Friday, September 26, 2008

Mushroom Hunting

Some years ago a friend of mine, feeling both pioneer spirit and the paternalistic imperative to teach his son went into survivor mode on a weekend camping trip. That included cooking up some delicious mushrooms to add to the ambience. A short while later, cell phone in hand (not THAT pioneerish) he called another friend who knows a good fungus from a bad. The conversation went something like this. "We're both sick. I think it might have been some mushrooms. What? Do they glow in the dark??? Hang on....uh, yeah they do. Hmmm...oh. Damn. Won't die, just feel like it? Oh. Gotta go....RIGHT NOW." Click

Congress for fear of the proverbial mushroom cloud being threatened (once again)by the administration is instead about to pick a toxic mushroom of its own. Barely an economist outside the investment banking world favors the bail out. Even Richard Fisher one of the Federal Reserve Bank governors has broken ranks with Ben Bernanke, his own chairman. In his words, "These are grand ideas that cannot be executed."
Paul O'Neill, Bush's former Treasury Secretary declared our president and nation's leaders, "in a panic." When asked the specific problems with the bill he replied, "Everything."

Last night the largest Savings and Loan in the country was taken over by federal regulators and within hours the FDIC had auctioned it off to J.P. Morgan which has sufficient capital to operate the bank, business as usual and did not run itself aground.
To put it in perspective, the previous largest bank failure in U.S. history was Continental Illinois in 1984 which had $40 billion in assets. WaMu had $310 billion.
The largest savings and loan in the country just quietly slipped beneath the waves. Its owners and bond owners have taken it on the chin. But it cost the taxpayers is close to zero and its depositors have been protected. True the FDIC may exhaust its insurance coffers as banks fail and the government will have to step in to top up the fund, and raise insurance premiums to banks, but its not a trillion dollars on a silver platter.

There is even suspicion in some serious circles that lending markets are freezing up as part of strategic behavior of large financial institutions about to benefit from the biggest gift in history. The stakes are huge. There will be winners and losers. Congress is about to choose for us.

Financial darwinism? Creative destruction? Call it what you will. There are enough managements who exercised proper risk management to survive and now are reaping the benefits. Warren Buffet, Bank of America, J.P. Morgan, PNC? or Washington Mutual, National City, AIG, Lehman? Who should get your money and your support?

John Barnyak