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.
Tuesday, January 22, 2008
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.
Monday, December 31, 2007
Summary of sub-prime write-downs in Q4
Citigroup $18.1 bln
UBS $13.7 bln
Merrill Lynch $11.5 bln
Morgan Stanley $10.3 bln
Bank of America $5.3 bln
HSBC $3.4 bln
Deutsche Bank $3.1 bln
Barclays $2.7 bln
Royal Bank of Scotland $2.6 bln
Credit Agricole $2.3 bln
Credit Suisse $2.3 bln
Bear Stearns $1.9 bln
JP Morgan Chase $1.6 bln
Goldman Sachs $1.5 bln
Wachovia Bank $1.1 bln
Lehman Brothers $0.8 bln
SunTrust Bank $0.6 bln
Total: $82,800,000,000 and counting!
Keep in mind ... this is just in one quarter...
UBS $13.7 bln
Merrill Lynch $11.5 bln
Morgan Stanley $10.3 bln
Bank of America $5.3 bln
HSBC $3.4 bln
Deutsche Bank $3.1 bln
Barclays $2.7 bln
Royal Bank of Scotland $2.6 bln
Credit Agricole $2.3 bln
Credit Suisse $2.3 bln
Bear Stearns $1.9 bln
JP Morgan Chase $1.6 bln
Goldman Sachs $1.5 bln
Wachovia Bank $1.1 bln
Lehman Brothers $0.8 bln
SunTrust Bank $0.6 bln
Total: $82,800,000,000 and counting!
Keep in mind ... this is just in one quarter...
Friday, December 28, 2007
More Bad News about Citi
Goldman Sachs
Citigroup could write off as much as $18.7 billion in the fourth quarter, wrote Goldman Sachs analysts William Tanona, Betsy Miller and Neil Sanyal in a note to investors late Wednesday. If it does, they say, the bank may be forced to lower its dividend by 40%. Citi has about $55 billion in exposure to subprime mortgages.
Wall Street Journal
Citigroup is considering sales, the WSJ reported today, citing analysts and unnamed executives. Citi could sell 80%-held Student Loan Corp, its North American auto-lending unit, its 24% stake in Brazil credit card operation Redecard, and its Japanese consumer finance business. New Citigroup CEO Vikram Pandit is also considering laying off as many as 20,000 employees and shedding business lines.
Citigroup could write off as much as $18.7 billion in the fourth quarter, wrote Goldman Sachs analysts William Tanona, Betsy Miller and Neil Sanyal in a note to investors late Wednesday. If it does, they say, the bank may be forced to lower its dividend by 40%. Citi has about $55 billion in exposure to subprime mortgages.
Wall Street Journal
Citigroup is considering sales, the WSJ reported today, citing analysts and unnamed executives. Citi could sell 80%-held Student Loan Corp, its North American auto-lending unit, its 24% stake in Brazil credit card operation Redecard, and its Japanese consumer finance business. New Citigroup CEO Vikram Pandit is also considering laying off as many as 20,000 employees and shedding business lines.
Wednesday, December 26, 2007
Home Prices Down 6.7%
Yeah, I know some of you may have seen 6.1% instead, but that is not really correct. All the news articles seem to be focusing on the S&P Case-Shiller Composite 20 Index which consists of 20 large metropolitan areas. That index dropped 6.1% between October 2006 and October 2007. However in that same report S&P publishes the Case-Shiller Composite Index which includes all real estate in the country. That index dropped 6.7% between October 2006 and October 2007. And what nobody is talking about is that November was much much worse than October, so 6.7% is probably an understatement.
Some of the largest drops:
Miami -12.4%
Tampa -11.8%
Detroit -11.2%
San Diego -11.1%
Las Vegas -10.7%
Phoenix -10.6%
Los Angeles -8.8%
Washington -7.0%
San Francisco -6.2%
My own Atlanta area dropped only 0.7%. Charlotte, Portland and Seattle actually posted gains.
A picture's worth a thousand words, so here's a graph for ya...
Some of the largest drops:
Miami -12.4%
Tampa -11.8%
Detroit -11.2%
San Diego -11.1%
Las Vegas -10.7%
Phoenix -10.6%
Los Angeles -8.8%
Washington -7.0%
San Francisco -6.2%
My own Atlanta area dropped only 0.7%. Charlotte, Portland and Seattle actually posted gains.
A picture's worth a thousand words, so here's a graph for ya...
History Repeats Itself
Excessive and inappropriate reliance on mathematical models has led to...
1) October 1987 - crash caused by portfolio "insurance"
2) September 1998 - LTCM Collapse
3) October-December 2007 - Subprime CDO collapse
For guys that are supposed to be so smart, the quants sure do make the same stupid mistakes time and time again, don't they?
1) October 1987 - crash caused by portfolio "insurance"
2) September 1998 - LTCM Collapse
3) October-December 2007 - Subprime CDO collapse
For guys that are supposed to be so smart, the quants sure do make the same stupid mistakes time and time again, don't they?
Tuesday, December 25, 2007
Merry Christmas
Merrill Lynch will sell up to $5 billion in shares to Singapore's Temasek Holdings, $4.4 billion immediately, with an option to buy another $600 million later. If Temasek exercises its option, it will be right at the 9.9% foreign ownership limit. Merrill Lynch is selling another $1.2 billion in shares to asset manager Davis Selected Advisers. Both investors bought their stakes at $48 a share, or more than 13% below where the stock closed on Friday. News of the discount, not to mention the 13% dilution to existing shareholders due to this investment, pushed Merrill shares 3% lower. The announcement of these deals is likely a prelude to another large write-down for Merrill Lynch in the fourth quarter, with some analysts estimating the hit will be bigger than the $8.4 billion write-down Merrill recorded in the third quarter. (Sources: Yahoo, The Australian)
In related news, Merrill Lynch Capital, the middle-market commercial finance business of Merrill Lynch, is being sold to GE Capital. Terms of the deal with the GE unit weren't disclosed, but Merrill Lynch said the deal will enable it to redeploy about $1.3 billion into other parts of its business.
http://www.cnn.com/2007/BUSINESS/10/24/merrill.mortgages/index.html
In related news, Merrill Lynch Capital, the middle-market commercial finance business of Merrill Lynch, is being sold to GE Capital. Terms of the deal with the GE unit weren't disclosed, but Merrill Lynch said the deal will enable it to redeploy about $1.3 billion into other parts of its business.
http://www.cnn.com/2007/BUSINESS/10/24/merrill.mortgages/index.html
Friday, December 21, 2007
Thursday, December 20, 2007
More Write-downs
French bank Credit Agricole said it's increasing its write-downs on super-senior CDOs and because of the situation at ACA Financial Guaranty, resulting in a 1.6 billion euro ($2.3 billion) hit to 2007 results.
Bear Stearns posted its first-ever quarterly loss as the company's mortgage-related write-down grew to $1.9 billion after credit markets worsened last month. They reported a fourth-quarter loss of $854 million, or $6.90 a share. Consensus was they would come in at a loss of $1.80 a share. D'OH!
Bear Stearns posted its first-ever quarterly loss as the company's mortgage-related write-down grew to $1.9 billion after credit markets worsened last month. They reported a fourth-quarter loss of $854 million, or $6.90 a share. Consensus was they would come in at a loss of $1.80 a share. D'OH!
Wednesday, December 19, 2007
Morgan Stanley write-down
Morgan Stanley said Wednesday it's writing down an additional $5.7 billion of mortgage-related assets, taking the total fourth-quarter loss to nearly $10 billion in the latest sign that the credit crunch is worsening.
Morgan Stanley lost $5.8 billion or $3.61 a share. Analysts polled by Thomson Financial had forecast a loss of 39 cents a share.
D'OH!
Morgan Stanley lost $5.8 billion or $3.61 a share. Analysts polled by Thomson Financial had forecast a loss of 39 cents a share.
D'OH!
Wednesday, December 12, 2007
To Roth or Not To Roth, that is the question
MarketWatch has a debate going on this all-important question.
Roth IRA is the surest route to retirement-savings success
Investors will watch their dollars grow faster in a deductible account
Roth IRA is the surest route to retirement-savings success
Investors will watch their dollars grow faster in a deductible account
Citi appoints new CEO and new chairman
Former hedge-fund manager Vikram Pandit was named CEO of Citigroup. Pandit replaces Bischoff, who has filled the top post on an interim basis since former CEO Charles Prince was forced out.
Citigroup also named Win Bischoff chairman, replacing Robert Rubin, who will return to his previous duties as a director and chairman of the executive committee of the board.
Citigroup also named Win Bischoff chairman, replacing Robert Rubin, who will return to his previous duties as a director and chairman of the executive committee of the board.
Potkettleblack much?
J.P. Morgan Chase and Bank of America were downgraded to hold from buy, and Wachovia was cut to sell from hold at Merrill Lynch. J.P. Morgan is one of the largest U.S. consumer lenders and will be hard-pressed to avoid a consumer recession, Bank of America will be hurt by higher-than-expected credit losses and Wachovia will see a significant rise in net credit losses.
Tuesday, December 11, 2007
Stocks fall over 2%
Stocks fell off a cliff today afer the Fed cut shaved both its Fed funds target and discount rates by 25 basis points. What the heck were markets expecting?
DJIA Index down 2.14%, S&P 500 Index down 2.53%, Nasdaq Composite Index down 2.45%
Financial stocks were particularly hard hit: American Express down 5.24%, JP Morgan Chase down 3.12%, and Citigroup down 4.43%, Washington Mutual down 12.37%, H&R Block down 3.26%.
Monday, December 10, 2007
Friday, December 07, 2007
CompUSA shutting down operations
CompUSA will close its store operations (all 103 stores) after the holidays following sale of the company to Gordon Brothers Group LLC, a restructuring firm. CompUSA stores plan to run store-closing sales during the holidays. Privately held CompUSA, controlled by Mexican financier Carlos Slim Helu, said discussions were under way to sell certain stores in key markets. Stores that can't be sold will be closed. Gordon Brothers will also try to sell the company's technical services business, CompUSA TechPro, and online business. It would be up to the buyers whether to continue the CompUSA name.
Thursday, December 06, 2007
"The Mother of all Bad Ideas" by Patrick Schiffer
Without question, the Bush administration’s mortgage rescue plan will exacerbate, not alleviate, the problems in the housing market. As the plan will sharply reduce the ability of new buyers to make purchases, it really amounts to a stay of execution and not a pardon.
Although there are mountains of uncertainty as to how the plan will be structured and implemented, there is no question that as lenders factor in the added risk of having their contracts re-written or of being held liable for defaulting borrowers, lending standards for new loans will become increasingly severe (higher down payments, mortgage rates, and required Fico scores, lower loan to income ratios, and perhaps the death of adjustable rate loans altogether). The result will be additional downward pressure on home prices, despite the fact that in the short term fewer homes will be sold in foreclosure than what might have been without the rescue plan.
Most homes temporarily saved from foreclosure will continue to depreciate as new buyers fail to qualify for loans. As a result, lenders will be on the hook for more losses than had the foreclosures taken place sooner. Of course, as these chickens will likely come home to roost after the next election, that’s a trade-off incumbent politicians will happily make.
Compounding the problem is that subprime borrowers with frozen payments on loans that exceed the values of their homes will likely choose not to pay property taxes, condo or homeowners fees, or maintain the condition of their properties. Were these properties to be sold in foreclosure now, at least their new owners would have financial incentives to maintain the value of their investments. Upside-down subprime borrowers will have no incentive to throw money down a rat hole: why make additional payments on properties in which they have no equity and which they will likely lose to foreclosure anyway? When these homes do go into foreclosure, back taxes and other fees on dilapidated properties will inflict even greater losses on lenders.
Also, subprime borrowers with frozen resets will be unable to either borrow additional money against their homes or sell them. As rising credit card payments, higher food and energy bills, and stagnating wage growth or unemployment make even paying the frozen rates increasingly more difficult, this lack of flexibility will prove fatal. Also, the moral hazard inherent in offering help to only those who can demonstrate an inability to afford the reset rates, or restricting the bailout to borrowers with low credit scores, guarantees that borrowers will alter their circumstances to qualify for the aid. Therefore more loans will be frozen than are currently forecast, and the financial circumstances of the borrowers will be that much more impaired as they endeavor to pile on added debt or reduce their incomes to conform to the requirements of the bailout.
Lost in current discussion is the fact that few subprime borrowers have any skin in the game in the first place. Having put nothing down or having extracted equity in previous refinances, most subprime borrowers will lose nothing if their homes go into foreclosure. In some cases the teaser rates were so low that borrowers actually paid less than what they might otherwise have paid in rent. In fact, those who have already extracted equity have received huge windfalls from their homes and will leave their lenders holding the bag.
Also missing from the dialogue is the fact that those individuals and companies that sold these homes to subprime borrowers in the first place pocketed large sums of money they never would have received if these exotic loans were not available. Is anyone going to ask them to give some of that money back in order to compensate the lenders for their losses?
Finally, it’s the camel’s nose under the tent that is the most troubling. Delinquencies on auto loans are now at record highs, and with no home equity left to extract and a weakening economy, this problem can only get worse. What is next, a moratorium on car payments? Of course if the government can “require” private parties to rewrite contracts, what about the government’s obligations to re-pay its debts? After all, the Federal government is the biggest subprime borrower of all and it has committed the American taxpayer to the mother of all adjustable rate mortgages. With the majority of our near 10 trillion dollar national debt financed with short-term paper, what happens when interest rates rise? Will the government extend the maturities of one-year treasury bills, tuning them into 10-year treasury bonds, forcing holders of government debt to accept below market returns for extended time periods? These are real risks that will not go unnoticed by a world already saturated with depreciating U.S. dollar denominated debt.
Ostensibly, this plan is being offered in an attempt to stem the tide of foreclosures that might otherwise cause further weakness in home prices. The reality of course is that current home prices are still too high, having been a function of the lax lending standards and rampant real estate speculation that got us into this mess in the first place. A return to prudence in lending also means a return to prudence in pricing. Everyone seems to agree that a return to traditional lending standards is a good idea, but no one seems willing to accept a return to rational prices as a consequence. The government’s attempt to orchestrate such an outcome is doomed to failure, as it is impossible to maintain bubble prices after the bubble has burst!
The final absurdity is the Government’s attempt to portray their plan as voluntary. Of course the authorities point out that if their “suggestions” are not adopted by lenders, much more draconian legislation will surely follow. Let freedom ring.
Although there are mountains of uncertainty as to how the plan will be structured and implemented, there is no question that as lenders factor in the added risk of having their contracts re-written or of being held liable for defaulting borrowers, lending standards for new loans will become increasingly severe (higher down payments, mortgage rates, and required Fico scores, lower loan to income ratios, and perhaps the death of adjustable rate loans altogether). The result will be additional downward pressure on home prices, despite the fact that in the short term fewer homes will be sold in foreclosure than what might have been without the rescue plan.
Most homes temporarily saved from foreclosure will continue to depreciate as new buyers fail to qualify for loans. As a result, lenders will be on the hook for more losses than had the foreclosures taken place sooner. Of course, as these chickens will likely come home to roost after the next election, that’s a trade-off incumbent politicians will happily make.
Compounding the problem is that subprime borrowers with frozen payments on loans that exceed the values of their homes will likely choose not to pay property taxes, condo or homeowners fees, or maintain the condition of their properties. Were these properties to be sold in foreclosure now, at least their new owners would have financial incentives to maintain the value of their investments. Upside-down subprime borrowers will have no incentive to throw money down a rat hole: why make additional payments on properties in which they have no equity and which they will likely lose to foreclosure anyway? When these homes do go into foreclosure, back taxes and other fees on dilapidated properties will inflict even greater losses on lenders.
Also, subprime borrowers with frozen resets will be unable to either borrow additional money against their homes or sell them. As rising credit card payments, higher food and energy bills, and stagnating wage growth or unemployment make even paying the frozen rates increasingly more difficult, this lack of flexibility will prove fatal. Also, the moral hazard inherent in offering help to only those who can demonstrate an inability to afford the reset rates, or restricting the bailout to borrowers with low credit scores, guarantees that borrowers will alter their circumstances to qualify for the aid. Therefore more loans will be frozen than are currently forecast, and the financial circumstances of the borrowers will be that much more impaired as they endeavor to pile on added debt or reduce their incomes to conform to the requirements of the bailout.
Lost in current discussion is the fact that few subprime borrowers have any skin in the game in the first place. Having put nothing down or having extracted equity in previous refinances, most subprime borrowers will lose nothing if their homes go into foreclosure. In some cases the teaser rates were so low that borrowers actually paid less than what they might otherwise have paid in rent. In fact, those who have already extracted equity have received huge windfalls from their homes and will leave their lenders holding the bag.
Also missing from the dialogue is the fact that those individuals and companies that sold these homes to subprime borrowers in the first place pocketed large sums of money they never would have received if these exotic loans were not available. Is anyone going to ask them to give some of that money back in order to compensate the lenders for their losses?
Finally, it’s the camel’s nose under the tent that is the most troubling. Delinquencies on auto loans are now at record highs, and with no home equity left to extract and a weakening economy, this problem can only get worse. What is next, a moratorium on car payments? Of course if the government can “require” private parties to rewrite contracts, what about the government’s obligations to re-pay its debts? After all, the Federal government is the biggest subprime borrower of all and it has committed the American taxpayer to the mother of all adjustable rate mortgages. With the majority of our near 10 trillion dollar national debt financed with short-term paper, what happens when interest rates rise? Will the government extend the maturities of one-year treasury bills, tuning them into 10-year treasury bonds, forcing holders of government debt to accept below market returns for extended time periods? These are real risks that will not go unnoticed by a world already saturated with depreciating U.S. dollar denominated debt.
Ostensibly, this plan is being offered in an attempt to stem the tide of foreclosures that might otherwise cause further weakness in home prices. The reality of course is that current home prices are still too high, having been a function of the lax lending standards and rampant real estate speculation that got us into this mess in the first place. A return to prudence in lending also means a return to prudence in pricing. Everyone seems to agree that a return to traditional lending standards is a good idea, but no one seems willing to accept a return to rational prices as a consequence. The government’s attempt to orchestrate such an outcome is doomed to failure, as it is impossible to maintain bubble prices after the bubble has burst!
The final absurdity is the Government’s attempt to portray their plan as voluntary. Of course the authorities point out that if their “suggestions” are not adopted by lenders, much more draconian legislation will surely follow. Let freedom ring.
Saturday, December 01, 2007
RAGE!!!!
The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled subprime home loans, according to people familiar with the negotiations. An accord could reassure investors and strapped homeowners, both of whom are anxious as interest rates on more than two million adjustable mortgages are scheduled to jump over the next two years.
Exactly which borrowers will qualify for the freeze and how long the freeze would last are yet to be determined. Under one scenario, the freeze could run as long as seven years.
Borrowers whose loans are resetting are likely to have a tougher time sidestepping the rising payments by refinancing or selling their homes. Lending standards have tightened and many borrowers can't qualify for refinancing. And falling home prices mean that many borrowers have little or no equity in their homes. Some owe more than their homes are worth.
Well, boo f'ing hoo! Things like this make me so outraged I can hardly see straight. These people (and I mean both the borrowers and the lenders) took huge risks because they thought they were going to make outrageous profits; their idiotic bets didn't pay off. And now those of us who did NOT take those risks (and did not earn any profit) are forced to subsidize the risky decisions and prevent losses to those who took the risks? What the bloody hell?! There are not enough bad words in the English language to describe my outrage! ¡Me cago en todos ellos!
Exactly which borrowers will qualify for the freeze and how long the freeze would last are yet to be determined. Under one scenario, the freeze could run as long as seven years.
Borrowers whose loans are resetting are likely to have a tougher time sidestepping the rising payments by refinancing or selling their homes. Lending standards have tightened and many borrowers can't qualify for refinancing. And falling home prices mean that many borrowers have little or no equity in their homes. Some owe more than their homes are worth.
Well, boo f'ing hoo! Things like this make me so outraged I can hardly see straight. These people (and I mean both the borrowers and the lenders) took huge risks because they thought they were going to make outrageous profits; their idiotic bets didn't pay off. And now those of us who did NOT take those risks (and did not earn any profit) are forced to subsidize the risky decisions and prevent losses to those who took the risks? What the bloody hell?! There are not enough bad words in the English language to describe my outrage! ¡Me cago en todos ellos!
Monday, November 26, 2007
Bad Day on Wall Street
The weekend retail numbers were good, so the market started off OK (an exception was Circuit City, down 8.0%). But then came multiple banking whammies, and the Dow Jones Industrial Average slid 237 points to 12743, as 28 of its 30 components retreated.
Citigroup fell 3.15% amid news of massive layoffs. The official number is not known, but analysts said it could be as many as 45,000. I don't understand that. Citi may have lost money in sub-prime, but doesn't the work of those 45,000 people still need to get done? If not, then why weren't they laid off BEFORE the sub-prime losses? The absurdity of big business! In after hours trading, Citi dropped an additional $1.
JP Morgan Chase fell 3.55% on no particular news.
UBS downgraded both Fannie Mae (down 10.19%) and Freddie Mac (down 7.44%).
And the current news from Asia is likewise bad...
Japan is down 2.1% (both Topix and Nikkei indices). Hong Kong's H-share index is down 3.4%. Seoul's Kospi index was down 2.7%.
Tomorrow is going to be a bad day on Wall Street.
Citigroup fell 3.15% amid news of massive layoffs. The official number is not known, but analysts said it could be as many as 45,000. I don't understand that. Citi may have lost money in sub-prime, but doesn't the work of those 45,000 people still need to get done? If not, then why weren't they laid off BEFORE the sub-prime losses? The absurdity of big business! In after hours trading, Citi dropped an additional $1.
JP Morgan Chase fell 3.55% on no particular news.
UBS downgraded both Fannie Mae (down 10.19%) and Freddie Mac (down 7.44%).
And the current news from Asia is likewise bad...
Japan is down 2.1% (both Topix and Nikkei indices). Hong Kong's H-share index is down 3.4%. Seoul's Kospi index was down 2.7%.
Tomorrow is going to be a bad day on Wall Street.
Thursday, November 15, 2007
Barclays Write-down
Barclays Plc, Britain's third-biggest bank, unveiled a 1.3 billion pound ($2.7 billion) writedown for losses on securities linked to the U.S. subprime housing crisis.
In related news...
Capital One Financial said it expects to take a writedown of about $5 billion. Washington Mutual said it will take $2.7 billion to $2.9 billion in writedowns because of falling home values (and at least one analyst at Lehman Brothers expects that amount actually to be closer to $3.8 billion).
In related news...
Capital One Financial said it expects to take a writedown of about $5 billion. Washington Mutual said it will take $2.7 billion to $2.9 billion in writedowns because of falling home values (and at least one analyst at Lehman Brothers expects that amount actually to be closer to $3.8 billion).
Wednesday, November 14, 2007
Money Market Issues
Bank of America, stung by the fallout in subprime mortgages, acted to safeguard its money market mutual funds. The bank planned to set aside $600 million to cover potential losses in its money market funds and an institutional cash management fund. The action is the largest recent step by a financial institution to ensure that its money funds aren't forced to reduce the value of their shares below $1.
The crisis in subprime mortgages has jolted the market for the short-term securities in which money funds invest. Bank of America's move is a sign of how the crisis has gone beyond complex institutional portfolios to potentially affect everyday savers. The bank said $300 million will be used by a group of its money funds that are offered to individuals. The other $300 million will support an institutional cash fund, which isn't technically a money fund. The money would help keep the funds' share price at $1 if some of their holdings defaulted.
Several other financial institutions have also bolstered their money funds:
• SEI, an institutional money manager, has set aside $129 million to support two of its money funds.
• Legg Mason has set up a $238 million line of credit for two money funds. It also invested $100 million to buoy an offshore money fund.
• SunTrust Bank has received SEC permission to set up credit lines for two money funds.
What's tripped up many funds are investments in Structured Investment Vehicles. SIVs use short-term loans to buy longer-term assets, such as mortgage-backed securities, that pay higher rates. The SIVs with the worst problems were often invested in subprime mortgages. As a result, some SIVs have stuck money funds with losses.
Money funds fear that if any fund "broke the buck," falling below $1 a share, investors would flee. That's why they're moving fast to try to avoid defaults.
The USA Today article does not mention (online, the print version does) that the only time in history when a money fund has broken the buck was Community Bankers U.S. Government Fund, a small institutional fund run by Community Bankers Mutual Fund in Denver, which liquidated in 1994 because of losses on interest-rate derivatives. The fund, which had more than 27% of its assets in the derivatives, paid investors 96 cents on the dollar.
The reason the fund lost money despite US Government in its name explains the problems that it (and a lot of other funds in that period) got into trouble in the first place. While US Treasuries are of course guaranteed by the US government with regards to both principal and interest, derivatives based on them such as Interest-Only bonds (IOs) or Principal-Only bonds (POs) can rise or drop in price because of movements in interest rates. That caused losses at many money funds although only Community Bankers actually broke the buck. Money funds had no business investing in IOs and POs in the first place.
The crisis in subprime mortgages has jolted the market for the short-term securities in which money funds invest. Bank of America's move is a sign of how the crisis has gone beyond complex institutional portfolios to potentially affect everyday savers. The bank said $300 million will be used by a group of its money funds that are offered to individuals. The other $300 million will support an institutional cash fund, which isn't technically a money fund. The money would help keep the funds' share price at $1 if some of their holdings defaulted.
Several other financial institutions have also bolstered their money funds:
• SEI, an institutional money manager, has set aside $129 million to support two of its money funds.
• Legg Mason has set up a $238 million line of credit for two money funds. It also invested $100 million to buoy an offshore money fund.
• SunTrust Bank has received SEC permission to set up credit lines for two money funds.
What's tripped up many funds are investments in Structured Investment Vehicles. SIVs use short-term loans to buy longer-term assets, such as mortgage-backed securities, that pay higher rates. The SIVs with the worst problems were often invested in subprime mortgages. As a result, some SIVs have stuck money funds with losses.
Money funds fear that if any fund "broke the buck," falling below $1 a share, investors would flee. That's why they're moving fast to try to avoid defaults.
The USA Today article does not mention (online, the print version does) that the only time in history when a money fund has broken the buck was Community Bankers U.S. Government Fund, a small institutional fund run by Community Bankers Mutual Fund in Denver, which liquidated in 1994 because of losses on interest-rate derivatives. The fund, which had more than 27% of its assets in the derivatives, paid investors 96 cents on the dollar.
The reason the fund lost money despite US Government in its name explains the problems that it (and a lot of other funds in that period) got into trouble in the first place. While US Treasuries are of course guaranteed by the US government with regards to both principal and interest, derivatives based on them such as Interest-Only bonds (IOs) or Principal-Only bonds (POs) can rise or drop in price because of movements in interest rates. That caused losses at many money funds although only Community Bankers actually broke the buck. Money funds had no business investing in IOs and POs in the first place.
Tuesday, November 13, 2007
Monday, November 05, 2007
Citigroup Woes
Citigroup announced significant declines since September 30, 2007, in the fair value of the approximately $55 billion in US sub-prime related direct exposures in its Securities and Banking business. Citi estimates that, at the present time, the reduction in revenues attributable to these declines ranges from approximately $8 billion to $11 billion (representing a decline of approximately $5 billion to $7 billion in net income on an after-tax basis).
(ETA: Note that this writedown is in addition to the $6.5 billion writedown already taken for the third quarter.)
And another CEO goes down...
Citigroup says its chairman and CEO, Charles Prince, has retired and is being replaced as chairman by former Treasury Secretary Robert Rubin. Citigroup also said Sir Win Bischoff, chairman of Citi Europe and a Member of the Citi management and operating committees, would serve as interim CEO.
And one last (mostly symbolic) piece of news...
Bank of America is now the largest bank in the country by market capitalization, and it may stay that way for a while. After weeks of flip-flopping with Citigroup for market-cap supremacy - with the financial rivals no more than $3 billion apart at various points - Bank of America surged ahead on the heels of Citigroup's implosion. Bank of America's total market value was $197B while Citigroup was at $179B.
(ETA: Note that this writedown is in addition to the $6.5 billion writedown already taken for the third quarter.)
And another CEO goes down...
Citigroup says its chairman and CEO, Charles Prince, has retired and is being replaced as chairman by former Treasury Secretary Robert Rubin. Citigroup also said Sir Win Bischoff, chairman of Citi Europe and a Member of the Citi management and operating committees, would serve as interim CEO.
And one last (mostly symbolic) piece of news...
Bank of America is now the largest bank in the country by market capitalization, and it may stay that way for a while. After weeks of flip-flopping with Citigroup for market-cap supremacy - with the financial rivals no more than $3 billion apart at various points - Bank of America surged ahead on the heels of Citigroup's implosion. Bank of America's total market value was $197B while Citigroup was at $179B.
Saturday, November 03, 2007
Bring on the lawyers!
Three different shareholder lawsuits...
Law Offices of Brian Felgoise Announces Class Action Lawsuit Against Merrill Lynch
Abraham Fruchter & Twersky LLP Files Class Action Lawsuit Against Merrill Lynch
Coughlin Stoia Geller Rudman & Robbins LLP Files Class Action Suit against Merrill Lynch
And just for good measure an ERISA lawsuit against the 401(k) plan...
Keller Rohrback L.L.P. Announces ERISA Investigation of the Merrill Lynch 401(k) Savings and Investment Plan
Law Offices of Brian Felgoise Announces Class Action Lawsuit Against Merrill Lynch
Abraham Fruchter & Twersky LLP Files Class Action Lawsuit Against Merrill Lynch
Coughlin Stoia Geller Rudman & Robbins LLP Files Class Action Suit against Merrill Lynch
And just for good measure an ERISA lawsuit against the 401(k) plan...
Keller Rohrback L.L.P. Announces ERISA Investigation of the Merrill Lynch 401(k) Savings and Investment Plan
Citigroup CEO on way out
Citigroup's board plans an emergency meeting tomorrow, and CEO Charles Prince is expected to offer to resign, according to the Wall Street Journal, which cited people familiar with the situation.
People familiar with the matter said the Securities and Exchange Commission is looking into the bank's accounting for its off-balance sheet investment funds that have recently attracted scrutiny. Citigroup may report further losses on Monday, reflecting continued declines in the value of some mortgage-linked securities since the third quarter ended Sept. 30, people familiar with the matter said.
People familiar with the matter said the Securities and Exchange Commission is looking into the bank's accounting for its off-balance sheet investment funds that have recently attracted scrutiny. Citigroup may report further losses on Monday, reflecting continued declines in the value of some mortgage-linked securities since the third quarter ended Sept. 30, people familiar with the matter said.
Tuesday, October 30, 2007
O'Neal out
Stan O'Neal, chairman and CEO of Merrill Lynch, has decided to retire from the company effective immediately.
The board of directors has elected Alberto Cribiore as interim non-executive chairman. Ahmass Fakahany and Gregory Fleming will continue as Merrill Lynch co-presidents and chief operating officers.
The board of directors has elected Alberto Cribiore as interim non-executive chairman. Ahmass Fakahany and Gregory Fleming will continue as Merrill Lynch co-presidents and chief operating officers.
Saturday, October 27, 2007
Countrywide
Countrywide Financial Corp., the nation's largest mortgage lender, said Tuesday it will begin calling borrowers to offer refinancing or modifications on $16 billion in loans whose interest rate is set to adjust by the end of 2008.
There's two aspects of the story on which I'd like to comment...
Countrywide said it would refinance about $10 billion in loans and modify another $4 billion. It also plans to contact borrowers of some $2.2 billion who are late on their loans and having trouble paying because of a recent rate reset. In total Countrywide's plan would reach out to about 82,000 borrowers for some kind of relief. [...] The company estimates some 10,000 borrowers with subprime loans who are now behind on their payments due to their mortgage interest rate resetting will be offered rate reductions by the end of the year.
So if you did the right thing and did NOT overextend by taking on more mortgage than you could afford, Countrywide only has one thing to say to you: SUCKER!
There's two aspects of the story on which I'd like to comment...
Countrywide said it would refinance about $10 billion in loans and modify another $4 billion. It also plans to contact borrowers of some $2.2 billion who are late on their loans and having trouble paying because of a recent rate reset. In total Countrywide's plan would reach out to about 82,000 borrowers for some kind of relief. [...] The company estimates some 10,000 borrowers with subprime loans who are now behind on their payments due to their mortgage interest rate resetting will be offered rate reductions by the end of the year.
So if you did the right thing and did NOT overextend by taking on more mortgage than you could afford, Countrywide only has one thing to say to you: SUCKER!
So far this year, Countrywide has completed about 20,000 loan modifications -- a figure that represents less than 5% of the more than 500,000 loans the lender reports were behind in payments as of last month and about 24% of the roughly 82,000 loans the company said were in foreclosure as of September.
There's over 80,000 loans in foreclosure and another420,000 behind? That doesn't mean anything good for Countrywide.Friday, October 26, 2007
Thursday, October 25, 2007
Wednesday, October 24, 2007
Merrill Lynch Loss Wider Than Expected
From Yahoo...
Merrill Lynch said it was taking a sharper-than-expected writeoff of 7.9 billion dollars for losses in its mortgage activities in the third quarter. Merrill Lynch said the charge was "significantly greater" than the 4.5 billion dollars forecast earlier this month. The investment bank reported a third-quarter net loss from continuing operations of 2.24 billion dollars compared with a net profit of 2.14 billion dollars a year ago. The loss amounts to 2.85 dollars a share, far wide that that the Wall Street consensus forecast for a loss per share of 45 cents.
From TheStreet...
Merrill Lynch stunned Wall Street for the second time this month with the disclosure that it was forced into a $7.9 billion writedown of bad debt tied to risky mortgages and structured paper. The announcement comes three weeks after Merrill surprised investors by estimating that its third quarter would swing to a loss under the weight of $4.5 billion in writedowns on certain securities. Merrill said the writedown increased after the firm took a second look at its valuation of collateralized debt obligations and subprime mortgage backed securities.
Merrill's third-quarter report has to rank among the worst in modern Wall Street history. The firm swung to a loss of $2.24 billion, or $2.85 a share, from continuing operations from a year-ago profit of $3.05 billion, or $3.14 a share. The firm took a $5.9 billion loss on its in-house trading operation. said $6.9 billion of the third-quarter writedown was related to its CDO positions and $1 billion to its subprime holdings. The firm said its net exposure to those securities dropped from second-quarter levels, but it continues to have $15 billion worth of CDO exposure and nearly $6 billion worth of subprime exposure.
What I (and I'm sure others) want to know is how could the loss be SIX TIMES as large as expected just three weeks ago. What kind of risk management do the guys at Merrill Lynch have in place?
Merrill Lynch said it was taking a sharper-than-expected writeoff of 7.9 billion dollars for losses in its mortgage activities in the third quarter. Merrill Lynch said the charge was "significantly greater" than the 4.5 billion dollars forecast earlier this month. The investment bank reported a third-quarter net loss from continuing operations of 2.24 billion dollars compared with a net profit of 2.14 billion dollars a year ago. The loss amounts to 2.85 dollars a share, far wide that that the Wall Street consensus forecast for a loss per share of 45 cents.
From TheStreet...
Merrill Lynch stunned Wall Street for the second time this month with the disclosure that it was forced into a $7.9 billion writedown of bad debt tied to risky mortgages and structured paper. The announcement comes three weeks after Merrill surprised investors by estimating that its third quarter would swing to a loss under the weight of $4.5 billion in writedowns on certain securities. Merrill said the writedown increased after the firm took a second look at its valuation of collateralized debt obligations and subprime mortgage backed securities.
Merrill's third-quarter report has to rank among the worst in modern Wall Street history. The firm swung to a loss of $2.24 billion, or $2.85 a share, from continuing operations from a year-ago profit of $3.05 billion, or $3.14 a share. The firm took a $5.9 billion loss on its in-house trading operation. said $6.9 billion of the third-quarter writedown was related to its CDO positions and $1 billion to its subprime holdings. The firm said its net exposure to those securities dropped from second-quarter levels, but it continues to have $15 billion worth of CDO exposure and nearly $6 billion worth of subprime exposure.
What I (and I'm sure others) want to know is how could the loss be SIX TIMES as large as expected just three weeks ago. What kind of risk management do the guys at Merrill Lynch have in place?
Tuesday, October 23, 2007
[Obsolete] Bear - Citic Swap
Bear Stearns and Citic Securities [a Chinese firm, not to be confused with Citi] will each invest about $1 billion in each other. In return for its investment in Bear Stearns, Citic will receive securities that can be converted into about 6% of Bear Stearns's outstanding shares. As part of the deal, Citic has the right to buy an additional 3.9% of the brokerage's outstanding shares [for that magic 9.9% share]. In return for its investment in Citic, Bear Stearns will receive a 2% stake in the firm. It has the option to buy an additional 5%.
Edited (3/17/2008): Citic Securities has canceled this investment deal with Bear Stearns. "The situation has changed," said Citic Chairman Dan Kong, after Bear's buy-out yesterday by JPMorgan Chase.
Edited (3/17/2008): Citic Securities has canceled this investment deal with Bear Stearns. "The situation has changed," said Citic Chairman Dan Kong, after Bear's buy-out yesterday by JPMorgan Chase.
Thursday, October 18, 2007
Friday, September 28, 2007
More Recalls
US retail giant Target has become the latest company to recall Chinese-made toys because of safety fears.
Another Chinese product in the United States is under scrutiny. Federal officials ordered a recall of 450,000 Chinese-made tires.
Imagine that. Offshoring production to China (or elsewhere) only results in savings if those other countries cut corners on the safety regulations that are required here in the US. Who could have imagined such a thing? It's not like Economics 101 would suggest that such a thing was likely.
Another Chinese product in the United States is under scrutiny. Federal officials ordered a recall of 450,000 Chinese-made tires.
Imagine that. Offshoring production to China (or elsewhere) only results in savings if those other countries cut corners on the safety regulations that are required here in the US. Who could have imagined such a thing? It's not like Economics 101 would suggest that such a thing was likely.
Thursday, September 20, 2007
Investment Bank Results
Goldman Sachs earned $2.85 billion, or $6.13 a share, in the three months ended Aug. 31, compared to $1.59 billion, or $3.26 a share, in the third quarter a year ago. Net revenue rose 63% to $12.33 billion from $7.58 billion a year ago.
Bear Stearns reported net income of $171.3 million, or $1.16 a share, for the quarter ended Aug. 31, down from $437.6 million, or $3.02 a share, earned in the same period a year earlier. Net revenue declined 37% to $1.33 billion. Lehman Brothers and Morgan Stanley also reported a profit decline.
In trading (as of 2:40pm today), Lehman Brothers (LEH) is down around 3% and Morgan Stanley (MS) is down around 5%. Goldman Sachs and Bear Stearns are essentially flat. Bear Stearns' troubles had already been priced into its stock since its disastrous bailout of two hedge funds, but I am very surprised that GS has not spiked on the earnings surprise.
Wednesday, September 19, 2007
Top Ten International Accounting Firms
Ranked by 2007 fiscal year revenue...
PricewaterhouseCoopers International, $25.2B
Deloitte Touche Tohmatsu, $23.1B
Ernst & Young Global, $21.1B
KPMG International, $19.8B
BDO International, $4.7B
Grant Thornton International, $3.5B
RSM International, $3.1B
Praxity, $2.8B
Baker Tilly International, $2.5B
Horwath International, $2.5B
[Updated with 2007 numbers]
PricewaterhouseCoopers International, $25.2B
Deloitte Touche Tohmatsu, $23.1B
Ernst & Young Global, $21.1B
KPMG International, $19.8B
BDO International, $4.7B
Grant Thornton International, $3.5B
RSM International, $3.1B
Praxity, $2.8B
Baker Tilly International, $2.5B
Horwath International, $2.5B
[Updated with 2007 numbers]
Top Ten US Accounting Firms
Ranked by fiscal year 2007 revenue...
1 Deloitte & Touche $9,856,000,000
2 PricewaterhouseCoopers $6,922,000,000
3 Ernst & Young $6,890,000,000
4 KPMG $4,438,000,000
5 RSM McGladrey $1,389,260,000
6 Grant Thornton $939,551,000
7 BDO Seidman $589,000,000
8 CBIZ & Mayer $466,810,000
9 Crowe Group $430,276,000
10 BKD $318,078,000
http://www.wolterskluwer.com/WK/Press/Product+Press+Releases/2007/Sep/pr_19Sep07b.htm
1 Deloitte & Touche $9,856,000,000
2 PricewaterhouseCoopers $6,922,000,000
3 Ernst & Young $6,890,000,000
4 KPMG $4,438,000,000
5 RSM McGladrey $1,389,260,000
6 Grant Thornton $939,551,000
7 BDO Seidman $589,000,000
8 CBIZ & Mayer $466,810,000
9 Crowe Group $430,276,000
10 BKD $318,078,000
http://www.wolterskluwer.com/WK/Press/Product+Press+Releases/2007/Sep/pr_19Sep07b.htm
Saturday, September 01, 2007
CIT Shuttering Home Lending
CIT Group said it will take a $35 million pre-tax charge in its third quarter associated with its previously announced plans to shutter its home lending business. Its loan collection and customer service activities are unaffected by the announcement.
Friday, August 31, 2007
Ameriquest Closing Its Doors
The last assets of its parent ACC were sold to Citi today. This is largely a formality, since the company had ceased origination at the end of last year.
Lousy business model (lending to subprime borrowers) but great Super Bowl commercials.
Lousy business model (lending to subprime borrowers) but great Super Bowl commercials.
Tuesday, August 28, 2007
Earthlink Lays Off Half Its Workforce
EarthLink, one of the few survivors of Atlanta's tech wave of the 1990s, said it will slash its work force nearly in half in an effort to stabilize its business after a string of losses. The company will focus on providing Internet access while cutting 900 jobs -- 562 of them in Atlanta. EarthLink last quarter reported a $16.3 million loss, following losses of $30 million, $24.8 million and $3.2 million in the previous quarters. Perhaps more ominous, revenues stagnated. EarthLink reported revenues of $312 million in the most recent quarter -- a third consecutive quarter of decreasing sales.
The company will close its Orlando FL, Knoxville TN, Harrisburg PA and San Francisco CA offices and substantially reduce its presence in Pasadena CA and Atlanta GA.
The company will close its Orlando FL, Knoxville TN, Harrisburg PA and San Francisco CA offices and substantially reduce its presence in Pasadena CA and Atlanta GA.
Friday, August 24, 2007
Krispy Kreme posts loss
KKD posted a net loss of $27M for the quarter ending 7/29/2007. That comes on the heels of loss of $7.4M and $24.4 in the prior two quarters.
Tuesday, August 21, 2007
Friday, August 10, 2007
Tuesday, August 07, 2007
Wells Fargo Jumbo Rate Jumps to 8%
Wells Fargo, one of the nation's biggest mortgage lenders, raised the interest rates on it 30-year, fixed-rate, non-conforming (AKA jumbo) loan to 8 percent last week, up from 6.875 percent. Other lenders are likely to join Wells Fargo.
The reason is apparently the collapse of the secondary mortgage market.
The reason is apparently the collapse of the secondary mortgage market.
HomeBanc exiting the mortgage business
HomeBanc today announced that it intends to exit the mortgage loan origination business. The Company at present is unable to borrow on its credit facilities and was unable to fund its mortgage loan funding obligations. Accordingly, the Company does not anticipate funding any future mortgage loans and is no longer accepting any mortgage loan applications or funding any mortgage loans previously originated and not yet funded. The Company is seeking the most appropriate course of action to preserve the value of its remaining assets. Kevin Race, HomeBanc's President and CEO, stated, "In light of the extraordinary difficulties that HomeBanc continues to face in the mortgage loan origination market, we feel that it is in the best interests of the Company to exit this business so that we can focus on preserving the value of our investment portfolio assets and loan servicing operations."
Also, I found this really good website which tracks the mortgage lenders that have imploded recently (112 in the last 15 months). I see tough times ahead for the real estate market.
HomeBanc also announced that it has reached agreement with Countrywide Financial Corporation whereby Countrywide will acquire certain assets related to HomeBanc's retail loan origination operations, including up to five branches located in Georgia, Florida and North Carolina, and will assume the leases related to those branches. In addition, Countrywide expects to make offers of employment to substantially all of HomeBanc's retail loan originators. Countrywide will pay no cash premium in this transaction and will not acquire any other assets or assume any other liabilities related to HomeBanc. This transaction, which is subject to certain conditions, is expected to close by Friday.
There's that phrase again.Also, I found this really good website which tracks the mortgage lenders that have imploded recently (112 in the last 15 months). I see tough times ahead for the real estate market.
Sunday, August 05, 2007
Friday, August 03, 2007
Chrysler Taken Private
Private equity firm Cerberus Capital Management took control of Chrysler Group on Friday in a $7.4 billion deal designed to set the beleaguered 82-year-old automaker on a path to recovery as a private company. Daimler AG will retain a 19.9% interest in the company.
Daimler paid $33 billion for Chrysler in 1998. Now the company is apparently worth $9.2 billion. That's almost $24 billion gone with the wind. In other terms it's a compounded 13% loss every year for nine years, without even counting the losses that Chrysler accumulated over those 9 years. What a bonehead move.
Daimler paid $33 billion for Chrysler in 1998. Now the company is apparently worth $9.2 billion. That's almost $24 billion gone with the wind. In other terms it's a compounded 13% loss every year for nine years, without even counting the losses that Chrysler accumulated over those 9 years. What a bonehead move.
Monday, July 02, 2007
Tyco Spins Off Two Units
On Friday Tyco International spun-off to its shareholders two of its five units -- Tyco Healthcare (which has been renamed Covidien) and Tyco Electronics.
About 500 million Tyco Electronics shares and 500 million Covidien shares will be distributed to Tyco International shareholders. Immediately following the distributions, Tyco International's shareholders will own 100% of the common shares of Covidien and Tyco Electronics.
Tyco International also said that its board approved a one-for-four reverse split which will become effectively immediately following the completion of the dividend distribution. As a result, Tyco International will have about 500 million shares outstanding after the reverse stock split.
Tyco Electronics and Covidien have applied for listing their shares on the New York Stock Exchange and the Bermuda Stock Exchange under the trading symbols "TEL" and "COV" respectively.
About 500 million Tyco Electronics shares and 500 million Covidien shares will be distributed to Tyco International shareholders. Immediately following the distributions, Tyco International's shareholders will own 100% of the common shares of Covidien and Tyco Electronics.
Tyco International also said that its board approved a one-for-four reverse split which will become effectively immediately following the completion of the dividend distribution. As a result, Tyco International will have about 500 million shares outstanding after the reverse stock split.
Tyco Electronics and Covidien have applied for listing their shares on the New York Stock Exchange and the Bermuda Stock Exchange under the trading symbols "TEL" and "COV" respectively.
Blackstone Down Another 9.8%
Blackstone closed at $29.27 today, down another 9.8% from its $32.44 closing price a week ago. It's dropping even faster than I thought.
Wednesday, June 27, 2007
Beazer Homes cans chief accounting officer for ethics violations
Beazer Homes, already under a Securities and Exchange Commission informal investigation, has fired Chief Accounting Officer Michael Rand "due to violations of the company's ethics policy stemming from attempts to destroy documents." The move comes four months after the company fired General Counsel Kenneth Gary "for a pattern of personal conduct which includes violations of company policies." In a filing with the SEC, the Atlanta-based homebuilder said Rand's termination followed a briefing by independent legal counsel retained by the company's audit committee, which is conducting an internal investigation of the company's mortgage origination business and related matters. Beazer said it recently became aware of Rand's actions during that investigation.
You have to think that the news in the housing sector is even worse than we think if accounting officers are destroying documents to hide the facts.
You have to think that the news in the housing sector is even worse than we think if accounting officers are destroying documents to hide the facts.
Monday, June 25, 2007
Blackstone Down 7.5%
Shares of Blackstone Group fell in their second day of trading as doubts set in about the valuation of the private equity firm. Blackstone shares were down 7.5% to $32.44 on the NYSE.
It could be that Friday was the high point of the market for the foreseeable future. A lot of smart people are wondering about that when the smart money (i.e., Blackstone) starts selling.
Bear Stearns Bails Out Hedge Fund
Bear Stearns said it would provide up to $3.2 billion in financing for a struggling hedge fund it manages, raising concern about other funds that invested in bonds linked to subprime mortgages. The biggest bailout since Wall Street's 1998 rescue of Long-Term Capital Management signaled that the funds' main investments -- a type of bond known as a collateralized debt obligation (CDO) -- may be riskier than previously reckoned. Bear Stearns, the fifth-largest U.S. investment bank, said it would provide secured financing to its High-Grade Structured Credit Strategies Fund so the fund can sell assets in an orderly fashion. Bear also said a second fund (High-Grade Structured Credit Strategies Enhanced Leverage Fund) that took greater risk is still working out a restructuring plan with creditors. The two funds melted down after rising U.S. subprime mortgage defaults earlier this year depressed prices of CDOs, which were essentially repackaged portfolios of subprime home loans and were among the funds' main investments. Bear Stearns' High-Grade Structured Credit Strategies Fund was down about 5% so far this year through the end of April. The High-Grade Structured Credit Strategies Enhanced Leverage Fund, meanwhile, which borrowed more to magnify potential returns and potential risk, was down 23% over the same period.
Another story that provides more of the numbers and paints a much clearer -- and much bleaker -- picture than above...
Merrill Lynch seized $850 million of bonds held as collateral for loans it had made to the funds. Lehman Brothers, JPMorgan Chase and Cantor Fitzgerald also pulled out, leaving Bear Stearns to sort through the wreckage of bad bets on subprime mortgage bonds and collateralized debt obligations. Without assistance from his Wall Street peers, Bear Stearns was forced to salvage the healthier of the two funds, putting $3.2 billion of the firm's capital at risk in the biggest bailout since LTCM. Bear Stearns may dissolve the second fund after more than $600 million of investors' money dwindled to less than $200 million.
Another story that provides more of the numbers and paints a much clearer -- and much bleaker -- picture than above...
Merrill Lynch seized $850 million of bonds held as collateral for loans it had made to the funds. Lehman Brothers, JPMorgan Chase and Cantor Fitzgerald also pulled out, leaving Bear Stearns to sort through the wreckage of bad bets on subprime mortgage bonds and collateralized debt obligations. Without assistance from his Wall Street peers, Bear Stearns was forced to salvage the healthier of the two funds, putting $3.2 billion of the firm's capital at risk in the biggest bailout since LTCM. Bear Stearns may dissolve the second fund after more than $600 million of investors' money dwindled to less than $200 million.
Monday, June 04, 2007
Tuesday, May 01, 2007
2006 Fortune 500
Top Fifteen by Revenue
1 Wal-Mart Stores $351.1B
2 Exxon Mobil $347.3B
3 General Motors $207.3B
4 Chevron $200.6B
5 ConocoPhillips $172.5B
6 General Electric $168.3B
7 Ford Motor $160.1B
8 Citigroup $146.8B
9 Bank of America $117.0B
10 AIG $113.2B
11 JP Morgan Chase $100.0B
12 Berkshire Hathaway $98.5B
13 Verizon Communications $93.2B
14 Hewlett-Packard $91.7B
15 IBM $91.4B
Top Fifteen by Profit
1 Exxon Mobil $39.5B
2 UAL $22.9B (due to bankruptcy accounting)
3 Citigroup $21.5B
4 Bank of America $21.1B
5 General Electric $20.8B
6 Pfizer $19.3B
7 Chevron $17.1B
8 ConocoPhillips $15.6B
9 JP Morgan Chase $14.4B
10 AIG $14.0B
11 Microsoft $12.6B
12 Altria Group $12.0B
13 Wal-Mart Stores $11.3B
14 Johnson & Johnson $11.1B
15 Berkshire Hathaway $11.0B
Top Fifteen by Market Cap
1 Exxon Mobil $426B
2 General Electric $368B
3 Microsoft $274B
4 Citigroup $256B
5 AT&T $243B
6 Bank of America $231B
7 Procter & Gamble $201B
8 Wal-Mart Stores $198B
9 Pfizer $182B
10 Altria Group $179B
11 AIG $177B
12 Johnson & Johnson $175B
13 JP Morgan Chase $169B
14 Berkshire Hathaway $167B
15 Chevron $159B
You can slice and dice the data anyway you want at
http://money.cnn.com/magazines/fortune/fortune500/2007/
1 Wal-Mart Stores $351.1B
2 Exxon Mobil $347.3B
3 General Motors $207.3B
4 Chevron $200.6B
5 ConocoPhillips $172.5B
6 General Electric $168.3B
7 Ford Motor $160.1B
8 Citigroup $146.8B
9 Bank of America $117.0B
10 AIG $113.2B
11 JP Morgan Chase $100.0B
12 Berkshire Hathaway $98.5B
13 Verizon Communications $93.2B
14 Hewlett-Packard $91.7B
15 IBM $91.4B
Top Fifteen by Profit
1 Exxon Mobil $39.5B
2 UAL $22.9B (due to bankruptcy accounting)
3 Citigroup $21.5B
4 Bank of America $21.1B
5 General Electric $20.8B
6 Pfizer $19.3B
7 Chevron $17.1B
8 ConocoPhillips $15.6B
9 JP Morgan Chase $14.4B
10 AIG $14.0B
11 Microsoft $12.6B
12 Altria Group $12.0B
13 Wal-Mart Stores $11.3B
14 Johnson & Johnson $11.1B
15 Berkshire Hathaway $11.0B
Top Fifteen by Market Cap
1 Exxon Mobil $426B
2 General Electric $368B
3 Microsoft $274B
4 Citigroup $256B
5 AT&T $243B
6 Bank of America $231B
7 Procter & Gamble $201B
8 Wal-Mart Stores $198B
9 Pfizer $182B
10 Altria Group $179B
11 AIG $177B
12 Johnson & Johnson $175B
13 JP Morgan Chase $169B
14 Berkshire Hathaway $167B
15 Chevron $159B
You can slice and dice the data anyway you want at
http://money.cnn.com/magazines/fortune/fortune500/2007/
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