Wednesday: AIG CEO Edward Liddy cited the "cold realities of competition," but said he's asked for 50 percent of the controversial bonuses to be repaid. David Friehling, accountant for confessed super-swindler Bernard Madoff, was charged with alleged fraud. Sunnier notes: Bank of America CEO Kenneth Lewis said BofA could repay its $45 billion TARP loan this year. And Sun Microsystems shares jumped on IBM deal talk. CNBC heard from experts who said AIG is not hurting the markets — and calculated the likelihood of another "Great Depression." UPDATE: The Fed said it will buy back hundreds of billions in mortgage-backed securities and long-term Treasurys.
Sentiment and Statistics: Miles Apart
Mark Hulbert, editor of the Hulbert Financial Digest, said people are quickly getting less bearish, and perhaps never were that bearish in the first place. Our minds play tricks on us and we rewrite history as though it's a straight line, he said. The low in his sentiment index came last July, and it's nowhere close to that now.
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Monetary Policy, Credit and 'The Count of Monte Cristo'
MF Global's Jessica Hoversen said it makes more sense for the Fed to focus on credit than liquidity, because the market is already extremely liquid. The Fed should increase its purchases of mortgage-backed securities and agency paper. The AIG furor doesn't appear to have hurt the stock markets, which look range-bound. Markets will be watching Washington, having become "handcuffed" to government by aggressive U.S. moves. Hoversen quoted Alexander Dumas: "All human knowledge can be summed up in two words: wait and hope." (UPDATE: The Federal Open Market Committee announced the Federal Reserve will buy up to $750 billion of agency mortgage-backed securities and up to $300 billion worth of longer-term U.S. government debt.)
Hedge-Fund Advice: Seek Value — And Beware Treasurys
Clifford Asness of AQR Capital Management said no one knows about near-term market outlooks. The probability of another Great Depression is higher than normal, but still lower than "probable." Government bonds are priced at bubble levels. The spread of corporate debt to government debt is priced to "fairly insane" levels, and certain hedge fund strategies like convertible arbitrage are "priced four times weirder than that, priced to a liquidity crisis."
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