Monday, March 24, 2008

Hussman on Bear

I only read Hussman on and off but he is dead on here which is why I have continued to short Bear (and been wrong might I add). I have avoided going off on the Fed and the travesty of everything that has happened but Hussman does it for me. In the end it doesn't matter so I try not to get upset about it. You got to make money within the system and its current rules not the systems old rules or how it should be. You have to evolve so when the system changes illegally and you take losses lick your wounds and adjust to work within the system. I do strongly recommend reading this whole thing though. As readers of my blog know, I agree with him in that we are not done heading down.

http://hussmanfunds.com/wmc/wmc080324.htm

Alarmingly, immediately after the pixels dried on last week's comment (noting “the Fed is emphatically not taking the default risk of the mortgage market onto itself” with these term facilities), details emerged that the Fed had agreed to a very different deal in its attempt to rescue Bear Stearns. This is a major and ominous departure from historical Fed policy, and from legality.

I'll cut straight to the chase.

Bear Stearns is trading at $6 instead of $2 because unelected bureaucrats went beyond their legal mandates, delivered a windfall to a single private company at public expense, entered agreements that violate the the public trust, and created a situation where even if the bureaucratic malfeasance stands, the shareholders of Bear Stearns will either reject the deal or be deprived of their right to determine the fate of the company they own.

and

Rick Santelli of CNBC is exactly right. If this is how the U.S. government is going to operate in a democratic, free-market society, “we might as well put a hammer and sickle on the flag.”

and

No, this is not a loan. It is a put option granted by the Fed to J.P. Morgan on a basket of toxic securities. And it is not legal.

and

Again, this is not water under the bridge, and the deal struck last week should not be allowed to stand if we care at all about the integrity of the capital markets. The Long-Term Capital crisis was resolved by a consortium of financial institutions providing capital in return for ownership. The panic of 1907 was resolved the same way. This deal should be busted, and fast.

and

If the market was “certain to crash” in the event that Bear Stearns failed, then the market is certain to crash anyway, because Bear Stearns wasn't the last shoe to drop – it was one of the first. Unfortunately, we're standing in a shoe store. Wasn't the market “certain to crash” without the Fed's surprise rate cut in January too? At what point will investors figure out that the liquidity problems are nothing but the precursors of insolvency problems? At what point will investors stop begging the government to save private companies and recognize that the losses should be taken by the stock and bondholders of the offending financial institutions? If the Fed and the Treasury are smart, they will act quickly to figure out how to respond to multiple events like we've seen in recent days, to expedite turnover in ownership and quickly settle the residual claims of bondholders, without the kind of malfeasance reflected in the Bear Stearns rescue.

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