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?
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?