In another sad twist on "The Ownership Society," the New York Times reports that the Fed now has warrants for 80% of AIG in exchange for an $85 billion loan. In the ongoing struggle for the soul of Ben Bernanke, "Damned if he does" is leading "Damned if he doesn't" by a score of 3 to 1. In truth, I think the real motivator is this sentence:
Of the $441 billion in credit default swaps that A.I.G. listed at midyear, more than three-quarters were held by European banks.
As with Fannie and Freddie, losing face internationally is just a whole lot worse than losing it within your own borders, particularly if you are a large debtor nation.
When push comes to shove
When push comes to shove Republican administrations don't believe in the Laissez Fairy.
Nationalization of private business
Fiscal responsibility
Cut spending
Balance budgets
Free market
Free trade (no steel tariffs)
They act the opposite of everything they claim to favor. What new wonders could John (don't know much about the economy) McCain and Phil (Enron) Gramm bring to our government? "Drill, drill, drill" reminds me that President McCain might feel like 4 years in the Dentist's office.
Evidence vs. Faith
Bakho, it's more interesting to me why so many people who believe in your list of formerly Republican values don't recognize that their party has left them behind. I can't prove it, but it seems consistent with our culture's general aversion to evidence. When I present "right wing" voters with a simple, clear fact (for example, the president and republicans had control of the government for 6 years, and we went from a big surplus to a big deficit) the responses I get are often pathetic non-sequitors ("Nancy Pelosi has a pro-gay agenda!" "IRAQ/IRAN/9-11/SAFTEY/TERRORISM all liberals are traitors!"). I see the same behavior in the other direction, of course, it's a general pattern.
It's really important for the grown-ups to take back the debate, and to consistently call out rhetorical sins. We must recapture the notion that wise and smart people (not elites, normal people with common sense) change their conclusions when presented with new facts. The examples they see (TV pundits) are paid to maintain their farcical positions no matter what. They are not role models, they're a clown show...and we should no more emulate them in a political debate than we should put on a red nose and squirt our friends with water at a cook-out.
More to come
Morgan Stanley now under attack.
SEC finally put some naked shorting rules in today. Maybe too late.
Hanging is too good for Cox.
Opinions vary on why Cox should be hung
Michael Lewis (of Liar's Poker fame) names Cox as his #1 (identifiable) culprit in all this -- for harassing the short sellers who were trying to get the truth out about the likes of Lehman Bros. Thus keeping the market from recognizing their real situation until it was too late.
~~~~~~~~~
Blame? Start Here
...
1. Christopher Cox.
... He went as far out of his way as he could to enable the brokerage firms by harassing the small group of informed financial people who have been trying to tell the truth to the markets: the short sellers.
They bet against the stock price of a company and so have always had a bad reputation with the public. But in this case, they are the closest thing we have to heroes.
A man named David Einhorn is a case study. He runs a hedge fund called Greenlight Capital, which sells short some stocks and buys others. That is, he doesn't just bet against companies, but for them, too.
Still, for some time now, he's been standing up in front of large audiences, announcing that he was shorting Lehman Brothers stock, and then explaining in great detail its dubious accounting practices.
The SEC responded by demanding to see his firm's e-mail, hinting darkly that he was part of some conspiracy to drive Lehman Brothers out of business, and generally making him feel that he'd pay a price for telling the truth.
Christopher Cox is probably a nice man who has no real idea what just happened. But for the way he treated people with the nerve to speak the truth to power, you should feel free to blame him anyway....
[NY Post].
FWIW
Another angle on it
I'm not a big fan of Cramer (his stock picks are worthless), but he's had it right on the macro level for a long time
http://www.youtube.com/watch?v=M7QsQ4VVCNI&eurl=
Jim Glass, Was your title
Jim Glass,
Was your title some sort of pun?
(sorry, couldn't resist)
More on lax SEC regs (leveraging) that caused problem
http://www.nysun.com/business/ex-sec-official-blames-agency-for-blow-up/...
Allowing the big five investment banks to leverage 40:1 was a big mistake (2004 SEC rule change)
God help us
Goldmann Sachs taking a huge hit right now.
SEC needs to halt trading and give these companies time to reorganize, find international funds, whatever. These guys have to scramble to meet on weekends to hammer out deals that would normally take months. They can't even react.
COX, HALT TRADING NOW!
What a bunch of idiots. Oh my God, they'll ruin all of us.
Landslide for Obama.
You can talk all you want
You can talk all you want about the Republican Party abandoning it principles, but the Feds did the right thing here (even if it came a little late). The issue is a liquidity trap. If you don't bail this firms out capital will disappear, and you'll have a monetary contraction, unemployment will be way up, interest rates will go way up, and you'll get a replay of the Great Depression. The way to get out of this is more inflation to stop a liquidity squeeze. I'm a bit surprised more people aren't criticizing Bernanke for not cutting rates yessterday particularly after consumer inflation has declined.
Republican Principles
Of course Republicans are forced to violate their principles. Republican Principles got us into this mess. Republican principles are not sustainable and do not work in the long run. At some point, letting the wealthy campaign donors do WTF they want to the rest of us will fail. Corporate predators wanted no regulations and they reaped chaos.
Bush is a total failure. This Fall has taken Bush down to 43/43. McCain might be even worse and push Bush out of the cellar. More of the same is not the answer. Firing people left and right will not fix the problem. McCain is economically clueless. His economic advisors are social parasites like Phil (Enron) Gramm and Carly (Golden Parachute) Fiorina. Listening to McCain's angry outbursts is a turn off. Who wants to work for a guy like that? The economic burdens will fall on the young. Get the old guy out of the way and let the next generation repair the damage.
Agree with Robert
Some bailout has to happen or we'd be in deep doo-doo ala Great Depression with horrible unemployment. Injecting liquidity is the right thing to do . . . Bernanke knows it and has said as much many times in the past.
The problem is balance . . . how much and who and working the deals to make the banks cooperate (not freeze up lending). Right now everything is in knee-jerk reaction mode. If trading in financials were halted for, say a week, the majors could get together and work this out (and this includes bankers from Europe and Asia).
As it is the train wreck continues day after day . . . just not a good way to solve the crisis.
Why Fed must inject liquidity -- the paradox of deleveraging
I think McCulley does a good job of putting into laywoman's terms ;-) why we have to do these bailouts. Massive deleveraging (what the banks are doing right now) leading to asset deflation is a negative feedback loop . . . which of course means it leads to more severe asset deflation if it isn't addressed by someone countering with leveraging (the government in this case) . . . so the bailouts are necessary right now.
Read the whole thing.
http://www.pimco.com/LeftNav/Featured+Market+Commentary/FF/2008/GCBF+Jul...
Policy Makers Working Hard Tonight
Looks like we'll get a temporary ban on shorting, similar to what UK did today.
The seem to be considering an RTC type entity to take on the bad debt . . . announcement from Pelosi, Bernanke, Paulson tonight.
Finally some movement and announcement from trusted sources (Pelosi, Bernanke, Paulson) . . . good start!
Injecting liquidity is the right thing to do . . . the best way to prevent Depression 2.0.
"Interesting times" abroad too
"losing face internationally is just a whole lot worse than losing it within your own borders"
Not just in the US.
With all of the action on our financial markets, nobody here's noticing what's happening in Russia -- still a fairly significant place, with those 15,000 nuclear weapons -- where they have no subprime loan or CDOs at all!.
Say "oil bubble bursts". And also, international investors apparently didn't like the Georgia adventure.
Their financial markets have been closed for two days now, their banks are going bust, the gov't is pouring money into the big ones that haven't gone bust yet.
The ruble-denominated Micex Stock Exchange suspended trading indefinitely at 12:10 p.m. after its index plunged as much as 10 percent within an hour. The benchmark fell 17 percent yesterday...
Chris Weafer, chief strategist at Uralsib investment bank: "We’re in completely uncharted territory where the prevailing emotion is of fear and numbness. No one knows where this could stop"....
The Finance Ministry said it was increasing liquidity for the country's three largest banks, raising lending to 1.12 trillion rubles ($44.9 billion). The country's top banks — Sberbank, VTB, and Gazprombank — will be loaned federal funds for a minimum of three months, the ministry said.
Considering the size of the governments, that's a lot more money to them than it is to us.
foreign investors have pulled at least $35 billion from the nation's stocks and bonds since the five-day war in Georgia last month ... Production of crude oil, the government's chief source of revenue, has started to decline even as the price of oil has fallen by a third ... the inflation rate advanced more than expected in August to 15 percent... [combined soruces]
Interesting times all around.
Yes, interesting times
Macke, CEO of Morgan, called for action from Cox. Also CEO of Goldman Sachs . . .says naked shorting is hurting their stock and has called on Cox to do something. Ironically the CEOs of these firms are now calling for the same reforms that investors (including me) have been screaming about for over a year.
Cox is incompetent.
Apparently there is an emergency meeting of SEC going on right now. Washington Mutual now up for auction.
Anyway, we were warned about Cox back in 2005.
Prescient Article from 2005:
http://www.businessweek.com/magazine/content/05_26/b3939126.htm
Cox's SEC: Investors Beware
The new Securities & Exchange Commission chairman seems likely to undo his predecessor's legacy of toughness
It has been less than three years since the enactment of the Sarbanes-Oxley Act and the appointment of William H. Donaldson as Securities & Exchange Commission chairman combined to help restore investor confidence in U.S. financial markets. That's why President George W. Bush's choice of Representative Christopher Cox (R-Calif.) to replace Donaldson is such a shocker. A conservative critic of aggressive market regulation, Cox seems likely to undo Donaldson's reforms even as still-fragile financial markets struggle with the debt overhang, rising interest rates, a possible housing bubble, and the growing U.S. dependence on foreign capital. The gutting of the SEC certainly would make Wall Street insiders happy, but how can the White House be so reckless about something so critical?
In the words of Dr. Samwick
http://www.businessweek.com/magazine/content/05_26/b3939126.htm
Read the whole thing.
Mom, you're right on one out of two.
Without going into the goods and bads of shorting per se, about which I am agnostic, it's very clear that what killed the firms that have gone under was not any sort of mob attack by short sellers, but their lack of sufficient capital to support their liabilities.
Look at the recent "Demise of AIG" story in the WSJ. What put it under was that when they thought they had a deal worked out to guarantee it had sufficient capital to survive, they discovered -- on Sunday, in one single day! -- another $20 BILLION in liabilities they had overlooked! And, oh yeah, before that AIG had somehow seriously underestimated the credit lines it would need in its risk analysis projections of the scenarios where its investments went bad.
That is, management sorely underestimated what it would need to cover investments that might go bad -- and then happily discovered $20 billion of new bad investments. Short sellers had noting to do with it.
End of AIG.
If my company has capital sufficient to cover its liabilities, the "shorts" can knock its price down to 5 cents and it will still be in business -- and long before that it will become a strong "buy" ... heck I'll be buying it myself hand over fist, and the shorts will get killed.
The only way the shorts can kill me is if they are right that I don't have enough capital to cover my liabilities -- and if they are, and I know it, you can bet I will be screaming bloody blue murder about those evil shorts raping and pillaging the market, and be wanting Cox's head on a plate, and demanding the uptick rule and all the rest -- but my motive will be ... self-interest.
In all this, Goldman's stock has never gone below the 100s, because it got rid of the bulk of its toxic investments early and has ample capital to carry the rest. (Apparently.) Buffett runs an insurance company much like AIG, but nobody's shorting him -- for some reason nobody thinks he's likely to discover $20 billion of previously uncounted liabilities in ONE DAY. Nobody's shorting Dimon's bank, etc.
Besides, banning shorting is as futile as banning margin purchases -- even if it's technically forbidden to execute them explicity, they are still easy to execute in substance with a little bit of financial engineering, so everybody winds up in the same place anyhow (as Tyler Cowan notes).
Let me put it all in a nutshell: What's been going on is a credit crisis, not a stock crisis, so making like short sellers are to blame for what's been going on by moving stock prices is bogus. The shorters here are just the whippin' boys, they're just the bearers of bad tidings whom everybody wants to shoot for it.
Where you were right was with ...
Allowing the big five investment banks to leverage 40:1 was a big mistake
... that's much more on point as to the substance of the matter.
The innocent are taken down with the guilty
"t's very clear that what killed the firms that have gone under was not any sort of mob attack by short sellers, but their lack of sufficient capital to support their liabilities."
SEC just implemented a shorting ban for 799 companies. I'll never believe that all 799 lack sufficient capital to support their liabilities (if that's the case we're in big trouble). For many of these firms the problem is indeed a "mob attack" . . . they are being taken down only because they exist in the same sector as the bad ones.
And that's why SEC implemented the ban . . . as did UK. SEC recognized the damage being done to good, solvent institutions . . . the shorts didn't care about the quality of the balance sheets on each company but simply creating downward moment to create trading profits. The market can behave illogically during turbulent times, and this is what was happening. Fortunately SEC recognized the problem and acted.
But the solvent don't go down with the insolvent
"It's very clear that what killed the firms that have gone under was not any sort of mob attack by short sellers, but their lack of sufficient capital to support their liabilities."
SEC just implemented a shorting ban for 799 companies. I'll never believe that all 799 lack sufficient capital to support their liabilities
And well you shouldn't. Warren Buffett's Berkshire Hathaway is on that list. Hundreds of other equally safe and sound firms are too.
The SEC is well known for acting in response to politics, and to pressure from those whom it regulates -- permitting 40-1 leverage and all for the banks, for instance (on Donaldson's watch, not Cox's). In the midst of a presidential election, when it is getting big-time poltical heat from all sides, and with those whom it regulates screaming, that's of course going to be more true than ever. Not less true! That's why the sudden ban on shorting. It's responding to political pressure like it always does.
That doesn't mean the response is any more constructive than the one to that lead it to allow 40-1 leverage.
The WSJ reported today that as of three days ago, less than 3% of Morgan and Goldman shares were sold short. Do you really believe these stocks were driven down so much by that less than 3% short?
"the shorts didn't care about the quality of the balance sheets on each company but simply creating downward moment to create trading profits."
The shorts most definitely care about having to cover their short positions, and if they short a stock to below its true balance sheet value they can get killed doing so. Because that's where the value of the stock is going to wind up in the end. Shorting is a high-risk gambit.
And just how do trading profits of investors hurt a profitable, soundly-financed business, anyway?
If you think shorting a stock is some magic way to make money by putting a sound business with sufficient capital to cover all its liabilities out of business -- so there really is no need to consider the business's balance sheet -- you are going to have to explain how that works.
Say a "short attack" succeeds in temporarily lowering a stock price. How does that kill a profitable business that can pay all its debts? And if the business doesn't die, what happens to the shorts when its stock goes back up to the normal market p/e?
E.g., could a cabal of plotting shorters get together and whip up a big profit for themselves by shorting Berkshire Hathaway (an insurer very much like AIM? But smaller than AIM, so maybe more vulnerable to attack?) "Ha! Ha!, Warren will never expect it!" Should Warren too be living in fear? If his balance sheet really doesn't matter, why not?
Look, the balance sheet counts plenty, nearly the whole game. This is a credit crisis, with firms that are leveraged 40-1 and that lack the balance sheet to cover their debts going down. The GSEs, Bear, Lehman ... they were all broke, not one was "sound". AIM went down because it found an overlooked $20 billion(!!) liability in one day! Not because anybody shorted it.
Firms with solid balance sheets are having no problem -- in fact, obviously, they are buying. (Warren's going on a binge!)
Hey, if shorters really don't care about the balance sheet, why did Einhorn and his Greenlight Capital choose to take so much political heat for giving all those public lectures about the dubious state of Lehman's balance sheet? -- which turned out to be entirely correct!
Blaming shorters for putting 40-1 leveraged firms that can't cover their debts out of business is like blaming greedy mortgage bankers for driving all those small family farmers bankrupt and off the land at the turn of the last century, as mechanization made small-farming obsolete. It was really popular to blame those greedy mortgage holders -- but they were merely the mechanism of what happened, not the cause. Same with the shorters.
(Bonus opinion from Prof. Bainbridge !)
Bailout nonsense
I am tired of reading that the Federal Reserve Bank had to bail-out or rescue some failing financial institution because otherwise our whole system will collapse. What utter bullcrap. We have a time-tested process for handling a failing business: bankruptcy court. If the failing institution has huge near-term debts, then the Federal Reserve Bank could guarantee those near-term payments (and get the money back after the bankruptcy process has progressed).
With the above system, the financial sector 'domino effect' is avoided, the failed institutions go into bankruptcy whereby smarter (or luckier) institutions can buy the assets, loans, and investments. The taxpayers don't get soaked, and the executives and the stockholders at the failed institutions don't get rewarded for bad decision-making.
we are about to see
See site below - we get labor market data tomorrow, and other action on Friday. We are about to see if "much worse" comes to fruition.
http://bloomberg.com/markets/ecalendar/index.html
http://www.nber.org/papers/w14221
Edward E. Leamer
NBER Working Paper No. 14221
Issued in August 2008
NBER Program(s): EFG
---- Abstract -----
Monthly US data on payroll employment, civilian employment, industrial production and the unemployment rate are used to define a recession-dating algorithm that nearly perfectly reproduces the NBER official peak and trough dates. The only substantial point of disagreement is with respect to the NBER November 1973 peak. The algorithm prefers September 1974. In addition, this algorithm indicates that the data through June 2008 do not yet exceed the recession threshold, and will do so only if things get much worse.
Well dang, McCain's in favor of firing Cox
http://campaignspot.nationalreview.com/post/?q=ODhlZTNlYjhiNjk3ZDI1Y2I3M...
He can't distance himself from the sitting administration fast enough. This is rather amusing.
And putting back the uptick rule
McCain is actually saying this . . . where was he when his friggin' Republican friend Cox repealed the rule a year ago??
What a piece of work. He must be reading my posts on this board ;-)
Stopped clock strategy
McCain has been spewing conflicting pronouncements on the economy all week. McCain must be using the stopped clock strategy. (The time is correct twice a day.) If you don't understand economics a few angry blusters and tirades make entertaining TV. Is McCain auditioning for extended appearances on SNL or running for president?
It will be interesting to hear what Bush says after his meeting with Ben Bernanke, Christopher Cox Henry Paulson, Edward Lazear, and Keith Hennessey
It will be interesting to hear what Obama has to say after his meeting with Paul Volcker and other economists.
What McCain has to say may be entertaining, but it is not enlightening.
Into the Valley of Death...
...rode the Great Barack. bakho, what, pray tell, qualifies former community organizer--for ACORN (the Prime Suspect in the Redlining Caper that is at the bottom of all this) no less--to be the better qualified Leader of the Free World?
His stint as a copy editor at a newsletter 25 years ago?
Simple, Patrick
He's not a Republican. Why don't you ask Bakho a hard question?
Where to start . . .
"Not less true! That's why the sudden ban on shorting. It's responding to political pressure like it always does."
If you believe that every action of the SEC is politically motivated then you likely have zero trust in the markets (and if this is true, none of us should have any trust in the markets -- their mission is to provide stable markets and protect the individual investor, not respond to politics). When Bernanke, Paulson, Cox, et al met in emergency session do you think they said, "Gee, what do we have to do to be politically right now?" Or do you think they said, "what is causing this, and what do we have to do to save the financial system?"
This is a crisis, and true patriots ask what must be done to save the system . . . and then they do it. And they base their decisions on sound evidence. Cox is taking a lot of heat, but he is not responding to it (for example the call for uptick rule reinstatement) . . . if he were politically driven we'd have the uptick rule back right now.
So if my argument doesn't fit your theory you wave your hand and say "it's just politics". Right.
"The WSJ reported today that as of three days ago, less than 3% of Morgan and Goldman shares were sold short. Do you really believe these stocks were driven down so much by that less than 3% short?"
A couple thing here. Short interest is not (was not, before the rule just changed this week) reported on a daily basis by huge funds -- it wasn't required. Short interest could swing widely on a daily basis and we'd never know because disclosure wasn't required. Secondly, it doesn't take much shorting to cause panic selling. Ask Cramer about how he used a few million dollars to short a stock in the thinly traded before-market session to create a panic. He's got a video out about it (on you tube). It doesn't take much at all to create the illusion . . . and there are other clever strategies used by shorts to push the herd into selling.
Don't know if you read another article I posted, but this is VERY important . . . bank stocks are uniquely vulnerable to collapse following bear raids for the reason Coffee mentions here . . . and that is the rapid deterioration of their balance sheets causes immediate downgrades and loss of business which dominoes into collapse:
""Bank stocks are a uniquely exposed industry to naked shorting," a professor of law at Columbia University, John Coffee, said. "In most other markets, if a company's stock price declines it doesn't have any operational impact. If I am a bank, however, and my stock price declines, the credit ratings agencies put me under review and counterparties who engage in trading with me back away." This leads to a loss of confidence by the markets and a possible liquidity crunch, much like the ones that felled Bear Stearns and Lehman Brothers, and might have toppled Merrill Lynch if not for the deal with Bank of America."
You say that the shorts won't take the risk of shorting below a company's balance sheet value. I say that in a market collapse situation, such as we had earlier in the week, balance sheets be damned. Every stock is falling (every company, good and bad both -- when they raid the house they get everybody). They don't discriminate . . . they are looking for quick profits and it's easy to take them all over the board. It's like falling off a log. Pick a company, short it, take your profits by the end of the day. In an electronic age it's easy and there are thousands of housewives doing it (some in places like Asia). Do you think they look at each company's balance sheet when they see an extreme momentum trade? Heck no, they just pile on, for fun and profit!
"And just how do trading profits of investors hurt a profitable, soundly-financed business, anyway?"
See above quote from Coffee . . . when a bank's stock price is driven down it affects their ratings. When ratings are downgraded they must raise more cash (capital) for collateral. When that happens they don't lend (hoard their cash). When they hoard we have what's called a "credit crunch". If they can't raise the capital they are in trouble.
"Look, the balance sheet counts plenty, nearly the whole game. This is a credit crisis, with firms that are leveraged 40-1 and that lack the balance sheet to cover their debts going down."
Yes, definitely there are banks in trouble, those who were irresponsible, etc. But the average joe can't figure out which ones are good and which ones are bad. There were runs on banks (even little local banks) in the past week which had no basis. But they happened anyway. Same thing was happening with bank stocks, and it had to be stopped. SEC is doing that with the short ban.
Berkshire Hathaway represents one end of the spectrum (the name Buffet generates trust and respect). Lehman is the other (Einhorn et al made sure we all knew that Lehman was junk). But there are many banks in between, names that people aren't sure about, some good and some bad, but all vulnerable in the present environment. They had to be protected.
If you asked me today which banks had bad balance sheets I might be able to name four or five (I don't read balance sheets all day long). The rest I'd say, "Heck, stay away from them all, because they might be toxic". Of course I'd be lumping some good ones in their with the bad, but why take a risk . . . if I owned stock in any I'd sell it all. Dumping the baby out with the bathwater? Yes. But that's what was happening.
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