Guest Post: Wall Street Back To Its Criminal Ways?

Submitted by Tyler Durden, publisher of Zero Hedge

There was a time on Wall Street when insider trading was rampant, when sellside analysts would pump stocks under the guidance of their superiors only to have their corporate finance colleagues do an equity offer shortly after, when the amount of money a bank’s corporate clients paid would determine its rating, and when analysts said in internal emails a company is worthless, only to issue reports claiming the company was the next sliced bread. Then things changed for the better briefly, when Spitzer came on the stage. However, with his thunderous fall from grace in an act of utter hypocrisy, the behavior he fought so hard to curb started gradually coming back.

Yesterday, Wall Street’s shadiness came back with a vengeance.

As Zero Hedge disclosed yesterday, mall REIT Kimco decided to dilute its equityholders by issuing over $700 million (including the green shoe) in new shares which would be used to buy back the company’s debt, as KIM has $735 million in debt maturities over the next 3 years, and a $707 million currently drawn on its secured credit facility. One look at the company’s equity prospectus reveals that the lead underwriter is non other than “scandal-central” investment bank Merrill Lynch.

There is, of course, nothing wrong with being a member of an underwriting syndicate – in fact, absent generating profits from AIG structured finance liquidations forever, banks like ML (better known these days as Bank of America’s slam dunk acquisition if one listens to Ken Lewis) will need it if they want to generate revenues. However, what Zero Hedge has a major problem with, is what ML equity research analyst Craig Schmidt did hours if not minutes after the offering was announced. In a research note update, Schmidt, who now gets his paycheck from Bank Of America (this will be relevant in a second), raised KIM’s rating from Underperform to Buy.

This is where visions of Jack Grubman should resurface. While Zero Hedge will not speculate over the efficiency of the Chinese Wall at Merrill Lynch, aka Bank Of America, something in this transaction stinks to high heaven.

Let’s walk through the sequence of events:

1) First Merrill Lynch/BofA gets clients to subscribe to a massively diluting equity offering (105 million new shares out of 271 million pre-offering shares, or 39% dilution). The offering prices at $7.10/share, a 6% discount to the previous day closing price of $7.49. In the process Merrill pockets an underwriting fee likely equal to 3% of the offering or around $20 million.

2) Minutes after the offering Merrill REIT analyst Schmidt comes out with a report, changing the recommendation on the stock from a Sell to a Buy, thereby getting the vanilla money which makes critical fiduciary decisions merely based on what some sell-side analyst will recommend. As a result Kimco stock rises throughout the day and closes at $9.40, a 25% premium to the closing price, and a 30% premium to offering price of $7.10, which closed that very same day.

3) Notable here is that Schmidt had come out with a Sell (aka Underperform) report on the company less than two months ago, on February 5, titled “Write-downs drove the miss.” Among Schmidt’s concerns were the following very salient points:

Write downs, not Q4 operating metrics, are the issue

KIM’s Q4 operating metrics took a back seat to write downs in the quarter as the company reported a sharp drop in FFO as it booked $111.8mn in non-cash impairment charges. These write-downs included $83.1mn for securities investments, $22.2mn for the equity investment in JVs with Prudential and $6.5mn for development projects in addition to $4mn of severance charges due to a reduction in headcount. While Kimco’s shopping center operations held up reasonably well in Q4 (rent spreads remained positive and same-store NOI was +1.4%), the company expects far weaker results in 2009 which is common theme running through the REIT industry.

Transaction income non-existent; lowering estimates

With the extensive write-downs, KIM’s reported 4Q08 FFO of $0.04 was $0.21 below our estimate. Looking to ’09, we expect NOI to decline 3% which includes a 300bp decline in vacancy by YE09. Given the impact of deteriorating operating metrics combined with a sharp reduction in transaction activity, we are reducing our ’09 FFO estimate from $2.15 to $1.74 while our ’10 estimate drops from $2.14 to $1.60.

Lowering PO to $12.50

Due to lower projected NOI growth for ‘09, we reduced our forward NAV for KIM from $17.04 to $14.13 and as a result our PO falls from $15.50 to $12.50 which is roughly a 10% discount to forward NAV. Given the weakness in retail spending and cautious leasing environment combined with a sharp erosion in Kimco’s noncore business segments we are maintaining our Underperform rating until we gain better visibility on the retail landscape.

4) Even assuming Merrill’s Chinese Wall is fully operational, it would be curious to see how the company managed to “sell” to its clients a stock offering in which its very own analyst had a Sell rating: the cynics among us would presume these very clients would have no problem buying into the offering if they knew or anticipated a change in recommendation (especially one from a Sell to a Buy), and knew they could flip the stock they bought through the offering for a 30% gain in one day!

5) And now for the piece de resistance. The company said in its prospectus it would use the offering proceeds to pay down its revolver. “We intend to use the net proceeds from this offering for debt repayment and for general corporate purposes. Our U.S. revolving credit facility is scheduled to mature in October 2011 and accrues interest at LIBOR plus 0.425% per annum. Affiliates of certain of the underwriters are lenders under our U.S. revolving credit facility and will receive their pro rata share of repayments thereunder from the net proceeds of this offering.” That last bit is critical. The company’s $1.5 billion credit facility, on which it had $707 million outstanding as of December 31, will be the direct beneficiary of the offering as the entire $707 million amount would be paid down with the proceeds. And what entity benefits from this paydown: none other than Bank Of America, otherwise known as Merrill Lynch!

Ah, good old circular conflicts of interest. To summarize: i) Merrill, which is probably not too happy with having lent out Kimco $707 million on its credit facility, underwrites a $720 (including a 15% overallotment) stock offering for which it gets $20 million, ii) Merrill’s analyst changes the stock from a Sell to a Buy, causing it to pop 30% in one day, and allegedly allowing participants in the offering to sell their shares at a 30% gain in a day, a mindblowing annualized return, iii) Kimco uses to proceeds to repay Merrill’s credit facility, cleaning out any credit risk exposure Merrill might have with respect to Kimco’s underperforming properties and operations.

At least Schmidt can sleep with a clean conscience after putting the following disclaimer in his report: “I, Craig Schmidt, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.

Zero Hedge, for one, hopes that Cuomo is reading Zero Hedge, as this kind of conflicted circularity would never have been allowed in the Spitzer days. Additionally, on a recent trip, this author stumbled upon a mall in a major metropolitan area where a Michael’s store (another LBO special) had recently vacated thousands of square feet of retail space: the beneficiary of this lack of future cash flow: Kimco Realty Corporation.

In conclusion – to those that managed to get in on the stock offering: congratulations. The 30% return in one day is nothing to sneeze at. To all those other retail and institutional accounts, who piggybacked, and all day were buying the shares sold by the follow-on participants (likely using Merrill’s brokerage desk as an intermediary, thereby generating even more profits for the company), hopefully you see something about the dreary mall REIT space that Zero Hedge is missing. Then again, as these purchasers are likely the very same people who are convinced that all the bad news in this market are lagging indicators, with all the seasonally adjusted “good” news are leading, the fair price of KIM to them is likely much, much higher. We hope they are right: in the meantime it never hurts to look at a cash flow or FFO model, and determine just how much cash a 38% equity-diluted KIM will be generating in the future as the bulk of its mall tenants either go bankrupt or decide they simply can not afford the rising rents that retail REIT operators hope to charge.


There have been comments concerning the sensationalizing of this event. I disagree with these allegations. My point here has been to point out that ML’s benefits from the Kimco affair are numerous, and to a large extent predicated upon the analyst’s rating:

– ML trading desk benefits from increased trading volume in the stock based on the report
– ML’s credit exposure is mitigated from a risky lender as the entire offering will go to pay down ML as a lender on the credit facility.
– ML’s corporate finance department generates a significant amount of revenue on successfully pre-selling the deal to equity investors who apriori only had the ML “Sell” report to fall back on.

Incidentally, a Credit Suisse report from March 12 (Neutral, $9.50 target price), repeats the very same concerns voiced in the earlier ML report. It also goes further to note that KIM needs to raise not $700 million but $300 million more for it to be viable in the long-run. I quote from the CS report:

The initial gameplan for this report was simple: We were going to write a report that would hit KIMCO’s value for the assets outside of core operating portfolio (33% of assets in the company Net Asset Value (NAV) and 27% of our gross assets estimate) and tell you to avoid it. We did exactly that, and still came up with an implied cap rate of 10.5%-one of the highest amongst a study set of trusts. And this is on a company with a management team that knows real estate, has bench strength, and did a lot to deleverage before things got too ugly-they just didn’t do enough.

The problem in our view is that the stock is too leveraged. At a 9% cap rate, we estimate KIMCO’s liabilities to assets leverage nears 70% with 27% of asset value outside of core operating real estate. The global REIT market seems to be applying going concern equity value to trusts with less than 60% leverage at 9% or higher cap rates-not a dumb assumption if this could potentially be the leverage level where conventional first mortgage lending might settle out. The cheapness of KIMCO also deflates when comparing its implied cap rate to its implied bond yield on credit default swap spreads. As a result, we believe KIMCO needs to reduce leverage to become an investable stock.

The trick to deleveraging is that you need to do enough of it. An incomplete offering like GGP’s ill-fated $822 million deal in March 2008 (and for that matter, KIMCO’s $408 million September 2008 offering) does not lead to outperformance. To that end, we estimate that to get to our 60% liabilities to assets goal, KIM needs to issue roughly $1 billion of equity.

Deleveraging can come from other sources: retained cashflow and asset sales come to mind. However, we have sat through too many presentations on how asset sales are on the way in global REITs only to see these transactions fall over at a later date. That being said, perhaps KIMCO can get to our magic 60% number with a combination of asset sales and equity-in other words, requiring less shocking dilution than implied by our $1 billion estimate.

Of course, ML may have had a perfectly innocent goal in mind when it upgraded KIM from a sell to a buy the day it did an equity offering. Whether or not that is the case is up to regulators to decide, if and when they analyze the specifics of the deal, having much more information than I have had access to. I will reiterate: the whole point of the post has been to highlight all the sides of the story, not merely what has been captured by the media or the report. ML could have avoided a lot of this hoopla by disclosing in its research report that it is the lead underwriter on the credit facility that is being repaid by the stock that it has just issued a Buy opinion on.

Another point: on March 25, another REIT AMB properties, on which ML also had a previous Sell rating, raised over $500 million in stock – ML was not a lead arranger on the credit facility but was a lead underwriter on the equity offering. Another ML analyst, Steve Sakwa raised the stock from a Sell to a Neutral (5 days after the offering mind you), not a Buy, on the offering. If the deleveraging thesis was indeed the critical issue here, does it not stand to reason that both stocks would have gotten the same rating (either neutral or a buy) based on the same catalyst?

Lastly the criminality was obviously framed as a question: to be a statement, many more facts need to come to light and hopefully in time they will. To unequivocally state that there are no conflicts between the research side of a bank and the other aspects of a bank’s operations would be to ignore the numerous discoveries unearthed in the Grubman scandals early in the decade.

Disclosure: no position in Kimco stock.

Print Friendly, PDF & Email


  1. Anonymous

    Ok, so here’s what I don’t understand. 9.7 million shares of KIM traded on Friday following the pricing and allocation of the deal.

    Despite the dilution, and points that you raise re conflict of interest, investors bought a lot of stock. And they bought it in blocks. If you really believe that “the vanilla money… makes critical fiduciary decisions merely based on what some sell-side analyst will recommend” you’re very naive.

    Your suggestion that investors “all day were buying the shares sold by the follow-on participants” ignores the fact that the deal size was about 105 million shares. The overwhelming majority of participants did not flip their shares. If this was such a bad deal, why didn’t more deal participants blow out and take the gain? Demand for the stock was certainly strong, as it traded steadily higher all day long.

  2. Lucifer

    Ever read the story of the scorpion and the frog?

    Do you think wall street is going to change?

  3. Anonymous

    All one needs to know about these thieves is contained in the book Other Peoples Money by Nomi Prines Fleecing the sheep by all of these firms is job numro uno.

  4. Anonymous

    I won't defending the timing of the rating change–even a perfectly independent call should have some separation from the offering. However, from 2/4 to 4/2 (the days before the two ratings changes) KIM underperformed the S&P 500 by about 45% and the NAREIT retail index by about 25%. I do think that's a significant factor overlooked here.

  5. xgene

    Some of the trading came from ultrashorts like SRS — which got crushed over the past two trading days — selling off.

  6. Yves Smith

    Anon of 1:22 PM,

    I started out in underwritings (corporate finance at Goldman) and while my knowledge of practice is less than current, I doubt much of the fundamentals have changed all that much (informed readers invited to correct me) This area is subject to SEC regs, and to my knowledge, save Rule 415 in the early 1980s, my understanding is there has not been much in the way of SEC intervention since then.

    First, in an equity underwriting, the vast majority of the time the stock is pre-sold (bonds are different, “bought” deals where the underwriting group bids on the deal and then re-sells it are the norm). Note that even in the traditional equity underwriting model, the iBank also buys and then resells the deal, he does not commit to buy the deal until he has a sufficiently large book of “circles” meaning orders from institutions (and that also includes from retail firms placing orders for clients). It’s a complete no no to welsh on a circle. You’d cut yourself off from future new issue product, which most firms like to buy.

    Equity offerings are also priced BY DESIGN to yield a first day profit. If it didn’t, investors would have much less reason to buy. Historically, you could look at deals by lead manager (ie, Merrill versus Morgan Stanley or Goldman) and determine over time whether their pricing of equity offerings favored investors (largish appreciation the first day of trading) or issuers (more modest price increase).

    The stock generally trades down on the announcement of the offering (due to prospective dilution), the managers go out and sell the deal, the stock generally recovers most if not all of its loss during the marketing period. At least in the 1980s, studies by academics confirmed this pattern.

    The sales story from the analyst is VERY important in placing the deal. The analyst is the lead actor in the road show (if there is one, probably not the case here) and provides the talking points to the institutional sales force (whether directly or indirectly via the corporate finance team).

    The part that is highly irregular here is the analyst changing his rating the day of the IPO (you would have expected it to have happened earlier, which would still be plenty sus). That means he either had the rating change in the works (was that conveyed to investors?) or was pressured into issuing the change and knuckled under very late in the process.

    The results on the first day of trading aren’t terribly meaningful. Under SEC regs, the syndicate manager is permitted to engage in stabilizing transactions (and they ALWAYS do that, it’s a key part of the value added by the lead manager). It’s effectively a legal form of stock manipulation until trading settles down to normal levels. Stabilization is permitted until the syndicate is broken. In my day, that was often at the end of the first day of trading, but could extend longer.

  7. Tyler

    Following up on Yves’ comment, anon @ 1:22 brings up a fair point. It obviously would have been impossible for 30% of the stock float to trade in one day, plus it would have immediately caught the attention of FINRA who, despite being behind the curve, can at least track block buying and selling by account and broker. The trading pattern is an example of rather efficient game theory where if even profit was taking on 10% of allocations, the funds could pat themselves on the back as they effectively lowered their cost basis by another 10%+. And there were of course other technicals involved, but the self-referential buying into REIT stocks (compliments of SRS daytraders) onnly exacerbated the move. The “flipping” is merely one of many potential factors to be considered, and the real heart of the problem, as Yves pointed out, is the motivation of the anlayst (who btw only had gotten restricted on March 30 I believe). And this is where, absent concrete evidence, the various theories emerge. The point of the post is merely to point out that there were numerous conflicts of interest that ultimately end up benefitting the udnerwriter’s (ML)trading desk, lending desk, corporate finance department, and ananlytica staff.

  8. S

    Since 2001 – analysts do not participate in the roadshows and are fairly limited in what they can do as regards managing talking points and coaching. Indeed, analysts were essentially banned from teach ins barrng a dial in listen only. Remnants of Sarbox.

  9. Yves Smith

    Whoops, good catch re Sarbox. However, I think you are underestimating the influence of analysts, or at least, the belief of management of the issuers in the importance of analysts (remember, perceptions are what count in wining mandates)

    In my day, analysts actually just about never went on roadshows, but were still very important in the selling process. Corp fin staff took their memos and wrote them up into selling points, plus (if they could come up with any) added their own. And those were (and I suspect still are) important to the institutional sales force.

    Point is you don’t need personal interaction, which is what has been curtailed, for the analyst to influence the process.

  10. Anonymous

    I am not fully up to speed on the Kimco investment thesis but I do believe that ML REIT research had a pretty big thesis in place that highly/over leveraged REITs could actually benefit by issuing equity and retiring debt…in essence lowering the probability of bankruptcy added more to the equity and overpowered the impact of dilution. This is particularly true when debt can be purchased well below face which is where most debt is traded. So a capital market transaction can clearly change the investment thesis in this market that loathes leverage.

    Although I realize the optics of an upgrade on the day of stock issuance is not great, Zero Hedge may want to read the SEC rules on this issue. If my memory serves me correctly for seasoned issues the analyst can reinstate/change ratings on the day following the pricing. Accordingly, only a dolt would sit around for several days waiting to change the rating when ones competitors are acting the next day. Zero hedge may want to take this up with the SEC but don’t castigate the analyst.

    And also, having worked at a larger broker/dealer, I can clearly tell you that compliance departments now basically manage the dissemination of research with the SOLE intention of not getting sued. In fact one of the reasons I left research two years ago was that the research release process became so arduous there is no way it could get out into the market in a timely fashion.

    The bottom line here is that very skeptical investors realize/believe Kimco is now probably not going bankrupt. I can give Zero Hedge another 20 companies that if they could raise equity and do a major equity for debt swap would see their shares easily move 25% on the day the offering is complete.

    Lastly, you may want to reassess your cynicism with respect to Wall Street analysts and the power they wield. Wall Street research has been gutted as most seasoned individuals left owing to big pay cuts. The juniors who were promoted to fill the spots carry little weight with the large buy side institutions or hedge funds all of which have superior research resources at this point in time.

    Look, I am frustrated and enraged by what the Wall Street and the Treasury have done and are doing regarding the financial crises, but I still believe Zero Hedge’s article is off base in this instance and that ones information needs to be correct and not inflammatory.

  11. Anonymous

    This blog is very inflammatory and the innuendo probably unfair. It also exposes a deep hypocrisy about this blog.

    First, most analysts for US i-banks are genuinely independent because post-Sarbox they can’t be paid from investment banking revenues. I can cite many many examples of analysts putting “SELL” ratings on stocks being marketed by underwriters. Why, Merrill Lynch’s analyst has an UNDERPERFORM on the Swedish bank Nordea when it is underwriting (on a hard basis) a huge capital increase being completed this month. I’m sure if I go through other deals mentioned in the financial magazines as being priced shortly, I can find other examples.

    Second, there are lots of examples of companies whose shares have RISEN when they announce a capital increase. The reason is that it lifts the risk of financial distress which had been baked into the share price. I don’t know anything about Kimco, but that logic seems to apply here.

    Finally, I think it’s ironic that this blog – which has gone to some lengths to criticize both excessive leverage and financial complexity – would lay into a plain vanilla equity offering aimed at de-risking a balance sheet. Surely, this is exactly what you would want financial intermediaries to be doing: assisting companies in raising equity. One of the reasons we’re in this mess is that the system had too much leverage.

  12. Anonymous

    Further to my previous comment @6:37pm, I should mention that the title of the blog entry suggests criminality: “Wall Street Back to Its Criminal Ways”. You have no proof of any criminality; you cite not a single law that may have been broken.

    Yves has asked that readers show more civility and respect in their comments. But then yourappeal for civility is difficult to square with the unsubstantiated ad hominem attacks from your guest blogger “Tyler Durden” (who I assume is named after the psycopathic fantasy character in “Fight Club”).

    The i-banks have much to be criticized for, but you can’t call people criminals on a widely-read website without some semblance of proof.

    I have no idea why the research analyst here upgraded the stock. Somebody suggested that the share price had fallen since the last research report, which I guess means that the share price was below the analyst’s target price by the time of the stock offering. Would it have been too much trouble for Mr “Durden” to call and ask before accusing the analyst of CRIMINAL behavior?

  13. Sam

    @6:52 Big deal. Who cares about semantics anyway? The word “criminal” fit in so naturally with Wall St. in the title, I didn’t even give it a second thought.

    The fact that someone would be offended that an anonymous blogger called a bank/analyst “criminal” means that you are either the said analyst or work for the bank. In which case, go whine elsewhere.

  14. Pixie (previously "Anonymous" @6:37pm and 6:52pm; I chose this name from the closing song in the film Fight Club, from which Tyler Durden chose his name )

    “Sam” @7:04pm – I’m not the analyst. I know nothing about Kimco. I work in the financial industry and I recently started to read this blog regularly. I agree sometimes with what’s written and other times I don’t. These were not my first posts, by the way.

    Very revealing that instead of addressing my arguments, you go straight to questioning my right to speak (“go whine elsewhere”).

    If the comment section is supposed to be a forum for debate (as opposed to a wall in an echo-chamber), I believe I’m entitled to question the tone and substance of what I think is a deeply unfair and (probably) inaccurate “guest post”.

  15. Anonymous

    is zero hedge short Kimco? or did it get caught short? the allocations the blog makes are very aggressive and from what i can see there is nothing criminal about changing a rating after a material event. if zero hedge believes that research/underwriting/lending can’t exist under one roof other than in a criminal enterprise then the blog should craft that article in a more robust manner rather than a shrilly described anecdote.

  16. gordon

    Obviously Wall St. is feeling more confident than it was a few short weeks ago. Wonderful what a rise in the market will do for morale – or is it just that they see that the wind is blowing in a more favourable direction now?

  17. Dean

    Re:criminality claims please watch the Bill Moyers Friday segment on PBS with William Black. It is a declaration of deceit.

  18. Edwardo

    Anonymous has a point or two, and the use of the word criminal with respect to this particular instance is as yet unwarranted. Having said that, does Wall Street, after what they have engaged in deserve the benefit of the doubt? NOOOOOOOOOOOOOOOOOOOOOOOOO!

  19. brushes9

    A few minutes ago, the Country Music Awards had John Rich sing his song: “Shuttin Detroit Down,” to the seated and televised crowd.

    From the song:

    “Cause in the real world their shuttin Detroit down
    While the boss man takes his bonus paid jets on out of town
    DCs bailing out them bankers as the farmers auction ground
    Yeah, while there living up on Wall Street in that New York City town
    Here in the real world their shuttin Detroit down”

    The crowd was quiet, compared to other songs. It hits a nerve. It’s message is inconsistent with messages from the right this crowd usually hears, designed to co-opt the following of the cowboys and cowgirls to cut benefits for the worker and to champion the super rich.

    Of course, he was wearing a big hat!

    If you want to hear the song:

  20. Anonymous

    Since REITs are required to distribute 90% of income, they are dependent on their committed bank revolvers and/or access to debt and equity markets for capital (ie, they have little, if any, retained earnings). The fact that Kimco refinanced its bank debt with common equity is a huge positive for the company, its stock and its debt, since the unsecured debt markets are closed. Therefore, the ML analyst made the right call here. You are drawing attention to a sell-side analyst making the RIGHT call AFTER the equity was placed. Fair disclosure – I am a buy side REIT analyst.

  21. Tyler Durden

    One final point: the transaction here in a nutshell is using equity trading at a 52 week low to replace a credit facility which pays interest at a ridiculously low rate: LIBOR + 42.5 bps – this is less than 1.7% a year. Of course, whether this kind of quid pro quo inspires confidence is ultimately up to the markets.

  22. Anonymous

    The fact that Kimco refinanced its bank debt with common equity is a huge positive for the company
    With the money raised, they can pay down 15% of their debt at most.

  23. Gentlemutt

    Anon 6:37 (as an aside, I love the natural method of referring to prior comments, so remniscient of how theologians dispute tranches of scripture — G_d bless everyone…) made the following point:

    “Why, Merrill Lynch’s analyst has an UNDERPERFORM on the Swedish bank Nordea when it is underwriting (on a hard basis) a huge capital increase being completed this month.”

    Is the Nordea situation comparable to that of Kimco? In other words, is Nordea indebted to ML? The underwriter’s interest in the selling of the stock may be, as I think Mr. Durden was pointing out to us, magnified when the underwriter is a creditor.

  24. YK

    The post clearly states that Lynch America Countrywide is on the right side of the deal, getting multiple benefits from it. The people on the wrong side of the deal are the investors who bought the stock after it jumped 30%. Will the investors run to sell after reading this post?

  25. Anonymous

    Sensationalizing of the event? You basically accused someone of being a child molester, then when people called bullshit, you retreated behind “(it) was obviously framed as a question: to be a statement, many more facts need to come to light”. Very weak.

  26. Yves Smith

    Anon of 12:10 AM,

    Sorry, your argument does not hold water. Raising a rhetorical question is not the same as making an accusation. There were very clear and extensive conflicts of interest, the disclosure was thin if permissible, and the extraordinary cheapness of the funding raises questions about how valuable the deleveraging really was, and thus, the appropriateness of such an extreme change in rating.

  27. Tyler

    Anon at 12:10 – please clue me in on who has called “bullshit” and what facts have these “people” brought up to make the presented argument of numerous conflicts of interest weaker. I have presented irrefutable facts: if you disagree with my conclusion, that is of course your right.

    As for the clarification, it is for the benefit of people like yourself who completely deviate from the jist of the argument, which, as Yves points out, has to do with other things than whether or not someone here is a “child molester.”

  28. Pixie

    Thank you Tyler and Yves for reading and responding to my post. But let me offer a couple of thoughts.

    First, there is a legitimate issue about maintaining a research analyst function when you’re marketing shares. Spitzer’s Global Settlement aimed to prevent the conflicts you cite. I don’t know if it was successful but I don’t see how it is the cause of today’s crisis.

    (I find it ironic that Yves sometimes cites the Clusterstock blog when its founder/CEO, Henry Blodget, was caught a few years ago recommending stocks as a Merrill Lynch analyst which he disparaged in private. His conduct was the catalyst for the Spitzer reforms. To my knowledge he has never apologized for this… Your blog, by the way, is a lot better than his.)

    Second, you are concerned that a lender could also underwrite an equity issue. But why is that problematic? There’s no explanation in Durden’s entry other than to call it a conflict. Even if it’s problematic, it’s nowhere close to “criminal”.

    Third, as I said before, you have previously criticised excessive leverage and financial “innovation”. This is a plain vanilla offer of common stock, taking down leverage and reducing the risk of default, failure and mayhem. Shouldn’t you be encouraging i-banks to be underwriting common stock offerings for overindebted companies (and as opposed to warehousing CDOs and writing CDSs)?

    Finally, Tyler attempts to backtrack a bit in response to my criticism: “Lastly the criminality was obviously framed as a question: to be a statement, many more facts need to come to light and hopefully in time they will.” The key word here is “hopefully”, suggesting that Tyler Durden has already reached his verdict and this question is more rhetorical than anything else. (Reminds me of Laurence Fishburne’s great line in Mission Impossible 3 (the only good part of a terrible film): “Don’t interrupt me when I’m asking a rhetorical question.) Launching a criminal investigation is pretty serious business for all concerned. You have offered no facts, just innuendo.

  29. Yves Smith


    With all due respect, I do not find your arguments persuasive. For the most part, you bring up irrelevant issues.

    To your first point: I don’t see how this relates to the discussion of conflicts. Blodgett is now providing financial commentary (and providing space for others to do so). What does his conduct at Merrill have to do with that? Even if it related to the post (which it doesn’t), it’s an ad hominem attack, which is a logical fallacy. Richard Nixon wrote three books on foreign policy after he left office that are very highly regarded. By your logic, no one should consider their arguments either.

    To your second point, that very issue was such a cause of abuse in the 1920s that it lead to the implementation of Glass Steagall, separating commercial banking. In this case, the stock offering took Bank of America out of a loan that is currently very much underpriced, given the condition of the borrower.

    Your point three is unrelated. The issue of conflict has nothing to do with innovation. Spurious argument.

    Your “finally” is clearly a biased reading. I see Tyler’s “hopefully” as wanting more disclosure and expecting none.

    Argumentation like that is not effective, In truth, it suggests you do not have much of a case.

  30. Leo Kolivakis


    Great stuff but those of us who worked on the buy and sell side know the games that are being played. It’s just business as usual – all in an “honest day’s work”.

    As far as REITs are concerned, you should come to Canada to see how corrupt they really are.Makes the U.S. market look like Disney World.



  31. Anonymous

    Remeber oil over $140? Since no one went to jail over that minor conspiracy we can not expect BAC subsidiary, the SEC to enforce anything. The market is now as lawless as a wild wild west casino.

Comments are closed.