Senate Passes Revised Rescue, SEC Extends Ban on Shorts, Futures Not Ripping

The Senate voted 74 to 25 to pass the new and improved bailout bill. The Senate version included an increase in FDIC coverage on deposits from $100,000 to $250,000. The plan also granted the FDIC unlimited borrowing ability from the Treasury through 2009. That sums up the portion of the bill that actually addresses some of the panic that consumers are facing over whether their money is safe in the US banking system. The other provisions, which allow the Treasury to issue $700 billion in debt to purchase illiquid securities from banks at above-market prices, give the SEC the authority to suspend mark-to-market accounting, and grant $150 billion in completely unrelated tax breaks, I find patently absurd. If my brief summary of the highlights does not suit your need for details, you can read the entire 451 page document here.

Not to be outdone by the Senate, the SEC extended its ban on the shorts until either three days after a bailout bill is passed or no later than 11:59pm Friday, October 17th. At least the idiots at the SEC had the sense not to repeal the law on an expiration Friday which would've wreaked havoc on the market similar to what occurred on September options expiration, when bank stocks experienced extraordinary volatility. What did the short-sale ban actually accomplish? It didn't keep insolvent institutions like Washington Mutual and Wachovia from failing. But at least it is perfectly clear that short-sellers had nothing to do with the precipitous falls in the stocks of the two large banks. The ban couldn't stop the market from dropping 8% in one day on Monday. It did allow several banks to raise capital at what I believe will prove to be inflated prices. Sure Warren Buffett jumped in and bought some preferred stock, but he received 10% dividends and free options. Most other long-only investors, the only investors allowed to participate in the market in the past two weeks weren't so savvy. What the short-sale ban actually accomplished was increased volatility and decreased liquidity in stock, option, and convertible bond trading. In retrospect, it will be viewed as a desperate attempt to manipulate markets higher by an inept organization that failed to regulate the broker dealer industry while it levered itself to the hilt and created the current credit crisis.

Despite all of the "positive" actions by lawmakers overnight, futures are pointing to a lower open. Stress in the money markets persists while signs of significant slow-downs in the economy evident in weak car sales, continued home price declines and companies unable to secure short-term funds on a reasonable basis keep popping up in economic numbers. Whatever the case may be, investors are beginning to realize that the $700 billion bailout may not be the appropriate solution to produce a quick turnaround in our economy.