The always-readable Andy Kessler offers up a novel spin on both the bank bailout and the dynamics of the bank crisis in Thursday's Wall Street Journal. Kessler's a smart guy. Even better, he's exceeding clear without being simplistic. This is a rare combination -- one Paul Krugman once displayed before he discovered the joys of politics. Kessler argues that many of the problems with toxic bank assets stems from their role in a sort of hedge fund-driven bear raid, which exploited the flawed "asymmetry" within banks that used derivatives to fund short and loan (or invest) long. Kessler's doesn't think the plan of Treasury Secretary Timothy Geithner will work, unless Treasury fights fire with fire.
He offers some fire. He argues that Treasury needs to battle the bear raid by counterintuitively selling credit default swaps into the market (as he says, what's to lose: The government has to pony up in the event of a loss anyway), thus reversing the downward pressure on these marked-to-market assets tied to the CDSs and exploited by the bears, effectively driving up prices high enough that banks will agree to unload them. The banks, he adds, should then dump those assets on private-public buyers before bear raiders return with a new strategy. Will it work? Who knows? But Kessler's argument makes a few points about the crisis, and how we react to it, worth noting.
First, is the role of the shorts, or under his more capacious tent, the bear raiders. For most pundits, mention of shorts, hedge funders and bear raids would be accompanied by ritual fear and loathing. Kessler's cooler take implicitly suggests several truths about current bears. An effective bear raid in markets as complex as ours requires more complex strategies than simply shorting stocks that you're talking down -- a practice, by the way, Jim Cramer famously was excoriated for describing. With hindsight, the Christopher Cox anti-shorting and rumor jihad was even dumber than it seemed, because Cox and the Securities and Exchange Commission unwittingly flashed an anachronistic view that may have contributed to the problem in the first place. They thought that if they could ban rumors and shorting, they could stop stocks from falling. Well, no. Makes you wonder about the broad therapeutic benefit of the uptick rule.
But was the bear raid "bad?" Kessler waits until the end of his column to offer the seeming paradox: The bear raid may have been at the center of the crisis, but it did us a favor. "The bear raid," he writes, "probably saved us five to 10 years of bank earnings disappointments." In other words, it focused on a real and dangerous flaw that would have hurt us anyway. This is, of course, a variation on the traditional defense of shorting and, very implicitly, agrees with the take-your-medicine-quickly thrust of the nationalization party.
One final point, which has less to do with Kessler and more to do with the emotional politics that surrounds this crisis. In an oddly wandering column in the Financial Times Thursday, James Carville discusses critics of President Obama's communication "breakdown." Carville, however, blames not Obama, or the critics, but the complexity of finance for the problem, admitting that he himself doesn't have a clue about these matters. Carville thought Obama did well on "Jay Leno" until he used the term "leverage," which, he says, "is a term that escapes 97% of the public." He might be exaggerating, but only a little. Today, the crisis is as much political as financial. Complex linkages, ambiguous instruments, terms like leverage, liquidity and shorting, are translated into what Carville admits are "simple words" and ever-shorter sound bites. And what he doesn't mention also holds true: These simplified concepts are then cloaked in moral judgments, good or bad, up or down.
There are, as Jon Stewart suggests, two worlds: those who have some sense of the real market game and those who don't. Stewart makes a valid point in criticizing Cramer and CNBC for luring neophytes into a professional game they cannot win. But all the regulatory reform in the world, all the best financial journalism available, all the best intentions, won't close that 97% gap. - Robert Teitelman
See Kessler's column from WSJ.com
See Carville's column from FT.com
Robert Teitelman is the editor in chief of The Deal.
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