Archive for September, 2008

• Should Lehman Have Been Allowed to Fail?
  Eddy Elfenbein, September 29th, 2008 at 12:02 pm

  I certainly though so, but now the evidence may point the other way:

  Lehman’s bankruptcy filing in the early hours of Monday, Sept. 15, sparked a chain reaction that sent credit markets into disarray. It accelerated the downward spiral of giant U.S. insurer American International Group Inc. and precipitated losses for everyone from Norwegian pensioners to investors in the Reserve Primary Fund, a U.S. money-market mutual fund that was supposed to be as safe as cash. Within days, the chaos enveloped even Wall Street pillars Goldman Sachs Group Inc. and Morgan Stanley. Alarmed U.S. officials rushed to unveil a more systemic solution to the crisis, leading to Sunday’s agreement with congressional leaders on a $700 billion financial-markets bailout plan.
  The genesis and aftermath of Lehman’s downfall illustrate the difficult position policy makers are in as they grapple with a deepening financial crisis. They don’t want to be seen as too willing to step in and save financial institutions that got into trouble by taking big risks. But in an age where markets, banks and investors are linked through a web of complex and opaque financial relationships, the pain of letting a large institution go has proved almost overwhelming.
  In hindsight, some critics say the systemic crisis that has emerged since the Lehman collapse could have been avoided if the government had stepped in. Before Lehman, federal officials had dealt with a series of financial brushfires in a way designed to keep troubled institutions such as Fannie Mae, Freddie Mac and Bear Stearns Cos. in business. Judging them as too big to fail, officials committed billions of taxpayer dollars to prop them up. Not so Lehman.

  One of the major problems with this mess is that we don’t know what we don’t know. If we had saved Lehman, would it have made things much better?

• A Vote is Due Today
  Eddy Elfenbein, September 29th, 2008 at 10:22 am

  It looks like the House will vote today on the bailout plan. You can read the bill here. The market, however, is not in a good mood today. Ultimately, I’m sure the House will pass the plan. If credit markets recover, however is another matter.

• WaMu Is Undo
  Eddy Elfenbein, September 25th, 2008 at 10:46 pm

  Remember these used to be that company Washington Mutual (WM)?

  Washington Mutual Bank, the country’s largest savings and loan, was seized late today by federal regulators and immediately sold to JPMorgan Chase & Co., the New York banking giant that has long coveted the thrift’s California and Florida branches.
  With assets of $307 billion and deposits of $188 billion, Washington Mutual is the largest bank to fail in U.S. history.
  Washington Mutual depositors won’t lose access to any of their money, even if it wasn’t fully insured, the Federal Deposit Insurance Corp. said.
  “For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks,” FDIC Chairman Sheila C. Bair said. “For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning.”
  Washington Mutual, one of the country’s largest mortgage lenders, was a victim of the housing downturn, recording $6.1 billion in losses in the nine months that ended June 30.

  WaMu is a victim?

• Bill O’Reilly on the Bailout Plan
  Eddy Elfenbein, September 25th, 2008 at 10:42 pm

  Bill O’Reilly gets angry and incoherent, but mostly angry.
  

• German Finance Minister Blames “Anglo-Saxon” Banking Model
  Eddy Elfenbein, September 25th, 2008 at 1:58 pm

  From Bloomberg:

  Steinbrueck, in a speech on the financial-market crisis to lawmakers in Berlin today, set out an eight-point plan urging greater regulation and larger capital reserves for banks. He championed the German banking system over its U.S. counterpart, dismissing the “Anglo-Saxon” model as having “an exaggerated fixation on returns.”

  Paul Kedrosky neatly fillets this comment with a good amount of contempt (“Right, as opposed to the Teutonic banking system’s fixation on what, nice drapes?”).
  As for me, if the Germans are prepared to call our banks, “Anglo-Saxon” banks, then I consider it an improvement.

• Oh Dear Lord
  Eddy Elfenbein, September 25th, 2008 at 12:17 pm

  An actual news story written by actual adults:

  Michael Douglas asked about Wall Street crisis
  Michael Douglas had to field questions Wednesday about the financial turmoil shaking world markets from reporters recalling his role in the 1987 film “Wall Street.”
  The actor sought to focus on the subject of Wednesday’s news conference — urging the United States and eight other holdout nations to ratify a nuclear test ban treaty.
  Douglas won an Academy Award for portraying the rapacious banker Gordon Gekko, who popularized the phrase “greed is good” in the movie.
  After world leaders here condemned the “boundless greed” of world markets, Douglas was asked to compare nuclear Armageddon with the “financial Armageddon on Wall Street.”
  But the likening to Gekko did not end there, with a reporter asking: “Are you saying Gordon that greed is not good?”
  “I’m not saying that,” Douglas replied. “And my name is not Gordon. He’s a character I played 20 years ago.”

  I’ve always wanted to ask Mark Hamill how those levitating cars worked.
  (Via: DealBreaker)

• Bush’s Speech
  Eddy Elfenbein, September 25th, 2008 at 11:57 am

  Here’s part of the president’s speech from last night:

  First, how did our economy reach this point? Well, most economists agree that the problems we’re witnessing today developed over a long period of time. For more than a decade, a massive amount of money flowed into the United States from investors abroad because our country is an attractive and secure place to do business.
  This large influx of money to U.S. banks and financial institutions, along with low interest rates, made it easier for Americans to get credit. These developments allowed more families to borrow money for cars, and homes, and college tuition, some for the first time. They allowed more entrepreneurs to get loans to start new businesses and create jobs.
  Unfortunately, there were also some serious negative consequences, particularly in the housing market. Easy credit, combined with the faulty assumption that home values would continue to rise, led to excesses and bad decisions.
  Many mortgage lenders approved loans for borrowers without carefully examining their ability to pay. Many borrowers took out loans larger than they could afford, assuming that they could sell or refinance their homes at a higher price later on.
  Optimism about housing values also led to a boom in home construction. Eventually, the number of new houses exceeded the number of people willing to buy them. And with supply exceeding demand, housing prices fell, and this created a problem.
  BUSH: Borrowers with adjustable-rate mortgages, who had been planning to sell or refinance their homes at a higher price, were stuck with homes worth less than expected, along with mortgage payments they could not afford.
  As a result, many mortgage-holders began to default. These widespread defaults had effects far beyond the housing market.
  See, in today’s mortgage industry, home loans are often packaged together and converted into financial products called mortgage-backed securities. These securities were sold to investors around the world.
  Many investors assumed these securities were trustworthy and asked few questions about their actual value. Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac.
  Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk.
  The decline in the housing market set off a domino effect across our economy. When home values declined, borrowers defaulted on their mortgages, and investors holding mortgage-backed securities began to incur serious losses.
  Before long, these securities became so unreliable that they were not being bought or sold. Investment banks, such as Bear Stearns and Lehman Brothers, found themselves saddled with large amounts of assets they could not sell. They ran out of money needed to meet their immediate obligations, and they faced imminent collapse.
  Other banks found themselves in severe financial trouble. These banks began holding on to their money, and lending dried up, and the gears of the American financial system began grinding to a halt.

• Bed, Bath & Beyond’s Earnings
  Eddy Elfenbein, September 25th, 2008 at 9:48 am

  Amid all the credit market ruckus, Bed, Bath & Beyond (BBBY) reported earnings of 46 cents a share yesterday which was inline with the Street’s consensus. For the same quarter last year, the company earned 55 cents a share.
  The market seems to be responding well to the earnings report. For this quarter, BBBY is expecting earnings-per-share between 41 and 47 cents, compared with last year’s 52 cents. The Street is expecting 45 cents.
  Here are the earnings results going back a few years:

  Quarter	Sales	Gross Profit	Operating Profit	Net Profit	EPS
  May-99	$356,633	$146,214	$28,015	$17,883	$0.06
  Aug-99	$451,715	$185,570	$53,580	$33,247	$0.12
  Nov-99	$480,145	$196,784	$50,607	$31,707	$0.11
  Feb-00	$569,012	$238,233	$77,138	$48,392	$0.17
  May-00	$459,163	$187,293	$36,339	$23,364	$0.08
  Aug-00	$589,381	$241,284	$70,009	$43,578	$0.15
  Nov-00	$602,004	$246,080	$64,592	$40,665	$0.14
  Feb-01	$746,107	$311,802	$101,898	$64,315	$0.22
  May-01	$575,833	$234,959	$45,602	$30,007	$0.10
  Aug-01	$713,636	$291,342	$84,672	$53,954	$0.18
  Nov-01	$759,438	$311,030	$83,749	$52,964	$0.18
  Feb-02	$879,055	$370,235	$132,077	$82,674	$0.28
  May-02	$776,798	$318,362	$72,701	$46,299	$0.15
  Aug-02	$903,044	$370,335	$119,687	$75,459	$0.25
  Nov-02	$936,030	$386,224	$119,228	$75,112	$0.25
  Feb-03	$1,049,292	$443,626	$168,441	$105,309	$0.35
  May-03	$893,868	$367,180	$90,450	$57,508	$0.19
  Aug-03	$1,111,445	$459,145	$155,867	$97,208	$0.32
  Nov-03	$1,174,740	$486,987	$161,459	$100,506	$0.33
  Feb-04	$1,297,928	$563,352	$231,567	$144,248	$0.47
  May-04	$1,100,917	$456,774	$128,707	$82,049	$0.27
  Aug-04	$1,273,960	$530,829	$189,108	$120,008	$0.39
  Nov-04	$1,305,155	$548,152	$190,978	$121,927	$0.40
  Feb-05	$1,467,646	$650,546	$283,621	$180,980	$0.59
  May-05	$1,244,421	$520,781	$150,884	$98,903	$0.33
  Aug-05	$1,431,182	$601,784	$217,877	$141,402	$0.47
  Nov-05	$1,448,680	$615,363	$205,493	$134,620	$0.45
  Feb-06	$1,685,279	$747,820	$304,917	$197,922	$0.67
  May-06	$1,395,963	$590,098	$148,750	$100,431	$0.35
  Aug-06	$1,607,239	$678,249	$219,622	$145,535	$0.51
  Nov-06	$1,619,240	$704,073	$211,134	$142,436	$0.50
  Feb-07	$1,994,987	$862,982	$309,895	$205,842	$0.72
  May-07	$1,553,293	$646,109	$154,391	$104,647	$0.38
  Aug-07	$1,767,716	$732,158	$211,037	$147,008	$0.55
  Nov-07	$1,794,747	$747,866	$203,152	$138,232	$0.52
  Feb-08	$1,933,186	$799,098	$259,442	$172,921	$0.66
  May-08	$1,648,491	$656,000	$118,819	$76,777	$0.30
  Aug-08	$1,853,892	$739,321	$187,421	$119,268	$0.46

  

• Jessica Hagy on the Paulson Plan
  Eddy Elfenbein, September 24th, 2008 at 2:34 pm

  Perfect.
  

• More Market History
  Eddy Elfenbein, September 24th, 2008 at 1:13 pm

  Today is the 139th anniversary of Black Friday. This was when Jay Gould and Jim Fiske tried to corner the gold market. It didn’t work and the bottom fell out of the gold market on September 24, 1869. Fisk was ruined and eventually shot by an angry creditor.
  Forty-three years ago, President Eisenhower had a heart attack and that sent the market down 6.5%. This was a time of very low volatility so that sell-off was one of the biggest in years.
  (Via: Gary Alexander)