Friday, June 5, 2009

The Government's hand

Look at today's WSJ on Citigroup:

WASHINGTON -- The Federal Deposit Insurance Corp. is pushing for a shake-up of Citigroup Inc.'s top management, imperiling Chief Executive Vikram Pandit, people familiar with the matter said.

The FDIC, under Chairman Sheila Bair, also recently pressed a fellow regulator to lower the government's confidential ranking of Citi's health -- a change that would let regulators control the firm more tightly.

Government money comes with strings!

Yesterday, Angelo Mozilla was charged with securities fraud.

When housing imploded, Angelo argued that"the real culprits, were the Federal Reserve raising interest rates for too long, crooked real estate speculators, falling housing prices and regulators' attacks on interest-only and other risky subprime mortgages."

Now he has to fight off the Government, who wants the $139 million that he got from selling stock in 2006 and 2007.

Do you think that Vikram Pandit ever felt that Sheila Bair could tell him to go cash unemployment checks? Does anybody think that Angelo thought he coould be charged with securities fraud?

Now let's look at those who are bearish, that used to spread rumours about stocks failing, while buying credit default swaps on the stocks, and shorting the companies endlessly. Now we know that game is over. And we also know that some of these bears that did this, are now getting crushed.

How many of these want to p*ss off the Governement? When the Government is all in? How many want the Government looking over their books? Parsing every trade, checking every email and electronic communication?

Did anyone see the emails that is the basis of the SEC complaint against Mozilo?

On subprime
The 100% loan-to-value subprime product is "the most dangerous product in existence and there can be nothing more toxic and therefore requires that no deviation from guidelines be permitted irrespective of the circumstances."

In all my years in the business I have never seen a more toxic prduct. It's not only subordinated to the first, but the first is subprime. In addition, the FICOs are below 600, below 500 and some below 400 With real estate values coming down...the product will become increasingly worse. There has to be major changes in this program, including substantial increases in the minimum FICO. ... Whether you consider the business milk or not, I am prepared to go without milk irrespective of the consequences to our production.

On pay option ARMs.

We have no way, with any reasonable certainty, to assess the real risk of holding these loans on our balance sheet. The only history we can look to is that of World Savings however their portfolio was fundamentally different than ours in that their focus was equity and our focus is fico. In my judgement, as a long time lender, I would always trade off fico for equity. The bottom line is that we are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales.

These were the key emails that were released by the SEC, so this is their case. I'm sure some in finance would argue that some of his statements were just business judgements. Angelo had a lawyered up 10-B 5-1 plans to sell stock. One was changed in February of 2007, so he could sell more. Did these lawyered up plans protect him?

Now let's go to the cowboy world of hedge fund land, that live on breaking the rules, but not getting caught. Do you think that these folks now are more receptive to a long trade, or a short position?

Especially when the Government is all in!

How about the IM's that were pinged among traders when they were coordinating a takedown of a stock? The only growth in hedge fund land, has been in the cleanup business!

So who is going to short stocks and take the "Government and litigation" risk?

Is that variable in these quants portfolios?

The black swan risk, was never another implosion, but of a melt up in equities.

As I've said before, "These bears give us these predictions that will never happen, while I'll give you a target, that is impossible for the market to not attain."

Remember this news on April 16th? When the bears had trouble understanding what was happening in quant land?

Barclays Matthew Rothman said that he knew only one quant manager out of 80 that was up since March 9th. His quote, "It is fair to say that just about everyone is bewildered and trying to understand when this rally will end.."

Merrill Lynch analyst Mary Ann Bartels is all up in arms because "Hedge funds are an important source of liquidity for the markets - particularly true of quant funds employing high-frequency algorithmic and programming trading strategies. A big drop in HF presence in the equity markets could result in rising volatility.

Duncan Neiderauer, the chief of the NYSE said that "real money" investors were on the sidelines, and it was just short term traders moving prices.

I suppose then, these guys thought they had a handle on things. Obviously they don't. And it's the same reason today, as what I ended that piece with:

And of course the bears can't recognize it---because the bears are the market's next black swan!

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