Sunday, September 21, 2008

This Weekend's Contemplation - In Case You Thought the Markets Were Not Manipulated

Just in case you wondered whether or not the markets were manipulated. Debating whether this is good or bad is a whole different issue. Text in bold is my emphasis. See the following two articles from Market Watch:

The Treasury Department said on Saturday that its financial rescue plan could permit it to buy assets beyond those backed by mortgages and potentially buy them from foreign holders.

A fact sheet issued by Treasury on legislative proposals it has before lawmakers said the intent was to buy residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans, but added a significant proviso.

"The Secretary will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets," the fact sheet said.

Troubled assets eligible for purchase should come from financial institutions with "significant operations" in the United States. But it said there could be an exemption to that condition by the Treasury secretary, in consultation with the Fed chairman, that broader eligibility is necessary to stabilize financial markets.

Treasury said it would try to set prices for assets it buys using market mechanisms where possible, adding that included the use of "reverse auctions," in which financial institutions would offer their assets for government purchase.

The second article from Market Watch:

U.S. and U.K. regulators may have restricted short sales, but investors have other tools to protect themselves from falling share prices, The Wall Street Journal reported.

And some consequences of the restrictions might be unintended, the paper reported.

The U.K. Financial Services Authority on Thursday restricted short sales of financial stocks. The U.S. Securities and Exchange Commission on Friday banned shorting - bets that a security's price would drop - of roughly 800 financial-services stocks through Oct. 2.

Volumes in credit-default swaps, other derivatives trades and options are likely to rise in the wake of the short-sale restrictions, the Journal reported on Saturday.

Derivatives like credit-default swaps aren't publicly traded, and their growth and their lack of transparency have raised concern, the Journal reported.

In addition, some exchange-traded funds enable bets against the financial sector, and short-sellers might now turn their attention to financial-related stocks that aren't on the regulators' restricted list, the paper reported.

The short-sale restrictions also could affect the corporate-bond market, the Journal said. Investors who buy convertible bonds will often short the same company's stock as a hedge, the paper said.

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