Monday, September 29, 2008

Eight Percent Lost

Washington DC

As the House of Representatives are pandering to the most resentful and least educated of their respective constituents, the economists on Wall Street started another sell off.

The results, about 8% loss. Of course, this depends on what index you are looking at, but 8% seems to be right about in the middle. The Dow is down 777 points or 6.98%. The Russel 1000 is down 8.69%. Nasdaq Composite is down 199 points or 9.14%

I also feel that there is some risk in the behavior of congress talking about bailouts. I get the feeling that some of the most recent bank mergers are so that companies with less exposure can gain more exposure, and get some of the bail-out pie. However, those are the breaks. The government either can get involved, and start buying companies that are "too big to fail" ... or the government can stop claiming that this is in the works.

For all the folks who are protesting about the largess of Wall Street and high rolling CEO types, keep in mind that it's not the CEO that approved his own golden parachute... the CEO merely signed up with the best golden parachute offered by the boards of directors that are out there. The CEO gets the golden parachute because they are being given a job where they know beforehand that they will be fired if something goes wrong. That's the nature of business, a certain amount of risk is necessary to move a business forward, and balancing that risk against safety is always a difficult proposition.

Any CEO or market manager who didn't try to take advantage of the forward market trends in real-estate (a rising trend for well over 10 years straight), was bound to get fired for not taking enough risk.

Either way, today is a day where the markets are down 8%. This is because of market panic, and the market panicked because it didn't expect that the government money was at risk of being taken off the table. Wall Street ALWAYS panics when something unexpected happens. I'm not an economist or anything ... I learned this from listening to radio shows.

Why have my congressional representatives not figured this out yet?

Full Text of current proposed law (as defeated today):


  1. Your point about a CEO getting fired if he didn't take risks in Real Estate:

    WHY is that the case?

    1. Zero Congressional Oversight -- I've heard clips from 2004 and 2005 on talk radio where Republicans were too weak to use their majority to reform Fannie Mae and Freddie Mac ... and Democrats were apologizing and defending the executives from those companies, and the regulator who was calling for reform was ripped to shreds on Capital Hill.

    2. Moral Hazard -- Executives KNOW that the Federal Government will bail them out, and they have FAITH that the Federal Government will not fail financially. There's ethics, morality, and reality. If you teach execs that the Government will bail them out, they will take bigger risks.

    3. Poor Communication: Being here in Florida, in the center of the financial storm, I can tell you that the mortgage crisis was starting two years ago, after all the Hurricanes. People wanted to get out of Florida ... too many homes went on the market all at once ... Real Estate agents were not realistic with sellers, telling them to wait until the buyers returned (I was shopping for a home at the time, looking for a bargain -- it was a mantra) ... ARMs started to reset at higher interest rates (The Fed never should have lowered rates to 1% -- another symptom of moral hazard) ... foreclosures ... buyers circling like vultures ... banks reacting slowly.


    Anyway -- I would not give CEO's the benefit of the doubt on this issue. They made a CHOICE to take risks, while not keeping an ear to the ground to hear what was really happening in major markets like Florida.

    This is why I am against the bailout -- I think we need an end to Moral Hazard -- CEO's need to understand that the Government will not bail them out ... the fear will eventually work itself out of the market, and things will stabilize -- it will be a little different, of course, but normal.

    I have zero faith that my idea will happen ... or if it does happen, the consumer will be punished SEVERELY for insisting that Congress vote NO on a bailout. We the masses will suffer, one way or another, for this mess, with higher interest rates and scarcity of credit.

  2. Vahl,

    I am not giving CEOs the benefit of the doubt at all. Actually, I refuse to give them credit for thinking outside of their private boxes to be able to cause this sort of mess.

    The golden parachute is a personal contract between a corporate entity and a key employee, and it frees that employee up about having to personally worry about the outcome of his/her actions on a personal level.

    Clearly, this does not protect a CEO from criminal investigation in the case of rampant wrong-doing. It does protect a CEO from being forced into retirement with no prospects for future employment on the heals of a miscalculated risk.

    My greater point about the crisis has more to do with follow-through, though. The key when dealing with free financial markets is to deliver (within a margin) on what you say you will deliver. In the case of the bail-out, it had been widely reported that a bail-out deal that was palatable to both sides had been found. When that failed, the result was panic.

    I'm still not 100% convinced that this is the right bail-out at the right time, and I find it deplorable that so many programs have been tacked onto it .. forcing anyone to votes against it to have to face future election ads that say " ... voted against parity for the mentally disabled ... "

    I am 100% convinced that something needs to happen - and that something should come at the banking level, and that something should come at a cost.

    Meanwhile, the markets are teetering on another panic because lawmakers have again said that the bail-out will still happen. I hope for all our sakes it either happens, or government learns to stop making promises that it doesn't intend to keep.