SEC Issues Emergency Rule on Short-Selling Financials

How thoughtful of the SEC to come to the aid of the primary dealers, the Wall Street banks, after virtually ignoring the naked short selling problem in the markets for the past eight years.

SEC to fight short selling of financials
By Joanna Chung in New York
July 15 2008 21:31
Financial Times

US regulators will take emergency action to stop abusive short-selling of stock in financial institutions such as mortgage financiers Fannie Mae and Freddie Mac and investment bank Lehman Brothers.

Christopher Cox, Securities and Exchange Commission chairman, told legislators on Tuesday that the agency would issue an emergency rule to stop so-called “naked” short-selling of shares in significant financial entities. The SEC will also consider new rules to extend those trading limits to the rest of the market.

Short sellers aim to profit from share declines – usually by borrowing a stock, selling it and buying it back in the market. But in a “naked” short the shares are sold without being borrowed first. The emergency rule, which would be in effect for up to 30 days, would require anyone making a short sale to borrow the security first.

It would apply to Fannie and Freddie – the government-sponsored entities that own or guarantee almost half of US mortgages – and all primary securities dealers including Lehman, whose shares have been battered by rumours the bank says are false.

The action comes amid intensifying efforts by authorities to crack down on rumour-mongering intended to manipulate securities prices. The SEC has been investigating whether false rumours and abusive short selling contributed to the collapse of Bear Stearns in March and the declines in Lehman’s shares.

It is now working with the Financial Industry Regulatory Authority and New York Stock Exchange Regulation to conduct industry-wide “sweep examinations” of market participants, including hedge fund advisors

“If we are successful in bringing future cases . . . I believe the penalties should be commensurate with the enormous amount of shareholder value that is destroyed by this kind of wantonness toward other people’s money,” Mr Cox said. The agency has used emergency rule-making powers in the past, for instance after the September 11 terrorist attacks, but this would be the first time it has issued an emergency rule on short selling.

Fannie Mae and Freddie Mac closed down 27.3 per cent and 26 per cent respectively.

US Treasuries Default Spreads "Surge to Record"

U.S. Treasuries' debt protection costs jump to record
Fri Jul 11, 2008 2:26pm EDT

NEW YORK (Reuters) - The cost to insure U.S. Treasury debt against default surged to a record on Friday on fears that the U.S. government may need to put capital into mortgage finance companies Fannie Mae and Freddie Mac, adding to government debt levels.

Investors are worried about increased Treasury debt supply after a report that the U.S. government may be considering a takeover of the country's two biggest mortgage finance companies.

The cost to insure Treasury debt with credit default swaps jumped to 16.5 basis points, or $16,500 per year for five years to insure $10 million in debt, from 8 basis points on Thursday, an analyst said.

Credit default swaps are used to buy protection against the likelihood of a borrower defaulting on its debt and to speculate on an issuer's credit quality. Protection costs rise when people become more concerned about an issuer's credit quality.

The 10-year Treasury note was trading 1-1/32 lower in price for a yield of 3.93 percent, up from 3.80 percent late on Thursday, while the 2-year note was 8/32 lower to yield 2.55 percent, up from 2.41 percent.

Debt protection costs on U.S. government debt are now higher than those for Germany, which trades at 9.5 basis points, and are trading at similar levels as Japan and the United Kingdom, which are around 16.5 basis points, the analyst said.
(Reporting by Karen Brettell; editing by Gary Crosse

The Stock Market Crash of 2008-10 is Well Underway Led by the Financial Sector

"The period of financial distress is a gradual decline after the peak of a speculative bubble that precedes the final and massive panic and crash, driven by the insiders having exited but the sucker outsiders hanging on hoping for a revivial, but finally giving up in the final collapse." Charles Kindleberger

We wished to make this post on a day in which the markets started to rally, so as to give readers the latitude to exit their long positions gracefully should they choose to do so, and not leave them in a panic, which is not necessary nor productive.

As a reminder, market 'crashes' are notoriously difficult to predict, and the fallibility of our judgement is acknowledged. There is not even a clear distinction between a crash and a severe correction, except that 'crashes' are thought to be short term, and are precipitants to bear markets. We think that the credit bubble has 'crashed' taking the financial sector and the housing sector with it. As it spreads, that will be the 'bear market.'

This is our opinion based on the facts at hand. If you read it through you will understand our reasoning, and may choose to agree or not.

It is not clear to us that once begun that 'crashes and bear markets' must inevitably play out to a pattern. There is a great deal of difference for example between the declines of 1987 and that of 1973-4, or 1929-33 and 2000-2. Sometimes they are over quickly, and sometimes they are protracted.

We suspect that the Treasury and Fed have more plans in their playbook, and we wish them well. Perhaps this event can be turned, or mitigated to a more graceful correction. But we are assuming a very defensive posture, and you may consider doing the same for yourself once you look at the charts.

Those of us that can remember such things will recall that in the tech bubble contraction of 2000-2 it was the big cap NASDAQ that led the way lower, well ahead of the other US equity markets, with a much deeper correction.



By almost any measure and definition, the US financial index has crashed as part of the credit bubble contraction.



The tech bubble was more isolated from the rest of the economy, whereas the credit bubble seems to permeate almost every aspect of the US economy. We expect this crash to be more pervasive and with a much more lasting impact on the real economy.

The financial markets seem to be leading the way for the credit bubble contraction and the Crash of 2008-10.



Please keep in mind that the deleveraging of a bubble is almost never a straightforward excercise, and even the worst decline, such as the Crash of 1929 and decline into the bottom of the Great Depression in 1933, was marked by sharp rebounds and bear market rallies.

We believe that our CrashTrak model has confirmed we are in a stock market crash. We expect the declines to at least rival those of the last Crash which we had in 2000-2, and perhaps that of 1929-33, barring some explosive growth in monetary inflation that will distort the statistics.

The stock market is of less importance we think than the real economy and employment levels. We expect the Fed and Treasury to push the Dollar to the limit in trying to prevent a destructive collapse in the real economy, and again, wish them well in this effort.

Blatant Market Manipulation Is a Distinct Moral Hazard

Our personal view is that one or two big trading desks just gave the futures markets a broad 'gut check' in commodities and stocks, selling oil and gold and silver, and buying equities.

Anyone who says that such things do not occur, often with an air of feigned sophistication and objectivity, is either naive or a poseur.

The 'game' is to dump a huge position into a particular market, driving down the price and running stop loss orders and small speculators and funds out, creating a short term drop in price and then buying back the positions at a cheaper price and pocketing the gain.

This scheme can be used over both short and long periods of time. Its is an old game, going back before even the great market 'pools' of the 1920's that set up the environment for the Crash of 1929 and the Great Depression.

The SEC remains blissfully asleep at the switch during the general looting of the country by the financial interests. The state of the silver market in the US under the guidance of the CFTC is a disgrace.

As traders we can live with it, but as citizens and parents we are appalled. It creates a general atmosphere of lawlessness and cynicism and amorality. It spawns larger and more sophisticated con games like Enron and collateralized debt, as the big financial houses become more greedy and emboldened. It is a source of corruption and decay in the politicial system. It corrupts regulators, politicians, and even the media.

It is one of the reasons why Glass-Steagall was enacted back in the 1930s, to prevent this predation by the large national banks using federally insured depositors funds and privileged access to cheap Federal Reserve funds as the instruments of their common cheats and frauds.

PBS: the RCA Stock Pool

The New York Times
Citigroup Regrets Bond Trades in Europe
By HEATHER TIMMONS
September 15, 2004

Citigroup told employees on Tuesday that it regretted executing a $13.5 billion bond trade that has raised the ire of rival traders in Europe and led to an investigation by regulators in Britain.

In an memorandum to all 40,000 employees of Citigroup's global corporate and investment bank, the chief executive for global capital markets, Thomas G. Maheras, said the trade was an "innovative transaction, that sought to access the liquidity in the European bond markets," but that it "did not meet our standards."

As a result, "we regret having executed this transaction," he said.

The bond sale, executed Aug. 2, caused widespread concern in Europe's markets. Citigroup sold 11 billion euros ($13.5 billion) of European government debt within minutes, mainly through electronic trades, then bought some of it back at lower prices less than an hour later, rival traders say.

Though the trades were not illegal, they angered other bond houses, which said the bank violated an unspoken agreement not to flood the market to drive down prices.

Citigroup "failed to fully consider its impact on our clients, other market participants and our regulators," Mr. Maheras said in the memo...

Citigroup Regrets Bond Trades in Europe