PII asked John Moynihan, of Diversified Financial Advisors, LLC (Printers 401k) to share his opinions on the financial crisis with our membership. His thoughts on the crisis, the legislative rescue plan and the fate of large and small banks follow:
Both sides of the ‘bailout bill’ As for the Emergency Economic Stabilization Act (EESA), I can argue both sides. On the “yes” side, while these deeply troubled financial institutions are few, they provide a huge amount of lending, securities issuance, trading, and other functions. We could let these Wall Street firms succeed or fail on their own and then build new firms to take their place, but that course is risky and uncertain. I doubt it would lead to the Great Depression II, but it might worsen a developing modest recession.
On the “no” side, we may be able to avoid serious consequences. Perhaps the many other good banks will continue to pick up the lending slack and acquire the needed pieces of failed banks, as JP Morgan did with Washington Mutual and Citibank did with Wachovia. Likewise, the EESA program could turn into a bailout, costing taxpayers, and rewarding poor decision makers. It could spiral into a “Let’s bail out everybody” program; lobbyists are already swarming Washington.
Weighing both sides, although my heart says “no,” my head says “yes.” I am glad there has been vigorous debate over the program, and that the legislation now incorporates important safeguards, which will likely be necessary in the months ahead.
Main Street banks doing okay Credit market instability does not appear to be widespread; rather, it is heavily concentrated at a few prominent financial institutions. For example, the S&P Regional Bank stock price index is up more than 50 percent from its mid-July low. This bank group is still well below its peak, but certainly not crashing. Banks that maintained more profitable lending standards and reasonable loan terms, and avoided the lure of high-leverage are the norm, not the exception. I think the vast majority of local and regional banks will do just fine. They have lower borrowing costs and higher lending rates today, a lot less competition from some high-risk non-bank mortgage originators, and do not require capital from Wall Street banks. Though, of course we don’t see headlines that read: “Local bank XYZ doing just fine.”
Maintaining perspective Although total bank lending is slowing, it is not screeching to a halt. And, although the economy will likely experience a credit market shock from these severe problems at some of our largest financial institutions, I do not think it will be devastating. This is not a replay of the 1930s, and I continue to think that we are not heading into a major recession. I think policy makers are now doing the right things, and we will work our way through this financial crisis. A recession is possible, but so too is recovery.
Through all of this, we need to maintain a sense of proportion. I think the rescue program will quell this financial market crisis, allowing us, over time, to return to evaluating the substantial fundamental economic value in the market. Maintaining perspective is important. Panicky moves away from well-balanced investment portfolios at times like this, in my experience, most often lead to locking in losses and missing out on ensuing recovery.
This content was prepared by John Moynihan of Diversified Financial Advisors, LLC (Printers 401k), whose broker dealer is MSC/LPL Financial. The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual. If you have financial questions, email
or call 800-307-0376.
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