Okay, it was kind of funny when the SEC put restrictions on "naked" shorting for a few select financial institutions, but now it looks like they are trying to put an end to nearly all shorting of the finance industry to maintain a government mandated artificial elevation of asset prices—and this is just getting annoying. Today, Wall Street has become a fine example of a socialist economy.
ADDENDUM [10/1/08]: The ban on shorting was extended today by the SEC until October 17.
UPDATE [1/4/09]: In a nice validation, Cox, chairman of the SEC, expressed regrets over the shorting policy, and admits that on reviewing the data it had unintented consequences. Faced with similar circumstances he says he would not be inclined to repeat the action again.
UPDATE [3/26/09]: Recently, limits have been placed on shorting on down ticks, but you can still short on up ticks. Oh brother!
Friday, September 19, 2008
I'm Getting a Bailout
For probably similar reasons that people bungee jump and eat puffer fish, through all of this I've been keeping a money market account at Washington Mutual. It's a small fraction of the savings I have, but the amount is not trivial either. The branch is right down the street from me, so I went there asking for an FDIC-insured CD, but they pushed a money market on me instead—showing me CD rates that were close to a half a percent and a money market rate closer to 3%. Suspicious, I querried about the possibility of losing money but they insisted everything was insured and it was no different than a CD, and could pull out my money whenever I wanted. So I bit. It's been working out fine, except one time after making a deposit two or three weeks ago the teller machine refused to let me make a withdrawal.
Without an exhaustive bailout everybody knows Washington Mutual is teetering on a seizure by the FDIC, which doesn't worry me particularly. I figure a bank going down sooner in this mess is better than one going down later. Still, without the sudden and rather unexpected passage today by congress of a $50 billion "backstop" for institutional money market funds, I'm wondering if I might have lost some money in all this.
Without an exhaustive bailout everybody knows Washington Mutual is teetering on a seizure by the FDIC, which doesn't worry me particularly. I figure a bank going down sooner in this mess is better than one going down later. Still, without the sudden and rather unexpected passage today by congress of a $50 billion "backstop" for institutional money market funds, I'm wondering if I might have lost some money in all this.
Thursday, September 18, 2008
Bush Saves the Day
After feeling a stone's throw—a long one—from almost being mainstream this morning, President Bush comes out and says he will use my tax dollars to keep asset prices excessively high and, in the case of home ownership, out of reach of new buyers, unless I want to take out a toxic loan where the banking industry benefits from the high interest payment I would be forced to endure, not to mention high taxes for state coffers, and the banks will expect a bailout if I run out of money in all this. Put briefly, I feel entirely disconnected from the societal consensus and contrarian harmony has been restored.
I'd be distressed if I weren't convinced he is just speaking irrelevant gibberish that is neither here nor there in terms of the inevitable price corrections and return to economic equlibrium. The Feds injections of liquidity is just a temporary bandaid which, like all credit, will have no effect on money supply if viewed over the full course of the loan. If they really want to keep prices elevated they are going to have to print.
But the market seemed reassured by Bush's speech and abruptly shot up by 400 points, erasing yesterdays losses.
I'd be distressed if I weren't convinced he is just speaking irrelevant gibberish that is neither here nor there in terms of the inevitable price corrections and return to economic equlibrium. The Feds injections of liquidity is just a temporary bandaid which, like all credit, will have no effect on money supply if viewed over the full course of the loan. If they really want to keep prices elevated they are going to have to print.
But the market seemed reassured by Bush's speech and abruptly shot up by 400 points, erasing yesterdays losses.
The Contrarian's Fear
From the Fed: "The Federal Open Market Committee has authorized a $180 billion expansion of its temporary reciprocal currency arrangements (swap lines). This increased capacity will be available to provide dollar funding for both term and overnight liquidity operations by the other central banks." By my math, the amount of dollars that was available by the Fed for short term loans to banks and investment banks was around $300 billion through TAFs, TSLFs, and PDCFs. Now, with this, it sounds like close to half a trillion is available to the financial industry through cycling short term bonds originated by the Fed.
This is a response to the turmoil in the wake of Lehman's Bankruptcy and AIGs de facto conservatorship by the Fed, with the DJIA dropping 500 points on Monday and 400 Wednesday, with a modest gain on Tuesday—plunging it well into 10,000 territory for the first time in years. Treasury bonds and gold rallied, such that investors are now taking three-month treasuries with interest payments approaching 0%. This is a highly defensive position. Dollars are in high demand. Institutions are running to treasuries, gold, and cash. The TAF expansion is a response to a scarcity of dollars. Banks worldwide are holding on to dollars and reluctant to lend to one another.
Which raises that uneasy tingle in the back of any contrarians mind when the sheeple start to agree with him, and the position he holds shows signs of becoming mainstream. Lately, the U.S. dollar has been strong against all investment classes: assets, securities, and commodities, and even the Euro. Dollars are a hot item.
This is a response to the turmoil in the wake of Lehman's Bankruptcy and AIGs de facto conservatorship by the Fed, with the DJIA dropping 500 points on Monday and 400 Wednesday, with a modest gain on Tuesday—plunging it well into 10,000 territory for the first time in years. Treasury bonds and gold rallied, such that investors are now taking three-month treasuries with interest payments approaching 0%. This is a highly defensive position. Dollars are in high demand. Institutions are running to treasuries, gold, and cash. The TAF expansion is a response to a scarcity of dollars. Banks worldwide are holding on to dollars and reluctant to lend to one another.
Which raises that uneasy tingle in the back of any contrarians mind when the sheeple start to agree with him, and the position he holds shows signs of becoming mainstream. Lately, the U.S. dollar has been strong against all investment classes: assets, securities, and commodities, and even the Euro. Dollars are a hot item.
Wednesday, September 17, 2008
Another One Bites the Dust!
Okay, here's the deal: your house is burning down. While that is happening, your fire insurance company is teetering on the edge of bankruptcy. If that were to happen, you might be tempted to call your congressman to get a little government assistance to the insurance company—you know, for the "public good"—at least until your business with them is settled.
The same thing is happening with AIG, except that the banks are you, the house burning down is widespread defaulting on mortgage securities, and AIG is the bond insurer of the securities the banks are holding. As the bonds fold (issued through Lehman for example), the banks want their reimbursement.
So the Fed puts $85 billion of taxpayer-funded treasury bills on the line to underwrite AIG, to make sure these swaps are covered. AIG cedes its control to the Fed, who now has a 79.9% stake in the company, and will sell off its performing assets... pretty much the rest of its insurance business, to cover this "bridge" loan. So the plan goes. Almost certainly, stock in the company as of the opening bell is worthless.
Some perfunctory motions were made to have private industry cover the AIG bailout, but there were no serious takers. The Treasury Department briefly pondered another conservatorship, but Fannie Mae and Freddie Mac required Congress to enact, which was easily piggy-backed on the mortgage rescue bill. For AIG this would take time, which it doesn't sound like it had. So the Fed was left holding the bag—or more specifically, taxpayers were.
My earlier prediction that the conservatorship of Fannie Mae and Freddie Mac was sufficient to cover the bailout fell squarely on its rear end less than a week later. You win some, you lose some. Time was when $85 billion was a lot of money. Now it's just pocket change casually thrown around at bankers whimsies.
ADDENDUM [10/8/08]: AIG takes that bailout money... and parties! Days after the bailout, AIG execs celebrated with a $443,343.71 "conference" at the St. Regis Resort in Dana Point, CA. They are planning another little gathering for their brokers in Half Moon Bay this weekend. [10/15/08]: Oh my goodness gracious they just won't stop!
The same thing is happening with AIG, except that the banks are you, the house burning down is widespread defaulting on mortgage securities, and AIG is the bond insurer of the securities the banks are holding. As the bonds fold (issued through Lehman for example), the banks want their reimbursement.
So the Fed puts $85 billion of taxpayer-funded treasury bills on the line to underwrite AIG, to make sure these swaps are covered. AIG cedes its control to the Fed, who now has a 79.9% stake in the company, and will sell off its performing assets... pretty much the rest of its insurance business, to cover this "bridge" loan. So the plan goes. Almost certainly, stock in the company as of the opening bell is worthless.
Some perfunctory motions were made to have private industry cover the AIG bailout, but there were no serious takers. The Treasury Department briefly pondered another conservatorship, but Fannie Mae and Freddie Mac required Congress to enact, which was easily piggy-backed on the mortgage rescue bill. For AIG this would take time, which it doesn't sound like it had. So the Fed was left holding the bag—or more specifically, taxpayers were.
My earlier prediction that the conservatorship of Fannie Mae and Freddie Mac was sufficient to cover the bailout fell squarely on its rear end less than a week later. You win some, you lose some. Time was when $85 billion was a lot of money. Now it's just pocket change casually thrown around at bankers whimsies.
ADDENDUM [10/8/08]: AIG takes that bailout money... and parties! Days after the bailout, AIG execs celebrated with a $443,343.71 "conference" at the St. Regis Resort in Dana Point, CA. They are planning another little gathering for their brokers in Half Moon Bay this weekend. [10/15/08]: Oh my goodness gracious they just won't stop!
Tuesday, September 16, 2008
Fed 2% Pause Continues
The FOMC kept overnight rates at 2% today. The Fed has previously suggested its anticipation that they would hold at 2% throughout this year and slowly increase starting next year. Given recent market turmoil, general expectations shifted toward the possibility of a cut. I wouldn't have been surprised if they had cut, and if current deflationary trends continue I anticipate they will cut, but for once we see a hint of backbone against the interests of Wall Street. Here's my thinking: those who are going to be saved—i.e. the major banks—are already in the lifeboat. Those not part of the old boys network will be left to drown, starting with Lehman. AIG remains to be seen.
AIG Woes
The latest Wall Street firm to be headlining the financial news is American International Group (AIG), the largest insurance firm in America that is involved with life insurance and credit default swaps, as well as car insurance that I've been hearing about on the radio (they will come out and change a flat tire for me), and generally a broad range of insurance products. Their stock value (AIG) has followed almost exactly the pattern of Fannie Mae and Freddie Mac, plateauing at just over $60 a share until late 2007, then a steady decline since to around $3 today. As usual, they have given us the song and dance about being "well capitalized" while scrambling for cash—to the tune of asking the Federal Reserve for a $75 billion loan.
Personally I cannot get excited about the downfall of an insurance company; they are the embodiment of the risk aversion seemingly inherent to American culture, if not human nature, that ultimately leads to the expectation that higher powers will fix everything that goes wrong. However, if AIG goes down, their involvement in credit default swap market will likely have diffuse implications in the ongoing financial turmoil.
Personally I cannot get excited about the downfall of an insurance company; they are the embodiment of the risk aversion seemingly inherent to American culture, if not human nature, that ultimately leads to the expectation that higher powers will fix everything that goes wrong. However, if AIG goes down, their involvement in credit default swap market will likely have diffuse implications in the ongoing financial turmoil.
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