty up for sale on eBay. It was later withdrawn after it was discovered to have been mortgaged. Later the trio appeared with President Bush and the plan was explained to him in words of one syllable.
Most people of both parties are backing the plan even though it will be the taxpayer who foots the bill. Even if the government gets its money back eventually in 15 years, it is of no help to current taxpayers that it might benefit their children. The amount currently quoted is $700 billion but if house prices continue to decline for another year or two, the final figure could easily exceed $1 trillion.
As time goes on, more and more mortgage holding companies will go under or need to be rescued. Alan Greenspan is pessimistic about the housing market and expects prices to fall 10-20 percent. The lower that house prices fall, the more difficult it will be to find a solution that will not bankrupt the Treasury. Of course, they could keep printing money but then the dollar would get weaker and weaker and China and the Middle East might abandon it as the world’s reserve currency.
Unfortunately, the malaise has spread worldwide and the situation in the UK is particularly grim. The rest of Europe is affected and injected $100 billion into the financial system. Japan and Australia injected $80 billion, mostly Japan, and the US $200 billion, making a total of about $300 billion.
China cut interest rates for the first time in six years and reduced bank deposits in an attempt to stimulate the slowing economy. Weakening exports were the main concern so the appreciation of the yuan is likely to cease. Factories are reopening in Beijing and imports of nickel ore have picked up indicating that the growth of infrastructure will continue. This is good for commodities and gold jumped $70 one day and $45 the next. China remains the powerhouse.
The UK banned temporarily naked short selling and the next day, the New York SEC followed with a list of 799 stocks, mainly financial. The Philippines has followed suit so the new dress code will be that traders in shorts will be admitted but not naked option sellers.
Previous columns:
The news gets worse– 2008/09/16
So much bad news – 2008/09/09
Peso at year’s low – 2008/09/02
One world – 2008/08/27
Chaos theory– 2008/08/12
|
