Here are a couple of thoughts that popped into my head when I was watching the BBC Newsnight discussion on the Lehman collapse:
– Anatole Kaletsky commented that no one is going to invest in financial institutions now because the authorities allowed the investors in Fannie Mae, Freddie Mac, and Lehman get completely wiped out. Um, hello, free markets?
– When Robert Reich was asked by host Jeremy Paxman where he thinks we are in the credit crisis, Reich responded wonderfully with something along the lines of, ‘we’re at the end of the middle of the beginning is where we are.’ In other words, nobody knows.
– There were several negative comments about wall street being a casino. I thought that was broadly the point, that you pays your money and you takes your chances. Transparency is another matter.
– The discount rate to ‘not knowing’ has suddenly got a lot higher. Transparency in companies varies to different degrees. Sometimes it can be improved, but sometimes it can’t. Do analysts have a decent way to deal with this, or is it too dependent on investor preferences to be priced?
– Many UK financial institutions are in decent shape and churning out large profits from their retail customer base. So why are they getting hammered along with the investment banks? The way I see it, the likelihood of a major UK bank going under is extremely slim, but it exists and as we have seen, a company does not go bankrupt in a linear fashion, it is more of rapid death spiral. As that probability of this death spiral increases, even by a small amount, it makes sense for share prices to get hit hard. Most of the time, the marginal danger disappears and the stock stages a strong recovery. People then talk about how the price was irrationally low, an obvious bargain for the seasoned investor. But once in a rare while, the bank goes under.
– It is easy to be blinded by the bad news, but there is some good news in the commodity world. At around $94 a barrel, oil is over a third off the highs. ‘If’ the financial crisis doesn’t spiral out of control and infect the real economy at a deep level, then I see lower oil prices as a crucial ingredient for a rosier longer term outlook. Good stuff, what?