Hang On: Hedge Funds Aren't Done Selling

Hang On: Hedge Funds Aren't Done Selling
10/27/08 - 12:56 PM EDT
,
Jeff Bagley

Editor's note: This was originally published on RealMoney. It is being republished as a bonus for TheStreet.com readers.
The newspapers blame the weakening economy and somber earnings forecasts for the sharp selloffs we've been experiencing. Declining earnings and recession fears play into the declines, to be sure, but the real story -- which does not get the headlines it truly deserves -- is the mass liquidation that is occurring within the highly leveraged hedge fund community.
The mind-boggling size of the redemptions -- resulting in the need to sell at any price, especially if leverage is involved -- renders obsolete even the most seasoned professional's playbook. Gaming investor sentiment and using valuation as a guide have proved to be folly in the face of the avalanche of forced selling.
The good news is that valuations will matter eventually, and the incredible amount of cash that is currently on the sidelines will be put to work. For now, though, it is imperative that investors realize that the selling we are seeing now is not the work of rational human beings. Rather, it is the result of the largest deleveraging in financial history.
Half a Trillion?
The numbers are staggering. Although estimates vary, the total size of the hedge fund industry was about $1.8 trillion at the end of the third quarter, with about a third of that controlled by funds of funds, which are notorious for their itchy trigger fingers. Redemptions in August and September were substantial, at about $60 billion according to Eurekahedge, with most of the money coming out of long/short equity funds.
The high level of redemptions, together with the negative performance, has resulted in hedge fund assets falling precipitously in the third quarter. The total decline in hedge fund assets was on the order of $160 billion. That was the third quarter. Unfortunately, the damage has been much, much worse so far in the month of October.
Although data are sketchy at this point, many believe that hedge funds are facing redemptions on the order of half a trillion dollars. This is certainly not a surprising number given the amount of money that funds of funds control, and given the fact that many absolute return strategies are losing money -- a lot of money -- institutions and individuals alike have been losing at least a little faith in the entire asset class.
The bad news is that the hedge funds are not done liquidating, and the constant selling creates a vicious cycle -- a negative feedback loop -- on both Wall Street and Main Street. Funds are forced to sell as valuations move lower, and Main Street grows ever more frightened by unending incineration of wealth.
The headlines attribute each successive drop in the market averages to the latest earnings disappointment or lowered forecast, but the real story is the forced selling. The forced sales -- especially of the margined funds -- have overwhelmed the market, and the situation is only made worse as programs and humans have piled on to the downside.
Note the extreme moves at the end of each day, as the margin clerks try to give the foundering funds a chance for the market to turn in their favor. Ultimately, however, the collateral must be protected and the funds are forced to unwind their positions.
Sidelined Cash Will Be Put to Work Eventually
The good news is that many in the hedge fund and mutual fund industry have been somewhat ahead of the curve, raising cash on the way down. That means there is currently a tremendous amount of cash on the sidelines. That money at some point will move back in to the market, but so far most trading desks have not been seeing buying of any real consequence.
It will happen, though. There are a great many stocks that are trading at levels that discount the very worst of outcomes. Stable, defensive businesses with high levels of cash and prodigious amounts of cash flow are now trading at extremely low valuations. I will focus on some of those opportunities in future columns, because I am confident that investors will realize sizable gains from these levels over the next few years. So, yes, there is hope.
But for now, valuation and sentiment does not matter. It is imperative for investors to realize that and to acknowledge exactly what they are up against. This is the Great Deleveraging of 2008, the likes of which nobody has ever seen.

corsi e ricorsi

"Non mi risulta ci sia nulla di negativo nei fondamentali del mercato azionario, delle imprese e della struttura creditizia a esso relativa".

Sbagliato, non e’ Bush...
No, non e’ Draghi...
No, non e’ neanche Bernanke...
Ah no, non e’ neanche Berlusconi

Così aveva parlato, alla vigilia della grande caduta dei mercati finanziari, Charles E. Mitchell, presidente della National City Bank.

Era il 22 ottobre 1929.

Il giovedì successivo sul New York Stock Exchange furono scambiate 12,9 milioni di azioni.
L'ondata di panico tra gli investitori non si fermò e il Dow Jones inaugurò la settimana successiva con un calo del 12,82%.
Il giorno dopo, 24 ottobre 1929, l'indice perse un altro 11,73%.

D'altra parte, la grande crisi non era arrivata totalmente inattesa. Nel mese precedente al "giovedì nero" del 24 ottobre, data d'inizio della crisi, i mercati avevano già dato forti segnali di instabilità. All'inizio di settembre del '29 la media del rapporto tra prezzi e utili delle azioni di S&P Composite aveva raggiunto quota 32,6. Nel mese successivo il valore dei titoli scese del 17%, per poi recuperare metà delle perdite e calare di nuovo.

La spirale ribassista non si fermò, e il 24 ottobre si scatenò il panico tra gli investitori. In una sola seduta furono vendute 12,9 milioni di azioni. Il giorno successivo alcuni tra i più grandi banchieri d'America si riunirono per cercare di trovare una soluzione alla crisi. Con il capitale messo a disposizione dai colossi della finanza di allora, come il numero uno della Chase National Bank, Albert Wiggin, e il presidente della Morgan Bank Thomas W. Lamont, il vicepresidente della borsa, Richard Witney comprò titoli di alcune tra le principali blue chip a un prezzo che ne sopravvalutava nettamente il valore. Ma la mossa non riuscì, come sperato, a spingere gli investitori ad acquistare di nuovo, ed ebbe come unico effetto una chiusura di sessione piatta. Ma il peggio doveva ancora arrivare.

Lunedì 28 ottobre l'ondata di vendite continua, e il Dow Jones perde il 12,82%. Il giorno successivo è il caos. Il principale indice della Borsa della Grande Mela lascia sul terreno altri 11,73 punti percentuali. Solo in quella sessione vengono bruciati 14 miliardi di dollari. E' il "martedì nero". Il crollo si arresterà solo l'8 luglio del '32, con il Dow Jones che chiude a quota 41,22 punti. Il 3 settembre 1929 era a 381,17 punti, il record di allora. In meno di due anni l'indice aveva bruciato l'89% del suo valore e dovette attendere fino al 1954 per recuperare le perdite.
Nelle parole dell'economista Richard M. Salsman "chi comprò azioni nella metà del 1929 e le tenne vide passare la maggior parte della vita da adulto prima di ritornare in pareggio". Il panico si diffuse presto a tutte le piazze statunitensi ed estere. Si parla di numerosi suicidi di squali della finanza che in poche ore avevano visto svanire nel nulla tutte le loro ricchezze, un fenomeno successivamente ridimensionato da John Kenneth Galbraith in quello che è forse il libro più famoso sull'argomento: "The Great Crash, 1929".

I mercati finanziari di tutto il mondo vararono misure per sospendere i titoli che registravano ribassi eccessivi. Nel 1933 il Glass-Steagall Act introdusse la distinzione tra banche commerciali e banche d'affari, quegli istituti che, oltre a gestire depositi e fornire prestiti, si occupano del mercato dei titoli. Nel frattempo lo Smooth-Hawley Tariff Act del 1930 aveva bruscamente aumentato i dazi doganali sulle importazioni, spingendo i partner commerciali degli Usa a reazioni dello stesso segno e alimentando la sfiducia dei mercati e, con essa, le tendenze al ribasso. Era iniziata la Grande Depressione, le cui conseguenze inizieranno ad avvertirsi presto anche oltreoceano.

Cramer's 'Mad Money' Recap: Hedge-Fund Madness

Cramer's 'Mad Money' Recap: Hedge-Fund Madness
10/23/08 - 07:49 PM EDT
Forced selling by hedge funds is behind the late-day market volatility these days, Jim Cramer told the viewers of his "Mad Money" TV show Thursday.

He fears we may never see a bottom until the selling comes to an end.

Cramer said many hedge fund strategies have just been dead wrong, such as the betting on a Chinese recovery after the Olympics that failed to materialize. As evidence, he used the Baltic Dry Shipping Index and the Shanghai Composite Index to graphically show how much China's economy has slowed.

The result of hedge funds gone bad is forced selling, he said. At around 2:45 p.m. each day, hedge funds begin preparing for the next day's round of redemptions by liquidating their ill-conceived positions.

These billion-dollar liquidations, in turn, wreak havoc on the markets, causing huge late day declines and subsequent snap-back rallies. "These funds are getting killed," he said.
Cramer also blamed on what's known as "fund-to-fund managers," middlemen between the large hedge funds and their clients. These managers, who typically take a 1% to 2% commission for their services, often pressure funds for immediate redemptions, forcing managers to think only for the short term.
Cramer doesn't expect this trend to end anytime soon. Even worse, he expects to see a pickup in mutual fund selling about the time many investors receive their October statements and realize the magnitude of their losses. "This is when people will really start pulling their money out," he warned.
Until then, Cramer said this market hasn't bottomed yet. "Until the only ones left in stocks are the ones who never sell, we won't find a bottom," he said.
In the hunt to find high-yielding, recession-resilient dividend stocks, Cramer invited Kinder Morgan Energy Partners' chairman and CEO, Richard Kinder to talk about his company's whopping dividend yield.

Cramer explained that as a master limited partnership, Kinder Morgan must return all of its profits to its shareholders, and that's exactly what this natural gas pipeline operator has been doing. Kinder currently has a 8.6% dividend yield, and is expected to raise that yield 15.3% in 2009.
Given Kinder's long history of dividend raises, Cramer said money invested in the company will double every eight years. In fact, an investment made in December of 1997 would be up 213% solely on dividend yield, and had those dividends been reinvested, the return would be a stellar 498%. "I like this stock," he said.
Kinder explained that his company acts much like a toll road, collecting fees for the products that travel through it. He said the company is not affected by the price of natural gas and even has long-term through-put contracts in place to hedge against large scale declines in volume.
According to Kinder, his company's goal is simply to provide nice growth on top of a nice yield. The company continues to expand its pipeline system, connecting to both new natural gas sources as well as to new areas of demand.
Healthy Nuts

As evidence that some companies are still making money in this horrible market, Cramer welcomed Michael Mendes, president and CEO of Diamond Foods (DMND Quote - Cramer on DMND - Stock Picks) to the show to see if he's nuts for recommending this leader in the nut and snack category.
Cramer said the stock is up 51% since he last recommended it on Feb. 5, 2007.
Mendes said his company has brought innovation and excitement to what traditionally had been a commodity business. He said it has introduced new flavors and packaging to nuts and nut snacks, and is appealing to a younger demographic for the first time.

He said Diamond has positioned itself and its products as a healthy alternative to most other snacks.
Mendes said his company is working hard to increase distribution and break into non-traditional distribution channels. He cited the company's recent acquisition of the "Pop Secret" brand of popcorn from General Mills (GIS Quote - Cramer on GIS - Stock Picks) as an opportunity for the company to expand and innovate.
Cramer called Diamond a great company, citing its recent earnings beat by 6 cents a share as proof that Mendes' plan is working.
Mad Mail

In this segment, Cramer told a viewer that Apple (AAPL Quote - Cramer on AAPL - Stock Picks) and Google (GOOG Quote - Cramer on GOOG - Stock Picks) are two of the best run companies in America.
He said if these two companies can't rally in this market, then nothing can.
Lightning Round

Cramer was bullish on Duke Energy (DUK Quote - Cramer on DUK - Stock Picks), Eaton (ETN Quote - Cramer on ETN - Stock Picks), Qualcomm (QCOM Quote - Cramer on QCOM - Stock Picks), Apple (AAPL Quote - Cramer on AAPL - Stock Picks) and Google (GOOG Quote - Cramer on GOOG - Stock Picks).

He was bearish on Netflix (NFLX Quote - Cramer on NFLX - Stock Picks), General Motors (GM Quote - Cramer on GM - Stock Picks), Ambac Financial Group (ABK Quote - Cramer on ABK - Stock Picks), Broadcom (BRCM Quote - Cramer on BRCM - Stock Picks), Amylin Pharmaceuticals (AMLN Quote - Cramer on AMLN - Stock Picks), Mosaic (MOS Quote - Cramer on MOS - Stock Picks) and Amazon.com (AMZN Quote - Cramer on AMZN - Stock Picks).

Cramer: Lots of Stocks Aren't Low Enough

Cramer: Lots of Stocks Aren't Low Enough
10/23/08 - 01:09 PM EDT

This post appeared earlier today on RealMoney. Click here for a free trial, and enjoy incisive commentary all day, every day.
The bad stuff is in the market. It just has to get more in. That's all. That's the conclusion you have to reach when you see companies like Terex (TEX Quote - Cramer on TEX - Stock Picks), which is valued at only a billion and a half dollars, or Joy Global (JOYG Quote - Cramer on JOYG - Stock Picks) at $2 billion and change or McDermott (MDR Quote - Cramer on MDR - Stock Picks) at $3 billion.

In other words, forget about the stock prices. They are almost all absurd unless we are headed into a recession of such magnitude that companies start showing severe losses in the first quarter. Think about the market cap size. If Terex, which is actually a pretty good machinery company, can sell at a billion and a half dollars -- about the price that some acquisitive company might have paid for a division of Terex a year ago -- why can't it sell at $1 billion? How about $800 million? What's to stop it? The sellers at this point obviously don't even care about it, not one bit. They just want money. The buyers have had their heads twisted off and don't want anything more to do with it. No one wants to recommend it because the estimates are too high.
And without a dividend, it has no protection; besides, people might perceive that the dividend can't be paid -- a la Freeport (FCX Quote - Cramer on FCX - Stock Picks) -- and sell it anyway.
Last night I had a call from an employee of Parker-Hannifin (PH Quote - Cramer on PH - Stock Picks) who wanted to know what I thought of the stock at $37. I know I have liked this company for years, just a solid metal bending company that has done many things right and really represents the best of American manufacturing. But I took a look at the yield, 2.63%, and said simply that it hadn't fallen enough.

That's how I feel about so many stocks that are owned by the wrong owners with the potentially right owners either on the sidelines or petrified -- not down enough yet.

And because of the phony nature of how the market trades -- the price could be up or down 4 in a heartbeat -- why not wait until it at least yields something more worthy? Because with the exception of NRG (NRG Quote - Cramer on NRG - Stock Picks), there hasn't been a single opportunistic offer of a company whose stock has been beaten down beyond reason.
Except that it could be beaten down beyond reason by another 10% or 20% and no one would care.
At the time of publication, Cramer was long Freeport-McMoRan.

Credit Default Swaps: Bad Enough to Ban?

10/21/08 - 02:05 PM EDT

AIG , C (Action Alerts PLUS PICK) , GS , JPM , LEHMQ.PK , MS

 Dan Freed

There seems little doubt tighter regulation of esoteric financial derivatives that have played a major role in the financial crisis is on the way, but one influential lawmaker is weighing a more drastic measure: banning them outright.

Sen. Tom Harkin (D., Iowa), chairman of the Senate Agriculture Committee, which regulates derivatives and so has a claim to authority over credit default swaps, has repeatedly questioned whether the $60 trillion industry should be outlawed. The unregulated derivatives, which insure lenders against borrowers' default on debt, have been blamed for the financial meltdown of companies like American International Group (AIG Quote - Cramer on AIG - Stock Picks), which required a multi-billion government bailout last month.

"They've been touted as reducing risk, but as we have seen, it has actually increased the risk, the systemic risk, of the whole society," Harkin said during an Oct. 14 hearing exploring the need for greater regulation of the derivatives.

It is unclear how much support an outright ban of CDS would have in Congress and Harkin has not yet introduced legislation on the subject. Still, the debate has exposed the enormity of the gulf between a Democratic party that looks to have a significant mandate to regulate business for the first time in decades and a Wall Street community that is used to being left alone by Washington.

"People on trading desks don't really typically know how to interact with people who are making laws, because most of the stuff we do is unregulated," says a senior trader at a large bank, who declined to be identified.

The federal government's aggressive actions to protect the financial system, including a plan to invest $250 billion in preferred equity stakes in major banks like Goldman Sachs (GS Quote - Cramer on GS - Stock Picks), Morgan Stanley (MS Quote - Cramer on MS - Stock Picks), JPMorgan Chase (JPM Quote - Cramer on JPM - Stock Picks) and Citigroup (C Quote - Cramer on C - Stock Picks), suggest that strings will be attached in the form of stricter laws, although we haven't yet had much of a taste of what those laws might be.

That may be why the threat to ban CDS has caught Wall Street totally unprepared. The financial industry's chief lobbying arm in this area, the International Swaps and Derivatives Association, seems unable to bring itself to admit the need for any regulation at all. Ask ISDA if it supports regulation, and it doesn't provide a clear yes-or-no answer.

"ISDA continues to support the development of options for participants in the credit derivative markets to undertake their business in the most prudent and efficient manner and to the highest standards of commercial conduct," the trade group says in an emailed statement.

"ISDA is not the most constructive force in all of this," says John Coffee, a law professor at Columbia University.

The Wall Street trader agrees. "Congress is swinging all the way in one direction with a pendulum, the Street is saying 'no regulation,' and we're going to end up in the wrong place," he says. "We're going to have to work together to come up with good regulations."

CDS are unregulated, privately negotiated contracts that allow creditors to insure themselves in the event that their borrower defaults. But the derivatives have also been used for speculative purposes -- these are known as "naked" CDS, in which third parties trade the derivatives as a way of betting on the health of a given company or, in some cases, a basket of securities.

Fear of the destructive potential in this little-understood but massive market was an important reason -- if not the only reason -- the Federal Reserve did not allow Bear Stearns or AIG -- both big players in the CDS market -- to fail. Many observers argue the Fed's decision to letLehman Brothers fail on Sept. 14 threw the CDS market and, in turn, the stock market into turmoil, which led to Congress' passage of the controversial $700 billion bailout on Oct. 6 and its $250 billion investment in the banking system eight days later.

Credit default swaps have also caught the attention of New York state and federal attorneys who are investigating market manipulation in the product, The New York Times reported Monday.

Harkin suggested that if CDS cannot be outlawed, they should be traded on an exchange and subject to regulation by state insurance commissioners. It is unclear, however, exactly what he contemplates banning or better regulating. Congressional Quarterlyon Oct. 14 reported Harkin planned to introduce a ban on naked CDS. But in hearings, Harkin often seemed to lump them in with other complex financial derivatives. At one point, he referred to a $587 trillion market for "all types of financial swaps," and later a $62 trillion CDS market, so when he asked "shouldn't we just outlaw all of these fancy little things?" observers were left to draw their own conclusions.

Harkin's press office did not return calls asking them to clarify his position.

The Fed, which has been trying to get some control over the industry for more than three years, is also getting more involved. The central bank is suddenly pushing hard to centralize trading in CDS by establishing what is known as a clearinghouse, which would make sure both parties to a trade meet certain regulatory and capital requirements. Fed officials have told banks a clearing function needs to be established in a matter of days, says Jamie Cawley, CEO of credit derivatives broker IDX Capital. A New York Fed spokesman declines to comment on how urgently the Fed is pushing its agenda.

Columbia University's Coffee says setting up a clearinghouse is critically important.

"Until we get a clearinghouse, there is the continuing possibility, maybe even more than a possibility, that sooner or later we'll have a major crisis in the over the counter derivatives market," he says. "It still could develop because AIG appears to be still several billion -- several dozen billion short of what it needs to remain as a going concern."

AIG spokesman Nick Ashooh says AIG is working on selling assets and still has access to several billion dollars worth of credit, but says he "will not speculate," on whether AIG might need to borrow more money from the government.

Despite the threat of a CDS-led market meltdown, Coffee says an outight ban is ludicrous.

"This would be the 21st century equivalent to the Luddites, who 200 years ago tried to destroy all the knitting mills because they were putting workers out of business," he says. "The credit default swap lacks transparency today, but in terms of what it does: it's basically a sophisticated insurance policy, and it makes every bit of sense that people who want insurance should be able to purchase it."

That way of thinking has led several observers to argue that the market should be restricted to creditors who want to insure themselves against a default by a debtor, as a ban on naked CDS would do. Michael Greenberger, law professor at University of Maryland and a former director of trading and markets at the Commodity Futures Trading Commission, favors that solution, which he estimates would shrink the market by 80%. Naked CDS should probably be banned, he says.

"I'm perfectly happy to have a discussion with those who would advocate otherwise, but I don't understand what the economic interest in [naked CDS] is," Greenberger says. "It is nothing more than taking a flyer, for example, that AIG will fail, or Lehman will fail, and I don't think we should be writing those guarantees. They're essentially shorts on companies outside of the regulated stock market. If you want to short a company, short it on the stock market; don't buy a derivative."

But such a remedy would amount to an outright ban, according to the trader, who says banks that write CDS protection must be also able to hedge themselves, which he says is done by actively buying and selling naked CDS.

While hedge funds are big users of CDS and would probably prefer to have them around as another weapon in their arsenal, they have less to lose than the banks if the instrument goes away. David Tepper, founder of hedge fund Appaloosa Management, says CDS should be centrally cleared with less leverage allowed and more money down required.

"There's nothing inherently wrong with CDS," Tepper says. "The problem was when you only put down 2% and could do things endlessly. But if they ban, it they ban it. I'll live with that."

The banks are likely to be less blasé, as is evident from the frustration in the words of the CDS trader who suddenly finds his livelihood threatened by a regulatory zeal in Congress that has been dormant for a generation, at the very least.

CREDIT CARDS & LEVERAGED BY OUT! LO TSUNAMI DEL DEBITO ALL'ORIZZONTE

da ICEBERG FINANZA 21/10/08

CREDIT CARDS & LEVERAGED BY OUT! LO TSUNAMI DEL DEBITO ALL'ORIZZONTE

Alle volte mi fermo, salgo sulla plancia del nostro veliero e guardo alla sua scia, tra le onde ed i gabbiani! Ancora oggi mi chiedo dove stiamo andando, come è possibile che io abbia saputo vedere la dove milioni di persone non hanno neanche accennato lo sguardo, seguito da un manipolo di splendidi compagni di viaggio!
Abbiamo intravisto prima di chiunque altro ogni iceberg, scoglio o banco di sabbia di questa crisi epocale, aiutati dalle stelle polari del firmamento finanziario ed economico mondiale, stelle reali che hanno saputo vedere al di là dell'orizzonte, armati di passione, realismo, coraggio e sete di verità, analizzando ogni minimo particolare dove il sistema stesso faceva scendere quotidianamente un lenta ed inesorabile cortina fumogena. Abbiamo saputo impostare una rotta che va al di la di questo " Regno delle Tenebre", privo di qualsiasi trasparenza e verità, lo stesso "Regno" che oggi si affanna a consultare mappe e strumenti nautici alla ricerca di un punto di approdo, mentre noi guardiamo al di là alla ricerca di un'alternativa reale, spesso presente nelle nostre realtà!
Quando nel dicembre dello scorso anno scrissi il post dal titolo lo TSUNAMI_DEL_DEBITO ero consapevole del potenziale devastante di questa nuova ennesima follia demenziale, che sosteneva i consumi americani, unitamente alla leggenda infinita del MEW, l'home equity, mortgage equity withdrawals, il bancomat immobiliare dove il consumatore americano attingeva risorse per i suoi consumi, sul presupposto che il mercato immobiliare sarebbe salito all'infinito.
Chapeau! " L'abitudine rende sopportabili anche le cose più spaventose " ( Esopo ).
Il fenomeno "subprime"...... una passeggiata in Central Park al confronto, i druidi della finanza hanno cartolarizzato ogni sorta di debito, hanno impacchettato l'impero del debito, immobiliare, carte di credito, credit default swaps, leasing, credito al consumo, leveraged by out, munibond, mutui alle famiglie, student loans e il futuro delle giovani generazioni, in sintesi hanno elevato alla potenza demenziale tutto quello che le loro menti concepivano infinito.
Il buon Benjamin Franklin, uno dei patri della patria americana soleva ricordare che i creditori hanno miglior memoria dei debitori.
Tempo fa l'orgasmo del debito insito nelle carte di credito raggiungeva la siderale cifra di 915 miliardi di dollari, oltre il doppio dei famigerati "angeli" subprime, rischio disseminato per la finanza mondiale, rischio che poggia su fondamenta costruite sulle sabbie mobili, nessun mattone a garanzia.
Lo scrissi nel settembre del 2007, urlai ai quattro venti il potenziale di questo impero del debito, segnalai il nome di ognuna di queste follie collettive, senza dimenticare i "leveraged by out" ai quali accennerò a breve.
Ogni iceberg, scoglio o banco di sabbia di questa crisi è stato preventivamente segnalato da Icebergfinanza. Questa analisi del WSJonline testimoniava come ormai il virus fosse ampiamente diffuso attraverssro tutti i livelli di solvibilità.
L'avrete già letta, ma rileggerla vi aiuterà ad aprire gli occhi su questo sistema, fondato sui consumi, ad oltranza senza sosta esponenziali, per sostenere il breve termine a qualunque costo.
Su REPUBBLICA si ricorda che secondo un rapporto di Innovest Advisors 41 miliardi di dollari sono in sofferenza, all'inizio di una recessione della quale nessuno conosce l'entità ma che si preannuncia lunga e profonda. Oltre il doppio nel 2009, il tutto rigorosamente cartolarizzato per la bellezza di 365 miliardi di dollari altro giro, altro regalo!
Sottostante di questi innovativi CDO, zero, nessun mattone che sostenga il debito!
Chissà cosa starà pensando il "Castello di Carte" derivate, dall'alto del suo inestimabile valore pari a 700.000.000.000.000 di dolori! Bazzecole!
Oggi tutti chiedono la fine dell' "OVER THE COUNTER" il ritorno alla regolamentazione per i derivati, benvenute tra noi, piccole addormentate nel bosco del neoliberismo!
Carte di credito a colazione, ovunque, magari anche per l'elemosina, credito illimitato, subprime ovviamente. JPMorgan con il 20 % di fatturato in questione, sostiene il report di Repubblica, comunica un aumento del 45 % dei default nel terzo trimestre in accelerazione. Il resto lo lascio alla Vostra attenzione.
Americam Express spreme gli agrumi americani, per consegnare all'attesa delle trimestrali risultati accettabili, ma ci fa sapere di aver riportato perdite per 1,4 miliardi di dollari, in aumento del 51% rispetto ai 905 milioni dello stesso periodo dello scorso anno. Ci vediamo il prossimo anno, auguri!
Ed ora veniamo ad un argomento che molti dimenticano, ma che Icebergfinanza ricorda da tempi immemorabili, la stagione dei "leveragedbyout" altra immensa follia collettiva, con i suoi Collateralized Loans Obligation, per gli amici CLO.
IL_MAGO_DI_CLOZ scriveva nel lontano luglio 2007 un "oscuro" capitano di marina, di lunga data!
I CLO, talvolta detti anche CLOs ovvero derivazione sintetica, sono quelle obbligazioni che contengono portafogli di prestiti concessi alle imprese e successivamente rivenduti agli investitori. Prestiti concessi alle imprese.....come la mettiamo ra con la recessione che bussa alle porte.
Attraverso la cartolarizzazione viene costituità una società veicolo che acquista un numero indefinito di piccoli prestiti aziendali che vengono garantiti dai finanziamenti relativi.
La tecnica è sempre la stessa ovvero presuppone il trasferimento del rischio e la sua dispersione nell'universo dei mercati globali. L'incentivo è quello di poter offrire maggiori prestiti alle aziende anche con basso livello di accreditamento (rating) Teoricamente dovrebbe essere uno strumento che diversifica il rischio rispetto all'investimento in un unico corporate bond.
Ovviamente è diventato lo strumento che ha permesso ai private equity di mezzo mondo di poter dar vita alla più grande e intensa campagna acquisti aziendale che la storia ricordi, ovviamente tutto rigorosamente tramite LBO la tecnica del leverage by out.
CLO rimasti sullo stomaco dei bilanci finanziari, dopo aver finanziato i "pirati" del private equity, in nome di una non meglio identificata missione di salvezza per aziende " non produttive" che il Financial Times ci aiuta ad identificare.....NERVOUS_TIMES_FOR_INVESTORS_IN_LOANS_MARKET.
In Europe, the average price of the most commonly traded large leveraged loans to companies such as Alliance Boots, Ineos, NTL and United Biscuits saw its biggest weekly drop, according to S&P LCD, the market information service, and Markit Group.The US market for such debt, which is mainly used for private equity buy-out deals, has also suffered big falls in recent weeks as hedge funds and other market value sensitive investors have become forced sellers.
Hedge o non hedge questo è il problema! Ed in lontananza quel rumore di risucchio che prende il nome di "chiamata di margine" ........un circolo vizioso di rimborsi e margini, per ulteriori rimborsi che rende nervoso lo spread a breve termine di questi titoli, loans & credits. Il loans di Ford Motor sono scesi dai 65 cents ai recenti 42 in base ai dati Markit.
Investors put out requests for bids on portfolios of loans worth $2.28bn this month alone, according to S&P LCD, which compares with a total of $471m for all of the third quarter.
Signori, cari compagni di viaggio, questa è informazione, il resto chiacchere in libertà!
Il capo del pool per i reati finanziari della Procura di Milano, Francesco Greco, sottolinea che " Gli istituti di credito hanno fatto profitti con una 'mutazione genetica'. E anche alcune autorita' di vigilanza hanno investito in hedge funds''. E ancora: ''deve terminare questo senso di impunita', ma il parlamento vuole ridurre le pene per bancarotta''......
Il gioco delle tre carte, continua!
Alzo lo sguardo al cielo.......in attesa del Diluvio Universale! Scusate ma oggi ho bisogno di una valvola di sfogo! Anche il buon Draghi si è accorto che siamo in recessione, ...chi manca ancora!??
Secondo lo ILO, ufficio Internazionale del Lavoro, vi sono venti milioni di disoccupati, un possibile aumento di lavoratori poveri, che sopravvivono con meno di un dollaro al giorno di oltre 40 milioni e coloro che vivono con due dollari al giorno possono arrivare a 100 milioni in più. Un particolare ringraziamento alle nostre " Belle addormentate nel Bosco ".
Se non consumiamo non abbiamo futuro, questo è il messaggio principale della fiaba infinita, Bernanke sussura che avremo una crescita al di sotto del suo potenziale di lungo periodo per alcuni trimestri ma non si fermerà sino a quando non avrà raggiunto l'obiettivo di riparare, riformare il sistema finanziario e di riportare la prosperità. Forse vi sarebbe da riformare la ........materia grigia!
Politica monetaria espansiva, quindi tassi a zero e debito per tutti, la festa continua, andate in pace!
Il tempo della fiducia è finito, il tempo della fiducia in un sistema che utilizza l'uomo come un burattino.......sempre che quel burattino abbia ancora nel cuore il sogno di crescere per diventare un bambino, dimenticando il paese dei balocchi e il campo dei miracoli!

Crisi,Fmi:vicini a collasso globale

Crisi,Fmi:vicini a collasso globale
"Attivate misure di emergenza"

Il Fondo Monetario internazionale ritiene che "il sistema finanziario globale sia sull'orlo di un collasso sistemico", ma appoggia il piano del G7. Lo dice il direttore generale Dominique Strauss-Kahn alla luce dell' "intensificarsi dei problemi di solvibilità delle maggiori finanziarie Usa e Ue'". Attivate le procedure di emergenza per le risorse del Fondo ai Paesi emergenti, non solo per quelli in crisi. Oggi a Parigi il vertice dell'Eurogruppo
Oggi intanto i quindici capi di Stato e di governo della zona euro si incontreranno a Parigi per cercare di dare una risposta coordinata alla crisi finanziaria. Secondo anticipazioni del quotidiano "Le Figaro", potrebbe essere presentato un piano di sostegno al settore bancario ispirato a quello inglese. Dal canto suo Bush è certo che serva una ''seria risposta globale'' per affrontare una crisi globale, che non si risolverà in una notteAnche Inghilterra e Australia corrono ai ripariSecondo il "Sunday Times", la Gran Bretagna lancerà lunedì il suo maggiore piano di aiuti bancari in quanto i quattro maggiori istituti del paese, HBOS, Royal Bank of Scotland, Lloyds TSB e Barclays, hanno chiesto sostegno per 35 miliardi di sterline (44 miliardi di euro). Questa decisione, senza precedenti, convertirà il governo nel maggiore azionista in almeno due dei quattro istituti, HBOS e Royal Bank of Scotland, ha affermato il quotidiano sul proprio sito web. Dall'altra parte del mondo intanto Il governo australiano garantirà tutti i depositi bancari per i prossimi tre anni, stando a quanto annunciato dal primo ministro laburista Kevin Rudd.

Cramer: I Was Too Bullish

Cramer: I Was Too Bullish
10/10/08 - 06:15 AM EDT

In the end, I was too bullish. I didn't think things would get so bad that they would sell what they could sell because they couldn't sell anything else. And that's what happened to the soft-goods components of theDow Jones Industrial Average.
If you remember my Dow 8400 crash scenario last month I put drastic but realistic price tags on a host of companies - including zero for General Motors(GM Quote - Cramer on GM - Stock Picks) (prescient, I guess). But I did not think that Johnson & Johnson(JNJ Quote - Cramer on JNJ - Stock Picks),Coca-Cola(KO Quote - Cramer on KO - Stock Picks),Procter & Gamble(PG Quote - Cramer on PG - Stock Picks), and Kraft Goods (KFT Quote - Cramer on KFT - Stock Picks) could be so easily annihilated.
My bad.
I am working on some new downside targets, but it is obvious now that we could be taking that soft-good fortress to levels that look ridiculously cheap, and will probably be ridiculously cheap, at the end of this crash.
Unlike the others, though, they are self-financing and in the end this is a selloff rooted in anything that needs financing, and if it doesn't, it just might stop down 10% from here.
Here's the reprise of the piece:
Let's run through the Dow 30:
1. Caterpillar(CAT Quote - Cramer on CAT - Stock Picks) can retreat back to $43 where it started both before the housing boom and before the energy boom and before BRIC became a dominant force. All of its markets will be challenged with housing downturns worldwide and energy prices retreating from highs, something that I think will happen as economies slow.
2. Citigroup(C Quote - Cramer on C - Stock Picks) -- $14. This is where it traded before the short-selling rules were created on July 15, and this is where it is going without a financing and a big investment. It might not stop there if there is no relief at all. I am really bearish on this stock without a plan.
3. Du Pont(DD Quote - Cramer on DD - Stock Picks) has a lot of businesses that are less cyclical than people think and a safe dividend. I would be surprised if it went much below $40, where I would like to buy it.
4. American Express(AXP Quote - Cramer on AXP - Stock Picks) has turned into a terrible lender with a product that is viewed as something that is no longer indispensable, courtesy great marketing by Mastercard(MA Quote - Cramer on MA - Stock Picks) and Visa(V Quote- Cramer on V - Stock Picks). This stock's headed to $31, maybe lower, as it is really a weak sister in the Dow now. 5. Disney(DIS Quote - Cramer on DIS - Stock Picks)traded at $25 when people thought there was nothing to it other than a declining advertising business and an expensive group of theme parks. This is a company I will buy for Action Alerts PLUS if it hits that downside target.
6. United Technologies(UTX Quote - Cramer on UTX - Stock Picks) is a BRIC derivative for certain with too much aerospace and a defense business that could be hurt by an Obama election. Knock it back to $51, which would be a repeal of the whole BRIC move.
7. Coca-Cola (KO Quote - Cramer on KO - Stock Picks) talked recently about how it is not immune from a retail sales slowdown; when it did, the stock retreated to about $48, where it would surely be headed again.
8. 3M(MMM Quote - Cramer on MMM - Stock Picks) is a play on worldwide growth in a number of industrial areas, and worldwide growth is on the decline beyond what this fine firm is ready for. It could have a huge decline in earnings, and I am putting it at $50.
9. General Motors(GM Quote - Cramer on GM - Stock Picks), without a plan and without a handle on Delphi and on the right kind of cars, will burn through the bailout money quickly and disappears. Yes, it goes bankrupt. Stocks don't get down to where they are like this one if something hasn't become out of control. This one's out of control.
10. General Electric(GE Quote - Cramer on GE - Stock Picks) -- I think it could trade down to $20. The decision to end the buyback, which was just wasting a gigantic amount of money, is now behind them, so all it would have to contend with is lower earnings and a less turbo-charged report.
11. McDonald's(MCD Quote - Cramer on MCD - Stock Picks): This one's going to suffer for pennies by a stronger dollar, but not much more, and it just boosted the dividend. I think it would be a gift below $57.

12. Home Depot (HD Quote - Cramer on HD - Stock Picks) retreats to where it was on that July 15 low, $21, where it finds buyers for that dividend.
13. Bank of America(BAC Quote - Cramer on BAC -Stock Picks): With the plan, this is the biggest winner in the Dow. Without the plan? Sorry, it revisits the low of July 15 as it has to get rid of these bad mortgages it is stocked with. Target is $18.
14. Chevron(CVX Quote - Cramer on CVX - Stock Picks): This is a slow-growth company with decent oil assets that would quickly go down to where its dividend made it compelling. Call it $54 as in a falling-oil environment -- perhaps down to $70. You will see price/earnings shrinkage continuing.
15. Hewlett-Packard (HPQ Quote - Cramer on HPQ -Stock Picks): This company's acquisition of EDS is going to work and help numbers for years, but the stock will still have to revisit at least its recent lows on fears of a worldwide tech slowdown; call it $41.
16. JPMorgan (JPM Quote - Cramer on JPM - Stock Picks): This company keeps doing everything right, but the plan would make this the best bank on earth other than Bank of America. Without the plan, it goes to its July 15 low of $31.
17. Pfizer (PFE Quote - Cramer on PFE - Stock Picks): Here's a company that can only make more money by firing people, which is a good strategy until you run out of people. Still, the dividend is safe for at least another two years, so I think the stock stays at $18.
18. Kraft (KFT Quote - Cramer on KFT - Stock Picks): A food company that is getting better run is nothing to rave about, but this new addition to the Dow sure beats the disastrous runAIG (AIG Quote - Cramer on AIG - Stock Picks) has had. I think it can drop a couple to $30 but not go much below that because it is so defensive.
19. Alcoa (AA Quote - Cramer on AA - Stock Picks) is a great mystery. During the great 21st-century commodity boom that say Phelps Dodge and Alcan disappear, this homely little aluminum company has done nothing! Now it is free to go to $19, as the boom is totally over.

20. Johnson & Johnson (JNJ Quote - Cramer on JNJ- Stock Picks) is a super stock. Well managed, great earnings, good pipeline, I think it goes up a couple from here.
21. Boeing (BA Quote - Cramer on BA - Stock Picks): Here's one that could get cut in half if the strike doesn't settle and the airlines around the world contract. It could go as low as $24. It's one of the most vulnerable stocks in the Dow because of its clients' stress and voracious need for hard-to-get capital.
22. Intel (INTC Quote - Cramer on INTC - Stock Picks)retreats back to where it was during the last tech recession -- $13. Think of it this way: It bought back a lot of stock. That money was wasted.
23. AT&T (T Quote - Cramer on T - Stock Picks) faces landline challenges and corporate weakness. In a disaster scenario, it could lose a third of its value. Call it $21. I only say that because look at what the competition, outfits like Qwest (Q Quote - Cramer on Q - Stock Picks) and Winstar are selling for with slackened to no growth. Bad geographies. At the bottom, there will be a lot of fretting about the dividend.
24. Verizon (VZ Quote - Cramer on VZ - Stock Picks) needs more phone lines, more frivolous texters and photo-senders and a heck of a lot of clients for FiOS. None is likely to happen in this environment. I could see the stock retreat back to $26. It didn't help that they bought Alltel ... for now. Same dividend worries as above.
25. Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks) is like Intel. Bought back a lot of stock. Nothing to show for it, and it now goes to $21.
26. Wal-Mart (WMT Quote - Cramer on WMT - Stock Picks) either stays the same or goes up, because that's where everyone will shop -- they'll all be trading down in retail.
27. Merck (MRK Quote - Cramer on MRK - Stock Picks) is pretty much where it is going to go. It's a challenged company with safe yield. $31.

28. IBM (IBM Quote - Cramer on IBM - Stock Picks)could be facing a huge headwind of global recession, and I think that its business is far more economically sensitive than people realize. It could lose as much as 50 points -- it used to be that low for a long time -- sending it to $60. This and Boeing are probably the two most severe cuts, and the ones I am most likely going to be too pessimistic about if things get a little better.
29. Procter (PG Quote - Cramer on PG - Stock Picks)stays at $68 or goes a little lower, not much. The company is set up to win in this environment.
30. Exxon (XOM Quote - Cramer on XOM - Stock Picks): If you repeal the whole oil boom, which is what will happen in a worldwide recession or worse, Exxon's failed buyback strategy will be revealed for what it was: a giant money pit. The stock could retreat to $57, as it has minimal dividend support.
At the time of publication, Cramer was long GE, Wal-Mart, Procter & Gamble, Chevron, JPMorgan, Johnson & Johnson, Kraft, and Hewlett-Packard.

Panic Creates Sale of the Millennium

da thestreet.com

Panic Creates Sale of the Millennium
10/10/08 - 12:26 PM EDT

Terry Savage
The markets have been hit by the financial equivalent of a neutron bomb. It has left the companies standing, but destroyed the value of the shares that represent their businesses.
Either the financial world as we know it is coming to an end -- or it's not. We'll only know in hindsight. But unless this is the proverbial "black swan," the totally unimaginable and unique event that annihilates capitalism, this panic will subside.

It's impossible to predict how low markets will go. But since stocks represent real assets, at some point cooler heads will decide there is value at these lower prices. When that happens, we'll look back on this as the sale of the millennium.

One good sign: People are starting to ask if markets can go to zero. Well, for sure, that would be a bottom. But that desperation is also a pretty good sign that even the most sophisticated players are ready to, or already have, thrown in the towel.

Instead of playing guessing games, let's see what history has to say about these losses. The S&P 500 is now down more than 40% from its peak in October 2007. That's not the worst bear market we've ever seen.

Market historian Jim Stack at InvestechResearch.com says the worst percentage loss came in the bear market of 1929, where the loss from peak to trough was 86.2%.

The runner-up for bear-market losses came in 1937-38. The market rebounded in the early '30s but fell more than 50% in 1937-38.

And in the bear market of 1973-74, the S&P 500 lost 48%, a figure that was matched in the tech wreck of 2000.

So the current decline, coming from lofty numbers, doesn't yet match the worst the market has seen -- and survived. As Stack notes: "The final market bottom is defined as the point of maximum pessimism on Wall Street."

Investors are always saying it's "different this time" to justify markets that go to excessive valuations. The most recent example was the belief that technology changed everything.
Now many investors fear that it's different on the downside, that this time the market collapse will never find a bottom. That's as unlikely as the belief that the market will always go up.
What is different this time is that we've turned millions of ordinary Americans into pension fund managers -- without an investment education, without risk-management tools and without self-discipline that comes from experience. It's not easy to see money melt away, and with it your retirement plans and dreams. And, thus, the panic is more widespread and personally targeted.
But one thing is sure: Panic selling is what creates market bottoms. And those who sell out at the bottom lose their chance of regaining value in the future, if and when their stocks rebound.
There are no guarantees in life or in the stock market. There is only historical perspective. History shows no one ever got rich betting against America. And that's the Savage Truth.

Four Ways to Help Us Out of the Crisis

da thestreet.com

Four Ways to Help Us Out of the Crisis
10/10/08 - 09:25 AM EDT

The catastrophic turn of events in the financial markets this month were actually exacerbated by the Treasury's "fixes" themselves.
From my "front lines" perch as a hedge fund manager that traverses up and down capital structures (loans, bonds, convertibles, preferreds, equities, options, etc.), let me offer four key observations and solutions that the equity-centric media coverage may have missed:
Problem No. 1: The Fannie(FNM Quote - Cramer on FNM - Stock Picks)/Freddie(FRE Quote - Cramer on FRE - Stock Picks) "bailout" eviscerated the preferred markets.
When Treasury Secretary Henry Paulson put Fannie and Freddie into conservatorship, he also eliminated the dividends on $36 billon of preferred stock, and that move sent formerly AA-rated securities to mere cents on the dollar overnight. Treasury's flawed assumption was that the agencies are special entities and that the treatment of their preferred shares ought not to affect the preferred securities of other financials. How utterly wrong and naive.
In the days following the "rescue" of Fannie and Freddie, the market for financial preferreds was essentially eviscerated, virtually eliminating any hope of recapitalization through public markets.
Why is this relevant? Aside from the direct consequences of many regional banks having to write their agency preferred investments to nearly zero and further eroding already-thin capital ratios, the overall market for preferreds is significantly larger than the amount of agency preferred outstanding. In fact, this market was one of the only capital markets that remained open to financial institutions in the last eight to nine months, and it raised nearly $80 billon during this period from straight and convertible preferred issuance.
It's one thing to "punish" common equity holders who arguably have lived off the "fat of the land" when Fannie and Freddie reaped abnormal profits, but it's entirely another thing to pull the rug out from under a class of investors (senior to the common) who stuck their neck out to recapitalize financial firms in need less than one year ago! This has caused preferred holders to hedge their exposure by heavily shorting the underlying stocks, further blowing out their cost of capital for the underlying companies.
Although Korea Development Bank walked away from purchasing a stake in Lehman for various reasons, the rapid erosion in financial preferred shares didn't help instill confidence in the prospective buyer.

Solution: Treasury should reinstate the dividends on Fannie and Freddie preferred shares and emphasize a renewed commitment to keeping the preferred asset class viable. The increased cost to taxpayers (roughly $644 million quarterly) is paltry compared with the hundreds of billions we're currently debating about in Congress, and it paves the way for private capital to re-enter the marketplace. This is ultimately what is needed to sustain any recovery.
Problem No. 2: Lehman's bankruptcy has severely eroded confidence between counterparties.
While it was arguably OK to draw the line and appease the "moral hazard" hawks by letting Lehman go, it was a disastrous mistake to not guarantee Lehman counterparty risk -- especially when Barclays was allowed to feast on its carcass. We have not even begun to see the shoes that are about to drop here, as Lehman was a very pervasive counterparty to innumerable sell-side/buy-side accounts.
While the face amount of credit default swap contracts has never been released, as of May 31, Lehman's net derivative position was $47 billon, cash collateral was $45.6 billion, and cross-product and counterparty netting was $43.3 billion. Keep in mind that the face amount of the derivative portfolio could be orders of magnitude greater than its net value. As a result of the bankruptcy, any over-the-counter trades done with Lehman have now been terminated.
To make things immeasurably worse, any associated profits from these trades have to be treated as senior unsecured claims in bankruptcy court. (By the way, Lehman's senior unsecured bonds are now trading at 15 cents on the dollar. This means that if I hypothetically had $1 million of profit in any over-the-counter trade I had on with Lehman, $850,000 of that "profit" just evaporated, and it would remain to be seen when I'd even get the remaining $150,000 back.
Furthermore, if I had cash collateral against any of these trades, or if I had prime-brokered my portfolio at Lehman (there is supposedly more than $40 billion of prime brokered assets that might be stuck), the cash and positions that are rightfully mine have yet to be returned, and the word is that it could take months. The knock-on effects of this disaster could be huge, and this will be widely felt, not only financially but also psychologically, because it undermines the validity of any and all transactions involving counterparty risk.

Ultimately, our financial system revolves around mutual trust, and not backstopping Lehman's counterparty obligations severely damages that trust. Perhaps the only good thing is that this debacle will speed up the move to a clearinghouse mechanism for the CDS market -- something that should have happened years ago.
Solution: Treasury should backstop Lehman's counterparty obligations. It may cost a lot now, but it could obviate future bailouts, since we don't yet know how widespread the damage is. They should have done this already by imposing counterparty guarantees as a condition for letting Barclays buy the assets for a song, but now it might be too late for that. Once again, Treasury needs to take on the mantle of leadership. The "moral hazard" problem should be dealt with, but not at the expense of confidence in the financial system as a whole.
Problem No. 3: The FDIC protection threshold is too low, and the FDIC is undercapitalized as it is.
With the collapse of IndyMac, "Main Street" mom-and-pop depositors already got a frightening dose of what a bank run could mean to their life savings. WithWashington Mutual(WM Quote - Cramer on WM - Stock Picks) on the brink, we are running the risk of overwhelming the FDIC, since WM's roughly $145 billion in retail deposits is three times the size of the FDIC's reserve. Obviously, depositors with more than $100,000 should be worried, but even much smaller, theoretically insured accounts are running scared in this environment.

Solution:To prevent bank runs, the feds must make it abundantly clear that the current limits on the FDIC should in no way mean that insurance is about to run out. Depositors must know that their cash is safe. In addition, the FDIC protection limit should actually be increased to multiples of the current $100,000 (it seems Jim Cramer agrees with me). While it might cost more for existing thrift failures being processed by the FDIC, the psychological impact of knowing you have a bigger umbrella will prevent potential bank runs and obviate the need for a massive FDIC bailout of a giant bank or thrift failure.

Problem No. 4: Grudging incrementalism plus a short-sale ban equals death spiral
As the fallout from Fannie/Freddie cascaded into Lehman, which then careened into AIG(AIG Quote -Cramer on AIG - Stock Picks), the Treasury devised yet another incredibly punitive, confiscatory "bailout": taking 80% of the equity in AIG in return for making an $85 billion bridge loan at an interest rate of more than 12%. Wow. When did the U.S. government get into the loan-sharking business? Was this seizure meant to engender confidence in our free market system?
The mistakes that the Fed and Treasury have repeatedly made since the onset of this crisis have been ones of grudging incrementalism. Each time they act, the timidity with which they apply Band-Aids instead of the required tourniquets ultimately results in even lower confidence in the system. Even worse, these Band-Aids are laced with a toxic ointment that kills both good and bad cells, so that the wound is never allowed to heal cleanly.
The culmination of these actions led to the harrowing near-deaths of yet another two bastions of Wall Street, Goldman Sachs and Morgan Stanley. It was the fear of government-inspired intervention and seizure that caused the run on these companies, not the "evil shorts," as the SEC and Treasury would have everyone believe. Yet, incredibly, the response was to ban short-selling of financials (and the list is expanding).
This is yet another example of a ham-fisted response to a problem that the feds themselves created, and this particular action may have the most insidious unintended consequences. If one is not allowed to hedge one's exposure via short-selling of equities, one is forced to get creative in how to limit one's exposure.

The resultant creative hedging practices inspired by this ban on short-selling is leading to wholesale panic-selling in the rest of the capital structure (everything senior to the equity, from preferreds to bonds to even secured bank loans), not to mention countless equity indices, precipitating a self-fulfilling "death spiral" in many of the names that are ironically on the no short-sale list.
Not only that, the short-sale ban has effectively shut down one of the most important asset classes that was once available to the financial sector -- the convertible bond/preferred market - because its main participants are arbitrageurs who require the ability to short out their equity exposures for bona fide hedging purposes. Over the last eight or nine months, financial institutions raised close to $40 billion in this asset class, when almost all other financing avenues were effectively shut. The law of unintended consequences has obviously struck again with this short-sale ban, basically shutting down another public capital market.
Solution: Lift the short-sale ban, albeit gradually, by reducing (not expanding) the list day by day. The old uptick rule could be reinstated as a compromise. Market participants must be allowed to hedge their exposures, or the resulting damage to other parts of the capital structure will force the underlying companies into a "death spiral."
Let the Pakistan ban on short-selling this year be a model for what not to do. After short-selling was banned on June 23, the Karachi SE-100 Index staged a massive 1,300 point rally for three days before collapsing 26% in the weeks and months after. Does the market response in the U.S. sound eerily familiar so far? Let's not wait for a 26% drop to find out.

Cramer: It's a Worldwide Crash

Cramer: It's a Worldwide Crash
10/06/08 - 11:49 AM EDT Jim Cramer

Here it is, the dawning of the selloff that will finally put us at levels where ... we will sell off again.
For two years the credit markets have been submerged under central bank happy talk and a sense that the worries were about inflation. You can see why in the outlines of the institutions that are failing now.

The problem is the Europeans got stuck fighting the inflationary war that ended in July. Rates are ridiculously high in Europe vs. the crunching of debt that is happening and will continue to happen.
In our country, the "Fundamentals are Sound" group at Treasury, and the "Whip Inflation Now" group at the Federal Reserve couldn't switch fast enough either.
But boy, are they great at public relations. There has been remarkable awe at how well Treasury, the Fed and the FDIC are handling the crisis.

It seems very misplaced. Some of it is pure economic ignorance. Fed Chairman Ben Bernanke studied the Depression, or so they say, and knew more about how to stop it than anyone. Actually, he knew less than anyone, and he and his merry band of governors and presidents presided over the deflationary destruction of Western finance with a bias toward -- are you ready? --inflation. Yes, that's still their bias. We were able to jump-start the economy in 2003 with rates as low as 1%. But our rates are twice that now even though we are in a deflationary spiral, not an inflationary one. We should be printing money left and right here but Bernanke is Hoover and we all know it now.

There's another sainted figure, who I guess must call the media all the time to burnish his image. That's Tim Geithner, the Federal Reserve Bank of New York president, who is supposed to be the eyes and ears of the Fed. We learn from The New York Times Monday that Geithner was the genius behind the "not too big to fail" decision to keep Lehman out of the Federal Reserve system. That was brilliant. We had rescued Bear, but not twice-its-size Lehman, perhaps because the watchdog/press hound Geithner didn't understand the complexity of Lehman's book, or because it was time to mete out punishment to the worst banker on earth, Dick Fuld.

And I thought the guy had a handle on it. I was fooled, but unlike Geithner, I would have had to call Fuld a liar, and you can't do that without subpoena power and a bunch of sources who would betray him. I knew only the people who surrounded him, and they told me everything was fantastic, just a little slow.

Of course, we know the truth now. The Fed has been put out to pasture, a victim of being theoretical, not practical, an organization that simply didn't take seriously those of us who warned them in person and on TV. What did they think, we made it up for ratings? Is that what they thought? You think I, a reputed bull, want to go on TV and scream that they knew nothing? I would rather recommend Colgate(CL Quote - Cramer on CL - Stock Picks), but given the crisis it sure seemed worth waking them up.
Even as late as the summer, the Fed thought for sure the price of iron and copper meant more than the implosion of housing-based finance.
Now along comes Sheila Bair and Hank Paulson, who alternately want us to believe that everything is sound (with public pronouncements that the worry is misplaced) and that there is a list of obscure banks that might have to be taken over.
Then Paulson comes to the Capitol and says the truth, that the Western world of finance is going to break, and Bair seizes Washington Mutual and tries to seizeWachovia(WB Quote - Cramer on WB - Stock Picks), no doubt to save Citigroup(C Quote - Cramer on C -Stock Picks), which could have risen, done an equity offering and joined Bank of America(BAC Quote - Cramer on BAC - Stock Picks),JPMorgan(JPM Quote - Cramer on JPM - Stock Picks) and Wells Fargo(WFC Quote -Cramer on WFC - Stock Picks) as the new titans of finance.
Of course, either the FDIC doesn't know the tax law changed to make it so if Wells bought WB it wouldn't have to pay taxes on ordinary income for years, or was oblivious to the imminent passage of TARP.

This, plus the disintegration of Lehman, which then left Morgan Stanley (MS Quote - Cramer on MS - Stock Picks) and Goldman Sachs (GS Quote - Cramer on GS - Stock Picks) in the hands of the shorts, was too much for everyone, and now no one lends to banks and it makes no sense to them, and no one wants commercial paper because it makes no sense to them.

Which is where we are this morning, in a worldwide crash that will leave us with gigantic institutions that we have never heard of, with balance sheets that are ridiculously large that must fall, and a hedge fund community that has lost control of its asset base.
And in this moment we are supposed to be buyers?
I say let it fall without me. I say keep selling industrials unless they yield more than 4%.
I say it is no longer in the hands of the central banks. It is in the hands of rational people making rational decisions to get out before more institutions fail, more hedge funds liquidate, and still lower prices are upon us.

That Sound You Hear is the Government's Printing Presses Running Overtime

Dear Money Morning Reader,

After some of the most tumultuous trading in history - not to mention the most pathetic political posturing we've ever seen - my e-mail box has overflowed with questions, comments and suggestions.

This week, I want to answer one of the most frequently asked questions that I've received: "Where does all the bailout money come from?"

Clearly, Uncle Sam doesn't have a safety-deposit box - or even a greenback-stuffed Chock full o'Nuts can buried out in his back yard - but right about now I'm betting that he wishes he did.

To pay for the new $700 billion bailout bill, or even to cover the ever-growing federal debt, the U.S. government sells securities - lots of securities. The money is literally created from thin air by authorization and subsequently lent to institutions, individuals, foreign governments and others for what basically boils down to the mother of all IOUs. A portion of it, of course, is physically printed by Team Bernanke and the U.S. Federal Reserve on its turbocharged printing presses - and put into circulation as currency.

With regard to the bailouts, theoretically the Fed accepts an institution's assets as collateral. Warts and all. In exchange, the Fed's money is regarded as "senior" to even other senior debt holders, meaning that the Fed gets repaid ahead of paying everybody else including other debt holders.

Earlier this month, for example, the U.S. Treasury Department sold $40 billion in short-term debt that it would buy back in 35 days as part of a special program that will allow the central bank to keep pumping cash into the system on top of hundreds of billions it is making available through other channels.

Most Treasuries are auctioned off more regularly by so-called "primary dealers," which are those financial institutions engaged in buying and selling U.S. government securities and which have established business relationships with the Federal Reserve Bank of New York, the biggest and most important of the 12 Fed banks. Individual investors can buy smaller amounts directly from the Treasury Department at auction or in secondary markets.

All of this is pretty plain vanilla stuff. But here's something that's actually very interesting: I'm hearing reports that at some of these auctions in recent weeks, several investors have literally bid zero - as in $0.00.

On the surface, that could be interpreted to mean that Treasuries are worthless. But in reality, this is one of the smartest moves I can think of for a professional trading house to make right now with cash it can't afford to lose.

What these guys are doing is simply lending money to the Treasury - knowing full well that they'll get it back in just over a month - instead of risking it in the stock market, or loaning to some other bank that has even more "toxic waste" on its balance sheet. In some cases, they're even reportedly paying for the privilege of knowing their short-term money is safe.

This reminds me of something that I saw in Japan in the early 1990s, at the start of that country's "Lost Decade," when there was actually a premium associated with the "short-term investment funds," or STIFs, that were held overnight.

In fact, the situation got so bad during the early days of Japan's collapse that banks were basically paying each other - and the Japanese government - to take overnight deposits. Many refused … and we know the rest of the story.

Admittedly, the comparison I'm drawing is sort of apples to oranges, but the idea is similar, as are the underlying circumstances. Financial institutions want to transfer risk from their books to Uncle Sam so that they can ride through this unscathed - or at least to minimize any additional damage they might incur.

What all this says about our own immediate financial future is open to debate. But one way to look at this is that these institutions - which are running hundreds of millions of dollars they can't afford to lose - believe the overall financial situation could get worse before it gets better. And that's why they are going to extraordinary lengths to protect their assets, just as their counterparts in Japan did nearly two decades ago.

Having personally lived through those events in Japan 18 years ago, my instincts tell me we'd be wise to pay attention. Now isn't the time to take anything for granted - and I do mean anything.

Best regards,

Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report