TheStreet.com's Jim Cramer says the guys at the top don't know what they're doing, and it shows.
AIG's (NYSE: AIG) (Cramer's Take) making everyone's life difficult today. That's in part because AIG had been the biggest proponent of "super senior," meaning they repeatedly said that their collateralized debt obligation (CDO) exposure was of the kind that was intelligent, measured and thoughtful. They talked endlessly about how their due diligence made the difference and that unlike all of the other buyers, they kicked the tires three times and never bought the plain ol' CDOs. Then they brought in professors from Wharton to be sure that even if all heck broke loose and they were being too aggressive, they would be hedged.
They also were the first to give you the percentages of how much could go bad and that even in the worst-case scenario, they were overcapitalized. And, most important, they were insurers, no need to mark to market, they can play it all out.
Plus, they touted their own struggles. They made the point that because of the turmoil at the top, they hadn't bought any bad stuff and stopped buying residential real estate products after 2005. What they did buy -- they assured us in that big teach-in dog-and-pony show in December -- was the extra-special nature of their particular buys and that, unlike everyone else, risk officers scrutinized every single piece of paper that went into their super senior insurance, meaning only the top-top part of a CDO-squared, the part where everything had to default ahead of it; they made a point of how impossible that would be.
The Wall Street Journal reported that, in an attempt to toughen its regulation standards, SEC chairman Christopher Cox said earlier this week the agency would push Wall Street investment houses will have to reduce borrowing and rely less on short-term financing.
As part of plans to reduce costs and restore profit growth, people close to the situation said that Citigroup Incorporated (NYSE: C) is likely to today identify up to $400B in non-core assets that could be sold. Additionally, the Financial Times reported that Citigroup CEO Vikram Pandit will confirm his pledge to cut the bank's cost base by about 20% at a meeting with analysts today. Sources familiar with the matter believe Pandit will dismiss calls for a break-up of the company.
TheStreet.com's Jim Cramer says the exchange rate plus massive undervaluations make the great brands prime targets.
There's always been a groupthink in Europe about currencies. The companies that want to buy American companies have, at times, seemed to care more about the currency, or at least not buying a company in a country whose currency is in decline, than they care about the actual target.
That's what it looks like now that a large German company and now a large Italian company have decided to start splurging. It is no coincidence that Deutsche Tel (NYSE: DT) (Cramer's Take) and Finmeccanica are exploring Sprint (NYSE: S) (Cramer's Take) and DRS (NYSE: DRS) (Cramer's Take). These companies are selling for something like 40% off for those bearing euros, and neither potential acquirer has debt problems or subprime issues, so the deals don't have big borrowing problems.
That's what I am thinking about when I see the better-than-expected figures today from Unilever (NYSE: UL) (Cramer's Take) and the other day from Nestle. These companies are part of that same groupthink. They are looking, no doubt, at a Heinz (NYSE: HNZ) (Cramer's Take) and thinking, "Wait, that's about a $10 billion company that's a global leader."
According to senior industry sources, the Financial Times reported that the Ministry of Defense could ask General Dynamics Corporation (NYSE: GD) to provide the vehicle design for a new generation of armored vehicles for the army. It is unclear whether General Dynamics, in competition with Nexter and Artec, will be awarded the contract or will be named the preferred bidder.
Following the collapse in March of The Bear Stearns Companies Inc (NYSE: BSC), the Financial Times also reported that the SEC will soon require Wall Street banks to publicly disclose more details about liquidity and capital positions. Cox also urged lawmakers to pass legislation that would allow the SEC, or another regulator, the "explicit mandate to supervise" investment banks.
OTHER PAPERS:
According to the New York Times, Citigroup Incorporated (NYSE: C) will move senior investment banker Alberto Verme to Dubai by the end of the month in the hopes of establishing a stronger foothold in the region, a crucial area for global banks.
The New York Times also reported that several large oil companies, including BP Plc (NYSE: BP), ConocoPhillips (NYSE: COP) and Chevron Corporation (NYSE: CVX), agreed to pay nearly $423M in cash in order to settle a lawsuit that alleged water contamination from methyl tertiary butyl ether, a gasoline additive. Under the terms of the deal, the oil giants also agreed to pay 70% of the future cleanup costs for the next 30 years. Exxon Mobil Corporation (NYSE: XOM) and several other companies named in the suit did not agree to the deal.
Three years into its $35B takeover of Nextel, the Wall Street Journal reported that Sprint Nextel Corporation (NYSE: S) is considering selling or spinning off the troubled unit. Few details were available and a deal is not imminent.
The Wall Street Journal also reported that pressure is mounting on Citigroup Incorporated's (NYSE: C) CEO Vikram Pandit to show that he can turn around the troubled bank. Executives believe Pandit, who has been praised for his cautious and deliberate approach, has been taking "too long" to make crucial decisions.
WEB SITES:
According to a person close to Google Inc (NASDAQ: GOOG), Reuters reported that Google and Yahoo! Inc (NASDAQ: YHOO) are still "hammering out the intricacies" of a potential advertising and search deal. The source said no final agreement has been reached yet.
ABC News learned that if Rupert Murdoch does not testify in a lawsuit accusing one of his companies of "corporate espionage," it may cost News Corporation (NYSE: NWS) hundreds of millions of dollars, a federal judge overseeing the trial said. News Corp has denied any wrongdoing, and lawyers maintain Murdoch had no direct knowledge of the unit's alleged hacking into EchoStar Corporation's (NASDAQ: SATS)/DISH Network Corporation's (NASDAQ: DISH) security code and posting it on the Internet.
Because the subprime mess hasn't been invigorating enough, Citigroup (NYSE: C) will now have to go to court to deal with a lawsuit brought by Parmalat, the Italian dairy company that collapsed under the weight of a massive accounting scandal back in 2003.
Enrico Bond, who was brought in to run Parmalat by the Italian government, is reportedly seeking $2-4 billion in damages from Citigroup. Parmalat claims that Citigroup was aware of the company's treacherous finances, and concealed and helped to conceal the truth from investors. According to Paramalat, "Citigroup faces a very serious charge at the trial in New Jersey - that its bankers helped the corrupt insiders dress up Parmalat's financial statements and loot the company over a number of years."
Citigroup countered that "Citi is a victim of Parmalat's fraud and is confident that the merits of our position will be demonstrated in court."
When the CEO of one of the world's largest money center banks says things in the credit market will be bad for a long time, it is at least worth a listen.
James Dimon, head of JP Morgan (NYSE: JPM) told German publication Welt am Sonntag that he thinks the financial crisis in the U.S. could go on for much longer, according to a report by Reuters. Because Dimon's bank is in fairly good shape and has not had to level of write-offs that many of his peers have suffered, the long cold Winter of finance may not harm his company too badly. That does not go for other banks.
If the stock market is a fairly good proxy for which financial firms are likely to be OK in a prolonged crisis and which are not, then Merrill Lynch (NYSE: MER) and Citigroup (NYSE: C) have to be the top candidates for more trouble. Over the past year, JPM's shares are off about 5%. Citi is down 50% and Merrill is off by over 40%.
If Dimon is right, many big banks and brokerages are in for more write-offs as mortgage defaults move up, LBO debt loses more of its value, and consumer credit card paper gets hit by delinquencies. More write-offs mean raising more capital, something which Merrill and Citi have been doing with regularity.
If the two weak firms need to raise another $10 billion each, it is not hard seeing their shares slide by 15% or more. They almost certainly will survive, but not without shareholders paying a big price.
Douglas A. McIntyre is an editor at 247wallst.com and the author of the Ten Stocks Under $10 letter.
Vikram S. Pandit, the CEO of Citigroup (NYSE: C), got his start at the big bank by selling them his hedge fund business, Old Lane. A few months after the transaction, Pandit go the top job, but the business he sold Citi is in trouble. How humiliating.
According to The New York Times, "Citigroup said late Friday that it was planning to restructure Old Lane after 'substantially all' its outside investors withdrew their money." The bank bought Pandit's company for $800 million.
Another black eye for the Citigroup board? Absolutely. How can the governance body of a financial firm not look at the key asset that its top CEO candidate brought to the company?
While the news makes Pandit look bad, it makes the Citi board look like boobs. It is essentially the same board that let Chuck Prince stay on too long while he screwed up the bank and let it invest in mortgage-backed paper. Now it has picked a CEO who cannot even do a good job of managing his own investors' money.
News that financial services giant Citigroup (NYSE: C) is selling shares of common stock to raise capital is disturbing. According to a report in Bloomberg: "The company announced plans to sell $3 billion of stock to increase capital depleted by writedowns on subprime-related mortgages and bonds."
To dilute investors even more is just plain "Chutzpah." Shareholders over the last year or so have already lost more than 50% on their City shares; there has got to be a better way for the company to increase capital. Instead of diluting investors why not try and unlock some value for shareholders? It's not like the company has no assets. It could spin off the credit cards division, separate domestic and global consumer banking, spin off the capital markets division, and so on. It could generate a lot more than a measly $3 billion, and actually make shareholders happy!
Commenting on the move, as reported by Bloomberg, "Super Analyst" Meredith Whitney, who basically has been correct each step of the way as the banking crisis has worsened, said, "The fact that the company raised such a small amount of capital at this time confounds us. We believe Citi needs to raise an additional $10-$15 billion or sell several hundreds of billions worth of assets in order to truly shore up its capital position.''
It's time for Citi to be broken up, so that investors can finally reap some rewards.
Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 4/30/08
TheStreet.com's Jim Cramer says they won't fail, but they can't be bought yet.
What do the words "we have enough capital" mean? It means get ready for an offering. Merrill (NYSE: MER) (Cramer's Take) last week said they had enough capital. So did Citigroup (NYSE: C) (Cramer's Take). Of course they left themselves some sort of out. Merrill said it had enough "equity" capital, so it did a huge preferred deal. Citigroup stressed that it had more than it needed, but they just made you look like a moron if you bought stock the other day at $27.
But if you did buy, I have no sympathy for you, none whatsoever. I have no sympathy for you because I have said over and over again that as bank stocks go up, they must issue equity until housing stops going down. Every uptick must be met by equity if the downcycle is elongated.
In the stock market, there are the indexes of consequence.
Certainly, the closely-watched Dow Jones Industrial Average is perhaps the world's best-known stock market index, as it serves as an indicator of both U.S. economic conditions, and the nation's economic prospects, 6-9 months ahead.
For those who are advocates of technical analysis, including yours truly, the DJIA's 50-day moving average and 200-day moving average, also are important, among other technical measures.
Wendy's International Inc (NYSE: WEN), struggling since the 2002 death of founder Dave Thomas, and pressed by investor Nelson Peltz to improve results, will today announce a deal with Peltz, the Wall Street Journal reported.
The Wall Street Journal also reported that the House Financial Services Committee voted to approve $15B in loans and grants so that local governments can buy foreclosed homes throughout the U.S. Committee chairman Barney Frank said the bill will avoid abuse, including requiring that purchased homes be a minimum 60 days into the process.
Adding to evidence of a rally in corporate credit markets, the Financial Times reported that Deutsche Bank AG (NYSE: DB) is preparing another big sell-off of its leveraged loans in Europe.
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Several e-mails that have been obtained by the New York Post sent between Wall Street banks may prove a serious setback in the fight over the takeover Clear Channel Communications Inc (NYSE: CCU). The e-mails reportedly show the banks, led by Citigroup Incorporated (NYSE: C) and Deutsche Bank, looking to get out of financing the buyout by Bain Capital and THL Partners by offering terms "they know the [firms] won't be able to accept."
If the financial crisis hasn't crippled banks enough, the cost to build bank loan reserves may be just as painful, according to the Wall Street Journal's "Heard on the Street". The need for larger reserves is eating away at earnings and is showing up in first quarter reports for banks such as Bank of America Corporation (NYSE: BAC), whose results took an additional hit because of a $6B addition to its loan loss reserve.
Just four months after Journal parent Dow Jones & Co. was bought by Rupert Murdoch's News Corporation (NYSE: NWS), Wall Street Journal managing editor Marcus Brauchli is expected to resign, according to the Wall Street Journal. Journal publisher Robert Thomson may temporarily take over until a new managing editor is hired.
According to Reuters, activist shareholders in ASM International (NASDAQ: ASMI) believe, by giving more equity to top managers, that they can boost its value by $1.6B.
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Oil hits record $127.43 on supply concerns, raised Goldman forecast
Icahn's 'shock and awe' on Yahoo -- a gutsy play
Housing starts surprisingly rise in April on apartment construction
