Daily Archives: September 17, 2008 @ 5:33 pm (Wednesday)

Equity prices dropping to takeover levels

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A while back I wrote about how shareholders were at risk of management selling them up the river with dilutive converts and the like.

But if a someone buys all the shares in a takeover they don’t have that risk.

Therefore, I concluded, equities would get cheap enough for a massive round of takeovers.

Now a different risk has presented itself. Seems when the Fed or the Treasury decides to step in and help they take 79.9% of the equity.

So when the stock of a too-big-to-fail prospect starts going down, the incentives are in place for it going down further/faster as the risk of government intervention increases.

Lower prices make takeovers even more attractive.

Once they get going, look for record takeover volume.


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Re: Commentary

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>   
>   On Wed, Sep 17, 2008 at 8:54 AM, Pat wrote:
>   
>   Summary of Michael Cloherty (BoA) assessment this morning:
>   
>   Following Reserve’s Primary Money Mkt Fund breaking the buck, we are looking
>   at possible structural changes to the funding markets depending on how the
>   money investor’s perception of Money Mkts funds safety is. Massive
>   withdrawals from this $4.6 trillion market could be devastating most of the
>   money would go to T-bills and bank deposits.
>   

all the t bills are already sold so what it does is bid up t bills to new indifference levels. quantity stays the same

yes, bank deposits would go up, and banks would invest in what the money funds were investing in, though perhaps at different spreads

the move to money markets was a disintermediating event.

instead of putting funds in banks, they put them in money funds

since ‘loans create deposits’ this changed the entire financial landscape

repo, commercial paper and other funding instruments replaced bank lending to create the newly desired money fund balances.

>   
>   This is rattling the repo markets which were already under enormous pressure.
>   The repo market relies on the MMKT funds cash to back it. “If withdrawals are
>   large enough we will head towards a bank financed system (as if balance sheets
>   weren’t crowded enough already). Liquidity could get worse”.
>   

with the falling desire for money fund balances vs bank deposits funding returns to the banking system.

>   
>   At the very least money market funds will be defensive and cash will be
>   expensive in the mornings as they switch to O/N repos and CP.
>   

yes, it’s all returning to bank funding at the moment, which means wider spreads for borrowers

we are now in the endgame of the great repricing of risk as previous business models go by the wayside and new ones emerge.

warren

>   
>   -Pat–
>   


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Bloomberg: Europe Trade Deficit Widens to Record on Exports, Energy Costs

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What’s happening is the world desire to net accumulate euro financial assets has increased and can only be achieved by the rest of the world net selling goods and services (or real assets) to the eurozone.

Europe Trade Deficit Widens to Record on Exports, Energy Costs

by Fergal O’Brien

Sept. 17 (Bloomberg) Europe’s trade gap widened to a record in July as a cooling global economy damped exports and crude oil’s advance to a record boosted the energy deficit.

The 15-nation euro region had a seasonally adjusted deficit of 6.4 billion euros ($9.1 billion), compared with a 3.5 billion-euro trade gap in June, the European Union’s statistics office in Luxembourg said today. The July deficit is the largest since the euro was introduced in 1999.

Euro-area exports to the U.S., the second-biggest buyer of the region’s goods, have fallen the most since 2003 this year as economic expansion there has eased. At the same time, record oil prices pushed up spending on imported fuels such as gasoline and heating oil by 41 percent, further widening the trade gap.

“On the one side, you’re getting weakness in exports and that then is feeding through to weaker industrial production,” said Marco Valli, an economist at Unicredit MIB in Milan. “On the other side, there is the oil prices and in July we will see the maximum impact of that, as oil peaked in early July.”

Crude oil reached a record $147.27 a barrel on July 11 and the euro region’s energy imports soared 41 percent to 151 billion euros in the first half, according to today’s report. The detailed data are published with a one-month lag.

The soaring energy costs boosted imports from Russia, which supplies 34 percent of Europe’s imported oil and 40 percent of its imported gas. Overall imports from Russia, home of OAO Gazprom, the world’s biggest gas producer, soared 22 percent in the first half and the euro area’s trade gap with the nation soared 25 percent to 20.4 billion euros, today’s report showed.

First-Half Decline
The detailed data for the January-June period also showed exports to the U.S., the world’s largest economy, fell 4 percent from a year earlier. That is the biggest first-half decline since a 9 percent drop in 2003. Shipments to the U.K., the euro area’s biggest trading partner, rose 1 percent.

The euro reached a record above $1.60 to the dollar in July, taking its gain over the previous 12 months to 15 percent. The euro’s strength undermines the competitiveness of European goods sold abroad. The currency was at $1.4224 today, down 11 percent from its record.

A slowdown in overseas sales has curbed production at Europe’s factories and dragged the region’s economy into its first contraction in almost a decade in the second quarter. Manufacturing activity has contracted for the last three months, according to a monthly survey of purchasing managers, while export orders have fallen for five months.

`Mightily Relieved’
“Euro-zone exporters will be mightily relieved by the recent marked retreat in the euro from its July peak,” said Howard Archer, chief European economist at Global Insight in London. “However, this is being countered by slowing global growth and a very uncertain outlook.”

Some companies have tried to offset falling U.S. orders by expanding in Asia and oil-exporting countries. Asian sales at French skin-creams maker Clarins SA rose 3 percent in the second quarter as North American sales fell by the same percentage.

Volkswagen AG, Europe’s biggest carmaker, on Sept. 8 said emerging markets will provide the fastest growth in worldwide sales over the next 10 years, led by economic expansion in Asia and Russia.

Europe’s trade deficit with China, which last year overtook the U.K. to become the euro area’s biggest supplier, narrowed by 1.2 percent to 49.9 billion euros in the six months through June. Exports to Asia’s second biggest economy rose 15 percent.

Economists had expected the euro region to show a trade deficit of 3.5 million euros in July, compared with an initially reported 3 billion-euro deficit in June, according to the median of nine estimates in a Bloomberg News survey.


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Fed loan to AIG

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My question remains: can they give the shareholders less than they would have gotten in a bankruptcy?

The burden of proof may be on the government to show that the shareholders are better off with the 20% of net worth they are giving them due to the value added of the loan facility, vs 100% of the net worth in a straight bankruptcy.

Press Release

Release Date: September 16, 2008

For release at 9:00 p.m. EDT

The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under Section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.

The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance.

The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.

The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility.

The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.


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