Sense on Cents

Wall Street’s Next Big Trade…

Posted by Larry Doyle on January 4th, 2009 7:45 AM |

Secretary of the Treasury Henry Paulson has become a household name over the course of 2008. Paulson has been roundly criticized for his mixed messages and inconsistent use of funds from the $700 billion TARP (Troubled Asset Repurchase Program).

While most of us have seen more of Henry than we would have ever cared, allow me to introduce you to another Paulson. John Paulson (no relation to Henry) is one of the most highly acclaimed and profitable hedge fund managers on Wall Street. While investment banks, hedge fund managers, and most asset managers were investing in and promoting sub-prime mortgages and the like, John Paulson was “going the other way.” In 2006, he started shorting sub-prime originators, the ABX (the CDS index that tracked the sub-prime market) and the investment banks that most heavily trafficked in this sector. He personally and the investors in his fund made tidy fortunes in the process.

The reason for my introducing you to John Paulson at this juncture is because he wants to enter the world of community banking. One may wonder why a titan from Wall Street would want to enter into the world of regional and community banking.

This past summer, the first large bank to fail was Indymac Bank located in Pasadena, CA. Since then there have been another 24 banks that have failed with another 200 on the FDIC “watch list.”
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What Is a Mortgage Cram Down?

Posted by Larry Doyle on January 1st, 2009 11:35 AM |

On December 23rd in my piece, “Everything’s Negotiable…“, I wrote that I thought for those financially challenged and potentially facing personal bankruptcy with resulting mortgage default and foreclosure that principal reduction was definitely on the horizon. I wrote in that piece:

Additionally, the likely first piece of government assistance to come from the Obama administration is capital to help homeowners in foreclosure or approaching foreclosure. I expect that that assistance will incorporate some degree of mortgage principal reduction.

I would definitely broach with your banker the topic of principal reduction after laying out your budget. The worst that the bank can do is say no. If that is their response you will have been on record as having been proactive in the process and that can’t hurt you if in fact you end up actually defaulting.

Given the anemic response to the current loan modification programs along with the high level of re-defaulting, it is readily apparent that the powers that be should have been listening to Sheila Bair’s proposal on principal reduction from the outset. Sheila promoted the concept of government funding sharing in the losses with the banks in the principal reduction process.

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“Where’s The Money??….!!”

Posted by Larry Doyle on December 29th, 2008 6:38 PM |

I thought about providing an outlook for 2009. I considered offering further opinions on Obama’s economic plans. Perhaps a review of the Bush economic program would be well received. Then yesterday, the lead editorial in my local newspaper asked “Where did the bailout money go?” I had my answer. In previous pieces I have touched upon why I thought there was a very good chance why this money would not flow through the system. I hesitate to continue to refer back to my piece published on November 12th (The Wall St. Model is Broken…and Won’t Soon be Fixed), but for new readers I do firmly believe it is as good as anything I have read or seen in any publication in explaining how we find ourselves in our current position.

Please allow me to digress for a second. I will admit that I am not a movie buff, but I do enjoy films that focus on the success of underdogs, have a measure of financial intrigue, or perhaps a combination of the two. Not surprisingly, a few of my favorite movies are, Rocky, Jerry Maguire, and The Sting.

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Christmas 1919

Posted by Larry Doyle on December 24th, 2008 6:30 PM |

I will not ruin this piece by adding any unnecessary commentary.

Merry Christmas, Happy Hanukkah, Happy Kwanza, or however you celebrate, Happy Holidays!!

A Christmas Tale — 1919, Wall Street Journal, December 2008

Below, a short excerpt from the beginning: Read the rest »

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Everything’s Negotiable

Posted by Larry Doyle on December 23rd, 2008 7:15 AM |

At “Central Station” the other day, a loyal reader thought it may be useful to write about the implications of defaulting on a mortgage. Certainly nobody wants to default on a mortgage, but given the dynamics of our current housing market and economy, delinquencies and defaults are simple realities.

In thinking through this topic, it struck me that it may be just as beneficial to address what to do before defaulting as it is to know what happens after defaulting.

First and foremost, given the economic environment there should be no sense of shame or embarrassment in a deteriorating financial condition. That said, as one of my earliest mentors taught me “people in finance typically do not have problems with losses but they have big problems with surprises.” How does that piece of wisdom apply to today’s deteriorating housing market and rising foreclosures?

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The Greatest Risk

Posted by Larry Doyle on December 21st, 2008 4:56 PM |

There remain no shortage of developments in the economy, the markets, and on “the street.” While I could continue to write at length on a number of those topics, I think it is healthy to take a weekend break from the regular hustle and bustle. With a break in the show, perhaps we can take a walk backstage and I can share with you some insights into Wall St. that occurred back in the ’90s but didn’t fully play out until 2008.

Please allow me to set the stage. I joined First Boston (now Credit Suisse) in 1983. I was very fortunate to gain employment at First Boston (FOB) as it was one of, if not, the hottest shops on the Street at the time. FOB was very much a traditional “white shoe” sort of firm. Propriety was important in executing business, although I am sure there were some sort of improprieties that occurred behind the scenes. I was too young to get dragged into anything that pushed the envelope. Although the head of HR threatened to fire me 6 weeks into my tenure (I think she was just trying to scare me), for the most part my 7 year career there was wonderful. I learned the business and developed many great relationships.

I was recruited to join Bear Stearns by an individual for whom I worked with for almost 15 years. I was very hesitant to go to Bear Stearns because it always had a reputation for being an extremely aggressive firm in every regard. That said, the person recruiting me was the most principled individual with whom I ever worked on Wall St. and he and I continue to have a very close relationship. I felt that I was working as much for him, if not even more, than I was working for Bear. I admired and respected his values and integrity. Read the rest »

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Economic/Market Highlights . . . 12/17: “The Golden Rule”

Posted by Larry Doyle on December 18th, 2008 7:00 AM |

For time immemorial, nations and economies have operated by the Golden Rule. Well, in this economy and this market, that Rule is strong and seemingly getting stronger. While the U.S. dollar sank to a 13yr low vs the Japanese Yen and declined another 2+% vs the Euro, gold moved higher by another 2+% and is now at a 9 week high and up 9% for the year.

In speaking with an investment advisor today, he told me that he has moved almost 20% of his fund into gold in anticipation of continued declines in the value of the dollar.

While gold is increasing in value, we are not seeing other commodities follow its lead. In fact, oil (down 7% on the day) intraday went below $40 per barrel, while copper dropped to a near 4yr low. Through the grapevine, a close friend shared with me today that Goldman is long oil in SIZE from a very large transaction with Mexico. Both commodity moves indicate to me that the market believes the economy will bump along the bottom for the foreseeable future.

What is going to get us to turn the corner on the economy? The Fed has done all it can monetarily, and will clearly utilize “quantitative easing” in buying longer maturity mortgage, consumer, and corporate assets. There is another $350 billion in TARP funds, some of which will likely be directed towards helping homeowners on the brink of foreclosure.

Beyond that, all eyes in Washington and across the country are looking toward a MASSIVE economic stimulus. Obama has already indicated the outlines of his plans with the largest component being infrastructure.

Will this be the “magic bullet” that we all hope? It would be foolhardy to think that $300 billion, if not $500 billion, and perhaps $1 trillion, would not give a serious jolt to our economy. That said, will a package of the size and type being discussed by Obama revolutionize the art of stimulus packages and lead us to a viable and sustainable economic recovery? I think not. Why? Read the rest »

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How Bernie “Madoff” With $50 Billion!!!

Posted by Larry Doyle on December 14th, 2008 4:20 PM |

The neighborhood of Far Rockaway in Queens, NY epitomizes the essence of middle income urban life. To say that the kids from this neighborhood develop “street smarts” at a very early age is a huge understatement.

Hustlers of every strain, predominantly positive in nature, grow up early in Rockaway. The movie, “Flamingo Kid,” starring Matt Dillon is set in Rockaway Beach. From the beaches in Rockaway one could see the Twin Towers off in the distance. Dreams of fortunes and fame earned on Wall St. drove many with real ambition. Bernie Madoff was one of those boys filled with ambition. However, while ambition can be an amazingly powerful force, if left unchecked it can be fatal.

When the tide is high and the surf is pounding in Rockaway, the kids frolic and never want to come out of the water. However, when the tide goes out, the ocean can leave a few gems. Often times, though, the waves leave a mix of driftwood and waste and a very unpleasant, if not putrid, odor.

Bernie Madoff

In similar fashion, in 2008 the tide on Wall St. has gone out. While there will be some gems amidst the rubble, it is also mostly a mix of driftwood and waste left upon the shore. Just as at times large fish are trapped and die as the tide recedes, this past Thursday,the unchecked ambition from one of Rockaway’s boys finally caught up with him and in so doing left the biggest “carcass” in the person of Bernard Madoff on the shore for all to observe.

How is it that this “fish” which appeared to be the marvel that created wonderment in the form of outsized financial returns for so many for so long was actually a shark that enveloped and ultimately devoured his followers? Let’s enter the world of this “shark.”

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“Mr. Raines Returns to Washington….”

Posted by Larry Doyle on December 12th, 2008 1:35 PM |

In the midst of the economic turmoil, the Obama transition, the “rescue” of the domestic auto industry, and the Blagojevich fiasco, the biggest story of all in terms of “$$$” is getting limited coverage in the media, but not here at NQ!!

The core of the global economic meltdown is centered on our domestic housing market and the core of that market is centered on Freddie Mac and Fannie Mae.

It is a shame that the Congressional hearing of the four senior executives (Richard Syron and Leland Brendsel of Freddie Mac and Daniel Mudd and Franklin Raines of Fannie Mae) is not front and center on every media outlet in our country.

It is also a shame that the respective heads of the Congressional Banking Committees are not heavily involved in these hearings. Those individuals, Barney Frank and Chris Dodd, along with their colleague, Chuck Schumer should not only be compelled to question these executives, but they themselves should be compelled to be questioned by their colleagues.

Read here as to how “Fannie, Freddie Executives Knew of Risks….” The fact that the executives “generally dodged demands by committee members that they accept blame for those problems” is the height of shamelessness and hypocrisy.

How I wish that we had real statesmen in Washington who had the courage to question these individuals on the following points, which were highlighted here on October 16 in a piece entitled “A Wall St. Insider’s View of Freddie/Fannie.” Read the rest »

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Who and What is Cerberus….??

Posted by Larry Doyle on December 11th, 2008 9:05 PM |

While the debate in Washington over a potential rescue package of the domestic auto industry seems to be ending and a short term “bridge loan” is being arranged, I empathize with the innocent laborers and families within these companies and across the industry who have truly suffered from the imprudent management of this business model. One outfit that is heavily involved in this industry, though, deserves no sympathy. Everybody knows General Motors, Ford, and Chrysler, but not many people know of Cerberus Capital Management.

GM and Ford are publicly traded entities. Chrysler, however, is 80% owned by one of the largest private equity funds in the business. If any company understands risk, the cost of capital, business models, restructurings, leveraged buyouts, asset liquidations, return on equity, etc it is Cerberus Capital Management.

While the CEOs of GM and Ford most assuredly have extremely limited to zero means of raising capital at this juncture, to think that Cerberus does not have access to capital is ridiculous. The simple fact is Cerberus “chooses” not to put more money into Chrysler to defend their previous investment. Read the rest »

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