Financial Musings

My head is spinning. Freddie Mac, Fannie Mae, Bear Stearns, Lehman Brothers, AIG. Federal bailouts seem imminent for most of them. I cannot calculate how many people have asked me in the past week for my opinion about these historic events. Uncertainty and financial markets mix like oil and water, and this time around is no exception. I would like to add a calming voice to the current situation. There is a history of this sort of thing, and the financial world did not end. Most people do not realize that in the Savings and Loan bailout of the 1980’s, the government was able to recoup most or all of its investment, as I mentioned many blogs ago. I do not want to minimize what has happened either. The Federal government has taken on debt that some estimate may be as much as half a trillion dollars. That sort of thing will have far reaching repercussions. We are in uncharted waters, I think, but the ship is sound.

I am fascinated by the mass psychology of tumultuous financial events such as the one we are currently in. I get impatient to know how it will all turn out, wishing I could fast forward to a more stable point in the future. Not just for the financial gain I would have by knowing the future (though if I’m daydreaming, there is no reason to leave out those sort of fantasies) but just to see who steps forward, who was right, who was dreadfully wrong. You can say a lot of things about the twenty-first century so far, but you can never call it boring. I am also fascinated by the history of such events. The decision of this government to bail out these institutions makes me wonder if the entire Great Depression might have been avoided if the government came in and supported the banks in 1929. That is the most fascinating thing about all this. Did we just avert the second Great Depression, or did we just guarantee its arrival?

By Myron Gushlak

Sovereign Wealth Fund

There’s a new kid in town. Actually, he’s not a new kid at all, but he seems to have caught everyone’s attention now that he’s grown up. I’m talking about the “new” financial entity, the Sovereign Wealth Fund. A SWF is an investment tool used by countries to invest in other countries. Over the past five years, the number of new funds has spiked. The International Monetary Fund estimates that $3 trillion is currently being invested, and that amount could jump to 12 trillion by 2012. Though that number looks futuristic, it is only four years from now.

China’s recent investment (I hesitate to use the word “bailout”) in the struggling US companies, Morgan Stanley and Blackstone Group has raised more than a few eyebrows. And China’s SWF investments are less than a quarter of what the Abu Dhabi Investment Authority currently holds. Most sovereign funds do not disclose exactly where their money is being invested. The obvious big issue is whether these investing countries will continue to use Sovereign Wealth Funds solely as financial investments, or will they begin to use their power as political muscle. According to Lawrence Sommers, the former United States Treasury Secretary, right now the goal of these funds is “to maximize the value of their shares.” But, he cautions, “It is far from obvious that this will over time be the only motivation of governments as shareholders.”

For a financial guy, this makes me giddy. This is as exciting as human g-nome developments to biologists. I wish I could fast forward a few years to see how this all plays out. The trenches of the next world war may be on the stock market floor, and the soldiers may all be wearing suits, pardon the hyperbole. Just thinking about this is like chugging a can of Red Bull. Now I’ll never get to sleep.

By Myron Gushlak

Bear Sterns

The fire sale of Bear Stearns to JP Morgan this past weekend is the “Brittany Spears” event of the week. The wave of media has crashed over all the principles. I’m certain Eliot Spitzer is grateful for the relief this event provides him as the media scurries off en masse to cover the newer, hotter, better, sexier story. Experts proliferate on every tv station, armed with the powerful wisdom of hindsight. The incendiary words “government bailout,” are bandied about, looking, I suppose, to rile up the masses into a lather. It’s pretty easy to come down hard against the idea of “rewarding a private industry guilty of egregiously bad judgment and business practices.” But what does that really do towards solving the problem? I don’t know why that is always the approach the media takes with every news story, but this “chicken little – the sky is falling” approach certainly seems intentional to me. Obviously, it sells papers and draws viewers.

If I owned a media outlet, I might try a new approach. I might try to allay the fears of my readers/listeners. How? For example I might tie this story to a report about what happened when the US government bailed out the Savings and Loans twenty some years ago. It is my understanding that the Federal government actually made money on that bailout. Eventually, it sold the properties it took over at a profit. It took a few years to accomplish, and God knows, in a few years this story will be a thousand stories behind us in our rear view mirror, with nary a reporter in sight to record the final fallout of that hot story of March 2008. It seems with the pace of today’s world, that nothing in the past brings any relevant weight to the present. Already there are media sharks searching for the next hot story. What we lose sight of in this media driven society is that these are more than stories and sound bytes. They are “events” with ties to the past and ties to the future. They live on long after the media spotlights are dimmed. It’s called “perspective” and it sure looks like we don’t have any.

By Myron Gushlak

The Great Depression

The lingering power of the Great Depression amazes me. It began seventy-eight years ago and ended incrementally as the Second World War began. That means that those who were at least ten years old and able to have some first hand memories of its devastating effects are in their eighties or nineties, and yet it looms over all of us like a malevolent god. It seems that every article I read about the current mortgage crisis in the United States sooner or later gets around to a comparison with The Great Depression. “Possibly more foreclosures than at any time since TGD,’ or “more bank failures since TGD.” are almost required components of any media coverage. It predates the lives of ninety percent of all Americans, yet it is still the milestone of financial failure.

I don’t mean to minimize the effects of TGD, but it does cause me to pause and consider. The very mention of those three dreaded words commands attention like no other. Say the words “World War Two,” and people nod and might tell an anecdotal story of an uncle or grandfather who fought. It belongs in the black and white world of yesteryear. The majority of today’s college students couldn’t even name the major powers involved in the conflict. Say the words “influenza epidemic” and the reaction received is similar to that of a science fiction movie, except less real or terrifying. But The Great Depression? A shudder and a hushed question follow. “Could it really happen again?”

I can think of no event with more of a lingering impact to modern man, and I can include Biblical stories in that statement. The destruction of Sodom and Gomorrah or Noah’s flood story are child’s play. Even modern disasters like Chernobyl or Darfur do not carry the clout of TGD. I try to keep that in mind as I read articles about the mortgage crisis. Yes, it is a major problem and it will have rippling effects throughout the economy, but I think we’ve lost perspective. The scariest Halloween costumes in America in the past seventy-five years are not Freddy Kruger or aliens from outer space. They are costumes of a hobo with his earthly possessions on a stick or a WPA worker in khaki pants and a shovel in his hand. Those are the most terrifying images to Americans. The next time you read an article about the mortgage problem, keep that in mind. It will help with your perception.

By Myron Gushlak