Toro's Running of the Bulls Market Blog

Bernanke's Childhood Home Foreclosed

Oh, the irony...

Travis Jackson walks through his modest ranch house, admiring the kitchen's built-in spice rack and the red-oak floors. He draws back the curtains, and sunlight illuminates the pride on his face.

The young banker just bought Federal Reserve Chairman Ben Bernanke's childhood home at a foreclosure sale.

"This is where it all happened," marvels Mr. Jackson, a 27-year-old loan officer at First Citizens Bancorp, which is down the street from the old Bernanke place. "Kind of a surreal feeling, isn't it?"

Mr. Bernanke's family sold the property more than a decade ago. It ended up on the block late last year after its former owners fell behind on their mortgage payments.

Bailout Application

Since the government is giving money to just about anyone with a pulse - as long as they screwed up really badly - we here at Running of the Bulls would like to expedite the process of distributing trillions of dollars to the unworthy.

If you are a CEO of an American auto company, or the clueless head of a giant American financial institution who never took financial history at your Ivy League school, Running of the Bulls is happy to offer you this easy application so you can patch up that black hole on the balance sheet you incompetently destroyed.

Download Bailout 

(Thanks to Bill.)

BAC, C Death Watch

So now that it appears that as long as Bank of America and Citigroup remain alive, the two house of cards banks are going to act as a giant anchor on the stock market, taking all stocks down on their journey towards zero.

Since we've seen this movie before, so much so that deep down, we all know the end game, there is no point prolonging the inevitable.

Therefore, I ask you, how long before BoA and/or Citi go toes up?

a.) end of the week
b.) end of the month
c.) end of summer at the latest
d.) they will rise from the ashes and bestride the world as beacon's of American financial capitalism once again!

Getting "AIG-ed" - whereby the government effectively wipes out the shareholders - is, for our exercise, considered a zero.

Pick accordingly.

Analogy of the US Economy

Posted at Dealbreaker

Damn that made me laugh.

Post-Crisis Corporate Logos

From Business Pundit, via Financial Ninja

 

America Hedged Partners, LLC

Dear Mr. Paulson

I noticed today that the debt instruments of the entity you head are trading at levels for which you pay virtually nothing.  For example, one-month and three-month T-bills were yielding a knee-scraping 0.02%, the 2-year was at 0.97% and the 10-year at a shade under 3%.

Clearly, everybody loves you, even though you are issuing boatloads of the stuff.

Contrast that to everything else fixed income that is not guaranteed by the government.  CMBS spreads have blown out of record highs.  Junk bonds are yielding over 20%.  Corporate bond spreads are at or above all-time highs.  Leveraged loans, mezzanine debt, and securitized paper are all trading at mouth-watering levels.

Everybody hates them.  Nobody will touch risky assets with a 10-foot pole.

Now, Mr Paulson, you worked at Goldman Sachs, a hedge fund in drag.  You know how this works.  Create a special purpose entity (SPE) - preferably incorporated in the Cayman Islands to avoid taxes, and off balance sheet so we are all fooled that it is non-recourse to the US government - issue a trillion dollars of debt and transfer it to the SPE, sell it to those who believe the end of the world is upon us, then buy all those risky assets at mind-blowing yields.

I figure you could probably earn 8%-10% over Treasuries in aggregate for at least the next seven years.  At a trillion dollars, you could earn up to $700 billion, enough to fund your wildly successful TARP program!

Leveraged assets got us into this mess.  Let's get leveraged assets to get us out of this mess Mr. Paulson.

Pirates v. Private Equity

Amusing article at Deal Journal.  I especially liked

Start-up costs

Piracy: Gun, boats, a handful of men, rocket-propelled grenades.

Private equity: Office on Park Avenue.

Jargon

Private equity: “Internal rate of return,” called IRR.

Piracy: Eerily similar: “Aaar.”

Now THAT'S German Engineering!

I am more than a little amused at the saga of Porsche sticking it to the hedge funds through their stealth purchase of Volkswagen shares.

Porsche Automobil Holding SE is emerging as a potential big winner, and the target of heightened scrutiny, as hedge funds reel from billions of dollars in losses after betting wrongly that Volkswagen AG's share price would fall.

The small German sports-car manufacturer has moved closer to securing control of much-larger rival VW through a stealth strategy relying on sophisticated derivative instruments, and has been able to book big paper profits in the process. ...

Continuing its gyrations, VW's share price plunged 45% to €517 ($656) Wednesday after Porsche said it planned to sell as much as 5% in options tied to VW shares. VW's shares had soared 348% over the two previous sessions -- briefly making it with world's most valuable publicly traded company -- fueled by Porsche's disclosure Sunday that it had boosted its VW stake to 42.6% and held so-called cash-settled options linked to another 31.5% of VW's shares.

Porsche said Wednesday it didn't break any disclosure rules by quietly building an ever-larger position in VW through the use of cash-settled options. Cash-settled options, which are settled in cash instead of shares, don't need to be disclosed to regulators under German law.

But a Porsche spokesman acknowledged that the company has made a "sizable profit" this year from the use of such derivatives, adding that it could help finance its VW takeover. VW is Europe's largest car manufacturer by sales, rolling out six million vehicles a year, compared with Porsche's annual output of 100,000. ...

Porsche discreetly began buying VW options in 2005, when it first took a 20% stake in the company. Many of those options are believed to be priced below €200 and in some cases even below €100, allowing Porsche to pocket the difference when VW's shares are much higher. That could add up to billions of euros at current prices if the options are exercised.

In the previous fiscal year ended July 31, 2007, Porsche said it made €3.59 billion in pretax profit from stock-options transactions, more than it earned from the sale of cars.

The weekend disclosure by Porsche that it was gunning for a 75% stake in VW forced investors who sold VW shares short in recent weeks and months to reverse gear and buy shares to cover bets that the price would fall. In the process, hedge funds lost more than $20 billion, according to some market estimates.

Despite Wednesday's downturn, VW's share price is still more than double Friday's close of €210.85, leaving short sellers on the hook for major losses. Investors say Porsche misled financial markets in recent months by indicating it wouldn't aim for a 75% stake.

Dealbreaker speculates that Porsche has earned €6 billion in profits.  Good for them, I say.

Now, hedge funds are whining that they have losses and may go belly up.

The London-based Alternative Investment Management Association (Aima), the hedge fund trade body, said yesterday that it planned to ask the European Union to clamp down on a controversial German legal loophole that allowed Porsche secretly to take its VW stake to almost 75 per cent.

Andrew Baker, Aima deputy chief executive, said: “This sounds somewhat irregular. If you tried that in this country, there would be a number of questions to be answered.”

He said losses for hedge funds were likely to be less than a tenth of the forecast €20billion. “There are funds hanging on by their fingertips because of redemptions for whom this could be the last straw,” he said.

The casualty list of hedge funds hit by the Porsche squeeze on VW grew yesterday as it emerged that Steven Cohen's SAC Capital and Och Ziff, and Perry Capital, a key financier in Malcolm Glazer's takeover of Manchester United, were among the losers. Greenlight Capital, run by David Eindhorn, Marshall Wace, York Capital and Glenview Capital are also among about a hundred hedge funds thought to have made losses.

What is particularly amusing is that many of these Masters of the Universe who charge egregious fees and would have no problem imperiling the future of the world by raping the financial system so they can create dynastic wealth for themselves did not understand the rules by which they were playing.

Germany's stock market regulators are the laughing stock of Europe.

It is embarrassing that Porsche could have been allowed to build a secret options stake in Volkswagen equivalent to 32 per cent of its market value, on top of an existing holding of 43 per cent, with no disclosure. A false market of epic proportions was allowed.

But that does not mean those short-selling hedge funds nursing nasty losses have real grounds for complaint.

They knew perfectly well, or should have known, the lacuna in the German rules and the fact that such positions could be kept secret. Given the ferocity with which they fought proposals to close precisely this loophole in the UK, they have no excuse for ignorance and little cause for sympathy.

Is this not why hedge funds demand outrageous fees from suckers investors?  Are they not paid more in a year than a small city is paid in a decade to discover and exploit such loopholes in the regulations?

I would like to know if there were any German hedge funds caught in this short squeeze.  Volkswagen is the most heavily shorted stock in Germany.  Did the German money managers know about this rule in their market while the "dumb money", i.e. "foreigners," not know?  (It is axiomatic in financial markets that foreigners are usually the "dumb money," even when we are the foreigners.)

Yeah, hedge funds are worth their 2 & 20 alright. 

Quote of the Day

I’m sorry.  Libor? 

- Spokesman for Christopher Dodd, Senate Banking Committee Chairman

It is not particularly comforting when the advisers to the politicians charged with Saving the Financial System and the World are not familiar with LIBOR.

Bad Idea, Ms. Pelosi

Some Democrats want to tax trading.

A group of House Democrats is proposing to make Wall Street companies and investors pay more of the cost of any financial rescue plan through a new tax.

In a letter sent late yesterday to House Speaker Nancy Pelosi, 16 Democrats asked her to ensure any rescue legislation include a ``transaction tax'' on all U.S. stock trades and on other types of trades, such as credit default swaps, options and futures. They are proposing the tax would be at a rate of one quarter of one percent on all trades.

``The same Wall Street speculators and investors who are principally responsible for having caused this avoidable financial crisis and profited from it must now be required to pay for it, not U.S. taxpayers,'' according to the letter, which was signed by Representative Peter DeFazio, an Oregon Democrat, and Representative Pete Stark, a California Democrat.

Actually, Representatives, this crisis was caused by many players, of which your party, the Democrat Party, was one.  By blocking any attempts to reign in the GSEs, you Democrats allowed the mortgage behemoths to take an astonishingly unstable amount of debt onto their balance sheets which ultimately contributed to their collapse.

Now, there are many other factors that contributed to this debacle, principally Alan Greenspan's Fed, but also lax regulators, the Republican Party for weakening regulatory oversight, mortgage brokers, ratings agencies, naive and/or greedy speculators in the housing market, people who bought homes they could not afford especially those who thought they were entitled to the biggest and nicest home regardless of price, local and regional banks, appraisers, fraudsters, real estate agents, homebuilders, market cheerleaders, financial academics who preach the gospel of rational and efficient markets, consultants, sleazebag lobbyists, dumb investors who bought the garbage mortgage paper wrapped in derivative structures, and yes, greedy and arrogant Wall Street executives.  But also, you Democrats.

You members of the Dumb Wing of the Democrat Party (and yes, there is a Dumb Wing of the GOP too (it's much larger - ed.)) now want to demonize investors who played no part in this debacle, which is almost all of us.   Some of us tried to warn you about it.  Did you listen to us, M. DeFazio and Stark? Did you take action to stop this financial melt-down?

Taxing financial transactions is an enormously stupid proposal.  First, it will be burdensome and bureaucratic nightmare to implement.  Second, it will inhibit price discovery and decrease liquidity, increasing the cost to everyone in the market.  Third, you will drive trading offshore, which is harmful to the country as the financial services industry is a significant part of the American economy.

Now, M. DeFazio and Stark, I share your frustration with the idiocy of Wall Street.  I get it.  But your tax is directed mainly at people who had nothing to do with this debacle and the primary effect would be to drive financial services away from the United States.

Ms. Pelosi, this idea should be dead on arrival.  We have had eight years of bad government and dumb ideas.  We don't need four more.