Four at Four: Please Resume Your Normal Worrying

by David Gaffen

With the photo-ops, the handshakes, the forced smiles from leaders of opposition parties ready, Wall Street can go back to doing what it does best: Worrying about some other unknown problem somewhere out on the horizon. Thursday’s rally — sort of a “buy the rumor, buy the news” approach to the $700 billion bailout (a figure that was basically plucked out of a hat, as reported), and gives Wall Street enough cover to move ahead from here. That has already translated to a loosening in the Treasury market, where short-term debt yields shot up after days of pressure — the three-month note yield was lately at 0.75%, up from earlier in the day. “The alternatives seem pretty obvious and pretty bad — and there’s some comfort in that some progress is being made and it appeared to take some of the risk out of financials,” says William Rutherford, president of Rutherford Investment Management in Portland, Ore. There are, of course, massive logistical hurdles to implementing the U.S. Treasury Garbage Barge Trust, the least of which includes the value of the securities and which institutions will participate, and some are concerned that it may be all too much for the markets right now while still falling short of taking care of the issues. “There should be no illusion that the $700 billion estimate proposed by the Administration will be enough to end the debt crisis,” write analysts at Weiss Research. “There should also be no illusion that the market for U.S. government securities can absorb the additional burden of a $700 billion bailout without putting dramatic upward pressure on U.S. interest rates.”

Amid the euphoric reaction from the equity market, one notable financial name stands out as a result of its struggles. The nation’s largest thrift, Washington Mutual Inc., fell 22% Thursday, swimming against a current that the rest of the market surfed gladly. The ongoing expectation — realistic or not — is that WaMu will eventually find some kind of buyer, but such an acquiree may not include the entirety of the company, as investors might want to carve out the value and leave the rest (presumably to float on the garbage barge). Standard & Poor’s downgraded the company’s counterparty credit ratings Wednesday to triple-C from C, and lowered its preferred stock rating as well, citing the expectation that the holding company’s creditors might be at greater risk of default. The company has $14.4 billion of rated unsecured debt outstanding, and a sale of the assets at the holding company might not be enough to pay those off. Mr. Rutherford says the company’s fate is a stone in the market’s shoe. “WaMu is down substantially today while everybody else is up,” he says. “That’s got to get resolved. One would hope it’s in the process of resolving, but there doesn’t seem to be a lot of optimism about it.