The ‘Fed Put’ in Action on Lehman Last Week

Posted on June 15th, 2008 in Daily Stock Market / Economic News - The Real Story

First, a two-month stock market rally citing the ‘Bear Stearns event’ as the bottom, which caught many shorts (who were right all along), with their pants down. Then, beginning a few weeks ago, the markets rolling over because underlying conditions in the primary sector that led to the this mess in the first place, housing, is continuing to worsen. This caught ever-optimistic longs and bubblevision with their pants down. Finally to this.

This is not the first sign of the ‘Fed Put’ or ‘Moral Hazard’ over the past many months, but last time around Bonds and CDS did track the stock price and volatility of the institutions in question. However, things like this highlight which constituancy Bernanke serves, and why there is such dissent ion within the US Gov’t and Federal Reserve itself. First due to the months of denial and then the swift bailout of the very companies that started all of this in the first place causing an inflationary ripple effect being felt across the world.

Posted by John Carney, Jun 13, 2008, 4:10pm

Investors bid up Lehman Brothers’ bonds yesterday after news broke that the company was replacing two top executives. The price of protection on Lehman bonds also declined. This reaction–which starkly contrasts to the decline in Lehman’s share price yesterday–has government officials concerned.

Government officials who spoke to DealBreaker on the condition of anonymity said they are worried that the market is convinced the Federal Reserve won’t let a major US securities firm collapse. This is a cause for alarm because it indicates that investors are not taking into account full range of risks faced by investment banks, which could in turn remove an important market check on risky behavior. Although Lehman and its rivals have been pushing down debt levels recently, cheap debt that is unlinked to institutional risk could encourage a new round of re-levering, one official warned.

“What we saw yesterday was moral hazard in action,” the official said.

The price of credit default swaps for Lehman is now half of what it was in March, the Wall Street Journal pointed out this morning.That can be looked at as a dramatic demonstration of the value of having the Federal Reserve’s implicit guarantee of Lehman’s credit worthiness. In recent weeks, officials from the Federal Reserve have publicly remarked on the dangers created by this guarantee. On Wednesday, Treasury department undersecretary Robert Steel went out of his way to stress that the window was not a permanent guarantee for securities firms.

48 Responses to “The ‘Fed Put’ in Action on Lehman Last Week”

  1. Come on Mr. Mortgage … This is just another example that the PPT (Plunge Protection Team) is more relevant than anytime prior. The fu**ers have propped up the markets the last 2 months, but it only creates more tension in the system, and causes the .Vix to run havoc. The game is about to end, and the markets MUST reflect the events of today = lower equity prices … commodities too. Everything is going to drop!

  2. Thats what I said Donny.

  3. I can’t pinpoint the “real” reason they have let the market stay at these lofty levels. It is obvious to many the market is way over priced. Maybe they will delay the crash till after the election or perhaps wait till 9/11 for that extra added touch. Anyway great find.

  4. Today, once again, national foreclosure rate and gas pirce shoot up for another record high…

    OK, many thanks to FED’s BSC salvation, brings down every Joe to the line of nationalized bankrupcy and poverty.

  5. I am planning to buy some oil and gas trusts now, for the coming hurricane season, just wonder if I should inform you guys to buy some shorts, since, already proved by history, whenever I long, it drops, whenever I short, it rallies.

  6. LOL – so feng we can trade on your personal “murphy’s law” sorry dude don’t mean to poke fun – I just have a sick sence of humor like that, but thanks. 🙂 The gov’t is bringing down all the “joes”, I am pretty sure friends of mine will not have their home by the end of they year, they tanked out the 401k, cannot pay back the money, so the taxes will eat any of it up, and the big reset on the mtg. they have was in may. I am not saying they were smart with their money, but more nieve, I love their kids, and it is sad, and I know I have said this before, but I live in the North East, not CA, FL, AZ, etc….it’s all over the place.

    Mike you are right – it is just too weird, 9/11 nice touch, just scare the sheep a bit more, at the exact right time, (again not making too much light, my husband lost friends that day, but we are also realists).

    Hey, Mr. M – hope you had a nice “dad’s day” and didn’t have to sell the kid(s?) to get relax time at the lake house :).


  7. This was not supposed to happen.”Bubbles are impossible to predict.” Alan Greenspan. Strange. These morons from the FED and BoJ, and the BoE, and ECB, should read your excellent blog.

  8. Forgot to say, wish all fathers a happy dinner today. Including Mr. M.

  9. A little bit of humor.

    All the episodes are really funny.

  10. I am really increasing my gold position. I think when everyone realizes we are going into a global recession/depression, the oil gas play will fall apart and everyone will rush into gold because the onlly way the world’s central banks will be able to fight is with massive amounts of liquidity.

  11. Sold half my position in oil and gas last week. I think you are absolutely correct on this. The debt structures cannot support a 140$ or a 200$ price. The price of hay stack went up 15% in one shot this week. That’s in Canada. We have a strong currency. I just can imagine the increase of a hay stack in the USA or other countries with weak currencies. Love the hay stack example because it means, don’t expect the price of beef or milk going down. It’s going up and big time, again !

  12. I’m in gold as well. The question is physical vs. traded. I have some real concerns about ETFs like GLD, and whether they are vulnerable to the weaknesses of their hosts. Also, in a truly dire situation there is precedent for the government to confiscate gold (see the 1930’s). I’d imagine that PM etf’s would be target #1.

    Peter Schiff has some interesting commentary on how to safely invest in gold. If I had more assets to protect I’d seriously consider his advice, e.g. the Perth mint in Australia.

  13. Here’s something for all the gold bugs to think about:

    “Come now, you rich, weep and howl
    for your miseries that are coming upon you!

    Your riches are corrupted,
    and your garments are moth-eaten.

    Your gold and silver are corroded,
    and their corrosion will be a witness against you
    and will eat your flesh like fire.
    You have heaped up treasure in the last days.”

    from the Book of James

    “The Word of God is living and powerful.”

  14. Go physical. Silver is great bargain. The physical silver is dissapearing. It won’t take a lot to squeeze the crazy shorts here. I expect complete mayhem in the physical market. And you can buy 50 times the amount of silver for the same amount of money. You don’t have the central banks as sellers.

    Silver is really an accident to happen for the stupid shorts. By the way, no silver paper, no ETFs. I have a feeling that your politicians will put their hands on it.

    Senator Lieberman floated the idea last week making illegal holding commodities and speculating on it in the USA. Naturally It would just apply to ordinary folks, not to the bums Mr. Lieberman works for, and operate in places like Cayman Islands. 🙂

  15. And what does the God’s poem say about toilet paper called fiat money, bonds, SIV, CDO, MBS, or Bear Stearns shares, on Countrywide bonds ? Personnally I hate gold and silver. It’s just that I can’t afford buying top soil agricultural land in Montreal area. 9400$ a hectare (100m x 100m). And what’s the most maddening, is that most farmers are still being strangled and goin bankrupt, because everything (fertilizer, diesel, tractors, insecticide, herbicide, damn taxes) is also exploding in prices. Yeah gold and silver are corroded but the paper is rotten and turning into dust.

  16. Dear Mr Mortgage et al,
    The corruption on Wall Street and the City of London is being exposed on a daily basis,thanks to you and a number of other blogs.These “geniuses” have packaged garbage,which until a short time a go,was treated like gold,yet the their actions are not being punished.Pension fund administrators must also carry the can,not only for incompetence,but the williningness to accept the word of rating agencies as gospel truth.Why should they escape without reprimand?
    Another group which I cannot see escaping this whole charade,just has to be accountants-who signed off accounts for these corporate bodies over recent years.I would hate to be the insurers of these guys!Yet,perhaps,another shoe to fall?
    Where does this level of dishonesty end and what will be the result for all our economies and our standard of living?Wage inflation is negligible,whilst real world inflation is in double digits,you know eggs,milk etc.
    For all this,selfishly,I just have to play the short side in the hope I can make a few dollars-yet I am concerned that the counterparty to any trade,if losing,may not payout,lose,lose for the small guy.


    Secret Emergency meetings. Big problems in credit default Swaps. TOP SECRET. No for your eyes. Something real bad in going on in the credit default swaps market. Why all the secrecy and panic ?

  18. Rule making in secret.

    Where are the supposedly transparent and uncorrupted US capital markets so much boasted around the world? 🙂
    The place more and more, looks a lot like Russia. This story is disgusting. It’s scary too. Completely opaque market of 60,000 billion and impossible to know what is going on ?

  19. MA – you are NO DUMMY! 🙂

    You have identified many pieces of The Puzzle (at least the economic ones), now connect them and SEE! what sorta picture they form. If you need a little help, visit my website ( and you’ll have lotsa new and very interesting dots to connect.

    There’s an interesting website called ‘Daily Reckoning’ (Mogambo Guru, et al) where several people have been ‘calling the shots’ about to be fired for quite a while. The Mogambo Guru is one of those – but even he has not connected enough dots (yet). Kurt Richenbacher (God rest his soul) was another one (Ludwig von Mises and Austrian School). They have the Macro Economics right BUT there is A LOT MORE going on here than Macro Economics!

  20. Good links, MA! We are about to witness the wheels coming off the American (and global) financial system house of cards. (I like mixed metaphors). One of those wheels will be coming in your direction soon and turn you into road kill. It’s all part of the PLAN (really!). They want us dead.

  21. Peter Schiff has been predicting Economic Armageddon (Depression) for many years – he will be proven right! (But he doesn’t have all the pieces of The Puzzle either!)

  22. Haha, lunch money! Bot SRS@88 before work, sold @89 for lunch. Thanks a lot, Mr. PPT!

  23. Hi Everyone…I am here watching over all of this but sometimes don’t get a chance to comment right away. I appologize. Keep up the good work. Good job Feng. I just jumped back into some front month LEH puts on this spike. I am holding Goldie, Morgan and MER still.

    Take a look at US Bank. They are dirty dirty dirty. I have an expose’ I am completing research on now I should release in the next week. Their foreclosure rate is much higher than most think. In CA, they are number 14 of all banks taking back prop. And guess what, it is not for 2nd mortgages, which is one of their specialties. It is for their subprime firsts, which was a big part of their business and still is!

  24. “You can’t handle the truth!”

  25. The Bust

    By last summer, the atmosphere was motionless in his office. Each morning, Connelly visited a Web site called “the Mortgage Lender Implode-O-Meter,” which chronicled lenders that were going under. His day “went from talking to 10 people and doing eight transactions to talking to 10 people and doing one transaction,” he recalled.

    By summer’s end, he said, “I was working alone in that office.”

  26. They are all dirty dirty dirty and all going up.
    How about that !How moronic can you be ?

    Manufacturing is doing just great too. Inflation is just fine. 🙂 Just kidding. Nobody is talking a lot about the downgrade of General Electric. Only stress the positive, like the hypocrits at Bloomberg and company toaday. Disguisting hypocrits all of them. What’s so positive today ?

    Ah yes Lehman is not yet bankrupt. Wow! They will have time to dump the manure to unsuspecting stupid and corrupt foreign suckers. Today was a fantastic exercice of total désinformation by Ben and the gang. What would be worth all these bonds if somebody in the US and the rest of the world used real inflation rate ? Not much indeed.

  27. LEH hit the $22 goal. It is retracing now and should come back down after options expire.

  28. this is all too well crafted. GS reports tomorrow morning. Call volume was huge. A rumor also leaked on Friday in the hedgie community they would blow away earnings. No way. GS comes clean tomorrow and at the very least, the nimbiciles know what to look for. You know last quarter MS and GS both took gains on the losses in their own debt…not just Lehman. I am playing this options xpy to the short side. I was in there today but puts on the usual suspects. Short termers. Hey, I maybe wrong but if GS disappoints, bad things will happen fast.

    GS tidbit…only 3 of the float is short which is a 1.6 day cover. EVERYONE is positioned the long side so a negative surprise will be painful in price and duration to the downside. I am willing to fade all these pump monkeys.

  29. Call volume on GS was huge ? Figures. The prevaling propaganda today pumped on Bloomberg, was that Morgan Stanley and Goldman Sachs will compensate their losses with trading profits in commodities. What a pack of bullshit. It works. All these people were suckered in thanks to Bloomberg propaganda. Bet against the grain, and the sheep might we add. Not a bad idea. Good luck. 🙂

  30. Wow, China Stock down for the straight 10th day, 60% off from the peak time. Great chance to step in for me…. When it comes 70% off, I will load a lot of Chinese bank stocks and aluminum stocks, for the next 5years.

    I am glad those Chinese dollars I bot @7.2, now is @6.8, plus 3.4% APR, yes, this year will be 10-15% return for sure.

  31. Chinese central bank needs to learn something from FED: set up a PPT, cut trees to print money, raise interest rate by mouth, and make up CPI/employment number according to the mood.

  32. Oh my good, within 10days, Chinese stock market has experienced -7.7%, -3% and another -3% today.

    Yes, with the tanking of our great empire, USA, all the other countries suffered and were fored to throw their 10years hard working into water.

  33. Welcome to the North American Union, the combining of Canada, Mexico and the US. This will be the result of the housing bubble and eventual debauchery of our currency. The Amero was created for just this eventuality.

    Everything will pick up steam to the downside after the summer Olympics in Beijing. The summer olympics is being used much the same way as Hitler used the 1936 Olympics in Berlin. Just as 1939 was a wild year so to will be 2009! You ain’t seen nothing yet!

    If you look closely you will see this entire economic event(housing bubble and wipe out)is in reality political in nature.

    To understand this situation one needs to understand our monetary system. To understand our monetary system one must to understand fiat money and fractional reserve banking. To understand fiat money and fractional reserve banking one must understand central banking. To understand central banking one must understand those who own the central banks. To understand those who own the central banks one must understand secret societies and the ancient mystery religions. To understand secret societies and the ancient mystery religions one must understand the occult. And to understand the occult is to understand evil!

    PS Lehman Bros is a minority owner of the Fed

  34. Good. Maybe after that, they will start paying decent salaries to their slave labour and start being a little bit more critical about the bums and tramps operating the US financial system. Did these real stupid chineese buy Countrywide bonds ? Hope so. Chineese are real stupid when it comes to USA. They are like the stupid Ukrainians, Arabs, Indians, Canadians, Europeans and Russians. It’s sad. Lack of intelligence from these stupid morons, is not doing a service to anybody. It will ruin us all.

  35. Not bad, vike!

    BUT – you didn’t finish:

    To understand Evil (Devil) is to understand its opposite: (Good) God – specifically, Jesus the Christ. This is the most important piece of The Puzzle!

    You can SEE! the complete Solution to The Puzzle by clicking on my name. ALL the important dots have been connected. 🙂

  36. Yes EternalOptimist, you ARE correct. This is a spiritual battle and so many who are involved(all of mankind)don’t even know the battle is on! This entire scenario is spelled out in the Bible. Ezekiel 22:25 [There is] a conspiracy of her prophets(profits)in the midst thereof, like a roaring lion ravening the prey; they have devoured souls; they have taken the treasure and precious things; they have made her many widows in the midst thereof.

    The elite of this world worship a different god and that is Lucifer, doubt it not. And they are bringing about Lucifer’s one world govt. The European union is really the reemergence of the Holy Roman Empire and the consolidations of North America, South America, And Africa are the first steps in forming the 10 kings as spoke of in Revelations 13:1. And I stood upon the sand of the sea, and saw a beast rise up out of the sea, having seven heads and ten horns, and upon his horns ten crowns, and upon his heads the name of blasphemy.

    And for those who think the Bible is some collection of old myths and tales I urge you to discover the truth, you can start here…

    The authenticity of the Holy Bible has been attacked at regular intervals by athiests and theologians alike but none have explained away the mathematical seal beneath its surface.

    It would seem the divine hand has moved to prevent counterfeiting in the pages of the Bible in a similar manner to the line that runs through paper money. Bible numerics appears to be God’s watermark of authenticity.

  37. Interesting insight to Lehman’s CC.

  38. looks like goldman sachs is weathering the storm pretty well, if not thriving compared to its peers. what is it about this firm? is it so truly well and above all the other banks? or will a david einhorn type scenario emerge. Or maybe they are the smartest firm on wall street.

  39. vike:

    Fancy meeting you here – of all places in cyberspace!

    My entire life revolves around the number 14 (and other multiples of 7).

    Maybe it should be ‘what’s in a number’, rather than ‘what’s in a name’?! Or better yet, ‘the number of His name’.

    Dr. Stan…I presume?

  40. Looks like Goldman is fudging the numbers ? Maybe. It’s so useful to have all these people placed in good places.
    Political insiders rarely lose money.

  41. Hey Mr M check this link out.

    Trulia Hindsight is an animated map of residential properties in the USA that allows you to see when neighborhoods and cities were built. A fascinating site to play around with. “seeing” the growth of cities.

  42. By the end of April, China central bank has purchased total 504B of US bonds, including an increasing 11B in the month of April…

    China will be the next 1970s Japan to support Americans’ living standard with 10years hard working for nothing…

  43. China will eventually gobble up USA. Learn mandarin. Jim Rogers was right.

  44. Last month geological surveys and seismic data compiled by several international oil companies exploring Iraqi oil reserves showed that Iraq has the world’s largest proven oil reserves, with as much as 350 billion barrels, significantly exceeding Saudi Arabia’s 264 billion barrels, according to a report in the London Times.

    Assuming prices level of at a 100 usd, those oil reserves alone would be worth 35 trillion USD. And guess who is going to get all the major oil contracts? No prizes for guessing though!

  45. Oh and you think that China, Russia, Iran, India, will let you plunder the place wihtout sharing the loot ?

    Don’t think so. We knew all along that Al Quaida was just plain bullshit and real good and horrible excuse to rape Irak. Good luck if you think that the rest of the world will stay eternally stay idle and don’t ask a cut.

    Finally the US is proving to be just a good old coloniast empire. Exactly as the others. Sad. By the way 350 billion barrels seems a lot. But it isn’t. The world eats up 2,5 billion barrels per month. This war was stupid and it will banrupt the US and probably lead us to a third world war. Don’t count on me to fight this one.

  46. That’s the problem. The FED put will also give you 15$ for a gallon of gas in the next 24 months. There is no way that all this bailout money won’t trickle down in into almost hyperinflation prices. No way. Bernanké and the gang really thinks that the rest of the world will gobble up all that inflation ? Not this time anyways.

  47. ‘This time’ is the Last time! That puts everything to come in a different light. Remember that their Gameplan is to DESTROY, once and for always. There will be no Time to recover according to models or cycles of the past. That’s why gold, silver and PUT options will (also) be useless. There will be NO EXIT. The only thing anyone can escape with is their Life (and I don’t mean their natural life, either). Time is running out – literally!

    “Behold – I make ALL things new”

  48. Anyone interested in American politics?

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