Go, Economy!

[Gooch]

Ford is a bad comparison to refer to. GE (specifically GECC) is troubled, CDS on GECC is trading dangerously wide (though off its worst levels), and it's on the verge of being downgraded. There's blood in the water.

[Doc Holliday]

Bank of America

Is there something here I don't know? I work on the BofA account of EDS-HP; we just had an account meeting discussing Q1 and everything I've read, heard about, led me to believe BofA is among the solidest banks out there. True they took on LaSalle, Countrywide, Merrill Lynch, and Home Depot. But as I saw it, they could afford it; and if they go, then all banks go.

[Drewbacca]

There's seems to be a sense of bailouts just delaying the inevitable. The unregulated markets the banks thrived on during the bubble haven't been mended, so you're throwing water in to a sieve and wondering why it's not catching.

[Gooch]

Is there something here I don't know? I work on the BofA account of EDS-HP; we just had an account meeting discussing Q1 and everything I've read, heard about, led me to believe BofA is among the solidest banks out there. True they took on LaSalle, Countrywide, Merrill Lynch, and Home Depot. But as I saw it, they could afford it; and if they go, then all banks go.

They're insolvent and were on the verge of nationalization just two weeks ago along with Citi before Team Obama indicated it wants no part of a bank nationalization. We'll see if they can stick to that. Citi followed by having the government raise its investment to 40% (conversion of preferred to common) and Bank of America has eluded the news as of the last week, but I don't expect that to continue.

BAC really started hitting the death radar in January.

[Gooch]

More news on GE this morning:

March 5 (Bloomberg) -- General Electric Co. investors are treating the company as though it’s on the verge of failing ahead of a potential cut in its top-level AAA rating.

“It’s a leper right now,” said Marilyn Cohen, president of Envision Capital Management Inc. in Los Angeles, who oversees $180 million in fixed-income assets and no longer own GE bonds. Bankruptcy “seems improbable, but we’ve seen improbable things happen,” Cohen said.

GE, which just posted its third-highest annual profit ever, has lost about $264 billion in market value in 12 months. Yesterday it fell a fourth straight day to the lowest closing price since November 1992, feeding a surge in options volume and credit-default swaps. Investors are punishing the shares on a presumption, which the company disputes, that GE Capital will need more outside funding to cover potential writedowns and losses in real estate, consumer credit cards and leasing.

The run underscores how stock investors may have lost confidence in companies with finance operations -- even those like GE that own industrial businesses, still predict a profit, and operate with some degree of backing from the U.S. government. While federal commercial paper liquidity backstops and debt guarantees since October have prevented the type of creditor panics that sank Bear Stearns Cos. and Lehman Brothers Holdings Inc., a former Federal Reserve official says the programs haven’t made a convincing case for stock investors.

“Creditors are being bailed out everywhere but equity owners are not,” said William Poole, president of the St. Louis Federal Reserve Bank until March 2008. “What that does is create cascading weakness because you can’t raise any equity capital.”

Confidence in Managers

Investors unwilling to be calmed by the federal guarantees also aren’t taking comfort from GE’s managers. Chief Executive Officer Jeffrey Immelt, Vice Chairman Michael Neal and other directors bought stock as a show of faith this week. Immelt bought 50,000 shares and Neal, who also oversees GE Capital as its chief executive, bought 125,000 shares over two days. Each day the shares closed lower. GE shares trading in Germany fell 2 percent to $6.56 as of 10:13 a.m. local time.

“Our company’s reputation was tarnished because we weren’t the ‘safe and reliable’ growth company that is our aspiration,” Immelt, 53, said in his yearly letter to shareholders dated Feb. 6. “I accept responsibility for this. But, I think the environment presents an opportunity of a lifetime.”

GE, the biggest maker of jet engines and power turbines, cut its dividend Feb. 27 for the first time since 1938 to save $9 billion a year.

Lowering the dividend was necessary but also “a reputational blow to GE and an income hit to long suffering shareholders,” wrote Citigroup Inc. analyst Jeffrey Sprague, who has a “hold” rating on the stock, in a March 1 note to clients.

Debt Ratings

GE may soon lose the top-level AAA debt ratings it has held for decades. Standard & Poor’s Corp. in December said GE had a 1- in-3 chance of losing its top designation within two years, and S&P kept GE’s “negative” outlook unchanged after the dividend reduction. Moody’s Investors Service put GE on review in January and, after the dividend cut, said it would keep studying GE’s debt for a possible lower rating.

While Immelt has said he’s prepared to run GE with less than a AAA, analysts including Richard Hofmann of CreditSights Inc. in London say bondholders are concerned that the company may split off all of GE Capital, sending the unit’s ratings lower and causing them to lose money.

‘Pure Speculation’

GE spokesman Russell Wilkerson repeated yesterday that there are no plans to separate GE Capital, and the company dismissed as “pure speculation” that there is any need to raise outside funding for the finance arm for now.

“It’s a spiral happening here both on the stock and credit side that could spur more dramatic strategic action, and a lot of bond holders are concerned that action could be a spinoff of GE Capital,” Hofmann said. “We’ve weighed the pros and cons and think the window has passed for that and it’s unlikely.”

The parent company carried GE Capital on its books at about $53 billion at the end of 2008, its annual filing with the U.S. Securities and Exchange Commission shows.

GE Capital may be required to post as much as $12 billion if the long-term ratings are reduced four to six levels into the single-A category and short-term ratings fall below A1/P-1, Hofmann estimates based on GE’s filings. Nicholas Heymann, an analyst with Sterne Agee & Leach Inc. in New York, estimated in a note March 3 that GE may need more capital to cover losses of between $21 billion to $54 billion in the next several years.

Investors also are worried about the quality of GE Capital’s $637 billion in debt, particularly loans at its real estate division and in slowing economies such as Eastern Europe. GE’s Wilkerson said total financial assets in Eastern and Central Europe are about $26 billion.

GE’s Reserves

GE says it’s adequately reserved. The finance arm has assumed $10 billion in credit losses for 2009 and has set aside $7.2 billion in reserves, mostly in consumer finance, as it slows underwriting, the company said Feb. 10.

“GE has taken aggressive steps to strengthen the capital base and liquidity of GE Capital, weather the current economic storm and be well positioned for long-term growth,” Wilkerson said. “GE Capital’s loan loss reserves are at historic highs in absolute dollar terms.”

For stock investors, who are first in line to bear losses on bad credits, the question is how much the finance assets are worth. The recession continues to drag on, making any estimates difficult, so investors assume the worst-case scenario.

“The market is increasingly pricing these assets at liquidation values,” said Dino Kos, managing director at the New York research firm Portales Partners and a former vice president at the New York Fed. “You can’t have a financial system valued at that price.”

Working on Balance Sheet

The run on GE has continued even as Immelt says he’s improving the balance sheet and shrinking the finance arm to 30 percent of total earnings this year compared with about half in 2007. GE’s profit from continuing operations was $18.1 billion last year as its finance arm made $8.6 billion. The company has projected the unit will have a profit of $5 billion this year, above most analysts’ estimates.

After injecting $9.5 billion this quarter, GE will have added $15 billion of capital to the finance unit in the past six months to reduce its debt-to equity ratio to 6-to-1 net of cash.

In total, GE Capital now has $63 billion in equity, $34 billion of tangible equity, and $36 billion of cash, GE said yesterday. That gives GE Capital a 5.3 percent ratio of tangible common equity to assets, it said.

Federal Programs

GE is included in the Fed’s commercial-paper backstop program, has $70 billion remaining in federal bond-insurance guarantees, and has repeatedly said in presentations that it’s lending more conservatively.

The company says it’s funded 71 percent of the $45 billion in long-term debt maturing this year, more than $4 billion of that without the federal insurance. Commercial paper balances have been reduced to $60 billion.

Sellers of GE Capital credit-default swap contracts yesterday demanded 15.5 percent upfront in addition to 5 percent a year as of 4:30 p.m. in New York, according to broker Phoenix Partners Group. That means it would cost $1.5 million initially and $500,000 annually to protect $10 million of the unit’s debt from default. The price fell from a record 20 percent upfront in earlier trading.

The recent increase in credit swaps may have been exacerbated because contracts on GE Capital were often loaded up in so-called synthetic collateralized debt obligations that bet on the creditworthiness of companies, Tim Backshall, chief strategist at Credit Derivatives Research LLC, said in a March 2 note to clients.

Credit-Default Swaps

As underlying swaps increase, dealers who sold those deals need to hedge their exposure by buying protection against a sudden default, he said. Concern that GE Capital could be downgraded also may trigger unwinds of the CDOs, he said.

The Standard & Poor’s Financials index is down 45 percent this year versus a 21 percent decline for the S&P 500 index.

“Investors aren’t willing to give any company the benefit of the doubt,” said Joel Conn, who manages $100 million at Lakeshore Capital LLC in Birmingham, Alabama, and doesn’t own GE stock. “It isn’t even trust-but-verify. It is verify all up front, and maybe we will believe you.”

[Drewbacca]

Business is such a rat race.

[Bojack]

Business is such a rat race.

I would say business is largely a luck bonanza. There's things you can do to improve your luck but it's still luck.

[Gooch]

We hear about write-offs, write-downs, loss provisions, but where does all that money end up? This adds to the earlier posts about market value.

The Baseline Scenario expounds:

Where did all the money go?

This is a fairly common question. If banks are taking losses by writing down hundreds of billions of dollars, is someone else gaining hundreds of billions of dollars? Or is money just vanishing? Planet Money took a stab at this with Satyajit Das, but I thought I could help clarify it with a simple example.

Let’s say the economy has just three people: Developer Danny, Homebuyer Harry, and Banker Bonnie. At time zero, Developer Danny has $200,000, Homebuyer Harry has $40,000, and Banker Bonnie has $360,000, so there is a total of $600,000 in the world. Developer Danny sees that the housing market is hot, so he spends his $200,000 buying land and building a house that has a market price of $400,000. He then sells the house to Homebuyer Harry. Harry makes a 10% down payment of $40,000 and borrows $360,000 from Banker Bonnie.

Now, in time one, Danny has $400,000 in his pocket, up from $200,000. He has that $200,000 profit because he has created that much value - he took stuff that was only worth $200,000 and he made it worth $400,000. Good for him. Harry has a $400,000 house and a $360,000 mortgage, so his net worth is $40,000; Bonnie has a $360,000 mortgage asset. There are $800,000 in the world now, thanks to Danny. Danny has $400,000 he can use to build more houses or buy expensive sports cars; Harry can get a home equity loan to renovate his kitchen, because he has positive equity; and Bonnie can get more loans against her $360,000 asset.

Then, in time two, housing prices crash, so the house is only worth $300,000. Let’s say Harry had an Option ARM mortgage and he can’t make his payments, so Bonnie forecloses on him. Now Harry has nothing; Bonnie has a house that is only worth $300,000; and Danny still has $400,000. There are only $700,000 in the world. Harry can’t spend money, because he doesn’t have any; even after Bonnie resells the house, she doesn’t have as much lending capacity as she used to. (Even if Harry did make his payments, Bonnie’s mortgage would still be worth $360,000 to her, but Harry would have negative equity for a long time, so there would still only be $700,000 in the world.)

What happened? The fact that housing prices went up meant that there was more money. (Imagine the house already existed, and someone bought it for $200,000 and later sold it for $400,000.) But there wasn’t actually more stuff - as the price goes up or down, a house is still a house. As prices come down, there is less money to go around. What makes it particularly painful is the phenomenon of leverage. Because people, and banks, are able to borrow considerably more than their net worth, falls in asset prices are magnified. This can create a vicious cycle. For a highly leveraged financial institution, losses in one asset category can force you to raise cash by selling other assets, causing their prices to go down. For a homeowner, if you hadn’t borrowed money, the fall in the value of your home wouldn’t necessarily affect your consumption. But if your consumption is based on your ability to borrow, then a small fall in your house’s value can cause a large drop in your discretionary income.

There are many variations of my little example - for example, imagine that Bonnie sold half of the mortgage to Hedge Fund Helen; or imagine that Danny invested his money in Hedge Fund Helen, so he gets hurt, too - but I think this demonstrates the basic principle.

We come back to value. It may help to think of money as the manifestation of market value. I suppose one could argue that as value that did not previously exist is created, money must be printed (and lent) in order to represent, embody, finance that newly created value. And as value is destroyed, write-downs and write-offs occur.

[youandwhosearmy]

I'm not big on talking about the Daily Show doing anything serious (I've always thought of it as a pretty funny left wing comedy show and not much more) but holy shit did John Stewart own Jim Cramer the other night...

NEW YORK (AP) - Jon Stewart hammered Jim Cramer and his network, CNBC, in their anticipated face-off on "The Daily Show," repeatedly chastising the "Mad Money" host for putting entertainment above journalism.

"I understand that you want to make finance entertaining, but it's not a ... game," Stewart told Cramer, adding in an expletive during the show's Thursday taping. The episode was scheduled to air at 11 p.m. EDT on Comedy Central.

It was perhaps the hardest lashing Stewart has given to a TV commentator since 2004 when he called Tucker Carlson and his then co-host Paul Begala "partisan hacks" on CNN's "Crossfire," the since canceled political commentary program.

The program opened in mock hype of the confrontation, which caught headlines through the week as each snipped at the other over the air. The show announced it as "the weeklong feud of the century."

In his opening, Stewart announced that it was "go time." He played a video clip of Cramer's Thursday guest appearance on "The Martha Stewart Show" in which Cramer beat a mound of dough, pretending it was Stewart.

Said Stewart: "Mr. Cramer, don't you destroy enough dough on your own show?"

Once Cramer came out for the interview, Stewart wondered: "How the hell did we get here?"

Cramer, his sleeves characteristically rolled up, said he was a "fan of the show."

But the humorous tone - at least for Stewart - changed as the interview continued.

Stewart repeatedly said Cramer wasn't his target, but aired clip after clip of the CNBC pundit.

"Roll 210!" announced Stewart, like a prosecutor. "Roll 212!"

Most were from a 2006 interview not meant for TV in which Cramer spoke openly about the duplicity of the market.

"I can't reconcile the brilliance and knowledge that you have of the intricacies of the market with the crazy ... I see you do every night," said the comedian.

Stewart said he and Cramer are both snake-oil salesman, only "The Daily Show" is labeled as such. He claimed CNBC shirked its journalistic duty by believing corporate lies, rather than being an investigative "powerful tool of illumination." And he alleged CNBC was ultimately in bed with the businesses it covered - that regular people's stocks and 401Ks were "capitalizing your adventure."

For his part, Cramer disagreed with Stewart on a few points, but mostly acknowledged that he could have done a better job foreseeing the economic collapse: "We all should have seen it more."

Cramer said CNBC was "fair game" to the criticism and acknowledged the network was perhaps overeager to believe the information it was fed from corporations.

"I, too, like you, want to have a successful show," said Cramer, defending his methods on "Mad Money." He later added: "Should we have been constantly pointing out the mistakes that were made? Absolutely. I truly wish we had done more."

Cramer insisted he was devoted to revealing corporate "shenanigans," to which Stewart retorted: "It's easy to get on this after the fact."

At one point, Cramer sounded the reformed sinner, responding to Stewart's plea for more levelheaded, honest commentary: "How about I try that?" said Cramer. "I'll do that."

By the end, the two-segment interview went far beyond its allotted time. Comedy Central said the on-air version would be cut by about eight minutes, though the entire interview would be available unedited on ComedyCentral.com on Friday.

To answer the unspoken question, yes this is far more uncomfortable than the Tucker Carlson Crossfire exchange.
It frightens me when the only person with genuine balls when it comes to interviewing people is a fucking failed stand up comic hosting a show on a comedy network. The string of videos showing how much the networks and specialists really knew about the economy, how it was collapsing, and the sub sequential push they would give it to help themselves is just, bizarre.

Nothing on youtube, so here's the link to the video if anyone's interested. At least it's unedited.

http://www.thedailyshow.com/video/in...ited-interview

[kingoffighters]

Hedge Fund Helen is a real bitch I tell ya.