If you are in any way involved with Wall Street, we hope you slept all weekend so as to recover from the exhausting week that just passed. If your name is Hank Paulson, Ben Bernanke or Christopher Cox though, you canʼt even sleep on weekends these days. This past year has put these poor fellows through such a wringer that they deserve a health and welfare department the caliber of the New York Giants.
Just the last week alone included a slew of high-pressure situations that would do most of us in. The bankruptcy of Lehman Brothers, after another weekend of last minute hot button meetings geared to find a salvable solution to the bankʼs woes, led off a week that was one of the most eventful in financial markets history. Then AIG (NYSE: AIG) took its place in line, the firing line that is, as our dear friends at the credit rating agencies downgraded the insurerʼs credit worthiness. That favor worthy of the “Goodfellas” forced AIG nearly into insolvency, as its new standing required a higher level of capital reserves to stand behind its underwritten risks, which by the way included securities across the globe.
As you might expect, the globe got a little nervous, and markets the world over collapsed into freefall on Wednesday. The Dow Jones Industrials Index fell 4.1% that day, but if you were reading WallStreetGreek.com, specifically our article, “Naked Short Selling Rules – Itʼs a Buy Signal,” then you were moving against the crowd and buying stocks. The SEC, under heavy political pressure, intensified its effort against naked short selling, and by Friday it had even restricted short selling in financial stocks altogether. The moves offered significant support to stocks. Meanwhile, the strongest driver of all made way on Friday morning by way of a 3:00 a.m. press release.
The Treasury Secretary, along with Federal Reserve Chief and SEC Chairman, had “substantive meetings” with Congressional officials, and worked out the basis of a bailout bigger than that which rescued the Savings & Loan Industry. Seems the feds grew weary of rescuing firm after firm and taking company after company into conservatorship. The costs of doing so were mounting, and no end was in sight. Public confidence in the financial sector was waning, and it threatened driving the American economy into depression. We do not use this word lightly; the Presidentʼs press conference on Friday confirmed that the Administration was also concerned about this very thing.
It finally became clear to the government that the way to save the system would have to be for the government to bear the weight of the system itself. So, according to the preliminary plan, the government expects to extend hundreds of billions of dollars to financial institutions, buying distressed and illiquid assets from them. This is geared to rid the financial system of risk, restore confidence to the shareholders of these firms and free them up to do business normally again. This great extension of aid soothed a collective exhale from global markets on Friday, and after a gap-higher open, allowed the Dow to close the week just 0.3% lower than it started it.
As a result of these actions, what surprises next week may hold seem significantly subdued, and so we believe last weekʼs market lows may hold on to such infamy for some time to come.