Investor Confidence - Thoughts?
What do you think influences investor confidence most? Do you consider yourself someone who is swayed by outside factors in your decisions? In these economic times, investor confidence means more than ever.
I noticed that the NY Times today had two articles next to each other, and it occurred to me that maybe they were more related than meets the eye.
First - the Dow Jones went up 379 points. Good news!
Then, the next headline - Madoff Guilty Plea Expected: Could Face Life in Prison.
Sure, the first article gave some convincing arguments as to why the Dow "soared" today.
I noticed that the NY Times today had two articles next to each other, and it occurred to me that maybe they were more related than meets the eye.
First - the Dow Jones went up 379 points. Good news!
Then, the next headline - Madoff Guilty Plea Expected: Could Face Life in Prison.
Sure, the first article gave some convincing arguments as to why the Dow "soared" today.
A memorandum from Citigroup saying that the bank had been profitable in the first two months of the year; calls for regulatory reforms from the Federal Reserve chairman, and the possibility that the government would reinstate rules governing short sales of stocks.
But what of the likely Madoff outcome? I think we can all agree that, however irrational, hesitant investors want to see results, and fast. Whether those results come from the bailout or from the criminal courts, investors are looking for answers.
The bailout requires prudent and cautious execution. I'm not saying a criminal trial does not, but results may come faster from criminal trials (or at least charges) if investors are anxious to place blame. Should the government enforcement mechanisms and the media be focusing more on the Madoffs and Stanfords of the world to boost investor confidence?
I would love to hear your thoughts on this - please comment below!
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6 comments :
Here is my problem with some of this news. I think a lot of people are forgetting Enron. What I mean is that the appearance of solid financial ground is way too important to investors. Yes, Citi MAY have been profitable in jan/feb (is anyone else a little suspicious of this??), but investors are too quick to forget that they are standing on billions of taxpayer money, as well as the closest thing to a nationalized bank this country has ever seen. This relates to Enron because I think the government is too anxious to make these banks appear to be financially sounder than they actually are (which is the problem that brought enron down in the first place).
As for Madoff, it will hopefully serve to be a great deterrent to such behavior in the future. As an investor (maybe someday i will have money to actually invest), I am much more confident investing in a fund when I know any potential cons like Madoff will possibly serve life in prison for such a degree of wrong-doing.
Also, I'm no accountant, but wasn't a huge part of the Enron scandal about their use (well, abuse) of mark-to-market accounting? After Enron, and after everything that has happened this past year, Bernanke still says we need to improve rather than abandon the practice.
The arguments for getting rid of mark-to-market were different during the Enron scandal than they are during this crisis. The people that want to get rid of mark-to-market (M2M) accounting right now are banks and other entities with interests in distressed illiquid assets. The M2M process requires you to first determine a fair value of the asset (net realizable value I think) and then mark it up or down based on what the market would pay for it at that moment. In a market with near zero activity (liquidity), a valuable asset would have to marked down massively because there are almost no buyers, a.k.a. no demand. Those who want to ditch M2M right now want this because it causes assets that will be valuable in the long-term to look worthless and this leads to big writedowns in a bank's balance sheet. The Enron schemers used M2M to make worthless assets look like gold, so the argument for getting rid of M2M there was that it provided too much leeway when the market had a lot of liquidity. I think Bernanke is right about improving M2M rather than abandoning it, and the market seems to agree as well.
Thanks for clarifying, Drew! Mark-to-market is a term that gets thrown around a lot, and I think a lot of people (myself included) don't fully understand the implications of the practice.
So do you think that Bernanke's comments helped consumer confidence, at least for those people who understand the benefits of using mark-to-market?
NY Times had a great write-up of the Jon Stewart-Jim Cramer "interview" (http://www.nytimes.com/2009/03/14/arts/television/14watc.html). What do you think of this statement from that article, about the influence of the media -
"In today’s television news market, the cable network and its stars are like the financiers they cover — media short-sellers trading shamelessly on publicity, good or bad, so long as it drives up ratings. There isn’t enough regulation on Wall Street, and there’s hardly any accountability on cable news: it’s a 24-hour star system where opinions — and showmanship — matter more than facts."
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