The Long Crisis

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Wall Street Rises on U.K. Bank Deal – Potential Citigroup Deal

February 26th, 2009

The stock market is thought of by many novice investors as a rational, logical market place where price discovery is carried out under techniques which includes careful analysis.

The following headline on CNN shows just how wrong this assumption usually is. “Wall Street Rises on U.K. Bank Deal, Potential Citigroup Deal.”

Who in their right mind would consider that the greatest loss in UK history by a bank by the Royal Bank of Scotland is good news? RBS reported that the British government’s stake in the bank could rise as high as 95 percent after it stumped up billions to insure risky bank assets. It doesn’t seem encouraging to me and I expect to RBS shareholders or Britain taxpayers as the government effectively nationalizes the bank, wipes out the shareholders, and takes on considerable risk in adding toxic assets to its own books in doing so.

Now it’s the US government’s turn. It looks like the US “leaders” of this Long Crisis have decided that creeping nationalism is the way to go with Citigroup. The latest plan is for the government to increase its holdings of common stock in Citigroup to the 40% level. The dirty word of nationalism will be saved for another day.

Of course, those who are familiar with Wall Street’s devilish ways know all too well that bad news often is given as the reason for rallies and good news for sell offs in the market. Market action is more focused on expectations for news events, rather then on the news itself. For example, bad news becomes magically transformed into good news when the bad news is not as bad as expected. It’s a neat game that traders play, eh?

Unfortunately, we are beginning to see that while President Obama is a highly intelligent man he seems to have surrounded himself and to be heavily influenced by an economic team that is largely responsible for getting the world into this mess.

A team that thinks, like Ben Bernanke, that nationalism is a dirty word and that the government should continue to toss billions of Dollars into the black hole of zombie banks and financial institutions like AIG. While I don’t like nationalization either, I fear that the US major banks are so under water with toxic assets that have yet to be revealed that in the end nationalization will be the only way out. If that is so let’s get on with it or we risk making the Long Crisis a permanent crisis.

President Obama will probably eventually figure out for himself that he is getting advice from “experienced failures” as determined by the results they have achieved in previous administrations. In the mean time I doubt that the stock market will rally very far before making new lows as the Long Crisis continues. Especially on headlines like “Wall Street Rises on U.K. Bank Deal and Potential Citigroup Deal”.

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