Posted on July 30th, 2008 in Daily Stock Market / Economic News - The Real Story, Mr Mortgage's Personal Opinions/Research
I don’t care whether the market goes up or down, but I do care when free markets are not free to trade under their own devices and moral hazard litters the landscape. Other than typical month-end mark-ups, which the SEC has turned a blind eye to forever, a couple of things worth nothing about today’s massive rally in the markets, led by the financials.
First, most traders I spoke with today had the same fear from the early morning. That was the SEC striking midday with an announcement that the new, temporary specific arrangement short selling rules would be extended to ALL stocks. This could have played a major factor in keeping the financials elevated with sporadic bouts of short-covering throughout the day.
But only one of the fears came true. After hours the SEC did extend the rule until Aug 12th but only to the original 19 stocks. By law they can only extend it 10 trading days at a time. Cox sure put those dastardly short seller pirates who created this entire subprime crisis that bled over into a global crisis and looming depression in their place.
Anyway, this qualifies as a disappointment if you ask me. The SEC fear is now gone for another two weeks and all that sticks out on the day is another mystery rally on the back of Merrill’s massive equity capital raise, dilution and the selling of billions of CDO’s including Super Senior 2005 and prior ABS CDO for 22 cents on the dollar, which they were kind enough to finance for the buyer with only 25% down. As a matter of fact if you go to Big Picture, they maintain Thain sold the CDO’s for 5.47 cents on the dollar.
The SEC needs to focus more of its time on banks and their reporting. If you remember, Citi posted ‘lower than expected’ marks on their CDO book at about 61 cents. Why does Citi get to mark at 53 cents and Merrill 22, 17 or 5.47 cents depending on your math?
Morgan Stanley quickly covered for Citi saying ‘this isn’t an apples to apples comparison bla bla because Merrill had more 06-07 vintage bla bla’. But that was before we learned that indeed most of what was sold was prior to 2006 vintage…Doh! They tried to cover for AIG as well, which posts earnings on Monday…in a transparent world they would be talking about much lower marks on their CDO in the future.
Sean Egan from Egan-Jones, arguably the only ‘honest’ rater in the business says:
Sean Egan, of Egan Jones, called the sale a watershed moment, with implications that would trigger huge additional writedowns on CDOs and related assets worldwide. “This sends a loud and clear signal that the issue with CDOs is not liquidity in the market but problems with the value of their underlying assets,” he said.
Mr Egan said that Monday’s sale indicated that the problems were not temporary and that there needed to be widespread devaluation of CDOs. Mr Egan said: “The accountants will have to put significant pressure on their clients to write down these assets — Fannie Mae and Freddie Mac in particular — as this high-profile transaction has underscored the losses that are inherent in these kind of asset-backed securities.”
Merrill aside, banks need to raise money, Paulson and Bernenke have been preaching this for months. Most have already burned all foreign investors through capital raises Q4 2007, private investors through capital raises in Q1 2008 so the only thing most have left is to sell common and burn the share holder. Merrill will likely be the first of many, so look out. And it may come quickly while the euphoria from Merrill burning the share holders (such a strange statement – ‘euphoria from Merrill burning shareholders’) is in the air and many bank’s stock prices are near 2008 highs.