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HomeNo ‘Get Out of Jail Free’ Card for CIT
Posted by Larry Doyle on July 10th, 2009 11:37 AM |
Green shoots? Stop the madness.
Despite all the disguises and shams perpetrated on the American taxpayers to this point, the simple fact is our economy is awash in excessive debt. The inability to refinance debt will be with us for a while. No company is more reflective of this dynamic than CIT.
Who and what is CIT? You should take the time to quickly study this company because it may very well be the linchpin that drops and causes the next leg down in our economy. Are they too big to fail?
From the CIT corporate web site:
CIT (NYSE: CIT) is a bank holding company with more than $60 billion in finance and leasing assets. For more than 100 years, CIT has provided lending, advisory, and leasing services to small and middle market businesses guided by unparalleled industry expertise and focus. Headquartered in New York City, CIT is a Fortune 500 company and member of the S&P 500.
CIT operates CIT Bank, a full service Utah state bank, which is regulated by the Utah Department of Financial Institutions and the FDIC.
Deep industry expertise
Operating in more than 50 countries, we have deep expertise across 30 industries. Our areas of expertise are:
Corporate Finance is a top 10 lead arranger for small and middle market level loans (less than $150 million) with more than 3,000 customers. Businesses include Commercial & Industrial, Communications, Media & Entertainment, Energy, Healthcare, Investment Banking Services, and Small Business Lending.
Trade Finance is a leading factoring company in the U.S. with customers in the U.S., Canada, Europe and Asia. CIT factoring services provides funding to thousands of small manufacturers which, in turn, sell to small and large retailers that also rely upon CIT for the flow of goods into their stores.
Transportation Finance is the third largest rail car leasing firm in the U.S. with more than 116,000 railcars and the third largest in aircraft financing worldwide with over 100 commercial airline customers and more than 300 business air customers.
Vendor Finance is the #1 independent leasing company in the U.S. serving more than 500,000 commercial end customers ranging from small businesses to Fortune 500 companies. It maintains customer relationships with a variety of marquee technology and office equipment companies providing trusted business equipment leasing.
Commitment to small business and the middle market for more than 100 years
Since 1908, CIT has driven success by delivering three types of capital to clients. We believe that the combination of relationship capital + intellectual capital + financial capital can yield infinite possibilities for our customers.
Relationship Capital: Our employees and the long-term partnerships they have created with thousands of clients are our biggest asset.
Intellectual Capital: We understand that it takes more than money to help our clients grow and prosper. Our knowledge and ideas, combined with relationship and financial capital ensures client success.
Financial Capital: The funding we provide is critical to our clients’ success.
CIT does have CIT Bank in Utah. Can CIT utilize that vehicle to get government funding or government backstops on debt financings much like Hartford Financial, Lincoln Financial, GMAC, and GE Capital? As of now, CIT has not received a “get out of jail free” card. As Bloomberg reports, FDIC Said to Withhold CIT Debt Guarantees Due to Risk.
If CIT were to fail, there would be a significant ripple effect across our economy. There is no sugarcoating that reality. The fact of the matter is, these are not new developments for CIT. Their predicament is simply a function of the timing of the maturities of their debt. They have plenty of company.
Where do you draw the line?
LD
Does Wall Street Run ‘One Way’?
Posted by Larry Doyle on July 10th, 2009 8:47 AM |
Does the American public appreciate the essence of Wall Street? Is it as cutthroat and greedy as many would attest?
As with anything, I do not think it is fair or productive to generalize. There are plenty of world class people on Wall Street and the world is a better place for them. There are also plenty of people for whom I have no personal or professional regard. That’s life. Who couldn’t say the same about every industry.
While individual firms and certain executives would want the American public to focus on single situations, for our purposes currently let’s focus on the financial industry as a whole.
In so doing, it becomes very apparent that Wall Street is now showing it runs “one way.” How so?
The Wall Street Journal highlights how the financial industry is haggling over the valuation of warrants purchased by the U.S. Treasury as part of the TARP (Troubled Asset Recovery Program). The WSJ reports, J.P. Morgan to Send Warrants to Market.
I believe the WSJ ‘s choice of title for this article is amazingly weak. The simple fact is that Wall Street firms are complaining loud and clear about the price they may have to pay to repurchase warrants currently owned by the U.S. Treasury (that’s you and me, folks).
The WSJ writes:
Several Wall Street firms seeking to buy back warrants held by the government as part of the $700 billion financial bailout are complaining that the Treasury Department is demanding too high a price, according to people familiar with the matter.
The Treasury has rejected the vast majority of valuation proposals from banks, saying the firms are undervaluing what the warrants are worth, these people said. That has prompted complaints from some top executives. J.P. Morgan Chase and Co. Chief Executive James Dimon raised the issue directly with Treasury Secretary Timothy Geithner, disagreeing with some of the valuation methods that the government was using to value the warrants.
The inability to agree on a price has already prompted J.P. Morgan to take the next step in a complex process to remove the warrants from the hands of the government. The bank has waived its right to buy the warrants and will allow the Treasury to auction them in the public market, which bank executives say will result in an actual market price.
How gracious of Mr. Dimon! Who would be bidding on these warrants? Other Wall Street banks. Do you think there is a chance for more than a little bit of collusion in the bidding process to keep the warrant valuations excessively low? Of course. Who loses? The American taxpayer . . . again. (more…)
About That Stimulus . . .
FROM the ARCHIVES: “An $800 Billion Mistake”
Posted by Larry Doyle on July 9th, 2009 3:59 PM |
Is our economy so weak that we will need another Stimulus Package? In my opinion, the American public has become so numbed by the depth and breadth of the government bailouts and fiscal follies as to not fully appreciate their overall magnitude.
Let us not forget that in current dollars the initial Stimulus Package passed under the Obama administration was only exceeded by Uncle Sam’s funding of World War II. The development of the interstate highway system under the Eisenhower administration was of comparable size to this initial Stimulus. For those who care to compare and contrast the size and scope of federal programs over the years, I submit from the January 6, 2009 edition of the Wall Street Journal “Feel Like a Trillion Bucks”.
While politicians and bankers receiving federal bailouts throw “OUR” money around liberally, let us hold them to account. On that note, let’s revisit commentary from noted Harvard economist Martin Feldstein just prior to the passage of the initial Stimulus.
I resubmit “An $800 Billion Mistake.”
LD
Pimco Punts on the PPIP
Posted by Larry Doyle on July 9th, 2009 2:27 PM |
Did Bill Gross just flip off Uncle Sam? It would appear that he did. While the U.S. Treasury is touting the official launch of the Public Private Investment Program (PPIP) as a noteworthy event, the most significant aspect is the absence of Mr. Gross and Pimco as one of the managers. As Bloomberg highlights, U.S. Treasury Opens Distressed-Debt Program Without Pimco:
The U.S. plan to help buy as much as $40 billion in assets from banks got started almost four months after it was proposed and without Pacific Investment Management Co., the world’s biggest bond manager and an early supporter.
The Treasury Department picked nine money managers yesterday for the Public-Private Investment Program, or PPIP, including BlackRock Inc. and Invesco Ltd. Pimco, which in March announced plans to apply, said it withdrew its application in June because of “uncertainties” about the initiative’s design.
Uncertainties? How about if we return to Mr. Gross’ May 2009 Investment Outlook, in which he cautioned us all about business dealings with Uncle Sam:
If the government indeed becomes your investment partner, you should keep the big Uncle in clear sight and without back turned.
Over and above Pimco’s absence, the other notable development within the PPIP is the fact that Uncle Sam plans on injecting 75% of the initial equity capital while the private managers inject 25%. Given that equity split, why wouldn’t the taxpayer receive 75% of the returns? In my opinion, Treasury is injecting more capital simply because a $20 billion or even $30 billion launch would render this initiative as nothing more than PPIP: A Virtual ‘Odd Lot’, as I had written the other day.
. . . ‘without back turned’ . . . ‘odd lot’ . . . two strikes before the game has even begun.
Mr. Gross’ absence speaks volumes!!
LD
Banks Build Better Mousetrap
Posted by Larry Doyle on July 9th, 2009 7:54 AM |
Is there truly any reason to trust financial institutions these days?
Developments within the credit card space have exposed the true colors of these institutions . . . not that there was ever any doubt. Recall how consumer outrage at rapidly rising interest rates on credit cards pressured Washington to rein in the usurious business practices of the financial industry.
New legislation was badly needed as banks clearly utilized abusive business practices. The Wall Street Journal highlighted these developments in writing on May 21st, Credit-Card Fees Curbed:
“Credit cards are a tremendously valuable and useful tool for consumers, providing them with relief during critical moments,” said Senate Banking Committee Chairman Christopher Dodd. “This is a very important industry….We just want it to work better.”
The legislation marked a major defeat for the credit-card industry, as lawmakers complained that consumers are being hit with tricks and traps on their cards.
Well, while the legislators were in the front room having the photo ops, the bankers were in the back room building a new and better mousetrap, at least from their perspective.
The Los Angeles Times sheds light on how Credit Card Firms Try End Run Around New Federal Rules:
Banks are quietly changing the terms of millions of credit card accounts as they brace for a tough new law that will limit rate hikes.
The law would restrict interest rate increases unless a credit card has a variable rate. So at least two major lenders are switching their cards with fixed rates to — you guessed it — variable rates.
“It’s completely unfair,” said Linda Sherry, a spokeswoman for Consumer Action. “It’s an end run around the intent of the new law.”
That law is the Credit Card Accountability, Responsibility and Disclosure Act, which President Obama affixed with his signature in May. Its various provisions will be phased in between next month and February.
Who are these two major lenders? Bank of America and JP Morgan Chase. Given the size of their operations, watch every other credit card issuer set the same trap. (more…)
Risk Aversion Returns
Posted by Larry Doyle on July 8th, 2009 2:43 PM |
Risk aversion returns to the markets. Was the weakness in last week’s employment report so unexpected as to have investors running for the exits? Not in my opinion. I believe the equity markets got overdone to the upside and never truly belonged as high as they had gotten. The risk aversion is playing out in most, but not all, sectors of the market. Let’s review . . .
1. Equities: down .5-1% on the day and down 4% on the month. Concerns about 2nd quarter earnings along with prospects for future economic growth are weighing on stocks. See my post from earlier today about revised IMF projections for GDP.
2. U.S. Treasuries: a real flight to safety bid has reemerged in this sector. The $19 billion 10yr auction today was extremely well bid. The note was awarded at 3.365%, while it had been trading at 3.4% just prior to the bidding. The bid-to-cover ratio of 3.28 is extremely high.
On the month, the 10yr Treasury rate is lower by .20 (20 basis points) as is the 2yr note, as well.
3. Commodities: have largely tracked the equity markets lower with certain commodities, such as oil, declining even more. Oil on the month is down approximately 12%. There is increasing noise about further regulation within the oil markets, as the Wall Street Journal reports, Oil Speculators Under Fire.
4. Currencies: the greenback is sliding sharply versus the Japanese yen (currently 92.50) versus a closing level at the end of June at 96.30. The dollar is slightly stronger versus the Euro, but within levels seen over the last few months.
5. Bonds: while virtually every other sector of the market is flashing warning signals on the horizon, the credit sensitive sectors of the bond market seem remarkably calm. I would certainly not look to add exposure in the corporate bond or high yield sectors, and if I had exposure there I would lighten up. High yield bonds on the year are up approximately 25% and despite the selloff in equities from the early June highs, this sector has given back very little. Morgan Stanley concurs as Bloomberg reports, Junk Bonds Are ‘Dangerous’ After Rally, Peters Says:
The rally in junk bonds of the most debt-laden companies makes the market “incredibly dangerous,” said Greg Peters, head of credit strategy at Morgan Stanley.
“I just don’t see the proper risk reward here,” said Peters, who is based in New York. “The bet that you’re making in high yield right now is that the consensus forecast for defaults is actually going to come in lower than anticipated.”
Be careful out there!!
LD
GDP Projections from IMF, CBO, OMB
Posted by Larry Doyle on July 8th, 2009 12:05 PM |
For those not familiar with the acronyms of the organizations referenced in the title of this post:
IMF: International Monetary Fund
CBO: Congressional Budget Office
OMB: Office of Management and Budget, which operates within the White House
This morning the IMF released their updated Global Economic Prospects.
I will share with you the projected growth rates for the United States against those provided by the CBO and OMB. I will then provide some comparative analysis.
United States
IMF -2.6% (2009) .8% (2010)
CBO -3.0% (2009) 2.9% (2010)
OMB -1.2% (2009) 3.2% (2010)
The figures provided by CBO and OMB were projections from the 1st quarter 2009. As you can see, the White House projections forecasted by the OMB are wildly optimistic both for this year and next relative to the IMF and CBO.
Those projections play directly into projected tax revenues and then, in turn, to the level of the federal deficit. If the IMF’s current projections are anywhere close to being accurate, our deficit will be significantly worse than previously forecast. What does that mean?
HIGHER TAXES ACROSS THE BOARD!!! What happens then?
SLOWER GROWTH GOING FORWARD!!!
In regard to the rest of the globe, the IMF’s projected numbers speak volumes:
China 7.5% (2009) 8.5% (2010)
Euro Area -4.8% (2009) -.3% (2010)
Japan -6.0% (2009) 1.7% (2010)
India 5.4% (2009) 6.5% (2010)
Emerging/Developing 1.5% (2009) 4.7% (2010)
Economies
Advanced Economies -3.8% (2009) .6% (2010)
Global -1.4% (2009) 2.5% (2010)
Bloomberg provides a review of the IMF report, IMF Sees Stronger Global Rebound From ’09 Recession. I would question the accuracy of Bloomberg’s title. I see a wide divergence between growth prospects in the BRIC nations and emerging markets from those of the advanced economies, especially with Europe and the United States. Bloomberg reports:
Still, risks to the outlook, which have “diminished noticeably,” are still “tilted to the downside,” the fund said, citing a possible downward pressure on asset prices resulting from rising unemployment, pressure on bond yields from concerns on public debt, and emerging economies’ vulnerability to financial stress.
A larger-than-expected drop in risk aversion and stronger demand in emerging economies could offer “some upside risk” that boosts growth, according to the fund.
In a separate report today on the state of the global financial system, the IMF said that while financial markets and confidence in an economic recovery have improved since April, risks remain and policy makers must remain vigilant until a sustained recovery is under way. Credit risks are high, bank lending to the private sector is slowing and the recovery so far has been dependent primarily on public funds, the fund said in an update to its Global Financial Stability Report.
Can the emerging economies of the world pull the developed countries out of the ditch? Will the global economies decouple? Is there any surprise why countries are pursuing protectionist measures?
In regard to the United States, President Obama may want to have the members of his economic team, including Secretary Geithner, Larry Summers, and Peter Orszag, call John Lipsky at the IMF and ask him what he sees.
Risks remain extraordinarily high.
LD
Is Uncle Sam Manipulating the Equity Markets?
Part III
Posted by Larry Doyle on July 8th, 2009 6:47 AM |
Kudos to the blog Zero Hedge for highlighting the questionable nature of the technical flows in the equity market that have occurred via high frequency program trading.
Massive kudos to Joe Saluzzi of Themis Trading for going public last week on Bloomberg with this story. While Zero Hedge, Sense on Cents, and every other financial blog sit outside the fray, Joe Saluzzi is actually ‘in the arena.’ I commend him for his character and courage in shedding light on this opaque and arcane program trading business. Yesterday on his blog at Themis Trading, Saluzzi wrote a piece entitled “Manipulation?”:
We have talked extensively on our blog and in our white papers about the power of high frequency trading and program trading. We have noted that these trading strategies can move the market quickly during the trading day. We have always suspected that there have been certain major players that can dominate this space. Now comes the case of the stolen proprietary trading code from Goldman Sachs.
http://www.bloomberg.com/apps/news?pid=20601087&sid=axYw_ykTBokE
Most interesting in this Bloomberg article is the following statement by Assisitant U.S, Attorney Joseph Facciponti:
“The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” Facciponti said
Is this an admission by Goldman Sachs that there is the possibility of manipulation in the market? Does anyone think that this is the only program in the world that can “manipulate” markets? With all the programmers in the world, we can only imagine how many more manipulative programs are out there. Now here is the best part according to the assistant U.S. Attorney:
The proprietary code lets the firm do “sophisticated, high- speed and high-volume trades on various stock and commodities markets,” prosecutors said in court papers. The trades generate “many millions of dollars” each year.
Markets are a zero sum game – somebody wins and somebody loses. Where do you think these “many millions of dollars” are coming from? They are coming from you – the average retail investor and the large institutional investor. These programs are taking advantage of real order flow and are siphoning off small profits throughout the day that belong in the pockets of the retail investor and the traditional money manager.
So, who is out there to protect you from these “machines” and their army of programmers? One would think the SEC has your back. But what did they have to say about high frequency trading. According to an article in the WSJ (http://online.wsj.com/article/BT-CO-20090618-707189.html )
The Securities and Exchange Commission believes institutional money managers are “sophisticated” enough to trade against the machines without further regulation.
“We don’t want to curtail liquidity,” said Gene Gohlke, associate director for the SEC. Gohlke said it’s up to the managers themselves to make sure other traders aren’t manipulating their models.
This story is just at the beginning stages and we here at Themis Trading intend to keep a careful watch on it.
WOW!!! This statement by Mr. Saluzzi is as powerful a condemnation of a Wall Street business practice as I have seen in a long time.
Effectively, Mr. Saluzzi is stating that the high speed program trades ‘front run’ order flow from retail and institutional investors. This practice helps explain the disconnect between the underlying economic fundamentals and the technical support of our equity markets. The SEC has given the practice of program trading its blessing.
This smells.
For those interested in this topic, please reference previous posts by Sense on Cents on this topic:
Is Uncle Sam Manipulating the Equity Markets?
Is Uncle Sam Manipulating the Equity Markets? Part II
Kudos again to Zero Hedge and especially Joe Saluzzi!!
LD
Warren Buffett: “Wall Street Owes the American People”
Posted by Larry Doyle on July 9th, 2009 11:36 AM |
Oracle of Omaha, Warren Buffett
When the Oracle of Omaha speaks, people listen. What is Warren Buffett saying now? What does he see on our economic landscape? How do we prepare? We can let Warren be our guide, but let’s make sure we question him aggressively as we manage our own finances.
ABC News reports, Warren Buffett Backs Second Stimulus:
Not for nothing, but where was Warren at the time the initial bill was rammed through Congress? Warren is a close economic adviser of Obama’s but he does us no favor by playing his political cards when our country is screaming for real economic leadership.
In regard to the PPIP? What does Warren think about this government program to help banks cleanse their books of toxic assets?
How about the economy? What does the Oracle see in his crystal ball? The grand swami believes that:
I concur. Warren is not totally clear, but in so many words he is saying the American economy is adjusting to the lack of a shadow banking system.
How about over the long haul? Does Warren think America will rebound? He is very optimistic, as ABC reports:
That’s great. I am also eternally optimistic. That said, things do not just happen and we will not have better days without reinstilling strong discipline and values throughout our economy and our country. In my opinion, those disciplines and values need to encompass the following:
1. honesty on where we currently stand across all aspects of our economy and society. Publicize our successes and, more importantly, our failures so we can properly address them.
Do not allow urban education dropout rates of 50% to be swept under the rug. Promote the correlation between those figures, single parent birth rates, income levels, and criminal behaviors. BE HONEST ON THESE TOPICS!!!
2. Expose the lack of integrity and transparency in our financial and political institutions. Hold people accountable!!
That is a good start. Warren has the bully pulpit. Perhaps he could speak aggressively on these topics in the future.
LD
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