Trouble with a Capital T

Posted by Steven D | Sep 19, 2008 | 10 |

How bad are things on Wall Street? Well, far worse than I imagined, and I imagined a lot. Why do I say that, you ask (and rightly so)? I’m no economist. I’m not a registered broker/dealer. I don’t own a seat on the NY Stock Exchange nor am I a member of the Federal Reserve’s board. Well, all that is true, but even an ignoramus about financial matters like me can get the message when he’s hit in the face with a brick bat. And today, ladies and gentlemen, the Securities and Exchange Commission (the SEC for all you financial hipsters out there) hit the stock markets with one of the biggest bats in its arsenal:

SEC bans short-selling

WASHINGTON (AP) — The Securities and Exchange Commission took the dramatic step early Friday of temporarily banning the routine practice of betting against company stocks. […]

In the announcement, the commission said it was acting in concert with the U.K. Financial Services Authority in taking emergency action to “prohibit short selling in financial companies” to protect the integrity of the securities market and boost investor confidence. […]

“The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets,” SEC chairman Christopher Cox said in a statement. “The emergency order temporarily banning short-selling of financial stocks will restore equilibrium to markets.”

I’m fifty one and 9/10th years old and I can’t remember a time when the SEC banned short selling. Essentially, short selling a stock is placing a bet that the price of that stock will go down. If it does you win the bet. If it doesn’t you can lose your shirt or cocktail dress. On the other hand, in a market headed sharply downward, short selling can be a way to make a great deal of money in a very short (pardon the pun) time.

In a normal market short selling is a risky play, but what the SEC and its corresponding agency across the Pond, the U.K. Financial Services Authority are telling us by banning the practice is that these are not normal times. Obviously a wave a short sellers was anticipated, and that doesn’t exactly take a rocket scientist to calculate based on the losses in the markets this week. Hell, if I had any money I’d have been short selling financial stocks the minute Bear Stearns’ cow manure hit the fan back in March.

So the SEC, and I’m willing to bet the Treasury, the Federal Reserve and anyone else (i.e., central banks all over the world) with any interest in preventing financial markets from going into a death spiral, are clearly planning for the worst, even while they keep every finger crossed and pray each night for a miracle to deliver them from the evil of economic turmoil the likes we haven’t seen in a very long, long time. Indeed, the SEC’s action is clearly part of a coordinated effort to circle the wagons of our global economy:

Reflecting severe concern about the health of the global financial system, American, European and other major central banks drastically escalated their response Thursday, making almost a quarter of a trillion dollars available to banks after lending had stalled and threatened further harm to an already battered world economy.

In a statement released as markets opened in Europe, with trading well under way in Asia, the U.S. Federal Reserve said that it had authorized another $180 billion lending program to help banks in need of emergency cash. That took the total size of the Fed’s agreements with other central banks to $247 billion.

Something tells me $247 BILLION DOLLARS (damn, if that doesn’t start to begin to sound like real money), isn’t close to what it’s going to take. Not by a long shot. We are edging ever closer to the abyss of a global economic meltdown that will make Chernobyl far too inadequate a metaphor for what will happen to the markets, jobs, foreclosures, trade, the whole nine yards of globalization. People holding lots of gold will be happy, I suppose, but not many of the rest of us.

You know, if I were John McCain, I’m not so sure I’d want to be the next President of these United States. He signed up to run in order to play with all the US Military’s toys while chasing the bad guys in Iraqiranafghanapakistan and blowing stuff up. That is, he’s running for President so he can play the role of the all conquering military hero in the greatest melodrama ever fabricated by a speech writer. McCain and his tax cutting, deregulating lobbyist pals won’t have a clue what to do when the economy tumbles down around their ankles. After all, they and the rest of the Multinational Corporate wing of the Republican Party had a great deal to do with creating this mess in the first place.

Then again, I’m not so sure Obama is all that thrilled about the prospect of becoming the next “Leader of the Free World,” either. He was running to be the next JFK. Now, if he wins, he’s likely going to have to pull off morphing into the next FDR. We better hope he wins though, because McCain has “Hoover” redux (with a dash of Curtis LeMay) written all over his pancaked mug.

Ps. I wonder if McCain still plans to fire the Chairman of the SEC if he’s elected, even if he can’t, you know, legally do that?

About The Author

Steven D

Father of 2 children. Faithful Husband. Loves my country, but not the GOP.

10 Comments

BooMan on September 19, 2008 at 8:56 am

who the hell are you, Steve, to tell President McCain that he can’t legally do something? Huh? Where do you get the nerve?
- Steven D on September 19, 2008 at 9:03 am
  
  Heh.
Zandar1 on September 19, 2008 at 9:02 am

This is scary, scary stuff. Truly scary.

The minimum numbers I’m seeing from this industry-wide bailout plan this morning start at $1.2 trillion, in addition to the hundreds of billions already spent.

On top of the trillions spent on Iraq.

And again, that’s just for starters. The next four years are, as Steven says, a choice between Hoover and FDR.
- ask on September 19, 2008 at 9:32 am
  
  ..start at $1.2 trillion,..
  
  The numbers are getting hard to grasp. A bit of perspective; with a population of ~300 million, $1.2 trillion will amount to $4,000 for every woman, man and child in the country.
  How is that for capitalist welfare – a transfer from the public (us) to reckless speculators @ $4,000 a head?
  
  The word ‘deregulator’ will be a swear word before long…
- Brad on September 19, 2008 at 9:33 am
  
  More like Mussolini and FDR
- idredit on September 19, 2008 at 9:40 am
  
  I wrote in another diary, that the SEC ban of naked and/or manipulative short selling was the most important announcement yesterday. Its a practice that’s been in place forever,an illegal malicious action that Regulators ignored. Short selling yes because you need to “borrow the shares” and you need to deliver those shares. Naked short selling means you really have no shares – some traders short more shares than are on the company’s books…that action leads to the company’s ruin.
  
  Under cover of this financial crisis the SEC took action. Lawsuits were pending. For the past 8 months there’s been a concerted effort to have the Powers put an end to naked short selling.
  
  As for the “Comprehensive Action Plan” to buy up toxic debt, they have no idea. None. Toxic debt that’s the creature of leveraging 35:1 on borrowed money!
  
  The reference to the RTC for the S&L bailout, in comparison to today’s debacle were billions then but are pennies in this sh8tpile. This bailout will be in the multiple trillions. That’s a big T.
  
  Did you see Senator Reid’s body language at the presser? It’s GRIM.
  
  So far on 3 entities – Fannie, Freddie and AIG – amounts to a $7 trillion exposure. When added to the country’s debt = burning the dollar.
  
  Nouriel Roubini was shunned when in 2006 he alerted to this implosion. He now suggests:
  
  “We need a new HOLC – more than a new RTC or RFC- to provide massive debt relief to the household sector. We need to create the HOME (Home Owners’ Mortgage Enterprise)
  
  Let me explain in detail how we now need bold policy action to resolve this most severe financial and economic crisis…
  
  Households in the US have too much debt (subprime, near prime, prime mortgages, home equity loans, credit cards, auto loans and student loans) while their assets (values of their homes and stocks) are plunging leading to a sharp fall in their net worth. And households are getting buried under this mountain of mounting debt and rising debt servicing burdens. Thus, a fraction of the household sector – as well as a fraction of the financial sector and a fraction of the corporate sector and of the local government sector – is insolvent and needs debt relief.
  
  [.]
  
  So of the five possible uses of fiscal policy – income relief to households (the 2008 tax rebate), rescue/bailout of financial institutions (Bears Stearns, Fannie and Freddie, AIG), purchase of assets of failed institutions (an RTC-like institution), recapitalization of undercapitalized financial institutions (an RFC-like institution), government purchase of distressed mortgages to provide debt relief to households (an HOLC-like institution) – the last option is the most important and effective to resolve this severe financial and economic crisis. During the Great Depression the Home Owners’ Loan Corporation was create to buy mortgages from bank at a discount price, reduce further the face value of such mortgages and refinance distressed homeowners into new mortgages with lower face value and lower fixed rate mortgage rates. This massive program allowed millions of households to avoid losing their homes and ending up in foreclosure. The HOLC bought mortgages for two year and managed such assets for 18 year at a relatively low fiscal cost (as the assets were bought at a discount and reducing the face value of the mortgages allowed home owners to avoid defaulting on the refinanced mortgages).
  
  [.] Over a year has been wasted playing with minor and ineffective programs while the perfect storm of the century was battering financial markets and the economy.
  
  At this point a severe recession is unavoidable; the only question is how severe and protracted it will be. Debt reduction and public recapitalization of banks will not instantly resolve every problem and will not prevent a painful recession that – at this point – will last at least 18 month.”
  
  Yeah, and we’re talking multi-trillions.
  
  Gold positive.
BooMan on September 19, 2008 at 9:41 am

Below is a Statement from Senator Barack Obama on the Emerging Federal Reserve – Treasury Plan

“The events of the last few days have made it clear that we must take further bold and decisive action to shore up confidence in our financial markets and avoid a deepening economic crisis that could jeopardize the life savings and well-being of millions of Americans. I support the effort of Secretary Paulson and Federal Reserve Chairman Bernanke to work in a bipartisan spirit with the Congressional leadership to find a systemic solution to our deepening crisis, and I will closely examine the specifics of their effort and the opportunities for swift action. As I review the emerging details of Fed-Treasury proposal with my top economic advisors this morning I will be guided by four basic principles:

“First, we cannot lose sight that we are in the midst of a broad economic crisis that also requires immediate action to create jobs and help support distressed homeowners and communities. For too long, this Administration has been willing to hit the fast forward button in helping distressed Wall Street firms while pressing pause when it comes to saving jobs or keeping families in their homes. Swift and unprecedented action to shore up Wall Street must come alongside equally swift and serious efforts to help struggling families on Main Street, create new jobs, and grow our middle-class once more.

“Second, any taxpayer-funded support must have as its focus protecting our nation’s long-term interest in a stable financial market and a growing economy rather than rewarding particular companies or the imprudent decisions of borrowers or lenders. These extraordinary steps must be designed with only the public good in mind, not to enhance the personal gain of CEOs and management at taxpayers’ expense.

“Third, this plan must be temporary and coupled with tough new oversight and regulations of our financial institutions. There must be a clear process to wind down this plan and restore private sector assets into private sector hands after restoring stability to the system. Taxpayers must share in any upside benefit that such stability brings.

“Finally, this plan should be part of a globally coordinated effort with our partners in the G-20. We are facing a global financial crisis and the United States can take a leadership role in coordinating a global response to the present crisis, as well as greater regulatory cooperation and alignment to prevent future crises.

“As we move beyond immediate actions to stabilize financial markets, it is important that we build upon the ideas I have laid out over the last several years about how to modernize our financial regulation. Eliminating consumer protections and lax oversight contributed to the crisis we are in today, and establishing commonsense rules of the road for our financial system can help restore confidence in our financial system.

“Given the gravity of this situation, and based on conversations I have had with both Secretary Paulson and Chairman Bernanke, I have asked my economic team to refrain from presenting a more detailed blue-print of how an immediate plan might be structured until the Treasury and the Federal Reserve have had an opportunity to present their proposal. It is critical at this point that the markets and the public have confidence that their work will be unimpeded by partisan wrangling, and that leaders in both parties work in concert to solve the problem at hand,” said Senator Barack Obama.

link
tampopo on September 19, 2008 at 9:45 am

A diary over at ET, “Let Wall Street Burn” by NBBooks begins with a paragraph worth sending to all local newspapers:

At the cost of your future, the U.S. financial system is being saved. For a half century, the United States has been unable to find a hundred billion or so a year to fund general healthcare, but now that financial powerhouses like Bear Stearns, Freddie Mac, Fannie Mae, and AIG are crumbling, the U.S. Treasury can magically procure trillions of dollars in promises without so much as a nit of resistance in either chamber of the U.S. Congress.
rdf on September 19, 2008 at 10:25 am

When pols start playing economists you know we are really in trouble.

Short sales are a perfectly legitimate way to trade. At any time there are people who want to bet that a stock will decline as well as those who want to bet that it will rise. If you ban the pessimists from the market then the optimists will have no counterbalance and sales will just shrink and the stock will fall anyway.

There is a legitimate reason to ban “naked” short sales. This is where one doesn’t borrow the stock to sell it, but just sells without owning any. If this is done in a concerted fashion it can lead to wide swings, especially if the stock starts to rise and the naked sellers have to pony up more money or buy the stock. With money to lend being in short supply allowing these traders in would put a further strain on the market for funds.

The stock market is one of the few places where a “free market” tends to work. There are lots of traders, they all have access to pretty much the same information (or lack) and no trader controls much of the market. This is not true of the side market between big firms, hedge funds and the like, which is where the trouble lies.

Banning covered short selling is just stupid and will only make things worse.
mainsailset on September 19, 2008 at 10:40 am

Not to oversimplify but it looks as though the Financial sector is culling the market to shove the dead wood into the taxpayers’ column and move the value into the hands of the incoming Big Monopoly.

Trouble with a Capital T

About The Author

Steven D

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