The Ticker

There's no such thing as fairness in the government's efforts to fix this crisis. Investors need to keep that in mind as the terms of the bailout evolve (for the most entertaining example witness Treasury Secretary Henry Paulson and bailout czar Neel Kaskari spending their day defending their decision to revise the TARP program against angry lawmakers today.)

Highlighting the unintended consequences of one part of the program, Sivaram Velauthapillai, who blogs at Can Turtles Fly?, makes a good point about how the Fed's decision to support only top-tier commercial paper in its financial sector backstopping efforts might be hurting companies that don't qualify for government  support. He points to this Bloomberg article for evidence. It says a group reportedly including Textron, Nissan, and American Electric Power, Home Depot, Dow Chemical and Honda -- a collection of not-awful companies -- are pressing for the Fed to fund their second-tier commerical paper (right now, the Fed only buys top-rated paper). Velauthapillai writes:

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A Barclays note on commodities says a lot about how scared markets still are:

• The signals that commodity prices are moving ever further below long-term equilibrium levels continue to proliferate. However, despite the growing lists of producers cutting output and projects being cancelled or deferred, commodity prices show little sign yet of bottoming out. In fact in most energy and industrial metals markets, the price decline has accelerated again over the past week.
• Current price levels are likely to encourage demand to grow much faster than supply over the medium term, but with financial markets showing few signs of stabilising and while economists continue to play leapfrog in their downgrading of 2009 growth forecasts, it is unlikely that downward price trends will be interrupted just yet.
• For investors the key theme is still one of risk aversion as market participants continue to reduce both counterparty and market risk. Consequently, hedge funds, institutions and retail investors are still liquidating their long positions in commodities and the downward price momentum that this is causing is feeding aggressive shorting of a number of markets by technical traders.

The point: The fundamentals of supply and demand are still a secondary concern in all sorts of markets, and it's not industry patterns that are driving selling across the commodity spectrum. Instead, it's fear -- of credit problems, of unknowns at hedge fund -- and confusion over just how bad the global slowdown will get that are creating a wild trading environment everywhere. On a day where stocks tested their lows for the year before posting a big rally in the afternoon without much in the way of credible explanation for either, investors shouldn't expect trading to calm down soon.

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Give Henry Paulson some credit for an impressive slight of hand: On his watch, the government set up a massive bailout plan, and without spending a dime of those funds for their stated purpose managed to convince lending markets to calm down (at least for now. Track regular updates at Calculated Risk).

Treasury Secretary Paulson's announcement today that the government won't use its $700 billion Trouble Asset Relief Program to do the very thing its name implies (buy up troubled assets) should still prompt some minor disgust among those admittedly few investors who believed the government had a secure handle on the problem. Instead, the evolving nature of the plan is now just acquiescence to earlier proposals heavy on direct investment in troubled institutions. As Paulson put it, “I will never apologize for changing an approach or strategy when the facts change."

Some reactions:

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And they didn't even go bust!

This week a new wave of stories chronicling the decline and fall of Wall Street as we knew it take some pointed jabs at Merrill Lynch as it tumbled toward its final sale to Bank of America.

Over at Portfolio, Michael Lewis revisits his "Liar's Poker" days with this nugget about short-seller Steve Eisman of FrontPoint Partners:

Not long after that, FrontPoint had a visit from Sanford C. Bernstein’s Brad Hintz, a prominent analyst who covered Wall Street firms. Hintz wanted to know what Eisman was up to. “We just shorted Merrill Lynch,” Eisman told him.

"Why?" asked Hintz.

"We have a simple thesis," Eisman explained. "There is going to be a calamity, and whenever there is a calamity, Merrill is there." When it came time to bankrupt Orange County with bad advice, Merrill was there. When the internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit. That was Eisman's logic - the logic of Wall Street's pecking order. Goldman Sachs was the big kid who ran the games in this neighborhood. Merrill Lynch was the little fat kid assigned the least pleasant roles, just happy to be a part of things. The game, as Eisman saw it, was Crack the Whip. He assumed Merrill Lynch had taken its assigned place at the end of the chain.

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