Bloomberg News reports that two more big banks -- JPMorgan Chase (NYSE: JPM) and Morgan Stanley (NYSE: MS) have made offers of $7 billion to 30,000 holders of Auction Rate Securities (ARS) -- those long-term securities whose yields reset in weekly auctions until the auctions failed this February. JPMorgan and Morgan Stanley also agreed to $60 million worth of fines. This brings to five the number of large firms that have settled so far. The Wall Street Journal reports that of the big firms that have yet to settle, Goldman Sachs (NYSE: GS) is proving to be among the most unhelpful to its clients.
Meanwhile, the Wall Street Journal's James Stewart, who first got me writing about the ARS catastrophe, has finally broken his silence. And he seems to think that the ARS mess is much worse than he originally thought back in February. Stewart was shocked that brokers were unloading this toxic waste on customers so they could get it off of their books and out of the accounts of their executives. Stewart's reaction struck me as surprisingly naive -- particularly considering his long track record of reporting on Wall Street misdeeds.
Nevertheless, the problems with the frozen ARS continue to stress out investors who fell victim to Wall Street's chicanery. Among the top 10 municipal ARS issuers, the following have yet to offer any restitution to ARS holders (the value of their 2007 ARS issuance is in parentheses):
CNNMoney notes that Morgan Stanley said it would offer to repurchase all ARS "held by individuals, charities and small and medium-sized business with accounts of $10 million or less at the bank." Morgan Stanley will begin to start buying back $4.5 billion worth of ARS on September 30th and will "make its best effort to provide liquidity solutions" for institutional investors by the end of 2009. But New York attorney general Andrew Cuomo is not satisfied with Morgan Stanley's proposal.
Meanwhile, the list of big ARS issuers that have not settled grows shorter. Here are six holdouts (with their 2007 municipal ARS issuance in parentheses):
The Wall Street Journal reports that the $330 billion auction rate securities (ARS) scandal, which since February has frozen the funds of investors who thought they were getting a low risk place to park their cash, has finally generated its first criminal probe. The charge is that two Credit Suisse brokers lied "to investors about how they placed their money into short-term securities."
I have been following the ARS scandal since February when I first became aware of the situation. Since then, my post has generated 5,036 comments from people whose money has been frozen thanks to the collapse of the weekly auctions that were intended to set the yields on these municipal bonds. These commenters are trying to team up to figure out how best to get back their money.
The Journal reports that the Justice Department's U.S. attorney's office for New York's Eastern District, represents the first known criminal matter stemming from the crumbling ARS market. Up until then, the lawsuits were of a civil nature -- seeking class-action status and more than 80 individual arbitration claims. But a criminal probe based on lying could result in cash damages and jail terms for these brokers.
Six months of 2008 are now behind us and the stock market has not been a friendly place to most investors. Stability that was once found in household names that were industry giants is gone, and they have now been brought to their knees.
Many of them were the stocks we might have looked to in the past for stability, so you can be sure I put forward my five candidates with a little trepidation, but forward I go anyway. First a little review is in order.
Citigroup Inc. (NYSE: C) dropped from around $53 per share last year to around $30 in January and we can buy it today for around $17. Even at that price Goldman Sachs (NYSE: GS) has downgraded it to a sell and thinks there is more bad news to come. Citigroup was the largest bank in the world. Not any more.
General Motors (NYSE: GM) was the largest car maker in the world. That was before the stock tumbled from $43 to its current $11 range. A crushing blow to long time investors hoping that someone in the company could stop the ship from sinking.
The Wall Street Journal's "The Game" column speculates that one of the results of the Bear Stearns crash could be the push of investment banks and commercial ones closer together, which could result in better handling of volatility with more stability. Some observers think Merrill Lynch & Co (NYSE: MER), Morgan Stanley (NYSE: MS) or The Goldman Sachs Group Inc (NYSE: GS) could go that route by buying a commercial bank. Any move would force them to adhere to better reserve ratios, affect short term bank funding, and shrink balance sheets.
The Wall Street Journal reported that Google Inc (NASDAQ: GOOG) will soon make available a new service that measure hits on the Internet with the intent of helping advertisers decide where to buy ads online and would directly compete with comScore Inc (NASDAQ: SCOR) and Nielsen Online. Ad executives said Google's method could make targeting markets more efficient.
A Manhattan judge dismissed four claims made by American International Group Inc (NYSE: AIG) in its fight to regain control of a block of its shares held by Starr International, a company that once founded a lucrative compensation plan for AIG executives. AIG believes the shares held by Starr should continue to be used to fund employee compensation, the Financial Times reported.
WEB SITES:
According to Scorpio Partnership, Bloomberg reported that UBS AG (NYSE: UBS) and Merrill Lynch had slower growth in assets under management last year due to losses connected to the U.S. subprime crisis.
Morgan Stanley (NYSE: MS) F2Q08 Earnings Conference Call June 18, 2008 11:00 AM ET
Management Summary
Operator Welcome to the Morgan Stanley conference call. The following is a live broadcast by Morgan Stanley and is provided as a courtesy. Please note that this call is being broadcast on the internet through the company's website at www.morganstanley.com. A replay of the call and the webcast will be available through the company's website, and by phone, through July 18th, 2008.
This presentation may contain forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which: speak only as of the date on which they are made; which reflect management's current estimates, projections, expectations or beliefs; and which are subject to risks and uncertainties that may cause actual results to differ materially.
JPMorgan Chase (NYSE: JPM) shares are falling today after competitor Morgan Stanley (NYSE: MS) reported its second-quarter profit sunk 61 percent to $1.01 billion, or 95 cents per share, after paying preferred dividends. MS beat analysts' estimates of a 92 cent per-share profit, but only after raising $1.4 billion through asset sales, which could be a bad sign for the financial sector and JPM. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on JPM.
After hitting a one-year high of $50.99 last June, the stock hit a one-year low of $36.01 in March. This morning, JPM opened at $38.53. So far today the stock has hit a low of $37.93 and a high of $38.70. As of 11:45, JPM is trading at $38.80, down $0.24. The chart for JPM looks bearish and steady, while S&P gives the stock its highest 5 STARS (out of 5) strong buy rating.
For a bearish hedged play on this stock, I would consider a September bear-call credit spread above the $50 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 4.2% return in three months as long as JPM is below $50 at September expiration. JPM would have to rise by more than 30% before we would start to lose money. Learn more about this type of trade here.
Goldman Sachs (NYSE: GS) reported earnings today, and while revenue and profit were -- not surprisingly -- down from a year ago period (but higher compared to the previous quarter), it actually had profits to speak of, $2.09 billion of them to be exact. Indeed, Goldman did it again, surpassing Wall Street expectations for a profit of $3.42 per share on $8.74 billion of revenue with a profit of $4.58 per share and revenue of $9.42 billion.
It would be only natural to ask how Goldman made $2 billion while Lehman lost $2.8 billion. The answers are many, not the least of which is size: Goldman is the world's biggest securities firm, Lehman Brothers (NYSE: LEH) is the smallest among the four Wall Street investment banks. Other factors could include better hedging, financial decision making, diversification, management and strength of balance sheet.
To get a feel of the differences in numbers, Goldman currently holds about $14 billion of leveraged loans, down from $52 billion at their height less than a year ago in August. Residential mortgages, which include the subprime loans, have fallen to about $15 billion on Goldman's balance sheet from $19 billion last quarter. Lehman Brothers' portfolio of mortgages, including commercial loans, stood at $60.8 billion. It also has about $18 billion of leveraged-buyout loans. It is no wonder CEO Fuld took ten minutes at the beginning of the conference call to take responsibility.
Editor's Note: In Toddo's honor, this post comes from Ag and Energy specialist Ryan Krueger. Please see more at www.minyanville.com.
In the first six months of 2008, the United States Oil Fund (AMEX: USO) has seen short interest rise 140%, or two times the total float. For its part, the Powershares DB Commodity Index (AMEX: DBC) has watched its short interest climb more than 500% this year. According to Morgan Stanley (NYSE: MS), the average short interest among exchange-traded funds (ETF) in the U.S. is 10%.
I'll alert Minyanville.com readers when Congressional hearings are scheduled to address this other form of speculation, which includes windfall losses.
As for the market, it would seem the largest institutions are equally hopeful -- for the sake of their relative performance -- that this simply can't be: According to some reports I've seen, they're roughly 500 basis points underweight energy.
I'd imagine both will continue to be long shaking heads.
Bloomberg News reports that 10 of the biggest names in investment banking are blocking investors from getting their hands on their share of the $330 billion Auction Rate Securities (ARS) that they were told was as safe as a money market fund.
I first posted about this back in February and now it has 4,325 comments from people trying to get at their money. Bloomberg quotes one victim of frozen ARS syndrome: Franklin Biddar, a 65-year old real estate investor who can't get his $100,000. "I can't do anything," said Biddar, who was so eager to unlock his money that he was willing to accept 11 percent less than what he paid for the securities. "Bank of America (NYSE: BAC) got me into these securities that are supposed to be as safe as a money market, and now they won't get me out."
Here's a list of the banks involved in this money blocking operation and the volume of municipal ARSs they issued between 2001 and 2007:
After hitting a one-year high of $77.30 in June, the stock hit a one-year low of $33.56 in March. MS opened this morning at $43.00. So far today the stock has hit a low of $42.79 and a high of $44.17. As of 12:15, MS is trading at $43.80, up $1.15 (2.7%). The chart for MS looks bearish and steady while S&P gives MS a negative 2 STARS (out of 5) sell rating.
For a bullish hedged play on this stock, I would consider a October bull-put credit spread below the $30 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in just four and a half months as long as MS is above $30 at October expiration. Morgan Stanley would have to fall by more than 31% before we would start to lose money. Learn more about this type of trade here.
Bloomberg News reports that Lehman Brothers Holdings (NYSE: LEH) wants to sell $4 billion in equity. But it already raised $6 billion so why does it need more? It should be no surprise -- but thanks to a chorus of statements by financial leaders that "the worst is over" -- including Lehman's CEO Richard Fuld, Jamie Dimon, Hank Paulson, and Barton Biggs some are surprised that there are still problems.
Since the crisis began -- last August when the Fed began cutting rates from 5.25% to 2% -- banks have been trying to reduce their ratio of debt to equity below the hugely risky 32:1. But it's hard when they hold $500 billion worth of Level 3 assets -- which don't trade and therefore have no objectively set market value. To maintain or improve their capital ratios, banks have been writing down the value of the securities on their books -- $276 billion worth so far -- and simultaneously raising capital. Citigroup (NYSE: C) has raised the most -- $44 billion.
S&P downgraded Lehman, Morgan Stanley (NYSE: MS) and Merrill Lynch (NYSE: MER) saying they may disclose more write-downs for devalued assets. And hedge fund manager David Einhorn -- who's short Lehman -- got into a verbal debate with Lehman CFO Erin Callan arguing that Lehman had failed to disclose $6 billion worth of such Level 3 assets -- known as Collateralized Debt Obligations (CDOs) and it needed to raise capital. Today's announcement suggests that Einhorn was right.
Just because executives act like cheerleaders, it doesn't mean investors should take them at their word.
It's hard to believe: the credit crunch is getting close to a year old. When it first hit, the result was stunning as pending deals came under much pressure, such as with price renegotiations, litigation and abandonments. There was also an evaporation of mega deals.
However, lately there are signs that buyouts are making a comeback. A recent example is Carlyle's $2.54 purchase of the government business of Booz Allen Hamilton.
But, that's not enough to support the heavy dealmaking infrastructure on Wall Street. As a result, we are now seeing some major layoffs as well as the departures of key players.
For example, according to a piece in Bloomberg.com, the co-head of leveraged finance at Morgan Stanley (NYSE: MS), Ashok Nayyar, has left the firm. And the global leveraged finance chief at Deutsche Bank AG, Michael Paasche, is also leaving.
Of course, this doesn't mean that leveraged finance will go away. If anything, major private equity firms will likely bolster their own platforms. Or, we may see other banks entry the fray, such as Barclays Capital (NYSE: BCS).
According to the Wall Street Journal, former American International Group Inc (NYSE: AIG) CEO Maurice R. "Hank" Greenberg is pressing the troubled insurer to turn the company around. He says that he and other major shareholders have "deep concern about the persistent and seemingly endless destruction of value at AIG."
Hybrid Capital Second, a Morgan Stanley (NYSE: MS) investment vehicle, increased its stake in internet start-up Livedoor to 18.15% from 12.76% in March, the Financial Times reported, superseding the company's founder, Takafumi Horie.
OTHER PAPERS:
After it incurred $3.2B of bad debts in the first three months of the year, the Telegraph reported that Knight Vinke, an HSBC Holdings Plc (NYSE: HBC) shareholder, has renewed calls for the bank to shed its U.S. consumer finance business.
With the super-growth in emerging economies – especially in India and China – there is likely going to be a secular trend for infrastructure. In fact, this should be the case in mature economies as well, even the US, as the infrastructure is getting fairly old and needs to be replaced.
To deal with the growing infrastructure needs, there will also be a need for substantial amounts of capital. To this end, Morgan Stanley (NYSE: MS) announced it has formed an infrastructure fund, raising $4 billion for the fund.
Basically, these funds will focus on things like toll roads, ports, water systems, airports, parking lots and other income-generating platforms. While the upfront costs can be tough, the long-term cash flow characteristics look bright. Perhaps that's why – despite the credit crunch – these funds had little trouble getting started.
Bloomberg News reports that two more big banks -- JPMorgan Chase (NYSE: JPM) and Morgan Stanley (NYSE: MS) have made offers of $7 billion to 30,000 holders of Auction Rate Securities (ARS) -- those long-term securities whose yields reset in weekly auctions until the auctions failed this February. JPMorgan and Morgan Stanley also agreed to $60 million worth of fines. This brings to five the number of large firms that have settled so far. The Wall Street Journal reports that of the big firms that have yet to settle, Goldman Sachs (NYSE: GS) is proving to be among the most unhelpful to its clients.
Six months of 2008 are now behind us and the stock market has not been a friendly place to most investors. Stability that was once found in household names that were industry giants is gone, and they have now been brought to their knees. 
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Goldman Sachs
Editor's Note: In Toddo's honor, this post comes from Ag and Energy specialist Ryan Krueger. Please see more at 
It's hard to believe: the credit crunch is getting close to a year old. When it first hit, the result was stunning as pending deals came under much pressure, such as with price renegotiations, litigation and abandonments. There was also an evaporation of mega deals.
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The week in preview: Chicken soup (or a doughnut) for the recession-weary soul?
Comfort Zone Investing: Oil's down, which is a start, but not good enough
Stocks have their worst week in six years
