U.S. stocks took another good old-fashioned street beating as policymakers scare the heck out of capital – it’s running for the hills, maybe Galt’s Gulch if not careful, and they seem oblivious to the fact that it’s their fault. JP Morgan’s Jamie Dimon put it straight when on the decision to slash the dividend payout stated he is preparing for a worsening economic situation due to a more costly political environment. That pretty much sums it up.
The Dow Industrial Average closed at its lowest level since May 1997 and the broad S&P 500 at its lowest point since April of that year.
Stocks engaged in a brief rally during the initial hour of trading, apparently on news the government would inject more capital into banks. However, possibly after traders had a chance to think about it sentiment did a 180 – oh, talk of raising tax rates didn’t help either; good job!
The administration delivers a new plan each week, and absent of detail to boot. Then we have Senator Dodd popping off, making statements that increase market confusion. It’s hard to see how they could screw up anymore. More on the capital injection and policy response thing below.
Basic material, information technology, industrial and energy stocks led the broad market’s decline as expectations of an economic rebound occurring anytime over the next six months deteriorated, at least for now. A gloomy forecast for the PC market from Morgan Stanley certainly didn’t help things, especially for tech names.
Market Activity for February 23, 2009
Please Stop
Well, here we go again. Policymakers chose to engage in essentially more of the same by proposing a plan to pump additional capital into banks, and the current preferred shares they own via former injections would convert to common shares – this conversion will help capital adequacy as what is known as tangible common equity (TCE) will improve financial health since that health is based in part on common share-based capital. Problem is this is just another step toward nationalization – and if some form of nationalization is not swift (take the troubled institutions over, clean them up, and summarily send them back out to the private sector) such action only exacerbates the capital strike.
But assuming, on the surface, that more capital injections from the government is a good thing, what happens when current “toxic” assets continue to fall in price, or assets acquired by writing new loans are dragged down by distressed pricing as mark-to-market accounting demands? You’ll get more capital injections and thus greater government control over banks -- that can’t be good, only need to look at Fannie and Freddie for that one. (Regulators say major banks have capital ratios that exceed requirements, but as we’ve seen all we need is a couple of quarters of distressed-pricing write-downs and suddenly more capital is needed. The more capital that comes from the government, the longer private capital will sit on the sidelines.)
Public-sector injections can make things even worse in two ways (the freeze it puts on private capital is the result):
One, does anyone really believe Washington can manage the banking system? This of course is a rhetorical question – to ask is to answer --, as we all know politicians are not at all capable of this task. You think things are highly politicized now, just wait.
Two, what happens to the thousands of banks that have not needed government assistance? What is the fall-out from the appearance that government funded institutions are stronger. Does money run from those that did not engage in poor decisions to those that did as the perception is your money is safer at the government-backed bank?
These are the types of consequences that result from government action and we’re seeing Washington involved on such a grand scale right now that no one can contemplate the magnitude of consequences that will bring about their own problems.
We have argued for mark-to-market accounting to be abolished. For one thing, pro-cyclical accounting rules are extremely damaging. In good times, banks can hold less capital and in bad times they are forced to build more – either way you look at it such behavior is destructive.
The second reason to abolish this 15-month accounting regime (and more appropriate to today’s discussion) is because the longer we wait it means that government engages in a plethora of programs that have huge economic costs – not just from a perspective of money but simply because the market is at the whim of Washington; in which case, capital freezes (as the rules are changed weekly), essentially going on strike.
Eliminating mark-to-market is not an elixir that heals all, but it stops the self-affliction, with the former accounting standard in place I am convinced we would not have been this damaged – the credit chaos would not have occurred (not to the extent with which it did last quarter) and thus economic deterioration and job losses would not have been so substantial.
I believe when the history is written readers two decades hence will be bewildered why we chose to engage in various highfalutin ideas when abolishing mark-to-market was staring us right in the face.
The other thing readers of history will be astonished by is how we let the Federal Reserve off the hook for so long – without their mistakes earlier in the decade, none of the damage from credit expansion, with little standard, would have occurred. I do believe though that it won’t be too long – five years or so – in which setting major constraints on the Fed’s monetary policy decisions will be a consensus view. The Fed has been responsible for the largest economic distortions since its inception in 1913. Certainly Congress plays its role in causing havoc, but substantial policy mistakes from the FOMC are the origin of the major crises over the past 96 years.
Have a great day!
Brent Vondera, Senior Analyst
The Dow Industrial Average closed at its lowest level since May 1997 and the broad S&P 500 at its lowest point since April of that year.
Stocks engaged in a brief rally during the initial hour of trading, apparently on news the government would inject more capital into banks. However, possibly after traders had a chance to think about it sentiment did a 180 – oh, talk of raising tax rates didn’t help either; good job!
The administration delivers a new plan each week, and absent of detail to boot. Then we have Senator Dodd popping off, making statements that increase market confusion. It’s hard to see how they could screw up anymore. More on the capital injection and policy response thing below.
Basic material, information technology, industrial and energy stocks led the broad market’s decline as expectations of an economic rebound occurring anytime over the next six months deteriorated, at least for now. A gloomy forecast for the PC market from Morgan Stanley certainly didn’t help things, especially for tech names.
Market Activity for February 23, 2009
Please Stop
Well, here we go again. Policymakers chose to engage in essentially more of the same by proposing a plan to pump additional capital into banks, and the current preferred shares they own via former injections would convert to common shares – this conversion will help capital adequacy as what is known as tangible common equity (TCE) will improve financial health since that health is based in part on common share-based capital. Problem is this is just another step toward nationalization – and if some form of nationalization is not swift (take the troubled institutions over, clean them up, and summarily send them back out to the private sector) such action only exacerbates the capital strike.
But assuming, on the surface, that more capital injections from the government is a good thing, what happens when current “toxic” assets continue to fall in price, or assets acquired by writing new loans are dragged down by distressed pricing as mark-to-market accounting demands? You’ll get more capital injections and thus greater government control over banks -- that can’t be good, only need to look at Fannie and Freddie for that one. (Regulators say major banks have capital ratios that exceed requirements, but as we’ve seen all we need is a couple of quarters of distressed-pricing write-downs and suddenly more capital is needed. The more capital that comes from the government, the longer private capital will sit on the sidelines.)
Public-sector injections can make things even worse in two ways (the freeze it puts on private capital is the result):
One, does anyone really believe Washington can manage the banking system? This of course is a rhetorical question – to ask is to answer --, as we all know politicians are not at all capable of this task. You think things are highly politicized now, just wait.
Two, what happens to the thousands of banks that have not needed government assistance? What is the fall-out from the appearance that government funded institutions are stronger. Does money run from those that did not engage in poor decisions to those that did as the perception is your money is safer at the government-backed bank?
These are the types of consequences that result from government action and we’re seeing Washington involved on such a grand scale right now that no one can contemplate the magnitude of consequences that will bring about their own problems.
We have argued for mark-to-market accounting to be abolished. For one thing, pro-cyclical accounting rules are extremely damaging. In good times, banks can hold less capital and in bad times they are forced to build more – either way you look at it such behavior is destructive.
The second reason to abolish this 15-month accounting regime (and more appropriate to today’s discussion) is because the longer we wait it means that government engages in a plethora of programs that have huge economic costs – not just from a perspective of money but simply because the market is at the whim of Washington; in which case, capital freezes (as the rules are changed weekly), essentially going on strike.
Eliminating mark-to-market is not an elixir that heals all, but it stops the self-affliction, with the former accounting standard in place I am convinced we would not have been this damaged – the credit chaos would not have occurred (not to the extent with which it did last quarter) and thus economic deterioration and job losses would not have been so substantial.
I believe when the history is written readers two decades hence will be bewildered why we chose to engage in various highfalutin ideas when abolishing mark-to-market was staring us right in the face.
The other thing readers of history will be astonished by is how we let the Federal Reserve off the hook for so long – without their mistakes earlier in the decade, none of the damage from credit expansion, with little standard, would have occurred. I do believe though that it won’t be too long – five years or so – in which setting major constraints on the Fed’s monetary policy decisions will be a consensus view. The Fed has been responsible for the largest economic distortions since its inception in 1913. Certainly Congress plays its role in causing havoc, but substantial policy mistakes from the FOMC are the origin of the major crises over the past 96 years.
Have a great day!
Brent Vondera, Senior Analyst
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