ValuePlays

Barney Frank, Poverty, Housing, Rally

– “No housing bubble”

– This is what “poor” is. It isn’t not being able to afford a 3000 sq. ft. house

– Can’t sell ’em? Wreck ’em.

– More doubts

Disclosure (“none” means no position):

This filing is a must read…it is only 11 pages, please read it.

All politics aside, this is serious stuff and the case has a huge effect going forward. IF, the government is allowed to redistribute the capital structure in a Chapter 11 proceeding as it sees fit, then the “contract” debtholders hold in purchasing seniority is no longer valid. If that is true, then the lending costs and availability of credit for all but the strongest institutions are both in for stunning negative changes. If “senior” debt instruments can now be treated equally with equity and subordinate debt, then why hold senior at an lower interest rate?

To now make up for this lowered safety, either the interest rate must now go up dramatically OR the debt will simply not be purchased. Both are very adverse for those issuing debt.

Do I care about Chrysler? NO. What I do care about is laws we have in place being respected and enforced. Would you buy senior debt in a troubled company knowing there is a case in which it’s place in the equity structure could be erased? There currently is debt in troubled companies I am looking at BUT now am not sure of the rules. If I do not know what the rules are, why would I even look at it?

This case has ramifications far beyond this group of lenders. For this reason, it bear very close watching.

From Page 8

The sale of assets by the Debtors to New Chrysler is not a sale that was
negotiated by independent parties at arm’s length. Rather, it is a sale that was orchestrated entirely by the Treasury and foisted upon the Debtors without regard to corporate formalities, the fiduciary duties of the Debtors’ officers and directors or the other important checks and balances typically found in good faith sales. Indeed, well before the filing, the Debtors had ceased to function as an independent company and had become an instrumentality of the government.

President Obama, in his public statements, made it clear that the Debtors would be required to pursue the sale transaction with Fiat and ordered the Debtors to cease all efforts to pursue any other transaction. Both actions are clearly inconsistent with the requirements of a good faith sale. And, the government exerted extreme pressure to coerce all of the Debtors’ constituencies into accepting a deal which is being done largely for the benefit of unsecured creditors at the expense of senior creditors. Under the circumstances, the sale transaction does not pass muster under section 363(n), let alone section 363(m), and New Chrysler simply cannot establish that it is a good faith purchaser in connection with the proposed sale.

FULL FILING:
Chrysler Non-TARP Lender File Objection

Disclosure (“none” means no position):

Aaron Elstien has an interesting piece on Wilbur Ross in Crain’s NY.

Reprinted with permission:

‘King of Bankruptcy’ moves into toxic mortgages. Hope that proves wiser than his auto-biz bets

By Aaron Elstein
Wilbur Ross, who famously pocketed hundreds of millions turning around bankrupt steel mills, is moving to dramatically different turf. Last week, the “King of Bankruptcy” unveiled plans to invest up to $1 billion in distressed mortgages.

It’s worth a shot. After all, little else of what Wall Street’s top vulture has feasted on since his steel coup has turned out very well. The auto-parts company Mr. Ross created nearly four years ago has seen its revenue sink and its prospects darkened by Chrysler’s bankruptcy filing last week. His coal-mining outfit has suffered three consecutive years of losses and now faces a cash crunch. He acquired a stake in a bond insurer last spring, and has seen its stock price fall 60% since.

“I have a heck of a lot of respect for the guy,” says Nicholas Colas, chief market strategist at brokerage firm BNY ConvergEx. “But there’s no doubt he’s got a bunch of businesses in really tough shape now.”

It’s a humbling moment for Mr. Ross, a turnaround specialist for more than 30 years. He sealed his Midas-like reputation when he invested $325 million in bankrupt steelmaker LTV in 2002 and created International Steel Group. Thanks to booming demand—and Bush administration tariffs on imported steel—he took the company public a year later and then sold it the following year for $4.5 billion, reportedly reaping a quarter-billion dollars for himself.

He further boosted his fortune, recently estimated by Forbes at $1.8 billion, when he sold his boutique investment firm WL Ross & Co. in 2006—a market top, in hindsight—for $375 million.

Life since the steel deal, however, illustrates the danger in the game the 71-year-old Mr. Ross plays: the risk of buying into troubled businesses too early. Mr. Ross, who declined to comment for this article, is hardly the only bottom-feeder to run into difficulties. Highly regarded investment firms Warburg Pincus and Davis Advisors, for example, suffered last year from ill-timed bets in MBIA and Merrill Lynch, respectively.

“Everybody I’m aware of took big losses in “08,” says Robert Miller, chief executive of restructuring advisory firm Miller Mathis & Co.

Game gets harder

Yet Mr. Ross may also be struggling because the game he’s played best—buying bankrupt companies at rock-bottom prices—is getting harder. Fewer businesses are restructuring under bankruptcy-court protection, but instead are heading straight to liquidation, a result of the dismal economy and reluctance on the part of cash-strapped banks to lend. Mr. Ross must look farther afield than before for distressed investments.

Perhaps that explains the industrialist’s move into distressed mortgages. It also helps that his latest move—if the government lets him make it—looks like a can’t-lose proposition. Under the terms of the Obama administration’s public-private investment program, which Mr. Ross is seeking to join, the government, alongside private money managers, will buy toxic assets from banks and minimize investors’ losses.

A windfall would be most welcome as Mr. Ross grapples with the enormous challenges faced by International Automotive Components Group, a car-parts maker he cobbled together beginning in 2005 by acquiring pieces of bankrupt manufacturer Collins & Aikman and other concerns. Oops: IAC’s revenue sank $800 million last year, to $4.5 billion, and the company is looking at an even bleaker 2009, with U.S. auto production free-falling 50% in the first quarter.

Chrysler contracts torn up?

Now comes Chrysler’s bankruptcy. IAC, which makes instrument panels and flooring for the Town & Country minivan, could see its contracts with the automaker torn up in court. An IAC spokesman says it’s premature to assess how Chrysler’s bankruptcy could affect the supplier, adding that the federal government’s $5 billion Auto Supplier Support Program should ensure that IAC gets paid what it’s owed. He declined to say whether IAC is profitable.

Mr. Ross’ International Coal Group (ICO) is also struggling. It was created when he acquired a mining outfit out of bankruptcy for $290 million in 2004 and was taken public a year later in a $231 million offering. The West Virginia-based company has posted losses for three consecutive years, for a total $180 million worth of red ink.

Its stock, which debuted at $11 a share, now fetches about $2.50 amid declining demand for the coal used to make steel in cars and growing questions from credit raters over the company’s ability to maintain sufficient cash.

Mr. Ross’ buy-low instincts betrayed him last spring, as well, when he invested $250 million in bond insurer Assured Guaranty (AGO). Unlike in his previous deals, Assured Guaranty wasn’t in bankruptcy proceedings, and Mr. Ross paid $23.47 a share—market price at the time—for his 13% stake. The insurance stock has since declined to about $10 a share. Last September, the company said Mr. Ross would increase his stake to 18%, but he hasn’t done so yet because, a spokeswoman says, Assured Guaranty is in the process of acquiring a rival.

Rolling snake eyes so many times has taken a toll on Mr. Ross’ investors, which include major pension funds like the California Public Employees’ Retirement System. His $4 billion WLR Recovery Fund IV, which closed to new investors in January 2008, posted a decline of 17% through last Sept. 30, according to CalPERS data.

In contrast, his funds raised in 1997 and 2002 generated returns of 35% and 82%, respectively. If CalPERS fears Mr. Ross is losing his touch, it isn’t saying so—at least, not publicly.

“Performance tends to be negative for younger funds since it takes a few years for them to ramp up,” a CalPERS spokesman says. “We of course communicate with them privately if we have concerns.”

While his auto plays are in trouble, I think Wilbur is going to hit a home run with his mortgage buys. The thing about these valueplays is that they take time to run their course. With these we’ll have to take a look back a few years from now in order to make an accurate assessment. My money is on Wilbur (figuratively, not literally)

Disclosure (“none” means no position):

Dodd, “Green shoots”, Caffeine, Bolling

– Trails “3 guys nobody knows” and a bag of socks in his re-election bid

– Nope

– The withdrawal is real

– What the car team drives

Disclosure (“none” means no position):

William D. Cohan, author and former Wall Street veteran, speaking to Blaise Zerega, President and CEO of FORA.tv, about his book House of Cards: A Tale of Hubris and Wretched Excess on Wall Street.

Cohan demonstrates why the seemingly invincible Wall Street money machine came crashing down. He chronicles the swashbuckling corporate culture of Bear Stearns, the strangely crucial role competitive bridge played in the company’s fortunes, the brutal internecine battles for power, and the deadly combination of greed and inattention that helps to explain why the company’s leaders ignored the danger lurking in Bear’s huge positions in mortgage-backed securities.

Disclosure (“none” means no position):

Frank Beckman talks with Tom Lauria, bankruptcy attorney at White & Case, who represents a group of lenders that object to the Chrysler sale.

Folks, this is rather sobering news for both contract law and for debt holders in any industry that may fall into a perilous condition. If the Federal government can arbitrarily step in and reallocate the capital structure of a company, then the current set up of any company is meaningless.

Disclosure (“none” means no position):

Talking about my recent entry into USO options and the reason I’m, avoiding DXO (for now)

More Video on Wall St. Media

Disclosure (“none” means no position):Long USO (through options), none

John Bogle, founder and retired CEO of The Vanguard Group, assess governance practices at public corporations and how they affect the underlying value of a firm’s equity.

He also discusses if the “free market” has corroded “moral character” and how the recent structural changes in the character of the financial and capital institutions have contributed to the current financial crisis.

Disclosure (“none” means no position):

Have you ever had a relative/pets in the hospital with a serious illness? Initially it looks like the situation is dire and then for whatever reason the rapid descent they were in seems to relent? Has a doctor in that situation ever told you “they are getting better”? Me either..

Thus is the current economic condition. After successive -6% quarterly GDP figures, estimates are for -2% to -4% in Q2. This is being taken by some to mean the economy is “getting better”. No, it isn’t. It just is not “worsening as fast”. Q1 GDP of -6.1% means it was 6.1% worse than Q4 2008. A drop of anything in Q2 means Q2 was worse than Q1 and the decline continues. Any negative number means the economy is still contracting (worsening). Measuring it isn’t like earnings that are compared for like periods year to year. GDP is a rolling, continuous number.

Think about it like this. It is like having three heart attacks today and only two tomorrow, would the doctor say tomorrow “you are getting better”? Of course not. You still sick and there is still a very large problem.

Now there are those who will say I see the glass half empty. My retort would be that the glass has a leak, just because the water is leaking out more slowly, does not mean it is filling (the analogy is the leaking is the contracting economy and the filling is growth). The half empty argument is one to be had when we approach 0% GDP or only marginally negative.

What is more likely to me is that we are approaching a period of prolonged economic malaise. Very little if any growth, and this is important, from already severely reduced levels. While sitting here is better than a continued decline, I’m not sure is warrants the single best two months performance in the history of the US stock market.

Put in perspective. 40% of this market run up has been due to the performance of financial stocks. These are companies that without Federal aid or adjusted accounting rules would have reported far different results. That does not qualify for “getting better” in my book.

Now, I hope I am wrong. I am not “short” (although I own a tiny bit of SH to take the bite out of any large decline) and talking my book. Just giving reasons I am more hesitant that most to be putting fresh money to work is anything other than commodities or deep value stuff.

Are there some positive signs out there? Sure. I would counter that after the free fall we had at the end of 2008, any economic activity is wonderful news. That still does not equate to “recovery”. I think we may need to get used to the fact that we may be entering a period of a “new normal”. Whether that is good or bad is another debate, I think it may be inevitable.

With that being said, I’m not sure the market recognizes that yet…

Disclosure (“none” means no position):

Here we go again….

First, read this post for some reasoning

Some additional thoughts:

1- If successive quarters of -6% US GDP and a global recession cannot get oil to stay below $45 – $50, I’m not sure what can

2- The world IS NOT a more peaceful place

• Iraq still dangerous
• Afghanistan a mess
• Pakistan teetering 
• Iran/Israel about to come to head. Netenyahu is coming to the US in May to give Obama an ultimatum (not billed that way buit it is none the less), “Take care of Iran’s nukes or we will”. Iran had vowed to destroy Israel and now may have nuclear capabilities. Only a suicidal leader would sit back and let that continue. Netenyahu lacks Europe’s infatuation with Obama and has had a lifetime of reality in the region to counter Obama’s “I know how to deal with this” mentality. He is staring a catastrophic threat in the face and if anyone thinks he can be told to “sit back and relax”, I would have to question their knowledge of the man and the region. 

3- Supply
Looked like world supply is cratering, Mexico continues to run out faster than anyone expected and Canada’s tar sands are not profitable with oil at these levels.

Talkoing to Douglas about News Corp (NWS)

Disclosure (“none” means no position):None