Cuomo Unleashes Unholy Wrath On All Banker Bonuses

Andrew Cuomo just will not let this one go. The scandal over the $4 billion in Merrill Lynch bonuses that was paid in December (paid out just days ahead of the BofA merger conclusion, and in advance of disclosing a $15 billion quarterly loss, and a $27 billion annual loss), is reaching epic proportions, and rightfully so. Cuomo is particularly incensed over the allocation of the bonuses, which he notes does not come down to $91,000 per Merrill employee, but has a very skewed pyramidal structure, with 696 people receiving bonuses of over $1 million. The full disclosure from the letter is below:

• The top four bonus recipients received a combined $121 million;
• The next four bonus recipients received a combined $62 million;
• The next six bonus recipients received a combined $66 million;
• Fourteen individuals received bonuses of $1 0 million or more and combined they received more than $250 million;
• 20 individuals received bonuses of $8 million or more;
• 53 individuals received bonuses of $5 million or more;
• 149 individuals received bonuses of $3 million or more;
• Overall, the top 149 bonus recipients received a combined $858 million;
• 696 individuals received bonuses of $1 million or more.

What this means is that the populist wave will now turn away from compensation at banking executive committees, which may or may not be capped at half a million, to those traders, analysts, advisors and brokers who actually make money for the firm, and as such will have their bonuses scrutinized with a fine-toothed comb. It also implies that all those JP Morgan Managing Directors who were hoping to fly under the radar while they were earning 20 times more than Jamie Dimon, are about to get the royal boot.

Full Cuomo letter here:


cuomoletter - Free Legal Forms Sphere: Related Content

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Paging Lazard: Aladdin Capital For All Your DIP Needs

Realizing there is an unmet need for DIP and rescue financing as well as for more oddly named hedge funds, Aladdin Capital has recently launched a Debtor-In-Possession only fund. The Stamford fund, which claims to be avoiding the current Treasury bubble, yet which in January sacked virtually all people in its structured bond business (CLO and Loan obligation desk), likely the biggest bubble over the past decade, hopes to be on the leading edge of the next bubble, this one in super senior bankruptcy lending. The logic goes that as nobody, not even Goldman is willing to let the L+1000 DIP Genie loose, this should make for a terrific niche. Of course the logic does ignore the fact that even with DIPs, most bankruptcies will imminently lead to liquidations (how many Sharper Image massage chairs does one honestly need).

But we are not ones to rain on their parade. Says Neal Neilinger, vice chairman and CIO of Aladdin:

"This provides a tremendous opportunity to capture meaningful market share. The
DIP fund will participate, structure and lend directly into both large-cap and
mid-cap facilities."

So for all those who believe in a magic carper ride over the credit market bottom, and have a necrophiliac fascination with DIP lending and extracting 20% before an existing DIP has to be primed by yet another DIP (see Delphi), please send your resumes to Aladdin credit fund managers Victor Russo and Luke Gosselin.

Sphere: Related Content

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Istithmar Lucky To Get Half Its Cost For Barneys

It was only three weeks ago that Istithmar had put Barney's on the chopping block expecting to get not less than its full cost of $942 million. Well it didn't take long for them to realize that they would need to have Buffett's investment horizon in order to monetize at that offering price. As we speculated, the sale was borne out of a substantial need to raise cash, and as such it is quickly progressing into a full blown firesale. According to Bloomberg, 4 people familiar with the sale process have said bids are coming in the $350 to $600 million range, meaning Istithmar, which is owned by government owned Dubai World, will be lucky to get half of the price it paid for the ultraluxury retailer.

“It’s a buyers’ market,” said John Guy, a fashion and luxury analyst with MF Global Securities in London. “The fact that luxury-goods stocks have fallen more than 30 percent in the past year is also going to weigh on expectations.”

Dubai had borrowed $80 billion to finance the emirate's transformation into a tourism and finance hub, however with oil now at $40, and absolutely no need for tourism and finance hubs in a 110 degree desert, the small country is quickly realizing how horribly wrong its strategy was, especially as Dubai CDS are going wider and wider by the day. Sphere: Related Content

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Russian Bond Market Facing 80% Yields

Despite some muddled explanations from its administration on how Russia may or may not be in fact filing for private sector (but definitely not sovereign) bankruptcy, this story shows why some sort of default is imminently unavoidable as essentially the entire Russian private sector is now shut out from the primary bond market, with no foreign bond issues since August 2008.

Russian companies, the biggest emerging-market borrowers during the last three years, are shut out of the international bond market after yields jumped sixfold since August amid plunging energy prices and a weakening ruble.

No Russian company has raised money through foreign bond sales since August, compared with $80 billion raised by more than 200 companies in Latin America and Asia outside of Japan, according to data compiled by Bloomberg. Yields on bonds due next year from Moscow-based Transcapitalbank and JSC AIKB Tatfondbank in the Russian republic of Tatarstan are trading at yields above 80 percent, up from 12 percent in August.

“The primary market is dead,” said Stanislav Ponomarenko, a fixed-income analyst at ING Groep NV in Moscow. “I wouldn’t be too surprised if there are no bond deals done by Russian corporates for most of 2009, if not the entire year.”

The credit squeeze will force companies to rely on government bailouts to refinance their debt or face default, according to MDM Bank, VTB Group and Commerzbank AG. International banks proposed talks with Russian companies that owe $400 billion in the next four years, the Russian Association of Regional Banks said yesterday.

Is it too early to watch the fire? Semi-government owned Troika Dialog of course seems to think so. After all, not a lot advisory and broker dealer business going down when your country is bankrupt.

While investors “fear massive defaults” on some of the $100 billion of Russian debt due in 2009, the concern is “overstated,” Troika Dialog analysts Andrey Kuznetsov and Kingsmill Bond in Moscow wrote in a research note on Jan. 19. Companies have between $20 billion and $30 billion of their own funds, will borrow between $30 and $40 billion from the government and will rollover another $30 to $40 billion of debt this year, according to the note.

“The shortfall is likely to be in the region of $10-$20 billion, but this is more likely to damage the weaker credits among smaller banks” rather than big corporations, the Troika Dialog analysts said.

Basically, the government will have to foot a massive debt maturity bill at a time when it is spending $10 billion a week to make sure the rubble doesn't have a hundred handle. The rapidly diminishing bank reserve can only hold so long, and as head of fixed income at MTM in Moscow Mikhail Galkin says "If a company doesn't have access to state funds, it is in deep trouble." So essentially forced nationalization, but when you aren't lucky enough to be printing dollars, it gets a little tough. As Putin evaluates his options and realizes that the only outcome is oil over $80, we would not be surprised if we see a massive rally in oil over the next 3 months for one reason or another. Sphere: Related Content

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Early Feb 11 Headlines

• Roubini more on the N-Word, or N-Process as he calls it (RGE Monitor)
• Buffett's infinite investment horizon in need of lengthening (Bberg)
• Wall Street CEOs face grilling today (Reuters)
• Geithner ducks key questions, markets make him pay (Bberg and NY Post)
• European banks may be forced to report every week (DealBook)
• McGraw-Hill does not like criticism of its S&P unit (The Big Picture)
• Stock buyback halts will spell more trouble for Wall Street (Reuters)
• Harvard endowment sold 67% of U.S. stocks held in Q4 (Bberg)
• Pimco sold Treasuries in January, bought MBS, starting to get very nervous (Bberg here and here)
• Tontine's amusing latest position update (Market Folly)
• Comic relief: Geithner-Volker pep talk "transcript" (Bruce Krasting)

Sphere: Related Content

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Late Tuesday News

• Bonuses alive and well for U.S. retail brokers (Reuters)
• CDS Clearinghouse efforts have stalled (Bloomberg)
• Martin Wolf: Why new TARP will fail to rescue the banks (FT)
• Edra Blixseth's bankrupt Yellowstone Club being sold for $100 million to CrossHarbor Capital (Bloomberg)
• The big 3 banks cutting back on $1.6 trillion of credit lines (Bloomberg)
• Hedge-Funds return 0.5% in January (Bloomberg)
• CEO homes picketed by underwater homeowners (NYPost)

Sphere: Related Content

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China Wants U.S. Treasury Guarantees

In a day when the schizophrenic market's antipsychotics finally kicked in, the scariest piece of news did not come out until very late, and this one has the potential to really throw the Treasury a curveball. Yo Yongding (cruel, cruel parents), former advisor to China's Central Bank is agitating China to seek guarantees on its $682 billion of U.S. Treasury Holdings, so that these do not get eroded by "reckless policies."

Bloomberg has the following to say:

"The U.S. should make the Chinese feel confident that the value of the assets at least will not be eroded in a significant way,” Yu, who now heads the World Economics and Politics Institute at the Chinese Academy of Social Sciences, said in response to e-mailed questions yesterday from Beijing. He declined to elaborate on the assurances needed by China, the biggest foreign holder of U.S. government debt.

In [upcoming] talks with Secretary of State Hillary Clinton, China will ask for a guarantee that the U.S. will support the dollar’s exchange rate and make sure China’s dollar-denominated assets are safe, [and that this] would be one of the prerequisites for more purchases.”

“The government will be a net buyer of Treasuries in the short-term because there’s no sign they have changed their strategy,” said Zhang Ming, secretary general of international finance research center at the Chinese Academy of Social Sciences in Beijing. “But personally, I don’t think we should increase holdings because the medium- and long-term risks are quite high.”

While China may be posturing after suffering $5 billion in losses on its $10.5 billion investments in Blackstone, Morgan Stanley and TPG, this is a very serious threat. Granted, China does not have many options of where to invest its surplus cash, although refocusing on its own economy and expanding its fiscal assistance policies (ala what the U.S. is doing) is an option, thereby making it less of a sure investor in U.S. debt. Yu further confirms this threat:

A decline in reserves “isn’t likely because of China’s huge twin surpluses,” Yu
said. China “should diversify its reserves away from U.S. Treasuries if the
value of China’s foreign- exchange reserves is in danger of being inflated away
by the U.S. government’s pump-priming,” he said.

Although this is most likely a preamble to a diplomatic escalation arising from Geithner's initial claims about currency manipulation by China, the threat that the U.S. may lose it largest foreign debt purchaser should be enough to make people in the administration very worried. China is currently in a position of strength relative to the U.S., and only an altruistic desire to cooperate from a game theory p.o.v. will prevent a huge blow to the U.S. economy (which would of course impact China as well). In all likelihood, China is reminding the U.S. that it is no longer the big dog in the economic playground and that wisecracks like Geithner's, or a neo-unilateralist economic policy will not longer be tolerated. Sphere: Related Content

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Geithner = Paulson v2

As Zero Hedge expected, the market's recent misplaced optimism was tested as soon as Geithner's speech was made public earlier today, and deteriorated precipitously during his presentation.






In an eerie recreation of the market's action that would accompany Paulson's on air discourses, the equity market plunged in its biggest one day drop since December 1. Despite our, and everyone else's pleadings for transparency and a shock-treatment to stir the comatose economy, Geithner is merely perpetuating Paulson's mistakes and is taking America on a course that will result in slow, pervasive and miserable destruction of value. The derisking was punctuated by a run on Treasuries as investors sought some safe haven refuge.



In the upcoming days I will present some thoughts on the various alphabet-soup recommendations that are part of the latest bailout, with an emphasis on the much hyped TALF which, for all practical purposes, is a government-backstopped credit call option available to private investors, that exposes taxpayers to even further losses presuming asset market prices are artificially high (it will basically be a 5x leveraged bet on RMBS and CMBS assets). In the credit realm, versions of the TALF have already been extensively priced in, implying that current credit prices may be poised for a significant pull back as investors digest its full implications, especially if managers are uncomfortable with taking a 5x levered bet on RMBS and CMBS asset values which are by far the most opaque and complex to quantify.

Unfortunately, the magical silver bullet called in sick today, and while Geithner did an admirable job defending himself before the senate, he did nothing to soothe investor nerves, and instead managed to convince even more people that the widely expected breath of fresh air that would come with the Obama administration in the Treasury department, will end up being a mirage.

Goldman Sachs is more diplomatic and eloquent in their skinny on the Geithner Doctrine, so we will present that for more skeptical readers.

Here is GS ECS US Research's much more official thoughts on Geithner so far today :

BOTTOM LINE: The Geithner announcement and accompanying fact sheet are largely in line with expectations. The key features include: (1) a 'stress test' for banks; (2) another round of recapitalization via preferred shares; (3) 'public-private partnership' to purchase troubled assets; and (4) expansion of TALF to up to $1 trillion to encourage new lending. However, little detail is provided – especially on the public-private partnership – and much of the program clearly remains to be worked out over the coming weeks and months.

KEY POINTS:

1. As expected, the Treasury's financial rescue plan will work within the constraints of existing TARP funding (of which about $350bn remains), attempting to catalyze private sector funds to purchase bad assets and restart the securitization process. However, the speech and accompanying fact sheet leave open many questions about the timing of these interventions and the terms of asset purchases and recapitalization. Much of the program clearly remains to be worked out over the coming weeks and months.

2. Bank stress test. A key feature of the program will be a "stress test" for all banks with assets >$100bn. This will be used to determine which banks need to be recapitalized, or shut down. However, details on the exact nature of the stress test are scant. The Treasury will make additional TARP funds available to purchase convertible preferred shares that will be converted to common "if needed to preserve lending in a worse-than-expected economic environment."

3. Public/private bad bank. Rather than a fully government-funded bad bank, the Treasury will attempt to catalyze private sector investment via a "public-private partnership." This will start at “up to” $500 bn in size, and potentially expand to $1 trn. It is clear from Geithner's remarks that this is a concept at this point, rather than a fully designed entity -- Geithner mentioned getting public comment on the potential structure. Supposedly, private sector investors will determine the prices (perhaps with the benefit of cheap financing or partial loss protection from the government).

4. TALF expansion. As leaked repeatedly prior to the speech, the Fed's Term Asset-Backed Securities Lending Facility will be scaled up by a factor of five to $1 trillion and expand to backing CMBS and possibly RMBS. The goal here is to restart securitizations and thereby expand the flow of new lending (this is not an approach to deal with bad assets). While potentially an innovative approach to restarting securitization, it remains to be seen how effective this program will be. The Treasury's commitment to this would be $100bn rather than the $20bn currently earmarked and would be drawn from the $350bn remaining in TARP.

5. Transparency and accountability provisions. Not many surprises here, though it bears emphasis that the provisions apply to new extensions of aid rather than to those already supplied. Institutions that accept new help will be required to pay only $0.01 per quarter in dividends, refrain from purchasing shares and from pursuing new acquisitions. Geithner also outlines a number of additional reporting requirements intended to keep the pressure on institutions to make new loans. Sphere: Related Content

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Latest DTCC CDS Update (Week Of Feb 6)

The credit market was one step ahead of equities yet again, and correctly anticipated the market shakedown of this week, as accounts actively bought protection on a net basis in most sectors. Derisking was rampant with the net notional change week-over-week was $138 billion or an increase in 11,585 single-name CDS contracts. Rerisking occurred only in utilities, by $34 billion, and in industrials, by $12 billion. Derisking was most pronounced in sovereign and consumer services, by a little over $30 billion each.

Additionally, the decline in gross notional amounts seems to have stopped as broker dealers were likely writing new protection contracts on increased customer demand. Gross single-name notional increased from $14.2 trillion last week to $14.4 trillion, while indices and index tranches climbed from $13.2 trillion to $13.8 trillion, for total gross notional outstanding $28.2 trillion.

Based on these technicals, utility CDS seem to be best poised to widen over this week, especially with the pronounced overall market weakness.

Sphere: Related Content

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Sirius XM Preparing For Bankruptcy

ARS is all over the latest gossip on satellite radio company Sirius XM. Turns out the provider of paid commercial-free radio for cars, is working with Lehman liquidator Alvarez & Marsal and Simpson Thacher & Bartlett, in preparation for a Chapter 11 filing. According to Sorkin: "The documents and analysis are close to being completed and a filing could come within days." Bill Repko is also about to make off like a bandit, as his restructuring group at Evercore is allegedly also all over this one.

The recent trending of car sales (which would hit negative SAAR if that was at all possible), has been destroying the top and bottom lines at Sirius XM, which is reliant on new cars to be sold with its equipment, so the company can peddle its expensive monthly service to new drivers.

A filing would be a bad blow to EchoStar which owns a lot of SIRI's debt, and with recent prices of DISH in the mid 90s, these have much more space to drop compared to Sirius' 13 of 13 issued in August of last year and which were last trading at 25 per Trace. Sphere: Related Content

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Madoff Clawbacks Set To Begin, Investors Furious

Investors with Bernie Madoff, who were "lucky" enough to withdraw funds from Madoff anytime before the most spectacular ponzi explosion up to 2 to 4 years prior (depends on treatment), and were hoping they could tiptoe away from the whole mess, are starting to realize they will soon have two options: 1) repay the money or 2) not repay, end up getting sued and only then have to pay it back.

Under the civil jurisdiction of fraudulent conveyance, which is how Madoff's ponzi will be treated for civil purposes, the liquidating trustee is about to start distributing claims to withdrawing parties, giving them a pro rata claim of recovery in the ponzi, however in exchange for refunding any money they withdrew over the past couple of years.

This is already drawing significant anger by numerous investors, who unfortunately don't have a legal leg to stand on. Entities such as the Lucerne Foundation, Collingwood Enterprises and Douglas Rimsky have petitioned trustee Irving Picard in NY Bankruptcy Court to push back the July date to distribute claims. Ironically, if those lucky enough to have withdrawn their money do not file proper claim forms, they will likely end up being sued by the liquidating estate, making their life even unbearable.

A more detailed overview of the fraudulent conveyance dilemma for Madoff investors, courtesy of Information Arbitrage. Sphere: Related Content

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Nortel ISDA CDS Auction Presents 15% One Day Return; Is UBS In Serious Trouble?

As we wrote extensively two weeks ago when discussed the ISDA CDS dutch settlement auction, we came to the conclusion that it presents a terrific one-time arbitrage opportunity due to the fundamentals-to-liquidity disconnect in the valuation of a given defaulted security (much more in linked article). Today the Nortel ISDA auction was completed and at first glance is generating a 15% one day returns for any accounts that got involved, as the bond complex is bid 14 post the auction (and closed at 14 yesterday as well), after the ISDA auction had a final clearing price of 12, for a virtually risk free pick up of 2 points or 15%. For anyone who picked up some bonds, nice annualized 5475% return.

Some details from Creditex:

Final clearing price: 12.00
Weighted average limit price based on indicated notional and levels: 8.56
Sell limit orders total notional: $290.47 million
Total broker expressed bid notional interest: $2.1 billion
Bid Interest to Sell order ratio: 13.9%
Brokers expressing notional interest and limits (sorted by proposed limit price):

• Bank of America: $135 @ 11.62
• Barclays: $140 @ 11.47
• Morgan Stanley: $314 @ 10.89
• RBS: $75 @ 10.03
• BNP Paribas: $13.5 @ 9.83
• Goldman Sachs: $311 @ 9.68
• JP Morgan: $265 @ 9.42
• Credit Suisse: $215 @ 8.24
• Deutsche Bank: $295 @ 6.45
• UBS: $326.9 @ 3.78

Some very curious results: in the Lehman auction we noticed that Morgan Stanley was providing many straw man limit bids, all of which did not get hit. The Nortel auction presents that the trading desks of UBS with their $326 million of notional bid and Deutsche Bank at $295 (as well as Credit Suisse to an extent with $215 million) may be in substantial trouble (or just have no viable hedge fund accounts left), as the weighted average bid for UBS was 3.78, while for Deutsche Bank was 6.45. No doubt these trading desks were aware there is no chance in hell these bids would be hit, so they were merely presented for posturing with the notional amount presented, knowing full well they would not have to allocate the capital. Which leads one to believe that they simply do not have the capital available!

As we had mentioned before, ISDA auctions are a terrific way to glean real insight into the true inner workings of assorted trading desks, and the Nortel auction definitely did not disappoint. Sphere: Related Content

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No More Elevator Music, Muzak Files For Bankruptcy

Muzak, which somehow made money for decades, selling elevator music to.... elevators, and which over the past 4 years was on life support, pulled the plug today and filed for bankruptcy. The filing (09-10422, Delaware), listed over $500 million in debt and less than $50,000 in assets. Funny how that works - one day that ratio of liabilities to assets may be applicable to the U.S. as well. Anyway, it is unclear (and to be honest we were too lazy to check) if the company obtained a DIP, or whether existing lenders simply rolled existing secured interests into a priming DIP. As the company disclosed in the bankruptcy filing:

Muzak and its major creditor constituencies are committed to building upon the momentum gained over the past 22 days in an effort to continue, and ultimately complete,restructuring negotiations, which can be implemented on an expedited basis in Chapter 11.

22 days of momentum seems quite spectacular and we are all rooting that it continues for at least another 22 days before the company has to liquidate its 50,000 in assets.

And before still employed restructuring bankers start screaming for pitch books, the company has been already working with bonvivant Thane Carlston of Moelis as financial advisor and Kirkland and Ellis as legal counsel since December 19.

Sphere: Related Content

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A Glance At The Upcoming Eastern European Cataclysm

As most eyes are glued to CNBC and the exploration of the huge financial problem at home, few follow just how bad the situation is at fledgling developing economies. With news of potential defaults out of Russia, Kazakhstan devaluing its currency and begging for handouts, and Baltic states (Lithuania and Estonia) on the verge of downgrade, things in Eastern Europe are getting from bad to worse. This is most obvious when looking at the foreign currency exchange rates of countries in the region: since September 2008 the Ruble has lost 32%, the Polish Zloty 37%, the Hungarian Forint 29% and Ukraninian Hryvna 42%.

What are the immediate observable impacts of currency devaluation (this may also be relevant for the U.S. soon):

1. Speeds up asset quality deterioration and write-downs as unhedged corporate and retail customers that have borrowed in foreign currency face a relative increase in their debt burden.

2. Borrowers may chose to withdraw local currency savings to transfer them into a more stable foreign currency, which would shrink banks' funding base.

3. The capital ratio of banks with large foreign currency exposure will fall as a consequence of currency devaluation-related issues.

So as the vicious cycle of risk aversion accelerates in more countries, it results in domestic economies becoming worse off, thereby making traditional international commerce impossible, and impacting larger beneficiaries of globalization such as the G7.

But that is not all: in addition to sovereign risk, external investors also have creditor, liquidity and cash repatriation risk. The is because many West European banks acquired East European banks in the course of of privatization of state-owned banks during the transition from planned to market economies. According to the Bank for International Settlements, claims of West European banks on Eastern Europe amounted to €1.3 trillion in the first quarter of 2008, which depending on the degree of contraction and asset write-downs could be significantly impaired.

As the chart below shows, the countries that stand to be impacted worst by Eastern European bank deterioration (by being domiciles to investing banks) are Austria, France, Italy, Belgium, Germany and Sweden, as banks in these countries account for 84% of Eastern European bank claims. And of these, Austria is most on the hook, as E.E. banks account for half of Austria's global bank claims. Specific bank names that have the most exposure include Raiffeisen Bank, Erste Bank, Soc Gen, Unicredit and KBC.

This presents the case for the unwind of globalization, which is worthy of a much more indepth analysis. Over the past 10 years, as the globalization and credit bubble went hand in hand, we will inevitably see the ripple effects of a globalization in reverse, marked by constrained trade relations and minimized international commerce, in addition to the expected problems of how to deal with a widespread increase of domestic corporate and sovereign defaults, and spiking f/x rates and deflation. The true shape of the global economic problem is only now starting to take gradual shape.

Indicatively, the CDS levels of some Eastern European countries have been the biggest underperformers in recent days, and some are presented below.

Sphere: Related Content

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GE Provides GE Capital With New $9.5 Billion Injection

Adding to today's bad news, GE's CFO Keith Sherin announced that the company transferred $9.5 billion in cash from to GECC as Moody's is currently evaluating the finance unit for a possible downgrade. Shering said the transfer lowered the division's leverage ratio from 7x in the fourth quarter to the 6x pro forma for the injection. What is concerning is that GECC, which is currently AAA rated by Moody's, also has full access to the Fed's Commercial Paper Funding Facility (CPFF) and the FDIC's Temporary Liquidity Guarantee Program (TLGP), and these seem to not be sufficient to provide the near term breathing room the company needs. Furthermore, GECC has been troubled by holding a very large book of illiquid credit investments and other arcane assets, as together with CIT, it was the largest provider of rescue financing over the boom years. Now that many of those companies are on the verge of chapter 11 or outright liquidation, its asset pool is rapidly diminishing in value. In terms of its shaky capitalization, GECC ended 2008 with $36 billion in cash, had a prior cash injection from GE of $5.5 billion and has planned term debt issuance of $45 billion.

Lastly, Moody's used the following cautionary language when it presented the case for a potential downgrade:

Moody's also notes that GE's industrial businesses retain strong competitive positions, and should demonstrate improved performance once the economy rebounds. Additionally, the company's $172 billion of infrastructure equipment and service backlog provides important visibility into future revenue. Recent initiatives to reduce costs and enhance cash flow generation should also help to support near term operating performance.

"Nevertheless, the global economic downturn and continued tight credit market conditions create some strong headwinds for the company's long cycle Energy, Aviation, Transportation, and Healthcare businesses," said Moody's Lane. "Reduced order flow and deferral or cancellation of existing orders could be a more significant concern in the coming year."

Performance of the company's short cycle businesses (appliances, lighting, and local television stations) continue to exhibit weakness and could see greater earnings erosion during 2009. The impact of these short cycle businesses on GE industrial's overall performance, however, should be modest as they represent less than 5% of industrial operating profit.

Sphere: Related Content

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Alcoa Downgraded To Lowest Investment Grade BBB-

AA Shares, meet Anton Chigurh...

Some extracts:

We have concerns regarding the company's liquidity position in light of the current difficult credit environment. Although Alcoa currently has a $3.275 billion revolving credit facility maturing in 2012 and a $1.9 billion 364-day revolving credit facility expiring in October 2009, the $3.275 billion multiyear facility currently supports approximately $1.5 billion of commercial paper borrowings. With significant capital expenditures planned during the first half of 2009, combined with our expectation of reduced earnings due to continued weak end-market demand and lower aluminum prices, borrowings on the $3.275 billion facility could total in excess of $2.5 billion. This would result in total liquidity of less than $3 billion going into 2010, which we believe could also be another challenging year for the company's operations. Moreover, in our view, given the current tight credit markets, the company's ability to roll over its 364-day facility at similar terms and size is uncertain, which could result in a somewhat constrained liquidity position.

Translation: Run...Get to the Chooppaaahhh

And if that didn't convince you, here is their outlook:

The outlook is negative. Although Alcoa has been implementing restructuring and cost savings measures in response to weak market conditions and very low prices, we expect the company to post very weak results in 2009. Moreover, although we expect earnings to improve in 2010 due to somewhat better market conditions and the positive impact from restructuring and cost savings initiatives, we believe credit metrics will remain relatively weak for the 'BBB-' rating during this period, with adjusted debt to EBITDA likely to be above 3.5x and FFO to adjusted debt likely below 20%. A further downgrade would likely result from a continuation of current low prices and weak end-market conditions over the next few years, combined with a constrained liquidity position, such that in our view Alcoa's adjusted debt to EBITDA will rise to more than 4x and remain there and Alcoa's ability to improve FFO to total debt to the 20% area becomes less certain.

Sphere: Related Content

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Full Text of Tim Geithner Speech

geithner - Free Legal Forms

Can someone say selling on the news? Sphere: Related Content

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GSEs Will Need (Much) More Than $200 Billion

If anyone wants to see a glaring example of the faulty approach the government has applied to "fixing" its failed entities, look no further than the GSEs (Fannie and Freddie). And for pearls of the economic wisdom percolating in D.C. one only has to listen to FHFA director James Lockhart, who discusses why the GSEs will likely need much more than the previous $200 billion number-out-of-a-hat.

When we sized the amount in September, we obviously looked at stress tests and what was happening in the marketplace. There’s been some significant events since then that weren’t in our forecast.

This kind of brilliance rivals the rating agencies... And this is the nationalized agency that makes sure that the mortgage problem is contained. So what are the GSEs doing now to deal with this cash sinkhole:

We would expect them to be writing business that’s profitable at this point, not a large profit. But we would not expect them to be writing business at a loss under any program.

We are just speechless. And for the knockout punch: "The Treasury, not the companies, would bear the cost under proposals to use the companies to drive down mortgage rates to about 4.5%." With intellectual giants like Lockhart out there, we fully expect mortgages to have lower rates than Treasuries very soon.

As we wrote yesterday, the GSEs were the first failed attempt at properly fixing the system and to date the most indicative, and as long as the administration is terrified of taking decisive action, one should fully expect this $200 Billion number to grow to $1 Trillion within a year. Sphere: Related Content

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Is Clear Channel Communications Preparing For A Chapter 11?

And the uber-leveraged LBO dominoes keep falling. The spotlight now turns to Clear Channel Communications (CCU) which was acquired a brief 6 months ago in July 2008 for $20 billion in one of the biggest LBOs of recent years. In this curious case, sponsors Tommy Lee and Bain Capital were so much in love with their overpriced provider of billboards and radio stations, that they, and the company (which of course knew it was getting a great price for its shares, even at the amended $36/share) sued the banks who were aware they would be unable to place the insane amount of debt needed to complete the LBO (most recently CCU had $19.6 billion of total debt on $2.2 billion of declining EBITDA, or cash flow).

Yesterday, Clear Channel, which has a $2 billion, six-year revolving credit facility, filed an 8-K disclosing it had drawn the remaining $1.6 billion balance it had available. The text provided in the 8-K was a paltry and insufficient two sentences:

Clear Channel Communications has borrowed the approximately $1.6 billion of remaining availability under its $2.0 billion revolving credit facility. Clear Channel made the borrowing to improve its liquidity position in light of continuing uncertainty in credit market and economic conditions.

The biggest concern for investors is that CCU does not actually need this cash currently, thereby raising questions about what is really going on behind close doors, especially since CCU would incur an additional $75 million in annual interest as a result of the drawdown. Any potential issue is likely not related to its net bank debt leverage covenant, which has a 9.5x ceiling, while the company is currently at roughly 6x on this metric.

So what is going on? Traditionally preemptive bank runs of this nature are indicative of something more troubling. Maybe the company has realized that the likelihood of raising a DIP in this environment is negligible, which is why it is using the revolver draw down as a "cheap" DIP (see Nortel). However, the fact that it might even be considering the DIP option, should send shivers down bondholders' spines... And also the spines of LPs in Tommy Lee and Bain, who blew over $2 billion of equity on this acquisition less than a year ago, especially when they could have easily scuttled the deal by siding with the banks against the company... It will be curious to see how the PE firms explain this huge potential loss to their declining investors.

Key items to keep an eye out for: whether Lazard is hired over the next few months (just kidding, any overpriced restructuring vultures will do), whether CCU continues tendering for assorted bonds, and whether the company will roll its $500 million 4.25% notes due May into its Delayed Draw Term Loan.

Sphere: Related Content

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Schaeffler Considering Restructuring

We were half joking when we said 2 days ago that 2nd largest auto-supplier in Europe Schaeffler-Continental may go bankrupt. However, today Bloomberg is out with an article discussing the company's attempts at a debt-for-equity swap, which may end in the downfall of not only bearing-maker Schaeffler and its target Continental AG, but possibly the bank underwriting syndicate ala Lyondell. The whole situation may be worthy of its own financial soap opera one day. It has all the elements:

- small company acquiring huge company
- shady board dealings and scandals
- heart-felt appeals to portion of shareholders to go with acquiror's "low-ball" bid
- shareholders' realization that low-ball bid is actually "high-ball" and mass subscription to bid
- getting contractually forced to buy 90% more of shares than desired
- financial system unravelling months after deal closure and inability to place acquisition debt
- OEMs realizing SAAR has been artificially high by 50% in credit bubble and telling suppliers to leave them alone, resulting in massive drop in profit and earnings
- combined company so hideously overleveraged it needs to amend covenants while new M&A smell is still fresh
- more heart-felt appeals, this time to German government, to bail company out, only to get glass of water thrown in face
- large bank consortium consisting of RBS, UBS, Commerzbank, Dresdner, Landesbank and UniCredit realizing they are stuck with another huge credit loss
- having hands tied and contractually unable to raise new equity or debt

In a way we feel bad for Maria-Elisabeth Schaeffler. After all her husband (whom she married in 1963 and only inherited Schaeffler subsequent to his death in 1996) told her not to bother taking business lessons way back when. In retrospect they may have been well worth it now that the company her family had built up is about to be sold off or given away to creditors.

A pragmatic person may say at 15 points up, Continental 5 yr CDS has the makings of "cheap" Sphere: Related Content

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