Monday's mayhem in the financial sector was stunning. Even
after the US treasury department and the Fed announced their dubious bail-out
program to save Fannie (NYSE:FNM) and Freddie (NYSE:FRE), big banks like
Washington Mutual (NYSE:WM) hit 52-week lows slightly above $3 a
share.
What is this, the start of the horror movie "Great Depression II" or
"Nightmare on Wall Street"? The leadership of WM had to assure the public they
had enough money and sure enough, Tuesday dawned with the stock rallying a
dizzying 25%. It's enough to give an investor or writer a case of vertigo.
Speaking at a news conference on Tuesday, President Bush also called the U.S.
banking system basically sound. Now he either lives in a different country than
I do or he knows something the rest of us aren't aware of, other than the fact
that the US can print money and the Bernanke Fed can drop billions of dollars
from helicopters if they want to to save the economy.
Another bank that rose from the dead on Tuesday was First Horizon National
(NYSE:FHN) the Memphis, Tenn.-based financial-services holding company, which
swung to a second-quarter net loss from a year-earlier profit, increased its
capital ratios and named a new chief executive as part of a succession plan.
The loss was $19.1 million, or 11 cents a share, compared with net income of
$22.1 million or 17 cents a share in the year-earlier period. First Horizon, the
top gainer in the S&P 500 earlier Tuesday, was recently up around 22% so far
for this session.
**A clever article by Paul Krugman at the New York Times gives a contrarian
view as to why the government (you know, the same people who tell us that "the
U.S. banking system is basically sound") will not, and yeah can not, allow Fannie
Mae or Freddie Mac to expire worthless. Here's the heart of the article for
your consideration and education:
"The case against Fannie and Freddie begins with their peculiar status:
although they're private companies with stockholders and profits, they're
"government-sponsored enterprises" established by federal law, which means that
they receive special privileges.
The most important of these privileges is implicit: it's the belief of
investors that if Fannie and Freddie are threatened with failure, the federal
government will come to their rescue.
This implicit guarantee means that profits are privatized but losses are
socialized. If Fannie and Freddie do well, their stockholders reap the benefits,
but if things go badly, Washington picks up the tab. Heads they win, tails we
lose.
Such one-way bets can encourage the taking of bad risks, because the
downside is someone else's problem. The classic example of how this can happen
is the savings-and-loan crisis of the 1980s: S.& L. owners offered high
interest rates to attract lots of federally insured deposits, then essentially
gambled with the money.
