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The Financials Pit Review

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For the week of September 22nd, 2008

Tue, Sep 23 2008, 06:21 GMT
by Kalvin O’Brian

Pit Guru

U.S. Economy

Last week was historic to say the least. Early in the week the S&P plummeted coming off the Lehman bankruptcy, Merrill Lynch takeover, and the government seizing AIG. This created a drop similar to the terrorist attacks back on 9/11/01. The second part of the week was very different as the government took action and tried to directly infuse the markets taking on $700 billion in bad mortgage investment from financial companies. This plan was created to dodge a credit freeze which would paralyze the financial system and the world’s largest economy. Through the new plan, Secretary Paulson will have the authority to buy home loans, mortgage-backed securities, commercial mortgage-related assets and any other assets, as deemed necessary to effectively stabilize financial markets. The bill would also prevent courts from reviewing actions taken under its authority. This seems to me like it is way more power than one should have. This plan obviously adds to an already huge national debt. This bill alone spends as much as the Department of Education, Defense, and Health and Human Services combined. The Securities Exchange Commission has also banned the short selling of financial stocks through October 2nd and the U.S. Treasury said that it will insure eligible money market funds for a year, announcing that the move is essential to protecting the integrity of the global financial system. I understand that time will tell how this plays out but I can’t believe that that much should be removed from the private sector. This intervention is not an intervention; it appears to be an all-out takeover. I would expect severe volatility as this plays out.

Currencies

The Swiss franc dropped the most in five months against the dollar after the U.S. government proposed measures to move tarnished assets from bank balance sheets, encouraging investors to buy higher-yielding assets. The Swiss National Bank kept its benchmark rate on hold yesterday and joined other central banks in pumping money into financial markets to restore confidence. The Euro and the Pound increased due to investors’ interest for high yielding, export-backed currencies. Right now, low interest rates are less appealing. I expect the gains in both currencies to continue through this week.

Published on  Tue, Sep 23 2008, 06:23 GMT