The New York Times today tallied up repayments to Uncle Sam for loans made late last year to prevent the banking system from collapsing, after Lehman Brothers was allowed to fall, weighed down with toxic loans and reckless leverage. While free marketeers like myself would in principal,prefer less, not more government involvement in the Market, this article reveals that thereisa place for government when an emergency strikes.
August 31, 2009 – The New York Times today tallied up repayments to Uncle Sam for loans made late last year to prevent the banking system from collapsing, after Lehman Brothers was allowed to fall, weighed down with toxic loans and reckless leverage. While free marketeers like myself would in principal, prefer less, not more government involvement in the Market, this article reveals that there is a place for government when an emergency strikes. Most people agree we need a government to organize people in the event of war. Well, in my opinion, we had the equivalent of a war on our hands last year. Had money center banks holding assets for millions of Americans and foreigners failed, we would now be in a full scale depression, the kind that happened in the United States repeatedly during the 19th century and of course, into the 1930’s. Let’s recall that even money market funds were for a time suspect, one fund fell below $1.00 per share, an unheard of event. For value investors, such as ourselves, once it became clear that certain entities were going to be backstopped by the government, attractive opportunities in banking company preferreds were irresistible. Beginning October 2008, we picked up NYSE listed preferreds on Goldman and JP Morgan at sharp discounts to par value of $25. We periodically continued adding NationalCity/PNC then two foreign bank preferred that did not receive government help, also at discounts to par: Barclays and Deustchebank. Sure, the common stock of these companies has soared, but let’s remember that less than six months ago, there were mainstream media articles questioning the survival of Goldman. For my clients and myself, we slept better at night knowing we were in a senior position to common. Here’s the link to the NY Time article if you are interested in reading it: http://www.nytimes.com/2009/08/31/business/economy/31taxpayer.html?_r=1&hp
Lest the reader think I am blissfully unaware that significant challenges remain for the financial system, the Wall Street Journal’s front page carried two ominous stories: one having to deal with toxic commercial backed mortgage securities (CMBS) the other highlighting how many smaller banks are failing around the country. The war is not over, nor is the need for a government role.
