When Bazookas Don’t Work
September 18, 2008 by Brandon Clay
Filed under Commentary, Regulation & Legislation
Apparently, the bazooka didn’t work to fight the current financial crisis. This was Hank Paulson’s term for the U.S. Treasury cash ready to be deployed for troubled government sponsored enterprises, Fannie Mae and Freddie Mac. When Fannie Mae (FNM) and Freddie Mac (FRE) couldn’t stop declines in their mortgage business, the Feds stepped in. Your government is now the proud owner of a couple of mortgage companies that should be bankrupt. Paulson’s ‘bazooka speech’ 7/15 reassured the markets temporarily. But it did not work for long.
Since the bazooka failed, the Feds decided to pull out a tank. Over the weekend, they brokered a deal with Bank of America (BAC) to save another institution overlooking the bankruptcy precipice. BAC bought Merrill Lynch (MER) for $50 billion. They probably overpaid given MER’s precarious financial straits. However, the Fed apparently issued a ’shotgun wedding’ ultimatum. B of A decided not to blink and now MER and BAC are happily married. But the tank was not enough. The markets declined further on Monday.
On Tuesday, the Fed upped the ante. When bazookas and tanks don’t do the trick, it’s time to call in the artillery. So they pulled out a Howitzer. The Federal Reserve loaned American International Group (AIG) $85 billion to shore up their balance sheet. Cries of ‘government bailouts’ rang through the land, while the market shed nearly -5% on Wednesday. The Dow lost -449 points by the close, apparently ignoring the Feds improved armaments. Investors wanted to see more firepower.
So early this morning, the Federal Reserve called in the international Air Force. Partnering with British, Canadian, and Japanese central banks, they announced a $180 billion cash infusion in the markets via liquidity windows to global banks. Finally, something worked. After struggling this morning, the markets started rising. At the end of the day, the Dow climbed above 11,000 and the S&P 500 inched above 1200.
Granted, this is only one day in the life of the markets, but it’s an encouraging sign. Time will tell if investors can hold onto their gains. No doubt, the Fed has more tricks up their sleeves. Let’s hope they don’t have to go nuclear.
Funny stuff!
I guess we’ve already gone nuclear with the $700 billion bailout scheduled this week. I wonder what the damage will be in the long run? Seems like another setup for a housing crisis – deja vu?