Moe Meet Ron

Our friends, the jolly bankers. NYTimes (070.28.08), via The Washington Monthly:

"Banks struggling to recover from multibillion-dollar losses on real estate are curtailing loans to American businesses, depriving even healthy companies of money for expansion and hiring.

Two vital forms of credit used by companies — commercial and industrial loans from banks, and short-term 'commercial paper' not backed by collateral — collectively dropped almost 3 percent over the last year, to $3.27 trillion from $3.36 trillion, according to Federal Reserve data."

Worried Banks Sharply Reduce Business Loans

"That is the largest annual decline since the credit tightening that began with the last recession, in 2001."

Sez Kevin: "Of course banks overshot on the way up and are overshooting on the way down too. That's what always happens. It happened with savings and loans, it happened with South American loans, it happened with dotcoms, it happened with housing, it always happens."

Yeah Well

We suppose it could have been worse. AP (06.02.08), via Taplin:

"Ford Motor Co. officially unloaded its storied Jaguar and Land Rover businesses on Monday — netting the cash-strapped automaker a $1.7 billion boost that's a mere third of what it paid for the two luxury brands."

Ford completes sale of Jaguar, Land Rover to Tata Motors

"Ford bought Jaguar for $2.5 billion in 1989 and Land Rover for $2.7 billion in 2000."

Moody's thought so much of the deal that it downgraded Tata's "corporate family rating".

And Another

The Guardian (04.14.08):

"America's fourth largest bank, Wachovia, is raising $7bn (£3.52bn) through emergency fundraising as the subprime mortgage crisis in the US continues to reverberate through the banking sector.

Wachovia is raising the funds through public offerings of common and convertible preference stock after incurring a surprise $350m loss in the first quarter of 2008 compared with $2.3bn in profit a year earlier."

Fourth Largest US Bank Resorts To Emergency Fundraising

A surprise loss of a third of a billion dollars? Whoopsie!!

Not my fault. "Wachovia's chief executive, Ken Thompson, blamed the 'precipitous decline in housing market conditions and unprecedented changes in consumer behaviour' for the figures. The group bought Golden West Financial Corp, a specialist in these adjustable rate mortgages, just before the home loan market plunged."

Otherwise it wouldn't have been one of the worst deals in the history of banking. The Australian (04.14.08):

"Wachovia's current problems stem largely from its $25.5 billion purchase of Golden West nearly two years ago.

The bank’s executives initially trumpeted the deal as an ideal way to grab a foothold in California, where Golden West was based.

Wachovia To Get $8bn Capital Infusion

"While the heart of Golden West's business was non-traditional mortgages, Mr Thompson assured jittery investors that its tough underwriting standards and decades of experience meant that the company was well positioned to weather an anticipated slowdown in housing markets."

Then again.

Damned Lawyers

Health Net used to pay bonuses based on the number of policy holders who were cancelled. LATimes (02.23.08):

"One of California's largest for-profit insurers stopped a controversial practice of canceling sick policyholders Friday after a judge ordered Health Net Inc. to pay more than $9 million to a breast cancer patient it dropped in the middle of chemotherapy.

The ruling by a private arbitration judge was the first of its kind and the most powerful rebuke to the state's major insurers whose cancellation practices are under fire from the courts, state regulators and elected officials.

Health Net ordered to pay $9 million after canceling cancer patient's policy

"Calling Woodland Hills-based Health Net's actions 'egregious,' Judge Sam Cianchetti, a retired Los Angeles County Superior Court judge, ruled that the company broke state laws and acted in bad faith."

Health Net cancelled Patsy Bates' policy back in January 2004, right in the middle of her treatment. She "was stuck with more than $129,000 in medical bills and was forced to stop chemotherapy for several months until she found a charity to pay for it."

Health Net's CEO "ordered an immediate halt to cancellations and told The Times that the company would be changing its coverage applications and retraining its sales force."

"'I felt bad about what happened to her,' he said. 'I feel bad about the whole situation.'"

There are three other cancellation lawsuits pending, and a class action suit on the way.

Just damn those lawyers.

Ooopsie!!

This is rich. Bloomberg (02.22.08):

"Joe Lents hasn't made a payment on his $1.5 million mortgage since 2002.

That's when Washington Mutual Inc. first tried to foreclose on his home in Boca Raton, Florida. The Seattle-based lender failed to prove that it owned Lents's mortgage note and dropped attempts to take his house."

Banks Lose to Deadbeat Homeowners as Loans Sold in Bonds Vanish

"Subsequent efforts to foreclose have stalled because no one has produced the paperwork."

This may turn into a very big problem for our JollyBankers. "Judges in at least five states have stopped foreclosure proceedings because the banks that pool mortgages into securities and the companies that collect monthly payments haven't been able to prove they own the mortgages."

Proof? What's up with that? A lender's attorney is exasperated. "Requiring banks to produce the paperwork at a foreclosure hearing is a nuisance, said Jeffrey Naimon, a partner in the Washington office of Buckley Kolar LLP."

"'It's a gigantic waste of time,' Naimon said. 'The mortgage may have transferred five, six, eight times. It's possible that you don't have all the pieces of paper, but it was enough to convince the next guy in the chain. There's no true controversy over whether the owner owns the loan.'"

Well then. Shouldn't have a problem proving that, huh Jeff.

We Scream, You Scream

Free enterprise. In your dairy section today. AP (02.04.08), via BeatThePress:

"Ben & Jerry's Homemade Inc., one of the first companies to label its ice cream as free of a synthetic hormone, is protesting a move by some states to restrict such labeling.

The South Burlington ice-cream maker has joined a national campaign to block what critics say is an effort driven by Monsanto Co., which markets recombinant bovine somatotropin, or rBST, also known as recombinant bovine growth hormone, or rBGH.

Ben & Jerry's in Fight Over Labeling

Monsanto claims that labeling your ice cream like this is inaccurate and misleading.

We hesitate to wonder how inaccurate and misleading Monsanto would think it if ice cream makers were required to disclose whether or not the milk in their ice cream came from hormone-treated cows.

We're Number Two

From worse to worser; the continuing saga of one of the world's stupidest retailers. Bloomberg (01.08.08):

"Circuit City Stores Inc., the second- largest U.S. consumer-electronics chain, said December sales dropped 8.9 percent and repeated a forecast for a loss in the fourth quarter after holiday discounts failed to attract shoppers."

Circuit City Sales Fall 8.9%; Loss Forecast Repeated

How well have they been doing? "'You name it, they are having a problem with it,' said Anthony Chukumba, an analyst at FTN Midwest Securities Corp. in New York. 'The quality of their merchandising, their inventory management and their customer service in particular.'"

Which doesn't leave a whole lot, does it.

Some are not pleased. AP (01.11.08):

"A major shareholder of Circuit City Stores Inc. has sold nearly its entire stake in the nation's No. 2 electronics retailer, which reported earlier in the week that sales in December had fallen.

The TCW Group Inc., which was formerly the company's largest institutional investor, slashed its holdings to 310,045 shares, which represents a 0.2 percent stake in the company, according to a Securities and Exchange Commission filing Thursday.

Major Circuit City holder cuts stake

"That's down from a 10.9 percent stake, or 18.3 million shares, TCW reported owning in August."

"TCW declined to comment further on its sales of shares in the Richmond company."

Believe it or not, Circuit City also declined to comment, except to say they are now using both hands in their continued search for their ass, which some might say has already been handed to them.

Don't cry for the CEO though; he's doing rather well: "Circuit City chief executive Philip J. Schoonover received a salary of $716,346, along with a $704,700 bonus last year. He also has long-term compensation of $3 million in stock awards and $340,000 in underlying options, according to company filings."

Ha Ha

Dumb fucks. Bloomberg (12.21.07), via Eschaton:

"Circuit City Stores Inc., the second-largest U.S. consumer-electronics retailer, reported a fifth straight loss and said it won't make money this quarter, when it typically generates most of its annual profit."

Circuit City Loss Widens; Shares Plunge on Forecast

Not that this decision had anything to do with it. "Circuit City, which cut 10 percent of its U.S. workforce this year and hired people willing to work for less, is losing market share to larger rival Best Buy Co. Sales in stores open at least 12 months fell 5.6 percent in the third quarter."

Mind you this kind of business savvy doesn't come cheap.

Let's recap the brilliant strategy. Washington Post (03.29.07):

"Circuit City fired 3,400 employees in stores across the country yesterday, saying they were making too much money and would be replaced by new hires willing to work for less."

Circuit City Cuts 3,400 'Overpaid' Workers

The gratitude and generosity was overwhelming. "The company gave the dismissed workers severance pay and told them that after 10 weeks they were free to apply for any openings. Employees reached by a reporter said they were notified yesterday morning and told to leave immediately."

At the time, Circuit City said it "'deeply [regretted] the negative impact that was had on these folks'"

And the CEO? You want to know how he did last year? "Circuit City chief executive Philip J. Schoonover received a salary of $716,346, along with a $704,700 bonus last year. He also has long-term compensation of $3 million in stock awards and $340,000 in underlying options, according to company filings."

And you thought you had to be smart to make a lot of money.

Hitting The Wall

Here's what's scaring the daylights out of our Jolly Bankers. LATimes (12.06.07):

"A so-called collateralized debt obligation managed by Credit Suisse Group liquidated its mortgage bonds and related derivatives, recording a loss of more than 75% on the securities, Standard & Poor's said Wednesday.

About $165 million of Adams Square Funding I's notes, including debt originally rated AAA, won't be repaid, S&P said, based on information from a trustee."

Moody's sees capital risk at MBIA

There's a ton of this stuff out there. This liquidation is very spooky news. Financial Times (12.06.07):

"Adams Square went into liquidation in November, but the results of the asset sale have only just filtered through. Adams Square I has been liquidated at less than 25 per cent of par value. Which, in financial parlance, is a wipeout. As S&P explains:

'Based on the notice we received, the trustee anticipates that proceeds will not be sufficient to cover the funded portion of the super-senior swap in full and that no proceeds will be available for distribution to the class A, B, C, D, or E notes.'"

CDO wipeout: AAA noteholders get nothing

"In other words, note holders got nothing.... AAA notes? Nothing. Not a penny. This is a fairly big leap from even the most dire CDO news we’ve heard in the past couple months, where losses of the 10-30 per cent order were the most bearish estimates for AAA tranches."

As opposed to a 75% loss.

Fire Sale

These guys have already taken a $6.5 billion hit, and are estimating additional losses of $8 billion to $11 billion. Talk about having your panties in a bunch. Bloomberg (11.27.07):

"Citigroup Inc., the biggest U.S. bank by assets, will receive a $7.5 billion cash infusion from Abu Dhabi to replenish capital after record mortgage losses wiped out almost half its market value."

Citigroup to Raise $7.5 Billion From Abu Dhabi State

It's quite the deal. For Abu Dhabi that is. "Abu Dhabi will buy securities that convert to stock and yield 11 percent a year, almost double the interest Citigroup offers bond investors, underscoring the New York-based company's need for cash."

Can't get more succinct than this: "'(c)learly, Citi has a problem with capital adequacy after the subprime crisis,' said Giyas Gokkent, head of research at National Bank of Abu Dhabi PJSC, Abu Dhabi's biggest bank by market value. 'ADIA has seen an opportunity to get cheaply into a blue-chip stock.'"

And besides, it's an offer Citigroup can't refuse.

Welcome To The Shitpile

Man, this thing is really starting to smell up a storm. These morons gave their investors a money-back guarantee. Duncan sums it up for us (11.21.07):

"Basically the 'liquidity put' involved investment banks taking a piece of the shitpile, offloading it to someone, but then promising to buy it back at a given rate if it tanked in value.

Because of the Magic of Modern Accounting, they would do this to take bits of the shitpile off their books, even though it meant that the worst of the shitpile - the stuff which would tank - would inevitably return to their books in the future.

Liquidity Put

Liquidity puts and a bunch of other new words right here.

Next Up

Freddie Mac - come on down! AP (11.20.07):

"Freddie Mac set aside $1.2 billion in the third quarter to account for bad home loans and the company posted a $2 billion loss Tuesday amid a worsening mortgage crisis.

Losses for the nation's second largest guarantor of home mortgages widened from $715 million last year during the same period."

$2 Billion Freddie Mac Loss

"Freddie Mac said it made the provision for credit losses in the July-September period because of defaults on home loans, which 'reflects the significant deterioration of mortgage credit.'"

Fear not, however. Freddie Mac's CFO Buddy Piszel sez things will be better. "'We have begun raising prices, tightened our credit standards and enhanced our risk management practices,' Piszel said. 'We also continue to improve our internal controls.'"

And just never you mind that stuff about the horse and the barn door.

Meanwhile, back at the ranch. Bloomberg (11.20.07):

"The risk that banks and brokerages from Citigroup Inc. to Bear Stearns Cos. will default on their debt is accelerating as analysts increase their estimates of losses from subprime mortgages, credit-default swaps show.

Contracts on New York-based Citigroup, the largest U.S. bank by assets, rose 12 basis points to 91 basis points yesterday, according to broker Phoenix Partners Group, setting a record for the sixth time this month."

Citigroup, Bank Credit Swaps Rise on Subprime Concern

"Contracts on New York- based Bear Stearns climbed 23 basis points to 173 basis points, about a six-year high. A rise signals investors are less confident in a company's creditworthiness."

A lot less confident in this case.

And Another

Next up on the subprime hit parade. NYTimes (11.10.07):

"The E*Trade Financial Corporation, the discount brokerage and banking firm, said yesterday that it would not be able to meet its previously announced profit targets because it expected to report 'significant write-downs' in the value of mortgage-backed securities it holds.

The company said the Securities and Exchange Commission began an informal inquiry last month into “matters relating to the company’s loans and securities portfolios.'"

E*Trade Cuts Profit Forecast, Citing Write-Downs on Mortgage Securities

"The company also said that the head of its capital markets operations, Dennis E. Webb, ceased working for the company yesterday and would receive severance payments. It did not say whether he had resigned or was fired."

Ahhh, Dennis. What have you done? The SEC is also investigating whether or not the division Dennis ran had "'traded ahead' of customers by executing its own orders for shares before it executed those of customers."

Coverage? What Coverage?

Just think how good the bottom line would look if we didn't pay any claims. LATimes (11.09.07):

"One of the state's largest health insurers set goals and paid bonuses based in part on how many individual policyholders were dropped and how much money was saved.

Woodland Hills-based Health Net Inc. avoided paying $35.5 million in medical expenses by rescinding about 1,600 policies between 2000 and 2006."

Health insurer tied bonuses to dropping sick policyholders

"During that period, it paid its senior analyst in charge of cancellations more than $20,000 in bonuses based in part on her meeting or exceeding annual targets for revoking policies, documents disclosed Thursday showed."

Hooray for Barb! In 2002, Health Net set Barbara Fowler's goal at "15 cancellations a month. She exceeded that, rescinding 275 policies that year -- a monthly average of 22.9."

Double hooray for Barb!! "Her supervisor described 2003 as a 'banner year' for Fowler because the company avoided about '$6 million in unnecessary health care expenses' through her rescission of 301 policies -- one more than her performance goal."

Triple hooray for Barb!!! "In 2005, her goal was to save Health Net at least $6.5 million. Through nearly 300 rescissions, Fowler ended up saving an estimated $7 million, prompting her supervisor to write: 'Barbara's successful execution of her job responsibilities have been vital to the profitability' of individual and family policies."

Though California law "forbids insurance companies from tying any compensation for claims reviewers to their claims decisions", Health Net's lawyer "told the arbitrator in his opening argument Thursday that the law did not apply to the insurer in the case because Fowler was an underwriter -- not a claims reviewer."

So there.

And anyway, it's been a tough month, what with the lawsuits and all.

Speaking of lawsuits, here's an interesting little tidbit from EdgarOnline (03.01.07):

"On August 9, 2005, plaintiffs filed a motion with the District Court seeking sanctions against us for a variety of alleged misconduct, discovery abuses and fraud on the District Court. The District Court held twelve days of hearings on plaintiffs' sanctions motion between October 2005 and March 2006.

During the course of the hearings, and in their post-hearings submissions, plaintiffs also alleged that some of Health Net's witnesses engaged in perjury and obstruction of justice."

HEALTH NET INC - HNT Annual Report (10-K) Item 3. Legal Proceedings.

The Court was not amused. "On December 6, 2006, the District Court issued an opinion and order finding that Health Net's conduct was sanctionable."

In a word, given the number and types of sanctions the Court imposed, the conclusion would be that Health Net was rather naughty, to say the least. How naughty? Considering it was ordered to pay plaintiffs' attorneys' fees, Health Net must have been very, very naughty.

The Looming Debacle

If you think the subprime mess is bad now (h/t Jerome), you ain't seen nothing yet.

Next up: Citigroup. AP (11.04.07), via Eschaton:

"In a separate statement, Citi, which took a hit of $6.5 billion from asset writedowns and other credit-related losses in the third quarter, said it would take an additional $8 billion to $11 billion in writedowns."

Citigroup CEO Resigns; Interim Named

Uh Oh

Business Week (11.02.07):

"The Securities and Exchange Commission has launched an investigation into deals Merrill Lynch & Co. undertook to allegedly cloak its vulnerability to risky mortgage debt, the Wall Street Journal reported Friday.

The Journal reported Merrill Lynch struck deals with hedge funds to take certain positions that did not transfer risk, but merely delayed when Merrill Lynch would have to disclose its exposure to that risk."

SEC reportedly launches Merrill probe

Here's how it worked. Merrill would sweet talk some hedge fund into loaning a "'Merrill-related entity'" a bunch of money. Normally this would mean the "'Merrill-related entity'" would be liable if the money wasn't repaid.

However!! What actually was happening was Merrill would guarantee it would buy back the loan after a year. And what this meant was that even though Merrill was ultimately on the hook, it didn't have report the debt as a liability because one of its entities was providing cover! Clever, eh?

Should have checked with Enron about how that kind of stuff can work out.

We're innocent, damn you! Dow Jones (11.02.07):

"Merrill Lynch & Co. doesn't think it engaged in any inappropriate transactions designed to avoid taking writedowns, thea bank said Friday in a press release.

'We have no reason to believe that any such inappropriate transactions occurred,' Merrill said in the release. 'Such transactions would clearly violate Merrill Lynch policy.'"

Merrill:'No Reason To Believe Inappropriate Transactions Occurred'

Nice Work If You Can Get It

LATimes (10.29.07):

"The beleaguered head of Merrill Lynch & Co. has reportedly decided to step down and leave the firm, becoming the first chief of a Wall Street investment bank to be done in by the sub-prime mortgage crisis."

Stan O'Neal, who endured withering criticism last week because of Merrill's enormous losses on mortgage-related securities, will quit his post as soon as today, according to a report on the Wall Street Journal's website."

Merrill CEO said bound for exit

Stan had a very bad week last week. "On Wednesday, Merrill wrote down $7.9 billion in losses caused by beaten-down sub-prime and other mortgage-related securities, the largest such hit taken by any Wall Street firm."

A very, very bad week. "Including losses on bonds related to troubled private-equity deals, Merrill's total write-down was $8.4 billion and its third-quarter net loss was $2.2 billion."

He won't be leaving empty-handed, however. NYTimes (10.27.07):

"Merrill Lynch’s directors may be weighing E. Stanley O’Neal’s future, but one thing is already guaranteed: a payday of at least $159 million if he steps down. Mr. O’Neal, the company’s chairman and chief executive, is entitled to $30 million in retirement benefits as well as $129 million in stock and option holdings, according to an analysis by James F. Reda & Associates using yesterday’s share price of $66.09."

The Price of Any Departure Will Be at Least $159 Million

Stan jumped feet first "into lucrative businesses like the packaging of subprime mortgages and other complex debt securities." It worked for a while as Merrill posted "a string of blow-out quarters — and blow-out paydays."

Then came the day of reckoning.

"'I lay the blame at the foot of the board,' Frederick E. Rowe Jr., a money manager and president of Investors for Director Accountability. 'He was paid a tremendous amount of money to create a loss that is mind-boggling, and he obviously took risks that should never have been taken.'"

But, as they say, luck's as good as brains. As long as it lasts.

And last week, Stan's luck ran out.

Insult To Injury

Nice. Rumor hits you're gonna be shitcanned and your company's stock jumps. Bloomberg (10.26.07):

"Merrill Lynch & Co. surged the most in five years on speculation Chairman and Chief Executive Officer Stan O'Neal will be ousted and the world's biggest brokerage will become a takeover target."

Merrill Shares Rise Amid Speculation O'Neal Will Go

Now You See It

Now you don't. How do you buy something when no one knows what it's worth? Bloomberg (10.25.07):

"The collapse of confidence in Merrill Lynch & Co. after the world's biggest brokerage lost six times more than it forecast earlier this month helps explain why Treasury Secretary Henry Paulson's attempt to rescue SIVs [ed. - via the Master Liquidity Enhancement Conduit (what a great name)] is troubled."

O'Neal's Subprime Shakeout Shows Peril of SIV Bailout

Merrill took a huge hit earlier this week "after reducing the value of mortgages and asset-backed bonds. Those are the same hard-to-trade securities owned by structured investment vehicles, or SIVs, that Paulson is attempting to keep afloat with a new $80 billion fund."

The idea is for the fund "to purchase assets of SIVs and prevent the possibility they might be forced to dump them on markets at fire-sale prices to raise money."

The problem is how much are these damned things worth? As Bloomberg points out, "there's no central trading system or exchange", and believe it or not, buyers don't seem to be willing "to rely on estimates by Wall Street traders to value these bonds". Fancy that, eh?

Which means that "(m)any of the 30 SIVs worldwide can't find buyers for their commercial paper -- debt that comes due in 270 days or less. The concern is that without the funding, the SIVs would have to sell their investments and might have to accept fire-sale prices. That would force owners of similar securities to assign new, lower values to their holdings, causing losses to spiral."

The clock is ticking, and the big guys are nervous as hell. Why? Reuters (10.19.07):

"A fire-sale of assets could lift borrowing costs globally, trigger big losses from investors and force banks to further write down some holdings on their balance sheets. Such sales could trigger huge losses for banks, and in the worst-case scenario tip the U.S. or Europe into recession."

SIV fund support grows with PIMCO, Fidelity: Draghi

Thus the effort to throw a lot of money at these things and hope to stem the tide. Good business? Nope. This is desperate business.

Warren's not overly sympathetic. Bloomberg (10.25.07):

"'One of the lessons that investors seem to have to learn over and over again, and they'll have to learn it over again in the future, is that not only can you not turn a toad into a prince by kissing it, but you also cannot turn a toad into a prince by repackaging it,' billionaire Warren Buffett said today to reporters in Daegu, South Korea, where he's visiting cutting-tools maker TaeguTec Ltd., a subsidiary of Berkshire Hathaway Inc."

O'Neal's Subprime Shakeout Shows Peril of SIV Bailout

"Buffett, called 'the world's greatest investor' by biographer Robert Hagstrom, has described derivatives as 'financial weapons of mass destruction.'"

Ooopsie

Bloomberg (10.24.07):

"Merrill Lynch & Co. reported its first quarterly loss in six years after a larger-than-forecast $7.9 billion of writedowns for subprime mortgages and asset- backed bonds, the most by any Wall Street firm."

Merrill Lynch Reports Loss on $7.9 Billion Writedown

Noting that the charge "is the biggest in the firm's 93-year history", Bloomberg comes in with an elbow to Stanley's noggin: "Merrill's failure to meet its own projection shows how Chief Executive Officer Stanley O'Neal misjudged the severity of the decline in the credit markets since July, after late mortgage payments from borrowers with poor credit histories surged."

And a knee to the gut: "'It sends a very poor message to the marketplace that Merrill doesn't have a good handle on their risk,' said William Fitzpatrick, a financial-services analyst at Johnson Asset Management in Racine, Wisconsin, which oversees $1.7 billion and doesn't own Merrill shares."

It gets worse from there.

Racine, as we all know, is home to that delightful Danish pastry known as the kringle.