enablers -- big time enablers -- in this fiasco...
We used to be able to punish the guilty in this country; all of them, high and low -- now we punish the innocent.
That sounds like "I was just following orders."Originally Posted by tequila
Blame the guys at the top because they are guilty, but exclude the guys at the bottom because they are guilty? Why not blame both? I don't see why it needs to be one or the other. Focusing the blame on just the fat cats helps to fuel the class warfare angle of the issue, rather than forcing people in this country to come to terms with the fact that most (of all classes) have been living beyond their means. The rich can be catalysts for unethical behavior, but they cannot pull it off themselves. If people placed value upon personal responsibility and ethics, then the rich folks would have had a much tougher time - and maybe more people would have blown the whistle earlier and more would have listened.
The fat cats couldn't have done it without the assorted losers. And the losers couldn't have done it without the fat cats. Focusing all vitriol upon only the fat cats just tells the losers to wait for the next gravy train out of the station and to apply their lessons learned on that next joyride.
Let us not forget our esteemed Congress who are also
enablers -- big time enablers -- in this fiasco...
We used to be able to punish the guilty in this country; all of them, high and low -- now we punish the innocent.
Anatomy of the Morgan Stanley Panic: Trading Records Tell Tale of How Rivals' Bearish Bets Pounded Stock in September, by SUSAN PULLIAM, LIZ RAPPAPORT, et. al. The Wall Street Journal, NOVEMBER 24, 2008.
Emphasis mine.Trading records reviewed by The Wall Street Journal now provide a partial answer. It turns out that some of the biggest names on Wall Street -- Merrill Lynch & Co., Citigroup Inc., Deutsche Bank and UBS AG -- were placing large bets against Morgan Stanley, the records indicate. They did so using complicated financial instruments called credit-default swaps, a form of insurance against losses on loans and bonds.
Guess how many failures to deliver for Morgan Stanley there were on September 17?As Morgan Stanley's stock tumbled, the number of shares sold short by bearish investors soared to 39 million on Sept. 17, nine times the daily average this year, adding to the 31 million shares shorted in the prior two days, according to trading records.
Mr. Mack sent a memo to employees on Sept. 17. "I know all of you are watching our stock price today, and so am I.… We're in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down."
The stock and swaps trading were feeding on each other. That afternoon, Mr. Schorr, the UBS analyst, wrote: "Stop the insanity -- we need a time out." In an interview that day, he said "the negative feedback loop of stocks and CDS making each other crazy shouldn't be able to destroy the value of companies."
30,706,728
Naked Shorts Frolic While Financial System Fries, by Mark Mitchell. DeepCapture, October 10th, 2008.
Here we go again. A giant bank has some weaknesses, but it is, in all respects, a going concern — except that short sellers are peddling rumors and phantom stock, so the share price is plummeting. With the share price in peril, the rating agencies (perhaps over vigilant after taking so much criticism from short sellers and the media) put the bank’s debt ratings on review for a downgrade.
Meanwhile, short sellers corner the market for the bank’s credit default swaps, and point to the value of the CDS as evidence that the bank is doomed. They feed the media with analyses and bogus indexes that mark the bank’s assets to nothing. They spread the news that the bank’s counterparties and trading partners could bail.
The clients and partners stay with the bank. Up until now they have no reason not to.
But then, there’s more naked short selling, the hedge funds flooding the market with stock they do not possess – phantom stock. Maybe the hedge funds send a fax to CNBC with one last rumor. Over the course of a day or two, the stock price is slashed in half.
Then, suddenly, the stock is in the single digits.
As a result of the low stock price – not as result of the balance sheet – the bank’s partners and clients freak out. This time, they really do pull their money.
End of bank.
Gentleman, my jaw is on the floor.
The US Treasury Market Reaches Breaking Point, by Helen Avery. Euromoney Magazine, November 25, 2008.
As attention focuses on the treasury market's ability to cope with the US's growing funding needs, Euromoney reveals the structural issue that could cause the world's market of last resort to grind to a halt in its hour of greatest need.
The problem: the settlement system for the US government has broken down.Following the collapse of Lehman Brothers in September, fails to deliver among the 17 primary dealers in the US treasury market have rocketed to more than $2 trillion over a period of weeks and still lie above $1.3 trillion.Economists also claim that fails have spread across to other bond markets such as municipals, agencies, mortgage-backed and corporate-bonds.Failures in US treasuries were 8.6% of all treasuries outstanding in the first five months of this year, compared with 1.2% in the first five months of 2007. That has ballooned further over the past three months, hitting more than $2 trillion for almost the entire month of October - more than 20% of the daily treasuries trading volume.Trimbath believes that given that a blind eye was turned to fails in the treasuries markets, that in turn encouraged fails to deliver in the mortgage bond markets and to a lesser extent the corporate bond market. "In 2004 the failure to deliver rate for a government agency MBS was 40%," she says.This failure to deliver also has the effect of creating phantom securities - a higher number in the system than actually exist.(h/t: The Sanity Check)"By selling bonds that they cannot or will not deliver to the buyer, the dealers have been allowed to artificially inflate supply, thereby forcing prices down."
Last edited by bourbon; 11-26-2008 at 04:34 PM. Reason: Hat tip to the Funny Bunny
If we don't start putting some people in jail where they belong this will never stop.
The losers will ALWAYS be around for the next bubble, if only because there will always be people who will agree to take large amounts of money for little work, especially if that work is something they neither understand and especially when they often have little money to start with. And those losers can and often are punished - witness the bankruptcies and job losses at the mortgage brokers like Ameriquest.
The fat cats, on the other hand, get bailed out like Citigroup just did, in the latest outrage that Paulson & Co. have foisted upon us.
More importantly, it is the fat cats, as I've gone on and on about, who have turned what would be a normal real estate housing bubble, affecting homebuyers and construction companies and some small banks in certain regions, into global financial apocalypse that is putting the creditworthiness of the United States itself at risk.
An informative article (though the last bit about Wall St. investment banks going public is not that convincing) from Michael Lewis, who was there for the birth of mortgage-backed securities:
The End of Wall St's Boom
Eisman knew subprime lenders could be scumbags. What he underestimated was the total unabashed complicity of the upper class of American capitalism. For instance, he knew that the big Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust, carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA.
But he couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says.
...
Later, when I sit down with Eisman, the very first thing he wants to explain is the importance of the mezzanine C.D.O. ... “You have to understand this,” he says. “This was the engine of doom.” Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a “particularly egregious” C.D.O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities. “I cannot ####ing believe this is allowed—I must have said that a thousand times in the past two years,” Eisman says.
...
FrontPoint had spent a lot of time digging around in the dog #### and knew that the default rates were already sufficient to wipe out this guy’s entire portfolio. “God, you must be having a hard time,” Eisman told his dinner companion.
“No,” the guy said, “I’ve sold everything out.”
After taking a fee, he passed them on to other investors. His job was to be the C.D.O. “expert,” but he actually didn’t spend any time at all thinking about what was in the C.D.O.’s. “He managed the C.D.O.’s,” says Eisman, “but managed what? I was just appalled. People would pay up to have someone manage their C.D.O.’s—as if this moron was helping you. I thought, You prick, you don’t give a #### about the investors in this thing.”
Whatever rising anger Eisman felt was offset by the man’s genial disposition. Not only did he not mind that Eisman took a dim view of his C.D.O.’s; he saw it as a basis for friendship. “Then he said something that blew my mind,” Eisman tells me. “He says, ‘I love guys like you who short my market. Without you, I don’t have anything to buy.’ ”
That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with ####ty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”
Last edited by tequila; 11-27-2008 at 07:14 AM.
tequila you got my vote. Management has the responsibility of due diligence before it gets to the point of sale.
I put the financial crisis issues into two buckets.
1) Corporate personage - Thomas Jefferson wanted to have it declared that Constitutional rights should be for people and tried to make that an amendment. The pro-slavery group and anti-slavery groups for various reasons fought that amendment. Corporations have no soul and can't go to jail. In fact in many laws they are considered super-persons with extensive extensions to financial laws and rights.
2) The stock market - which is not the economy. The stock market is a false economy that allows companies to leverage from below wort to 30 or 40 times their possible valuation based on future worth. Volatility of the stock market is "emotion" rather than "logic" and as such can be manipulated by any of the many information operations tools.
Sam Liles
Selil Blog
Don't forget to duck Secret Squirrel
The scholarship of teaching and learning results in equal hatred from latte leftists and cappuccino conservatives.
All opinions are mine and may or may not reflect those of my employer depending on the chance it might affect funding, politics, or the setting of the sun. As such these are my opinions you can get your own.
Thank you sir, I have been looking for a way to explain my opposition to a system based on "growth" over one being based on sustainable profit. Your discourse on the subject is spot on and says it far better then I could. I also agree strongly with point one, but that standpoint has been easier to articulate.
Reed
I'm with you regarding the fat cats being dirt bags. I'm amazed at how casually you dismiss the complicity of the rank and file.
The stock market is not the economy, but it is the heart beat of the economy. Everyone on earth with two grey cells in their head knows that stock values "should" be around 15 times current values and "cannot" be over 25. Arguing what stock values "should" be is just like disbelieving the ability of an airfoil to fly. Unfortunately for foolish investors, (But fortunately for the rest of us) large crowds of idiots are willing to risk their money to buy tulip bulbs just because everyone else is, no matter what the price.
You can oppose the law of gravity (or aerodynamics) all you want, but you really can't change it. Of course, you could revert to a command economy, such as many are now advocating, but I think we all know how that one is going to turn out.... "Sustainable economy" is buzz-speak for Marxist Command Economy controlled by an "elite"....
We'll have to agree to disagree. Numerous corporations exist that are not in the stock market. LARGE ones. Picking leverage numbers out of the air does not make them right. They also reflect the same kind of thinking that has the balloon going pop for the second time in less than a decade. Allen Greenspan in 1998-9 made the comment that there was no "right" number or span of "correct" leverage for companies and he was going to get a handle on the rising tech economy. 2000 wasn't much fun for a lot of people. The entire story of "Barbarians at the Gate" is based on sub-valuation. When Sun Microsystems former CEO Scott Mcnealey threatened in 2002 to buy back all Sun stock because they had more cash on hand than the stock was worth the SEC stopped him. He quit not long after that.
As to the comment the stock market is the heart beat of the economy. I rather consider it a cancerous tumor strangling the livelihood of the middle class and ruining the competitive nature of the country while simultaneously engorging the pocket books of those who do no work and stripping the savings of those who do. I haven't seen any politician suggesting we put all of social security in the stock market lately have you? Maybe the visualization should be that of a hydra snarling at each criticism as it eats our children. I don't care about leveraging value out of stock quarter to quarter. That is short sighted and evil in that somebody will lose. I want to see well managed companies with flat stock prices paying dividends out of profits. In other words real growth not sucker-winner bets.
Motley Fool disclosure: Unlike my father and those in government service with pensions my ENTIRE retirement rides on the whims of the stock market. A legal policy framework of government that I have no choice about. If I want to have a savings retirement plan all of the available tools for a civilian are 401K, IRA, and annuity of which they are tied to the stock market entirely.
Sam Liles
Selil Blog
Don't forget to duck Secret Squirrel
The scholarship of teaching and learning results in equal hatred from latte leftists and cappuccino conservatives.
All opinions are mine and may or may not reflect those of my employer depending on the chance it might affect funding, politics, or the setting of the sun. As such these are my opinions you can get your own.
Ah Ha, the original purpose of buying a stock in the first place, to help companies have stable capital access to finance expansions and improvements in the products that the company makes. Whenever we violate the original purose of a system we do so at our own peril.
A lot of stupid, greedy people that is. Who didn't have the sense to pour pee out of a boot with the instructions on the heel and got precisely what they deserved... Infinite valuations? Ya gotta be kidding me.... BTW, if anyone still thinks Greenspan is a genius, I have a bridge in Brooklyn to sell you...
Ah, yes. The Marxist myth of the eeeeevil idle rich. Very nice.... Nevermind that average investors (like me) can consistently do quite well over the entire history of the market by dollar-cost averaging and buy and hold investing.The entire story of "Barbarians at the Gate" is based on sub-valuation. When Sun Microsystems former CEO Scott Mcnealey threatened in 2002 to buy back all Sun stock because they had more cash on hand than the stock was worth the SEC stopped him. He quit not long after that.
As to the comment the stock market is the heart beat of the economy. I rather consider it a cancerous tumor strangling the livelihood of the middle class and ruining the competitive nature of the country while simultaneously engorging the pocket books of those who do no work and stripping the savings of those who do.
Probably because voters are as a class too stupid to breed. They'd much rather continue running the current Ponzie scheme than to actually do something smart like forced retirement savings. It's easier to steal from my kids and grand-kids than to do the responsible thing for their retirement, after all.I haven't seen any politician suggesting we put all of social security in the stock market lately have you?
Are you speaking about the stupidity of fully funded pensions here? Or Social Security/Medicare?Maybe the visualization should be that of a hydra snarling at each criticism as it eats our children.
I would support dividends instead of growth, except the government would seize a large portion of those dividends to over-pay for failed social engineering programs, government workers and "pensions". Make dividend income tax-free and I'd be on your side. The saving grace of the 401k "system" is that it keeps the money out of the hands of the criminal class which runs our government.I don't care about leveraging value out of stock quarter to quarter. That is short sighted and evil in that somebody will lose. I want to see well managed companies with flat stock prices paying dividends out of profits. In other words real growth not sucker-winner bets Motley Fool disclosure: Unlike my father and those in government service with pensions my ENTIRE retirement rides on the whims of the stock market. A legal policy framework of government that I have no choice about. If I want to have a savings retirement plan all of the available tools for a civilian are 401K, IRA, and annuity of which they are tied to the stock market entirely.
Yowza!
Consider the joys of a cold weissen mein freund.
Since I believe that in chaos there is often opportunity to be found, and also because I am a dedicated fellow capitalist, I have been reading and rereading the Special Report: Saving the System in my Oct 11th-17th 2008 copy of The Economist. They often reference IMF reports which also make for interesting reading. A total figure of 600 Trillion USD dollars has been estimated for all outstanding contracts in the global derivatives market vs. an annual global GDP of 54.5 Trillion
In the meantime, purchasing index fund shares via dollar cost averaging, which reduce my diversification risk, are my primary hope. I try and snipe a few individual stocks from time to time based on an examination of some easy statistics work: 1) Results of OLS regression (excel has several built in functions that make it easy) for daily stock prices downloadable from Google. 2) Comparison of book price: (assets - debts)/# of shares issued vs. today's price. 3) A little very rough MC/Bayesian/Black Scholes modeling in Excel. 4) Cheating by seeing what various Stock Analysts are saying/estimating.
Most importantly I am really trying to focus upon the joys of family this holiday season.
Inshallah this too shall pass.
Last edited by Surferbeetle; 11-29-2008 at 10:05 PM.
Sapere Aude
A friend of mine who is an active trader has been bearish on the market for the past two years. The vast majority of his purchases in that time were put options against the S&P. He still buys them everytime the market goes up about 500 points (about once per week) and then turns around and sells at a hefty profit when it tanks again (about once per week). He'll be retiring early.
Nice...
Schmedlap,
I wish I had the capability to do it profitably. I am currently wrestling with financial modeling and have found Advanced Modelling in Finance using Excel and VBA by Jackson and Staunton (ISBN 97804719920) to be of use. There are some 2-3 year Financial Mathematics/Engineering programs out there, but the work-life balance issues are always tough....
Any literature suggestions that you might be willing to share?
Best,
Steve
Sapere Aude
I've bought quite a few put options in the last year, but most of them were only to hedge against losses in stocks that I own. Literature? I'd say read anything by Jack Bogle. Other than that, read Barron's and, time permitting, the Wall Street Journal. I think that the timeless advice of a balanced portfolio, matching your investments to your risk tolerance, and not overreacting are the only sane advice. The rest of it - models, timers, etc - are just gambling, in my opinion. I don't know of any literature on it, so I can't recommend any. But, I would say that if you're determined to try a model, your best bet is to search for options that are over or undervalued. Even experienced option traders have never seen this type of volatility and they're in uncharted territory right now. The playing field isn't level, but it's a little flatter, so long as you're not looking to cash in purely on arbitrage trades.
US equity market – Fails to deliver: The naked truth, by Helen Avery. Euromoney Magazine, December 01, 2008.
Up to that point in 2008, cumulative fails to deliver of Bear Stearns’ stock were only between 10,000 and 200,000 on any given day. On March 14, more than 2 million Bear Stearns shares went undelivered, and from then until the end of March, failures increased, peaking one day at more than 13.78 million shares. At the same time, from March 12 to the announcement on Friday March 14, Bear Stearns’ share price crashed from $61.68 to $30, dropping to $4.81 the following Monday.I'll point out an ambiguous connection here. This Euromoney article refers to a series of previous articles on naked short selling. One of these articles mentions a man by the name of Anthony Elgindy. This is an interview with Bob Baer, who at 9:47 mark states: "I know the guy that went into his broker [on 9/10/2001] in San Diego and said 'Cash me out, it's goin' down tomorrow'…"One former employee of regulator NASD says he knows of a hedge fund that was shorting Freddie Mac and Fannie Mae on a "massive scale", with no intention of ever locating stock. "His prime broker let the trade go through regardless as he was a large client of theirs," he says.
Illegal naked shorting, at its worst, can be implemented to bring a company down. In the present crisis of confidence among financial institutions, it can also simply be a means of jumping on a losing target. If a financial institution’s stock looked as if it was falling, why not short-sell without promising a buy-in within three days and hope that the fall is sufficiently large beyond three days to make an even bigger profit?
A glance at the fails to deliver in the financials market indicates that some investors applied this strategy. A comparison of the average daily reported shares failing to deliver between the first quarter of 2007 and the first quarter of 2008 for the US’s top financial firms showed a clear increase over the period. The data, compiled by Washington publication IA Watch, showed a 335% increase for Freddie Mac, a 226% increase for Citigroup, a 133% increase for Goldman Sachs, a 632% increase for Morgan Stanley and a 1,123% increase for Bear Stearns. One source even suggests that some market participants never intended to buy-in and simply marked their tickets "long" selling shares that they did not even own as they knew they would never have to make delivery.
Guess who that man was?
Hedge Funds to US Soldier: “I need a Maybach, so… You can die too.” December 6th, 2008 by Patrick Byrne
A blood-boiling post by Dr. Patrick Byrne at DeepCapture. In this example of naked short selling is the case of Force Protection Inc. FPRT manufactures MRAP's, and after receiving a large order from the Pentagon the company issued a secondary stock offering to raise capital in order to expand. Once they announced their intent, their stock began to be naked short sold to oblivion, and they had to roll back the expansion. This means less MRAP's produced and deployed.
Disgusting.
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