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Monday, November 24, 2008

Citi's 'slow, grudging nationalization

Image via WikipediaCan Citigroup survive? - Nov. 24, 2008: "Citi's 'slow, grudging nationalization'

Monday's massive rescue package hasn't solved Citigroup's problems, says bank analyst Christopher Whalen.

(from Fortune Magazine) -- In just a few days Citigroup went from trouble to trauma as its stock price plunged amid sweeping layoffs and deep losses on some of its more esoteric assets. When news reports swirled that the megabank was considering a sale of part or all of the company, it was clear that Citi was singing from the same hymnbook as firms like Lehman Brothers, Wachovia and AIG had before they fell. The public's only question: What would the end game look like?

Now we have our answer - a government agreement to shoulder hundreds of billions of dollars in possible losses and inject billions of dollars into the bank. FORTUNE checked in with bank analyst Christopher Whalen, co-founder of Institutional Risk Analytics and a prescient critic of Citigroup (C, Fortune 500) since 2003, when he said its riskier, higher-return strategy made it more vulnerable than its banking peers.

Here are some excerpts. This one is well worth a read of the full article.

Fortune:

Does this plan solve Citi's problems?

Whalen: This does nothing more than temper the problem, but, no, it hasn't solved anything.

Fortune:

How does this rescue plan differ from the other bailouts we've seen in the past few months?

Whalen: The accurate term for what the government has done is "open bank assistance." It's similar to what the FDIC had to do when it was clear that Wachovia could no longer go on, except there is not a ready buyer in this case. The other big financial institutions have had parties willing to pick up the assets, but you won't see that with Citi. This bailout is more like a resolution. That means that the government essentially has to take control of Citicorp and become more and more involved with its operations until the bank ultimately is nationalized.

Home Sales Fall, Record Drop in Prices

Image via WikipediaBloomberg.com: U.S.: By Timothy R. Homan

Nov. 24 (Bloomberg) -- Home resales in the U.S. dropped in October and prices fell by the most on record, signaling a deepening housing recession going into 2009.

Purchases of existing homes slid to an annual rate of 4.98 million, lower than forecast, a National Association of Realtors report showed in Washington. The median price fell 11.3 percent from a year earlier, the most since the group began collecting data in 1968.

Today’s figures indicate a renewed downturn in an industry that showed signs of stabilizing this year, hurt by the credit squeeze and record mortgage foreclosures. That may raise pressure on President-elect Barack Obama to aid homeowners and potential buyers as he assembles a record stimulus package.

“Home sales will continue to fall over the next few months because of tightening credit conditions,” said Sal Guatieri, senior economist at BMO Capital Markets, which had the closest estimate for the sales level among 67 forecasts in a Bloomberg News survey. “Underlying demand appears very weak” because “many sales are coming from cheap prices on foreclosed properties,” he added."

Goldman to Sell Bonds in First FDIC-Backed Offering

Image via WikipediaBloomberg.com: U.S.

By John Detrixhe and Gabrielle Coppola

Nov. 24 (Bloomberg) -- Goldman Sachs Group Inc., the biggest U.S. securities firm to convert to a bank, plans to sell notes in the first offering of debt backed by the Federal Deposit Insurance Corp., according to a person with knowledge of the transaction.

Goldman is leading banks in what analysts said may be a wave of as much as $600 billion of government-guaranteed issuance. Goldman’s benchmark sale may price as soon as tomorrow, said the person, who declined to be identified because terms aren’t set. Benchmark size typically means at least $500 million.

The government guarantee opens a new channel for bank funding after the credit seizure sapped demand for financial debt and sent yields to record highs of 7.24 percentage points above Treasuries. Banks, which haven’t sold dollar-denominated bonds since September, may raise $400 billion to $600 billion under the program within six months, Barclays Capital estimated in October."

Bailout Funding Sources

ALBURY, AUSTRALIA - FEBRUARY 23: The dry bed ...

Great chart that breaks down what the US government has committed in terms of dollars and what agencies it is using to do it.

http://www.bloomberg.com/apps/data?pid=avimage&iid=i0YrUuvkygWs

U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit

Image by imageining via FlickrBloomberg.com: Exclusive: Nov. 24 -- "The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.

The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis."

The important thing to note at this time is that the $700B TARP bailout is just the tip of the iceberg. Keep an eye on this story updates. The writers, Bloomberg's Mark Pittman and Bob Ivry, seem to have a good feel for these complex issues.

Recession’s Grip Forces U.S. to Flood World With More Dollars

Bloomberg.com: Exclusive: "Nov. 24 (Bloomberg) -- The world needs more dollars. The United States is preparing to provide them.

In an all-out assault on capitalism’s worst crisis since the Great Depression, the U.S. is taking on the role of both lender and borrower of last resort for the global economy.

The Federal Reserve, which has already pumped out hundreds of billions of dollars, might formally adopt a policy of flooding the world financial system with even more money. The Treasury, on course to borrow some $1.5 trillion this fiscal year, may tap global capital markets for even more to finance a fiscal stimulus package of as much as $700 billion and provide additional bailout money for banks.

“You want to do everything you can when you’re facing the threat of a deflationary breakdown of the economy,” says Michael Feroli, a former Fed official who is now an economist at JPMorgan Chase & Co. in New York."

Sunday, November 23, 2008

Thomas Friedman: What we can do

WASHINGTON - NOVEMBER 24: U.S. President Geor...

Image by Getty Images via DaylifeWhat we can do now, ....said the Congressional scholar Norman Ornstein, co-author of “The Broken Branch,” is “ask President Bush to appoint Tim Geithner, Barack Obama’s proposed Treasury secretary, immediately.” Make him a Bush appointment and let him take over next week. This is not a knock on Hank Paulson. It’s simply that we can’t afford two months of transition where the markets don’t know who is in charge or where we’re going. At the same time, Congress should remain in permanent session to pass any needed legislation.

Friday, November 7, 2008

Is Laissez-faire dead?

Chicago: atrium, Jim R. Thompson Center, 100 W...

Image by jetzenpolis via FlickrSome strong words. Read full article here: Are sovereign investment funds the new economic model?

"The Western financial system, as we know it, is dead. Not tarnished or cracked. Dead. With its demise go the Anglo laissez-faire financial mechanisms of the Reagan-Thatcher-Kohl era that have held sway for nearly three decades. The American subset, affectionately referred to as “the cowboy experiment,” run by self-centered eccentrics, is at the root of this collapse. After all, New York, not London, had been the creator of new financial products, strategies and entities. We were the innovators. Leverage was the tool. And greed was the measure of success."

Saturday, October 18, 2008

Hedge Fund Redemption

"The big picture is the economy is just starting to deteriorate,'' said Mark Kiesel, executive vice president at Pimco, who runs $180 billion in corporate bonds. ``We still think there are a lot of redemptions and hedge fund liquidations coming.''

Hedge funds may be forced to dispose of half their $135 billion in high-yield loans to fund redemptions, Stephen Antczak, a UBS credit analyst in Stamford, Connecticut, wrote in an Oct. 10 report to clients. That may send loan prices as low as 60 cents, he said.

``The de-leveraging that we're witnessing will probably continue,'' said Paul Scanlon, team leader for U.S. high yield and bank loans at Boston-based Putnam Investments LLC, which manages $55 billion in fixed income. ``My sense is that's not turning around in the very near term.''

See full article at: Bloomberg.com: Exclusive:

Bloomberg.com: Exclusive

Bloomberg.com: Exclusive: "Investors withdrew a record $43 billion from hedge funds in September, according to TrimTabs Investment Research, which has been tracking the data since 2000. The industry had declines of 9.4 percent this year through the end of September, according to Chicago-based Hedge Fund Research Inc., the worst year in two decades.

For buyers to lose money on some top-rated bonds backed by mortgages on offices, hotels, apartment buildings and other commercial properties, the circumstances would have to surpass the worst conditions on record, according to Darrell Wheeler, global head of securitized strategy at Citigroup Inc."

Bloomberg.com: Exclusive

Bloomberg.com: Exclusive: "Commercial-mortgage securities rated AAA that require an unprecedented three-quarters of the underlying loans to default for any loss of principal are trading at about 70 cents, according to New York-based Citigroup.

``We're not at these prices because of the fundamentals: We threw those out the window a year ago,'' he said. ``This is strictly people want to sell something to raise cash, and it's easy to sell these CMBS because it's a liquid market.''

Yields on AAA commercial mortgage bonds were at a record 620.7 basis points over benchmark swap rates on Oct. 15, up from 47.8 basis points a year ago, according to Bank of America Corp. A basis point is 0.01 percentage point."

Tuesday, October 14, 2008

Bloomberg.com: Economy

Bloomberg.com: Economy: "Oct. 15 (Bloomberg) -- The Bank of Japan said it will offer lenders as many dollars as they want, joining European counterparts in attempting to lower borrowing costs in money markets and freeing up credit worldwide.

The central bank will provide dollars at fixed interest rates for an ``unlimited amount against pooled collateral,'' it said in a statement late yesterday. It also announced measures to improve companies' access to cash, expanded the range of Japanese government bonds it accepts from lenders, and suspended a program of selling shares it bought from banks between 2002 and 2004.

The Bank of Japan's supply of dollars comes from a swap agreement with the U.S. Federal Reserve. Last month the two central banks agreed to swap as much as $120 billion for yen. The increase to unlimited dollar supply came a day after the Fed removed caps on swap lines with the European Central Bank, Bank of England and Swiss National Bank."

Bloomberg.com: Economy

WASHINGTON - SEPTEMBER 19: A statue of the fi...

Bloomberg.com: Economy: "Oct. 14 (Bloomberg) -- Treasury Secretary Henry Paulson urged banks getting $250 billion of taxpayer funds to channel the money to customers quickly to halt a credit freeze that's threatening to bankrupt companies and hammer the job market.

``Leaving businesses and consumers without access to financing is totally unacceptable,'' Paulson said in Washington. He rolled out the emergency program after a crisis of confidence in the financial system last week spurred the biggest stock sell- off since 1933. Paulson told companies getting the government funds to ``deploy'' the money in loans.

The Treasury chief was forced to change tack from an initial plan to buy distressed assets from banks after the financial panic caused banks to hoard cash and send money market rates to record levels. In its biggest effort yet to halt the 14-month credit rout, officials will also offer guarantees on new bank debts and start purchasing commercial paper in two weeks."

Bloomberg.com: Economy

Bloomberg.com: Economy: "Fragile Banks" The Treasury also said it is working

This is an close-up of Sir Joseph Banks, cropped from the official portrait of Banks as President of the Royal Society.

on another element of its plan that will specifically address banks that may be on the brink of failure. Those banks will face different guidelines than healthier firms who take part in the asset-buying and capital injection programs."

Bloomberg.com: Economy

Speculators knock OPEC off oil-price perch

Bloomberg.com: Economy: "The Treasury's stock buying program will begin with nine banks, which it didn't name. People briefed on the matter said $125 billion will be disbursed in days: Citigroup Inc., Wells Fargo & Co., JPMorgan Chase & Co. and a combined Bank of America Corp./Merrill Lynch & Co. each will get $25 billion, while Morgan Stanley and Goldman Sachs Group Inc. will get $10 billion each. Bank of New York Mellon Corp. said it will receive about $3 billion and State Street Corp. said it's getting $2 billion."

Bloomberg.com: Economy

Elaborate marble facade of NYSE as seen from t...

Bloomberg.com: Economy: "About 100 or fewer of the 7,000 U.S. banks with less than $10 billion in assets may consider taking advantage of the program, said Camden Fine, president of the Independent Community Bankers of America, a Washington trade group representing about 5,000 banks.

``The headline in the local paper that everybody's going to read is, `Local Bank Seeks Government Assistance,''' Fine said in an interview. ``That doesn't look real good to the folks in the local towns.''"

Bloomberg.com: Economy

NEW YORK - OCTOBER 07: Traders work on the flo...

Bloomberg.com: Economy: "The Fed said in a separate statement that its previously announced program to buy commercial paper will start on Oct. 27. Officials haven't indicated a limit for the total size of the fund."

Monday, October 13, 2008

Commodies Likely to Continue Fall

Oct. 13 (Bloomberg) -- The record 39 percent decline in commodities since July 3 is nowhere near finished, if history is any guide.

The Reuters/Jefferies CRB Index of 19 commodities from coffee to silver would have to drop another 37 percent to reach the trough of the 2001 recession and 35 percent for the 1998 slide, when crude bottomed at $10.35 a barrel. The measure is 28 percent above its lowest during the economic contraction that ended in November 1982. Copper, after its biggest weekly loss in two decades last week, is still triple 2001 levels.

While tumbling prices of oil, nickel and soybeans already crippled stock markets from Moscow to Sao Paulo and sliced Alcoa Inc.'s profits by 52 percent, investors say rising stockpiles of copper and slowing energy demand mean prices will continue to fall. The U.S. slowdown will last more than a year and be deeper than any in three decades, according to Harvard University economist Martin Feldstein, a member of the committee that charts American business cycles.

``This downturn is going to make 2001 look like a walk in the park,'' said Tim Mercer, chief investment officer of Hong Kong-based hedge fund Musashi Capital Ltd., who sold all his commodity investments in July. ``This is the bursting of a 25- year asset-credit bubble. People have really stopped spending money, everywhere.''

Tech sales down $170B next year?

Image representing Intel Corporation as depict...

Oct. 13 (Bloomberg) -- Intel Corp., Microsoft Corp. and the technology companies that so far have escaped the credit crisis relatively unscathed will lose out on as much as $170 billion in sales next year as the crunch catches up with them.

Corporate spending on computers, software and communications equipment may be little changed or fall as much as 5 percent next year as the lending freeze spooks clients, said Jane Snorek, an analyst at First American Funds in Minneapolis who has followed the industry for 13 years. It would be the first decline in the $3.41 trillion market since 2001 after the dot-com bubble burst.

``Business kind of stopped dead in the last two weeks,'' said Snorek, whose firm owns Microsoft and Intel stock among more than $100 billion in assets. ``People are pushing off orders and saying, `I have no idea if we're going to have a global meltdown, so I'm not going to buy anything right now.'''

Worst crisis in 50 years?

"This is the worst crisis I've seen in my 50-year career,'' William Rhodes, senior vice chairman of Citigroup Inc. in New York, told fellow bankers in Washington yesterday. "We still have to deal with the effects on the real economy here and elsewhere.''

Portrait shows Florence Thompson with several ...

Oct. 13 (Bloomberg) -- The world may be heading for its worst recession in a quarter of a century -- if it's lucky.

A steep slump looks likely as the credit squeeze crunches economies from the U.S. to Singapore and panic engulfs global financial markets.

``It's certainly going to be the worst since the 1980s,'' says Bradford DeLong, an economics professor at the University of California at Berkeley who worked at the U.S. Treasury
Department from 1993 to 1995. ``The hope is that it won't become the worst unemployment business cycle since the Great Depression.''

Bill Gates - "Fairly Significant Recession" Ahead

Microsoft Corp. founder Bill Gates III said that the U.S. economy is headed for a ``fairly significant recession,'' and that the unemployment rate may peak at more than 9 percent.

Sunday, October 12, 2008

Still Holding Back - Barrons.com

Rare 1934 $500 Federal Reserve Note, featuring...

Still Holding Back - Barrons.com: Interview with Jeremy Grantham, Chairman, GMO

"What about some other trades [that might provide opportunity in this falling market]?

I'm speaking for the asset-allocation unit at the firm. We have been substantially long the safe-haven currencies. We have been very long the yen and somewhat long the Swiss franc and short sterling, which is one of our favorite bets. We have been short the euro for three months, and slightly long the U.S. dollar. One of the paradoxes is, if the world is worse than people expect, the U.S. dollar will outperform."

Still Holding Back - Barrons.com

Still Holding Back - Barrons.com: "Where do you see all of this going?

I want to emphasize how little I understand all of the intricate workings of the global financial system. I hope that someone else gets it, because I don't. And I have no idea, really, how this will work out. I certainly wish it hadn't happened. It is just so intricate that all I can conclude, by instinct and by reading the history books, is that it will be longer, harder and more complicated than we expect."

Good Gracious! - Barrons.com

Good Gracious! - Barrons.com: "ALAN TRIPP HAS WITNESSED FAR MORE FINANCIAL SHOCKS than the average American, beginning with the 1929 Wall Street crash, when he was a child. The Bryn Mawr, Pa.-based entrepreneur also knows all about risk: His former company, Product Resources International, specialized in finding ways to commercialize bleeding-edge technologies."

Good Gracious! - Barrons.com

Image via WikipediaGood Gracious! - Barrons.com: "On Sept. 11, his 91st birthday, Tripp ended a 30-year relationship with his financial advisers at Lehman Brothers' private banking division, Neuberger Berman -- just days before Lehman went under. 'I was verbally assured that my assets were safe,' he recalls, 'but I know when things are falling apart, funny things can happen.' He yanked his money and sent it to another bank.

Plenty of other rich investors are just as dismayed, a result of dismal investment performance and mounting concern about the strength of financial institutions. More than 80% of wealthy investors in one survey said they planned to withdraw at least some of their money from their private bank, and more than half plan to dump their banks altogether.

Many of the respondents probably were venting, rather expressing actual plans. But it's clear that private banks -- outfits that cater to the wealthy and are owned by banks, brokerages and others -- haven't been immune to the turmoil of the past year. Assets under management at the top 40 private banks increased just 4.3% in the year through June 30, versus 20%-plus in each of the previous two years, according to an annual study by Barron's. See nearby table for a ranking of the top 40, based on assets in $1 million-plus accounts."

Fannie, Freddie told to buy $40 bln of mortgages a month - report - MarketWatch

Fannie, Freddie told to buy $40 bln of mortgages a month - report - MarketWatch: "SAN FRANCISCO (MarketWatch) -- Federal regulators have ordered Fannie Mae and Freddie Mac to start buying $40 billion of troubled mortgage bonds each month as the U.S. government tries to revive the economy, according to a published report.

A story from Bloomberg News on Saturday reported Fannie (FNM - FRE) began telling bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, Bloomberg said, citing three unidentified people familiar with the situation.
The purchases would be separate from the U.S. Treasury's $700 billion bailout plan, which was signed into law earlier this month, Bloomberg noted."

Economic signs pointing down - MarketWatch

Economic signs pointing down - MarketWatch: "WASHINGTON (MarketWatch) -- The U.S. recession has been nearly forgotten in all the anxiety about the financial meltdown in the past few weeks. For those who care about the fundamentals, however, the coming week will feature a lot of data about the economy, much of it rather depressing."

Sovereign may sell itself to Banco Santander for $2.53 bln - MarketWatch

Sovereign may sell itself to Banco Santander for $2.53 bln - MarketWatch: "SAN FRANCISCO (MarketWatch) -- Spain's Banco Santander SA was in late-stage talks Sunday to acquire Sovereign Bancorp Inc. in a deal that could be worth as much as $2.53 billion, according to a published report.
A story in the online edition of the Wall Street Journal citing people familiar with the matter reported that a deal could be completed by Monday and that while the details of the transaction weren't clear, Banco Santander could be expected to pay Sovereign's Friday closing price of $3.81 a share."

Bloomberg.com: U.K. & Ireland

The Royal Bank of Scotland Plc Banca Rìoghail ...

Bloomberg.com: U.K. & Ireland: "Oct. 13 (Bloomberg) -- U.K. Prime Minister Gordon Brown's government is set to buy majority stakes in Royal Bank of Scotland Group Plc and HBOS Plc to contain the worst financial crisis since the 1930s, two people familiar with the matter said."

Saturday, October 11, 2008

Greenspan Legacy

Former Chairman of the Federal Reserve Alan Gr...

The Reckoning - Taking Hard New Look at a Greenspan Legacy - Series - NYTimes.com: "George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”

And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003.

“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan in 2004

Switch to Cash?

A comparison of three major stock indices: the...

Your Money - Switching to Cash May Feel Safe, but Risks Remain - NYTimes.com: "It’s a question we’ve all asked in our darker moments of late: Why not just put all of our investments in cash, 100 percent, just for a little while, until things calm down?"

Some people already seem to be acting on that instinct. In the first six days of October (through Monday), investors pulled $19 billion out of mutual funds that invest in United States stocks, matching the outflows for the entire month of September.

By fleeing for the comfort of safe and insured, however, investors with a time horizon beyond a few years may be doing real damage to their long-term finances. If you’re tempted to make a big move to cash right now, you’re doing something called market timing. It’s an implied statement that you’ve figured out the right moment to get out of stocks — and will also know the right time to get back in.

So let’s dispense with the first part straightaway. The right time to move out of stocks was a year or so ago, before various stock indexes the world over fell by one-third or more.

If you missed that opportunity, you’re hardly alone.

But if you sell now, you’ll be locking in your losses. And once you’re in cash, there isn’t much upside. In fact, with interest rates low, you’re likely to lose money in cash, because inflation will probably eat up the after-tax returns you earn from a savings or money-market account.

Monday, November 24, 2008

Sunday, November 23, 2008

Friday, November 7, 2008

Saturday, October 18, 2008

Tuesday, October 14, 2008

Monday, October 13, 2008

Sunday, October 12, 2008

Saturday, October 11, 2008

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