The Financial Markets MAD

(From WSJ of Oct. 10, 2008: Would this weekend , the G7 meeting, give some hope to the mindless bloodletting going on the world financial markets? I am using this post to serve as a reference point for the future-Sid)

OCTOBER 10, 2008, 2:38 P.M. ET

Dow Continues Historic Slide

By PETER A. MCKAY

Stocks' relentless slide continued Friday, leaving the Dow Jones Industrial Average poised to register the bloodiest weekly drop in its 112-year history.

The Dow Jones Industrial Average fell more than 600 points shortly after the opening bell, sliding below the 8000 mark intraday for the first time since April 1, 2003. Blue chips quickly moved off those levels, and at one point managed to climb into positive territory. But in recent trade, the Dow was off about 480 points at around 8100.

The S&P 500 Index was down about 58 points at around 851, with energy and consumer-discretionary stocks seeing sharp losses. Industrials stocks were also hammered. The Nasdaq Composite Index lost about 87 points to trade around 1557.

An early rebound in financial stocks played a part in moving the market off its opening lows. But banks saw their shares sink back into negative ground after the initial results for an auction of credit-default swaps tied to Lehman Brothers bonds. The auction set the recovery rate on the firm's senior debt at 8.625 cents on the dollar, suggesting hefty losses for holders of the swaps.

The recent freeze-up in the CDS market has hurt many hedge funds, said David Kotok, president of Cumberland Advisors in Vineland, N.J. He said that much of the recent stock selloff has come as hedge funds unwound a popular trading strategy in which they would buy a company's stock and then buy credit-default protection on the same company, since that protection would tend to go up in value as the stock or index went down.

But as CDS paper has become ever more difficult to value -- or fallen in value in cases where a price can be set amid doubts that the sellers of the insurance-like contracts can make good on their commitments -- many funds have been forced to raise cash to meet margin calls. To do that, they sell stock, which is easy to unload on a public exchange compared to opaque, privately negotiated CDS trades.

"As all this is going on, you have average Joe investors who are getting more nervous as they watch on the sidelines, they don't quite understand the trade, and so they just pile on and sell their stock as well," intensifying the market's slide, said Mr. Kotok. "It's just feeding on itself."

The Dow is threatening to extend a seven-day losing streak during which it has shed nearly 21%. Heading into Friday, the average was down 17% this week. The stock market has so far avoided a one-day plunge of 10%, the traditional definition of a crash. But even in the two instances when such a single-day drop did happen, in 1929 and 1987, the full-week bloodletting was not as bad.

"In some ways, this is worse than '87," said James D. Baer, a managing member at Uhlmann Price Securities, a Chicago brokerage. Alluding to the previous session's 678-point drop, he added: "Going down 600 points a day adds up, but you're not getting a one-day purge," to shake sellers out of the market and pave the way for a renewed rally.

Mr. Baer, who was a Treasury-futures trader on the floor of the Chicago Board of Trade in 1987, said, "I've never seen a credit market like this one. The fear has gotten way ahead of the fundamentals," including an unprecedented round of coordinated central-bank rate cuts this week that would normally prompt banks to increase their lending to one another.

Tony Saliba, chief executive of the Chicago options brokerage LiquidPoint, said the market's recent slide "has been anticipated to some extent, since you had the market at records without much behind it fundamentally."

"Coming into this move, you've had a lot of people buying options for protection" against unexpected declines in their stock portfolios, said Mr. Saliba. "You have a lot more buying now, but anyone who's doing that is coming late to the game."

The Chicago Board Options Exchange Volatility Index surged 16% on Friday, climbing above 74 for the first time.

Many Wall Street veterans believe the roots of the selloff lie in the interbank lending market, where tensions aren't easing. Three-month Libor, a key lending benchmark for loans of U.S. dollars, climbed to 4.81875% Friday, the highest in nearly 10 months, up from 4.75% a day earlier. The jump overshadowed a sharp drop in the overnight rate.

The losses for U.S. stocks followed a plunge Friday in international markets, which itself came after a late-day rout Thursday in the U.S. In Asia, Tokyo's Nikkei Index dropped 881.06 points, or 9.6%, to 8276.43, its lowest level since May 2003. Since the start of this week, the benchmark index has lost 24% of its value.

In Hong Kong, the Hang Seng Index plunged 7.2% after falling by more than 9.5% intraday. Australia's S&P/ASX 200 ended down 8.3%, in its biggest one-day percentage loss ever. The U.K.'s FTSE 100 Index fell 8.4%.

This week has seen an unprecedented coordinated rate cut by six central banks, a comprehensive bailout plan for U.K. banks and a move by the U.S. Federal Reserve to lend directly to borrowers in the commercial paper market. And yet markets have continued to plunge.

"Despite the innovative and, in our view, comprehensive actions taken by the UK government and central banks, the sell-off in equity markets continues apace as relief in pricings of various credit and money markets have failed to materialise," says Robert Quinn, equity strategist at Standard & Poor's in London.

After a late-Thursday warning from Moody's on the credit ratings of Morgan Stanley and Goldman Sachs, shares of the banks fell. Morgan Stanley recently slid 41% while Goldman dropped 19%.

Crude-oil futures continued a months-long slump, falling below $78 a barrel, and commodities generally suffered a broad-based selloff Friday.

"The oil market is in the same carnage and liquidation that we have seen in other markets," said Peter Donovan, vice president with Vantage Trading, who was speaking from the trading floor at the New York Mercantile Exchange. "Everyday, we see the Dow Jones industrial get crushed, we are getting crushed," he said. Oil traders have ignored the news of OPEC's call for an emergency meeting on November 18.

"There's such a herd mentality in every market, once the selling tide and wave starts, it's really hard to stop it," he said. While many believe the selloff in commodities is overdone, traders are still waiting on the sideline and reluctant to get back into the market as the general trend is pointing downward.

—Carolyn Cui and Jeannie Clarke contributed to this article

(Mine) Who will inherit the Earth?

(NYT, Oct. 4, 2008)
By Judith Warner

October 2, 2008, 10:02 pm

Waiting for Schadenfreude

A couple of years ago, at the height of the boom, a friend in New York publishing described to me the indignities of being a five-figure employee commuting daily from suburban New Jersey on trains packed with traders, stock brokers and hedge-fund types.

“These were the guys who, in college, I used to step over on Sunday mornings when they were lying in a pool of their own vomit,” he said. “And now they’re earning millions and millions – in bonuses alone.”

The image, as you might imagine, stuck in my mind. For it summed up so well a certain kind of resentment and sense of injustice that a particular class of non-monied professionals in the New York area came to feel sometime in the late 1990s.

The feeling of injustice wasn’t just about money, though it was partly about being more than solidly middle class and still struggling to pay the bills, as New York writer Vince Passaro captured so well in his “Reflections on the Art of Going Broke” (“Who’ll Stop the Drain?”) in Harper’s in 1998.

It was, rather, about a sense that the wrong people had inherited the earth.

They had taken over everything. Their salaries (and bonuses in particular) had pushed real estate costs and living expenses sky-high. Their values had permeated every aspect of life. And their choices seemed to have become the only acceptable — even viable — ones possible.

In the 1970s, even in New York, it had been financially possible for a middle class family to survive if parents — even one parent — built a professional life around something other than purely making money. In the 1980s — even in the “greed is good” (which was of course meant to be a damning phrase) 1980s — it seemed respectable, honorable and, dare I say, valuable to do things other than make a lot of money. But by the late 1990s, in New York, if you weren’t in the financial industry, it was hard to survive.

And so it went, in a more general way, throughout the country, in the whole winner-take-all-era ushered in by the boom years of the late 1990s. The model for success narrowed. The goal posts marking success grew more out of reach. For all the people who did something with their lives other than doggedly, single-mindedly — and successfully — pursuing wealth (“You mean, some people’s jobs are just about making money?” Julia once asked me in the course of one of our “What the World is About” conversations), life got harder and scarier and more confusing.

Many of us who’d proudly decided, in our twenties, to pursue edifying or creative, or “helping” professions, woke up to realize, once we had families, that we’d perhaps been irresponsible. We couldn’t save for college. We could barely save for retirement. If we set up a “family-friendly” lifestyle, we threw our financial futures down the drain.

So, like just about everyone, we worked hard and treaded water, but felt we were entitled to do better than that. And if we lived in the New York area, or another similarly wealthy area where the spoils of the new Gilded Age were constantly thrust in our faces, we felt, like my friend on the train, a little something more: we knew that we were losers.

(“The Big L,” a friend, an art school grad turned design consultant, declared last week, calling me in tears after her stockbroker told her how little she cared about her modest portfolio. “Why not just brand it right on my forehead and be done with it?”)

This financial crisis is supposed to be a big moment of reckoning. “666-Mark of the Beast” and “Root of all Evil” the End-of-World Web sites are shouting, quoting prominent economists on the demise of the American banking system. “Wall Street, R.I.P.”, a headline in The Times proclaimed last weekend. “The Master of the Universe Era is over,” New York magazine chimed in.

For those of us who have hated this period — the wealth worship, the wealth gap, the elevation of everything suspiciously shiny and irrationally bubbly and stupidly ebullient, there should be some feeling of vindication. But it just isn’t coming. A great emptiness — and a gnawing kind of fear — has taken its place.

After 9/11, psychologists said that the tragedy and trauma would magnify whatever emotional state people were already experiencing. Depressed people would become much more depressed. Anxious people would become much more anxious.

The current financial crisis has, I think, proven to be a similar sort of emotional Rorschach test. People who felt impotent feel even more powerless. Those who felt lied to see new levels of conspiracy. Demagogues are engaging in even more demagoguery.

And those of us who felt, well, like losers, are feeling like even bigger losers, as we shove our unopened 401K or (if we’re double-loser freelancers) SEP-IRA statements into bottom desk drawers and wait for a cathartic burst of schadenfreude that simply refuses to come.

Schadenfreude is impossible because the fat cats — the ones who bent the rules, the ones who pushed the envelopes, the ones who paid lower taxes because capital gains were most of their income, the ones who opposed regulations on the banking and mortgage industries — are taking us down with them.

The very wealthiest are, as always, likely to do just fine. Real, hard-core Wall Street, as Tom Wolfe reminded us last weekend, long ago decamped for the hedge funds of Greenwich. The political leaders who allowed this mess to develop have turned into the great defenders of “Main Street.” (If I have to hear the juxtaposition of “Main Street” and “Wall Street” one more time, I will be the one drowning in a pool of vomit.). It’s a whole host of other people — vulnerable middle class homeowners and small business owners and, now, universities unable to make payroll — who are hurting.

I called my friend in publishing yesterday to ask him how things were going on the train.

“There’s a lot of rueful chuckling. There’s a lot of talk about riding this out, about maintaining,” is all he had to say.

It was 23 years ago that Tom Wolfe introduced us to the Masters of the Universe. They were curiosities then — remote, very rich, and decidedly not like you and me. But now, the world of Wall Street has become our world; there is no outside to it, there is no other option than to pay and play. Our fortunes rise and fall together to a degree like never before, and our values are enmeshed like never before. The language of Wall Street — of cost-cutting and efficiency, self-interest, using each situation to maximize profit, is the language of everyday life and social interaction.

We’re all losers now. There’s no pleasure to it.