Archive for February, 2008
February 29, 2008 10:29AM
By Elizabeth MacDonald
Lots of talk about inflation here, due to a weaker dollar, high oil and commodity prices.
There’s an even bigger inflationary force looming on the horizon: China.
The Beijing Olympics will open up the Middle Kingdom to scrutiny like never before. What’s going on in China could cause another stock market-rattling event here in the U.S.
Sources tell me that the Chinese government is doing much more than shutting down factories to stop the choking air pollution in the nation’s capital in a last-ditch bid to get cleaner air for the summer Olympics. And it will have to.
As China’s state-controlled economy continues to blend with more freewheeling Western capitalism, China is now home to 16 of the planet’s 20 most polluted cities. Beijing sits in a valley surrounded by mountains and is hit with frequent sandstorms that trap it in smog.
With the media descending upon it, the summer Olympics could turn into a big embarrassment for China.
China has been exporting deflation in the form of cheap goods to the US for years now, keeping inflation here in check.
But given its own inflationary forces, including new labor laws, tougher environmental laws, and given that China is very much about honor and about saving face, coverage of the Olympics in the Middle Kingdom could seriously embarrass officials and cause them to crack down on factories that make cheap goods and to dial back on expanding them.
That spells more inflation here and that would hurt the market.
Read More
February 28, 2008 1:47PM
By Elizabeth MacDonald
Some quick headlines after covering the Ben Bernanke testimony today before the Senate Banking committee with Fox Business’s Ray Hennessey, Cheryl Casone, Tom Sullivan, Dagen McDowell and Stuart Varney, here’s what caught our attention:
*The DJIA was down about 30 to 40 points, but then started selling off, down more than 150 points, after news crossed the wires that Bernanke said he expected more bank failures this year. But he was talking about smaller regionals, not the big banks.
“I expect there will be some failures,” Bernanke told the Senate Banking Committee, notably smaller regional banks who became heavily invested in real estate. “Among the largest banks, the capital ratios remain good and I don’t anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system.”
As our DC correspondent Adam Shapiro points out, there are 76 banks on the FDIC’s watch list, all small to mid-cap banks. Three banks failed last year. That’s no where near what the US economy saw after the S&L crisis of the late 80s early 90s. Back then between 1988 and 1992 the FDIC administered 1600 bank failures.
Key point here: Watch out for banks exposed to both construction loans coupled with regular mortgages, given the downturn and way too high housing inventory still out there. The number of banks where construction loans exceed total capital has risen from 1,179 institutions to 2,368 since 2003, according to the FDIC.
*The U.S. economy now faces headwinds from “a broader set of issues” worse than the popping of the dot.com and telecom bubble in 2000-2001, Bernanke said. Tougher now, because the US faces a “less advantageous” fiscal situation, due to the weaker dollar now at record lows against the euro (brought on by lower rates). Tougher too, because the government ran a surplus a few years ago, Bernanke noted.
*Bernanke sees downside risks to inflation and unemployment, but he doesn’t see ‘70s era stagflation. The economy has become more flexible having been deregulated since the ‘70s, when bureaucrats really ruled the day. Which is interesting given the clamor out of the House’s hearing with Bernanke yesterday, where Congressmen demanded much more mortgage lending regulation. The free market is fixing itself seemed to be the message—though now Freddie and Fannie, meaning taxpayers, will be taking on even more mortgage paper in the form of mortgage asset-backed securities (meaning the government, meaning taxpayers, given the two mortgage finance companies’ implicit backing from the government).
*Pulling aside the curtain on record bank writedowns: Best exchange for me of the day was between Senator Charles Schumer (D-NY), who queried Bernanke on what’s creating massive bank writedowns, a heated debate roiling Wall Street now that is picking up steam.
This is a critical issue for the stock market. The mark to market rules are somewhat controversial, as they are being criticized for causing record bank writedowns, which lead to credit rating downgrades, capital squeezes, market caps cratering, and CEOs being shown the door.
What’s happening is, the housing crisis is unfolding in slow motion due to the nature of how slowly adjustable rate mortgages reset to higher rates.
At the same time, the banks have to try to price-tag securities backed by mortgages in a credit market that’s frozen solid, where they can’t sell the securities.
If those rules were in effect during the Latin American Crisis or the Asian flu, markets there would still be in the drink, as I’ve noted to you in prior blogs. Instead, banks used historical book values.
Wall Streeters are arguing that the losses from asset-backed securities are really just on paper, that some of these assets are still tossing off cash flow, and the banks expect to recoup at least some of these assets when the markets recover.
Schumer asked Bernanke whether auditors “should delay using mark-to-market accounting rules” when scrubbing the banks’ books and when valuing their asset-backed securities.
Bernanke seemed to really sit up and listen, it seemed he was energized by the question and had given it thought. Because it is another “conundrum,” as central bankers like to say.
Bernanke said no, that doing so would make it seem like the “banks were hiding something.” Instead he deferred to the Financial Accounting Standards Board which sets the rules, but seemed to suggest it’s something that’s on his mind and worthy of future debate.
February 27, 2008 3:03PM
By Elizabeth MacDonald
Before I tell you about Ben Bernanke’s testimony today before Congress, which I was honored to cover for three hours with the estimable Fox Business news editor Ray Hennessey, anchors Cheryl Cassone, Tom Sullivan, Dagen McDowell and Stuart Varney, I need to give you some news.
Congress has postponed its hearing scheduled tomorrow with former Wall Street bankers testifying about the fat cat pay they got despite record bank writedowns. I wrote about this in my last blog, I’ll keep you posted on it when it happens, stay tuned.
Bernanke gave the same downbeat forecast on the economy today before the House Financial Services Committee as he did when he testified before Congress a couple of weeks ago with Treasury Secretary Henry Paulson and Securities and Exchange Commission chairman Chris Cox.
“The economic situation has become distinctly less favorable” since the summer, and the Fed “will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks,” Bernanke said.
All this augurs for more rate cuts come March 18th when the Fed meets again–expectations are for a 50 bp cut (watch too for a revision of GDP growth coming out tomorrow). A close read of the recent Fed minutes shows it doesn’t expect the economy to return to trend before 2011 at the earliest, so if the Fed does cut, it’s using up some ammo here.
Bernanke, though, applied novocaine to some nerve endings when he added that the subprime contagion has not gone viral, that non-financials’ are in “good financial condition, with strong profits, liquid balance sheets, and corporate leverage near historical lows.” He noted that “US exports should continue to expand at a healthy pace in coming quarters, providing some impetus to domestic economic activity and employment.” Read More
February 25, 2008 1:50PM
By Elizabeth MacDonald
Expect some fireworks out of Congress this Thursday as chief executives from Citigroup (C), Merrill Lynch (MER) and Countrywide Financial (CFC) face questions about how they walked away with rich pay, after leaving behind the smoking wreck of companies damaged by the sub prime mess.
At bat: Former Citigroup chairman and chief executive Charles Prince, former Merrill Lynch CEO Stan O’Neal and Angelo Mozilo, founder and CEO of Countrywide Financial, who has become the public face of the mortgage crisis as the CEO of the nation’s largest mortgage company. All will share the same panel before the House Committee on Oversight and Government Reform, with Congressmen Henry Waxman, Carolyn Maloney and Dennis Kucinich. Read More
February 19, 2008 12:54PM
By Elizabeth MacDonald
The news late last week that Bear Stearns (BSC) and Citic Securities are re-pegging their share-swap deal led to fevered media speculation over whether China’s largest state-run brokerage has ice-cold feet.
Lots of talk, too, that if Citic bails, Bear Stearns would have no choice but to do a last-ditch merger to save the Wall Street brokerage from extinction. The speculation caused Bear’s shares to gyrate last Friday, with shares closing at $83, up from $78 the day before. We kicked this around with Liz Claman and David Asman on their show, boy those two are good.
The Bear-Citic story has generated lots of talk, too, about the desperate straits U.S. financials would be in if sovereign wealth funds (SWFs) didn’t come to the rescue with carpet bags stuffed with cash.
It’s beyond a misapprehension, however, for some armchair critics who never ran a business and who never had any skin in the game to suggest the Bear-Citic deal is merely another story of a SWF parking itself with suitcases full of cash on the doorstep of yet another dying Wall Street firm.
The issue of foreign money increasingly washing up on US shores is a big, controversial issue. I urge you to read through to the bottom of this blog to get a cheat sheet on this important issue in this presidential election year. Neil Cavuto has been all over the SWF story asking the really hard questions, so have Alexis Glick and Peter Barnes on Money for Breakfast, Dagen McDowell and Stuart Varney on their noon show, and Fox Business news director Ray Hennessey. Read More
February 14, 2008 2:20PM
By Elizabeth MacDonald
The Senate Banking Committee took testimony today from Federal Reserve chairman Ben Bernanke, Treasury Secretary Hank Paulson and SEC head Christopher Cox.
The headline here is that Bernanke testified that the economy will see a “period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt.” He added that “overall consumer price inflation should moderate from its recent rates” and that “inflation expectations should remain reasonably well-anchored.”
However, lots of after-the-fact refereeing, lots of gaseous rhetoric from senators with their own hobbyhorses that wiped out some icebergs in the Arctic, notably the questions from left field about naked short selling from Sen. Robert Bennett of Utah, home to companies that have come under fire from short sellers, such as online retailer Overstock and just about any penny stock you can think of.
Not much tough talk about the structural changes that need to be made, but you can’t blame Bernanke–he’s being as creative as he can applying the paddles to the Goldilocks economy, with hefty rate cuts and by pumping liquidity in, which includes opening wider the discount window as well as term auction facilities.
Paulson, well, he is parachuting in to a minefield that he didn’t create. Neither did Cox, though the SEC is still the water pistol, not the shotgun behind the door, as Supreme Court Justice William Douglas had hoped it would be.
Not enough tough talk about correcting a housing finance system that is built on sand. Not enough talk about how once again investors are suffering because greed has won out over common sense on Wall Street.
Not enough talk of the moral hazard that arose when banks no longer cared about keeping a tight leash on delinquent borrowers because they shoved those loans off their books in securitizations to reap hefty fees, bye bye borrower.
Or how credit ratings agencies reported record profits by getting rich fees from Wall Street to rubberstamp their toxic subprime securities with triple A ratings, but now the raters run from accountability by hiding behind the ruse that their ratings are really “opinions” protected by First Amendment free speech rights, and that they now argue they don’t have to actually examine any of the loans backing these securities because they are not auditors.
And nothing much about bond insurers who mindlessley sold guarantees backed by their microscopic capital reserves to Wall Street for its dodgy subprime securities, guarantees that are really paper promises. Read More
February 12, 2008 12:11PM
By Elizabeth MacDonald
The market rallied on Tuesday on the news that Buffett is stepping in to reinsure up to $800bn in municipal bonds at the beleaguered bond insurers.
But it seems like someone’s reality check has bounced here. Read behind the news. This is not Buffett the white knight, he’s not taking on the bond insurers’ liabilities–he’s selling reinsurance to the bond insurers, to make money on a pretty safe business.
Buffett is basically selling a second level of insurance to the severely damaged bond insurers, MBIA, Ambac and FGIC. Under the deal, Berkshire would stand to collect a hefty 150% premium of the companies’ unearned premium reserves over the life of the bonds. The bond insurers have taken massive writedowns for insuring all sorts of bad securities backed by shoddy loans created in the subprime crisis.
The market is reacting positively because Buffett effectively would sell to the bond insurers, who are fast losing their Triple A status, his own more stellar Triple A credit rating (a Triple A rating at the bond insurers these days is worth about as much as the GoodHousekeeping rubber stamp seal of approval on an old blender circa 1952). Also, Buffett has already opened up a new bond insurer that’s going to charge more than his competitors for his Triple A.
And Buffett is only offering to pick off the safest parts of the bond insurers’ business, government bonds that hardly ever default. Investors in bonds issued by the biggest municipality that defaulted, Orange County, Calif., eventually got paid in full (only after the county filed for bankruptcy and only after a protracted court fight).
Muni bonds are considered safe because they are backed by local taxpayers and by hard assets like bridges, tunnels or highways. Which should make you stop and think about why the bond insurers exist at all (yes, yes yes, cheaper yields because of a paper promise that basically reap fat fees for the insurers). Read More
February 6, 2008 11:56AM
By Elizabeth MacDonald
Why do I feel like everyone has lost their minds?
The markets are hollering for even deepr cuts to the Fed funds rate. Futures markets are betting on a half-point cut in interest rates, from 3%. Traders put the chance of a three-quarter-point cut at 28%.
I’ve said it before–rate cuts can’t make all bad loans good again. Real rates are already near zero (after inflation). Rate cuts do debase the dollar, which is why inflation is rearing its ugly head.
This is the worst time to be the top U.S. central banker. Bernanke needs crocodile-thick skin now, because he’s damned if he does, damned if he doesn’t.
I’m usually very mild-mannered. Today is Ash Wednesday, the first day of the Catholic Lenten season of penance. I am wondering if, because of my peevishness, my Catholic priest will put an even bigger ash mark on my forehead for saying all this (I actually think some priests use Catholic foreheads as billboards to advertise the faith with big honking ash crosses, but hey that’s me.)
(And another thing, I also expect my Fox Business buddies here, Ray Hennessey, Charles Brady, Connell McShane and Robert Gray, even though Gray is not Catholic, will get extra big ash mark crosses, bigger than the one Jesus carried up to Calvary, because of the penance they owe for tormenting me with hot pitchforks on a daily basis. That goes for you too Kevin Magee–oops he runs the network, I take that back, I actually torture him. No actually it’s his beautiful and lovely assistant Valerie Alexander who torments him. And no big ash cross billboards on the foreheads for Neil Cavuto, David Asman or Liz Claman, they are nice to me, ok I’ll stop now).
Anyway, I wasn’t always like this, so peevish. Read More
February 4, 2008 12:48PM
By Elizabeth MacDonald
Ok, so now a battle royale is breaking out between Google, Microsoft and Yahoo!
Pull up a chair, this fight is a good one–if anything a high stakes merger provides a distraction from the gloomy housing mess and Bernanke’s attempts to apply the paddles to revive the Goldilocks economy.
Google is offering to help Yahoo! fend off Microsoft’s hostile $44.6bn bid for the Internet bellwether, and Google’s top lawyer shot a torpedo right at Microsoft’s weakest spot, antitrust issues, in a letter on Google’s website. And now Microsoft apparently is threatening a boardroom coup at Yahoo! if it doesn’t accept its mega-offer or sit down for talks.
But the battle royale obscures a more important question: Is Microsoft overpaying in its $44.6bn bid for Yahoo!, and what’s really at stake?
Neil Cavuto and the gang here at Fox Business have been spit-balling this one, with Neil pointing out that Microsoft CEO Steve Ballmer is likely pulling out the stops with a big whopping bid to put a fence around the coveted Yahoo!, to shoo away other bidders. Already, AT&T, Comcast and News Corp. reportedly have no interest in buying. Neil notes that the all-chips-on-the-table approach appears to have worked in News Corp.’s successful $5bn bid for The Wall Street Journal.
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