Tuesday, October 14, 2008
(Cont'd from above)...

Two reasons...

First, it saves us from the abyss... It takes the Great Depression - the sequel - scenario off the table... and I believe that.

Second, which may be just as important, and you're about to find out a behind-the-scenes story that you've never heard before... It may be just as important, if you're an investor... because it puts a stop to the short-selling gravy train... the behind-the-scenes war against capitalism that the foolish SEC - who's suppose to regulate things for you - has aided and abetted until just a few short weeks ago...

Ahh, until this morning, life was easy if you were a bear... if you were a bank short seller... You were pretty much entirely in control of how the money was allocated in the financial sector. You could knock down, with ease, any of these banks that just got federal protection to stay in business.

You know what I called it?... I called it "bank barrel fishing"... the idea that any bank could fall apart, simply because the short sellers decided it should be so... so their rich clients could profit from the demise of these institutions... sent a could chill of fear down the spine of every manager out there... every corporation out there... every individual out there... who wasn't in on the big short-selling game...

Oh yeah, it shook everybody to the core, and made them not want to invest in new bank preferred (stock)... that's the way banks finance big loans... out of irrational fear, inspired by the incredibly reckless decision by the Federal Reserve and Treasury to let Lehman Brothers fail. These potential bank investors pulled their money out of savings deposits and put it into treasuries... and we were knocking on the door of financial Armageddon as recently as Friday.

So, I'm going to do something I've never done before...

I'm going to give you the real skinny about how this worked... about how you lost trillions of dollars at the hands of short sellers... And, by the way, the short sellers would never agree they did this... But let me tell you how it's done... let me tell you exactly how the shorts accomplished this feat of destroying well-run firms in the name of profits for their wealthy clients. And now why that anti-capitalist game is, at last, over... at least when it comes to the banks.

You know, I searched the English language for a term that conveys what the shorts were doing, and I come up short... The best I could summon is to take out my German dictionary, and use a German term for a decisive battle of encirclement and annihilation... because that was the shorts' plan... and it's called a Kesselschlacht... and it has worked continuously against all the banks or brokers that you keep your money in, or that you may own, or that run your mutual funds or sell your insurance. They Kesselschlacht'd against you...

Here's how this battle of annihilation and encirclement worked, how the short gravy train operated...

If you were a short seller, you would pick a financial... any financial... you know, one that requires trust and confidence... and then you would target it, and destroy it, and encircle it... with rumors and articles and anything else you needed to instill panic... and we all knew this was going on... The government knew what was going on... the government kind of liked it, although they didn't do anything about it...

I saw it happen to every one of the outfits that received government protection last night...

For example, out of whole cloth, let's just say, hypothetically, you decided to operate on State Street Corp. (STT)... that was one that got protection... to knock it down... make a little money knocking STT, stamping it down, like it was a bug, okay. It was done on many occasions... perhaps why it merited the protection racket...

First the shorts, acting, of course, collectively with the same mindset, would put down, say, $25 million to buy credit default swaps... bear with me... I mean to talk over your head... I didn't know what they were either... That's betting against STT's debt... it's bonds... Swap are... let's speak in English, because everyone understands this... They're basically life insurance policies on debt. But, unlike life insurance, anybody can take out a policy, not (just) a loving beneficiary. I mean, for instance, let's say you're planning to murder the institution you're buying swaps for. That's right, think of it this way... this will be a good way to get it... You hate your neighbor... well, I'm not too keen on mine... no, I take it back. You hate your neighbor and you buy fire insurance on the neighbor's house... and then, you set the house on fire!... which works in this metaphor, because financial arson's legal in this game, thanks to our SEC, which blesses it... and you make hay while STT's house burns! Thanks SEC! It's totally legal!...

Then short sellers buy as many put contracts... put options... that allow them to profit if a stock goes down... as they are allowed to... The SEC loves that game too! After they push the stock down with endless selling of shares they don't own, or didn't even bother to borrow... Again, until only very recently, a practice that Christopher Cox - the SEC guy - loved... and his pro- short selling SEC said two thumbs up to...

After the first shorts push the stocks down, big and noisily, all of their like-minded friends would join them in a gigantic bear raid blessed by the government... It was an Ursa Major Tupperware party!... Again, in this completely hypothetical situation...

Once they got the stock going downhill, they'd buy another set of credit default swaps... and pay a higher price than before, to show people that things had really deteriorated... The cost of the insurance didn't matter, even if they paid up, because they knew they were going to win... and these contracts are unregulated anyway, because of the SEC...

The shorts, what do they want to do?...

They wanted to create panic!... Good job... SEC-endorsed panic!...

Then they called the media to talk about how everyone's pulling their money out of the institutions, be it State Street, Bank of New York (BK), Goldman Sachs (GS*), Prime Brokers... it didn't matter... and how the credit default swaps are spiking... spiking huge! So the media went out and reported a really juicy story... one that the company's helpless to refute... of course... because the problem was caused by the short sellers themselves, not by the core business... and the stock gets slammed again!...

Other hedge funds hear about it and they short the stock down further... (acting as if he's on the phone)... "Hey, I'm hearing real bad things about State Street... short some, short 500 million shares of State Street. Take it down to $5... "

That's the kind of nonsense that would go on. Then the longs (i.e., long-term shareholders) would panic, and the spineless, helpless ratings agencies, like Moody's and Standard & Poors... they too would panic, and they would furiously downgrade State Street's debt... again, a hypothetical... the debt that the shorts had bought the insurance on... making that insurance more valuable than ever.

Then the real clients of the bank... Oh, my God... They'd be so frightened, they would sell, sell, sell... because they didn't want to be caught dead in a company that their clients had read and heard about was in trouble.

The clueless credit rating agencies just figure out that, well, where there's smoke, there's go to be fire, right? Or why else would the stock be down in the first place?...

They too are the unwitting agents of the short sellers...

Then the remaining clients pull their money out, the banks pull their credit lines, and that's really all she wrote for whatever institution they attack.


Hey, by the way, that's how Morgan Stanley, legally almost went out of business last Friday, with the government holding off that infusion of capital from the Japanese (i.e., Mitsubishi)... waiting for anti-trust to clear... As they're merging every bank in the world, they suddenly have anti-trust concerns...

Hey, believe me... check out MS... It was at $7, because of the Kesselschlacht last Friday... It was a wonderfully-executed short selling Kesselschlacht that got the SEC seal of approval, even as its CEO, John Mack... a nice guy trying hard to save his firm... silly him... trying to negotiate a lifeline with the Japanese...

The shorts almost cut that lifeline and Mack knew it, but the regulators didn't understand it, and we literally came within 48 hours of elimination of a company that I actually think is pretty good, Morgan Stanley (MS*)... I own it for my charitable trust... I don't know, it seems like a legitimate outfit. What a win that would have been for the bad guys. I guess the SEC would have loved that too.

The SEC's earlier move to ban short selling (of the financials) was just stupid. It didn't solve the chief problem... the need for capital... unlimited capital... and insurance on the debt that destroyed the credit default nonsense that made the shorts so successful.

After all, you can't bet against debt insured by the U.S. government. That's just a waste of short sellers money. That's why the new plan might work. It taps into the newest, greatest sovereign fund out there... the sovereign fund of the United States of America which, coincidentally perhaps, doesn't want Morgan Stanley to go out of business... or Goldman (Sachs)... The government doesn't want J.P. Morgan to go out of business. State Street... they want it to survive... Someone better tell the SEC... Maybe don't wake them up...

Anyway, because the sovereign fund insures bank debt and gives the banks lending firepower, in return for a Good Housekeeping seal of solvency, the principal tool of encirclement is now busted, the bear raids will be stopped, and something that helped cause the first Great Depression has now been put behind us, making the Great Depression Part 2 a lot less likely...

Do you know... I wish I were being facetious about anything in this story... Do you know what a travesty has gone on in this country?... Unwittingly, not known by President Bush, who is not sophisticated enough to understand it... not known by Treasury, who should have, because that guy (i.e., Treasury Secretary, Hank Paulson) worked at Goldman Sachs... completely unknown by (Federal Reserve chairman) Ben "Princeton" Bernanke, who's never seen what it's like to destroy a company... and (SEC chairman) Christopher Cox... well, hands off Cox... Hey listen... the longs and the shorts... they're equal. There is no interest to protect here....

Yeah, bottom line...

The bottom line!:   It's time for the shorts to cover, and move on from the financials... Go onto the autos, go onto the industrials... go do whatever the heck you want... because their trade... their era of anti-capital allocation is, at last, over. The financials are no longer walking bullseyes, and a large-scale banking collapse, followed by a second Great Depression, is off the table. All because the European socialists broke the cycle which made the shorts so much money, and brought so many banks close to destruction... Hey, it only cost them $750 billion... the U.S. government... to figure out something that I could have told them has been going on for a year and a half now.   My show's for free...

Read Jim's next Segment here