Author Archive

  • Citi Slickers
    , August 31st, 2005 at 6:17 am

    So many Citigroup execs are jumping ship, you’d think the bank was Hewlett-Packard. That’s not quite fair—the Hewlett-Packard employees are getting laid off. The Citigroup folks are voluntarily leaving en masse. Funny, I’d think it’d be a good joint to work for. Huge salary, nice office, no heavy lifting. Be that as it may, the top brass is rushing for the exits.

    The latest is Marjorie Magner, the consumer banking chief. She got nailed by a taxi in New York. While recovering, she decided what she wanted to do with her life and apparently it has little to do with being one of the most powerful women in world finance. Her unit (think credit cards) makes more money than Wal-Mart. What could be more powerful than that? Well, she’s considering a career in the entertainment industry (I’m not making this up). The stock sold off on the news. It’s kinda hard to analyze that one.

    Then there’s Robert Willumstead. Remember him. Me neither. Anyway, he was the guy Sandy Weill brought in to quiet down the “Sandy has no heir” choir. Well, Willumstead is out too. And by “out” I mean, “an office, car and driver until he finds a job.” Oh, and did I mention the $18 million? That too.

    Wall Street wants to know what’s going on. The answer is that Citigroup is being de-Sandyfied. All the negative karma is fleeing and taking its money with it. Ironically, when Weill chose Chuck Prince to be the new CEO, the Street thought it was because Sandy would still be in charge. He’d be the bank’s Dick Cheney to Chuck Prince’s George Bush. Few people thought that Prince would ever be king. But now Prince is in charge and he’s giving the bank an extreme makeover.

    Firstly, Citigroup needs to change its strategy of aggressive growth through mergers. Actually, that’s not a choice. The Federal Reserve put Citigroup on Double Secret Probation—no mergers until they’re clean. During the Sandy Years, Citigroup was the banker of choice to all the all future members of Cell Block D—Enron, Parmalat, WorldCom, Adelphia. I think they even did a few deals with Suge Knight. It’s all a little hard to remember.

    The big difference now is that Prince is a lawyer. His top priority is cleaning up Citigroup’s regulatory reputation as a bank of easy virtue. One of the moves he’s made is that he’s hired more lawyers. In fact, Willumstead complained of too many Indians in the head office. Magner also complained of micro-managing. Sandy used to let them do whatever they wanted.

    Perhaps the biggest surprise was when CNBC reported that Sandy was bolting as chairman of the board. The board told him that if he walked, he’d have to give up his lifetime perks. Sandy backed down.

    Today, Citigroup’s stock is barely above its 52-week low. The shares are down 17.3% since April 1, 2004.Obviously, the flattening yield curve hurts the bank, but Wall Street wants to see what Prince can do. I won’t go near this stock until it can prove its turned around.

  • Hope for Dell
    , August 30th, 2005 at 11:15 pm

    Daniel Gross has more on the recent anti-Dell noises. I still think it’s a thesis looking for a story.

    Despite this rash of bad news, it’s too early to write either the Dell-is-doomed or Dell-is-back story. Dell’s business model isn’t broken, and it’s not fundamentally challenged. No, for every trend, there comes a time when you can no longer simply extrapolate the results of the past into the future. It happens to every great company and to every great brand. Dell’s stock still trades at a significant premium to the market. Investors are willing to pay far more for a dollar of Michael Dell’s earnings than they are for a dollar of the S&P 500’s earnings today because they think his will grow faster. To a degree, Dell has finally fallen victim to the same malaise that has affected the other gigantic stock stars of the 1990s: Wal-Mart, General Electric, Microsoft, and Citigroup. They have undergone ungainly transitions from supercharged growth to merely impressive growth. At 21, Dell has belatedly entered its awkward adolescence.

    That’s an important reminder, but I disagree. Dell is still able to deliver astonishing growth. The company’s sales growth rate has actually accelerated in the past few years (13.6% in 2002, 17.1% in 2003, 18.7% in 2004; although just l5.3% YTD).

    Here’s more on the falling prices in the PC industry.

  • Spitzer’s Settlement Two Years On
    , August 30th, 2005 at 12:04 pm

    Eliot Spitzer made quite a name for himself taking on Wall Street. Two years ago, he forced the biggest firms on Wall Street into a global settlement due to conflicts of interest between research and investment banking. The firms had to pay over $1.4 billion. The money was supposed to go to investor education, independent research and investors who were harmed. Instead, it’s turned into a money grab among competing federal and government agencies.

    Most of the $413 million that went to the states, based on population, went to help balance state budgets (or close big gaps). California had the largest share–$43 million. It put $40 million into its general fund and reserved $3 million for investor education. So far, it has spent $150,000 on a campaign to teach military personnel and their families how to avoid financial scam artists.

    Georgia. The state spent $4.3 million on public service announcements featuring Secretary of State Cathy Cox, who just so happens to be running for governor. The ads ran all over the state. Also, the independent research isn’t working out well either.

  • More on Bayou
    , August 30th, 2005 at 10:14 am

    The New York Times has more on the fall the Bayou hedge fund.

    “It’s not logical to me,” said Leon Meyers, an investor in Bayou who is still baffled by the indications of possible fraud at the firm. “If this was a Ponzi scheme, why would the firm go through a voluntary liquidation, when all this would come to light?”

    The Wall Street Journal has more on Bayou’s clients. Also, The Stamford Advocate has a good article on the investigation.

  • The Collateralized Debt Obligations Market
    , August 30th, 2005 at 9:53 am

    The market for collateralized debt obligations, or CDOs, is the fastest-growing business on Wall Street.

    Banks create CDOs by bundling together assets ranging from mortgages to loans to high-yield bonds, with income from those assets used to repay investors. The securities are divided into pieces, or tranches, that can offer yields as high as 14 percent, said Nestor Dominguez, 48, co-head of Citigroup’s North American CDO group in New York. Average investment-grade bonds yield 5.1 percent and junk bonds yield 7.5 percent, according to Merrill.
    “The high yields have created great demand for CDOs from hedge fund managers and arbitrageurs,” said Thomas Eggenschwiler, 47, co-head of fixed-income research at Aladdin Capital Management LLC in Stamford, Connecticut, which oversees about $3.5 billion and buys the securities.
    CDO fees usually equal about 1.5 percent to 1.75 percent of the size of a deal, bankers who arrange such sales say. That’s more than triple the average 0.4 percent that banks charge to sell investment-grade bonds and about the same as fees on junk bonds, traditionally the most lucrative, Bloomberg data show.

    Many CDOs are “synthetic,” meaning they’re backed by credit default swaps. Although Greenspan has spoken favorably of credit default swaps, the growth of this market has led to meeting to a meeting of top Wall Street firms next month at the New York Fed to discuss credit derivatives.

  • Reuters: China Defends Yuan Policy
    , August 30th, 2005 at 9:37 am

    China defended its currency regime on Tuesday ahead of a visit to the United States by President Hu Jintao, but hinted at possible future changes by saying it would “develop and perfect” the exchange rate.
    Some U.S. politicians and industry groups complain that the yuan’s small revaluation last month will do little to address the yawning U.S. trade deficit, and hope President Bush will press Hu on the matter when they meet next week.
    In a briefing about Hu’s trip, He Yafei, director-general of the Foreign Ministry’s department of North American and Oceanian affairs, said the reforms to the yuan, also known as the renminbi, fit China’s reality.
    “We will further develop and perfect the renminbi exchange system with a firm heart,” He said.
    He said that currency issues were a matter of national sovereignty and that Beijing had always taken a responsible attitude toward the exchange rate.
    “We have taken into consideration the practical situation of China’s economic development and how to maintain the financial and economic stability of the region and the world,” He said.
    Critics accuse Beijing of keeping the yuan undervalued so as to make its exports cheaper on the world market.
    On July 21, the central bank revalued the yuan by 2.1 percent and dropped the dollar peg in favor of managing the exchange rate with reference to a basket of currencies.
    Hu visits the United States from September 5 for talks also expected to feature concerns over Taiwan and the trade deficit.

  • Greenspan Warns
    , August 30th, 2005 at 8:58 am

    grrrr.jpg
    Financial Times

    Greenspan Warns Successor

    The Telegraph

    Greenspan Warns of the Dangers from Capital Gains

    NewsHour

    Greenspan Warns of Growing Risks to U.S. Economy

    Smart Money

    Greenspan Warns of Rise in Risk Tolerance

    Myrtle Beach Sun News

    Greenspan Warns Homeowners

    BBC News

    Greenspan Warns on Protectionism

    The Washington Post

    Greenspan Warns End of US Housing Boom Inevitable

    Globe and Mail

    Greenspan Warns on Deficits

    Financial Times

    Greenspan Warns on Dangers in US Housing Market

    The Spoof

    Alan Greenspan and Jessica Simpson Burned in Effigy After Warning of House Price Crash

  • Police Arrest NYSE Member for Death Threat Against Fellow Member
    , August 29th, 2005 at 2:40 pm

    Wall Street can be a tough place. According to police, Edward A. Reiss made a death threat against William Higgins. Higgins has been opposed to the New York Stock Exchange’s plan to buy Archipelago.
    Here’s more on Reiss:

    “In the past 10 years, electronic technology has transformed the Exchange at lightening speed,” says Ed.
    Although Ed marvels at the computerization of the floor, there have been no advances in saving shoe leather. He’s in constant motion, running from the Main Room to the Garage and back, shouting and gesticulating in a lingo unique to the Exchange.

  • Bayou Hedge Fund
    , August 29th, 2005 at 10:17 am

    Two weeks ago, Eric Dillon went to the offices of Bayou Management. He’s a money manager and he wanted to find out what was happening at the hedge fund. The fund had abruptly shut down, and despite promising to return everyone’s money, no money had been dispersed. Also, no phone calls were being returned. Dillon knocked on the Bayou’s front door, but no one came. He came in through an unlocked back door, and on the CFO’s desk, he found a letter that began, “This is my suicide note and confession.”
    The Wall Street Journal has the whole story. Also, Gretchen Morgenson wrote about Bayou on Sunday.

  • Foreigners are Pouring Cash into Emerging Markets
    , August 29th, 2005 at 9:48 am

    The Economist has an interesting article on the sudden interest in emerging markets.

    Between the beginning of June and the week ending August 17th, emerging-market equity funds took in a net $6.94 billion. That brings the year’s total to $8.74 billion, nearly three times 2004’s level and more than the previous high of $8.6 billion for all of 2003. Bond funds tell the same story, with total net inflows this year of $4.74 billion, a record.

    Many emerging markets are doing very well, plus the risk is much lower than it was eight years ago.