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Anatomy of Morgan Stanley Panic
Wall Street Journal (subscription) ^ | November 24, 2008 | SUSAN PULLIAM, LIZ RAPPAPORT, AARON LUCCHETTI, JENNY STRASBURG and TOM MCGINTY

Posted on 11/24/2008 1:38:52 AM PST by CutePuppy

Two days after Lehman Brothers Holdings Inc. sought bankruptcy protection, an explosive rumor spread that another big Wall Street firm, Morgan Stanley, was on the brink of failure. The chatter on trading desks that Sept. 17 was that Deutsche Bank AG had yanked a $25 billion credit line to the firm

That wasn't true, but it helped trigger a cascade of bearish bets against Morgan Stanley. Chief Executive Officer John Mack complained bitterly that profit-hungry traders were sowing panic. Yet he lacked a critical piece of information: Who exactly was behind those damaging trades?

Trading records reviewed by The Wall Street Journal now provide a partial answer. It turns out that some of the biggest names on Wall Street -- Merrill Lynch & Co., Citigroup Inc., Deutsche Bank and UBS AG -- were placing large bets against Morgan Stanley, the records indicate. They did so using complicated financial instruments called credit-default swaps, a form of insurance against losses on loans and bonds.

A close examination by the Journal of that trading also reveals that the swaps played a critical role in magnifying bearish sentiment about Morgan Stanley, in turn prompting traders to bet against the firm's stock by selling it short. The interplay between swaps trading and short selling accelerated the firm's downward spiral.

This account was pieced together from the trading documents and more than six dozen interviews with Wall Street executives, traders, brokers, hedge-fund managers, regulators and investigators.

For years, sales of credit-default swaps were a profit gold mine for Wall Street. But ironically, during those tumultuous few days in mid-September, the swaps market turned on Morgan Stanley like a financial Frankenstein. The market became a highly visible barometer of the Panic of 2008, fueling the crisis that ultimately prompted the government to intervene.

.....

(Excerpt) Read more at online.wsj.com ...


TOPICS: Business/Economy; Crime/Corruption; Government; Politics/Elections
KEYWORDS: campaigndonors; cassano; cdss; economy; econoterrorism; election; financialpanic; financialterrorism; morganstanley; obama; octobersurprise; septembersurprise; shortselling; soros; sorostm; swaps; wallstreet
Bear Stearns was brought down very similarly in February-March of this year. The timing of attacks on Lehman, Morgan Stanley and others - just before elections - which severly affected and froze the financial markets, and took down market and particularly financial stocks including some of the firms which participated in short-selling and CDS "insurance", is very interesting.
1 posted on 11/24/2008 1:38:53 AM PST by CutePuppy
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To: CutePuppy

The Wall Street pack members were turning on their own. There is no honor among jackals.


2 posted on 11/24/2008 1:43:29 AM PST by snarks_when_bored
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To: CutePuppy

this is what happens when you allow short selling! The short buyers buy huge amount of short stock with only about 10% capital. They then spread a rumor, stock prices plummet and then the short buyer makes millions! Bad for investors and causes extreme fear on the markets!


3 posted on 11/24/2008 1:53:29 AM PST by tallyhoe
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To: TenthAmendmentChampion; Smokin' Joe; LottieDah
The pattern, finally but slowly, is making its way into financial press.

Pressure also mounted on another front. There was a surge in "short sales" -- bets against the price of Morgan Stanley's stock -- by large hedge funds including Third Point LLC. By day's end, Morgan Stanley's shares were down 24%, fanning fears among regulators that predatory investors were targeting investment banks.

That pattern of trading, which previously had battered securities firms Bear Stearns Cos. and Lehman, now is dogging Citigroup, whose stock fell 60% last week to a 16-year low.

SEC launches probe of Third Point hedge fund - Aug. 20, 2008 - this was even before September Lehman's collapse and near-collapse of Merrill Lynch.

No wonder Citi was asking Chris Cox to reinstate short-selling ban. In wrong hands it can be a weapon of mass destruction of capital. Soros made a lot of his money exactly the same way destroying capital with short-selling, using rumors and insider government information.

4 posted on 11/24/2008 2:01:20 AM PST by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: tallyhoe
Bad for investors and causes extreme fear on the markets!

And fear is stronger than greed. Not only that, the selling itself, besides causing the fear and/or financial panic, often triggers the forced portfolio liquidations due to margin calls and "stop orders", thus rolling down the price like snowball from top of the mountain turns into avalanche. The margin calls, portfolio liquidations and market panic, in turn, affect the stocks that have nothing to do with initial issues or industry.

Capital destruction leads to economic contraction. Intended or unintended consequences? That is the question.

5 posted on 11/24/2008 2:14:10 AM PST by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: tallyhoe
Short selling serves an important function. To make it illegal would be a mistake. What is bad is allowing naked short selling (selling stock short without officially “borrowing” the shares from an owner). Winking at naked short selling was the SEC’s biggest sin here.

Of course there is mischief that can be done with shorting, but there is mischief that can be done through making it illegal. It is sort of like fire: it can be dangerous, but the benefits outweigh the downside.

6 posted on 11/24/2008 3:20:29 AM PST by Tom D. (Beer is proof that God loves us and wants us to be happy. - Benj. Franklin)
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To: CutePuppy

Relying on cascading investments is what caused this mess. The reselling over and over of mortgages. It should have been illegal.


7 posted on 11/24/2008 3:59:16 AM PST by raybbr (You think it's bad now - wait till the anchor babies start to vote!)
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To: tallyhoe

Just what we need: make short-selling illegal! NOT!

What’s informative in this article is the description of the use of credit default swaps mixed with shorting. The CDS market is what scares me. While I’m not a great fan of regulation, allowing this unregulated market in these complex instruments has been the black hole of this market meltdown and it may go further, unfortunately.


8 posted on 11/24/2008 4:10:03 AM PST by ReleaseTheHounds ("The demagogue is one who preaches doctrines he knows to be untrue to men he knows to be idiots.")
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To: CutePuppy

I you’re leveraged 40-1, you’re trading on your good name.

If your good name goes, you go.


9 posted on 11/24/2008 4:14:05 AM PST by proxy_user
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To: Tom D.

“Short selling serves an important function. To make it illegal would be a mistake.”

Tom or anybody, this is a serious question. Why is short selling necessary to a healthy market? I fail to see its purpose beyond the obvious nefarious one: sowing panic by putting artificial downward pressure on a stock’s price.

And don’t even get me started on naked shorting - its like being in a casino where you’re playing with house money. Just sell till you wipe out all the longs, and KEEP selling till the average investor panics, the margin players get calls and all the stops are wiped out.


10 posted on 11/24/2008 4:53:20 AM PST by StatenIsland (The '08 Election: It's about the survival of our country, not making a point...)
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To: tallyhoe

Oh bull. Short sellers are the only ones that put a floor under the market. Geez, get a clue and look at China. They’ve never allowed short selling and their indices are off 70%. They are just now talking about allowing short selling.


11 posted on 11/24/2008 4:55:37 AM PST by nicola_tesla (www.fedupusa.org)
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To: StatenIsland

ARTIFICIAL downward pressure ? Why do you say artificial ?

A large short interest in a stock is usually a major tell that there is something wrong in the company books. Short sellers read balance sheets and 10Qs, something that most buy-and-hold or long-term investors do less of.

Short sellers put a floor under stock prices. As an example look at the DOW then lok at the Hang Seng. Which index is down more - bearing in ming that the US allows short selling and the Chinese do not. Would you rather your market down 40 or down 70 % ?


12 posted on 11/24/2008 4:59:15 AM PST by nicola_tesla (www.fedupusa.org)
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To: StatenIsland
this is a serious question. Why is short selling necessary to a healthy market? I fail to see its purpose beyond the obvious nefarious one: sowing panic by putting artificial downward pressure on a stock’s price.

Short-sellers, believe it or not, are usually "smart" money. Meaning, on average, an average short-seller is more sophisticated and knowledgeable than your average standard investor. If you find yourself in an argument with a short-seller over the future prospects of a company, you may want to listen closely to what they are saying, even if you disagree with them.

Also, some of the biggest scams have been discovered by short-sellers. Why? Because they are on the prowl for these overbloated issues, and will normally do extensive research on the company to support their decisions. Because your losses are potentially unlimited in a short position, you need to be pretty confident in your position if you are short. They will do extensive investigations on a stock and will normally know the balance sheet inside and out. Again, it would probably be to your benefit to listen to what they are saying. Some of the biggest scams (Enron, etc.) have been initially unearthed by short-sellers.

Also, short-sellers provide the stock market with liquidity. When you sell a stock, someone has to be on the other side of your trade. Short-sellers buy, or "cover", when you sell, and sell when you buy. If a stock gets completely crushed overnight after announcing bad news, they are the reason for most of the buying pressure off the open, as they are covering their positions. In the case of a bankrupt stock, short-sellers can often be the only reason that you can get ANYTHING back for your virtually worthless equity position.

Lastly, short-sellers can help to self-police the equity markets. The SEC can't investigate every company, but a short-seller can do extensive investigations on a company if they feel as though the company is not on the up and up. The short-seller can then publicize his findings, giving you a chance to exit the stock if what you hear alarms you. Contrary to what you might think, short-sellers do a great service for the ordinary Joe Average investor. >P> Of course, naked shorts are different altogehter. They are nothing short (no pun intended) of criminal. It is nothing more than electronic stock counterfeiting. The failure of the SEC to bring even ONE case to court for failure of regsho is enough reason to dismantle theat whole corrupt inefficient, phenomenally lazy excuse for a "regulatory" body.

13 posted on 11/24/2008 5:05:06 AM PST by slnk_rules (http://mises.org)
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To: raybbr
Subprime explained.   ;-)
14 posted on 11/24/2008 5:05:52 AM PST by 6SJ7 (Atlas Shrugged Mode: ON)
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To: nicola_tesla
Naked short selling is the biggest problem in this market followed closely by the removal of the uptick rule. Left to extremes, a company's stock issues can exceed more than double its authorized issuance. How can any market absorb that volume of stock?

Now then, the stock market collapse is not due to naked short selling BUT such selling has allowed for pools of short sellers to single out and drive out of business companies that would normally have withstood declines. That is not investing, that is simply bludgeoning companies out of business on a whim. Bankruptcy due to failed business models is how failed firms are supposed to go out of business. Naked shorting fails firms that rely upon confidence, not just product sales, i.e. banks and financial firms. It should be outlawed.

Vince

15 posted on 11/24/2008 5:12:51 AM PST by Mouton
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To: slnk_rules

Thank you, and tesla, for the informative replies.


16 posted on 11/24/2008 5:37:57 AM PST by StatenIsland (The '08 Election: It's about the survival of our country, not making a point...)
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To: tallyhoe

TallyHoe,

Short selling is what happens when one individual, a stock owner, agrees to lend or rent the benefits of stock ownership to another person. The right of individuals to contract among themselves in this way is basic. Apartment rental is similar...one transfers the privileges of ownership to a different person for a period of time in exchange for compensation.

What is the compensation to a person who allows stock to be lent? It is access to a margin account, with features not available in a cash account. In a margin account one can trade more kinds of instrument and receive broker loans.

What is not basic, is fraudulent and should not be allowed, is naked short selling, where the original stock does not exist. Effectively, securities are being manufactured out of thin air on demand. This is nothing short of fraud.


17 posted on 11/24/2008 5:53:00 AM PST by Tax Government
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To: CutePuppy

bump


18 posted on 11/24/2008 5:57:05 AM PST by WashingtonSource
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To: 6SJ7
Subprime explained. ;-)

Those guys are funny. I bet they will be funnier this evening. British humor is not easy to follow in the morning.

19 posted on 11/24/2008 6:00:56 AM PST by raybbr (You think it's bad now - wait till the anchor babies start to vote!)
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To: CutePuppy

Mack was protected by the SEC in an insider trading investigation brought on by a veteran SEC investigator.

Yes it seems there are more politics here than meets the eye and could be tied to the October surprise and market collapse. To tie it to the Election is a stretch though as it would be difficult to forecast what markets would do. But if there had been a lesson learned in the Bear Stearns takeover and then the Lehman bankruptcy, it is likely the hedge funds saw gold in buying default swaps and shorting the investment bank targets.

It would be interesting to know the party registrations of the executives involved and whether any Soros or Clinton related hedge funds were involved.


20 posted on 11/24/2008 8:15:55 AM PST by Hostage
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To: Mouton

The only ones doing naked short selling would be JPM, GS and the like, and I don’t see the SEC eager to investigate any of them. The average trader is not - none of the trading platforms will allow you to short without having shares available to borrow. Naked shorting has been illegal for years, and what I object to is the confusion of shorting with naked shorting.

And bull on the bludgeoning out of business of otherwise quality firms on a whim. If you think that then you have no idea what short sellers do. Give me one example in the past year of a firm shorted to zero that didn’t have severe problems with their asset valuations, balance sheets or some other aspect of their business model. Shorted firms don’t necessarily need to go bankrupt if they have a solid balance sheet - if they have credit problems then yes they might not get credit to stay aive.

It’s all about the balance sheet, fella. As ole Warren says, when the tide goes out we get to see who is swimmming naked.


21 posted on 11/24/2008 5:52:33 PM PST by nicola_tesla (www.fedupusa.org)
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To: Hostage

Not sure about party registration, but would be curious to see the full list of hedge funds involved. Also of interest could be the list and cross-reference of funds involved in spiking oil to entirely unsustainable ‘peak oil’ levels, no doubt helped by no-drilling and hot-air wind and solar ‘energy policy’ of Democratic Congress.


22 posted on 11/25/2008 12:23:37 AM PST by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: nicola_tesla

They are off 20% because our markets are down 35%. When you send out rumors about a company that may or may not be true which causes the investors to sell all their stock in said company it does nobody any good especially the company. Chuck Schumer leaked a rumor about Indy Mac bank which caused a run on the bank and they lost 25 billion dollars in assets in a few days. Short selling can be dangerous in a volatile market especially when you only need to put up 10% of your money. The short sellers changed the way the game was played during the Hunt brothers run on silver ya know. Why because they were losing their shirts!


23 posted on 11/25/2008 6:14:49 PM PST by tallyhoe
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To: tallyhoe

Are you saying that IndyMac was not a dead bank walking propped up by the Fed ? If you think they were a viable well-capitalized bank then you haven’t looked at their loan portfolio. Your comments are a prime example of short bus thinking - you never dug into the bank fundamentals so you accuse short sellers of doing the same.

News flash - short sellers were short because the bank was going down sooner or later.

Ever heard of a short squeeze ? The action goes both ways.

Do some research: http://mrmortgage.ml-implode.com/2008/07/08/indymac-one-more-lie-for-the-roadconsumers-mortgage-brokers-beware/

IndyMac: One More Lie For the Road…Consumers & Mortgage Brokers Beware

Posted on July 8th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage’s Personal Opinions/Research

In my breaking story Sunday afternoon about IndyMac potentially going down on Monday July 7th, I was highly critical of IndyMac’s CEO Mike Perry. I said “last year when things fell apart seeing Perry immediately resort to what seems to me as stretching the truth, doing everything possible to manage the stock price and not the company, blaming short sellers, always guiding higher after earnings and missing, releasing fluff press releases in order to drive the stock price higher etc, it showed me his true colors.” In the story I gave specific examples of these things.

Now, in one last attempt to spin the news, IndyMac has been caught in another half truth that significantly impacts consumers and mortgage brokers, the two constituencies that I try my hardest to serve. CONTINUED…

In Perry’s letter to stock holders released today in which he tells the tale and likely fate of Indy, he says “We plan to honor all of our existing rate-locked loans and will continue to fund these loans in the coming weeks.” Many cheered IndyMac for ‘doing the right thing’.

IS THIS TRUE MIKE?

IndyMac will indeed fund all loans in its pipeline that qualify, which could be in excess of $1 billion. But it comes at a hefty price to the borrowers. In order to fund your loan there as they wind down their mortgage business, they are charging an extra 1% of the loan amount or 1 ‘point’. On a $417k Fannie Mae loan this is an extra $4,170.00. If you wanted to build that hit into your rate it could raise your rate as much as 1/2 percent.

Below is an excerpt talking about it. Please note that I do not know if this applies to retail but it sure seems like it applies across the board. This move make no sense to me, To me it means either they are a failed bank or committing extortion. (full email from IndyMac at bottom of page)

“In order to protect your rate locks, we will require a 1% cash deposit to convert these loans to mandatory delivery. All fees must be received by the end of business on Thursday, July 10th, or your rate locks are subject to cancellation. These fees are fully refundable in the event IMB declines the loan. This fee requirement is all inclusive. You must protect the entire pipeline as part of this process. If you do not submit the required fee for any individual loan as part of this process, all of your rate locks will be subject to cancellation.”

In my opinion, this looks awfully shady. As far as I have always known, ‘mandatory delivery’ comes at a BETTER rate that ‘best efforts’, therefore why ask for 1% to change to ‘mandatory’ from ‘best efforts’? And why tell the brokers their ENTIRE pipeline must be paid for and not on a loan-specific basis? Remember, they clearly state they ‘will only refund the amount if the loan is declined’.

Many of these loans have been in process for weeks and many are purchases. No doubt a large number of the purchase loans will have no choice but to close the loans there and take the penalty hit or risk losing their deposit and home. Refi’s can be moved to a different lender but that comes at the expense of having all the paperwork including the appraisal put into the new lenders name and taking down another rate lock at a potentially higher rate. The processing and paperwork change can cost roughly $750. A higher rate lock can cost $10s of thousands over the life of a 30-yr fixed loan.

This is absurd. WHAT A RIP-OFF! Is this even legal?!? This tells me either they just plan to stick it to everyone on their way out or really have no money or lines on which to fund these loans and someone else is putting up the funding capacity at a hefty price.

If they don’t have the funding capacity all of a sudden that begs to question whether or not IndyMac is really voluntarily shutting down its mortgage operation or is this how the FDIC and other regulatory bodies will operate from now on when banks fail.

If they would have come out with news today that IndyMac had been seized, that could have started a run on other regional banks with heavy Pay Option ARM, Alt-A or HELOC exposure, which are the very loan types that led to their demise.

As a matter of fact, this morning Schumer said ‘IndyMac’s troubles to not extend to other regional banks’. That also goes in-line with my theory this is simply an FDIC seizure cover-up.

I believe there is more to this story than we have been told. But despite that, charging borrowers 1 point to close a loan already in process that may need to close at the rate initially promised or it will cause significant financial hardship to the borrower, is nothing more than plain old extortion. -Best Mr Mortgage

BELOW IS THE FULL LETTER TO MORTGAGE BROKERS ACROSS THE NATION BY DREW BUCCINO, CEO OF THE MORTGAGE PROFESSIONALS GROUP AT INDYMAC BANK

This does not sound like a company who voluntarily is ‘winding it down’.

Dear Indymac Mortgage Banker or Broker,A few months ago, when WaMu made the decision to exit wholesale lending, we wrote to let you know that we were committed to all of our mortgage professional customers, and that we were working hard to rebuild our business model. Since then, our employees have worked tirelessly and professionally to rebuild our production model and I am very thankful for their service and their unwavering commitment under the most difficult of circumstances. We have successfully transformed ourselves into a competitive Agency and Government lender, and for this we should all be very proud.

However, with the continued very difficult and challenging environment, we are taking steps to continue to protect Indymac’s safety and soundness, and have made the difficult decision to cease production of new mortgages, which includes exiting the third-party lending business altogether. Going forward, Indymac will be focused on operating its Southern California retail banking business, offering reverse mortgages through Financial Freedom and operating our home loan servicing and opportunistically growing these groups over time as market conditions permit.

Our decision to exit third-party lending is effective immediately, however, the following timeframes and guidelines are in effect:

Effective immediately we will no longer accept any new rate locks.

Effective immediately we will no longer accept new credit package submissions (either in physical form or through e-FlowSM functionality) for loans that do not have a valid rate lock.

The last day to fund refinance transactions will be July 31, 2008.

The last day to fund purchase transactions will be August 15, 2008.
Important Message About Protecting Your Rate Locks:

In order to protect your rate locks, we will require a 1% cash deposit to convert these loans to mandatory delivery. All fees must be received by the end of business on Thursday, July 10th, or your rate locks are subject to cancellation. These fees are fully refundable in the event IMB declines the loan. This fee requirement is all inclusive. You must protect the entire pipeline as part of this process. If you do not submit the required fee for any individual loan as part of this process, all of your rate locks will be subject to cancellation.

Please understand that all of our regional operating centers will be closed. Your regional mortgage production team will be in contact with you to ensure a smooth transition over the coming weeks and facilitate timely processing of your loan pipeline. Additionally, we will keep our Pasadena regional office open for a limited time, until we have cleared out our entire pipeline of loans.All of these actions are necessary and are designed to keep Indymac Bank as an institution safe and sound; we believe they are the necessary steps we must take to ensure the company’s survival during this turbulent period.

On behalf of the roughly 800 employees of Indymac’s Mortgage Professionals Group, I want to thank you for your business and support of Indymac Bank over the past 15 years.
Sincerely,

Drew Buccino CMB
CEO Mortgage Professionals Group
Indymac Bank


24 posted on 11/26/2008 1:09:06 PM PST by nicola_tesla (www.fedupusa.org)
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To: nicola_tesla

Are you saying that Senator Schumer did not help in the demise of Indy Mac? When you have a run on a Bank and about 10 billion dollars was removed from the bank in several days. It is hard for any bank to stay in business when all the assets are removed! Want to look at loan portfolios look at Freddie Mac and Fanny Mae? We pumped in to these two lenders last summer 300 billion dollars!


25 posted on 11/26/2008 1:26:26 PM PST by tallyhoe
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To: nicola_tesla

So you go to Mr Mortgage for your info? Mr Schumer is a disgrace and should resign. Loose lips sink ships!


26 posted on 11/26/2008 1:33:07 PM PST by tallyhoe
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To: aflaak

ping


27 posted on 12/04/2008 10:23:35 AM PST by r-q-tek86 (Keep the Change)
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To: tallyhoe

pong


28 posted on 12/22/2008 11:48:16 PM PST by KellyM37
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