Today in the NYT, US Treasury Secretary Hank Paulson writes an op-ed on the current state of play for the economy and explains his actions to the American people. Let me address a few of his comments.
"We are going through a financial crisis more severe and unpredictable than any in our lifetimes. We have seen the failures, or the equivalent of failures, of Bear Stearns, IndyMac, Lehman Brothers, Washington Mutual, Wachovia, Fannie Mae, Freddie Mac and the American International Group. Each of these failures would be tremendously consequential in its own right. But we faced them in succession, as our financial system seized up and severely damaged the economy."
I'm glad the Secretary included Bear Stearns as I believe it was the Tsy's unprecedented destruction of shareholder value ($29 a share vs the original $2 cram down) that showed the way for short sellers to go after the rest of the sector. Then to allow Lehman to fail was the detonator to the nuclear explosion that occurred in the credit crisis.
"There is no playbook for responding to turmoil we have never faced. We adjusted our strategy to reflect the facts of a severe market crisis, always keeping focused on our goal: to stabilize a financial system that is integral to the everyday lives of all Americans. By mid-October, our actions, in combination with the Federal Deposit Insurance Corporation’s guarantee of certain debt issued by financial institutions, helped us to accomplish the first major priority, which was to immediately stabilize the financial system."
Here's where I do agree with the Treasury Secretary, they made excellent decisions to adjust to the rapidly deteriorating credit situation and acted decisively by changing course with the direct injections. This stopped credit spreads from widening and reversed the process. But it has stalled at these levels.
"It (TARP) is not a panacea for all our economic difficulties. The crisis in our financial system had already spilled over into the overall economy. But recovery will happen much, much faster than it would have had we not used TARP to stabilize our system. If Congress had not given us the authority for TARP and the capital purchase program and our financial system had continued to shut down, our economic situation would be far worse today."
Unfortunately for Mr. Paulson, they don't give out rewards for averting disaster and stabilizing the system. The best example of this is the dearth of terrorist strikes against the US since 9/11 and the collapse of support for President Bush.
"If we have learned anything throughout this year, we have learned that this financial crisis is unpredictable and difficult to counteract. We decided it was prudent to reserve our TARP money, maintaining not only our flexibility, but also that of the next administration."
These comments stem from two developments. First, credit spreads have stabilized and reversed half way meaning that Tsy can take a breath before it acts again. Two, President-elect Obama sent a clear message to not do anything until he takes over and has his new Treasury Secretary decide how to use the rest of the TARP's funds.
Wrapping this into today's markets, I wrote yesterday that I was noting a slight shift in the market action from currencies. Today, the same vibe is resonating through the system. We had the equities lower last night and we didn't get the accompanying US dollar rally and Yen carry sell-off. While the swings continue to be vicious, they are not occurring with new lows or highs being made. To me, this means we are shifting away from the extremes we've had over the last two months to a more stable market environment. This doesn't mean we won't see new lows for the equities, but it should mean we won't have them in an extreme move. To some extent, this is backed up by US Treasury Secretary Hank Paulson not asking for additional capital at this time.
Either way, the last major bad shoe to drop appears to be the US auto sector and let's hope this doesn't collapse in the changeover void between now and January 20th. Otherwise for the time being, the worst is priced in for the markets and now we will beat each other up figuring it out.