Lunchtime Links 1-19

Jan 19, 2010 19:18 UTC

MUST READSouring mortgages, weak market put FHA on tightrope (Timiraos, WSJ) Good article, though Timiraos doesn’t address the absurd circularity perpetuated by FHA Chief David Stevens when Stevens says, on the one hand, that more gov’t lending protects the housing market from further declines, while simultaneously arguing that such lending isn’t sustainable. That said, Timiraos has worked lots of interesting stuff into this piece, especially towards the end. For instance, in late ’07 investors were refinancing at-risk borrowers into FHA loans in order to shift risk to taxpayers. Barney Frank defends permanently raising FHA maximum loans for certain geographies to $729k. Also lots of data about how badly FHA loans are performing.

Citi’s Q4 earnings: Not terrible but not great (Wilchins, Reuters) Trading revenues in the investment bank were much weaker compared to last quarter. Citi also benefited from a tax break, without which they wouldn’t have met consensus estimates for the quarter. Here’s a helpful chart.

(Click here to enlarge in new window)


How the French outplayed AIG and the Fed (Berman, WSJ…subscription req’d) Great column. Goldman gets all the bad press, but it was far from the only bank that got 100¢ on the dollar for derivative contracts with AIG…

Too big to fail is here to stay (Salmon, Reuters) Felix does a great takedown of Andrew Ross Sorkin’s latest column.

Record cash means S&P 500 at half 2007 valuation (Xydias/Nazareth, Bloomberg) A very interesting idea, though lots of bones to pick with the way this piece was written. In nearly 1,300 words the writers never manage to provide a solid definition of how they’re computing valuation. What is price to cash flow? Do they mean price to free cash flow? Do they mean price to EBITDA? There’s a line about cash flow being earnings plus depreciation and asset writedowns. That may be a very relevant metric. But it’s not one that investors know or understand and the authors fail to explain it.

The bidding war for failed banks (Mathews/Fisher, SNL) Interesting data on competitive bids for failed banks. (Until FDIC stopped releasing it)

In defense of a 4-day workweek (Hari, Independent)

Google at war in China, now postpones handset launches (BBC)

Another Swiss bank whistleblower (Browning, NYT)

AT&T/Verizon cut prices (Furchgott, Gadgetwise) The price cuts are just for some voice plans, not data plans. You can call the carriers and get the new lower prices without having to extend your contract…


No, Ron, they didn’t. It happens for balance sheet periods beginning on 1/1/10. So the Q1 release will be the first to include it.

Posted by Rolfe Winkler | Report as abusive

Morning links 12-14

Dec 14, 2009 14:07 UTC

No shortage of news this morning….

Dubai gets bailout from Abu Dhabi (Reuters)

Exxon to buy XTO for $41 billion (Reuters) $41 billion is the enterprise valuation. It’s incomplete to say the Exxon is only paying $31 billion for the stock when it is also assuming $10 billion of debt.

Citi to repay TARP, raise $17 billion (Reuters) The ringfence agreement on Citi’s pile of toxic assets will end and Treasury will also start selling its common shares back to the market. Here are all the details from Citi.

Morgan Stanley hires Greg Fleming (NYT) Fleming was the guy who pressed Merrill to sell itself to BofA. He hashed out the deal, including Merrill’s controversial bonus package, with BofA’s Greg Curl.

VIDEO: “Wall Street doesn’t get it.” Too bad Obama’s reform plan does little to change the status quo. And in any case, Fed policy will continue to support banks for an “extended period.” The Prez meets with Wall Street CEOs this morning.

Watch CBS News Videos Online


$41B including assumed debt. “Only” $31B in stock.

Posted by Andrew | Report as abusive

When banks use capital made of sand

Nov 12, 2009 19:04 UTC

Citigroup’s capital position appeared much improved when the bank reported third-quarter earnings, but a look beneath the surface shows that much of its capital is of questionable value.

According to its recent 10-Q, Citi had $38 billion of deferred tax assets as of Sept. 30, more than a third of the bank’s tangible common equity of $107 billion.

Backing that out, Citi’s TCE ratio — the inverse of leverage — is reduced from 5.7 percent to 3.7 percent. And when Citi adopts new accounting rules for off-balance-sheet assets, the ratio will be reduced further to 2.8 percent.

Bank regulators should be concerned. To fortify their balance sheets so they can withstand systemic events without government support, banks need genuine capital available to absorb losses.

Deferred tax assets, or DTAs, don’t fit that bill. Imagine an individual in bankruptcy court asking to pay off his credit card debt with tax-loss carryforwards.

So long as Citi generates profit, its DTAs have value. But earnings could evaporate quickly if the Fed decides it has to prick the new asset price bubble being inflated by near-zero rates, or if an unanticipated systemic event puts stress on Citi’s balance sheet.

There may be another problem with Citi’s ability to realize the value of its DTAs. According to Barclays analyst Jason Goldberg, future transactions in the company’s stock could be considered an “ownership change” that would require some DTAs to be written off. That would be a direct hit to tangible common equity.

Citi’s pile of DTAs may be the largest, both absolutely and as a percentage of TCE, but JPMorgan Chase, Bank of America and Wells Fargo each have their own.

Some regulators are taking action. As Robert Barba reported in the American Banker, the California Department of Financial Institutions last week took the unusual step of instructing Hanmi Financial Corp. to raise common equity as part of an enforcement action.

It’s a promising portent. Bank regulators have a lot of power to force Citi and the other big banks to raise real capital. They should use it while markets are receptive.


Rolfe, I have had a bad American weekend. The tides tend to wash sand away. The US President seems to have announced a dramatic revival in US manufacturing and exports. Presumably that excludes GM foods and IT and Armament and Surfboards. Do you know what will be really nice:- if he would visit the Southern Hemisphere countries for a cup of tea with no strings attached. Even better, if he does a road show in his own country and see the distress that has been caused. The World is tired of the US rhetoric, and quite frankly, the US is destabilizing the World financial systems by trying to baby sit everyone.

Posted by Casper | Report as abusive

Architect of Citi says bring back Glass-Steagall

Nov 6, 2009 16:14 UTC

Objective observers mostly agree that it doesn’t make sense for banks to be in the securities business, not if they’re explicitly insured by the government. Wall Streeters invent rationalizations to support the current structure because a large chunk of their profits come from trading.

It’s very refreshing that John Reed, an architect of Citigroup — the biggest, most disastrous financial supermarket of them all — now says the merger was a mistake and banks should be broken up.

From Bob Ivry, Bloomberg:

Congress’ overhaul of U.S. financial regulations should include ordering banks to hold more capital, ensuring executives’ compensation is aligned with long-term profitability and banning firms that take deposits from also engaging in equities and fixed-income trading, Reed said.

“I would compartmentalize the industry for the same reason you compartmentalize ships,” Reed said in the interview in his office on Park Avenue in New York. “If you have a leak, the leak doesn’t spread and sink the whole vessel. So generally speaking you’d have consumer banking separate from trading bonds and equity.”

Lawmakers were wrong to repeal the Depression-era Glass- Steagall Act in 1999, Reed said. At the time, he supported overturn of the law, which required the separation of institutions that engaged in traditional customer banking services from those involved in capital markets.

“We learn from our mistakes,” said Reed, who wrote an Oct. 21 letter to the editor of the New York Times endorsing a division of banking activities. “When you’re running a company, you do what you think is right for the stockholders. Right now I’m looking at this as a citizen.”

Again, this is just half the battle. Getting dangerous activities outside of insured banks doesn’t mean the activities themselves, which in many cases still pose systemic risks, won’t continue to benefit from an implicit government guarantee.

As long as investment banks remain highly complex, systemically dangerous institutions, they’ll always have a government lifeline. (“No more Lehmans!”)


We must bring back Glass-Steagall. Nothing else will work!!!!

Posted by Lance | Report as abusive

Banks and hedge funds don’t mix

Oct 9, 2009 18:01 UTC

It was a good decision, for the wrong reason. Citigroup will sell Phibro, the energy trading business run by Andrew Hall, to avoid embarrassment over Hall’s compensation package.

Citigroup is right to rid itself of the operation, not because of pay but because federally-insured institutions have no business bankrolling hedge funds.

It’s not that Hall isn’t worth the money. According to a press release from Occidental Petroleum, which is acquiring Phibro from Citi: “from 1997 until the second quarter of 2009, Phibro averaged approximately $200 million per year in pre-tax earnings, while over the last five years Phibro’s earnings averaged $371 million per year.”

Hedge fund managers typically keep 20 percent of profits. Assuming Phibro’s earnings are reported after compensation expenses, it sounds as if the fund has been racking up $500 million in profit per year recently. A $100 million payday is in-line with what Hall would make were he operating the fund privately.

Many on Wall Street complain that Citigroup should keep the operation and give Hall his payday. Desperate to recapitalize its balance sheet, Citi is foolish to dump a profitable unit. Such concerns miss the point.

For every Andrew Hall, there’s a Ralph Cioffi and a Boaz Weinstein.

Weinstein was a wunderkind trader who made piles of money for Deutsche Bank before blowing up to the tune of $1.8 billion in 2008. Cioffi ran an internal hedge fund for Bear Stears that bet big on CDOs. He was a star while the bubble inflated, a $1.6 billion disaster when it collapsed. Before them, there was the notorious example of John Meriwether and Long-Term Capital Management, who made oodles of money before imploding and nearly bringing down most of Wall Street.

Hedge funds can be rather risky operations. Funded by thinly-capitalized federally-insured institutions, they can be lethal to the financial system. Their proprietors make big bets, often turbocharged with leverage. When they win, they take home 20 percent of profits. When they lose, they’ve lost someone else’s money.

What of the bank that stands behind the fund? What of taxpayers who stand behind the bank? With Bear Stearns, we ate $29 billion of the firm’s risky assets.

To prevent a re-run, we now stand behind all banks. This significantly reduces their cost of funds in the marketplace, funds which are still used to bankroll highly risky trading operations, internally and externally.

“Organizations that live because the government insures their liabilities shouldn’t do highly speculative things. That proposition is obvious on its face” says author Martin Mayer, who will be speaking at a conference commemorating the 10 year anniversary of the repeal of Glass-Steagall next month. “When you insure the liabilities, you have to control the assets.”

If you don’t control the assets, foolish financiers will tend to blow themselves up. In our heads-they-win-tails-we-lose banking system, this puts taxpayers in an intolerable position. Not to mention that the derivatives daisy chain means a single failure can lead to systemic failure. Yet despite today’s retreat by Citi, there’s little prospect government-backed banks will end their risky ways.


The gist is in the last paragraph:

“If you don’t control the assets, foolish financiers will tend to blow themselves up. In our heads-they-win-tails-we-lose banking system, this puts taxpayers in an intolerable position. Not to mention that the derivatives daisy chain means a single failure can lead to systemic failure. Yet despite today’s retreat by Citi, there’s little prospect government-backed banks will end their risky ways.”

‘Risky ways’ is considered business as usual in the finance world, even still. And this will lead to an inevitable crash. The deck is as stacked as it was in 2008 – maybe even more so. I think 2010 is going to be a very rough, rocky ride.

Recession indicators

Reuters Staff
Jan 19, 2008 14:24 UTC

If you’ve been surfing the economics blogosphere recently, you’ve likely seen charts of various economic indicators pointing towards a recession. Forthwith, my (growing) collection. Lots more of these out there. If you’ve got one to add, send it our way:

YoY change in unemployment, by month. From the NYT:

Credit Card Trends, (via the NYT, hat tip Mish):

Manufacturing sentiment. The Philadelphia Fed’s general economic index:

Money Supply (using the “M Prime” calculation of the Von Mises Institute, again thanks to Mish). Check out that link for a full explanation of the M Prime money supply calculation. Fascinating read.

Housing Starts and Completions (hat tip CR):

The Philly Fed’s calculation of states with increasing activity. Thanks to CR.


I beleive in the free enterprize system.
I beleive in a free USA.
I do not beleive the government has the right to tell me what I can and can not do.
But, in all societies, laws and regulations are needed to protect the people from others hurting them. I can not buy a Farrari and drive it 200 MPH down the interstate for laws and regulations prohibiting it due to the fact I may injure someone or worse.
The Glass Steagall Act was created to keep the banks from risk of lossing depositors money and also from a faulse market inflation.
Seems the regulations worked just fine until Clinton and his administration decided to remove the banking “safety net” and at the same time enact the houseing revitalization act.
This was a receipt for disaster and thats what we have now.
Pouring $$$ into a boat with hole does not work.
The holes need to be fixed before we can stop the leak.
The whole world (consumers and governments)has lost its confidence in the USA’s ability to to regulate the actions of the criminals that made the loans, (housing act) bundled bad loans and sold them for more than they were worth.
As for the comment about we should not be like Russia and nothing needs to be regulated by government, Im sure your doors at your home are never locked and anyone can come and take anything you have, at will, and you dont mind.
Or do you depend on laws and regulations to prevent this?
The repeal of the Glass Steagall act did just that. Our government allowed the criminals into your bank account, use your money to invest in the stockmarket with you having a say.
Bill Clinton also signed the Commodities Futures Modernization act of 2000 which allowed the AIG’s to trade without regulations.

Posted by Mark64 | Report as abusive