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Letters & Theses

John Hussman · Hussman Funds

Four Magic Words: "We Are Providing Capital"

John Hussman's October 2008 market comment on recapitalising the banks

Published 13 Oct 2008Investor memo · Investment

What to notice

  1. 1

    Hussman argues that buying troubled assets improves a bank's capital only if the Treasury overpays, and proposes preferred stock or a senior "super-bond" instead.

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Why read it

A policy argument written in the worst weeks of 2008, explaining why buying bad assets does less for a bank than giving it capital, and how a hedged fund responds to a panic.

About this commentary

John Hussman published this weekly market comment on 13 October 2008, in the weeks after Lehman Brothers failed and Congress passed the bank rescue. Hussman ran the Hussman Funds and had warned for years that stocks were overvalued, which he uses to give weight to a change of view: by his measures, the market had become undervalued.

The comment makes three arguments. It says much of the panic came from fear rather than from losses most people had experienced. It proposes that the Treasury should provide capital to banks directly, in a form senior to their bondholders, rather than buy their bad assets. And it suggests a change to bankruptcy law that would let judges reduce mortgage principal in exchange for a share of future price appreciation. It ends with notes on how the author's own fund was reducing its hedges as prices fell.

Themes

  • crisis
  • banking
  • regulation
  • valuation
  • market cycles

L3VLUP does not host this document. It belongs to Hussman Funds; the notes above are L3VLUP’s reading of it.

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