1929?

On Sunday morning, I pre-wrote a post about bank stocks knowing that Lehman Brothers was for sale but nothing about AIG’s liquidity issues and Merrill Lynch selling itself to Bank of America which all hit Sunday night/Monday morning, causing a mass panic on financial stocks. Wow, talk about an ill-timed post!

Regardless, some of my analysis still remains true. Non of the trinity of Lehman Brothers, AIG and Merrill Lynch were deposit taking banks. Two of the three were investment houses that bought bad assets and AIG is an insurer that took premium money and bought bad assets with it.  The Canadian banks have also fared better with RBC dropping 2.24% on Monday’s trading and Bank of America falling 35.7% on the same day (although RBC fall 3% on yesterday’s trading).

What do I make of all this? Cue the ramble.

Let’s be honest. This problem has persisted for the better part of more than the year when subprime finally exploded circa 2007. Its a little disingenuous of the media to suddenly think this is a sudden collapse. We just all acted like ostriches hoping it would go away and, because its an election year, the people in power do what kids do when they don’t want to hear bad news. They covered their ears and went “la, la, la, la…”

In many ways, the sale of Bear Stearns to JP Morgan Chase in March was really the beginning and the end. Fortune Magazine reported that when Bear Stearns was sold it had $11.5 billion in cash on their books and the Federal Reserve bascially guaranteed the value of all of Bear Stearns bad assets. As Fortune pointed out, JP Morgan Chase bascially doesn’t have to pay for the cost of the merger because it is using Bear Stearns cash to do it AND the taxpayer is footing the bill for all the bad assets. Talk about a swindle (how Bear Stearns went down with $11.5 billion in cash on its books is a lesson on how sheer panic blinds us to the facts).

What message did that send to all the other investment houses? Even if you are in trouble-big trouble- the taxpayers will bail you out. So nobody did anything of substance to fix the issue- not the investment houses, the government or the regulators. When things finally caught up to Lehman Brothers, they had one serious buyer- Barclays- who were only willing to do the deal if they got the same sweat-heart deal from the government that JP Morgan Chase did. The government said no and the house of cards finally came down (Barclays has cherry-picked best Lehman Brothers’ assets for pennies for the dollar).

As an observation of human nature, we downplay the important and prioritize the trivial and this seems to have been what happened. As opposed to making the financial institutions really answer for utterly bad risk management, we worried about how to keep companies run by millionaire i-bankers afloat so we can continue to consume, god forbid that an economy that goes up must come down.

In the last few days, everyone has been uttering 1929. 2009 will be a rough year but, as far as I know, there wasn’t some consortium made of oil billionaires pumping billions into the financial system in 1929. China wasn’t buying up America’s debt in 1929 and there sure wasn’t worker mobility in 1929 like there is now.  The population pyarmid in 2008 also makes it easier to find a job given how few workers there are with an aging population.

This is probably more like 1991and everything wil be fine eventually if you keep your head up. As my boss likes to say “get a grip people and calm the [expletive] down.”

Since 9/11, North America has been an orgy of excess. Buy more cars! Leverage your home! Max out your credit cards! Get a new hand-held every 6 months! Have we ever looked around and said “look at all this useless stuff that surrounds us that doesn’t make us happier or more efficient or content. Its just STUFF for stuff’s sake.”

Perhaps 2009 will be a reset back to a normal quality of life that doesn’t depend on 4,000 square foot homes, 2 cars and a vacation property in Mexico as the norm. If that occurs, it may actually be a good thing. Perhaps, its happening already. It was reported in the Globe and Mail today that Toronto has the most high rises going up in North America per capita (and only behind New York City in sheer number). A good number of these high-rises are in the city core which dictate smaller living spaces and make it harder to own more than one car- living like the rest of the world does.

If there is also one lesson to learn from all of this- watch how JP Morgan came out smelling like roses. It got out of exotic products very early on (it began selling a lot of exotic products it owned before they became worthless).  It never got too greedy and it stayed in cash. When the opportunity came around, it was the only player who could save anyone and bought assets on the cheap. Good rules for all of us to follow with portfolios much smaller than theirs.

This post was a little all over the place. Thanks for your indulgence.  I’ll address one product advisors seem to be flogging in this climate which I am opposed to.