Items of interest for December 8th

Some articles and opinions you may find insightful:

• FedRes considers issuing debt (MarketWatch): In an unprecedented move, the FedRes is considering issuing debt. Recall that the US Treasury, a branch of the government, is what has issued debt in the past. I don't know much about banking so I'm not sure what this means. I'm not too sure but I think some other central banks do issue debt (maybe India? Or Kenya?). In some other countries, the central bank is also tightly integrated with the government (it's not independent) so I'm not sure what any of this means. One thing is for certain: if the FedRes issues debt to finance their operations, rather than printing money out of thin air, it will not be inflationary.
  
• Money-market returns may go negative (Bloomberg): If the short-term rates hit 0%, money market funds will have trouble providing positive returns since management expenses will still be positive and hence act as a drag. Unattractive short-term investments will also induce savers to shift to higher risk, higher yielding, investments. It may also result in a massive US$ carry-trade, on the scale of the Yen carry-trade of the last decade, developing.
  
• Is Dick Fuld the villain of Wall Street? (New York): Thanks to The Big Picture for pointing me to this story capturing Dick Fuld, Lehman's CEO, during the collapse of Lehman Brothers. I personally think he tried his best and really believed that the firm could survive. He saved Lehman in 1998 and was trying to pull a similar feat. It's sad to see the firm, which was heavily owned by the employees (little conflict of interest,) collapse but they paid the price for the risk they took. They clearly did not understand that they were part of the duo--other being Bear Stearns--of the biggest players in real estate during a massive bubble... I also don't believe in the conspiracy theory floated by some that Henry Paulson let Lehman fail because they were his enemy when he was running Goldman Sachs. I suspect that they really wanted to let the risktakers suffer their consequences (as liquidationists such as Jim Rogers have called for) and it wasn't a personal attack on the company or its CEO. Unfortunately, letting Lehman fail signalled to bondholders that debt can go to zero and the whole bond market locked up after that. The thing is, I think the bondholders should have suffered the consequences of lending to high-risk firms (30x leverage at some of these investment banks, which are, at times, nothing more than gambling (i.e. trading) operations). But, unfortunately for everyone, the bond investors also shut off credit to everything after that, including concerns with good credit.
  
• Appointment of car czar may trigger automaker CDS (MarketWatch): I don't think the government or the automakers care about the CDS writers but it looks like the appointment of a czar may trigger CDS contracts. It seems to depend on the actual wording, which hasn't been finalized. I suspect the final outcome will be minor since the automaker bonds have been deteriorating for what seems like an eternity. Unlike some company like AIG, the market has been marking down the automaker bonds for a long time. Furthermore, the bonds have been non-investment-grade since 2004(?) so the market should have priced in high probability of default.
  
• Commodities super-cycle over? (Naked Capitalism): Yves Smith of Naked Capitalism synthesizes a bunch of different sources that raise questions about the commodity super-cycle theory. Commodity bulls and bears should read the post and make up their mind.
  
• Starting a hedge fund (F Wall Street): Thanks to gurufocus.com for the article by Joe Ponzio's guide to starting a hedge fund. I have no interest in starting a fund but it is interesting to know some basics if you are ever in that situation. As always, remember that the details and the laws depend on the jurisdiction so you should treat this as a rough guide. Of course, given the contraction we are witnessing in the hedge fund industry, you may want to wait a few years to start your hedge fund :)
  
• Want a superbearish view? How about the Q ratio? (Bloomberg): Q ratio? Bill Gross referred to in his recent commentary and I ran across an article where Bloomberg quotes Russell Napier, a CLSA analyst, as saying that the market can drop another 50% if the Q ratio overshoots and falls below its average, as it has in 1921, 1932, 1949, and 1982.