Saturday, September 20, 2008

Too Big To Fail?

9/21/08 Not Too Big To Fail?

As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program "Good Morning America," the congressional leaders were told "that we're literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally."

One senior banker described the new Paulson, Bernanke & Co. plan as "the privatization of profits and socialization of losses."

Paul Krugman sees "Socialization" of U.S. financial system."

Richard J. Codey: "The good news is, we're not bankrupt. The bad news is, we're close."

Lehman Brothers Holdings Inc., the U.S. investment bank that filed the largest bankruptcy in history, won federal court approval to sell its North American business to London-based Barclays Plc for $1.75 billion.

U.S. Bankruptcy Judge James Peck in Manhattan overruled objections from Lehman creditors who said the sale was moving too quickly, setting the stage for Barclays, the U.K.'s third- biggest bank, to close the deal over the weekend. Peck said it was clear no other purchaser would emerge if he delayed the sale, and that the deal would help stabilize global financial markets.

Lee Iacocca: "One of the things the government can't do is run anything. The only things our government runs are the post office and the railroads, and both of them are bankrupt."

Doug Noland points out over the past year, total commercial papaer has contracted $106bn, or 5.7%.

Bloomberg:“The American Bankers Association objected to the U.S. Treasury’s plan to insure money-market mutual funds, saying it may compromise the ability of banks to attract and keep deposits.”

The dollar index dropped 1.6% to 77.68.

Peter Schiff: "The U.S. dollar will be shattered beyond repair. The government simply has no means to make good on the trillions of new liabilities. Interestingly, while both Paulson and President Bush acknowledge that the plan will put "significant amounts of taxpayer dollars on the line," they did not mention any tax increases. Given the politics, no such move is forthcoming. The printing press is their only solution."

Steven Spielberg has completed his protracted exit from Paramount Pictures after sealing a $1.2bn deal with Reliance Big Entertainment of India to finance his future projects.
Mr Spielberg is taking the DreamWorks brand with him, which he co-founded with David Geffen, before it was bought by Paramount in 2005.

Randall W. Forsyth: "In the U.S., the economy is anything but strong. And it's getting worse as credit contracts in the crisis. Neither has run its course as the excesses of the bubble have yet to get worked off.
Fixing the markets is fine, but the underlying fundamentals are what really need

This bailout/rescue plan is aimed at creating a safety net for brokers and banks. Main Street will be left with a bill in the multi-trillions of dollars. Government will get bigger.
Taxes will go up. Main Street's standard of living will go down further. This is not the same country founded in 1776. We are surrounded by big government, big deficits, and huge unfunded liabilities. The exodus from the U.S. is on. Listen to the sound of foreign capital leaving the U.S. It is a thundering herd rushing for the exits. That leaves Main Street left to hold the bag. Don't complain. You voted Bush and Co. in for two terms. You let his administration trample on your freedoms. You got what you deserved. Look in the mirror. You are one big schmuck. If you vote for McCain, and a third Bush term, you should be placed in an insane asylum.

Cal State Sacramento political communications Professor Barbara O'Connor said this week. She said that in the 23 days since Palin was named the GOP vice presidential choice, her script has been a limited and increasingly predictable one. "It's fine to say she needed some time to get her footing ... but we're well past that." What did anyone expect?
She got her 15 minutes of fame and is about to go back to the Moose circuit.

The Oil Drum: "EIA weekly gasoline stocks are diving, on a path to 180 million barrels of gasoline or less, in the next week. Weekly gasoline supplies when Katrina hit in 2005 declined, but not nearly to the extent we are seeing today."

Earthfiles: "The September 16, 2008, ozone hole covers 27 million square kilometers, compared with 25 million kilometers in 2007 - bigger than North America. When ozone levels drop, harmful UV radiation gets to the Earth's surface and can cause skin cancer, eye damage and harm to the immune system. New Zealanders and residents at the tip of South America will need more sun protection."

“Companies are much worse than you think,” says Carl Icahn on Fast Money. I go to these board meetings and I don’t have to watch Saturday Night Live anymore because they’re so crazy. The boards are completely out of it.” Lehman Brothers might be the quintessential example, “I know CEO Dick Fuld. How they heck did that guy get paid $17,000 an hour last year?”

The Bush administration is asking Congress to let the government buy $700 billion in bad mortgages as part of the largest financial bailout since the Great Depression.

The plan would give the government broad power to buy the bad debt of any U.S. financial institutions for the next two years. It also would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion — making room for the massive rescue.

A draft of the proposal obtained Saturday by The Associated Press does not specify what the government would get in return from financial companies for the federal help.

If you believe this bailout will amount to $700 billion and not run into the trillions of dollars, then you really are in denial. When was the last time this administration told the truth?

Dwight D. Eisenhower: "We will bankrupt ourselves in the vain search for absolute security."

Friday, September 19, 2008

We The People

9/20/08 We The People

Charles Dickens: “Credit is a system whereby a person who can't pay gets another person who can't pay to guarantee that he can pay”

According to the FT, Morgan Stanley is in talks to sell a stake of up to 49 per cent to China Investment Corp, the state investment fund, as part of the Wall Street firm’s efforts to ensure its survival and reverse a slump in investor confidence. In pre-opening Friday, Morgan Stanley shares rose 33%, Goldman's shares up 25%, Washington Mutual up 40%, AIG up 35%, Wachovia up 34%, and overnight the Hang Seng rose 9% and the Nikkei 4%. Short covering can do that.

Mike Shedlock: "Weak institutions need to die. It is an enormous waste of capital to prop them up. Instead of wasting money bailing out the likes of Washington Mutual or Wachovia the US could be rebuilding infrastructure instead.

There is over capacity in housing. That overcapacity needs to be annihilated, not added to.

Every proposal above by Congress and Paulson amounts to fiscal insanity. Yet, the stock market is cheering wildly. In my opinion this rally will not hold. However, the rally will hold long enough to destroy any overleveraged bears, especially those in front month options.

This is one of the reasons for an old Wall Street adage that goes something like this: "Bear markets destroy the bulls and bears alike".

Banning short sellinin 799 financial companies: "In these unusual and extraordinary circumstances, we have concluded that, to prevent substantial disruption in the securities markets, temporarily prohibiting any person from effecting a short sale in the publicly traded securities of certain financial firms…is in the public interest and for the protection of investors to maintain or restore fair and orderly securities markets."

Michelle Leder: "Here’s a radical idea: Let’s leave the new rules to comedians like Bill Maher. That’s because coming up with hastily put together new rules — not to mention new forms that seem unlikely to address the real problem — makes for both bad markets and bad politics."

Reggie Middleton: "Note to Commissioner Cox: You have doomed the last two independent investment banks. Congratulations. By actually trying to directly manipulate the US capital markets by literally banning the short selling of a certain cadre of stocks (while allowing the long buying of those same stocks) you have upset the natural equilibrium of our capitalistic environ. You must learn to wrap your mind around, and grasp the difference between, price and value. The short sellers were driving the prices of these investment banks down to match their value. Now, with your short sighted intereference, you have allowed - no, let's be more accurate, you have overtly facilitated the divergence between price and value."

Citigroup Inc.may be mulling a bid for Washington Mutual Inc.,according to a report Friday in The Wall Street Journal's online edition, which cited unnamed people familiar with the situation. Other potential bidders include Banco Santander, Wells Fargo & Co.and J.P. Morgan Chase & Co, the article reported.

The U.S. Treasury said it's established a temporary guaranty program for U.S. money market funds. For the next year, the U.S. Treasury will insure holdings of any publicly offered money market mutual fund, retail and institutional, that pays a fee to participate. President George W. Bush approved the use of existing authorities by Secretary Henry M. Paulson, Jr. to make available as necessary the assets of the Exchange Stabilization Fund for up to $50 billion. In God We Trust but do we trust the U.S. Treasury?

In early Friday trading, gold futures fell $65.20 to $831.80 an ounce. The dollar rose 2% to 107.60 yen, and the euro fell 1% to $1.4171. "Though the longer-term fiscal implications are U.S. dollar unfriendly, the dollar has clearly benefited from the news overnight, reversing course and registering broad-based gains against most of its G10 counterparts," said analysts at Societe Generale. Crude-oil futures rose over 2% to trade near $100 a barrel early Friday, getting a boost from hopes that U.S. government officials will hammer out a broad-ranging plan to fix the financial crisis.

Rob Hanna: "The kind of price action we’ve seen in the S&P over the last two days has been found almost exclusively in one type of place – bottoms." Sentiment may have changed on a dime but do you really believe the fundamentals have changed in a lasting way? The free market with supply and demand will rule the day and not guarantees built on sand.

Barry Ritholtz: "If you want to know who to blame for the past 5 years of naked shorting, you only have two places to look: The Financial brokers themselves, and the nonfeasance of a feckless SEC."

AMG Data Services: "Including ETF activity, Equity funds report net cash inflows totaling $4.371 billion in the week ended 9/17/08 with Domestic funds reporting net inflows of $6.824 billion and Non-domestic funds reporting net outflows of -$2.453 billion;
Excluding ETF activity, Equity funds report net cash outflows totaling -$3.914 billion with Domestic funds reporting net outflows of -$1.814 billion and Non-domestic funds reporting net outflows totaling -$2.100 billion."

An agreement to extend the American military mandate in Iraq beyond this year — near completion only a month ago — has stalled over objections by Iraqi leaders and could be in danger of falling apart, according to Iraqi and Bush administration officials.

Clint Eastwood: “If you want a guarantee, buy a toaster.”

Fear is alive and well with the VIX having traded at 40.

More is not better. Home sales in California surged 13.6 percent in August as a flood of foreclosures drove down prices.

The figures released Thursday by MDA DataQuick showed 37,988 new and preowned homes were sold statewide last month, up 13.6 percent from August 2007 but down 3.8 percent from July.

The firm said 46.9 percent of all homes sold last month were foreclosed properties.

That helped send the statewide median home price plunging 35.3 percent to $301,000 during the year ended in August.

``Clearly, Obama is gaining,'' said Jim Pinkerton, a Republican strategist. McCain has to distance himself from the Bush administration to avoid being pinned to the crisis, Pinkerton said. ``When consumer confidence falls, it's not good for the perceived incumbent.''

The Sept. 15-17 Gallup Poll Daily tracking update showed Obama with a 48 percent to 44 percent lead over McCain among registered voters, ``marking the first time that Obama has held a statistically significant lead in two weeks,'' the polling and research organization said yesterday. Obama had a 5-point lead over McCain, according to a CBS News/New York Times poll conducted Sept. 12-16 and posted on the CBS Web site on Sept. 17. McCain had a 2 percentage-point lead among registered voters in a CBS News poll released on Sept. 8, just after the Republican National Convention, CBS said.

``If Obama is down a point or two going into Ohio and he has a superior ground game, he wins,'' said Democratic strategist Joe Trippi. The strategy is to ``hang tight and then hang within the margin and then deliver the final blow on Election Day with a massive ground operation that's been building for 19 months.''

Treasury Secretary Hank Paulson briefed Congressional leaders on plans to address the "illiquid assets" on U.S. financial institutions' balance sheets, possibly including the creation of a government facility to take on financial firms' bad debts.

The proposal to create a massive facility to buy mortgage-backed securities could cost as much as a half-trillion-dollars and would involve the purchase of both private-label and government-guaranteed mortgages, according to an administration official.

The plan would have two parts. The largest part would be the purchase of private-label (those underwritten by Wall Street) mortgages by some as-yet unnamed vehicle. Financing would occur through the sale of treasuries, the official said. That part of the plan would require congressional approval. The idea is to hold the securities to maturity. The average mortgage has a life of about 7 years.

A second part of the plan would involve the purchase by Treasury of additional government-backed (Fannie Mae and Freddie Mac) under a plan it announced several weeks ago to rescue the two government-sponsored entities. Back then, it said it would purchase $5 billion initially. The idea is to ramp up those purchases more quickly. It does not require approval by Congress.

The administration is contemplating hiring a private investment manager to run the mortgage vehicle. Yet to be worked out with Congress are the amount of mortgage securities the government would buy and from whom the government would accept them.

The price to be set on those purchases and the process for setting it was also unknown.

$500 billion is money the U.S. Treasury does not have. Printing dollars is their main asset.

The credit shock is in some ways reminiscent of the 1973 oil embargo, which “came into people’s lives right away,” said Andrew Kohut, director of the Pew Research Center, the public opinion pollster. Then, Americans were forced to line up for gasoline and turn down their thermostats in winter. Though less visible, the credit squeeze, if it persists, will force businesses and consumers to cut spending more than they already have.

On the day following the 221st anniversary of the signing of the U.S. Constitution, WTP (We the People Foundation) Chairman and constitutional activist Robert Schulz today filed a federal lawsuit in United States District Court in Albany seeking to halt the execution of the emergency bailout of American International Group, Inc. (AIG) by the United States Government and the Federal Reserve.

Schulz believes that, "Beyond the moral hazard and dangerous precedent established by this action, it is of vital importance that the American people recognize that the present financial crisis is a direct and predictable result of decades of constitutional violations by the Federal Government. Through a longstanding policy of disinformation and collusion with the Federal Reserve and Wall Street financial elite, the United States Federal Government has denied public access to information about the secretive operations of the privately owned and operated Federal Reserve and its monopoly control of America’s money system. This monopoly control of our currency by a private banking cartel has resulted in increasing distortion, volatility and cyclical (boom and bust) economic conditions in the U.S. and abroad. America’s fiat currency (produced from thin air) is manipulated by the Federal Reserve for the benefit of its owners, major Wall Street financial institutions and the Federal Government and is not unaccountable to the taxpayers. These abuses of the Constitution have taken our financial system to edge of the abyss. The chickens have come home to roost."

In this election there is only one alternative to change: a vote for Barack Obama!

Northfork, West Virginia-based Ameribank Inc. has been closed, the Federal Deposit Insurance Corporation said late Friday, marking the 12th bank closure so far this year.

General Motors said late Friday it will use the remaining $3.5 billion of its $4.5 billion secured revolving credit facility to boost its liquidity position as it continues its restructuring efforts.

The Dow Jones Industrial Average rose 368.75 points to end at 11,388.44, a lapse of 0.3% from a week ago. The S&P 500 rose 48.56 points to 1,255.07, a weekly gain of 0.3%, while the Nasdaq Composite climbed 74.80 points to finish at 2,273.90, leaving the technology-laden index up 0.6% for the week.

October crude closed at $104.55 per barrel on the New York Mercantile Exchange Friday, up 6.8%, or $6.67, for the session. It gained 3.3% for the week. Gold for December delivery closed down $32.30, or 3.6%, at $864.70 on the Comex division of the New York Mercantile Exchange. Despite Friday's losses, gold ended the week up 13%, helped by the previous two sessions' rallies.

Wednesday, September 17, 2008

America's Credit Profile

9/19/08 America's Credit Profile

The Federal Reserve almost quadrupled the amount of dollars central banks can auction around the world to $247 billion in a coordinated bid to ease the worst crisis facing financial markets since the 1920s. The cost of borrowing in dollars overnight tumbled after central banks worldwide pumped $247 billion into money markets.

The three-month rate rose for a third day, to the highest since January, signaling that banks are still wary of more failures among financial institutions after Lehman Brothers Holding Inc. collapsed and the U.S. government bailed out American International Group Inc.

The dollar fell versus the euro in the biggest two-day decline since March after the world's biggest central banks said they will act jointly to revive financial markets, easing demand for the U.S. currency. ``Most of the problems we've seen so far have been centered in the U.S., and therefore it shouldn't be positive for the dollar,'' said Henrik Gullberg, a currency strategist at Deutsche Bank AG in London. ``When banks stop scrambling for dollars, it should be reflected in the price of the currency. Dollar sentiment is very negative.''

America's credit ``profile is now weaker because contingent risks have become actual risks to the U.S. government,'' said John Chambers, managing director of sovereign ratings at Standard & Poor's in New York.

The result: Foreign investors may demand higher compensation for providing the money the U.S. government and economy depend on. That, in turn, could translate into lower living standards for Americans as borrowing costs are pushed higher and the dollar is pulled lower.

Lloyds TSB PLC's 12.2 billion-pound ($21.8 billion) deal to acquire struggling HBOS PLC, Britain's biggest mortgage lender, eased some concern among traders there.

Volkswagen AG, whom investors believe will likely be completely taken over by Porsche SE in the coming weeks, pushed shares of Europe's biggest automaker up more than 10.1 percent in trading.

The London interbank offered rate, or Libor, for overnight loans fell 1.19 percentage points to 3.84 percent today, according to the British Bankers' Association. It dropped 1.41 percentage points yesterday after jumping 3.33 points the day before. The three-month rate, which rose yesterday the most since 1999, climbed a further 14 basis points to 3.20 percent today, according to BBA data.

Despite an intense effort to distance himself from the way his party has done business in Washington, Senator John McCain is seen by voters as far less likely to bring change to Washington than Senator Barack Obama. He is widely viewed as a “typical Republican” who would continue or expand President Bush’s policies, according to the latest New York Times/CBS News poll.
Mr. Obama had the support of 48 percent of registered voters, compared with 43 percent for Mr. McCain, a difference within the poll’s margin of sampling error, and statistically unchanged from the tally in the last New York Times/CBS News poll, in mid-August.

This poll found evidence of concern about Ms. Palin’s qualifications to be president, particularly compared with Senator Joseph R. Biden Jr. of Delaware, Mr. Obama’s running mate. More than 6 in 10 said they would be concerned if Mr. McCain could not finish his term and Ms. Palin had to take over. In contrast, two-thirds of voters surveyed said Mr. Biden would be qualified to take over for Mr. Obama, a figure that cut across party lines.

And 75 percent said they thought Mr. McCain had picked Ms. Palin more to help him win the election than because he thought that she was well qualified to be president; by contrast, 31 percent said they thought that Mr. Obama had picked Mr. Biden more to help him win the election, while 57 percent said it was because he thought Mr. Biden was well qualified for the job.

Fedex Corp. said Thursday its fiscal first-quarter net income fell to $384 million, or $1.23 a share, from $494 million, or $1.58 a share, in the year-ago period.

Trading on Russia's major stocks exchanges remained halted for a second day Thursday according to published reports.

In early Thursday trading crude oil rose to $99+ per barrel and gold jumped $30 to $880.

In Hong Kong, the Hang Seng had its most volatile day for at least five years. It fell 7.7 per cent during the morning session. News of the intervention came in the last of half an hour of trading in the afternoon and the index rallied to show a gain of 1.2 per cent on the previous close within twenty minutes. But the benchmark then fell back in the next ten minutes to close almost unchanged on the day, down 0.03 per cent at 17,632.46.

An experimental biotech treatment for the chronic immune disorder psoriasis eliminated red, scaly skin patches more than the leading biologic treatment for moderate-to-severe cases, researchers reported Thursday.

The study by Johnson & Johnson's biotech unit, Centocor Inc., is the first head-to-head comparison of biologic drugs in psoriasis patients, the company said.

Robert McHugh: "We believe there is a stock market decline coming in 2008 that will make this week's drop look gentle. Stick with us through this mess. We base this conclusion on chart patterns, several with downside targets that are worrisome." I continue to quote this professional because he has been right over and over again.

Japan's central bank said it reached a dollar-yen swap agreement with the Federal Reserve until Jan. 30, 2009, for a maximum amount of $60 billion, which will make it easier to exchange dollars with yen, ensuring the smooth operations of the money market.

"The move is aimed at maintaining stability in the market," said Yuji Kameoka, senior economist at the Daiwa Institute of Research. Barnum was correct. There are fools born every day. They should place the dollar in an internment camp.

Douglas J. Hagmann: " A disturbing communication posted in a high level Arabic language forum suggests that some type of terrorist operation is currently underway, targeting sites within the United States and Europe. According to information developed within the last 24 hours by a deep-cover intelligence operative, Islamic terrorists have been dispatched to the U.S. and Europe and may be in place, preparing to execute unspecified terrorist attacks within the U.S. and Europe.

Neither the targets nor the types of attacks were able to be identified from an analysis of the communications, although it appears possible that the European and American operations could be conducted in tandem. Also unclear is the timetable of potential attacks, although the wording pertaining to the "anticipated celebration" of the success of such attacks suggests that they will be carried out within the next few days.

While many such threats by Islamic terrorists are published constantly and end up being nothing more than propaganda, it is important to note that the origin and nature of the communications isolated here meet a significantly higher standard of evidence for threat evaluation purposes. As such, it is the recommendation of this agency that individual awareness of any suspicious activity be stepped up accordingly, and immediately reported to the appropriate law enforcement agency.

Increased vigilance by law enforcement and security professionals is also urged, especially at areas of likely "hard" targets such as our infrastructure."

Morgan Stanley is in advanced merger talks with Wachovia Bank, according to sources close to the company. Morgan sank almost 10 percent in early New York trading, after plunging 42 percent this week following the bankruptcy of smaller rival Lehman Brothers Holdings Inc.

Warren Buffett's MidAmerican Energy Holdings Co. agreed to buy Constellation Energy Group Inc. for about $4.7 billion.

The cash deal is valued at $26.50 a share, the companies said today in a statement on Business Wire.

Kraft Foods Inc. will replace American International Group Inc. on the Dow Jones Industrial Average, effective Monday, Dow Jones & Co. announced Thursday.

Alaska Gov. Sarah Palin's husband has refused to testify in the investigation of his wife's alleged abuse of power, and key lawmakers said Thursday that uncooperative witnesses are effectively sidetracking the probe until after Election Day.

Todd Palin, who participates in state business in person or by e-mail, was among 13 people subpoenaed by the Alaska Legislature. Palin's lawyer sent a letter to the lead investigator saying Palin objected to the probe and would not appear to testify on Friday.

The U.S. Securities and Exchange Commission intends to temporarily ban short-selling, The Wall Street Journal reported Thursday night.

Washington Mutual, which has offered itself up for sale, failed to attract bids as of yet, the U.K.'s Financial Times reported in its online edition. Maybe Paulson and Co. can buy them too.

Commercial banks, investment banks and American International Group had borrowed a total of $121.2 billion from the Federal Reserve as of Wednesday, the Fed reported Thursday. Considering the Fed is busted, getting the money out of thin air is another magic trick aimed at the pockets of hard-working Americans who cannot make ends meet.

Our non-freemarket government is busy at work. The U.S. government is considering creating a new agency to handle takeovers and bailouts of financial firms, Sen. Charles Schumer, D-N.Y., said Thursday. ``The Federal Reserve and the Treasury are realizing that we need a more comprehensive solution," Schumer said. Schumer said the new agency should not simply take over the bad assets of failed companies, but also modify mortgage loans to give homeowners relief. Naturally, the money will be printed and in so doing lower your standard of living.

October crude closed at $97.88 per barrel in New York Thursday, up 72 cents for the session after reaching a high of $102.24 on Globex. Gold futures surged for a second day Thursday, with the benchmark contract topping $900 an ounce for the first time in six weeks before closing up 5.5%, as money injections from the Federal Reserve and five other central banks failed to calm nervous investors. After a $70 rally on Wednesday, the biggest one-day gain in dollar terms, gold futures rose $46.50 to end at $897 an ounce on the Comex division of the New York Mercantile Exchange. Earlier gold surged $75.50 to $926.

The Dow Jones industrials closed up 410 points, or 3.9%, to 11,020. The Standard & Poor's 500 Index jumped 50 points, or 4.3%, to 1,207, and the Nasdaq Composite Index soared 100 points, or 4.8%, to 2,199.


9/18/08 USSRA

Senator Everett Dirksen: "If you owe the bank $10,000, you have a problem. But, if you owe the bank $1,000,000, the bank has a problem..."

Nouriel Roubini: "The transformation of the USA into the USSRA (United Socialist State Republic of America) continues at full speed with the nationalization of AIG".

Rep. Ron Paul: "Legal tender laws should be repealed at the Federal level. Congress has the Constitutional duty to protect the integrity of our money. However, since it has passed this duty off, and the Federal Reserve has only debased our currency, Congress should no longer force Americans to do business in dollars if they would prefer to transact in gold, or silver, or cigarettes or seashells, for that matter. Free people should be free to associate and do business in ways that benefit them. Instead they are forced to use the unstable dollar to their own detriment, and the benefit the government."

AIG shares fell 20 percent, or 75 cents, to $3 in premarket trading. Shares closed Tuesday at $3.75.

Where are we getting the money to save AIG? Not from foreign capital!

Treasury International Capital (TIC) data for July 2008 are released today and posted on the U.S. Treasury website ( The next release, which will report on data for August, is scheduled for October 16, 2008.

Net foreign purchases of long-term securities were $6.1 billion.

* Net foreign purchases of long-term U.S. securities were negative $25.6 billion. Of this, net purchases by private foreign investors were negative $20.7 billion, and net purchases by foreign official institutions were negative $4.9 billion.

* U.S. residents sold a net $31.7 billion of long-term foreign securities.

Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been negative $8.2 billion.

Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities decreased $8.4 billion. Foreign holdings of Treasury bills decreased $4.4 billion.

Banks’ own net dollar-denominated liabilities to foreign residents declined $58.1 billion.

Monthly net TIC flows were negative $74.8 billion. Of this, net foreign private flows were negative $92.9 billion, and net foreign official flows were $18.2 billion.

"With the Wall Street crisis deepening, the major presidential candidates took divergent approaches in their appeals to anxious voters yesterday," the Boston Globe reports, "with John McCain casting himself as an outspoken populist outraged at corporate greed and Barack Obama hammering what he called a Republican-led climate of deregulation that McCain championed."

John Dickerson: "When McCain talks about eliminating earmarks, his record is a mile long. When he talks about cutting CEO pay and regulating the financial industry, his aides can provide only one amendment to an accounting-reform bill to show his history on the issue. He offered it six years ago."

Morgan Stanley is pondering whether it should stay independent or merge with a bank after the stock's steep pullback, reported Wednesday.

The Commerce Department said housing starts declined 6.2% to a seasonally adjusted rate of 895,000 in August, a 17-year low. Starts of single-family homes fell 1.9% to a 17-year low of 630,000 annualized units. Building permits for single- and multiple-family dwellings fell 8.9% to a 26-year low of 854,000 annualized units, with permits for single-family homes dropping 5.1% to 554,000, also a 26-year low.

The U.S. current account deficit widened to $183.1 billion in the second quarter, or 5.1% of gross domestic product, the Commerce Department reported Wednesday, and marked an increase of 4.3 percent to $183.1 billion in the April-June quarter, compared to a revised deficit of $175.6 billion in the first quarter.

Federal-Mogul Corp.said Wednesday that it planned to cut about 4,000 jobs, about 8% of its workforce, in response to challenging conditions in the automotive market.

Trading on Russia's two largest stock markets was halted for the second day in a row following more sharp declines, according to published reports. Regulators ordered the halts after sharp trading declines on the RTS exchange, where listings are denominated in dollars, and the Midex exchange, denominated in rubles, the Times Online reported.

Russia's government will lend its three largest banks up to 1.3 trillion rubles ($44 billion) for three months and longer if needed, the Finance Ministry said in a statement Wednesday.

The New York Post: "The fate of Washington Mutual remained in question yesterday as federal regulators recently called a number of banks asking if they would consider buying the nation's largest savings and loan should it eventually falter."

Sixteen people were killed in a bombing and rocket attack against the US embassy in the Yemeni capital Sanaa on Wednesday, including six soldiers, six attackers and four civilians, the interior ministry said.

The Wwashington Times: "One of the oil industry's most influential voices called Monday for a temporary 1970s-style rationing of gasoline in parts of the United States to help avoid hurricane-related shortages and declared that the Bush administration, the Congress and the two men running for president have failed to exhibit the courage needed to solve America's longer-term energy problems.

"We need to get a Congress that is willing to make some courageous decisions, and we need to have a president willing to make courageous decisions with respect to energy supply," former Shell Oil Co. President John Hofmeister told editors and reporters at The Washington Times.

Mr. Hofmeister, who now serves as chairman of the National Urban League, also said that America's current economic crisis is disproportionately hurting middle- and lower-income families.

"The economy is actually quite weak for middle- and low-income folks because of the drain on their disposable income" resulting from soaring energy, food and health care costs, he said. "America is suffering a lot more than is being reported."

Mr. Hofmeister laid blame squarely on the country's political leaders, saying President Bush unnecessarily waited 7 1/2 years as gas prices soared to lift a presidential moratorium on offshore drilling and that Congress has made only token gestures to solve an energy crisis that requires significant action."

Goldman Sachs, until now the most bullish bank on oil prices, slashed its average 2009 U.S. crude oil forecast by $25 to $123 a barrel on Wednesday after this summer's price surge tapped the brakes on demand.

"We stand by our bullish view on oil, but just think it will now take longer to get to our previous price targets," the bank's commodity research team said in a note to clients dated Sept. 16.

The worst of the financial crisis may still lie ahead and more major financial institutions may face trouble in coming months, IMF director general Dominique Strauss-Kahn said on Wednesday.

The crisis risks weighing on the world economy, he said, though both developing and developed countries were showing signs of resilience, Strauss-Kahn told reporters after a meeting with Gulf Arab finance ministers and central bank governors.

"It is a very serious financial crisis," he said. "The consequences for some financial institutions are still in front of us. We have to expect that there may be in the coming weeks and coming months other financial institutions with some problems," he said.

Strauss-Kahn spoke the day after U.S. authorities engineered an $85 billion rescue American International Group , staving off bankruptcy for the insurance giant and bringing a measure of calm to shell-shocked global markets.

U.S. Treasury three-month bill rates dropped to the lowest since at least 1954 on concern that credit market losses will widen after the bankruptcy of Lehman Brothers Holdings Inc. and the federal takeover of American International Group Inc.

Investors pushed the rate as low as 0.233 percent as the loss of confidence in credit markets deepened. Reserve Primary Fund, the oldest U.S. money-market fund, became the first in 14 years to expose investors to losses after writing off $785 million of debt issued by Lehman.

Banks abruptly stopped lending to each other or charged exorbitantly high rates Tuesday, threatening to spread the troubles of American International Group Inc. and Lehman Brothers Holdings Inc. to a broad range of financial institutions and the global economy.

Associated Press: " Women's rights groups endorsed Barack Obama for president Tuesday, asserting the historic selection of a female Republican vice presidential candidate does not make up for John McCain's lack of support on issues important to women.

"We don't think it's much to break a glass ceiling for one woman and leave millions of women behind," said Eleanor Smeal, president of the Feminist Majority Foundation.

Smeal was among leaders from six organizations that announced their endorsement of the Democratic presidential nominee at a news conference.

Obama also won the support of the National Organization for Women, which said it has not endorsed a candidate for president since Walter Mondale and Geraldine Ferraro shared the Democratic ticket in 1984. Ferraro was the first female major-party vice presidential candidate.

NOW backed New York Sen. Hillary Rodham Clinton in the primaries. "We join with her in saying 'no,'" said NOW President Kim Gandy, referring to a line Clinton used at the Democratic convention last month. "No way, no how, no McCain."

Gandy and Smeal dismissed polls that suggested McCain has received a boost in support from white women after he picked Palin.

"The die is not cast yet," Smeal said.

An Associated Press-GfK Poll of likely voters last week showed Obama's lead among women at 49 percent to 44 percent. The same AP-GfK poll showed that white women are backing McCain over Obama, 53 percent to 40 percent.

Gandy predicted women will quickly swing their support to Obama once they know where Palin stands on the issues. The Alaska governor opposes abortion except in the case of a threat to the mother's life.

However, data from the recent AP-GfK poll suggests that it might be difficult for Obama to win over some white women.

The survey, conducted Sept. 5-10, found 65 percent of working-class white women say Palin shares their values, 71 percent said so of McCain, compared to 52 percent for Obama and 46 percent for Democratic vice presidential nominee Joe Biden.

The McCain campaign said it was unhappy with NOW's decision to endorse Obama in the race for the White House.

"It's extremely disappointing that an organization that purports to be an advocate for all women not only opposes, but feels compelled to go out of its way to criticize and make negative comments, about the only ticket in the presidential race with a woman on the ticket," Palin's spokeswoman Maria Comella said in an e-mail.

Smeal said the organizations have and will continue to protest any sexism in the presidential campaign, but she added, "We think it's time to get off issues such as lipstick and on to the issues, really, that are challenging this nation."

Gandy criticized Republicans for changing their tone on sexism.

"I love it that Republicans have discovered sexism in the media," she said. "Because they didn't see any of it when it was being directed at Hillary Clinton. But once Sarah Palin got a dose of it, which we also pointed out, they were all over it." She did not explain how her group defended Palin from sexism.

Obama was also endorsed by leaders from Business and Professional Women/USA, the National Association of Social Workers, the National Congress of Black Women and the Women's Information Network."

Major Japanese banks held 320 billion yen ($3.06 billion) in outstanding loans to Lehman Brothers Holdings Inc. as of Tuesday, with 44% of that exposure in the form of unsecured loans, the Nikkei business daily reported Thursday.

Morgan Stanley received interest from Wachovia Corp. to merge one of Wall Street's last remaining investment firms with the bank, The New York Times reported on its Web site late Wednesday, citing people familiar with the discussions.

The Dow Jones Industrial Average shed 449.44 points, or 4.1%, to end at 10,609.58. The S&P 500 fell 57.21 points, or 4.7%, to 1,156.38, while the Nasdaq Composite plunged 109.05 points, or 4.9%, to 2,098.85.

October crude closed at $97.16 per barrel, up $6.01, or 6.6%. Gold futures surged more than $80 an ounce Wednesday, the biggest daily gain in dollar terms since at least 1980, as news of the U.S. government's takeover of the biggest U.S. insurance company fueled massive safe-haven buying. Gold for December delivery closed up 9% at $850.50 an ounce. It earlier jumped $83.80 in electronic trading to $864.30.

The Treasury Department issued $40 billion in 35-day cash management bills Wednesday at a rate of 0.30%. Proceeds from the sale will immediately be transferred to the Federal Reserve to fund its operations to improve liquidity in money markets.

The American Petroleum Institute reported Wednesday a drop of 4.4 million barrels in crude supplies for the week ended Sept. 12. The Energy Department had reported a decline of 6.3 million barrels for the latest week. Motor gasoline supplies were down 4.3 million barrels, the API said. The government had reported that supplies fell by 3.3 million barrels. Distillate supplies were down 1.7 million barrels, the API said. They were down 900,000 for the week, according to the Energy Department.

Tuesday, September 16, 2008

Another Government Rescue

9/17/08 Another Government Rescue

Net overall capital outflows from the United States rose to $74.8 billion in July, the Treasury Department said Tuesday. This is the largest amount of net selling since last August, said economists at Action Economics. Foreign investors lost their appetite for U.S. securities in July. They sold a net $25.6 billion, including a record net selling of $50 billion for agency securities, as concerns increased over Fannie Mae and Freddie Mac. Net long-term capital inflows totaled $6.1 billion in July down from $53.4 billion in June. Net private outflows totaled $92.9 billion.

Bill Gross, manager of the world's largest bond fund, guaranteed $760 million of debt issued by American International Group Inc. as of June 30, obligations that may prove costly if the insurer fails to stay afloat.

American International Group Inc.'s credit ratings were downgraded by Standard & Poor's and Moody's Investors Service, threatening efforts to raise emergency funds to keep the company afloat.

The Bank of Japan injected 1.5 trillion yen ($14.4 billion) into the financial system Tuesday morning in an effort to assuage investor worries and ensure ample liquidity in the wake of big losses on Wall Street.

Wells Fargo & Co.said late Monday it will take a non-cash charge in the third quarter for its investments in senior unsecured notes and perpetual preferred securities issued by Lehman following its bankruptcy filing. Wells Fargo's investments in the notes and preferred securities are included in securities available for sale at about $90 million and $109 million, respectively. "The notes currently trade at 25-30 cents on the dollar. The preferred securities currently trade at less than 1% of par value," said the bank in a statement. Wells Fargo estimates that it had about $50 million in unsecured counter-party exposure to Lehman as of Sept. 12 but it has no direct lending exposure and the Wells Fargo Advantage Money Market Funds also do not have any direct exposure to Lehman, it said.

J.M. Smucker Co. will pay a special one-time dividend of $5 in connection with its buy out of Folgers. The dividend will be paid on Oct. 31 to shareholders of record at the close of business Sept. 30. The deal is expected to add to J.M. Smucker's earnings and will close in the fourth quarter.

Brett Steenbarger: " Had a nice phone conversation with Jon Markman last night; he referenced Paul Desmond of Lowry's Reports in observing that selling does not make a market bottom; buying does. Great point. We only get a bottom when large market participants perceive price to represent value. Not there yet. Here's Markman's latest take on the market."

Rob Hanna: "It’s official. July was NOT the bottom. Today marked a new low (in a number of ways) for the S&P 500. One measurement that isn’t as extreme as at the July bottom is the number of new 52-week lows today on the NYSE. Some may see this as a positive divergence. I did a study a few months ago and found the divergence to be unreliable."

Alaska Gov. Sarah Palin is unlikely to meet with a special prosecutor looking into whether she or other state officials improperly pushed to punish a trooper, a spokesman for John McCain's presidential campaign announced Monday.

Since Palin was named as McCain's running mate Aug. 29, the campaign has dismissed the state legislature's investigation into her dismissal of the state's director of public safety, saying that Democrats are exploiting the probe for political gain.

McCain campaign spokesman Ed O'Callaghan said that Palin is "unlikely to cooperate" with the investigation, which he called "tainted." Sound familiar?

Saying that a disorderly failure of American International Group would add stress to fragile financial markets, the Federal Reserve agreed late Tuesday to lend the giant insurance firm $85 billion. In return, the U.S. government will receive a 79.9% equity interest in AIG. The two-year loan is secured by all the assets of AIG and its primary non-regulated subsidiaries. the loan will be repaid from the sale of certain of the company's assets. Interest on the outstanding balance will accrue at the three-month Libor rate plus 850 basis points.

The Bank of Japan injected 2 trillion yen ($18.8 billion) into money markets Wednesday morning, the second straight day it has undertaken special operations to help ensure ample liquidity in the system amid the global financial market turmoil.

Samsung Electronics late Tuesday said it offered $26 a share for the outstanding shares of SanDisk.

McClatchy Co. will lay off about 1,150 employees, equivalent to 10% of its total workforce, in an effort to reduce costs, the media company said late Tuesday.

Excluding special items, Adobe said earnings in the quarter were 50 cents a share. Analysts on average had estimated Adobe would post earnings excluding special items of 46 cents a share.

October crude closed at $91.15 per barrel on the New York Mercantile Exchange Tuesday, down $4.56, or 4.8%, for the session. The U.S. Federal Reserve said it would leave its benchmark fed funds rate unchanged at 2.0%. Gold futures fell slightly in electronic trading after the Federal Reserve kept its key interest rate unchanged. Gold for December delivery lost $1.90, or 0.2%, to $778.60 an ounce in electronic trading after floor trading closed.

Goldman Sachs, the largest securities firm, said third quarter earnings fell 70 percent on weaker-than-expected revenues, knocking its shares to nearly three-year lows.

Monday, September 15, 2008


9/16/08 Adjustment

Americans are justified to be worried, says Nouriel Roubini, of NYU's Stern School and RGE Monitor, who notes there is already a "slow-motion run on retail banks" occurring nationwide.

That "run" could accelerate as people realize the FDIC fund has about $50 billion to "insure" about $1 trillion in assets at the nation's financial institutions, says Roubini. "They're going to run out of money" unless Congress acts soon to recapitalize the FDIC.

Bush says the economy is going through an "adjustment". I say adjustment this!

Prior to Lehman filing for bankruptcy Sunday night, John Hussman wrote: "As I noted in last week's market comment, “by essentially capitulating that Fannie and Freddie have to be taken over, the government is also sending a signal that other financial institutions (particularly investment banks with high gross leverage multiples) may be vulnerable to failure.”

It's important to recognize that the timing of the stress at Lehman is not a coincidence independent of the Fannie and Freddie bailout. Rather, the U.S. government essentially sent an information signal that highly leveraged financial institutions were insolvent. Next to Bear Stearns, Lehman had the highest gross leverage multiple on the street (the continuing problem is that several others are quite close). Last week, Lehman reported $600 billion in assets, on less than $20 billion of common shareholder equity. Evidently, the markets (and potential acquirers) don't believe that the $20 billion is as tangible as Lehman reports. Put another way, a markdown in the value of Lehman's assets by just over 3% would wipe out that reported shareholder equity. One would need to have a great deal of faith in that asset valuation to be willing to buy the company out at any price, since an outright buyer would have to agree to pay off Lehman's bondholders (in excess of $100 billion).

A buyer might very well be willing to pay nearly $100 billion for Lehman's assets, as well as its customer and counterparty liabilities, but the proceeds wouldn't be quite enough to pay off Lehman's bondholders entirely. That's what everyone has been trying to avoid. Not customer losses, but a bankruptcy that would leave Lehman's bondholders less than whole.

Note the problem is not just one of “illiquidity.” Even if your assets are worth more than your liabilities, you can be illiquid without being insolvent, in the sense that your cash immediately on hand is not sufficient to meet demands for withdrawal or other payments. Insolvency goes further, to the point where the market value of your assets falls short of the market value of your liabilities."

According to the FT, Lehman Brothers Holdings owes more than $600bn to creditors scattered across the US, Europe and Asia, according to the investment bank’s Chapter 11 petition.The largest unsecured creditors include Citigroup and Bank of New York Mellon, who have around $138bn of exposure to Lehman’s bond debt as indenture trustees.

Traders fully expect the Federal Reserve to reduce its benchmark rate at its meeting tomorrow to 1.75% from 2% to make borrowing and lending more feasible for a battered financial system. Futures also show a 92% chance of another quarter percentage point cut at the central bank's meeting on Oct. 31.

Manufacturing activity declined in the New York state in early September, the New York Federal Reserve Bank said Monday. The Empire State index dropped to negative 7.4 in September from 2.8 in August, indicating more firms said business was worsening than said it was improving. The new orders index rose to 4.4, while the shipments index rose to 0.6. The inventories index dropped to negative 2.8.

The German DAX 30 index touched a level not seen since October 2006 on Monday.

The Securities and Exchange Commission may move quickly to protect against short-selling, according to a report published Monday morning in The Wall Street Journal's online edition, which cited an unnamed person familiar with the matter.

Led by a big drop in auto production, industrial output plunged 1.1% in August, the biggest drop since Hurricane Katrina three years ago, the Federal Reserve reported Monday. The decline was much worse than the 0.3% decline expected by economists. Industrial production has now fallen 1.5% in the past year and 2% since the peak in January.

Aig plummets to the $5 area. What a horror show. Is Wachovia and Citigroup close behind?

Wilbur Ross, chairman and CEO of WL Ross & Co., says he sees possibly as many as a thousand bank closures in the coming months. And this will create opportunities for investors.

Shares of U.S. video game publisher Take Two Interactive Software Inc plunged nearly 30 percent in premarket trading on Monday after larger rival Electronic Arts Inc abandoned its takeover bid.

The Bank of New York Mellon said Monday it has no outstanding loans to Lehman Brothers and that its relationship with Lehman was as a trustee for its bond offerings.

Whirlpool Corp.said Monday it will lay off about 700 workers at its Fort Smith, Ark. plant. Whirlpool said the lay offs will begin in November, and that there is no timetable "for when employees may be called back to the facility."

Gold for December delivery rallied $22.50, or 2.9%, to end at $787 an ounce on the Comex division of the New York Mercantile Exchange. Hurricane Ike has damaged about 10 offshore petroleum platforms in the Gulf, according to news reports. October natural gas climbed 29 cents, or 3.9%, to $7.656 per million British thermal units on Globex. But October crude was down $4.05, or 4%, at $97.13 per barrel.

The Federal Reserve will cut its target overnight borrowing rate by a half percentage point to 1.50% at its meeting tomorrow, said Merrill Lynch economists David Rosenberg and Drew Matus in a note Monday. Lower interest rates will cause more inflation and crater the U.S. dollar. It will not put more cash on the debt-swollen balance sheets of corporations and individuals.

Counterparty credit risk in the derivatives market surged Monday on concern the bankruptcy of Lehman Brothers could trigger losses throughout the financial system. The CDR Counterparty Risk Index, which tracks credit default swaps on leading banks and brokerage firms, jumped 89 basis points, or 40%, to 305.4. That's a record, according to New York-based Credit Derivatives Research, which compiles the index. CDS spreads on American International Group surged 415 basis points to 1,315. CDS spreads on Morgan Stanley rose 177 basis points to 452 while spreads on Goldman Sachs widened by 119 points to 317, according to CDR. Merrill Lynch spreads narrowed by 130 points to 325 after it agreed to be acquired by Bank of America.

Hewlett-Packard Co. on Monday said it would cut 24,600 jobs as part of its acquisition of Electronic Data Systems. The job cuts amount to about 7.5% of the combined company's total workforce.

With the Dow dropping 500 points on Monday and over 3000 stocks declining, it is not surprising that the VIX jumped 5+ points to the 31 area.
Fear is afoot.

The refiners got truly slammed on Monday.

Financial Upheaval

9/15/08 Financial Upheaval

Lehman Brothers, burdened by $60 billion in soured real-estate holdings, said it is filing for Chapter 11 bankruptcy after attempts to rescue the 158-year-old firm failed.

Bank of America said it would exchange .8595 shares of its common stock for each Merrill Lynch common share, valuing Merrill at $29 a share. Merrill's shares changed hands at $17.05 each on Friday, after falling sharply in the wake of Lehman's looming demise. The transaction is expected to close in the first quarter of 2009. Bank of America said it expects to achieve $7 billion in pretax cost savings.

According to the WSJ, insurer American International Group Inc., succumbing to relentless investor pressure that drove its shares down 31% on Friday alone, is pulling together a survival plan that includes selling off some of its most valuable assets, raising more capital and going to the Federal Reserve for help, people familiar with the situation said.

China cut interest rates for the first time in six years and allowed most banks to set aside smaller reserves as worsening credit-market turmoil and weakening export demand dim the outlook for economic growth.

The People's Bank of China reduced the one-year lending rate to 7.20 percent from 7.47 percent, effective tomorrow, and lowered the reserve ratio at the nation's smaller banks by 1 percentage point. The changes were in a statement on the central bank's Web site today.

The Federal Reserve widened the collateral it accepts for loans to securities firms to include stocks in an effort to help Wall Street weather Lehman Brothers Holdings Inc.'s plans for bankruptcy.

The Fed also yesterday boosted its program for lending Treasuries to bond dealers by $25 billion, bringing it to $200 billion. At the same time, a group of 10 banks that includes JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. formed a $70 billion fund to ensure market liquidity.

The European Central Bank and the Bank of England today pumped emergency funds in their financial systems. The U.K. central bank loaned an additional 5 billion pounds ($9 billion) for three days. The operation attracted bids for 24.1 billion pounds. The ECB said it injected 30 billion euros ($43 billion) for one day after bids totaled 90.27 billion euros. The central banks of Switzerland and Australia also provided extra funds.

Mike Burk: "The market is overbought and likely to sell off over the next few days. The sell off could be deep enough to qualify as a retest of the July lows for the DJIA. The retest could be the low for the remainder of the year.

I expect the major indices to be lower on Friday September 19 than they were on Friday September 12."

The Oil Drum: "Based on my analysis, fuel supply shortages are likely to last well into October, and are likely to get considerably worse before they get better."

“The too-big-to-fail mantra or concept or government policy is, in my opinion, off the table and we have to deal with that,” said David H. Ellison, president and chief investment officer at FBR Funds, a mutual fund company. “They are not going to save these companies.”

Analysts say many financial companies, including the insurer A.I.G., need to raise capital. But every time their stock prices fall, raising capital becomes harder. And when that happens, bondholders and credit rating companies start worrying too. Stock prices fall even further — and the whole cycle repeats again.

Yields on two-year Treasury notes fell below 2 percent for the first time since April on speculation the Federal Reserve will need to lower interest rates to bolster financial institutions battered by $514 billion of credit losses and asset writedowns from the subprime-mortgage market's collapse. Gold rose 2 percent, while the dollar dropped the most in a decade against the yen and fell versus the euro, pound and Swiss franc.

Almost 20 percent of the nation's oil refining capacity was shut after Hurricane Ike slammed into the Gulf Coast, limiting fuel deliveries and prompting analysts to predict gasoline prices may again reach $4 a gallon.

At least 13 refineries in Texas including plants operated by Exxon Mobil Corp., Valero Energy Corp. and Royal Dutch Shell Plc shut 3.64 million barrels a day of refining capacity as Ike approached Texas. Exxon and Shell said today they would begin assessing damage of Gulf facilities as soon as weather permitted. Gulf refineries and ports are the source of about 50 percent of the fuel and crude used in the eastern half of the U.S.

``If these refinery outages go three weeks or more, most of the nation could see $4 gasoline again,'' Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University in Dallas, said in an telephone interview. ``If they are back up in a week, it may be a 15- or 20-cent-a-gallon increase.''

According to Bloomberg, Lehman Brothers Holdings Inc. received bids for its asset-management unit from private- equity firms including Bain Capital LLC and Clayton Dubilier & Rice Inc., said people familiar with the situation.

The bids value the unit, which includes the Neuberger Berman fund business, private-equity funds and a brokerage firm serving wealthy individuals, at about $5 billion, said the people, who asked not to be named because the auction is private. KKR & Co. LP, which was weighing an offer, hadn't made a bid by the 5 p.m. deadline, the buyout firm told people involved in the process.

Randall Forsyth: " Deleveraging means raising cash; since most of the borrowing was in dollars, that's spurred a demand for greenbacks, evident in the currency market, where the dollar has been on a tear. Everything else, from Russian rubles to real estate to hedge fund assets -- along with the banks who make markets in them -- is for sale.

This dash for cash seems far from over."

Nouriel Roubini: "If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch first but also in sequence Goldman Sachs and Morgan Stanley and possibly even those broker dealers that are part of a larger commercial bank, I.e. JP Morgan and Citigroup). Then this run would lead to a massive systemic meltdown of the financial system. That is the reason why the Fed has convened in emergency meetings the heads of all major Wall Street firms on Friday and again today to convince them not to pull the plug on Lehman and maintain their exposure to this distressed broker dealer."

Republican vice presidential pick Sarah Palin faced accusations Sunday of handing jobs to friends while serving as Alaska state governor, as the presidential campaign grew increasingly negative.

The New York Times reported that Palin had given the 95,000-dollar-a-year directorship of the state division of agriculture to a high school classmate, Franci Havemeister, who cited her childhood love of cows as a qualification for running the agency.

Havemeister was one of at least five schoolmates Palin hired, often at salaries far exceeding their private sector wages, the paper noted in an investigative report.

"Throughout her political career, she has pursued vendettas, fired officials who crossed her and sometimes blurred the line between government and personal grievance, according to a review of public records and interviews with 60 Republican and Democratic legislators and local officials," The Times wrote.

"Since naming Gov. Palin as their vice presidential nominee, the McCain campaign has distorted, distracted and outright lied to the American people about her record in a desperate attempt to hide the fact that a McCain/Palin administration would be nothing more than a continuation of the failed Bush policies of the last eight years," the memo read.

Among other things, the memo cited the Iraq-visit dispute, as well as Palin's claims to be a fiscal conservative despite significant growth in the Alaska state budget.

Sunday, September 14, 2008

Financial Storm

9/14/08 The Financial Storm

Doug Noland: "Negative real interest rates and even unprecedented bailouts do little to address the deep structural deficiencies that have developed over many years. Sustaining inflated U.S. asset markets requires massive ongoing growth in Credit and speculative trading. The deeply maladjusted U.S. "services" Bubble economy is sustained only through ongoing Credit excess. To be sure, the heart of today's predicament lies in the reality that a heavily impaired U.S. financial sector is simply incapable of partaking in the degree of Credit excess required to sustain inflated assets prices, incomes, corporate profits, government receipts and much needed (restructuring-related) investment spending. The problem is systemic. Bailouts and other government measures have minimal impact because they are not inciting heightened Credit expansion... Again, the attention this week was on Lehman, while I believe a much more unwieldy facet of today's crisis mounts with the bursting of the historic hedge fund Bubble. Perhaps Sunday we'll read news of BofA acquiring Lehman - and perhaps the markets will rally big on such news. But such a transaction would have little if any impact on crisis dynamics that have engulfed the leveraged speculating community. The various markets - global equities, real estate, mortgages, energy and commodities, currencies, CDS and risk assets generally - have all become an absolute and unmitigated mess. Money is being lost in waves; scores of favorite trades are being unwound; redemptions are gathering pace; and the ugly side of Ponzi Finance Dynamics has taken firm control... Repeated government interventions have only exacerbated market instability and vulnerability..."Moneyness of Credit" remains an invaluable analytical concept. Despite acute vulnerability, the U.S. Credit system - hence the American economy - has resisted implosion specifically because the heart of the monetary system has retained its "Moneyness." Indeed, nationalizing Fannie and Freddie was seen as necessary to retain confidence in the core of contemporary "money" - agency obligations, "repos" and money fund assets. This highly inflated supply of "money" has become so large as to almost on its own shoulder the entire U.S. (global?) financial system and economy. "Money" has become Too Big and Consequential to Suffer a Loss."

Acording to the WSJ, Lehman's business has suffered as its stock has fallen. Hedge-fund clients of Lehman's prime brokerage business, which provides trading and lending services, have been shifting some or all of their assets to other firms, people familiar with the matter say. That's in part because some hedge-fund investors have pressured managers to reduce exposure to Lehman, these people say. They say the moves, which include clients in both U.S. and Europe, have accelerated in recent days and continued on Friday...

The Federal Reserve Bank of New York held an emergency meeting Friday night with top Wall Street executives to discuss the future of venerable firm Lehman Brothers Holdings Inc. and the parlous state of U.S. financial markets.

The meeting, which began at 6 p.m., was called by the New York Fed in an attempt to find a solution to the problems plaguing Lehman. The group, which consisted of the heads of most major financial institutions, is expected to meet throughout the weekend to see if it can agree on some way to rescue the ailing firm, according to a person familiar with the matter.

George Ure: "Capital is being destroyed and in order to stop the spin, we're likely to head down what I call "Japan Road" - which is where the Japanese in 1989 (and shortly thereafter) had to take interest rates to zero (and beyond) in order to halt the slide. Even so, they saw the Nikkei go from over 40,000 to around 10,000.

Extrapolate that out to the Dow over the next five or six months and what do you get? I mean what's a quarter of 1,4000? Dow 3,500?"

George notes from the operators’ reports, it is estimated that approximately 96.9 % of the oil production in the Gulf has been shut-in. Estimated current oil production from the Gulf of Mexico is 1.3 million barrels of oil per day. It is also estimated that approximately 93.3 % of the natural gas production in the Gulf has been shut-in. Estimated current natural gas production from the Gulf of Mexico is 7.4 billion cubic feet of gas per day.

Bear Stearns down the drain. The market is now punishing Lehman, Washington Mutual, AIG, Merrill Lynch etc. Who is next? There will be many nexts. Is the U.S. dollar too big to fail?

The nation's leading oil producers, including Exxon Mobil and Shell, said it was too early to assess the damage to its refineries and other operations, but power outages were proving to be a vexing problem for refiners all across the region. For instance, Valero Energy, the nation's largest refiner, reported that power was out at its Houston, Texas City and Port Arthur refineries, which it had closed in anticipation of the storm. The company said last night that assessment crews found no significant structural damage to the facilities.

The storm also led to the shutdown of several pipelines, including Colonial Pipeline, which transports fuel from the Gulf Coast through cities along the Eastern Seaboard, including some in central Virginia and Maryland. Steve Baker, a spokesman for Colonial, said that the company's Houston area stations had lost power and that two pipelines, one carrying gas and one carrying distillates such as diesel fuel and home heating oil, were shut down.

GM to increase support to Delphi to about $10.6 bln.

“Every day not talking about the economy, the war and how to fix a broken system is a victory for McCain,” said John Weaver, a former top strategist to the nominee who left the campaign last year. “They’re going to ride it as long as they can and as long as the mainstream media puts up every ridiculous charge.”

The negative and often exaggerated or misleading claims being made about Obama and Delaware Sen. Joe Biden, especially those playing on Palin’s gender, are just too irresistible for the process-consumed online and cable news media that now drives the campaign conversation, Weaver said.

“Unless there is a hurricane, they’re going to cover it,” he observed.

Adds Terry Nelson, McCain’s former campaign manager: “It works in part because Obama responds to it.”

Walgreen Co. made an offer late Friday to buy Longs Drug Stores Corp. for $2.8 billion, hoping to unseat a rival offer from CVS Caremark Corp. that Longs had already accepted.

Deerfield, Ill.-based Walgreen said it would pay $75 a share in cash to buy Walnut Creek, Calif.-based Longs, besting CVS's price of $71.50 per share, also in cash, which was equivalent to about $2.7 billion. Either deal would also include the assumption of about $200 million in debt.

Longs shares rose 4 percent to $74.50 in after-hours trading.

Alaska Air to cut up to 1,000 jobs.

Bloomberg (Matthew Brown and Abigail Moses): "The cost of protecting Dubai government bonds from default doubled in the past three months on concern the emirate will be unable to maintain the borrowing that's driven its real-estate boom. Credit-default swaps protecting Dubai debt for five years traded at 220 bps, CMA Datavision prices show, up from 110 at the beginning of June..."

Crude futures closed at $101.18 per barrel in New York Friday, up 31 cents for the session.

Gold for December delivery rose $19, or 2.5%, to $764.50 an ounce on the Comex division of the New York Mercantile Exchange. October natural gas climbed 2.5% to $7.429 per million British thermal units on Globex Friday.

Peter Schiff: "By transforming $5.5 trillion of suspect mortgage-backed securities into seemingly bullet-proof Treasury bonds, the move has sparked a relief rally in the dollar as foreign investors no longer have to worry about defaults or markdowns. In fact, to holders of Fannie and Freddie debt, it no longer matters what happens to the housing market. Home prices can drop another 50%, every single homeowner can default on their mortgage, and bond holders will not lose one dime. This has emboldened foreign investors, and temporarily increased demand for both dollars and Freddie and Fannie debt.

Had the government done the right thing and not guaranteed Freddie and Fannie debt, I believe we would now be experiencing an outright financial crisis. The dollar would be falling sharply along with real estate prices, gold would be soaring and the recession would be deepening. However, by nationalizing Freddie and Fannie, the government has merely delayed the crisis. The borrowed time will cost us dearly, as the day of reckoning will now likely involve much steeper losses for our currency."

UBS will have to write down the value of certain investments by another $5 billion in the second half but was unlikely to raise more capital, a Swiss newspaper said, according to Reuters.