Our Timid Government Is Killing Us

This column was written by Michael Kao, CEO and portfolio manager of Akanthos Capital Management, a hedge fund specializing in convertible, capital structure and event-driven arbitrage strategies.

So far, we have seen expanded Term Auction Facilities, a $700 billion rescue package and global rate cuts. So why are all asset markets still falling? Simple. Given the recent severe violations of market trust and the basic sanctity of capitalistic conventions, the U.S. government still has done little to repair the damage dealt over the last several weeks.

Two weeks ago, I wrote an article called "Four Ways to Help Us Out of This Crisis," in which I outlined four basic issues and four suggested solutions. To briefly summarize, the four issues were:

1. The "bailout" of Fannie Mae (FNM - commentary - Cramer's Take) and Freddie Mac (FRE - commentary - Cramer's Take) by the Treasury also simultaneously eviscerated a multi-hundred-billion-dollar market for preferred securities;
2. the lack of support for Lehman's counterparty obligations, which severely undermined mutual trust amongst all counterparties;
3. the undercapitalization of the FDIC and the low limit of FDIC insurance; and
4. the ill-conceived ban on short-selling that ironically exacerbated the pressure of companies' capital structures and costs of capital.

Since that column was published, two of the four issues have been directly addressed. Specifically, the FDIC insurance limit was raised to $250,000 (one of the many "Christmas ornaments" attached to the TARP bill) and, as a result of the TARP's passage, the expiration of the ban on short-selling.

So why are the markets still in free fall? As I tried to emphasize, the answer lies in the government's grudging incrementalism in dealing with the issues. Not once in the last two months have the actions of the Treasury, Fed or Securities and Exchange Commission shown that they are ahead of the curve, or that they are throwing everything they have at the problem. In fact, the government's actions appear to be ad hoc and improvised without proper analysis of the ramifications.

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At the time of publication, Kao and his firm were actively trading FNM, FRE, GS, MS and WB.