The gnawing sensation I feel in the pit of my stomach is not hunger, I know. It’s dread – of the immediate future, of what’s going to happen next, and the frightening realization that those who are best placed to avoid this crisis are doing nothing to help, but may in fact be worsening it.
I wish they had bailed out Lehman. I still do not understand why they chose to play God and let Lehman fail. Why was Lehman different from Bear Stearns, or Fannie Mae or Freddie Mac? Or AIG or Merrill Lynch or any of the others who followed? Why Lehman alone?
Simple – they thought they could get away with letting Lehman fail.
They didn’t realize, you see, that it would cause money market fund RPF to “break the buck” (NAV go below $1) and cause chaos in the money market. They didn’t realize, you see, that it would start a liquidity crisis. Or cause investors to completely lose faith in the government and start wondering which Institution would fail next.
They didn’t realize, you see, that by committing a few tens of billions to Lehman, they would avoid having to spend $700 billion on a bailout.
(For a detailed analysis of the effects of the fall of Lehman, read this WSJ article. It is interesting and it’s free (no subscription required, that is), though it’s a bit involved, and more importantly, it only addresses the immediate aftermath of Lehman. The ripples are still being felt.)
What happens if Institutions start collapsing one after another like sand castles after a wave? People panic, that’s what happens. If you think people are panicking now, well, they are panicking only in Wall Street. Main Street is yet to feel the panic, which is why it it sitting around arguing on why Wall Street doesn’t deserve any pity.
Main Street doesn’t understand why we need a bailout. Yes, $700 billion is a lot of money, more than the sum total of the lifetime earnings of all the readers of this blog. It does seem unfair as Wall Street clearly shares some of the blame for this mess. But not bailing out Wall Street now is not going to help Main Street – it would instead, hurt. It would be like cutting one’s nose to spite one’s face.
Now, banks are disappearing one after the other. IndyMac, Washington Mutual, Wachovia. Here one day, gone the next. People have NatCity and Sovereign on their crosshairs now – their stock fell more than 60% on Monday. Each one of this is a really large Institution, most of them are among the top ten banks in the country. Where will all this end?
And don’t even get me started on the inconsistency of regulatory policy. When the government seized WaMu, it wiped out the senior credit holders, but the benefit was not passed on to the taxpayers, it only benefited J P Morgan. Wiping out senior credit holders will obviously also make institutions more and more unwilling to lend money to any bank, for it’s obvious that even the biggest banks are not safe.
But in case of Wachovia, the deal was structured differently and creditors were not wiped out. Why have one rule for WaMu and another for Wachovia? The markets are fearful because there is no consistency, no transparency and no rationale for how Institutions are treated.
When banks start failing like that, credit dries up. No institutional investor will lend money to banks, or any other financial institution. Main Street will not get any loans – no credit cards, no student loans, no car loans..given that Main Street is largely a credit card driven economy, I hate to think of the repercussions.
Meanwhile, what do our lawmakers do? Well, they cannot go against the wishes of Main Street in an election year, however misguided or misinformed Main Street is.? So what happens is a classic re-enactment of the “Prisoner’s Dilemma”.? They vote against the Bill, hoping that the other representatives will vote for the Bill. This way, the bailout bill will pass, but the representatives get to go home to their constituents and brag about how they spoke up in the interests of Main Street.
The trouble with this is, if enough representatives think this way and vote against the Bill, it will never be passed. Which is exactly what happened today. Yes, you cannot have your cake and eat it too. Too bad some people keep forgetting this.
By the way, for all those who say $700 billion is a lot of money – yes, it is, but the stock market lost $1.2 trillion today alone, when the bailout plan failed. Doesn’t that loss come out of Main Street’s pockets too?
I can understand that Main Street will not understand all the implications. What I don’t understand is when people who should know better, choose to act extremely short-sightedly.
Did I mention – I am terrified? I am also very angry. And that gnawing sensation ? It’s here to stay.
P.S. These opinions are all mine, and don’t represent any one else’s opinions. But then you know that.