New Blog - FOSS Trading

I've started a new blog to focus on trading and quantitative finance using free open source software. I will post updates on my R packages on that blog instead of Quantitative Contemplations.

You can find the new blog at http://blog.fosstrading.com.

Short Sale Ban Lifted

Today was the first day since September 19 that many financial stocks could be sold short. And there was certainly a lot of selling today. The Financial Select Sector ETF (XLF) dropped 10.4%.

If you only consider today's action, you may conclude that the short-selling ban was working. That could not be further from the truth. Financials rose nearly 12% on the day the ban was instituted, but it was almost all downhill after that. Only 4 of the next 13 days were positive. Over the whole period the ban was in effect, the XLF fell 23.6% (from the close on 9/18 to the close on 10/8).

The major indices have seen declines, many of them severe, in the last 7 consecutive trading sessions. We most certainly would have seen a short-squeeze within that period, had short sales been allowed.

Botched Bailouts

I've been following the government's many recent financial bailouts (Fannie and Freddie, AIG) and interventions (Term Lending and Auction Facilities, short selling rules, RTCII) fairly closely.

There has been much discussion of how deregulation of the financial industry lead to this crisis - especially in the case of the (former) five firms that 'enjoyed' net capital exemptions from the SEC - and how the government's recent actions smack of socialist policies.

Until Friday, I had not read anything about how these actions may have exacerbated the financial crisis. Jim Jubak does a superb job of outlining how these rescues have actually made some things worse. The whole article is worth reading, but the highlights are below.

[I]n the name of creating an orderly liquidation of a company such as Lehman Bros., they create a mad scramble to get paid before the bankruptcy court can act.

By wiping out the Fannie Mae and Freddie Mac preferred stock, the Fed and Treasury killed off any possibility that some other financial institution in need of capital could raise cash by selling these dividend-paying shares.

[T]he Treasury and Fed have ensured that no conservative, income-seeking investor in his or her right mind would buy preferred stock from a troubled financial company looking for capital.

After drawing a line in the sand and saying no more bailouts, the Fed and Treasury ponied up $85 billion in taxpayer cash to go into the insurance business. Their excuse for the about-face: Though the Fed had planned for a Lehman bankruptcy, it hadn't modeled a failure at AIG and couldn't predict the consequences of letting the company go into bankruptcy. That's not reassuring.

Source:
Botched rescues are killing markets
Jubak's Journal 9/19/2008 12:01 AM ET

New R-Finance Group on LinkedIn

I've created a new group on the professional networking site, LinkedIn. It is oriented toward finance useRs. The goal of this group is to help members:

• Reach other finance useRs (you decide if group members can contact you directly)
• Accelerate careers/business through referrals from R-Finance group members
• Know more than a name; view other members' rich, professional profiles

Click here to join. Joining will allow you to find and contact other R-Finance members on LinkedIn.