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Bo Peng
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I run a fund based on automated trading and technical analysis. But my favorite pastime is thinking and talking about political economy. I guess I'm George Soros. Writing helps clarifying my thinking. All opinion expressed here is mine, wholly mine, nobody's but mine. And all trading/investment... More
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  • Since The Beginning of the World, Forever And Ever 4 comments
    Jul 1, 2010 5:03 AM | about stocks: AIG

    Even if you thought the AIG bailout has been smelling worse and worse as the veil of secrecy is slowly lifted, you still may not be prepared for this: Fed forced AIG to agree to a last-minute added clause to waive the right, for anybody related to AIG in any way (including but not limited to AIG employee's mothers-in-law), to sue their derivatives counterparties, the big banks who got 100% back on their otherwise risky trades, for any reason whatsoever, since the "beginning of the world" till the Rapture, our puny planet gets demolished by Vogon ships, the infinite tower of tortoise holding up the Earth collapses, or whatever your version of end-of-the-world might be. It's not clear, however, whether "beginning of the world" means the beginning of Earth, that of homo sapiens, the big bang, or the beginning of the world as we know it today where nothing TBTFs do ever carries any risk.

    You cannot make this stuff up. It is so delicious you have to read it yourself.

    The moral of the clause is supposedly that AIG would not be able to use tax-payers' money to sue. PARDON ME? AIG is now solidly owned by tax payers, OK? If they can sue for fraud and get some money back, tell me why that's a bad thing for tax payers?

    In short, the Fed volunteered to be the big banks' lapdog and they did a great job at that. It fought mightily for its political independence when the Congress wanted to take a look at what it did during the crisis. But it has no ideological objection against its overt dependence on banks.

    How about this for unintended consequence? Since counterparties get 100% back on bailed out banks and will never ever ever be sued, everybody is incentivized to drive the weak one to death on the first sign of trouble and force bailout. In other words, more government bailout is guaranteed.

    I had thought the populist anger against big banks was more or less about to peak. Now I think it has a long way to go. I hate to even think what kind of delicious secret will be uncovered when more Fed secrecy gets revealed.

    No, I lied. I love to think that.

    Disclosure: None

    Stocks: AIG
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Comments (4)
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  • Bo Peng
    , contributor
    Comments (475) | Send Message
    Author’s reply » Today's market feels like total liquidation -- stocks, EUR short unwind/squeeze, LBOs doing IPO at losses, especially gold down >2% now. This is beginning to feel like 9/2008.


    Now an interesting thought. Since banks are incentivized to force bailout, therefore get paid 100%, by killing the weakest one, who would be the sacrificial lamb this time, C or MS?
    1 Jul 2010, 11:19 AM Reply Like
  • Jasper M
    , contributor
    Comments (1652) | Send Message
    You are the first guy I've ever seen on SA to be first to post a comment on his own article. (that's not a slam, just an observation)


    As for market action, not "total" liquidation - there's always something else to sell. As for the next "lamb", C is a pure taxpayer zombie, it will be better defended than The Morgan . . . or will it? Jamie "Saruman" Dimon is reputedly trying to construct a poison pill vs. fed dismantling so Toxic as to remain TBTF. He should know better - "There is but One Lord of the Fed; and He does Not Share Power!" Stay tuned . . .


    As for the article itself, this was predicted (albeit by somewhat less reserved authors) some time ago. The Fed was being the Big Banks' total Butt Monkey™, in this case inserting exactly the sort of "get out of jail free" card that Hank Paulson demanded from congress when this mess all started. And now they are caught at it.


    This sort of thing continues until the threat of torches and pitchforks ends it, and we are about there. At this point, odds of a RoBust Fed audit are growing. And that will inevitably lead to its end. Ron Paul et al, may have the last laugh.
    1 Jul 2010, 10:50 PM Reply Like
  • Bo Peng
    , contributor
    Comments (475) | Send Message
    Author’s reply » Heh, I just wanted to jot it down somewhere before I remembered StockTalk.
    3 Jul 2010, 06:38 AM Reply Like
  • Michael Clark
    , contributor
    Comments (12024) | Send Message
    Isn't that the same line Paulson tried on one can be sued over this, even if they broke the law, even if they authorized murder or assassination, even if they stole money from Donald Duck's retired mother. In which reality are these guys living?
    3 Jul 2010, 07:50 AM Reply Like
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