More Problems for the Ailing Financial Sector?

It has long been known that cognitive biases can engender a distorted sense of reality. Even though people may be presented with facts and figures that clearly point in one direction, behavioral mechanisms can prevent them from acknowledging or even seeing the data - data that might allow them to make a dispassionate and rational, not to mention accurate, assessment of what happens next.

For example, despite widespread recognition of the numerous excesses that took place and imbalances that built up before the credit bubble burst, many observers - especially those on Wall Street who allegedly have some sort of forecasting acumen -- have argued that the fallout from the bust would be mild and short-lived. Of course, this is ridiculous. Yet they and others (especially stock traders and federal government officials) have repeatedly gone along with such smoke-blowing nonsense.

More recently, those who are deluded by human foibles such as wishful thinking, expectation, neglect of probability, extreme aversion and other biases (see Wikipedia's "List of Cognitive Biases," for the full range of possibilities) have come to the conclusion that the difficulties in the financial sector must be nearing an end, if only because the crisis has been going on for a while. They believe this even though there is plenty of evidence that suggests otherwise. They also ignore the fact that credit continues to contract in the face of aggressive Fed easing and the U.S. economy has almost certainly slid into recession.

And if they were really focused on reality, the facts noted in the following report, "FDIC Fund Strained by Bank Failures May Have to Raise Premiums," would surely help them to understand that now is not the time for a sanguine outlook. Instead, they would be forced to acknowledge that yet another burden will soon be added to the burgeoning list of problems that are already undermining the long-term financial health of the nation's banking system.

Comments

[helplessobs...:]

All what you say is true, but somehow the invisible hand of the stockmarket says "not so fast" and refuses to enter a new downwave. It has been a lousy forecasting mechanism. Example, when it hit a new high last October
- what in the world did investors see then? What they saw was wrong, maybe they are wrong agin. Looks like it.

2008 Aug 12 10:46 AM

[neeb??:]

"corrections" seem to overcorrect, upsiders overdo the upside, bears tend to take a swipe at everything. Again, no matter how much we say we have the facts we end up speaking through our emotions. No surprise here.

2008 Aug 12 11:15 AM

[Fish Gone Bad:]

My sentiments exactly.

My only explanation of the market behavior is that the market makers had to run the stocks up to unload them. That and the McClellan Summation index has been in an uptrend lately.

The special anti-shorting privilege disappeared today at 11:59 p.m. EDT, and is not being extended. If anyone needs to see which companies these are with pork chops tied around their necks, here they are:
BNP Paribas BNPQF or BNPQY, Bank of America Corporation BAC, Barclays PLC BCS, Citigroup Inc. C, Credit Suisse Group CS, Daiwa Securities Group Inc. DSECY, Deutsche Bank Group AG DB, Allianz SE AZ, Goldman, Sachs Group Inc GS, Royal Bank ADS RBS, HSBC Holdings PLC ADS HBC, J. P. Morgan Chase & Co. JPM, Lehman Brothers Holdings Inc. LEH, Merrill Lynch & Co., Inc. MER, Mizuho Financial Group, Inc. MFG, Morgan Stanley MS, UBS AG UBS, Freddie Mac FRE, and Fannie Mae FNM.

Clark Jenkins
FishGoneBad.com

2008 Aug 12 10:26 PM

[RonB:]

It is very easy to take the negative approach. That takes no work, no vision, no constructive effort. This same sort of gloom and doom was written in the early 1990's. It was incorrect then as it is now.

The stronger financial institutions will come out ahead when these problems work their way through the economy. Wells Fargo, for instance, reported last quarter that it added 15% to its assets and improved its Tier 1 ratio and its net interest margin. All the gloom forecasters can see is the looming writeoffs that most banks will face over the next few quarters. Looking past that, however, well capitalized, disciplined banks like Wells should profit handsomely from the new business they are getting now, and the assets of troubled banks they are acquiring at a discount.

Wells Fargo is a substantial holding in my personal and client accounts.

Ron Beasley
Investment Advisor
rwbi.net

2008 Aug 15 01:19 PM