EVEN IN THE DARKEST days of the dot-com bust, I can't recall any large-cap technology companies ever losing 50% of their value in one day only to come roaring back to break-even by the closing bell. I don't remember widely owned names experiencing the 25% daily ranges as so many banks and financials have in recent weeks. Even in the depths of the 2000 tech collapse, I don't think you saw legitimately profitable companies dropping 60% or more in half a month.
When Cisco Systems or CMGI fell hard back in the early 2000s, it was prompted by changing perceptions about valuations and business fundamentals. But when Freddie Mac loses 30% in 15 minutes or Lehman Brothers drops from $24 to $14 in four days' time, the explanation can be summed up in one word: government.
Between the Federal Reserve, SEC, FHA, OTS, FDIC and CFTC, the financial industry is among the most regulated of all. And as I noted in March, the Bear Stearns bailout further reinforced the dangerous belief that economic problems need political solutions.
What's been building over the past few weeks is the quiet realization among investors that, when it comes to commerce, trade and their money, the government can basically do whatever it wants.
Regulators can increase the margin on futures trading or ban speculators from participating in energy markets altogether. They can impose windfall profits taxes or, as we saw in the so-called stimulus plan, redistribute income to whomever they please. And if we can trust the latest headlines they could even end up buying stock in Fannie Mae and Freddie Mac, two companies the actual market the free> market wants nothing to do with whatsoever.
And they're terrible traders. The Federal Reserve Bank of New York has reported that the value of the Bear Stearns portfolio it's holding has already declined by $1 billion to $28.9 billion.
Other recent policies continue to exacerbate the problem. Just last week, a $300 billion housing package passed the Senate that will, among other things, refinance up to $300 billion in troubled mortgages into insured loans backed by the government and provide $4 billion for states to purchase foreclosed loans. The net effect will be to prolong the correction and waste hundreds of billions of honest taxpayer dollars in the process.
They can even bring down banks. The Office of Thrift Supervision cited Sen. Chuck Schumer (D-N.Y.) as the cause of the failure of IndyMac bank, the second biggest bank failure in U.S. history. After his June 26 letter questioned the bank's viability, depositors withdrew more than $1.3 billion from their accounts, collapsing the bank.
It's very difficult to make money in markets such as these because major decisions with trillion-dollar implications are reached for political reasons, not economic ones. And after watching hours of Congressional hearings over the past few weeks, it's readily apparent that politicians, while certainly well-meaning, are neither bankers nor economists. Every hearing in which I see the blatantly anti-capitalist Rep. Barney Frank (D-Mass.) rattling off collectivism and wealth redistribution as sound ways to strengthen the economy, well I don't know whether to weep or throw up.
The consensus among both Democrats and Republicans is how much new regulation and controls are needed. Free-market solutions are literally never discussed. Indeed, even as Treasury Secretary Hank Paulson stressed the need for Fannie and Freddie to continue "in their current form as shareholder-owned companies," he put forth a plan to allow the Treasury to potentially purchase the stock in the companies directly to ensure they "have access to sufficient capital to continue to serve their mission."
The size of the equity stakes really just a further line of credit made available by the U.S. government are indeterminate. One thing is certain, both political and economic considerations will be given as the government decides best how to invest your tax dollars into companies that you likely wouldn't think of buying on your own.
After losing roughly 50% on the week, Bill Miller and other investors are welcome to keep betting on Fannie and Freddie with their own money. But for the government to pump more tax dollars into these Ponzi schemes is criminal. Like the stimulus checks, Hope Now Alliance and other efforts to "fix" self-created problems, government intervention is only making matters worse.
How to Kill a Market
For a recent and real-world example of the negative effects of market regulation, you'll note that trading at Pakistan'sKarachi Stock Exchange
has dropped 92% to the lowest level in a decade since June 24, when local regulators instituted new rules that limit daily share declines to 1%.
According to Bloomberg, stocks like MCB Bank, Pakistan's second biggest lender, are now trading 14,000 shares a day compared to 4 million before the rules were put in place.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.>