naked capitalism

wintermute says:

Who is the masterful teacher of how to handle a market meltdown?
Pakistan?! Of course not – you scoff – but you wouldn’t believe it from the actions and words of our economic leaders and top economists.

Their stock-market falls like crazy so Pakistan bans short-selling. Monkey-see, monkey-do: the FSA of UK and SEC of US ban short-selling. Widely recognised as an idiot move. Tampering with market mechanisms can only cause more damage. Anyway – it did not work for Pakistan either. So next they shut the market. Stocks can’t go down if people can’t trade – brilliant?
Er. No. Angry investors stone the stock exchange – and when it does open it crashes maniacally.
Monkey see – monkey do. Why not close the markets in Western countries?

BECAUSE IT IS THE STUPIDEST IDEA IN 300 YEARS OF CAPITALISM.

It is one thing having a huge credit crisis – it will blow over in 5, 10 or 15 years. But, it is another thing to destroy trust in free markets! That will take 20, 30 or 50 years to restore. This must not be allowed to happen!

mxq says:

“The usual saying is when the U.S. sneezes, the rest of the world catches a cold. Unfortunately, this time around the U.S. is not just sneezing, it has a severe case of chronic and persistent pneumonia.”

Pneumonia isn’t directly contagious, per say.

The cold virus is something that can certainly be contagious and sometimes it turns into pneumonia.

However, it does not mean a patient with pneumonia is any more or less likely to pass the actual pneumonia around, than say, someone that simply sneezes.

(sorry, all…that’s my snark for the day)

cent21 says:

Roubini is probably correct that hedge funds are going to continue to be pressured, at least those that have leveraged the wrong way.

I think, though, that unlike a couple years ago, we don’t need anyone – particularly not someone who “called the past two years correctly” – making bold downside predictions. The excesses have been shaken fairly well, there’s probably some shaking left to do, but no need to push the patient over the cliff at this point.

So maybe, I’d say, Roubini could go off to an undisclosed location and have a conference with Bush and Paulson, and leave Bernanke back on 9 to 5 duty with instructions to maintain a steady policy and tweak as necessary to shake off speculators making runs at policy, for the next month.

Then allow the next President to hold a pre-inauguration conference, a la Clinton.

Anonymous says:

Roubini might not be wrong. A dislocation in the bond markets, even treasuries and longs could happen. I have also been hearing persistent rumors about the COMEX jawboning those wishing to take delivery into cash instead. Here are some interesting tid bits from Jesse’s Cafe American…

‘Delivery failures plague Treasury market
Total hit a record $2.29 trillion as of Oct. 1
By Dan Jamieson
October 19, 2008

The credit crisis is causing a growing number of delivery failures with Treasury securities.

The latest data from the Federal Reserve Bank of New York showed that cumulative failures hit a record $2.29 trillion as of Oct. 1. The federal settlement period is T+1 (trade date plus one day).’

and…

‘Naked short selling and float and reserve plays are causing a record ‘failures to deliver’ in the US Treasuries markets. Some of this may be a ‘kiting’ scheme in which the sellers are playing an aribtrage against the slight fees and penalties versus returns on price distortions and extremes in volatility.

Or it might be a case of selling and using the same thing so many times as collateral that you don’t really know what is your actual condition, solvent or insolvent. We can think of several (roughly nine) derivative and instrument laden banks that are utterly insolvent if forced to deliver their net obligations.

The Fed cannot even regulate its own products among its own dealer circles. What could possibly possess anyone to believe that they can do this with any other product in a larger, less exclusive market?

There are system breakdowns that have caused signficant spikes in failures, such as the widespread technical failures following the distruptions caused by 911.

But we are not aware of any massive computer system failures and shutdowns at this time. This may be a case of when the going gets tough, the frat boys bend the rules until they break, and then line up for a slap on the wrist from dad’s business associates.

Is this because of the failures of Lehman and Bear Stearns and AIG? Hard to believe but we have an open mind. Transparency builds confidence more effectively than rhetoric and empty promises.

Who are the responsible parties? Let’s have a list of the prime offenders of this market. We might *not* be surprised at who is failing to deliver what they sell. It might be an indication that they are in trouble. Oops, perhaps that is why we can’t have it.

We suspect the Fed is turning a ‘blind eye’ to this activity. But more transparency would be helpful to alleviate that concern.

And do not be surprised when other things that you think that you are buying or think you own fail to show up.

There are some who see an approaching ‘fail to deliver’ spike at the COMEX and they may be right. There were some who believed that LTCM was short 400 tons of gold at the time of its failure, and that several central banks stepped in to depress price and increase supply to alleviate the potential shock on counterparties.

Replay in progress? It could get interesting if it is.

Stand and Deliver: Significant Fails in the US Treasury Market – 10 Oct 2008

Delivery failures plague Treasury market
Total hit a record $2.29 trillion as of Oct. 1
By Dan Jamieson
October 19, 2008

The credit crisis is causing a growing number of delivery failures with Treasury securities.

The latest data from the Federal Reserve Bank of New York showed that cumulative failures hit a record $2.29 trillion as of Oct. 1. The federal settlement period is T+1 (trade date plus one day).

The outstanding U.S. public debt is $10.3 trillion.

“Current [fail] levels are at historic levels,” said Rob Toomey, managing director of the Securities Industry and Financial Markets Association’s funding and government and agency securities divisions. “There’s been significant flight to quality” with the market turmoil, he said.

With the strong demand for Treasury securities, “some of the entities that bought Treasuries are not making them available in the [repurchase] market, which is the traditional way to get them,” Mr. Toomey said.

Unlike some past bouts with high failure rates that involved particular bond issues, the current high fails involve all types of maturities, he said. (Such as in the 2001-2003 market crash – Jesse)

This month, New York- and Washington-based SIFMA came out with a set of best practices to reduce failed deliveries.

This year, the New York Fed revised its own Treasury market trading guidelines. Its guidelines, originally released last year, warned that short-sellers “should make deliveries in good faith.” (And all good boys and girls should remain pure until they are married – Jesse)

LACK OF LIQUIDITY

Chronic failures can increase illiquidity problems in the market and expose market participants to losses in the event of counterparty insolvency, according to the New York Fed.

“There is a question about there being some impact on liquidity if [delivery failures] last for a long period,” Mr. Toomey said.

Many retail investors also own Treasury securities, either directly or indirectly. The Treasury market is also an important fixed-income benchmark, so any liquidity problems can affect all participants.

In extreme cases, chronic fails could cause participants to limit their trading in secondary markets, the New York Fed said.

“Who wants to buy what they’re not going to get?” said Susanne Trimbath, a market researcher with STP Advisory Services LLC of Santa Monica, Calif. In a September research paper, she estimated that based on failure rates in 2007 and 2008, the cost to investors from failed deliveries is about $7 billion annually. (Pays for the facials – Jesse)

The cost arises because sellers don’t have access to their money. In addition, the federal government loses $42 million a year in lost revenue, and the states miss out on an additional $270 million in revenue due to excessive claims of tax-exempt income on state-tax-free Treasury securities, Ms. Trimbath said.

She and researchers at the New York Fed said that some delivery failures are intentional. (We’re shocked, shocked! – Jesse)

As with naked shorting of stocks, naked shorting of Treasuries “allows you to avoid the borrowing costs,” Ms. Trimbath said.

“There can be circumstances in a low-rate environment where it’s cheaper to fail” than deliver, Mr. Toomey said. Such an environment also reduces incentives to act as a lender of securities, he said.

A 2005 study by the New York Fed confirmed that episodes of persistent settlement fails are often related to market participants’ lack of incentive to avoid failing. (Thanks for the kind of knowledge that most mothers, teachers, and adults over the age of 25 could have told us for free, propeller heads – Jesse)

“We’ve got to get the [Securities and Exchange Commission], the Fed and SIFMA in there to force” Treasury traders to deliver securities, Ms. Trimbath said. (That ought not to be hard. We hear the Fed has people on premise every day with most of the probable perpetrators – Jesse)

The Department of the Treasury has a buy-in rule for the cash markets, but the repurchase markets rely on contracts, Mr. Toomey said. Currently there are no penalties for failures, and regulators to date have not required disclosure whether the dealer or the client fails to deliver. (Self regulation at its finest. Sounds like the honor system my neighbor uses to sell tomatoes in the summer from a box in her front yard. Except for the most part the people here in our neighborhood are not greedy, self-centered, shameless, hedonistic shits – Jesse)

By industry convention, fails are generally allowed to roll over until they are eventually closed out, Ms. Trimbath said.

SCRUTINY

She said that scrutiny by the SEC and the Fed, and widespread investigations into short-selling practices, are driving the industry to rein in questionable practices with Treasuries. (Apparently with ‘great success,’ Borat, given the record number of fails – Jesse)

Mr. Toomey said that one of SIFMA’s best-practices suggestions is to require that extra margin be provided by the party that is underwater due to a failed delivery. (Wrist slap by fines is a real deterrent – Jesse)’…snip

http://jessescrossroadscafe.blogspot.com/2008/10/buyers-of-treasuries-cannot-take.html

luther says:

memo to us —

http://www.youtube.com/watch?v=dMuKRbJa3O8

tompain says:

How would it help to close markets for a week? Won’t happen.

foesskewered says:

The question is is shutting down capital markets the answer to the crisis. What happens when markets are closed? An accumulation of nerves and panic to a point where rationality is completely overwhelmed. In turn, this might lead to the point where the minute the markets are opened, the accumulated panic would force a sell-off that overwhelms systems already burdened by the quantity of trade.

Close the markets and you risk “realizing the greatest fears of the investor” that the value of whatever investment they are holding is nil or close to nil. Marked to market and trading in such times are not the culprits, the correction of past excesses is the main event.

We may even see a curious situation where trading is halted, no money is technically lost on the exchanges but hedge funds close down anyway, because, investors (particularly those with large stakes) are pulling out $ as fast as is humanly possible. When you see queues of ordinary people ( read, non-millionaires) outside their banks and financial institutions requesting to close investment accounts and enquiring about company pension schemes/funds, that’s when the crap has hit the fan, ‘cos the masses are usually the last ones to hear the bad news.

Anonymous says:

What is the math behind this prediction? Let’s say, 1/3 hedge fund investors pulled their money out in October/November. Anyone experts out there have any insights? Would this amount be enough to close the markets?

Anonymous says:

I took advantage of the hedge fund deleveraging to buy some gold. A few dealers continue to sell KRands, Eagles, etc, although the wait period for delivery has grown longer.

I believe gold to be a poor investment but a good safety net.

Anonymous says:

If market can not form a price you shut it down. I understand that reckoning that market is not God make some people feel bad but this is not my problem, it is their problem. Should they have spared time instead of spending all of it blessing the liberist ideology and read something about institution, man and history probably today they would have been better of. And me too. But the point, plainly speaking, is that you’d have cashed in lower bags (or whatever you call it… bonuses?)

David says:

I’d been seeing the parallels with the 1920s over and over again. I try not to say the “D” word and hope that it’s never like that…but reading yet again wikipedia’s entry on the Great Depression brings up the over use of credit in the markets as prime reasons…but the intense growth of income of the top one percent while the middle classes and workers suffered are other problems paralleling.

I think we’ve avoided the bank failure problems that happened then so it hopefully won’t be as bad but then we’ve got a whole new bag of problems unimaginal then. hedge funds, credit swaps and ridiculous “notational” values. Again ‘credit’ unsustainable.

but above all….the die-off of demand by a shuttered and ignored middle class (workers) is the major problem of next year. If demand continues to fall….the values of the Dow can’t but vaguely rally and then fall again. I was thinking that our friend, an accountant professor and daytrader, predicting a 5000 Dow was being overly extreme….but hell we’re almost there.

read Marriner Eccles at wiki’s Great Depression: wide differences of income between the rich and the middle and then bankruptucy for the many after a financial collapse and a market admidst lowering incomes has only one way to go in a consumer culture: Down.

Only a massive return to Demand side economic principals, away from purely supply-side reactions such as the huge giveaways to the banking entities can turn this around. Probably 2 trillion in govt. projects, job’s programs, to increase income and demand can turn this around and it has to done next year!!

Temporary rally’s will come and go…but with demand continuing to fall?