Friday, May 30, 2008

Moody's Keeps Bear Stearns on Review for Possible Upgrade, Officially Loses All Credibility

According to MarketWatch "Moody's said it will continue to review Bear Stearns debt for a possible upgrade." Separately, and yet completely related, Bear Stearns shareholders begrudgingly approved the firm's sale to JP Morgan Chase yesterday. Despite the close of the sale, Moody's thinks it might possibly be a good idea to upgrade the debt, but it's not entirely certain so for now, it's just going to put it on review. Whatever shred of credibility may have remained after the Financial Times reported that Moody's accidentally awarded AAA ratings on billions of dollars of derivatives because of a computer bug, has officially evaporated. In the statement released today Moody's claimed that it would like to wait until it receives more clarity on the ultimate legal structure of the Bear Stearns and JP Morgan deal. Seriously, who cares? The merger is a done deal. How can any further analysis of legal issues possibly be of use to any investors? Anyone who is trading Bear's debt at this point is probably far more in tune with the legal issues than Moody's. Wanna work on some useful analysis? Here's my top four list of things Moody's can investigate that would actually help investors:
1.) Ask for a detailed list of Level 3 assets and their prices from every highly leveraged institution. Then tell me what they are actually worth. Make sure to downgrade those that refuse to offer the information, particularly any institution with an implied government guarantee.
2.) Go through GE's balance sheet and force them to describe the $25 billion in assets that it has labeled as "other" on its balance sheet. Then tell me what they are actually worth.
3.) Take another peek at the monoline insurers. Do everyone a favor and downgrade them from AAA BEFORE they go out of business.
4.) Take a look at all the assets being used as collateral against the Fed loans being offered to primary dealers. Tell me what they're really worth and if the Fed is using an appropriate haircut.
Anyone else want to add to the list?

Kerkorian Waives Condition Tied to Ford Tender Offer

Taking the concept of dollar cost averaging a bit further than most investors, Kirk Kerkorian's Tracinda investment arm said it would continue with its tender offer despite a more than 10% drop in Ford's stock price. Since Tracinda's initial offer to purchase 20 million shares of Ford at $8.50, investors have punished the stock, causing it to drop below the 10% threshold required by the terms of the tender offer. Apparently, that crazy old coot is still bullish on the US auto industry. While it's true that Ford did post a meager $100 million in profit on about $40 billion in revenue in the first quarter of 2008, the company has recently claimed that it no longer expects to be profitable for the year due to an "unexpected" slowdown in US vehicle sales. The problem with the auto industry is that it is tied to the fortunes of the housing market. Most people who purchase new cars require financing of some kind. Home equity loans were a huge source of financing for purchases of autos during boom times. How huge? Nearly two million new cars were purchased with home equity loans in 2007. In California, 29.83% of new sales were made with home equity loans. In Florida, the percentage was 19.72%. Guess how many people will get to tap home equity loans this year to purchase cars? If you said anything over zero, keep guessing.
Ford Motor's credit unit is suffering, despite largely avoiding the mortgage market mess. While this makes it a safer bet than General Motors, whose struggling mortgage lending operation ResCap just missed a bankruptcy filing by the hair on its chiny chin chin, Ford's credit unit is still facing a bleak environment. Ford used to collect hefty dividends from the unit, but not anymore. The lender is suffering from increases in repossessions, delinquencies, and a dramatic decline in the resale value of used vehicles. Average prices for used pickup trucks were down almost 16% from a year earlier. As a consequence, the loss that Ford Credit took when it resold its repossessed cars was $2,200 more per vehicle than the year earlier period. Ford Credit earned only $36 million in the first quarter, making it extremely unlikely that the financing arm will hit the company's initial estimates of a $1.2 billion profit for the year. The upshot? If you're in the market to buy a used Ford pickup truck, you're going to get a great deal, despite the fact that it may cost you $75 every time you need to fill the tank. However, if you're looking to buy 20 million shares of a beat-up US auto company, you may get a much better deal at a later date.

Thursday, May 29, 2008

"Liar Loans" Live Up To Expectations

Investors who purchased soured mortgages securities are forcing lenders to repurchase the original loans based on a provision that required lenders to take back loans that defaulted unusually fast if mistakes were made or fraud was committed during the underwriting process. The Wall Street Journal reported yesterday that Countrywide estimated that its liability for such claims rose to nearly $1 billion as of March 31, 2008. Countrywide took a first-quarter charge of $133 million for claims that have already been paid. The loan disputes allege bogus appraisals, inflated borrower incomes, and other misrepresentations made at the time the loans were originated. Demands from loan buyers include Fannie Mae, who claimed in a recent conference call that it was attempting to review every loan that defaults and force lenders to buy back loans that failed to meet promised standards. The bond insurers including Ambac and MBIA which guaranteed investment-grade securities backed by home-equity loans and lines of credit are also getting in the game of scrutinizing the quality of loans in the original pools and taking action where necessary. Even GE, through its subprime mortgage subsidiary WMC Mortgage, is being sued by PMI Group who alleges that WMC misrepresented the quality of loans it included in a pool of subprime loans that were insured by PMI.
Offering further proof that the incidence of misrepresentation was not merely a subprime problem, S&P cut or downgraded its ratings on $34 Billion of Alt-A securities yesterday. Ratings on 1,326 classes of bonds created in the first half of 2007 were reduced. Another 567 similar bonds with AAA ratings were placed on review. A total of 14% of the bond issuance from the period was either cut or placed under review. Late payments of at least 90 days and defaults among Alt-A loans underlying the bonds issued last year rose to 6.64% as of April 2008, up 65% since January of 2008. Clearly the situation is getting worse rather quickly. Alt-A loans were made to borrowers who provided little-to-no documentation of income or assets but had respectable credit scores. Among skeptics they were deemed "liar loans", as it gave borrowers ample opportunity to fabricate their income and assets in order to receive loans to purchase houses they otherwise could not afford. Investors in the securities must've assumed that either borrowers were telling the truth or home prices would never decline. Loans were offloaded by the originators to investors who were more than willing to purchase diversified pools of these loans as they were given AAA ratings by the ratings firms.
Investors are now facing the double whammy of misrepresentations of the borrower's financial condition coupled with declining home prices across the nation. As a consequence, default rates on the loans are surging beyond original estimates when the securities were structured, leaving investors with losses. The ratings agencies are, of course, late to the downgrade party as the securities are already being pummeled in the market. Pissed off investors are now attempting to recoup losses by forcing the originators to repurchase the loans because the quality of the loans was misrepresented. The top four Alt-A lenders in early 2007 were Indymac, Countrywide, GMAC, and Washington Mutual. Clearly these once celebrated lenders have suffered a considerable drubbing. Yet, bottom-fishers have emerged, betting that their fortunes will turn. Given the continuing parade of lousy housing news, I remain a skeptic. Furthermore, I'm disappointed that I never took advantage of the opportunity to purchase a $25 million home using my imaginary bars of gold as a stated asset.

Dallas Fed President Richard Fisher Reiterates Inflation Fears at the Fed

In a speech delivered in San Francisco, Dallas Fed President Richard Fisher said the "I" word several times. Mr. Fisher said "If inflationary developments and, more important, inflation expectations continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic" economy. He went on to emphasize: "I don't know a single person on the committee that isn't concerned about inflation." In case you didn't get the hint that Fed Presidents Gary Stern and Thomas Hoenig dropped earlier this month, Mr. Fisher was there to pound you over the head with it. Perhaps he had asked for advice on expressing subtlety about his feelings on the direction of monetary policy from Sharon Stone. Ms. Stone accidentally let her political leanings show last week when she claimed that the devastating earthquake in China was a result of bad karma due to China's treatment of Tibet. In a speech delivered at Cannes, Ms. Stone said "I've been concerned about how we should deal with the Olympics, because they are not being nice to the Dalai Lama, who is a good friend of mine." Ms. Stone's films are now being boycotted in China, which is funny because her films are already being boycotted in the US primarily because they suck. How many people went to see "Basic Instinct II"? I'm guessing Mr. Fisher had more attendants at his speech last night in San Francisco.

Wednesday, May 28, 2008

AIG Drops on Citigroup Analyst Research Note

Investors in AIG are having a crummy day thanks to a research report released by a Citigroup analyst who claimed that the insurer would need to raise more cash above and beyond the $20.3 billion already collected. The Citigroup analyst predicted that AIG may seek another $5 to $10 billion in order to avoid the indignity (not to mention increased borrowing costs) of being downgraded again by those pesky ratings agencies that are somehow still considered noteworthy, despite their inability to deliver a credit assessment that resides anywhere within the universe of accuracy. Investors are clearly taking this research report to heart. After all, when it comes to massively dilutive capital raising schemes, Citigroup leads the pack with $44.1 billion raised to date. Interestingly, Citigroup rates AIG a "hold." I guess the analyst has attended a few too many internal meetings at Citigroup where he was adequately convinced that raising loads of capital is not terrible news for a stock. I, on the other other hand, am not quite sure why anyone would want to "hold" on to a stock whose CEO seems incapable of understanding the risks of its assets. AIG's CEO Martin Sullivan has repeatedly underestimated the losses the firm would take on its credit default swap portfolio. As I mentioned when AIG initially reported its gargantuan losses, the firm held a credit default swap portfolio on over $500 billion in securities, $60.6 billion of which were on subprime mortgages. Mr. Sullivan as recently as December maintained that any losses on the portfolio were merely "temporary." Temporary losses, however, shouldn't require a $20 billion capital infusion.

First Quarter Commercial Real Estate Sales Statistics

Perhaps the commercial real estate market is releasing a collective sigh of relief over the successful sale of the GM building by the struggling Macklowes to an investor consortium led by Mortimer Zuckerman over Memorial Day weekend. However, a few enlightening statistics representing the true state of the commercial real estate market were presented in the Wall Street Journal's Property Report this morning. First quarter sales of apartment buildings have declined over 40% from the first quarter of 2007. Office and retail building sales have dropped by 80% and 70% respectively. Meanwhile, capitalization rates (rental income in the first year of ownership divided by the purchase price) have increased for most commercial real estate sectors. In April, the average cap rate for apartment buildings rose to 6.19% from a revised 6.15% the previous month. The average cap rate for office properties in central-business districts rose to 6.25% from a revised 6.0% in March. Although an increase in cap rates is a sign that property values are finally beginning to reflect current market conditions, the average cap rate is still very low compared to historical levels. At the beginning of 2002, cap rates were over 9% and have steadily declined, hitting lows of around 5.75% in the first quarter of 2008 before ascending again. It seems inevitable that cap rates will continue to march higher. Although easy monetary policy has nearly always caused cap rates to decline in the past, it seems unlikely to happen this time around. Sales activity in the commercial property market has declined so significantly that it may take several quarters for a true clearing price on property values to emerge. Exacerbating the problem is a dramatic increase in properties offered for sale in addition to significantly tighter lending standards from banks that are unlikely to offer any new financing until they can successfully clear their books of all crap they currently own at inflated prices. The only thing the commercial real estate market can hope for is a return to spiraling inflation, which always increases the value of hard assets. Investors under that scenario, however, would be looking at financing rates of 20% and grinning with joy. Given the Fed's genuine attempts to bring back 1970's style inflation, that situation may not seem so far-fetched.

US Thrifts Reserved $7.6 Billion for Future Loan Losses in First Quarter

US Thrifts reserved $7.6 billion in the first quarter for potential loan losses, the Office of Thrift Supervision reported on Tuesday. Thrifts lost a total of $617 million in the first quarter of 2008. Although this loss looks absolutely spectacular compared to the $8.75 billion that Thrifts collectively flushed down the toilet in the fourth quarter of 2007, it is somewhat shabby compared to profits of $3.61 billion in the first quarter of the previous year. OTS Director John Reich has been urging Thrifts to be aggressive with their loan loss provisions. Mr. Reich's suggestion was based on a troubling increase in loans at least 90 days past due, which rose to 1.78% of assets at the end of the first quarter. The worst performing loans were construction loans, 6% of which were noncurrent at the end of the first quarter, up from a mere 1.23% a year ago. This should not surprise anyone who has visited Miami, Phoenix or Vegas lately and seen the deluge of construction cranes dotting the skyline. Single-family loans at least three months overdue climbed to 2.85% from 1% in the first quarter of 2007, also not surprising to anyone following the residential real estate market. Thrifts have responded by reducing their originating activities in the first quarter by 21% from the fourth quarter of last year to $133.7 billion. I suppose if your underwriting abilities are that lousy, the best way to avoid future losses is to make fewer loans.

Tuesday, May 27, 2008

Home Prices Decline Further, New Home Sales "Increase"

The Case-Shiller housing index showed declines in home prices of 14% year-over-year and 6.7% from the fourth quarter. Las Vegas led the pack with a 26% drop, followed by Miami and Phoenix with 25% and 23% declines respectively. Meanwhile, new homesales rose 3.3% to an annual rate of 526,000. The reported "rise", however was due to a downward revision of the prior month. Last month's number was originally reported at 526,000, the worst level in 17 years. Today, last month's number was revised down to 509,000, and this month's number was reported at 526,000. This leads to a headline-friendly "rise" of 3.3%, or a fancy way of saying that new homesales remained at 17 year lows. With consumer confidence at 15 year lows, it's hard to imagine that consumers are going to rush out to buy new homes, or new cars, or furniture, or shoes, or (insert any consumer goods here)...

Bank of America Slashes Estimates for Goldman, Lehman, Morgan

Analysts at Bank of America cut earnings estimates for Goldman, Lehman and Morgan Stanley today. In the event that you have been on a mission to the moon for the past three months and some delivery snafu has prevented you from receiving your copy of The Wall Street Journal, which has outlined in painstaking detail how terrible the environment has been for nearly every single line of business that the brokers rely on, day after day, you can depend on the trusty analysis from these jokers at Bank of America. Somehow, over Memorial Day weekend, it occurred to them that maybe, just maybe, they need to lower their unrealistic earnings targets so they don’t wind up looking like fools in front of the investment community when the brokers report their dismal earnings results next week. When Lehman reports a loss, instead of a profit as these guys were predicting before today, they can say “See, we predicted they would lose money!” I suppose that if analysts continue to lower earnings estimates a week before earnings every single quarter, than their overzealous earnings targets for these stocks may actually begin to resemble reality. Here’s a tip to all the brokerage analysts out there: you may wish to extend your ability to forecast earnings beyond the one week timeframe, or risk becoming a part of next week’s unemployment numbers.

Friday, May 23, 2008

Existing Home Sales Decline, Inventories Rise

Sales of previously owned homes declined 1% from the prior month to an annual pace of 4.89 million. Year-over-year sales and prices declined 18% and 8% respectively. The number of previously owned unsold homes jumped from 4.12 million in March to 4.55 million in April, representing an 11.2 month supply. The spike in inventories should quiet some of the recent claims that "the worst is over." I will spare my regular readers the bearish tirade that typically accompanies lousy housing market statistics. Instead I will wish everyone a Happy Memorial Day Weekend! Rest assured the tirade will continue on Tuesday...

Record Crude Prices Blamed on Hurricanes, Traders, OPEC...Etc

According to Bloomberg, crude oil prices rose near record levels again because the National Oceanic and Atmospheric Administration warned of a more severe hurricane season than originally forecast. This story is quickly followed by another blaming crude's rise to $135 on traders who have been forced to cover losing short bets. Meanwhile, Congress has unearthed this mysterious orginization called OPEC, who unexpectedly formed a cartel with the evil plan of cornering the crude oil market. Who are these people called OPEC? Too bad they weren't around when oil was trading $10 a barrel. We could've sued them back then when the price of oil was obviously too low. The House of Representatives, fulfilling their duty to always pass useful legislation aimed at resolving our country's issues, voted this week to sue OPEC. Who will this legislation benefit the most? Possibly class action lawyers, who can now begin to gather plaintiffs for a huge class action lawsuit on behalf of every American to reclaim their God-given right to cheap oil from the Middle East. There are plenty of lawyers on Capital Hill so maybe one or two of them can explain to me how we can force countries outside of our jurisdiction to follow our anti-trust laws. More importantly, how do legislators expect to hold the Middle East responsible for our insatiable consumption habits? What I know for certain is that this legislation won't and can't lower the price of oil.
There are two and only two culprits that explain the rise in crude prices: supply and demand. On the demand side, we have the United States who refuses to change its consumption habits. Then we have China and India growing at 10% a year, giving rise to a new segment of demand that never existed before. Certainly there are "speculators" who have entered the commodities trading arena because it is "hot" now. But if you drive a car and heat your home and you're buying into an oil fund, then you are not really speculating, you are hedging your future consumption needs. The fact remains that a high price is being supported by a significant increase in demand as parts of the world rise out of poverty and demand cars and heat, luxuries that are no longer out of their reach. One can even make the argument that the price of energy has been too cheap and that consumers will only change their oil consumption habits when it gets too expensive to make economic sense. We are finally starting to get to that point as consumers are finally beginning to tire of driving large gas guzzling vehicles.
In terms of the supply side, there is the serious question of how much oil is left in the ground. The large, cheap oil fields are in decline and few new discoveries have been made. People are beginning to believe the "peak-oil" theory, instead of chalking it up to a bunch of alarmists looking for attention. Apparently, even the International Energy Agency is conducting a survey to assess the condition of the top 400 oil fields. The results will be available in November. Be sure to check back for an update then. In the meantime, there's a class action lawyer I need to call...

Thursday, May 22, 2008

BCE Buyout on the Rocks - Part II

The BCE buyout is looking less likely, as a Canadian court ruled yesterday in favor of the bondholders who challenged the LBO, claiming that BCE hadn't taken their interests into account. This is shocking news indeed, and this time I really mean it. The fact that the deal probably wasn't going to be completed at the old price is old news. You can read about my initial skepticism in Part I of BCE Buyout on the Rocks. But the fact that the deal was blocked by a court ruling in favor of the old bondholders and not the new lenders is what makes the news notable. Coincidentally, the court ruling was delivered on the same day that the private equity sponsors were busy fighting with the lenders in New York, who were demanding better terms on the financing package. This was Canada's gift to Wall Street. If anyone is out on the town in New York tonight, look for bankers from C, DB, and RBS. Tell them you're Canadian, and they'll probably buy you round after round of Cristal and you can feel like P. Diddy for one night.

Wednesday, May 21, 2008

Lehman Brothers Options Action: Deja Vu All Over Again?

Despite all the recent chirping among Wall Street big wigs proclaiming the credit crisis to be almost over, a decidedly bearish tone has returned to the markets. Witness the drubbing of Lehman's stock and the significant increase in put buying in Lehman's options today. While the volumes and volatility are not near the levels they reached during the height of the panic around mid-March, they are still notable. Lehman has worked very hard to dispel the rumors of liquidity problems, and it seemed to have convinced the investing public that it would not face Bear's fate. An interesting article in the Heard on the Street column in the Wall Street Journal this morning discussed how some investment banks were losing money on hedges used to offset losses on CMBS investments. Apparently, banks had shorted the CMBX index as a hedge against their commercial real estate holdings. The index has rallied significantly, while the securities have in some cases declined. Lehman was cited as the biggest loser with analysts expecting write-downs in the $1.5 - $2 billion range on the CMBS portfolio including hedges. Erin Callan, Lehman's CFO, recently called some of the firm's hedges "counterproductive." That's a very creative way of saying Lehman just flushed some of its newly raised equity down the toilet.
Analysts are once again slashing their estimates for investment banks earnings two weeks before the banks are set to report. It is very generous and helpful of them to reduce their overly optimistic projections right before we get the actual news. As I pointed out several months ago the last time we were going through the same ridiculous exercise, it is nearly impossible to project investment banking earnings due to the opacity of their trading positions. Despite horrible news amid unprecedented strains in the credit markets, analysts were gleefully predicting huge hockey stick revenue rebounds by the middle of the year due to the Fed's aggressive liquidity injections. Banking activity would once again surge and everybody would be making money again. Except they aren't. What we're faced with is further uncertainty in the real economy. The probability of soaring defaults on residential real estate, commercial real estate, home equity, auto, and credit card loans as well as soured private equity deals completed at the highs, is increasing by the minute. Consumers are facing record high prices on food and energy coupled with declining equity in their homes. Now the Fed is signaling that it may be finished cutting rates due to inflation fears.
Investors were happy to snap up equity and debt issuance after issuance of the banks and brokers in the past month thinking they were getting a great deal. They aren't so sure anymore. Can Lehman survive another crisis of confidence? If fear exceeds the levels reached in mid-March, it may not. It is a highly levered financial institution that relies on debt to stay alive. Any levered institution can go belly up from one day to the next. Investors who didn't know that before, learned their lesson in March. The parade of broker earnings in the next few weeks will offer some real insight into how investment banks are weathering the storm. Assuming, of course, that you trust the marks on their portfolios...

Harry Macklowe Close to Unloading GM Building

Harry Macklowe, aka "I like to pay the high in commercial property prices," is reportedly close to a deal to sell the GM building to Goldman Sachs, Boston Properties, and two Middle Eastern investors. The deal would value the GM building at $2.8 billion, $200 million less than Mr. Macklowe's target price, but still a record for a single office building. Mr. Macklowe recently defaulted on $7 billion in short-term loans to Deutsche Bank and was forced to hand over the keys on seven buildings that he bought from Blackstone Group in early 2007. In addition to the properties he lost, Mr. Macklowe must now sell the GM building to pay off a loan from Fortress Investment Group. If the sale fails to satisfy the debt to Fortress, his personal assets are in danger. Those assets include some pretty fancy digs at New York City's Plaza hotel, where real estate developers have shown that they love to pay the high in their personal property purchases as well. The elevator at The Plaza Hotel is meanwhile becoming the place to exchange humorous anecdotes on "how I lost a bunch of money in the 2008 credit debacle." Apparently, Mr. Macklowe paid over $60 million to purchase several units at the Plaza in June 2007 with plans to combine them. Recently, Mr. Macklowe was joined at the Plaza by Jim Cayne, who closed on a relatively paltry $28 million apartment at the Plaza in March of 2008, right as his firm Bear Stearns was imploding. Apartments at the Plaza have been changing hands at prices of around $4,000 to $6,000 per square foot, but an Italian businessman is currently trying to punt his unit, on which he has yet to close, for over $10,000 a square foot. According to the Wall Street Journal on April 7,2008, Luigi Zunino was attempting to sell his apartment at the Plaza for $100 million. Mr. Zunino is in the real estate business, much like Mr. Macklowe, as his property development company bought the Manhattan flagship of Barney's last year, at the high. The stock of Mr. Zunino's property company is down significantly since then, so he is probably looking to make a quick buck and sell to a greater fool before he is forced to pony up the cash for his closing. The problem is, it appears as if all the greater fools already reside at the Plaza.

Moody's Awards False AAA Ratings on CPDOs Due to Computer Error

According to the Financial Times, who conducted an independent investigation, Moody's awarded incorrect Triple A ratings to billions of dollars worth of CPDOs. Apparently, the Financial Times discovered a computer glitch in Moody's models that would have awarded ratings up to four notches lower than the original AAA rating. Moody's is now investigating the "computer bug" after reading FT's report. Isn't it great when one of the largest ratings agencies outsources its computer modeling to a bunch of financial reporters? It should give comfort to all of those investors out there who purchase securities solely based on AAA ratings granted by the rating agencies. How reliable are those models anyway? Apparently, betting on Naomi Campbell to show up on time and not throw a phone is a safer bet.
Sure we can blame the AAA rating on a computer bug, but intuitively, it's amazing that investors ever thought that CPDOs were "safe" investments. CPDOs, Constant Payment Debt Obligations, were structured products that were supposed to yield a nice steady income of Libor + 200 ( a fabulous return at the time in 2006.) The yield was generated by selling credit default swaps, or insurance, on the main investment-grade indices in the US and Europe, and collecting a premium. Anyone with even a cursory knowledge of derivatives can tell you that a structure that is designed to sell volatility and then sell some more when volatility goes higher, has a fairly decent shot of losing boatloads of money. Selling volatility is always a high risk proposition, particularly when you do it when premiums are at record lows, right before they spike to record highs. This is not a case of "hindsight is 20/20," as several astute investors and commentators criticized the structure when it was initially introduced. The bigger question here obviously is not about the computer bugs found in these particular structures. The question is: How much more reputational damage can the ratings agencies suffer before investors start to call Warren Buffett instead?

Tuesday, May 20, 2008

Citigroup in a Pickle, Again

In a desperate attempt to avoid being sued by its retail investors in April, Citigroup chose to bail Smith Barney investors out of Falcon, a hedge fund that lost 75% in three months. Institutional investors are now stepping up to the Citi bailout trough. Wachovia and Fifth Third have disclosed enormous losses from investments in Falcon. According to the Wall Street Journal, Fifth Third is suing the insurer and brokerage firm that arranged the investments. Fifth Third and Wachovia had invested in Falcon through their Bank Owned Life Insurance assets. For those unfamiliar with BOLI, this is life insurance that banks take out on their employees in order to collect money if and when their employees die. If you think it is morbid and creepy that banks hope to collect money when their employees die, rest assured that they have ulterior motives. Apparently, BOLI is some sort of a tax shelter.
Fifth Third and Wachovia had invested over $600 million and $1 billion in Falcon respectively and are now facing combined losses of approximately $1.2 billion. They weighed the embarrassment factor of disclosing the losses against the magnitude of $1.2 billion. Although it was probably a very close call, they chose to suck it up and go after the money. After all, Citigroup has already set a precedent by propping up other hedge funds that were failing and bailing out its retail investors in Falcon. It is true that institutional investors shouldn't be able to sue for refunds based on the "we didn't know what we were doing" defense, since it is their job to know. But it's worth a shot. Citi has already written down $40 billion in losses and raised $44 billion in new capital. What's another $1.2 billion, if investors are willing to continue to throw money at the bank? Note to Wachovia and Fifth Third: If you're looking for a better place to put your BOLI money, give me a call. I'm thinking of starting a hedge fund that comes with a guarantee that it won't lose more than 50% in the first three months.

Home Depot and Lowe's Feel the Housing Pain

Home Depot reported a 66% drop in income as consumers cut back on home improvement projects. HD's dismal report came on the heels of Lowe's 18% decline in earnings yesterday. With consumer confidence at 28 year lows, it is not a surprise that folks aren't rushing out to buy new granite counter tops and travertine floors. It is hard to imagine sales for the home improvement retailers bouncing back any time soon. The surge in home remodeling over the past few years was primarily financed with home equity lines of credit on the rapidly increasing equity in people's homes. Several lenders have already slashed or suspended availability of HELOC's to customers, particularly those in areas where housing prices are falling (i.e. most of the country.) Washington Mutual was the latest to join the HELOC slashfest. Those who believe that home equity loans are the next shoe to drop in the credit crisis would be advised to avoid home improvement retailers until the housing outlook improves.

Monday, May 19, 2008

BCE Buyout on the Rocks

According to Reuters, the $34.8 billion buyout of BCE, Canada's largest telecom company has stalled. Supposedly, the buyout group (Ontario Teachers Pension Plan, Madison Dearborn, Merrill Lynch, Provdence Equity Partners and Toronto Dominion Bank) still wants to do the deal, but the banks who offered financing are wavering. The banks who had originally agreed to finance the deal have proposed new terms for the debt. Apparently, the new set of terms contained higher interest rates and other "onerous" conditions. Additional details were not immediately available. In a situation like this, open to so much interpretation and mockery, it is entirely appropriate for K10 to offer an imaginary conversation detailing what the lenders may have said to each other in a secret meeting arranged to squash this deal. The lenders were the usual suspects: Citigroup (C), Deutsche Bank (DB), and Royal Bank of Scotland (RBS).

C banker: Ahem. Does anyone actually still want to do this deal?

Silence, followed by hysterical laughter.

C banker: Ok. So, let's suggest some terms that nobody can possibly agree to. First, we have to hike the interest rates.

DB banker: Libor + 3,000 sound good?

RBS banker: Make it 10,000

C banker: Done. Now we have to get rid of this ludicrous PIK toggle feature we originally agreed to.

RBS banker: Brilliant! We'll make up some sort of formula where they actually have to pay us interest biannually.

C banker: Um. I think that's the way bonds used to work before 2006.

RBS banker: Right, right. Of course. I was joking.

C banker: I think we should also ask for free telecom service from BCE for life.

RBS banker: I like that. Very original

DB banker: These terms might be too lenient. They may still want to do the deal at a lower price. We can't risk it!

C banker: True. That would be terrible. We need a sure-fire deal killer. Something sinister. Something....

DB banker: Onerous.

RBS: Yes. That's the right word.

C banker: I have it! We'll add some covenants!

DB banker: Brilliant! They'll never go for that!

RBS: Um...What are covenants?

ResCap Bondholders Begrudgingly Accept Tender Offer

Residential Capital announced that the company could go forward with the $14 billion proposed tender offer to stave off bankruptcy. ResCap, the mortgage finance unit of GMAC, has been hit very hard by the credit crisis. The company had losses totaling $5.3 billion in the past six quarters, with no end in sight, threatening its ability to remain an ongoing concern. Although the holders of the debt threatened to oppose the restructuring, they ultimately had little choice as any holdouts to the plan would have become subordinated to a very long line of creditors. Simply stated, since bonds are no longer issued in paper due to advances in technology, their claims on the company would've actually been worth less than toilet paper.
The tender offer requires debt holders to exchange their notes for new notes with longer maturities. Holders of the short term debt will receive new notes worth as much as 100 cents on the dollar, while longer term debt holders will receive new notes worth roughly 80 cents on the dollar. GMAC, the parent, would help finance the tender offer by increasing its credit line to ResCap, again, by $3.5 billion. GMAC's credit line would become senior to all the existing note holders. What ResCap should've done was issue PIK toggle bonds, similar to those I mentioned in my prior post this morning. If you have the option of rolling debt into more debt, you don't even need to get approval to screw the debt holders. The buyers of the debt sign up to get screwed from the get go.
Why should anyone even care about yet another mortgage lender going bankrupt? Well, Rescap's inability to remain an ongoing concern would threaten GMAC's viability, which would hurt GM. Most people who purchase cars from GM use GMAC for financing. Furthermore, GM still owns 49% of GMAC, meaning it would take a financial hit as well. The possible failure of ResCap would clearly have negative reverberations beyond the mortgage finance market. Why investors are willing to take this risk by purchasing shares in GM is a complete mystery to me. Anyone with any insight is welcome to comment.

Payment-In-Kind Bonds Deliver No Payment

According to the Wall Street Journal, more and more companies that issued PIK toggle bonds during the private equity boom are opting to pay investors more debt rather than interest. For those unfamiliar with PIK toggles, it is debt issued with the option to substitute interest payments for more debt. The option resides with the issuer, of course, not the investor. This structure was very popular during the peak of the private equity boom when debt investors were tripping over themselves to pay absurd prices for leveraged loans. Private equity sponsors took full advantage of the deluge of cash at the time by issuing bonds with PIK toggles to give themselves a little breathing room in case the companies ran into liquidity problems in the future. What does a company with liquidity issues need more than anything else? I'll let you in on little secret: it is not more debt. Granted, not having to make an interest payment is a temporary respite from possible bankruptcy, but it only delays the inevitable.
Seven companies have taken advantage of the PIK toggle option on $2.4 billion in bonds so far. Claire Stores, a retailer taken public by Apollo a year ago, is a prime example. Claire Stores bonds now trade at $.58 on the dollar. Investors were absolutely shocked! Personally, I would be shocked if every single PIK toggle bond issued didn't end up eventually taking this option. It's like asking how many people who took out option arms expected to make the full payment on their mortgage. The answer? Zero. Why? Because none of them could afford to make the full payments in the first place. This is why default rates on option arms are skyrocketing. Anyone with half a brain should have expected the same out of the companies that issued PIK toggle bonds. Leveraged loan investors who bought into these loans deserve exactly what they are getting: no cash, just a tenuous IOU.

Friday, May 16, 2008

ECB Worries About Liquidity Schemes, Fed Worries About Bubbles

According to the Financial Times, the European Central Bank is growing concerned that banks are taking advantage of its generosity. In an effort to alleviate frozen credit markets, the ECB began allowing banks to swap illiquid mortgage and other securities for treasuries on a temporary basis three weeks ago. In that short period of time, banks have created approximately $175 billion worth of bonds out of formerly unusable loans in order to provide collateral to the ECB to increase their liquidity. The ECB was apparently taken by surprise by the frantic securitization efforts and is now highly concerned that the banks are taking advantage of its leniency with the type of collateral it will take. In fact, the ECB is "looking very hard at whether there is not a specific deterioration of collateral."
Meanwhile, across the pond, the Fed is beginning to look at attempting to prevent asset bubbles in the future. The Fed also began allowing dealers to submit extremely illiquid collateral in exchange for treasuries through the TSLF two months ago to alleviate the panic in the credit markets. Now the Fed is studying how it can prevent asset bubbles? Perhaps it can start by not accepting collateral it doesn't understand and can't price, thus encouraging further speculation from dealers. Maybe the Fed and the ECB don't fully understand what is going on behind the scenes within the dealer community right now as they attempt to craft ever new and creative securities to shovel into the eager central bank liquidity machines. But K10 has been behind the scenes. It probably looks something like this:

Repo Trader: I can't get bleepin' financed. Nobody will lend us any bleepin' money!

CFO: What's the problem?

Repo Trader: I'm not sure. But there's some rumor floating around about us not being able to get financed.

CFO: Can't you just give something to the Fed and get some treasuries?

Repo Trader: All I've got is these bleepin' loans! Fed will only take AAA rated securities.

CFO: Oh, why didn't you say so? We can cook up some of those by the end of the day. (yells to securitization desk) Hey Jones! Can we bundle some of this crap and make some AAA's by the end of the day?

Frank: Um, you fired Jones last week.

CFO: Oh. What about you? Can you make some AAA's?

Frank: Yeah, I don't really do that.

CFO: Anyone there who does?

Frank: Nope. All gone. The whole department was laid off last week.

CFO. Who the hell are you? And who are all those people with you?

Frank: We're the clean up crew.

CFO: Ok. No problem. This should be easy. I was the head of securitization two years ago when we were having a banner year before I got promoted to CFO. I can do it, but I'll need your help.

Frank: Yeah, we're not really experienced.

CFO: Don't worry about it. Hey repo guy! Does the Fed care what's in the securities?

Repo Trader: Nah. They have no idea. As long as somebody says its AAA.

CFO: Excellent. Ok gang, grab all the mops, buckets, shoes and coats you can find. Repo guy, call the Fed! We have some collateral.

Repo Trader: I have a name, you know.

CFO: Shut up! You still have a job.

Housing Starts Rise 8.2%

Housing starts rose at a higher than expected pace of 8.2%. The rebound in housing starts was mostly due to increases in condo and multi-family construction. Starts on US single-family homes dropped 1.7% from March to the lowest level in 17 years. This news is being greeted with cheers from the market, which is pointing higher before the opening bell. You know what I was just thinking? What we really need today is a few more condo projects to add to the glut of inventories. I sure hope some of those condo starts were in San Diego where the glut of inventories at today's sales pace would take 12 years to work through. Or maybe in Miami, where it is 16 years long. The market rightfully should ignore the fact that lending standards continue to tighten, delinquencies are rising, and sales are still moving at a snail's pace in most parts of the country. It should pay attention to the enthusiasm of homebuilders, who are still breaking ground on new projects, despite their inability to unload the garbage sitting on their books. My guess is that some of the new condo projects started this month will end up in the "uncompleted condo project" statistic in a year. There's an indicator that the Commerce Department should consider adding to the report.

Thursday, May 15, 2008

Blackstone Posts Loss That Confounds Analysts

Blackstone Group, the publicly traded asset manager widely known for its buyout business, reported a loss of $66.5 million attributable to declining fees in every single one of its businesses. The first-quarter loss, which excluded some compensation costs, was $.06 a share, compared to average estimates of $.12 a share profit that analysts had been expecting. Profits? From a private equity firm? Did the analysts' Wall Street Journal subscriptions expire in December? Blackstone completed exactly one leveraged buyout in the quarter for $1.2 billion, compared to $42 billion in deals the previous year. Furthermore, revenues declined by 94% in its real estate business and its buyout funds. The hedge-fund unit was the real performer with a revenue drop of only 81%. Those guys should expect a big fat bonus. Speaking of compensation, Blackstone's net loss was actually $251 million including costs related to the vesting of executives' ownership stakes as part of the initial public offering in June. Let's see, really lousy asset management performance, yet really high compensation costs. I'm sure if performance turned around, compensation would increase even more. Very interesting negative and positive correlation between compensation and performance. The company expects to post net losses during the next FIVE YEARS due to vesting expenses. Anyone who still wants to buy the stock after reading the last sentence may be interested in investing in a partially completed condo project I'm working on in Las Vegas. Please call me.

GE to Sell Appliance Unit

GE is planning to sell its appliance division, one of the oldest and least glamorous portions of the conglomerate's huge and disparate holdings. Apparently, CEO Jeffrey Immelt is facing increasing pressure to divest some underperforming businesses to appease shareholders who were angered at the company's disappointing earnings announcement. Mr. Immelt had the audacity to miss earnings guidance just a few weeks after giving a chipper view of the company's outlook. Furthermore, as I reported here a few weeks ago, Mr. Immelt faced the indignity of being scolded on national television by his former boss, Jack Welch, who publicly derided the new CEO for accurately reporting GE's results. After the public flogging, I'm certain that Mr. Immelt regretted selling off the insurance business several years ago, since he could no longer borrow from insurance reserves (as his former boss had done for many years) to boost earnings results to satisfy Wall Street analysts.
Frankly, I don't know if it a good idea for GE to sell its appliance unit. I'm sure it's good for the investment bankers who will earn a few bucks. Investment banks love companies that are constantly buying and selling units. So many "synergies" and "strategic alliances" to nurture, while at the same time "unlocking value" and "focusing on core competencies." These are just the catch phrases I've heard of, but any good one will do as long as the churn continues.
I have a suggestion for Mr. Immelt on how to raise $25 billion dollars. Go through the balance sheet and sell every asset that is labeled as "other." I took a look at GE's 10-K after the earnings miss recently and tried to determine if I could figure out its holdings from looking at the balance sheet. Although GE is often described as an industrial conglomerate, it is actually a huge financial services firm with no regulatory capital requirements or ability to borrow from the Fed if it runs into trouble. Intellectually, I have an interest in determining where GE's exposure lies. The most interesting thing about my analysis was the many categories labeled as "other" on the balance sheet. When I scrolled down to the appendix, I was surprised to find that within the descriptions of the "other" categories were further sub-categories labeled as "other." Adding up all the sub-categories yielded a grand total of $25 billion worth of assets without any detailed description. Perhaps that seems like a trifle for a company that has $800 billion in assets? But it represents about 21% of GE's book value. Maybe Mr. Immelt would consider "unlocking" some of that value?

Wednesday, May 14, 2008

Freddie Posts Loss, Increases Level 3 Assets to "Beat" Estimates

Freddie Mac shares rose this morning as the company posted a narrower loss than estimated by analysts. Freddie lost $151 million in the first quarter. How did the company pull off this amazing feat despite growing delinquencies and a bleak housing outlook? The company, known for its creative accounting in the past, pulled a few tricks out of its sleeve, and shuffled some assets around. Freddie increased its assets classified as Level 3 to $157 billion from $32 billion. A quick reminder to those who don't keep up with arcane financial accounting rules, Level 3 assets can't be sold today because no price exists in the market. If you put Level 3 assets up for sale on Ebay, the listing would expire. Freddie is basically guessing at the price of these securities based on its own pricing models. It is also raising $5.5 billion in capital to help overcome "rising credit costs." Investors who buy into this new sale of common and preferred shares are betting that the company, which has already endured an incredibly embarrassing accounting scandal in the past, has cleaned up its accounting house. Personally, I'd rather throw all my chips on the roulette table.

Fiscal Stimulus Package Fails to Stem Rising Foreclosure Filings

According to RealtyTrac, 243,353 foreclosure filings were recorded for the month of April. This was a 65% increase year-over-year and a 4% rise from March. The areas with the highest number of foreclosure filings continue to be the usual suspects. California recorded 64,683, the highest among all the states with Florida, Ohio, Arizona and Texas following behind. Nevada still had the highest rate of foreclosures with one in every 146 households receiving a filing.
Our clever Government officials, despite their attempts to boost the economy by sending everyone a check for $600, have yet again failed to address the real problem in this country. As long as foreclosures are rising, borrowers are defaulting, and homeowners face declining equity, the glut of housing inventories can only rise. A one-time check of $600 does nothing to reverse this situation. What the government should have done was send everyone in America a foreclosed property. All of that "pride of ownership" that was trumpeted by the administration for so many years can now become a reality for every household. I, for one, wouldn't even mind if my free foreclosed property was a condo in Ft. Lauderdale. I would certainly stimulate the economy by flying across the country to see my new digs. As long as the HOA dues weren't too high. And it was on the beach.

Tuesday, May 13, 2008

Median Home Prices Continue to Decline, Taking Homeowner Equity With Them

The median price for a single-family home in the US dropped 7.7% in the first quarter to $196,300. The median price for a single-family home fell in 100 of 149 metropolitan areas, with Sacramento posting the largest decline of 29%. The metropolitan area around Riverside and San Bernardino was next with a 28% decline, followed by Lansing, Michigan with a 27% decline. Little surprise then that Bank of America increased its loss estimates on its home-equity loans to 2.5%, up from the 2% it projected just last month. Liam McGee, president of the consumer and small business division said at an investors conference today that Bank of America expects the economy to shrink in the second quarter.
Possibly causing some consternation at the investor conference was MeGee's statement about mistakes made during the housing boom. "We made some mistakes in 2005 and 2006 in how we grew this portfolio." He claimed that the bank has tightened lending standards since then. Although I personally did not have the opportunity to attend the conference, I can only imagine the furious rustling among analysts who jumped at the chance to pepper the banker with the questions:

Analyst I : Mr McGee, are you trying to tell us that the problems in your loan portfolio are the result of actual mistakes your bank made? Are you sure it wasn't linked to the credit crunch?

McGee: Yes, I'm certain we made some mistakes.

Analyst II: But that just doesn't make any sense. The losses in your portfolio had to have been caused by outside market forces that you had no control over.

McGee: No. I'm pretty sure, we lowered our underwriting standards to keep up our market share numbers and now we have to take some losses.

Analyst III: But would you say the worst is over?

McGee: No. As I said before, we just raised our estimates for loan losses just from the prior month based on new data. We'll probably need to raise them again.

Analyst IV: How do you expect us to buy your stock if you don't tell us that the worst is over?

McGee: I'm sorry. Was that a question?

Analyst V: What you are saying then is that you are the only bank that made mistakes, so it must be a terrible investment to buy your stock.

McGee: No, other banks made mistakes too. Possibly even bigger ones than we made

Analyst VI: Who made bigger mistakes than Bank of America?

McGee: Countrywide.

Toll Brothers CEO Urges Buyers to Come Out of Woodwork

Toll Brothers anticipated revenue declines of 30% for the quarter ended April 30th. Robert Toll, the luxury home builder's CEO stated that "The just-completed spring selling season was quite weak in most markets as buyers remain on the sidelines." He further asserted "We believe there is significant pent-up demand which is growing." He characterized the current market as a "buyer's market, but buyers can only take advantage of it if they buy; sooner or later they will, but unfortunately we can't predict when." Mr. Toll then took out his trusty pent-up-demand-o-meter that he carries with him to open houses to show how he measured all of that "growing pent-up demand." But his COO hissed "Put that thing away! We don't want the competition to see that!"
Mr. Toll went on to give some dismal stats on the company's current and future money-making prospects. The number of signed contracts fell by 44% from a year earlier, leading to a 58% decline in terms of dollars. The math on that works out nicely because the average price per unit on contracts signed was $590,000, down from $711,000 a year earlier. These numbers strike me as particularly interesting because I had the pleasure of listening in on Toll's earnings conference call earlier in the year. At the time, Mr. Toll was adamant about the company not needing to cut its prices because it was a luxury home builder that operated in a different segment than the other home building clowns. Mr. Toll claimed that the company did less speculative building and would just wait for the market to turn around so margins shouldn't decline. Essentially he was saying that his company really sells houses on the Moon, where the laws of physics and hopefully economics do not apply. It's an entirely different competitive landscape. You see? There's practically no gravity on the Moon, so prices can't go down. People will continue to pay top dollar for our great houses even though every other new house on Earth is being discounted by at least 30%. Then he turned to his COO and whispered "When is that stupid Moon initiative getting off the ground so I can officially announce it, instead of beating around the bush?"

Monday, May 12, 2008

XM Satellite Losses Exceed Estimates

In a brilliant PR move, XM Satellite Radio managed to report its earnings in the sixth paragraph of its actual earnings release. The company begins the announcement with "XMSR today announced earnings for the three-month period ended March 31, 2008." It then trumpets its 17% increase in first quarter revenues, 18% subscriber growth, new customers, blah blah blah. Then, after a discussion of its first quarter "adjusted operating loss", which is one of those alternative earnings measures typically invented by companies who are attempting to masquerade larger losses, the company mentions its $129 million loss. Despite XMSR's "ample" liquidity and "strong" financials, it is difficult to support a business plan that involves charging a subscription for something that is essentially offered for free (albeit with annoying commercials.) Furthermore, given that the cost of launching a satellite can cost in the neighborhood of $50 million, the company has managed to pinpoint the most expensive avenue possible to offer a service.
The satellite story can and has ended badly in the past. Does anyone else remember the expensive bombs that were Iridium and Globalstar? These companies trumpeted the miracle of satellite phone service, offering customers the ability to receive service anywhere in the world. I actually had the pleasure of seeing an Iridium phone in 1998. It was the most preposterous electronic gadget I'd ever seen in my life. It was so large and unwieldy that it required a suitcase to hold all the components. Furthermore, when it was removed from its 50 pound case, a two-foot antennae had to be unfolded in order to receive reception. The handsets cost several thousand dollars and the service providers planned to charge $9 a minute. Most potential consumers examined their puny non-satellite phones, decided they didn't need to be reached while climbing Mount Everest, and resisted purchasing the phones. Although XMSR has managed to attract some customers, it has blown through over $4 billion of its investors cash. How much longer investors will be able to tolerate losses going forward remains to be seen. I, for one, will be tuning in on my free local radio station to hear the answer.

MBIA Posts $2.4 Billion Loss, Shocking Those Who Believed Worst Was Over

MBIA posted a loss twice as large as anticipated by analysts, as the company was forced to write-down the value of its credit default swaps by $3.58 billion. The loss was equivalent to $13.03 a share allowing MockTheMarket to honor MBIA with its coveted "We lost more money than our market capitalization in one quarter!" award. Furthermore, it pulled off this amazing feat two quarters in a row and still maintained its AAA rating. CEO Brown was optimistic, claiming "We have ample liquidity, our balance sheet is built to withstand credit stress levels many multiples of what we are experiencing now." What he didn't mention in his reassuring speech was that MBIA's share in the municipal bond insurance business had dwindled to 2.5%. This used to be MBIA's bread and butter before it ventured off into the lucrative business of granting AAA ratings to CDOs whose cash flows it didn't understand. Now the company is stuck with a deteriorating portfolio coupled with insufficient capital. It can't venture into new businesses and has lost most of its municipal insurance business to Berkshire Hathaway, a company with ample capital and a solid reputation. What does the future hold for MBIA? A tremendous amount of risk from its current portfolio and an inability to do future business. Not a combination that would tempt one to buy the stock, even at a hefty discount to its former glory.

Friday, May 9, 2008

Citigroup Seeking Buyers For $400 Billion in Assets

Citigroup's Vikram Pandit announced today that the bank would be selling $400 billion of assets it identified as "not central" to its mission, including $170 billion worth of marked-to-market assets in its investment banking division. Pandit's ambition to streamline Citigroup's bloated balance sheet is predicated on a number of highly optimistic assumptions. First, Citigroup needs to find investors with very deep pockets that would consider buying Citi's garbage, over that of all the other garbage currently being aggressively marketed on the Street. Other banks and insurance companies are also slashing assets so the buyers will need to come from somewhere else. Sovereign wealth funds? Maybe, but they may still be licking their wounds from premature investments in the first of Citi's "final" capital raising schemes. Second, Citi is hoping, possibly praying, that it will be able to sell assets at prices somewhere close to where they are being carried on its books. Given that only $170 billion of the assets are marked-to-market, it seems unlikely that Citi will be able to pull this feat off without taking yet another massive write-down. Finally, Citi believes that when it allows some of the loans to mature, the borrowers will be able to repay the loans in full. This assumes that other banks will step into Citi's shoes to offer financing at similar terms, or that the borrowers will have the money to pay off the loans. It is hard to imagine that Citi has been a prudent and careful underwriter of its loans in recent years given that it has taken around $44 billion in asset write-downs. It is also somewhat inconceivable that borrowers will be flush with cash without the need to refinance, given that the US economy teeters on the brink of Recession. The proceeds from this yard sale may not live up to expectations. Mr. Pandit will then need to move on to Plan B. Or is it C? D?

Ian Bruce Eichner Facing Foreclosure Again, Sixteen Years After Prior Foreclosures

Ian Bruce Eichner is joining the swelling ranks of former real estate moguls forced to hand over the keys to trophy properties. According to the Wall Street Journal, the developer was in negotiations with Deutsche Bank over the Cosmopolitan Resort Casino, a property in the midst of construction on the Las Vegas Strip. Deutsche Bank is on the hook for around $1 billion on the unfinished project as the property mogul defaulted on his loans late last year. Mr. Eichner claimed in an interview following the default that the credit crisis was the root of his problems and that banks would eventually lend to him again. "It's probably pretty safe to say that somewhere in 2009 or 2010, Bruce Eichner will surface with another one, something. There's zero that will stick to my shoes." I do enjoy it when over-levered egomaniacs blame their misfortune on the credit crisis, rather than their brilliant strategy of just borrowing money without any plan to pay it back.
Those who have followed the commercial real estate market for some time may be experiencing a bit of deja vu. Haven't I heard this guy's name somewhere before? Yes! Mr. Eichner was forced to hand over the keys to a series of buildings in Manhattan sixteen years ago. Yet somehow lenders thought he had developed some skill in managing his finances in the interim. On the other hand, according to The New York Times, in an article written in 1994, Mr. Eichner was quoted as saying "I've built three million square feet in Manhattan and none of it came in on budget or on time." Apparently, Deutsche Bank thought that this philosophy qualified him for a $1 billion loan. Now the bank is faced with yet another defaulted loan to work out, in addition to the $5.8 billion it lent to Harry Macklowe. At this rate, Deutsche may become a very large property manager in the US. Mr. Eichner can continue to believe that lenders will eventually come back begging him to take their money. If I ran the Fed, I would permanently ban any bank who lent this guy money again from accessing the discount window or any other loans provided by the Fed. Furthermore, if I ran Deutsche, I'd make him pay off his debts by washing my dishes for the next sixteen years. But since I only run MockTheMarket, the best I can do is call him and his lenders "idiots" and move on to the next inane story of the day.

AIG Downgraded After Posting Wrenching Losses

AIG posted a first-quarter loss of $7.8 billion, due mostly to a write-down of $9.11 billion in credit default swap contracts tied to fixed income mortgage securities. The insurer has written credit default swap contracts on over $500 billion of securities, about $60.6 billion tied to subprime mortgages. CEO Martin Sullivan predicted as recently as March that losses in the derivatives book were temporary and the worst-case scenario of actual losses taken may be only $900 million over a period of years. Yesterday, the company raised that amount to $2.4 billion. If Sullivan's actual loss estimates continue to triple every month, the company will be in a world of hurt before the end of the year. AIG will begin a capital raising extravaganza by offering $7.5 billion in stock, debt and equity units today followed by an additional $5 billion in hybrid securities at a later date. Both Fitch and S&P lowered AIG's debt ratings one notch after the miserable earnings report. While Sullivan claimed that he was "surprised" by the magnitude of the losses, he chose not to declare the popular refrain of "the worst is behind us." That alone should cause serious concern for investors contemplating investing in the new stock offering.

Thursday, May 8, 2008

Do the Uber-Rich Care About the Slowing Economy? Check the Art Market

Both Soethby's and Christie's held their spring auctions of Impressionist and Modern Art this week. Last night's results from Sotheby's were modest and uninspiring. The auction house managed to sell $235 million worth of art, versus an expected range between $207 and $284 million. The company shrewdly lowered the supply of works to auction in order to temper supply with the possibility of sagging demand due to the recent worldwide increase in financial market volatility. Many have been predicting a dismal end to the red hot art market which has been exhibiting bubble-like tendencies as multiple records are broken at each successive auction. This week's results point to more of a droop rather than a drop off of a cliff.
The Sotheby's auction produced 41 sales out of a total of 52 lots on the auction block. Many of the works that sold garnered prices well above initial estimates but only four records were broken. As for the guarantees that Sotheby's issued for some works, they managed to sell all but one lot. Christie's auction of similar works Tuesday night brought in $277.2 million, versus expectations of $286 million. 44 out of 58 lots sold. Again, the results were somewhat contradictory. A few works broke records, some sold for higher than estimated, while others failed to sell. Overseas investors comprised 70% of buyers at Christie's, and 30% of buyers at Sotheby's. Apparently, those that attended Christie's auction are familiar with the weak dollar, while those at Sotheby's believe in our government's "strong dollar policy".
Next week's auctions of Contemporary Art will be an even better barometer of whether the incredible momentum in the art market can be sustained. Prices of contemporary works have skyrocketed beyond comprehension in the past few years. Many have hypothesized that this is the result of new investors who are both newbie rich people as well as newbie art buyers, driving up the price of Contemporary Art by bidding for works as an investment despite their lack of understanding of art. Rising art prices have also been attributed to the increase of wealthy buyers from the Middle East and Asia who have recently become wealthy from rising oil prices and stock markets. What do the newly rich know about Contemporary Art? Some would argue that they know nothing. They just raise the paddle and pay more and more because its currently fashionable and because they can. Museums and auction houses have contributed to the frenzy by attempting to "explain" Contemporary Art in what amounts to ridiculously pretentious gibberish. The less the newbies understand about the art, the more the mystique is elevated. In a hilarious editorial in the Wall Street Journal on April 18th, Eric Gibson offered a few priceless snippets from the Whitney Museum's commentary accompanying the Contemporary Art exhibit. My favorite description went something like this:
"...invents puzzles out of nonsequiturs to seek congruence in seemingly incongruous situations, whether visual or spatial...inhabits those interstitial spaces between understanding and confusion."
Color me officially confused. I don't profess to understand art, particularly that of the contemporary variety, but I know that the above description was possibly the result of the curator's monkey randomly picking words out of a dictionary. Needless to say, next week's Contemporary Art auctions will be very interesting. Now that the Chinese and Indian stock markets have corrected, and turmoil in the credit markets has caused many a hedge fund to blow-out, will these investors show up with the same appetites for less traditional works? And will it be a good indicator of prudence returning to even the upper crust? Will Sotheby's and Christie's be left holding the bag due to overoptimistic guarantees offered to sellers? The only guarantee I'm willing to make is the following: Whoever decides to shell out between $6 - $8 million for a large painting of a Campbell's Soup Can should prepare to be mercilessly mocked the following morning.

ECB and BOE Leave Rates Unchanged To Combat Inflation

Choosing to ignore the threat to growth, The European Central Bank left rates unchanged at a six-year high to stave off inflation. The Bank of England also left rates unchanged, despite a slump in the UK housing market that threatens growth in the region. ECB President Trichet said "inflation rates have risen significantly since Autumn. As we have said, inflation rates are expected to remain high for a rather protracted period of time before gradually declining again." The ECB and BOE appear to be taking an alternate view from the one expressed by US Federal Reserve Chairman Bernake, who advocates stimulating growth in the face of rather obvious inflationary pressures. Despite the Fed's recent habit of dousing the market with dollars with the appearance of any economic panic, whether real or imagined, a few talking heads are beginning to signal that the days of easy money may be behind us.
The IMF's deputy chief John Lipsky gave a speech where he declared that inflation is back. Giving credence to his moniker, Mr. Lipsky gave some serious lip to the Fed by claiming that the problem of surging energy and commodity prices was only compounded by low central bank interest rates and a falling dollar. Meanwhile, Fed Bank of Kansas City President Hoenig also gave a speech claiming that "serious" inflation pressures may compel the central bank to increase interest rates. What exactly is "serious" inflation? $4 a gallon gas? Skyrocketing food prices? It shouldn't be a surprise that Walmart and Costco reported higher sales than expected, while other retailers suffered. When the average American is trying to fight off inflation in his own household, he chooses to shop at a discounter.

Wednesday, May 7, 2008

Pending Home Sales Hit Record Low, Again

Pending home sales hit a record low for the second consecutive month in March. March's reading was down 20.1% year-over-year and 35% from the index's peak in April 2005. With the recent resilience in homebuilder stocks, powered by those who must believe that the housing market is bottoming, these numbers should be a disappointment. In my universe of understanding, a bottom should be followed by some sort of uptick, not continuing declines. The nagging persistence of weakness in the housing market is perplexing to those who subscribe to the theory that loose monetary policy always juices the market. The Fed has done its part, now where are all the buyers? Or was a large portion of demand in the housing market merely the result of lenders handing money to anyone with a pulse who claimed to have assets and income?
A close look at Fannie Mae's earnings yesterday reveals that the company has a problem with its Alt-A portfolio. Apparently, $946 million of the $2.2 billion in losses incurred during the first quarter involved Alt-A loans. The company went on to state that it had $344.6 billion in Alt-A exposure and a limited strategy for stemming future losses. For those unfamiliar with Alt-A mortgages, they are backed by loans to borrowers with higher credit ratings than subprime but have little to no documentation of a borrower's assets or income. Fannie's Chief Daniel Mudd said the vintages performing the worst in a four-year average book were late '05, '06, or early '07. This should not come as a surprise as housing prices peaked in 2005, and mortgage lenders dropped like flies in early 2007, causing what is the biggest problem for current mortgage borrowers: the lack of ability to refinance. The inability of overextended borrowers to refinance into a more favorable loan is the root of surging delinquencies leading to foreclosures. It is such a big problem that I don't believe any government plan will be able to adequately address it.
Here is the link to a fantastic post on a UK blog which follows the path of one single mortgage pool of $500 million in Alt-A loans securitized by Washington Mutual in May 2007. The average credit score of the pool was 705, 92.6% was originally rated AAA, even though only 11% provided full documentation of assets. Less than one year later, in April 2008, 29.07% of the pool was 60 days delinquent or more, 13.87% was in foreclosure and 6.21% was an REO (the property had reverted to the lender after foreclosure.) These numbers grow worse and worse every month. When I hear the pundits talking about the prices of MBS being grossly understated due to unrealistic default rates priced in, I wonder if they've looked at some of these stats. This particular pool, which was not even subprime, is looking at potential default rates of over 50% and it isn't even a year old. Then I look at FNM's statement that it has $344.6 billion in Alt-A exposure. I scratch my head at why everyone rushed out to buy FNM's stock yesterday. Then I go to Costco and buy my alloted bag of rice for the day.

Legg Mason To Raise Equity, Won't Solve Miller Problem

On the heels of its abysmal earnings report yesterday, where Legg Mason posted a $255.5 million loss, the company is opting to raise capital by issuing $1 billion in "special" equity. What makes this class of stock so special? The investor not only receives a share of stock for $50, it also gets 1/20 of a $1,000 bond that matures in 2021. What a clever way to raise capital to refinance that pesky $425 million in bonds maturing in July that Legg Mason can't repay otherwise because it spent the money keeping its money market funds afloat.
Recent equity issuances by financial firms beleaguered by enormous asset write-downs have incited sheer euphoria in the equity markets, but one has to wonder if this particular equity issuance will do the trick. Although the write-downs were related to the company bailing out its money market funds, which were invested in illiquid securities, Legg Mason appears to be suffering from a much bigger problem. Outflows from its flagship mutual fund point to a crisis of confidence in former star mutual fund manager Bill Miller.
For those who aren't familiar with Mr. Miller, he spent 15 years heralded as one of the finest mutual fund mangers due to a value investment approach that outperformed the S&P. Unfortunately, his streak ended with a thud in 2006. Performance in the flagship fund has suffered dramatically since then due to some very poor decisions in the past two years. In fact, it appears as if Mr. Miller has developed an uncanny ability to pick the worst performing stocks and sectors out of the bifurcated market we have experienced in recent years. Mr. Miller was a big buyer of the homebuilders in 2006. His investment thesis? The builders had very low P/E ratios thus causing them to be "value investments". His analysis, which appears to have involved looking at one number, failed to take into account the builders' bloated balance sheets and negative cash flow statements as well as a deteriorating housing market in a clearly cyclical industry. He was a big investor in Countrywide, the poster child of irresponsible lending which would have eventually gone bankrupt if not for a bailout by Bank of America. Mr. Miller held a stake in Bear Stearns at some very high prices, while failing to give any weight to the rumors of impending bankruptcy in early March which were even reported in a little-known financial commentary website called MockTheMarket in a story entitled Is Bear Stearns Going Bankrupt?. Furthermore, Mr. Miller holds a large stake in Yahoo, and seems to think that Microsoft will come back to Yahoo. The Bloomberg article quotes Mr. Miller as saying "I'm more puzzled by Microsoft not going up to $37 than Yahoo wanting to walk away." Really? Puzzled that Microsoft, who is known for its shrewd negotiations isn't going to pay $37 for a stock that was trading at $19 before it entered the ring? Mr. Miller goes on to claim that Microsoft will be back. That's funny because Microsoft's Gates says the company will pursue other alternatives after walking away from Yahoo. So, who are you going to side with?
Legg Mason's Value Trust Fund lost 19% in the first quarter. As of March 31, the fund held sizable stakes in some underperforming stocks such as UNH, Yahoo and GE. In his first-quarter investment commentary to shareholders Mr. Miller forecasts that the 'worst is behind us.' Hmmm, where have I heard that one before?

Tuesday, May 6, 2008

Merrill Moves $33.8 Billion Into Level 3

Merrill's Level 3 assets jumped by 70% to $82.4 billion. Level 3 assets now comprise 8% of Merrill's total assets. For those unfamiliar with Level 3, it is the bucket where dealers throw assets whose prices cannot be determined by market values. Maybe there used to be a market for them, but that was before the credit kerfuffle. For example, let's say I want to claim a $5,000 tax deduction on my 25 year-old TV. I paid $5,000 for it 25 years ago. I'm pretty sure if I tried to sell it on Craigslist, I'd have to pay someone $50 to come pick it up because it weighs about 87 pounds. So instead of selling it, I put it in my Level 3 basket, where I continue to value it at $5,000 thus increasing the value of my total assets so I can get a $1 million stated income and asset home equity loan. Once I get the loan, I donate the TV to the Salvation Army and claim my $5,000 tax deduction. I'm not really worried about the audit which will come after I have paid myself a $500,000 bonus out of the loan I took against my assets. If this analogy seems absurd to you, you've never worked on Wall Street.

D.R Horton Posts $1.3 Billion Loss

Trying desperately not to be overshadowed by the gargantuan losses posted at Fannie Mae and UBS, D.R. Horton lost $1.3 billion for the quarter on $834 million in land write-downs. This means DHI only punted around $500 million in its core operations of selling houses. Revenues declined to $1.62 billion from $2.62 year-over-year. Net sales orders fell to 7,528 from 9,983 a year ago and the cancellation rate was 33%. Waiting for a rebound in the homebuilders is beginning to bear a remarkable resemblance to the plot of Waiting for Godot, a play by Samuel Beckett, which I have never seen or read. The only thing I know is that a bunch of people sit around and wait for a guy who never shows up. Maybe in Act I these people purchase a bunch of homebuilder and financial stocks because they think Godot is just around the corner? Act II is where they become disappointed again when someone realizes it was just a Godot lookalike. What happens in Act III? I think that's the part where the weakest homebuilders go bust when Godot fails to show up.

Financial Losses Mount at Fannie Mae and UBS

Fannie Mae posted a $2.19 billion loss, forcing the company to cut its dividend and seek a $6 billion capital infusion. FNM stated that home price declines this year are exceeding its estimates and blamed a large portion of the $8.9 billion in credit and derivatives losses on the markets in California, Florida, Michigan and Ohio. Somebody tell FNM to stop getting its estimates for home price declines from the National Association of Realtors.
UBS posted a $10.9 billion loss, mostly due to $17.3 billion in losses from its weak investment banking unit. The bank plans to slash its workforce by 7% and sell $15 billion in distressed assets to a new fund which BlackRock will manage. Interestingly, the CEO of UBS didn't mention that the "worst is over." He may have been too busy tallying up the mounting losses of each unit, and the rising exodus of capital from its asset management division. The market is actually pointing to a lower open on the disastrous financial performance of these two financial firms. Perhaps it is starting to sink in that it may be decades before we ever return to the frantic levered investing environment during the boom, if at all.

Monday, May 5, 2008

ResCap May Need Even More Cash

ResCap began its $14 billion debt exchange or buy back today to help improve its liquidity position, which is looking bleaker by the day. As I mentioned in my earlier post on ResCap, the company is seeking a new $3.5 billion credit line from its parent GMAC to finance the debt restructuring. Additionally ResCap wants GMAC to contribute $350 million of ResCap notes outstanding by the end of the month and give it $150 million more in borrowings under an existing credit facility. The mortgage lender is asking alot from its parent GMAC, whose own financial prospects have been greatly harmed by the residential mortgage lender's abominable financial performance. I think I once asked for a $20 credit line increase from my parents, and they scoffed at me. And I'm fairly certain I've never punted billions of dollars of their money.

ResCap goes on to say that it will need to enact assets sales or other capital generating actions in order to provide additional cash of $600 million by June 30th. This news prompted me to dig up GMAC's 8-K released on April 29th. One interesting tidbit in GMAC's earnings announcement stuck out at me that hadn't received much attention in the financial press. ResCap reported a 2008 first quarter loss of $859 million, which looked positively rosy compared to the $910 million loss posted in the first quarter of 2007. However, the losses would have actually been much larger had ResCap not bought back $1.2 billion of its own debt at a discount, which boosted its earnings by $480 million. Without it, ResCap would've posted a loss of $1.339 billion. Furthermore, GMAC's loss would've ballooned to $1.069 billion. You've got to love a company experiencing major liquidity problems that is attempting to boost its own earnings by wasting precious cash to buy back its own distressed debt. Whether this new $14 billion debt buyback scheme will actually keep ResCap solvent remains to be seen. My guess is the money could have been better spent investing in the actual operations of the firm. But I'm sure the financial geniuses at Cerberus would never stoop to such an old-school, unsophisticated solution to a major financial blow-up.

Countrywide's Debt Lowered to Junk, Still Worth More Than Analyst's Opinion

S&P cut Countrywide's debt to junk after Bank of America hinted it may not back all of Countrywide's debt in an SEC filing on May 1st. Meanwhile, FBR's crack analyst Paul Miller said Bank of America should renegotiate its bid for Countrywide, and downgraded the stock to "underperform" from "market perform." Why this analyst's musings are reported as news, I will never understand. First of all, he upgraded Countrywide's stock to "market perform" on August 23, 2007, when the stock was trading around $22. During the entire time that the stock dropped to around $5 before Bank of America's bid, he said nothing. He must've been in hibernation for the credit crunch, and just woken up to realize that he must say something, anything, about a stock that has now lost 90% of its value. He did the same thing with Thornburg, which he downgraded from an "outperform" to "underperform" last week, a full month after the company narrowly avoided bankruptcy by raising a private placement that diluted its stock by 95%. When he issues research notes that have completely missed the boat and come months after the obvious has already been priced into the market, he should also issue an apology. In the meantime, I'm reaffirming my "underperform" rating on Paul Miller's research, and issuing a "junk" rating on his outlook.

Microsoft Walks, Yahoo Shares Tumble

Microsoft withdrew its bid for Yahoo after negotiations fell apart this weekend. Analysts, who were stunned by the news that Microsoft didn't meet Yahoo's absurd demands for $37 a share, were tripping over themselves to downgrade the stock to a "sell." Regular readers of mockthemarket, however, weren't shocked by this news as I noted in a story on April 28th that Microsoft clearly had the upper hand in negotiations. Growth in Yahoo's search business is lagging Google's by a significant margin. Meanwhile, investors only thought the company was worth $19 a share before Microsoft's bid. $33 a share was a gift to Yahoo's shareholders and Microsoft knew that. It's why Steve Ballmer reiterated in the press several times that he was not going to raise his bid by a substantial amount. Now Jerry Yang has the difficult job of trying to prove to investors that turning Microsoft away was the right thing to do. If Yahoo's future earnings fall short of Yang's somewhat overzealous predictions, Yang may be looking for another job before the end of the year.

Friday, May 2, 2008

ResCap Offers To Buy Back Debt at Discount

In an effort to shore up liquidity, Residential Capital, the mortgage-finance arm owned by GMAC, is offering as little at $.80 to exchange or buy back $14 billion of bonds to stave off bankruptcy. The beleaguered mortgage lender will offer cash or notes as part of a tender offer to start next week. ResCap's cash position has been greatly eroded by problems in the housing market that have led to six straight quarterly losses. The company will not be able to meet its current debt obligations so it must attempt to extend the maturity on its debt until 2010 and 2015, when credit market conditions will hopefully improve. The new debt will be senior to the old debt so investors have little choice other than to exchange their bonds at $.80 to receive new ones.
According to the Bloomberg article, ResCap is also seeking a $3.5 billion credit facility from its parent, GMAC, to help finance the restructuring, less than a month after receiving a $750 million credit line. GMAC is getting sucked into the mortgage death spiral at an alarming rate. Will it suck GM down with it? Fitch downgraded ResCap to C from B+. When I was in high school and I did a mediocre job on an assignment, I would get a C from my teacher. What ResCap deserves from the ratings agencies is an F-.

Linens 'N Things Officially Bankrupt

Linens 'n Things filed for Chapter 11 bankruptcy protection today, becoming the first of what will probably be a series of high profile bankruptcies of LBO's completed in the past few years. As I mentioned in my prior story on Linens 'n Things, the company has been on a money-losing tear for the past two years, pretty much since the day Leon Black's Apollo purchased the retailer for $1.3 billion in February 2006. Apparently, Apollo grew weary of supporting the retailer and chose the bankruptcy route, thus screwing the debt investors who were foolish enough to believe the company's cash flow could support a ridiculous debt burden. Linens 'n Things received $700 million in debtor-in-possession financing from GE Capital Corp, allowing the company to continue operations but further screwing the debt investors, as debtor-in-possession financing becomes senior to existing debt holders. If you still think it's a good idea to invest in Apollo's impending IPO after reading this story, please call me. I have some great condos in Miami to go that are perfect for an investor just like you!

Bank Of America May Not Back $38 Billion of Countrywide's Debt

Bank of America has indicated that it may not guarantee $38.1 billion in Countrywide's debt despite its determination to close the acquisition of CFC in the third quarter. The company stated that "There is no assurance that any such debt would be redeemed, assumed, or guaranteed." According to the Bloomberg article, because of BAC's tough language, analysts are expecting the company to put the assets into another company called Red Oak Merger Corp. Red Oak would then file for bankruptcy thus dealing a loud slap across the face to Countrywide bondholders who expected to own BAC debt after completion of the merger. When I say slap, I'm talking Joan-Collins-Dynasty-Style slap. A default on $38 billion in bonds may cause loud ripples throughout the credit markets. It's hard to imagine problems in the credit markets resurfacing given the rabid bullishness on financials lately, but I, for one, am not ruling it out.

Economic Headlines 5/2/2008

Continuing the parade of conflicting economic news, the employment report showed the US economy shedding fewer jobs than forecast and the unemployment rate unexpectedly dropping to 5%. Meanwhile, car sales came in at a lower-than- forecast 14.4 million annual pace in April, the fewest since 1998. The Fed has raised the amount of cash it will offer to banks via the Term Auction Facility to a total of $150 billion in two auctions from $100 billion. The Fed is also increasing the type of collateral it will take in its Term Securities Lending Facility (the treasury/MBS swap totaling $200 billion) to include auto loans and credit cards. What the Fed should do is accept canned goods as a hedge against one of its counterparties going bust. That way, the Fed can always ease some more, cause food prices to skyrocket and then sell the canned goods for a profit. I believe that the changes to the Fed's programs are a strong indication that the Fed is finished easing and will attempt to use these sources of liquidity to help ease conditions in the credit markets. This is the best course of action to attack the liquidity problem in the banking system. However, we are once again confronted with the issue of moral hazard. This only encourages banks to take greater risks if they can always rely on the Fed to bail them out. If something goes wrong and one of these banks defaults on its loan to the Fed, and the Fed discovers the collateral it holds is worthless, guess who ends up with the bill? I'll let you mull that one over for awhile but I think you already have a good idea.

Thursday, May 1, 2008

Back From One-Month Vacation, Analyst Downgrades Thornburg

An analyst from Friedman Billings downgraded Thornburg Mortgage yesterday to Underperform from Outperform. He claimed that the recent capital raise and related transactions result in 95% dilution and questions how shares will trade when 2.9 billion restricted common shares are registered and start trading mid-May. I have to wonder if this guy just got back from a one month vacation and found Thornburg's one-month old 8-K in his inbox. I am not a professional analyst, and yet it took me about 15 minutes to read and dispense an opinion on Thornburg's private placement released on March 25th. The dilution problem was clearly outlined when the company was attempting to raise the money it needed to stay alive. Did it really take this guy a month of analysis to come to the conclusion that the stock just might "underperform" when an additional 2.9 BILLION shares are issued? Can his abacus not count that high?
What is truly astonishing about this downgrade is the number of opportunities the analyst chose to ignore to decide the company was in trouble. For example, when Thornburg's repo lenders issued margin calls that the company couldn't meet, was that not a clue that it might not be outperforming its peers? Or when the company attempted to raise a convertible with a 12% interest rate that investors wouldn't touch, did that not raise a red flag? Or perhaps it may have been appropriate to downgrade the stock when the actual announcement was made about the $1.35 billion private placement that paid an 18% coupon and came with detachable warrants of a gagillion shares of stock issued at a penny? Thornburg didn't even outperform the other high-profile near-bankruptcy of Bear Stearns. Given all of the people currently getting laid off on Wall Street, how does this clown still have a job?