Downturn Upside

Is the government privatizing profits and nationalizing losses?

Kung: There is real economic risk in this market. This is not the time to be too worried about “moral hazard,” which is the concept that the government will always be there to bail out excessive risk-taking. You have to take what Treasury Secretary Henry Paulson and [Federal Reserve Chairman Ben] Bernanke are saying at face value, that the larger risk will—absent a concerted government plan—create further market disruptions that could translate into larger costs to the taxpayer.

As a fixed-income strategist, which sectors of the market are you overweighting?

Kung: We like the credits of financial firms—the winners in this whole process, such as J. P. Morgan and Bank of America. We also like a variety of other non-Treasury securities, in particular commercial mortgage-backed securities. We think these securities have been unduly battered in this whole process and will do well when we see a sustained recovery in risk taking.

Do the markets need more regulation?

Kung: I think markets would welcome efforts to make transparent what has been so opaque. I would worry, though, if in the zeal of the aftermath of this period of market stress we go overboard and move into areas of oversight that end up having a chilling effect on healthy risk taking.