on the way to work, i drove over a log with my wife's car, and got a flat front tire... had to wait on the side of the highway for AAA to come and help me change the tire. Not that I can't do it myself, just that I didn't want to risk it, since traffic was literally 2 feet away from the car.
anyway, i guess a few of ya look for financial digest from me, so here's my latest take on it all...
First - WaMu
The biggest bank failure in history. This dragged out for so long because FDIC can't afford to have WaMu on its books. Unfortunately, they also couldn't prolong it anymore because WaMu lost $16b in deposits in a week! Continue to let this thing drag on would mean more run, more forced deleverage, more liquidity issues, more bailout, more of just about everything. Instead, FDIC forced WaMu to JPM, for a meager amount of $1.9b, which is approximately 1% of current total deposit of WaMu. (considering usually a bank holds 10% of cash on hand, most if not all of their cash is gone from last week's run) If you read JPM's statement, their estimate of losses, from taking over WaMu, is 36-54 billion dollars, which is no small chunk of change. Figure much of that will be guaranteed by the Fed just like Bear Sterns. Considering the weeks long talks, the fact that Morgan Stanley and
Goldman Sachs needs banks, and still no suitor for WaMu, it was pretty
obvious they had too much bad stuff and nobody wanted them as is. So we now have all shareholders and most bondholders wiped out, and Chase will be operating most of WaMu branches. Now, we have a JP Morgan Chase Bear Sterns Washington Mutual... lovely...
<update> yup, Wachovia also failed... but their bondholders didn't get wiped out. National City and Downey Savings are next.
-=-
Second - this whole bailout (will be updated after lunch, hehe)
I guess never got around to writing about this after lunch... but hey, after a lot of haggling and speculation, the bill finally got defeated in the house! =D if you haven't gathered, i'm one of those who thinks it shouldn't pass.
"but it will be financial armageddon" some of you may claim.
looking at the wall street numbers, you might be close to the truth. DOW and S&P suffered its biggest single-day point loss. NASDAQ suffered 3rd largest single-day percentage drop. But if you ask me, all the indexes are still above where they should be.
the fact is, Paulson eff-ed up. He let Lehman fail, and I bet the real reason is a personal vendetta when he was the CEO of Goldman. Ever since then, the train that was slowly marching toward death accelerated 100x, and Paulson's Bazooka suddenly turned to a water gun. Today's WSJ had an article detailing what I had said all along - Lehman's failure dramatically accelerated AIG's demise, which brought down the entire market.
The next problem Paulson had, was not so much the 700b, but the clause that said cannot be challenged by the courts or congress. If he had been a good boy and asked for an oversight committee, then he might've gotten his bill passed right away, before public and economist outcry. Initially, economists thought it was okay, but that was before congress stepped in.
Congress was a greedy child. Fundamentally, Pelosi and Frank wanted to pass this asap because the democratic congress has been seen as one that's done very little. Unfortunately, they put it off for too long. If they had only added an oversight clause and put it up for a vote by last Monday, it might have passed. After a few days, with massive amount of people calling/writing in and the bill becoming more bloated, they lost support. Here are the problems I saw with it:
1. executive pay limitations? if you limit the executive's pay in this kind of environment, where they'll make less than their underlings, even less than the guy who's been with the firm for a few years, what's their incentive to use the bailout at all? they'll try their best to run it into the ground and have it go bankrupt instead of using gov't funds! of course you can't limit everyone's pay, that would be unconstitutional!
2. installments? it became pretty clear by mid last week that 700b was not nearly enough... if they wanted enough to contain this problem, it would've been a good 2-3 trillion. of course congress didn't know about that, and decided to do this in installments... 250 here, 100 there, 350 afterwards... then what? extension for another 350? followed by another 500? it was too wishy-washy to assure anyone.
3. this totally became a main-street vs. wall-street issue. if you don't bail out main-street, house representatives are going to lose their jobs. how do you bail out main-street? ~60% home-ownership, of which about 8% or so are behind or in default, so only 5% of the population on main-street are getting any benefits of the bailout. the other 95% will not allow for anything dramatic. Moratorium is also a ridiculous idea, as it'll hurt the investors more, and not fundamentally help the consumers.
4. McCain eff'd up! Obama was a pussy for having a great economic advisory team and have done nothing, McCain probably lost the election for good this past week. Pauline's embarrassment aside, McCain's whole "I'll stop campaigning until a deal... i'm optimistic there will be a deal... " and no deal, just made him lose all credibility and leadership in the eyes of Americans. 2/3 of republicans voted against it! (and 40% of democrats, a vote of no-confidence on Pelosi) I think even republicans admitted that they were closer to a deal until McCain showed up.
Now that the plan is dead, let's see what happens next. I wouldn't be surprised if Morgan Stanley goes out of business in a week's time. Wells Fargo hasn't bought anyone yet, maybe this is the chance! It was funny that just a week ago, Wachovia was in talks with Morgan... As for Goldman, Paulson probably has too much stock options to let it go, and they'll probably stand until the next administration. We'll see.
One joke I heard last week was this:
guy one - "if the bill doesn't pass, DOW will be 8000 by Monday"
guy two - "no, Wednesday"
Well boys and girls, 2,300 points and 2 days to do it, what do you think? will we get there? why not?
p.s. one of my ex-coworkers asked me last tuesday, what i thought about the bailout, and i told him it won't pass. just in case you are wondering if i'm bsing after-the-fact...
