“Short selling / media / ratings agency cycle” and the banking industry
Wall Street is a nasty place. Jim Cramer describes the vicious hedge funds — media — ratings agency cycle that can sequentially take down any number of financial institutions, given enough time and enough government ineptitude:
Lehman Brothers was just a terrible blow because it didn’t have to go down like this. We now know there were multiple buyers, but one man, Dick Fuld, Lehman’s chief, turned them down and was not pressured to accept their offers. (He will no doubt be reviled for as long as he lives and then some.)
That left a series of enhanced margin accounts, actual cash, left overseas as part of the ridiculous unregulated offshore shenanigans that brokers have been conducting for years. The inability to access that cash, which was something the Feds might not even have known about, triggered waves and waves of selling everywhere as frantic hedge funds couldn’t access capital. This was a totally botched black-hole fill from which we are still trying to recover. Like Fannie Mae/Freddie Mac, it was avoidable.
Lehman suffered from the vicious hedge funds — media — ratings agency circle that can bring down pretty much any institution: Short the common stock relentlessly, buy puts relentlessly, buy credit default swaps on the black market — that’s really what it is — at any price for any amount to mark the bonds as losers, take money out of the prime brokerage and tip off the media. That spreads panic, which then causes the stock to decline further, which then triggers ratings agency downgrades, which then cause people not to deal with the firm. Then it’s all over.
The speed with which this can occur also brought down a better capitalized firm, Merrill Lynch, from $28 right through what I thought was a sacrosanct line — but which turned out to be a Maginot line — of $22, where 300 million shares were offered. Capital in stock can’t equal the selling vortex that I described. It is really what I would call a Kesselschlacht by the shorts. That’s German for a decisive battle of encirclement (literally, “cauldron battle.”)
There’s another potentially sinister element that comes into play, the fact that the rating agencies use the price of Credit Default Swaps — a market that can be readily manipulated — as a reason to downgrade a company’s credit rating. Reuters:
The promise of additional capital had in any case been too little to save Swiss Re’s AA rating, a key indicator of its ability to cover its reinsurance liabilities. Ratings agency S&P cut its rating to A+ on Wednesday because of the larger-than-anticipated capital depletion in 2008. S&P also cited the company’s battered share price, credit default swap (CDS) levels, yields on its bonds and its exposure to Berkshire Hathaway
Thus hedge funds or other bad actors (you don’t have to be a conspiracy theorist to believe this, just a capitalist) can take advantage of markets (and media) that are readily manipulated or influenced to create a self-reinforcing and vicious circle to wipe out US financial institutions, one by one.