Desperate times call for desperate measures. What a crazy day! I am glad I got the chance to leave my computer to enjoy lunch with an industry contact I respect. It was a beautiful day here in Montreal.
This morning I woke up to see that central bankers around the world were busy pumping billions of dollars into the financial system.
In a massive coordinated effort to shore up liquidity, central banks worldwide pumped $247 billion into money markets.
That was step 1 of Operation "AIG" (ALL IN GODAMMIT!).
Then news stories broke out that the Securities and Exchange Commission was looking into requiring that hedge funds reveal their short positions.
As I was leaving to head out for my lunch, I almost gasped watching Senator McCain on CNN deriding short-sellers and saying if he were president, he would have fired Donald Cox, the chairman of the SEC:
"The chairman of the SEC serves at the appointment of the president, and in my view has betrayed the public's trust,'' the Republican presidential nominee said at a rally today in Cedar Rapids, Iowa. "If I were president today, I would fire him.''
As I came back from my lunch, I noticed that Britain's Financial Services Authority (FSA) banned short-selling of financial stocks and prohibited any increase in new bearish positions in the sector (the ban is due to remain in force until Jan. 16, but it will be reviewed in 30 days):
"While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets. As a result, we have taken this decisive action, after careful consideration, to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector," said Hector Sants, chief executive of the FSA.
Step 2 of Operation "AIG".
And finally, the government is formulating a "permanent'' plan to shore up financial markets and regulators and pension funds took steps aimed at curbing bets against banks and brokerages:
Senator Charles Schumer proposed a new agency to pump capital into troubled financial companies. Wachovia Corp. rallied 48 percent, while Morgan Stanley and Goldman Sachs Group Inc. erased most of their earlier plunges, as regulators in the U.S. and U.K. stiffened rules against so-called short sales and the nation's three largest public pensions stopped lending shares of Goldman and Morgan Stanley to short sellers.
The new agency will be modeled after the Great Depression's Reconstruction Finance Corp. :
"The Federal Reserve and the Treasury are realizing that we need a more comprehensive solution,'' Schumer, a Democrat who chairs the congressional Joint Economic Committee, told reporters in Washington today. "I've been talking to them about it.''
Schumer urged forming an agency to inject funds into financial companies in exchange for equity stakes and pledges to rewrite mortgages and make them more affordable. His remarks indicate momentum is building for some wider plan after the Fed and Treasury's takeovers of Fannie Mae, Freddie Mac and American International Group Inc. this month.
Schumer advocated a Great Depression-era Reconstruction Finance Corp. model, different from the Resolution Trust Corp.- type plan others have floated. Another RTC, which was a 1990s agency that sold devalued assets in the Savings and Loan Crisis, would "simply transfer excessive risk to the U.S. government without addressing the plight of homeowners,'' he said.
"The series of ad-hoc interventions in the market over the past 10 days were important to avoid a systemic disaster,'' Schumer said. "But we cannot continue to act in such an uncoordinated and ad-hoc fashion.''
Under Schumer's RFC plan, "the government would come first,'' he said. "The government would get repaid before the others in the financial chain.''Step 3 of Operation "AIG".
The end result? BAM! Stocks EXPLODED UP in the Mother of all short squeezes. The Dow surged 410 points, or 3.86% (I added some of those explosive movers in the table below the toilet paper - mostly financial and insurance dogs!).
But the big question is does Operation "AIG" have any staying power? More importantly, all these government interventions are not addressing the underlying problems plaguing the financial system, namely, that banks and brokerages still have huge amounts of toxic debt on their books that they are hiding from regulators.
Consider what some of the short-sellers are saying:
"The consequences of a hasty or ill-considered rule in this environment could be extremely harmful to the capital markets,'' said Jim Chanos, chairman of the Coalition of Private Investment Companies, which represents 20 funds with assets in excess of $120 billion. "Such a requirement is akin to the government suddenly requiring Coca-Cola to disclose their secret formula for free to all their competitors.''
"The temptation during times like this is to be seen doing something,'' said Andrew Baker, deputy chief executive of the London-based Alternative Investment Management Association, representing 1,300 funds in the $1.9 trillion industry. "The risk is they get out the bazooka and shoot the wrong target.'' The rules are "very wide sweeping,'' he said in a telephone interview from Greenwich, Connecticut.
"Naked short-selling has become the scapegoat, but the fundamentals of how these businesses were run is what caused these issues,'' said Stephen Ehrlich, CEO of New York-based Lightspeed Professional Trading LLC, which makes trading systems for hedge funds and professional traders. "The problems roiling the market and financial stocks are not going to change with less short-selling.''
That last comment sums it up well. Instead of forcing these crooks on Wall Street to open up their books and come clean, government officials everywhere are taking unprecedented steps to shore up stocks at all cost, leading some to ask the following question: Is Capitalism Dead?
As I end this post, I remind myself of what my chemistry teacher once told us: Sola dosis facit venenum (Latin for "only the dose makes the poison").
For now, investors are breathing a little easier, but I honestly think these desperate measures will flop in a spectacular fashion.
A battle was won today but the war will be long and tortuous.