Trick or treat.

Freak.

I don't know about anywhere else, but in New York City, every day is Halloween.

When I was a kid, Halloween was that one day a year when people -- children, actually -- toddlers with parents, adolescents, juveniles, the yet-to-mature -- dressed as freaks, ghouls, and other scary things, went up to complete strangers and asked (with assured expectancy) for stuff. Granted, one group does the dressing and another the asking, but, still, this happens every single day here.

Freak, Jr.

Back in the day, skeletons and skulls adorned houses and costumes one day a year. But here, every manner of stylized skeletons and skulls adorn just about everything all the time. In the fashion capital of the world, I see the most imaginative renderings of skulls woven into clothing, on backpacks, tattoos, and graffiti (of course). I even saw one on a baby's pacifier recently. Is it safe to say I've seen everything?

We don't need to know when Halloween falls this year. What we need to know is, when's it going to end?

Can you say "Arkancide?"

Do they have Teamsters in Arkansas?

The New York Post reports that "Cops Eye "W" Role as Possible Motive" in this brutal attack:

The cameo role of a bubbly, blond TV anchorwoman in the controversial movie "W." is being looked at as a possible motive in her bloody beating inside her Arkansas home, authorities said yesterday.

It's now a murder. This lovely young woman passed away on Saturday, October 25, 2008. But why would her cameo role be a "motive?" The Post:

She had a small role in the new Oliver Stone movie "W.," which was filmed in Shreveport, La. She appears briefly as a conservative commentator who speaks favorably of President Bush's "Mission Accomplished" event on an aircraft carrier shortly after the start of the Iraq war.

Anne Pressly, R.I.P.

Whether it's art imitating nature or the other way around, or just a long line of concatenated coincidences, tragedies like this call to mind some things that simply refuse to let themselves be forgotten: Only one state has a cause of death named after it in the popular lexicon; only one former president -- former governor of said state -- representing one political party distinguished by its radical left-wing elements, has been associated by history with something called a "Clinton body count" (it returns "about 273,000" results when entered as a search keyword in the Google search engine).

Does every poor innocent who crosses these folks wind up going the way of Jimmy Hoffa? That's a useful segue into the Chicago politics connection, which went national when William M. Daley, the seventh son (it's true) of the late Chicago Mayor Richard J. Daley, became Al Gore's campaign chairman in the 2000 Presidential election -- and sought to overturn the entire election process in the courts, after they'd lost. He's currently "a prominent supporter" of the latest offspring of the Chicago Political Machine to go nationwide, Barack H. Obama.

Who in their right mind would suggest such things are anything more than a series of unfortunate, but striking, coincidences? But who in their right mind could reckon themselves with such impossible odds for misfortune?

Who has paid any attention to the bloody trend in world politics in our lifetimes? Rigged elections, body counts... suspicious bouts of mortal bad luck befalling numerous individuals whose proximity to them is the one thing they all have in common -- such things do not constitute a good omen when they characterize a political cabal.

And if there's no fire, how come there's so much smoke?

Memo:

Anna Schwartz, in an interview published in the WSJ October 18, got me thinking...

What say we take what's left of that $700 bn and dream up some kind of incentive to get an exchange set up to transparently price the structured OTC inventory (or at least its major parts) ASAP?

All assets that impact statutory capital have to be priced without any further delay (wasn't that the spirit of FASB 157?).

Then let the market do its thing. It's going to anyway, eventually. The sooner, the better.

Instead of bailing out the banks which were rather poor stewards of the money they had, why not invest in the market infrastructure? Some of the bright lights at the NYMEΧ, for example, are making some headway. If a deal can be struck, then take a position in the solution instead of the cause of the problem.

If the government has to be involved, let it be in a way that upholds markets, not supercedes them.

You'll probably still have to bail out the banks, but at least the problem will be on its way to being solved. And getting an exchange working properly will very likely speed the process and reduce its cost to taxpayers. Oh, and it will create value and wealth in the process.

The market will fix the problem if it has the tools.

Wouldn't it be cool if America leveraged this situation into a leadership position in these new markets, like it had once in equities, options and futures?

I feel a crude bounce coming, boys and girls.

More later.

But be warned: if you see an idea here in the morning, you'll see it on Bloomberg by the afternoon.

No God but Caesar

For well over a decade, I've been saying that Florida is a police state, that its sheriff's deputies are the creme of the crop of insecure, power-hungry, steroid-pumping, gender-identity-challenged thugs who would make Brownshirts look enlightened, and that its judicial system reeks of putrid corruption.

If you need more proof than the fact that a Florida court ordered a man to jail for failing to re-sod his lawn, and that, in fact, deputies arrived at his home, shackled him as though he were a violent threat to society and hauled him to jail, trust me, it's out there.

In The Constitution State -- that's Connecticut, in case you don't know -- the Constitution is no longer needed, because the supreme court makes all the decisions now. So don't worry about anything. They'll take care of you. Just get to work and pay your taxes.

And speaking of idolatry -- hey, I'm not the one who calls him "messiah" -- the oldest trick in the book is to tell people who they're going to vote for before they do. It is reported that "traders say that Obama could win 364 electoral votes to McCain's 174". Two things about this. No, three.

First, the operative word is "could." Lots of things could happen. Monkeys could, as the saying goes, fly out of my butt. Second: "traders." Online information exchanges are just like any other market: they're fickle and can go to extremes of extremes. Traders --those Wall Street types --it's not like they ever get enamored of a bad idea, right? Do you really want them picking your next president?

Third: if the traders are right, you can bet it's because they've done the math on how many bogus voter registrations there are.

The Issue

There isn't a presidential candidate anywhere who can "fix" the "crisis." Either one of them can make it a great deal worse than it is.

Americans fool themselves if they think the issue of this election is the markets. The groundwork for the markets' current upheaval was laid...some time ago (the debate about "when" obscures my point).

In this way, the candidates are homogeneous. Neither can fix the crisis, neither is really remarkable in meaningful ways. Obama's silver tongue is undone by his shady friends and an at-best unremarkable past. McCain is barely a republican, apparently. They net out to mediocre.

Where the candidates differ -- and therefore, the issue at hand in this election -- is this: One candidate is against abortion, and the other, is not. One candidate adopted a discarded baby into his home, the other thinks of an unplanned baby as "punishment." One honors innocent life, the other feels free to discard it if its arrival seems inconvenient. Would any candidate hold that position if fetuses could vote?

With regard to the VP candidates, again: one could have aborted a baby diagnosed before birth with Downs Syndrome, but did not. The other one ignores the teaching of his professed faith on the matter of abortion in his policies.

The difference: how they view human life -- not necessarily their own, but innocent, silent, defenseless baby human life. In this way, the candidates could not be any farther apart.

America ought to concern itself with this question: is a candidate who cannot grasp the value of any and all human life fit to lead it?

Like it or not, that's the decision you're making this election.

Fashion

Pelosi's Encore

After conferring with her cohorts in congress and seeing the virtually unlimited amount of money that's being thrown at the financial system, Speaker of the House Nancy Pelosi has announced that more money is needed to buy favors for Barack Obama in this election cycle, and that a second bailout bill is the ideal way to get it.

Soros says...

In the Financial Times, Soros has offered some ideas on how to fine-tune the Emergency Liquidity Provisions and implement them practically. It's an action plan, really, and it appeals in that sense.

Especially on point, he suggests what should be obvious (he often does that, but because he's Soros, it is received as though it's inscribed on a tablet of stone):

The Fed would also guarantee interbank borrowing by banks eligible for recapitalisation. This would reactivate the interbank market and return the spread of Libor over Fed funds to normal and reduce the abnormally high interest rates on business and mortgage loans linked to Libor.

Of his action-plan, he estimates with characteristic modesty:

It would help restart the economy and likely produce returns for taxpayers comparable to my fund’s.

This will undoubtedly appeal to Barney Frank and friends, who tried to get the government into the hedge fund business via Fannie and Feddie.

Not a big fan of the big man, but, given his stature and experience, even his utterances of the obvious have a certain authority.

Something that should be obvious, but was omitted from his to-do list is, "Get the government the heck out of the markets as soon as possible thereafter."

Nothing New Under the Sun

Sometimes wisdom is needed but, if it is being uttered at all, it is drowned out by the cacophony of yapping "experts." One need only reach back for some saner perspective.

To that end, I will relate these words from the best book I have read in years:

An immense change in manners and morals had been slowly creeping through society since well before the war, and was now reaching its fruition. Moral standards especially were changing -- or were going out altogether. This was evident in business as well as in social circles. The old business ethics were well nigh shot to pieces -- especially in big business -- during that era of greed. All sorts of practices which would have been utterly taboo a quarter century before, were now becoming commonplace. The question, "Is it honest?" became more and more overshadowed by the other question, "Can we get away with it?"...I have told of an instance where, many years ago, a large corporation was ready to hand me a substantial bribe to help them fool the government...such methods seemed as common in big business as snowflakes in Labrador, and were scarcely questioned as being illegitimate...

...Such had become our modern temper; and with it life was speeding up. Though the whole world was bankrupt and none of the major...problems had been settled; though racketeering, bootlegging, business rascality, and political corruption flourished as never before; though morality between the sexes was more and more being laughed to scorn -- yet we all thought we were living in an era of splendid progress and great spiritual awakening...

...Yes, it was a golden age while it lasted. We did not know how speedily we were riding for a fall; how we were heading, ever faster, toward an economic cataclysm such as the modern world had never dreamed could be.

-- John Moody, The Long Road Home, 1933

If you read this blog you ought to get that book.

Aluminum has crashed.

I don't trade aluminum. The last I heard, it was near all-time highs. But I learned today from the most unlikely aluminum trader that, no, it's crashed.

The weather in Manhattan is beautiful. And as the trains downtown are on their spotty, weekend schedule, I have ample opportunity to walk across the gaps in service. One of these brings me through City Hall Park and past the tourist-saturated Ground Zero before getting home a couple of blocks to the south.

Making my way there, right in front of Ground Zero, I noticed a man struggling with an overloaded shopping cart full of junk nearly in the middle of the very busy street. Some of the junk, which was piled high on the cart, had shifted, and some had fallen off into the street. He looked like a particularly obsessed homeless person -- scruffy beard, unkempt hair, shabby clothes, and of course, the cart full of junk. I thought he looked too young to be so destitute. For some reason, maybe it was to see if anyone would help him (nobody did), I stood there and just watched him wrestle with his cart load of junk.

I watched with what I later realized was a misplaced pity, as he pushed, pulled, and tied over and over, a load of discarded metal. I had decided that, no matter what it looked like, I was going to offer to at least help him get out of the street. As I walked over, the pieces of the puzzle came together, and I realized that everything he was lugging was aluminum. He wasn't destitute as much as he was industrious.

I asked him, "would you like some help with this?" "No, no thanks," he replied, in broken english that was otherwise lucid. No, he wasn't a street person. "Are you taking this to the scrapyard," I asked? "Yes." "How much do you think you can get for all this?" "Maybe about thirty dollars, now," he answered. "The price has come way down." "When," asked the man who works on Wall Street? "All this week," replied the aluminum trader.

So I looked up the price of aluminum and, sure enough, it had.

Odds and ends.

I'm going to indulge myself a monologue of loosely related observations.

First, Friday's market action: Without a doubt the most volatile equities session I can remember in 22 years -- years that have been peppered with various and sundry financial upheavals. (Yes, of course the VIX hit another peak -- it reached over 100, in fact).

Friday's action was inhuman in character. That is, it bore the marks of robotic trading, and that in the form of a professional wrestling event. A cold, mechanical, zany, lightning fast contest of machines. One does not simply blink, when he sees the market down by seven hundred, only to see it down by three hundred by the time he has opened his eyes, unless large orders are being generated, sent and executed at or near the speed of light.

One thing robots lack is subtlety, which was always the mark of the capable trader. And lack of subtlety can be telling. Does Friday's robotic twitching tell us anything? It does suggest that reasons to buy were found, along with reasons to sell. If nothing else, some fleeting, historic arbitrage trades were made.

Wall Street -- I mean the real Wall Street, not the dog-feces reeking runway of overpriced condos where the neo-rich, the weird, and the arrogant come to strut -- is a treasury of time-tested wisdom. The old timers used to say that extreme volatility suggested (not "guaranteed") an impending trend change. Think of a damsel torn between the suitor she had been pledged to for so long (the existing trend) and the one she really wants. If you could chart her sentimental machinations, it might look like Friday's market action.

We'll have to wait and see which one she chooses. This kind of fickleness is the very thing that trading ranges are made of, as we indicated in previous discussions.

Speaking of Wall Street's treasury of wisdom, there's another favorite that says, "Money always returns to its rightful owners." If you want proof of that, just ponder this turn of events: Abramovich, Deripaska, Oligarchs Lose $230 Billion.

And another thing. What to say about this bit of incredible nonsense? During an emergency G-7 meeting in the throes of the most volatile day in world equities markets history, the prime minister of a European nation says, for quotation by the media, "The idea of suspending the markets for the time it takes to rewrite the rules is being discussed."

It is hard to outdo this remark in terms of sheer arrogance, not to mention folly, in which it lacks nothing. Its implications for the geopolitical structure are mind boggling. It calls to mind the word "apocalypse" in its fuller meaning. Fortunately the market, long since jaded to the inane utterances of grandstanding politicians, ignored this irresponsible remark at first, pending a reality check. Can you imagine the absolute rush for the exits that would have ensued, if the market really believed the doors were about to be barred with everyone locked inside? I trust any trading range would be bounded on the lower end by a significantly reduced value, should the idea be taken seriously.

Soon thereafter, the bright lights in the media began emitting stories with headlines like, "Market rebounds on Berlusconi comments," as if a global dictatorship over markets is somehow a good thing for asset values. Sheer nonsense. Fortunately, reality did indeed check in as saner heads in Washington announced, "White House denies plans to close markets."

Finally, a chastened, quite foolish looking old fat Italian billionaire "reverses himself, says no discussions were held to close markets." Oh, wait: he was a billionaire. He'll have to wait and see what this month's brokerage statement says he is now.

Do you need this translated for you? It means the fat socialists in Europe wanted to close the markets and get on with their plans for the long weekend. It means the idea was floated as if it were a done deal, telegraphed by a compliant media. Thankfully there's still enough backbone left in America that we said, "Get lost. Markets stay open." Let's hope we keep it up, because there is a meaningful possibility that we may not be able to, unless the supply to the markets abates.

Right now, America is the cool head on the scene, as it has been in one world crisis after another. America is the father that bails the wayward brats of the world out every time they get themselves into another pickle.

"Tulipomania."

Quit saying this is America's fault, by the way. That's a tired old rant. We didn't create your asset bubble, any more than we created the tulip bulbs that ruined your economies a few centuries ago. But you can be sure we'll have to help bail you out. Not because we like you, but because we always seem to do the right thing for the common good.

Europe's drag on this mess is going to be a whole lot heavier than the US's, and Europe doesn't have the collective economic sense to grow out of it the way we do. We'll be the engine, you can be all the cars we drag along.

And finally, speaking of dead weight, may I please head off the flood of bleating for "global regulation" and "global market control" and all the associated idiocy that's going to be unleashed by saying, if antitrust applies to business, it also applies to government?

Enormous and ubiquitous.

If I talk about a market at all, I prefer to talk about its state or mood, rather than make price predictions. I don't hold myself out to have any better idea about the market than anyone else, necessarily. But sometimes, often during times of extremes, things become quite clear: like the VIX thesis presented a few posts ago. I still haven't gotten around to posting my crude oil thesis from this summer, but I may.

In my last post I said I thought equities were going into a trading range. Well, since the market sold off extremely hard today, I had to think about that thesis. It was in a trading range, of course, for most of yesterday and half of today. Then it broke like thin ice under a pogo stick.

I suppose the reason I think the 9-11 era lows fit is that they are crisis lows -- extremes. The low of the market of the week of Sept 17,2001 was 8235.81. Just a year and two weeks later, the week of Sep 30, 2002, the market hit a low of 7528.40. This is the range I mean, where I suspect we might hang for a while. This is an educated guess. Today's low was 8579.19 -- still a ways above the 9/17/01 low, but near enough. Also, glancing at a chart today, a trading range between 8000 and 10000 seems arguable, but contingent upon many things, not least of which is holding the 8000 area.

It was an interesting news day. One thing I noticed on Bloomberg was a story, early in the day, that quoted a bunch of experts on the VIX as saying that, once the short-selling ban was lifted, the VIX would come right down. These boys actually tried to make their readers believe that the short-sale ban was the cause of the VIX spike. This was such an inane premise -- exactly the reverse of reality -- that I felt it was my duty to the cause to truth to email the author and editor and tell them so. I said, among other things, exactly this:

And I think I can say with the utmost assurance that, had there been no short selling ban, the VIX would have explored much, much higher territory than it has in the pasty [sic] 20 years.

Of course, today there was no short selling ban, for the first time in 3 weeks. I sent the email at 10:53 am EST, when the Dow, at 9199, was 59 skinny points below the previous close. By the end of the day, the VIX made a 22 year high and the Dow was down 678.91 points. So much for the short selling ban causing VIX spikes.

In rereading the article looking for a representative quote, I see it is so full of educated ignorance that I could probably write a book just on it. But as the masthead says, "too many ideas, too little time..." Here's a quote that sums up the premise:

Since the Securities and Exchange Commission started the [short-selling ban] rule Sept. 19, volume on the New York Stock Exchange dropped 35 percent and the Chicago Board Options Exchange Volatility Index surged to 57.53 yesterday, its third straight record. Options on the VIX, as the volatility gauge is known, imply it will fall 44 percent in the next two weeks after the rule expired last night.

Can the VIX fall 44% in the next two weeks? Anything's possible. The article contains a liberal helping of quotes from "experts," some of whom allegedly manage deci-billions. Well, at least they allegedly did when they were interviewed this morning. But if they shorted the VIX like they were yapping about doing, well, I trust they're managing a bit less now. While I don't wish ill on anyone, I can't say that I don't like being proven so right so dramatically, and so fast. It was a ridiculous premise for an article and I really pity everyone involved.

Both Bloomberg and CNN continued being ridiculous by claiming, incorrectly, that the VIX had made all-time highs, later in the day. Check out CNN's graphic faux-pas:

I'm not going to waste my time with CNN, but I did email Bloomberg, after reading this headline:

VIX Options Index Advances to Record Above 60 on Credit Freeze

As pointed out in previous posts, in order to advance to a record, the VIX would have to register a reading greater than the high on October 20, 1987, and, indeed, for the entire CBOE VIX data set.

Bloomberg responded as follows:

hi charles,

bloomberg uses the new vix.

jeff

I think anyone would be confused by the nomenclature, myself included. In order to clarify, I revisited the CBOE site, and this is what I learned (white paper here):

The VIX was based upon OEX (S&P 100) options, from 1986 - 1993. Then, a new methodology was launched, based upon the SPX (S&P 500), with a different methodology that gives basically the same results. Then, in 2003, the original VIX was renamed the "VXO," while the new VIX was...still called the VIX.

Note: The data from Jan, 2004 - Aug 2007 has, in fact, an average difference (VXO-VIX) of -0.327 (2.4% of the average index value) and a standard deviation of that difference of 0.550. From July, 2008 - Oct 9, 2008, the average difference is 2.758 (9.0% of the average index value), with a standard deviation of 2.394 (CBOE seems to be missing VXO data from Aug 2007 - July 2008). The difference between the two, for determining trend and magnitude, is irrelevant. For this reason, it can be safely said that the all time high of the VIX, which is what it was called before it became the VXO, is, indeed that of October 20, 1987. While the then-current VIX high on that day was 172.79, the new methodology will undoubtedly result in a different nominal amount, but surely we can expect something relatively close in order to be considered a "record high."

Finally, the CBOE continues to publish current VXO data, and has a history available from 1986. So, determining an all-time-high of the fear index needn't be such a complicated issue. Enough about this.

We refer to our previous discussions about the VIX/VXO for some context, and, if you'll pardon our saying so, we said explicitly and repeatedly that, at 36, and then at 42, the VIX was not reflecting the gravity of the financial situation and must go higher, meaning equities must go lower. On Sept 17, the Dow closed at 10,609.66. We said, "Lower." On Oct 2, the Dow close at 10,482.44. We said, "Lower." Today? 8579.19 The VIX has been very useful in putting things in perspective.

We've also been saying, "Lower, ultimately." And we still are. No, we're not setting time frames and, no, we can't rule out bounces. In fact, we might be due for a biggie.

But this problem is not only enormous, it's ubiquitous.

***

[edit] we've just checked the Nikkei. In the two hours it's taken to write and edit this, the Nikkei has opened and dropped a whopping 13.25%. Enormous and ubiquitous, indeed.

Separately, IBM has just completed a $4 bn bond offering, priced to yield 387-400 bps over similarly dated US Treasuries. This is investment grade. Unless the world falls apart, someone's going to do really well on these.

Respite

The markets are exhausted. People are exhausted just thinking about them. I know I am.

I have thought (for years) that when the asset bubble burst the market would test the 9/11 era price range. I still think so. As of this writing I am looking for a trading range -- a regrouping -- until the next definitive event/revelation/whatever. Perhaps sometime after the election, but not sure about that.

This would be a very good thing, because there are issues more important than asset values that are on the table in this election. There is, for example, the value of a human life, which it will be given you, your neighbors, and I, to weigh. We get to decide if some life is unfit for life just because it seems to present itself at moments when we are preoccupied with ourselves, our dreams, our assets, or even the consequences of our own misfortunes or bad choices.

As for the market's fate, I believe lower, ultimately. Way lower. But, I could be wrong.

10 weeks after conception.

Of far more enduring consequence is the fate of mankind -- determined one tender, innocent life at time. It is in our hands each and every day, but especially so as a matter of public policy during this presidential election. The verdict we render on it will be the verdict we render on ourselves.

If you knew your Jewish neighbors, business associates, classmates, friends, were being herded into trains by the millions and sent to torture camps and gas chambers, and you could cast a vote on the practice, would you shrug your shoulders and say, "I wouldn't do that, but who am I to force my views on someone else," or would vote in favor of saving their lives?

There are worse things than an asset crash. There are more important things than liquidity. Maybe we'll have some time now to think about these, to inform our consciences, and to act courageously in accordance with them. Future generations will either thank us, or be mute.

re: Wachovia/Citi -- Cui Bono?

What could explain the sudden change of heart Mr. Steel had after agreeing to sell his company to Citi last week?

Referring to the $700 bn rescue package recently signed into law, Gary S. Becker opines in the Wall Street Journal (emphasis added):

Partly because many consumers are repelled by the intention to bail out companies and their executives who made decisions that got the companies into trouble, the new law includes income and severance pay limits for executives whose firms seek government help.

It was widely (and ambiguously) reported that the deal Wachovia signed with Citi invoked "government help." (One report made it crystal clear that Citi granted the FDIC warrants for upside participation; and one reported correctly that the Wells Fargo deal is a far greater burden on the taxpayer owing to the tax benefits of buying Wachovia's losses that Wells would enjoy. Citi would not, because the deal was signed before the tax benefits were enacted as law).

The premise offered for consideration, then, is thus: Robert Steel, Wachovia's CEO, exposed his company to substantial liability by wantonly breaching an exclusive contract executed with Citi. What reason could possibly be given for such bizarre and irresponsible behavior? Maybe he was just trying avoid those "income and severance pay limits" in the new bill. Maybe he was trying to save his bonus.

Memo to Wachovia:

Not only did your CEO [bury your company under a mountain of the most poorly priced California real estate in history, have to check my facts on this -- apparently he came on after Golden West was bought] he also breached a contract with Citi and exposed your company to untold liability in the process. Oh, and he also sold your company at the bottom but, hey, there were no other bidders and he was obviously desperate.

And then there are the consequences for the markets at large and the FDIC's attempts to stabilize them, which suffer as a result of the CEO's disregard for his commitments. He has singlehandedly set an example of how to demolish what little confidence is left in the asset markets.

He may think he's shrewd, or badass. But he looks like a complete ass who's caving in under the enormous pressure he must be facing. You really ought to ask him to step down.

The Lawyer from Hell

Bloomberg reports that David Boies is at it again.

Wachovia Bank signed a merger agreement with Citigroup a little over a week ago. They signed the agreement -- indicating their intention to merge at the negotiated terms. All that remained to complete the deal was regulatory and shareholder approval, and a closing.

The last time I checked, a signed deal is deal.

Maybe it just depends on what you mean by "is." Wells Fargo has come along and offered more money for WB - a lot more.

No matter that a deal was done with Citi; Wachovia has retained David Boies -- the notorious shark who argued the sham case for Al Gore when his attempt to rig the Florida presidential vote failed in 2000. The esteemed counsel is arguing, once again, that rules change when enough is at stake. In Boise's world, rule of law and signed contracts are meaningless when political favors can be called and public opinion can be manipulated to nullify them.

His tack in this, his most recent attempt to decimate the legal foundations of western civilization for a nice, fat fee, is to argue something about the "bailout bill obliging Wachovia to seek a higher bid." But Wachovia relinquished its freedom to seek a higher bid when it signed off on the deal with Citi. And the "bailout bill" simply does not apply to banks that don't need to be bailed out.

Surely Boies' main value-added here is that Chris Dodd, Barney Frank, Chuck Schumer, Nancy Pelosi, et al, are kindred spirits and speak the same language, making bargaining a foregone conclusion. It doesn't hurt that the new legislation probably gives him lots of gray area to exploit, along with popular sentiment. Count on much grandstanding by Boies' fellow travellers in congress about "doing what's best for the taxpayer," when the taxpayer has nothing whatsoever to do with Wachovia's merger or its unholy attempt to squirm out of it.

The only upside to this is that Boies might be too busy trying to nullify Wachovia's contract to help Barack Obama hijack the presidential election.

The lesser of the evils if there ever was one.

Fear's Silver Lining

Here we dig a little deeper into the idea of "Moral Hazard," which we really only alluded to in the post that bore its name.

Before the dot-com bubble was acknowledged to be a bubble, James Grant, whom everyone should read, wrote a book entitled, "The Trouble With Prosperity." Insofar as all asset manias share the same blueprints, the book was a perfect forewarning of our day: the perils of plenty, bringing as they often do sloth and poor judgment in places high and low. The foolishness of excess capacity that results. And the inevitable deleveraging and downward repricing of assets that follows.

There's a useful converse to the idea that prosperity can be troublesome, and that would be that want can be beneficial. How so? By preventing the perils that times of plenty seem to repeatedly bring.

Referring to the VIX chart below -- that's the "Fear Index" -- we commented that not since the 1987 stock market crash has the index had a really powerful spike. In spite of events greater in magnitude and in threat to security, including an incalculably destructive attack on the very heart of finance, fear, as measured by the VIX, has never really been manifest since that Black Monday 21 years ago.

And this is where "moral hazard" comes in. We argued an obvious point: that after the Fed decisively and effectively provided emergency liquidity to the financial system during those trying days in October of 1987, the market concluded, "Oh, we won't have to worry about that happening again." In other words, there was no need to fear, for the Fed was here.

This the lack of fear brought about that disregard for the consequences of the bad side of risk (and perhaps that presumption that risk could be socialized through Fed intervention) that invariably renders many people silly. And dangerous. People who should be habitually and especially sober and self controlled, because of their fiduciary responsibility or the influence they have in the economy.

No, we're not saying the Fed was wrong to intervene on Black Monday, or on any other day, necessarily. Only that doing so seems to have implied a precedent that market disasters will henceforth be prevented, which has been received as an incentive to play more aggressively than one might without the benefit of taxpayer-subsidized disaster insurance ("The Greenspan Put"). And what will prove the precedent to be broken, except...a market disaster? What will offset the tendency to disregard risk, other than the fear of loss? If enough people had just enough of the right kind of fear in them, a whole lot of this particular peril could have been avoided. This is why the issue isn't simply econometric; it's moral: it demands wisdom and self control to avoid the perils of excess.

We said, back in those VIX posts, that the market just isn't scared enough about what it's facing; that it just hasn't registered the magnitude of the problem. We said the VIX argued that stocks must go lower still, and they have. Even Bloomberg picked up on the idea.

Now, as to how high the VIX will go -- that is, how much more real fright is on the way, as manifested in turmoil in the equities market -- I suppose that could be argued, depending on one's assessment of the magnitude of the financial system's difficulty. Ours? Maybe we're in the third inning. Hopefully it's not the first game of a seven game series; hopefully we're wrong.

We said that our problems right now are structural -- that is, that they are caused by market mechanisms like structured-asset-valuation accounting regulations linked to statutory capital requirements that are prone by their configuration to downward (and upward) asset spirals. Structural things are usually fixable, if caught in time (which is why congress' little stalling gambit this week caused a 9+% selloff in world markets and may have caused incalculable damage going forward). But we've only just begun to recognize the economic problems these structural problems have finally ignited.

The unwinding of folly with the reinstitution of the right kind of fear doesn't have to be terrible. It could be, but it doesn't have to be. But hopefully, like that generation that passed through the Great Depression, we and our children will have learned the right lessons.

The great peril on the other side of this is that we fail to learn the lesson; that we place our faith in more ill-conceived regulations and simply don't take our lumps and strive to be smarter and more disciplined and more responsible with our risk taking; that we fail again to recognize the debt we owe to our progeny to keep our houses in order.

Pelosi's Hustle

Living in the big city, one often has experiences that raise the question: is that person malicious, inconsiderate, or just stupid? It's a recurring cause of wonderment.

And so are the actions of congress, at times. Take this week, for example. The US (and world) financial markets are in a historic meltdown. The lender of last resort, the Fed, appeals to congress for authorization to take some really drastic and necessary measures. And what does congress do? It says, "nah."

By the following day, the world's stock indices register an across the board decrease in wealth on the order of at least 7%-9% as a rough guess of the value of the House's signatures. Suddenly, the House has found a ready market it can mark the value of its assets to (meaning, they know they can fatten up the provisions of the rescue bill in myriad self-serving ways, because we're over a barrel). It does so, and the buyer (that's us) acquiesces because it has no choice.

Malicious, inconsiderate, or just stupid?

Former Fed Chairman Alan Greenspan has been making utterances to the effect that the current crisis is one that "occurs once in a century." The math guys say, no, it will only occur once every 10^257 years. In any event, we can all agree that it's a rare day when Congress holds all the aces from all the decks -- those above and those under the table. To their credit, they recognized that much.

Perhaps our esteemed representatives were caught up in a little bubble of their own. Surely some of them have taken on far too much leverage, and it's impaired their judgment. Unfortunately, I'm not aware of any statutory limit on how many times a Congressman can sell his soul.