AIG Counterparties: Why were they paid in full?

"But in their letter, the representatives said that while they were aware of “systemic risk,” they still wanted to know who had decided that the way to contain such risk would be to completely insulate the banks from losses."

"“Credit-default swap contracts were at the heart of A.I.G.’s meltdown,” Mr. Cuomo said in a statement. “The question is whether the contracts are being wound down properly and efficiently, or whether they have become a vehicle for funneling billions in taxpayers’ dollars to capitalize banks all over the world.”"

The corruption continues.

http://www.nytimes.com/2009/03/27/business/27cuomo.html?em

Massive shift of risk away from Wall Street and onto the back of the American taxpayer

"After putting up a relatively small amount of capital, institutions like Pimco, BlackRock, Legg Mason, Invesco and others of that ilk would have the opportunity to participate in 50% of future upside, should it occur. That, in turn, might entice them to pay above-market rates for the assets, which is very good for the banks. But it's hard to imagine any transaction where "everybody" wins - banks, investors and taxpayers alike. The bottom line is Geithner's plan represents a massive shift of risk away from Wall Street and onto the back of the American taxpayer. "

Wall Streets loves free money.

http://finance.yahoo.com/tech-ticker/article/217878/'Win-Win-Win'-vs.-'Robbery'-Wall-St.-Loves-Geithner's-Bad-Debt-Plan-But-Taxpayers-Should-Hate-It?tickers=WFC,GS,XLF,FAS,JPM,BAC,C?sec=topStories&pos=8&asset=TBD&ccode=TBD

Stock Exchanges Push for Uptick Rule

http://www.thestreet.com/_yahoo/story/10476766/1/stock-exchanges-push-for-uptick-rule.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

"BATS, along with the NYSE and Nasdaq, said in a letter to the Securities and Exchange Commission that a modified uptick rule and circuit breaker would help deal with the critical issue facing the U.S. equity markets. "

"The argument is that the lack of a rule that required share prices to go higher before more short sellers could pile in created an environment where shorts could accelerate the failures of a number of companies, especially financial names like Bear Stearns, Lehman Brothers and Washington Mutual." Do we want to impede the markets?

New Treasury Bailout Plan is Garbage

http://www.portfolio.com/views/blogs/market-movers/2009/03/23/geithners-doomed-bailout-plan

"The problem with this approach is that it's needlessly expensive. " How can we justify spending billions more? Felix Salmon argues this will be a failure.

"The depth of public anger and the gravity of this crisis require that every policy we take be held to the most serious test: whether it gets our financial system back to the business of providing credit to working families and viable businesses, and helps prevent future crises. Does the plan as presented today pass this test? In a word, no. Sadly."

There is no systemic risk issue here. The government is giving your money away.

$173 Billion and counting for AIG

Excellent article that highlights the billions transferred should be the outrage. Not the million dollar bonuses.

"A few people on Capitol Hill moan and groan but there is popular agreement on the wisdom of this transfer of ONE HUNDRED AND SEVENTY THREE BILLION dollars from the taxpayer to the financiers. But when AIG itself pays out $165 million in bonuses -- money it is contractually obliged to pay -- the entire political system goes insane. President Barack Obama says he’s going to find a way to abrogate the contracts and take the money back. "

http://www.bloomberg.com/apps/news?pid=20601039&sid=atlHxXH7FweQ&refer=home

WSJ: AIG Still Isn't Too Big to Fail

Finally, someone who has the audacity to question the systemic risk concept and the necessity of government intervention!

"But there is far too little debate on the government's willingness to back all of AIG's obligations."

"Letting AIG's derivative counterparties take a significant haircut, however, should not lead to such a crisis. AIG's obligations are to derivative counterparties, not to depositors." Why should the government bailout counterparties such as Goldman Sachs. These are not depositors. These counterparties took risk and must accept the consequences of their risk.

"At a minimum, the government should conduct "stress tests," estimating potential losses in alternative scenarios, and formulate a policy on the magnitude and fraction of derivative losses it would be willing to cover. A policy that doesn't fully back AIG's obligations should be seriously considered." What an excellent idea to balance the interests. A blanket coverage of AIG obligation is not only ludicrous, it is expensive.

http://online.wsj.com/article/SB123751263240591203.html

Arguments against Uptick Rule

"The advocates include long-term investors and corporations who believe that short selling contributed to the destabilization of the markets. Opponents include hedge funds, day traders and riskier investors who believe that short selling is a great opportunity to capitalize on a down market."

Short sellers may also be long traders that are hedging! Hedgers are not speculators and may need to short in order to hedge or reduce risk.

http://www.etftrends.com/2009/03/what-effect-will-the-uptick-rule-have-on-etfs.html

Uptick Rule was created in 1938

http://online.barrons.com/article/SB123758871198199971.html

"The "uptick rule" was imposed in 1938, requiring that traders wait for a stock's price to tick higher before initiating a short position. Now, of course, there's a push to reimpose this rule -- it was lifted in 2007 -- in order to constrict short-sellers' ability to operate. More qualitatively, 1938 followed a year in which the U.S. suffered a crushing recession and a devastating bear market."

Naked Short Sales - Lehman Brothers

"The SEC has linked such so-called fails-to-deliver to naked short selling, a strategy that can be used to manipulate markets. A fail-to-deliver is a trade that doesn’t settle within three days." This type is behavior is clearly fraud and market manipulation. The SEC needs to enforce the delivery requirement to ensure that shorters really have underlying shares.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aB1jlqmFOTCA&refer=home

Government Sachs (GS)?

"Wall Street's most storied firm is surviving on taxpayer dollars." Enough said.

http://www.slate.com/id/2214076?nav=wp

The Bailout Outrage

"At the end of the day, the thing to get outraged about is not the $440 million in bonuses at AIG or the $10 million that Citigroup is spending to redesign its shrunken executive suite. These may seem like princely sums, but they are almost insignificant compared with the real outrage: the hundreds of billion dollars of taxpayer funds that have been put at risk to keep AIG and Citi from failing and taking the whole financial system down with them. Let's keep our attention on the elephant rather than the pimples on its behind."

Yes, the real issue is not the measly $1 million bonuses at AIG. It's the trillions that are spent to prop up financial companies in the name of systemic risk. But are these institutions truly systemic? We may never know, because they are not allowed to fail. That raises the question that some non-systemic institutions may be propped up, in the name of systemic risk.

"During a financial crisis, fairness is a luxury we cannot afford. " First of all, what is a financial crisis. Who decides when a recession becomes a financial crisis? It is possible that a "financial crisis" is used as a means to justify the bailout of the irresponsible. Precisely, we see that some institutions are benefiting unfairly.

"Unfortunately, the price of righteous indignation is a wave of foreclosures, a further decline in home values and billions of dollars of additional loan losses at banks that are already on government life support. Given the financial and economic hits they have already taken, that's a price that most "innocent" homeowners and taxpayers would probably prefer not to pay. "
Why are lower home prices detrimental? Lower home prices mean absolutely nothing to those with equity that are staying in their homes. The question is whether or not the government should be artificially propping up asset values such as homes that were inflated based on leverage.


http://www.washingtonpost.com/wp-dyn/content/article/2009/03/19/AR2009031903607.html?hpid%3Dtopnews&sub=AR

Wired: Recipe for Disaster: Formula that Killed Wall Street

Basically the financial models were not correct. And investors and portfolio managers, with great leverage, relied on the models heavily. Ratings agencies obscured the truth.

Nice quote -- "Nassim Nicholas Taleb, hedge fund manager and author of The Black Swan, is particularly harsh when it comes to the copula. "People got very excited about the Gaussian copula because of its mathematical elegance, but the thing never worked," he says. "Co-association between securities is not measurable using correlation," because past history can never prepare you for that one day when everything goes south. "Anything that relies on correlation is charlatanism.""

http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all

Graphic: Crisis of Credit Visualized

Nice picture about the anatomy of the credit crisis.

http://crisisofcredit.com/

SEC Study on the Uptick Rule

SEC staff has studied the effects of the Uptick Rule, in "The Uptick Rule of Short Sale Regulation - Can it Alleviate Downward Price Pressure from Negative Earnings Shocks?" The answer to their study was that "The study has not found any evidence that prices of stocks subject to the rule declined at a slower speed than prices of exempted stocks at times of stress. The two groups of stocks had similar levels of short sale volumes despite the rule's prohibition on short selling at minus or zero-minus ticks."

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=956106

Short Selling Ban for Financials in the U.S. was a Failure

In Fall of 2008, the SEC banned short selling for two weeks for about 800 financial stocks. Although there was a temporary "relief" in prices, financial stocks headed lower -- much lower -- in the weeks and months after the ban.

Did the short selling ban work?

http://www.fool.com/investing/general/2008/09/23/the-short-sale-ban-is-a-fiction.aspx

Welcome to DownTick Rule!

Welcome everyone!

The first post is about the absurdity of reinstating the Uptick Rule. A properly functioning market requires both bulls and bears. Imposing an uptick rule for short sellers makes as much sense as imposing a downtick rule for buyers who want to take a long position in stocks. That is the name of this blog, DownTick Rule.

Trading programs, believe it or not, can also cause inflated stock prices. Bear "raids" are not unlike bull "raids" a/k/a rampant speculation. Can anyone dispute that investors are better off with Nasdaq at 5000 or million dollar homes justified by 22 year olds with stated income? If regulators truly wanted to stop "raids," they would enforce laws. They would cut down on naked short selling. They would focus on market participants that abuse and violate the law and not impose blanket favoritism for one group of investors.

Studies have shown that even a short sale ban does not stem the decline in equity prices if the companies have weak financials. Traders can easily use derivatives to circumvent any uptick rule or short sale ban. An uptick rule or short sale ban distorts the markets and causes confusion for traders.

A properly functioning market allows the exchange of risks for a price. Regulators should allow markets and exchanges to support both bulls and bears, if they want the public's trust and confidence.

Ultimately, fundamentals -- not market manipulation -- will drive equity prices in the proper direction.

Disclaimer

The views on this blog only reflect the author's personal opinion. Views do not represent any institution.