Sunday, September 14, 2008

For You and Me a Silver Lining; For Wall Street and Washington a Lesson; For Banks an Opportunity; For Insurance Yet Another Worry

Hey, I'm in a good mood tonight. I'll leave the Fannie/Freddie feeding frenzy to a million able bloggers. The deal stinks. Period. As the FT said last week, Paulson should stick to bird watching. Were he still head of Goldman, he'd be screaming about the current level of Treasury meddling.

Here's my contrarian silver lining spin:

  • Perhaps the Treasury and Fed noticed what nationalizing FnF did to the market consensus about the long-term financial viability of the US. There is a faint hint today that they may have inasmuch as prediction markets are beginning to suggest Lehman will be allowed to fold (as it should). The Fed has signalled their approval of this solution by throwing a doggie biscuit to the rest of the Street in terms of loosening it's collateral requirements at the discount window. This is sorry pandering, in effect further nationalizing the industry's financial woes.
  • Even this might have a silver lining. Perhaps this will score the (historically trustworthy) Fed another point on the (historically brazenly political) Treasury in the regulator cage fight.
  • Perhaps this will also lead other banks to think twice about their decisions regarding risk and capital reserves. The fact that "solid" long-standing pillars of US and global finance can be brought down by the whims of a credit rating downgrade, a liquidity pinch, or 2 bad quarters in one or two business lines ... ridiculous. Most small businesses are vastly more resilient.
  • I can't tell you how many deal meetings I've sat through where the i-bankers, the traders, the brokers, the analysts bluster and storm management into concession over the concerns of their colleagues on the other, dusty, stodgy, "20th century" side of the firm such as commercial bankers, trade financeers, and risk managers. Perhaps the fact that Merrill is going to B of A finally will cause people with money to finally see conclusively that there's more hype than opportunity in the trendy Wall Street mantra about "21st Century finance" where brokers take over everything and the stodgy old banks go extinct. Banks are stodgy because they actually have something scarce and tangibly valuable to shepherd (the bank's capital). It's no secret that the prudent boring ones like Chase and B of A and BNPP and HSBC who were "too slow to modernize"are now the only ones with money in their britches and no internal panic to fight.
  • Perhaps the whole credit crunch will nudge people to live on their income, not their paper gains.
  • Perhaps this will inadvertently save a few acres of virgin US property from slash-and-burn urban sprawl.
  • Perhaps it will nudge the government to be just a bit more fiscally responsible as their cost of rolling debt goes up.
  • Perhaps Republicans will finally feel embarrassed enough about ridiculous growth of the Federal government on their watch to start walking the walk of limited government with some real (even if unappetizing) admissions ... along with the right solution.
  • Perhaps Palin will blurt out that FnF were created by a democrat (Johnson) in the first place ... If it doesn't go over well, she can plead innocent youthful exuberance.

Honestly, though, I have no silver lining yet when it comes to AIG. I've bemoaned (sometimes tongue in cheek) the accumulation of assets inside these insurers, and their appetite to participate in any financial market, product, or hype irrespective of their clear inability to keep up with the financial engineers enough to understand what they're doing. Should the current financial industry brimstone and hellfire spread to the insurance industry (and how could it not?) I fear what may come out of the bellies of those whales.

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