Language in the Financial Markets

Our economic markets are a mess. If you follow the noise on CNBC or regularly scan what passes for journalism in magazines like Smart Money, you might think the world is coming to an end. Beyond our fascination with the numbers, we forget that words play a powerful role in our financial markets. Consider the following statements with each happening approximately a week or so apart by the same person:

“Bear Stearns’ balance sheet, liquidity and capital remain strong.” (link)

“The past week has been an incredibly difficult time for Bear Stearns. This transaction represents the best outcome for all of our constituencies based upon the current circumstances. I am incredibly proud of our employees and believe they will continue to add tremendous value to the new enterprise.” (link)

Both statements, made by Alan Schwartz, President and Chief Executive officer of Bear Stearns, cover the recent action taken by the Federal Reserve (our central bank, spending our money). The Fed set up a buyer for Bear Stearns, JPMorgan, and took financial responsibility ($30 billion) for the most questionable liabilities. Note that The Wall Street Journal calls the Fed’s move “unprecedented.” (link)

Don’t Ignore the Words

While I take issue with the Fed’s actions from an economic standpoint, I’m most interested in how little attention is paid to the words surrounding the events. For example, JPMorgan, in an effort to appease both its shareholders and Bear Stearns’ shareholders positioned the purchase as a benefit for everyone involved.

“JPMorgan Chase stands behind Bear Stearns,” said Jamie Dimon, Chairman and Chief Executive Officer of JPMorgan Chase. “Bear Stearns’ clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns’ counterparty risk. We welcome their clients, counterparties and employees to our firm, and we are glad to be their partner.”

Dimon added, “This transaction will provide good long-term value for JPMorgan Chase shareholders. This acquisition meets our key criteria: we are taking reasonable risk, we have built in an appropriate margin for error, it strengthens our business, and we have a clear ability to execute.” (link)

Long-term, the deal may end up a great one for JPMorgan, but I’d argue that the language covers up a bigger issue pointed out by The Wall Street Journal:

Consider: The whole credit crisis largely reflects a lack of good information…A spectacular bankruptcy would shine a bright line on this mess. To start, Bear’s trading counterparties and other creditors would have to show themselves and explain their positions to a public examiner. And then bankruptcy lawyers would have to pore through each and every one of Bear’s assets and liabilities, making the full autopsy public.

Of course, such a full accounting would take at least a year and likely longer. But we’ve already endured almost a year of an opaque credit crisis. What if, in another year, we’re still in the middle of the crisis with no new real, third-party information to guide us out? The information provided by Bear’s bankruptcy would then be invaluable. (link)

Going back to an earlier post, I posit that our impatience with language and our pursuit of of immediate gratification impacts current monetary policy and not in a good way. When did we stop being a society that saw value in long-term investments? When did we start buying into the hype, as a group, that getting rich quick was not only possible but almost guaranteed to everyone?

Building Something

When was the last time you knew your money was being spent or invested on something bigger, something with a larger impact? In the movie It’s a Wonderful Life, Jimmy Stewart’s character, George Bailey while trying to convince depositors to not sell their Building and Loan shares to the “evil” Mr. Potter or to close their accounts, has a great line about why the money isn’t just sitting in the safe:

You’re thinking of this place all wrong. As if I had the money back in a safe. The money’s not here. Your money’s in Joe’s house…right next to yours. And in the Kennedy house, and Mrs. Macklin’s house, and a hundred others. Why, you’re lending them the money to build, and then, they’re going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?…Now wait…now listen…now listen to me. I beg of you not to do this thing. If Potter gets hold of this Building and Loan there’ll never be another decent house built in this town…Can’t you understand what’s happening here? Don’t you see what’s happening? Potter isn’t selling. Potter’s buying! And why? Because we’re panicky and he’s not. That’s why. He’s picking up some bargains. Now, we can get through this thing all right. We’ve got to stick together, though. We’ve got to have faith in each other. (link)

I believe we’ve stopped thinking about our money actually working for something bigger and instead, we’ve focused on quick results that potentially leave us with liquid funds to fuel our consumer habits. What if we actually invested in companies that did things, measurable things? What if we looked around our local communities for investment opportunities? What if we picked companies that could explain, using easy words, what they do and why they add value? If companies could talk plainly about what they do, do you think we’d care as much about stock prices?



6 Responses to “Language in the Financial Markets”

  1. 1 torbjornrive
    March 26, 2008 at 7:35 am

    You’re absolutely right. Also, it’s the words that begin these quick reactions that you speak about. The fundamentals beneath hardly matter when someone of authority is screaming something bigger from the rooftops.

    re Your last paragraph, looking locally has worked out for me on two occasions. Examining resource businesses, and reading in the papers about protest vs. development is a good way to see who’s investing in their future.

  2. 2 Britt
    March 26, 2008 at 9:33 pm

    @torbjornrive: I glad to get confirmation that my intuition on looking local is applicable outside my experience. Part of me also wonders what’s changed so drastically in our financial makeup that we’ve reached a point as a society where we have a NEGATIVE savings rate.

  3. 3 torbjornrive
    March 27, 2008 at 4:29 pm

    Re Negative Savings – I just commented with the following stat on another blog this morning:

    In the US in 2007 – up to 90% of money used to “buy” homes was borrowed. Furthermore 40% of other general consumption is on credit.

    Mind-boggling. All of it!

  4. March 27, 2008 at 9:05 pm

    Good ideas, especially the investing locally angle. Additionally, I think that if you want your money to make a difference, it is important to donate to causes you believe in and can monitor (i.e. local charities and community organizations).

    One company with a very plain spoken leader who seems to remain calm when others are panicky is Berkshire Hathaway. Living just an hour from Omaha, I’ve had a keen interest in Warren Buffett’s company for a long time. If you haven’t ever read one of his letters to shareholders, they are candid and very self-critical when mistakes are made.

  5. 5 Britt
    March 27, 2008 at 9:58 pm

    @Shannon: I’m glad you mention charitable contributions. I think we often underestimate what we can contribute and the impact when can have through those organizations.

    And funny you should mention Warren Buffett. I’m actually a contributor on a new financial blog at behaviorgap.com. We often talk about the financial wisdom of Warren and his success with Berkshire Hathaway.

  6. March 30, 2008 at 11:46 pm

    That’s a very interesting blog and a wonderful, worthwhile project to be associated with. If you only help one or two people with such a project, you’ve earned your ‘gold star’.

    The word “impact” in your response reminds me of a discussion I had with a co-worker at lunch about a year ago. He was preparing to purchase a house and we were discussing how what we own can impact others.

    I was trumpeting the merits of purchasing a home in a small town versus living in a big city, while he took the opposite position. While we never reached a real conclusion, we did agree on some basics, such as financial effects. For one, in the large city, the city impacts you (higher purchase price, higher taxes, etc.) while instead, you can have real impact in a smaller town.

    Fundamentally, this is related to the barriers to entry into larger metropolitan real estate markets. Additionally, there is a dilution effect of larger population: a new business generating three jobs matters more to a community of 300 people than it does to a city of 300,000 people.

    This concept of urban versus rural impact extends beyond just owning residential or commercial properties, but that was the focus of our lunch time discussion. It certainly applies to socially active and charitable organizations, where volunteering and donating can actually impact every soul in the entire community.

    He bought in the city, by the way.

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