Capitalism takes a sabbatical – Rosenberg

A few interesting quotes from a research note titled ‘Capitalism takes a sabbatical’ by arch pessimist David Rosenberg, head of economics at Merrill Lynch:

…. It must be noted that what the government is doing today with (TARP) is much bigger and more complex than RTC was back in 1989. What Mr. Paulson wants to establish is a “good bank, bad bank” much like RTC, but RTC sold off assets from banks that had folded, not assets from the living zombies. The assets sold in the open market were not opaque CDO’s but “real” stuff like buildings, cars, planes and art. This time around, banks are going to be forced to mark down their assets to market values – and the government is about to set up a process to discover what those prices are. Estimating the total losses was far less complicated back then. And it was a regional problem, not a national or even global dilemma. What Paulson is really doing is digging into the 1930s playbook – the Federal Reconstruction Finance Corporation; as well at the Home Owner Loan Corporation (since the Democrats are very likely going to want to modify the mortgages they end up taking into the government’s books to avoid a further uptrend in foreclosures).

… The elusive bottom Keep in mind, for all the bottom pickers out there, that after the RTC was established in 1989 it took a year for the stock market to bottom, two years for the economy to bottom, and three years for the housing market to bottom. And recall that after the FSA in Japan was unveiled in 1997 the stock market didn’t bottom for another five years and it’s an open question as whether the economy ever did manage to stage a sustainable recovery. In the Swedish case of the early 1990s, even with an effective government solution, the process of extinguishing the bad debts via government intervention was painful – the equity market incurred a 28-month long bear market that saw Sweden’s major index decline 45% from peak to trough and the economy undergo a 20-month recession that saw domestic demand contract by 2-1/2%.

… Once we get through this upcoming period of consolidation and insolvency of the weak banks, the industry is going to come under greater regulatory oversight which will constrain leverage, off-balance sheet activities and future earnings growth. And, of course, we have history to tell us that what led the market down in the bear phase – in this case, financials and consumer cyclicals – never go on to lead in the next bull market.


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