The Big Picture

Another Tool for the Fed ?

Tuesday, May 06, 2008 | 10:00 PM

Have you ever even thought about this?

"The Federal Reserve is formally asking Congress for authority -- starting this year -- to pay interest on commercial-bank reserves, in an effort to gain better control over interest rates and more leverage to battle the credit crunch...

In 2006, Congress gave the Fed permission to pay interest on reserves -- the sums banks keep on deposit at the Fed -- but it delayed the effective date of the legislation until 2011 to postpone the cost to the Treasury.

Banks are required by law to hold a certain fraction of their deposits in reserve accounts at the Fed, but receive no interest on these deposits. Having the authority to pay interest would solve two technical headaches for the Fed.

If they earned interest from the Fed, banks would have no incentive to lend out excess reserves for less. That would make the Fed's benchmark federal-funds rate, which banks charge on overnight loans to each other, less likely to plunge below the Fed's official target -- now 2% -- on days when the banking system was awash in cash.

I'll bet this sort of stuff never even entered your thinking . . .

Source:
Fed Seeks Approval to Pay Interest to Banks
GREG IP
WSJ, May 7, 2008
http://online.wsj.com/article/SB121011673771072231.html

Disconnect

Tuesday, May 06, 2008 | 07:04 AM

in Credit | Finance | Markets | Psychology/Sentiment

Today, we are going to go to Bill King, a long time observer of the stock markets. Bill writes the daily “Independent View of the News”, for institutional clients (you can contact him here).

This morning, he wryly observes:

"Despite the braying about the credit crisis being over, the economy about to rebound and stocks entering a new bull market, the fundamentals not only remain crappy, they are worsening.

Months ago, Goldman’s CFO said there was a historic disconnect between the stock market and the credit market. But that’s not the entire story. There is also a historic disconnect between L’Affaire Bear and the credit markets and the economy.

Because the US financial system did not implode when Bear was rescued, people assume all is well in the credit markets and financial system. This is a gross miscalculation. The Fed proved this last Friday when it expanded its record credit-creation gimmicks and loosed collateral standards to a new all-time low.

Bloomberg: The Federal Reserve said the proportion of U.S. banks making it tougher for companies and consumers to borrow approached a record in the past three months as the credit crunch deepened. A net 70 percent of banks increased loan rates over their cost of funds for commercial and industrial borrowing, according to the central bank's quarterly survey of senior loan officers released today in Washington. That compares with 45 percent in the January survey, the Fed said.

As we stated several missives ago, there is no way the US economy, which has never been more dependent on debt to generate GDP, can flourish without an enormous amount of debt creation. If debt is now being curtailed or rationed, there can be only one direction for the US economy.

Morgan Stanley economist Richard Brenner: DISCONNECT - The economic fallout begins: Financial turmoil peaked six weeks ago, but the economic downturn is only beginning. It’s still a recession, in our view, and that’s no longer in the price. Indeed, reflecting higher energy quotes and slipping growth abroad, we see weaker US growth over the next few quarters than we did a month ago

The Times of London: After the crunch, a crisis in banking confidence Credit risk – that of borrowers not repaying loans – was cited as the next-biggest risk after liquidity. Consumer indebtedness was also a worry. A senior banker in an American bank said: “Consumers are in worse shape than most observers appreciate … their failure rate will look like a tsunami to those lollygagging on the financial beaches.”

Bill adds a pretty astute trading call each day: Example:

Today – Traders will play for a Turnaround Tuesday to the upside. But S&Ps must hold 1400; oil and commodity must behave and FNM (-.64 exp) cannot issue a disturbing report…There is no economic news or impact events to worry about.

Great stuff -- thanks Bill.

Sources:
The King Report
M. Ramsey King Securities, Inc.
Bill King
Tuesday May 6, 2008 – Issue 3869
http://www.mramseyking.com/index.html

Fed Survey Shows More U.S. Banks Tighten Loan Terms
Scott Lanman
Bloomberg, May 5 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=a45nIbT1eKLo&

After the crunch, a crisis in banking confidence
Patrick Hosking
Times Online, May 6, 2008
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3876856.ece

Report on UBS' $37 Billion Writedown

Saturday, April 26, 2008 | 07:06 AM

Kids, we have some fascinating reading in store for you this weekend.

The "conservative" Swiss banking giant UBS -- and I put that in quotes for obvious reasons -- wrote down a previously unimaginable $37 Billion dollars. Their shareholders were (ahem/cough) quite perturbed. So the nice folks at UBS, with an assist from KPMG, put together a 50 page report detailing the hows and whys UBS took such a humungo hit.

For what you would expect to be a dry report, it is absolutely compelling reading. It explains much more than the subprime fiasco. The report implies that management didn't really understand what the hell they were getting into with their purchases of Warburg/Dillon Read Capital Management. This unit eventually became UBS' internal hedge fund (it has since been shut down).

I wonder if management ever truly understands the nuts and bolts of these large acquisitions. We will find out if JPM knew what they were ~~getting into~~ getting the Fed into with the Bear Stearns (BSC) acquisition.

The report includes an indictment of the firm's compensation packages. The current structure -- big salaries and bigger bonuses -- encourages the riskiest and most short term of strategies. Prudence, risk management, and long term thinking were not money makers for employees. When the time came for the company to take its writedowns, many of these bad actors were long since gone. Go on, take the money and run.

You may not be surprised to learn that external consultants were involved and recommended "streamlining of risk processes." I don't know if these unnamed consultants were McKinsey & Co., but the whole description has a faint Enron-like smell to it.

A few other questions arise from the report:

Why do very risky strategies seem to end up in Fixed Income ?

How did Risk Control fail so badly?

Why was there an "Absence of risk management" and "Incomplete risk control methodologies" ?

Who created these compensation system ?

Again, this is just the tip of the iceberg in terms of asking what went wrong.

I wonder if this the inevitable banking equivalent of the Minsky moment. Perhaps these megabanks are simply too big, too unwieldy to be appropriately managed as hedge funds, rather than sleepy conservative banking institutions. The perverse incentives encourage reckless behavior.

Fascinating stuff . . .

Sources:

Shareholder Report on UBS's Write-Downs
18 April 2008
http://www.ubs.com/1/e/investors/agm.html

UBS ShareholderReport.pdf (download)

Related:

A good name sliced, diced and traded
John Gapper
FT, April 24 2008 03:00 | Last updated: April 24 2008 03:00
http://www.ft.com/cms/s/0/51099762-1198-11dd-a93b-0000779fd2ac.html

How UBS came undone
Roderick Boyd
Fortune, APRIL 23, 2008: 4:38 PM
http://money.cnn.com/2008/04/23/news/companies/ubs_deflates.fortune/

Too many risks, too few controls, says UBS report on write-downs
David Gow in Brussels
The Guardian, Tuesday April 22 2008
http://www.guardian.co.uk/business/2008/apr/22/ubs.europeanbanks

Fear of Missing A Rally

Friday, April 18, 2008 | 02:15 PM

A friend who is a fund manager asked me the following question today: What's the greater fear, missing a rally, or owning equities that go down?

Today's rip-roarin expiration day market rally might help answer that question. The fear of missing the rally certainly appears to be the much greater sin -- at least to most professional managers today.

Now consider this interesting variation (This one should definitely get the attention of trend followers).

John Roque -- the very smart technical analyst for Natixis Bleichroeder -- John relates how he continues to hear on CNBC and from clients that “financials are cheap…we’re doing selective buying.” Or, “We’re buying financials down here. They’ve been destroyed.” Or, “The financials are raising capital and getting the deals done. The worst is over. We’re buying some good ones.”

Now, compare that attitude with typical investor interest/sentiment about oil, food commodities, or natural resource stocks. Extended! Overbought! Driven by speculation!

So if you are looking for a true contrary trade, which do you choose:

- The one in a long-term uptrend with no sign of any technical weakness, widely disbelieved the whole way up?

- Or, do you go for the relentlessly beat up, long term down trend -- the one if you are buying here, you are merely guessing the worst is over.

Thanks to John Roque of Natixis Bleichroeder, here's the relative Market Cap of S&P Energy versus S&P Financials:

courtesy of Natixis Bleichroeder

Bailout Poem

Saturday, April 05, 2008 | 05:15 PM

in Credit | Derivatives | Finance | Real Estate

If it wasn't so sad, it would be terribly amusing:

Tom Toles

Thanks, Kitty.

Today's Infoporn: Follow the Money in Global Dealmaking

Wednesday, April 02, 2008 | 11:44 AM

in Credit | Finance | M&A

NYT's special Dealbook section today had a deliciously giant graphic on the global path money takes in today's deal making. You may have stumbled across it in print, but found it difficult to track down on line. It was buried in the Dealbook blog, and required a few extra clicks.
>

click for ginormous version

Source:
Follow the Money
ANDREW ROSS SORKIN
NYT Dealbook, April 2, 2008, 2:03
http://dealbook.blogs.nytimes.com/2008/04/02/follow-the-money/

Housing slump comes to the Hamptons

Tuesday, April 01, 2008 | 12:15 PM

in Economy | Finance | Real Estate

Manhattan has been mostly immune from the Housing slump. This has been primarily due to lots of Wall Street money, and the cheap dollar, which has made real estate in the NY area very attractive to Europeans.

The Hamptons are apparently less immune. Its a seasonal market, so when problems show up, they do so very quickly. Its now the beginning of the rental/purchase season, and the issues are brought into bright relief:

"In a sign that falling prices and home sales gluts are no longer limited to the nation’s declining rust-belt cities or bubble markets, prices for gilt-edged properties in East Hampton and Southampton have fallen sharply.

The Long Island resort towns, among the wealthiest and most well-connected in the US, experienced a boom between 1998 and 2007 when home values quadrupled...

The three-month running median sales price of single-family homes in the two towns fell 19.2 per cent to $638,600 (€400,000, £320,000) between December and February, according to Suffolk Research. That is almost as much as the 19.3 per cent drop in home prices that Miami and Las Vegas, where the boom and bust in the housing markets has been most dramatic, suffered in the whole of last year, according to the S&P Case-Shiller house price indices.

As we noted over the weekend, sales of vacation property fell 31% across the US, against a 10 per cent drop in sales of homes bought to live in.

The Hamptons are now facing a high end rental market with decreasing demand, amid a glut of properties to let. FT specifically mentioned several properties owned or rented by Bear Stearns executives that are back on the market. Agents said the rental market is off 10%, after several years of double digit gains.

I wonder if this might be presaging weakness in the NY housing market . . .

Source:
Housing slump comes to the Hamptons
Daniel Pimlott
FT, March 31 2008 19:35
http://www.ft.com/cms/s/0/ca4ccbbe-ff49-11dc-b556-000077b07658.html

See also:
New York City Real Estate Market Slows as Wall Street Cuts Jobs
Sharon L. Lynch
Bloomberg, March 31 2008
http://www.bloomberg.com/apps/news?pid=20601109&sid=ahgWx1z6LFxE&

Home building tumbles for 24th month
MARTIN CRUTSINGER
AP, April 1, 2008
http://news.yahoo.com/s/ap/20080401/ap_on_bi_go_ec_fi/economy_14

Goldman: Total Leveraged Credit Losses = $1.2 trillion

Sunday, March 30, 2008 | 10:52 AM

in Credit | Data Analysis | Derivatives | Finance

Barron's Alan Abelson praised Goldman Sachs economic team this weekend, saying, "They're not always right . . . but they do tend to call them as they see them, they avoid as much as possible the usual economic gobbledygook, and the numbers they collect -- the raw material, as it were, of their analyses and forecasts -- are commendably reliable.

Abelson specifically cited Andrew Tilton's recent report on leveraged losses: "that is, losses inflicted on banks, broker-dealers, hedge funds and government-sponsored outfits by the cruel credit crunch."

Ubiq-cerpt:™

"The sorry total weighs in, by Goldman's reckoning, at a cool $460 billion. And that's after loan-loss provisions.

Now, $460 billion is a nice round figure, with about half of it losses on residential mortgages and perhaps 15%-20% from commercial mortgages. As Tilton comments, "although we have made considerable progress in the residential-mortgage area, U.S. leveraged institutions have written off less than half" their projected losses. Manifestly a cheerful type, he feels "there is light at the end of the tunnel, but it still is rather dim." So dim, we must admit, that these tired old eyes, strain as they will, have trouble making it out.

We hate to add to what we consider a pretty gloomy prospect, but Tilton takes care to note that the $460 billion that Goldman expects to go down the drain is "only part of total credit losses," which it anticipates will reach a tidy $1.2 trillion. However, he explains, the leveraged losses are especially critical, as they cause a significant tightening of credit as institutions curb their lending to conserve shrinking capital. Which, for us, anyway, makes the tunnel a lot longer and the light a lot dimmer."

A trillion here, a trillion there, pretty soon, you're talking real money . . .

Source:
The True Contrarians
ALAN ABELSON
UP AND DOWN WALL STREET
Barron's, March 31, 20080
http://online.barrons.com/article/SB120674503851173099.html

Related:
Everett Dirksen
http://en.wikipedia.org/wiki/Everett_Dirksen

~~~

Discount Window Borrowing

Wednesday, March 26, 2008 | 06:59 AM

in Credit | Federal Reserve | Finance

Terrific chart via Bill King shows the extent of the borrowing by financial institutions at the Fed Discount Window.

Note the 4 spikes: Continental Illinois bailout (1960s), S&L Crisis (1980s), 9/11 (2001), Credit Crisis (today)
>

Chart courtesy of Bloomberg, Bill King

I'd call that provocative!

~~~

Mr. Swashbuckling Capitalist

Saturday, March 22, 2008 | 06:15 PM

in Derivatives | Finance

via Washington Post

Bear Stearns Paraphernalia on eBay

Thursday, March 20, 2008 | 01:30 PM

in Credit | Finance | Psychology/Sentiment

More gallows humor from the usual crowd -- this time, with a motherlode of Bear Stearn's mementos on eBay.

>
click for more mementos

It reminds me of the old expression: If you want a friend on Wall Street, get a dog . . .

Sources:
Bear Stearns mementoes fetch more than shares
Steven Bertoni
Reuters March 20th, 2008
http://blogs.reuters.com/reuters-dealzone/2008/03/20/bear-stearns-mementoes-fetch-more-than-shares/

Derivative Exposure

Monday, March 17, 2008 | 12:45 PM

in Data Analysis | Derivatives | Finance

Here is the full Derivative exposure for iBanks, via Jesse's Café Américain:

>
click for jumbo table

Hat tip Mish

UPDATE: March 17, 2008 1:55pm

Recognize that this does not mean JPM has $92 Trillion in potential exposure, or that Bear has (had) $13 trillion. Remember, the derivatives are ran as offsetting positions -- kinda like a bookie -- where they should be reasonably balanced, regardless of who wins the game.

Remember, Bookies & iBanks make their money on the spread, not betting on who is going to win the big game . . .

LIVE BLOGGING BEAR STEARNS: Bear Stearns Gets NY Fed, JP Morgan Bailout

Friday, March 14, 2008 | 09:41 AM

in Credit | Federal Reserve | Finance

LIVE BLOGGING BEAR STEARNS: (in reverse chronological order)

~~~

5:00pm Final Price: $30 even, down -27.00 (-47.37%)
Total Volume: 186,986,843 (avg vol = ~12m)

~~~

2:30: S&P Cuts Bear Stearns' Rating http://biz.yahoo.com/ap/080314/bear_stearns_ratings.html?.v=1
(Talk about late to the party!)

~~~

2:15: 148 million shares in Bear Stearns

~~~

12:54 "bridge" to other solutions including strategic alternatives (they are shopping themselves); Earnings moved up Monday

~~~

12:40: Bear Stearns conf call is busy -- cant get on call -- 800-374-2412 -- Live stream anywhere?

~~~

11:00: Whew! That was fun, but I have work to do -- live blogging over
Feel free to play in comments.

~~~

10:59: CNBC reports that BSC is actively being shopped to JPM and others -- if they do get bought, you can expect huge layoffs.

~~~

10:58: Shameless Self-promotion: Here was our most recent FusionIQ rank on Bear -- Sell @ $75 -- less than 2 weeks ago.

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10:57: Dunno why this reminds me of that, but there was a great episode of Coupling on BBC -- The Melty Man Cometh -- kinda reminds me of BSC today. (For more on Coupling, see this post)

~~~

10:56: My office is 2 blocks from Bear's HQ. I should walk over and make a bid for their building, which is really nice.

~~~

10:53: Bear hits new low $26.85 at 10am (late prints everywhere) -- BSC at $32
Markets recover somewhat -- Dow off 130

~~~

10:49 Some of their directors have options to buy at $79.86

~~~

10:48: I've always really like the Bear logo:
Here's the firm's about page

~~~~

10:46: Jim Rogers comments to Short all investment banks looks pretty spot on.

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10:44: So much for the recovery -- Dow off 200

~~~

10:42: For you numerologists: Bear at $28, down $28 -- a ~~two~~ one for one split

~~~

10:40: Groundhog Day: All we've done is guarantee 6 more months of this exact same thing. I hope I am alive when the post-mortem is written on this 50 years hence. I suspect it will be rather critical.

~~~

10:38: When I whine about Socialism, this is EXACTLY what I am referring to. Instead of letting Bears Stearns get crushed, and then see the assets and talent pool get scooped up by someone else, we keep a wounded Bear on life support hanging around . . . My preference is creative destruction.

~~~

10:36: Welcome to Bailout City!

Now you know: BSC is considered to big to fail.

~~~

10:33: If you are wondering WTF a non-recourse, back-to-back financing is, pull up a chair:

JPM gets to go the the Discount Window and borrow all the greenbacks they want; Then they loan that to Bear. In the event that Bear defaults, the NY Fed cannot go back to recover from JPM -- hence, non-recourse.

~~~

10:32 SEC statement Washington, D.C., March 14, 2008

The Securities and Exchange Commission today issued the following statement regarding The Bear Stearns Companies: “The Securities and Exchange Commission has been in close contact with the Department of the Treasury, the Federal Reserve, and the Federal Reserve Bank of New York during discussions concerning an agreement by J.P. Morgan Chase & Co. to provide a secured loan facility to The Bear Stearns Companies. We will continue to work closely together in a way that contributes to orderly and liquid markets.”

~~~

10:32: Fed Statement (10:32 release time)

The Federal Reserve is monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system http://www.federalreserve.gov/newsevents/press/monetary/20080314a.htm

~~~

10:31: Here's the JPM press reslease

JPMorgan Chase and Federal Reserve Bank of New York To Provide Financing To Bear Stearns
http://biz.yahoo.com/bw/080314/20080314005430.html?.v=1

JPMorgan Chase & Co. (NYSE: JPM - News) announced that, in conjunction with the Federal Reserve Bank of New York, it has agreed to provide secured funding to Bear Stearns, as necessary, for an initial period of up to 28 days. Through its Discount Window, the Fed will provide non-recourse, back-to-back financing to JPMorgan Chase. Accordingly, JPMorgan Chase does not believe this transaction exposes its shareholders to any material risk. JPMorgan Chase is working closely with Bear Stearns on securing permanent financing or other alternatives for the company.

~~~

10:29: Here's the link tot he 9:21 press release from Bear

Bear Stearns Agrees to Secured Loan Facility with JPMorgan Chase
http://biz.yahoo.com/bw/080314/20080314005441.html?.v=1

~~~

10:26: Bear Stearns Press Release:

"We have tried to confront and dispel these rumors and parse fact from fiction," CEO Alan Schwartz said in a release. "Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations."

~~~

10:25: Dow off 100 -- things seem to be stabilizing -- what a wild ride

~~~

10:20 Dow recovers . . . off 126

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10:15: No NY Fed statement released as of 10:15 yet . . .

Lots of good quotes on the Bear Stearns site -- too mean to post here, but go have some fun clicking around.

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10:12: Seemed to have stabilized at $35-36 -- At 45 minutes into trading, they have traded over 52 million shares

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10:11 No Federal Reserve Press Release on this? I better check the NY Fed site . . .

~~~

10:08: Turns out Richard Bove was right -- the Fed action on Tuesday ABSOLUTELY WAS to rescue Bear Stearns . . .
~~~

10:05: Bear = $34 -- $7 bucks off the 26.85 low

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10:03: Thought: Bear denied on CNBC they had any liquidity concern. (Bear Stearns CEO: No Liquidity Crisis for Firm). liars.

Financial institutions have been issuing denials about the credit crunch for for over 12 months now -- all of them full of shit. Once again, we learn you cannot trust managements to tell the truth -- especially in a crisis!

~~~

10:00: Amazing freefall

~~~

9:50: Dow off 300 points, Nasdaq off 58

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9:59: BSC = $30 Down $28 off 45%

~~~

9:58: Bear down $26 -- off 40%

Dow off 200

~~~

9:56: Down $18

Market is down 160 -- Goldman, others under pressure

~~~

9:53: Down $20

~~~

9:51: Down $19 -- its gonna be halted soon -- $38.50

As we discussed last night, liquidity concerns about Bear Stearns (BSC) have been validated.

The NY Federal Reserve Bank, and JP Morgan (JPM) have agreed to provide secured funding to Bear and an initial period of up to 28 days. JPM is working with Bear to secure permanent financing or other alternatives for them.

~~~

9:49: Bear is down 15, $42 and falling fast. 25 million shares traded in 20 minutes

~~~

9:48: Doug Kass asks a good question: "If Bear Stearns (BSC) requires a temporary bailout, did the company's management fib in its recent CNBC interview?"

~~~

Quick Headline roundup:

Yes, Bear Stearns Is Having Liquidity Issues Wall Street Journal

Bear Stearns Options Show Higher Odds Stock Headed for `Zero' (Bloomberg)

Bear admits its liquidity 'significantly deteriorated' (MarketWatch)

Bear Stearns In Crisis Forbes

Bear Stearns gets Fed funding, shares plummet Guardian, UK

Investment banks down after Bear Stearns gets financing from ... CNNMoney.com

Market slides on Bear Stearns liquidity issues Reuters

Should Alan Schwartz Sell Bear Stearns? (WSJ)

Gold Futures Rise to Record $1009 on Bear Stearns Bailout (Bloomberg)

Bear Stearns shares plunge as it seeks emergency funding

Bear Stearns to Get Backing From J.P. Morgan, N.Y. Fed (WSJ)

Bear Stearns to Get Backing from J.P. Morgan, N.Y. Fed (Bloomberg)

Bear Stearns Stock Plunges Amid Risk Worries

Bear Stearns `Undermines Credibility of Issuers,' Pollack Says Bloomberg

Today's Rumor: Bear Goes Belly Up (Who's next?)

Thursday, March 13, 2008 | 09:30 PM

in Corporate Management | Finance | Investing | Valuation

A few years ago -- around 2001-02 -- I had strongly recommended Bear Stearns (BSC).

They had a great franchise, they had lagged the rest of the banking sector for no apparent reason, and overall, the quality of management under Ace Greenberg seemed to be terrific. The stock was $54-57.

Subsequently, Bear ran to $170+. I have long since been gone from the stock.

Today, we witnessed it complete the round trip as it careened through that $54-57 range. At one point, today, Bear was down $10, on a rumor that they were going to go belly up.

I have no opinion or special insight as to the truth of that . . . Hey, it could happen, it really wouldn't surprise me, but I don't know, and we have no position in BSC.

But that rumor raises a more interesting question: What companies could take the long dirt nap? Who out there is ripe to be absorbed, merged, taken over (hostile or not). There has to be a long list of mortally wounded firms out there that simply haven't keeled over yet. What CEOs are dead men walking? What stocks are waiting to be euthanasized?

~~~

What say ye?

(I want names and stock symbols!)

~~~

CFOs: Recession Has Already Started

Thursday, March 13, 2008 | 09:52 AM

in Economy | Finance | Psychology/Sentiment

Let the economists, pundits, strategists and talking heads debate all they want. CFOs -- the people in charge of Corporate America's finances -- have already weighed in. These are the folks who have the greatest influence in corporate hiring and capex spending have made their views known in a recent Duke University/CFO Magazine survey completed on March 7.

What did the CFOs say? "A recession has already started and the downturn is likely to last longer than in the recent past, with the economy recovering only late next year."

Here are the highlights of the CFO's views:

• 54% said the US is in recession; another 24% said there was a high likelihood of one starting this year.

• Nearly 75% of the CFOs were more pessimistic this quarter than the prior quarter;

• Companies are scaling back plans for capital spending and are not planning significant hiring;

• Most CFOs said interest rate cuts by the U.S. Federal Reserve have had no impact on their business

• One third said credit conditions have directly hurt their companies by making capital tougher to get and more expensive;

• The Duke U index of economic optimism is at 52 (1 to 100 scale) -- the lowest in the seven-year history of the index;

• CFOs in Europe and Asia have grown more pessimistic about economies in their regions,;

• Two-thirds of Chinese CFOs said they are concerned about U.S. recession hurting their profit margins or demand for their exports;

It is interesting to note that the CFOs see this recession as different from the past two -- the short shallow contractions of 2001 and 1990. Both of those lasted ~eight months. Duke professor Campbell Harvey said: "In contrast, 90 percent of the CFOs do not believe the economy will turn the corner in 2008. Indeed, many of them believe it will be late 2009 before a recovery takes hold."

The CFO survey further points out the absurdity of the claims that "There is no credit crunch."

Here is Duke's the Economic Optimism Index:

Sources:
Global CFO Survey: Recession in 2008, no relief until 2009
Duke University, 4:40 p.m. EDT Wednesday, March 12, 2007
http://faculty.fuqua.duke.edu/cfosurvey/08q2/PressRelease.pdf

Recession has already started, CFOs say-survey
Nick Zieminski
Wed Mar 12, 12:38 PM ET
http://news.yahoo.com/s/nm/20080312/bs_nm/cfo_survey_dc_3;_ylt=AqmYgCD_1j51u_Mtk94oasoE1vAI

Portfolio Strategy | Crunch Mythology
Ken Fisher
Forbes 03.24.08, 12:00 AM ET
http://www.forbes.com/home/columnists/forbes/2008/0324/168.html

Why the Fed Bailed Out the iBanks

Wednesday, March 12, 2008 | 08:01 PM

in Credit | Derivatives | Federal Reserve | Finance | Psychology/Sentiment

This is the best explanation I have seen as to why the Fed set up the TSLF, and allowed it to accept less than stellar paper:

"The real problem began in late February, as several of Wall Street's biggest investment banks prepared to close their books for the quarter and realized they were looking not only at big declines in profit from issuance of new stocks and bonds and fees from mergers and acquisitions, but also another round of write-offs in the value of their holdings. In response, the banks began to hunker down, instructing their trading desks to raise margin requirements for hedge funds and other customers, requiring them, in effect, to post more collateral on their heavy borrowings.

Thus began a chain reaction in which hedge funds began selling what they could -- largely mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae -- to raise the cash to meet their new margin calls. That wave of forced selling drove down the price of those bonds, which prompted more margin calls and more forced selling. By the end of last week, the interest rate spread on those securities -- the difference between their yield and that of risk-free U.S. Treasury bonds -- had jumped four, five, even 10 times the normal rate.

Among those caught up in the vicious cycle were hedge funds run by such blue-chip names as KKR and Carlyle Group, along with Thornburg Mortgage, a big mortgage lender. News of their troubles swept through Wall Street, heightening the sense of panic, as did rumors that Goldman Sachs was about to post big losses and Bear Stearns was about to run out of cash. Meanwhile, Lehman Brothers announced that it would lay off 5 percent of its staff in what was viewed by many as a first installment of a consolidation that would eventually eliminate 20 percent of the jobs on Wall Street. Analysts began to warn that financial-sector losses from mortgages, commercial real estate, failed takeover loans and other bad gets could reach as high as $1 trillion.

It was against this backdrop that the Fed announced Friday that it would auction $200 billion in additional loans to banks looking for cash to lend or use as reserve capital. By accepting AAA-rated mortgage-backed securities as collateral for the loans, the Fed aimed to restore confidence and trading in that beleaguered market and begin to put a floor under prices."

Read the entire article -- but the above explains the gravamen of the Fed's actions . . .

Source:
A Bailout. For Everyone
Steven Pearlstein
Wednesday, March 12, 2008; Page D01
http://www.washingtonpost.com/wp-dyn/content/story/2008/03/11/ST2008031103060.html

Latest Bank Headache: Home Equity Loans

Wednesday, March 12, 2008 | 07:58 AM

in Credit | Economy | Finance | Psychology/Sentiment | Wages & Income

"This product was meant to help people do construction on their house, [and] do debt consolidation -- not to take out every last dollar of equity in their home to finance a different kind of lifestyle."

-Charles Scharf, head of J.P. Morgan's retail business.

That is, in a short phrase, the reason that the US consumer is all spent out. They used debt and home equity -- as opposed to Income gains -- to finance an improving lifestyle. After the vacations are passed, the big screen TV and new cars become old, what are you left with?

Appreciation in the value of your home has long been considered a form of forced savings. (As in don't eat your seed corn). The economic boost is over, the savings impact is significant, and you are left with a financial hangover. Talk about a negative wealth effect.

For the banks, it raises all different manners of headaches. Unlike Mortgages, Home Equity loans are secondary against the collateral -- the house itself:

"While banks can foreclose on a first-lien mortgage, lenders often have little recourse when trying to collect a delinquent home-equity loan, especially if another bank holds the primary mortgage. Banks holding home-equity loans generally can only seize the collateral -- a house -- after the mortgage is paid off.

When another bank holds the mortgage and the mortgage payments are current, the home-equity lender is effectively powerless to collect the debt.

Unfortunately for home-equity lenders, many borrowers understand that pecking order, concluding there are few repercussions if they stop making payments on their home-equity loan . . . Other types of consumer loans also are souring, including credit cards and auto loans. But delinquent home-equity loans are rising faster, representing 12.5% of all delinquent loans in the fourth quarter at Bank of America Corp., the largest U.S. bank in stock-market value. That was up from 9.4% in last year's first quarter, according to research firm SNL Financial.

Pretty amazing stuff.

The bankers are finally asking themselves "How the hell did we get into this mess?" The answer surprises no one:

Leaning on outside mortgage brokers for home-equity business was "one of the biggest mistakes we've made." Those loans have performed worse than home-equity loans generated by J.P. Morgan.
-Charles Scharf, head of J.P. Morgan's retail business.

Indeed . . .

Source:
Latest Trouble Spot for Banks: Souring Home-Equity Loans
Losses May Hit Lenders That Skirted Subprime; Surprise Delinquents
ROBIN SIDEL
WSJ, March 12, 2008
http://online.wsj.com/article/SB120527998662928743.html

Ambac, Part III

Wednesday, March 05, 2008 | 03:00 PM

in Credit | Derivatives | Finance

Riddle Me this Batman: Over the past 2 months, we have seen at least 3 rallies predicated on the rumor of an Ambac (ABK) rescue -- either through a capital infusion, or a direct purchase of the company.

Let me remind you that just a week ago their triple-A rating was confirmed by the (choose one a. criminally negligent; b. technically incompetent) organizations known as Moody's and S&P.

To you can imagine my surprise when the stock was halted today. WSJ Marketbeat announced "Ambac Bailout Imminent! Maybe! Possibly!"

Then we learn that the deal was dead, and that Ambac needs to raise $1.5 billion dollars. Thus, all of those rumors and CNBC appear to have been patently false.

But here's the question that keeps coming up: Who are the people leaking this information? And, is this legal? Now, we have learned that all of these attempts at manipulating the market were based on rumors that proved to be false.

~~~

Question: If material, non-public, inside information turns out to be none of the above (i.e., just rumors), has a crime been committed?

UPDATE: May 6, 2008 5:22am

CNBC reporter Charlie Gasparino has repeatedly caveated this to death on any of his reporting: He recommended people be “cautious” about trading on the latest rumors, and specifically noted that a deal has been rumored to be “close” before” and none had come to pass.

Source:
Ambac Bailout Imminent! Maybe! Possibly!
David Gaffen
Marketbeat, March 5, 2008, 12:47 pm
http://blogs.wsj.com/marketbeat/2008/03/05/ambac-bailout-imminent-maybe-possibly/

Monoline Duoline Rescue Plan: 5th Time the Charm?

Monday, February 25, 2008 | 07:17 AM

in Corporate Management | Credit | Derivatives | Finance

US Equity markets were ending last week on a down note, when rumors of an Ambac (ABK) rescue plan started circulating (via Charlie Gasparino of CNBC)

A few issues that may be getting overlooked in the initial reaction to this:

1) This is the fifth such rumor in 2008, and I'm not sure why that is. Is it wishful thinking, or have the other deals have fallen apart? If they did, was it for good reason, too?

We had the initial rumor over a month ago (Next on the Worry List: Shaky Insurers of Bonds); that was a $15 Billion dollar bailout. Then came the Wilbur Ross - Ambac rescue plan. It went nowhere fast. Another bank consortium plan came and went. Lastly, the Buffett offer, which was widely misrepresented as Berkshire (BRK'A) injecting money into the ~~monolines~~ duolines, when in reality all Buffett offered to do was merely sell reinsurance to the duolines.

2) The current rescue operation is for but $3B. This small sum is intriguing -- not just relative to the prior rumors. First, the duolines have potential exposure anywhere from $30 to $75 billion dollars. On top of that, the bank's counterparty and hedging exposure has been estimated at $150B to $200B. Can $3B really solve this problem?

3) From the FT Friday: Banks to aid Ambac with up to $3bn

The banks looking at supporting Ambac include Citigroup (C), Wachovia (WB), Barclays, Royal Bank of Scotland, Société Générale, BNP Paribas, UBS and Dresdner. They have the most exposure to guarantees supplied by Ambac on structured bonds and derivatives, the value of which could fall sharply, resulting in billions of dollars of writedowns if the insurer's credit ratings drop far below the triple-A level. (emphasis added)

Hence, the banks who are Part of the rumored consortium are (of course!) the ones who have the most to lose if any of the Duolines fail. This is not so much a bailout as a possible attempt to kick the can down the road. They have the most exposure to guarantees supplied by Ambac on structured bonds and derivatives, the value of which could fall sharply, resulting in billions of dollars of writedowns if the insurer’s credit ratings drop far below the triple-A level.

What's truly bizarre is that a dozen banks spending three large may actually be a relatively good deal for them, if it avoids a quarter trillion in writedowns.

4) Coincidence or good timing? Look who's expected to report writedowns this week: Fannie Mae (FNM), Freddie Mac (FMC), Lehman (LEH), Morgan and Goldman Sachs (GS), and Royal Bank of Scotland.

The bottom line: Until this deal gets done and the details are better known, its simply another in a loing string of rumors. Worse yet is what it means: Banks have so much derivative exposure they are willing to throw away $3 billion to prevent the counter-parties from getting a ratings agency downgrade.

UPDATE: January 25, 2008 2:50pm

S&P has reaffirmed MBIA's AAA rating. Markets are rallying on the news. To achieve this feat, MBI was forced to sell surplus notes at par that yielded 14% during that capital raise --t hat is way above junk bond levels. In the markets, its trading between 97-100. Note that US Govt is AAA, GE is AAA , Exxon Mobil, Johnson & Johnson, Berkshire Hathaway and Northwestern Mutual are also AAA.

Peter Boockvar of Miller Tabak points out:

"What S&P is saying is that a bond yielding 14% in the marketplace is also AAA. It's now a game among the rating agencies, regulators and banks with whether the bond insurers are rated AAA or not when they clearly are not and their securities don't trade as they are. This is being done in an attempt to prevent the banks from going through another round of writedowns."

What of Ambac? Any hope of its AAA ratings reaffirmations are likely contingent upon a deal going thru -- and if it falls apart so, do any hope of AAA ratings for Ambac.

What this really points out is how worthless and corrupt the S&P and Moody's ratings actually are.

Forget that the foxes are watching the henhouse, it appears that the regulators, banks, insurers, and SEC, Federal Reserve -- pretty much anyone else you can think of -- are all in cahoots with each other. Its American Socialism at its finest . . .

Source:
Banks to aid Ambac with up to $3bn
Aline van Duyn and Ben White in New York
Fri Feb 22 19:25:37 EST 200
http://www.ft.com/cms/s/91568ea8-e1b2-11dc-a302-0000779fd2ac.html

Alternate link
http://us.ft.com/ftgateway/superpage.ft?news_id=fto022220081945499701

How SubPrime Really Works

Friday, February 15, 2008 | 11:15 AM

in Credit | Derivatives | Finance |