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Sounds brutal here, bum
Nouriel Roubini: I fear the worst is yet to come
When this man predicted a global financial crisis more than a year ago, people laughed. Not any more...Dominic Rushe
As stock markets headed off a cliff again last week, closely followed by currencies, and as meltdown threatened entire countries such as Hungary and Iceland, one voice was in demand above all others to steer us through the gloom: that of Dr Doom.
For years Dr Doom toiled in relative obscurity as a New York University economics professor under his alias, Nouriel Roubini. But after making a series of uncannily accurate predictions about the global meltdown, Roubini has become the prophet of his age, jetting around the world dispensing his advice and latest prognostications to politicians and businessmen desperate to know what happens next – and for any answer to the crisis.
While the economic sun was shining, most other economists scoffed at Roubini and his predictions of imminent disaster. They dismissed his warnings that the sub-prime mortgage disaster would trigger a financial meltdown. They could not quite believe his view that the US mortgage giants Fannie Mae and Freddie Mac would collapse, and that the investment banks would be crushed as the world headed for a long recession.
Yet all these predictions and more came true. Few are laughing now.
Related Links
Global panic as investors take fright
Wall Street halts futures trading amid panic
What does Roubini think is going to happen next? Rather worryingly, in London last Thursday he predicted that hundreds of hedge funds will go bust and stock markets may soon have to shut – perhaps for as long as a week – in order to stem the panic selling now sweeping the world.
What happened? The next day trading was briefly stopped in New York and Moscow.
Dubbed Dr Doom for his gloomy views, this lugubrious disciple of the “dismal science” is now the world’s most in-demand economist. He reckons he is getting about four hours’ sleep a night. Last week he was in Budapest, London, Madrid and New York. Next week he will address Congress in Washington. Do not expect any good news.
Contacted in Madrid on Friday, Roubini said the world economy was “at a breaking point”. He believes the stock markets are now “essentially in free fall” and “we are reaching the point of sheer panic”.
For all his recent predictive success, his critics still urge calm. They charge he is a professional doom-monger who was banging on about recession for years as the economy boomed. Roubini is stung by such charges, dismissing them as “pathetic”.
He takes no pleasure in bad news, he says, but he makes his standpoint clear: “Frankly I was right.” A combative, complex man, he is fond of the word “frankly”, which may be appropriate for someone so used to delivering bad news.
Born in Istanbul 49 years ago, he comes from a family of Iranian Jews. They moved to Tehran, then to Tel Aviv and finally to Italy, where he grew up and attended college, graduating summa cum laude in economics from Bocconi University before taking a PhD in international economics at Harvard.
Fluent in English, Italian, Hebrew, and Persian, Roubini has one of those “international man of mystery” accents: think Henry Kissinger without the bonhomie. Single, he lives in a loft in Manhattan’s trendy Tribeca, an area popularised by Robert De Niro, and collects contemporary art.
Despite his slightly mad-professor look, he is at pains to make clear he is normal. “I’m not a geek,” said Roubini, who sounds rather concerned that people might think he is. “I mean it frankly. I’m not a geek.”
He is, however, ferociously bright. When he left Harvard, he moved quickly, holding various positions at the Treasury department, rising to become an economic adviser to Bill Clinton in the late 1990s. Then his profile seemed to plateau. His doubts about the economic outlook seemed out of tune with the times, especially when a few years ago he began predicting a meltdown in the financial markets through his blog, hosted on RGEmonitor. com, the website of his advisory company.
But it was a meeting of the International Monetary Fund (IMF) in September 2006 that earned him his nickname Dr Doom.
Roubini told an audience of fellow economists that a generational crisis was coming. A once-in-a-lifetime housing bust would lay waste to the US economy as oil prices soared, consumers stopped shopping and the country went into a deep recession.
The collapse of the mortgage market would trigger a global meltdown, as trillions of dollars of mortgage-backed securities unravelled. The shockwaves would destroy banks and other big financial institutions such as Fannie Mae and Freddie Mac, America’s largest home loan lenders.
“I think perhaps we will need a stiff drink after that,” the moderator said. Members of the audience laughed.
Economics is not called the dismal science for nothing. While the public might be impressed by Nostradamus-like predictions, economists want figures and equations. Anirvan Banerji, economist with the New York-based Economic Cycle Research Institute, summed up the feeling of many of those at the IMF meeting when he delivered his response to Roubini’s talk.
Banerji questioned Roubini’s assumptions, said they were not based on mathematical models and dismissed his hunches as those of a Cassandra. At first, indeed, it seemed Roubini was wrong. Meltdown did not happen. Even by the end of 2007, the financial and economic outlook was grim but not disastrous.
Then, in February 2008, Roubini posted an entry on his blog headlined: “The rising risk of a systemic financial meltdown: the twelve steps to financial disaster”.
It detailed how the housing market collapse would lead to huge losses for the financial system, particularly in the vehicles used to securitise loans. It warned that “ a national bank” might go bust, and that, as trouble deepened, investment banks and hedge funds might collapse.
Even Roubini was taken aback at how quickly this scenario unfolded. The following month the US investment bank Bear Stearns went under. Since then, the pace and scale of the disaster has accelerated and, as Roubini predicted, the banking sector has been destroyed, Freddie and Fannie have collapsed, stock markets have gone mad and the economy has entered a frightening recession.
Roubini says he was able to predict the catastrophe so accurately because of his “holistic” approach to the crisis and his ability to work outside traditional economic disciplines. A long-time student of financial crises, he looked at the history and politics of past crises as well as the economic models.
“These crises don’t come out of nowhere,” he said. “Usually they arrive because of a systematic increase in a variety of asset and credit bubbles, macro-economic policies and other vulnerabilities. If you combine them, you may not get the timing right but you get an indication that you are closer to a tipping point.”
Others who claimed the economy would escape a recession had been swept up in “a critical euphoria and mania, an irrational exuberance”, he said. And many financial pundits, he believes, were just talking up their own vested interests. “I might be right or wrong, but I have never traded, bought or sold a single security in my life. I am trying to be as objective as I can.”
What does his objectivity tell him now? No end is yet in sight to the crisis.
“Every time there has been a severe crisis in the last six months, people have said this is the catastrophic event that signals the bottom. They said it after Bear Stearns, after Fannie and Freddie, after AIG [the giant US insurer that had to be rescued], and after [the $700 billion bailout plan]. Each time they have called the bottom, and the bottom has not been reached.”
Across the world, governments have taken more and more aggressive actions to stop the panic. However, Roubini believes investors appear to have lost confidence in governments’ ability to sort out the mess.
The announcement of the US government’s $700 billion bailout, Gordon Brown’s grand bank rescue plan and the coordinated response of governments around the world has done little to calm the situation. “It’s been a slaughter, day after day after day,” said Roubini. “Markets are dysfunctional; they are totally unhinged.” Economic fundamentals no longer apply, he believes.
“Even using the nuclear option of guaranteeing everything, providing unlimited liquidity, nationalising the banks, making clear that nobody of importance is going to be allowed to fail, even that has not helped. We are reaching a breaking point, frankly.”
He believes governments will have to come up with an even bigger international rescue, and that the US is facing “multi-year economic stagnation”.
Given such cataclysmic talk, some experts fear his new-found influence may be a bad thing in such troubled times. One senior Wall Street figure said: “He is clearly very bright and thoughtful when he is not shooting from the hip.”
He said he found some of Roubini’s comments “slapdash and silly”. “Sometimes the rigour of his analysis seems to be missing,” he said.
Banerji still has problems with Roubini’s prescient IMF speech. “He has been very accurate in terms of what would happen,” he said. But Roubini was predicting an “imminent” recession by the start of 2007 and he was wrong. “He hurt his credibility by being so pessimistic long before it was appropriate.”
Banerji said on average the US economy had grown for five years before hitting a bad patch. “Roubini started predicting a recession four years ago and saying it was imminent. He kept changing his justification: first the trade deficit, the current account deficit, then the oil price spike, then the housing downturn and so on. But the recession actually did not arrive,” he said.
“If you are an investor or a businessman and you took him seriously four years ago, what on earth would happen to you? You would be in a foetal position for years. This is why the timing is critical. It’s not enough to know what will happen in some point in the distant future.”
Roubini says the argument about content and timing is irrelevant. “People who have been totally blinded and wrong accusing me of getting the timing wrong, it’s just a joke,” he said. “It’s a bit pathetic, frankly. I was not making generic statements. I have made very specific predictions and I have been right all along.” Maybe so, but he does not sound too happy about it, frankly.
Nouriel Roubini: I fear the worst is yet to come
When this man predicted a global financial crisis more than a year ago, people laughed. Not any more...Dominic Rushe
As stock markets headed off a cliff again last week, closely followed by currencies, and as meltdown threatened entire countries such as Hungary and Iceland, one voice was in demand above all others to steer us through the gloom: that of Dr Doom.
For years Dr Doom toiled in relative obscurity as a New York University economics professor under his alias, Nouriel Roubini. But after making a series of uncannily accurate predictions about the global meltdown, Roubini has become the prophet of his age, jetting around the world dispensing his advice and latest prognostications to politicians and businessmen desperate to know what happens next – and for any answer to the crisis.
While the economic sun was shining, most other economists scoffed at Roubini and his predictions of imminent disaster. They dismissed his warnings that the sub-prime mortgage disaster would trigger a financial meltdown. They could not quite believe his view that the US mortgage giants Fannie Mae and Freddie Mac would collapse, and that the investment banks would be crushed as the world headed for a long recession.
Yet all these predictions and more came true. Few are laughing now.
Related Links
Global panic as investors take fright
Wall Street halts futures trading amid panic
What does Roubini think is going to happen next? Rather worryingly, in London last Thursday he predicted that hundreds of hedge funds will go bust and stock markets may soon have to shut – perhaps for as long as a week – in order to stem the panic selling now sweeping the world.
What happened? The next day trading was briefly stopped in New York and Moscow.
Dubbed Dr Doom for his gloomy views, this lugubrious disciple of the “dismal science” is now the world’s most in-demand economist. He reckons he is getting about four hours’ sleep a night. Last week he was in Budapest, London, Madrid and New York. Next week he will address Congress in Washington. Do not expect any good news.
Contacted in Madrid on Friday, Roubini said the world economy was “at a breaking point”. He believes the stock markets are now “essentially in free fall” and “we are reaching the point of sheer panic”.
For all his recent predictive success, his critics still urge calm. They charge he is a professional doom-monger who was banging on about recession for years as the economy boomed. Roubini is stung by such charges, dismissing them as “pathetic”.
He takes no pleasure in bad news, he says, but he makes his standpoint clear: “Frankly I was right.” A combative, complex man, he is fond of the word “frankly”, which may be appropriate for someone so used to delivering bad news.
Born in Istanbul 49 years ago, he comes from a family of Iranian Jews. They moved to Tehran, then to Tel Aviv and finally to Italy, where he grew up and attended college, graduating summa cum laude in economics from Bocconi University before taking a PhD in international economics at Harvard.
Fluent in English, Italian, Hebrew, and Persian, Roubini has one of those “international man of mystery” accents: think Henry Kissinger without the bonhomie. Single, he lives in a loft in Manhattan’s trendy Tribeca, an area popularised by Robert De Niro, and collects contemporary art.
Despite his slightly mad-professor look, he is at pains to make clear he is normal. “I’m not a geek,” said Roubini, who sounds rather concerned that people might think he is. “I mean it frankly. I’m not a geek.”
He is, however, ferociously bright. When he left Harvard, he moved quickly, holding various positions at the Treasury department, rising to become an economic adviser to Bill Clinton in the late 1990s. Then his profile seemed to plateau. His doubts about the economic outlook seemed out of tune with the times, especially when a few years ago he began predicting a meltdown in the financial markets through his blog, hosted on RGEmonitor. com, the website of his advisory company.
But it was a meeting of the International Monetary Fund (IMF) in September 2006 that earned him his nickname Dr Doom.
Roubini told an audience of fellow economists that a generational crisis was coming. A once-in-a-lifetime housing bust would lay waste to the US economy as oil prices soared, consumers stopped shopping and the country went into a deep recession.
The collapse of the mortgage market would trigger a global meltdown, as trillions of dollars of mortgage-backed securities unravelled. The shockwaves would destroy banks and other big financial institutions such as Fannie Mae and Freddie Mac, America’s largest home loan lenders.
“I think perhaps we will need a stiff drink after that,” the moderator said. Members of the audience laughed.
Economics is not called the dismal science for nothing. While the public might be impressed by Nostradamus-like predictions, economists want figures and equations. Anirvan Banerji, economist with the New York-based Economic Cycle Research Institute, summed up the feeling of many of those at the IMF meeting when he delivered his response to Roubini’s talk.
Banerji questioned Roubini’s assumptions, said they were not based on mathematical models and dismissed his hunches as those of a Cassandra. At first, indeed, it seemed Roubini was wrong. Meltdown did not happen. Even by the end of 2007, the financial and economic outlook was grim but not disastrous.
Then, in February 2008, Roubini posted an entry on his blog headlined: “The rising risk of a systemic financial meltdown: the twelve steps to financial disaster”.
It detailed how the housing market collapse would lead to huge losses for the financial system, particularly in the vehicles used to securitise loans. It warned that “ a national bank” might go bust, and that, as trouble deepened, investment banks and hedge funds might collapse.
Even Roubini was taken aback at how quickly this scenario unfolded. The following month the US investment bank Bear Stearns went under. Since then, the pace and scale of the disaster has accelerated and, as Roubini predicted, the banking sector has been destroyed, Freddie and Fannie have collapsed, stock markets have gone mad and the economy has entered a frightening recession.
Roubini says he was able to predict the catastrophe so accurately because of his “holistic” approach to the crisis and his ability to work outside traditional economic disciplines. A long-time student of financial crises, he looked at the history and politics of past crises as well as the economic models.
“These crises don’t come out of nowhere,” he said. “Usually they arrive because of a systematic increase in a variety of asset and credit bubbles, macro-economic policies and other vulnerabilities. If you combine them, you may not get the timing right but you get an indication that you are closer to a tipping point.”
Others who claimed the economy would escape a recession had been swept up in “a critical euphoria and mania, an irrational exuberance”, he said. And many financial pundits, he believes, were just talking up their own vested interests. “I might be right or wrong, but I have never traded, bought or sold a single security in my life. I am trying to be as objective as I can.”
What does his objectivity tell him now? No end is yet in sight to the crisis.
“Every time there has been a severe crisis in the last six months, people have said this is the catastrophic event that signals the bottom. They said it after Bear Stearns, after Fannie and Freddie, after AIG [the giant US insurer that had to be rescued], and after [the $700 billion bailout plan]. Each time they have called the bottom, and the bottom has not been reached.”
Across the world, governments have taken more and more aggressive actions to stop the panic. However, Roubini believes investors appear to have lost confidence in governments’ ability to sort out the mess.
The announcement of the US government’s $700 billion bailout, Gordon Brown’s grand bank rescue plan and the coordinated response of governments around the world has done little to calm the situation. “It’s been a slaughter, day after day after day,” said Roubini. “Markets are dysfunctional; they are totally unhinged.” Economic fundamentals no longer apply, he believes.
“Even using the nuclear option of guaranteeing everything, providing unlimited liquidity, nationalising the banks, making clear that nobody of importance is going to be allowed to fail, even that has not helped. We are reaching a breaking point, frankly.”
He believes governments will have to come up with an even bigger international rescue, and that the US is facing “multi-year economic stagnation”.
Given such cataclysmic talk, some experts fear his new-found influence may be a bad thing in such troubled times. One senior Wall Street figure said: “He is clearly very bright and thoughtful when he is not shooting from the hip.”
He said he found some of Roubini’s comments “slapdash and silly”. “Sometimes the rigour of his analysis seems to be missing,” he said.
Banerji still has problems with Roubini’s prescient IMF speech. “He has been very accurate in terms of what would happen,” he said. But Roubini was predicting an “imminent” recession by the start of 2007 and he was wrong. “He hurt his credibility by being so pessimistic long before it was appropriate.”
Banerji said on average the US economy had grown for five years before hitting a bad patch. “Roubini started predicting a recession four years ago and saying it was imminent. He kept changing his justification: first the trade deficit, the current account deficit, then the oil price spike, then the housing downturn and so on. But the recession actually did not arrive,” he said.
“If you are an investor or a businessman and you took him seriously four years ago, what on earth would happen to you? You would be in a foetal position for years. This is why the timing is critical. It’s not enough to know what will happen in some point in the distant future.”
Roubini says the argument about content and timing is irrelevant. “People who have been totally blinded and wrong accusing me of getting the timing wrong, it’s just a joke,” he said. “It’s a bit pathetic, frankly. I was not making generic statements. I have made very specific predictions and I have been right all along.” Maybe so, but he does not sound too happy about it, frankly.
Someone shot up a house that had a McCain sign outside. Does that mean the Obama campaign is desperate?
Get a grip, zambia.
Gold May Pay Only in Case of Maximum Despair: Jane Bryant Quinn
Commentary by Jane Bryant Quinn
Oct. 22 (Bloomberg) -- Gold is for rich guys -- buying physical gold, that is. The metal's highest and best investment use is as insurance policy against a currency collapse. For that purpose, you need a lot of it, stored around the world. Owning 20 or 30 coins is nice but won't protect your standard of living in a world where dollars are dust.
Gold isn't even a reliable hedge against inflation. It reached $850 an ounce in January 1980, a price not seen again until January 2008. During those intervening 28 years, gold plunged and reared but lost more than half of its purchasing power. For a 1980 investor to break even after inflation, gold would have to reach $2,200.
It might, but how long did you plan to wait?
For the average investor, gold boils down to a speculation on higher prices. The latest run-up started in August 2007, when the housing market visibly started falling apart. From $652, it raced up to $1,003 an ounce last March, zig-zagged back to $747 in September, jumped to $905, then slid to $772 as of yesterday.
Hedge funds drove the market but individuals jumped in, too. So far this year, investors have purchased 611,000 newly minted, one-ounce U.S. gold coins, compared with 315,000 in all of 2007.
``We've seen a switch in appetite, with investors moving from futures to physical gold, either owning it directly or going through exchange-traded funds,'' says Suki Cooper, an analyst at London-based Barclays Capital.
Coins purchased strictly for their gold value, not their numismatic value, are known as bullion coins. Many countries mint them -- South Africa (Krugerrand), Canada (Maple Leaf), China (Panda), Austria (Philharmonic) and Australia (Kangaroo), among others. The U.S. Mint makes Buffalos and American Eagles. For investment purposes, you want the one-ounce size.
Supply Shrinks
That is, if you can find them. The yearlong run on bullion has dried up the supply of coins for immediate delivery. Everything was out of stock last week at the online dealer onlygold.com. Kitco.com had Maples at 7 percent more than the spot gold price.
``The premium will likely come down 1 or 2 percent when all coin supplies improve a bit,'' says Jon Nadler, senior analyst for Kitco Metals & Minerals in Montreal.
The various mints project the number of coins they expect to sell each year and produce on demand. Toward the end of each year, they let their inventories run down while gearing up for next year's run. The surge of buyers left them short of high- quality blanks.
Currently, the U.S. Mint is striking only a limited number of 2008 Eagles. The wholesalers are on allocation. No Buffalos are being shipped at all, although a small number might still be minted before the end of the year. By late December, dealers expect to start receiving 2009 coins.
Coin of the Realm
For U.S. investors, American Eagles are the bullion coin of choice. You can put them into individual retirement accounts as long as they remain in their original U.S. Mint capsules. (It's not clear that Buffalos are allowed.)
Eagles also slip through a loophole in the tax reporting law, says Scott Travers, author of ``The Coin Collector's Survival Manual.'' Dealers have to report to the Internal Revenue Service if you sell 25 or more Maples or Krugerrands. They're not required to report your sales of American Eagles and some other coins, although some may do so. (Kitco, in Canada, says it does no tax reporting at all.)
Normally, one-ounce Eagles sell for 5.5 percent to 7.5 percent over the gold price, Nadler says. Small dealers might mark up the price even more.
In this buying panic, I saw online dealers charging as much as 13 percent more than spot gold. Their Web sites warned that there might be a wait before your Eagles could be shipped.
Fool's Gold
On EBay and the Home Shopping Network, coins sell at fantasy prices. A set of Eagles in four different weights was offered on HSN at $4,999.99. In gold, it's worth about $1,450. Prices like these take advantage of neophytes. A coin dealer might sell a four-coin set for $1,850, Travers says.
A cheaper way of buying gold is through an exchange traded fund. The most widely traded fund, SPDR Gold Shares, costs 0.4 percent a year in fees, plus your brokerage commission. You don't own the gold directly. A trust holds large gold bars (warehoused principally in London) and sells shares against them, which are traded on the open market. You can't redeem in gold itself.
It costs even less to buy bullion in a pool account, such as the ones offered by Kitco. Like an ETF, a pool account sells shares in a large bar of warehoused gold. You pay just a hair over the spot gold price, and sell it back to Kitco for just a hair under. There are no annual expenses. For a fee, you can redeem in gold itself. As with ETFs, you depend on the pool's trustee to support its guarantee.
Gold, by the way, is taxed as a collectible -- whether you buy it in the form of coins, ETF shares or an interest in a pool account. Your tax rate on long-term capital gains would be 28 percent, compared with 15 percent on other assets. Only a significant price gain (or currency collapse) redeems your bet.
(Jane Bryant Quinn, a leading personal finance writer and author of ``Smart and Simple Financial Strategies for Busy People,'' is a Bloomberg News columnist. She is a director of Bloomberg LP, parent of Bloomberg News. The opinions expressed are her own.)
To contact the writer of this column: Jane Bryant Quinn in New York at jbquinn@bloomberg.net
This Hedge Fund Manager Tries to Short Himself: Michael Lewis
Commentary by Michael Lewis
Oct. 24 (Bloomberg) -- The first time I sensed the alarming change in my soul was when I caught myself, five minutes after the market open, reaching for a reefer.
Trust me, I didn't amass legacy wealth (underestimated by Forbes magazine in the high eight figures) by smoking weed during trading hours. Exhaling that first hit I thought and might even have moaned aloud: ``Whoa, dude! Why are you even running a hedge fund?'' The markets were collapsing, and so was my passion.
Bloomberg subscribers have come to know me as a seriously successful hedge-fund manager who tries to serve society in more ways than one. Not only have I made as much money as possible, and proven the natural inferiority of the little rich-kid idiots from Harvard and Yale who went to work for Lehman Brothers Holdings Inc. I have also freely shared my thoughts and opinions with you.
As the trading room filled with smoke, and acquired that only sweet smell I know that is not success, I realized it was time for me to share more. To go deeper. I needed to re-examine honestly who I was, and why.
What could possibly have caused me to doubt my own value? I cannot say. But with my lungs stretching to the bursting point I felt a sudden urge to make the argument for shorting myself. I looked for weaknesses. I found three:
Misplaced Trust
1) I trusted America to do the right thing.
My fund may be an offshore entity, but I trade in U.S. markets. When they move from ``God Bless America'' to ``Take Me Out to the Ballgame'' at Yankee Stadium, I keep my hand over my heart. And I trusted my government to preserve one of man's most basic rights: the right to short Morgan Stanley.
Six weeks ago I was right where I wanted to be: short not only Stanley but also Goldman Sachs Group Inc., in real size. Both were going to zero, and I was going to have another Merry Christmas. Then the Goldman alums at Treasury jump in and force the Securities and Exchange Commission to ban short selling.
The short squeeze forces me to buy back everything at prices that would make a Japanese investor blink. How did I feel? Imagine how it would feel to be Michael Jordan in mid-air, three feet above the rim with no one around you, when the ref blows the whistle. Dunking is now illegal, he says. The league fines you for trying to dunk; the media lambastes you for trying to dunk. Barney Frank subpoenas the dunkers.
I'm not saying I'm the Michael Jordan of hedge-fund managers. Others say that. I'm saying that for the first time in his career the Michael Jordan of hedge-fund managers feels like picking up his ball and going home. Which brings me to...
Love What You Do
2) I hate my job.
When people ask me what it's been like making hundreds of millions of dollars for myself I always try to smile as if to say: ``It's no big deal. Some people are just built to win in the financial markets.''
The truth is nothing comes naturally in the financial markets. Winning is so much harder than you know. It comes with this huge opportunity cost: not winning at something else. For example, I think I could be one of the best ever at finding meaning in life. But I have to put that to one side, to help keep markets efficient. Don't get me wrong. I'm not a whiner and I'm not a quitter. I'm not writing a letter to my investors to tell them why I'm too good for their money and my own Blackberry. No, I'm no Andrew Lahde. (Though he has a point about pot.) I'm just underutilized. Which leads me to...
Wrong Man
3) I was rocked to my core that I -- or one of the few people like me -- wasn't put in charge of the bailout.
If you haven't figured it out by now, America has hired the wrong Paulson. There are two of them, Hank and John. Hank turned Goldman Sachs from an investment bank into a busload of tourists going to a casino, with borrowed money.
Goldman might have been the smartest investment bank but you only needed to see Dick Fuld testify before a congressional committee to know how much that means. No pun intended, but Dick didn't know dick.
Astute observers will note that every time they run across a party of midgets, one is tallest, and his name is usually Goldman. Suffice it to say that while Hank's shop was creating subprime mortgage-backed bonds, John's was shorting them. Hank wound up working for the government, John wound up making $3.7 billion. For himself.
Wake up America! The teacher has just asked the class to send one member to the chalk board to figure out a problem. You just reached past the A student in the front row and plucked the guy in the middle who's working hard for a B-minus. And he's confused!
To be honest, I'm not sure what I'm going to do next with my life. But the more I think about it, the weakness I'm feeling isn't mine. It's yours.
(Michael Lewis, author of ``Liar's Poker,'' ``Moneyball,'' and ``The Blind Side,'' is a columnist for Bloomberg News and an imaginary hedge-fund manager. The opinions he expresses are his own.)
To contact the writer of this column: Michael Lewis at mlewis1@bloomberg.net
CHART
TNRI
GLG's Roman, NYU's Roubini Predict Hedge Fund Failures, Panic
By Tom Cahill and Alexis Xydias
Oct. 23 (Bloomberg) -- Hedge funds closures will eliminate about 30 percent of the industry, and policy makers may need to shut markets for a week or more to stem panic, according to presentations at an investor conference today in London.
``In a fairly Darwinian manner, many hedge funds will simply disappear,'' Emmanuel Roman, co-chief executive officer at GLG Partners Inc., told the Hedge 2008 conference in London. U.S. regulators will ``find a way to force regulation,'' said Roman, 45, who runs New York-based GLG with Noam Gottesman, 47. The firm was founded 13 years ago as a unit of Lehman Brothers Holdings Inc. and now manages about $24 billion in assets.
Nouriel Roubini, the New York University Professor who spoke at the same conference, said hundreds of hedge funds will fail as the crisis forces investors to dump assets. ``We've reached a situation of sheer panic,'' said Roubini, who predicted the financial crisis in 2006. ``Don't be surprised if policy makers need to close down markets for a week or two in coming days.''
Many hedge funds have resisted oversight by the U.S. Securities and Exchange Commission, even as policy makers coordinated global interest-rate cuts and bailed out banks this month to try and stem the crisis. The hedge fund industry is stumbling through its worst year in two decades and posted its biggest monthly drop for a decade in September.
``There needs to be some scapegoats, and they are going to go hunt people,'' said Roman, who didn't indicate when new U.S. regulation may take effect. Regulation is ``long overdue,'' he said. In the U.S., ``someone can graduate from college on a Friday and start a hedge fund on a Monday.''
More Difficult
Increased regulation and higher borrowing costs will make the hedge-fund business more difficult, Roman said. Still, financial markets have ``overshot,'' he said.
In some areas of financial markets, including loans, there are ``once-in-a-lifetime opportunities,'' he said. ``At some point, people will say this isn't 1929 to the power of 10.''
Roubini, a former senior adviser to the U.S. Treasury Department, forecast this Feburary a `catastrophic' financial meltdown that central bankers would fail to prevent and that would lead to the bankruptcy of large banks exposed to mortgages and a ``sharp drop'' in equities.
The comments preceded the collapse of Bear Stearns & Cos. and Lehman Brothers Holdings Inc. as well as the government seizure of Freddie Mac and Fannie Mae. The Dow Jones Industrial Average, a benchmark for American equities, has lost 37 percent this year, including its biggest daily drop in more than twenty years on Oct. 15.
He predicted earlier this month that the world's biggest economy will suffer its worst recession in 40 years.
`Worst is Ahead'
``This is the worst financial crisis in the U.S., Europe and now emerging markets that we've seen in a long time,'' Roubini said. ``Things will get much worse before they get better. I fear the worst is ahead of us.''
Developing nations' borrowing costs jumped to the highest in six years today as Belarus joined Hungary, Ukraine and Pakistan in seeking a bailout from the International Monetary Fund to help weather frozen money markets and a slump in commodities. Argentina risks defaulting for the second time this decade.
``There are about a dozen emerging markets that are now in severe financial trouble,'' Roubini said. ``Even a small country can have a systemic effect on the global economy,'' he added. ``There is not going to be enough IMF money to support them.''
Italian Prime Minister Silvio Berlusconi roiled international markets on Oct. 10, first saying world leaders were discussing shutting down global financial exchanges, and then saying he didn't mean it.
Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.
Looks like the market is headed down again manana
LEHMQ chart
Nice BOTTOM busting action today on ICOG and DTG
ICOG
Nice call on the market, Conix
DTG, ICOG charts
ICOG
Oppenheimer and Co. Reiterated their OUTPERFORM Rating on NCC today with a Target Price of $5/ share. Talked about a potential buyout and the quality and size of their deposits that will attract other banks looking for capital.
Of course, any deal will be for stock most likely.
GLGT just starting waking up --Up 66%
Ho, Clay! Annotated chart on GLGT possible soon?
TIA
Just hit my scan on refresh, Wang- GLGT
Subprime SEC Bungled While Bear Stearns Imploded: Susan Antilla
Commentary by Susan Antilla
Oct. 21 (Bloomberg) -- At last we're taking steps to tackle the overflow of crises connected to subprime mortgages. But when are we going to get around to the fiasco of subprime regulators?
The Securities and Exchange Commission has been the target of four scathing reports by its internal watchdog over the past month, skewered in hundreds of pages that depict everything from deference to the industry it's supposed to regulate to the inability or unwillingness to act in the face of palpable warning signs before Bear Stearns Cos. collapsed.
In a horrifying Sept. 25 report entitled ``SEC's Oversight of Bear Stearns and Related Entities: The Consolidated Supervised Entity Program,'' the Office of Inspector General describes the SEC as having been aware for years that Bear was loaded up with a dangerous concentration of mortgage-backed securities even as it floundered with its risk-management policies.
With critical information about market stability in hand, the SEC had meetings, sent memos, and then did little or nothing. It ``became aware of numerous potential red flags prior to Bear Stearns' collapse,'' according to the report, but ``did not take serious action to limit these risk factors.''
Before March 2008, when Bear was sold to JPMorgan Chase & Co. in an 11th-hour move to dodge bankruptcy, the SEC knew that Bear had so many mortgage securities that it was in breach of SEC ``concentration'' limits. In fact, the agency knew that Bear wasn't satisfying even its looser in-house standards.
And the agency gave its blessing for the firm to skirt other rules. Although SEC regulations required that Bear use external auditors to do certain ``critical audit work'' pertaining to risk management, it gave permission to Bear to let employees do the work instead.
Black Eyes
In a written response to the inspector general, the SEC's division of trading and markets said that the findings were ``inaccurate and without empirical foundation.''
The SEC was dealt another black eye in an Oct. 10 missive from the inspector general titled, ``Failure to Vigorously Enforce Action Against W. Holding and Bear Stearns at the Miami Regional Office.'' This doozy gives a blow-by-blow of how, after a four-year probe and a $500,000 tentative settlement with Bear, the director of the SEC's Miami office abruptly called the firm's outside counsel in August 2007 to say the case was being dropped.
``Christmas is coming early'' this year, Miami's regional director, David Nelson, told Michael Trager, the securities firm's attorney and a friend of Nelson for 20 years. ``Bear Stearns can keep their money.''
Old Pals
The good news, if you can call it that, is that the inspector general said the fact that the legal opponents were old pals, while ``disturbing,'' wasn't at play in the decision to deep-six the case. The bad news is the bumbling itself: After what the report calls ``delays and blunders,'' a settlement finally was at hand when Nelson made the Christmas-in-August phone call.
It turns out that, among other reasons to pull the investigation's plug, Nelson testified that there was ``pressure'' from SEC commissioners in Washington, who had become more demanding about the ``relevance'' of old cases. If a securities-pricing problem at Bear Stearns wasn't relevant in August 2007, I'm not sure what is.
The agency in 2007 was actively reforming its enforcement policies, taking away the power of regional directors to open investigations, and pushing to let the targets of investigations know if a probe was being dropped. It was in many ways a period when enforcement was backing off: Fines collected by the SEC dropped in 2006 after reaching a peak of $1.5 billion in 2005.
Disappearing Overnight
In a three-page memo in response to the report, the SEC's enforcement division said the report was ``misleading'' and relied too often on speculation and innuendo.
The discarded Miami effort was troubling, considering the behavior it had unearthed. Dating back to 2002, W. Holding Co., which owned Westernbank Puerto Rico, was getting monthly price quotes from Bear that inflated the value of the asset-backed securities in its $64 million portfolio. Then, seemingly overnight, the portfolio lost $21 million.
Meanwhile, a lawyer in the U.S. Attorney's office in New York was poking around into a similar but separate case and suspected a systemic problem at Bear.
And then? The SEC ``failed to follow up with the U.S. Attorney's Office,'' the report said.
I hate to break it to you, but there's more. The inspector general also revealed the special access you can get with enforcement if you're a Wall Street big shot.
On Oct. 7, the inspector general outlined the VIP treatment given to Morgan Stanley Chief Executive Officer John Mack. The report says that an SEC lawyer who ``began pushing to take the testimony of a prominent individual in the financial industry, John Mack,'' suddenly began getting a hard time from his superiors.
The inspector general blasted the SEC for sharing information about Mack's role in that investigation with Morgan Stanley's lawyer, who was described inside the agency as someone who had ``juice.'' Members of the SEC's enforcement division ``conducted themselves in a manner that raised serious questions about the impartiality and fairness'' of the probe, the inspector general wrote. (No charges were made against Mack).
In the wake of all the flak, the SEC has done what every institution in decline does: It hired more public-relations people.
Any chance Congress will get smart and dismantle this incompetent agency in favor of an entity with power to regulate and the guts to use it? If it happens, don't lose any sleep over the SEC staff. I'm sure they'll get lots of job offers from pals in what's left of the financial-services industry.
(Susan Antilla is a Bloomberg News columnist. The opinions expressed are her own.)
To contact the writer of this column: Susan Antilla in New York at santilla@bloomberg.net
Morgan Stanley's Bonuses Get Saved By You and Me: Jonathan Weil
Commentary by Jonathan Weil
Oct. 21 (Bloomberg) -- Wall Street had it wrong: An investment bank's most precious asset isn't the army of employees who head down the elevators each day. It's the paychecks they take with them out the door.
You can imagine the devilish grins on the faces of Morgan Stanley employees last week, after the Treasury Department said it would pump $10 billion into the bank. Not only did we, the taxpayers, save their company, with the help of a Japanese bank named Mitsubishi UFJ Financial Group Inc. More importantly, we funded their 2008 bonus pool.
Morgan Stanley has accrued $10.7 billion of employee- compensation expense this year, almost twice as much as its pretax earnings. The vast majority of this remuneration hasn't been paid yet. Now it probably will be, assuming the firm survives through next month. Meantime, Morgan Stanley's stock- market value has dropped $34.7 billion, to $21 billion, since the company's fiscal year began.
The rescue of Morgan Stanley's bonus pool is an unpleasant downside of Treasury Secretary Hank Paulson's decision to inject $250 billion of cash into U.S. banks in exchange for preferred stock. It is one thing for a company to pay much more to employees than it earns for its shareholders. It's quite another to keep doing it while receiving taxpayer bailout bucks.
Before securities firms were public companies, a brokerage in need of capital would have called on its partners to pony up. That's how it still works at private partnerships, such as law firms. The reason they don't get taxpayer rescues is they can't credibly threaten to take down the world's financial system.
Global Threats
Morgan Stanley can. So can Paulson's old firm, Goldman Sachs Group Inc., which also is getting a $10 billion infusion from Treasury. Year-to-date, Goldman has reported $11.4 billion of compensation expense, almost twice its $5.9 billion of pretax earnings. During the same span, its market capitalization has fallen $41.7 billion, to $57.7 billion.
Morgan Stanley needed Treasury's cash. Goldman didn't, but got it anyway. As long as Paulson can't think of any better ideas, the government will keep throwing money at an industry that pays too many people more than they're worth, to perform services the world has too much of already. The bright side is we avoid a global meltdown, for now.
Here's all you really need to know to see who lost and who benefited most at the Five Families of Wall Street, otherwise known as Goldman, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns. From the start of their 2004 fiscal years through yesterday, the big standalone investment banks lost about $83 billion of stock-market value. During the same period, they reported about $239 billion of employee-compensation expense.
Lined Pockets
So, for every dollar of shareholder value destroyed, the employees got paid almost three. Only a sliver of that money went to chief executives such as Goldman's Lloyd Blankfein, who got a $70.3 million package last year, and Lehman's Richard Fuld, who made $34.4 million. Morgan Stanley's John Mack, by the way, received $1.6 million for 2007.
The Five Families -- now down to just Goldman and Morgan Stanley -- weren't alone. Citigroup Inc., which is getting a $25 billion injection from Treasury, has reported $139.3 billion of compensation expense since the start of 2004, more than double its $62.8 billion of pretax earnings. Its market cap, by comparison, has declined by about $168 billion, to $82 billion.
For all the complaints about outrageous executive pay and how little Paulson is doing to curb it, a big reason why these firms have been scrounging for capital is they keep blowing huge wads of it on their rank-and-file, too. The Paulson plan will do nothing to change that.
In the interim, we continue propping up an industry that's bloated with overcapacity, because we're all too scared to let the market fix it. That's good for the people getting bonus checks at Morgan Stanley and Goldman Sachs. It's not so great for the rest of us.
(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)
U.S. Is Said to Be Urging New Mergers in Banking
Gerald Herbert/Associated Press
Treasury Secretary Henry Paulson said Monday that there was enough stabilization money left over to assist every qualified bank.
By MARK LANDLER
Published: October 20, 2008
WASHINGTON — In a step that could accelerate a shakeout of the nation’s banks, the Treasury Department hopes to spur a new round of mergers by steering some of the money in its $250 billion rescue package to banks that are willing to buy weaker rivals, according to government officials.
As the Treasury embarks on its unprecedented recapitalization, it is becoming clear that the government wants not only to stabilize the industry, but also to reshape it. Two senior officials said the selection criteria would include banks that need more capital to finance acquisitions.
“Treasury doesn’t want to prop up weak banks,” said an official who spoke on condition of anonymity, because of the sensitivity of the matter. “One purpose of this plan is to drive consolidation.”
With bankers traumatized by the credit crisis and the loss of investor confidence, officials said, there are plenty of banks open to selling themselves. The hurdle is a lack of well-capitalized buyers.
Stable national players like Bank of America, JPMorgan Chase, and Wells Fargo are already digesting acquisitions. A second group of so-called super-regional banks are well positioned to take over their competitors, officials said, but have been reluctant to undertake or unable to complete deals.
By offering capital at a favorable rate, the government may encourage them to expand. In this category, industry analysts point to regional leaders, like KeyCorp of Cleveland; Fifth Third Bancorp of Cincinnati; BB&T of Winston-Salem, N.C.; and SunTrust Banks of Atlanta.
With $125 billion left over after investing in the nine largest banks, the Treasury secretary, Henry M. Paulson Jr., said there was enough capital to invest in every qualified bank.
“We have received indications of interest from a broad group of banks of all sizes,” he said at a news conference. “This program is not being implemented on a first-come, first-served basis.”
Mr. Paulson did not address the issue of bank mergers in his remarks, but officials say it has been widely discussed within the Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation, which has been burdened in recent months by having to support teetering banks like Wachovia.
Providing capital to help facilitate a merger, officials say, is also a way to track how the capital is used. Some analysts have questioned how much control the government can exert over its investment, when it is injected into banks in return for nonvoting preferred shares.
“We think there will be pressure behind the scenes by Treasury to push together companies that should have merged months or years ago,” said Gerard Cassidy, a banking analyst at RBC Capital Markets in Portland, Me. “If you can create stronger companies, that is a positive.”
In selecting banks, Mr. Paulson said the Treasury would also rely on advice from the quartet of regulators who oversee the banking industry: the Fed, the F.D.I.C., the comptroller of the currency and the Office of Thrift Supervision.
But Mr. Paulson made clear that the final decision of who gets federal money rests with the Treasury. And he reiterated that the government expected the banks that got money to lend it out rather than hoard it — putting in a special plea for homeowners with troubled mortgages.
“We expect all participating banks to continue to strengthen their efforts to help struggling homeowners,” he said. “Foreclosures not only hurt the families who lose their homes, they hurt neighborhoods, communities and our economy as a whole.”
The Treasury’s bank rescue comes amid a rising clamor in Washington that the government should focus on helping mortgage holders directly. But officials say it is unlikely that the Bush administration will present a new plan for homeowners between now and the election.
“There’s no inexpensive, easy way to address the terms of people’s mortgages,” said Robert J. Shapiro, an economic consultant who is chairman of the globalization initiative of NDN, a left-leaning research group in Washington. “I think that’s why they haven’t addressed it.”
Most likely, he said, the campaigns of Senator John McCain and Senator Barack Obama will hone their own proposals. Then, if Congress reconvenes after the election in a lame-duck session, the new president-elect will try to push through a bill with new measures.
Under the terms of the $700 billion rescue plan approved by Congress early this month, the Treasury has authority to purchase whole mortgages. Treasury officials also note that Mr. Paulson has pressed banks and loan servicers to show flexibility in modifying loans to avoid foreclosures.
Still, Treasury’s recent efforts have been almost wholly focused on stabilizing the banks — first by proposing to buy distressed assets from the banks, and later by injecting capital directly into them. There were some signs in the credit markets Monday that those efforts were paying off.
On Monday, Mr. Paulson described a process for banks to apply for government investments that is little more complicated than the one-page term sheet he handed to the chief executives of the nation’s nine largest banks at a meeting last week at the Treasury Department.
The institutions, he said, must fill out a standardized two-page form and submit it to their primary regulator by Nov. 14. The Treasury will receive the applications, with a recommendation, from the regulator. Once it decides whether to inject capital, it will announce its investment within 48 hours. It will not disclose banks that withdraw or are turned down.
The Treasury’s program is open to large and small banks, as well as thrifts. Officials said they had received inquiries from other financial institutions, including insurance companies, but the plan did not provide for them.
Given the potential weakness of insurers, some analysts said the government should consider expanding the eligibility for capital injections. These analysts said $250 billion would not be enough.
“They should see themselves as having $700 billion to recapitalize the industry in creative ways,” said Simon Johnson, a former chief economist at the International Monetary Fund.
While the Treasury’s offer of capital is attractive, analysts cautioned that cash alone might not be enough to reshape the industry. Recent deals, they note, have featured distressed banks sold at fire-sale prices.
“There are a lot of obstacles to mergers in the banking industry,” Mr. Cassidy of RBC Capital Markets said. “I don’t know how the government could persuade banks to do deals at below book value.”
COF is going to head down again. Credit cards in a recession?
Can you imagine the chargeoffs coming?
Man, there are some great buys out there in pennyland.
Spreading it out for the pops to come.
Nice NCC. Which way is up? LOL
LOL--Ich spricht ein biesschen Deutsch.
All my longs are actually up today.
Bought Puts on Tiffany's and Toll Brothers. Trying to get the right price on URBN puts. Also, thinking about COF puts--the credit card industry has a tough rough to hoe.
Wrong chart... here it is.
IWEB does look good--with some more volume.
Nice low market cap--am I right? $1.3 Million and $19 Million revenue in 2007?
Everything out there has gotten taken out to the woodshed and SHOT! Might be good for a play.
Playing NCC to be strong into the close. Scotia Bank could be the buyer of NCC
You must have eggs in your pants? LOL
Viel Spass.
Just got some more NCC after the pop up. $2.17
Morgen!
Keep an eye on NCC--a bank in the MidWest.
Cheap microcap--IWEB. Only 21 Million shares outstanding and trading at $0.05--with annual revenue of $18 Million.
Panic selling has really made some good opportunites out there.
Wie sagt man auf Deutsch?--"You have to have balls?"
Bis spater.
ENZ chart
I am in there with you--NCC
Buying ENZ on Monday
Earnings Preview: Enzo Biochem (NYSE: ENZ) is scheduled to announce fiscal forth quarter and year-end results for the fiscal year ended July 31, 2008 on Tuesday after the market closes and will host a conference call on Wednesday morning. Investors are likely to focus on the growth at the company's Life Sciences business, as there will be another quarter to assess the impact of the acquisition of Axxora Life Sciences. For the nine months ended April 30, 2008, the company reported revenue of $56.6 million, an increase of 62% helped by the acquisition of Axxora and strength in the company's Clinical Labs business. The company continues to build its life sciences business organically and through acquisition. With more than $96 million in cash as of the end of April, 2008, the company has the financial flexibility to continue to grow its Life Sciences division, where revenue rose to $7 million in its third fiscal quarter ended April, 2008 compared to just $0.9 million in the year-earlier period. The company is also expected to provide updates on Alequel, its immune regulation approach for the treatment of Crohn's disease currently in Phase IIb trials, and Optiquel, its proprietary drug candidate for the treatment of uveitis, While the company's stock has decreased 40% in value just last week, such a sharp decline appears to be more attributable to liquidations by small-cap hedge funds than any specific developments at Enzo. The stock ended the week at $6.01, down $4.09.
Wie geht's?
If you really look for opportunities, you can get some good trades this week.
CHK had its CEO sell out his shares in a forced sale due to margin calls. ALL his millions of shares. CHK is going to pop on Monday.
Tshuss und Viele Gluck.
MS will be a gapper on Monday
Morgan Stanley, Goldman May Gain Investment From U.S. Treasury
By Christine Harper
Oct. 11 (Bloomberg) -- Morgan Stanley and Goldman Sachs Group Inc., the biggest independent U.S. investment banks, may reap cash infusions as part of Treasury Secretary Henry Paulson's plan to buy stakes in financial institutions, investors said.
Paulson, in a statement yesterday, said the U.S. will purchase equity in a ``broad array'' of banks and other financial firms to restore market stability and ensure economic growth. The Treasury is working on a ``standardized program that is open to a broad array of financial institutions,'' he said.
Morgan Stanley Chief Executive Officer John Mack, 63, and Goldman Sachs CEO Lloyd Blankfein, 54, failed to regain investor confidence by converting their firms into bank holding companies last month and raising new capital from private investors. Morgan Stanley's stock dropped almost 60 percent this week, while Goldman's fell 29 percent.
``Based on the fact that they're allegedly commercial banks now and are moving that way, I think they're likely to get protection,'' said Benjamin Wallace, an analyst at Grimes & Co. at Westborough, Massachusetts, which manages about $700 million. ``Whatever solution they come up with for the banking industry as a whole will apply to them, because they're no longer special.''
Michele Davis, a spokeswoman for the Treasury, declined to comment.
Morgan Stanley and Goldman were among the most profitable firms in Wall Street history and paid out $36.7 billion in compensation and benefits to employees for 2007. Both investment banks stayed profitable through the first three quarters of this year.
Lehman's bankruptcy on Sept. 15 ignited investor fears about Goldman and Morgan Stanley. To try to win back confidence, the firms obtained Federal Reserve approval to become bank holding companies.
Buffett, Mitsubishi
Goldman raised $10 billion on Sept. 24 from Warren Buffett's Berkshire Hathaway Inc. and a public share sale. Morgan Stanley struck an agreement to get $9 billion from Japan's Mitsubishi UFJ Financial Group Inc. The accord is scheduled for completion on Oct. 14.
Moody's Investors Service added to the concern about both investment banks on Oct. 10, when it placed Morgan Stanley's A1 long-term rating on review for a possible downgrade and lowered its outlook for Goldman Sachs's Aa3 long-term rating to negative.
Morgan Stanley's $4.5 billion of 6.625 percent senior bonds that mature in April 2018 fell to 61 cents on the dollar yesterday from 71 cents a week earlier.
Paulson, supported by Federal Reserve Chairman Ben S. Bernanke, won Congressional approval last month to spend as much as $700 billion to buy assets from banks and take equity stakes as part of the so-called Troubled Asset Relief Program, or TARP.
`Follow Through'
The move followed the bankruptcy of Lehman Brothers Holdings Inc. in mid-September after the government refused to provide money to support a takeover. The Lehman failure roiled debt markets and led to a loss of confidence in Morgan Stanley and Goldman.
``The government can go a long way by buying a stake in Morgan Stanley,'' said David Killian, a portfolio manager at Valley Forge Advisors LLC, which oversees $650 million, including Morgan Stanley shares and bonds. ``Paulson has to follow through on his promises; he and Bernanke went to Congress and said `we need this TARP facility to protect against ongoing systemic risk' and here we go, put your money where your mouth is.''
The U.S. government will support Morgan Stanley and Goldman after Lehman's bankruptcy caused losses in money market funds and led investors to avoid commercial paper, which companies rely on for short-term funding, according to Grimes &Co.'s Wallace.
Lesson Learned
``The government learned its lesson with Lehman,'' said Wallace. ``You need them to potentially come in and invest in these companies.''
Egan-Jones Ratings Co. said Morgan Stanley probably needs to raise $60 billion in new equity to reassure customers and investors. The investment bank has about $900 billion of assets and an equity market value of $10 billion. Mark Lake, a Morgan Stanley spokesman, declined to comment.
``The analogy is a snowball rolling down a mountain; the mass needed to stop that negative momentum increases as that snowball picks up speed and size,'' Egan-Jones's Sean Egan said in a phone interview yesterday. ``Perception trumps reality. They need a massive injection to stop the slide.''
The government can't allow financial companies to continue collapsing, Paul Krugman, an economics professor at Princeton University, said in an Oct. 9 interview.
`Big Mistake'
``It's really hard to put humpty-dumpty back together again after those things fail,'' Krugman said. ``The failure to rescue Lehman it turns out was a really big mistake.''
Morgan Stanley is selling more than 20 percent of itself to Japan's Mitsubishi UFJ for $9 billion -- an amount that nearly equals Morgan Stanley's total market value. The slide in Morgan Stanley shares has led investors to question whether the deal, scheduled to be closed on Oct. 14, will go through as planned.
Mitsubishi UFJ agreed to pay $6 billion for preferred stock and $3 billion for common stock at a value of $25.25 apiece, or 62 percent more than yesterday's closing price. Morgan Stanley and Mitsubishi UFJ have moved to quash speculation that the deal would collapse.
``I would be angry if I were a Mitsubishi shareholder and I got the same amount of Morgan Stanley when the stock has been cut in value,'' said Kenneth Crawford, a senior portfolio manager at Argent Capital Management in St. Louis, Missouri.
Crawford said he sold his Morgan Stanley stock last month after Lehman went bankrupt and American International Group Inc. was forced to rely on government support to fund itself.
`Incredible Scenarios'
``After Lehman was allowed to go bust and then AIG couldn't come up with the liquidity they needed, all of a sudden it seemed more likely that incredible scenarios could be more credible,'' he said.
Mitsubishi UFJ would be the second overseas investor to take a significant stake in Morgan Stanley. In December, China Investment Corp. paid $5.58 billion for equity units in Morgan Stanley that pay 9 percent a year and convert to common stock in 2010, granting CIC about 10 percent of the U.S. company.
For Morgan Stanley and Goldman, becoming bank holding companies regulated by the Federal Reserve may ``limit profit opportunities,'' while at the same time lower risks, Moody's Investors Service said when it cut the ratings outlook for both firms on Oct. 10.
Moody's in August cut Morgan Stanley's long-term credit rating from Aa3. At A1, the firm now has the fifth-highest investment grade rating.
The Morgan Stanley credit review affects about $200 billion of debt, Moody's said. The ratings company affirmed its Prime-1 grade for Morgan Stanley's short-term debt. The outlook for Goldman affects $175 billion of debt, and the company's short-term ratings were also affirmed at Prime-1.
``The government is not going to allow this to go the way of Lehman because the repercussions of Lehman have been vast, especially the resulting losses in money-market funds,'' Valley Forge's Killian said.
To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.
MS to Pop on Monday
Morgan Stanley, Goldman May Gain Investment From U.S. Treasury
By Christine Harper
Oct. 11 (Bloomberg) -- Morgan Stanley and Goldman Sachs Group Inc., the biggest independent U.S. investment banks, may reap cash infusions as part of Treasury Secretary Henry Paulson's plan to buy stakes in financial institutions, investors said.
Paulson, in a statement yesterday, said the U.S. will purchase equity in a ``broad array'' of banks and other financial firms to restore market stability and ensure economic growth. The Treasury is working on a ``standardized program that is open to a broad array of financial institutions,'' he said.
Morgan Stanley Chief Executive Officer John Mack, 63, and Goldman Sachs CEO Lloyd Blankfein, 54, failed to regain investor confidence by converting their firms into bank holding companies last month and raising new capital from private investors. Morgan Stanley's stock dropped almost 60 percent this week, while Goldman's fell 29 percent.
``Based on the fact that they're allegedly commercial banks now and are moving that way, I think they're likely to get protection,'' said Benjamin Wallace, an analyst at Grimes & Co. at Westborough, Massachusetts, which manages about $700 million. ``Whatever solution they come up with for the banking industry as a whole will apply to them, because they're no longer special.''
Michele Davis, a spokeswoman for the Treasury, declined to comment.
Morgan Stanley and Goldman were among the most profitable firms in Wall Street history and paid out $36.7 billion in compensation and benefits to employees for 2007. Both investment banks stayed profitable through the first three quarters of this year.
Lehman's bankruptcy on Sept. 15 ignited investor fears about Goldman and Morgan Stanley. To try to win back confidence, the firms obtained Federal Reserve approval to become bank holding companies.
Buffett, Mitsubishi
Goldman raised $10 billion on Sept. 24 from Warren Buffett's Berkshire Hathaway Inc. and a public share sale. Morgan Stanley struck an agreement to get $9 billion from Japan's Mitsubishi UFJ Financial Group Inc. The accord is scheduled for completion on Oct. 14.
Moody's Investors Service added to the concern about both investment banks on Oct. 10, when it placed Morgan Stanley's A1 long-term rating on review for a possible downgrade and lowered its outlook for Goldman Sachs's Aa3 long-term rating to negative.
Morgan Stanley's $4.5 billion of 6.625 percent senior bonds that mature in April 2018 fell to 61 cents on the dollar yesterday from 71 cents a week earlier.
Paulson, supported by Federal Reserve Chairman Ben S. Bernanke, won Congressional approval last month to spend as much as $700 billion to buy assets from banks and take equity stakes as part of the so-called Troubled Asset Relief Program, or TARP.
`Follow Through'
The move followed the bankruptcy of Lehman Brothers Holdings Inc. in mid-September after the government refused to provide money to support a takeover. The Lehman failure roiled debt markets and led to a loss of confidence in Morgan Stanley and Goldman.
``The government can go a long way by buying a stake in Morgan Stanley,'' said David Killian, a portfolio manager at Valley Forge Advisors LLC, which oversees $650 million, including Morgan Stanley shares and bonds. ``Paulson has to follow through on his promises; he and Bernanke went to Congress and said `we need this TARP facility to protect against ongoing systemic risk' and here we go, put your money where your mouth is.''
The U.S. government will support Morgan Stanley and Goldman after Lehman's bankruptcy caused losses in money market funds and led investors to avoid commercial paper, which companies rely on for short-term funding, according to Grimes &Co.'s Wallace.
Lesson Learned
``The government learned its lesson with Lehman,'' said Wallace. ``You need them to potentially come in and invest in these companies.''
Egan-Jones Ratings Co. said Morgan Stanley probably needs to raise $60 billion in new equity to reassure customers and investors. The investment bank has about $900 billion of assets and an equity market value of $10 billion. Mark Lake, a Morgan Stanley spokesman, declined to comment.
``The analogy is a snowball rolling down a mountain; the mass needed to stop that negative momentum increases as that snowball picks up speed and size,'' Egan-Jones's Sean Egan said in a phone interview yesterday. ``Perception trumps reality. They need a massive injection to stop the slide.''
The government can't allow financial companies to continue collapsing, Paul Krugman, an economics professor at Princeton University, said in an Oct. 9 interview.
`Big Mistake'
``It's really hard to put humpty-dumpty back together again after those things fail,'' Krugman said. ``The failure to rescue Lehman it turns out was a really big mistake.''
Morgan Stanley is selling more than 20 percent of itself to Japan's Mitsubishi UFJ for $9 billion -- an amount that nearly equals Morgan Stanley's total market value. The slide in Morgan Stanley shares has led investors to question whether the deal, scheduled to be closed on Oct. 14, will go through as planned.
Mitsubishi UFJ agreed to pay $6 billion for preferred stock and $3 billion for common stock at a value of $25.25 apiece, or 62 percent more than yesterday's closing price. Morgan Stanley and Mitsubishi UFJ have moved to quash speculation that the deal would collapse.
``I would be angry if I were a Mitsubishi shareholder and I got the same amount of Morgan Stanley when the stock has been cut in value,'' said Kenneth Crawford, a senior portfolio manager at Argent Capital Management in St. Louis, Missouri.
Crawford said he sold his Morgan Stanley stock last month after Lehman went bankrupt and American International Group Inc. was forced to rely on government support to fund itself.
`Incredible Scenarios'
``After Lehman was allowed to go bust and then AIG couldn't come up with the liquidity they needed, all of a sudden it seemed more likely that incredible scenarios could be more credible,'' he said.
Mitsubishi UFJ would be the second overseas investor to take a significant stake in Morgan Stanley. In December, China Investment Corp. paid $5.58 billion for equity units in Morgan Stanley that pay 9 percent a year and convert to common stock in 2010, granting CIC about 10 percent of the U.S. company.
For Morgan Stanley and Goldman, becoming bank holding companies regulated by the Federal Reserve may ``limit profit opportunities,'' while at the same time lower risks, Moody's Investors Service said when it cut the ratings outlook for both firms on Oct. 10.
Moody's in August cut Morgan Stanley's long-term credit rating from Aa3. At A1, the firm now has the fifth-highest investment grade rating.
The Morgan Stanley credit review affects about $200 billion of debt, Moody's said. The ratings company affirmed its Prime-1 grade for Morgan Stanley's short-term debt. The outlook for Goldman affects $175 billion of debt, and the company's short-term ratings were also affirmed at Prime-1.
``The government is not going to allow this to go the way of Lehman because the repercussions of Lehman have been vast, especially the resulting losses in money-market funds,'' Valley Forge's Killian said.
To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.
Looks like we will be getting a deal by Tuesday morning.
Monday's trading could be fantastic
Abramovich, Deripaska, Oligarchs Lose $230 Billion (Update1)
By Yuriy Humber, Greg Walters and Maria Kolesnikova
Oct. 10 (Bloomberg) -- Russian billionaires from aluminum magnate Oleg Deripaska to soccer-club owner Roman Abramovich lost more than $230 billion in five months during the nation's worst financial crisis since the 1998 default on its debt.
The combined wealth of Forbes magazine's 25 richest Russians tumbled 62 percent between May 19 and Oct. 6, based on the equity value of traded companies and analysts' estimates of closely held assets they own. The loss is four times larger than the fortune of the world's wealthiest man, Warren Buffett.
Moscow's benchmark Micex stock index declined 61 percent since its peak in May. The global credit seizure, war with Georgia and falling commodity prices led foreign investors to pull $74 billion out of Russia since early August, according to BNP Paribas SA. While Russia's 1998 default and devaluation of the ruble eradicated savings for most of the population, this year's losses are wiping out its richest citizens' fortunes.
``There was a massive transfer of wealth into the hands of the oligarchs in 1998,'' said Mark Mobius, executive chairman of Templeton Asset Management Ltd., which has about $30 billion in emerging market stocks. ``Now it's going the other way.''
United Co. Rusal's Deripaska, 40, the richest Russian on the list, lost more than $16 billion and in the past week ceded stakes in Hochtief AG and Magna International Inc. Chelsea FC owner and Evraz Group SA shareholder Abramovich, 41, lost $20 billion, based on assets excluding property and cash.
Lisin's Losses
The biggest loser has been Vladimir Lisin, 52, an avid hunter and head of Russia's Shooting Club, whose 85 percent stake in OAO Novolipetsk Steel lost $22 billion in value in the period.
Novolipetsk rival Evraz declined 83 percent, shrinking 49- year-old founder Alexander Ambramov's fortune to $2.2 billion from $13.4 billion. Russia's biggest steelmaker, OAO Severstal, also fell, cutting the wealth of chief executive officer and majority owner Alexei Mordashov, 43, to $5.3 billion.
``They should take us all off the Forbes list,'' said Alexander Lebedev, ranked 39th by the magazine in May with $3.1 billion of wealth. Lebedev, 49, who owns 30 percent of state-run airline OAO Aeroflot, said in an interview on Sept. 23 that ``silly'' rhetoric by the Kremlin over the conflict in Georgia was responsible for 40 percent of the stock market's drop in August.
Lukoil, Alfa
OAO Lukoil Chief Executive Officer Vagit Alekperov, 58, saw his 20 percent stake in Russia's second-biggest oil producer decline to $7.2 billion from $19.5 billion. The fortune of Alekperov deputy Leonid Fedun, 52, declined to $3 billion from $8.4 billion. Both men have said they will continue to buy more Lukoil shares.
Dmitry Rybolovlev, 41, who controls OAO Uralkali and owns 20 percent of OAO Silvinit, the country's only potash producers, lost about $12.8 billion, leaving him with $4.1 billion.
Alfa Group partners Mikhail Fridman, 44, German Khan, 46, and Alexei Kousmichoff, 45, ranked seventh, 10th and 17th, respectively, lost at least a combined $12.1 billion.
Alfa's shareholdings include BP Plc's Russian oil venture TNK-BP, mobile-phone operators OAO VimpelCom and Turkey's Turkcell Iletisim Hizmetleri AS, supermarket chain X5 Retail Group and television broadcaster CTC Media Inc.
Spokespeople for companies including Deripaska's Basic Element, Evraz, Nikolai Tsvetkov's UralSib Financial Corp. and Rybolovlev's Uralkali declined to comment on the losses.
Cashing Out
At least one of Russia's wealthiest got out in time.
Mikhail Prokhorov, 43, sold his 25 percent stake in OAO GMK Norilsk Nickel to Deripaska's Rusal for an undisclosed amount in April, just before nickel prices began to slump. The value of that stake plummeted from $13 billion on April 24 to $3.38 billion on Oct. 6.
Prokhorov received $7 billion in cash as part of the Norilsk transaction, the Kommersant and Vedomosti newspapers reported then, citing unidentified people familiar with the deal.
``Are you criticizing me for feasting amid the Black Death,'' Prokhorov joked with reporters in Moscow on Sept. 30, after buying half of Renaissance Capital for $500 million. That was less than a quarter of the value the investment bank had a year ago when VTB Group sought to take it over, according to a Vedemosti report. ``Crisis time is a peak for opportunities,'' Prokhorov said. ``An absolute peak.''
Trading Delayed
Russia's Micex and RTS stock exchanges delayed the opening of trading today on orders of the market regulator. It was unclear when trading would start, a spokesman for Micex said. The RTS won't resume stock trading until ``further notice,'' the bourse wrote in an e-mailed statement.
``You can now buy the free float of the entire Russian energy sector with the market cap of Coca-Cola, and still have change to buy all the Russian banks,'' Merrill Lynch & Co. emerging markets equity strategist Michael Hartnett said in a note to clients today.
The unprecedented loss of wealth may set the stage for a new round of asset redistribution, said Pavel Teplukhin, president of Troika Dialog Asset Management in Moscow.
``We've seen quite a significant inflow of fresh money by our wealthy individuals to acquire at these very attractive levels that we haven't seen since 2003, 2004,'' Teplukhin said in a Bloomberg Television interview on Oct. 9, a day the Micex Index climbed 9.8 percent.
Next Round
The next round of wealth building may be the most intense yet, according to Renaissance Capital. The first came between 1995 and 1998 as Russia's first president, the late Boris Yeltsin, agreed to sell stakes in the nation's biggest industrial assets in return for loans from bankers including Potanin, who helped organize the state bailout.
``It will be a game with bigger stakes than in early 1990s privatizations and the redistribution after the 1998 crisis,'' said David Aserkoff, chief strategist for Russia at Moscow-based Renaissance Capital.
``Oligarchs with cash will be able to use their knowledge of the business and political landscape to find the next billions,'' Aserkoff said in a research report on Oct. 6.
``The market will grow back,'' billionaire Viktor Vekselberg, 51, one of BP Plc's four partners in oil company TNK-BP and founder of Renova Group, told reporters yesterday. ``The only issue is when. I don't think it will be soon.''
To contact the reporters on this story: Yuriy Humber in Moscow at yhumber@bloomberg.net; Greg Walters in Moscow gwalters1@bloomberg.net; Maria Kolesnikova in Moscow at mkolesnikova@bloomberg.net.
Bounce?
Bottom?
AXTG
Manana is another day