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HomeFreddie Mac’s David Kellerman
Posted by Larry Doyle on April 22nd, 2009 11:54 AM |
The news this morning of the death of David Kellerman, acting CFO of Freddie Mac, stopped me in my tracks. In my career on Wall Street, I crossed paths with David numerous times. David was a consummate professional and a real gentleman.
While the trials and tribulations of our economy are challenging, the pain felt by employees of Freddie Mac, the friends of David, and the Kellerman family must be indescribable.
I extend my sympathies to all of them at this time.
LD
The FT reports Freddie Mac’s Kellerman Found Dead
Will Bank Stress Tests Be “Put on a Curve?”
Posted by Larry Doyle on April 22nd, 2009 9:10 AM |
Will the soon to be released Bank Stress Tests provide real clarity on the health of our banking industry or will the tests be “curved?” Meredith Whitney, highly regarded bank analyst, has indicated that the tests will provide plenty of wiggle room for the banks. Just yesterday Secretary Geithner “goosed” the market by indicating the majority of banks have sufficient capital. To what degree can we trust what Turbo-Tim is telling us?
Mohamed El-Erian, CEO of PIMCO (Pacific Investment Management Company) provides a blueprint for an honest review of the Stress Tests. Mr. El-Erian highlights the following in a Financial Times article:
First, transparency is key. Whether the government likes it or not, hundreds of analysts around the world will reverse engineer the stress tests. The government would be well advised to assist the process through clarity. Obfuscation would result in damaging market noise and further derail the real economy. At the minimum, policymakers need to provide credible details on the methodology, the underlying assumptions and scenario analyses.
To this point, neither the banks nor the government have provided real transparency. What are we to expect when Congress pressures the FASB to relax mark-to-market accounting thus forever clouding real transparency?
Second, the results of the stress tests must be part of a comprehensive, forward-looking package to resolve problems at banks. Out-performing banks should be provided with exit mechanisms from the exceptional government support that they have been receiving and, presumably, no longer need. At the other end, there must be clarity as to how capital-deficient banks that no longer have access to private capital will be handled. (more…)
Missed Opportunity
Posted by Larry Doyle on April 21st, 2009 7:52 PM |
Yesterday I asked, Is The Stimulus “Stimulating?” Today, Bloomberg reports how Caterpillar Says U.S. Stimulus ‘Missed Opportunity‘. Specifically, the bulldozer manufacturer described the Stimulus Package as “disappointing and less effective than measures approved by China.”
“The infrastructure portion of the stimulus package was disappointing in that it was less aggressive than other countries and missed an opportunity to correct past underinvestment in U.S. infrastructure.”
In my piece, I highlighted how the Stimulus Package was more a promotion of the Democratic agenda rushed through Congress without a full and proper review. Without targeted spending on immediate areas of need and benefit, our economy suffers while our deficit worsens. While the Democratic leadership railroaded the Stimulus legislation through Congress, which country did enact targeted fiscal stimulus? China.
The Chinese economy is benefitting from their stimulus while many workers in our country suffer. While President Obama visited Caterpillar in February to push the Stimulus Package, I do not get the sense that he would be invited back now. Caterpillar’s CFO said:
“We think China has it right,” Chief Financial Officer Dave Burritt said in an interview. “The majority of their package is on infrastructure spending. We are seeing life there. We are seeing the turnaround. We would like to see a more robust infrastructure package in the United States.”
I would qualify that statement as a courteous indictment of the political process in our country. Caterpillar is not the only company benefitting from the Chinese stimulus. Additionally,
United Technologies Corp., Eaton Corp., and Dupont Co. are among other U.S. industrial companies that said they have seen results from China’s plan. This week all three reported first- quarter sales declines ranging from 12 percent to 20 percent.
United Technologies’ fire and security division “is seeing some benefits from the stimulus already in terms of the dollars which are flowing through to infrastructure,” Akhil Johri, the head of investor relations, said today. The Hartford, Connecticut-based company is the maker of Otis elevators, Carrier air-conditioners and Pratt & Whitney engines.
At Wilmington, Delaware-based DuPont, the third-biggest U.S. chemical maker, “electronics customers are reporting some benefit from the China stimulus package,” CEO Ellen Kullman told analysts on a call today.
Eaton CEO Sandy Cutler, on a conference call yesterday, described China as “the first market where we can really string things through to government stimulus activity.”
Caterpillar predicted the U.S. recession in October 2007, two months before it officially began, and said today it expects the world economy to decline about 1.3 percent this year.
Missed opportunities do not necessarily always present themselves again.
LD
“IMF Puts Financial Losses at $4.1 Trillion”
Posted by Larry Doyle on April 21st, 2009 9:57 AM |
The FT provides in depth analysis as IMF Puts Financial Losses at $4.1 Trillion. The IMF had forecast these losses earlier this month. The actual report is no better than the initial warning. The simple fact is the world is awash in excessive debt. This debt can be restructured, defaulted, and/or devalued. Each of these respective approaches will take time and money. While the IMF has a checkered reputation, I had the good fortune of working at JP Morgan with John Lipsky, current First Deputy Managing Director at the IMF, and hold him in very high regard. Lipsky is often the public face to the markets for the IMF given his reputation.
The FT report is fairly comprehensive, although I still question the relative amount of losses outside of the U.S., Europe, and Japan. Is there anyplace in the world to truly hide in the face of these losses? Can China single-handedly be the economic engine for the global economy? The FT does a great service in shedding light on this report. (more…)
Is The Economy Turning The Corner?
Posted by Larry Doyle on April 21st, 2009 7:05 AM |
Markets correct by price (both up and down) and time (extended). Despite the 3+% price declines in equity markets yesterday, the markets are up approximately 20% since the market lows seen on March 6th. Some analysts believe this upward move signals an improvement in the economy largely due to the fiscal and monetary stimulus provided by Uncle Sam. I am not in that camp.
A few emerging economies, specifically China, have improved. Can the rest of the world, including the U.S., expect those economies to be the engine for a global turnaround at this juncture? I do not think so. I still see the following issues on our domestic horizon:
1. continued deterioration in loan performance on bank books
2. a banking system woefully capital deficient
3. an automotive industry which must downsize
4. municipalities which are faced with the predicamant of capital shortfalls and underfunded pensions
5. commercial real estate just starting to experience real defaults
6. a housing market with increased foreclosures pressuring prices
7. an unemployment rate clearly headed toward double digits
Earnings reports for the first quarter have been mixed. I view the recently reported bank earnings as largely “managed” via accounting gimmicks. Meredith Whitney believes the earnings for major money center banks will turn negative in the 2nd quarter. The regional banks, without the benefit of large capital market activities but facing credit writedowns, report earnings today. Key Corp just reported a loss of $1.09 eps (earnings per share) versus an estimate of -.21. I suspect we will see losses from other regional banks of a similar magnitude. (more…)
Democracy Likely Defeats Moral Hazard
Posted by Larry Doyle on April 20th, 2009 7:06 PM |
As part of Obama’s proposal to support housing, the administration pushed the application of principal reduction via bankruptcy proceedings. This process, known as a mortgage cram-down, was pushed hard by the administration and many Democrats. Virtually all Republicans and mortgage investors viewed the mortgage cram-down as another in a long line of moral hazards. In short, the mortgage cram-down would violate the implicit and explicit terms of a written contract.
I wrote What Is a Mortgage Cram Down? on January 1st. While the Obama administration pushed hard for this legislation to be approved, ultimately those with a longer term vision prevailed. What are the concerns about principal reduction? As I wrote:
I personally find it difficult to swallow the concept of government funding for this program. At this juncture, though, the horse is so far out of the barn that we are trying to prevent the illness from becoming a full blown epidemic, if not a plague.
Home prices are down 18% year over year in the top 20 cities in the country and foreclosures have increased by approximately 40%. Both of these figures are certainly headed further in those directions with continued losses for the holders of the underlying mortgages, whether those mortgages are already pooled into securities or held in whole loan form.
The unintended consequences of a principal reduction program will likely be an increase in mortgage rates over the longer term along with a more stringent credit review for those applying for a mortgage. Why will this happen? Very simply, investors in mortgage securities will demand those concessions if they are to purchase mortgages that have the chance of being “crammed down.” Additionally, this program may actually incentivize some borrowers to intentionally become delinquent in their mortgage payments, and actually risk personal bankruptcy in an attempt to be “crammed down.” Where does the madness end?
Why Is the Market Selling Off Today?
Posted by Larry Doyle on April 20th, 2009 2:30 PM |
The broad equity market indices are down 3+% on the day. Why would that happen when the bulk of company news today was generally positive? At least on the surface the news was positive:
1. Bank of America posted .44 earnings per share vs. expectations of .04
2. Eli Lilly earnings were up 23% outpacing expectations.
3. Halliburton disappointed with earnings down 35% but that is due to the massive correction in the price of oil from a year ago.
Merger Activity:
4. Oracle is purchasing Sun Microsystems in a $7.4 billion deal.
5. Pepsi is buying two bottling companies for $6 billion.
6. Glaxo is purchasing Stiefel for $2.9 billion.
Leading economic indicators declined by .3 but that decline is offset by an improved reading from the prior month.
Then, why is the market down so much? Two reasons are promoted, but only one of them is getting proper coverage.
Market analysts supposedly are focused today on the ongoing increases in chargeoffs and writedowns on the loan portfolios in the banking industry. These loans consist of credit card loans, residential mortgages, commercial mortgages, and corporate loans.
I don’t buy this line of reasoning for today’s selloff. Increased chargeoffs and writedowns have been widely expected for a while. The level of reserves taken by the banks has been widely panned as being insufficient. Then why is the market down so much? (more…)
Is the Stimulus “Stimulating?”
Posted by Larry Doyle on April 20th, 2009 5:30 AM |
As I referenced on my radio show last evening (note: you can listen to an audio recording of the show from the BlogTalkRadio player in the right sidebar), China’s economy is benefitting from economic stimulus enacted by its government. Well, the U.S. government also enacted a major Stimulus Package in early February. How is our package doing? Is it impacting the economy? Our economy certainly does not seem to be benefitting significantly from any government stimulus.
I wrote on February 7th that Martin Feldstein, renowned Harvard economist who sits on Obama’s Economic Recovery Advisory Board, called the Stimulus Package An $800 Billion Mistake.
Feldstein’s concerns about the Stimulus as reported by the Washington Post, focused on several items:
1. On the spending side, the stimulus package is full of well-intended items that, unfortunately, are not likely to do much for employment.
2. The largest proposed outlays amount to just writing unrestricted checks to state governments.
3. The plan to finance health insurance premiums for the unemployed would actually increase unemployment by giving employers an incentive to lay off workers rather than pay health premiums during a time of weak demand.
4. A large fraction of the stimulus proposal is devoted to infrastructure projects that will spend out very slowly, not with the speed needed to help the economy in 2009 and 2010.
5. The problem with the current stimulus plan is not that it is too big but that it delivers too little extra employment and income for such a large fiscal deficit.
Let’s see how business executives view the rollout of the Stimulus Package. Would they agree or disagree with Feldstein’s concerns? (more…)
Repaying TARP Funds: Playing Ball With Uncle Sam
Posted by Larry Doyle on April 20th, 2009 10:27 AM |
Last evening on NQR’s Sense on Cents with LD (note: you can listen to audio recording of the show from the BlogTalkRadio player in the right sidebar), I proposed that the Obama administration would not release individual results of the Bank Stress Tests. I further added that I thought the administration may encourage stronger banking institutions to channel funds to weaker institutions. In so doing, these stronger banks – such as JP Morgan and Goldman Sachs – may actually take equity stakes in the weaker banks. Will JP Morgan and Goldman bear the entire risk of those equity stakes? Doubtful. Uncle Sam will likely negotiate terms along the lines of other bank bailouts in which a strong bank provides capital but the government bears the brunt of the losses.
As I write this, Bloomberg reports Bank of America is speculated to need another $10-20 billion in equity capital. BofA’s earnings were reported this morning at .44 earnings per share versus an expectation of approximately .03 earnings per share. Analysts are panning the earnings due to the propsects for ongoing increases in credit losses within BofA’s loan portfolio. BofA’s stock is down approximately 8% in early trading.
If BofA does need another $10-$20 billion in equity capital, where might it come from? In my opinion, in a non-public transferral of capital, those funds may come from JP Morgan and/or Goldman Sachs, and would actually be recycled TARP funds. Effectively, JPM and GS will merely be a conduit for increased government funds injected into BofA and Citigroup, as well. Remember JPM has $25 billion in TARP funds, Goldman has $10 billion. If BofA took $15 billion of these funds then Citi could receive $20 billion. What would JPM and GS receive in return? I would think these negotiations would be private and not released, although given that the capital provided is public money all information should be released. (more…)
Tags: Bank of America's earnings, Bank Stress Tests, FDIC-backed debt, Goldman Sachs repaying TARP, JP Morgan repaying TARP, Larry Summers comments on repaying TARP, TARP fund repayment
Posted in Bank Stress Test, Banking Institutions, TALF, TARP, Wall Street | 2 Comments »