Friday, September 19, 2008

Demise of the Securities Industry

“There is no securities industry.”

Jim Cramer
CNBC Interview
September 19, 2008


It is a rarity that I agree with Jim Cramer - hedge fund manager, market maven, pundit, and talking-head - whose ranting and raving on his television show “Mad Money” makes him seem more like an entertainer than a serious financial professional.

However, I had to nod my head in approval when Cramer suggested on a CNBC interview that the securities industry has come to an end with the moves by the U.S. Government to bail out American International Group (AIG: NYSE) and take over bad mortgage debt with a new government-sponsored special purpose entity.

The securities industry is gone - at least the one we knew. We have socialized risk and spread it across the backs of taxpayers - many of whom might be hard pressed to even spell the phrase “mortgage-backed securities” let alone understand them. You cannot get much more socialistic than that - uninformed citizens and centralized decision making by an elite power structure.

The only consolation today is that the last time the U.S. Government came to such an extensive rescue, the taxpayers actually made money on the savings and loan assets taken over by the Resolution Trust Company. In mid-to late 1980s, there was a similar situation of out-of-control lending that left a number of savings and loans insolvent. The RTC lifted those bad loan assets off balance sheets, leaving the S&Ls to go back to normal business.

So what is different today that has the likes of Cramer decrying the demise of the securities industry? Our economics text books suggest that in a capitalist system market mechanisms are supposed to keep people from entering into unprofitable business transactions. Yet somehow investment bankers around the world had stopped making intelligent assessments of risk in favor of near-term profits. Now John and Jane Q Citizen get to make the investment bankers whole. So much for capitalism!

Yet trading hours were kept as usual following Secretary Paulson’s announcement and the President’s comments. Markets will open as usual on Monday morning this next week. Investors will need a strategy to manage risks. In the interests of diversification it seems real estate is not the place to be since taxpayers are about to become major holders of housing stock underlying defaulting loans.

Next week we will be looking at the wisdom or folly of utility and commodity plays.

2 comments:

Anonymous said...

Deb, it's spelled Jim Cramer, not Kramer.

It's right on the link to TheStreet.com on the blog post (above).

David J. Phillips said...

Deb,

Funny thing, no one's talking about the relationship of McCain to the "Keating-Five" Scandal that hogged the headlines during the last bank implosion! Guess 20 years ago is a generation too early for voter's memories. [And, no, I'm not a Barack "Entitlement" Democrat supporter either.

I say let's burn the Ferderalist Papers, send all the hacks and politicians to the guillotine, and get the [new] party started!