MonkeyBusinessBlog

Chatter

Alright. Yesterday felt good to take a break from writing about all the disasters out there in our business. But as Michael Corleone said in the otherwise unmentionable Godfather III (I will do penance for bringing up III as I know it is heresy), “Just when I thought I was out…..they pulled me back in!” The ingenious plan being hatched to save the beleaguered monolines late yesterday was just too much to pass without some comment. I read about some rumblings earlier in the morning in the Financial Times and I just gave it the old hand wave, chuckled and moved on. Then it happened:

News Item: Banks, New York Regulator Meet on Bond Insurer Rescue!

Now, we here at Monkey Business have been saying this all along. The Street will do everything in its power to keep the fraud of the AAA monolines alive. Why, you should be asking? Forget all the munis these guys have guaranteed. I have a feeling if the ratings morons did their job, 99% of the munis would be AAA anyway. Hell, Moody’s all but admitted it last month! The problem here is all those credit default swaps the monolines have on with the Street on CDO paper. Where the hell do you think all those hedges came from to keep some firms from “being battered” by the housing credit meltdown? Because the monolines are AAA they don’t have to post initial margin. The have to mark to market, and pass mtm margin to the counterparties but it’s that initial margin that is supposed to absorb the hit to the counterparty “should there be a problem”. Well now there is a big fat problem and the second one of these guys can’t come up with the cash, its game over. This thing will spiral out of control faster than poop through a goose. The Banks will lose many billions. This plan is about as intelligent and transparent as “Super SIV”. I’m expecting Hank Paulson to come in and bless this thing at any moment. Anyway we had this nice exchange with Our Pal Fred:

Eric: UMMM, WHO ARE "THE BANKS" GOING TO GET THE CAPITAL FROM TO GIVE TO THE MONOLINES?

Our Pal Fred: The Treasury Dept. And they're gonna get it from drug dealers, and they're gonna get it from their custys who are stripping vacant houses for the copper plumbing.

Eric: That’s Good!....and not to be outdone...

Our Pal Fletch: And then we'll need to build more prisons reduce crime rate, to create more jobs, spend more on "infrastructure" so our candidate can win AND PUT MONEY IN THE CONSUMERS POCKET..FISCAL STIMULUS!

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News Item: MoneyGram Shares Have Biggest Drop on Loan Losses

Eric: Ok this is why I love this business, you learn something new everyday. MoneyGram International, the second biggest wire transfer company in the world behind Western Union had their stock price halved (their debt rating got knocked down too but at this point who really gives a rats ass what the rating agencies say) as they announced losses of $860mm in subprime backed ABS!

Our Pal Fred: Why would anybody be surprised a company like this is invested in subprime? I mean, who uses them? "know your customer"

Eric: You’re right! good point! UNLIKE SAY.....SOME DOPEY GERMAN LANDBANK..THEY DEAL WITH THE ACTUAL “subprime” PEOPLE everyday!! I can see some ivory tower dope (read rating agencies, monolines, structuring desks, etc) thinking you could take people with 5 handle FICOs, “diversify them” and think you could wring $800mm of AAA notes out of $1BB subprime loans. After all to them it was a neat “theory”. But these guys?? They are all over the country, thousands of offices. If you took the guy who handles New York and put him in to handle Nevada, his customer profile wouldn’t change one iota!

Rich: If you think about it, these guys should have known exactly what was going on. They should have taken all that dough and given it to Paulson….not the moron who runs Treasury…but Paulson & Company, the hedge fund genius who shorted the bejeezus out of the housing credit market and made a zillion percent!

Eric: And instead they do the opposite. I’m sure they got taken to some nice dinners, ballgames and concerts by whoever sold them the bonds…as opposed to the Paulson guys who just would have made them a fortune.

Our Pal Fletch: But E, as check cashers, u can't blame these guys for not being good at making "no lose" bets, ahhhh I mean investments marketed by the street. They've been in the biz of risk-free rape and pillage for years. When they heard about the party going on in structured products during the past few yrs (probably from Joe college mortgage broker who was already driving a Ferrari) and how eeeeeaaaasseeeee the money is, how could they pass it up?

Eric: Makes you wonder who is next. I was at the Brooklyn Botanical Gardens Saturday…they looked a little nervous!

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News Item: Citigroup Posts Record Loss on $18 Billion Write-down

Our Pal C.R. Looking at these huge losses just makes you think that these companies are too big to be managed.

Eric: GOOD POINT. BUT LETS FACE IT...PEOPLE GOT FIRED IN '06 (LIKE KRONTHAL AT MERRILL) FOR not GETTING INTO THE MORTGAGE CREDIT GAME...FOR NOT TAKING ENOUGH RISK (LIKE MACK WANTED THE STANLEY GUYS TO DO) ETC...THEY ALL GET INTO FRENZY NOT TO GET LEFT BEHIND AND THE NEXT THING YOU KNOW, THE FIRM IS CHASING DOWN EVERY LAST BAD DEAL THEY CAN FIND.

Rich: And that was chasing down the deals not only in residential credit, but CMBS and High Yield too.

Eric: And by chasing I mean throwing leverage to anybody or any structure that needed it, getting rid of covenants, etc. There was one common theme and that was leverage or funding. That makes assets that the risk management types (read that to be those with little common sense) would view as uncorrelated, to be completely correlated!

Our A.C.: And the funding and risk license was like a binary gate. One minute the firm has balance sheet to burn and risk license to the sky, and then all it takes is one of those business lines to explode..and the balance sheet and risk license goes to zero.

Eric: Exactly, taking down the CMBS and High Yield with it.

Our Pal C.R.: No firm has a culture of "No" -- Mgtm: "last yr you made $4bb -now we need you to make $5B" how do i do that? take more risk

Eric: Right, you would walk into these beginning of the year meetings and they would role out the new “budget” and they would tell you that the new target…after a record setting year…is 15% higher than last year. Oh, and by the way, the firm wants to reduce the compensation vs revenue expense ratio…so to make what you made last year you really have to jack it up by 25%!

Rich: That about sums it all up.

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Our Pal Fletch: Here is a good story. Joe Mysak from Bloomberg News writes: “New Jerseyans can't blame Governor Jon Corzine for coming up with a big deal. That's what Wall Street guys do. On Jan. 8, Corzine, the ex-Goldman Sachs banker who is in the third year of his first term, announced his long-awaited plan to fix the state's finances. Now he has to convince New Jerseyans that selling a whole bunch of bonds to pay off another whole bunch of bonds makes sense. The key feature of the plan is for the state to sell the toll roads, except not to some foreign engineering firm, as the city of Chicago and the state of Indiana have -- but to itself.

Eric: AM I JUST NOT TOO BRIGHT OR DOES JERSEY JUST TAKE THE GENERAL OBLIGATION BONDS AND CONVERT THEM TO REVENUE BONDS..WHICH I ASSUME ARE HARDER TO RATE AND HENCE A HIGHER YIELD...unless OF COURSE NJ RAISES THE TOLLS ON THE TPK AND GS PARKWAY TO MAKE RATING AGENCIES AND BOND HOLDERS HAPPY....WHICH IS JUST great FOR COMMUTERS NOW WITH GASOLINE AT $3.65 A GALLON.

Our Pal Fletch: Read yesterday's NY Post on the toll hikes he envisions. NJ to become Liechtenstein (in the way in isolation). I'd be better off (more cost effective) as a driver to build my own road around NJ than to drive thru it.

Eric: So besides The Street doing their usual fee fest and swap gouge on the state, who the hell benefits from this?

Our Pal Fletch: Well, this is why you guys (Monkeybusinessblog.com) are doing this. The average person, no matter how well educated..if they didn’t work on the Street, probably wouldn’t have a clue where all the money went and exactly why his tolls and taxes went up. He just gets pissed off…and then pays his higher tolls and taxes.

Eric: Can you imagine if just one or two or three people felt empowered enough to walk into a town board meeting or a state legislature meeting and just started asking simple questions like, “show me the cost benefit of this ‘refinancing’….oh and you disclose the fees we are paying our dear friends who are underwriting the bonds…oh and while your at it, make sure you include the bid/offer on all the interest rate swaps you put on with the dealers…I assume you checked away to get the best level. And on that point, with all the fees we are paying shouldn’t we get done at least at MID??”

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Eric: My favorite Bloomberg header today, Bid Wanted in Comp (BWIC) Countrywide Legal Liability-Whole Tranche..Please Call Ken Lewis at BOA with bids.

Rich: Is it “All or None (AON)” BWIC?

Eric: Oh yes. I think you have till June to respond though. Now there are so many great things happening today we are just going to skip over the obvious ones like BOA buying Countrywide, and Merrill needing to write off another 15bb, or Citi probably having to take another 20bb writedowns..give or take a billion. It’s getting boring. Lets look at the next big disaster, Corporate Credit Default Swaps.

Rich: There is a fantastic article in The Financial Times by Robert Cookson, Sarah O’Connor and Paul Davies, “Painful Lessons to be learnt(Brits!) for CDSs.”

Eric: What this article will show, yet again, is that while Wall Street would like to be thought of as brilliant and innovative, it can be just as dumb, if not dumber than all the Fredo’s out there in the business world.

Rich: So this guy Ned Bowers leaves Radian, a bond insurance group that you can probably guess is not doing so well now (last Feb the stock was around 67…now 8). In summer 2006 he starts what is called a Credit Derivative Product Company (CDPC). They call their cdpc “Structured Credit Company”.

Eric: Now these companies get set up usually with a solid amount of capital and get the rating agencies to give them a AAA rating. With that they can take say 100mm of capital and write credit protection on say, 1bb or maybe 2bb. Structured Credit Company?? They had 200mm in capital and they wrote FIVE BILLION in credit default swaps (a mere 25x leverage)…oh and the best part….they didn’t even get around to getting rated by the Rating Agencies. They weren’t even targeting to get AAA, they were going to go for AA-…which they never got

Rich: Here is what one of the SCC chaps had to say in late 2006, “the company’s size and low rating target would be no handicap since, we have stressed tested our capital to the Nth degree and believe that the platform we have is the most flexible and comprehensive you could have.”

Eric: Ahh, where have we heard that before? Still to me, the best part is that they never even got the AA- rating….and the Street STILL put on default swaps with them.

Rich: And now well…..Structured Credit Company is done and between Merrill, Morgan Stanley, Bear Stearns, Deutsche Bank and HSBC (you really can’t have a loss without including HSBC!) they have lost $250mm.

Eric: And the worst part is SCC isn’t the only one out there with not enough capital. The F.T. article quotes Andrea Cicione from BNP Paribas where she says “Counterparty risk will be a big theme in 2008 and that losses from market players being unable to honour their derivative contracts could exceed $150BB.” So throw that on the pile!

Our Pal Fletch: Fellas, as Confucius say, “Man who drive like hell...is bound to get there.”

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Eric: My Lord there is some funny stuff to talk about today. First Mr. Bill Gross, a man we usually don’t find ourselves agreeing with has come out today to say that the credit default swap market will inflict at least 250BB of hurt to the financial system.

Our Pal Fred: Isn’t there something like $40 trillion outstanding? I think I will take the over on the $250BB.

Rich: Yes its more than the capitalization of the entire planet’s equity markets.

Our Pal Fred: But that’s only the notional amount.

Eric: Right, so no need to worry. So lets see, we probably have what…another 250BB of Residential MBS to write off (and if the monolines go bust add another 100BB), probably a similar amount for CMBS, then we have the High Yield Fiasco…maybe that’s only 75 to 100BB, and now this 250BB. So that’s 850BB for the financial system to get hit with? We literally may be selling apples and pencils on 54th and Madison when this is over.

Rich: We better get our corner NOW!

Our Pal Fred: Either that or start making a concerted effort to find life on mars to sell this all this stuff to. When Hank Paulson comes out in support of a manned mars mission, we’ll know our goose is really cooked.

Eric: Perfect. Now on to one of our favorite subjects….Monolines. Joe Mysak at Bloomberg has a great piece today about Ambac potentially taking a hit, if they are still around, on a muni deal! Yes you heard correctly, a muni deal. Here is a piece of Joe’s article,

“The trustee notice shows that not all of the insurers' problems stem from rapid meltdown in the mortgage market. Sometimes they can get in trouble from things they planted in what might best be termed their very own gardens. Ambac began life as a municipal bond insurer, after all. It knew better than to underwrite risky municipal credits, didn't it?

Perhaps I should mention that the issuer of those bonds guaranteed by Ambac back in 2000 was the "Director of the State of Nevada, Department of Business and Industry," but the state has no obligation to repay them. No, the $451 million in First Tier bonds helped build and are secured by the Las Vegas Monorail.

Rich: OH THIS MONORAIL IS GOING BUST ON THE monoline for sure! ME AND THE MRS AND our 3 year old RODE ON THIS MONORAIL. My daughter LIKED IT BECAUSE SHE WAS IN A STROLLER. DADDY AND MOMMY GOT A WORKOUT GETTING ON IT AND GETTING off IT. It is FAR and sometimes the temperature in Las Vegas can be, shall we say WARM. WHICH MEANS ONE THING.

WHEN THE monoline (Ambac) CAME TO LOOK AT THE monorail THEY SPENT no TIME WALKING TO THE monorail BUT THEY DID GO TO THE CHEETAH CLUB!

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News Item: Ex-General Re Chief Ferguson's Fraud Trial Starts in Hartford

Rich: So this is finally the trial for the Gen Re. folks who played a scam to help AIG inflate their reserves to the tune of $500mm back in ’00-‘01.

Eric: Yes, they did they old “Loss Portfolio Transaction”…or LPT. AIG pretends to reinsure Gen Re and Gen Re pretends to pay AIG. Apparently Mr. Ferguson is claiming that the big boss at the time, Mr. Warren Buffett gave him the ok to do the transactions.

Rich: Ah, this is Ferguson’s defense. An email to someone else saying, “I had a good discussion with our WEBmaster on Friday .... Also wanted to make sure the AIG LPT passed the NYT test – in his view yes (but, not by a huge margin),” Ferguson wrote. He called Buffett “Webmaster.” Buffett should have fired him just for that!

Eric: So Ferguson would have us believe that a conversation like this took place between himself...and the Webmaster:

Ferguson: “So chief, we have this great idea. AIG is going to reinsure us (yes, I know it’s usually the other way around) and we pay AIG a fee of $500mm. But don’t worry…see AIG is going to pay us back with an above market rate of interest and in return we aren’t going to hold AIG accountable for any of the risk they “reinsure for us.” So AIG gets to overstate their reserve position by $500mm and we get FIVE MILLION DOLLARS!!”

Buffet: “Hmm, that’s intriguing Fergie…let me think, my $200 billion empire and 50 years of impeccable credibility on the one hand and a unimaginative scam to help my dear friend Greenberg over at AIG for the princely sum of $5mm. On the other hand….that sounds about the right risk reward relationship…make the deal…but see if you can get him to $5.5mm just for giggles.”

Rich: I think a more accurate description, if that conversation ever took place is, Ferguson would have been fired on the spot, the deal never would have happened and Ferguson would have to book himself into the NY Hospital for Special Surgery to have Buffett’s shoe removed from his ass!

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News Item: (BN) SEC Probes Merrill Trades Before Client Orders, People Say.

Eric: This really has to be a Southwest Airlines “Wanna get away?” moment for John Thain!

Our Pal T.R.: he's been there 14 days - i am sure its been one very long moment of "wanna get away" or "first - lets beg for capital globally then we'll write our investments down - who's on board?"

Eric: AND THEN YOU GOT THE GUY WHO TOOK A DUMP ON THE FLOOR FRIDAY AND TRACKED IT AROUND THE FIXED INCOME AREA...RUMORED TO BE AN EQUITY GUY.. THEY MAY NEED WHAT WE HAD AT FREDDIE MAC TO BUILD MORAL…AN “ICE CREAM SOCIAL.”

Rich: Remember in ’98 when the Bank you and I worked for dropped $300mm (boy that seemed like such a big number then..now..rounding error) in European Equity Derivs….and one of our fixed income credit deriv. guys in London walked right out of his bonus meeting and punched the head equity derivative trader in the face!

Eric: Yes! We will definitely see some of that over the next few weeks no doubt.

Our Pal Fletch: This should not be a surprise for anyone who has spent more than a month on a trading floor, and is not legally blind, & deaf.

Eric: Thain may need to get his brother Fredo (Hank Paulson) to help out on this one.

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News Item: State Street Corp. is Sued Over Pension Fund Losses.

Eric: So if I read this correctly, State Street took pension money that was supposed to be invested in Treasuries and High Grade Corporates….and instead bought CDOs backed by subprime….and for kicks leveraged them up!

Our Pal Fred: Is that a problem?

Eric: I guess. They fired the CEO of the money management arm (State Street Global Advisors) William Hunt…after he got a severance of $14mm….but he won’t be entitled to a bonus for 2007.

Our Pal Brian: Did they really lever it up….pension money…into subprime….like a hedge fund would?

Eric: It says here in the NY Times, "THE LAWSUIT ASSERTS THAT STATE STREET LAST YEAR USED BORROWED MONEY TO INVEST IN SUBPRIME MORTGAGES AND RELATED DERIVATVIE CONTRACTS IN A FUND THAT WAS SUPPOSED TO INVEST ONLY IN TREASURIES AND CORP BONDS."

Rich: So they have 5 different pension funds suing them for violating their fiduciary responsibility?

Eric: Yep. Now State Street wanted to be clear that of the $2 trillion that they have under management, only 2% is in Subprime. So only $40BB

Rich: They set aside $618MM to cover legal claims. So essentially they have just said that they committed a gross violation of fiduciary responsibility which could be worth billions as they shred their credibility and the guy in charge leaves with $14mm!

Eric: The part I liked the best is that the stock surged on the news of them “coming clean”!

Our Pal Fred: I think that’s because the way the stock analysts look at it, they bill themselves for in-house attorney fees…and you know fee income gets a higher multiple.

Rich: Is there anybody you can trust anymore?

Our Pal Fred: Hedge funds.

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News Item from Financial Times: Blackstone’s failure to secure PHH indicates gloom for a wider market.

Eric: Ah, welcome to 2008.

Rich: Here’s a good quote, "LAST MONTH CO-FOUNDER OF THE CARLYLE PRIVATE EQUITY GROUP SAID TITANS OF THE INDUSTRY WERE HOPEFUL THAT "AS 2008 APPROACHES, THE WORST OF THE CREDIT CRUNCH SEEMS TO HAVE ABATED"

Eric: ABATED!!! WELL HERE IS A BETTER QUOTE, “HOWEVER ONE DEBT CAPITAL MARKETS HEAD SAID, "WE ARE ALL GRAPPLING WITH THE NEW MATH" NOBODY CAN PREDICT HOW IT PLAYS OUT. WE'VE NEVER SEEN THIS MANY HIGH YIELD LOANS OUTSTANDING, THIS MUCH OFA BACKLOG OR THIS MANY UNCLOSED MERGERS."

Rich: Any time anybody on Wall Street uses the term “new math”….just keep selling.

Eric: THIS IS BEAUTIFUL . THEY HAD WHAT, 300BB OF DEALS TO SETTLE AND THEY SOLD WHAT? 75BB??, 50BB?? BY DISCOUNTING THEM...LEAVING 225BN...250BN?? IT SOUND LIKE THE SAME TALK THAT WE HEARD ABOUT RMBS IN LATE SUMMER 2007. WHEN THE BANKS GO TO SELL THEIR "DISCOUNTED" HIGH YIELD BONDS THE INVESTOR WILL SAY..."YOU KNOW..WITH ANOTHER 250BN ON THE FOLLOW...I THINK I'LL WAIT..BUT THANKS FOR THE CALL."

Rich: I'M SORRY TO SAY THAT ITS ONLY IN THE THIRD INNING IN THE CREDIT CRISIS. WAIT TILL THE LAWSUITS START WHEN THE BANKS SAY WE CANT FUND YOUR DEAL UNDER THESE TERMS AND THE PRIVATE EQUITY GUYS SAY "FINE, GIVE ME THE 500MM OR 1BN BREAK FUNDING FEE....AND THEN THE TARGET COMPANY TELLS THE PRIVATE EQUITY GUYS TO PAY UP THEIR BREAK UP FEE. THIS CERBERUS-UNITED RENTAL BATTLE…PICTURE ABOUT 12 OF THEM GOING ON SIMULTANOUSLY!

Eric: FOR THE NEXT TWO YEARS! I WONDER IF YOU CAN MAKE A PASSIVE INVESTMENT IN SECURITY LAW FIRMS? THESE GUYS MAY GO PUBLIC!

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News Item: Dec. 27 (Bloomberg) -- Jeffrey Bewkes, who takes over as chief executive officer of Time Warner Inc. next week, may be measured by how quickly he can dismantle the world's largest news media company.

Eric: Wait till the book comes out on this saga. Done right this could be a fantastic and tragic comedy!

Rich: OH STAN O’NEALS MESS IN SUBPRIME IS TINY COMPARED TO THIS. 125BN FOR AOL. BEST OF LUCK. THEY GIVE THE SERVICE AWAY NOW.

Eric: THEY SHOULD TOTAL UP ALL THE FEES THE STREET MADE PUTTING THESE GUYS TOGETHER, RAISING DEBT, PULLING THEM APART AGAIN, ETC..ITS TEXTBOOK STREET...LIKE IN THE 60'S OR 80'S, MAKE CONGLOMERATES, CHARGE FEES, PULL APART CONGLOMERATES, CHARGE FEES...TAKE THEM PRIVATE, CHARGE FEES, TAKE THEM PUBLIC AGAIN...CHARGE FEES.

Rich: WHAT DID OUR PAL FLETCH SAY REGARDING THE EXISTENTIAL "WHY DOES THE STREET EXIST?"

Eric: Ah yes, The Street Exists to get itself paid!

Rich: When you look at it, it is a kind of predictable give or take a year or two. In even decades (60’s, 80’s and 00’s) you put the conglomerates together and/or take them private and then in the odd decades you take them apart and or take them public again!

Eric: Perfect.

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News Item: Muni Insurance Proves Worthless as Borrowers Shun MBIA, Ambac

Eric: Now here is a little story that came out on Bloomberg News Friday. Maybe it’s the holiday season, but this should cause a march on the offices of Moody’s, S&P, MBIA and Ambac. You really have to wonder if someone should be brought up on RICO charges! Look at this:

"Many investment-grade munis would have AAA ratings without insurance if they were ranked the same way as corporate debt. Every state except Louisiana would be Aaa, based on the scale for companies, which ranks borrowers on the probability of default, according to the report by Moody's."

Rich: So essentially, Moody’s just said that they have been incorrectly rating municipalities for years and those incorrect ratings have led to this:

"Taxpayers give insurers $2 billion a year because of a dual-rating scale," said Matt Fabian, senior analyst and managing director of Municipal Market Advisors, an independent municipal bond research firm in Concord, Massachusetts. "You could easily save taxpayers that $2 billion by rating them on the same scale as corporate bonds."

Rich: AH THE DUEL RATINGS SCALE..ONE OF THE many SCAMS THAT WILL COME TO LIGHT. THE POINT HERE SHOULD ALSO BE THAT THE RATING AGENCYS RATINGS ARE WORTHLESS TOO.

Eric: Oh, I think the rating agencies passed worthless a LONG time ago. This here is racketeering!

Rich: So to summarize; the rating agencies grossly overrate Subprime and Alt-A MBS and CDO’s, which ends up being perhaps the main catalyst for the disaster we are currently in.

Eric: The rating agencies also overrate the monolines, which allows the financial system to get an huge false sense of confidence, not to mention real losses as these guys are on the other end of a few hundred billion credit default swaps (Like the loss CIBC just took after ACA got down graded from A to CCC!!)

Rich: And then these guys UNDER rate the municipalities, driving them into the arms of the monolines, who fleece them for about $2bb a year!

Eric: Ah well, what do municipalities need money for, except schools and roads and libraries and police and fire departments, etc. If I wasn’t living in the spirit of Christmas right now I’d say some people should be going to freakin jail!

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News Item: Morgan Stanley Bonus Pool Rises Despite 9.4 Billion Charge off.

“If you were to normalize our business and take out this $9.4 billion charge, you would see that we had a record year across the whole enterprise,” Chief Financial Officer ColmKelleher said in an interview today.

Eric: This is great! If the Jets could normalize their 11 losses they’d be 14-0 right now! This needs some deep thought. Its time to talk to our old pal Fletch, who majored in philosophy, either before or after he studied pre-law (or maybe pre-med) at a prestigious Ivy League School.

Our Pal Fletch: Well guys, there are a number of ways you can look at this Morgan Stanley “strategy”. Lets list a few:

Practical: If there were no kryptonite, Superman would be 14-0 and Lex Luther would be 0-14.

Existential: If there were no kryptonite maybe there would be no Superman (?)

Musical: If there were no kryptonite, Spin Doctors would rule da world

Political: If there were no kryptonite, spin doctors would not exist, which of course gets us back to existential: Why does the street exist?

Eric: Ummm

Our pal Fletch: Good answer, E. The Street exists to get itself paid!!!

Rich: Class dismissed!!!!

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News Item: (BN) Florida Got Lehman's Help Before Run on School's Tainted Funds

Eric: Oh Jesus Pop, look at this, just like you said, the day after O'Neal was fired, Stipanovich was in New York, for the confidential meeting with Lehman Brothers. In a presentation at the Nov. 1 meeting, Lehman Brothers included a graphic titled "Potential Opportunities to Explore."

It suggested that Florida could buy more structured finance commercial paper from Lehman Brothers for the state pension fund. "Florida is very well funded relative to its peer group,"' the graphic said.

Rich: Yep, check out how much of this fine paper they sold them in July and August $842mm! And it all defaulted! They may want to retain the same lawyers Merrill used from their 1994 Orange County “event”.

Eric: They were buying Countrywide CP…the day before Mozilo grabbed the $11.5bb!

Our Pal Fletch: The Chief Financial Officer for the state is named Sink. How can anyone entrust so much money to someone w/a name like Sink? Too many obvious & snide applications to list.

Rich: Look at this quote from Sink, "At the time, I never knew it was Lehman Brothers that actually sold us these investments.” (he is saying this after finding out that this clown Stipanovich met with Lehman for advise…in NOVEMBER!!).

Eric: He sounds just like the Don (in Godfather I) after the famous meeting with the 5 families. “It wasn’t until today that I realized it was Barzini all along.” Poor Sink.

Our Pal Fred: You know, the states really have no business running money.

Eric: Right! They should leave it ALL to the Street! At least it will make the lawsuits easier.

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Eric: GOOD ARTICLE IN FT ABOUT GOLDMAN SELLING "LARGE-BANK STABILITY NOTES." 3YR NOTES ON A BASKET OF 50 INTERNATIONAL BANK STOCKS. YOU GET 10% ON EACH BANK IN THE BASKET (ASSUME THERE IS WEIGHTING BY MKT VALUE) UNLESS THE STOCK PRICE OF THE BANK FALLS BY 50% OVER THE 3 YEARS. SO GOLDMAN IS BUYING CHEAP 3 YR PUTS ON 50 BANK STOCKS....KEEP SELLING MORTIMOR, KEEP SELLING....

Rich: AND ALTHOUGH THEY MISSED IN THE BEGINNING OF THIS MORTGAGE MESS (LONG A LOT OF ABX) THEY SEEMED TO HAVE CERTAINLY SHORTED ENOUGH TO GET IT ALL BACK AND THEN SOME! SO IF THEY DONT LIKE BANKS I DON’T EITHER!

Eric: Maybe someone should tell all the central banks who will probably end up owning all the garbage that they are accepting now as collateral in the “great liquidity giveaway”

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News Item (BN) Subprime Securities Market Began as `Group of 5' Over Chinese food

Eric: THE CREATION OF THE ABX....TAKES 14 PAGES TO SAY WHAT NEEDS TO BE SAID IN ONE PARAGRAPH....I'M SURE YOU HAVE SOME INTERESTING ANECDOTES ON THIS.

Rich: OH POP, THIS IS GREAT THE "GROUP OF FIVE" IS WHAT THEY CALLED THEMSELVES? “NOT REALLY GLAMOROUS.” That’s mighty humble of them.

Eric: "'LIPPY LIPPMAN AND THE FURIOUS FIVE"

Rich: I LOVE THIS STUFF. LOVE IT ALL. LIKE THEY WERE STATESMAN!

Eric: RIGHT, "THE POTSDAM CONFERENCE", "THE U.N. CHARTER", "NIXON AND MAO", "REAGAN AND GORBACHEV" and NOW "THE GROUP OF FIVE"!

Eric: Changing gears a bit, Citi has a great new ad in the papers. Full page proclaiming “The Way Forward.” I spit my coffee out and almost choked to death laughing!

Rich: Citi and “The Way Forward” Why am I thinking of those classic Bing Crosby and Bob Hope movies, “On The Road to Dubai”!!

Eric: Allah be praised! Now the guy who has it right is the new guy Pandit.

Rich: Right Brilliant indeed! HE LOOKED AT THE BOARD AND SAID YOU GIVE ME THIS freakin’JOB AND I TAKE PRINCE'S REFUSE AND PUT IT ALL ON THE BALANCE SHEET AND WE RING FENCE THE freakin’ THING. MEANING IF IT GOES FROM $49 BILLION TO ZERO I CANT GET FIRED CAPice? AND EVERYBODY SHOOK THEIR HEADS saying “UM YEP”.

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News Item: Dec. 17 (Bloomberg) -- Merrill Lynch & Co. hired Jeff Kronthal, a former bond-trading executive who was fired in 2006 by former Chief Executive Officer Stan O'Neal, to advise the firm on how to stanch losses on mortgage-related investments.

Kronthal, 53, will become a consultant to New York-based Merrill, Co-President Greg Fleming said today in an internal memo that was confirmed by spokeswoman Jessica Oppenheim. He will advise fixed-income chief David Sobotka ``on a variety of business issues,'' Fleming wrote in the memo.

Eric: Look at this!!

Rich: DONT EVEN NEED TO READ THE ARTICLE. THIS IS GUY THAT WAS SAYING WHAT THE hell ARE YOU THINKING AND STAN FIRED HIM RIGHT?

Eric: RIGHT...LIKE, "UM STAN, THIS TRAIN LEFT THE STATION ABOUT A YEAR AND A HALF AGO.

Rich: AND HE FIRES HIM! I HOPE HE TOLD THem HE WANTS 160 MILLION AND ONE PENNY TO DO THE JOB. A PENNY THAT HE WILL give TO STAN THE NEXT TIME HE SEES HIM.

Eric: Yep, to cram in his ear!

Chatter

News item (BN) CIBC's Big Subprime Secret Might Cost Billions

Our pal Fletch: How bout this one? Some nice work from Bloomberg’s Jonathan Weil...

CIBC's lightly guarded secret is the name of a ``U.S. financial guarantor'' that faces a possible downgrade on its A credit rating and is ``not necessarily rated by both Moody's & S&P.'' That's how CIBC last week described the company that is insuring $3.47 billion, or about a third, of the collateralized debt obligations it holds that are tied to U.S. subprime mortgages.

The company's identity matters because the bank said these hedged CDOs were worth just $1.76 billion at Oct. 31, down almost half from their face amount. If the guarantor goes poof, CIBC loses its hedge on these derivative contracts. And the Toronto-based bank would have to recognize the loss.

Eric: Ah, name the monoline. ACA…DING DING DING! Well there’s a few loonies flushed down the toilet because ACA has been toast since 2006!

Rich: Hah! Look at this quote:
“It's unclear why CIBC thought it made sense to have a small A-rated insurer guarantee a third of its AAA-rated ``super senior'' CDO holdings. This would be like paying your middle-class friend to insure your 100-foot yacht. Perhaps it just wanted to say it was hedged, and didn't think about needing to file a claim someday.”

Eric: Now you know what’s really funny? I bet a lot of guys are laughing about this, maybe at some big shops that have somehow magically avoided the “major credit hits.” Meanwhile, they got THEIR hedges with the GOOD monolines…..like MBIA and AMBAC.

Rich: Right. Umm, If I was at these larger shops I would be pooping my drawers and praying that they can keep the “GOOD” monolines AAA.

Eric: At least in time to collect my RECORD SETTING bonus.

CMBS Chatter

Eric: FT HAS AN ARTICLE ABOUT CMBS...IT SOUNDS VERY FAMILIAR.."PIGGYBACK” SECONDS TO TAKE YOU TO 100% CLTV, DIVERGENCE OF INTEREST BETWEEN THE LENDERS/PACKAGERS AND THE INVESTORS....OVER LENDING, LAX TERMS, LOWER CREDIT STANDARDS....AND THE BEST PART, THE CLINCHER IS YOUHAVE A RESEARCH GUY SAYING CMBS MARKET IS COMPLETELY WRONG....VALUES SHOULD BE "MUCH HIGHER.

Rich: Here’s a nice quote, MOREOVER, SECURITIZATION HAS ENABLED A RUSH OF LOAN CAPITAL TO ENTER COMM PROPERTY FROM NON-BANKING SOURCES SUCH AS SIVs, THAT HAVE BEEN THE HEAVIEST BUYER OF UK PROPERTY LOANS. BANKS HAVE TAKEN THE LOWER-REATED TRANCHES OF PROBERTY LOANS, THOSE THAT BEAR FIRST LOSS AND SECURED THE BLESSINGS OF RATING AGENCIES TO REPACKAGE THEM INTO CDOs WITH AAA RATINGS”!! HERE WE GOOOOOOOOOOOOOOOOOOOOOOO!!

Our Pal Fred: The mezzanine parts are the worst. Never was a bid for them until they invented CDOs, for RMBS and CMBS. Now that CDOs are dead, who knows where they end up.

Rich: .We should call Hank Paulson. Its time for “SUPER-MEZZ”!!

Our Pal Fred: This is where the rating agencies screwed up again. The credit slices are so thin, any bond below A is a digital bond, and even more so in cmbs land when 1 loan can wipe out more than 1 layer of credit protection.

Eric: Good point. This should get 2008 off to a smashing start!

Chatter

Rich: Hey, you see this on Bloomberg, (BN) Ambac, FGIC Commence Their Countdown to Armageddon: Joe Mysak? This guy’s on the money.

Eric: He says, “The next day MBIA said it was ``pursuing capital contingency plans,'' and the stock rose $2 a share, as if saying it and doing it were the same thing. What did people expect the company to say? ``Sorry, gang, it looks like we're done?” That’s freakin’ great!

Rich: Oh it gets better Pop, he essentially says essentially, LETS SAY MBIA NEEDS 4BB..IF YOU HAD THAT TO GIVE WOULDN'T YOU JUST SAY, "I CANSTART MY OWN MONOLINE WITH 4BB....AND PRICE THE PROTECTION RIGHT AND START WITH A CLEAN SLATE..WHY GIVE IT TO YOU CLOWNS??

Eric: THIS IS ALL A BIG SCAM. THE BANKS FINALLY REALIZE THAT THE MONOLINES ARE A MIRAGE AND NOW THEY MUST RELY ON THE RATING AGENCIES EITHER BEING TOO STUPID OR TOO INVOLVED TO BACK OUT NOW...TO KEEP THEM AAA WITH A 4-5BB CAPITAL INFUSION.

Rich: And I think you can vouch for me that I’ve been saying this for about 7 years.

Eric: Yes I can. And just to emphasize the point, Teddy, my 2 year old just walked in, braced himself, and took a huge dump!

Chatter

News Item: Dec. 10 (Bloomberg) -- MBIA Inc., seeking to avert a crippling reduction of its AAA credit rating, will receive as much as $1 billion from private equity firm Warburg Pincus LLC.

Rich: AND UBS STILL OWNS THESE GUYS RIGHT? MIGHTY BIG OF THEM ON A DAY THEY WRITE DOWN 10BB....WHY DO I HAVE THE FEELING ABOUT 5 OTHER MAJOR FIRMS ARE GOING TO "MAKE A INVESTMENT" IN MBIA.....AND IT STILL WONT BE ENOUGH!

Eric: THIS IS FANTASTIC...THEY (THE BIG BANKS) ALL GET TOGETHER AND ASK THE RATINGS MORONS..HOW MUCH..AND THEY PUSH THE HAT ACROSS THE TABLE...5BB...AND THEN EVERYONE GOES IN FOR A YARD...AND MBIAKEEP THEIR AAA...AND MAYBE ANOTHER 3BB FOR AMBAC....8BB BETWEEN ALL OF THEM IS BETTER THAN ANOTHER 100BB LOSS FOR EACH OF THEM IF THEY GET DOWNGRADED.

Rich: ITS A JOKE. THEY ARE TOAST IF THESE SUBPRIME BONDS FAIL. TOAST. IT SAID THEY WRAPPED $650BN OF STUFF (MUNICIPAL, STATE AND STRUCTURED BONDS). AND THEY GET $1BN TODAY? U KNOW WHAT THAT IS POP. THATS LIKE SAYING THE BONDS THEY WRAPPED WENT FROM PAR TO 99.875. UM WOULD THEY NEED ANY MONEY IF THAT WERE THE CASE? RIIIIIGHT NOW TRY PAR TO 90 ON THE WHOLE PORTFOLIO,(ASSUMING A LOT OF THE SUBPRIME GARBAGE IS WORTH 20)..AND THAT IS BEING REAL GENEROUS.. DIFFERENT NUMBER.

Eric: THE CONGRESSIONAL HEARINGS ARE REALLY GOING TO BE GOOD ON THIS! WHAT MAKES THIS SPECIAL IS WHEN THE STREET IS ASKED, “HOW MUCH CAPITAL DO THEY NEED?” THE STREET RANGE IS ANYWHERE FROM 4BB TO 20BB! AND THE RATING AGENCIES HAVE LITERALLY SAID, “WE’LL GET BACK TO YOU ON THAT!” THAT IS LITERALLY WHAT MOODY’S SAID LAST WEEK!

Chatter

News Item (BN) Orange County Funds Hold SIV Debt on Moody's Review

Update: ``We don't have the same kind of debt that Florida has," said Paul Cocking, the chief portfolio manager for the county.
``They're all highly rated assets.'' 
 
Eric: YOU SEE ORANGE COUNTY California with the subprime bonds?
 
Rich: NO  ITS FLORIDA . I WOULDVE DIED IF IT WAS CALIFORNIA
 
Eric: I know its hard to believe but, Orange County California too.  The same one that blew up in '94. Don’t worry though, they have the “good bonds” not like Florida ! The Chief Investment Officer said so.
 
Rich: GOOD GOD. U WANNA GO WITH THIS FOR SUNDAY? I CAN TELL THAT STORY LIKE NO ONE.
 
Eric: I THINK WE HAVE TO!
 
Rich: LETS SEE HOW IT UNFOLDS THIS COULD BE PERFECT. THIS GUY MOORLACH WHO IS THE COUNTY SUPERVISOR IS THE GUY WHO tried TO BEAT BOB CITRON FOR COUNTY TREASURER IN THE '90s WARNING EVERYONE THIS GUY WAS A PROBLEM. HE LOST IN A LANDSLIDE. THEN THE ROOF CAVED IN AND THEY JUST appointed HIM! THEY WERE LIKE UM NO ELECTIONS HERE. THEY JUST SAID THIS GUY UNDER STANDS AND WE WERE WRONG, TAKE OVER.
 
Eric:  Moorlach said, "WE'LL FIND OUT PRETTY QUICK!" If the bonds are bad. I WONDER IF MERRILL SOLD THEM THE BONDS again!

Chatter

News Item: Subprime Rate Five-Year Fix Eyed by U.S. Regulators, Lenders

Eric: And after 5 years what happens? Santa Claus comes and helps
these people pay 11% AND principal...which has gone up at least 15%?

Rich: AFTER 5 YEARS THE GUYS WHO SET THIS POLICY ARE OUT OF OFFICE. THEN IT'S SOMEBODY ELSES PROBLEM.

Eric: Then it's the Easter Bunny's turn.

Chatter

Rich: So there's some good stories about dead beat commercial real estate developers starting to crop up. Bad news for the Commercial Mortgage Backed Security ("CMBS") market.

Eric: Ah, excellent. Another highly levered sector that's going to get a "time out" for the next couple of years. Street has made a lot of its dough in CMBS underwriting.

Rich: Yes it has. So lets see, No more Residential MBS underwriting, no more CMBS underwriting, no more high yield LBO fees, no balance sheet. As Ahmad from the Bad News Bears would say, "That's a lot of Goddamn bad news for the Street in '08!"

Eric: It reminds me of the scene in "Donnie Brasco" where the gangs steals all the parking meters and is banging them with hammers to get them open. Michael Madsen's character, the captain of the crew "Sonny Black" is bitching, "Sonny Red and his ‘frickin’ crew got the airport, the trucking and paving unions, what the Hell do we got to make money." And Bruno Kirby's character cracks wise, "Well, we got a lotta ‘Frickin’ parking meters!" Everybody laughs except Madsen, who belts Kirby across the mouth!

Rich: Yep, just like that.

Chatter

Rich: Ah, and wait, look here. Citi is raising money by selling Abu Dhabi $7.5BB 11% notes, with options to convert to stock.

Eric: Didn't they just issue bonds 2 WEEKS ago, $4.5bb 10yrs at 6.25%?

Rich: Yes they did. And those are just straight bonds, no rights to convert to stock. They better hope the AAAA-RAABS will keep ponying up because I donít think the bond holders will anymore.

Chatter

Richie: Hey here's a story. Citi is looking to cut costs after its subprime writedowns and come up with policies that make it more efficient going forward.

Eric: How about starting with a policy of "No more running the place like a bunch of ass grabbing chuckle Heads." I think the sheik may like something like that.

Richie: Right and another one might be, "Lets not pile into markets that anyone with ANY sense is getting out of...and DOMINATE IT!"

Eric: And perhaps they should do away with the policy of, "lets rent out balance sheet we don't have...by the billions into levered up subprime disasters...just because we think they'll never ask us for the money." That would be a good one too.

Rich: Ass clowns