Good Layman's guide to the financial crisis

[tequila]

Naked shorters are not being punished by the market - their practices are being banned by the government.

[bourbon]

Naked short sellers hastened the collapse of fundamentally weak companies. The question that I think we should be asking is whether, in the long run, that is a bad thing. I don't think the answer is an obvious one and I don't think I know the answer. Would Lehman have come out of this situation intact if it could have bought a few more months of time? Or did the short sellers just rip off the band-aid and get it over with?

Its not up to the naked short sellers to decide. They fail to deliver, they are not investors, and they should have no impact. Maintaining this mechanism creates rampant opportunities for stock manipulation. This manipulation was rampant in the 90's in the microcap world, and it appears now to have been picked up by the hedge funds.

The Amr Elgindy case should show you the scope of this manipulation. His syndicate had 200+ members and counted a number of hedge funds amongst it. That was in 2002. Scratch beneath the surface in this case and you will also likely find more nefarious connections percolating on issues much more related to this forum.

Bloomberg TV Special Report on Naked Short Selling (2007)

Naked shorters are not being punished by the market - their practices are being banned by the government.

The ban expires on the 8th. We'll see what happens then.

[Schmedlap]

Its not up to the naked short sellers to decide.

Which "it" are you referring to?

Scratch beneath the surface in this case and you will also likely find more nefarious connections percolating on issues much more related to this forum.

Russian Sovereign Wealth Funds?

[slapout9]

OK Folks now here is a theory you may not have heard. The reason the financial markets are all messed up is because Iran is going Nuclear and there are no longer any safe places to invest so everyone is just piling up as much cash as possible. Here is link below to the blog where I saw this. scroll down to the post called "Reiterate", this is the second time he has posted this theory. If you read the guys bio he is not what I would call a flake since he helped start Mastercard some years back. Anyway what do ya'll think?

http://phillips.blogs.com/

[Ski]

Ridiculous blog.

The markets are tanking because there are $50-65 TRILLION in derivitives floating around, and no one knows what to do with that shadow market. The banks don't have any credit because this was all built off the accumulated debt of the American people, who thought they could all own their own houses despite not having anywhere near the assets to do so. The mortgages were shredded into nothingness, rebundled, and now they can't be tracked. The credit markets are dried up because most banks overleveraged themselves. There is over $2 Trillion in credit card debt in the US alone.

Now the solvent banks are getting top dollar for any credit they give out - as I said earlier in this thread, my old man is a CEO of a one billion dollar plus bank and he is now quoting ridiculous terms to his customers because they have no other place to turn to. He does business on four continents, so this is much more widespread than the US.

Iran going nuclear has nothing to do with this at all. Bizarre statement to say the least.

[bourbon]

Which "it" are you referring to?
If a company fails or not.

Again, naked short selling has about as much to do with short selling, as sexual harassment has to do with sex. Delivery failure is the crux.

Russian Sovereign Wealth Funds?

No, in the case of Elgindy it's terrorism. That avenue was not allowed to be pursued at his trial.


Fwiw, from Dick Fuld's testimony before the House Committee on Oversight and Government Reform today:

The second issue I want to discuss is naked short selling, which I believe contributed to both the collapse of Bear Stearns and Lehman Brothers. Short selling by itself can be employed as a legitimate hedge against risk. Naked short selling, on the other hand, is an invitation to market manipulation. Naked short selling is the practice of selling shares short without first borrowing or arranging to borrow those shares in time to make delivery to the buyer within the settlement period  in essence, selling something you do not own and might not ultimately deliver to the buyer.

Naked short selling, followed by false rumors, dealt a critical, if not fatal blow to Bear Stearns. Many knowledgeable participants in our financial markets are convinced that naked short sellers spread rumors and false information regarding the liquidity of Bear Stearns, and simultaneously pulled business or encouraged others to pull business from Bear Stearns, creating an atmosphere of fear which then led to a selffulfilling prophecy of a run on the bank. The naked shorts and rumor mongers succeeded in bringing down Bear Stearns. And I believe that unsubstantiated rumors in the marketplace caused significant harm to Lehman Brothers. In our case, false rumors were so rampant for so long that major institutions issued public statements denying the rumors.

Following the Bear Stearns run on the bank, we and many others called on regulators to immediately clamp down on naked short selling. The SEC issued a temporary order that went into effect on July 21 prohibiting "naked" short selling of certain financial firms, including Lehman, Merrill Lynch, Fannie Mae and Freddie Mac. This measure stabilized the share prices of Lehman Brothers and the other firms. However, this restriction was temporary, and on August 13 it expired after 17 trading days. History has already shown how wrong and ill-advised it is to allow naked short selling.

Many of the firms that have recently collapsed or have been forced into emergency mergers, takeovers, or government bailouts  Bear Stearns, Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, AIG  did so during the gaps of time in which there was no meaningful regulation of naked short selling. On September 15, when the market opened after the collapse of Lehman, naked shorts appeared to turn their attention to Morgan Stanley and Goldman Sachs. In the three days between the announcement of Lehman Brothers' bankruptcy and the SEC instituting an emergency ban on short selling, Goldman Sachs' and Morgan Stanley's share prices fell 30% and 39% respectively. None of this was a coincidence.

After seeing this stock price reaction in the week following Lehman Brothers' bankruptcy, the SEC, like the Federal Reserve, took immediate action to stabilize the system. On September 18, following the decision of the Financial Services Authority in the United Kingdom a day earlier, the SEC instituted an emergency ban and other restrictions on short selling financial institutions. In taking these steps, Chairman Cox explained: "Given the importance of confidence in our financial markets as a whole, we have become concerned about the sudden and unexplained declines in the prices of securities. Such price declines can give rise to questions about the underlying financial condition of an issuer, which in turn can create a crisis of confidence without a fundamental underlying basis. The crisis of confidence can impair the liquidity and ultimate viability of an issuer, with potentially broad market consequences." These new restrictions are set to expire no later than October 17. Permanent regulation of naked short selling is needed to prevent a similar demise for the firms that survived with the government's help.

[Watcher In The Middle]

Fix the Bailout to Help Homeowners - An Open Letter from Thomas Peterffy, Chief Executive Officer, Interactive Brokers Group

Dated: Friday October 3, 3:51 pm ET

GREENWICH, Conn.--(BUSINESS WIRE)--The following Open Letter appeared in Friday’s editions of the New York Times, Wall Street Journal and the Washington Post.

Even those political leaders that support the current bailout proposal don’t like it very much. The American people like it less. It creates a complicated bureaucracy, does not directly help homeowners and does not address the foreclosure crisis.

Amend the bill to allow the Treasury to provide direct mortgage assistance to all American homeowners.

If the Treasury were to pay the first $250 of every American’s primary residential mortgage each month for five years, the value of all mortgage-backed securities would rise immediately. The housing market would stabilize and the banking system with it.

The $250 monthly payment would be made to all homeowners who pay the rest of their monthly mortgage bill. It would help families and create a strong incentive for them to pay their mortgages.

Those homeowners behind in their payments could be given a window of time to bring their payments up to date and receive the subsidy retroactively for a specific number of months.

The program could be extended to current and future buyers with a declining subsidy as we go forward and further stabilize real estate markets.

Link To His Proposal

Opinions? The logic seems simple, and politically, it's going to come across as really appealing. But I've learned to look for the holes in these types of things, and the first one I see, which is a biggie, is that There has to be a hard and fast cap on the five year expiration - otherwise, it just becomes one big new added "entitlement".

[reed11b]

Link To His Proposal

Opinions? The logic seems simple, and politically, it's going to come across as really appealing. But I've learned to look for the holes in these types of things, and the first one I see, which is a biggie, is that There has to be a hard and fast cap on the five year expiration - otherwise, it just becomes one big new added "entitlement".

Looks like a temporary extension of the "bubble" to me. Allowing mortgages to be refinanced based on lower housing values if the market falls would help homeowners more, not great for banks, but reduced income would have to be better then "no" income (foreclosures). Cost the taxpayer less as well. Of course I'm as far from a financial SME as one can get, so...
Reed

[jmm99]

Forecasters see U.S. leading global downturn
IMF predicts credit crisis will cut world economic output sharply
AP
updated 2 hours, 12 minutes ago

WASHINGTON - The world economy will slow sharply this year and next, with the United States likely sliding into recession reflecting mounting damage from the most dangerous financial jolt in more than a half-century.

The International Monetary Fund, in a World Economic Outlook released Wednesday, slashed growth projections for the global economy and predicted the United States — the epicenter of the financial meltdown — will continue to lose traction.

"The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s," the IMF said in its report. ....

http://www.msnbc.msn.com/id/27083134/

The 10-year S&P chart (DJI would be similar) is of little comfort. It is hard to see a support level above 800 - it went through 1100 like a hot knife through butter. See attached.

[jmm99]

The S&P hit 843 and has rebounded over 950 (see attached). However, if you bring up today's 10-year chart, that chart looks no different from that in the previous post.

The 10-year chart shows a classic double top - in the jargon of technical analysis. The double top theory holds that a drastic drop from the last top will reach, or go below, the valley between the two tops.

That valley (approx. 800-850 from the 10-year chart) is a support level. Whether that will hold up cannot be predicted (IMO) by technical analysis. There is not enough data over a long-enough time.

So, despite the rebound, the stock market is still a dangerous place.

[bourbon]

Wall Street banks in $70bn staff payout: Pay and bonus deals equivalent to 10% of US government bail-out package, by Simon Bowers. The Guardian, October 18 2008.

Financial workers at Wall Street's top banks are to receive pay deals worth more than $70bn (£40bn), a substantial proportion of which is expected to be paid in discretionary bonuses, for their work so far this year - despite plunging the global financial system into its worst crisis since the 1929 stock market crash, the Guardian has learned.

Staff at six banks including Goldman Sachs and Citigroup are in line to pick up the payouts despite being the beneficiaries of a $700bn bail-out from the US government that has already prompted criticism. The government's cash has been poured in on the condition that excessive executive pay would be curbed.

Hat Tip to Bob O'Brien of The Sanity Check, who writes:

Let's face it, the same lying cheats who created the financial swindle of the century, via now worthless CDO and CMO products, who took out hundreds of billions of dollars in profits directly attributable to the creation of these instruments (a large number of which are likely worthless, as they are backed by non-existent mortgages or the same mortgages re-used countless times), created a crisis of their own devising (by shorting those same CDOs into the ground, thereby reducing the value of the collateral value, thus creating single handedly the "credit crisis"), after lobbying hard in 2004 to eliminate rules that barred the industry from eliminating reality-based loan loss reserves and levering up to dangerous levels, have put the pork to the nation's taxpayers yet again.

Never mind that the bailout plan isn't working. Credit markets are still locked up, because the recipients of the bailout aren't doing what they are supposed to with the money - lending it out. No, instead, they are holding on to it, which is sort of the same as saying the plan never would have worked given the character of those involved. But what are they doing with all the taxpayer money they are holding onto?

[slapout9]

The Beatles wrote a song about how we will pay for it...The Taxman.


http://www.youtube.com/watch?v=8y2XLIitX8o

[Schmedlap]

I found George Harrison's later work to be spot on for the current financial abortion.

http://www.youtube.com/watch?v=MOCBRkXlg-c

- time
- whole lot of precious time
- money
- whole lot of spending money

Those are not guarantees of a good outcome, but just what it's going to take to do it right. Until then, many people are going to have their minds set on this situation.

[slapout9]

So did John Lennon....Power To The People.


http://www.youtube.com/watch?v=GpsF_0-ta_A

[Ski]

Taxation isn't going to help much either when the country is close to $11T in debt.

We are digging a deeper hole by bailing out the system. We are borrowing money from the Middle East and Asia to fund the bailout packages.

American workers are literally going to have to work for free for some time in order to pay off the debt. If you start paying off the debt, and then start saving money (what novel concepts), then you can go forward.

The entire last month has been designed to limit political damage within the US establishment until the elections are complete. The same people who created this mess are supposed to be given a blank check, and they are supposed to get us out of this mess? I might have fallen off the turnip truck, but it wasn't yesterday.

[Schmedlap]

I think that this is a sneak preview of the collapse of the ponzi scheme known as Social Security. The financial collapse that we are experiencing now was not forecasted until relatively soon before it happened - even the most far-sighted critics didn't make much noise until 2006. Social Security has been an emerging disaster for decades, and still, nobody is going to do anything about that train wreck until it has already crashed and burned. And then they'll just point fingers and borrow a bunch of money to throw at it. But we'll have some good times, borrowing, spending, and giving money away right up until that moment, so as to look out for "the little guy," whoever that is, and provide for our childrens' future, which is presumably to say that we're trying to give them a brighter one. Rock on.

[Ken White]

'Cept Medicare will be first.

Congress. That simple.

[slapout9]

Or we could do what the Constitution says and let congress authorize the printing of coins and money through the US Treasury and not the federal reserve which charges us interest to use our own money

http://www.prolognet.qc.ca/clyde/pres.htm

A more eloquent reply by James K. Galbraith
http://dir.salon.com/story/opinion/f...span_deficits/

[jmm99]

you are turning into a Galbraithian.

OK, here are some words of truth from JKG (same initials as dad).

(from JKG article)
"But don't we need the surplus to save Social Security? No. The policy of 'saving the surplus' contributes nothing to the future of Social Security. It is impossible for 'savings' today to 'pay' for pensions 20 years from now. Proposals to 'fund' Social Security misunderstand the basic fact that putting 'funds' into the 'trust fund' is redundant. Congress, not the trust fund, controls benefit levels paid under Social Security. The promises to pay are already written into law. The special government bonds that the trust fund holds and that Mr. Clinton would have the projected surpluses add to are mere symbols of that legal commitment. So long as Congress leaves the law intact, benefits will be paid whether or not a bond is held in the trust fund to be redeemed when future benefit payments are met."

I like to simplify this for folks in our respective Redneck Heavens - looking at present (## 1-3) to future (# 4 on) in steps:

1. SS taxes > SS "Trust Fund" (= XS of current SS taxes over current SS payments)

2. US bonds from Treasury > SS "Trust Fund" (bonds have to be paid for)

3. SS taxes (= to bond $) > US "General Fund" (Congress now has XS tax $ to spend)

4. SS taxes = current SS payments (no surplus $ in SS "Trust Fund"; no bonds issued; Congressional cash cow is now dead)

5. SS taxes << current SS payments (SS "Trust Fund" needs $; so, redeem US bonds)

6. US bonds from SS "Trust Fund" > Treasury (bonds have to be paid for)

7. Congress raises taxes (could be any or all taxes) to provide $ for redemption.

Note: You could put in a mesne step 6½, where the redemption $ are borrowed (all 75T looking at future SS and Medicare payments); but, at some point, you reach step 7.

As Schmedlap says, it's something of a Ponzi scheme - a fact pointed out in the New Deal era by a few conservative Democrats (northern species, IIRC) who were in and then out of that administration.

So, a question for Schmedlap: you are of a later generation than JMM (now 66) and Slap (who is younger still - ca. 10 yrs or so) and Ken (who wrote the original SS statute). Are you younger guys willing to pay the freight when we hit step 7 ?

JKG seems to think so; but, I'm not so sure. Recall the conversation between the teacher and the janitor in the Breakfast Club movie.

PS: - Slap. I'll have to look at the legal and economic reasoning behind Fed Res Notes - as opposed to Treasury Notes. If someone else has an objective explanation, please post it.

[Ken White]

Are you out of your mind?

If the idiots in DC had to do that, they wouldn't know what to do, they'd sit on their hands...

(and look how much better off we'd all be. Sigh... )