President Obama is just what the market doctor ordered. Investors in financials (XLF) were initially racked with fear at the thought of losing the remaining $350 billion in TARP funds to distressed homeowners and small businesses but I don’t think this is a negative for financials at all. I have a variant view on TARP 2. I think this move suggests that mark to market is about to be repealed by the new SEC which will pave the way for a sustained financial recovery.
Smart people do smart things. When one takes a look at the 2008 crisis and asks what could have been done differently the answer sticks out like a sore thumb: REPEAL MARK TO MARKET ACCOUNTING! The chairman of the SEC, and I’m not going to leave out President Bush or Secretary Paulson, decided that the entire financial system should be pushed to the brink of collapse in order to keep this ridiculous accounting regulation in place.
This decision to hang on while the confidence of the American people dwindled was the single dumbest decision our government made. Trillions of dollars would have been saved from government bailouts and market losses, not to mention the millions of jobs that would have been preserved had the SEC correctly managed this crisis. Americans should be furious at the fact that our own government misdiagnosed again and again the root cause of the financial crisis. For some unknown reason they didn’t listen to those like Steve Forbes who gave common sense suggestion after common sense suggestion to get rid of this thing, they didn’t listen to former FDIC chairman William Isaac, and they certainly didn’t listen to me when I recommended it back in July of last year. Before I get too worked up on this issue it’s important to remember that 2009 isn’t 2008. Leadership is about to change. Obama has selected Mary Schapiro as the new chairwoman of the SEC and if you read into Obama’s TARP 2 announcement, mark to market is about to get tossed.
What am I seeing that others are missing? I’m seeing a new President who is sick of throwing money at an accounting mishap. He’s not going to give another dollar to the banks. This doesn’t mean that he’s going to let them fail. Absolutely not. It means he is going to make sure they won’t need any more balance sheet help. There are several alternatives to the current law that would work just fine, he’ll pick one of them; maybe it will be the solution that they came up with in Europe (by the way it only took them one week to figure it out). Obama’s memo to congress about TARP 2 basically was a green light to investors that the worst is behind the financial sector.
By eliminating the baggage of mortgage backed securities from financial balance sheets, many of these companies will be free to begin lending again and their stock prices should begin to recover. The obvious winners will be Bank of America (BAC) and JP Morgan (JPM). Two solid banks that turned themselves into titans as they beefed up during the crisis. Acquiring Merrill Lynch and Countrywide was a brilliant move by CEO Ken Lewis as was the merger of Bear Stearns by CEO Jaime Dimon. In the short run investors have been worried but in the recovery they will be giddy. The opportunity to buy BAC under $11 and JPM under $30 before the market catches wind of a possible mark to market change is a wonderful opportunity. Obama is about to clean this mess up.