Monday, September 29, 2008

Question---what role did the equity ownership clauses have in the financial rescue bill's defeat

On pages 36 - 38 of the draft of the defeated financial rescue plan released yesterday, there was an overview of the requirement that companies participating in asset sales give warrants or senior debt to the government as a quid pro quo. Warrants would have been required from public companies that had enough authorized stock in place to do so. Senior debt, "at a reasonable interest rate premium", would have been required from companies without enough authorized stock or from private companies. All definitions and parameters of these equity or debt give-ups to the government were left to future determination.

This part of the draft plan that was added as an essential requirement to get the support of the Democratic leadership and it was a questionable insertion. How would it be implemented. How would CEOs and Boards balance their fiduciary and legal duties to shareholders with the requirement to negotiate dilutive action with the Federal government---between a rock and a hard place comes to mind. How would the government manage its portfolio and determine its hold or sell decisions. Why should the Federal government own large parts of corporate America when the plan is designed to be a pool of assets that liquidates over time to pay for itself. Why would any company participate in the plan unless it was absolutely necessary.

It would be interesting to know how many congressmen who supported the initial Paulsen/Bernanke plan voted nay because of this Democratic initiative. Notwithstanding the last post here, few hands are clean on this one.

The McCain Meltdown

May it ever be remembered as such. In an effort to turn a financial crisis to his political benefit John McCain rushed to Washington last week to create the facade of a populist Republican opposition to "bailing out Wall Street". He may now have more than he bargained for.

The House vote today is not just the rejection of a plan. It is the rejection of responsibility. It is the rejection of doing anything above immediate self interest. It is the rejection of accepting a role in a global financial system.

Whether anything can be done to salvage something out of this is unclear. Will the unequivocal market reaction be noticed. Will Americans step up and say "if this is what not 'bailing out' Wall Street means then it's not what I wanted". Walking away from this now should not be an option, but nothing would surprise now.

There is no guarantee that narrow minded, bitter people who rarely cracked a book in school can't be our leaders. At least George Bush wasn't bitter. If McCain would win, we would have a trifecta. His leadership has now been demonstrated and the American people will soon be able to choose.

"Now we need to get the votes"

Was this comment yesterday afternoon from Nancy Pelosi supposed to be reassuring. A flawed financial package to take to a vote has been agreed upon but the lack of a sense of urgency on the part of Congress is receiving an unequivocal market reaction. Uncertainty is anathema to the markets. In the hands of the U.S. House of Representatives is a choice that is crucially important, and in the eyes of the markets, especially the global markets, the House is an especially unimpressive bunch of people. The opportunity for maximum impact has already been blown. Half measures availed us...

Sunday, September 28, 2008

The baseball playoffs dilemma

It's Major League Baseball playoff season and what does a New Yorker do. It just seems part of being American, something ingrained in childhood, to have favorites, especially by the time the World Series comes around. What would I say to the butcher, baker or sandwich maker if I didn't have some interest. The problem is that, for the first time in 12 years, both New York teams are out. I'm a Mets first, Yankees second man, unlike most native New Yorkers who must choose to love one and hate with a passion the other. I go with either as long as they last and if, as happened in 2000, they both make the Series I'm pulling for the Mets.

So choices must be made, favorites must be chosen from teams about which I know little.

In the American League, now pulling up the sports section from my lap to remind myself of the teams to choose from, the only team that I really know anything about is Boston and I'm tired of them and their rivalry with the Yankees, and besides they traded away Manny Ramirez, one of the few great characters in the baseball today. Since I know absolutely nothing about the Minnesota Twins or the Chicago White Sox the fact that their division is up in the air means little, although Chicago is certainly a fine city. That leaves Tampa, having come from a season last year in which they lost far more games than they won, entering the playoffs for the first time. The do have Cliff Floyd who is a good guy and played for the Mets, and is having a comeback year. They also have a star pitcher named Kazmir who the Mets traded away before he cut his teeth and they have regretted that deeply. Tampa Rays is the choice in the AL.

In the National League there is no debate. It's the Los Angeles Dodgers. Two reasons. First, their coach is Joe Torre who was fired from the Yankees after taking the team to 12 straight post seasons. He won in a weak division but, who cares, he got there for a 13th time in a row and the wealthiest team in the business did not. Second, the Dodgers have Manny Ramirez, one of the few great characters in baseball today. He's also an amazing clutch hitter and an entertaining prankster in his free spirit way. Dodgers in the NL, and they're a total longshot, and if they can make it Dodgers all the way.

Now there's a break from the Great Financial Crisis of 2008.

Saturday, September 27, 2008

Letter to a friend - "Word from the meltdown"

This morning I sent the following to a hometown friend who has lived overseas for many years. His father ran a successful global company.

"I hope all is well with you, other than the fact that you are likely experiencing the same portfolio shrinkage as the rest of us. The political gamesmanship in the midst of this crisis is driving me nuts, but something your father once said to me came to mind as I was trying to understand what's going on. It may take a minute but I'll get to it.

So I'm sure you have followed the events and everyone can have their own opinions. The facts are that the big financial package was proposed by Paulsen, Bernanke, and company and after some difficult give and take there seemed to be the realization by Congress that something had to be done and the details of a deal were being hammered out. Then McCain goes to D.C. and politicizes everything. At the meeting in the White House with Bush, Obama and everyone else he just sat there and said nothing. He had already been around Capital Hill putting together a Republican coalition of libertarians, neo-con extreme free marketers and just plain resentful good old boys to back out of the agreement led by the ambitious Boehner who does a complete about face. His tactic was to paint the Democrats and Bushites plan as bailing out Wall Street and to assert that this group of Republicans was supporting Main Street. It's as clear as the nose on my face that there is no Wall Street as we knew it left to bail out, with Bear and Lehman gone, Merrill taken over, Morgan Stanley now 20% owned by Mitsubishi and still reeling and Warren Buffett being given one of the sets of keys to Goldman. Right now, right now, the need is to make sure that more non fat cat financial institutions don't fail. Wachovia and National City will likely go down this coming week if a package does not come from Washington and after that who knows. The revolting plan from this Republican group(double-entendre intended) seems to be a check list of tax breaks for corporations and the wealthiest that would exacerbate the differences between the well-to-do and Main Street, at least in the short term, and the insurance plan proposed would seem to further neuter a financial services industry that is already on its back, but I must admit the details of that are totally unclear. And the key to this is that they are painting it as, selling it as, a populist plan to protect Main Street against the rapacious folks on Wall Street. If they, over this weekend, don't win out, and I'm not sure that they even want to do so, the McCain campaign message will be that the Democrats sold out the regular guy to support those rich people in New York.

How is this possible? First, most Americans don't know much about economics or finance. That's understandable to some extent, but over time our country has become a relatively under educated and anti-intellectual one. Second, there is an abiding resentment against the wealth of and perceived arrogance of northeast intellectuals and financiers. This has a long history, with different story lines in regions like the South, Midwest, and the West, but the antipathy is the same. Much of it is based not just on perceived but real experiences, real exploitation, real arrogance over time. So now that we're at a point when the sky is really falling, just the phrase 'bailing out Wall Street' leads a majority of Americans to prefer rejecting the needed injection of liquidity even if, as they may not appreciate, it could lead to maybe half of their local banks failing over the next year and their small businesses having no access to credit. Yeah, the basis of their resentment has a lot of truth to it, I admit, and that brings me to your father.

In June 1980, I was back in Danville after getting my degree at Thunderbird and was packing up to move to New York for my new job in the international division of Manufacturers Hanover. I was over at your house one evening, as always, and ended up sitting in the den talking to your father about this new job. I asked him if he had any advice as I headed off to the big city for this new opportunity and he paused for a minute, looked me in the eye, and said, 'Borden, just remember one thing, the streets of New York are paved with shit."

I guess it's time to clean it up and save our entire economy as well. Fingers crossed for an effective package this weekend.

Friday, September 26, 2008

Whether to laugh or cry

Watching on You Tube the Sarah Palin interview with Katie Couric.

Thursday, September 25, 2008

Update on financial rescue plan, as if that's possible

News flying left and right even tonight as some House Republicans propose completely different ideas, compromises are still being negotiated on the deal that supposedly almost done, and rumors suggest that WaMu will be taken over by the FDIC in the morning and JPM will buy their deposits. That's a lot but here are a few brief comments on some of the open issues in the only plan we know. Compromises on oversight, CEO pay and other issues are more or less done. Here are some that might not be.

There are two issues being discussed that if included in plan could inhibit future capital raising by firms that participate in the rescue. For equity there is discussion of the government taking warrants or preferred stock in institutions that sell assets. This dilutes current shareholders who rarely forget about dilution and much more importantly it creates an impediment to future share offerings as the government is inevitably not a shareholder among equals. Why invest along side someone who is not on a level playing field. For debt, giving courts the right to individually restructure mortgage loans retroactively is a huge disincentive to the securitization markets. The securitization markets are not inherently evil. They allow for distribution of risk and give more capacity for lending institutions to serve their communities. The securitization markets were abused, used, and overextended by bad practices but getting back to the basic model would be a wonderful thing. Giving courts the right to restructure individual components at their will, in no systematic way, would not be attractive to investors who are putting up money long term and would be a nightmare for servicers who handle the back office for the loans and therefore raise costs. Getting companies back on their feet again with independent funding and stronger capital would seem to be the goal and these two compromises, if included, would be harmful for long term recovery. Of course the two proposals are politically attractive to many and on top of that they may seem like the fair thing to do, but they could well be detrimental to rebuilding the strength of the banking system.

One other issue under discussion is putting some sort of stop to foreclosures through government intervention which would of course require funding. On the surface that sounds like one reasonable side of a debatable argument. There is one problem. In 2008 the great majority of the increase in foreclosure from 2007 has been of homes that no one has ever lived in. They are homes built by developers and financed by banks, lots of new developments and condos in places like Arizona, California, Florida and Nevada. No way these commercial enterprises should be bailed out. They're often big businesses. If this foreclosure hiatus is penned into the bill, homes that have never been lived in or for that matter homes that have been warehoused by speculators should be excluded. The intent is to protect working families from being forced out of their homes in a recessionary environment.

In the time that it has taken me to write this, including an interuption to watch the Mets win in the 9th just down the road in a driving rainstorm, there will no doubt be more news on this serious financial crisis. Good night.

Bill Clinton campaigns for McCain Palin

With barely disguised bitterness and an eye on 2012, Bill Clinton is transparently and actively campaigning for the McCain Palin ticket. In fact, people who know Clinton say that his bitterness is always close to the surface. Here's the latest.
---Several days ago in a widely quoted interview he could not have been more effusive in discussing the attractiveness of Sarah Palin as a candidate. He certainly is not obligated to say anything negative but she's obviously not qualified by most measures to be Vice President and he went out of his way to highlight everything positive about her and then some. One couldn't help but laugh about some of his comments, paraphrased, "And I like the story about the infant with Downs syndrome, there's one of those that lives down the street from me". Or about Palin's husband's snowmobile achievements, "He went on in that race for the last 500 miles with a broken arm. That's my kind of dude." Clinton has done many things but he has always been notoriously un-athletic, whether as the pudgy band member in high school or the chronic blatant cheater on the golf course when he tried show that he could play some sport during his presidency.
---Two days ago Clinton was quoted as saying "I'll never criticize John McCain." Ok, so that's fair enough, then just don't criticize him. But what is his agenda when he makes a point of being quoted on that.
---Late yesterday Clinton defended McCain's obvious political tactic of "suspending" his campaign and went so far as saying that he agreed that the debate should be canceled. Most people who want to know the truth understand that the Obama campaign called the McCain campaign and proposed that the two candidates issue a joint statement supporting efforts to create a package to stabilize markets as soon as possible. Obama waited for a return call from McCain after the proposal. McCain did not return the call. Instead he announced the "suspension" and his unilateral debate withdrawal. McCain's move was 100% politics of the lowest sort, people know that, and Clinton supports it.

We human beings are hard wired to be self-centered, a few are almost like saints but most of us clearly have that trait to some degree. Bill Clinton is off the charts. I think the word is shameless.

Wednesday, September 24, 2008

Negativity and the presidential campaign----insight from David Foster Wallace

Back in 2000, Rolling Stone hired David Foster Wallace to write a critique of John McCain during the Republican primary, and he spent seven days on the campaign trail during the South Carolina and Michigan primaries. His piece as first published can be found on the Rolling Stone website and was titled then "The Weasel, Twelve Monkeys, and the Shrub--seven days in the life of the late great John McCain". The original unedited cut of the essay, more than twice as long, was published in 2005 in "Consider the Lobster" under the new title "Up, Simba".

Now anyone can read it who wants to do so. For anyone who likes politics it's a wonderful read, somewhat similar to Hunter Thompson's best political efforts but with better writing and no drugs.

The purpose of mentioning this here is to quote one of the major insights of the essay as follows:

In discussing how Bush's calculated negative attacks led to McCain's retaliation that escalated he wrote "the whole GOP race could quickly degenerate into just the sort of boring, depressing, cynical, charge and counter-charge contest that turns voters off and keeps them away from the polls, especially Young's maybe actually in the Schrub's own political self interest to let the GOP race get ugly and Negative and have voters get so bored and cynical and disgusted with the whole thing that they don't even bother to vote."

That's a snippet and there's much more to this thought in the essay. Bush did turn radically negative in the 2000 South Carolina primary following McCain's surprise win in New Hampshire. It was really over the top negative as only a Lee Atwater or Karl Rove dared to be, remember the fathering a black child out of wedlock lies and stuff like that. McCain was almost forced to respond and not be a wimp given that he runs on being a tough military guy who will stand up to the bad guys. McCain responded, and it was the turning point of the campaign.

McCain learned the lesson, and he's taking the negative path and that will only heighten in the coming weeks. Obama needs the inspired voters, the young voters and the new registrants. McCain gets the guaranteed Republican base vote, guaranteed now because of Sarah Palin, and his strategy is to dissipate the Obama vote by exaggerations and lies. It's worked before and DFW was the first to clearly articulate why.

P.S. DFW had the same mixed feelings about McCain as many have had until recently. He liked him in many ways but did not really know what he was about. In the preface to the republished essay he makes that clear and admits to voting for Bill Bradley in the Democratic primary that year.

WSJ and the mark to market issue

The lead editorial in the Wall Street Journal is cautiously supportive of a toned down Paulson rescue plan, not toned down in terms of the money requested but in the rationale and administration of it. Written by the free market zealots at that paper, commentary on mark to market accounting in this editorial rankled me to the extent that here's one more comment on that issue that I'm getting sick of writing about. To quote the WSJ's editors:
"Another misconception is that the credit problem will vanish if only Treasury suspends 'mark to market' accounting-as if those bad assets wouldn't still exist...Mark to market has surely contributed to this mess and needs to be revisited. But to toss it aside wholesale now would risk turning banks into the zombies of Japan's lost decade."

Red herring, smells like it. No one, absolutely no one is suggesting "tossing it aside wholesale". Mark to market is appropriate accounting in normal or reasonable volatile markets. The rules as they exist now have an achilles heel that is stomping the markets. The WSJ is correct when it says the rules "need to be revisited", but this is not like a stroll to Grandma's house when the leaves begin to turn. It is urgent.

The flawed parts of the rules can be revised and all of the good parts kept. Revising could be complex and require some creativity. That should be no big deal for financial markets that have created complex derivatives and securities for two decades and a U.S. government that can come up with and administer one of the most convoluted, complex and in some aspects inexplicable tax codes in the world.

Simple idea, maybe Forest Gump like, but here goes. Keep mark to market accounting as is but with this change. When market volumes for an individual security, or set of like securities, are trading below 20% of historic volumes as measured over a two year period, require any new marks to be at least at that 20% volume level. Pick any % that you want, and any historic period that you want, but plug them in. It would mean that the last distressed seller near bankruptcy would not set the price for all of that security or set of securities.

There are ways to come up with a solution. It seems that for their own philosophical or self serving reasons that the WSJ wants no part of this.

Tuesday, September 23, 2008

UPTICK rule and MARK to MARKET rules

Congress "has its bowels in an uproar", to use one of father's old sayings, and in no productive way. I'll go no further than that with this analogy. Whatever comes out of their dangerous game of chicken with the Fed and Treasury, there are three things that can be done now that will make any plan come out much more smoothly. Oops, sorry.

This is mostly repetition from various posts that began March 10. There are many others who agree as well and who can rant in a more public way, from Jim Cramer on the regulating of short sellers to Bill Issacs, former head of the FDIC, on mark to market accounting. The three actions are:

---Reinstate the uptick rule and monitor it
---Enforce rules against naked short selling and rumor mongering intensely, and put in some enforcement teeth that mean something to very wealthy people, things like revocation of securities licenses, big fines, and jail.
---Revise the mark to market accounting rules asap. Mark to market rules that require marks to markets that don't exist have no doubt led to the credit default swap crisis, as credit default swaps are essentially mechanisms to short sectors of the bond markets, mostly mortgage securities to date but you can bet that credit card and auto loan securitizations now have targets on their backs. Shorting the bond markets based on forced price discovery in illiquid and thin markets has been a disaster for entire companies, for pension funds and individual investors, and of course a bonanza for a limited number of traders.

Isn't it strange that so many congressmen rail against "bailing out Wall Street and the rich" while the absence of these rules and regulations are creating huge wealth for a relative handful of professional traders who do not create jobs for our economy and do not provide useful products to improve the standard of living for the broad economy. All's fair in their free markets. Some might say you could say the same about Wall Street, but that decimated area employed tens of thousands of people(120,000 have lost jobs so far in this panic) and found equity and debt financing for productive investments for many companies. These trading shops, the predatory market manipulator SAC Capital is a perfect example, employ a few hundred people and have no goal other than taking cash out of the market. Why no fair regulations for these firms?

Implement these rules and then give the Treasury and Fed at least enough ammunition and discretion to go out and begin clearing the markets. With those rules addressed the Fed will ultimately have a chance of breaking even or possibly making money on the taxpayer's investments over several years and restoring credit markets today.

Congress jabbers, market falls

The market was somewhat of a relief for much of the day even as Paulson, Bernanke, and Cox were questioned by Senators. For the most part it was a reasonable give and take from what I saw, with open questions but general support for doing something. It seemed at times like the Senators knew that they were going to be approving something large and dramatic but were buying some political cover.

Then that hearing was over and in the afternoon an unknown, to me, Democratic representative from Maryland whose claim to fame is apparently raising money for the Democrat's campaign committee decided to talk to reporters, at a little after 2pm. According to Bloomberg he said that it would be difficult for House Democrats to support the financial market rescue. Immediately the market cracked, once again, and the last two hours were down down down. Then reporters began talking to the Kentucky baseball player who is also a Senator and he whipped up the no nothing school of credit markets into a frenzy, and others members from both sides of the aisle began to jabber. The Bloomberg story on this is disturbing, and I'm so glad that I wasn't watching CNBC through all of this.

Earlier I had caught the new anchor on MSNBC, the aging preppy David Gregory who had been NBC's White House correspondant, and he had no understanding at all of what's going on. He made Olbermann and Matthews look smart. Fortunately he did interview a columnist from the Washington Post who seemed to be a veteran observer of the markets and he was brilliant. After hearing a little of that Gregory cut him off abruptly and said there was no more time, and it seemed obvious that he did not want to hear what was being said by someone who was so much more knowledgeable that his ego was getting bruised.

The fact that this financial proposal is being presented by all of these media commentators as a rescue of Wall Street is bad, some sort of false populism that now is not the point, not the point with the exception of getting the personal approval of many Americans watching who simply don't understand any argument for or against the proposal. Give-em a cliche that they want to hear. It's sort of obvious at this point that Wall Street has already been devastated.

The only good news here is that Congress plans to recess on Friday, or had planned to, going back to their homes to put in a little campaign time and vacation time in their states and districts. They can't possibly leave D.C. without doing anything. That would be a calamity. Maybe arm twisting can get this done soon if only because the congressmen want to go home.

Wednesday, September 17, 2008

More from an Inspector Montalbano Mystery

"The question had been asked by a young guy, and up-and-coming assistant inspector, well-dressed, quick-tongued, and well-toned, with a lock of hair falling rakishly onto his forehead. He looked like a social climbing business type. One saw so many of his ilk these nowadays. A rapidly proliferating race of assholes. Montalbano took an immediate dislike to him."

From "The Patience of the Spider" 2004, by Andrea Camilleri

There is no long term...

Yesterday's post ended with the comment that wiping out AIG shareholders "would be a short term solution but in the long term could be a terrible market and economic choice". The short term was overnight. The long term was today. The government's Putin like confiscation of an 80% equity stake in AIG creates a new definition of the term "moral hazard".

Monday's financial post began with an analogy to Ike and Gustav and then said "the thought that it could be like Katrina with levees breaking 36 hours not pleasant". The levees have broken. Picking up the pieces is now a long term project and unlikely something that will be solved by cyclical bounce in equity prices. Readjust folks, you now permanently have less money.

Today's morning post suggested two mergers. One has been around a long time, JPM and WaMu, but it is back on the front burner. As mentioned the other day former WaMu CEO Killinger had saved his skin for a short time by agreeing to a put for TPG but amazingly TPG has agreed to give up that right today. If JPM pays, say $4, I guess TPG decided that getting half of its money back plus stock in the best run financial company was better than a one time payout. Actually I don't get it. None of these folks give an inch, so as said earlier today there must be some arm twisting going on as well. The real stretch here was Wachovia/Morgan Stanley but it now seems to be real. You might say that it's like tying two bricks together and hoping they will float, but that's what they said about Manufacturers Hanover and Chemical and it led to the company that bought Chase and bought JPMorgan and bought Banc One so it could ultimately be a good thing.

The AIG deal is difficult to evaluate. Had a deal not been done would the Dow be down 2000 and dealers around the world be unable to calculate the value of any credit security that is below AA. Maybe. We can't know. We do know this here. The 80% confiscation of AIG stock was a horrendous mistake. Does GE come under a liquidity run due to its big financial services division and now get bought by the government as well. This is the short sellers dream. They become fabulously rich and the country they live in takes the loss, the taxpayers take the loss. Are we really modeling ourselves after the oligarchs of Russia and the obscene mega wealth capitalists of China. AIG was a difficult decision but there was no need to rush. They have, had, so many valuable assets that a bridge loan backed up by the aircraft leasing operation or the Asian insurance operation could have been put in place to come up with a reasonable solution. Fannie and Freddie are no comparison. They were always viewed by the market as government entities, mainly just back office operating companies, and the huge salaries that were paid there were funneled in part back to members of Congress. It was government controlled graft, by both parties. AIG is totally different. There is immense value in this company. For the government's political face they took almost all of it, and of course they will have no idea what to do with it. Government bureaucrats are experts in where to go to lunch and how best to exploit vacation and sick days. Their oversight of a company as brilliant as AIG was is ludicrous. There is no long term. It's all happening now.

I sure hope that I'm wrong.

Three things that must be done tomorrow...

--- reinstate the uptick rule on shortsellers immediately
---start enforcing rules for once in this administration against naked short selling
---announce that the terribly flawed mark to market accounting rules(repeatedly explained here) will come under Treasury and SEC review for revision

This is all so simple. Not doing this suggests complicity with the Steve Cohen's (SAC Capital) and other hedge fund types to essentially hijack our economy.

Deals under discussion

---JPM and Washington Mutual is back on the table apparently. The Fed and Treasury would like nothing better than getting WM off the table and JPM would get a west coast franchise plus tons of cost cuts from the bloated and overlapping WM businesses. JPM has played a key role in the Lehman filing to stabilize markets by providing significant liquidity and Treasury and FDIC arm twisting could be a quid pro quo.
---My guess, big guess, is that Wachovia and Morgan Stanley are kicking the ball back and forth. A day ago I would not have believed it, but rumor is that Morgan Stanley is seeking a deposit base. The Charlotte banks seem to move in lockstep and after BAC/MER that's the only incentive needed for Wachovia. The problem is that Wachovia is up to its eyes in problems of Ken Thompson's creation but, rethinking that, other earnings streams could be helpful. Both Mack and Steel, the respective CEO's, are Duke grads and have North Carolina backgrounds. Any deal would likely be highly dilutive to Wachovia shareholders in the short term but they should be accustomed to that after 25 years of Crutchfield and Thompson.

Tuesday, September 16, 2008

A few bits of market recap...

There has been so much going on today in this turbulent time for financial markets that only a few random comments follow. Anything that captures it all would not allow me to tune in to the middle innings of the Mets game and see if their bullpen can finally work. The market was up today after what appeared to be furious retail selling in the morning. A few comments:
---The Fed's decision not to further lower rates as many in the market had predicted was perfect. In this environment lowering rates would have made no difference at all, at least on the positive side. It would be immaterial and completely irrelevant. It would also set the table for further dollar weakening which is the last thing that is needed. In fact in could be counterproductive to its supposed goal of combating inflation as weakening the dollar could exacerbate total inflation given the oil and food issues, albeit that they are considered non-core. Great decision by the Fed.
---Who the hell is Nouriel Roubini, the doomster NYU professor, to get all of this prime time attention. The punks at Fast Money on CNBC love this guy but he reminds me of Ravi Batra, the SMU professor who wrote the best seller of 1987 titled "The Great Depression of 1990" which was followed in 1988(all published by the reputable Simon and Schuster) "Surviving the Great Depression of 1990". Without being politically incorrect I would humbly suggest that these non native, non ethnic, but American educated professors do not understand the strain of optimism that underlies the best of the American psyche and that they exploit fear for personal gain and attention. Unfortunately that statement could apply to many pure Americans, even those at the highest levels. PC gods please absolve me.
---Two side by side video segments on Bloomberg tonight were, first, Bill Gross of Pimco saying that some government aided short term solution to the AIG issue was absolutely necessary and, second, Senator Richard Shelby of Alabama saying that there should be no goverment involvement at all. Who would one believe, the astute and successful manager of the world's largest bond fund even if he is talking his own book to some extent or a powerful political hack who is viewed as distasteful and untrustworthy even by many members of his own party.
---McCain is going haywire, today calling the financial crisis a result of "corruption", "reckless behavior" and "lack of regulation". One by one, the "corruption" charge sounds like Hillary and there is no one talking about any kind of fraud here. "Reckless behavior" is great in hindsight and that may well be a correct statement but where was McCain when the free markets were allowing this miracle of credit creation for all. "Lack of regulation" is the biggest stunner because McCain has always opposed any step up in regulation. He was a charter member of the Keating Five in the S&L debacle(barely avoiding being indicted) and he has always been thick as thieves with the Day family in Arizona, right wing free marketers in the extreme with Robert Day(Day is currently under investigation for insider trading of Societe Generale stock) who is head of Trust Company of the West and a long time Board member of Freeport McMoran(same if not more extreme) with Sandra Day O'Connor turning out surprisingly to be the anomaly in the family to the dismay of those who supported her Supreme Court appointment. McCain of course cannot say something like "I have no idea what the fuck is going on but I will appoint good people" but he shouldn't just outright lie about his entire history in the Senate.
---Good Morgan Stanley earnings this evening, continued decline in oil prices, lower inflation numbers, and some resolution of AIG possibly ahead, all maybe leading to some respite tomorrow. If the AIG solution almost totally wipes out shareholders and even some bondholders that would be a short term solution that is a politically expedient choice but in the long term could be a terrible market and economic choice.

Monday, September 15, 2008

David Foster Wallace

The death of David Foster Wallace is sad. I had just recently reread his essay "A Supposedly Fun Thing I'll Never Do Again" in preparation for a first cruise that was a family obligation, or opportunity. That trip has since been canceled but I enjoyed reading the essay again and essentially revisiting why I have not yet been on a cruise.

After almost 48 hours of just the information that it was a suicide by hanging it has now become clear through his father that an issue with depression that had been managed by medication had become unmanageable in the last year. The medication no longer worked, no substitute was found and electo-shock treatment over the summer had not worked. David Foster Wallace could not see any answer and take the pain any longer.

Again this is sad, and disheartening to me. He was by all accounts a good sincere person, a darn good junior state and college tennis player, a good student, and a gentle and interesting person to be around. His fiction could be manically brilliant or obsessive and his journalistic work was humorous, insightful, and self conscious. He was a talented writer and there was no one quite like him.

Peace, God Bless, Live on, too bad too soon

The market issues continue...

In the financial markets today was like the equivalent of Ike or Gustav, meaning for most of us you could do nothing about your investments, just take cover and watch the devastation. The thought that it could be like Katrina with the levees breaking 36 hours later is an analogy that is not a pleasant thought.

Some thoughts on today:
---BofA and Merrill made the same mistake that was made in the Chase/JPM an all stock deal. They somehow assumed that the market would accept whatever price was suggested, in this case $29 for Merrill. The market of course values the aggregate concern in any way it pleases based on its view of the valuation so today's judgment was that Merrill was worth the same $17 that it started the day at and BofA lost 21% of its value to finish at $26.55. Do Boards of Directors really fall for this ruse, or do CEO's really not understand it. In both instances the answer is likely yes for BofA, while Thain was getting the best deal possible for his shareholders and his reputation. Whatever, it's a positive market development.
---Washington Mutual aka WaMu is likely going down. It was downgraded to junk debt this afternoon and the stock was at $1.76 in after hours. The deposit withdrawals could begin soon, and they will likely begin in its area of greatest concentrations in the northwest U.S. Concern will begin to spread contagiously if there is any catalyst. New York Senator Chuck Schumer did the job on California based Indymac with his, as usual, camera hogging and attention seeking provocative comments about confidential information that created headlines and lines at banks there(Indymac was almost totally Alt-A, not subprime, and had only 3 billion of option pay loans compared to 25B for Countrywide, 53B for WaMu, and 122B for Wachovia but it failed because of a bank deposit run instigated by Schumer. It certainly could have ultimately failed but the immediate reason was a complete dry up of liquidity). Let's hope no politician inadvertantly starts the run and no hedge fund player intentionally does something fatal.
That risk stated, and it could be big and immediate(as in this week), Washington Mutual's Board of Directors and former CEO Kerry Killinger's actions in attracting funds from private equity investor TPG were such that they should be put into the general population of the worst prison in Washington state. Bloomberg reported today that in getting TPG's equity infusion(and that of several other private equity funds) to fend off JPM's bid of several months ago they agreed to contractual language that required that huge payments be made to these private equity firms in the event that any bid was accepted below their offer price of $8.50. What is essentially a poison pill makes the likelihood of a WaMu bankruptcy much higher, and therefore Killinger's last stab at his personal longevity may cost the jobs of thousands upon thousands of what he cheerleaded as Wamullian employees if the FDIC takes over. That such agreements are even legal is a question here, but if it prevents JPM or some capital solid foreign institution like HSBC from stepping in it's sad.
---AIG, as mentioned in yesterday's post, was ultimately the key today. Unbelievably there was no news out of the company despite all reports of expectations. Looking at the company's Board of Directors the answer is clear. Of the 18 non-executive directors only two or three are not the honorary types, which are those chosen only by connections, long past accomplishments, or pc considerations. This Board is not remotely knowledgeable about financial markets and was never intended to be anything but a rubber stamp for management and a verification of the firm's preminance. They are overwhelmed and they likely had not given new CEO Willimstad the authority to do anything. It is still "stunning" that this incredible franchise could be killed by liquidity issues, and it would be doubly stunning to the overall financial markets if it was. Governor Patterson of New York gave some wise regulatory leeway this evening and now Goldman and JPM have been charged with finding a pool of liquidity, privately, to stand behind AIG. Morgan Stanley has been hired by the Fed to evaluate AIG as well. So all the real firepower left on Wall Street is now left to figure this out quickly. The middle of the order is up and now they need to score some runs in the bottom of the ninth. That's about it. They must get it done.
---The issue of liquid and orderly markets was apparently a good sign today. No major issues reported in the derivatives markets, which if it holds is a big, big, big positive deal, and everything worked. It did take the NYSE much longer than usual to process final trades as I left the screen at 4:12 with the Dow down in the mid 400's and was back a half hour later to see that it had closed down over 500, but it all worked.

Sunday, September 14, 2008

Unprecedented market day ahead

With the significant financial market scramble this weekend, the equity and credit markets will be tested early this Monday morning in Europe and then follow through into the U.S.(many Asian markets including Japan and China are closed for a holiday). The impact of the news will likely be difficult to digest initially. It's safe to say that the derivatives markets have never gone through such a test and that the impact on the largely unregulated hedge fund industry is a concern. At the time of the '87 crash most derivatives markets were small and by today's standards simple, mainly fx and interest rate, and the hedge fund industry was relatively small. In the near total seize up of the credit markets in the 1998 LTCM and Russia debacle the derivatives markets were larger, but there still was almost no such thing as credit derivatives, and the hedge fund industry had grown but remained small compared with today.

So there's likely to be a rough start to the day as the market absorbs the news and the tone of trading, is it orderly and liquid or does it become chaotic, is judged. The day's result, however, is far from certain on the downside or even, dare it be said, in a late day recovery. No one knows.

Lots of lingering issues overhanging the market are being dealt with in a crisis mode. That is seemingly how difficult decisions of this magnitude get made. Lehman files and parts of the company get firewalled to operate until picked up at huge discounts to their probable long term value. Lehman's $50 billion plus face value of unquantifiable assets are segregated, and the market says goodbye to Lehman as an ongoing firm. That is the biggest risk of chaos but Fed money flowing out with all kinds of collateral allowed should provide liquidity along with a sort of bad bank consortium of funds from ten other major banks.

With it now clear that there will not be another Bear Stearns type Fed backstop deal, BofA dropped its due diligence of Lehman and then Merrill and BofA ran as fast as they could to each other, Merrill for survival with honor of sorts and BofA for a firm with the presumption of considerable value over the long term. That's good news.

The biggest wild card tomorrow is AIG due to its extensive involvement in the credit derivative markets and mortgage securities markets. AIG is just too big and complex at this point for anyone to acquire but they will put out restructuring and refinancing plans of some type in the morning. Without any leadership available from the gutted securities research industry, getting a handle on AIG will be a huge market challenge, one that may be addressed simply by the word "sell" until notified otherwise. That this global insurance powerhouse with its huge and pioneering base of business in Asia has come to this so quickly is stunning, even more of a sign of the stress of these times than Bear and Lehman, but there's no denying that it's in trouble(interesting 13-F filing's show that all of AIG' s top 15 institutional shareholders chose to add more shares in the second quarter, that's what stunning means).

A few big banks will be watched tomorrow as well. WaMu is a relatively simple business but may need a buyer to step forward. The WaMu option ARMs Alt-A book of $53 billion is a big problem for any buyer but JPM could perhaps stomach it at $1 a share. Unfortunately, if things get really ugly Wachovia is not out of the woods yet either, given that its option ARMs book is more than twice as big as anyone in the industry, over $122 billion, as its Golden West acquisition was the west coast market leader in this innovation with WaMu a distant number two.

May trading be liquid and orderly!

Thursday, September 11, 2008

Rolling the dice

Lehman to BofA, Wamu to JPMChase, that's the deal I guess.

Wednesday, September 10, 2008

Doing the Lehman limbo, or how low can financials go

Even the prime minister of Thailand could hardly have conspired to cook this mess up. Combine a consumer credit bubble driven by home mortgages and a loss of faith in securitization markets, add in a flawed set of mark to market accounting rules abetted by a sprinkle of potential criminal liability, and then throw in a heaping portion of unfettered short selling. Turn up the heat, it's the Lehman limbo.

We are back in crisis mode for financials, a situation that seems to come around every three months at the moment. The Fannie and Freddie takeovers were necessary but it set an alarmist tone that rocked the entire market, well beyond the financials. Searching for liquidity some hedge funds and lots of individual investors were selling indiscriminately yesterday.

Other than the obvious fact that the market is going through the pain of deflating a credit bubble, there are two things that are exacerbating, or exaggerating hopefully, this downward spiral in equities. First, the mark to market accounting rules did not anticipate a situation in which markets for certain securities and contracts, that definitely have some value, would not exist in a credit seizure environment. This is an unrelenting negative trigger during these crises, and was discussed here at ENS ad nauseum in a March 18 post. Second, also previously discussed somewhere here, is the lack of restrictions on short selling, notably the elimination of the uptick rule in July 2007. This rule was put in place in 1938 to deal with times when liquidity dried up and the market was subject to severe declines or outright manipulation. In 2007 the SEC and others decided that U.S. markets had become more sophisticated and therefore more stable and this rule was not necessary and was hindering the free market mechanism. My conspiratorial mind suggests that this was no accident but who knows. It seems clear that now is the time to put the uptick rule back in place, immediately and not just for two weeks.

This week we find out if Lehman can go low, make it under, and stand back up. Who's next in line.

Sunday, September 07, 2008

The Conventions, and Sarah Palin

The long primary season, followed by the recent political refining of both presumed nominees views and political tactics, left little to be revealed at the political conventions. The only real news of the two weeks was Sarah Palin. Standing back from all of the exhaustive, tedious, and repetitive coverage of the conventions there was little to add, and little motivation to comment on the spectacles. That said, here are a few post convention comments:
---Both parties ran well-organized and for the most part tightly controlled conventions. Minor point, but they both ran something well.
---In hindsight, isn't it kind of weird that the Democrats built so much of their convention language and thinking around George Bush and the Republicans did not. It's understandable, of course, but the impression is what counts today it sometimes seems, not the facts. Even the minority of voters who still support George Bush are for the most part tired of him. Did the Democrats give the "impression" of needing him while the Republicans are ready to look ahead.
---One has to wonder if Obama's oratory skills have taken him as far as they can and that he needs to pull another arrow out of the quiver to get over in the hump in the next two months. The words are high minded and often delivered with unexpected intelligent nuance and of course with a cadence and intonation that can be inspiring. Unfortunately this now may have become old news. His vaunted but familiar speaking style combined with his mannerism of looking slightly skyward as he speaks, with a tilt of his head to the right that is suitable for framing, could be taken the wrong way at this point. What actually won the Democratic nomination for Obama was a political strategy and on the ground work that surprised the Clintons, and by the time they understood what was going on it was too late. Obama, the campaign, needs to get back to focusing on the basics that got him to the podium in the first place.
---The one speaker that can't escape comment here is Rudy Guiliani. That was the real Rudy, the one that we lived with in New York. Charming and ugly, decisive and vindictive, having a wonderful time, in love with himself, and taking so much more time than he was allotted that the convention controllers eliminated a Palin video and trotted her out there immediately so that a little prime time remained.
---Sarah Palin was the earthshaking news. There really should be no debate about the fact that she is totally unqualified to be one step away from the Presidency and it is not sexist, biased, or even partisan to say that. That is really the sole importance of the Vice Presidential role(until Cheney at least), and it is important. Five times in the 20th century the Vice President had to step up, and there were two other very close calls. John McCain is 72, and one could suggest that it is not really a "young" 72. Life takes its toll. McCain's five plus years in a concentration camp were, to put it mildly, grueling and left him a physical wreck that required determined and painful rehabilitation. His bouts of melanoma can be checked and dealt with, but there's is an element of uncertainty here. On top of that it is well known and acknowledged that McCain lived a work hard play harder lifestyle both before his captivity and after and only calmed down in his fifties. It is often said that life expectancy is high in his family and his vibrant late 90's mother is pointed out. But there are two sides to this. His father died at age 70 and his paternal grandfather died at age 60. An insurance actuary, factoring in the candidate's age and history, would charge some steep rates if he had the need for life insurance.
Palin's convention speech was well presented. She showed personality and presence. The fact that almost every word was written for her by a talented speechwriter is no knock either since that is true with most politicians, corporate CEO's and other people in power. Obama is one of those exceptions that writes some of and actively participates in everything that he says. The problem came when Palin reached the foreign policy part of the speech, subject matter that until last week even she admitted knowing little about, and it seemed that she was like a sixth grade student reading from the textbook. To my mind that diminished her. The fact that others wrote the speech and created some big lies about her record was politics as usual, but having her look like the puppet she is was over the top. I don't guess many people inclined to like her will notice, and it is not important that some of us found the whole speech immensely depressing.
The power of Palin is that her appeal rises above capability. The fact that she is a woman is just a sideline benefit because her real appeal is lifestyle choice, the kind described in the book "The Big Sort". Her small town background, experience with guns and the outdoors Western life combined with her evangelical Christian background and unequivocal points of view on so-called conservative "values" issues gain her a credibility that cuts into Hillary Democrats in Pennsylvania as well as fence sitters in important Western states. Obama, Biden and McCain don't reach some of this constituency at all and Palin will. Her lack of experience, knowledge, and any type of world view, or even national view, are meaningless to some when her lifestyle numbers are added up. To some she will be simply "one of us" and nothing else matters.
That McCain chose Palin has been characterized by many as indicative of the type of seat of the pants decision making that he could also make as President of the United States. In some ways, however, it was a calculated decision to change the game in this election. The vetting process may not yet be over, given the short shrift it got in the first place, but if Palin survives it fully within a few weeks(has she paid taxes for all caregivers while her husband was fishing, working for oil companies, and snowmobiling and she was being a politician and governor for example) then the biggest risk of McCain's choice will have passed. What it says mostly about McCain is that he is a cocky and insular fly boy just as George Bush has been a cocky and insular frat boy. As an experienced and to a large degree accomplished U.S. Senator, how could he be so cynical that he would pick someone with Palin's thin credentials and complete lack of any global perspective to be his candidate for Vice President of the United States?

Friday, September 05, 2008

Bonanza ahead for trial bar extortion?

A week ago I received one of those regular notices of a class action settlement for one of the stocks that I own. This one was a great example of what goes on in these cases and, darn it, I tossed the letter out after sending back my usual hostile reply, but I do remember the basics. This was the settlement of a class action suit against the Coca Cola Company filed by an Atlanta law firm and a Los Angeles law firm jointly. What it was about was impossible to tell with a quick scan of the legalese, some sort of accusation of supposed misleading communication by Coke. The settlement was was for $139 million with Coke not admitting to any wrongdoing. The case had been ongoing for five years, and covered the class of all shareholders of the company from 2001 to 2005. The law firms were awarded by the court a fee of 27% of the settlement plus all expenses associated with the action.

So here's a little quick math. A 27% cut as the law firms' fees equates to $38 million of the settlement. One can only guess at the expenses, but they include all printing, mailings, phone calls, hotels, meals eaten when working on the case, car services used by all employees when working on the case, all air travel, outside vendors such as deposition video services, stenographers and outside experts, and god knows what else. Since law firms are generally not public corporations there are no limits on their spending and everything is generally top drawer, meaning front of the plane, limousines, the best restaurants, no limits, as long as the court can be shown that it related to the case. So over five years it is easy to guess that there were as much as $10 million of expenses associated with the case. So that's $48 million to those defenders of the little guys against the evils of corporate America, and that leaves $91 million for the affected class. At that time on average it appears that Coke had 2.1 billion shares outstanding. Since there is turnover in shares and the settlement covers anyone who held shares during a four year period that needs to be grossed up by 20%, and that is definitely conservative, and it leads to a class of 2.5 billion shares. That leads to an award of 3.6 cents per share for the shareholders. So you, the little guy who the trial bar says they protect, had 200 shares, you could fill out detailed forms proving what you held during that time period, pay your postage, and get $7.20 back in the mail. 1000 shares you own, which means that you have over $50,000 worth of Coke stock, not such a little guy, you would get $36 back. Meanwhile, your company, KO's the symbol, has spent countless man hours and expenses dealing with the trial bar. There is only one winner here, and there is no ethical purpose whatsoever to their calling.

Most retail shareholders for obvious reasons don't even bother seeking their pittance and even small institutions can't take the time to document their holdings for such a small payout. Only the biggest institutions bother to file, and only a group of union pension funds who are allied with the trial bar in ways that should be investigated feel like this is any victory. So, just guessing, say 50% of the $91 million goes unclaimed. Eventually the court allows Coke to pay the shareholders in general, so Coke cuts a check, so to speak, from their cash account and pays it to their shareholder equity account, meaning Coke pays Coke. The only real purpose of the great majority of these suits is for a small group, relative to the employees of corporate America a tiny group, of attorneys to make huge fees for themselves.

Of course there is a public purpose of value for the trial bar. Some represent victims of true medical malpractice although that has become an extortionary business of its own in recent years raising medical costs for all. Some sue insurance companies who refuse to honestly pay off claims against their policies and, generally speaking, more power to them. Some have cases where corporations have knowingly produced faulty, unhealthy and dangerous products and foisted them on the public, and some of course take corporate managements to court for deliberately and materially misleading shareholders. Unfortunately those types of cases that were the stated purpose of the trial bar years ago are in the great minority today. Most are just plain extortionists.

Today a few of the leading practitioners of this activity in the last 30 years are going to jail so there is at least a shot across the bow of this pirate ship. Unfortunately, however, the riches to be gained are such that firms dedicated to simply looking for the next suit have proliferated and attorneys graduate from law school seeking a career in what is a huge waste of economic resources with no social purpose.

Why do I bring this up now. Stocks across the board have suffered over the past year. That's all the trial bar needs. What corporate management predicted this current environment correctly. If they did not, well, of course they misled their shareholders. Massive numbers of suits will be filed against companies large and small as this develops. It's damn sad.

So I started by mentioning "my usual hostile reply". With every one of these "settlements" there are forms to fill out to claim a part of the settlement plus, of course, a return envelope, occasionally pre-stamped in real legitimate cases, but most often not. With Coke I put my 42 cent stamp on the envelope and enclosed a brief note on an index card that began "To the person that opens this envelope---the people you are working for are the genital warts on the American free market economic system. They extort millions, sometimes even billions, for the benefit of no more than a handful of people from U.S. corporations that employ millions of hard working Americans...SHAME", or something like that. Genital warts was a new one, as scum, vultures, leeches etc. have also come to mind at times. Juvenile, useless, yeah I know, but what the heck.

What political party is by far the biggest supporter of the trial bar and is a huge beneficiary of their largesse? What party actually had one of these people running for President? What party blocked all efforts at any reform legislation when they held the presidency from 1992 - 2000? What party passed some meaningful reforms(more are needed) in the last eight years and began to seek to prosecute the most high profile and egregious offenders, among whom was Bill Lerach who openly bragged about what he was really doing, and now the creep is finally off to prison.

If Obama, by any chance, is elected one would hope that he could take on the Carl Levin and Hillary Clinton types of his party, and there are many, and begin to address this amazing blind spot in a party that purports to have much more noble goals.