This morning is so chock-full of earnings releases and other important stories that I really was having a problem figuring out what I was going to write about first. Freddie's earnings came out showing they were down $821 million for the quarter, cutting their dividend (the fact that they are allowed to pay ANY dividend after the events of July 12 should be a poke in the eye with a sharp stick for all of us) and taking $2.8 billion in credit charges on their insurance book and a $1 billion writedown on their subprime securities book. Their estimates of .0012% losses in 2008 and .00014% in 2009 on their credit books are a bad joke. Try moving the decimal point one big move to the right and then multiply by two and you'll get a reasonable number!
There also was Citigroup announcing it may buy back $5 billion of Auction Rate debt and pay a $100 million fine for hoodwinking investors (partially through tainted research), at the same time as it is being reported that they plan on reversing the Spitzer-era reforms on separating equity research from investment banking. That's awesome! Provided that Citi can actually return to underwriting equity, this should provide much fodder for comedic blogging in future years.
There were at least four other stories I was considering as I thumbed through the Financial Times when I stopped to read, "Clones Turn Pitbull Loss Into Happy Tale." It seems the South Koreans are cloning peoples pets and charging about $150,000 per cloned animal. I was reading this article thinking,
"Cloning pitbulls, great. It's not like that breed has any psychotic violence issues to begin with, lets clone a few hundred and see what happens. Every drug lord in the U.S.A. will have an army of these mutant beasts!.
And then, I look to my left and see a TRULY SHOCKING ARTICLE! "Treasury Turns to Wall Street for Fannie and Freddie Advise." The coffee literally dribbled out of my slack-jawed mouth! Quoting from the Times article;
"Henry Paulson, Treasury secretary and former Goldman Sachs chief executive is turning to his former Wall Street rivals for "market analysis and financial expertise" related to Fannie and Freddie which suffered a crisis of confidence last week leading Congress to approve a rescue plan for the two groups."
They are out of their minds, they really are. My favorite part is Paulson has been talking to John "The Capital Cremator" Mack at Morgan Stanley about Stanley being the chief adviser. Forget about the fact that Treasury should have people that know a hell of a lot more than Morgan Stanley investment bankers, but Morgan Stanley and practically the rest of The Street have proved that when it comes to residential mortgage credit risk, they know LESS than either Freddie, Fannie and Treasury! Does Paulson not understand that it was this stunning mispricing of risk by The Street (aided by the ratings companies) that caused this whole problem to begin with? The fact that Paulson turned to Morgan Stanley, one of the late to the party group that plowed in with both feet at the VERY TOP of the market is amazing. Why doesn't Paulson see what Stan O'Neal and Dow Kim, formerly from Merrill Lynch, have to say?
Now, I know that Stanley's advise will be limited to just "capital markets" advice and, "not expected to include work on the future status of Fannie Mae and Freddie Mac", but how do you really separate the two and be effective? I don't think you can, and Morgan Stanley's track record makes you really wonder what value they are going to add. Additionally, I've seen the work that investment bankers have done in the past on Freddie and Fannie, and you can write a very large book on what they didn't understand. Treasury and Morgan Stanley were quick to point out that the mandate for Morgan Stanley is prestigious and that Stanley will be waiving any fees. Additionally, this work will prohibit Morgan Stanley from participating in any future underwriting of any capital raising by either GSE over the next few months. Big whoop! There is going to be exactly one capital raise from Freddie and then it's Treasury's turn.
So why would Morgan Stanley be so anxious to do this? Well, yesterday it was reported that Morgan Stanley froze thousands of clients home equity credit lines of credit. A little cashflow problem perhaps? Additionally, Morgan Stanley has about $20 billion funding to roll in 2009. I have a strong feeling as this credit crisis intensifies, Stanley, along with Lehman and Merrill are going to have to turn to the Fed's Primary Dealer Credit Facility. That's the fund that lends tax-payer money against collateral that we should be dropping on the Taliban! Therefore, in my twisted, cynical mind, I think Morgan Stanley just bought themselves at least one, get out of jail free card. When everyone gets rightfully up in arms next year as the government spends billions to keep them afloat, someone can say, "Look at all the selfless and patriotic work they did advising Treasury on the GSE's." That's what I think.
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