Friday, March 28, 2008
Fannie, Freddie May Raise $20 Billion, Regulator Says (Update1): “Fannie Mae and Freddie Mac, the U.S. government-chartered mortgage companies, may raise as much as $20 billion in capital as part of an agreement that allows them to buy more debt securities, their regulator said.”
The market might view this crap as Bullish… but reality will eventually sink in. COMMON shareholders WILL GET WIPED OUT as there will be MANY such capital raises in the coming months and years by FNM and FRE. COMMON shareholders will get owned. FNM and FRE investors can then go hang out with Thornburg Mortgage (TMA) bagholders at the bar and drink their rage and sorrow away together. The final deal, and this could be years down the road, for FNM and FRE will be similar to the current TMA deal. COMMON shareholders will get 10% of the company at most and instead of preferred shares and convertibles, the GOVERNMENT will step in directly. I suppose that if anybody can get their money out of these names, it would be the BONDHOLERS as the government would not let the debt go into default (a la Bear Stearns).
This is ALREADY their second visit to the capital markets:
“Fannie Mae, based in Washington, raised $7 billion in December by selling preferred stock. McLean, Virginia-based Freddie Mac sold $6 billion a month earlier.”
Right now they can’t even be sure that they COULD raise more capital. That’s why they don’t even know HOW they’ll go about it yet:
“The companies didn't say last week how or when they would raise the additional capital.”
How funny is it that bagholders (that would be YOU poor bastard taxpayers) are currently upset about the taxpayer backed Bear Stearns (BSC) bailout? Cuz, this one is going to be OH SO MUCH BIGGER (eventually).
Bear Stearns: Bagholders Start to Agitate
Thornburg Mortgage: Pyrrhic Rescue
Sarcastic Rant on Fannie and Freddie
Bear Stearns is Dead, Lehman is Probably Next
Posted by Ben Bittrolff at 9:07 AM
Thursday, March 27, 2008
They caught these charts from the Wall Street Journal (WSJ) over at The Big Picture. The full WJS article: Stocks Tarnished by 'Lost Decade'. I first posted about “The Lost Decade” in my September 24th, 2007 pos The 11th Hour. I’ve re-posted the updated chart today.
“The Fed had a simple choice: INFLATE or DO NOTHING. Had the Fed done nothing the housing market and therefore the economy as a whole would have CORRECTED by falling into a MANAGEABLE and DESERVED recession. Instead the Fed chose to cut rates and add liquidity. In other words: INFLATE the entire system. The ultimate results will still be a recession. Only now the recession may have been postponed, possibly for years, and when it does hit it will be neither MANAGEABLE nor MILD.” –TheFinancialNinja, The 11th Hour, 09/24/07
What I overlooked at the time, is the significant DELETRIOUS effect on money supply that the wholesale DESTRUCTION of credit will have. Although the Fed will try to inflate, I do not think they will be able to. I’m firmly in the DEFLATION CAMP.
Notice how RATE OF CHANGE in the monetary base is decreasing rapidly? (Source: Federal Reserve Bank of St. Louis) The monetary base is set to go into CONTRACTION, much like after the Tech Bubble burst in 2000… only much much worse and for much much longer.
$ Hear This: $
$ Money is debt. $
$ No debt, no money. $
$ Less debt, less money. $
$ Less money, less inflation. $
$ Even less money, is deflation. $
$ Because $
$ "Inflation is always and everywhere $
$ A monetary phenomenon." $
(Money Tree from Sudden Debt)
The Lost Decade refers to:
-The post-war period in Britain from 1945-1955.
-The 1980s in Latin America, as the area experienced a significant economic depression due to the two oil crises of 1973 and 1979. In addition, fluctuating interest rates on lending agreements went up following these oil price shocks. The supply of U.S. dollars in the international financial markets, broadly available after World War II, was channeled into OPEC countries when the oil prices went up in the 1970s. The reduced supply of dollars in the international debt markets has pushed interest rates up on debt agreements. This chain of events has contributed to a major increase in the international debt in Latin American countries in the 1970s and 1980s.
-The 1990s in Japan, following the collapse of the Japanese asset price bubble.
Soon, America will join that list.
Really Scar Fed Charts, Why Bernanke Will Furiously Cut
Commodities Unravel, Confidence Collapses
Posted by Ben Bittrolff at 10:37 AM
Protesters Enter Bear Stearns Lobby, Demand Meeting With Dimon: “Bear Stearns Cos.' New York headquarters was entered by about 200 people protesting the U.S. government's role in the securities firm's sale to JPMorgan Chase & Co.
Demonstrators from the Neighborhood Assistance Corp. of America streamed into the midtown Manhattan building's lobby through a rear entrance after security guards tried to keep them from using revolving doors. The group demanded to meet with JPMorgan Chief Executive Officer Jamie Dimon, chanting “We want Dimon.” They left voluntarily after about a half-hour.
“It's a taxpayer bailout,” Bruce Marks, the Boston-based nonprofit group's CEO, said of the Bear Stearns sale in an interview today. “You've got to take the people who created the mortgage crisis'' and have them fix it.”
My favorite quote comes from a Reuteres article. When a protester argued that the average American homeowner should have been bailed out, not the reckless fat cats at Bear Stearns, a Bear Stearns employee SCREAMED back at the protester:
“Homeowners, that's more than $1 trillion (in mortgage debt), you're crazy.”
Smelling some political points or a MASSIVE POLITICAL LANDMINE, especially in an election year, the Senate Banking and Finance committees have decided they better take a closer look.
Bear Stearns Sale to JPMorgan to Be Probed by Senate (Update4): “The Senate Banking and Finance committees are probing the government-backed sale of Bear Stearns Cos. to JPMorgan Chase & Co., voicing concerns about the risk posed to taxpayers from federal involvement in the deal.”
This is good ASS-COVERING behavior. Politicians can safely say, “We are looking into it.” Then IF the agitations become true RAGE and things get politically dicey, they can say, “We’re on it and we will take corrective measures.” But if the bagholders loose interest and loose focus or simply have to turn their attentions to more pressing matters, such as finding a new job, then the committee will drag on just long enough to fade from memory.
“It's some pushback from Congress to send a warning shot to the Fed to not use taxpayer resources to bail out Wall Street. If there is a significant negative response from Congress, it would deter the Fed from doing this in the future.” -Andy Laperriere, managing director at International Strategy & Investment Group in Washington.
“The question is how much of a risk has the government taken in extending this loan, and that's fully dependent on the value of the collateral” -Gilbert Schwartz, a partner at the law firm of Schwartz & Ballen in Washington and a former Fed lawyer.
At 2:45 PM there was a massive price spike in Bear Stearns (BSC). The price did a moonshot, 20% in 15 minutes on a rumor that a new higher bid was in the works. The deal is done at $10. Bears Stearns is worth exactly ZERO. Take the $10.
A smaller version of that same spike occurred in the S&P as well. Rumors about Bears Stearns somehow translates into a MASSIVE change in the value of exactly 500 of the largest corporate titans. Traders shoot first and hardly ask any questions. Not even later.
Fun AND profitable should you be nimble enough… but downright crazy if you take a step back and look at the bigger picture.
Also, somebody please teach me how to start these UBER rumors. They look like EASY MONEY.
Thornburg Mortgage: Pyrrhic Rescue
Sarcastic Rant on Fannie and Freddie
Bear Stearns is Dead, Lehman is Probably Next
Posted by Ben Bittrolff at 8:26 AM
Wednesday, March 26, 2008
Thornburg Offers $1.35 Billion of Debt Paying 18% (Update7): “Thornburg Mortgage Inc., the “jumbo” mortgage lender trying to stave off bankruptcy, rose by more than a third after disclosing plans to raise $1.35 billion.”
Well, a RESCUE plan would indeed be good for a company that is effectively bankrupt and out of business. So a closer look is warranted.
“The rescue plan gives new investors debt that pays 18 percent and the chance to own a 90 percent stake, according to terms of the private placement outlined by Santa Fe, New Mexico- based Thornburg in a statement today.”
The common shareholder is of course wiped out in this rescue. CURRENT shareholders will end up with less than 10% of the company.
New investors are getting a 90% stake in the company AND an 18% yield on their money. This is where things get interesting.
“The sale includes senior subordinated secured notes due to mature in 2015. Terms call for an initial interest rate of 18 percent, falling to 12 percent later if certain conditions are met. The investors also get warrants to buy common stock for a penny a share.”
First of all, the ENTIRE Thornburg Mortgage Inc business model is this: Borrow CHEAPLY, lend DEARLY. They borrow money and then turn around and lend YOU that same money for your JUMBO mortgage. Obviously for this to work they have to be able to borrow at a LOWER rate than what they charge YOU. The SPREAD between the rate they borrow and lend at needs to be large enough for Thornburg to pay its employees and office rent. Naturally, a profit margin is preferred as well.
Borrowing at 18% and lending out sub 5% (see Rates chart) isn’t exactly sustainable. Granted, this money is not intended to be used for new mortgages. The purpose of this money is to meet margin calls on their EXISTING mortgage portfolio.
The company has $34.19 BILLION in debt going into this RESCUE. The company also only generated $309.4 in REVENUE. 18% on $1.35 billion is $243 MILLION in annual interest costs. So this rescue alone will consume 78% of the companies REVENUE. Factor in the servicing costs of the original $34.19 BILLION and the cost of both employees and office rent and you get ONE DEAD COMPANY.
I would call this a PYRRHIC RESCUE. “Victory with devastating cost to the victor.”
Taxpayers May Be Liable for Billions From Bear, Mortgage Rescue: “Even as the Bush administration insists it won't risk public funds in a bailout, American taxpayers may already be liable for billions of dollars stemming from Federal Reserve and Treasury efforts to quell a financial crisis.
History suggests the Fed may not recover some of the almost $30 billion investment in illiquid mortgage securities it received from Bear Stearns Cos., said Joe Mason, a Drexel University professor who has written on banking crises. Treasury's push to have Fannie Mae and Freddie Mac buy more mortgage bonds reduces the capital the government-chartered companies hold in reserve at a time when foreclosures and defaults are surging.”
Hahahaha… TAXPAYERS ARE ALWAYS THE ULTIMATE BAGHOLDERS. Taxpayers are also the BEST bagholders because they are just ignorant enough to muster nothing more than some anemic complaints and protestations AFTER the fact.
Just wait until taxpayers get the bill for Fannie Mae and Freddie Mac, because that one will be in the TRILLIONS.
The S&P couldn’t get past a key level around 1360 after two attempts over two days. Up volume quickly disappeared as the short covering dried up. With the BOTTOM CALLING at a fevered pitch, I rebuilt my short positions at these prices over the last two days.
Money-Market Rates Rise as Central Bank Cash Injections Fail: “The cost of borrowing in dollars and euros rose as central bank efforts to break the squeeze in short-term lending misfired.
The three-month London interbank offered rate, or Libor, for dollars increased 1 basis point to 2.67 percent, the highest level since March 14, the British Bankers' Association said today. The comparable euro rate climbed 2 basis points to 4.72 percent, the highest since Dec. 27.”
Here comes the financial stress… again.
“The difference between the rate banks charge for three- month dollar loans relative to the overnight indexed swap rate showed a decline in the availability of cash today. The so- called Libor-OIS spread widened 4 basis points to 67 basis points. It averaged 8 basis points in the first half of 2007.”
Time for risky assets to curl over and head once again for the edge of the abyss.
Sarcastic Rant on Fannie and Freddie
Posted by Ben Bittrolff at 8:35 AM
Tuesday, March 25, 2008
Yet another leveraged buyout bites the dust.
Clear Channel Drops as Journal Says Buyout Nearing Collapse: "Clear Channel Communications Inc. dropped in extended trading after the Wall Street Journal reported its $19.5 billion private-equity buyout is close to falling apart.
The buyout group, led by Thomas H. Lee Partners LP and Bain Capital Partners LLC, hasn't been able reach an agreement on terms with the banks financing the transaction, the newspaper said today, citing people familiar with the matter. The lenders include Citigroup Inc., Morgan Stanley, Deutsche Bank AG, Credit Suisse Group, Royal Bank of Scotland Group and Wachovia Corp.
Clear Channel, the largest U.S. radio broadcaster, dropped 14 percent to $28 after closing at $32.56 in New York Stock Exchange composite trading. Since the buyout was announced in November 2006, the stock has traded below the $39.20-a-share offer price because of investor concerns that the deal won't be completed. Credit-market turmoil has made it harder for buyout firms to obtain financing.
Negotiations are stuck on details regarding the banks' credit agreement, the Wall Street Journal reported, citing the people. While lenders typically agree to finance the transaction when it is announced, the final terms are worked out just before the deal closes, the Journal said.
Clear Channel isn't commenting, spokeswoman Michele Clarke said. Matt Benson, a spokesman for Thomas H. Lee Partners, and Alex Stanton, a spokesman for Bain, didn't immediately return calls seeking comment.
Clear Channel's 5.5 percent notes due in September 2014 rose 2.75 cents, or 4.4 percent, to 65 cents on the dollar to yield 13.9 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority."
No wonder the deal couldn't get done. Bondholders weren't willing to bid more the 65 cents the dollar for the fully leveraged entity. That is definately NOT a sign of confidence in ability to pay.
This is obviously not the last leveraged deal that is going to IMPLODE.
Nor is it the first.
LBO's Fail, While the Bounce Continues
Posted by Ben Bittrolff at 5:59 PM
Just a quick update on Fannie Mae and Freddie Mac…
They were both DOWN yesterday in an UP market, which has piqued my interest.
Fannie Mae delinquencies jump; portfolio up 1 pct: “Fannie Mae (FNM.N: Quote, Profile, Research), the largest provider of funding for U.S. home mortgages, on Monday said its portfolio edged higher in February while delinquencies jumped in the prior month to more than a decade high.
The government-sponsored enterprise said its mortgage investments increased $594 million to $721.6 billion in February, representing a 1 percent annualized growth rate.
Delinquencies on Fannie Mae's single-family home financing business rose in January to 1.06 percent, the highest since at least 1997. The rate increased from 0.98 percent in December.”
Sure enough, FNM’s portfolio continues to deteriorate RAPIDLY, while they continue to EXPAND it. The delinquency rate of 1.06% doesn’t sound like much. That’s exactly why it was reported that way. More importantly is the RATE OF CHANGE of delinquencies. That is a truly freakish number. Delinquencies increased 8.16% MONTH OVER MONTH.
A delinquency rate of 0.98 resulted in $3.6 billion in losses in the fourth quarter. What do you suppose a delinquency rate of 1.06% will result in? Especially if those continue to increase at anywhere near 8%?
FNM would have to IMPLODE.
“Fannie Mae's business of guaranteeing payments on mortgage-backed securities it issues grew at a torrid pace in February. The company said it issued $69.4 billion in the securities in the month, marking a 21.4 percent annualized growth rate.”
In the meantime, taking on more risk is probably not the cleverest thing to do.
Federal Home Loan Banks May Buy $150 Billion of Bonds (Update3): “Federal Home Loan Banks were freed to increase their purchase of mortgage-backed bonds by about $150 billion as part of a government effort to pump money back into a market that slumped as the housing crisis deepened.
Directors of the Federal Housing Finance Board, the banks' regulator, approved the temporary increase today, according to an e-mailed statement. The purchases will be restricted to bonds guaranteed by Fannie Mae and Freddie Mac, the board said.
The approval for Federal Home Loan Banks to increase their purchases comes a week after Fannie Mae and Freddie Mac, the two government-chartered mortgage-finance companies, were cleared to buy at least $200 billion of mortgage securities.”
In all their wisdom, the powers that be have mandated that THIS is the time to MASSIVELY increase their exposure to mortgages. How massively exactly?
“The government increased the limit on the FHLBs' investments to six times capital for two years, up from three times, the statement said. The board said that would increase the banks' spending by “well in excess” of $100 billion. Based on the banks' capital of $54 billion, the change may increase the FHLB's purchasing power by about $150 billion.”
Well, how about SIX TIMES CAPITAL? (What could possibly go wrong?) What happens two years from now when the FHLB’s are forced to start dumping? I’m willing to bet that that two years gets extended indefinitely instead…
Go taxpayers! Bagholders of last resort.
Junk Bond Losses Top $35 Billion as JPMorgan Says More to Come: “High-yield, high-risk bonds are off to their worst start ever, and the biggest investors say there's no recovery in sight.
Junk bonds have fallen an average 3.9 percent this year, losing about $35 billion, according to data from Merrill Lynch & Co. indexes. Some funds managed by John Hancock Advisers LLC, OppenheimerFunds Inc. and Fidelity Investments are down more than 7 percent, showing that even the largest investors were caught off guard by the collapse.
While the Federal Reserve has slashed benchmark interest rates by 3 percentage points since September, it has been unable to get investors to increase their purchases of the riskiest assets. The declines are choking off financing for speculative- grade companies, boosting defaults. The debt is likely to “struggle” for months as the economy enters a recession, according to JPMorgan Securities Inc., the top high-yield research firm in Institutional Investor magazine's annual poll.”
Sarcasm ON. >check<
Ok, so you’re saying that HIGH YIELD bonds, or ‘JUNK’ bonds are risky and that the debt is likely to ‘STRUGGLE’ as the economy enters a RECESSION? Unbelievable. I thought I could get HIGH YIELDS for free. You know, without the risk. I thought I was the SMARTEST HEDGIE ALIVE and that I could buy these things on massive leverage and laugh at all the dummies in lower yielding, safer investments.
“The slump is hurting more companies than ever before. Some 51 percent of U.S. corporate borrowers are rated below investment grade, up from 28 percent in 1992, according to S&P.”
Oh sweet momma! Not only is the economy going into a recession, while simultaneously in a credit crunch, but corporate borrowers have never been WEAKER as a whole? 51% of borrowers are BELOW investment grade as the single largest credit bubble in history bursts. Just awesome!
Don’t worry though; last week was the BOTTOM in equities. Equities and other risky assets are clearly set for a MOONSHOT to new record highs.
Sarcasm OFF >check<
NOTE: As I post this Freddie Mac just reported the same DISGUSTING results on their portoflio this morning. [EDIT: UPDATE 1-Freddie Mac portfolio shrank 12.4 pct in February]
Posted by Ben Bittrolff at 8:25 AM
Monday, March 24, 2008
Bear Stearns Rises on Report of Higher JPMorgan Bid (Update3): “Bear Stearns Cos. surged more than 50 percent in early trading in New York after the New York Times reported that JPMorgan Chase & Co. may quintuple its takeover offer for Bear Stearns Cos. to more than $1 billion in an effort to win support from employees and shareholders opposed to the deal.”
I can see this making sense. JP doesn’t want to take on 7000 pissed off employees that have been bankrupted. (1/3 of Bear Stearns was owned by its employees.) Raising the prices may sooth some frayed nerves and prevent a long drawn out legal battle.
Clearly Joesph Lewis has been furiously manning the phones in a last ditch effort to make some of his billion back.
“Lewis and James “Jimmy” Cayne, Bear Stearns's 74-year-old former chief executive officer, are trying to recruit investors to counter JPMorgan's offer, the New York Post reported last week, citing people familiar with the situation.”
Since nobody else can match the Fed backstop of $30 billion and since JP gets the prized most prized procession either way (the Bear Stearns headquarter building), I don’t actually take these attempts seriously.
CIT Is in Talks With Overseas Banks on Refinancing, WSJ Says: “CIT Group Inc. is in talks with an overseas bank to raise funds for its lending business, the Wall Street Journal reported, citing people familiar with the situation.
The New York-based company drew on its entire $7.3 billion of emergency credit lines last week after ratings downgrades left it unable to finance itself with commercial paper. The company may also raise $5 billion to $7 billion through asset sales.
CIT will probably have to sell itself to another lender to survive, as its business model, which relies on its ability to raise short-term debt backed by its loans, has been made obsolete by the drying-up of credit markets, the Journal added, citing unidentified people.”
I posted on CIT on 03/22/08 in Commodities Unravel, Confidence Collapses. They are not likely to survive on their own.
Goldman, Lehman Rating Outlook Cut to Negative by S&P (Update3): “Goldman Sachs Group Inc., the biggest U.S. securities firm, and smaller rival Lehman Brothers Holdings Inc. had their credit-rating outlook cut to negative by Standard & Poor's, which said Wall Street banks' profits may fall as much as 30 percent in the coming year.”
This isn’t getting nearly as much play as it should in the media. People will forget probably forget about it until actual day that Goldman or Lehman get downgraded comes… and the market will freak out and act ‘surprised’.
I would let Lehman Brothers and Goldman Sachs bounce some more and then look for a nice, low risk short entry. To reduce the carnage of a sudden, giant up gap up in the morning on some ridiculous news, puts are an option.
Lehman Brothers Downgraded by Oppenheimer's Whitney (Update2): “Lehman Brothers Holdings Inc. was downgraded to “perform” by Oppenheimer & Co.'s Meredith Whitney, the analyst who correctly predicted Citigroup Inc. would cut its dividend this year.”
Considering Lehman almost imploded a week ago, these ratings make me laugh. Go analysts!
Fed May Buy Mortgages Next, Treasury Investors Bet (Update2): “Forget lower interest rates. For the Federal Reserve to keep the financial markets from imploding it needs to buy troubled mortgage bonds from banks and securities firms, say the world's biggest Treasury investors.
Even after cutting rates by 3 percentage points since September, expanding the range of securities it accepts as collateral for loans and giving dealers access to its discount window, the Fed has been unable to promote confidence. The difference between what the government and banks pay for three- month loans doubled in the past month to 1.92 percentage points.
The only tool left may be for the Fed to help facilitate a Resolution Trust Corp.-type agency that would buy bonds backed by home loans, said Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co. While purchasing some of the $6 trillion mortgage securities outstanding would take problem debt off the balance sheets of banks and alleviate the cause of the credit crunch, it would put taxpayers at risk.”
These rumors have be circulating for weeks now but have started to become more widely accepted. This has helped put a giant short covering bid into Fannie Mae and Freddie Mac. Both have rallied almost 100% off their recent lows.
Regulators have approved $200 billion in ADDITIONAL purchasing power. How exactly? Well simple of course. Fannie and Freddie have had their regulatory capital surplus requirements REDUCED from 30% to 20%. In other words: THEIR ALLOWABLE LEVERAGE HAS BEEN INCREASED. Considering that both companies are really massively leveraged already, I fail to see how this is Bullish for anything. In actual fact, this should SCARE THE SHIT out of rational people. Basically mortgage risk, which is already highly concentrated in these two players, is being further concentrated in these two players.
Posted by Ben Bittrolff at 8:56 AM