Monday, September 15, 2008

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.

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