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Monday, May 4, 2009
The Mystery That Is SPY Advertised Volume
Not surprisingly in today's (or more appropriately, insert x calendar period) increasingly odd trading action, the total advertised SPY volume was gobs (this is not a DeMarkian technical term) lower than Friday's. And oddest of all... Morgan Stanley is not anywhere in the top 12 advertised brokers. Has the accumulation/deleveraging passed? But oddness is the theme de jour. Anyone who tries to make sense of it is ridiculed or receives outright motivational calls from assorted Czarist departments.
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The Sun God And Other False Deities
I present some "theological" musings compliments of JP Morgan.
The Sun God
Ancient sun worshippers were mostly unaware of the astronomical forces at work guaranteeing that the sun would rise every day, whether they offered a sacrifice or not. It reminds me of part of the fanfare being given to recent economic data. There's no doubt the news is improving: U.S. regional manufacturing surveys picked up sharply (particularly new orders and even ISM employment); profit declines are mitigated by a record-low 2.1% growth in employment costs; and consumer goods purchases are running ahead of production enough to lead to a production bounce later this year. The best way to visualize the healing: a global measure of manufacturing orders-to-inventory is almost back to normal, as is a measure of inter-bank counterparty credit spreads.
But after $2.7 trillion of asset purchases, guarantees, DIP financing, swap lines, municipal transfers, direct aid to industries and other stimulus injections in the US alone, what did the sun worshippers expect? The world had BETTER start seeing positive payback. To put the rescue mission in context, here's the March 30th EOTM chart which compares the current recession response to prior ones. The Sun deities show the current policy response, and where it's headed for 2010. Even "bad" recessions in '57, '73 and '81 never saw anything like this. Markets may one day have to deal with the costs of this response as well as the immediate benefits.
On Commercial vs Residential Real Estate Markets: Are We There yet?
Some ask whether it's too early to invest in commercial real estate debt via CMBS: "hasn't the commercial real estate crisis just begun?" Residential mortgage markets went through stages of denial, anger and frustration before finally pricing in a catastrophic deterioration in delinquencies and salvage value. As seen below, there were several false dawns for subprime before it reached its current resting place at 30-35 cents on the dollar (2006-vintage AAA subprime paper). What about CMBS? Last summer, it was pricing in a more optimistic outcome. But the Lehman bankruptcy exposed the frailties of the real estate markets when their $40 billion portfolio of industrial, office and multi-family loans was subjected to price discovery. CMBS markets promptly collapsed in October, as shown by the convergence below. So while some banks, insurance companies and REITs may still cling to outdated valuations on commercial property, the same cannot be said for CMBS markets.
Here's another way to compare these two securities at 35 cents on the dollar. Let's use our best guess of Fed Stress Test loss assumptions, and the specific credit enhancement and structural loss-sharing rules for each (too detailed to summarize here). In both cases, the loss-adjusted price is around 50% on the dollar. The timing of repayment is uncertain, which is why they trade at steep discounts. For the record, our managers prefer the risk-return of securities much higher up in the capital structure than the examples in the chart, whose prices have rallied a bit from their March lows. The exhibit is simply meant to convey that similar levels of bad news are
priced into both markets.
hat tip Mike Sphere: Related Content
The Sun God
Ancient sun worshippers were mostly unaware of the astronomical forces at work guaranteeing that the sun would rise every day, whether they offered a sacrifice or not. It reminds me of part of the fanfare being given to recent economic data. There's no doubt the news is improving: U.S. regional manufacturing surveys picked up sharply (particularly new orders and even ISM employment); profit declines are mitigated by a record-low 2.1% growth in employment costs; and consumer goods purchases are running ahead of production enough to lead to a production bounce later this year. The best way to visualize the healing: a global measure of manufacturing orders-to-inventory is almost back to normal, as is a measure of inter-bank counterparty credit spreads.
But after $2.7 trillion of asset purchases, guarantees, DIP financing, swap lines, municipal transfers, direct aid to industries and other stimulus injections in the US alone, what did the sun worshippers expect? The world had BETTER start seeing positive payback. To put the rescue mission in context, here's the March 30th EOTM chart which compares the current recession response to prior ones. The Sun deities show the current policy response, and where it's headed for 2010. Even "bad" recessions in '57, '73 and '81 never saw anything like this. Markets may one day have to deal with the costs of this response as well as the immediate benefits.
On Commercial vs Residential Real Estate Markets: Are We There yet?
Some ask whether it's too early to invest in commercial real estate debt via CMBS: "hasn't the commercial real estate crisis just begun?" Residential mortgage markets went through stages of denial, anger and frustration before finally pricing in a catastrophic deterioration in delinquencies and salvage value. As seen below, there were several false dawns for subprime before it reached its current resting place at 30-35 cents on the dollar (2006-vintage AAA subprime paper). What about CMBS? Last summer, it was pricing in a more optimistic outcome. But the Lehman bankruptcy exposed the frailties of the real estate markets when their $40 billion portfolio of industrial, office and multi-family loans was subjected to price discovery. CMBS markets promptly collapsed in October, as shown by the convergence below. So while some banks, insurance companies and REITs may still cling to outdated valuations on commercial property, the same cannot be said for CMBS markets.
Here's another way to compare these two securities at 35 cents on the dollar. Let's use our best guess of Fed Stress Test loss assumptions, and the specific credit enhancement and structural loss-sharing rules for each (too detailed to summarize here). In both cases, the loss-adjusted price is around 50% on the dollar. The timing of repayment is uncertain, which is why they trade at steep discounts. For the record, our managers prefer the risk-return of securities much higher up in the capital structure than the examples in the chart, whose prices have rallied a bit from their March lows. The exhibit is simply meant to convey that similar levels of bad news are
priced into both markets.
hat tip Mike Sphere: Related Content
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Daily Credit Market Summary: May 4 - Light Flows
Spreads were tighter in the US as all the indices improved amid light volumes. Indices generally outperformed intrinsics with skews mostly narrower as IG's skew decompressed as the index beat intrinsics, HVOL underperformed but narrowed the skew (as it saw some modest index arb among high beta names), ExHVOL outperformed pushing the skew wider, XO underperformed but compressed the skew, and HY outperformed but narrowed the skew.
The names having the largest impact on IG are American International Group, Inc. (-172.71bps) pushing IG 0.62bps tighter, and RR Donnelley & Sons Company (+15bps) adding 0.11bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 2.83bps tighter, and RR Donnelley & Sons Company contributing 0.49bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Universal Health Services Inc (-15bps) pushing the index 0.16bps tighter, and Dell Inc. (+5bps) adding 0.05bps to ExHVOL.
The price of investment grade credit rose 0.31% to around 97.55% of par, while the price of high yield credits rose 0.85% to around 79.88% of par. ABX market prices are higher (improving) by 0.2% of par or in absolute terms, 0.93%. Broadly speaking, CMBX market prices are lower by 1.22% of par. Volatility (VIX) is down 0.77pts to 34.48%, with 10Y TSY rallying (yield falling) 0.2bps to 3.16% and the 2s10s curve flattened by 3.4bps, as the cost of protection on US Treasuries rose 0bps to 38bps. 2Y swap spreads widened 0.3bps to 59bps, as the TED Spread tightened by 3.3bps to 0.83% and Libor-OIS deteriorated 0.9bps to 80.1bps.
The Dollar weakened with DXY falling 0.68% to 83.97, Oil rising $1.24 to $54.44 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 0.59% today (a 1.65% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $15.3 to $901.85 as the S&P rallies (904 3.18%) outperforming IG credits (157bps 0.32%) while IG, which opened tighter at 163bps, underperforms HY credits. IG11 and XOver11 are -5.25bps and -9.7bps respectively while ITRX11 is -1.9bps to 141.6bps.
The majority of credit curves steepened (and we saw some very short-dated BWICs) as the vol term structure flattened with VIX/VIXV rising implying a more bullish/less volatile short-term outlook (normally indicative of short-term spread compression expectations).
Dispersion fell -16.3bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.
63% of IG credits are shifting by more than 3bps and 61% of the CDX universe are also shifting significantly (less than the 5 day average of 63%). The number of names wider than the index stayed at 43 as the day's range fell to 8.5bps (one-week average 9.55bps), between low bid at 156 and high offer at 164.5 and higher beta credits (-4.21%) outperformed lower beta credits (-3.36%).
In IG, wideners were outpaced by tighteners by around 4-to-1, with 18 credits wider. By sector, CONS saw 8% names wider, ENRGs 25% names wider, FINLs 5% names wider, INDUs 7% names wider, and TMTs 35% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 141.3bps and the latter at 127.43bps.
Cross Market, we are seeing the HY-XOver spread compressing to 311.48bps from 334.3bps, but remains below the short-term average of 369.97bps, with the HY/XOver ratio falling to 1.39x, below its 5-day mean of 1.45x. The IG-Main spread compressed to 15.4bps from 20.75bps, but remains below the short-term average of 22.53bps, with the IG/Main ratio falling to 1.11x, below its 5-day mean of 1.16x.
In the US, non-financials outperformed financials as IG ExFINLs are tighter by 4.4bps to 127.4bps, with 83 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 3.71bps to 227.51bps, with Brokers (worst) tighter by 2.19bps to 288.95bps, Finance names (best) tighter by 38.78bps to 909.1bps, and Banks tighter by 5.89bps to 285.44bps. Monolines are trading wider on average by 12.61bps (0.19%) to 2814.36bps.
In IG, FINLs underperformed non-FINLs (4.74% tighter to 3.35% tighter respectively), with the former (IG FINLs) tighter by 21.7bps to 435.2bps, with 19 of the 21 names tighter. The IG CDS market (as per CDX) is 1.5bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (155.51bps), with the bond ETFs underperforming the IG CDS market by around 8.14bps.
In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 1.74bps to 141.3bps (with ITRX FINLs -trending tighter- better by 2.53 to 142.8bps) and is currently trading in the middle of the week's range at 32.97%, between 151.06 to 136.5bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading in the middle of the week's range at 43.35%, between 107.43 to 95.95bps. ExHVOL outperformed LoVOL as the differential compressed to -8.03bps from -4.51bps, but remains below the short-term average of -3.61bps. The Main exFINLS to IG ExHVOL differential decompressed to 48.41bps from 45.34bps, but remains above the short-term average of 45.33bps.
Commentary compliments of www.creditresearch.com
Index/Intrinsics Changes
CDR LQD 50 NAIG091 -6.02bps to 217.84 (5 wider - 42 tighter <> 31 steeper - 17 flatter).
CDX12 IG -7.25bps to 157 ($0.31 to $97.55) (FV -7.08bps to 174.99) (18 wider - 102 tighter <> 79 steeper - 44 flatter) - Trend Tighter.
CDX12 HVOL -15bps to 360 (FV -20.47bps to 467.38) (4 wider - 26 tighter <> 23 steeper - 7 flatter) - Trend Tighter.
CDX12 ExHVOL -4.8bps to 92.89 (FV -3.31bps to 96.86) (14 wider - 81 tighter <> 39 steeper - 56 flatter).
CDX11 XO -10.6bps to 367.9 (FV -14.27bps to 435.45) (4 wider - 30 tighter <> 24 steeper - 10 flatter) - Trend Tighter.
CDX12 HY (30% recovery) Px $+0.85 to $79.88 / -32.5bps to 1119.3 (FV -23.34bps to 1051.41) (29 wider - 66 tighter <> 63 steeper - 33 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $+0.61 to $78.1 / -41.29bps to 1052.9 - Trend Tighter.
MCDX12 +2bps to 195bps. - No Trend.
CDR Counterparty Risk Index fell 3.71bps (-1.6%) to 227.51bps (4 wider - 11 tighter).
CDR Government Risk Index fell 0.4bps (-0.59%) to 67.31bps.
DXY weakened 0.68% to 83.97.
Oil rose $1.24 to $54.44.
Gold rose $15.3 to $901.85.
VIX fell 0.77pts to 34.48%.
10Y US Treasury yields fell 0.2bps to 3.16%.
S&P500 Futures gained 3.18% to 904. Sphere: Related Content
The names having the largest impact on IG are American International Group, Inc. (-172.71bps) pushing IG 0.62bps tighter, and RR Donnelley & Sons Company (+15bps) adding 0.11bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 2.83bps tighter, and RR Donnelley & Sons Company contributing 0.49bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Universal Health Services Inc (-15bps) pushing the index 0.16bps tighter, and Dell Inc. (+5bps) adding 0.05bps to ExHVOL.
The price of investment grade credit rose 0.31% to around 97.55% of par, while the price of high yield credits rose 0.85% to around 79.88% of par. ABX market prices are higher (improving) by 0.2% of par or in absolute terms, 0.93%. Broadly speaking, CMBX market prices are lower by 1.22% of par. Volatility (VIX) is down 0.77pts to 34.48%, with 10Y TSY rallying (yield falling) 0.2bps to 3.16% and the 2s10s curve flattened by 3.4bps, as the cost of protection on US Treasuries rose 0bps to 38bps. 2Y swap spreads widened 0.3bps to 59bps, as the TED Spread tightened by 3.3bps to 0.83% and Libor-OIS deteriorated 0.9bps to 80.1bps.
The Dollar weakened with DXY falling 0.68% to 83.97, Oil rising $1.24 to $54.44 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 0.59% today (a 1.65% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $15.3 to $901.85 as the S&P rallies (904 3.18%) outperforming IG credits (157bps 0.32%) while IG, which opened tighter at 163bps, underperforms HY credits. IG11 and XOver11 are -5.25bps and -9.7bps respectively while ITRX11 is -1.9bps to 141.6bps.
The majority of credit curves steepened (and we saw some very short-dated BWICs) as the vol term structure flattened with VIX/VIXV rising implying a more bullish/less volatile short-term outlook (normally indicative of short-term spread compression expectations).
Dispersion fell -16.3bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.
63% of IG credits are shifting by more than 3bps and 61% of the CDX universe are also shifting significantly (less than the 5 day average of 63%). The number of names wider than the index stayed at 43 as the day's range fell to 8.5bps (one-week average 9.55bps), between low bid at 156 and high offer at 164.5 and higher beta credits (-4.21%) outperformed lower beta credits (-3.36%).
In IG, wideners were outpaced by tighteners by around 4-to-1, with 18 credits wider. By sector, CONS saw 8% names wider, ENRGs 25% names wider, FINLs 5% names wider, INDUs 7% names wider, and TMTs 35% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 141.3bps and the latter at 127.43bps.
Cross Market, we are seeing the HY-XOver spread compressing to 311.48bps from 334.3bps, but remains below the short-term average of 369.97bps, with the HY/XOver ratio falling to 1.39x, below its 5-day mean of 1.45x. The IG-Main spread compressed to 15.4bps from 20.75bps, but remains below the short-term average of 22.53bps, with the IG/Main ratio falling to 1.11x, below its 5-day mean of 1.16x.
In the US, non-financials outperformed financials as IG ExFINLs are tighter by 4.4bps to 127.4bps, with 83 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 3.71bps to 227.51bps, with Brokers (worst) tighter by 2.19bps to 288.95bps, Finance names (best) tighter by 38.78bps to 909.1bps, and Banks tighter by 5.89bps to 285.44bps. Monolines are trading wider on average by 12.61bps (0.19%) to 2814.36bps.
In IG, FINLs underperformed non-FINLs (4.74% tighter to 3.35% tighter respectively), with the former (IG FINLs) tighter by 21.7bps to 435.2bps, with 19 of the 21 names tighter. The IG CDS market (as per CDX) is 1.5bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (155.51bps), with the bond ETFs underperforming the IG CDS market by around 8.14bps.
In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 1.74bps to 141.3bps (with ITRX FINLs -trending tighter- better by 2.53 to 142.8bps) and is currently trading in the middle of the week's range at 32.97%, between 151.06 to 136.5bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading in the middle of the week's range at 43.35%, between 107.43 to 95.95bps. ExHVOL outperformed LoVOL as the differential compressed to -8.03bps from -4.51bps, but remains below the short-term average of -3.61bps. The Main exFINLS to IG ExHVOL differential decompressed to 48.41bps from 45.34bps, but remains above the short-term average of 45.33bps.
Commentary compliments of www.creditresearch.com
Index/Intrinsics Changes
CDR LQD 50 NAIG091 -6.02bps to 217.84 (5 wider - 42 tighter <> 31 steeper - 17 flatter).
CDX12 IG -7.25bps to 157 ($0.31 to $97.55) (FV -7.08bps to 174.99) (18 wider - 102 tighter <> 79 steeper - 44 flatter) - Trend Tighter.
CDX12 HVOL -15bps to 360 (FV -20.47bps to 467.38) (4 wider - 26 tighter <> 23 steeper - 7 flatter) - Trend Tighter.
CDX12 ExHVOL -4.8bps to 92.89 (FV -3.31bps to 96.86) (14 wider - 81 tighter <> 39 steeper - 56 flatter).
CDX11 XO -10.6bps to 367.9 (FV -14.27bps to 435.45) (4 wider - 30 tighter <> 24 steeper - 10 flatter) - Trend Tighter.
CDX12 HY (30% recovery) Px $+0.85 to $79.88 / -32.5bps to 1119.3 (FV -23.34bps to 1051.41) (29 wider - 66 tighter <> 63 steeper - 33 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $+0.61 to $78.1 / -41.29bps to 1052.9 - Trend Tighter.
MCDX12 +2bps to 195bps. - No Trend.
CDR Counterparty Risk Index fell 3.71bps (-1.6%) to 227.51bps (4 wider - 11 tighter).
CDR Government Risk Index fell 0.4bps (-0.59%) to 67.31bps.
DXY weakened 0.68% to 83.97.
Oil rose $1.24 to $54.44.
Gold rose $15.3 to $901.85.
VIX fell 0.77pts to 34.48%.
10Y US Treasury yields fell 0.2bps to 3.16%.
S&P500 Futures gained 3.18% to 904. Sphere: Related Content
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False recovery continues on the back of housing numbers
On today's release of housing numbers, Bloomberg reports more false positives on the economic recovery path. On the second straight month of pending home sales rising (up 3.2%), many are calling this the bottom, pretty much THE leading indicator that we are close to out of the woods. I mean, come on... housing got us into this mess, it'll get us out, right? A little noticed follow up though was that the Housing Affordability Index was also at record highs - basically, after a long period of restrained consumption people are reacting to lower home prices.
Of course, this is not the basis for a sustainable recovery. With unemployment numbers climbing, mortgage spreads still significant and the threat of a deflation/inflation bounce, this is unlikely to change much of the reality of the situation we are facing. None of this is new to ZH readers but merely another indication of the false rally we're going through.
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For Now, Judge Gonzalez Siding With Chrysler Creditors
In an event that just as easily may not have occurred, Judge Gonzalez presiding over the boiling hot Chrysler bankruptcy, has sided with an objection of the Chrysler Non-TARP creditors (aka abominable hedge funds). The issue at hand was a request for a delay of the hearing on Section 363 bidding procedures from today until tomorrow at 2:30 pm. If Lehman's bankruptcy is any indication, this is the kind of objection that would have been quickly steamrolled by Judge Peck on his route to bankruptcy Superstardom (the latter has used the words "biggest bankruptcy in history" approximately 240 times to date, according to docket records). Could it be that Gonzalez is actually an adherent to due process and will give both sides in this bankruptcy a fair chance?
Either way, as Zero Hedge speculated yesterday, today's court hearing was indeed a mini drama after Tom Lauria disclosed to Judge Gonzalez that some Chrysler creditors had received death threats. While the threats have been referred to the FBI, it is obvious why Lauria is set on keeping the identities of the 20 hold outs secret at this point.
Among the other disclosures today was the statement by Robet Manzo of Capstone that not only is the U.S. government not charging interest on the Chrysler DIP but that there is a "low probability" that Chrysler would be able to repay the loan. This means that the UST could lose as much as $8 billion in this bankruptcy, an amount which includes the $4 billion already loaned in January. Also uncovered was the new projection for legal fees associated with the Chapter 11, which has grown from $20 million a week ago to a cool $30 million currently (this is not the last iteration of the number).
Lastly, Corinne Ball of Jones Day had this to say about the situation:
Either way, as Zero Hedge speculated yesterday, today's court hearing was indeed a mini drama after Tom Lauria disclosed to Judge Gonzalez that some Chrysler creditors had received death threats. While the threats have been referred to the FBI, it is obvious why Lauria is set on keeping the identities of the 20 hold outs secret at this point.
Among the other disclosures today was the statement by Robet Manzo of Capstone that not only is the U.S. government not charging interest on the Chrysler DIP but that there is a "low probability" that Chrysler would be able to repay the loan. This means that the UST could lose as much as $8 billion in this bankruptcy, an amount which includes the $4 billion already loaned in January. Also uncovered was the new projection for legal fees associated with the Chapter 11, which has grown from $20 million a week ago to a cool $30 million currently (this is not the last iteration of the number).
Lastly, Corinne Ball of Jones Day had this to say about the situation:
"The survival of Chrysler's business is at stake in these proceedings, as is the fate of hundreds of suppliers and thousands of Chrysler dealers around the country. Absent immediate action, (Chrysler) will lose the only opportunity available to them to preserve their business as a going concern and to avoid the economic devastation that will occur if Chrysler's business, and Chrysler's suppliers and dealers, are forced to shut down."These are, almost verbatim, the same words used by Harvey Miller, Lori Fife and Shai Waisman when the Weil Gotshal legal team steamrolled through any and all objections to sell Lehman's Broker Dealer division a mere 4 days after the bankruptcy filing (and with uber-Judge Peck's blessings all the way). It is yet to be seen how quickly Gonzalez caves. Sphere: Related Content
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CMSA Tipping Its Hand Over General Growth Properties
After the CMSA, through the valiant efforts of one Chris Hoeffel, Managing Director at InvestCorp, got what it wanted in the TALF extension for CMBX from 3 to 5 years, but subsequently realized it is insufficient to package all existing loans and lower rated securities, it is now focusing on other, much more relevant aspects of the ongoing crunch in Commercial Real Estate (but don't think they are done with TALF, only a matter of time before the push for the new version is rekindled, see below). Their most recent concern: General Growth Properties and the troubling development of Bankruptcy Remote Entities potentially suffering substantive consolidation, a topic whose dramatic implications Zero Hedge has discussed previously.
The CMSA has apparently read Zero Hedge and is now sweating which buttons to push and reverse the course that GGP has taken, which as I speculated, could be very adverse not just for the bankrupt mall REIT but for the entire industry. Here is a press release the Commercial Mortgage Securities Association has issued:
CMSA amicus brief below:
hat tip Alex Sphere: Related Content
The CMSA has apparently read Zero Hedge and is now sweating which buttons to push and reverse the course that GGP has taken, which as I speculated, could be very adverse not just for the bankrupt mall REIT but for the entire industry. Here is a press release the Commercial Mortgage Securities Association has issued:
CMSA Files Amicus Brief on General Growth Properties BankruptcyAnd of course, any outcome that is not to the liking of the CMSA, will only provide them with more political leverage to readjust the terms of the TALF programs for Commercial Real Estate one more time. In fact Citi has already opined on this in a Roundtable on Securitized Products:
CMSA and the Mortgage Bankers Association on May 1, 2009 filed an amicus brief with the U.S. Bankruptcy Court, Southern District of New York, presenting information on the serious negative implications for commercial real estate finance in the remedies and positions pursued by General Growth Properties in its bankruptcy filings.
CMSA believes that the inclusion of special purpose subsidiaries in General Growth Properties bankruptcy filing in mid-April may threaten the fundamental principles of structured finance and securitization. Borrowers receive favorable loan terms based on lender, investor and rating agency reliance on isolation of the commercial property from the credit exposure of affiliates of the borrower. CMSA believes the strategy pursued by GGP violates this principle and, if upheld, would put into question the reliability of the rule of law in commercial finance.
CMSA strongly believes that the actions sought and positions taken by GGP are not supportable, violate fundamental legal and financial principles, and would be a tremendous blow to an already shaky economy and to federal and private-sector attempts to revive the commercial mortgage-backed securities market.
For a full copy of the joint amicus brief, click here.
We believe Friday’s announcement was only an early expansion of TALF 1.0. We believe that the Fed and Treasury are still evaluating expanding TALF to secondary CMBS positions as part of the next phase of TALF expansion. An announcement is likely in the coming weeks.So yes, looks like more money will be thrown at the problem. After all it is merely cotton with some green ink at this point.
CMSA amicus brief below:
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Insights From America's Richest Men
Always amusing getting three of America's richest men together, along with some more traditional "insights" from Charlie Munger. It is curious what the insurance policy for Fox was to have all three of them together at the same time, especially if they had to all fit in an elevator together on the way to the studio. Compliments of Fox Business News.
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Cliff Asness "I Am Ready For My 'Personalized' Tax Rate Now"
Cliff Asness, who runs quant fund AQR Capital, has distributed an opinion letter discussing the most relevant topic over the past few days that has gotten no MSM attention, namely the demonization of hedge funds. Cliff brings up the "other side" of the argument, which is actually quite relevant here, as soon the channeling of Main Street anger at Wall Street in general, and hedge funds in particular, under the baton of Barack Obama, will easily become a force too big to stop, and soon the populist monster that the president has created will jump off the Dr. Frankenstein table and proceed to run amok, beheading (metaphorically) hedge funders left and right, until these is no asset management class, except of course for the long-only plain vanilla mutual funds. Asness summarizes it well:
And for all who say good riddance to hedge funds, the two most glaring big picture arguments worth pointing out are that in the market's ecosystem hedge, funds provide a critical role of lowering not only the cost of capital by being in competition with each other for asset funding, but also in the role of bottom feeders, purchasing stressed assets, which your traditional prop desk or BHC would not touch with a 10 foot pole in the current over-TARPed environment, thus providing much needed capital and liquidity to the credit capital markets (very much comparable to the "provisioning" that Goldman Sachs is doing singlehandedly with regard to equities).
Unafraid In Greenwich Connecticut
Clifford S. Asness
Managing and Founding Principal
AQR Capital Management, LLC
The President has just harshly castigated hedge fund managers for being unwilling to take his administration’s bid for their Chrysler bonds. He called them “speculators” who were “refusing to sacrifice like everyone else” and who wanted “to hold out for the prospect of an unjustified taxpayer-funded bailout.”
The responses of hedge fund managers have been, appropriately, outrage, but generally have been anonymous for fear of going on the record against a powerful President (an exception, though still in the form of a “group letter”, was the superb note from “The Committee of Chrysler Non-TARP Lenders” some of the points of which I echo here, and a relatively few firms, like Oppenheimer, that have publicly defended themselves). Furthermore, one by one the managers and banks are said to be caving to the President’s wishes out of justifiable fear.
I run an approximately twenty billion dollar money management firm that offers hedge funds as well as public mutual funds and unhedged traditional investments. My company is not involved in the Chrysler situation, but I am still aghast at the President's comments (of course these are my own views not those of my company). Furthermore, for some reason I was not born with the common sense to keep it to myself, though my title should more accurately be called "Not Afraid Enough" as I am indeed fearful writing this... It’s really a bad idea to speak out. Angering the President is a mistake and, my views will annoy half my clients. I hope my clients will understand that I’m entitled to my voice and to speak it loudly, just as they are in this great country. I hope they will also like that I do not think I have the right to intentionally “sacrifice” their money without their permission.
Here's a shock. When hedge funds, pension funds, mutual funds, and individuals, including very sweet grandmothers, lend their money they expect to get it back. However, they know, or should know, they take the risk of not being paid back. But if such a bad event happens it usually does not result in a complete loss. A firm in bankruptcy still has assets. It’s not always a pretty process. Bankruptcy court is about figuring out how to most fairly divvy up the remaining assets based on who is owed what and whose contracts come first. The process already has built-in partial protections for employees and pensions, and can set lenders' contracts aside in order to help the company survive, all of which are the rules of the game lenders know before they lend. But, without this recovery process nobody would lend to risky borrowers. Essentially, lenders accept less than shareholders (means bonds return less than stocks) in good times only because they get more than shareholders in bad times.
The above is how it works in America, or how it’s supposed to work. The President and his team sought to avoid having Chrysler go through this process, proposing their own plan for re-organizing the company and partially paying off Chrysler’s creditors. Some bond holders thought this plan unfair. Specifically, they thought it unfairly favored the United Auto Workers, and unfairly paid bondholders less than they would get in bankruptcy court. So, they said no to the plan and decided, as is their right, to take their chances in the bankruptcy process. But, as his quotes above show, the President thought they were being unpatriotic or worse.
Let’s be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients’ money to share in the “sacrifice”, they are stealing. Clients of hedge funds include, among others, pension funds of all kinds of workers, unionized and not. The managers have a fiduciary obligation to look after their clients’ money as best they can, not to support the President, nor to oppose him, nor otherwise advance their personal political views. That’s how the system works. If you hired an investment professional and he could preserve more of your money in a financial disaster, but instead he decided to spend it on the UAW so you could “share in the sacrifice”, you would not be happy.
Let’s quickly review a few side issues.
The President's attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him. Why is he not calling on his party to "sacrifice" some campaign contributions, and votes, for the greater good? Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power.
Let’s also mention only in passing the irony of this same President begging hedge funds to borrow more to purchase other troubled securities. That he expects them to do so when he has already shown what happens if they ask for their money to be repaid fairly would be amusing if not so dangerous. That hedge funds might not participate in these programs because of fear of getting sucked into some toxic demagoguery that ends in arbitrary punishment for trying to work with the Treasury is distressing. Some useful programs, like those designed to help finance consumer loans, won't work because of this irresponsible hectoring.
Last but not least, the President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying. The TARP recipients had no choice but to go along. The hedge funds were singled out only because
they are unpopular, not because they behaved any differently from any other ethical manager of other people's money. The President’s comments here are backwards and libelous. Yet, somehow I don’t think the hedge funds will be following ACORN’s lead and trucking in a bunch of paid professional protestors soon. Hedge funds really need a community organizer.
This is America. We have a free enterprise system that has worked spectacularly for us for two hundred plus years. When it fails it fixes itself. Most importantly, it is not an owned lackey of the oval office to be scolded for disobedience by the President.
I am ready for my “personalized” tax rate now.
***
hat tip Travis. Sphere: Related Content
The hedge funds were singled out only because they are unpopular, not because they behaved any differently from any other ethical manager of other people's money. The President’s comments are backwards and libelous.In this case, as in every other, it is always imperative to hear the other side's argument, and Cliff actually does a good job of presenting it.
And for all who say good riddance to hedge funds, the two most glaring big picture arguments worth pointing out are that in the market's ecosystem hedge, funds provide a critical role of lowering not only the cost of capital by being in competition with each other for asset funding, but also in the role of bottom feeders, purchasing stressed assets, which your traditional prop desk or BHC would not touch with a 10 foot pole in the current over-TARPed environment, thus providing much needed capital and liquidity to the credit capital markets (very much comparable to the "provisioning" that Goldman Sachs is doing singlehandedly with regard to equities).
Unafraid In Greenwich Connecticut
Clifford S. Asness
Managing and Founding Principal
AQR Capital Management, LLC
The President has just harshly castigated hedge fund managers for being unwilling to take his administration’s bid for their Chrysler bonds. He called them “speculators” who were “refusing to sacrifice like everyone else” and who wanted “to hold out for the prospect of an unjustified taxpayer-funded bailout.”
The responses of hedge fund managers have been, appropriately, outrage, but generally have been anonymous for fear of going on the record against a powerful President (an exception, though still in the form of a “group letter”, was the superb note from “The Committee of Chrysler Non-TARP Lenders” some of the points of which I echo here, and a relatively few firms, like Oppenheimer, that have publicly defended themselves). Furthermore, one by one the managers and banks are said to be caving to the President’s wishes out of justifiable fear.
I run an approximately twenty billion dollar money management firm that offers hedge funds as well as public mutual funds and unhedged traditional investments. My company is not involved in the Chrysler situation, but I am still aghast at the President's comments (of course these are my own views not those of my company). Furthermore, for some reason I was not born with the common sense to keep it to myself, though my title should more accurately be called "Not Afraid Enough" as I am indeed fearful writing this... It’s really a bad idea to speak out. Angering the President is a mistake and, my views will annoy half my clients. I hope my clients will understand that I’m entitled to my voice and to speak it loudly, just as they are in this great country. I hope they will also like that I do not think I have the right to intentionally “sacrifice” their money without their permission.
Here's a shock. When hedge funds, pension funds, mutual funds, and individuals, including very sweet grandmothers, lend their money they expect to get it back. However, they know, or should know, they take the risk of not being paid back. But if such a bad event happens it usually does not result in a complete loss. A firm in bankruptcy still has assets. It’s not always a pretty process. Bankruptcy court is about figuring out how to most fairly divvy up the remaining assets based on who is owed what and whose contracts come first. The process already has built-in partial protections for employees and pensions, and can set lenders' contracts aside in order to help the company survive, all of which are the rules of the game lenders know before they lend. But, without this recovery process nobody would lend to risky borrowers. Essentially, lenders accept less than shareholders (means bonds return less than stocks) in good times only because they get more than shareholders in bad times.
The above is how it works in America, or how it’s supposed to work. The President and his team sought to avoid having Chrysler go through this process, proposing their own plan for re-organizing the company and partially paying off Chrysler’s creditors. Some bond holders thought this plan unfair. Specifically, they thought it unfairly favored the United Auto Workers, and unfairly paid bondholders less than they would get in bankruptcy court. So, they said no to the plan and decided, as is their right, to take their chances in the bankruptcy process. But, as his quotes above show, the President thought they were being unpatriotic or worse.
Let’s be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients’ money to share in the “sacrifice”, they are stealing. Clients of hedge funds include, among others, pension funds of all kinds of workers, unionized and not. The managers have a fiduciary obligation to look after their clients’ money as best they can, not to support the President, nor to oppose him, nor otherwise advance their personal political views. That’s how the system works. If you hired an investment professional and he could preserve more of your money in a financial disaster, but instead he decided to spend it on the UAW so you could “share in the sacrifice”, you would not be happy.
Let’s quickly review a few side issues.
The President's attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him. Why is he not calling on his party to "sacrifice" some campaign contributions, and votes, for the greater good? Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power.
Let’s also mention only in passing the irony of this same President begging hedge funds to borrow more to purchase other troubled securities. That he expects them to do so when he has already shown what happens if they ask for their money to be repaid fairly would be amusing if not so dangerous. That hedge funds might not participate in these programs because of fear of getting sucked into some toxic demagoguery that ends in arbitrary punishment for trying to work with the Treasury is distressing. Some useful programs, like those designed to help finance consumer loans, won't work because of this irresponsible hectoring.
Last but not least, the President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying. The TARP recipients had no choice but to go along. The hedge funds were singled out only because
they are unpopular, not because they behaved any differently from any other ethical manager of other people's money. The President’s comments here are backwards and libelous. Yet, somehow I don’t think the hedge funds will be following ACORN’s lead and trucking in a bunch of paid professional protestors soon. Hedge funds really need a community organizer.
This is America. We have a free enterprise system that has worked spectacularly for us for two hundred plus years. When it fails it fixes itself. Most importantly, it is not an owned lackey of the oval office to be scolded for disobedience by the President.
I am ready for my “personalized” tax rate now.
***
hat tip Travis. Sphere: Related Content
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Dead Bodies Always End Up Floating To The Surface
Finem Respice has snagged some more thorny tidbits on the scent trail of the former NYT reporter and current Czar Of Government Motors's negotiating tactics. As more dead bodies float to the surface, it appear that Perella Weinberg was merely one of the hedge funds on the receiving end of the "persuasive" tirades. This is, of course, to be expected, as there were in the end, more than one hold out, and if Mr. Rattner felt compelled to provide justification (increased decibels or otherwise) for his point of view to an otherwise administration-friendly shop such as P-W, one can only guess how some of the smaller/less intertwined funds fared. And the kicker is that these "lesser beings" would have been on the receiving end of not only the White House Press Corps, but such other jovial acronyms as the SEC and the IRS. Perhaps Mr. Rattner, after he is done finding replacements for the UAW's source of Viagra, which is apparently the biggest concession granted by the Union, can move on to facilitate marine wildlife conciliatory strategies, specifically in the "White Shark vs Everyone Else" category.
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Populism De Jour: Pillage The Tax Cheats
Obama is really taking it to those greedy capitalist fatcats by ending "illegal overseas tax evasion." Foreign banks will be forced to send 1099 forms to the IRS for US depositors or else Obama "will assume they are sheltering money and act accordingly." And since there is currently a huge budget surplus, Obama has decided to spend some more of the extra cash collecting dust by hiring another murder (+/- 800) of highly competent IRS auditors.
Good thing the camera had zoomed in on Obama as else one may be able to watch TurboTaxTim's (T3) face during Obama's diatribe on tax evaders.
Perhaps one point that would have been worth mentioning is the staggering amount of Net Operating Loss Carryforwards which US companies have managed to accumulate over the past year due to the massive drop in GAAP earnings. Thanks to existing accounting rules, it is fairly certain that companies will be able to take advantage of these and not pay any taxes not only in Switzerland, but in the US (both federal and state) for the next 10-15 years.
hat tip Richard. Sphere: Related Content
Good thing the camera had zoomed in on Obama as else one may be able to watch TurboTaxTim's (T3) face during Obama's diatribe on tax evaders.
Perhaps one point that would have been worth mentioning is the staggering amount of Net Operating Loss Carryforwards which US companies have managed to accumulate over the past year due to the massive drop in GAAP earnings. Thanks to existing accounting rules, it is fairly certain that companies will be able to take advantage of these and not pay any taxes not only in Switzerland, but in the US (both federal and state) for the next 10-15 years.
hat tip Richard. Sphere: Related Content
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Citi (Incremental?) Equitization Talks In Progress
Developing story per Dow Jones: Citi is "meeting with success" in persuading some investors who own preferred shares to convert them to common shares, according to Elizabeth McDonald from Fox Business News. The sovereign wealth funds of Singapore, Abu Dhabi and Kuwait are among those named in the report. Saudi billionaire Alwaleed bin Talal has also been involved in discussions, the report said. The report said the company hadn't yet heard from the New Jersey State Pension Fund or former CEO Sandy Weil.
It is not clear whether this is in addition to or merely under the parameters of the existing exchange offer. But as more news of this nature leaks, it becomes more and more obvious that there will be at least some fireworks on the 7th. Sphere: Related Content
It is not clear whether this is in addition to or merely under the parameters of the existing exchange offer. But as more news of this nature leaks, it becomes more and more obvious that there will be at least some fireworks on the 7th. Sphere: Related Content
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Loans Versus Bonds Relative Value: Week Of April 30
Just when we thought the heat-seeking short squeeze in credit land may be subsiding, three new bonds rip tighter: old shorter max-pain name Neiman Marcus, whose bonds tightened by 540 bps, Graham Packaging which ripped by 550 bps and Huntsman Int'l which tightened by 425 bps. As in the last week, the rolling equity squeeze in unique stocks and sectors has caused comparable squeezes in corresponding highly-shorted credits.
Some odd names that stand out this week with respect to a disproportionate widening in loans and a tightening in bonds are: BE Aerospace, Centennial Communications, Constellation Brands, First Data Corp and Pantry, although the moves are marginal enough to be likely noise.
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Some odd names that stand out this week with respect to a disproportionate widening in loans and a tightening in bonds are: BE Aerospace, Centennial Communications, Constellation Brands, First Data Corp and Pantry, although the moves are marginal enough to be likely noise.
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Chrysler Non-TARP Lenders Come Out Guns Swinging (Pick Your Verb), Object To 363 Sale
As expected, the first salvo in the Chrysler war was fired today by the now infamous and much maligned Non-TARP secured lenders (the group represented by Tom Lauria of White & Case). Just hitting the Chrysler bankruptcy docket is an objection filed by W&C on behalf of its clients, objecting to the 363 asset sale. The filing is attached below (and linked here). Some very harsh language with regards to Uncle Sam in there. And as a lot of lawyers were working all night to put this together, the filing includes the following loophole "The Preliminary Objection was filed on very short notice. The Chrysler Non-TARP Lenders reserve the right, and intend, to submit a more detailed objection as time permits." As this case will be flying at alarming speed, expect to see a lot of hypercaffeinated, underslept lawyers on speed at the court hearings.
Some highlights from the filing:
1. The Proposed Sale Constitutes an Illegal Sub Rosa Plan that Redistributes Value Among Creditor Classes.
2. The Proposed Sale Fails the Requirement of Section 363(f).
3. The Sale Is Not Proposed In Good Faith.
4. The Taking of Collateral through a Direct or Indirect Use of TARP Authority is Unconstitutional. (This one is Huge as it sets a case law precedent.)
The issue at play here is that Judge Gonzalez will have to step into a role as a constitutional lawyer much more so than a bankruptcy judge, which should make i) his life interesting over the next 30 - 3000 days (depending on how long the case drags for), and ii) the hearing of the 363 asset sale more fun and exciting than any soap opera on TV. We will keep readers posted on when that is slated to occur.
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Some highlights from the filing:
Separate and apart from the lack of due process and any infirmities in the bidding procedures themselves, the Sale Motion should be denied because it seeks approval of a sale that cannot be approved under the Bankruptcy Code. In short, the Court should not permit a patently illegal sales process to go forward. Among other things, the sale proposed by the Debtors constitutes an impermissible sub rosa plan of reorganization that strips the Chrysler Senior Lenders of the protections of section 1129(a) of title 11 of the United States Code (the “Bankruptcy Code”) and improperly attempts to extinguish their property rights without their consent. Further, the sale does not comply with section 363(f) of the Bankruptcy Code and was not proposed in good faith. Indeed, the sale is far from an arm’s length transaction, but rather, is the result of a tainted sales process dominated by the United States government. Under these circumstances, the Sale Motion should be denied.The summary of the grounds for the objection:
1. The Proposed Sale Constitutes an Illegal Sub Rosa Plan that Redistributes Value Among Creditor Classes.
2. The Proposed Sale Fails the Requirement of Section 363(f).
3. The Sale Is Not Proposed In Good Faith.
4. The Taking of Collateral through a Direct or Indirect Use of TARP Authority is Unconstitutional. (This one is Huge as it sets a case law precedent.)
The issue at play here is that Judge Gonzalez will have to step into a role as a constitutional lawyer much more so than a bankruptcy judge, which should make i) his life interesting over the next 30 - 3000 days (depending on how long the case drags for), and ii) the hearing of the 363 asset sale more fun and exciting than any soap opera on TV. We will keep readers posted on when that is slated to occur.
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Biggest Loan Movers: Week Of May 1
The Friend-O treatment that secured bondholders seem to be poised to get as a result of the administration's "preferentializing" of unions, may make some of these bids a tad soft in the coming week. Biggest loan movers for this past week below.
source: Loanconnector.com Sphere: Related Content
source: Loanconnector.com Sphere: Related Content
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Frontrunning: May 4
- BofA and Citi in last push on stress tests, both plan to raise $10 billion in capital (FT)
- General Motors bankruptcy probable as Obama favors UAW over bondholders (Bloomberg)
- How big banks want to game the mortgage mess (WSJ)
- Obama seeks to end tax haven rules that save companies $190 billion (Bloomberg)
- E.U. says Europe faces deep recession, lowers growth forecast (NYT)
- New York Fed chairman's ties to Goldman raise questions (WSJ)
- Major change in PPIP? FDIC may let investors buy toxic assets without treasury stake (Bloomberg)
- Art prices at New York auctions expected to drop by 50% (FT)
- Obama to secured creditors: Drop Dead (Real Clear Markets)
- Only muscle cars will save Detroit (National Post)
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Sunday, May 3, 2009
JPY Punk'd In Early Trading
Early attempts to jam the USD into the stratosphere and recreate the carry trade have failed miserably. Definitely will not be the last time on this late Sunday night/early Monday morning as fat fingered currency traders try to soak up the spilled moccachino from between the keys of their Bloomberg keyboards.
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Chrysler First Day Motions Hearing
For all readers interested (and able) in seeing the drama of the most critical bankruptcy since Lehman unwind in real life, the hearing over Chrysler's First Day Motions will be held tomorrow at 10:00 am in New York Bankruptcy Court at 1 Bowling Green, and is open to the general public (do not bring weapons: there is a metal detector for some paranoid reason). Nothing like watching lawyers' body language to see how they feel when they know their adversary is not only the administration, but Steve Rattner himself.
As there likely will be throngs of people trying to get into one of the 10 overflow rooms, we suggest appearing at least an hour in advance. However, tomorrow's hearing will be largely formulaic, and the real circus will occur at some point in mid May when Judge Gonzalez will hold a hearing on the 363 asset process. That one may very well be a spectacle for the ages. Sphere: Related Content
As there likely will be throngs of people trying to get into one of the 10 overflow rooms, we suggest appearing at least an hour in advance. However, tomorrow's hearing will be largely formulaic, and the real circus will occur at some point in mid May when Judge Gonzalez will hold a hearing on the 363 asset process. That one may very well be a spectacle for the ages. Sphere: Related Content
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White House Claims Head Of White & Case Restructuring Group Lied
In a story becoming more bizarre by the minute, ABCNews has now picked up on the Perella Weinberg scent with some new twists. According to ABC, White House deputy press secretary Bill Burton claims that the allegations by Tom Lauria, global head of the Financial Restructuring and Insolvency at White & Case are "completely untrue". As Zero Hedge already disclosed, Perella Weinberg was previously a client of White & Case, however, the firm run by former head of M&A at Morgan Stanley Joe Perella (where incidentally Steve Rattner was head of the Communications group until 1989), decided to fire the law firm after developments unknown, and in a radio show, Tom Lauria had this to say about the White House's alleged strongarming tactics:
Granted there could be even more to this story than meets the eye, thanks to some keen observations by our friends at Finem Respice.
Ultimately, this will be a very interesting development, because without factual backing, Tom Lauria's career is now on the line, as he has taken on not just the administration but his very own, former client. The bottom line here is that someone is lying, and if any further facts emerge to substantiate White & Case's position, it could prove to be a massive PR blow to both the White House and the FDIC's advisor, Perella Weinberg.
The full statement by Perella Weinberg is presented below:
"One of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under threat that the full force of the White House press corps would destroy its reputation if it continued to fight...That was Perella Weinberg."The White House has now stepped in and claims that this story is patently false:
"The charge is completely untrue," said White House deputy press secretary Bill Burton, "and there's obviously no evidence to suggest that this happened in any way."What is more strange is that now Perella Weinberg itself is claiming Lauria's story misrepresented the facts:
"A Perella Weinberg Partners spokesperson told ABC News on Sunday that “The firm denies Mr. Lauria’s account of events.” The spokesperson would not elaborate."What is strangest is that Lauria would stake his career and reputation on the line by stating on the record the facts previously disclosed. As such his downside is much bigger than that of Mr. Burton or of the PW's spokesperson, as they effectively side with the Obama's side of the story.
Granted there could be even more to this story than meets the eye, thanks to some keen observations by our friends at Finem Respice.
Ultimately, this will be a very interesting development, because without factual backing, Tom Lauria's career is now on the line, as he has taken on not just the administration but his very own, former client. The bottom line here is that someone is lying, and if any further facts emerge to substantiate White & Case's position, it could prove to be a massive PR blow to both the White House and the FDIC's advisor, Perella Weinberg.
The full statement by Perella Weinberg is presented below:
Suggestions have been made that the Perella Weinberg Partners Xerion Fund changed its stance on the Chrysler restructuring due to pressure from White House officials. This is incorrect. The decision to accept and support the proposed deal was made by the Xerion Fund after reflecting carefully on the statement of the President when announcing Chrysler’s bankruptcy filing. In considering the President’s words and exercising our best investment judgment, we concluded that the risks of potentially severe capital loss that could arise from fighting this in bankruptcy court far outweighed any realistic potential upside.
We have a very specific mandate from our investors, and that is to carefully weigh investment risks and rewards. It is not our investment mandate to pursue political or risky legal campaigns with our investors’ money. This was our assessment of investment risk and reward, nothing else.
While we did and still do believe that the lenders would be justified in pressing their objections under conventional bankruptcy law principles, we believe a settlement would now be in the best interests of all parties in the context of avoiding a drawn out contested bankruptcy litigation proceeding, and we encourage our colleagues in the loan syndicate to pursue this immediately.”
Lastly, should it be at all odd, that Mr. Arbess, fund manager of Perella Weinberg's Xerion, which is at the heart of this whole Chrysler fiasco, was not only a Partner, but also Head of Global Privatization at ... White & Case.
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Weekend Reading
- The DTCC's CNS naked short selling residue (Deep Capture) - must read for everyone curious about regulation SHO and the gimmickry going on in the equity shorting market.
- How Lehman got its real estate fix (New York Times)
- More glowering optimism from Templeton's Mark Mobius, who sees an EM bull market, and a boost to Mexican EPS despite H1B1 (here and here)
- "I can only hope this proves to be inflammatory nonsense" (Finem Respice)
- Gold may be off to the races above $950 (Bloomberg)
- Berkshire calls investment 4 replacement candidates' 2008 performance subpar, to succeed internally (Bloomberg)
- WHO prepares for a pandemic (WSJ)
- Chartology:
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Guest Post: Global Economics on Tilt - How To Protect Your Ass(ets)
Submitted by Jeff Clark, Editor of BIG GOLD
Gold isn’t going to $2,000 an ounce.
Before you gag on your coffee or suffer chest pains, allow me to explain.
We’re about eight years into the bull market, and gold has breached the $1,000 level twice and has spent weeks trading above the old high of $850. Some observers are now saying that gold’s pretty much had its day and that once the recession is over, it will retreat for good.
However, the four-digit gold price we’ve seen so far is with no price inflation to speak of, no effects of the atrocious increase in the money supply, and despite a rising dollar. What happens to gold when each of those pictures gets turned upside down – high inflation, excess cash jolting the economy, and a falling dollar? After all, gold’s performance to date has been powered only by general anxiety, not by any visible erosion in the dollar’s value.
I decided to take a fresh look at calculations that could be used to appraise gold’s upside potential. No one of them, by itself, comes with compelling logic. But they all point in the same direction.
Gold’s Percentage Rise in the Last Bull Market. What if gold in this bull market repeats the percentage rise in the last bull market? In the 1970s gold rose from $35 to $850, a factor of 24.28. Our low in 2001 was $255.95. Multiply that by 24.28 and you get a gold price of $6,214 per ounce.
U.S. Gold Holdings to Money Supply: The M1 money supply consists of currency and checkable deposits. The U.S. government currently holds 286.9 million ounces of gold. If the government were to make each dollar redeemable by the amount of gold it possesses, we’d arrive at the following price for gold: $1.569 trillion ÷ 286.9 million oz. = $5,468.80 per ounce
Gold/Dow Ratio: The ratio was about “1” when gold peaked in 1980, meaning the Dow and gold were the same price. To restore that relationship at today’s stock prices would mean when the Dow is at 6,626, gold should be at $6,626/oz. Of course, we think it likely that the Dow will get a lot lower before gold peaks. But even if it drops all the way to 4,000, that would imply a gold price of $4,000/oz.
All the Money in the World vs. Gold Reserves: If the public eventually sees the paper game being run by the central banks for what it is, governments will be forced to back their currencies with gold (and perhaps other tangibles like silver). Assuming they had to go into the market and buy the gold needed to restore faith in their currencies, the numbers might look like this: Total central banks reserves (including gold holdings) = $4.8 trillion, divided by 929.6 million ounces total gold reserves held by all official institutions that issue currency = $5,246 gold price.
U.S. Gold Holdings to U.S. Foreign Trade Deficit: The size of a country's deficit or surplus would be of no consequence if all currencies were convertible into a fixed amount of gold. However, the dollar is increasingly considered a hot potato, and when the trade balance reverses, as it must, dollars will flow back to the U.S. and fuel domestic price inflation. Based on the cumulative trade deficit of $9.13 trillion (up from $6 trillion since June ‘07!) and U.S. gold holdings of 286.9 million ounces, the corresponding price of gold would be $31,822 per ounce.
U.S. Gold to U.S. Government Liabilities: Finally, the GAO (Government Accountability Office) calculates an income statement and balance sheet for the U.S. government. As you’d suspect, it is dominated by future liabilities for Medicare and Social Security. What if they had to be backed by the supply of gold? Official U.S. government liabilities now ring in at an incredible $55.2 trillion. To make good on that would require a $192,401 gold price.
No, we don’t think gold will hit $192,000 or even $32,000. And there really isn’t any surefire way to forecast the eventual high. But it’s clear that every weathervane is pointing in the same direction. So, yes, gold isn’t going to $2,000; it’s going higher.
Witness the Breakdown
Given the ongoing turmoil and the swallowing darkness at the end of the crumbling economic tunnel, our recommended BIG GOLD strategy remains keeping one-third in cash, one-third in physical gold, and one-third in our selected gold stocks. New money for investment should be split among the same three categories; we just don’t see any safer places to be.
As economies around the world continue to shrink and governments continue administering larger doses of the wrong medicine, we’ll sit in relative comfort with our gold for protection and our stocks for profit. We expect the prices of both to rise as others join us.
***
Even though some of the mainstream media are already popping the champagne, cheerfully pronouncing the end of the crisis, we beg to differ. The economic quagmire the U.S. and much of the developed world is in is far from over… so be right and sit tight, as we at Casey Research like to say. And find out how you can make the most out of gold as a safe-haven investment, by clicking here. Sphere: Related Content
Gold isn’t going to $2,000 an ounce.
Before you gag on your coffee or suffer chest pains, allow me to explain.
We’re about eight years into the bull market, and gold has breached the $1,000 level twice and has spent weeks trading above the old high of $850. Some observers are now saying that gold’s pretty much had its day and that once the recession is over, it will retreat for good.
However, the four-digit gold price we’ve seen so far is with no price inflation to speak of, no effects of the atrocious increase in the money supply, and despite a rising dollar. What happens to gold when each of those pictures gets turned upside down – high inflation, excess cash jolting the economy, and a falling dollar? After all, gold’s performance to date has been powered only by general anxiety, not by any visible erosion in the dollar’s value.
I decided to take a fresh look at calculations that could be used to appraise gold’s upside potential. No one of them, by itself, comes with compelling logic. But they all point in the same direction.
Gold’s Percentage Rise in the Last Bull Market. What if gold in this bull market repeats the percentage rise in the last bull market? In the 1970s gold rose from $35 to $850, a factor of 24.28. Our low in 2001 was $255.95. Multiply that by 24.28 and you get a gold price of $6,214 per ounce.
U.S. Gold Holdings to Money Supply: The M1 money supply consists of currency and checkable deposits. The U.S. government currently holds 286.9 million ounces of gold. If the government were to make each dollar redeemable by the amount of gold it possesses, we’d arrive at the following price for gold: $1.569 trillion ÷ 286.9 million oz. = $5,468.80 per ounce
Gold/Dow Ratio: The ratio was about “1” when gold peaked in 1980, meaning the Dow and gold were the same price. To restore that relationship at today’s stock prices would mean when the Dow is at 6,626, gold should be at $6,626/oz. Of course, we think it likely that the Dow will get a lot lower before gold peaks. But even if it drops all the way to 4,000, that would imply a gold price of $4,000/oz.
All the Money in the World vs. Gold Reserves: If the public eventually sees the paper game being run by the central banks for what it is, governments will be forced to back their currencies with gold (and perhaps other tangibles like silver). Assuming they had to go into the market and buy the gold needed to restore faith in their currencies, the numbers might look like this: Total central banks reserves (including gold holdings) = $4.8 trillion, divided by 929.6 million ounces total gold reserves held by all official institutions that issue currency = $5,246 gold price.
U.S. Gold Holdings to U.S. Foreign Trade Deficit: The size of a country's deficit or surplus would be of no consequence if all currencies were convertible into a fixed amount of gold. However, the dollar is increasingly considered a hot potato, and when the trade balance reverses, as it must, dollars will flow back to the U.S. and fuel domestic price inflation. Based on the cumulative trade deficit of $9.13 trillion (up from $6 trillion since June ‘07!) and U.S. gold holdings of 286.9 million ounces, the corresponding price of gold would be $31,822 per ounce.
U.S. Gold to U.S. Government Liabilities: Finally, the GAO (Government Accountability Office) calculates an income statement and balance sheet for the U.S. government. As you’d suspect, it is dominated by future liabilities for Medicare and Social Security. What if they had to be backed by the supply of gold? Official U.S. government liabilities now ring in at an incredible $55.2 trillion. To make good on that would require a $192,401 gold price.
No, we don’t think gold will hit $192,000 or even $32,000. And there really isn’t any surefire way to forecast the eventual high. But it’s clear that every weathervane is pointing in the same direction. So, yes, gold isn’t going to $2,000; it’s going higher.
Witness the Breakdown
- When determining how to keep your wealth safe, the state of global affairs can be a powerful reminder that gold should be part of the strategy. And today our world, essentially, is on fire.
- Eastern Europe borders on bankruptcy. Brazil's economy is falling off a cliff. Ditto Mexico.
- Protests have erupted in Latvia, Chile, Greece, Bulgaria, Iceland, Dublin, and parts of the U.S. Workers have gone on strike in Britain and France.
- In the U.S., 36 states and the District of Columbia have proposed or implemented reductions in the civil workforce. (You think customer service is poor now...)
- An astounding one in nine homes, 14 million, sits empty in the U.S. The December median price of a home sold in Detroit was $7,500. More than 8.3 million homeowners were upside down on their mortgage in the fourth quarter. Freddie Mac's new CEO resigned after six months on the job.
- Last quarter, 12 U.S. banks failed, bringing the 2008 total to 25, the highest one-year death rate since 50 failed in 1993. More foreboding, another 252 banks joined the FDIC’s “problem list.” So far this year, 19 banks have failed.
- The central bank of Ukraine banned the early redemption of term deposits, the most popular form of savings in the country. Bank deposits have dropped 20% since September, as bank customers dodge the risk of getting locked in.
- The projected US$1.75 trillion federal budget deficit is almost four times the nation’s previous record-high budget deficit. The Times Square debt clock reads over $11 trillion. Japan’s now reads $7.8 trillion.
- High unemployment has become a worldwide epidemic, with the infection spreading.
- With world economies taking it on the chin, it’s little wonder that investor interest in gold as a safe haven is growing – a trend we expect to continue. And just wait until the dollar resumes its slide, the expanding money supply jolts the real economy, and inflation kicks in.
Given the ongoing turmoil and the swallowing darkness at the end of the crumbling economic tunnel, our recommended BIG GOLD strategy remains keeping one-third in cash, one-third in physical gold, and one-third in our selected gold stocks. New money for investment should be split among the same three categories; we just don’t see any safer places to be.
As economies around the world continue to shrink and governments continue administering larger doses of the wrong medicine, we’ll sit in relative comfort with our gold for protection and our stocks for profit. We expect the prices of both to rise as others join us.
***
Even though some of the mainstream media are already popping the champagne, cheerfully pronouncing the end of the crisis, we beg to differ. The economic quagmire the U.S. and much of the developed world is in is far from over… so be right and sit tight, as we at Casey Research like to say. And find out how you can make the most out of gold as a safe-haven investment, by clicking here. Sphere: Related Content
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