As the economic events of the past few weeks have unfolded we’ve heard continuing cries from the Democrats that unregulated markets are bad and that the reason this “melt down” has occurred is that there wasn’t enough government intervention. Now I know our regular readers are smart enough to know this not to be the case. However, if pressed, could you provide specific examples where excess government interference has actually been a negative?
Throughout this crisis, the government has taken an unusual role in picking winners and losers. The picked Bear Stearns to be a loser and JP Morgan to be a winner. The chose Lehman to be a loser but picked AIG to be a winner by virtue of the guarantees it provided to keep AIG afloat. Most recently, the government chose Wachovia to lose and Citi bank to win….except it didn’t.
After determining that Wachovia was about to implode, the FDIC negotiated a deal for Wachovia to be sold to Citi for $1/share. Along with the sale, the FDIC agreed to provide loss protection for anything in excess of $42billion, on Wachovia’s $312 Billion dollar mortgage related securities. This approach had been similar to how the FDIC and other government agencies had been operating since May so no one questioned their logic, until……
Wells Fargo looked at the Wachovia assets and said “We’d like some of that!” Wells Fargo liked it so much that they offered a stock transaction originally worth $7/ share. How the heck did that happen?
The “funny” part about this is that Citi is now suing to get their governement approved deal. I’m sure they view Wachovia as getting a $12 billion gift from the government!
Every one of the governments actions in this financial crisis has been as the weak side of a negotiation. Imagine negotiating for the purchase of a house where you have cash, are ready to close and the seller is on the verge of losing the house to the bank. I’ve done that a few times personally and I can tell you that you will find the lowest price possible on that house at that time because the seller has few, if any, options. That is the situation that the government has been in, they’ve been negotiating forced sales and those will always garner the lowest bid.
It’s fairly obvious that the “crisis” we were all warned of in the last two weeks has not been abated by securing the magic elixir of the bailout plan. If anything, the markets have either laughed or yawned at the effort and have returned taking their ques from other stimuli, real and imagined. Wells Fargo showed us that if the government stays out, there may be temporary pain but ultimately, quality assets will find buyers.
Oh, and did I mention that with the Wells Fargo deal, the government isn’t guaranteeing $280 billion dollars of mortgages? Wells Fargo is buying Wachovia “As Is.” Tell me again what good the government is doing in these deals?
To your larger point–something’s screwy here that I don’t really understand yet.
IF the ‘bailout’ was supposed to resolve the credit lockup (which in and of itself was credible, if not optimal), THEN credit should be OK.
But now the Fed is buying commercial paper, too. And while TED-spread is down, LIBOR is up.
I’d like to lay all this off to stark raving fear, which goes away after a while…