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What a buffoon, how pathetic was this? The markets sure didn’t like it.

In Debt Downgrade Aftermath, Obama Serves Up a Silly Speech

First, do no harm. That is a useful injunction for doctors, lawyers, and, it turns out, U.S. presidents.

But President Obama’s useless speech Monday about the basic soundness of the American economy managed to reinforce all the concerns Americans on the left and right have about his stewardship of the country.

The speech did at least temporary harm. As soon as he finished speaking, the already jittery financial markets plunged.

. . .

His calm, passionless, “voice of reason” message, without a single new proposal except his pledge to make specific proposals in the future and work with the Congressionally designated super-committee to address the deficit and debt crises – “leading from behind again” – actually panicked the markets. And no wonder. Americans were looking for a leader, and what we got was the professor again.

See also:
Dow plunges as Obama says US A-OK
Presidential Failure
Matt Gurney: Obama’s speech writers should have their salaries downgraded
Obama’s jobs-message problem
Obama’s Jobs Message Isn’t Catching On
The Washington-Wall Street Disconnect Grows Even Wider
The most powerful man on Earth?
World’s Most Powerful Man Seems … Powerless
Republicans pan Obama’s speech
Democratic logic downgraded

If Obama can’t lead the economy out of the wilderness, he needs to at least call off his regulatory zealots and generally get out of the way. I’m guessing his resignation would be too much to expect from someone so obsessed with himself.

/Obama wouldn’t know sound economic policy if you tattooed it on his forehead backward, so he could read it in the mirror

What The Hell Happened?

It’s been over 24 hours now and still no one has any idea as to what caused Thursday’s bogus market plunge. Needless to say, that’s not good.

Yesterday’s market swerve: fat fingers, glitch, or cyber-warfare?

Theories about yesterday’s stock market swoon, where within a matter of 20 minutes, the stock market plunged by 1,000 points and then nearly completely recovered, are abounding. Fortune asked Rishi Narang, founder of the hedge fund Telesis Capital and author of Inside the Black Box, to share the theories he’s heard and handicap them in terms of likelihood and plausibility.

Narang, who uses high-frequency trading techniques, explains why high-frequency traders got out of the market during the dive, and why the catalyst for the drop is far more important to understand than the drop itself:

What happened yesterday?

There are two points to understand. First, what catalyzed the activity? What was the reason for the market wanting to fall? It might be that the catalyst was of such size that it overwhelmed all other factors. There are three plausible theories:

1) The fat finger. Plausible, but unlikely. Typing in billions with a “b” versus millions with an “m” seems impossible. Trading systems don’t work that way. More likely, the trading system accepts the sell/buy amount in thousands. Some trader in the heat of the moment forgets it’s in thousands, types in an order for 16,000,000 instead of 16,000. That kind of thing seems far more plausible.

But even then: why on Earth would the trading entry system not have a sanity check? For almost no one in the world is a $16 billion sell order okay to send out as soon as it’s entered. The trader should be fired, along with everyone in the IT department. If this happened, most likely, it was something along those lines. If it wasn’t all one order, maybe it was meant to sell just $1 billion shares but was sent 3 or 5 times instead of once.

2) Software error. Plausible, likely, but doesn’t fit the facts. Here, the trading software is in a recursive loop, pounding out sell orders due to a bug somewhere in the software. In a sense, this is more plausible, more likely, but doesn’t seem to fit the facts well enough.

The speed of the decline in the market just doesn’t seem to fit — should be a series of small orders, not a series of large orders. In 7 minutes we saw a 580-point drop. That doesn’t look like a recursive loop. But there is a lot of software, and somewhere a bug is bound to exist. You can easily imagine a software glitch happening. Things go buggy. Like the Toyota [accelerator] problem, at heart a software problem. Technology is a two-edged sword, and this is the other edge of the sword. We rely on software, but it’s not always written well enough.

3) Computer hacking. Implausible without proof, but possible. This is the most interesting theory because we know terrorists are interested in cyberterrorism. We know they would target the financial markets. We know a great day to launch an attack would be one with a mild bit of panic [due to the Greek crisis and sovereign debt downgrades].

Some other really crazy things happened with stocks, like Accenture and Exelon. [Both stocks traded for one cent for short periods of time.] Two parties really transacted on these trades [at one cent], even though they were later busted and cancelled. If it was just high-frequency traders bailing out, why wouldn’t [that drop] happen on every stock? It just doesn’t add up. Things are too idiosyncratic and that feels uncomfortable. This also happened in the options markets, but again, only on a handful of options.

And the second point to understand?

That’s the question of the enabler. What, if anything perpetuated the selloff? And did so in seconds? There’s a lot of speculation about high-frequency traders vanishing from the marketplace.

The consensus is that high-frequency guys didn’t provide the liquidity and that’s what allowed for prices like one penny on Accenture. I do know for sure that high-frequency traders backed off, but old school market makers would’ve done the same thing, in a little bit different way. They just would’ve created super-wide market spreads. Same thing.

We shouldn’t be so sanguine about taxes and impediments to high-frequency trading if we are upset when high-frequency traders leave the market. Those are incompatible ideas.

As a side point: traders have stop loss levels; one big move triggers other moves. There are systematic, discretionary, and plain-old panic trades.

But for all of those styles and programs, once they see the stock market fall 6%, a liquidation effect takes hold. That’s just a function of people. Someone screams fire, and if enough people start running, everyone will. Those are the dynamics of computer software, people, animals, fires, whatever. It’s how we work. That kind of stampeding effect could easily be part of the response.

But the speed of the market falling down, going back up, and partway back down again? If this was really a stampede, why not repeat the 1987 crash [which kept going]? Nothing ‘stopped’ this crash except that the catalyst seemed to have ended.

If it was an error or a software bug, it stopped. If it was a hack, the hackers left. In other words, the enabling side of this drop is totally irrelevant [to the catalyst]. The only interesting thing here is the catalyst. If this was a gas pedal that was stuck, it would’ve looked differently, kept going.

Whether this was intentional or unintentional, it happened all at once. If it was an intentional [attack], then the question is, was it a demonstration, a test, or the attack itself? Whatever it was, we didn’t stop it. It stopped itself.

See also:
Regulators Are Stumped by Drop
NYSE, Nasdaq bicker over stock-market drop
Plunge highlights fragmented markets, fast traders
Stock Market Crash? Or Trading Error?
Theories abound about how the 1,000 point Dow drop occurred
UPDATE: Everyone Seeks Answers Behind Stock Market’s Rout
Programs, NYSE Circuit Breakers Contribute To Market Plunge
Nasdaq cancels the trade of 296 stocks after Thursday’s Wall Street stock market crash
SEC reviewing Thursday’s sudden stock market drop
SEC Said to Outline Possible Causes of Market Plunge (Update1)
House panel to hold stock market inquiry

All I can say is that the investigators at the SEC had better get off their asses, take a break from their prodigious porn surfing, and get to the bottom of what exactly caused Thursday’s bogus market plunge. And they had better come up with a definitive answer quickly.

/the ongoing inability of exchange operators and regulators to pinpoint the problem is beginning to shake market confidence even more than the bogus plunge itself

The Banks And Car Companies Are Not Enough!

Obama must have more power, more control! He must reign over everything, the entire U.S. economy belongs to him! You cannot be trusted with capitalism and free markets. Obama knows best and Obama has spoken.

New Foundation, New Stability

Over the past decades, government has often haphazardly weakened and jettisoned the regulations on the financial sector that were designed to bring stability to the economy. The result has been what the President refers to as a “bubble and bust” economy, leaving American families at the whim of greed and excess far beyond their control and hundreds of miles away. As the President said today, it is indisputable that this peril was a leading contributor the economic breakdown America has seen over the past years.

Today marked a culmination of a months-long process in which the President consulted with the most expert and experienced regulators, leaders in Congress, and his entire economic team to craft a revamping of the system, a “new foundation” on which our economy can grow for decades to come. Many of them joined him today as he announced the principles they had agreed upon.

The President began his remarks by diagnosing the problem:

In recent years, financial innovators, seeking an edge in the marketplace, produced a huge variety of new and complex financial instruments. And these products, such as asset-based securities, were designed to spread risk, but unfortunately ended up concentrating risk. Loans were sold to banks, banks packaged these loans into securities, investors bought these securities often with little insight into the risks to which they were exposed. And it was easy money — while it lasted. But these schemes were built on a pile of sand. And as the appetite for these products grew, lenders lowered standards to attract new borrowers. Many Americans bought homes and borrowed money without being adequately informed of the terms, and often without accepting the responsibilities.

Meanwhile, executive compensation — unmoored from long-term performance or even reality — rewarded recklessness rather than responsibility. And this wasn’t just the failure of individuals; this was a failure of the entire system. The actions of many firms escaped scrutiny. In some cases, the dealings of these institutions were so complex and opaque that few inside or outside these companies understood what was happening. Where there were gaps in the rules, regulators lacked the authority to take action. Where there were overlaps, regulators lacked accountability for their inaction.

. . .

The President concluded by making clear the necessity of the solution:

There’s always been a tension between those who place their faith in the invisible hand of the marketplace and those who place more trust in the guiding hand of the government — and that tension isn’t a bad thing. It gives rise to healthy debates and creates a dynamism that makes it possible for us to adapt and grow. For we know that markets are not an unalloyed force for either good or for ill. In many ways, our financial system reflects us. In the aggregate of countless independent decisions, we see the potential for creativity — and the potential for abuse. We see the capacity for innovations that make our economy stronger — and for innovations that exploit our economy’s weaknesses.

We are called upon to put in place those reforms that allow our best qualities to flourish — while keeping those worst traits in check. We’re called upon to recognize that the free market is the most powerful generative force for our prosperity — but it is not a free license to ignore the consequences of our actions.

This is a difficult time for our nation. But from this period of challenge, we can once again tap those values and ideals that have allowed us to lead the global economy, and will allow us to lead once again. That’s how we’ll help more Americans live their own dreams. That’s why these reforms are so important. And I look forward to working with leaders in Congress and all of you to see these proposals put to work so that we can overcome this crisis and build a lasting foundation for prosperity.

And, of course, Obama has a detailed plan for tightening his grip on the free market system.

Financial Regulatory Reform: A New Foundation

We must act now to restore confidence in the integrity of our financial system. The lasting economic damage to ordinary families and businesses is a constant reminder of the urgent need to act to reform our financial regulatory system and put our economy on track to a sustainable recovery. We must build a new foundation for financial regulation and supervision that is simpler and more effectively enforced, that protects consumers and investors, that rewards innovation and that is able to adapt and evolve with changes in the financial market.

In the following pages, we propose reforms to meet five key objectives:

(1) Promote robust supervision and regulation of financial firms. Financial institutions that are critical to market functioning should be subject to strong oversight. No financialfirm that poses a significant risk to the financial system should be unregulated or weakly regulated. We need clear accountability in financial oversight and supervision. We propose:

• A new Financial Services Oversight Council of financial regulators to identify emerging systemic risks and improve interagency cooperation.

• New authority for the Federal Reserve to supervise all firms that could pose a threat to financial stability, even those that do not own banks.

• Stronger capital and other prudential standards for all financial firms, and even higher standards for large, interconnected firms.

• A new National Bank Supervisor to supervise all federally chartered banks.

• Elimination of the federal thrift charter and other loopholes that allowed some depository institutions to avoid bank holding company regulation by the Federal Reserve.

• The registration of advisers of hedge funds and other private pools of capital with the SEC.

(2) Establish comprehensive supervision of financial markets. Our major financial markets must be strong enough to withstand both system-wide stress and the failure of one or more large institutions. We propose:

• Enhanced regulation of securitization markets, including new requirements for market transparency, stronger regulation of credit rating agencies, and a requirement that issuers and originators retain a financial interest in securitized loans.

• Comprehensive regulation of all over-the-counter derivatives.

• New authority for the Federal Reserve to oversee payment, clearing, and settlement systems.

(3) Protect consumers and investors from financial abuse. To rebuild trust in our markets, we need strong and consistent regulation and supervision of consumer financial services and investment markets. We should base this oversight not on speculation or abstract models, but on actual data about how people make financial decisions. We must promote transparency, simplicity, fairness, accountability, and access. We propose:

• A new Consumer Financial Protection Agency to protect consumers across the financial sector from unfair, deceptive, and abusive practices.

• Stronger regulations to improve the transparency, fairness, and appropriateness of consumer and investor products and services.

• A level playing field and higher standards for providers of consumer financial products and services, whether or not they are part of a bank.

(4) Provide the government with the tools it needs to manage financial crises. We need to be sure that the government has the tools it needs to manage crises, if and when they arise, so that we are not left with untenable choices between bailouts and financial collapse. We propose:

• A new regime to resolve nonbank financial institutions whose failure could have serious systemic effects.

• Revisions to the Federal Reserve’s emergency lending authority to improve accountability.

(5) Raise international regulatory standards and improve international cooperation. The challenges we face are not just American challenges, they are global challenges. So,as we work to set high regulatory standards here in the United States, we must ask the
world to do the same. We propose:

• International reforms to support our efforts at home, including strengthening the capital framework; improving oversight of global financial markets; coordinating supervision of internationally active firms; and enhancing crisis management tools.

Nowhere in the President’s remarks or in his new regulation plan will you find any mention, let alone an admission, of the government’s primary role in causing the latest financial collapse. Fortunately, IBD tells it like it was.

Regulation Nation

Regulation: The White House wants to impose sweeping new rules for the financial industry to prevent another meltdown. Unfortunately, it was government — not the private sector — that was to blame.

Citing a “culture of irresponsibility” that it says helped cause last year’s financial crisis, the White House on Wednesday released an 88-page report that proposes major changes in America’s financial system. The Associated Press aptly called it “the greatest regulatory transformation since the Great Depression.”

Among the reforms put forward were a new, pumped-up Federal Reserve with greater powers to regulate and oversee the entire financial system, a new consumer credit watchdog to oversee home loans and credit cards, and new rules and oversight for hedge funds and exotic securities, such as credit default swaps and collateralized debt obligations, which some blame for making the financial crisis worse.

It’s nice to see that our government is so concerned about not repeating the errors of the past. But our advice comes from an ancient proverb:

“Physician, heal thyself.”

The White House’s financial regulation proposal blames “gaps in regulation” for our financial crisis. Wrong. It was in fact government misregulation and miscalculation that created our financial crisis — not private businesses. The record on this is quite clear.

As economic historian Lawrence White of the University of Missouri has written:

“The expansion in risky mortgages to underqualified borrowers was encouraged by the federal government. The growth of ‘creative’ nonprime lending followed Congress’ strengthening of the Community Reinvestment Act, the Federal Housing Administration’s loosening of down-payment standards, and the Department of Housing and Urban Development’s pressuring lenders to extend mortgages to borrowers who previously would not have qualified.”

Add to that Fannie Mae and Freddie Mac — created and regulated by acts of Congress — which together at one point controlled nearly half of the nation’s $12 trillion mortgage market. The two quasi-private entities served as the grand financial engine by which Congress would boost homeownership.

It worked well for a while. And we can’t fault the intent to help people. But the failure was one of too much government — not too little, which is the rationale for the new financial regulation regime sought for Wall Street and the banks.

As for the Fed’s new powers, we happen to believe the central bank has done a reasonably good job responding to this crisis — though as many others have noted, the vast expansion of the U.S. money supply in the last year poses a future inflationary threat.

But we don’t think the Fed needs enhanced powers. Far from it. It’s too powerful already. Giving it virtually unbridled control over our financial system without having to directly answer to the people is a danger to free market capitalism.

Many have argued that the Fed’s slashing of interest rates from 6.25% in 2001 to 1% in 2003 — following a stock market meltdown, a recession, the 9/11 attacks and the start of the War on Terror — was too much and led to the housing market bubble.

Now, strangely, many of the same people advocate giving the Fed even more power. It makes no sense.

If the White House really wants to fix our ailing financial system, it would do well to start by repealing what remains of TARP, undoing the government’s takeover of our auto industry and halting the fraudulent and wasteful $787 billion “stimulus” program.

Then you might see a real economic recovery take place.

See also:
Obama Defends Financial Overhaul
Geithner: Govt. Needs Better ‘Crisis Management’ Tools
In huge change, Obama’d strip Fed of credit card oversight
Obama: ‘A sweeping overhaul’
Historic Overhaul of Finance Rules
Obama Lays Out ‘Sweeping Overhaul’ of Financial Rules (Update3)
Not Everyone Is Cheering Fed’s New Role
New financial rules: Major changes for big, small
Obama unveils ‘sweeping overhaul’ of financial regulations

The truly ironic part is that most of Obama’s free market control plan has to go through Congress to become law, those most responsible for the financial mess in the first place. Can you just imagine what hideous manner of bull[expletive deleted] regulation will come out the other end? How much additional U.S. government oppression can free enterprise take before major corporations will just say enough already and reincorporate in another country with a more business friendly environment?

/one thing I know for sure from daily first hand stock trading experience, between Obama’s encroachment into the private sector economy and his out of control government spending, he’s spooking the ever loving [expletive deleted] out of the markets