The Fed cut the federal funds rate another 50 basis points (on top of their 75 bp cut last week) with indications of further cuts. The DJIA quickly jumped 200 points ... and just as quickly gave every point of it back before the close.
Wednesday, January 30, 2008
Q: What happens when the Fed runs out of ammo?
A: Japan
The Fed cut the federal funds rate another 50 basis points (on top of their 75 bp cut last week) with indications of further cuts. The DJIA quickly jumped 200 points ... and just as quickly gave every point of it back before the close.
The Fed cut the federal funds rate another 50 basis points (on top of their 75 bp cut last week) with indications of further cuts. The DJIA quickly jumped 200 points ... and just as quickly gave every point of it back before the close.
Somebody's going to jail!
The FBI said it is investigating whether accounting fraud or other crimes were committed by mortgage lenders, loan brokers and Wall Street banks involved in extending loans to borrowers with poor credit. The agency has refused to identify the companies under investigation since the probe began last spring. However, it is known that at least 14 companies are involved. The FBI is cooperating with the SEC, which is investigating how subprime loans were made and packaged, and how the securities they backed were valued.
FBI Director Robert Mueller said investigators believe a "substantial" amount of mortgage fraud was committed in connection to home loans made to risky borrowers. The bureau is looking into the practices of subprime lenders. Agents also are probing potential accounting fraud by financial firms that hold subprime loans themselves or securitize them and sell them to other investors.
FBI Director Robert Mueller said investigators believe a "substantial" amount of mortgage fraud was committed in connection to home loans made to risky borrowers. The bureau is looking into the practices of subprime lenders. Agents also are probing potential accounting fraud by financial firms that hold subprime loans themselves or securitize them and sell them to other investors.
Subprime woes spread to Japan
Mizuho Financial Group may soon report subprime losses of as much as $2.8 billion, Japanese newspapers report. The losses could force Japan's second-largest bank to cut its full-year profit forecast for the second time.
Japan's other three top banks -- Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Sumitomo Trust & Banking -- will take subprime hits totaling approximately $2 billion.
Japan's other three top banks -- Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Sumitomo Trust & Banking -- will take subprime hits totaling approximately $2 billion.
First ever loss at UBS
After writedowns of about $14 billion on subprime-related losses, UBS posted a fourth-quarter loss of $11.4 billion. The loss was nearly twice as much as what analysts had estimated. The result is the first annual loss for UBS since it was created a decade ago through a merger.
Near Zero CMBS Volume in January
Barring some big (and highly unlikely) surprise tomorrow, January will end with the smallest issuance of commercial mortgage-backed securities priced in the market's two-decade history. Dealers sold a record $234 billion of US CMBS in 2007, up 14% from 2006 even as volume began to dry up at midyear.
Edited to add:
Three CDOs -- two in Asia and one in the U.S. -- worth a combined $1.3 billion were sold in January 2008. As a comparison, in January 2007, 37 CDOs worth a total of $22 billion were issued.
Edited to add:
Three CDOs -- two in Asia and one in the U.S. -- worth a combined $1.3 billion were sold in January 2008. As a comparison, in January 2007, 37 CDOs worth a total of $22 billion were issued.
Tuesday, January 29, 2008
News of the day
Six months after acquiring the Chicago Board of Trade for $12 billion, the CME Group has confirmed that it has entered a 30-day exclusive negotiating period to consider buying the New York Mercantile Exchange for about $11 billion. The deal would solidify CME's position as the most important futures market in the world.
Purchases of new homes in the U.S. unexpectedly fell to a 12-year low in December, ending the worst sales year since records began in 1963. The S&P/Case-Shiller 20-city home price index fell 7.7% for the year through November. The 10-city index fell even further, declining a record 8.4%. The 20 city index showed yearly price declines in 17 of the 20 cities surveyed and all 20 cities showed monthly price drops. Not only did the 10-city composite index post another record low in its annual change rate, but 13 of the 20 metro areas did the same. The weakest market in November was Miami, where prices fell 15.1% in the past twelve months.
Analysts at Bank of America are warning of trouble for credit default swaps if even a small bond insurer defaults. ACA Capital Holdings may face delinquency proceedings next month from the Maryland Insurance Administration if it can't delay action on $60 billion of CDS contracts. The company guarantees more than $75 billion of debt.
Countrywide Financial Corporation reported a fourth-quarter loss of $422 million, but the results were not expected to hinder its proposed $4.1 billion takeover by the Bank of America. Countrywide’s earnings fell far short of Wall Street estimates. Still, shares rose 36 cents (6%) to $6.31. CEO Angelo Mozilo will voluntarily give up $37.5 million in severance and consulting pay in connection with the proposed takeover by the Bank of America Corporation. His stock and employee equity awards would be treated the same as that of other shareholders and employees if the sale goes through. However, Mozilo sold almost $450 million in stock from April 2004 to August 2007.
Purchases of new homes in the U.S. unexpectedly fell to a 12-year low in December, ending the worst sales year since records began in 1963. The S&P/Case-Shiller 20-city home price index fell 7.7% for the year through November. The 10-city index fell even further, declining a record 8.4%. The 20 city index showed yearly price declines in 17 of the 20 cities surveyed and all 20 cities showed monthly price drops. Not only did the 10-city composite index post another record low in its annual change rate, but 13 of the 20 metro areas did the same. The weakest market in November was Miami, where prices fell 15.1% in the past twelve months.
Analysts at Bank of America are warning of trouble for credit default swaps if even a small bond insurer defaults. ACA Capital Holdings may face delinquency proceedings next month from the Maryland Insurance Administration if it can't delay action on $60 billion of CDS contracts. The company guarantees more than $75 billion of debt.
Countrywide Financial Corporation reported a fourth-quarter loss of $422 million, but the results were not expected to hinder its proposed $4.1 billion takeover by the Bank of America. Countrywide’s earnings fell far short of Wall Street estimates. Still, shares rose 36 cents (6%) to $6.31. CEO Angelo Mozilo will voluntarily give up $37.5 million in severance and consulting pay in connection with the proposed takeover by the Bank of America Corporation. His stock and employee equity awards would be treated the same as that of other shareholders and employees if the sale goes through. However, Mozilo sold almost $450 million in stock from April 2004 to August 2007.
Sunday, January 27, 2008
Another leftist idea
Senate Banking Committee Chairman Christopher Dodd proposed creating a federal program to buy “very distressed” mortgages at steep discounts as part of economic stimulus legislation being developed in Congress. The Federal Homeownership Preservation Corporation would buy loans and finance them as 30-year fixed-rate mortgages to help keep borrowers from losing their homes, Dodd said today at a Washington news conference to outline the committee’s agenda.
The latest way the gummit is going to tax me to reward those who took risks that I chose to avoid. ARGH!
The latest way the gummit is going to tax me to reward those who took risks that I chose to avoid. ARGH!
Saturday, January 26, 2008
Thursday, January 24, 2008
Financial WMDs
Societe Generale said today that a single trader who fooled his bosses carried out a massive 4.9 billion euro ($7.15 billion) fraud -- one of the biggest in financial history. Trading in the bank's shares was temporarily suspended but fell 5% after they resumed because of the fraud and a 2.05 billion euro loss in the US subprime mortgage market. The bank said it needed a 5.5 billion euros capital increase to restore its balance sheet. Chairman Daniel Bouton said the unnamed rogue trader had used "extremely sophisticated and varied techniques" to carry out "fraud of a considerable scope." The trader, based in Paris, is believed to have built up the huge losses gambling on share futures. The bank said the trader took out "massive fraudulent directional positions in 2007 and 2008 beyond his limited authority." The case dwarfs that of Nick Leeson, the original British "rogue trader" who lost $1.5 billion at Barings, causing the failure of the venerable British bank in 1995. (Source: AFP)
GM by a nose
Toyota sold 9.366 million vehicles last year globally (up 6% from 2006). Toyota had said as late as yesterday that its total was 9.37 million vehicles, but today Toyota spokesman Paul Nolasco in Tokyo confirmed the extra digit in Toyota's sales, showing that GM's total (9,369,524 up 3% from 2006) was narrowly higher. So GM retains its crown as the world's #1 automaker for the 77th year in a row.
Last year, Toyota deposed Ford as the #2 auto seller in the US. Toyota sold 2.6 million vehicles for a 16% share of the market, more than double from what it sold in 1990.
GM remains the auto sales leader in the US, but its market share has dropped dramatically from about 35% in 1990 to about 24% in 2007. GM sold 3.8 million vehicles in the United States last year, down 6% from 2006, due largely to a reduction in fleet sales. Sales in the rest of the world are up 10%. It's like I wrote about Ford about 2.5 years ago. If they could just close down their US operations, they would be insanely profitable companies.
Wednesday, January 23, 2008
Wachovia Earnings
Wachovia's fourth-quarter net income plummeted 98%, as the company's deteriorating lending portfolio forced it to dramatically increase its loan-loss provision. The company also saw its bad loans and delinquencies surge. The bank reported net income of $51 million, or three cents a share, versus $2.3 billion, or $1.20 a share, a year earlier. The latest results included five cents in net merger-related costs. The company increased its loan-loss provision by $1.3 billion.
AAPL Slaughtered
Apple reported a first-quarter profit that rose 58% from a year ago, but the company gave an earnings outlook that fell short of Wall Street analysts' forecasts. I don't know how reasonable those forecasts were, but the stock got slaughtered. They dropped 11% in after hours trading yesterday, and as of 11:45 this morning are down 16% at $130.60. They are now down an amazing 35.7% from their high of $202.96 just a few weeks ago. I really wish I had shorted them as I suggested at that time. I guess I am just too much of a chickenshit to play the market.
Follow up on earlier post
Yesterday, Ambac shares went up 34%, and shares of MBIA went up 40%.
So let's see if I understand the sequence of events here...
1) Wall Street analysts rate Ambac and MBIA buys
2) Ambac and MBIA lose over half their value
3) Wall Street analysts downgrade Ambac and MBIA to holds
4) Ambac and MBIA shares skyrocket
Brilliant!
So let's see if I understand the sequence of events here...
1) Wall Street analysts rate Ambac and MBIA buys
2) Ambac and MBIA lose over half their value
3) Wall Street analysts downgrade Ambac and MBIA to holds
4) Ambac and MBIA shares skyrocket
Brilliant!
Tuesday, January 22, 2008
Fed Blinks
The Federal Reserve unexpectedly slashed the federal funds rate by a bold three-fourths of a percentage point from 4.25% to 3.5%, responding to a global plunge in stock markets that heightened concerns about a recession. The Fed signaled that further rate cuts were likely. The reduction marked the biggest reduction since 1990. It also marked the first time that the Fed has changed the rate between meetings since September 2001, in response to the terrorist attacks. Despite the Fed's bold move, Wall Street plunged at the bell with the DJIA down 465 points immediately after trading started. Stocks rebounded somewhat and the DJIA finished the day off 128 points at 11,971.
ETA - turns out a good part of that global plunge was caused by SocGen unwinding its derivative positions.
ETA - turns out a good part of that global plunge was caused by SocGen unwinding its derivative positions.
Bank of America Earnings
Bank of America posted earnings of $0.05 EPS, while First Call had estimates at $0.18 on last look. Net income was down 95% at $268 million for the quarter. Trading account losses were $5.44 Billion, driven almost exclusively by $5.28 Billion in CDO writedowns (considerably larger than the $3.3 billion estimated as recently as Dec 22). Provision expenses increased $1.74 Billion, mostly due to a $1.33 Billion addition to the reserve for credit losses. Amazingly despite the bad day overall on Wall Street, Bank of America shares actually closed up 4% after slipping in early trading.
Monday, January 21, 2008
Stock Bloodbath
Markets in the US are closed today, but around the world stocks took quite a beating...
India, down 9.5%, trading was halted
Hong Kong, down 8%, down 21% so far this year
Australia, down 7%
Brazil, down 6.9%
Germany, down 6.7%
South Korea, down 6%
France, down 5.9%
Japan, down 5.7%
Canada, down 4.8%
UK, down 4.7%
India, down 9.5%, trading was halted
Hong Kong, down 8%, down 21% so far this year
Australia, down 7%
Brazil, down 6.9%
Germany, down 6.7%
South Korea, down 6%
France, down 5.9%
Japan, down 5.7%
Canada, down 4.8%
UK, down 4.7%
Friday, January 18, 2008
On barns and horses
Yesterday Ambac shares lost more than half their value when Moody's Investors Service warned that it may cut the AAA ratings of Ambac and rival MBIA. Fitch Ratings actually took the plunge and downgraded Ambac Financial to AA from AAA. Today Banc of America Securities analyst Tamara Kravec cut her rating on the bond-insurance sector to neutral from overweight and downgraded Ambac, MBIA and Security Capital Assurance to neutral from buy.
ETA: And it's not like this would have taken any brilliant insight or unavailable information to discover. The at-risk nature of the rating has been discussed on websites like www.marketwatch.com since the company announced a $737M loss for the fourth quarter and the resulting need to float a $1B bond offering.
ETA: And it's not like this would have taken any brilliant insight or unavailable information to discover. The at-risk nature of the rating has been discussed on websites like www.marketwatch.com since the company announced a $737M loss for the fourth quarter and the resulting need to float a $1B bond offering.
S&P down 10% for year
Wow, it's only January 18th and the S&P500 is already down almost 10% for the year, closing today at 1325. If you remember my prediction just 9 days ago was that 1322 by year end was a pessimistic prediction. Of course, there's a good chance of some sort of bounceback in the next 11 months, but any way you slice it 2008 is going to be a rough year for the market. I hate looking at my 401(k) balances; at least I'm buying some cheap shares - thank God for dollar averaging in down markets.
Countrywide still plummeting
Despite the deal to be bought out by Bank of America, Countrywide stock continues to plummet. It dropped 9.5% today to $4.96, far below the price BoA is planning to pay. Presumably, the market thinks this deal might not happen.
Self-serving opinion
David Ellis is executive vice president of the Greater Atlanta Home Builders Association. He wrote an editorial in today's AJC entitled "Law of supply and demand says: Buy a home now." What an incredibly self-serving opinion. I wonder if he actually believes it.
NYSE to buy AMEX
The New York Stock Exchange agreed to buy the American Stock Exchange, ending a once intense rivalry that began in colonial times when brokers traded in outdoor markets. The AMEX, unable to compete like it once did, began to focus on trading options and other financial products. It now trades generally smaller companies that are often too illiquid to meet the standards of bigger rivals. NYSE said it would pay AMEX's seatholders $260 million in NYSE Euronext stock. In addition, they would receive more stock after the sale of the AMEX's building at 86 Trinity Place, a landmarked art deco building it moved into in 1921 that sits only blocks away from the World Trade Center site. The deal will give NYSE a second US license for an option exchange and make the NYSE the #3 US options marketplace after CME and CBOT.
Sprint
Sprint Nextel shares are down 25% to close at $8.70 today.
Fitch Ratings downgraded several of its debt ratings to BBB- from BBB on Friday over a lack of visibility of the company's performance going forward and concerns over financial and operating results.
In the fourth quarter, Sprint lost 109,000 subscribers overall and 683,000 postpaid customers.
Sprint ended 2007 with 53.8 million wireless customers, barely higher than the 53.1 million it served at the end of 2006. AT&T gained a net 4.7 million mobile customers through the first three quarters of 2007 to 65.7 million. In the same time frame, Verizon added 4.6 million mobile subscribers to 63.7 million. What's worse, the number of postpaid subscribers served by Sprint fell by 1 million in 2007 to 40.8 million.
Sprint said it would cut 4,000 jobs from its workforce of 60,000 just one year after it eliminated 5,000 positions. Sprint also said it would close 125 of its 1,400 stores. Those cuts would save as much as $800 million on an annualized basis, the company said. Sprint aims to complete the reductions in the first half of 2008.
Poor customer service is cited as the reason for the mass subscriber defections. Anecdotally I can vouch for that. I am in a dispute with them now because they overcharged me for data usage both of the prior months and refuse to budge. If I weren't locked into a contract I'd be one of that million.
Fitch Ratings downgraded several of its debt ratings to BBB- from BBB on Friday over a lack of visibility of the company's performance going forward and concerns over financial and operating results.
In the fourth quarter, Sprint lost 109,000 subscribers overall and 683,000 postpaid customers.
Sprint ended 2007 with 53.8 million wireless customers, barely higher than the 53.1 million it served at the end of 2006. AT&T gained a net 4.7 million mobile customers through the first three quarters of 2007 to 65.7 million. In the same time frame, Verizon added 4.6 million mobile subscribers to 63.7 million. What's worse, the number of postpaid subscribers served by Sprint fell by 1 million in 2007 to 40.8 million.
Sprint said it would cut 4,000 jobs from its workforce of 60,000 just one year after it eliminated 5,000 positions. Sprint also said it would close 125 of its 1,400 stores. Those cuts would save as much as $800 million on an annualized basis, the company said. Sprint aims to complete the reductions in the first half of 2008.
Poor customer service is cited as the reason for the mass subscriber defections. Anecdotally I can vouch for that. I am in a dispute with them now because they overcharged me for data usage both of the prior months and refuse to budge. If I weren't locked into a contract I'd be one of that million.
WaMu
Washington Mutual reported a nearly $2 billion fourth-quarter net loss as the lender continued to struggle in the face of a meltdown in the mortgage industry and questions about its viability. The company lost $2.19 a share in the period after taking a $1.6 billion charge to write down the value of its home loan business and set aside more provisions to cover the cost of housing-market weakness.
However ...
However ...
The stock was up 8.75% on speculation that it is a tempting takeover target
Thursday, January 17, 2008
Merrill Lynch 4Q Numbers Out
Merrill Lynch wrote off $11.5 billion of bad debt and derivatives and reported a fourth-quarter net loss of $9.83 billion, or $12.01 a share. Revenue was negative $8.19 billion. [Analysts were expecting $702 million on the plus-side, with a range between +$7.86 billion and -$3.34 billion. D'OH!] Merrill also made $2.6 billion in credit-valuation adjustments related to hedges on CDOs. The loss from continuing operations was $12.57 a share. [The analyst range was between $1.51 and $11 a share.] The stock closed down $5.56 (10.1%) at $49.45.
Tuesday, January 15, 2008
Busy day on Wall Street
Market down over 2%, led by several key stocks.
Story 1: Bad news (REALLY bad news) from Citi
Citigroup reported its first quarterly loss since 1998 and the largest loss in the bank's 196-year history. It slashed its dividend by 41% and raised more than $12 billion to bolster its capital position. The company swung to a fourth-quarter loss of $9.83 billion, or $1.99 a share. Continued woes in the subprime-mortgage market caused the bank to book pre-tax write-downs and credit costs of about $18.1 billion. Revenue dropped 70% to $7.22 billion from $23.83 billion. This was the worst quarter in Citi's 196 year history. Its stock fell $2.12 (7.3%) to $26.94. It took JP Morgan Chase and Merrill Lynch, both down 5.29%, with it.
Story 2: Bank of America exiting investment banking
Bank of America today outlined a streamlined corporate and investment banking unit that guards the functions most closely aligned with serving large businesses but eliminates or scales back more exotic trading functions. Bank of America is selling its prime brokerage, which lends to hedge funds. The company is also gutting parts ofits trading unit and shutting down such structured products areas as CDOs. Bank of America will lay off 650 people in its global corporate and investment bank in the coming weeks, in addition to 500l ayoffs announced in October after the unit posted disastrous third-quarter results. (Source: WSJ) The stock dropped 3.4%. Also, its upcoming acquisition Countrywide was down 4.6%.
Other bank stocks were clobbered too. Wells Fargo was down 6.1%; State Street was down 5.94%; Washington Mutual was down 5.1%; Wachovia Bank was down 4.38%.
Story 3: Apple down
Despite revealing its new (super-cool) machine at MacWorld, Apple shares went down $9.74 (5.45%) to $169.04. I'll note that the stock is now down 16.7% from its 52-week high of $202.96 just two weeks ago.
As an aside, not a big market mover, but Krispy Kreme was down 9% to $2.32, a 52-week low.
Story 1: Bad news (REALLY bad news) from Citi
Citigroup reported its first quarterly loss since 1998 and the largest loss in the bank's 196-year history. It slashed its dividend by 41% and raised more than $12 billion to bolster its capital position. The company swung to a fourth-quarter loss of $9.83 billion, or $1.99 a share. Continued woes in the subprime-mortgage market caused the bank to book pre-tax write-downs and credit costs of about $18.1 billion. Revenue dropped 70% to $7.22 billion from $23.83 billion. This was the worst quarter in Citi's 196 year history. Its stock fell $2.12 (7.3%) to $26.94. It took JP Morgan Chase and Merrill Lynch, both down 5.29%, with it.
Story 2: Bank of America exiting investment banking
Bank of America today outlined a streamlined corporate and investment banking unit that guards the functions most closely aligned with serving large businesses but eliminates or scales back more exotic trading functions. Bank of America is selling its prime brokerage, which lends to hedge funds. The company is also gutting parts ofits trading unit and shutting down such structured products areas as CDOs. Bank of America will lay off 650 people in its global corporate and investment bank in the coming weeks, in addition to 500l ayoffs announced in October after the unit posted disastrous third-quarter results. (Source: WSJ) The stock dropped 3.4%. Also, its upcoming acquisition Countrywide was down 4.6%.
Other bank stocks were clobbered too. Wells Fargo was down 6.1%; State Street was down 5.94%; Washington Mutual was down 5.1%; Wachovia Bank was down 4.38%.
Story 3: Apple down
Despite revealing its new (super-cool) machine at MacWorld, Apple shares went down $9.74 (5.45%) to $169.04. I'll note that the stock is now down 16.7% from its 52-week high of $202.96 just two weeks ago.
As an aside, not a big market mover, but Krispy Kreme was down 9% to $2.32, a 52-week low.
Monday, January 14, 2008
China putting brakes on US investment
Beijing put the brakes on a plan by its investment arm, China Development Bank, to invest $2 billion in Citigroup. No surprise. Earlier this year, China Investment Corporation made a $5 billion investment in Morgan Stanley (which as I've discussed in this blog has done very poorly), and as part of its 2007 IPO, Blackstone solicited and obtained a $3 billion investment from China (which is worth less than $2 billion today).
Source: Marketwatch
Source: Marketwatch
Friday, January 11, 2008
Structured Finance Market Dead For Now
Here's a graph of new securitization deals (in billions of dollars) by month during 2007...
Clearly the securitization market is dead.
Continuing Saga at Merrill Lynch and Citi
Merrill Lynch is expected to report write-downs of $15 billion stemming from soured mortgage investments, coming in at nearly double the original estimate. The losses are expected to be disclosed when Merrill reports earnings next week. Wall Street expects Merrill to report losses of $10 billion to $12 billion. In related news, Charlie Gasparino reported on CNBC that sources inside the firm have told him the Citigroup write-downs could be $24 billion when earnings are announced next Tuesday.
These write-downs are prompting both firms to raise additional capital from outside investors. Citigroup could get as much as $10 billion from foreign governments, and Merrill is expected to receive $3-4 billion, with much of the cash coming from a Middle Eastern government investment fund. Citi is also expected to consider slashing its dividend in half in a move that would save it around $2.5 billion a year. Both firms are rushing to finalize the deals before they report earnings.
http://www.marketwatch.com/merrill-lynch-reportedly-facing-massive/
http://www.marketwatch.com/citigroup-merrill-reportedly-seek-fresh/
These write-downs are prompting both firms to raise additional capital from outside investors. Citigroup could get as much as $10 billion from foreign governments, and Merrill is expected to receive $3-4 billion, with much of the cash coming from a Middle Eastern government investment fund. Citi is also expected to consider slashing its dividend in half in a move that would save it around $2.5 billion a year. Both firms are rushing to finalize the deals before they report earnings.
http://www.marketwatch.com/merrill-lynch-reportedly-facing-massive/
http://www.marketwatch.com/citigroup-merrill-reportedly-seek-fresh/
Bank of America to acquire Countrywide Financial!
Bank of America is purchasing Countrywide Financial for $4 billion, effectively doubling down on its previous investment in the troubled firm and catapulting the buyer into the top spot among mortgage lenders and loan servicers in the US. The stock-swap deal will put an end to the independence of the troubled California lender. Terms call for Countrywide stockholders to receive 0.1822 of a share of Bank of America stock in exchange for each share they own. At yesterday's close, that values Countrywide at $7.16 a share - lower than the $7.75 closing price after news leaked of a possible deal. Countrywide's shares fell 13%, dropping $1.04 early today, to $6.71.
While Countrywide's market value is a fraction of its peak level of $45 billion last year, Bank of America's bigger expense would be writedowns from declining value of the lender's $209 billion loan portfolio, said Sean Egan, managing director of Egan-Jones Rating Co. in Philadelphia. A 5% writedown on the portfolio would be more than $10 billion, roughly half of the bank's 2006 profit of $21 billion. And keep in mind that it is more likely to be much much MUCH worse than $10B than to be any better than that. In my mind $10B is an optimistic best case scenario.
* Merger would create by far the largest mortgage lender and servicer in the US - with approximately 12.8 million customers and 23% market share
* BofA would gain the opportunity to cross-sell bank products to an estimated 9 million Countrywide mortgage customers
* BofA would gain Countrywide's retail bank (thrift deposit) customers
* BofA would acquire leading - while proprietary - loan origination and loan servicing platforms
The Bad
* Managing through a potential culture clash between Countrywide's aggressive mortgage operations and Bank of America's professional retail banking environment may be a significant challenge
* With the prospect of this merger, BofA will test regulators anxiety levels associated with the 10% deposit rule by exploiting a little known, never used loophole
* BofA's balance sheet status and capitalization requirement will come under further scrutiny, which started when it acquired LaSalle bank
* Identification and elimination of redundant lending and banking systems is complex, and will be a multi-year process
The Ugly
With a recession looming, capital markets becoming more nervous, an overspent consumer, rising energy rates and a collapsing real estate market, this acquisition is a very bold move by the BofA board. In fact, the timing of this acquisition seems on the surface little more than a bailout strategy to protect its earlier $2 billion investment in Countrywide.
While Countrywide's market value is a fraction of its peak level of $45 billion last year, Bank of America's bigger expense would be writedowns from declining value of the lender's $209 billion loan portfolio, said Sean Egan, managing director of Egan-Jones Rating Co. in Philadelphia. A 5% writedown on the portfolio would be more than $10 billion, roughly half of the bank's 2006 profit of $21 billion. And keep in mind that it is more likely to be much much MUCH worse than $10B than to be any better than that. In my mind $10B is an optimistic best case scenario.
Sources: WSJ, MarketWatch
ETA:
* Merger would create by far the largest mortgage lender and servicer in the US - with approximately 12.8 million customers and 23% market share
* BofA would gain the opportunity to cross-sell bank products to an estimated 9 million Countrywide mortgage customers
* BofA would gain Countrywide's retail bank (thrift deposit) customers
* BofA would acquire leading - while proprietary - loan origination and loan servicing platforms
The Bad
* Managing through a potential culture clash between Countrywide's aggressive mortgage operations and Bank of America's professional retail banking environment may be a significant challenge
* With the prospect of this merger, BofA will test regulators anxiety levels associated with the 10% deposit rule by exploiting a little known, never used loophole
* BofA's balance sheet status and capitalization requirement will come under further scrutiny, which started when it acquired LaSalle bank
* Identification and elimination of redundant lending and banking systems is complex, and will be a multi-year process
The Ugly
With a recession looming, capital markets becoming more nervous, an overspent consumer, rising energy rates and a collapsing real estate market, this acquisition is a very bold move by the BofA board. In fact, the timing of this acquisition seems on the surface little more than a bailout strategy to protect its earlier $2 billion investment in Countrywide.
Thursday, January 10, 2008
CC
Circuit City down 80% for the year. Who would have thought that their brilliant strategy of firing all their employees who, like, actually knew stuff and replacing them with cheaper noobs would not pay off? I mean who could possibly have foreseen that?
I am continually amazed at the arrogance and stupidity of executives who view their sorry asses as irreplaceable while looking down at the folks who actually get the work done as interchangeable cogs to be obtained at the lowest possible price.
Delta Seeking Merger Partner
In a story in today's WSJ, "people close to the matter" were cited as saying Delta would seek permission from its board of directors for CEO Richard Anderson to begin merger talks with Northwest. Analysts also expect Delta to consider a tie up with either UAL or Continental. Wow, what a collection of financially weak airlines. Perhaps merging will give you a stronger company. Then again, maybe it will just give you a larger weak airline.
Bank of America to acquire Countrywide Financial?
The Wall Street Journal just reported that Bank of America is in advanced talks to acquire Countrywide. It isn't clear how quickly a deal might be struck. Bank of America last August propped up Countrywide by buying $2 billion of preferred shares convertible into a stake of about 16% in the lender. The total market value of Countrywide has plunged to about $3 billion.
Too bad. It looks like they will avoid bankruptcy after all. Although I am unclear why BoA would want them in the first place. Perhaps after some due diligence this deal will fall apart, but presumably BoA already did a lot of due diligence when they bought their stake in August (although maybe not given how poorly that stake has performed since then).Weak December Sales
For December 2007, 27 retailers missed December forecasts for sales at stores open at least a year (14 beat forecasts and 2 met forecasts). The worst results were...
AnnTaylor posted a 9.4% decline, worse than the 1.9% decline anticipated
Limited posted a 8% drop, worse than the 4% decline anticipated
Macy's posted a 7.9% drop in same-store sales, worse than the 6.5% decline anticipated
Gap posted a 6% decline, worse than the 2.2% decline anticipated
Abercrombie & Fitch posted a 2% decline, worse than the 0.8% decline anticipated
Those sales numbers are REALLY bad. It would indeed appear that a recession is in the works.
Wednesday, January 09, 2008
Annual Forecasting Dinner
The CFA Society of Atlanta had its annual forecasting dinner tonight. I have two thoughts related to this...
1) As an aside, I was reminded of my recent post referencing an article about the intellectual benefits of living in a big city. Our speakers were OK, but the New York chapter? For their most recent soiree they got ... the Secretary of the Treasury!
2) More to the point, I have the answer to some questions you might have. Have you been wondering how the investment experts at UBS could have been left holding the bag on over $13 billion of worthless CDOs? Have you been wondering how the investment experts at Bear Stearns could have lost almost $7 a share in a single quarter? Well, wonder no more. Tonight I learned the truth ... They are smoking some good s--t! Both those firms are predicting 12/31/2008 S&P 500 at 1700. That's a +17.6% return ... for an economy where the best-case scenario is that it narrowly avoids recession in 2008.
For the record, the predictions for 12/31/2008 that I put in for the contest were
S&P 500 = 1322 (a 10% drop from its 12/31/2007 value, which I now think is overly pessimistic, but I do think the market is going to be slightly to moderately down for the year)
Well, so much for overly pessimistic. The S&P500 ended down 38.6% at 903. 1700 my butt.
Ten year Treasury note yield = 3.70% (down from its 3.79% value today)
Yield as of 12/31/2008 = 2.21%
Fed Funds Rate = 3.50% (down 75 basis points from its value today)
Fed Funds Rate = 0.25% (!)
1) As an aside, I was reminded of my recent post referencing an article about the intellectual benefits of living in a big city. Our speakers were OK, but the New York chapter? For their most recent soiree they got ... the Secretary of the Treasury!
2) More to the point, I have the answer to some questions you might have. Have you been wondering how the investment experts at UBS could have been left holding the bag on over $13 billion of worthless CDOs? Have you been wondering how the investment experts at Bear Stearns could have lost almost $7 a share in a single quarter? Well, wonder no more. Tonight I learned the truth ... They are smoking some good s--t! Both those firms are predicting 12/31/2008 S&P 500 at 1700. That's a +17.6% return ... for an economy where the best-case scenario is that it narrowly avoids recession in 2008.
For the record, the predictions for 12/31/2008 that I put in for the contest were
S&P 500 = 1322 (a 10% drop from its 12/31/2007 value, which I now think is overly pessimistic, but I do think the market is going to be slightly to moderately down for the year)
Well, so much for overly pessimistic. The S&P500 ended down 38.6% at 903. 1700 my butt.
Ten year Treasury note yield = 3.70% (down from its 3.79% value today)
Yield as of 12/31/2008 = 2.21%
Fed Funds Rate = 3.50% (down 75 basis points from its value today)
Fed Funds Rate = 0.25% (!)
Tuesday, January 08, 2008
Countrywide Going Down?
Shares of Countrywide plunged today on reports that the company was nearing bankruptcy. The stock recovered somewhat since the company put out a statement saying that "There is no substance to the rumor that Countrywide is planning to file for bankruptcy, and we are not aware of any basis for the rumor that any of the major rating agencies are contemplating negative action relative to the company." But that's not the only bad press the company has gotten today. Federal bankruptcy judge Thomas P. Agresti had this to say about documents "recreated" by Countrywide that are part of a bankruptcy proceeding in Pennsylvania: "These are a sign that something is not right in Denmark". This is big trouble for Countrywide.
Judge Agresti said that discovery should proceed so that those involved in the case could determine how Countrywide’s systems might generate such documents. A spokesman for the lender, Rick Simon, said: “It is not Countrywide’s policy to create or ‘fabricate’ any documents as evidence that they were sent if they had not been. We believe it will be shown in further discovery that the Countrywide bankruptcy technician who generated the documents at issue did so as an efficient way to convey the dates the escrow analyses were done and the calculations of the payments as a result of the analyses.” The documents were generated in a case involving Sharon Diane Hill, a homeowner in Monroeville, Pa. Ms. Hill filed for Chapter 13 bankruptcy protection in March 2001 to try to save her home from foreclosure. After meeting her mortgage obligations under the 60-month bankruptcy plan, Ms. Hill’s case was discharged and officially closed on March 9, 2007. Countrywide, the servicer on her loan, did not object to the discharge; court records from that date show she was current on her mortgage. But one month later, Ms. Hill received a notice of intention to foreclose from Countrywide, stating that she was in default and owed the company $4,166. Court records show that the amount claimed by Countrywide was from the period during which Ms. Hill was making regular payments under the auspices of the bankruptcy court. They included “monthly charges” totaling $3,840 from November 2006 to April 2007, late charges of $128 and other charges of almost $200. In May, Countrywide sent Ms. Hill another notice stating that her loan was delinquent and demanding that she pay $4,715.58.
Countrywide is going down. And in my opinion it couldn't happen to a more deserving company. Too bad that CEO Mozilo is going to avoid the worst of it. Scum!
Judge Agresti said that discovery should proceed so that those involved in the case could determine how Countrywide’s systems might generate such documents. A spokesman for the lender, Rick Simon, said: “It is not Countrywide’s policy to create or ‘fabricate’ any documents as evidence that they were sent if they had not been. We believe it will be shown in further discovery that the Countrywide bankruptcy technician who generated the documents at issue did so as an efficient way to convey the dates the escrow analyses were done and the calculations of the payments as a result of the analyses.” The documents were generated in a case involving Sharon Diane Hill, a homeowner in Monroeville, Pa. Ms. Hill filed for Chapter 13 bankruptcy protection in March 2001 to try to save her home from foreclosure. After meeting her mortgage obligations under the 60-month bankruptcy plan, Ms. Hill’s case was discharged and officially closed on March 9, 2007. Countrywide, the servicer on her loan, did not object to the discharge; court records from that date show she was current on her mortgage. But one month later, Ms. Hill received a notice of intention to foreclose from Countrywide, stating that she was in default and owed the company $4,166. Court records show that the amount claimed by Countrywide was from the period during which Ms. Hill was making regular payments under the auspices of the bankruptcy court. They included “monthly charges” totaling $3,840 from November 2006 to April 2007, late charges of $128 and other charges of almost $200. In May, Countrywide sent Ms. Hill another notice stating that her loan was delinquent and demanding that she pay $4,715.58.
Countrywide is going down. And in my opinion it couldn't happen to a more deserving company. Too bad that CEO Mozilo is going to avoid the worst of it. Scum!
Banks could lose a quarter TRILLION dollars
Banks could lose as much as $242 billion from the mortgage crisis, leaving the industry in need of more capital, analysts warned on Monday. Since subprime mortgage problems erupted in August, banks, thrifts and brokerage firms around the world have written down the value of mortgage-related assets by more than $94 billion. Banks could suffer another $59 billion to $148 billion of such losses over the next few years, partly depending on how fast house prices in the U.S. fall, the analysts forecast. That would leave total losses at between $153 billion and $242 billion, forcing the banking industry to raise more capital.
Edited (2/1) to add:
Standard & Poor's estimates that banks, credit unions and foreign financial institutions may be hit with more than $265 billion in losses from securities tied to subprime mortgages.
Edited (2/1) to add:
Standard & Poor's estimates that banks, credit unions and foreign financial institutions may be hit with more than $265 billion in losses from securities tied to subprime mortgages.
Bear Stearns CEO Ousted
Bear Stearns's James Cayne is relinquishing the post of CEO but retaining the chairman post. They got it half right.
Monday, January 07, 2008
Krispy Kreme CEO Ousted
Daryl Brewster has left the building for “personal reasons.” And it's about time, with the results KK has been having. The only reason KK's loss narrowed by 20% recently was a halving of general and administrative costs while sales, free cash flow and cash continued to crumble.
Chairman James Morgan now slides into the President and CEO spots, and according to the company: “This is not an interim appointment, and it is anticipated that he will serve as President and Chief Executive Officer for the foreseeable future.” Until the company goes into bankruptcy, anyway.
Chairman James Morgan now slides into the President and CEO spots, and according to the company: “This is not an interim appointment, and it is anticipated that he will serve as President and Chief Executive Officer for the foreseeable future.” Until the company goes into bankruptcy, anyway.
5% Unemployment
A follow-up on my comment almost three years ago about economic reporting (by the way, you will note that there was no stagnation or inflation in 05, 06 or 07) ...
Bush is getting blasted for the weak economy as unemployment climbs to 5%. Does anybody remember when Clinton was praised for the strong economy as unemployment dropped to 5%?!
Bush is getting blasted for the weak economy as unemployment climbs to 5%. Does anybody remember when Clinton was praised for the strong economy as unemployment dropped to 5%?!
Credit Suisse Write-Down
Credit Suisse is expected to announce further losses from its exposure to U.S. subprime loans and declare new writeoffs worth $2.3 billion.
Friday, January 04, 2008
Response to Comment
I take a look at this - which I find hard not to believe is not a result of the bursting of the real-estate/housing bubble - and what I perceive to be the idiocy which is causing successive loss after successive loss on Wall Street in recent days, and immediately think in terms of 1929's foolishness all over again. I remember Alan Greenspan's comment when the market was on the rise - "irrational exhuberance", he called it - and I see much of the same irrational action today, just in the opposite direction.
Unfortunately the issue is that the foolishness is the run-up in prices, not the subsequent drop. Once the idiocy is apparent, there is nothing rational markets can do but price down the assets involved. Without reaching out to the 1929 crash, we have the much more recent 2000-2002 stock market collapse. Collateralized Debt Obligations (CDO) simply became overpriced due in large part to an overreliance on mathematical models that seriously understated the possibility of default. If you lend money to borrowers who cannot manage 3% down payments and need interest-only loans to "afford" payments and who are relying on unrealistic appreciation of their houses, what do you think is going to happen? Duh! Massive default, resulting in a massive drop in value of the CDOs. And that's what we're seeing now. And what should happen to a company that foolishly invested tens of billions of dollars in these CDOs that are now close to worthless? Exactly what we're seeing - their balance sheets are ravaged, their income statements disintegrate, their CEOs are terminated, and some of their other assets are liquidated in a fire sale. I do not view it as reverse irrational exhuberance, but rather a rational pricing of companies that were irrationally priced before.
Take oil, for example. It once again broke the $100/barrel benchmark, based on [...] "fear" that violence in Nigeria - which has not impacted its production of oil - might do so. Say what? I found the following on Bloomberg: "Not one drop of oil was disrupted when Benazir Bhutto was assassinated last week, but prices surged," Mueller said. "Anything that can is sending the market higher. That's what happens when you have a jittery market." Huh?!? So let me get this straight: Nothing real or tangible has actually happened which directly impacted oil supplies - but we hammer its price ever wildly upward because ... of expectations? Fears? Psychological BS??? Whiskey Tango Foxtrot!!!! That tells me we are actually not working with what a thing is worth - which, to me, is the foundation of what free-market capitalism means - but instead catering to the psychological well-being and/or unreasonable reactions of people I must assume are fundamentally insane (given the volatility of what they're acting upon) and allowing such people to determine these things for ... well, pretty much everything. Uh oh.
Something to remember is that all investors like predictability. The real (even if unlikely) possibility of disruption is going to cause a type of hoarding mechanism to kick in, driving prices higher.
Although your point about the resulting insanity of prices is well taken, I think we have a fundamental disagreement over the phrase I've underlined. In a completely capitalist free market, what exactly is a thing "worth"? Exactly what willing buyers and willing sellers agree to trade that thing at, no more and no less. So if oil prices are bid up because morons panic without need and want to buy more, then the higher price is exactly what oil is worth.
Is this really what (and who) we want controlling our economic viability and well-being? Regrettably, I do not have a solution. But it sickens me to watch the markets move for no good reason, know that especially some of the ridiculous trends we've seen recently hurt those people everywhere who depend upon them for their every-day survival, and see signs which tell me no one's paying attention to Santayana's maxim as regards what happened in the late Twenties and early Thirties. Sorry for the rant. But I must be honest and say I find almost everything about what I see in the markets, these days, as utterly laughable. Do any of the people there have so much as two undamaged neurons to rub together? I guess the same goes for the morons who runs some of the companies showing the most egregious foolish behavior.
In my mind, the issue of mismanagement is a completely different one from the issue of prices. The institutions I've been posting about (Citi, Morgan Stanley, Merrill Lynch) are supposed to be the nation's premier investment institutions. It should go without saying that a large part of prudent investment is proper risk management, but the common thread in all these write-downs -- which have passed the $70 billion mark at this point and will certainly surpass $100 billion before all is said and done -- is a complete breakdown in the risk management process. As far as I'm concerned, it borders on the criminally negligent. That not all these executives have been fired, that those who have been fired have walked away with multi-million dollar packages, and that the boards have not been held accountable, is appalling.
Any ideas? Something sure would be nice to settle the mind that there is something more reasonable than what I believe I see ...
Unfortunately the only idea I have - administering IQ tests before you allow folks to invest - is unworkable for a variety of reasons.
Unfortunately the issue is that the foolishness is the run-up in prices, not the subsequent drop. Once the idiocy is apparent, there is nothing rational markets can do but price down the assets involved. Without reaching out to the 1929 crash, we have the much more recent 2000-2002 stock market collapse. Collateralized Debt Obligations (CDO) simply became overpriced due in large part to an overreliance on mathematical models that seriously understated the possibility of default. If you lend money to borrowers who cannot manage 3% down payments and need interest-only loans to "afford" payments and who are relying on unrealistic appreciation of their houses, what do you think is going to happen? Duh! Massive default, resulting in a massive drop in value of the CDOs. And that's what we're seeing now. And what should happen to a company that foolishly invested tens of billions of dollars in these CDOs that are now close to worthless? Exactly what we're seeing - their balance sheets are ravaged, their income statements disintegrate, their CEOs are terminated, and some of their other assets are liquidated in a fire sale. I do not view it as reverse irrational exhuberance, but rather a rational pricing of companies that were irrationally priced before.
Take oil, for example. It once again broke the $100/barrel benchmark, based on [...] "fear" that violence in Nigeria - which has not impacted its production of oil - might do so. Say what? I found the following on Bloomberg: "Not one drop of oil was disrupted when Benazir Bhutto was assassinated last week, but prices surged," Mueller said. "Anything that can is sending the market higher. That's what happens when you have a jittery market." Huh?!? So let me get this straight: Nothing real or tangible has actually happened which directly impacted oil supplies - but we hammer its price ever wildly upward because ... of expectations? Fears? Psychological BS??? Whiskey Tango Foxtrot!!!! That tells me we are actually not working with what a thing is worth - which, to me, is the foundation of what free-market capitalism means - but instead catering to the psychological well-being and/or unreasonable reactions of people I must assume are fundamentally insane (given the volatility of what they're acting upon) and allowing such people to determine these things for ... well, pretty much everything. Uh oh.
Something to remember is that all investors like predictability. The real (even if unlikely) possibility of disruption is going to cause a type of hoarding mechanism to kick in, driving prices higher.
Although your point about the resulting insanity of prices is well taken, I think we have a fundamental disagreement over the phrase I've underlined. In a completely capitalist free market, what exactly is a thing "worth"? Exactly what willing buyers and willing sellers agree to trade that thing at, no more and no less. So if oil prices are bid up because morons panic without need and want to buy more, then the higher price is exactly what oil is worth.
Is this really what (and who) we want controlling our economic viability and well-being? Regrettably, I do not have a solution. But it sickens me to watch the markets move for no good reason, know that especially some of the ridiculous trends we've seen recently hurt those people everywhere who depend upon them for their every-day survival, and see signs which tell me no one's paying attention to Santayana's maxim as regards what happened in the late Twenties and early Thirties. Sorry for the rant. But I must be honest and say I find almost everything about what I see in the markets, these days, as utterly laughable. Do any of the people there have so much as two undamaged neurons to rub together? I guess the same goes for the morons who runs some of the companies showing the most egregious foolish behavior.
In my mind, the issue of mismanagement is a completely different one from the issue of prices. The institutions I've been posting about (Citi, Morgan Stanley, Merrill Lynch) are supposed to be the nation's premier investment institutions. It should go without saying that a large part of prudent investment is proper risk management, but the common thread in all these write-downs -- which have passed the $70 billion mark at this point and will certainly surpass $100 billion before all is said and done -- is a complete breakdown in the risk management process. As far as I'm concerned, it borders on the criminally negligent. That not all these executives have been fired, that those who have been fired have walked away with multi-million dollar packages, and that the boards have not been held accountable, is appalling.
Any ideas? Something sure would be nice to settle the mind that there is something more reasonable than what I believe I see ...
Unfortunately the only idea I have - administering IQ tests before you allow folks to invest - is unworkable for a variety of reasons.
Problems at SSgA
State Street is parting ways with William Hunt, head of the company's investment management arm State Street Global Advisors. Although the company said Hunt resigned, he will receive a severance package worth $14.1 million.
State Street has reserved $618 million to contend with investor lawsuits related to its fixed income strategies (translation: the CDO subprime mess), which resulted in a $279 million charge to earnings.
Thursday, January 03, 2008
Indian Salaries
The meteoric rise of India's currency, the rupee, might be good news for Indians who travel abroad, but it spells disaster for millions of entrepreneurs like Rajiv Prem, a clothing exporter in this dusty boomtown. Prem has had to close one of his three factories and lay off about 200 workers, more than a fifth of his work force. Most were tailors and seamstresses who made clothes mainly for U.S. retailers, including H&M, Kohl's and Anthropology.
This clearly illustrates what I've been saying for a long time. The rampant replacement of Indian labor for US labor is a temporary arbitrage. Currently, Indian labor is cheap relative to US labor. Like any arbitrage, this encourages buyers (companies) to short the expensive US labor (layoff employees) and buy the cheap Indian labor (offshore). Of course, economics 101 tells us what happens when you do this. US wages go down; Indian wages go up. And due to the overhead of setting up in a foreign country, the wages don't have to become equal (not even close) before it's no longer worth it for US firms to get their labor offshore.
One conclusion is that Cooper Anderson should have a Coke and a smile and ... . Another conclusion is that all the companies that built their business models on offshoring work to cheap Indian labor to compete on price are in for a rude awakening. They'd better find a new way to compete because the long-term consequences of the short-term decision to offshore are starting to come due. Hewitt Associates, which pioneered this model in the benefits outsourcing industry, had a loss of $175M last year. Offshoring doesn't seem to be a panacea for them.
This clearly illustrates what I've been saying for a long time. The rampant replacement of Indian labor for US labor is a temporary arbitrage. Currently, Indian labor is cheap relative to US labor. Like any arbitrage, this encourages buyers (companies) to short the expensive US labor (layoff employees) and buy the cheap Indian labor (offshore). Of course, economics 101 tells us what happens when you do this. US wages go down; Indian wages go up. And due to the overhead of setting up in a foreign country, the wages don't have to become equal (not even close) before it's no longer worth it for US firms to get their labor offshore.
One conclusion is that Cooper Anderson should have a Coke and a smile and ... . Another conclusion is that all the companies that built their business models on offshoring work to cheap Indian labor to compete on price are in for a rude awakening. They'd better find a new way to compete because the long-term consequences of the short-term decision to offshore are starting to come due. Hewitt Associates, which pioneered this model in the benefits outsourcing industry, had a loss of $175M last year. Offshoring doesn't seem to be a panacea for them.
Stock Futures Point to ... ?
"Stock Futures Point to Further Decline"--headline, Associated Press, Jan. 3, 7:02 a.m.
"Stock Futures Point to Flat Open"--headline, Associated Press, Jan. 3, 8:22 a.m.
"Stock Futures Point to Higher Open"--headline, Associated Press, Jan. 3, 9:21 a.m.
(Thanks to WSJ's Best of the Web)
"Stock Futures Point to Flat Open"--headline, Associated Press, Jan. 3, 8:22 a.m.
"Stock Futures Point to Higher Open"--headline, Associated Press, Jan. 3, 9:21 a.m.
(Thanks to WSJ's Best of the Web)
Wednesday, January 02, 2008
Interesting Article on FT website
Since September, Middle Eastern and east Asian sovereign wealth funds have made a succession of investments in four US banks: Bear Stearns, Citigroup, Morgan Stanley and Merrill Lynch. Most commentators have been inclined to welcome this global bail-out: better to bring in foreign capital than to shrink balance sheets by reducing lending. Yet we need to recognise that these “capital injections” represent a transfer of the revenues from the US financial services industry into the hands of foreign governments. This is happening at a time when the gap between eastern and western incomes is narrowing at an unprecedented pace.
Edited to add links to explanations of the four deals in question:
Merrill Lynch, 12/25/2007
Morgan Stanley, 12/19/2007
Citi, 11/26/2007
Bear Stearns, 10/23/2007
What's most striking is the speed of the collapse - we're talking about 2 months for foreign interests to own 10% of four of the largest US investment banks.
Edited to add links to explanations of the four deals in question:
Merrill Lynch, 12/25/2007
Morgan Stanley, 12/19/2007
Citi, 11/26/2007
Bear Stearns, 10/23/2007
What's most striking is the speed of the collapse - we're talking about 2 months for foreign interests to own 10% of four of the largest US investment banks.
Worst is not over at Merrill
Merrill Lynch may cut 1600 jobs soon, as they struggle with billions of dollars of mortgage-related write-downs. Merrill could also unveil write-downs of as much as $10 billion from the fourth quarter.
John Thain, Merrill Lynch's new CEO, is in talks with Chinese and Middle Eastern investors that could lead to a capital-raising sale of another big stake in the US investment bank. Thain is taking calls from a number of potential buyers, understood to include sovereign wealth funds from the Gulf and China, in a bid to raise extra capital. The observer quoted an unnamed US observer as saying that the Temasek cash would not be enough to insulate the group from the impact of the global credit crunch and another unidentified source as saying Thain was seeking extra overseas capital to boost Merrill's balance sheet and to avert potential future liquidity problems.
John Thain, Merrill Lynch's new CEO, is in talks with Chinese and Middle Eastern investors that could lead to a capital-raising sale of another big stake in the US investment bank. Thain is taking calls from a number of potential buyers, understood to include sovereign wealth funds from the Gulf and China, in a bid to raise extra capital. The observer quoted an unnamed US observer as saying that the Temasek cash would not be enough to insulate the group from the impact of the global credit crunch and another unidentified source as saying Thain was seeking extra overseas capital to boost Merrill's balance sheet and to avert potential future liquidity problems.
Tuesday, January 01, 2008
World Economy
The World Bank says China and India are not what they are pumped up to be. The Bank has "downsized" the economies of the two Asian giants by nearly 40% under new metrics, which it says are more reliable and accurate than previous estimates.
According to the new data, India's GDP in Purchasing Power Parity (PPP) terms was $2.34 trillion in 2005 and in nominal dollar terms was $779 billion. Prior to the revision, India's GDP in PPP terms was $3.8 trillion in 2005, which would have made it the third largest economy after China and ahead of Germany, tied with Japan. Using the new figure, it's fifth.
The revised estimates also downsized China's economy, although it remained the second largest economy behind the US. China's economy under the new metrics was $5.33 trillion in 2005 in PPP terms against the $8.8 trillion estimated earlier.
The top 10 economies in the world, totalling 64% of the global $55 trillion GDP(PPP):
1 United States $12.38T (22.5%)
2 People's Republic of China $5.33T (9.7%)
3 Japan $3.87T (7.0%)
4 Germany $2.51T (4.6%)
5 India $2.34T (4.3%)
6 United Kingdom $1.90T (3.5%)
7 France $1.86T (3.4%)
8 Russia $1.70T (3.1%)
9 Italy $1.63T (3.0%)
10 Brazil $1.59T (2.9%)
Source: World Bank
According to the new data, India's GDP in Purchasing Power Parity (PPP) terms was $2.34 trillion in 2005 and in nominal dollar terms was $779 billion. Prior to the revision, India's GDP in PPP terms was $3.8 trillion in 2005, which would have made it the third largest economy after China and ahead of Germany, tied with Japan. Using the new figure, it's fifth.
The revised estimates also downsized China's economy, although it remained the second largest economy behind the US. China's economy under the new metrics was $5.33 trillion in 2005 in PPP terms against the $8.8 trillion estimated earlier.
The top 10 economies in the world, totalling 64% of the global $55 trillion GDP(PPP):
1 United States $12.38T (22.5%)
2 People's Republic of China $5.33T (9.7%)
3 Japan $3.87T (7.0%)
4 Germany $2.51T (4.6%)
5 India $2.34T (4.3%)
6 United Kingdom $1.90T (3.5%)
7 France $1.86T (3.4%)
8 Russia $1.70T (3.1%)
9 Italy $1.63T (3.0%)
10 Brazil $1.59T (2.9%)
Source: World Bank
Apparently others think so too
Currency analysts say the value of the U.S. dollar in 2008 will depend on the country's economic growth. Hans Redeker of BNP Paribas says the main reason for the dollar's recent decline has been the idea that the US is no longer the world's driving economic force. He says 2008 will show that decoupling has not happened as much as previously thought, giving the dollar a boost.
Has the US dollar bottomed out?
USD against
GBP 0.50178
EUR 0.68006
JPY 113.115
I think 2008 will be a moderately good year for the greenback.
GBP 0.50178
EUR 0.68006
JPY 113.115
I think 2008 will be a moderately good year for the greenback.
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