Bloodless Coup

There is a colorable, history-based argument suggesting that developments like this indicate that the bottom isn't too far off.

Conventional Wall St wisdom holds that new bull markets begin when the last of the optimists "capitulate" -- bail out of stocks. "Flight to quality" indicators -- like, say, tremendous demand for Treasury securities -- are considered signs and portents of capitulation.

If Goldman Sachs and Morgan Stanley somehow manage to project stability and confidence -- whether through mergers with depository banks oor through I-dunno-what -- and no other surprises pop up in the near term (a Washington Mutual collapse or the like wouldn't count as a surprise; I think a lot of folks are already expecting WaMu to be this weekend's collapse, and the market has set prices accordingly), it's not impossible that we could be through the worst of the storm.

And actually, in a perverse way, the rush to Treasuries is a good sign in and of itself -- at least investors still consider Treasuries to be the best store of value in the world. If the flight to quality was taking money OUT of the US, that would be a really awful sign.

I did see a blub/blogpost somewhere that showed capital flight out of the US. Not trillions, but a hefty store of billions. Not sure where that was; if I find it I'll post it.

I'm happy to think we're at the bottom. If it gets any worse, I'm not sure where the bottom is.

Another interesting question concerns the shape of the future: it's clear that this has been unprecedented in a modern financial sense, and I'm very curious as to what regulatory/legal changes come down the pipeline to "prevent" this sort of thing from happening again.

I'm also curious to see what the Fed and the Treasury look like. They've been acting in some ways (and in some markets) that they've never done before.

The regulatory changes will be to impose some sort of transparency on the global derivatives markets and to set leverage limits on institutions (like the ones that were lifted on the big five a few years ago, if that NY Sun story is to be believed.) And yes, if that story is true I expect it to become THE popular narrative of this crisis, with frogmarched executives to follow in short order, no doubt.

At some point the more aggressive hedge funds -- who are the pirates on these seas at the moment -- will get slapped down too. Really, just about everyone would like to see the hedgies doing some frogmarching, but most of what they're doing is completely legal. Just nasty. Not that that stops the DoJ these days - take enough 9 hour depositions and you'll eventually generate some inconsistency you can base a perjury charge on.

But re regulation... if Obama is successful, look for a lot of changes at the SEC the moment they give him the keys in January. I am not sure we'll see much before then, though SecTreas and/or Barney Frank may force the issue in the coming weeks.

What the Fed looks like? How about this?

I'm revising and extending my remarks. Looks like this revive-the-RTC-zombie thing that Barney mentioned in passing on NPR the other day has taken on a life of its own. I wouldn't be surprised if they managed to get it created tomorrow -- there's a fuck of a lot of exhausted improvisation going on right now in the offices of everybody involved in this mess, all day and all night -- but next week is probably more likely.