Fear of Rumors and Contagion

As if banks weren't already very conservative, the fear of bad rumors that can lop 60% off of a company's share price in a day, will turn them into neanderthals. As in: using the Feds credit facility is an admission of weakness. Dealing with a counter-party that is beset by rumor is an declaration of exposure and potential failure (only the most storied/wealthy players can even attempt it within this environment).

The broader equity market seems to be immune from the contagion for now (since the data upon which the decisions to purchase/sell is generally good). It has become, however, a great place to severely punish any financial firm for even the slightest whiff of weakness.

Comments

[Tangurena]

Since there are so many off-balance-sheet items, no one knows what anyone is worth. In such an environment, the first ones out the door get their money back, and the ones that were too slow to move get the shaft. We'll see a lot more of this until sufficient re-regulation can restore order and sanity to this market (when the market is too opaque to determine good from bad, then the only smart behavior is to take one's money and leave).

Until then, it will be more like high school, where every little rumor sends folks into a tizzy.

The investment banks still have large piles of "pier loans" that they're still trying to offload. And some are starting to look like bargains:
>Goldman, the world's biggest securities firm by market value, is selling its portion of Chrysler LLC's $7 billion in loans for as little as 72 cents on the dollar, said investors, who declined to be identified because the terms are private.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a2EBySUcm.UY

Some folks see the BSC/JPM deal as an American repetition of the Yeltsin days:
>In Russia under Yeltsin, when a bank was close to collapse they always assured the public that everything was fine and they blamed "rumors" for causing problems; this week, the CEO of Bear Stearns and all the American journalists on Bear Stearns payroll blamed "rumors" and "irrational psychology" for causing a run on Bear Stearns' money during the week. The purpose of these lies is that it allows the insiders to cash out their money while the rest of the trusting American fools keep their money in, only to lose it later. Then after the insiders cash out, comes the supposed "panic" and "sudden" collapse, best to take place on a Friday of course.
http://www.exile.ru/blog/detail.php?BLOG_ID=17818&AUTHOR_ID
I don't think that will be the case, unless this sort of bailout repeats itself. And especially if any more of these bailouts are done during weekends to hide them from the market.

[Tangurena]

And it looks like the immediate response of the authorities is to hunt down rumors rather than hunt down the problems causing the meltdown:

>The Financial Services Authority [Britain's financial regulator] said it had started an investigation into whether some traders spread rumors about British financial institutions over the last few days and might have profited from the decline in the stocks' share prices. Separately, the Bank of England, which almost never makes public statements about specific lenders, denied rumors that it met or scheduled to meet with executives at a British bank to discuss potential liquidity problems.

>The Bank of England on Wednesday denied speculation that its governor, Mervyn King, had called off a trip to Asia, saying there was never one scheduled, or that staff members were told to cancel their Easter vacations because of the current market turmoil.
http://www.iht.com/articles/2008/03/19/business/ukbank.php