MonkeyBusinessBlog

Who Can Take A Sunrise, Sprinkle it With Dew?

The state of domestic and global commerce seems to have ground to a halt.  Many of you have been kind enough to either comment or email us your experiences regarding the continued unwillingness on the part of the nation's banks to provide credit to anyone other than Uncle Sam.  This is reflected in Treasury bill yields of practically zero and ten-year Treasury note rates of less than 3%.  We hear stories of banks continuing to sever lines of credit to long time commercial customers as well as the refusal of banks to provide standard bankers acceptances and other transactional guarantees.  International commerce is declining rapidly and it is not just due to declining demand.  Port-to-port delivery of goods requires bank guarantees of delivery as well as short term financing.  Banks are providing neither and thus, the global economy contracts dangerously.  Meanwhile, there are countless stories in this weekend's papers of businesses being driven to bankruptcy for no other reason than their bank relationships, some that have been in place for decades, have been severed over the bank's fear to conduct normal business.

Over the last month the Treasury has injected approximately $250 billion of low cost capital into the nation's banks.  Last week, banks began raising stable funding through the FDIC's new program to guarantee new senior bank debt for the first three years of it's term.  In a holiday shortened week, billions of debt has already been issued.  The combination of immense short-term liquidity that has been provided by the Fed, the FDIC's debt guarantor program and the Treasury's capital injections should start providing positive results.  However, I strongly hope that the Federal Reserve, the Office of the Comptroller of the Currency and the Office of Thrift Supervision are closely monitoring and engaging with the banks and thrifts in their regions.  For example, if the truck maker Navistar is pointing out examples of customers inability to finance either the purchase of new trucks or obtain working capital, the Fed's need to investigate what the problem is.  If the banks aren't lending because they are still terrified about letting capital out the door, stuff them with more capital (provided the bank is otherwise healthy) to make them less terrified and willing to conduct business as close to normal with their strong customers.  Right now, this problem is more important and probably "easier" to fix than the housing problem.  It needs vigorous and steadfast attention.

Alright, enough with the lecture.  All this talk about the importance of banks got me thinking about a little tune that was a big hit when I was a lad.  It was performed by the incomparable Sammy Davis Jr.  "The Candy Man".  Here is a slightly altered version I wrote, "The Credit-Man".  Because some of you are either from overseas, or too young to remember, I've attached a clip of the great Mr. Davis performing his number.  Enjoy;

Who can take a TARP capital, borrow a billion or two
Lend it to a shipyard at a spread of three-oh-two
The Credit Man, oh the Credit Man can
The Credit Man can 'cause he lends it with love and makes the world feel good

Who can take a bridge loan, put it against next month’s supply
Lend it to the General Foods to make groovy lemon pies
The Credit Man, the Credit Man can
The Credit Man can 'cause he lends it with love and makes the world feel good

Yeah, yeah, yeah
Who can simply borrow, debt the Fed will guarantee

Finance a grain dealer and collect a big fat fee?
The Credit Man, the Credit Man can

The Credit Man can make everything he lends practically riskless
He can collateralize your children, and put in any covenant he wishes

 

The Credit Man can 'cause he lends it with love and makes the world feel good
Yes, the Credit Man can 'cause he lends it with love and makes the world feel good
a-Credit Man, a-Credit Man, a-Credit Man
Credit Man, a-Credit Man, a-Credit Man
Credit Man, a-Credit Man, a-Credit Man

Wal-Mart Associate Killed in Black Friday Stampede

I'm sorry but we have some serious issues.  A Wal-Mart worker is reported dead after being run over by hundreds of shoppers at a Long Island New York Wal-Mart.  This is sickening.  Our hearts go out to the Walmart associate's family.  Here is the story on Bloomberg Wal-Mart Worker Killed in Stampede

Blog Closed - Gone Fishing!

Hi All,

Richie and I are both traveling today and are both too hungover and stuffed to say anything meaningful except, "Hope you all had a great Thanksgiving and we will be back covering the mayhem on Monday!"

Meredith Whitney Predicts More Bank Write Downs in Q4.......Boorrr-ing!

Meredith Whitney's predicting more bank writedowns, $44 billion, in the fourth quarter of this year.  We love Ms. Whitney here at Monkey Business.  She has her own special category on the blog and we have given her her own song.  With that in mind I have to say;

"Meredith, leave this mundane stuff to the lesser analysts that you have left in the dust.  Think about the true great ones, like say Bob Dylan.  He could have spent the rest of his career writing and singing folk songs.  Instead of that, he went a total different direction and went electric, blazing a new path.  Meredith, you've proven you rock the house as a bank analyst, there's little else you can really do but play the same old songs in that genre because its going to be the same thing, quarter after quarter.  Branch out girl!  Shift gears until it's time to call the bottom for the banks.  Take a walk over to the biotech or commodity producer analysts, throw them out of their chairs and start writing about that.  Your fans will probably hate it, just like Dylan's original fans did. However, once you show your brilliance in that arena, you will triple your fan base and become a true legend.  Until then it's just this little ditty from Aerosmith;

THE CHAIRMAN is Coming Back to Washington!

Now THIS is good news!  Chairman of the Federal Reserve (I will never refer to him as former, and yes I do have a man-crush on him) Paul Volcker is coming to Washington DC to head up a new White House panel to revive economic growth.  I want to say right now that all the other folks like Rahm Emanuel (Obama's incoming Chief of Staff) should keep their ears open when The Chairman speaks and use their mouths only to say, "Yes sir Mr. Chairman."

I know I'm going overboard here but Volcker is going to make a huge difference.  Trust me.  Between his intellect, experience, 6' 7" 300 pound frame, and the fact that he brooks zero bullsh*t, he is going to get things done.  Some of the things he recommends will probably hurt, but this is the guy that crushed inflation in the late 1970's- early 1980's and set us off on a twenty-five year prosperity binge.  I know a lot of you out there do not like President Jimmy Carter BUT, Carter is the one who appointed Volcker to be Federal Reserve Chairman even when his aides said, "If you pick Volcker, he will do what he has to do to crush inflation.  To do that he will most likely throw the economy into recession right as you are going to be running for re-election.  You will almost be guaranteed to lose the Presidency.  Carter said, "Is he the right guy to get rid of inflation?"  His aides said yes, and Carter appointed him.

Think about how much of a pompous, self serving ass Greenspan is and know that Volcker is the opposite.

Here's the Bloomberg story Volcker Said to Lead New White House Panel

I Know its Wednesday, but Its Still Time for Big D!!

Editor's Note--Yes its Wednesday, but since this weekend starts technically tomorrow, Thanksgiving Day, we are going to have Big Dick from Big Dick's Picks lay his 6 picks down right now! We figure Big D will build on his 4-2 winning weekend last week so lets get to the ACKKK-SHUNNNNN!

Ah yes Richie, we were happy last week but not completely satisfied. We never are, unless we go 6-0. Speaking of 6-0, here are the 6 feastful picks! In order of when they are being played. First on Turkey Day! Pass the dark meat and the stuffing and go against  "America's team" the Dallas Cowboys. +13 is too many with the now healthy SEATTLE SEAHAWKS. Take the SEAHAGS. On Friday, UCLA plays in the desert at Arizona State. Both teams have had disappointing seasons. But Asu lays 10 points to UCLA? Too many pal. Take UCLA+10!

Saturday gives us the CINCINNATI BEARCATS favored by 22 against the Syracuse Orangemen. Well Syracuse stepped waaaaaay up last week and beat Notre Dame. CINCY is no joke. Syracuse has had their "success" and will lay down. Lay the 22 with CINCY. Also on Saturday, in the battle of Houston, we like the home underdog RICE OWLS getting 3 points. WHOOOO? The RICE OWLS. Thats WHOOOOO.

Sunday brings that awful battle on the West Coast, Oakland versus Kansas City. We smell a real defensive battle even though both teams scored a lot last week. 41.5 is too high of a total. UNDER! Finally, on Monday Night, the smart bet this year has been OVER. There are 2 very good OVER teams going HOUSTON and JACKSONVILLE. Yes the total is high at 48 but take OVER!

To recap: Thursday: SEA+13 @ Dal, Friday: UCLA+10 @ Arizona State, Saturday: CIN-22 vs Syr, RICE+3 vs Hou, Sunday: UNDER 41.5 OAK/KC, Monday: OVER 48 HOU/JAX.

From all of us here at Big Dick's Picks, we wish you and yours a most happy, healthy, and profitable Thanksgiving. Enjoy the turkey, the lobster, and champagne. Oh you dont have lobster and champagne on Thanksgiving? Big D does. You should too. Enjoy.

Pandit: "Citi's Strength is Viewed to be America's Strength." Thanks Vik

Last night Vikram Pandit, Citigroup's CEO went on Charlie Rose's show (PBS) and uttered these words;

“We’re in 109 countries around the world, and Citi’s strength is viewed to be America’s strength in many ways.  The bailout was really about the entire financial system. It was about confidence in the financial system. It was about stability,” 

Umm, Mr. Pandit, we have enough problems without having to all be tied in to the freakshow that is Citigroup.  A couple of days ago on the blog I said that in reality, besides blowing the Wachovia deal, almost all of Citi's problems were baked in by former management (and the CURRENT Board) before Pandit got there.  I'm really starting to wonder though if part of the reason Pandit was picked for CEO was because someone at Citi said, "We paid $800 million for this guy's half-assed hedge fund, $161 million paid directly to him.  Let's put him to work!"  What's scary is I was talking to a friend of mine who is the CFO of a large, established and successful hedge fund yesterday about Old Lane.  He said that from an infrastructure standpoint, Old Lane, despite being in business for over a year, really didn't have much of a infrastructure.  You see, a hedge fund, as a business, isn't about a bunch of guys just coming in with their brilliance and "trading stuff".  A lot of the value, or lack thereof, has to do with analytics, risk and operational control, prime brokerage agreements and legal infrastructure.  It appears that Old Lane didn't have much in the way of this "stuff".  Paying $800 million for a hedge fund with a very short track record is probably insane to begin with.  Paying $800 million for a hedge fund that hasn't even done the basic "blocking and tackling" with regard to infrastructure is off the charts stupid.

Anyway, back to Mr. Pandit's remarks yesterday with Charlie Rose.  I guess I have to expect Pandit to "talk his position" and lump Citi's problems in with this "act of God" (my line, not his) that all these management types claim happened to them in the last two years.  But to say Citi's problems are America's problems? You just stepped over the line Vik.  Citigroup IS America's problem.  So for this "infamnia" we have to bring out an article written Monday by the champion finder of corporate accounting bull-sh*t, Bloomberg's Jon Weil.  Mr Weil was really the first guy to come out and not only say Freddie and Fannie's capital calculations were a fantasy, but he showed us very clearly why.  Three words DEFERRED TAX ASSETS.  Freddie and Fannie, by the second quarter of 2008 had wrung up approximately $50 billion of these "assets".  A deferred tax asset (DTA) is essentially capitalizing losses on your balance sheet with the idea being, when future income is generated, you can put these losses against future income (you can also carry back for two years).  To keep the assets on your balance sheet unreserved you have to show that you will make the appropriate income in the future years to use all the DTAs.  Freddie and Fannie certainly were not going to use these "assets" because they sure as hell were not going to make the kind of money over the next few years.  Hence, Treasury finally opened their eyes to this sham and took the GSE's into conservatorship.

Guess who else relies heavily on DTAs, unreserved, for their gross capital and Tier 1 capital?  Ding ding....Citigroup.  Remember this when Citi tells us about their "strong capital position" over and over again.  Here is Jon's Article Citi's DTAs.  The main upshot is Citi reports a net DTA of $28.5 billion as of September 30 , 2008.  These "assets" are buried on the balance sheet as "Other Assets".  That represents 29% of Citi's common shareholder equity and 19% of itsTier 1 capital calculation (Tier 1 capital only allows for carry forward that will be used in the next twelve months).  The problem is DTAs can only be 10% of your Tier 1 capital unless you can show that the excess 9% can be used to carry back against two years of tax provisions. To keep this excess DTA on their books at year end 2008, Citi would have to show that they can carry a portion of the DTA back to 2006and 2007.  In 2007 Citi had a negative tax provision and in 2006 it was only $3.9 billion.  If you combine Citi's inability to show that the excess DTAs can all be used for carrybacks, and they certainly won't be used for 2008 (as Citi will generate negative tax provisions) you arrive at the point that Citi is still strongly overstating its capital position.

We're going to need a bigger boat.

Forget Treasury Secretary, How Did This Guy Get His Job as President of the NY Fed??

So, I have had my doubts about Tim Geithner for a while now.  He certainly seems smart, capable and likable. However, the fact that he was President of the New York Fed from 2003 to now and the following things occurred on his watch troubles me:

1. The rapid expansion of asset backed commercial paper, whereby nearly $1 trillion commercial paper conduits, run by money center banks, sprang up with a good amount of their investments centered in "AAA" rated residential CDOs.
2. The explosion of off-balance sheet entities, run by the likes of Citigroup, also invested in "AAA" rated CDOs.
3. The massive amounts of bank profits coming from magically turning poorly underwritten residential mortgages, commercial mortgages and high yield corporate bonds and loans into highly rated securities.
4. The high leverage and low liquidity of New York's investment banks. 
5. The resulting horror show that we are witnessing now as a result of the above mentioned items.

Sure Mr. Geithner has been at the center of it all the last year and a half, trying to fix things but like Hank Paulson and Ben Bernanke, wasn't he part of the problem?  When Paulson and Bernanke were consistently behind the curve on this crisis from late 2006 to summer 2008, where was Geithner?  Like Richie said earlier, if he was telling his boss and the Treasury Secretary something different, we would have seen those stories already from "unnamed sources".

But lets forget about all that for a second.  I read an article in the Financial Times today by Gillian Tett titled "Always the Pragmatist, Geithner Gets the Job Done"  Ms Tett says this about Mr. Geithner's backround when he took the post as President of the New York Fed;

"Some wondered how he would make his mark at the New York Fed given his youth and his lack of macroeconomic qualifications.  And indeed, during the first couple of years, Mr Geithner exerted relatively little influence at policy meetings - not the least because these tended to be dominated by Alan Greenspan, then chairman.  However, Mr Geithner quietly sat down to boost his knowledge of macroeconomics finance and surrounded himself with a key group of advisers: men such as Gerald Corrigan, former NY Fed president, and Paul Volcker, whom he would regularly call for a "chat" and to garner ideas.  He also threw himself into the task of understanding how the mechanics of modern financial markets work, right down to the level of grasping the intricacies of,say, the structure of a CDO."

WTF?  How did he get that job in the first place?  If you are the president of the most powerful Federal Reserve bank aren't you supposed to know things about macroeconomic finance already?  I can see if he didn't have that exact knowledge base but had been in banking for twenty-five years and knew everybody and everything they did.  But he was younger than I am now with umm, no real banking experience!  I'm glad MsTett is impressed that Mr Geithner learned how a CDO worked, but wasn't that kind of his job since all the major banks under his watch were cranking them out by the billions each month and essentially financing half the U.S. economy with them?

I don't know, I guess this is how things work.  The frightening thing is Mr Geithner has learned so much on the job the last eighteen months that he probably is now the best candidate to take over from Hank Paulson.  I just wish he had learned a little earlier before he took the reigns of the New York Fed.

Talk About Being Long Oil!

A quick post on something that I saw, fell over laughing, and then said, "I have to write about this."  Bloomberg has a story, "Putin to Hold Call-In TV Show Next Week. Could Signal Comeback." Putin May Come Back.  Now I thought who the hell could have long oil more than say, T-Boone Pickens, the Arabs or Goldman Sachs?  How about current Russian President Dmitry Medvedev??!  He took over from Vladimir Putin (hand picked by Vlad of course) a few months ago.  At the time oil was skyrocketing, hard currency was flowing into the country like vodka at a Russian wedding, and everybody seemed to be getting rich.  The Russians were starting to rebuild their venerable armed forces, bee-otch slapping Georgia and Ukraine around, which made the people proud.  It was like fantasy land.  The glory of the old Soviet Union, law and order and military strength, WITH the ability to get rich!  Who got all the credit?  Why Putin of course.  He was the President from 2000 to 2008.

Then, because the constitution said he couldn't stay president forever, he engineered it so his young protege Medvedev could take over as president (he was elected but I think he ran against a bag of old hockey pucks!).  Putin "stepped aside" and became Premier.  Now just a few months later, oil craters and the economy is going into a tailspin.  Poor Medvedev, he's getting all the blame as the people are terrified that they are going back to the mid 1990s.  Now Putin announces he is going to do a live, nationwide call-in show with the people next week to talk about the nations problems.  This is something he did yearly when he was president.  Oh, I'm sure the questions are completely uncensored and picked at random...NOT!  Now here is the best part, President Medvedev will be out of the country visiting India!  You think Citigroup owner Prince Aleweed threw Chuck Prince under the bus yesterday?  Wait till you see what Putin is going to do with his young protege!  Mr. Medvedev will be described as very good but perhaps not ready for the big job, and in will step Vlad to take another eight years!  See, there is a loophole in the constitution.  You can't serve more than eight consecutive years. However, after "some time" out of office, you can be president again.  Dosvedanyah Dmitri!  

You Say Toe-May-Toe and I say Tah-Mott-Oh

So I get the sense that there were a ton of dudes and dudettes all charged up when the TARP program came out. And by charged up I mean feeling good. They thought "man we've got all these 'toxic' bonds and we havent marked them right, but here comes the Fed and they are going to buy em from us! Probably at too high a price too! Happy Days!" Then on November 12, Treasury Secretary Paulson hit them with a big ol' thud. He and his lieutenant, Neel "cash and carry" Kashkari, said they werent going to buy those "toxic" bonds anymore. And by "toxic", I mean formerly AAA bonds backed by CDOs or CBOs or subprime loans, etc. That was not a good day for a lot of folks. It also caused the low prices on these "toxic" bonds to drop even lower. Now lets flash forward to today.

The Fed announced a new program called Term Asset-Backed Securities Loan Facility or TALF. Not to be confused with the old program, TARP.  Just an aside, do you think theres a whole department in the government that come up with these catchy acronyms? I do. They work really hard too. Just hope they arent singing that big song back in the day, "Oh you say TARP and I say TALF, and you say toe-may-toe and I say tah-mott-oh, TARP, TALF, toe-may-toe, tah-Mott-Oh, lets call the whole thing off!"

Anyhoo, the Fed is backstopping a bunch of "AAA rated asset-backed securities backed by "newly and RECENTLY originated" loans, as in education, or credit cards, or auto loans. You know what? When this whole crisis started, these bonds in the new TALF program were viewed as very safe. No way these were labeled toxic. So its a sign of the times that THIS is the new toxic. I dont even want to say what the previous toxic stuff is now called. The Feds should come up with an acronym for those bonds. Perhaps S.H.Y.T.? Some Horrible Yucky Things? As in, "sorry we wont be buyin any SHYT today. Or any other day." In any event, you dudes and dudettes holding the SHYT  hoping the Feds were gonna come bail you out, they aint. You might as well take the pain now and sell or at least mark the bonds to where they should be marked. Good luck.   

It's All About Change......Right?

The President-Elect ran and won his election on the idea that things are going to CHANGE. You remember right? "We cant have the same old policies" and "Are you better off then you were 8 years ago?" Thats good politics for sure. Does it work in reality though? Theres been a few major announcements for the new administration. At the G-20 country economic summit, President-Elect Obama sent Madeline Albright to listen. Um shes 80 years old. Served in Washington for awhile. Thats change? Then his Secretary of State cabinet will be filled by Senator Clinton. You've heard of her right? Yeah thats more change.  But the real "change" that the markets LOVED was Obama's choice of Treasury Secretary.....Tim Geithner.

Now Mr. Geithner has run the NY Fed for a while. As a matter of fact, he's kind of at the head of the table when it comes to all the New York banks. Now sure, stories are coming out about how he TRIED to change a few things that the banks were doing but his backers said "he didnt have any authority" or "he faced some unregulated markets that he couldnt control". To which I say hogwash (and i cleaned that up). This guy was in charge of these banks for a long enough time to know what was up. And now look what we got. Oh one of his mentors? Bob Rubin. You know Bob from us talking about him right? Yeah Bob has sat at the head of the table at Citigroup for more then 10 years, eaten out of the trough for over $100mm, and how is Citi doing now? But its not Bob's fault? Whose fault is it? Mine? No I never worked there or owned their stock. Unfortunately, didnt short it either.

So I'm feeling a little bit bad for Hank Paulson these days. He's getting yelled at from all angles. Yes we smashed him and his Princeton boy Bernanke for not seeing the light in February and saying things were "ok". But has anyone asked if it was  Mr. Geithner, who was the HEAD of the NY FED and therefore head of these NY banks that have gotten crushed, that told his bosses "everything was ok" back then too? I bet you he was. Cause if he wasnt he'd be telling you via the press right now. Oh thats no change either. Good luck to us.

Fed to Buy Freddie and Fannie MBS in Size to Offset the Widening THEY Caused!

I wrote a piece yesterday, "Here Come the Banks! Good Luck Getting Anything Else Financed". Here Come the Banks!  The basic gist was, with the FDIC guarantee of new bank debt for the first three years of it's term, a deluge of bank debt issuance was on it's way, starting today with Goldman Sachs (who again doesn't NEED any help but if its being given away, what the heck right?) and Morgan Stanley.  Total issuance for the whole sector is expected to total $400 billion.  Goldman's issuance, three-year paper. is expected to come at three-year Treasury +3.20%.  Other issuers will come wider, which is funny because they are all guaranteed by the FDIC.  What has happened is big bond funds have been selling Freddie and Fannie debt and mortgage backed securities so they can buy this high yielding risk free debt.  This of course sticks prospective home buyers and prospective refinance clients right in the eye and defeats the attempt to help the all important housing market.

So today, as well as launching a new facility to buy asset-backed paper the Fed will buy up to $600 billion of Freddie and Fannie debt and mortgage backed securities.  Problem solved!  As Bruce Springsteen said, "Some day we'll look back on this and it will all seem funny."

Paulson & Bernanke Ready to Restart The Sausage Factory!

Sometime today The Fed and Treasury will unveil their latest funding facility.  Here is a Bloomberg News article Treasury Fed to Unveil Plan to Boost Consumer Financing.  Similar to the facility, funded by the Federal Reserve to purchase A-1, P-1, F-1 (highest rated) commercial paper (both primary issuance and secondary market), I think a new facility will be created to buy AAA rated securities backed by auto loans and potentially credit card debt.  As we have talked about many times, the Wall Street securitization machine ("The Sausage Factory") became the primary source of liquidity for these consumer loan assets over the last decade.  The Street would underwrite deals that used say, new car auto loans made by the financing arms of one of the"Big Three" auto makers.  We would create a trust to house the loans and structure a deal whereby a large percentage of the auto loans formed a AAA rated, floating rate security.  The rest of the structure would serve to protect the AAA bond from losses.

These deals were very "plain vanilla" and served to provide tremendous liquidity for consumer loans for more than a decade.  For the most part these deals were a positive example of how securitization of loans or receivables like credit cards, worked to provide liquidity and disperse risk.  Demand for these deals from money market funds and overseas investors looking to park dollars was voracious.  Now, with the credit freeze, the demand has gone away and the liquidity for such things as auto loans and consumer credit have gone away with it.  This past October we saw the first month in fifteen years where not one credit card securitization was underwritten.  Not coincidentally, a few days later American Express (the credit card and charge card company) applied for a bank holding company charter.  They needed funding because the Sausage Factory was shut down.

It took a while, but Treasury and the Fed have learned that the securitization machine that some might call "The Shadow Banking System" was providing approximately forty percent of consumer credit financing.  This new facility that they are going to unveil will most probably buy the most senior AAA rated (and the rating companies, for the most part, didn't screw this one up) classes of auto and credit card deals, both primary issuance and in the secondary market.  I imagine that as we head into the worst recession in our lifetimes, these deals will require a lot more subordination or "credit enhancement" to create AAA rated bonds.  The government will need some expertise in evaluating these new deals to make sure they are adequately protected.

This program will be designed to kick start consumer borrowing and consumption.  The problem we may very well run into is that we are starting this program too late into the credit freeze.  The recession that we are in is already effecting consumer behavior to the point that even if great financing deals are offered, the consumer is already tapped out.  There is a risk that the only borrowers we get, especially in the credit card sector, are the ones going down for the last time.  Stay tuned.***

And here is the plan Full Text of "Term Asset Backed Security Loan Facility"

Don't Forget The Reality of Hedge Fund De-Leveraging.

A cautionary article from Bloomberg News Hedge Funds May Sell $200 Billion More Assets.  There is still an awful lot of de-leveraging that needs to be done.  A survey by Sanford C. Bernstein & Co. predicts that hedge funds are only half way to meeting their liquidity needs, either due to redemption requests or borrowing covenants.  Do not forget the "Yen Carry" trade that we have spoken of many times before.  While hedge funds had lots of different strategies in different sectors (equities, debt, derivatives, emerging markets, etc) a great majority had one thing in common.  Borrow super low Yen funding, invest in the assets of higher yielding currencies and believe as an article of faith that projected forward Yen levels would never be realized.  This went on for over a decade (and more often than not the forwards never strengthened like they were supposed to)  and fueled the explosion of leveraged investment strategies.  Now as hedge funds are hit with major redemption requests and their lending banks pull lines, it's time to pay the piper.  According to Sanford's Adam Parker, "Our conclusion is that increasing cash on the sidelines and quality, liquid stocks used as sources of funds will likely remain a significant issue in the near term,”  The trade therefore, is sell what is liquid and buy back borrowed Yen. 

On days where equities have skyrocketed and the Yen has weakened I would look for a pretty vicious down trade as these forced hands look to liquidate in size.  The S&P is up over 13% the last two days.  Look out below.  I also expect to see the Yen appreciate sharply as well over the rest of the week.

 

From the Archives on a Historic Day

Wow, what a day huh?  A historic bank bailout and a historic two day run for equities.  Just last Friday SKF (the Pro-Shares Financial Ultra Shorts ) topped $300.  Today back down to $173!  There's talk of a homebuilder bailout circulating around, hence the thirty-three percent one day drop for SRS (Pro-Shares Real Estate Ultra Shorts).  A bailout of the homebuilders?  Umm, can someone tell me why? 

All this bullishness got me thinking back to when I got my ass handed to me in April of this year when suddenly the financials were in the fourth quarter or the ninth inning of the crisis and were "dirt cheap".  I was short them up to my eyeballs and got a public schtupping.  Thank God the blog readership was a lot smaller then, although I remember a few of you buggers saying nice things like, "Hey Eric, how do all those SKF's feel up your ass??"  Anyway, in early April I wrote this little song, sung to the tune of The Temptations Classic, "Just My Imagination";

I look at my Bloomberg and watch as the news scrolls on by
I say to myself I'm such a lucky guy
To buy the banks down here is a dream come true
With all the bad news in the world Citi is a steal at twenty and two

But it was just my imagination, once again
Running away with me
It was just my imagination
Running away with me

UBS wrote down 19 billion, that’s a billion with a B
I don’t know about you, but that’s great news for me.
Toll Brothers at 20, glee just blows my mind
The bottom finally is here and value I shall find

But it was just my imagination, once again
Running away with me
It was just my imagination
Running away with me

Every night I hope and pray
"Dear lord, hear my plea
Don't ever let another take Merrill from me
Or I will surely die

The Fed’s love is ecstasy
When their cheap funds enfold me
I hear a tender rhapsody But in reality, if they’re worried shouldn’t I be?

But it was just my imagination, once again
Running away with me
It was just my imagination
Running away with me

 

So This is Finance Nowadays

As you know, I dont watch CNBC. I dont need to go into it again do I? Suffice it to say, I'm sure they have good people there but they must not have been on when I was watching. So in any event, I get a screaming call from one of my pals a little while ago saying I MUST put on CNBC. He knows I am no fan so I know its got to be good. I flip it on and my mouth hit the floor.

Sitting on a throne-type chair, with sunglasses, a handlebar mustache, a camel colored (perhaps camel skin) vest, hair slicked back, a scarf around his neck, and a walking stick in front of him as he scratched his "groin area" every so often (I cant make this up!), was Prince Alaweed himself. You know the guy who is one of the bigger Citigroup stock investors? Yeah thats him. The big rich "Middle Eastern Prince". Well the "money honey" herself, Maria Bartiromo was conducting an interview with him and it got even better.

You see as he talked, from I gather a nice studio in his $350mm palace, something moved on the screen. It was a horse! Eating some hay! Grazing! Now this guy is talking about the US economy or something and scratching his nutbag with his "outfit" on, and theres a horse grazing behind him! INDOORS! Then something else moved again. It was a camel!!! Again I cant make this stuff up. But this didnt faze CNBC in the least which is why I "love" them. They kept the camera rolling as if people were listening to this "Michael Jackson wannabe". Somebody had to be in the CNBC control room saying "get this idiot off the screen he's making a mockery of us"! But you know there was some other assclown who overruled him who said "hey we will get a lot of youtube hits out of this!" And you know what? He's right! But it wont be because CNBC is some cuttting edge business network. Its because it was HYSTERICAL watching this circus act while the "money honey" tried to be Diane Sawyer.

Then I heard the line of the day. Someone said, "this guy looks just like Father Guido Sarducci." Now for those who are too young to remember Father Guido Sarducci, he was a big hit back in the 70s on Saturday Night Live. Then it dawned on me. This was such a surreal interview, Saturday Night Live NEEDS to do a bit on this right away. It was that good.

So I dont know what the hell he said, but I do know the Prince makes money when the market goes up and he gets smashed when it goes down, which doesnt sound too different from you and me. I just think he's got a bigger "reserve" from some family money. Well he's getting absolutely smashed right now, but he does have a nice horse, camel, walking stick, sunglasses to wear indoors, scarf, and camel vest. He should get some Tinactin though for that jock itch. Don't be sad if you missed it, it'll be on youtube soon enough. And as it gets proven again and again, keep the TV tuned away from CNBC. Unless we get the Prince with his camel and horse on again. Spectacular stuff! Oh and my guess is he said "buy stocks" because he owns "a few" himself.  

Remember the Charts, Luke! Luke! The Charts!

The market for stocks has popped higher again and thats always a good thing unless you are short. I've been the one saying soon we will be buying some stocks but even off this 2 day gain (so far up over 10% from Friday's open!), we arent saying to buy just yet. Remeber when I told you about my "tea leaf" analysis on Friday? Well due to the markets dropping so much, so fast, in the week prior to last Friday, my charts are still NOT giving me the "buy" signal.

Trust me. Other then watching  1) Big Dick's Picks, 2) Entourage, and 3) the prices on foreclosed houses, there is NOTHING I am watching more then my "tea leaf"charts. You'll be the first to know when we give the go ahead and BUUUUUUUUUUY! In the meantime 2 stocks I know we have mentioned here are doing well: MCD (McDonalds) and NLY (Annaly Capital). We've got some other beauties in the hopper. Stay tuned.

Meanwhile Back on Planet Earth Housing Still Sucks

Purchases of existing homes for October fell 3.1% from the prior month.  Median sales price fell 11.3% from same time last year.  That is the sharpest decrease since 1968.  Unsold home inventory also moved in the wrong direction, increasing from 10 months to 10.2 months.

However, there is a silver lining!  Home sales in the Western part of the country jumped 37.5% from same time last year.  Considering the West led us down, maybe they are now brining us back...maybe...hopefully?  Probably not.

The Heck With Us Saying Citi is Gonna Lose More Money. Meredith Whitney Makes it Official and Credible!

Hell yeah!  It's been months since I added a post to the "Meredith Whitney" category.  I don't know what happened to bring about this omission but it's time to end it NOW!  From Bloomberg News here is the Damsel of Destruction;

“We are still cautious on the potential future dilution from further prospective capital raises for the group as well as continued higher losses related to credit and asset deflation,” New York-based Whitney wrote in a note today.

Citigroup’s “risky assets” total about $120 billion, Whitney said, reiterating her “underperform” for the stock

I am pumped (and on my 5th cup of coffee after a late night Citigroup vigil)!  Without further adieu, here is our own Meredith Whitney song, POD's "Here Comes the BOOM!  Still the funniest music video ever!  Gangstas playing ping-pong!

Here Come the Banks! Good Luck to Anything Else That Needs Financing!

Bloomberg News is reporting that new bank holding company, Goldman Sachs will lead the start of a $400 billion avalanche of new bank bond issuance.  Goldman May Lead New Bank Debt Issuance This bank debt will be backed for the first three years of its life by the full faith and credit of Uncle Sam.  Seeing how this paper is yielding well in excess of risk free Treasury rates (by about 5% or more!), even with the guarantee, expect the bond buying world to gorge itself on this buffet.

Remember of course, that investing, like anything else, is a zero sum game.  If guys like Pimco do the correct thing and buy debt that is explicitly backed by the U.S. government at way above risk free yields, they will pare back their purchases of things like Freddie and Fannie debt and more importantly, Freddie and Fannie Mortgage Backed Securities.  This of course will make mortgage spreads widen, thus jamming prospective home buyers and prospective refinancers.  Oh well.

The "LAW OF UNINTENDED CONSEQUENCES" STRIKES AGAIN!!

Hank Greenberg's Timing Always Impeccable

Check out CNBC interviewing Hank Greenberg, former CEO of "The Cancer on the U.S. Financial System - AIG"  The nice young man from CNBC starts the conversation off by asking Hank what he thinks about the government's latest move with Citibank.  Hank says, "Well, lets talk about AIG."  Check it out.  Listen to Hank complain how WE destroyed the "National Asset" AIG.  Great stuff.  Keep on truckin' Hank!  You're a national treasure yourself if you don't mind me saying!

Hank Greenberg on CNBC

Some Thoughts Now That Citigroup is Out of the Way......For Now.

Ok, the Citi bailout euphoria has worn off for me.  It lasted about an hour.  Now I am thinking about all the time and money that has gone into just keeping Citi from melting down and ruining Christmas...for the next ten years.  We put $45 billion into Citigroup over the last few weeks and all that money is going to do is keep them alive.  Maybe.  I just opened my Financial Times and saw this headline, "UBS May Need Further Bail-Out Warns Regulator".  If you remember just a few weeks ago, the Swiss Central Bank took what was supposed to be the last $60 billion of toxic garbage off UBS books and gave them a $5 billion capital infusion.  Great timing.  Can't you just hear Hank Paulson doing a big Homer Simpson, "DOH!"

Meanwhile, we have politicians and the media (see Gretchen Morgenson's article in yesterday's New York Times.  I used to like her until she didn't answer an email from me.  So now I'm not going to even check if I spelled her name right) demonizing the banks for "hoarding" capital and not lending.  This is definitely a huge problem.  We have gotten some great color from our readers as to how frozen commerce, both domestic and international, has become due to the lack of credit.  Between banks cutting lines, refusing to provide standard letters of credit and or guarantees, day to day business is not getting done.  This is reinforcing the grave deflationary threat we face.  Nevertheless, bankers aren't sitting in their vaults like Ebenezer Scrooge counting the new government money.  They are scared to lend it and scared to add to their balance sheets.  We have regional Federal Reserve banks as well as regional Office of Comptroller of the Currency (OCC) offices.  We need these people on the ground to visit their regions banks and find out what the problem is.  Nothing positive is going to get done by bullying folks, especially when they are scared.  Frank discussions need to be had.  Something like;

Fed:  Who are your three biggest regional credits?

Bank: Moe, Larry and Curly

Fed: Do you think Moe, Larry and Curly are in trouble?  If they are in trouble is it because of a lack of normal financing and credit (not emergency funding)?

Bank:  No, Moe, Larry and Curly would be fine if they and their counterparts were operating under normal banking conditions.

Fed:  Do you need more capital to lend to Moe, Larry and Curly?  Do you think your current capital position is at risk due to this unprecedented crisis.  And before you get defensive, we aren't looking to take you down.  We really are here to help.  The guys we aren't visiting are the guys we've already written off.  So do you need another $500 million of capital?  Do you need $1 billion?

Bank:  We think if we got $500 million, we would feel safe going back to normal lending conditions for our good credits.

Fed:  Ok, you're done for $500 million.  Go get em!

I think this is what we need to be spending our time doing, with regard to getting the wheels of commerce moving again.  It's a lot better than just yelling at people.

Citigroup Gets a Deal. It's BIG and IT WILL Cause Barney Frank's Head to Explode!

Citigroup and the U.S. Government have arrived at a rescue deal.  Here are the details;

1. Citigroup will receive $306 billion of guarantees against losses on their "troubled asset portfolio.  Citi will take the first $29 billion of losses (in addition to any reserves or writedowns that they have already taken) and the government and Citi will split the losses over $29 billion, 90% government, 10% Citigroup.
2. The Government ( The Treasury Department and the FDIC) will obtain 254 million warrants to buy Citigroup common shares at $10.61 each to allow Treasury to participate in upside of Citigroup.  The warrants have a ten year term. 
3. Citigroup may not pay more than a one cent dividend on it's common shares for the next three years.
4. The Treasury will inject $20 billion of capital into Citi and will receive from Citi $27 billion of preferred stock carrying a dividend of 8%. The additional $7 billion of preferred is to compensate Treasury and the FDIC for the 90% backstop of losses over $29 billion on the $306 billion troubled asset portfolio.
5. Citi is NOT required to make management changes but compensation must be approved by Treasury.

Here is the press release from Treasury, the Fed and FDIC Treasury FDIC Press Release

Wow!  The mother of all bailouts....so far anyway!  This really is a lot like we talked about last night.  It resembles the FDIC-Citi deal that would have taken place if Citi had won their takeover bid of Wachovia.  In that deal, in return for preferred stock (which was supposed to pay a dividend of 12%) Citi was to take the first $42 billion of losses on Wachovia's portfolio and the FDIC would absorb losses over that amount.  In this deal, Citi is splitting losses over $29 billion with the government (Treasury first for $5 billion, FDIC next with $10 billion.  After that the Fed gets involved in the fund.  I assume they will create a facility and fund the assets.) 90% government and 10% Citi. 

Essentially, we also have a wrinkle in here that looks a bit like the TARPs original plan. Treasury and the FDIC will have direct exposure to 90% of Citi's troubled structured credit assets, over an additional $29 billion of losses (meaning, $29 billion in ADDITION to writedowns or reserves Citi has already taken on these assets).  That gets around the messy prospect of Treasury managing the assets directly.  However, it is a bit of a reverse course again for the TARP, with government taking direct exposure to the assets.  This measure will be very interesting.  We have not seen the methodology to arrive at the $29 billion loss threshold.  I hope it was the old fashion, gun to the head, "If you had to sell these assets right now, where would they clear?"  Citi taking the next $29 billion in losses should alleviate the rest of the banking world's "What about me?" reaction, although you know we are going to hear it from every politician who has taken at least one dime from Detroit this morning. 

The government has allowed Citi to live, keeping its management structure in place.  My gut reaction is, "Throw the bums out!"  However, Treasury has enough on its plate right now to start managing a gigantic global bank.  Citigroup has now recieved $52 billion in capital with which to weather the storm.  Is it enough?  I honestly think it is going to be a close call.  This capital is plugging a gapping hole.  Therefore, it is not going to be "high powered" capital that will spur lending.  That's tough when you consider that Citi's allocation from the full $700 billion TARP is now 7.5%. 

**Actually I should not include the $7 billion of preferred the government gets for backstopping losses.  Therefore, $45 billion of TARP, or 6.4%

"Sympathy For Bob Rubin"

My God, this is awful.  I am waiting for something out of Citigroup and am being forced to watch CNBC cover this event.  They have this poor female correspondent standing outside Citi headquarters in the bone-chilling cold looking for "signs of activity".  Essentially she is seeing if Vikram Pandit's office lights are on (the're not) and counting the amount of catering delivery boys coming into the building.  Meanwhile, they have a panel of six folks all talking over each other at the same time.  I can't believe that this is the premier business network.  I also can't believe that I am missing the finale of HBO's "True Blood" for this.

They just don't get it.  They are arguing about the TARP.  Steve Liesman is saying, "This is America, if we can't get a price on an asset class there's something really wrong."  Actually maybe Liesman does get it!  I still say that there are definite indications on where a lot of these assets clear.  It's a horrible number, but it's the number.  Mark the assets down, take the hit, realistically reserve against future losses in the other business lines exposure to the rising consumer and corporate books and then get TARP capital.  End of story.

Now lets get to Bob Rubin.  It seems that Secretary Bob has been at the center of everything.  From stopping stronger regulation of the derivative markets, to helping overturn Glass Steagall, to standing by for ten years allowing, even cheer leading Citi's decent into hell.  Hell!  Bob Rubin is the Devil!  With that here is a great old clip of the Rolling Stones "Sympathy for the Devil".  Rubin is Mick Jagger of course, poor Brian Jones (its 1968 and he's about 27 cards short of a full deck at this point) mindlessly shaking the maracas is Chuck Prince.  Also check a very stoned John Lennon make a appearance! 

It's 5:30 PM on Sunday. Time for a Bailout!

In the last half hour stories have begun to circulate around potential plans to save Citigroup.  The common theme is centered around Citi's portfolio of residential and commercial mortgage backed "troubled" assets.  Perhaps Treasury (which includes the FDIC) and the Fed are contemplating the type of deal that UBS got from the Swiss Central Bank last month.  In return for a large capital infusion, UBS moved approximately $59 billion of "troubled assets" off their books to the central bank, took the writedown and received a capital infusion that gave the central bank a 9% interest in the bank. The Wall Street Journal is reporting that this type of plan is in the works (though they do not mention controlling interest for Treasury)  WSJ "Bad Bank" . 

The New YorkTimes NYT Story is talking about a different twist whereby Treasury absorbs losses (through the FDIC) over a certain amount in exchange for equity interest in Citi.  This sounds a bit like the deal Citi was going to get from Treasury and the FDIC when they launched their unsuccessful attempt to purchase Wachovia. 

Personally, I would rather have Citi, and everyone else write garbage assets down to their correct, garbage levels, ring fence the assets on their own balance sheet and then take a capital infusion from Treasury through the TARP.  Treasury can't reverse course now and start buying these assets.  It would completely shatter their credibility.   There's been a lot of crying and hand wringing that Treasury's U-turn on the decision to buy structured assets has destroyed the value of these assets.  That is complete nonsense.  These assets, until they are marked down to the level where real money buyers will purchase them, are overvalued.  If the only reason that these assets had a temporary increase in value was because the Treasury was going to overpay for them, then that's ridiculous.  We need a Citi balance sheet that reflects the true market value of these assets as well as proper reserves for the losses coming down the pike, due to the deteriorating global economy.  That will give us a real sense of Citi's capital position.  From there the TARP plugs the hole to stabilize Citi.  Citi is too big to fail and this is what needs to be done.

Time For a Trip Down Citi-Memory Lane With Gary Crittenden!

Considering what's happening to Citigroup and considering that this post I wrote July of this year contains one of my top three "Little Rascals" scenes EVER, here's Crittenden Says Off-Balance Sheet Risks are "Well in Hand."

Its Friday. Its Cold Out. Its Fall. Its Time for Big Dick's Picks!

Editors Note--Another 3-3 week for the Big Man, Big Dick. Now if you had that kind of record in your other investments last week, you'd be pretty happy. But not Big D. He strives for excellence like the 1970s Oakland Raiders. Or should I say Raaaaaaaaayyyyyy-duuuuuuuuuuuhhhhhsssss? Big Dick should be breaking out of his 3-3 record this weekend and he is wasting no time. Take it away Big Dick!--R.B.

Yes Richie, 3-3 again. But you're right I feel like we will be breaking out of this "lull" right away. We start with the "TV Dinner Special" at 6pm eastern tonight. The BUFFALO BULLS (yes the BULLS not the BILLS this is college football) are hot as a pistol. Bowling Green? Not so much. Take the +4 with BUFFALO. On Saturday, NC STATE is at Unc in their annual rivalry game. NC STATE is getting 11 points. Smells like too many in a rivalry game. TAKE the WOLFPACK of NC STATE +11! Finally in the college, UTEP is a good dog, covering 11 of their last 15 chances. They play a defenseless Houston team and get 15 points. Take the sturdy UTEP!

On Sunday, it looks like a lot of defense in the NEW ENGLAND and MIAMI game. 42 points is a lot. UNDER! ARIZONA and the GIANTS can put up a lot of points. Even though the total is high at 48 we still say OVER!! Finally, everyone thinks the Dallas Cowboys are "back". They might be but so are the 49ERS of SAN FRANCISCO with their new coach and new QB. The line is a juicy 10.5. Big D says TAKE SAN FRAN in Big D.

So to recap: Tonight: BUFFALO+4 @ Bowling Green, Tomorrow: NCSTATE +11 @ unc, UTEP+15 @ Houston. Sunday: UNDER 42 MIA/NE, OVER 48 NYG/AZ, SAN FRAN+10.5 @ Dallas. Good luck and god bless.

What is a "Money Center" Bank Really Worth?

This post is more of a question to you all out there.  I caught myself yesterday saying, "Wow, if you took Goldman, Merrill, Morgan Stanley and Citi and added up their combined market capitalizations, they would be worth less than JPM Chase."  I started thinking things like, "these four companies together aren't EVEN worth $87 billion (JPM Chase's market cap.), that's CHEAP!" Then I caught myself and asked, "Should JPM Chase, or any big money center bank be worth $87 billion?"  I started compiling a list of things these big guys did (and I include GS, MER and MS in this category) to make lots of money, that don't exist anymore or are severely crippled;

1. Underwriting Structured Credit -  What we refer to as the "Sausage Factory".  The ability to structure trillions of consumer and commercial debt and essentially buy for a dime, sell for a quarter, is over....kaput.  Not only is the amount of revenue these massive operations produced shut down, but the once valuable enterprises of analytics, structurers, traders, back office, clearing, etc is no longer of much value simply because the business no longer exists.
2. Hedge Fund Prime Brokerage - With hedge funds shrinking dramatically, the great amount of revenue banks got acting as the hedge fund community's banker and broker will shrink dramatically as well.
3. Proprietary Trading - This "skill" will be hampered by the repeated lesson that paying prop. groups six to ten percent of their trading P&L in good years and then not being able to claw anything back in the year where they blow the prior three years profits is a losing proposition.  Additionally, hedge funds were a great source of liquidity and idea generation for banks.  That will hurt bank trading as well as the hedge fund world shrinks.  Additionally, banks used to be able to tout their "in-house" hedge funds as accretive (love that word).  Not anymore. 
4. Off-Balance Sheet Usage - The sham that was SIVs, VIEs,QSPEs, etc., is over.  In the glory years banks were creating structures nearly half the size of their balance sheets that threw off tremendous amounts of cashflow and revenue against a tiny sliver of capital, all off the balance sheet.  Of course we now know that those earning were a mirage and all those "off-balance sheet" assets are now coming onto the balance sheet.
5. Municipal Finance - It appears that the huge sums of money banks made off the municipalities in the way of underwriting fees and the sale of associated "hedges" is over.  So are the profitable "auctions" for variable rate municipal debt.  These were all big money makers.  No more.
6. Greater regulation and higher deposit insurance costs (remember the FDIC needs to receive more in insurance premiums from banks due to the increase in deposit insurance for interest and non-interest bearing accounts.)  I assume that this will be a net large cost to banks.  With greater regulations will probably come less leverage as well.

That's what I am thinking about. There's probably some that I've missed.  It's your job to come up with more (or less if I'm wrong)!  Anyway, if you take away the above mentioned huge sources of what was once considered value, add the projection of a deep, global recession as well as a discount for any other "hidden bodies" on the big bank balance sheets, is a bank like JPM Chase really worth $80+billion?  Is Goldman worth $26 billion?  Is Morgan Stanley worth $10 billion.  I don't think so.  Would love to hear your thoughts.

I'm No Psychic, But I Play One On This Blog

I'm going to let you in on a little secret. I look at fundamental stuff (like revenue, industry trends, profit margins, etc.) when I look at companies to invest in. I also look at the "technicals". "Technicals" can get pretty complicated but for our purposes today lets talk about charts. The charts I look at I like to refer to as "Tea Leafs". As in reading the "tea leafs". Now I couldve called them "Tarot Cards" and hung out with Dionne Warwick and the other psychics but I went another way. As some might say, "I do NOT know the way to San Jose".

Well I look at these individual stock charts and when certain lines cross in my top secret proprietary model, I strike. So a few weeks ago when I started giving the bullish signals, guess what was going on? My tea leafs (charts) were moving in the right direction. But guess why I kept saying not yet not yet? Becasue the charts hadnt quite got to my magical number yet. Well guess what? This recent smashing of the markets have made my charts look uglier. So although we could still be close to giving out the "Monkeybusinessblog.com buy signal", its still going to take some time. But you know what? It doesnt bother me because I havent stuck my foot in yet. Maybe my toe, with ANNALY CAPITAL (NLY) but not my foot or my leg. And it delights me to no end, that when I do enter the game now, it will be at even lower prices. I stay very disciplined and patient and watch the money come to poppa. Now I'm humming that wonderful Detroit Spinners song "Then Came You" featuring Dionne Warwick also on vocals. As in, "i never knew love befoooooooooooooore, then came you. Then came you!"

Finally! A Bank CEO and COB Mans Up and Says Sorry.

Well, maybe my faith in bank senior management will regain a pulse.  A weak pulse mind you, but a pulse.  Last night Royal Bank of Scotland Chairman Tom McKillop (he's a "Sir" but we don't do that at Monkey Business) and former CEO Fred Goodwin (also a "Sir") gave a sincere apology to shareholders.  Here is the story from FT Alphaville  RBS Management Apologizes