Total borrowings during the week to 25 September at the Federal Reserve discount window more than doubled:



With the following non-result in the interbank lending markets (as of 26 September):

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[UPDATE: Benelux 49% nationalisation it is.]

Do Minister Reynders and the Belgium government not yet realise this kind of thing is the kiss of death?

Fortis used to be proud number 14 on the Fortune Global 500 list - a blurb also showing them on over 26 times leverage. At the last balance sheet date the asset base was €974bn against equity of €30bn, levered 32 times.

Mr Reynders, Santa Claus and Rudolph may confidently announce this is only a liquidity issue but, at a time when banks are trying to delever and yet leverage increases, the issue of solvency is surely a legitimate concern. Either way, it is not a great shock that potential saviours reportedly want public guarantees (EuroPaulson, please stand up). According to Bloomberg:

"Talks about a takeover of Fortis by ING Groep NV and BNP Paribas SA stalled late yesterday amid demands for state guarantees, De Standaard reported on its Web site, without saying where it got the information. The Sunday Times reported the Belgian central bank and regulator are preparing to bail out Fortis. The newspaper didn't say where it got the information. "
Why might that be?

The €41.7bn Fortis structured credit portfolio has decreased €6.5bn since end-2007 and the bank reported that only €67m of this was subprime-related in the half (page 17 - huh?) with €4.6bn of the drop due to "repayments, final redemptions and exchange rates".

Yet within the proprietary trading of the credit spread bond portfolio lurks the €14.2bn conduit 'Scaldis' described by Fortis thus:

"Scaldis is fully consolidated within Fortis and is a conduit that purchases eligible assets from investment grade, non-investment grade and unrated sellers. The asset pools contain continuous financing of third party clients’ assets such as consumer and auto loans, trade receivables, mortgages and lease receivables."
If you're a shareholder and still not worried, take a look at it (page 81):


Without even going near the car loans and CLOs there is €4bn of residential mortgage exposure in there. It may not be subprime but it sure is not prime either. And it's only 20% of the total residential mortgage exposure in the €37.6bn credit spread portfolio - which according to Citi research enjoys an overall carrying value of 93%.

Course the accounts have been audited and credit agency scanned. So ideas that writedowns have been light in the quarter are probably unrelated to q1 guidance that:

"Lower capital gains are anticipated to be offset by lower impairments on the structured credit portfolio" [emphasis added]
Which they were: €380m versus €342m (page 7). Thank goodness they were right about that.

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Vive le free press, in this case the New York Times:

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.

[...]

Few knew of Goldman’s exposure to A.I.G. When the insurer’s flameout became public, David A. Viniar, Goldman’s chief financial officer, assured analysts on Sept. 16 that his firm’s exposure was “immaterial,” a view that the company reiterated in an interview.

It's almost enough to make one doubt the bona fides of, well, most of those intimately involved in this catastrophe. But then again, how one earth could a little thing like this


cause any problems whatsoever to AIG's number one trading partner?

Poor old put upon Lucas van Praag, the Goldman spokesman cited in the piece, knew all the time the famous Lehman-style "active hedging strategies" had the whole thing under complete control at all times.

Just like Mr Buffet.

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...according to Belgium Minister of Finance Didier Reynders. I think it was a Bismarck line to never believe anything until it has been officially denied. But that probably does not apply in this case.

Nonetheless, Fortis shares are off 40% since 1 September and the cost of protecting their bonds from default has surged to record levels, according to Bloomberg this morning.

This is all about Tier 1 adequacy levels related to absorbing the circling albatross of ABN Amro operations. Fortis need €5bn by 2010 (their timetable); their market cap is about €13.6bn as I type; and the capital raising window - be it equity, debt or disposals - is currently hardly open.



Oh, yes. Fortis have also this morning, in an attempt to quell "rumours", said that only 3% of its Benelux retail and private-banking customer assets have left it since 1 January.

Reassured?

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A small reminder that this is all about houses and not hold-to-maturity. I don't know exactly what hold-to-maturity is (though I'm pretty certain it's not the loving neighbour of mark-to-market) but I do know I wouldn't want any of it to appear in my tax paying life.

So while the fleas in DC argue about who owns the dog here is a little graph on the state of the single home market in the US.

Exhibit 1: US single home sales & stock, 1970-2008


Some bullets:
  • stock to sales ratio has never been this high out of a recession
  • stock, although dropping, is still only near prior historical peak levels
  • sales are maybe 2 quarters away from troughs historically associated with bottoms
While the stock-to-sales ratio and absolute sales are at levels that in the past might have looked a turning point high inventory is clearly a problem this time. You may have heard the fine analysis President Bush, always at home on economic matters, made on this very point.

Previous inventory peaks have taken 1 to 3 years to trough from current levels. Given the destruction this cycle has wrought on lenders' balance sheets the top end of that historical guidance looks the minimum required just to get some stability back into the mortgage market (alone).

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Cute little story in the tabloids which is even being carried by the broadsheet the Daily Telegraph: Lord of The Mansion Hugh Hefner is being forced to make some cutbacks due to the credit crisis.

Year over year Playboy Enterprises stock is down 63% with no signs of tumescence on the horizon.

Separately - and in no way related, I'm sure - Mr Hefner seems to being having some woman problems.

NB: Nod to the Mrs Merton show for the post title

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Began a draft on this only to see that Sam Jones over at the FT Alphaville site has done it excellently already. Point being normal distributions are not helpful - but please do read the link.

Exhibit 1: LIBOR - OIS spread since 2002

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Hong Kong quoted Bank of East Asia (BEA) has been battling "rumour mongering" which is "unfounded". So says the company, the Hong Kong Exchanges and Clearing and the Hong Kong Monetary Authority.

Text messages spread far and wide of the supposed liquidity problems facing BEA which resulted yesterday in large queues of "foolish and naive retail customers" seeking to withdraw their savings. Overnight many of these lines had dissipated on the coordinated denials of regulators and the bank itself.

BEA Chair David Li, his directors and the local equivalent of Warren Buffet Li Ka-Shing (for whom a better surname couldn't have been invented in the circumstances) have even gone in and bought shares in a show of confidence. Nobody knows how much was laid out in this show of confidence ("substantial" amounts according to "sources"). But they have bought some unspecified quantity of the bank's equity.

NakedShorts has noted the tendency of "malicious rumours" like those in this story (but, let's be clear, not necessarily those of this story) to be viewed retrospectively as "early facts". Lack of interbank liquidity is ultimately the cause of these scares; and the irony is that a centrally planned system (or maybe hybrid is more accurate) is depending on a democratic Congress to sort it all out.

Related links:
'Malicious rumours' spark run on Bank of East Asia

Bank of East Asia hit by trading loss

UPDATE 1-Tycoons prop up Bank of East Asia, shares rally

Asia Money Rates Rise as Bailout Doubt Chokes Lending (Update1)
Bank of East Asia defends liquidity

HK central bank injects funds amid tight credit
Hong Kong authorities move to quell rumors over bank's stability

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It starts off gently. A little bet here. A larger risk there. Dentists do it. Lawyers do it. Bankers do it. Even the odd bureaucrat too. Lending it a veneer of respectability. Pretty soon the user who knows no better is hooked on it : short selling.

I'm not saying in makes you dip into Granny's purse for a fix. Not at first anyway. I'm not saying it makes you a (completely) Bad Person. But it is the thin edge of the proverbial.

For the next step is entry into the shadowy, coded, jargon filled world of options. This is harder stuff, now - gamma, theta, vega, delta. Straddles, butterflies and generally going naked short all over the shop in an alarming variety of degenerative, vulgar positions. Unwholesome stuff.

And it feeds the need. Before one realises that the flight out the door on the wing of serious leverage was ever made assets are 150 times equity and an entire portfolio of unbacked credit default swaps have been hidden from sight in some Vanuatu-registered offshore public lavatory.

No point fighting it at this stage. Might as well retire directly to the Shady Pines "Active Hedging Strategies" rest home populated by (amongst so many unfortunates) the spirits of Metallgesellschaft and, of late, Lehman Brothers.

So don't be fooled by the charm, wit and logic of short pushers like Mr James Chanos (some shorters' campaign material is below for easy id) and his recent oh-so-clever Wall Street Journal guest editorial. Write this instant with serious pen and ignorant ink to your political representative to demand that this repugnant, degenerative habit - which can also cause blindness, let's not forget - be banished from our financial system.

And also to ask for cash to pay the mortgage.




NB: Mr Chanos is not quite as at home as Peter Tosh in this shot. For the avoidance of doubt that is because Mr Chanos does not to my knowledge promote the cultivation or smoking of any vegetation where such acts contravene law. So don't sue me. What's more, neither the gardening nor the recent smoking habits of the SEC, FSA and their equivalents across the short-banned equity market world are known to me.

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The last post was pretty unfair to those quoted. For balance it is polite to illustrate that many more people than them thought - many times - that the worst was behind us. With nearly every significant US government intervention since August 2007, in fact.

Course, this time it's obviously true.

Exhibit 1: S&P500 reactions to significant US economic announcements since August 2007


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With Congress playing hard to get (Dodd just reported on the wires as calling the Paulson plan "not acceptable" in its current form) a little follow up from a May posting on the likely duration of the credit crisis seems due.

Several experts were cited in that article setting out the belief that the worst was past.

1. Chris O'Meara, the former chief financial officer of the former investment bank Lehman Brothers said on 21 September 2007:

"I think the worst of this credit correction is behind us"
A world of pain and failed "active hedging strategies" later and things look so different.


2. In May 2008 John Thain, the former CEO at the formerly independent Merrill Lynch said:

"Well, I think that the the vast majority of the credit-related problems, which of course began with sub-prime and then moved to other classes, are in fact over."

Mr Thain subsequently revised his view and now works for Bank of America.


3. Mr Buffet, also in May 2008 said:

"The worst of the crisis in Wall Street is over. In terms of people with individual mortgages, there's a lot of pain left to come.''

Clearly Mr Buffet remains a man to watch mainly when he puts his money behind his opinions. But at least he was half right. UPDATE: He just put down some money.


4. Current man in the news Hank Paulson said, again last May:

"There's progress, I think we're closer to the end of this than the beginning...Later this year, I expect growth will pick up"
The good news with this view is that he could still be right on both counts. The bad news is that for the moment he is not.


5. Bill Miller of Legg Mason fame told his shareholders in April that:

"We will do better from here on, and that by far the worst is behind us. The credit panic ended with the collapse of Bear Stearns, and credit spreads are already much improved since then."
No comment.


6. Sir Win Bischoff, Chair of Citi gave by far the most equivocal quote back in May:

"...2008 is not going to be easy. But I think there are sufficient numbers of people working very hard to get (the financial system) out of this and I think we will be able to do so."
Admirable fluff.


7. Which brings us to Alan Greenspan. Difficult to find direct quotes from the man in the wake of Bear Stearns' implosion. However, "attendees" of one of his $200,000 appearance fee Specials in New York in May report him as saying the worst was well behind.

You may wonder why there is no formal record of this declaration. The answer, according to the organisers of the NY conference, was that the Maestro demanded a media ban. This means that it is difficult to contrast his then position with his now (ie September 2008) position of:

"The current credit crisis is the most wrenching in the last half century and possibly more"
Apparently Mr Greenspan thought this safe and uncontroversial enough for media coverage but could not get anyone to stump up $200k for it


8. Best for last. The Bank of England, in its Financial Stability Report of last May claimed that credit markets:

"overstate the losses that will ultimately be felt by the financial system and the economy as a whole".
Captions on a postcard.

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Including:

Express Scripts, Inc. (ESRX)

Their business? Read their highly financial mission statement for yourself (and possibly weep):

"Express Scripts makes the use of prescription drugs safer and more affordable for millions of Americans through thousands of employers, managed care plans, governments and labor unions."
I don't know - check their website - maybe the SEC and/or Nasdaq found something integral to the capitalist system in there that just isn't obvious.

Nice to confirm once again that market mechanisms are in safe hands.


NB: The company have no idea how they got on the list either

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Marc Faber must be wondering about these belated calls for oversight and transparency by the SEC and Congress (hypocrisy being the grease that make the world turn). Entertaining interview:


Meanwhile, simultaneous urgings by Mr Bernanke and Mr Paulson on CNBC to speed things up in Congress make one wonder.

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Begs the question: Who the ASS can we blame now?

Wait - maybe the list was just too small. At 799. Happily the SEC has thought of this and expanded the order to allow exchanges to add to the list. Dow Jones reports tonight on the New York Stock Exchange's process for achieving this:

"Blast emails were sent to more than 2,500 NYSE-listed companies Sunday afternoon asking if they qualified to be on the short-sale ban because they are in the banking, insurance or financial-service business. Since the NYSE had no quick way to determine which of its members are in the financial business, it asked firms to self-certify that they are financial companies, subject to verification by the NYSE.

Further expansion of the list appears likely."
I'd not question that last line. Nor the possibility of a SEC Compulsory Buying Directive.

And self certification - what a grand idea! Wonder if they ever thought about that in the mortgage lending industry.


Link of the Day:
Short Sellers Keep the Market Honest

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Exerpt off DJ Newswires:

US Senate Dems to float rival aid plan for financial system

"Senate Banking Committee Chairman Christopher Dodd, D-Conn., said Senate Democrats intend to unveil their own plan to shore up the U.S. financial industry, which will likely allow the U.S. Treasury to receive warrants on the stock of firms that off-load their toxic mortgage assets onto the government."

Which sounds much like a line from the earlier quoted Why Paulson is wrong paper by Professor Zingales:

"...debt is forgiven in exchange for some equity or some warrants."
It's surely a case of Great Brains. On the other hand, this utterly fabulous (purportedly genuine) email from the keyboard of an anonymous Congressional Democrat might indicate the Mother of all Debates is coming:

"Paulsen [sic] and congressional Republicans, or the few that will actually vote for this (most will be unwilling to take responsibility for the consequences of their policies), have said that there can't be any "add ons," or addition provisions. Fuck that. I don't really want to trigger a world wide depression (that's not hyperbole, that's a distinct possibility), but I'm not voting for a blank check for $700 billion for those mother fuckers.

Nancy said she wanted to include the second "stimulus" package that the Bush Administration and congressional Republicans have blocked. I don't want to trade a $700 billion dollar giveaway to the most unsympathetic human beings on the planet for a few fucking bridges. I want reforms of the industry, and I want it to be as punitive as possible.

Henry Waxman has suggested corporate government reforms, including CEO compensation, as the price for this. Some members have publicly suggested allowing modification of mortgages in bankruptcy, and the House Judiciary Committee staff is also very interested in that. That's a real possibility.

We may strip out all the gives to industry in the predatory mortgage lending bill that the House passed last November, which hasn't budged in the Senate, and include that in the bill. There are other ideas on the table but they are going to be tough to work out before next week.

I also find myself drawn to provisions that would serve no useful purpose except to insult the industry, like requiring the CEOs, CFOs and the chair of the board of any entity that sells mortgage related securities to the Treasury Department to certify that they have completed an approved course in credit counseling. That is now required of consumers filing bankruptcy to make sure they feel properly humiliated for being head over heels in debt, although most lost control of their finances because of a serious illness in the family. That would just be petty and childish, and completely in character for me.

I'm open to other ideas, and I am looking for volunteers who want to hold the sons of bitches so I can beat the crap out of them."

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1. This is what's referred to as 'taking the piss'.

(Excerpt from DJ Newswire 5th UPDATE: Paulson Urges Quick, Clean Rescue Legislation)

"Meanwhile, a key banking industry trade group called for key refinements to the Treasury rescue plan, such as temporarily suspending mark-to-market accounting rules for all mortgage-related assets."

2. Seriously, if you tie two stones together, will they float?

3. "We're not aware of any legal challenge." an FSA spokesperson said. 'Not aware'. Classic.

4. Have you noticed the uncanny coincidental (I think) timing of trans-Atlantic bans on short selling and the breakdown of the LHC? It's out for months too.

5. Maybe the EU could have Sir Mick draw up a solution to the financial crisis while he's at it. The man has economic training after all from his time at the LSE (which he described as "really a dull, boring course”). Given his subsequent history at least we'd be having more fun than Paulson's offering promises.

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The New York times has it covered. Over $2,000 for every man, woman and child in the United States is merely one way of looking at it.

But - apparently - a comprehensive (or partial) health insurance system or a secondary education system not funded by local taxes are still socialism-gone-mad ideas.

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Never spend your money before you have it
(Thomas Jefferson)

Everyone not living beneath a stone knows what happened in equity markets last week. Included in that down/up roller coaster was the TED spread. Despite the absence of detail in the announcement credit markets see stability round the corner.

Or do they? Althought the TED spread has contracted dramatically in the wake of the announcement the 3 month LIBOR - OIS unsecured element of the spread is not exactly markedly different from its panic stations position. And this is the bit of TED that gauges risk as it is perceived by interbank lenders.

That suggests a persistent level of prudence (or mistrust) that would have been useful back in the promiscuous days of mortgage self-certification free love. These fellows are waiting to see the colour of Hank Paulson's money. Perhaps with good reason if 'The Hammer' lives up to his nickname. On the other hand the draft proposal (see links below) has the number $700 billion pencilled in.

Exhibit 1: Pre-Paulson 3 month LIBOR, OIS and 3 month T-bill rates, 18 September



Exhibit 2: Post-Paulson 3 month LIBOR, OIS and 3 month T-bill rates, 19 September



Just in related links:
$700 Billion Is Sought for Wall Street in Massive Bailout

U.S. Bailout Plan Calms Markets, But Struggle Looms Over Details
Proposed Wall St bailout to cost $700bn

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This two-pager, entitled Why Paulson is wrong, was emailed to me (and another 800 websites too probably) yesterday by its author Professor Luigi Zingales of the University of Chicago's Graduate School of Business. An excerpt:

If banks and financial institutions find it difficult to recapitalize (i.e., issue new equity) it is because the private sector is uncertain about the value of the assets they have in their portfolio and does not want to overpay[...]The Paulson RTC will buy toxic assets at inflated prices thereby creating a charitable institution that provides welfare to the rich—at the taxpayers’ expense. If this subsidy is large enough, it will succeed in stopping the crisis. But, again, at what price? The answer: Billions of dollars in taxpayer money and, even worse, the violation of the fundamental capitalist principle that she who reaps the gains also bears the losses.

Since we do not have time for a Chapter 11 and we do not want to bail out all the creditors, the lesser evil is to do what judges do in contentious and overextended bankruptcy processes: to ram down a restructuring plan on creditors, where part of the debt is forgiven in exchange for some equity or some warrants.
It's a good read and, perhaps unsurprisingly for the Chicago School of Friedman et al, concludes:

The decisions that will be made this weekend matter not just to the prospects of the U.S. economy in the year to come; they will shape the type of capitalism we will live in for the next fifty years. Do we want to live in a system where profits are private, but losses are socialized? Where taxpayer money is used to prop up failed firms? Or do we want to live in a system where people are held responsible for their decisions, where imprudent behavior is penalized and prudent behavior rewarded? For somebody like me who believes strongly in the free market system, the most serious risk of the current situation is that the interest of few financiers will undermine the fundamental workings of the capitalist system. The time has come to save capitalism from the capitalists.

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Excellent round up of the last two weeks from the FTs John Authers, now in specs. So things must be serious:



As for the preview of next week (since the blame game seems irrelevant now - heat of the last post notwithstanding) all will center on price: specifically, at what price will the new SuperBad federal entity (so much more entertaining than 'RTC') takes assets off troubled financials?

If it is at below balance sheet valuations - which are at best worthy guesses and at worst fiction - capital raising will still be required. Which defeats the purpose of a political intervention. Although it would be entirely in step with those misguided individuals who cling pathetically to the notion of caveat emptor.

What then remains, it would seem, is The List of which lucky firms get invited to the Big Table. Assuming Congress has been sufficiently cowed into bipartisan cooperation by the apocalyptic scenario related to them by Messers Bernanke and Paulson.

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Did the FSA have to ban short selling in selected financials because they have never had an effective punitive regime against market manipulation and abuse? A Body Shop plc IT guy getting done for reading emails? A bond manager out of work for a year? PR stunts? Is this the monument to rigorous market 'fair-play' the FSA is proud to leave as its legacy of battle against the high priests of manipulation?

What is the consequence? Beside a well-earned reputation as ineffective prosecutors, when blow-back occurs as the political shit hits the fan the FSA, in many ways like the SEC, has no apt response. It can only listen to Alex Salmond and other populists play to their constituent galleries and bring forth a blanket ban on the shorting of selected financials. That is the price of never having had a useful process for regulating and monitoring market trades.

And what is the consequence of that? London is up an all time record amount on the back of financials of whom some are enjoying rises of 30%-40%. Is that really price discovery? Or legal market manipulation as the gamekeeper turns poacher?

Suppose a heretic says the creative destruction of the banks, or of those parts of the banks, that made a long series of bets on the back of cheap credit in real estate markets is in everyone's best interests? And that a freer market can achieve this - especially if regulators insist that the idea of heading off asset bubbles is a ridiculous one and, in any case, not covered by their mandates.

Heresy and unrealistic. But quite possibly that end will be served by other means (albeit within the limits allowed by political lobbying, influence and ramification). The public SuperBad bank along the lines being mooted is going to emerge a wolf in sheep's clothing. The wipe out of AIG equity is a precedent and the public purse is not without limit. Any bank offloading its toxic loans on the taxpayer expecting anything other than similar severe dilution, or its effects in kind, is a well-connected outfit indeed.

Yet the 'free market' equity holders of financials are currently voting for quasi nationalisation with full voice.

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Well worth 13 odd minutes of one's time.

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The intended target of Fed's $180 billon infusion was not quite as enthusiastic yesterday as equities were about it (OK - maybe the Fed bailout of the world (assisted by others) has more to do with the equity reaction).

Exhibit 1: Before - TED, OIS and LIBOR spreads



Exhibit 1: After - TED, OIS and LIBOR spreads


Now it looks like financials might be able pass anything smelly onto the public no doubt everything will be right once again in the world.

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That was snappy, wasn't it? AIG already has its hands on $28bn of that bridge loan (Fed release here). No points for wondering if this is a bridge of the Alaskan variety.

Total withdrawals via the Fed disount window were over 5 times last week's. Just don't ask to see the collateral.

Exhibit: Fed table H.4.1 "Factors Affecting Reserve Balances"



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A couple of days ago CC put up this chart of the TED spread. Which looked bad.

Exhibit 1: Bad - TED spread at 16 September


But that now has the ring of the 'Good Old Days' about it.

Exhibit 2: Much worse - TED spread at 18 September, a record 3.04 points


And neither element of the TED offers comfort. An understandably frazzled looking John Authers covers yesterday's astounding panic below.

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It’s all confidence, it’s not reality” is how UBS analyst Glenn Schorr describes the decimation to Morgan Stanley's equity price.

Exhibit 1: Morgan Stanley volatility now more than x4 its historical level


But is it any surprise that 'frothy' volatility has increased on the back of investment bank dissembling and sector upheavel? Curiously, the longer-term short interest chart reveals a more calculated price discovery picture that perhaps puts the public utterances and 'leaks' from John Mack into some sort of perspective:

Exhibit 2: Morgan Stanley short interest chart since October 2004


Hardly a new development this belief that the investment bank's equity is overvalued. But the recent frenzy is surely driven most by the proofs of Lehman/Barclays and Merrill/BoA that partners and/or buyers are not going to pay any kind of premium to anyone no matter how well capitalised they (appear) to be. With funding issues coming to a head - and the Fed picking and choosing carefully - what would you rationally do to MS (or GS for that matter) equity in such circumstances?

Neither is it clear that SEC politically-inspired rules against short sellers are going to win the argument. Not so easy to separate 'evil speculation' from price discovery.

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  1. Decoupling. The art of rationalising overweight positions in Asia
  2. “Our funding position is satisfactory” is now up there with “the cheque is in the mail”
  3. Bank and financial house mergers: if you tie two bricks together will they float?
  4. If you are going to invade Georgia, timing is everything
  5. Maybe buying the dollar wasn’t such a great trade after all
  6. What’s $85bn between friends anyway? Central planning has its attractions after all, comrades.
  7. It’s surely a cold day in hell when an American investment banker like John Mack decides shorts are the root of Morgan Stanley’s problems.
  8. AIG: the Fed puts the ‘hospital’ into ‘hospitality’ as AIG discovers what losing your no-claims bonus feels like
  9. Lehman: this is the way the market is supposed to work
  10. At least one guy thought Wednesday 16 September was a “Great” day: Ford chief Mulally was euphoric at the thought of the auto industry’s $25bn bailout. Wait - I misspeak - the Mulally word is “enabler”.

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O Otmar why do you stand above it all
Dissing so much and so much at the FT, Bloomberg and Telegraph TV?
O pampered bureaucrat whom nobody in investment banking loves just now
Why do you diss us and iss us
When you too might have been compressing spreads into thin air
And taking the fat bonus(es) home to mamma?
O why do you stand above us now
Plugging that damn book
And dissing and Issing so much and so much?

(w/apologies to F Cornford)

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...unless you happen to be an insurer named AIG.

Genuine text:

Between the lines:

"We are the best in the world! We are best in the world! Fed Fund futures - kiss our assess!! We have beaten the financials!! It is completely unbelievable! We have beaten the financials!! Kerry Killinger, John Thain, Chuck Prince, Jimmy Cayne, Stanley O'Neal, Dick Fuld - we have beaten them all. Hank Paulson can you hear me? Hank, I have a message for you in the middle of the election campaign. I have a message for you - isn't 2% enough?! We aren't Wall Street's pension plan! Hank Paulson, as they say in your language in boxing bars around Madison Square Garden in New York: your boys took a hell of a beating! Your boys took a hell of a beating!"

This may make some sense to anyone who has heard of Bjørge Lillelien and his piece of commentary, now folklore for (round) football fans, of Norway beating England 2-1 in 1981 (see clip below).

In the meantime, markets look to Hank Greenberg (b. 1925) and his proxy fight story (pending the Fed's say on the matter). Which may have some of his old AIG actuaries reaching for their longevity calculators.

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A brief synopsis:

"Just give us the $70b public bridge dammit. AIG only need a little time"


Funny thing is, there has been plenty of time. But if one will insist on valuing one's Alt A and subprime mortgage securities at x1.7 to x2 the price placed on similar 'assets' by those prudent accountants over at Lehman (ed - who dat?) one is asking for trouble.

Or a Federal bailout.

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Exhibit 1: 3 month LIBOR, 3 month Treasuries & Overnight Index Swap rates


Today there are comparable spreads as existed immediately prior to the 0.75% slash on 18 March. Exhibit 2, put up today on the Cleveland Fed's site, is already badly dated: CBOE Fed Fund futures imply a 90% chance of a cut.

Exhibit 2: Fed Futures via the Cleveland Fed



Related links:
Money-Market Rates Double Amid Global Credit Seizure
Interbank dollar crisis deepens as overnight Libor surges
Lehman Collapse Spurs Call for Credit Clearinghouse
Banks wary of Lehman plague
Central banks strain to contain market crisis
Nervous mood sees interbank lending dry up
A black swan in the money market

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“I’ve got to say our banking system is a safe and a sound one. The American people can remain very, very confident about their accounts and our banking system.”
Treasury Secretary Henry Paulson, 15 September, at the White House

Hope so given what's on the cards.

Exhibit 1: Update of a chart from decisionbysquiggle

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Exhibit 1: AIG 5 minute price chart (so far today) aka up and down like the proverbial tart's knickers:


Exhibit 2: AIG daily volatility (238%) shooting up



AIG's 30 day volatility (ie composite implied volatility on all its options) is now 446% compared to a historic reading of 121%. There are no obvious outcomes to its capital raising needs is what this chart's saying.

NY state may relax its rules for the firm and AIG may get that $40b Fed loan but if you hold the equity it is very, very hard to envisage anything other than a longer term solution that is severely dilutive.

Failing a new line in the Federal Reserve sand.

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"Give me your tired, your poor,
Your huddled equities yearning to breathe free,
The wretched refuse of your asset backed security shore.
Send these, the worthess, tempest-tost to me,
I lift my lamp beside the golden door!"
(With apologies to E Lazarus and The New Colossus)



"We've re-established 'moral hazard'".

Or so says an unnamed person involved in the weekend picnic at the New York Fed’s offices in Manhattan, quoted in the Wall Street Journal.

For clarity, this means no taxpayers’ money for the bail out of the likes of Lehman. Seriously. Full stop. I mean it this time. You better quit it.

In separate - as in nothing to do with public bailing - developments on Sunday the Fed announced “enhancements to its existing liquidity facilities”. This includes, bar a decoding error, the acceptance of equity as collateral for Fed loans. Maybe even equity like AIG, ABK, WM and others of equal distinction.

Again, it is important to note that these “enhancements” ought not to be confused with, or discussed in the same breath as, the notion of moral hazard.

Can't you see the line in the sand?

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Apparently brotherly love has its limits if your name is Lehman. Or Duke. See line at 4'31" for full, detailed and thoughtful answer to the ambulance suggestion.




Strangely apt exchange from the film:

Louis Winthorpe III: Think big, think positive, never show any sign of weakness. Always go for the throat. Buy low, sell high. Fear? That's the other guy's problem. Nothing you have ever experienced will prepare you for the absolute carnage you are about to witness. Super Bowl, World Series - they don't know what pressure is. In this building, it's either kill or be killed. You make no friends in the pits and you take no prisoners. One minute you're up half a million in soybeans and the next, boom, your kids don't go to college and they've repossessed your Bentley. Are you with me?

Billy Ray Valentine: Yeah, we got to kill the motherf... - we got to kill 'em!

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Or at least it is according to Citi:

Exhibit 1, Citi 'flash' summary of this am:


So it seems, with Merrill trading at $17.76 as I type (and this includes a "Citi Flash" bounce earlier today to $19.20), that this is one whopper of an opportunity. Citi itemise $40 of value and toss in another $5 for (in car mechanic speak) sundries. Or maybe they simply like numbers divisible by 9.

On the small matter of risks to this cajones-heavy call Citi summarise:


I must be misreading it but I can't seem to find the timing on this expected 165% return. Maybe it's one of those feared 'long-term' investments (ie short-term gone awry). Or perhaps some liberty-taking by Citi with the efficient markets hypothesis.

Sarcasm aside, they may be entirely correct but not - for understandable reasons - want to lay out the timing.

And timing is of course the secret to Great Comedy.


NB: Writer short MER
NB1: Thanks for the concern, short closed Friday prior to BoA's $29/share takeover of MER.

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From efinancialnews.com. With which question does one start?

"Lehman Brother's accrued bonus pool for the year so far is estimated to be worth in excess of $3 billion, according to one analyst, while the bank was valued at less than $3 billion at close of trading Thursday night.

[...]

Compensation allocated to Lehman staff this year totals about $6.2 billion, roughly half of which will be money directed towards the bonuses, giving a total pool for the first nine months of the year of $3.1 billion, according to his calculations."

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Trading tool update...

Friday, September 12, 2008 | | 0 comments »


Been pointed out this small addition to Monday's plug is worth making: the Marketclub boys offer a 30 day risk free trial.



Plus they run videos regularly to show their own system in action - here's the latest: "Gold, wasn't it supposed to hit 2,000 an ounce?"

This isn't act of altruism. I do use some of the tools but this is also an affiliated site.

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The a-week-is-a-long-time-in-politics cliché enjoys great play just now. On September 3 CC put up this graph:

Exhibit 1: Presidential Election betting, state-by-state on September 3:


Then came the Governor of Alaska of whom the contrast with Mr Obama could hardly be starker. The same graph now looks like this:

Exhibit 2: Presidential Election betting, state-by-state on September 12:


But the key state of Colorado has resisted the Palin Surge leaving the Republican ticket short of the Electoral College majority. Much hangs, it would seem, on how well Mrs Palin performs in her unscripted round of interviews begun, also, this week.

In the meantime the aggregate Intrade money now has Mr McCain a full 2 points ahead -which presents an interesting arbitrage window.

Exhibit 3: Intrade overall Presidential line:


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Determining the exact degrees of distress of WM, LEH and MER is not easy. But it is easy to see they are all on the same dreaded path of equity (and company) destruction. It's just a question of how far along it they'll go - hence their extreme volatility:

Exhibit 1: Merrill Lynch historical and implied volatility


Exhibit 2: Lehman historical and implied volatility


Exhibit 3: Washington Mutual historical and implied volatility


Course, "The Three Degrees" are more famously a fine R&B trio out of Philadelphia whose most well-known hit is the apt in the circumstances "When will I see you again?" Video below and showing better form than the financials.




Data source: Chicago Board Options Exchange

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Side view of the Lehman balance sheet

The world’s most powerful balance sheet smasher was set in motion for the first time Wednesday morning at the start of an experiment designed to unlock the secrets of the investment bank accounting universe.

Muted applause and limited relief greeted the first crucial announcement of a complete gamut of ‘initiatives’ made at close to the speed of light around a 27m teleconference table built deep under Lehman Brothers headquarters in New York.

After some “small presentational problems” overnight involving misinformation out of South Korea, the start-up of the Large Fuld Collider (LFC) went without a hitch mainly due to the fact that analysts had to wait to propel their questions around the conference call circuit – a piece of engineering designed to control temperatures expected to exceed the interior of a hot furnace.

The next step, which may come as early as this afternoon, will be those very questions, expected to send a beam in the opposite direction to the LFC, paving the way in the next few weeks for the first collisions of the two opposing beams.

By smashing the proton beams together, analysts and onlookers at the Fuld Nervous Algorithm experiment, known by its acronym FUNERAL, plan to examine at sub-atomic level the intense energies spent by Lehman building its shaky balance sheet edifice a millionth of a second after the “Too Big to Fail” signal that gave birth to our subprime universe some years ago.

Cathedral-sized detectors have been built to capture any traces of bullshit that emerge from those collisions, putting existing theories to the test and perhaps revealing new dark holes or hidden liabilities of space and time.

“The LFC is a discovery machine. We don’t know what we’ll find,” says Mr Fuld, caretaker of Lehman Brothers pending its new form. Whatever that might be.


Related links:
Lehman losses $3.9bn in third quarter


NB: Original genuine piece on the CERN atom smasher spoofed herein can be read at this link.


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Exhibit 1: Implied volatility (via the CBOE):

and their commentary:

"Afternoon news of fruitless talks between Lehman Brothers and Korea Development Bank was followed closely by negative comments from Standard & Poors on its capital raising efforts - effectively lobbing a bushel of confidence-killing tomatoes at Lehman’s share price. How much more killjoy can Lehman take before it loses its mojo completely? With implied volatility remaining near the day’s highs at 312% (our all-time highest reading), it’s hard to see how much more Lehman can take. Shares closed 43.5% lower at $7.99 - this, needless to say, representing a new low for Lehman Brothers . The disparity between implied and historic volatility suggests about 131% more potential price risk over the next month than past performance would indicate, according to options traders. A look at front-month options suggests shares could rise or fall by as much as $5.00 over the next 11 days – effectively retracing or redoubling the loss since yesterday’s close. With 1.6 puts trading for every call, the conviction with which option traders are staking bets on Lehman can be deduced from the fact that the equivalent of more than 1 of every 3 Lehman option contracts in existence traded actively today. Fresh volume has been drawn to September puts at the 2.50 strike – where implied volatility at 612% is almost double the level for all Lehman puts. Also extremely active today were the January 5.00 puts, trading some 57,000 times today where open interest prior to today numbered only about 13,500."

Exhibit 2: News flow for today only (via DJ Newswires):


Course, that won't stop Other People's Money syndrome.

Exhibit 3: The morning's Frankfurt trading in LEH (+10.9%):



Mr Fuld's message on today's earnings announcement ('why we are right to hold out for better deals'?) ought to be worth listening to.

Related stories:
Lehman worries take shine off US bail-out

Lehman to announce initiatives; KDB talks over
Lehman's Fuld Faces Pressure to Land Deal After Drop

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Banking has long been a beneficiary of legislative protections that have unduly exacerbated the industry tendency to seek ways to maximise its loan book. Which generally means finding means to minimise (read: circumvent the regulation governing) its reserve requirements. This is an inherently risk-happy approach for the key sector of any national economy.

The most successful banks at the game of tiny reserves are usually the first ones in trouble when things sour. A reserve is, after all, a deposit (in some form) and a liability. Yet however clever the regulatory-inspired off balance sheet construct no one has yet found a way to overcome the reality of double-entry bookkeeping. In the world of fractional reserve banking this skewed incentive is, unsurprisingly, a particular danger.

Yesterday’s bailout of Fannie and Freddie was not therefore the rescue of the free market from itself. It was a rescue of an industry with insufficient incentive to handle its own risks. It is as normal for business to fail as to thrive in an open market – banks included. But to implicitly guarantee a $5.3 trillion property game, as the US Federal Government did (and does), is to let mortgage sales teams everywhere off the leash. Supply will inevitably outstrip demand as speculation is encouraged up and down the line of credit provision. The normal cycle becomes prone to structural crises rather than cyclical ones.

This is essentially part of the Keynesian vs Austrian economics debate. But the reality is that Keynes is politics friendly (c/f Obama vs McCain) and it has become near impossible to align regulation with the capitalistic principle that economic agents must manage the risks they undertake - instead of living in the knowledge that they can be passed to another when the proverbial hits the fan.

This structure, so long as it lasts, will constantly require buttressing. And it will last: Mr Paulson, like Mr Darling before him, merely has to invoke the cause of rescuing the "little people" in order to line up political support. Which, unfortunately, leaves only the timing of the US Treasury intervention to discuss.

With the exception of 2001 previous recessions (or quasi recessions for sticklers) have seen US new home sales bottom out in the 250k-350k range. The relevance of the last recession on this line of reasoning is questionable – new sales in 2001 did not even break the trend they had held since 1991.

Exhibit 1: Sales of US new one-family houses. Recessions in pink.



The latest data point is for July and is 515k. I’d suggest this indicates the bailout may have come right on time politically but is too early in economic terms. The last 18 years have been characterised by extraordinarily low (sometimes negative in real terms) interest rates and a feverish churning of real and derived property assets encouraged by levels of mis-selling rarely before witnessed. Bailing before the supply side effects of this overselling bias have dissipated sufficiently to be at least comparable to demand will continue to reward economically distorted incentives, the refusal to manage risk and, overall, failure.

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Run a blog/diary/website long enough and you get peppered with offers to be an ‘affiliate’ (or worse). These are usually for not terribly helpful products. Sometimes, though, it is not all dross (eg those free finance magazine offers).

And here is another offer that, unfortunately, is not free when it comes to the best features available. The service is called Marketclub.

Although there are free bits to it like the blog, DJ News headlines and free 'educational' TV (plus the inevitable sales chatter emanating off the site) the best tools by far are the premium scanners – especially the Smart Scan tool.

I use this service - they agreed to let me test it prior to talking about it - and I’m fairly certain there are not many investors/traders cheaper than me when it comes to data. An annual sub is $449.

I don’t do hard sell and I'm certainly not about to cover all the bells and whistles. For more detail just click on the icon below to go to their home page and then click again on the "What you get" tab to see the main product offering page.



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Bootleg footage of the shotgun ceremony involving US Treasury and Government officials and the Fannie & Freddie boards.

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To rest, of course.

What does a $25 - $35 billion (depends who you read) mortgage market bailout feel like if you are the US dollar? Pinprick probably, but the start, maybe, also of many pinpricks. It's a $5.3 trillion dollar problem.

The dollar index, the daily and weekly charts of which have looked so good for SUV owners recently, may not therefore be as comforting over a moderately longer view as it has so far appeared:

Exhibit 1: dollar index, monthly since 2000


For that matter, what does a unpleasantly sized hurricane turning the opposite direction from the expected (south west!) have the potential to do in the Gulf of Mexico to oil prices - in hand with a Paulson bung?

Exhibit 2: 5 day predicted track of Ike


For traders, the getting laid this week likely refers to the laying of commodity bets.

Further Fannie/Freddie reading:
If you are going to reward failure, do it bigtime
The bwessed awaingement of Fannie & Freddie

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