Nobel, America, Bloggers, Marginspan class=”fullpost”>
– OK….just in case the Al Gore Nobel Prize did not denigrate the whole thing enough, this will
– This is great
– Great…
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Category: Articles
This is the 4th put sale by Berkshire Hathaway’s (BRK.A) Warren Buffett in Burlington Northern (BNI) in a week.
On 10/10 Buffett sold $75 strike puts on 1,217,500 shares that expire 12/12 at a price of $7.094 each.
Buffett is clearly taking advantage of the market volatility and its effect of increases option pricing. The more the market swings in either direction, it increases the prices option buyers must pay. If you are a seller like Buffett, it increase the money you take in relative to the strike price of the option.
SEC FILING
Disclosure (“none” means no position):none
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Schumer’s Op-Ed Off Base……Way Off
Dear Charles, this isn’t the best answer, it was the easiest.
Here is Senator Charles Schumer’s WSJ Op-Ed today.
Here is the key point in it:
The administration’s initial approach to the crisis was to propose buying troubled assets from banks. But direct capital injections into financial institutions — modeled on the Depression-era agency, the Reconstruction Finance Corporation (RFC) — always offered a far better prospect of success. The RFC provided fresh capital to banks and restored confidence (and lending) to the U.S. banking system, while making a small profit.
I pointed this out on the Senate floor a few days before Mr. Paulson came to Congress to ask for authority to spend as much as $700 billion to buy up troubled assets. Later, Democratic leaders Sen. Chris Dodd, Rep. Barney Frank and I made explicit our desire to make direct infusions of capital a part of the approach to solving the crisis during our negotiations with the Treasury.
The benefits of this approach are clear, which is why so many economists, both liberal and conservative, have embraced it. More than a liquidity problem, today we face a solvency problem. History has shown that under such conditions, the most effective means to restore health to the financial system is large injections of capital — which only the government has the wherewithal to make.
Capital infusions are also far more efficient than purchasing assets. Banks can lend much more if their capital bases are restored, and when they dispose of their troubled assets, private markets, not the government, will fix the price.
There is little question that making the government a major investor in American banks raises thorny questions, especially about the role of the public sector in private markets. So let me be clear — this is a temporary solution to an unprecedented crisis, and the government’s role must be limited.
However, that does not mean the government should simply make investments with no or minimal restrictions. We must operate in the same way any significant investor operates in these situations — when Warren Buffett invested in Goldman Sachs and General Electric in recent weeks, he demanded strict, but not onerous terms. The government must be similarly protective of taxpayer interests, without involving itself in daily operational decision making. I believe there are a series of steps and principles, both carrots and sticks, that must be applied if Treasury embraces this approach.
The government should encourage widespread acceptance of capital injections, and mandate it where there are clear systemic risks.
Direct injections of capital will encourage all institutions to lend again. But because depositors and creditors may interpret an injection of government capital as a sign of weakness, we need to start by persuading a substantial cross section of major banks, even those in relatively good health, to accept capital. Widespread bank participation will reduce the risk that depositors may flee or that other institutions will refuse to do business with banks that accept or request public capital.
So, what about the ratio he talks about….
Here is a good definition of the “Tier 1 Ratio:
The Tier 1 capital ratio is the ratio of a bank’s core equity capital to its total risk-weighted assets. Risk-weighted assets are the total of all assets held by the bank which are weighted for credit risk according to a formula determined by the Regulator (usually the country’s Central Bank). Most central banks follow the Bank of International Settlements (BIS) guidelines in setting formulae for asset risk weights. Assets like cash and coins usually have zero risk weight, while debentures might have a risk weight of 100%.
A good definition of Tier I capital is that it includes equity capital and disclosed reserves, where equity capital includes instruments that can’t be redeemed at the option of the holder (meaning that the owner of the shares cannot decide on his own that he wants to withdraw the money he invested and so cannot leave the bank without the risk coverage). Reserves are, as they are held by the bank, by their nature not an amount of money on which anybody but the bank can have an influence on.
Tier 1 capital is also seen as a metric of a bank’s ability to sustain future losses.
In short, there are two ways to look at it. You either increase the equity portion of the ratio, or reduce the debt. Either improves the ratio. Now, I would argue that just raising the equity portion will not do the trick. Why? Many banks already have capital ratio’s far about the legal limit yet still are not lending. Why? The bad debts they have that still cannot be fully valued are causing the debt portion of the ratio to rise and remain unacceptably unstable.
Adding capital to the banks now does NOT “encourage them to lend”. It does assure they will not fail and does let management know it has ample capital to cover future expected losses. Neither of those “encourages lending”. Rather they encourage management to “sit pat” until they have a handle on losses and things “work themselves out”. This is opposed to them running around searching for capital injections like they are now. Removing the debt would have stabilized (even diminished) loan losses AND freed up currently reserved capital being held to cover anticipated losses. Bank management then assured of its situation, would then have begun lending.
In short, removing the bad debt would have encourage lending.
While Schumer does opportunistically mention he terms Bekshire’s (BRK.A) Warren Buffett got from Goldman Sachs (GS). He also does, I think dishonestly omit Buffett enthusiastically not only supported the original plan (buying of debt), but offered to take 1% of the assets ($7 billion dollars worth). Why? It kept the gov’t out of private business and Warren was more than confident the transaction would be profitable for the tax payers and by default, Berkshire’s shareholders.
Schumer also omits this “capital infusion plan” is essentially what the Japanese did during the 1990’s. What happened? A decade of economic malaise as banks simply sat on the money. Having the gov’t as a partner only encourages the most benign of business practices. These are not conducive to economic growth.
Why wasn’t the debt purchase plan done? Timing. It would have been very difficult and time was a factor. The setting up of auctions and the implementation of it would have been a bureaucratic nightmare. Paulson and Bernanke took the capital infusion option not because it was “the best idea”, but because it was the “best idea we can do today”.
If you read the Treasury’s term sheet and watch the Paulson video here, it is clear that Paulson does not think this idea is the best one, just the one we can do this minute.
Had the market not cratered last week, this plan would not have been unveiled.
The following bank have already agred to the program: Goldman Sachs Group Inc. (GS), Morgan Stanley (MS), J.P. Morgan Chase & Co. (JPM), Bank of America Corp. (BAC), Merrill Lynch (MER), Citigroup Inc. (C), Wells Fargo & Co. (WFC), Bank of New York Mellon (BK), and State Street Corp. (STT).
None of these banks were in danger of being below required capital ratios…
All have uncertain loan losses coming up….they still do…
What this plan did as diminish irrational fear in the market banks were going to fail. You saw that relief in yesterday’s rally. What it will not do is lead them to increase lending dramatically and that will hamper any economic recovery. That is where we sit now
I hope Schumer is as willing in the future to step up and take credit for the economic flaccidity this plan will induce just as eagerly as he was today in standing up to take credit for its implementation.
Disclosure (“none” means no position):Long WFC, C, GS, none
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Here It Is: The TARP Program
The following bank have already agreed to the program: Goldman Sachs Group Inc. (GS), Morgan Stanley (MS), J.P. Morgan Chase & Co. (JPM), Bank of America Corp. (BAC), Merrill Lynch (MER), Citigroup Inc. (C), Wells Fargo & Co. (WFC), Bank of New York Mellon (BK), and State Street Corp. (STT). Video at end.
October 14, 2008
HP-1207
Treasury Announces TARP Capital Purchase Program Description
Washington- Treasury today announced a voluntary Capital Purchase Program to encourage U.S. financial institutions to build capital to increase the flow of financing to U.S. businesses and consumers and to support the U.S. economy.
Under the program, Treasury will purchase up to $250 billion of senior preferred shares on standardized terms as described in the program’s term sheet. The program will be available to qualifying U.S. controlled banks, savings associations, and certain bank and savings and loan holding companies engaged only in financial activities that elect to participate before 5:00 pm (EDT) on November 14, 2008. Treasury will determine eligibility and allocations for interested parties after consultation with the appropriate federal banking agency.
The minimum subscription amount available to a participating institution is 1 percent of risk-weighted assets. The maximum subscription amount is the lesser of $25 billion or 3 percent of risk-weighted assets. Treasury will fund the senior preferred shares purchased under the program by year-end 2008. Institutions interested in participating in the program should contact their primary federal regulator for specific enrollment details.
The senior preferred shares will qualify as Tier 1 capital and will rank senior to common stock and pari passu, which is at an equal level in the capital structure, with existing preferred shares, other than preferred shares which by their terms rank junior to any other existing preferred shares. The senior preferred shares will pay a cumulative dividend rate of 5 percent per annum for the first five years and will reset to a rate of 9 percent per annum after year five. The senior preferred shares will be non-voting, other than class voting rights on matters that could adversely affect the shares. The senior preferred shares will be callable at par after three years. Prior to the end of three years, the senior preferred may be redeemed with the proceeds from a qualifying equity offering of any Tier 1 perpetual preferred or common stock. Treasury may also transfer the senior preferred shares to a third party at any time. In conjunction with the purchase of senior preferred shares, Treasury will receive warrants to purchase common stock with an aggregate market price equal to 15 percent of the senior preferred investment. The exercise price on the warrants will be the market price of the participating institution’s common stock at the time of issuance, calculated on a 20-trading day trailing average.
Companies participating in the program must adopt the Treasury Department’s standards for executive compensation and corporate governance, for the period during which Treasury holds equity issued under this program. These standards generally apply to the chief executive officer, chief financial officer, plus the next three most highly compensated executive officers.
The financial institution must meet certain standards, including: (1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) prohibition on the financial institution from making any golden parachute payment to a senior executive based on the Internal Revenue Code provision; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive. Treasury has issued interim final rules for these executive compensation standards.
Nine large financial institutions already have agreed to participate in this program, moving quickly and collectively to signal the importance of the program for the system. These healthy institutions have voluntarily agreed to participate on the same terms that will be available to small and medium-sized banks and thrifts across the nation.
Here is the term sheet for companies using it:
Video:
Disclosure (“none” means no position):Long WFC, C, GS, none
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Here it is for those who were wondering…
October 14, 2008
2008-10-14-9-5-0-19994
Treasury Announces Executive Compensation Rules Under the Emergency Economic Stabilization Act
Washington- The U.S. Treasury Department today announced the development of three programs under the Emergency Economic Stabilization Act and corresponding executive compensation and corporate governance standards. These standards generally apply to the chief executive officer, chief financial officer, plus the next three most highly compensated executive officers. Any firm participating in the following three programs will be required to adopt these standards.
Troubled Asset Auction Program- Treasury continues to develop a program to purchase troubled mortgage-related assets through an auction format, and will be issuing program guidance for this program in the coming weeks. Treasury is issuing guidance for the executive compensation requirements that will apply to firms participating in this program. As prescribed by the Act, any financial institution that sells more than $300 million of troubled assets to the Treasury via an auction would be prohibited from entering into new executive employment contracts that include golden parachutes for the term of the program. Treasury is releasing Treasury Notice 2008-TAAP regarding this restriction. Furthermore, under the Act, (1) the financial institution may not deduct for tax purposes executive compensation in excess of $500,000 for each senior executive, (2) the financial institution may not deduct certain golden parachute payments to its senior executives and (3) a 20-percent excise tax will be imposed on the senior executive for these golden parachute payments. Treasury is releasing I.R.S. Notice 2008-94 regarding these new tax rules.
Capital Purchase Program- The Treasury is issuing guidance for this program designed to provide equity capital under standardized terms directly to certain financial institutions, further strengthening their capital structures to facilitate their continued lending in the capital markets. Any financial institution participating in the Capital Purchase Program will be subject to more stringent executive compensation rules for the period during which Treasury holds equity issued under this program. The financial institution must meet certain standards, including: (1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate; (3) prohibition on the financial institution from making any golden parachute payment to a senior executive based on the Internal Revenue Code provision; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive. Treasury is issuing interim final rules for these executive compensation standards.
Programs for Systemically Significant Failing Institutions- The Treasury Department is currently developing a third program to potentially provide direct assistance to certain failing firms on terms negotiated on a case-by-case basis. Treasury is issuing guidance for the executive compensation standards that will apply to the firms participating in such programs and their senior executives (Treasury Notice 2008-PSSFI). These standards are similar in all respects to the Capital Purchase Programs executive compensation standards described above, with one significant difference. In situations where Treasury provides assistance under the systemically significant failing institutions programs, golden parachutes will be defined more strictly to prohibit any payments to departing senior executives.
Disclosure (“none” means no position):
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Graham and Doddsville Newsletter
Here is the link for the latest issue from Columbia Business School.
Featured are Warren Buffett, Mohnish Pabrai and Bill Ackman
FULL ISSUE. PDF
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The Paulson Plan (video)
Press conferences coming this morning at 8am..
Part 1:
Part 2:
The FDIC deposit insurance raise is a no brainer and should have been done years ago. This seems like a better way than just buying massive amounts of debt because it removes the “value” issue of the loans they were buying.
Disclosure (“none” means no position):
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Tuesday’s Links
Tolerance, TV, 1929, Election
– I love it …..liberal “tolerance” on display
– Best TV moment ever compliments of the Newlywed Game
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– A good election overview
Disclosure (“none” means no position):
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This is the fourth such purchase for Wells Fargo in the insurance field this fall.
Wells Fargo Insurance Services — part of Wells Fargo & Company (NYSE:WFC) — said today it has acquired the EMAR Group, one of the nation’s largest independently-owned commercial insurance agencies, headquartered in Livingston, New Jersey, with an office in Florida. Terms of the agreement were not disclosed.
Founded in 1971 by Emil Solimine in New Jersey, EMAR is a leading local agency in the Tri-state Region. It serves middle market and upper middle market clients as well as risk management customers. The agency works with businesses in diversified industries with a significant concentration in transportation, construction, real estate, and financial institutions industries. EMAR also has access to specialty market programs in small business niches including the limousine services and restaurant industries.
“Risk management is a key product area for our middle market customers and large corporate clients,” said Dave Zuercher, head of Wells Fargo’s International and Insurance Services Group. “EMAR will significantly expand and build on our commercial insurance capabilities on the east coast. It’s another opportunity for Wells Fargo to gain new customers and to achieve our vision of satisfying all of our customers’ financial needs and help them succeed financially.”
“Joining up with the EMAR team will increase our presence significantly in New Jersey,” said Gary Tully, head of Wells Fargo Insurance Services Northeast, Inc. “With our recent acquisition of Herder-Terricone Associates in Three Bridges and the expansion of Wells Fargo Regional Commercial Banking in the Tri-state region, we’re in a strong position to meet even more of the financial needs of New Jersey companies and consumers.”
“We’ve reached a point in the development of our agency that the breadth of products and services provided by Wells Fargo will help bring our business to the next level,” said Solimine. “The majority of our customers have been with us a long time because we bring honest, experienced people to every relationship, a practice we know we can continue as part of Wells Fargo.”
Solimine and his son, David, will continue bringing the EMAR relationship business model to companies in Florida and New Jersey.
Wells Fargo Insurance Services, Inc. (wellsfargo.com/wfis) is the fifth-largest insurance brokerage in the world with 170 offices in 37 states. Its 7,200 insurance professionals place $11.5 billion of risk premiums with expertise in property, casualty, benefits, international, personal lines and life products.
This current banking malaise will pass and when it does, after the Wachovia (WB) buy and these insurance moves, Wells Fargo will be a monster.
JP Morgan (JPM) will be the class of the industry and Citi (C) and Bank of America (BAC) will be the second tier institutions. BAC will struggle with the ramifications of the awful decision to double down on a losing multi billion dollar investment in Coutrywide (CFC) and Citi, well until Citi becomes far less bloated, it will struggle.
Disclosure (“none” means no position):Long WFC, C, none
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May not sound like a lot but it could boost eps 10%.
Silicon.com Reports
Fibreglass giant Owens Corning claims it will boost company profits by $20m in one year using a new data warehouse and business intelligence system.
The company has spent $3m on the 60 day implementation of the data warehousing system from Kalido, which was spun-off from its parent company Shell last year.
Klaus Mikkelsen, global development leader of information systems at Owens Corning, told silicon.com the system will help improve profit margins by some $20m.
“We expect that to be over the first 12 months of operation,” he said.
The new technology will underpin Owens Corning’s Information Access Project (IAP), which will provide more accurate reporting and analysis of which business processes have the biggest impact on gross margins.
Mikkelsen said the IAP has already been used to identify products that were being sold at a loss or very low margins and provided data for managers to identify the problems.
The system is now used by 600 employees and Mikkelsen said the functionality will also be extended throughout the year.
“One of the things we have just completed is the sourcing of sales data. We have also moved forward with sales planning and production statistics,” he said.
Owens Corning (OC) has done a brilliant job diversifying away from housing to composites. Any stabilization in housing will lead to a surge in eps as composite are growing double digits.
Disclosure (“none” means no position):Long OC
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Obama’s Tax Plan: "Spread Wealth Around"
Don’t believe me……in his own words..
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Marc Faber "Don’t Get Optimistic"
Faber, editor of the “Gloom and Doom” reports talks about the current state of affairs. He says US Treasuries are the next “shoe to drop”
Part 1
Part 2
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It’s Our Fault, Not Theirs
I have been reading like a fiend lately on 1929, the 60’s, late 90’s and obviously today. One theme is a constant….greed, margin, debt then a reckoning..
Each episode had its roots, not in corporate greed or lack of “regulation”, although there were certainly elements of them in each, but of the greed of the public. What follows is a basic overview of each and their similarities.
The 1920’s featured the barber and the paperboy speculating on stocks with money they did not have using margin. It was common for people to buy stock using 90% to 95% borrowed money. This rush of investor funds drove prices up to stratospheric levels. When they peaked and inevitably fell, margin calls exacerbated to fall and wiped out investors.
The 1960’s featured investors blindly throwing money into mutual funds at unprecedented rates. Again, the rush of funds drove asset levels up to untenable levels. The result was a fall in the market and investor disillusionment in stocks, a psychology that lasted until the 1980’s.
The late 1990’s again featured investors who had never thought about the stock market wildly chasing stock prices to ever higher levels. Conversation everywhere was about the latest IPO issue and newest tech stock that was rocking upward for no fundamental reason. Everyone knew someone who “hit it big” in a tech stock and people rushed to join the fray. Of course eventually the necessary funds for continued stock appreciation ran out as the economy began to slow an then stock prices began to fall. Again, as huge amounts were bought on margin in companies that had no earnings (or any prospects for them), the fall was fast and furious.
Now…one word, housing. Rather than stock prices being inflated, now it is housing and consumers borrowing far too much to purchase homes. Yes, the banks were complicit in their lax lending standards but when all is said and done, it is you who sign on the bottom line buying the 4,000 sq. ft. house with granite kitchen counters when all you really could afford was 2,000 sq. ft. and formica. The collapse in housing has caused a liquidation of the most salable asset, stocks. Investors selling stocks for liquidity and redemptions at mutual funds have cause a rush to sell and stock price collapse.
In all the above episodes there are outlying factors many of which has to do with the gov’ts response at the time, corporate scandals, accounting “issues” and others. But, the constant theme in them all and the primary reason for the inflated bubbles that then popped was the consumer and their borrowing. Without the consumer rushing blindly and without hesitation into the hot investment, the rise in prices that then collapsed would not have been possible. Whether it be margin for stocks or mortgages for houses, investors continually have borrowed to excess chasing rising prices that when they began to fall, took investors with them.
Will “we learn” and not repeat these mistake again? No. In housing perhaps as prices there ought to take a decade or more to reach prior levels and that by itself ought to dampen enthusiasm for the asset class. As for stocks? If history tell us anything, it will happen again. Here is the scenario. Burned investors will sit idly by as stocks eventually bottom and begin their ascent. Fear of a repeat will keep them out of the market initially though. Now, they have will have been hearing from various sources that they ought to be buying now but fear caused them to sell.E veryone will now know somebody will have been buying now (I am) and they will be hearing stories of the wealth it will have created or the paper lossed that were erased and turned into gains.
Like a dog looking at another dog with a bone, the one thing that is irresistible to an investor is watching another make money while they sit on the sidelines (the dog will always drop their bone for the other). Regretting they “got out of the game” they will jump back in…fast and we will start the whole dance over again.
How long will it take? Who knows. One thing is for sure. The internet is allowing information to travel at speeds measured in seconds, not days or weeks like in the past. I think that will have the effect of shortening the time between and the steepening of the ascension and descent of prices in these episodes. It also means that for the investor who can take a step back and see where we are in the cycle, there is plenty of money to be made and losses to be avoided.
Yes, there are fundamental reasons why we are where we are today but the current sell-off is just way overdone. I know people who are pulling money out of stocks “because”. That is the reason, “because”. That is just unadulterated fear and void of any rational thought. Times like this offer spectacular opportunities for those will to step in and buy. Stocks are off 40% for the year. Thinking of buying a summer home? Many such areas are selling those home 40% to 50% cheaper that they did a year ago.
There are tons of opportunities out there….if you have the patience and clarity of thought. If you think I am full of it, just listen to history’s greatest investor, Berkshire’s (BRK.A) Warren Buffett. He has always said “buy fear and sell greed”. If you think this is not fear in the market, think again. What has Warren been doing? Buying..in a big way. Buying stakes in Dow Chemical (DOW), Goldman Sachs (GS), GE (GE) and others for a cool $40 BILLION in investments..
Warren has watched his investments in Coke (KO), Wal-Mart (WMT) and Home Depot (HD) fall just like you have have. The difference is that he has not sold and cemented those losses. He has held on and will pocket the rebound in prices. He has also realized that when things are on sale, it is then the best time to be a buyer.
Here is the suggested reading list
“Once in Golconda” (1929)
“The Go-Go Years” (60’s)
“Origins of the Crash” (Late 90’s)
Mr. Market Miscalculates (today)
Disclosure (“none” means no position):Long GS, DOW, GE, None
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Monday’s Links
Without question the strongest Fed Head we have had talks about the current crisis and possible solutions. This is a great discussion..