Bailout Might Not Be Popular, But It's Necessary

They’re angry and they’re not going to take it anymore.

That’s the message I’ve been getting loud and clear from opponents of the proposed financial rescue, now widely derided as a bailout.

In their view, Armageddon is better than using taxpayer money to support the financial system: “We need to go through a brutal process of resizing down;” “I don’t believe anyone should be bailed out;” “Let the overextended banks fail”-- all from a single day’s letters to the Wall Street Journal. Congressmen were overwhelmed with letters and messages from furious constituents.

I can understand the anger. Every story about a failing financial institution carries with it the details of the multi-million dollar exit package the chief executive stands to receive. In many cases these executives have been recent arrivals; their predecessors, the real culprits, had already left, taking with them their millions in deferred compensation and bonuses. No one is ever fired “for cause,” which all but requires the commission of a felony; merely destroying value for your shareholders doesn’t suffice.

What I didn’t grasp was the depth of this rage. Many are so angry that punishment is now their first -- indeed, their only -- priority.

There are many things Congress and the Justice Department can and should do to address these legitimate grievances and hold those responsible accountable for their actions. But derailing a financial rescue operation at this critical moment is not one of them.

Our collective anger will not change the sobering fact that we live in an interconnected and all-too-fragile web of financial institutions whose well-being affects all of us. To punish those at the top of Wall Street by destroying the system they manipulated, I fear, will end up harming all the rest of us, in many cases more than those who will simply retreat to their secluded mansions.

Perhaps Monday’s 778-point drop in the Dow Jones Industrial Average will serve as a jolt to those unconvinced that Wall Street’s predicament has any real impact on them. Over half of all Americans have some exposure to the stock market. Many depend on pensions and retirement programs whose assets are invested in stocks. Apart from individuals, the stock market affects nearly all institutions, from hospitals to universities, whose endowments support spending. But let’s look beyond the stock market, since I’ve heard some say that they don’t care, since stocks are owned by “the rich.”

The catalyst for the rescue operations was paralysis in the credit markets. Some companies have had trouble borrowing in the commercial paper market to finance their short-term cash needs. Should conditions continue to worsen, it’s plausible that some employers will find that they can’t meet their payrolls. When workers show up for their paychecks, and don’t get them, will that be enough to shock them into recognizing we face a crisis?

Or what about money market funds? The government had to step in to guarantee the $1-a-share asset value for most money market funds after Reserve Management’s Primary Fund said its holdings were worth just 97 cents. That should reassure most money market fund investors, but it didn’t stop Reserve customers from a run on Reserve’s other funds, causing them to halt withdrawals. If people can’t get access to their money market funds, will that wake them up?

If this crisis continues unchecked, millions of innocent people are going to be hurt, in weeks if not days. The ensuing financial chaos and all-but-certain recession will inflict untold additional suffering. There was another time in history when Congress did nothing in the face of crisis, allowing banks to fail and the free market to exact the “brutal process of resizing” that some are now calling for. Herbert Hoover was president.

I don’t think history is doomed to repeat itself. I believe Congress will muddle through. Perhaps the resulting legislation will actually be an improvement. I continue to buy stocks in the face of what is shaping up as the worst financial crisis I’ve lived through. Last week I pointed out that if the Nasdaq fell through 2025, which was my most recent buying target, I would be buying. It did, and so I am.

Virtually everything has sold off, but the financial sector suffered the most in Monday’s plunge, dropping 17%. I concentrated all my buying on banks: Northern Trust (NTRS), which by my calculations has the best balance sheet of any bank in America, dropped over 18%, along with other custodial banks, including Bank of New York Mellon (BK), which fell over 20%. I also bought UMB Financial (UMBF), SVB Financial (SIVB) and JPMorgan Chase (JPM), all cited in my recent article on America’s best-capitalized banks.