March 31, 2009 Wall Street Journal By Jeff P. Opdyke
Tuesday ends 2009's first quarter. And while corporate earnings will likely prove better than that disaster of a fourth quarter last year, "better" is a relative word.
The $13 a share analysts expect the S&P 500 constituent companies will have earned when the quarter's operating profits are fully tallied is nearly 22% worse than reported results a year earlier. It is 42% worse than reported results from the same period in 2007, before the known financial universe imploded.
The question, though, is whether $13 is wishful thinking. "It's a leap of faith to expect a material bounce-back [in profits], given the shape of the economy in the first quarter," says David Rosenberg, chief North American economist at Banc of America Securities-Merrill Lynch. He thinks $13 will prove too high.
Consider the ratio of companies preannouncing weaker results to those preannouncing stronger results: it is double normal levels, and at its highest reading since 2001, according to Thomson Reuters, though that partly stems from fewer companies offering positive guidance nowadays.
Nevertheless, companies including Xerox and steelmaker Nucor have warned Wall Street that analysts' projections for the calendar first quarter are too high. Financials may disappoint. Citigroup and J.P. Morgan Chase said they were profitable in January and February, raising market hopes about the sector. But worries have emerged that business was worse for financials in March.
John Butters, director of U.S. earnings research at Thomson Reuters, expects negative preannouncements to "spike before companies begin reporting results." That doesn't bode well for $13 a share.
Survey: Industrial Demand Declining by Longbow Research
Demand reports were predominantly flat or negative; 48% now say demand is weaker than this time last year, compared with 34% in December and 24% in October. Flat demand remains a relatively stable percentage of all reports, at 43%. Demand growth was reported by 10% [of respondents] in March, versus 20% in December and 33% in October. Pricing increases have reportedly stopped almost entirely.
Not only is this the first survey where we have seen price declines, but the number of respondents reporting price declines (11%) was higher than those reporting price increases (5%); the vast majority of respondents (84%) now categorize prices as flat, compared with 0% in our December and October surveys.
Some of our contacts did report that they expect traditional price increases from their major suppliers later in the year, likely in line with inflation. Automation- and electrical-supply inventories remain primarily stable at 58%, although reported declines nearly doubled compared with our December survey; 31% now say their inventories have declined versus 16% in December and 5% in October....
(Pandora was given many seductive gifts from Aphrodite, Hermes, Hera, Charites, and Horae (according to Works and Days). For fear of additional reprisals, Prometheus warned his brother Epimetheus not to accept any gifts from Zeus, but Epimetheus did not listen, and married Pandora. Pandora had been given a large jar and instruction by Zeus to keep it closed, but she had also been given the gift of curiosity, and ultimately opened it. When she opened it, all of the evils, ills, diseases, and burdensome labor that mankind had not known previously, escaped from the jar, but it is said, that at the very bottom of her box, there lay hope.-AM)
By Ronald D. Orol Last update: 10:23 a.m. EDT March 31, 2009
WASHINGTON (MarketWatch) -- A key lawmaker on Tuesday said he would support allowing banks in some circumstances to recoup losses they have already taken due to controversial mark-to-market accounting rules. House Financial Services Committee Chairman Barney Frank, D-Mass., said he would support a procedure for firms to make the case that they have been forced to take losses on assets that they are holding to maturity. Mark-to-market rules are an accounting methodology that requires banks and other corporations to assign a value to an asset, such as mortgage securities, credit-card debt or student-loan investments, based on the current market price for either the security or a similar asset. Frank said he would talk to the Securities and Exchange Commission about a rule change.
(Trader friend of mine took me to task on my recent Federales laundromat post suggesting that I was being a tad paranoid and that the 'structure' to enact such a plan could not be whipped up overnight. In response please review an article from today's FT that provides a blueprint for the laundromat. Putting a benjamin down that a year or two from now we'll read articles about how a considerable percentage of toxic/legacy/crappy paper was laundered, or if you prefer a more sanitized euphemism, recycled, from the bank to the bank. Be the ball grasshopper ... they're banksters and that's how they roll.-AM)
Published: March 30 2009 20:36 By Paul Davies Financial Times
It would be easy to think that life for all those “financial engineers”, the bankers focused on default probabilities and credit ratings arbitrage who were crucial to the boom in mortgage bonds and other structured niceties, was over – professionally at least.
However, for some the job is busier than ever – and their work is a big part of the bump in first-quarter revenues in the debt businesses of their investment bank employers.
Many of them are now engaged in financial restructuring, which involves dealing with toxic assets and freeing up or protecting capital. But they will not get fanfares in earnings reports because the work they are doing – and have in some cases been doing for more than a year – is very hush-hush.
Their work often began in shoring up their own employers’ balance sheets, but has increasingly become a client business.
This is one reason for keeping the work quiet. There is huge sensitivity over anything leaking into what remains a highly tetchy market for bank securities of all kinds, still beset by the fear of panics.
Even the simple fact that an investment bank has been engaged to work with another bank or company could be enough to spook some investors, it is feared. Specialists at only two banks were prepared to be identified at all in this piece.
But it is not only commercial sensitivity. There is also a feeling among some that financial regulators are behind the curve.
Some of those involved fear that if they speak about it, they may then have to spend many hours bringing regulators up to speed, rather than earning money for their companies.
As one banker put it: “I don’t want to spend the next three days with [my regulator] talking about exactly what I’m doing, how and for whom.” (Oh those pesky regualtors!-AM)
Oldrich Masek, head of global structured solutions, an 18-month-old business unit at JPMorgan, says some of this type of work will not prove sustainable.
“There are still some people out there who are proposing regulatory arbitrage trades to try and generate capital,” he says. “These trades are at best window dressing, which is just not palatable any more.” (Gosh no reason to doubt something he would put this name to eh?-AM)
Quite a few banks, large and small, are active in the field.
Most of these – banks that either had few problems or have cleared them up without being gutted or nationalised in the process – have people chasing such business. Mostly it involves banks, but insurers are increasingly coming into focus.
The work is split between derivatives – unwinding synthetic collateralised debt obligations, for example – and work with cash assets.
According to another structured finance specialist, it is much easier to get rid of derivative exposures.
“The synthetic side, the derivative structures, can be unwound more easily,” he says. “They still lose capital, but it makes the asset go away and frees up the remaining capital, which you cannot do with the cash assets.”
There has been a decade of securitising almost any kind of bond or loan thinkable. But these are real debts that cannot be made to disappear: they must either mature or default. (There is a third option thanks to PPIP.Got a nickel? Make a quarter.-AM)
A lot of the work comes from the need among banks to raise either fresh capital or debt, or both.
This means that they must complete full third-party due diligence and that has been focused on valuing these tricky cash assets.
“Even if capital is raised, clients are still faced with questions as to what to do with troubled legacy assets,” says Mr Masek.
Geoff Smailes, managing director in the credit solutions team at Barclays Capital, says that clients’ issues involve among other things how they finance certain assets, their capital charges and derivatives contracts exposures.
“Many of these exposures have to be either restructured, renegotiated, offloaded or unwound,” he says.
A range of examples about what else clients can do came from the more than half a dozen specialists interviewed for this article.
Banks concerned about problem loan books can look at buying first-loss protection on a pool of assets from investors such as hedge funds. Alternatively, they can retain the first loss and look for insurance on the rest.
Some are also looking at using what they call “new light-weight, non-bank entities”, which will look a lot like small operating companies.
Some talked about seeding new hedge funds to take pools of assets, although others say that option is not economic because of the regulatory capital a bank must hold against an investment in a hedge fund.(Refer to previous comment about those pesky regulators...-AM)
All this work is meant to get banks – and ultimately the financial system – through the current crisis and not all of it is hidden. (The operative phrase is 'not all'.-AM)
(Attribution for charts is on top right of each. What is stunning is the comparison between NASDAQ post Tech versus 1929-1940. Additionally,consider that the 80%+ initial drop in tech stocks mirrors the recent 80%+ drop in major bank indexes. Scary stuff.-AM)
A few days ago I posted an article from the New York Post:
'Citigroup and Bank of America have been aggressively scooping up securities in the secondary market.
But the banks' purchase of so-called AAA-rated mortgage-backed securities, including some that use Alt-A and option ARM as collateral, is raising eyebrows among even the most seasoned traders. Alt-A and option ARM loans have widely been seen as the next mortgage type to see increases in defaults.
One Wall Street trader told The Post that what's been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay.'
My comments on this article were: Hey when the Federales bring the leveraged up buyers to the table banks gotta have something to sell at inflated prices - won't be loans valued at par that's for dang sure- so the obligatory press release can be generated to boost stocks.
Upon further review of the PPIP however, there still appeared at least to this humble blogger to be a disconnect as to why Citigroup and Bank of America were overpaying for these securities.
The PPIP as I understand it basically matches funds with a private investor and then levers up but it still exposes the private investor to a 100% loss of their principal. The much ballyhooed benefit of the plan, that the private investors set the price, is in fact the plans' greatest drawback, i.e., private investors won't want to overpay and if they don't overpay than why in the world would the banks want to sell?
They don't want to sell loans or marked-to-market assets for less than what they can currently get, or at a level that will cause additional writedowns, and the private investor doesn't want to risk their principal by overpaying ... so how can PPIP work?
Well if you believe the article in the Post it's obvious that Citigroup and Bank of America believe that it will work for the assets that they are overpaying for ... so obviously they see a way to game the system, so much so, that they are willing to overpay to collect additional assets for that purpose.
And then it clicked...
What if the banks were the private investor? In the opaque world of finance this is not challenging and the Federales are not going to be disclosing the identities of the investors.
This would be the equivalent of spinning straw into gold for the banks. For a nickle you can double the market value of a toxic/legacy asset you hold, or reap a quarter for each newly acquired asset you launder from the secondary markets.
Methinks that the Federales laundromat may soon be open for business. Pretty clever Timmy.
(Glad to know industrial policy is based on the little engine that could. Hope Barry knows about that potential 1 trillion dollar sword of Damocles. Carservatorship without credit event won't fly with DTCC. -AM)
“We think we can have a successful US auto industry. But it’s got to be one that’s realistically designed to weather this storm and to emerge, at the other end, much more lean, mean, and competitive than it currently is,” said Obama.
Blackstone Group LP, the world’s largest private-equity firm, rebuffed a request from securities regulators to publicly disclose the performance of its buyout and hedge funds.
The U.S. Securities and Exchange Commission asked the New York-based company to include fund returns in their financial reports, according to letters the agency released earlier this month. Blackstone told the SEC it wouldn’t.
Blackstone Chief Financial Officer Laurence Tosi told the SEC in a Dec. 5 letter that disclosure of detailed performance data wasn’t required under applicable regulations and wasn’t a meaningful measurement of operating results.
“The individual rates of return have no direct impact on our financials and therefore we question the relevance to our investors,” Tosi said in the letter.
In the prospectus for its initial public offering, Blackstone said it intends to be a “different kind of public company” whose managers take a long-term perspective.
Last Updated: Monday, March 30, 2009, 19:17 irishtimes.com
Ireland had its top credit rating removed by Standard & Poors, which cited the country's deteriorating finances.
The rating was lowered one step to AA+ from AAA with a "negative outlook," S&P said in a statement today from London. Ireland received the top rating in October 2001.
The deterioration of Ireland's public finances will likely require a number of years of sustained effort to repair, on a scale greater than factored into the government's current plans, Trevor Cullinan and Frank Gill, analysts at S&P in London, wrote in a report today.
Fine Gael's spokesman on finance Richard Bruton said the news was further evidence of the Government’s "appalling handling" of the economic crisis.
“This is bad news for Ireland at a very bad time. Standard & Poor’s decision to downgrade Ireland’s credit rating will make it even harder for the economy to recover. Yet the need for a credible strategy to get the country out of this mess has never been greater," he said.
"Borrowing just became more expensive, and the Government will have to dig even deeper to balance the books next week."
Mr Bruton described it as "startling" that Ireland was one of the first economies to be downgraded by S&P.
Euro-region governments are increasing borrowing to bolster ailing economies and bail out banks reeling amid the fallout from the global credit crisis. S&P lowered the ratings of Spain, Portugal and Greece in January.
The European Commission forecast in January that Ireland's budget deficit may widen to 11 per cent of gross domestic product this year, almost four times the European Union's approved limit.
(This article summarizes what I would call my optimistic view as to what is currently transpiring ... Kabuki theatre that I have previously characterized as Barry Dunham hustling the hustlers - playing the role of the pretty german blonde in the gym. That viewpoint places faith in Big O being a pragmatic liberal intellectual and playing the hand he was dealt. The darker viewpoint though on current events would be best summarized as 'the seduction of Barry Dunham' ... I want to be hopeful, it has yet to be verified. -AM)
Financial Times Published: March 28 2009 02:00 By Michael Mackenzie in New York
A new bail-out plan from the US Treasury and, once again, a divergence of opinion between equity and fixed income investors.
The equity crowd eagerly snapped at the bone thrown by Tim Geithner this week. His unveiling of the public-private investment plan (PPIP) revealed a few more details than his hazy statement in February, which had sent stocks tumbling.
But fixed income investors were less taken by Mr Geithner's latest offering, a stance that has long defined their behaviour since the credit and mortgage crisis emerged in August 2007.
The substantial rally in banking stocks has been accompanied by a far more tentative rebound in the various derivative indices for leveraged loans and subprime mortgages, which the PPIP is expected to grease.
The mechanics of the PPIP also illustrate just how broken finance has become since the onset of the crisis. Not only do some bankers expect a bonus in the bad years, private investors require a hefty lay up from the taxpayer before they take a punt and buy impaired assets.
Beyond the irony that the Treasury is relying on securitisation and leverage to resolve a banking crisis that is based on excessive borrowing and owning securitised assets, the PPIP is trying to resolve a paradox between banks and investors. There is a substantial gap between the price at which banks want to sell their loans and mortgages, and the price investors are willing to pay for them.
The PPIP is attempting to get the market for impaired mortgages and loans moving by clarifying a clearing price for these assets. The Treasury hopes that investors, bearing little risk as the taxpayer is on the hook, will close the gap between the bid and offer for these assets.
Complicating the standoff associated with setting a market price is the likelihood that banks will cherry pick their portfolios of loans and sell the bad stuff.
As one trader put it this week: "Why should a bank give hedge funds an opportunity to clean up?"
For an investor, buying lemon loans will not translate into lemonade. They also need loans with some upside to sweeten the deal.
More than 18 months into this mess, the Treasury still acts as if the problem facing markets is a lack of liquidity, not one of solvency. Since the demise of Lehman Brothers last September, fixed income investors have voted for insolvency.
Ominously, the peak in corporate and consumer bankruptcies for this current recession and ensuing torching of bank loans is likely still to be a long way in the future.
Such an outlook is not priced into the equity market, given the rally in banking stocks this month. But the fixed income market suggests a lot of these assets are nearly worthless.
This is where things could get very nasty. Here we have the taxpayer being set up to transfer funds to investors and banks; but there is no guarantee that financial institutions will play ball.
Lurking behind this is the fear that the sale of loans and mortgages at prices set under the PPIP will reveal that some institutions are insolvent.
Banks are still in a position to play for more time. Should they fail the Treasury's highly publicised stress tests, which should be completed by the end of April, banks will have another six months to try to raise private capital.
They can remain zombies throughout that period.
One big unanswered question is how tough the Federal Deposit Insurance Corporation will be with those banks and whether it will force them to sell loans and raise more capital ahead of that schedule.
For all its shortcomings, the PPIP may be an act of Kabuki theatre that moves us one step closer to knowing the full cost of Wall Street's collective failure.
That might then open the door to what has been an unpalatable prospect for regulators: the outright nationalisation of banks. In these circumstances, maybe everyone might at least agree with such an extreme outcome.
Submitted by Tyler Durden, publisher of Zero Hedge
Zero Hedge is rarely speechless, but after receiving this email from a correlation desk trader, we simply had to hold a moment of silence for the phenomenal scam that continues unabated in the financial markets, and now has the full oversight and blessing of the U.S. government, which in turns keeps on duping U.S. taxpayers into believing everything is good.
I present the insider perspective of trader Lou (who wishes to remain anonymous) in its entirety:
"AIG-FP accumulated thousands of trades over the years, all essentially consisted of selling default protection. This was done via a number of structures with really only one criteria - rated at least AA- (if it fit these criteria all OK - as far as I could tell credit assessment was completely outsourced to the rating agencies).
Main products they took on were always levered credit risk, credit-linked notes (collateral and CDS both had to be at least AA-, no joint probability stuff) and AAA or super senior portfolio swaps. Portfolio swaps were either corporate synthetic CDO or asset backed, effectively sub-prime wraps (as per news stories regarding GS and DB).
Credit linked notes are done through single-name CDS desks and a cash desk (for the note collateral) and the portfolio swaps are done through the correlation desk. These trades were done is almost every jurisdiction - wherever AIG had an office they had IB salespeople covering them.
Correlation desks just back their risk out via the single names desks - the correlation desk manages the delta/gamma according to their correlation model. So correlation desks carry model risk but very little market risk.
I was mostly involved in the corporate synthetic CDO side.
During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent - these were whole portfolio unwinds. The size of these unwinds were enormous, the quotes I have heard were "we have never done as big or as profitable trades - ever".
As these trades are unwound, the correlation desk needs to unwind the single name risk through the single name desks - effectively the AIG-FP unwinds caused massive single name protection buying. This caused single name credit to massively underperform equities - run a chart from say last September to current of say S&P 500 and Itraxx - credit has underperformed massively. This is largely due to AIG-FP unwinds.
I can only guess/extrapolate what sort of PnL this put into the major global banks (both correlation and single names desks) during this period. Allowing for significant reserve release and trade PnL, I think for the big correlation players this could have easily been US$1-2bn per bank in this period."
For those to whom this is merely a lot of mumbo-jumbo, let me explain in layman's terms: AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this, for lack of a better word, fraudulent scam.
In simple terms think of it as an auto dealer, which knows that U.S. taxpayers will provide for an infinite amount of money to fund its ongoing sales of horrendous vehicles (think Pontiac Azteks): the company decides to sell all the cars currently in contract, to lessors at far below the amortized market value, thereby generating huge profits for these lessors, as these turn around and sell the cars at a major profit, funded exclusively by U.S. taxpayers (readers should feel free to provide more gripping allegories).
What this all means is that the statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were 1) one-time in nature due to wholesale unwinds of AIG portfolios, 2) entirely at the expense of AIG, and thus taxpayers, 3) executed with Tim Geithner's (and thus the administration's) full knowledge and intent, 4) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.
For banks to proclaim their profitability in January and February is about as close to criminal hypocrisy as is possible. And again, the taxpayers fund this "one time profit", which causes a market rally, thus allowing the banks to promptly turn around and start selling more expensive equity (soon coming to a prospectus near you), also funded by taxpayers' money flows into the market. If the administration is truly aware of all these events (and if Zero Hedge knows about it, it is safe to say Tim Geithner also got the memo), then the potential fallout would be staggering once this information makes the light of day.
March 13 (boston.com) -For an executive whose bank is under pressure on many fronts, Kenneth D. Lewis sounded remarkably optimistic in Boston yesterday. The chief executive of the nation's largest lender, urged an audience at a lunchtime speech downtown to look beyond the recession now weighing on the country to budding signs of an economic recovery.
March 18 (lse.co.uk)- Banks were mostly higher, helped by comments made by Bank of America Chairman and Chief Executive Kenneth Lewis, who said in an interview in the Charlotte Observer that the largest U.S. bank could repay the $45 billion of government capital it has taken by late 2009 or early 2010, depending on the economy.
March 28 (wsj)- During a meeting with President Barack Obama and other bank executives Friday at the White House, Bank of America Corp. Chief Executive Ken Lewis expressed cautious optimism that the economic downturn was either at or near the bottom of the cycle, according to people at the meeting.
(Well when a captain of industry like Mr. Lewis, the man with his finger on the trigger of the largest lender in these United States of America, opines that he sees budding signs of a recovery and is cautiously optimistic we are at or near the bottom resulting in his fine institution being able to repay TARP funds, you know such sentiment is based on an extensive analysis of the many metrics at his fingertips as he stands at the helm of his.... Waitaminnit. -AM)
March 28 (wsj) -Mr. Lewis mentioned some encouraging comments made recently by West Coast customers of his bank as an example of how the downturn could be nearing a bottom.
(Mr. Lewis what's wrong with a little bullishtness on our time?-AM)
Mar 27, 2009 2:35PM GMT The Journal of Commerce Online by Alan Field
The Organization for Economic Co-Operation and Development is slashing its 2009 forecast to show economies in the 30-nation bloc will shrink a combined 4.2 percent, General Secretary Angel Gurria announced Friday.
Gurria said economies around the globe are experiencing a "terrible" year, and that recent data had gone from bad to worse. The Paris-based OECD predicted in November the economies of the bloc would contract by only 0.4 percent. Its next revised outlook will be published next Tuesday.
"We know the numbers are going to be looking worse and worse every day, every time we measure," Gurria told reporters. "And we know it is going to be a terrible year. What we should not do is act like we've been surprised, taken aback by the news ... every week, when a new piece of information comes out confirming what we know is going to happen."
It's a comfort in this wildly spinning world to find some things remain the same. We had feared that with the change in administrations, we'd have to revise our long-standing mistrust of government statistics. But, though it is still early days, the initial evidence gives us reason for hope. The numbers flowing out of Washington seem as dubious as ever, and so are the inferences being extracted from them by more than a smattering of investment strategists, money managers and, it pains us to say, even journalists.
The misleading figures cut across a wide swath of the economy, encompassing housing, manufacturing, employment -- you name it. The leading agent of deception, unintentional or otherwise, has been that old sly villain, seasonal adjustment. As it turns out, the seasons don't need adjustment as much as the adjustors need seasoning.
As Merrill Lynch's David Rosenberg (who, incidentally, is planning to do a bit of adjusting himself and moving back to his native Canada; our loss, Canada's gain) points out in a recent commentary, the official keepers of the books have been unusually aggressive in constructing seasonal adjustments for February's economic data.
To illustrate, the seasonal adjustment for new-home sales was the strongest since 1982; for durable-goods orders, the strongest since they were first released in 1992; the retail-sales figures for February were flat (or, as David says, flattering) after such adjustment, but unadjusted fell 3%, the biggest drop on record. He also notes dryly that the 40,000 raw non-seasonally adjusted housing-start total for February "all of a sudden becomes a headline-adjusted annual rate figure of 583,000."
Which makes David think that come the inevitably sharp downward revisions of such distorted data, first-quarter real GDP is likely to suffer a 7.2% drop. Which, together with the 6.3% skid in the fourth quarter of 2008, would be the worst back-to-back contraction in the economy in 50 years.
REALITY: You fight with the strength of many men, Sir BULL. I am Reality, King of the Markets. [pause] I seek the finest and the bravest traders in the land to join me in my Court of Capitalism. [pause] You have proved yourself worthy; will you join me? [pause] You make me sad. So be it. BLACK BULL: None shall sell. REALITY: What? BLACK BULL: None shall sell. REALITY: I have no quarrel with you, good Sir BULL, but I must make new lows. BLACK BULL: Then you shall die. REALITY: I command you as King of the Markets to stand aside! BLACK BULL: I move for no man. REALITY: So be it! [hah] [Market trading at $70 earnings when reality is about half that] [parry thrust] [REALITY chops the BLACK BULL's left arm off] REALITY: Now stand aside, worthy adversary. BLACK BULL: 'Tis but a scratch. REALITY: A scratch? Your arm's off! BLACK BULL: No, it isn't. REALITY: Well, what's that then? BLACK BULL: I've had worse. REALITY: You liar! BLACK BULL: Come on you pansy! [hah] [Top banks are insolvent and there are still over 5 trillion in off-balance sheet assets] [parry thrust] [REALITY chops the BLACK BULL's right arm off] REALITY: Victory is mine! [kneeling] We thank thee Lord, that in thy merc- [hah] BLACK BULL: Come on then. REALITY: What? BLACK BULL: Have at you! REALITY: You are indeed brave, Sir BULL, but the fight is mine. BLACK BULL: Oh, had enough, eh? REALITY: Look, you stupid bastard, you've got no arms left. BLACK BULL: Yes I have. REALITY: Look! BLACK BULL: Just a flesh wound. [bang] REALITY: Look, stop that. BLACK BULL: Chicken! Chicken! REALITY: Look, I'll have your leg. Right! [ 7% contraction this quarter, unemployment properly measured over 15%, world economy contracting] [whop] BLACK BULL: Right, I'll do you for that! REALITY: You'll what? BLACK BULL: Come 'ere! REALITY: What are you going to do, bleed on me? BLACK BULL: I'm invincible! REALITY: You're a loony. BLACK BULL: The Black Bull always triumphs! Have at you! Come on then. [yields creeping up despite monetization, commodities creeping up not on demand but production cuts and stockpiling, deleveraging continues in households, commons will be severely diluted, credit terminally distressed with expected defaults worse than the Great Depression] [whop] [REALITY chops the BLACK BULL's other leg off] BLACK BULL: All right; we'll call it a draw. Oh, oh, I see, running away then. You yellow bastards! Come back here and take what's coming to you. I'll bite your legs off!
Feb 23 -On a conference call Jamie Dimon said the lender was “solidly profitable quarter-to-date” and its outlook for the quarter was “in line with analysts’ expectations.”
March 11 -Jamie Dimon, the chief executive of JPMorgan Chase, said Wednesday that the bank was profitable in January and February, echoing a similar statement made earlier this week by Vikram Pandit, chief executive of Citigroup.
March 12 -JPMorgan Chase CEO Jamie Dimon told an audience at a US Chamber of Commerce event Tuesday that he sees 'modest signs' of an economic recovery.
(Rock on, get them rally monkeys out. Banks are going to the moon baby .... Waitaminnit.-AM)
March 24 -JPMorgan Chase , the second-largest U.S. bank, slashed its common stock dividend 87 percent on Monday, a surprise move by a lender considered among the strongest in the U.S. financial sector. "Extraordinary times must call for extraordinary measures," Chief Executive Jamie Dimon said on a conference call. He said JPMorgan was "not asked by anybody" to cut the payout, but did so out of a "normal abundance of caution."
By Josh Fineman March 26 (Bloomberg)
JPMorgan Chase & Co. will delay contributions to 401(k) retirement plans for salaried employees until the end of the year and may reduce the payments, according to a person who received a company memo on the changes.
Workers making $50,000 to $250,000 annually will cease getting the contributions every two weeks and may see the benefits adjusted to a yet-to-be-decided amount, according to the person, who declined to be identified because the New York- based bank hasn’t disclosed the new policy. The dollar-to-dollar match for those earning less than $50,000 won’t change, the person said.
JPMorgan, which is the biggest U.S. bank by deposits and has a global workforce of about 200,000, doesn’t contribute to retirement plans of employees with annual salaries of more than $250,000.
(I'm sure JPMorgan employees appreciate the bosses' abundant caution given that the bank is solidly profitable and there are modest signs of an economic recovery.-AM)
(Look on the bright side by the time we get to the 5 trillion in off-balance sheet assets, the dollar will be worth a hell of a lot less. Uh... waitaminnit... -AM)
by David Reilly
March 25 (Bloomberg) -- The U.S. government wants to clear as much as $1 trillion in soured loans and securities from bank balance sheets with its latest bailout plan.
That might prove a short-term respite. No sooner might the Treasury Department mop up those assets than $1 trillion or more in new ones spring up to take their place.
That is due to the potential return of assets held in so- called off-balance-sheet vehicles that banks may soon have to put back onto their books. The end result may be that banks are in no better shape to increase lending even after the government bailout.
So investors betting for quick solutions to the financial crisis could be disappointed. The tangled web that banks wove over the years will take a long time to undo.
At the end of 2008, for example, off-balance-sheet assets at just the four biggest U.S. banks -- Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. -- were about $5.2 trillion, according to their 2008 annual filings.
Even if only a portion of those assets return to the banks - - as much as $1 trillion is one dark possibility -- it would take up lending capacity the government is trying to free.
The hidden assets that may return to banks consist of mortgages, credit-card debts and auto loans, among others. Over the years, banks bundled them together and sold them to investors as securities.
Whether these assets are “troubled” or “toxic,” their return to bank balance sheets could slow efforts to get credit flowing again. After all, banks shed the loans to make their balance sheets look smaller, allowing them to hold less capital to act as a buffer against losses. Until a couple of years ago, that boosted profits.
It also helped inflate the credit bubble, even as these accounting maneuvers made it harder for investors and regulators to see how much risk banks actually faced.
Accounting rulemakers now want banks to bring some of those assets back onto their books. They are trying to crack down on transactions that banks used to sidestep rules inspired by the off-balance-sheet antics that led to Enron Corp.’s collapse. Of course, there is a danger that the rulemakers will backtrack, especially given recent congressional efforts to twist rules that will let banks polish their books.
Investors have all but forgotten these out-of-sight assets. That’s a mistake.
True, banks won’t have to repatriate all of them. Mortgages guaranteed by Fannie Mae and Freddie Mac, for example, may have to be booked by those two companies, rather than banks.
Yet other assets will come back to banks. The tough part for investors is gauging how much. That is because the accounting- rules changes aren’t final, and their impact will depend on judgments by bank executives and auditors.
In its annual filing, JPMorgan said the rules change might lead it to bring back about $160 billion in assets. Citigroup estimated it may have to reclaim $179 billion.
That would equal about 9 percent of year-end 2008 assets at Citigroup, and about 7 percent at JPMorgan.
Neither Bank of America nor Wells Fargo provided such estimates. It’s possible, though, from JPMorgan and Citigroup’s disclosures and the thrust of the new accounting rules, to get some idea of what they might face.
Both Citigroup and JPMorgan said most of the assets they expect to return will be securitized credit-card debt -- $92 billion at Citigroup and about $70 billion at JPMorgan. Bank of America disclosed it had about $114 billion in off-balance-sheet credit-card debt. So a portion of that may shift back onto its books. (A similar estimate wasn’t possible for Wells, based on the information it disclosed.)
The return of credit-card debt may prove especially painful for banks, since delinquencies are soaring as unemployment increases. That might force banks to add to loss reserves, eating into profits.
Banks may also have to consolidate securitized commercial loans. That could be an issue for Wells, which had securitized $355 billion of this kind of debt.
And while mortgage-backed securities guaranteed by Fannie and Freddie likely wouldn’t have to be booked by banks, there are plenty of other mortgages out there.
Bank of America, for example, disclosed that it had about $360 billion of securitized mortgage debt that wasn’t backed by Fannie or Freddie.
Of the non-guaranteed debt, about $58 billion was subprime loans and about $138 billion was so-called Alt-A mortgages, according to Bank of America.
All told, Bank of America and Wells Fargo have a combined $600 billion in assets that may be under consideration for possible consolidation. If just half these assets come back to the banks, that would equal almost 6 percent of Bank of America’s assets and about 14 percent at Wells.
Granted, those are rough numbers. They underscore, though, that there is still a lot investors don’t know about banks and their books. That’s reason to worry.
Published: March 26 2009 02:00 Financial Times LEX column
Technical terms mask the crux of an issue. So when the US Treasury hurriedly asks for "resolution authority" to deal with large "non-bank financial institutions" it is worth asking what exactly is at stake. Put this piece of the puzzle together with the Treasury's bank stress tests and its plans to buy bad assets. Selling loans and securities to public-private funds is likely to force banks to crystallise large losses. Meanwhile, stress tests could force thinly capitalised banks to top up with government funds.
Should these in combination reveal any bank to be in real trouble, the authorities are (belatedly) seeking powers to take the required action. The Treasury and the Federal Deposit Insurance Corporation want to be able to support, restructure or wind down a large financial firm. Not limited to the likes of AIG, these powers would also cover bank holding companies. Let's be clear, the government wants the authority to deal with a big, complicated bank - a Citigroup, for example.
The FDIC's existing powers over "banks" extend only to deposit-taking subsidiaries, not their holding companies. That is a problem when much of banks' funding and derivatives contracts are stuck at the holding company level. Equally, the failure of one subsidiary may prove fatal for other parts of a sprawling financial outfit. The new authority would allow the government to control a company's demise, to renegotiate contracts or potentially impose haircuts on creditors or counterparties.
All these moves suggest some method behind the madness. Still uncertain, however, is whether the final element is in place to push these pieces together: the political guts to nationalise those banks that at the end of all this prove insolvent.
By James Carville Published: March 25 2009 22:39 Financial Timess
If nature abhors a vacuum, politics abhors complexity. There has been much discussion and some angst in the press lately about President Barack Obama’s supposed communication breakdown during the financial crisis. The breathless reports convey the impression that he has lost his communication skills altogether. One headline admonished: “Obama struggles as communicator.”
The essential problem is not how good a communicator he is but the complexity of what he has to communicate.
Mr Obama had a relatively easy time communicating the value of the recent economic stimulus package. After all, we know what bridges look like. We use them every day. And we know that repairing infrastructure creates jobs.
The same cannot be said, however, about the banking crisis that has handcuffed the US and world economies. It is impossible to break the explanation of the crisis into a sound bite or image. As someone who has prided himself on being able to reduce complex problems to simple messages, I am totally stumped by derivatives.
After hours of research, they seem to be something rich, greedy bankers thought up to make more money selling them to other rich, greedy bankers. They did not understand what they were selling. Buyers did not understand what they were buying and insurers did not understand what they were insuring. Now the taxpayer is stuck with these things that no one can explain. It is notable that the single most eloquent quote of the crisis by a flummoxed Mr Bush came in the first bail-out debate when he said: “If money isn’t loosened up, this sucker could go down.” The problem is compounded by the fact that the only people who can explain them are the bankers who created them. It is like relying on a criminal to tell us how he committed a crime – and paying him to do it.
It is not that Mr Obama is not communicating as well; it is that what he is communicating is too complex to reduce to simple words, especially when in the last 40 years, the length of a TV soundbite has dropped by 40 seconds. That being said, try this experiment. Contact an engineer and ask him what a bridge is. Or contact a doctor and ask what surgery is. Then walk into your local bank and ask your friendly banker what a derivative is.
(No need to go into the local bank Mr. Carville this humble blogger can explain what a derivative is in a 40 second soundbite. Ready? Here we go....
DERIVATIVES ARE SPECULATIVE BETS. INVESTORS BET THAT EITHER THE VALUE OF THE DERIVATIVE WOULD ALWAYS GO UP OR BOUGHT INSURANCE BETTING THAT THE VALUE WOULD GO DOWN. HOWEVER NO ONE REGULATED THESE BETS SO THE AMOUNT OF BETS GREW TO BE LARGER THAN THE SIZE OF THE WORLD ECONOMY.
THERE ISN'T ENOUGH MONEY TOO PAY OFF THESE BAD SPECULATIVE BETS AND SINCE RICH FOLKS DON'T WANT TO FESS UP TO WHAT THEY LOST, AN ONGOING DISTRIBUTION OF TAXPAYER WEALTH TO PARTIALLY PAY OFF THESE BAD SPECULATIVE BETS IS UNDERWAY...
THE RESULT WILL PROBABLY BE A WICKED INFLATION THAT WILL ROB FUTURE GENERATIONS.
(Either we rip your faces off now or they get ripped off later ... -AM)
March 26, 2009 Wall Street Journal By LIZ RAPPAPORT, LIAM PLEVEN and CARRICK MOLLENKAMP
Amid the flap over bonuses at American International Group Inc. two of the company's top managers in Paris have resigned. Their moves have left the giant insurer and officials scrambling to replace them to avoid an unlikely but expensive situation in which billions in AIG trading contracts could default.
Representatives of the Federal Reserve, AIG's lead U.S. overseer, are talking with French regulators and AIG officials to deal with the consequences of a complicated legal scenario in which the departures of the managers in Banque AIG, a subsidiary of AIG's Financial Products unit, could trigger defaults in $234 billion of derivative transactions, according to people familiar with the situation and a document AIG provided to the U.S. Treasury.
Defaults, by no means inevitable, could not only hurt AIG but also could force European banks involved in the trades to raise billions in capital to cushion potential losses, according to AIG documents.
That is because the banks used Banque AIG to hedge the risk in some of the assets they own, allowing them to hold less capital against those assets, which could include securities such as mortgages and corporate debt.
The executives at Paris-based Banque AIG, Mauro Gabriele and James Shephard, have resigned in recent days but have agreed to stay on for a transition, according to people familiar with the matter. In the wake of their resignations, AIG must replace them to the satisfaction of French banking regulators.
If they don't, French regulators may appoint their own designee to manage the bank -- an outcome that could trigger defaults under the bank's derivative contracts. The private contracts say that a regulator's appointment of a manager constitutes a change in control, according to a person familiar with the matter; the provision is often included in derivative contracts where parties want to preserve a way out if something about their counterparties changes.
The risk that the Banque AIG transactions would default if managers departed would represent an unexpected problem for what had been one of the AIG Financial Products businesses that hadn't run seriously aground in recent months, according to AIG securities filings.
Banque AIG enabled AIG to generate revenue by helping European banks lower the amount of capital they are required to hold to protect against losses on assets such as mortgage and corporate loans. The bank was set up in the early 1990s, and was licensed by French banking regulators in early 1991. More recently, a Banque AIG branch has been located in London's Mayfair district along with the financial-products unit.
In the event of a default, European banks that have done these trades with AIG could be forced to take back responsibility for billions of dollars in assets. That could require them to raise billions of dollars in capital, AIG has said.
The deals worked like this, according to a Banc of America Securities-Merrill Lynch report and a person familiar with AIG's contracts: A European bank with a hypothetical $1 billion portfolio of assets could unload some of the risk by having AIG protect the top and largest layer, or tranche, against losses with insurance-like derivative contracts. The move greatly reduced the regulatory capital charge for AIG clients.
In May 2007, a British executive in the financial-products office in London told investors: "For the European banks and the Asian banks, this is very much a regulatory capital arbitrage business. By structuring their businesses, whether it's their mortgage lending or their corporate loans into these sorts of trades and tranching the risk up, they're able to significantly reduce the capital they have to hold against their portfolios."
(Mr. Practical is a fictional character that represents the best mindmeld of the minyanville.com brain trust. -AM)
Mr. Practical March 24, 2009
The Public Private Investment Partnership found a couple of willing participants (Black Rock (BLK) and PIMCO) to say what a good deal it was. But there are two caveats to that: 1. it is a good deal for private speculators, definitely not taxpayers and 2. the speculators have to think prices are going to go up alot.
Here is how it will work (my interpretation). A private fund puts up $100 in equity and the government puts up $100 in equity. Then, in an ironic twist, a bank, maybe even the one selling the assets, will for certain assets lend between 3 (for derivatives and securitized assets) to 7 times (for bank loans) the amount. This will of course be guaranteed by the FDIC, a government insurance company that 1. has no real funds and 2. makes AIG risk management look like genius. So let's say our equal partnership puts up $200 in equity and then levers that up seven times so it can buy $1,400 of toxic assets at $.50 on the dollar.
If the assets rise 20% in value to $1,680, the partnership splits the profits (as long as the government doesn't change the deal in the future, which is a big if given what we have seen lately) of $280 equally. But let's say the assets decline in value by 20% to $1120. The deal is the private investor can only lose his $100 dollars equity while the public partner (you) will lose $180.
So today we saw a great rally in the stock market as it perceived that many private investors would not be able to resist such a good deal for them. But don't be so sure many will bite. While there is some low hanging fruit, maybe $500 billion worth, which is what the few are salivating about, I still estimate that banks on average have most of their illiquid assets marked at $.6 on the dollar, while a private investor in order to risk money might be willing to pay $.30 on the dollar. If this is going to work the government you) will have to make up the difference, which could be around $3 trillion. If they were to do that the dollar would plummet.
So while the program will show initial success (it’s most likely all pre-arranged) on a small amount of assets, it will eventually expose more losses down the road and more need for capital.
The government's plan, through carry trades, bailouts, and plans within plans, is to buy time by slowly bilk the taxpayer and hand the money over to banks, banks that don't deserve to have their equity worth anything. Bulls are talking about how much free cash reserves banks have, but two things are offsetting that: continued write-down of assets and rising margin requirements. The first is still a black hole the second we can only hope that regulators are serious about "not letting this happen again": it was their continued lowering of margin requirements and looking in the other direction of shadow banking that allowed this situation to happen.
Which brings me to my final point. We hear over and over again how government bailouts always make back the money. Wait long enough and the economy will grow so that the assets can be sold at a higher price. But remember what we have learned about price and the value of the dollar: prices go up when the dollar goes down. So although bailouts like the savings and loan crisis may have earned back all the "nominal" dollars it spent, it received dollars to settle the debts that were worth much less. The value of the dollar has eroded by 95% since 1930. In other words, real wealth was lost.
(Citizen King serves up the Geithner plan with a side of hemlock. Other than Grant's Interest Rate Observer his newsletter IMHO is the best on the Street. Link is to the right, if you can afford it...he is a must read.-AM)
March 24, 2009 Issue 3474 The King Report
Geithner’s plan effectively creates ‘calls’ on banks’ toxic assets. The US taxpayer will underwrite losses in this program. The call premium will be the private equity risk; the buyer gets the upside appreciation. The taxpayer provides the funding/leverage.
Bill Gross sees private investor risk of 4% to 5%. This is the call premium for the toxic assets.
Let’s think through this plan and the probable consequences.
We know that the US government and Fed desperately need to foment massive asset inflation to avert collapse of the US’s dysfunctional financial and political systems. History is clear that government will do whatever is necessary to survive, including tramping on anyone & everyone.
The US’s founders articulately and clearly warned of this inevitability.
The Fed avers that it will remove the record credit before inflation becomes a problem. This is bogus for several reasons.
For the past eight decades the Fed’s principal role has been to paper over (inflate) profligate US spending of both the public and private sectors. With the exception of Martin and Volcker, Fed chairmen err greatly on the side of inflation.
The Fed is trying to engineer massive asset inflation while holding general price inflation to a benign level. When has the Fed ever, with the exception of Volcker, been able to forecast or time big picture variables correctly?
Most importantly, general price inflation has already returned to the marketplace. After a couple months’ decline, PPI and CPI are increasing at a faster rate than forecast. When hasn’t asset inflation produced an increase in general inflation, especially the necessities of life?
Now back to the plan. Everyone knows that solons are trying to engineer massive asset inflation. So if we are running a bank why would we sell any asset that has a chance to reflate?
We would only sell assets that we deem hopeless. Are there enough private equity patsies to buy calls on assets that we deem have a low probability of increasing substantively in value?
Most call buyers do not intend or wish to own the underlying assets. They are interested in a levered gain. So even if the toxic assets are inflated enough in value to produce a gain for the ‘call’ buyers, what patsies will appear as a dumping ground for the call buyers?
Geithner’s toxic asset scheme is a repo with a call option. And unless end-user patsies appear at some point, the toxic assets will return to sender and the US taxpayer.
We are in this mess due to excess derivatives and leverage. Ironically or absurdly, Geither’s toxic asset plan & solution (TAPS) creates a derivative on derivatives (toxic paper) and increases the leverage on levered toxic assets! You can’t make up stuff like this.
BTW, why buy big banks stocks when you can buy calls on their toxic assets with only 4% to 5% downside and an estimated 10 to 20-fold upside gain?
Did solons ensure that the stock market responded positively to the plan? Monday’s market had that ‘Touch of Rubin’ that used to appear during Clinton’s reign. Back then if an ugly report would fell bonds or stocks almost immediately ‘impact buyers’ would appear and stocks or bonds would soar. (Pit traders would shout ‘Rubin, Rubin’ when this occurred.)
Forcing a beneficial market reaction before the market can vote ensures that the financial media and pundits will ignore any negatives and propagate a positive rationalization.
In other words, if one creates a rally after an event or report, most people will spin or view the occurrence as a positive without regard to analysis. We would not be surprised if that transpired yesterday. PS - Pit sources say JPM was a huge SPM buyer, including 1k at the NYSE close.
Unfortunately for solons their expediency just delays the inevitable negatives. Solons have created extremely positive expectation for the TAPS. If the scheme does not go exceptionally well, the consequences will not be pretty…BTW, $1 trillion is not nearly enough.
The first TAPS auction will probably go well because solons will exert intense pressure on the community to play nice. Entities that are already adjuncts of the Fed or Treasury, like PIMCO and Black Rock, will be subjected to enormous pressure to stand and deliver.
By James Quinn, Wall Street Correspondent Last Updated: 11:45AM GMT 25 Mar 2009 telegraph.co.uk
The US government plan to free beleaguered banks of up to $1 trillion (£690bn) of toxic assets will expose American taxpayers to too much risk, leading economist Joseph Stiglitz has cautioned.
The Nobel Prize-winning economist, speaking a day after the Dow Jones Industrial Average rose by almost 7pc in support of the novel public-private partnership (PPIP), said that the plan is "very flawed" and "amounts to robbery of the American people."
Professor Stiglitz on Tuesday led a list of well-known economists and high-profile industry figures who have said Treasury Secretary Tim Geithner's toxic asset plan may not be as successful as it first seems.
The plan involves ensuring up to $100bn of government funding is matched by private investors, with the monies combined and leveraged up, in some cases to by as much as 20:1, with the help of the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), to buy pools of unwanted assets.
Professor Stiglitz, speaking at a conference in Hong Kong, said that the US government is essentially using the taxpayer to guarantee the downside risks, namely that these assets will fall further in value, while the upside risks, in terms of future profits, are being handed to private investors such as insurance companies, bond investors and private equity funds.
"Quite frankly, this amounts to robbery of the American people. I don't think it's going to work because I think there'll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer."
His comments echo those of fellow Nobel Prize winner Paul Krugman, who said on Monday that the plan is almost certain to fail, something which fills him "with a sense of despair."
Others to criticise the plan include former Securities and Exchange Commission chairman Arthur Levitt, and Bill Gross, of bond manager PIMCO, who has said he does not believe the plan will be enough to solve the banking crisis.
It is understood that the PPIP was only finalised after Treasury officials, led by Mr Geithner, spoke to a number of senior bankers on Wall Street, including JP Morgan Chase chairman Jamie Dimon, in the hope of getting a plan that was workable for the market, following the dismissal of Mr Geithner's earlier attempt to solve the financial crisis.
1 day ago WASHINGTON (AFP) — Researchers at a US Navy laboratory have unveiled what they say is "significant" evidence of cold fusion, a potential energy source that has many skeptics in the scientific community.
The scientists on Monday described what they called the first clear visual evidence that low-energy nuclear reaction (LENR), or cold fusion devices can produce neutrons, subatomic particles that scientists say are indicative of nuclear reactions.
"Our finding is very significant," said analytical chemist Pamela Mosier-Boss of the US Navy's Space and Naval Warfare Systems Center (SPAWAR) in San Diego, California.
"To our knowledge, this is the first scientific report of the production of highly energetic neutrons from a LENR device," added the study's co-author in a statement.
Scientists have been working for years to produce cold fusion reactions, a potentially cheap, limitless and environmentally-clean source of energy.
Paul Padley, a physicist at Rice University who reviewed Mosier-Boss's published work, said the study did not provide a plausible explanation of how cold fusion could take place in the conditions described.
"It fails to provide a theoretical rationale to explain how fusion could occur at room temperatures. And in its analysis, the research paper fails to exclude other sources for the production of neutrons," he told the Houston Chronicle.
"The whole point of fusion is, you?re bringing things of like charge together. As we all know, like things repel, and you have to overcome that repulsion somehow."
But Steven Krivit, editor of the New Energy Times, said the study was "big" and could open a new scientific field.
The neutrons produced in the experiments "may not be caused by fusion but perhaps some new, unknown nuclear process," added Krivit, who has monitored cold fusion studies for the past 20 years.
"We're talking about a new field of science that's a hybrid between chemistry and physics."
By James S. Chanos March 24, 2009 Wall Street Journal
Mark-to-market (MTM) accounting is under fierce attack by bank CEOs and others who are pressing Congress to suspend, if not repeal, the rules they blame for the current financial crisis. The rules now under attack are neither as significant nor as inflexible as critics charge. MTM is generally limited to investments held for trading purposes, and to certain derivatives. For many financial institutions, these investments represent a minority of their total investment portfolio. A recent study by Bloomberg columnist David Reilly of the 12 largest banks in the KBW Bank Index shows that only 29% of the $8.46 trillion in assets are at MTM prices. In General Electric's case, the portion is just 2%.
Why is that so? Most bank assets are in loans, which are held at their original cost using amortization rules, minus a reserve that banks must set aside as a safety cushion for potential future losses.
MTM rules also give banks a choice. MTM accounting is not required for securities held to maturity, but you need to demonstrate a "positive intent and ability" that you will do so. Further, an SEC 2008 report found that "over 90% of investments marked-to-market are valued based on observable inputs."
At a recent hearing, bankers said that MTM forced them to price securities well below their real valuation, making it difficult to purge toxic assets from their books at anything but fire-sale prices. They also justified their attack with claims that loans, mortgages and other securities are now safe or close to safe, ignoring mounting evidence that losses are growing across a greater swath of credit.
According to J.P. Morgan, approximately $450 billion of collateralized debt obligations (CDOs) of asset-backed securities were issued from late 2005 to mid-2007. Of that amount, roughly $305 billion is now in a formal state of default and $102 billion of this amount has already been liquidated. The latest monthly mortgage reports from investment banks are equally sobering. It is no surprise, then, that the largest underwriters of mortgages and CDOs have been decimated.
Commercial banking regulations generally do not require banks to sell assets to meet capital requirements just because market values decline. But if "impairment" charges under MTM do push banks below regulatory capital requirements and limit their ability to lend when they can't raise more capital, then the solution is to grant temporary regulatory capital "relief," which is itself an arbitrary number.
There is a connection between efforts over the past 12 years to reduce regulatory oversight, weaken capital requirements, and silence the financial detectives who uncovered such scandals as Lehman and Enron. The assault against MTM is just the latest chapter.
Instead of acknowledging mistakes, we are told this is a "once in 100 years" anomaly with the market not functioning correctly. It isn't lost on investors that the MTM criticisms come, too, as private equity firms must now report the value of their investments. The truth is the market is functioning correctly. It's just that MTM critics don't like the prices that investors are willing to pay.
The FASB and Securities and Exchange Commission (SEC) must stand firm in their respective efforts to ensure that investors get a true sense of the losses facing banks and investment firms. To be sure, we should work to make MTM accounting more precise, following, for example, the counsel of the President's Working Group on Financial Markets and the SEC's December 2008 recommendations for achieving greater clarity in valuation approaches.
The FASB proposal on March 16 represents capitulation. It calls for "significant judgment" by banks in determining if a market or an asset is "inactive" and if a transaction is "distressed." This would give banks more discretion to throw out "quotes" and use valuation alternatives, including cash-flow estimates, to determine value in illiquid markets. In other words, it allows banks to substitute their own wishful-thinking judgments of value for market prices.
The FASB is also changing the criteria used to determine impairment, giving companies more flexibility to not recognize impairments if they don't have "the intent to sell." Banks will only need to state that they are more likely than not to be able to hold onto an underwater asset until its price "recovers." CFOs will also have a choice to divide impairments into "credit losses" and "other losses," which means fewer of these charges will be counted against income. If approved, companies could start this quarter to report net income that ignores sharp declines in securities they own. The FASB is taking comments until April 1, but its vote is a fait accompli.
(So banks will be able to show a profit by not taking mark-to-market write-downs on the 30% of their assets that fall under MTM and underestimating reserves necessary to take against the loans they hold ... by far the majority of their assets.
Banks will declare they were profitable for the first quarter hence equity prices will rise allowing them to raise funds by diluting the commons. Treasury monetization will compress spreads allowing more debt issuance. Of course the banksters can always churn out the synthetic treasuries i.e., FDIC backed... that is if they need more after they use current proceeds to pay back TARP to protect their compensation.
Not being willing to sell loans or incorrectly marked MTM securities the pablum narrative will espouse success as the banksters game the process to show they are moving toxic securities out of the plumbing ...
(Hey when the Federales bring the leveraged up buyers to the table banks gotta have something to sell at inflated prices - won't be loans valued at par that's for dang sure- so the obligatory press release can be generated to boost stocks!-AM)
New York Post Last updated: 1:11 am March 25, 2009
By Mark DeCambre
As Treasury Secretary Tim Geithner orchestrated a plan to help the nation's largest banks purge themselves of toxic mortgage assets, Citigroup and Bank of America have been aggressively scooping up those same securities in the secondary market, sources told The Post.
But the banks' purchase of so-called AAA-rated mortgage-backed securities, including some that use alt-A and option ARM as collateral, is raising eyebrows among even the most seasoned traders. Alt-A and option ARM loans have widely been seen as the next mortgage type to see increases in defaults.
One Wall Street trader told The Post that what's been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay.
Recently, securities rated AAA have changed hands for roughly 30 cents on the dollar, and most of the buyers have been hedge funds acting opportunistically on a bet that prices will rise over time. However, sources said Citi and BofA have trumped those bids.
While some observers concur that the buying helps revive a frozen market, others argue the banks are gambling away taxpayer funds instead of lending.
Around this same time last year some of the same distressed mortgage paper that Citi and BofA are currently snapping up was trading around 50 cents on the dollar, only to plummet to their current levels.
One source said that the banks' purchases have helped to keep prices of these troubled securities higher than they would be otherwise.
Sept. 23 (Bloomberg) -- The U.S. slowdown may be shorter than expected and private equity investors should start searching for bargains after valuations tumbled this year, said Mark Mobius, executive chairman of Templeton Asset Management Ltd.
``I just don't see a long, protracted recession,'' Mobius, who manages about $40 billion in emerging market stocks, told the Super Return Asia conference in Hong Kong today. ``There is an opportunity to buy low right now and sell high in the next cycle.''
Nov. 17 (Bloomberg) -- Mark Mobius said he’s “aggressively” buying consumer stocks, including cell-phone companies, retailers, banks and furniture makers, as faster economic growth in China, India, South Africa and Turkey offsets sagging demand from developed nations.
“We see a consumer boom in all of those countries,” Mobius, who oversaw more than $24 billion in emerging-market stocks on Sept. 30 as executive chairman at Templeton Asset Management Ltd., said in a Bloomberg Television interview from Johannesburg. “Per-capita income is growing at a very rapid pace in these countries.”
The slowdown “will be rather short-lived and, of course, the markets will anticipate this,” Singapore-based Mobius said. “There will be some deceleration, but these are still fast- growing countries.”
Jan. 17 (Bloomberg) -- Mark Mobius, who oversees about $26 billion in emerging-market stocks at Templeton Asset Management Ltd., said he plans to buy more shares of consumer and commodities companies in emerging markets.
“Valuations are attractive,” Mobius, Templeton’s executive chairman, said at a briefing in Kuala Lumpur today. “We feel that this year would be a year of recovery of the stock markets in the emerging markets.”
“There is an incredible build-up of foreign reserves in the emerging markets, and the increase in money supply is quite dramatic,” the executive chairman said. “We’ve seen a very big increase of money coming into markets.”
March 23 (Bloomberg) -- The next “bull-market” rally has begun and there are bargains in every emerging market following a record slump in stocks, Templeton Asset Management Ltd.’s Mark Mobius said.
“You have to be careful not to miss the opportunity,” said Mobius, who helps oversee about $20 billion of emerging- market assets as executive chairman at San Mateo, California- based Templeton. “With all the negative news, there is a tendency to hold back.”
(Hey eventually the dude is going to get it right!-AM)
By JOHN CHRISTOFFERSEN, Associated Press – 1 hr 25 mins ago
FAIRFIELD, Conn. – A busload of activists representing working- and middle-class families paid visits Saturday to the lavish homes of American International Group executives to protest the tens of millions of dollars in bonuses awarded by the struggling insurance company after it received a massive federal bailout.
About 40 protesters — outnumbered by reporters and photographers from as far away as Germany — sought to urge AIG executives who received a portion of the $165 million in bonuses to do more to help families.
"We think $165 million could be used in a more appropriate way to keep people in their homes, create more jobs and health care," said Emeline Bravo-Blackport, a gardener.
She marveled at AIG executive James Haas' colonial house, which has stunning views of a golf course and the Long Island Sound. The Fairfield house is "another part of the world" from her life in nearby Bridgeport, which flirted with bankruptcy in the 1990s and still struggles with foreclosures and unemployment." "Lord, I wonder what it's like to live in a house that size," she said.
Another protester, Claire Jeffery, of Bloomfield, said she's on the verge of foreclosure. She works as a housekeeper; her husband, a truck driver, can't find work.
"I love my home," she said. "I really want people to help us."
News of the bonuses last week ignited a firestorm of controversy and even death threats against AIG employees. The company, which is based in New York, has received $182.5 billion in federal aid and now is about 80 percent government-owned, while the national housing and job markets have collapsed as the country spirals into a crippling recession.
American International Group Inc. has said it was contractually obligated to give the retention bonuses, payments designed to keep valued employees from quitting, to people in its financial products unit, based in Wilton, Conn. Congress began action on a bill that would tax 90 percent of the bonuses, and the company's chief executive urged anyone who received more than $100,000 to return at least half.
AIG has argued that retention bonuses are crucial to pulling the company out of its crisis. Without the bonuses, the company says, top employees who best understand AIG's business would leave.
Besides Haas' home, protesters on Saturday also visited the Fairfield home of AIG executive Douglas Poling. They were met both times by security guards. They left letters that acknowledged some executives, including Haas and Poling, are giving up the money but that asked them to support higher taxes on families earning more than $500,000 a year.
"You have a wonderful opportunity to help your neighbors in Connecticut," the letters said. "We ask you to consider the experiences of families struggling in this economy."
Afterward, the group protested at the office of AIG's financial products division in Wilton, where they waved signs and chanted, "Money for the needy, not for the greedy!"
There were no arrests.
Mary Huguley, of Hartford, said AIG executives should share their wealth with people like her sister, who is facing foreclosure.
"You ought to share it, and God will bless you for doing it," she said.
(Here's a strange thought experiment. Is Barry's reluctance to liquidate insolvent banks in part because he can't apply the 'only Nixon could go to China' rationale? Would there in fact have been a higher probability that tougher measures would have been taken faster under a McCain Administration? Conversely though, he should be in a better position to mitigate the 'bonus outrage.' Of course if McCain had become President the 9 scariest words -'I'm from the government and I'm here to help.' would have been transmogrified into 'Hi, I'm Sarah Palin , where are the launch codes?' -AM)
Reuters March 21, 2009 By Jennifer Ablan and Kristina Cooke
The lack of big investor interest in the debut of the Federal Reserve’s consumer lending program is heightening fears private capital will also shun the government’s toxic-asset plan amid public outrage over outsized executive bonuses.
The Fed’s new program to resuscitate consumer credit, the Term Asset-Backed Securities Loan Facility, or TALF, received only $4.7 billion in requests for loans out of $200 billion on offer.
What’s more, big money stayed away. Applications came from just 19 hedge funds and firms that manage between $3 billion and $5 billion, fewer and smaller than expected.
The lack of investor appetite could also be a problem for the U.S. Treasury’s public-private investment fund plan, which will aim to buy up to $1 trillion in assets by leveraging taxpayer and investor capital with government loans.
“If populist furor over bonuses and related issues fades in coming days, TALF may yet achieve its potential,” said Dino Kos, who ran the New York Federal Reserve Bank’s markets desk before William Dudley, now the New York Fed’s president, and is now at research firm Portales Partners.
Many big private investors are getting cold feet over the government funding plans in the wake of the public and political outrage surrounding American International Group (AIG.P), fearing that an irate U.S. Congress is more likely than ever to change the rules of engagement — possibly retroactively.
“If that furor continues to rise, TALF and for that matter, the nascent private-public investment program will prove to be white elephants,” Kos said.
One high-level private equity investor who asked not to be named said private capital was more cautious and wary about investing in the Treasury public-private investment fund because of what has unfolded with AIG.
Another private equity official said the government hasn’t consulted much with the private-equity industry. That official cited concern that details of private equity firms’ proposals and future returns could be made public.
“The climate is rather treacherous as investors do not necessarily trust that the government will not change the rules or create retroactive measures — particularly as it relates to clawbacks,” said Greg Peters, head of global credit strategy at Morgan Stanley in New York.
Potential investors in the public-private investment fund “worry about getting involved with the government and then having congress try to dictate how to run your business,” Peters said