Subscribe: Mock The Market
Added By: Feedage Forager Feedage Grade B rated
Language: English
aig  bank  billion  fed  financial  government  interest rates  market  markets  million  money  much  news  rates  stock  time 
Rate this Feed
Rate this feedRate this feedRate this feedRate this feedRate this feed
Rate this feed 1 starRate this feed 2 starRate this feed 3 starRate this feed 4 starRate this feed 5 star

Comments (0)

Feed Details and Statistics Feed Statistics
Preview: Mock The Market

Mock The Market

Financial Commentary and Mockery

Updated: 2018-03-06T09:40:01.595-08:00


Moody's Not Crazy Bout JP Morgan's $20 Billion Bridge Loan


Amidst all the cheering and hullabaloo over AT&T's proposed $39 billion bid to acquire Deutsche Telecom, a few sober credit folks over at Moody's would like to point out something in passing. Nothing major really, just the fact that JP Morgan is giving AT&T a $20 billion bridge loan to finance the acquisition. Certainly $20 billion is chump change, but despite the Fed's proclivity for spending trillions on mortgage and treasuries, it still hasn't stooped to buying bridge loans for large Telecom mergers in the event that no buyers turn up to buy the debt. Then again, earthquakes, tsunami's, nuclear reactor meltdowns, middle east unrest, nor the implosion of parts of the EU is going to stop this market from loving debt issued by anybody to finance anything. In any event, it's really great to see AT&T turning itself into an enormous crappy monopoly again. After all, the government is going to need something to break up in a couple of years. As long as the investment bankers keep getting paid, everybody's happy.

Yay Dividends!


After the latest round of stress tests, the Fed has decided to play nice and allow some of the 19 largest US banks to do the fun stuff they used to love to do before they all fell into the big black hole of 2008. Banks have the Fed's permission to pay dividends and buy back stocks again! Yippee!!

Everybody seems to have forgotten just how much $40 stock Citigroup bought right before it went straight to $3. Or Wa Mu. Yes, the same Wa Mu whose former executives (and their no-good, asset-shuffling wives!) are getting sued by the FDIC, used to spend all day paying $45 for its own stock, months before it was seized by the FDIC. These firms spent billions upon billions of capital, capital that would've really come in handy when all their fraudulent mortgage underwriting was finally unveiled, to help boost their stocks so that executives (and their money-sucking gold-digging wives!) could sell stock and collect north of $900 million in comp. The FDIC is looking for $900 million dollars, so you know the wives have run off with way more than that.

See, everybody just has way too much capital sitting around and it's just so wasteful. It's not like we're ever going to need that capital for any reason. Because if you can just go crying to the Treasury and Fed for more capital and cheap financing every time your own balance sheet throws up on itself after looking at its asset, then why would you need any excess capital? We've already rewarded employees, time to get back to our second favorite thing to do, rewarding our shareholders.

So if you're reading the news, and you're wondering why on earth the market is staging a comeback today given all the turmoil in the Middle East, possibility of nuclear armageddon in Japan, and the Fed's determination to continue to ease in the face of recent inflationary data, you have your answer: bank dividends. Whoopdy Doo.

Japanese Tsunami Wrecks Markets


US equities rallied marginally on Friday despite the devastating 8.9 earthquake/tsunami combo that struck Japan. After having the weekend to think it over, and watching the Nikkei plunge 6%, investors have reconsidered. Lately, it seems like equities can seem to talk themselves into rallying no matter what the headlines. It's like they read the news in their sleep and bought stocks out of habit. Hmmm.... Yawn, a natural disaster that cripples one of our largest economies and brings the Japanese to the brink of a nuclear disaster? No biggie. Price of oil is down, that's great for us, keeps inflation in check. Right? Goldilocks economy. Give some money to the Red Cross. Buy more stocks. A couple of nuclear power plant explosions, a few fuel rod fusions later and the news seems, well, maybe not so bullish anymore. Suddenly, things like the announcement of Berkshire Hathaway's intent to buy Lubrizol for $10 billion, which would've sent stocks into a euphoric lather a few weeks ago, seem pretty insignificant when compared to the aftermath of the Japanese tragedy. Is logic and reason returning to the markets?

China Posts a Trade Deficit


China posted a $7.3 billion trade deficit in February, surprising those who expected them to continue their usual habit of flooding the world with their manufactured goods without reciprocity. Analysts are blaming this anomaly on the Lunar New Year holidays, when apparently even the Chinese get lazy and party too hard to make stuff to export. Better to believe that, of course, then the alternative; that world economic growth might actually be slowing. If this continued, it would be extremely inconvenient for the Fed, who was probably hoping that somebody else would step in to buy a few Treasuries after it is done with QE2. I mean, somebody has to help keep US interest rates in check so our debt fueled recovery won't be crushed by the slightest uptick in rates. If it's not going to be the Chinese, who's it gonna be? Maybe everybody who is puking Spainish government bonds on Moody's downgrade this morning? All of those investors who are surprised, yes SHOCKED, that it's gonna cost Spain more to recapitalize its banks than the government's previous official estimates? They actually needed Moody's to tell them to sell. Anyway, the more havoc elsewhere in the world, the better the US looks in comparison.

What Kind of Sell-Off is This?


So is this the Middle-East-is-having-trouble-working-out-some-democracy-issues sell-off? Or the NAR-has-been-overestimating-home-sales + home-prices-are-still-falling + interest-rates-going-higher sell-off? Or OMG-the-Fed-is-going-to-stop-buying-the-market-in-June sell-off? Perhaps the-market-has-gone-straight-up-for-2000-points, maybe-wise-to-take-a-breather sell-off? In any event, if you were starting to wonder when on earth would've been a good day to finally initiate your short in Netflix? You should've done it on Friday.

The Budget and Zynga


The White House put out its budgetary needs for the 2011 fiscal year. Projections call for a $1.65 trillion deficit, which doesn't surprise me much. This is what happens when you spend like crazy, don't raise taxes, and finance it all buy selling yourself debt. The good news is that the White House is terrible at projections, so maybe, just maybe, it's overestimated the big black hole we're in and we still have some shot of getting out before the rioting begins.

Speaking of crazy amounts of money, the valuation explosion in social networking sites continues unabated. Zynga is wooing potential investors in an attempt to raise $250 million in new funding, which would value the three-year-old start-up at between $7 to $9 billion. Way back in April, the company was only valued at around $4 billion. But then, Facebook was a puny start-up with a mere $20 billion valuation. Whether any of these valuations fulfill investor's expectations is anybody's guess, at least until somebody goes public and we get some financials and see some real trading Gotta take advantage of the ability to raise gobs of money without having to reveal financials. But venture capitalists are certainly itching to cash out after many years of lackluster returns in the industry. Employees too want their cars, jewels, and houses. It's hard to keep a lid on that so we're gonna see some awesome IPO action.

Fannie, Freddie and Facebook


The administration has unveiled its proposal to wind down the mortgage market, I mean Fannie and Freddie, over the course of some very long and ambiguous time frame. I haven't read the white paper myself, but having read the WSJ's summary, it's abundantly clear that a few pesky details have not been addressed. Such as, who's going to buy the trillions of dollars worth of mortgages that will need to be originated in order to keep the housing market from collapsing? Or, how will the average American be able to afford to buy a house at current prices, when interest rates sky-rocket on mortgages because there is no federal subsidy anymore? Stuff like that. All minor.

Moving on to way more interesting and exciting news. According to Reuters, Facebook is mulling a $1 billion employee share sale that would value the company at $60 billion. This is not to be confused with the $1.5 billion share sale it did a month ago that valued the company at $50 billion. I'm not blaming the folks at Facebook for wanting to cash out a bit. Most 25 year old geeky programmers could really use a porsche and a 10,000 sq ft bachelor pad to get chicks at 25. But if the company is really going to tack on $10 billion in market cap per month, you might as well wait for the IPO, which is only a year away. Otherwise, you're gonna make it look like you really think your company's stock is overvalued and you've got to get out RIGHT NOW before it craters.

Good News For Housing, For Real


The WSJ reports today that home affordability has returned to pre-bubble levels in many US markets in the past year. Having prices return to a point where the average person can actually buy one is far better for the economy than any bailout, tax break or zero interest rate. It didn't stop our politicians and friends at the Fed from attempting to artificially inflate prices to keep this dreaded reality from occurring, by offering free money mostly to those who didn't need or deserve it. For there are many folks out there who were prudent, bought what they could afford, had bad timing, are underwater now, can't refi, and have had to watch the parade of hand-outs pass them by. It'd be like the government refunding everybody who bought stock on margin in 2000 at the highs, without giving a penny to those who bought Enron in their retirement accounts, even though Enron was a fraud and was just a really dumb business idea. Both of them pumped by Wall Street, of course. But back to housing...

The ratio of home prices to annual income had fallen to 1.6 by last September, below the historical average of 1.9 from 1989-2003 and down from the peak of 2.3 in late 2005. Great news for those who: a.) have a job b.) need a house and don't already own one and c.) can get a mortgage. In the bad news department, there are still: a.) lots of unemployed folks out there b.) people who bought at the highs who are underwater and might walk away if prices continue to decline, and c.) mortgage rates are marching higher.

Fannie and Freddie have been the mortgage market since all of our friendly neighborhood non-conforming specialists, ahem, got out of that market rather quickly in 2007-2008. The White House is planning to release its plans for the two mortgage behemoths on Friday. Although somebody leaked to the WSJ that the administration wants to phase out the housing-finance giants, it seems impossible to imagine. They are 90% of the market. We're talking trillions of dollars. Are banks really going to originate and hold on to all those mortgages? Cause nobody is going to buy them without government guarantees. Especially not after the CDO fiasco of 2007. We'll see what the government has to say, and then the market is just going to do what it wants to do.

China Raises Rates, US Yawns


Last I checked, our fearless Fed Chairman, Ben Bernanke, was busying himself with ZIRP + QE + QE2, oblivious to all signs of brewing inflation or bubbles. I mean, who cares about spiking food prices? And oil prices. And copper prices. Or the return of covenant-lite bonds? Or money pouring into emerging markets? Or record bonuses at US banks? None of these things have anything to do with US monetary policy. Because buying trillions in Treasuries and mortgages directly from broker dealers at any price is the best and most direct way to bring the unemployment rate down from over 9% to 5%. And it's not liable to leak out and cause distortions in other markets. Right. So that's working really well so far.

Anyhoo, at least the Chinese are paying attention. China raised its interest rates for the third time since mid-October. Admittedly, China's growth rates are a tad higher than ours and the chance of getting runaway inflation is more likely when your economy is experiencing explosive growth of 10%, rather than the anemic 3% or so we're getting in the US. Nevertheless, global markets actually respond to this kind of thing. Oil, copper, and emerging-market stocks fell across the board in response to China's interest rate move. Please make of note of that, Mr. Bernanke.

AOL Buys Huffington Post for How Much?


Nothing can revive the Rip Van Winkle of bloggers (yours truly) faster than the news of a $315 million purchase price for a blog. Mostly a blog aggregator at that. Sure, AOL's $315 million announcement to acquire the Huffington Post would be a much bigger deal if it weren't AOL doing the math on the financials, but still, pretty big news for aspiring bloggers everywhere. AOL has a history of pumped up acquisitions that wind up being worse investments than even the doubters initially imagined. Nevertheless, Tim Armstrong, AOL's fearless Chairman and CEO, has maintained his enthusiasm that maybe, just maybe, someday, one of these deals is going to turn into something other than a really nice tax write-off. "When people think about Google for search and Amazon for commerce, I think they're going to end up thinking about AOL for content" the FT quoth Mr. Armstrong. Ah, content. That's what he's going for. Identifying AOL with content. Instead of say, really slow dialup internet service, chat rooms, and enormously expensive acquisitions, which is what AOL is currently associated with. In any event, this time, for obvious reasons, I hope Mr. Armstrong hits the big time.

Mock the Market on Hiatus


Apologies for the lack of posting in the past few months. Many big things are in the works in the K10 household and it leaves virtually zero time for blogging. After an intense search for a new home, that involved looking at 110 houses over the course of the past year-and-a-half all over the Bay Area, we finally found one we liked at a price we could stomach, have made a purchase and plan to move in the next few weeks. Hopefully, once the move is complete, I will be able to resume my blogging activities on a somewhat regular basis. Maybe by then something interesting will be afoot in the markets.

AIB and AIG Again, With Some Details


The Central Bank of Ireland has finally put a price tag on the total cost of bailing out the state-owned Anglo Irish Bank, Ireland's equivalent to AIG. The bank was nationalized in January 2009 and has put on a real damper on Ireland's ability to borrow in the international bond markets. The losses have been capped at $46.75 billion in a worst-case scenario. In US-terms this sounds like chump change. But the government sponsored bailout of its financial sector will cause the budget deficit to rise to 32% of Irish GDP. Sure, the Irish plan to cut the deficit to 3% to make the bond market happy again, but that will be a bitter pill to swallow for the country's citizens.

Meanwhile, in the US, where $150 billion government bailouts are de rigueur, the US government and AIG have agreed in principle on a plan for the government's exit. The details are as follows:
  • The government converts its $49.1 billion of preferred into common to increase its ownership stake to 92.1%.
  • The conversion will take place in early 2011 if AIG can repay $20 billion to the Fed, which it can only do if it can IPO its Asian unit successfully.
  • Current shareholders, who really really love this plan, will receive 75 million warrants with a $45 strike price (still out of the money as we speak, despite the inexplicable rally in the shares.)
  • The Treasury takes over the NY Fed's interests in two SPVs that will theoretically recoup $26 billion from sales of AIG's overseas assets.
  • The Treasury will commence gracefully puking 1.655 billion shares over some period of time to complete its exit.
Assuming everything goes according to plan, the US will recoup its money. Count me among the skeptics, of course. Alot of things have to go right for this hare-brained scheme to work. AIG needs to pull off a monster IPO. The stock market has to remain in its chipper mood where no economic number, no matter how bad, gets it down. Investors actually have to get involved in AIG's stock, instead of all the day traders that like to play on the limited float. And we have to avoid a double dip, without discouraging the Fed from purchasing every asset in sight to keep markets going higher. Given how the Fed is eagerly offloading its stake in AIG to the Treasury, it seems you can count the Fed out on purchasing anymore AIG assets.



Ireland is set to unveil yet another tax-payer funded recap of Anglo Irish Bank. The restructuring is being cobbled together as Ireland's cost of borrowing hits record levels and the expiry of Ireland's two-year blanket guarantee for bank liabilities looms. With any luck, this particular European black hole will be plugged and we can go back to worrying about Greece again.

Speaking of black holes, perhaps the Irish can take some solace from the US government's handling of AIG. Or rather, the US government's optimistic plans for exiting the financial debacle that is AIG. AIG's board is set to finalize a restructuring plan that would increase the US Treasury's stake in the insurer to 90%. The Treasury will be converting its preferred stake to common, thereby increasing its stake and diluting the bejesus out of shareholders yet again. The shareholders, mind you, think this is GREAT NEWS, as the stock is actually rallying today. I mean, everybody loves dilution. Right? To compensate shareholders for this particular kick in the groin, they get the pleasure of receiving warrants in AIG to buy MORE shares in the future at a discount to the current price. According to the genius quoted in the FT article "This would give other people the chance to buy shares on the cheap as well." Because, you know, the stock is definitely still gonna be trading at this price in the future, so the warrants are a real bargain. Also, since this is being called a "Government exit plan" and not an "entry plan," the government will be cleverly and sneakily off-loading its 90% stake (i.e. dumping large quantities of stock onto the market) which won't have any effect on the price, I'm sure. The stock can only go higher. So, you know, free money for everybody.

Markets Rip on Lackluster Data


Equities rallied this morning on the heels of some relatively lousy data. Durable goods orders were down 1.3%, slightly worse than the 1% decline the average economist was expecting. Sales of new homes remained at a 288,000 annual pace, also worse than expected and the second-worst month of new home sales data going all the way back to 1963. So what gives? Why are equities in such a good mood today? Can it really be excitement over German business confidence numbers? Has anyone involved in the US markets ever cared about German economic numbers until today?

Perhaps the truth is that the data was pretty bad. Bad enough for the Fed to want to keep the monetary spigot open. But not so bad that we're scared the economy is collapsing again. Not so bad that we're worried the European Union is going to fall apart again and create another credit crisis. Maybe the new Goldilocks is just limping along with virtually zero growth, just enough to keep the Fed involved, but not enough to fall off a cliff. After all, the market doesn't care if unemployment is at 10%. It wants interest rates at zero. It wants the Fed to keep buying securities. And as long as some people are shopping at Walmart, that's enough to keep us going.

The WSJ has an interesting article about how frustrated stock pickers are in this market. Correlations remain high, at roughly 66% in recent weeks, lower than the 80% during the European debt crisis, but still much higher than the 27% average between 2000 and 2006. How are you supposed to pick good stocks if everything just moves in lockstep for no apparent reason? Like ripping higher on lousy economic data? Further proof that nobody really cares about fundamentals. Only about the Fed's next move. Unless you're Bill Gross and you get to tell the Fed what to do, what's the point of investing in a market like that?

Larry Summers Out, Next Up: A Woman???


Larry Summers is stepping down from his post as the head of the President's Economics Council and returning to all of his female fans on the faculty at Harvard. According to the WSJ's account of his resignation, his departure is driven partially by a desire to return to Harvard before January so that he won't lose his tenure. You see, you never want to lose that tenure because outside of academics, it is impossible to be completely ineffective without eventually losing your job. Tenure guarantees the ability to do nothing, keep your paycheck, and occasionally run off at the mouth about something that offends a bunch of people, all while continuing to look either peeved or fast asleep in every single newspaper stock photo next to articles detailing your gaffes.

Moving on to the next question: Who's going to replace Mr. Summers in that ever crucial role of continuing to pour all kinds of stimulus down the drain? Or making sure the banking sector isn't truly reformed but just continues to siphon off money from the public sector? A few candidates: Anne Mulcahy, formerly of Xerox? But, um, she's a woman. How about Diana Farrell, the Deputy National Economic Council Director? Ack!! Another woman. The third candidate? OMG, Laura Tyson, an economist from UC Berkeley! What is with all these women? How are they ever going to do Larry's job? Everybody knows they are not that smart. Well at least back in the comfy confines of academia, Mr. Summers won't have to read the WSJ to find out who replaced him.

Mark Hurd Gets New Job at Oracle, HP Miffed


Those who have casually followed the HPQ-Oracle-Mark Hurd-sexual harassment imbroglio may be interested to hear it has taken an even more amusing/bizarre turn. Here's a quick recap of the history:
  • Everybody Loves HPQ's CEO Mark Hurd.
  • Mark Hurd settles a sexual harassment claim with a former HPQ consultant/employee whose job description was at best murky.
  • HPQ board gets mad because, um, this is a bit embarrassing. Why is our CEO sexually harassing our employees? Wait, what did she do for us? What are these "expenses"? She used to be an actress? On reality TV??? Then she worked in real estate? Oh right, we hired her to be a greeter/escort at our fancy parties. Because we need one of those to sell our lousy printers.
  • Mark Hurd "resigns" (aka given boot by board) and given massive severance payment.
  • Everyone is shocked that CEO is fired, especially the harassee (didn't mean to get the guy fired, thought it would be all hush hush)
  • Except for Larry Ellison who apparently doesn't care if his employees sexually harass (or whatever) other employees, as long as they "create shareholder value."
  • Mark Hurd gets job at Oracle.
Which brings us to present day: HP's board is now really pissed off and is suing to block Mark Hurd from joining Oracle. I mean he's going to bring all of those trade secrets over to Oracle. And now Oracle is going to start making lousy printers too and it's going to eat into our monopoly and we won't be able to get away with selling printers that run out of ink a week after purchase, then charging $50 a cartridge for another week's worth of ink! Oh No!

Here are a few thoughts I'd like to share with HPQ's board:
  • Next time you fire someone for cause, don't pay them a $35 million severance. Trust me, you'll feel better when they immediately go to a competitor.
  • According to the FT, there was no non-compete clause, but something about not releasing trade secrets to competitors. Nonetheless, suing will likely be as big of a waste of money as his severance.
  • Hire someone who will figure out why my two week old printer keeps giving me error messages instead of printing.

Whistle-Blowing Gets More Lucrative


With the economy double-dipping, bank profits screeching to a halt, and unemployment hovering at record high levels, where can enterprising folks look to make the big bucks? And fast? How about a job at the SEC? Not a salaried position. But how about as a consultant working for a contingency fee? One of the nifty new parts of the new Dodd-Frank financial law passed in July is the ability to net as much as 30% of the penalties and recovered funds collected by the SEC in fraud cases. Since the legislation passed in July, there has been a surge in tips from whistle-blowers looking to tip off the SEC to all that fraud that has been operating under its nose since the beginning of time.

"We've gotten some very high-quality tips," said SEC official Stephen Cohen.

Hopefully, it won't take the next financial crisis to unveil the next wave of ponzi schemes that build up during the proceeding bubble. And there will be a bubble. Because you can't have zero interest rates and QE without another bubble somewhere. And you don't have bubbles without hidden ponzi schemes and fraud. But maybe this time, with adequate incentives to folks looking to collect a bounty, the SEC will catch them before they morph into $65 billion ponzi schemes, or $8 billion frauds, or $650 million...well, you already know the story.

GDP and 3Par


Second Quarter GDP growth was revised downward from an initial estimate of 2.4% to 1.6%. Economists were anticipating a larger downward revision to 1.3%, so the market is breathing a sigh of relief at the moment. It has moved on to bigger and better things, such as Ben Bernanke's upcoming speech, but more importantly, the exciting bidding war between HP and Dell over 3Par.

You know the market is grasping at straws when a $1.8 billion merger war over a company that nobody outside of Silicon Valley had ever heard of a few weeks ago is plastered all over the front page of the financial press. Moments ago Hewlett-Packard topped Dell's bid (again), by the way. Analysts are struggling to make sense of the valuation, but at this point, who really cares? The feeding frenzy over this company is beginning to rival the Sotheby's auction of the Giacometti "Walking Man I" back in February. Sure it's a neat sculpture and all, but really, $104.5 million? Ok, it's three times taller than the "Toppling Man" that sold for $19.3 million last November. But even the optimistic art lovers at Sotheby's were shocked by the final sales price. Don't those rich folks have better things to do with their cash?

Therein lies the rub. The folks at the Fed are desperately trying to goose the economy with super easy monetary policy. When banks can borrow at zero percent, but they are refusing to lend to lousy credits, they buy Treasuries. As the economy remains sluggish, firms refrain from expanding payrolls and increasing costs, so they look for other ways to generate growth. So they get into ridiculous bidding wars over the few companies out there that are in growth industries. The irony is that even though Wall Street might love M&A because of the fees, M&A isn't exactly a growth engine for the economy. M&A frenzies, particularly dumb deals, typically happen at market tops. After all, what is the first thing that happens when a company buys another one? Layoffs. I mean "synergies." How's that gonna get GDP on the right track?

Existing Home Sales Hit Already Nervous Market


Equity markets were off to a rough start, nervous about the existing home sales number, even before the actual data came along to make matters worse. Existing home sales plunged 27.2% to an annual rate of 3.83 million in July, a number much worse than anticipated. Also, the lowest level in 15 years. Inventories leapt to a 12.5 month supply, up from the previous month's 8.9 months. Bad news all around.

Before everyone goes into a giant tizzy about the sky falling, let's just contemplate what exactly this number means. As the always enlightening Calculated Risk pointed out yesterday in a post by economist Tom Lawler, it was impossible to understand given how horrible the pending home sales index had been, the expiration of the tax credits in June, and huge fall-offs in activity in many local markets, how on earth economists had arrived at such an optimistic consensus forecast of a mere drop of 10%. So really, had economists done a better job of forecasting, nobody would've been surprised by this horrendous economic number. Then again, bad economic forecasting or not, the number still stinks.

What does this mean? Bad economic news points to deflation which leads the nervous nellies at the Fed to buy more treasuries, mortgages, whatever it takes to reflate assets, which doesn't actually get rid of housing supply, instead just leads to pockets of inflation, say in commodities, which leads to takeover battles for fertilizer companies (see Potash) and niche tech firms (see 3Par.) See? It really is all so predictable...

Banks and Loan Buybacks


The WSJ reports today on the battle banks are facing over potential loan buybacks. Banks face the prospect of a new round of losses from loans they originated right before the credit markets collapsed. While originating and securitizing loans as fast as they could to fuel the bubble machine, some banks forgot to do a few basic things, like make sure the borrowers had income, for example. So they just filled out loan docs and made up the info that didn't fit normal underwriting standards. While it was easy to just shovel the loan off and forget about it, Fannie and Freddie, at the behest of their regulator the FHFA, are stepping up efforts to recoup losses on delinquent loans if they find any violations of "reps and warranties" (i.e. lies lies and more lies on loan docs.)

Last month, the effort to claw back loan losses was stepped up when FHFA broadened its probe to include private label, or non-agency, MBS. The FHFA sent out subpoenas to 64 issuers of MBS and other parties to probe for potential loan repurchases. Even the Fed has stated it may make repurchase claims after reviewing some of the dogsh-, I mean "collateral", it inherited from Bear and AIG.

What does this mean? More losses for banks and more pummeling of MBS securities. Who is this going to affect the most? The analyst quoted in the WSJ article, Chris Gamaitoni of Compass Point Research & Trading, believes losses at Bank of America might hit $21.8 billion for the bank. Losses at Wells and JP Morgan are estimated to be a mere $6 billion or so. The article does not mention how much he believes non-agency losses might be. In any event, the banks are not going down without a fight, as it pays to spread the losses out for as many years as they can. The irony is if they would've spent as much time and effort underwriting the mortgages to begin with, they wouldn't be in this pickle.

Lehman Pointing Fingers at Och-Ziff


Nearly two years after Lehman's failure, despite the piles of evidence pointing to neglect, mismanagement and outright fraud committed by Lehman's leaders, some people still believe that short sellers caused Lehman's downfall. Lawyers for Lehman's estate are furiously subpoenaing Wall Street firms and hedge funds for documents that they think will show that rumor-mongering led to the demise of the storied investment bank. Apparently, Och-Ziff was the only target that objected outright in court to producing the documents. Oh sure, it makes the fund appear guilty, but perhaps it's the $3.3 million cost associated with producing 3.9 million documents that the fund objects to? The lawyers for Lehman's estate claim that Och-Ziff was involved in the spreading of false rumors but provided no additional evidence to support the that claim, other than the fact that Och-Ziff refuses to produce the documents.

According to the WSJ:

Och-Ziff Capital Management LLC "likely disseminated and/or was the recipient" of an inaccurate rumor that Lehman had spun off debt to two Lehman-controlled hedge funds to reduce the investment bank's leverage, according to the filing. Investors were focused on Lehman's debt levels in the months before its failure.

The rumor was one of many "lies" spread by unscrupulous market participants looking to profit from shorting the troubled investment bank's stock, alleged the filing, made on Wednesday by lawyers investigating Wall Street firms on behalf of Lehman's bankruptcy estate.

Ah yes, all those "lies" that everybody was spreading that the investment bank was insolvent and wasn't going to make it and would wind up bankrupt. Those crazy crazy untrue rumors that the investment bank was lying about its leverage ratio, its liquidity, the value of the assets on the balance sheet etc. etc. And now, we must expose those rumor-mongerers in bankruptcy court after said firm has gone bankrupt. How come nobody is subpoenaing all the real lies from all the investment pros that insisted the firm was solvent and cheap at $15 per share?

Pondering the Great Dichotomy While the Fed Meets


The Fed meets today to discuss its next move in the exciting game of "Re-inflate the Bubble." Sure the Fed thinks it's playing whack-a-mole against lousy economic data. Every time a bit of bad news peeps its head out into the supposedly robust economic recovery, the Fed whacks it down with some other ingenious bit of monetary easing. Our monetary authorities are just looking for more and more ways to flood our financial markets with free money, at the behest of Wall Street, so financial assets will rise in value so all of those underwater residential, commercial and other loans can be refinanced or repackaged and sold without another financial catastrophe. You see, it's working really well. Deflation is our worst enemy. Today anyway. That's what Bill Gross says so it must be true. So if we need another $2 trillion in quantitative easing, so be it. Right?

In the economic bad news/deflation corner:

  • Fannie and Freddie continue to bleed cash, albeit at slower rates than before. After posting their most recent losses, the mortgage lenders increased their borrowing from the Treasury to a total of $148 billion. Mind you, Fannie and Freddie are 90% of the mortgage market, so regardless of the economic health of the rest of the banking sector, the true state of the mortgage market is reflected by Fannie and Freddie's performance.
  • Productivity slowed by a unexpectedly jarring 0.9%. So much for the theory about robust profit growth leading to increased productivity leading to increased hiring.
  • Unemployment remains stubbornly high at 9.5% and will likely not decrease unless productivity continues to increase.

In the good news/inflation corner:

  • Money is flooding the system and investors have nowhere to go with it, so they are just piling into anything reasonably safe with a yield and forcing rates lower. The WSJ has two articles this morning, one on MLP shares ripping on zero fundamental improvement this year and another on the relentless march lower in corporate bond yields. The FT has commentary on how the bottom line at strong companies is getting stronger while weak companies are floundering. Case in point: IBM can issue debt at 1%. Can you?
I call this the Great Dichotomy. Part of the economy is flashing deflationary signs, the other inflationary signs. What's a good Fed to do?

The Fed Also Forecloses


The WSJ reports on the current state of the Maiden Lane portfolio the Fed acquired in March 2008 when it helped facilitate the sale of Bear Stearns to JP Morgan. You know, that portfolio that was just marked up and showing a "profit" as of the last quarter end? Turns out, not all the assets in the vehicle are performing that well, as it is stuffed to the gills with souring commercial and residential mortgages. The Fed is in the curious position of not wanting to sell problem assets at a discount because it could"disrupt markets and hurt banks." That's funny, because every day I keep reading about how much money banks are making again. Is the Fed suggesting that bank profits are a mirage? In any event, the Fed is going to have to deal with the thorny issue of either foreclosing on delinquent borrowers, or doing workouts. Going ahead with the numerous foreclosures scheduled in coming months on residential properties could raise the hackles of legislators who still believe homeowners need to be protected. Like the real estate investor profiled in the article who is just dying to hand over his investment property because he is obviously upside down on the mortgage. He filed for bankruptcy and the Fed is offering to lower his rate, but he says it's not enough. He needs an extension and a much lower rate to get his investment to workout for him. Apparently, no amount of failed HAMP mods is going to stop politicians from trying more mods!

So far, the Fed has only taken ownership of one commercial property, a mall in Ohio that it is trying to sell. But more commercial foreclosures are on the way. Much less political risk with foreclosing on malls. Malls are as American as apple pie. Why shouldn't the US government own a bunch of them?

Maiden Lane made its first monthly principal repayment in July equal to $30 million. In not entirely unrelated news, Blackrock was paid $35 million in fees last year for its work managing the Maiden Lane portfolio, even though a 22-person team at the Fed is also working on it. I'm guessing the entire Fed team took home roughly $1 million in comp last year? But they probably aren't working as hard as the guy at Blackrock who billed the Fed for $35 million.

Buried in the article is my favorite part: "Maiden Lane now owns a large amount of relatively safe securities guaranteed by GSE's Fannie and Freddie. Many were bought over the past two years with cash Maiden Lane received from interest and principal payments in the portfolio and they have helped make up for some value declines from soured assets." When exactly did Maiden Lane turn into a trading account? Why isn't the money being used just to pay down principal on the loan? Is that because Blackrock's fees are based on the size of the portfolio? So we just want to keep reinvesting so the portfolio maintains its size so we can keep cutting a check to Blackrock? So the Fed, the most leveraged entity on the planet, is buying assets from the other most leveraged entities out there. This is what our government borrows money for, so it can trade with itself and pay money managers in the private sector fees. When will the madness end?

Zero Interest Rates, But Where's the Inflation


Currently deflation is winning the first couple of rounds in the inflation/deflation debate raging among economists, analysts, and investors. CPI/PPI remains subdued. GDP growth is sluggish as evidenced by this morning's GDP report, which showed a slow down in second quarter growth to a 2.4% annualized rate. Wage price inflation? Forget about it. You have to have a job first before you demand higher wages. Commodities surging? Yeah, cocoa prices hit all time highs, mostly due to some jokers at a commodities hedge fund who are clearly trying to build the world's largest chocolate bar, because why else would you take delivery of the biggest amount of physical cocoa in 14 years? But the price of gold hasn't really kept up with the gold bug crowd's expectations. Even hedge fund manager John Paulson has suffered losses in his funds, and he had managed to expertly time every hairpin turn in the market for some time. So the Fed is keeping interest rates at zero, and anyone who's had any economics classes knows that exceedingly friendly monetary stimulus coupled with exceedingly friendly fiscal stimulus should cause runaway inflation. Except that hasn't happened yet. Instead prices for everything have either taken a breather from heading lower (i.e. housing,) or are still actively going lower (i.e. your favorite retailers are having a sale.)The only thing staging a monster rally is financial assets. The stock market ripped, and is currently taking a reflective pause to decide if it can defy all the recent rotten economic news to rip ever higher. Heck even the Fed's portfolio of Maiden Lane securities is staging a big comeback. Paper profits on "formerly" toxic securities! But the real out-performer is the bond market. Interest rates on treasuries are at record lows. This was the busiest July on record for sales by junk issuers. Financial firms are jumping on the bandwagon, feverishly issuing debt at record low rates before the window of opportunity closes. According to the FT: Wall Street executives say recent debt issues were triggered by “reverse inquiries” – informal approaches by fundmanagers seeking to raise their exposure to a sector they had largely avoided since the crisis. Fund managers have so much cash with nowhere good to go with it, so they're begging financial firms to issue debt. Why financial firms? Because they are too big to fail. So you get slightly higher rates than treasuries, with the US government's stamp of approval on it. What is too much money chasing too few goods? I think that's called inflation. Seems like the "reverse inquiry" situation was exactly what was going on in the mid-00's, when Wall Street needed subprime product to continue to feed the CDO machine. All the demand for subprime mortgages perpetuated the frenzy in housing. Again CPI/PPI was subdued and interest rates were low because there was no "inflation," just a massive financial bubble in the making. Will the story end the same way this time? [...]

Madoff Trustee Goes After the Goods


Irving Picard, the hard working court-appointed trustee tasked with recovering assets for Bernie Madoff's victims, said in an interview that he might sue around half the estimated 2,000 individual investors who unwittingly made money investing in the ponzi scheme. Although Mr. Picard sent hundreds of letters last year to investors who withdrew money from their Madoff accounts before the fraud was exposed asking them to settle the matter amicably, few of them have chosen to do so. Now it's time to pay the piper. While it seems entirely reasonable (not to mention lawful) for Mr. Picard to go after those who accidentally profited from the scheme, it's not as easy to stomach when you are, say, an 87 year-old retiree who plowed all of her life savings, including the life insurance proceeds from her husband's passing, into what she thought was a safe investment.

Meanwhile, Mr. Picard accused one of the largest feeder funds, Fairfield Greenwich Group, of having "actual and constructive knowledge" of the ponzi scheme. Not sure why this took two years to figure out. When you get paid hundreds of millions in fees to perform due diligence for investors, and yet you are incapable of making a phone call to a single counterparty to make sure the firm is actually trading with somebody else. Or perhaps confirming that the auditing firm has the 20 partners it claims to have and isn't just one dude in an office in Florida. Or actually doing something, anything other than counting and spending all those fat fees on houses and cars and boats and PR agents to brag about all your houses and cars and boats in Vanity Fair, then you probably are more than just a lousy money manager. You are probably complicit in the scheme. But in either case, you need to give the money back so that those 87 year-old retirees can have something to split between them.