Extract:

For me the basic dynamic of the mortgage bubble is some Ivy League dickwad hawking a billion dollars of securitized subprime mortgages to a pension fund, and then Hobie-sailing off into the sunset with a bonus after they all blow up. Of course my seeing it that way might have a lot to do with my own personal psychological prejudices, and I get that some other person with different hangups might choose to focus on Barney Frank deciding to “roll the dice on home ownership” with the GSEs…

This GSE story is a big one, but if it gets used as a path back to a “The Market Reacted Rationally” version of history, we’re screwed. It has to be looked at as an important part of a diabolical whole, a symbiotic scheme in which the banks and the state were irreversibly intertwined in an enterprise that on both sides was never about market economics, but crime. Because otherwise… the diversionary notion that one side or the other is wholly to blame is part of what makes the whole scam possible…“

Or perhaps the dysfunctional government article referred to in my previous post is a deliberate smokescreen?

http://jessescrossroadscafe.blogspot.com/2010/01/class-warfare.html

http://trueslant.com/matttaibbi/2010/01/04/fannie-freddie-and-the-new-red-and-blue/#

http://www.zerohedge.com/article/origins-american-kleptocracy

More comment:

http://www.nakedcapitalism.com/2010/01/limiting-the-destruction-wrought-by-irrational-exuberance-in-a-one-party-state.html

But there’s a price we all will pay If politicians won’t display A little courage and crack down Upon these unsafe, grasping clowns: Another bomb is being built, By bankers with no sense of guilt.

http://www​.ft.com/cm​s/s/0/76d4​eabc-f41a-​11de-ac55-​00144feab4​9a.html

Expect main street to follow this exemplary model?  Will bad companies will be lumped together to form TBTF entities that will get bailed out by their governments?  Will the MSM even notice?

Corporate CEOs are getting a lot of the blame for the economic meltdown. But what about the people who hire and fire them? Strategic News Service publisher Mark Anderson shares his Open Letter to the Board of Directors with KPLU’s Dave Meyer.

Listen Now

A day earlier, a US investment expert (in London at the moment) exhorted the US audience at MSNBC to reinstate the “uptick rule”, one of the many regulations cleared away in the last few years, which prevented shorts from just piling on without an interim uptick.  Citibank asked for the same assist today.

Finally, John Bogle (Vanguard co-founder) has now come out strongly against what I’ve been calling Vampire Investors; he figures they take about $600B a year out of the US financial system, without adding value.  He actually says they subtract value.

One of these classes of Vampires are a certain category of shorts.

One view of shorts is that they are the other half of a natural balance: long vs. short.  Simple, eh?

Another is that they form a necessary part of any arbitrage play, and so provide natural risk aversion and stabilization to — to what?   To individuals, hedge funds, or the market?

I would suggest that the natural balance of things is represented not by long vs. short, but by buy vs. sell.

Shorts operate in various ways, but the most insidious, I think, is the Jackal Trade, where you see a whole bunch of jackals pick a target (in the last few weeks, we’ve seen a long list of examples in the financial sector), and then attack it in concert, driving the price down even as they make money on the decline.

Does this add value?  No.  Does this stabilize the market?  Just the opposite: it is perhaps the primary danger equities markets face today.  Can we count on the self-interest of shorts to stop doing it when it endangers otherwise-healthy companies, or even whole market segments?  Obviously not; they won’t stop as long as there is money to be made – and why should they?

Australia outlawed shorts in September.

I think it is time for serious consideration to be given not just to stopping shorts in the financial sector, but in the markets.  Perhaps there is some alternative way to provide some hedging range of offlaying risk, without allowing shorts to drive global banking stocks down 40% in a day.  If so, fine.

But the SEC and friends have to bring this carnage to a stop.  It has nothing to do with capitalism, everything to do with market manipulation, and it is wreaking incredible damage at a time when we need serious repairs.

If there is any reasoning going on on the Street, it is a switch from a day earlier, when The Pack thought that all financials were worthless, to post-AIG save, when they suddenly realized this was not true, and that the government was probably going to win in preventing (short term) financial meltdown.

As readers of our newsletter will already have guessed, I was impressed, and a bit surprised, that Chis Cox put a stop to all shorts trading in financials for a couple of weeks.  No doubt, this came as a result of his conversation with John Mack, whose shares were next to go under attack, and from Hank Paulson.

This raises lots of really interesting questions about market dynamics in general.

The boys at the top seem to be admitting a failure in our economic system, about which I’ve been warning for a while, under the term “vampire investing.”  What is the future of a society or country in which a highly educated, highly motivated group of people find a way to extract money from all kinds of transactions, without adding value?

This is no different than a tax; it is just a private tax, paid to some unknown trading desk.

And the answer to the not-rhetorical question above is simple: eventually, this drag on transactions puts the company or country at a distinct competitive disadvantage.  (It is no excuse, but it probably increases pressure to deliver undeliverable profits, and paves the way to unnatural acts like bundling mis-labeled CDOs and selling them to small towns in Norway.)  It’s like a tire with a leak; the system eventually goes flat.

This is different from supply and demand and other market dynamics, and watching short teams gang up on banks in an orchestrated series of orderly attacks brings exactly the kind of example everyone can agree upon.  Why allow this kind of behavior at all?

Yes, there are reasons.  But those reasons are much less attractive this weekend morning than they were a week ago, or five years ago.  Allowing jackals to pull apart working institutions within minutes, hours or days of an attack, is not the smartest aspect of a regulatory system.  And, as if the publication of short positions isn’t enough flag for the rest of the shorts, and the following investment community, there are the efforts to insert often-false and always-negative information into the news flow about the target company.  This, too, does not serve any standard supply and demand theory.

I would go so far as to assert that, even if the stocks are the target of the discussion, and not the companies themselves or the products and services they provide, it is difficult to make the case for a good deal of the shorting that goes on on the Street.

I don’t expect that Cox is up to this task, but no doubt he will not be the person asked to fix the problem.

Whoever they are, one hopes they begin by dealing with reality, on the street, vs. some outdated theory of supply and demand.