Thursday, September 18, 2008

The Commissar's in Town

The SEC has decided to ban short selling of any financial stock. I suggest you click on the link and read the document. The text part is reasonably short and I regard it as fascinating reading.

To actually see some of the things I've jabbered about over the years actually come true, in my country, is sickening and amazing. It's one thing to talk in the abstract about the potential for market lock-ups or ham-fisted government intervention. It's not so bad - to me - watching this foolishness play out in places like Argentina. But to watch the USA betray centuries of economic theory and generations of hard work by overt subsidization of corrupt institutions that leveraged themselves into this situation stings because it is personal. This isn't some Banana Republic doing this - it is the USA. Well, the USSRA, I guess.

The SEC Document

I suggest you read the SEC announcement linked to above, mainly for the entertainment value. You know that the wording of this document was vetted by numerous functionaries. I love some of the language -

SEC: "...we are concerned about the possible unnecessary or artificial price movements based on unfounded rumors regarding the stability of financial institutions..."

FJ: What about the facts of balanced sheets highly leveraged to toxic assets?

SEC: "...Recent market conditions have made us concerned that short selling in the securities of a wider range of financial institutions may be causing sudden and excessive fluctuations of the prices of such securities in such a manner so as to threaten fair and orderly markets..."

FJ: And when it was manufacturing companies going out of business or the tech companies getting killed when the dot com bubble blew up, that was fine - just don't threaten the financial elites in the USSRA - screw everyone else.

SEC: "...the Commission has concluded that there continues to exist the potential of sudden and excessive fluctuations of securities prices generally and disruption in the functioning of the securities markets that could threaten fair and orderly markets..."

FJ: By what standard? By whose measure?

SEC: "...we have concluded that, to prevent substantial disruption in the securities markets, temporarily prohibiting any person from effecting a short sale in the publicly traded securities of certain financial firms, which entities are identified in Appendix A ("Included Financial Firms"), is in the public interest and for the protection of investors to maintain or restore fair and orderly securities markets..."

FJ: The balance sheets of the financial firms must be even worse than I'd feared.

And then there is the list. Curious. I wonder about the standard used to create that list. What about GE? It's one of the largest financial institutions in the USSRA, but it is not on the list. Hmmmm. Just something to ponder.

UPDATE: GE doesn't pay those lobbyists massive amounts of dough for nuthin'... GE Expected to Be Added to SEC's No-Short List Watch the panicked jackals clamor for more.

The Treasury to Backstop Money Market Funds

The Politburo has also decided to backstop money market funds, "to temporarily protect investors from losses on money- market mutual funds."

Hey - my investment club bought some GE awhile back and it has been slammed. Maybe the Treasury will step in and "temporarily protect" me from this bad investment decision? Where's my check?

What Now?

Okay, enough rambling. What will the effects be to me and thee? Not sure, to be quite honest. Over the past few weeks I've mentioned, sort of tongue in cheek, that watching los federales respond to this crisis is like reading Atlas Shrugged, especially towards the middle and end where we see the blowback effects of the various failed government policies that get implemented. Love her or hate her, Ayn Rand was onto something there.

I wouldn't be shocked to see the DJIA up 1,000 points today. That said, Bill over at Calculated Risk (one of the BEST places on the web for financial analysis of the credit and mortgage markets) was kind enough to answer a question for me regarding current shorts - it looks like they won't be forced to unwind and the big players with over $100 million in assets will have new reporting requirements, so maybe we won't see an enormous run-up like we'd have if they forced all existing shorts to unwind.

Like any big dose of Meth, life seems like on big party now, but the after-effects are going to be awful.

No future shorts on these financials means that you won't have a new group of speculators to add liquidity to the system. Now, when there is a bid on a stock it won't be from someone who is covering their short position, possibly buying the stock at a higher price than the fundamentals say, just so they can take profits. You will only have money coming in at prices investors think is realistic for financial companies. This should scare the living hell out of the financial elites.

Why? Because the panic we are seeing would indicate that the powers that be know something we little people don't. What if the value of many of these firms is zero? Think that's too over the top? Washington Mutual, one of the largest banks in the USSRA is trying to pimp itself out on the auction block. After having several big banks inspect its balance sheet, no one has yet stepped up to buy WaMu, even at what are being claimed are "fire sale" prices. No one knows how deep the rabbit hole of toxic "assets" goes. The value of many of these financial firms could actually be negative once exposure to all potential liabilities is figured in. WaMu may get a deal done, especially if there is federale money involved to backstop it, but can los federales do this for every bank in the USSRA? Maybe. Nothing would surprise me anymore.

No new advice here, friends. Keep your head, keep an eye on the markets. Don't believe anything officially announced until you have researched it fully.

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