Short Ban lifted —
No “terrorism” after all?
Joltin’ Jersey Jim Cramer re
How to break a stock

1. Thursday of the week of Worldwide Wreckage — and the SEC lifts its ban on short-selling financial stocks.

The Dow 30 close down another 679 points at 8,625.

2.  Recall that two weeks ago Todd Harrison at Minyanville.com reported that a good Washington source said that the feds had identified a concerted shorting campaign out of London and Dubai that began on September 11 and which they considered financial “terrorism.”  Rather than simple Creatively Destructive greed.

But apparently that worry no longer troubles the SEC.

3.Here’s Joltin’ Jim Cramer re how the big short sellers destroy targeted stocks.

Fed loans AIG another $38 bils:
Business as usual

The Fed press release about AIG’s latest injection reads deceptively for anyone who doesn’t understand swaps and repurchase agreements.

Here then is an elaborate homespun explication.

And the text:

The Federal Reserve Board has authorized the Federal Reserve Bank of New York to borrow securities from certain regulated U.S. insurance subsidiaries of the American International Group (AIG), under section 13(3) of the Federal Reserve Act.

Under this program, the New York Fed will borrow up to $37.8 billion in investment-grade, fixed-income securities from AIG in return for cash collateral. These securities were previously lent by AIG’s insurance company subsidiaries to third parties.

As expected, drawdowns to date under the existing $85 billion New York Fed loan facility have been used, in part, to settle transactions with counterparties returning these third-party securities to AIG. This new program will allow AIG to replenish liquidity used in settling those transactions, while providing enhanced credit protection to the New York Fed and U.S. taxpayers in the form of a security interest in these securities.

Central banks do big rate cut /
Throw the Fed bums out?

1.  The central banks of the US, Canada, the European Union, Great Britain, Switzerland and Sweden, all cut the interbank rates they control by half a percentage this morning.

The US stock markets gyrated wildly, with the Dow 30 winding up down 191 points.

Bernanke last month told Congress that a year ago he had warned Paulson that something dramatic (like the Paulson Plan) might eventually have to be done.

The time to act was indeed a year ago.  Nothing but a lot of time and pain will cure what now ails the global system.

2.  The US has had something like five central banks (empowered to issue the currency and lend it to the government) thru its history.   Jefferson and his school were against the idea, the Federalists led by Alexander Hamilton were for.

Some people are convinced the federal government cannot recover its fiscal health unless it takes back the power to issue currency, as was last done under President Andrew Jackson.  It was 77 years until, in 1913, a private central bank was again established on the eve of the world wars.

Here’s a feature length doc about the history of central banks in Europe and the US, made by people hoping to dethrone the Fed.

Iceland nationalizes collapsing
banks, asks Russia for help

Pretty frightening.

And rather than London they go to Moscow, for a $5 bil loan.

After the Rescue:
“Worldwide Wreckage”

Ed Note:  See comments below for day by day, blow by blow summaries of what turned out to be the worst week in the history of the Dow 30.

Monday Morning.

After Europe’s traumatic weekend (see comments here), European stock markets fell roughly 7% Monday.

And with an hour ’til closing time, the Murdoch (formerly Dow) 30 is down another 700 points (6.8%), to roughly 9,600, breaking the psych barrier at 10,000 for the first time since 2004.

Along the way a new all-time point drop was notched — 806 — breaking the record set way back uh, let’s see … Last week.

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Broad & Wall Street, 1929

The central banks and treasuries have shot most of their bullets.  No one has yet taken heart.   Credit markets are broken worldwide.  Nothing else now matters.

It is truly The Great (debt) Unwind that some people have been predicting for fifteen years — ever since the advent of Excel and email jolted high-tech Structured Finance to life in the money centers.

Traders this afternoon are sniffing “capitulation,” and supposing tomorrow we may have a bounce.  Perhaps even coordinated rate cuts by every central bank from Tokyo to Washington.

But people with slightly longer-term views are saying Dow 8,000 might prove to be a floor.

It’s been a wild ride, since …

August 23, 2007:

MY OWN TWO CENTS, based on awareness of how vast the universe of structured finance securities is, and of how confidence in the methodologies used to rate and evaluate them has been shaken, and on watching the mortgage business get dismantled daily, is that the worst is far from over.

Recession, asset deflation (houses mostly), prolonged credit contraction. The Dustbowl returneth … But what do I know.

The sign at the Cyclone says “HOLD ONTO YOUR WIGS AND CAR KEYS.”

August 3, 2007:

The mortgage-bond failures demonstrate that the rating agency methodologies used to evaluate and rate high-tech “structured finance” bonds are seriously flawed.

This wethinks is why the private bond markets across all sectors (well beyond mortgage bonds) have seized up. The rating methodology failure means no one in the world really knows what their high-tech bonds are worth.

A radical thought, then: Perhaps the authorities might institute 90 days of price controls on the teeming mystery bonds to quell the panic …

After the Fall

It seems to have been twelve years since I bothered to put together a resume. Time flew while I was having only a modest amount of fun.

It seems I had more fun before buying a home.

How long do these (ahem) dislocations tend to last?

A good review at Naked Capitalism gauging how bad and how long financial disasters tend to be.  In a nutshell:

The episodes of credit crunches and housing busts are often long and deep.

For example, a credit crunch episode typically lasts two and a half years and is associated with nearly a 20 percent decline in real credit. A housing bust tends to last even longer: four and a half years with a 30 percent fall in real house prices. And an equity price bust lasts some 10 quarters and when it is over, the real value of equities has dropped to half.

Rickie Lee Jones: The Sermon
on Exposition Boulevard

Ed Note: After a spirit-deadening summer, Rickie’s latest album, from last year, is bringing me back to life.

Below is my original quick review — which while not lacking for enthusiasm no longer quite does the album justice.

Its depth is … reminiscent of T.S. Eliot. It takes a while to get there … Down the well …

And people who shuffle their Favorite Songs on an Ipod will never get there at all.

Rickie Lee Jones has a new album coming in early February. I posted this capsule review over at Amazon because the glib ne’er-do-tell who did the official thumbnail there couldn’t be bothered to listen or think. Odd they can’t find better help. The dud’s name is McLeese and he concluded by reporting “Some of this music is oddly affecting; much of it is merely odd.”

That’s alright, I know where he lives.

===================

BORN ANEW

Beneficiary of an advance copy of this life-hugging album, let me say (pace Mr McLeese) that THE SERMON is not “merely” anything at all. To begin: two tracks are extemporaneous meditations expounded on the spot — neither composed nor rehearsed (!?!) — and the second of these miracles, “Where I Like it Best”, now reaches me as the richest song in the collection.

(See producer Lee Cantelon’s pennyhead.com for the amazing story of how the record was born.)

It IS a departure from the studied studio perfection of her prior work. Much of the music is by younger collaborators, and the tracks were recorded with a “liveliness” that takes one back to the garage bands and stoop singers of foundational rock. “It was so different from a musical environment I would make,” she said in a recent interview, “and that helped me become something different.”

The mystic religiosity springs from mediations on the life & words of Jesus — another departure — but then again on stage she often refers to the songs of her mystical masterpiece Ghostyheads as “prayers.” Both albums are deep echoing wells, a bit spooky to slide down into (“Watch your elbows — I don’t KNOW how deep, watch you don’t burn your hands”) — but once down it’s heaven. I’ve no faith in the divinity of Jesus but these meditations, born out of the smouldering rubble-strewn spiritscape of America post 2004 elections, have been just what the flamen ordered.

There IS something happenin’ here, after all. And what it is AIN’T exactly clear. In a world gone wrong, post 2004, she found a way to sing. And perhaps it was the only way. Perhaps any other would have been false to the moment and have failed.

Maybe it’s like this (from Deep Space on The Magazine):

This tear will finally fall
Keep your eyes here
When there’s no net at all
Where the Lord’s face is like an all-night cafe
There’s a woman who will wait on
What you have to say

The equestrienne of the Circus of the Falling Star will be found not Born Again here, but born anew. Maybe there’s more to miracles than meets the eye. Rejoice and be exceedingly glad for this troubadour, our companion voice these long years in the wilderness.

Hey! There’s a limited edition DVD on sale (the link above) for pennies more than the regular CD. Has video, a 5:1 surround mix, and high quality mp3 files for downloading. Plus an expanded booklet. Great package, less than $20.

GO ORDER A COPY! The release date is February 6 or similar.

Brit Commander in Afghanistan:
“We’re not going to win this war.”

Brigadier General Mark Carleton-Smith says it’s time to talk turkey with the Taliban.

Yet, one of McCain’s big talking points in last week’s debate was the need to do a Surge over there.

The Onion:
McCain unveils Recovery Plan /
Obama’s new attack ads

McCain’s recipe for recovery.

Team Obama says No more Mr Niceguy

Swift Boats Redux:
Need a Weatherman to know which way the wind blows?

Yow.  The GOPhers are hitting swing states with TV commercials highlighting Obama’s relationship (?) with an old Weatherman bomber.

And Palin has added the notion to her stump speech. Accusing Obama of “palling around with terrorists.”

McCain betrayed his career in the Senate when he choose Palin.  One wonders how precisely it came about.

Should Obama lose, it will be interesting to see how the academic feminists who splintered the Democratic Party’s base in the 80s — with Identity Politics targeted at the White Male Hegemony — will react to the prospect of President Palin up their butts.

Trust betrayed:
The Paulson Plan gets privatized

An article in the Times re the structure of the new Treasury bond trading operation — perhaps to become the biggest on the planet — is alarming in the extreme. First doubts about the Paulson Plan, however misdirected through the murk, turn out to have been well rooted in muck.

O my prophetic soul …

1.  Treasury intends to “outsource” all the asset management. To things like Blackrock — which is already involved in scandal over its participation in the Bear Stearns take-under.

Foxes, then, are to guard the hen house.

“I can’t even fathom how I would manage that,” Mr. Siegel said. “How would I manage one side, where I’m seeking to maximize profit, and the other side, where I’m looking out for the social good?”

This is in stark contrast to the Savings & Loan rescue, where a single trust controlled and operated by the federal government handled all assets, and turned a profit.

Why are they going the other way now?

Most financial experts agree it would be impossible to build an internal operation of this size in a few weeks.

Don’t got time to do it right …

Bulldinky.

The Street is awash with laid off lawyers and bankers who used to draft and sell these very wounded instruments.  Let them manage a static trust — with one-time sales of securities permitted, but no active trading.

This would be safer (bond trading is a tricky business) and not require an army of specialists to man.

2.  Further, the prices at which wounded mortgage bonds and the like will be bought are to be determined by … the broken credit markets.

The main mechanism for buying these assets will be reverse auctions, using the same principles that govern auctions of electricity or the wireless spectrum. In this case, the government will issue an offer to buy a class of assets — for example, subprime mortgage-backed securities — with the final price being determined by how many banks are willing to sell.

(I.e., the more willing to sell, the lower the price.)

It seems that Bernanke’s “hold-to-maturity price” — based on performance not market forces, and which he spoke about at length on the Hill in past weeks — is toast.  So then, too, is the plan Congress bought.

If the markets were competent to achieve “price discovery” with these complex and wounded instruments, they would have. It was their failure to do so that provoked the notion of a public rescue to begin with.  These facts remain:

– The market for mortgage bonds (MBS and CMO tranches) has been seized up with loss and fear for fourteen months; and

– CDOs were never designed to support efficient en masse trading, and never have.  Least of all now.  The notion of “market value” here has always been a phantom.

And yet it’s into the frozen machinery of these markets — in a matter of weeks — that Treasury means to pour its hundreds of billions in mad money.

3.  What then is going on?  Don’t need a weatherman …

Stories of finance lobbyists descending on D.C. are everywhere.  And the Times piece points out that not only Paulson but his top planners on the rescue are all from Goldman Sachs.

Of all the challenges that the Treasury faces, the trickiest might be determining a price for the largely unwanted wreckage it will be buying.

Many of the junk loans and mortgage-backed securities have no market price at all because they have no potential buyers. The firms hired by the government will have enormous power to push the “market” price up or down as they choose.

If the government bargains to buy at the lowest possible price, it will protect taxpayers. But forcing the banks to book big losses could be self-defeating if they cannot resume lending until they raise fresh capital. If the government agrees to buy the assets at the value at which banks are keeping them on their balance sheets, taxpayers will almost certainly be overpaying.

The “right” price will depend on whether the government is favoring buyers or sellers. Many banks are hoping that the government will pay close to par — the value listed in their books.

But hedge fund managers and other potential buyers are demanding that the government push for the much lower price …

O heat, dry up my brains! 

Tears seven times salt, burn out the sense
and virtue of mine eyes!

The public trust has been betrayed.

Why were these free-marketeer ideas never publicized before Congress passed the bill?

Is it too late to stop Paulson, Sachs from railroading into the private sector what was sold as a public utility?

Call and email your Senators and Reps and scream bloody murder.

(Go to, eg, www.[senator's last name].senate.gov and then to the Contact page, where you’ll find an email form.)

Paul Newman

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Thoughts looking back . . .

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The Great Unwind: Alphabet Soup and the Search for
Phantom Market Values

A website called The Great Unwind recently commented on a story here on TNC while discussing Credit Default Swaps.

There was some terminology confusion in the GU piece. So I posted a comment at their site, and have stored it here.

It’s worth reading if you’re confused by the alphabet-soup of structured finance in the press — and for the brief pointed chat about why the notion of market value does not and never has applied very well to CDOs.

Banks most likely to go under

Here from a small money manager in Palm Beach are lists (compiled in August, it seems) of the strongest and weakest banks, rated by capital, exposure to derivatives risk and other things.

And here’s the people who compiled the lists chatting about them.

Vice Prez Debate

Miss Alaska not only did not pee on the floor, but carried herself with surprising poise and flair.

Thank goodness the Swimsuit Competition had been canned.

Biden was flawless, earnest and charming.  I admire him as much as anyone in Washington.

But the net effect of the show will be to stem the tide of GOP disserters that Palin’s dumb public appearances had loosed.

First reactions to the VP choices are now again current.

So. Down to the wire. The same basic map that’s constituted the prior two elections — but with McCain drawing more so-called independents than baby Bush ever did — and with Obama powered by a youth vote that may be largely beyond the scope of the landline phone polls.

Good news that Camp McCain has conceded Michigan.  Surely the Wall Street meltdown has to help Barack?

Everybody seems to agree there’s no need for more debates.   As a friend recently wrote, “I want my President Obama now!”

London Calling: Credit crisis
may tear European Union apart

London this decade was as big a purveyor of complex debt instruments as New York, and the big Euro banks participated in a big way.

The EU was also even more lax than US re allowing banks to hold potential future liabilities incarnated in swap agreements off their balance sheets.

Thus today, as those obligations have been triggered and are being called, the Euro banks are apparently even worse off (re debt-to-capital ratios) than ours — leading the Daily Telegraph (London) to worry aloud that the lack of a central authority with both power and resources to stabilize the Euro banks may pull the Union itself apart.