Monday, October 11, 2010

Mock the Market on Hiatus

Apologies for the lack of posting in the past few months. Many big things are in the works in the K10 household and it leaves virtually zero time for blogging. After an intense search for a new home, that involved looking at 110 houses over the course of the past year-and-a-half all over the Bay Area, we finally found one we liked at a price we could stomach, have made a purchase and plan to move in the next few weeks. Hopefully, once the move is complete, I will be able to resume my blogging activities on a somewhat regular basis. Maybe by then something interesting will be afoot in the markets.

Thursday, September 30, 2010

AIB and AIG Again, With Some Details

The Central Bank of Ireland has finally put a price tag on the total cost of bailing out the state-owned Anglo Irish Bank, Ireland's equivalent to AIG. The bank was nationalized in January 2009 and has put on a real damper on Ireland's ability to borrow in the international bond markets. The losses have been capped at $46.75 billion in a worst-case scenario. In US-terms this sounds like chump change. But the government sponsored bailout of its financial sector will cause the budget deficit to rise to 32% of Irish GDP. Sure, the Irish plan to cut the deficit to 3% to make the bond market happy again, but that will be a bitter pill to swallow for the country's citizens.

Meanwhile, in the US, where $150 billion government bailouts are de rigueur, the US government and AIG have agreed in principle on a plan for the government's exit. The details are as follows:
  • The government converts its $49.1 billion of preferred into common to increase its ownership stake to 92.1%.
  • The conversion will take place in early 2011 if AIG can repay $20 billion to the Fed, which it can only do if it can IPO its Asian unit successfully.
  • Current shareholders, who really really love this plan, will receive 75 million warrants with a $45 strike price (still out of the money as we speak, despite the inexplicable rally in the shares.)
  • The Treasury takes over the NY Fed's interests in two SPVs that will theoretically recoup $26 billion from sales of AIG's overseas assets.
  • The Treasury will commence gracefully puking 1.655 billion shares over some period of time to complete its exit.
Assuming everything goes according to plan, the US will recoup its money. Count me among the skeptics, of course. Alot of things have to go right for this hare-brained scheme to work. AIG needs to pull off a monster IPO. The stock market has to remain in its chipper mood where no economic number, no matter how bad, gets it down. Investors actually have to get involved in AIG's stock, instead of all the day traders that like to play on the limited float. And we have to avoid a double dip, without discouraging the Fed from purchasing every asset in sight to keep markets going higher. Given how the Fed is eagerly offloading its stake in AIG to the Treasury, it seems you can count the Fed out on purchasing anymore AIG assets.

Wednesday, September 29, 2010


Ireland is set to unveil yet another tax-payer funded recap of Anglo Irish Bank. The restructuring is being cobbled together as Ireland's cost of borrowing hits record levels and the expiry of Ireland's two-year blanket guarantee for bank liabilities looms. With any luck, this particular European black hole will be plugged and we can go back to worrying about Greece again.

Speaking of black holes, perhaps the Irish can take some solace from the US government's handling of AIG. Or rather, the US government's optimistic plans for exiting the financial debacle that is AIG. AIG's board is set to finalize a restructuring plan that would increase the US Treasury's stake in the insurer to 90%. The Treasury will be converting its preferred stake to common, thereby increasing its stake and diluting the bejesus out of shareholders yet again. The shareholders, mind you, think this is GREAT NEWS, as the stock is actually rallying today. I mean, everybody loves dilution. Right? To compensate shareholders for this particular kick in the groin, they get the pleasure of receiving warrants in AIG to buy MORE shares in the future at a discount to the current price. According to the genius quoted in the FT article "This would give other people the chance to buy shares on the cheap as well." Because, you know, the stock is definitely still gonna be trading at this price in the future, so the warrants are a real bargain. Also, since this is being called a "Government exit plan" and not an "entry plan," the government will be cleverly and sneakily off-loading its 90% stake (i.e. dumping large quantities of stock onto the market) which won't have any effect on the price, I'm sure. The stock can only go higher. So, you know, free money for everybody.

Friday, September 24, 2010

Markets Rip on Lackluster Data

Equities rallied this morning on the heels of some relatively lousy data. Durable goods orders were down 1.3%, slightly worse than the 1% decline the average economist was expecting. Sales of new homes remained at a 288,000 annual pace, also worse than expected and the second-worst month of new home sales data going all the way back to 1963. So what gives? Why are equities in such a good mood today? Can it really be excitement over German business confidence numbers? Has anyone involved in the US markets ever cared about German economic numbers until today?

Perhaps the truth is that the data was pretty bad. Bad enough for the Fed to want to keep the monetary spigot open. But not so bad that we're scared the economy is collapsing again. Not so bad that we're worried the European Union is going to fall apart again and create another credit crisis. Maybe the new Goldilocks is just limping along with virtually zero growth, just enough to keep the Fed involved, but not enough to fall off a cliff. After all, the market doesn't care if unemployment is at 10%. It wants interest rates at zero. It wants the Fed to keep buying securities. And as long as some people are shopping at Walmart, that's enough to keep us going.

The WSJ has an interesting article about how frustrated stock pickers are in this market. Correlations remain high, at roughly 66% in recent weeks, lower than the 80% during the European debt crisis, but still much higher than the 27% average between 2000 and 2006. How are you supposed to pick good stocks if everything just moves in lockstep for no apparent reason? Like ripping higher on lousy economic data? Further proof that nobody really cares about fundamentals. Only about the Fed's next move. Unless you're Bill Gross and you get to tell the Fed what to do, what's the point of investing in a market like that?

Wednesday, September 22, 2010

Larry Summers Out, Next Up: A Woman???

Larry Summers is stepping down from his post as the head of the President's Economics Council and returning to all of his female fans on the faculty at Harvard. According to the WSJ's account of his resignation, his departure is driven partially by a desire to return to Harvard before January so that he won't lose his tenure. You see, you never want to lose that tenure because outside of academics, it is impossible to be completely ineffective without eventually losing your job. Tenure guarantees the ability to do nothing, keep your paycheck, and occasionally run off at the mouth about something that offends a bunch of people, all while continuing to look either peeved or fast asleep in every single newspaper stock photo next to articles detailing your gaffes.

Moving on to the next question: Who's going to replace Mr. Summers in that ever crucial role of continuing to pour all kinds of stimulus down the drain? Or making sure the banking sector isn't truly reformed but just continues to siphon off money from the public sector? A few candidates: Anne Mulcahy, formerly of Xerox? But, um, she's a woman. How about Diana Farrell, the Deputy National Economic Council Director? Ack!! Another woman. The third candidate? OMG, Laura Tyson, an economist from UC Berkeley! What is with all these women? How are they ever going to do Larry's job? Everybody knows they are not that smart. Well at least back in the comfy confines of academia, Mr. Summers won't have to read the WSJ to find out who replaced him.

Wednesday, September 8, 2010

Mark Hurd Gets New Job at Oracle, HP Miffed

Those who have casually followed the HPQ-Oracle-Mark Hurd-sexual harassment imbroglio may be interested to hear it has taken an even more amusing/bizarre turn. Here's a quick recap of the history:
  • Everybody Loves HPQ's CEO Mark Hurd.
  • Mark Hurd settles a sexual harassment claim with a former HPQ consultant/employee whose job description was at best murky.
  • HPQ board gets mad because, um, this is a bit embarrassing. Why is our CEO sexually harassing our employees? Wait, what did she do for us? What are these "expenses"? She used to be an actress? On reality TV??? Then she worked in real estate? Oh right, we hired her to be a greeter/escort at our fancy parties. Because we need one of those to sell our lousy printers.
  • Mark Hurd "resigns" (aka given boot by board) and given massive severance payment.
  • Everyone is shocked that CEO is fired, especially the harassee (didn't mean to get the guy fired, thought it would be all hush hush)
  • Except for Larry Ellison who apparently doesn't care if his employees sexually harass (or whatever) other employees, as long as they "create shareholder value."
  • Mark Hurd gets job at Oracle.
Which brings us to present day: HP's board is now really pissed off and is suing to block Mark Hurd from joining Oracle. I mean he's going to bring all of those trade secrets over to Oracle. And now Oracle is going to start making lousy printers too and it's going to eat into our monopoly and we won't be able to get away with selling printers that run out of ink a week after purchase, then charging $50 a cartridge for another week's worth of ink! Oh No!

Here are a few thoughts I'd like to share with HPQ's board:
  • Next time you fire someone for cause, don't pay them a $35 million severance. Trust me, you'll feel better when they immediately go to a competitor.
  • According to the FT, there was no non-compete clause, but something about not releasing trade secrets to competitors. Nonetheless, suing will likely be as big of a waste of money as his severance.
  • Hire someone who will figure out why my two week old printer keeps giving me error messages instead of printing.

Tuesday, September 7, 2010

Whistle-Blowing Gets More Lucrative

With the economy double-dipping, bank profits screeching to a halt, and unemployment hovering at record high levels, where can enterprising folks look to make the big bucks? And fast? How about a job at the SEC? Not a salaried position. But how about as a consultant working for a contingency fee? One of the nifty new parts of the new Dodd-Frank financial law passed in July is the ability to net as much as 30% of the penalties and recovered funds collected by the SEC in fraud cases. Since the legislation passed in July, there has been a surge in tips from whistle-blowers looking to tip off the SEC to all that fraud that has been operating under its nose since the beginning of time.

"We've gotten some very high-quality tips," said SEC official Stephen Cohen.

Hopefully, it won't take the next financial crisis to unveil the next wave of ponzi schemes that build up during the proceeding bubble. And there will be a bubble. Because you can't have zero interest rates and QE without another bubble somewhere. And you don't have bubbles without hidden ponzi schemes and fraud. But maybe this time, with adequate incentives to folks looking to collect a bounty, the SEC will catch them before they morph into $65 billion ponzi schemes, or $8 billion frauds, or $650 million...well, you already know the story.

Friday, August 27, 2010

GDP and 3Par

Second Quarter GDP growth was revised downward from an initial estimate of 2.4% to 1.6%. Economists were anticipating a larger downward revision to 1.3%, so the market is breathing a sigh of relief at the moment. It has moved on to bigger and better things, such as Ben Bernanke's upcoming speech, but more importantly, the exciting bidding war between HP and Dell over 3Par.

You know the market is grasping at straws when a $1.8 billion merger war over a company that nobody outside of Silicon Valley had ever heard of a few weeks ago is plastered all over the front page of the financial press. Moments ago Hewlett-Packard topped Dell's bid (again), by the way. Analysts are struggling to make sense of the valuation, but at this point, who really cares? The feeding frenzy over this company is beginning to rival the Sotheby's auction of the Giacometti "Walking Man I" back in February. Sure it's a neat sculpture and all, but really, $104.5 million? Ok, it's three times taller than the "Toppling Man" that sold for $19.3 million last November. But even the optimistic art lovers at Sotheby's were shocked by the final sales price. Don't those rich folks have better things to do with their cash?

Therein lies the rub. The folks at the Fed are desperately trying to goose the economy with super easy monetary policy. When banks can borrow at zero percent, but they are refusing to lend to lousy credits, they buy Treasuries. As the economy remains sluggish, firms refrain from expanding payrolls and increasing costs, so they look for other ways to generate growth. So they get into ridiculous bidding wars over the few companies out there that are in growth industries. The irony is that even though Wall Street might love M&A because of the fees, M&A isn't exactly a growth engine for the economy. M&A frenzies, particularly dumb deals, typically happen at market tops. After all, what is the first thing that happens when a company buys another one? Layoffs. I mean "synergies." How's that gonna get GDP on the right track?

Tuesday, August 24, 2010

Existing Home Sales Hit Already Nervous Market

Equity markets were off to a rough start, nervous about the existing home sales number, even before the actual data came along to make matters worse. Existing home sales plunged 27.2% to an annual rate of 3.83 million in July, a number much worse than anticipated. Also, the lowest level in 15 years. Inventories leapt to a 12.5 month supply, up from the previous month's 8.9 months. Bad news all around.

Before everyone goes into a giant tizzy about the sky falling, let's just contemplate what exactly this number means. As the always enlightening Calculated Risk pointed out yesterday in a post by economist Tom Lawler, it was impossible to understand given how horrible the pending home sales index had been, the expiration of the tax credits in June, and huge fall-offs in activity in many local markets, how on earth economists had arrived at such an optimistic consensus forecast of a mere drop of 10%. So really, had economists done a better job of forecasting, nobody would've been surprised by this horrendous economic number. Then again, bad economic forecasting or not, the number still stinks.

What does this mean? Bad economic news points to deflation which leads the nervous nellies at the Fed to buy more treasuries, mortgages, whatever it takes to reflate assets, which doesn't actually get rid of housing supply, instead just leads to pockets of inflation, say in commodities, which leads to takeover battles for fertilizer companies (see Potash) and niche tech firms (see 3Par.) See? It really is all so predictable...

Wednesday, August 18, 2010

Banks and Loan Buybacks

The WSJ reports today on the battle banks are facing over potential loan buybacks. Banks face the prospect of a new round of losses from loans they originated right before the credit markets collapsed. While originating and securitizing loans as fast as they could to fuel the bubble machine, some banks forgot to do a few basic things, like make sure the borrowers had income, for example. So they just filled out loan docs and made up the info that didn't fit normal underwriting standards. While it was easy to just shovel the loan off and forget about it, Fannie and Freddie, at the behest of their regulator the FHFA, are stepping up efforts to recoup losses on delinquent loans if they find any violations of "reps and warranties" (i.e. lies lies and more lies on loan docs.)

Last month, the effort to claw back loan losses was stepped up when FHFA broadened its probe to include private label, or non-agency, MBS. The FHFA sent out subpoenas to 64 issuers of MBS and other parties to probe for potential loan repurchases. Even the Fed has stated it may make repurchase claims after reviewing some of the dogsh-, I mean "collateral", it inherited from Bear and AIG.

What does this mean? More losses for banks and more pummeling of MBS securities. Who is this going to affect the most? The analyst quoted in the WSJ article, Chris Gamaitoni of Compass Point Research & Trading, believes losses at Bank of America might hit $21.8 billion for the bank. Losses at Wells and JP Morgan are estimated to be a mere $6 billion or so. The article does not mention how much he believes non-agency losses might be. In any event, the banks are not going down without a fight, as it pays to spread the losses out for as many years as they can. The irony is if they would've spent as much time and effort underwriting the mortgages to begin with, they wouldn't be in this pickle.

Friday, August 13, 2010

Lehman Pointing Fingers at Och-Ziff

Nearly two years after Lehman's failure, despite the piles of evidence pointing to neglect, mismanagement and outright fraud committed by Lehman's leaders, some people still believe that short sellers caused Lehman's downfall. Lawyers for Lehman's estate are furiously subpoenaing Wall Street firms and hedge funds for documents that they think will show that rumor-mongering led to the demise of the storied investment bank. Apparently, Och-Ziff was the only target that objected outright in court to producing the documents. Oh sure, it makes the fund appear guilty, but perhaps it's the $3.3 million cost associated with producing 3.9 million documents that the fund objects to? The lawyers for Lehman's estate claim that Och-Ziff was involved in the spreading of false rumors but provided no additional evidence to support the that claim, other than the fact that Och-Ziff refuses to produce the documents.

According to the WSJ:

Och-Ziff Capital Management LLC "likely disseminated and/or was the recipient" of an inaccurate rumor that Lehman had spun off debt to two Lehman-controlled hedge funds to reduce the investment bank's leverage, according to the filing. Investors were focused on Lehman's debt levels in the months before its failure.

The rumor was one of many "lies" spread by unscrupulous market participants looking to profit from shorting the troubled investment bank's stock, alleged the filing, made on Wednesday by lawyers investigating Wall Street firms on behalf of Lehman's bankruptcy estate.

Ah yes, all those "lies" that everybody was spreading that the investment bank was insolvent and wasn't going to make it and would wind up bankrupt. Those crazy crazy untrue rumors that the investment bank was lying about its leverage ratio, its liquidity, the value of the assets on the balance sheet etc. etc. And now, we must expose those rumor-mongerers in bankruptcy court after said firm has gone bankrupt. How come nobody is subpoenaing all the real lies from all the investment pros that insisted the firm was solvent and cheap at $15 per share?

Tuesday, August 10, 2010

Pondering the Great Dichotomy While the Fed Meets

The Fed meets today to discuss its next move in the exciting game of "Re-inflate the Bubble." Sure the Fed thinks it's playing whack-a-mole against lousy economic data. Every time a bit of bad news peeps its head out into the supposedly robust economic recovery, the Fed whacks it down with some other ingenious bit of monetary easing. Our monetary authorities are just looking for more and more ways to flood our financial markets with free money, at the behest of Wall Street, so financial assets will rise in value so all of those underwater residential, commercial and other loans can be refinanced or repackaged and sold without another financial catastrophe. You see, it's working really well. Deflation is our worst enemy. Today anyway. That's what Bill Gross says so it must be true. So if we need another $2 trillion in quantitative easing, so be it. Right?

In the economic bad news/deflation corner:

  • Fannie and Freddie continue to bleed cash, albeit at slower rates than before. After posting their most recent losses, the mortgage lenders increased their borrowing from the Treasury to a total of $148 billion. Mind you, Fannie and Freddie are 90% of the mortgage market, so regardless of the economic health of the rest of the banking sector, the true state of the mortgage market is reflected by Fannie and Freddie's performance.
  • Productivity slowed by a unexpectedly jarring 0.9%. So much for the theory about robust profit growth leading to increased productivity leading to increased hiring.
  • Unemployment remains stubbornly high at 9.5% and will likely not decrease unless productivity continues to increase.

In the good news/inflation corner:

  • Money is flooding the system and investors have nowhere to go with it, so they are just piling into anything reasonably safe with a yield and forcing rates lower. The WSJ has two articles this morning, one on MLP shares ripping on zero fundamental improvement this year and another on the relentless march lower in corporate bond yields. The FT has commentary on how the bottom line at strong companies is getting stronger while weak companies are floundering. Case in point: IBM can issue debt at 1%. Can you?
I call this the Great Dichotomy. Part of the economy is flashing deflationary signs, the other inflationary signs. What's a good Fed to do?

Wednesday, August 4, 2010

The Fed Also Forecloses

The WSJ reports on the current state of the Maiden Lane portfolio the Fed acquired in March 2008 when it helped facilitate the sale of Bear Stearns to JP Morgan. You know, that portfolio that was just marked up and showing a "profit" as of the last quarter end? Turns out, not all the assets in the vehicle are performing that well, as it is stuffed to the gills with souring commercial and residential mortgages. The Fed is in the curious position of not wanting to sell problem assets at a discount because it could"disrupt markets and hurt banks." That's funny, because every day I keep reading about how much money banks are making again. Is the Fed suggesting that bank profits are a mirage? In any event, the Fed is going to have to deal with the thorny issue of either foreclosing on delinquent borrowers, or doing workouts. Going ahead with the numerous foreclosures scheduled in coming months on residential properties could raise the hackles of legislators who still believe homeowners need to be protected. Like the real estate investor profiled in the article who is just dying to hand over his investment property because he is obviously upside down on the mortgage. He filed for bankruptcy and the Fed is offering to lower his rate, but he says it's not enough. He needs an extension and a much lower rate to get his investment to workout for him. Apparently, no amount of failed HAMP mods is going to stop politicians from trying more mods!

So far, the Fed has only taken ownership of one commercial property, a mall in Ohio that it is trying to sell. But more commercial foreclosures are on the way. Much less political risk with foreclosing on malls. Malls are as American as apple pie. Why shouldn't the US government own a bunch of them?

Maiden Lane made its first monthly principal repayment in July equal to $30 million. In not entirely unrelated news, Blackrock was paid $35 million in fees last year for its work managing the Maiden Lane portfolio, even though a 22-person team at the Fed is also working on it. I'm guessing the entire Fed team took home roughly $1 million in comp last year? But they probably aren't working as hard as the guy at Blackrock who billed the Fed for $35 million.

Buried in the article is my favorite part: "Maiden Lane now owns a large amount of relatively safe securities guaranteed by GSE's Fannie and Freddie. Many were bought over the past two years with cash Maiden Lane received from interest and principal payments in the portfolio and they have helped make up for some value declines from soured assets." When exactly did Maiden Lane turn into a trading account? Why isn't the money being used just to pay down principal on the loan? Is that because Blackrock's fees are based on the size of the portfolio? So we just want to keep reinvesting so the portfolio maintains its size so we can keep cutting a check to Blackrock? So the Fed, the most leveraged entity on the planet, is buying assets from the other most leveraged entities out there. This is what our government borrows money for, so it can trade with itself and pay money managers in the private sector fees. When will the madness end?

Friday, July 30, 2010

Zero Interest Rates, But Where's the Inflation

Currently deflation is winning the first couple of rounds in the inflation/deflation debate raging among economists, analysts, and investors. CPI/PPI remains subdued. GDP growth is sluggish as evidenced by this morning's GDP report, which showed a slow down in second quarter growth to a 2.4% annualized rate. Wage price inflation? Forget about it. You have to have a job first before you demand higher wages. Commodities surging? Yeah, cocoa prices hit all time highs, mostly due to some jokers at a commodities hedge fund who are clearly trying to build the world's largest chocolate bar, because why else would you take delivery of the biggest amount of physical cocoa in 14 years? But the price of gold hasn't really kept up with the gold bug crowd's expectations. Even hedge fund manager John Paulson has suffered losses in his funds, and he had managed to expertly time every hairpin turn in the market for some time.

So the Fed is keeping interest rates at zero, and anyone who's had any economics classes knows that exceedingly friendly monetary stimulus coupled with exceedingly friendly fiscal stimulus should cause runaway inflation. Except that hasn't happened yet. Instead prices for everything have either taken a breather from heading lower (i.e. housing,) or are still actively going lower (i.e. your favorite retailers are having a sale.)

The only thing staging a monster rally is financial assets. The stock market ripped, and is currently taking a reflective pause to decide if it can defy all the recent rotten economic news to rip ever higher. Heck even the Fed's portfolio of Maiden Lane securities is staging a big comeback. Paper profits on "formerly" toxic securities! But the real out-performer is the bond market. Interest rates on treasuries are at record lows. This was the busiest July on record for sales by junk issuers. Financial firms are jumping on the bandwagon, feverishly issuing debt at record low rates before the window of opportunity closes. According to the FT:

Wall Street executives say recent debt issues were triggered by “reverse inquiries” – informal approaches by fundmanagers seeking to raise their exposure to a sector they had largely avoided since the crisis.

Fund managers have so much cash with nowhere good to go with it, so they're begging financial firms to issue debt. Why financial firms? Because they are too big to fail. So you get slightly higher rates than treasuries, with the US government's stamp of approval on it. What is too much money chasing too few goods? I think that's called inflation.

Seems like the "reverse inquiry" situation was exactly what was going on in the mid-00's, when Wall Street needed subprime product to continue to feed the CDO machine. All the demand for subprime mortgages perpetuated the frenzy in housing. Again CPI/PPI was subdued and interest rates were low because there was no "inflation," just a massive financial bubble in the making. Will the story end the same way this time?

Monday, July 26, 2010

Madoff Trustee Goes After the Goods

Irving Picard, the hard working court-appointed trustee tasked with recovering assets for Bernie Madoff's victims, said in an interview that he might sue around half the estimated 2,000 individual investors who unwittingly made money investing in the ponzi scheme. Although Mr. Picard sent hundreds of letters last year to investors who withdrew money from their Madoff accounts before the fraud was exposed asking them to settle the matter amicably, few of them have chosen to do so. Now it's time to pay the piper. While it seems entirely reasonable (not to mention lawful) for Mr. Picard to go after those who accidentally profited from the scheme, it's not as easy to stomach when you are, say, an 87 year-old retiree who plowed all of her life savings, including the life insurance proceeds from her husband's passing, into what she thought was a safe investment.

Meanwhile, Mr. Picard accused one of the largest feeder funds, Fairfield Greenwich Group, of having "actual and constructive knowledge" of the ponzi scheme. Not sure why this took two years to figure out. When you get paid hundreds of millions in fees to perform due diligence for investors, and yet you are incapable of making a phone call to a single counterparty to make sure the firm is actually trading with somebody else. Or perhaps confirming that the auditing firm has the 20 partners it claims to have and isn't just one dude in an office in Florida. Or actually doing something, anything other than counting and spending all those fat fees on houses and cars and boats and PR agents to brag about all your houses and cars and boats in Vanity Fair, then you probably are more than just a lousy money manager. You are probably complicit in the scheme. But in either case, you need to give the money back so that those 87 year-old retirees can have something to split between them.

Wednesday, July 21, 2010

Earnings and Headlines 7/21/2010

  • Morgan Stanley had a great quarter! Seriously! I know, I can't believe it either (see yesterday's highly inaccurate prediction below.) The investment bank roared back into the big leagues with a second quarter profit of $1.96 billion, up from $149 million a year earlier. $514 million of that was related to the sale of its retail asset-management arm, but earnings on a continuing basis were still better than expected. Results in its new and improved asset management unit were boosted by the purchase of Smith Barney from Citi. CFO Ruth Porat stated that although the banking industry will undergo a period of intense scrutiny, the firm was not a target of a major investigation. So things are looking up including the stock price, which is up 8%. Now go sell your real estate arm while you have the chance.
  • BlackRock also had strong results, posting a near doubling in quarterly profit to $432 million. The surge in profits was attributed to the purchase of BGI last year. Seems like the thing to do to boost profits is go out and buy a money manager.
  • Wells Fargo posted a profit of $2.88 billion, higher than last year's $2.58 billion but on slightly lower revenues. Results were better than expected and the stock is up 5%.
  • The WSJ's quarterly housing report is out and shows a deteriorating housing market. It's nothing you didn't already know; pending sales down sharply after expiration of tax credit, new housing construction down, inventories up across the board. etc etc. But it has a nice city by city chart that makes you say things like "Wow, I'm glad I don't live in Detroit."
  • MBA purchase applications are actually up slightly, which may have something to do with mortgage interest rates being at their lowest levels in the history of the universe.

Tuesday, July 20, 2010

Morgan Stanley, Lehman, and Real Estate Investing

The day before Morgan Stanley is set to report earnings, the WSJ runs a story about the investment bank's attempts to deal with the $46 billion disaster that is MSREF, its commercial property investment funds. MSREF never met a commercial real estate investment it didn't love during the boom and is now stuck with a host of turkeys in every corner of the world. What now? Should it sell the pile of ailing (yet diversified!) real estate investments? After all, both Citi and Bank of America have sold off significant real-estate investment fund businesses in the past month, to Apollo and Blackrock respectively. Also, ING is looking to do the same and MS really does just like to do what everyone else is doing, just later, and less profitably. Should it hold on and hope for the best? After all, the fund still earns management fees even when it does stuff like lose 75% of its investors' money. Maybe leak a story to the press, see if anyone out there has any better ideas?

Here's an idea: Maybe Lehman can buy it? After all, Lehman's bankruptcy has done nothing to slow down the frantic pace of activity at the real estate arm of the now-defunct investment bank. The WSJ reports that Lehman just took over Innkeepers, a REIT that owns more than 70 hotels. Well, this was less of a traditional takeover and more of a "you're wearing it" type of deal, as the hotel operator filed for bankruptcy and Lehman was its largest creditor. Lehman's debt in Innkeepers stems from its participation in the 2007 $1.5 billion buyout performed by none other than Apollo Investment, a subsidiary of the same folks that just bought Citi's real estate portfolio (see above.) Buy low AND high. I think that's called dollar cost averaging.

What should Morgan Stanley do? Tomorrow's earnings announcement will offer some clues as to whether the firm can finally return to its former glory as a premier investment bank, rather than a GS also-ran. If so, maybe MS has a shot at reaping a solid price for its ailing commercial real estate investment funds based on the prestige factor associated with its name. Because it's not going to get top dollar based on the fund's performance.

I'm predicting a lousy quarter for MS. They might even lose money. Why? Because all its competitors have had a lousy quarter and MS does exactly the same thing, except usually worse, even though the market seems to grant them some sort of a premium. How much longer can the premium prevail? Tune in tomorrow.

Goldman Sachs' Earnings Miss Estimates

With the $550 million settlement with the SEC behind it, Goldman Sachs can get back to doing what it does best: trading, advising, and then trading ahead of its advice. The problem is, even if you are the best at front-running, picking-off, and lobbying, there's not much you can do about lackluster markets.

Earnings for the investment banking giant were pretty weak, $0.78 a share to be exact, which was a far cry from the $4.93 a share GS earned in last year's second quarter or the $5.59 per share it earned in the first quarter of 2010. Even when adjusting for the impact of the UK payroll tax and the SEC settlement, earnings of $2.75 per share are pretty paltry, yet somehow the stock is only down around 3% on the news pre-market. Given the size of the miss, I would've expected a bigger hit. Maybe investors were prepared by the lousy investment banking results out of the big banks. Or maybe nobody's awake yet.

Friday, July 16, 2010

Goldman Settles, Now What?

Goldman Sachs settled its dispute with the SEC over whether it misled investors in some CDO deals for $550 million. Apparently, if you tell one client to buy a security while simultaneously telling another that it's worthless, it'll cost you $550 million. Goldman should've known better. I mean, after the internet bust, it cost Henry Blodget $25 million just for telling investors to buy a stock while secretly believing deep down inside that it was worthless. He didn't even tell anyone to short the stocks he was recommending, he just kind of had a bad feeling and sent one internal email to a colleague. $550 million is a nice round number. It's a big enough penalty to make you think that the bank definitely did something very wrong and is contrite. The investment bank went so far as to admit that it made a "mistake." On the other hand, the penalty amounts to about one week's worth of trading revenues. That's right. One week. So yeah, they're kind of sorry, but considering how much money the bank made during the credit boom, and then how much money it extracted from the government afterwards, this penalty amounts to peanuts.

Everybody knows that investment banks need to continually create complex products out of thin air that nobody really understands and then market them as the opportunity of a lifetime. That is where the real juice lies. Nobody gets rich trading transparent products like stocks anymore. Turns out, much of the time "complex" actually means worthless. If this weren't the case, investment bankers wouldn't be so rich, and they wouldn't have to pay so many gosh darn fees to various regulatory agencies every few years. We wouldn't have bankrupt municipalities done in by interest rate swaps, or pension funds that can't seem to meet their obligations because they bought some SIVs that were AAA rated for about a minute, or foreign banks that are pissed off at us because they just discovered they are exposed to a bunch of defaulting US subprime borrowers, or mutual funds that don't understand why their largest holding turned out to be a ponzi scheme masquerading as an oil and gas company. Or investors who don't understand why that internet stock never had an 8,000% annual growth rate. Or rich people who can't figure out why the hedge fund that their advisor told them was a guaranteed money maker, with a strategy that was "too complicated to explain," was a ponzi scheme masquerading as a...ponzi scheme.

In any event, with this round of regulatory action pretty much behind them, it's time to move on to a better question: How are investment banks going to screw their customers out of money next? So far, earnings out of the big banks have been decent due mostly to reduced charges taken on the main-street banking side. Investment banking revenues are down significantly. Goldman tends to outperform the other banks in trading, but without a large lending arm to lean on, odds are that earnings might disappoint. Time to get the quants cranking on some new products.

Wednesday, July 14, 2010

FDIC Giving Distressed Real Estate Away and Other Distressing News

The FDIC conducted the second bulk sale of its sizable commercial real estate portfolio, which it inherited from all of the bankrupt banks deemed too small to survive. As a taxpayer, you'll be happy to hear it went off without the hitch and we get to keep much of the upside to boot! Wouldn't want to miss out on any of the upside, considering all the downside that's been shoveled down our throats in the past few years. Colony Capital and a minority owned investment firm named Cogsville LLC are proud owners of $1.85 billion (notional) in distressed assets. The investors paid 59 cents on the dollar, or $445 million for a 40% equity stake, with the FDIC retaining 60%, and (this is my favorite part) they get a seven-year, zero-interest loan, to reduce the upfront cash to $218 million. Let me repeat my favorite part: seven-year, zero-interest financing. I know I've been grousing for awhile now how all that zero interest financing is only benefitting the banks and they aren't passing the savings on to consumers and small businesses. Turns out I was wrong. All that zero percent money is helping large private equity funds goose their returns too!

Let's see, how else are we boosting the economy? Oh, according to the latest Fed lending survey, hedge funds, in addition to private equity funds, are getting better terms from their lenders. Consumers? Not so much. Dealers reported that funding markets for key consumer loans remained under stress, with a quarter of dealers reporting that liquidity and functioning of the consumer loan market had deteriorated in recent months. So what to do if you are a small business or consumer that needs a loan and you can't get one because your bank is too busy offering good deals to hedge funds? Quit complaining and start your own fund! Better yet, find the nearest woman or minority, call them CEO, and give the FDIC to call. You'll get all sorts of zero-percent financing, provided you take a few Las Vegas condos off their hands.

Tuesday, July 13, 2010

Living the High Life as Renters in Miami

Bloomberg's story on the condo-turned-rental scene in downtown Miami makes me wish I were a recent college graduate with an accounting degree. Who cares about the financial meltdown when you are having this much fun? If you can fast forward through the crazy amount of real estate development of the mid-oughts, when developers neglected to give each other a call or count the cranes already littering the skyline and deduce that maybe the city didn't need ANOTHER luxury condo development in downtown Miami, things haven't turned out too bad. Oh wait, you also have to fast forward through the real estate bust, when a bunch of empty and half-built buildings sat among the chirping crickets, awaiting a buyer for all the excess units. Then forget about the part where a bunch of buildings were handed over to the lenders, prices were slashed, bulk sales occurred, and large losses were booked. Finally we come to present day in downtown Miami, where are bunch of 24 year-old accountants are renting luxury condos with wraparound decks, rooftop pools and spas, and going out every night to the restaurants and bars that have popped up to satisfy the partying needs of a its new tenants.

See? It all worked out after all. Developers didn't really misjudge demand, they just mispriced it. There are plenty of people that want to live in luxury high-rises in the middle of the action in exciting downtown locations. It's just that most of them are accountants in their 20's, who noted that it was far cheaper to rent a unit from a bankrupt developer for $900 a month than pay $500,000 for it. I know accountants get a bad rap, but for once they actually did the math right.

The biggest problem now? Older residents (probably owners who are bitter about paying too much for their unit) are complaining about "crowds by the pool, loud music, and women taking their tops off" in one particular development that has been overrun by recent University of Miami graduates who are renting. Jorge Perez, President of The Related Group in Miami which was forced to hand back two of the three Icon Towers it built said it the best: “Over the long run, what we did in building those buildings, was it wrong?” Perez said. “I wish there wasn’t the suffering on a personal basis, on a banking basis and individual basis. But have we made Miami a much better city? Absolutely, yes.”

Friday, July 9, 2010

Retail Sales and Consumer Credit

Yesterday's reports from the world of the retailing were, by most accounts, underwhelming. Thomson Reuters index of 28 retailers showed sales at stores open at least a year rose only 3.1% in June. While far better than the 4.9% drop reported in the same month last year, it's not the snap back that most were expecting just a few short months ago when many retailers placed their orders. What does this mean? Excess inventory for the stores and hopefully big sales coming up for the consumer. Woo Hoo!!

Lackluster retail sales are logical given the continuing shrinking in consumer credit. It seems that the American consumer is still hungover from its credit card binge of the mid-oughts and is attempting to cut back. The Federal Reserve's report on consumer credit yesterday showed a contraction in credit at an annual rate of 4.5% in May, with revolving credit down a whopping 10.5%. Total consumer credit currently stands at $2.4 trillion, down from roughly $2.6 trillion at its peak and up from $2 trillion in at the end of 2003, when the US was climbing out of the last recession. So credit contracted by $200 billion and our entire financial system nearly collapsed. During most economic recoveries, credit is expanding. Yet most consumers just can't do it anymore. They have to cut back because they just can't borrow anymore due to economic hardship or just plain common sense. It's hard to expand when you're really supposed to be contracting. Which is why you can't solve a problem of too much debt by offering more credit. But don't worry, the Fed's just gonna keep on trying.

Wednesday, July 7, 2010

Commercial Real Estate Update

The WSJ property report has some informatively juicy nuggets about the state of the commercial real estate market. In short, things are looking up but it's still a grind getting deals done. Case in point: Dividend Capital Total Realty Trust's $1.4 billion purchase of 32 properties from iStar Financial. On the bright side, it was the biggest commercial real estate transaction since August 2008! Of course, the buyer had to pony up 37% in equity and agree to a $443 million loan that had limited recourse to its operating partnership. Oh and the seller had to provide $100 million in mezz financing too. And Google,, and FedEx were some of the tenants. Still, the largest commercial real estate transaction since August 2008! According to the WSJ, five commercial real estate portfolio sales valued at more than $1 billion have been completed in the US since 2007. Back in 2007, when commercial real estate hot potato was the fun fad, 20 such deals were closed. So the sludge-like recovery is moving forward, yet at a more reasoned and sobering pace.

Moving on to the condo market, the WSJ reports that some adventurous folk are snapping up condos in bulk at reduced prices in some of the hardest hit markets, like Florida. Florida, if you'll recall is merely one of the places where condo developers went a little cuckoo with the building and decided it was a great idea to build around 300 years of luxury inventory. Some of those folks have gone bankrupt, while others are just puking units to stay in business. In any event, buyers are scooping up boatloads (cause its Florida) of condos at "fire sale" prices and hope to sell them for higher prices. The classic quote comes courtesy of a property broker that is currently marketing units: "Bulk sales in general can depreciate value of an asset and it does trickle down and affect other properties." Right. Cause it's the bulk sale that "depreciates" the asset, and not the fact that there are like 5,000 similar units on the market at prices where nothing is selling. Buyers who had the misfortune of purchasing before the market collapsed are torn between hating the fact that the value of their condo has just officially been cut in half and liking the fact that somebody actually bought all the units that were for sale in the building.

Meanwhile, builders such as Toll Brothers, whose overpriced units on a Singer Island development don't look so hot compared to the prices of a bulk sale that just took place in a competing property offer up these optimistic words of wisdom: "Anything that gets the inventory down is a good thing." True enough. But if the bulk buyer just plans to turn around and flip the properties for a higher price (which is true in most cases,) how exactly does that solve the inventory problem?

Thursday, July 1, 2010

Joseph Cassano is Really a Hero

The man responsible for blowing up AIG, nay our entire financial system, has finally slithered out from his hole to say his piece to Congress. A reasonable person might expect a tone of contrition from the tool who bankrupted the world's largest insurance company in a matter of years because he loved subprime so much he couldn't stop selling insurance way too cheaply on it. Maybe something like: "Props to you guys and all your constituents for all the dough. We did a few trades that didn't really work out, so, it's awesome that the government could be a backstop for us. I mean, we could've just gone bankrupt and that would've sucked." Or even "Wow, I feel so bad about causing all this trouble that I'm gonna write a $300 million check, equal to all the pay I collected on profits I never made." But then apparently none of you people know Joseph Cassano. Widely reported to be an arrogant jerk BEFORE the crisis, it turns out that the implosion of AIG has only strengthened his self love. The following are the highlights from the WSJ's account of Mr. Cassano's testimony:
  • Joseph Cassano, who led the division of American International Group Inc. responsible for the mortgage trades that proved the insurer's downfall, on Wednesday staunchly defended his actions, maintaining he made "prudent" decisions and that American taxpayers would have been better off had he stayed on.
  • AIG's problems, he said, were brought on by a liquidity crisis when credit markets seized up— and weren't a result of lax underwriting practices or defaults among mortgage assets his unit had insured.
  • "I think I would have negotiated a much better deal for the taxpayer than what the taxpayer got"
  • Mr. Cassano said things might have turned out differently, had he not been asked to leave AIG.
  • Mr. Cassano did not hesitate to parcel blame and responsibility elsewhere. He said he still disagrees with the decision by AIG's outside auditors, PricewaterhouseCoopers, to disallow an accounting adjustment that made his unit's reported losses from derivatives look smaller. "I still believe now that it was a wholly appropriate adjustment," his testimony said. The accounting firm declined to comment, saying it does not comment on client matters.
He didn't cause any of these problems. But still, he would've handled the clean-up way better from all those problems he never caused to begin with. The market was wrong, the auditors were wrong, the government was wrong, Goldman Sachs was wrong. All those margin calls? Meaningless! My marks were right. I'm never wrong about anything! EVER! Somebody should give me a cape. Oh, and build a statue of me too. Several statues. Like that guy who used to run Uzbekistan. No wait, maybe its Turkmenistan? One of the Stans. Anyway, you know what I mean. I'm a friggin hero!

Tuesday, June 29, 2010

Financial Headlines 6/29/2010

A few snippets of news/data for the market to worry about (200 point drop in Dow so far and counting):
  • Everyone worried about growth in China again. Cause the thing is, China is supposed to suck the entire universe out of its economic funk. So the Chinese economy had better keep growing at double digits, or else we're in some deep poop.
  • Speaking of economic funks, the ECB's monster one-year 442 billion euro funding facility is due to expire on Thursday. There are some concerns that banks will have trouble finding other places to park their garbage collateral. Greek and Spanish banks might even have trouble finding anyone willing to lend against their good collateral. To smooth the transition, the ECB is planning to offer three-month money (ye old extend and pretend) and markets are watching how much of the one year funds will be rolled into the three-month facility.
  • Our venerable SEC has been approving new listings for companies from the Ukraine and Russia with no assets and zero revenues. Apparently, nine such companies were approved in the past two years without the SEC asking any questions. Now this is just flat-out SEC-bashing. I mean, this is a HUGE improvement over the years 1998-2000, when the SEC gave the green light to around 1,000 internet start-ups that had zero revenues and zero assets.
  • Forget what everyone has said about consumer confidence improving. The Conference Board's index of consumer confidence dropped 10 points to 52.9, which is just a smidge below the 62.5 our cheerful economists were expecting.

Friday, June 25, 2010

GDP Fails to Impress But Consumers Still Upbeat

First quarter GDP was revised down from from an initial estimate of 3.2% to a more paltry 2.7% annual rate of growth. While certainly better than the horrifying negative numbers we were getting during the depths of the crisis, GDP is hardly living up to the standards expected by the V-shaped recovery crowd. The V is turning into more of a W, which should be disappointing to anyone other than my Romanian relatives who could never tell the difference between a V and a W anyway.

While today's Michigan consumer confidence index was marginally higher than expected, (76 vs expectations of 75) one would think things were actually improving. I know that consumer sentiment is a leading indicator and GDP is lagging, but still, consumers don't seem to be living up to expectations. This is perhaps why the market has been hit lately. All that confidence doesn't seem to be translating into actual spending as consumer spending was revised down from 3.5% growth to 3.0%. This took the biggest bite out of GDP growth. On the bright side, corporate profits were revised higher, once again proving that it's much easier to make money when you don't have to pay a bunch of employees. Nevertheless, somebody is gonna have to buy products, so I'm not quite sure how we're going to get out of this conundrum.

Wednesday, June 23, 2010

Existing Home Sales-Bad, New Home Sales-Even Worse

All eyes were on this week's release of home sales data, which were expected to prove that the expiration of the tax credit wouldn't be a catastrophe for the housing market. Turns out that our overly optimistic band of economists were wrong yet again. As yesterday's data showed, existing home sales were down, instead of up. Today's reported new home sales numbers were much worse than expected and were the lowest level ever recorded. New homes sales plunged 33% to an annual pace of 300,000 last month from April. Also, the median dropped 9.6% from the same month last year to $200,900.

Clearly the tax credit merely shuffled housing demand around, moving it forward, rather than stimulating new demand, which most people with a brain understood from the get go. Our congressmen are far too beholden to the NAR and homebuilder lobby to do any critical thinking on their own. So they fell for the whole "we need this credit to boost the economy" line. Nice to know that our tax dollars were spent to give a bunch of people money to buy houses that they would've bought anyway. Oh well, the money was spent, so not much we can do now, except, of course, introduce even more legislation to get people to buy vacation homes.

According to Bloomberg, the housing market will now be "dependent on gains in employment." With unemployment hovering near double digits, it's not looking good for a robust housing recovery. Double dip anyone?

Friday, June 18, 2010

AOL Punts Bebo For Next To Nothing

Need a lesson in how to incinerate $850 million in two years? Witness AOL's purchase, then pukage of Bebo. Let me summarize: pay a preposterous sum of money untethered to any sort of economic fundamentals to jump on the social networking bandwagon circa 2008. Can't get your hands on the first (Facebook?) or second tier (Myspace?) property? How about Bebo?! Ever heard of them? Nah, me neither. But I hear they are huge in the UK among 13-22 year olds. Seems those young British folk are fickle and now that they're all grown up to be 15-24, they've abandoned Bebo. In any event, now that the value of Bebo has become somewhat more crystalized, AOL has punted the social networking mini for a realistic, yet "undisclosed" value. Those in the know claim it is far less than $10 million. Far less than Ten = Closer to Zero.

This kind of loss would be embarrassing for most companies, but probably not so much for AOL which set the standard for money punting ten years ago in its historic purchase of Time Warner, which wound up costing shareholders $100 billion or so. Everybody was too busy day trading internet stocks like they were going out of style (and they were!) to count.

In any event, everybody needs a good tax break, even AOL, which will receive a deferred tax benefit in the second quarter of $275-$325 million. The good news is that somebody got rich in the meantime, namely the founder of Bebo, who reportedly paid the highest price ever paid for a single family home in San Francisco. It's always nice when you can sell the high so you can afford to pay the high.

Thursday, June 17, 2010

Former Taylor Bean CEO Arrested For Fraud

The phrase "failed Florida mortgage lender" may no longer raise eyebrows, but the story of the multi-billion dollar alleged fraud at Taylor Bean & Whitaker Mortgage is a doozy. The WSJ reports that the FBI has just arrested Lee Farkas, the former chairman of Taylor Bean, and "charged him with orchestrating a seven-year, multibillion-dollar fraud that contributed to the collapse of a major bank and targeted the US government." According to the charges, Mr. Farkas and his schemes have cost investors and government programs in excess of $2 billion. The good news is that Taylor Bean was never granted the $550 million in TARP funds it was hoping to snare, so at least one government program was spared the embarrassment of being swindled by a shyster. Unfortunately, our savvy folks at the FHA were outwitted by Mr. Farkas and his alleged co-conspirators. The government agency claims that it alone lost $3 billion because Taylor Bean had lied about the health of loans it was servicing. Sounds more like Taylor Bean cost the government in excess of $3 billion? I'm not following the math here, but maybe somebody somewhere made a billion to offset the FHA's loss? It wasn't the FDIC, which was tasked with cleaning up the mess left in the wake of the collapse of Colonial Bank. Colonial, one of the largest bank failures of the recent credit crisis, purchased around $400 million in "fake assets" from Taylor Bean. Perhaps Mr. Farkas profited handsomely? The guy did own a gym, which was where the FBI chose to make the arrest. They were nice enough to wait for him to finish his workout. Also, Mr. Farkas had the prerequisite fancy car collection. No doubt there were several obnoxious houses too? Yep, five of them. Oh, and he liked corporate jets.

If found guilty of the charges filed against him, Mr. Farkas will face up to 435 years in prison and fines of at $13.8 million as well as a forfeiture of $22 million. Once again, I'm not quite getting the math. This is a multi-billion dollar scheme. Where did all the money go? How is it that he only has to give up $35.8 million? In any event, the prison sentence sounds about right.

Tuesday, June 15, 2010

Fed in "Quiet" Discussions Over Economy

According to the WSJ, Fed officials are quietly debating steps to take if the economy falters or inflation falls further. What do you call a debate that is so quiet that it is plastered on the front page of the WSJ? A hint.

Fed Chairman Ben Bernanke has made several comments voicing his optimism about the economic recovery and down-played the risks of a double dip. Yet the signs of a double dip are growing more evident by the day as domestic economic numbers fail to impress and turmoil overseas threatens our recovery further. So it's time for the Fed to hedge its bets and leak a story to the press and say something like:

"I know we said we were going to end our asset purchases, but we might reverse course, even though rates are already preposterously low and monetary stimulus at this point may have a muted effect on demand. We have to do something, but frankly, we're all out of ideas that don't involve a helicopter. Let's hope we're wrong and our next move is a tightening. But just in case we're wrong, or wrong about being wrong, be forewarned. We have no idea what we're doing. Got that bond market?"

Crystal clear.

Thursday, June 10, 2010

Goldman and BP in PR Battle With Administration

What do oil spills and CDOs have in common? In addition to the fact that they were both disasters, one environmental the other financial, much. First of all, they were both very expensive, one causing incalculable damage to wildlife and industry, the other to homeowners, taxpayers and banks balance sheets. The cleanups of both are ongoing, with the final impact still years away from being tallied. Naturally, the administration has had to get involved, as the damage to the general public grows by the minute. Curiously, both Goldman Sachs and BP are in a PR battle for their lives with a wounded administration that needs to appear as if it is capable of assigning blame and proposing satisfying punishments to calm the furor of the angry voting public.

Witness today's front page FT article on the SEC's probe into yet another Goldman-backed CDO deal called Hudson. The $2 billion Hudson Mezz CDO was not included in the charges filed by the SEC back in April. This is a new investigation replete with similar accusations that GS structured and sold deals to its customers while simultaneously shorting the same securities because it thought they were junk. There is even an email where a GS employee said of a potential investor that it was "too smart to buy this kind of junk." It makes one wonder how many more of these deals is the SEC going to try to nail Goldman on? How much will this ultimately cost the storied and now embattled investment bank? The FT helpfully points out that $1.1 trillion in CDOs were issued between 2005-2007. Certainly not all of that issuance was by GS alone, but still, this could get very expensive. Particularly if all of Goldman's customers start to sue. Goldman's pockets are deep but even it cannot survive criminal charges. Anybody old enough to remember Drexel? For you younger folk, how about Arthur Anderson? Is the administration willing to go that far, or is it just trying to win a PR battle? As much as everyone hates Goldman right now, I suspect the latter. If we chose not to let the bank die in 2008, why do so now?

BP is another story. It is not an American company so who cares? Drive these fish killing bastards into the dirt, or at least until the stock gets cheap enough so that a US company can scoop it up, point the finger at the last bunch of jokers who ran the firm and reach an affordable settlement with the government, fishing industry, idled oil industry employees, and residents of the gulf who are wading through the sludge washing up in their backyard. Or a Chinese company. Whatever. In any event, pushing BP to the brink seems likely, as there seems to be little political upside to protecting a foreign company in an already vilified industry.

If I had to wager, I'd bet on GS surviving and BP not making it, with loads of volatility in between. The two even have a history together. Forget about BP's current CEO, who in a brilliant video posted on LOLFed, is compared to a cat. Let's talk about BP's former CEO, the disgraced John Browne, who resigned in 2007 due to scandal related to his lying on the stand about how he met his former lover, Jeff Chevalier. Mr. Browne was also forced to resign from Goldman's board, where he was serving as chairman of the audit committee. Not sure what Mr. Browne was doing while chairman of the audit committee during the boom, but he certainly wasn't auditing the bank's CDOs.

Tuesday, June 8, 2010

B of A Leaves Its Countrywide Frat Boy Days Behind

In a widely anticipated move, Bank of America agreed to pay $108 million to the Federal Trade Commission to settle charges that it cheated hundreds of thousands of customers facing foreclosure on their homes. I say the move was widely anticipated because anyone with a bit of knowledge about the banking industry knew when B of A announced its pre-crisis purchase of Countrywide either: B of A didn't know Countrywide's underwriting was corrupt to the core or the serial acquirer knew and figured it could settle charges, pay a small fine, (what's $100 mill or so to the banking behemoth?) and get on with its happy life of borrowing at zero and lending at 18% to its valued customers? I mean all of this bad stuff happened before B of A bought the mortgage lender, so really, they had no idea what was going on behind the scenes. Far be it for B of A to do a smidge of due diligence to figure out what the hell it was buying when it shelled out billions to buy a lender that would've gone bust like two months later.

The settlement money is to be used to reimburse all of those customers who were screwed over due to Countrywide's fraudulent practices of inflating fees and overstating amounts that customers owed. However, the FTC is having a hard time figuring out who should get the money because of Countrywide's abysmal record-keeping, which FTC's Chairman Jon Leibowitz compared unfavorably to those of a frat house. Actually, Mr. Leibowitz said "Most frat houses have better record-keeping." Back when I was in college, frat houses had stellar reputations for keeping scores of copies of old tests. I'm not sure how much better a mortgage lender should be about figuring out who it was busy ripping off. In any event, the lawyers will get paid, the FTC gets its press release, and Angelo Mozilo is still rich.

Monday, June 7, 2010

Where Did That V-Shaped Recovery Go?

Amidst all the scary news about the potential collapse of the Euro, China's bursting property bubble, Greece, Ireland, Italy, Hungary (huh? where did that come from?), environmental disasters in the Gulf, scary financial regulation, one must wonder whatever happened to our V-shaped recovery. I mean, all the smart guys were calling for one because, well, that's what always happens after a really steep economic downturn. And if our economists aren't capable of happily parroting history then, really, what are they good for? Because they're not very good at forecasting, that's for certain.

Take, for example, Friday's abysmal employment report. The US economy was supposed to add all sorts of jobs last month, hundreds of thousands of diverse and well-paying jobs, according to our economists' forecasts. Unfortunately, the best our economy could do was add a bunch of temporary census workers to the payrolls, with a scant 41,000 in additional private sector jobs joining the ranks of the folks collecting $15 an hour for helping our residents fill out a few forms. Yes, I know that employment is a lagging indicator. So they taught me in economics class many moons ago. But this time around, it seems to be lagging a wee bit too far behind the economic boost we were supposed to be getting from multiple trillions in fiscal and particularly monetary stimulus.

The problem remains the debt overhang. Consumers had too much debt. Asset values supporting that debt declined. Governments chose to solve the problem by assuming much of that debt and then attempting to stimulate demand by making money even easier to borrow. Sure it boosted the stock and bond markets for awhile, but now the markets are looking shaky as they face up to the reality that you can't cure a debt problem with more debt.

Thursday, June 3, 2010

"Hotshot" Traders Leaving Street

According to the WSJ, "hotshot" traders are leaving Wall Street in droves. Apparently, the mere threat of some watered down financial regulation that will limit pay is causing all the talent to flee in droves. The article notes the high profile exit of Deutsche Bank's Greg Lippmann on Friday and, well, that's pretty much it. So, one guy leaving. That's almost a drove. The rest of the story focuses on hedge funds, Blackrock and Citadel, that are gearing up to seed traders and portfolio managers who wish to leave Wall Street firms to trade their own capital. Well, to trade other people's capital, just with more upside than they'd get at their current banks. Sometimes it's not enough to be a multi-millionaire. Much better to be a billionaire.

All cynicism aside, if this mass exodus of traders leaving the street is actually occurring and isn't just more of the Journal editorializing its hatred of new Wall Street regulations as a substitute for actual reporting, then I'd say it's good news. I still firmly believe that risk taking should occur with private capital and not with FDIC guaranteed funds. Besides, hotshot traders come and go. New guys come along to replace the old guard. Proprietary trading is hard and many traders that thrived in the cushy environment of a bank, where it was easy to pick off customers and borrow money at zero, may not do as well with limited capital, higher financing costs and no customers to lean on. And the really good ones should be starting their own firms and creating more jobs for our beleaguered job market. Let the exodus continue, I say. Let's see if we can get another "article" from the WSJ tomorrow about how traders are threatening not to go to hedge funds because of the threat of higher taxes on carried interest.

Tuesday, June 1, 2010

Equities Lower on a Smattering of Ominous News

Maybe it is the FT's front page story on China's property bubble being worse than that in the US and UK. Or perhaps the article on the Eurozone's jobless rate rising to the highest level in a decade? How about the failure of Pru and AIG to agree to a new deal terms, as AIG opts to play hard ball with the insurer? I wish AIG good luck in finding another sucker to pay more for its Asian wares. Oh, and has BP plugged that leaking well yet? Nope. Down goes BP's stock. Or how about Google's bold move to ditch the internal use of Microsoft Windows on security concerns after the China hacking incident? Maybe not the best news for MSFT shareholders. Although this could merely be a savvy PR move by Google.

The news isn't any better over at the WSJ. Euro-zone banks face $239 billion in write-downs this year and next according to the ECB. So then why is the ECB tripping over itself to offer uber-cheap financing for the Euro-zone's crappy government bond holdings if the banks are insolvent? I have no idea, but the Bundesbank is pretty mad about it. Also, if the story above about China's property woes doesn't faze you, try the one about China eating into its own commodity reserves. Better yet, Dubai Holding posted a $6.2 billion loss for 2009. Does anybody care about Dubai anymore? A few months ago the bulls were writing off the news of Dubai's default claiming that it was too small to affect anything. I mean, it's not like they're another Lehman, Right? Funny now they're saying the same thing about Greece and Spain. And Portugal. Italy? Them too.

Friday, May 21, 2010

The Crash Without Flash

While regulators and investors are still scratching their heads over what on earth happened May 6th that caused what is now being dubbed the "Flash Crash," the market has gone about its merry way steadily marching lower. We are now sitting within a hair of the "horrifying" lows hit on that day when markets plunged unexpectedly on extremely heavy volume, only to rip higher within minutes. Oh my God! What could've caused stocks to hit such extreme and unbelievably cheap levels? The SEC still has no idea, but they've introduced circuit breakers, so that should fix the problem. Any market crash that's going to happen on the SEC's watch is gonna take some time. Sort of like any good ponzi scheme. After all, it wouldn't have been right to catch the Madoff fraud early, better to let it snowball for a few years into a $65 billion fraud so it can ensnare everybody.

Now that equities are legitimately lower, and not the result of some fat finger or HFT trading malfunction, we have to think of an explanation. Because it's just inconceivable to think that maybe investors are bailing because the volatility scares them and a near 80% rally straight to the moon was good enough for them after 2008's drubbing. The WSJ pins the blame for the recent selloff on a highly leveraged pro-growth trade that is currently being unwound by the various hedge funds that profited it from it all year. The trade was based on the view that global economies would recover strongly and commodities and high yielding currencies and stocks would continue to rise. Hedge funds piled into the trade, which was pedaled by, you're never going to believe this, Goldman Sachs. Seems like the folks at GS really are to blame for everything.

In any event, it is expiration Friday. Everybody get their Dow 10,000 hats out AGAIN. Although it's not nearly as fun watching the computers wear them.

Wednesday, May 19, 2010

US Housing After the Tax Credit Expiration

The MBA has released two troubling updates on the state of the housing market. A record 14.69% of mortgage loans were either one payment delinquent or in the foreclosure process in the first quarter of 2010. As if that weren't enough to send you to the ledge, mortgage purchase applications plummeted to a 13-year low. Purchase applications fell 27% last week and have declined nearly 20% over the past month, this despite very low interest rates. Clearly the expiration of the tax credit has had a significant impact on would-be purchasers. With the administration's HAMP program stalling, somebody's going to have to come up with some more creative ways to pump up housing. The alternative? Face the inevitable economic outcome that the only way to a market clearing price is through supply and demand.

Tuesday, May 18, 2010

Germany to Ban Short-Selling of Stocks and Euro Government Bonds

Via FT Alphaville, Germany is banning short-selling of stocks and Euro government bonds, including CDS on bonds. How is it that the world's trusty regulators are so gosh darn predictable? See below in my last post about what European regulators might do for an encore to stem the bleeding: "They could always go after the shorts again, because that worked for like a minute in 2008." Just as I was confused (and admittedly angry) back in 2008 when governments around the world banned short-selling to resolve the completely unrelated issue of our globally insolvent banking system, I am perplexed by this action. I mean, since 2008, many of the financial institutions that we weren't allowed to short for a brief period of time eventually went bust, or were bailed out. Furthermore, the short-sale ban only hastened the stocks' plunges into the abyss. The stupid ban worked for all of a day, which just happened to be an expiration Friday, when stocks experienced unbelievable volatility, ripping through through call strikes already given up for dead by options traders that either raked it in, or experienced massive pain. And yet, once again, government manipulation of the market is being floated around as a solution by the Germans. And since all of our regulators like to coordinate their actions, even really dumb ones, I fully expect everyone to follow suit.

Friday, May 14, 2010

What's the Euro Going to Do For an Encore?

Because if a trillion dollar bailout package, plus ECB buying bonds, plus a vow to defend the currency isn't going to keep the wolf pack at bay, then they have to come up with something bigger and better over the weekend. Otherwise, it's Greek riots and mass pandemonium all over again on Monday. They could go after the shorts again, because that worked so well in 2008 for like a minute. Speaking of which, I find it interesting that nobody has tried to pin the blame on the shorts for last week's mysterious mid-day market rout (and then rally) in the US. Maybe that's because the uptick rule is back in force, and "naked shorting" has been banned, thanks to all those boobs that kept insisting that if we squeezed out the shorts, the market would never be volatile again. So now what? The only sensible step at this point, if you want to keep the market up, is to ban selling. Outright. That should do the trick.

Wednesday, May 12, 2010

Morgan Stanley In CDO Probe

Federal prosecutors are investigating whether Morgan Stanley misled investors about its crappy CDO deals. You're never going to believe this, but apparently MS arranged and marketed CDOs to its investors while simultaneously betting against them! I mean that sounds like something that only Goldman Sachs would do! Yet who is Morgan Stanley really? Oh that's right: a less profitable Goldmans Sachs. I've even heard that Morgan Stanley's strategy is replicating Goldman Sachs, once it actually figures out what the hell those stupid vampire squids are doing over there to make so much G-ddamned money! In any event, the probe is on.

Monday, May 10, 2010

EU Likes to Bail Out Its Bankers Too

If you were checking the headlines all day yesterday in anticipation of the news of Europe's rescue package for its banks, you too might have been amused by the escalation of the size of the rescue package. It went something like this:
  • EU agrees to rescue package. Details to come (Can we get some details please?)
  • How's $500 billion?
  • Ok, we'll try $700 billion?
  • No. No, let's do a trillion. The market should love that.
In an effort to prove that it too loves its bankers, the European Union managed to cobble together a massive bailout package comprised of 440 billion euros in loans from euro-zone governments, 60 billion euros from an EU emergency fund, and 250 billion euros from the IMF. Furthermore, the ECB is buying euro-zone government and private bonds "to ensure depth and liquidity" in markets, a move it recently swore it wouldn't resort to. The US Fed jumped into the foray as well by reopening its swap lines with other central banks to make sure they had enough access to dollars. Nothing like global coordinated government love to juice recently beaten down equity markets around the globe. Yet another transference of risk from the private to the public sector to embolden bankers to take more risk. As for how we're going to pay for all this? Um, we'll figure that one out later.

Friday, May 7, 2010

On Unemployment, Fat Fingers, and Market Plunges

If you happened to step out for a post-lunch latte in the middle of the trading day yesterday, you might have missed the near 1,000 point plunge in the Dow. If you were long, that would've been a good thing, as you definitely would've lost your lunch at the lows. Although the market rallied back from its lows, all major indices closed down some 3% on the day. The WSJ declares "Market Plunge Baffles Wall Street" as traders and pundits scramble to figure out what on earth would cause our predictable and rational markets that never have large price swings for no apparent reason to whipsaw the BeJesus out of equity players. 1987, 1989, 2000, 2002, 2008 don't count because the market had its reasons. Oh, and the developing Greek crisis, credit spread blowout, and fears of another banking meltdown don't count either because the fundamentals for US stocks are just so peachy.

From what I hear, electronic market makers (high frequency traders etc.) pulled their quotes when a wave of selling triggered stops. With no bids below, stocks plummeted, some to as low as a penny a share before ripping back. While everyone is wondering what fat finger triggered the stops, I'm sort of wondering why anyone would want to buy stocks in a market where the liquidity is so thin that bids disappear right when you might want to sell.

Meanwhile, in economic headlines, nonfarm payrolls were up 290,000, a bit more than economists were expecting. However the unemployment rate jumped to 9.9%. This is somehow being painted as a positive as apparently a bunch of happy unemployed people are choosing to reenter the workforce. That's just fine and dandy that they are no longer discouraged and depressed. But let's just hope they can all find jobs.

Thursday, May 6, 2010

Geithner Says Can't Take All Risks Out of Banking and He Should Know

Treasury Secretary Tim Geithner in his prepared statements to the Financial Crisis Inquiry Commission says that it would be a mistake to take all the risks out of banking. "The lesson of the that we cannot make the economy safe by taking functions central to the business of banking, functions necessary to help raise capital for business and help businesses hedge risk, and move them outside banks, and outside the reach of strong regulation."

Funny, I thought the main lesson of the crisis was that regulators should actually pay attention to what our banking system is doing before the system blows itself up, takes the economy with it, and requires massive government bailouts and subsidies. Another takeaway from the crisis? That massive bailouts and subsidies to the banking sector essentially remove risk from the banking sector and cause them to do really stupid things that will eventually blow up the system anyway. Except now the government is paying for the clean up. Want a good example? Check out what's happening in Europe right now. European banks are absolutely browning themselves over a Greek default. Why do they own Greek debt given the risks, you might ask? Because the ECB allowed them to pledge Greek debt as collateral into its term repos at extremely low rates. So banks bought up loads of Greek debt at high rates and pledged it to the ECB to make huge "risk-free" spreads, something they certainly would not have done if they had nowhere to go with the debt and had to finance it at market rates. In retrospect, the trade was maybe not such a great idea. Although if the European bailout of the Greeks actually works, it was a great idea. Yet another way of removing financial risk from the banks and passing it on to the public sector.

Mr. Geither says you can't take all the risks out of banking and yet that is exactly what he has done in his handling of the crisis. Here's a list of the many ways that Mr. Geithner, in cahoots with Mr. Bernanke, was responsible for taking all the risk out of banking:
  • Bailing out Bear, AIG, Fannie, Freddie, [insert all your favorites here.] By the way, bailing all these companies out was primarily a bailout to debt-holders, which were generally banks.
  • Creating a variety of Fed facilities to help banks finance their inventories.
  • Allowing banks to borrow at cheap rates via FDIC's government-guarantee program.
  • Zero interest rates. Really does this need any elaboration?
  • Quantitative easing. Ditto.
  • Capital injections, in some cases repeated capital injections, into the largest banks.
I mean, could we possibly take any more of the risk out of banking? I have a better idea. Let's return all the risk to banking, regulate our financial firms, and let the losers actually take the fall the next time they screw up.

Wednesday, May 5, 2010

In Other News 5/5/2010

  • The UK's Prudential PLC has been forced to delay the rights offering that was supposed to finance the purchase of AIG's Asian insurance arm. It seems the FSA is having some issues with the capital position of the combined group if the merger were to go through. Let's hope Prudential works it out, otherwise we'll have to find another sucker to pay $35 billion for the unit.
  • One of the problems with crafting a solution to our healthcare woes is that everyone agrees that costs are spiraling out of control, nobody seems to understand why, so everyone sort of makes up reasons that match their political agendas. So isn't it nice to hear that one of the largest health insurers, WellPoint, has been jacking up its premiums to customers around the country because of a likely mathematical error? Score one for the insurance company haters.
  • BP is cleaning up its oil spill with a detergent-like chemical. I'm sure the fish will really appreciate that.
  • A Picasso sold for $106.5 million, an auction record. It's either a sign that confidence is back, or that people are hoarding hard assets because they don't want to own fiat money. I'll let you decide. In any event, I'll be covering the upcoming auctions of contemporary art as they will be a better barometer of how low investors are willing to stoop for hard assets. Giant stuffed shark bathed in formaldehyde? Anyone? Anyone?
  • Spreads on MBS reached their widest levels in months. The bozos interviewed for Bloomberg's story attribute it to the Greek contagion. Yet maybe it has something to do with the fact that the Fed is no longer spending trillions to prop up the market? Just maybe?
  • Oh yeah, and Jimmy Cayne doesn't think that Bear Stearns' collapse had anything to do with his failure to pay attention to what the hell was going to at the firm he was in charge of. After all, he was at a bridge tournament. Remember? It was that unforeseeable credit crisis that got them.

Could the Euro Debacle Get Any Worse?

While the Greeks are busy burning buildings to protest the austerity measures included in the bailouts offered by their generous and more solvent European neighbors, investors are fleeing European stock and bond markets. The Euro is plummeting and the ratings agencies cannot downgrade the PIIGs fast enough. It seems the folks at Moody's have no interest in being hauled before Congress to get yelled at for not warning investors that Portugal, or Spain, or Italy, or whoever might be next. At least the subprime debacle taught them the right lesson, eh?

Over here in the US, our economic data seems to be pointing to a respectable, although not spectacular, recovery. So why on earth do we care if the EU implodes? Can't we just go about our own business issuing piles of government debt to finance our various bailouts of banks, car companies, insurance companies, mortgage lenders, and anything else our legislators decide to throw into the mix? I mean, all of this chaos in European markets is forcing investors into US Treasuries because we remain the safe haven so that helps us finance our bloated deficit a bit cheaper. If it weren't for that nagging suspicion that the US was doing exactly the same thing as some of our less solvent friends across the pond (because it's really all relative,) I'd be running around in circles waving the American flag. The problem is: when investors stop being kind enough to finance our government's excesses, there's nobody big enough to bail us out.

Tuesday, May 4, 2010

Financial Headlines 5/4/2010

  • The Dow is down 147 in early morning trading on - you're never going to believe this but - "European debt fears" AGAIN. I mean, how many more times are we going to do the Greece-is-imploding/Europe-is-bailing it out dance, before everyone wakes up and realizes that we're all overextended and need to restructure? Apparently, many.
  • At least people are buying cars again. Car sales were up 20% in April year-over-year, which is good if you forget about the fact that sales hit multi-decade lows in April of last year. April's annualized sales pace was about 11.21 million vehicles, slower than the rate of 11.78 million in March, supporting the theory that we're experiencing a nice bounce but nowhere near the 16 million pace of the bubble years.
  • The Lehman bankruptcy estate started presenting evidence last week in an attempt to prove that Barclays gouged its eyes out after the investment bank's bankruptcy filing. The evidence? $11 billion or so that Barclays made immediately after it cherry picked some assets. The estate plans to go after other banks - you've heard of a few of them - that it claims picked its carcass clean in the confusion following Lehman's implosion.
  • Lending standards remained tight and even got tighter at US banks, but you already knew that. I mean how many ways can your bank say "No. No. I said No! Go away!" before you get the message. A few categories showed improvement, industrial and commercial loans for large businesses, but otherwise, hope you're doing fine living off your unemployment check.
  • Curiously, one of the only stocks showing green today on my screens is BP. Apparently, if you cause a major environmental disaster that will cost billions to clean up, it's no biggie. It just means your stock is now viewed as "defensive." According to the FT, the US is raising pressure on BP over spill costs. Apparently, after the 1989 Exxon Valdez spill, landmark legislation was passed to ensure that these types of oil spills are paid for by the "responsible" party. Included in the legislation, however, was a $75 million liability cap, because that was apparently the best that the jokers in office at the time could do to pass something. But fear not, our savvy lawmakers are just now getting around to trying to raise that cap to $10 billion, which will likely get whittled down to $100 million by the time the oil lobby has done its work.