Can Warren Buffett’s $5 billion investment turn the tide?
Or at the very least, help my pocketbook.
The value of this blog – at least what I get paid for it – has plummeted more than 6 percent in the last week.
If you’re sitting in London, the plummeting dollar versus the British pound (and almost every other currency) is a pretty good barometer of global uncertainty over what lies ahead.
The reason, as the always-brilliant commentator Nils Pratley makes clear, is that no one knows just how Treasury Secretary Henry Paulson’s plan will pan out. In particular, how will those toxic assets contaminating banks’ balance sheets be valued?
Fifty cents on the dollar? Twenty cents? Two cents?
"If prices are set low, banks will be pushed into fresh write-downs and again find themselves looking for new
capital," Mr. Pratley writes in the Guardian. "If they are set high … the dollar could come under pressure."
That will hit us exporters in the U.S. hard. We were just getting used to a nice uplift in the greenback after a steady six-year descent when suddenly this happened.
The impact was clear in Wednesday's markets: oil moved above $108 per barrel (oil is a hedge against the falling dollar), stocks weakened with dollar exposure, and the Rice-Oxley household saw a return to rationing at their breakfast table this morning.
Shall we blame the Other Paulson?
Short sellers took over from teens in hoodies as the nation's public enemy No. 1. In Britain, there’s a grand witch hunt on for the villains who wreaked havoc in the markets last week.
The Financial Times identifies US hedge-fund manager John Paulson (no relation to Henry, we hope) as placing a cool billion pounds (give or take some spare change) bet against four of the five biggest British banks. He made billions, it says, predicting the subprime loan implosion.
According to the FT: “Paulson took pre-emptive action to defend the short positions from what is likely to be a barrage of criticism from politicians and the popular media, saying the firm ‘empathises’ with the tough position facing financial companies.”
Ah, so that's all right then. It may be a while before Mr. Paulson can repeat the feat, however. Prime Minister Gordon Brown said Wednesday that after the current ban on shorting financial stocks expires in January, we should expect new rules for the game.
"It is right to stop the short-selling because it is a problem in a difficult economic situation that we have put a moratorium on for four months," he told BBC Radio. "We will be reviewing it over the next four months and I think you'll find new rules come in for the future."
There was relief that not every billionaire is profiteering from the credit market mess. Or is he? Warren Buffett's decision to take a $5 billion stake in Goldman Sachs was well received by traders and gave European markets a lift. What's good enough for the Sage of Omaha is good enough for me, appeared to be the general sentiment.
Meanwhile, central banks are not the only entities pumping liquidity into the markets. Criminal gangs, presumably worried about the rapid contraction of the money supply and the effect this might have on national income, are doing their bit for queen and country. The BBC reports that a surge of counterfeiting has doubled the number of fake one-pound coins in circulation.
At the rate this is going, we might need every last one of them.