How the Markets Really Work

[ via News N Economics ]

Leverage: What Could Possibly Go Wrong?

“We’ve said these are the big guys but that means if anything goes wrong, it’s going to be an awfully big mess.” -Harvey J. Goldschmid, authority on securities law

“I’m very happy to support it and I keep my fingers crossed for the future.” -Commissioner Roel C. Campos

I yelled at my computer screen after reading this.

I don’t even know what to say.

The lone dissenter was a software consultant. Poor bastard was the only voice of reason. He probably got absolutely destroyed by the big five after this for daring to dissent.

Agency’s ’04 Rule Let Banks Pile Up New Debt, and Risk: “Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.

On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.

They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.

The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.

A lone dissenter — a software consultant and expert on risk management — weighed in from Indiana with a two-page letter to warn the commission that the move was a grave mistake. He never heard back from Washington.

One commissioner, Harvey J. Goldschmid, questioned the staff about the consequences of the proposed exemption. It would only be available for the largest firms, he was reassuringly told — those with assets greater than $5 billion.”

Brilliant. We will only let the largest and most important firms leverage up like this so we can absolutely concentrate the risk in the most critical parts of the financial system.

What could possibly go wrong?

Think About the Massive Ripple Effects

“Every time you tinker with this delicate system even small changes can create big ripples. This is the impossible situation they are in. The risks are that the government's $700 billion purchase of assets disturbs markets even more.” -Dino Kos, former head of the New York Fed's open-market operations

Paulson-Bernanke Steps Created `Big Ripples,' Leading to Rescue: “The $700 billion rescue that the U.S. House considers today reflects the unintended consequences of decisions made by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke since March.

Beginning with the orchestrated purchase of Bear Stearns Cos. by JPMorgan Chase & Co., each step was a bold effort to forestall a collapse of the financial system. The economy grew in the first two quarters of this year, and financial distress eased for a while after the Bear Stearns rescue. Still, each decision to bail out or not created more instability, leading to further runs on securities firms, banks and insurers.

Paulson and Bernanke insist that the program to buy troubled mortgages and other securities is needed to revive lending and restore stability to markets. What they haven't discussed is the risk that they inadvertently make matters worse. By creating a government pool of distressed real-estate and bad debt, they could depress the housing market further. Risk may become even more concentrated through a wave of bank mergers that, if unsuccessful, would stick taxpayers with an even higher bill.”

WOULD? Don’t even worry about that. It WILL stick taxpayers with an even higher bill.

Fannie Mae and Freddie Mac are the ultimate example of the concentration of risk. Mind you, everybody KNEW exactly what the consequences would be back in 1999: Clinton, Fannie Mae: They Knew, Did it Anyways.

Best case scenario: This bailout bill passes and inspires a bounce that can be shorted.

Commodites: Hedgies Puke, Almost Done

On Monday September 29th in Baltic Dry, Commodities, Bubbles I re-iterated: I’m Still Short Commodities as the Hedgies Puke.

Today I’ve reduced that position, leaving me with my last 25% of SMN, DUG, HXD.TO, HED.TO, HOD.TO.

I think the hedgies are almost done puking, take a look at AGU, MON, MOS and POT. I may pick up some of these names for a bounce trade... after Non-farm payrolls and just after the House votes "YES" on the damn bailout.

Clinton, Fannie Mae: They Knew, Did it Anyways

Click to enlarge.

Notice:

1) The Date.

2) Whodunnit?

3) Whocouldanode?

They knew the consequences and did it anyways.

Leading the sheeple to the slaughter is so easy...