Archive for the ‘Financial Collapse’ Category

BofA/Merrill – the other shoe drops

Friday, April 24th, 2009

One of the principles of a good lawyer is you don’t ask a question of a witness unless you already know the answer.

NY Attorney General Andrew Cuomo released to the SEC details of his questioning of Bank of America Kenneth Lewis. What has become clear is that as BofA was becoming aware of how much money Merrill Lynch was losing, they wanted to back out of the deal.

Then Secretary of Treasury Henry (“Hank”) Paulson and current Federal Reserve Chairman Bernanke threatened Lewis that the entire management of BofA would be fired if he didn’t complete the merger and conceal the financial mess Merrill Lynch was in from Bank of America’s shareholders. Paulson and Bernanke were in clear violation of US Securities law, according to the former SEC Chairman Harvey Pitt and other industry experts according to the Bloomberg News Story.

Bankruptcy Watch – Chrsyler

Thursday, April 23rd, 2009

According to the NY Times, the U.S. Treasury Department (translation: Tim Geithner) is preparing the paperwork for filing Chapter 11 next week when the April 30th deadline arrives and Chrysler hasn’t found a buyer.

Geither’s folks have been talking about surgical bankruptcies for both GM and Chrysler – splitting up the “good” and “bad” parts of the company, taking the good and giving them to the UAW and current workers – and leaving the bad parts with the creditors – but that’s not the way bankruptcy works. 

One creditor cannot dictate the terms of the bankruptcy settlement for the others, segregate assets for themselves and cut up the pie the way it wants  (putting the UAW’s claims in front of bondholders – for instance).   Neither can the “Debtor in Posession” do that (DIP is the entity runnning the company while it works through the bankruptcy). 

Those decisions are the role of the bankruptcy judge – and following the law and legal precedents of similar cases in the past.   The more creditors that agree on a single plan, the more likely the judge will accept that version of the plan. 

Section $1114 of the US bankruptcy code already has rules about how to deal with retiree health insurance when their former employer goes bankrupt.   In addition, special COBRA provisions have been added in the past few years allowing retirees to buy COBRA for the rest of their life, and a 65% tax credit to pay for most of it (if they are working for a company whose pension plan was taken over by the Pension Benefit Guaranty Corporation). 

[I am not a lawyer]

Update:  Daniel Howes writing for the Detroit News makes the same point.  He quotes Larry Denton, the former CEO of an auto parts supplier that has been through the process:

“If GM thinks they can package this in a 90-day period, that’s pretty naive. The judge can’t say, ‘I’m going to give this company a good deal here because of its size,'” Denton says. “He has to follow the law.”

Then again, the Rule of Law doesn’t seem to apply lately to the Obama administration’s actions.  Perhaps this is a dry run to see if Geithner can force through the GM bankruptcy in June on his terms.

The Next Crisis – Upside Down 401(k)s

Tuesday, April 21st, 2009

This will take a little longer than home mortgages to play out, but could be a much bigger disaster.

The types of people who “used the system” to “flip houses” and buy preconstruction condos (and are now the ones in default in the real estate mess) are the same types of people who would exploit the loopholes in 401(k) plans.

The 401(k) plan is intended to be savings for your retirement – so that we don’t wind up with a country full of poor senior citizens – but the politicians weakened the entire idea by allowing people to borrow using their 401(k) plan as collateral (originally only for an “emergency”, but that was further weakened).

First the rules:

  • You can only borrow 50% of your “vested balance”, up to a maximum of $50,000
  • You have to repay the loan in 5 years (with some exceptions)

So what some people do is deliberately withdraw their contributions right back out and spend the money – avoiding paying income taxes.  Thirty  years from now, they’ll deal with the unpaid loan balance – Live for today because we could die tomorrow.

But what happens if the “unthinkable” happens?   What if value of the investments in the 401(k) dropped by more than 50%?  Well, that could never happen of course.   The person with the 401(k) could end up owing more on their 401(k) loan than what the 401(k) is worth.    What happens then?  Forced repayment of the loan?   The 401(k) being liquidated by the trustee to pay off the loan balance?   Everyone closes their eyes and just Hopes things work out?

Well, there are 30 years left for the stock market to go back up, so why worry?  

For people trying to fend off foreclosure, borrowing against a 401(k) account is an obvious choice as there is no credit check  – the “loan” is just you borrowing you own money( right?).   You have 5 years to repay the loan back – and what’s the chance things won’t work themselves out in the next 5 years?

Tick. Tick. Tick.

Bankruptcy Watch – General Growth Properties

Thursday, April 16th, 2009

This one is huge and could directly affect you.  [Bloomberg story]

This bankruptcy has been rumored since before Christmas.  General Growth properties is the second largest shopping mall operator in the United States.  They owe $27 billion in debt they used to buy up around 200 shopping centers around the United States.

The debtor in possession which will run the company in bankruptcy is Pershing Share Capital Management, a private equity firm.

Japanese firm hires away traders from Bank of America

Thursday, April 9th, 2009

Reuters

Well, people warned Congress it would happen.

With the threat of punitive 90% taxes on their income and earnings caps on the truly talented in the financial services business becoming scapegoats, firms beyond the reach of Andrew Cuomo’s show trials and public intimidation are hiring away the very people who have the skills to prevent further collapse of the US banking and financial services industry.

Good job!… especially you Republican traitors in the U.S. House.

Arab Emirates to buy Textron – any problem with that?

Thursday, April 9th, 2009

Bloomberg

On a post over on the radio blog, I detailed how Textron got itself entangled in the Radio business.   Textron’s main products are Cessna airplanes and Bell Helicopters.  Textron is also involved in designing control systems for other military weapons.

Bell Helicopters are used by the US military and they were involved in building the new fleet of presidential helicopters that was just cancelled.  Textron was already obviously in finanical distress before that announcement.   The “war on private airplane travel” particularly hit Textron hard.

So today’s news is a group in the United Arab Emerites wants to buy Textron.  

Anyone have a problem with folks in the middle east owning the company that makes aircraft and weapon control systems for the US military, and  airplanes?

After all, we’re not at war with Islam – there is no risk here – we’re all part of the same community.

Manhattan Office vacancy rate approachs 10%

Tuesday, April 7th, 2009

Bloomberg reports

Office rents are falling, vacancy rates are approaching 10%, and construction of the new World Trade Center continues.

Anyone with an option is fleeing Manhattan, the smoking bans, transfat bans, proposed taxes on free bridges, higher income taxes, MTA claiming new budget shortfalls – and living and working in the most obvious target if/when there is another large terrorist attack.

Bankruptcy Watch – General Motors

Tuesday, April 7th, 2009

Reuters Story

“Intense Preparations” are underway preparing for a possible GM bankruptcy, along the lines of Geither’s plan – to split the company into a “good GM” and a “bad GM”.

Reading between the lines, it sounds like the decision has been made – in a company as complex as GM, it takes a while for lawyers to write up the paperwork and anticipate possible objections the court or other parties (including countries in Europe) may have.

If GM “goes”, the automotive parts business will likely follow – as well as serious damage to the bondholders (most of the value of the bonds has already been “written off”, but forces everyone to adjust their valuation)

But don’t worry – the Federal Reserve has lots of “money” it can create to keep funding cascading bailouts of the companies that fail.

Why there is no going back now

Thursday, April 2nd, 2009

A few of you are aware that in a previous life, I worked for a major equity trading venue (not the NYSE – think #2) doing programming and software design of electronic order matching (trading) systems.  People who personally knew Bernie Madoff from when he ran that market in the early 1990s made it clear they would rather I leave and stop pestering them about planning for the future – things like in 2000 and 2001 having a real disaster recovery plan in the event of a terrorist attack that destroyed our facility) – so it made my decision to leave in 2002 that much easier.

Many politicians – and radio people like Bob Brinker and Michael Savage – believe one of the root causes of the past year’s collapse of equity prices is to the end of a quaint rule called the “Short Sale Uptick Rule”.  

Without getting completely boring, the purpose of this rule in the 1930s was to allow the person who manages a stock on the NYSE (call the Specialist) to prevent a sudden fall in the stock of a price – by people who wanted to bet that the price will go down further by creating a stampede.   70 years ago, this was a really great idea to avoid market instability and prevent 1929 from happening again. 

If you wanted to sell IBM stock 40 years ago, your order was sent to New York on a teletype, printed out, hand carried to the specialist on the floor, and he would find a buyer or if nobody was buying – the specialist would directly buy your stock at a price that HE set.   Pricing information was delayed 15 or 20 minutes to the general public, so he had a lot of time to “work things out”.   Your sale reported on the “stock ticker”, a machine at your local stock broker so they could keep somewhat current on the day’s trading.

By controlling what traded when and at what price, the specialist (one person) could block a surge in selling using the “tick” when he did not want to be the buyer  (because he also believes the price is headed down and wants to get the prices adjusted lower first and get out of the way in the 15 minute window before the entire world found out).  

So if this rule was working so well to prevent market panics, why did the SEC allow exchanges to get rid of it in 2007?  The main answer:  Electronic trading.   Only the most inefficient markets now involve human decision making to routinely manage the trading of a market.    Note that “program trading” and “electronic trading” are different things.  Program trading is the computers for a customer making automated decisions to buy and sell.  Electronic Trading is the actual matching of buy and sell orders.   You don’t need electronic Trading to do Program Trading – but it does make it faster and potentially more dangerous to market stability.

With automated trading in 2009, the last sale price (which controls the uptick rule) can go up and down 100s of  times a second.  That crawl you see on the cable TV channels is no more real than the Pirates of the Caribbean ride at Disneyland.   It’s nothing but a snapshot of some recent stocks at a speed the human mind can absorb.

A TV picture only updates 30 times a second (computer monitors typically are 70-90 times/second). You just can’t enforce a rule like the uptick rule – even if you still thought it was a good idea.  A human being cannot absorb information at 100 times a second and certainly can’t click a mouse at the “right” time to not break the rule.  

Just how is an electronic market so different in 2009?  Here are the specs for the Universal Trading Platform  that NYSE Euronext is rolling out in Europe, and recently replaced the ARCA trading system that trades NYSE stocks in Chicago (not New York, Andrew Cuomo)

“Customers trading on NYSE Euronext European cash markets will realize reduced latencies […] of 150-400 microseconds per roundtrip on the Universal Trading Platform . In addition to delivering exceptionally fast transaction speed and system-wide reliability, the Universal Trading Platform sets new industry standards for capacity with the ability to handle 100,000 orders per second.“   (The system my group designed in 2001 was shooting for a target of 150 matches per second)

To put this in context, light (and electricity) travel at 186,000 miles per second.   In 400 microseconds, electricity travels only 74 miles.  400 microseconds is their “worst case” total time for the Euronext UTP to get an order, match it and give the answer back to the buyer and seller. 

There are other reasons the Uptick rule also makes no sense in 2009 – because stock options, single stock futures, ETFs (like SPDRs and contra ETFs that bet on an index going down) and a variety of other financial products allow people to “bet the market will keep going down” without any regard to whether the last sale that happened 572 microseconds ago was at a better or worse price than the 2nd older sale.  

Making things even uglier – there is no such thing now as “the exchange” where a stock is traded – no more than there is an “American Car”.  There are multiple trading platforms all trading the same stock at the same time all over the world.    By the time each trading venue “hears” about the last trade at another exchange, it is probably no longer the most recent trade.

This is why I described the NYSE trading floor as nothing but a TV studio living out the quaint fiction for the masses that there is still a trading floor.  Any humans you see on the floor are there for very little reason in 2009, and with each passing day there is less and less reason for humans to stand around on “Wall Street” in New York City.  

Mayor Bloomberg, Governor Paterson and Andrew Cuomo have no leverage over “Wall Street”to keep them under the jurisdiction of any part of New York State goverment – they just are too blinded by their own desire for power to realize it yet.   That’s especially odd in the case of Mayor Bloomberg – since his fortune was made on selling information to people on Wall Street, and knows every detail of the business. 

The Federal Government only has nominally more control because it controls the creation of US dollars by the US Treasury and Federal Reserve.  That power card has now been put on the table for the last time.  Globalism is going to win this fight, and that’s not a good thing if you believe in the values of the United States, individual freedom and representative government based on our national interests. 

But to finish on a positive note, Congress did solve that problem with Baseball Players taking steroids and Michael Vick is in jail for those dog fights.    We need to keep the inportant issues in focus.   Who do you think is going to win American Idol this season?

Bankruptcy Watch – Silicon Graphics files Chapter 11

Wednesday, April 1st, 2009

Reuters

Silicon Graphics makes high end servers for business and government customers – their niche in the computer business was high performance graphics systems like those used for Computer Aided Design (think car companies)