Another quick thought

Does anyone else find it a bit weird that banks are being asked to pony up money to shore up the capital position of monoline insurers? The same monoline insurers who are insuring dubious financial instruments currently held on (or near) the balance sheets of banks?

Seems like a circular firing squad to me (and what does it say about the true value of the bank assets?).

Monoline Insurers

I'll have more on these companies at some point in the future (including a question as to why a AAA-rated company (MBIA) has to borrow money at 14%), but for now, check this out:

Ambac Financial Group, Inc., the first monoline bond insurer to see its AAA credit rating wiped out because of ill-timed mortgage exposure, said it is pursuing “strategic alternatives” after reporting a $3.2 billion quarterly loss — that’s $31.45 per share — on Tuesday.

Losses of $31.45 a share? Wow. It will probably surprise nobody that they closed today at $7.92, down from a 52-week high of $96.10.

BofA

It won't surprise (m)any of you, but I hate the B of A deal with Countrywide. First of all, I don't think it was much of a bargain. Sure, they paid $4 billion for a bank with a book value of $12 billion but, really, who can be sure what the true book value of this pig is?

Second, why buy it now? If they were really interested in the business, why not wait until Countrywide files Chapter 11? It would have delayed the transaction by what, a week? Two?

Third, I understand that Countrywide owns something like 1 in 5 mortgages in the US, and B of A is not (was not) a major mortgage player. I also understand that B of A is anticipating having that portfolio once the housing market turns around. What I fear (for them) is that by the time the market turns, they may still be a smaller player in the mortgage market, but a huge landlord.

Many are pointing to this deal as evidence that the market works, that companies are able to find their own fixes and government need not "interfere with the market". The cynic in me believes that Ken Lewis had a long and fruitful discussion with both Hank Paulson and Ben Bernake before agreeing to take the plunge here. Let's see what happens once the write downs begin in earnest.

I guess the one upside of all of this is for B of A retail banking customers - they will probably enjoy some seriously good rates on deposits as B of A ramps up the funding mechanisms to feed the Countrywide pig.

Thoughts?

Circuit City

I posted on Circuit City here. How are they doing now? Not so well:

Circuit City Stores Inc., the second-largest U.S. consumer-electronics retailer, reported a fifth straight loss and said it won't make money this quarter, when it typically generates most of its annual profit. The chain dropped 32 percent in early New York trading.

Buh-bye.

Citi of Arabia

That is, I swear, the title of an editorial in today's WSJ. It's an amusing read. Apparently the WSJ believes in free markets up to the point where the markets do something that they don't like. Like having shifty Arabs buy up our good assets. Harsh? Judge for yourself:

Abu Dhabi's 4.9% stake combined with the 3.9% stake of Saudi Prince Alwaleed bin Talal makes them the bank's dominant shareholders, and who knows how many other smaller holdings are in Middle Eastern hands. The small Gulf states may be governed separately from Saudi Arabia, but they are closely linked by geography, family ties, and national interests. For purposes of political influence, they often behave as part of the same tribe.

Got that? "[S]ame tribe." Nice. And these are just the big deals. Who knows how many other Arabs from the same tribe have bought little pieces of Citi - hell, Arabs may own all of it for all we know! And if they own it they'll use it... for what exactly?

and it offers a Middle Eastern entree into the U.S. financial system that since 9/11 plays a pivotal role in the war on terror.

Ah, yes, they'll have an entree into the U.S. financial system which up until this time has been great at stopping Saudi Arabia and others in the tribe from funding terrorism. WTF? Note to the WSJ: they really don't need the U.S. financial system to fund terrorists.

And, on top of all the other nonsense, the editorial uses a weird phrase:

Citigroup did have to shore up its balance sheet, and we suppose petrodollars are a better source of capital than U.S. taxpayers under a "too big to fail" doctrine. On the other hand, where were Mr. Rubin and the bank board when Citi was betting so much on subprime?

Did you catch it? How in the hell is that an "On the other hand"? It's my understanding that when one uses those words, it indicates that you are making a counterpoint to your previous statement. Most of the time it wouldn't be a big deal and I'd let it go, but it stuck out for me because they do it again later in the editorial:

Readers of these columns might recall in particular Abu Dhabi's adventures in Beltway banking. It was Sheik Zayed, the father of the current ruler of
Abu Dhabi, who owned the infamous Bank of Credit and Commerce International, or
BCCI, whose fraudulent tentacles spanned the globe, including the highest levels
of Washington politics a decade and a half ago.

The current emir, Sheik Khalifa bin Zayed al Nahyan, is not his father -- who always maintained that he was a victim of the BCCI fraud himself. And Robert Morgenthau, the Manhattan District Attorney who investigated BCCI, tells us that Abu Dhabi "has been responsible" since BCCI.

On the other hand, the bank was forced to settle for hundreds of millions of dollars after lying to evade American banking laws. Mr. Morgenthau also recounted that the elder Sheik Zayed once called to inform the State Department that, if Mr. Morgenthau indicted anyone in the royal family over the scandal, he would pull his billions out of the U.S. and make no further investments here.

So in the 80's, al Nahyan's father led BCCI. However, al Nahyan is not his father, and Abu Dhabi has been fine since BCCI. On the other hand, in the 80's his father was a crook and said unpleasant things.

If this was an off-the-cuff speech maybe I'd understand, but I'd expect someone proofread this. Perhaps I expect too much.

One last thing to keep in mind, the next paragraph after the excerpt above reads:

Mr. Morgenthau says this message was passed to him via the Justice Department. His reply: "Tell them that you don't control that cranky S.O.B. in New York." As a long-time New York DA, Mr. Morgenthau could stand up to such political pressure the way the Justice Department might not. In certain corners of the world, large investments come with political expectations.

"The way the Justice Department might not." Truer words were never written on in a WSJ editorial. When it comes down to our safety, or the profits of the friends of highly placed Republicans, even the WSJ knows what the score is.

It's just weird

That Goldman can issue a "Sell" rating on Citibank. I'd think there'd be a conflict or two when these entities rate one another.

Another interesting factoid, Goldman's bonus pool is larger than Bear Stearns' market cap.

Some very long knives

out for Jimmy Cayne:

In the 10-day span that led to the collapse of the firms’ High-Grade Structured Credit Strategies and Enhanced Leverage funds, Mr. Cayne was playing at a bridge tournament in Nashville, without a cell phone or e-mail device, the Journal said.
Insiders also told the Journal that Mr. Cayne would sometimes smoke marijuana at the end of the day during his bridge tournaments. In 2004, following a game of bridge at a Doubletree hotel in Memphis, he shared a joint with a woman in a lobby men’s room, a source told the Journal.

Friedman

Tom Friedman has a very odd Op-Ed in today's NY Times. In many ways, it is a classic Tom Friedman piece (sounds worldly, says nothing). For instance, it says this early on:

Look, I get pork-barrel politics. I understand senators from oil states protecting the windfall profits of oil companies. Ditto for farm subsidies. It’s an old story: Protect my winnings, and I’ll reward you with campaign contributions. I get it. I get it.

Followed by this:

What I don’t get is empty-barrel politics — Michigan lawmakers year after year shielding Detroit from pressure to innovate on higher mileage standards, even though Detroit’s failure to sell more energy-efficient vehicles has clearly contributed to its brush with bankruptcy, its loss of market share to Toyota and Honda — whose fleets beat all U.S. automakers in fuel economy in 2007 — and its loss of jobs. G.M. today has 73,000 working U.A.W. members, compared with 225,000 a decade ago. Last year, Toyota overtook G.M. as the world’s biggest automaker.

Which means he obviously doesn't get pork-barrel politics at all. American car manufacturers fight higher mileage standards for a number of reasons, the two primary reasons being that (1) American car manufacturers currently make much more money on low mileage cars and trucks and (2) Foreign manufacturers are much better at making high mileage cars and would, in the view of the American car manufacturers, increase their market share in the short and medium terms if higher mileage standards were mandated.

So, American car manufacturers contribute huge sums to ensure that fuel standards are not raised, and they are not raised. That is pork-barrel politics. What the politicians care about is raising enough money to get re-elected. They really don't care much what happens to Ford, GM, et al in 10 years if they themselves don't survive the next election cycle. It would be responsible for Congress to raise fuel standards, but if those in Michigan voted for it, they'd be operating outside of pork-barrel politics rather than inside it. Friedman doesn't get it, regardless of how many times he says he does.

Further on, he states:

But assisting Detroit’s suicide seems to be contagious. Everyone wants to get in on it, including Toyota. Toyota, which pioneered the industry-leading, 50-miles-per-gallon Prius hybrid, has joined with the Big Three U.S. automakers in lobbying against the tougher mileage standards in the Senate version of the draft energy bill.

Which does sound weird. Why would Toyota, a company that makes the Prius lobby against the new bill?

Is it because Toyota wants to slow down innovation in Detroit on more energy efficient vehicles, which Toyota already dominates, while also keeping mileage room to build giant pickup trucks, like the Toyota Tundra, at the gas-guzzler end of the U.S. market?

Oh, that makes perfect sense! They then can sell very profitable Tundras while at the same time continuing to dominate the fuel efficient markets. That makes sense to me. They are in a win-win situation then, regardless of the outcome. If they succeed in getting fuel standards stalled, they sell Tundras. If they fail, they sell Prius's. I'm not saying I agree with the strategy, but it sure seems to be logical and one that could be very successful. So, he doesn't get pork-barrel, but he gets the Toyota strategy. Bring it home, Thomas!

Sad. If Toyota were to take the lead on this front, it could enhance its own reputation and spur the whole U.S. auto industry to become more globally competitive. Hey, Toyota, if you are going to become the biggest U.S. automaker, could you at least bring to America your best practices — the ones that made you the world leader — instead of prolonging our worst practices? We have enough people helping us commit suicide.

Um, whaaaa? WTF? Toyota has a great reputation, I'm not sure it really needs any additional "enhancing" at the current time. People love Toyota (with the exception of Joe White at the Journal, of course). And why should Toyota help the U.S. auto industry become more globally competitive? I mean seriously, WTF? Is he really asking Toyota to let its competition back into the game? Really? And finally, isn't Toyota bringing their best practices here? After all, they aren't exactly camped out in Detroit talking to the UAW now, are they?

Sadly, this is increasingly a typical Friedman column - world-weary, preachy, ignorant babble.

And to preempt some comments, let me say that I don't necessarily like the fact that Toyota is selling Tundras, nor do I like the fact that they are campaigning against CAFE. I'm just saying that the strategy is (obviously) a winner.

Nardelli?!

WTF? Seriously. I don't really care what type of turnaround guy he is, I don't understand how you hire a guy that just got forced out of another job under pressure for exorbitant compensation and a long-lagging stock price. Note that the stock was lagging in a time of historic home appreciation and equity extraction.

Not a good first move for the new Chrysler, not in my opinion anyway.

I think that the UAW is also got to be feeling a tad hosed in all of this. Thoughts?

That could be interesting

In the wake of the Devil's bid for the WSJ, another potential suitor has emerged: Yahoo! I like Yahoo!'s finance portal, it's one of the things I think that Yahoo! does much better than Google. The WSJ is one of the few news sites that actually charges for online subscriptions (I have one) and gets people to sign up for it. And the site itself is great.

It could be a very interesting partnership.

You don't get that rich by being an idiot

Sir Richard Branson announced this week that he was buying a number of Boeing Dreamliners and exploring whether jets could run on biofuels. In the open skies initiatives that were being negotiated between the US and the EU, Branson was pretty vocal in his desire to expand Virgin Atlantic's reach beyond the London-NY route to some US domestic routes.

Think dropping a billion or two at Boeing (vs Airbus) will help that cause any?