Copy of letter sent to Chairman Bernanke - March 2, 2009
PETER R. MACK
March 2, 2009
Chairman Ben. S. Bernanke
Federal Reserve Board
Constitution Ave & 20th St.
Washington, DC 20551
Dear Chairman Bernanke:
SUMMARY:
The economic recovery depends on 1) stimulating the economy and 2) repairing psychology and restoring confidence. The Fed and Treasury have been working on stimulating the economy but restoring confidence against a barrage of bad news is proving elusive. In order to repair psychology and restore confidence to the markets, and to provide a better future rate-of-return to all American citizens than an investment in Treasury Bills, I suggest that the Federal Reserve Bank invest $1 Trillion into the domestic equity markets through periodic purchases of large, mid and small cap index funds through the leading fund distributors.
RATIONALE:
The markets decline almost daily, setting new multi-year lows. Fears are being stoked by rampant rumors about troubled banks and nationalization, putting stocks into free fall. In recent days, rumors and speculation in the media about nationalization of Citicorp and Bank of America have driven shares of those stocks to low single digits, putting the value of their preferred shares and the continuance of the enterprise in great jeopardy. Managements of both institutions have publicly tried to assure shareholders about their long term viability but the markets are disbelieving. President Obama and Secretary Geithner have publicly stated their opposition to nationalization but again, the markets aren’t listening. Your own recent testimony to Congress, which I thought was a powerful affirmation, failed to stabilize the markets.
As a small and quite recent stockholder of Citigroup, in particular, but many other industrial companies as well, and as an executive in the brokerage industry for 45 years, I
am fearful that shareholders of common and preferred stocks in these institutions are about to get wiped out. It is my strong belief that a nationalization of the
two large institutions most commonly mentioned, together with the prior catastrophic and ill conceived bankruptcy of Lehman Brothers and collapse of AIG, Wachovia, WaMu, GM and the like of our widely held corporations, will sound a death knell for the equity markets until long in the future. Individuals will flee common stocks and equity mutual funds. Today, GE broke the $8 level – a grim omen.
George Soros has long held and publicized his view that markets drive fundamentals, rather than the other way around, producing bubbles and crashes – a dynamic he calls reflexivity. In my view, stabilizing the markets is the key to recovering household wealth and creation of economic recovery. Following is my idea about how this can be accomplished while the world waits for Government action to take effect.
THE PLAN:
The Federal Reserve must become an equity investor by deploying $1 trillion into the equity markets through periodic purchases of broad-based large, mid and small cap index funds through the leading fund distributors. The Fed can operate under its normal procedures to minimize impact on the markets. Because of the market sensitivity of prospective Fed actions, leakers and leakees of Fed market actions under this program should be dealt with under criminal rather than civil statutes, under Justice Department rather than SEC jurisdiction. The public is sick of front running and other abuses done by insiders and hearing rumors in the financial media that turn out to be true.
These operations should be conducted on behalf of the account of the Social Security Trust Fund. For those who believe that privatization of Social Security into self-directed accounts was, and continues to be, a good idea, this plan should get their support. For those who feel that current aid to banks and financial institutions is a bailout for “fat cats” and incompetent and spendthrift financial executives, this plan is inclusive and benefits all citizens equally. If the US economy ever is able to emerge from its current squalor, these investments should become quite profitable. Purchases of equities for the Social Security account will also provide a hedge against inflation, which many fear as inevitable following the current period of money creation and growing deficits. There is no reason why equities should not co-exist with low interest T Bills in the Social Security account and no more appropriate time than now. Over the past weekend, in his letter to Berkshire shareholders, Warren Buffett described the market in US Treasuries as an investment bubble.
Were the Fed to conduct these open market equity operations, the playing field would be more leveled in the equity markets. Bear markets occur when there is an excess of fear over greed, when sellers overwhelm buyers, in this case, because of a weak economy. Because of relaxed rules regulating short selling and other market changes such as decimalization and the growth of leveraged short ETFs, short sellers and hedge funds have had relative free rein, as normal buy side investors such as mutual funds, pension plans and individual households have had much of their ammunition taken by deflation,de-leveraging, and low confidence caused by the weak global economy. In addition, as the markets continue to decline and further, as the hedge fund industry is rocked by recent scandals, additional deleveraging by hedge funds is expected as investors withdraw funds. Weakness in the markets has driven fundamentals lower. It is not coincidence that as household wealth and investment portfolios have declined, economic fundamentals have deteriorated as consumers stop spending.
As you are known as a scholar of The Great Depression, you know far better than I how, on Black Thursday during The Crash of 1929, Richard Whitney, J.P. Morgan’s broker came to the floor of the Exchange and placed sizable orders in blue chip stocks for Morgan’s account. As word spread of Morgan’s intervention, prices firmed, effectively stemming the crash. Several months ago, legendary value investor Warren Buffett emulated Morgan by stepping in to snap up shares in Goldman Sachs and General Electric, hoping to set a confident example as well, but he was far too early and has lost enormous amounts of money, an experience shared by many.
Fed participation in influencing equity markets is nothing new, having that ability through its authority in setting margin requirements. Although I can’t recall any Fed action since at least the early 1970s, margin requirements were a tool used to encourage or discourage equity investments. Aside from just quaintly complaining about “irrational exuberance” a number of years ago, Chairman Greenspan could have used the Fed’s authority to try and curtail speculation if he thought it important enough to do something other than to comment, but he did nothing. If this were a normal recession, now might be an appropriate time to lower margin requirements, but with the volatility and illiquidity in the markets, and the fact that this is more a depression than recession, lower margin requirements would probably accomplish little at this time.
Again, I believe it’s time for the Fed to act - to be the Morgan of today and buy stocks on behalf of the people - to do what I and so many others would do if we had any money left and weren’t so fearful of losing everything. If we as a nation have any economic future at all, these purchases will turn out to be great investments.
Thank you for your attention.
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