Friday, November 21, 2008

Advice to Sec. Paulson (IMHO)

Out the 700 billion dollars authorized by Congress last month to rescue the economy (read: bailout financial institutions), 290 billion dollars has now been spent by Sec Paulson in doling out taxpayer cash to companies of his choice. Rightly or wrongly, Sec. Paulson made a little publicized comment that he is reluctant in approaching Congress for approval on spending the rest knowing full well that it might be an uphill battle with the public suffering from an extended bout of 'fat cat only' bailout fatigue. He has rightly called that the next President-elect have the reins on the money to do what is best fit to get us out of this hole.

Meanwhile, what does the market do - it holds us hostage. Every day we see the DOW slipping by about 400 points. Yesterday evening it closed at 7552. We see prominent banks calling for the rest of the $410 billion to be disbursed as soon as possible. Many are warning of dire forecasts if the stated plan is to wait until the next administration takes office. Yesterday, Citigroup’s stock fell by historic amounts to less than 5 dollars a share. Some people are hinting at a Citigroup based bailout, others are mentioning Citi's merger with another firm. From a macro view of events, large financial institutions know that now might be the best time to wring the rest of the bailout funds - kind of like looting banks as the banks premises are engulfed in flames.

At this point in time, it might be prudent for Sec. Paulson to just sit back - take a deep breath and let the markets settle down. Let the much talked about 'bottoming of the markets' run through its course. It is clear that all of the policies (however loftily planned) introduced by Sec. Paulson have failed miserably - whether it be buying troubled assets or investing in banks directly or shoring up credit card and loan companies - nothing seems to have affected the downward slide. With a lame duck (looks more crippled than lame) administration and a Congress awaiting a change of hands, now might be a good time to relax and tell the market "Just shut the **** up - do what you have to do – we are not moved by your daily swings".

Yes, this is a classic case of the tail wildly wagging the dog. Instead of prudent policies guiding investments and market conditions, we live in an age where fiscal and monetary policies are determined by the direction of the DOW or the spiraling stock values of ‘select’ companies. Yes and remember, it only ‘select’ companies like prominent Wall Street firms that get the preferential treatment. Sec. Paulson: Now, more than ever, is time for a much needed respite, some introspection and enact of policy of 'wait patiently'. People will respect this policy of yours more than the failed policies associated with the TARP bailout. I suspect the moment Sec. Paulson starts to project an image of this nature, the market which has been behaving more like a spoilt brat on painkillers will also settle down. Of course, before the ‘settling down’ can actually happen, the spoilt brat might throw just one more hissy fit taking the DOW to maybe 5000 and swallow a couple of companies with it, but what the hell, we have endured so much so far and used up billions of dollars of taxpayer money and nothing much has happened, let the hissy fit run its course. As soon as the market and (by translation the big financial institutions) understand that they cannot wag the dog any longer, they will also resort to prudent methods of buying and selling.

Irrationally exuberant behavior started this whole thing. Inflated housing prices, unbelievably cheap credit and overleveraged companies all acted in collusion to hype the markets to soaring levels. Rational approaches like the one outlined above will help end it.

Talking about irrational behavior, it is indeed interesting to end with the cover of a book published some years back that predicted a DOW of 36,000. The book said that it will offer the reader “Rock solid investment advice. Long term investors can place it next to the works of Benjamin Graham and Peter Lynch, as well as Warren Buffett’s annual homilies to his Berkshire Hathaway’s investors”.

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