Is the FED Backstop Causing the Current Volatility?

Heat wave here in Massachusetts. It has been 90 degrees plus since about noon Saturday. Had to run out yesterday and buy two air conditioners because our dog (a pug) cannot tolerate high temps. Late tonight a cool down is expected.

Rare Four Standard Deviation Event
With that kind of teaser, I must have your complete attention! Mish over at his amazing site has been on fire as of late, and his discussion of widening yield spreads across various bonds. I will not pretend I have full command of these issues, but the key point is that when a rare event like a 4 standard deviation occurs, something is going on. Something big. Read the post here:
http://globaleconomicanalysis.blogspot.com/2008/06/treasury-curve-steepening-bet-unwind.html

Any institution or major player that has a big position that is wrong is looking at serious trouble that came about over the course of a very short time. Stress on the street must be at a level not seen is some time. I wish I could get a graph of alcohol sales for the Wall Street bars and liquor stores over the past year, I bet it is spiking this week!

Lehman Brothers a Disgusting Joke
The whole sorry parade that is Lehman Brothers (LEH) makes me ill. Seriously ill. If you wanted to you could not make up a story so crazy and dumb as the real time progression has been for LEH. Disgusting.

LEH had said that they did not need additional capital. They blew 500 Million buying their own stock on the open market trying to stem a move down. They complained about short sellers. They went out and reported a quarter that erased 8 YEARS worth of earnings, and went out to get 6 Billion in capital they said they did not need. Whatever. This company is a joke.

Just who in their right mind is buying in to LEH's offering? I mean, unless you are a firm believer that LEH is either going to survive and prosper, or get taken out by a larger entity, buying at the offered $28 is a HUGE risk. Even a FED bailout is highly unlikely to make that buy whole again. There must be some devil in the details that I do not know. Or more risk taking. Go figure.

Is the FED Backstop Causing the Current Volatility?
The FED's terrible BSC bailout will have consequence on many levels for many years. I will not bore you loyal readers with another sorry rant about moral hazard, you know how I feel about those punks at the FED by this point.

What I want to put out there tonight is an observation about the markets, mostly the action in the financials. Pull up any chart since January, and you will see wild volatility and crazy swings. Watch LEH just on Friday of last week, and Monday-Tuesday this week and you can see what I mean.

I am wondering if players out there are at getting aggressively short various banks/brokerages to push the share prices down. Historically this kind of run would cause a "crisis" like the one at BSC, but in the new era of "bailout nation" no collapse occurs. These same players may be opposed by bottom guessers that are trying to figure out where a FED backstop would put a floor under a stock. Or the same shorters could be doing both. Either way, there seems to be a real struggle right now trying to value insolvent banks. As their true value is of course ZERO, their value as a FED backstopped institution is unknown. The action right now in stocks like WM, LEH, and WB seem to be a tussle to figure this value out.

The FED has no idea what kind of dirty Wall Street is. They would indeed be betting on a FED backstop. They would even be using the same cash the FED loaned them to push a troubled bank into a crisis so the FED has to act, thus making cash on the way down, and on the FED rescue. Thanks gentlemen. You are all wonderful people.

Have a good night.

Lehman a Confusing Soap Opera

50 degrees and rainy here today. But it will be around 90 degrees this weekend! Crazy weather swings are a New England norm. I may be venturing out to the "Gray Lady", Quabbin Reservoir this weekend for my first trip out there for the year. Huge smallmouth bass, some very good largemouth bass, a shot at a lake trout, white bass, crappies, and huge yellow perch make a trip out there a great day as there is always something biting!

Off Balance Sheet Tomfoolery to End? Only in Your Dreams!
There was a bunch of mileage across the blogosphere given to this story:
http://www.americanbanker.com/usb_article.html?id=20080527YPS0NT46

Full disclosure, I have zero understanding of the dynamics of this stuff. I zone out when too many acronyms are involved, and that story sure has a ton of those!

That said, my understanding is that the regulatory powers that be want a better accounting of what the banks they oversee are holding in off balance sheet vehicles. They are throwing out the idea that this stuff come onto the balance sheet of the banks. HAHAHAHAHA! Fat chance of that happening. There is simply NO WAY this is going to happen. People getting excited about this are wasting their time. With the current "teetering on the edge of economic Armageddon" baloney there will be no move to make the banks instantly insolvent and on the prowl for more cash. Simple as that.

Lehman a Confusing Soap Opera
Trying to follow the Lehman Brothers (LEH) action over the past month has been like trying to stay on top of a soap opera and all of its twists and turns. If you are a regular reader you will remember this post: http://economicdisconnect.blogspot.com/2008/04/califonia-leads-way-back-in-time.html which detailed LEH CEO Richard Fuld's call that the "worst is over" back on April 15th. Well since then there has been plenty of action.

If you believed Mr. Fuld and bought LEH on April 15th at $39 a share, you are looking at a 20% loss at today's prices ($31). Good call, bad call? Short term it looks pretty bad!

So basically LEH is in great shape and does not need to find additional cash going forward. Except they are currently looking for a cool 6-8 Billion, hopefully from Korea. Oh yeah, on top of the 6 Billion they have raised already this quarter. On top of the 2 Billion they raised last quarter. Oh yeah, and they have actively been buying back their own stock. Inquiring minds may want to know if LEH has been doing stock buys on the OPEN MARKET with CASH they got at the FED when they swapped their toxic paper there. I would guess they absolutely did not do anything of the sort. No way.

So why would a company buy back stock at the same time they are looking for big money at bad lending terms? I am gonna guess because they need it. Badly. You would think that with BSC still a fresh memory people would stop getting excited when LEH says they are in great shape. Only time will tell the real story. Until then we can only guess.

Have a good night.