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Sequoia Rings the Alarm Bell: Silicon Valley Is in Trouble

This fucking shit has gone far enough, the Bay Area is immune from the rest of the madness sweeping the world, it is an oasis, unique, perfect in every way, everyone makes 1.4HaHas per annum. Gay marriage is not only accepted, but the law. The streets are paved with gold, all code monkeys are sheltered and well fed, why hells bells folks, google just opened another googleflophouseaplex just yesterday. So shut the fuck up, the Bay Area is just fine, more than fine in fact, it is perfect. You are just a bunch of shallow bitter renters living in flyover states, you will never have what us Bay Aryans have, housing that only goes up, perfect weather, the world is our oyster and your fucker are just the shuckers.

wow, that is just refreshing, like a coffee enema at a fancy resort paid for by a bailout.

I’m moving the balance to another card but also delaying all non-essential purchases until I pay off the balance

You should have been doing this all along.

TOB
Well, in the near term they can work out something where credit card companies can hedge against defualt using insurance agencies that set aside approriate reserves.
In the IMMEDIATE term, tomorrow can start the biggest snowball you have ever seen.
Personally, I think stopping the snowball BEFORE it starts rolling is a pretty good idea.
In the medium term we can regulate the derivatives market to make sense.
In the long term, everything will be regulated to death since all pretext of trusting people to act in their own best long-term interest has not proven to be accurate. For every Mozilla that crushes a countryide for the simple reason that 'he got his' there are 1million American Mozilla wannabes. Given the chancet o make a short term killing then retire to Napa is the American dream. Taken to its illogical extreme you have. . .why, you have where we are today. Insolvent banks holding assets of insolvent businesses with working people losing their etire life savings.

Can anyone think of a reason it would be *useful* to lift the shorting ban right now? Who stands to gain, and how are they connected to Paulson & Co?

Without the shorting ban, the market may shoot up.

Short-sellers (especially retail traders) are bulls' best friends.

Duke,

>>I think we need to nullify all CDS where the party hedging debt has no interest stake (or a trivial stake) in those bonds. The math is scary.

Allowing tradable "insurance" polices that exceed the underlying insured asset is like having multiple fire stations starting an office pool on whether your house will burn down. The odds are that no-one will show up if somebody sets a match to the house.

Duke,

I asked the the question further up in the thread whether the lift of the shorting ban in some perverse way was related to the fact that a big chunk of Lehman CDSs are coming due Friday 2008-1010, which you also mentioned.

Any insights on that?

I think we need to nullify all CDS where the party hedging debt has no interest stake (or a trivial stake) in those bonds. The math is scary.

Sorry, but you really know nothing about the financial market.

Nothing should be done. It is so simple.

LET THE BANKSTERS EAT CAKE.

Capitalism is driven by the prospect of success and the reality of failure.

I missed this on SNL, but heard about it and finally tracked it down. It was missing from the NBC video website for a few days.

http://gregmankiw.blogspot.com/2008/10/snl-on-financial-rescue.html

Duke,

is there a real way to nullify CDS contracts? Every article I've read points to how complicated the web is, and how they wouldn't even know how to start a process like that.

At this point, if there is a way to stop the carnage by changing the rules in the banking industry, then they'd better do it quick. I don't give a shit if some banker doesn't get his payout on a CDS. They lost all their rights when they started sucking the taxpayer tit.

Nullifying private contracts is what communists do.

Wow, MLEC and Super-SIV. I had almost forgotten about that whole thing.

http://en.wikipedia.org/wiki/Master_Liquidity_Enhancement_Conduit

It was announced on 2007/10/15, and never went anywhere, likely because the banks did not trust each other. This was in the aftermath of the initial 2007-08 credit meltdown.

Another analogy: CDS is the policy (yeah pun) of mutually assured destruction of the financial world. Now, how are we going to force all the actors away from the launch button?

I know Peter P wants to launch and have all the Banksters eat cake, but then so will the rest of us.

forgot to add...
it's a pretty funny skit.
It may be a sign that we are hitting the phase of the crisis, long predicted on this blog, where people who were involved in risky lending are constantly and publicly lampooned. (the "how could we/they have been so stupid??" phase). Anyone who saw the dot-com bust or the S&L crisis will understand where we are at now.

I know Peter P wants to launch and have all the Banksters eat cake, but then so will the rest of us.

I doubt you have enough skin in the game to care.

Look Peter I appreciate your free-market-or-die approach. I do.
I think failure is exactly the right perscription for bad bets.

What you fail to see is that this unregulated market has intertwine everyone. The amounts payable are impossible to pay. Whole sectors will be wiped out. Whole nations.

I suppose the realty may be that a counter-party simply refuses. The challenge the legality of the claim and buy time with legal review.

Since we have heard from every branch of the governement so far, I suppose it is time for the Judicary to step in.

They can call CDS, 'illegal and unenforcable contracts' which would satisfy Peter P's pathoological desire to follow the letter of the law in the free market world. Namely, the law would say, "In our legal opinion these contracts never existed,'

And yes Peter, the free market can do things like enter into contracts for things like human organs. And yes Peter, those contracts are illegal.

Justme,

I don't think so. The length of the bans is jist Cox makng this stuff up as he goes along. I guess the insider view wouldsee it like this:

Someone, say GS, knows the counterparties to the Kehman CDS. Say, Mogan Stanly. GS takes an enormous short against MS today. Tommorrow, MS reveals it owes $900b on CDS and MS goes under. GS then covers it short with MS stock at near 0. GS makes a killing.

Phew, there is so much money at stake - mebbe? Wow, I would love to see the legal review of that trade. Especialy if GS was orignally asked to be the hedge of Lehman bonds, they refused, then they recomended MS.

They would have material information not know o the rest of the market. and their profit would be grotesque.

What you fail to see is that this unregulated market has intertwine everyone. The amounts payable are impossible to pay. Whole sectors will be wiped out. Whole nations.

Scary tactics worked on you, huh? :)

If the amounts payable are impossible to pay, then no one will be payed as everybody cross-defaults everybody else. So what? They entered the game with full knowledge of credit risks and systemic risks. It is a fair game.

You think us human beings can be wiped out by numbers on pieces of paper? Not so easy.

And yes Peter, the free market can do things like enter into contracts for things like human organs. And yes Peter, those contracts are illegal.

They ought to be legal.

Bankster want a bailout? That is going to cost him a kidney!

Hi SP - I am still around - can't shake the habit of checking Patrick now and again after about 5 years of reading this blog - but I kinda stopped posting as it was like watching paint dry in this area of ours. Most houses in Mountain View and some in Los Altos now seem to be selling for 10% less than original asking price - but they need to come down a lot more than that and I am hoping the Alt-A resets will do the trick, along with a weakened tech.

However, I am now thinking that if the stock market doesn't improve in a years time, then we will no longer be in a position to buy a house ourselves(i.e my husband will be looking for a new job) and we would be better off being mobile.

Bap33 - where are you located roughly - offering for?

Dennis would certainly kow better than I the statue for legal and illegal contract, but I would guess the test is this:
Is the contreact harmful to society; so:
Parents cannot enter contracts to sell their children (in whole or in parts)
You cannot take a contract to have someone killed
You cannot take a contract to dump toxic waste in Giradelli square
You cannot take a contract that will trigger $600t of other contracts.

Large governments are harmful to the society and they too should be illegal.

Duke,

That's the thing. I'm not sure it would be illegal, and this is exactly what I was thinking about.

I think the claim now is this:
"No one knows who the counterparties are."
If someone knows, and they short that counterparty you have a good 'ol SEC violation. It is a meterial piece of information not publicly available. The easiest way to detect who had the insider knowledge? Look who shorts Lehman counterparties today. The forensic FBI/SEC stuff will crucify them.
Dunno, maybe Cox expired the shorts just so he can catch a bad guy and say, "See! I am doing my job! I caught a bad guy!"

duke,

What's the new prediction for markets? some how dow 8500 feels really old.

Good call Duke!!

That is a very good question sa.
The Dow prides itself on being forward looking by 6 months. Given this credit crises is triggering mass-replanning in the busines sector which will show up in lower earnings going forward. . .these are the underlying fundamentals of the contraction.
In the near term we have game changers like: bank holidays, closing the excahnges (here or abroad), the capital injctions due at the end of this month, the outcome of the Lehman CDS event (and possibly others), a specualtive currency attack, the extent to which Europe can keep first Ireland, then Greece and Spain afloat.

How about this: We see DOW 7,500 by end of October. If the world doesn't do a better job of sorting the bad banks from the truly awful (you can't save them all) and if the world does not figure out how to difuse the CDS threat, we can go to Dow 4,000 by year end, this means we could get Dow 2,000 the next year. And all of this is going way faster then I thought possible.

If we DO a good job by end of october and some measure of international cooperation an thus confidence can be achieved, how about Dow 7,000 at year end?
Sadly, nations are already moving to strengthen their own currencies. The unwinding of globalization as well as the deflation of the credit bubble is making the bad scenario look more probable. . .

The next 3 months will tell the tale.

Will Bernake's theory on reflating the money supply work? Or were the Austrian economists right in saying there's no way you can stop it.

Also, will Bernake pick the RIGHT place to reinflate? Is it with the banks? Is it through public stimulus?

This is one hell of an experiment we're running.

Bap33 - yep, sorry my question was a bit cryptic. Thanks for replying. I was wondering where your location was in comparison to ours to work out if those prices you're talking about are likely to occur here for us down the line.

I was browsing some house listings in South San Jose - where I originally thought of buying when I first realized I was priced out of the area we rent in and the S San Jose houses are now priced in the $400,000 - $500,000 range down from the $700,000's.

We could afford one of these, but I'm thinking they are going to sink lower, after all, we still have all those Alt-A's out there to go. So I am hoping that after the Alt-A's even Mountain View and Los Altos will be within our reach (the good school district areas) and by then we should know whether the company my husband works for will survive.

On topic -

The only thing I like about the bailout is that it included some legislation that allows my family to dodge a bullet we didn't even realize we were in the line of fire for - ISO's - phantom profits. I think this was included as the government has realized a lot of start-ups are going to go belly-up and a lot of people would have been in a bad situation - but maybe that's just me thinking the government acted intelligently for once - nah, that's not possible for them.

$700 billion has just gone down the toilet never to been seen again I am sure.

Well, direct stock injection seems to be the buzzword of the hour. From what I can tell (third hand, from a discussion on CR using text from Roubini), TARP gives Paulson this authority via a discussion (between Reps Moran and Frank) of the bill in the House legislative record before it was voted on... All is not lost. Call your representatives: "Give me equity or give me death."

I suck.

EBGuy,

Yes, indeed. It looks like Paulson for once is about to do it right. But of course the devil is in the details, especially as concerns price paid for preferred stock.

My mantra is still BUY senior-preferred-voting-convertible-stock ONLY.

What is funny today is that some MSM are acting all worried about using the bailout to buy preferred equity. WTH? Do they not understand that this is infinitely better than buying overpriced assets? Did they not pay attention at all during the bailout discussion?

Actually I think I know what is going on: Regular folks and the MSM have seen stocks drop very rapidly in value during the last two weeks. They think buying preferred stock in banks is similar to their own speculation in the stock market, and therefore bad. Time for another round of educating everyone. The Buffett analogy is probably the most effective method.

Hey, maybe Cox and Paulson allowed shorting again just so that we the tax-payers can get a better deal? That would be too good to be true :-).

C:aire

l searched through the senate version of the bailout bill to figure out what you meant about ISO pahnatom gains. On page 268 I found:

‘‘(f) TREATMENT OF CERTAIN UNDERPAYMENTS, IN7
TEREST, AND PENALTIES ATTRIBUTABLE TO THE TREAT8
MENT OF INCENTIVE STOCK OPTIONS.—
9 ‘‘(1) ABATEMENT.—Any underpayment of tax
10 outstanding on the date of the enactment of this
11 subsection which is attributable to the application of
12 section 56(b)(3) for any taxable year ending before
13 January 1, 2008, and any interest or penalty with
14 respect to such underpayment which is outstanding
15 on such date of enactment, is hereby abated. The
16 amount determined under subsection (b)(1) shall not
17 include any tax abated under the preceding sentence.

But does that really mean that paper gains on exercising stock options will no longer be taxable, or is it something less dramatic than that? Do you have a reference to an independent analysis?

OK, I am going to a few open houses this weekend, I want to see who these brave souls are that haven't gotten the memo.

Fed might as well do a 1% cut. I already said BB wasted the last 50pt cut, it was too baby step, if he wants anything that will be remotely useful, he needs to pledge to the market participants that if you do not buy stock, I guarantee that your USD on hand will become worthless.

Thanks TOB!

My mantra is still BUY senior-preferred-voting-convertible-stock ONLY.

What are you talking about?

What is a convertible stock? Shares that convert to toilet paper? :)

Most preferred stocks are non-voting. Convertible bonds are like debt with equity options (i.e. derivatives!).

Are you talking about convertible preferred stocks?

justme

http://www.marketwatch.com/news/story/coalition-tax-fairness-reformamt-praise/story.aspx?guid={239AC5CE-8657-4FD1-83F0-9FB0C0AC9571}&dist=hppr

This is where I got the info about the ISO AMT tax reform, but maybe it only fixes past problems and not any incurred in the future?

Did anyone look at H3?
http://www.federalreserve.gov/releases/h3/Current/

WTF!!!

justme

:-(

You're right - looks like the AMT ISO fix was just upto this Jan 08, so going forward anyone who has ISO's in a company that goes bankrupt could be in for a big tax bill. Damn, just when I wanted to credit the government with being decent for once!

Guys,

it is really not the time to argue whether buying preferred or common or whatever is the best for the taxpayer, save it for another day.

If the Fed and Treasury doesn't take care of this credit market clogging problem, we will revert back to bartering within a week! There will be no gas, no food and supermarkets will be completely light out. There are already reports of grain producers not shipping at all because they cannot trust the LOC or payment guarantee of the other side. Now multiply this situation by 10x.

The government has to do something right now, something drastic, like straight printing, guaranteeing all bad loans there was, there is and there will be.

One's wealth will pretty much by measured by your ability to secure food, and your ability to defend your food source. Got guns?

Should we shop for Apocalypse now?

I don't want to survive on freeze-dried food. :(

What do you guys think about frangible ammunition?