Commentaries

from Rolfe Winkler:

Lunchtime Links 1-12

China surprises with bank reserve hike (Xin/Rabinovith, Reuters) The Fed could learn something from the PBOC. This sudden move to tighten bank lending maintains the PBOC's reputation for acting without warning. If the Fed had a similar rep, U.S. lenders wouldn't be so cavalier taking interest rate risk.

Special bankruptcy court for banks mulled in Senate (Younglai, Reuters) Interesting proposal for Dodd's Senate financial reform bill. Can't really comment until details are made available.

Citi unit grows -- with Fed's help (Enrich, WSJ) The fact that Citi subsidiary GTS is so important to the global financial system -- and that its failure would be disastrous -- is a good argument that regulators should find a way to wind it down...

Obama weighs tax on banks to cut deficit (Calmes, NYT) No details here either, but I expect whatever is proposed to pass, as the proposal will come not long after banks announce bonuses. Plan would raise as much as $120 billion. Taking money away from the financial sector, including its customers, is a necessary step towards de-leveraging the economy.

Devaluation sparks chaos in Caracas (Lyons/Crowe, WSJ)

Single stock dividend futures launched (Hedgeweek, ht Nick Gogerty) Not sure what the value of these is, but Nick points out that the leverage available to those trading futures means someone in need of a trading fix will get it...

Mark McGwire admits using steroids (ESPN) He cries a lot, complains of the pressure he was under and the difficulty of a 162 game schedule.

from Rolfe Winkler:

Consumer bankruptcy filings increase

From the American Bankruptcy Institute (no link yet):

The 135,913 consumer bankruptcy filings in October represented a 27.9 percent increase over last October’s monthly total of 106,266, according to the American Bankruptcy Institute (ABI), relying on data from the National Bankruptcy Research Center (NBKRC). The October 2009 consumer filings represented an 8.9 percent increase from the September 2009 total of 124,790. Chapter 13 filings constituted 28.5 percent of all consumer cases in October, a slight increase from the September rate.

“The nearly 9 percent increase in consumer bankruptcy filings in October, together with a 7 percent jump reported in business cases, demonstrates the sustained stress on the U.S. economy,” said ABI Executive Director Samuel J. Gerdano. ABI forecasts that total bankruptcies this year will exceed 1.4 million, the highest number since 2005.

Filings in 2005 were inflated by the passage of a new bankruptcy law that made it harder to file.

Lehman the tax scofflaw

Wow, Lehman Brothers really didn’t like paying taxes.

Back in June, New York City’s tax department filed a $626 million claim for back taxes against the bankrupt investment bank. And now comes New York State with an even bigger $1.2 billion tax claim.

Most of Lehman’s unpaid taxes to the state stem from last year, not surprising given what happened to the firm. But the state lists Lehman as having a $223 million outstanding corporate tax liability from 1999.

The unpaid liability from 1999 is so old that the interest owed to the Empire State actually exceeds the amount in unpaid taxes.

It makes you wonder is other Wall Street are equally as stingy when it comes to paying the taxman.

‘Living wills’ easier said than done

In the wake of the widespread chaos that accompanied the bankruptcy of Lehman Brothers last September, regulators have sought to find a better way to unwind global financial giants. One approach is that the banks themselves should prepare for their own orderly demise — a kind of “living will”.

That idea has been gathering steam of late. The G20 group of finance ministers and central bankers meeting in London over the weekend agreed to require “systemic firms to develop firm-specific contingency plans.”

The concept has wide appeal. The crisis has convinced politicians and regulators of all colours that even large financial institutions must be allowed to fail without imposing a huge burden on taxpayers. Many bankers see such a regime as a preferable alternative to more intrusive regulation.

However, drawing up a detailed “living will” is easier said than done.

Simon Gleeson of Clifford Chance argues that it is more important for regulators and legislators to establish a cross-border crisis-management and resolution regime than it is for individual firms to prepare for their own demise.

The mandate of the Financial Stability Board (FSB), the international body comprising finance ministries, central banks and financial regulators, was recently expanded to include contingency planning for cross-border crises. It published a series of relevant principles in April. However, as the Institute of International Finance (IIF) noted, it is “clear from the high-level nature of the principles and the aspirational language [that] there remains a lot to be done.”

The IIF is calling for the FSB to develop a convention on crisis management that would include detailed rules, including on early intervention. It also wants the FSB to run cross-border crisis simulations of the sort routinely carried out by domestic regulators.

Stones and glass houses, offshore tax haven edition

One of the week’s more amusing stories takes us to the sun-kissed shores of the Cayman Islands, scuba diver’s paradise, magnet for hedge funds and – until very recently – world-beating tax haven.

The financial crisis has not been kind to the Caymans. Hundreds of hedge funds have collapsed and global banks have slashed jobs. As if this was not enough, President Barack Obama in the spring launched a crackdown on tax havens that forced a number of Caribbean islands, including the Caymans, to embrace greater transparency – after a fashion.

Things are so bad that the government of the Cayman Islands is facing a $82m revenue shortfall in the budget. Local officials say they need a big loan or the government risks bankruptcy.

However, the British government – which oversees the islands – last week vetoed the loan. Chris Bryant, the British Foreign Office Minister, said he would not approve any new lending until he was convinced the Caymans had their house in order. He even suggested the islands might have to introduce – horror of horrors – income taxes in order to make ends meet.

Bryant continued:

It would be unwise, I suspect, to rely too heavily on a rapid improvement in trust fund income or to expect that the Cayman Islands’ prosperity can presume on an off-shore tax haven status.

Bryant would appear to have a point. But the island’s financial authorities think the British have other, baser, motives. As Anthony Travers, head of the Cayman’s financial services authority CIFSA, told Reuters’ Lorraine Turner:

Trash is king as Lehman shares surge

It’s either a sign of sheer boredom on Wall Street, or an early celebration of the one-year anniversary of Lehman Brothers’ demise, but shares of the fallen invesment bank were red hot today.

The stock rose some 200%. Take that AIG.

For some inexplicable reason, shares of the bankrupt investment bank, which trade on the loosely regulated over-the-counter Pink Sheets, changed hands some 73 million times on Friday. That’s a lot of trading in a stock that’s been worthless for nearly 12 months.

Indeed, on a typical day, the average trading volume in Lehman shares is about 2.6 million. The last time Lehman’s stock came anywhere close to today’s trading volume was way back in October, about a month after the Wall Street firm filed for bankruptcy.

Then again, today’s trading surge boosted Lehman’s closing stock price to 15 cents. It had been sitting around 5 cents for months. Better yet, Lehman now has a respectable market cap of $103 million–not too shabby for a small-cap company on the Pink Sheets.

Of course, this trading in Lehman is just crazy. There’s not good explanation for it. Just as there is no good explanation for the big surge in shares of American International Group.

Maybe this is just a case of traders trading trash financials to score a quick profit because they can’t find anything else to trade.

Germany should call GM’s bluff

Recently bankrupted companies seeking billions in taxpayer handouts do not generally have the strongest hand at the negotiating table. Yet General Motors seems determined to drive a hard bargain over the bailout of Opel, its European car arm.

After months of tortured negotiations with the German authorities, GM is now threatening to reverse away from the deal. However, it appears to have few alternatives.

Opel reckons it needs 3.3 billion euros in loan guarantees and other support to see it through to the end of 2011. Germany is ready to stump up the cash, but would like to see Opel sold to Magna,  the Canadian car parts maker, and its Russian backers.

GM is worried that Magna’s bid is too complex and would hand its precious intellectual property to the Russians. It favours a rival bid by RHJ International, the Belgian investment group, which requires less state support but would cost more jobs. With an election looming, however, the RHJ deal looks a non-starter in Berlin.

Now GM is suggesting it might keep Opel and raise the cash elsewhere. Quite where it hopes to find that kind of money is unclear. GM is barred from using U.S. government funds to support its international operations.

It has a presence in Britain through its Vauxhall division, but the British government is less prone to being blackmailed with the prospect of plant closures. Just ask Tata, the Indian group which spent months seeking government support to prop up Jaguar Land Rover before giving up.

GM could raise some cash by flogging or mortgaging its Chinese operations, the largest outside the United States. Even though credit markets have eased since the spring, however, the political complexities of such a sale would surely rival anything thrown up by the Magna proposal.

Nortel value for Ericsson is to keep out rivals

LONDON, July 27 (Reuters) – Ericsson’s last-minute bid of $1.13 billion for Nortel Network’s wireless assets is difficult to justify on sales prospects alone.     A merger won’t wring out much in the way of efficiencies either: Nortel has already undergone years of huge job cuts.      There is, however, another factor at work here: The value of keeping competitors out.     The Swedish mobile network equipment maker snatched the Nortel business away at auction from Nokia Siemens, which last month agreed to pay $650 million for the same assets — a little over half Ericsson’s final price.      Ericsson also significantly outbid a third bidder, private equity firm MaitlinPatterson, which offered $725 million, for Nortel. BlackBerry-maker Research in Motion is seeking a separate patent licensing deal with Nortel after its $1.1 billion offer for Nortel’s mobile business failed to win support.  

Understanding the deal requires knowing some of the technology dynamics involved. Nortel’s main franchise remains in CDMA networks, the technology that came to dominate the North American mobile market in the 1990s and earlier this decade. It’s a region where Nokia Siemens has struggled to make inroads.     Ericsson, on the other hand, shares some of the same customers and technology as Nortel. As the world’s biggest maker of mobile network equipment, Ericsson bought its way into the CDMA market earlier this decade by acquiring the wireless network assets of CDMA pioneer Qualcomm Inc.     Nortel Networks has also been working on the next generation of high-speed networks based on a technology called LTE, or Long Term Evolution. Nortel sold around $2 billion worth of CDMA and LTE equipment in 2008.      But the business has been in decline. Customers have been taking a go-slow approach to upgrading their networks, even before the global economic downturn. Nortel also lacked the scale of bigger rivals like Ericsson, Nokia Siemens or Alcatel Lucent that would have helped it compete with lower-cost Chinese and Korean competitors.      Nomura analyst Richard Windsor estimates that at a price of $1.13 billion, Ericsson stands to receive only a meager return of 6.25 percent on Nortel assets, assuming continued sales declines and optimistic operating margins of 20 percent — far higher than Ericsson itself is predicting for the Nortel business.     The value of Nortel’s wireless business depends on milking the remaining market for replacement CDMA equipment, while working with those customers to help them make a stable long-term transition to LTE and other next-generation equipment. But that would be paying a lot to simply reinforce relationships.     Call the additional price Ericsson is paying the “keep-out premium.” To make this deal work, Ericsson needs to turn its greater scale into sustained gains in operating margins. Keeping competitors at bay is the only way to justify the acquisition price.   – At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. Read some of Eric’s previous columns and blogs here. –

(Editing by Martin Langfield)

(Photos: Reuters/Bob Strong, Stockholm; Reuters/Karoly Arvai, Budapest)

Lehman D-Day

It’s taken awhile, but a deadline for filing claims in the Lehman Brothers bankruptcy has finally been set and it’s Sept. 22.

A Sept. 15 deadline, the one-year anniversary of Lehman’s collapse, would have been more appropriate. But maybe that would have just been rubbing everyone’s face in it.

If nothing else, the claims deadline won’t get in the way of all those obligatory Lehman bankruptcy anniversary stories that every news media outlet, including Reuters, will publish.

Even before the deadline, claims from the tens of thousands of Lehman creditor have been steadily filing in. The claims filed in the case can be found on the public docket for the Lehman bankruptcy.

Actually, the Sept. 22 deadline isn’t a hard and fast deadline. Any derivatives counterparty of Lehman has an additional month to file a claim. That’s because any creditor claiming a loss on a derivatives trade must also fill out a lenghty questionnaire.

In the end, the issue of how to resolve some 700,000 busted derivatives trades will be the thorniest matter before the bankruptcy court.

GM sprung free and world still standing

They said it couldn’t be done and here we are less than 40 days after GM filed and the new leaner, possibly meaner, automaker has been sprung free from bankruptcy court.

I don’t want to downplay the hardship of the GM workers being left behind, but the much feared Armageddon just hasn’t happened, giving the Obama Administration a big win for making the politically risky move of allowing GM and Chrysler to go into bankruptcy in the first place.

Last year, some said bankruptcy just wasn’t feasible for such a sprawling industrial company, and that the company’s failure would cause millions of Americans to lose their jobs.

That’s not to say the auto sector’s troubles are over. GM still has to build cars that Americans want to buy, and let’s face it, there are fewer Americans looking to buy given the sorry state of the economy. On top of that, the new company is majority owned by a US government that is spread pretty thin trying to save the economy, housing, big financial institutions and all. That could make for a pretty distracted owner.

But it’s an important start.

It also opens up the door for more so-called 363 bankruptcies where a failed company can be split into good and bad assets so the good part won’t get bogged down in the normal food fight between creditors and the company. Here‘s a fact sheet on 363, and the key bit about why the process can be lickety-split.

A 363 sale requires only the approval of the Bankruptcy Judge while a plan of reorganization must be approved by a substantial number of creditors and meet certain other requirements to be “confirmed.” A plan of reorganization is much more comprehensive than a 363 sale in addressing the overall financial situation of the Debtor and how its exit strategy from bankruptcy will affect creditors.