Mock The Market

Moody's Not Crazy Bout JP Morgan's $20 Billion Bridge Loan

2011-03-29T06:37:00.000-07:00

Amidst all the cheering and hullabaloo over AT&T's proposed $39 billion bid to acquire Deutsche Telecom, a few sober credit folks over at Moody's would like to point out something in passing. Nothing major really, just the fact that JP Morgan is giving AT&T a $20 billion bridge loan to finance the acquisition. Certainly $20 billion is chump change, but despite the Fed's proclivity for spending trillions on mortgage and treasuries, it still hasn't stooped to buying bridge loans for large Telecom mergers in the event that no buyers turn up to buy the debt. Then again, earthquakes, tsunami's, nuclear reactor meltdowns, middle east unrest, nor the implosion of parts of the EU is going to stop this market from loving debt issued by anybody to finance anything. In any event, it's really great to see AT&T turning itself into an enormous crappy monopoly again. After all, the government is going to need something to break up in a couple of years. As long as the investment bankers keep getting paid, everybody's happy.

Yay Dividends!

2011-03-18T08:50:00.000-07:00

After the latest round of stress tests, the Fed has decided to play nice and allow some of the 19 largest US banks to do the fun stuff they used to love to do before they all fell into the big black hole of 2008. Banks have the Fed's permission to pay dividends and buy back stocks again! Yippee!!

Everybody seems to have forgotten just how much $40 stock Citigroup bought right before it went straight to $3. Or Wa Mu. Yes, the same Wa Mu whose former executives (and their no-good, asset-shuffling wives!) are getting sued by the FDIC, used to spend all day paying $45 for its own stock, months before it was seized by the FDIC. These firms spent billions upon billions of capital, capital that would've really come in handy when all their fraudulent mortgage underwriting was finally unveiled, to help boost their stocks so that executives (and their money-sucking gold-digging wives!) could sell stock and collect north of $900 million in comp. The FDIC is looking for $900 million dollars, so you know the wives have run off with way more than that.

See, everybody just has way too much capital sitting around and it's just so wasteful. It's not like we're ever going to need that capital for any reason. Because if you can just go crying to the Treasury and Fed for more capital and cheap financing every time your own balance sheet throws up on itself after looking at its asset, then why would you need any excess capital? We've already rewarded employees, time to get back to our second favorite thing to do, rewarding our shareholders.

So if you're reading the news, and you're wondering why on earth the market is staging a comeback today given all the turmoil in the Middle East, possibility of nuclear armageddon in Japan, and the Fed's determination to continue to ease in the face of recent inflationary data, you have your answer: bank dividends. Whoopdy Doo.

Japanese Tsunami Wrecks Markets

2011-03-14T05:50:00.000-07:00

US equities rallied marginally on Friday despite the devastating 8.9 earthquake/tsunami combo that struck Japan. After having the weekend to think it over, and watching the Nikkei plunge 6%, investors have reconsidered. Lately, it seems like equities can seem to talk themselves into rallying no matter what the headlines. It's like they read the news in their sleep and bought stocks out of habit. Hmmm.... Yawn, a natural disaster that cripples one of our largest economies and brings the Japanese to the brink of a nuclear disaster? No biggie. Price of oil is down, that's great for us, keeps inflation in check. Right? Goldilocks economy. Give some money to the Red Cross. Buy more stocks. A couple of nuclear power plant explosions, a few fuel rod fusions later and the news seems, well, maybe not so bullish anymore. Suddenly, things like the announcement of Berkshire Hathaway's intent to buy Lubrizol for $10 billion, which would've sent stocks into a euphoric lather a few weeks ago, seem pretty insignificant when compared to the aftermath of the Japanese tragedy. Is logic and reason returning to the markets?

China Posts a Trade Deficit

2011-03-10T05:40:00.000-08:00

China posted a $7.3 billion trade deficit in February, surprising those who expected them to continue their usual habit of flooding the world with their manufactured goods without reciprocity. Analysts are blaming this anomaly on the Lunar New Year holidays, when apparently even the Chinese get lazy and party too hard to make stuff to export. Better to believe that, of course, then the alternative; that world economic growth might actually be slowing. If this continued, it would be extremely inconvenient for the Fed, who was probably hoping that somebody else would step in to buy a few Treasuries after it is done with QE2. I mean, somebody has to help keep US interest rates in check so our debt fueled recovery won't be crushed by the slightest uptick in rates. If it's not going to be the Chinese, who's it gonna be? Maybe everybody who is puking Spainish government bonds on Moody's downgrade this morning? All of those investors who are surprised, yes SHOCKED, that it's gonna cost Spain more to recapitalize its banks than the government's previous official estimates? They actually needed Moody's to tell them to sell. Anyway, the more havoc elsewhere in the world, the better the US looks in comparison.

What Kind of Sell-Off is This?

2011-02-22T10:08:00.000-08:00

So is this the Middle-East-is-having-trouble-working-out-some-democracy-issues sell-off? Or the NAR-has-been-overestimating-home-sales + home-prices-are-still-falling + interest-rates-going-higher sell-off? Or OMG-the-Fed-is-going-to-stop-buying-the-market-in-June sell-off? Perhaps the-market-has-gone-straight-up-for-2000-points, maybe-wise-to-take-a-breather sell-off? In any event, if you were starting to wonder when on earth would've been a good day to finally initiate your short in Netflix? You should've done it on Friday.

The Budget and Zynga

2011-02-14T06:33:00.000-08:00

The White House put out its budgetary needs for the 2011 fiscal year. Projections call for a $1.65 trillion deficit, which doesn't surprise me much. This is what happens when you spend like crazy, don't raise taxes, and finance it all buy selling yourself debt. The good news is that the White House is terrible at projections, so maybe, just maybe, it's overestimated the big black hole we're in and we still have some shot of getting out before the rioting begins.

Speaking of crazy amounts of money, the valuation explosion in social networking sites continues unabated. Zynga is wooing potential investors in an attempt to raise $250 million in new funding, which would value the three-year-old start-up at between $7 to $9 billion. Way back in April, the company was only valued at around $4 billion. But then, Facebook was a puny start-up with a mere $20 billion valuation. Whether any of these valuations fulfill investor's expectations is anybody's guess, at least until somebody goes public and we get some financials and see some real trading Gotta take advantage of the ability to raise gobs of money without having to reveal financials. But venture capitalists are certainly itching to cash out after many years of lackluster returns in the industry. Employees too want their cars, jewels, and houses. It's hard to keep a lid on that so we're gonna see some awesome IPO action.

Fannie, Freddie and Facebook

2011-02-11T06:14:00.000-08:00

The administration has unveiled its proposal to wind down the mortgage market, I mean Fannie and Freddie, over the course of some very long and ambiguous time frame. I haven't read the white paper myself, but having read the WSJ's summary, it's abundantly clear that a few pesky details have not been addressed. Such as, who's going to buy the trillions of dollars worth of mortgages that will need to be originated in order to keep the housing market from collapsing? Or, how will the average American be able to afford to buy a house at current prices, when interest rates sky-rocket on mortgages because there is no federal subsidy anymore? Stuff like that. All minor.

Moving on to way more interesting and exciting news. According to Reuters, Facebook is mulling a $1 billion employee share sale that would value the company at $60 billion. This is not to be confused with the $1.5 billion share sale it did a month ago that valued the company at $50 billion. I'm not blaming the folks at Facebook for wanting to cash out a bit. Most 25 year old geeky programmers could really use a porsche and a 10,000 sq ft bachelor pad to get chicks at 25. But if the company is really going to tack on $10 billion in market cap per month, you might as well wait for the IPO, which is only a year away. Otherwise, you're gonna make it look like you really think your company's stock is overvalued and you've got to get out RIGHT NOW before it craters.

Good News For Housing, For Real

2011-02-09T06:20:00.000-08:00

The WSJ reports today that home affordability has returned to pre-bubble levels in many US markets in the past year. Having prices return to a point where the average person can actually buy one is far better for the economy than any bailout, tax break or zero interest rate. It didn't stop our politicians and friends at the Fed from attempting to artificially inflate prices to keep this dreaded reality from occurring, by offering free money mostly to those who didn't need or deserve it. For there are many folks out there who were prudent, bought what they could afford, had bad timing, are underwater now, can't refi, and have had to watch the parade of hand-outs pass them by. It'd be like the government refunding everybody who bought pets.com stock on margin in 2000 at the highs, without giving a penny to those who bought Enron in their retirement accounts, even though Enron was a fraud and pets.com was just a really dumb business idea. Both of them pumped by Wall Street, of course. But back to housing...

The ratio of home prices to annual income had fallen to 1.6 by last September, below the historical average of 1.9 from 1989-2003 and down from the peak of 2.3 in late 2005. Great news for those who: a.) have a job b.) need a house and don't already own one and c.) can get a mortgage. In the bad news department, there are still: a.) lots of unemployed folks out there b.) people who bought at the highs who are underwater and might walk away if prices continue to decline, and c.) mortgage rates are marching higher.

Fannie and Freddie have been the mortgage market since all of our friendly neighborhood non-conforming specialists, ahem, got out of that market rather quickly in 2007-2008. The White House is planning to release its plans for the two mortgage behemoths on Friday. Although somebody leaked to the WSJ that the administration wants to phase out the housing-finance giants, it seems impossible to imagine. They are 90% of the market. We're talking trillions of dollars. Are banks really going to originate and hold on to all those mortgages? Cause nobody is going to buy them without government guarantees. Especially not after the CDO fiasco of 2007. We'll see what the government has to say, and then the market is just going to do what it wants to do.

China Raises Rates, US Yawns

2011-02-08T05:54:00.000-08:00

Last I checked, our fearless Fed Chairman, Ben Bernanke, was busying himself with ZIRP + QE + QE2, oblivious to all signs of brewing inflation or bubbles. I mean, who cares about spiking food prices? And oil prices. And copper prices. Or the return of covenant-lite bonds? Or money pouring into emerging markets? Or record bonuses at US banks? None of these things have anything to do with US monetary policy. Because buying trillions in Treasuries and mortgages directly from broker dealers at any price is the best and most direct way to bring the unemployment rate down from over 9% to 5%. And it's not liable to leak out and cause distortions in other markets. Right. So that's working really well so far.

Anyhoo, at least the Chinese are paying attention. China raised its interest rates for the third time since mid-October. Admittedly, China's growth rates are a tad higher than ours and the chance of getting runaway inflation is more likely when your economy is experiencing explosive growth of 10%, rather than the anemic 3% or so we're getting in the US. Nevertheless, global markets actually respond to this kind of thing. Oil, copper, and emerging-market stocks fell across the board in response to China's interest rate move. Please make of note of that, Mr. Bernanke.

AOL Buys Huffington Post for How Much?

2011-02-07T06:59:00.000-08:00

Nothing can revive the Rip Van Winkle of bloggers (yours truly) faster than the news of a $315 million purchase price for a blog. Mostly a blog aggregator at that. Sure, AOL's $315 million announcement to acquire the Huffington Post would be a much bigger deal if it weren't AOL doing the math on the financials, but still, pretty big news for aspiring bloggers everywhere. AOL has a history of pumped up acquisitions that wind up being worse investments than even the doubters initially imagined. Nevertheless, Tim Armstrong, AOL's fearless Chairman and CEO, has maintained his enthusiasm that maybe, just maybe, someday, one of these deals is going to turn into something other than a really nice tax write-off. "When people think about Google for search and Amazon for commerce, I think they're going to end up thinking about AOL for content" the FT quoth Mr. Armstrong. Ah, content. That's what he's going for. Identifying AOL with content. Instead of say, really slow dialup internet service, chat rooms, and enormously expensive acquisitions, which is what AOL is currently associated with. In any event, this time, for obvious reasons, I hope Mr. Armstrong hits the big time.

Mock the Market on Hiatus

2010-10-11T07:41:00.000-07:00

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.

AIB and AIG Again, With Some Details

2010-09-30T06:19:00.000-07:00

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.

AIB and AIG

2010-09-29T10:40:00.000-07:00

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.

Markets Rip on Lackluster Data

2010-09-24T07:33:00.000-07:00

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?

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

2010-09-22T08:05:00.000-07:00

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.

Mark Hurd Gets New Job at Oracle, HP Miffed

2010-09-08T06:44:00.000-07:00

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.

Whistle-Blowing Gets More Lucrative

2010-09-07T07:32:00.000-07:00

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.

GDP and 3Par

2010-08-27T06:33:00.000-07:00

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?

Existing Home Sales Hit Already Nervous Market

2010-08-24T07:04:00.000-07:00

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...

Banks and Loan Buybacks

2010-08-18T08:26:00.000-07:00

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.

Lehman Pointing Fingers at Och-Ziff

2010-08-13T07:57:00.000-07:00

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?

Pondering the Great Dichotomy While the Fed Meets

2010-08-10T07:03:00.000-07:00

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?

The Fed Also Forecloses

2010-08-04T07:37:00.000-07:00

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?

Zero Interest Rates, But Where's the Inflation

2010-07-30T06:51:00.000-07:00

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?

Madoff Trustee Goes After the Goods

2010-07-26T07:32:00.000-07:00

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.

Earnings and Headlines 7/21/2010

2010-07-21T07:01:00.000-07:00

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.

Morgan Stanley, Lehman, and Real Estate Investing

2010-07-20T07:46:00.000-07:00

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

2010-07-20T05:18:00.000-07:00

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.

Goldman Settles, Now What?

2010-07-16T06:05:00.000-07:00

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.

FDIC Giving Distressed Real Estate Away and Other Distressing News

2010-07-14T07:09:00.000-07:00

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.

Living the High Life as Renters in Miami

2010-07-13T06:34:00.000-07:00

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.”

Retail Sales and Consumer Credit

2010-07-09T06:19:00.000-07:00

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.

Commercial Real Estate Update

2010-07-07T07:21:00.000-07:00

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, Amazon.com, 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?

Joseph Cassano is Really a Hero

2010-07-01T07:01:00.000-07:00

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!

Financial Headlines 6/29/2010

2010-06-29T06:51:00.000-07:00

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

2010-06-25T08:01:00.000-07:00

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

2010-06-23T07:06:00.000-07:00

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

2010-06-18T06:46:00.000-07:00

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

2010-06-17T07:07:00.000-07:00

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

2010-06-15T06:48:00.000-07:00

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

2010-06-10T06:13:00.000-07:00

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

2010-06-08T07:20:00.000-07:00

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?

2010-06-07T06:24:00.000-07:00

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

2010-06-03T07:31:00.000-07:00

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

2010-06-01T06:12:00.000-07:00

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.

The Crash Without Flash

2010-05-21T06:02:00.000-07:00

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.

US Housing After the Tax Credit Expiration

2010-05-19T07:19:00.000-07:00

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.

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

2010-05-18T10:20:00.000-07:00

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.

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

2010-05-14T12:58:00.001-07:00

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.

Morgan Stanley In CDO Probe

2010-05-12T07:10:00.000-07:00

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.

EU Likes to Bail Out Its Bankers Too

2010-05-10T06:23:00.000-07:00

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.

On Unemployment, Fat Fingers, and Market Plunges

2010-05-07T06:13:00.000-07:00

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.

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

2010-05-06T07:25:00.001-07:00

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 crisis...is 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.

In Other News 5/5/2010

2010-05-05T06:35:00.000-07:00

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?

2010-05-05T05:59:00.000-07:00

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.

Financial Headlines 5/4/2010

2010-05-04T06:52:00.000-07:00

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.

Pressure Mounts on Goldman

2010-05-03T07:02:00.000-07:00

The folks at Goldman might still believe they are doing God's work, yet the regulators believe otherwise, as the news of a possible criminal probe by federal prosecutors hit the tape last week and sent the investment bank's stock reeling. Add that to the SEC charges filed last month, and it's not looking so good for the world's most lovable vampire squid. Sure there's enough money to settle charges with everyone, but criminal charges? Not good, and generally not survivable. Time to crank up the PR machine and work on convincing everyone that they're really sorry, they're nothing to change and stuff like this is never going to happen again, at least not for another seven years or so.

The FT reports this morning that GS is planning to "change some of its practices in dealing with institutional clients, a step that could help it settle charges filed last month by US securities regulators." The thing is, even though the designation of "institutional client" implies that said client actually understands what it's investing in, that has proved not to be the case. In fact, many clients gladly purchased billions upon billions of complicated structured products from GS without knowing that they would likely be worthless in a matter of months. So, what to do to address the issue of GS's clients being boobs for assuming that the bank actually cared that it was selling worthless garbage to book monster profits? Hmmm, let's see... Oh, here's a great idea! Make them state that they understand the risks associated with any given security before doing a transaction with the bank. Creates a bunch of needless paperwork. Protects the bank from lawsuits in the future. Keeps the lawyers busy. Problem solved.

Might I suggest the following format for the new documents:

"Dear Valued Customer,

Please be advised that when our salesmen call you, they are attempting to sell securities that Goldman no longer wishes to own in its inventory. If we actually believed the securities were going to rise in value, we would keep them. In fact, it is highly likely that we believe the securities will lose value immediately. Furthermore, please be aware that we have likely front-run you before calling you in order to bid up the price of the securities we want you to purchase. In fact, if the securities are actively traded and you see bids on the screens reflecting certain prices, please be aware that it might just be our trader trying to paint the screens to coerce you into paying an inflated price. The minute you place your order, the trader might pull his bids in order to make you look and feel like a jackass. If the securities are less liquid products without tradeable prices, products in fact that we have created, please be aware that you are paying WAY more for the securities than we actually believe they are worth. It's what we at Goldman refer to as "customer service." As a profit making enterprise, it is our job to rip you off until you feel it in your keister. If you haven't thought of your keister today, might I recommend that you give your GS salesman a call. Have a nice day!"

Administrative Note

2010-04-23T05:31:00.000-07:00

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.

What Happened to Financial Armageddon?

2010-04-22T07:03:00.000-07:00

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.

Goldman Earnings Fail to Inspire as SEC Threat Looms

2010-04-20T06:57:00.000-07:00

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 pets.com 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.

Whitehall Bests MSREF For "Worst Real Estate Fund Ever"

2010-04-16T07:53:00.000-07:00

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.

Financial Headlines 4/15/2010

2010-04-15T06:21:00.000-07:00

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:

Jobless claims rose to 484,000, much higher than estimated. Bad news for employment.
But both industrial production (up 0.1%) and capacity utilization (up 0.2% to 73.2) showed gains in manufacturing. Good news for manufacturing.
Meanwhile, foreclosure filings were up 7% in the first quarter, according to RealtyTrac. Obviously, housing numbers still weak.

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:

From the FT we get"Fed Funds Rate Rise Points to Policy Shift"
From Bloomberg, there is "Fed May Keep Low-Rate Vow as Bernanke Sees Recovery Restraints."

Don't forget to pay your taxes.

Earnings, Losses, and Excuses

2010-04-14T05:48:00.000-07:00

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 equity...so 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.

WaMu, Lehman and Fraud

2010-04-13T07:43:00.000-07:00

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.

Foreclosures of the Rich and Famous

2010-04-09T08:01:00.000-07:00

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.

Citi and the Value of Consultants

2010-04-08T07:18:00.000-07:00

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.

Calpers, Placement Agents, and Corruption?

2010-04-07T06:46:00.000-07:00

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.

Inflation VS. Deflation Inside the Fed

2010-04-05T06:50:00.000-07:00

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.

Financial Headlines 4/1/2010

2010-04-01T07:44:00.000-07:00

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.

Fed MBS Purchase Program Ends Today

2010-03-31T07:36:00.001-07:00

Today marks the end of the Fed's $1.25 trillion agency MBS buying spree. The program contributed to reviving the mostly dead housing market by keeping mortgage interest rates low so home buyers could afford their mortgage payments. A zero fed funds target didn't hurt either. It's like the Fed acted as the anesthesiologist, while Drs. Fannie, Freddie and FHA argued over how to correctly perform the quadruple bypass, with the Treasury occasionally running in with a crash cart, shouting "Clear!" and introducing another homeowner tax credit.

The Fed's attempts to boost the housing market had other side affects as well. Today's WSJ has a front page story on the monster rally in bonds since October 2008. Junk bonds, in particular, have outperformed nearly every asset class since the lows in the market. By buying over one trillion in MBS and another $250 billion in Treasuries, the Fed gobbled up a significant amount of supply from bond market investors who had nowhere else to go with the $375 billion in inflows that their funds received in 2009.

So now what? Pundits far and wide are arguing over what will happen to interest rates once the Fed is out of the picture. My two cents is that the long end absolutely has to go higher. It's just simple economics. A huge portion of the demand has been removed and who will replace it? Bulls keep arguing that zero interest rates for an "extended period of time" will continue to stoke demand for higher-yielding assets. But does anyone really know the Fed's exact definition of "extended period"? Sometimes my three-month-old spends nearly 30 minutes in her swing, a time period which she refers to as "an extended period." The Fed can turn on a dime if it needs to. Particularly if the FT's front page stories go from today's "Steel Prices Set To Soar" to "Holy Cow! Steel Prices are Surging" tomorrow.

Financial Headlines 3/26/2010

2010-03-26T07:40:00.000-07:00

The headline reads "Europeans Agree on Bailout For Greece". Although leaders of the euro zone backed a deal where they and the IMF would jointly bail out Greece "should the country's debt troubles intensify," (yeah, because that hasn't already happened) details remain somewhat scant. "The agreement won't immediately trigger a Greek rescue, but it lays the groundwork." Sounds like if things get really bad, everybody's promised to have another meeting.
More than a dozen banks are accused of conspiring to rip off muni bond issuers in a criminal probe begun by the Justice Department's Antitrust Division. Financial are ripping on the fabulous news.
The White House has entered the mortgage principal forgiveness fray by extending its foreclosure prevention program. The new efforts will give unemployed borrowers forbearance for a few months as well as require banks to consider writing down loan balances as part of a formula for lowering monthly balances. The FHA is going to be used to put this initiative in place, which aims to help borrowers who are current on their mortgages, but are just unhappy about being upside down on their mortgage. For awhile there, I was leaning towards Fannie and Freddie ultimately costing the government the most in the long run, but now I'm rooting for FHA.
Meanwhile, at the Fed, Bernanke and Plosser have been running off at the mouth about what to do about all the crap they purchased in the quantitative easy frenzy of the past year. "I anticipate that at some point we will, in fact, have a gradual sales process." quoth Bernanke, in his typical calm and measured way. Because unloading a couple of trillion in securities when the world is watching your every move will be really easy, calm and measured. Right. I'm sure bond traders aren't going to be running around with their hair on fire trying to front run while screaming "Just find me a freakin bid and hit it!!"

Bailouts and More Bailouts

2010-03-25T06:57:00.000-07:00

Today's winners in the world-wide bailout ruse are:

Dubai World, which announced a restructuring plan involving a $9.5 billion lifeline from the government. The plan will take months to implement and will require some discussion with creditors but it will involve recycling the $5.7 billion left over from the $10 billion bail-out from Abu Dhabi last year, and the remainder from "internal government sources." It's always nice to see a government use a bailout from another government to fund a bailout of its ill-timed property bets. Dubai World will receive a $1.5 billion cash injection to cover stuff like working capital and interest payments, with the remaining $8.9 billion of government funding and claims turning into equity in the government-owned businesses. Meanwhile non-government creditors will receive "100 per cent of their claims, through the issuance of two new tranches of debt with five and eight-year maturities." So, extend and pretend is the name of the game here. More details of the package in the FT article.

Bank of America is offering to reduce principal balances by as much as 30% for troubled borrowers. As it turns out, offering mere interest rate reductions to borrowers who are upside down on their mortgages is not enough to entice them to make their monthly payments. B of A probably has no idea if this is going to work. But they are just tired of all the rejection. According to the President of Bank of America Home Loans "The whole purpose of the program is to get more customers to return phone calls." Who knew that defaulting borrowers could be so rude?

In bailout announcements we're still waiting for:

German chancellor Angela Merkel said EU leaders were set to "specify" what "combination of IMF and bilateral aid" might be awarded to Greece, should it ask for help. Which it hasn't done. Yet. Even though everyone knows that it will have to. Meanwhile, in completely related news, the ECB has announced that it will relax its collateral requirements so that European banks could continue to shovel Greek debt to the central bank for funding beyond the end of 2010. Originally, the ECB was going to raise collateral requirements by the end of the year, before it realized that banks were in a tizzy over where to park their Greek garbage. Whew! That was easy. Problem solved. Right?

Why Does Main Street Hate Wall Street?

2010-03-24T07:18:00.000-07:00

In a shocking development, a Bloomberg National Poll reveals that most Americans say they "don't like Wall Street, banks or insurance companies and favor letting the government punish bankers who helped cause the worst financial crisis since the Great Depression." Everyone knows that polls can be skewed, so maybe this is just some sort of error. Perhaps the questions were phrased like this:

Poller: Do you hate Wall Street?

Pollee Uh, I don't know. Some of my good friends work for banks.

Poller: Do you hate whoever caused the worst financial crisis since the Great Depression?

Pollee: Definitely!

Poller: Do you think that whoever caused the worst financial crisis since the Great Depression should be punished?

Pollee: Hell Yeah!

Poller: Thank you for responding to this poll. Have a nice day!

Paradoxically, despite the fact that Americans hate Wall Street and think those cads should be punished, nearly seven out of ten people surveyed supported using current bank regulators for consumer protection rather than introducing a new federal agency. Because keeping the same regulators who allowed banks to lend millions of dollars to people who couldn't afford a shoebox, then leverage themselves to the hilt, then bankrupt themselves, then allow them to go crying to the Fed for zero percent financing, then plead with the Treasury for capital injections, and then use the capital injections to pay bonuses to employees, is the best choice for sound future regulation. Bloomberg quotes a lawyer specializing in banking supervision with the following: "People are generally satisfied with the way consumer protection has worked with banks." I'm sure the people who bought a house with a zero down negative am mortgage, and have been living in that house in default for the past year, arguing with their lender over their HAMP loan mod are very satisfied. The rest of us, maybe not so much.

The reality is that Main Street is still suffering, while Wall Street thrives. Unemployment is still very high. Home values are stagnant, if not still declining. Credit continues to contract. Meanwhile, the stock market has ripped 73% off the lows, bond spreads are back to pre-crisis levels, and bankers are busy counting their bonuses, albeit in a somewhat more restricted and stock-like form. Furthermore, headlines about JP Morgan, as well as other banks and homebuilders getting huge tax refunds, don't help ease the ire. This is the kind of crap that gets tacked on to $800 billion stimulus bills that should make Americans hate stimulus packages. How does allowing the homebuilders to carry back losses five years instead of two, giving them huge tax refunds help stimulate the economy? It isn't making more people people buy new homes, that's for sure. If you checked this morning's economic headlines, new home sales fell to record lows.

In any event, the growing divide between the two Streets should continue until the economy improves and everyone starts having fun flipping houses again and forgets that they were mad. Or the market collapses and Wall Street crumbles again and politicians no longer have the political or actual capital to bail them out. Then everyone can be miserable together.

Merrill Tattled on Lehman

2010-03-19T06:31:00.000-07:00

The FT reports that Merrill officials warned the SEC and the Fed in early 2008 that Lehman was "incorrectly calculating a key measure of its financial health" (or, "cooking the books" as you or I might call it.) The former Merrill officials' intentions were far from humanitarian. They alerted regulators because Lehman was touting its reported liquidity position to investors and counterparties as proof that it was sounder than Merrill. Merrill officials probably said to themselves, "Hey wait a minute. I know we're insolvent, but Lehman is DEFINITELY more insolvent than we are. " We're talking about Wall Street guys here. They're so damn competitive.

The Merrill guys didn't believe Lehman's claims. In fact, they thought that Lehman was including regulatory capital in its liquidity calculations. Big no no. So, they picked up the phone and called the SEC and the New York Fed, both of whom did, well, absolutely nothing about it. But we already knew that because we know how this story ended. The SEC declined to comment beyond saying that the folks who fell asleep at the switch at that particular unit are no longer there. The NY Fed claims it was unable to verify that the conversation with Merrill ever took place.

The Fed's Move: Expected and Unexpected All At the Same Time

2010-03-17T06:17:00.000-07:00

Yesterday's Fed statement following the FOMC meeting offered little in the way of surprising news. Sort of. Traders and investors were focused on two things:

Would the Fed remove the statement about keeping interest rates low for an extended period of time? (It left it in.)
Would the Fed end its purchases of mortgages as scheduled by the end of the month or extend its quantitative easing further? (It chose to end the program.)

It seems somewhat contradictory that the Fed would both end the purchase program AND plan to keep interest rates at zero, yet this is exactly what it did. The Fed justified its moves by stating that "Economic activity has continued to strengthen. The labor market is stabilizing." And "Inflation is likely to be subdued for some time." Now that economic activity has picked up, the Fed thinks it can end its quantitative easing program, yet leave interest rates at zero all without causing inflation. You see, it's a "Goldilocks Economy." Growth is not too high, not too low, it's just right. Besides, if inflation does pick up, the Fed will know exactly what to do to stop it in its tracks without causing another meltdown in the markets. The Fed is really good at this type of thing, right? Remember the last time we had a Goldilocks economy from 2004-2007, and how well the Fed handled "easing" us into a recovery after asset price inflation got a wee bit overheated? It'll probably go something like that.

The Lehman Report

2010-03-12T06:07:00.000-08:00

The court-appointed examiner's report on Lehman Brothers is available to peruse and it is a doozy. Coming in at over 2,200 pages, the report provides a more detailed look into how and why the investment bank failed spectacularly in September 2008. I say "more detailed" because it was obvious to many, even before the firm collapsed, that the bank was mismarking assets and engaging in accounting fraud. You don't wind up with 10 cents on the dollar as a secured creditor unless the assets were wildly overinflated to begin with. Still, it's always nice to know the details.

Most of the report focuses in on the so-called "Repo 105" transactions. Repos are collateralized loans used to finance a bank's assets and are reported as liabilities on the balance sheet. However, if the repo met conditions of an accounting rule called SFAS 140, it could be counted as a true sale and the assets could be moved off the balance sheet. Lehman used these specific Repo 105 transactions to move assets off of its balance sheet to reduce the leverage ratios it reported to investors. Lehman's auditors, Ernst & Young, even signed off on the transactions, so they had to be kosher, right? According to FT Alphaville, Lehman could not find a US lawyer to sign off on their treatment of these particular repos as a true sale. So what did the enterprising folks at Lehman do? They just went abroad and found some London lawyers to sign off on the transactions. Presto! $50 billion in assets disappeared off of the balance sheet. So while maybe technically not illegal, the transactions were most definitely used in a calculated way to mislead investors about the investment bank's true financial condition.

The folks over at Zerohedge have unearthed more juicy tidbits from the report about the ordinary tri-party repo transactions with JP Morgan that indicate the firm was definitely mismarking assets and that JP Morgan knew about it. According to the excerpts from the report, Lehman was attempting to pledge more and more worthless collateral at par against the loans as the bank's financial condition deteriorated. Apparently, as Lehman neared bankruptcy in September 2008, it had attempted to pledge $3 billion of a security called "Fenway," that was actually asset backed commercial paper credit enhanced by Lehman itself. That's right, backed by the full faith and credit of...Lehman Brothers. JP Morgan said, "Um, no thanks. Maybe some Treasuries would be better? Or perhaps a sack of potatoes?"

Back in August 2008, "JP Morgan had learned that Lehman had pledged self-priced CDOs as collateral over the course of the summer." Lehman "pledged $9.7 billion of collateral, $5.8 billion of which were CDOs priced by Lehman, mostly at face value." Of course they were self-priced. There was no liquid market for CDOs so Lehman had to price them using its own models. Pricing them at par was the really stupid and possibly criminal part. Furthermore, why did JP Morgan just "learn" about this in August? Didn't JP Morgan know what collateral was in the repo since JP was the clearing firm that is supposed to verify and price the collateral in its own repos with customers? Why on earth did JP Morgan ever accept CDOs as collateral in its repos? My how far the standards of the repo market have fallen since back in the day when I was a lowly repo trader. If you didn't have treasuries, agencies, or agency backed MBS, no financing for you!

The report goes on to state that when JP Morgan "discovered" the CDOs and decided it wanted other collateral, Lehman said it had no other collateral to pledge. Ok, so Lehman was clearly insolvent, even during the time that the firm continued to claim that it was swimming in a pool of liquidity and was just a victim of short sellers. Furthermore, JP Morgan KNEW that Lehman was insolvent. Meanwhile, the SEC and the Fed sort of knew about some of this, but probably didn't understand and mostly just had their collective heads stuck up their collective asses.

"Hard Work" of Selling Build America Bonds Costs $1 Billion

2010-03-10T06:40:00.000-08:00

The WSJ has an amusing article about Build America Bonds this morning. The new bonds were introduced in April 2009 under the economic stimulus plan to create jobs building roads, schools and hospitals. Unlike traditional muni-debt, Build America Bonds are taxable and generally carry higher interest rates. The US pays 35% of the interest, which helped the local governments to borrow during the credit crunch while saving money on interest payments.

Naturally, this has been a huge profit center for Wall Street firms, as it has allowed them to collect fees for a new product. Furthermore, the clients have unlimited resources, so why not jack up the fees? Apparently the fees Wall Street is charging are "surprisingly high" according to a Federal Reserve economist and amount to a significant mark-up over traditional muni bonds. The underwriters have netted approximately $1 billion in fees over the past year from $78 billion in sales and will continue raking it in on the more than $150 billion in forthcoming Build America Bond issuance. The banks don't deny charging higher fees, but claim that the fees are justified because they are "wording harder to sell the bonds to investors who wouldn't traditionally buy municipal debt, such as pension funds, insurance companies and foreign investors." Right. Because it's such hard work picking up the phone, calling a bunch of pension funds, insurance companies and foreign investors that are already your clients and saying "hey, I've got some bonds that have high yields, where the interest is subsidized by the federal government."

Yes, selling muni debt is such hard work. The investment banks probably had to pay out a bunch of disability to the sales forces for sprained fingers from dialing too hard. Certainly worth $1 billion in fees. Seriously, does our government ever, even for a second, consider negotiating for better rates from the private sector?

Banks On Edge Not Happy With FDIC Auctions

2010-03-08T07:17:00.001-08:00

Bloomberg is out this morning with an uplifting story about the current state of our regional banking system. Apparently, banks that are on the brink are not happy with the FDIC's upcoming auctions of assets seized from failed banks because they may trigger writedowns of their assets and weaken them further. According to Bloomberg, of the $50.4 billion in loans seized from failed banks currently held by the FDIC, 63% involve participations by other lenders. Consequently, if the seized loan is auctioned at a discount, the lenders who participated on the loan will be forced to write down the loan on their own books.

The funny, and therefore highly mockable, portion of the story is the great quotes Bloomberg has managed to extract from the various mouthpieces of the banking industry. Take this gem from the lawyer who is representing 25 lenders that took part in financing the W Hotel (which will be auctioned next month by the FDIC): " These banks can't believe that the regulator they pay to protect them is going to sell these loans to someone who can flip them and cause them serious losses." For clarification purposes, the FDIC's role is not to protect banks; they are required to pay premiums in order to get deposit insurance. The FDIC is tasked with protecting depositors FROM banks, in the event that banks decide to piss away depositors' cash on ridiculous investments such as financing the construction of a W Hotel in Atlanta in the middle of a property glut and a credit bubble. Mr. Lawyer for the Bankers goes on to say "Our banks just cannot believe they are being treated in a way that ultimately hurts the FDIC's insurance fund because some of them are right on the edge." How dare the FDIC treat banks this way after they've done such a fabulous job winding up on the brink of insolvency!

"We have a number of banks teetering on the edge, and we don't need this problem" quoth the president of Community Bankers of Washington. Yeah, so can we just get back to burying our heads in the sand and forgetting about the fact that we're insolvent? That 140 banks failed last year, another 26 this year, and 702 are on the "problem" list? If it weren't for those pesky FDIC auctions, the banking system would be virtually sound. Right? In any event, those interested in purchasing a swank hotel in Atlanta, as well as a myriad of other half-built and partially vacant properties across the US, for a song are in luck.

FDIC Investigates Failed Integrity Bank

2010-03-04T06:37:00.000-08:00

The FDIC has been busy for the past couple of years cleaning up the mess left behind in the wake of the credit bubble. Only the big banks were politically powerful enough to get the bailouts, while the smaller banks are getting shuttered on a weekly basis. The WSJ takes a peek inside what went wrong at Integrity Bank, a Georgia bank that opened in 2000 and was closed by the FDIC in August 2008.

What is interesting about Integrity Bank is that it went belly up because it lent out all of its capital to one borrower, a real estate developer that owned a hotel in Sausalito, California. The hotel went bankrupt and was auctioned off by the FDIC last month. Why on earth would a bank lend all of its capital to one borrower? Don't worry, the FDIC plans to find out. Now. After it has already cost the deposit insurance fund $295 million. Nevertheless, the regulator that was tasked with keeping and eye on banks and making sure they don't do things like lend all their capital to one guy in Sausalito, has launched an investigation. The FBI and Federal prosecutors are also hot on Integrity's tail postmortem.

Everybody's looking for the flight recorder because investigators want to know why the plane crashed so that we can keep it from ever happening again. But do we really need an FDIC investigation to conclude that it was a dumb idea for the bank to give 14 loans totaling $83 million, or 127% of the bank's capital, to one guy? Or that it wasn't a great idea for said loans to have interest reserves so that said guy wouldn't have to pay interest on the loans? I mean, don't banks already know that they should expect their borrowers to pay them interest? Or that dipping into a credit line to pay interest on a borrower's other loans doesn't actually lower the risk associated with the borrower? Really, are we going to have any big epiphanies here? Federal prosecutors just need to put a few people in jail. The FDIC needs to focus its resources on the rest of the regionals that are going to fail.

How Dumb Did CMBS Investors Get?

2010-03-03T06:51:00.000-08:00

Even on the most boring financial news day, the WSJ Property Report always offers up a few tasty morsels of mock-worthy stories. You can skip over the tale of Istithmar World Capital, the private equity arm of the Dubai government's investment fund, which is handing back yet another building to lenders. As it turns out, buying a former hotel-turned-office building in Times Square, kicking out all the cash-flow producing tenants, in the hopes of turning it back into a high end hotel, maybe wasn't such a great idea. Must've been a bug in that excel spreadsheet that spit out the ridiculous purchase price in 2006. Then there are the continuing problems of former real estate mogul Kent Swig who used to like to do deals in just nine days because he was just so great at ripping apart the numbers and analyzing the deal "very, very quickly." Now Mr. Swig is being sued by lenders and five of his properties are listed by Real Capital Analytics as "troubled." You don't need nine days to analyze that.

No, the real juice this morning is in the article about the Biscayne Landing development (or lack of development) in Miami. Sure we've read a multitude of stories about silly CMBS issued in the 2005-2007 period secured by properties with extremely optimistic and preposterous future cash flow assumption. But this is the first time I've read about CMBS that was used to finance a land acquisition. In Florida. On landfill. That had been on the EPA's Superfund site list. Sure it was taken off the EPA's list in 1999, but still. Are you kidding me???

The developer of the project, Boca Developers, had grand visions to build 6,000 residential units, a hotel, a town center, pools and clubhouses. Oh, and they were going to cleanup the groundwater that had been contaminated by the aforementioned landfill. Credit Suisse gave the developers a $233.5 million loan, of which $163 million was repacked into CMBS secured by the ground lease and sold off to a bunch of investors who were apparently too sophisticated to read offering documents. In any event, the project is now largely unbuilt except for two condo towers that are involved in a separate foreclosure action. Furthermore, the affordable housing and the Olympic training facility that the developers agreed to help build elsewhere in the city has yet to materialize so the Mayor is pissed. "The project currently is a failure" says the angry Mayor. Ya think? Apparently the next step for the failed development is for someone to step up to take on the ground lease. Shockingly, there are few bidders that are willing to sink equity into unimproved property that doesn't throw off any cash flow. Any takers?

Calpers Considers Cutting Rate of Return Target

2010-03-01T06:54:00.000-08:00

Calpers is considering taking some drastic action on the heels of the bruising 23% decline its investments posted for its last fiscal year ended June 30th. The mammoth pension fund that manages approximately $200 billion in assets for California's pensioners is contemplating reducing its current projected rate of return from 7.75% to maybe something with a six handle. You see, it was time to take some decisive action. What could be more effective than tweaking an imaginary number and using that as a basis for all future investment decisions?

I totally understand the decision. I did the same thing with my own investments. In fact, I just resolved my looming retirement fund issues by raising my return "target" from 8% to 35%. Now I should have no problem retiring with a cool $100 million in the bank. Problem solved.

A logical person might ask why Calpers chose to lower its imaginary rate of return number instead of raising it to plug the hole in its future obligations? Imaginary (and scary) as it might be, the percentage is an important factor in calculations by Calpers officials of future contributions needed from employees and local governments to cover payouts promised to retirees and other beneficiaries. If return assumptions decline, contributions have to rise. Uh yeah, because California has so much extra money lying around that it's going to be thrilled to increase its contributions to the pension fund that pissed away retiree assets while making private equity and real estate investment fund managers rich. In case the folks at Calpers haven't been keeping up with current events, California is mired is some pretty serious budget poop. This is not exactly the right time to go hat in hand to the state and local governments.

Additionally, the pension fund believes that lowering the rate of return would "reduce the temptation" to seek outsize profits through real-estate, private equity and other alternative investments. This decision would've been brilliant had it been made like three years ago. Now? Maybe not so smart. In any event, the final decision isn't expected until early 2011. So they have another year or so to debate whether the right number is 6%, 6.1%? How about 6.5%?

AIG Still Losing Money and Other Headlines

2010-02-26T06:32:00.000-08:00

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.

SEC Can't Solve Problems, Curbs Short Selling Instead

2010-02-25T06:31:00.000-08:00

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.

Fallout From Financial Crisis Widespread

2010-02-24T06:08:00.000-08:00

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.

BofA Controversy Settled, Sort Of

2010-02-23T06:32:00.000-08:00

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.

Fed Shocks Market With Largely Symbolic Discount Rate Hike

2010-02-19T06:00:00.000-08:00

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.

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

2010-02-18T06:08:00.000-08:00

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.

Good News For Housing, Finally

2010-02-17T06:34:00.000-08:00

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.

Financial Headlines 2/12/2010

2010-02-12T07:06:00.000-08:00

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...

UBS Digs its Claws In, MS Faces Shareholders' Ire

2010-02-10T06:40:00.000-08:00

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.

CIT Hires Former Merrill CEO John Thain To Run Lender

2010-02-08T06:50:00.000-08:00

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.

Financial Headlines 2/5/2010

2010-02-05T06:47:00.000-08:00

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.

AIG Finds New Legal Counsel, Shuffles Bonus Money

2010-02-03T07:54:00.000-08:00

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?

Banks Battle Regulation. Period.

2010-02-02T07:37:00.000-08:00

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...

Bonuses ("But how are we supposed to retain talent???")
New Fees Imposed on Liabilities ("You're going to kill the repo market with that mindless 15 bp tax!!")
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.

Strong GDP Report Fails to Inspire Equities

2010-01-29T06:46:00.000-08:00

Equities were only marginally higher Friday morning on a better-than-expected 5.7% fourth quarter GDP growth rate. To add insult to injury, stocks failed to snap back sharply following yesterday's reconfirmation of Ben Bernanke to another term as Fed Chairman. Mr. Bernanke's reappointment guarantees more of the same bank-loving easy monetary policy which should have given financials a boost. Even great earnings reports from tech bellwethers like Microsoft and Amazon have done little to reverse the dour mood that has stricken stocks in the past week.

So what exactly is going on? Despite preposterous headlines such as "Strong Fourth Quarter Growth May Give Reason to Bid Up Beaten Down Stocks," only the inmates at the asylum would label stocks that have ripped 70% and then dropped 5% "beaten down." The truth is that a market that has rallied as relentlessly and vertically over the past nine months was bound to eventually grab a cigarette, take a break and say to itself "Whoa! Just hold on for one minute! Why the hell have we rallied so hard and so fast in such a dismal economy where most of the growth comes from inventory restocking?" Funny I've been asking myself the same question.

What the Future Holds After Fed MBS Purchases End

2010-01-28T06:58:00.000-08:00

Other than how to deal with the AIG backlash, the largest conundrum facing the Fed is how and when to pull back on its massively expansive monetary stimulus. Certainly Bernanke maintains that he will know what to do and when to do it. You know, just like he saw the housing bubble from a mile away and prevented the whole thing from happening. Right. Moving along, the Fed made it relatively clear in its announcement on interest rate policy yesterday, that it would be ending its massive Agency and MBS purchases as originally scheduled. So that's been settled. Hope everybody's ready.

Most folks are anticipating an increase in mortgage interest rates when the Fed's purchase program is over. With the Fed purchasing roughly 80% of all GSE issuance from last year, it seems the most logical conclusion. However, the WSJ did manage to find that the ranks of "mortgage bulls" are growing. These folks argue that investors who are "reaching for yield" in this great new bull market of ours will step in to purchase MBS because it is a lower risk investment than other corporates that are not explicitly backed by the US government. We saw how well that "reaching for yield" argument worked in early 2007 too, when bubble investors were trying to convince themselves to continue to purchase all sorts of crap at ridiculous prices.

So who are these fools that are about to dive into the market when the largest and currently only buyer is about to step out? Sadly, it might be your pension fund. A very interesting, yet widely ignored, article in the WSJ yesterday mentioned that pension funds were considering leveraged fixed income investments as a way to make up for all the money they have lost in the credit crisis. The pension managers were really unhappy about the fact that they had piled into stocks in the late 90's, only to get smoked. Then they followed that shrewd move by piling into private equity and hedge funds in the '00's, then got smoked. So now they are going to make up for all of it by using that low-risk strategy of purchasing high- rated fixed income products and levering up to juice returns. Because leveraged fixed income investing never blows up in your face, particularly when you dive in when rates are at historical lows and the Fed is considering pulling back on its easy monetary policy. I mean look at how well Orange County did with this strategy in 1994, and Long Term Capital in 1998. It's bound to be a big winner.

Naturally, this idea is the brainchild of pension consultants who are just looking for more and better ways to blow-out pensions so they continue to lose money so they need to hire more consultants. Because frankly, I can't think of a single reason why anyone would advise this strategy right now. Furthermore, if you wanted to give a pension fund some good advice on how to meet its 8% a year earnings target, you could've told them to pile into fixed income, without any leverage, in 2008-2009 when high quality corporates were yielding double digits. But most consultants were probably too busy cowering in the corner while their customers were yelling at them because they couldn't get their money out of that hedge fund the consultant had recommended. Not to mention the private equity fund. Or the money market fund. Oh yeah, and why the hell were their stocks all trading back at 1997 levels?

The AIG Soap Opera Continues

2010-01-27T06:43:00.000-08:00

Tune in today for some fairly dramatic daytime television programming: the House Oversight and Government Reform Committee's hearing on AIG. The interrogations are unlikely to reveal any new information that points to a conspiracy among bankers and the Fed to siphon money out of taxpayer pockets into fat cat bankers' wallets. The truth is likely closer to the WSJ's description of emails between Fed officials in late 2008: "the emails paint a picture of confusion, uncertainty and fatigue among a small army of Fed staffers, lawyers and bankers on the rescue." So the bad news is, rather than finding a real villain in the AIG mess, the House is likely to be met with revelations of incompetence instead. I'm sure those Fed staffers were doing their best to stop the financial meltdown that was a "certainty" if the banks weren't paid 100 cents on the dollar on their CDS contracts. The real question remains: why on earth did nobody at the Fed see this coming until that fateful week in September 2008? It was widely known that AIG had a huge short CDS position, much of it tied to subprime. This became abundantly clear when its own auditor found accounting irregularities at the firm in early 2008, and the stock began its nosedive.

In any event, if we're really looking for a good conspiracy, perhaps Larry Fink from BlackRock should testify before the House and explain why his firm put out a 44-page analysis in November 2008 to the Fed that stated that the banks had significant bargaining power with AIG and had little incentive to cancel the contracts unless they received par, or 100 cents, on the dollar. But then again, if you are depending on a fund manager with very strong ties to Wall Street to tell you how much bargaining power you have with Wall Street, then you're bound to be in the noodle in negotiations.

Tishman Speyer's Stuyvesant Pain Over As Ownership Handed Over to Creditors

2010-01-25T06:25:00.000-08:00

Tishman Speyer finally mailed in the keys to creditors of its massive Peter Cooper Village and Stuyvesant Town apartment buildings in Manhattan. In what is likely to be known for some time as both the biggest and dumbest residential deal (until the next bubble,) the drawn-out and painful saga of Stuyvesant Town will be sorely missed by those who have chronicled the tale. First, came the shock and awe when the deal was actually done in 2006 ("they paid how much at what cap rate???), followed by a period of intense speculation over how long it would take for the deal to burn through its interest reserve, followed by the lawsuits from furious tenants who did not want their below-market rents to rise, followed by the collapse of the economy, and the actual depletion of the interest rate reserve. Now, in what is largely a ceremonial move, Tishman will cede ownership to creditors. No doubt the folks at Tishman won't be shedding a tear as they put in only $112 million into the deal, leaving a trail of other equity investors holding the bag. The creditors will not be left unscathed either, as the properties are currently valued at $1.8 billion, with roughly $4.4 billion in debt piled on top. Who will take the reigns next? Stay tuned for Stuyvesant the Sequel.

V is for Volcker, and Also Vendetta

2010-01-22T07:03:00.000-08:00

In what is being coined "The Volcker Rule," President Obama introduced a sweeping agenda yesterday aimed at limiting the size and scope of activities of the nation's largest banks. With former Federal Reserve Chairman Paul Volcker at his side, the President railed against the banks and promised the American taxpayer that we would no longer be held hostage by banks that are too big to fail. Although the specifics of the plan have yet to be outlined, the basic premise is that that banks would no longer be able to own hedge funds and private equity funds nor engage in prop trading. As many analysts have already pointed out, it will be extremely difficult to differentiate between customer-driven trading and proprietary trading. Take Goldman Sachs for example. The investment bank claims that only 10% of its trading profits come from prop trading. But then take a look at its balance sheet, which carries $882 billion in assets. If Goldman was strictly buying on the bid and selling on the offer, then it would carry no inventory. Clearly that is not the case, as the bank carries a tremendous inventory of financial assets. How much of it is related to customer trading? Is it hedged? (Obviously not all of it, as it wouldn't be making so much money) What about all the carry it is making holding that inventory while lending it out at zero percent? That is considered taking interest rate risk, so does that count as prop trading or customer trading? Making a distinction will be extremely difficult and banks will figure out ways to get around it.

The really big question is the following: What was the true significance of Paul Volcker's presence behind Mr. Obama as the President delivered his speech? Sure Mr. Volcker has been wandering the press circuit, calling for the repeal of Glass Steagall. But that might not be the whole story. For those who aren't familiar with Mr. Volcker, he served as Fed Chairman from 1979 to 1987. He is widely credited with stamping out the runaway inflation of the late 70's and early 80's by hiking short term interest rates to a peak of 20%. Politically, this was an extremely unpopular move, and he reportedly received death threats while in office. So you've got to hand it to the guy, he sticks to his guns, and isn't afraid to piss people off and ruin presidencies if it means doing the right thing with monetary policy.

Meanwhile, Bernanke's confirmation hearing in the Senate has been postponed and the Senate Democrats are not sure they can get enough votes to reconfirm him. Who would be a likely nominee in the event that Mr. Bernanke is not reconfirmed? Paul Volcker. Having proven himself to be perhaps one of the greatest inflation hawks of all time who doesn't bow to political influence, Mr. Volcker's possible nomination could tank the bond market. And if the bond market tanks, the stock market will follow, particularly financials. All of this is pure rampant speculation and probably unlikely, but worth considering. Next week could get interesting...

Goldman Sachs Posts Profit of $4.95 Billion, Still Not Good Enough

2010-01-21T06:20:00.000-08:00

In what is bound to anger a bunch of people for a variety of reasons, Goldman posted one heck of a profitable quarter. First of all, the investment bank's profit of $4.95 billion, or $8.20 per share makes the guys at Morgan Stanley look like a bunch of losers (of money, as well as sissies who wouldn't understand a steep yield curve if it hit them in the head.) Then, of course, there are all of those folks in government (the few that never worked for Goldman) who have to fire up better versions of their "evil bankers who steal from the poor and uninsured" speeches before the next election or face the fate of Martha Coakley. Let's not forget the hapless employees of Goldman Sachs, some of whom have been rumored in the press to be unhappy with having to accept compensation in any form that is not their well-deserved cold hard unrestricted cash. I don't even have to mention what Rolling Stone readers must be thinking...

I will give the guys at Goldman a big gold star because investors so far are not that impressed (the stock is only up 1% currently.) That bank knows how to make money. Government subsidies, zero interest rates, once-in-a-lifetime opportunities in fixed income trading, raging commodities bull markets, massive volatility in equities, WHATEVER. The bank is not afraid to take those opportunities, pile on the risk (which Mr. Blankfein will tell you they are masters at managing) and knocking the ball out of the park. Sure it was bailed out last year, but so was Morgan Stanley and it still lost money in 2009. That preposterous sounding vampire squid analogy appears more apt with every passing day.