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Bailouts, Bank Failures and Rumor Mills


Perception key to banks' survival.


I was asked by a buddy at the Wall Street Journal about what I thought regarding the SEC looking into false rumors designed to bring down companies.

I don't think it'll amount to a hill of beans. It's the late stuff that regulators have become famous for. In my opinion, the only thing they ever busted were small brokerage firms in the 1980s that couldn't defend themselves. The sad thing is the SEC turned its back on small, publicly-traded companies that were hunted down like the great buffalo herds in America, shorted savagely and put out of business company by company.

And that only emboldened the vultures to go after bigger game. Just like OPEC was amazed at how little was done in this country to prepare for oil over $50.00 a barrel, I think the predatory shorts were shocked they were able to pull all kinds of shenanigans with big companies, too.

I actually wrote about it in my book, Be Smart Act Fast Get Rich, in the chapter on watching the tape and market manipulation where I highlighted what I thought was an orchestrated effort to bring down the shares of Apple (AAPL). It worked!

Don't get me wrong: There is a place for shorting, but when it involves rumors and other manipulation techniques it ruins the integrity of the entire market. The SEC let thousands of America companies get crushed because they held micro cap stocks in low regard. Now they can't put the genie back in the bottle, especially when they are only getting started "looking into the situation" a decade late. Of course, it's compelling when the vultures turn on each other and would be fun to watch if the stakes for the entire country weren't so high.

It's fascinating that Wall Street would get to the point where lack of trust within its very own midst would leave all but the very top of the echelon vulnerable.

Banks Depend on Perception

"We are well capitalized." These famous last words were uttered throughout the land by management teams of regional banks yesterday. Judging by the reaction in the market, it might not matter.

Washington Mutual (WM) was slammed even as management said it has $40.0 billion in liquidity and $150.0 billion in retail deposits. Once considered the prettiest girl at the ball and a sure takeover candidate, the stock would now give one of Cinderella's ugly sisters a run for her money.

Zions Bancorp (ZION) was downgraded to "sell" at Goldman Sachs (GS) and that decimated the stock and others in the niche like National City (NCC) and Fifth Third Bank (FITB). Now there is open chatter (a little different than the predatory rumor mill in the sense there is legitimate concern from folks with no skin in the game or huge put positions) of up to 150 banks going out of business.

There's a serious wildfire raging out of control and in the end some of these names may go out of business in part because of perception (see Bear Stearns). Let's not lose sight of the fact these companies made mistakes in judgment while blindly chasing easy money. It may be inconsequential now except for politicians but if this was a master plan to nefariously rip off little people then it could be the largest backfire in history.

Is A Bailout The Answer?

Speaking of raging fires, and rages in general, there was an overwhelming response to my question on whether Fannie Mae (FNM) or Freddy Mac (FRE) should be bailed out. 76% felt it would be the right thing to do by letting them go out of business and even some of the 24% that said these government sponsored enterprises should be saved had some reservations.

The comments were intelligent (I learned a lot) and heartfelt. On the pro-bailout side, some said it was needed because of the domino effect, counterparty risk going too high, the global banking system could fail, to save Wall Street and because it was the right thing to do. Those against a bailout talked about corporate welfare, Paulson bailing out his buddies, "Let them eat cake," jailing Schumer, the free market economy, "thorny," and "world beaters" like America in the 20th/21st? century, 17th century Spain and 19th century England.

I think at this stage of the game so many people watching this opera (has to be Wagner) are so demoralized they wouldn't mind if the whole thing blew up and we went back to "Go" and started all over.

Here's an excerpt of one particular email I think sums up the general feeling of most folks watching this horror play out.

You asked the question this morning: Should there be anymore bailouts or should the chips land where they may? I loved Flip Wilson back in the 80's and as one of his characters might have said then, 'Let 'em fall Rev, let 'em fall'. I don't say this flippantly (ahem) either. Two years ago I lost everything I had except my family, and I almost lost them due to my own financial irresponsibility. It hurt badly (you can't imagine how badly) but it wasn't the end of the world - very close to it, but not the end.

I could write a novel about the shenanigan goings-on today and if I were to do so, I would start in 1978 probably; I was 27 then, 57 now. The Hunt brothers had decimated the silver market (over-leveraged), Chrysler was on the ropes (old-thinking) but got bailed out, and inflation was really starting to roar. Fortunately, Lee Iacocca was a man of his word and Paul Volcker had a major set of ----- in order to start the taming of the shrew, inflation; 30 years on and lessons still not learned, Washington, Detroit and Wall Street still out of touch with reality.

My point is this, and don't take this personally because it's not directed toward you, but the 'smart', money-savvy, arrogant financial people and the mavericks (your polite term) need to get some come-uppin's. If they lose their house in The Hamptons or Martha's Vineyard they will be far more prudent the next time around, assuming they get a next time. The Great Depression served us lessons of don't over-extend, don't over-leverage; work hard, pay yourself some of what you make (dividends and savings), be a little humble - or did it?

Government agency regulators need to do their job and get in touch with reality; I am a very less-government oriented thinker yet there is a place for some watching of the store. However, our watchdogs have been asleep; more bureaucracy and more tax revenue isn't going to bring 'Change', in spite of what Liberals, capital L, say to the contrary. Why should you and I have to pay for someone else's screw-ups? Should our children and grandchildren have to? Emphatically NO!!! Two quasi-governmental agencies in over their heads!? Yep, more government, that's what we need. Even with a conservative, capital Democrat, we have had more Big G, higher revenues AND deficits. Where's the morality in this?

Off-sheet balances? What is that? I'm going to get a raise next year (I'm pretty sure I will, I promise!) so go ahead and let me buy this shiny new car/plasma TV/etc and I'll start paying you back next year - I promise! Let's get back to basic sound fiscal management; let's have just a pinch of morality.

(Name withheld upon request)

Not as Bad as People Think?

I have to say that while I think the market is oversold I have to respect the fact that reality is shaped by convictions and each day more and more people seem to be bracing for the worst. I was on a plane coming from Minneapolis and I just looked around and saw commerce, people working, a full plane and as we took off nice homes with some swimming pools and active traffic. It didn't feel like the Great Depression.

When I landed in Newark there were more houses and more swinging pools and people taking care of business (my cab driver made $70.00). I don't want to sound naïve or insensitive but I don't see it anecdotally or in the data, though it probably will get worse as foreclosures multiply.

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