AND THAT’S THE WEEK THAT WAS…

For the Week Ended September 19, 2008

Market Matters…         

When Henry Paulson left his “cush” job in the Goldman Sachs’ exec suite to serve as Treasury Secretary, who knew he was becoming the head of the world’s largest private equity capital firm?  (At least, his new boss had a Harvard MBA.)  Fresh off of last week’s nationalization of Freddie Mac/Fannie Mae, Paulson and his friends at the Fed orchestrated another government buyout (bailout has such a negative connotation) of a global institution, AIG, the nation’s largest insurer.  While analysts claim that its core insurance business remains sound, bad bets (to put it mildly) on mortgage derivatives brought about AIG’s rapid demise and no white knight emerged to keep the financial markets from further unraveling.  Hopefully, Paulson’s investment banking background and financial savvy will propel the $85 billion investment into a tidy profit for the taxpayer.  (Can’t one dream?)  For good measure, he passed on a national investment in Lehman Brothers, a move that led the 158-year old investment giant into bankruptcy.  A day later, Barclays PLC bought many of the failed firm’s banking assets for a bargain basement price of $1.75 billion. 

Fearful for its own future, Merrill Lynch sold itself to Bank of America (of recent Countrywide fame) for $50 billion to create a mega-financial institution (that may one day also be considered “too-big-too-fail”).  Almost lost in the shuffle, Morgan Stanley and Washington Mutual sought some form of private relief/bailout of their own.  A large money market from the Reserve “broke the buck” (fell below $1 NAV) as its plunging Lehman holdings prompted mass redemptions and sent shockwaves through the markets; the most riskless of investments suddenly proved risky.   And, thus, the nation’s (make that the world’s) financial landscape had changed forever.  Unbelievably, in one day, Merrill and Lehman virtually ceased to exist (“Bank of America is Bullish on America” just doesn’t have the same ring) and the government is involved in areas many believe are well beyond its true role.  McCain swooped in to demand SEC Chair Cox’s firing.  Meanwhile Obama (as expected) called for “change.”  In reality, there is plenty of blame to go around (and the major culprits/victims will be debated for years to come). 

Hurricane Ike has long been forgotten (except by those directly affected). Houston felt the devastation and its “reasonably” healthy energy-driven economy was threatened as businesses assess damage.  Despite production disruptions, oil traders initially disregarded the Ike news and prices plummeted well beyond $100/barrel for the first time since March.  However, as the week progressed, prices rebounded as investors moved back into commodities (like gold and oil), perhaps because they simply did not know where else to go.  Global equities plunged early and often on the never-ending financial negativity, and a measure of market volatility known in some circles as “the fear index” surged to its highest level in six years.  Fortunately, bottom-fishers emerged in a big way as Paulson and the SEC (for a change) proposed additional relief and the markets overcame the mass sell-off.  Uncertainty remained the universal theme, though eternal optimists began to believe the initial panic selling was overblown.  Has equity investing become sheer speculation?  How does one justify 200, 300, 400, 500 points moves (up, down, or both) each day?  Here’s to hoping Henry Paulson will make a heck of a private equity fund manager.   

Economically Speaking…        

Weekly Economic Calendar

"The American people can be sure we will continue to act to strengthen and stabilize our financial markets and improve investor confidence."  Somehow, those soothing words from renown economist, Harvard MBA, and (lame duck) President W provided little comfort.  Many politicos questioned the authority granted Paulson and Bernanke to “bail out” those global financial failures (let the grandstanding begin), though few (none) offered any real solutions of their own.  Meanwhile, the Fed chose to leave rates unchanged at the past week’s policy meeting, and instead worked with other Central Bankers to apply much-needed band-aids on the global financial system through some significant injections of short-term liquidity ($180 billion on Thursday alone).  For now, the talks about upcoming interest rate hikes have all but ended, and analysts are projecting fed fund cuts prior to the end of the year.  Additionally, late in the week, the government proposed the creation of an RTC-like entity to manage (and ultimately sell off in an orderly manner) much of the remaining underwater assets on these financials’ balance sheets. 

The economic data of the week took a back seat to the other more pressing news of bailouts, bankruptcies, and buyouts.  In fact, nothing earth-shadowing was announced that prompted any real change in most economists’ overall (pessimistic) views. Housing remained weak as new construction experienced its slowest pace since early 1991.  Industrial production dropped by over one percent in August as automakers continued to struggle.  CPI fell for the first time in almost two years as the recent dramatic decline in energy prices and other commodities eased some of the prior inflationary fears (for the time being).  Even the core numbers (excludes food and energy prices) rose by a mere 0.2%, a welcome sign in light of the other depressing releases. 

On the Horizon…Where to start?  Market volatility is sure to continue for the indefinite future as investors, economists, analysts and politicos debate the merits of the government moves and try to make heads or tails of the new financial landscape.  Mega-financials which offer everything (deposits, lending, brokerage, underwriting, wealth management, M&A) appear to be the wave of the future (and suddenly beleaguered Citigroup is ahead of its time).  Comparisons to past crises are emerging: Great Depression, S&L, junk bonds, Japan real estate, tulip bulbs.  Many investors have thrown in the towel (capitulation) and unloaded any and all financials (not to mention autos, airlines, even techs…anyone catch the 25,000 jobs lost at HP or the negative Dell comments?).  To some, this environment represents a great time to buy and seek out bargains.  To others, today’s markets have become sheer speculation and investors who wish to participate in the growth potential of their favorite corporations are instead subject to daily gyrations, often without much rhyme or reason.  Housing and GDP data will be given cursory analyses in the upcoming week, but the bigger picture will be on the markets as a whole and the changing roles of the government.  Still want to be President, Obama/McCain?  W looks pretty darn beat these days. 

Brounes & Associates is a Houston-based consulting/marketing firm that performs research, marketing, and education projects for financial services companies and other professionals.  “And That’s the Week That Was” is a weekly market/economic commentary that is distributed each Friday afternoon.  Any financial professionals who have interest in rebranding the piece and sending to their investors should inquire to:

Ron Brounes

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