Posts filed under “Bailouts”

The CNBC Octagon

The Economy & You – Wall Street Collapse: Jon figures the Wall Street collapse won’t hurt you, assuming you fit into one of a few broad archetypes.

Awesome:

Category: Bailouts, Markets, Video

SEC: Ban All Short Selling

Ban_short_selling

Here is tonite’s theater of the absurd SEC headline: 

SEC intends to temporarily ban short selling, but it’s not clear if the commission has approved the move. Cox is briefing congressional leaders. Separately, the government is seeking congressional authority to buy distressed assets.

This is nothing short of a total panic by people who have no clue what they are doing. And to think, I mocked Russia for being a nation run by market commies.

This is the ultimate bailout attempt, which will have repercussions far far beyond our imaginations:

1) We suffer a loss of Market Integrity; The US is now a Banana Republic

2) Blatant market manipulation: this is nothing more than an attempt to force markets higher;

3) 60 days prior to a presidential election? This is a none-too-subtle attempt to influence the elections — especially coming on top of the Fannie/Freddie bailout;

4) The coming pop will create a huge air pocket, ultimately leading to us crashing much lower;

5) Expect a huge increase in volatility — upwards first, then down;

We Are A Nation of Morons, led by complete Idiots, making us complicit in our own self destruction.

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Category: Bailouts, Markets, Psychology, Short Selling, Taxes and Policy

Merger Rumors, Shotgun Weddings

Category: Bailouts, Credit, M&A

How SEC Regulatory Exemptions Helped Lead to Collapse

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The losses incurred by Bear Stearns and other large broker-dealers were
not caused by “rumors” or a “crisis of confidence,” but rather by
inadequate net capital and the lack of constraints on the incurring of
debt.

Lee Pickard, former director, SEC trading and markets division.

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Is Financial Innovation just another word for excessive and reckless leverage?

Apparently so.

As we learn this morning via Julie Satow of the NY Sun, special exemptions from the SEC are in large part responsible for the huge build up in financial sector leverage over the past 4 years — as well as the massive current unwind

Satow interviews the above quoted former SEC director, and he spits out the blunt truth: The current excess leverage now unwinding was the result of a purposeful SEC exemption given to five firms.

You read that right — the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.

Instead, the 2004 exemption — given only to 5 firms — allowed them to lever up 30 and even 40 to 1.

Who were the five that received this special exemption? You won’t be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley.

As Mr. Pickard points out that “The proof is in the pudding — three of the five broker-dealers have blown up.”

So while the SEC runs around reinstating short selling rules, and clueless pension fund managers mindlessly point to the wrong issue, we learn that it was the SEC who was in large part responsible for the reckless leverage that led to the current crisis.

You couldn’t make this stuff up if you tried.

Here’s an excerpt from The Sun:

“The Securities and Exchange Commission can blame itself for the current crisis. That is the allegation being made by a former SEC official, Lee Pickard, who says a rule change in 2004 led to the failure of Lehman Brothers, Bear Stearns, and Merrill Lynch.

The SEC allowed five firms — the three that have collapsed plus Goldman Sachs and Morgan Stanley — to more than double the leverage they were allowed to keep on their balance sheets and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults.

Making matters worse, according to Mr. Pickard, who helped write the original rule in 1975 as director of the SEC’s trading and markets division, is a move by the SEC this month to further erode the restraints on surviving broker-dealers by withdrawing requirements that they maintain a certain level of rating from the ratings agencies.

“They constructed a mechanism that simply didn’t work,” Mr. Pickard said. “The proof is in the pudding — three of the five broker-dealers have blown up.”

The so-called net capital rule was created in 1975 to allow the SEC to oversee broker-dealers, or companies that trade securities for customers as well as their own accounts. It requires that firms value all of their tradable assets at market prices, and then it applies a haircut, or a discount, to account for the assets’ market risk. So equities, for example, have a haircut of 15%, while a 30-year Treasury bill, because it is less risky, has a 6% haircut.

The net capital rule also requires that broker dealers limit their debt-to-net capital ratio to 12-to-1, although they must issue an early warning if they begin approaching this limit, and are forced to stop trading if they exceed it, so broker dealers often keep their debt-to-net capital ratios much lower.

Chalk up another win for excess deregulation . . .

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Source:
SEC’s Old Capital Approach Was Tried – and True
Lee A. Pickard
SECTION: VIEWPOINTS; Pg. 10 Vol. 173 No. 153
American Banker, August 8, 2008 Friday

http://www.americanbanker.com/article.html?id=20080807ZAXGNH3Y&queryid=2110207978&

Ex-SEC Official Blames Agency for Blow-Up of Broker-Dealers
They constructed a mechanism that simply didn’t work’
JULIE SATOW,
NY Sun, September 18, 2008

http://www.nysun.com/business/ex-sec-official-blames-agency-for-blow-up/86130/

American Banker excerpt after the jump.

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Category: Bailouts, Credit, Legal, Markets, Taxes and Policy

Professor Stiglitz’ on “Financial Alchemy”

Professor Stiglitz’ explanation of the
"financial alchemy" responsible for the collapse of Lehman Brothers: "The Fall of Lehman Brothers"

Professor Stiglitz then addressed the question of whether Lehman’s executives should have to answer for their decisions:  "Should We Hold Lehman’s Executives Accountable?"

Stiglitz also looked beyond the headlines, drawing attention to the less visible factors influencing America’s economy: "How Foreign Governments are Buying America"

Category: Bailouts, Economy, Video

Professor Stiglitz’ on “Financial Alchemy”

Professor Stiglitz’ explanation of the
"financial alchemy" responsible for the collapse of Lehman Brothers: "The Fall of Lehman Brothers"

Professor Stiglitz then addressed the question of whether Lehman’s executives should have to answer for their decisions:  "Should We Hold Lehman’s Executives Accountable?"

Stiglitz also looked beyond the headlines, drawing attention to the less visible factors influencing America’s economy: "How Foreign Governments are Buying America"



See also:
How to prevent the next Wall Street crisis   
Joseph E. Stiglitz
9:19 a.m. EDT, Wed September 17, 2008
http://www.cnn.com/2008/POLITICS/09/17/stiglitz.crisis/index.html

Category: Bailouts, Economy, Video

Take A Number

Category: Bailouts, Taxes and Policy

Layman’s Explanation of AIG vs Bear vs Lehmann

Category: Bailouts, Derivatives, Media, Psychology, Taxes and Policy

Layman’s Explanation of AIG vs Bear vs Lehmann

Category: Bailouts, Derivatives, Media, Psychology, Taxes and Policy

Video: The Lessons of Bear Stearns

Category: Bailouts, Media