The Week of the Bailout

Well. This certainly has proven an exciting week for anyone with money in the stock market. It started off on Sunday with the announcement that Lehman Brothers was going to declare bankruptcy. Many had thought the bank “too big to fail”, but it seems that US Treasury Secretary Hank Paulson and Fed Chair Ben Bernanke felt otherwise.

The stock market fell quite a bit on Monday, as people began to wonder if AIG was next. Then on Tuesday, Bernanke announced that there was no need to cut rates, because the US economy was strong enough to weather the current crisis.

And the result?

A rally of roughly half the losses suffered Monday as Wall Street figured that this ‘tough love’ was a good sign; then, the next day, it’s announced that Bernanke was offering a loan of $85 billion, or so, to bail out AIG and, in so doing, take over the company. So much for tough love!

What was really peculiar here was Wall Street’s reaction: a huge sell-off of all stocks across the board — and that gold rallied $89 an ounce; the biggest one-day rally ever! This bailout suddenly prompted people to lose faith in the system. The next day was more of the same as the stock market continued to rout and gold continued to rally.

That is, until President Bush announced the biggest bailout in history.

The results are still sketchy, but essentially, the government is going to “buy” all of the bad, toxic, or dubious “assets” off of everyone’s balance sheet. The details are a bit shaky at this point, but the plan sounded bold enough for the stock market to stage a huge late-day rally that’s continued on into today. It would seem the market is nothing if not confused as to whether it wants tough love, or the mother of all bailouts.

Like most bold promises made by politicians, it leaves most of the important questions unanswered:

Just how bad does an asset have to be for the government to buy it?

What price is the government going to purchase it for?

How much is itgoing to cost the US taxpayer?

And, my personal favorite:

Where exactly is the government going to get the money for all of this?

But no one seems to care about all of that right now. Wall Street traders breathe a huge sigh of relief as President Bush pledged taxpayer dollars to cover the sins of their gross excesses. It’s as if the Pope had suddenly visited a whorehouse and not only forgiven all of the sinners, but agreed to pick up the tab.

Truth, as they say, is stranger than fiction and this week proves that yet again. No work of fiction would have all of its major characters be so fickle from one day to the next. Can you imagine if Romeo and Juliet seemed to sway between all-consuming passion and a sober coolness? Or if their warring families had similarly gone from feuding one day to offering an alliance the next? I’m pretty sure that if Shakespeare had penned such a tale that it never would have made it to the big stage, much less become a timeless classic.

Yet, this week we see all the authority figures vacillate wildly between the stances of needing to be cruel to be kind, and offering outright martyrdom for the American taxpayer to cover the sins of the financier’s bad beats. And we’ve seen the market all over the place — going from hating it on Monday, to loving it on Tuesday, hating the bailout on Wednesday, to then loving it on Thursday and Friday.

What remains the biggest mystery of them all is the US Dollar is rallying today on the bailout news. Why a currency would rally when its sponsor government just pledged to spend an extra half-trillion dollars or so that it doesn’t have is truly mystifying, but it seems to go with the carnival-like insanity that we’ve seen the rest of this week.

Until next time,

Preston Poulter