A Message for the New President
President-Elect Obama:
The country has voted for new leadership. The perceived economic crisis is at the front of concerns. You won a great victory with support from people of all ages, and varying political persuasions.
The stock market is not providing you with much of a honeymoon. Rightly or wrongly, many investors choose fixation with some of your ideas, while ignoring your main theme of strength and unification.
Today's stock market decline will be perceived by some as skepticism about your leadership. It is no more relevant than yesterday's stock market increase. Many other factors are at work.
The Most Important Action
To figure out what you should do, look at the biggest threat. Let me state it quite simply:
The Threat. The financial assets held by major financial institutions are viewed with extreme skepticism. Investors, pundits, and many accountants do not understand the rules for evaluating current holdings. In the post-Enron world, everyone assumes the worst.
People assume that any mortgage holdings are worthless. This started with sub-prime holdings and concern over adjustable-rate mortgage resets. Even though we have moved through the reset period, the concern persists. Now the concern has turned to other credit holdings — Alt-A, auto loans, student loans — whatever.
A leading market analyst opined today that all of the financial institutions will need much greater capital infusions to keep up with the decline in their asset values. This was the proximate cause of the late-day selling in the market.
The Solution. We know that you have many astute advisers. Some of these people are focused on specific constituencies, and it may be appropriate to help them. Others have a strong theoretical background, perhaps not focused on markets.
With this in mind, here is the most important solution:
The original "Paulson Plan" sought to establish a market for the various securitized debt instruments, popularly described as "toxic waste." Sadly, this is the general level of market understanding.
Instead, why not engage in financial jujitsu?
Since market participants cannot determine the value of these holdings, everyone assumes the worst. Even the most astute market pundits now believe that the government will merely invest in companies–an ever-expanding list. They see increasing demands for more capital. Since the Bush Administration has not yet acted to buy distressed securities (mostly because it takes time to implement), they believe it will not happen.
The only way to stop this death spiral is a method of actual price discovery for securitized debt. As you assemble a transition team for Treasury and TARP, we hope that the people you choose understand this problem — fully and completely.
Simply investing more in various financial, insurance, and auto companies is not a solution.
There are some excellent ideas for price discovery in credit markets. Leading experts like Bill Gross have suggested that current prices for these securities are far too low. Top economists have contributed suggestions. Meanwhile, it is difficult for anyone to trade in these debt obligations without a liquid market.
For Final Emphasis
Let us be clear that we do not recommend that the government buy distressed securities at poor prices. We hope that you will use your power to create a price discovery mechanism where we can find stability in financial assets.
This is a win-win-win solution.
- It is good for the current holders of these securities, since they get a fair market.
- It is good for the buyers, since the yield-to-maturity on the performing segments of the assets outweighs the risk.
- It is good for the economy, since it ends the death spiral.
There is no single action that you can take before Inauguration Day that will have more impact.
Please make sure you submit your ideas regarding this topic at the President-Elect’s site:
http://www.change.gov/
At the bottom, blocked in dark blue are the various topics, click on the appropriate ones, and then click the submit idea icon.
Of course, we have an actual mechanism for price discovery. It’s called the market, and the market has said this stuff ain’t worth much. The market is plenty liquid, just not at the prices that keep banks solvent.
This isn’t a liquidity problem, it’s a “the banks fucked up problem.” And the way to solve it isn’t with price discovery, it’s with transparency, separating the screw-ups from the solvent banks, swapping debt for equity in Chapter 11 processes, and getting on with life.
And attempt at “price discovery” is just a backdoor attempt to subsidize banks who screwed up.
If leading experts like Bill Gross think these prices are too low, then he can make a ton of money buying this stuff at these low prices. I cetainly wouldn’t begrudge the man his juicy profits, as long as he isn’t doing it on the backs of taxpayers. But nailing the taxpayers is definitely the hidden agenda behind all this “price discovery.”
Surely, price discovery mechanism proposal may not be a bad idea. But as mentioned, the market has this already. More important will be the re-establishment of trust between trading entities, by having a fast, strong and decisive leadeship.
Everyone is simply scared and uncertain at the moment.
A big part of the trip back to stability would be efficiency in these wildy overbuilt sectors: finance, retail, etc. via M&A…
But lo and behold the Administration stopped the first combo of any kind outside the highly-political, overtly-racist Dubai Ports World deal. I’m sure it had nothing to do with Eric Schmidt’s meetings in Chicago this week… naw… not a thing.
Gentlemen:
As usual, I appreciate the comments from our readers. I think our comments generally show a high level of sophistication, rather than a cheering section.
My point is a simple one. The existing “markets” have not done a good job of pricing. Anyone who monitors prices regularly knows the difference.
How can anyone object to price discovery? We should all beware of thinking that we know the answers when we do not have a liquid trading market.
I invite those objecting to this viewpoint to defend the credit default swap market, the source of the problem.
Thanks agin to all.
Jeff
How you think when the economic crisis will end? I wish to make statistics of independent opinions!
Price discovery ? Why not let the market deceive and not a private banking cartel. See Adam Smith – Wealth of Nations