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RISKY BUSINESS AS USUAL

Wall Street’s Fed Addiction

The recent events on Wall Street prove once again that the Fed is nothing more then an enabler to Wall Streets addiction for constant intervention.  This ‘business as usual’ attitude is a risky and reckless bet that has not worked and in my humble opinion will not work anytime soon.  Lets Recap the Fed’s Actions over the past year:

  •       The Fed aggressively lowered interest rates in 2007 trying to prop up Wall Street and the banks.  That failed.
  •       The Fed, acting through the Securities and Exchange Commission, banned short selling in the largest and in some cases, the most corrupt financial Institutions on the Street. The Market continued to slide.
  •       The Fed came in an arranged for financing of the take over of Bear Stearns and Merrill Lynch..  That failed to stop the slide on Wall Street.
  •       Then the Fed came in and took over the largest Insurer, AIG Insurance and The largest lenders in Fannie Mae and Freddi Mac.  The markets still slid lower.
  •       Finally, We were assured by the Fed (Bernanke and Paulson) that if we spend roughly a Trillion Dollars on a bail out of the banks and Wall Street Elite, all our problems will be solved and the markets will stabilize and prosperity would be here in a few months and the markets would be happy.  The markets have collapsed since the President signed the act over a week ago. 

So in the face of further market declines, this morning the Fed cut rates another 50 basis points.  As Joel, played by Tom Cruise in the classic movie Risky Business once immortalized: “sometimes you just have to say What the F#@!”?????

Two weeks ago many Brokers and B/D owners bombarded the SIPA with concerns about the Trillion dollar bail out.  We wrote an article in which we questioned whether it would work and more importantly whether ample time and thought had been given to the plan.  Today proves once again the Fed has about as much clue about the markets and the economy as the greeter at Wal-Mart!

This continued obsession with only wanting BULLISH days on Wall Street must end.  In a free capital market, BAD, CORRUPT and UNPROFITABLE companies should and will get punished.  For some reason the Fed believes it’s wrong to have a down day on the market.  The fact that the Federal Government was going to put a Trillion Dollar band aid on the Banking industry does not mitigate the fact that most of the companies impacted by this bail out will not be profitable for several quarters!  It boggles my mind that investors have been rushing in to buy these companies every time it appeared a bailout plan was going to pass.  At the end of the day you should be buying a company for its balance sheet and profit margins, not because the Fed has stopped their bleeding.  This latest round of rate cuts by the Fed was based purely on the decline in the stock market, not on our economic pulse.  The Fed also had a responsibility to tell congress that in addition to the trillion dollars, more rate cuts will be needed.  Oil prices have come dramatically down over the last few months after a dramatic rise over the last two years.  For some reason though, The Fed believes the Stock market should only go strait up.  We now will be staring HYPERINFLATION strait in the eyes just so we can stop a decline on UNPROFITABLE companies on Wall Street.  Does that make any sense or did Joel have it right on when he said “ What the F#@!”?

 

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Date
October 7th, 2008

Author
jbusacca

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