From the November 01, 2008 issue of Futures Magazine • Subscribe!

Smartest guys in the room?

The October rout of the stock market and the bailout plan reminded me of a line in the movie “Armageddon.” In the movie, Earth was being threatened by a killer meteor, and NASA was trying to determine how to destroy the rock before it hit. One U.S. military general suggested shooting up a bunch of nuclear weapons to destroy the meteor. But a (of course, brilliant) physicist responded, and I paraphrase: “You could shoot up as many weapons as you wanted but they would just bounce off and the meteor would keep on smiling.”

The $700 billion (plus) bailout plan cobbled together by the U.S. government seems to be our nuclear weapons strategy. The stock market looked at it and kept on dropping, uncomforted by either government intervention or the amount of money being used to help unfreeze credit markets. As I write this, the market is down almost 45% from its high in October 2007. The good news, and there is good news, is at least it hasn’t dropped 22% in one day (ala Oct. 19, 1987) as it couldn’t because of safeguards taken after that market frenzy. Will the bailout work, eventually, to calm the markets? Maybe. A coordinated interest rate plan didn’t seem to help much, but hopefully a meeting of G7 countries will stem the tide. What will work is smart market regulation. My definition of that is when a firm is too big to fail, you don’t allow other firms to buy it and become even bigger. It also means all levels must take responsibility for their actions. The man on Main Street should not be able to buy a house he can’t afford, the predatory lenders should be prosecuted and banks and Wall Street should not be allowed to repackage junk that eventually blows up in their (our) faces.

Someone said to me that many firms don’t seem to know what they have on their books. How exactly does that happen? In the futures and options industry, positions are marked-to-market daily. Margins are collected, money flows through. Bad managers get bounced. It’s all about transparency, a model Wall Street should follow.

I was on the road during much of September, and when I’m traveling, other than reading the newspapers, I’ll typically have CNBC on when in the hotel room as I’m not always plugged into the Internet. (Confession: I never watch CNBC except when I am on the road.)And truthfully, in listening to the constant whirl of what was happening, I could see why the general public, hell, even market players, were afraid. The constant blathering about every move in the market, the eight talking heads and the gasoline on the fire of madman Jim Cramer and it’s no wonder the American public is responding badly. As someone who watches markets and has been through several financial crises, I thought the information coming from CNBC, however true, was presented with hysteria. And this was in September!

In this issue, we take a look at how the futures and options markets responded to this global financial volatility, who the winners and losers were and how traders need to respond to operate smartly and hopefully successfully (See “Great Bailout of 2008”). I know many people who thought the bailout should not have happened, that the markets would handle it. And maybe they are right. However, with the credit markets frozen to the core, doing nothing would have triggered much larger problems. The stock market? Let the happy talkers on television continue to rant and rave, but it’s the credit markets that matter. No doubt when things slow down, and they will, governments will review what happened and why. And regulations, and maybe the world, will change. I had dinner with a friend when I was in New York the week when Freddie Mac, Fannie Mae and AIG were saved and Lehman was told to get lost. He suggested our next cover be a painting of Che Guevara, Hugo Chavez, Vladimir Lenin and George W. Bush, with a headline Socialism lives! Sadly, he’s right.

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