Time to sound the Tocsin?? revisited

See the post for 9/9/08, time to sound the tocsin. I have been pondering that quote for a week now and I realize that Director Lockhart may have meant that investors are only buying higher quality mortgage backed security portfolios, especially those with low or no exposure to sub-prime mortgages. Of course the higher quality MBS command a higher price than those with riskier mortgages in them. If you have an opinion on this please express it in the comments section.

Another day another line in the sand drawn

The Federal Reserve Board announced an $85 billion loan to AIG in exchange for a 79.9% equity stake in the company. The Fed, along with the US Treasury, consider AIG too big, too interconnected to fail. The good news is the Fed might actually turn a profit on the deal. The Fed's hope is that AIG will be able to ride out the current storm in the credit markets and get back on its feet again. When that occurs, the Fed will cash in their equity stake and pay back the loan. Let's hope this works.
Apparently the "line in the sand" the Fed drew with Lehman Brothers can shift. It seems that sand line is actually calculated on a case by case basis. The criteria being how big the company is and what impact its failure will be on the US and world economy. Lehman Brothers just didn't qualify for a direct bailout. A year ago LEH's market capitalization was $33 billion, now it's in bankruptcy proceedings and selling off its assets at bargain basement prices. Barclays bank is offering $250 million for LEH's North American investment banking and trading operations. Barclays is also paying $1.5 billion for the LEH New York headquarters and 2 New Jersey data centers. The deal is subject to approval by the bankruptcy court. The deal would save almost 10,000 LEH employees from job loss. This makes me believe the court will have no problems with it, unless it considers the price way,way,way too low.
Here's another interesting development in the LEH bankruptcy, JPMorgan Chase (JPM)advanced LEH $87 million Monday morning to allow LEH to continue its trading operations and avoid disruptions to financial markets. The New York Federal Reserve Board reimbursed JPM for this. Apparently the treasury secretary's refusal to bail out LEH did not apply to loans made after no deal was reached and LEH decided to file chapter 11 bankruptcy. On Tuesday, JPM advanced LEH another $51 million. The bankruptcy court judge also appointed JPM as LEH's clearing house for its trading operation during the proceeding. This means that JPM has put $138 million into LEH to fund its trading operations in 2 days. This is over 50% of Barc's offer of $250 million for trading and investment banking operations. What this means is beyond me, if anyone out there has any knowledge on this please share it in the comments section.

Another day another sunrise!!

Good Morning from Mt. Washington everyone!! Despite all the bad news from the world's stock markets, the Sun is rising today. Another ray of hope, the UK based Barclays (barc) bank is negotiating with Lehman Brothers to buy some units of LEH's business, just not asset and wealth management. Barc backed out of a purchase deal when the US Treasury would not guarantee LEH's future trading obligations. Barclays is interested in LEH's core broker dealer businesses. There is an urgency to the deal because Barc wants to close before LEH loses staff and clients, which would diminish the value of the purchase and make resumption of operations more difficult. Another concern is Barc's shareholders who will want to see a very low price as reward for the risk of investing in a bankrupt company.

Praise for The Feds!!!

Here in Mt. Washington, It is Monday morning and the Federal Reserve Board's meeting failed to arrange a buyer for Lehman Brothers(LEH). The Feds refused to provide any funding or guarantees for a buyer of LEH so no one offered to buy it. Bank of America, one of the potential buyers of LEH did buy Merrill Lynch(MER)for $50 billion. LEH will file for chapter 11 bankruptcy protection.
I am very pleased with the feds decision not to fund the purchase of LEH. The American taxpayers have already bailed out too many companies. We cannot afford to keep protecting investors from the risks they took on when they invested in subprime real estate. The credit markets need a correction and the sooner it starts the sooner the markets will recover. In my opinion, the bailout of Fannie Mae/Freddie Mac was good money after bad. Hopefully I am wrong and the Fannie/Freddie buyout will help stabilize the market in the long term. Today and this week will be an interesting one for Wall Street and the financial services sector of our economy.

P.S. Remember yesterday's post saying that LEH was the most urgent concern? The meeting also was concerned about other financial services firms in dire straits. Two of the other firms on the short list of troubled companies are Washington Mutual, the largest savings bank in America and American International Group(AIG), one of the world's largest insurance companies. More to come on these companies soon.

Another weekend another bailout!!

As if Mondays aren't inherently bad already, The New York Federal Reserve board convened a meeting between federal finance officials and executives of major banks, thrifts and investment firms Friday night. Lehman Brothers (LEH), the USA's 4th largest investment firm was the major and most urgent reason for the meeting. On Wednesday, Sept 10, LEH CEO Richard S. Fuld announced a plan to sell the company. He proposed taking the real estate holding which are dragging LEH's stock value down and transferring them to a separately held and traded new company. Then majority shares of the remaining institutional and personal money management units would be sold to raise much needed cash. Bloomberg news reported that LEH received bids for these units for approximately $5 Billion. Fuld proposed the sale after negotiations for a capital investment from the Korea Development Bank stopped without an infusion for LEH.
Apparently this was not good enough or fast enough for the Feds. Timothy Geithner, president of the New York Federal reserve board started the meeting Friday night by advising the executives present to come up with a bailout plan or run the risk of being the next company to face liquidation, bankruptcy or takeover. Meetings continued Saturday and are expected to continue on Sunday as well. LEH share price closed Friday (9/12/08) at $3.65,the trading range on Friday was $3.17 - $4.22, the 52 week range was $3.17-$67.73. This makes Friday's close a loss of over 90% from the 52 week high. No wonder the feds are acting so quickly.
Another reason the Fed is acting quickly is to reassure Foreign Banks that their holdings of LEH and other US financial services companies bonds will not suffer sudden losses. This weekend European Union finance ministers met in Nice, France to discuss the economic downturn started by the decline of the US sub-prime market. German Finance Minister Peer Steinbrueck told reporters that "The news from the United States is bad." He also expressed hope that the LEH situation would be resolved before Monday's Asian Markets opened for trading. How did the US ever get to the point where we have to reassure the world of our ability to withstand market corrections?? Maybe it's time to let LEH fail and spare the US treasury and its financiers, the American taxpayers another expensive bailout. Who knows??
To the government's credit, treasury secretary Henry Paulson is insistent that there will be no cash bailout from the US treasury this time. Most of the banks that are considering buying LEH want the US to inject some cash into the deal a la Bear Sterns in March 2008. Hang in there Hank, we're counting on you.

Time to sound the Tocsin??

So far, the goal of these rants has been to reveal that the socalled subprime mortgage crisis is not so much of a crisis as a regular part of the business cycle. (feast then famine then back to feast again in 25 words or less) This "crisis" is actually a correction. Mortgage lenders went overboard in the subprime lending area and eventually got burned. Bear Stearns, Fannie Mae & Freddie Mac the most prominent examples. Each required bailout by the Feds because they were too big to fail. Same old, same old.
On Sunday, 9/7/2008, the director of the Office of Federal Housing Enterprise Oversight, soon to become the Federal housing finance agency, James B. Lockhart, issued a statement on the takeover of Fannie Mae and Freddie Mac. I will quote paragraph 5 here:

"Key events over the past six months have demonstrated the increasing challenge faced by the companies in striving to balance mission and safety and soundness, and the ultimate disruption of that balance that led to today's announcements. In the first few months of this year, the secondary market showed significant deterioration, with buyers demanding much higher prices for mortgage backed securities."

Please read the last sentence, this is disturbing to me. Remember, the goal of Federal Agencies such as the FRB, FHFA, OFHEO.. etc is to help maintain orderly, efficient and effective markets. Director Lockhart seems to be saying that buyers are demanding higher prices for mortgage backed securities. Since when did the buyers demand higher prices?? Most markets, orderly, efficient, effective or otherwise have the sellers demanding higher prices and the buyers demanding lower prices. Has anyone ever gone into a grocery store and said" This chicken is worth lots more than $2.00 a pound, charge me $4.00 or I'm taking my business elsewhere, and asking everyone I know to do the same!! " If that person continued to demand higher prices one of 2 things would happen. A store employee would charge the extra money and pocket the excess for her/himself or the police would be summoned and commitment proceeding would start. (in most cases, the latter. I have an optimistic opinion for my fellow human beings.)
If the buyers are demanding higher prices, maybe I am wrong and this is a true crisis. Hopefully, there is another more reasonable explanation for buyers wanting to pay more for their purchases.
You can read the Director's statement about Fannie Mae & Freddie Mac's takeover at visit FHFA newsroom. Choose Statement of FHFA Director James B Lockhart dated 09/07/2008 when you get to the newsroom.

Feds seize Fannie Mae & Freddie Mac

WooooHoooo!!! The Federal Government put Fannie Mae and Freddie Mac in Conservatorship to prevent further economic losses from the deteriorating home mortgage market. These 2 quasi-government agencies hold nearly 50% of the USA's home mortgage debt. Who created this gross violation of the investor's risk management rule of not putting too many eggs in one basket?? The Federal Government of course. This reminds me of the farmer jokes about the fox guarding the chicken coop from the weasels. Fortunately, The Feds are bringing in retired banking executives to guide the "Enterprises" through the conversatorship. David Moffett, former vice chairman and CFO of US Bancorp, will head Freddie Mac. Herb Allison, former vice chairman of Merrill Lynch, will head Fannie Mae. This gives me hope that this conversatorship will eventually work to the benefit of the American taxpayers, not the shareholders who are supposed to deal with both the risks and rewards.
What exactly is a conversatorship?? When a company is in dire straits and facing failure, it can be put in a conversatorship. The goal of conversatorship is to turn a company around, stabilize it and let it go back to business as usual. Oftten when a company is bailed out by the government, the phrase too big to fail becomes all too commonplace. Liquidation of the company is not a goal, in fact, it is considered an option of last resort.
Another ray of hope for the success of the conversatorship are the presidential candidates responses to the takeover. Republican John McCain supports the conversatorship but wants the "enterprises" to be privatized once they are out of the conversatorship and taken off the backs of the American taxpayers. Barack Obama wants "clarification of the private and public nature of our housing policies." He also does not want shareholders to be protected from the risk inherent in mortgage investing by the American taxpayers. For once they both agree on the right way to handle one of our nation's problems. Wow! Sept. 7, 2008 should be a red letter day in history.

Speaking of history, let's add a historical perspective to this event. So far in 2008 11 banks have failed and required bailout by the Feds. In 1988, over 200 banks failed. During the 1980s over 800 banks and 500 savings and loan associations failed. That is 1300 financial institutions in a 10 year period. Do the math and you will discover that is 130 failures a year or over 10 failures a month for 120 months. Yikes!! History does repeat itself from time to time and those who do not learn from past mistakes are bound to commit them again and again.