It's been a long week...
Last Friday, the markets took heart that a fix was in the works. The proposal on the table was for the government to purchase $700 billion worth of assets from struggling financial companies. Bernanke and Paulson both spent this past week testifying first in front of one group of lawmakers, then another in an effort to persuade Congress to pass legislation approving the deal. Depending on who was speaking and (it seemed at times) the tone of their voice, the market swung one way or the other. The President even interrupted prime time television programming to weigh in on the matter.
Seemingly every politician did his or her absolute best to make sure that they got airtime. In many cases, they should have remained quiet, as their pontification did not help matters, nor even lend anything of importance to the discussion. John McCain and Barack Obama both flew back to Washington to lend their respective weight to the discussions.
Thursday afternoon, it appeared that a compromise had been reached, and the markets took a breather from their slide. The Dow Jones Industrial Average climbed 197 points.
Within hours, the deal was back off the table, and markets around the world went back into protection mode. This morning it was announced that Washington Mutual (WaMu), a bank founded over 100 years ago, failed and was taken over by the Office of Thrift Supervision (the Federal agency that regulates thrift savings companies). They then turned around and sold the company to JP Morgan for $1.9 billion, making it the second largest bank in the US.
Also during the week, Warren Buffet committed $5 billion to purchase perpetual preferred stock of Goldman Sachs, lifting the value of that company, and sparking some buying as some viewed his move as being a sign that companies might be selling too cheap.
As I type this, the negotiations for the rescue plan continue. As word leaks out regarding the talks, the market rises and falls. While having no clear indication where things might end up, this is much better than the way things looked this morning. In the pre-market action it appeared that the market was going to be down a few hundred points at the open.
At the end of the day, some sort of a deal will be reached. While I do not relish the thought of the government spending $700 billion, it should be pointed out that the media has spun this as a "bailout", implying that the money is being flushed down the drain, never to be seen again. This is not the case, at least based on the reports I've heard thus far. The plan is to purchase assets, not to just hand out money. While determining what those assets are really worth is going to be a difficult task, the purchase will be made at a discount to the intrinsic value of the assets. The assets will be off the books of the financial services companies, giving them some breathing room in terms of capital requirements, thereby stabilizing those institutions. The assets themselves are primarily mortgages and mortgage based securities. Assuming that they are purchased at a discount, merely holding them to maturity results in a gain, potentially a very large one. Even if a number of those mortgages default, there should not be a problem, considering that $700 billion represents a LOT of mortgages.
In closing, these remain trying times for our economy and the markets. We are monitoring the situation, and working to discern where risks may lie. While there are definitely opportunities to be had in markets like these, at present we are working defensively, seeking security rather than taking risks in extremely uncertain and volatile times.
