Money Managers
Jul. 15th, 2008 02:39 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksI was idly looking for Hank Paulson's statement on Freddie Mac and Fannie Mae, in which he seemed to resort to typical political obfuscation. But, more of that later.
I came across a site of some "independent money managers" in Atlanta. This was their conclusion from the Paulson statement:
The interesting thing here is the fact that money managers, if they are any good, shouldn't adopt value-laden comments. "This is bad news for oil prices" equals "oil prices are going up". "This is good news for gold prices" equals, yes, the gold price is going up.
Indeed, the whole caboodle is really so embarrassing that I won't name the company. But, well, if they just don't understand economics, let alone English, would you trust them with your money?
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But, yes, Paulson. Well, how to make a big crisis out of a small crisis. Paulson has admitted that the two FMs need to be recapitalised, but the fundamental question that this raises is "to what level". To which Paulson can only reply "to a sufficient level".
The problem is, to recapitalise the FMs to a level that would allow them to stand alone properly would require huge sums of taxpayer funds. To recapitalise them so that they go back to the level of "implicit support" from the government could mean that the FM management might start making dangerous bets with taxpayers' money. In other words, Paulson's answer to "where to from here" is, basically "let's see how things develop".
The $75bn that the FMs have as capital is, you will recall, funding some $5tn of debt. To have proper Tier 1 solvency, we should be looking at something like $500bn of capital. Now, if you want to pump $425bn into the company, that either requires shareholders to stump up six times their current investment just to maintain their current stake (and, well, you can whistle dixie for that), or you dilute the shareholding to one-sixth and put in the money from the taxpayer, some $2000 a head. Well, that won't happen either.
What is likely is a sticking plaster. Say, $75bn of capital, of which half can come from shareholders and half from the government. But this leaves the FMs in a strange position, one that is based on its curious semi-governmental status.
On top of this, no-one knows how deep a hole the FMs are in. Taxpayers, in effect, will be putting in cash based on blind faith and little else. The shareholders might not feel that they are being "bailed out" (they will, after all, lose about 80% of their investment on the price of the stock at the beginning of the year; but a bail-out it is. because the alternative would have been losing 95%.
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I came across a site of some "independent money managers" in Atlanta. This was their conclusion from the Paulson statement:
This is bad news for the taxpayer because we have now been saddled with even more debt.
This is bad news for interest rates since increased indebtedness and a threat to America's AAA credit rating will mean higher rates in the long run and lower prices for current holders of U.S. Treasury bonds.
Higher rates are bad for anyone with a mortgage, credit card debt, a home equity loan, a margin account, etc.
Higher rates also increase the government's debt burden via higher interest payments on outstanding debt.
This is bad news for the U.S. dollar for all the reasons above.
This is bad news for oil prices since a weaker dollar helps drive up all commodity prices.
This is good news for gold prices in the long run for all the reasons above.
The interesting thing here is the fact that money managers, if they are any good, shouldn't adopt value-laden comments. "This is bad news for oil prices" equals "oil prices are going up". "This is good news for gold prices" equals, yes, the gold price is going up.
Indeed, the whole caboodle is really so embarrassing that I won't name the company. But, well, if they just don't understand economics, let alone English, would you trust them with your money?
++++++++++++++
But, yes, Paulson. Well, how to make a big crisis out of a small crisis. Paulson has admitted that the two FMs need to be recapitalised, but the fundamental question that this raises is "to what level". To which Paulson can only reply "to a sufficient level".
The problem is, to recapitalise the FMs to a level that would allow them to stand alone properly would require huge sums of taxpayer funds. To recapitalise them so that they go back to the level of "implicit support" from the government could mean that the FM management might start making dangerous bets with taxpayers' money. In other words, Paulson's answer to "where to from here" is, basically "let's see how things develop".
The $75bn that the FMs have as capital is, you will recall, funding some $5tn of debt. To have proper Tier 1 solvency, we should be looking at something like $500bn of capital. Now, if you want to pump $425bn into the company, that either requires shareholders to stump up six times their current investment just to maintain their current stake (and, well, you can whistle dixie for that), or you dilute the shareholding to one-sixth and put in the money from the taxpayer, some $2000 a head. Well, that won't happen either.
What is likely is a sticking plaster. Say, $75bn of capital, of which half can come from shareholders and half from the government. But this leaves the FMs in a strange position, one that is based on its curious semi-governmental status.
On top of this, no-one knows how deep a hole the FMs are in. Taxpayers, in effect, will be putting in cash based on blind faith and little else. The shareholders might not feel that they are being "bailed out" (they will, after all, lose about 80% of their investment on the price of the stock at the beginning of the year; but a bail-out it is. because the alternative would have been losing 95%.
___________
There is a solution to this ...
Date: 2008-07-16 12:38 am (UTC)http://www.theonion.com/content/news/recession_plagued_nation_demands
It's a hand up, not a hand out.
DY
Re: There is a solution to this ...
Date: 2008-07-16 11:53 am (UTC)Less long-term strategy, more short-term unviable solutions.... Many a true word spoken in jest....
PJ