This interview in Jan. 2007, 60 minute long is interesting as it talks about his then new book “Corporate America Run Amok: The Battle for the Soul of Capitalism”. Given recent events, it may just be reading for today.
Ross says short selling “got excessive”. He also comments on current gov’t plan.
Disclosure (“none” means no position):
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Bernake’s Testimony
Here is Fed Chairman Ben Bernanke’s testimony (his prepared remarks) to be delivered later this morning.
Chairman Ben S. Bernanke
U.S. financial markets
Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate
September 23, 2008
Chairman Dodd, Senator Shelby, and members of the Committee, I appreciate this opportunity to discuss recent developments in financial markets and the economy. As you know, the U.S. economy continues to confront substantial challenges, including a weakening labor market and elevated inflation. Notably, stresses in financial markets have been high and have recently intensified significantly. If financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse.
The downturn in the housing market has been a key factor underlying both the strained condition of financial markets and the slowdown of the broader economy. In the financial sphere, falling home prices and rising mortgage delinquencies have led to major losses at many financial institutions, losses only partially replaced by the raising of new capital. Investor concerns about financial institutions increased over the summer, as mortgage-related assets deteriorated further and economic activity weakened. Among the firms under the greatest pressure were Fannie Mae (FNM) and Freddie Mac (FRE), Lehman Brothers, and, more recently, American International Group (AIG). As investors lost confidence in them, these companies saw their access to liquidity and capital markets increasingly impaired and their stock prices drop sharply.
The Federal Reserve believes that, whenever possible, such difficulties should be addressed through private-sector arrangements–for example, by raising new equity capital, by negotiations leading to a merger or acquisition, or by an orderly wind-down. Government assistance should be given with the greatest of reluctance and only when the stability of the financial system, and, consequently, the health of the broader economy, is at risk. In the cases of Fannie Mae and Freddie Mac, however, capital raises of sufficient size appeared infeasible and the size and government-sponsored status of the two companies precluded a merger with or acquisition by another company. To avoid unacceptably large dislocations in the financial sector, the housing market, and the economy as a whole, the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship, and the Treasury used its authority, granted by the Congress in July, to make available financial support to the two firms. The Federal Reserve, with which FHFA consulted on the conservatorship decision as specified in the July legislation, supported these steps as necessary and appropriate. We have seen benefits of this action in the form of lower mortgage rates, which should help the housing market.
The Federal Reserve and the Treasury attempted to identify private-sector approaches to avoid the imminent failures of AIG and Lehman Brothers, but none was forthcoming. In the case of AIG, the Federal Reserve, with the support of the Treasury, provided an emergency credit line to facilitate an orderly resolution. The Federal Reserve took this action because it judged that, in light of the prevailing market conditions and the size and composition of AIG’s obligations, a disorderly failure of AIG would have severely threatened global financial stability and, consequently, the performance of the U.S. economy. To mitigate concerns that this action would exacerbate moral hazard and encourage inappropriate risk-taking in the future, the Federal Reserve ensured that the terms of the credit extended to AIG imposed significant costs and constraints on the firm’s owners, managers, and creditors. The chief executive officer has been replaced. The collateral for the loan is the company itself, together with its subsidiaries.1 (Insurance policyholders and holders of AIG investment products are, however, fully protected.) Interest will accrue on the outstanding balance of the loan at a rate of three-month Libor plus 850 basis points, implying a current interest rate over 11 percent. In addition, the U.S. government will receive equity participation rights corresponding to a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders, among other things.
In the case of Lehman Brothers (LEH), a major investment bank, the Federal Reserve and the Treasury declined to commit public funds to support the institution. The failure of Lehman posed risks. But the troubles at Lehman had been well known for some time, and investors clearly recognized–as evidenced, for example, by the high cost of insuring Lehman’s debt in the market for credit default swaps–that the failure of the firm was a significant possibility. Thus, we judged that investors and counterparties had had time to take precautionary measures.
While perhaps manageable in itself, Lehman’s default was combined with the unexpectedly rapid collapse of AIG (AIG), which together contributed to the development last week of extraordinarily turbulent conditions in global financial markets. These conditions caused equity prices to fall sharply, the cost of short-term credit–where available–to spike upward, and liquidity to dry up in many markets. Losses at a large money market mutual fund sparked extensive withdrawals from a number of such funds. A marked increase in the demand for safe assets–a flight to quality–sent the yield on Treasury bills down to a few hundredths of a percent. By further reducing asset values and potentially restricting the flow of credit to households and businesses, these developments pose a direct threat to economic growth.
The Federal Reserve took a number of actions to increase liquidity and stabilize markets. Notably, to address dollar funding pressures worldwide, we announced a significant expansion of reciprocal currency arrangements with foreign central banks, including an approximate doubling of the existing swap lines with the European Central Bank and the Swiss National Bank and the authorization of new swap facilities with the Bank of Japan, the Bank of England, and the Bank of Canada. We will continue to work closely with colleagues at other central banks to address ongoing liquidity pressures. The Federal Reserve also announced initiatives to assist money market mutual funds facing heavy redemptions and to increase liquidity in short-term credit markets.
Despite the efforts of the Federal Reserve, the Treasury, and other agencies, global financial markets remain under extraordinary stress. Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy. In this regard, the Federal Reserve supports the Treasury’s proposal to buy illiquid assets from financial institutions. Purchasing impaired assets will create liquidity and promote price discovery in the markets for these assets, while reducing investor uncertainty about the current value and prospects of financial institutions. More generally, removing these assets from institutions’ balance sheets will help to restore confidence in our financial markets and enable banks and other institutions to raise capital and to expand credit to support economic growth.
At this juncture, in light of the fast-moving developments in financial markets, it is essential to deal with the crisis at hand. Certainly, the shortcomings and weaknesses of our financial markets and regulatory system must be addressed if we are to avoid a repetition of what has transpired in our financial markets over the past year. However, the development of a comprehensive proposal for reform would require careful and extensive analysis that would be difficult to compress into a short legislative timeframe now available. Looking forward, the Federal Reserve is committed to working closely with the Congress, the Administration, other federal regulators, and other stakeholders in developing a stronger, more resilient, and better regulated financial system.
When this is all said and done and history looks back at the current conditions, it is my opinion that Bernanke will be credited with avoiding a 100 year event.
Disclosure (“none” means no position):none
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FINALLY……Schoonover Gone….FINALLY
If Circuit city (CC) shareholders (what few there are left) aren’t dancing around like it is Mardi Gras’, there isn’t anything that will make them do it. After almost a year of my pleading, CEO Phillip “Phil The Shill” Schoonover has finally been asked to “pursue other opportunities”.
Schoonover, who served as chairman, president and chief executive officer, was brought in from Best Buy (BBY) four years ago to turn around Circuit City. Instead, the 48-year-old executive, who was named CEO two years ago, presided over a further deterioration in the company.
The latest blunder was when Blockbuster (BBI) offered to buy Circuit City for $1 billion, or about $6 to $8 a share (it currently trades under $2). It ended in July when the Blockbuster rescinded its offer after Circuit City inexplicably would not open its books. That gaffe followed the replacing (firing) of 10% of the highest-paid, most-seasoned staff in the company’s stores, in an effort to reduce costs. It turned out those “high paid” people were the only ones who actually knew how to sell the products in the stores. This was evident when only months later the begged them to return.
All these of course follow buyout offers of $17 and $23 a share that Schoonover and his merry band of shareholder wealth destroyers dismissed as “too low” and “inadequate”. Uh huh.
What is still disappointing here is that it took this long to finally pull the plug. It is a lesson in giving too much power to a person who has not earned it through results. Circuit city has been in a free fall for two years now and every move Schoonover made only increased the downward velocity. It is one thing to have a deteriorating operating environment, it is another entirely to have management mistake time after time cause conditions to worsen…..for two years!!
Now that this chapter is finally done. we can look at Circuit City. I believe it has a valuable brand, quality real estate in good locations and a valuable franchise in their “Fire Dog” operations. They have just been abysmally run…
I just need to find out more about the current “acting” CEO and wait for the replacement.
Disclosure (“none” means no position):none
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nothing to do with investing, but, its been a long time coming for my Buffalo Bills, New York’s ONLY team by the way.
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Tuesday’s Links
Race, Berkowitz, Whitman, Coaching
– This is at least the 3rd time Obama has used race-baiting
– Good article on Berkowitz, Winters and Whitman. Hat tip Vlado for the heads up
– Marty Whitman’s half full glass. Again, thanks Vlado
– Anyone need a “Career Transition” coach? Talk to someone who has done it
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S&P Puts AutoNation on "Credit Watch"
Let’s look at this because it really is……well…..odd at best/
First the details:
Standard & Poor’s put AutoNation (AN) on credit watch, citing the U.S. economy and falling auto sales. AutoNation ranks No. 1 on the Automotive News list of top 125 U.S. dealership groups selling over 325,000 new vehicles last year.
Currently AutoNation has a BBB- investment grade from S&P, one step above a junk. The credit watch status, issued Friday by New York analyst Nancy Messer, reflects “conditions that could pressure already weak credit measures well into 2009” and “increased uncertainty” about the length of the auto industry’s downturn and U.S. economic woes.
AutoNation’s corporate credit rating dropped to BBB- in April 2006. S&P changed the company’s outlook last November , from “stable” to “negative,” which indicates a one in three chance S&P will lower the credit rating in the future and the decision to put the company on “credit watch” indicates a 50-50 chance S&P will decrease the credit rating after credit rating officials meet with AutoNation executives in the next 90 days to discuss financial plans.
As of June 30, AutoNation had total balance sheet debt of $1.5 billion, not including floorplan debt, the memo said. In the second quarter of 2008, AutoNation reported the number of new vehicles sold in individual dealerships dropped 12.8 percent from the same quarter in 2007, to 73,545 units.
Now, let’s look sat it. AutoNation has, by far, the industry’s nest numbers and is solidly profitable. Sure profits has deteriorated (they would be expected to) but this company is by no means at risk of losing money.
This is in the face large dealerships across the country closing their doors, which, will increase AutoNations markets share. In the face of this they are opening Mercedes dealerships in Las Vegas, Orlando and a BMW dealership in_______.
Why wasn’t this action done in May? In May CEO Mike Jackson said the auto industry had been “turned upside down” by both high gas and contracting credit conditions, yet S&P was silent.
Now, for the first time in over a year we have some clarity out there that credit conditions may begin to relax as a result of the Treasury’s plan.
What is the worst happens? What if the S&P does take action and downgrade AutoNation to junk? Does it effect any debt covenants that could cause a liquidity issue? No. None of AutoNation’s debt covenants are tied to their debt rating.
Wouldn’t it have made more sense for S&P to have taken this action in May, and now that their is a bit of clarity in credit conditions (In May there was absolutely none) upgrade them from “negative” to “stable”? It seems that S$P is about 6 months behind the curve here. Although, if you have been alive the last year, this ought not be a surprise to anyone.
The bottom line here is the credit agencies are scrambling. They are publicly taking a fair amount of the blame for the current situation were are in and are now going into full “CYA” mode. Rather than looking at company’s individually, they are just painting entire industries with the same brush. This action follows similar ones at Ford(F) and GM(GM) and an expected one at Toyota (TM). This is a bit like saying Wells Fargo (WFC) and Washington Mutual (WM) are in the same boat. They clearly aren’t. If on looks at Berkshire (BRK.a) Buffett investment #2 CarMax’s (KMX) recent results, AutoNation’s are still superior.
Aren’t we talking about “risk of default” with the ratings anyway? How can they say a company like AutoNation is at a higher risk of default now? The company is very profitable and very cash flow positive. It is without question the cream of the crop in its industry. Think about it this way. If the #1 retailer is at risk of being “junk” then every automaker and every other retailer ought to already be. You can’t have #1 rated below those who trail it.
Disclosure (“none” means no position):Long AN, none
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After announcing yesterday that Goldman Sachs (GS) and Morgan Stanley (MS) would need to wait five days, the Fed just rescinded that and said “the transactions may be consummated immediately”.
Says the Fed:
Based on consultation with the Department of Justice regarding the applications of Goldman Sachs and Morgan Stanley to become bank holding companies, the Federal Reserve Board announced on Monday that the transactions may be consummated immediately without the application of the five-day antitrust waiting period.
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SEC Changes the Rules it Changed Friday
How are people supposed to invest in an environment like this? The rules are changing every day? Memo to Chris Cox…get it together.
The SEC issued “Amended Rules” to the rules it changed Friday without notice. Couldn’t we take a day or two and issue a order that did not need to be altered twice in 48 hours after it was issued? Too much to ask?
Washington, D.C., Sept. 21, 2008 — The U.S. Securities and Exchange Commission today approved amendments to its emergency order of September 18 (Release No. 58591) requiring that certain institutional money managers report their new short sales of certain publicly traded securities.
Additional Materials
* Amended Order Requiring Institutional Money Managers to Report New Short Sales
* Form SH (revised)
* Form SH Instructions (revised)
In addition to making technical amendments, the revised order also provides that the information disclosed by investment managers on new Form SH will be nonpublic initially, but will be made available to the public via the Commission’s EDGAR website two weeks after it is electronically filed with the Commission.
The amended order will take effect at 12:01 a.m. EDT on Monday, Sept. 22, 2008.
Under the order, covered institutional money managers will be required to report any new short selling in all equity securities, except options, that are admitted for trading on a national securities exchange or quoted on the automated quotation system of a registered securities association. If any new short sales are effected on September 22 through September 27, the managers are required to submit a report on new Form SH to the Commission on Sept. 29, 2008. These managers are already required to report their long positions in these securities on Form 13F.
The Commission may extend the emergency order beyond its current effective period of 10 business days if it deems an extension necessary in the public interest and for the protection of investors, but will not extend the order for more than 30 calendar days in total duration.
Disclosure (“none” means no position):Disdain for Chris Cox
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Wilbur Ross Talk About Treasury Plan
Am I the only one who just cannot envision Wilbur getting upset?
Disclosure (“none” means no position):Wish I had the $$ to give to Wilbur
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Hank Paulson (video)
The former Goldman Sachs (GS) head in two hour long interviews.
At Harvard in 2004
May, 2007
Disclosure (“none” means no position):Long GS
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So, all last year CNBC has been running stories about Sears Holdings (SHLD) Chairman Eddie Lampert and saying he has “lost it”, or word to that effect. Yet, AutoZone (AZO), which Lampert will soon own about 50% of is trading just off an all-time high. The silence from the boob tube is deafening.
AutoZone, which is the largest U.S. auto-parts retailer, reported a 12.2% rise in quarterly profit on Monday.
Net income rose to $243.7 million, or $3.88 per share, in its fiscal fourth quarter that ended August 30, from $217.2 million, or $3.23 per share, a year earlier. Net sales increased 10.4 percent to $2.2 billion and same-store sales, rose 0.6 percent in the quarter.
Now, I still say that something is in the cards for AutoZone (AZO), AutoNation (AN) and Sears Auto. Lampert has controlling stakes in all of them and has friendly Boards to deal with.
Maybe not now, but there are just too many things pointing to it to ignore.
Disclosure (“none” means no position):long SHLD, AN, none
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Goldman Sachs (GS) and Morgan Stanley (MS) have received approval from the Fed.
From the Fed
The Federal Reserve Board on Sunday approved, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies.
To provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure, the Federal Reserve Board authorized the Federal Reserve Bank of New York to extend credit to the U.S. broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley against all types of collateral that may be pledged at the Federal Reserve’s primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility (PDCF); the Federal Reserve has also made these collateral arrangements available to the broker-dealer subsidiary of Merrill Lynch. In addition, the Board also authorized the Federal Reserve Bank of New York to extend credit to the London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and Merrill Lynch against collateral that would be eligible to be pledged at the PDCF.
Perhaps speculation of either or both making a move for a bank is not so crazy after all? In the case of Morgan, it has all been assumed but Goldman has been at least publicly denying it.
Video:
Disclosure (“none” means no position):Long Gs, None
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Dow Chemical JV Update
A couple updates on new Dow Chemical (DOW) JV’s.
Dow Izolan, a joint venture between Dow Chemical and Izolan (Vladimir, Russia), has broken ground on a polyurethane (PU) systems plant at Vladimir. Dow says the plant will help meet demand from the “fast-growing” appliance, automotive, construction, consumer products, and furniture markets in Russia. The facility is due onstream in mid-2009.
Saudi Aramco and Dow’s giant Ras Tanura petrochemical faces delays as the sheer size of the project complicates design, the Middle East Economic Survey (MEES) reported.
Dow’s investment in the plant, estimated at $22 billion, will be the largest single foreign investment in Saudi Arabia’s energy sector. The plant, due to begin production in 2012 had awarded KBR (KBR)the front-end engineering and design contract for the plant in July 2007, but that contract will be split and partly awarded to another company, MEES reported, citing industry sources.
“Around 2 million man hours of work, covering utilities and offsites and some aromatics units have been taken off KBR and will be given to another firm, leading to delays,” the weekly MEES reported.
I’m not sure this really qualifies as a “delay” as the original time frame for the project was 2011-2012. I am guessing that the 2011 part of the equation isn’t going to happen. Not really all that big a deal as they are still in the ballpark and a whole lot of time can be made up between now and 2011.
The Russian JV shows a ton of promise. It is also fraught with risk due to Putin. One has to consider the very real lesson Mr. Putin learned the past couple week watching his country’s stock market and currency plunge after the Georgian actions. Far from politician’s teaching him a lesson, the market will enact a far more severe cost to him. That being said, one can only hope the reality of the world he now lives in is sinking in.
That being said, the Russian JV is not critical project like Ras Tanura but event in Russia will now bear a closer eye. One can only hope markets have taught Putin a lesson he needed to learn.
Disclosure: Long Dow
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A Review: "Once in Golconda"
I cannot recommend this book enough.
Backround from the Saturday Review:
Once in Golconda “In this book, John Brooks-who was one of the most elegant of all business writers-perfectly catches the flavor of one of history’s best-known financial dramas: the 1929 crash and its aftershocks. It’s packed with parallels and parables for the modern reader.” -From the Foreword by Richard Lambert Editor-in-Chief, The Financial Times Once in Golconda is a dramatic chronicle of the breathtaking rise, devastating fall, and painstaking rebirth of Wall Street in the years between the wars. Focusing on the lives and fortunes of some of the era’s most memorable traders, bankers, boosters, and frauds, John Brooks brings to vivid life all the ruthlessness, greed, and reckless euphoria of the ’20s bull market, the desperation of the days leading up to the crash of ’29, and the bitterness of the years that followed. Praise for Once in Golconda “A fast-moving, sophisticated account.embracing the stock-market boom of the twenties, the crash of 1929, the Depression, and the coming of the New Deal. Its leitmotif is the truly tragic personal history of Richard Whitney, the aristocrat Morgan broker and head of the Stock Exchange, who ended up in Sing Sing.” -Edmund Wilson, writing in the New Yorker “As Mr. Brooks tells this tale of dishonor, desperation, and the fall of the mighty, it takes on overtones of Greek tragedy, a king brought down by pride. Whitney’s sordid history has been told before..But in Mr. Brooks’s hands, the drama becomes freshly shocking.” -Wall Street Journal “It’s all there in Once in Golconda-the avarice of an era that favored the rich; and the later anguish of myriads of speculators doomed by a bloated market, easy credit, and their own cupidity and stupidity.”
If you read this for no other reason, it will assure you that “this time” is not really different. These boom bust cycles always happen, whether it be tech, housing or credit. You cannot legislate and regulated away people emotions when it comes to money. If anything, the more you try to regulate them, the more folks seem to become determined to find a way around those regulations and it typically involves more risk/reward, thus the bubble then pop (see “liar loans” or $100 tech stocks than ignored earnings).
By walking through history perhaps the reader will be able to put current events in a historical context, be able to see the “how’s” of the end of the crisis (not necessarily the “when’s”) and be better able to control oneself when the talking heads on TV or the MSM do their best to try and make you jump out of your office window everytime the Dow falls 300 points.
What was of particular interest was what “was to blame” for the 1929 crash and what followed:
1- “Short Sellers”
2- Banks
3- “Speculators”
4- Excess leverage
5- Lack of Gov’t regulation
Did any of them work? No…It was the war and the energy it out into business that did the trick…not Gov’t “engineering”.
Geez…..glad we have managed to avoid the same pitfalls now that were are allegedly almost 80 years wiser.
So, in the past eighty years we increased regulation, enacted capital requirements, separated investment houses from banks, set margin rates and yet…here we are.
You cannot, under any circumstances regulate stupidity and greed, no matter how hard you try.
It really was a great book.
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