Continue reading Congress, SEC and Goldman Sachs Failures

Congress, SEC and Goldman Sachs Failures originally appeared on BloggingStocks on Wed, 12 May 2010 14:00:00 EST. Please see our terms for use of feeds.

Goldman Sachs (GS) made a huge mistake: it earned too much money when too many others lost large amounts. While the economic circumstances were somewhat different, this is very reminiscent of when Drexel Burnham Lambert made the error of profiting from deals no one else could have done, and then had the audacity to pay the genius behind the deals, Mike Milken, a great deal of money. Those howls of moral righteousness that brought down Drexel and Milken are echoing in the halls of Goldman Sachs.

Continue reading Comfort Zone Investing: Is Goldman Sachs the Drexel Burnham of Today?

Comfort Zone Investing: Is Goldman Sachs the Drexel Burnham of Today? originally appeared on BloggingStocks on Sat, 01 May 2010 10:30:00 EST. Please see our terms for use of feeds.

Continue reading Moody's ratings are coming under fire

Moody's ratings are coming under fire originally appeared on BloggingStocks on Wed, 23 Sep 2009 09:35:00 EST. Please see our terms for use of feeds.

What a way to go into the holiday weekend, eh? On Thursday, seven banks were shut down by authorities, which pushed the total of failed banks for 2009 to 52 -- which more than doubles the number of bank failures in 2008. Six of the seven banks seized were located in Illinois and the other was in Texas, according to the Federal Deposit Insurance Corporation (FDIC).

According to the federal group, the Illinois failures are interlinked, as all six banks were controlled by one family and used a similar business model. The FDIC noted that this model "created concentrated exposure in each institution." This model left the banks heavily exposed to collateralized debt obligations and other loan losses. The six banks brings the total of failed banks in Illinois to 12.

As for the Texas bank failure, it was the first in the state this year.

Continue reading Seven banks go up in smoke ahead of the holiday weekend

Seven banks go up in smoke ahead of the holiday weekend originally appeared on BloggingStocks on Fri, 03 Jul 2009 10:00:00 EST. Please see our terms for use of feeds.

Continue reading Vulture investors enter the mortgage market

Vulture investors enter the mortgage market originally appeared on BloggingStocks on Thu, 26 Feb 2009 15:53:00 EST. Please see our terms for use of feeds.

Last March, I posted on whether we were at the beginning of the Greatest Depression. Back then, my reasoning was that there was $6.1 trillion in financial toxic waste -- in the form of Collateralized Debt Obligations (CDOs) -- in our financial system resting on a sliver, a mere $340 billion, in capital.

Therefore, a 6% decline in the value of that toxic waste would wipe out the bank capital. (I should have added in another $6 trillion in mortgage-backed securities). When you consider that Merrill Lynch sold $31.6 billion of its CDOs last year for 22 cents on the dollar, you realize that toxic waste needed an 80% haircut rather than a 3% one -- and voila -- you've wiped out all the capital!

If you look at some basic statistics comparing the current economic situation with that of the Great Depression, you might think that we are in relatively great shape. Our unemployment rate now is 7.2% -- at its nadir, 25% of the population was unemployed in the Great Depression.

Continue reading One more time: Is this the Greatest Depression?

One more time: Is this the Greatest Depression? originally appeared on BloggingStocks on Thu, 22 Jan 2009 11:30:00 EST. Please see our terms for use of feeds.

CDOs have been one big factor in the credit crisis we are now facing. Not only AIG, but major banks as well are still holding CDOs "off the books." A big step forward toward more transparency would be for banks to disclose these CDO holdings and put them "on the books."

There is no way of knowing the total amount of these CDOs until there is full disclosure. These obligations are "hidden" from investors and it is difficult if not impossible to determine the share value of a given bank.

What are your thougts on this matter?

Why are CDOs so important? originally appeared on BloggingStocks on Wed, 31 Dec 2008 17:00:00 EST. Please see our terms for use of feeds.

The recession, which officially began a year ago, is accelerating the pace of job loss. Since I began to notice the collapse of subprime back in the fall of 2006, watching the economy implode has been like a huge highway pileup in slow motion. And that crash is starting to create big economic injuries in the job market.

How so? Firing announcements rose 148% in November 2008 to 181,671 -- the most since January 2002 -- from 73,140 in November 2007. So far in 2008, the number of cuts has spiked 46% to 1,057,645, surpassing 1 million for the first time since 2005. And many of these cuts have come from financial services (91,356), computer and electronics (15,350), and retailing (11,073).

Having lived through two credit contractions, I could see this coming from miles away. But it happened far more slowly than I thought it would. And I did not foresee how the bad mortgages would cause a global financial crisis. But they have and here's how: $1.3 trillion in subprime mortgages were added to packages of complex securities, including $13 trillion of mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs).

Continue reading Job cuts up 148% as the downward cycle deepens

Job cuts up 148% as the downward cycle deepens originally appeared on BloggingStocks on Wed, 03 Dec 2008 13:20:00 EST. Please see our terms for use of feeds.

Have central banks reached the limit of what they can do to fix the global economic crisis? The answer is yes, if you believe that the price of Credit Default Swaps (CDSs) is any indication. With CDS premiums for corporate bonds reaching a new high, investors in the thinly traded, unregulated and poorly-disclosed corner of our financial markets are signaling that central banks cannot fix what ails the global financial markets. That scares me.

How are these CDS premiums measured? By a couple of complex CDS indices in the U.S. and Europe. For example, there's the Markit iTraxx Crossover Index of 50 high-risk, high-yield credit ratings corporate bond issuers whose premium climbed 18 basis points (100 basis points is 1%) to 956 this morning. in London. And there's the Markit iTraxx Europe index of 125 investment-grade corporate bond issuers which climbed 3.5 basis points to 191.5 having earlier traded at a record 198. Similar indices in Australia and Japan are at record levels as well.

Central banks around the world have cut their short-term lending rates to near zero and yet things keep deteriorating. As I posted, the next step for central banks could be trying to lower the rates of longer-dated, e.g., two year, government securities. But none of these efforts will work because banks are so afraid to lend since it is so hard to find businesses and individuals who are safe bets to pay back the money. So absent global infrastructure programs by governments around the world, this crisis could continue to explode.

Continue reading No fix for global crisis?

No fix for global crisis? originally appeared on BloggingStocks on Tue, 02 Dec 2008 10:25:00 EST. Please see our terms for use of feeds.

Collateralized Debt Obligations (CDOs) -- those fiendishly complex securities that slice bonds into different groups based on risk -- are a $1.3 trillion pile of toxic waste likely to be written down 90% from financial institutions' (FIs) books. That's a shame because so far FIs have written off $660 billion worth of subprime mortgages and mortgage-backed securities (MBS) and that total is expected to top $2 trillion before it's all over. That is way more than the $340 billion in capital that resides on FIs books.

Since there is very little information about CDOs available, it is difficult to both put a value on them and to know how bad the damage is. One firm estimates that $254 billion of CDOs tied to subprime mortgages have defaulted. But corporate CDOs are privately traded, so the damage from writing down this toxic waste is difficult to quantify. These corporate CDOs were called synthetic -- they consisted of bundles of Credit Default Swaps (CDSs) on corporate bonds.

The $54 trillion CDS market -- famously deregulated by John McCain's chief economic advisor Phil "Americans are Whiners" Gramm -- is now causing shudders for owners of synthetic CDOs since they are tied to the bankruptcy of Lehman Brothers along with Iceland's biggest banks. Fitch downgraded 422 classes of CDOs on October 13 after seven financial companies defaulted or were bailed out since September. And Barclays estimates that 70% of synthetic CDOs were tied to Lehman Brothers.

Continue reading With CDOs slashed 90% will toxic waste's toll top $2 trillion?

With CDOs slashed 90% will toxic waste's toll top $2 trillion? originally appeared on BloggingStocks on Wed, 22 Oct 2008 09:39:00 EST. Please see our terms for use of feeds.

The basic problem here is that banks lack capital. The simple solution, which occurred to me this morning after reading an op-ed piece by Paul Krugman, is for the government to buy the banks and help them raise the capital they need so they can resume lending. There is so much political damage from the current catastrophe that nationalizing the banks as I propose really won't hurt that much more. I am not sure how much it will cost -- but we've already nationalized Fannie, Freddie and AIG so why not make a list of all the under-capitalized commercial and investment banks and let the government take them over.

Compared to the $700 billion that Paulson wants for his wacky plan, we could buy up Citigroup (NYSE: C), Morgan Stanley (NYSE: MS), and Goldman Sachs (NYSE: GS) for about $200 billion (roughly 10% over their current market value). In light of the $800 billion spent so far, that $200 billion would be chump change. And if the government runs them right, it can sell their shares back to private investors once we get through this period of "adjustment" and make a nice profit for taxpayers.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citi shares and has no financial interest in the other securities mentioned.

Time to nationalize undercapitalized banks originally appeared on BloggingStocks on Mon, 22 Sep 2008 15:32:00 EST. Please see our terms for use of feeds.

It looks like SEC Chairman Chris Cox still has his job -- this despite John McCain's call to fire Cox. And what has Cox done for us lately? He's banned short selling on 799 financial stocks for the next 10 days, according to the Wall Street Journal [subscription required]. The SEC's temporary ban on short selling won't help deal with the underlying problems causing this 100 Year Crash -- but it won't make them any worse.

Short selling is one way to bet against the decline in a stock's share price. A short seller borrows shares from a broker and sells them at that market price. SEC rules give the short seller three days to obtain custody of those shares. The short seller profits by buying back the shares at a lower market price to repay that stock loan. So-called "naked shorting" -- when the short seller never obtains custody of the shares -- is considered abusive. By banning short selling, the SEC is trying to interrupt a negative feedback loop about which I posted yesterday.

This loop helped shorts profit from a decline in investment bank shares. How so? All the bad news has been driving down their shares so much that ratings agencies downgraded the investment banks' debt. Since that debt was insured through the $62 trillion Credit Default Swap (CDS) market, the downgrade threat boosted CDS premiums requiring the investment bank to post collateral in the billions. This put even more pressure on the investment bank to raise capital, driving down its shares even more.

Continue reading SEC should ban hedge funds from pulling out their money, then shorting

SEC should ban hedge funds from pulling out their money, then shorting originally appeared on BloggingStocks on Fri, 19 Sep 2008 09:15:00 EST. Please see our terms for use of feeds.

The Wall Street Journal (subscription required) has obtained a draft version of the SEC's report on bond-rating firms and their role in the credit bubble, and some of the stuff is pretty scary.

In one e-mail, a staffer at Standard & Poor's, which is own by McGraw-Hill (NYSE: MHP) told another that "we rate every deal," and that "it could be structured by cows and we would rate it."

Another wrote that "rating agencies continue to create" an "even bigger monster -- the CDO market. Let's hope we are all wealthy and retired by the time this house of cards falters. ;O)"

Yes -- complete with the smiley face. If this seems reminiscent of disgraced analyst Henry Blodget's e-mails bashing stocks he was publicly pumping during the dot-com bubble, that's because it's exactly the same. The lesson here, once again, is this: e-mails ever really get deleted permanently and, if you're being shady or doing something unethical, make a phone call, talk with the person in a dark alley, or send them a letter that they can promptly discard. Don't send an e-mail!

Of course, S&P's investment-grade ratings on CDOs stuffed with dodgy loans turned out to be wildly optimistic, and the house of cards has done more than falter -- it's brought down Bear Stearns and wreaked havoc on the economy.

S&P rated deal 'structured by cows' according to SEC report originally appeared on BloggingStocks on Sat, 02 Aug 2008 14:40:00 EST. Please see our terms for use of feeds.

Reuters reports that Merrill Lynch (NYSE: MER) reported worse than expected results for the second quarter. Merrill lost $4.9 billion and is selling $8 billion in fresh assets to raise capital.

Merrill's news is the latest of the asset write-down capital raising dances that have taken place in the last year. This dance pairs the write-down of mortgage-backed securities that nobody wants to buy with a desperate effort to raise capital to keep its capital ratios from collapsing. To that end, Merrill took $9.4 billion of write-downs of repackaged debt, including CDOs, as well as exposure to bond insurers. And it raised $4.425 billion from selling its 20% stake in Bloomberg. Merrill may also sell a controlling interest in Financial Data Services for $3.5 billion.

Its loss of $4.42 a share was more than twice the $1.94 loss that analysts had expected. There is not likely to be an end to this asset write-down capital raising dance until people are willing to trade CDOs. And that's the optimistic scenario. If CDOs remain illiquid, it will be ever more difficult to raise capital. And in that case, the prospect of bankruptcy or government bailout loom large. Meanwhile, Merill's stock lost 7.3% in after-hours trading.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Merrill gets gored originally appeared on BloggingStocks on Thu, 17 Jul 2008 18:33:00 EST. Please see our terms for use of feeds.

The news from Lehman (NYSE: LEH) was not bad enough. The brokerage will post a loss of $2.8 billion and raise $6 billion in new capital. Now word comes that big Swiss bank UBS (NYSE: UBS) is in trouble again.

According to The Wall Street Journal, "When it proposed its capital-raising plan to investors, UBS said further write-downs may hit earnings, and it said in May that some asset classes continued to deteriorate and will hamper future earnings."

Of course, the news begs the question: how bad can things get for US banks? Citigroup (NYSE: C) may be the prime example. It still holds billions in mortgage paper and LBO debt, and it could face charges on credit card defaults. The market has already started to price more trouble into the US bank's stock.

Citi is now trading below $20 for the first time since March when a panic hit a number of large US bank shares. The stock recovered to almost $27 in late April. Several other American banks have seen their shares drop by similar amounts.

Citi's stock probably has not found a bottom. If the bank reports weak numbers in the next two quarters, it may have to raise money the way Lehman did. Substantial dilution could take the shares down another 10% to 15%.

Douglas A. McIntyre is an editor at 247wallst.com and the author of the Ten Stocks Under $10 letter.

Financial crisis spreads, more write-downs at UBS originally appeared on BloggingStocks on Tue, 10 Jun 2008 08:27:00 EST. Please see our terms for use of feeds.

Ted Allrich is the founder of The Online Investor and author of the just released book: Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he'll offer advice to investors who are just getting started.

Merrill, Lynch (NYSE: MER), Lehman Brothers (NYSE: LEH) and Morgan Stanley (NYSE: MS) are on the watch list at Standard & Poor's, the ratings agency that can make raising money very expensive for companies that get downgraded. Of the three, Lehman appears the most shaky with many expecting it to report a loss for the first time since it went public. Word is that the firm is trying to raise $3 billion to $4 billion to keep its capital base healthy. It's out there competing with many banks and insurance companies working on the same thing. Merrill Lynch already has its money in the bank but may need more.

The real problem all these firms have, along with all financial institution money raisers, is that they are loaded with securities they can't sell. They're called mortgage-back securities or Collateralized Debt Obligations (CDO's) or SIV's (Structured Investment Vehicles) or some other acronym. They all mean the same thing: no buyers anywhere at any price. It reminds me of the high inflationary days of the 70's when selling a 30-year bond was impossible. The joke was: What's the difference between a long term bond and VD? You can get rid of VD.

Continue reading Comfort Zone Investing: Big brokers, big troubles

Comfort Zone Investing: Big brokers, big troubles originally appeared on BloggingStocks on Sat, 07 Jun 2008 10:30:00 EST. Please see our terms for use of feeds.

Fortune -- which shares parent Time Warner (NYSE: TWX) with BloggingStocks -- provides a clue about how big of a write-down Lehman Brothers Holdings (NYSE: LEH) needs to take in order to account accurately for its Collateralized Debt Obligation (CDO) portfolio. By my estimate, that write-down could total roughly $4 billion -- wiping out 20% of Lehman's $20 billion in capital.

How so? I calculated $4.07 billion worth of write-downs -- $1.63 billion of the write-off is from worthless BB and below rated CDOs and another $2.44 billion is from the remaining CDOs that are worth about half their stated value. This is based on Fortune's report that Lehman has $6.5 billion worth of CDOs. The 25% that are rated BB or below it believes are worthless. The remaining 75% it figures are worth 50 cents on the dollar.

But wait, there's more. Lehman has $39 billion worth of Commercial Mortgage Backed Securities (CMBSs) which have lost value. A key index has declined in the last quarter -- but I don't know how much. Assuming the decline was 25%, Lehman would need to write down an additional $9.8 billion. If Lehman needed to take the $9.8 billion write-down plus the $4 billion for the CDOs, its capital would decline 75%.

When I think about how Lehman is not the only one to hold these dodgy securities, it becomes clear that our financial system is resting on a very shaky foundation.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

When will Lehman take $4 billion in CDO write-downs? originally appeared on BloggingStocks on Thu, 05 Jun 2008 09:48:00 EST. Please see our terms for use of feeds.

Like water-torture, the drip, drip, drip of bad news out of Wall Street keeps coming. According to a report in The Wall Street Journal, Merrill Lynch (NYSE: MER) will report mortgage securities write-offs of another $6 billion to $8 billion, raising the question whether the firm will have to bring in more money by selling shares..

The newspaper reports that "The latest would bring its total since October to more than $30 billion and mean that Merrill reports a third straight quarterly net loss." Merrill compounded its problems by getting further into the CDO markets as 2007 went on.

While some experts believe that the worst is behind big banks and brokerages, that may not be true. The paper based on mortgages still carries risk as the housing market continues to fall.

Statements from Wall Street firms about a near-term recovery is a victory of hope over reason. The truth of the matter is that they have no idea how much more the economy will slide. That raises the question of whether home equity loans, credit card debt, and auto loans will begin to fail at a faster rate. There are securities held by banks based on pools of all of this debt. The value of LBO debt could also continue to drop as business profits are squeezed by a poor economy.

The Merrill write-down is a sign of one thing and one thing only. Wall Street's numbers could get much worse and there is little reason that the economy will help them get better.

Douglas A. McIntyre is an editor at 247wallst.com.

Merrill Lynch (MER) plans $6 billion to $8 billion in write-offs originally appeared on BloggingStocks on Wed, 16 Apr 2008 08:35:00 EST. Please see our terms for use of feeds.

The Wall Street Journal is trying to gin up some pity for Alan Greenspan. Apparently his feelings are hurt because people are blaming him for the current economic mess. They criticize him for keeping interest rates at 1% for too long, praising adjustable rate mortgages, and maintaining lax regulatory oversight. But the Journal missed the two key flaws in Greenspan's record -- his love of securitization and his critical support of Bush's $1.3 trillion worth of tax cuts.

Meanwhile Greenspan is raking in enormous bucks. The Journal reports: "His memoir has sold about a million copies. He collects six-figure fees to answer questions for audiences, typically assemblies of financial professionals. He has signed consulting contracts with three firms, including Germany's biggest bank, Deutsche Bank AG; the world's biggest bond-fund manager, Pacific Investment Management Co.; and Paulson & Co., a hedge fund that made billions betting against housing."

In a 2002 speech referring to credit derivatives, he said financial instruments such as credit default swaps, collateralized debt obligations (CDOs) and credit-linked notes have also helped make the economy shock-resistant. "Such instruments appear to have effectively spread losses from defaults by Enron, Global Crossing, Railtrack, WorldCom and Swissair in recent months from financial institutions with large short-term leverage to insurance firms, pension funds, or others with diffuse long-term liabilities or no liabilities at all,"

Continue reading Greenspan wallowing in self-pity

Greenspan wallowing in self-pity originally appeared on BloggingStocks on Tue, 08 Apr 2008 14:43:00 EST. Please see our terms for use of feeds.

The New York Times reported a blockbuster revelation from yesterday's Congressional testimony on the JPMorgan Chase & Co. (NYSE: JPM) acquisition of The Bear Stearns Companies (NYSE: BSC). It turns out that the religious right and government bailouts go hand in hand -- that's because Treasury Secretary Hank Paulson decided that he would not put $30 billion worth of taxpayer money at risk unless JPMorgan paid a really low price for Bear.

The reason? Moral hazard. Specifically, Paulson wanted to use Bear as an example that would scare all the other banks that borrowed $32 for every dollar of equity to buy Collateralized Debt Obligations (CDOs) and other difficult -to-value securities. Paulson wanted to wipe out Bear shareholders so they would be reluctant to seek government help if they got into trouble.

And another thing. Alan Schwartz, Bear's CEO, claims to have misunderstood and thought it was a 28-day loan granted on Friday 14th. This would have given him a month to straighten things out. But he later learned that the loan lasted only for the weekend. And he would need to file for bankruptcy or accept the deal that Paulson was offering. Faced with two terrible choices, Schwartz took the Paulson deal.

How much will taxpayers lose due to Paulson's moral qualms? Was this really necessary? Wouldn't the 28-day loan have avoided this?

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

How Paulson engineered the Bear bailout originally appeared on BloggingStocks on Fri, 04 Apr 2008 08:40:00 EST. Please see our terms for use of feeds.