Shiv139

It's Time For a U.S. Sovereign Investment Fund

I do not believe a US Sovereign Investment Fund is the answer; a nation in surplus I can understand; a nation in deficit; maybe not.

I can see next steps being required as including:

1. An RTC type vehicle to hold and sell assets of failed banks.
2. Nationalization as in the case of FNM/FRE/AIG.
3. Combination to create a stronger entity post acquisition like BAC/MER.
4. Active marketing of new capital requirements to SWF’s and nations with budget surplus.

Everyone has a responsibility to act; this crisis may have started out in the US, but its impact has and will continue to be felt the world over. How bad it gets depends on how early and how actively the world engages in seeking a solution.

Escalating deficits from the rescue packages will cause an elevation of inflation; this will hurt the world. In my view nations which can look at risk from a multi-decade perspective will need to engage in providing a solution.

Wall Street Breakfast: Must-Know News

Like the UK FSA, early Friday morning the SEC too has banned short selling for financial services. While stocks can still be shorted; naked short selling is history for now. You can see the full text of the SEC orders at www.sec.gov/news/press....

A significant rally is likely to develop in companies where naked shorts have been high. These would include GS, MS, C to name a few. The financial services sector has a positive catalyst in terms of the additional liquidity provided to the market and initial steps taken to address the solvency issues causing great concern on capital markets. It would take significant foolish guts to short the sector. So for this sector expect a strong rally on account of short covering.

Outside financial services, we can expect to see Energy and Metals recover too; though the exuberance might be muted compared with financial services. Technology is another area where naked shorts have built up since Dell cited concerns on growth. NOTE THAT THE BAN IS ONLY ON FINANCIAL SERVICES, BUT I EXPECT SYMPATHY TRADING IN OTHER SECTORS.

Since the short covering adjustment will be a one time event, it will make sense to adopt a trading position - i.e. use the rally to exit in a few weeks. For financial services, the risks to short term positions, long term positions and secular positions, while considerably reduced, remain elevated. The healing process has begun and much will happen between now and the end game; this will allow building value positions with lower levels of risk (because of better visibility).

Federal Reserve Buys AIG

United States stepped up with an $85 billion loan in exchange for a 79.9% equity stake in AIG.

When BSC was bailed out the question of a moral hazard arose. Yet a LEH buy out was not forth coming. A few days prior, FRE & FNM were rescued. A day later we have AIG rescued. Why?

Now that solvency has become a major issue and is a great danger to both Wall Street & the real economy, how should this be tackled? A central back serves an important function as a lender of the last resort; should the government also act as an investor of the last resort?

The problem, has spread from mere sub-prime to other debt and on to liquidity & now solvency. The de-leveraging of the system is causing all asset classes to contract as positions are wound down. This is probably one major reason why oil stays down despite production costs & Ike (whose impact was limited but certainly not welcome news).

I think a trend is emerging. United States will act as a "lender of the last resort" to prevent damage from liquidity related issues through the Fed's monetary policy including rate cuts as necessary & most importantly the window.

In addressing a crisis arising from solvency related problems - United States will protect Main Street, acting as an "investor of the last resort"; which is not dis-similar to a sovereign wealth fund. So FMN, FRE and AIG are saved but LEH is not. In all cases the moral hazard is avoided simply because the existing owners effectively lose all; this is unlike the first bail out of BSC where the existing shareholders were protected.

My own view is that for a nation to act as a sovereign wealth fund in times of crisis is not desireable; particularly for a nation with spectacular deficits. However in times of unprecedented crisis it might be perceived that such an action is required.

Ultimately, a view might form that if Wall Street institutions (not their shareholders) are saved; in most situations, the administration will secure a good long term return on its investment. And that too with no moral hazard. The entity failing is racked by a confidence crisis, the United States administration can provide the lacking confidence; the synergy from provision of the confidence intangible has an immediate positive impact on the acquired entities valuation and to an extent makes a profitable exit once the crisis is over likely. This avoids getting into a self perpetuating cycle of crises of liquidity-write downs-capital required-confidence-so...

The big risk is that these investments will cause a rising deficit, inflation and interest rate increases. Today foreign investors question the risk of United States financial institutions; tomorrow, if the credibility of the United States as a debtor nation comes into question, there will be hell to pay for the globe.

Had the United States been in a surplus position, the governments acting as an "investor of the last resort" is a no brainer; in the present situation of record deficits, it is a huge risk. In the long run, it might be better to allow the solvency issues to work their way through the system and allow the economy to restore its own health and well being.

Federal Reserve Buys AIG

United States stepped up with an $85 billion loan in exchange for a 79.9% equity stake in AIG.

When BSC was bailed out the question of a moral hazard arose. Yet a LEH buy out was not forth coming. A few days prior, FRE & FNM were rescued. A day later we have AIG rescued. Why?

Now that solvency has become a major issue and is a great danger to both Wall Street & the real economy, how should this be tackled? A central back serves an important function as a lender of the last resort; should the government also act as an investor of the last resort?

The problem, has spread from mere sub-prime to other debt and on to liquidity & now solvency. The de-leveraging of the system is causing all asset classes to contract as positions are wound down. This is probably one major reason why oil stays down despite production costs & Ike (whose impact was limited but certainly not welcome news).

I think a trend is emerging. United States will act as a "lender of the last resort" to prevent damage from liquidity related issues through the Fed's monetary policy including rate cuts as necessary & most importantly the window.

In addressing a crisis arising from solvency related problems - United States will protect Main Street, acting as an "investor of the last resort"; which is not dis-similar to a sovereign wealth fund. So FMN, FRE and AIG are saved but LEH is not. In all cases the moral hazard is avoided simply because the existing owners effectively lose all; this is unlike the first bail out of BSC where the existing shareholders were protected.

My own view is that for a nation to act as a sovereign wealth fund in times of crisis is not desireable; particularly for a nation with spectacular deficits. However in times of unprecedented crisis it might be perceived that such an action is required.

Ultimately, a view might form that if Wall Street institutions (not their shareholders) are saved; in most situations, the administration will secure a good long term return on its investment. And that too with no moral hazard. The entity failing is racked by a confidence crisis, the United States administration can provide the lacking confidence; the synergy from provision of the confidence intangible has an immediate positive impact on the acquired entities valuation and to an extent makes a profitable exit once the crisis is over likely. This avoids getting into a self perpetuating cycle of crises of liquidity-write downs-capital required-confidence-so...

The big risk is that these investments will cause a rising deficit, inflation and interest rate increases. Today foreign investors question the risk of United States financial institutions; tomorrow, if the credibility of the United States as a debtor nation comes into question, there will be hell to pay for the globe.

Had the United States been in a surplus position, the governments acting as an "investor of the last resort" is a no brainer; in the present situation of record deficits, it is a huge risk. In the long run, it might be better to allow the solvency issues to work their way through the system and allow the economy to restore its own health and well being.