Nov

15

Judas Steer, from Russ Sears

November 15, 2007 |

A few years back, in an eBay auction I was watching, I suspected two exercise equipment dealers of bidding on each other's listings to jack up the prices to closer to retail price rather than sell below wholesale due to uninterest in a "no minimum" treadmill offer. This enticed several bidders to jump in due to the apparent "smart money" high volume bidding, and eventually a bidder, following the Judas steer to slaughter, bid above retail and paid $200 shipping. Further, I suspected a wash sale would occur, if the other dealer really won the bidding. No actual delivery in that case.

MLEC does this.

1. It gives liquidity bids to an illquid market.
2. It prevents SIVs from ever having to sell because they have a floor under the market value of their assets. They don't run through their equity; as long as their booked MV of their assets aren't below trigger levels.
3. While  real transactions will occur, the rules will simply lead to a shuffling of the deck. An ace of spades for an ace of diamonds.
4. If one of the banks "cuts in line" the Feds step in and lower the hammer on them, ensuring they all play nice and follow the rules.

If it's a panic that's overblown, as most are, it will work out just fine. If it's a panic such that current subprimes are just the tip of the iceberg, this simply buys time and helps the Feds deliver life jackets.

Size is not as important, as those watching think the banks and MLEC are "smart money" and have enough skin in the game, like the retail buyer and the bidding treadmill dealer.


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