I have had many questions asking why the markets, especially financial bonds and preferreds, have not responded more positively to the government's rescue plans. My answer has been that the market does not trust that the government will infuse money and take a passive role. Recent comments from legislators have only heightened these fears. Some of my readers have doubted my belief that the government (thanks to its treatment of the GSEs and Lehman) has caused more fear instead of easing investors concerns. Maybe the following excerpt from the Wall Street Journal is more convincing:
"A survey of more than 400 firms by Sifma and other financial-industry trade groups found that a large percentage of financial firms would be reluctant to participate without more details about any potential program. More than nine in 10 said they were less likely to participate in the so-called Troubled Asset Relief Program because of a "lack of clarity." Nearly the same number expressed reluctance if Treasury requires firms to issue warrants in return for taking assets from them."
No one trusts the government, not the banks and not investors. Banks want the government to buy toxic assets at reasonably high prices without becoming beholden to the government. Investors want to be assured that banks have accounted for all of their toxic assets and that the government will not force a suspension of dividends or other actions which would be negative for their investments.
What is frightening to me is that the banks are so adamant that the government get these assets of their books. They don't want accounting rule changes. They don't want cash infusions due to preferred or warrant sales. They want the government to take bad assets at good prices. Oppenheimer's Meredith Whitney may frighten the heck out of us, but I believe her to be on the money. Look for more pain down the road.
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