1-2 Knockout

Bernanke, Take My Breath Away

(Hat Tip: KW)

BAC Tells Orangemen to Get Lost

From today's BAC conference call:

"All I can say at this point is we don’t intend to guarantee the public debt but we do understand the ramifications of not paying at maturity. We’ll keep you informed as we continue to integrate the Countrywide transaction."

Later:

"Betsy Graseck - Morgan Stanley

On the point that you mentioned regarding the Countrywide debt where you indicated that you understand the ramifications of not paying, it’s kind of open-ended. I just wonder if you could clarify a little bit what you’re implications are there?

Joe Price

We don’t really have anything else to add to what I said earlier, responded to earlier. We’ll continue to work through the process and when we decide what the ultimate legal and entity structures look like, how we’re going to operate, all the other parameters, we’ll let you know, but that’s kind of where we are right now.

Betsy Graseck - Morgan Stanley

Is there a possibility that you might at some point fully bring the CFC subsidiary into the Bank of America?

Joe Price

Haven’t made any decisions on that."

Buyer's remorse? Already?  Ouch.

Venture Capitalism in Football (Soccer) Players

Tyler Cowen, if you're reading, this certainly fits in your "Markets in Everything" aisle:

From the NYT:

SÃO PAULO, Brazil — Some co-workers are sitting around their office here on a recent Monday afternoon, dissecting the weekend’s soccer matches and picking their top players.

One of the men likes a talented fullback. Another wants a player who has been scoring regularly for a top second division team. And the boss is keen to sign a teenage defender whose contract is up soon.

It could be a fantasy football draft in any office in America — only these trades are real. This is the office of Traffic, a Brazilian company leading a new, and controversial, wave of investment in Brazilian soccer.

WFC Lays Bear Trap on Wall St.

Today's Wall Street darling is a little old bank from the left coast, Wells Fargo.  The transcontinental horse-back messenger service bank, largely expected to begin an arduous write-off period, surprised analysts by beating their ever sage estimates guesses by $.03 (.53 v .50 est).  The stock bounced 30% on the news.  Unfortunately, WFC's earnings are actually a mine field waiting to blow the legs off some unwitting retail investor.

Most notably, Wells Fargo changed their charge-off policy this quarter for home equity mortgages.  Traditionally they recognized losses after 120 days; now it's 180 days.  Oh, and did I mention they did it to protect homeowners?  From page 4 of their 8-K:

“...the Home Equity charge-off policy changed in the second quarter from 120 days to no more than 180 days to provide more time to work with customers to solve their credit problems and keep them in their homes. The Company has helped nearly 900 customers, and approximately $90 million of Home Equity loans have been modified due to this change."

I know what you must should be asking yourself: what effect did this have on their earnings.  Curiously you have to turn to the next page for that information, divided into two paragraphs, which surely was for clarity obfuscation.

"The policy change had the effect of deferring an estimated $265 million of charge-offs from the second quarter…”

Well, now that Cox solved that problem...

Cox made his "no short selling" announcement at 12:51 (according to Bloomberg).  Expecting the end of the worst, investors bid up shares 9%, only to realize that maybe it wasn't the naked shorts 'who dun it'.

We've Seen This Before

Hey, remember the time large financial entities, implicitly backed a market's liquidity?  The whole problem was created by a duration mis-match between assets and liabilities.  To "serve their clients", provide "temporary relief" and mainain an "orderly market in times of strain" the banks backstopped the rollovers when the regular buyers ceased to come back for more.

I remember.

It worked for awhile.  Until it didn't.

Just a thought.

Define Irony

Does anyone else find it interesting that, up until this point, the entire SEC investigation into rumor-mongering in the downfall of BSC is based on nothing more than unsubstantiated rumors?

Credit Crisis Contagion Kills Celluloid

Thanks, I know, amazing title, right?

Anyways, the credit crisis has struck another victim (from the FT):

The credit crunch has hit home in Hollywood after Paramount Pictures, which has released a string of hit movies this year, was forced to suspend plans for a $450m film financing.

The studio has been working with Deutsche Bank on a financing that would have provided funds for up to 30 films, including possible blockbusters such as the sequel to Transformers and a new version of Star Trek.

However, Deutsche has decided to close its film finance unit and concentrate on other areas. With the Paramount deal proving difficult to close because of a market-wide lack of enthusiasm for the senior debt component of the deal, the financing has effectively been left in limbo...

...While Deutsche’s decision to close its film unit is a blow for Paramount, the films affected by the deal are still likely to be released as scheduled.

But if the studio fails to revive the deal with another bank it could force Paramount to seek funds from Viacom, the media conglomerate that owns the studio, to produce the titles. This would expose the company to greater financial risk if the films fail to perform as expected.

Well Thank God We Have the GSEs!

It seems to me that there are exceedingly few government entities that actually do what they were set up to do.  Whether through the law of unintended consequences, politically motivated 'drift', or just plain failing management, these agencies pervert their 'jobs' on a regular basis.  For a case in point I give you the Fannie Mae "who we are" write-up.  Emphasis is mine; my snide comments are in blue italics.

Fannie Mae provides stability, liquidity, and affordability to the nation's housing finance system under all economic conditions. Well, thank god we have the GSE's to provide "stability, liquidity and affordable houses".  Without them we may find ourselves in a housing/credit crisis, too few homes on the market (sarcasm), and expensive (yet declining) houses.  We are a shareholder-owned company with a public mission. "We privatize the profits, and socialize the risk just as Moussilini would have wanted."  We exist to expand affordable housing (unless congressional pressure tells us we can't let house prices fall) and bring global capital to local communities that give the most money to congress in order to serve the U.S. housing market help incumbents get re-elected.

Fannie Mae has a federal charter and operates in America's secondary mortgage market to ensure that mortgage bankers and other lenders have enough funds to lend to home buyers at low rates. Seeing as how we had more money flowing into the RE sector than we knew what to do with (that's how you get a bubble), at rates too low to compensate for the riskiness of loans, what problem did this solve again? Our job is to help those who house America.

Fannie Mae was created in 1938, under President Franklin D. Roosevelt, at a time when millions of families could not become homeowners, or risked losing their homes, for lack of a consistent supply of mortgage funds across America.  This line should read "we now have the honor of being the first of the Socialist New Deal programs to fail, but you should expect the others to follow suit shortly.  Go us!"

The government established Fannie Mae in order to expand the flow of mortgage funds in all communities, at all times, under all economic conditions, and to help lower the costs to buy a home. HAHA! "at all times, under all economic conditions"  Well, it seems like the GSE's lent when the private market was functional and lending, but now, when we "theoretically" (open to debate) need the new loans for stability FNM and FRE are unable to provide them.  Phew, what would we do without all their help.

In 1968, Fannie Mae was re-chartered by Congress as a shareholder-owned company, funded solely with private capital raised from investors on Wall Street and around the world. Unless they need my capital.

Fannie Mae has a unique duty to the public it serves -- and the private investors that fuel its service -- to be a model company focused on service, reliability, and value. No comment.

Like all who participate in the housing market, Fannie Mae has a responsibility to help home buyers, homeowners, and communities through market challenges. We believe in the long term health of America's housing market. The nation is growing and that growth will bring a renewed demand for housing and for responsible, sustainable mortgage lending. Fannie Mae will be there to help meet America's changing housing needs.  We'll see, won't we.

It's also important to note that, by definition, to provide "low cost" loans means providing loans that are not expensive enough to cover their risks.  If the loan rate was enough to cover those risks and a profit margin they loans would cost exactly what the market charged.  Suffice it to say, the GSEs are performing EXACTLY AS SHOULD HAVE BEEN EXPECTED.

Bondholders 2 - Taxpayers -365,743

Generally companies facing insolvency don't see their debt climb...

NEW YORK, July 11 (Reuters) - Debt of Fannie Mae and Freddie Mac  soared in their best one-day gain in history on Friday amid speculation that a government takeover of the housing giants would make the bonds more like ultra-safe U.S. Treasuries...

...But that also means a credit-quality downgrade for U.S. Treasury debt, which slumped, investors said.

Thank god I get the junk Fannie and Freddie trade in for the t-bills.

UPDATE: In you haven't seen it, i present to you the first page of any Fannie Mae prospectus (emphasis theirs!):

Fannie Mae Guaranty

We guarantee that the holders of the certificates will receive timely payments of interest and principal. We alone are responsible for making payments under our guaranty. The certificates and payments of principal and interest on the certificates are not guaranteed by the United States, and do not constitute a debt or obligation of the United States or any of its agencies or instrumentalities other than Fannie Mae.