World markets soar on possible US rescue package

FRANKFURT, Germany (AP) – Global stock markets roared higher on Friday after news of a possible U.S. government plan to rescue banks from toxic mortgage debt raised a collective sense of hope amid the world’s worst financial crisis in decades.

[/FONT]SEC bans short-selling for financials…
[/FONT]California home sales surge as prices plummet…
[/FONT]Treasury to guarantee money market funds…
[/FONT]London records biggest surge in history…
[/FONT]Russian stocks suspended amid massive surge…^DJI/chart;range=1d/image;size=239x110

Perhaps the most interesting items are:

  1. Prohibition of “naked short selling” of financials.
  2. Daily disclosure of hedge funds’ short positions. That will be bombshell information, and may explain much. Unfortunately, it may not be possible to trace the villains to their lairs before the election, but it will happen. And I’ll bet I know who one of the major players is in all this turmoil, and who his candidate is.

To steal from Greenspan, this is irrational exuberance. There isn’t enough money to back all of this up. We are heaping debt upon debt.

I can see that some of the “short sale” companies are already nose-diving on the market. Ah, when the wind shifts, the skunks can be smelled!

Never in the history of the U.S. was there ever money enough to back up anything at all. Not the national debt. Not the currency. (Even the gold in Ft. Knox was not enough when we were on the gold standard; and gold is only a commodity itself.) Not banks. Not the stock market. Nothing. The whole thing depends on understandings and the rules regarding how things work. It is delicate, and has always been delicate. But then, human life is delicate. This world is, after all, no home, but a wilderness.

You are correct. But when a financial community is undisciplined and anticipates the capacity of someone else to bail it out, a dangerous imbalance is created.

I’m not sure how much the bailouts really bailed anybody out. The effort, and perhaps the effect, is to bail out the system as a whole, not bail out individual companies. You will note that the equity in the “bailed out” entities was wiped out, or nearly so.^DJI

Personally, I’m wondering when the daily reports will start coming out showing who is selling short. That should be extremely enlightening, though it might not be easy to penetrate to the true players’ identities. But I expect somebody will. Just hope it happens before the election, as I think it will open a lot of eyes.

Frankly, though I am sure there really are weaknesses in the mortgage market (saw a lot of them being created, myself) I think we, and the government, have been nailed by malefactors of great wealth.

It’s almost impossible to watch the shorts “ripple through” this financial institution or that one, then on to the next and the next in tremendous force and concentration, and not think it. Some bounce back, some don’t. It’s like watching a burglar trying every door in an apartment building, except that in this, the burglar takes at least the doorknob with him, even if the door doesn’t open.

A bold move. But, maybe that’s what’s needed. These are unprecedented times. I’m not in favor of regulation or bailouts usually, but in this case something radical has to be done. Save the financial community now, sort it out and fix it later.

I would not likely prevail in any argument with a true expert about the propriety of the standards generally used to determine whether a particular institution is “unsafe”, “unsound”, “well capitalized” or any of those things.

But we ought to at least consider that those standards by which, e.g., “soundness” is determined are really just conventions.

I’m old enough to remember the fluidity that once existed in some of those things. At one time, what is now understood as “well capitalized” depended on the movement of the institution’s assets, and was lower than it is now. So, for example, a fast-growing institution was required to have a lower equity in an absolute sense than one that was slow-growing. An equity position that was considered quite adequate 30 years ago will get one shut down today.

Further, there are now these “trip wire” standards that cause institutions to auger in. My understanding is that AIG stepped on one, in effect, when Moody’s dropped its rating, automatically causing AIG to be required to come up with billions of dollars in credit reinsurance that it didn’t have in its piggy bank. It really didn’t necessarily mean that Moody’s was right or that AIG was a hazardous debtor or that the reinsurance bond was the right amount or anything. I’m not saying AIG did not, for some reason, become scarier than it was a couple of years before, but I am saying that crossing a number of lines that are essentially arbitrary does not necessarily make an institution perilous, since the overall business of the institution is what really determines its soundness as an enterprise. “Insolvency” is generally defined to mean that one owes more than one owns and cannot timely meet one’s obligations. The two segments of that definition are not necessarily coincidental, particularly when the second part is readjusted according to a minefield of potential readjustments, and when one’s access to liquidity is subject to sudden change based on criteria that are essentially conventional.

So what we have here, at least to a degree, is a series of institutions which have crossed lines that do not necessarily define, accurately, their long range ability to survive. In other words, they have crossed “fear factor” lines that did not even exist some years previously. What, for the most part, the Fed and Treasury have done is ground the current in the trip wires for now. If the Fed and Treasury are correct in believing that doing so will reasonably ensure the long term viability of certain institutions, then one must question whether the trip wires were reasonably placed to begin with.

To my previous post, I will add that it is clearly the business of some precisely to bump this company or that over a trip wire, or to create the impression that it happened.

Politicians are busy prating about creating new standards, breaking up companies, governmental seizure of this or that, and so on. I am not persuaded yet that we are not simply on the cusp of creating a new complex of conventional standards that do not necessarily ensure solvency or sound business practice.

And to add a bizarre twist to it, we could well end up enacting a number of governmental benefits to individuals that bear no relationship at all to the question whether businesses in the U.S. are viable or not.

Supposedly, the proliferation of subprime lending created all of this, and maybe it did. But it has to be acknowledged that, not long ago, it was considered perfectly sound to do it. Theoretically, it was. Supposedly all those subprime borrowers still met arbitrarily established standards of viability, tempered by “risk pricing”. Theoretically, the appraisals on the collateral were all correct. What (one may conclude) went wrong was not so much the activity itself as the lack of judgment (in some cases honesty) utilized in determining that the requisite number of such loans was “in the safe zone”; again, the “safe zone” being a collection of arbitrary criteria.

Long ago I was in the banking business, but left it. One of the things I found most irritating about it was the fact that, as time went on, regulators had less and less actual personal authority and more and more could only determine whether some “bright line” or other had been crossed or whether some activity was permissible or not according to some standard that had nothing at all to do with safety or soundness. I well remember creating an entirely new kind of branch entity simply by employing a signature writing machine at a remote location. It “fit” the regs at the time, whereas utilization of a rubber signature stamp did not. That silly distinction made the difference between whether the location was deemed “safe” and “sound” or “unsafe” and “unsound”. Stuff like that was fun for a time, but it highlighted for me the arbitrariness of it all.

Yes, in the past, a great deal of regulation required the application of personal judgment. This has now been turned over to arbitrary lines and computer models.

I was at one time involved in mortgage banking on the government side. Early on, all underwriting was done personally, so that a human being was evaluating all factors in a loan. Now everybody uses desktop underwriting software and FICO scores. You get the right number, you get the loan, regardless of the underlying factors.

Regulation works best when personally applied by humans. Inflexible bright lines can cause more problems than they solve.

As for banning all short sales, that could also backfire, by encouraging price run-ups which eventually crash further than they would without the brake of the short sellers. What was needed was a ban only on ‘naked shorts’ and reinstatement of the uptick rule.

When I was in high school, I had a terrific job, which was to drive a bunch of S&L loan committee people around to appraise houses offered for collateral. I would also tape the houses, figure square footage, make notes on the type of shingles, etc, while they just “eyeballed” the place. Then while I was driving them to the next place, they would all write down on matchbook covers what they thought the last place was worth. Usually they were pretty close together on them. They had done this for years, and, to my unexpert eye, seemed to know what they were doing. That S&L prided itself on the fact that it had never taken a loss on anything, and I don’t suppose they did.

Later, of course, that was deemed an “unsafe and unsound” practice, and “professional appraisers” were required by regulators. I did some of that myself while I was in college, and the result totally depended on where you got your information. The only expertise required was knowing quality levels, getting comparables that seemed to fit and doing the math. You could easily manipulate both if you wanted them to “fit”. I knew then that it was a profoundly flawed way of doing things, and I know it now.

My impression is that short sales are not totally banned; only short sales on a limited number of financial institutions. I follow financials on the market a little, and I have noticed “attacks” by short sellers on particular institutions that, if you looked at their actual results, didn’t deserve it at all. Many have bounced back from those attacks. Seems like a handful of institutions will come under attack; their stock plummets, the shorts get out, then it floats back up. Then they go on to another group and attack. Something nefarious is going on in all this. People with access to a great deal of money are deliberately devaluing peoples’ assets, forcing them out, then moving on. I hate to think what is happening to people who had what were formerly considered “safe” margin levels. They would have sold out or been sold out by the brokerages if they couldn’t meet margin calls. I have a feeling there is a staggering amount of that going on. And in most of the cases I have seen, none of it had to do with the intrinsic worth of the institution. There is a tremendous amount of predation going on. A perfect, but small, example of that can be seen by looking up the recent history of OZRK. It was in the twenties, plunged to about $7.00 under pressure of shorts something like 20% of float, and is now again in the upper twenties. All the while, the underlying bank was entirely sound. That’s just one bank, but there are many, many, many more examples of that. Meanwhile, of course, anyone with margin accounts on OZRK surely got forced out, just plain robbed.

As archaic as it might sound to say it, I truly do believe a lot of the turmoil we’re seeing is the creation of “malefactors of great wealth”. I really do.

Worldwide, the financial system is a delicate thing. Always was, always will be. What has happened in the last couple of decades is that some have become in command of so much wealth that they can “game” the whole thing. I think right now some of what we’re seeing has both a profit and political purpose. The people of this country are coming very close to being shoved into a “nanny state” in which being financially independent of government or big business will be more difficult and in which dependence on both will become more the rule. Financial turmoil is one way to persuade people that they have to resort to “nanny”. I truly think that’s a big part of what we’re seeing.

I don’t consider myself extraordinarily paranoid, but if you just look at the political choices we have right now, one end of it is so extreme that no one would have imagined, only a few years ago, that it would have been seriously considered. Imagine, ten years ago, increasing tax levels having any popularity at all. And yet, people somehow now believe that’s good for them.

What people don’t realize is that the left is just as voracious as the right; only the former doesn’t let go once it gets the upper hand. “Class warfare” is never the “poor against the rich”. It’s always the elitists and their super wealthy patrons against the middle class.

Yes, that sounds familiar. :rolleyes: At one point while doing property management work for my agency I was out appraising foreclosed homes. I would first eyeball the place and decide after seeing the inside and out, what amount I was going to list it for. After that I’d go back to my hotel room and work the data on whatever limited comps were available to make the price come out how I wanted.

Not entirely a scientific approach, but the market was going to make the decision anyway. If I overpriced, it would just sit there; if I underpriced, it would be snapped up. I often thought that appraisers weren’t really necessary; if we just made sales data totally available to the general public, the market would take care of itself.

You are right about the shorts; I think the ban was just on a certain number of financial companies.

I had always thought that with shorting, you had to borrow the stock from your broker (and pay interest) before selling it. But apparently there was a lot of naked shorting going on–selling stock that is neither owned or borrowed. Doing that, it would be actually possible to put more stock out on the sell side than was actually outstanding. Hedge funds with that much financial power could easily force prices down, buy at the bottom and sell at a gain.

Ordinary investors don’t have that kind of financial power.

It’s going to take awhile, but I think we’re going to find out there was a lot of manipulation going on. Panic has a way of spreading. You see some bank stock go from, say, $40 to $10 in a couple of months, and you can’t help thinking something is wrong with the institution. Lots of people panic and sell. Lots of people get margin calls, can’t meet them, and get sold out. Even banks get scared. A banker told me recently that the regulators had advised them to check regularly with their correspondent banks to see if their “credit” is still good, whether anything had changed on their balance sheets or not. Credit among banks is essential, and when one of them gets “shut out”, it’s over.

There’s a lot to be said for that. People wouldn’t like it and would consider it an “invasion of their privacy”. But it would probably also have a modifying effect on speculation. If a person could see, e.g., that a 2000 s.f. house in a particular neighborhood sold six months ago for, e.g., $175,000, he would resist paying $250,000 even if another in the same neighborhood just sold a month ago for $240,000. It would at least tell him something wasn’t right. Maybe people could actually determine for themselves whether a speculative bubble or “flipping” was going on.

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