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Zanibel17 (97.49)

Behind the Scenes of the 340+ drop on August 16th

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September 05, 2007 – Comments (3)

Everyone should read this article about why the market dropped 340+ points and then recovered it all right before the closing bell that Thursday afternoon less than three weeks ago.  The logic goes something like this:

The market tanked on the news that Countrywide, the #1 mortgage lender in the U.S. and financial behemoth, was on the verge of insolvency (let's call it what it is) and would have to tap into it's $11.5 billion line of emergency "last resort" credit that day.  But because the market reacted so violently to the news, the Federal Reserve swooped in and 'leaked' the news that it intended to lower the rate at the discount window (and alter a few rules about what would pass as collateral) the next day to make it possible for those lender banks to Countrywide to effectively pass on their Countrywide debt to the Fed.  The market shot right back up in response to the news.

I pretty sure I'm not the only other person in the world who recognized that Thursday afternoon that something was going on behind the scenes.  Then when the Fed announced the discount window rate cut the next morning my suspicions were confirmed.  With that in mind I ask sincerely:

1.) How many decisions take place in Wall Street's inner sanctum that only profit or protect those members of the inner sanctum?

2.)How, as an individual investor, are we to profit or protect ourselves when we are not privy to insider information in situations such as this?

3 Comments – Post Your Own

#1) On September 05, 2007 at 2:32 PM, TMFHelical (98.75) wrote:

Zanibel,

First, we all benefit, but of course not to the same degree.  The government does have to at some point prevent a total market collapse that could take decades to sort out.  A depression hurts everyone.  As for question 2, be a well diversified long term buy and hold investor should do the trick (or were you looking for more of a get rich quick answer - in which case I have none).

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#2) On September 05, 2007 at 5:20 PM, Zanibel17 (97.49) wrote:

I agree, HelicalZz, that now would not be the time for Bernanke or the Federal Reserve to play a game of "What happens if we just sit here and let those TBTF (Too Big To Fail) go ahead and fail?"  It's the Fed that made this mess (my opinion) so they get to mop it up.  I guess I'm just bitter at the mop they seem to have chosen.

I don't think it's too much to expect those in charge of "maintaining order" in the U.S. markets to have an understanding about what a potential shitstorm we are in, rather than spending the greater part of this entire year pushing their message of 'subprime containment' and 'goldilocks' warm-fuzzies on the unsuspecting public.  Meanwhile greedy CEOs in the mortgage lending and Housing Industries quietly sell-off the stock they hold in their own companies, while secretly knowing the day of reckoning is at hand for anyone who's bought the shady paper they dealt including - surprise! - pensioners and baby boomers just about to retire.

Transparency is sorely lacking on Wall Street today, and so is truth.  With that in mind, I don't see how an honest investor won't get chewed up and spit out by this machine.

 

 

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#3) On September 06, 2007 at 11:30 AM, Imperial1964 (97.78) wrote:

I'm divided about how much we all benefit from bailing out mortgage lenders, homeowners who got in over their head, etc.  Perhaps I just believe in an old-fashioned idea of personal accountability and perhaps I don't quite see all the doom and gloom associated with purging a few lenders and bad mortgages.

I posted a pretty-good rant in my blog about how I think bailing out risky mortgages hurts us all.

So far, I think Bernanke has played the situation well, except for "leaking" the discount rate change.  Some shorts really got burned good on that one.  I didn't; I'm long-only until I'm more experienced--even if I think the market is headed lower.

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