The Upsides of Market Turmoil

Why gloom can be good.

By SHARE

Funny thing about Wall Street: Good news and bad news are often the same thing.

For every seller there's a buyer, and when one person is losing money, somebody else is usually making it. Even the most dismal economic news can send markets higher, if it means the Fed will cut rates or some other relief is imminent.

The worst market plunge since the 9-11 attacks is hardly cause for relief, and the collapse of storied companies like Lehman Brothers and AIG makes it seem like any company could tumble. But there's some good news mixed in with all the gloom. You might need a microscope to see it, but it's worth taking a look:

The Lehman bankruptcy. The bad: It wasn't inevitable that the 158-year-old brokerage firm would have to declare Chapter 11, but unrealistic hopes of a white-knight rescue or a government bailout led CEO Richard Fuld to hold out for a deal that never materialized. Lehman's demise has triggered a new financial crisis bordering on panic. Just what we needed.

The good: Wall Street now knows without a doubt where the government stands: Bailouts are out of the question unless they deeply threaten the entire financial system. Any troubled firm now knows to look for another way out. Luckily, no Wall Street bank seems to be in such dire condition as Lehman. And severe market conditions will make many companies stronger. "Investors will know that companies that make it through this period are baptized by fire," wrote analyst Conley Turner of the research firm Wall Street Strategies.

The ugly: Most of Lehman's 25,000 employees will lose their jobs. Bankers are people, too. With disposable income to spend.

Merrill Lynch's disappearing act. The bad: Something's terribly wrong when one of Wall Street's biggest firms gets folded into another bank, literally overnight.

The good: Merrill CEO John Thain learned fast from the Lehman debacle. Instead of presiding over a slow-motion suicide, Thain sold his company while the winning bidder, Bank of America, was still willing to pay a decent price. That prevented yet another nightmare on Wall Street.

The ugly: Bank of America, one of the few big banks that are in decent shape, sure has its hands full.

AIG's meltdown. The bad: For decades, insurance companies were nearly as lucrative as the U.S. Mint, taking billions in upfront premiums and earning surefire returns through predictable investments. So what gives? AIG's predicament proves that bad mortgage-backed securities, the bane of the entire economy, are as toxic as ever.

The good: AIG has to solve its own problems, more or less, since the government took a pass on this tar baby, too. Yet another reason for all other companies to behave less recklessly.

The ugly: A rare deal with the state of New York allows AIG to fund current operations by tapping into assets set aside for policyholder claims. If AIG can't pay out future claims, New York taxpayers and potentially the whole insurance industry could get saddled with the bill.

The Fed's mixed signals. The bad: The Federal Reserve set a risky precedent by taking over $29 billion worth of troubled securities from Bear Stearns in March. But it slammed the door when Lehman was in similar straits, confounding the markets with mixed signals. "In retrospect, I think Bear will look like an anomaly that didn't have to happen," says David Beim, a Columbia University finance professor.

The good: The Bear Stearns collapse happened rapidly, over just a few days, and the Fed probably took the most conservative course it could by intervening. Lehman's demise played out over months, giving the Fed more room to consider options. Evidently it concluded that the financial system could survive another big financial collapse. That should make us feel a bit better. Right?

The ugly: If not for the Bear precedent, Lehman might have taken a different course and survived in some form. But let's not call the Fed an enabler.

The market plunge. The bad: It's a lousy day when shareholders lose a combined $700 billion of value. And it's shaping up as an awful year, with the Dow off 28 percent so far.

The good: The Fed now seems likely to abandon its hold-steady position on interest rates and start cutting. Businesses, home buyers, and many consumers stand to benefit.

The ugly: The government has used nearly every instrument available to goose the economy. If the patient gets much sicker, there won't be much treatment left.