Wednesday, July 16, 2008

The $666 billion short bet

On March 13 and 14 David Faber told CNBC, that a hedge fund manager that he "trusts" told him Goldman Sachs had refused Bear Sterns credit. This wasn't true. If David Faber would reveal his "trusted" source, we can find out who started the Bear Stearns "run on the bank."

In today's WSJ we have this nugget:

The chief executives at Lehman and Bear Stearns have made private calls in recent months to, among others, Goldman Sachs Group Inc. CEO Lloyd Blankfein to raise questions about whether Goldman was helping to fuel, even indirectly, pressure on their firms' shares, according to people familiar with the matter. Short interest, or the amount of short positions outstanding, is at an all-time high, at 18 billion shares, for NYSE Euronext listed stocks.

Average price on the NYSE is 37. 37x18 billion shares gives you $666 billion. And that's just the NYSE!

We are always told, by Doug Kass, and others that: "The dedicated short community is well under $10 billion -- less than one-fifth the size of Fidelity's Magellan Fund."

So we have a "fudge factor" of 66 times.

JP Morgan, CEO Jamie Dimone, said on the Charlie Rose show that:

"I would say where there is smoke, there’s fire. If someone knowingly starts a rumor or passes on a rumor, they should go to jail…This is even worse than insider trading. This is deliberate and malicious destruction of value and people’s lives. They shouldn’t go to jail for a short period of time. So if I was the SEC I’d find out who made the money and I’d investigate–emails, phone records, you name it–and I’d find out….There’s enough smoke around that I think there should be a full investigation…”

Apparently now there is!

Yesterday there was a bit of joy in Deep Capture, the website run by Overstock founder, Patrick Byrne, who has said for years that naked short selling exists, all to howls of laughter by most of Wall Street:

Folks, today was history in the making. The Deep Capture thesis, which is that miscreant short-sellers have put the American financial system at risk, can no longer be in doubt.

First came the stunning announcement that the SEC has sent subpoenas to 50 hedge fund managers as part of a major investigation into rumor-mongering and illegal short-selling of Bear Stearns and Lehman Brothers. Then came the even more remarkable announcement from SEC Chairman Christopher Cox that he is instituting an “emergency action” requiring traders to pre-borrow stock before shorting all “substantial” financial companies.

Of course, there is a some bitter irony here. Over the years, hundreds of public companies have been grievously wounded by hedge funds who sell phantom stock (ie. stock they have not borrowed), and the SEC has done nothing. Now Wall Street finance companies, including the very investment banks whose prime brokerages facilitated the creation of phantom stock, find themselves victimized by phantom stock, and the government decides it’s time to do – or at least, say – something about it.

We’d be glad to see the big banks suffer their Shakespearean fates if the SEC were to rescue the hundreds of innocent victim companies who have been hollering about the phantom stock problem for years. We’ll see if the SEC extends the emergency action to the rest of the market, as Mr. Cox suggested it might.

Either way, all the talk of an “emergency” suggests that the SEC recognizes just how big the phantom stock problem has become. Obviously, it sees the catastrophe of Bear Stearns as a clear-cut case of short-seller abuse. A well-timed false rumor, presented as fact by CNBC, combined with phantom stock sales, took the bank down. Now, the same people are using the same tactics against Lehman Brothers. Fannie and Freddie are on the brink. And experts say there are 300-plus other publicly traded companies – including 50 finance companies — getting similarly clobbered.

An “emergency,” indeed.

So now, we have the CEO of the most respected bank in the country, the CEO's of Investment Banks, and Christopher Cox of the SEC saying there is a problem. It wasn't a problem, when it didn't affect them! But now it is. But don't worry, Charlie Gasparino will tell us that the shorts are "saints!"

There is no doubt, that much of these banks have toxicity on their balance sheets, but it isn't something that can't be cured. Good gosh, the whole world is now telling us we are awash in oil; a week ago they were touting it to $200! Now the same people want you to believe that housing can't ever get a bid? Half of the new problems in mortgages are those "gaming" the system. With the crackdown in IndyMac by the FBI we'll soon have more people singing than in a Hallelujah chorus!

If they are singing, don't think the subpoenas won't have Wall Street pointing fingers either.

Unlike Regulation SHO, which mainly just affected the small cap companies that nobody seemed to care about, now the financial system was put at risk. The short selling priced in the disaster scenario in a couple of weeks, that normally would of taken a couple of years. By driving the stock prices down while these companies were recognizing losses on their mortgages, that would cause any capital raise to be highly dilutive.

So the Fed's fought back. This shortseller rule was disregarded Tuesday as ineffective. Today it was punitive. Tomorrow it will be punishing.

The stocks on the list moved up an average of 12% today:

In a sign that the plan already is throwing sand in the gears of short sellers, the stock prices of most of the 19 financial companies affected by the new rule soared Wednesday, rising an average of 12%. Fannie Mae jumped 31%, or $2.18, to $9.25, while Freddie Mac was up 30%, or $1.57, to $6.83 in 4 p.m. New York Stock Exchange composite trading. Lehman Brothers Holdings Inc. surged 26%, or $3.43, to $16.65. All three stocks had been thrashed for weeks by nearly relentless selling pressure.

If the "fudge factor" on the size of this imbroglio is discounted by a factor of 66, then how many institutions are all using the same stocks for a borrow?

Well consider that BAC was up 22%, WFC was up 33%, JPM was up 16%, STI was up 18%, WM was up 26%, WB was up 16%, and C was up 13% to 16.47 and it can probably print a 20 handle by Monday.

How much pressure is on the shorts? Here's my two cents worth. AIG, which closed at 23.28 has the July 26 call at a nickel, and for two cents you can get the 27's.

Nickels to dollars, dollars to donuts, they close in the money!

1 comment:

Anonymous said...

What about false rumors producing long bets? Nobody cares about that. The SEC doesn't care about the little guy who is suckered into buying a worthless stock because supposedly Warren Buffet is going to buy the company.

They only care if the PIGMEN are hurt by those terrible short sellers. What a joke.