Tick Talk

“The U.S. government intends to exit its support of AIG over time in a disciplined manner consistent with maximizing the value of its investments and promoting financial stability.”

[begin sarcasm]
“This is the best! We now have key to a high probability/high profitability/low risk trade on AIG! If we buy right now, we will be following ”the big money” in to a stock that is sure to go up! After all, its success is now implicitly backed by the U.S. government - just like Fannie Mae and Freddie Mac! All that we need to do now is to get out when the Fed gets out!”
[end sarcasm, begin criticism]

The exit strategy proposed is the most asinine that I have ever seen. It is called a “discretionary exit” and it is the same one that I have witnessed fail THOUSANDS of times. As a former investments educator I knew that a student was doomed when this conversation played out:

“When will you exit the investment?” I ask.
“When I’m making money.” they respond.
“What if the company goes down?” I counter.
“Then I’ll sell it.” they say.
“What will you use as the indicator and signal to exit for a loss?” I ask.
They get very quiet and respond “I don’t know.”
“That’s one problem.” I say.

Then…

I would then ask “What if it goes up?”
They would say “Then I’ll sell it.”
I would continue “What if it only goes up a penny? What if it goes up a hundred dollars? What if it goes up and then goes back down below break even? What will you use as the indicator and signal to exit for a profit?”
They would get very quiet and say “I don’t know, the more the better…”

Bottom line: All risk takers must plan their trades and trade their plans. All risk takers must comprehensively plan for every contingency or they are more susceptible to fallible decisions due to the emotions that cloud good judgement.

How many Fed Chairmen have espoused the maxim that “Nobody can time the market.”? And yet in the closing line of the plan for AIG, they have the arrogance to assume a discretionary exit, essentially, “When the time is right.” and “When they feel like it.” This is a recipe for disaster or domestic equity dominance by the U.S. Government. Pick your poison.

I don’t care if they Fed felt forced into the trade, if they can’t articulate an exact exit, who will force them out? It certainly won’t be AIG. 
[end criticism] 

[begin dark, cynical, German rap song "Exit Strategie"]

[end ranting article]