Despite putting taxpayers on the hook for hundreds of billions of dollars, the bailout passed by Congress last week has done little to restore confidence in the country's financial sector. Ditto for the rate cuts orchestrated by the Fed and other countries.
So taxpayers face massive losses, runaway inflation, dismantling of the capitalist system, and dwindling ammunition to stem further market crashes -- and we're still no closer to restoring confidence in being able to bail out of this thing. Thanks for nothing.
To the blanks fired by the government, we can also add the SEC's ban on short-selling. This was a misguided effort from the get-go that sought to give the financial sector a breather from the big, bad short-sellers who were driving stock prices down. Now that the ban has expired, it instead is generally viewed as having added to the mayhem while doing little (if anything) to prop up stocks.
In the weeks since the ban was first instituted, financial stocks like Sovereign Bank (NYSE: SOV) saw their shares tumble as much as 80%, while the wheels at Washington Mutual finally came apart. Wachovia is now a wounded bird, about to be carved up by Citigroup (NYSE: C) and Wells Fargo (NYSE: WFC). In fact, shares of financial stocks are 23% lower today than they were three weeks ago when the ban took effect.
But we need to look at the nearly 200 other stocks that were added to the list, stocks that investors don't normally associate with finance: along with General Electric (NYSE: GE) and CVS Caremark (NYSE: CVS), the list included both publicly traded U.S. automakers and a builder of senior citizen complexes. Shares of Sunrise Senior Living plunged 7% Monday -- two days before the ban expired -- amid the carnage of the market. Morgan Stanley (NYSE: MS) plunged 25% on Tuesday because of fears about whether Mitsubishi will actually follow through on its cash injection.
The turmoil in the markets was heightened precisely because short-sellers were not there to even out the excesses. When markets tumble, short-sellers are usually buyers to cover their positions. It serves as a bit of equilibrium, but in their absence, there were no checks in place, and the S&P 500 is now more than 200 points lower, or 18% below where it was beforehand. The Dow is down more than 1,750 points.
With hedge funds being a big component of the short-selling milieu, their inability to short certain stocks -- a key component of their investing strategies -- may have pushed stocks down even further. With their funds showing steep losses, investors have been liquidating the holdings, causing the hedge funds to have to sell off shares at depressing prices.
The government has made bad choices about the markets from the very beginning, when it forced the sale of Bear Stearns. It multiplied the fear when it bailed out Fannie Mae and Freddie Mac, nationalized free-spending American International Group (NYSE: AIG), and let Lehman Brothers fail. Funny, but that act alone may now be pushing governments worldwide to the brink of bankruptcy. The short-selling ban itself only served to exacerbate what was already a bad situation.
These are the people we trust to get us out of this mess? Don't worry, folks. The government's here and it wants to help.
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