We now have a report that the SEC will be taking actions to restrict naked short selling. (primer on the practice here)
Of course, they are a bigger problem with small stocks, where someone can naked short shares in a micro cap, and drive the price down, because the stocks that they are selling dwarf the total volume of trading, but the SEC only noticed it when it affected the big guys.
Buried in a very good post by the Angry Bear is this little gem:
But the effect of LEH going out of business would not be so severe as the effect of BS going out of business for one reason that Roubini, for some reason, appears not to have mentioned.
Lehmann has no clearing business.
Had Bear gone out of business, about 30% of the hedge funds in the country would not have been able to execute virtually any transaction for the following thirty days. Not a payment. Not a redemption. Not a trade on a listed exchange. Not a receipt. Not a de-leveraging. Not a swap payment, not a CDS payment, not fulfilling an option exercised against them.
There’s not just a “maybe” about financial collapse in such a scenario; P probably well in excess of 0.9944. $30 billion is a “bargain” in such a situation.
(emphasis mine)
Bear Stearns was a surprise. Lehman was not. This has been bubbling up for months, and the firms have been able to create contingencies to allow for trading in the departure of the firm from the market.
Well, it appears that while Lehman technically filed for chapter 11 reorg, because of changes to the laws the effect is much closer to that of a Chapter 7 liquidation, particularly with the 2005 changes to the bankruptcy laws.
The bullet points:
So have this problem:
Now comes the downside potential. The risk is that lots of these commercial counterparties will choose to terminate their financial contracts with Lehman — say, for instance, credit default swaps — all at once, and then try to rehedge themselves all at once, causing the market to seize up.
But the market is already seized up.
The US financial system is in a pit of ugly, and no know knows which way is out.
Former GSE CEOs Daniel Mudd and Richard Syron had had their multimillion dollar severance packs rescinded.
There is some justice in the world.
I’m not completely opposed to severance to failed executives, it’s just that it needs to be much less figurative.
Obviously, with Merrill Lynch ceasing to exist as an independent entity, and Lehaman ceasing to exist completely, it has been a busy day.
This update, therefore just covers the more ordinary stories, as opposed to the 767s slamming into the US financial system, though many of these stories are in fact driven by the bigger stories.
Let’s start with one that has nothing to do with Lehman or Merrill, retail gasoline is up for the 3re time in 3 days, because Hurricane Ike has closed about 20% of US refining capacity.
We’ll see how this shakes out over the next few days, but we also now have another unrelated pice of news, that the New York Fed Manufacturing Index Decreased to -7.4 in September, indicating that it’s not just those Wall Street whores getting it up the ass, it’s all of us, which is why
credit card debt and delinquencies are up the past month.
And now on to the main show:
Suburban Guerrilla is reporting that:
Wow. Live on CNBC, they’re showing the Lehman Brothers employees who were told to come into the office tonight and clean out their desks.
They’ve been told to clean out their desks on a Sunday night?
Oh my God.
No new entries on the FDIC: Failed Bank List, at not when I posted this.
Well, I guess that the lead story has to be Lehman Brothers, which appears to be collapsing Bear Stearns style, and looking for government funding of it’s eventual sale, Bear Stearns style, so negotions with potential buyers continue apace.
The Fed and the Treasury Department appear to be seriously twisting arms to make the deal go through, though they claim that there will be “no federal money” involved.
Seriously, all we are doing here is socializing losses. Nationalize the lot of them, throw out upper management, and go after their bonuses, otherwise, we will see more of the same.
Of course the fact that WaMu just had its ratings cut….again…Means that Paulson may have two things on his “to do” list this weekend.
There are already rumors that Washington Mutual is on the auction block.
In the real economy, the one that the rest of us live in, news ain’t great. The weekly job claims fell, but the 4 week moving average and the continuing claims, continue to rise.
Additionally, retail sales fell again in August, showing a continued weakening in the economy, as does the large gain in business inventory.
Real estate is looking worse and worse too, with foreclosures continuing to increase.
This has driven the dollar down, because it points toward the Fed cutting rates.
In energy, oil is continuing on a downward trend, because of hurricane Ike, selling briefly below $100/bbl (!), though the fact that it’s heading toward refineries is driving gasoline up.
I would note that this is actually normal market behavior. Knock out refineries, and the demand for oil decreases, and the price drops, but the demand for gasoline remains the same, so prices increase.
BTW, I’m not sure what is going on in insurance, but it is clear that American International Group is getting absolutely hammered, and when the subject of the short selling is the largest insurer in the world, something is whack.
It appears that Fannie Mae’s Daniel Mudd and Freddie Mac’s Richard Syron will both get severance packages in excess of $5 million.
The little guys, and the tax payers, eat sh%$, and the Harvard MBA types walk away with millions.
To quote Bruce Cockburn, “If I had a rocket launcher, some son of a bitch would die.”
Kerry Killinger had already been dumped as chairman of the board earlier this years.
Deck chairs, meet Titanic.
What a group of WATBs.
But the White House blond bimbo, Dana Perino, is claiming that they could have fixed Fannie and Freddie, if not for those meddling kids Congress.
You know, this all occurred during a Republican controlled Congress…..You know….the folks who had their tongue so far up their ass that you never had to veto them even once.
Seeing as how the nationalization-in-everything-but-name of the GSEs has been covered elsewhere on the blog, it won’t be here.
That being said, the response of the international markets, rising dollar and oil prices falling despite a hurricane pointed at the gulf, appear to be positive.
It comes from the fact that while shareholders will get F$#@ed, the foreign national banks and sovereign wealth funds which bought Fannie and Freddie paper are getting bailed out.
It also looks like the monoliner bond insurers are winners here too, at least that’s how their stocks reacted to the news.
This does not mean that the housing crisis is over, or even that it has bottomed out, which is why foreclosures hit a record high in Q2.
Additionally with the official unemployment rate spiking to a 5 year high, the rest of the economy sucks wet farts from dead pigeons too.
What’s more, as Krugman notes that the U6 numbers are positively grim.
The common reported number is U3, while U6 is:
Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons, as a percent of all civilian labor force plus all marginally attached workers
And U6 is higher than it was in the worst part of the 2001 recession:
It’s not just banking, real estate, or employment though; Paul Volker is saying that the current financial system, which relies on complex securitization, as opposed to conventional loans is very broken.
The best proof of this is that the bank of China is suffering a liquidity crisis, because its investments are illiquid.
It appears that both firms grossly overstated their capital using accounting tricks, and the Morgan Stanley auditors hired caught the problems:
Indeed, one person briefed on the company’s finances said Freddie Mac had made accounting decisions that pushed losses into the future and postponed a capital shortfall until the fourth quarter of this year, which would not need to be disclosed until early 2009. Fannie Mae has used similar methods, but to a lesser degree, according to other people who have been briefed.
Some techniques used:
This is all stuff that only Fannie and Freddie could do. No other US bank is allowed to.
This is why the elimination of political and lobbying activities is important. The mess uncovered will become even bigger as normal accounting is applies.
Upper management has been replaced, and Fannie Mae and Freddie Mac are under US government control.
They are calling it a conservatorship, but its nationalization.
Here is the story that everyone is missing though:
At the same time, dividends on both common and preferred shares will be eliminated in an effort to conserve about $2 billion annually. All of the firms’ lobbying and political activities will be halted immediately and charitable activities reviewed.
The GSEs dropping dividends is not surprising, to do otherwise would political suicide, but terminating their lobbying and other political activities changes the environment under which they operate, because it is their lobbying and other political activities that has allowed them to have such a favorable legislative and regulatory regime.
They are done.
It appears that regulators have sent a letter notifying the GSEs of this, here and here, and the details will be announced tomorrow.
It won’t be called a nationalization, my money would be on “conservatorship”, but the share holders are rumored to get little to nothing, and management will be replaced by people who answer to the government
One of the interesting dynamics here, and one that is barely covered in the financial press is the fact that Fannie and Freddie have been aggressive lobbyists and soft money contributors (their employees are big hard money contributors) for years, and with a nationalization, that will stop.
This means that Congress will stop writing laws, and pressuring regulators, for the benefit of Fannie and Freddie, which is apt to lead to major changes in said laws, regulation, and oversight.
Silver State Bank in Nevada closed by state regulators and taken over by the FDIC.
Andrew McCain, the sick old man’s son, was on its board of directors for the bank and its parent, and also sat on the banks audit committee….until he resigned “for personal reasons” in July…..Very convenient that….
McCains and failed banks go together like….McCains and failed banks.
Things have seemed pretty hectic today.
Normally I don’t mention this, I think that it is just noise, but all three major stock indices are down 3%+, so while it’s not yet raining Katz and Lehmans, it’s pretty ugly.
Note that this is my economic update post, so I’m not going to claim that a certain VP pick’s speech caused anything, and instead point at jobless claims spiking unexpectedly by 15,000, though truth be told, it should not cause that sort of reaction: the weekly data is simply too noisy for any rational investor to act upon the basis of those numbers.
But this isn’t “rational investors” this be Wall Street, so it could have been the Lehman CEO’s choice of shoes today.
The rest of the financial news is no where near as definitive, and even Federal Reserve officials are publicly disagreeing on whether the concern is recession or inflation.
Meanwhile, even though the Bank of England and the ECB kept rates steady, the cost of money in Europe went up, because the ECB has significantly tightened requirements to lend to banks.
In any case, the lack of rate hikes strengthened the dollar.
Mortgage rates are down this week, which would ordinarily be good news, but I think that “the markets” (and I) see this as a sign of a weakening economy, just as “the markets” (and I) see declining oil prices and declining gas prices as signs of a weakening economy.
Even so, the numbers for the service sector were good, so the blood on the street today is a bit odd.
Of course, it sucks to be a bank right now, with Community National Bank of Sarasota looking to be on the FDIC’s Friday afternoon press releases, and Lehman floating the idea of creating a “bad bank” to shift bad assets to.
Someone needs to explain the concept to me, because it seems to suffer from the, “We’ve run out of gullible idiots,” problem.
In any case, it appears that insurance giant AIG is considering something similar.
I’m not sure how piling crap in a separate pile really helps anything.
It’s generally not been a good year for manufacturing and construction, with the Institute for Supply Management’s (ISM) manufacturing index falling to 49.9, with any number below 50 meaning contraction, though I wonder how much inflation is being measured as “growth”, which is what I think is driving much of the US Commerce Department data showing an increase in factory orders.
I think that this is entirely export driven growth, a position that the abysmal auto sales reinforces, but these export sales are being driven by a cheap dollar, which will eventually drive interest rates higher in the US (foreigners will demand higher returns), crushing domestic consumption.
That being said, construction is clearly cratering, falling 0.6% in July, twice expectations.
Meanwhile, banking continues to look pretty heinous with the FDIC expanding office space in the expectation of a spate of bank failures, S&P downgrading two regional banks, and suggesting that 37% of regional banks will be down graded.
Additionally, when GMACis laying off thousands, you know that the industry is in dire straits.
With Euro zone inflation falling, it appears that the ECB will hold rates steady, for a while at least, which will serve to keep the dollar relatively strong, as evidenced by the US Dollar’s rise today.
Since the hurricanes in the Gulf were relatively mild, oil and gasoline have continued their downward path.
Integrity Bank, Alpharetta, GA
I’m off for Shabbos now.
Well, the big news is that the US GDP rose by an adjusted 3.3% rate in Q2. The initial estimate was 1.7%, and the estimate for this, the 2nd cut on GDP numbers was 2.7%.
Of course, inflation ran at a 4.2% rate, which puts it back into negative territory, though the economists typically use the “core” rate, 2.1%, even though purchasing energy and food is included in the GDP numbers.
This is reinforced by the weekly unemployment numbers, with new claims down by 10,000 this week, but, “continued claims are now above 3.4 million for the first time since 2003.”
What is going on is that the real estate asset bubble was concealing the fact that productivity from 2000 through 2007, but middle class income fell.
We were working harder for less money, and going into debt because our houses were appreciating.
Things ain’t great in Europe either, with European retail sales falling, though German unemployment fell, even while the German economy contracted….I really don’t get that one.
We do have good news on the monoliner insurers, with MBIA getting a juicy insurance deal thanks to the help of the New York State Insurance Superintendent…..Smells like a backdoor bailout to me.
In the world of home mortgages, it appears that numbers showing a mortgage application increase may be garbage, because they do not account for multiple applications from one person, which is what tends to happen when lenders get pickier about issuing loans.
Finally, oil is down, the dollar is up, and gas prices are down again, more than 45¢ off their peak.