The Mother of All Bailouts!

by Larry Levin

It was a beautiful day here in Leningrad-West today Comrades. I hope you had a great day too. News from Mother Russia today - oops, I meant the U.S.S.A. (United Socialist States of America ) turned the equity market on its ear, sparking a massive rally. Yes Comrades, you showed Marshal Mikhail Paulson how much you appreciate his benevolence by sewing a silk purse from a sow's ear. Молодец Comrades, молодец!

Yesterday I said - The SEC can grunt all it wants, pretending that wicked, greedy speculators and so-called illegal naked shorts are driving the markets down. Of course, this is a feeble attempt to ignore the real problem: a global derivative meltdown in a financial system that grew morbidly obese with outrageous debt and fees collected via its ability to foist that debt on unsuspecting investors. Stocks are falling because of the actual condition of these financial institutions. They are falling because they have hundreds of billions of dollars of liar-loans on their books in Level-III assets. A ban on naked short covering may slow down the sellers, but covered short selling will continue - en masse.

It seems like today's buzzword on television, as mentioned earlier, was short sellers. To be fair, they mention naked shorts, but only briefly. The effect of this is to lump all short selling together with the goal of making it illegal entirely. It is simply another step on the road to the new U.S.S.A (United Socialist States of America ). Have there been any investigations into those evil individuals who caused Bear Stearns to fail? Did the itsy-bitsy short seller FORCE the gargantuan US government to bailout Fannie Mae, Freddie Mac and AIG? Did the elusive and immoral short seller also cause Merrill Lynch to be sold and Lehman Brothers to fail?

It is only ONE day later and there are already calls to ban ALL short selling. Why not, they say, England instituted that very rule today. Our Comrades in England have stood up against the oppression of the capitalist pigs known as short sellers, crushing them like Nikita Khrushchev would have done. Although we long for the glory days of Nikita Khrushchev, don't worry comrades, Mikhail Paulson and Vladimir Bernanke are looking out for the interests of the State. They will also say to the short sellers: We will crush you!

On the heels of England banning all forms of short selling comes word from the Kremlin of our own U.S.S.A: we too have banned ALL forms of short selling. The Wall Street Journal reported tonight that the ban has come down from the SEC.

The Kremlin of the U.S.S.A has now decided that free markets are the way of the old USA . Now, free markets are only allowed for the bulls. Once the slack-jawed yokels of the U.S.S.A warm up to this idea, it won't be long before The Party bans all buying or selling in which ever market doesn't suit its preconceived notions of outcome. Let's not forget that those fools in Congress - excuse me, The Kremlin - wanted to BAN buying oil futures not too long ago!

Perhaps they'll just make an Executive Order that exclaims - No house shall ever sell for a loss! And while they're at it, they'll put a ceiling on oil prices or gas prices. Maybe they will declare that people must be happy; they can ban all sad days. By fiat, they will declare that we will have nice weather year round, and rain will on be appropriate on a certain scheduled basis during the harvest season. Golly gee, maybe they'll even the SEC and The Kremlin leadership say that they are for cute puppies and children and ice cream on a hot summer days.

This way, we'll pay no attention to the trillions in bad derivatives they will soon be holding!

The problem is folks, banning short-sales isn't going to matter in the long run. A worthless piece of dung is still going to zero and banning short-sales won't change the financials of a company. Think about it folks, would banning short selling years ago have kept Enron, WorldCom, or Polaroid from bankruptcy? Of course not. Now that the Kremlin doesn't like the outcome, it will just change the rules in the middle of the game. WELCOME TO CENTRALIZED PLANNING, COMRADES.

These same idiots that you keep voting into the U.S.S.A's Kremlin told us, as well as cry-baby long only fund managers, that the Nasdaq crash was caused by day traders. Yeah, right!

Why aren't there government interventions to stop the bubble blowing parties BEFORE we have crashes and crisis? Oh yeah, because that's when the market's are going up.

This is actually a set up for what's to come: The Mother of all Bailouts. Why ban short selling? The government doesn't like competition.

The majority of today's gains came when word was leaked out that Mikhail Paulson was speaking with Vladimir Bernanke and the Kremlin about a mega-bailout, which would be a Resolution Trust Corporation-like (RTC) rescue package of the banks. Hold on to your wallets Comrades!

What I am hearing this evening is that the government, that would be YOUR TAX DOLLARS, will buy up all of the toxic sh!* that are on bank Level-III balance sheets, because you apparently now want to own the largest, WORST, most underperforming bank of all time. Keep in mind, the government has already bought you an investment bank (BSC), nearly all of the mortgages in the country via FNM and FRE, an insurance company (AIG), and now all of the worst parts of the most egregious, lying obfuscating banks in the country. What the hell, while were at, let's get us a few car manufacturers!

By the way, where in the Constitution does it authorize the executive branch of government to go into the insurance business? I doubt it's in there, but no one cares anyway.

The RTC was created in 1989 to solve another banking crisis. Apparently the greed and hubris of homebuilders, developers, and Wall Street is never ending - or has no memory. We taxpayers had to bailout these clowns before, which caused the worst recession, since the 70's. Lawmakers said they would only need 3-yrs to rectify the problem. However, the RTC was not folded into the FDIC until 1995. Many people believe the RTC bailout was profitable to the taxpayer. Not true. According to CNBC, the total bailout cost to the taxpayer was $123.8-billion.

Today's problem, however, is far deeper. So if the Kremlin says that this latest Wall Street crisis will be over in 3-years, consider it to be more like 10-years. If the clowns in the Kremlin say it will only cost the taxpayer, who didn't vote in this, $300-billion; laugh first, then cry when you realize it will be at least $2 or $3-TRILLION.

According to the UK Telegraph: Bear Stearns had total (derivatives) positions of $13.4 trillion. This is greater than the US national income, or equal to a quarter of world GDP - at least in notional terms. The contracts were described as swaps, swaptions, caps, collars and floors. This heady edifice of new-fangled instruments was built on an asset base of $80bn at best. On the other side of these contracts are banks, brokers, and hedge funds, linked in destiny by a nexus of interlocking claims. This is counterparty spaghetti.

The total amount of these derivatives you will soon own is a staggering amount. The total notional, or face value, of derivatives held by U.S. banks is $180-trillion, and it's three times that much globally. This figure is said to overstate the actual market risk. But it does not overstate the risk of defaults such as those that could be triggered by the failure of a company the size of Lehman Brothers, which just happened.

Consider just a 5% hit in this $180-TRILLION bag of garbage. It's significantly worse than the number I gave above, which would be a $9-trillion loss to the deaf, dumb, and blind - the taxpayer of the U.S.S.A. Have you called Congress yet?

If short selling is bad for traders, isn't it reasonable that it would be bad for the real culprits of this mess - the banks? In the U.S.S.A we have a fractional banking system, which means banks are allowed to loan way more money than they actually hold in reserves. Said another way, banks regularly engage in short selling loans since they are short of the deposits. In fact, that's all they do.

Banning fractional reserve banking would fix all of these problems for future generations overnight.

Real Time Trading Signals*for

Trade Date: 9/18/08

E-Mini S&P Trades*
(before fees and commissions):

1) PP buy @ 8:40am at 1173.75 = -2.00 (1 lot)

2) VA sell @ 10:35am at 1167.00 = +3.00 (1 lot)

3) FT buy @ 1:05pm at 1162.25 = b/e (1 lot)

4) Algorithm positions (3)...combined total...b/e

ZB (30 Year Bond) Trades*
(before fees and commissions):

1) Sell @ 7:45am at 121.175 = +2.0

2) Sell @ 9:26am at 121.270 = -3.5...combined total...-1.5


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