JPMorgan and the U.S. Treasury just saved us from the real risk of Depression...It was the Panic of '07. The economy was weakening. Stocks were falling. Banks had lent too much and were now seriously tightening up. It all came to a head when a major bank was about to fail. Something had to be done.
The U.S. Treasury understood the risk of a downward spiral. So after a secret meeting, it took the surprising step of providing a whopping $30 million to JPMorgan and other bankers. The goal was huge... it was to save the U.S. financial system. In hindsight, it worked...
Ultimately, the speedy actions of JPMorgan and the Treasury marked the bottom in the banking crisis and the stock market.
Wait a minute! There's something wrong with that story... Can you figure it out?
This was the Panic of 1907! The story today is similar to 100 years ago... only it's billions instead of millions from the government to save the financial system...
After our multiple credit crises in 2007, it all came to a head last month.
Once again, JPMorgan and the government got to together. The government provided roughly $30 billion in guarantees to JPMorgan, for Morgan to take over Bear Stearns.
Importantly for you and me, after the bailout in 1907, stocks (as measured by the Dow) doubled in two years.
I believe we'll be able to look back on March 2008 – when the government and JPMorgan got together in secret to save the financial system – as the bottom in share prices. I could be wrong of course. But from here, I believe stocks could do very well, just as they did after the 1907 JPMorgan bailout...
Earlier this month, our current Treasury Secretary Hank Paulson released a 218-page proposal, in part arguing the Federal Reserve should be granted exceptional new powers to deal with crises.
Once again, history repeats...
I've not been to the Jekyll Island Club; but,... It is the resort in Georgia where it's said the Federal Reserve was created, after the Panic of 1907.
Back then, a half-dozen men – supposedly representing a sixth of the world's wealth – sneaked out of New York and headed to this nearly deserted Georgia island. They lived here for a week under such secrecy they didn't use their real names (so the servants wouldn't know what was going on). B.C. Forbes called it "the strangest, most secret expedition in American finance."
Personally, I think many Jekyll Island-style meetings have been happening in the last month. I think many departments of government finally got sufficiently scared. And they're now in hyper "fix it" mode.
I'm not a fan of government intervention in markets, as the usual result is a colossal waste of taxpayer money. The only time intervention has a chance of working is if we are close to a turning point anyway... Then sometimes a nudge from the government starts the pendulum swinging quicker and more powerfully in its new direction. That's where I believe we are.
If this is the case, once again, we need to be looking to buy financial stocks. With the Fed now proving it'll provide a backstop to the financial system, the argument is only getting stronger...
Financial stocks have been beaten up. Most of them deserved it. Like UBS, which announced this week its subprime writedowns are up to $37 billion, many big banks took too much risk and bought "derivatives" they didn't fully understand. Now they're paying for it.
But some banks didn't do stupid things. The thing is, there are literally thousands of financial companies. Looking for the needle in the haystack – the one bank that didn't get into U.S. subprime real estate, didn't invest in all these exotic financial instruments, and didn't take on too much risk – is hard work!
How high could it rise? In 1907, it took two years for stocks to double. I think today, we can see the same kind of move, in the same time frame, in regional banks. So what are those who wish to build and maintain wealth doing during through these financially turbulent times? They're investing in themselves, they're recession-proofing themselves, and they're enjoying some truly luxurious benefits.
Prosperous Regards,
DLW
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