THE DOT - if this turns orange or red be alert

Tuesday, May 11, 2010

Tuesday Brainstorming - part 1

1. So far we almost exactly repeat the events of the TARP whipsaw as explained yesterday with the chart - the only deeply disturbing fact is that we have massive puts being bought for 5 days in a row now. During the whole crash from 1200- 666 in the Sep08 to March09 period we had only one 67 ISEE day, last week we had 3 consecutive days below 67 and even yesterday it closed at 84. The amazing part is that all are extreme sentiment statements for themselves but in such a concentration rather disturbing.
Furthermore is the fact that the SEC has no clue what happened not only a disgrace but puts it rather on a weak spot as the biggest exchange and will undermine the Dollar and value of stocks going forward as the save heaven status losses credibility.

excerpt 1

SEC Admits Cluelessness About Market Crash After Intimate Meeting With Guilty Parties Who Refuse To Take Blame

It appears that the SEC's extensive deliberations on what the cause for Thursday's crash was, have yielded no answers. Mary Schapiro, proving again that she is nothing less than an intellectual titan, met with all the guilty parties in last week's market crash, in a meeting in which shockingly, none admitted that the crash was all their doing directly and indirectly. Bloomberg reports: "The chief executive officers of NYSE Euronext, Nasdaq OMX Group Inc., Bats Global Markets Inc., Direct Edge Holdings LLC, International Securities Exchange Holdings Inc. and CBOE Holdings Inc. saw no evidence that a mistaken order caused the plunge, according to the people, who asked not to be named because the discussions were private." No, instead of raising their hands and saying it was all their fault, the execs all said that the SEC needs... circuit breakers. Which is funny cause the market already had those in overabundance. We all saw how much good curbs and circuit breakers did when the Dow was dropping by 100 points every second. So sure, let's deflect a little longer until the next market structure induced crash comes, which will take the market down by not 10% but 30%, 40%, or more. And, as usual, the SEC will say "Well, we tried, but nobody really foresaw this." And that wold be ironic, because even though the SEC could be excused for not reading blogs or anything else that is not linking externally from, one would think they do on occasion turn on Bloomberg TV. Which is why we bring your attention to this clip from February of this year, in which Themis' Joe Saluzzi pretty mich predicted to the dot what would happen. And instead of consulting with those who actually predicted the whole collapse, the SEC instead seeks advice from the parties responsible for the crash, and whose entire business model is dependant on perpetuating the status quo. This is the thought process of an an agency which receives $1 billion in taxpayer funding each year.

2. Buffet violates insider rules with CEO of Moddy's as they clearly take advantage of information which is delayed to the public. That are criminal intentions and need to be dealt with by the SEC and DOJ.
Buffett's business ethics are very obscure to say the least as he again did a very questionable thing with his Moody position he defends with his mouth but not his actions. The problematic part is really that he acted on an information which was not made public at that time and qualifies for insider trading. Moody's Wells notice was published just a few days ago but Buffett obviously got that information as it arrived and acted on it by selling big amounts of shares.


Buffett Has "No Comment" On His Sale Of $30MM In MCO Shares Just After Moody's Wells Notice Receipt

As Zero Hedge first pointed out on Saturday, Moody's is in very big trouble - in its 10Q, in the very last paragraph of the very last page, the company indicated that on March 18, it had received a Wells Notice and a recommendation by the SEC to pursue a Cease and Desist order against the agency's NRSRO status, in effect killing its business model. This was not lost on the market, which punished Moody's stock by 10% yesterday even as every other stock went vertical. When all is said and done the 10% could well become 100%, and as far as the market is concerned nobody would shed a tear: the conflicted rating agency model is long dead, and the independent third party vendors are the only ones that add any actual value at this point. However, far more interesting are the actions by Moody's CEO Raymond McDaniel and key shareholder and kindly grandfather, Warren Buffett, both of whom sold millions worth of Moody's share and stock, the day of, and just after, the Wells notice receipt. The New York Times has reported that Buffett, who recently has not had a problem commenting on pretty much everything, and was vociferously defending not only arch monopolist Goldman Sachs at his annual ukulele outing in Borsheims, but Moody's as well, has had "no comment" on his sales. Perhaps it is time for someone to take Mr. Buffett to task, instead of just to his word: sure, it could be just a coincidence... or three - he sold over $30 million in MCO stock on March 19, March 24 and March 26. Or it might not. However, now that it has become far too clear that nobody in the finance business has a shred of integrity and honesty left, perhaps it is time an independent and impartial jury to decide if any impropriety based on material, non-public insider information, was committed.

From the New York Times:

According to regulatory filings, Raymond W. McDaniel Jr., Moody’s chief executive, sold or exercised options worth about $4.3 million on March 18, the same day that his company received the Wells notice.

Moody’s shares closed at $29.66 the day of Mr. McDaniel’s sale, near their high of $30.54 so far this year. Moody’s shares have traded as low as $18.50 over the last 52 weeks. On Monday, the shares fell as much as 12 percent, but finished the day down 7 percent at $21.77.

Moody’s said Mr. McDaniel’s sales in March were part of a prearranged plan established about a month before the Wells notice arrived.

Berkshire Hathaway, the investment vehicle for Warren E. Buffett and a major Moody’s shareholder, also sold more than one million shares worth more than $30 million on March 19, March 24 and March 26. The sales represent a small portion of Berkshire’s overall stake in Moody’s. Berkshire did not return a call seeking comment about its sales. A spokesman for the S.E.C. would not comment on Moody’s disclosure.

And an even bigger problem for Moody's is that the Wells Notice, with its open ended outcome, comes at a horrible time for the firm - in a book straight out of Goldman Sach's future, Moody's is now struggling to even keep up with all the lawsuits that are hitting it not daily but hourly. It will be difficult for the SEC action not to precloud the judgment of any of a variety of juries that will be asked to opine on just how potentially criminal Moody's actions may have been in allowing toxic sludge to be rated AAA+++ for a good 5 years, and, according to some, to allow the credit bubble to reach its historic proportions.

According to Moody’s, the S.E.C. was prompted by a report in May 2008 in The Financial Times. The article stated that in 2007, members of a committee that oversaw a certain type of European derivative — called constant proportion debt obligations — knew that some of the products had been given inflated ratings because of a problem in the company’s risk modeling software.

Without that problem, The Financial Times reported, the bonds would have received ratings as many as four notches lower. Moody’s corrected the software error, but the bonds maintained their Triple A ratings until January 2008.

Moody’s hired an outside law firm to investigate the matter, and subsequently took disciplinary actions that included terminations, according to Mr. Adler. He declined to provide further detail.

In June 2007, the company submitted an application to become a nationally recognized statistical rating organization, as required by S.E.C. regulations. That application included a code of conduct. The Wells notice essentially says that because Moody’s employees had violated that code, the application included a false and misleading statement.

What the S.E.C.’s action will mean for lawsuits against the ratings agencies is unclear, though Adam Savett of RiskMetrics, which has tracked the litigation, predicts that it might serve as a thumb on the scale for plaintiffs’ lawyers.

“Judges are human and when they look at the facts of a case, if this Wells notice turns into an actual lawsuit, it will become part of the gestalt when judges weigh whether to allow cases to go forward,” he said. “Then again, if you take a step back, the judges in these cases have been focusing very narrowly on the facts before them, taking each case on its merits, teasing out the true culpability. There was a concern in the business community initially that there would be mass lynchings for the ratings agencies in courts across the country. But that has not happened.”

If we were betting men, we would say those MCO $2.50 strike 2011 Puts look damn attractive right about now. Since we are not, we will leave the trade to some other, soon to be much richer, gambler, better known as investor.

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