Tuesday, September 30, 2008

Party like it's 1999

Just so everyone remembers, exactly nine years ago is when this whole merry-go-around started:


In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

   - New York Times, Sept. 30, 1999.

And... we're back!

God, I hate fucking roller coasters!


Monday, September 29, 2008

'Cause I'm Free... Free Fallin'

chart Remember how a couple of weeks ago I mentioned that the Dow had dropped 500 points, making it the largest single day drop since 9/11? I had italicized it and everything. Well, that was... how do I put this delicately? ... a Sunday stroll in Central Park. On a spring afternoon.


Or nearly 7%. Or about $1.2 trillion (yeah, that's with a 't' - again) in market capitalization.

Making it the largest single day drop since Black Monday - October 19, 1987 - when it dropped 23%.

That's it - I'm speechless.

Wednesday, September 17, 2008

Déjà Frikkin' Vu

Another day, another bloodbath...

The Dow shed 450 points in the second largest sell-off this year. Considering that the largest occurred only two days ago, this is beginning to feel like a gang-bang! Once again it was financial stocks that got battered, in particular Morgan Stanley and Goldman Sachs, the last two independent investment banks left standing. MS dropped 28% from its Tuesday close and GS dropped 19%, leading some observers (ok, only me) to wonder - if their stocks took such a battering the day after they announced results in which they beat analysts' consensus estimates, what else is there left to say?

The fierce, and relentless, pounding has started to make dents in the MS edifice at least. It has started preliminary merger talks with Wachovia. Perhaps MS CEO John Mack wants to ahead of the game, a la Merrill Lynch, but I sure hope he knows what he's doing. Now that the market has sniffed MS blood in the water, if he has started something he cannot finish and these talks go nowhere, things could get very ugly for MS indeed.

Wise Man Say... 08.04

This too shall pass.

    - King Solomon


Update (9.29.08): Will it?

Hold the Horses?

Just as we thought that the end of the world was upon us, comes news that it might have been temporarily postponed. After doing nothing to save Lehman Brothers from bankruptcy over the weekend, the Fed finally blinked and has decided to extend a 'bridge loan' of $85 billion to AIG, which otherwise would have filed bankruptcy on Wednesday (it had apparently already engaged the same bankruptcy lawyers as Lehman to handle their paperwork. If only Weil Gotshal & Manges were a public company. Now, there's a growth stock for you!). Under the terms of the deal, in return for the lifeline, the US government will get an 80% stake in the company. The line of credit is available for two years, will accrue interest at 3M LIBOR + 850 and will be repaid by the sale of AIG's assets.  The loan is collateralized by all the assets of AIG and the US government has right to veto the payment of dividends to common and preferred shareholders.  This basically means that shareholders of AIG will be 'severely diluted' (read wiped-out).

It also means that AIG will eventually be liquidated, likely sooner rather than later, just not at the fire sale prices that would have been the result of a bankruptcy. Considering that AIG has over $1 trillion in assets (again, with the 't'!), a bankruptcy slash fire sale would have made the Lehman situation look like a Thanksgiving sale at Macy's. Plus, with the agencies downgrading AIG by two (Moody's, Fitch) to three notches (S&P), it would be required to post an additional $13.3 billion of collateral, money it simply did not have.

In sum, AIG "could not be allowed to fail."

In other news, Barclays PLC has agreed to buy the US investment bank of Lehman Brothers for $2 billion and about 9,000 employees of the investment bank will join Barclays. Not included in the sale are any of "Lehman’s real estate, real-estate-backed securities, derivatives positions or over-the-counter trades." So, Barclays is basically buying the 'good' parts of Lehman and is getting almost exactly the same deal it wanted when it was negotiating a sale of Lehman over the weekend but Dick Fuld had put the kibosh on those plans.

But because Lehman, the holding company, is under bankruptcy protection, Barclays can pick and choose the parts of the company it wants and leave the rest to be liquidated by the bankruptcy court. So Lehman's filing bankruptcy got Barclays the deal Lehman wouldn't do to save itself.

Oh, the irony.

R.I.P - Richard Wright

Richard Wright, one of the founding members of Pink Floyd along with Roger Waters, Nick Mason and Syd Barrett has gone to the Dark Side of the Moon.

And I am not frightened of dying, any time will do, I
Dont mind. why should I be frightened of dying?
Theres no reason for it, youve gotta go sometime.

- Richard Wright, The Great Gig in the Sky

R.I.P - David Foster Wallace

david_foster_wallace David Foster Wallace - novelist, philosopher, journalist, humorist and one of the best wordsmiths to put pen to paper died on September 12, apparently having committed suicide by hanging himself.

In his fiction, Wallace was considered the heir of Thomas Pynchon and Don DeLillo and in his essays and observational pieces, he could be a combination of Malcolm Gladwell and Chuck Klosterman. He could write with equal felicity about tennis, porn or food. He was published in the New York Times Magazine, the New Yorker and in Playboy. His breakthrough novel, Infinite Jest was named one of Time magazine's 100 Best English Language Novels.

I first learnt of Wallace from a 2004 Gourmet magazine article about the ethical complexities of boiling alive lobsters for food. I remember thinking at the time, 'this is an odd article for a food magazine.' But that was the subversive genius of Wallace - he could write a philosophical screed on the "whole animal cruelty and eating issue" in a food magazine. I'm sure that when Gourmet commissioned him to write the article, they were expecting a standard issue travelogue , not a footnoted, annotated essay, which as Slate writer Troy Patterson puts it, "ranks as a must-read for anyone even thinking of having dinner."

Since we all think of having dinner at some point, here is the article. Hopefully, it will make us think also of David Foster Wallace.

Godspeed, and farewell.

Monday, September 15, 2008

Behold a Pale Horse

Wow! What else can you say but, Wow! I thought that the Thursday-Sunday stretch this summer that UpDn-Merrillgobbled up Bear Stearns was breathtaking, I thought the disappearance of Fannie Mae and Freddie Mac were once in a lifetime events but this... this is a whole new order of magnitude. 

Two of the world's largest investment banks ceased to exist this weekend. And they weren't the 95-pound weaklings that Bear was either. They were behemoths. Lehman Brothers had 26,000 employees worldwide. Merrill Lynch had over 60,000. Between them they probably managed over a trillion dollars  worth of assets (yes, that's trillion with a 't').

Unlike the Fed, which did not see fit to save the 3rd and 4th largest investment banks in the world, the markets decided that that the failures of Lehman and Merrill were sufficiently cataclysmic events to shed 505 points - the largest single-day drop in the Dow Jones index since September 17, 2001, the day the markets re-opened after 9/11.

Merrill, of course made out much better than Lehman and it's pre-emptive sale to Bank of America for $50 billion (or about $30/ share) is a huge premium to where it's stock closed today ($17.06/ share). And then there is Merrill's crown jewel, it's fabled "Thundering Herd" of brokers, 17,000 strong, who will likely get absorbed into B of A. But that still leaves another 40-45,000 Merrill employees, a lot of whom (some say as much - or, at least! - half) could end up getting laid off. Not to mention the thousands of B of A employees who will get laid off through no fault of theirs - because they were actually good at their jobs.

And as for Lehman? Well, Lehman doesn't have an All-Blacks of a brokerage team to offer, only $40 billion is toxic real estate debt, and so for the 26,000 Lehman employees, this is the end of the road.

As bad as things got today, they have the potential to get much worse. AIG, the largest insurer in the world as little as a year ago, is on the verge of collapse, an event that would be an even bigger shock to the system (if such a thing is even possible anymore), if for nothing else than the fact that it is part of the Dow Jones index. Its stock price closed at less than $5/ share today, down from $65/ share a year ago, and rumors are that the Fed has asked Goldman Sachs and JPMorgan Chase to lend $70 billion(!) to the insurer. Even if GS and JPM had that kind of money laying around, which they don't; or even if they could syndicate this debt, which they likely can't - is it really going to help at this stage? Or is this like sticking a finger in the dyke and hoping that the dam holds?

Then there is Washington Mutual,  whose stock is trading at less than $3.32/ share and whom S&P and Moody's downgraded to junk status. WaMu looks like it is ripe for failure as well and oh, by the way - it only has $180 billion of exposure to mortgages and related loans.

And finally, consider this: The brokerage subsidiaries of Lehman Brothers were not included in the bankruptcy filings today and remain open for business for the time being. So, the liquidation of Lehman hasn't even started and the already the markets are down 500 points.

So, if you see four horsemen riding about, be afraid. Be very afraid.