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Another Take on the Market Meltdown

In reference to the article below, another friend comments that this view sounded a little paranoid. 

I quote:

“I’m not sure of Stiglitz’ full views on the crisis, though i recall he was opposed to the original bailout plan from sept 2008 which was to have treasury buy toxic assets from the banks. I believe he felt we should be helping the underwater homeowner instead. As you may recall, that plan soon morphed into capital infusions into the banks instead of buying bad assets.

I am familiar with Soros’ general views on the crisis, however. He was opposed to the capital infusion plan into the major banks as presented by Paulson and Bernanke and ultimately adopted by the Obama administration when they added additional infusions to a number of banks and forced conversion of a number of the gov’t preferred investments into common stock to boost certain capital ratios.

It is my view that the Obama administration had no choice but to make these investments because if another major financial institution failed (like Citi or BAC) this could have been catastrophic for the financial markets. We were already in freefall late Feb./ early march of last year, with the market down over 60% from the highs in a little more than a year. We were falling at a faster rate than the ’29 – ’32 period – the worst bear market of all time.

And one of the biggest differences from that era is how much middle class families today have invested in the stock market thru 401ks and indirectly thru pension funds, etc.  It is true that the Federal Reserve is now holding alot of questionable assets on its balance sheet as collateral, but that process started back in march 2008 after Bear Stearns collapsed.

The fed has also pumped alot of money into the economy merely by printing it. So far we are not seeing inflationary pressures from that, so it speaks volumes as to how strong the deflationary cycle has been. Soros would have liked to have seen a major commercial bank or two fail because this could have meant a potential tremendous windfall for certain large and powerful hedge funds like Soros’ Fund.They were hoping to purchase crappy assets dirt cheap from the fdic ala the Indymac Bank model, with govt guarantees on the losses – in other words – tails i win – heads the taxpayer loses. These hedge funds’ best argument (as put forth by mouthpieces like Nouriel Roubini)  was that as long as the governement continued to protect large insttitutions like BAC from having to take the hit on their bad assets (ie. marking them to reality and essentially admitting insolvency), the longer this financial crisis would hang over the banking system.

Soros wanted to purge the system of all the bad assets and start anew – in other words – accept the deep pain and shock that would come from that but it would lead in their view to a much faster recovery. Of course if certain funds like Soros and John Paulson’s happened to make tens of billions of dollars by going that route, oh well, that was merely an incidental consequence.

I think it is curious that the other day the justice department announced an investigation of some of the most powerful hedge funds for perhaps colluding to drive down the euro while driving up the cost of credit default swaps for greek debt. I have no doubt that certain hedge funds regularly collude on certain trades ( which is illegal), although proving it is very difficult.

It will be interesting to see if anything comes of this investigation. I’m currently reading Too Big To Fail by Andrew Ross Sorkin (a sort of blow by blow account of the crisis from March to September 2008- he’s a very good NYT reporter – provides interesting color on the principal players).“