Seeking Alpha: A Black Hole Nearly Swallows Wall Street (23 Sep 2008)

A Black Hole Nearly Swallows Wall Street
by: Tony Daltorio posted on: September 23, 2008

Last week, scientists switched on the Large Hadron Collider in Switzerland. The Large Hadron Collider is the world's largest and highest-energy particle accelerator. Scientists are hoping it will help unlock some of the mysteries of the universe. Non-scientists were fearful that it may create a black hole which could possibly swallow the Earth.

It looks like the non-scientists were right on the mark. A black hole appeared right in the middle of Wall Street and swallowed Lehman Brothers. The black hole also forced the Merrill Lynch Blundering Herd into the arms of Bank of America and giant insurer AIG into the arms of Uncle Sam.

Other events caused by the black hole included several money market funds losing money down that black hole and “breaking the buck”. This event in turn led to panic selling of money market funds with nearly $90 billion liquidated on Wednesday alone and massive purchases of 3-month Treasury bills, lowering the yields of these T-bills to nearly zero.

Uncle Sam to the Rescue?

The run on the Wall Street casino this past week sent Uncle Sam into action. Led by Bailout Ben and Handout Hank, the government decided to not only bail out giant insurer AIG, but to now “temporarily” insure money market funds and “temporarily” ban short selling of financial stocks. The icing on the cake was, of course, the plan for the government to take the bad loans off the books of US financial institutions and lay the burden onto pack mules, otherwise known as US taxpayers.

Let us not forget that there are even more bailouts looming on the black hole's event horizon. There's the FDIC which insures bank deposits up to $100,000. The FDIC has only $45 billion on hand. What happens when Washington Mutual, with their $145 billion worth of insured deposits, needs help? You guessed it. Another $100 billion dollars will be put on the US taxpayers tab.

Famed billionaire distressed assets investor Wilbur Ross said he thinks 1,000 banks will fail across the US. More money needed for the FDIC. Harvard economics professor and former chief economist for the International Monetary Fund, Kenneth Rogoff, wrote in the Financial Times this week that the bill to the US taxpayer may total $1 trillion to $2 trillion. What a piker! The bailouts will probably be well in excess of Mr. Rogoff's figures.

Overseas Influence

I have been asked by numerous people why did the government bail out Fannie Mae, Freddie Mac, and AIG. I told them that the government had no choice. Banks of all sorts globally, including central banks, own massive amounts of Fannie and Freddie paper. AIG has policy holders in every corner of the globe.

The overseas holders of Fannie and Freddie paper were very worried, and rightly so, about the return of their capital. They told the Treasury and the Fed that if the situation continued to deteriorate, they would immediately stop all purchases of Fannie and Freddie paper. This would have basically stopped mortgage lending in the US, so Uncle Sam bailed out Fannie and Freddie.

Most of AIG's customers are overseas. Many foreign customers insured by AIG were in doubt about the value of their policies. There were unbelievably long lines of AIG customers in Hong Kong and Singapore looking to cash out their policies. Foreign governments urged the Treasury and the Fed to take action and they did.

Once again, foreign creditors forced the hand of the US government to use taxpayer dollars to guarantee the value of their investments in US assets. This is what happens when you are in hock so deep that you need billions of dollars a day from overseas sources just to keep the lights on in the country. You do what your creditors want or it's lights out! What choice do you have?

Biting the Shorts

Instead of laying blame where it belongs – Wall Street greed and incompetence – the blame for the meltdown in US financial institutions has been squarely placed on the “evil” short sellers. Shorting of financial stocks has been banned until early October. Do not be surprised if that “temporary” ban will be extended to at least after the November elections.

I guess the old saying – you learn something new every day is true. I certainly learned some new things this past week. I had not known that short sellers had forced Wall Street firms to massively leverage their balance sheets. I had not known that short sellers had forced Wall Street firms to place such highly leveraged and nonsensical “bets” into opaque financial instruments that no one can fairly value. Wow! Those short sellers sure are powerful.

Politicians have always loved to blame the short sellers. The Dutch banned the shorting of tulips before and after the tulip mania. Moralist politicians tried, in a series of laws throughout the 18th and 19th centuries, to ban both futures markets and shorting, which they equated to gambling.

It is amazing to hear the echoes of that history in today's headlines. Ban those “evil” short sellers!
Stop those “evil” speculators from pushing up the price of oil! I'm sure the upcoming Congressional investigation or “witch hunt” will be great theater and provide much amusement.

Don't get me wrong. Some market players, such as certain hedge funds, brought this upon themselves with their aggressive tactics. Some hedge funds would go into the CDS (credit default swaps) market and purchase contracts, betting on the demise of certain companies. Then they would aggressively short these same companies. This is the equivalent of buying a life insurance policy on your neighbor and then promptly running him down with your car.

Back in the USSA?

As I watched events unfold this past week, the title of the 1968 song which opened the Beatles White Album, Back in the USSR, kept floating in my head. Except that instead of USSR, it was the USSA.
I'm sure that libertarians are going crazy and some of them must be thinking about re-naming the country the United Socialists States of America.

The Wall Street fat cats, with their cronies in Washington, have moved the nation toward a perverted mix of capitalism and socialism. The gains made are still “privatized” and go into the pockets of the Wall Street fat cats. However, the losses, from the incompetence of these Wall Street fat cats, are “socialized” and are dumped onto the backs of the American taxpayer. I'm sure that Vladimir Lenin is in his grave smiling right now. I'm sure he's very proud of the work his comrades on Wall Street and Washington have done.

Disclosure: The author and publisher do not hold positions in the securities mentioned.