Applying short term band-aids in exchange for serious long term problems

Discussion in 'Economy' started by gonegolfin, Sep 18, 2008.

  1. gonegolfin
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    gonegolfin Member

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    A lot happened today and continues to happen tonight ...

    * House and Senate leaders (Democrat and Republican) gathered with Treasury Secretary Paulson, Federal Reserve Chairman Bernanke, and SEC Chariman Cox tonight on live TV to address the financial crisis and attempt to recapture confidence in our financial system. The scene was a bit disconcerting. You know when this group of people are positioning themselves as a unified front, promising to solve the nation's financial ills ... grab your wallet or purse, because you are about to get fleeced.

    * Reportedly our political leaders along with Paulson, Bernanke, and Cox are working towards implementing an RTC (Resolution Trust Corporation) type facility to buy distressed assets (not take on already failed assets, but buy them) . Exactly how the purchase of these assets will work (how would the market clearing price be determined?), remains to be seen. We do not know the details yet (those will be coming over the weekend), but if this is implemented the way it sounds, obviously moral hazard becomes pervasive. The market reversed course today and rallied hard once reports began surfacing that our leaders were considering what is essentially a bailout of the entire financial system. Of course investors in financial equities loved this news because it effectively puts a floor under our distressed financial institutions. But such legislation would essentially render the cost of failure nil and send the bill to the US taxpayer as well as all holders of the US Dollar. It will be interesting to see how foreign investors (including Foreign Central Banks) react to whatever plan is proposed. We certainly do not want to see them begin dumping their Dollars. We are at the mercy of our creditors, unlike Japan in the 90's which had a sufficient savings rate to deal with the problem. Sweden navigated a financial crisis in the early 90's when they did not attempt to prop up the banks (nationalized them), wiped out equity, brought in new management, and helped recapitalize the banks. I am having a difficult time reconciling which country is more socialist in this regard and am leaning toward the United States. The latest story has this costing up to $500 billion (half a trillion). Um, yeah. Our political leaders did such a bang up job on estimating the severity of the crisis thus far. In fact, when is the last time the government has estimated the funds required for a major bailout within 2X the original cost. Remember the RTC estimates? Bad Debt Plan May Cost Up to Half a Trillion Dollars - Financials * US * News * Story - CNBC.com, Bloomberg.com: U.S.

    * I have heard several reports speculating that our leaders are working on an "FDIC" type plan for money market funds (as opposed to the already FDIC insured money market bank accounts - at least most all are insured). This is after the commercial paper market has nearly frozen and several money market funds have been exposed as possessing Lehman commercial paper. Several funds have broken the sacred $1/share price and have either had to be recapitalized by their sponsor financial institution or have passed the losses onto investors. At least one of these funds has suspended redemptions and will close after liquidation of what remains. One of Putnam's money market funds is being closed and liquidated (due to heavy redemptions), despite the fund's maintenance of the $1/share price. The Bank of New York Mellon announced that their $22 billion money market fund also broke the buck due to its exposure to Lehman commercial paper.

    * Investors continue to rush into short term treasuries. Yesterday there were several negative yield trades on three month treasury bills. This means that investors were paying the treasury to hold their cash in treasuries. Yesterday's three month treasury yield closed at 0.04%. Today it closed at 0.07%. One week ago, three month treasuries yielded 1.61%. The Fed will be forced to cut the federal funds rate if short term treasuries remain this cheap. Meanwhile LIBOR (the rate banks charge for unsecured lending to one another) continues to move higher. The banks are simply not lending to each other. We will see if the proposed mega-bailout changes this. Meanwhile, the TED spread (spread between what banks pay to borrow (LIBOR rate) and what the Treasury pays to borrow) reached an all-time high today ... higher than Black Monday 1987. No doubt this got the attention of the Fed and Treasury.

    * Several reports have the SEC proposing a temporary ban on short selling. Not naked short selling, all short selling. Wow. Makes you wonder why there was not a ban on long purchases in the bubble years of 1999 and 2000. :) SEC Is Set to Issue Temporary Ban Against Short Selling - WSJ.com

    Brian
     
  2. editec
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    editec Mr. Forgot-it-All

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    Your facility for understatement is awsome, to say the least.

    Ah...yeah.

    Faciliting still another massive transfusion of money from the working classes to the capital class.

    The band plays on and the people (as always) who aren't ever invited to the ball pay the pipers.


    Not to worry. GG, the hazard is only to the wroking people of the USA. Its elite class will soldier on, won't they?

    The only thing the market hates worse than a certain bad outcome is an uncertain outcome, eh?

    Exactly

    They seem to be propping up that move.

    I suspect that they realize that if the American banking scam falls apart their banking scams will follow, don't you?

    The central banks may elect not to dump their dollars, but the currency market is way bigger than all those central banks combined, I suspect.

    The dollar is going down, the only question is does it go down worse than their's will?

    The market will prevail in the long run. You know it, I know it, and the people in charge must know it too. Eventually truth will OUT.


    Who owned those recapitalized banks? The people of Sweden, or the insiders of Sweden?

    What?

    You mean confiscating AIG and paying for it with fiat dollars from the Treasury (created out of nothing by the Fed) wasn't a perfect example of the free market capitalism correcting its excesses?

    I'm shocked to hear it.

    The formerly clandestine nature of the totalitarianist regime which has controlled our nation via the alliance of the FED, the TREASURY, and private banks is becoming more and more difficult to mask, isn't it?

    Now, I'd have thought that most Americans would have understood the scam when the Savings and Loan disaster happened, but I was disappointed.

    Sadly, the capacisty for the average American to buy the bullshit that we've been fed our entire lives seems infinite.

    I too have heard rumors to that effect.

    And I am informed that most of the capital of the working Americans is in money market funds, now.


    I have sagely elected to keep my spare change in a piggy bank under my mattress.

    Ouch! There are seldom many times when I take comfort in being nearly broke, but this is one of those rare times. I recall going broke and it is not a pleasant event.


    Don't think of this is anything but what it really is...the REAL tickle down effect of our economy.

    In the NAV, we expressed this natural trickle down phenomenae thusly...

    Shit rolls downhill.

    Get used to lowering your expectations, investors.

    Preservation of your capital in this environment is about all you can hope for. Of course eventhough the numbers of dollars will be the same, their purchasing power is likely to decline.

    Lending to banks doesn't seem like a stellar investment right now, does it?

    The discount window is open and the presses are being warmed up, I suspect.


    Because the FED has never acknowledged that the price of stocks is ALSO an inflationary pressure on our species, that's why. They continue to see inflation in the markets as a sign of a healthy economy when it prove time adn again to be not.

    According to the Fed, the only boogieman for inflation is when working people start to make a decent living or too few of us are unemployed.

    Then the Fed is johnny on the spot ready to raise up the cost of money, to crush inflation, isn't it?

    The superrich, every couple generations seem to forget that their wealth is really based on having enough of us little people working and doing well enough to keep working so we can continue make them rich.

    They write the laws which give them more and more and more advantages until they have so god damned much of the specie that they cause bubbles in the investment markets because they just don't fucking know what else to do with it all.

    Then when, as is happening now, the whole damned rigged economics game gets so out of line, that people cannot pay their bills, and that it all falls apart because the workling classes can't keep the economy going.

    Then as we have seem before and are seeing right nowe, they make the goverment come to their aid, and they transfer their debts to our children and our grandchildren or hide them under inflation by increasing the mony supply.

    I think you know all this better than I do, don't you?

    This bankrupting of the society event which seems so new to us is basically how every empire goes down.

    Now the ignorant board neo-cons will rush in to tell us that the working people who busted their asses trying to buy homes and get in to the RE bubble, are the root cause of the problem,

    But those self loathing workers who buy into that bullshit explaination of this disaster, are simply propagandized into buying that lie.

    When the ship is going down because it hit the iceberg of reality, you don't blame the bos'n matea for it, you blame the bastards in the officer's quarters.

    Well, you do that if you've a handle on reality, at least
     
    Last edited: Sep 19, 2008
  3. gonegolfin
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    gonegolfin Member

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    I have now seen the official SEC document. The short selling ban is through 11:59pm EST on October 2nd (but can be extended) and affects only the "financial" equities. That is, banks, insurance companies, and securities firms. The list is still quite long and is included in this document. Most online brokerage accounts are posting this information.

    Brian
     
  4. Care4all
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    Care4all Warrior Princess Supporting Member

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    what is short selling? short selling what? options? derivatives? stocks? how the hell is a regular josephine suppose to understand this stuff? and why do I have to use my money to bail these guys out?

    if i have no intentions of borrowing any money, have most of my savings in secure investments not in the market, own my home outright, own our cars outright, have no kids needing a college loan, have zero on our credit cards, no plans of ever needing another loan, WHY WOULD ME BAILING THESE SUCKERS OUT be beneficial to me?

    care
     
    Last edited: Sep 19, 2008
  5. gonegolfin
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    gonegolfin Member

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    The SEC has banned short selling "financial" equities through at least October 2nd. This includes banks, insurance companies, and securities firms. It is easy to find the names of companies that are on the list that cannot be shorted. Yet another privilege for the financials. But I can imagine possibilities where this may backfire on them (but this is out of context for my reply to you).

    Short selling is essentially borrowing an existing financial instrument from an owner (a long) of that financial instrument ... and selling that financial instrument with the promise that you will buy back that financial instrument at a later time and fulfill the contract. Obviously, as a short seller you are betting that the price will drop such that you can buy back cheaper than your original sale. Naked short selling is when a short is allowed to sell a financial instrument without first borrowing it. That is, naked shorting can be infinite. If this sounds wrong, it is. But normal short selling is obviously much different than naked short selling. I am not a big fan of short selling. But I can see where it plays a role in providing liquidity to the markets. Naked shorting has no place in the markets.

    You must use your money to bail out these folks because you (meaning we) have allowed the Federal Reserve system (and our fiat money system) to not only continue to exist, but to flourish without any required tangible backing. The Central Bank and our politicians (I include Treasury here) have virtually no constraints on what they can do with our money, short of being thrown out of office or collapsing the currency. And I think some politicians would prefer the latter over the former.

    If "most of your savings" is in US Dollars, "most of your savings" is not in a secure investment. You say you own your home outright, but you really do not. The government can confiscate your property if you fail to pay your property taxes. We do not truly have property rights. Now imagine a hyperinflationary environment where you have not adequately protected your assets from inflation. Government continues to raise property taxes to meet its budget shortfalls. You still have your dollars, but they do not purchase nearly what they once did. Property taxes then become a significant, if not fatal, burden.

    To answer your last question ... bailing out anyone is not beneficial to you. We should not be bailing out anyone.

    Brian
     
    Last edited: Sep 19, 2008
  6. editec
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    editec Mr. Forgot-it-All

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    Secure investments "not in the market"?

    You mean like money market funds?

     
  7. gonegolfin
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    gonegolfin Member

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    The cash register is ringing ...

    * The Treasury today announced a $50 billion guarantee program for money market funds, to be funded out of the Exchange Stabilization Fund. It will be interesting to see how this actually works as participation in the program is voluntary (it does not seem that they could mandate participation, but with some of the stunts the Fed and Treasury has pulled this week, nothing will surprise me). Only funds that want to participate need pay premiums. Thus the funds that wish to participate are seemingly the ones most likely to have problems. Meanwhile, the sounder funds pass on the insurance.

    * The Fed announced that it would provide non-recourse loans to depository institutions and bank holding companies to finance the purchase of asset backed commercial paper (ABCP). The purpose of this is to aid money market funds holding such commercial paper in meeting investor redemptions (this has thrown the money markets into turmoil this week).

    * The Fed also announced that it plans to purchase from the primary dealers, agency discount notes and short term agency debt issued by Fannie Mae, Freddie Mac, and Federal Home Loan Banks (FHLBs). This is in addition to the Primary Dealer Credit Facility (PDCF) that provides loans in exchange for these assets (and others) as collateral. This purchased agency debt will be piled onto the Fed's balance sheet next to all of the other assets the banks have been able to unload to the Fed (and the market did not want) in exchange for cash and treasuries over the past ten months.

    * Regarding the short selling ban, I have seen the official SEC document (which is available through your broker). The short selling ban is effective through 11:59pm EST on October 2nd (but can be extended) and affects only the "financial" equities. That is, banks, insurance companies, and securities firms. The list is still quite long (799 issues) and is included in this document.

    * While the short selling ban puts a temporary artificial floor under these equities and caused an expected short squeeze today, this could actually backfire on the SEC, Treasury, Fed, and some of the financials. Banning short selling may cause problems for some hedge funds that rely on short selling in their overall portfolio strategy (especially as a hedge). This could trigger losses and in a worst case scenario, bankrupt a hedge fund or two. It also could force hedge funds to raise capital (in survival mode) by selling other long assets (such as other financials) and put unexpected pressure on this sector or the broader market once again. This is truly uncharted territory so nobody really knows what to expect. But it is a risk.

    * Short term treasury yields snapped back in a dramatic sell-off of treasuries throughout the yield curve, but especially at the short end. This was expected as our authorities made it safe to play in the water for now (equity and money markets). The three-month treasury registered some trades at a negative yield on Wednesday. Yesterday it closed at 0.07%. It closed at 0.95% today. Agency spreads (over treasuries) also tightened significantly.

    Brian

     
  8. Zoomie1980
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    Zoomie1980 Senior Member

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    Short selling is a bet on a market to drop. You sell things you don't own, hoping to buy them back (and zero out the contract) cheaper, at a later date and pocket the difference.

    Right now, today, if that is your state then you are in good shape and really feeling no pain at all. However, imagine your 100,000 house you own and say your $1500 property tax bill. You can probably handle that $1500 today. But if you get into another California like real-estate bubble and your tax rate even remains flat (1.5% of assessed value) and in 10 years you house explodes to $2,000,000 of value, your annual tax bill is now $30,000 a year!!!! That's probably a problem for you now, especially if you have retired on a fixed income. So lets say you take out a $500,000 loan to help out with that an other inflationary stuff. the the bubble bursts and now your house is worth only $400,000..... You are in deep poop now..... Welcome to this current problem....
     
  9. Zoomie1980
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    Zoomie1980 Senior Member

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    Maybe he owns gold or rare coins.....
     
  10. Zoomie1980
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    Zoomie1980 Senior Member

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    This is what's so spooky these days. My generation was raised that there were two absolutely rock solid bedrocks you could count on, Gold, and the US dollar. Hold your retirement in either and you would likely be just fine....forever. If the US dollar ever lost that trait, shoot yourself, because your world is no longer worth living in....

    ....I got rid of my .38 last month.....damn....
     

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