Friday, February 26, 2010

AIG Still Losing Money and Other Headlines

Fourth quarter GDP was revised up to an annual rate of 5.9% this morning, albeit mostly on inventory adjustments. Furthermore, enthusiasm for the continuation of robust economic growth was dampened somewhat by yesterday's abysmal jobs report. I probably shouldn't even bring up the day before's even more abysmal new home sales numbers, which is considered a leading indicator.

Amidst the erratic economic data, one thing investors and taxpayers can always depend upon is AIG. Like a timex or the energizer bunny, the insurance conglomerate continues to reliably crank out losses, quarter after quarter. AIG posted a nearly $9 billion fourth-quarter loss, which was worse than analysts' estimates but still a bang-up job-well-done compared to the $62 billion it lost in the prior year's comparable period. Or, in other words, the company went from losing $458.99 a share in one quarter last year to only losing $65.51 a share in one quarter this year. Not bad for a $25 stock.

In addition to posting the loss, AIG announced a decision to scrap a plan to use cash flows from life-insurance policies to repay $8.5 billion in debt to the Fed. According to the WSJ: "AIG now believes it can repay the $8.5 billion through other means, such as with cash generated by its insurance business and asset sales." Read a bit further and you get to the juicy part about how AIG's operating loss at the general-insurance business widened, while net premiums written fell and that the company expects that both property and casualty market pricing will continue to decline. So, um yeah, we're going to pay the government back with all the cash generated from our insurance business, which is in decline. A bit further still and we get to best part of the story "AIG won't be holding a conference call with analysts to discuss the results." Enough said.

Thursday, February 25, 2010

SEC Can't Solve Problems, Curbs Short Selling Instead

It's been at least a few weeks since I've had the pleasure of ranting against the SEC for its inanity. Fortunately (or unfortunately depending on how you look at it), the SEC voted 3-2 on Wednesday to adopt new, mind-numbingly complicated restrictions on short selling that are certain to prevent another financial crisis. The new rules kick in when a stock drops 10% and stipulate that a stock can only be sold short at a price that is above the national best bid. The curb remains in place for two days - the day the stock drops and the following day. The SEC did not exempt option and equity market makers who only short stocks to hedge and facilitate liquidity to other investors. Still confused? MarketBeat has a handy Q&A that helps explain the news rules.

If we take a step back in the time machine and review what happened to the markets, you will recall that financial stocks were taking it on the chin when investors were panicking about massive losses at financial institutions. Bank CEOs complained and the SEC banned short selling to "fix the problem" of falling stocks. Then stocks fell off of a cliff. Meanwhile, Fannie and Freddie were put under conservatorship, Lehman failed, AIG was nationalized, WaMu and Wachovia were seized by the FDIC and auctioned off. The government was forced to inject capital into the nation's largest banks (some more than once) to keep them from collapsing as they absorbed catastrophic losses from their excesses during the financial bubble years. Any rational person reviewing history would look at the evidence and conclude that short selling had nothing to do with what happened in the fall of 2008. It had nothing to do with ANYTHING. Stocks fell off a cliff DURING the short sale ban as investors finally realized that things were bad and about to get worse. A rational person wouldn't even need to scratch their chin to come to this conclusion. Instead the SEC has instituted new bans that will likely do nothing other than screw up the markets and allow more sophisticated players to game the system. The short selling restrictions will not:
  • Help the SEC find the next ponzi scheme before it turns into a $65 billion debacle.
  • Keeps investment banks from spinning IPOs or putting out conflicted research
  • Keep investment banks from creating another technology, housing, private equity, or commercial real estate bubble
  • Keep investment banks from helping sovereigns or insurance companies from hiding assets off balance sheet
  • Keep investment banks from hiding their own assets off balance sheet
  • Keep investment banks from mismarking level III assets and hiding them from investors
  • Insert more examples of things the SEC should've been focusing on instead of this moronic regulation.
Aren't you glad we raised the SEC's budget so it could waste its time on ineffective regulation? For a better, more heated rant on the subject, travel back in the Mock the Market time machine and read what I said when the short sale ban was introduced. It was some of my finest work.

Wednesday, February 24, 2010

Fallout From Financial Crisis Widespread

This morning's WSJ is a veritable cornucopia of articles detailing the lingering effects of the financial crisis. First, the reader is hit in the face with the headline story "Lending Falls at Epic Pace" and the accompanying graph that depicts, well, lending falling at an epic pace. Aside from the top-tier banks, most of which are making money from trading rather than lending, the rest of the banking industry is suffering, according to the FDIC's quarterly report. Banks registered their biggest full-year decline in total loans outstanding in 67 years. Also, the FDIC's problem bank (those at risk of failing) list grew to 702. Furthermore, more than 5% of all loans were at least three months past due, the highest level recorded in the 26 years the data have been collected.

Moving right along to some dismal local news for those of us in California, there is the story entitled "Lehman's Ghost Haunts California," which tells the sad tale of the aftermath of San Mateo County's failed investment in Lehman Brothers. That $155 million the county punted on Lehman bonds (commercial paper? whatever it was, the risk premium was definitely not justified) is looking pretty foolish now that the public schools are laying off teachers, community colleges are scrapping new facilities and the commuter rail is trimming service.

Speaking of California and really bad investment decisions, you can read all about Calpers latest woes in "Backlash Hits Calpers Property Deals." The story details the controversy surrounding some of Calpers' real estate deals which, in addition to losing buckets of money for California retirees, also had the socially conscious benefit of evicting low income residents from their housing units. Calpers response? "These historical investments were made under previous investment leaders" and outside managers who handle Calpers real-estate investments. Translation? If you're looking for someone to nail to the stake, you might want to go after, um, the other guys who were here. Back in early 2008 when most of Calpers' senior investment managers left for "personal reasons," it turns out those reasons weren't so personal after all. Who could've guessed? Oh yeah, me.

Moving right along, there is the article on yesterday's unexpected plunge in consumer confidence entitled "Jittery Shoppers Dim Stores' Hopes." It turns out that unemployed people don't shop so much. Shocking.

Even Casket Makers are hitting tough times, according to the cleverly titled "Casket Makers Dig In as Sales Take Hit." In addition to discussing how the economic slump is hurting the casket making industry, the article also sports the Pulitzer-worthy opening line of: "As their sales slow, some casket makers worry their business is hitting a dead end."

Looking for some good news amid the gloom? Look no further than "Bon Appetit: Toxic Bonus Yields 72% at Credit Suisse," which tells the tale of the 2000 investment bankers forced to take some of their bonuses in 2009 in the form of toxic assets. The assets have since rallied 72%, although employees can't withdraw from the plan until 2014. According to the story, the bankers groused about the plan when it was first introduced and they are probably still grousing that they only get to collect interest payments until the plan's expiration in four years.

You can read all about Wall Street bonuses rebounding in 2009 in "Wall Street Bonuses Get 17% Bounce." Then again, unless you work on Wall Street, maybe you'd better not.

Tuesday, February 23, 2010

BofA Controversy Settled, Sort Of

Judge Rakoff reluctantly approved the $150 million settlement reached between Bank of America and the SEC over the bank's failure to disclose mounting losses at Merrill Lynch prior to the shareholders' vote that approved the merger. Still, the venerable federal judge blamed the bank for hiding "material information from its shareholders" and blamed the SEC for being "content with modest and misdirected sanctions." Judge Rakoff also asked the parties to distribute the $150 million to shareholders harmed be the alleged nondisclosures. So the bank, which is owned by shareholders, is being asked to pay its shareholders. Interesting. Sort of like writing myself a check from my own bank account. That'll teach me.

Of course, all of the leadership responsible for this colossal failure has moved on and the bank's new leadership would never allow such a thing to happen again. Right. Remember when Chuck Prince became head of Citi to solve the bank's legal problems? Then Vikram Pandit replaced Chuck Prince to solve its risk management problems? That's the one thing you can always count on with Wall Street. The revolving door will always shuttle through new and improved leaders who will continue to botch the job because their incentives will always be skewed to the short term. Walk the ethical tightrope now, collect your fat check and watch somebody else pay a small fine after you are long gone. The only thing different this time around is that government dollars were used to facilitate this bungled merger, which were immediately used to pay a bunch of people piles of money in 2008, a year in which both banks became insolvent. Maybe Andrew Cuomo will have better luck in crafting a more satisfying settlement.

Friday, February 19, 2010

Fed Shocks Market With Largely Symbolic Discount Rate Hike

Yesterday afternoon, the Federal Reserve announced a hike in the discount rate from 0.50% to 0.75%. Everybody panicked, sold equity futures and bought dollars. While the Fed had already made clear that a hike in the discount rate would likely be the first move towards reversing the extraordinary monetary easing of the past two years, the market was positively flummoxed. Despite accompanying comments from the Fed stating the "modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy," market participants were scrambling to interpret the move. Traders of all products were seen running around in circles after the close yesterday grabbing each other by the collar and screaming "I know they said it doesn't mean anything, but WHAT DOES IT MEAN???!"

After all, if the move was completely meaningless, why do anything at all? And why announce it at a weird time on a day when nobody was looking for the Fed to make an announcement? In its effort to keep from roiling the market, at least the folks at the Fed made the announcement after the close. But still, has Mr. Bernanke not heard of after-hours trading?

The discount rate, for those who are still unclear on the difference between the Fed's money market rates and various facilities, is the rate that banks can borrow from the Fed's emergency discount window. Up until the most recent credit crisis, NOBODY borrowed from the discount window, EVER unless they were minutes away from bankruptcy. In fact, rumors of a bank needing to borrow from the discount window could cause a run on the bank. Until the Fed relaxed the rigid rules of borrowing from the discount window during the height of the panic, investment banks on the brink would go knocking, begging to the Fed's discount window (i.e Drexel, Bear etc.) only to be turned away. Even though the Fed tried to encourage banks to borrow during the height of the crisis and ignore the stigma, it still refuses to hand over the names of the banks who were borrowing from the discount window. The stigma still exists even though nobody wants to admit that there is still a stigma.

So why, for the love of God, would the Fed raise the discount rate? Why make an announcement when nobody is expecting an announcement from the Fed? What purpose can it possibly serve? If it's largely symbolic, why accompany the move with a statement that says don't read anything into this? I believe that this is a big hint to the credit markets. The easy money party is nearly over. Be prepared for the Fed to turn on a dime and start making moves that aren't largely symbolic. Take heed. You have been warned.

Thursday, February 18, 2010

AIG Drops Plan to Sells Derivatives Portfolio, Thinks Market Will Rally Forever

In the latest bold announcement from the government supported insurance behemoth that still thinks and acts like a private company, AIG has decided to hold on to its derivatives portfolio. According to the FT account of the company's reasoning: "The decision underlines the management's confidence in AIG's future." Or alternatively, the decision underlines the management's lack of ability to find a buyer of its toxic wares at prices that it likes. Apparently AIG's crack CEO Robert Benmosche believes that holding on to $300 to $500 billion of the derivatives portfolio would "reduce the need for fire sales and enable AIG to reap the benefits of rallying credit markets." You see, Mr. Benmosche looked into his crystal ball and foresaw that credit markets plan to rally forever. If AIG sells the portfolio now, AFTER an already powerful credit market rally in 2009, just think of all of the upside AIG is going to miss out on. After all, who needs to think about risk-reward when you can predict the future?

What's funny, in a sort of depressing way, is that AIG is still moving forward with its plans to sell off any business line that it can actually get a bid for, such as the Asian life insurance unit for which Metlife is a potential buyer. Yet it doesn't seem to want to part ways with the crap that has no bid, or rather a bid that it doesn't like. Since the company takes a massive charge every time it actually sells a unit, it's not going to pay back the government any time soon. Furthermore, after the functioning units are sold, the government will be left with a burnt out hull of company that is really just a bunch of illiquid crap with very suspicious marks that the next CEO is waiting to "rally back" to non-fire sale prices.

This is precisely why I hate the term "fire-sale" prices. According to the FT article, "AIG recorded billions of dollars in paper profits on its derivatives in the third quarter of 2009." Either it is just marking up positions to prices that don't exist in the market, which is really bad, or it just wants to continue to ride the coming rally, which is even worse. In other words, either there are accounting irregularities at the firm, or Mr. Benmosche's plan relies on gambling on an uncertain future instead of just taking his chips off the table and admitting that AIG will never pay the government back. Pretty ridiculous any way you slice it.

Wednesday, February 17, 2010

Good News For Housing, Finally

No, I'm not referring to this morning's upbeat housing starts report. The 2.8% rise in housing starts to a seasonally adjusted 591,000 annual rate is a positive leading indicator for the media that is looking for good headlines. But really, what difference does builder confidence really make when we have too many existing homes lying vacant and pending foreclosures looming on the horizon? Certainly the builders have misjudged demand before. The only reason they are still around is due to the nice tax refunds they received courtesy of the last round of legislation aimed at stimulating housing demand. The real question remains how we are going to solve the fundamental problem of too many homeowners buried underneath the financial burden of their upside-down mortgages. Fortunately, I think we finally have a promising answer.

The FT reports that the administration, and more importantly banks, are starting to warm up to the idea of facilitating short-sales between buyers and sellers of distressed properties. Since it is becoming painfully obvious that mortgage modifications don't really work en masse, and foreclosures are far too expensive for banks, the idea of speeding up the process of short-sales is taking hold. This is the best news I've heard for the housing market in some time and the most promising solution to our continuing housing woes. Why? Because the financial incentives for all the parties are finally aligned. Short-sales keep distressed assets from winding up on the banks balance sheets and are cheaper than foreclosures. Yes, the bank has to take a hit, but it is the cheapest option. The original home-owner gets paid to relocate and is released from the burden of owning an asset that is worth far less than what he paid for it. He can move on and maybe buy another place in a few years. The buyer gets a good deal and no longer has to go through the often lengthy and frustrating process of buying a short sale. The house is less likely to get trashed by an angry former owner. The otherwise inevitable expensive and painful foreclosure step is removed from the equation, making the transaction easier and cheaper for everyone. See? Win-win for everyone.

Friday, February 12, 2010

Financial Headlines 2/12/2010

Yesterday stocks rejoiced on the news that the EU would support Greece, the current black sheep of the highly dysfunctional European family, through its financial crisis. Today stocks are off on Greek "jitters", according to some headlines. In other market roiling news:

  • Since the EU plans to stand united behind its weakest members, news that economic growth stumbled in the final quarter of 2009 was not greeted with enthusiasm by the market. Considering all the monetary stimulus thrown at the region, one would think GDP could muster a bit more than a 0.1% rise.
  • China, a day after announcing a surge in both lending and property prices at bubble-like rates, has unexpectedly tightened lending standards. Investors wondered who they could depend on for the next bubble? If the Chinese can't have a bubble, and the Fed is already thinking about tightening, what's a savvy trader to do? Sell Mortimer! Sell!!
  • Fannie and Freddie announced plans to step up purchases of delinquent mortgages at par. This would be fabulous news for holders of delinquent loans, except that most of these mortgages were trading at a premium. News of the purchases apparently roiled the MBS market yesterday, as traders and investors struggled to quantify the impact of the announcement. As the largest holder of MBS, I'm wondering how much this is going to cost the Fed, since it owns, oh around a trillion or so in agency MBS. Then again, I'm not sure how much spreading losses from one government agency to another really matters...

Wednesday, February 10, 2010

UBS Digs its Claws In, MS Faces Shareholders' Ire

On the heels more losses for UBS investors, shareholders can at least rest easy that management hasn't completely forgotten about them. Last year, the Swiss bank introduced a plan that would pay 900 million francs to managing directors in equal parts over three years, because even managers of the financial Titanic need to be motivated. The plan, however, came with clawback provisions in the event that the bank continued to post losses. At some point, management must've thought, we've got to stop losing money. Right? I mean, statistically it just can't be possible to continue to lose money like this, can it? Yet UBS managed to beat the odds by posting a 2.74 billion-franc loss for 2009, which sounds awful, unless you compare it to the prior year's 21.3 billion-franc loss. In any event, managers can say goodbye to the 300 million they were due to collect this year as it will be clawed-back. UBS is still paying out 2.9 billion francs in bonuses for 2009, so it's not like anyone is going hungry.

Speaking of comp, Morgan Stanley is finally stealing attention away from Goldman Sachs in the compensation ire department. After a lackluster year where the investment bank was short on profits, it still managed to fork over 62% of its revenues to employees. Shareholders are rightfully pissed off and are not going to let this type of thing fly anymore. Well, except for the guy quoted in the article who said:

"I'm willing to give them a free pass given the decline in revenue" last year, "but going forward, there needs to be an attitude that shareholders are first in line."

It's attitudes like these that have kept the comp scam going as long as it has. Willing to give them a free pass this year??? Why? In all the years, this is the year they shouldn't get a free pass. They got about two trillion free passes from the government. Zero percent interest rates? That's a free pass. How about $2 trillion in fixed income purchases from the Fed? Also a free pass. 62% of revenues in comp? Dude, grow a spine and sell your damn stock. I've been carping for some time about Morgan Stanley not getting its share of bad press compared to Goldman. I'm glad somebody is finally putting two and two together over how preposterous it is to grant pay packages based on competitors' performances.

Monday, February 8, 2010

CIT Hires Former Merrill CEO John Thain To Run Lender

Good news for the nation's employment statistics! John Thain is heading back to work today after a 13 month absence from the work force. CIT Group has hired the former Merrill CEO to run the show at the bankrupt lender. But is this good news for CIT? As usual, I don't think it will make much of a difference. CIT made its bed years ago when it veered away from the staid business of lending to small businesses and dove headfirst into subprime and student lending. Ironically, the brilliant move into toxic lending was pioneered by CIT's former CEO, Jeffrey Peek, another Merrill banker. I'm not sure why the board at CIT thinks that hiring yet another investment banker is the solution to all that ails the lender. One would think that after all the debacles of the past couple of years in the banking industry, it might sink in at company boards that celebrity CEO's aren't worth the money. Yet it hasn't. Perhaps CIT's board thinks that Mr. Thain will convince Bank of America to pay $50 billion for CIT? After all, that was Mr. Thain's only accomplishment in his brief tenure as the head of Merrill Lynch (other than redecorating the office.) It's not like he somehow magically made all of Merrill's losses on its CDOs disappear. The funny part is, selling Merrill wasn't even his idea. And yet somehow, he's worth $5.5 million in restricted shares.

Friday, February 5, 2010

Financial Headlines 2/5/2010

Markets around the world worked themselves into a real tizzy yesterday over the prospect of a downbeat employment report release today in the US. That and the inevitability of a default by Greece, and possibly Spain and who knows who's next? Investors decided to just pound the heck out of the Euro just to cover all bases. Actually risky assets across the board fell, credit spreads widened and treasuries rallied, which is pretty much what always happens when everyone freaks out at the same time about news that has been fairly obvious for some time. Here are today's headlines for confirmation:
  • Nonfarm payrolls dropped by 20,000, bringing total jobs lost since the beginning of the recession to 8.42 million (note the benchmark revisions that took this number from 7.2 million to 8.42 million in one pop.) For the optimists out there, the unemployment rate fell from 10% to 9.7%. Still, that's a heck of a lot of out of work people.
  • The New York attorney general has filed a civil complaint against ex-BofA CEO Ken Lewis for failing to point out to investors what a large turkey Merrill Lynch was before shareholders voted to approve the massively overpriced deal. Separately, the SEC settled with BofA AGAIN, this time for $150 million, despite the fact that Judge Rakoff threw out the previous suit because it forced shareholders to pay, even though they were the victims. Not sure why screwing shareholders out of MORE money is going to fly with the judge this time, but we'll see.
  • GMAC lost money again. Shocker. The 56% owned by the US government mortgage/auto lending concern puked $4.95 billion in the quarter on an 86% decline in revenues. Go TARP!
  • A Citibank prop trader takes a hike to a hedge fund. According to the WSJ article, he only had good things to say about Citi, so I take it he was happy with his bonus number.
  • Oh and if you are in the market for a half built Caribbean resort, lenders have seized one on the island of Anguilla. Give Credit Suisse a call if you'd like to have Dan Brown and Simon Fuller as neighbors.

Wednesday, February 3, 2010

AIG Finds New Legal Counsel, Shuffles Bonus Money

AIG has found someone to fill its General Counsel position, recently vacated by Anastasia Kelly, who left in a huff over a pay dispute. Other than leaving the firm with yet another dent in its cash balances, Ms. Kelly's departure will change absolutely nothing at AIG. Furthermore, the appointment of the new General Counsel, Thomas Russo, won't help the insurer pay back the multiple billions that it owes the government either. But, at least Mr. Russo is thankful for the new job, having recently left a legal position at Lehman Brothers. Mr. Russo worked at Lehman through the investment bank's collapse and its subsequent bankruptcy, so he is highly qualified for his new gig as the insurer voted most likely to fail when the government tires of the political controversy required in propping it up. Mr. Russo also compared himself to Brett Favre, indicating that he fulfills the inflated ego requirement necessary for working in a senior management position at AIG. What kind of personality tests do the recruiters for AIG administer? ("Please insert celebrity whose talent you consider similar to your own. The more preposterous, the better.")

Separately, and yet entirely related, AIG has recouped $20 million in bonuses from its employees. Yet the insurer has moved to pay out as much as $100 million in bonuses this week. But somehow the $100 million is different from the $20 million, as it goes towards the $45 million it promised the pay czar it would recoup from last year's bonuses. See? They aren't related at all. According to AIG, it believes the recouped $20 million "allows us to largely put the matter behind us." So leave them alone, would you?

Tuesday, February 2, 2010

Banks Battle Regulation. Period.

The headline in the WSJ reads "Banks Gear Up for a Battle." The ensuing article discusses banks' new worries over being forced to define and hive off their profitable proprietary trading units due to the Volcker Rule. Yet the headline is symbolic of the new financial environment. In fact, you could play a fun little game of fill in the blank if you were too lazy to read the story. Banks Gear Up for a Battle Over...
  1. Bonuses ("But how are we supposed to retain talent???")
  2. New Fees Imposed on Liabilities ("You're going to kill the repo market with that mindless 15 bp tax!!")
  3. Forcing Issuers of Asset-Backed Securities to Retain a Sizable Amount of Default Risk ("You're going to destroy the ABS market! How are we ever going to fuel another bubble? I mean, ahem, you're going to destroy the market!")
The list could go on and on. The theme for the year will be banks pushing back against an army of regulators attempting to prevent more rampant speculation that leads to yet another huge boom and bust cycle that requires more bailouts because the economy is still a slave to our bloated financial system. Get used to it. The banks have way too much money and power now that they are profitable again and can operate with government guarantees. There is a much easier answer to stopping a bubble in its tracks, of course. Raise interest rates. The free money goes away.