Pretty interesting week on Wall Street. At least in the US. From what news reports says, the capitalism in US has changed for good. God, knows what that means. I am sure they must have said similar things every time something significant rattled the economy whether it is the collapse of banks in 1929 or black Monday in 1987 or Savings & Loans debacle (very similar to housing and mortgage mess of now) in 80's.
Last weekend was real busy. Was constantly looking for fresh news to keep track of what they were going to do with Lehman Brothers, investment banking firm. Feds (aka government) did not give anything. Pan handling Lehman folks who had gone to beg Feds came with a empty bowl. With empty bowl, no one was ready to buy the beggar with the empty bowl. All interested suitors were interested only if Feds put some lose change in the bowl of Lehman. When they did not see any such change, they made their way how. Both BOA and Barclays said 'right' and left. So, having lost proverbial shirt, Lehman declared bankruptcy. Why do they call bankruptcy. Rupturing bank? May be.
At the same Merrill Lynch's pant was getting wet. Before, it got completely soaked and started stinking, CEO Thain engineered its sale to BOA. Smart guy. Persevered some value. If he had remained adamant, I am sure fate would not have been any different for Merrill. Bank of America scalped Merrill for a decent sum. It's altogether a different question what would happen to BoA after sometime. After seeing the collapse of behemoths, nothing will surprise anyone anytime in the future. All these guys are capable of wielding powerful begging bowl any time.
Then to come with begging bowl was insurance giant AIG. AIG's height of financial meltdown. Those guys do not even know what they have insured, what's their worth and what they owe and what they want. They said we insured some debts which are packaged into some weird financial instruments. We can not even value them because formulas are so arcane we do not know how to figure out. Looks like equations without solutions. God help them who employed geniuses who devised such debt securities which AIG insured. What was AIG thinking? Their eyes, I am sure, were on the steady stream of insurance premiums they were going to get. They never bothered to think about the fact that one day you may have to pay for what you are taking the money to insure.
Now Feds took note and said we will bail you out. If not, you guys will sink everything. So, AIG got 80 odd billions to tap into. In return, public got 80% equity in AIG. Hey, we all own AIG now because 80 billions is our tax money.
Then came another news. Government is going to set aside close to 600 billion to buy distressed debt from all banks so that banks can write them off from their books. This is proverbial 'left holding the bag' for general public. We will be paying for years to come to own some junk that nobody wanted.
Why are 'we' doing this? I say we because government is just representing us. We could have done two things. First, let banks collapse and lose all money. Second, bail these buggers out and hold on to useless piece of paper with no value. On the face, both situations seem alike because money with no value is no money. But, letting banks collapse would totally evaporate the wealth and you can not reverse it. By bailing out these banks, we are at least holding the paper so that we can hope when we get out of this mess, we will still have some paper which we can pass off to some other gullible entity. So, it is better to have prevented the total collapse of banking system.
Root cause - greed. Period. Greed is good but does not come free. It comes with pain even when it delivers. What's the alternative? Be like a sage and have no greed at all? That's fine if you live in isolation. When we live as part of society, greed is required for general advancement of society. Without wealth creation, society won't survive. So, we need to pursue wealth. Whether we take a slow and steady route which is slower but safer or whether we try to make a big splash is up to you. I would prefer slow and steady. It is less glamorous. Days and months and years may go by without much happening. But, in the end we all will be better off. Or you can do the way we have been doing off late. Put greed in overdrive. You will enjoy the heady ride while your vehicle lasts but driving in overdrive for long is going to burn your engine up and you will have to take a break. We are in that proverbial break now. Not bad. Even with such mentality we will do well but not in a steady way but with many ups and downs. It is up to you.
Next item is knee jerk reaction from Feds to ban short selling of selected financial market securities. I am not convinced it is the right thing to do. Yes, it does seem cruel to benefit from falling stock prices - i.e. that's what short selling is. You first borrow the share, sell the share, collect the money, hope that share price will fall, when it falls, you buy back the share and return it to owner. You made a nice profit. What is wrong with that? If one can buy shares with a hope that it will go up and make profit, what's wrong with someone borrowing the share from you, selling it off, buying it back when it falls in price and returning it back to you? Other than the fact that the person is betting on negative sentiment, there does not seem to be anything wrong at all. But, Feds in their wisdom thinks some people have been driving down the share price of selected companies by spreading false rumors and artificially creating bad news. May be true to some extent. If a company is worth the salt, its books should be sparkling clean to quell off any such rumors which can depress the stock price. If a company's stock price goes down because of rumors and if the company is not able to do anything to hit back at those rumors, rumors must be correct. If you look at the companies which are crying now that their prices were depressed by short sellers did not disclose everything they knew about their own books. Do you think if these begging bowl banks were to come clean with all the mess they had on their book, stock prices have stayed where they did? No chance. We as general public would have done the same thing - i.e. bringing the stock price to ground. These companies did not come clean. They continued to paint a rosy picture and fooled the public for as long as they could. But, they should have understood you can not fool everyone all the time. There are smart short sellers who can read between lines and read your lips. When these smart people could sense something was wrong, they increased short positions and stock started falling because general public started seeing short position going up and that's a sure sign to start dumping the stock. If people know something I do not know they would not have betted on short positions. History has told us that Enron, Worldcom kind of sleaze balls would have lived longer if not for astute short sellers. Now by banning these corporate vigilantes we are letting unscrupulous companies to screw us for longer so that they can take their sweet time to screw us and also prepare nice exit strategy. Bring back short sellers. Our guiding beacons.
Should this dampen our spirits and stop us from investing? I do not think so. What options do you have? Stuff your money under mattress? That is no good. Put in fixed deposits. That's ok if you are happy with interest rates which are less than inflation. If you want to build wealth, then knowing what we can know from history, there is no other way than to stay put in the markets. Once you decide to be in the market, choice is up to you. You can chart a slow, steady but safer course to wealth or rash zig-zag route. Both will get you to your destination. Not necessarily in the same condition. Choice is yours.
Happy investing. Happy wealth building.
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