Ban on short-selling

US: The Securities and Exchange Commission on Friday issued an emergency order temporarily banning short selling in the shares of 799 financial institutions until midnight on October 2, 2008. The SEC said it may extend the order if it's necessary to protect investors, but it won't last more than 30 days. In a pre-trading market GS and MS have gained 10%.


The U.S. Securities and Exchange Commission may require hedge funds to disclose their short-sale positions and plans to subpoena the funds' communication records. The SEC would hedge funds and investors managing more than $100 mn to publicly report their daily short positions. SEC has also made it a securities fraud when sellers deceive brokers about delivering shares to buyers. The SEC would also impose penalties on brokers if their clients haven't delivered shares to buyers within three days of a short sale. The SEC also approved a rule drafted in March 2008 that it would amount to be a fraud for investors to lie to their brokers about locating shares to be sold short. Currently, brokers rely on their customers' assurance that they had located shares that could be used to cover a sale.

UK: Britain's Financial Services Authority has imposed temporary ban on investors from taking new short positions in financial stocks from midnight on Thursday, September 18. The ban has been imposed until January but would be reviewed each month.

Published in BoomBustBlog
Friday, 19 September 2008 00:12

The ABA letter to Paulson, pt 2

Below is a transcript of the letter to Paulson from the ABA, and the red font is Paulson’s unofficial reply (this is a joke)…

Our bankers are, understandably, very upset by the action. Among the critical questions raised by today’s announcement are the following:

1. While the action is temporary, how will you address the perception by the market that money market mutual funds now have a permanent implicit government guaranty - much like Fannie Mae and Freddie Mac did? Address it! We will promote the notion, just like Fannie Mae and Freddie Mac!

2. Banks face a wide range of regulation and examination because of their FDIC insurance to ensure their safety and soundness. What equivalent regulation and examination will be placed on guaranteed money market funds? How will the government ensure the safety of its guaranty without equivalent regulation? Uhh!!! We didn’t really think about that!

3. How will you keep corporations from taking unreasonable advantage of the lower cost of funding provided by the guaranty by moving more and more of their financing to commercial paper in these funds? We didn’t think about that either, but sounds like a damn good idea, doesn’t it?

4. Will there be any limit on the amount an individual or institution can put in a guaranteed fund and still be covered by the guaranty, or will an individual or institution be able to have millions of dollars guaranteed by the government in a single fund? Million here, billion there, is there any difference. Seriously now…

5. The guaranteed funds will generally contain commercial paper of large, AAA-rated companies. Those companies will now have a funding advantage because of the guaranty. Funds will be moved from bank deposits to the guaranteed funds driving down interest rates large companies will need to pay. Shhh!!! Don’t say that so loud, someone might hear you. Really! Since banks are the traditional lenders to smaller businesses, less credit will be available for small businesses. How will this impact on small business lending be addressed? F*ck ‘em! The little bastards. Aren’t they the one’s who read those blogs that bad mouth the government! We cater to the big boys, exclusively.

6. The FDIC fund consists of tens of billions of dollars paid by banks over the years, plus the interest the fund has earned. While the announcement says that fees will be charged for the guaranty, those fees will not fund the guaranty program in any material way. Unlike the FDIC fund, which is pre-funded by banks and then backed in the first instance by the almost $1.5 trillion in bank capital, this new guaranty program is in the first instance a direct tax-payer funded program. How is that fair to the banking industry and what precedents are being set? All is fair in love and war, baby!

7. What is the exit strategy? How do you remove the guaranty at the end of the temporary period without causing severe market disruptions? We’ll worry about that when the market disrupts. Look how well it worked with the credit crisis.

8. Will the guaranteed funds have some type of obligation to serve their communities, equivalent to the Community Reinvestment Act, which applies to banks? What’s wrong with you? You didn’t hear me when I said F*ck ‘em the first time?

While we understand this program was put together in great haste under emergency circumstances, we respectfully suggest these and other questions need to be answered immediately, before the program is finalized and any further long term harm is done to our banking industry and the economy.

Published in BoomBustBlog

Do you remember about 3 months ago when Henry Paulson said he believes the "worst is behind us"? I clearly stated that the worst is in front of us, way in front of us. In terms of credibility, Mr. Paulson's statements speaks volumes.

Today's headlines:

Telegraph - In a year's time, consumers may look back on the past 48 hours as a bit like the first few minutes after the Titanic struck the iceberg, when high-spirited passengers played snowballs unaware of the danger they were in.

U.S. Takes Over AIG, Ousts Management After Providing $85 Billion Lifeline

Lloyds TSB Said to Discuss Takeover of HBOS After Mortgage Lender Slumped

Barclays Will Buy Lehman's U.S. Investment Bank After Shunning a Takeover

Russia's Markets Halted for Second Day; Emergency Funds Fail to Stem Rout

European Stocks Rise After AIG Bailout, Led by Axa, ING; U.S. Futures Fall

Dollar Interest Rate May Stay at Seven-Year High as Credit Markets Freeze

Bush's Political Calendar Empty as McCain, Republican Lawmakers Avoid Him - Go Republicans!

New Jersey's `Wall Street West' Quakes Amid Financial Market's Travails

GM, Domino's, Novell Say Wall Street Woes May Ripple Through U.S. Economy

Worst is behind us - Indeed!

For site subscribers, next week will be an info packed week. I will be releasing new "members only" opinion and analysis and will be revisiting the Doo Doo 32 list. I believe there's gold in them thar hills...

Published in BoomBustBlog
Wednesday, 17 September 2008 01:00

The USSRA???

From Nouriel Roubini's blog :

Last week we argued that, with the nationalization of Fannie and Freddie, comrades Bush, Paulson and Bernanke had started transforming the USA into the USSRA (United Socialist State Republic of America). This transformation of the USA into a country where there is socialism for the rich, the well connected and Wall Street (i.e. where profits are privatized and losses are socialized) continues today with the nationalization of AIG.

This latest action on AIG follows a variety of many other policy actions that imply a massive - and often flawed - government intervention in the financial markets and the economy: the bailout of the Bear Stearns creditors; the bailout of Fannie and Freddie; the use of the Fed balance sheet (hundreds of billions of safe US Treasuries swapped for junk toxic illiquid private securities); the use of the other GSEs (the Federal Home Loan Bank system) to provide hundreds of billions of dollars of “liquidity” to distressed, illiquid and insolvent mortgage lenders; the use of the SEC to manipulate the stock market (restrictions on short sales); the use of the US Treasury to manipulate the mortgage market (Treasury will now for the first time outright buy agency MBS to manipulate and prop up this market); the creation of a whole host of new bailout facilities (TAF, TSLF, PDCF) to prop and rescue banks and, for the first time since the Great Depression, to bail out non-bank financial institutions; the recent extension of the collateral available for the TSLF and PDCF facilities to a much wider range of toxic securities including equities and thus allowing the Fed to effectively manipulate even the stock market; and a whole range of other executive and legislative actions (including the recent bill to provide a public guarantee to mortgages for banks willing to reduce their face value).

So, with the nationalization today of AIG, comrades Bush, Paulson and Bernanke welcome you again to the USSRA. At least in the case of Fannie and Freddie these two institutions were semi-public to begin with as they were Government Sponsored Enterprises (GSEs). Now we get instead the first pure case of a fully private company, actually the largest insurance company in the world, being nationalized. So the US government is now the largerst insurance company in the world. So the transformation of the USA into the USSRA goes a step further.

Let me now flesh out in more detail my arguments on why this government AIG takeover is reckless, flawed and should have and could have been avoided. There were other ways to deal with the potential systemic effects of collapse of AIG…

I think I'm going to take this man out for drinks. I like his style :-)

Published in BoomBustBlog

I refer you to the post made in April of this year...

The worst is behind us, unless massive bank failure is considered a bad thing
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)

I hear many bank CEOs saying they believe the worst is behind us. I am not a banking exec, and I am not on the street, but I definitely disagree. Bank of America has missed estimates by about 44%...
Sunday, 20 April 2008
The Fed is in full protection mode and now must replenish its coffers via the Treasury. The SEC has implemented new enforcement rules for naked short selling. Unfornately, in 2003, when the mortgage financing and leveraged loan craze kicked into overdrive and when the off balance sheet special purpose vehicle was used more often than the average toothbrush, the powers that be sat back and gave the implicit okay. It's too late to use a condom after your pregnant, fellas...
Published in BoomBustBlog
Tuesday, 16 September 2008 01:00

I won't say I told you so, again

My warnings on Goldman Sachs, Morgan Stanley, and CDS have born fruit, by the bushels, for those who have heeded it. The Doo Doo 32 and commercial real estate shorts will be revisited soon, for they are in for a round of hell after this malaise. My industrial shorts will follow, as well as my lesser known real estate and finance services positions and research.


Goldman is down over $50 per share (from about $185 to $134) since I issued my warnings and forensic analysis. Many thought they were too connected to fall with the crowd. That is not a scientific approach to these markets. It's simple math, they are at extreme risk and trade at a significant premium. For those who are hesitant to subscribe to my proprietary research, this trade (off of a relatively small commitment) would have paid the professional subscription for several years, with plenty left over. We have been hitting on all cylinders with the investment banks. I expect the Goldman trade to be more profitable than the Bear Stearns trade where the research came out at about $105 or so and eventually warned that a long would make sense at $3 and it was bought at $10 (see More on the accuracy of this blog's research and Performance of This Site for historical details of much of the research performance). The market is starting to see Morgan Stanley as the bastion of risk that I see it as, and it is paying off. I'll assume that there is no need to comment on how we did with the Lehman research and forewarning.


Reference the Moody's and S&P downgrades of AIG to see how my multiple warnings of the risks the CDS markets will pose come to pass. Bloomberg - AIG's Ratings Lowered by S&P, Moody's, Threatening Efforts to Raise Funds:

Published in BoomBustBlog

Okay, I'll admit it. I watch CNBC when I should be trying to make money. What can I say? It's entertaining. On CNBC today, there are the usual cadre of long only guys talking their book. Don't get me wrong. There is nothing wrong with talking your book, after all that's all that I do. But there comes a point where you would want a little common sense to be thrown in there as well. Being long only, regardless of the trend of the market cycles and macro environment is akin to driving a car that can only make right turns. Seriously, it is a simple as that. Despite this undeniable fact, we still have the long only crew who help develop mentalities that produce what would be some fairly humorous happenstances if your money wasn't actually at stake.


For instance:


  1. Lehman went bankrupt yesterday. It's ratings get dropped severely - shortly thereafter???

  2. Goldman and Morgan get pummeled today and yesterday in the markets. I am sure I am the only one who had outright sell on Goldman (not to mention sell short). More than 100% in return later, who still has this company as a hold or buy. Please pundits, limit the bullsh1t on the "I'm in there for the long term" speeches. I'm in it for the long term as well. That doesn't mean that I'm willing to voluntary let me money scatter in the wind.
  3. Have you guys hear the "AIG is not insolvent, it simply has a liquidity problem." line yet? The inability to meet your obligations due to a lack of cash is called...... are you ready???........ INSOLVENCY!!!
    1. From Wikipedia: Insolvency means the inability to pay debts when they fall due.

      This is different to having negative net assets. A business can have
      negative net assets showing on their balance sheet but still be (cash flow - I had to add this for accuracy) solvent
      if ongoing revenue is able to meet debt obligations. Reggie comment: The article does not distinguish between cash flow insolvency and balance sheet insolvency...

      Insolvency is not a synonym for bankruptcy, which is a determination of insolvency made by a court of law with resulting legal orders intended to resolve the insolvency... Under the Uniform Commercial Code,
      a person is considered "insolvent" when the party has ceased to pay its
      debts in the ordinary course of business, or cannot pay its debts as
      they become due, or is insolvent within the meaning of the Bankruptcy Code.
      This is important because certain rights under the code may be invoked
      against an insolvent party which are otherwise unavailable.



So, not only is AIG insolvent, but so are many of its financial services brethren. This insolvency will not be assisted, at least significantly, by another rate cut. To add, the Fed's mandate is not to guaranty the bonuses of traders. The rate cut will placate the market for an hour or two, and then it will fall - just like it did with the last 3 rate cuts. It will also increase the risk of inflation. As partial evidence of the inability of rate cuts to significantly assist the insolvents in our financial system, I bring you excerpts from "
The Anatomy of a Sick Bank!".

Published in BoomBustBlog
Tuesday, 16 September 2008 01:00

Why isn't this called a bailout?

The government is not paying back any of my loans or margin?

Bloomberg:

Lehman Brothers Holdings Inc., the securities firm that filed the biggest bankruptcy in history yesterday, was advanced $138 billion this week by JPMorgan Chase & Co. to settle Lehman trades and keep financial markets stable, according to a court filing.

One advance of $87 billion was made on Sept. 15 after the pre-dawn filing, and another of $51 billion was made the following day, according to a bankruptcy court documents posted today. Both were made to settle securities transactions with customers of Lehman and its clearance parties, the filings said.

The advances were necessary ``to avoid a disruption of the financial markets,'' Lehman said in the filing.

The first advance was repaid by the Federal Reserve Bank of New York, Lehman said. The bank didn't say if the second amount was repaid. Both advances were ``guaranteed by Lehman'' through collateral of the firm's holding company, the filing said. The advances were made at the request of Lehman and the Federal Reserve, according to the filing.

Or how about this: AIG Loan Package Under Consideration by Federal Reserve, Reversing Course

The Federal Reserve is considering
extending a ``loan package'' to American International Group
Inc.
, the insurer facing a cash shortage, according to a person
familiar with the negotiations.

The stance by federal regulators is a reversal from a
position they held as late as last night, and people with
knowledge of the talks are ``cautiously optimistic,'' said the
person, who declined to be identified because negotiations are
confidential...

Senate Banking Committee Chairman Christopher Dodd warned
the Fed and Treasury against a rescue of AIG without checking
with him first, expressing anger about past incidents where he
was only informed afterwards. He also said he was skeptical that
AIG merited aid while Lehman didn't.

``Tell me why this situation is different from Lehman,'' he
said today. ``I'm willing to listen.''

Now, the markets will rally because excessively risky, insolvent companies are being bailed out by an increasingly socialist government. Let's count the bailouts - Countrywide???, Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers, AIG??? Oh government, oh government, where is thou credibilty when thou decry no government assistance???

Published in BoomBustBlog

With Lehman in bankruptcy, AIG about to fail and WaMu and many regional banks about to implode, you can bet your Aunt Petunia's toe nails that CDS default events will be triggered left and right. Remember, the regionals have not crumbled yet, but it will come.

Lack of regulatory authorities in the credit insurance market

The valuation of CDS contracts by banks and other institutions are typically done based on highly complex statistical models as they are generally bought and sold in the over the counter (OTC) derivative market. The nonexistence of any exchange or centralized clearing agent where these insurance contracts trade results in their prices not being reported to the general public. Furthermore, as the CDS contracts are sold and resold again and again among financial institutions, an original buyer may not know that a new, potentially weaker entity has taken over the obligation to pay a claim raising doubts about the counterparty failure and the impact on its books.

The lack of regulations and proper settlement mechanisms in the CDS market saw the Aon Corporation (AON) book huge loss on its protection sold to Bear Stearns. Aon, having sold credit protection to Bear Stearns, had hedged itself by purchasing protection from Societe Generale but had to ultimately bear the loss as it was unable recover losses from Societe Generale.

Bear Stearns provided a loan of US$10 million to a Philippine entity and demanded the borrower obtain a surety bond from a Philippine government agency, the Government Service Insurance System (GSIS). Bear Stearns, to further hedge default risk on the US$10 million loan purchased protection contract from AON for US$0.425 million. AON, to hedge this risk purchased protection from Societle Generale for US$0.3 million believing it made a cool profit of US$0.1 million.

Published in BoomBustBlog

I really think that I will scream if I hear another pundit or regulator comment on how the injection of liquidity will help this or that bank or lending institition. Haven't we all learned by now that the problem is insolvency, not liquidity? The Fed has created an alphabet soup of lending programs, discount windows and mechanisms to provide literally unlimited liquidity to the banks, even the option to offer stock as collateral! That's right, the US government has become the world's largest broker dealer, offering margin lending for stock accounts, mortgage financing and M&A deal finacing and advisory.

From CNBC:

Investors will wake up to see their portfolios shrunk compared to close of trading on Friday and there will be some panic selling in the U.S. market Monday morning, but the Lehman collapse is unlikely to bring any more investment bank bankruptcies, Dennis Gartman, founder of the Gartman Letter, told CNBC.

Isn't this what was said when Bear Stearns blew up?!

Published in BoomBustBlog