Sunday, December 30, 2007

Benazir Bhutto: imperfect past tense

Guambat is not at all versed enough in the life and times of Benazir Bhutto to utter more than his sincere regrets that she has been wiped from the pages of today's papers and relegated to the murky history still to be written about the clash of uncivilizations.

But, for all the talk, Guambat has had the gnawing feeling in his not insubstantial gut that there was much, much more to the story than American primetime is barking on about, or even as the likes of Al Jazeera and other closer on the ground sources are providing.

So, finding something that resonates with his prejudice, Guambat passes along this article from The Guardian, which must be read along with its comments to sort of describe Guambat's suspicions that the world is much more complex, shaded and surprising than we assume on our daily rounds.

Judge pushes credit crunch case over the Finish Line

Easy credit, just a few months ago it seems, was behind the buying binge of private equity and other grabby acquisitors that has now given way to the credit crunch heaves -- barf follows binge for these financial fashionistas.

When money was easy deals were being done in wild west mode: buy first and ask questions later. Lawyers, who, like doctors, usually get blamed when the patient's antics end disastrously, have tried to put these deals together as best they could at their clients' behest, but when clients boldly go where no lawyer has yet gone, the cart sometimes gets there without the horse.

How's that for a grab bag of mixed nuts and other metaphors!

Giving context if not clarity to that prelude is the story of a couple of companies, Genesco and Finish Line, a couple of shoe stores. Finish Line, it seems, wanted to put the boot into Genesco by way of a takeover offer, that was contested by another shoe company, Foot Locker, but Finish Line got there the fastest with the mostest and won the bid. It doesn't appear that Genesco was real happy with the loss of its independence, initially, but eventually gave it up as an offer too good for its shareholders to pass up.

Now, Guambat recalls an old economic geography notion that suggests that, counter-intuitively, two competing shoe stores will actually generate more profits for each of them than one standing alone. It has something to do with market creation and generation of more traffic/demand. This case may actually support that theory because, if they are bound to be bound together as Finish Line at first insisted, the combined whole may go bankrupt.

The story has interest to Guambat because Finish Line and its financial backer, UBS, having won the bid on a shoe-in began to drag their feet as the credit crunch barf began to replace the easy credit binge. Seemingly they just didn't see the party coming to an end and that the consumer would soon be feeling the pinch of tight credit, which would affect the sales of products like shoes.

Blogging Stocks recently highlighted the plight of the poor shoe salesman:

Back in August, I wrote about all the beaten-down shoe stocks currently on the market: companies like Rocky Brands (NASDAQ: RCKY), Finish Line (NASDAQ: FINL), Phoenix Footwear Group (AMEX: PXG), and Shoe Pavilion (NASDAQ: SHOE).

Basically, selling shoes without a strong brand name is a tough business. Companies like Phoenix and Rocky are seeing their margins crushed by competitive forces, and retailers like Finish Line, Shoe Pavilion, and Genesco (NYSE: GCO), owner of stores like Journeys, are having a hard time making any money.

There are a lot of cheap shoe stocks out there. But the companies that are selling commodities and providing customers with a commodity-like experience are unlikely to see a turnaround. Before investing in shares of a shoe retailer like Finish Line, Foot Locker, or Genesco, ask yourself whether that company provides an experience that is unique. If all they're selling are shoes, they'll be extremely vulnerable to price competition.
Rather than put the blame on the consumers' reluctance to continue to spend, they based their own reluctance to buy Genesco on a claim that Genesco misrepresented the company's financials. Finish Line and, indirectly, UBS have brought suit to try to hoof it out of the Genesco purchase.

As a "hometown" report noted, Genesco
finds itself in a legal wrestling match with a reluctant suitor and its bank, both of which have accused the Nashville-based retailer of fraud, a charge that if proved would tarnish Genesco's well-polished image.

The dispute started when Genesco agreed to a $1.5 billion buyout bid from Indianapolis-based athletic shoe retailer Finish Line Inc. in June. Now, Genesco is suing Finish Line, accusing the company of trying to get out of the merger because it can't get financing from UBS, its Swiss bank.

Genesco's lawsuit against Finish Line "is one of the more high-profile cases of a deal falling through with the credit crisis,'' said Morningstar stock analyst Brady Lemos.

Lemos and others are watching the case. They say it illustrates what can go wrong when credit becomes too easy to get on Wall Street.

Counterclaims of fraud by Finish Line and UBS also have piqued the interest of the U.S. attorney's office in New York, which has issued subpoenas to look at Genesco's financial records.

Some analysts see the fraud allegations as a delaying tactic by Genesco's opponents, and they don't expect investigators to uncover corporate wrongdoing.

On top of it all, Genesco and Finish Line have each seen profits decline in recent months as consumers spend less on clothes, shoes and other goods. Legal costs tied to the case have added to Genesco's losses.

Finish Line originally planned to finance the deal with $11 million in cash and $1.5 billion from UBS [can you spell leverage? Is this corporate subprime lending?]. Since the first of the year, though, sales at Finish Line stores open at least a year have fallen 4 percent, and it has warned shareholders to expect a loss of $14.5 million to $15.3 million when it releases its third-quarter results in January.

UBS is suing both companies in a New York federal court, saying that Finish Line can't afford the deal and that if a merger were to go through, the combined company would go broke.

Finish Line's plan to borrow so much money from UBS concerned some analysts from the start. And today most doubt that anything can be done to salvage the deal.

Given Finish Line's financial condition, it's no wonder UBS wants out of the deal, added Steven Davidoff, an assistant law professor at Wayne State University in Detroit.

Finish Line's plan to borrow $1.5 billion makes it "a very highly leveraged buyout deal that probably shouldn't have been financed and only happened because markets were buoyant at the time," he said.

Today's rancor is a far cry from the environment earlier in 2007, when consumer spending was stronger and Genesco stock was in demand. Wall Street credit markets were soaring and suitors came calling.

In fact, athletic shoe retailer Foot Locker CEO Matthew Serra, representing another of Genesco's competitors, called Pen nington in January and offered to buy Genesco for $48 to $50 a share, a 20 percent premium over its stock price at the time. Genesco said it had no interest in selling.

Serra, though, was insistent. He called again in February to say his company was putting together a formal offer. By mid-March, rumors of a hostile takeover by Foot Locker were reported in the media, and Genesco's stock price started to climb.

Genesco ultimately rejected Foot Locker's final bid of $51 a share, saying it wasn't in the best interest of shareholders, but it did open the door to other companies to make offers. Several private equity firms were interested, but only Finish Line, with about half the annual sales of Genesco, made a bid.

On June 13, Genesco's board accepted that offer, worth $54.50 a share.

Soon, though, Genesco says, Finish Line developed "buyer's remorse."

On Aug. 30, Genesco released its second-quarter results, saying it had lost 19 cents a share, or about $4 million, in the period, surprising Wall Street and leading to accusations from Finish Line and UBS that Genesco hid the extent of problems at the company. Genesco says that it opened its books to Finish Line before their deal and that the buyer shouldn't have been surprised by the losses.

On Sept. 11, UBS said in a letter to Finish Line that it also was concerned about Genesco's results. In November, UBS filed a separate lawsuit in the U.S. District Court in southern New York, saying it should be let out of its commitment to fund the deal.

One key issue to watch as the Genesco trial plays out this week is how the original merger agreement was written, analysts say.

Page, the Indiana University law professor, said the contract was drawn up without a clause letting Finish Line escape if it couldn't get financing. The wording may have been a sign of exuberant times on Wall Street before the current credit crunch kicked in, he said.

"The market became so confident that these conditions were being dropped," Page said. Finish Line and UBS seem most at fault, he said, because they failed to see "the (financing) party was maybe coming to an end."
Suing Genesco on a claim of nondisclosure, especially after Enron and the like, seemed such a shoe-in that many other law firms joined in class actions against Genesco, on behalf of its own shareholders, e.g., this and this.

The accusations and responses in the case are, for a Guambat burrowed well away from the sidelines, quite entertaining.
Genesco: E-mails indicate UBS feared financial risk

Shoe and hat retailer Genesco presented e-mails in court Thursday that showed UBS employees thought the Swiss bank's financing of Indianapolis-based Finish Line's $1.5 billion acquisition of Genesco was one of its biggest financial risks.

The e-mails suggested the risk was high because of the downturn in the credit market, bolstering Genesco's argument that Finish Line and UBS wanted out of the deal simply because they thought it no longer would be profitable.

"What seemed like a good deal in June turned out to be a disastrous deal in July," testified Anthony Saunders, chairman of the department of finance at New York University's Stern School of Business.

UBS, which has almost $2 trillion in assets, projected in August it would have a $132.1 million net loss if the deal were to go through.
In his cross-examination, UBS attorney Joe Frank said the credit markets have improved slightly since August, changing the bank's projections of a net loss to $65 million.

Meanwhile, UBS has filed a lawsuit in New York seeking to escape its commitment to finance the deal, contending the combined company of Genesco and Finish Line would be unable to pay off its debt.

The meat of the story for Guambat, though, lies in what the judge in the case said, as reported in MarketWatch, in holding Finish Line's feet to its own fire:
Tennessee Chancery Court judge Ellen Hobbs Lyle ruled that Finish Line has breached the parties' merger agreement and dismissed Finish Line's claims that Genesco withheld key financial information....

"The merger in this case was a highly negotiated transaction, with teams of lawyers, advisors and handlers being paid enormous sums to orchestrate the procedure for obtaining information, the product of information, and the use and reliability of information," the judge wrote.

"The court finds it doesn't offend the conscience to enforce the performance of the merger agreement, Finish Line and UBS have failed to prove that Genesco fraudulently induced Finish Line to enter into the contract or that Genesco committed securities fraud."

Meanwhile, S&P rates Finish Line as far from finished:
The Chancery Court in Nashville (Tenn.) has ruled that Finish Line cannot back out of its merger agreement with Genesco (GCO). That said, a suit by UBS AG (UBS), which had committed financing to Finish Line, seeking to halt the merger is still pending in the U.S. District Court for the Southern District of New York. The merger would be halted if the New York Court determines that a combined Finish Line-Genesco would go bankrupt. We believe completion of the merger has been priced into Finish Line shares, which are trading at forward P/E and price-to-sales multiples well below peers.

And this legal tiff may be just the beginning of a long string of such cases as the euphoria of buy-ins and buy-outs floated with easy money fades and is replaced by the cold judgment of old-fashioned banking.

As the WSJ noted
In the latest private-equity buyout agreement to dissolve into acrimony, Platinum Equity LLC is suing PPG Industries Inc. to end or renegotiate its $500 million deal for the company's troubled auto-glass business.

In a complaint filed in New York State Supreme Court, Platinum alleged that PPG misrepresented the health of the business, which makes sunroofs and windshields, as a way to squeeze a higher price from a buyer. In the lawsuit, Platinum said PPG's behavior was "repugnant, wanton, and involved a high degree of moral turpitude."

Jack Maurer, a PPG spokesman, says that the company believes Platinum's claims are without merit and will defend itself against the suit. "Platinum Equity is a sophisticated financial buyer," Mr. Maurer said. "They looked into this; we had a signed sales agreement."

Buyout firms are loath to pull out of signed contracts because of the risk to their reputations and an aversion to lawsuits. But that aversion has subsided amid weak credit markets and a stumbling economy. A host of players, from KKR to Goldman Sachs to J.C. Flowers & Co., have recently walked away from deals.

The Leagles are busy discussing the rarely invoked specific performance remedy (instead of damages) and the so-called "MAC/MAE" clauses and its effect, or lack of same, in this case; see, e.g. the WSJ lawblog, which has obtained and made available a copy of the judge's decision here (which Guambat has some difficulty downloading but got there in the end). This clause is suggested to give the buyer a "get out of jail free" card in the event of "material adverse" events affecting the value of the deal. See this and this for more explanation.

These legal issues make for fun Monday morning quarterbacking and other games, but Guambat considers the real moral of the story to be the morals of the easy money, get rich quick crowd who ran with the bulls in the subprime/easy credit melt up.

Friday, December 28, 2007

The making of CDO koolaid

(Guambat is not speaking here of his childhood summer drink of choice, but of the poisonous "brand" of the recent vernacular.)

Delighted by colourful pictures, Guambat was attracted to the illustrations Barry Ritholtz extracted from a WSJ article to describe, pictographically, how CDOs based on subprime mortgages were created. You have to go to Barry's post to get the full flash treatment, but the images he put up are these:

Jumping over to the article, Wall Street Wizardry Amplified Credit Crisis by By CARRICK MOLLENKAMP and SERENA NG, Guambat gained a bit more understanding (or sense of it, anyway) as to how it was that the spread-the-risk-a-mile-wide-and-an-inch-deep theory of risk management that the recent credit boom was supposedly based on failed of its purpose when taken from the drawing board to the production floor.

From Guambat's limited mental resources, it looks like risk was sure enough spread, but greed got distilled to the point of poison. These were his take-aways from the story:
Norma [a cute name for an abnormal Collaterilized Debt Obligation - CDO] illustrates how investors and Wall Street, in their efforts to keep a lucrative market going, took a good idea too far. Created at the behest of an Illinois hedge fund looking for a tailor-made bet on subprime mortgages, the vehicle was brought into existence by Merrill Lynch & Co. and a posse of little-known partners.

A CDO, most broadly, is a device that repackages the income from a pool of bonds, derivatives or other investments. A mortgage CDO might own pieces of a hundred or more bonds, each of which contains thousands of individual mortgages. Ideally, this diversification makes investors in the CDO less vulnerable to the problems of a single borrower or security.

The top underwriter of CDOs from 2004 to mid-2007, Merrill had generated hundreds of millions of dollars in profits from assembling and then helping to distribute CDOs backed by mortgage securities. For each CDO Merrill underwrote, the investment bank earned fees of 1% to 1.50% of the deal's total size, or as much as $15 million for a typical $1 billion CDO.

To keep underwriting fees coming, Merrill recruited outside firms, called CDO managers. Merrill helped them raise funds, procure the assets for their CDOs and find investors. The managers, for their part, choose assets and later monitor the CDO's collateral, although many of the structures don't require much active management. It was an attractive proposition for many start-up firms, which could earn lucrative annual management fees.

One of the investment bank's clients, a hedge fund, wanted to invest in the riskiest piece of a certain type of CDO. Merrill worked out a general structure for the vehicle. It asked N.I.R. to manage it.

Norma was established as a company domiciled in the Cayman Islands. N.I.R., as its manager, would earn fees of some 0.1%, or about $1.5 million a year.

Norma belonged to a class of instruments known as "mezzanine" CDOs, because they invested in securities with middling credit ratings, averaging triple-B. Despite their risks, mezzanine CDOs boomed in the late stages of the credit cycle as investors reached for the higher returns they offered.

For Norma, N.I.R. assembled $1.5 billion in investments. Most were not actual securities, but derivatives linked to triple-B-rated mortgage securities. Called credit default swaps, these derivatives worked like insurance policies on subprime residential mortgage-backed securities or on the CDOs that held them.

Many investment banks favored CDOs that contained these credit-default swaps, because they didn't require the purchase of securities, a process that typically took months. With credit-default swaps, a billion-dollar CDO could be assembled in weeks.

In principle, credit-default swaps help banks and other investors pass along risks they don't want to keep. But in the case of subprime mortgages, the derivatives have magnified the effect of losses, because they allowed bankers to create an unlimited number of CDOs linked to the same mortgage-backed bonds.

In its use of newfangled derivatives, Norma contributed to a speculative market that dwarfed the value of the subprime mortgages on which it was based. It was also part of a chain of mortgage-linked investments that took stakes in one another.

Such cross-selling benefited banks, because it helped support the flow of new CDOs and underwriting fees. In fact, the bulk of the middle-rated pieces of CDOs underwritten by Merrill were purchased by other CDOs that the investment bank arranged, according to people familiar with the matter. Each CDO sold some of its riskier slices to the next CDO, which then sold its own slices to the next deal, and so on.

But the system works only if the securities in the CDO are uncorrelated -- that is, if they are unlikely to go bad all at once. Corporate bonds, for example, tend to have low correlation because the companies that issue them operate in different industries, which typically don't get into trouble simultaneously.

Mortgage securities, by contrast, have turned out to be very similar to one another.

Most importantly, though, Norma offered high returns: On a riskier triple-B slice, Norma said it would pay investors 5.5 percentage points above the interest rate at which banks lend to each other, known as the London interbank offered rate, or Libor. At the time, that translated into a yield of over 10% on the security -- compared with roughly 6% on triple-B corporate bonds.

Beyond that, rating firms say they had reason to believe that the securities wouldn't all go bad at once as the housing market soured.... all three rating companies gave slices comprising 75% of the CDO's total value their highest, triple-A rating -- implying they had as little risk as Treasury bonds of the U.S. government.

Ratings companies say their March opinions represented their best read at the time, and called the subprime deterioration unprecedented and unexpectedly rapid.
Guambat recommends you read the whole story, if you can, because it is full of the personalized touches, anecdotes and characters that WSJ stories do so well.

Guambat has no experience in the credit industry and only knows what he's read here and there. But even Guambat noticed some time ago that this credit swapping derivative Frankenstein was up to little good as he blogged on about Credit Default Swaps, CPDOs and other creatures from the black backroom.

Guambat reckons that the credit crunch is not so much the result of poisonous risk (such as the poor schleps stretching for a subprime piece of the American Dream who are blamed for this mess) as it is about the fee-for-all stampede of the bulls of greed who ply their trade on Wall Street.

Guambat offers this bit of pictograph to illustrate the matter:

Tuesday, December 25, 2007

Ho Ho Ho !

And after a long winter's nap, Santa awoke, yawned, stretched, scratched his sleepy hoary head and wished us all a long winter's Christmas-nappy-headed "HO Ho ho".

And fell back asleep.

Here's hoping you find something to content you and smile about as this year's end approaches and next year beckons.


Saturday, December 22, 2007

Japan plays dumpty humpty

With the newly elected Australian government planning to send planes, boats, trained personnel and automatic weapons to keep an eye on the annual Japanese whaling scientific slaughter of whales in the Antarctic regions, Japan is showing signs of backing off, if not backing down.

Humpbacks win reprieve
Japan last month sent its fleet to Antarctica on its largest whaling expedition, including 50 humpback whales in its catch - for the first time since the 1960s.

The fleet will still kill up to 935 minke whales and 50 fin whales. However, even before the [Australian government letter of demarche] protest document was delivered, Japanese public broadcaster NHK announced the humpback cull had been scrapped.

"Japan has decided to delist humpbacks from the whaling list for now due to concern about the negative impact on relations with Australia," NHK said, quoting unnamed officials.

A couple of interesting perspectives from Australia touching on the topic are:
Whaling debate touches a raw nerve in Japan

AS Kevin Rudd embarks on a morally inspired whaling war with Japan, using gunboat diplomacy on the high seas, he should remember that this will be Whale War II and that Australia was the villain in WWI.

How many exceptions break the rule?

Australians have felt themselves the Lucky Country for many years and many reasons (even though it was a bit of a slur, issued with a bit of tongue in cheek irony originally), and have generally applied that blessing to dodging the American-centred subprime mortgage mess. The Four Pillars sing as one to the tune of "it isn't happening here".

But there are small contagions popping up. Will these small events mutate into a larger pandemic? At this point, it would seem not, even though it is hard to believe in a paradigm of disconnect in a world of finance hard wired to the same trading screens.

Some isolated cases of the subprime flu are the subject of 2 reports in the Sydney Morning Herald today.

Councils to mount legal action over extensive subprime losses:

Wingecarribee Shire Council, in the Southern Highlands, is suing Lehman for "deceptive and misleading conduct" in selling $3 million of subprime-linked collateralised debt obligations, the council's managing director, Mike Hyde, said yesterday.

New York-based Lehman, which manages up to $1 billion on behalf of 35 councils in NSW and Western Australia, might face further action as the assets in its US mortgage-linked product have declined amid a shakeout in global credit markets.

"We strongly deny the claims made in the press statement that we have not acted in their best interests, or that we have engaged in any misleading or deceptive conduct," Sinead Taylor, a spokeswoman for Lehman said.

Lehman Brothers Australia, which was rebranded from Grange Securities after being acquired by Lehman, is offering to buy Wingecarribee's CDOs for less than 16 per cent of their face value.

No escape from the subprime meltdown
Steve Howell and Stuart Fowler were this year's smartest guys in the room. In the airless, driven world of hedge funds they were top performers.

This reputation has not survived the collapse of one of Basis Capital's hedge funds, Basis Yield, at a total cost to Australian investors of $320 million. Another fund, the Aust-Rim Diversified Opportunity Fund, is limping along with losses of 50 per cent with a total loss to Australian investors of about $160 million.

The [unnamed] fixed interest manager says: "Every non-Australian investment bank has been basically slaughtered by subprime. The world's greatest collection of clever people."

These banks and broking firms with gold-plated names such as Citi, Bear Stearns and Merrill Lynch had suffered losses of $US29.8 billion ($34.7 billion) by the end of November, according to Fortune magazine. Morgan Stanley topped that up on Wednesday with a further $US9.4 billion in losses.

In this context the collapse of Basis Capital's hedge fund from June is a small, compelling and very public example of a massive disruption happening behind the gilded doors of the world's financial powerhouses.

The disruption has gone on to claim the mortgage lender RAMS and the property trust Centro as loans they were seeking simply dried up - with every likelihood of more problems to come as major debt insurers now face credit rating downgrades.

The example of Basis Capital exposes a global financial system with linkages that are far-reaching, surprising and not entirely logical. It shows how defaults on mortgages by US home owners resulted in a loss of $1.5 million for a West Australian charity that helps children with deafness and blindness. And how a small council on NSW's Mid-North Coast has invested $25 million of its $75 million in direct investments into risky fixed interest assets.

What killed Basis, and crucial to the understanding of what has spurred the financial crisis throughout the world, was not a classic credit crisis in which rising defaults prompted greater and greater losses.

"What they clearly didn't realise was that everyone was on the same trade and the moment something went wrong you got that avalanche," says the fixed interest manager who knew Howell and Fowler through the conference circuit.

This phenomenon of forced sales and write-downs is shown quite spectacularly in continuing attempts by the boutique asset consultant Grange Securities to flog off its collateralised debt obligation in Australia.

Grange is still offering financial planners by email nothing less than a fire sale of a grab bag of collateralised debt obligations with Australianised names such as Esperance, Blaxland, Flinders, Kakadu and Blue Gum.

Grange, now known by the moniker of its US investment bank owner, Lehman Brothers, marketed almost $1 billion of these complex debt products to councils throughout Australia. Grave questions are being asked about the level of knowledge councils had about the fixed interest assets they were buying.

The email shows the face value of these investments has fallen substantially from their issue price, in some cases by almost 30 per cent. But the obvious risks are still not enough to deter Grange from attempting to pass them on to investors through financial planners.

Port Macquarie-Hastings Council on the Mid-North Coast counts $25 million of collateralised debt obligations among its direct investments - or a third of its $75 million investment portfolio, including many sourced from Grange.

The council is holding on, hoping it will all go away: it has not marked down any of the collateralised debt obligation it is carrying in its investment portfolio despite the likely loss in value.

The Senses Foundation in Western Australia helps children who are deaf and blind to communicate with their parents, among other services.

The charity lost more than $1.5 million when the Basis Yield fund operated by Basis Capital Funds Management collapsed.

The foundation's chief executive, Debbie Karasinski, says the issue of how Senses came to be invested in Basis was with its lawyers. It used a Perth asset consultant, Counterpoint.

"Senses Foundation has an investment policy and it has an investment adviser. The question for us is whether Basis sat within the foundation's policies," she says.

The Combined Fund, which is a Melbourne-based industry superannuation fund for teachers in private schools, appears to have a similar story after losing $12.4 million.

To a large degree, the product disclosure statements were bulletproof, adequately warning investors of the risks of the fund.

Super funds and local governments might reasonably be expected to look after themselves. The real surprise is Basis Capital and other collateralised debt obligation-style products were and are widely available to mum-and-dad retail investors.

As Basis succeeded it began to find more and more retail investors through various investment "platforms", which allow financial planners to invest their clients' money.

Eventually various margin lenders were offering people the ability to invest in Basis Yield, borrowing up to 80 per cent of their investment. This added even more debt to an already debt-fuelled vehicle.

"I remember being struck at the time seeing it in margin lending platforms," says an asset consultant who put clients into the still-surviving Aust-Rim Diversified Opportunity fund.

Friday, December 21, 2007

Faire and lazy

As in laissez faire. See this recent post for explanation of this characterisation.

The market crisis du jour is the credit meltdown, blamed by most, simplistically, on the subprime mortgage market.

For some, the villain here is the slick, cheap trick mortgage salesman/broker/packager/bank/syndicator/etc., and the victim is the unsophisticated "Least sophisticated borrowers".

For others, the villain here is the vile, greedy, wannabe homeowner who tried to shoehorn into a house knowing full well that that was not their rightful due in the pecking order of thisngs, and the victim is the hapless, helpful mortgage salesman/broker/packager/bank/syndicator/ etc.

The WSJ profiles some of the victims and villains today (hint: not including average joe home buyers).

In one article, the Journal tabulates about 2 dozen "Companies [that] Blame
Housing, Credit Problems for Weakness", including AutoNation, FedEx, GE, and Hershey in addition to the usual banking, finance and housing industry suspects.

IN another article, the Journal reports that "Fraud [is] Seen as a Driver
In Wave of Foreclosures". It explained,
Skyrocketing foreclosures are a testament to how easy it was to borrow from mortgage lenders in recent years.

It may also have been easy to steal from them, to judge from a multimillion-dollar fraud scheme that federal prosecutors unraveled here in Atlanta. The criminals obtained $6.8 million in mortgages from Bear Stearns Cos., including a $1.8 million mortgage to Calvin Wright, a New Yorker who told the investment bank that he and his wife earned more than $50,000 a month as the top officers of a marketing firm. Mr. Wright submitted statements showing assets of $3 million, a federal indictment alleged.

In fact, Mr. Wright was a phone technician earning only $105,000 a year, with assets of only $35,000, and his wife was a homemaker.

Suspicious Activity Reports, which many lenders are required to file with the Treasury Department's Financial Crimes Enforcement Network when they suspect fraud, shot up nearly 700% between 2000 and 2006.

In 2006, losses from fraud could total a record $4.5 billion, a 100% increase from the previous year, says Arthur Prieston, chairman of the Prieston Group, which provides lenders with mortgage-fraud insurance and training. The surge ranges from one-off cases of fudging and fibbing to organized criminal rings.

"We've created a culture where a great many people know how to take advantage of the system," says Mr. Prieston.

Yet the system itself bears blame. The evolution of mortgages into a securities instrument turned loan origination into a competition. Caution gave way to a push for speed and volume. Embroiled in an all-out war for market share, issuers reduced barriers to credit, for example, by offering so-called "stated-income" loans, which require no proof of income. "The stated-income loan deserves the nickname used by many in the industry, the 'liar's loan,' " says the Mortgage Asset Research Institute, which works with lenders to prevent fraud. A recent review of a sampling of about 100 stated-income loans revealed that almost 60% of the stated amounts were exaggerated by more than 50%, MARI says.

Bear Stearns says the scheme evaded its antifraud efforts by supplying false information at every step of the application process. "We as an industry cannot eliminate fraud entirely," Tom Marano, head of mortgages and asset-backed securities for Bear Sterns, said in a statement about the Atlanta ring. "We can and do continue to develop systems and detection techniques that evolve with the complexity of criminal schemes.'"

But others contend that the Atlanta case illustrates the recklessness with which lenders were issuing mortgages in recent years. "This case should have been an indictment of the mortgage industry," says Patrick Deering, an Atlanta defense attorney involved in the case.

In an eye-opening setback for prosecutors, Mr. Deering and other defense attorneys successfully defended three home builders against charges that they had participated in the scheme. Prosecutors had attacked the home builders for failing to raise red flags when they witnessed mortgages being issued far in excess of what the builders were being paid.

But some defense attorneys went on the offensive and attacked lenders for failing to guard against fraud. Particularly illuminating was the testimony of Lucy Lynch, a former vice president of mortgage operations at BankFirst.

"Fraud was not really a consideration in our world," Ms. Lynch testified, according to a trial transcript.

Ms. Lynch said the bank relied on an outside "loan officer" at a reputable mortgage broker to serve as its "eyes and ears" in the real-estate transactions. As it turned out, that person was indicted as part of the fraud ring.

In some cases, the bank gave its blessing to closing documents that showed unexplained payments of hundreds of thousands of dollars to obscure companies that turned out to be owned by the fraudsters. On three different Atlanta-area homes over a three-month period starting in late 2005, closing documents approved by BankFirst showed large payouts to the same companies.

Ms. Lynch said the bank assumed that the cash was going to subcontractors for construction work. But the bank never asked for invoices. In an interview, Ms. Lynch says the bank was primarily checking to make sure the borrower wasn't being charged any additional fees or debt. "We didn't do anything different from the rest of the industry,'' she said, adding that she believes her testimony helped convict three perpetrators of the fraud -- two borrowers and a real-estate agent who helped lead the ring.

Asked in court why the pattern of payouts didn't raise any red flags, Ms. Lynch responded: "Do you have any idea how many loans came into BankFirst during that time period?" She said BankFirst typically allowed a "15-minute window" from the time it received closing documents by fax to the time it released the loan proceeds to the borrower.

Ultimately, prosecutors failed to convict any of the three home builders. Charges against one were dropped. Another was the subject of a mistrial. And the third was acquitted before the case went to the jury. "These were the wrong people on trial," says Mr. Deering, whose client, home builder Randall Tharp, was acquitted.

One of the biggest losers in the Atlanta scheme was Bear Stearns. A total of $6.8 million in Bear Stearns loans were used by the enterprise. The fourth-largest mortgage that Bear Stearns originated in 2006 went to a borrower in the Atlanta scheme. That involved a mansion on which Bear Stearns lent nearly $3 million. Today, that mansion is in foreclosure and listed at $1.75 million.

Bear Stearns says falsified income and asset documents are difficult to detect "if they are part of a sophisticated fraud ring." In the case of the $1.8 million loan that Bear Stearns issued to Mr. Wright, the New York telephone worker, the company says it verified Mr. Wright's employment and assets.

But Mr. Wright's attorney, Mr. Secret, says, "Bear Stearns certainly couldn't have verified any of the assets or any of the money. It simply wasn't there."

Some banks victimized by the Atlanta ring say they depended in part on a party called the closing attorney to protect their interests. But often, lenders neither choose nor pay for the closing attorney: The buyer does. In this case, the closing attorney was part of the fraud ring. The 58-year-old lawyer, Raymond Costanzo Jr., known in the ring as "Uncle Joe," signed off on several fraudulent sales, and collected $250,000 from the scheme, the indictment alleges. In 2006, Mr. Costanzo pleaded guilty to bank fraud and is awaiting sentencing.

In the neighborhoods where the Atlanta scheme operated, values have plummeted. Many homes associated with the scheme are now in foreclosure. Some have sold for as low as 50% of what buyers in the fraud ring paid. "The banks are getting more and more aggressive in their pricing because they don't want to own these homes," says Warren Lovett, a real estate agent with Coldwell Banker in Atlanta.

Mr. Lovett has taken listings for about 60 foreclosed properties this year. He estimates that half of the foreclosures he's encountered are due to fraud.

IN yet another article, it looked at the industry's activities in trying to hide/downplay/manage/massage the situation, in "Pricing Probes On Wall Street Gather Steam".
During the past several months, financial firms have announced more than $80 billion in write-downs on mortgage-related assets. This includes a $9.4 billion write-down by Morgan Stanley on Wednesday stemming from bad bets on such securities. Last week, UBS AG took a $10 billion write-down bringing its total for the year to $13.7 billion; Merrill Lynch & Co. has had write-downs of $7.9 billion, and more are expected. In all three cases, the firms added to the write-downs they initially announced.

The credit crunch that has hurt some homeowners and led to the Wall Street write-downs has highlighted an unnerving reality in the financial world: Investors increasingly have no way of knowing with any certainty the value of many of the securities now traded.

The SEC has set up a working group that also is looking at whether firms adequately disclosed the risks of these investments and were timely in announcing stresses on the firms' financial statements. The probes are in early stages.

"The fact that we're investigating does not mean that we have uncovered wrongdoing," said Walter Ricciardi, deputy director of the SEC's enforcement division. "We don't know now that we will be recommending any enforcement actions in the subprime area."

To bring civil charges, the SEC likely would need specific evidence that a firm intended to make itself look better by misstating the value of its assets, says David Meister, a former federal prosecutor who now is a partner in New York at the law firm Clifford Chance LLP.

The SEC is asking questions specifically about whether financial firms were valuing mortgage-related securities differently on their own books compared to the valuations they applied to the holdings of customers such as hedge funds.

The SEC also is asking why securities firms would price the same or similar mortgage securities at higher prices for their in-house trading desks than for their asset-management groups, for instance, or the repurchase desk, where large slugs of securities are sold on a short term basis.

Lastly, the Journal dissected the recent Bear Stearns developments, in "Bear's Woe: Beyond Mortgages".
Bear, the smallest of Wall Street's five big investment banks but one of the worst hit by the mortgage downturn, recorded a net loss of $854 million for its fourth quarter.

Bear Stearns Cos.' loss in the fourth quarter, the first in its 84-year history, is stoking concerns that the Wall Street firm's troubles extend beyond the mortgage market and into once-steady money makers like the firm's stock and asset-management divisions.

"The write-downs are less surprising and less disconcerting than what looks like a loss of franchise," wrote Credit Suisse Group securities analyst Susan Roth Katzke in a research report, noting that revenue in equities, fixed-income, and clearing services all dropped significantly. [See, also, The Bear Flu: How It Spread.]

Guambat noted a parallel to this in a story today, in the Sydney Morning Herald tale of the throttling of shopping centre owner gone all but bust, Centro Properties. The thrust of the tale had to do with the over-leveraging and under-disclosing by Centro's management.

But an aside caught Guambat's eye. It had to do with JP Morgan and its huge fees. Because, in many cases of subprime write-downs we're seeing, the banks are saying this is a one-off confined to bad subprime bets but that the rest of their fee generating business is just hunky dory thank you very much.

This was the part of the story that caught Guambat's eye:
It was a spectacular firestorm surrounding a company that had built the value of its business to a portfolio of funds under management worth $26 billion, including 128 shopping centres in Australia and 682 in the US.

Large in stature, he [Centro CEO Andrew Scott] is said not to tolerate fools gladly. But in his fall, he has dragged some big names with him. These include substantial investors such as UBS and Macquarie Bank. Then there are big names behind the organisations, like the executive chairman of JP Morgan in Australia, Andrew Pridham, who has served as mentor to Scott's ambitious program of expansion. It signals challenging times for what has been a lucrative partnership: in one transaction alone, underwriting a capital raising of $1 billion for Centro Retail Group in March, JP Morgan banked $25 million.

Assuming a not insignificant part of the fees these banks have been earning have been associated with feeding the various aspects of the subprime melt-up, what will become of those fees once the subprime melt-down runs its course?

Wonky pet toys don't always bowl strikes after all, maybe

Guambat, with the help of Felix Salmon, took a moment's interest in trying to follow the loose thread hanging off the jumper of CPDOs. It was never to be. Guambat just couldn't fathom such a "sure thing". So he found better or worse things to do, like scratching that infernal itch behind his ears.

Now, Guambat is just as glad to have lost interest, if not principal, nor principle.

It seems that CPDOs don't forever bowl strikes, after all. The statistics on the number of gutter balls is yet to be compiled.

Gwen Robinson, in FT Alphaville, writes:
The volatility in credit markets appears set to claim fresh victims after Moody’s on Thursday put a number of complex and highly leveraged products, known as CPDOs, on review for downgrade.

The move affects seven deals from the bank that invented the product, ABN Amro, as well as deals from Lehman Brothers, Dresdner Kleinwort, BNP Paribas and Merrill Lynch.

The bets made through CPDOs (constant proportion debt obligations) on large portfolios of highly-rated corporate debt exposures are leveraged by 15 times on average, which means the CPDOs’ value can be highly volatile.

Moody’s said all the transactions involved had lost about 30% of their value since launch in 2006 or this year.
Maybe that's what 3CPO was going on about and R2D2 went into blue screen of death trying to explain.

To be fair to Felix Salmon, and why not, he's a regular read, the only thing that has happened so far is that the CPDOs in question are only up for review for downgrade. It's not like they've actually defaulted yet. We still don't know if "
they're largely immune to corporate defaults". But we're in a pretty good environment to test the hypothesis.

China takes a stake in Australian banks

This is how China is administering its massive US dollar foreign exchange reserves that its built up by exporting huge quantities of toxic toys and other things the American consumer addiction craves.

China's State Administration of Foreign Exchange ("SAFE") "has taken small stakes in Australian banks", according to a Dow Jones Newswires report by Lyndal McFarland.
Before proceeding, note that the Australian guvmint has for decades maintained a bit of a closed shop when it comes to the Australian banking industry under the so-called "Four Pillars" doctrine.

There are other players in the industry, both Australian and foreign, but the Large Lads of Australian banking are -- with their respective shares of the ASX/S&P200 share index -- NAB (National Australian Bank - 4.9%), CBA (Commonwealth Bank of Australia - 6.26%), ANZ (Australia New Zealand bank - 4.13%) and WBC (Westpack bank - 4.2%). So influential are these banks on the Australian stock indexes that these four companies account for nearly 20% of the entire index' value.

If you add BHP and Rio Tinto to the mix, you have about one-third of the value of the entire field, with the remaining 194 stocks making up the rest.) By simply limiting trading/dealings with those 6 stocks, any one could practically affect the valuation of the entire Australian stock exchange. Given that the Australian government mandates that employees pay into superannuation funds, and that most of those funds invest in the ASX index, a whole lot of battlers' savings swing in that wind.
Now, continuing with the DJ Newswires story, it was reported that,
"The stakes taken by the state-owned agency, run by Madam Hu Xiaolian, who is also deputy governor of the People's Bank of China, are considered [by whom?] portfolio rather than strategic investments."

A subsequent DJ Newswires "Market Talk" item notes that the stakes taken by SAFE are approximately one percent each of ANZ, CBA and NAB. Those 3 banks comprise about 15% of the entire ASX index. The Market Talk report says, "Chinese purchases would be a good sign for Australian banks as it would suggest that 'weight of money' is providing support..."

With Rupert Murdoch's Dow Jones media bringing us the bigger picture of Chinese investments in Australian banks, his Australian flagship operation (and isn't it nice to have choice of news sources?), The Australian, reported earlier today, ANZ has become the latest target:
ANZ chief executive Mike Smith, who is keen to step up the bank's ties with China, revealed this week that a major Chinese investor had taken a stake in the bank but would not release the name.

"China is sick of pissing away its foreign reserves on low-yielding US Treasuries," said one observer yesterday.

The financial sector is seen as a key target area. China Development Bank paid $US3billion for a 3.1 per cent stake in Barclays Bank in July, while the Industrial and Commercial Bank of China spent $US5.6 billion to buy 20 per cent of the Standard Bank Group of South Africa in October.

Morgan Stanley's new Chinese benefactor, CIC, was set up only months ago, given $US200 billion of its own to invest, with a mandate to do better than returns on US Treasuries.

Its first investment was a nightmare, swiftly losing millions on its $US3 billion investment in the listing of US private equity firm Blackstone.

But the Morgan Stanley deal shows that it has learnt the lessons of Wall Street very quickly, negotiating a tough deal for its cash injection, which will give it almost 10 per cent of the once powerful bastion of US capitalism.

The latest investment by CIC is the third bailout of its kind in a matter of weeks, following the $US7.5 billion investment by the Abu Dhabi Investment Authority in Citigroup under similar circumstances, while UBS last week announced it was getting an $US10 billion injection from the Government of Singapore Investment Corporation and an unnamed Middle Eastern investor.

This followed the $US1 billion deal by Wall Street's Bear Stearns - which was one of the first on the Street to be hit by the sub-prime mortgage crisis - with the Chinese Government-owned Citic Securities.

With Australian companies such as property group Centro caught by the closure of some international debt markets as a result of the sub-prime crisis, and banks such as St George and ANZ this week warning that their cost of funding is under pressure, it is worrying to think how much worse the fallout from the sub-prime crisis could have been if the sovereign wealth funds were not ready with their handy billions.

The deals have also been remarkably free from the xenophobic reaction seen over recent years against Chinese companies such as CNOOC wanting to buying into US companies. [And Mr. Murdoch would be well versed on the who's and how's of stirring up that xenophobic reaction. Guambat wonders why the oil deal created so much distress compared to the recent financial bail-outs? Is saving the skin of the Big Boys of Wall Street, perhaps, a factor?]

While no specific deal is on the horizon, the prospect of Canberra having to deal with attentions of the big Chinese investors in Australian companies next year is increasing. So far there has been none of the xenophobia in Australia about potential Chinese investments here that there has been in the US.

But this week's sabre-rattling by NSW unions opposing the sale of the state's electricity assets - claiming that Chinese investors who happened to be visiting the state were "kicking the tyres" of a NSW power station - shows that there is always the potential for those with vested interests to raise the issue.
In a related opinion piece in the same paper, John Durie said,
THE Chinese Government has brilliantly exploited the greed-inspired US sub-prime crisis to build a strong case against the predicted increase in protectionism against sovereign wealth funds. Indeed, in Australia a Chinese Government entity on one's share register is something some brag about.

This year is the first in recent history in which China has acquired more foreign portfolio assets ($US29.2 billion) than investments in China ($US21.5 billion).

This move will spark protectionist fears, but saving Wall Street helps.

The transfer of power from West to East was never more apparent than in deals like these, which appropriately enough came via Wall Street's penchant for blowing itself up through lax risk controls and outright greed.

[Newly elected] Australian Finance Minister Lindsay Tanner, a free market advocate who in years past has urged the scrapping of foreign investment controls, now says he is having second thoughts because of the political impact of, say, China bidding for BHP Billiton.

No matter where you stand, clearly the trend is real and getting bigger.

UPDATE: It now appears that SAFE is distancing itself from this story. The WSJ reported:
China's foreign exchange regulator Saturday denied it has invested in Australian banks, saying the news is inaccurate and could be confusing the regulator with other parties.

Wei Benhua, vice head of SAFE, said, "The rumor is inaccurate. We have investigated it," when asked by a reporter to comment on the news during a forum held in Beijing.

Asked by Dow Jones Newswires if SAFE has bought the stakes as a proxy for China's sovereign wealth fund, which was set up in September to manage US$200 billion worth of foreign exchange reserves, Wei declined to comment.

Thursday, December 20, 2007

Japan won't chip in, so Japanese banks soar

Guambat reckons, second only to Greenspan's too low for too long interest rate regime, the cheap-as-chips yen-carry trade diligently pursued by the Bank of Japan was the primary source of the glut of liquidity that led, ultimately, to the collapse of the credit markets after they got too much easy credit for their own good.

Consequently, Guambat is positively gobsmacked at the audacity of the Japanese banks to not touch the subprime fix-up schemes, not even with a 10 foot pole.

Just how bad is this credit crunch anyway? What do they know that the rest of us don't.

This is the slightly old news set-up:

Japanese Stocks Fall, Led by Banks on U.S. Credit-Line Request
Japanese stocks fell, led by Mitsubishi UFJ Financial Group Inc., after Nomura Holdings Inc. said the country's three largest lenders were being asked to contribute too much to a subprime-asset bailout fund.

Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. paced the drop after the Nikkei newspaper said they will have to reply this week to a request by U.S. banks that the banks each provide a $5 billion credit line for the fund.

So, that was yesterday. But yesterday's gone. Today, there's this from Reuters:
"Bank shares such as Mitsubishi UFJ Financial Group were flooded with buy orders after reports that they plan to reject a request to help finance a U.S.-led subprime rescue fund." (Reporting by Taiga Uranaka)

Also see this Reuters report.

MarketWatch offers this explanation, which borders on apology:
The Japanese financial world underwent its own real-estate-centered crisis after the property bubble burst in 1989. Japan's banks were unable to raise funds in the short-term money markets and were forced to cut lending to corporate clients.

Japanese companies weren't able to borrow from banks or raise funds in the capital markets, and the economy entered what is now known as "The Lost Decade" of stop-and-go sluggish growth and contraction, until a banking-sector cleanup began in earnest in 2002.
Guambat reckons that there are some Japanese bankers who still blame Wall Street bankers for their off-balance sheet tricks which they sold to Japan and that helped sink their economy in the 1990's. Nevertheless, this is pretty rough. Japanese bankers aren't the only ones with memories.

Is a worldwide credit war looming?

Hear the lonesome whiperwill

Did you ever see a robin weep
When leaves begin to die
That means he's lost the will to live
I'm so lonesome I could cry

-- Hank Williams

Guambat has always thought that song of Hank's was the most forlorn thing he'd ever heard, ... until this poor Minyan's lament:

Never Bet Against the House
Due to my preference for security and prudence, I forgo the opportunity for larger gains and windfalls in exchange for the lower risk and security... yet, my very own government is treating me as a sucker. I mean openly, which is kind of new.

The flogging of the prudent investor has moved from sublime to ridiculous, as government officials blatantly enter a mode of panicked bailout of preferred gamblers and spreading misinformation about the situation.

Not to be too dramatic, but I am left wondering how to explain this to my children.

The net effect of these bailout activities is to reward the people who took wild risk and ignored generations of wisdom about debt and gambling. It leaves me trying to explain why I chose a higher-rate fixed mortgage and a modest house and modest consumer debt, with a higher proportion of my investment in low yield supposedly "safe" mutual funds. I am left now ... watching as my government actively turns the knife in my back.

Dramatic? Perhaps. But I would argue that we are witnessing a very dramatic episode in US economic history. The "end of consequences" and the era of overt elite market socialism?

I don’t know yet what I will tell my kids. Something along the lines of: go ahead and be reckless; someone will save your butt – so long as that butt is aligned with the chosen elite butts.

“Never bet against the house”. I get that now.

I've never seen a night so long
When time goes crawling by
The moon just went behind a cloud
To hide its face and cry

Meanwhile, over at Morgan Stanley's earnings call, as reported by MarketBeat (David Gaffen):
“The results we announced today are embarrassing to me and the firm, and they’re the result of an errant judgement on one desk in our fixed income area and a failure to manage that,” [CEO John Mack] says.

He says the firm had a “large illiquid trade on our books in a deteriorating trading environment,” and the “firm’s hedges did not perform adequately in late October.” Due to this, they decided to take this $7.8 billion writedown instead of the estimated $3.7 billion writedown detailed on Nov. 7.

Mr. Kelleher [CFO] details the subprime trading position that caused the losses, saying the firm elected to short the lowest-rated tranche of subprime to the tune of $2 billion, but decided to “cover the cost of negative carry by going long the $14 billion super-senior tranche.” As the value of these positions declined, the company ended losing a ton.
Sam Jones explains that Morgan Stanley was just having a subprime superbad super senior moment, and was not unique in that regard. He suggests Goldman may be nursing one of those in its 10-Q filing in September.

And MarketWatch added to the Morgan story (detailing in a sidebar the $70 Billion major banks reported losing in the 3rd quarter of the year):
With Wednesday's announcement, Morgan Stanley also became the latest U.S. financial titan to announce a big investment by an investment fund controlled by a foreign government.

China Investment Corp.'s total passive ownership in Morgan Stanley common shares, assuming the conversion of the equity units, amounts to 9.9% or less of total shares outstanding, the company said. The equity units will pay a fixed annual payment rate of 9% and convert into Morgan Stanley common shares in 2010.

"This quarter questions the validity of the increased risk taking efforts put forth by Morgan Stanley when John Mack became CEO," wrote analysts at Wachovia Securities in a research note.

With the write-down, Morgan Stanley's management essentially "kitchen-sinked" the quarter, according to analysts at Banc of America Securities.
"The bull case is that the company now has just $1.8 billion in reported net ... subprime exposure, having taken their medicine, and now it can look forward to a clean 2008," they wrote in a report to clients.
Felix Salmon asks of that Chinese 9.9% "passive" investment, "What Did CIC Know, and When Did They Know It?" because "one has to suspect that Morgan Stanley has been sitting on the news of these losses for much more than four days - and that CIC has, as well", which would be "a prima facie problem here. That's because under SEC regulations, such information must be released on a 'rapid and current basis,' which the courts take to mean four days."

And I'm so lonesome I could cry

Wednesday, December 19, 2007

"Least sophisticated borrowers" shagged, Fed shrugged

Alan Greenspan's propensity to shy away from actually trying to regulate anything while serving as head of the Central Bank has been spotlighted in the NYT's article, Fed Shrugged as Subprime Crisis Spread. The article provides facts and deep background to Guambat's spew at Greenspan's Putzpa.

It turns out there were many warnings and attempts to enlist the Central Bank Chairman to use his regulatory powers to derail or diminish the so-called subprime problems well before they reached critical mass.
In 2000, Mr. Gramlich [Edward M. Gramlich, a Federal Reserve governor] privately urged the Fed chairman to send examiners into the mortgage-lending affiliates of nationally chartered banks.

Mr. Greenspan argued that the Fed was ill-suited to investigate deceptive lending practices.

“I got the impression that there were a lot of very questionable practices going on,” he said. “The problem has always been, what basically does the law mean when it says deceptive and unfair practices?"

“It becomes essentially an enforcement action, and the question is, who are the best enforcers?”

The Fed was hardly alone in not pressing to clean up the mortgage industry. When states like Georgia and North Carolina started to pass tougher laws against abusive lending practices, the Office of the Comptroller of the Currency successfully prohibited them from investigating local subsidiaries of nationally chartered banks.

But the regulators were also fragmented among an alphabet soup of agencies with splintered and confusing jurisdictions.

And so the band played on and Greenspan fiddled while homes burned.

Barry Ritholtz noted the allusion to Ayn Rand's followers in the NYT's article's title.

Bearly a correction

The stocks (indexes, actually) started out positively today and, despite the midday weakness could end that way, because those great spreaders of joy and myrrh and leveraged derivatives, Goldman Sachs, have produced over-the-top profits, much of which was built on the bet that the stuff they were spreading was more manure than fertilizer.

This is another iteration of an ongoing theme. (See, You can't get there from here: "No doubt Goldman will already be making money from it.")

This is, of course, in the context of merely a correction in the stock indexes. For all the ballyhoo, you'd think we'd be in a fair dinkum bear market, but we can't seem to organize one of those; "not even a pre-pubescent bear market".

My Precious is running out of Patience.

Not so Neil Welch, an analyst at Fox-Pitt Kelton. He reckons there's good value and buying time yet to come, particularly for brokerage stocks:
“Why not wait for a proper bear market? It’s not clear that now is the right time cyclically.”

Soothe the markets, nationalise the banks

There's nationalising and then there's nationalising.

Typically, whenever any country talks about nationalizing all or part of any industry, or even hint at the "N" word, the markets run for the woods. Think socialism. Think Chavez and the oil industry. Bad.

Now, speak of privitizing an industry, and that's another thing. A good thing.

But having the "nation" doing the "privatizing" is a bad thing. It takes the profits out of private hands and hands them over to some of the world's worst managers -- government leaders. Privatization puts those profits back into the hands of the world's best managers -- corporate leaders.

(Guambat is being merely cynical here, not really suggesting that popularly elected politicians make good business managers, just pointing out that privately appointed corporate leaders do not automatically come with any divine inspiration or devotion, either.)
But over in Jolly Old England they've been happily and openly discussing the very real possibility of privatizing Northern Rock bank, and presumably any other bank for which Northern Rock nationalisation may set a precedent.

Today, Sam Jones reports in FT Alhpaville that Bank of England Governor Mervy King has reiterated
“If -and I stress if - we were to get to nationalisation, it would be a very good way of breaking the logjam.”
And the markets shrugged.

You see, this is not really any kind of nationalisation (or nationalization as far as that goes). This is the "free market" kind of nationalisation whereby you socialise the expenses and privatise the profits, and that's a good thing -- for the markets.

Monday, December 17, 2007

Toil and trouble

And Ive got no defense for it
The heat is too intense for it
What good would common sense for it do

cause its witchcraft, wicked witchcraft

-- Frank Sinatra

Stuart Bowen was "tasked" by Congress to do something about all the corruption in post-invasion Iraq, particularly involving US money. A cynic might have thought that this was just another political stunt to hide real issues under the bushel basket of committee reporting. Bush, for whom Bowen had previously worked, probably hoped for some kind of whitehouse whitewash. But Bowen actually began to take note of all the very real big bucks being taken out in big buckets, unaccounted for.

See prior Guambat posts about the Special Inspector General for Iraq Reconstruction (SIGIR) here and here.

Now, in time honored "kill the messenger" fashion, someone has put out a hit on Bowen. Not that he's entirely unblemished, but the stuff being thrown at him shouldn't even pop above a routine personnel file entry. It is all fairly petty in the context of the immense pressures his task must have faced from the very beginning. Now he's being troubled mightily for all his toil.

The thing that makes this "post-able" for Guambat is the Guam Connection to the story.

A couple of decades ago when Guambat had a leadership role in the Guam Chamber of Commerce, he got interviewed on enough occasions by one reporter that they could recognize each other in the supermarket. Not a close association, but an acquaintance, you could say.

Now this reporter turns up, gingerly, bewitchingly, in the Investigation of the Investigator. It's a small world after all.

The bigger story was thoroughly reported in the Washington Post, and carried elsewhere as noted by The Jurist.

But the salacious, too-juicy bits are all about Ginger Crunden (as she was when Guambat knew her) Cruz. It appears, Guambat having no knowledge, Ginger may have held some beliefs about witchcraft. She won't have been the first, and there has been more than a little movement toward a push to make Wiccan a more mainstream, or at least acceptable to a tolerable few, belief system (see, e.g.).

As the Muckraker is pointing out,

Ginger Cruz, Bowen's deputy, allegedly used, um, witchcraft to intimidate subordinates
This reference to intimidation comes from the Washington Post report in this context:
Cruz, a former spokeswoman for the governor of Guam, originally joined SIGIR as a contractor working for the accounting firm Deloitte & Touche. Current and former SIGIR employees have told investigators that Cruz threatened to put hexes on employees and made inappropriate sexual remarks in the presence of staff members.

Cruz denied making comments of a "sexual nature" and noted that she was cleared of any wrongdoing by an internal SIGIR investigation into the claim.

After the detailed but anonymous complaint was sent to the presidential council, Cruz sought special dispensation from Bowen for SIGIR to pay her legal fees -- an uncommon practice within government, according to U.S. officials. So far, the agency has paid for more than $32,000 of Cruz's legal fees, according to copies of the invoices provided by SIGIR under a Freedom of Information Act request. Bowen said the agency's general counsel advised him that the payment of Cruz's legal fees was permissible.

Greenspan's Putzpa

Forget "Greenspan's put". Greenspan's chutzpa may well be his greatest legacy.

First, he advised America's homebuyers, at the worst possible point in the economic cycle, to go out and get some of that new financing, such as an adjustable rate mortgage.

Then, when all that home ownership via new fangled financing began shaking the foundations of the housing market, he said, he detected "early signs of stabilization" in the housing market.

When the housing market teetered and began falling over the brink of collapse, he said, "This is not the bottom, but the worst is behind us."

And now, after encouraging the mortgage market meltdown, ignoring the signs it was approaching, failing to do anything to alleviate it when he had his hands on the controls -- now, and you really got to admire his chutzpa for this, he says:

he favors spending U.S. government money to bail out mortgage borrowers who risk losing their homes because they can't make payments.
If Greenspan had kept his balls and stuck to his central banking when he first noted that the markets, well in advance of the dot-com boom/bust, were engaging in too much irrational exuberance, rather than become Wall Street's eunich muse, he wouldn't need the chutzpa award now.


Friday, December 14, 2007

Silent Malaysian majority backs lock up of loud-mouth demonstrators

Five ethnic Indian rights activists have been arrested in Malaysia, under a rarely used security law that allows indefinite detention without trial.

The men belong to the Hindu Rights Action Force (Hindraf), which organised a mass rally last month alleging discrimination against ethnic Indians.

The United States demanded Thursday that Malaysia provide fair treatment to five leaders of a rights group held under a security law that allows for indefinite detention without trial.

The five from the Hindu Rights Action Force (Hindraf), pushing for an end to discrimination of ethnic Indians in multi-racial Malaysia, were picked up Thursday and ordered held under the feared Internal Security Act (ISA).

"Our expectation as a government is that these individuals would be provided the full protections under Malaysian law, that they would be given due process, that they would be accorded all the rights accorded to any other citizen, and that this be done in a speedy and transparent manner," State Department spokesman Sean McCormack said.

Hindraf enraged the government of Prime Minister Abdullah Ahmad Badawi last month by mustering at least 8,000 people to the streets of Kuala Lumpur to highlight various issues facing ethnic Indians, including lack of economic opportunities and destruction of Hindu temples.

Police used tear gas, water cannons and baton charges to break up the protests.

"It is our firm position that those individuals who want to peacefully express themselves in a political forum or any other forum should be allowed to do so," McCormack told reporters.
The New York Times:
The government detained five leaders of an ethnic Indian organization under a strict and rarely used security law after they were accused of threatening national security. The law allows for indefinite detention without trial. The group brought 10,000 people onto the streets of Kuala Lumpur last month to protest what it claims is discrimination against ethnic Indians by the mainly Malay government.

The Times of India:
"A terrorist is a terrorist. He has no religion and his origin does not matter," said foreign minister Pranab Mukherjee.

The Indian government refused to meet the leader of the protesting Indian group Hindraf — Waytha Moorthy — on Thursday.

India is not going to give the protesting Malaysians more traction. This is clear from the recent actions of the government that they consider the protests to be part of an internal matter of Malaysia, because these were all Malaysian citizens. To the extent that they are persons of Indian origin, they would receive notional support from India.

But, India will not place its relations with Malaysia on the line for them. This is a clear message. So even though there will be expressions of support for the protesters the government will not be seen to be backing any group that might have sympathies with the LTTE. This will complicate its relations not merely with Malaysia and Sri Lanka but could prove to be a legal hot potato — because LTTE is banned in India.
The Star Online (Malaysia):
Representatives of Damai Malaysia – an umbrella body comprising 395 non-governmental organisations – handed over to Datuk Seri Abdullah Ahmad Badawi yesterday a memorandum criticising the illegal street rallies.

Damai represents 1.5 million members and its representatives include those from 75 Chinese-based and 20 Indian groups and associations.

In the joint declaration read by Mohd Saiful Adil, the members expressed their disgust at street demonstrations and the use of religious and racial issues to create hatred among Malaysians.

They condemned individuals and groups who used lies and slander against the country and asked for foreign intervention in Malaysia’s internal affairs.

“We also condemn accusations that the country’s leaders had allowed ethnic cleansing to occur in the country,” he added.

Damai advisor and Bukit Bintang MCA chief Senator Datuk Dr Lee Chong Meng said the Bersih and Hindu Rights Action Force (Hindraf) illegal demonstrations last month had caused tourists to cancel trips to Malaysia.

Cheras Hindu Youth Organisation vice-president S. Ariivazhagan regretted that Hindraf had used religion to protest.

“Hindraf has presented the wrong view to the world that the Indian community here is being persecuted. This group is not fighting for our rights,” he said.

On arrival in Kuantan, Abdullah labelled those who solicit support from outsiders as traitors and the action of Hindraf, which claimed to fight for the rights of the Indian community in Malaysia, as an attempt to destroy the country and racial unity, Bernama reports.

The Prime Minister said the memorandum was a sign that people were angry with illegal protests and violent acts.

“The country’s successes and achievements didn’t come about due to street demonstrations or illegal protests.

“We have progressed because we have been able to maintain democratic institutions which respect the law while the people enjoyed the fruits of peace and political stability.

“If freedom cannot be respected and used in a responsible manner, the people themselves will be at the losing end.

“As can be seen from today’s memorandum, the people who remained silent have now stood up to make their stand. They want peace to be maintained.”

He said he was informed that the street demonstrations had caused a 10% cancellation of hotel room bookings and rental of tour buses, while retail stores also reported a drop in sales.