The equity markets were broadly spared a further lashing today thanks to Secretary Paulson’s announcement of some “RTC Like” solution. This is a GOOD THING, and obvious thing, but sadly it is NOT the Holy Grail, and it is shamefully late. I am totally peeved that they did not do this last week, it would have been equally appropriate then. What the heck are they thinking????? Paulson saying he is ‘considering this type of solution” rallies the markets hundreds of points? Sorry thousands of people at Lehman, Merrill, Morgan, Goldman, and for that matter the hundreds of millions of holders of any kind of financial assets. We all got whipped around like a bunch of 10 year olds on the tilt-a-whirl. It is no wonder I feel like vomiting.
So why did they not do this last week? Perhaps because they viewed this as a last step? A place they did not want to go because they realized how complex this would be? I hope Treasury Secretary Paulson is very careful to say enough to calm the markets but not so much as to scare the daylights out of anyone who knows better.
The worry, big worry, is that they are effectively going to own the whole US fixed income securities market? That is not a good thing let me tell you. They are already the new Fannie and Freddie, the newest and biggest giant hedge fund, “Govifreddiefan.” ( has a ring to it, doesn’t it?) Both those mortgage companies got in to trouble in the first place by borrowing at government rates and investing in securities they did not understand. The next step was to take in AIG – another forced step because they waited too long. That added a trillion dollars of stuff and a 'who knows' amount of leverage, but hey, the government can borrow basically at zero.
Think about that for a moment. The government has lowered their funding cost dramatically by failing to act appropriately, and now they are taking on massive leverage to buy the assets of the companies forced in to failure. Only in America.
My friend at a hedge fund wrote to me and said the following, "Everyone in the financial industry is going to become a government employee." That is a rough day.
It is just getting more and more and more and more complicated.