President Obama had a great line for Wall Street in his inaugural address yesterday: “On this day, we gather because we have chosen hope over fear ...”
Bingo, Obama! Hope and fear are the yin and yang of the markets. Last week this column talked about hope as the elusive elixir of capitalism. Given the stock slaughter on Inauguration Day, seems like a good time to talk about hope's necessary counterbalance: fear.
For most of the past year we have been way out of balance. Unmitigated fear has been allowed to wrack and ruin Wall Street, overwhelming any semblance of hope. The biggest financial companies define this panic pandemic. They already are battered beyond recognition: Citigroup lost $112 billion in market value last year, J.P. Morgan Chase’s market cap plunged by $60 billion, Goldman Sachs lost $51 billion and Morgan Stanley $33.2 billion.
Yet they got clobbered again on Tuesday. In a single day Citi fell 20%, JPM dived 21%, Goldman slid 19% and Morgan Stanley was down 16%. All four stocks are up by 10% or better today. Cold comfort.
Gone are the good ol' days when traders dumped bank shares because the next quarterly earnings report might disappoint. This savage selloff is driven by the fear that these huge financial contraptions may not survive at all.
Maybe it serves ’em right. The big banks are akin to the House That Jerks Built. First they loaded up on arcane and obtuse securitizations of millions of mortgages infected with a sliver of subprime risk. Then they profited on fear by selling credit default swaps that promise a payoff if a company goes belly-up on its bonds--even if you never held the bonds in the first place.
Now they pay the price of frightfulness. Credit swaps on the banks' own bonds are wildly inflated, raising their cost of selling debt. News headlines tell us the defaults are spreading from home loans to other kinds of debt: commercial real estate, credit cards, car loans, college loans and on and on.