Citigroup Starts to Break Apart
Posted by Eddy Elfenbein on January 10th, 2009 at 3:11 pm

Now that everything has blown up in their faces, Citigroup (C) is taking the first steps in breaking itself up. The WSJ reports:

Citigroup Inc., under pressure from the federal government, took a big step toward breaking up the financial supermarket, entering discussions to spin-off its Smith Barney brokerage unit into a joint venture with rival Morgan Stanley, according to people familiar with the talks.
News of the talks, which could result in an agreement as soon as next week, surfaced Friday afternoon as Robert Rubin, a senior counselor and director at Citigroup, announced his retirement from the New York company. The former Treasury secretary brought his high profile and respectability to Citigroup, but his reputation was diminished by his role in the financial turmoil at the bank.

This is long, long overdue. In fact, some of us were telling them to break long before the troubles started:

The financial supermarket idea doesn’t work. Repeat after me, Mr. Prince, it doesn’t work. I know, it sounds good on paper, but people don’t do their finances that way. They never have and they’re not about to now. This was just a nice idea to justify some lousy acquisitions many, many years ago.
Eddy’s rule of business #15,783: No matter who is put in charge to execute a dumb idea, when it starts to fail, people will blame the execution, not the dumb idea. Lots of people are ready to toss Chuck Prince overboard. Fine, but he’s not the problem.
Twenty-five years ago, Sears bought Dean Witter. They had this great idea. Stick brokerage offices in the stores! Well, it didn’t work and Sears eventually sold Dean Witter. Later Dean Witter bought Discover and turned it into a hugely profitable credit card business. Then Morgan merged with Dean Witter, and made a whole lotta money.
Guess what Morgan is spinning off now? Discover!
Think about it, Chuck. Split Citi up.

Some Madoff “Victims” Made Profits
Posted by Eddy Elfenbein on January 10th, 2009 at 11:18 am

The Securities Investor Protection Corp. has informed Madoff investors that they can apply for up to $500,000 in aid. There’s one little problem: Many of these folks made money from Madoff.

Jonathan Levitt, a New Jersey attorney who represents several former Madoff clients, said more than half of the victims who called his office looking for help have turned out to be people whose long-term profits exceeded their principal investment.
“There are a lot of net winners,” he said.
Asked for an example, Levitt said one caller, whom he declined to name, invested $1.8 million with Madoff more than a decade ago, then cashed out nearly $3 million worth of “profits” as the years went by.
On paper, he still had $4 million invested with Madoff when the scheme collapsed, but it now looks as if that figure was almost entirely comprised of fictitious profits on investments that were never actually made, leaving his claim to be owed anything unclear.

Legally, this isn’t going to be pretty. The courts may rule that the recent profits have to be returned. This will pit the Madoff winners against the Madoff losers.

Dow and the S&P 500
Posted by Eddy Elfenbein on January 9th, 2009 at 6:36 pm

On November 20, the Dow’s ratio to the S&P 500 broke 10-to-1 for the first time in over four decades. What did that mean?
I’m not sure but it did happen to coincide with the market’s bottom. Both indexes have rallied nicely since then.

The black line is the Dow and it follows the left scale. The blue line is the S&P 500 and it follows the right scale. The lines are scaled at 10-to-1.

Dennis Kneale Asks if Steve Jobs has PMS
Posted by Eddy Elfenbein on January 9th, 2009 at 1:44 pm

Stay classy, Dennis.

Today’s Jobs Report
Posted by Eddy Elfenbein on January 9th, 2009 at 1:23 pm

The jobs report today was terrible. The good news is that the market was expecting it, so stocks aren’t getting clobbered.
Here’s some perspective: On average, 16,000 people lost their job every day for the last four months of the year. That’s like a decent-sized town getting wiped out every day.
Here’s the NFP (in thousands):

That trend does not look good. Eleven million Americans are now unemployed. Over the last three years, the labor force has grown by 4.44 million, yet employment has grown by 555,000.

Daron Acemoglu
Posted by Eddy Elfenbein on January 9th, 2009 at 12:42 pm

Arnold Kling points to some thoughts from Daron Acemoglu on what caused our blindness:

The first is that the era of aggregate volatility had come to an end. We believed that through astute policy or new technologies, including better methods of communication and inventory control, the business cycles were conquered. Our belief in a more benign economy made us more optimistic about the stock market and the housing market. If any contraction must be soft and short lived, then it becomes easier to believe that financial intermediaries, firms and consumers should not worry about large drops in asset values.
Even though the data robustly show a negative relationship between income per capita of an economy and its volatility and many measures did show a marked decline in aggregate volatility since the 1950s, and certainly since the prewar era, these empirical patterns neither mean that the business cycles have disappeared nor that catastrophic economic events are impossible. The same economic and financial changes that have made our economy more diversified and individuals firms better insured have also increased the interconnections among them. Since the only way diversification of idiosyncratic risks can happen is by sharing these risks among many companies and individuals, better diversification also creates a multitude of counter-party relationships. Such interconnections make the economic system more robust against small shocks because new financial products successfully diversify a wide range of idiosyncratic risks and reduce business failures. But they also make the economy more vulnerable to certain low-probability, “tail” events precisely because the interconnections that are an inevitable precipitate of the greater diversification create potential domino effects among financial institutions, companies and households. In this light, perhaps we should not find it surprising that years of economic calm can be followed by tumultuous times and notable volatility.

Stryker Delivers
Posted by Eddy Elfenbein on January 9th, 2009 at 10:28 am

Good news from Stryker (SYK).

The company reaffirmed that it expects a 2008 profit, excluding special items, of $2.82 to $2.84 per share, an increase of 18 percent from 2007.
For 2009, the Kalamazoo, Michigan-based company forecast earnings of $3.12 to $3.22 per share, up 10 percent to 14 percent from expected 2008 results. Analysts’ average forecast is $3.15.

Check out this trend in EPS growth:
2002: $0.88
2003: $1.12
2004: $1.43
2005: $1.75
2006: $2.02
2007: $2.40
2008: $2.82 to $2.84 (est)
2009: $3.12 to $3.22 (est)

The Politics of Fear?
Posted by Eddy Elfenbein on January 9th, 2009 at 8:30 am

Remember how George Bush used the “politics of fear” during a national crisis to “scare voters” into approving his pre-existing agenda? Maybe it’s just me. Anyway, here are some choice quotes from Obama’s speech yesterday:

We start 2009 in the midst of a crisis unlike any we have seen in our lifetime.
I don’t believe it’s too late to change course, but it will be if we don’t take dramatic action as soon as possible.
If nothing is done, this recession could linger for years.
We could lose a generation of potential and promise.
a bad situation could become dramatically worse.
we won’t get out of it by simply waiting for a better day to come, or relying on the worn-out dogmas of the past.
Only government can break the vicious cycles that are crippling our economy.
If we act with the urgency and seriousness that this moment requires.
we need to act boldly and act now to reverse these cycles
This must be a time when leaders in both parties put the urgent needs of our nation above our own narrow interests.
For every day we wait or point fingers or drag our feet, more Americans will lose their jobs. More families will lose their savings. More dreams will be deferred and denied. And our nation will sink deeper into a crisis that, at some point, we may not be able to reverse.
I know the scale of this plan is unprecedented, but so is the severity of our situation.
God Bless America

Wow, I’m sold.

Anti-TARP Day
Posted by Eddy Elfenbein on January 9th, 2009 at 8:11 am

Today seems to be Anti-TARP day. The first salvo comes from a congressional oversight committee:

The U.S. Treasury has failed to reveal its strategy for stabilizing the financial system, not answered questions asked by a government watchdog, and has done nothing to help struggling homeowners, a report being released Friday charges.
In the most scathing criticism yet of Treasury’s implementation of the $700 billion financial-rescue package, a draft report being issued by the five-member congressional oversight panel said there appear to be “significant gaps” in Treasury’s ability to track hundreds of billions of dollars of taxpayer money.
“The panel’s initial concerns about the [Troubled Asset Relief Program] have only grown, exacerbated by the shifting explanations of its purposes and the tools used by Treasury,” said the draft report, which found that the department has “not yet explained its strategy” for stabilizing the financial markets.
The report faults Treasury on a variety of fronts: having no ability to ensure banks lend the money they have received from the government; having no standards for measuring the success of the program; and for ignoring or offering incomplete answers to panel questions.

Even harsher news comes from this Bloomberg article:

Henry Paulson may be the most powerful manager of money in the world and he still couldn’t do for taxpayers with the $700 billion bailout of American banks what Warren Buffett did for his shareholders in investing in Goldman Sachs Group Inc.
The Treasury secretary has made 174 purchases of banks’ preferred shares that include certificates to buy stock at a later date. He invested $10 billion in Goldman Sachs in October, twice as much as Buffett did the month before, yet gained warrants worth one-fourth as much as the billionaire, according to data compiled by Bloomberg. The Goldman Sachs terms were repeated in most of the other bank bailouts.
Paulson’s warrant deals may give U.S. taxpayers, who are funding the bailouts, less profit from any recovery in financial stocks than shareholders such as Goldman Sachs Chief Executive Officer Lloyd Blankfein and Saudi Arabian Prince Alwaleed bin Talal, owner of 4 percent of Citigroup Inc., said Simon Johnson, former chief economist for the International Monetary Fund.
The transactions are “just egregious,” said Johnson, a fellow at the Peterson Institute for International Economics in Washington. “You want to do it the way Warren does it.”

Bank of England Cuts Rates to Lowest Level Since ’94
Posted by Eddy Elfenbein on January 8th, 2009 at 9:39 am

That would be 1694 when the bank was started:

The Bank of England cut the benchmark interest rate to the lowest since the central bank was founded in 1694 as policy makers tried to prevent the credit squeeze from deepening Britain’s recession.
The Monetary Policy Committee, led by Governor Mervyn King, trimmed the bank rate by a half point to 1.5 percent. The result matched the median forecast of 60 economists in a Bloomberg News survey. The pound rose against the euro and the dollar.