Monday, September 29, 2008

Financial consolidation

Since I like optimism, let's give it a try.
TARP fails. No direct, blanket government help to people who made massively stupid mistakes. Hmmm, so far so good.

Financial sector bloated, needing to shrink. Citigroup, JPMorgan/Chase, BoAmerica even too-bigger-to-fail. GoldmanSachs and MorganStanley looking for more business (maybe not entirely by choice). Fed increasingly and dramatically willing to extend liquidity, especially to aid financial consolidation.
Private financial houses care of ailing and failing institutions (as in 1907 - read this chronicle), now that it seems clear that the Treasury will not help. It worked this morning with Wachovia - why not with the smaller fish out there? Hmmm, that's not too bad.

Financial sector profits (and wages) out of the stratosphere. Fewer bright people going into investment banking – more into real jobs (:-))

Joseph Calhoun agrees

Last week Goldman Sachs raised $10 billion in new capital in one day. They sold $5 billion in preferred stock and warrants to Berkshire Hathaway and also completed a secondary offering of common stock that raised another $5 billion. Friday, JP Morgan raised $10 billion in a secondary offering to help pay for the Washington Mutual takeunder. Both of these offerings were oversubscribed, meaning that the companies could have raised more capital if they wanted. There is not a shortage of capital for well run financial companies.

There is, however, a shortage of capital for companies that have acted irresponsibly with investor capital in the recent past. For some reason, our political leaders believe this is a failure of the market, but isn’t this what should be expected from rational investors? Given a choice, why would a rational investor allocate limited capital to the losers rather than the winners? If capital is really as scarce as it seems, isn’t it better for our economy if we make sure that it is allocated wisely?

What about the credit channel? What about Main Street choked to death? I guess we’d do well to watch rates on commercial paper.

How does this impact the election? The House Republicans are being blamed for the failure of the bailout. Even if Main Street is choked, and even if the bailout would have helped, I bet it won’t be within the next six weeks, and I bet it will take the public many months to realize TARP might have helped. But even if we do tailspin into depression, they are more likely to blame the greedy than to blame the representatives who refused to rescue the greedy. “It was their greed that got us to this mess!”

Obama’s party voted for $700,000,000,000 for very rich, imprudent people who put me on the verge of foreclosure. McCain’s party said no. Hmmm.

This is supported by this article in Money:

Instead, average workers read the plan as the "big guys bailing out their friends," says former House Speaker Newt Gingrich, who commissioned a bipartisan survey on the subject. Gingrich's poll - conducted by Schoen and Republican Kellyanne Conway - found that a majority of Americans don't want Congress to use taxpayer dollars to bail out financial institutions, even if their collapse means a rocky ride for investors in the stock market.
On the other hand,

The collateral damage to the business agenda will be far more sweeping. Take trade. Even with a decent economy, Bush was unable to get major trade deals passed because a rising populist tide emboldened Democrats. Now it's going to be even harder. By contrast, an Obama agenda of aiding union-organizing efforts, raising taxes on capital gains, and imposing a windfall-profits tax on oil is looking more enticing.

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