Smarty_Pants

How Do You Recapitalize $1.8 Trillion in Bank Loan Losses?

Sadly Geithner's error, like all gub'mint bureaucrats, is misdiagnosing the problem in the first place.

The root cause of the 'crisis' has been the extensive use of credit as a foundation for growing the economy.

The only sustainable solution is to shrink the economy back to a size that is capable of supporting itself without credit. That's what recessions are all about. People who borrowed and did foolish things lose, and those who didn't borrow get a chance to buy the foolish mistakes at a discount using savings instead of credit.

The 'most forceful course' is only a bandaid on a sucking chest wound. It won't help for long, if at all.

The End of Citigroup

Good thing we injected $45 Billion into Citi in November and pledged a $306 Billion gub'mint guarantee to back them up. It helped them survive almost two months.

That deafening sound you hear is the accelerating whir of the printing presses.

Who's next?

Rubin Deserts a Sinking Citi

Rubin and his contemporaries are probably going to be the last of his breed we see for a while. The collapsing financial sector won't be able to support the second step of the tried and true means to wealth in the District of Criminals:

1) Highly placed political sycophant
2) Overpaid corporate influence peddler.

With an anticipated gutting of the immense pay and stock option path to riches, the former bureaucrats will need to put in a lot more time peddling influence to highly placed former buddies in order to sock away the big money.

A Remedy for Short Selling Manipulation

"One important additional component of the pin-the-bid technique is for shorts to first "load up" at as high as price as possible"


So the first thing that abusive short sellers do is to raise the price so they can 'load up' before they drive it down?

I don't think so. It is my humble opinion that the author hasn't thought his position through very much.

Check the actual numbers on short interest in any blue chip stock and you will find that the volume of short selling is TINY compared to total volume. Typically 1% to 2% of total volume in a given time period and a significant fraction of that short interest is generated from option market makers hedging new options positions.

If the author is proposing that a swing of 2% of volume to the bid will move a DJIA stock enough to make a difference then I am agog at his lack of understanding. That's like saying moving from 49% selling volume to 51% selling volume will cause the stock to tank. Hardly.

Mutual funds routinely buy huge blocks of stock far in excess of the volume of short selling, but nobody is claiming that they are 'driving' the prices too high, and in fact they aren't. Even that much volume doesn't drive the market very far for very long.

If the entire 2% short volume hit the bid simultaneously it wouldn't move most issues more than a point. Hardly enough to start the 'stampede' that the author claims would result, and certainly not enough to generate any serious profits.

Market manipulation via short selling is a red herring. IMHO. The volumes are far too small to be a factor in large cap stocks. Any prolonged decline in stock prices results from massive volumes of selling longs due most likely to changing information regarding the stock.

'Bailouts' Are Misunderstood

"If the cost of a business failure proves bigger than the cost of a "bailout," the bailout makes sense."

Cost to whom?

In the case of the business failure the cost is borne by the business and its shareholders/bondholde...

In the case of the bailout, the cost is borne by taxpayers.

Is this the sign of a free market? That I, as a taxpayer, am financially responsible for the mistakes of others, including their debts? Did any of these irresponsible businesses seek my opinion on undertaking their risky ventures? No. Nor do I recall receiving my cut of the leveraged profits they enjoyed for several years while they speculated with borrowed money.

What moral principle do you advance that places the burden of rescue on me while denying me any input into operations or receipt of the profits that were generated?

What you advocate is theft of my property for the benefit of others against my will.

Why not just end free markets and let the gub'mint decide who will succeed or fail?

Hint: It didn't work very well in the former Soviet Union, it's not likely to work very well here.

What's a Super-Senior Tranche?

Good explanation of all the behind the scenes wangling and how even so called professionals can become so full of themselves that they overplay their hand.


The flip side of the hedging transactions were companies like AIG who figured that "real estate always goes up" and so their risk model figured that they couldn't ever get whacked by levering up on issuing insurance for all those junk mortgage tranches.

Oops indeed.

Stock Market Rally: Does It Have Legs?

Seasonal tendencies should be viewed with a comparison of underlying conditions between past data and the current economy in mind.

Past December rallies follow reporting of Black Friday sales results (usually good). This year has the potential for very discouraging sales in light of the increasing unemployment numbers and near record low consumer confidence.

If people decide to shop selectively or not at all, then poor sales numbers could easily result in lackluster market conditions through December and into the new year.

Demonic Short Sellers

The volume of short selling in any stock is so small that it couldn't drive prices very far down in any event. It is a red herring used by politicians to manipulate public opinion via scapegoating.

The prime drivers of any stock price are new buyers and existing holders who sell. That is where the volume of trading originates that moves the markets.

The Sun Is Shining on Wall Street

"Now all those Hummers, jetskis, ATVs, et.al are all showing up "forSale", as they struggle with reality once again." - Homer II

Yep. They are forced to do on a personal level what the banks should be doing on a corporate level. Liquidate and pay off debts.

Soon we will be seeing the same thing happening in commercial real and credit cards.

Drive around town and see how many empty mini-malls units are festively decorated with holiday "For Lease" signs. Many of those were built with borrowed money. If the units are sitting there empty it is only a matter of time before the owners will default on their loans.

The Sun Is Shining on Wall Street

"But loans to consumers <i>qua</i> consumers have no ill effects" - Mises, through Rothbard, via moonbat


I guess it would depend on whether loans to consumers result in any changes in their spending behaviors. Did the widespread use of home equity loans end up with more blantant consumerism than otherwise would have happened? I'd argue for the positive response.

I saw on CNN a few weeks back that a two paycheck family (ie. not poor) had lost their house to foreclosure when the interest rate reset increasing their mortgage payment from $4000 to $5800. They had lived there for over 16 years before losing the house. I'd have to guess that the refi loan must have been for over $500,000 to get those size monthly payments, and that the prior mortgage must have been far less having been taken 13+ years earlier before housing prices shot up (assuming 3 years to reset of rates).

Assume they took $300,000 out in equity, yet they were foreclosed upon when the payment increased by $1800/month. What happened to the $300,000? If they had used it only to make mortgage payments they would still have more than half of it left after 3 years and would have had their entire income to save.

Think maybe they spent it on "stuff" that they otherwise wouldn't have bought? I'd guess so, but I don't know.

Any one loan may not have much impact, but plop a big hunk of cash into a lot of peoples' hands and I think that a significant portion of it would be unwisely spent.

Then again, I'm no Mises or Rothbard so maybe I'm missing something.

The Sun Is Shining on Wall Street

"it will be a two-year, nationwide effort to jumpstart job creation in America and lay the foundation for a strong and growing economy." - B. H. Obama


If anyone in the media had any useful knowledge in economics they would recognize this statement as an oxymoron. The only way to get a truly 'strong and growing' economy is to cut spending and increase savings, which is almost certainly NOT what Obama's team will chose as their approach.

Instead we will get more of the same old borrow and spend programs that do nothing productive and serve only to dig the debt hole that much deeper. Meanwhile the talking heads continue to blather on as though the light at the end of the tunnel wasn't an oncoming train.

Buckle up, it's going to be a bumpy ride.

Citi's Underwhelming Bailout

"one wonders if there was any point to this exercise at all"

Nothing meaninful. It's merely an exercise at keeping the wheels on for as long as possible. Wait until our foreign creditors start balking and decide they don't want any more of our debt. When the current treasury bubble pops interest rates will move upward strongly, further dampening the economy. The 'crisis' is a long way from over.


"the U.S economy is heading for a major rebound" - gabe borenstein

I see Gabe has been in the kool-aid again. I'm sure he's snapping up as many shares of the big banks as he can afford so he will be able to retire after the 'major rebound' and remind us "he told us so". Good luck with that.

Thursday Market Preview: The Bears Are Firmly in Control

On Nov 20 10:48 AM Louisa wrote:

> In light of all this awful news about the markets, I am wondering
> if anyone has opinions/advice about alternative investments?
> I am trying to learn more about alternative investments
> in general, any thoughts would be appreciated!

Tangible and productive assets with good returns will be the things to find.

One alternative you may find interesting:

www.tropicalhardwoods..../

Spending, Production Slowing: Happy Holidays, You're Fired

MikeZ: If all shareholders take a 100% loss then who winds up 'owning' the company?

The current shareholders have already paid for the shares. They own a piece of the company. Period. What that piece is worth is determined on the market by voluntary bids for purchase. The only way to "give" shareholders a 100% 'loss' is to take away their ownership.

If that's part of the 'package', who winds up with those shares?

Citi's Achilles Heel: Foreign Depositors

Leverage is a two edged sword. Adding ignorance and/or arrogance to it as our banking system has done usually doesn't help.

While it's great to collect high interest on 9 and pay low interest on 1, it really stinks when several depositors decide to remove that 1 and force you to find enough money to maintain even minimal reserves for the remaining 9. Doubly so when 2 of the 9 are losing money.

Fractional reserve banking is like a daring circus act juggling with lit sticks of dynamite. Even if you collect lots of ticket money for every show, eventually you'll wind up blowing your head off.