Trillions of dollars have been introduced into the world economy since last July, when I thought it would be interesting to jump in and pick stocks prior to the carnage in the financial sector taking complete hold.

For the past eight months our government has been taking over financial institutions, absorbing debt, lowering interest rates, nationalizing some private companies, investing in others, and rebating taxes through stimulus packages to increase liquidity and spending. The Federal Reserve has essentially dropped the interest to zero.

The government was the last to announce that we are in a recession. Well, duh! However, recession or not the world is still open for business although less of it. Gold is down 30% from it's highs and oil having totally collapsed from $147 a barrel at the time of the original story to the low $30's now.

The original story was Serious Money: Tempting fate with 10 financials -- buying into a pool of financial stocks at a time when these stocks went unloved by all.

Continue reading Chasing Value: reviewing financial ruins MBI, MER, WB, WM

Chasing Value: reviewing financial ruins MBI, MER, WB, WM originally appeared on BloggingStocks on Mon, 22 Dec 2008 15:20:00 EST. Please see our terms for use of feeds.

This post is part of AOL Money & Finance's Best & Worst in Money 2008 feature.

In the decades to come, business school students will be faced with a plethora of examples from 2008 in studying how not to do something.

Picking one business decision as the worst is sort of like choosing a favorite child. Each was wretchedly awful in their own unique way. They each deserve their own wing in the hall of shame, but there only can be one winner. In my mind, the company that consistently shot itself in the foot with a heretofore unknown precision was American International Group Inc. (NYSE: AIG).

Of course, AIG is now owned by the U.S. government, largely thanks to two bailouts. The government ripped up the first $85 billion deal after determining that the New York-based company needed an even bigger life preserver of $150 billion. Even then, it managed to post a $24.5 billion loss.

What set the standard for corporate hubris, though, were the junkets. There was a fun-in-the-sun getaway to a resort in California, only days after the $85 billion bailout went through. Recently, it was disclosed that another junket was held in Arizona. Though the amount of money involved in the gatherings was piddly, the principle at stake was not. AIG was telling people -- especially members of Congress who approved the bailout -- that nothing had changed when, of course, everything had.

Continue reading Best & Worst in Money 2008: Dumbest business move

Best & Worst in Money 2008: Dumbest business move originally appeared on BloggingStocks on Thu, 04 Dec 2008 10:56:00 EST. Please see our terms for use of feeds.

Continue reading Signing bonuses on Wall Street: Do they really still exist?

Signing bonuses on Wall Street: Do they really still exist? originally appeared on BloggingStocks on Tue, 28 Oct 2008 06:30:00 EST. Please see our terms for use of feeds.

Around the world, governments are flooding the market with new currency in order to stem the tide of bank collapses and slippery stock market slopes. They are taking over financial institutions, absorbing debt, lowering interest rates, nationalizing some private companies, investing in others, and rebating taxes through stimulus packages to increase liquidity and spending.

So far all we can say is that the world is still open for business, but it is a different world. Even gold and oil are down significantly.

In concert with world markets, the stocks in my daring (maybe fool hardy) story I posted a few months ago Serious Money: Tempting fate with 10 financials -- buying into a pool of financial stocks at a time when the "hate 'em" factor was at a peak, or so I thought -- are down even more. I think I am turning into the web's leading glutton for punishment by posting such stories. However, while my stock ideas have taken a beating now and then, I hope my integrity has remained intact.

I took some major lumps during the collapse of Washington Mutual (NYSE: WM) as I candidly posted, Chasing Value: Not -- WaMu one week later - ouch!, and I lost some money also.

Nine of the ten financial stocks I wrote about are down or out at this point. When I last reported, the portfolio was losing 4.8%, and now it is losing 47% to date, not counting dividends. Only MBIA Inc. (NYSE: MBI) is up and there are question marks about this company too.

Continue reading Chasing Value: Money flood & bank mud

Chasing Value: Money flood & bank mud originally appeared on BloggingStocks on Mon, 27 Oct 2008 11:28:00 EST. Please see our terms for use of feeds.

Continue reading Lehman screws workers out of severance payments

Lehman screws workers out of severance payments originally appeared on BloggingStocks on Tue, 07 Oct 2008 13:25:00 EST. Please see our terms for use of feeds.

If not for the collapse of Washington Mutual (NYSE: WM) this week, I would probably not have posted this saga so soon after last Monday's report. However, since I was a shareholder of WaMu and thought there was value in it when I posted Chasing Value: Are you watching WaMu? I felt it was time to take my lumps.

I cannot go on ranting and raving about the failures and deceptions of others without making sure that I am forthright and transparent myself. I did post Chasing Value: Not -- WaMu one week later - ouch! but now WaMu is toast and so is some of my money.

Since I posted Serious Money: Tempting fate with 10 financials, the results of buying into the following pool of financial stocks at a time when the "hate 'em" factor was at a peak, with each passing day investors have found something more to hate.

The portfolio is losing 4.8% to date, not counting dividends. Some of my colleagues thought it was way too early to get back into the financial sector; seems that way now, and one read me the riot act for reporting the story so soon on MBIA Inc. (NYSE: MBI) being up substantially.

Continue reading Chasing Value: WaMu gone, vultures circling for more

Chasing Value: WaMu gone, vultures circling for more originally appeared on BloggingStocks on Sun, 28 Sep 2008 16:10:00 EST. Please see our terms for use of feeds.

BusinessWeek offers an excellent critique of Treasury Secretary Henry Paulson's $700 billion plan to conduct a reverse auction of $13 trillion in financial toxic waste. But more importantly, it proposes a solution that could be just what we need to solve the problem -- recapitalizing the strongest banks and letting the weakest merge or fail. As I posted, such a strategy would not only solve the real problem -- a lack of capital -- but it would give taxpayers an equity stake in those banks. And that stake might be sold at a profit in a future economic recovery, helping us recoup our investment in this plan.

What exactly is the problem? Too much financial toxic waste and not enough capital to back it up. More specifically, financial institutions (FIs) holding the $13 trillion in mortgage-backed securities (MBS) and collateralized debt obligations (CDSs) only have about $340 billion in capital. So a 2.6% decline in the value of that toxic waste wipes out their capital. To estimate how much capital it would cost these FIs to write that down, I will assume that have already partially written it down -- to 60 cents on the dollar -- or $7.8 trillion. If its market value is even lower, say 20 cents, they would need to take a $3.1 trillion write-down to mark it to market -- leaving FIs with a capital deficit of $2.8 trillion ($3.1 trillion minus $340 billion).

Paulson's plan is deeply flawed since the reverse auctions -- which reward the FI willing to sell its toxic waste for the lowest price -- will either add misery to FIs or taxpayers. The FIs that sell toxic waste that's on their books at 60 cents on the dollar for, say, 20 cents on the dollar will be required to take a 40 cent loss. This will deplete their capital as I illustrated above and they will not be able to raise more.

Continue reading BusinessWeek's brilliant solution to the financial mess

BusinessWeek's brilliant solution to the financial mess originally appeared on BloggingStocks on Thu, 25 Sep 2008 08:52:00 EST. Please see our terms for use of feeds.

How many billions are Paulson and Bernanke asking for? Seven hundred billion dollars. Now that's real money! And the administration is touting this new program as if they knew what they were talking about.

We have heard folks wondering how and why Treasury Secretary Paulson should be given the power and discretion to do as he sees fit with this bailout money.

We have heard people speaking about the pain and the injustice, along with the doubts and reservations about the concept of giving away so much money.

Actually giving this handout to companies that have demonstrated such corrupt thinking and irresponsibility (see SEC opens the gates and the world drowns) is a supreme injustice given that their decisions led to the collapse of once-mighty financial industry titans. See Lehman Bros 158-year sad ending for just one example.

Has anyone asked how the Treasury came up with that number? Can someone explain the difference between $700 billion and a blank check?

Continue reading $700 billion is real money!

$700 billion is real money! originally appeared on BloggingStocks on Wed, 24 Sep 2008 13:15:00 EST. Please see our terms for use of feeds.

Let's be polite. It looks like John "Straight Talk Express" McCain may have misspoken when he said that his campaign manager did not receive money from Freddie Mac (NYSE: FRE). McCain said in a CNBC interview on September 21 that his campaign manager, Rick Davis, "has had nothing to do with [Freddie and Fannie Mae (NYSE: FNM)] since [2005], and I'll be glad to have his record examined by anybody who wants to look at it," according to the New York Times. He was either kidding, having a senior moment, or worse. It turns out that Freddie paid Davis "$15,000 a month from the end of 2005 through [August 2008]," according to the Times.

Although Davis did not do much for the money -- besides retain his ties to McCain -- his firm, David Manafort, got $500,000 from Freddie and $2 million between 2000 and 2005 as president of "the Homeownership Alliance, which [Freddie and Fannie] created to help them oppose new regulations," according to the Times. It's too bad because more regulation might have prevented the need to spend $200 billion worth of our money to bail out Fannie and Freddie bondholders like PIMCO's Bill Gross and China's People's Bank.

Sure, McCain has been trying to change the subject -- by creating, what I consider to be, false advertisements that accuse a former Fannie CEO of advising Obama. (This former CEO and the Obama campaign both deny the ad's claim, according to the Times). And while McCain's "verbal missteps" may disturb some, his pattern of working closely with those who deregulated the financial services industry links him to what put our economy in the tank. After all, his chief economic advisor, Phil "Americans are Whiners" Gramm, deregulated the Credit Default Swap (CDS) market that helped bring down Lehman Brothers and American International Group (NYSE: AIG).

Continue reading Was McCain's campaign manager in the tank for Fannie/Freddie?

Was McCain's campaign manager in the tank for Fannie/Freddie? originally appeared on BloggingStocks on Wed, 24 Sep 2008 10:15:00 EST. Please see our terms for use of feeds.

The history of Lehman Brothers parallels the growth of the United States and its energetic drive toward prosperity and international prominence. What would evolve into a global financial entity began as a general store in the American South. Henry Lehman, an immigrant from Germany, opened his small shop in the city of Montgomery, Alabama in 1844. Six years later, he was joined by brothers Emanuel and Mayer, and they named the business Lehman Brothers.

Cotton was the cash crop of the time, and the Lehmans accepted it from the local farmers as currency to settle accounts. The brothers traded the cotton for cash or merchandise, becoming brokers for buyers and sellers of the crop. In 1858, they opened an office in New York, which was the commodity trading center of the country.

Continue reading Lehman Bros 158-year sad ending

Lehman Bros 158-year sad ending originally appeared on BloggingStocks on Tue, 23 Sep 2008 12:00:00 EST. Please see our terms for use of feeds.

Almost two months have passed since I posted Serious Money: Tempting fate with 10 financials - the results of buying into the following pool of financial stocks at a time when the "hate 'em" factor was at a peak, or so I thought. Now things are even worse, much worse, and a new market bottom was reached only last week.

Trying to predict where this market will go is not possible, but there are many ways to play it. I chose to buy into a pool of financial stocks, believing the survivors would post gains that would overshadow the losers.

When I last updated this story, the pool of stocks was up 26%. Things have gotten worse, but the group is still up 13.89% plus the dividends. This is better than any of the indices, although it is much more speculative.

There was plenty of big news since the last report. While Lehman Brothers Holdings (OTC: LEHMQ) went bankrupt, MBIA Inc (NYSE: MBI) made up for it by more than doubling. Meanwhile, Merrill Lynch (NYSE: MER) is in survival mode supported by a Bank of America (NYSE: BAC) buyout offer. Seven stocks are up, two are down and one is gone (returns from July 29 prices):

Continue reading Chasing Value: Financial devastation? Still up but less

Chasing Value: Financial devastation? Still up but less originally appeared on BloggingStocks on Mon, 22 Sep 2008 12:40:00 EST. Please see our terms for use of feeds.

Lehman Brothers CEO Dick Fuld has been in seclusion since the company's bankruptcy filing last week, but get out your popcorn and soda: he's set to be in Washington this week to testify before the House Committee on Oversight and Government Reform. Fortune's Patricia Sellers reports that "Fuld is supposed to explain what led to Lehman's collapse and explore the impact on financial markets and the U.S. economy."

For those of you who are playing along at home, there are essentially two possibilities for what Mr. Fuld will offer as an explanation:

• "I screwed up. We borrowed too much money to make bad investments that we didn't understand, and when the crap start to hit the fan, I was dumb enough to buy back stock instead of raising cash. Can you believe that? I take full responsibility for this mess and, no, I'm not giving back my money."
• "My company was destroyed by mean nasty short-sellers who spread mean nasty rumors about the company, and then drove down the stock through naked short-selling. If the SEC would have reined in market speculators and manipulators, we would still be alive and I'd still have that cushy leather desk chair."

I'm going to go out on a limb and suggest that Fuld's explanation will be mainly the latter. But take it with a grain of salt: when former Enron CEO Jeff Skilling was hauled before Congress to explain that company's collapse, he said that "It is my belief that Enron's failure was due to a classic run on the bank, a liquidity crisis spurred by a lack of confidence in the company."

But the reality is that Enron and Lehman filed for bankruptcy protection because they didn't have enough assets to cover their liabilities. Period. And it's wrong to blame that on the few short-sellers who were prescient enough to see through optimistic and misleading "forward-looking statements."

Dick Fuld heads to Washington to explain Lehman collapse originally appeared on BloggingStocks on Sun, 21 Sep 2008 15:10:00 EST. Please see our terms for use of feeds.

I've put together a good-sized Enron memorabilia collection, inspired by the affordability. I was able to buy an Enron lunch bag on eBay for less than the cost of a similar nonbranded product at Wal-Mart.

The collapses of Lehman Bros. and Bear Stearns aren't anywhere near as interesting but the headlines have attracted a swarm of eBay listings. According to The New York Times, "When a big Wall Street firm goes belly up, one bet you can take to the bank is that memorabilia will be offered for auction on eBay within hours. "

If you're looking to support a charity instead of an opportunist -- or burned employee who, having lost his 401(k) grabbed a stack of mugs on his way out the door -- one seller sold a piece of toast with the initials "BS" and "LB" branded on each side. Proceeds benefit the Children's Diabetes Foundation in Denver. The price? A mere $15.50. A piece of toast that offers the ticker symbols of companies about to collapse would likely be worth far more.

As an investment, I don't think Lehman and Bear memorabilia are compelling: collectibles from the Enron and Worldcom blowups do not appear to have appreciated in value.

Lehman Bros. and Bear Stearns are toast -- and on toast on eBay originally appeared on BloggingStocks on Sun, 21 Sep 2008 11:40:00 EST. Please see our terms for use of feeds.

With theories flying about the cause of the problems in the financial sector, just about every possibility has been discussed. Unfortunately, the media has given tremendous attention to the "evil short-seller conspiracy" idea but, on his blog, billionaire Mark Cuban offers a more sane alternative: "Risk and reward have been decoupled for CEOs on Wall Street."

Cuban writes: "If you are the CEO of a major public company, once you qualify for your golden parachute there is absolutely no reason not to throw the Hail Mary pass, and do high risk deals every chance you get.... Lets just say for example, you run Fannie May or Freddie Mac. You basically f*** up the entire housing economy. Your punishment ? You walk away with 9mm and 14mm dollars as severance."

Instead of cracking down on short-selling, regulators and especially directors should be looking at the corporate governance issues that led executives at companies like Fannie Mae (NYSE: FNM), Lehman Brothers (NYSE: LEH), and American International Group (NYSE: AIG). One possible solution that is already beginning to take hold at many companies is providing executives with restricted stock grants instead of options so that there is an incentive to retain value rather than betting the farm on growth.

While Cuban's analysis is probably overly simplistic -- the recent mayhem is not only a result of poorly structured CEO pay -- the huge unchecked risks and excessive leverage at so many companies should lead to a renewed call for changes in corporate America.

Mark Cuban on the cause of bank meltdowns -- it's not short-selling! originally appeared on BloggingStocks on Sat, 20 Sep 2008 16:40:00 EST. Please see our terms for use of feeds.

Historians are likely to look back on this week as one of the most significant in American economic history. This was the week that the government let Lehman Brothers Holdings Inc. (NYSE: LEH) fail -- a record $639 billion bankruptcy, lent $85 billion to keep American International Group (NYSE: AIG) from collapsing, and pumped $300 billion into global financial markets to keep them from seizing up. But that turned out not to be enough to keep the markets afloat -- for that Hank Paulson needed the ultimate bailout.

While I don't remember much of the American History I studied in high school, one thing sticks with me today. It always seems that it takes a major crisis to get America to make big changes. It is never possible for leaders to foresee problems and take action to avert them before they turn catastrophic. The averting catastrophe approach always struck me as far smarter than the crisis approach. However, it seems that lawmakers need tangible evidence of prior bad outcomes to make the case that the status quo is deeply flawed and must change.

While he had already loosened up $800 billion in taxpayer money by Wednesday, Paulson needed an even scarier story to get Washington to agree to an additional $500 billion to create an agency to buy illiquid assets from financial institutions. What exactly did he tell Congress and the president to scare them into agreeing to this plan? AP suggests that he described evidence of the global financial market ceasing to function and painted a frightening picture of the economic and political chaos that would ensue if that functioning ceased for an extended period of time.

Continue reading How Paulson scared Washington into $500 billion bailout

How Paulson scared Washington into $500 billion bailout originally appeared on BloggingStocks on Sat, 20 Sep 2008 08:05:00 EST. Please see our terms for use of feeds.

Goldman, Morgan Stanley soar on newest government bailout originally appeared on BloggingStocks on Fri, 19 Sep 2008 13:14:00 EST. Please see our terms for use of feeds.

Financial stocks indeed rose in pre-market trade. Goldman Sachs (NYSE: GS) is up over 21%, Wachovia (NYSE: WB) up over 24%, Washington Mutual (NYSE: WM) up over 35%, Citigroup (NYSE: C) up over 17%, Bank of America (NYSE: BAC) up over 18% and JP Morgan Chase (NYSE: JPM) up about 9% to name a few.

Morgan Stanley (NYSE: MS), which is also rallying nearly 25% in pre-market trade, is apparentlyI in talks with China Investment Corp. on selling a stake of up to 49% to , as opposed to merging with Wachovia, the Financial Times reported.

Oracle Corp. (NASDAQ: ORCL), reported better-than-expected quarterly results and raised its outlook. The stock is up 6% in pre-market trading.

Palm Inc. (NASDAQ: PALM) shares, however, are down 9% in pre-market trading after initially reacting positively to the quarterly results Thursday in after-hours trade. The smartphone maker reported overall better-than-expected quarterly results even as its net loss widened.

Continue reading Before the bell: Huge rally expected; financials (GS, WM, WB, MS) up big; ORCL, PALM respond to earnings

Before the bell: Huge rally expected; financials (GS, WM, WB, MS) up big; ORCL, PALM respond to earnings originally appeared on BloggingStocks on Fri, 19 Sep 2008 08:08:00 EST. Please see our terms for use of feeds.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. DISCLOSURE: I owned BSC and now own shares in its acquirer JPM.

SEC opens the gates and the world drowns originally appeared on BloggingStocks on Thu, 18 Sep 2008 13:51:00 EST. Please see our terms for use of feeds.

The New York Times reports that the Federal Reserve has less reserves. Specifically, a year ago it had $800 billion in reserves and that number is down 63% to $300 billion. The other $500 billion is "encumbered" -- that's a nice way of saying that instead of being invested in "safe" Treasury bills, the Fed owns the assets of American International Group (NYSE: AIG), $29 billion worth of grubby former Bear Stearns collateralized debt obligations (CDOs) and the like through a little something it calls "Maiden Lane LLC", and tens of billions worth of the same from Lehman Brothers Holdings Inc. (NYSE: LEH) and other banks.

I raised the question of Fed solvency in July. Whether it was solvent then, it is less so now. But is there a limit to how much money the Fed can create to fund itself? With demand for Treasury Bills skyrocketing (albeit at interest rock bottom interest rates of 0.14% for the 1-month bill), it looks like now would be a great time for the Fed to replenish its coffers by issuing a trillion dollars worth to shore up its balance sheet. If it can indeed do that, the downside is that these low rates will pay it very little income.

And assuming that the Fed does not want to be in the business of owning half a trillion worth of encumbered assets, it will eventually need to get rid of them. And in so doing, it could find itself in competition with the ever- dwindling portion of the investment banking and insurance industry which the government does not own. How so? Because the Fed will be competing to get the best price for the assets it is trying to sell.

Will it use its power to put those publicly traded companies in a pickle? Or will it forgo the advantage to the taxpayer so its competitors can profit? Beats me.

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

Here we go again: Is the Federal Reserve solvent? originally appeared on BloggingStocks on Thu, 18 Sep 2008 10:10:00 EST. Please see our terms for use of feeds.

Continue reading Cramer on BloggingStocks: I'm waiting for the other shoes to drop

Cramer on BloggingStocks: I'm waiting for the other shoes to drop originally appeared on BloggingStocks on Thu, 18 Sep 2008 09:57:00 EST. Please see our terms for use of feeds.