29 September 2008


Ben Folds Five's "Mess." An apt choice for today.

And can you guess the relevance of the photo below?

The answer: A crash-landed Boeing 777, coinciding nicely with the Dow's 777-point faceplant.

I'd like to thank John McCain, the House Republicans, and even Nancy Pelosi and her pre-vote speech for today's mess. And W deserves some criticism, too, for having so little legitimacy left, that his own party saw no need to back the bailout bill. Before becoming President, Bush certainly knew how to fail upward, but he's made quite an art of failing over the last eight years, except when it's election time. Unfortunately for investors, Bush failed to buck the trend.

With that off my chest, I found plenty of good reading on the interweb that I'd like to share.

The Bespoke Boys quickly pointed out (by 2:30pm) that Congress' inaction already cost us more than the $700B bailout pricetag:

While Congress was busy debating and voting down the $700 billion financial rescue package, one of the key arguments against the bill was that our voted officials didn't feel right risking $700 billion in taxpayer money on a 'bailout' of the Financial sector. In voting the bill down, our elected officials may feel like they have done their constituents a service by protecting their money.

However, with a decline of 6% today, the S&P 1500 has now erased $746 billion in market cap alone. This doesn't even take into account the lost GDP that is likely to result from the continued deep freeze in the credit markets. Once again, Congress has done more harm than good for the 'good of the people.' What's worse -- that Congress couldn't put partisanship aside and come up with a solution, or that we put any faith in them in the first place? Nice job Washington!

David Callaway at Marketwatch revised that market cap loss figure upward, as the market continued on its path to the largest point loss evar:

But by making this about a bailout of fat cats and not what it clearly was -- an emergency rescue of the global financial system -- Congress imperils the investments, deposits, money markets and life savings of millions of Americans, to say nothing of people around the world.
Even the notoriously splintered government of Belgium was able to engineer a rescue of banking and insurance giant Fortis over 48 hours this weekend. But our own representatives, faced with the gravest economic threat in 70 years, took more than 10 days to hash up this rescue plan, and then rejected it anyway.

In total, more than $1 trillion was wiped off the value of the entire U.S. stock market Monday, as measured by the Dow Jones Wilshire 5000 Index.

Not to say the market was all cheery optimism this morning. I was mildly alarmed by this piece in the Times discussing the potential cash outflows from hedge funds:

First, the money rushed into hedge funds. Now, some fear, it could rush out.

Even as Washington reached a tentative agreement on Sunday over what may become the largest financial bailout in American history, new worries were building inside the nearly $2 trillion world of hedge funds. After years of explosive growth, losses are mounting — and so are concerns that some investors will head for the exits.


One little-known hedge fund barometer is pointing to trouble, however. The alphabet soup of complex investments that Wall Street created in recent years — R.M.B.S.'s, C.D.O.'s and the like — includes C.F.O.'s, short for collateralized fund obligations. Virtually unknown outside the industry, these investments are the hedge fund equivalent of mortgage-backed securities: securities backed by hedge funds.

But last week, credit ratings agencies warned that they might lower the ratings of several C.F.O.'s, in part because of the concern that investors would withdraw money from the funds backing the investments. Standard & Poor's downgraded parts of nine C.F.O. deals, Fitch placed five on a negative rating watch, and Moody's put one on a downgrade review.

"The concern is over the redemptions that are happening," said Jenny Story, an analyst with Fitch Ratings. "The gates are being closed."

With the bailout now in limbo, the threat from unwinding hedge funds is much greater this evening than it was this morning.

Otherwise, Dan Drezner is worth reading. Megan McCardle provided some good insight, but she was too quick to focus blame on Pelosi. And Barry Ritholtz was on top of the action, as always.

Here are a couple of charts worth perusing. First, the VIX is at appropriately extreme levels, which convinced me to plunk down some precious dollars on my long positions.

Click on the image for a large and legible view of the VIX:

The next chart shows the yield of a 1-month T-bill effectively going to zero:

Today's transaction:

Bought UYG at $18.80 in the morning, and at $16.47 in the pm, bringing down the cost basis down to $18.76.

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