The Fix Is In
Monday Lehman Brothers went under and Merrill Lynch
sold itself to Bank of America. Tuesday AIG had to be
rescued. Wednesday money market funds were said to be
“breaking the buck”. Thursday Morgan Stanley looked in
trouble and the market tumbled, some stocks falling 30%
or more on rumor and innuendo. Friday the market rallied
sharply. The weekend brought news that Goldman Sachs and
Morgan Stanley will become regulated banks with access
to the Fed window.
Every time we have put pen to paper in these past few
days to communicate with clients and reassure them,
events have made our missives old news within hours. Now
the fires seem to have subsided enough to begin making
sense of it all.
The fix is in. The Treasury/Fed will seek
Congressional approval to create a Federal agency
similar to the Resolution Trust Corporation formed in
the 1980s to clean up the S&L debacle. American
taxpayers will fund a $700 billion investment pool
(about 5% of GDP) to buy distressed securities from
financial institutions, pumping much needed liquidity
into the financial system. In essence, Uncle Sam will
become the investor of last resort.
The title of this piece suggests there may be a bit
of a scam going on here. It could be argued that the
true cost will be much higher and that responsible
taxpayers like you and me will have to bail out
irresponsible banks, mortgage brokers and home
speculators. That may well be true. But we have no
Fed Chairman Bernanke is a practical man. He has
commented that, “In foxholes there are no atheists, in
financial crises there are no ideologues.” A failure of
the financial system would leave us impoverished indeed.
And we may get some of the money back. Unlike much
government spending, which is gone when spent, this
scheme, if handled skillfully, could return to the
Treasury much of the money invested up front.
While the fix may be in, for investors it is unlikely
to be a quick fix. Problems for the economy remain.
Unemployment is rising, housing foreclosures have yet to
peak, consumer debt is high, corporate earnings are
bound to come down, and oil, despite its recent decline,
remains very high. We note that it took a year for the
market to make its low after the creation of the
Resolution Trust Corp in 1989. We don’t know how long it
will take this time, but it could be a while.
* * *
We realize that clients are anxious about their
hard-earned savings and investments. For the last six
months we have been slowly raising cash in client
accounts to the highest level in many years. This
has helped cushion the declines. As of the end of
August, managed client accounts in the aggregate fell
7.6% versus 11.6% for the S&P with dividends included.
Wall Street panics come and go, and many investors
sell at just the wrong time. In the midst of all the
media pandering to investor fears (our advice: don’t
watch CNBC!) it is easy to forget that US authorities
are coordinating vigorously with counterparts in other
countries (where stock prices have dropped more sharply
than here) to prevent the disorderly collapse of crucial
Until things settle down we will maintain above
average cash balances in client accounts. We take
comfort in knowing that your cash is in funds prudently
managed by Federated Investors and that your assets are
held at Pershing/Bank of New York Mellon, a good port in
However, we don’t believe long-term investors should
be excessively cautious in the face of panic which often
represents the final stage of a market decline. Bear
markets offer exceptional opportunities. We note that in
the midst of last week’s turmoil, Warren Buffet’s
Berkshire Hathaway made a $5 billion acquisition of a
distressed electric utility whose stock had collapsed.
During these turbulent times, we will consider buying
stocks that represent good value.
* * *
The SEC requires us each year to offer to clients our
Form ADV II, which discloses important information on
how we manage client funds and run our business. You can
find the form (technically a “replacement brochure”) in
the “Disclosures” section on our website at
www.prherzig.com. Let us know if you would like us to
mail you a hardcopy. Also FINRA requires us to ask
clients periodically to advise of any changes in
address, financial circumstances, or financial
objectives. Please let us know if we need to update any
of your information.
Please read our important notice
about these letters and the securities they mention.