Wednesday, April 8, 2009

financial kesselschlacht, the coordinated blitz of all securities

with the sec meeting today on 5 restrictions of short-selling, presumably including some form of the old plus-tick rule, let's talk about this. what we've had for awhile, about a year and a half, but really since august or september of last year, was financial stocks' kesselschlacht, or battle of encirclement.

these companies were (are still?) in trouble; there's no doubting that fact. their stocks deserved to go down. what they didn't deserve; what was so completely UNFAIR about the playing field was the way the sellers/shorts encircled them with credit default swaps, out-of-the-money puts, shorting without upticks, illegal naked shorting and abuse via the SKF etf...and rammed the stocks down and destroyed the actual companies (bear, wachovia, lehman, etc.).

the issue is that bank stocks aren't some industrial like etn or ph. when the bank stocks get crammed down, as we know from wachovia, you can create a run. if you buy their credit default swaps, you buy puts, and then you come in and crush them with concentrated skf etf buying, there really isn't any way to stop the decline.

the banks can't stop their stocks from coming down like cb or trv, two companies in the SKF that can buy all the stock they want. they don't have any capital to buy back stocks. they are "destroyable" because of the gimmick of the SKF. (i call the SKF a gimmick because consider that the bank stocks are much lower than they have been during this whole raid, yet the SKF is way, way off its high. that shows you this SKF plays no role other than to destroy the financials that are included in it. otherwise, what's the point? it's a sucker's bet as a hedge against the banks falling.)

if you cause the run, then you get a lehman situation, and we do not have, right now, anything in place to break the fall of citigroup and bac except the deeply-flawd aig plan.

the basic inconsistency of everything that hank paulson did -- the aig model of 80% buy, the lehman model of total destruction of preferreds and bonds, the wm model of some saved fixed-income and no common stock worth, the fnm and fre preferred wipeouts, the bear model of saving the bonds and the preferred -- makes the gambit of shorting the entire complex of a bank, corporate, preferreds, common stock, and then using the SKF to break the common stock and thus causing a run, worth pursuing, particularly right now with no uptick rule blocking your path.

if i were a short-seller, i can't think of a reason in the world not to try to break citigroup and bac. presumably the government can't let them fail, like leh. the only specific option that seems available is the aig one, but you also have to remember that this new regime seems hostile to the entire complex of securities involved with a bank.

so, we are back to the old kesselschlacht, the battle of encirclement, where you buy the puts, you buy the credit default swaps, you short the common and you come in blasting with the SKF, which causes a settlement price at the low. that then triggers media, which should then trigger a bank run, which then triggers a rescue, perhaps at unfavorable terms to all security holders.

of course, if geithner and summers crafts a plan that actually causes the common to go up and the securities to be insured, then perhaps we could have a citigroup save like we had before, in the early '90s. the issue, of course, is that without massive and balanced support for the common and the fixed-income securities that overcompensates for the worst-case scenario out a year ago, you are not going to get where you want to go.

that's why any government plan must address the kesselschlacht, the coordinated surrounding blitz of all securities. any solution that continues to punish security holders of these banks just sets up for a kesselschlacht run. the piecemeal arbitrary and capricious methods of "solving" the crisis through all sorts of guarantees, weapons, punishment and dissolving probably won't work for banks that are too big to be merged and too big to fail.

what is needed is a coherent pattern that will break the stranglehold of the bears until we solve the house price depreciation that is behind all of these declines.

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