Please Don't Help, You've Done Enough!
Zachary Karabell, writing in the Wall St. Journal notes that much of what's ailing the financial sector today has to do with the knee jerk 'solutions' the government came up with after the Enron fiasco a few years back. He doesn't advocate no regulations on the market, but points out that bad regulations are killing it.
His example is AIG. Because of new accounting rules, companies like AIG that either hold or insure mortgage based derivatives have begun marking down their values. The problem is that because of a number of regulations, some of these mortgage based derivatives are being valued at $0, even though they are obviously worth more than that.
If you have a portfolio with $1 billion worth of mortgage paper, and housing prices decline 20%, how does that suddenly add up a portfolio worth $0? It doesn't in a sane world, but in the one created to prevent an Enron it's creating a disaster of much larger proportions.
AIG and other companies have warned shareholders that the losses they are reporting aren't "real". Why would they say that? Because they know that regulations require one type of accounting, but real value uses a different one.
AIG is now a government held entity not because there was a run on their mortgage based security insurance products, but because their "might be" a run on them, and they couldn't cover it.
How weird is this environment? Goldman Sachs reported higher than expected earnings yesterday, and their stock DROPPED about 20%. If you listened to the news today, you probably figure that they are done, the next big investment bank that will fail.
Did you know that the 20% drop brought their share price down to $114.00? Or that they earned $1.81 per share, yes, they turned a profit, of 810 million dollars! Yet markets are freaking out over their liquidity.
Only in a government "helped" world would a company that earned 800 million dollars be considered primed for failure. Only in a government "helped" world would a company holding $1 billion in good mortgages be in trouble because of $200 million in bad ones.
I've seen what the government does to help, thanks but no thanks. If you are really interested in helping, consider fixing your screw up on financial reporting so that good investments don't look bad.