Where We Going?

The business press doesn't know either

The Grand Old Duke of York. He had ten thousand men. He marched them up the hill. Then he marched them down again.

When they’re up they’re up.
And when they’re down they’re down.
And when they’re only halfway up,
They’re neither up nor down.

The business press these days reminds us of the Grand Old Duke. Marching with 10,000 investors, analysts, and economists, it is up and down and back again with every indicator, report, market move, and earnings announcement.

Newspapers cover the news. We understand that.

But business-press readers should be clear: authoritative headlines, impressive logos, reasoned commentary, smart-aleck blogs all notwithstanding, no one knows where the bottom is right now. Not economists. Not Wall Street. Certainly not the Treasury Department. And not the business press, either.

Let’s follow the financial coverage of the last few days.

Before Wednesday, Ben Bernanke met with the Federal Open Market Committee, and the business press appropriately previewed the meeting. The Wall Street Journal’s longtime fed reporter, Greg Ip, profiled Bernanke—the man, the myth, the legend—providing ample background of how he arrived at this point and smart warnings about what might follow the meeting.

Whether Mr. Bernanke made the right calls in the most severe shock to U.S. financial markets since Sept. 11, 2001, will be clear only in hindsight. Critics charge that he and his colleagues, prior to August, underestimated the housing bust’s magnitude and its potential spillover to markets. They say the Fed team should have shifted its focus from inflation to the slowing economy far sooner. Its efforts to restore order through the Fed’s little-used discount window have shown limited results.

Today, Mr. Bernanke faces another delicate decision on whether to cut interest rates for the second time since credit markets began gyrating. Markets place high odds on a quarter-point cut.

The Fed’s quarter-point rate cut was treated as one big never-mind. Stocks go up. Everything’s cool. Halloween metaphors are deployed.

The Journal’s “No Tricks From the Fed: Stocks Rally” began:

Investors held out their Halloween bags yesterday and got some big treats: not only a Federal Reserve interest-rate cut but also exceptionally good news on third quarter economic growth and inflation.

Business Week online:

A Halloween Treat from the Fed: The central bank’s moderate Oct. 31 rate cut aims to ward off a truly scary creature - recession


London’s Financial Times, the Duke of York’s spiritual heir, on Wednesday said both that the “U.S. economy shrugs off subprime fallout,” and Data add to gloom on US economy”.

Blimey. Neiytha up no’ dehwn, those blokes bey.

Today, it is a different story, isn’t it?

Stocks, which initially rallied after the announcement of the cut, tanked. The Dow Jones Industrial Average fell 362.14 (or 2.6 percent) the next day. As The New York Times says today: “In Wild Swing, Stocks Give Up Rate-Cut Gains.”

But it’s not just the stock market. Would that it were. The global financial system seems to be in serious trouble, and the business press, like the rest of us, is clearly groping to understand how serious.

Friday’s news is down, down, down.

Citigroup Inc., which is turning into the economy’s rogue elephant, may need to sell assets or cut its cash dividend just to meet its capital requirements, the amount needed to cover loan and trading losses, according to a CIBC analyst. The Journal reports that Citigroup board members are holding an emergency meeting this weekend.

And Merrill Lynch & Co. is crumbling. After taking staggering third-quarter write-downs of $7.9 billion and forcing out its chairman and chief executive, Stan O’Neal, the investment bank, we now learn, may have been hiding its losses via complex transactions with hedge funds, according to a terrific report by Susan Pulliam in today’s Journal.

And the lending process may have been corrupted, according to New York Attorney General Andrew Cuomo, who sued a home appraisal company alleging that it mislead consumers by allowing Washington Mutual to pressure it to overrate property values.

The Journal says:

The case marks one of the highest-profile government actions yet to assign blame for the mortgage crisis that is causing havoc in the financial markets.

But the Journal’s Serena Ng and Carrick Mollenkamp take everyone down the hill in a hurry today in their front-page story: “Fresh Credit Worries Fresh Credit Worries Grip Markets.”

The riskiest securities held by banks are turning to dust, the Journal says.

The paper says an index that tracks risky subprime bonds has fallen to a record low of 17.4 cents on the dollar, down 50% from August, according to Markit Group.

But the Journal says, even the highest-quality securities are losing value:

Rated triple-A, they should be affected by mortgage defaults only in extreme circumstances. An index that tracks triple-A securities is trading at 79 cents on the dollar, down from roughly 95 cents just a month ago.

And remember, much of these securities held by Wall Street and big consumer banks depend on the health of the housing market:

House prices, as measured by the S&P/Case-Shiller national index, are likely to decline about 7% this year and a similar amount in 2008, contends Jan Hatzius, chief U.S. economist at Goldman Sachs in New York. He expects a further small decline in 2009.

Double-time, march.

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Anna Bahney is a Fellow and staff writer for The Audit