A Short Seller's Tale | MotWee Award!
 

[url=http://www.bloomberg.com/apps/news?pid=20601109&sid=a4JOcJNafRyQ&refer=news]Short-Selling `Math Geek' Says He Is Never Naked, Though Covered in Blame[/url]: [i]One of the stock market's latest villains is a 32-year-old self-described ``math geek'' from a Minneapolis suburb who won't move to Wall Street unless they let him wear flip-flops.[/i]
[quote]Matthew Paschke, who manages the $165 million Grizzly Short Fund at the Leuthold Group, says short sellers like him have become scapegoats for the financial crisis that's wiped out $20 trillion from stocks and brought down Bear Stearns Cos. and Lehman Brothers Holdings Inc.

Wall Street chiefs blame those who sell borrowed stock and profit when prices decline for driving shares down as the credit crunch unfolded. After wagers against Morgan Stanley, Merrill Lynch & Co. and Citigroup Inc. surged to records, the Securities and Exchange Commission last month banned short sales of almost 1,000 companies. Paschke says that was the wrong move.

``The whole witch hunt is unfounded and it's frustrating,'' said Paschke, a father of three, in Leuthold's 46th floor offices overlooking the Mississippi River. ``They're changing the rules on the fly, so for those of us that make our livelihood in this business that becomes a very, very difficult proposition.''

Moreover, the ban may prolong the downturn by propping up companies that borrowed heavily and took on too much risk, he says. The Grizzly fund has returned 41 percent this year. Through August it almost tripled the average gain for hedge funds specializing in bearish bets. Paschke declined to identify any companies his fund shorts.

`Who's Next?'

James Angel, a finance professor at Georgetown University in Washington who studies short selling, says the 400-year-old practice may have accelerated some companies' declines by undermining investor confidence.

``There was a financial panic going on,'' Angel said. As a result, there was ``the behavior of crowds going, `Who's next?' It's only human instinct to ask.''

At the same time, he said, ``When the shorts are circling around, on average they are right.'' [/quote]
[b]My Comment:[/b] All the anti-short-selling pundits like Angel seem to love embracing the illogical to make their arguments. According to Angel himself, most of the time, when the shorts pile onto a company and thereby "undermine investor confidence" in said company, the company DOES NOT DESERVE INVESTOR CONFIDENCE, and the shorts are usually by far the earliest red-flag warning that something is amiss. [You sure never hear the warnings from the bulltards in the mainstream financial media]. Yes, abuse of naked short selling was a problem, but naked shorting WAS ALWAYS ILLEGAL - the issue was that the SEC`s longstanding lack of enforcement of their own rule turned the naked shorting prohibition into a joke. Perhaps the fact that the same investment banks which have been going under left and right were some of the biggest abusers of naked shorting had something to do with the SEC looking the other way.

Anyway, there`s a very simple way to allow legitimate short selling and prevent such from being abused to manipulate a company's share price downward - simply reinstate the Depression-era "uptick rule" [by which a stock can only be shorted when its price is rising] which THE SEC ITSELF ABOLISHED IN 2007. In other words, all of the issues related to illegal and manipulative shorting are a direct result of the SEC`s own lack of enforcement of one sensible rule, and outright abolition of another. This is one thing I actually agree with John McCain on: SEC head Christopher Cox should be fired - what McCain had wrong was assuming that it is in the President's power to do so, which it isn't.

[b]Moron of the Week:[/b]

[url=http://www.bloomberg.com/apps/news?pid=20601103&sid=ax1QCC1nFsjM&refer=news]Greenspan Says Markets Will Recover `Sooner Rather Than Later' From Crisis[/url]: [i]Former Federal Reserve Chairman Alan Greenspan said financial markets and the economy will recover ``sooner rather than later'' from the worst turmoil in seven decades.[/i]

[b]My Comment:[/b] Here`s your well-deserved MotWee, Al - how many is that on your trophy shelf, now? Now, will you please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please please just STFU already, you serial-bubble-blowing, economy-wrecking, irrelevant-statistics-blathering, incompetent, doddering old fool?

This Bill is VITAL for the Economy
 

That`s why the Senate version adds 107 pages` worth of critical funding provisions missing from King Henry`s original 3-page "modest proposal". for example, the economy would clearly collapse within weeks without the following earmarks:
[quote][b]New Tax earmarks in Bailout bill:[/b]
- Film and Television Productions (Sec. 502)
- Wooden Arrows designed for use by children (Sec. 503)
- 6 page package of earmarks for litigants in the 1989 Exxon Valdez incident, Alaska (Sec. 504)

[b]Tax earmark “extenders” in the bailout bill;[/b]
- Virgin Island and Puerto Rican Rum (Section 308)
- American Samoa (Sec. 309)
- Mine Rescue Teams (Sec. 310)
- Mine Safety Equipment (Sec. 311)
- Domestic Production Activities in Puerto Rico (Sec. 312)
- Indian Tribes (Sec. 314, 315)
- Railroads (Sec. 316)
- Auto Racing Tracks (317)
- District of Columbia (Sec. 322)
- Wool Research (Sec. 325 [/quote]
It is clear that the excessive and unfair taxation of "wooden arrows designed for use by children" is at the heart of the housing market implosion and the credit crisis.

"What we have here is a Failure To Communicate"
 

Briefly, my current view:

(1) My initial reaction upon reading about the original $700 billion "bailout" was the same as many folks': that the government was going to just give that to Wall Street companies. But I was (and they were) mistaken, mainly because the original plan was not explained well enough to the public. It's more complicated than I can discuss briefly, but I now agree with the president, etc. that it's an immediate necessity.

[I]Forbes[/I] explains it here: [URL]http://finance.yahoo.com/banking-budgeting/article/105887/The-Bailout:-An-Owner's-Manual[/URL]


(2) _However_, the original 3-page proposal omitted some absolutely essential provisions that were necessary to keep it from turning into an actual, not just theoretical, giveaway. Shame on the prez for that.

Such provisions _were_ added to the first version of the bill, that the House voted on. However, there was an ongoing failure to communicate to the public how the plan was necessary to the financial world, so that, quite understandably, the overwhelming majority of citizen messages to House members were to kill the bill.

(3) Though, ideally, in this occasion, legislators would set aside partisan and special-interest politics and just do what's necessary, enough wouldn't do that so that it became necessary to cater to them. Thus, we have earmarks and tax cuts and so on in the second version of the rescue bill. (* sigh *) Ugh-ly, but that doesn't make the rescue necessity disappear, so we'll have to pay that price for the aforementioned failure to communicate.

- -

Summary: Setting aside what led up to the crisis, the big blame for now is on those who failed to communicate to the general public why the rescue was so necessary and how it worked, and thus blundered in allowing the plan to be framed as a "bailout" or "giveaway".

It was possible to have presented the plan in a way that would have triggered more understanding and less opposition. Only because that was not done will we now have to pay an additional price in the form of "pork" and tax cuts in order to get what is necessary.

- - - - -

"What we have here is a failure to communicate." -- so apt to the national situation at the time of Paul Newman's death.

[QUOTE=cheesehead;144317]Briefly, my current view:

(1) My initial reaction upon reading about the original $700 billion "bailout" was the same as many folks': that the government was going to just give that to Wall Street companies. But I was (and they were) mistaken, mainly because the original plan was not explained well enough to the public. It's more complicated than I can discuss briefly, but I now agree with the president, etc. that it's an immediate necessity.

[I]Forbes[/I] explains it here: [URL]http://finance.yahoo.com/banking-budgeting/article/105887/The-Bailout:-An-Owner's-Manual[/URL][/QUOTE]

Cheesehead, how do you compare the Forbes take on the senate version of the bailout with the [url=http://www.bloomberg.com/apps/news?pid=20601039&sid=aguOUred8Bjg&refer=home]alternative proposal[/url] of the Bloomberg analyst I link to in post #583?

My take on the current plan:

1. Oversight of how much gets spent and on what is laughably weak. There is *nothing* keeping Paulson and his buddies from spending way too much, buying debt which is exceedingly unlikely to ever be repaid, and from effectively bailing out foreign banks and investors who bought toxic paper.

2. It is exceedingly vague on the government getting any kind of equity stake in the firms being bailed out. Again, this is all left up King Henry and his minions.

3. It probably won't work, because it does NOTHING substantive to address the fundamental issue driving the credit implosion, namely that there is a massive speculative asset bubble which will continue to unwind as housing seeks a long-term-sustainable price level, and that a tapped-out consumer is a tapped-out consumer, and banks are unlikely to start giving out risky loans again. [And if they do, it will only add fuel to the fire, this time with the taxpayers footing the bill for the fuel!]

To put the "will it work?" issue in perspective: Just last week, the Fed and Treasury did a coordinated pump of over $600 Billion in liquidity into the U.S. banking system in an attempt to unfreeze the credit markets - nearly the same amount as proposed in the bailout bill, just in a slightly different form. Did it work? Not even close. Similarly, the alphabet soup of good-assets-for-bad lending programs the Fed has created throughout the past year has not done a damn thing to "fix" the credit markets. That's because the fundamental issue dogging the credit markets is SOLVENCY, NOT LIQUIDITY. The bailout bill may temporarily rescue some troubled institutions from insolvency, but it only shuffles the bad assets around, and delays the day of reckoning, in very expensive fashion.

My prediction is that even throwing upward of a trillion dollars at the problem will only provide a temporary respite, and by the end of the year or early next year, we'll find ourselves no better off, and now with a trillion dollars added to the U.S. account deficit. But the foreign central banks and "friends of Hank" who will use this wonderful get-of-of-jail-free card to unload piles of toxic debt off of their balance sheets and onto ours will certainly be laughing all the way to the metaphorical bank.

In theory, mortgages are backed by real property.

Simple math shows that most of the mortgages in MBS have a bubble related mark-up of about 60% above the real and historical property value. This should translate that mortgages on average are worth about 40 cents on the dollar based on face value.

Now lets see if Paulson has the gumption to go to his high flying fiscal fudges and tell them he will pay them 40% of the value of their MBS's.

The next question would be to ask how the government will go about disposing of repossessed properties that they will in theory own as a result of the buyout.

DarJones

p.s. I'm saving my money just on the off chance I can pick up one of these el cheapo 40 cents on the dollar government houses!

[QUOTE=Fusion_power;144325]The next question would be to ask how the government will go about disposing of repossessed properties that they will in theory own.[/QUOTE]

This happened 2-3 decades ago. The Resolution Trust Corporation held the assets and sold them into "the market" at a rate that recognized the inherent value of the property rather than the "fire sale" value.

Understand that the "bubble" in prices is not actually as great as some claim. "Replacement cost" has to be taken into account.
If there is a $100,000 property that would cost $120,000 to replace, then it is worth more than the $40,000 that some investor might offer if it is forced "to be sold on the Courthouse steps".

There are a number of "deep pocket" investors who do nothing more than buy distressed assets at a steep discount, hold them until the market can absorb them at a "reasonable" price and profit on the difference. The federal government certainly has those "deep pockets".

[QUOTE=Wacky;144328]This happened 2-3 decades ago. The Resolution Trust Corporation held the assets and sold them into "the market" at a rate that recognized the inherent value of the property rather than the "fire sale" value.[/quote]
Not true, because unlike the proposed "new RTC", the "old RTC" only dealt with institutions which HAD ALREADY FAILED, and took entire possession of their assets, both good and bad, as opposed to "only the bad" as is being proposed in the current bailout bill. Nice 19 Sept article in the New York Times about this:

[url=http://www.nytimes.com/2008/09/20/business/20resolution.html]Looking for Lessons From Agency That Mopped Up 1980s Thrift Mess[/url]
[quote]WASHINGTON — Does the Resolution Trust Corporation — the government entity formed in 1989 to dispose of hundreds of failed savings banks and hundreds of billions of dollars in their bad loans and other assets — offer a model for dealing with today’s financial crisis?

Although some lawmakers and former officials are tempted by the idea, other experts say the analogy is faulty and the current situation is vastly larger and more complex than the comparatively contained savings and loan mess of two decades ago.

...
[b]
The biggest difference between the mid-1980s crisis and now, and where the R.T.C. model falls notably short, is that the government, which insured the deposits of the failing savings institutions, ultimately became the owner by default of the savings and loans, with all of their bad paper, foreclosed real estate and other assets, some above-par and readily marketable.

In the current crisis, the government is trying to keep private institutions like the American International Group and many commercial banks and investment houses operating while relieving them only of tens of billions of dollars in paper nobody else wants.
[/b]
The White House, Treasury Department and Federal Reserve are asking Congress to permit existing government entities to become a securities buyer of last resort. It is a more open-ended commitment, in part because the problem crosses international borders and its scope is as yet unknown.

It is also likely to be vastly more expensive. In its six-year existence, the R.T.C. handled 747 failed savings banks and disposed of more than $450 billion in assets. The cost to taxpayers, originally estimated at as much as $500 billion, ultimately totaled $120 billion to $140 billion.[/quote]


[quote=Wacky;144328]Understand that the "bubble" in prices is not actually as great as some claim. "Replacement cost" has to be taken into account.
If there is a $100,000 property that would cost $120,000 to replace, then it is worth more than the $40,000 that some investor might offer if it is forced "to be sold on the Courthouse steps".

There are a number of "deep pocket" investors who do nothing more than buy distressed assets at a steep discount, hold them until the market can absorb them at a "reasonable" price and profit on the difference. The federal government certainly has those "deep pockets".[/QUOTE]
But we are not talking about a "representative slice of mortgage-backed assets" here - we are talking only about the "toxic waste" worst-quality, highest risk stuff out there. I'm sure if the various "deep pocketed" private investment funds thought that the stuff was worth more than pennies on the dollar, there would be a market for it, since 40-50 cents on the dollar seems to be the range most of the financial firms are asking, unless they are really on the deg of the abyss. In other words, the government is almost certain to pay much more for this stuff than any private investor would. In the best-case scenario I envision, the government might recoup 3/4 of what they paid by the time the "assets" reach maturity, but that doesn't factor in the lost opportunity cost of putting the same amount of money to more productive use.

Anyway you slice it, it's gonna be a massive boondoggle.

Harry Ried's mishap
 

I'm sure that some of you read about [URL="http://money.cnn.com/2008/10/02/news/companies/insurance_stocks/"]this[/URL].

I'm amazed that the leader of the US Senate (a Democrat) would make such a ridiculous statement. His reckless statement significantly hurt a number of insurance companies financially. How does that make him any different than the short sellers on Wall Street who have help create the financial mess that the country is currently in?

To me, the real concern is related to "LIBOR". Banks do not trust other banks as "reasonable" credit risk. This translates into a situation where credit is no longer available to even "excellent" credit risk companies.
We are being forced into the situation whereby NO-ONE can "leverage" their financial position.

I don't have the ability to put $1MM into a business venture. But I may be able to present a reasonable plan to borrow a significant portion of that amount and reward the lender (bank) with a guaranteed rate of return (interest) for providing that capital.

In today's market, that is not possible. As a result, the entire community (populace) is harmed because these ventures cannot even attempt to find funding.

[QUOTE=Wacky;144332]To me, the real concern is related to "LIBOR". Banks do not trust other banks as "reasonable" credit risk. This translates into a situation where credit is no longer available to even "excellent" credit risk companies.[/QUOTE]
This gets right back to my point about "more productive uses for the bailout money" - $700 Billion would fund a *lot* of "excellent risk" corporate ventures. But instead of using the money to make good bets, we're gonna us it to help greedy banks weasel out of their bad bets.

[quote=ewmayer;144334]But instead of using the money to make good bets, we're gonna us it to help greedy banks weasel out of their bad bets.[/quote](1) Why do you write as though the current rescue bill will be the only financial-crisis legislation passed? The current bill is aimed (or was, before unrelated add-ons) only at the acute credit crisis subportion of the mess because that's what demands swift action to avoid a catastrophe. There certainly will be more legislation aimed at other portions of the mess, but those portions are less urgent than the credit system.

(2) As the Forbes article says,

"Once the bill becomes law, the Treasury will hire a team of consultants and managers to help the government figure out what to buy. This group will also assist the Treasury in determining how to price the assets, which are now tough to value."

The Treasury will not be obligated to purchase any securities at a price greater than this determined value.

You wrote that "we are talking only about the 'toxic waste' worst-quality, highest risk stuff out there." Yes ... [I]so that will be taken into account when evaluating it[/I] -- the evaluated fair market value will be the fair market value of that very "toxic waste", worst-quality, highest-risk stuff!

You wrote, "I'm sure if the various "deep pocketed" private investment funds thought that the stuff was worth more than pennies on the dollar, there would be a market for it, since 40-50 cents on the dollar seems to be the range most of the financial firms are asking, unless they are really on the deg of the abyss." So, the government group's evaluation [I]will be[/I] pennies on the dollar in that case!

You wrote, "In other words, the government is almost certain to pay much more for this stuff than any private investor would." Why? Why will the government be evaluating this stuff any higher than a private investor? If a firm offers stuff at a price higher than any private investor would pay, [I]the Treasury will have no obligation to buy it from them at that price.[/I]

(3) The Treasury is going to hold a "reverse" auction to purchase the securities, in which only the best deals (i.e., price relative to evaluation) offered to it will be accepted. If a firm offers to sell, at 40, a security evaluated to have a fair value of 5, the Treasury will not buy it.

For an analogy, notice the way the Treasury has always marketed its bonds, notes, and bills: it offers them for auction and accepts only the highest bids -- up to the point at which it purchases the total it needs. The "reverse" auction in the toxic securities case, in contrast, [I]will not have any [U]required[/U] total the Treasury must accept[/I], so there will be no reason for it to pay more than its own evaluation of any particular security. It need "accept" bids only up to the point at which the offered price is no higher than the evaluation (and it would stop before even that point if it reached the limit of its authorized amount to purchase).

(4) If a firm holds a security originally valued at 100, its evaluated fair market value is now 5, and the Treasury buys it at 5, where is the "greedy bank" "weaseling out" of its "bad bet"? The bank loses the same 95 it would lose when selling the security at 5 to anyone else.

- -

While I'm at it, why haven't you mentioned (maybe I missed it) that four months from now there will a different President and Secretary of the Treasury? Whatever power is granted to Paulson will expire then, and be given instead to the new Treasury Secretary. (How likely is it that Obama would retain Paulson, hunh?)