This just in from Constellation Energy. The company was supposed to close on a $2 billion line of credit today that would have shored up its liquidity and increased its options. But RBS Securities and UBS Loan Finance will front only up to $1.25 billion now, and the deal might not close until Nov. 26.

Constellation is trying to make up the difference elsewhere -- including maybe with more cash from Warren Buffett's MidAmerican Energy Holdings, the company that has agreed to buy Constellation for the fire sale price of $4.7 billion. Buffett rescued Constellation in mid-September by injecting $1 billion, but he insisted on being able to buy the whole company as part of the agreement.

The Constellation/MidAmerican buyout must be approved by shareholders and the Public Service Commission. Last week I wrote about the chances that shareholders could reject the deal and Constellation could slip out of Buffett's grasp. It was always a long shot, but this lowers the chances even more.

From Constellation's press release:

Constellation Energy announced that the closing of the previously announced credit facility has been extended to no later than Nov. 26 and currently expects to receive total commitments from the banks of approximately $1.0 billion to $1.25 billion. The company also announced that it is exploring other alternatives with MidAmerican Energy Holdings Company and other parties to provide additional liquidity of up to $750 million.

"Despite the very challenging credit environment, we are making significant progress toward meeting our liquidity needs. We believe the combination of the $1.0 billion investment by MidAmerican, the expected size of the credit facility, and the progress toward and expected impact of achieving our strategic initiatives provides sufficient liquidity to manage our business and successfully close the merger," said [Constellation CEO Mayo] Shattuck.

Posted by Jay Hancock at 7:29 PM | Permalink | Comments (0)
Categories: BGE/electricity
        

Politico's Mike Allen has an excellent, helpful list of potential Obama appointees. (They promise a McCain list soon.) Here are the economics folks:

White House economic adviser: Austan Goolsbee, senior policy adviser to campaign and University of Chicago economics professor; Jason Furman, director of economic policy for the campaign; Michael Froman, former Treasury chief of staff, Citigroup executive and Harvard Law classmate with Obama

Treasury secretary: former Clinton treasury secretaries Larry Summers and Robert Rubin; FDIC Chairman Sheila C. Blair; New York Fed President Timothy Geithner, former Treasury under secretary and Assistant Secretary; former Federal Reserve hairman Paul Volcker.

Deputy Treasury secretary: Jake Siewert.

Environmental Protection Agency administrator: Former Sen. Lincoln Chafee (R-R.I.); Kathleen McGinty, former head of the Pennsylvania Environmental Protection Agency

Commerce secretary: Penny Pritzker; Kansas Gov. Kathleen Sebelius; Sen. Olympia Snowe (R-Maine).

Secretary of Labor: Former Rep. Richard Gephardt (D-Mo.); Andrew Stern, president of the Service Employees International Union; Kay Hagan of North Carolina (if she loses her challenge to U.S. Sen. Elizabeth Dole); Jeanne Shaheen, former New Hampshire governor (if she loses her challenge to U.S. Sen. John Sununu)

Secretary of Agriculture: Former Iowa Gov. Tom Vilsack; Rep. Collin Peterson (D-Minn.)

Posted by Jay Hancock at 6:28 PM | Permalink | Comments (0)
        

From the Telegraph:

A bank customer who criticised an "unhelpful" worker at an Indian call centre has alleged the clerk played a revenge prank on him by freezing his account and changing his identity to that of a Ugandan divorcee.

HT to Yves Smith.

Posted by Jay Hancock at 3:35 PM | Permalink | Comments (0)
        

I missed this yesterday. From the NYT:

Wall Street is coming under mounting political pressure to cut bonuses for top executives, traders and bankers in what was already expected to be a down year for pay.

Under pressure from members of Congress to curtail compensation, banks now face a new threat from Andrew M. Cuomo, the New York attorney general, who sent a letter on Wednesday to nine big financial institutions receiving government aid.

Mr. Cuomo gave the companies a week to provide a “detailed accounting regarding your expected payments to top management in the upcoming bonus season.”

That could prove difficult for the banks, which typically do not complete bonus pools until later this month at the earliest.

Mr. Cuomo’s letter also warned that payments worth more than the services provided by executives might violate New York law.

Posted by Jay Hancock at 10:39 AM | Permalink | Comments (0)
        

Like they were five years ago, economists again are talking about the dangers of deflation. A reader asks:

Could you explain what is bad about deflation? I understand why inflation is bad, and I presume that deflation is the opposite of inflation. If so, why is it bad if my money is increasing in value rather than decreasing?

The short answer is that deflation, like inflation, can kill demand and productive economic growth. First, inflation. Inflation is a persistent and broad increase in prices. It does damage two ways. 1) It drives up interest rates, which makes it more expensive to borrow, which hurts consumer and business demand. (High inflation causes lenders to demand high interest to compensate.) 2) Long-term, severe inflation distorts the price signals that are essential for efficient economies.

Deflation is a persistent and broad decrease in prices. Deflation arrives when there is too much productive capacity/supply and too little demand. (The real estate market, with 11 months' supply of empty homes trying to get sold, is the primo example.) When supply is too great relative to demand, companies cut prices. Lower prices mean lower profits, and lower profits cause debt defaults and layoffs, which reduces demand even more. Perhaps the most damaging deflationary outcome is when consumers stop spending because they see prices falling and figure the car they want will be cheaper in six months. So they wait. Then they may wait another six months, especially if they just got laid off. This puts new pressure on companies.

There is no macro deflation yet in the U.S. economy. True, car and house prices are falling. But it's not deflation until there is a broad and persistent fall in the overall consumer price index. Yesterday's interest-rate cut by the Federal Reserve was intended to flood the economy with money, spur borrowing and demand and forestall deflation. Eventually it will work.

Posted by Jay Hancock at 10:16 AM | Permalink | Comments (1)
        

Nice day. Up $5.

UPDATE: Posted too soon. There was a market downdraft in the last 10 minutes. Legg ended up $4, or 30 percent.

Posted by Jay Hancock at 4:04 PM | Permalink | Comments (0)
        

The Federal Reserve cut the target for its key interest rate to 1 percent, matching the rock-bottom hit a few years ago when Ben Bernanke said he would drop money from a helicopter if necessary to keep deflation from happening. Now deflation looks like an even bigger threat. This sentence is the Fed's communique is a beautiful understatement:

In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.

Posted by Jay Hancock at 2:25 PM | Permalink | Comments (1)
        

Great piece in Slate by Ray Fisman on researchers who have found that stock prices of companies likely to benefit from CIA coups d'etat rose in advance of the event. Exhibit A: United Fruit Co. and the outrageous toppling of Guatemala's democratically elected government in the 1950s. The academics speculate that government insiders were buying up United Fruit shares, knowing that the company was soon to get its Guatemalan plantations back.

Such trading on inside information is illegal, and when it involves highly classified details about a future CIA coup, it verges on treason. Yet the researchers found that prices of companies affected by the CIA's regime-toppling efforts—UFC in Guatemala, Anglo-Iranian (oil) in Iran, Anaconda (mining) in Chile, and American Sugar in Cuba—went up in the weeks and months preceding the coups. (The authors restrict their analysis to coups for which they had access to declassified planning documents and for which U.S. companies had had property nationalized by the targeted regimes.)

Posted by Jay Hancock at 1:13 PM | Permalink | Comments (0)
        

Alexey Mordashov, owner of Severstal Steel and Baltimore's Sparrows Point steel mill, has lost $16.6 billion in Russia's stock market crash, reports Smart Money magazine via a Russian daily. Severstal shares have fallen more than 80 percent.

Even so, Mordashov was quoted recently as saying: "We believe that we should continue investing in the United States. Total investment will hit around USD 6 billion by the end of next year.”

Posted by Jay Hancock at 11:53 AM | Permalink | Comments (0)
        

People keep asking me if Constellation Energy has cut its dividend. The answer is no. That doesn't mean it won't at some point. But it hasn't. Says a spokesman:

On October, 17th, the board declared a quarterly dividend of 47.75 cents per share on the company's common stock, equivalent to $1.91 per share annually. The dividend is payable Jan. 2, 2009, to shareholders of record at the close of business on Dec. 10, 2008. This dividend amount is consistent with the dividend we have paid the prior three quarters.

The company has said nothing about cutting future dividends.

Posted by Jay Hancock at 11:16 AM | Permalink | Comments (0)
        

The stock is up huge on today's earnings report, which was terrible. It's trading in the $16 range, up from $13. That means the earnings weren't as awful as people feared and there may be light at the end of the tunnel for Legg's exposure to soured structured investment vehicles.

The company is also talking about efficiencies, which means layoffs. Here is CEO Mark Fetting in this morning's communique:

We believe that the three pillars to support that outcome are: 1) superior investment performance over the long term; 2) world-class distribution capability here and abroad; 3) appropriate level of corporate services to achieve these goals in as efficient a manner as possible.

"While we are not satisfied with where we are, we have solid plans in
place to drive our three strategies forward. Immediately, we have
identified significant cost savings that will be implemented between now
and fiscal year end that will make us leaner and meaner. As we have stated,
our model, unlike others, automatically provides for reduced costs in
periods of lower revenue. But that is just the beginning. We will not rest
until we achieve all of our stated objectives."

Posted by Jay Hancock at 10:06 AM | Permalink | Comments (1)
        

Legg Mason lost $104 million for the September quarter. Assets under management fell $81 billion. CEO Mark Fetting says, "I have never been more convinced that we have the right model and strategy to take this company to the next level."

Baltimore's Legg Mason Inc. reported this morning its third straight quarterly loss because of continuing costs associated with shoring up some of its money market funds hurt by soured mortgage-backed investments.

The money manager said it had a fiscal second-quarter loss of $103.8 million, or 74 cents per diluted share, compared with a net income of $177.5 million, or $1.23 per diluted share, in the year-ago period.

The company's earnings were hurt by an after-tax charge of $191.1 million, or $1.35 a share, to support the money funds.

Assets under management fell 9 percent to $841.9 billion, from $922.8 billion in June, because of market losses, net client outflows and exchange rate impact from the strengthening dollar.

Posted by Jay Hancock at 9:48 AM | Permalink | Comments (0)
        

Today's column. First thing I noticed in the paper: I misspelled Wells Fargo CEO John Stumpf's name. Left off the "f." Heck. Read the whole thing here.

When taxpayers bailed out Chrysler Corp. in 1980, CEO Lee Iacocca acknowledged the extraordinary assistance with a sacrifice of his own. He cut his salary to a dollar a year and trimmed other executives' pay by up to a tenth.

"Although my reduced salary didn't mean I had to skip any meals, it still made a big statement in Detroit," Iacocca wrote in his autobiography. "It showed that we were all in this together. It showed that we could survive only if each of us tightened his belt."

Now, as the government launches a rescue a thousand times bigger, similar gestures are hard to find. At bank after bank uploading billions of government dollars, it's basically executive pay as usual.

Posted by Jay Hancock at 9:25 AM | Permalink | Comments (1)
        

This is stretching the definition of "OK," OK? But the 12 percent decrease in Maryland new car sales for September doesn't seem too bad when you look at the economic backdrop. Stocks were plunging, financiers were being bailed out and the end of the world was forecast in several places. New car sales were 26,751 in September 2008 vs. 30,248 in September 2007. Used-car sales dipped slightly -- 51,206 vs. 52,541. The most remakable thing besides the decreasing volume is the average price of a used car -- down to $7,800 from $8,500 last year.

Posted by Jay Hancock at 11:30 AM | Permalink | Comments (0)
        

Saturday's column, in case you missed it:

It's a beautiful idea: Constellation Energy shareholders reject the emergency merger with Warren Buffett's MidAmerican Energy Holdings, retake control of their company and watch the stock head back upward.

Baltimore gets to keep a Fortune 500 corporate headquarters.

And Constellation shareholders beat the planet's greatest investor at his own game.

It's not anything that big shareholders are counting on. For now, Buffett's deal is the only thing keeping Constellation stock from plunging even further than it has.

But it's not impossible. Buffett locked up Constellation at such a screaming bargain that shareholders of all stripes are dreaming of a Houdini scenario.

Such an outcome is almost certainly being discussed inside Constellation. ("We look forward to closing the transaction with MidAmerican and building our business," said spokesman Robert L. Gould after I asked.)

Posted by Jay Hancock at 10:28 AM | Permalink | Comments (3)
        

HT to Greg Mankiw for linking to this call for papers from Econ Journal Watch. Professional economists are invited to confess (anonymously) to any and all of the following. Of course this sort of intellectual shading goes on to some degree in almost every profession. All the more reason to promote the free speech and political checks and balances that can counter self-interested malarkey.

-- Building models one does not really believe to be useful or relevant.

-- Making simplifications that obscure or omit important things.
Using data one does not really believe in.

-- Focusing on the statistical significance of one’s findings while quietly doubting economic significance.

-- Engaging in data mining.

-- Drawing “policy implications” that one knows are inappropriate or misleading.

-- Keeping the discourse “between the 40 yard lines” so as to avoid being outspoken; knowingly eliding fundamental issues.

-- Tilting the flavor of policy judgments to make a paper more acceptable to referees, editors, publishers, or funders.

-- Disguising one’s methodological or ideological views, such as by omitting revealing activities or publications from one’s vitae.

-- For government, institute, or corporate economists: Having to significantly play along with things one does not believe in.

Posted by Jay Hancock at 10:23 AM | Permalink | Comments (1)
        

This is dramatic stuff. From AP via NYT:

Facing a firing line of questions from Washington lawmakers, Alan Greenspan, the former Federal Reserve chairman once considered the infallible maestro of the financial system, admitted on Thursday that he “made a mistake” in trusting that free markets could regulate themselves without government oversight.

Although he defended the use of derivatives in general, Mr. Greenspan, who left office in 2006, told members of the House Committee of Government Oversight and Reform that he was “partially” wrong in not having tried to regulate the market for credit default swaps.

But in a tense exchange with Representative Henry Waxman, the California Democrat who is chairman of the committee, Mr. Greenspan conceded a more serious flaw in his own philosophy that unfettered free markets sit at the root of a superior economy.

“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,” Mr. Greenspan said.

Referring to his free-market ideology, Mr. Greenspan added: “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”

Mr. Waxman pressed the former Fed chair to clarify his words. “In other words, you found that your view of the world, your ideology, was not right, it was not working,” Mr. Waxman said.

“Absolutely, precisely,” Mr. Greenspan replied. “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”

Posted by Jay Hancock at 1:25 PM | Permalink | Comments (4)
        

It's a big job, but somebody has to do it: Keep track of the bailouts. Grail Research says it has a Global Bailout Tracker. Presumably they need a Cray or maybe two or three to add it all up.

Grail’s Global Bailout Tracker is a comprehensive repository of bailout data, categorized by firm-level buyouts, country or regional bailouts, as well as country or regional financial guarantees.

So, how much money?

Total country or regional bailouts: $1.7 trillion

Financial institutions with the largest bailout packages:

Fannie Mae/Freddie Mac (U.S.) – $200 billion
AIG (U.S.) $85 billion
Hypo Real Estate Holding (Germany) – $68 billion
UBS (Switzerland) – $54 billion
Fortis Bank Nederland Holding (Netherlands) – $46 billion

Posted by Jay Hancock at 11:52 AM | Permalink | Comments (0)
        

From yesterday's NYT:

Some Regret Locking In Price for Oil

After the rapid run-up in oil and gas prices over the past two years, many consumers have been happy to see them subside in recent weeks.

But then there are those who tried to outsmart the market by signing contracts this summer — when prices peaked — locking in rates for delivering home heating oil through the winter. They will most likely end up paying more than their neighbors to heat their homes and apartments this winter.

Barbara Daley, who is 76 and lives on Long Island, signed up in September at $4.22 a gallon. Now, with prices around $3.10, she is looking for a little sympathy. Mrs. Daley said her heating oil company, which she did not want to antagonize by naming, told her it would cost $599 to terminate the contract — about what she paid to fill up her 250-gallon tank one time last winter.

“They said it might go up to $6, so I locked in a fixed price,” Mrs. Daley said. “I’ve been with this company 30, 35 years. You would think you would get some consideration. I’m not asking for the world.”

Posted by Jay Hancock at 11:01 AM | Permalink | Comments (1)
        

From AP:

WASHINGTON (AP) _ The number of homeowners ensnared in the foreclosure crisis grew by more than 70 percent in the third quarter of this year compared with the same period in 2007, according to data released Thursday.

Nationwide, nearly 766,000 homes received at least one foreclosure-related notice from July through September, up 71 percent from a year earlier, said foreclosure listing service RealtyTrac Inc.

By the end of the year, RealtyTrac expects more than a million bank-owned properties to have piled up on the market, representing around a third of all properties for sale in the U.S.

RealtyTrac monitors default notices, auction sale notices and bank repossessions. More than 250,000 properties were repossessed by lenders nationwide in the third quarter, 81,000 of which were taken back last month.

Six states — California, Florida, Arizona, Ohio, Michigan and Nevada — accounted for more than 60 percent of all foreclosure activity in the quarter, with California alone making up more than a quarter of all U.S. foreclosure filings.

Detroit and Atlanta were the only cities outside California, Florida, Nevada and Arizona to make RealtyTrac's list of the 20 hardest-hit metropolitan areas.

Posted by Jay Hancock at 10:27 AM | Permalink | Comments (0)
        

The Dow was down more than 500 today, coming close the multiyear, 8,451 low it hit a couple weeks ago. You can get a lot more where this came from at The Brokers With Hands On Their Faces Blog. When you get tired of that, check out Sad Guys On Trading Floors.

Posted by Jay Hancock at 4:18 PM | Permalink | Comments (1)
        

The Tax Foundation is out with its latest state-by-state tax rankings. Maryland does poorly. Thanks to last year's tax increases, Maryland fell from 24th to 45th. And now it's dead last in personal income taxes. Today's column refers to the study.

Posted by Jay Hancock at 12:07 PM | Permalink | Comments (2)
        

The London Interbank Offered Rate is down. The Treasury Eurodollar spread is down, and so are other credit-market indicators that were red-zoning last week.

Here's another indicator that stress is fading: Gold, the investment of last resort when everything else is going to heck, is down $27 this morning to $773 per ounce, its lowest point (except for a brief plunge in September) in more than a year.

Posted by Jay Hancock at 11:38 AM | Permalink | Comments (0)
        

From AP today:

On Tuesday, the Federal Reserve took more steps to break through a credit clog that has hobbled lending and threatens to plunge the country into a deeper recession. The central bank announced that it will start buying commercial paper — a crucial short-term funding mechanism many companies rely on for day-to-day operations — from money market mutual funds.

Posted by Jay Hancock at 10:38 AM | Permalink | Comments (0)
        

George Ferris dies. See Free Rasmussen's obituary here.

George M. Ferris Jr., whose career in the investment business spanned nearly six decades and who was chairman of the board of the investment firm of Ferris Baker Watts, died of a heart attack yesterday at the company's Washington office. He was 81.

He was named chairman of firm in 1988 after its merger with Baker Watts. Even though Ferris Baker Watts sold itself to RBC Dain Rauscher, a subsidiary of the Royal Bank of Canada earlier this year, Mr. Ferris remained as chairman of the board at his old company.

Posted by Jay Hancock at 10:32 AM | Permalink | Comments (0)
        

Broker/musician/economic analyst/rapper extraordinaire Gregg Somerville is back, with the latest musical/video installment on the subprime crisis, fabulous lyrics and even better production values. If you really want to understand the bailout and rock the socks off your office while you're at it, this is the place to go. Best verse:

Oh yeah I forgot they let Lehman fail

Dick Fuld was sure that he could make a sale

He tried to sell at last minute but it wasn't enough

The only guy that ever lost calling Paulson's bluff.

Posted by Jay Hancock at 10:45 AM | Permalink | Comments (0)
        

Civic-minded tycoons often see it as their duty to reassure the masses in times of financial crisis. It is also in their self-interest, as panicked markets do no good to those whose riches and power depend on stability. I do not believe we are entering another Depression. (In fact I switched about 6 percent of my 401(k) and IRA dough from cash into emerging-market and U.S. stock index funds yesterday.) Nevertheless, there is striking similarity between Warren Buffett's piece in today's NYT and J.D. Rockefeller's soothing utterances from 79 years ago.

John D. Rockefeller, Oct. 30, 1929:

"Believing that fundamental conditions of the country are sound and there is nothing in the business situation to warrant the destruction of values that has taken place on the exchanges during the past week, my son and I have for some days been purchasing sound common stocks. We are continuing and will continue our purchases in substantial amounts at levels which we believe represent sound investment values."

Warren Buffett, Oct. 17, 2008:

I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds... Fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now...

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Posted by Jay Hancock at 11:00 AM | Permalink | Comments (0)
        

In a homily in today's NYT, he says:

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Posted by Jay Hancock at 10:03 AM | Permalink | Comments (0)
        

Ms. Marian Moore's financial class at George Washington Carver Center for Arts and Technology (a Towson magnet high school, part of the Baltimore County Public School System) is full of smart cookies. They know the federal debt is $10 trillion. They know the U.S. consumes 25 percent of the world's oil and has much less in reserves. They know taxes at very high levels can suffocate growth. They know why recessions diminish public resources. We argued about the housing mess. We argued about the bailout. We argued about homeowner responsibility vs. business exploitation.

If these are the people who will run the country tomorrow, we're in good hands. The conversation was at a higher level than in many college classes I've addressed. It certainly blew away anything that happens in Congress.

Posted by Jay Hancock at 3:29 PM | Permalink | Comments (7)
        

Ed Yardeni is very wise, noting Henry Paulson's antipathy to hedge funds (huge, little-regulated investment pools) and the possibility that the Treasury secretary told the 9 bankers at Monday's confab not to use government money to lend to them. Plus, hedge funds are probably seeing huge redemptions at the end of the third quarter. Often partners can cash out once a quarter.

From Yardeni's daily email blast:

Godfather Hank Paulson gave hedge funds the kiss of death at a dinner with Lehman’s CEO on April 12, 2008. After the dinner, Dick Fuld sent one of his Lehman colleagues an email listing six “takeaways.” The fourth item was: “4-they want to kill the bad HFunds + heavily regulate the rest.” (See link below.) I'm not sure what a "bad" hedge fund means. In any case, Bazooka Paulson started gunning them all down when he let Lehman fail on September 14. That seriously disrupted their suppliers of cheap funds, i.e., Wall Street’s prime brokerage dealers. On Sunday, September 21, Goldman Sachs and Morgan Stanley received permission from the Fed (in record time) to get bank charters. On Monday of this week, Paulson forced the nine biggest banks to sell the Treasury non-voting preferred shares. It was an offer they were not permitted to refuse. He gave them $125bn in capital and made it very clear that they should lend to auto and home buyers and businesses.

I don't know who else was at the April 12 dinner, but odds are that Paulson has told all the bankers who now work for him that they better not lend a dime to hedge funds. So the hedge funds are raising cash by selling their positions in everything they can in one of the greatest fire sales in financial history. [Emphasis mine.] It is a Bonfire of Insanity. It is the mirror opposite of irrational exuberance.

Posted by Jay Hancock at 10:43 AM | Permalink | Comments (0)
        

James Grant, Baltimore Sun alumnus and financial Cassandra, sees a few buying opportunities in the stock market. One may be PHH Corp. whose fleet-management division is based in Baltimore County. The latest edition of the Grant's Interest Rate Observer letter expatiates on PHH stock. You have to subscribe to read Grant's, but the previews of the Oct. 17 edition include this teaser, which is obviously PHH. PHH's Chairman is Alex. Brown and CIA alum Buzzy Krongard. Can't tell what the ultimate recommendation is. (The stock's low, low price only "shades" the discussion about whether to buy, Grant says, but doesn't close it.)

ELEGY ON VALUE [COMPANY] formerly a cheap stock, is today a very cheap stock. That fact might close the investment discussion. Instead, it only shades it. You may recall--some readers will hardly be able to forget--our previous analyses of this provider of mortgage and fleet management services (Grant's, February 8 and May 16). We were bullish. At $19 or $20 a share, we pointed out, the stock was priced for the imputed value of the fleet management business alone. The mortgage and mortgage-servicing businesses came for free. Now, the price is $9 a share, or one-third of book value, and the mortgage businesses come cheaper than free. . . .

UPDATE: The stock just got even cheaper. It's below $8 this morning.

Posted by Jay Hancock at 10:01 AM | Permalink | Comments (0)
        

As many have pointed out, the scariest financial developments are not in the stock markets but in the credit markets. Lending institutions have almost stopped lending, and this is reflected in very high short-term interest rates. If you want a short-term leading indicator, don't watch the Dow. Watch short-term interest rates and associated metrics. Accrued Interest, published by an anonymous (at least to me) Baltimore-area bond Yoda, gives an excellent primer on what to look for and links to regular quotes, starting with the London Interbank Offered Rate.

Right now LIBOR and the other indicators flagged by Accrued Interest are the world's economic vital signs.

LIBOR has gotten plenty of press, but many have been focused on the TED spread, which is the yield differential between 90-day T-Bills and 90-Day LIBOR. TED is interesting in terms of historic comparison, but its the absolute level of LIBOR that is a better credit indicator right now. With T-Bill rates extremely low (0.19% as of 10/10), and intra-day T-Bill moves highly volatile, it would be entirely possible to see T-Bill rates rise by some degree without any significant improvement in conditions. Thus the TED spread would technically be tighter, but to no import.

Instead, watch 1-month and 3-month LIBOR rates. Both should be around 1.5-2%, based on where the Fed Funds target is. Watch Euro-denominated rates as well. A governmental guarantee of inter-bank loans would certainly drive LIBOR lower, as LIBOR is supposed to measure inter-bank lending rates. Otherwise I'd expect LIBOR to remain elevated until at least year-end.

Get various LIBOR rates, including international levels at the British Bankers' Association website.

UPDATE: For another list of credit vital signs and links, see Calculated Risk here.

Posted by Jay Hancock at 5:25 PM | Permalink | Comments (0)
        

Asian-based financier Marc Faber, true to the title of his Gloom, Boom and Doom report, says this to the Australian Broadcasting Corp. Sorry to be so negative today, but the bailout's wake is bringing out the naysayers.

Obviously, if the [U.S.] Government bails out the entire system, the credit of the Government diminishes and in my opinion Treasury bonds in the US should already be rated as junk bonds. I'm sure the US Government will eventually go bankrupt. Maybe not tomorrow, but as far as the eye can see, we will have deficits in the US Government, deficits of more than $1 trillion annually.

Posted by Jay Hancock at 3:07 PM | Permalink | Comments (3)
        

I was wondering what unthinkable thing governments could do next to save the world. One thing would be using taxpayer dollars to buy common stocks on the open market. We've already broken every other taboo, right? Let's go whole hog. Berkeley's Brad DeLong takes this a step farther: use the Social Security trust fund to buy stocks. That way SS assets get a chance to grow at a much faster rate than with the Treasuries they hold now. And the market gets propped up.

Now Might Be a Good Time to Take the Social Security Trust Fund Balance Out of Treasuries and Move It into Equities

Buy low, sell high after all.

Just saying...

Note that this would be different from the private accounts President Bush wanted. With private accounts, investment risk would be borne by the individual. If trustees put SS money into stocks, individual benefits would still be guaranteed.

Posted by Jay Hancock at 2:47 PM | Permalink | Comments (0)
        

Electricite de France, the state owned French electricity company, has decided not to make another offer for Baltimore's Constellation Energy Group. After an on-and-off interest in the owner of Baltimore Gas and Electric, EDF said today that "the current conditions are not conducive to presenting a new offer."

EDF had talked to Constellation several weeks ago as the American company's credit-rating came under pressure, but Constellation signed a deal to be bought by Warren Buffett's MidAmerican Energy Holdings for $26.50 a share. EDF has said its offer was $35 a share. Constellation is down $2.50 to $23 today. EDF's statement:

Given the current state of financial markets and in particular the difficult credit market for corporates, and after discussions with several potential American partners, EDF has determined that current conditions are not conducive to presenting a new offer for Constellation Energy Group. EDF confirms its objective of developing at least 4 EPRs in the United States in partnership with one or several American players and continues to review closely all possible options.

Posted by Jay Hancock at 2:18 PM | Permalink | Comments (0)
Categories: BGE/electricity
        

I always look forward to the quarterly analysis by bond managers Lacy Hunt and Van Hoisington at Hoisington Investment Management. Deeply grounded in economic history, they make their living forecasting how macroeconomic forces affect the bond market and particularly Treasury bonds. They have been right about the lack of long-term inflation, right about economic overcapacity generally, right about the housing bubble specifically and right about the value of long-term Treasuries. In the last 12 months the Wasatch-Hoisington U.S. Treasury Fund has returned 13.5 percent while the S&P 500 has lost 37 percent. In the last decade the Wasatch-Hoisington fund had returned 6.3 percent a year while the S&P 500 returned 2.3 percent a year.

Here is a chilling summary from their latest dispatch:

The present financial chaos is only the outer band of the economic hurricane yet to arrive. The economic fallout that follows a period of excessive debt increases and subsequent restriction of credit availability will carry over to the real side of the economy in the form of lower production, sales, jobs and profits. The winds of this economic downturn began long ago, and will not be meaningfully altered by federal or monetary authorities. Time will eventually cause this storm to pass, and prosperity will return, but two or three years of economic difficulties are unprecedented in modern times.

Posted by Jay Hancock at 11:45 AM | Permalink | Comments (0)
        

From Reuters.

NEW YORK (Reuters) - The Royal Bank of Scotland and UBS have begun syndicating a critical $2 billion liquidity facility for Constellation Energy Group, sources told Reuters Loan Pricing Corp.

Constellation Energy (CEG.N: Quote, Profile, Research, Stock Buzz) is currently subject of a takeover play by Warren Buffett's MidAmerican Energy Holdings and a potential joint bid by KKR and French utility EDF.

The loan is one of the few deals testing bank appetite in a generally frozen loan market. Constellation, which is under capital and financing pressure due to commodity and counterparty risk, is offering rich premiums to entice banks to support its facility, sources added.

With a 'BBB' rating profile, Constellation's financing is seen as key to the survival of its commodity trading business.

Posted by Jay Hancock at 5:56 PM | Permalink | Comments (3)
        

The Dow is treading water today, but commercial real estate, as gauged by the VNQ exchange-traded fund, is off more than 4 percent.

Posted by Jay Hancock at 12:13 PM | Permalink | Comments (0)
        

Hedge fund manager and blogger Barry Ritholtz keeps hammering the idea that poor people and government pressure to lend to them caused the financial catastrophe.

Goal: Increase Minority Homeowners by 5.5 Million in a Decade

Guess who's goal this was? You might be surprised:

"More and more people own their homes in America today. Two-thirds of all Americans own their homes, yet we have a problem here in America because few than half of the Hispanics and half the African Americans own the home. That's a home ownership gap. It's a -- it's a gap that we've got to work together to close for the good of our country, for the sake of a more hopeful future. We've got to work to knock down the barriers that have created a home ownership gap.

I set an ambitious goal. It's one that I believe we can achieve. It's a clear goal, that by the end of this decade we'll increase the number of minority homeowners by at least 5.5 million families . . .

Home ownership is also an important part of our economic vitality. If -- when we meet this project, this goal, according to our Secretary of Housing and Urban Development, we will have added an additional $256 billion to the economy by encouraging 5.5 million new home owners in America; the activity -- the economic activity stimulated with the additional purchasers, the additional buyers, the additional demand will be upwards of $256 billion. And that's important because it will help people find work."

- George W. Bush, U.S. President, October 15, 2002 1:55 P.M.

Last week, we mentioned this speech from 2004. Fast forward to today's excerpt, from an even earlier, 2002 speech.

Why keep bringing these up? Because it derails the false argument brewing amongst those on the right who blame the 1977 CRA or the 1938 Fannie Mae for the current housing and credit problem. I have zero patience for this nonsense, and am unafraid to call people on it.

Nothing in any of these Bush speeches that pushed for more lending to minorities and increased lower income home ownership caused the problem. Neither did any similar Clinton speeches. Nor did related the legislation related to the Bush speeches, nor did the CRA, nor Fannie Mae or Freddie Mac. Indeed, none of these actions required the sort of reckless lending that we saw from 2002-2007.

Understand this simple fact: In an ultra-low rate environment, where prices are appreciating rapidily, and mortgaes are being securitized, ALL THAT MATTERS IS THAT THE BORROWER NOT DEFAULT IN 90 days (or 6 Months). The goal was to make a loan that did not default in that period of time, it cannot be put back to the originator.

As a mortgage salesman, you only lose your a fee if a borrower defaults within 3 or 6 months. What do you do to maximize your returns? The best way to do that -- to put people in houses that would not default in 90 days -- was the 2/28 ARM mortgages. Cheap teaser rates for 24 months, then the big reset. By then, it was no longer your problem.

Can you grasp what a monumental change this was? Instead of making sure that borrowers could pay back ALL OF THE 30 YEAR FIXED MORTGAGE, you only had to find people who could afford the teaser rate for a a few months. THIS WAS AN ENORMOUS AND UNPRECEDENTED SHIFT IN LENDING.

This is the key to the hosuing boom and bust, anbd ultimately underlies the entire credit freeze. And, it would not have been possible without the Greenspan ultra-low rates, which made the teaser portion (the "2" of the 2/28) of these mortgages so attractive.

Those who continue to blame the CRA, Fannie Mae, etc. reveal their fundamental misunderstanding of how credit operates in general, what the financing process was like from 2002-07, and how this situation came to pass. Or worse, they understand it, and choose to lie about it anyway for partisan political purposes.

For an earlier Ritholtz rant on this subject, see here.

Posted by Jay Hancock at 10:46 AM | Permalink | Comments (3)
        

With today's blastoff, the Dow and S&P 500 have risen nearly 20 percent from their intraday lows on Thursday (Dow: 7885 -- 9388; S&P: 840 -- 1003). At least one definition considers a bull market to be an increase of 20 percent. Does this feel like a bull to you?

Posted by Jay Hancock at 4:21 PM | Permalink | Comments (1)
        

In solidarity with the credit markets, I am on a blogging strike until the Treasury Eurodollar spread falls below below 2 percentage points. Or until Monday, whichever comes first.

Posted by Jay Hancock at 7:59 PM | Permalink | Comments (1)
        

The Public Service Commission is hiring consultants to help it evaluate MidAmerican Energy's proposed buyout of Baltimore-based Constellation Energy.

The Maryland Public Service Commission issued two Request for Proposals today for expert consulting services to assist the Commission and the Commission Staff in evaluating, pursuant to Public Utility Companies Article 6-105, an expected application seeking the Commission's approval of an announced transaction between Constellation Energy Group Inc. and MidAmerican Energy Holdings Co.

"Through these RFPs, the Commission is seeking the best available experts to help us evaluate what we expect to be an important and complex transaction," said Commissin Chairman Douglas Nazarian. "Although no application has yet been filed, releasing these RFPs now will allow us to conduct a throrough, public analysis and meet the six-month deadline established in our statute."

Posted by Jay Hancock at 11:24 AM | Permalink | Comments (0)
        

Iceland is experiencing the prelude to what looks like a very, very severe downturn. From tomorrow's editions of The Times of London:

The Icelandic Government seized control of the country’s biggest banks last night in an attempt to fend off wholesale economic collapse.

Turmoil at the banks, whose shares were suspended by the Government yesterday afternoon, had sparked panic in the tiny state, which has a population roughly the size of Coventry.

Queues formed at petrol stations as Icelanders rushed to fill up before reported fuel shortages, while savers who tried to withdraw money from banks or sell bank shares on the internet found websites were not working.

In a late-night sitting, parliament approved a Bill giving the Government wideranging powers over the banks, including the ability to seize their assets, force them to merge or compel them to sell off their overseas subsidiaries, many of which are in London.

Icelandic banks have lent hundreds of billions of pounds overseas and their position in the world’s financial system far outweighs the size of the country’s tiny economy, the GDP of which was only $20 billion last year.

The country’s banks have been under pressure for most of the year, struggling with rampant inflation, the collapsing value of the currency and the general fallout from an overheated economy.

In Reykjavik, the capital, confusion reigned among a public unsure whether their savings and investments were safe, even after the Government moved to guarantee deposits. The country’s state surgeon even warned politicians and the media to ensure that they did not alarm old people.

Posted by Jay Hancock at 6:12 PM | Permalink | Comments (1)
        

Newsweek's Sharon Begley sums up what she calls the "shocking" decision to exclude Robert Gallo from the prize for discovering the AIDS virus.

It’s rare for the announcement of a Nobel prize in science to make researchers utter a collective “holy ****” (insert favorite expletive here), but the mandarins of Stockholm have managed to do it this morning...

The other half of the prize went to Françoise Barré-Sinoussi and Luc Montagnier for their discovery of the human immunodeficiency virus, or HIV, which causes AIDS. Without equivocation, the Nobel committee credits the two with the 1983 discovery of HIV in lymphocytes from patients in the early stages of what would soon be recognized as AIDS, and in blood from patients with late stage disease. The discovery, of course, led to the AIDS test and to tests to screen blood for HIV, limiting the spread of the pandemic. “The unprecedented development of several classes of new antiviral drugs is also a result of knowledge of the details of the viral replication cycle,” the Nobel citation adds.

The shock is not who is included but who is left out: Robert Gallo.

In the United States, at least, Gallo (then at NIH, now at the University of Maryland) was and is widely credited with co-discovering HIV. Uncounted web sites, books and articles assert that Gallo “is considered the co-discoverer, along with Luc Montagnier at the Pasteur Institute, of the human immunodeficiency virus (HIV),” as a PBS site puts it. “Gallo established that the virus causes acquired immunodeficiency syndrome (AIDS), something which Montagnier had not been able to do, and he developed the blood test for HIV, which remains a central tool in efforts to control the disease.”...

The fight for credit grew so bitter that, in 1987, Presidents Ronald Reagan of the U.S. and Jacques Chirac of France had to step in, signing an agreement that split royalties from the AIDS blood test between the two countries. And that’s where the dispute has stood—until the Nobel committee weighed in with a verdict that arguably carries more weight among scientists than any other: Montagnier’s lab, and only Montagnier’s lab, discovered HIV.

Posted by Jay Hancock at 4:11 PM | Permalink | Comments (0)
        

Barry Ritholtz says Jim Cramer's advice to pull any money you might need in the next five years out of the stock market might be "a giant buy signal," based on the notion that when the news media finally figure out that a trend is big REALLY BIG, it's probably close to being over.

As I have said in the past, I don't like to harp on any one person. I also don't want to be a Cramer stalker. But DAMN if that headline doesn't smell like a giant buy signal.

The market down 30%, the VIX spiking to 56, and Cramer giving a panicky SELL on TV this morning. We have a 9,500 downside target, and the likelihood of an emergency action makes us want to get long -- at least for a trade . . .

We are putting a toe in the water here.

Note -- he said "at least for a trade," which means short term! On Cramer: Of course, if you EVER need money in the next five years, it shouldn't be in stocks.

Posted by Jay Hancock at 12:36 PM | Permalink | Comments (1)
        

Here are responses from 1,006 Americans polled by Opinion Research for CNN last week. Question No. 34 is on whether people expect a new Great Depression.

As you may know, the U.S. went through a depression in the 1930s in which roughly one out of four workers were unemployed, banks failed across the country, and millions of ordinary Americans were temporarily homeless or unable to feed their families. Do you think it is very likely, somewhat likely, not very likely, or not likely at all that another depression like that could occur in the U.S.?

Very likely 21%

Somewhat likely 38%

Not very likely 29%

Not likely at all 13%

No opinion *

The correct answer is C) Not Very Likely. We are headed into a challenging recession, there is little doubt. But unemployment exceeding 20 percent, as we saw in the 1930s? Not very likely indeed. To the extent that the incumbent party gets blamed for economic pain, this is not good for McCain.

Posted by Jay Hancock at 12:15 PM | Permalink | Comments (2)
        

The market is not placing much confidence in talk that Electricite de France will beat Warren Buffett's bid for Constellation Energy. EDF had made a previous offer of $35 that was rejected and now is talking big about taking another look. But the stock is going for $28 and change, not much above Buffett's $26.50 price.

Posted by Jay Hancock at 12:43 PM | Permalink | Comments (3)
        

Good piece by the WSJ's Kimberly Strassel on the political courage of Wisconsin Congressman Paul Ryan and the grief he's taking for it.

If political leadership is hard to come by in Washington, it's because it invites political retribution. Just ask Republican Rep. Paul Ryan.

Mr. Ryan, perhaps the free market's truest friend in Congress, earlier this week voted to help rescue that free market. He hated the Paulson plan, but hated more the economic crash he is convinced will follow inaction. And in casting his "yes" vote on Monday, he knew what was coming: "The easiest thing would be to vote no and go hide in my office and watch the markets collapse. I will suffer politically for this, but I will sleep at night."

Posted by Jay Hancock at 9:09 AM | Permalink | Comments (1)
        

Wall Street hedge fund operator and blog proprietor Barry Ritholtz demolishes the contention that the liberal-inspired Community Reinvestment Act of 1977 and the Democrat-linked Fannie Mae caused the housing bubble.

Making the rounds amongst a certain subset of wingnuts on CNBC, at IBD and other selfconfoozled folks has been the meme that the entire housing and credit crisis traces to the the Community Reinvestment Act (CRA) of 1977. An alternative zombie myth is the credit crisis is due to Fannie Mae and Freddie Mac. A 1999 article from the New York Times about the GSE's role in subprime mortgages has been circulating as if its the rosetta stone of the credit crisis.

These memes have become a rallying cry -- cognitive dissonance writ large -- of those folks who have been pushing for greater and greater deregulation, and are now attempting to disown the results of their handiwork.

I feel compelled to set the record straight about this pseudo-intellectual detritus. As we have painstakingly discussed over the past few years, there were many direct and indirect causes of the current financial mess.

Let's clarify the causes of current circumstances. Ask yourself the following questions about the impact of the Community Reinvestment Act and/or the role of Fannie & Freddie:

• Did the 1977 legislation, or any other legislation since, require banks to not verify income or payment history of mortgage applicants?

• 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations. How was this caused by either CRA or GSEs ?

• What about "No Money Down" Mortgages (0% down payments) ? Were they required by the CRA? Fannie? Freddie?

• Explain the shift in Loan to value from 80% to 120%: What was it in the Act that changed this traditional lending requirement?

Read the whole thing here.

Posted by Jay Hancock at 12:08 PM | Permalink | Comments (7)
        

Carole Trivi, spokeswoman for Electricite de France, which made an earlier offer of $35 a share for Constellation Energy, says on the phone in response to a Financial Times story reporting that EDF and KKR are close to a new attempt to beat Warren Buffett's $26.50 bid for Constellation:

"We have no special comment about the FT story."

"We remain committed to opportunities in the U.S. nuclear industry. EDF is now reviewing all its options to increase the value of its investment in Constellation."

What about KKR? "We submitted a joint offer with KKR and TPG Capital" for Constellation, previously. "We are still studying different options... We are still in talks with KKR" regarding Constellation.

EDF owns nearly 10 percent of Contellation, the parent of BGE. From the FT story:

EDF is nearing a deal with private equity group KKR which it hopes could trump billionaire businessman Warren Buffett in his agreed $4.7bn takeover of Baltimore-based Constellation Energy.

Pierre Gadonneix, chief executive of the French electricity group, will meet KKR executives in the US this week to finalise details of a new assault on the company it had chosen as its bridgehead into North America, where it is looking to tap into the revival of civil nuclear power generation.

Posted by Jay Hancock at 10:48 AM | Permalink | Comments (0)
        

Legg Mason's Value Trust mutual fund is once again creaming the S&P 500 -- for the last two weeks. Bill Miller's fund, which famously beat the S&P year after year, has been performing miserably lately because of huge bets on housing and finance. But from Sept. 17 through yesterday, Value Trust is up 4 percent while the S&P 500 is basically flatlining.

UPDATE: I can't get the default chart on the link to show the last two weeks. You have to reset the start date for Sept. 17.

Posted by Jay Hancock at 10:11 AM | Permalink | Comments (0)
        

From a column two weeks ago, the day AIG was seized:

Henry Paulson could afford to apply tough love to Lehman Brothers, the investment company that entered bankruptcy proceedings this week. Lehman's collapse, the treasury secretary knew, would cause limited damage outside midtown Manhattan.

It is becoming increasingly apparent that Lehman's collapse triggered the start of an avalanche that required the serial bailouts since then. Here is a good story in today's NYT on how the crisis played out.

Posted by Jay Hancock at 9:54 AM | Permalink | Comments (0)
        

Whee! From the official Treasury national debt clock. What a great way to cap off the fiscal year.

9/30/2008

Current Debt Held by the Public: 5,808,691,665,403.71

Intragovernmental Holdings: 4,216,033,231,508.78

Total Public Debt Outstanding: 10,024,724,896,912.49

HT Calculated Risk.

Posted by Jay Hancock at 5:05 PM | Permalink | Comments (1)
        

story idea: Looking younger to save your career; plastic surgeon is the hero for middle-aged bankers...

Hi Jay,

I want to see if you would be interested in a story on how foreigners are saving the aesthetics industry in the US. While everything in the US appears to be on sale for foreigners, hitting up the plastic surgery office is on the “shopping lists” for millions of tourists.

One aesthetics specialist that we work with, Dr. Antonio Armani is a world-renowned hair transplant surgeon with offices in Dubai, Paris, Milan and Tokyo – but the branch that has the biggest business boom is his Los Angeles office. Let me know if you would like an interview with Dr. Armani on how his Beverly Hills business has been looking a lot more like the UN recently.

Posted by Jay Hancock at 2:37 PM | Permalink | Comments (0)
Categories: Stupid PR pitches
        

This looks like it'll be several cuts above the normal yackfest on the financial crisis. It's the 7th annual Business Law Conference at the University of Maryland/Baltimore. Friday from 8:45 to 3:45 at the law school. Open to the public, but you have to register (see below). Panelists are financial and regulatory players and include:

Ann Kappler, former Fannie Mae general counsel

Kathleen Ryan, Federal Reserve Board counsel

David Smith, U.S. House Committee on Financial Services chief economist

Paula Dubberly, Securities and Exchange Commission associate director

Thomas Perez, Maryland Department of Labor, Licensing and Regulation secretary

The full agenda and online registration are here.

Posted by Jay Hancock at 2:19 PM | Permalink | Comments (0)
        

Help for distressed homeowners in the new bailout bill. It's pretty vague (like everything else in the bill!), but here it is:

19 REQUESTS.—Upon any request arising under existing in20 vestment contracts, the Secretary shall consent, where ap21 propriate, and considering net present value to the tax22 payer, to reasonable requests for loss mitigation measures, 23 including term extensions, rate reductions, principal write 24 downs, increases in the proportion of loans within a trust 27 O:\AYO\AYO08C32.xml S.L.C. 1 or other structure allowed to be modified, or removal of 2 other limitation on modifications.

10 (b) HOMEOWNER ASSISTANCE BY AGENCIES.—
11 (1) IN GENERAL.—To the extent that the Fed12
eral property manager holds, owns, or controls mort13
gages, mortgage backed securities, and other assets
14 secured by residential real estate, including multi15
family housing, the Federal property manager shall
16 implement a plan that seeks to maximize assistance
17 for homeowners and use its authority to encourage
18 the servicers of the underlying mortgages, and con19
sidering net present value to the taxpayer, to take
20 advantage of the HOPE for Homeowners Program
21 under section 257 of the National Housing Act or
22 other available programs to minimize foreclosures.
23 (2) MODIFICATIONS.—In the case of a residen24
tial mortgage loan, modifications made under para25
graph (1) may include—
29

1 (A) reduction in interest rates;
2 (B) reduction of loan principal; and
3 (C) other similar modifications.
4 (3) TENANT PROTECTIONS.—In the case of
5 mortgages on residential rental properties, modifica6
tions made under paragraph (1) shall ensure—
7 (A) the continuation of any existing Fed8
eral, State, and local rental subsidies and pro9
tections; and
10 (B) that modifications take into account
11 the need for operating funds to maintain decent
12 and safe conditions at the property.
13 (4) TIMING.—Each Federal property manager
14 shall develop and begin implementation of the plan
15 required by this subsection not later than 60 days
16 after the date of enactment of this Act.

4 (c) ACTIONS WITH RESPECT TO SERVICERS.—In any
5 case in which a Federal property manager is not the owner
6 of a residential mortgage loan, but holds an interest in
7 obligations or pools of obligations secured by residential
8 mortgage loans, the Federal property manager shall—
9 (1) encourage implementation by the loan
10 servicers of loan modifications developed under sub11
section (b); and
12 (2) assist in facilitating any such modifications,
13 to the extent possible.

Posted by Jay Hancock at 12:42 PM | Permalink | Comments (0)
        

Among the extraordinary things going on in Washington this week is this: The SEC and the Financial Accounting Standards Board have given "additional guidance" on the rules for determining the value of mortgage bonds and other toxic assets on bank balance sheets. The problem is that very few of these securities are trading, so there's no price, so they're hard to value. But the effect of the guidance issued yesterday by SEC/FASB will have management puffing the value of bad assets.

Management can make "internal assumptions" about cash flows from dubious assets. They can even ignore market prices that are determined in "disorderly" transactions -- ie. fire sales. Try telling that to your mortgage lender -- "Hey, I lost my job and I was forced to sell my house. But it was a disorderly transaction, so the lousy price I got doesn't really reflect what the house is worth!"

It's no accident the guidance came hours before the end of the third quarter. Now companies will be able to get more creative in how they value assets on their third-quarter financial reports.

Baltimore's Jack Ciesielski, publisher of the Analyst's Accounting Observer, has some things to say about this on his blog (subscription required):

Memo to auto managers and other industrial players: Next time you go to Washington for a "relief package," be sure to ask for the accounting you want so that you can show investors that you didn't need the relief package at all. Hey, it seems to be working for the banks - at least to some degree.

The clock had only a few more hours on it before the calendar flipped over to October 1, ending the misery of the third quarter - and the SEC and the FASB issued a four-page immediate staff clarification on fair value accounting. Concurrently, Bailout Bill 2.0 was being crafted in Congress. You can't escape thetiming coincidences: end of quarter reporting by afflicted banks, new bill that might contain anti-fair value provisions, and new guidance that might defuse the issue in the bill. Hence, under these circumstances the new Statement 157 clarification was born.

And there's also the promise of FASB "preparing to propose additional interpretative guidance on fair value measurement under U.S. GAAP later this week." So don't go thinking that this "immediate clarification"is the last word, folks.

What does the new clarification do? Does it relieve firms from using fair value reporting in some fashion? No, not at all. Nor does it wipe out or completely refute portions of Statement 157 - it amplifies the parts of it that allowed the use of judgment in developing fair value estimates. Good news for those who feared that the SEC and FASB would revert to being total "cave" men and women, one supposes.

The bad news is that these interpretations will give a better hand to the managers arguing with auditors over fair values to report...

Does this mean that all fair value reporting is going to be a big lie? No - maybe just the fair value reporting that's done with dodgy disclosures. You know, kind of like what was in place before Statement 157 went into effect. Companies had to write financial assets down to fair values if necessary, but they didn't give enough disclosure about the methodology to give investors a toehold for investigating whether or not the writedowns were legitimate. THAT'S the biggest change wrought by Statement 157, not some new imposition of fair value reporting on banks.

Posted by Jay Hancock at 10:56 AM | Permalink | Comments (2)
        

From today's Washington Post:

There was a widespread sense on Capitol Hill that Monday's vote had snapped the public to attention about the potential repercussions of Congress's failure to act. Last week, House and Senate offices were bombarded with calls from opponents who viewed the bill as a Wall Street boondoggle. That call pattern shifted sharply after Monday's vote, aides to lawmakers in both parties said. "It's completely in the other direction now," said Michael Steel, a spokesman for House Minority Leader John A. Boehner (R-Ohio).

Posted by Jay Hancock at 9:29 AM | Permalink | Comments (1)