Friday, September 19, 2008

Bad Beat - Game Changer

I'm pretty speechless this morning. I knew it was going to be a crazy week before I even left for Vegas, but I didn't know that our financial regulators were going to drastically alter the rules of the game in the middle of the hand. I sat down to start to write an analogy to the house altering the rules in blackjack after you received your cards, but I'll abandon that and just hit some points:
The regulators, today, BANNED the short sales of 799 different stocks, almost all of which are financial stocks. I feel like we've been through this before, but for the non-financial savvy out there, let me spell it out again: the price of an asset, be it gold, oil, orange juice, or a share of Goldman Sachs, is the net "view" of what all market participants think it is worth at the time. I explained in detail how blaming "speculators" for rising oil prices was absurd, and blaming "short sellers" for the decline in stock prices is equally asinine. If you want to make yourself throw up in your own mouth, just think about both of those points combined. As I said previously:
We blame the "speculators" when prices rise against our will, and we blame the "short sellers" when prices fall against our will. This is patently, outright, ABSURD. I don't know how else to say it. We don't blame the equity "speculators" when stock prices go up, and we don't blame the oil "short sellers" when oil plunges from $150 to $100. We have our cake and eat it too.
Instead of vilifying people like Greenlight Capital's David Einhorn a "short seller," of Lehman Brothers stock who "stood to profit if the price of Lehman Brothers declined," (I put it in quotes cause these are the kind of talking points the press uses to brainwash the American public who knows no better) we should give Einhorn a medal for WARNING us about Lehman. Maybe if we'd LISTENED to him, instead of CRITICIZING him, Lehman Brothers would have addressed their problems and survived.
Another point on short sellers, for the brainwashed public: short sellers do not cause a company's stock to go to zero. If the short sellers are wrong and acting irrationally, then the LONG BUYERS will step in and buy the stock from the short sellers. It's a game where the stock price is the score - it measures the will of the longs vs the shorts. The problem now, is that the game isn't fair: you cannot short these stocks any more, so the prices are pure manipulation.
Earlier this week, Russia took an interesting step to halt the decline in their market - they simply closed it! Then, Russia's largest bank gave "stock market players" a large cash infusion so they could buy stocks to prop up the market! Sounds crazy right? Like market manipulation? See the difference between Russia, Venezuela, China, and the USA was that our market was FAIR. That ended today: we changed the rules to prevent one half of the market pricing mechanism (the short sellers) from acting. In addition, the government, who had decided not to "bail out" Lehman because of "moral hazard," decided to just bail out THE ENTIRE STREET. This latest "bail out" - which will probably be in the neighborhood of $500BILLION, basically results in the Treasury/Federal Reserve buying all the dog shit liabilities off the Wall Street Banks' books so that they can regain their liquidity. A number of financial blogs had taken to sarcastically labeling our country the USSA (Unites Socialist States of America) as we'd taken a decidedly communist turn when we SOCIALIZE losses (via bailouts) but privatize gains (when companies succeed). Now we've gone one step further and joined these lesser tier markets in directly manipulating the rules of the game.
I'm not exactly sure what happens to my ponzi scheme thesis now: I'm covering my bank short - the thesis that all these guys were insolvent and would go bust, while correct, is now pretty much dead. However, we still have to pay for this! I think what happens is that it takes years instead of months - we have a long, drawn out recession, and massive inflation as our Treasury continues to print more money to pay for all of this. Then, maybe China stops buying our debt, and we have real problems. We'll see.
The saddest part of this whole equation is Lehman Brothers. I have some good friends who work(ed) at Lehman, including a former boss of mine. It's kinda sick for Lehman how everyone got some sort of relief except them, and it illustrates an important lesson: the Treasury basically said that they'd let Lehman die because they had to put a cap on "moral hazard" at some point; at some point firms need to be held responsible for their decisions. The tragedy is that when this lesson extended to Hank Paulson's boys at Goldman Sachs (where Paulson was a partner previously), the officials did an about face - the Goldman Mafia squeezed the trigger, and Paulson came to the rescue, changing his tune. I guess moral hazard only applies selectively.
For now I'm taking a watch and wait approach to the markets, as I usually don't like to get involved in games where the rules are liable to change at any point in time. I'm also pretty depressed that our government leaders really seem to have no idea of how our markets actually work. Every time I hear a congressman blame short sellers for the problems (instead of the banks with 100-1 leverage who made bad loans), it makes me want to move to Canada.
good luck eh?

1 comment:

Fuel55 said...

Someone as wise as KD is always welcome in Canada.