Archive for September, 2008

  • The Bubble Isn’t All Bush’s Fault
    , September 16th, 2008 at 10:08 am

    I just don’t get the argument that the credit bubble is the fault of George Bush, or free market ideology. People toss around the words “more regulation” as if that’s the obvious cure. Sure, if we restricted the number of people who got mortgages, I assume the bubble would have been averted. But who would have been the first person barred from getting a mortgage? The message I’m getting from this crisis is not that government should do more, but it’s really how little the government can do.

  • Oil is Down Again
    , September 16th, 2008 at 9:51 am

    As far as impacting the overall economy, Lehman’s downfall doesn’t mean very much. In the larger scheme of things, Lehman was never really a big company. The media always like to use the, how will this effect Main Street angle. Simply put, it won’t.
    But what will impact Americans is the plunge in oil. I see that oil is down sharply again and is now below $92. I remember way, way back when we would have thought $92 for oil was expensive. For example, the beginning of the year.
    In my very unsophisticated analysis, I think gold is due for a big fall.

  • Goldman’s Net Plunges
    , September 16th, 2008 at 9:44 am

    The market is rattled again this morning as Goldman Sachs (GS) reported a major earnings decline. For their third quarter, Goldman earned $1.81 a share which beat Wall Street’s consensus of $1.73. This is a major shortfall compared with the $6.13 a share it made for last year’s third quarter.
    I’m seeing a lot of scary headlines (Goldman Sachs net plunges 70 percent) but some perspective is needed. Goldman is still making a lot of money, just not the absurd amounts seen in 2006 and 2007. GS’s profits are up 25% in the last three years. Annualized, that’s not a huge increase, but it’s still up.

  • The Fed’s Suez Crisis
    , September 15th, 2008 at 3:10 pm

    Something that struck me about Lehman’s demise is how little power the Federal Reserve really has. Don’t get me wrong, the Fed is darn powerful, but it’s not all-knowing and all-seeing, despite what some folks think. The Fed is powerful because people think it’s powerful.
    Analysts hang on every word in a statement or testimony, but in the case of Lehman Brothers (LEH), the Fed really couldn’t do much. Wall Street basically stood up to the Fed and the central bank was exposed. Since Bear was the first, the Fed can open its mouth and get its way. But the Fed can’t make the weaker argument the stronger, and that’s what was needed with Lehman.
    I’d say the Lehman story was a combination of too much debt—at one time they were leverage 40-to-1, they didn’t know what they owned, and they refused to listen to any criticism. To top it off, they had horrible luck too. That’s not a good combination.
    With Level 3 assets (these are basically assets that can’t be priced easily so we have to trust Lehman for the price), Lehman once claim they their Level 3 stuff was up 9%, even though the market was down by 10%. When people called them on it, Lehman got mad and blamed the shorts. That’s just arrogance. Then they spent something like $22 billion on Archstone? I mean, what the hell? Talk about the wrong price, the wrong industry at the wrong time. Aside from that, it was a great deal!
    Einhirn and other shorts said they didn’t know what their stuff was worth and they were undercapitalized. Fuld & Co. just refused to listen. I don’t think they’re crooks at all, they sincerely believed in what they were doing. Until the end, the company was offering assurance to investors.
    With Bear and Lehman we often heard about counterparty risk. Well, that theory got shot down with Lehman. I’m going to go on the idea that the reason there wasn’t a deal for Lehman is that no one wanted one. If someone wanted, it would have happened. Novel thinking I know. But it tells us that the Street is hardly concerned about counterparty risk. JPM was concerned about with Bear because it was mostly their risk.
    I heard Hank Paulson talk about bringing stability to the markets. Yeah, right. That’s basically like the flea giving orders to the dog. The Fed and the Treasury do not have this thing contained. If the housing market recovers, then the problem goes away. It’s as simple as that.

  • Eddy TV
    , September 15th, 2008 at 2:40 pm

    I was just on Britain’s SkyTV discussing Lehman’s implosion. If I can find the video, I’ll post it here.

  • 91-Day Treasuries
    , September 15th, 2008 at 11:03 am

    The yield on the 91-day Treasury basically got chopped in half today. At one point, the yield got down to 0.67%.10-year Treasury futures had their best one-day gain in nearly 20 years. Now if I can only remember what happened in October 1987.

  • Happy Birthday General Motors!
    , September 15th, 2008 at 9:17 am

    GM turns 100 years old today.
    The stock is currently around $13. Unfortunately, their book value per share is about -$100.
    Someone alert Hank Paulson.
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  • Yale and Harvard’s Endowments
    , September 15th, 2008 at 8:32 am

    From June 30, 2007 to June 20, 2008, the S&P 500 lost -13.1%. But Harvard and Yale managed to eek out gains for their endowments. Yale hasn’t announced the figure yet, but it’s expected to be positive in the single digits. Harvard gained 8.6%, which is better than 95% of institutional managers, to reach a total of $36.9 billion. Yale’s endowment now stands at $23 billion.

  • Just a Reminder
    , September 15th, 2008 at 7:19 am

    Erin Callan from Lehman’s conference call in June:

    Lowering gross and net leverage to less than 25 times and less than 12.5 times respectively, both of those numbers are prior to today’s capital raise; reducing our gross assets by approximately $130 billion and our net assets by approximately $60 billion with a large part of the reduction, as I will talk about in detail, coming from less liquid asset categories and also providing significant price visibility for marking the remainder of our inventory.
    We significantly reduced our exposure to asset classes such as residential and commercial mortgages, and real estate held for sale of approximately 15% to 20% in each case and acquisition and finance exposure by almost 35%. We also reduced our high yield or non-investment grade debt inventory in the aggregate, which includes our funded acquisition finance position by greater than 20% in the quarter.
    I want to be clear at this point that we do not intend to lower our leverage ratios from these levels. From a liquidity perspective, we made great progress growing our cash capital surplus to approximately $15 billion, that’s the surplus, from $7 billion in the first quarter. We grew our liquidity pool to almost $45 billion and that compares with $34 billion at the end of the first quarter.

  • Lehman Fills for Chapter 11
    , September 15th, 2008 at 6:49 am

    It’s official. After 158 years of business, Lehman Brothers (LEH) is no more. The company has filed for Chapter 11. I was glad to see the Fed walk away from saving them. A year ago, LEH was going for about $60 a share. The current bid is for 70 cents a share.
    In a very exciting Sunday, Bank of America (BAC) announced that it’s buying Merrill Lynch (MER) for $29 a share. Now Morgan (MS) and Goldman (GS) are the last two independent I-banks standing.
    That’s not all. There’s talk of a Fed rate cut today (bad idea). Also, AIG (AIG) is in very big trouble and is scrambling to raise money. Oil is also down over $4 and is now below $97.