Monday, September 15, 2008

CSI: Wall Street

Somebody just got straight murdered. Dow ended up down 504 points to under 11,000, its biggest one day loss since 9/11. AIG down 60%. Its days are numbered and this weekend we'll be playing Deal or No Deal once again...AIG might not make it through tomorrow morning.
In the final minutes of trading, major indexes broke through their July lows, with the Dow Jones Industrial Average plunging a whopping 504.48, or 4.4 percent, to close at 10917.51. The S&P 500 falling 4.7 percent to close at 1192.96. The Nasdaq shed 3.6 percent.

The market is worried about a possible failure of AIG — as early as tomorrow morning — said Matt Cheslock, a senior specialist at Cohen Specialists, and traders just don't want to stick their necks out amid that kind of uncertainty.

"When the Fed came out and said they [AIG] have got to go to alternative sources, that means no one would want to bail out AIG without any backup," Cheslock said. "If AIG fails tomorrow morning, it's the same thing written all over this market," he said. "I don't think anyone is going to want to take any positions overnight."

Keep in mind AIG is the biggest insurance company in the world. If they go under, it might take the entire system with it.

It's only a question of when AIG fails and how much damage it causes.

[UPDATE] Washington Mutual is under $2 a share and falling in after hours trading as its credit rating is officially lowered to junk bond status by S&P. It might not survive tomorrow either.

[UPDATE 2] Hewlitt-Packard announced late today that it is cutting nearly 25,000 jobs and taking a $1.7 billion charge. The toxin is spreading.

Le Sigh, Le Moan Part 5

Today's "Obama should have picked Hillary" concern troll is HuffPo's Andy Ostroy, who says Obama should actually dump Biden now and take the Hillster.

Conventional wisdom says replacing Biden with Clinton can't be done. That it's too late. That it'll make Obama appear indecisive, impulsive and lacking good judgement. Many Democrats believe this would cause irreparable harm to the campaign, ringing Obama's death knell. But this couldn't be further from the truth. In fact, it'd be a freakin' coup for Obama, and would instantly melt Palin's undeserving outsize political ice cap.

To be sure, a Biden-Clinton switch would cause quite a stir in the media. They'd accuse him of all sorts of things, from being politically expedient and flip-flopping to being irrational and ill-equipped to be president. The talking heads on CNN, Fox and MSNBC would be locked in a non-stop frenzied orgy of derisive rhetoric. But we also know that it would make about 18-million Hillary voters ecstatic at the same time. So, honestly, who really cares what Joe Scarborough, Keith Olbermann, Wolf Blitzer or Brit Hume thinks? These pundits don't constitute an appreciable voting block. What they think and feel would be utterly dwarfed by the euphoria from Clinton's faithful supporters. It's a pretty safe bet that an Obama/Clinton ticket would capture virtually all of these loyal Clintonistas. It's also a safe bet that many of those highly coveted 18-49-year-old women who polls show migrated to McPalin this past week would drop the spunky little hockey mom in a heartbeat for Hillary. Lastly, it's an even safer bet that Obama's current voters would stick with him as well. So, where's the downside? Show me a Democrat, today, who'd dump Obama for McCain if Biden was replaced with Clinton? They don't exist.

Oh really. I would not vote for Barack Obama if he did that. I would not. I'm betting a lot of people would just give up on any hope of anything getting done.

You're a prick. Stop talking.

Everything's Fine Here, How Are You?

How the hell is this guy even close in the polls?

Remember: The GOP did this to America. The next 50 days should be nothing but a string of reminders that John McSame has the same economic policies that wrecked our economy. And he wants MORE of them: more tax cuts for the rich, less government oversight, more transfer of wealth from the middle class to the top 1%.

The GOP screwed the economy. That is your message, Barry. You win.

The Lessons

The guys at the Big Picture have the lessons Wall Street learned from Bear Stearns that got us to Black Monday today.

The lesson from the Bear Stearns' bailout -- $29 Billion in Federal Reserve bad paper guarantees -- are quite stark:

Go Big: Don't just risk your company, risk the entire world of Finance. Modest incompetence is insufficient -- if you merely destroy your own company, you won't get rescued. You have to threaten to bring down the entire global financial system. The fear and disruption caused by a Bear collapse is why it was saved. (AIG has the right idea on this)

If you cant Go Big, Go First: Had Lehman collapsed before Bear, then the same fear and loathing of the impact to the system might have worked to their advantage. But having been through this once before, the sting is somewhat lessened -- especially for a smaller, lets interconnected firm like LEH. (First mover advantage!)

Threaten your counter-parties: Bear Stearns had about 9 trillion in its derivatives book, of which 40% was held by JPMorgan (JPM). Some people have argued that the Bear bailout was actually a preventative rescue of JPMorgan. Its a good strategy if your goal is a bailout -- risk bringing down someone much bigger than yourself.

Risk an important part of the economy: If your book of derivatives is limited to some obscure and irrelevant portion of the economy, you will not get saved. On the other hand, if Mortgages are important, credit cards and auto loans are too. Securitized widget inventory is not. To use a dirty word, Lehman's exposure is "contained."

Balance Sheets Matter: Focus on the media, complain about short sellers, obsess about PR. These are the hallmarks of a failing strategy -- and a grand waste of time. Why? Its call insolvency. ALL THAT MATTERS IS THE FIRMS' BALANCE SHEET. Lehman's liabilities exceed its assets, and they are now toast. Merrill Lynch got a lot of the junk off of its books, and got a takeover at 70% premium to its closing price. And Credit Suisse, who dumped much of its bad paper many quarters ago, is in a better tactical position than most of its peers.

Unintended Consequences lurk everywhere: When the Fed opened up the liquidity spigots via its alphabet soup of lending facilities, the fear was of the inflationary impacts. But the bigger issue should have been Complacency. The Dick Fulds of the world said after Bear, these new facilities "put the liquidity issue to rest." Lehman got complacent once liquidity was no longer an issue -- perhaps they acted to slowly to resolve their insolvency issue in time.

Unfortunately, Moral Hazard has created terrible lessons in 2008 -- via Bear Stearns (BSC), Lehman (LEH), Fannie Mae (FNM) and Freddie Mac (FRE).

The GOP is one big moral hazard anyway. We need to jettison them. Remember how we got into this mess: the lack of oversight and regulation thanks to the GOP's Wild West financial system.

Almost Missed This One

Over the craziness and the power loss this weekend, Amanda at Shakesville has yet more proof Republicans are just assholes.

Hey Barry, you mad yet? You ready to hit back at these douchebags?

Bloodbath: The Lossification

Going to live blog this for posterity.

9:55 AM -- Dow off 300 points in 25 minutes. We'll see just how bad this is going to get.

10:35 AM -- Lehman shares are down to 0.20 and falling. It's over. The BoA/Merrill merger news conference is going on. AIG is down 5 bucks to $6 a share and falling.

11:00 AM -- Dow is only down 200 points. Some bargain hunting going on.

11:30 AM -- AIG now off more than $6, having lost over 50% of its value. AIG is the world's largest insurance company, or was. That's no longer the case. If AIG goes under, today's maelstrom will look like a picnic. Dow back down 275.

11:45 AM Dow off 288. Roubini is predicting no independent broker dealers will survive, and that the Dow will lose 20% to under 9,000 before the end of this mess.

12:10 PM -- Still down 275, but the big news is AIG is now off more than $7.50 to less than $5 a share, over 60% of its value is gone. AIG might not survive the day, let alone the week.

12:55 PM -- AIG is scrambling to save itself. It's only down by half now, but it looks like most financials are down 20%. WaMu, Wachovia, Goldman, all down big. Dow still floating around 225 down.

1:20 PM -- Losses are being pared because of rumors of a Fed emergency rate cut tomorrow.

1:55 PM -- Dow back down 325 and falling, because the rumors of a rate cut are killing the dollar.

2:45 PM -- Dow off 3.40, AIG under $5.50 again.

3:05 PM -- Dow off 370, AIG off $7.

3:08 PM(!) -- Dow off 400.

3:25 PM -- Dow briefly dips under 11,000 to 10,997, off 425 points.

3:35 PM -- Tripping the 11k mark and falling to 10,985 has triggered some bargain hunters, Dow shoots up 100, to being only off 340.

3:45 PM -- People realized that bargain hunting is dumb. Dow is down 400 again.

3:50 PM -- Dow under 11k again and falling towards the finish line.

4:00 PM -- Dow just about hit the 500 point loss mark as it completely fell apart in the last 20 minutes of trading.

4:10 PM -- Official numbers, Dow down -504.48 to close at 10,917.51. AIG down 7.38 to 4.76, a loss of 60%.

How To Look Like An Idiot

Write a Sunday column in the WaPo that basically says there's no economic crisis and we're all imagining economic distress the day before the markets come unglued.
Patient zero in this epidemic is the Democratic candidate for president. As it would be for any challenger, it's in his interest to portray the incumbent party's economic performance in the grimmest possible terms. Barack Obama has frequently used the Depression exaggeration, including during a campaign speech in June, when he said that the "percentage of homes in foreclosure and late mortgage payments is the highest since the Great Depression." At best, this statement is a good guess. To be really true, it would have to be heavily qualified with words such as "maybe" or "probably." According to economist David C. Wheelock of the Federal Reserve Bank of St. Louis, who has studied the history of mortgage markets for the Fed, "there are no consistent data on foreclosure or delinquency going all the way back to the Depression."

The Mortgage Bankers Association (MBA) database, which allows rigorous apples-to-apples comparisons, only goes back to 1979. It shows that today's delinquency rate is only a little higher than the level seen in 1985. As to the foreclosure rate, it was setting records for the day -- the highest since the Great Depression, one supposes -- in 1999, at the peak of the Clinton-era prosperity that Obama celebrated in his acceptance speech at the Democratic National Convention late last month. I don't recall hearing any Democratic politicians complaining back then.

Remember, this is all Barack Obama's fault, and has nothing to do with the Republicans.

Once More Into The Breach, Dear Friends

Today is already shaping up to be a nightmare. Worst case scenarios abound right now on Wall Street: Lehman Bros. has filed for bankruptcy, Bank of America bought out Merrill Lynch for $50 billion, and insurance giant AIG is restructuring in a desperate attempt not to be the next Lehman Bros.-type casualty.

Euro markets are down 3-6% already, Asian markets are down in limited holiday trading off 4% and the Dow is set to open up with a 350-point drop on the opening bell. We will see the Dow hit trading curbs, most likely tripping the 500-point loss circuit breaker before lunch. This week is going to be a disaster, and it's just the beginning.

Trying to unravel Lehman's $700 million Gordian knot of securities and bad investments will take time, and it's time the sector doesn't have. Crisis of confidence doesn't begin to describe the underlying problem, which is that all the investment banks are tied up in securitized mortgage garbage. They will keep falling like dominoes, and the speed of the collapse will only increase now. Once one set of blocks is knocked out from under the pyramid scheme, the whole structure becomes unstable. It won't take much to take the whole thing down.

That "much" that it won't take? This weekend's triple meltdown. Now the boil has been lanced, and the pain is really going to begin.

Remember, the GOP says our economy is still strong, and everything is fine.

Do you still believe that?

Our next President has to deal with this crisis. It has exploded onto the front pages of every newspaper and the tickers of every cable news channel. This crisis of confidence is now getting ready to pull the whole thing down. Mike Allen at Politico takes a look at what all this means for Obama and McSame.
1. The candidates had hoped to put off their detailed prescriptions until they were in office, unrolling an economic agenda in conjunction with an address to the new Congress. Now, there's no way to duck it.

2. The new crisis crowds the candidates’ agendas in the stretch run, keeping them from talking about the issues that they had planned to focus on. But the candidates are creatively trying to meld the disaster into their existing messages.

3. Just like the markets, however, each candidate faces an enormous downside risk: Troubled times could make voters less likely to take a chance on Obama, with his shorter time in Washington. McCain could pay the price for the economic disruption on a Republican's watch, or if he looks like he doesn’t have the energy and creativity to reassure a worried nation.

4. They will also be more constrained when they get to Washington, with analysts estimating that the government takeover of mortgage giants Fannie Mae and Freddie Mac is likely to cost the Treasury $100 billion to $300 billion.

As disastrous as this is, I believe it favors Obama. This takes Sarah Palin off the front pages and puts the spotlight straight back on the issues, where Obama has the advantage if he can attack McSame's economic policy. He's already going on the offensive, saying that the Republicans have dropped the ball on the economy one time too many and now Main Street is paying for Wall Street's mistakes.

But McSame can make major inroads here if he keeps up his scare tactics and plays the fear card. I expect some brutal ads from them saying Obama's not ready and only McSame The War Hero(tm) can save America.

We'll see. Sarah Palin was a game-changer. But the game just got changed again.


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