Thanks for the comments and questions, all! Glad to see that some are paying attention.
Leigh, to answer your follow-up question, let me define apocalyptic by copying and pasting an exchange from an old movie:
This city is headed for a disaster of biblical proportions.
Mayor: What do you mean, "biblical"?
Dr Ray Stantz: What he means is Old Testament, Mr. Mayor, real wrath of God type stuff.
Dr. Peter Venkman: Exactly.
Dr Ray Stantz: Fire and brimstone coming down from the skies! Rivers and seas boiling!
Dr. Egon Spengler: Forty years of darkness! Earthquakes, volcanoes...
Winston Zeddemore: The dead rising from the grave!
Dr. Peter Venkman: Human sacrifice, dogs and cats living together... mass hysteria!
OK, just kidding, but the above description is not that far from what I heard some panicky investors saying today. The panic produced some truly apocalyptic predictions.
The real worst case scenario is this: if Morgan Stanley had gone out of business today (or tomorrow, or over the weekend), we would have had an instant 1000 point drop in the Dow Jones Industrials. After that, in all likelihood, we would have seen another plummet of possibly 1000 points as everyone became convinced that Goldman Sachs would be the inevitable next victim of the pirrhana school.
(By the way, I failed to attribute the "pirrhana" quote in yesterday's post to former SEC chairman Harvey Pitt, who used it on CNBC yesterday).
So our hypothetical definition of apocalyptic includes a potential market drop of 20%. That would then almost certainly be followed by a rally, or the beginning of a bull market. The average bull market, from the bottom to the following peak, has resulted in a gain of over 40%.
So apocalyptic still means that you will be higher in the stock market before too long, so no sense in selling now.
To answer odetteroulette's question, and address tarheel's link, and Leigh's follow-up question:
Chairman Cox did not seem to pull a very effective all-nighter with his staff, because the response detailed in tarheel's link did nothing whatsoever to stop the madness. By early afternoon today, Morgan Stanley stock had been cut in half as the hedgies continued to bang the bids. The Dow had opened 200 points higher, then tanked to minus-100 as all of us became convinced that Morgan Stanley would be the next Lehman.
At this point, the calls coming into my office were truly bizarre. One wealthy client informed us he was going down to his local bank and withdrawing $1/2 million in cold hard cash to hide somewhere on his Greenwich, CT estate, "just in case." Another told us to sell everything, and shared his plan to take his family to his Vermont summer house with two shotguns and enough canned goods t0 get him through the inevitable rioting and looting and burning by angry mobs.
That, leigh, is surely the definition of "apocalyptic."
It is also the kind of panic that always, ALWAYS, occurs closer to major market bottoms than it does to market tops, or even the middle of bear markets.
As Morgan Stanley stock was cut in half, CEO John Mack was said to be furiously working the phones, putting together the deal that would save his firm from the same fate as Bear Stearns, Lehman, and AIG. And around one o'clock today, the street was nearly unanimous in its opinion that he would not succeed.
Around that same time, John McCain made a speech someplace far away from Wall Street in which he called for Securities Exchange Commission Chairman Cox to be fired, which all of us knew was required, since he has been asleep at the switch more deeply than that guy that Bush did not want to fire as head of FEMA after Katrina.
One luminary was quoted on the Dow Jones Newswire as having said that the new rules designed to slow down the short-selling hedgies was the equivalent of giving up the secret recipe for Coca Cola. In other words, the new rules were written in such a way as to actually be giving guidelines to the short-sellers in how to hammer a stock to zero.
And hammer it they did, banging the bids all the way down to 12 from yesterday's close of 23, which was down from Tuesday's close of 29.
While this was happening, it gave every appearance of being the classic self-fulfilling prophesy. In every way, it shadowed the collapse of Lehman last week: stock tanking, CDS soaring, CEO scrambling to raise capital and publicly denying rumors of the firm's demise.
The new definite on the Street has been this: if you are on TV denying that you are going out of business, you are almost certainly going out of business.
Sometime between one and two, with the Dow looking like it was going to take another 500 points out of our hides, a remarkable story crossed the tape. In London, the regulators had made the simplest of moves: they had banned all short-sales in financial company stocks. Take that, hedgies!
After having been down as much as 50% intra-day, Morgan Stanley stock recovered to close up a fraction on the session. We call that an intra-day reversal, and it almost always means that the bottom has been reached.
And that, folks, is apparently all we needed to do, because on that news, the Dow surged forward, ending up over 400 points on the day. Sometimes the simplest solutions are the ones you never think of.
Sure enough, as this is written on Thursday evening, the Wall Street Journal is reporting that Chairman Cox is briefing members of congress on his plan to ban all short-selling in financial stocks. Kudos to the chairman for such an original idea!
The other piece of news is that Bush, Paulson, Bernanke and company have been meeting around the clock, and have come up with the idea to create the Resolution Trust Company (RTC) II. The original RTC was created in the late 1980s to hold and sell the assets of banks that failed in the S&L crisis. It eventually liquidated itself fully, and actually turned a slight profit for the US government.
So RTC II will be created to hold the assets of Fannie, Freddie, Bear Stearns, Lehman and AIG, as well as to provide a bid for whatever other assets (read: mortgages) that the banks need to shed. At the end of the process, the prediction here is that RTC II will show a much greater profit than RTC I.
The other bold prediction, from one who is in the trenches today, is that snyderico is way off-base with his assertion that we are still in the early stages of this crisis. The problem has been that we have not been able to see where this would end, but the RTC II concept should take care of that. Any bank or investment bank that wants to do so will now be able to sell its mortgage securities at a deeply discounted price. Where there has been no market for these things, there will now be a price at which the market will clear. I wrote in a similar post to this in the comments section that "this thing is over...stick a fork in it!", but after the benefit of a restless night's sleep, I will take back some of my certainty. There are still some problems out there, but financial crises and bear markets have historically ended with the kind of spectacular failures of institutions that we have just seen.
What will take the market higher and signal the end of the crisis? Only the largest sea of liquidity ever in the history of global finance. Until panicky folks started pulling money out of money market funds over the last few days, balances there totaled over $3.5 trillion. That number equals 27% of total US stock market capitalization, the highest number in decades. By comparison, the last bear market ended in 2002 with money market balances at 22% of the value of all US stocks.
Additionally, private equity funds are still sitting on $500 billion cash that they raised in the last few years but never put to work, and sovereign wealth funds have trillions of dollars of cash looking for a home. You know that $700 billion in oil money that T Boone Pickens says we have been sending overseas every year? It ain't sitting in some sheikh's mattress.
All that cash has to go somewhere, and while this last stage of the crisis has driven it into very safe and risk averse investments like treasury bills, gold, and cash buried in the ground on Greenwich estates, as the hurricane passes and the skies clear, some of that cash will venture further out on the risk spectrum.
So I am keeping my fingers crossed that it is in fact over, but allowing for the possibility that there still may be a few ripples out there. Either way, now is not the time to sell, because we are certainly much closer to the end of this thing than we are to the beginning.