“Being right can be very lonely”, said Richie’s dad to his son in an episode of ‘Happy Days’. It came from an episode back when the show was an actual period piece and interesting to watch.
It hasn’t even been two days since my last post and most of my predictions are coming true already. The financial giant AIG was bailed out, and now ALL of the troubled financial institutions are being bailed out. The trillion-dollar deal took place in the dark of night and with no transparency or details for the American taxpayer who is expected to once again, pick up the tab for poor behavior. The poor behavior will again go unpunished and undisciplined, but I have to admit, at the moment, there’s a twist. The stocks in those failing entities have profited SOME people as much as 80% overnight!
If you were deliberately trying to erode faith in fiscal conservatism, this is a beautiful example of how to do it. Let’s look back for a moment. One financial giant teeters on the brink of failure (Bear Stern) so, predictably, the government meddles in and basically bails them out. Just a couple of months later, another banking giant staggers. The stock value plunges and many investors jump in, buying the bargain shares and expecting another bailout and a nice return on their investment risk. Remember that twist I spoke of? What the…xxxx? The government draws a line in the sand, so to speak, and refuses to help Lehman Brothers. How low can a speculator’s stock go? How about zero. Lehman files for bankruptcy (the largest in U.S. history!)and dies the death they deserve, taking the speculators down with them.
I’m o.k. with this scenario so far. I’m not happy about it, but bad behavior has to occasionally result in bad consequences. I think its arbitrary for the Fed to pick and choose whose jobs and stock will whither and die, but I’m glad we finally show some restraint and refuse to reward poor practices in our ‘thrift’ industry forever. The other thing about this is the ‘pain’ involved in learning. The investor/speculators who thought they’d be buying low discovered that there are situations that are so bad, so historically bad, that there’s no upside to buying. I like this even more. Good, conservative banks and funds that invest in companies that actually make real things and lend to homes in their own neighborhoods finally get the last laugh and tell their investors, ‘we may not pay the highest rate, but we’re safe and sound, and aren’t you happy to be with us now?”. Those of us who played by the rules may come out of a bad situation on top in the long run. Sweet vindication!
Not so fast. Overnight, the leaders of the Fed, SEC, and the Sect. of the Treasury announce that they’ll not only inject TRILLIONS of dollars to safeguard these gambling idiots’ institutions, they cheat legitimate stock traders by suspending the ability of traders to ‘short’ these poorly behaving banks as they should be! It is, simply, unprecedented and patently wrong. The immediate result of this historic measure is that the banks and funds who had behaved so poorly were not only rescued, they were rewarded and get to assume the same safe stature as the banks and funds that did the right thing by foisting their mistakes on the taxpayers! Oh, by the way, their stocks were pummeled to all-time lows the day before, but skyrocketed today once their 'miracle cure' was emminent and short selling was suspended! That would also be good for myself and other investors if we’d bought them at their lows, but most of us didn’t, based on the lesson we’d learned from the government allowing Lehman Brothers to collapse earlier this week! So who profited as these ‘worthless financial stocks’ swung up in the 40-80% range that quickly? Who would possibly risk investing in such a losing proposition? I wouldn’t, unless I knew the bailout was coming-and I didn’t-but clearly others did and took windfall profits from it.
So what are the lessons we take away from this? The government will arbitrarily reward the worst behavior, so don’t bother investing prudently. The government will arbitrarily change the rules of the game as the game is being played, so have no faith in it. The government systematically degrades and punishes good behavior, in a sense mocking those institutions and people for their foolish trust and hard discipline by making them 'owners' of the bad loans that others gambled on! It's almost unbelievable. It's incredibly unfair. All these lessons have come in the past few days from the leaders of the party of fiscal conservatism, the Republican Party. I spoke last time about learning from painful experiences. I’m feeling the pain right now, and believe me, I have learned my lesson.
