The Long Crisis

Jesse Eisinger reckons that America is cognitively incapable of understanding a long crisis as opposed to a short one:

As a culture, we’ve gotten so good at disseminating and assimilating an idea and then moving on, that we can no longer grasp a slow-moving phenomenon like a housing-market crash.

He’s right. And he’s his own best example:

The rampant optimism, which has bolstered financial stocks, makes little sense.

Rampant optimism? Bolstered financial stocks? Here’s a chart of the S&P 500 financials: not only has it been steadily declining over the past year, dropping a good 40% over that period, but I can’t even find a time when it was lower than it is now: the chart only goes back five years. Financial stocks have been in continuous free-fall for a year now, there’s no sign of a bottom, and there’s been no bolstering going on at all.

Eisinger’s quite right that the investors who tried to catch the falling knife – be they Warburg Pincus with MBIA, or Joe Lewis with Bear Stearns, or Eddie Lampert with Citigroup – turned out to be very wrong in their judgment of where those companies were headed. Which is why I think he’s being unfair when he picks on SWFs in particular:

Many banks first turned to sovereign wealth funds, the equivalent of the rube tourists who think they can win a game of three-card monte in Times Square.

Rube tourists are trying to make a quick buck; I daresay Joe Lewis and Eddie Lampert were, too. The SWFs weren’t. They don’t trade in and out of positions, they sit on shareholdings for decades. And they were given an opportunity to take a large stake in major banks in a primary offering – a stake which they would be very wary about trying to build up through purchases in the secondary market. In other words, they were invited to be major shareholders.

If you’re a sovereign wealth fund who’s underweight US financials, that’s a very tempting invitation indeed: there’s really no other way you can build up that kind of stake without running the risk of serious political frictions.

So while I agree with Jesse that this crunch is likely to be around for a while, I disagree that there’s some premature burst of rampant optimism. And I also disagree that the sovereign wealth funds have been the patsies in the whole affair.

Update: Eddy Elfenbein posted a chart at the end of April showing the last time the S&P financials dropped below 300, which was in early 2003.

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