Rethinking Markets

I made a few claims, it’s fair to see how I’m doing:

1)

– This is not a market collapse, in the sense of a price drop in the stock market. It is an institutional collapse because of a price drop. In other words, as long as housing prices, avarice, and economic growth propped up the more esoteric derivatives based on mortgage payments, the value of those derivatives would stay high. When that collapsed last year, many of the investment banks were left holding on to hundreds of billions of dollars of financial crap. Lehman lost over half its assets’ value in the past year (from $32 billion to $14 billion). Merrill lost about the same percentage, though a much larger number (from $64 billion to $28 billion).

Well, let’s just take S&P 500 as an indicator of ‘not a market collapse’: down 20% over the year, down 17% YTD, down 5% over the last three months. Self-grade: C; degree of difficulty 3 of 10 (it is still volatile, and we could still see another shoe drop going forward).

2)

– This is an institutional collapse, in that we should expect to see a number of institutions falter and then either get bailed out by the federal government, “bailed in” by a consortium of other firms (who would guarantee credit, take on some assets, or both), or bought out. Some of these firms seem like they cannot fail. But they will. We’re talking about Goldman Sachs, Morgan Stanley. Effectively, all the independent broker-dealers are potentially on the block. More traditional banks with commercial deposits, less leverage, and less exposure to the financial markets as such are in better shape.

Well, Merrill bought by B of A had already happened; Goldman and Morgan both decided to become bank holding companies. WaMu bankrupt, we’ll still see another large bank or two go under but haven’t yet. Self-grade: D; degree of difficulty 6 of 10. I’m not giving myself credit for the ‘redefine as bank’ – if they fail or are taken over, I will give myself credit.

3)

– Investor money in brokerage firms is probably, but not necessarily, safe. These assets are not guaranteed under FDIC, but there are other protections, and it has never happened that customer brokerage accounts have been lost because a bank went under. Though, that does not mean that it couldn’t happen. Just that it hasn’t. The value of your investments may go down dramatically with the stock market, but they will probably be around. Merrill’s customers will likely just become B of A customers, or whatever they call the new entity.

Aside from some money market funds being shaky, this is correct so far. Self-grade: A; degree of difficulty: 1 of 10.

4)

– The finance sector economy, especially for New York City, is likely about to be in for a battering.
Self-grade: A- (because I’m too vague – but we did see our budget already be pre-emptively slashed by the mayor); degree of difficulty: 1 of 10.

5)

– It is unclear how the financial crisis will be related to the ‘real’ economy. It will be harder to get a loan, both residential and commercial. Assets like treasury bills will skyrocket (because of a ‘flight to quality’, though who know how much quality our gov’t bills have currently), which means that rates will fall. But no one will want to give credit. So now is the time to protect your credit rating. Right Martha? This all may exacerbate an already shaky consumer-spending-driven economy.

The bailout may alleviate these kinds of pressures and allow for more liquidity in lending (at minimum we’ll see the T/ED spread ease, and lending might loosen some). Self-grade: B; degree of difficulty: 5 of 10.

In other words, like most other prognosticators, I am pretty much full of it.