ING France raise, ah, capital

Wednesday, July 30, 2008 | | 4 comments »


From New York to London, Madrid to Ankara, Wellington to Sydney, Geneva to Berlin (to mention a few) worried bankers are selling off obligations at 20 cents on the dollar and /or kissing the tails of likely investors in order to shore up balance sheets.

But some, it appears, are not so concerned. This was another piece of mail waiting for me on return from holiday.

Exhibit 1: The Invitation

It is impossible from this side of the invitation to know if the raven haired lady is offering "personal coaching" of the telephone booth type; or some other strain of, hopefully, greater distinction. But turn over and all is revealed. Well, some.

Exhibit 2: The Disappointment - where is the vital savings rate stat?



Oh, right - cash coaching. From ING Direct (France - does it need to be added?)

ING has, like many of its competitors of course, a large asset-backed security portfolio with exposure to the US. A recent Morningstar report on the group says:

"These subprime and Alt-A securities amount to 75% of equity, but 95% are rated AAA, providing a strong cushion from losses on the underlying collateral. ING has largely limited its exposure to higher-quality portions of the Alt-A market, with the underlying mortgages carrying virtually no loan/value ratios above 80% and no FICO scores below 680."
Morningstar somewhat bravely rate the firm a Five Star buy on the back (mainly) of ING's growth prospects in Central Europe and, especially, Asia. Not those in France. Which means over there the "Invitations" probably use fabulous savings rates as eye candy rather than the unrelated vital stats of young ladies.

Or at least I hope so for holders of the equity.

Exhibit 3: ING share price


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On return from a fabulous trip to the south west of France a fresh copy “Global Finance” was waiting on the doorstep.

It is the first time I have read the magazine for which I took a free, promotional subscription via the RevResponse service written of here in April and May. The cover story on carbon trading alone is worth the read; but much of the rest of the issue, particularly the timely "Focus" section on events unfolding in Turkey, was valuable.

I write this plug to show that the RevResponse service works as promised: one can get useful finance (or other) magazines without paying and without subjecting oneself to endless email or snail mail spam.

If there is a catch it is this - subscribers to the free offers must be professionals of the industry served by the magazine in question. Other than that, the system works by geographic location. Some publishers will not make offers outside their target areas. The Deal and The Economist (trial) for example, will not send free subscriptions outside the USA.

But several others have international offerings including, for example, World Oil and Risk & Insurance.

The full catalogue is here; and the international eligible section is here. Alternatively, the 'Free Resource Center' widget promoting the service in the middle column of this site can be used to the same end.

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From 21 July, a two week writing gap/cellar refill down by le Canal du Midi.

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Amazing scenes as Mr Cox announces "new" rules aimed at naughty short sellers. These bear remarkable similarity to "old" rules announced in June last year.

Naked shorting should not be allowed - that is clear. If the SEC are so sure of their audit showing larger floats than issued stock then there are grounds, it would seem, to take action. There are also bear squeeze opportunities going a begging - albeit difficult ones to take advantage of.

On the other hand, if market participants just think, for some odd reason, that financials do not look a great place to be, the regulator is on a political justify-our-existence romp just as the proverbial is being blown off the fan. And a decent portion of shorting (legitimate or otherwise) will probably shift into the options and CFD markets simply on the back of the bureaucratic and administrative confusion Mr Cox's intervention is generating.

There is the greater question of Fannie and Freddie - and by implication systemic dangers - which Mr Cox referred to directly in his testimony. But highlighting his agency's inability to enforce its regime or targeting "rumour mongers" (brilliant) is not any solution to the spawn of excessive leverage.

Related articles:
In defense of short sellers
SEC calls top bankers in hunt for 'manipulators'
SEC's new red herring
SEC moves to curb stock manipulation

Feds fight the fear factor

SEC Chairman Answers Critics

Christopher Cox's Shorts
(Fox video interview with Mr Cox - recommended)

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Livres Hebdo (sub required) have announced the release for 8 September of:


Sample extracts:

"Tomorrow I’ll take it easy. I’ll place 200 million on a Death Index tracker backed by either a future, a warrant or maybe an interest rate swap. It all depends on how my concierge greets me in the morning. If he says “Not at all hot for summer”, I’ll buy the upside on the DAX for 20 billion. Otherwise I’ll bet on a drop."


7h21 : The moron. He said “I put my heating back on” What do I do? Compromise and I could lose 10 billion. The guy just doesn’t realise that with these guesstimates France could lose a quarter point of GDP growth. It's always the same with the man in the street – a lot of talk, a lot of complaining but when it comes to decision making, then there's nobody home.

If it's got you in stiches pre-order it from FNAC here (in French only).

Hat tip: www.apprendrelabourse.org

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"On the one hand, repeatedly decreasing incoming orders indicate that Germany''s momentum will loose steam in the next six months. On the other hand, continuing price increases for energy and food are reducing the purchasing power of consumers. Furthermore, loan conditions for companies should worsen as a result of the financial market crisis and the expected interest rate increase by the ECB." (ZEW press release)

"The expectations of the financial market analysts are strongly influenced by the current forecast of a weaker economic momentum in 2009." (ZEW President Wolfgang Franz)

"The upswing will lose significant drive in the coming 12 months." (Germany's Chamber of Industry and Commerce)

"Leading indicators point to much worse news ahead on the manufacturing side of the euro-zone economy, including more recently in Germany. As a consequence, the risk of a recession is increasing and, unlike the previous downturn, monetary policy isn't going to come to the rescue." (BNP Paribas economist Luigi Speranza)

"Germany is on the verge of falling back into its old weak growth pattern. For 2009, we see a notable trough in economic growth looming." (BDI Federation of German Industry's managing director Werner Schnappauf)

"The data is really quite shocking. The mood among the analysts has dropped close to freezing point." (DekaBank economist Andreas Scheuerle)

"The strong increase in the price of oil is the deciding reason for the worsening outlook." (Commerzbank analyst Matthias Rubisch)

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With crude pushing $138 as I write, this fresh in from Eurostat this morning (2006 data being the latest available):



See? The UK does have at least something economic going for it. Sort of.

Nota bene, from Eurostat: "The energy dependence rate is defined as net imports divided by gross consumption, expressed as a percentage. Gross consumption is equal to gross inland consumption plus the fuel (oil) supplied to international marine bunkers. A negative dependency rate indicates a net exporter of energy. A value greater than 100% occurs when net imports exceed gross consumption. In this case, energy products are placed in stocks and not used in the year of import."

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Previous entries here covering French property prices as scored by the Fédération Nationale de l'Immobilier (FNAIM) have had an incredulous tone at the accompanying sanguine commentary of the organisation. Their latest quarterly missive treats readers to this claim:

"The idea that there are direct risks of contagion to the French property market from the year-old US subprime crisis well deserves rejection. Indeed, the mechanical selling obliging US households to take losses on their homes against a backdrop of collapsing prices, oversupply and reduced demand has not spread…However, the financial and stock market crises which have since broken appear to have definitely affected the health of the property market." (page 1)

This finesses, somewhat, prior more bellicose rejections. And, leaving aside the curious question as to where, according to the FNAIM, the current financial crisis originated, the declaration (unlike previous ones) seems to be actually supported by the numbers: the Q1 drop of –1.0% has been all but annulled by a Q2 rise of 0.9%.

This, say the FNAIM, translates to an annual 2008 forecast of +1.7% (page 1). Or 1.6% (page 6). Or 1.5% (page 7). Whichever, in fact, of the convenient methods, frequently mislabelled, that the reader prefers.

One explanation for this unexpected rush of good vibe is that the FNAIM retrospectively adjusts its monthly data once the quarterly data is known. Which is, of course, an invitation to compare the monthly releases to the quarterly ones.

Exhibit 1: FNAIM monthly versus quarterly data


Funny, isn't it, that the FNAIM’s adjustments say the exact opposite in aggregate of the raw(er) monthly numbers. Even the year-to-date number, at minus 0.1%, can hardly be judged as confirmation of the monthly data’s equivalent.

It is not a shock, therefore, that some have already questioned the integrity of the June adjustment; and it does seem FNAIM have plenty of latitude in both the samples they take and the opaqueness of their statistical methods. It is, for example, notable that the monthly end May comparables are remarkably different in composition and magnitude (but not direction) to those of June.

Exhibit 2: FNAIM monthly data for May

Why these gaps and jumps are unexplained is testament to FNAIM’s close-chested calculations, biased commentary requirements and locked down databases. On the other hand, it may be that FNAIM have actually discovered an asset class that is immune from the credit crisis despite its reliance on credit.

However, deciding which data are more representative of reality requires only a survey of general conditions. Down between 3% and 5% in a year looks accurate. 'Adjusted' flat year-to-date and year-over-year is laughable; and it is surprising the President of the FNAIM, René Pallincourt, risks so much credibility so stating.

That FNAIM deny the straight line relationship between subprime, French banking write downs, credit scarcity and falling prices is their choice. But torturing the data to lend statistical weight to that remarkable logic is – euphemistically – disingenuous.

Related articles:
Immobilier : les clignotants passent au rouge, Paris résiste
Nouvelle prévisions de baisse des prix de l'immobilier

Réactions des économistes à la production industrielle

HSBC chiffre à 0,5 point la perte de croissance liée au retournement immobilier

La baisse revue à la hausse

Sources: FNAIM monthly data; and quarterly data

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Neat overview from leMonde.fr entitled "Subprimes : 4 stratégies pour sortir de la crise". Looks more like 3 and a half; and that "Dépréciation d'actifs" graph will require an update sooner rather than later (c/f links below).



Related stories:
Europe banks set for big Q2 writedowns-analysts
UBS faces more US credit writedowns

Merrill May Take Writedown, Sell BlackRock, Citi Says

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Brought to you by the Financial Services Authority:

Fox Point Capital 0.40% short (2 July 2008)
Marshall Wace, LLP 0.40% (27 June 2008)
Bridger Management, LLC 0.35% (22 October 2007)
Tiger Global Management, LLC 3.4% (on or before 20 June 2008)
Steadfast International, Ltd 0.842% (16 May 2008)
FIL Limited 0.25% (on or before 20 June 2008)
American Steadfast, LP 0.392% (May 27 2007)
Steadfast Capital Management 1.233% (February 29 2007)
Oceanwood Global Opportunities 0.455% (on or before 20 June 2008)
Odey Asset Management 0.28% (on or before 20 June 2008)
JGD Management Corporation 0.49% (6 June 2008)

Not quite 8.5% of the issued share capital. Shame be upon these manipulative abusers of rights issues so easily able to punch amazingly above their weight.

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Sunset, physically fit, long nights, leçons de séduction
and Aubade.

Salute the ladies of Saint Savin, Vienne.
Savoir faire, artists, therapists (even). But now sad.

Many others too. What now of Tigresse, Lotus, Verone
and the model to match?

Laid off, not even your regional president
Madame Ségolène Royale, doubtless quite mad

Could stop the the sun rising at the new factory in Tunisa.
Globalisation is not a fad.

Nor did voluptuousness make the break of day.
The new collections plus skinny are simply not up to scratch.

Lingerie française. Now made in the Maghreb.

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Texas Pacific Group Capital (TPG) are abandoning the Blowhard & Bongley rescue. In the spirit of black comedy that now dominates the UK's financial sector TPG had this right of action written into the original deal should the Maestros in the Ratings Game lower B&B's credit worthiness.

Well, never an outfit to knowingly shun publicity, Moody's have done the trick. See? they can be hard, too. This is surely the death rattle for B&B in its current form.

But, meanwhile, the spotlight has turned (again) onto the Financial Services Authority (FSA). Many inquiring minds, most of them in the British Bankers Association, want to know WHAT THE ASS the FSA is going to do now about the short sellers who have infiltrated Moody's out of Crispin Odey's shop.

Unsubstantiated reports have BBA suprema Angela Knight alternately frothing at the mouth and plaintively asking anyone who will listen "Now who will protect the market from getting a false impression of the demand for our members' securities?" A spokesman for BBA member HBOS plc, commenting on condition of anonymity, said of the FSA Plan B "We weren't serious when we signed up for it. It was just a bit of a laugh, really. Expect Plan C presently."

For its part, having inadvertently carved a niche for itself with its recent disclosure regime as a friendly PR agent for short sellers (did the wicked, wicked Mr Odey get to regulators too?) the hour is upon the FSA to retool and let the word go forth that within their arsenal of regulatory devices are indeed the weapons of fear, surprise, and ruthless efficiency (the current one of three really isn't cutting it). The near fanatical devotion to the Pope and nice red uniforms cited in the new promo video below are mere nice-to-haves.

On the other hand, they need every assistance going.





Related articles:
Bungle bank
FSA imposes short-selling rules and rejects critics
Short sellers wager £60m that B&B stock will fall
FSA clampdown on 'shorting' of rights issue bank shares
B&B: Texas raiders in saddle at lender

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Time lags are strange things, really. The moments between a blow to the crotch…and the pain; the time between an earthquake…and the tsunami; and the wait between a major dislocation in credit markets…and the ensuing job losses in the wider economy leading to lower consumption.

The US is not there yet (which is one reason there are still optimists) but chances are the shots taken to the tenders will not be denied their inxeorable pain however much praying is done in the foetal position.

The latest ADP National Employment Report, whilst showing a definite confirmation of the Bureau of Labor Statistic’s now negative trend data, reveal most damage is still to be found, unsurprisingly, within the construction and mortgage financing sectors. But this bit is a likely harbinger for the wider economy:

"Employment in the service-providing sector of the economy declined 3,000, the first decline since November 2002."

Exhibit 1:

Europe and US futures data are down very modestly in the wake of the report; if that's not a time lag in action (and on cue) go ahead and take the (benign) over for Thursday's non-farm payroll data.

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See Dick run

Wednesday, July 02, 2008 | | 0 comments »


Richard Grasso, or 'Dick' as friends (and enemies) call him, is back in the news. The case against him has been thrown out by the New York State Court of Appeals. An entertaining background is in this Fortune article.

The case was about whether or not Mr Grasso's job at the New York Stock Exchange (NYSE) was worth $188m. In other words, the public wanted a case brought because they thought his package was unjust.

Although the answer is morally obvious to most it is expecting much that a legal action would rule thus in a context where the money was already voted by the board of the NYSE, had been paid (except for $48m in pension benefits) and did not involve any public funds. Nor would the NYSE have done anything particularly admirable with the difference had a smaller salary been settled on instead.

As it happened, the judges did not have to rule on the "fairness" question. From the NY Times link above:

"The decision means the case was not decided on whether Mr. Grasso’s pay had been unreasonable but rather was thrown out because the exchange merged with Archipelago Holdings in 2006, becoming a public company. The appeals court concluded that the attorney general has no standing to sue Mr. Grasso since the exchange has been converted from a nonprofit entity to a for-profit corporation, negating the attorney general’s ability to sue on behalf of the public rather than for private shareholders."
The irony of Archipelago's role in the technical victory will not be lost on Mr Grasso. Pre-NYSE, Archipelago (an electronic trading-platform company) was 15% owned by Goldman Sachs. Goldman pushed hard for the merger with the NYSE but encountered resistance from Mr Grasso. His departure paved the way for the transaction.

At the time Goldman was run by Hank Paulson who was on the NYSE board that voted Mr Grasso's compensation. However, Mr Paulson also led the charge to get rid of Mr Grasso (having missed the board meeting where the final package was approved) - a constellation of events that led to the Grasso side nursing a conspiracy theory against Goldman/Paulson.

Still, hard for the victim to complain of a conspiracy that inadvertently ends up paying him $188m.

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"Like chess without the dice" is a nod towards both the world of football from where this comparison came (Podolski, Germany); and the world of stock market strategy, so often a parallel universe when forecasting is involved.

In that spirit the following chart, a current pet, does not mean anything. There is no particular reason to consider the two periods correlated (although there are obviously some ties). But it is astounding to watch it unfold as is. Especially today as the SPX hits 1261.

Exhibit 1: 2000-2002 equity & bond market versus now

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One of the ironies of this financial crisis is that if you have run a business prudently and are debt free but desperately short of working capital then you are all alone when seeking financing. Usually in the parallel lending shark-pool world of private equity.

In contrast companies that went wild at the top with expansion debt have effectively handcuffed themselves to conventional lenders.

Bankers, of course, are known as chaps who keep offering umbrellas when the sun shines; and snatch them back when the storm breaks. Sharing the shelter is not, generally, part of the deal. But between taking a soaking and tolerating a companion most of them are prepared to modify terms.

UK house builder Barratt plc is a decent enough example of this. The firm bought a rival, Wilson Bowden, for over £2bn last year by taking on a short-term credit facility of £600m. Barratt was worth close to £4bn at the time.

The firm now finds itself with circa £1.9bn of debt to service as its central markets collapse. Moreover, Barratt’s shares have declined over 95% to give the company a market value of under £300m. It is tough to raise more money than the worth of one’s assets.

But the good news is that with so much debt Barratt, as far as its lenders are concerned, has become the well-worn euphemism “a long term investment”. This is reflected in the nature of the deal – a refinancing – which aims to give the company an extra 2 years to find £400m.

Barratt made its acquisition in a bid to catch the UK’s largest builder, Persimmon plc. Everyone involved in the deal, as one might expect, thought it was a grand idea. Money was cheap and house prices had not declined for over a decade. Extrapolating that experience forward seemed the obvious forecast.

Now the rescue is en route. However, there is a slight issue: it is/will be based on assumptions about the length of a housing downturn. These guesses will be visible in the degree to which builders fiddle (with) the asset write-downs they should be making to reflect the state of the housing market. Taylor Wimpey plc has already begun this painful process.

The trend shows that property-sector managements have been persistently overly optimistic on this count. Not that analysts seem to be taking the hint. In May Panmure thought this yet Barratt today is at 63p/share. Worsening conditions (as they are) will imperil this rescue and risk showering further troubles upon the banks.

A final point which stretches beyond the property sector. Barratt carry £817m of goodwill relating to the Wilson Bowden purchase. Since IFRS was introduced in the UK in 2005 goodwill is no longer written down mechanically. It must be ‘judged’ impaired; and inevitably this is a difficult task done in hindsight - for who can judge impairment meaningfully in fast changing times?

£817m was over 35% of the buy price. That is a lot of value to put on the upmarket Wilson Bowden trade name; or its supposed superior ROA earnings potential; or whatever else is within the figure. Barratt are not alone in having paid handsomely for acquisitions. But where/if buyers have managed, in easy money times and contrary to prudence, to incorporate goodwill into any of their financing arrangements there will be trouble; and the incentive to under impair will be strong.

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