Thursday Night update - Miss me?

Ok, enough of a break. Lots here, but with the frequency down, you can read 1 or 2 a day and likely finish before you get another one of these.

So since this all started we have cut the Fed funds rate 3% to 2.25%! Europe has cut their rate exactly 0% in that time. Yet our markets have declined about the same amount. But now the dollar is becoming worthless, price inflation is getting worse, and moral hazard has gone through the roof. All to get the same stock market returns they so clearly seek. Idiots.

Let's start with a timely one - it's long but important, so I'll put it first.
http://market-ticker.denninger.net/2008/03/aa2-mayyyybe-oh-and-cds-explosion-part.html

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"The past 10 days will be remembered as the time the U.S. government discarded a half-century of rules to save American financial capitalism from collapse."
(When this is the front page article on Yahoo, it's probably too late) http://online.wsj.com/article/SB120657397294066915.html?mod=yhoofront

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Here's how it works. Yep, they were told to leave Lehman alone. I remember when I thought we had free press in this country – how naive. Thanks again London for sharing the truth. Unfortunately for our system and Lehman, it's exactly these kind of games that will probably accelerate their (potential) demise.
http://tinyurl.com/34dn3h

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So the Fed tells them to take it easy on each other. Which is a clear signal that they shouldn't trust each other. So they reduce their exposure while they tell the public everything is fine. Makes sense. Yet another thing that will end well.

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People are starting to really call for the government to start buying mortgages now. This is getting dangerous. Normally it would take an act of congress to allow that - but clearly the Fed is now playing above the rules. What's it called again when the government of a country owns everything?

I wonder where they are going to fit the hammer and sickle on our flag? Feel free to send me your design ideas and I'll be sure to pass them along.

Regardless, putting a floor under the price of houses won’t help. Affordability is way out of whack and needs to reset.

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I usually don't post this stuff as it isn't fact-based or linked to some article somewhere. But you'd be shocked at how many like this I am seeing, so I'll let one slide. The greedy dumb-sh*ts at the top, and the lawlessness that went on (and continues to) is devastating the employees of the financial services companies. I.e., the ones that had virtually nothing to do with this mess.

"I spoke with a bunch of friends this evening trying to get some gossip - all employees of different I-banks. They are absolutely scared shitless. All of them. Nobody knows what is going to happen. My best friend who works for a large German bank that trades on their exchange was told that the bank has 20 days of liquidity remaining (don't ask me who, I'm not trading off the info and I won't pass the info) after which he left the office at noon and drank until 9pm. A mortgage, two car payments and a pregnant wife at home makes it hard to sleep. Two friends from Deutche were told that tomorrow will be their last day. A good friend from Lehman who was the head of the Archstone deal, top of his class at Wharton - out. A friend at Lehman who says nobody is getting any work done because they're losing their life savings every day as the stock drops. Two friends at UBS, one with 3 kids, sending out resumes in a panic - but nobody is hiring. These were all kids that were top of their MBA/law school classes. These guys aren't a**holes. These guys didn't do anything wrong or defraud people. None of these guys have ever seen an MBS or CDO. Guys that have worked their asses off, 3 to 4 thousand hours a year, to get to where they are. And it's all gone."

From the same guy last night: (IG = Investment Grade - and the rumor they are referring to is that Lehman's collateral was not accepted by the Fed yesterday)

Got off the phone with a friend of mine who is mid level there (8 years in). And if any of you want to bash him or laugh or say good riddance, don't bother and go f yourself. He's as good of a kid and as hard-working as anyone you have ever met. Came from a lower-middle class Boston suburb and took on $250k in debt to get through Harvard and HBS.

Anyway, the repeat of last week was in the office today. He said, at least in his department, nobody was working and everyone was freaking out. He was under strict orders not to talk about the rumors - what they were, if they were true, etc. Not even to me. I ran the auction thing by him and this is all he could say (in summary):


I asked him about Goldman coming to the rescue:

The interesting part is that I emailed another buddy at a German bank and independently this was his exact response to the auction rumor:



So there you go. Something's out there but nobody's talking or confirming. Everyone is pretty freaked out. The auction rumor seems a little fishy, however. My buddy at UBS responded:

<< I didn't see that news. been on the road doing healthcare deal.
stock's not doing much in after hours trading. I would think if there were serious liquidity concerns like that, the stock would be smashed at least 20%+ right now. let's hope it's OK, that would be a very bad thing for everyone.>>

The understatement of the year.


Well, here you go. I have another friend there who is on the floor at LEH (not upstairs). He had a completely different take:

Appreciate the well wishing, but my honest assessment is that the stock getting beaten up is total BS (I'm biased, I know). People say that Lehman could face a run on it just like Bear did, but the liquidity situation here is so much different than Bear, so I don't see it. Bear depended on CP, repo market and credit balances from their client accounts to stay liquid. We've got less than $5B in CP, repo is still strong and we don't use client balances to fund ourselves. Perception of insolvency can beat up the stock, but I don't see how it eats up our $30B in cash that we hold (plus almost $60B in other free assets).

Didn't hear anything about the Fed denying our collateral today, and would've thought that would make Bloomberg news somewhere. The stock volatility is definitely nuts... but we seem to move $3 every day now. Don't know how all this shakes out, but the mood on the floor from senior management is pretty positive, not somber. Crazy times though, that's for sure


My comment: Take your pick as to who you think is right.

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From a mish article, I'll spare you having to read it and just give you the punch line.

What To Do About The Liquidity Trap

Here's what to do about the liquidity trap: Nothing. The concept of liquidity traps is imaginary. Home prices are too high, they need to correct. There are too many houses and stores so we should not encourage more building. Savings should be encouraged, not discouraged. Overcapacity needs to be worked off not fueled. Bankruptcies are part of the solution not part of the problem.The real trap is doing something as opposed to nothing. Quantitative Easing and ZIRP (zero interest rate) did not help Japan and they will not help the US either.The central bank simply cannot force additional credit down the throats of prospective borrowers, nor should it try. Attempts to do so will only prolong the agony while punishing innocent savers, especially those on fixed incomes.

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Nice
http://tinyurl.com/38dgat

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If this doesn't annoy you then I've been bothering you with these emails past my welcome, let me know to take you off. Of course it's not written in this country.
http://tinyurl.com/2jj232

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CNBC reporter after getting destroyed by an economist on air for their incessant pumping."for the record I tried to get him to say something positive"Didn't want his boss to think he took a minute off from the lies?

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Consumer confidence has biggest drop in 20 years to levels not seen since 1973.1 in 10 people in Ohio receives food stamps. That is astounding. Wait, is it possible the rate cuts and bailouts aren't helping the public at all? I'm shocked.

Case/Shiller index shows home prices down 10.7% since last March. As if that isn't bad enough, the rate of decline is increasing. Cramer called house prices to soon bottom. He's done that many times in the past year. He laughed when the guy from the C/S index optimistically said we had another year of this. I would seriously punch him in the face if I met him.If you want to see a quick breakdown of the housing ugliness:
http://tinyurl.com/39bu73

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As for the media front I just mentioned:"as a foreigner and a TV producer in Europe I’m just amazed at conic and their obvious reporting bias, calling a bottom and telling people to buy financials every 10 mins in this territory - it just baffles me. they should face criminal liability imho. it just adds to the growing impression in Europe of increasingly nationalized US TV network reporting, 'something' has gone fundamentally wrong in your media landscape during the bush era folks, not just in financials...! your conic and fox TV news producers would envy the relative press freedoms in the former USSR and in China, even there it didn't seem like everyone had been handed the same script in the morning. your average joe is getting seriously f*cked, poor folks."

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The Fed instructing investment banks to not talk poorly about Lehman does not make the company any more solvent. Here is a good explanation why they may go away too. Accounting tricks still work?http://tinyurl.com/37c8o9

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Seriously???

"Rice prices jumped 30 per cent to an all-time high on Thursday, raising fears of fresh outbreaks of social unrest across Asia where the grain is a staple food for more than 2.5bn people."

http://www.ft.com/cms/s/0/d6f1cd74-fc29-11dc-9229-000077b07658.html?nclick_check=1

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Luckily for the unsuspecting public, Herb Greenberg was grandfathered in on CNBC so they occasionally let him speak on the air. This was good. Eerie how familiar it all sounds.
http://blogs.marketwatch.com/greenberg/2008/03/memo-to-cramer-about-bear-raids/?mod=MWBlog

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Ok, for those who follow the builders (and actually for those who don't as well) - this guy is the closest thing to inside information that you will ever find over the past year. Up to this point he has looked at it from the long perspective trying to find things to buy (which always baffled me), but last night his tune changed. For him to write a piece like this tells you how bad it is getting. Banks are in trouble.
http://tinyurl.com/3axqcc

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Even the Fed knows what is about to happen to banks. I didn't post this the first time, but now that they are re-upping just a couple weeks later, it's worth noting - especially after you read that last link.
http://tinyurl.com/2oln7z

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Your guess is as good as mine as to where this chart bottoms. But the excess of the past 15 years is quite evident.
http://tinyurl.com/2u328z

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Bear Stearns rant.
http://tinyurl.com/349oym

There is a petition link in there. I've avoided getting you involved in those things, but that was dumb on my part. All you have to do is put your name etc. and reply to the email you get and he takes care of the rest blast-faxing it to representatives/congress/etc. They are messing the system up, and we need as many people pointing it out as we can. There are already investigations on the Bear Stearns deal happening - what they did went above their power.

Congress is paying attention to grass-roots stuff like this, so I hope you'll look at it – extreme, but gets a point across.

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The actions our government is going to have to take to avoid a complete financial meltdown will likely be shocking. As if they haven't been drastic enough already. We haven't seen nothing yet. But at what cost will it happen?

My off the record prediction - something monstrous blows up before the end of summer. Hopefully that "something" is just a company.