H. Michael Arguello_

Combating Cascading Short Spirals

Thanks for the comments all.

Turkeyeys, I agree that a short circuit breaker by itself is insufficient. However with realtime short information being made available, special situation funds could take out short attacks. If the shorts stop at 19% per day, a daily basis is more than enough time for Spec Sit funds to do their homework. The problem right now, in my opinion, is that the current time window the shorts have been using to overload the system with sell orders is too short of a time to research a company and go the opposite way. The bear raiders have the advantage in that they know how many fiat shares they are creating whereas long investors are flying blind on the fiat float.

Once a company has collapsed more than 25% in share price in one day it begins the downward spiral of downgrades and panic amongst investors and creditors.

Short selling has its uses in the market, but the current abuses on the Street require a response. The uptick rule would be nice but truth of the matter is, modern buy and sell programs can easily get around it by using computers to trigger minor upticks with a buy prior to large sell orders.

Another Gift from the FASB

I’m going to have to disagree that there is not more paper coming down the pipeline to fill the L3 holding tank.

Sorry, but the figures the banks have written down are not even the bulk of the delinquencies. The majority of subprime ARM resets occurred in Oct 07 and will go thru 6/08. This is fairly well documented. It also takes about 6 months from a reset before a borrower is even classified in default (3mo before borrower cannot keep treading water and 90 days past due before bank starts becoming aggressive and marks it down). In some banks cases, like Wachovia, they are refusing to count anything under 180 days as a write-down (a recent article pointed out they had 5.1 billion in loans that were 120-179 days past due they were refusing to write down). This is in comparison to the 1.1 billion or so they have written down.

The numbers and timing of current defaulted loans are PRE-BULGE of the distribution of ARM resets; throw in some creative accounting (Wachovia may not count the loan as in default on its books, but it seems to count it as a default on credit reports and court actions - dbl standard there) and fact of the matter is, the major banks have alot more to come.

Too many people are trying to dismiss the recession/bear market and say it’s over. FYI, the S&L crisis of the 80s took years to work out and it took the major banks about 6 quarters of heavy losses to swallow - and that was with partners who had balance sheets (albeit light ones) to help shoulder the load of holding bad paper on your bal. The current model, next to none of the major originators had any amount of capital worth mentioning in their capital structure.

In short, the banks have alot more write downs, the bulk is to come and is not behind us, and there is no one else to dump it on. Confidence is a key piece of the US banking system and I certainly understand the govt's and the exec's attempts to build it back up. But until they come clean, they will not have it. The losses will have to be written off eventually - else we really risk becoming like the Japanese during the 90s (big banks refusing to write off loans, govt bailouts, no growth and possibly even deflation, near zero interest rates, etc.)

Hmmm, kinda sounds like what we are doing now.