Tuesday, September 30, 2008

Standard and Poors Drops Rating on Stuy Town Bonds

Standard and Poors decides to finally show up for work and look what happens...
"On Friday, Standard & Poor’s dropped its rating on the bonds used in Tishman’s $5.4 billion purchase of the Stuyvesant Town and Peter Cooper Village apartment complexes in 2006, the biggest real estate deal in modern history. Standard & Poor’s said it cut the rating, in part, because of an estimated 10 percent decline in the properties’ value and the rapid depletion of reserve funds."
(Keep in mind that Tishman's partner in the Stuy Town deal is BlackRock, which Merrill Lynch bought several years ago, and which itself was sold to Bank of America last week.)

Permalink: http://dowwtf.blogspot.com/2008/09/standard-and-poors-drops-rating-on-stuy.html

Watch This. Seriously. Watch This.

As if it weren't enough to have Kevin Phillips (the dude who wrote The Emerging Republican Majority) effectively endorse Obama on his show last week, Moyers also has former US Army Colonel Andrew J. Bacevich calling the Bush doctrine out, and laying the grounds for some realistic and informed American foreign policy (if I were McCain, I'd be up all night trying to figure out how to shake Palin from the ticket)...

Permalink: http://dowwtf.blogspot.com/2008/09/moyers-is-on-roll.html

The Revolution Will be French

Okay, so we're not gonna lop his head off Marie-Antoinette style in Times Square. But still, this movie is coming out while the bastard is still in office, and just two weeks before election day...

Permalink: http://dowwtf.blogspot.com/2008/09/revolution-will-be-french.html

Market's Betting Hard on Obama

Intrade has Obama up 338/200 over McCain...

...everyone who bought in to Obama positions after the Republican convention owes a big thanks to Palin.

Permalink: http://dowwtf.blogspot.com/2008/09/markets-betting-hard-on-obama.html

I Can Has Happy DOW!?!

The Journal is all excited about the DOW up 400. Forgive them--it's incumbent upon them to report this with breathy excitement...

...but keep in mind that these daily shifts are not the point. This is. After all, let's look at the DOW over the last couple weeks...

Permalink: http://dowwtf.blogspot.com/2008/09/dow-is-up-yawwwwwn-lolz.html

Bloomberg Seeking Third Term = Hell Yes

Yes, New York voters voted for term limits. Yes, he let any tasteless dip sh*t with a $40mm-credit line build a sh*tty glass tower anywhere he wanted. But like the presidential election, the main question facing an increasingly cash-strapped city is, above all else, Who can secure the necessary capital to keep the lights on? Quinn et al are simply not up to the job.

Permalink: http://dowwtf.blogspot.com/2008/09/bloomberg-seeking-third-term-hell-yes.html

What Does Buffet Know About Goldman's Derivatives Exposure?

Warren Buffet recently put $5b into Goldman (admittedly they issued him some new stock that comes loaded with all kinds of options and dividends), and amid reports that Goldman may have significant derivatives exposure via AIG, one would assume that Buffet (Mr. Anti-Derivatives, at least in name) required full transparency on the Goldman balance sheet before signing the check.

Gretchen Morgenson digs around for some numbers in yesterday's IHT, nohing the Blankfein was the only CEO at the Fed AIG meeting, but she comes up short:
"Few knew of Goldman's exposure to AIG. When the insurer's flameout became public, David Viniar, Goldman's chief financial officer, assured analysts on Sept. 16 that his firm's exposure was 'immaterial,' a view that the company reiterated during an interview....Lucas van Praag, a Goldman spokesman, declined to detail how badly hurt his firm might have been had AIG collapsed two weeks ago. He disputed the calculation that Goldman had $20 billion worth of counterparty risk to AIG, saying the figure failed to account for collateral and hedges that Goldman deployed to reduce its risk....Regarding Blankfein's presence at the Fed during talks about an AIG bailout, he said: 'I think it would be a mistake to read into it that he was there because of our own interests. We were engaged because of the implications to the entire system.'"
Given that Goldman was the only big bank to officially pull out of subprime crime crap ahead of the meltdown, I'm inclined to believe Blankfein, and take Buffet's investment as a vote of confidence.

Roubini Calls It...What to Do with the $700b?

I hate to do a simple copy and paste, but the man nails it (I'd link you to his blog, but it's subscription only)...
"Indeed, the plan also does not address the need to recapitalize those financial institutions that are badly undercapitalized: this could have been achieved by using some of the $700 billion to inject public funds in ways other and more effective than a purchase of toxic assets: via public injections of preferred shares into these firms; via required matching injections of Tier 1 capital by current shareholders to make sure that such shareholders take first tier loss in the presence of public recapitalization; via suspension of dividends payments; via a conversion of some of the unsecured debt into equity (a debt for equity swap). All these actions would have implied a much lower fiscal costs for the government as they would have forced the shareholders and creditors of the banks to contribute to the recapitalization of the banks. So less than $700 billion of public money could have been spent if the private shareholders and creditors had been forced to contribute to the recapitalization; and whatever the size of the public contribution were to be its distribution between purchases of bad assets and more efficient and fair forms of recapitalization (preferred shares, common shares, sub debt) should have been different. For example if the private sector had done its fair matching share only $350 billion of public money could have been used; and of this $350 billion half could have taken the form of purchase of bad assets and the other half should have taken the form of injection of public capital in these financial institutions. So instead of purchasing – most likely at an excessive price - $700 billion of toxic assets the government could have achieved the same result – or a better result of recapitalizing the banks – by spending only $175 billion in the direct purchase of toxic assets. And even after the government will waste $700 billion buying toxic assets many banks that have not yet provisioned for such losses/writedowns will be even more undercapitalized than before. So this plan does not even achieve the basic objective of recapitalizing undercapitalized banks."

Tom Wolfe: This Sh*t Wouldn't Have Happened Pre-Computer

Ya'll know by now what a CDO is, but if you don't...CDOs are collateralized debt obligations that are financial instruments (think of them as bonds) that are packages of many thousands of individual mortgages. The person holding the CDO is collecting (or not collecting) all of the monthly payments of all the mortage holders in his CDO. For more detail, check out the famous stick-figure primer. (Click on the arrows on the bottom left of the page.)

Anyhow, in last week's Observer, Wolfe makes a great point. Back in the 80's (think Liar's Poker), banks used to review every single mortgage, on paper, by hand, before purchasing a CDO. What's more, they even rejected indivudal mortgages from a proposed CDO and threw them out before buying the CDO. This prevented any of the subprime crap from sneaking in.

Wolfe notes that computers sped this process up, and made it inconvnient and seemingly unnecessary. He's right. But further, the dynamism of the market, the ability to move quickly in and out of positions, knowing that you could easily sell your CDO next week, lowered the standard of scrutiny and led the the mess that we have now.

Wolfe writes...
"The whole thing, starting with the subprime, is the fault of the computer. I was just talking to a banker the other day, and not that long ago, 20 years ago, an investment banking house, let’s say, Lehman Brothers, when it got a package of mortgages, they would go through every mortgage, every single one, and they’d throw out the ones that just seemed absurd, they just wouldn’t accept them. Things used to arrive on paper. Today things arrive on a screen, and a screen is back lit, and one of the biggest pains in the neck is trying to read something dully written and complicated on a computer screen. It will drive you nuts—I mean, try it sometime. Now they say, ‘Oh, to hell with it,’ and they just accept the whole package. And if it hadn’t been for that, they’d be going over each loan. What’s happened is the backward march of technology"
The next question is, Where was Moody's and Standard & Poor's in all this? And when do they become accountable?

Roubini on the $700b

NYU prof Nouriel Roubini (the guy the Sunday Times magazine recently dubbed "Dr. Doom"), who's been calling this crap for several years, has this to say about the $700b bailout...
"...purchasing toxic/illiquid assets of the financial system is not the most effective and efficient way to recapitalize the banking system. Such recapitalization – via the use of public resources – can occur in a number of alternative ways: purchase of bad assets/loans; government injection of preferred shares; government injection of common shares; government purchase of subordinated debt; government issuance of government bonds to be placed on the banks’ balance sheet; government injection of cash; government credit lines extended to the banks; government assumption of government liabilities."
He points to this IMF study of 42 systemic banking crises (anyone else smell a Thursday Styles trend piece, here?) around the globe and concludes that...
"...of all, only in 32 of the 42 cases there was government financial intervention of any sort; in 10 cases systemic banking crises were resolved without any government financial intervention. Of the 32 cases where the government recapitalized the banking system only seven included a program of purchase of bad assets/loans (like the one proposed by the US Treasury). In 25 other cases there was no government purchase of such toxic assets. In 6 cases the government purchased preferred shares; in 4 cases the government purchased common shares; in 11 cases the government purchased subordinated debt; in 12 cases the government injected cash in the banks; in 2 cases credit was extended to the banks; and in 3 cases the government assumed bank liabilities."

Monday, September 29, 2008

The A.R.M. Bomb and Why that $700b Will Really Be $1.5 Trillion

Business Week reports:
"...the next wave of foreclosures will begin accelerating in April, 2009. What that means is that hundreds of thousands of borrowers who took out so-called option adjustable-rate mortgages (ARMs) will begin to see their monthly payments skyrocket as they reset. About a million borrowers have option ARMs, but only a fraction have already fallen due."
Congress is now sweating over $700b, but when April roles around, we'll find out that banks are sitting on top of even more sh*tty paper, and we'll be asked to bail that crap out, too. Obama and McCain should be planning for this now, but all indications, from both of them, suggest they aren't.

Biggest Lie of the Moment: The Current Crisis Is Such a Surprise!

Plenty of people saw this coming long ago. Here's some sanity from James Grant.

Part 1, Part 2, Part 3

Russia and Real Assets

If the US supports Georgia's sovereignty and independence from Russia, why doesn't it support Ossetia's sovereignty and independence from Georgia?

Gorbachev is no fall-in-line Putin backer. As the Times reports, it looks like he's about to join Russian tycoon, and vocal Putin critic, Alexander Lebedev, to form an opposition party. But in an op-ed last month, Gorbachev called crap on the US media's coverage of the war, and pointed out that Georgia was an easy aggressor, and perhaps not in the right.

Palin (and everyone else) took the war as an opportunity to talk tough on Putin. (Her blatant idiocy appears below). They're completely missing the point.

As the bogus credit of the last several years is wipped off the market, it will become necessary to tie credit to real assets. With all of these fancy, and once-high performing financial instruments out of the market, investors and lenders will have to ask, What is a real asset? It's pretty clear that Russia is asset rich. They've got plenty of oil, a massive (and growing) agricultural base, and a burgeoning consumer economy (the fact that their birthrate is below-replacement is negligable when year-over-year GDP and spending-power growth is taken into account). This makes them credit worthy, and it also makes them cash rich (how many Russian oil oligarchs are there now?).

The best way to keep the peace between Russia and the US is to turn them into our national credit card, just as we've done with China. China holds $500 b in t-bills--Russia could hold more. The US needs liquidity from somewhere, why not get it from Russia, and tie their fate and their financial interest more in line with our own? Financial ties keep the peace.

(Yes, Putin just loaned Venezuela $1b for arms purchases, but this is posturing and nothing more. Venezuela--or for that matter, Russia--is not about to go to war with the US.)

God help us, this woman has absolutely no idea what she's talking about...

The Bailout? $700b
Market Value of Top 5 American Banks? $446b

The bailout under consideration is $700b, but the current market cap of JPMorgan, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley is $446 b.

Don't hold your breath for either McCain or Obama to say anything intelligent about this.

Ron Paul on the Bailout

The man is probably the only elected official in DC who knows the details and the larger issues of what's going on right now. His methods and his policies are perhaps too intense, too much of a shock to the system, but he's right when he says we need to bite the bullet, take the hit, and get down to real asset valuation.

What Would Bloomberg (and William Gross) Do?

If the federal government does take on $700 b worth of sh*tty paper from Wall St (and though the bill failed today, I do think it will pass before Oct 15), the main question will be: how much is that sh*tty paper valued at, and who will do the valuation?

Paulson's asked for the Fed to do all of the valuation, subject to no one else's reviews, and he's indicated that he'll pay almost 100 cents on the dollar for them. This would amount to a ridiculous and toxic bailout. Given that these banks are leveraged up to 40 times, and that you've got CDSs sitting on top of CDOs sitting on top bad loans...it's hard to make the case that this crap is worth more than 4o cents on the dollar.

So, who does the valuation? I say Bloomberg and PIMCO. Look, PIMCO's even volunteering to do it pro bono...link here.

Kevin Phillips on the Bill Moyers Show

This is worth it. Phillips is right on...

The take-away point (regarding the election): Obama and McCain both fail when it comes to the economy and the bailout. Neither have been showing leadership or intelligence. But, judging by their selection of advisers, Obama comes out ahead (if only because McCain's are complete fools).

Why the Current Draft of the Bill Sucks

Here are the issues:
  1. The economy needs credit liquidity to stop from shutting down
  2. That liquidity can only come from the Treasury
  3. How is that liquidity put into the market?
The current proposal has the federal government (US tax payers) buying $700 billion worth of sh*tty loans from US banks. The market would then go up, the 'toxic' loans would be off their balance sheets, and people would be more willing to lend--credit would come available.

But is that really the best way to get credit into the market? Bush has been trying to pin this as a 'rescue plan' rather than a 'bailout.' But the truth is that it's both. And history has shown (Chrysler, and Long Term Capital Management) that bailouts merely solve temporary symptoms, and leave the larger problem unaddressed, and festering, only to explode later.

So, how to get that liquidity into the market? There are credit-worthy individuals, business, and small business out there. And there are clean banks out there. Let the federal government take the time to get that liquidity to those parties through clean institutions.

It will be complex, and it will take time, and it will be painful to see the market drop while it does, but at some point, we must fess up to the recent ills and face the real valuation. If we don't, we're only pushing it off to future generations.

Pelosi on the Bill

Sure, it's political grandstanding, but she's right. Clinton's surpluses and Bush's deficits--and now his plea for $700 billion--are a matter of regulation and oversight as much as they are worker productivity and the 'real' economy.

The Dow Belongs at ~8,000

The Times is treating today's falling DOW as though it were 9/11. Ignore this. The DOW (and attendant commodity- and oil futures) will be up and down a lot over the coming months.

The real question is not how much the DOW is up or down in a day, but where does the DOW really belong?

It belongs at 8,000.

Once credit leverage has been removed from the market, the market can then assess asset prices (securities, home prices, commodities) for their real (non-leveraged, supply-demand) market value.