" Soros finally shorted oil at $137 a barrel and put on a long position in gold; he expects to see gold hold its ground even if oil continues to decline. In fact, the gold bug clique believes in a consistent 10-to-1 ratio for gold and oil. It holds that either gold will rise to 10 times a barrel of oil ($1,350 an ounce) or oil will fall to $96 a barrel--one-tenth the present market price of gold."
Wealth destruction took a day off Wednesday as illiquidity surfaced as a top issue at a major investment bank.
The market rallied in the wake of a lower oil price, Federal Reserve Chairman Ben Bernanke promised that Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ) were solvent, and new rules began to lean against avaricious short-sellers of bank shares.
Undoubtedly, this spike in bank shares was due in large part to hedge funds, which began covering some of the massive short positions they've built up over the past 18 months. For example, billionaire George Soros--Croesus was told--has covered much of his shorts in financial stocks. Why chance another public policy move by regulators to shut off this automatic feeding trough?
Soros finally shorted oil at $137 a barrel and put on a long position in gold; he expects to see gold hold its ground even if oil continues to decline. In fact, the gold bug clique believes in a consistent 10-to-1 ratio for gold and oil. It holds that either gold will rise to 10 times a barrel of oil ($1,350 an ounce) or oil will fall to $96 a barrel--one-tenth the present market price of gold. Croesus was told Tuesday that statistics spanning many decades support, on average, this 10-to-1 ratio.
As for the second issue of the day, Croesus has been informed about a disheartening problem at Merrill Lynch (nyse: MER - news - people )--$6 billion of illiquid securities, called auction rate preferreds, that are owned by some 40,000 customers of the thundering herd.
It seems these 40,000 investors can't sell these supposedly secure money-market-type instruments, which require auctions, and turn them into hard cash. And the issuers of these securities--closed-end mutual funds, like some in the BlackRock (nyse: BLK - news - people ) group, municipal authorities and student loan organizations--can't raise the cash to pay off investors.
It was some months back that a shocked Croesus learned about auction rate preferreds, which represent an asset class worth $360 billion in the market. Soros and others of his ilk even admitted to Croesus that they had never, ever heard of them.
As a Comerica Securities memorandum explains why cash doesn't always keep pace with these instruments: "Recent failed auctions appear to have been caused by volatility in and tightening of the credit markets and waning investor confidence. Although there are no obligations for firms to back ARS [auction rate securities], auction agents that collect fees for running auctions used to step in with their capital to prevent failures when bidding faltered. However, these firms and broker-dealers have grown unwilling to commit their money to ARS after suffering significant credit losses stemming from write-downs of mortgage debt and various corporate debt instruments."
The memo bluntly states: "In other words, the credit crisis is still alive and causing intense investor suffering."
Imagine that. In the year 2008, you can't turn shares into cash, especially when cash is king!
