The Ticker
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Simon Johnson Is Such A Downer!
Continue reading… 5 CommentsSimon Johnson, an MIT prof and former IMF chief economist, is behind the The Baseline Scenario blog, which has been a vital read during this crisis. This week he's particularly smart and scary on both upcoming policy decisions and wider structural problems that still need to be addressed in the economy.
First in the WSJ: With Peter Boone, Simon writes about Tim Geithner's "nuclear option" for the banks -- basically giving the government power to liquidate or restructure large troubled banks at the expense of bondholders and creditors who until this point have been largely protected to prevent the sort of investor flight from the banks that caused Lehman Bros./Bear Stearns-style failures. Such a move would take the impetus off of taxpayers, but would almost certainly send bond and equity markets into a severe swoon. Simon says if the government grants "resolution authority" power and regulators move quickly (as in yet another long weekend), the strategy could work. If the process takes months, uncertainty could result in market panic.
Bottom line for everyday investors: There's no real upside, other than the possibility of long-term financial stability (which might make it worth the risk). Whatever happens, if Geithner is granted authority and uses these new powers, the end result will likely be Very Bad Things for stocks even if the plan goes off without a hitch. He writes:
This route to recapitalization would not be pleasant. Bank shareholders and creditors will cry foul. There will be several months of turmoil in markets, and there will be substantial disruption since bond holders and some creditors may be required to take losses when they receive equity. It will also send shockwaves to other undercapitalized institutions around the world, and could lead to their share and debt prices falling in anticipation that other governments will follow America’s example.
For a broader look at the crisis, Johnson also shows up in May's The Atlantic where he puts on his IMF hat and takes a look at the U.S. economy. What he finds are scary parallels between our current situation and the sort of structurally unsound emerging market economies forced to reach out to the IMF for help:
In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.
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Another Bad Quarter Comes To A Close
Continue reading… 7 CommentsCNBC runs down the sixth straight quarter of market declines. The damage incurred in the latest quarter is below:
Major Indices
- Dow Industrials -14.29%
- Dow Transports -24.98%
- Dow Utilities -12.57%
- S&P 500 -12.81%
- Nasdaq Composite -4.77%
- Russell 2000 -16.71%
S&P 500 Sectors
- Tech +1.92%
- Materials -3.58%
- Telecom -8.59%
- Healthcare -8.98%
- Consumer Discretionary -9.37%
- Consumer Staples -11.11%
- Energy -11.65%
- Utilities -13.30%
- Industrials -22.60%
- Financials -33.93%
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3 Ways Consumers Win In Obama's Auto Bailout
Continue reading… 1 CommentIn his speech today on the auto bailout, President Obama outlined how the government will help consumers looking to buy a new car. The highlights:
- Tax breaks. If you bought your car after Feb. 16, the IRS will notify you that you can deduct the cost of any sales and excise taxes, and the same goes for new cars purchased through the end of the year.
- "Green" incentives. Obama said he might use parts of the stimulus package to fund a "generous credit" for consumers willing to replace less fuel-efficient cars with cleaner models.
- Warranties. In an effort to convince new car shoppers to buy from ailing automakers GM and Chrysler, Obama pledged that the federal government will guarantee warranties on those vehicles.
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GM Sinks Stocks As Obama Pans Auto Plan
Continue reading… 3 CommentsAs General Motors goes so goes the market, at least today. With the clock started on a new 60-day deadline for Detroit the threat of bankruptcy in the auto sector remains a distinct possibility. Meanwhile, the decision by the Obama Administration to force out GM chief executive Rick Wagoner sets an aggressive new precedent for intervention at the highest levels of companies accepting bailout cash. All major indices are off roughly 3.5 percent in afternoon trade. GM shares opened down more than 20 percent.
[See: Why Booting Wagoner Won’t Solve GM’s Woes]
Obama pledged the auto sector bailout would not resemble an "unending flow of taxpayer dollars" and said the government has "no interest in running GM." But after today that reality looks more likely, not less, given the sizeable hurdles automakers will face over the next two months. GM and Chrysler could face a "surgical" structured bankruptcy unless GM comes up with an acceptable continuity plan and Chrysler completes its pairing with Fiat within 30 days. Even then, GM bondholders and unions will likely face mounting pressures. Those groups are facing lots of renewed heat from White House car czar Steve Rattner, who is reportedly taking a much harder line in light of continued stark weakness in auto sales. Also, remember GM has $1 billion worth of convertible debt due June 1. Failure to meet any of the above obligations would likely trigger Detroit's most-feared "B" word.
Today's other shift is the administration's tougher methods for dealing with bailout recipients: Wagoner is out at GM after the government asked him to step aside Friday, and a large-scale board shake-up is in the works. The ouster of Wagoner will ripple through boardrooms at all the companies being bailed out by the Obama Administration (see: bank stocks, which are sinking today on those fears as well as weekend comments by Treasury Secretary Tim Geithner that banks will likely need "large amounts" of additional help from the government). The move is a sizeable expansion of the government's active presence at companies on its dole.
For consumers, there's a bit of good news in the form of government incentives for new car buyers. In his speech, President Obama said the federal government would back auto warranties and let buyers deduct sales and excise taxes, plus new incentives for buying new cleaner models. Obama's statement is here.
[See: 3 Ways Consumers Win In Obama's Auto Bailout]
Analysts remained skeptical of the auto sectors ability to avoid bankruptcy by at least one of the Big Three. From Merrill Lynch:
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Schadenfreude Wayback Machine: Glass-Steagall Edition
Continue reading… 3 CommentsIt's making the rounds today, but a quick skim of this 1999 article on the repeal of Glass-Steagall is just full of all sorts of infuriating passages. Give it a read.
From the New York Times on Nov. 5, 1999:
CONGRESS PASSES WIDE-RANGING BILL EASING BANK LAWS
A lead quote from a familiar name:
''Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,'' Treasury Secretary Lawrence H. Summers said. ''This historic legislation will better enable American companies to compete in the new economy.''
It was true, until it wasn't.
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Noted: The Nasdaq Goes Green For 2009
Continue reading… 0 CommentsIn case you missed it, the Nasdaq Composite Index closed today at 1,587, up 0.6 percent for the year, according to MarketWatch. Is a tech going to lead us out of the bear market?
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Geithner Regulates: After The Carrot, A Stick For Banks
Continue reading… 8 Comments"Not modest repairs at the margin, but new rules of the game."
That's Treasury Secretary Tim Geithner today on sweeping changes being proposed for the financial sector.
The administration’s regulatory framework would make it mandatory for large hedge funds, private-equity firms and venture-capital funds to register with the Securities and Exchange Commission. The SEC would be able to refer those firms to the systemic regulator, which could order them to raise capital or curtail borrowing.
The strategy also would require derivatives to be traded through central clearinghouses. And it would add new oversight for money-market mutual funds to reduce the risk of a run on those funds after a shock like last year’s failure of Lehman Brothers Holdings Inc.
The Treasury chief also said regulators should consider new rules requiring banks to set aside extra reserves during boom times to build up a cushion for economic slumps.
“We need to examine our accounting rules to see whether, consistent with investor protection, we can require firms to build up loan loss reserves that look forward and account for losses in downturns,” Geithner said.
It's a seedling of a good idea: A single regulator with expanded access to financial information and understanding of realtime risk in the banking sector could help stop this sort of crisis from happening again. We simply don't have that now.
As for the argument against oversight, namely that it will kill innovation, well, innovation got us into this mess and regulation is coming one way or the other. That's where the Geithner Plan gets smart. In the long run, oversight by a systemic regulator could actually foster more innovation compared to allowing the more draconian elements of the government step in and punish banks using traditional tools like punitive capital requirements or blanket rules for leverage (though Geithner's comments hint there could easily be a bit of that as well). As with all first drafts of the Obama Administration's plans, Geithner's latest is thin on specifics, so it's tough to know what it'll look like in the end.
What the plan really offers is an opportunity for wider debate on how regulators should adjust to the enormous complexity of the modern financial system. That debate needs to center on transparency and information. The very same technological advances that made possible the huge explosion in securitization that eventually spawned the mortgage and credit mess also contain the very tools regulators can use to track where the money is flowing in the future. For example, hedge funds may operate in the shade, but their trades bottleneck at the few prime brokers left in the market. An agreed-upon set of metrics to analyze and measure market risk are more a question of agreeing on what existing tools are best, rather than building them from scratch. The technology is already largely in place.
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S&P Downgrades Investment Bank For Being Too Good At Investment Banking
Continue reading… 1 CommentWant to know just how backward banking is right now? Analysts are downgrading financial institutions because they don't have enough exposure to bad assets!
Today, Standard & Poor's cut its rating on merger advisor Greenhill & Co. to "strong sell" from "sell" on valuation. That's no big deal, but look at the reason. From S&P (bold is mine):
We think GHL is unlikely to benefit directly from recent government programs to stimulate credit markets since it lacks balance sheet exposure to risky assets. The firm should see some long term benefit if these actions improve the flow of credit, which could help to revive the stagnant M&A market, but near-term benefits are less certain. We believe GHL will be profitable in 2009, but we think the current valuation, which is more than 36X our '09 EPS estimate and well above our $42 target price, is inconsistent with the company's earnings power in this operating environment.
Is this S&P's not-so-loquacious way of telling us that the only short-term game in banking right now is getting in bed with the government? That makes some sense given the dearth of dealmaking, the slow economy and a trading landscape that hinges largely on whether or not the government can price and sell all of those toxic mortgage assets still on the balance sheets at the bad banks.
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Market Optimism Roaring Back
Continue reading… 2 CommentsFor the first time in a long while it's OK to get (a little) excited about the stock market.
The Dow is up more than 2 percent today and on top of Monday's 7 percent surge we could be heading for the best monthly gain since 1987. Happily, the bulls are also running in the most troubled sectors including banking and home builders (tech stocks and bellwethers like GE are pulling their weight too).
Today's highlights:
- New home sales jump 4.7 percent, and while the overall sales numbers are abysmal, analysts are finally seeing hints that the housing market may stabilize. High Frequency Economics says: "Sales remain incredibly weak but, as with the existing sales numbers, we are prepared to hazard the view that the post-Lehman meltdown is now over and the market is stabilizing. That's not the same as a recovery, but it is better than continued declines in sales." The message for stocks: Cautious optimism is better than none at all.
- Durable goods orders rose 3.4 percent, a big surprise for markets expecting a 2 percent drop. There's noise in the numbers (revised January orders fell 7.3 percent), but the first gain in seven months is a reason to hope the pace of decline in the factory sector is at least slowing.
- The Obama/Geithner plan continues to be viewed as a possible solution to banking sector problems (and I stress "possible").
All good things, and whatever the reason for the rally, any bit of bullishness is welcome. Still, a word of caution: Always remember that a couple of good economic reports do not a trend make. The banking sector is still broken, and while the impact of government stimulus past and present should help put a floor under equities, not everyone is breaking out the champagne just yet.
So what could go wrong?
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Alpha Magazine Ranks Your Hedge Fund Overlords
Continue reading… 3 CommentsInstitutional Investor's Alpha magazine ranks the Top 25 Money Makers in the hedge fund world based on 2008 earnings:
1. James Simons, Renaissance Technologies Corp. - $2.5 billion
2. John Paulson, Paulson & Co. - $2 billion
3. John Arnold, Centaurus Energy - $1.5 billion
4. George Soros, Soros Fund Management - $1.1 billion
5. Raymond Dalio, Bridgewater Associates - $780 million
6. Bruce Kovner, Caxton Associates - $640 million
7 David Shaw, D.E. Shaw & Co. - $275 million
8 Stanley Druckenmiller, Duquesne Capital Management - $260 million
9 (tie) David Harding, Winton Capital Management - $250 million
9 (tie) Alan Howard Brevan, Howard Asset Management - $250 million
9 (tie) John Taylor Jr., FX Concepts - $250 million
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Jake DeSantis: Dear AIG, I Quit!
Continue reading… 296 CommentsThe best example yet of the perils of the AIG bonus witch hunt:
From The New York Times:
The following is a letter sent on Tuesday by Jake DeSantis, an executive vice president of the American International Group’s financial products unit, to Edward M. Liddy, the chief executive of A.I.G. It ran in The New York Times’s op-ed section.
DEAR Mr. Liddy,
It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:
I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.
After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.
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Jim Chanos On AIG, Or Why We Need Shorts
Continue reading… 1 CommentShort-seller Jim Chanos warns on CNBC that the immediate response to the collapse and Bear Stearns was a push in Washington to loosen accounting standards, repeating his belief that the push to change mark-to-market rules are simply pleas to "bubble-wrap financial statements."
He writes in the WSJ (sub. req.) today:
We have a sorry history of the banking industry driving statutory and regulatory changes. Now banks want accounting fixes to mask their recklessness. Meanwhile, there has been no acknowledgment of culpability in what top management in these financial institutions did -- despite warnings -- to help bring about the crisis. Theirs is a record of lax risk management, flawed models, reckless lending, and excessively leveraged investment strategies. In the worst instances, they acted with moral indifference, knowing that what they were doing was flawed, but still willing to pocket the fees and accompanying bonuses.
Here's Chanos on CNBC:
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Today's Recession Moment: The Fifth Third Burger
Continue reading… 3 CommentsAmerica, you are awesome. First came the Bacon Explosion, and now the Internet's most gluttonous gastronomes point us to the Fifth Third Burger.
It's being served by the West Michigan Whitecaps (they play at the Fifth Third Ballpark). Here's the scoop via CNBC's SportsBiz:
It's 5/3 lbs (1.66) of beef with lettuce, tomato, salsa, sour cream, chili and Fritos on an eight-inch sesame seed bun.
The team says it feeds one to four people and sells for $20, and if a person finishes the Fifth Third Burger in one sitting, the team will offer up a Fifth Third Burger T-shirt.
So there you have it: A nearly 5,000-calorie monstrosity (mmm.... monstrosity) is named for a bank that lost roughly 90 percent of its value in the last year. My stomach is growling even as my head wants to explode.
Related: For more obscene food goodness, see This is why you're fat.
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Toxic Assets And TARP, Together Again
Continue reading… 0 CommentsGive Tim Geithner credit for his latest shot at fixing the banking system: At least the name is getting more sophisticated.
Six months after Treasury and the Fed rushed through the original $700 billion "Troubled Asset Relief Program" to buy up "toxic assets" held on bank balance sheets, they continue to linger in stagnant, unpriceable pools around the global financial system's backwaters. Today we get new details on the latest plan to fix the problem, but the ideas don't seem to have changed much from the original. Replace "toxic assets" with "legacy assets" and the TARP with the Public-Private Investment Program (PPIP!), and the Treasury Department is essentially repeating the plan it had back when the crisis started, namely buying (or in this case finding buyers) for those toxic loans based on subprime mortgages and other risky assets.
The price? The total public-private partnership starts at $500 billion, and could eventually hit a trillion dollars. The risk? That buyers won't fall in line following the uproar over executive compensation and the AIG bonus tax.
The plan won't be comforting for Americans angry over the (necessarily) cozy relationship between Washington and Wall Street right now. It's ripe for concessions to financial sector. FDIC guarantees and reports that PPIP investors won't be subject to punitive compensation rules are sweeteners. Essentially, the government has to make these assets attractive and then coerce investors to step up. Unfortunately, it has to do so without much leverage to negotiate the best deal for taxpayers. As White House economist Christina Romer said on "Fox News Sunday," buyers of these assets are "kind of doing us a favor."
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Who Will Buy iShares?
Continue reading… 0 CommentsNow that Barclays has said it is shopping its iShares exchange-traded fund business, bets are mounting as to who might be buying.
First, what is iShares really worth? A few initial reports put it somewhere around $7 billion, though that's likely a high (other analysts put it closer to $3 billion). Still, the prospect of a sale does seem to be helping Barclays stock this week. As the FT notes, Barclays shares are up a whopping 45 percent this week even as the bank suffers through reports of a huge tax-dodge scheme, and even more modest valuations for iShares put it at more than a third of the entire bank's value (and one of the easier spots to find much-needed funding).
So who's stepping up to buy? Forbes rounds up some fund and ETF experts and tosses out a few names including Northern Trust, Charles Schwab Corp., and Fidelity, plus BNY-Mellon or Deutsche Bank.
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'Layoff' The Game: The Latest In Recession-Era Time Wasters
Continue reading… 1 CommentUSA Today's Game Hunters points to the latest in depressing online games to help you muddle through this recession. Layoff lets you match up the employees, and send them to the unemployment office to save the corporation money. Only the bankers are exempt! It's sad and fun at the same time!
Bonus: Take another spin around The Bailout Game.
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Citi's Insult: Reverse Stock Splits And Office Renovations
Continue reading… 10 CommentsWe've got a new recipient for the John Thain Toilet Award!
Forget your AIG bonus outrage. Today, Citigroup shows that whole "chastened investment banker" meme is basically a lie. According to Bloomberg, Citi gets $45 billion in taxpayer bailout money and decides its chief executive and top lieutenants should spend $10 million on new offices. Crass or stupid? You decide.
As Bob O'Brien puts it at Barron's:
The only takeaway is that these executives don’t seem to understand how unseemly this conduct looks in an era where the taxpayers who are keeping them afloat are too afraid to buy new floormats for their cars because it seems like a discretionary purchase - a no-no for anybody worried they or a family member could be unemployed at any time.
That's not the worst of it. Citi other big announcement is its plan to further punish common shareholders (because $1 a share earlier this year wasn't bad enough). Citi's deal with the government to shift preferred shares into common stock (press release is here) is only going to dilute you again. As for that reverse stock split? Well, the price goes higher, but the value of your stake says the same. Reverse splits are a refuge for companies who simply don't like where their stock is trading.
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Cisco Flips Out
Continue reading… 1 CommentSomebody was going to buy Pure Digital, maker of the hugely popular Flip Video camera, which has become one of the most exciting consumer gadgets of the past few years. The surprise here is the buyer.
Cisco Systems is paying $590 million in stock for a company where the value is essentially its brand. With more than 2 million Flips sold in North America, the company dominates the field in low-cost hand-held cameras (unless you count cell phones, of course). I've got one, and completely love the tiny camera's less-is-more usability.
The deal puts Cisco in the consumer space with a product that produces a ton of bandwidth-occupying content (which is right in Cisco's wheelhouse). It also signals the latest shift of the company (its recent push into the sever market was touted as a reason for IBM's talks to buy Sun Microsystems).
But you have to ask: Is the Flip's marketing edge (and that's really the only edge it has) worth the price?
A camera with a built-in USB is a great design idea, but what keeps the rest of the consumer electronics world (from Sony to Apple) from barging in on Flip's innovation and Cisco's future profits? -
Fed's Bond Buy Signals Crisis
Continue reading… 1 CommentStocks are rallying, bonds are soaring, and your mortgage rate could fall again now that the Federal Reserve has agreed to take on billions worth of new Treasuries and other securities to support the ailing economy.
Don't be fooled: The Fed's decision is a reason to worry.
The decision today to buy $300 billion worth of long-term Treasuries over the next six months and expand existing lending programs by another $750 billion is actually a little scary. Precisely this sort of action was long considered a last-resort arrow in the Fed's quiver. But as the Fed said in its statement, the economy has continued to contract since January. With interest rates close to zero and available options dwindling, the Fed's move simply shows central bankers think the crisis is continuing.
As it has all along, the Fed has said it will act as needed to head off this recession. The question is, are we now finally approaching the point where as-needed becomes if-possible? With this move, the Fed's balance sheet is likely to pass the $2 trillion mark, and at some point the ability of the Fed to pour additional stimulus into the economy will run out.
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AIG Bonuses: 'Distasteful' . . . And Dangerous
Continue reading… 6 CommentsAIG's Edward M. Liddy says he finds AIG's $165 million bonus payout to executive level employees "distasteful." He's right, and now Congress could try and take the money back after placing Liddy's head on a figurative pike today.
Too bad it won't matter if they succeed or not.
Bonuses are simply a sideshow. Anger surrounding the payouts may be legitimate, but it is also a dangerous distraction at a time when there is still simply too much at stake to spend valuable time bashing even the most egregious pay abuses by AIG. That's because the audience Congress needs to be impressing right now isn't the American public. It's actually the people drawing a good bit of all this populist scorn: Big investors.
Here's why: This Thursday, applications for the government's Term Asset-Backed Loan Facility, or the TALF are due. That's the $1 trillion government plan to team up with investors to get lending flowing again.
If those investors look at the AIG scandal and see a partner (the government) that looks both unfriendly and unreliable, the pool of risk-takers willing to lend to consumers and businesses during a time of economic uncertainty could simply decide participating in the government's public-private partnership is too much of a hassle.
