MonkeyBusinessBlog

F**king Banksters!

Alright, it's official.  There will be a day, and that day is coming soon when the banks in this country push enough people too far.  I just got off the phone with my bank, who I have banked with for the last five years, and I am so pissed off they have me walking around my "workspace" muttering like a mad man.

I have banked with JPM Chase for 5 years.  During those 5 wonderful years, because I like liquidity, I kept a nice balance in a savings account.  I also took out a line of credit with JPM Chase last year for a nice low rate to keep my liquidity in these uncertain times.  I know it cost a little something but late last spring I thought it best to be prepared.  Additionally, because I knew last year that banks like JPM Chase were giving people lines and then slashing the unused portion to free up potential balance sheet use, I took the whole line down the second after we signed the papers!

Now I am selling my house and renting because quite frankly, I am going to cry like a little girl if I'm still in my house a year from now and my equity stake declines by another 20-30% AND my real estate taxes go up.  So we got a good sale off and now we are going to rent and protect our equity.  Anyway, I call up Chase to get the payoff information on my line.  Low and behold, they are charging me a $1,000 fee because I'm "prepaying the line".  I said, "Are you guys kidding me?  You guys are cutting peoples lines left and right and I'm doing it for you.  Also, you got me at Prime minus 50 basis points!  I know your making a smidgen off me, but at the end of the day I'm one less NY real estate exposure that you have to worry about."

Now naturally, I am probably saying all this to a 25 year old girl in Mumbai but still!  Then I say, "Do you realize that I'm going to get a nice check when I close.  My FDIC limit was going to stay at your bank at some fabulous 13 month interest rate of .9%  I'm lending you money for practically nothing! 

You want me to walk over to your friends at Wells or BofA and give them the money?"  Of course all I get is, "I'm sorry sir."  Finally I just say, "Look, I'm sorry. I shouldn't take it out on you, but you have to admit it is a pretty bad business move.  Here's the number to fax to my attorney."  The nice Indian girl says, "Oh, we have a fax charge of $30!"    "What???  $30 bucks to type in a fax number and send the payoff!  Are you guys nuts??  "Oh, and sir, just so you know that the fax will probably get to your attorney in 24 hours."  I just started laughing and said, "Ok, did you just make that one up because I'm being an A-hole?"  She says, "Oh no sir, that's standard policy."  Then before hanging up she told me that I qualified for a high limit Visa card!  F**KING BANKSTAHS!

After All We Aren't Communists.......Are We?!

Ahh the famous line from Barzini in Godfather I when at the meeting of the "5 families" and he suggests that the families pay Don Corleone for use of his "services", "after all we are not communists", which was met with roars of laughter. That Barzini was funny. Then he was dead about 2 scenes later. Whacked by the new Don Corleone's people. Take that funny guy.

Anyhoo, was at my favorite watering hole last night and the "City Examiners" had been by a few days ago and fined the restaurant for having too many smoking tables. OUTSIDE! Look I know the whole thing about 2nd hand smoke and its nice to save the lives of busboys and waiters but I thought that's why Mayor Bloomberg outlawed smoking......INDOORS! Now they are moving outdoors too? Which is hysterical because you can smoke outdoors at the restaurant just at one specified table. So its not like the smoke still wont be there and if you want to stand up outside you can smoke! So lets get this straight, if you stand up outside like a real degenerate, you can smoke. But if you want to sit down and be dignified (and perhaps ORDER a ton more food and drinks than you can standing up--with no table--in this bad economy) you are outta luck unless you get the 4 seat smoking table. I wont even say the name of the place because I dont want them to lose any more business for these stupid, business killing rules. Look if people want to get cancer from smoking after all the warnings, let them do it. Its a free country still right? Sometimes I wonder.

In further anti-capitalist news, this guy Feinberg, Obama's "compensation czar" is starting to rattle his saber. He's going to be personally checking the top 75 paid guys and gals at the 7 major institutions that were saved last year with TARP money. Whats he gonna do lower the pay if he doesnt like it? What if you are 76th on the list and Feinberg drops numbers 65 to 75 lower than you? Does that make you sad, happy, bewildered? Or does he drop you too? Slippery slope if you ask me. Look I'm all for paying people ooon gots (technical term) if they stink up the joint, but if they are bringing it in, they should get paid. Otherwise that's another slippery slope where everyone makes the same and no one works hard and drinks booze since they are all depressed. Sound familiar? Sure it does. That's Communist Russia 1950s. Heads up.

"Seven Out, Take the Pass, Pay the Dont's"

For those of you who play craps in Vegas and play BACKING the shooter, that headline above is the worst thing you could ever here. Not even, "your mother does bad things in hell" (and I cleaned that up from "The Exorcist") could be worse than that line starting with "Seven Out" for crap players. For those who don't play or don't know the crap game, this is the time when everyone loses all their money wagered on the table. Not good.

Speaking of not good, the June gambling revenue numbers just came out for Las Vegas. In May, it was less than bad news. As in down, "only" 6.4% from the previous May's total. Here comes June......down 15% from last June. Sheesh. Seven Out. Not good. Step backwards even. No bottoming out.

I know there are many arguments against this but I like the old "as Vegas goes, so goes America" theory. Housing is still kinda "crappy" there too right? Tread carefully all. Sin City can provide some good market indicators. Watch the numbers coming out of Vegas until you hear someone yell "Eleven! Yo Eleven! Winner!"

This Has Gotten Out of Hand.

ENRON

What exactly do you think of when you see the above?  Whatever it is, I'm sure it's not something pleasant. Before the banking sector really showed us what wanton financial deception and destruction was all about, Enron was our poster child for everything that a modern company could do harm its country. Not only did they wipe out countless investors, take down one of the nation's largest public accounting firms (Arthur Anderson), bruise the credibility of countless financial institutions (unfortunately, that was a nice peek into the future that we should have taken advantage of), Enron actually created severe energy shortages in the nation in order to make windfall profits!  If these guys were named Mohammad or Akbar as opposed to Kenny and Jeff we would have thrown them into Gitmo with the other terrorists!  

Therefore, one would imagine that anyone that was a senior player with Enron would be persona-non-grata in the halls of government.  Well, as we talked about last Friday afternoon, the Fed doesn't feel that someone who was ENRON'S CHIEF LOBBYIST IN WASHINGTON D.C. should be excluded from positions of influence and power.  From Bloomberg News;

The Federal Reserve intends to hire a veteran lobbyist as it seeks to counter skepticism in Congress about the central bank’s growing power over the U.S. financial system, people familiar with the matter said.

Linda Robertson currently handles government, community and public affairs at Johns Hopkins University in Baltimore, and headed the Washington lobbying office of Enron Corp., the energy trading company that collapsed in 2002 after an accounting scandal. She was also an adviser to all three of the Clinton administration’s Treasury secretaries.

First of all, the Fed needing their own internal lobbyist is pretty funny.  However, I can see the need. The Fed is supposed to be independent of all government influence.  The oversight of the Fed is non-existent.  Central banker independence is something that has scared many smart people for centuries. In times like these where the Fed is launching multi-$trilllion financing facilities and engaging in the purchase of $trillions of Treasury and mortgage backed securities, the Fed's independence even scares the Fed!  So it makes sense that they would want to hire a liaison to explain to Congress what they are doing and why.  However, perhaps they would hire someone who actually understands things like how markets trade, how our system of asset-financing works..silly stuff like that.  Nope!  Instead they hire a crackerjack lobbyist!  And not just anyone mind you, but ENRON'S crackerjack lobbyist.  The fact that Ms. Robertson bounced from her Treasury post to Enron when the Democrats lost the White House is just another example of what President Obama is supposed to be against.

Some of you may say, "Eric, the Fed is independent.  They made this personnel choice so don't go blaming it on the Obama Administration."  To that I would say, "Don't you find it troubling that Ms. Robertson worked closely for Larry Summers and Bob Rubin?  Do you think Ben Bernanke had Ms. Robertson at the tip of his tongue when it came time to hire his internal lobbyist? I doubt it."  

Somehow, I think Mr. Summers had a big hand in recommending Ms. Robertson to the Fed.  You would think these boys would want to stay away from someone as potentially toxic as Enron's chief lobbyist. After all, it was Bob Rubin who, back in late 2001, as head of Citigroup's Executive Committee,  made what was universally deemed a highly inappropriate phone call to Senior Treasury official Peter Fisher, asking Treasury to intervene with the major bond rating agencies.  The rating agencies, under the backdrop of a growing ENRON collapse, were ready to sharply downgrade Enron.  Rubin asked Treasury to advise the rating agencies against an immediate downgrade of Enron debt on the grounds of.......?  There were no legal grounds.  Enron was a giant scam and they were insolvent.  Citi had huge exposure and Rubin tried to use his influence to keep the Enron charade going.

Did you forget about that one?  We didn't. They want to dig all that back up to show another example of "influence abuse"?  Be our guest!  These guys, Rubin&Summers Inc., are so smug, so arrogant and so out of touch, that it probably never occurred to them that this move might be viewed by the public as getting another golden shower from this gang that was supposed to offer hope and change.  How many times have we heard President Obama, both on the campaign trail and now as President say;

 "We want to change the way things are done in Washington." 

This isn't change Mr. President.  It's just more of the same and maybe even worse.  Your financial team is making you look like you're either full of it or clueless.    

Zombie Banks Are Bad Enough. Now a Zombie Bank Army?

This Chrysler announcement yesterday has left me very troubled.  If I am thinking about this correctly, President Obama and Car Czar Rattner tried to ram through a deal that was grossly in favor of the UAW at the expense of the company's creditors, secured and unsecured.  When it came time to stand up to The Administration to fight for their rights, creditors like Perella Weinberg Partners stood up and suddenly found their fellow creditors, some of the nations largest banks, still sitting in their chairs, mumbling incoherently and staring at their shoes.  These are the TARP banks!  This vote was going to be like the kind they have in North Korea every few years!  The TARP banks were already given their marching orders;

• Vote yes for the government plan.
• Send a message to the rest of your brethren that they better get in line.

The non-TARP creditors didn't get in line and ended up getting called out on the carpet by the President worse than the idiot in his administration who flew a jumbo jet up the Hudson at downtown Manhattan this past Monday!  What does tell this you about buying distressed debt?  Who the hell knows what the government has in store, what their agenda is, and who might be pulling strings for them.  The government has a zombie bank ARMY now!  If I were a firm like Perella and Weinberg I would really start to worry about my banking relationships.  Who knows if behind closed doors these "rogue" creditors are getting told, "Good luck getting financing in this town again.  We're not going to forget what you did here today and we'll make sure our Zombie Bank Army (the "ZBA"!!) won't forget either."

Suddenly, I really can see Paulson and Bernanke telling Ken Lewis that he better take Merrill AS IS, or else!  I wonder if we can get  "Night of The Living Dead" creator George Romero to work on the movie version of "The Attack of the Obama Zombie Bank Army!"

IBM Says I Got Your Stock Market Problems Right Here

Stocks were poised to open lower. What with swine flu, banks that dont have any money, car companies being owned by the government, more layoffs, and I can go on. But somebody didn't send that memo to "Big Blue".

Who is "Big Blue" you ask? International Business Machines. IBM. They do computers. A lot of em. Well they just now announced, "Hi we got so much money we are RAISING our dividend 10% and we are going to probably buy up to $3bn of our stock back. Because its so cheap. And we have money".  

Stocks arent up. But they arent down like they could've been. So today's "monkey business" thank you goes to IBM.  Wish we had bought the stock 5 months ago when it was at 70. Its at 101 and climbing now. As they used to say in Lake Placid, NY in February of 1980, "U-S-A! U-S-A!" 

CNBC's Melissa Lee & Porn. Suddenly My Day is Looking Up!

I continue to gain respect CNBC as I maintain my semi-invalid status.  The financial reporting is still pretty atrocious, but it is getting to the point where it's really funny.  This morning as the horrific jobs number came out the big question on CNBC was, "Well, the Dow futures are up on this news, maybe this is some relief that the non-farm number wasn't as bad as some thought."  I swear, before I can say anything the lovely Mrs. Salzman says;

 "What are these idiots talking about?  They just told you that they revised the prior two months numbers down 150k!  Why would you believe this number?  And didn't you tell me yesterday that unemployment offices around the country had their web-site and phone banks go down because there's too many people trying to file?"

I'm so proud.  I've turned my wife into a "yelling at the TV" cynic just like me!

Anyway, someone had the foresight to send my favorite CNBC reporter, Melissa Lee to Las Vegas to cover the National Porn Convention.  Great piece here, check it out;

http://www.cnbc.com/id/15840232?video=991008568

The Old Man Had too Much Wine.....and Ford

Remember when Frankie Pentangelli goes up to the Lake Tahoe home of Michael Corleone in the Godfather II to express his concerns about not being able to run his family back in NY the way he wanted? He tells Mike, played by Al Pacino, that he wants to talk business like they did in the old days. He doesn't really care for drinking champagne......champagne cocktails in the Sierra Mountains. Then he leaves abruptly when he's drunk and makes it clear he's pissed off when he doesnt get what he wants from Mike. Al Neri, one of Mike's henchman, then asks Mike, "you want me to take care of this?" Mike says, "No its ok, the old man had too much wine."

Well I think a similar thing happened with one of our favorite real life characters this week, Kirk Kerkorian. He mightve had too much wine but he certainly had too much Ford. As in Ford Motor Company. As in 140 million shares. At prices a lot higher then the $2.40 that he sold 7.3mm of his Ford holding yesterday, according to Bloomberg News this a.m. All told the big bopper through his Tracinda Holding Corp might lose $700mm. Thats a lotta Ford F-150 Pickups if you know what I mean.

So the lesson here today is even if you are worth $11 billion (before yesterday I believe), when you go searching for "value stocks" that are at depressed prices, they can still go lower if they have a crappy business model. Now we shouldnt cry too much for the 91 year old Kirk, cause back in 2003 when he "raided" Chrysler, it looks like he MADE $2.7bn! So that's not a bad track record in the auto industry, all things being equal. Ford stock is at about $2.23 right now and I still wouldn't recommend it. Kids dont try this at home.....

Funding is Still Completely Frozen.

Despite all the strategies the Fed and Treasury are working to deploy, bank balance sheets are frozen up solid.  I'm going to give you an example of how bad it is.  I am not going to get too technical, but in the multi-trillion Freddie Mac and Fannie Mae mortgage backed securities markets there is such a thing as a "dollar-roll".  All you need to know is that it is a funding mechanism.  A VERY LARGE and LIQUID funding mechanism.  Right now the dollar roll market implies a one month funding rate of about 5.52%.  The overnight Fed Funds rate is 1.5% and one-month Libor (unsecured funding) is 4.29% (at least that is what they tell us. It is rumored that the British Bankers Association is using the "anus model" to come up with a daily rate)

To quote Chief Brody from "Jaws", "we're gonna need a bigger boat!"

Eric and I visiting the People

It looks like just one of us but its actually both of us waiting on tables in a Japanese restaurant. We have decided to see how the restaurant market is fairing in these wild economic times and to repay the thanks we had for the restaurant owner allowing the cameras in, we work for peanuts and green peas. Enjoy

Wells and Citi May Divide Wachovia

As a potential compromise, Citigroup and Wells Fargo may split Wachovia, Bloomberg News  is reporting this morning.  Citi would get the retail branches in the Mid-Atlantic and North East while Wells gets the branches in the South-East.  Of course the Godfather II scene where Hyman Roth judiciously divides up his empire comes to mind!  I wonder if "The Lake-View Road Boys" get a branch??!!

Anyway, it is pretty damn complicated how they are going to work this out.  At least Wachovia has to be feeling a little prettier now that the boys are fighting over her.  To add some insight here is a comment we received yesterday from of our readers that suggests, from a tax-payer perspective, Citi and Wells's bid may not be as starkly different as it appears upon first glance.  Our reader discloses that he is a Citigroup shareholder;

Either deal costs the US taxpayer. The taxpayer has given every bank an implicit put to sell troubled assets to the TARP - making the taxpayer's liability unlimited for these assets of both banks. The difference is how you deal with the starting losses.

The IRS regulation that came out on the 30th allows when purchasing or merging an entire bank you can use favorable tax treatment to write-off the losses you incur (that's Wells Fargo) whereas it does not apply when only buying a portion (that's Citi).

If Citigroup were to purchase, Citi takes the first $42 billion in losses, $30 immediately, plus pays the FDIC another $12 billion in preferred stock plus yearly dividends to insure the rest (even though the TARP has already done that). Assuming Wachovia has being doing its marks right, the portfolio of $370 billion would have to have a loss rate of greater then 15% further before the taxpayer got hit.

Wells Fargo if it gets Wachovia will take the losses immediately and apply them through favorable tax treatment to offset tax earnings stealing it out of the IRS revenue. However, by buying Wachovia and saying that it won't cost the taxpayer a dime is faulty logic. The only way for it not to cost the taxpayer is for Wells to give up TARP protection and not take advantage to the tax treatment.

Since both firms have implicit puts to sell troubled assets its better to take the one that explicitly spells out what losses that will sustained and are rewarded for it with equity kickers, the Citi plan. In exchange for not having the FDIC make an explicit agreement - Wells Fargo will be deducting off their taxes. This does not resolve the implicit put to sell to TARP. Ultimately, this is why its bad deal.

Yes, I am a shareholder and that biases my argument but its the way I see it. If Wells is willing to walk away from tax treatment and not use the TARP to sell Wachoiva assets then I'm fine with the Wells's purchases - it would be better for the taxpayer. However, I do demand a portion of the upside Wachovia received, if Citi had not stepped in last weekend - there would be no Wachovia.

New York State Issues Emergency Injunction on Wells Bid for Wachovia

New York State Supreme Court Judge Charles Ramos issued a emergency injunction last night, stopping Wachovia from going ahead and accepting a all-in, non-government assisted, $15.1 billion bid from Wells Fargo until both Citi and Wells appear before the court October 10.  Citi was seeking $60 billion in damages from Wells, after Wells trumped Citi's $2.1 billion bid for Wachovia.  Citi's bid included a backstop from the FDIC against losses in Wachovia's loan book, greater than $42 billion.  Citi, in turn, agreed to issue $12 billion of preferred stock to the FDIC for the credit back-stop.

Hmm, I don't know about you but it looks like Wells has a better deal for everyone at the table, except for Citi.  And to be honest, Citi is still reeling from losses in multiple asset books, short capital and long immense distractions.  I know Citi wants those juicy retail deposits of Wachovia, but this a company that needs desperately to get it's act together, as opposed to franchise building.  It may be best for Citi too!  Anyway, I guess we will have to let the drama build until October 10 to see what the judge says.  It would almost seem Orwellian if the judge ruled in Citi's favor, especially if Citi doesn't sweeten their bid.

Wells Fargo to Buy Wachovia for $15 Billion in Unassisted Deal!

It just came across the wire that Wells Fargo is buying Wachovia for $15 billion in a non-government assisted deal!  Citi is out and Wells is in.  Wachovia trading $7 now.  Wells will be taking the entire enchillada without any government assistance.  They better pray they can offload the Option ARM portfolio on us!

My worry though is that Citi had announced they were going to take writedowns of $5 to $10 billion in the third quarter.  They needed to raise at least $10 billion in capital for this deal.  They may have got the feel that raising that capital was going to be real tough.  Our buddy Axel just commented with regard to Citi getting out.  "It's like the Little Rascals episode where the horse, 'Algebra' goes into a big fancy house and Stymie tells him, 'Algebra, this ain't no place for you!"

"Main Street" Corporate America Feeling the Credit Pinch Like Never Before.

Great article from Bloomberg New today, "Treasurers Try to Keep Credit With 'Hardball' Banks."  The piece illustrates how cash and capital starved banks are using any excuse to either not renew lines of credit with long-time corporate customers, or use any clause and covenant possible to jack up the fees for lines of credit.  As we have said many times, this short term funding is the life's blood of our economy.  Most of the companies in this report do not have access to the Commercial Paper ("CP") markets.  Even if they did, that market is in a state of arrest anyway.  Yesterday it was revealed that the CP market shrunk $95 billion in a week.

With their businesses already feeling the pinch of a slowing economy, the sky-rocketing cost of credit is killing these guys.  One executive of a chemical company summed it up perfectly;

"These are very different circumstances than many of us have dealt with before.  We are all having to learn everyday about provisions that were buried in documents executed fifteen years before."

Banks have the ability to hit "market disruption" clauses in lines of credit and senior loans to companies.  If a bank lends to a company at 3-month Libor plus 1%, but the bank's true three-month funding costs are significantly higher than 3-month Libor (which they are as it has been shown for at least a year now that Libor is low balling the true cost of funds), the bank can change the benchmark rate to reflect it's real cost of funds.  The bank can also jack up the premium they charge to keep the line of credit open.

Companies (and this goes for companies in Europe as well) are seeing a spike in "technical defaults".  If debt to equity ratios rise to trigger covenants or the company is late submitting required reports, banks are using the triggers to either renegotiate higher rates and fees, or pulling the lines all together.  This type of action can obviously create a vicious cycle.  As the economy slows, debt to equity triggers get hit as equity declines, funding costs increase sharply, which in turn hits debt to equity triggers again, etc, etc...  This is very familiar to what we saw when the residential and commercial mortgage backed security market seized up.  Leveraged players would have their bonds marked lower, triggering margin calls, which would trigger sales, which would lower market prices, which would trigger more sales.......

This has not happened on a grand scale such as this since the 1930's.  You want a history lesson?  You can get one right now for free because it's happening right in front of our eyes.

Overnight Update

UBS says they will post a "small" third-quarter profit!  If they pull this off it will be the first winning quarter in more than a year.  UBS has been very aggressive, relative to their competitors, in writing down and getting rid of structured residential and commercial mortgage assets.  So there is some good news!  UBS has a long way to go to back to fifty-percent of what they were two-years ago, but maybe, just maybe, they have bottomed.

The bad news is money markets are still frozen.  The cost of borrowing euros for three months, "Euribor", rose to another record, 5.33%.  One month Euribor also rose to a record 5.12%  Banks are still afraid to lend to one another for more than a week.  I think the market will not even consider that we have bottomed or turned the corner in the money-market freeze until they see the U.S. House of Representatives pass the rescue legislation, hopefully on Friday.  Libor just posted, showing 3-month Libor increasing another 5 basis points to 4.207%.  Traders report that the market is all one way, all bids and no offers.  Also Libor/OIS spreads have climbed to a record 2.60%.  Yikes.

We will be on Strategy Room today from 9am to 1pm.  Here is the link that should get you there.  Sorry, we've had some problems getting the right link out.  User error!

http://www.foxnews.com/video2/live.html?chanId=3

What's Next? We Have Work to Do.

Alright, lets think about what's next now that Congress wants to re-evaluate the bill and see what happens to the economy.  We know that the life's blood of the economy is seizing up.  The Fed is turning on the liquidity full blast, but the banks (think of them as a fire hose) have so many holes that the water can't get to the fire no matter how hard they push the liquidity pedal.  This has been going on since August of last year and the Fed and other central banks have been trying to hold it together with their different lending facilities.  Here's what I think needs to be done IMMEDIATELY;

• The bill that the House just rejected had the provision for the Federal Reserve to pay interest on deposits from member banks.  While 435 morons in Congress don't know what that means, we do.  Banks with excess cash, through some arm twisting and by offering nice rates of interest, should be persuaded to put some cash on deposit with the Fed for term (3-month, 6-month).  The hoarding of cash has to ease, at least a little bit to get to banks who are under the most pressure.  The provision of the bill that allows the Fed to pay interest on deposits should be separated and signed into law immediately.
• The Fed and the Treasury have to get liquidity to the commercial paper market.  Banks are hoarding cash.  Between deposit outflows (which if you listen to Nouriel Roubini will come from foreign depositors to the tune of a $ trillion), the anticipation of more losses from commercial mortgages, corporate loans, credit cards and other consumer lending, a complete distrust of just about any and all counterparties, and lines of credit extended to corporate borrowers getting drawn down as the CP market is frozen.  I think the Fed has to go direct to the CP markets to keep the finance flowing.  We've already bought two GSEs an insurance company and a broker dealer, why the hell not become a short-term financier of corporate America!
• Announce Plan B of the Troubled Asset Relief Plan (TARP).  The plan we here at Monkey Business proposed.  Lets get the massive amount of capital sitting on the side lines to start putting bids on this garbage destroying bank balance sheets.  Let them buy the assets at market price, which is going to be nasty, but fair.  Let's quantify the difference between cost and market, and then infuse the difference into the participating institutions in the form of preferred stock or better, super senior debt.  The Treasury's interest stands in front of everyone in the capital structure.  If this means turning sub-debt or even existing senior debt into equity, so be it. In fact, that should happen to increase capital for participating institutions.  Next time don't so careless with your balance sheets. 

Market Color & Some Thoughts.

This morning I have been polling different buddies on various trading desks, expecting them to tell me that everything is in complete chaos.  The best answer was, "No, everyone is exhausted and doesn't know what to do."  The good news I take out of this is, this may be a sign of capitulation!  Seriously, in markets like this, when guys who are used to giving real strong opinions, both with their mouths and their money, just throw their hands up and say "F- it!" we could actually be reaching the bottom....maybe.

What frightens me is what happens between now and the weeks that Treasury actually devises the operating plan (assuming the bailout is passed)?  Everyone is still scared sh*tless.  The Treasury's program to back-stop money market mutual funds starts today so presumably that should aid the commercial paper market, the lifesblood of our economy.  Also, if the bailout bill is passed, the Fed will be able to pay interest on bank's excess reserves.  This should somewhat reduce the hoarding of cash as the Fed becomes the credit go between for the banking sector.  However, right now, unless you get events like Wamu and Wachovia, which shows the failing banks (although technically, FDIC says Wachovia didn't fail) dirty laundry, no one trusts anyone's books.  Therefore, the commercial paper markets are still frozen up.  With the cp markets frozen, companies with funding lines to commercial banks are trying to hit those lines.  The banks in turn are having a hard time coming up with the funds to meet those demands.

Once Paulson and Bernanke put the doomsday scenario in motion, it's starting to happen and it may not wait for Treasury to come up with their plan and start executing.  I am wondering if we see government intervention in the commercial paper markets. 

Meanwhile in Other News, Negotiatons for Wachovia Intensify

According to the New York Times, Wachovia is in discussion with Citigroup and Wells Fargo about a "merger" with one of the two banks.  The Federal Reserve is very involved with President of The New York Fed, Tim Geithner bringing the parties together.  Senior official from Treasury and the FDIC are also involved.  Wachovia CEO Robert Steel arrived in New York this morning to lead the negotiations for Wachovia personally.

Ah, Mr. Steel, we warned you not to get mixed up in Wachovia.  Mr. Steels predecessor, Kenny Thompson sunk the firm with the trade of a life time.  That is the life time of Herb Sandler at Golden West.  Golden West sold themselves to Wachovia in mid-2006, giving Wachovia the number one slot on the leader-board for Option ARMs.  The $122 billion portfolio, that may be the most diabolical mortgage product ever created has sunk Wachovia.  It really is a damn shame because Wachovia was a hell of a franchise.

Citi and Wells would both like to do a similar deal that JPM Chase did with Wamu last week.  That is, have the regulator seize the institution and then allow themselves to bid on Wachovia's retail deposits and assets.  Write-downs will be steep.  So far what we are hearing is the the Feds are pushing back on the seizure as Wachovia's position is not yet dire.  Lets hope news of the bailout buy Wachovia a little time.  However, we have all seen this before.  The bank continues to take hits to capital and defaults and loan loss reserves increase.  The stock price plunges making capital raises nearly impossible.  Meanwhile, the retail deposit base starts exiting, cash must be replaced with hot brokered money, and soon it's over.

It sucks but once you get caught in that spiral, there is not much you can do but pray for a suitor.  This business should be wrapped up in a couple of days I imagine.

Quick Update From CDS Market

This morning there is very heavy pressure on Wachovia and Morgan Stanley in the CDS markets.  Since Monday, the price of protection has exploded.  With Wamu's $54 billion Option Arm portfolio now in the public view (JPM wrote down $31 billion of the total residential loan portfolio.  I  believe that the portfolio already had significant reserves against it) at a steep discount, all eyes are now on Wachovia's $122 billion Option ARM portfolio.  As we have said here many times, the market value of that portfolio is 60-00, best case, leaving Wachovia significantly under-capitalized.  Credit Default Swaps (CDS) are currently trading twenty-seven points up front, assuming +500 basis points running.  On Monday, CDS was trading with no points up front (par), +460 basis points!!

Morgan Stanley is under pressure as the combination of stories of large hedge fund prime brokerage cash outflows, the stalled bailout talks and possibly the fact that Wamu's juicy retail deposits (a potential source of stable funding) was snapped up by JPM Chase.  CDS on Stanley opened up this morning, twenty points up front, assuming +500 basis points running.  On Monday, this traded with no points up front, +550 basis points.

Wamu Seized By Regulators & JPM Chase Gets a Steal.

Wow!  I go out one night thinking the banking system is sleeping safely under the warm security blanket of a federal bailout, I come home and Wamu fails and the bailout deal looks like its back to square one.  Lets deal with Wamu first.  Frankly, I said to Richie tonight when we heard the news, "Can you believe that Wamu actually outlasted Freddie Mac, Fannie Mae, Bear Stearns, Lehman, Merrill and AIG??"  Wamu has been a dead man walking for quite some time now.  Their loan portfolio was a shop of horrors that made Wachovia and AIG look like Fort Knox.  Between the $54 billion Option ARMS (which we have described as the gift that keeps on giving, like herpes) and $53 billion poorly underwritten Home Equity Lines of Credit and second liens, it should have been over a lot sooner.  Poor TPG and David Bonderman.  They put $7 billion into Wamu this spring despite us yelling, "David, don't do it, this ain't 1989 and they aren't American Savings!  Put your wallet away and don't go to the light!" 

Meanwhile, JPM Chase essentially pays only 1.9 billion for Wamu's $188 billion customer deposits.  Those are some great retail deposits.  I'm surprised they didn't go to Goldman or Morgan Stanley.  I hope the FHLB System is okay because they are Wamu's biggest creditor.  Those advances are very well collateralized....I think.  JPM is taking the $176 billion loan portfolio (which includes the Option ARM and HELOCs) and writing the portfolio down by $31 billion.  Seperately, JPM announced they will raise $8 billion in common stock.

Let's Take Our Time and Get The Bailout as Right as We Can Get it

It was a near given that after Friday's euphoria (partially manipulated by the SEC), over Treasury's announcement of a $700 billion plan to purchase "value-challenged" assets, the world was going to wake up Monday and say,

• "They're going to do what?" 
• "How are they going to do that?" 
• "Who's going to pay for that?"
• "The whole plan is on two sheets of paper?"

So naturally yesterday, we had a collective crap in our pants, and despite the SEC's short selling ban on eight hundred "financial" stocks (the list of names is growing everyday as more companies are asking "what about us?") equities dropped about four percent, the dollar was destroyed and oil had its biggest one-day increase due to a massive short squeeze in the October contracts and due to the falling dollar.  It was a bad day.  However, lets look at the positives;

1. Goldman Sachs and Morgan Stanley became commercial banks!  While these last two investment banks already had access to the Fed's Primary Dealer Credit Facility with regards to liquidity, I think this move inspires more confidence in the companies and should stop hedge fund prime broker outflows from Morgan Stanley.
2. Mitsubishi UFJ announced that they are ready to put as much as $9 billion into Morgan Stanley.  Fresh capital, wooooohooooooo!  I am sure that Mitsubishi's confidence grew with Stanley's new bank charter as well as the promise of a Treasury bailout of tier III assets.  I wouldn't be surprised if there were a few winks from Treasury to get this deal done.
3. The Fed and Treasury put the fire out in the Money-Market Mutual fund arena through setting up a stop loss fund to insure that investors will be protected if their funds break-the-buck.  Perhaps this is the most important positive development as the run on these funds is what brought us to the edge of melt-down last Thursday.
4. The fact that Treasury actually announced that there will be a enormous bailout is a positive in and of itself.  We know it's coming for sure.

So, putting aside the possible unfairness that Treasury and the Fed essentially saved Morgan Stanley and maybe even Goldman {AUDIBLE GASP!} from the fates suffered by  Bear, Lehman and Merrill, in a macro sense it was a good move.  We have the money markets under some semblance of order (Relatively speaking. From a scale of 1 to 10, the market went from a zero to a two!) and we have a promise from Uncle Sam that help is on the way.  Therefore, I think we are better (again a relative term) than we were last week.

Now lets talk a little it about the bailout.  I think we have some time to get this thing as right as possible.  Remember, this plan is probably not going to raise capital in the banking sector and there's a good chance it will weaken it.  I look at this bailout like "Operation Overlord".  That was the code name for the invasion of France in 1944.  We told the Germans we were coming to kick their Nazi asses back to Berlin back in 1943.  We said were coming to liberate Europe once we were ready.  We then planned the invasion for nearly a year.  What if instead, Eisenhower proclaimed that we were coming in 1943 and then just sent the men into the beach with the promise to figure out a plan once the boys got in the boats?  Ridiculous right?  That's what I think we are doing with this bailout right now.  I'm not saying it will take a year to plan, or even six months.  But lets get it into the playbook before we rush in and start handing out tax-payer money.  The world knows we are coming.  That and the actions I listed above have bought us some time.

Lets figure out;

1. How are we going to go about buying these assets?  Is it going to be some sort of reverse bidding process?  Are we going to deal with specific types of mortgage bonds one at a time, maybe partnering up with Sovereign Wealth Funds and other pools of capital to ensure that once the trade is over, the bonds are gone for good and that the tax-payer didn't get stuck with every high print.  Whatever we do, we should have a comprehensive plan of attack.
2. Are we going to take equity stakes in banks that participate in the plan?  I'm not sure, but lets debate the issue.
3. Are we going to meld this plan with some sort of bankruptcy reform and The Housing Recovery Act of 2008?  Seems like the latter should definitely be working hand in hand with the bailout.  Lets stop being hysterical and figure out how to work these two vast sums of tax-payer money hand in hand so we don't end up trading against ourselves.
4. There has to be some sort of oversight.  I think that's an issue both Republicans and Democrats agree on.  The government has about one million lawyers, so lets get them drafting up proposals.

There's more but I'm tired.  My main point is, we told the huddled masses we are coming to save them.  Now lets come up with the best plan we can to do it.

Al Cervix..I Mean Mitsubishi UFJ to Buy up to Twenty Percent of Morgan Stanley. Now We're Talkin!

Now THIS is news.  The Japanese are buying!  This is going to be something to watch.  The Japanese, who stated just last week that they weren't interested, got very interested once Treasury launched it's $700 billion credit fund AND Morgan Stanley got it's bank charter.  Mitsubishi is probably counting on Treasury taking most of Stanley's garbage at levels that do not produce significant losses (and they are going to be PISSED if they don't!), and now they have a premier investment bank that can go out and stabilize their funding by slurping up retail core deposits by hard hit regional banks looking to increase capital.

If you're saying to yourself, "Wow, it really does sound like Uncle Sam just bailed out Morgan Stanley,"  you're right!  Tax payers are going to take Stanley out of assets at 75-00 on the dollar, probably ten points too high, just to get deals like this done.  But hey, we gave Hank the bazooka and he's going to use it.  At least somebody is making money.  Mitsubishi UFJ has arrived just like Al Cervix arrived at Bushwood!  Wooohooooooooo!

Troubled Asset Relief Act: Some Initial Thoughts.

My first reaction when I saw the "Legislative Proposal For Treasury Authority to Purchase Mortgage-Related Assets" on Saturday was, "Two pages?"  I was loading up the paper tray for a mind-numbing eighty-five pages of legal speak and legislator speak, thinking it would take the rest of the day trying to figure it out.  Nope, just two pages.  It's like a permission slip for Treasury to spend $700 billion on what has now been revised to, "any troubled assets", which I assume means CMBS, Leveraged Loans and all kinds of consumer credit loans and receivables. 

This scares me and I hope that Treasury is going to be able to adjust strategy quickly and efficiently as they see what works and what doesn't.  I think the one positive thing that will come out of this is, this is probably the signal for distressed funds to get back involved.  Uncle Sam just created a $700 billion "Buy-Only, Long-Only. Structured Credit Fund".  If the government starts buying, these assets will be sent to a secret air force base in  the Mojave.  I don't think the Treasury will be the best bid, at least I hope not.  This will allow firms looking to unload to shop Treasury's bid (which Treasury won't mind at all) and perhaps we get fresh capital involved, armed with the knowledge that if they (distressed funds) buy $100 million of some Option Arm Mezzanine bond, $5 billion of the same bond won't come out on the follow.  So I think this is a positive.  I would love to hear other thoughts because this is a brave new world. 

What I, and everyone who pays attention to this stuff is scared of is where the big problem shops like Citi and Bank of America (Merrill?) and Morgan Stanley have there "troubled assets" marked.  Will this move by Treasury actually create more losses at these "too big to fail" shops?  Initially this spring, when distressed funds got involved, we were modeling these assets to what we thought were "bullet proof" levels.  That meant you could run a fifty-percent default rate and fifty-percent severity (the percentage of losses on the loans that default) and at a price on the highest part of the capital structure (AAA super-seniors) of say, 60-00, and the best bond would still give double digit returns.  The rest of the capital structure, in these circumstances was either wiped out or bore very significant losses.  Many distressed asset funds got banged up however, when the "Spring Thaw" turned out to be another false bottom.  Credit spreads blew out and despite owning these assets at "bullet proof" levels, the market called for higher yields.  The question is, where do the big boys have their stuff marked?  Also, I can definitely see a case where the Treasury comes in, puts a bid on Stanley's portfolio of say 65-00, and Stanley says, "We can't sell it there without taking a $5 billion hit.  So Treasury ends up adjusting their bid to 70-00.   Meanwhile, over at Citi, they've already hit Treasury's 65-00 bid because the assets were marked lower on their books to start with.  You know this situation is going to occur many times over.

Bottom line is, this program may work to cleanse balance sheets but I don't see how it deals with the real underlying problem, filling the capital hole.  We are going to have to put a lot of faith in institutions like Treasury to make this work, and this is clearly a case of "failure is not an option."  They screw this up and they are out of ammo.  I hope they do better than the SEC with the short-sell ban.  How did you like those dopes essentially shutting down the equity option market on Friday by not allowing market makers to hedge through short sales!  Ooops. 

Ready, Fire......Aim! Oops

I find it laughable that when stocks are going up, the CEOs are all gushing with pride and talking at board meetings about how well they manage, how smart their employees are, and blah blah blah. There never could possibly be a "speculator" who just happens to be buying that company's sector and could really give 2 hoots about the company they are buying but its pushing the stock up like nobody's business. They just know that the market is going up and they want in. Kinda like back during the internet boom. Did you ever once here someone from the SEC say, "um look dudes, you have this leveraged money and you are buying this "X.com" stock and you really have no idea what you are doing and you're just creating a friggin' bubble that's gonna hurt us all if I don't shut you down. So no more BUYING this stock ok?!" No those guys weren't labeled nasty speculators or any other deragatory name. That wouldve been Un-American. Right?

So now there are neat new rules today like "No Short Selling" in almost 800 stocks. Is that American? Now look, the you know what was hitting the fan over in Russia this week too. You know what they did? Shut the whole market down for 2 days. Isnt that great?! But I can understand it from the Russians. After all in my book, "once a communist, always a communist". But dear god, we are getting this now in the land of the free and home of the brave?!?!

Uncle Richie is gonna get a little technical right now but not too crazy. I think you'll get the gist of what I'm laying down. You see on Wall Street there are desks at broker/dealers that do "Convertible Arbitrage". There are entire hedge funds that do "Capital Structure Arbitrage". What trades these desks or funds put on doesn't really concern them with whether a company is doing great or going out of business. They generally want to buy one instrument and sell another issued by the same company and are really making a bet that the price between THOSE 2 instruments changes a lot and they can profit from it. So for today's purposes lets say a hedge fund goes and buys a loan of company X and shorts the stock of that same company X simultaneously. Now lets not get into the nitty gritty but that fund might only care if the trade moves just a little bit in his favor and he unwinds it. Remember if the stock price goes down chances are so is his loan so he aint necessarily happy.

Well guess what? Mr Paulson's plan is gonna stop these desks from doing their businesses. Oh and those desks were sources of nice income for their firms. Oh and they provided a lot of liquidity to the markets because they usually took big positions and tried to eke out a little tiny gain, and then took the trade off and started again. Guess what? These businesses don't happen with the new "No short selling" rules! You think anybody thought about that when they shot the rules out from the SEC today? They say they want to make them permanent now too?!?! Remember what Don Barzini says to Don Corleone at the meeting of the five families in Godfather I? "After all, we are NOT communists". Today it smells like we might be.   

A couple more points and I'll let you go. Remember all the rage about the oil "speculators" driving that oil price up this summer. Are they talking about them much anymore? No. You know why? Because most of them are bust!! Yeah speculation is RISK TAKING! Sometimes you win sometimes you lose. So when the capital markets are alive and well and you buy oil at $147 cause you think its going to $200 and it goes to $100, you have a tingly sensation in your back side. And those are the breaks. Or should I say were the breaks until today. The short sellers of these financial stocks would've lost someday too if they had just left this thing alone. But now we'll get no more short selling and the wiseguys at the SEC think they've fixed everything but you know what? Does it make you all warm and fuzzy wanting to buy a stock that could very well be artificially priced high because no one could short it? Going back to our McDonalds story from a few days ago. You think there were guys shorting that stock and getting beat up? THATS a stock I want to buy brother. As the immortal Isaac Hayes once sang in "Shaft", yawwwwwwwwww dammmmmmmmmmmmmmn riiiiiiiiiiiiiigght!

Hey dudes keep firing that gun without aimin. Talk to the guys in the fixed income markets and I bet they can tell you maybe you should've saved Lehman too. God bless us.   

The Definition of Scary

So I go to the bank just now. Its the local neighborhood branch of a LARGE US bank that will not be mentioned by name because they aren't advertisers of the site........yet. Now I have been going to this branch since they built it about 5 years ago. I always say hi to the nice ladies and gents that work there. They know me. So I go in and stop dead in my tracks. Its the LONGEST line Ive ever seen at this little neighborhood branch. The line had to be 10 deep and they only have 2 tellers working.

Without missing a beat, I scream out "is everyone making a withdrawal in this line?!?!" Luckily, only one person said yes. The rest were depositing or transfering or whatever. But isn't that scary that the only thought that went through my head was "christ a run on the bank!"

If everyone had said yes in that line, I wouldve taken out all my money, called the mrs. and told her to fill up the family truckster, gone home and taken my wallet, my Joe Namath autographed picture, my photo with Frank Sinatra, picked up my kid at school, and we wouldve headed for the hills with my briefcase filled with unmarked 100 dollar bills, locked in its special teflon bag. But thankfully, everything is ok. But that is my definition of scary for today.

Putnam Just Announced Closure of $12.3 Billion Money Market Fund

Putnam Investments LLC has closed it's $12.3 billion Putnam Prime Money Market Fund and plans to return all  cash to investors.  This is after Reserve Primary Fund "broke-the-buck" yesterday as it lost $785 million on its investment in Lehman CP and medium term notes.

Putnam cited, "Significant redemption pressure."  The company stated they had NO exposure to Lehman, Wamu or AIG.  The 2 year Treasury note just jumped half a point and now yields 1.396%.  Two year swap spreads have gapped out to 150 basis points.  I've never seen this before.  I'm now hearing BNYMellon's money market fund has broken the buck due to Lehman exposure.

Stay with us.

A Call to Arms or New Board Members

It dawned on me today that being on a Board of Directors of a major U.S. company is perhaps one of the biggest "old boy clubs" known to man, woman, and childrenkind. I know. I know. You're saying that dawned on you TODAY, Richie? Hey sometimes I'm a little slow.

In any event, I'm not even sure why most of these boards exist other then for the "old boys" to get together once a quarter, eat some fat meals, drink some nice wine, let their wives go shopping, and collect a check for "serving" on the board, ALL on the company dime. Or shall I say, billions of dimes. Where was the board of Lehman when "Slick" Dick Fuld was watching his company slip slide away? Did even ONE of them stand up and say, "I dont know about you assclowns but I got some stock in this company that I was counting on to buy my 4th house. If we let Fuld keep going the way he's going, I aint gonna get that 4th house. And if I dont get that 4th house, there's gonna be hell to pay with my old lady." Nope. There was none of that. So I have a solution.

From this moment on, Eric and I will be willing to be on ANY company board. We would appreciate it if you the kind readers of MonkeyBusinessBlog would recommend us for all the companies you own shares in. For chrissakes, don't you think the Monkey Business at these companies might end a little if the boys from MonkeyBusinessBlog were on these boards?! I mean talk about making the CEO sweat! Asking the right questions. Now that I think about it more, this MUST happen! A free T-shirt to the guy who gets us in with the Bank of Hawaii. I could do that trip once a quarter. I already have my first speech for the board prepared. As you can see, I had a pretty good mentor. 

Bedlam in the Credit Derivatives Market!

We are hearing that in the wake of Lehman's bankruptcy and AIG's conservatorship, the operations of the credit derivative market are in complete disarray.  It's funny, but Sunday night when CNBC did its "Exclusive-The Fall of Lehman Brothers", in between the titans of the financial media fighting each other for camera time, there was a guy, I believe from ICAP, one of the biggest credit derivative brokers, trying to explain how utterly screwed up the entire $multi-trillion credit derivative market was.  Every time the guy started talking about how Lehman's bankruptcy (and this was before AIG's "sitch" happened) would bring the credit derivative market to its knees, and why, there would be a "BREAKING NEWS!!" alert to interrupt him.  The "BREAKING NEWS" was The Money-Honey calling to put her two cents in, or a quick break to hear from freaking Burt Ely!  I ran my entire family out of the room as I'm screaming, "BURT ELY, WTF??!!  WHO CARES WHAT HE HAS TO SAY, PUT THE ICAP GUY BACK ON!!"

Anyway, we are hearing that the "novation process", the process where one credit derivative counterparty can essentially move a trade from one counterparty to another by assignment, or monetize a winning trade by tearing the contract up with the existing counterparty, is broken.  Meanwhile, as credit spreads have blown out dramatically this week, owners of protection have trades that are increasing in value (many acting as hedges against trades going down in value) thus increasing their counter-party credit risk against some names that they would rather not have anymore risk with.  Guys are trying to hedge this growing exposure by buying protection on the over-the-counter Investment Grade Index.

The main point of this post is, we are JUST starting to see the very beginning of the aftermath of Lehman going down and AIG kinda going down.  Yesterday it was money-market funds stuck with Lehman notes, today we see the jamming up of the CDS market. 

Barclays Pulls Out Of Talks to Buy Lehman

It is just being reported that Barclays Bank is pulling out of talks to purchase Lehman Brothers.  The headlines read, according to a Barclays spokesperson, that they were not able to come to terms on "credit guarantees." 

It seems like the last two days has been a high-stakes game of chicken between Barlcays, Bank of America and the Federal Reserve.  Barclays and BOA letting the deadline draw closer and hoping that the Fed would blink and backstop the deal.  The Fed is going to stand fast on this position it appears.  This also probably means that the consortium of banks and private equity cannot come to an agreement on funding and capitalizing of the Good Bank/Bad Bank plan.  I think the amount of capital needed is beyond the capacity of the consortium.  Long Term Capital was about $3.5 billion.  I believe this number is at least $15 billion.

Hold on to your hats.

"Libor Is Not the Price of Anything."

Today Bloomberg News reports that Willem Buiter, former Bank of England policy maker commented on the benchmark rate called London Interbank Offered Rate or Libor.  Mr Buiter said, 

"Libor is not the price of anything.  It is the rate at which banks don't lend to each other.  It is fundamentally flawed."

Lets pause for a moment and consider what Mr. Buiter just said.  The rate that trillions of cash bonds and derivative contracts index off of is meaningless.  If Mr. Buiter came out two years ago and said this on national television you would have seen six armed guards covering his mouth and taking him away as a stark raving lunatic!  And while the guards were shoving Mr Buiter into an ambulance, one of his learned colleagues would have appeared and calmly assured us that Libor was fine and Mr. Buiter had been acting "erratic" as of late.

Now?  I look at the headline on Bloomberg and say, "Oh wow, Libor is still screwed up....YAAWN!"   This rate is the foundation of our fixed income universe!  How can anyone seriously tell you that ANYTHING that has to do with finance has hit bottom or poised to rally when the entire banking system is still scared sh*tless to lend money to each other for any period longer than overnight?  Central bankers in the U.S., Canada, the ECB and the U.K. have been working on this for over a year and we are no better than when the interbank lending system for USD first seized up last August.

What's horrifying is, this has become normal operating procedure.  Think about whats happening at the British Bankers Association (the guys who poll the banks and set Libor);

"Hey Bill, what should I use for the three-month Libor setting today?" 

"I don't know Frank, what would you like to use?"

"Well, I'm pretty sure it starts with a two and my mom just turned seventy-five today.  Lets go with 2.75%"

"That works Frank. Cheers!."

Sounds like a good time to buy some more SKF!!