Bear Raids and Economic Warfare on a Global Scale

The lawmakers and regulators may wish to look into the quiet but devastating run on the hedge funds that is occurring right now, that is going to cut that industry in half, and distort the markets until the end of the year.

This will affect key commodities in addition to certain industries, and may temporarily impair some national economies.

The Prime Brokers have a rough idea where the hedge funds, their clients, have their major holdings, and are leading bear raids on them as the funds have to raise liquidity because of redemptions. They are publicly identifying those positions to other players in the industry. A conflict of interest of the first order it appears at first blush. Perhaps not illegal, but certainly destructive and 'feeding the fire.'

These bear raids on key positions generate more panic and losses for the hedge funds, which in turn generates more forced selling and losses.

The irony of course is that the Prime Brokers are also the biggest banks, and are being bankrolled by the US Treasury and the Fed by about 400 billions per day in rolling capital. They appear to be at a loss so to speak with regard to productive investment opportunities. Thus they turn to speculation.

In addition to the hedge funds, many banks with their own small trading desks are being caught in the cross fire.

We do not think of this as a conspiracy but clearly the unintended consequence of poorly thought out but well intentioned actions taken in haste.

The lawmakers and regulators must create a firebeak to stop the cycle of destruction. They could require any bank accepting Federal funds to adhere to some simple guidelines about the potentially predatory use of those funds, especially banks that are more like large hedge funds themselves in their composition.

This cycle of destruction of assets is exactly why the Congress enacted Glass-Steagall in the 1930's. Some of the Washington and Fed whiz kids might wish to go back and revisit the raison d'etre for that legislation.

Some likely measures would be an immediate limit on the expansion of short positions in all commodities, with limits based on market size, and the enforcement of laws against naked short selling on all equities immediately.

There should also be disclosure from all recipients of taxpayer money of all net positions to the SEC on a daily and weekly basis. We would also approve of a ban against short selling over certain limits of the size of a market or the shares outstanding by players over a certain size, and all those receiving Fed subsidies.

But this will probably not happen, which is why we may have a political crisis next year.

To put a very fine point on this so no one can miss it, it is not the hedge funds themselves that we care about, or the 'qualified investors' that put money into them. What concerns us are the unintended consequences, the malinvestment, the market distortions, the polarization of wealth, and the political blowback that come from interfering with markets and other people's business for a protracted period of time, and in a big way. The actions being taking by our banks, our 'national champions,' is ours because we are funding them and regulating them. And in this world, if you break it, you bought it, whether it was intended or not.

This is starting to look like economic warfare from some perspectives. The blowback may not be attractive.

Short Term Treasury Debt Issuance Goes Parabolic

Derivatives Losses Hit French Depositor Bank Caisse d'Epargne

"You are told that your ONLY job is take as much money from your customer's pocket as you can and put it in your pocket. Then they give you all the crappy little accounts and you hit the phones hard and convince them to buy the stuff all the bigger accounts which are "desk" accounts are trying to sell. You move up to "desk" accounts when you prove that you can sell freezers to eskimoes. Aggressive rookies in derivatives beat the bushes globally to find any smaller unloved accounts and they plug them full of exotic derivatives that were designed to have huge yields and no downside - until the markets become very volatile, that is. Before this is over, we will see that just about every financial firm around the globe is loaded with highly questionable derivatives."
Confessions of a Wall Street Bond Trader

Caisse d'Epargne Had EU600 Million Derivatives Loss
By Fabio Benedetti-Valentini
October 17, 2008 08:07 EDT

Oct. 17 (Bloomberg) -- Groupe Caisse d'Epargne, the French customer-owned bank in merger talks with Groupe Banque Populaire, reported a 600 million-euro ($807 million) loss on equity derivatives after stock markets plunged last week.

The loss occurred at the proprietary-trading unit of Caisse Nationale des Caisses d'Epargne, the lender's holding company, the Paris-based bank said today. The team of about half a dozen people exceeded trading limits in terms of size and risk, said an official at Caisse d'Epargne. (Rogue traders again, les joueurs compulsifs - Jesse)

European stocks last week slid 22 percent, driving the Dow Jones Stoxx 600 Index to its worst week on record, on concern the deepening credit crisis will push the economy into a recession. The equity derivatives losses don't affect the ``financial solidity'' of Caisse d'Epargne, which has more than 20 billion euros of shareholders' equity, the company said. The stock market plunge may have led to losses at other banks.

``Everyone will have incurred big losses because of market volatility,'' said Bahadour Moussa, a consultant specializing in derivatives recruitment at London-based Pelham International. ``A lot of the banks will have positions they can't unwind or shift and that are losing money, and when the time's up, they'll have to publish losses.'' (Everyone was doing it, Maman - Jesse)

Bank Rescue Plan

Banks in Europe and the U.S. are also grappling with the impact of the global credit crisis. The French government this week announced plans to loan as much as 320 billion euros to banks to unlock lending and to spend as much as 40 billion euros on equity stakes in financial companies, if needed.

Caisse d'Epargne and Banque Populaire started merger talks last week, with the encouragement of the French state, as the financial crisis put pressure on banks to combine. The banks are the main shareholders of Natixis SA, the Paris-based investment bank that piled up about 3.9 billion of writedowns tied to the U.S. subprime mortgage market collapse by June 30.

The loss doesn't affect the merger plan between the holding companies of Caisse d'Epargne and Banque Populaire, the official said. A deputy of Julien Carmona, Caisse d'Epargne's head of finance and risk management, has been suspended because of the loss and the bank is pursuing ``sanctions'' against the members of the proprietary-trading desk, he said.

Lagarde Calls for Inquiry

French Finance Minister Christine Lagarde, in a statement, said the losses don't threaten the financial strength of Caisse d'Epargne. She asked the French banking commission to carry out an inquiry into the trades, and to ensure that French banks are complying with market controls.

The announcement comes about nine months after Societe Generale SA, France's second-largest bank by market value, reported a 4.9 billion-euro trading loss because of unauthorized bets by Jerome Kerviel. (Le Rogue Trader prototype - Jesse)

Caisse d'Epargne and Banque Populaire formed Paris-based Natixis in 2006 by merging their investment-banking and asset- management businesses. They own about 34.5 percent each in Natixis and agreed on Sept. 29 that they may raise their holdings by as much as 2 percent each.

Natixis said in July that it plans a ``strong reduction'' of its proprietary-trading business as it cuts 850 jobs and trims costs by 400 million euros in 2009 to restore profitability. French banks had at least 18 billion euros of writedowns and provisions so far stemming from the collapse of U.S. mortgages. (Bonjour, mon nom est Guillaume, et je suis un 'derivatives trader' - Jesse)

Caisse d'Epargne, formed by 21 member banks, is France's third-largest consumer banking network by branches, with 4,770 agencies. Caisse d'Epargne had 358 billion euros of savings and deposits at the end of 2007.

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.

Neither a Borrower nor a Lender Be: Banks Getting their Daily Fix from the Fed

Oh yes. This will surely work.

Keeping the insolvent Morgan Stanley and Goldman Sachs on life support, and paralyzing an entire economy and its banking system to cover their embarrassment.

Reuters
Banks borrow record $437.5 billion per day from Fed
Thu Oct 16, 2008 5:14pm EDT

NEW YORK (Reuters) - Financial institutions ran to their lender of last resort for record amounts of cash in the latest week, under extreme pressure from the worst global financial crisis in a generation, Federal Reserve data showed on Thursday.

Banks and dealers' overall direct borrowings from the Fed averaged a record $437.53 billion per day in the week ended October 15, topping the previous week's $420.16 billion per day.

Some analysts are concerned that banks' dependence on Fed lending might become long term and difficult to change.

"The banking system is going to become addicted to this very cheap money. Unwinding it will be very difficult," said Howard Simons, strategist with Bianco Research in Chicago.

"We have effectively allowed the central banks to disintermediate the banking system. Why would I want to borrow from you if I could do it with the central bank, because they can always print it up and say 'here'...and they are in the business now of making sure I stay in business," Simons said.

Primary credit discount window borrowings averaged a record $99.66 billion per day in the latest week, up from $75.0 billion per day the previous week.

Primary dealer and other broker dealer borrowings were $133.87 billion as of October 15, versus $122.94 billion on October 8.

"Other credit extensions", mostly reflecting loans to insurer AIG, were $82.86 billion as of October 15, versus $70.30 billion as of October 8.

The Fed's lending to banks to enable them to purchase asset-backed commercial paper from money market mutual funds was $122.76 billion as of October 15, versus $139.48 billion on October 8.

Proceeds from the U.S. Treasury's sales of Treasury bills in the Fed's supplementary financing account, which are helping to fund the Fed's support of financial institutions, were $499.13 billion as of October 15, versus $459.25 billion as of October 8.