Category: Articles

With all the myopic focus on Merrill (MER), Lehman (LEH), AIG (AIG), Fannie (FNM), Freddie (FRE) the last 2 weeks days, there are some other things going on..

– Did you hear about Ike? Can’t help but notice the apathy in the media towards those affected

– Oil looks to fall below $90

– ABC’s Brian Ross appears to think Sarah Palin is the only candidate in the election.

– The NFL Season has started (Thank God)…..

– The Yankees season is officially over…..

– Housing? Still sucks…

Disclosure (“none” means no position):
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It’s official, AIG (AIG) will not go under. Here are the details…

Fed Release

The Federal Reserve Board on Tuesday, with the full support of the Treasury
Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.

The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.

The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.

The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility.

The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.

This had to be done and it is being done in a way that current shareholders, will see little benefit for quite some time (if ever if they bought shares last year). The market really did hold its own through Bear Sterns (BSC), Fannie (FNM), Freddie (FRE) , Lehman (LEH) and Merrill (MER). There are, however, only so many shots anyone can take before throwing in the towel and AIG may just have been that final shot for the market and its participants.

What does remain to be seen is who starts picking up pieces of it now that the process will begin.

No word yet on any management changes. More tomorrow..

Disclosure (“none” means no position):
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The Fed did not lower rates today at 2:15.

The Fed said:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Ms. Cumming voted as the alternate for Timothy F. Geithner.
2008 Monetary Policy Releases

Release:

Disclosure (“none” means no position):
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Have finally found a way to post trade info for all…Twitter.

Just sign up for a Twitter account (it takes 15 seconds) and then “follow” me. Any trades I make will be posted there along with other tidbits. It is a great way to communicate also.

Now, if you download the free Twirl app to your desktop, you can follow live.

I really recommend it.

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It would be catastrophic to State’s already tapped out budgets.

What do I mean? In Massachusetts, if an insurer goes under, its claims go to an “insolvency fund“. Most State have similar statutes. An AIG (AIG) collapse, being the largest insurer, would destroy the value of these funds as they are not sufficiently capitalized to handle a collapse the size of AIG, nor are they staffed to handle to onslaught of claims that would then flow their way.

The Massachusetts Insurers Insolvency Fund (the “Fund”), created by Mass. Gen. L. c. 175D, is a nonprofit unincorporated association of all insurers writing liability and property insurance in the Commonwealth. It is available to settle up to $300,000 per claim that arises from an insurance policy issued by an insolvent insurer. The Fund’s obligations and expenses are met by mandatory contributions by all liability and property insurers who write insurance in the Commonwealth.

The States would then be on the handle for these claims while, they waited perhaps a decade to e reimbursed from the bankruptcy proceeding. State do have the money now to repair roads and fund schools, do we really think they can handle the trillion dollars of liabilities AIG has? Me either. 25 states currently operate in a deficit, there isn’t any more money from them to handle these claims.

Watch NY Govenor David Patterson on CNBC this morning:

Patterson almost gets into it but avoids the “forget about AIG, think about us” statement.

I bought some AIG at $2.35 today, a small amount since it is still very risky. I just do not see the States, and by association, Paulson, allowing it to go under. Whatever it costs them to keep it solvent it far less than a failure will cost them.

We’ll see….fortunately with this trade, it will not take very long to know how it worked out..

Disclosure (“none” means no position):
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It would be catastrophic to State’s already tapped out budgets.

What do I mean? In Massachusetts, if an insurer goes under, its claims go to an “insolvency fund“. Most State have similar statutes. An AIG (AIG) collapse, being the largest insurer, would destroy the value of these funds as they are not sufficiently capitalized to handle a collapse the size of AIG, nor are they staffed to handle to onslaught of claims that would then flow their way.

The Massachusetts Insurers Insolvency Fund (the “Fund”), created by Mass. Gen. L. c. 175D, is a nonprofit unincorporated association of all insurers writing liability and property insurance in the Commonwealth. It is available to settle up to $300,000 per claim that arises from an insurance policy issued by an insolvent insurer. The Fund’s obligations and expenses are met by mandatory contributions by all liability and property insurers who write insurance in the Commonwealth.

The States would then be on the handle for these claims while, they waited perhaps a decade to e reimbursed from the bankruptcy proceeding. State do have the money now to repair roads and fund schools, do we really think they can handle the trillion dollars of liabilities AIG has? Me either. 25 states currently operate in a deficit, there isn’t any more money from them to handle these claims.

Watch NY Govenor David Patterson on CNBC this morning: (video coming in updated post later)

Patterson almost get into it but avoids the “forget about AIG, think about us” statement.

I bought some AIG at $2.35 today, a small amount since it is still very risky. I just do not see the States, and by association, Paulson, allowing it to go under. Whatever it costs them to keep it solvent it far less than a failure will cost them.

We’ll see….fortunately with this trade. it will not take very long to know how it worked out..

Disclosure (“none” means no position):Now Long AIG,
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Did anyone else the first financial institution to report its exposure to Lehman (LEH) was Wells Fargo (WFC), and they did so just hours after Lehman was toast?

Wells Fargo Reported in an SEC filing:

In connection with the filing today by Lehman Brothers Holdings Inc. (Lehman Brothers) of a Chapter 11 bankruptcy petition, Wells Fargo & Company (the Company) will record other-than-temporary impairment and take a non-cash charge to earnings in third quarter 2008 for investments in senior unsecured notes and perpetual preferred securities issued by Lehman Brothers. The Company’s investments in the notes and preferred securities are included in securities available for sale at a cost of approximately $90 million and $109 million, respectively. The notes currently trade at 25-30 cents on the dollar. The preferred securities currently trade at less than one percent of par value. The Company estimates that as of September 12, 2008, it had approximately $50 million of unsecured counterparty exposure to Lehman Brothers. The Company has no direct lending exposure to Lehman Brothers, and the Wells Fargo Advantage Money Market Funds do not have any direct exposure to Lehman Brothers

In other words, the Lehman filing is essentially irrelevant ti Wells Fargo and its shareholders. It kind of rains on the “systemic risk” scenario being bantered about on TV by the talking heads. Perhaps the risk is only systemic to those institutions that were careless, and that those who were not will simply end up in a better position after all this is over?

It does give the “let them fail” camp more ammo. This is not to say what is happening is a good thing, it is to say perhaps it is not the end of days scenario we keep hearing about.

Disclosure (“none” means no position):Long WFC, none
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So, the “King of the Hill” for investment banks reported this morning and Goldman Sachs (GS), is still at the top of the heap, it is at the top of a much smaller heap.

Goldman reported “net revenues of $6.04 billion and net earnings of $845 million for its third quarter ended August 29, 2008. Diluted earnings per common share were $1.81 compared with $6.13 for the third quarter of 2007 and $4.58 for the second quarter of 2008. Annualized return on average tangible common shareholders’ equity (1) was 8.8% for the third quarter of 2008 and 16.3% for the first nine months of 2008. Annualized return on average common shareholders’ equity was 7.7% for the third quarter of 2008 and 14.2% for the first nine months of 2008.

Net Revenues

Investment Banking
Net revenues in Investment Banking were $1.29 billion, 40% lower than the third quarter of 2007 and 23% lower than the second quarter of 2008. Net revenues in Financial Advisory were $619 million, 56% lower than a particularly strong third quarter of 2007, primarily reflecting a decrease in industry-wide completed mergers and acquisitions. Net revenues in the firm’s Underwriting business were $675 million, 8% lower than the third quarter of 2007, due to lower net revenues in equity underwriting, primarily reflecting a decrease in industry-wide initial public offerings. Net revenues in debt underwriting were essentially unchanged from the third quarter of 2007. The firm’s investment banking transaction backlog increased during the quarter.

Trading and Principal Investments
Net revenues in Trading and Principal Investments were $2.70 billion, 67% lower than the third quarter of 2007 and 52% lower than the second quarter of 2008. Net revenues in Fixed Income, Currency and Commodities (FICC) were $1.60 billion, 67% lower than a very strong third quarter of 2007, primarily reflecting particularly weak results in credit products and mortgages, which were adversely affected by broad-based declines of asset values. Credit products included very weak results from investments and a loss of approximately $275 million (including hedges) related to non-investment-grade credit origination activities. Mortgages included net losses of approximately $500 million on residential mortgage loans and securities and approximately $325 million on commercial mortgage loans and securities. Commodities produced strong results, which were higher compared with the third quarter of 2007. Net revenues in currencies and interest rate products were also strong, although essentially unchanged from the third quarter of 2007. During the quarter, FICC operated in an environment generally characterized by wider mortgage and corporate credit spreads, volatile markets and lower levels of client activity.

Net revenues in Equities were $1.56 billion, 50% lower than a particularly strong third quarter of 2007. During the quarter, Equities operated in a challenging environment characterized by a significant decline in global equity prices, deleveraging by clients and generally lower client activity levels towards the end of the quarter. The decline in net revenues reflected very weak results in principal strategies. In addition, net revenues in derivatives were significantly lower than a particularly strong third quarter of 2007. Commissions were strong, but lower, compared with the third quarter of 2007. Principal Investments recorded a net loss of $453 million for the third quarter of 2008. These results included losses from corporate and real estate principal investments, partially offset by a $106 million gain related to the firm’s investment in the ordinary shares of Industrial and Commercial Bank of China Limited (ICBC).

Asset Management and Securities Services Net revenues in Asset Management and Securities Services were $2.05 billion, 4% higher than the third quarter of 2007 and 5% lower than the second quarter of 2008.

Asset Management net revenues were $1.13 billion, 6% lower than the third quarter of 2007, reflecting lower management and other fees, as well as lower incentive fees. The decrease in management and other fees primarily reflected the impact of one fewer week in the firm’s fiscal third quarter of 2008 compared with the third quarter of 2007. During the quarter, assets under management decreased $32 billion to $863 billion, due to $25 billion of market depreciation, primarily in equity assets, and $7 billion of net outflows. Net outflows reflected outflows in equity and money market assets, partially offset by inflows in alternative investment and fixed income assets.

Securities Services net revenues were $916 million, 20% higher than the third quarter of 2007. The firm’s prime brokerage business continued to generate strong results and customer balances were higher compared with the third quarter of 2007.”

With the recent demise of Lehman (LEH) and the sale of Merrill Lynch (MER) to Bank of America (BAC) the fact Goldman is still very profitable is a feat in and of itself. With that being said, a 70% fall in profits is lousy in anyone’s book no matter how you look at it.

The bright side is Goldman and Morgan Stanley (MS) are now the last men standing. One has to wonder though if the next run is on them? Goldman is too strong and can resist, Morgan, I just do not know. The scary thing is that I don’t think anyone knows.

One this that could assure either avoids a run would be the acquisition of a depository institution. That would provide a capital base and lessen the total dependence on capital markets.

Which one? Washington Mutual (WM)? JP Morgan (JPM) has been rumored to be sniffing around them but as of yet has not made a move. SunTrust (STI)? Possible..

Here is a thought, is there a reason the two could not merge? Clearly the end entity would be that much stronger and necessary than the two independent…

Just a thought..

Disclosure (“none” means no position):Long GS, none
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Rangell, Flip, Oprah, Gumshoe,

– Charlie, it isn’t about the money, it is all about your hypocrisy..

– This is going to be huge….it is my only complaint about my Blackberry

– So, Is Oprah playing politics or not? Seems to be she can no longer claim she isn’t….so much for “you go girl!!!”

– Make million curing cancer…..with a stock

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Wilbur Ross on Sunday talking Lehman (LEH), Merrill (MER) and Bank of America (BAC).

Disclosure (“none” means no position):None
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Not sure I get this one. When Bank of America CEO Ken Lewis bought Countrywide (CFC) earlier this year, he essentially doubled down on a bet he made last year when he invested $2 billion in the mortgage lender at prices double his eventual takeover price. Now, Merrill Lynch (MER).

After last night’s failure of Lehman Brother’s (LEH), I don’t think anyone can argue Merrill Lynch (MER) was not the next domino to fall. That being said, to buy them now, for a premium to it current valuation, smacks of deja vue of Lewis’s initial Countrywide investment.

While Merril is a premium name and we all know Bank of America wanted to expand into Merrill’s domain, one can’t help but wonder about the price being paid. Going into the weekend the future of Lehman was in doubt and patience on the part of Lewis could have saved shareholders billions.

After watching both Bear Sterns and Lehman, options for Merrill were minimal at best for this upcoming week. Even had Lehman got its lifeline, its effect on Merrill would have been minimal as it still would have been the next institution in the cross-hairs.

All in all the deal is a good one for Bank of America from an operational standpoint, it was just done a way too high a price…

Disclosure (“none” means no position):None
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