I have read a huge amount in the last few days about the sets of announcement we have seen this week. Monday’s news of the huge repurchasing scheme has been amplified by US Treasury Secretary Geithner’s testimony to Congress today, in which he started to spell out a refashioned financial services sector. The full text of his speech can be found here http://blogs.wsj.com/economics/2009/03/26/3889/
I definitely think this is worth reading, although it is light on detail at this stage (I haven’t been able to find the 61 page supporting Bill, which has been passed to Congress yet).
One sentence in particular leapt out at me;
“Our system is wrapped today in extraordinary complexity, but beneath all that, financial systems serve an essential and basic function.”
I couldn’t agree with this more, but if you read on a central pillar of the proposed solution is to create a mega-regulator, which will have far-reaching powers in dealing with perceived systemic risk. While it wouldn’t be fair to criticise this move, without seeing the detail behind it, it strikes me as odd that the solution for extraordinary complexity would be to create an even more complex system on top of the existing one; almost as odd, one could argue, as solving a crisis caused by excessive liquidity with increased liquidity.
I will do my best in the next week to try and forget the total failure of regulators all over the World in averting the Credit Crisis and read the detail of Geithner’s plan with as open a mind as I can.
After all at face value the market has reacted extremely positively to all this news, with major equity indices posting roughly 8% gains so far this week. Of course if you scratch beneath the surface of these market moves, there are still significant signs of weakness. Volume has been high on the falls, whilst declining on the rises. Volatility is still extreme and short interest (short positions taken up by traders against stocks) on the New York Stock Exchange has reached levels last seen when Lehman failed. Even so the strength of this rally should not be taken lightly (but as an aside I still intend to short the Dow at 8,000 – make of that what you will!).
I will leave you with one of the more interesting pieces I have read in the last few days http://www.marketwatch.com/news/story/tim-geithner-has-gone-toxic/story.aspx?guid=%7B259097F3%2D62E6%2D4089%2D9E47%2D87A11493B59F%7D. As the writer says, this week could well turn out to be the making of Geithner and that this might be the most surprising event of 18 months of shocks. While I am still sceptical about this, I think having an open mind for the next week or so wouldn’t be a bad thing. With the G20 meeting and the next US Payrolls number occurring next week, we should have an excellent opportunity to plan what to do over the course of April and the vastly important earnings season.