Crisis Coverage: The Most Difficult Decision An Investor Must Make

We here at The Long Run Blog are not here to make predictions, give direct advice or be just another source of news.  However, we are here to add a rational, skeptical perspective at what goes on in our world of economics and finance.  I think it is important and hopefully helpful to add perspective to the recent events.

Investors are notorious for making exactly the wrong decision at exactly the wrong time.  Numerous studies of mutual fund, pension and brokerage accounts all confirm the same thing: people get greedy near the top and fear causes them to sell near the bottom.  The stock market is a gauge of human emotion in the short run, not the capital allocation machine it is in the long run.

Crisis Coverage: FDIC Rumors

It appears today’s market activity and the news regarding Merrill, Lehman and AIG has spiked an interest in my earlier post about the safety of financial institutions.  I read on the tape today that one economist was emphasizing bank failures and the possibility of the FDIC running out of the reserves used to insure deposits up to $100,000.  Let us examine this possibility from a rational perspective:

What a day!

1:19pm ET: As you might guess, I am extremely busy monitoring the markets today, but I wanted to drop a quick note to say that so far, action on Wall St. is much more orderly and contained that one would have expected given the news over the weekend and the foreign markets overnight.  Simply put, Wall St. is fearful, but not panicky (yet) over what happened.  What happened?  Lehman Brothers filed Chapter 11 and no longer exists; the rest of Wall St. must sort out the damage from counterparty risk and trade to replace lost or illiquid bets held at Lehman; Merrill Lynch will become part of Bank of America; and AIG is on the ropes.  AIG’s situation is the most difficult to assess and also potentially the most impactful given it’s $1 trillion balance sheet.  More thoughts on the day’s events to come later.