Pull up the daily charts of GS, MS or any other financial stock you want.   If the shorts aren’t selling then why are so many of these stocks below the open?

I thought only shorts sold stocks.

There seems to be a belief that putting one troubled financial company together with another troubled company immediately removes the fact that either or both are troubled.

They may get a reprieve and the next individual company may get most of the negative attention for the timebeing, but I don’t see where a marriage of two ugly people makes them look pretty.

Merrill may think it escaped attention and it may have in the short term, but nothing about their proposed deal with BAC changes the risks they still have.  And if they make it to the closing, the merged entity is not immune to selling in my opinion.  The same statement can go for any other shotgun wedding arranged by our central government matchmaker.

It’s easy to blame short sellers.  The last time I checked shorts did not build the balance sheets of these companies full of excessive leverage and inflated asset prices while selling toxic financial innovation and collecting huge fees for products that have no value other than manipulating financial statements.  All those smart management teams did that all on their own.  Well, they got a lot of help from the government who provided cheap interest rates and failed to do their job to regulate this mess.

Regardless, it does appear that the government will once again shift the blame entirely on the shorts and speculators so they can ignore dealing with the real issues.  Shorts better pay attention or they will get spanked by the focus on them. The Public Relations and media spin of this story is classic.  Just suggest that all the problem is due to the shorting and then, if the government comes out strong to help the bulls, VOILA! it might appear that the situation is resolved.  That deception might work for a while, but the real culprit will return.

As you may know, I am fully supportive of reinstating the Uptick Rule and enforcing the naked short selling regulation they have chosen to ignore for years.  I cannot stand CDS so if you want to get rid of it to prevent someone from selling the equity and simultaneously buying a CDS, please make that happen.  As for this new concept being tossed around about requiring daily reports of short positions, bring it on as long as you are willing to force the longs to show their positions every day as well.  I’d love to have the daily data to see who is selling out of a long position in quantity.  I am sure many long only investors want to blame everything on the shorts, naked or legal, and there will be a growing push to ban shorting altogether.  I will never support getting rid of all short selling.  Longs are selling these stocks in quantity - you may not want to blame them, but they are selling and the shorts are not forcing them to do so.

If the issue is supposedly all about shorts and all about the low stock price, then don’t you wonder why none of these guys were willing to screw over all these excessive shorts and buy AIG or LEH for $2 per share.  I am sure the government would have loved to help anyone punish the shorts and create another one of their massive squeeze plays.  But it did not happen.  AIG was in trouble.  LEH was in in trouble.  If someone else had bought them compliments of a low stock price, they would have been in trouble too regardless of how much the shorts would have gotten caught short.

AIG is now owned 80% by the US government…another nationalization of our financial system.  I am no longer shocked by anything the President, Fed, Treasury, and Congress does.  Other than sovereignty (the right to do it to ourselves), why we ever fought the Cold War is beyond me.

Here is the Federal Reserve statement announcing this decision.  And as expected, they invoked the exigent circumstances clause (13-3) of the Federal Reserve Act.

A few thoughts from me:

Fannie and Freddie controlled almost 100% of the mortgage market.  AIG is a competitor with many different public and private insurance companies in the US and abroad.  The US is now in direct competition with its citizens and taxpayers, as well as foreign entities.  Our claims against foreign subsidies are greatly weakened.

I am doubtful that AIG’s liquidity needs will end with the initial $85 billion the government is putting in.

The idea that the US government is now the counterparty for all those Credit Default Swaps is absurd.

Please reread what I wrote about the THE ULTIMATE COUNTERPARTY on March 6, 2008 a week before Bear Stearns blew up.  Here’s a sample.

The biggest example that is still being ignored is the entire Credit Default Swap market. Every once in a while we see hints of the losses that will eventually hit, but they are always downplayed. Never mind that it is the embodiment of counterparty risk and has a notional amount of approximately $45 trillion. Somehow the lovers of CDS feel it is immune to loss simply because it is designed to counter counterparty risk. Eventually we will suffer from that ignorance.

There are multiple tiers where moral hazard meets counterparty ignorance. The higher it goes, the bigger the consequences. The ultimate counterparty? The United States Government.

I understand the consequences of an AIG failure.  I’ve been harping on the risks posed by Credit Default Swaps for quite a while and during all that time, I did not see our political leaders or regulators do anything to prevent this catastrophe.   I am not impressed by or calmed by or confident in our government and yet, I realize that the market will likely cheer what was called “a triumph of pragmatism over ideology.”  THIS IS NO TRIUMPH OF ANY SORT.   In the short term, this avoided a huge problem.  In the long term, we will pay for what has been done.

The S&P and Moody’s downgrades of AIG has happened and it will rapidly push this situation to an end…either an end that prolongs the drama or the end.

If the government cannot find a way to ignore their lack of authority to lend to AIG and wiggle out of their suggestion that they will not make the loans, I do not expect another situation to arrive fast enough that could save AIG.

It is very surprising to me to see S&P and Moody’s make this decision without acceptance or understanding by the Federal Reserve and Treasury.  Therefore, it would not surprise me to see a last minute bailout program that makes all the past financial creativity exhibited by Bernanke and Paulson look basic.  If something like this happens, it will either be a new facility specifically created using some obscure provision in the Fed’s charter or it will just be a giant money laundering process to shove it through an existing conduit, similar to what they did with Bear Stearns on March 14th.

One extreme idea….have some other Central Bank lend directly to AIG.  Sounds crazy…right!?!  AIG is a global corporation doing business in about 100 countries.  If this is a global problem, maybe it is time for a global solution.   If this is solely a US problem, then we are probably screwed.  If our government cannot or will not lend to AIG, then I see no other workable deal.  I am not advocating this or any other solution.  It has not mattered what I think or what I have said.

After Bear Stearns I wrote that what we had was a Crisis Averted, Not A Crisis Solved.  Fannie and Freddie’s bailout was another example.   This Lehman fiasco is yet another.  Regardless of whether there is a deal tomorrow or whether Lehman fails, none of the future crises will be solved by what has been done by Wall Street’s “brightest” or their protectors at the Fed and Treasury.  Next!  We have a great Aversion To Solutions in this country, especially if they are tough.

It’s not really worth anything to opine on the logic of any deal terms being rumored.  First of all, I don’t believe “sources familiar with the matter” on most things.  And if there was a non-anonymous quote from Secretary Paulson or Geithner or any other Fedhead, I wouldn’t believe it either.  After all the lies being told by these individuals, I choose to ignore what they say.  So that big talk about Paulson and Bernanke/Geithner not being willing to put up a Bear Stearns-like guarantee at the expense of taxpayers….I choose to just believe that is a lie or a truth.  I won’t really care which it is until something actually happens.  I am not sure these guys know themselves what a lie is or a truth is so how the hell are the rest of us supposed to understand it?

Some of the conversations that supposedly happened at the bigshot meetings are interesting, if they are in fact true.  Who knows?  If it was true, but doesn’t happen…is that any more (or less) relevant than something that is a lie, but ends up happening?  What a bunch of bullshit!

Reading this Reuters article I came across this threat  “Federal Reserve Bank of New York President Tim Geithner — flanked by Paulson and Securities and Exchange Commission Chairman Christopher Cox — told the banks their own firms could be the next victims of the credit crunch if they didn’t work together on a Lehman solution, the New York Times said.”   If that was really said by our fearless feckless financial leaders, it is a very revealing threat.  Think about it.  Either you work with US (Fed and Treasury) or you’ll be next!   OOOOOOOOOOHHHHH…..TOUGH GUYS!!!!!!!   The silly part of that comment is that it assumes that agreeing to the Lehman bailout will prevent someone from being next.  Really?  Did they make that promise when they bailed out Bear Stearns?

As for the rumored “bad bank” proposal that Geithner is supposedly pushing…in the second paragraph of this post I said it wasn’t worth anything to opine on it as if I was making a promise not to do it.  I told the truth when I wrote that a few minutes ago, but now it looks like a lie.  Oh hell, now Paulson has really taught me something!

So here is my opinion that I lied about when I said I wouldn’t give it.  The “bad bank” proposal is similar to what taxpayers got stuck with after Bear Stearns, but that was more direct.  In this case, if it goes through, the feds will probably just find a convenient way to launder the money through some creative means and make it look like they lived up to their promises not to put taxpayer money at risk.  Maybe they can come up with a new lending facility acronym to lend the IBs the money to “capitalize” the “bad bank”.  I suggest POSLF (stands for Piece Of Shit Lending Facility).  And as for the name of the new “bad bank” LLC, Maiden Lane was already taken….let’s call it either “Slut Lane” or if that offends you, maybe we should name it “Henry” in honor of Henry Lehman who came up with the idea for the original Lehman and Henry Paulson who will be instrumental in the bad bank Lehman.

As for those anonymous quotes from nameless executives…here are two fun ones from this CNBC article.

“Why should we give up capital so Barclays and Bank of America can buy a clean bank,” said one Wall Street executive.   Mike’s take?…..good question.

AND

Because the consequences of not doing a Lehman deal are so grave, though, people with direct knowledge of the deliberation say both sides will begin to compromise on Sunday. One Wall Street executive involved in the meetings put it this way: “I’m thinking logically; if they do nothing it’s Armageddon. That means they do a deal. It will be announced at 6 p.m. (ET) Sunday.”

I guess I’ll have more to say at about 6:15 pm EST Sunday.

Countrywide was Too Big To Fail, so the government orchestrated an acquisition by Bank of America.  Of course, that just made BAC which was already Too Big To Fail, Too Bigger.

Bear Stearns was Too Big To Fail, so the government orchestrated an acquisition by JP Morgan.  Of course, that just made JPM, which was already Too Big To Fail, Too Bigger.

As one of the stupidest comments ever made by Secretary Paulson, he said Fannie And Freddie were just too big and so, the government just had to rush in and take them over.  DUHHHHHH!!!!  Of course, that just made the US Treasury / government, which was already Too Big, Too Bigger and Too Biggest.

By the way, did Paulson just suddenly discover that Fannie and Freddie were too big last week?   Isn’t it neat that even though they were too big, the Treasury intends to let them get Too Bigger before they supposedly will draw them down?

So now we have Lehman apparently being Too Big To Fail and needing the Treasury and Federal Reserve to play matchmaker and probably provide some new acronym lending facility or some other bailout method.  Whoever will buy LEH is probably already Too Big To Fail, which of course, will just make them Too Bigger.

The Too Big To Fail concept is easy to understand.  But the way the government keeps solving it is not understandable.  If something is bad because it is Too Big, then “solving it” by making something else too big….too bigger, does not make the situation any better.

Capitalism encourages growth.  When something grows for a long time, it gets unmanageable and that is where we are now.  Dealing with this is an extremely difficult proposition as you have to consider your alternatives.  Would anyone like to tell a company how big they can get within an industry even though they are not monopolistic?  I am sure socialists would, but how many capitalists could do it?  Is some government official going to determine what is too big and then force a company to not grow or to get smaller?   Or do we just let things grow out of control and then when there is a problem, we employ the Too Big To Fail bailout solution.  Or…..do we actually let something fail that is either too big, too bigger, or too biggest?

Lehman came out with its news…I saw no new news there.

Lehman announced this evening that they would report their results tomorrow morning, a week ahead of schedule.

Here’s a snippet from a Marketwatch article.

SAN FRANCISCO (MarketWatch) — Lehman Bros. said late Tuesday that it would report its third-quarter results Wednesday morning before the market opens, a week earlier than had been anticipated, in a bid to calm investors shaken by a session that wiped out nearly half of the brokerage firm’s market value.

Now, read this one from March…..

NEW YORK–(Business Wire)– The Bear Stearns Companies Inc. (NYSE: BSC) plans to announce its first quarter 2008 financial results on Monday, March 17, 2008, in a press release that will be issued after the close of the New York Stock Exchange. The press release will also be available on the firm’s Web site at www.bearstearns.com. The call was previously scheduled for Thursday, March 20, 2008.

How did that turn out?

NEW YORK — In light of entering into an agreement to merge with JPMorgan Chase, The Bear Stearns Companies Inc. (NYSE: BSC) will not be announcing its first quarter 2008 financial results on Monday, March 17, 2008, as previously scheduled.

I am not sure I like the idea of reporting early.

After the SEC ban against naked shorting of Fannie and Freddie and 17 other companies was allowed to expire on August 12th at midnight, FNM opened at $8.00/share the next day. From that Wednesday to Friday August 15th, FNM traded in a range of $7.55 to $8.62 and closed the week at $7.91. If you believe in the short ban, you might have thought that the shorting would have immediately crushed FNM, but it did not. Of course, the loudest supporters of the SEC’s attempts to limit shorting were mostly silent. That’s what happens when the facts get in the way of the bullish hype agenda. The way the anti-short crowd promoted things, you would assume that the SEC’s ban would be largely responsible for “stabilizing” Fannie and Freddie from July 21 to August 12 while the ban was in place. That’s interesting given that FNM opened at $15.25 on July 21 and closed at $8.02 on August 12. I wouldn’t call that stabilizing.

But when FNM started plummeting again during the week that began August 18th and hit its low of $3.53 on August 21, suddenly the removal of the naked shorting ban was used to explain why the stocks might be declining(in addition to the missing Uptick Rule). Of course, this is stupid. There happened to be a few other things going on than just the initiation, implementation and then removal of the SEC’s ban. It’s just really convenient for people pushing an agenda to ignore facts in opposition to their argument and then apply coincidences that support their claim. Never mind that FNM has advanced 80% since the August 21 low at a time when the short ban was not in place.

The naked short ban had some effect on the stocks because all market rules impact trading in some way. However, it is tough to identify what effects it really had and to what degree. We do know that it did not provide stability and it did not prevent selling of the stock and it did not guarantee that buyers would show up. During the naked short ban, the protected stocks went up and down. Without the naked short ban, the protected stocks went up and down.

Maybe it is unfair to place the success or failure of the naked short ban by just analyzing Fannie’s stock movements. Okay. Pull up the charts of the following 17 companies that were on the SEC’s list of 19 companies protected(I am excluding BNP Paribas and Daiwa since they do not trade on the NYSE)….AZ, BAC, BCS, C, CS, DB, FNM, FRE, GS, HBC, JPM, LEH, MER, MFG, MS, RBS, UBS). Do a price study of these stocks on the following dates…. July 15th close, July 21 open, August 12 close, and today’s close.

You’ll find the following performance:

• From July 15 close to July 21 open - all 17 stocks appreciated with an average gain of +35.7%
• From July 21 open to August 12 close - 11 of 17 stocks declined with an average loss of -17.5% and an average gain of +6.3%
• From August 12 close to August 27 close - 15 of 17 stocks declined with an average loss of -7.9% and an average gain of +2.5%

Here’s my take…The announcement of the ban on naked short selling caused a short squeeze and speculative momentum play from the announcement date (midday on July 15) until the ban actually took effect starting with the open on July 21st. Regulators like the Fed and the SEC love to put temporary floors in markets and create bullish spikes by squeezing shorts and encouraging bullish speculative trading on the momentum that follows. Bernanke did that on several occasions since August 17, 2007 so I guess it is only fair that Cox had his day. I find it interesting that Cox tried to prevent manipulation by short sellers by manipulating short sellers. Good one! Is this the kind of thing that gives investors confidence in markets and regulators?

As for the price action during the naked shorting ban, it did not suggest that the ban had an identifiable effect. Just consider how many of the covered stocks declined during the ban period of July 21 to August 12.

Since the ban ended, most of the protected stocks have declined. If you have read this whole post and still believe that the removal of the ban and manipulative short selling was the primary reason for the declines, please don’t waste your time reading my crap. It will not help you.

Naked short selling has been, is, and should be illegal regardless of whether the regulators choose to enforce existing rules for all or some of the stocks.

When Cox announces his next attempt to limit the effects of shorting, either naked or otherwise, please realize that the implementation of these rules does not materially affect prices. However (and this is the important part), the announcement of rules provides the majority of the gains and those gains are very short lived.

I call FNM and FRE “toy stocks”.

Countrywide (CFC) became a toy stock before it disappeared. Bear Stearns (BSC) became a toy stock before it disappeared. Subprime lenders like Novastar and New Century became toy stocks before they got delisted.

When a stock no longer trades based upon fundamentals and gets in the hands of speculators that love to treat it like a plaything, it’s a “toy stock.”

On a day like today, with FNM and FRE up over 30% from their open to their intraday high based upon Freddie Mac being able to borrow more money, these toys made some people happy. Just don’t confuse an investment with a toy.