Wall Street Breakfast: Must-Know News
by SA Editor Rachael Granby
* Little progress on Big Three bailout. House Speaker Nancy Pelosi, arguing General Motors (GM) is too big to fail, urges 'immediate action' to help automakers, but faces resistant Republicans and a noncommittal White House. Pelosi wants to include automakers in TARP, but without bipartisan support, the measure is unlikely to pass until a new congressional session begins in January. The Treasury too has been hesitant to aid automakers, concerned that expanding a rescue to include non-financial companies would raise expectations of assistance from other industries facing a slowdown. Meanwhile, General Motors' (GM) shares sank to their lowest levels in 65 years as the company warned it may run out of operating cash by the end of the year.
* Help for homeowners. The Federal Housing Finance Agency, the regulator for Fannie Mae (FNM) and Freddie Mac (FRE), unveiled plans yesterday to stem foreclosures by easing mortgage payments for potentially over 400,000 homeowners. Homeowners spending more than 38% of their income on mortgage payments and delinquent by 90 days or more could be eligible to have their mortgage rate cut, the life of their loans extended or their principal reduced. FDIC's Sheila Bair said the measure is 'a step in the right direction, but falls short of what is needed,' arguing the Fannie/Freddie focus is too narrow and ignores the 60% of seriously delinquent mortgages held by Wall Street firms and other investors. MBA Chief Economist Jay Brinkmann says a 50% success rate in the loan modification program would be 'a good result.'
* Banks win with AIG's new terms. Many banks that had bought protection from AIG (AIG) on mortgage-backed securities will be able to recoup their investments under AIG's revised rescue which will see a new facility buy around $70B of these securities. Companies that had previously sought and received collateral from AIG (including GS, MER, UBS, DB), much of which came when AIG received government funds in September, will be able to keep their collateral. Banks which participate in selling securities to the new facility will be compensated for the full, or par, value. "It's like a home run for some of the banks," says Carlos Mendez of ICP Capital. "They bought insurance from a company that ran into trouble and still managed to get all, or most, of their money back."
* AmEx looks to TARP. Sources say American Express (AXP), which just this week received approval to become a bank holding company, is requesting $3.5B in federal aid under TARP. The card issuer has not been directly impacted by the housing crisis, but faces slowing consumer spending and rising defaults. The TARP funds would allow AmEx greater flexibility in funding its operations while it deals with the market downturn. AmEx has not announced its application for aid, and federal regulators won't disclose which companies have been approved or denied for assistance.
* Changing TARP on the fly. The Treasury is considering adding a private enterprise element to TARP, say sources familiar with the matter, which would require firms to raise private capital in order to qualify for public assistance. The condition would probably not apply to the existing $250B capital repurchase program, but may become relevant for future capital investments. The same sources said the Treasury is unlikely to conduct auctions to buy troubled assets, as originally intended under TARP, and instead will continue to inject capital directly into the financial sector. These modifications could be officially announced as early as today.
* Fed wants clearinghouse role. As pressure mounts to build a central credit-default swaps clearinghouse, the Federal Reserve is angling to become its lead regulator. Sources involved in private talks between the Fed, the S.E.C., the Treasury and the Commodity Futures Trading Commission said the agencies discussed a memorandum that would outline clearinghouse oversight, and a regulatory structure announcement could come by the end of the week. CME Group (CME), which is competing with Intercontinental Exchange of Atlanta (ICE) and NYSE Euronext (NYX) to create a system, says it is open to Fed oversight.
* Execs want more regulation and less. A survey released earlier today shows over 75% of company executives believe credit-rating agencies must be regulated. The survey also showed support for lifting global bans on short-selling, as well as for beefing up supervision of hedge funds and structured-finance products. Respondents were divided on the need for a global financial regulator. The survey was timed for this weekend's G-20 summit in the hopes that global leaders will consider the opinions of business executives before enacting broad regulations.
* Microsoft's Verizon grab. Microsoft (MSFT) is nearing a deal to become the default search provider for Verizon Wireless' (VZ) mobile phones. A successful deal would be a slap in the face to rival Google (GOOG), which has been in negotiations with Verizon for months. Under its current offer, Microsoft would share ad revenue with Verizon and would guarantee payments of $550-$650M over five years, roughly twice Google's offer. Verizon is still in discussions with Google, but sources say Microsoft's offer is favored.
* If at first you don't succeed, try a hostile bid. After its $6.1B takeover bid was rejected earlier this week, Exelon (EXC) launches a hostile bid for NRG Energy (NRG). Exelon will take its offer directly to shareholders, will file a lawsuit against NRG and its directors and will try to nominate its own directors to the board. NRG had rejected the original bid after arguing it undervalued the company and pointing to Exelon's recent credit downgrade, but had left the door open to a higher bid which would include debt refinancing. NRG advised shareholders not to take any action while it reviews the proposed exchange offer.
* Hedge funds get clobbered. Hedge funds lost an average 5.52% in October, the fifth consecutive down month. The average hedge fund has lost 15.3% in 2008 so far, putting the industry on track for its worst year ever. October was an especially bad month as hedge funds were forced to sell assets at sharply reduced prices to cover redemption requests. Many investors are shocked by the size of the losses after being promised by money managers that their funds could make money in any market.
* Recession metrics. A survey of economists says the current U.S. slowdown will be the longest in three decades, and the drop in consumer spending could be the worst ever. The respondents expect the economy to shrink an annualized 3% in Q4 after 'the economy fell off a cliff in October' and for growth to decline at a 1.5% pace in Q1 2009. The odds of an official contraction occurring within the next twelve months rose to 100%.
* Confidence rises. Consumer confidence roared back in November. The IBD/TIPP Economic Index jumped 23.6% – the biggest one-month increase in the index's eight-year history - to reach 50.8. Any readings above 50 indicate optimism, and the index showed gains in all three of its key components. Confidence improved on falling gas prices, the government's economic rescue plans and possibly on hope connected to the U.S. presidential election.
* Chain store sales. In the slowest weekly growth since April, chain store sales rose 0.4% last week vs. a year ago, and fell 1.0% vs. the week before, ICSC says. Consumers continued to buy everyday items but scaled back on other purchases. Redbook reported national chain store sales fell 1.2% in the first week of November vs. the previous month and fell 1% vs. a year ago.
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