Going to Hell in a Handbasket: The Rush To Protect More Stocks

by: Trader Mark September 19, 2008 | about stocks: AIG / CIT / GE    
Trader Mark

Trader Mark

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Ah, unintended consequences - they always crop up when the not so invisible hand muddles into the stock market.

Now General Electric (GE), since it has a financing arm, is going to be "protected". (Is this like the endagered species act?) When the stock was battered it protested, saying less and less of its business was financial - now it waves its financial arm in the air saying "hey, save us too!"

  • General Electric is expected to be added to a list of financial stocks that can no longer be sold short, according to people familiar with the situation. The parent of CNBC and CNBC.com, makes about half its profit from its financial services unit, GE Capital.
  • Other companies with large financial services interests such as CIT (CIT) also are petitioning the SEC to be added to the initial list of stocks released Friday morning.

Now every Tom Dick and Harry with >1% of business financial will be screaming at SEC to get them on the protected list too.

So why don't we just skip these steps and put everyone on the short protection list?

Now AIG (AIG) investors want to reverse the bailout!!! Because with the government eating the bad assets ... I mean with the government making a great investment that will work out in the long run... why should they suffer? What's next? Bear Stearns asking to be detached from JPMorgan? Lehman asking bankruptcy court to reverse their filing? WHY NOT?

Seriously folks - these events could not be sold as a work of fiction; no one would buy the premise. I

liked this take from CBSMarketwatch.com

- at least other socialistic countries admit it. What a joke this all is. (Emphasis mine.)

  • When Russia shut down its stock markets to avoid the global collapse sweeping the markets earlier this week, most of Wall Street shook its head. The move smacked of totalitarianism and artificial manipulation, such a brazen intervention wouldn't happen in a free market.
  • Well, the Russians are having a good chuckle after Securities and Exchange Commission Chairman Christopher Cox, following the lead of the U.K.'s Financial Services Authority, initiated a ban in short selling for 799 U.S. financial institutions
  • The move smacks of irony on several fronts. For one, institutions such as Morgan and Goldman regularly practice short-selling as part of their proprietary trading strategies. These firms made billions in profits by running hedge funds or serving them through prime brokerage operations. They shrugged when companies complained that short sellers were ruining their companies.
  • Now, Morgan's John Mack and Lloyd Blankfein of Goldman not only won a ban of naked shorting, but of all shorting of their industry. They also have persuaded New York State Attorney General Andrew Cuomo to investigate short selling in the market place.
  • ...the SEC is doing exactly what claims to be against -- manipulating the markets and propping up ailing financial companies. They're doing it because the banks are essentially backed by taxpayers and have become politically important.
  • Our complaint through history about countries that try to influence their markets by changing the rules mid-game was that it was tantamount to cheating. For all of its faults, the U.S. markets were supposed to be the most level playing fields in the world. At least Russia shut everyone out of the game.

I wanted to begin today with a headline "The Death of Free Markets," but then I remembered I used that back in the fall when the Federal Reserve targeted shorts by announcing rate cuts or liquidity injections premarket at 8:30 AM so that people who were positioned wrong were crushed at 9:30 AM. Or when I used it during the Bear Stearns fiasco. Or during the... well, it's been long gone - I can't count the ways. This was just the icing on the cake for those who have not been paying attention. Disgusting, but SO representative of how this country works. If you pay, you own the decision makers.

We are a disgrace. All of us. Because we vote these people in and we don't push back. So we are rolled over. What an era.

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This article has 32 comments:

  •  
    Sep 19 03:33 PM
    So true. If this current "plan" had been in place two weeks ago, LEH would still be in business. We are a pathetic lot.
    Reply | Link to Comment
  •  
    Sep 19 03:40 PM
    I can't help but be haunted by Plato's words:

    'The punishment of wise men who refuse to partake in government, is to be governed by unwise men.'
    Reply | Link to Comment
  •  
    Sep 19 03:52 PM
    "We are a disgrace. All of us. Because we vote these people in and we don't push back. So we are rolled over. What an era."

    The bingo statement. Think logically from the bottom to the very top in how to reconstruct this economy at some point. The obstacle is Washington. Those in power that control the resources are the last to be effected personally, are encapsulated and move only after calamity has hit and there jobs are at stake. Hence the big finger pointing this week in Washington. But reality is, it takes time for the population to vote the corrupt from Washington. We as investors job now is to help educate the public to prepare them for the downstream ripple effects, offer up the big picture of what is going on to our local Congressmen and perhaps solutions and over time facilitate the removal of the most corrupt. Doing this won't make you any friends of course but it is necessary, unless you and your family wish to live in a country like Venezuela (not the admiration for some of our government personell for Hugo Chavez's, Castro's and Pinochet's of the world).
    Reply | Link to Comment
  •  
    Sep 19 03:54 PM
    Meant 'NOTE' the admiration of communists/socialists mentioned.
    Reply | Link to Comment
  •  
    Sep 19 03:56 PM
    Indeed DaveW.
    Reply | Link to Comment
  •  
    Sep 19 04:28 PM
    Speak for yourself. I am not a disgrace--our leaders are a disgrace! Yes, I vote, but what am I supposed to do, run for President myself? I am forced to just hold my nose and vote for the least bad candidate.
    Reply | Link to Comment
  •  
    Sep 19 04:48 PM
    I've got no sympathy for short sellers, but if we're going to put a few companies out of bounds, why not outlaw short selling entirely? Why do we have a system that rewards anyone for creating a situation in which others suffer financial pain? Stocks are fully capable of crashing on their own - there's no need for Shorts to pump up the volatility.
    Reply | Link to Comment
  •  
    Sep 19 05:27 PM
    All the short sellers in the world couldn't make these companies worthless. These companies made themselves worthless. Guess where the shorts borrow their shares from? The same big banks that are now whining about shorts. Hey, there's interest to be collected and fools to be fooled.

    Solutions:

    Can we all agree that it was a bad idea to repeal Glass-Stegal, a law enacted during the depression that prevented banks from getting "too big to fail"? Financial companies should be prevented from becoming monopolies. The govt. failed at this because of ideology.

    Can we all agree that Alan Greenspan was wrong to tout the benefits of mortgage securitization a couple years ago?

    Can we all agree that Bush's and McCain's ideas of deregulation resulted in NINJA loans, interest-only floating rate loans, etc?

    Can we all agree that banks that are critical to the economy should not be leveraged 50-1?

    Can we all agree that a $500k mortgage at a rate of 6% on a property that's worth $300k is worth, at most, $250k (considering immediate foreclosure costs)? Fine, then somebody sell it or buy it. Case closed.

    Can we all agree that there is a problem with the structure of most banks (and indeed most companies) where short-term executives make gobs of money on bonuses and stock options for reaching the next quarter's goals, regardless of the long-term consequences, which they will not be around to see? How many more times do we have to watch this happen? Pay them a high cash salary so they have incentive to keep the job as long as possible and to keep the company healthy for the long term.
    Reply | Link to Comment
  •  
    Sep 19 09:19 PM
    I am fascinated by these comments, trying to blame the government for the absolute havoc wrecked by the "free market", as it created mortgage-backed securities it did not understand and could not sustain. You all mis-place the blame, which lies with the Reagan-Clinton-Bush de-regulation, so that the unimpeded free market could do what it always does, create a disaster where only government intervention can save the investor class (and the government steps in because letting the investor class suffer their true free market travails would also mean a long and deep recession that would hurt everyone.)
    Those of you who blame Washington -- who created mortgage-backed securities, who traded them, who built houses of cards with them -- not Washington, but companies like Lehman, WaMu, Freddie Mac, Fanny Mae, Merrill. Come off it.
    Reply | Link to Comment
  •  
    Sep 19 11:41 PM
    This began with government overreation to 9-11...

    Greenspan created this real estate speculation by lowering interest rates for to long, spurring economic activity, post 9-11. This,FREE MONEY became blatant speculation on a National level. Ya , Greenspan applauding the Mortgage industry to loosen lending requirements early in 2004 was a green light. Gravitational well opened up and the dollars began to swirl into the Black Hole. The giant sucking sound is the increase in taxes that will be required to prop up a worthless currency.

    Case-Shilling ratio of house vs. wage ratio has a lot farther to fall to reach historic norm. This story isn't done.

    'Greenspan and Bush legacy bankrupts USA ' should be the headline of the day.

    US$ is DOA.

    Paul Volker must be livid.
    Reply | Link to Comment
  •  
    Sep 19 11:55 PM
    the investment banks - with not only the blessings of the government but the direction of the government - have been manipulating the markets. with the investment banks weakened, the markets were unable to be manipulated and got out of control.

    watch the two faced policy of the government in everything they do - from foreign policy to domestic social programs. remember, the economy is strong.
    Reply | Link to Comment
  •  
    Sep 20 09:40 AM
    Imlet will get a golden parachute! Anybody that did not see this coming should be put in a home and given heavy drugs.
    Reply | Link to Comment
  •  
    Sep 20 10:36 AM
    I am tired of these bailouts and market manipulation by the Govt. Fat cats on wall street must not be bailed out – not by may tax money. These guys screwed up big time – now they raise the boogeyman- too big to fail. Fire all the CEOs – zero the equity - erase the golden parachutes.

    Call your congressman- jam their lines. Do something. There has to be accountability – if I screw up on my job – even if it is not me - I get fired. Why are these pompous overpaid fat cats in Wall Street not already fired.
    Reply | Link to Comment
  •  
    Sep 20 10:39 AM
    All financials should be prohibited from shorting any business outside financials. All we are doing now is allowing the banks to screw with commodities without backlash, esp. PMs and energy. These bankers will certainly have the last laugh. (for now)
    Reply | Link to Comment
  •  
    Sep 20 11:02 AM
    Try to remember all this when you are offered the chance to vote for someone promising more government involvement in your life....
    Reply | Link to Comment
  •  
    Sep 20 11:06 AM
    Try to remember all this when you are offered the chance to vote for someone promising more government involvement in your life....
    Reply | Link to Comment
  •  
    Sep 20 11:35 AM
    You are an idiot. AIG was not bailed out by the Government, the Government took them over. There was no need to take the 80% interest in the company. That was a throw in. AIG just needed time to sell its assets a bridge. The core company (the international and domestic commerical insurance) is doing great, in fact operating at a bigger surplus than any other insurance company in the world. The non core can be sold for at least 180 billion. The Government, however, had AIG over a barrell on Wed with company facing bankruptcy because they could not raise the capital quick enough for the rating agencies and thus the government decided not only to loan the money but to also steal the company because they could. Now the shareholders rather pay back the loan to the FED and get the company back from uncle Sam. Also, that bad unrealized debt that AIG insured which caused the need to raise capital in such a hurry in the first place will now go away pursuant to the bailout so it will actually be a surplus rather than a debt for AIG. That debt will never be realized Thus, whomever gets control of AIG will have control of one of the best companies in the world.
    Reply | Link to Comment
  •  
    Sep 20 12:17 PM
    "Try to remember all this when you are offered the chance to vote for someone promising more government involvement in your life.... "

    Oh I will...but I will first look at the liars who promised the LEAST government involvement, the LOWEST taxes and look at the overwhelming government involvement and the astromical taxes I will face because of them! They lie to get in office...and change the rules as their house of greed is falling.
    Reply | Link to Comment
  •  
    Sep 20 01:17 PM
    Hey, pay attention. The idiot financiers that ruined the nation's financials gave millions to the campaigns of the idiots in DC. OF COURSE the Congresscritters are going to bail out their buddies. Heck, it's not their money..
    Reply | Link to Comment
  •  
    Sep 20 01:20 PM
    I need someone to explain how a public owned company is allowed to give away company money to a politician? On which company disclosure form does that appear? I thought this was stock holders money and management was hired to run the firm in the interests of the stock owners, not the interests of any politician they like.

    It would also seem to be a conflict of interest for GSE type companies to give money to the election funds of any government politicians and a conflict of interest for politicians to receive such money. GSE firms were setup to take care of taxpayers but seem to be taking care of those who are charged with GSE oversight and why is it that the liberal politicians are at the top of the recipients list of GSE funds?

    I remember several years ago someone tried to offer a bill to control the GSE firms and I also remember that a Senator who received large donations to his election fund was instrumental in blocking the bill. Anyone remember who?
    Company CEOs seem to have a great pay system, do bad and leave with big bucks and to better and leave with bigger bucks. I do not own enough stock to vote a difference, but I try. Had the GSEs been like Ceasar's wife, most of this mess would have been better.
    Reply | Link to Comment
  •  
    Sep 20 02:03 PM
    definition of CAPITALISM: a small so called select group controls the money and the lives of every single one of us. We are not supposed to get rich we are suppose to be and to stay poor,to have barely enough so we don t revolt. That s it,agree or not?
    Reply | Link to Comment
  •  
    Sep 20 02:41 PM
    You wrote:
    ... Ah, unintended consequences - they always crop up when the not so invisible hand muddles into the stock market. ...

    Yes, looked at as unintended consequences, the attempt to mitigate the crash when the dot.com mania ended via easy money had the unintended consequences we see today.

    The operators on wall street, the fast buck artists, have used financial chicanery to convert tax dollars into personal compensation. Now that is alchemy.

    I don't know about you, but it gives me a warm fuzzy feeling to know that my tax dollars will be used to maintain the lifestyle of the operators on wall street at the level to which they are accustomed, nay, have a right.

    The sad thing is that it is possible those tax dollars are actually being used for something more productive than they would be by the government. Try to think of the most outrageous and absurd programs you can. They are probably being funded by congress.

    This crisis and the savings and loan crisis were created by congress. Not deliberately of course, but as unintended side effects. I've read a comment somewhere on the web, that congress creates problems quietly and then claims great credit for solving them.

    It is clear from the output, that congress is ignorant of control theory, systems theory, complexity theory, risk theory, optimization theory, and many others pertinent to large complex systems. They don't have to be experts, but they should be aware that actions have effects that aren't always intended so they can ask the right questions when solutions are proposed. Maybe it should be a requirement that you have to be able to play SIMS before you can run for congress.
    Reply | Link to Comment
  •  
    Sep 20 02:57 PM
    User 138602 wrote:
    ... definition of CAPITALISM: a small so called select group controls the money and the lives of every single one of us. ...

    This is complex. Capitalism is a form of meritocracy. It guarantees that the people best able to produce with capital use it. For instance, the economy of the US has increased by 40% in size over the last 7 years. That equates to roughly the entire output of China (actual output is difficult to gauge because of their communism) or 4 times the output of India. In 7 years! And there was the crash of the dot.com mania and 9/11 in there.

    On the other hand, laws are required to protect the rest of us from those wielding such power. They can never protect us fully, money is power and will bend the rules for its possessor. But on the whole they have worked fairly well in the US. When excess has grown exorbitant, the system has tamed it. The one place I think really needs reform is in the inheritance of wealth. Those whose ancestors had merit are still exerting control, control they haven't earned. A couple of recommendations are either a very high death tax (90 - 100%) or a small annual tax on assets, on wealth (set at the rate of GDP growth). In the first case, the playing field is levelled, and those able to use the capital most efficiently are able to buy it. In the second, the capital is sold off to finance the tax if it isn't generating at least a GDP growth in rate of return, so it ends up in the hands of those more productive.

    I like the first one, though the second one is the one more likely to pass.

    Incidentally, while we speak of a small class of controlling capital owners, the top 1% of wealthy adults in the US would be around 2 million people. They definitely won't all know each other, and any effective cabal would be difficult to set up. In fact, they are probably at odds on many issues as much as the general population. So while there is some truth to your statement, it think it is still hyperbole.
    Reply | Link to Comment
  •  
    Sep 20 03:33 PM
    Poor lehman, if only they had goldman in their name!!!
    Reply | Link to Comment
  •  
    Sep 20 04:24 PM
    AIG was "saved" for it's 401ks. The politicos and Fortune 500 types don't want to tip their hand that these are just another bubble waiting to go bust.
    Reply | Link to Comment
  •  
    Sep 20 05:22 PM
    Pockyclips: You are out of your mind.
    Reply | Link to Comment
  •  
    Sep 20 07:08 PM
    What a sad week. My one question, if you are going to do loans and bailouts why not Lehman? Maybe that was a learning process. The financial tenacles of these companies are long and very very very involved. By the way it is not just the Wall street types getting hurt, lots of retirees, maybe some of them your parents.
    Reply | Link to Comment
  •  
    Sep 20 07:14 PM
    Constable, you forgot one thing. The push from congress for banks to offer a loan to anyone who could breath whether they had income or not. Hope and pray congress doesn't get involved in the details of this, just vote the $ and leave so they don't mess anything else up.
    Reply | Link to Comment
  •  
    Sep 20 10:49 PM
    I see this whole mess as inside investor trading.
    All the big boys, and well, you and I, were sweating at our losses last week. I can guarantee that all the big decision makers are more heavily invested than the rest of us. They got all their gains back Thursday and Friday with this very call. They are now going to use the lower and middle class to prop up the federal coffers, to pay for the banks, and have recouped their losses. Its a win win.
    Reply | Link to Comment
  •  
    Sep 21 06:50 AM
    This is right on. Congress should close the Fed, and regulatory agencies and get government out of the way of the free market. Remember the Consitution? It says ALL legislative power is vested in the Congress of the United States
    Reply | Link to Comment
  •  
    Sep 21 06:52 AM
    The Fed is nothing more than a cartel of huge, private banks. Aren't they just helping themselves to our money?
    Reply | Link to Comment
  •  
    Oct 16 06:20 PM
    How gullible are we supposed to be. Henry Paulson is just camouflaging a huge cash infusion into CITIBANK the sick boy in the "In" group.

    Last week Paulson arranged for CITI to buy up Wachovia Bank as a means to hide its massive losses (I judged to be in the 30-50 B this Qtr). It would have been a perfect media cover to explain this massive write-off as part of the takeover write-down no one would be the wiser about the rotten core of this bank.

    In came Buffett.. er..Wells Fargo, and offered actual cash for Wachovia, all be it $6.00 a share and ruined Citi's party. What looked like a toddler's tantrum erupted and Paulson was smack in the middle of his two buddies squabbling over left-over cake..
    What to do? What to do?
    Ah Hah!!!
    Start a new party and "force " everyone to partake of the cake thus hiding the deplorable state of Citi’s finances in the party's milieu. Today, Thursday the 16th , Citi came out with a 2+B loss which , it turns out was a 13+B loss, which would have been a 38B loss, had Paulson not doled out the candy.

    What a bunch of hokum!! To insinuate that everyone HAD to partake in order not to stigmatize any one in the party. I really feel bad for JP Morgan to “Have to take $25B of taxpayers’ money after they already took $30B for Bear and $50B for WaMU both of which will yield JPM $200B over the next three years.

    Well it’s MY money that Paulson threw at t