Sunday, November 30, 2008

More cracks in Dubai property market

...But in recent weeks the cracks in Dubai's economy have become undeniable. Property prices have slumped, demand has dried up and, for the first time, the emirate is being forced to consider calling a halt to its expansion. Some analysts are claiming that Dubai could implode, weighed down under a pile of debt and, given that it has relatively small oil reserves, no obvious way of paying for it. One said: "This has been the most spectacular spending mission on Earth. But it's a mirage. If complex debt structures have brought the financial world to its knees, Dubai is the world's biggest toxic timebomb."

The possibility is absorbing Western firms. The Middle East, floating on a magic carpet of vast oil and gas reserves, was supposed to be the oasis in the global financial chaos. The hopes of the financial system, most obviously the banks, have been pinned on securing cash injections from the Middle East, while hundreds of thousands of City workers are looking to the region for new jobs. If Dubai can't pay its debts, much of which is owed to international banks, the emirate could turn from potential saviour to yet another big problem.

Last week, at Dubai International Financial Centre (DIFC) Week, a series of international business conferences, Dubai's authorities scrambled to address the mounting speculation by unveiling for the first time details about its financial position.

Mohammed Ali Alabbar, a member of Dubai's executive council and chairman of Emaar Properties, which owns the Burj Dubai among other landmarks, said the emirate's borrowings amounted to $80bn against assets of about $350bn. He insisted: "The government can and will meet all its obligations."

While admitting for the first time that the Gulf was not immune to the global downturn, Dubai and its oil-rich neighbour Abu Dhabi unveiled a series of initiatives designed to tackle the dangers head-on.

Mr Alabbar announced that a special council had been established to look at each sector of the economy, in particular the crucial property market. The Advisory Council has been tasked with reporting in detail the state of the economy to the Ruler Sheikh Mohammed Bin Rashid Al Maktoum. The council members, who include Dubai's top representatives in "government finance, real estate, banking and equity markets", will also have to make proposals and recommonations managing "the current and future supply of new projects onto the market".

Mr. Softee to buy Yahoo search?

Nov. 30 (Bloomberg) -- Microsoft Corp. is backing a new management team to take control of Yahoo Inc.’s search business following its failed takeover attempt, the Sunday Times of London reported.

Microsoft will put up $5 billion to back Jonathan Miller, the former chief executive officer of AOL and Ross Levinsohn, a former president of Fox Interactive Media, the newspaper reported, without saying where it got the information.

The duo would seek to raise an additional $5 billion from institutional investors to buy a stake of over 30 percent in Yahoo, the Sunday Times said. The terms would give Microsoft a 10-year operating agreement to manage Yahoo’s search business, plus a two-year option to buy it for $20 billion.

Free vegtables and 40,000 show up

PLATTEVILLE, Colo. -- A farm couple got a huge surprise when they opened their fields to anyone who wanted to pick up free vegetables left over after the harvest -- 40,000 people showed up.

Joe and Chris Miller's fields were picked so clean Saturday that a second day of gleaning -- the ancient practice of picking up leftover food in farm fields -- was canceled Sunday. " 'Overwhelmed' is putting it mildly," Chris Miller said. "People obviously need food."

She said she expected 5,000 to 10,000 people to show up Saturday to collect free potatoes, carrots and leeks. Instead, an estimated 11,000 vehicles snaked around cornfields and backed up more than two miles. About 30 acres of the 600-acre farm 37 miles north of Denver became a parking lot.

Miller said they opened the farm to the free public harvest after hearing reports of food being stolen from churches. It was meant as a thank-you for customers.

Wednesday, November 26, 2008

China cuts rate to 5.58%

BEIJING (AP) -- China announced its biggest interest rate cut in 11 years on Wednesday to spur private borrowing and support a multibillion-dollar stimulus package to boost slowing economic growth.

The 1.08 percentage-point rate cut -- the fourth cut in three months -- reflects the government's urgency about raising private consumption and investment to supplement state spending on the stimulus package.

Tuesday, November 25, 2008

$7.7 Trillion and counting....

WSJ's advice to Obama: Assume every bank will fail

One way for the new administration to take a more proactive approach: Assume every bank that matters will fail, plan accordingly and think through the unintended consequences of whatever approaches are put into place.


CAPITALISM: You have two cows. You sell one and buy a bull. Your herd multiplies, and the economy grows. You sell them and retire on the income.

SOCIALISM: You have 2 cows. You give one to your neighbor.

COMMUNISM: You have 2 cows. The State takes both and gives you some milk.

FASCISM: You have 2 cows. The State takes both and sells you some milk.

NAZISM: You have 2 cows. The State takes both and shoots you.

BUREAUCRATISM: You have 2 cows. The State takes both, shoots one, milks the other, and then throws the milk away...

SURREALISM: You have two giraffes. The government requires you to take harmonica lessons.

AMERICAN CORPORATION: You have two cows. You sell one, and force the other to produce the milk of four cows. Later, you hire a consultant to analyze why the cow has dropped dead.

FRENCH CORPORATION: You have two cows. You go on strike, organize a riot,and block the roads, because you want three cows.

JAPANESE CORPORATION: You have two cows. You redesign them so they are one-tenth the size of an ordinary cow and produce twenty times the milk. You then create a clever cow cartoon image called 'Cowkimon' and market it worldwide.

GERMAN CORPORATION: You have two cows. You re-engineer them so they live for 100 years, eat once a month, and milk themselves.

ITALIAN CORPORATION: You have two cows, but you don't know where they are.You decide to have lunch.

RUSSIAN CORPORATION: You have two cows. You count them and learn you havefive cows. You count them again and learn you have 42 cows. You count them again and learn you have 2 cows. You stop counting cows and open another bottle of vodka.

SWISS CORPORATION: You have 5000 cows. None of them belong to you. You charge the owners for storing them.

CHINESE CORPORATION: You have two cows. You have 300 people milking them. You claim that you have full employment, and high bovine productivity. You arrest the newsman who reported the real situation.

INDIAN CORPORATION: You have two cows. You worship them.

BRITISH CORPORATION: You have two cows. Both are mad.

IRAQI CORPORATION: Everyone thinks you have lots of cows. You tell them that you have none. No-one believes you, so they bomb the sh#t out of you and invade your country. You still have no cows, but at least now you are part of a Democracy...

AUSTRALIAN CORPORATION: You have two cows. Business seems pretty good. You close the office and go for a few beers to celebrate.

INVESTMENT BANKING: You have two cows. You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman Island Company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more. You sell one cow to buy a new president of the United States, leaving you with nine cows. No balance sheet provided with the release. The public then buys your bull.

NEW ZEALAND CORPORATION: You have two cows. The one on the left looks very attractive.

Monday, November 24, 2008

Jets smack Titans 34-13!

Citigroup offloads it's dreck to the taxpayer

That in essence, is what this Government bail-out of Citi actually is.

$306 billion of assets are ring-fenced, with Citigroup taking the first $29 billion of losses. After that, the Government eats 90% of the losses in excess of that $29 billion.

This guarantee costs Citi a $7 billion preferred stock with 8% rate.

But the Government lends Citi another $20 billion, in a 8% perpetual preferred, convertible in stock or cash.

All Citi has to do is modify mortgages like they were previously supposed to do, and cut their dividend to a penny, and no one responsible for this mess loses a job.

The dividend cut will save Citi $3.3 billion, but Citi will pay the Government $2.16 billion in interest each year. ($27B x .08%=$2.16 billion)

So the Government lends Citigroup $27 billion, and Citigroup saves a billion from dividends that go to shareholders by cutting it to a penny. That money is now given as interest to the Government. The $29 billion of losses are already taken; the only question is when they are going to be recognized.

But now Citigroup's capital position increases by $16 billion because of the Government backstop of the toxic assets.

Now Citi has gotten rid of their most toxic junk, and the taxpayer has picked up the tab. The $120 billion of additional losses that would exist on this dreck is now put in the warehouse that never was, and now that mortgage modifications are on the Government's dime, maybe Citi will actually give a concession to a homeowner.

Assuming that Citigroup already knew what their most toxic assets were, then this is a step in the right direction. And just like AIG went back to the well twice, so has Citigroup. Didn't this "healthy institution" just get $25 billion from the TARP? Now they need another $27 billion, and guarantees on $300 billion of mortgages.

What this does show, however, is that we have a new monoline insurer, and he charges below market rates.

And his name is the US taxpayer!

Sunday, November 23, 2008

Fed to back Citigroup

Another bank with fictitious book value; and this time it is Citigroup. Last quarter, they had $42 billion of real estate assets that weren't collectively worth $20 billion, but they were conveniently booked in the Level 3 category.

Citigroup had at least another $40 billion of losses in their $186 billion of "available-for-sale" securities that they were "discovering" losses of $10 billion per quarter.

Citigroup's book value on September 31, 2008 supposedly was $98 billion. Now it's shareholder value is $21 billion. Wipe out $77 billion and you still need the Government to bail them out, because in the words of Meredith Whitney, "Citigroup is in such a mess, even Steven Hawking couldn't turn this company around."

Which is why the Government had to step in. Because who knows what else lies on their two trillion dollar balance sheet, after all their off-balance sheet assets get brought on.

And which is why Citigroup decided to "reach out" and make a big splash last week saying that they wanted to modify some homeowners mortgages before they were not yet current delinquent.

Because Citi, as of then, was not yet backstopped by the Federal Government.

But even the Government doesn't grasp the extent of Citigroup's problems. But then didn't AIG have to come back for a second dose? From the WSJ:

The talks Sunday centered on the creation of what is sometimes called a "bad bank" -- an outside entity designed to hold some of a financial firm's worst assets. That structure would help Citigroup cleanse itself of billions of dollars in potentially toxic assets, these people said.

Under the terms being discussed with top Treasury Department and Federal Reserve officials, Citigroup would agree to absorb losses on assets covered by the agreement up to a certain threshold, people familiar with the matter said. The U.S. government would then absorb any additional losses, these people said. One person said the new entity is expected to hold about $50 billion of assets.

But wasn't this was one of Paulson's "healthy institutions?" Does anybody now wonder why the Fed's tried to force Citigroup to buy Wachovia? If they would of swallowed them, the integration of the two banks would of allowed Citigroup to hide their losses with FDIC backing. Now despite $25 billion from the TARP, Citigroup is still broken. Now we have another $50 billion of bad assets. At least now they are starting to scratch the surface.

Remember when PNC was forced to buy National City? The "strong bank" buying the weaker one, with billions of aid from the Government? Does anybody think the market hasn't sniffed that out yet? How about PNC's stake in Blackrock? That asset was as solid as National City's commercial real estate loans it acquired and PNC's HELOC's!

And how about shareholders who bought into Citigroup's lies? A healthy institution that took money from investors at $30 a share when they kept their losses hidden.

Now their losses stay hidden with the Government, but this time it's the taxpayer that will take the hit.

The only difference is, they don't get a prospectus!

"Private Equity" on sale for 30 cents on the dollar!

Private equity commitments are being sold for 30 cents on the dollar, as nobody wants to put more money in with these leveraged liars who previously masqueraded as Masters of the Universe.

So who's buying these commitments?

Probably someone who will want to represent that the investment is worth 100 cents on the dollar! From FT:

Investors in buy-out funds are so concerned private equity returns will slump in the years ahead that they are selling their commitments for as little as 30 per cent of their original value.

Eighteen months ago, if such stakes were available at all, they generally traded at a premium.

The collapse in valuations reflects growing concerns that many private equity-owned companies will implode as the economic contraction intensifies. Some of the largest deals, struck at the height of the private equity boom that ended in the spring of 2007, now look to be disastrous for the equity holders.

Nonetheless, the sell-out from private equity funds is gathering speed as pension funds, endowments and family offices realise these funds are likely to fall far short of original target returns. They are already reeling from losses in the stock market and on hedge fund investments.

Monte Brem, chief executive of StepStone, which acts on behalf of such investors, says he thinks it may make more sense to buy funds at a sharp discount in the secondary market rather than paying full price for stakes in new funds. Mr Brem is now considering buying stakes in the secondary market for his clients.

The growth of activity in the discounted secondary market for private equity fund stakes is compounding problems for firms seeking to raise new funds. Even those firms whose portfolios have held up the best, such as Blackstone, are finding the going very slow.

Citigroup's strategy: More newspaper ads!

Citigroup may not sleep this weekend, as it ponders what to do amid a crisis that may test its survival. But it plans to reassure its customers — by taking out full-page advertisements.
Citi's Full-Page Ad
Get your own at Scribd or explore others: Business Citigroup

In a series of ads set to run in major metropolitan markets on Sunday, Citi plans to tell its customers that its business is fundamentally sound. It acknowledges that “our financial markets have been tested in unprecedented ways,” but argued that it has the diversity and experience to pull through. It throws out a few numbers, in particular 100 (the number of countries it’s in) and 200 (its years of experience and the number of its customers).

The ad concludes: “That’s why now, more than ever, you can feel confident that Citi never sleeps.”

Maheras, Rubin and Prince blow up Citigroup

Remember the fond days when Sandy Weil didn't take trading risks? Citigroup's CEO Chuck Prince, thought it would be simpler to just trade your way into profits, and Thomas Maheras was the head of risk management who was supposed to get this done. Instead he cost shareholders over $200 billion dollars.

Weill's strategy for building Citigroup had little to do with taking big trading risks, Maheras said. Instead, Weill drove up profit, and the stock price, by stripping the fat out of the companies he acquired and sticking to businesses that would generate safe, steady growth.

Now Prince is under pressure to improve Citigroup's revenue, profit and stock price. As of last Friday, Citigroup shares had climbed 8.5 percent since he took over in October 2003, compared with gains of 33 percent for J.P. Morgan Chase and 32 percent for Bank of America.

Lifting revenue, at least in capital markets, sometimes means taking more chances. That is where Maheras comes in. A former Salomon Brotherstrader, Maheras is no stranger to risk. "You have to stick your neck out in trading," he said. "And in management."

Prince promoted Maheras to head of capital markets in February 2004. Citigroup has spent more than $1 billion in the past three years to strengthen the bank's equity and fixed-income units, which are Maheras's bailiwick.

According to the NY Times, Chuck Prince didn't even know Citi had $43 billion of exotic mortgages on it's balance sheet until September of 2007. After all Maheras, the director of risk, had only written down these CDO's by $11 million dollars:

There, Citigroup’s chief executive, Charles O. Prince III, learned for the first time that the bank owned about $43 billion in mortgage-related assets. He asked Thomas G. Maheras, who oversaw trading at the bank, whether everything was O.K.

Mr. Maheras told his boss that no big losses were looming, according to people briefed on the meeting who would speak only on the condition that they not be named.

For months, Mr. Maheras’s reassurances to others at Citigroup had quieted internal concerns about the bank’s vulnerabilities. But this time, a risk-management team was dispatched to more rigorously examine Citigroup’s huge mortgage-related holdings. They were too late, however: within several weeks, Citigroup would announce billions of dollars in losses.

But is was also overpaid and overloved Bob Rubin who helped craft this strategy:

Citigroup insiders and analysts say that Mr. Prince and Mr. Rubin played pivotal roles in the bank’s current woes, by drafting and blessing a strategy that involved taking greater trading risks to expand its business and reap higher profits...

Chuck Prince going down to the corporate investment bank in late 2002 was the start of that process,” a former Citigroup executive said of the bank’s big C.D.O. push. “Chuck was totally new to the job. He didn’t know a C.D.O. from a grocery list, so he looked for someone for advice and support. That person was Rubin. And Rubin had always been an advocate of being more aggressive in the capital markets arena. He would say, ‘You have to take more risk if you want to earn more...

In fact, when examiners from the Securities and Exchange Commission began scrutinizing Citigroup’s subprime mortgage holdings after Bear Stearns’s problems surfaced, the bank told them that the probability of those mortgages defaulting was so tiny that they excluded them from their risk analysis, according to a person briefed on the discussion who would speak only without being named..

Just like AIG. And Citigroup's fate will be the same.

Economic reality hit the French

Times have become so difficult that the French have even quit going to cafe's. From the NY Times:

SAULIEU, France — Nathalie Guérin, 35, opened Le Festi’Val bar and cafe here two years ago full of high hopes, after working at this little Burgundy town’s main competition, the Café du Nord. But this summer, business started to droop, and in October, she said, “it’s been in free fall.”

“People fear the future, and now with the banking crisis, they are even more afraid,” she said, her eyes reddening. “They buy a bottle at the supermarket and they drink it at home.”

The plight of Ms. Guérin is being replicated all over France, as traditional cafes and bars suffer and even close, hit by changing attitudes, habits and now a poor economic climate. In 1960, France had 200,000 cafes, said Bernard Quartier, president of the National Federation of Cafes, Brasseries and Discotheques. Now it has fewer than 41,500, with an average of two closing every day.

The number of bankruptcies filed by cafe bars in the first six months of 2008 rose by 56 percent over the same period a year ago, according to a study by Euler Hermes SFAC, a large credit insurance company. No reliable figures are available for the latter part of this year, when an economic slowdown here has been accelerated by the general financial crisis, a collapse in consumer confidence and the quick tightening of credit.

But the impression is that business is bad and getting worse, with people and companies cutting back on discretionary spending and entertainment budgets. And that is only compounding longer-term problems stemming from changes in how people live and growing health concerns.

People used to drink to celebrate. Then you used to drink to commisserate. Now they drink to forget. And they do it at home.

Saturday, November 22, 2008

Weil family fortune crumbles

Sandy Weil rolled up Citigroup into a financial juggernaut on paper. He even invested more money into Citigroup when it was raising money at 30 in January.

Now the stock is under $4.

Sandy Weil said a part of the problem at Citigroup was a flawed succession model, where unqualified candidates became CEO.

Now it's his problem also. Weil's philanthropic pledges now will be about as good as Alberto Vilar's. But this time, the first cause of it was Chuck Prince who danced while the music had stopped. But he had help. Sandy also picked Bob Willumstad, as COO to work with Chuck Prince. He left to run AIG into the ground

His daughter, Jessica Bibliowicz has now run National Financial Products into the ground. This time, it was just a roll-up of insurance companies, and now NFP is at a dollar. Barron's had that story this weekend.

Sandy Weil's protege at Citigroup was Jamie Dimon, of JP Morgan, who was forced out by Sandy Weil in a power struggle. I wonder if Citi would of been better served with him?

It just wasn't the flawed succession model, but Citigroup's abuse of it's goodwill which allowed it to fool investors about the health of it's balance sheet, where the right hand didn't know what the left hand was up to. Even the Prince Alaweed of Saudi Arabia got conned.

I can understand that the Saudi's don't want to know where their left hand has been, but how about Citigroup's board?

What was Bob Rubin's $15 million salary for?

Citi was the company that never sleeps, because it's board of directors never woke up.

In corporate America, that's a symbiotic relationship!

Obama's Radio Address

Obama's Democratic Radio Address

Good morning.

The news this week has only reinforced the fact that we are facing an economic crisis of historic proportions. Financial markets faced more turmoil. New home purchases in October were the lowest in half a century. 540,000 more jobless claims were filed last week, the highest in eighteen years. And we now risk falling into a deflationary spiral that could increase our massive debt even further.

While I'm pleased that Congress passed a long-overdue extension of unemployment benefits this week, we must do more to put people back to work and get our economy moving again. We have now lost 1.2 million jobs this year, and if we don't act swiftly and boldly, most experts now believe that we could lose millions of jobs next year.

There are no quick or easy fixes to this crisis, which has been many years in the making, and it's likely to get worse before it gets better. But January 20th is our chance to begin anew – with a new direction, new ideas, and new reforms that will create jobs and fuel long-term economic growth.

I have already directed my economic team to come up with an Economic Recovery Plan that will mean 2.5 million more jobs by January of 2011 – a plan big enough to meet the challenges we face that I intend to sign soon after taking office. We'll be working out the details in the weeks ahead, but it will be a two-year, nationwide effort to jumpstart job creation in America and lay the foundation for a strong and growing economy. We'll put people back to work rebuilding our crumbling roads and bridges, modernizing schools that are failing our children, and building wind farms and solar panels; fuel-efficient cars and the alternative energy technologies that can free us from our dependence on foreign oil and keep our economy competitive in the years ahead.

These aren't just steps to pull ourselves out of this immediate crisis; these are the long-term investments in our economic future that have been ignored for far too long. And they represent an early down payment on the type of reform my Administration will bring to Washington – a government that spends wisely, focuses on what works, and puts the public interest ahead of the same special interests that have come to dominate our politics.

I know that passing this plan won't be easy. I will need and seek support from Republicans and Democrats, and I'll be welcome to ideas and suggestions from both sides of the aisle.

But what is not negotiable is the need for immediate action. Right now, there are millions of mothers and fathers who are lying awake at night wondering if next week's paycheck will cover next month's bills. There are Americans showing up to work in the morning only to have cleared out their desks by the afternoon. Retirees are watching their life savings disappear and students are seeing their college dreams deferred. These Americans need help, and they need it now.

The survival of the American Dream for over two centuries is not only a testament to its enduring power, but to the great effort, sacrifice, and courage of the American people. It has thrived because in our darkest hours, we have risen above the smallness of our divisions to forge a path towards a new and brighter day. We have acted boldly, bravely, and above all, together. That is the chance our new beginning now offers us, and that is the challenge we must rise to in the days to come. It is time to act. As the next President of the United States, I will.

Thank you.

Friday, November 21, 2008

Clueless bankers

Chairman Bernanke three days ago:
There are some signs that credit markets, while still quite strained, are improving.

Improving? What planet is he on?

Vice Chairman Kohn two days ago:
The current situation is so severe that it calls for careful review of how such a crisis evolved and how we can prevent a similar situation from happening again.

How can we prevent another? How about first fixing this?

The whole world now belatedly recognizes that sub-prime loans blew up, because homeowners could not refinance homes prices quit appreciating. But that spread to Alt-A, HELOC and prime mortgages. Why doesn't the whole world now recognize that commercial real estate is going to crash?

Let's start first with the "sub-prime" commercial real estate. This real estate that I label "sub-prime" is those properties that expected higher rents and revenues from the expertise of the developers, or just corporate real estate "liar loans" where they lied about future projections. And corporate real estate defaults is in the same place that sub-prime was. These problems, as any good banker will tell you, are "contained."

Mortgages on offices, shopping malls and hotels that were based on projections of soaring income during the real estate boom are roiling the bond market.

Mortgages on offices, shopping malls and hotels that were based on projections of soaring income during the real estate boom are roiling the bond market.

A $209 million loan made by JPMorgan Chase & Co. to finance the Westin La Paloma Resort & Spa in Tucson, Arizona, and the Westin Hilton Head Island Resort & Spa in South Carolina, is near default after cancellations sapped revenue, according to Standard & Poor’s. In southern California, the owner of the Promenade Shops at Dos Lagos missed two payments, according to analysts at Deutsche Bank AG.

Both loans were given to borrowers based on estimates that rents and hotel revenue would rise, and then were packaged with similar debt into a $1.16 billion bond sold by JPMorgan to investors. So-called pro-forma loans outstanding total more than $40 billion, according to Barclays Capital, all of which were put into securities. Concern that the Westin Portfolio and Promenade debt may be the first of many of those loans to default sent yields on commercial-mortgage backed securities to record highs relative to benchmark interest rates.

“These kinds of loans written during the height of the real estate boom could be the first to have problems,” said Christopher Sullivan, who oversees $1.3 billion as chief investment officer at United Nations Federal Credit Union in New York. “They were underwritten with outlandish expectations on rents and property appreciation that will turn out to be fiction

The stock market already recognizes that the buyers of corporate real estate are gone. Look at the prices of the insurance company stocks who have gobbled up this real estate. They are already stuffed more than a Thanksgiving turkey. Who is going to roll-over their paper?

And that's what the market is saying about the "Fortress 5" banks that got the big money from the Fed.

Why else do you think these government officials are finally going to offer the homeowner some foreclosure relief?

Because these institutions need to start begging for money again, and they want to throw the taxpayer a sop, so they acquiesce another sop from Uncle Sam to these "healthy institutions."

Healthy institutions? They are already in a hospice!

Thursday, November 20, 2008

NY Times cuts the dividend, IBM cuts 30,000

In a sign of the current economic times, the New York Times cut their annual dividend to .24 cents from .93. It will save the company $100 million annually.

IBM, which pre-announced earnings on October 10th, now sees a different outlook. I reacted skeptically to that announcement as just a way to goose the price of the stock. After borrowing $12 billion to do an accelerated stock buyback last year at far higher prices, it shows that IBM continues to manage their earnings and their stock price. Both are red flags.

Now IBM is canning 30,000 workers, but they are keeping it under wraps until they work out their severance packages. Apparently they didn't see this last month when they pre-announced earnings. But the week before they pre-announced IBM said they had hedged their foreign currency risk.

Maybe they should just become a hedge fund! But this market is undressing everyone. Add in the 52,000 workers that Citigroup is axing along with the 30,000 that IBM is cutting, and you'll understand why continuing unemployment claims are at a 26 year high.

Maybe the ECB will cut rates tomorrow, and our Fed will follow suit. You'd expect that with the last minute action in stocks at the bell, and Bernanke's penchant to affect options expiration. Aggresive world wide cut in rates is needed, but when have these Central Bankers gotten a clue?

So look for IBM's job cuts to be announced next week. They are following Citigroup, which supposedly has no need for capital, and GE, which supposedly had no need for money from overseas investors. Corporations lie, and stocks don't.

Will the sleeping Central Bankers wake up before everything becomes unhinged or will they only cut when they have their meetings?

Because these are the cuts the markets need, not the cuts from IBM or the New York Times.

Where's the money?

In Russia, any reporters or newspapers who put damaging information about their banks will be prosecuted. "Information attacks" versus the "bear raids" we see over here. But who is lying?

Now companies, who have squeezed every penny from their workers in the guise of productivity, are asking Congress to roll pack their contributions required to fix the worker's declining pension plans:

Stung by outsize investment losses, some of the nation’s biggest companies are pushing Congress to roll back rules requiring them to put more money into their pension funds, just two years after President Bush signed a law meant to strengthen the pension system.

The total value of company pension funds is thought to have fallen by more than $250 billion since last winter. With cash now in short supply for companies, they are asking Congress to excuse them from having to replenish the required amounts.

Lawmakers from both parties seem receptive to the idea, and there was talk of adding a pension relief provision to the broad fiscal stimulus package Congress considered for this week’s lame-duck session.

Supposedly companies in the S&P are sitting on $600 billion of cash, and the cash makes up a great portion of many of these companies stock prices. But their derivative exposure to counterparties with supposedly good credit that isn't not known is not reflected in these figures. The parties that made many of these bets with these companies are the hedge funds, who have unrelentlessly sold stocks. Do they worry about counter-party exposure, or do they just want cash at any cost and just plan on starting another hedge fund? With their high -water mark, they cannot get an incentive fee unless they make their losses. So like a homeowner, underwater in their home, who walks away to get out of debt, these hedge funds are doing the same.

Late yesterday, bond insurer commuted $3.5 billion of CDO exposure for $1 billion dollars. Ambac is supposedly still investment grade, yet they paid just .30 cents on the dollar. How about the hedges that these companies made with Investment banks? How good are they?

Yesterday the CPI had it's biggest drop in 60 years, showing that stores and the public don't have any money either. Gas is back to 2004 levels, and we should see prices of $1.79 at the pump. Even CNBC had a poll entitled: Will the recession turn into a depression? 57% of voters said yes.

Today GMAC, whose bonds you can get for 30 cents on the dollar, filed to become a bank holding company, ostensibly to get funds from the TARP. In NY Mayor Bloomberg said he won't send out the $400 homeowner rebate because "we have no money."

Pension plans don't have any money, neither does NYC, and neither does GMAC. All anyone wants is paper from the Fed. And the CPI had it's biggest drop in 60 years, showing that stores and the public don't have any money either. Gas is back to 2004 levels, and we should see prices of $1.79 at the pump.

So the next question to ask is, "Who is actually solvent?"

Banks with a trillion dollars of off-balance sheet exposure? Banks with $100's of billions of derivative exposure, all with other "solvent" counter parties?

It would appear to be easier to identify the solvent banks. But with commercial real estate collapsing, and the run in the real estate credit hedges exploding, the writedowns can only further increase, as banks exposure to real estate cannot be hedged.

And the only bank that the public trusts is their mattress!

Wednesday, November 19, 2008

Stay away from Strayer?

Strayer Education (STRA 214.95) is just a smidge off of it's 52 week high of 224, and up from it's low of 162 only last month. This is another stock being propped up by Wall Street, where they convinced management to buy back their stock at ridiculous "bargain" prices of 40X earnings and 10X revenue.

Institutions are desperate to own a winner, so they have accumulated over 100% of the outstanding shares. Last year, Sears Holdings was deemed a big winner under the genius of Eddie Lampert, and institutions owned over 100% of it's shares outstanding.That didn't work out so well. Wall Street also convinced management of a fertilizer company to spend their cash buying back stock when it was 110 points higher. They did the same to a certain organic grocer at 60 that is now trading less than 10. Could the same happen here?

Strayer charges about $14,000 a year for tuition, and about 2/3 of their students have Title IV government loans, with most of the rest getting employers to foot the education bill. Maybe that works in a good economy, but isn't there some risk to their model in these trying economic circumstances? Especially at over 40X earnings? Has student loan lending dried up because it is such a good business? And will these magnanimous employers keep paying these tuition bills for their employees in this business environment?

Strayer methodically raises tuition prices every year. But colleges are now considering lowering tuitions:

Are colleges and universities capable of lowering their expenses so that students’ bills, if not reduced, at least don’t increase faster than inflation?

They may be about to find out, especially in the public higher-education sector, where state governments are already pinched between declining tax revenues and increasing demands for spending on everything else.

In Strayer's annual report, they talk about buying back stock when it is below it's intrinsic value. Strayer said their model lacks mathematical and scientific precision, but shareholders should rest assured that their Board of Directors engages in a thorough review of that calculation.

The board of directors is preaching to the choir, and buying back stock at $218 is a waste of shareholder money.

Especially when the stock broke down last month, and is rolling over on the charts.

Sell it to management with their "intrinsic value" calculations. If they want to waste shareholder money by buying over-priced paper, let them take some stock off of your hands.

After all, can anybody name one shareholder buyback this year, by any corporation, where the buyback was done at a price lower than the current stock price?

"Insolvent" Citigroup shutters another hedge fund

Citigroup, with over $100 billion of undisclosed losses including it's off-balance shenanigans, is now closing another hedge fund, the Corporate Special Opportunity Fund, that will give investors 10 cents on the dollar. It's their 9th hedge fund to close this year.

Citigroup is liquidating its Corporate Special Opportunities hedge fund after it lost 53 per cent of its value last month, marking the ninth time in recent months that the bank has had to close or rescue a fund in its alternative investment unit.

CSO, which managed almost $4.2bn at its peak, has a net asset value of about $58m and debt of about $880m, investors say. People familiar with the matter say investors in the fund are likely to receive no more than 10 cents on the dollar.

This is the fund that Citigroup pumped in $320 million, and also gave it a line of credit for $450 million. It also put $1 billion of assets in the fund. Now investors will get 10 cents on the dollar.

This is the result of Citigroup's shenanigans that we can see. How about those shenanigans that we can't?

Why else would Citigroup trumpet that they were now going to modify mortgages for underwater homeowners? They raised rates on credit cards for those in trouble; now they are going to help those that don't need it?

Supposedly this stock is too big too fail.

It already has.

The only thing we don't know is the size of the rescue package!

Tuesday, November 18, 2008

Paulson buys mortgages

John Paulson, the hedge fund manager who was called before Congress last week to discuss the big profits he made by foreseeing the collapse of the subprime mortgage market, has started to buy securities backed by residential mortgages.

Mr Paulson’s move marks the latest example of a famously bearish investor shifting gears to profit from depressed prices in the global credit markets...

John Paulson, who is not related to the Treasury secretary, has told his investors that he started buying troubled mortgage-backed securities at the end of last week, hoping to capitalise on price falls that followed the Treasury announcement.

Mr Paulson, who has $36bn under management, was scheduled to hold a dinner and wine-tasting at New York’s Metropolitan Club on Monday night so that he could brief his investors on his plans.

According to Alpha Magazine, Mr Paulson made $3.7bn in 2007, reflecting the success of his strategy – begun in 2006 – of betting on a collapse of the subprime mortgage market. At the end of the third quarter of this year, his funds were up 15-25 per cent. His funds also made profits in October, his investors say.

In a letter to investors at the end of the third quarter, Mr. Paulson said his strategy was “to reduce leverage, maintain market exposure and maintain short credit bias”. He said: “The majority of our gains came from short positions in the equities of declining financials and CDS [credit default swaps] on financials. Generally our short exposure has been reduced as many of the companies we were short have failed.”

Monday, November 17, 2008

Everyone wants to be a bank!

Genworth bought a small thrift in Minnesota and then immediately filed for money from the TARP.

So did Hartford Insurance.

So did Lincoln National.

So did Aegon.

If you own a thrift, you can apply for funds, so now these insurance companies buy the smallest thrift they can find, so their insurance subsidiary can get the largest amount of money from the TARP that they can find.

This program was supposedly for healthy institutions. So why are all these institutions applying for funds? It's the same old bait and switch!

Now we see that automakers, municipalities and cities are lining up for aid.

But we have G20 meetings that accomplish nothing, and we have a meltdown that always moves many steps ahead of the reactive Central Bankers and their ill conceived plans.

And the mad rush for money indicates that no one trusts the balance sheet of any financial company.

The balance sheets of some of these institutions are so bad that all the top executives of Goldman Sachs declined a bonus this year. Last year, when people actually believed Goldman, Lloyd was taking out $60 million; this year he is stuck with his $600,000 salary.

Which means Goldman is stuck with bigger and larger losses that will be easier to find, and harder to hide on it's balance sheet.

SPAM production jumps

SPAM, Hormel's canned meat, is racking up tremendous sales, as the consumer continually trades down:

AUSTIN, Minn. — The economy is in tatters and, for millions of people, the future is uncertain. But for some employees at the Hormel Foods Corporation plant here, times have never been better. They are working at a furious pace and piling up all the overtime they want.

Through war and recession, Americans have turned to the glistening canned product from Hormel as a way to save money while still putting something that resembles meat on the table. Now, in a sign of the times, it is happening again, and Hormel is cranking out as much Spam as its workers can produce...

In a factory that abuts Interstate 90, two shifts of workers have been making Spam seven days a week since July, and
they have been told that the relentless work schedule will continue indefinitely...

Even as consumers are cutting back on all sorts of goods, Spam is among a select group of thrifty grocery items that are selling steadily.

Pancake mixes and instant potatoes are booming. So are vitamins, fruit and vegetable preservatives and beer, according to data from October compiled by Information Resources, a market research firm.

“We’ve seen a double-digit increase in the sale of rice and beans,” said Teena Massingill, spokeswoman for the Safeway grocery chain, in an e-mail message. “They’re real belly fillers.”

Sunday, November 16, 2008

The TARP scam

G20 comes up with nothing

Nothing but nonsense at the G20 meeting this weekend, except that a "broader policy response" on rates and stimulus; and after March 31, 2009 we'll have another meeting to discuss what we discussed, and supervisory colleges will be filled with academics who know nothing about the markets, who supposedly will help bank regulators with oversight. What do you expect? These participants laud other Central Bankers policies in thier communiques as "bold and decisive." Have they actually done anything that has worked?

At least the FDIC tries do something on the economy. Last week they pushed a plan on mortgages despite Treasury's resistance. Retail sales sucked, and part of the blame is that consumers weren't buying gift cards because they were worried that the merchants selling them would go bankrupt. So the FDIC guaranteed the cards:

The FDIC's Board of Directors has approved the attached new General Counsel's opinion on the insurability of funds underlying stored value cards and other nontraditional access mechanisms. The new General Counsel's Opinion No. 8 replaces the previous General Counsel's Opinion No. 8, published in 1996.

From the NY Fed, on what a stored value card is:

Paulson's plan is just one giant gift card given to Wall Street to offset the "stored value" in Level 3 assets, SIV's and off-balance sheet arrangements where every bad trade has been stuck. And now we have synthetic derivatives that multiply the amount of the stuck bad trades by banks thinking they could offset their bad trades by buying insurance from patsies that were dumber than them, who insured that this synthetic garbage was actually worth something.

These same people probably still think credit card debt is a decent recievable! Why don't they just take a look at the NY Times this weekend, for a harbringer of what is to come:

Bankruptcy lawyers report that they have been having more consultations with middle-class families with six-figure incomes — including many who either bought a home during the boom or pulled out most or all of their available home equity just keep to up with the cost of living...

"There are a lot of foreclosures that haven’t taken place yet because people still have available credit,” said Jeffrey H. Tromberg, a bankruptcy lawyer in Fort Lauderdale, Fla. “We don’t see them until they’ve maxed out their credit cards.”

Maybe these bankers think a credit card is a gift card! The consumer did, and they aren't paying it back!

Saturday, November 15, 2008

Fake bonds, real losses, and Mother Merrill blowing it

Portfolio has a great article on Wall Street thiefs. Here's part of it:

That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”...

“We have a simple thesis,” Eisman explained. “There is going to be a calamity, and whenever there is a calamity, Merrill is there.” When it came time to bankrupt Orange County with bad advice, Merrill was there. When the internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit. That was Eisman’s logic—the logic of Wall Street’s pecking order. Goldman Sachs was the big kid who ran the games in this neighborhood. Merrill Lynch was the little fat kid assigned the least pleasant roles, just happy to be a part of things. The game, as Eisman saw it, was Crack the Whip. He assumed Merrill Lynch had taken its assigned place at the end of the chain...

The models don’t have any idea of what this world has become…. For the first time in their lives, people in the asset-backed-securitization world are actually having to think.” He explained that the rating agencies were morally bankrupt and living in fear of becoming actually bankrupt. “The rating agencies are scared to death,” he said. “They’re scared to death about doing nothing because they’ll look like fools if they do nothing.”

..Eisman was appalled. “Look,” he said. “I’m short. I don’t want the country to go into a depression. I just want it to fucking deleverage.” He had tried a thousand times in a thousand ways to explain how screwed up the business was, and no one wanted to hear it. “That Wall Street has gone down because of this is justice,” he says. “They fucked people. They built a castle to rip people off. Not once in all these years have I come across a person inside a big Wall Street firm who was having a crisis of conscience.”

...He agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders. “When things go wrong, it’s their problem,” he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government. “It’s laissez-faire until you get in deep shit,” he said, with a half chuckle. He was out of the game.

Thursday, November 13, 2008

The reason CDS contracts are "opaque"

Yet the opaque trading environment has made it easier for Wall Street banks to mark up prices charged to outside buyers, which in turn has made CDS trading a huge profit center for the banks. In all, CDS trading amounts to 15% to 25% of top Wall Street firms' trading revenues, estimates CreditSights analyst David Hendler.

In the first two quarters of 2007, when trading revenues were at their peak, Mr. Hendler estimates J.P. Morgan could have cleared $1 billion to $1.9 billion from CDS sales and trading. For Goldman Sachs, that would mean $2 billion to $3.4 billion, said Mr. Hendler.

Wednesday, November 12, 2008

Credit cards: The $900 billion problem

It isn't going to be covered up by AXP borrowing $3.5 billion from the Fed, or Capital One selling stock and then getting money from the Fed either. COF's balance sheet is toxic, and they are even including fees that never get paid as income. Sound familiar? Yes that's right. The same trick that IndyMac and Washingtun Mutual did with their sub-prime loans that went belly up. But then, they just called that negative amortization "deferred interest."

The problem is already out of control. But the credit card companies aren't letting Wall Street know, and Wall Street likes to pretend that things are fine. Things are so good in credit card land, that last week, credit card companies were lobbying to allow forgiveness of up to 40% of credit card debt:

Big banks have formed an unusual alliance with consumer advocates to urge the government to allow huge portions of credit card debt to be forgiven, a turnabout from recent years when the banking industry lobbied strenuously to make it harder for consumers to erase their credit card debts in bankruptcy.

The new pilot program, which the banks hope will become permanent, could involve as many as 50,000 people struggling with credit card debt. On an individual basis, the amount of debt to be forgiven would rise according to the severity of the borrower's financial situation, up to a maximum of 40 percent.,0,2060183.story

Why would banks want forgiveness? Because 60% is better than ZERO! And then, banks would be able to defer the losses on the forgiven debt. But tonight, Federal bank regulators rejected this proposal:

WASHINGTON (AP) -- Federal bank regulators have rejected a request by banks and consumer advocates for a program to let lenders forgive huge portions of credit card debt.

The Office of the Comptroller of the Currency rejected the request for a special program that would allow as much as 40 percent of credit card debt to be forgiven for consumers who don't qualify for existing repayment plans.

An unusual alliance of financial industry interests and consumer advocates, represented by the Financial Services Roundtable and the Consumer Federation of America, made the request to the Treasury Department agency on Oct. 29. It demonstrated the urgency of the situation in a deepening economic crisis: consumers -- even those with strong credit records -- defaulting at high levels on their credit cards, while banks battered by the credit crisis bleed tens of billions from the losses.

An agency official said the government objects to allowing banks to defer losses for several years on the forgiven debt, as would occur in accounting by lenders under the special program.

An unusual alliance of financial industry interests and consumer advocates, represented by the Financial Services Roundtable and the Consumer Federation of America, made the request to the Treasury Department agency on Oct. 29. It demonstrated the urgency of the situation in a deepening economic crisis: consumers -- even those with strong credit records -- defaulting at high levels on their credit cards, while banks battered by the credit crisis bleed tens of billions from the losses.

An agency official said the government objects to allowing banks to defer losses for several years on the forgiven debt, as would occur in accounting by lenders under the special program.

The agency "does not consider any plan that defers the timely recognition of loss as prudent, and any such proposal cannot be viewed favorably by us," Timothy Long, senior deputy comptroller for bank supervision policy, said in a letter to the two groups dated Monday and made public Wednesday.

So credit lines are being cut and reduced. So the consumer will be forced to default, because he doesn't have the credit lines to keep them current. Unlike AIG, they can't borrow from the Fed to pay the Fed. The game is already up at American Express. Changing to a bank holding company to beg for money from the Fed showed that they had immense losses that they need to recognize. But still, you have stockholders vainly attempting to prop up Capital One, whistling past the graveyard, because they refuse to look at Capital One who uses bank deposits to hold toxic loans on their balance sheet, hoping that they can recognize these losses more slowly than they are accruing.

Today Best Buy said their was a seismic shift in consumer behavior in spending. That is evident already. The next seismic shift in consumer behavior is the defaulting on credit cards. And it is happening at a much quicker and faster rate than Capital One wants to acknowledge. The securitization market already recognizes this. That's why their was zero asset-backed-securitizations of credit cards last month.

Why else would Paulson not use the TARP money for the automobile companies? Besides some banks and insurance companies, he wants to save the balance for ABS'. In his statement today he said:

Approximately 40 percent of U.S. consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products. This market, which is vital for lending and growth, has for all practical purposes ground to a halt....

This market is currently in distress, costs of funding have skyrocketed and new issue activity has come to a halt. Today, the illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards. This is creating a heavy burden on the American people and reducing the number of jobs in our economy. With the Federal Reserve we are exploring the development of a potential liquidity facility for highly-rated AAA asset-backed securities.

So now Paulson wants another alphabet soup facility constructed by the Federal Reserve to buy "highly rated" credit card receivables. They are so "highly rated" that securitization has come to a halt! Why would anybody want to buy these receivables, that the same banks lobbied for the ability to write 40% of the value of them off?

Mr. Paulson, is the Treasury Secretary because he is paid to lie in front of the nation. He is paid to pretend that these problems don't exist. He is paid to pretend that these assets are worth more than they are not. He is paid to take your money, and give it to those who lost it, who pretend that they haven't. He is just a paid shill, but unlike Bernanke, his voice is gravely!

At least, when Capital One lies on their balance sheet they make television commercials that make you laugh. When Paulson tries selling the Treasury's plans his commercial makes you cringe!

And if you don't want to pour over a balance sheet to find a reason to sell Capital One, here's a quick bullet point question to consider:

Is the increases in sales of safes and guns just a statistical oddity or does it reflect the mindset of a consumer that is planning to default on his loans?

Maybe it's time to change "What's in your wallet?" to "What's in your safe?"

Santelli tells the world about Paulson's TARP

This morning on CNBC, someone finally told the truth about Secretary of the Treasury "liar-in-chief" Henry Paulson and the $700 billion TARP plan which is being used to prop up all the insolvent institutions that are taking the government's money.

Bait and Switch!

Why wouldn't they do it this way? These institutions hid their losses on their balance sheet just like Lehman Brothers and AIG did. The only difference was Lehman advertised in tennis matches and AIG advertised on television. Both were criminal enterprises, but AIG was bailed out because they owed the banks that got the money under the TARP!

But the losses in these banks are still staggering. Why else is Citigroup in single digits? That answer is easy. It is insolvent. Why did AXP get hit today when they said they wanted to borrow $3.5 billion from the Fed? Why did GE get hit when they said the Fed would backstop $130+ billion of their commercial paper? Well what's the difference between the rate on commercial paper with the Fed's backing and the 10% GE had to pay Buffett for money? Do that for $536 billion and now you are talking some real numbers. And then ask yourself why should GE trade at more than 6x earnings when they are a hedge fund?

At least the market is finally asking that question to Goldman Sachs! Is there any transparency in Blankfein's obtuse statement yesterday when he said that level 3 leveraged loans, and mortgage securities now make up less than 82% of their capital? Why did Goldman Sachs mysteriously spike up yesterday in trading? Oh that's right--Lloyd "Chinese wall" Blankfein spoke about Goldman Sachs after the close yesterday, and market players were just front running this news! Did anyone suspect anything different? These guys are as transparent as the hedge funds who will be testifying before Congress tomorrow! Meanwhile, Goldman Sachs gets the free pass just like Timothy "no nothing" Geithner of the NY Fed!

Will anybody ask James Simons tomorrow about the naked shorting his hedge fund participates in? We already know that answer. Just look at Philip Falcone of Harbinger Capital and his short of 117 million shares of Wachovia stock of which he made $2.5 billion for his fund. The news of this trade was plastered around everywhere.

The only place you couldn't find the trade was in the monthly short-interest figures! And how did he get the figure of 117 million shares? That's the total number of shares that were short in Wachovia at April 30th! The short interest only went up 3 million shares by May 15th when he supposedly put on these shorts!

So if this $2.5 billion dollar profit on this trade of 117 million shares of Wachovia stock mysteriously doesn't show up in the short interest figures, what chance is there that James Simons' shares will show up either?

That's a question you need to ask their prime broker! But then again, who was the prime broker of Harbinger capital when they were doing these Wachovia shorts?

Lehman Brothers!

AMEX now wants $3.5 billion

Yesterday AMEX was approved as a bank holding company. Today they want your taxpayer money--$3.5 billion of it.

AMEX is just another company that has tremendous credit risk, and it is just another company, like Citigroup, that is attempting to mask it's rapidly deteriorating financial condition with money from the Fed.

Except this time, AMEX is charging you.

AIG's new bailout bailouts the banks again

Banks in the U.S. and abroad are among the biggest winners in the federal government's revamped $150 billion bailout of American International Group Inc.

Many banks that previously bought protection from the insurer on securities backed by now-troubled mortgage assets stand to recoup the bulk of their investments under a plan by AIG and the Federal Reserve Bank of New York to buy around $70 billion of those securities via a new company. These securities are collateralized debt obligations backed by subprime-mortgage bonds, commercial-mortgage loans and other assets...

That enabled the banks to pry roughly $35 billion in collateral from AIG as a result of those declines and downgrades in AIG's own credit ratings. The banks that have sought and received collateral from AIG include Goldman Sachs Group Inc., Merrill Lynch & Co., UBS AG, Deutsche Bank AG and others.

Throughout its AIG rescue efforts during the past two months, the government has had the banks in its sights; it made its initial bailout of AIG in part to avoid potential bank losses that might have threatened the broader financial system.

Under the plan announced Monday, the banks will get to keep the collateral they received from AIG, much of which came when the government made funds available to AIG in September. The banks also will sell the CDOs to the new facility at market prices averaging 50 cents on the dollar. The banks that participate will be compensated for the securities' full, or par, value in exchange for allowing AIG to unwind the credit-default swaps it wrote.

"It's like a home run for some of the banks," says Carlos Mendez, a senior managing director at ICP Capital, a fixed-income investment firm in New York. "They bought insurance from a company that ran into trouble and still managed to get all, or most, of their money back."

Tuesday, November 11, 2008

Veteran's Day

Doom and Gloom on the Street

American Express was granted bank holding company status, and the Federal Reserve said that because of "unusual and exigent" circumstances, they granted the approval without the customary 30 day wait.

There hasn't been any securitizations of credit cards in the last 30 days, so that means AXP eats its own cooking. And with the delinquencies and the suspect nature of any revolving credit card portfolio, who would want want them? But American Express wants the Fed's cash--$3.8 billion or so, and now they are eligible for it.

Even AAA rated GE, has registered to sell $98 billion of commercial paper to the Government. The market is telling GE, to wean themselves off of commercial paper, but with $536 billion of debt at GE Capital, what are they supposed to do? Get a bank to lend them the money? At least they are hedging their fuel costs, now that oil is under $60 a barrel!

AIG is now up to $173 billion pumped in from the Government, and yet their CEO comes on television and says that AIG is still in strong shape. $173 billion from taxpayers, but yet, no one knows who is on the other side of the derivatives AIG wrote-besides Goldman Sachs of course!

Citigroup came out today and said they are now pro-actively going to seek solutions for homeowners underwater in their loans, even if they are not as of yet, late with payments. That just means Citigroup's book of mortgages is in far worse shape than what they want to tell the market. But then again, didn't the Government "force" these companies to take money? Money they said they didn't need, that they needed desperately?

Fannie Mae reported a $29 billion loss for the quarter, and said that it may soon have to hit up the Fed for money. No wonder the Fed is delaying the $540 billion money market bail-out!

Circuit City, was one of the few companies that actually did the right thing by going into bankruptcy. The only money they made was in the extended warranties that they sold. I suppose going bankrupt after Christmas, after selling these warranties would of brought more troubles; what it does show, however, is that the consumer has completely retrenched. That's why retail pre-sale orders are down 6-14%.

At least one thoing going down is gas. It is down to $2.19 a gallon, yet General Motors is hitting 50 year lows, as the TARP money hasn't yet been released to the automobile companies. $173 billion to AIG, and it didn't save a job, yet Paulson is hesitating about throwing some money at the car business and Bush wants this deal tied to a Columbia trade pact! In Detroit, they hire real workers, who make real contributions, by making real things in the real economy! AIG is just a bookie that made bad bets! But then, it's their buddies who want to collect on the bets they made with AIG!

AIG was Wall Street's neighborhood barber shop!

Monday, November 10, 2008

Federal Reserve statement on AIG

Release Date: November 10, 2008
For release at 6:00 a.m. EST

The Federal Reserve Board and the U.S. Treasury on Monday announced the restructuring of the government's financial support to the American International Group in order to keep the company strong and facilitate its ability to complete its restructuring process successfully. These new measures establish a more durable capital structure, resolve liquidity issues, facilitate AIG's execution of its plan to sell certain of its businesses in an orderly manner, promote market stability, and protect the interests of the U.S. government and taxpayers.

Equity Purchase

The U.S. Treasury on Monday announced that it will purchase $40 billion of newly issued AIG preferred shares under the Troubled Asset Relief Program. This purchase will allow the Federal Reserve to reduce from $85 billion to $60 billion the total amount available under the credit facility established by the Federal Reserve Bank of New York (New York Fed) on September 16, 2008.

Credit Facility

Certain other terms of the existing New York Fed credit facility, established on September 16, will be modified to help achieve the objectives described above. In particular, the interest rate on the facility will be reduced to three month Libor plus 300 basis points from the current rate of three-month Libor plus 850 basis points, and the fee on undrawn funds will be reduced to 75 basis points from the current rate of 850 basis points. The length of the facility will be extended from two years to five years. The other material terms of the facility remain unchanged. The facility will continue to be secured by a lien on many of the assets of AIG and of its subsidiaries.

Additional Lending Facilities

The Federal Reserve Board has authorized the New York Fed to establish two new lending facilities relating to AIG under section 13(3) of the Federal Reserve Act. These facilities are designed to alleviate capital and liquidity pressures on AIG associated with two distinct portfolios of mortgage-related securities.

Residential Mortgage-Backed Securities Facility

In one new facility, the New York Fed will lend up to $22.5 billion to a newly formed limited liability company (LLC) to fund the LLC's purchase of residential mortgage-backed securities from AIG's U.S. securities lending collateral portfolio. AIG will make a $1 billion subordinated loan to the LLC and bear the risk for the first $1 billion of any losses on the portfolio. The loans will be secured by all of the assets of the LLC and will be repaid from the cash flows produced by these assets as well as proceeds from any sales of these assets. The New York Fed and AIG will share any residual cash flows after the loans are repaid.

Proceeds from this facility, together with other AIG internal resources, will be used to return all cash collateral posted for securities loans outstanding under AIG's U.S. securities lending program. As a result, the $37.8 billion securities lending facility established by the New York Fed on October 8, 2008, will be repaid and terminated.

Collateralized Debt Obligations Facility

In the second new facility, the New York Fed will lend up to $30 billion to a newly formed LLC to fund the LLC's purchase of multi-sector collateralized debt obligations (CDOs) on which AIG Financial Products has written credit default swap (CDS) contracts. AIG will make a $5 billion subordinated loan to the LLC and bear the risk for the first $5 billion of any losses on the portfolio. In connection with the purchase of the CDOs, the CDS counterparties will concurrently unwind the related CDS transactions. The loans will be secured by all of the LLC's assets and will be repaid from cash flows produced by these assets as well as the proceeds from any sales of these assets. The New York Fed and AIG will share any residual cash flows after the loans are repaid.

The U.S. government intends to exit its support of AIG over time in a disciplined manner consistent with maximizing the value of its investments and promoting financial stability.

Citigroup to buy another bank

Why? Because they need the deposit money, and they need to hide their losses in bank charges via an acquisition! The story in the WSJ:

Less than a month after walking away from Wachovia Corp., Citigroup Inc. is in discussions to acquire another U.S. bank, according to people familiar with the situation.

The target's name couldn't be determined, but it is a regional bank that overlaps geographically with Citigroup's retail-banking unit, which has its highest concentration of branches in the Northeast, California and Texas. A deal could be reached later this month, the people said.

With Wachovia racing to complete its purchase by Wells Fargo & Co., any acquisition by Citigroup could feel like a consolation prize, because none of the remaining sellers among U.S. banks comes close to Wachovia in size...

Some insiders say an acquisition would pump up morale at Citigroup and ease the embarrassment of the Wachovia mess.

Beyond that, the renewed takeover efforts show that Citigroup Chief Executive Vikram Pandit is determined to secure a deeper base of deposits tied to the world's largest economy. Such deposits are relatively cheap and a reliable funding source that makes them even more attractive as turmoil continues to swirl through the capital markets.

Sunday, November 9, 2008

New $586 billion stimulus plan for China

China announced a stimulus program that could exceed half a trillion dollars, its biggest move yet to rebuild rapidly weakening confidence and unleash domestic demand to counter the prospect of global economic recession.

The package of infrastructure investment and other stimulus measures is to be spread over the next two years and appears to include some measures that were already announced. Still, the huge scale of the planned response -- potentially 4 trillion yuan ($586 billion) -- underscores how rapidly the outlook for China's once-booming economy has worsened and how the country remains comparatively well-placed to deal with such a slowdown.

But we have more stimulus here. The TARP plan is now going to cover the automobile companies. And even AIG is getting more money, and at better rates. AIG was borrowing money from the Fed's commercial paper window, and using that to pay off their loan. Now "this criminal enterprise" is getting an additional $40 billion from the TARP, and a rate on their previous government loan of just 3% points over LIBOR, instead of 8%. Now the Government, I mean taxpayer is on the hook for $150 billion from AIG. AIG then buys the troubled CDO's from those who bought the insurance, bailing out the Investment banks and hedge funds who relied on AIG.

They also get bailed out in their RMBS. In one of these deals, AIG puts up $1 billion to offset $40 billion worth of RMBS which will be sold for .50 cents on the dollar. The taxpayer puts up the other $20 billion.

Christmas came early for the Investment banks who bought protection from AIG! But why should we expect anything different? Remember how Bernanke effusively praised the punitive nature of the AIG bailout at Congressional hearings?

I guess Bernanke finally figured out that it doesn't pay to be punitive when you are backstopping the company!

Especially now that the TARP is being continually expanded, with the money going to those who lost the most!

That's Wall Street math!

Friday, November 7, 2008

We will end our dependence on Middle East oil in 10 years

Isn't that what Obama said?

Or was it just Jimmy Carter? His "Crisis of Confidence" speech in 1979:

In little more than two decades we've gone from a position of energy independence to one in which almost half the oil we use comes from foreign countries, at prices that are going through the roof. Our excessive dependence on OPEC has already taken a tremendous toll on our economy and our people. This is the direct cause of the long lines which have made millions of you spend aggravating hours waiting for gasoline. It's a cause of the increased inflation and unemployment that we now face. This intolerable dependence on foreign oil threatens our economic independence and the very security of our nation. The energy crisis is real. It is worldwide. It is a clear and present danger to our nation. These are facts and we simply must face them.

What I have to say to you now about energy is simple and vitally important.

Point one: I am tonight setting a clear goal for the energy policy of the United States. Beginning this moment, this nation will never use more foreign oil than we did in 1977 -- never. From now on, every new addition to our demand for energy will be met from our own production and our own conservation. The generation-long growth in our dependence on foreign oil will be stopped dead in its tracks right now and then reversed as we move through the 1980s, for I am tonight setting the further goal of cutting our dependence on foreign oil by one-half by the end of the next decade -- a saving of over 4-1/2 million barrels of imported oil per day.

Point two: To ensure that we meet these targets, I will use my presidential authority to set import quotas. I'm announcing tonight that for 1979 and 1980, I will forbid the entry into this country of one drop of foreign oil more than these goals allow. These quotas will ensure a reduction in imports even below the ambitious levels we set at the recent Tokyo summit.

Point three: To give us energy security, I am asking for the most massive peacetime commitment of funds and resources in our nation's history to develop America's own alternative sources of fuel -- from coal, from oil shale, from plant products for gasohol, from unconventional gas, from the sun.

I propose the creation of an energy security corporation to lead this effort to replace 2-1/2 million barrels of imported oil per day by 1990. The corporation I will issue up to $5 billion in energy bonds, and I especially want them to be in small denominations so that average Americans can invest directly in America's energy security.

Remember this?

Tracinda's Kirk Kerkorian gets flaky again

On Halloween, Kerkorian put out a tender for 14 million shares of Delta Petroleum at $11. Now a few day later, the stock is at $6.66 and he cancels the tender.

You couldn't make up these scripts when these billionaires lose billions!

More hedge funds blowing up

News continues to trickle out about giant losses at some of the nation’s biggest hedge funds. The latest report comes from Farallon Capital Management — once ranked as the fifth largest hedge fund in the United States. Its flagship fund, Farallon Capital Partners, is down nearly 24 percent through the end of October, according to several people who have seen the results.

The firm is now selling its positions in various portfolios in order to meet what could be huge redemptions at the end of the year, these people said. The fund has increased its cash holdings to 30 percent of its portfolio.

A spokeswoman for Farallon declined to comment.

At this rate, Farallon is headed for its first annual loss. The San Francisco-based firm, founded by a former Goldman Sachs alumnus, Thomas Steyer, invests in various assets from stocks to distressed debt and real estate. The main fund has climbed an average of 14.6 percent annually for the past 22 years.

Farallon’s troubles are reflective of the overall nasty environment for hedge funds.

On Wednesday, GLG Partners froze redemptions at one of its large funds amid tremendous market swings.

Meanwhile, Kenneth C. Griffith’s Citadel Investment Group was down 15 percent in September and is seen dropping further in October. Lee Ainslie’s Maverick Fund fell more than 19 percent in September, and Goldman Sachs recently told clients that its $7 billion Goldman Sachs Investment Partners fund has lost nearly $1 billion since its launch in January.