29 Sep 2008

Remarks from a Wall Street Big Gun

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My buddy on Wall Street wrote to me in an email saying:

I have been catching myself thinking the last few weeks…”I will never invest in a financial institution.”

Why? It seems that if they are insolvent the government just seizes them. If other kinds of companies go bankrupt there are still contracts, property rights and sufficient bankruptcy law/courts.

But, wow, did they ever wipeout Washington Mutual. The debtholders got zero.

Amongst the many unknown ramifications of this bailout, it could really damage people’s willingness to invest in financial institutions (including lending to them).

This is what I have been saying for weeks.

Again, folks, the verb used by the lapdog financial press is “seize” when it describes what the government regulators do to these troubled institutions. And also, no one is going to sell dubious assets to private buyers, since they will get such a better offer from Hank Paulson in short order.

Given this environment, what investor in his right mind would get into the financial sector?

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