Sunday, September 21, 2008

Sleight Of Hand - Just For You

Regulation is inherently prophylactic and cannot be properly created in the crises it seeks to prevent. Today calls for a single coherent and transparent approach to falling house prices (destined to continue), asset write downs (destined to continue) and liquidity crises (destined to continue). We simply cannot have Sunday closed-door meetings deciding the fates of tens of thousands of jobs, life and death for industries and billions in investor losses. Want to see what that creates? Pick up a newspaper.

Max Fraad Wolff
Editor of the Global MacroScope Website
From the article “US At A Turning Point” published in Asia Times Online 20 September 2008



Yes indeed……” a single coherent and transparent approach…..”

It’s not necessary to rehearse the hype or the horror that’s been seen on the streets and the media. More entertaining is how funny money i.e. the US Dollar (removed from the gold standard 37 years ago by Richard Nixon) continues to be printed at record rates to fill financial potholes created by Wall Street and their political cronies.

Having satiated themselves financially, they are now calling for regulation and the creation of a “Bad Bank”. The single coherent and purportedly transparent approach is a super-sized entity, by way of a fund of US800 Billion that will buy all the toxic debt and hold them indefinitely until they can be sold off at some point in the future. Effectively, it nationalizes the mis-managed, corrupt, criminally negligent results of the biggest fraud in modern history……..

…..with apparent legal immunity from prosecution.

There’s a trans-Atlantic threat to go after the short sellers and a temporary ban on short selling in the shares of some listed financial companies. But short sellers did what they do best – responding to rumour and fact by taking an opportunistic position against banks, hedge funds, insurance companies and investment banks who consciously leveraged risk to outrageous amounts then resorted to Sovereign Wealth Funds, private equity and carefully crafted press releases to buy funds and buy time. All this to allow them to dance around the perimeter of their rapidly growing pool of un-saleable, off-Balance Sheet, offshore-held, “asset”-backed and mortgage-backed securities.

If short sellers knew what they were doing, so too did the companies who were shorted.

There’s no denying that short selling abruptly stalls over-valued stocks and might crash their price, but that’s the inevitable flip side of overblown asset valuation, whose prices were allowed to bubble unchecked for……..7 years.

Quoted in the BBC’s online report of 19 September 2008, entitled, “Who’s In The Dock For The Financial Turmoil?” Professor Richard Portes of the Centre For Economic Policy Research said,

"You make money when it is opaque, you make money when you have got information that other people don't have.”

The extraordinary dereliction of duty by regulators and central banks fuelled the opacity. The creation of the super-sized “Bad Bank” centralizes the opacity. True transparency requires the full disclosure of actual or suspected toxic debt instruments, the use of criminal sanctions and the refusal to cave in to financial industry demands for lenient accounting standards and waivers.

Granted, the devil is in the details, but just how do you value opaque debt instruments? If banks looking to offload to the “Bad Bank” are forced to declare their toxic mortgage and non-mortgage based assets at a discount, won’t that affect their capital base and drive them into insolvency?

Perhaps SAW is too philistine in his views, but a true meltdown is required to flush this garbage out. We now risk being drowned not in a sea of toxic debt, but in a foam of political blather, half-baked regulations and the cherry picking rescue of those institutions deemed too important to fail. It appears that free market capitalism that made a certain clique rich beyond belief, has now morphed into emergency socialism with the express intent of limiting their losses, while purporting to act for the public good.

© 2008 Sanjeev Aaron Williams All Rights Reserved

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