Saturday, May 2, 2009

How FDIC dismantles a bank

Almost every Friday evening we hear the news: "So-and-so bank was shut down by Federal Deposit Insurance Corporation". Since the beginning of the year we have had 32 bank failures, according to FDIC. (In comparison, there were 25 bank failures in entire 2008, and 3 in 2007.)

Inquiring minds want to know... how do they do that?

Then I ran into this: "Anatomy of A Bank Takeover (NPR)"
It gives a good glimpse of how FDIC goes in and does their work. Quite fascinating. It is like an espionage operation of some sort. And from the description of it, it is also quite efficient and thoughtful (surprising, coming from a government agency).

Friday, May 1, 2009

Upcoming Treasury auction weighing down on the stock market

The stock market can't seem to decide whether it wants to go up or down. It spent just about entire April that way, and today, first day of "Sell in May and go away" May, it's flat again. How many dojis can the market chalk up until something gives?

Potential market-moving bad news turns out to be duds (e.g. a really, really bad GDP number, bankruptcy filing of a major auto company) and the indices just sit. Seeing this action (I should say non-action), every day sees a new analyst, pundit making a pronouncement that this may really be a start of the new bull market. The most recent is Abby Joseph Cohen of Goldman Sachs, saying she expects the broad stock market to finish higher this year, with the U.S. economy "at worst" experiencing a mild recession. (That sounds awfully familiar. I thought she stopped making predictions given her fantastic calls in 2007 and 2008.)

Weighing against this strangely positive mood, I think, is the bond market, which has been crowded with Treasuries the government must sell to fund the government operation. Next week is no different. US Treasury has to sell $155 billion worth of Treasury bills, notes, and bonds, all of that, in one week. Here's the schedule (data taken from Treasury Department's official announcements):

  • Monday May 4: 13-week bill, $30 billion
  • Monday May 4: 26-week bill, $28 billion
  • Tuesday May 5: 52-week bill, $26 billion
  • Tuesday May 5: 3-year note, $35 billion
  • Wednesday May 6: 10-year note, $22 billion
  • Thursday May 7: 30-year bond, $14 billion

    Total for the week: $155 billion

Oh, by the way... This one-week amount is about 35% of the debt that the Japanese government wants to sell this fiscal year.

... And Treasury will wait until Thursday to release the result of the "stress test".

Thursday, April 30, 2009

Zero Hedge's latest on Chrysler BK

Here it is: Chrysler Chapter 11 Case Assigned To Judge Arthur Gonzales

Zero Hedge says the judge worked on Worldcom and Enron before.

Alert: It's a Deal, and it's a Bankruptcy, too

Chrysler and Fiat are expected to enter into a partnership, and Chrysler will file for Chapter 11 bankruptcy with the bankruptcy court in Manhattan.

According to the president at today's noon press conference, the bankruptcy is to last 30-60 days, the remaining unresolved issue being the hedge funds holding out for more money for their debt holding.

He assured us that the bankruptcy is not the sign of weakness. ???? Equity holders will be wiped out and debt holders are getting 30 cents on a dollar. It's weakness, and nothing wrong at this point with being weak. They are bankrupt.

He also took a swipe at those hedge funds who didn't "do the right thing". It's business, Mr. President. Trying to get more for their money. It will be interesting to see how the bankruptcy court judge handles the hedge funds' claims, particularly if they also have CDS on the debt.

One very positive thing .. actually two: Chrysler CEO Nardelli (of wrecking Home Depot fame) will be gone, and Cerberus (of wrecking many small-town businesses fame) will be reduced to a minority stakeholder. [update: Cerberus will be completely out. 4/30/08] (Oh by the way did you know the former US vice president Dan Quayle runs one of their units?)

I do believe Chrysler, with the partnership with Fiat, will have a chance of success, though not the kind of success that the government is talking about. More on that later.

Wednesday, April 29, 2009

Fighting chance? Chrysler & Fiat Alliance

AP sources: Fiat to sign partnership with Chrysler
Wall Street Journal: UAW to get 55% Stake in Chrysler for Concessions
LA Times: Chrysler, Fiat appear near a deal

Deal as soon as Thursday, according to one source. Regardless of whether Chrysler files for Chapter 11 or not, Fiat (F.MI) would be a partner and the US government would finance the restructuring.

Chrysler's lenders are yet to agree to forgive $6.9 billion in secured debt in exchange for $2 billion cash now [I would prefer money at hand; I would take $2 billion today]. Four large banks that control 70% of the debt (JP Morgan Chase (JPM), Goldman Sachs (GS), Morgan Stanley (MS), and Citigroup (C)) already agreed, but 42 hedge funds who hold 30% of the debt were still holding out.

If they don't agree, Chrysler would file for Chapter 11 to restructure. If they do agree, the company would restructure out of court.

Under the deal,

  • United Auto Workers union will hold 55% equity stake;
  • Fiat will get 20% equity stake in exchange for its small car and engine technology (valued at $8 to 10 billion) , which could be increased to 35%;
  • Daimler's $19.9% stake will be turned over to Chrysler's parent company, Cerberus Capital Management LP.

According to Wall Street Journal,

"The latest concessions would bring the UAW contract at Chrysler closer to the pay and benefits earned by workers at nonunion auto factories operated by rivals Honda Motor Co. and Toyota Corp."

Deal or no deal? We will find out soon enough.

Is the market pricing in the government?

Interesting thought from my friend.

After the sharp V recovery from March low, the market participants, whether they are amateur traders/investors like me or professionals, have been expecting a significant correction. The problem is, we've been waiting for that correction for nearly a month now. The market feels like it is refusing to go down, but too tired or not too eager to resume the upward movement soon. What is it up to? What is it doing?

I am intrigued by my friend's assertion that the market is pricing in the government. So I am plotting major political events of the past 1 year against the Dow Jones Industrial chart. I'm hoping to post soon. Stay tuned....

Tuesday, April 28, 2009

Monetary Base resuming the sharp rise? And negative interest rate coming? (update)

Looks like adjusted monetary base is spiking up again, after a brief dip. If this is unleased onto the market, don't tell me it won't have any effect on inflation.
And here's an update to a nutty idea by the Harvard economist about a week ago on how to encourage spending (or how to make money unattractive to hold). Well, he wasn't so nutty after all.

According to Financial Times, the Federal Reserve's internal analysis prepared for the last policy meeting says "The ideal interest rate for the US economy in current conditions would be minus 5 per cent." Of course a central bank cannot technically cut the rate below zero. The actual plan based on the analysis would include expansion of asset purchase by the Fed well beyond the amount that has been authorized so far (over $1 trillion) and types of assets authorized, in order to intentionally cause inflation so that individuals and corporations who hold money would see their holdings decrease by 5% each year - so that they would spend money as soon as possible before it further loses value.

If you have $100 today, it will be effectively worth $95 in a year. In 3 years, it will be about $85. In 5 years, $77. In 10 years, $59. If they overshoot their target and we end up having -7% effective rate, $100 today will be only $80 in 3 years, $69 in 5 years, $48 in 10 years.

It would be a terra incognita for sure. Not even the Weimar Republic inflated intentionally.

Peter Schiff's take is on his blog. Here's the link.

Monday, April 27, 2009

Bad news (swine flu) is good news for some

Flu a windfall for some drug makers, shares jump (Reuters):

On a nervous down-day in the stock market, pharma and biotech companies were the winners.

One-day gain for large pharmaceutical companies:
Roche: 3.51% (who markets Tamiflu)
GlaxoSmithKline: 5.67%
Baxter (BAX): 2.4%
Sanofi-Aventis: 2.43%
Gilead Sciences (GILD): 3.78% (original inventor of Tamiflu)

One-day gain for smaller, biotech companies developing vaccines:
Novavax (NVAX): 78%
BioChryst Pharmaceuticals:75%

I seem to recall the name Baxter from a different piece of news... Does anyone remember this in February? "Baxter: Product contained live bird flu virus (Toronto Sun)"

Fear and Loathing in Debts and Liabilities

Particularly in Europe.... This from (By Ambrose Evans-Pritchard).

Snippets from the article (emphasis mine):

"Traders already whisper that some governments are buying their own debt through proxies at bond auctions to keep up illusions – not to be confused with transparent buying by central banks under quantitative easing. This cannot continue for long."

"Commerzbank said every European bond auction is turning into an "event risk". "

"As the IMF said last week, Europe's banks have written down 17pc of their losses – American banks have swallowed half."

"Japan's $1.5 trillion state pension fund – the world's biggest – dropped a bombshell this month. It will start selling holdings of Japanese state bonds this year to cover a $40bn shortfall on its books. So how is the Ministry of Finance going to fund a sovereign debt expected to reach 200pc of GDP by 2010 – also the world's biggest – even assuming that Japan's industry recovers from its 38pc crash? "

"Hayman Advisers says the default threat lies in the cocktail of spiralling public debt and the liabilities of banks – like RBS, Fortis, or Hypo Real – that are landing on sovereign ledger books. "

""The crux of the problem is not sub-prime, or Alt-A mortgage loans, or this or that bank. Governments around the world allowed their banking systems to grow unchecked, in some cases growing into an untenable liability for the host country," said Mr Bass. "

"A disturbing number of states look like Iceland once you dig into the entrails, and most are in Europe where liabilities average 4.2 times GDP, compared with 2pc for the US. "There could be a cluster of defaults over the next three years, possibly sooner," he said."

What has happened in the world financial markets since last September may look like a walk in the park several months from now...

Taliban Move Closer to Islamabad

This from Wall Street Journal, and this is from India Today. For those geographically challenged, Islamabad is the capital of Pakistan. Not much has been reported in the US about this, although UK's Guardian reported it (large Pakistaini and Indian contingencies in that country).

I'm watching gold and gold miners stocks. Indians are buying gold again, and maybe not just because of the upcoming festival.