USA Today Letter to the Editor

American Airlines' planned $15 checked baggage fee for coach passengers is wrong-headed, short-sighted and mean-spirited ... What if American Airlines had announced that fares were going up $15 but that those who do not check baggage would receive a discount off that fare? I think that would have been the better route to take with customers.

Anybody too stupid to understand that those two things are EXACTLY THE SAME* should not be given a forum to inflict his opinion on the rest of us.

* Except of course for the nightmare of processing all those refunds.

Excellent Series on Bear Stearns in the WSJ

The Wall Street Journal is publishing a three-day series on the collapse of Bear Stearns today through Thursday. A fascinating read!

ETA links (WSJ subscription NOT required for these particular articles):
Part 1 - Missed Opportunities
Part 2 - Run on the Bank
Part 3 - Deal or No Deal

55% of Bear Stearns to be laid off

JPMorgan Chase's CEO James Dimon has announced a plan to reduce more than 50% of Bear Stearns's staff, following its acquisition. JPMorgan will retain 45% of Bear Stearns employees and jobs have already been offered to around 6,000 of around 14,000 Bear Stearns staff members.

Issuance of CDOs may vanish!

A report issued by Aite Group found that only $1.5 billion in CDOs backed by asset-backed securities have been issued this year—all from three deals. By comparison, $226 billion worth of ABS CDOs were issued in 2006. With less collateral to securitize into CDOs and no ready buyers in sight, ABS CDO issuance has virtually disappeared. Report author John Jay doesn’t see that changing anytime soon. CDO arrangers, rating agencies and investment banks all had profit structures that “were too enticing to be dismissed.” Thus, collateral managers ended up producing as many CDOs as possible. The arbitrage CDO business model will “cease to be for the foreseeable future,” he predicted.

We're going to talk ourselves into a depression

Consumer sentiment is the worst since June 1980?! You have to be kidding me! The consumer one year inflation estimate is 5.2%. Consumers are wrong -- that number is way higher than it's actually going to turn out to be, but let's take it at face value. In 1980 inflation was 10.3%. And unemployment went up from 5% to 5.2%. Well unemployment was above 5% for most of the Clinton years. And in 1980 it was 7.1%. People just need to take a chill pill before they turn a bad economic situation even worse.

WSJ Star Analysts

WSJ published today the result of its annual "Best on the Street" analysts survey. The results are eye-opening in some cases.

One thing to keep top of mind when looking at these results is that even if the market (or a particular industry) is going down precipitously, these analysts should still get positive results because under the WSJ methodology they get credit for correctly rating a stock a sell. If they rate a stock a buy and it goes up or they rate it a sell and it goes down, they get that return added to their results. Conversely if they rate a stock a buy and it goes down or they rate it a sell and it goes up, they get that return subtracted from their results.

First of all, the median score in 9 industries was NEGATIVE. That means that more than half the analysts following that industry failed to correctly identify winners and losers even though they are the alleged experts in those industries.

• Airlines = -25.1% (this is a particularly egregious one, since you could have made a bundle just by reasoning that the airline industry was going to tank and rate EVERYTHING a sell; this strategy would have put me in SECOND place in the rankings), Kevin Crissey (UBS) scored 42.6%, two other analysts earned anemic 3.6% and 0.8% scores, and the other 9 analysts all got negative scores
• Banks = -17.3%
• Broadcast & Entertainment = -13.5%
• Consumer & Specialy Finance = -66.1%, 22 out of 26 analysts got negative scores (!!)
• Home Construction & Furnishings = -28.6%
• Hotels & Casinos = -15.6%
• Real Estate = -17.4%
• Restaurants = -29.8%
• Retailers Broadline & Apparel = -38.1%
• Retailers Specialty & Service = -15.7%

Ironically, it is also worth mentioning that several of the top analysts have been laid off since the beginning of the year. Gotta love Wall Street.

Communist Drive Continues in Venezuela

Venezuelan President Hugo Chavez nationalized the country's biggest steelmaker and its mining subsidiaries after the Argentine owners could not reach a labor agreement with its 12,000 workers. Chavez set a June 30 deadline for Argentina's Techint to transfer all assets in Ternium-Sidor to the government. Compensation discussions are still under way. Chavez also signed a new union contract with Ternium-Sidor workers Monday.

One for the DUH files!

Following the subprime meltdown, industry experts now say market participants should consider social sciences that affect human behavior, such as that of homeowners, rather than relying solely on mathematical models. "It's time perhaps to put aside mathematics and somehow find the right balance between qualitative, quantitative and sensitive risk management," said Philippe Carrel, global head of business development at Thomson Reuters.

Underwater

Half of all US homeowners who bought at the peak of the real estate bubble in 2006 owe more on their mortgage than their home is worth today. About 40% who bought in 2005 or 2007 are underwater. In Las Vegas, 90% of homeowners who bought in 2006 owe more than their home is worth. In Stockton CA it's 96%.

FNMA Loss

Fannie Mae posted a massive and deeper-than-expected quarterly loss, its third straight, prompting it to slash its dividend and set plans to raise $6 billion of fresh funds. Still, executives were cautiously optimistic that the worst of the credit turmoil may have passed. Their comments triggered a big rally.

WTF?

Fannie Mae posted a net loss after payment of preferred dividends of $2.51 billion, or $2.57 per share, for the first quarter. The loss was greater than even the most pessimistic forecast and came on the heels of a record $3.6 billion loss in the fourth quarter of 2007. Fannie Mae's loss and need to raise capital reflect the plight of financial services companies worldwide, which have written off more than $330 billion in soured mortgage securities and raised more than $200 billion to shore up depleted balance sheets. After Fannie Mae announced its capital-raising plans, its regulator said it intended to reduce the amount of surplus capital the company needed to hold, which further boosted optimism about its ability to expand its holdings of relatively cheap mortgage assets and restore profitability. Shares of Fannie Mae rose nearly 7% at $30.11 at midday.

Lowering capital requirements is a terrible idea, in my opinion. I guess the market feels differently. Of course, the market though it was a good idea to pay $330 billion for MBSs and CDOs that turned out to be worthless.

Source: Yahoo

Countrywide Deal at Risk

Four months after Bank of America agreed to buy Countrywide for $4 billion, Wall Street is buzzing that it may reduce the offer or perhaps even walk away from the deal. Countrywide’s share price sank 10.4%. The rout was touched off by an analyst report urging BoA to abandon the acquisition because of growing problems at Countrywide. Robert Stickler, a BoA spokesman, said the deal was on track. But stock market investors have their doubts. Countrywide’s shares closed at $5.36, almost 24% below the $7 offer price.

Many still hope the BoA deal will save Countrywide from an uncertain future. But the problems at Countrywide have intensified. Losses on mortgages and home equity loans have ballooned, federal and state agencies have investigated its business practices, and the company is bracing for a wave of lawsuits from angry customers and investors. The Senate Judiciary Committee is scheduled to hold hearings to examine the way Countrywide’s loan servicing unit has treated troubled borrowers who try to hang on to their homes by seeking Chapter 13 bankruptcy.

The troubles have grown so acute that two longtime analysts denounced the deal. “BoA should completely walk away from the Countrywide deal, as Countrywide’s loan portfolio will prove to be a drag on earnings and force BoA to raise additional capital,” Paul Miller, a mortgage industry analyst at Friedman, Billings, Ramsey & Company, wrote in a report. He downgraded Countrywide’s rating to underperform. Charles Peabody, a financial services analyst at Portales Partners, said the deal put BoA “between a rock and a hard place” and put a sell rating on its stock. “Either the deal goes through and BoA faces significant charges, or the deal fails and BoA faces a significant write-down on its $2 billion preferred investment in Countrywide,” he wrote.

Even before those warnings, BoA itself had prompted speculation it might pull back from the deal. BoA added a new paragraph to merger documents suggesting that it might not guarantee some or all of Countrywide’s publicly traded bonds. BoA previously created a bankruptcy-remote vehicle that could house Countrywide’s debt. S&P and Fitch responded by cutting Countrywide’s credit rating to junk-bond levels. Many analysts said BoA’s statement about Countrywide’s debt could be a hardball tactic to cut a new deal at a lower price. “They should walk away, but they will not,” Mr. Miller said. Instead, he thinks that BoA will try to renegotiate the deal for as little as $2 a share.

Countrywide’s losses have risen sharply since BoA made its initial $2 billion investment last summer. Losses may reach $16 billion. BoA, in the meantime, is under pressure to raise billions of dollars in fresh capital. On top of its recent $4 billion preferred stock offering, BoA may have to slash its dividend and raise up to $8 billion of common stock. Mr. Stickler said that the company felt “pretty comfortable at the moment” with its capital position and said the Countrywide transaction was “on track to close, as agreed to, early in third quarter.”

Countrywide has other pressing matters on its hands. Sen. Charles Schumer (D-NY), chairman of the Senate Judiciary Committee’s Subcommittee on Administrative Oversight and the Courts, is set to hold a hearing examining the lender’s practices. Steve Bailey, Countrywide’s chief executive for loan administration, is among those scheduled to testify. In prepared remarks, Mr. Bailey denies that Countrywide’s servicing unit is abusing the bankruptcy system and says that an internal review of loans in bankruptcy shows that mistakes are few. Nevertheless, the company is instituting new procedures to safeguard its customers. “Now that Congress is taking a close look at what Countrywide has been up to, the company finally seems to recognize the need to change its behavior,” Senator Schumer said in a statement. “But a pattern this unsettling will demand more than cosmetic fixes.”

[Source: NYT]