Lunchtime Links 4-27

Apr 27, 2010 16:26 UTC

ChartHome prices post first YoY gain in three years (Culp, Reuters) More good charts from CR.

Off Wall Street, worries about financial bill (Lichtblau/Nixon, NYT) Derivative “end-users” don’t want to be forced to post collateral against their positions. They like the cheap leverage that derivatives provide them. What they totally fail to grasp is that without proper safety measures, in particular collateral, counterparty risk threatens the integrity of the market itself. What good is a hedge if the counterparty can’t make good in the end? If hedging becomes more expensive and that leads to increased costs for consumers, then so be it.

Greek debt cut to junk (Davis, Bloomberg) And the price of insuring Greek debt via CDS also hit a record 814 bps.

Computers seized at home of Gizmodo editor who wrote about iPhone (Stelter/Bilton, Media Decoder) Apple has powerful friends in San Mateo County law enforcement. I haven’t followed this closely, but does it really make sense the iPhone prototype was “found” in a bar and found its way into Gizmodo’s hands almost immediately?

Apollo 11 launch revisited in slo-mo HD (boingboing)

We have met the enemy and he is PowerPt (Bumiller, NYT)

Hot Dog…

hot dog

Thrifty Hertz knows value of a Dollar

Apr 26, 2010 21:04 UTC

Cross-posted from today’s NYT.

The car rental company Hertz has picked an aptly named takeover target. The $1.3 billion acquisition of a smaller rival, Dollar Thrifty, comes with just a 6 percent premium.

Moreover, Hertz is using some of Dollar Thrifty’s own cash to finance the deal and isn’t giving away the cost savings. Small wonder Hertz shareholders like what they see.

It’s true, Dollar Thrifty would have been a considerably bigger bargain a year ago. Its shares have skyrocketed from under a dollar last March to nearly $39 on Friday. Yet even at that price, its valuation lagged competitors. Stripping out the depreciation and debt on Dollar Thrifty’s vehicle fleet, the company’s enterprise value to estimated 2010 EBITDA was under five times, according to Goldman Sachs, compared to more than eight times for both Avis Budget and Hertz.

Some discount looks warranted given the company’s dependence on troubled automaker Chrysler, more tourists than business travelers as customers and a bloated cost structure. But as Chief Executive Scott Thompson has made progress on all of the above, Dollar Thrifty shareholders might have expected the shares to keep rising.

Instead, Hertz appears to be speeding off with Dollar Thrifty’s untapped value. First, Hertz is using a $200 million cash dividend from Dollar Thrifty’s balance sheet to fund some 16 percent of the deal. Second, the announced enterprise value of the transaction was $930 million. Hertz expects $180 million of cost savings from the combination. Taxed, discounted and put on Hertz’s own multiple, these are worth about $900 million. Basically, the deal pays for itself.

Normally a buyer’s shares fall on a takeover announcement since sellers tend to extract pricey control premiums. But Hertz’s jumped by 14.1 percent on Monday, outpacing Dollar Thrifty’s 10.7 percent gains.

The target’s shareholders must be wondering why they aren’t getting more. Indeed during a conference call question and answer session, an analyst from Citadel Investment Group — Dollar Thrifty’s third largest shareholder according to Thomson Reuters – argued with Hertz CEO Mark Frissora over the low valuation.

Hertz needs Dollar Thrifty shareholders to approve the deal. After offering so little, they may not get it.

Morning Links 4-26

Apr 26, 2010 14:24 UTC

Buffett’s latest betrayal: Tries to water down derivatives regulation (Paletta/Patterson, WSJ) Though he’s long inveighed against derivatives as “financial weapons of mass destruction,” Buffett is lobbying hard to water down rules that would require derivatives traders to hold collateral against their positions. It’s a very sensible rule that would make derivatives trading less systemically risky, but it would also make it more expensive. Which is the point. “End users” are fighting derivatives regulation because unlike other financial contracts, they’re able to trade derivatives with far more leverage.

Buffett’s game has always been about float — he gets cash from a counterparty to enter a contract and can invest it as he sees fit until the contract comes due. Hopefully that’s never, as in the insurance business: if you underwrite insurance risks well, you’ll never face claims. But with insurance, you have to hold sufficient capital against the risk you’re underwriting. With derivatives you don’t. True, Berkshire has lots of cash so likely isn’t a systemic risk.  But changing the rule for Buffett means changing it for others who may not be so stable.

Don’t be surprised by his stance. We’ve come to expect Buffett to lobby for his own interests even when it conflicts his own folksy wisdom. He’s said bailouts are bad for the system, yet he lobbied very publicly for them and benefited more than anyone. Also, he fought the very sensible bank tax and was the progenitor of PPIP, which would have been a naked giveaway to banks had it not died.

Victim in Goldman case was a yield chaser (Buhl/Cassidy, Atlantic) Teri is no friend of investment banks, yet she makes a great point that it’s hard to find the “victim” in the Goldman/SEC case since IKB was desperately chasing yield. The real victims, of course, are taxpayers. We were left holding the bag when the casino that made IKB’s bets possible turned up insolvent. Unregulated side betting should be outlawed. It already is, in fact, via bucket shop laws. Yet in their zeal to deregulate derivatives markets, Greenspan/Summers/Rubin/Levitt thought it wise to exempt derivatives from such laws…

Best hope for Greece: Minimize the losses (Ewing, NYT)

More signs of a bubble in Chinese real estate (CR)

An uneasy marriage of the cultish and the rumpled (Clifford, NYT) BW as gobbled up by Bloomberg…

U.S. to push for global capital rules (Braithwaite, FT) It’s good news that the administration is pushing tougher global capital rules than some other countries would like. Great to see Obama leading a race to the top.

VIDEO: The story of a giant leopard seal and a National Geographic cameraman (YouTube)

U.S. vs. Russia (imgur)

Protesting Arizona’s new immigration law… (imgur)


For a longtime Buffett follower, today’s shareholder meeting was truly heartbreaking. In Warren’s defense, loyalty can also be considered a virtue, and Buffett was nothing if not loyal to Goldman Sachs.

But at a time when we really need an elder statesman to help sort out the tolerable and very bad, because there was certainly some of both. Instead we hear that Goldman behaved admirably at every stage.

Munger at least had the decency to chide investment banks for their bad behavior. Buffett was willing to admit nothing of the sort at any point in FIVE HOURS. When his interests were different, he has happily teed off re derivatives and poor ethics at investment banks.

Well we now have an idea what Buffett’s reputation can be had for in the market. More than zero but certainly less than the 1 billion he has earned from Goldman so far.

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Bank failure Friday: 7 in Illinois, one tied to Obama

Apr 24, 2010 01:41 UTC

FDIC may be using up all available hotel rooms in Chicago this weekend as it closes five banks in the city and two others elsewhere in Illinois.

But the big news is that one in particular has close ties to the whippersnapper Democratic candidate for IL’s U.S. Senate seat, and peripheral ones to President Obama. The Senate Candidate, Alexi Giannoulias, was an executive at Broadway Bank, owned by his family. While he was there, the bank morphed into an aggressive commercial real estate lender, funding itself primarily with high interest-rate brokered deposits.

Using brokered deposits to expand quickly in CRE is a common recipe for failure ever since the S&L crisis.

Most interesting are the characters that Broadway lent to. The Chicago Tribune reported earlier this month that it had lent $20 million to two known felonswhile Giannoulias was a senior loan officer.

It’s a must read story:

Shortly after Broadway began lending money to a Chicago firm the pair formed, Giorango and Stavropoulos used that company to launch their own lending business and make more than 40 short-term loans to borrowers who might not qualify for traditional bank financing, the Tribune found. Such so-called hard-money loans are typically riskier than long-term mortgages offered by banks.

Broadway officials say they were unaware of the pair’s lending operation and believe the bank’s loans were used solely to fund real estate purchases. They acknowledged they did not inspect or audit the company’s business records, though Broadway’s loan provisions allowed the bank to do so.

They were lending millions to these guys and they didn’t even know where the money was going?!?

In a two-hour interview this week with the Tribune, Giannoulias’ older brother, Demetris Giannoulias, the bank’s president and CEO, said he established Broadway’s relationship with Giorango in the mid-1990s. Giorango began investing in Chicago properties after completing two federal prison stints for running bookmaking schemes….

Demetris Giannoulias said the bank learned of Giorango’s bookmaking and prostitution promotion convictions from a spring 2004 Tribune report detailing those cases.

“But we’re a relationship bank,” he said. “So somebody comes in and in all his dealings with the bank seem to be on the level, everything makes sense, nothing seems illicit or untoward. Just because somebody gets a bad article written about them there’s no reason to say, ‘Hey, listen, I’m going to kick you out the door because you don’t win a popularity contest.’ We didn’t think he was doing anything illegal.”

Alexi Giannoulias happens to be an old basketball buddy of the President and his is just the latest seedy story in Chicago politics. He was elected state Treasurer at 29 thanks to an endorsement from then Senate candidate Barack Obama. His only experience had been at Broadway.

How did he get elected Treasurer? Because Obama endorsed him. Why did Obama endorse him? Because the Giannoulias family had been big financial supporters for Obama’s Senate campaign (Alexi continued his financial support for presidential candidate Obama).

Another well-known felon also got loans from Broadway: Tony Rezko.

Giannoulias continues to dodge questions about his time at the bank. As I noted in February, he won the Democratic primary despite Broadway having received a rebuke from FDIC just days before the election.

Now that the bank has officially been seized, it will be a tougher topic to avoid. Hopefully Democrats will lean on Giannoulias to quit the race. He has no business being there in the first place.


Here’s the run down of tonight’s failures:


–Failed bank: Amcore Bank, National Association, Rockford IL
–Regulator: OCC
–Acquiring bank: Harris National Association, Chicago IL
–Transaction: loss share covering $2.0 billion of assets
–Vitals: assets of $3.8 billion, deposits of $3.4 billion
–Estimated DIF damage: $220.3 million


–Failed bank: Broadway Bank, Chicago IL
–Regulator: IL Dept of Financial and Professional Regulation — Division of Banking
–Acquiring bank: MB Financial Bank, National Association, Chicago IL
–Transaction: loss share on $878.4 million
–Vitals: assets of $1.2 billion, deposits of $1.1 billion
–Estimated DIF damage: $394.3 million


–Failed bank: Citizens Bank&Trust Company of Chicago, Chicago IL
–Regulator: IL Dept of Financial and Professional Regulation — Division of Banking
–Acquiring bank: Republic Bank of Chicago, Oak Brook IL
–Transaction: Republic pays small premium for deposits, FDIC retains assets
–Vitals: assets of $77.3 million, deposits of $74.5 million
–Estimated DIF damage: $20.9 million


–Failed bank: New Century Bank, Chicago IL
–Regulator: IL Dept of Financial and Professional Regulation — Division of Banking
–Acquiring bank: MB Financial Bank, National Association, Chicago IL
–Transaction: loss share on $429.1 million of assets
–Vitals: assets of $485.6 million, deposits of $492.0 million
–Estimated DIF damage: $125.3 million


–Failed bank: Lincoln Park Savings Bank, Chicago IL
–Regulator: IL Dept of Financial and Professional Regulation — Division of Banking
–Acquiring bank: Northbrook Bank and Trust Company, Northbrook IL
–Transaction: loss share on $141.5 million of assets
–Vitals: assets of $199.9 million, deposits of $171.5 million
–Estimated DIF damage: $48.4 million


–Failed bank: Peotone Bank and Trust Company, Peotone IL
–Regulator: IL Dept of Financial and Professional Regulation — Division of Banking
–Acquiring bank: First Midwest Bank, Itasca IL
–Transaction: loss share of $57.5 million of assets
–Vitals: assets of $130.2 million, deposits of $120.0 million
–Estimated DIF damage: $31.7 million


–Failed bank: Wheatland Bank, Naperville IL
–Regulator: IL Dept of Financial and Professional Regulation — Division of Banking
–Acquiring bank: Wheaton Bank & Trust, Wheaton IL
–Transaction: loss share on $300.2 million
–Vitals: assets of $437.2 million, deposits of $438.5 million
–Estimated DIF damage: $133.0 million


7 bank failures in Illinois only on 04/23.
Here is the list and graph of bank failures : s_List_2010.jsp

About todays bank failures :

Total Assets of failed banks = 6.33 billion
Total Deposits of failed banks = 5.80 billion
Total number of branches of failed banks = 73
Total cost to DIF = 973.9 million

Check more on bank failures at:

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Afternoon Links 4-22

Apr 22, 2010 20:20 UTC

The busted homes behind a big bet (Mollenkamp/Whitehouse/Toianovski, WSJ) Great piece this one.

Peripheral panic in Europe (Alphaville) Greece CDS spreads blew out even more today as the EU said the country’s ’09 deficit vs. GDP  was almost a full 1% higher than government figures. Meanwhile Moody’s downgraded Greek debt and the country’s 10-year notes fell dramatically, now yielding over 9% vs. 7% just two weeks ago. (As a bond’s price falls, its yield increases). Clusterstock has a good chart.

Russia debt sale shows risk is back! (Connaghan/Froymovich, WSJ) Despite panic in Europe about a prospective Greek default, Russia was able to sell $5.5 billion worth of bonds. It’s the country’s first international bond sale since it defaulted in 1998. The 1.25-1.35% spread of U.S. Treasuries is just the latest sign of the apocalypse that folks are back to chasing risk.

For good financial reform we need more chum (Payne, HuffPo) Erica makes a good point. The importance of Goldman v. SEC is that it has concentrated more minds on financial reform.

Can’t stand to sit too long? There’s a desk for that (Manjoo, NYT)

Bond market will never be the same after Goldman (Michael Lewis, Bloomberg) Good column, though I think I disagree with Lewis’s conclusion that the Goldman case will fundamentally change the bond market, or any securities market for that matter. Casinos Wall Street will always find new and better ways to separate speculators from their money. The idea that it was once an idyllic place where investors were safe is just not true. If you want safe, don’t go to Wall Street, go to Valley Forge PA where you’ll find boring, low fee, low return Vanguard mutual funds…

Existing home sales increase, helped by tax credit (CR) Pulling demand forward. Note the jump late last year when folks thought the tax credit would expire. It was extended to this year but won’t be extended again.

Facebook privacy policy WTF (imgur) You’re checking my browser history? Really? This is not out of date. I checked.

Sausage Gravy & Biscuit machine (tumblr) Who thought this was a good idea?

Found on a whiteboard at Google

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Afternoon links 4-21

Apr 21, 2010 20:18 UTC

Senate panel OKs swap ban for banks (Sullivan/Rampton, Reuters) Now out of the Agriculture committee, which has jurisdiction over derivatives, the legislation goes to the Senate floor likely as part of the broader Dodd financial reform bill. Republicans are still opposed to it, and they do have some decent arguments about the bill leading to future bailouts. In particular, there’s a provision that effectively makes permanent the FDIC’s debt guarantee program. That was the most underrated bailout of the crisis. If made permanent, it would provide an escape hatch allowing regulators to avoid tough resolutions that impose losses on shareholders/creditors. Dodd should dump it.

Goldman taps ex White House counsel (Javers/Allen, Politico) The Washington/Wall Street revolving door keeps spinning…

Goldman already convicted in court of public opinion? (Rasmussen) ht DanHess

Lippman leaves Deutsche Bank (Dash, NYT) Immortalized in Michael Lewis’s recent book, Lippman made a very successful bet against the housing market on behalf of his bank. His move from DB had previously been telegraphed. Worth noting that he was also the center of many synthetic CDO deals. In the wake of SEC/Goldman, one wonders if all DB’s disclosures were in order…

Euro CDS spreads approach record, er, widths (Alphaville)

Financial debate renews scrutiny of bank size (Chan, NYT) Good idea.

A new $900 million Ponzi (Younglai/Margolies, Reuters)

Fabulous Fab to tell Senate panel he did nothing wrong (Woellert, Bloomberg)

Treasury unveils new $100 bill ( Benjamins get cool new security features.

Bear gets head stuck in milk can, rescued (AP)

AAPL to catch MSFT?

Apr 21, 2010 01:50 UTC

Apple reported a blowout quarter Tuesday, selling 8.8 million iPhones, a new record high. That’s three years after the device was released.

At posting time, Yahoo Finance shows the shares indicating up $14 (nearly 6%) to $261. The after-hours market is thin, so these gains may not hold on the open tomorrow. If they do, it would boost AAPL’s market cap $13 billion to $237 billion.

Don’t look now, but AAPL is the third largest public company in the U.S. If the gains stick, its market cap would be 13% behind Microsoft’s.

Even if they don’t, it’s amazing to think about how far the company has come since the dark days when John Sculley then Michael Spindler then Gil Amelio ran the firm.

In 1997, not long after Jobs took over from Amelio, AAPL shares were selling for just $4 (split-adjusted) and Michael Dell told a symposium what he would do to solve the company’s problems: “I’d shut it down and give the money back to the shareholders.”

Today Dell’s market cap is $33 billion, not even a sixth of AAPL’s.

Meanwhile, who needs the desktop? MSFT’s share of that market still dwarfs AAPL’s. Nevertheless, Jobs is poised to pass them not only by market cap, but also by revenue. Analysts estimate that MSFT’s fiscal year revenue (ending June) will be $61 billion, they put AAPL’s FY revenue (ending Sept) at $55 billion.

With the iPhone as strong as ever and the iPad having sold 500k units already, it’s probably a good bet Jobs will indeed surmount his rival.


Nobody wants what MSFT makes. It’s that simple

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Return of LBOs

Apr 20, 2010 18:48 UTC

Cross-posted from today’s NYT.

by Rolfe Winkler and Jeffrey Goldfarb

Public companies have quickly become leveraged-buyout targets again. The five “take private” deals of at least $500 million announced since February outnumber the four completed in all of 2009 according to Thomson Reuters data. The surprise return of such acquisitions signifies a marked change from the acrimony that followed the last round of private equity deals.

Many buyout attempts, including those of Sallie Mae and Huntsman, came undone in ugly ways as the boom turned to bust. Private equity firms walked away or slashed offer prices, while banks performed contortions to get out of lending commitments. The pricey lawsuits, investor losses and reputational hits were supposed to mean the hurdles to taking public companies private — including board and management conflicts — would be insurmountable for some time.

But a renewed sense of greed is driving new deals. Leverage is creeping back up, with the current crop of buyouts including debt at four to five times earnings before interest, tax, depreciation and amortization. Bankers privately say packages as high as six times are on the way, or roughly what was seen in 2006-7, though lenders are demanding more equity as well. Buyout firms are itching to put cash to work. And the shareholders of target companies seem happy to cash in on the juicy takeover premiums that have been hard to come by since 2007.

Yet buyers and sellers have learned some lessons. Lower trust and higher trepidation have led to tighter contracts. Private equity firms are including more stringent financial tests. For example, Thomas H. Lee Partners’ plan to buy CKE Restaurants  includes an escape clause linked to a debt-to-profit ratio.

Public companies, meanwhile, are insisting on bigger reverse break-up fees to avoid being left at the altar. Cerberus faces a $100 million penalty, 7 percent of the deal size, if it opts to walk away from the recently announced $1.5 billion purchase of DynCorp and $300 million more for a “willful breach” of the contract. Compare that to the paltry $100 million, or little more than 1 percent, Cerberus paid to slip out of a $7 billion buyout of United Rentals in 2008.

The returning deals are signals of forgiveness. But the safeguards suggest no one has yet completely forgotten the busted deals of yore.

Lunchtime Links 4-20

Apr 20, 2010 16:42 UTC

Democrats likely to drop $50 billion fund to draw Republicans (Vekshin/O’Connor, BW) Republicans are right that the fund creates moral hazard, but a bigger risk may be that the cost of a large resolution will be fronted by taxpayers. “Ex-post” funding from other banks to pay back taxpayers — which had been the alternative proposed — seems more than a bit unlikely. Post the failure of any large institution, banks would scream about paying a fee for a fallen competitor: “It will reduce lending!” If regulators could be trusted to seize large banks early enough such that there’s still some capital left in them, an ex-post regime would be better. But I fear WaMu may be the exception, not the rule.

CRE prices decline 2.6% in February (Calculated Risk) Take this index with a grain of salt. There aren’t many transactions happening in the CRE world from which to determine robust pricing info.

A race to the bottom in clearing Fan/Fred interest rate swaps? (Wood, Risk Mag) Wonky, but interesting.

Inside a Goldman Sachs Abacus deal (HuffPo) Also wonky, also interesting.

Goldman was Barack’s second-largest contributor (OpenSecrets) If he’s going to use GS as a talking point to push more stringent derivatives reform, can he keep their money? I would say sure. It’s only an embarrassing political conflict if you accept money and then carry water for the donor. By taking the money and stuffing Goldman anyway, seems to me that Obama makes GS the sucker. Could be a problematic campaign issue at some point though…

Charting grade inflation over time (Economix)

Gizmodo gets new iPhone prototype (Gizmodo) They say an Apple developer accidentally left it at a bar. Whoever picked it up, sold it to Gawker for $5k. Apple wants it back.

Higher rates coming in Canada (Gillies, AP) Not soon enough considering the bubble in Canadian real estate.

Nintendo post-it art: Mario (cool), Donkey Kong (awesome!)

The animated ash cloud (YouTube) No wonder flights are grounded.

How volcanic lightning works (ScienceBlogs) Cool photos.


A major story, not widely linked: Goldman has utterly lost in the court of public opinion. An overwhelming majority of Democrats, Republicans and independents think they are guilty of fraud. ontent/business/general_business/april_2 010/73_say_it_s_likely_goldman_sachs_com mitted_fraud

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In the wake of SEC/Goldman, the must-read Appendix

Apr 19, 2010 12:24 UTC

As luck would have it, I’m way late in writing my review of Yves Smith’s new book “Econned.” The book, which primarily describes how flawed economic thinking culminated in the financial crisis, is more important than ever in the wake of the SEC’s allegations against Goldman Sachs. In it, Smith reports extensively about synthetic CDOs. Goldman, of course, now stands accused of committing fraud in the structuring and marketing of one particular synthetic CDO, Fabulous Fab’s Abacus 2007 AC-1.

The most valuable part of her book may be the second appendix. In it she breaks down in minute detail the strategy that a hedge fund might employ to short subprime in large quantities via CDS. It’s a veritable roadmap to understanding other, similar malfeasance that may have happened in this market. The appendix, along with the the lengthy discussion of Magnetar in Chapter 9, together make a powerful argument that Goldman may not be the only firm that should face charges for securities fraud.

It seems to me that it shouldn’t matter whether Paulson & Co. took down the equity tranche of the Abacus deal. The securities fraud occurred when the CDO investors (ACA and IKB) were misled into believing that their interests were aligned with Paulson’s. But even if Paulson HAD taken down the $90 million equity tranche in order to get the deal done, his interests would still have conflicted with investors’ by virtue of the billion-dollar CDS insurance policy he took out on the deal.

Goldman not only knew about Paulson’s CDS position, it sold it to him. It then misled ACA into believing that Paulson’s interests were aligned with its own. By extension, it misled IKB into believing that ACA was an “independent collateral manager” when in fact Paulson gave ACA the bonds to put into the deal. Remember, Paulson as the perceived equity investor basically had the power to determine which bonds were included. Yet its undisclosed CDS position meant it wanted the most toxic bonds possible.*

Essentially, Paulson was insuring for full value a house deliberately designed to collapse. One he’d paid nothing to build. Goldman should have had the integrity not to do the deal in the first place. At the very least, investors should have been made aware.

Those trying to understand why other firms may face similar liability as Goldman should read Smith’s reporting on Magnetar, and her Appendix. Going long the equity tranche could actually be a brilliant trade for subprime shorts, as Magnetar’s stupendous returns appear to confirm.

Being long the equity tranche not only gave shorts the power to select the bonds in the CDO deal (the more toxic the better), it also gave them a cash flow stream to more than pay the cost of carrying the short position. That’s why Magnetar’s particular short trade is considered so brilliant in retrospect by the CDO cognoscenti: it more than paid for itself. “Positive carry” in the parlance. Smith’s appendix has the details.

It’s hard to imagine how other banks structuring similar deals for subprime shorts weren’t intimately aware of their true economic interest to see deals collapse. (Yes, the equity tranche might end up worthless, but CDS payouts after the whole deal pancaked would pay back a multiple of what was lost on the equity.) Michael Lewis’s book offers powerful reporting that the banks knew exactly what was going on.

Did they deliberately mislead investors about the independence of collateral managers? Did they mislead the managers themselves about the true economic incentives of the suprime shorts sponsoring the equity in their deals? If so, the banks should be brought up on the same charges now facing Goldman and the Fab.

UPDATE: After Khuzami said on Friday that the SEC would look to investigate similar deals, WSJ is reporting that they are indeed doing so. While it’s not clear what other firms/deals may be the target of investigations, WSJ mentions the usual suspects: Magnetar and Tricadia. The banks who helped structure their deals, Merrill and UBS, are already the subject of investor lawsuits.


*A particularly damning piece of the SEC’s complaint: “34. On February 5,2007, an internal ACA email asked, “Attached is the revised portfolio that Paulson would like us to commit to – all names are at the Baa2level. The final portfolio will have between 80 and these 92 names. Are ‘we’ ok to say yes on this portfolio?” The response was, “Looks good to me. Did [Paulson] give a reason why they kicked out all the Wells [Fargo] deals?” Wells Fargo was generally perceived as one of the higher-quality subprime loan originators.”


The SEC isn’t finished with their (our) indictments. They indicted GS to give notice. There are many more civil and eventually, criminal, indictments to follow. Stay tuned!

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Lunchtime Links 4-18

Apr 18, 2010 17:06 UTC

Flashback: Banks bundled bad debt, bet against it and won (Morgenson/Story, NYT) This story from December presaged most of Friday’s news. It mentions how the Fabulous Fab and Goldman managing director, Jonathan Egol, were instrumental in structuring the Abacus deals. Why isn’t Egol targeted by the SEC? It also mentions the case of Lewis Sachs, whose firm Mariner Investment Group structured CDOs at the peak and managed to make handsome profits. They claim they weren’t short their own deals. Sachs later joined Treasury as a senior adviser to Geithner. He stepped down a month ago citing the end of the financial crisis. Was that really the reason he left?

Top CDO underwriters, 2002-2007 (Kedrosky) Other targets? See next….

Rabobank sues Merrill for same CDO behavior (Bray, WSJ) Chad doesn’t mention that this was a Magnetar deal…

Your Magnetar questions answered (ProPublica) Speaking of which, Einsinger/Bernstein follow up their piece about that other big CDO player…

Goldman knew for months that charges were possible (Goldstein/Eder, Reuters) Yet they didn’t disclose the receipt of the Wells notice to investors? That’s not required, but typically such notices, which indicate that the government will file an enforcement action, are disclosed as they are a material event. With Goldman stock down 13% on the news, yeah, this was pretty material…

Liquidity puts that cost Citigroup $14 billion may be curbed by new accounting rules (Keoun, Bloomberg) Citi offered liquidity puts on CDOs it manufactured, effectively an insurance policy, giving holders the right to sell them back to the bank at par if their value collapsed. But it wasn’t required to hold any capital against these insurance policies. New rules will change that.

Clinton: I was wrong to take Rubins’/Summers’ advice on derivatives (Tapper, ABC) Bill Clinton deserves a big chunk of blame for the financial crisis. The final repeal of Glass Steagall was one big mistake, but the bigger mistake was to allow Rubin/Summers/Levitt/Greenspan to put the kibosh on Brooksley Born’s attempts to regulate derivatives. Funny, Rubin told the Financial Crisis Inquiry Commission this week that he didn’t appreciate the risk of Citi’s liquidity puts — he was Citi’s co-Chairman. Yet in the late ’90s he argued that those who would use derivatives would be sophisticated enough to manage the risks. His bank wasn’t.

Financial weapons ambush Europe (Katz, Bloomberg) Wall Streeters like to argue that folks they trade with (as opposed to clients whose money they manage) are responsible/sohpisticated big boys who should suck it up if they’re on the losing end of a trade. Stories like this put the lie to that argument. It would be good if bankers had the integrity not to sell speculative financial products to folks for whom they are clearly not suitable. Too often, integrity plays second fiddle to generating fees.

Tax rates…

tax rates


Question: does selling something that is unsuitable to a client not violate the fiduciary responsibility of a securities dealer? Doesn’t this supercede the “they should have done their homework” argument? And if so, why do the supposed free-market defenders cite the later and completely ignore the former? I’m inclined to think that these folks don’t actually believe in free-markets at all and are simply shilling for the banks.

Acknowledging the lack of fiduciary responsibility would implicate bankers themselves, so they conveniently ignore that aspect. Similarly, the “more regulation” camp seem to ignore the blatant legal violations as that would imply that if the law were only followed properly and securities dealers were actually held accountable, then more regulation wouldn’t be necessary.

Nobody seems to see it in their best interest to pursue the most obvious solution: follow the law as it is written.

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Questions for Khuzami

Apr 16, 2010 23:29 UTC

When the SEC announced its case against Goldman this morning, the Commission’s Director of Enforcement, Robert Khuzami, happened to be at the same New Orleans conference as this columnist. I’ll have more thoughts after I’ve had a chance to read the complaint. In the meantime, I thought I’d share some notes from the question/answer session he did with those of us in the mini press corps on hand.

Here’s the tape from CNBC. Your correspondent was off to Khuzami’s right…


1. How is this different than any other synthetic CDO? All of them are structured with a short on the other side.

He said there’s a difference between just going short and going short while simultaneously picking the bonds that are in the deal. The securities fraud occurred when Goldman failed to disclose the role Paulson played picking the bonds.

2. There are likely many other cases of subprime shorts directing the structuring of CDOs. Magnetar is one. But there are guys mentioned in Michael Lewis’s book, and many others besides Paulson. If the SEC is targeting Goldman for failing to disclose the role shorts played in this deal, will it target other banks who may have similarly failed to disclose?

He said they’re looking at a wide range of products … If they see securities with similar profiles, they’ll look at them closely.

3. According to e-mails in the complaint, ACA was communicating with Paulson and had final say about bonds went into the deal. So is it really that misleading to tell investors that the bonds were selected by an objective third-party manager?

Paraphrasing Khuzami’s response: ACA wasn’t really an objective third-party constructing the portfolio, as promised by offering docs, since Paulson was so heavily involved.

4. What about the SEC’s reputation? After the BofA blowup, it will look pretty bad if this prosecution fails.

Paraphrasing: Our job is to investigate and bring cases and that’s what we’re doing here.


The SEC already “won” just by filing the suit because no matter the outcome guilty or innocent, all deals that stink even remotely as bad Abacus will be regulated like they should have been all along. I vote for the guys with the RICO subpoenas, an army of them, the sooner the better. That should shake out a lot of middle desk CYA testimony to smoke out the Masters. It would really be nice to see America viewed by the world as an example of fair play rather than an embarassment.

Posted by Woltmann | Report as abusive

Bank failure Friday

Apr 16, 2010 23:05 UTC

Reporting from somewhere over Louisiana (Delta in-flight WiFi = very cool). Big bank failure news far tonight is a coordinated closure of three banks that involves three different regulators and a 50%/50% loss share agreement with FDIC and the acquiring bank. Typical loss-shares had been 95/5 and the news was they were going to 80/20. Here the FDIC has apparently secured a deal to share losses equally.


—Failed bank: Lakeside Community Bank, Sterling Heights MI
—Regulator: Michigan Office of Financial and Insurance Regulation
—Acquiring bank: None
—Transaction: payout transaction
—Vitals: assets of $53 million, deposits of $52.3 million
—Estimated DIF damage: $11.3 million


—Failed bank: AmericanFirst Bank, Clermont FL
—Regulator: Florida Office of Financial Regulation
—Acquiring bank: TD Bank, National Association, Wilmington DE
—Transaction: 50/50 loss share on total of $2.2 billion of assets among three institutions
—Vitals: assets of $90.5 million, deposits of $81.9 million
—Estimated DIF damage: $10.5 million


—Failed bank: First Federal Bank of North Florida
—Regulator: OTS
—Acquiring bank: TD Bank NA
—Transaction: 50/50 loss share on total of $2.2 billion of assets among three institutions
—Vitals: assets of $393.3 million, deposits of $324.2 million
—Estimated DIF damage: $6.0 million (one of the smallest loss rates as % of assets since WaMu cost the DIF $0)


—Failed bank: Riverside National Bank of Florida
—Regulator: OCC
—Acquiring bank: TD Bank NA
—Transaction: 50/50 loss share on total of $2.2 billion of assets among three institutions
—Vitals: assets of $3.42 billion, deposits of $2.76 billion
—Estimated DIF damage: $491.8 million


—Failed bank: Butler Bank, Lowell MA
—Regulator: Massachusetts Division of Banks
—Acquiring bank: People’s United Bank, Bridgeport CT
—Transaction: loss share of $206 million of assets
—Vitals: assets of $268 million, deposits of $233.2 million
—Estimated DIF damage: $22.9 million


—Failed bank: Innovative Bank, Oakland CA
—Regulator: California Department of Financial Institutions
—Acquiring bank: Center Bank, Los Angeles CA
—Transaction: loss share on $178.1 million
—Vitals: assets of $268.9 million, deposits of $225.2 million
—Estimated DIF damage: $37.8 million


—Failed bank: Tamalpais Bank, San Rafael CA
—Regulator: California Department of Financial Institutions
—Acquiring bank: Union Bank, NA, San Francisco CA
—Transaction: loss share on $522.3 million of assets
—Vitals: assets of $628.9 million, deposits of $487.6 million
—Estimated DIF damage: $81.1 million


—Failed bank: City Bank, Lynnwood WA
—Regulator: Washington Department of Financial Institutions
—Acquiring bank: Whidbey Island Bank, Coupeville WA
—Transaction: loss share on $455.6 million of assets
—Vitals: assets of $1.13 billion, deposits of $1.02 billion
—Estimated DIF damage: $323.4 million

Unsustainable Mods

Apr 15, 2010 15:30 UTC

Treasury’s March report for the its mortgage modification program shows another uptick in the number of so-called “permanent” modifications. It’s a positive trend, sure, but still not much to celebrate.

Screen shot 2010-04-15 at 12.54.03 AM

The 231k borrowers that have received such mods represent only a fraction of total borrowers who are at-risk of default. Amherst Securities estimates that 7 million borrowers have already defaulted on their mortgage and another 5 million are at high risk of default.

But the bigger problem is that these “permanent” modifications are anything but permanent…

Screen shot 2010-04-15 at 12.53.22 AMAs you can see, relatively few borrowers are receiving principal forgiveness. Instead, most modifications rely on extend and pretend tactics like interest rate reductions and extended loan terms. Many loan modifications also simply add missed payments to the loan balance. Such tactics do nothing to solve the key problem of negative equity. Unless borrowers have skin in the game, they’ll have much less incentive to stay current.

The scarier stat is the so-called “back-end DTI” figure. At 61.3%, the average is up nearly 2% since last month.

This means that the average borrower receiving a “permanent” modification still faces total monthly debt payments — including home equity loans and all the other stuff mentioned in footnote 2 — amounting to 61.3% of monthly GROSS income. So even before taxes are taken out, nearly two-thirds of borrowers’ pay has to go to pay down debt, leaving little for other necessities.

The HAMP modification program only targets first mortgages for modification, and then only reduces payments on the first mortgage and other housing expenses to 31% of gross income. That’s high on its own, never mind all the other debt these borrowers are carrying. A program to modify second liens has launched, but won’t ramp up for a few months.

The bottom line is that HAMP mods are likely unsustainable. Expect many of these borrowers to re-default.


“Expect many of these borrowers to re-default.”

Of course they will. If not the banks will simply turn around and lend them more. Has ANYTHING changed in the regulatory or business environment that discourages that type of activity?

Posted by ARJTurgot | Report as abusive

Reader note

Apr 14, 2010 15:48 UTC

Hi folks….just a heads up that I’m traveling to New Orleans this afternoon for the Tulane Corporate Law Institute. So posting will be lighter than normal next few days.