Thursday, September 18, 2008

Mayday: The Martians have landed

National Photo Co. Naked Shorts 1919
Washington, D.C. Chorus girls at Sidney Lust's Leader Theater

Don’t miss today’s Debt Rattle, September 18 2008: Burning down a house on fire

Ilargi: The world becomes a crazier place by the minute these days. Hot darn, I figured I could get some down time tonight, with the Dow up 3.86%. You think? Damn you, Hiwwawy Cwinton!!

The nuttiest plan in centuries comes out of the SEC this evening, and while it remains to be seen whether it’ll be given a chance at survival, it’s so far out there, out of anywhere including the left field recently discovered in Andromeda X, that I need to write this.

There’s a strong competitor for most stupid idea of the millenium in the plan for a repository for "all the bad debt" on Wall Street. I’ll address that tomorow. But jeez, what is this, a competition for the most gloriously braindead award?

The SEC wants a ban on all short selling of stocks. Which means that the stock market as it functions now is dead, gone, over, and pining for the fjords.

Mind you, the reason is glaringly obvious: every single financial institution on the bleeping planet is being shorted these days. And no, you’re right, they don’t like that. Well, unless they can short the neighbour while they themselves survive.

Why are they being shorted? Because they are dying of a terminal affliction. And that means there’s money to be made in betting against them. Just like there’s risk-bearing money in buying stocks you think will do well, but the 180 degree opposite. Two sides of the same coin. In fact, can you still sell any stock that you are losing money on if the SEC gets its way?

So what do you do when someone’s dying, and you don’t want anyone to know? You close the doors. Check. Prop up the corpse. Check. Photoshop. Check.

If this Martian idea gains favour, stocks will go through the roof of the roof of the roof. For a few days. Everyone who’s short out there, and there’s zillions of them, will have to cover, and still lose their shorts and shirts and socks and pants.

And when that is done, stocks will seek and find bottoms and gutters that you never even imagined existed. Nobody will buy anything anymore. And then they will come up with a way to make you pay for it all. Nah, they wouldn’t do that, would they?

It’s like fielding a foorball team, but being forced to play without the defense.

Even that is possible right now. Know why? The party under attack is Goldman Sachs. That's why.

SEC Plans to Temporarily Ban Short-Selling
The Securities and Exchange Commission took its most aggressive assault against bearish stock bets by stating its intention to issue a temporary ban on short-selling.

SEC Chairman Christopher Cox briefed Congress late Thursday of the agency's intention to take the extraordinary step of interfering with the market's regular functioning. Short-selling is a trading strategy of selling borrowed stock in hopes it falls and can be repurchased at a lower price.

It's unclear if the SEC's intention has been approved by the commissioners, which is required, and whether which stocks are covered or for how long it will be in effect. Earlier this summer, the SEC moved to restrict certain short-selling practices for 29 days, covering 19 financial stocks.

Thursday, the U.K.'s Financial Services Authority said it would ban short selling in financial stocks until January. The FSA said it would review the effect of the ban each month. The FSA also announced additional disclosure requirements from hedge funds of short-sales if a certain threshold is met.

The SEC's decision comes amid increasing concern that short-sellers are abusing legal trading strategies to drive financial stocks lower. Since the near-collapse of Bear Stearns & Cos. in March, regulators have been looking into a combination of short-sales and false rumors are part of the problem.

U.K. Treasury Chief Alistair Darling, who was involved in the FSA's decision, said in a statement Thursday, he welcomed the FSA's "decisive action." He said in current market conditions it was in the "interests of financial stability."

In a short sale, a trader sells borrowed stock, hoping it will fall in price and can be repurchased later at a profit. The pressure to step up efforts against short-selling gathered steam since last weekend when Lehman Brothers Holdings Inc. steered toward bankruptcy and Merrill Lynch & Co looked for a buyer. Wall Street executives urged Mr. Cox to take steps to slow the sell-off, which they believe is triggered by heavy short selling.

Investment banks are particularly vulnerable to low stock prices as it hurts their ability to raise capital to secure their funding.
The SEC sped up its rule-making and on Wednesday the SEC announced three trading rules that were aimed at curbing abusive short selling. That was followed late Wednesday night with intentions to require hedge funds to disclose more information about their short positions.

SEC Reportedly Plans Temporary Ban On Short Selling
Wow. In a move with huge ramifications for the stock market - and which is likely to result in howls of protest from hedge funds, arbs and various other market players, the SEC is planning a temporary ban on short-selling, according to the Wall Street Journal.

The story says it is unclear whether the move, which SEC Chairman Chis Cox reportedly described to Congress late Thursday, has been approved by the SEC’s commissioners, which would be required. It’s also unclear which stocks would be covered, or how long the ban would be in effect.

The WSJ piece raises more questions than it answers. What about short positions used to hedge convertible bond positions, or hedge funds used by risk arbitrageurs to establish positions in companies that are being acquired? What happens to short positioned already held? What would be the impact of this move on market makers, who sometimes short shares to keep markets orderly, or to the options market?

As I said, more questions than answers. But it certainly should make tomorrow interesting.

SEC weighs ban on short selling
US securities regulators were on Thursday night considering a ban on short selling as part of a group of new initiatives to restore calm to the stricken financial markets, people familiar with the situation said.

The US Securities and Exchange Commission was discussing a short-selling ban on some or all stocks and an announcement could come as early as Friday, these people said.

The SEC, which had already announced several actions to curb abusive short-selling on Wednesday, came under growing pressure to take more dramatic steps. Earlier on Thursday, short-selling in the UK was banned by the Financial Services Authority.

Christopher Cox, the chairman of the SEC, attended a meeting with US lawmakers, the head of the US Federal Reserve and the Treasury Secretary on Thursday night to discuss various solutions to the financial crisis.

Short-sellers, who profit from falling prices, particularly hedge funds, have been blamed for plunging shares of financial firms.
Shares in Morgan Stanley and Goldman Sachs – the two last independent banks on Wall Street – have fallen precipitously in the past week.

Many blame short-sellers for pushing down the share price of Lehman Brothers, which filed for bankruptcy, and of AIG, the insurance giant that was rescued by the government this week.

While the move is likely to be welcomed by many firms who claim they are the target of short-sellers, hedge funds have already warned that bans make it impossible to hedge investment risk during a rights issue or placing. The rule would also push up the cost to banks of raising new capital and share could also become more expensive to trade, as hedge funds provide less liquidity to the market.


rachel said...

Thank you for coming back tonight to post this.
How long will the high last and how long until the deep descent?, thoughts?
When I step back, breath and reflect... this is my one life, here and now, bad people are trying to destroy it, I refuse to stop fighting, I will continue to fight for good even as the ship is sinking. Maybe somewhere some good will come from the effort in my small sphere of existence.

Anonymous said...

It appears to me there weren't any rules into the mess and all rules are being abandoned trying to get out. The only constant is inconsistency.

Anonymous said...

So - I may have missed it, but - what do you think about Paulson's efforts to resurrect the Resolution Trust Corporation in order to get all that bad paper off the bank books?

tinyurl version of a wsj article online...

Anonymous said...

Oh, duh - I see you are going to talk about that tomorrow. Sorry bout that. Carry on. ;-)

Anonymous said...

It's the old lifeboat game. Everyone is trying to throw everyone else out of the boat. Savinar might be right about nuclear war as the endgame.

Lifeboat Game

The speed of all this is stunning.

Ilargi said...

" what do you think about Paulson's efforts to resurrect the Resolution Trust Corporation in order to get all that bad paper off the bank books? .."

Cygnus, my first thought went back to the Hadron collider, and the born again drillbits who feared it would create black holes. I said it before: if you're into black holes, you got to come to Wall Street.

Anonymous said...

Here is a question for our hosts,or anyone else who would want to take a stab at it[Its premise precludes insider from considering it]

How effective will this attempt to be to put all the brush in a pile for burning?

Will this give us a couple of months or so,before the REAL fun starts?waiting for the election,or events blow this idea up as its forming?.

I am thinking we will live in a different universe by Christmas.

They pulled out stocks from the SPR to address the shortages,had a meeting to let everyone know whats going on...and now want congress to sign off on their crimes to spread the blame around....and chill the possibility of this coming back to bite them.

When i see these guys,especially Paulson,I get the impression he is just pulling time to get free.His own ass is covered...and he really could care less if the whole thing craters...he has more than he could spend in 100 lifetimes... the traditional month for collapses


bicycle mechanic said...

The last line in this famous cartoon linked above is "run or you will be up to your arm pits in Martians.

Classic, but banned, do not attempt unless you have high speed. It was slow from the server for me just now.

Careful Ilargi, you're starting to sound like Bill Gross. If you listen carefully to a new CNBC ad for their shows,it has a number of small boxes with "guests" speaking, to show the voltage of the show. Bill Gross says,


And of course the modern version of who wears the short shorts

Gotta have a humor break when the clowns act is getting so repetitive. If it wasn't so real it might be funny, but it is not and its serious and the holes are popping in the dike as quick as they shove a finger in. The number of unintended consequences is growing exponentially also it seems.

team10tim said...


You guys need a primer for this site! A link at the top of the page that explains the basics to new comers. It would cut down on the volume of recurrent questions and it would give me a place to send people to when they are struggling with the concepts.

I also posted this comment on the "Burning down a house on fire thread" I wanted to make sure that you saw it. Stoneleigh, in particular, would save a great deal of time by only answer a question once.

Starcade said...

Madness, but to their end of destroying the nation completely, necessary madness...

As I have said in the Rattle comments recently, nothing in this country has any real value whatsoever -- so, on top of the half-quadrillion-dollar madness of creating this new RTC (which the taxpayers will be under for every penny!), they are now proposing banning the only means of giving real value (read: no value at all) to these worthless, bankrupt, piece-of-shit companies that populate this wasteland.

What you are going to end up with, bluntly, is a situation of "no-bid" -- no one is going to come forward to buy anything in, first, given stocks (and eventually entire markets).

At that point, the price goes to zero _instantaneously_!!

Starcade said...

How effective will it be to burn all the trash?

Let me be blunt: The only alternative, for any degree continuation of the American society whatever, would be to damn the dollar, terminate the present economy, declare a Jubilee (all debts forgiven automatically), and START THE HELL OVER.

New currency, new markets, new companies, all the old garbage gone.

Anonymous said...

Are hedge funds being forcibly liquidated here? They're all short everything financial and if those stocks zoom and they have to cover they're gutted.

Anonymous said...

While the move is likely to be welcomed by many firms who claim they are the target of short-sellers, hedge funds have already warned that bans make it impossible to hedge investment risk during a rights issue or placing. The rule would also push up the cost to banks of raising new capital and share could also become more expensive to trade, as hedge funds provide less liquidity to the market.

Anonymous said...

Just to be clear, the rule is temporary, set to expire Oct 2. Not that they can't extend it, but it's really just a ploy to stop the immediate plunge, which it has. After that, it's back to your regularly scheduled programming.

scandia said...

Thanks for this posting as the culling of " bad " banks backstopped by the taxpayer has keep me up all night! Listen in Martin Wolf(FT) in an audio clip in support of the move as he thinks uncertainty is the problem. culling the " Bad " banks will reduce uncertainty. So my question is why not have full transparency of the books and simply write off the toxic paper? I have concluded setting up a repository for bad loans is yet another way to make money, take money from the taxpayers pocket. Why write it off when it could still turn a profit over an open ended term. So much for the cant of reducing taxes!
This leads to the problems of evaluation. Who gets to evaluate, decide what is good productive debt and what is bad toxic to the system debt? Who establishes the mark when short selling is prohibited?
" Interesting times..." Back to the Bulgaria Model.
By the way economists in the UK are saying the UK banks are not in the same dire straits as US banks. Really?!

Anonymous said...


Tim, the primer exists at:

About six months ago, I asked Stoneleigh for a level-2 course and she is apparently working on it.


Anonymous said...

Francois, thanks for the link to Stoneleigh's primer article.


Anonymous said...

Damn something wrong with my browser I keep trying to get some picture of Paulson's plans and every search goes here

Bigelow said...

Feel free to use me as an inverse indicator. This summer when it was obvious even to me that financials were being shorted by pro big time I piled on with an exchange traded fund shorting the financials too. 2 days later the SEC changed the rules; evidently the other big banks had made enough temporarily with their naked shorting. Two days ago I shorted the S&P 500 using an ETF because I don’t know if the stock market is going down a lot or a little soon but I concluded it is going down still; next day market up massively “on news”. I still have my financial short; it is not much of an investment. The big boys banned financial shorting again. I’d say (in a bitter tone) that when markets are universally shunned and abandoned may be the only time they are not manipulated.

Anonymous said...

Worry not, brother Bigelow, my browser is fixed, now I get this guy. Feel more at peace now?

Anonymous said...

stoneleigh, crystalradio, outacontrol, anonymous
This stuff is very interesting and my efforts to get in a safe zone have been interesting.
WG refused me because I don't have a million, not in B.C. so Van City or KCSU is out, left a message with a person at BMO, haven't had anyone get back to me yet.
My planner said he could do what I want, but would then no longer do business with me.
This is getting scary, but I haven't given up. Will make another call to the bank. This won't last - it's just like they've put some gelfoam on the hemorrhage to stop it from immediately exsanguinating. This is so scary.

Ilargi said...

"I’d say (in a bitter tone) that when markets are universally shunned and abandoned may be the only time they are not manipulated."

I don't think you meant that as a prophesy, but it might very well turn out to be. The consequence will be the opposite of what the manipulators intended.

Anonymous said...

stoneleigh, crystalradio, outacontrol, anonymous
I just sent the post above and hit the wrong key, so it says anonymous.
I'm tired after a long shift.

Unknown said...

My guess is that they are banning short selling until they can get the corporation set up to buy bad debt, at which point they hope that financials will no longer be insolvent and vulnerable. That's just a guess.

Greenpa said...

It seems we're out of the "interesting times", and into "really really interesting times."

Now is when the truth of "herd behavior" is as obvious as it's going to get. The US Congress, all of it, is going "moooooo."

As is the rest of the world.

I'm very curious to know if, after what comes next comes, Ilargi and Stoneleigh will ever get credit for seeing it beforehand. My guess is not- in past panics, those who saw behind the curtain were easily hushed and ignored.

The internet is a new aspect though- much harder to hush. So far. Will a few more people learn, this time?


Anonymous said...

Annonymous said:

My planner said he could do what I want, but would then no longer do business with me.

I would not stay with that broker after I made him do MY bidding. There are a lot of other rats in the sea and some good guys too.

In fact here is a link to the B.C. securities commission if you wish to make a complaint. There is no reason for that person to threaten you. None!

Farmerod said...


Wow, I guess your financial planner just showed her true face. Not surprised. She might be out of a job soon.

At the risk of repeating myself ad nauseum:

If your investments are inside an RRSP and already in cash, then you're ok for the moment. If they're in equities, corporate bonds or you don't know, it's probably time to get them into cash. Personally, I wouldn't even bother with GICs, TD's or the like. The extra small amount of interest compared to keeping it in cash might not be worth the risk. No matter what, come October 6, I would recommend CSBs as I already mentioned. If you're worried about your financial institution itself going under, then find one you think is relatively sound and start the process of getting a self-directed RRSP account going there. They will handle the paperwork of getting your RRSP and its contents at your present institution transferred over.

Now, if it's NOT in an RRSP, I think you can just have them write you a cheque for the cash balance once you've sold everything. You deposit that at your bank (and then maybe distribute to one or two others, to scatter your eggs a little). Come October 6, you write cheques to the gov't for CSBs and 6 weeks later you have paper bonds in your hands.

As a health care worker, you may be a member of a large union and you're probably in a defined-benefit pension plan. If so, I have loads of other advice based on my own DB pension research. Ilargi has mentioned that there will be problems with pensions. I agree 100%. There were problems with DB pensions BEFORE markets started their plummet. If you don't rescue your entitlement in time, you might end up essentially working for nothing. I'd be happy to elaborate if you (or anyone else) is interested.

Bigelow said...

I'd like to submit this as a song for our times:
Put Your Lights On

Anonymous said...

Hi OC, sounds like good advice but what is the problem with Marianne going directly to CSB's now rather than waiting for Oct. 6. I would assume the rates could change on what she held but only if it were in an upward direction. At least that is how I read the site, but then I may very well be wrong about that.

Anonymous said...

crystalradio and outtacontrol,
You two are awesome people! I am not in B.C., but rather in the City of "Milk and Money" and as of a couple of days ago, extreme violence.
My FP also told me I'm not in any derivatives as the company's goal is preserving capital. That's not what the simplified prospectus is.
Fortunately, I was able to get through to the TD Bank today, and have an appt on Sat with someone to start the process. I have non registered and registered in mutuals and the proceeds of my house in a MM.
The lady I spoke to schedule the appt said a lot of people are doing what I'm doing.
I feel like I've been bullied.

Bigelow said...

“In the mid-1980s, upon arriving in New York from Chicago with an extensive background trading options and futures (the original derivatives), I was offered a job at what was then Citicorp [today’s Citigroup Inc. (C)]. The offer was for an entry-level post in the bank’s brand new OTC (over-the-counter, meaning not exchange traded) swaps and derivatives group. When I asked what the economic purpose of swaps was, the answer came back: “To make money for the bank.”

I declined the position.

It used to be that regulators and legislators demanded theoretical, empirical, and quantitative measures of the efficacy of new tradable instruments being proposed by exchanges. What is their purpose? How will they benefit the capital markets and the economy? And, what safeguards will accompany their introduction?

Not any more.”
The Real Reason for the Global Financial Crisis…the Story No One’s Talking About

. said...


This is obviously the song for our times.

And this one comes in a close second.

Anonymous said...

Aw you guys! Here is what Paulson is singing these days.

Bigelow said...

“The first casualty of the short selling ban will be liquidity.

The second casualty will be the synthetic demand that short sellers represent. Every share sold short must eventually be bought back at a later date. This layer of demand serves the critical purpose of softening declines. It is, at its very core, what makes a market a market; buyer and seller meeting to transact differing opinions about what constitutes value.

With short sellers absent, shares will initially rise. But once demand is satisfied, there will be no softening any declines. This could potentially create a vacuum below market prices and exacerbate a decline.”
SEC Bans Short Selling on Financials, Minyanville Staff

Farmerod said...

CR wrote : Hi OC, sounds like good advice but what is the problem with Marianne going directly to CSB's now rather than waiting for Oct. 6.

I just called the CSB office. You can't buy them right now. October 6 is the first day to purchase this year's series. You can buy them on-line, by phone or through your institution (which you'd probably have to do for RRSP accounts). Min $500 max $500K.

Careful with the MM. A couple such funds just collapsed in the US although today's news says that MM funds will be bailed out too there. Because the rate of return is irrelevant at this point, I wouldn't trust anyone in the industry or anything they said about security. ABCP was rated AAA; I wonder if it's worth even 10 cents on the dollar now, even if there was a market to buy/sell.

It's Friday afternoon. Do you know where you pension is?

Bigelow said...


I don't think Paulson is that sincere!

Iowa Boy has got it covered with song lyrics like "I hate banks, they bunch of poo poos."

Stoneleigh said...

With short sellers absent, shares will initially rise. But once demand is satisfied, there will be no softening any declines. This could potentially create a vacuum below market prices and exacerbate a decline.

This is it in a nutshell (thanks for posting it Bigelow). What we're seeing is nothing but a short-covering rally. There's no genuine buying interest beyond what the shorts are forced to buy, which means that the demand is artificial and unsustainable. Once that temporary demand is satisfied, a vacuum will indeed be created under stock prices.

My guess is that we'll see an event of 1987 proportions this autumn, only this time that will be just the beginning. There is vastly more downside potential over the next few years, and I would expect the bulk of it to be front-end loaded (ie between now and the end of 2010).

Anonymous said...

webjazz: but what next? Next, everything will fall as deep as it never was before...

Greetings from Czech Republic

Anonymous said...

So what is our govt. solidifying by controlling Wall St.? Corporatism, fascism? Is this in preparation for attacking Iran, accelerate stealing from the little people or finalize the transfer of wealth? I wonder about what else will take place before Inauguration Day.


Anonymous said...

Bill Gross on CNBC: expects gov’t to buy US mortgages at $0.60 on the dollar.

team10tim said...

Hey hey outtacontrol,

It's Friday afternoon. Do you know where you pension is?

That's the best comment all day

Anonymous said...

I don't understand your objection to the short-selling ban. If I read you correctly, your argument is that the financial system is doomed anyway. So why object to the short-selling ban due to its "harming" the financial system? You can't really harm something which is dead anyway.

Anonymous said...

September 19, 2008 1:50 PM
Blogger Bigelow said...


I don't think Paulson is that sincere!

Iowa Boy has got it covered with song lyrics like "I hate banks, they bunch of poo poos."

Bigelow, you is right to beat me with a stick ... and as well those lyrics contains the true ringing music of the Liberty Bell, ding, dung! Politicals as well as the economicals an if you really bend that stick to my back I might even get all religious an talk of the preying.

Sheesh, so early in the morning to start like this! Bodes not well for the rest of the day, poor wife!