Meltdown Is Here (LEH, AIG, WM, WB, MER, FRE, FNM): Short Summmary By Jason Kelly

Another Sucker Punch Sunday
September 14, 2008

http://jasonkelly.com/

It's another sucker punch Sunday in the making. Aren't these exciting? Weekends used to be so boring, just sitting around and relaxing. Not anymore. Now they're a thrill-a-minute as we all await the latest crisis and how it's going to be fixed until the next Sunday's crisis -- with the handful of our tax dollars left over after paying for the Iraq War.

Last Sunday was the nationalization of Fannie/Freddie. That was a double popcorn and triple caffeine feature. Hard to top, but they're trying. Today, it's the sale or bailout of Lehman Brothers!

The U.S. Treasury, fresh from its buyout of the nation's mortgage industry, is balking at buying Lehman Brothers. Those stingy guys. What's another multi-billion-dollar, taxpayer-funded rescue? They've done it enough. They should be good at it by now. At least they know where to file the forms.

It's not just Lehman, though. AIG is teetering so precariously on the edge that it's planning an investor conference call on Monday to outline survival steps such as holding a garage sale to get itself "asset lite" ASAP. I'm guessing today's pre-call party at AIG HQ is a strictly BYOC event -- bring your own capital.

Washington Mutual is apparently pasting a "For Sale" sign on its headquarters, as well. You know the saying: Billion-dollar banker see, billion-dollar banker do. The groupthink must be all but irresistible at this stage.

Investors worried last week that WaMu's capital -- that's Wham You's cap it all, as in off for good -- had reached the red alert level, and sold the stock down ferociously. Here we thought after all these months that capital was strictly optional in American banking, but evidently some fuddy-duddies are still insisting on it. JPMorgan is interested in buying, and may at this rate end up owning the entire U.S. financial sector.

You won't need to bother with an ETF or sector fund anymore. No sirree, Jobless Bob. Just buy JPMorgan stock and Treasury Bonds (now that the government bought the mortgage industry) and you'll own the whole shebang. Life is getting pleasant and simple thanks to these exciting Sundays!

Merrill Lynch shares fell 17% on Thursday and another 12% on Friday, so earmark it as next Sunday's emergency rescue candidate. Somebody speed-dial JPMorgan. Oh, and get Henry Paulson on the line from the Treasury. He's a good friend of JPMorgan's, and downright convenient in a pinch when one company wants to buy another, but doesn't want to shoulder the risk of the transaction.

No problem these days. That pickle has been neatly resolved with a two-step process: One, move target firm's profitable parts to the acquiring firm's balance sheet and, two, move target firm's bad assets to the taxpayer's balance sheet so Jobless Bob can pick up the tab.

We do value teamwork in America, and nowhere is that spirit more evident than in these serendipitous Sundays, veritable grab bags of financial fun and lucre logrolling! JP, take the profit; Bob, take the bag of crap. Done! Everybody shake hands.

So pull up a chair and sit back for the show. Here comes JP, here comes Henry, and there are the Lehman Brothers mingling with Fannie and Freddie. Jobless Bob couldn't make it, but Henry was nice enough to bring his money for him.

Three cheers for teamwork! See you next Sunday.

 

So, let's see. While we're helping offshore entities destroy American Capitalism while raking in the fees, that 's good............ now:

New Push to Reduce Short Selling
By LOUISE STORY
In May, David Einhorn, one of the most vocal short-sellers on Wall Street, made no secret he was betting against Lehman Brothers.
Now, some investors are afraid that fund managers like him will take advantage of the climate of fear stirred up by the troubles of Lehman to target other weak financial firms whose declining share price would bring them rich rewards.
At emergency meetings over the weekend, the heads of major financial institutions urged Timothy R. Geitner, the president of the New York Fed, and Treasury Secretary Henry M. Paulson Jr., to consider having the Securities and Exchange Commission reinstate a temporary rule to limit the risky but potentially lucrative practice of betting on a firm’s falling share price, according to two people who were briefed on, but did not attend, the meetings. They are concerned that short-sellers might fix their gaze on big financial institutions like Merrill Lynch and the insurance giant American International Group, which also need billions of dollars in capital to strengthen their businesses.
In July, the S.E.C. briefly halted a practice known as naked short selling after speculators placed large bets that shares of Fannie Mae and Freddie Mac, the troubled mortgage giants, would decline. That also made it harder to short the stocks of 19 financial institutions, including brokerage firms like Lehman Brothers and Morgan Stanley, although the curb wound up having little impact on the price of their shares.
The investment tactic of betting a stock will slide is not new, of course. But it has become particularly controversial in the last year, when Wall Street firms started to be targeted as the credit crisis turned the financial sector upside down. Short sellers and their free market supporters say they have done nothing wrong. If anything, they say, they have merely spotted problems at financial institutions ahead of everyone else, making them a useful early warning system for the rest of the market. Critics believe they have contributed to the speed of the decline of any number of financial shares.
Short-selling against financial institutions has proven particularly lucrative for hedge funds. Mr. Einhorn’s accusations that Lehman was failing to properly account for its marks on troublesome holdings, which appear to have presaged the bank’s early report of a $2.8 billion loss for its second quarter, has presumably netted him a handsome return.
Lehman’s shares were already under pressure when he took the microphone at a large industry gathering in May to lay out his case against the investment bank. The firm, he told the crowd, had used “accounting ingenuity” to avoid large write-downs and remained tainted by bad commercial real estate investments. Mr. Einhorn stood to profit by convincing people of his view: He had been betting against Lehman’s stock — it stood at around $40 when he spoke — since July 2007, when they traded for around $70 a share.
While Lehman’s shares have declined as investors lost confidence in its ability to repair its balance sheet, in the four months after Mr. Einhorn’s remarks, short-selling played a role in the erosion. A rapid plunge in the shares to below $4 last week ultimately created the conditions that brought the 158-year old firm to its knees on Sunday.
For all his boldness, Mr. Einhorn is aware of the havoc that bank failures can create. “We would not win if Lehman went down and took the whole financial system with it,” Mr. Einhorn said in an interview in June. “An actual collapse of Lehman — that would not be a good thing.”
Other hedge fund managers recognize the dangers and the harm that is befalling bank employees who have been paid in their companies’ stocks . “My children, their playmates’ fathers work at Lehman,” said one manager who is short Lehman and asked to remain anonymous, citing the sensitivity of the situation. “Obviously I had nothing to do with what happened, and the idea that I profited, and they got clobbered, and I’ve got to see them on Monday is awkward. I feel badly for them.”
Mr. Einhorn was never shy with his criticism of Lehman. He pointed to the bank’s investments in two real estate companies, Archstone and Sun Cal, and said Lehman had not marked its mortgage assets down enough. “Lehman is one of the deniers,” he said in the June interview.
He first mentioned Lehman in a speech in October when he pointed out that the company had shifted $9 billion of mortgage securities into the “hard-to-value” category on its balance sheet. In April, he appeared unsure whether Lehman would suffer any time soon, saying “given that Lehman hasn’t reported a loss to date, there is little reason to expect that it will any time soon.” To many, Mr. Einhorn simply saw the writing on the wall early. And, hedge fund managers say, Lehman executives failed to realize how much credibility Mr. Einhorn has in the investor community. Lehman might have fared better if it raised capital or took write-offs far earlier, as Mr. Einhorn suggested.
But to some in the world of finance, Mr. Einhorn and investors like him are dangerous.
“It is really like taking a baseball bat to someone who is down,” said Jim Hardesty is president of Hardesty Capital Management in Baltimore. “A bunch of these guys with very large bats are circling around certain companies and banging them over and over again. It is unsportsmanlike conduct.”
Mr. Hardesty is among the investors who believe the S.E.C. made a mistake in allowing the temporary curb to slow the impact of short-selling to expire.
Hedge fund managers who focus on shorting companies stand out in the industry in an otherwise terrible trading year. Hedge funds are down more than 4 percent but short-focused hedge funds are up 9.76 percent, said Hedge Fund Research, a firm in Chicago.
Ironically, Mr. Einhorn’s fund, Greenlight Capital, is down 4.3 percent this year through Aug. 22, according to HSBC (he also invests in stocks, as well as shorting them). His is a so-called long-short fund, which means he invests $2 buying shares in companies for every $1 he places shorting other companies. One company he took a positive view on in recent years was New Century, one of the first subprime mortgage lenders to file for bankruptcy.
Mr. Einhorn declined to comment for this article and a spokesman would not say if he is still short Lehman’s stock or on what day he exited the position.

Eric Dash contributed reporting.

 

Hey Bylo - you realize this guy's strategy has been averaging down into indexes and xlf for quite some time? No wonder why hes so bitter.

 

Yep. Value investors have gotten absolutely slaughtered, especially trying to catch any bottom in financials.