May We Live in Interesting Times…

Consider these events of the past week:

• Life Insurers may gain access to TARP funds (though “only” $130 billion remains under the current authorization) to deal with a severe liquidity crunch. Several of the largest life insurers – Hartford, Genworth, Lincoln National – scrambled to buy thrifts shortly after TARP came into being to gain a place in the queue. Few have really focused on the implications of a sick life insurance industry. Trillions of assets. Hundreds of trillions of insurance in force. The largest buyers of corporate bonds. If life insurers really feel a liquidity crunch, they will spit out their liquid assets, e.g., corporate bonds, by the billions, sharply raising the cost of capital for businesses across the country. This is not a happy thought when businesses are under so much pressure to begin with. Also, like banks, life insurers are enormous. Consider what a TARP II might look like with life insurers as part of the bail-out; it will make the $700 billion TARP I look positively cheap. But does the stock market care? Nah. But corporate bond spreads certainly haven’t moved in lock-step with the equity rally; credit traders appear to know something their equity counterparts don’t. Like, how to quantify and price risk?

• The Administration is pushing money managers to create “Bailout Bonds,” or the ability for retail investors to play the PPIP game. I have heard some bad ideas in my day, but this one is up there. The rationale is ostensibly “Don’t moan and groan about those money managers making all the money off the Government bailout programs; you can do it, too.” Linking together the Government, Wall Street and Main Street in one big, happy bailout embrace. This is being directed at a retail public, many of whom haven’t the faintest idea of how to properly plan for their financial future. How about providing a tax refund for taking a life-cycle investing class? How about investing people’s Social Security balances intelligently? Providing the cash-strapped US consumer with an opportunity to buy bailout paper is patently irresponsible. It is nothing more than a PR stunt to put a damper on complaints that the Blackrocks and PIMCOs of the world are getting sweetheart deals at the taxpayer’s expense. Given how the Administration has chosen to address te financial sector’s problems these complaints have real merit, but creating yet another money-making vehicle for the large retail asset managers is not the solution. Fixing the plan the right way, by creating a centralized troubled asset vehicle that takes on assets at market value which get worked out over time for the taxpayer’s benefit, solves the problem without marketing spin and PR stunts.

• Goldman Sachs is issuing stock to repay its TARP funds. Goldman has enjoyed a 162% run-up since its November low, trading just shy of $125. I understand it wants to repay the Government, but when smart market-timers like Goldman are selling, take heed. Generally it means the market has run up and is due for a breather. Whether it is a breather or a collapse, who knows, but is certainly doesn’t portent good things for the equity market – or at least the GS stock price – in the near term.

Next week’s market action should be fascinating. On a tiny bit of good news and a bunch of bad news the market roared higher. With bank stress test results on the horizon and more bad earnings reports coming up, the recent rally will be sorely tested.

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