Unstructured Finance

The Green Mountain saga: a cup of joe to go

By Matthew Goldstein

In some ways, the story of Green Mountain Coffee Roasters is one of those quirky only in Vermont business stories, with a founder who made a small fortune in the 1970s selling rolling papers to potheads and a board member who helped invent the sports bra. Yet at the same time, Green Mountain is very much a Wall Street saga, with all the requisite highs and lows for its stock and questions about where the fast-growing company is going.

And right now, with shares of Green Mountain trading around $20–down sharply from the all-time high of $115 reached last September–it’s the Wall Street story that matters most.

Critics of the company question whether Green Mountain can maintain a stranglehold on the market for single-cup coffee products with other competitors joining the fray and some patents expiring. And, of course, there’s questions about that ongoing SEC investigation into the company’s accounting practices and how it recognizes revenues.

On Monday, Emily Flitter wrote a story that began taking a close look at the SEC probe and in particular focused on the little-known distribution company, M. Block and  Sons, that’s responsible for processing about 40 percent of Green Mountain’s single-cup coffee product.

One thing Emily found was that on at least two other occasions, the SEC investigated accounting practices at two M. Block customers and in both cases M. Block executives were deposed by SEC lawyers. In neither case did the SEC charge M. Block or its employees with any wrongdoing, but regulators did file civil fraud charges against executives of M. Block’s customers.

S&P calls baloney on Wall Street’s “cyclical” profit view

By Lauren Tara LaCapra

Ask a Wall Street CEO whether his bank will be able to make as much money as it used to make, once customers start trading and doing deals again. He will inevitably respond with some form of “Yes!”

Ask just about anyone else with a shred of common sense and the answer is more along the lines of “hahaha…you’re kidding, right?”

This conversation is known on Wall Street as the “Structural vs. Cyclical” debate. On the structural side, you’ve got those who are convinced that new regulations, higher capital requirements and clients’ mistrust of big, conflicted i-banks will keep  a lid on profits for firms like Goldman Sachs, JPMorgan and Morgan Stanley. On the cyclical side, you’ve got people like Goldman CEO Lloyd Blankfein and JPMorgan CEO Jamie Dimon, who keep insisting that everything will be just fine once various “headwinds” subside.

UF Weekend Reads

The heat is on all across the U.S. as we gear up for the 4th of July. And in Europe, the heat over the euro zone financial crisis seems to have abated for a day at least, judging by Friday’s big stock market reaction.

So is the euro zone financial crisis over? No, and a lot more work needs to be done. It’s also likely that Friday’s rally will give way to more selling pressure by next week. It’s the Madness of Wall Street and it’s simply how things go.

But here’s the thing: this week’s ability of European leaders to move toward getting something done–even if it is just a bigger band-aid–is one more indication that at the end of the day this crisis will be solved in someway. Oh sure, some nations will get hurt–and more importantly a lot of ordinary people that had nothing to do with the financial crisis will get hurt the most. However, maybe it’s time for everyone–especially those in the media, at hedge funds, bloggers and on Twitter–to back away from some of the worst doom-and-gloom hysteria. Yes, things are bad and could get worse, but is the world really coming undone over the euro zone crisis?

The eminent domain brush fire

By Matthew Goldstein

It didn’t take long for the powerful voices on Wall Street to rise up in protest over an intriguing and controversial idea to condemn distressed mortgages through local government’s power of eminent domain.

Two weeks after Jenn Ablan and I first reported that officials in San Bernardino County, Calif. were giving serious consideration to the novel idea being pushed by financier-backed Mortgage Resolution Partners, 18 financial trade groups are voicing strong objections. The groups, led by the Securities Industry and Financial Markets Association, are concerned that if local governments can seize underwater mortgages it might discourage bank lending. Why? The argument is that if it can happen now, who knows when local governments might move to condemn mortgages again–crisis or not.

The unified opposition may make it difficult for Mortgage Resolution Partners, which says it is talking to public officials in Nevada, Florida and on Capitol Hill, to get much traction for its plan outside of San Bernardino. And if San Bernardino County goes forward with using private money to buy-up underwater mortgages held by banks and in mortgage-backed securities, a U.S. Supreme Court lawsuit challenging the legality of the measure seems more than likely.

UF Weekend Reads

By Katya Wachtel

Yes, Germany and Greece have been in a war of words in the unfolding crisis over the latter’s membership in the euro zone, but this afternoon the two nations face off in a different (and far more entertaining) way: they go head-to-head in the European Championship quarterfinal.

As Reuters’ Alexander Hudson reports from Poland, the setting of tonight’s more-than-just-a-game battle, “When Greece take the football field in the Polish coastal city of Gdansk… the honor of the nation is at stake.” Greece, by the way, has never beaten Germany on the soccer pitch.

Closer to home, with the NBA season now officially over – congrats to our Miami Heat fans – there’s a little more time for some weekend reading…

Eminent domain for underwater mortgages could have biggest impact on banks

By Matthew Goldstein

A controversial idea of using the power of eminent domain to seize underwater mortgages may hurt some of the nation’s biggest banks more than investors in mortgage-backed securities.

The reason is the process of condemning a mortgage in which a borrower owes more money than their homes are worth will likely result in a seizure of any home equity loan–or second lien–on that property as well. And that could spell trouble for many U.S. banks, which at the end of the first quarter had $700 billion in second liens on their books, according to SNL Financial.

The trouble is that analysts say many banks have not adequately reserved against losses on those second liens or taken write-downs to reflect the impairment in value on the underlying mortgages. So an outright seizure of those second liens by a local governments could result in unexpected losses for the banks.

Spain, not Greece, on the minds of many money managers

By Katya Wachtel

On Sunday, voters in Greece’s parliamentary election gave market-watchers the result they wanted.

But in the minds of many money managers, those election results are little more than a band-aid for the euro zone’s deep and complex debt problems, and their attention is focused further West. Many hedge fund managers say it is Spain – the euro zone’s fourth largest economy and the recent recipient of a 100 billion euro bank bailout – that is the real concern for the stability global financial markets.

“Greece has been off the radar screen since March as far as I am concerned,” said Robert Koenigsberger, founder and chief investment officer at $3.2 billion investment manager Gramercy. “When everyone went to bed on Sunday night, I doubt they were expecting to wake up and find that Spain would be 25 basis points wider. People probably thought there would be a risk-on trade that could give Spain some relief.”

Exchange traded derivatives could mean low Treasury yields for years

By Matthew Goldstein and Jennifer Ablan

Fears of rising interest rates  may be overstated, especially if federal regulators push ahead with plans to have a good chunk of derivatives traded through organized clearing houses.

Todd Petzel, chief investment officer for Offit Capital, which manages $6 billion for wealthy investors, argues that the need for traders to post collateral for derivatives contracts traded with clearing houses could provide a new buyer for all the Treasuries the Fed will print to fund the U.S. government deficit and help spur the economy.

In other words, a new source of buyer for Treasuries will emerge.

In a recent letter to Offit’s clients, Petzel says moving derivatives onto clearing house platforms “should reduce systemic risk.” But the move could have the “unintended” effect of creating a new buyer for Treasuries because right now collateral postings in most derivatives trades is irregular and n0t always required at the outset of a transaction.

UF Weekend Reads

So there’s this election this Sunday in Greece and everyone–who follows the markets–is all excited. But at the end of the day, the main reason people in the markets are all up in arms is because they want to know who will get paid, in what order and most important–how much. Sadly, there’s too little focus on whether the right people/institutions are getting paid; let alone issues of social dignity and the quality of human existence. Guess that’s what the markets are all about, right?

But don’t let any of that stop you from saying thanks to your dad tomorrow. And for all of you dads out there—A Happy Father’s Day. Here then is Sam Forgione’s weekend reads:

 

From The New Republic:

Dierdre N. McCloskey spans the efforts of economists to gauge happiness.

From Foreign Affairs:

Layna Mosley offers a level analysis of euro zone government debt and how markets view it.

Mr. Geithner and the politics of condemnation

Matthew Goldstein and Jennifer Ablan

The idea of using eminent domain to help out homeowners who are underwater on their mortgages isn’t necessarily a new one.

Two years ago, a group of congressional leaders led by Rep. Brad Miller of North Carolina wrote to Treasury Secretary Tim Geithner recommending that the federal government consider buying underwater mortgages to stem the flood of home foreclosures. The Democratic congressman got two dozen of his colleagues to sign onto the proposal, which Geithner gave a pretty cool response to.

In a May 7, 2010 letter to the U.S. lawmakers, Geithner said the proposal had too many hurdles to be seriously considered. The Treasury secretary said eminent domain is a “complex and lengthy” proceeding. And he worried about the difficulty of  buying “mortgages out of the trusts and other securitization vehicles that own and control a substantial share of mortgage debt.”

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