Commentaries

from Rolfe Winkler:

Lunchtime Links 2-2

Homeownership rate falls to 2000 level (CR) At 67.2% it's still way overstated. Home "ownership" is a misnomer in cases when the owner has withdrawn mortgage equity or when the price of the home has fallen below the principal value of the mortgage. A better measure of homeownership, I think, is just to look at total owner's equity as a % of household real estate. The most recent Fed Flow of Funds report (page 104, line 50) puts the figure at just 37.6%...

U.S. could extend bank fee beyond 10 years, Geithner says (Di Leo/Crittenden, WSJ) The proposed tax on non-deposit liabilities should be permanent, and should target ALL liabilities, including repos. Deposits are guaranteed via FDIC. While that insurance is dramatically underpriced (witness the cash-strapped state of the DIF) at least banks pay something for it. Non-deposit liabilities are also effectively guaranteed, for the biggest banks anyway, via the promise that none which is too big will be allowed to fail. To counter moral hazard, this implicit guarantee must be taxed in order to offset any benefit derived from lower funding costs.

Must-Read: What's a college degree really worth? (Pilon, WSJ) A lot less than you think, as argued here before. This piece is well-written with lots of good data!

AIG derivatives staff said to forgo $20 million in retention bonuses (Katz/Son, Bloomberg) They're still well-paid, but this is better than nothing I suppose.

Deficits as a national security issue -- Sanger NYT & Seib WSJ -- Good to see prominent columnists picking up the thread. A refresher on the Suez Crisis of 1956 offers helpful background.

Rising FHA default rate foreshadows foreclosure crush (ElBoghdady/Keating, WaPo) Key line: "the FHA projects that it will pay out claims to lenders on one out of every four loans made in 2007 -- the worst rate in at least three decades. The claim rate should be nearly the same on the vastly larger volume of loans made in 2008."

Goldman spokesman's most withering rebuttals (Daily Intel) Methinks he doth protest too much...

from Rolfe Winkler:

Lunchtime Links 2-1

President's budget (gpoaccess.gov)

Barney Frank: The poor should rent, not own (Indiviglio, Atlantic)

Citigroup said to plan sale of private equity unit (Keoun/Keehner, Bloomberg) Citi cites raising cash to pay down debt as the reason to sell this unit. Of course this would also get Pandit some brownie points with Paul Volcker, who wants commercial banks out of private equity, hedge funds and proprietary trading...

HCA owners get $1.75 billion payout (Lattam, WSJ) Speaking of private equity...a nice payout for investors in one of the biggest LBOs in history.

All those little Stuy towns (Morgenson, NYT) Bullying as a business model...

Goldman Sachs and the $100 million question (Times UK) This is a thinly sourced article that claims Lloyd Blankfein will get a blowout $100m bonus for 2009. If true, talk about giving the finger to, well, pretty much everyone.

Five myths about America's credit card debt (Manning, WaPo)

from Rolfe Winkler:

Geithner’s faulty apologia

Tim Geithner's appearance in front of Congress today was another embarrassment, perhaps more for the people's representatives than the Treasury Secretary. Still, Geithner offered a clumsy defense for paying out 100¢ on the dollar to AIG's counterparties, which included more than Goldman Sachs.

What they lacked in knowledge and nuance, Congress made up for in volume and OUTRAGE. The worst moment I saw was the utterly bogus comparison by Rep. Stephen Lynch between AIG's payout to Goldman (100¢ on the dollar!) and the bailout offer for Bear Stearns shareholders (only $2 per share). 100 is a bigger number than 2, you see.

Geithner was lucky to be doing battle with such an unprepared, unimpressive group.

His defense, such as it was, amounted to the following:

Had the Fed imposed haircuts on AIG counterparties, it would have led to AIG's credit rating being downgraded and the company (and consequently the economy) would have collapsed.

But AIG had already been downgraded, that's why the government stepped in with a bailout. At that point the firm's liabilities were taxpayer backed, so it strains credulity to say that extinguishing certain CDS it had written would cause systemic fallout in and of itself. Essentially what was happening here was unused insurance contracts were being extinguished. (Imagine a pro-rata refund from your insurer for a homeowner's policy it wants to cancel...)

And there was precedent for this kind of negotiation. Eric Dinallo, former Commissioner of the NYS Dept. of Insurance and current candidate for Eliot Spitzer's old job, had previously negotiated haircuts on CDS written by the monoline bond insurers. They were never forced into a taxpayer bailout. Did anyone at the Fed pick up the phone to consult Dinallo? Why not?

Goldman Sachs says sorry

Wall Street’s response to public criticism has mainly been exercises in “never apologize, never explain.”

Which makes today’s mea culpa by Lloyd Blankfein all the more extraordinary. Bloomberg News reports:

“We participated in things that were clearly wrong and have reason to regret,” Blankfein, 55, said at a conference in New York hosted by the Directorship magazine. “We apologize.”

Such a simple and direct admission should have been made by a number of financial executives months ago, but it is to Blankfein’s credit that he has made it even as the pressure on Wall Street from Washington seems to be diminishing.

Reining in bonus pay and doing more on the charitable front would go a long way toward improving the image of a firm that is still associated in the public’s mind with a large vampire squid. But these words from Blankfein will be felt just as keenly.

from Rolfe Winkler:

Meredith Whitney asks the tough questions

----Not to beat a dead-horse here, but I thought I'd blog one last interesting thing on Goldman. This from today's conference call. (Transcript via Thomson Street Events, no link)----

Guarantees for certain liabilities aren't the only way Goldman has benefited from government largesse. They've also made money handling trading volume that is driven by the Fed...

Meredith Whitney, Analyst: I have a few questions. The government purchase program was supposed to end this quarter. They've extended it to next quarter. How much of that us a driver of velocity of flows? And how are you positioned when they exit, if they exit, for any type of principal risk? And what do you think that impact is going to be in the larger market? That is my first question. Start off with an easy one.

Is MW on to something here? Perhaps: Note the non-answer answer.

David Viniar - Goldman Sachs Group, Inc. - EVP, CFO: Not a problem. Look, I think, as you know and I think the Fed knows this, exiting their support of various markets is a very tricky thing. I think that they are going to do it carefully. They are going to do it slowly and over time. I think they are signaling the market. I think they are doing a very good job of letting people know they are going to continue for a while, but they aren't not going to continue forever. As far as our positioning, I don't think it really matters at all. As you know, as I said, most of what has happened has been the velocity, not the positioning. And I think that they are going to slowly extricate themselves for that as the markets get healthier and can pick up slack.

MW: Okay, but in terms of the flow volume, right -- so you have been the greatest beneficiary of increased flow volumes. How are the flow volumes going to be influenced as they exit?

DV: I think that they will try to time their exits for the market being healthy enough to pick up that flow. And so I think the flow will continue.

Another non-answer. But MW persists...

MW: And then who would you imagine would be the substitute buyers?

DV: The various market participants. I think it will be the various financial institutions, funds. I think the whole variety of buyers. And there is a lot of cash out there to buy.

MW: Okay. And then just a last one. I was teasing when I said it's the easiest one. But it was easy for you. The last one, of the principal revenues, almost $1 billion, how much of that was cash sales, and how much were markups?

DV: Oh, I would say that it was much more markups than sales...I don't have the exact number, but it would be much more markups than sales.

Commercial real estate death watch – Capmark

What do you get when you put a U.S. automaker, a leveraged buyout and commercial real estate together – a soon-to-be bankrupt company. Caroline Humer of Reuters reports that that Capmark – formerly the commercial real estate business of GM financing arm GMAC – is teetering on the brink of bankruptcy, with the final blow coming possibly by the end of next week?

The company, which owns a bank that will continue to operate while it is in court, is in negotiations with lenders, bondholders and the Federal Deposit Insurance Company that will result in a filing by the end of October at the latest, the source said.

They are working on details of a debt-for-equity swap that will take place to bring the company back out of bankruptcy, he said. It is not certain how long the court process could take.

Those that swooped in and bought the unit in March of 2006 in an LBO may be out of luck if the company files for bankruptcy.

Kohlberg Kravis Roberts & Co KKR.UL, Goldman Sachs Group (GS.N) and Five Mile Capital, which bought Capmark in March 2006 for $1.5 billion in cash plus more than $7 billion in debt at the peak of the housing market, will not receive payment through the bankruptcy.

The source said the company will belong to its creditor group, which is made up of more than 50 banks and more than 50 hedge funds among others. The lead banks are Citigroup’s (C.N) Citibank and JPMorgan Chase (JPM.N).

There’s also a Warren Buffett angle to this tale. Reuters said Capmark has will sell the company’s loan servicing and mortgage business to Berkshire Hathaway and Leucadia National for $490 million in what would be a 363 bankruptcy when good assets are separated from the bad and then spun out into a stronger standalone.

It’s not surprising that a commercial real estate financing company is in trouble given the woes in the sector. Property prices are down between 35%-40%,  a good chunk of borrowers are underwater and new financing is almost non-existent. The government’s TALF program has done little so far to jump start the CMBS market, with just a measly $400 million deal from Developers Diversified the only beacon of hope so far.

Coming soon on ITV…

Who needs a chief executive officer? Well, Lazard perhaps, when it’s Bruce Wasserstein (which is why his serious illness is also serious for the shareholders) but not ITV, it seems. On Monday, when its leadership saga had a better plotline than Corrie, the shares went up.

Perhaps it was the thought of all the money saved from that empty c-suite, or perhaps it was renewed hope for the end of Michael Grade’s disastrous tenure as executive chairman, or perhaps it was the upGrade (sorry) from Goldman Sachs, but the shares joined in the general stock market fun and rose to their best for three weeks.

The golden boys “had concerns going into the CEO announcement and Contract Rights Renewal decision. Neither announcement fulfilled our upside scenario” – whatever that means – “but they were consistent with our base-case assumptions.” They now reckon the shares are worth 58 pence, against Monday morning’s 46 pence, because advertising revenues at Britain’s leading free-to-air commercial channel are starting to rise after last year’s plunge.

This is surely the point.  ITV has a Golden Shot at puncturing the myth that without a powerful ceo, a business just can’t function. Michael Bishop was offered the job of (non-executive) chairman, and the result of his due diligence  was enough for him to run away.  Chief operating officer John Cresswell likes acting above his pay grade so much that he’s promised to resign as soon as a new chief executive can be found.

Given the disfunctional ITV board, Cresswell could find himself acting for quite a while. Perhaps in atonement for their sins, all the directors should be forced to make a special edition of I’m An Executive, Get Me out Of Here.

HFT and big dollars

There’s more evidence today about the big profitability of computer-driven high-frequency trading.

The Wall Street Journal says Ken Griffin’s Citadel Investment Group hedge fund empire made $1 billion from proprietary trading with HFT last year. The profitability number came out during testimony in an ongoing lawsuit Citadel has filed against a group of former HFT employees who left to start their own firm.

This is the same upstart firm that alleged Goldman Sachs HFT computer code thief Sergey Aleynikov had gone to work for before being nabbed July 4 weekend at Newark Liberty Airport. Aleynikov, who has pleaded not guilty and is trying to work out a plea deal, is set to be in court again on Oct. 16.

What’s worth remembering is this $1 billion figure is just the money raked in by Citadel’s prop trading HFT business. It doesn’t include the dollars Griffin’s empire takes in from market making–a business that’s also driving by HFT computer programs.

None of this is really a surprise given the way big HFT players like Goldman and Citadel have gone to protect the secret sauce of their lightening fast trading platforms.

Derivatives moolah

The nation’s top commercial banks are poised to generate record revenue from trading derivatives this year. And that’s as good a reason as any why no one should expect the nation’s bank to go along peacefully with a plan to regulate the trading of these sophisticated instruments.

In the first half of the year, the 25 biggest commercial banks took in $15 billion from trading derivatives, with JPMorgan Chase and Goldman Sachs being two of the biggest beneficiaries. And as things stand now, the nation’s banks will easily surpass the record $18.8 billion in derivatives trading revenue taken in during 2006.

In short, there’s a lot of money to be made from trading derivatives. So don’t expect banks to easily accept new rules that will put a crimp in this important source of income.

Oh, and just where did Goldman get most of its derivatives trading revenue from? Trading credit default swaps and other credit derivatives. The OCC reports that Goldman, in the second quarter, raked-in $1.48 billion from trading CDS-like transactions.

That ain’t chump change.

Is Goldman’s Chinese convertible really a taxi?

The number of London’s trademark black taxis booked and waiting outside the European headquarters of Goldman Sachs — meters running — was once used by some as a barometer of the health of London’s investment banking business.

When times were good, the queue was long and it was impossible for anyone else in the vicinity to hail a cab. But when the fees dried up, or markets turned, the cabbies who’d been at Goldman’s beck and call suddenly had to find new customers.

Last year, Goldman was reported to have stopped free taxis home for staff working in the office after 9pm, extending this to 10pm.

Now it looks as though taxis may be in vogue again at Goldman, at least indirectly.

Goldman Sachs Capital Partners — is that a taxi in the picture on the website? — now appears to be following in the tracks of the maker of many of London’s black cabs by cosying up to Geely Automotive — China’s 10th largest vehicle maker.

For Manganese Bronze — which has made more than 100,000 London taxis at its Coventry plant since 1948 — it was a case of turning to Geely for help and selling it a stake as well as entering a joint venture.

But in this case, it is Goldman that is providing the money — buying about $250 million of convertible bonds and warrants. Geely will use the proceeds to ratchet up its production.