Three banks, three first quarter reports but has the risk profile changed?

Three banks, three profitable quarters. But hold the champagne. Strong trading results were behind the red ink at Citibank, Goldman Sachs, and JPMorgan. Core businesses remain weak; accounting quirks contributed to the bottomline. But the Great Recession is far from over.

The question I have: How have their risk profiles changed? Each has taken hefty sums of money from Uncle Sam via TARP but none has seen fundamental improvement to the business model. Trading gains don’t come without increased risk. A Citi spokesman told me that the bank has not taken undue risks (can you imagine him saying otherwise?). But something has to be up.Even with interest rates low, trading is by definition risky.

The Monster Under Our Bed: AIG’s Untold Story – via trueslant.com

Monster? What monster?

Six months into the bailout, American International Group asks in a PowerPoint presentation pitched to anxious regulators “AIG: Is the Risk Systemic?” It’s a real nail-biter. In fact, it’s a new literary genre, the mystery-horror slideshow. It may look like any other mind-numbing Wall Street deck — dense, disorganized, and repetitive — but like AIG itself, it’s both scarier and more bloated.

The central message: AIG is big, really big, really, really, really big and if anything were to happen to AIG, any of its affiliates, subsidiaries or distant cousins, taxpayers around the world would suffer. But don’t ask too many specific questions. AIG is the monster under your bed and as we speak it is plotting to swallow you and your dollars before you can ask even one question. Don’t try running down the hall to Mom and Dad. He’s already taken care of them.

To read the rest of this story, go to www.trueslant.com. Contact me for a beta logon via comments.

Image by Yvette Silver, www.yvettesilver.com

Jump in housing starts isn’t the kind of good news I like to hear about

We got some good numbers today: The market jumped 2.5%.  Wholesale prices rose in February for the second consecutive month, up 0.1% over January but down 1.3% from a year earlier. The shocker: Home construction jumped 22% on a seasonally adjusted basis; apartments accounted for 82% of the jump.

I am eager to see signs of recovery, but more home construction is not what we need. The backlog of homes for sale is about 13 months. In an exchange on www.greenfaucet.com, Michael Pento, chief economist for Delta Global Advisors,  concurs with this assessment:

“Increasing the rate of new home construction now is absurd. They shouldn’t be building anything over 2 hundred thousand new units at this time. How are we ever going to eat through the inventory?”

And it can only depress prices further.

China worried US may spend too much; seignorage as ‘too big to fail’

One trillion dollars of debt later  and China expresses concern about the fiscal habits of the United States. I have some great mortgages they should consider at much higher yields than US govvies. Perhaps China could hire one of the rating agencies for some due diligence.

The Associated Press reports (h/t www.twitter.com/tliacono):

“China is telling the U.S. to be careful, not to overspend and keep an eye on the dollar,” said Kelvin Lau, regional economist at Standard Chartered in Hong Kong. “There are risks that China cannot control, so they’re depending on the U.S. to maintain fiscal prudence and keep the dollar reasonably stable.” (emphasis added)

Analysts estimate China keeps nearly half of its $2 trillion in foreign currency reserves in U.S. Treasuries and notes issued by other government-affiliated agencies.

The AP story goes on to explain that Premier Wen’s speech about his concerns vis-a-vis the US sovereign debt is part of a power play ahead of the G-20 meeting of finance officials this weekend.

“Inside China there has been a lot of debate about whether they should continue to buy Treasuries,” said Frank Gong, chief China economist for JP Morgan.

Beijing is trying to increase its leverage at the London G-20 meeting by reminding its partners of its role in financing U.S. spending, Gong said.

“Without China’s buying (Treasuries) and continuing to fund U.S. deficit spending, interest rates could have been much higher. That could be very destabilizing in this very recessionary environment,” he said. “By attracting a lot of attention to this issue, China is already increasing its influence ahead of the G-20 meeting.”

Financial sabre-rattling. But if  the US and related agencies owe China $1 trillion would it really be wise to undermine the stability of dollar-denominated debt? The privileges of seignorage (i.e., as Numero Uno Debtor) in this century may be another term for “too big to fail” — maybe even too big threaten.

Fitch downgrades Berkshire Hathaway as China frets about US debt — is it really ‘AAA’?

Even though they were critical enablers of the mortgage bubble, the rating agencies  have lost little of their power. Both Treasury and investors quiver before these private agencies. Uncle Sam came to the rescue of AIG for the third time in seven months in part because the Administration feared a ratings downgrade. A ratings downgrade would have triggered yet another liquidity crisis for the hobbled giant. Why do these agencies still have so much unfettered power?

But just to prove that it doesn’t easily hand out AAA ratings anymore, Fitch has slapped down Berkshire Hathaway, reducing its senior unsecured debt to AA because of concerns about its equity and derivatives holdings. So take that Warren. You dare to dabble in der*v*t*v*s?  And at your age? Well, that’s not exactly what Fitch said. Fitch is merely concerned what would happen if Buffet is unable to fulfill his duties as Miss America, I mean, chief financial officer. Bloomberg reports that Fitch is no agist:

“Fitch views this risk as unrelated to Mr. Buffett’s age, but rather Fitch’s belief that Berkshire’s record of outstanding long-term investment results and the company’s ability to identify and purchase attractive operating companies is intimately tied to Mr. Buffett,” Fitch said. Buffett is 78.

It’s good to know that Fitch Rating won’t be sued for dissing a senior citizen. Rather, the agency is concerned with $37.1 billion in derivatives contracts based on four stock indices from around the world. But Todd Sullivan cogently argues in his ValuePlays blog that the contracts are highly unlikely to undermine Berkshire’s profitability and are indeed most likely to boost profits. (H/T to www.twitter.com/TraderAlamo for the citation.) In assessing the contracts, Sullivan makes a number of assumptions about the distribution of the contracts and the rate of growth in the markets over the next 16 years (the length of the contracts). His key point: In order to lose money, the S&P 500, for example, would need to go to zero. If that happens, well, the world as we know it wouldn’t be worth the paper a triple-A Ginnie Mae is printed on. Sullivan concludes:

“The reality this is just another insurance policy for Berkshire. In the event of a dramatic event they pay off big, anything less, they collect premiums.”

Once, almost anything seemed to qualify for triple-A rating. Now almost nothing does. It’s the flip side of the dumbing down of ratings. The Bloomberg story goes on to quote an asset manager who tries to explain the reasoning of the Fitch move:

The downgrade isn’t surprising because the deteriorating economy is leading to increased uncertainty about all financial companies, said Michael Yoshikami, chief investment strategist at YCMNet Advisors. …

“Triple-A in the end is probably going to be left for the Treasury when it’s all said and done,” said Yoshikami, whose Walnut Creek, California-based firm oversees $800 million and owns Berkshire Hathaway shares. “You’re seeing the rating agencies taking an abundance of caution at this point.”

Thanks for the abundance of caution: Does the caution also apply to sovereign debt? The No. 1 lender to the leader of the free world would essentially like to know just how solid the AAA rating is for the US Treasury. The top story on Bloomberg’s homepage (just a hop away from the Berkshire item) reports:

China, the U.S. government’s largest creditor, is “worried” about its holdings of Treasuries and wants assurances that the investment is safe, Premier Wen Jiabao said.

“We have lent a huge amount of money to the United States,” Wen said today at a press conference in Beijing that marked the closure of the annual National People’s Congress meeting. “Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried. I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

Treasurys dropped 3.1 % in January and 0.5 % last month, according to Merrill Lynch’s Master Index. The 10-year note backed up 0.03% on the premier’s speech, Bloomberg reports, to yield 2.89%.

I would strongly urge Premier Wen to contact the US credit rating agencies immediately for assurance. At the moment, they seem to be the ultimate arbiter of the safety and soundness of our system.

Psst: Citi Turned a Profit — Is that Really Cause for a Rally?

Everytime I’m out on Mom-patrol the markets rally like it’s 2005.  Citi, whose stock price looks as if it never sleeps, let it slip that it was profitable in the first two months of 2009. In response, the markets surged 5.8% Tuesday; Citi surged to $1.45 from $1.02/share. The markets must have been looking for a reason to rally because I would like to know how the bank couldn’t have turned a profit: It can borrow money practically for free and then can charge a great deal to borrowers.

John Crudele in The New York Post sums up the skepticism that many feel about the leak from Citi’s fearless leader, Vikram Pandit:

… a couple of things trouble me.

First off, if Citi is suddenly profitable, I assume it won’t be needing any more bailout money from me and other taxpayers.

Second, if what Pandit is saying is correct why didn’t he make the news public in the traditional way so that Citi employees who got his memo couldn’t, ya’ know, engage in illegal insider trading?

Third, exactly what the hell is Pandit talking about?

Is the profit that Citi allegedly has on an operating basis – meaning that it comes from day-to-day business?

Surely it can’t include extraordinary items like all those nasty, worthless loans we’ve been hearing so much about.

Since Washington is lending money to Citi at virtually no inter est rate, and the bank is turn ing around and giving out loans at still fairly healthy rates, it isn’t really a sur prise that even Pandit can make money.

On the surface, Citi may be fine, but what’s underneath?

The Wall Street analysts who follow Citi still expect it to report a loss of $2.8 billion in the first quarter and a $5.7 billion loss for the full year.

Citi is expected to report results around April 21, so we’ll see whether Pandit can justify what was unofficially leaked yesterday.

Gallows humor for Citi, the penny stock

There was a time when CitGroup unit Smith Barney didn’t allow its brokers to trade stocks priced at under $10. Today, Citi briefly dipped below $1/share before clawing its way back past the dollar mark to close at $1.02, the most active stock traded today at 575 million shares. Five of the 30 components in the Dow Jones Industrial average are trading under $10/share: Citi, Alcoa, Bank of America, GE, and General Motors.

The fate of Citi’s stock brought out plenty of gallows humor from StockTwits:

 

• IRON100 Mar. 05 at 4:17 PM #
• $$ Wondering if $C will trade low enough that I can buy it (with what I have in my wallet lol).

  Ticker: C

• 
• mrmarket Mar. 05 at 4:17 PM #

• Good Gosh who in the hell wants to take Citi’s place in the Dow Jones? I would be begging for then not to include my company. $$

 stringsn88keys Mar. 05 at 4:16 PM # 

• You have to break a few eggs to make an omelet. $C, $GM

  Ticker: C GM

 

• WhatTheTrading Mar. 05 at 4:13 PM #
• I went to pay my $C credit card with $C stock and got an “insufficient fund” notice

  Ticker: C

Stripping the market of irrational exuberance – the view from Twitterville

Remember when Alan Greenspan first accused the market of “irrational exuberance”? In his blog The Big Picture, Barry Ritholtz  reminds us: It was December 1996 and the S&P500 stood at 744.38.  Today, the  index blew through that number to land at 700; the Dow is only a few hundred points away from where it stood back then.

On and off throughout the day, I checked into StockTwits and Twitter to take measure of reactions to the Dow breaking through 7000, a first in nearly 12 years.  Oil plunged 10% and Treasurys (those “safe” investments) rallied. Some wondered if today’s market devastation signalled a bottom (yet again?) while others seemed to be stunned at the barrage of bad news: AIG announced that it had managed to lose a record-shattering $61 billion in the fourth quarter. In response, AIG’s sugar daddy, aka  Uncle Sam, offered another $30 billion to fill in some of that hole. Good news was summarily dismissed: consumer spending, reported up 0.4% in January, the first advance in seven months, was simply viewed as  statistical white noise, the WSJ reported.  

Below, I present some of the thoughts exchanged on Twitter and StockTwits. I think it gives pretty good sense of how the day felt.

from the LOW of 1929 (195.35) the dow lost 79% of its value before it reached its ultimate low of 40.56 in 1932 (alphatrends)

reading some Biryni stuff – 2002 bull mkt, 40% of entire gain in financials occurred in first twenty days – rebuts idea that small caps lead (tradefast)

I should have guessed it’d be $AIG getting me my DOW 6k print. Wonder if betting it all in ultrashort ETFs will cover my portion of the $30B  (brycebaril)

only 3 stocks making 52 week highs today (kunal00)

Covered all of my shorts, including longs in $ERY and $DUG (still long 5k). 75% cash here. (The_Real_fly)

trade idea: if lose job have no cash flow even if job waiting immediately file for chapter 13 rid yourself of second lien, walk from house (gmrobertson)

AIG posted loss today nearly as big as the amount of money the US spends on 7.3 mln prisoners & parolees: $68 bln (nancefinance)

 

And courtesy of The Big Picture, a graphic image of  the S&P500 in 1996 , the Ur-period of “irrational exuberance.”

Citi CEO says US believes in privately held banks; Volcker says capitalism to survive – what next?

Reuters released a letter today from embattled Citigroup CEO Vikram Pandit assuring employees that the bank is fine, just fine (no numbers provided, thank you) and that the US believes in a privately held banking system. The letter doesn’t provide a link to the Wall Street Journal story saying Treasury plans on boosting its stake in the ailing giant.

He signs the letter simply “Vikram.”

Only this past Friday former Fed Chairman Paul Volcker stated that he believed capitalism will survive this crisis. What will our next assurance be –a statement from the ratings agencies  that  US Treasury securities will always be AAA-rated?

Here’s the text of the Vikram Pandit letter (hat tip to ericjackson for the link):

Dear Colleagues:

As you know, financial markets around the world remained under great pressure this week, again fueling speculation about additional intervention in financial institutions by the U.S. government. As we continue to navigate these unprecedented times, I want to reassure you that I remain very confident in Citi’s prospects and business position around the world. Our Tier 1 capital base is very strong and is one of the strongest in the financial services industry. Additionally, we continue to focus and make progress on reducing the assets on our balance sheet, reducing expenses and streamlining our business for future profitable growth.

While rumors and speculation persist in the market, I want to highlight for you statements earlier today from U.S. government officials. The White House reiterated that it “continues to strongly believe that a privately held banking system is the correct way to go.” Additionally, the U.S. Treasury Department said it “plans to preserve a financial system that is owned and managed by the private sector.”

I know how challenging these times are, and ask only that you continue your outstanding work in serving our clients and customers around the world. Your hard work is generating results that we are seeing on a daily basis. We need to continue to do our part to instill confidence in the financial system. Building confidence starts with each and every one of us communicating the strength of Citi to our clients and customers every day.

With our presence in more than 100 countries, Citi continues to be uniquely positioned to benefit when the global economies rebound. Thank you for your continued effort and dedication.

Vikram

CEOs who built the financial house of cards should return ill-gotten compensation

The New York Times ran an excellent story on Sunday analyzing the payouts to top executives at seven ailing financial firms from 2005 . The net total: $464 million. Yet since 2007, those firms have lost in excess of $107 billion.

This story is different from other analyses of bonus payments, most notably the 2008 outlays. The Times story correctly notes, in my view, that the executives who earned all that money in those allegedly profitable days — when firms began heavily pushing subprime mortgage lending — should be returning what are clearly ill-gotten goods. As I’ve written before, most of the people left on Wall Street are scrambling to fix what their predecessors destroyed. Let’s aim our opprobrium at the true villains.