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.





Speak your mind

2 Comments so far

  1. gabe on November 17, 2007 2:46 pm

    You’re right on except nobody believes they’re smart money anymore. “The entity”’s been beaten to death in all financial media and I have yet to hear one favorable review. Not even “Stagflation” Ben was willing to get behind it in the last congressional speech.

  2. Russell Sears on November 20, 2007 4:25 pm

    But I would argue against following what everybody is calling the new “smart money”, the downward momentum players.

    It cost much energy to keep the markets accelerating in one direction. It looks so easy, get the media behind you and the bandwagon keeps loading up.

    Drive it down, down, till “the truth” breaks literally the banks or insurance companies.

    But my caution is 3 fold,
    1. Fixed income deals are not Enron or Worldcom. Nor are the banks and insurance companies. The MBS deals may not have been priced right. But even on the worst pools the values is far from zero and much of the zero valued equtiy and lower tranches are already close to zero. Those that can stomach the vol are begining to step to the plate, for the highest tranches, lesson of LTCM.
    2. I believe the feds won’t let the banks or insurance companies credit panic increase too much more.
    3. The “smart money” have bought custom puts, perhaps several times more potential than they actual are selling in the market. Puts expire (or at least time value goes down), holding down markets ties up capital with a diminishing return potential and increasing risk. The momenteum big boys will leave long before the media and bandwagon knows they have left the building. Short squeezes are also often driven by the same big boy momentum experts.


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