Message to the President-Elect: Here's What You Should Do 7 comments
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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.
Yesterday's stock market decline will be perceived by some as skepticism about your leadership. It is no more relevant than Tuesday'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 yesterday 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.
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This article has 7 comments:
somehow i got the feeling the financial boys did not like me. somebody told me they pumped up the market to make it seem things were okay economically for the election. it was amazing to see it go up for the week before the election even though every fundamental screamed that rome was burning. i assume you suckered in a few empty headed investors telling them the market bottomed so that you did not have to waste their own money.
the banks ain't lending - but they cannot be in such a big mess because they are still passing out bonuses. obviously things are okay enough for that to happen.
the average joe is being laid off here, laid off there. the national debt is going up daily. the fed is leveraged to the limit. what rabbit do you want me to pull out of my hat? the chambers of the economic gun where emptied before i was even elected.
i am not going to let the banking system fail, but they will lay in their crap for a little bit while i figure out the best use of the few weapons i have left. what a mess Jeff.
signed - the president elect
You have described the heart of the problem: no transparency. I agree that establishing a market for these previously privately traded debt instruments will set in place a condition necessary to sort everything else out.
What is needed is to kill big government once and for all!! Why do I not have any reassuring feelings about Obama being able to get that one done? Democrats just don't understand basic principles of personal and economic freedom: their philosophy is that big government is the solution to all our problems. In that regard, Bush has succumbed to a very socialist, Democrat economic stance with his bailout fiasco! I give neither him nor any Repubs that went along with it any credit.
On Nov 06 03:05 AM The hand wrote:
> Jumbo, Jeff
>
> somehow i got the feeling the financial boys did not like me. somebody
> told me they pumped up the market to make it seem things were okay
> economically for the election. it was amazing to see it go up for
> the week before the election even though every fundamental screamed
> that rome was burning. i assume you suckered in a few empty headed
> investors telling them the market bottomed so that you did not have
> to waste their own money.