Weekend OT: Ready to Move to Vienna?

Vienna tops the list of Mercer's 2009 Quality of Living Survey. (And not so surprisingly, Bagdhad scored the lowest.) The survey also measured the quality of infrastructure (electricity supply, water availability, telephone and mail services, public transport provision, traffic congestion and the range of international flights from local airports), as infrastructure significantly affects the quality of living.

Top 5 cities for overall quality of living:

Vienna, Austria (1st)
Zurich, Switzerland (2nd)
Geneva, Switzerland (3rd )
Vancouver, Canada (tied 4th)
Auckland, New Zealand (tied 4th)

Top 5 cities for infrastructure:

Singapore, Singapore (1st)
Munich, Germany (2nd)
Copenhagen, Denmark (3rd)
Tsukuba, Japan (4th)
Yokohama, Japan (5th)

I would gladly settle for Munich, which is also 7th in overall quality of living. Trains and buses run frequently and on time, city center small enough that you don't feel lost, great beer, bradwurst, and street music. Vienna is a bit too big for me, but good to visit occasionally.

I love these songs about Vienna, though. So for your weekend entertainment...

and...

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Hedge Funds Capitulate in Chyrsler Debt Restructuring

Oppenheimer withdraws opposition to Chrysler plan, according to Reuters.

"Oppenheimer Funds was among the group of holdout creditors that own a combined $295 million of the automaker's $6.9 billion in distressed debt and which rejected a deal that offered them only 29 cents on the dollar."

There were about 20 such holders of Chrysler's senior secured debts when Judge Gonzalez started to hear the case on May 1. However,

"President Barack Obama called the dissenters "speculators" in public criticism for refusing to join Chrysler's biggest banks in a government-brokered deal to wipe out Chrysler's $6.9 billion debt and move forward with the Fiat alliance. "

So Mr. Rattner (car czar)'s eloquent persuasion has clearly worked.

Combine that with the bankruptcy judge's order on May 5 that all the names of the funds who oppose the debt restructuring are to be made public despite some death threats to the funds, and the fiduciary duty goes out the door quickly. Fiat gets the goods for practically nothing.

"More than half of the parties that had opposed Chrysler's plan have already dropped out of the group as public and political pressure grows to restructure the automaker quickly."

I wonder if Mr. Clifford S. Asness's fund is still opposing.

For all Chrysler bankruptcy related posts so far on this blog, click here.

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Subprime Lending Is Back With A Vengeance

This time, led by the state governments and the federal government, according to Minyanville.com article here by Andrew Jeffery. [emphasis is mine]

"Just when you thought it was safe to go back in the water... Subprime lending has come roaring back.

"But this time, reckless financial innovation isn’t being hatched on Wall Street. Instead, state governments are angling to “monetize” first-time homebuyer tax credits so borrowers can purchase homes with little or no money down.

"If this sounds eerily similar to the type of lending practices that got us into this mess, well, it should.

"The federal government, as part of the recently passed economic stimulus package, will refund first-time homebuyers up to $8,000 if they meet certain eligibility requirements. The program is frequently cited as one of the myriad reasons a bottom in the housing market is imminent."

So far, Mr. Jeffrery says, the criticizm of these scheme is that it is not doing enough. (That sounds familiar, too.)

"States are employing schemes whereby they offer prospective buyers low or no-interest loans for the amount of the tax credit, due upon of receipt of their money from Uncle Sam. If the borrower doesn’t make good, the loan becomes a junior lien on the property, with an interest rate that is far from usurious - usually just a bit over the prime lending rate.

Oh wait, didn't you just say that they would get $8,000 credit if they meet certain eligibility requirements? What are the requirements? That they breathe?

"......States are even lobbying the IRS to deposit the refunds directly to the states, rather than to the home buyers, in order to circumvent non-payment. The IRS, for its part, “is reviewing” this idea. "

So the money won't even reach the homebuyers; instead, it will go directly to the states' coffers.

"In Washington, the state Housing Finance Commission runs a tax credit bridge-loan program, which it hopes will grow in the coming months. Not surprisingly, local real-estate professionals are behind the initiative. Washington Association of Realtors president Bill Riley told the San Francisco Chronicle he believes around half of would-be first-time buyers in his state “cannot save enough money for the down payment and closing costs.” "

Shouldn't those would-be first-timers, if they cannot save money for down payment and closing costs, be renting? Wasn't that the lesson we were supposed to have learned in the past 2 years or so?

"In a rush to prop up home prices and delay the ultimate day of reckoning for the vast majority of US real-estate markets, the federal government -- and now state governments as well -- insist on coercing taxpayers to over-leverage themselves and take on a debt burden they cannot truly afford. "

Mr. Jeffery's punchline (I'd suggest you follow his link and take a look):

"From the looks of it, Washington is leading by example. "

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Bay Area Counties Join Others for TARP Money

over their loss on Lehman and Washington Mutual investments. A Congressional hearing was held Tuesday this week.

According to San Jose Mercury News:

"The Lehman collapse jolted the world economy and claimed collateral damage in at least 21 states, where counties and cities saw $1.7 billion in investments they thought were safe become almost worthless. That in turn cost about 20,000 jobs nationwide, including 1,658 in the Bay Area [that's California], said economist Christopher Thornberg."

San Mateo County lost $155 million, Alameda $5 million, Santa Clara $1 million, Monterey $30 million including Washington Mutual investment ($20 million), and the city of Fremont lost $4 million.

These counties and cities want their investment principals back, at 100% on a dollar. The Congressmen/women for these counties argue that total $1.7 billion bad investments that counties and cities nationwide hold is just a small change, compared to the size of the bailout fund spent by Treasury Department. The legislation has already been introduced legislation asking Geithner for TARP money to reimburse local governments that lost money to Lehman Brothers.

According to Monterey County Herald,

"A provision in the Toxic Assets Relief Program allows Treasury Secretary Timothy Geithner the latitude to use bank bailout funds to compensate local governments for the Lehman failure, a move urged by congressional representatives. Instead, the Treasury Department has focused on using the TARP money to prop up struggling banks.

"But County Treasurer Lou Solton said the federal government's decision to pass over Lehman while bailing out other institutions, including Fannie Mae, Freddie Mac and AIG, makes this a special case.

""The real issue is fairness," Solton said. "The bottom line is these are taxpayer dollars being returned to taxpayers. We're bailing out Wall Street, what about Main Street?""

This has made me wonder...

• "The bottom line is these are taxpayer dollars being returned to taxpayers." Sure.
• What about private, individual Main Street investors in LEH and WM debts? Don't they also deserve 100% on their principal?
• Who's next? University endowments? Calpers?
• Have they ever heard of Credit Default Swaps?

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Stress Test Results: Banks Need $74.6B

10 banks out of 19 are told to raise capital. Of 10, five are regional banks. So far in after hours trading, it's mostly "buy the rumor and buy the news" event.

Here's the scorecard:

• American Express (AXP): None needed: $25.97 close, $26.70 AH as of 3:04pm PST
• Bank of America (BAC): $33.9 billion: $13.51 close, $14.26 AH
• Bank of New York Mellon (BK): None: $29.51 close, $31 AH
• BB&T (BBT): None: $25.34 close, $26.50 AH
• Capital One Financial (COF): None: $26.45 close, $27.06 AH
• Citigroup (C): $5.5 Billion: $3.81 close, $4.12 AH
• Fifth Third (FITB): $1.1 billion: $5.34 close, $6.40 AH
• GMAC (GJM): $11.5 billion: $12.52 close
• Goldman Sachs (GS): None: $133.73 close, $135.81 AH
• JP Morgan Chase (JPM): None: $35.24 close, $35.62 AH
• Key Corp (KEY): $1.8 billion: $6.78 close, $7.25 AH
• MetLife (MET): None: $31.75 close, $32.50 AH
• Morgan Stanley (MS): $1.8 billion: $27.14 close, $26.90 AH (announced secondary)
• PNC Financial (PNC): $0.6 billion: $44.47 close, $45.55 AH
• Regions Financial (RF): $2.5 billion: $5.23 close, $5.65 AH
• State Street (STT): None: $37.83 close, $41.10 AH
• Sun Trust (STI): $2.2 billion: $18.52 close, $18.25 AH
• US Bancorp (USB): None: $19.56 close, $20.90 AH
• Wells Fargo (WFC): $13.7 billion: $24.76 close, $24.54 (announced secondary)

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30-Year Treasury Auction Update: "Messy"

Briefing.com's Market Update has a succinct summary of the auction result:

"1:30 pm : Stocks have retreated to a fresh session low in the wake of a messy bond auction, which had plenty of subscribers (offering covered more than 2-to-1 by bidders), but it failed to offer the yield that was desired. That has prompted many traders to dump Treasuries.

"In turn, the 30-year Bond has shed 46 ticks, which has pushed its yield up to 4.25%. Meanwhile, the benchmark 10-year Note is down 26 ticks, which has lifted its yield to 3.27%."

And here is the detail from Bloomberg: Treasuries Tumble as Bond Sale Draws Higher-Than-Forecast Yield

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(11:52am PST) 30-year Treasury auction was the smallest in $ amount among this week's offerings. And yet it has turned out to be the party pooper for the market - not the stress test leaks, not the GM share dilution. Who could have known?

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Obama Releases $3.4 Trillion Budget Plan

According to Washington Post article:

"The Obama administration today unveiled details of a $3.4 trillion federal budget for the fiscal year beginning in October, a proposal that includes substantial increases for a number of domestic priorities as well as a plan to trim or eliminate 121 programs at a savings of $17 billion."

$3.4 trillion federal budget is the largest ever in peacetime, and is projected to create the deficit of $1.8 trillion in 2009. $17 billion savings is equivalent to 0.5% of the size of the budget. (Treasury is to auction $14 billion 30-year bond today, by the way.) Yet, the administration goes on to say...

""We can no longer afford to spend as if deficits don't matter and waste is not our problem," he said. "We can no longer afford to leave the hard choices for the next budget, the next administration -- or the next generation.""

Sooo...as long as you spend the money you don't own with full acknowledgement that deficits do matter and waste is the problem, it's OK to spend? I'm confused. Is it just the matter of attitude, not the sheer magnitude of money?

"In any case, Orszag [White House Budget Director] said, "$17 billion a year is not chump change by anyone's accounting." "

OK, people, please watch the sock puppet on my left hand....

What about those Bush years deficit? Here's a chart, also from Washington Post (3/21):

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30-Year Treasury Bond Auction Today

Today is the auction day for 30-year Treasury Bond ($14 billion), the last of the batch for the week. The top chart is the 6-month chart of 30-year Treasury yield, the bottom chart is today's intraday chart. Traders (I suppose) have been slamming the yield (conversely, bidding the price up) hard since the opening, as the stock market heads south and gold price reverses to the south.

The market is under pressure from "less bad" unemployment numbers. Go figure. It could be from ever-dribbling "stress test" result pressure. Who knows.. It's Mercury Retrograde. See the post below.)

Supply pressure and buoyant stock markets around the world have been pressuring the Treasury yields (yield goes up as the Treasury note/bond price goes down), and the yields on 10-year notes and 30-year bonds are back to the Fed's pre-quantitative easing days (i.e. before December 1, 2008).

The Federal Reserve is the buyer of last resort, and some people are fearing that it may become the only buyer.

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Mercury Retrograde and Stock Market

In case you are wondering why this site prominently displays Mercury Retrograde dates (after all, this is supposed to be, and trying to be a financial market information site), it's because some unexpectedly bad things happen in the market during Mercury Retrograde.

From what I understand, Planet Mercury is in charge of communication, and when it goes retrograde, communication, or information exchange, goes awry. The stock market, in a sense, is all about communication: sellers and buyers each trying to assess the value of a company and exchange that information through stock pricing in an open market, and each making their own decisions based on that communication.

I am sure it's recency bias, and nobody could have cared less in the bull market that ended in October/November 2007 (non-inflation adjusted). But here's how the stock market behaved in the past several Retrogrades.

• 10/11 - 11/1, 2007: Dow Jones Industrial went from 14198, all-time high, to 13568. 11/1 happens to be one day after Nasdaq registered the high for the year. The market made a series of jerky movements in both directions, until it finally started to go down, down, and down in late December. (Now we know what the market top looks and feels like, don't we?)
• 1/28 - 2/19, 2008: DJI went from 12386 to 12337. This was right after the relentless January down days. (And we thought the worst was over.)
• 5/26 - 6/19, 2008: DJI went from 12573 to 12063. In retrospect, I think this was the first swoon that ended up in a spectacular crash later in September/October. The market never regained the May high.
• 9/24 - 10/15, 2008: How could we ever forget this Retrograde?
  DJI went from 10928 to 8578. (And we thought the worst was really over.)
• 1/11 - 2/1, 2009: DJI went from 8603 to 7937, including 343-pt drop on 1/20, largest ever drop on the inauguration day. Then the market accelerated the descent, and kept going down for almost entire month of February. Dow hit the lowest on March 6, at 6470.
• 5/6 - 5/30, 2009:???? (How about the market getting very confused and going up even further, for a change?)

Here are future dates for the remainder of 2009:

• 9/6 - 9/29, 2009
• 12/26 - 1/5, 2009

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Banks to Submit Plans in One Month

Regulators Ask Banks Needing Capital to Submit Plans (Bloomberg)

According to Bloomberg,

"The government will release results of the so-called stress tests Thursday at 5 p.m. Washington time...

"Banks that need to raise capital under the government’s stress tests will have until June 8 to develop a plan and until Nov. 9 to implement it, U.S. bank regulators said today."

One month? We are talking tens of billion dollars for those banks here. One month?

(Now this is starting to sound familiar. Just like Chrysler's Chapter 11 court hearing. Deadline for counter bids for Chrysler's assets by May 20, lead bid by May 26, final hearing by May 30.... )

A hasty move is often a wrong, very wrong move. And what's the need for haste here? Or is the government hoping that by the time November rolles around, 1) People will forget about the so-called stress test and need for so-called capital; or 2) the economy will recover so much that the banks will not need to do anything after all; or both?

And my question from the previous post remains:

What happens if those banks disagree with the results, and refuse to raise capital?

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Bank Stress Test Seen As Political Move

The results of the "stress test" for the nation's 19 financial institutions are due to be disclosed on Thursday, but ever since last Friday "people familiar with the test" and anonymous officials as well as financial analysts have been dribbling the numbers. First, it was only one bank out of 19. Then 2, 4, 14, 10. Warren Buffet has said the test doesn't mean much. The once-Dr. Doom, now calling himself Dr. Realist Roubini has said not to believe it. Every time the name of the bank comes up who needs to raise capital, that bank stock shoots up (e.g. Wells Fargo the other day and today, Bank of America today).

Here's an AP article on the issue, and it raises several valid points:

The stress test is not really to test the health of financial institutions, but it is basically a PR event:

"Regulators and internal auditors routinely use stress tests to manage bank risk. The tests, typically done in private, help guide investments and ensure the banks' stability. Normally, regulators disclose their evaluations and remedies with banks behind closed doors. By contrast, critics say, the Fed's approach seems designed for public consumption."

"One-size-fits-all" approach is not the right one to actually assess the health of the diverse set of financial institutions:

"Providing more information about the health of banks is a worthy goal, said William Seidman, who ran the Federal Deposit Insurance Corp. during the savings-and-loan crisis. But he said the best way to do so would be to tailor the tests to each firm. Among the 19 firms being stress-tested are an insurer, an auto finance giant and banks with diverse business models. [It includes credit card companies, too.]

"Applying the same scenarios to 19 firms makes little sense, Iyer agreed. A"one-size-fits-all approach" doesn't take account of the strengths and weaknesses of each bank's assets.
"I am very skeptical that we will learn much about the true conditions of these banks," he said."

Forcing the banks to boost their capital reserve may not be the answer to the problem:

"Federal Reserve Chairman Ben Bernanke told lawmakers Tuesday that the tests will help banks develop plans to raise their capital buffers if necessary. The extra capital would ensure the banks could keep lending even if the recession worsened.

"Yet there's no guarantee that forcing banks to boost their capital reserves will have the desired result, Seidman said.

"Iyer said he worries the tests have become too tangled in fears of political or economic aftershocks to do much good.

""I'm a little concerned that somewhere in there, we've lost complete sight of the meaning of this exercise," he said."

Here's the list of 19 financial institutions, by the way.

• J.P. Morgan Chase & Co. (JPM)
• Citigroup (C)
• Bank of America Corp. (BAC)
• Wells Fargo & Co. (WFC)
• Goldman Sachs Group (GS)
• Morgan Stanley (MS)
• MetLife (MET)
• PNC Financial Services Group (PNC)
• US Bancorp (USB)
• Bank of NY Mellon Corp. (BK)
• SunTrust Banks Inc. (STI)
• State Street Corp. (STT)
• Capital One Financial Corp. (COF)
• BB&T Corp. (BBT)
• Regions Financial Corp. (RF)
• American Express Co. (AXP)
• Fifth Third Bancorp (FITB)
• Keycorp (KEY)
• GMAC LLC

My BIG question is: What happens if the bank disagrees with the government's findings and refuse to raise capital? Is the government going to take over the recalcitrant bank?

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Judge OKs Chrysler Bidding Procedures Despite Protest

Judge Gonzalez Greenlights 363 Process, Redlights Justice (Zero Hedge)

Well it didn't take very long for the judge to capitulate. Super-fast dismantling, just like Lehman Brothers.

"What is notable is that during a witness testimony in court today, a Chrysler staffer under oath said that Chrysler had previously been in discussions with Nissan, GM and Fiat for alternative value enhancing programs, which had a Net Present Value of $11 Billion, $36 Billion and 4 Billion, respectively. And yet per the Sale Motion, Chrysler creditors (TARP and Non-TARP) will receive a mere $2 billion from Fiat now, in exchange for the Dodge-maker's good assets." [emphasis mine]

And

Judge OKS Chrysler bidding procedures, dissident lenders protest; identities to be disclosed (AP)

"Bids for all or part of Chrysler's assets must be submitted by May 20, and a determination of the lead bid made by May 26. A final sale hearing would be held on May 27 and the sale could close in as little as 30 days after that."

The judge also ordered the identities of the lenders to be disclosed, despite public threats to the lenders (with loudest threats coming from the White House and the car czar).

If you are performing fiduciary duty to your firm and your clients, you are now a "dissident".

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How Will Market React To GM, Bank of America News?

GM details plans to wipe out current shareholders (Reuters)
[emphasis mine]

"General Motors Corp on Tuesday detailed plans to all but wipe out the holdings of remaining shareholders by issuing up to 60 billion new shares in a bid to pay off debt to the U.S. government, bondholders and the United Auto Workers union.

"The unusual plan, which was detailed in a filing with U.S. securities regulators, would only need the approval of the U.S. Treasury to proceed since the U.S. government would be the majority shareholder of a new GM, the company said.

"Once GM has issued new shares to pay off its debt to the U.S. government, bondholders and its major union, it said it would then undertake a 1-for-100 reverse stock split."

Bank of America to need $34 billion in capital: source (Reuters)

"Bank of America has been deemed to need an additional $34 billion in capital, according to the results of a government stress test, a source familiar with the results said on Tuesday.'

Dow futures -83 as of 22:16 EST.
GM shares ended the regular session at $1.85, but dropped to $1.66 in after hours.
BAC shares ended the regular session at $10.84, and ended $10.86 in after hours.

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More on Hedge Funds vs Government over Chrysler

Hedge Funds Outraged At Obama Bullying But Also Cowering In Fear , from Business Insider (they say picked it up from Zero hedge).

It is a letter distributed by Clifford S. Asness, Managing and Founding Principal of AQR Capital Management, LLC.

The following are his concluding paragraphs:

"Last but not least, the President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying. The TARP recipients had no choice but to go along. The hedge funds were singled out only because they are unpopular, not because they behaved any differently from any other ethical manager of other people's money. The President’s comments here are backwards and libelous. Yet, somehow I don’t think the hedge funds will be following ACORN’s lead and trucking in a bunch of paid professional protestors soon. Hedge funds really need a community organizer.

"This is America. We have a free enterprise system that has worked spectacularly for us for two hundred plus years. When it fails it fixes itself. Most importantly, it is not an owned lackey of the oval office to be scolded for disobedience by the President.

"I am ready for my “personalized” tax rate now."

Well I'm sure Mr. Rattner is ready to give him the rate, but he may be too busy with the new project on GM...

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U.S. SEC told not to revive uptick short-sale rule

According to Reuters news.

"Financial professionals, academic experts and the U.S. broker-dealer watchdog agree the Securities and Exchange Commission should not reinstate its old uptick rule to regulate short selling but disagreed on what other measures would be effective.

"The SEC is considering five proposals, including reinstating an updated version of the Depression-era uptick rule, which would only allow short sales when the last price was higher than the previous price.

"None of the SEC proposals received overwhelming support at the public meeting on Tuesday. The only thing on which experts achieved some sort of consensus was their opposition to proposed legislation that would force the SEC to reinstate its old uptick rule. ..."

Looks like nothing is going to happen anytime soon, but traders seem to be covering the shorts on certain heavily shorted stocks (here's one example, and another), just in case.

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Mr. Steve Rattner and Chrysler

Mr. Steve Rattner of Quadrangle Group, a private investment firm which is currently investigated by New York Attorney General for the public pension scandal, heads the government auto task force, advising Geithner and Summers. He recently made news when his forceful words to the hedge fund who refused to accept the government's offer on the Chrysler debt they owned was reported in the press.

What I find more amusing though, is that Mr. Rattner, whose investment firm defaulted on its debt to Cerberus, soon-to-be-wiped-out owner of Chrysler, is advising the top government officials on Chrysler restructuring. Not that Cerberus is an angel, but it must be raising blood pressure there, having to deal with Mr. Rattner.

Mr. Rattner was also the one who told GM's Wagoner to take a walk.

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Wells Fargo Up 20% on News of Capital Need

Go figure. According to various news sources, Wells Fargo has been told by regulators to raise capital after stress test.

Right before the news hit the wire at about 12:30 EST, Wells Fargo (WFC) was trading about $21.40. It immediately dipped, then started ramping up. With 10 minutes left to trade, WFC is currently at $23.63, slightly off the day's high of $23.89.

Other "troubled" banks are flying, too.

• Bank of America (BAC): up 16%
• Citigroup (C): up 7.7%
• Regional Financial (RF): up 22%
• Fifth Third Bankcorp (FITB): up 22%

The number of banks that may be required to increase capital is now supposedly 14, out of 19 tested, as the stress test results continue to dribble out before the "official" announcement on Thursday.

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Fiat+Chrysler+GM=Fiat/Opel by end of May

From Financial Times: Fiat plans European car supergroup

Fiat is thinking big and moving fast. The tripartite deal by the end of May, and list shares of the new company by the end of the summer.

"Sergio Marchionne, Fiat chief executive, is on Monday due to outline plans to transform the global automotive landscape by spinning off Fiat’s core cars division, joining it with Chrysler and General Motors Europe, and creating a new publicly traded European car company.

"Mr Marchionne wants Italy’s largest industrial group to separate Fiat Auto from its other divisions, join them with Opel / Vauxhall, Saab, and GM’s other European operations, and Fiat’s stake in Chrysler to create a company with about €80bn ($106bn) of revenues and sales of 6m-7m vehicles a year – second to Toyota, more than Renault / Nissan or Ford Motor, or GM itself, and roughly as many as Volkswagen."

Fiat is taking full advantage of this worsening global resession and government intervention and subsidy that has grown with it. If he can pull it off, Mr. Marchionne's company will be a big force in three continents: Europe, North America, and Latin America.

It sure seems to me that the US government is selling Chrysler and GM short in the long run.

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Peter Schiff On Currencies and Chrysler

His video blog on May 1 (which I found at lewrockwell.com).

(Not surprisingly) Schiff is critical of the government interference in the market and economy (and particularly in Chrysler's affair).

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