Bad Medicine!
We live in extraordinary times and, here in the Southeast, we are also dealing with a profound gasoline shortage (thanks to Hurricane Ivan and its impact on Houston-area refineries), which sometimes gives life an even more apocalyptic feel. However, it is important to keep one’s wits when navigating life’s rocky shoals, so here are some thoughts on this afternoon’s news that the House has rejected by 228-205, the Administration’s “bailout package”.
One, could anything from government—be it a bailout, tax rebate or any form of legislation—really solve our problems? Actually, it is often government interference in the private sector for purposes of social engineering or wealth redistribution that lays the foundation for future storms—and we’re living through a whopper right now. It strikes us as stunning that the market—in all its collect wisdom—is actually waiting on tenterhooks for a piece of government legislation to rescue us all from our misery.
Although not experts on governmental affairs, we certainly imagine that there will be other efforts to redraft this legislation in order to find ways to remove bad assets from the books of staggering financial institutions so as to prevent what could ultimately be a very damaging freeze-up in the credit markets. Indeed, it has been this issue more than any other which has driven the Administration and Democratic leaders in Congress into each other’s arms.
Make no mistake, work is being done to take out the weakest players in the finance sector. This trend went global this weekend with the Belgian/Dutch rescue of Fortis. It continued today with Wachovia’s shotgun marriage to Citigroup (C). Last week we saw WaMu delivered into J.P. Morgan Chase’s arms. The relevant financial authorities are attempting to pare out the most at-risk entities, without all the fanfare and drama that we see on Capitol Hill.
Goldman Sachs (GS) proved last week that the market itself has solutions to our problems, if we would allow it to work. Goldman was able to raise $10 billion in new capital—half from legendary value investor Warren Buffett and half in a secondary offering. Clearly, there is money out there for well regarded businesses to tap into.
As a member of the investment community, I too sat in pain this afternoon watching the major stock indices slide in disappointment over failure of the bailout package. However, it is possible that this failed bill was not going to be a cure-all anyway. Perhaps something smaller, more focused and less statist will emerge from today’s legislative ashes and with time, hard work and a renewed focus on saving, not conspicuous consumption, things will improve.
While many around the world are gloating over our financial problems, just remember, America has been counted out before. In the seventies, many thought that American leadership was over and that we were a “paper tiger”. The eighties and nineties proved those forecasts wrong. At Ockham, we are confident that better days lay ahead this time as well.
Ockham Research Staff @ September 29, 2008
