Friday, December 21, 2007

Watch Out For Holiday Season Financial News: Does the ECB Know Something?

Public relations professionals know that one of the best times to release bad news is the week between Christmas and New Year’s. People are busy having fun (or at least going through the motions). There’s vigorous consumption of booze and eggnog. If you have something unpleasant (or worse) to announce, these are the times to ease a press release onto the news wires. Those with capital at risk—such as investors--should watch out for ambushes.

Heightened vigilance is especially in order this year. We all know that the big banks will likely be reporting negative news. Some already have. Others probably will. They’d like nothing more than to disclose it to a bunch of empty offices, whose usual occupants are eggnog-besotted.

It’s fair to expect that the news could be worse than expected. That was true of Morgan Stanley and Bear Stearns. Even the vaunted Goldman Sachs had a little tarnish on its golden financial results.

And the European Central Bank just flooded the European money markets with $500 billion of two-week loans to banks. That’s quite a bit of lunch money, more than the federal deficit. By comparison, the Federal Reserve in the U.S. recently auctioned $20 billion of special 28-day loans to banks through its Term Auction Facility. Someone high up in European finance has to be worried about something pretty big if they’re going to pump into the banking system enough money to buy 50 billion lunches.

Weaker financial results and losses for the banks aren’t necessarily bad. At this point, they are inevitable and it’s better to know what they are. Much of the problem in the financial markets today is a lack of confidence, not a lack of liquidity. Holders of capital and cash don’t know how bad things are at the major banks. That’s why they won’t lend. It’s not that they don’t have the money. It’s that they’d prefer to get 3% or 4% from U.S. Treasuries than invest in a black hole.

Disclosure and writeoffs clear up the picture. Even with large losses from mortgages and real estate, the major banks remain substantial commercial enterprises. With proper disclosure, they can probably continue to attract funding and capital, albeit at a higher price. The higher price is simply the way the markets work, and payment of the higher price is necessary to get the markets working again.

What doesn’t work is continued obfuscation of the facts. The SIVs and Super SIV cloud the picture. So does the administration’s mortgage rate freeze, with a near-impossible to predict impact on values of mortgage-backed securities and derivatives. Asset values become harder to determine, and some banks may delay recognition of losses that, given the continued decline of real estate, they almost surely will have to take sooner or later. Nothing good is likely to come from stalling and delaying. A four-corner offense doesn’t work when you’re trailing.

So, if you’re invested in the markets, keep an eye on the financial news. Enjoy the holidays. But remember, there are some out there who would gladly pour you another eggnog as they slip a press release onto the news wires.

Crime News: Santa in helicopter shot at. Next time, big guy, stick with the reindeer and sleigh.

No comments: