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.

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.

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?

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.

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.

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.

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.

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.

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.

"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.

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.