Global Cardiac Arrest

John Burbank of Passport Capital appeared at the Value Investing Congress this morning. I'm getting inured to scary prognoses at this point, but he managed to scare me by saying that GE, which is having difficulty rolling over its paper, and which has 22 times as many assets as it has tangible equity, is "at great, great risk of going bankrupt".

"The global capital markets system has had a heart attack," said Burbank, "and the policymakers are prescribing exercise and vitamins." If they really want to unblock things, they'll need to try something much more drastic: Burbank was talking about amounts as large as $5 trillion which could be injected into the system today, and taken out only when it was no longer needed.

Burbank also said that the US should aggressively devalue the dollar: the upspike in the dollar and concomitant downturn in oil prices, he said, has hurt hedge funds badly, just as they were coming to the end of their quarter and were allowing redemptions. The redemptions will cause panic selling, and indeed that might be what we're seeing this morning.

I'm not sure that it's either feasible or desirable for the government to attempt a $5 trillion bailout. And competitive devaluations don't help anybody. But I do think that GE, in particular, with more than $500 billion in debt, is at great risk in a credit crunch of today's proportions. It's outperforming the market today, but if you think it's a safe haven, think again.

As for what the government should do, a couple of correspondents have written to me this morning asking whether discount window funds from central banks could come with strings attached: essentially forcing some percentage of those funds to be onlent in the interbank market. Is that possible? Would it be useful, in terms of restarting interbank lending? It's a genuine question: I really don't know.

Comments

[JasonC:]

Loans with strings are silly, just cut out the middleman. The FOMC should simply buy all the double digit yield financial paper on offer. It will clean up. Pay in net new dollars.

2008 Oct 06 01:54 PM

[User 265729:]

I was talking with a friend of mine who is a senior economist in Europe this morning...

It is not really a matter of if, but when and where the rupture occurs. If it's Asia or Europe he calls me no matter what time of the day or night. If it's the U.S.A. , I call him.

There are too many young fools running around on Wall Street and in the media who have absolutely zero historical perspective of what could happen. They must be saying to themselves, "But this is American. It couldn't happen here!" News Flash! It could happen here and it has happened here before...

2008 Oct 06 03:20 PM

[User 265729:]

And GE...

Will this mean we won't have Matt Lauer and Brian Williams fronting as professional journalists?

2008 Oct 06 03:21 PM

[DougM:]

I agree with Jason. To cure the heart attack, it's time for bypass surgery. Central banks should bypass the banks and step into the CP and muni paper markets directly.

2008 Oct 06 04:09 PM

[Socialism c...:]

Sold my GE today. The numbers simply did not add up any more, and the credibility of management is long gone. The only thing I'm comfortable buying right now is gold, canned food, guns, and ammo.

2008 Oct 06 05:08 PM

[Mbuna:]

It remains to be seen whether this is a global cardiac arrest or is it the Titanic sinking and the only real option is to abandon ship!? Now that the economy really is global there is no longer any real freedom for provincial financial and economic thinking. Someone better start to re-examine the fundamental assumptions about fiat money systems. Just because something worked for 50-60 years doesn't mean it's going to work forever. Who will start thinking outside the box?

2008 Oct 06 06:13 PM

[User 265729:]

GE...

What is up at Bank of America? I thought they were on tierra firma?

My G**! They had a several $billion loss in their credit card unit (one quarter).

When are these banks going to take the credit card candy from consumers without personal solvency? I guess the banks are thinking they'll get another $700 billion from the taxpayers. Maybe they are right since I see Paulson is putting all of his buddies from Goldman in key positions... Sweet...

Disclosure: No positions in BAC, GE

2008 Oct 06 06:37 PM

[SO42:]

How would devaluing the dollar be accomplished in a sensible way?

And I do like that "discount window funds from central banks could come with strings attached: essentially forcing some percentage of those funds to be onlent in the interbank market." a sorta, "we'll throw you a line, in exchange for "X" portion MUST be interbank. A not-so-subtle kick in the pants, before we will have to get the Tin Man out here with his oil can.

2008 Oct 06 09:44 PM

[SO42:]

And...Points to DougM....." To cure the heart attack, it's time for bypass surgery. Central banks should bypass the banks and step into the CP and muni paper markets directly. ".....this gets an SJ nod.

2008 Oct 06 09:47 PM