Traderbill's Financial Markets Weblog

 

1…by now, even a casual observer of the Bear Stearns crisis is aware that this was not a bailout for the sake of Bear but for the US and indeed the global financial system. It took two days of Congressional testimony to make this clear to our elected officials though…especially Sen. Grassley (R) who is either stupid or just a fool. What is unclear is what will happen when the next one comes since the Bear has disproved the old theory of doing what you are told by the Fed. We are so liberated! At the gym yesterday TB ran into a friend…a lawyer who is semiretired. He was smiling. TB said: “2008 will go down as the year of the lawyer…in all areas: corporate, trial, and eventually criminal.” He laughed and nodded…or was it nodded and cackled? This is good news! Yes, what else were all those MBA hopefuls who wanted to run hedge funds upon graduation going to do? Go into industry? Real Estate? RETAILING??? Now they can get their LLD.’s or JD.’s…and that business background might just prove helpful…unless they are into quantitative analysis. There are going to be some very disillusioned MBA’s running around that have no experience in the business and even financial analysts are not necessary. We are looking at a sea change folks.

 

2. Poor Alan Greenspan…things have gotten so bad for him and his legacy (sic) that he is shamelessly (shamefully?), writing his memoirs, running around talking to Maria B. or anyone who is interested…or not…that, while it happened on his watch it was a/ not his fault, b/ not in his purview to regulate the mortgage market…or even warn about it, and c/ even without variable rate mortgages people would have gotten fixed rate mortgages that weren’t qualified and we would be right where we are today.

 

That last statement questions his qualifications to even be a nominee for Fed Governor…at least that would have been blocked by Sen. Dodd from going to a vote!…please contact your Senators on this to force him to an up or down vote and stop playing politics which will eventually backfire on the party (TB must say that when he called the SF offices of Feinstein and Boxer, he got an intern…all that was there and calls to DC were not returned…that is the how they respond to their constituency)…as it did with the GOP. There is still time for the donkeys to snatch defeat from the jaws of victory!  OK, where were we? Oh yes, Greenie told Maria that even if there hadn’t been variable rate mortgages…you know negative am, exploding arms, etc. lenders would have made fixed loans. THAT IS EITHER AN OUTRIGHT LIE or sheer stupidity that is an embarrassment to central bankers around the world!

 

A question: what was the problem? rate adjustments or credit? CREDIT! Loans were made to totally unqualified individuals not just by flaky mortgage originators but led by Wells Fargo as the largest sub-prime lender thru its non-bank sub, Wells Fargo Mortgage! The loans that defaulted causing the derivatives to fail, did so even before the rate cuts took effect…some never made the first payment! But he says they would have done fixed NO WAY! First, how did they qualify? on low interest teaser rates without principal amortization! Even a novice knows this. Most would have not qualified even at a low rate if they had to amortize principal. Secondly, every lender out there says those loans were expected to be refinanced within six months…hopefully to some other lender…in fact that is why we had those exploding ARM’s! Re-fi or die!

 

Next, Greenspan said that it was hedge funds that demanded more paper for securitization who pressured the dealers who in turn pressured the lenders for more paper…another bogus argument. Was the Fed to sit by and let them all destroy themselves? If, as we were told, the responsibility of the NY Fed is stable financial markets, why didn’t someone…and he would have been the logical choice…go public and issue a warning…had he forgotten about ‘jawboning’ as a tool? Also, when the late Edward Gramlich could see it and warned Greenspan repeatedly…how come he didn’t pay attention? THEN, he said regulation would not have helped…and should not be attempted…BECAUSE the best regulator is the market! Can you believe this Kudlowesque analysis? Capitalism is built on greed…undeniable! That point is even bragged about. Greed causes a rational person to do irrational things. Add to this an entire financial sector plus corporate management that is incented by short term rewards. Bonuses paid out either immediately in commissions as brokers on those failed mortgages, or annual bonuses to Wall Street’s best and brightest (sic). CEO’s running companies allegedly for the benefit of long term investors but doing it for short term gains either incented by earnings, stock price or both. Bonuses given even when it was merely luck…like Exxon Mobil’s Lee Raymond, a mediocre at best CEO, who was paid $460 million…NYSE’s Dick Grasso was more entitled to his compensation passage than Raymond! If the market is the best regulator, once all the big brokerage firms went from partnerships who, like hedge funds with their own capital at risk it became simply other people’s money (OPM) and therefore all that mattered is how much they could be paid…that is a fact…bank on it. So by the time these markets get wind that something is wrong it is far too late. How else does one explain the degree of risk taking?

 

TB’s favorite uncle (for the same reason that TB is his favorite nephew), called the other day all upset about the compensation to AT&T’s CEO…he has been doing this lately. TB asked if he was still reading the columns because this is not new, but that the AT&T compensation package isn’t that high! When are we going to get something done on this…and when we do will it end up like the last time that got us all those stock options. Capitalism rises above ethics, pride, and common decency…yet it is better than our elected officials.

 

This leads to the Neighborhood Rescue and Stabilization Act…it has those nice sounding term words, just like the new improved bankruptcy act did (Bankruptcy Abuse Prevention and Consumer Protection Act). First, Sen. Dodd, bless him, proposed increasing the tax loss carryback to fours year for homebuilders. That is now dead in the water and would have given them back $6 billion…now remember those were record years for them and think of the compensation that was paid…yet, like with Bear or any other firm we don’t ask that back…in fact we give them nice low tax rates since they are doing such wondrous things for the economy and the American people. TB cannot believe that he is siding with Wesbury and Bush on this but it just isn’t going to solve anything…and instead send a bad signal to those who profited: the lenders, brokers, and real estate speculators.

 

3. There is light at the end of the tunnel in auction rate securities. First, some bond funds, and these were the worst problems, are now retiring their auction rate notes. The delay came from a belief that long term investors who could then sue them…TB finds this hard to believe when they profited for years by the leverage, and besides all they would be giving up is expected profit…you can bet that their returns will be lower! But Nuveen is now retiring more than a $ billion of these with more to follow.

 

Second, TB is deeply involved in the auction rate securities market but with issues backed by municipals that are rapidly being called and the underlying long bonds are issued to replace them. TB likes Puerto Rico, a BBB rated triple tax exempt issuer. A month ago he bought a 7 day with a 12% yield, the next auction it dropped to 8%, the next 5.75%…now all of them are coming under 3% (yesterday one came at 2.75%). Why the change. TB has mentioned the SEC issued a no action letter to issuers so they could bid on their own paper and thus provide liquidity. So P.R. is buying up lots…have no idea where the source of the money is because unlike Cal, they are not calling the notes…by the way they cannot hold for more than six months or the bond issue will be deemed ‘retired’. Other rates are coming down too, some due to rate caps tied to a percentage of LIBOR, etc. But after the tax date next week they will probably continue to trend lower.

 

The muni bond industry is puzzled at the time the Supreme Court is taking to rule on a Kentucky ruling that states could not give their own bonds a preference by exempting them from state income tax. To TB this is sensible and that is why nobody can figure out what is taking that august group so long to decide. That too is impacting the markets as it could dramatically change relative values of states that have high income tax rates. Not to decide…is to decide?…or worse?

 

Lastly, Citi is negotiating to sell $12 billion of notes issued on leveraged buyouts…Black Rock is the presumed buyer…getting back their own loans at 90 cents or so on the dollar…what a great deal, as once again Citi falls flat on its face. But this is significant because as the banks are being forced to recapitalize they are not lending…this is not to provide new capital but to improve risk ratios. That means don’t count on Citi, or Wells, or BofA to welcome new borrowers with open arms (not ARM’s).

 

Yesterday, TB heard of the third instance of problems tapping home equity lines. The first two froze the line at the amount outstanding…as TB predicted. This one involved a small business (remember they have just two sources of capital these days: home equity and credit cards), where the owner had a chance to buy another business for $100,000 or so…he had $150k remaining on his line and homes in his area are not only selling but retaining their value. The bank refused the drawdown. The Bush Administration has preached how they are for small business but this is patently false…big business wins with them or Congress every time…that’s where the bucks are! But the point is it is small business, like the consumer that drives the US economy…NOT large corporations…they only drive Congress.

 

This all ties into the apathy in the stock market as shown by the low volumes…yesterday’s was the lowest of the year! Now look at the earnings and forecast disappointments this week: Alcoa, AMD (lowered forecast and laying off 1,000 or 10%), and wait for the banks as their charge-offs continue to mount. This is also why we have about 20 stocks that are the drivers of the market…and traders are making money off them thru trading them and options. TB still feel the path of least resistance is down: not to just a retest of the lows but new lows…and when that happens it can be 10% or more. Hang loose. Even the bulls are now less than convincing.

Fortunately, TB’s wife’s surgery went well yesterday…thanks to all of you who sent your best wishes.

Have a wonderful day!

TB

 

 

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful.
Copyright TBD Capital LLC April 9, 2008