The markets could change their name to ‘Yo-Yo’ today rather than the ‘Skydiver’ label they have had recently. The VIX (intra day volatility) reached multi-year highs of 40. There was further central bank intervention to pump more money in the market. But the really big news is the first overseas curbing of short selling financial stocks in the U.K. and word that the U.S. government is preparing a new version of the Resolution Trust Corporation. The S&P finished up 4.73% yesterday as a result… what financial crisis?

Ban on Short Selling

The UK’s FSA and the Irish Financial Regulator have banned short selling of financials for 30 days, and it looks like the USA’s SEC are getting ready to do something similar. This applies to AIB, Bank of Ireland, Anglo Irish Bank and Irish Life & Permanent in Ireland and all four have seen a huge jump in share price this morning. Anglo was up 125% at one stage this morning! Of course you can still buy put options. Capitalism has been abolished.

So What Was The Resolution Trust Corporation?

CNBC had a highly speculative report last night that Comrade Hank Paulsen is considering setting up a facility to buy up banks investments in debts that have gone sour. The facility would effectively then free up afflicted banks capital and potentially improve their credit ratings. There is a precedent for this in the Resolution Trust Corp (RTC) of the late ‘80’s and early ‘90’s which I have mentioned here before as a possible solution to this debacle.

The Resolution Trust Corp came into being after the failure of the Federal Savings & Loans Corp which provided deposit insurance protection to the Savings & Loans (small local building societies), 296 of which collapsed in a short space of time. The RTC was tasked with taking on the assets of the failed Savings & Loans and working them off. It lasted until 1995 & cost about $100bn.

While RTC II (RTC Redux?) has always looked the end game best option to stabilise the housing market, it will require Congressional ACTION. This, in this scribes humble opinion, is unlikely with 60 days to go to the election. RTC mark I did a fine job but it took a LONG time to work. Mark II could prove VERY VERY expensive at a time when the Federal budget is as a stretched as it’s ever been. The alternative would be something along the lines of Senator Chuck “Che” Schumer’s idea for injecting capital, leaving the government owning bank stock. This used to be called communism.

In sum I’d say that this issue is NOT going to be resolved in the timetable that the market is currently looking for.

State Street Troubles

State Street was the big loser yesterday. There are concerns about the viability of its conduits (off balance sheet vehicles), but it looks like the real fears may have been around it not being able to loan as much stock for short sales. Shares were down 15% at $54.99 right at the close but they had dipped down to about $30.00 intraday at the worst point.

State Street, like JP Morgan and Bank of New York Mellon, are massive CUSTODIANS i.e. they hold huge amount of client account stocks and earn big fees from LENDING out this stock (to hedge funds for example) who can then go short. If short selling is no longer allowed well then they will no longer be able to earn these once lucrative fees.

Equity Briefs

• Talk of Santander bidding for Bank of Ireland? Mind you they have been linked with everyone including WaMu and RBS yesterday.
• A report of Anglo Irish interest in Irish Nationwide. So consolidation in Irish financials? Bank of Ireland for Irish Life & Permanent next?
• The Lloyds / HBoS presentation to investors yesterday was amazingly short of details and dodged virtually every hard question. Credit rating downgrades look inevitable. Despite the massive jump in the share price this morning I’d be sceptical due to the state of HBoS’s loan book &andtheir exposure to US Alt A mortgages.