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

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.

Earnings, Losses, and Excuses

First the good news:

• Both JP Morgan and Intel reported solid earnings. Profit at JP Morgan rose by 55% from a year earlier to $3.3 billion helped by a sharp 30% reduction in provisions for credit losses. Oh, and zero percent interest rates. It's always nice when you can borrow money at zero percent from your friends at the Fed and then charge consumers 20%. Really pads the bottom line.
• Meanwhile Intel's quarterly profit nearly quadrupled to $2.44 billion, while revenue rose 44% to $10.3 billion. The tech giant's good quarter bodes well for the rest of the tech sector.

In somewhat disappointing news:

• Investors in Morgan Stanley's $8.8 billion MSREF VI real-estate fund were recently informed that they have likely lost two-thirds of their money. The WSJ helpfully points out that this would probably make it the largest dollar loss in the history of private 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.

Financial Headlines 4/1/2010

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

The Lehman Report

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.

JP Morgan, Intel Earnings Boost the Market

Who knew that force feeding banks free money, while allowing them to hike rates and fees and easing mark to market rules would provide such an earnings bonanza? JP Morgan didn't miss a trick this quarter posting a profit of $3.59 billion or 82 cents a share, handily beating analysts estimates of 52 cents a share. Revenues were up 81% to $26.62 billion. A sure sign that the bank's good fortune isn't necessarily being passed on to the rest of the economy is that loan balances continued to shrink despite a stabilization in assets and deposits. Credit-loss provisions which were $9.8 billion, up $3.1 billion from a year earlier and $100 million from the previous quarter painted a more sober view of the bank's business. Net charge-offs surged to 6.29% from 3.39%.

Meanwhile, in Techland, Intel, the chip giant, served up better than expected earnings as well, posting net income of $1.86 billion on $9.39 billion in revenue. Although these numbers were largely better than expected, revenues were still down 8% year over year. Intel also raised its revenue guidance for the fourth quarter to around $10.1 billion.

Now that everything is back to normal, and Wall Street is talking about doling out record bonuses again as if nothing ever happened and they didn't cause a financial meltdown that wrecked our economy and required government intervention, can we please ratchet back some of the crazy monetary policy the Fed is doling out? Please? Like maybe before the dollar goes to zero and gold goes to $5,000 an ounce and oil to $250 a barrel?

Financial Headlines 7/16/2009

• JP Morgan's profits rose 36% from a year earlier to $2.7 billion. The bank posted $26 billion in revenues, up 39% from a year earlier. The strong revenues were offset by an $8 billion provision for loan losses. Loan losses continue to rise but the bank believes that the $30 billion it has set aside to cover uncollectible loans should be sufficient.
• CIT was denied government assistance and is scrambling to line up at least $2 billion in rescue funds from existing debtholders. Debtholders have 24 hours to decide if they will come up with new cash. A bankruptcy of CIT could potentially wreak havoc on many small retailers and clothing manufacturers and suppliers that rely on the finance concern to provide cash advances to operate their businesses. Apparently California may be particularly hard hit because of the state's large apparel-import business. Also, the FT reported yesterday that a CIT bankruptcy could trigger widespread losses for investors in the $600 billion market for synthetic CDOs. The company is the second most widely referenced company in CDOs after Volkwagen, with almost two-thirds of those rated by S&P in Europe including it in their portfolios of credit default swaps. Synthetic CDOs are debt products that pool CDS against a range of companies. Shame on you for not knowing that. A credit event could trigger further downgrades of synthetic CDO debt, which would lead to more writedowns. The clock is ticking. Now we wait.
• Unemployment claims declined by 47,000 to 522,000 while continuing claims declined by 642,000 to 6.273 million. Calculated Risk notes that the seasonally adjusted weekly claims are being impacted by the layoffs in the automobile industry and other manufacturing sectors. Usually companies cut back production in the summer and the numbers are adjusted for that pattern, but this year the companies cut back much earlier. The distortion is expected to last another week or two.
• The Philly Fed index fell to negative 7.5% from a nine-month high of negative 2.2% in June. Manufacturing activity has declined for 19 out of the past 20 months. This was a weak report. Not much else to say about that.

Option ARM Defaults Now Worse Than Subprime

Buried on page two of the Money and Investing section of the WSJ is a very interesting article that highlights one of the few reasons why I believe a true recovery in the US economy is far off. Option ARM (or "pick-a-pay") default rates are now surpassing those of subprime. As a quick review, option ARMs were mortgages issued to borrowers with solid credit ratings that allowed them to choose from a variety of payment options. The minimum payment option was a partial interest-rate payment, where the unpaid interest portion was merely added to the loan's balance. A few years into the life of the loan, the loan would recast and require that the borrower begin to pay principal causing the monthly payment to balloon. The loans were most popular in high-priced real estate areas such as California and Florida, where they were used to aid in the purchase of houses that consumers couldn't afford with a traditional fully amortizing mortgage. As of April, 36.9% of option ARMs were at least 60 days past due, while 19% were in foreclosure, according to First American CoreLogic. This compares to 33.9% of subprime loan delinquencies and 14.5% of foreclosures. Many of my posts last year focused on the looming option ARM debacle, as it seemed very clear to me that these loans were being used as a mechanism for homeowners to "get in" on the great housing market ponzi scheme with the intention of just refinancing or selling before their payments recast and they were required to actually pay down the principal on the mortgage. The largest option arm lenders, Wachovia and Washington Mutual were predictably torpedoed by option ARMs but their toxic portfolios live on inside of their acquirers, Wells Fargo and JP Morgan. Certainly both banks took large writedowns on the option arm portfolios when they required the now-defunct lenders at distressed prices, but only time will tell how these mortgages end up performing. According to the WSJ article, Wells Fargo holds $115 billion, which it had marked at $93.2 billion, giving the bank room to absorb future losses. According to a securities filing in May, borrowers making the minimum payments accounted for 51% of its outstanding Pick-A-Pay balances as of March 31. JP Morgan holds $40.2 billion in option ARMS that it acquired from Wa Mu and another $46.5 billion sitting in complex off-balance sheet entities. Furthermore, our friends at the FDIC are picking up the tab on potential future losses on a $5 billion portfolio from BankUnited, the Florida-based bank that the FDIC seized and sold to private investors with a loss guarantee.

What is disconcerting about the option ARM debacle is that I don't believe we are near the peak in loan defaults. Most subprime lenders went bust in early 2007, and only now are we working our way through the worst period of subprime lending, which data shows was the mid-to late 2006 period of subprime lending. I wrote a post recently about the extraordinarily high default rates coming out of this period of lending from now-defunct subprime lenders. But option ARM and alt-A lending continued through 2007 and 2008, until it became clear that the credit crisis was not just contained to subprime. So, many of these loans have yet to recast and cause problems for borrowers. We have that to look forward to, which is nice.

Street to Log Best Quarter Since Crisis

According to the WSJ, securities firms are set to log their most lucrative financial performance since the credit crisis erupted. The article mentions that the usual suspects such as JP Morgan, Goldman Sachs, Morgan Stanley and Bank of America are banking huge profits. The best part is, the article says that "instead of relying on risk and leverage to drive profits," they are deriving profits from trading and underwriting. Apparently, whoever wrote the article doesn't seem to know that the definition of trading is "taking risk." Sure, you can call it market making, but you're still risking capital to make money from buying, selling, and hedging financial instruments, particularly if we're talking about derivatives trading. Furthermore, the article goes on to say that the record underwriting fees that the banks collected in the quarter were mostly from underwriting shares for banks (i.e. themselves) that were forced to raise capital to replenish their beaten down coffers. The article doesn't even mention all of the cheap financing that the government has thrown at them to keep their financing costs down, a huge oversight, in my opinion. If you could borrow money at zero percent from the government, you'd be having a banner quarter too. Too bad your bank just raised your credit card fees, jacked up your rates, cut off your credit and won't let you refi your house. So thoughtful of those banks to pass all those savings along to the consumer right?

If banks think that continuing to underwrite their own equity and debt offerings ad infinitum is a sustainable business model, then they are sadly mistaken. Eventually, investors are going to figure out that whole dilution business and not participate in the 50th capital raising plan that Bank of America or Citi, for example, try to shove down investor's throat. The article cautioned about one time accounting issues that are likely to obscure the results, but as usual, I'll be waiting for the actual earnings announcement and the 10-Q release before I make any judgements about the financial health of our financial institutions.

JP Morgan Earnings Vs GGP Bankruptcy

JP Morgan posted that profit it has been promising on the heels of Vikram Pandit’s leaked “we’re actually making a profit” memo in early March. JP reported $2.14 billion in profit, or 40 cents a share, beating analysts consensus of 32 cents a share. The bulk of the profits came from fixed income trading which added $4.9 billion in profits to the investment bank’s total take of $8.3 billion. In the “troubling” department, credit loss provisions nearly doubled to $8.6 billion, rising 18% from the fourth quarter. Credit card default rates surged to 7.72% from 5.56% in the fourth quarter and 4.37% in the prior year’s first quarter, while charge-offs rose to 4.9%. Can JP, in addition to all the banks, continue to out-earn their charge-offs and credit loss provisions with fixed income trading profits? The market seems to think so for the moment, having bid up JP’s shares to nearly double their price a mere month ago. I have my doubts.

Meanwhile, in Retail REIT World, General Growth Properties finally filed for bankruptcy protection. I suppose that debt investors have finally grown weary of not receiving interest payments and pushed the company to file Chapter 11. The company’s stock had been trading around $1, so this has not been too much of a surprise. What may come as a surprise to investors is the actual value of the REIT’s assets, which were listed in the filing at $29.3 billion versus liabilities of $27 billion. Anybody want to buy a mall? I hear they might be selling at a discount.

Unemployment Hits 8.1%

The jobs report was as dreadful as expected by those who can still stand to look at economic headlines.  The economy lost 651,000 jobs and the unemployment rate leapt to 8.1%.  Revisions for the prior two months showed losses of an additional 161,000 positions bringing the total number of jobs lost since the recessions began in December 2007 to 4.4 million.  The jobs report is sobering and yet really makes you want to have a drink all at the same time.

Following the lead of other financial institutions looking to retrench, Wells Fargo slashed its dividend in order to save $5 billion annually.  Clearly there is no longer a stigma related to reducing the dividend as investors have begun to prefer the idea of their banking institution actually remaining a going concern over a quarterly dividend check.  JP Morgan and GE made the same announcement recently and I view these actions as prudent, but necessary, if an institution is going to survive the brutal downturn.

Finally, in the "investment bank that needs to finally go away" category, Merrill Lynch is once again in the headlines.  The bank informed regulators that it had discovered discrepancies in certain trading positions.  Conveniently, the losses, which occurred last year, weren't discovered until after Bank of America purchased the investment bank and allowed it to pay out accelerated bonuses.  The details are sketchy so far, but apparently a London currency trader who had recorded a trading profit of $120 million for the fourth quarter, may instead have lost a "large amount."  The Bloomberg story doesn't specify whether we are talking Nick Leeson-large or Jerome Kerviel-large.  At least we have some insight into how Merrill managed to punt $15 billion in the fourth quarter.     

JPMorgan's "Good" Earnings Overshadowed By Bank of America's Need For Bailout

On the surface, JPMorgan's earnings didn't look too bad, relatively speaking (like compared with the run-of-the-mill Citigroup quarter).  The second-largest US bank reported net income of $702 million, or 7 cents a share, compared with $2.97 billion or 86 cents a share in the year-ago quarter.  However, JP's meager profit was boosted by a one-time gain of $1.3 billion from closing a joint venture and "risk-management results" (whatever that means.)  Without the one-time gain the company would've lost 28 cents a share.  This is an earnings "miss" in my book, but investors seem to disagree as the stock is higher on the news.

The scary news out of Bank of America this morning, frankly, overshadows JPMorgan's creative accounting triumph of seven cents of earnings.  According to the Wall Street Journal, Bank of America is close to finalizing a deal for additional aid from the government to help it close the acquisition of Merrill Lynch.  Apparently, Merrill was set to report larger-than-expected losses in the fourth quarter and Bank of America was not likely to complete its purchase.  Bank of America alerted the Treasury Department of the situation in mid-December.  Naturally the Treasury freaked out, fearing another Lehman-like debacle in the market and offered Bank of America help finalizing the deal.  The arrangement more than likely will include new capital in addition to guarantees on further losses.  I suspect this is not the last bailout package we will see for a major US bank.  A friend of the blog asked a very scary but insightful question in recent months.  "What if all bank equity is worth zero?"  I suppose what we'd have left was a bunch of bank stocks trading as if they were call options on some hope for future cash flows that leave something for shareholders, i.e. a bunch of stocks trading in the single digits.  Let review, Citigroup $4, BAC $8.  I'll stop now before it gets any scarier.     

JP Morgan To Purchase WaMu Deposits

The WSJ is reporting that JP Morgan will purchase the bulk of Washington Mutual's operations. This is being billed as a "government brokered deal," although it is not expected to affect the FDIC.  Perhaps the Fed is granting yet another one of its generous Bear Stearns-like loans?  The Fed seems to like arranging these types of deals for JP Morgan.  Details of who exactly will be swallowing the losses from WaMu's $60 billion option arm portfolio will be revealed on the conference call at 9:15 pm Eastern.    

Update: JP Morgan is acquiring Washington Mutuals assets and deposits from the FDIC for $1.9 billion.  Reuters reports that the FDIC felt it had to seize the bank before Friday to quell customer anxiety fueled by media leaks.  WaMu had suffered an exodus of $16.7 billion in deposits since September 15th, leaving it with insufficient liquidity.  Shareholders and senior bondholders will be wiped out in the deal.  

Why do we need a $700 billion bailout when JP Morgan can just buy every ailing bank?  Seriously, this is a fine example of why we shouldn't allow the government to pay "hold-to-maturity" prices for assets.  In this situation, a bank failed, and a healthier bank was willing to purchase the assets and deposits.  Shareholders and bondholders were wiped out, depositors were saved, and JP Morgan assumed the remaining risk in WaMu's portfolio because it purchased the assets at what it determined was a good price.  This proves that investors are willing to make opportunistic acquisitions at the right price.  Paulson and Bernanke's idea of buying assets from banks at prices above fair value would be a money-losing proposition.

Marginal JP Morgan Earnings Vs. Lousy Economic Number, Who Will Win Battle?

Yesterday's marginal earnings results from Wells Fargo (down 23% but exceeded estimates!) beat out a jarringly high CPI report and record low homebuilder confidence to propel the Dow up 276 points.  Not to be outdone, JP Morgan followed Wells Fargo with its own middling earnings report of a profit decline of 53% from the prior year that the market absolutely loves enough to ignore the abysmal housing starts number.  Housing starts rose due to a technical change in the way the index is calculated, but otherwise remained at 17 year lows.  The market is higher on what is perceived to be non-catastrophic results from two of the largest money center banks, which has caused a huge relief rally in the entire financial sector.  One has to wonder if the market is getting ahead of itself for a few important reasons.  First of all, we have yet to hear from Bank of America, Merrill Lynch, Wachovia, or Citigroup.  Merrill's decision to sell its Bloomberg stake for $4.5 billion, less than what it had initially anticipated is a sign that they are desperate for cash and are willing to part with some valuable assets (as opposed to perhaps the garbage that may still lurk on the balance sheet.)  

Most importantly, when banks report earnings, they do not supply a balance sheet.  In my opinion, it is nearly impossible to gauge a bank's financial condition without looking at the balance sheet.  Specifically for commercial banks, a line item called OCI (other comprehensive income) includes profits or losses taken on the bank's available for sale portfolio that the bank may deem as "temporary."  For some reason, investors seem to overlook this item, despite the fact that in times when spreads in the credit markets are at their widest levels in years, significant losses may be hiding in OCI, perhaps enough to wipe out reported earnings.  In any event the market seems to like the news for the time being.  We'll see how long this bear market rally lasts.   

Moody's Keeps Bear Stearns on Review for Possible Upgrade, Officially Loses All Credibility

According to MarketWatch "Moody's said it will continue to review Bear Stearns debt for a possible upgrade." Separately, and yet completely related, Bear Stearns shareholders begrudgingly approved the firm's sale to JP Morgan Chase yesterday. Despite the close of the sale, Moody's thinks it might possibly be a good idea to upgrade the debt, but it's not entirely certain so for now, it's just going to put it on review. Whatever shred of credibility may have remained after the Financial Times reported that Moody's accidentally awarded AAA ratings on billions of dollars of derivatives because of a computer bug, has officially evaporated. In the statement released today Moody's claimed that it would like to wait until it receives more clarity on the ultimate legal structure of the Bear Stearns and JP Morgan deal. Seriously, who cares? The merger is a done deal. How can any further analysis of legal issues possibly be of use to any investors? Anyone who is trading Bear's debt at this point is probably far more in tune with the legal issues than Moody's. Wanna work on some useful analysis? Here's my top four list of things Moody's can investigate that would actually help investors:
1.) Ask for a detailed list of Level 3 assets and their prices from every highly leveraged institution. Then tell me what they are actually worth. Make sure to downgrade those that refuse to offer the information, particularly any institution with an implied government guarantee.
2.) Go through GE's balance sheet and force them to describe the $25 billion in assets that it has labeled as "other" on its balance sheet. Then tell me what they are actually worth.
3.) Take another peek at the monoline insurers. Do everyone a favor and downgrade them from AAA BEFORE they go out of business.
4.) Take a look at all the assets being used as collateral against the Fed loans being offered to primary dealers. Tell me what they're really worth and if the Fed is using an appropriate haircut.
Anyone else want to add to the list?

CIT Announces Common and Convertible Preferred Stock Issuances Totaling $1 Billion

Joining the chorus of financial institutions desperate to beef up capital in today's uncertain markets is CIT, who announced concurrent offerings of common stock and convertible preferred today after the close of trading. The funniest thing about this offering (I'm sure you never believed there could be humor in a stock offering) is that CIT is using some of the net proceeds from the sale of the common to pay dividends to the outstanding preferred stock holders as well as interest to the outstanding junior subordinated notes. So, if you're actually buying into this stock offering, the company is taking your money and handing it out to other investors before it begins to deal with its major liquidity issues.

Nevertheless, issuing gobs of common, convertible, or preferred stock is the current thing to do as evidenced by:
1.) Citigroup, who plans to sell $6 billion of hybrid bonds.
2.) NCC, who is raising $7 billion, as noted below this morning.
3.) JPMorgan, who issued $6 billion of hybrid bonds.
4.) Wachovia, who raised $8 billion in common and preferred stock.
5.) Washington Mutual, who raised $7 billion.
6.) Lehman who issued $4 billion in convertible preferred stock, and UBS who is planning a major rights issue.
7.) Did I forget someone? I'm sure I did. Oh, that's right. My mother. I called my mother and told her that investors were dying to throw billions of dollars at any financial institution, even if it was carrying tons of assets it doesn't know how to value. So she's opening a bank, collateralized by some old shoes and is issuing a $2 billion convertible preferred. Give her a call if you're interested.

Economic Headlines 4/16/2008

Housing starts plummeted a whopping 11.9% in March from February. This was only a surprise to the analysts who had forecast a 5.2% drop. The homebuilders said "Are you kidding? Have you seen my inventories? You're lucky it didn't drop 100%" Meanwhile, CPI rose .3% in March, but only .2% excluding food and energy. This puts the annualized rate at 4.0%, and 2.4% excluding food and energy. Remember when Bernake first took office and said he was going to target a band for inflation? I'm pretty sure we've blown through the high band at this point and the guy is easing. This should clearly explain why a.) the dollar continues to get destroyed and b.) the price of oil, gold, copper, silver, and everything in my cupboard is skyrocketing.

In earnings news, JPM matched analysts estimates by posting a 50% drop in net income. Fabulous. Wells Fargo beat analysts estimates by posting an 11% drop in net income, a modest drop considering that Wells is a large mortgage lender. Hats off to Wells Fargo for not getting sucked into the no-doc lending frenzy and avoiding the CDO debacle. There's a good reason why Warren Buffet loves this stock. Because when everybody is blowing out, the few who are still standing get to reap the benefits of the recovery.

Banks in a Merrill Downgrading Frenzy...

UBS cuts estimates for Merrill. JP Morgan cuts estimates for Merrill. As I've mentioned before in my discussions of analysts estimates of investment bank earnings, I believe they are poppycock. It is impossible to predict how much money any investment bank will make in any quarter because it is dependent on their trading positions. Furthermore, many of these trading positions currently have no markets, so dealers are forced to "estimate" values for illiquid securities. So really, although I believe that Merrill is going to have a lousy quarter, and possibly year, I think these downgrades are more indicative of how the downgraders are doing rather than the downgradee. Because no bank will give out their trading positions to competitors, my guess is that the analysts from UBS and JP went over to their own trading desks and said "how much are you guys losing this quarter?" Then they made minor adjustments and Presto! We have some earnings estimates!

JP Morgan pays $240 million for Bear Stearns...

making Bank of America's purchase of Countrywide for $4 billion look mighty expensive.  This news is not terribly surprising given that Bear was on the brink of failing on Friday until JP Morgan bailed it out with the Fed's guarantee.  Bear's CEO, reassured the markets at the beginning of the week by declaring that the firm had ample liquidity and $17 billion in cash.  This announcement sent a very strong message to the markets:  You'd better get your money out now while we still have $17 billion.  A wave of customer defections followed on Thursday and Bear literally ran out of money in about a day.  Let this be a lesson to all of you leveraged vehicles out there!  If you need to borrow around $150 billion a day to finance your $300 billion inventory of garbage (which was Bear's short term borrowings around year end), $17 billion in cash is chump change!  At any rate, JP got a good deal on a building in New York City (Bear's headquarters which they owned), although I'm thinking they're going to need to look for some new tenants...

Needless to say, tomorrow will be a very interesting day in the markets.  Looks like the markets didn't like this news one bit, as equity futures are down sharply.  The Fed may be forced into a 100 basis point cut in the fed funds target tomorrow, a day before the meeting if the market starts plummeting.  This time, we won't be blaming it on Jerome Kerviel...