Friday, April 23, 2010

Administrative Note

I will be traveling today and visiting family on the east coast all next week. I will make a concerted attempt to put up a few posts but may fail miserably. In the meantime, I will try to work on some new inspiration/material to keep the mockery alive. Thanks to those of you who continue to read Mock the Market.

Thursday, April 22, 2010

What Happened to Financial Armageddon?

Amidst the somewhat decent economic headlines (excluding unemployment) and a number of relatively robust earnings reports (because it's much easier to make a bunch of money when you fire all those people,) we seem to have forgotten about the economic crisis of two years ago. Certainly the market has bounced back to a level much more tolerable to most investor's stomachs. Sure, Obama is going to "Castigate Wall Street" today and our legislators are going to pass some watered down version of a financial reform bill. Even the SEC is going after Goldman in an extremely complicated case involving CDOs, after failing to go after two obvious monstrous ponzi schemes that they were repeatedly warned about. But really, what happened to the financial armageddon that everyone was talking about? I'm talking about gold-hoarding-living-in-caves style financial armageddon. Has it really been averted?

A few worthy souls are still carrying the armageddon torch. For instance, Marc Faber thinks that our governments will bankrupt and expropriate us and that the whole system will collapse. He believes the crisis has merely been postponed by all the government intervention. Who does this Marc Faber guy think he is? He's the editor of the Gloom, Boom & Doom Report and he's just a savvy investor, that has been shockingly right about alot of stuff. Then there is Louis Bacon, head of Moore Capital that is joining George Soros in his expectation of a breakdown of the European Monetary Union. Also, the FT's chief economics commentator, Martin Wolf, in yesterday's paper discussed the "Challenge of halting the financial doomsday machine," which was accompanied by some fairly sobering graphs showing the explosion in financial sector assets in the UK and US, as well as displaying how much the fate of the financial industry was now concentrated in a few hands.

So which is it? Global economic V-shaped recovery? Or government reinflation by money printing leading to a much bigger bubble which is bound to burst later? I'm currently reading "Lords of Finance", the pulitzer prize winning account of the central bankers whose actions supposedly caused the Great Depression. It should offer some insight into our current situation. The problem is, I keep falling asleep, can't make it past page 237 and not much has happened yet. The good news is that Mr. Bernanke is a student of the Great Depression, and he's supposedly put us on a course to avoid it. The bad news is that his, as well as the other central bankers' actions around the world are unprecedented, and we still have no idea how this story is going to end.

Tuesday, April 20, 2010

Goldman Earnings Fail to Inspire as SEC Threat Looms

Goldman Sachs posted a robust quarterly profit of $3.46 billion, besting even the most optimistic analysts' estimates for earnings. Revenues were also 36% higher year-over-year to $12.78 billion. Nevertheless, investors yawned and pushed the sell button, forcing the stock slightly lower in early morning trading. Perhaps investors are merely licking their wounds after the drubbing the stock took last Friday on the heels of the announcement that the SEC was leveling charges against the firm for pumping CDOs while betting against the same CDOs in house. The company's shares can't seem to resume their peppy march higher with such sinister enforcement action, not to mention a potential major regulatory overhaul, on the horizon.

If the SEC's charges sound familiar to you it may be because they sound exactly like the charges that seem to be leveled against Wall Street firms every few years. Don't believe me? Try replacing the word "CDO" with "IPO" and see if you're taken back in time to the turn of the century. You see, herein lies the problem. Peddling crap to investors, while secretly knowing it is crap is what Wall Street does for a living. It's why Wall Street is referred to as the "sell side." There is this pool of natural buyers called the buy side. The buy side has money and needs to buy stuff. Investment banks create products for them to buy and then "market" those products in order to sell them out of their inventory for more than where they have those items marked, regardless of whether those items have any value. Investment banks hire a bunch of young, smart, kids out of great colleges to put together 500 page pitch books, which nobody reads, to peddle their latest creations. Then every couple of years everyone is ABSOLUTELY SHOCKED that Wall Street was selling stuff that they knew was garbage. How did that stock perform? Miserably? Really? We really thought that a $500 billion market cap made sense. I mean the company had almost $2 million in revenue. How about those Enron bonds? Worthless? I can't believe it, because, you know, when we were busy helping them create off- balance-sheet partnerships to sell their own assets to themselves at inflated prices, we really thought the company was just brimming with value. Worldcom bonds? I can't believe those didn't work out for you. I mean, our analyst, who was just trying to get his kids into a fancy upper east side preschool by kissing the CEO's ass and upgrading the stock to a "strong buy," really thought that was a good one. Wow, did we really just bankrupt Orange County? Oh sorry, I shouldn't be dating myself, why don't we just stick to the more recent Jefferson County.

I could go on, but I'll stop here. Does the SEC have a good case against Goldman and other banks that I'm certain did the same thing? Probably. Is it going to get us anywhere? Probably not. Banks will pay the fine, a few heads might roll, but we'll move on. Nothing will change. Why? Because Wall Street's motto is to make as much money now as you possibly can now, get paid, pay the fine and retire with a boatload of money when you're forced out. If we wanted the cycle to stop, we shouldn't have bailed them out.

Friday, April 16, 2010

Whitehall Bests MSREF For "Worst Real Estate Fund Ever"

So the conversation must've gone something like this:

GS exec 1: This commercial real estate fund needs to sound very exclusive. Because everyone wants in but we definitely want the riffraff to know they're not good enough.
GS exec 2: Right! It needs to sound pure from the taint of retail investors.
GS exec 1: How about White Shoe?
GS exec 2: Yes, I like the "white" part. But "shoe" is not highbrow enough.
Gs exec 1: White House?
GS exec 2: Too political.
GS exec 1" White Door? White Room? White Bridge? White Street?
GS exec 2: No. Something more grand, impressive. I've got it "Whitehall"
GS exec 2: Perfect!

For all those rich folks lucky enough to get in on Goldman's snooty sounding Whitehall Street international real estate investment fund, you should give them a call. Your two cents are waiting for you. For two cents on the dollar, or $30 million, is about what is left of the $1.8 billion in equity that the fund started with back in 2005, when piling leverage on to a bunch of commercial real estate investments at the peak of a bubble still sounded like a great idea. Anyone keeping score, and Wall Street loves to keep score, should note that this bests the 70% or so loss revealed yesterday by Morgan Stanley's international real estate investment fund. But the fund doesn't expire until 2014, so they have plenty of time to make it back.

Thursday, April 15, 2010

Financial Headlines 4/15/2010

Some Tax Day Must-Reads:

  • Calculated Risk has a great post on second mortgages from housing economist Tom Lawler. The largest mortgage loan servicers provided some statistics meant to dispute the claim that second mortgages have "virtually no value" because borrowers with seconds have total mortgage balances that exceed the value of the home collateralizing the mortgages. For example, although 50% of Chase's second lien portfolio is underwater, 95% is performing. Even more shocking, 30% of its second lien mortgages have combined loan-to-value ratios over 125% and 94% of this portfolio is still performing. People are just incredibly optimistic about future home values or they just like paying their bills. Much more in the post, I urge you to read the whole thing here.
  • The administration released its March HAMP report. As of March 2010, the program has performed just over 1 million in total modifications, with 227,922 of those permanent so far. Clearly, alot of folks still in mod limbo. Interestingly, debt-to-income ratios for those who received permanent mods were 45% on the front-end (this includes principal, taxes, insurance and homeowners associate fees) and 78% on the back-end (includes other stuff like payments on installment debt, junior liens, alimony, car lease payments and investment property payments,) before the modification. Clearly, people got overextended in every which way, not just on their mortgages. Why we're helping people service all of this other debt by reducing their mortgage payments is kind of a mystery to me. I mean really, if you're making payments on investment property, you should be forced to sell it before taxpayers pick up the tab on your mortgage. I'll cut you some slack on the child support. I'm not totally heartless. Just something to ponder as you walk to the mailbox with your tax returns.
Piles of domestic economic data released today including:
A few choice international headlines:
  • Everyone in a panic about Greece again as there was "no strong interest in the US for Greek debt." Don't worry, this will likely change tomorrow as the Greek rally/Greek sell-off/Greek rally/Greek sell-off ping-pong match will continue until the entire European Union experiment collapses in a heap (maybe George Soros is exaggerating, but he's been known to be right before.)
  • China GDP is exploding at a 11.9% annual rate. Don't worry, I'm sure that kind of growth is entirely sustainable without creating a bubble in something.
Dueling Fed interest rate policy speculation:
Don't forget to pay your taxes.

Wednesday, April 14, 2010

Earnings, Losses, and Excuses

First the good news:

  • Both JP Morgan and Intel reported solid earnings. Profit at JP Morgan rose by 55% from a year earlier to $3.3 billion helped by a sharp 30% reduction in provisions for credit losses. Oh, and zero percent interest rates. It's always nice when you can borrow money at zero percent from your friends at the Fed and then charge consumers 20%. Really pads the bottom line.
  • Meanwhile Intel's quarterly profit nearly quadrupled to $2.44 billion, while revenue rose 44% to $10.3 billion. The tech giant's good quarter bodes well for the rest of the tech sector.
In somewhat disappointing news:
  • Investors in Morgan Stanley's $8.8 billion MSREF VI real-estate fund were recently informed that they have likely lost two-thirds of their money. The WSJ helpfully points out that this would probably make it the largest dollar loss in the history of private far. The losses stem from a buying frenzy during the peak in the commercial real estate market using oodles of leverage. The property purchases were global, so you know, at least they were diversified. Possibly the biggest bummer about the loss is that it's really putting a damper on the firm's plans to raise the $10 billion follow-up vehicle called MSREF VII. Here's a bit of unsolicited marketing advice for the folks at MSREF that I learned in MBA school: maybe you want to rebrand? Give the fund a different name, or something? If I'd lost two-thirds of my money in your last fund, I'm definitely not investing in your new fund, because at this point I'm thinking you guys aren't very good at investing in real estate.
In hilarious, as well as infuriating news:
  • From Kerry Killinger, overseer of the multi-billion dollar fraud-infused-subprime-option-arm bubble-frenzy that was Wa Mu in its hey day before it collapsed under the weight of its stinky mortgage self: "For those that were part of the inner circle and were 'too clubby to fail,' the benefits were obvious. For those outside the club, the penalty was severe." Because underwriting over $100 billion in negative am mortgages without asking for a single W2, or verifying that the borrower actually had only $10K in annual income and $3 in his bank account before giving him a $2 million mortgage on a house that had sold for $300,000 last year had NOTHING TO DO WITH WASHINGTON MUTUAL'S COLLAPSE. No, it was the lack of a government bailout. You see, if only Washington Mutual had been bailed out by the government instead, it would've survived and would've been in tip top shape. This was all part of Mr. Killinger's business plan, and the FDIC had to go and ruin it all by seizing his bank. I mean, really, they had some nerve.

Tuesday, April 13, 2010

WaMu, Lehman and Fraud

The FT reports that the underwriting at Washington Mutual leading up to its spectacular implosion was "riddled" with fraud, according to a 500 page report being released today. Apparently, fraud rates of 58% and 83% were found in two of Wa Mu's California's offices. Furthermore, nobody at the bank did anything to stop the rampant lying and fraud. The WSJ quotes Stephen Rotella, a former president and COO, at WaMu in a 2007 email that he thought Wa Mu's home-loan division was the worst managed business he'd ever seen in his career, until he saw the company's subprime unit. In any event, former CEO Kerry Killinger, defended his actions, as well as I'm sure the over $100 million he collected in pay during his time at the helm. I mean, it's not easy blowing up the country's largest S&L in five year's time by encouraging employees to commit fraud. It's gotta be worth at least $100 mil.

Meanwhile, in other completely not shocking news for anyone who actually followed what was going on at our nation's banks, the NYT has an article today that discusses Lehman's use of a company that it likely controlled called Hudson Castle, where the investment bank liked to park its risk. If the 2200 page Lehman examiner's report didn't convince you that something was amiss at the investment bank, perhaps this will. Hudson Castle created four separate vehicles, one of which was called Fenway, that issued commercial paper and then used that money to do repos with Lehman. Now read the direct quote from the NYT article: "Lehman itself bought $3 billion of Fenway notes just before its bankruptcy that, in turn, were used to back a loan from Fenway to a Lehman subsidiary." The loan was secured by Lehman's investment in a California property developer, SunCal, which owned a bunch of land. Seriously? Yeah, no fraud going on there.

Friday, April 9, 2010

Foreclosures of the Rich and Famous

While the financial woes of Nicholas Cage have been highly publicized (he lost yet another house earlier this week,) the loss of high-end properties by the wealthy have so far appeared to be one-off events. A Madoff foreclosure here. A Marc Dreier Hampton's waterfront mansion there. A Wells Fargo employee throwing parties in another Madoff investor's seized property elsewhere. But really, it's seemed relatively contained compared to the mauling in the subprime market.

As it turns out, high-end real estate is just a lagging indicator. Rich people tend to have more financial resources to fall back on, and it just takes longer for them to exhaust every penny. Take for example, Richard Fuscone, the former head of Merrill Lynch's Latin American investment banking division featured in a WSJ front page article. According to the WSJ's account, Mr. Fuscone retired in 2000 after 21 years at Merrill Lynch in order to pursue personal interests. Such as the pursuit of personal bankruptcy, which took him about ten years to accomplish. Mr. Fuscone declared personal bankruptcy this week in order to forestal foreclosure proceedings on his 18,471 square foot mansion with two pools, 11 bathrooms and a seven car garage. Included in the long list of Mr. Fuscone's creditors is the local pet store along with the tony Greenwich Country Day School. So while we're not sure how much on-the-job money management training Mr. Fuscone acquired while at Merrill Lynch, at least he had his priorities straight. Kids and pets were taken care of until the very end.

Mr. Fuscone finds himself in good company these days, as he is not the only former high-flyer having trouble paying the bills on his enormous mortgage. According to First American CoreLogic's database, which accounts for 80% of the entire mortgage market, 14.8% of the 1,700 mortgages with balances over $4 million are 90 days or more overdue at the end of January. You can expect more high end foreclosures coming to an auction house near you.

Thursday, April 8, 2010

Citi and the Value of Consultants

The FT reports that the former co-head of Citi's investment bank, Thomas Maheras, revealed during his testimony to the Financial Crisis Inquiry Commission that the bank had leapt into the exciting field of CDO investing based on a consulting firm's advice. The aforementioned consulting firm is believed to be Oliver Wyman. The fabulous advice that Citi took, likely cost the investment bank millions in consulting fees. And then it cost them around $50 billion in investment losses.

Oliver Wyman. Now why does that name sound familiar to me? Let's travel back into the Mock the Market time machine to June 10, 2008 and read an old post about UBS, shall we? Oh, there it is. UBS also hired Oliver Wyman for advice on what on earth it should do with all of that capital burning a hole in its wallet. UBS also lost $50 billion after taking Oliver Wyman's advice to delve into the lucrative world of CDO trading. And everyone thinks consulting advice is worthless. Clearly somebody found the CDO pitch book and made $100 billion taking the opposite side of Oliver Wyman's advice.

Chuck Prince, the CEO of Citi back when it decided to pursue incinerating all of its capital had been the general counsel and had no prior capital markets experience. The moral of the story? If you need to hire a consultant to tell you how to run your business, you shouldn't be running a bank.

Wednesday, April 7, 2010

Calpers, Placement Agents, and Corruption?

Bloomberg reports that Calpers and Blackstone are having a slight difference of opinion over whether money managers should be allowed to pay contingency fees to "placement agents." Placement agents work for private equity, hedge funds, venture capital and real estate firms, typically earning a the equivalent of 0.5% to 3% of the money they place under the management of their client. Calpers is introducing legislation requiring placement agents to register as lobbyists and ending what Bloomberg calls "pay-for-success" arrangements and I call "pay-for-doing-nothing." Apparently, Blackstone is not happy about abolishing the practice, as it has likely benefitted enormously from the bribing, er, paying of enormous fees to win huge chunks of Calpers money to manage over the years. Besides, there's nothing corrupt about paying $59 million in fees to a former Calpers board member for doing all of that hard work of calling his old pals at Calpers and asking them to part with large chunks of $209 billion in retirement assets so he can get paid. I'm sure that required like at least a five minute phone conversation:

Placement agent: Hello Harry? This is Charles!
Calpers Money Manager: Hey Charles, you old goat! How ya doing?
P A: Wanna go grab beers today?
Calpers guy: Nah, the wife'll get all mad.
P A: Ok, we'll do it some other time. By the way, any interest in our new private equity fund? It's the biggest fund we've ever raised. We're preparing to do a $100 billion takeover. You know, lever it up and then flip it via IPO. Works every time.
Calpers guy: Oh, great idea! Here's $1 billion.
PA: How about our new real estate..
Calpers guy: Oh definitely. Here's another billion. I gotta hop. It's 5:05 PM, gotta head home.

So yeah, that conversation was worth $59 million in retiree money. I'm sure all those funds are performing swimmingly too.

Monday, April 5, 2010

Inflation VS. Deflation Inside the Fed

The WSJ has a somewhat troubling front page piece on the current debate raging inside the Fed over what poses the biggest threat to the US economy. It seems as if our fearful economists who control the US money supply can't agree over what to fear most: inflation or deflation. Here I thought the fed was busy genially discussing the nuances of a zero percent vs. .25% fed funds target. It turns out, they can't even diagnose the underlying economic issues that need to be targeted. It's as if our leading economists have turned into an episode of "House" where Dr. Foreman is arguing over some treatment that will kill the liver to save the heart, while Thirteen thinks it's a brain tumor. Yet every episode of "House" neatly resolves itself when the brilliant Dr. House has some sort of epiphany that leads him to discover that the patient was just pregnant. And then Dr. Cuddy adopts the unwanted child.

If only economics were so cut and dried. Markets seem to have concluded that the Fed has figured out how to extricate itself from the massive experimental quantitative easing and zero percent fed funds policies of the past couple of years without doing any harm. Interest rates are still relatively low, volatility is sagging at pre-crisis levels, bond spreads have tightened and equities have rebounded sharply. Commentators have resurrected the "goldilocks economy" phrase from the mid-oughts that served us so well right before the economy crumbled and went to Hell.

Whether the inflationists or deflationists are right won't likely be determined for some time, particularly since Fed policy has so much to do with the outcome. Yet Janet Yellen, widely rumored to be the next Fed Chairman is siding with the deflationists. That, my friends, is why I'm siding with the inflationists. No disrespect to Ms. Yellen, but there is one thing I know for certain: the Fed will not perform its duties perfectly. It always has and always will overshoot in one direction or another. If the person leading the charge is leaning towards a more accommodative monetary policy then we're headed towards much higher inflation down the road.

Thursday, April 1, 2010

Financial Headlines 4/1/2010

  • CEOs watched in horror as their pay declined for a second year in a row, according to the WSJ. Average comp for the 200 CEOs in the analysis declined by 0.9% to $6.95 million. Really, I have no idea how anyone can expect to get by on so little coin.
  • The Federal Reserve has released the details of the crap, I mean securities/other stuff, it purchased from Bear and AIG in its attempts to keep financial markets from imploding in 2008. I scrolled through the cusips and lack of cusips contained in Maiden Lane I (i.e. former Bear Stearns garbage barge) and wondered if it was as worthless as it looked (i.e. reams of unsecuritized loans on hotels and other commercial properties.) But I'm pretty sure I knew it was worthless back in March 2008 when Jamie Dimon said "We'll take that and that but, um, we're not gonna take any of THAT."
  • Speaking of Jamie Dimon, he regrets ever using the FDIC to guarantee $40 billion of JP Morgan's debt during the crisis. "We didn't need it" Dimon claims, although he goes on to say that it did "save us money." Curiously, he doesn't regret the zero interest financing that JP Morgan probably also didn't need. Also unloading Bear's $30 billion in crap collateral onto the Fed? I'm pretty sure none of us needed that.
  • Most importantly, everybody gets the long Easter weekend to think about the non-farm payroll number which is set to be released on Good Friday.