A request to help a child..
Adam Warner is doing a fund raising walk for the “Fellowship Circle” on Nov. 2.
Please help out and contribute any amount to the effort. They have almost reached their goal…
You may contribute directly from here.
Not sure who saw it but ABC’s John Stossel did a great piece on 20/20. He takes on politicians from both parties.There are 6 parts total but I only posted the more relevant part for us.
Part 1
Part 2
This is mandatory reading for those who did not see it.
From the WSJ:
In disclosing plans to buy a quarter-trillion dollars of bank stock in the name of the American taxpayer, Treasury Secretary Hank Paulson harped on confidence. “Today, there is a lack of confidence in our financial system, a lack of confidence that must be conquered,” he said on Tuesday.
What Mr. Paulson did not get around to mentioning was the excess of confidence that preceded the shortfall. Under the spell of soaring house prices (and before that, of stock prices), Americans trusted the things they ought to have doubted. But markets are cyclical, and there is always a new day. In compensating fashion, people will eventually doubt the things they ought to have trusted. Investment opportunity follows disillusionment. It’s complacency that precedes bear markets.
If the confidence deficit seems so high, it’s because the preceding confidence surplus was full to overflowing. People suspended critical judgment. They accepted at face value the pretensions of central bankers and the competence of investment bankers. Not one professional investor in 50, probably, doubted that wads of subprime mortgages could be refashioned into bonds that were just as creditworthy as U.S. Treasurys.
Federal Reserve Chairman Ben S. Bernanke and his predecessor, Alan Greenspan, were fine ones for believing impossible things. They propounded them, too. Never mind asset bubbles, they said. Not only can’t you predict them, but you can’t even recognize them after they’ve swollen to grotesque maturity. Better just to tidy up after they burst. Now Mr. Bernanke is likening our present troubles to those of the 1930s. The comparison is more confidence-sapping than he seems to realize. From peak to trough, 1929 to 1933, the gross domestic product was almost sawed in half, before adjusting for changes in the purchasing power of the dollar. No such mitigating fact helps to explain today’s set-to. It’s a crisis of competence of our financiers, of bankers and central bankers alike.
To the self-satisfied elders of the Fed, the past 25 years were a sweet validation of the art of central banking and of the efficacy of paper money. “The Great Moderation,” some of them called this interlude of low inflation and subdued economic activity — neither too boomy on the up side nor too recessionary on the down side. For these manifold blessings, the officials thanked, in good part, themselves, i.e., “the credibility of monetary policy,” as the president of the Federal Reserve Bank of San Francisco, Janet Yellen, put it earlier this year.
But it wasn’t the vigilance of monetary policy that facilitated the construction of the tree house of leverage that is falling down on our heads today. On the contrary: Artificially low interest rates, imposed by the Federal Reserve itself, were one cause of the trouble. America’s privileged place in the monetary world was — oddly enough — another. No gold standard checked the emission of new dollar bills during the quarter-century on which the central bankers so pride themselves. And partly because there was no external check on monetary expansion, debt grew much faster than the income with which to service it. Since 1983, debt has expanded by 8.9% a year, GDP by 5.9%. The disparity in growth rates may not look like much, but it generated a powerful result over time. Over the 25 years, total debt — private and public, financial and non-financial — has risen by $45.1 trillion, GDP by only $10.9 trillion. You can almost infer the size of the gulf by the lopsided prosperity of the purveyors of debt. In 1983, banks, brokerage houses and other financial businesses contributed 15.8% to domestic corporate profits. It’s double that today.
RelatedAttaching a face to an issue, as the presidential candidates did in the latest debate, has a history of success and plenty of backfires. Read Forbears of ‘Joe the Plumber.’
The modern financial economy requires a certain minimum leap of faith. The paper dollar is an example. There is nothing behind it except the government’s good intentions, yet we hoard it as if it were gold. However, we collectively outdid ourselves in credulousness in the runup to the financial crisis. People believed the Fed’s good press, as, evidently, the Fed did itself. Then there was the ever-flattering dollar. Warts and all, the American scrip is the world’s top monetary brand. It is this country’s leading export — and the agent of not a little of today’s financial dislocations. It is the dollar — the world’s reserve currency — that has allowed this country to consume much more than it produces and to put the deficit on a mammoth annual running tab, about $700 billion in even this year of a much improved trade picture.
Over the past few months, the dollar has found favor as a safe haven. But it was a drug on the market for years before. Asian central banks would buy up greenbacks by the boxcarful. Few profit-seeking entities seemed to want them. The central banks did not obtain their dollars for free, of course. They bought them from local exporters, paying with the local currencies that the bankers themselves printed. Since the close of 2002, developing-country central banks have absorbed more than $2 trillion in this fashion. This is debt that, under a gold-based monetary system, the United States could probably not have incurred. Living so grandly beyond our means, we would have raised the suspicions of our creditors, who would not unreasonably have begun to exchange their paper dollars for the gold that stood behind them. The loss of gold would have cut short our high living.
Our foreign creditors accepted dollars in payment for their goods and services — and then obligingly invested the same dollars in America’s own securities. It’s as if the money never left the 50 states. If Americans seemed an unusually complacent lot before the roof fell in, it was no wonder. Owning the reserve currency franchise, any other people would have been just as fat and just as happy.
So, brimful of confidence, we ran down our savings and ran up our debts. Among the myriad varieties of 21st-century debts we incurred were mortgage contraptions so complex as to baffle even the people who invented them. Yet professional investors snapped them up at interest rates only a few tenths of a percentage point higher than Treasury-bill yields. It bolstered the investors’ confidence that the structures — residential mortgage-backed securities and variations on the same — were appraised triple-A.
When unfounded confidence was still supporting excessive leverage, private equity promoters bought up whole companies. They borrowed most of the purchase price at negligible interest cost and with few of the legal safeguards customarily afforded to senior creditors. The confidence of the creditors was even more ill-founded than that of the promoters — and far less explicable, because there was so much less potential profit in it for the lenders than for the equity investors. When the music finally stopped, some investors were still in mid-deal. Cerberus Capital Management had not yet consummated its proposed purchase of United Rentals, for instance. Neither had General Electric Capital Corp. and Blackstone Group bought PHH, nor Kohlberg Kravis Roberts & Co. and Goldman Sachs Capital Partners acquired Harman. Next thing you knew, the transactions were being canceled.
The would-be acquirers prided themselves on the thoroughness of their due diligence and on the conservatism of their financial forecasts. Each announced an acquisition price that, supposedly, gave full value to the selling shareholders while still affording the prospect of a not-so-distant payday for the leveraged acquirer. But, without willing lenders or a rising stock market, the buyers withdrew.
The share prices of the target companies thereupon pulled back. One had expected it. But the former takeover candidates’ prices have plunged by 70% or more. Reddy Ice, the No. 1 manufacturer and distributor of packaged ice, is cheaper by 92% than it was on the day last summer when its falsely confident suitor, GSO Capital Partners, bid to take it private at 50 times earnings. Interestingly, no new buyer has appeared now that the shares are quoted at less than seven times earnings. Confidence in the judgment of our private equity titans is belatedly being marked to market.
Such is the way of markets — and of the fallible investors who operate in them. High prices boost our confidence, low prices sap it. We seek out bargains in Wal-Mart, but run away from them on the New York Stock Exchange. The proliferation of investment bargains brings us no joy. Share-price volatility is testing all-time highs. The debt markets are inconsolable. The triple-A rated mortgage bonds that once yielded only a small increment over the basic wholesale money-market interest rate today fetch 12% and up. And those are the securities that, as Grant’s Interest Rate Observer does the numbers, appear to be money-good — barring another 20% or 25% decline in house prices. Yet if the risk of true apocalypse in real estate is great enough to warrant these towering mortgage yields, there can be no easy explanation of the relatively low yields still attached to the unsecured debentures of some big American retailers. Lowe’s Cos., the giant home-improvement chain, would surely feel it if house prices dropped — again — through the floor. But an issue of unsecured Lowe’s debentures, the 5s of October 2015, are quoted at a price to yield just 5.8%.
In investment markets, confidence and coherence tend to restore themselves. The hardy souls who lead the way back derive their confidence not from the Treasury Secretary but from the pages of “Security Analysis,” by Benjamin Graham and David L. Dodd, the value investor’s bible.
But these are frightening times, and there is no very large constituency favoring the natural restorative processes of free markets. “A new form of capitalism is needed, based on values which put finance at the service of business and citizens, not vice versa.” Nicolas Sarkozy, the president of France, recently said that, but the sentiment is on the lips of heads of state the world over.
In the past two weeks, governments in Asia, Europe and the U.S. have effectively nationalized vast swaths of banking. Central banks have ramped up their money printing. In the past week alone, the Fed’s balance sheet swelled by $179 billion, to a grand total of $1.77 trillion. In announcing such radical measures, intervening governments never fail to invoke confidence. They say they must restore it.
Destroying confidence, however, is what governments do best. And the confidence they can restore is usually the kind that got us where we are today. Inflation and moral hazard led directly to the immense overvaluation of equities and residential real estate — and of the bloating of the leverage that sustained those prices. Yet, to cure what ails us, credit creation and the public guarantee of banking liabilities are the policies today most favored.
Perhaps the world has gone so far down the path of socialized finance that there’s no turning back. However, the doughty remnant of capitalists should be under no illusion about the risks and opportunities they confront. They can’t miss the risks. Mr. Paulson pledges that the government’s bank investments will be passive and apolitical, but the record of the Depression-era Reconstruction Finance Corp. suggests that the federal government is a shareholder that can throw its weight around. Besides, would Mr. Paulson’s apolitical intentions bind his successor?
For the false confidence that played so important a part in the creation of the late excesses, the government should decently bear its share of blame. It accepts none of it, however, at least none that Messrs. Paulson or Bernanke have admitted to. Not that a federal confession of sin would expunge the financial errors of the debt-financed upswing. But it would, at least, clear the intellectual air and help the country and its creditors find a way to do better next time. For a start, the Fed might foreswear the Greenspan-inspired conceit that it can put the economy back together again after a debt bomb explodes.
And the opportunities? For the first time in a long time, stocks, tradable bank loans and mortgages are becoming cheap. The bear market is truly a value restoration project. Wall Street will be going on sale — if the government will let it. For the entrepreneur, the silver lining in the federalization of finance is obvious. Start a bank or broker-dealer to compete with the institutions that will soon be smothered in Mr. Paulson’s quarter-trillion dollar embrace. There’s oxygen, still, in the free market.
James Grant, the editor of Grant’s Interest Rate Observer, is the author of the forthcoming “Mr. Market Miscalculates: The Bubble Years and Beyond.”
The book is great also. You can read my review of it and pre-order it here.
Yes it is a loss, yes it was expected. What do we care about? Deposits are growing, Tier 1 remains high and operating income is up.
The Headlines:
• Net Loss of $729 Million Driven by Continued Actions to Build Reserves; Loan Loss Provision Declines 25% from Second Quarter
• Pre-Tax Pre-Provision Operating Earnings of $636 Million Up 17% Year-Over-Year
• Tier 1 Capital Ratio of 11% Among Highest of All Major U.S. Banks and $6.6 Billion Above Regulatory “Well-Capitalized” Minimum
• Retail Deposits Stable in Quarter and Grow Year-Over-Year, Reflecting Steady Household Growth and Expansion
• Net Charge-offs Flat with Second Quarter Excluding Writedowns from Reclassification of Marine Loans to Held for Sale
• $8.4 Billion of Exit Portfolio Loans, Representing 8% of Total Loans, Account for 40% of Total Charge-Offs; Remaining Exit Portfolio Shows Stable to Improving Trends
• Performance Improvement Initiative Targets Total Annual Savings of $500-$600 Million by 2011; $240 Million to be Realized in 2009
Details:
National City Corporation (NYSE: NCC) reported a net loss for the third quarter of 2008 of $729 million, driven primarily by continued actions to build loan loss reserves. This compares to a net loss of $1.8 billion in the second quarter of 2008, and a net loss of $19 million in the third quarter a year ago. On a year-to-date basis, the net loss was $2.7 billion in 2008 compared to net income of $647 million in 2007.
Diluted net loss per common share was $5.86 for the third quarter of 2008 and $9.51 on a year-to-date basis, inclusive of a $4.4 billion one-time noncash preferred dividend recorded in September 2008 on convertible preferred stock issued as part of National City’s $7 billion capital raise completed in April. The non cash dividend had no impact on total capital or net income. Excluding it, diluted net loss per common share would have been $.85 in the third quarter of 2008 and $3.60 on a year-to-date basis based on weighted average common shares outstanding of 877 million and 745 million, respectively. As of September 30, 2008, post conversion of preferred shares, the Corporation had approximately 2.0 billion common shares outstanding. Had those shares been outstanding from the beginning of the period, diluted net loss per common share would have been $.37 for the third quarter of 2008, exclusive of the noncash preferred dividend.
The provision for loan losses was $1.2 billion, down $408 million, or 25%, from the preceding quarter. Net charge-offs were $844 million in the third quarter of 2008, up $104 million from the preceding period due to $134 million of writedowns from reclassifications of loans to held for sale.
Pre-tax pre-provision operating earnings were $636 million in the third quarter of 2008, about equal to the preceding period, and up $93 million from the third quarter a year earlier. On a year-to-date basis, pre-tax pre-provision operating earnings were approximately $1.9 billion in both 2008 and 2007.
As of September 30, 2008, the Corporation’s Tier 1 risk-based capital ratio was 10.98%, $6.6 billion in excess of the well-capitalized minimum. Total risk-based capital was 14.86% and tangible equity to assets was 8.93% at September 30, 2008.
The “Exit Portfolio” is responsible for the majoirty of losses and it is shrinking:
The Corporation’s Exit Portfolio (formerly termed “Liquidating Portfolio”) was formed so that loans remaining from exited businesses and discontinued products could be managed separately from National City’s core retail banking, corporate banking and wealth management businesses. This $21 billion portfolio consists of broker-originated home equity loans, nonprime mortgages, non-agency mortgages, residential construction loans, and automobile, marine and recreational vehicle loans originated through dealers.
These loans, which are in run-off mode, have been declining about $500 million per month, and are actively managed to mitigate losses by a dedicated team headed by recently appointed Executive Vice President James LeKachman, an experienced risk management executive. Significant resources and talent are devoted to this effort, which includes ongoing evaluation of potential strategic alternatives. Undrawn home equity lines have declined $2.9 billion since year end.
“A limited number of segments within our Exit Portfolio generated the majority of net charge-offs for the quarter,” said Mr. Raskind. “Specifically, $8.4 billion of Exit Portfolio loans, representing 8% of the company’s total loans, accounted for 40% of total net charge-offs. The remainder of our Exit Portfolio showed stable or improving trends. Importantly, we have no exposure to Option ARM-type mortgages. We are actively managing down and mitigating losses from the Exit Portfolio and have the capital flexibility to consider a variety of alternatives for these loans.”
Loans 90 days past due were $1.1 billion at September 30, 2008, down somewhat from June 30, 2008, primarily due to a lower level of delinquent residential real estate loans within the Exit Portfolio. Average core deposits, excluding mortgage escrow and custodial balances, were $83.3 billion in the third quarter of 2008, up $5.7 billion compared to the third quarter a year ago.
So, has the reasoning for buying National City fallen? No. Remember we bought National City because its core business was stable and growing, was adequately reserved and the loan portfolio was, while challenging, not worsening.
We are NOT seeing a Wachovia (WB) or WaMU (WM) situation where we are having either a run on deposits or loan losses overwhelming the bank. What we do have is a stable bank in a miserable environment. Will they take money from the gov’t? Will there be a buyer? I think the answer to both of those is maybe.
The good news, the real good news is that the bank has the option of gov’t money as back stop should they think they need it. That being said, we know the bank will not go under and loan writedowns are not an infinite proposition. There is an end.
If the bank is still independent when that comes, substantial profits will comes. My guess is though that once the Treasury begins handing out multi-billion dollar checks to banks, National City becomes part of another bank…
Disclosure (“none” means no position):Long NCC, none
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Deflation, $$, Hypocrisy. Omerosa
– Now, let’s not move from one self induced panic to another..
– Best candidate money can buy
– I love it when stuff like this is pointed out
– Wasn’t her 15 minutes up 5 years ago?
Before this recent transaction, Berkshire’s (BRK.A) Buffett had sold put options on 4.3 million Burlington Northern (BNI) shares.
Buffett on 10/16 added another million shares to the total selling $76 strike 12/2008 puts for $6.20 a piece.
Disclosure (“none” means no position):none
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Sears Holdings (SHLD) Chairman Eddie Lampert bought more AutoZone (AZO).
In just released SEC filing, ESL Partners bought another 63.1k share bringing Lampert ownership to 23.3m shares.
This follows heavy buying last week.
Disclosure (“none” means no position):Long SHLD, none
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This is a long clip but worth watching. Faber says govt’s “have no other option in the long term but to print more money and that will lead to inflation.”
He makes the point that gov’t’s are trying to “ensure lending” when the reality ought to be the opposite. He says what they ought to be doing is encouraging saving and lower consumption, “but that is painful”.
He says in a recession that “ordinary” American’s will not get hit that bad but the owners of the assets will.
I tell you, the the more I look at it, the more I am thinking we are in for a period of “restrictive economic times”. Now, the argument should be made that this is good because we have been “too loose for too long”. While that may be true, like Faber says, getting back to normal will be painful and unpleasant especially for those too exposed.
It also argues against simple index funds as the major markets may go nowhere for a while but there ought to be plenty of individual winners in the mix.
What took so long?
Here are the basics..
Now this basically goes back to June when (LEH) Lehman CFO Erin Callan, being thrown to the wolves by CEO Dick Fuld said:
The whole time investor David Einhorn was saying the opposite:
The option Fuld and Callan have here simple
1- We are grossly incompetant
2- We lied.
Simple. The firm went under. So either they were lying to try and buy it time or, they just did not really know what was going on. Callan can at least say she was “following marching orders”. Fuld…not so much.
Now, if you watch Fuld’s recent congressional testimony, it was scary. One could think that perhaps Fuld has not yet accepted is firm is gone.
There is always a fall guy(s) / gal(s) when we have these events. Fuld and Callan are going to have a real hard time, real hard, convincing a jury there were being 100% honest and that they are just incompetent….Fuld, for one, seem to prideful to take the ugly option in front of him. It just may be his downfall.
Disclosure (“none” means no position):none
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No matter what your politics, this is a great, very thoughtful interview. Hats off to Charlie Rose for the job he did.
Just because CEO Phil Schoonover is gone, it doesn’t mean the people who hired him and kept him there can’t continue to bury this thing…
Circuit City Stores Inc. is considering a plan to close at least 150 stores and cut thousands of jobs, as an alternative to filing for bankruptcy-court protection, said people familiar with the company.
Earlier this month, the nation’s No. 2 electronics retailer by sales hired Skadden, Arps, Slate, Meagher & Flom LLP — the law firm that oversaw the Chapter 11 reorganization of Kmart — as its bankruptcy counsel, according to several people familiar with the matter.
Circuit City also retained FTI Consulting Inc. to develop a turnaround plan and investment bank Rothschild Inc. to guide talks with banks and secure emergency financing, these people said.
What bank in their right mind right now would loan them a penny? Who?
In June of 2007 in a post that speculated on the possibility of a Circuit City (CC) bankruptcy, I said “if the economy slides any further….see ya’..”
In Sept. of 2007 I said they were on the “Bankruptcy Express”
Now, Circuit City did try to help the management that ran it into the ground by lowering the price points on their stock options in a move to keep this incompetent bunch happy. Stunningly, the performance of the company did not improve. Please note the sarcasm..
Nothing has changed from either post. The good news? The company still does have a good brand and whoever buys it in bankruptcy has a great opportunity to revitalize it. The price that will be paid will be minimal as the competition for it in the current environment will be minimal. That gives a buyer a tremendous opportunity for success. The bad news? If you are a current shareholder you will get nothing. Sorry…
Disclosure (“none” means no position):none
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This is a short term arb play.
Dow Chemical will purchase Rohm & Haas (ROH) for $78 a share and the deal will close in early 2009.
Berkshire Hathaway (BRK.A) is investing $3b in the deal and it is an all-cash transaction. Currently shares trade at $70 a share under the current credit environment. Purchasers of shares today will get a 10% 4 month return (30% annualized). Downside is minimal.
What could go wrong?
Kuwait, who is buying 1/2 Dow’s commodity business for $9.5b could back out of the deal. That cash is being used for funding the ROH transaction. How likely is this? Well, when one considers that the newly formed JV is in the process of hiring personnel and setting up shop in Michigan, not very.
Berkshire could back out. Again, can anyone come up with a scenario when this has happened? Me either.
Since no debt is being used for the transaction and Dow has already received the bridge loan necessary to complete it, credit market conditions are irrelevant here.
Why did the price fall? Simple. During mass sell-offs like we have had, everything falls, whether is should or not. That gives us tremendous opportunity for very safe situational investing. What this trade is essentially is a way to park some money for 4 months with a very high probability of a 10% payoff with very little downside risk (not none, but very little).
The deals today that are at risk are the ones that depend on bank’s lending for the financing, looks for the all cash or all stock ones.
Disclosure (“none” means no position):Long Dow, none
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Drunk email, 25yrs., Cramer, Selling low
– This is great….a way to stop you from sending drunk email by making you do math problems first
– 25 years since the first cell phone
– Another example to different opinions on the same day
– Cramer
Disclosure (“none” means no position):
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We could all use some….this is one of the funniest video’s yet… “Little Bill vs Barney Frank”
One bear finally turns…
Whitney is buying more Berkshire Hathaway (BRK.A), MLP’s (natural gas pipelines), Target (TGT). He also said Altria (MO), J&J (JNJ), Coke (KO) were “amazingly cheap”.
Disclosure (“none” means no position):Long MO, none
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