Monday, September 29, 2008


No corner of the world seems safe at the moment. Banks failing in Hong Kong, being nationalized in Europe, Island, Moscow. This market is acting rather abnormally, because it is dealing with a lack of clarity and confidence. Each day there something unexpected arriving on the investors doorstep.

Every headline in the world screamed, Panic! Like a tsunami, there is nowhere to hide and the turbulence is extreme. As with every crisis often the first solutions offered are not solutions at all but rather lifeboats as one hopes to buy time until help arrives. The political crosswinds are dramatic as every solution looks worse than the next. The general population balks at the idea that taxpayer money should prop up the institutions that brought us to this point. Wall Street admits mistakes were made but insists a boat with a hole at one end still sinks at both ends. It needs to be plugged.

The financial rescue package is so flawed the failure to pass in the House was proper, but now we have financial brinksmanship as credit market seize up. The crisis will undoubtedly spread to the economy at large as the oil that lubricates the wheels of commerce, credit, dries up. Already anecdotal stories are coming out of businesses having credit facilities constrained. This will lead to impaired business activity, employment pressure and declining consumer spending. Buckle up for a recession of some depth and length.

I remain against the Paulsen plan but accept that intervention is required. Purchasing the toxic debt at opaque prices with taxpayer money will not solve the problems. The current state of insecurity in the banking system has created a situation of banks unwilling to lend to other banks as no one knows who is solvent and who is not.

The solution requires capital, but not to buy illiquid debts. That ship has sailed. The government (taxpayer) should step forward to buy preferred stock in the troubled banks, injecting the needed capital to assure solvency and transparency. It should not be business as usual as banks would need to match the capital call with private equity while cancelling dividend payments to common stock holders. This would provide the taxpayer with some benefit for our dollars in the form of a call on the equity of the institution. Restoring confidence in the solvency of banking partners MUST be paramount.

The underlying problem which started the house of cards, real estate, must then be addressed. Whether by cancelling debt of some homeowners through a forgiveness or other procedures needed to keep home value and debt in step. The current situation of value below debt level provides incentive to walk away, foreclose and create additional downward pressure on the housing market. The housing market needs to stablize.

It is unfortunate that the urgency and panicked solution offered is such a poor one. But clearly time is of the essence.

I am confident a solution will be found and that rush to judgement never provides good outcomes. The term that comes to mind it triage. One third cannot be helped and should not use limited resources when the negative outcome is already known. One third can walk an need no attention. It is the other third, the injured but survivable that needs focus.