As Main Street Rejoices, Wall Street is a Basket Case

If you were not one of the 2 million people watching the inauguration on the Mall in Washington, you could watch the spectacle on any number of television channels. Flipping between ABC, CBS, NBC and PBS would have yielded different commentary but largely the same mood: euphoria, awe at the magnitude of electing the first African-American president, and somber urgency about what confronts our financial system and the world. Yet, even as Obama warned of a difficult road, the crowds were wildly enthusiastic, and millions were moved. Main Street has turned a corner.

But if you had turned on CNBC, you would have seen a different world. Wall Street was in free-fall, with the worst day for bank stocks ever. Some major banks, Citigroup, Bank of America and State Street especially, lost between 25% and 60% of their market value. Similar sell-offs occurred in British bank stocks, with the Royal Bank of Scotland particularly eviscerated. Wall Street pessimism was terrible a few months ago, and has now transcended pessimism and evolved into manic nihilism.

Six months ago, the relationship between Wall Street and Main Street was almost a complete inverse. Main Street believed that things were grim and getting grimmer; Wall Street thoughts things were bad, but manageable. Now, judging from polls and the wide-eyed wonder at the inauguration, Main Street thinks things are bad but that finally there is a chance of change for the better. Some big non-financial companies like Johnson & Johnson and IBM are holding their own, indicating that all is not lost in the real world. Wall Street, meanwhile, has become a basket case.

The financial world is caught in a negative feedback loop. As earning plunge and write-offs on bad loans continue, banks are forced to set aside more reserves against future bad loans and losses. Mark-to-market accounting rules demand that they value even illiquid holdings at current prices, which has the unintended consequence of devaluing almost everything. In a world where there are no buyers, everything approaches zero; if you have to sell today, you take what the market will give you.

The more financial institutions are forced to recognize losses that are technically unrealized, the more they have to hoard cash and turn to the government for infusions; and the more that the stock prices crash, the more margin have to be made or met, which accelerates the need to raise cash. There is also the psychological aspect: most of the people who work at these institutions are paid in part in the stock of their employers, and they have seen their personal net worth cut by 50% or 90%. That isn't a call for sympathy for the affluent, but it helps explain why many of the people manning those ships are mired in their own personal depression.

This vicious cycle has to stop. Many pensions hold these stocks and retirees as well, because until a few months ago, they paid reliable dividends. Now those are being slashed. Some say that we should let the equity of these companies be wiped out as they accept more government money, and with the sell-off we are getting there. But halting that slide is important, both psychologically and for the public good. Desperate times, you know, require unusual measures.

As government exposes more of public money to the private banking system, why not halt trading of these companies for an extended period, perhaps for weeks or even months? Suspend some accounting rules. Take direct equity stakes rather than simply injecting capital. Some will cry foul and decry the interference in the free-market, but in times of crises, expediency must trump ideology. Main Street is starting to roll up its sleeves and get down to business; Wall Street needs to do the same but clearly is in need of supervision, and intervention. Government is not a long-term solution, but neither is temporary hospitalization for a patient on suicide-watch. The bailout package passed in October may have been a solution had it been consistently applied; the result is we now need more. But it is now time for Wall Street to follow, not to lead.

Comments

[JBS]

Don't hear much lately about "taking personal responsibility" for the mess you make.

There must be a wall somewhere on Wall Street.

Make good use of it so all the CEOs and CFOs and boards of directors of these banks and other unregulated "financial institutions" can take personal responsibility.

The Bible says "unto the seventh generation", so let the sons of the fathers make their own restitution.

[TJCole]

We need to Nationalize these super banks we bailed out, to save our economy and start lending, low interest loans to stimulate our economy...­!

[drymartini1]

what we do not need is more loans to more deadbeats.

i dont think its a good idea to be loaning money to businesses as they go bankrupt or loaning to people who are about to lose their homes..

liberal lending is what got us in this place.

[tomas0808]

These big banks need to be 'broken on the wheel' and their leaders fired as they have done in Sweden. Anything less and they will find a way to screw Main Street again

[Chavez08]

We on Mainstreet were getting screwed and Wallstreet numbers mean nothing. Our investments in the stock market pale in comparison to the money we are losing annually with un and under-employment.

An economy based on insider-trading and money-managing is an epic failure (in case you haven't looked in any direction in the past 8 years) I, among milloins of others, was screwed by Wallstreet and reality now for 200+ million people unemployed, homeless and/or scared to death is that Wallstreet is only rich-mans' money. Who gives a rats-ass.

[drkazmd65]

"Some major banks, Citigroup, Bank of America and State Street especially, lost between 25% and 60% of their market value. Similar sell-offs occurred in British bank stocks, with the Royal Bank of Scotland particularly eviscerate­d."

Well,... since the 'free market' is some sort of demi-god/g­oddess,... wouldn't that be more accurate to state that these stocks were guided by the market to a more accurate assessment of their actual value?

Just sayin',... you can't have it both ways. Either the market is god,.. or it ain't.

[metalpipe]

Yeah, nice article. I think Obama's admin will see this light very soon.

[KCFreedom]

Don't worry. Wall St. will soon once again make Main St. a basket case.