It is said January sets the tone for the year, and if that is the case, it looks like 2010 will not arrive soon enough. In January 2009, the S&P500 index lost 8.6%, the worst January in its history. The US lost nearly 520,000 jobs, matching the jobs lost in the last four months of 2008. For benchmark purposes, 2008 set a record for the most jobs lost in a year since the end of WWII. GDP in Q4 2008 dropped at a 3.8% annual rate, the lowest pace since Q1 1982, when GDP contracted 6.4%. In the month, there was the continued saga of Citigroup, which reported its 5th straight quarterly loss and its decisions to break up into two parts, a good bank – Citicorp, and a bad bank – Citi Holdings. There was also Bank of America, which reported its first quarterly loss since bearing the BOA name, and in the process revealed its acceptance of an additional $20 billion of government capital and $118 billion in toxic asset protection in order to complete its Merrill Lynch acquisition.
It is clear the U.S. banking crisis is deepening, and policymakers have been busy formulating new and ever intrusive solutions. The likely ideas to emerge include forming a bad "aggregator bank" to take bad assets off banks’ balance sheets, further government capital injections, government guarantees of bad assets, or an outright nationalization of banks. In the short term, the capital markets will probably cheer any solutions coming from Washington, short of nationalization. As we wrote before, markets are acting like a crack addict needing a hit. Sadly the markets have become so accustomed to government intervention to ease the pain of new problems facing financial firms, that every new round of government money creates a momentary euphoria that quickly wears off as the markets wander aimlessly waiting for another hit. This leads the markets to freeze up whenever a rumor of a new handout emerges, as market players determine who will win and lose from the latest handout. The seemly insatiable appetite for significant government actions becomes a self-fulfilling prophecy as the markets demand new government funds, and the stooges in Congress are only happy to expand government’s power to preside over the economy. Given the ongoing budget situations found in state governments across the country, and the massive debt amassed by the federal government, trusting our elected officials from either party to effectively manage our financial system is a case of allowing the patients to run an asylum.
We have already heard the President label the $18.4 billion in bonuses paid on Wall Street for 2008 as “shameful” since these firms received government aid. While certainly some individuals performed poorly, assuming every worker in those institutions underperformed at their jobs is silly and unfair.
