Why the System Is Breaking
Posted: Friday, February 06, 2009
by Joseph Jagde
The economic system out there is breaking at the seams, and hopefully the problems can be contained but it doesn't seem like that is going to be the case anytime soon.
There is probably any number of reasons why but a number of them are readily apparent even to an amateur observer.
The idea of buying a share of stock in a company has been a big basis for the economy and this model is now being used globally. For even an individual being actually excited about a company and what it can or might do, maybe in terms of science or entertainment, this model of stock ownership is a real opportunity to get a small ownership in the company or a small stake in the operation.
Within all this, there has been an expected predictability range for the stocks and the potential performances of the companies and huge international brand name companies have been established as having blue chip status in the stock market.
What has happened though and this is very major in the financial conglomerates such as AIG and international big name financial firms is that there has been the type of bets made by management that had little to do with the core mission of the companies that could or might have netted billions but could also go right to the other direction right away. So you get the case where a company said to be an insurance company in the trillion dollar range in assets such as AIG which loses in one trading bet of a reported ten billion dollars. From activities such as this, the system breaks down because the shareholder doesn't have a clue in as to what they are buying in that the company bets and loses ten billion instantly and has to cover that in cold cash and then how can someone make a reasonable investment decision on the company? All the hard work of evaluating core business activities and where that might go gets thrown out the window with the big trading bets going into the overall finances of the company. .So one of the things you are seeing is the letting go of Wall Street analyst, a sign of just giving up on evaluating companies in the traditional fashion which is a within house sign that stock evaluation in some realms in like following a rogue wave at the beach.
They argue, you have to take care of Wall Street or upstream and then downstream will get the trickle down. But upstream has betrayed both itself and downstream with arrogant excesses capitalizing on brand names and using them as the guise for covering up any degrees of excess, in particular gambling away other peoples money which also includes money that could have been appropriated for employees who have otherwise been subsequently fired because of company wide losses.. It is not only companies names that have been used and exploited but brand financial America itself, which touted itself as the financial leaders of the world and used that play and then finally it abused en mass and now we have a world wide credit crises that might not find remedy in the stock market and the Dow because why would people want to throw their money to the wind at this point?
It seems like a lot of this stems from sheer overconfidence in size and name. It is like you can't sink the Titanic so play with the Titanic in any type of seas. An analogy might be that someone was giving a super jet and told it can fly okay to 28 thousand feet and they do that well and then extend the boundaries to 40,000 feet and all of the sudden we have big problems.
Another example that goes into this is the recent acquisition of Merrill Lynch by the Bank of America. After the deal was set initially, Merrill sustained a 4th quarter loss of 15.3 billions dollars. Bank of America claimed not to be in the know that this was coming. Okay, if that is true, then how is the stockholder in either company supposed to make their decision on the stock? When even the management teams can't see a loss of that size coming down the bend, how is someone expected to buy shares in the house?
Because of derivative bets and things like that, the potential shareholder can't know what value he is exactly buying into within reasonable predictability and boundaries. So the system then is broken, how can these companies expect new and continued holders of their stock and good stock prices, when they bet so wildly with vast sums of money at stake that can drop out of sight as if it were an actual casino operation?
It is at this point hard to visualize what can happen to bring shareholder confidence or interest back to these major financial concerns that have dallied so extensively in staggering bets that are not within any real corporate mission statement that one can derive from.
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