Friday, December 5, 2008

Where did the money go?

With global markets in turmoil, a frequent question is "where did the money go?”. One response - “money heaven”.

NPR attempts to answer the question today at the link "Where Did The Money In The Housing Market Go?” Their bottom line: "It was borrowed from some rosy future that never came. And now we have to pay it back."

Tuesday, November 18, 2008

GM, the bailout and the Volt

Today, CEO Rick Wagoner of General Motors, Alan Mulally of Ford and Robert Nardelli of Chrysler testified at a hearing with the Senate Banking Committee regarding the potential for $25 billion in loans.

Notably, even before the credit crises unfolded, GM had “bet the ranch” on its Volt hybrid car. During the hearing, Mr. Wagoner did not focus on the Volt’s potential and only mentioned that it would be available sometime in the future. Perhaps the bet is not paying off. Hopefully, US taxpayers are not caught holding the bag.

Global shipping trends remain a challenge

One measure of assessing global trade dynamics is the Baltic Dry Index which tracks the cost for shipping building materials, coal, crude oil, metallic ores, and grains around the world. The index is actually an average of three indexes: the Baltic Supramax, Panamax, and Capesize. (chart presents weekly performance since Nov. 1995)

The index, after reaching a high on May 21, 2008, has been significantly impacted by 1) a slowdown in global trade, 2) an oversupply of ships and 3) the challenges by shippers to obtain letters of credit.

While the aggregate index recently has stopped declining, the Capesize component continues to slowly trend lower. Capesize ships are generally associated with shipping crude oil. Additionally, some ships are been used to store, rather than ship goods. A reversal of these trends are among the metrics needed to support a positive view of the market.

Sunday, November 9, 2008

Wisdom from a retired investment professional: 10 Market Rules to Remember

In the midst of the market turbulence, it is worthwhile to step back and consider the words of someone who has experianced several market cycles. The following thoughts (which are posted elsewhere on the web as well ) are Bob Farrell’s 10 Market Rules to Remember. He spent several decades at Merrill Lynch as a market strategist before retiring in 1992.

1) Markets tend to return to the mean over time.
2) Excesses in one direction will lead to an opposite excess in the other direction.
3) There are no new eras – excesses are never permanent.
4) Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
5) The public buys the most at the top and the least at the bottom.
6) Fear and greed are stronger than long-term resolve.
7) Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names.
8) Bear markets have three stages – sharp down – reflexive rebound – a drawn-out fundamental downtrend.
9) When all the experts and forecasts agree – something else is going to happen.
10) Bull markets are more fun than bear markets.

Re: John Kenneth Galbraith's book "The Great Crash, 1929"

Over the past few weeks, I have discussed with friends John Kenneth Galbraith's book "The Great Crash, 1929" which was published in 1955. While two market crashes will not be identical, there are some startling similaries between the dynamics leading up to the 1929 crash and today's situation.

For additional thoughts , check out the front page of today's New York Times Week in Review section. The article "Seeking a Poet for the Great Mess of ’08" focuses on Galbraith's book.

Monday, October 27, 2008

Rep. Pelosi comments on the Bailout

October 27, 2008
Dear Mr. Dravis:

Thank you for contacting me to express your views on H.R. 1424, the Emergency Economic Stabilization Plan and Tax Extender Package. I appreciate hearing from you.

The Senate passed H.R. 1424 by a vote of 74-25 on October 1, 2008. On October 3, 2008, the House passed the bill by a vote of 263-171. Later that day, President Bush signed the bill into law.

The economic stabilization bill is intended to stabilize financial markets, and was substantially improved from the Administration's original proposal. The original bill proposed by the Bush Administration was unacceptable. It asked us to commit $700 billion in taxpayers' money without any meaningful safeguards; we rejected that proposal. In our bipartisan negotiations between the White House and Congress, we stood up for American taxpayers and demanded tough changes to the bill.

Restoring Stability to our Financial Markets
The plan is intended to help stabilize our financial markets by providing the Department of Treasury with the authority to acquire $700 billion worth of troubled assets from financial institutions. This investment in our financial institutions is intended to remove impediments to the flow of credit in our financial markets, and to provide financial institutions with the ability to raise the capital they need to return to the financial markets as active participants. If the plan works, small businesses will be able to borrow the necessary capital to grow, and the routine flow of credit can be restored to our community so that parents can send their children to college and families can purchase homes.

Reimburse Taxpayer Investments
The bill will protect hardworking American taxpayers who are being asked to invest in the future of our nation's economic health. The legislation requires that taxpayers benefit from the government's investments in the purchased assets by providing them with a share of the profits from participating companies, and ensuring that any costs incurred by the program are incurred by the financial industry.

Reform Wall Street Practices and Strong Government Oversight
This legislation imposes strict limits on excessive compensation for CEOs and executives of companies that participate in the asset purchase program, and provides for four separate layers of oversight to ensure that the government runs the program in a transparent manner and that taxpayers are protected.

Relief for Middle Class Americans
The plan will provide relief to millions of homeowners and thousands of small businesses. The legislation provides tax relief for 30 million homeowners and assists small businesses that need credit from small community banks to survive and grow. Importantly, the bill increases the amount of bank and credit union deposits insured by the government from $100,000 to $250,000, ensuring that Americans have confidence in the safety of their deposits in our nation's banks and credit unions.

Reinvigorate the American Economy
To strengthen the economy, the measure includes over $100 billion in tax cuts that will create over 500,000 American green jobs; provide tax relief to middle-class families struggling to make ends meet in the face of the rising energy, health care and grocery costs; and spur business investment and innovation. The legislation also provides tax relief for 25 million middle-class families, and extends tax cuts for American businesses and families.

This legislation is just the beginning of our efforts to address this financial crisis. Chairman Henry Waxman of the Oversight and Government Reform Committee, Chairman Collin Peterson of the Agriculture Committee and Chairman Barney Frank of the Financial Services Committee will hold a series of hearings to determine the origins of the crisis, how regulators and business leaders failed to protect the public interest, and the common sense, reasonable regulations needed to provide security and stability in the future. I have also asked them to review the economic impact of a larger recovery package and, because of the Congress' commitment to fiscal responsibility, the effect on the budget.

On October 13th, I held a forum with some of America's leading economists to help Congress develop a stimulus that focuses on creating jobs and strengthening our economy. Just as we worked in recent weeks on an economic rescue plan to help bring stability to our financial markets, we must now take additional action and pass a jobs creation and economic recovery plan. The legislation would boost the broader economy. It will include an extension of unemployment benefits, increased money for food stamps and the states, and more federal funds for bridges and other transportation projects.

Democrats have made fiscal responsibility a top priority, reinstating pay-as-you-go budget rules on the first day we took control of Congress in 2007. In keeping with these principles, each component of our recovery package will be justified in terms of creating good-paying jobs, stimulating our economy and returning revenue to the Treasury. When Americans are worried about losing their jobs, their savings, their homes and their chance at the American Dream, Congress and the president must work together to lift our economy and restore hope. That is the course the New Direction Congress will continue in the days and weeks ahead.

Our nation is at a critical point in our history, and we must continue to act to restore confidence in our financial markets and to reinvigorate our economy. The vote on H.R. 1424 was a vote with real consequence, and a vote that will shape the financial stability of our country, and the economic security of our people.

Thank you again for contacting me on this important issue. I hope you will continue to communicate with me on matters of concern to you. For more information on this or other issues affecting our city and our nation, please visit my website at or sign up to receive e-mail updates at


Nancy Pelosi
Member of Congress

Sunday, October 19, 2008

The Equity Markets - a glass half full, or half empty?

Equity markets remain very tricky and many of the indicators, which I believe are important are still trending down.
The S&P 500, KBW banking and Baltic Dry indexes all traded below their 10 day moving average.

Some positive points for consideration from the the past week:
  • The TED spread is coming down, but it remains at a ridiculously high level
  • The Volatility index (VIX) spiked to new high and then started to drop.
  • The US equity market has not dropped below its lows recorded on Oct. 10.
  • Morgan Stanley CEO admits that banks need better regulation – I think he is the first industry guy to admit any mistakes, although trusting bankers is very challenging in this environment!
  • Jim Cramer (Mad Money) said that for the first time in 23 years he can't say "there is always a bull market somewhere". Capitulation is always a good thing in a bear market.
  • Too many hedge funds are saying they are heavily in cash.
  • Warren Buffet wrote an op-ed in the NY Times stating that it is times to buy US equities. Note his time horizon is likely different than most and he has a lot of cash in the bank. If you like his strategy, buy his stock - ticker is BRK/A.

Trading will continue to be sloppy leading into the election... but we could get a short term rally.

If your strategy is buy and hold than look at TIPS.

I am taking nibbles, but will exit on any sense of weakness (set stop-loss limits if you are getting involved) - commodities, energy and utilities are areas that seem to make sense - hard assets.

Wednesday, October 8, 2008

The Credit Crisis - “Understanding the problem is part of the cure"

The following is provided in the spirit of "understanding the problem is part of the cure".

As with most big problems – the credit crisis has many contributing dynamics.
At a high level – it was stupidly, greed, leverage, derivatives and securitization - these attributes were not exclusive to the US.
Villains include members of both political parties and participation from a broad spectrum of industries.

A negative saving rate in the US has not been helpful. Joseph Stiglitz (Nobel prize - Economics - 2001) is making the case that spending in Iraq has been a significant contributing factor (I am not up to speed on that thought process).

The notes below present some of the significant milestones on the way to driving the economy into the ditch.

Early 1990s:
Government Sponsored Enterprises bills expanded the power and influence of Fannie Mae and Freddie Mac. With the mantra of "fair lending", a mix of positive sentiment and greed (especially among banks and former government officials), a toxic mess was created.

November 1999:
The Gramm-Leach-Bliley Act repealed the Glass-Steagall Act which regulated the financial services industry. Gramm later became a lobbyist for UBS, collecting over $750,000 in fees and than became a Chairman of UBS. UBS issued over $18 billion in subprime mortgages. Recently, Gramm was senior economic advisor to John McCain.After 9/11, Fed Chairman Alan Greenspan started a process that led to a series of interest rate cuts meant to stabilize the economy. Over time, the US was hooked on cheap credit and Greenspan was in charge of the "punchbowl".

During 2004:
The SEC granted 5 investment banks an exemption to a 30 year old rule which limited broker debt-to-net capital ratio to 12:1 (this is the amount of leverage they could apply to investment/speculation activities). The exemption allowed them to increase their leverage to 40:1 (this could have been dramatically higher in some situations – was it high-octane, toxic or just insanity)

So, who are the FAB FIVE and where are they today: Lehman (bankrupt), Bear Stearns (bankrupt) Merrill Lynch (almost dead)- purchased by Bank of America, Goldman Sachs and Morgan Stanley – both struggling and have changed their status to commercial banks to get "back stopped" by the US government.

Monday, October 6, 2008

Commenting on the market downturn.....

The following thoughts were shared today with a friend about the current market environment:

1) Be cautious of what is presented by the talking heads on TV. Their job is to generate viewers – don’t forget that.

2) The velocity of this equity market decline appears to be worse than the initial stages of the 1929 crash. I think the removal of the uptick rule for shorting, the unwinding of leverage (which has been taking place since July 2007) and computerized trading are among the contributing factors.

3) There is money on the sidelines waiting for the “deleveraging process” to stop. However, there could be 10-15% more downside in the S&P.

4) Patience is a critical – but scarce commodity – so don’t rush in to the market.
5) The average guy on the street thinks they understand the stock market. Most of humanity does not have a clue about the credit market (credit is more important). This market downturn is all about credit. One indicator of how well the credit markets are functioning is the TED spread (which is related to the rates banks lend money to each other). In good times, the TED spread is between 0.10% and 0.50%. Currently, it is in uncharted territory – 3.8%. The chart above presents the TED spread 1984 – present.

6) If you are heavily in the equity market – lighten up.

7) Is this going to be a depression? I having never been in one, so I don’t know. Will this be the worst economic downturn in a generation – Yes.

Saturday, September 27, 2008

U.S. Senator Dianne Feinstein responding on the Financial Bailout

Dear Mr. Dravis:

Thank you for your letter expressing concern about Congress' consideration of a plan to meet our Nation's credit crisis with financial help from the Federal Government. This is a difficult situation for which there are no perfect solutions, and I would like to share my thoughts and concerns about this issue with you.

On September 19, 2008, Secretary of the Treasury Henry M. Paulson, Jr. announced a legislative proposal to use $700 billion to purchase illiquid mortgage-related assets from ailing financial institutions. Secretary Paulson's three-page proposal was a non-starter, and without critical changes it has no chance of approval from Congress.

This proposal would have given a blank check to an economic czar who would have been empowered to spend it without administrative oversight, legal requirements, or legislative review. Decisions made by the Treasury Secretary would be non-reviewable by any court, agency, or Congress. The proposal also lacked a requirement for regular reports to Congress on the status of the program. This was simply untenable.

Since this announcement, my offices have received thousands of comments from Californians like you concerned about how this action will affect them. Yet, I believe prudent action must be taken. The bill should include the following principles: a phase-in of funding; oversight, accountability and transparency; a mechanism allowing the Secretary of the Treasury to modify mortgages to prevent additional foreclosures; and a precise cap on executive compensation.

The current credit crisis affects all Americans. If action is not taken to stem the crisis, Americans risk losing their homes, jobs, personal savings, life insurance and more. Banks will cease to lend to businesses and homeowners, and credit will be increasingly difficult to come by for average Americans. I strongly believe that the consequences of failing to act now would be greater than not acting at all.

Attached please find a statement I recently made on the floor of the Senate expressing my feelings on this issue. Please know that I will keep your thoughts in mind as this situation unfolds.

Once again, thank you for writing. If you have any additional questions or concerns, please do not hesitate to contact my Washington, D.C. office at (202) 224-3841. Best regards.

U.S. Senator Dianne Feinstein

Floor Statement on the Economic

Rescue Proposal

September 26, 2008

"Mr. President, to date I have received from Californians more than 50,000 calls and letters, the great bulk of them in opposition to any form of meeting this crisis with financial help from the Federal Government. I wanted to come to the floor to very simply state how I see this and some of the principles that I hope will be forthcoming in this draft. Before I do so, I wish to pay particular commendation to Senator Dodd, Senator Schumer, Senator Bennett, and others who have been working so hard on this issue. I have tried to keep in touch -- I am not a negotiator; I am not on the committee -- but California is the biggest State, the largest economic engine, and people are really concerned.

We face the most significant economic crisis in 75 years right now. Swift and comprehensive action is crucial to the overall health of our economy. None of us wants to be in this position, and there are no good options here. Nobody likes the idea of spending massive sums of Government money to rescue major corporations from their bad financial decisions. But no one also should be fooled into thinking this problem only belongs to the banks and that it is a good idea to let them fail. The pain felt by Wall Street one day is felt there, and then 2,3,4 weeks down the pike, it is felt on Main Street.

The turbulence in our financial sector has already resulted in thousands of layoffs in the banking and finance sectors, and that number will skyrocket if there is a full collapse. The shock waves of failure will extend far beyond the banking and finance sectors. A shrinking pool of credit would affect the home loans, credit card limits, auto loans, and insurance policies of average Americans. I am receiving calls from people who tell me they want to buy a house, but they can't get the credit or the mortgage to do so. Why? Because that market of credit is drying up more rapidly one day after the other. It would have a major impact on State and local governments which would lose tens of millions of dollars, if not hundreds of millions of dollars.

Hurricane Ike shut down refineries on the gulf coast 2 weeks ago, and now, today, people are waiting hours in lines for gasoline in the South. Similarly, the collapse of the financial sector would have severe consequences for Americans all across the economic spectrum: for the person who owns the grocery store, the laundry, the bank, the insurance company. Then, if the worst happens, layoffs. And even more than that, somebody shows up for work and finds their business has closed because the owner of that business can't get credit to buy the goods he hopes to sell that week or that month. Wages and employment rates have already fallen even as the cost of basic necessities has skyrocketed. Our Nation is facing the highest unemployment rate in 5 years, at 6.1 percent. Over 605,000 jobs have been lost nationwide this year. My own State of California, a state of 38 million people, has the third highest unemployment rate in the Nation at 7.7 percent. That is 1.4 million people out of work today. One and a half million people -- that is bigger than some States. We have 1.5 million people out of work, and one-half million have had their unemployment insurance expire and have nothing today.

Congress is faced with a situation where we have to act and we have to do two things. We have to provide some reform in the system of regulation and oversight that is supposed to protect our economy. We also have to find a permanent and effective solution to keep liquidity and credit functioning so that markets can recover and make profit. The situation, I believe, is grave, and timely, prudent action is needed.

Just last night, the sixth largest bank in America -- Washington Mutual-- was seized by government regulators and most of its assets will be sold to JPMorgan Chase. This follows on the heels of bankruptcies and takeovers of Bear Stearns, Lehman Brothers, AIG, Fannie Mae, and Freddie Mac. If nothing is done, the crisis will continue to spread and one by one the dominos will fall.

Now, this isn't just about Wall Street. Because we are this credit society, the financial troubles facing major economic institutions will ricochet throughout this Nation and affect everyone. So I believe the need for action is clear. But that doesn't mean Congress should simply be a rubberstamp for an unprecedented and unbridled program.

My constituents by the thousands have made their views clear. I believe they are responding to the original 3-page proposal by the Secretary of the Treasury. It is clear by now that that 3-page proposal is a nonstarter. It is dead on arrival and that is good. Secretary Paulson's proposal asked Congress to write a $700 billion check to an economic czar who would have been empowered to spend it without any administrative oversight, legal requirements, or legislative review. Decisions made by the Treasury Secretary would be nonreviewable by any court or agency, and the fate of our entire economy would be committed to the sole discretion of one man alone -- the man we know today, and the man whom we don't know after January.

Additionally, the lack of governance or oversight in this plan was matched by the lack of a requirement for regular reports to Congress. This proposal stipulated that the economic czar, newly created, would report to Congress after the first three months with reports once every 6 months after that. This was untenable. Six months is an eternity when you are spending billions a week. The Treasury Secretary asked Congress to approve this massive program without delay or interference. It is hard to think of any other time in our history when Congress has been asked for so much money and so much power to be concentrated in the hands of one person. It is a nonstarter.

Yesterday, shortly before we met for the Democratic Policy Committee lunch, we were told there had been a bipartisan agreement on principles of a possible solution, and many of us rejoiced. We know that our Members, both Republican and Democrat, have been working hard to try to produce something that was positive. Then, all of a sudden, it changed. One Presidential candidate parachuted into town which proved to be enormously destructive to the process. Now, negotiations are back on the table, and as I say, we have just received a draft bill of certain principles.

I would like to outline quickly those principles that I think are important. First is a phase-in. No one wants to put $700 billion immediately at the discretion of one person or even a group of a very few people, no matter how bright, how skilled, how informed they might be on banking or finance principles. The funding should come in phases and Congress should have the opportunity to make its voice heard if the program isn't working or needs to be adjusted.

The second point: Oversight, accountability, and governance. The Treasury Secretary should not and must not have unbridled authority to determine winners and losers, essentially choosing which struggling financial institution will survive and which will not. The original plan placed all authority in the hands of this one man, and this is why I say it was DOA -- dead on arrival -- at the Congress. We must assure that controls are in place to watch taxpayer dollars and make sure they are well-spent fixing the problem, and that oversight by a governance committee and the Banking Committees are strong, and that they give the best opportunity for the American people to recover their investment and, yes, even eventually make a profit from that investment. That can be done and it has been done in the past.

I believe that frequent reporting to Congress is critical. Transparency, sunlight on this, is critical. So Congress should receive regular, timely briefings, perhaps weekly for the first quarter, on a program of this magnitude. A proposal should mandate frequent reporting and the public should be ensured of transparency to the maximum extent possible.

I also believe that within the first quarter -- and this, to me, is key -- a comprehensive legislative proposal for reform must be put forward. We must reform those speculative practices that impact price function of markets. We must deal with the unregulated practices that have furthered this crisis. Look. I represent a State that was cost $40 billion in the Enron episode during 1999 and 2000 by speculation, by manipulation, and by fraud. There still is inadequate regulation of energy commodities sold on the futures market. And that is just one point in all of this. We must prevent these things from happening. The only way to do it is to improve the transparency of all markets. No hidden deals. Swaps, in my view, should be ended. The London loophole should be ended.

We have to outline rules for increasing regulation of the mortgage-backed securities market, along with comprehensive oversight of the mortgage industry and lending practices for both prime and subprime lending.

Senator Martinez of Florida and I had a part in the earlier housing bill, which included our legislation entitled the SAFE Mortgage Licensing Act. We found that the market was rife with fraud. We found there was one company that hired hairdressers and others who sold mortgages in their spare time. We found there were unscrupulous mortgage brokers out there unlicensed, preying upon people, walking off with tens of thousands of dollars of cash. This has to end. It has to be controlled. It has to be regulated.

So I believe the crisis of 2008 stems from the failure of Federal regulators to rein in this Wild West mentality of those Wall Street executives who led those firms and who thought that nothing was out of bounds. Every quick scheme was worth the time, and worth a try. Congress cannot ignore this as the root cause of the crisis. It was inherent in the subprime marketplace, and it has now spread to the prime mortgage marketplace.

It is also critical that accurate assessments of the value of these illiquid mortgage-related assets be performed to limit the taxpayers' exposure to risk and structure purchases to ensure the greatest possible return on investment.

Taxpayer money must be shielded at all costs from risk to the greatest extent possible.

Reciprocity is not a bad concept if you can carry it out. The Government must not simply act as a repository for risky investments that have gone bad. An economic rescue effort that serves taxpayers well must allow them to benefit from the potential profits of rescued entities. So a model -- and it may well be in these new principles -- must be developed to ensure the taxpayers are not only the first paid back but have an opportunity to share in future profits through warrants and/or stocks.

As to executive compensation limits, simply put, Californians are frosted by the absence of controls on executive compensation. Virtually all of the 50,000 phone calls and letters mentioned this one way or another. There must be limits. I am told that the reason the Treasury Secretary does not want limits on executive compensation is because he believes that an executive then will not bring his company in to partake in any program that is set up. Here is my response to that: We can put that executive on his boat, take that boat out in the ocean, and set it on fire. If that is how he feels, that is what should happen, or his company doesn't come in. But to say that the Federal Government is going to be responsible for tens of millions of dollars of executive salaries, golden parachutes, whether they are a matter of contract right or not, is not acceptable to the average person whose taxpayer dollars are used in this bailout. That is just fact.

The one proposal that was made by one of the Presidential candidates that I agree with is that there should be a limit of $400,000 on executive compensation. If they don't like it, too bad, don't participate in the program. As I have talked with people on Wall Street and otherwise, they don't believe it is true that an executive, if his pay is tailored down, will not bring a company in that needs help. I hope that is true. I believe there should be precise limits set on executive pay.

Finally, as to tangible benefits for Main Street in the form of mortgage relief, there have been more than 500,000 foreclosures in my home State of California so far this year. In the second quarter of this year, foreclosures were up 300 percent over the second quarter of 2007. More than 800,000 are predicted before this year is over.

I have a city in California where one out of every 25 homes is in foreclosure. This is new housing in subdivisions. As you look at it, you will see garage doors kicked in. You will see houses vandalized. You will see the grass and grounds dry. You will see the street sprinkled with "For Sale" signs, and nobody buys because the market has become so depressed.

This crisis has roots in the subprime housing boom that went bust, and it would be unconscionable for us to simply bailout Wall Street while leaving these homeowners to fend for themselves.

Everything I have been told, and I have talked to people in this business, here is what they tell me: It is more cost-effective to renegotiate a subprime loan and keep a family in a house than it is to foreclose and run the risks of what happens to that home on a depressed market as credit is drying up, as vandals loot it, as landscaping dries up, as more homes in the area become foreclosed upon; the way to go is to renegotiate these mortgages with the exiting homeowner wherever possible. I feel very strongly that should be the case.

I don't know what I or any of us will do if we authorize this kind of expenditure and we find down the pike in my State that the rest of the year, 800,000 to 1 million Americans are being thrown out of their homes despite this form of rescue effort. Think of what it means, Mr. President, in your State. You vote for this, any other Senator votes for it, and these foreclosures continue to take place and individual families continue to be thrown out of their homes. It is not a tenable situation.

I hope, if anybody is listening at all, that in the negotiating team, they will make a real effort to mandate in some way that subprime foreclosures be renegotiated, that families, wherever possible, who have an ability to pay, have that ability to pay met with a renegotiated loan. I have done this now in cases with families who were taken advantage of. We called the CEO of the bank, and the bank has seen that the loan was renegotiated, in one case in Los Angeles down to 2 percent. That is better than foreclosing and running the uncertainty of the sale of the asset in a very depressed housing market.

These are my thoughts. Again, it is easy to come to the floor and give your thoughts. It is much more difficult to sit at that negotiating table.

I once again thank those Senators on both sides of the aisle who really understand the nature of this crisis -- that it isn't only Wall Street, that it does involve Main Street, and if there is a serious crash, it will hurt tens of millions of Americans, many of them in irreparable ways. So we must do what we must do, and we must do it prudently and carefully.

I yield the floor. I suggest the absence of quorum."

Sincerely yours,

Dianne Feinstein
United States Senator

Saturday, September 20, 2008

E-mail to the Speaker of the House of Representatives related to Short-Selling

Congresswoman Pelosi:

These are challenging times and I do not envy your position. Therefore, the following is provided for consideration.

SHORTING STOCKS: The approach of limiting shorting to selected financial stocks is disturbing. Ironically, after months of market volatility, action on shorting is taken only after the stocks of Goldman Sacks (Paulson’s alma mater) and Morgan Stanley take serious hits - Goldman down 47% and Morgan Stanley down 70% from Sept. 10 to Sept. 18 (intraday).

GATED COMMUNITY: Now we have created a gated community for financial firms - the creators, distributors and users of the toxic products – what about the rest of the market!!!

NAKED SHORTS: The talking heads on TV endlessly discuss the attack of naked short sellers. I do not know who these naked short sellers are – do you?
Stocks can easily be shorted through most investment banks and on-line brokers. Bottom line – stocks go down because fundamentals are weak – period.

WHAT SHOULD BE DONE: If the equity market is so weak to warrant governmental intervention, either limit shorting on all stocks, or re-instate the uptick rule. Note: market volatility has increased since the uptick rule was eliminated on July 6, 2007. I suggest reinstating the uptick. As it stands now, the Wall Street cartel get special treatment once again.

SUGGESTED READING: I suspect many policymakers do not understand the BS that goes on at investment banks (I have worked at a few in the past). You or your staffers may benefit from reading "A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation" by Richard Bookstaber. It is a quick and lively book.
I have views on other processes in play at the moment, but I know your time is limited. If you, or your staff, have questions, feel free to contact me.

Respectfully and hopefully constructively,

Paul Dravis
San Francisco, CA