They were taken out and shot
Cramer does some arithmetic:
The largest 100 companies a year ago were worth $8 trillion; they’re now worth $5 trillion. That’s a lot of missing trillions. In the day-to-day drudgery and decline, they seem largely unaccounted for until you look at each line item.
You lose that much capital in bizarre ways. Consider last year’s top five capitalization stocks. ExxonMobil, a stock everyone says is the most stable in the world, goes from $459 billion to $357 billion. Microsoft — like Exxon, a company with a fabulous recurring earnings stream — goes from $264 billion to $160 billion. Dependable AT&T sheds about $90 billion from $228 billion to $135 billion. Procter & Gamble, which everyone thinks of as having a bad year, dropped about $50 billon from $204 billion to $150 billion.
But then there’s General Electric. It stood at $347 billion last year this week. It is now barely about $100 billion. Terrible, but not when you consider the other financials — and there is no doubt with that loss that anyone is thinking GE is anything but a financial. Take Bank of America, which has gone from $197 billion to $24 billion, Citigroup, which has retreated to $13 billion from $125 billion, and the colossal disappearing act of AIG, going from $116 billion to $7 billion.
If the administration does the really foolish thing and effectively nationalizes some large banks, we will likely grow wistful for even the low numbers.
Final point: some smart, generally sensible people favor effective nationalization of some of the large banks. There are many interesting analyses favoring this course. From our point of view, the immediate risk is not substantial government ownership per se. It is, rather, that wiping out shareholders in, say, Citibank, will create a risk-free environment for traders (from hedge funds to the Russian mafia to Iran’s bankers in Switzerland) to target and wipe out bank after bank, insurance company after insurance company, GE after GE, and so forth. (We have documented precisely how this is done in some detail.)
This is what happened when the government let Lehman fail. A version of this also happened when the government created a risk-free environment for oil speculators — and they rode that up to $147. (Of course eventually any carnage will stop, but how many companies would have to die first? Let’s not find out.)
February 21st, 2009 at 5:46 am
If I understand Jack, he says that the oil bubble and financial-stock crisis have a common feature: an anomalous reward/risk ratio that encourages individual trader behavior that collectively produces material harm to the economy.
Well, if it’s the Fed’s job to to take away the punch bowl just as the party gets going, why not expand their authority to intervene in the markets? I wouldn’t let them do whatever whenever they pleased: they could only act after determining that a) the economy would suffer systemic harm if they did not intervene and that b) their intervention would materially reduce such harm. Furthermore, for example, they could not vote shares they purchased and they could hold positions only for the duration of a crisis.
The primary intent would not be to manipulate prices, but to increase the risk to which highly leveraged hot-money speculators are vulnerable, i.e. to increase the denominator of reward/risk. Even an announcement of potential intervention would have an effect.
Just a thought. It seems worth mentioning given that no ideal recourse is apparent.
February 22nd, 2009 at 2:52 am
Who needs nationalized banks, when you can destroy the market by hiking taxes on investment inflows?
http://www.nytimes.com/2009/02/22/us/politics/22budget.html?_r=5&hp
“The president will propose to tax the investment income of hedge fund and private equity partners at ordinary income tax rates, which are now as high as 35 percent and could return to 39.6 percent under Mr. Obama’s plans, instead of at the capital gains rate, which is 15 percent at most.”