Details on FNM and FRE

From today's WSJ...

The Treasury will acquire $1 billion of preferred shares in each company without providing immediate cash, and has pledged to provide as much as $100 billion to each of the companies as they cope with heavy losses on mortgage defaults. The Treasury's plan puts the two companies under a conservatorship, giving management control to their regulator, the Federal Housing Finance Agency.

The WSJ doesn't mention this, but the government also acquires warrants to buy 80% of both companies at a nominal price. This essentially wipes out common shareholders, as is quite proper.

The Treasury plan limits the size of each company's mortgage portfolios to a maximum of $850 billion as of the end of 2009. (Fannie currently owns about $758 billion of mortgages and related securities, while Freddie's total is about $798 billion.) After that, the Treasury intends for the mortgage holdings to shrink about 10% a year until they reach about $250 billion at each company.

Fannie's CEO Daniel Mudd is succeeded by Herb Allison, who formerly served as chairman of the investment company TIAA-CREF. Freddie's CEO Richard Syron is succeeded by David Moffett, who has been vice chairman and CFO of US Bancorp.

Potentially, Mr. Syron could walk away with an exit package totaling as much as $15 million, said David Schmidt, a senior consultant at James Reda compensation consulting. That includes a pension and deferred compensation, about $3.7 million in severance pay and a possible payment of $8.8 million to compensate for forfeiting recent equity grants. A Freddie spokesman said Mr. Syron had said he doesn't "anticipate receiving nearly that much."

Not nearly? How nice! He shouldn't get anything. If you f up so bad that the federal government has to put your company in receivership and promise to inject $100 BILLION into it, you should get jack. If I were in charge, I might be convinced to let him have his pension and not send him to jail and I'd expect him to thank me for my generosity.

Mr. Mudd's exit package, including stock he already owns, could total $14 million, Mr. Schmidt estimates. That includes $5 million in pension and deferred compensation, $4.2 million in severance pay and $3.4 million of restricted stock, based on Friday's closing price. The value of that stock could fall sharply, however.

The stock is essentially worthless already so that problem takes care of itself, but $4.2M in severance pay? Hell, no!

FNM and FRE dead!

FNM down 22% to $5.50 and FRE down 21% to $4.04 in after-hours trading. So far, $108 billion in market cap has been wiped out. And apparently the last $8.5B will be wiped out this weekend by a government takeover of the two entities.

The Treasury Department is expected to announce as early as this weekend a plan to bail out and recapitalize collapsing home mortgage giants Fannie Mae and Freddie Mac in one of the biggest government rescues in U.S. history. Such a plan would end a long downward spiral for the firms, which the government created to help expand home ownership and provide a secondary market for home loans. Rep. Barney Frank (D.-Mass.) confirmed in a statement Saturday that Treasury Secretary Henry Paulson is set to put the federal government in control of the two troubled mortgage owners. But Frank, who is chairman of the House Financial Services Committee, said he had no details on the intervention plan. Officials at the Treasury Dept. could not be reached for comment.

The historic takeover of Fannie Mae and Freddie Mac, which could come as soon as Sunday, moved to the forefront of the presidential campaign Saturday as candidates and congressional leaders seized on the enormous implications for taxpayers and the economy. Fannie Mae and Freddie Mac together hold or back half of the nation's mortgage debt, and have played an increasingly important role in the real estate market since the credit crisis started in August 2007. A government bailout could cost taxpayers around $25 billion, according to the Congressional Budget Office. Treasury Secretary Henry Paulson and two other regulators are working on a plan to put the troubled mortgage finance companies into a conservatorship, and remove Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron, according to Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee. The government is expected to control the two companies at least a year as it evaluates and debates whether Fannie and Freddie should remain government-run entities or be restructured in some fashion, Frank said in an interview. At a rally in Colorado Springs, Col., Republican vice presidential nominee Sarah Palin said, "They've gotten too big and too expensive to the taxpayers. The McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help." Democratic nominee Barack Obama, speaking in Terre Haute, Ind., said, "These entities are so big and they're so tied into the housing market that it is probably true that we have to take steps to make sure they don't just collapse, because the housing market, which is already weakened, would be in even worse shape if we didn't take some steps."

Here's a fairly insightful piece into the collosal failure of common sense at the two entities as the housing market worked itself into a frenzy from 2001 to 2006.

Mortgage giants Fannie Mae and Freddie Mac — despite their robust cadre of economists and mortgage experts — failed to heed warnings that the most dramatic housing bubble in U.S. history would burst. The companies — particularly Freddie Mac — didn't raise enough cash to reassure Wall Street that they would be able to withstand a severe downturn in U.S. home prices. Federal regulators after scouring the companies' books with aid from investment bank Morgan Stanley — believe the companies pushed accounting conventions when calculating their financial cushion against losses, a person briefed on the matter said Saturday. The person declined to be named because details of the government's actions were not yet public. As their losses started rising at alarming rates over the past year, investors gradually lost confidence, forcing the government's historic takeover of the two companies, which could be announced as soon as Sunday and was expected to include the ouster of top executives.

Ironically, the big story on Friday was how FNM and FRE had both gone up 9.7% and 3% in what was otherwise a flat market.

IAM Strike Against Boeing

Strike started at midnight after an 80% vote against Boeing's "best offer." Apparently the biggest sticking point is outsourcing. Analysts say strike could cost Boeing $100M in revenue and $0.01 in EPS per day of the strike. Of course the costs to striking union members who make about $75K a year including overtime is equally staggering. Not what the economy needs right now. Too bad.

Time to buy oil?

On July 11th oil peaked at $147 a barrel. The "experts" (most notably Goldman Sachs) were loudly proclaiming $200 oil was just around the corner. Less than two months later oil is trading at $108 a barrel. Now BusinessWeek reports that these same folks "see the price of oil to be 'artificially inflated' and expect prices to fall further, even as low as $70 a barrel."

Now, I no longer think these folks are all stupid (although many are); I have recently become convinced that at least a few players are purposely trying to manipulate the market. They recommend buying when they expect prices to go down and they themselves are selling; they recommend selling when they expect prices to go up and they themselves are buying.

So, until this morning I thought prices were going down a little more, perhaps just under $100. But now that I hear about $70 oil from the "experts" I fully expect prices to go up. I seriously need to look into whether I have a good way to make at least a small bet on this guess.

Venezuela - Communism Full Steam Ahead

Venezuelan President Hugo Chávez and congressional allies passed a bill to nationalize gasoline. The law means an end to wholesale sales by private companies in the country. Distributors have 60 days to negotiate the sale of their businesses to the government.

Deja Moo

The feeling you've heard this bullshit before.

Commodities price bubble hasn't burst yet, analysts say. Commodities prices increased 29% during the six months prior to the end of June and then dropped 10% in July, their worst month in nearly three decades. Although prices have continued to slide, most analysts are not ready to call the bursting of the commodities bubble. Instead, they offer reasons for the recent price declines and why a collapse is not expected.

Source: The Economist

Corel Corporation on the block

Corel today stated that it is in discussions with a third party regarding a potential sale of the company.

FRE and FNM in free fall

(AGAIN)

FRE and FNM are down 17.8% and 16.8%, respectively. FNM is worth $5.3B at $4.95 a share and has lost 93% of its value in the last year. FRE is now worth $2.2B at $3.42 a share and has lost 95% of its value in the last 10 months.

Anybody still think Chavez isn't an out-and-out communist?

Venezuelan President Hugo Chavez is set to tighten his government's grip on the economy by taking over his first bank, the local unit of Spain's Banco Santander SA. Plans to nationalize the country's third-largest bank, announced yesterday, will give the state access to Banco de Venezuela SA Grupo Universal's 285 offices and $9.46 billion in deposits. It follows nationalizations in the oil, steel, cement, electricity and telecommunications industries. Chavez said he will pay "fair compensation" and said he has been in touch with the bank's local president, and that he is interested in seeking a "friendly agreement.''

Extreme Makeover: HomeLESS Edition

An Extreme Home Makeover may be going bust. The first Atlanta metro area family who got a new home is facing foreclosure. An army of volunteers swarmed a Clayton County neighborhood to build a new home for a deserving family on “Extreme Makeover: Home Edition” in 2005. When the show came to town, no one could have predicted what would happen just 3½ years later - foreclosure. A foreclosure notice appeared last Friday, a $450,000 mortgage they took out less than 15 months ago was in default. Lake City mayor Willie Oswalt was among the 1,800 volunteers helping "Extreme Makeover: Home Edition" build the Harper’s new home ago. Beazer Homes of Atlanta was the main sponsor. The mayor said he is baffled. "Beazer gave them $100,000 cash and paid their mortgage off and they still can't make it," said Oswalt. Harper told Channel 2 they invested the loan proceeds in a construction business and the business hasn’t been good. She didn’t say how much of the money is left. “What’s going to happen is instead of keep paying my mortgage, I’m going to take my money and not pay my mortgage because I’m being harassed,” said Harper.

I will limit my comment to the fact that I've always hated that show.

Ford

The headlines about Ford's second quarter will all be about its $8.7 billion loss -- its biggest quarterly loss ever. Most of that red ink is for asset impairments and does not directly address how the core operating businesses are doing Once investors look outside the US, Ford is doing fine, but not fine enough to float Ford's entire boat Even with all of its cost cutting initiatives, Ford lost $1.3 billion in North America.

In South America, Ford posted a pre-tax profit of $388 million, up from $255 million a year ago. In Europe, the numbers were remarkably strong. Pre-tax profits there were $582 million, up from $262 million a year ago In Asia, Ford's profits were much more modest. Ford Asia Pacific Africa reported a pre-tax profit of $50 million, compared with $26 million a year ago.

The earnings highlight the extent to which Ford is becoming a tale of two companies. One exists in the US market and it trapped by old products, high fuel prices, and plant which will take years to re-tool. There is nothing wrong with Ford that being out of North America would not fix. Too bad that cannot happen.

http://www.247wallst.com/2008/07/ford-f-all-the.html

New Post from a fellow Blogger

Hi Alberto,

We just posted an article on hedge fund and investment. I thought I'd bring it to your attention just in case you think your readers would find it interesting.

Title: 4 Reasons Why Investors Should Avoid Hedge Funds at All Costs

URL: http://www.bankaholic.com/finance/hedge-fund-risks/

Thanks for your precious time!

Thanks,

Helen Anderson

Lehman down 40% for week

Lehman fell the most since the firm went public in 1994 on speculation that Freddie Mac and Fannie Mae might fail. Lehman, which has lost about 40% of its market value this week, dropped $3.27 (19%) to $14.03 this morning.

FNM and FRE in free fall

At the opening bell, FNM is at $12.95 (down $2.36 or 15.41%) and FRE is at $8.03 (down 2.23 or 21.73%). I think people are finally starting to realize that yeah they really COULD fail. Woe are we if that happens.

Edited...

As of 10:19, FNM is at $12.61 and FRE is at $7.30. UBS AG analysts led by Eric Wasserstrom in New York increased their estimates for losses at Freddie Mac and cut their price target for the stock to $10 from $28. WTF? Why do these guys have jobs?

The Bears Have It

• Off 21.3% from its October high, the Dow Jones Industrial Average closed at 11,147.44
• The S&P 500 index was down 20.3% from its October 10, 2007, high of 1,562 closing at 1,244.68
• The Nasdaq Composite Index closed at 2,234.89, off 21.8% from its October high

In particular, Fannie Mae and Freddie Mac gave up yesterday's gains to end today at $15.31 and $10.26 respectively.

Fannie Mae and Freddie Mac plummet

As of 1:15pm today...

Fannie Mae (FNM) fell 19.5% to $15.08, down 51.2% YTD and 78.6% from its 52-week high.

Freddie Mac (FRE) fell 21.9% to $11.32, down 57.4% YTD and 83.2% from its 52-week high.

Reason: It was reported they may have to raise $46 billion and $29 billion respectively if forced to bring off balance sheet assets back onto their balance sheets.

Heads Roll at Lehman

Lehman CFO Erin Callan and COO Joseph Gregory are leaving their posts, replaced by Ian Lowitt and Bart McDade respectively.

MBIA and Ambac lost S&P AAA rating

Ambac and MBIA lost their crucial AAA ratings from Standard & Poor's, leaving the largest bond insurers with little ability to generate new business in future.

Downgraded to AA, not nearly far enough in my opinion.

MBIA may lose Moody's Aaa Rating

MBIA slumped 13% to $5.84 after a Moody's warning. Rival Ambac dropped 17% to $2.48. MBIA has weak new business prospects, little financial flexibility and may suffer higher losses on guarantees its main insurance subsidiary sold on mortgage-backed securities and more complex but related vehicles known as collateralized debt obligations, or CDOs, Moody's said in a statement. The agency put the Aaa ratings of MBIA's main bond insurance unit on review for a possible downgrade. The most likely outcome of the review will be a downgrade to the Aa range. But Moody's also warned that it could cut MBIA to single A.

Does anybody trust the rating agencies anymore? Is there anything in Moody's statement that wasn't true four months ago? How can MBIA and Ambac still have Aaa ratings?

Sharks (Vultures?) Circling at Lehman

Lehman Brothers (the smallest of the bulge bracket banks after Bear's demise) may not be independent for long. The WSJ reports the investment bank may be forced by its balance sheet woes and the recent plunge of its stock to sell part of even all of itself to another financial firm. Lehman shares sold off after the WSJ reported Lehman was considering a $4 billion sale of stock. Lehman shares were down as much as 15% before the firm publicly denied it had been forced to borrow from the Federal Reserve. The WSJ reports Lehman engineered part of its relief rally by buying back its own shares - an unusual move given the worries about the firm’s financial health and the company’s recent efforts to bring down its leverage ratios. Though the buyback could be taken as a sign of management’s confidence that Lehman can weather the storm, others see it as smacking of desperation.

http://dailybriefing.blogs.fortune.cnn.com/2008/06/04/lehman-on-the-block/?section=money_topstories

Wachovia CEO Ousted

Ken Thompson is retiring as CEO of Wachovia after being asked to leave by the company's board following a string of disappointing acquisitions and poor financial results.

USA Today Letter to the Editor

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

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

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

Excellent Series on Bear Stearns in the WSJ

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

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

55% of Bear Stearns to be laid off

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

Issuance of CDOs may vanish!

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

We're going to talk ourselves into a depression

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

WSJ Star Analysts

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

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

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

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

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

Communist Drive Continues in Venezuela

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

One for the DUH files!

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

Underwater

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

FNMA Loss

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

WTF?

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

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

Source: Yahoo

Countrywide Deal at Risk

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

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

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

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

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

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

[Source: NYT]

Another Airline Casualty

Eos, an all-business-class carrier operating between NYC and London, ceased operations today after filing for bankruptcy protection over the weekend, the latest casualty of a credit crunch and a money-losing airline industry that has been hit hard by high fuel prices.

No, Chavez is not a Communist

Venezuelan President Hugo Chavez said Ternium SA should accept a "fair" price for the nationalization of its 60% stake in the country's biggest maker of flat-steel products by tomorrow or face expropriation. The government has said it values Ternium's Siderurgica del Orinoco unit, known as Sidor, at $800 million. Chavez said he's prepared to occupy the company's facilities on April 29 should the company and the government fail to reach an agreement during a final meeting tomorrow. "I'll sign the expropriation decree and take control immediately of the company. I have no problem doing it." Ternium shareholders value its operations in Venezuela at $3.6 billion. Chavez said the company must be "crazy" to seek such a high amount, and that the government won't pay amounts reported by the press, which he said have ranged from $3 billion to $4 billion.

Chavez has also announced the nationalization of the country's cement industry this year in an attempt to increase state control over "strategic" parts of the economy.

Chavez also threatened today to take over Empresas Polar SA, Venezuela's largest food processor. The president said he has heard the company has considered shutting down one of its flour plants. "If they do that, we'll expropriate," Chavez said.

Last year, he nationalized foreign oil ventures and the country's biggest electricity and telephone companies.

HELOC Delinquencies

S&P said that 9.19% of lines issued in 2005 and 11.45% of lines issued in 2006 are delinquent, up 6.49% and 6.51% from February. UNREAL!!!

Moody Downgrades

Moody's has slashed ratings on 1,923 tranches from 232 seperate subprime RMBS deals from 2005-2007 vintages, all of which were previously rated AAA.

Some questions:
1) Why were they ever AAA?
2) What took them so long to downgrade?
3) How much of this crap has been used as collateral in the Fed window?

Bank of America Earnings

Bank of America's net fell 77% to $1.21 billion, or 23 cents a share, in the first quarter amid higher provisions for credit losses and at least $1.91 billion in write-downs. Net revenue fell 6.3% to $17 billion. The company had $1.31 billion in trading-related losses, which includes write-downs of $1.47 billion on collateralized-debt obligations and $439 million on leveraged loans. It increased its provision for credit losses to $6.01 billion from $1.24 billion amid rising credit costs in the home-equity, small-business and homebuilder portfolios.

Does anybody know what they're talking about...

First it was "The housing boom will continue."

Then it was, "Housing prices won't climb as fast as in the past, but they will continue to rise at more reasonable levels."

Then it was, "Housing prices won't climb, but they will plateau. Don't expect a drop."

Then it was, "Housing prices will drop but not sharply."

Then it was, "Housing prices are dropping sharply, but it shouldn't affect the broader economy."

Then it was, "The housing crash will affect financial stocks but not the broader stock market."

Then it was, "The housing crash will affect the broader stock market, but it's not a recession."

Then it was, "OK, it's a recession, but it will be short and shallow."

WTF?

Bankers Cast Doubt On Key Rate Amid Crisis

One of the most important barometers of the world's financial health could be sending false signals. In a development that has implications for borrowers everywhere bankers and traders are expressing concerns that LIBOR is becoming unreliable.

The concern: Some banks don't want to report the high rates they're paying for short-term loans because they don't want to tip off the market that they're desperate for cash. The Libor system depends on banks to tell the truth about their borrowing rates. Fibbing by banks could mean that millions of borrowers around the world are paying artificially low rates on their loans. That's good for borrowers, but could be very bad for the banks and other financial institutions that lend to them.

In one sign of increasing concern about Libor, traders and banks are considering using other benchmarks to calculate interest rates. Among the candidates: rates set by central banks for loans and rates on repurchase agreements.

A report published by the Bank for International Settlements raised concerns that banks might report incorrect rate information. It said that banks might have an incentive to provide false rates to profit from derivatives transactions. The report said that although the practice of throwing out the lowest and highest groups of quotes is likely to curb manipulation, Libor can still "be manipulated if contributor banks collude or if a sufficient number change their behavior."

[Source: WSJ, pointed out to me by MPC]

Google Up 20%

GOOG: 539.41, +89.87 (+19.99%)

Investors cheered Google's Thursday earnings report. Net income for the quarter ended March 31 rose to $1.31 billion, or $4.12 a share. Revenue rose to $5.19 billion. Revenue minus payments made to other sites to acquire Internet traffic, came in at $3.7 billion. Margin = 25%.

Merrill Lynch - Third Quarterly Loss

Merrill Lynch reported a third straight quarterly loss ($1.96 billion or $2.19 a share) as ongoing write-downs for soured mortgage investments and other bad credit bets continued. The company also said it is cutting 4,000 jobs. CEO Thain characterized the three months of the year as "probably as difficult a quarter as I've seen in my 30 years on Wall Street." !uarterly revenue fell 69% to $2.93 billion, on a combined $4.5 billion in write-downs and valuation adjustments related to CDOs. ML also detailed $2.3 billion worth of write-downs from leveraged finance and residential mortgage exposure, offset by a $2.1 billion benefit from a change in value on long-term liabilities. after taking those valuation adjustments on board, the firm reported that it still has $64.8 billion of net exposure to complex mortgage-related vehicles known as CDOs, residential mortgage securities and leveraged loans at the end of the first quarter. Amazingly the stock is UP 4.2%. Crazy crazy market.

[Source: MarketWatch]

Citi to cut costs

Citigroup CEO says the bank will cut its costs across the board by up to 20%, a move almost certain to trigger big layoffs and further ravage the financial-sector employment picture. Savings would not come entirely from job cuts but would also be harvested by improving technology. The cost cuts suggest that Citigroup may shed more jobs than the 25,000 which analysts estimate. "It is clearly feasible for us to take 10, 15, 20% off our cost base, especially in information and technology and operations," Pandit said.

The usual solution - employees don't actually generate revenue, they are simply costs to be cut. Makes me wonder why they didn't get rid of them before. Duh!

Spiraling costs push software companies from India

Here's a unique twist: the high cost of doing business in India is pushing some smaller technology companies to relocate elsewhere. Smaller firms consider relocating to Malaysia, Singapore as inflation soars.

Economics 101 at work again.

This is downright scary!

There is no other word for it ... I am seriously worried about the state of our economy.

Fourteen percent of mortgage holders expressed worry that they might miss payments in the next six months.

Banking News

Busy day today as several banks reported first quarter earnings:

Washington Mutual reported a $1.14 billion first-quarter net loss ($1.40 a share) as the lender suffered from the mortgage meltdown and broader credit crunch. It also said it closed a previously announced deal to raise $7 billion from a group of investors led by private-equity firm Texas Pacific Group. It also reported "steady" results from its retail banking, credit card and commercial businesses.

State Street reported that first-quarter net income rose 69% but the stock lost ground as investors worried over the firm's outlook as well as unrealized losses in its investment portfolio and asset-backed commercial paper program.

Several of the nation's major regional banks saw their shares rally on better-than-expected earnings and for several a boost from selling shares in credit-card company Visa. Shares of Regions Financial (RF), M&T Bancorp (MTB), U.S. Bancorp (USB), Commerce Bancshares (CBSH) and Marshall & Ilsley (MI) were all up. Analysts responded warmly to earnings, saying that despite significant loan-loss reserves still to come, many regional banks did better than expected.

Delta-Northwest Merger

Delta Air Lines and Northwest Airlines announced plans to merge, creating the world's largest airline. The proposed merger would create a global giant with 810 jets, 6400 daily flights and nearly $32 billion in annual revenue. The carriers estimate the value of the new company at $18 billion dollars, far above their current market value.

The proposal could also be a catalyst for further consolidation among the big airlines at a time when the industry is threatened by steep losses from high fuel prices and a weakening economy (Continental and United ready to merge too).

If the merger closes, the new airline will be named Delta and headquartered in Atlanta where Delta is based; Delta CEO Richard Anderson will be its CEO (translation: it's an acquisition, not a merger). Northwest shareholders would receive 1.25 Delta shares for each Northwest share.

Wachovia News

Wachovia posted an unexpected loss for the first quarter ($393 million or 20 cents a share) on Monday, reduced its dividend (to 37.5 cents a share from 64 cents, which will save $2 billion a year) and said it would raise about $7 billion through the sale of common and convertible preferred stock because of mounting housing losses and an ill-timed acquisition of Golden West Financial. Revenue fell 4.5% to $7.89 billion from $8.27 billion. The company also said it plans to cut 500 jobs in its investment and banking unit. Company shares fell $2.26, or 8.1%, to $25.55.

Unemployment

Frontier Airlines Latest Casualty

Frontier (FRNT 0.42, -1.15, -73.5%) joined a growing list of airlines filing for bankruptcy amid rising fuel prices and a slowing economy. But Frontier said it expects to continue operating its full schedule of flights, adding it will honor tickets and reservations as well as providing refunds and exchanges as usual.

Third airline in a week

Skybus Airlines announced last night that it was halting operations today. Aloha Airlines halted operations Monday, and ATA Airlines halted operations Thursday.

April Fool's Joke?

UBS's chairman abruptly resigned today as the Swiss bank reported a first-quarter loss of $12.1 billion and said it would seek $15.1 billion in new capital. UBS revealed more serious damage from exposure to the U.S. subprime crisis and said it expects write-downs of approximately $19 billion (that's in addition to the $18 billion it wrote down last quarter). The punchline is that the stock led a rally in financial stock, posting a 15% gain.

Lehman Brothers hares jumped 18%. It said it plans to offer 3 million convertible preferred shares "in response to investor interest." Translation: we need capital.

Wall Street gains are privatized; losses are socialized

More articles on the $29B at risk for the Fed in the JP Morgan - Bear Stearns deal. I have nothing to add, so I will just provide a couple of links.

http://www.marketwatch.com/news/story/capitol-report-fed-puts-lipstick/

http://www.bloomberg.com/apps/news?pid=20601068&sid=aNXDBlrk1H1s&refer=home

$1.2 TRILLION in credit losses

Goldman Sachs forecasts global credit losses stemming from the current market turmoil will reach $1.2 trillion, with Wall Street accounting for nearly 40% of the losses. US leveraged institutions, which include banks, brokers-dealers, hedge funds and government-sponsored enterprises, will suffer roughly $460 billion in credit losses after loan loss provisions, Goldman Sachs economists wrote in a research note. Losses from this group of players are crucial because they have led to a dramatic pullback in credit availability as they have pared lending to shore up their capital and preserve their capital requirements.

Goldman estimated only $120 billion in write-offs have been reported by these leveraged institutions since the credit crunch began last summer. "US leveraged institutions have written off less than half [actually less than one third but let's not quibble] of the losses associated with the bursting of the credit bubble," they said. "There is light at the end of the tunnel, but it is still rather dim."

Ford divesting Jaguar and Land Rover

Ford Motor agreed to sell its Jaguar Land Rover operations to India's Tata Motors for $2.3 billion (really $1.7 billion as Ford will contribute as much as $600 million to the unit's pension plan). I can't believe that Ford was unable to make money with the high-end Jaguar and Land Rover product lines.

Blackstone Down 47%

Blackstone closed today at 16.35, down a precipitous 47% from its $31 IPO price in June 2007. By comparison, the S&P500 is down only 10% in the same period. Amazing!

Home prices down 2.4% in one month

Home prices in 20 US metropolitan areas fell in January by the most on record (10.7%!), a sign the housing recession is deepening, according to the S&P/Case-Shiller home-price index. The gauge has fallen for 13 consecutive months. January home prices fell 2.4% from a month earlier, following a 2.1% decline the prior month.

JP Morgan Chase ups bid to $10

JP Morgan Chase raised its offer for Bear Stearns, the beleaguered investment bank, to $10 a share Monday morning in an effort to pacify angry Bear shareholders. The sweetened offer of about $1 billion is intended to win over stockholders who vowed to fight the original fire-sale deal, struck only a week ago at the behest of the Federal Reserve and Treasury Department. Bear’s shares, which closed at $5.96 on Friday, rose to $11.44 (not sure why it's trading above $10, a new suitor is unlikely to come out of the woodwork). Under the new terms, each share of Bear Stearns common stock would be exchanged for 0.21753 shares of JP Morgan Chase stock, up from 0.05473 shares. In addition, JP Morgan Chase will buy 95 million newly issued shares of Bear Stearns common stock, or 39.5% of the outstanding Bear Stearns common stock after the issuance, at $10 a share (and essentially guaranteeing that existing shareholders are too diluted to prevent the sale).

In addition, Bear’s directors have indicated that they intend to vote their shares — worth almost 5% of Bear’s shares after the dilution of issuing shares for JP Morgan Chase. The deal is expected to be completed by April 8. While the initial agreement appeared to have defused the financial crisis of confidence that undid Bear, the initial terms of the deal — and the government’s controversial role in reaching them — drew criticism from those who say the takeover amounts to a government bailout of Bear, a firm at the center of the mortgage meltdown.

As part of the original deal, the Fed guaranteed to take on $30 billion of Bear’s most toxic assets. Under the revised deal, JP Morgan Chase will bear the first $1 billion of any losses associated with the Bear Stearns assets being financed and the Fed will finance the remaining $29 billion on a non-recourse basis to JP Morgan Chase.

Source: NYT

GOOG

LTCM II in trouble

JWM Partners LLC, the investment firm run by ex-LTCM chief John Meriwether, lost 24% in its $1 billion fixed-income hedge fund this year through March 14, according to two people with knowledge of the matter. Meriwether's Relative Value Opportunity fund was hurt as bond managers such as Peloton Partners and Carlyle Capital were forced to sell securities to meet margin calls, said the investors, who asked not to be identified because JWM doesn't publicly disclose returns.

Citigroup analysts say avoid ... Citigroup

Citigroup strategists say that as markets and economies de-leverage, investors should steer clear of companies that have relied on borrowed money, especially in the financial services sector.

Poor Presentation Skills

I am constantly amazed at the poor presentation skills of many of our most luminary fianciers. I attended a luncheon today where a superstar investment strategist made a presentation on pension fund management. She was a good public speaker in terms of her comfort in front of an audience etc, but she was absolutely NOT a good speaker when things like logical coherence are considered. While she was clearly very knowledgeable and a lot of her points provided good insight, I would estimate that 90% of what came out of her mouth bore zero relation to the topic at hand.

Fannie Mae and Freddie Mac capital requirements reduced

US regulators may reduce capital requirements imposed on Fannie Mae and Freddie Mac to help them expand their combined $1.5 trillion in investments and revive the market for home loan securities. Fannie Mae and Freddie Mac also agreed to raise more capital as part of the deal with the Office of Federal Housing Enterprise Oversight. Fannie Mae and Freddie Mac are required by Ofheo to hold an extra 30% capital cushion to protect against losses on the mortgages they own and guarantee. An easing could amount to an extra $200 billion to $300 billion of purchases from the companies. Fannie Mae climbed 27% and Freddie Mac jumped 26% yesterday. Fannie Mae posted a $3.55 billion loss and Freddie Mac posted a $2.45 billion loss in the fourth quarter, both records as rising foreclosures sent credit costs soaring net loss for the period. The capital surcharge is one of the last remaining restrictions imposed on the companies after $11.3 billion of accounting misstatements.

This will not end well. Expand their capacity to make more of the same investments that lost them $6 billion in a single quarter? And presumably they already bought all the best mortgages, so they'd be dipping into lower quality stuff at the margin. Bad, bad idea.

Fed cuts fed fund rate 3/4 percentage point

Fed fund rate is down to 2.25%. But immediately following the news the DJIA dropped 100 points (from +300 to +200) because market was expecting a full point cut. According to MarketWatch, based on futures trading in Chicago, investor's bets implied a 100% chance of a cut of one percentage point.

Dallas Fed president Richard Fisher and Philadelphia Fed president Charles Plosser dissented in favor of less aggressive action.

In a related action, the Board of Governors unanimously approved a 75 basis point decrease in the discount rate to 2.5%.

Philip Morris International

Started trading today under ticker symbol PM, separate from parent Altria.

Bear Stearns Dead!

It turns out my guess of 28 days was wildly optimistic. JP Morgan Chase is buying Bear Stearns for $2 a share, exchanging 0.05473 share of its stock for one share of Bear Stearns. Both boards approved the transaction over the weekend. Bear Stearns opened down 88% from Friday's close at $3.70 (just one business day after it closed Thursday at $57). The collapse was bigger than Enron and faster than LTCM. I can just see the class action securities lawyers foaming at the mouth.

Bear Stearns on life support

Bear shares slumped $27 (47.4%) to $30 on news of a critical liquidity crisis at the investment house. The Federal Reserve invoked a rarely used Depression-era procedure today to bolster the firm. The arrangement allows JP Morgan Chase to borrow from the Fed's discount window and put up collateral from Bear Stearns to back up the loans. This process will be in place for 28 days. My guess is Bear Stearns will cease to exist as an independent entity before those 28 days are up.

Of course market participants are waiting for the other shoe to drop, which showed up in the stocks of all the other major players. Lehman Brothers down 14.6%, UBS down 8.3%, Citigroup down 6.1%, Goldman Sachs down 5.2%, Morgan Stanley down 4.9%, J.P. Morgan Chase 4.1%.

News of the day

If time allows I will add links, but for now I at least wanted to post quick blurbs.

1) Fed is temporarily willing to swap up to $200B of AAA structured financial products whose values are difficult to ascertain in the market (no such animal - if nobody wants them in the open market then their value is $0) for Treasuries. This will NOT end well, yet the market rallied on the news. Although subsequent analysis has shown that the added liquidity has not improved the credit crunch. Banks can take all the liquidity the Fed offers, but if they are not willing to lend then that doesn't really matter, does it?

2) A second SocGen trader has been brought in by the French police for questioning. It appears the rot goes a lot deeper than the lone trader that brought down Barings.

3) Chrysler is shutting down for two weeks to cut costs. If every car they make leaves them with a loss, perhaps the proper solution is to shut down for 50 additional weeks.

4) SecTreas Paulson says the current financial crisis shows that deregulation has failed us. We have regulations coming out of our ears; it is the regulators who failed us. Where were the SEC, the Fed, and all the other myriad regulators while mortgage banks were making all these worthless loans and Wall Street was pushing all these worthless structured products?

Carlyle Capital Collapses

Carlyle Capital, the bond fund affiliated with private-equity firm Carlyle Group, is on the verge of collapse after failing to agree a new financing deal with lenders. Late today, the fund said that it expects lenders will soon take possession of "substantially all" its remaining assets after it was unable to meet surging margin calls on its portfolio of residential-mortgage-backed securities. Shares of Carlyle Capital were all but wiped out, tumbling 98% to 29 cents from $12. So far, Carlyle Capital said it's defaulted on $16.6 billion of its debt, and its remaining borrowing is expected to go into default soon. Negotiations with lenders effectively ended when the pricing service used by certain lenders reported another drop in the value of MBSs. That was expected to trigger another $97.5 million of margin calls, on top of the roughly $400 million of demands that Carlyle Capital received last week. Margin calls have soared since the end of February as credit markets have worsened.

At the end of December, the fund had total equity of about $670 million and had used short-term loans, or repurchase agreements, to fund an investment portfolio of close to $22 billion. (That's leverage of 33x. There's the cause of the collapse right there.)

Debt > Equity

It's been widely reported (and misreported*) that home debt exceeded home equity for the first time on record (data goes back to 1945). Home equity percentage as of December 2007 is 49.6%, and I'm sure that number will go down a lot further before things recover. Other than the pain that this is going to cause me indirectly through a weak economy, I continue to fail to understand how other people's irresponsible financial decisions are my problem.

* NPR incorrectly reported that home debt exceeded home VALUES rather than equity (I've also heard at least one investment banking "expert" who should know better make this claim), and USA Today incorrectly defined the equity percentage as home debt divided by home value.

Oil Bubble

Crude oil may reach a record $130 a barrel this year because pension funds are investing more in commodities, said Pierre Andurand, the chief investment officer of BlueGold Capital Management LLP, a hedge fund. (Gee - I wonder if his fund is heavily invested in oil, which would make his opinion entirely self-serving. They shouldn't allow hedge fund managers to opine on the market.) The outlook for oil over the next five years is also bullish as producers find it hard to replenish reserves and demand outpaces supply. Oil companies are finding it tougher to replace their findings and are drilling for harder-to-reach deposits while energy demand and crude prices surge to records.

With commodities prices surging to all-time highs, Calpers, the largest US pension fund, said it plans to boost investments. "There's a lot of index funds flowing into oil, and the world is under-invested in commodities, especially pension funds,'' said Andurand. "Oil is now a medium-to- long-term outlook story, and it's bullish in terms of fundamentals of production constraints. Next year, oil may rise even further to $150 a barrel,'' said Andurand, whose $300 million fund has so far invested 70% in energy (BIG SURPRISE!) and 30% in agriculture and metals since February.

Translation: There are a bunch of upset people who have missed out on the spectacular run up in oil prices. Oil is a limited resource, so how can the value come down when everyone wants more? When they start buying oil, the price will go higher forever and ever.

Replace "oil" with "real estate" and you've got 2006, or "internet" or "telecom" and you've got 1999, or "tulip" and you've got the 17th century. The more things change, they more they stay the same.

Hedge Funds Frozen Shut

There's a chill spreading across the hedge fund industry. With more portfolios falling victim to the credit crunch, managers by the dozen are freezing investor redemptions, preventing a mad rush to the exits that would force funds to sell beaten-down assets to raise cash. But is this unprece­dented move just postponing the day of reckoning for funds and the market? Since November at least 24 hedge funds have barred or limited investors from taking their money out, tying up tens of billions of dollars for an indefinite period.

Bernanke off his gourd, as far as I'm concerned

"Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.''

Cool, so if I'm underwater I get my equity restored. Then when home prices rebound, I can pocket the additional appreciation in addition to Ben's giveaway. Damn, maybe real estate does ALWAYS pay off.

"Lenders tell us that they are reluctant to write down principal. They say that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again.''

Well, DUH! Does this strike him as unreasonable? What does he think will happen if prices drop further (which they probably will)?

Based on futures prices, traders expect the Federal Open Market Committee to lower the benchmark rate by 0.75 percentage point by or at the panel's next meeting on March 18. I hope the traders are off their rocker, because another 75 basis point cut will put us well on the Japan path of zero interest rates. And we all know how well that worked out for them. Come to think of it, their mess started with bloated real estate prices - if I recall correctly at one point the real estate in Japan had a paper value larger than all the real estate in the US.

ETA: I found it; it was even more ridiculous that I remembered:
Japan suffered one of the biggest property market collapses in modern history. At the market's peak in 1991, all the land in Japan, a country the size of California, was worth about $18 trillion, or almost four times the value of all property in the United States at the time.

Now I'm certain commodities are the new bubble

The first commodities index built to allow investors to profit from rising food inflation is due to be launched today. The UBS Bloomberg Constant Maturity Commodity Food Index will cover 13 commodities directly linked to food consumption. It will include raw materials not usually included in general commodity indices, such as high-quality winter red wheat, soyameal, soy oil, orange juice and lean hogs.

Muni auctions continue to fail

Auction-rate bond failures show no sign of abating after investors abandoned the market for variable-rate municipal securities. Almost 70% of the periodic auctions in the $330 billion market failed this week as investment banks stopped buying the securities investors didn't want. Yields on the debt averaged 6.52%, up from 3.63% before demand evaporated in January.

Sharper Image Bankrupt

Sharper Image filed Chapter 11 bankruptcy.

One observation made by MarketWatch is that $25 million in gift cards and certificates became worthless overnight since federal law allows a company to stop honoring store gift cards when it files Chapter 11.

Updated (5/31):
Sharper Image was purchased by Hilco Capital, Gordon Brothers and Bluestar Alliance for $49 million. It will operate solely as a licensing company, closing all remaining stores immediately.

Dumbest Thing I've Heard in a while

I just heard a CNBC analyst on TV asking, "The question is when are we going to see some of the money going into commodities start moving back into equities. When is that appetite for risk going to return?" That is idiotic. The risk isn't in equities (they obviously aren't going to skyrocket, but they aren't going to plummet a la 2000-2 either). The risk is in commodoties, which are being built up to be the next bubble. It's ridiculous...

• Gold +43% in six months
• Oil +46% in six months
• Wheat +100% in just under a year
• Corn, Cattle, hell even soybeans, are going through the roof

Now a good deal of these increases are that the prices are quoted in dollars on world markets, and the dollar is down quite a bit (which has no effect on non-US demand) so a lot of this is explained by the decline of the dollar as opposed to real price increases, but it doesn't come near (anywhere near) explaining all of these increases. So what's going on here?

We've got media headlines like "World recession blamed for basic commodity price hikes." Wait a minute - aren't prices supposed to DROP in a recession?

Looks a bit silly (and crooked) now, doesn't it?

2005:


2006:


For those of you who are not aware of this, David Lereah was the chief economist of the National Association of Realtors at the time these books were published. It's amazing to me the self-serving crap (almost criminally so in this case) that gets published under the guise of scholarly research just because the author has a credential. How can a publisher sell this in good conscience without even putting the author's affiliation on the cover? What happened to Dr Lereah's sense of intellectual honesty?

First Stocks, Then Real Estate, Now Oil?

Perhaps we are living in a perpetual bubble economy. Speculators now hold up to 45% of all oil contracts. The underlying world supply and demand data are pretty much the same as when oil was $75 a barrel. I wonder how soon before this particular bubble also comes crashing down around us?

Sprint Loses $29.5 Billion

Sprint Nextel Corp. posted a $29.5 billion loss and scrapped its dividend after writing down most of the Nextel Communications acquisition from two years ago. Sprint sank as much as 13% in New York trading and its credit-default swaps reached a record. The company reported a fourth quarter net loss of $10.36 a share. Sales fell 5.7% to $9.85 billion, missing analysts' estimates, and the carrier borrowed $2.5 billion under a credit line. The writedown put Nextel's value at 80% less than when it was acquired and the loss is the fifth-largest among S&P500 companies since 1990. Sprint expects 1.2 million subscribers to leave this quarter, as many as it lost in all of 2007. CEO Dan Hesse, who took over in December, said business is deteriorating.

$29.5 billion!! Another useless acquisition by another idiot executive. Perhaps Sprint should concentrate on improving its crappy customer service (yes, I will probably be one of the 1.2 million who leaves this quarter when my contract expires).

Home Price Declines

Home prices fell 8.9% in 2007, the largest decline in the Case-Shiller home price index in 20 years. The index fell 5.4% in the fourth quarter alone. Prices in 17 of 20 major cities fell, with eight cities falling by double-digits. After adjusting for inflation, real home prices were lower in all 20 cities. For the fourth straight month, nominal prices in all 20 Case-Shiller cities were lower than in the previous month. The 20-city index fell 2.1% in December and 9.1% for the year. The original 10-city index fell 2.3% in December and 9.8% for the year.

The biggest annual declines were seen in the former bubble areas in Florida and the Southwest. Home prices in Miami were down 17.5% in the past year, while prices fell 15.3% in Phoenix and Las Vegas. Phoenix had the largest decline in December, falling 3.5%, followed by San Diego at 3.4% (down 15% for the year) and San Francisco at 3.2% (down 10.8% for the year). But even in non-bubble cities, such as Atlanta, Cleveland, Chicago, Dallas, Detroit and Minneapolis, prices are dropping. Detroit, down 13.6%; Minneapolis, down 8%; Cleveland, down 6.3%; Chicago, down 4.5%; Atlanta, down 3.4%; Dallas, down 2.4%. Other major cities: Los Angeles, down 13.7%; Washington, down 9.4%; New York, down 5.6%; Boston, down 3.4%.

Visa going public

Visa is moving ahead with its plans to sell $17.1 billion to $18.8 billion worth of stock late next month. It would be the biggest IPO offering in US history. Since going public in May 2006, Visa's smaller rival MasterCard has risen 408% and has a market value of $26 billion.

Stay out of my wallet, Congress!

A proposal circulated by a bank to members of Congress warns that as much as $739 billion in mortgages is at "moderate to high risk" of default over the next five years and that millions of families could lose their homes.

Well, excuse me if I sound callous, but aren't many of these "families" actually flippers who bought, refinanced, sold and re-bought their way into outsized profits while I took the safe route? Now that the pyramid scheme has collapsed on them, the gummit wants to pick my pocket to bail them (and their bankers) out? To be fair, maybe they are talking about the folks who lied about their income (sometimes by 50%+) to qualify for Alt-A mortgages they couldn't afford? No? Perhaps they are talking about the folks who got interest only loans (or even negative amortization loans) because when they rates kicked up "they would definitely be making more money" and/or "real estate always goes up"?

Not sure how any of this is MY problem. As one of my professors used to say many years ago, "Lack of planning on YOUR part does not constitute an emergency on MY part."

More Bad News From Citi

Citigroup warns it may be forced to take further write-downs due to continued crumbling of the U.S. housing market. It says in its most recent 10-K that it has been forced to move a $10 billion hedge fund onto its balance sheet after major losses and revealed it has an exposure of $4 billion to the troubled bond insurance sector. It also disclosed that its traders suffered daily losses exceeding $100 million on 15 occasions in 2007. The disclosure may signal that Citigroup's problems go beyond mortgage-related losses.

Failed muni auctions

In recent days, over 100 bond auctions by US municipal borrowers and providers of student loans have failed to attract enough buyers amid concerns about the viability of bond insurers. Banks and dealers underwriting these sales have declined to buy the unsold debt given their already constrained balance sheets. This leaves local government entities facing sharply higher borrowing costs and some analysts say the market faces further failed auctions and possible extinction as a viable source of funding.

GM $38.7 Billion Loss

GM lost $38.7 billion in 2007, almost exclusively due to a non-cash charge of $38.3 billion to write down deferred tax assets. Excluding special items GM essentially broke even (a $23 million loss). The company also said it was offering a new round of buyouts to all of its 74,000 US hourly workers who are represented by the United Auto Workers. Perhaps, they will all take the company up on it, and GM can shutter its unprofitable US operations and concentrate on better opportunities abroad.

DJIA Changes

Bank of America and Chevron will replace Altria Group and Honeywell International in the benchmark Dow Jones Industrial Average effective February 19. The change is the first in four years and reflects the index's continued shift away from industrial firms and into other sectors such as energy and financial services. Excluding thinly traded Berkshire Hathaway, Bank of America and Chevron are the two biggest US companies by market capitalization that currently are not in the DJIA.

Option ARMs

The US housing crisis has focused attention on ARMs and the danger posed by their spiking interest rates, but mortgage bankers, industry experts and nonprofit officials say that the impact of Option ARMs has yet to be felt. And, they say, it will hit prime borrowers and subprime borrowers alike. People like Bruce Rose, who never should have got a loan. Rose bought his home in Boston in 1986. After stress and depression forced him to retire as a state employee in April 2006 he maxed out his credit cards on his annual income of around $16,000. On medication, he refinanced his debts through Countrywide (who else?). The new loan totaled $439,000. Rose said he did not know his mortgage broker and Countrywide used a stated income loan -- also called a "liar loan" because no proof of income is required -- and that they claimed his monthly income was $12,166. "If I had known what I was signing I would never have agreed to the loan," he said. "Now I may lose my home." With an Option ARM, borrowers can make a minimum monthly payment like a credit card, but if they do the principal increases. Rose's minimum payment rose from $1,200 a month to $2,800 and his loan now totals more than $500,000. He is fighting foreclosure. "No reasonable lender would have given him a loan like that."

If the story is trying to evoke sympathy for Mr Rose, it fails miserably. He didn't know what he was signing? He didn't know he couldn't afford a $439K mortgage on an annual income of $16K? I'm sure he took cash out (probably several years worth of income) when he refinanced; he didn't understand he'd have to pay it back? Did he think the mortgage fairy was giving away money? Gimme an effin' break!

China's latest export is inflation

After falling for years, prices of Chinese goods sold in the United States have risen for the last eight consecutive months. American consumers could see prices increase by as much as 10 percent this year on specific products — including toys, clothing, footwear, and other consumer goods — just as the United States faces a possible recession. Whether Chinese factories will succeed in making wholesalers pay more for their goods and whether retailers will be able to pass much of their higher costs on to American consumers is unclear, analysts say. Starting last June, for instance, China removed or reduced tax rebates on hundreds of items for export, including toys, garments, leather, wood and other goods. The moves are also part of Beijing's desire to move China higher up the global manufacturing chain — away from the least finished products, like plastic children's toys, toward more advanced exports that require skilled labor, like small electronics and even automobiles. Whatever the government's motivation, many Chinese exporters say the timing of the rebate cut was disastrous. Their factories had been struggling to cope with an array of other problems, including power shortages, higher raw material costs, rising wages (up to 80% in some places) and inflation in other areas. Many Chinese factory owners say a tough, new labor law, which went into effect on Jan. 1, complicates the hiring process and threatens to raise labor costs even more, at a time when parts of the country are already plagued with labor shortages.

It looks like the days of outsourcing manufacturing to obtain cheap imports from China are at an end. There's that labor arbitrage at work again.

Microsoft bids $45B for Yahoo

Microsoft to pay a $44.6B (a 62% premium) for Yahoo, in order to take on Google. This is probably not good news for Google, whose shares were already under pressure. It must be pretty nerve-wracking when Microsoft turns its guns on you. Just ask Lotus, WordPerfect, Novell, Borland and Corel about that.

News of the Day

Merrill Lynch's new CEO, John Thain, announced the firm will leave the subprime, CDO and structured credit businesses. In related news, Merrill Lynch agreed to pay $13.9 million to settle a dispute with the city of Springfield MA over CDOs that sank in value. Merrill said it agreed to reimburse Springfield after finding the city did not expressly consent to the CDO purchase. I'm sure there's more news like that in Merrill's future.

John Mack, CEO of Morgan Stanley, said the firm will stick with proprietary trading, despite trading losses that resulted in a $9.4 billion fourth-quarter writedown. It's a risky strategy for Morgan Stanley, which may face as much as $2 billion in additional writedowns for the current quarter.

Pershing Square manager William Ackman warned that the bond insurance industry might suffer crippling losses and has bet against the insurers' shares. He said MBIA and the Ambac Financial Group might lose $24 billion on the securitized mortgage investments they have guaranteed, a loss that could set off a chain reaction.

Motorola may be divesting the cellular phone business that represents half its revenue. This division has been beset with problems for the better part of a decade. The market actually greeted this news by driving Motorola stock higher; apparently the smaller company is expected to be more profitable.

Q: What happens when the Fed runs out of ammo?

A: Japan

The Fed cut the federal funds rate another 50 basis points (on top of their 75 bp cut last week) with indications of further cuts. The DJIA quickly jumped 200 points ... and just as quickly gave every point of it back before the close.

Recession - here we come

The economy grew at an anemic 0.6% rate in the fourth quarter.

Somebody's going to jail!

The FBI said it is investigating whether accounting fraud or other crimes were committed by mortgage lenders, loan brokers and Wall Street banks involved in extending loans to borrowers with poor credit. The agency has refused to identify the companies under investigation since the probe began last spring. However, it is known that at least 14 companies are involved. The FBI is cooperating with the SEC, which is investigating how subprime loans were made and packaged, and how the securities they backed were valued.

FBI Director Robert Mueller said investigators believe a "substantial" amount of mortgage fraud was committed in connection to home loans made to risky borrowers. The bureau is looking into the practices of subprime lenders. Agents also are probing potential accounting fraud by financial firms that hold subprime loans themselves or securitize them and sell them to other investors.

Subprime woes spread to Japan

Mizuho Financial Group may soon report subprime losses of as much as $2.8 billion, Japanese newspapers report. The losses could force Japan's second-largest bank to cut its full-year profit forecast for the second time.

Japan's other three top banks -- Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Sumitomo Trust & Banking -- will take subprime hits totaling approximately $2 billion.

First ever loss at UBS

After writedowns of about $14 billion on subprime-related losses, UBS posted a fourth-quarter loss of $11.4 billion. The loss was nearly twice as much as what analysts had estimated. The result is the first annual loss for UBS since it was created a decade ago through a merger.

Near Zero CMBS Volume in January

Barring some big (and highly unlikely) surprise tomorrow, January will end with the smallest issuance of commercial mortgage-backed securities priced in the market's two-decade history. Dealers sold a record $234 billion of US CMBS in 2007, up 14% from 2006 even as volume began to dry up at midyear.

Edited to add:

Three CDOs -- two in Asia and one in the U.S. -- worth a combined $1.3 billion were sold in January 2008. As a comparison, in January 2007, 37 CDOs worth a total of $22 billion were issued.

News of the day

Six months after acquiring the Chicago Board of Trade for $12 billion, the CME Group has confirmed that it has entered a 30-day exclusive negotiating period to consider buying the New York Mercantile Exchange for about $11 billion. The deal would solidify CME's position as the most important futures market in the world.

Purchases of new homes in the U.S. unexpectedly fell to a 12-year low in December, ending the worst sales year since records began in 1963. The S&P/Case-Shiller 20-city home price index fell 7.7% for the year through November. The 10-city index fell even further, declining a record 8.4%. The 20 city index showed yearly price declines in 17 of the 20 cities surveyed and all 20 cities showed monthly price drops. Not only did the 10-city composite index post another record low in its annual change rate, but 13 of the 20 metro areas did the same. The weakest market in November was Miami, where prices fell 15.1% in the past twelve months.

Analysts at Bank of America are warning of trouble for credit default swaps if even a small bond insurer defaults. ACA Capital Holdings may face delinquency proceedings next month from the Maryland Insurance Administration if it can't delay action on $60 billion of CDS contracts. The company guarantees more than $75 billion of debt.

Countrywide Financial Corporation reported a fourth-quarter loss of $422 million, but the results were not expected to hinder its proposed $4.1 billion takeover by the Bank of America. Countrywide’s earnings fell far short of Wall Street estimates. Still, shares rose 36 cents (6%) to $6.31. CEO Angelo Mozilo will voluntarily give up $37.5 million in severance and consulting pay in connection with the proposed takeover by the Bank of America Corporation. His stock and employee equity awards would be treated the same as that of other shareholders and employees if the sale goes through. However, Mozilo sold almost $450 million in stock from April 2004 to August 2007.

Another leftist idea

Senate Banking Committee Chairman Christopher Dodd proposed creating a federal program to buy “very distressed” mortgages at steep discounts as part of economic stimulus legislation being developed in Congress. The Federal Homeownership Preservation Corporation would buy loans and finance them as 30-year fixed-rate mortgages to help keep borrowers from losing their homes, Dodd said today at a Washington news conference to outline the committee’s agenda.

The latest way the gummit is going to tax me to reward those who took risks that I chose to avoid. ARGH!

GOOG down

Google closed yesterday at $566.40, down 24.2% from its all-time high of $747.24.

Financial WMDs

Societe Generale said today that a single trader who fooled his bosses carried out a massive 4.9 billion euro ($7.15 billion) fraud -- one of the biggest in financial history. Trading in the bank's shares was temporarily suspended but fell 5% after they resumed because of the fraud and a 2.05 billion euro loss in the US subprime mortgage market. The bank said it needed a 5.5 billion euros capital increase to restore its balance sheet. Chairman Daniel Bouton said the unnamed rogue trader had used "extremely sophisticated and varied techniques" to carry out "fraud of a considerable scope." The trader, based in Paris, is believed to have built up the huge losses gambling on share futures. The bank said the trader took out "massive fraudulent directional positions in 2007 and 2008 beyond his limited authority." The case dwarfs that of Nick Leeson, the original British "rogue trader" who lost $1.5 billion at Barings, causing the failure of the venerable British bank in 1995. (Source: AFP)