In almost every conversation I have these days, the topic of Ayn Rand’s epic novel, Atlas Shrugged, seems to rear its head. I happened to dust it off of my bookshelf early this past summer, and what a time to re-read it, as the parallels to what happened in 2008’s market panic were stunningly ironic.
In my mind at least, the true panic in today’s market started with the nationalization of the quasi-government entities, Freddie Mac (FRE) and Fannie Mae (FNM), after both had raised preferred capital over the prior months. These government actions were to be followed by the bankruptcy of Lehman Brothers (LEH), which sent ripples throughout the credit markets. Just days later American International Group (AIG) was effectively nationalized, as the firm’s creditors began to demand more and more collateral, and rating agencies downgraded the company, just when it needed stable ratings most. The government initially charged AIG 8.5% for its loan, and took rights to a 79.9% ownership stake in the company—effectively saving the company, but wiping out shareholders in the process. Next was Washington Mutual (WM), as its operations were seized and sold to JP Morgan Chase (JPM), saving depositors and the FDIC, but leaving debt and equity holders empty handed. Next was the TARP, with its attractive 5% capital, which some banks used to bolster their balance sheets, while others used it to buy up competitors on the cheap---think PNC’s acquisition of National City (NCC) and Wells Fargo’s acquisition of Wachovia (WB). This TARP money was so attractive that everyone and their brother (or auto maker) wanted to become a bank to access this cheap and stable funding. Heck, I was wondering if I could personally find a way to access this capital. All kidding aside, though, these actions of just a few short weeks were truly transformational to our market economy.
Were these actions necessary? Probably. Would I have done something different? Maybe. Is hindsight 20/20, and is a view from the cheap seats unfair? Absolutely. But I’m also a fan of the First Amendment, so I have some thoughts I’d like to share. I believe that our leaders were genuinely doing everything in their power to stabilize markets and thwart an economic depression type scenario. Quick decisions had to be made, long hours had to be put in, and somebody had to stand up and take charge. And for that type of courage under fire, I am grateful to and for our economic leaders. In the post mortem analysis, though, could the actions taken have actually exacerbated the market panic, rather than calm it?
Private investors in a market economy typically make money by investing in new and unproven ideas (the lottery ticket type investments) or turn around stories (good businesses in need of help). And, to me at least, it appeared as though the latter was happening, as private investors over the summer were buying both common and preferred equity in many of these companies in hopes of propping them up until the stormy credit seas had calmed. In return for this capital, these investors expected a healthy return, given the real probability that existed that some of these companies could have been pushed into bankruptcy anyway. But even in bankruptcy (which is not a liquidation, by the way), these private investors may have thought they would have been left with something to help recoup their investment.
Here is where the parallels to Rand’s novel come into play. In essence, what many of the past months’ actions served to do, was to scare off private investors from putting additional capital into companies and markets in need of it, given that those investors that had done so previously had seen their investments wiped out not through bankruptcy, but by fiat. Nobody knew what company or market would be next to either be in need of funding or to be nationalized, and as a result, these private investors just held cash and decided to wait it out. This behavior is similar to the continuous theme in Rand’s Atlas Shrugged, where each fictional capitalist, be it Ellis Wyatt, Ken Dannager, Henry Reardon, or finally Dagny Taggart, left the economic world to live in Galt’s Gulch and wait for a more rules based approach to economic governance to return. This “sitting on the sidelines” behavior, in turn, continued to create a more vicious cycle of economic and financial instability in the novel.
Think about today’s real world markets. There are over $4 trillion dollars sitting in money market accounts, earning essentially nothing. Almost all investors and financial professionals seem to be in paralysis mode, scared to do anything for fear of being second-guessed or wiped out. Treasury bills are returning, in some cases, negative rates of return—i.e. buy one for $1.00 and get $0.98 back. This “sitting on the sidelines” mentality is choking companies for credit, and further exacerbating an already difficult economic situation. It makes me wonder, are most people effectively trying to live in their own Galt’s Gulch of today?
The irony is that while most folks are, perhaps the greatest capitalist of the last century is doing anything but hiding in a fictional valley in Colorado. One could argue that Warren Buffett in both his personal account and via Berkshire Hathaway has never been more fully invested today, than he was at possibly a much much younger age. And remember, he is presently 78 years old.
In 2008, while Atlas effectively shrugged, Buffett bought or increased his stake via Berkshire in Wrigley, Marmon Group, Goldman Sachs (GE), General Electric (GE), Conoco Phillips (COP), Burlington Northern (BNI), United States Gypsum (USG), and US Bancorp (USB) to name a few. What’s more, Berkshire has made offers for all of Constellation Energy (CEG), and to also help Dow Chemical (DOW) finance its acquisition of Rohm & Haas (ROH). And upping the stakes even further, Buffett wrote an Op-Ed (1) piece in the New York Times, telling the world that he was buying U.S. equities in his personal account. Never, can I remember him being so bullish in both word and action.
It is impossible to know for certain what the future will hold, but as a rational individual and investor, it seems reasonable--to me at least--to follow the Oracle of Omaha’s lead into 2009, rather than wasting time listening to the myriad of today’s pundits and prognosticators continuing to create noise by yelping as loudly as they can. I hope that the end of 2008 finds you well, and my best wishes to you for a prosperous and safe New Year.
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Justin
(1) http://www.nytimes.com/2008/10/17/opinion/17buffett.html?_r=1&ref=opinionThe content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way. This content is intended solely for the entertainment of the reader, and the author.
