"Potter’s not selling, Potter’s buying!" In the immortal words of Jimmy Stewart in "It’s A Wonderful Life," many investors are snapping up bargains in the midst of a credit crisis.
General Electric announced Wednesday it is offering new common stock to the public of at least $12 billion.
As part of the deal Warren Buffett is buying again -– agreeing to a private offering of $3 billion in preferred GE stock.
Luckily for GE, Buffett is a much nicer investor than the Potter was in "It’s A Wonderful Life." Overall market action on Wednesday was positive.
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Despite strongly negative reports on U.S. payrolls and manufacturing activity blue chip stocks were off just slightly, bonds rose, lowering interest rates, and the dollar rose further against the euro.
Evidence of declining inflation concerns is also shown in Wednesday’s lower prices on oil and gold.
There is better new outside the U.S. as well. According to European statistics agency Eurostat, consumer-price inflation in Europe fell in September.
Normally, all this good news on inflation would be a boon to stocks, but apparently only the Potters of this market seem to see the good news.
Meanwhile, the Emergency Economic Stabilization Act is revived in the U.S. Senate. The rescue plan came back to life primarily through extension of deposit insurance. The bill also supports the SEC’s proposed suspension of mark-to-market rules.
These two provisions are likely to have a bigger effect on the markets than any of the $700 billion in planned expenditures on “troubled assets” (this is the terminology the bill writers are using for bad loans).
The FDIC will increase the government deposit-insurance ceiling for banks and credit unions to $250,000 from $100,000. Additionally, the FDIC can borrow from the Treasury “without regard to limitations" through 2009.
The last time the FDIC borrowed money from the Treasury was during the savings and loan crisis, when hundreds of institutions were going under.
So far this year there have been only 13 bank failures, but regulators and bank managers are predicting more and may now have unlimited funds to use for the next 15 months.
The SEC proposal is in conjunction with the Financial Accounting Standards Board (FASB). They are not saying fair value accounting rules no longer apply, but directing corporate executives use their own estimates of fair value when market information on the loan is not available.
As investors have seen this market is basically non-existent since lending activity has dried up over the past few weeks.
Therefore, bank managers will be giving investors their own estimates for many of the loans on their books.
The legislation now moves back to the House, but Potter’s not waiting. Buffet and others are moving in on the opportunity.
Since 2000, Peter R. Crabb has been a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.