Ahistoric

The definition of ahistoric is quite befitting the current financial crisis on Wall Street. I'm not even talking about how nations dealt with the Great Depression or even the recession of the late 1970s and early 1980s, or even the recession that took place at the start of the 1990s.

No, I'm talking about the failure to recall history from a few weeks ago.

Citigroup is now on the brink of going under, especially as its share price hovers near $5 per share. Below that amount, and you might see institutional investors selling in bulk.

Yet, it wasn't more than a few weeks ago that the federal government was pushing Citibank to take over Wachovia, another failing bank. The feds were doing so despite a far better offer from the solvent Wells Fargo bank.

At that time, I was questioning everyone's numbers. After all, why would the feds be pushing Citigroup over Wells Fargo to take over a failing multibillion dollar bank unless they thought that Citigroup was in a better position to do so.

Well, it now appears that the feds had no clue what they were doing and were simply running with whatever was available on hand. Citigroup's financial position could not have changed so suddenly in the matter of a month that it is now in the same position that Wachovia was just a few months ago. In other words, the feds seriously miscalculated on the Citigroup solvency, and had they pushed ahead with their plan to have Citigroup take over Wachovia, we might be seeing an even worse situation.

The moral of that story? The federal government doesn't know what to do any more than investors, but the market does seem to have a better grasp than the feds do. A federal intervention to force the sale of Wachovia would have had disastrous consequences.

Meanwhile, you're now watching the market volatility jump all over the map as the automakers have their hands out for a bailout in the same scenario that played out before the mother of all bailouts was approved. When the markets saw that Congress was going to pass the bailout, the markets all rose on the news, but when they had second thoughts and the House rejected the initial bailout proposal, the markets tanked in a big way.

We're now witnessing the exact same scenario play out over the auto bailout. I happen to oppose both bailouts as they remove risk from the market, and reward bad business decisions. That's precisely what providing billions of dollars to automakers who have made decades worth of bad business decisions will mean. It will only allow these companies to limp along for a few more months or even a few years before they come back and ask for more. There are fundamental problems with the domestic automakers, and reorganization is the best way to handle the situation, not a massive bailout. It's one thing to provide bridge loan guarantees so that the companies can have financing during reorganization, but it's quite another to give them the money, even with preconditions on its usage (again requiring them to follow government advice which may result in more harm than good by distorting the markets still further).

The moral here is that the government doesn't have the answers, and throwing money at the symptoms isn't going to be beneficial for long term economic recovery. The structural and underlying problems with the automotive industry have to be addressed, but doing so would mean serious problems for a Democratic party controlled Congress, which relies heavily on unions for support.

UPDATE:
Citi's slide continues. The share price is below $5, and trading as low as $3.91 this afternoon. Not a good sign at all.