Wall Street: The Cure Is Worse Than the Disease

The credit markets have been bouncing around wildly as of late, with one Wall Street firm after another – Lehman Brothers, Merrill Lynch, AIG – either merging with a more stable entity or being bailed out by taxpayers. This follows the massive government bailout of mortgage giants Fannie Mae and Freddie Mac, a veritable cesspool of corruption.

How did this come to be? Ironically, from the very thing that is now being proposed to correct it – more government involvement and oversight. The main reason these entities are looking to Washington to be saved is because it was, for the most part, following Washington's orders that got them in financial trouble. They were obliged, in the name of “not discriminating against the poor” to lend to those who were unlikely to be able to pay back what they had borrowed.

Then, when those risky borrowers inevitably defaulted, how else was the lender to get back what they had lost other than to go back to Washington and say “You made me take this silly risk, now save me!” And if politicians were reluctant to do so, just shovel some money into their campaign coffers to help them decide. The lenders and politicians would thus make out fine in the end, while taxpayers get stuck with the bill for all that malfeasance.

No big deal. Nothing to see here. Time to move on.

Forecast: U.S. Dollar Could Plunge 90%

Excerpt:
Published: Nov. 19, 2007
RHINEBECK, N.Y., Nov. 19 (UPI) — A financial crisis will likely send the U.S. dollar into a free fall of as much as 90 percent and gold soaring to $2,000 an ounce, a trends researcher said.
“We are going to see economic times the likes of which no living person has seen,” Trends Research Institute Director Gerald Celente said, forecasting a “Panic of 2008.”
“The bigger they are, the harder they’ll fall,” he said in an interview with New York’s Hudson Valley Business Journal.
Celente — who forecast the subprime mortgage financial crisis and the dollar’s decline a year ago and gold’s current rise in May — told the newspaper the subprime mortgage meltdown was just the first “small, high-risk segment of the market” to collapse.
Derivative dealers, hedge funds, buyout firms and other market players will also unravel, he said. * * *

It is important to understand that this is pure insanity. Our government has NO business eating the debts created by Wall Street. The criminals were engaged in massive fraud. That toxic debt may be unenforcible:

Video: 40% - 50% of Banks Have No Legal Right to Foreclose

Mortgage Servicers Sucking Loans Dry

That must be why Paulson want to do away with the Courts and of the laws that would govern any potential fallout . . .

Treasury Seeks Asset-Buying Power Unchecked by Courts

U.S. Treasury would normally inherit any defects inherent in the legal rights of the Wall Street Investment Banks. It is an open question whether people defrauded by lenders and mortgage servicing companies will be able to fight the Treasury.

Have a nice day . . .

Except that puts are so heavily regulated now it is very difficult to take advantage...

IB note follows

URGENT NOTICE REGARDING TRADING IN OPTIONS ON RESTRICTED SECURITIES [revision 1]
REVISION 9/22/2008 09:51 EST: An amendment of the SEC order reduces the restriction on short call trading. Accordingly, selling calls (NA3 below), creation of call spreads, and selling long stock against a short call position (NA3) will be permitted until further notice.

ORIGINAL NOTICE:
The SEC has imposed emergency rules for short sale and economically similar dealing in approximately 800 financial services companies. Part of the new rules impact options trading strategies that can lead to a short sale, even if temporarily. The following limitations on option trading have been put in place to conform to the SEC regulations. Additional information, and updates to the SEC rules as they become available, can be found on: http://www.interactivebrokers.com/en/tradi...tableStocks.php.

Allowed:
(A1) purchase of call options and exercise of long call positions
(A2) sale of call options against an existing long stock position in a ratio less than or equal to 1 call per 100 shares
(A3) purchase and sale of put options
(A4) purchase of single stock futures

Not Allowed:
(NA1) exercise of puts that would lead to a short stock position
(NA2) selling uncovered calls or uncovered single stock futures (coverage via stock)
(NA3) selling long stock if so doing will expose an uncovered short call position

The CRA was bad enough

That much we can certainly agree upon.

but the deregulation that happened under GLBA is what initiated the avalanche that threatens to bury us all.

It really wasn't. Even with it in place, the exact same economic situation that we have now could have easily occurred; banks could have simply incorporated overseas and used their deposits accordingly. The ONLY thing that Gramm's part of Gramm-Leach-Bliley did was put US banks on a more equal footing with foreign banks when it came to what services they could offer.

What really initiated this "avalanche that threatens to bury us all" was simple fraud on the part of FNM executives. But even that couldn't have happened if it were not for the implied government backing of FNM/FRE, which itself is a result of government interference in the market. Without their GSE credentials and the promise of cheap government loans for backing, FNM securities would have been considered junk and priced accordingly, and without the money from those securities they would not have been able to create the real estate bubble in the first place.

There is a great tragedy in this economic problem. Due to the way it is being misrepresented in the media, the average man assumes that this is an issue of insufficient regulation by government, when in fact it is government interference in the market (specifically FNM) that allowed the problem to exist in the first place. As a result, it is very likely that we are going to get more government regulation in the name of "oversight", without fixing any of the real causes of the problem. It also now seems unlikely that those responsible (such as FNM management, who committed fraud in posting bogus numbers in order to maximize their bonus) will reap any of the consequences of their actions.

But I don't think I'm wrong that Phil Gramm is a scumbag.

I will admit that I am biased in his favor, but I suspect that is only because I know him better than most. If the worst thing that can be said about Phil Gramm is that he dismantled part of Glass-Steagal, then he almost deserves sainthood on that basis alone. It was a stupid law (just like almost everything else that came out of the new deal) that did nothing other than protect certain financial interests at the expense of the consumer. It was the economic equivalent of banning the sale of meat at supermarkets to favor butcher shops, and to suggest that its repeal resulted in the current financial mess is the equivalent of suggesting that supermarkets cause food shortages.

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