Maybe I am getting a bit burned out. I almost took a night off because I couldn’t get worked up as I normally do about the stories du jour.
When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.
Mind you, this wasn’t pre-March 2007, when everything looked rosy. This was in July, when the cracks had started to appear and after the Bear hedge fund crisis. That sort of comment is a hubristic death wish, a willful defiance of the warnings. And the odds most assuredly caught up with Prince.
But for my money, the juicier bit in the Wall Street Journal story on Prince’s imminent departure is that Citi may take further writedowns:
People familiar with the matter said the Securities and Exchange Commission is looking into the bank’s accounting for its off-balance sheet investment funds that have recently attracted scrutiny…..
The board is expected to discuss whether Citigroup should update the amount of write-downs that it has taken on certain securities to reflect their deteriorating value, according to people familiar with the matter.
The issue has generated intense discussion in the bank’s senior ranks in recent days and could potentially result in a significant addition to the $3.55 billion capital-markets hit to third-quarter earnings that Citigroup announced just three weeks ago. The company is expected to file a quarterly report with the SEC next week.
Citigroup is the largest player in the $350 billion SIV market, managing seven of these off-balance sheet vehicles that hold a combined $80 billion in assets. SIVs have issued short-term debt to investors such as money-market funds while buying mortgage-backed securities and other assets that carry a higher yield.
“Citi is confident that its SIV accounting is proper and in thorough accordance with all applicable rules and regulations,” said Christina Pretto, a bank spokeswoman.
The SEC’s review of Citigroup is in the early stages, people familiar with it said. The result could range from no action to a referral to the agency’s enforcement division. The SEC is also taking a broad look at how brokerage firms valued assets tied to high-risk mortgages and whether they were timely in their disclosure of losses to investors, people familiar with the matter say.
There has also been surprisingly little discussion of the lack of bench depth at Citi and Merrill. Prince was a weak choice for CEO. For example, Sallie Krawcheck, the former CFO, now head of wealth management, has been given what amount to battlefield promotions. She may be talented enough to pull it off, but she does not have a depth of managerial experience (her stint at as the head of the newly constituted Smith Barney cum research and brokerage operation was relatively brief). Similarly, Vikram Pandit, the new head of investment banking, is undeniably able, but is now supervising some important businesses that lie outside his trading-area expertise.
To Merrill. Bloomberg claims that Stan O’Neal’s exit package is one of the five largest and is stoking Congressional ire. However, the proposed measures, to give shareholders more say on pay, is certain to have no impact. Diffuse and largely disenfranchised owners are no match (save when enough team up to wage an effective proxy battle) for comp consultants and craven boards who are nominated by management and therefore beholden.
As for the bombshell that Merrill may have parked securities with hedge funds to delay the reporting of losses, the Financial Times reports that there may be nothing untoward about Merrill’s actions:
Experts said that, without further details, it was hard to determine how such a transaction would have differed from a standard commercial paper funding arrangement, other than that it involved a hedge fund. Hedge funds are not typically buyers of commercial paper.
Many banks which underwrite collateralised debt obligations use off-balance sheet vehicles in which to hold the underlying mortgage-backed securities.
The vehicles are funded by issuing commercial paper for which the banks often provide so-called liquidity back-ups. This means the banks commit to buy the paper if other purchasers cannot be found when it comes due.
“It looks just like selling commercial paper with a liquidity facility,” said an analyst at a rating agency.
Whether the Journal’s charges are borne out, we still have the other Merrill eruption, namely, the Deutshce Bank estimate that it still have losses to take of $10 billion:
Merrill Lynch & Co. fell the most in six years, leading financial stocks lower for a second day, after Deutsche Bank AG said the world’s biggest brokerage may write down an additional $10 billion for losses on subprime assets.
“We have increasingly lost confidence in the financials of Merrill,” Deutsche Bank analyst Michael Mayo said in a report today. “Merrill may have additional credit rating downgrades” should the New York-based firm be forced to write down the value of its debt holdings, Mayo said.
I assume that Bloomberg misquoted Mayo. Merrill can’t possibly have $10 billion in losses on subprimes. since it has only $5.7 billion remaining. However, it has $15.2 billion in CDOs, and having almost assuredly sold the better ones (that’s how it generally goes in a deteriorating market), the rest looks plenty vulnerable, particularly with CDO downgrades being announced by the rating agencies. We had guesstimated that next quarter losses could exceed $7 billion, and Mayo’s figures are plausible.
Other observers suggested the alleged transaction might have involved the hedge fund buying the underlying assets with a guarantee from Merrill that they would be bought back in a year’s time at a set price. One expert said that on the surface this resembled a standard “repo” funding arrangement.
Similarly, we could have written about one of our favorite topics, phony government stats, but that has been ably covered elsewhere. The 3.9% GDP release was a complete crock, and Barry Ritholtz jumped on it right away:
At the risk of sounding shrill, I am compelled to point out the quantum bogosity of this 3.9% GDP number: It is highly dependent upon a rather suspect reading of Price Increases/Indexes for Gross Domestic Product: The Price Deflator rose a much less than expected .8% vs expectations of 2%.
The increase in real GDP in the third quarter reflected positive contributions from personal consumption expenditures (PCE), exports, federal government spending, equipment and software, nonresidential structures, private inventory investment, and state and local government spending that were partly offset by a negative contribution from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.
The slight acceleration in real GDP growth in the third quarter primarily reflected accelerations in PCE and in exports that were partly offset by an upturn in imports, a larger decrease in residential fixed investment, and a deceleration in nonresidential structures.
Price Indexes for Gross Domestic Product was an astounding low 0.8% (Table 4). In other words, this report benefited as much from higher inflation as it did from true growth.
I obviously take issue with that (as Crude Oil crosses $94 for the first time).
To highlight the impact that this 0.8% price gain had on the reported REAL GDP: that 0.8% gain matches a level last seen in 1998; prior to that, the previous deflator gain of .8% was n 1963.
Similarly, the non-farm payrolls report Friday, which showed an increase of 186,000, was also rubbish. As Michael Shedlock tells us:
The overall numbers look OK on the surface but once again the devil is in the details.
Manufacturing shed another 21,000 jobs this month and continues to lose jobs every month.
Government added 36,000 useless workers.
Leisure and hospitality (typically very low paying jobs) added 56,000 jobs.
But we get back to our usual culprit, the birth-death model, which is a statistical plug to allow for job gains or losses at businesses either so newly created or folded as to not show up in the stats. It has been a source of dubious adjustments for months running. Back to Shedlock:
The BLS is assuming not only that jobs were added, but that new unaccounted construction businesses were created in this environment where business capex spending has been weak, housing has been horrid, and over 170 lenders have gone out of business or stopped writing loans since last December as per the Mortgage Lender Implode-O-Meter.
Clearly this is reporting from an alternate universe.
A note of caution: One cannot take the birth death adjustments and subtract them from the reported numbers because one set of numbers is seasonally adjusted and the other is not.
Finally, we have been following what so far appears to be an underrreported story, namely, the tsuris of the mortgage guarantors, which include AAA so-called monoline insurers like Ambac and MGIC (see here and here). Elaine Meinel Supkis, who is eccentric, conspiracy minded (which appeals to me even when she is wrong, although she is most often right), and obsessive in her trolling for information, has a very lengthy and very good post, “Bond Insurers Are Going Bankrupt Now.” This is going to be important, and her entire post is worth reading. Some excerpts:
Credit derivative traders are valuing bond insurers Ambac Financial Group (ABK.N: Quote, Profile , Research) and MBIA Inc (MBI.N: Quote, Profile , Research) as deep junk credits, while their stock prices have also plunged on concerns the companies may need more capital to shore up their high ratings.
Credit default swaps on Ambac have surged to around 620 basis points, or $620,000 per year for five years to insure $10 million in debt, from 185 basis points a month ago, according to data provided by CMA DataVision.
Its shares have tumbled nearly 60 percent since the beginning of October, 41 percent this week alone.
Ambac and MBIA both reported third-quarter losses last week caused by their writing down the market value of their respective credit derivative portfolios, which are used to insure assets including residential mortgages against default.
This is a major failure. This is deep beneath the surface of the waters, like the Titanic ripping its hull underwater, these organizations we will visit tonight are similar: they are the hull of the banking system. They are the ones who are supposed to protect the banking system from failure and they are now failing, themselves. This is serious…..
Knowing this background, it is time to look at the effects of this major banking collapse which is bigger, I think, than the previous 3 banking collapses I have seen in the past.
href=”http://news.yahoo.com/s/ft/20071102/bs_ft/fto110120072249061435;_ylt=Ajn8QQhKv6OkXw4APDGfuFb2ULEF”>CDS traders warn of ‘blood on streets’
Bond insurers, or monolines, were also hit hard.
“[These triple-A rated companies are] exposed to the crumbling housing market,” said Gavan Nolan, an analyst at derivatives data provider Markit. “Investors in monolines will be waiting for the coming months of housing data with trepidation,” Mr Nolan said. CDS on MBIA Insurance rocketed to a four-year high, of 345bp, CMA Datavision said.
Last week the insurer posted $36.6m net loss and halted its share buy-back programme. Contracts on the bond insurance unit of Ambac Financial climbed to a five-year high of 310bp. Gimme Credit, an independent research term, downgraded both MBIA and Ambac this week.
When the AAA rating is dropped, this means one has to pay a higher interest rate because one looks more and more like the bastard sons of Miz Risky, that wench, that wild female who sleeps around and parties all the time and who goes to Vegas at the drop of her panties, no one trusts Risky or her children! But all speculators love her to death. Insurance groups that are supposed to be hedging banks and lenders can’t afford to look like Risky’s kiddies, they have to appear sober and clean, not drunk and staggering about the place. But who is going to replace these organizations that messed up?
First, I would suggest they never had insured these CDOs and tranches in the first place. Like Moody’s and others who also decided they wanted to play footsie with Risky, these guys threw caution to the winds and embraced an obvious old whore and kissed her and got the cooties. Yuck. Well, serves them right!
You have to love someone who has the nerve to write like that.