Plunge Protectors United Create Another Bubble

Oh, what a wonderful double talk, non-free market world we live in.

One of my favorite clowns (After Kramer of course.) on CNBC is Larry Kudlow, who, with all of his experience and intelligence can't seem to separate his political biases from his economic senses.

Kudlow, and his buddy, Steve Forbes, scream for free markets only until things are not going their way, meaning the stock markets continuously marching upward. So, a few weeks ago, in the midst of the nastiest part of the bear market, Kudlow and Forbes abandoned their "free market capitalist hats", and were screaming for multiple forms of government intervention. Are all Republicans by nature flip floppers?

And, of course, the denizens of the current administration, specifically Secretary of the Treasury Paulson, and the Chairman of the Securities and Exchange Commission, (SEC) Mr. Cox, (both political appointees of the great "W"), obliged with a couple of zingers.

Paulson came up with blank checks for bankrupt Fannie and Freddie and Cox decided to hobble stock short selling, thereby creating a massive short covering rally.

Rolling the clock forward to this past Monday, July 28, Cox's short selling ban was set to expire, and since there are even more ominous financial events on the horizon, (I'll get to this in a bit, remember the letter "Q".), the markets swooned with the Dow dropping 240 points.

Undoubtedly, the phones in Cox's and Paulson's office were ringing off the hook, and miraculously, the SEC rushed out a press release announcing the extension of the short selling ban early in the morning on Tuesday, July 29.

Presto, the short sellers rushed to cover again, and the Dow blasts up 260 points.

Today, Wednesday, July 30, with the markets looking to swoon a bit again, the Fed with Mr. Bernanke jump in and extend to the banks, broker dealers, investment banks, hedge funds, and all their other rich and connected folks, the ability to borrow against any worthless IOUs they can generate to January 30, 2009 at a measly 2% interest. And, guess what -- the markets pop up again.

Question. Why doesn't the Fed simply refinance all American, owner occupied home mortgages at 2% instead of giving the deals to only their insider friends? At least these are backed by real assets, our homes.

Now, remember that we have a little event coming up, called a presidential election. Notice that the Fed craftily extended the free money window past the upcoming inauguration of a new president.

Also, note that the SEC has stated that the temporary ban on short selling will not be extended past midnight August 12. My guess is that they will try to create a permanent rule change. But, remember, there are only 12-15 carefully selected banks and companies covered under the temporary rule.

BTW, who decided what companies should be on this list of the protected? How did they deicide? And, don't you think that every CEO in the USA is not being contacted by some Republican operative to "ask his opinion about extending the short sale ban to cover his company, and if he would like to make a campaign contribution"? This may be the best political fund raising protection racket ever!

And, you might want to consider that according to S&P that profits of US companies have dropped over 25%, the most ever. Yet, the market is going up? Can you say "plunge protection"?

OK, you say, so what? I told you before to remember the letter "Q".

In the secondary debt- and mortgage-backed securities market, (Where mortgage-backed securities are created and traded.), there is a thing call a Qualifying Special Purpose Entity (QSPE), know to insiders as the "Q".

Qs are yet another of Wall Street's accounting tricks to keep mortgage and debt-backed assets and liabilities off the books of banks etc. (You know, the friends of the Fed with now free access to our money.)

Up until recently, the FASB (Federal Accounting Standards Board, the supposed self-regulating authority of accounting. Ha!) let the wolves count the chickens in the hen house. But, since the mortgage debacle, the FASB crowd has gotten religion and decided to do some house cleaning.

So, FASB has proposed changes to two previously obscure (and equally obtuse) accounting standards known as FAS 140 and FIN 46R. Bottom line, these changes could bring back as much as $5 to $10 trillion back on to the balance sheets of various financial institutions!

Now you can imagine why the insiders are getting very nervous.

FASB has been expected to release its proposal on the two accounting standards by the end of August, and then leave it open for public comment for 60 days; parts of the new rule could be applied as soon as next year for companies with fiscal years beginning after Nov. 15.

As you might guess, the "W" administration and Wall Street crowd are furiously working to block this change until they leave town.

Hint - the fat lady has not left the stage, not yet.

The Best Money Guy.

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