Month: October 2008

So, if you see that Six Flags (SIX) stock price has risen, do not be encouraged.

Six Flags Inc. said late Thursday that it will consider various steps, including a reverse stock split, if its share price does not rebound soon. The statement comes in the wake of notification from the New York Stock Exchange that the company is not compliant with the market’s listing standards because its thirty-day average closing price was less than $1. The theme park company has six months to remedy the situation. Six Flags shares closed down 4.4% to 65 cents on Thursday.

Disclosure (“none” means no position):none
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James Grant who’s upcoming book I am reviewing was on Bloomberg in March.

Grant said then the best thing for the Fed to do is buy mortgages…and here we are..

It is a great discussion on interest rates, gold, treasuries, the dollar and the Fed.

Here is the book, you can pre-order it here:

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If, inflation is a “silent tax on all consumers” then isn’t a little deflation “a silent tax cut” for us all? If the economy is indeed slowing, then rather that forcing the Fed to lower rates and further emasculate the dollar, won’t a little deflation do the same things for him without a rate cut?

Let’s look at it. All summer into fall we were hearing about inflation and it’s evils. We were hearing that even the governments numbers were wrong and that inflation was actually higher than report due to food and energy.

Well, high prices did the trick. They destroyed demand. Isn’t there an old saying that “nothing cures high prices lie high prices”, meaning people cut back on items when prices rise too high? They rose, we cut back.

Now things seem to be slowing a bit too fast and correspondingly, prices are falling (deflation). Oil (USO) has fallen from $146 to under $94 and food commodities have plummeted with it. But, if high prices are cured by their very being, then ought not low prices be cured by the increased demand they then illicit?

Now of course there other factors involved and I am purposely keeping this basic. Why? We have had unprecedented Fed, Treasury and SEC actions and now Congress is due to get in on the game. We need time to let these event filter through the system before we begin to worry about falling prices.

The best thing the Fed could do now (once Congress acts) is to sit back for a while and go to the sidelines. If you have a problem (or think you do), playing with every lever you have will not help you identify a cause and in reality, you could easily make the problem far worse. If you walk into the Dr. with a stomach ache, they don’t typically prescribe dozens of remedies.

It has been a tumultuous summer and fall. Once Congress acts and the credit pipes begin to become unclogged, let’s just relax on the intervention side for a while and let the market work.

Disclosure (“none” means no position):
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I’m shuffling off the NYC Sunday for the Value Investing Congress, anyone else going? If not, watch here or follow on Twitter as I will be updating from there.

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A Section by section breakdown

Section 1. Short Title.
“Emergency Economic Stabilization Act of 2008.”

Section 2. Purposes.
Provides authority to the Treasury Secretary to restore liquidity and stability to the U.S. financial system and to ensure the economic well-being of Americans.

Section 3. Definitions.
Contains various definitions used under this Act.

Title I. Troubled Assets Relief Program.

Section 101. Purchases of Troubled Assets.
Authorizes the Secretary to establish a Troubled Asset Relief Program (“TARP”) to purchase troubled assets from financial institutions. Establishes an Office of Financial Stability within the Treasury Department to implement the TARP in consultation with the Board of Governors of the Federal Reserve System, the FDIC, the Comptroller of the Currency, the Director of the Office of Thrift Supervision and the Secretary of Housing and Urban Development. Requires the Treasury Secretary to establish guidelines and policies to carry out the purposes of this Act.
Includes provisions to prevent unjust enrichment by participants of the program.

Section 102. Insurance of Troubled Assets.
If the Secretary establishes the TARP program, the Secretary is required to establish a program to guarantee troubled assets of financial institutions. The Secretary is required to establish risk-based premiums for such guarantees sufficient to cover anticipated claims. The Secretary must report to Congress on the establishment of the guarantee program.

Section 103. Considerations.
In using authority under this Act, the Treasury Secretary is required to take a number of considerations into account, including the interests of taxpayers, minimizing the impact on the national debt, providing stability to the financial markets, preserving homeownership, the needs of all financial institutions regardless of size or other characteristics, and the needs of local communities. Requires the Secretary to examine the long-term viability of an institution in determining whether to directly purchase assets under the TARP.

Section 104. Financial Stability Oversight Board.
This section establishes the Financial Stability Oversight Board to review and make recommendations regarding the exercise of authority under this Act. In addition, the Board must ensure that the policies implemented by the Secretary protect taxpayers, are in the economic interests of the United States, and are in accordance with this Act.

The Board is comprised of the Chairman of the Board of Governors of the Federal Reserve System, the Secretary of the Treasury, the Director of the Federal Home Finance Agency, the Chairman of the Securities and Exchange Commission and the Secretary of the Department of Housing and Urban Development.

Section 105. Reports.
Monthly Reports: Within 60 days of the first exercise of authority under this Act and every month thereafter, the Secretary is required to report to Congress its activities under TARP, including detailed financial statements. Tranche Reports: For every $50 billion in assets purchased, the Secretary is required to report to Congress a detailed description of all transactions, a description of the pricing mechanisms used, and justifications for the financial terms of such transactions.
Regulatory Modernization Report: Prior to April 30, 2009, the Secretary is required to submit a report to Congress on the current state of the financial markets, the effectiveness of the financial regulatory system, and to provide any recommendations.

Section 106. Rights; Management; Sale of Troubled Assets; Revenues and Sale Proceeds.
Establishes the right of the Secretary to exercise authorities under this Act at any time. Provides the Secretary with the authority to manage troubled assets, including the ability to determine the terms and conditions associated with the disposition of troubled assets. Requires profits from the sale of troubled assets to be used to pay down the national debt.

Section 107. Contracting Procedures.
Allows the Secretary to waive provisions of the Federal Acquisition Regulation where compelling circumstances make compliance contrary to the public interest. Such waivers must be reported to Congress within 7 days. If provisions related to minority contracting are waived, the Secretary must develop alternate procedures to ensure the inclusion of minority contractors. Allows the FDIC to be selected as an asset manager for residential mortgage loans and mortgage-backed securities.

Section 108. Conflicts of Interest.
The Secretary is required to issue regulations or guidelines to manage or prohibit conflicts of interest in the administration of the program.

Section 109. Foreclosure Mitigation Efforts.
For mortgages and mortgage-backed securities acquired through TARP, the Secretary must implement a plan to mitigate foreclosures and to encourage servicers of mortgages to modify loans through Hope for Homeowners and other programs. Allows the Secretary to use loan guarantees and credit enhancement to avoid foreclosures. Requires the Secretary to coordinate with other federal entities that hold troubled assets in order to identify opportunities to modify loans, considering net present
value to the taxpayer.

Section 110. Assistance to Homeowners.
Requires federal entities that hold mortgages and mortgage-backed securities, including the Federal Housing Finance Agency, the FDIC, and the Federal Reserve to develop plans to minimize foreclosures. Requires federal entities to work with servicers to encourage loan modifications, considering net present value to the taxpayer.

Section 111. Executive Compensation and Corporate Governance.
Provides that Treasury will promulgate executive compensation rules governing financial institutions that sell it troubled assets. Where Treasury buys assets directly, the institution must observe standards limiting incentives, allowing clawback and prohibiting golden parachutes. When Treasury buys assets at auction, an institution that has sold more than $300 million in assets is subject to additional taxes, including a 20% excise tax on golden parachute payments triggered by events other than retirement, and tax deduction limits for compensation limits above $500,000.

Section 112. Coordination With Foreign Authorities and Central Banks.
Requires the Secretary to coordinate with foreign authorities and central banks to establish programs similar to TARP.

Section 113. Minimization of Long-Term Costs and Maximization of Benefits for Taxpayers.
In order to cover losses and administrative costs, as well as to allow taxpayers to share in equity appreciation, requires that the Treasury receive non-voting warrants from participating financial institutions.

Section 114. Market Transparency.
48-hour Reporting Requirement: The Secretary is required, within 2 business days of exercising authority under this Act, to publicly disclose the details of any transaction.

Section 115. Graduated Authorization to Purchase.
Authorizes the full $700 billion as requested by the Treasury Secretary for implementation of TARP. Allows the Secretary to immediately use up to $250 billion in authority under this Act. Upon a Presidential certification of need, the Secretary may access an additional $100 billion. The final $350 billion may be accessed if the President transmits a written report to Congress requesting such authority. The Secretary may use this additional authority unless within 15 days Congress passes a joint resolution of disapproval which may be considered on an expedited basis.

Section 116. Oversight and Audits.
Requires the Comptroller General of the United States to conduct ongoing oversight of the activities and performance of TARP, and to report every 60 days to Congress. The Comptroller General is required to conduct an annual audit of TARP. In addition, TARP is required to establish and maintain an effective system of internal controls.

Section 117. Study and Report on Margin Authority.
Directs the Comptroller General to conduct a study and report back to Congress on the role in which leverage and sudden deleveraging of financial institutions was a factor behind the current financial crisis.

Section 118. Funding.
Provides for the authorization and appropriation of funds consistent with Section 115.

Section 119. Judicial Review and Related Matters.
Provides standards for judicial review, including injunctive and other relief, to ensure that the actions of the Secretary are not arbitrary, capricious, or not in accordance with law.

Section 120. Termination of Authority.
Provides that the authorities to purchase and guarantee assets terminate on December 31, 2009. The Secretary may extend the authority for an additional year upon certification of need to Congress.

Section 121. Special Inspector General for the Troubled Asset Relief Program.
Establishes the Office of the Special Inspector General for the Troubled Asset Relief Program to conduct, supervise, and coordinate audits and investigations of the actions undertaken by the Secretary under this Act. The Special Inspector General is required to submit a quarterly report to Congress summarizing its activities and the activities of the Secretary under this Act.

Section 122. Increase in the Statutory Limit on the Public Debt. Raises the debt ceiling from $10 trillion to $11.3 trillion.

Section 123. Credit Reform.
Details the manner in which the legislation will be treated for budgetary purposes under the Federal Credit Reform Act.

Section 124. Hope for Homeowners Amendments.
Strengthens the Hope for Homeowners program to increase eligibility and improve the tools available to prevent foreclosures.

Section 125. Congressional Oversight Panel.
Establishes a Congressional Oversight Panel to review the state of the financial markets, the regulatory system, and the use of authority under TARP. The panel is required to report to Congress every 30 days and to submit a special report on regulatory reform prior to January 20, 2009. The panel will consist of 5 outside experts appointed by the House and Senate Minority and Majority leadership.

Section 126. FDIC Enforcement Enhancement.
Prohibits the misuse of the FDIC logo and name to falsely represent that deposits are insured. Strengthens enforcement by appropriate federal banking agencies, and allows the FDIC to take enforcement action against any person or institution where the banking agency has not acted.

Section 127. Cooperation With the FBI.
Requires any federal financial regulatory agency to cooperate with the FBI and other law enforcement agencies investigating fraud, misrepresentation, and malfeasance with respect to development, advertising, and sale of financial products.

Section 128. Acceleration of Effective Date.
Provides the Federal Reserve with the ability to pay interest on reserves.

Section 129. Disclosures on Exercise of Loan Authority.
Requires the Federal Reserve to provide a detailed report to Congress, in an expedited manner, upon the use of its emergency lending authority under Section 13(3) of the Federal Reserve Act.

Section 130. Technical Corrections.
Makes technical corrections to the Truth in Lending Act.

Section 131. Exchange Stabilization Fund Reimbursement.
Protects the Exchange Stabilization Fund from incurring any losses due to the temporary money market mutual fund guarantee by requiring the program created in this Act to reimburse the Fund. Prohibits any future use of the Fund for any guarantee program for the money market mutual fund industry.

Section 132. Authority to Suspend Mark-to-Market Accounting.
Restates the Securities and Exchange Commission’s authority to suspend the application of Statement Number 157 of the Financial Accounting Standards Board if the SEC determines that it is in the public interest and protects investors.

Section 133. Study on Mark-to-Market Accounting.
Requires the SEC, in consultation with the Federal Reserve and the Treasury, to conduct a study on mark-to-market accounting standards as provided in FAS 157, including its effects on balance sheets, impact on the quality of financial information, and other matters, and to report to Congress within 90 days on its
findings.

Section 134. Recoupment.
Requires that in 5 years, the President submit to the Congress a proposal that recoups from the financial industry any projected losses to the taxpayer.

Section 135. Preservation of Authority.
Clarifies that nothing in this Act shall limit the authority of the Secretary or the Federal Reserve under any other provision of law.

Section 136. Temporary Increase in Deposit and Share Insurance Coverage. Raises the FDIC and the National Credit Union Share Insurance Fund deposit insurance limits from $100,000 per account to $250,000 until December 31, 2009. Temporarily raises the borrowing limits at the Treasury for the FDIC and the National Credit Union Share Insurance Fund.

Title II—Budget-Related Provisions

Section 201. Information for Congressional Support Agencies.
Requires that information used by the Treasury Secretary in connection with activities under this Act be made available to CBO and JCT.

Section 202. Reports by the Office of Management and Budget and the Congressional Budget Office.
Requires CBO and OMB to report cost estimates and related information to Congress and the President regarding the authorities that the Secretary of the Treasury has exercised under the Act.

Section 203. Analysis in President’s Budget.
Requires that the President include in his annual budget submission to the Congress certain analyses and estimates relating to costs incurred as a result of the Act; and

Section 204. Emergency Treatment.
Specifies scoring of the Act for purposes of budget enforcement.

Title III—Tax Provisions

Section 301. Gain or Loss From Sale or Exchange of Certain Preferred Stock.
Details certain changes in the tax treatment of losses on the preferred stock of certain GSEs for financial institutions.

Section 302. Special Rules for Tax Treatment of Executive Compensation of Employers Participating in the Troubled Assets Relief Program. Applies limits on executive compensation and golden parachutes for certain executives of employers who participate in the auction program.

Section 303. Extension of Exclusion of Income From Discharge of Qualified Principal Residence Indebtedness. Extends current law tax forgiveness on the cancellation of mortgage debt.

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So, what did the Senate pass last night?

Here are basics:
I. Stabilizing the Economy
The Emergency Economic Stabilization Act of 2008 (EESA) provides up to $700 billion to the Secretary of the Treasury to buy mortgages and other assets that are clogging the balance sheets of financial institutions and making it difficult for working families, small businesses, and other companies to access credit, which is vital to a strong and stable economy. EESA also establishes a program that would allow companies to insure their troubled assets.

II. Homeownership Preservation
EESA requires the Treasury to modify troubled loans – many the result of predatory lending practices – wherever possible to help American families keep their homes. It also directs other federal agencies to modify loans that they own or control. Finally, it improves the HOPE for Homeowners program by expanding eligibility and increasing the tools available to the
Department of Housing and Urban Development to help more families keep their homes.

III. Taxpayer Protection
Taxpayers should not be expected to pay for Wall Street’s mistakes. The legislation requires companies that sell some of their bad assets to the government to provide warrants so that taxpayers will benefit from any future growth these companies may experience as a result of participation in this program. The legislation also requires the President to submit legislation that would cover any losses to taxpayers resulting from this program from financial institutions.

IV. No Windfalls for Executives
Executives who made bad decisions should not be allowed to dump their bad assets on the government, and then walk away with millions of dollars in bonuses. In order to participate in this program, companies will lose certain tax benefits and, in some cases, must limit executive pay. In addition, the bill limits “golden parachutes” and requires that unearned bonuses be returned

V. Strong Oversight
Rather than giving the Treasury all the funds at once, the legislation gives the Treasury $250 billion immediately, then requires the President to certify that additional funds are needed ($100 billion, then $350 billion subject to Congressional disapproval). The Treasury must report on the use of the funds and the progress in addressing the crisis. EESA also establishes an Oversight Board so that the Treasury cannot act in an arbitrary manner. It also establishes a special inspector general to protect against waste, fraud and abuse.

Here is the 400 page vesion

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Here is a great piece from the NY times about recent events..

This article is a must read…an excerpt:

Two hours later, Mr. Paulson and Mr. Bernanke trooped up to Capitol Hill for a somber session with Congressional leaders. “That meeting was one of the most astounding experiences I’ve had in my 34 years in politics,” Senator Schumer recalled.

As the members of Congress and their aides listened, the two laid out their plan. They would begin offering federal insurance to money market funds immediately, in order to stop the run on money funds.

In addition, the S.E.C. would institute a ban on short-selling of financial stocks. Although Treasury officials concede that the move was mostly symbolic — investors can still buy put options that have the same effect as shorting stocks — they did it mainly “to scare the hell out of everybody,” as one official put it.

After Mr. Bernanke made his remark about the possibility that there might not be an economy on Monday without this plan, you could hear a pin drop.

“I gulped,” Mr. Schumer said.

Full Article

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Here is more on the recent purchase of National City (NCC) shares.

Disclosure (“none” means no position):Long NCC
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Bought shares of National City this morning at $2. Here is why.

National City has said it has no exposure to adjustable rate mortgages and exposure to residential market is substantially less than Wachovia (WB) and Washington Mutual (WM).

Q2 results (ending 6/30) were as follows:
* Net Loss of $1.8 Billion Driven By Actions to Increase Loss Reserves on Liquidating Loan Portfolios; Includes $1.1 Billion After-Tax Non-Cash Goodwill Charge Related to Previous Acquisitions — No Effect on Regulatory Capital

* Excluding Unusual and Non-Operating Items, Pre-Tax Pre-Provision Operating Earnings Were $610 Million, Up 19%

* Tier 1 Capital $7 Billion over Well Capitalized Minimum; 11.1 % Tier 1 Capital Ratio Highest of All Major U.S. Banks

* Net Charge-Offs of $740 Million, Predominantly in Liquidating Loan Portfolios Versus $1.6 Billion Provision for Loan Losses; Nonprime Delinquencies Down

* Solid Progress in Actively Managing Liquidating Loan Portfolios, Which are Isolated, Contained, and Performing in Line with Expectations

* Aggressively Re-Focusing on Core Businesses, Which Remain Profitable; Deposits Continue Solid Growth Trend

* Enhanced Leadership Team Intensely Focused on Managing Risk, Controlling Expenses and Improving Profitability

Chairman, President and CEO Peter E. Raskind commented at the time,“We believe we have clearly identified and segregated our portfolio of non-core assets and have much better visibility regarding loss estimates than we did earlier this year. As a result, we expect the provision for loan losses to decline in the second half of 2008. Our liquidating portfolios are isolated and contained, and are performing in line with expectations. More importantly, we are making progress in reducing the size of the liquidating portfolio and mitigating associated losses,” continued Raskind. “National City was among the first in our peer group to raise capital and build reserves. Our strong capital position not only enables us to fully address the ongoing challenges in the credit and housing markets, but also allows us to continue investing in and growing our core businesses, which continue to be profitable.”

Here is the management discussion on Mortgages from the 8-K:

Mortgage-backed securities are collateralized primarily by prime residential mortgage loans. At June 30, 2008, approximately $124 million of the mortgage-backed portfolio represented securities collateralized by Alt-A first mortgage loans. Asset-backed securities are primarily collateralized by nonmortgage assets, principally bank and insurance company subordinated debt. The asset-backed portfolio also included $39 million of securities collateralized by home equity loans and lines to nonprime borrowers.

Management values the securities portfolio using observable market prices, when available, or a third-party pricing service or market-maker to determine fair value based on trade activity for the same or similar securities. At June 30, 2008, the securities portfolio had net unrealized losses of $119 million, comprised of gross unrealized gains of $113 million and gross unrealized losses of $232 million. Gross unrealized losses increased from $79 million at December 31, 2007 due to declines in the value of mortgage and asset-backed securities. During the first half of 2008, the value of these types of securities decreased due to an increase in credit spreads and a lack of liquidity in the capital markets. Total unrealized losses at June 30, 2008 on mortgage- and asset-backed securities collateralized by Alt-A first mortgage loans and nonprime home equity loans were $15 million and $4 million, respectively. The remainder of the losses related primarily to investment grade securities secured by prime residential first mortgage loans.

Management evaluates the available-for-sale securities portfolio for possible other-than-temporary impairment on a quarterly basis. During this review, management considers the severity and duration of the unrealized losses as well as its intent and ability to hold the securities until recovery, taking into consideration balance sheet management strategies and its view of the market. Management assesses the nature of unrealized losses taking into consideration factors such as changes in the risk-free interest rate, general credit spread trends, market supply and demand, creditworthiness of the issuer, credit enhancements and the quality of the underlying collateral. Other-than-temporary impairment losses of $29 million and $45 million were recognized on certain asset-backed securities and nonprime mortgage-backed securities during the second quarter and first half of 2008, respectively. There were no other-than-temporary impairment losses recognized in the second quarter or first half of 2007.

Excluding these impaired securities, there have been no recent credit downgrades of any mortgage or asset-backed securities with a material unrealized loss in the portfolio by either Standard & Poors or Moody’s Investors Service. For certain securities, management also reviewed the performance of the underlying collateral and considered the securitization structure, but did not find any indication of any security-specific credit concerns. Management believes the primary reason for the unrealized losses on securities is general credit spread trends caused by market concern over the credit quality of residential mortgages, an imbalance between market supply and demand for these securities, and in some instances, an increase in the risk-free interest rate at June 30, 2008 compared to the risk-free rate at the security’s acquisition date. Management has the intent and ability to hold these securities to recovery. Therefore, management concluded that none of the remaining unrealized losses on the securities in the available-for-sale portfolio represented an other-than-temporary impairment as of June 30, 2008.

Regarding credit risk:

During the second quarter of 2008, core commercial and retail credit quality was stable and loss rates remained low. Commercial real estate, in particular loans to residential real estate developers, has been affected by the continued weakness in the housing markets. Residential real estate and home equity lines of credit have also been adversely affected by declining housing values and pressures on consumers from rising fuel and food prices. Management expects that the weakness in the housing markets will continue to adversely affect the credit quality of the residential real estate portfolio through 2008 and into 2009.

During 2007 and 2008, the Corporation curtailed certain mortgage and home equity products and exited broker and correspondent origination channels. These portfolios of broker-sourced nonprime mortgage loans, broker-sourced home equity lines and loans, construction loans to individuals, and indirect automobile, marine and recreational vehicle loans are liquidating. Management has chosen to limit future lending to direct relationships with consumers. Mortgage offerings now consist substantially of loans that are readily salable to government sponsored entities. Home equity products are now limited to loans and lines originated throughout the bank branch network, which have historically been of high credit quality.

I spoke to a National City spokesperson today and gleemed the following information:

My concern about NCC was that a Washington Mutual (WM) or Wachovia (WB) scenario would unfold in which depositors withdrew funds and caused capital ratios to plummet, then forcing a liquidation. While not giving exact numbers, we get those 10/21 I believe, she did say that “National City has a stable, diverse and growing deposit base”. In other words, a WaMu or Wachovia event at NCC just isn’t happening.

I was also told, regarding the $20 billion “liquidation portfolio” referred to in Forbes yesterday that is was a portfolio they would sell if an attractive offer came in but that 90% of the loans in it were performing (on time and full each month).

Regarding the Washington plan? It “could provide additional options for such disposition opportunities, however, we are not reliant upon a plan”. Among all large US banks NCC is tops with an 11.1% Tier 1 Capital Ratio. Better than Wells Fargo (WFC), JP Morgan (JPM), and Citigroup (C).

After the recent convertible conversion, NCC has 2.1 billion shares outstanding. What about earnings. NCC does not give guidance but if we got back before the housing boom sent earnings to about $2 billion a year, we can see from 1999 to 2002 (including the 2001 recession) NCC earned about $1.5 billion a year. That would give us roughly 75 cents a share at a PE of 12 and a price of $9 a share.

When? Who knows. It depends on what comes out of Washington, how it is implemented and how things shake out. It is clear though that NCC has ample earnings power once the present malaise is cleared. I think patience will be rewarded big here.

Most recent 8-K


Disclosure (“none” means no position):Long WFC, NCC, C, none
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