The Fannie and Freddie Take Over
Posted by Eddy Elfenbein on September 8th, 2008 at 11:01 am

John Hempton at Bronte Capital has an excellent summary of the takeover of Fannie and Freddie. It’s odd to say this, but the markets forced the government’s hand. The WSJ looks at the events leading up to the takeover.

In the end, Fannie Mae and Freddie Mac had no choice.
Summoned to separate meetings on Friday with Treasury Secretary Henry Paulson and other top officials, the two mortgage giants were told they could either agree to a government takeover or one would be foisted upon them.
“We have the grounds to do this on an involuntary basis, and we will go that course if needed,” Mr. Paulson told senior executives at the two companies, who had little idea such a move was coming, according to three people familiar with the meetings.
There was no dramatic trigger, nor was there fear of imminent collapse. Instead, the sweeping government intervention stemmed from a growing realization by Treasury and Federal Reserve officials that the two companies couldn’t survive in their present forms, and that any collapse would be devastating to the economy.
The decision was hashed out over weeks of meetings. They included a conclave of Federal Reserve officials during their annual retreat at Jackson Hole, Wyo.; a mid-August polling of bond-market players by Morgan Stanley bankers advising Treasury; and a marathon session over the Labor Day weekend, fueled in part by Diet Coke and Coke Zero.
Dozens of bankers and lawyers were involved in the process. One junior banker joked that the round-the-clock schedule was tougher than prison — at least there, you got three square meals a day.
In the end, Mr. Paulson, Federal Reserve Chairman Ben Bernanke and James Lockhart, head of the companies’ regulator, the Federal Housing Finance Agency, concluded that the two companies had lost the confidence of the markets and couldn’t survive as currently structured. No one could say how much money from the Treasury, either via a loan or an equity investment, would be enough to get them through the housing mess. Hence, the need for the government to step in and stabilize what has become a vital cog for the housing and mortgage market.

I’m not against the government’s move and I see that it had to happen. Don’t believe any of the nonsense that this will “cost the taxpayer” fill-in-the-blank billions of the dollars. It won’t at all. What the companies needed as much as money is time and that’s what the government has given them.
This is sorta of like sausage-making. I only care about the end result and I’d rather not know how it happens. My problem is that the takeover should (must!) lead to full privatization. This can’t be a trip to the repair shop because the problem will happen again. That’s not a prediction. It will happen again.

I’m Back
Posted by Eddy Elfenbein on September 8th, 2008 at 10:51 am

I’m back to blogging after a great week at the beach. Although I had to leave the Outer Banks a bit early to escape Hurricane Hanna.
So what did I miss? Sarah Palin turned the McCain campaign around. The feds took over Fannie and Freddie and the Panthers stunned the Chargers on the last play of the game!
The Buy List did pretty well in my absence. We had good earnings from both Donaldson (DCI) and Jos. A Banks (JOSB). I’ll have more once I catch up on all my email.

I am Outta Here
Posted by Eddy Elfenbein on August 30th, 2008 at 11:18 am

I’m off to the Outer Banks for the week. I’ll be returning next Monday–tan, rested and ready.
In the meantime, please check out the many fine bloggers on my blogroll. Before I go, I’ll leave you with this:

Have a happy and safe Labor Day!

Ouch!
Posted by Eddy Elfenbein on August 29th, 2008 at 3:57 pm

From the FT:

Merrill Lynch’s losses in the past 18 months amount to about a quarter of the profits it has made in its 36 years as a listed company, according to Financial Times research that highlights the extent of the global banking crisis.
Since the onset of the credit crunch last year, Merrill has suffered after-tax losses of more than $14bn as its balance sheet has been savaged by almost $52bn in writedowns and credit-related losses.
Merrill’s total inflation-adjusted profits between its 1971 listing and 2006 were about $56bn, according to figures from Thomson Reuters Fundamentals and an FT analysis of reported earnings.
The $14bn in losses for 2007 and the first two quarters of 2008 equal half of Merrill’s profits since the beginning of the ­decade.

A Sell Signal
Posted by Eddy Elfenbein on August 29th, 2008 at 1:10 pm

From Marketwatch:

Mitch Williams to Ring the NASDAQ Stock Market Opening Bell

Afterward, he walked the next five traders.

Did the Political Markets Fail?
Posted by Eddy Elfenbein on August 29th, 2008 at 11:50 am

Barry and Felix weigh in on Intrade’s call on the Palin selection. As I’ve said many times, the futures markets are not predictions markets. They’re really odds setting markets.
The markets didn’t “fail” simply because a low-priced contract paid off. Did the markets fail when Google was at $100 a share? Not at all, the long-shot paid off.
Futures markets aren’t particularly useful in this instance because the Veep pick is entirely the selection of one person. They’re more useful with events that are transparent, like an election or the Super Bowl. The markets can’t read Senator McCain’s mind, particularly when he’s trying to give off false signals (hence the dance with Lieberman) and go for an unconventional pick.
The political markets work because they can process lots of information very quickly. With a Veep selection, however, there’s no information. So with these types of events, you have to expect hyper-volatility as the decision time approaches.

What If There Was a Recession and Nobody Came?
Posted by Eddy Elfenbein on August 29th, 2008 at 11:42 am

From today’s IBD:

We keep looking for the much-anticipated recession, but it doesn’t seem to have gotten here yet. Could it be that many of those expecting a downturn were wrong, and the economy’s not going into the tank?
Going out on a limb to predict what the economy will do is a tricky business. It’s possible, though by no means likely, that the economy briefly lapsed into recession late last year or early this year, based on weak GDP data, falling home sales, rising oil prices and a jump in unemployment. We won’t know for sure until months — maybe years — after it ends.
Even so, we were struck by Thursday’s news that second-quarter GDP was revised up from 1.9% to 3.3%, more in line with boom than bust. The consensus estimate was for 2.7% growth.
As more than one economist has noted, nearly all of that growth — some 3.1% of it — came from stronger exports, a result of the weak dollar. The rest came from inventories. Take those away, and the economy crawled at a weak 0.2% pace for the quarter.
Fair enough. But we did our own calculations. The slowdown in the economy is mainly due to one thing: housing. We indexed overall GDP to housing GDP back to 2000.

As the chart shows, it’s a very stark picture. We crunched even more numbers. Since 2006, the economy minus the ailing housing sector has grown at an average 3.3% rate. Add housing back in, and GDP growth has averaged just 2.4%. So housing’s collapse has cost us roughly 1% of GDP.
Housing is still weak, with sales off 35% year over year and values depreciating at double-digit rates. Banks can’t boost lending much, since they’re writing off old loans and have to shrink capital. This will take time.
But listening to the media and the Democrats in Denver, you’d think the economy was in a depression. Well, it’s not. In fact, we’re modestly optimistic. By the end of this year, all the really bad year-to-year comparisons in growth will be over. Sales and prices will start to look more normal. And the panic will leave the market.
As noted, exports have supported the economy this year. To critics, a stronger dollar means export growth will slow. Maybe so. But falling oil prices mean our import tab will also drop.
Moreover, oil demand now is falling. The Energy Department recently reported a shocking statistic that got little attention: U.S. demand in June plummeted 1.17 million barrels a day from last year, and a spokesman said prices could fall below $100 a barrel due to rising output in the U.S., Brazil and Canada.
Other data also suggest grounds for optimism. Just this week, the Census Department reported median household income hit $50,233 in 2007, after inflation, a gain of 1.6% since 2001.
Despite the slowdown in growth, the number of people without health insurance fell one million last year, while the poverty rate was unchanged at 12.5% of the population. And believe it or not, the average unemployment and poverty rates under President Bush have been slightly lower than under President Clinton.
Sure, bad things can happen. But we don’t have to will them into existence. As it stands, the much anticipated recession — thanks to Bush’s tax cuts and timely Fed actions — might just be a no-show.

My Boldest Prediction Yet
Posted by Eddy Elfenbein on August 28th, 2008 at 10:22 am

Write down this time and day, and note that I’m calling a bottom in Pakistan’s stock market.
In other news, Pakistan has barred stocks from trading below yesterday’s close.
One more prediction, this won’t end well.
(Via: Birthday Boy Joseph Weisenthal).

Latest Phony Concern: Delistings “Pinching” Exchanges
Posted by Eddy Elfenbein on August 28th, 2008 at 10:08 am

One of things I enjoy about the financial media is finding stories that are negative no matter what the outcome is. For example, you’re read a story about “red lining” and how banks are shutting out lower-income borrowers. Then a few years later, you’ll read a story about “predatory lending,” and how banks are taking advantage of lower-income borrowers. The completely contradict each other, but end results is always bad news. Or worse, it “raises concerns.” One day I hope to write a book, ” How Media Alarmism is Killing Our Children.”
If you want to be taken seriously as an economic analyst or policy maker, you need to spend much of your day being “worried” and/or “concerned.” You don’t have to do anything. Just say that this latest development “raises troubling questions.” (See Bernanke Warns.)
Probably the classic example is the worry of corporate consolidation and mega-mergers seamlessly turns into a worry about junk IPOs. I would think you can worry about one of these, but not both. Apparently the latest concern is a wave of stock delistings:

The combination of more delistings and fewer new listings has pinched the big U.S. exchange operators, as the financial meltdown topples some of their clients and spooks others.
Midway through this year, more companies than in previous years had been bumped from the Nasdaq Stock Market and, to a lesser extent, from the New York Stock Exchange because they failed to meet the minimum requirements.
Meanwhile, tumbling stock markets have brought the IPO market to a crawl, compounding the pain for Nasdaq OMX Group and NYSE Euronext, which derive up to 15 percent of their overall revenue from listing fees.
“It’s a negative” for the exchanges, said Ed Ditmire, analyst at Fox-Pitt Kelton. “But it ebbs and flows with the economic cycle.”
More Nasdaq-listed companies have been delisted for non-compliance so far this year than in either of the previous two years, according to Nasdaq data. Some 54 stocks were bumped as of Aug. 7, compared to 48 in all of last year and 52 in 2006.
At larger rival NYSE, data show 11 companies had been delisted due to non-compliance as of July 1. That compares to 21 delistings in all of last year and 14 in 2006.

Let me get this right: A growing wave of delistings is 11 for the first half of this year compared with 21 for all of last year?

Q2 GDP Revised to 3.3%
Posted by Eddy Elfenbein on August 28th, 2008 at 9:30 am

The government just revised second-quarter GDP to 3.3% from the original 1.9%. That’s a pretty hefty increase.

Record exports and the temporary stimulus from the tax rebates prevented the economy from stalling as housing slumped and companies cut expenditures. Consumer spending is now waning and slower growth abroad dims the outlook for foreign sales, signaling last quarter will be the year’s highpoint.
“Outside of trade, the economy is considerably weaker,” said Carl Riccadonna, an economist at Deutsche Bank Securities Inc. in New York. “When you look at the spending, it looks terrible for the second half of the year.”

I’m not too interested in the debate of, “are we or are we not in a recession.” Consider, however, a few facts.
Imports have now declined for three straight quarters, and four of the last five.
Fixed investment has declined for four straight quarters.
Residential investment has fallen for 10 straight quarters.