Investors responded to the federal government’s massive financial rescue plan with the biggest two-day rally for stocks since October 2002.
The sweeping plan includes measures to buy distressed mortgage assets from financial institutions, shore up money market funds, and temporarily ban short sales of financial stocks, or bets that the stocks will fall.
It remains to be seen if the program works as hoped, what shape it comes out of Congress in, and whether regulators and financial institutions can then agree on a price for the impaired assets.
But there is little doubt that the announcement marked a watershed moment in U.S. financial history, and market participants and historians will long be debating the winners and losers and heroes and villains of the 14-month crisis.
Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson, along with New York Fed President Timothy Geithner, will likely be viewed favorably for the bold and resourceful steps they have taken throughout the crisis. The measures will be expensive, but no one knows the alternatives better than Bernanke, a long-time student of the Great Depression.
But federal regulators could also be fairly questioned for not moving sooner to stop the growth of the complex debt and credit insurance instruments at the heart of the crisis, which continued to grow exponentially even after the housing market had already peaked.
The SEC has come under heavy criticism for its response to the crisis. If SEC officials believed that abusive short-selling was contributing to the troubles of financial companies, why did they wait for four major failures (Freddie Mac, Fannie Mae, Lehman Brothers and AIG) in two weeks before reinstating short-selling limits? When the dust settles, if not sooner than that, the SEC should reinstate the 70-year-old “uptick” rule that was eliminated in July 2007 — just a few weeks before the start of the crisis — and issue permanent restrictions on “naked” short selling.
But beyond those steps, let’s not forget that short sellers and bears are among the market’s savviest participants — they have to be to position themselves against the long-term trend of the market — and the insights they offer should not be dismissed out of hand. They sure warned about the risk of derivatives and growing debt for years.
Much has also been made of “mark to market” accounting rules, or FAS 157, which state that assets must be accounted for at current market values regardless of whether the holder intends to sell. The principle is an important one, but perhaps some accommodation should be made for frozen markets where assets can’t be moved at any price, which forced financial firms to raise money to meet capital adequacy requirements in a very difficult market.
The biggest losers, of course, are those who bet the future of their companies on short-term profits and lost — and their shareholders. Leverage and risk must be better controlled among all market participants, including unregulated areas like derivatives and hedge funds.
Others coming in for criticism include the ratings agencies like S&P and Moody’s, which gave the complex debt instruments at the heart of the crisis high ratings — and then downgraded the companies that initiated them when there was no hope of raising capital.
And we’ll end with this quote from former Fed Chairman Alan Greenspan from a speech five years ago in defense of the unregulated derivatives market:
“[T]he benefits of derivatives, in my judgment, have far exceeded their costs. Derivatives unquestionably do pose risk-management challenges to market participants. But those challenges are manageable and thus far have generally been managed quite well. The best way to ensure that those challenges continue to be met is to preserve and strengthen the effectiveness of market discipline.”
The failure of five of the nation’s financial pillars — four in the last two weeks and Bear Stearns in March — seems to us to be a little more market discipline than the former Fed chairman had in mind.
One winner on Friday was Oracle (NASDAQ: ORCL), which jumped 7% on better than expected results.
Apple (NASDAQ: AAPL), Cisco (NASDAQ: CSCO), Sun (NASDAQ: JAVA) and Research In Motion (NASDAQ: RIMM) jumped 5% or more.
The Nasdaq soared 75 to 2274, the S&P rose 46 to 1255, and the Dow surged 368 to 11,388. Volume declined to 9.38 billion shares on the NYSE, and rose to 4.05 billion on the Nasdaq. Advancers led by a 30-4 margin on the NYSE, and 23-6 on the Nasdaq. Upside volume was 85% on the NYSE, and 79% on the Nasdaq. New highs-new lows were 212-130 on the NYSE, and 231-152 on the Nasdaq.
