Tag Archives: Lehman

Bloomberg: Thoughts on Treasury plan

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My take is an RTC type solution only works when the government owns the institutions, so this will probably be different.

I suspect it will be more like Japan, where the government bought a new class of preferred stock in the banks to add capital.

Whatever they will do will cause credit spreads to come in, which will make the assets of AIG far more valuable and probably result in a ‘profit’ for the government.

Unsold Lehman assets will also appreciate.

More comments below:

Paulson, Bernanke Push New Plan to Cleanse Books

by Alison Vekshin and Dawn Kopecki

Government Options
Options that U.S. officials are considering include establishing an $800 billion fund to purchase so-called failed assets

I see this as problematic as above and as below.

and a separate $400 billion pool at the Federal Deposit Insurance Corp. to insure investors in money-market funds, said two people briefed by congressional staff. They spoke on condition of anonymity because the plans may change.

This puts money funds on par with insured bank deposits. Seems no need for both.

Instead, better to remove the $100,000 cap on bank deposit insurance to allow large investors use bank deposits safely. There is no economic reason for the low cap in any case.

Another possibility is using Fannie and Freddie, the federally chartered mortgage-finance companies seized by the government last week, to buy assets, one of the people said.

That’s already in place. They already have treasury funding to buy mortgages.

“We will try to put a bill together and do it fairly quickly,” House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, said after the meeting. “We are not in a position to give you any specifics right now” on the proposals, he said when asked about the potential cost.

The likelihood of the government taking on yet more devalued assets, after the seizures of Fannie, Freddie and AIG and the earlier assumption by the Fed of $29 billion of Bear Stearns Cos. investments, may spur concern about its own balance sheet.

We need to get past this concern about government solvency. It’s simply not an operational issue.

Debt Concern
The Treasury has pledged to buy up to $200 billion of Fannie and Freddie stock to keep them solvent, while the Fed agreed Sept. 16 to an $85 billion bridge loan to AIG. The Treasury also plans to buy $5 billion of mortgage-backed debt this month under an emergency program.

“It sounds like there’s going to be a giant dumpster for illiquid assets,” said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan, which oversees $22 billion in assets. “It brings up the more troubling question of whether the U.S. government is big enough to take on this whole problem, relative” to the size of the American economy, he said.

This is ridiculous and part of the problem that got us to this point.


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Racing to the bottom

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Here’s how I see the problem:

  1. The Fed and Treasury have set precedents of, for all practical purposes, wiping out shareholders when providing what they consider ‘taxpayer money at risk’.
  1. With FNMA, the Treasury provided funding on their own initiative without consent of management.

 
 
Therefore, while justified or not, this means the government can, on its own, decide to provide ‘taxpayer money’ AND eliminate all shareholder value.

This creates a serious risk for any shareholder for ANY business.

For an extreme example, the Treasury could decide unilaterally, that ANY corporation (including, for the strongest example, GE) needs a Treasury guarantee to be sure it can fund itself and won’t fail.

And any such action could carry with it eliminating any/all shareholder value.

This is the risk to Lehman shareholders.

Lehman may be perfectly able to function at some level without the need of new capital to survive.

But markets must now discount that possibility that the Treasury or Fed could decide Lehman’s counterparty risk poses sufficient systemic risk to justify intervention with ‘taxpayer money’ at risk, which would carry with it the elimination of all shareholder value.

The means the risk to shareholders from government intervention is much higher than the risk of bankruptcy or any other form of liquidation.

There was no economic reason for the Treasury to take 79.9% of the housing agencies capital. ‘Tax payer money’ was already as senior as the Treasury wanted it, and any funds added by Treasury also carried any type of interest and various other payments the Treasury desired.

All that wiping out most of the residual value for shareholders did was add a new element of catastrophic risk for all shareholders.

So when a stock like Lehman goes down, which increases the perception of risk of government intervention, the risk of shareholder value going to zero due to government intervention increases as well.

Not my first choice of institutional structure.


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Reuters: Lehman cuts oil demand forecast

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Lehman cuts oil demand forecast

by Richard Valdmanis

(Reuters) Investment bank Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz) said Wednesday it slashed its forecast for 2008 world oil demand growth due to a steeper-than-expected slowdown in energy consumption in the United States and other OECD countries.

Lehman added it believes the oil market is “approaching a tipping point” with prices expected to decline to an average of $90 a barrel in the first quarter of 2009.

“We now forecast annual oil demand for 2008 at 86.3 million barrels per day, a growth of 790,000 bpd from 2007. The growth has been revised down from projections of 1.5 million bpd in December,” Lehman said in a research note titled ‘Demand Demolition’.

If true, and non-Saudi supply remains about flat, Saudi production might fall to about 9 million bpd and the price would still remain wherever the Saudis set it.

There has been some talk that the Saudis may have agreed to lower prices after the last round of meetings with US officials. Could be, but with their output running within a million or two bpd of their total capacity, it seems doubtful they would do anything to increase demand before they have the excess capacity to meet it. But there could be other factors (including the US 7th fleet and concerns about a united Iran/Iraq threatening them) that might be influencing their decision. Only time and prices will tell. Should be more clear in a week or so.


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8:30 Numbers

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Consensus was high enough, let’s see how tomorrow turns out.

Also retail sales up a lot more than just energy prices, and claims down.

Still no sign yet of aggregate demand breaking down

Lehman earnings higher than estimates

November Inflation Surged; Retail Sales Also Strong

Inflation at the wholesale level was stronger than expected in November, thanks to higher gasoline prices, but retail sales also exceeded expectations as holiday shoppers coped with higher energy costs and the fallout from the housing slump.

U.S. producer prices surged at a 34-year high rate of 3.2 percent in November on a record rise in gasoline prices, the Labor Department said.

Excluding food and energy prices, the producer price index rose an unexpectedly large 0.4 percent, the heftiest gain since February, the report showed. When cars and light trucks also were stripped out, core producer prices rose 0.1 percent.

Autos had been lagging if I recall correctly, so was this overdue?

The rise in prices paid at the farm and factory gate was the largest since August 1973 and was well ahead of analysts’ expectations of a 1.5 percent gain. Analysts polled by Reuters had forecast core prices to rise 0.2 percent.

The 7.2 percent increase in producer prices from November 2006 was the largest 12-month gain since November 1981.

Gasoline prices rose 34.8 percent in the month, eclipsing the previous record gain of 28.8 percent in April 1999. Prices for all energy goods also rose by a record 14.1 percent, surpassing the previous high of 13.4 percent recorded in January 1990.

Sales at U.S. retailers posted a much stronger-than-expected 1.2 percent rise in November, government data showed as holiday shoppers coped with high energy costs and the fallout from a housing slump.

Excluding autos, retail sales gained 1.8 percent, the Commerce Department said.

Surprising on the upside.

Economists polled by Reuters forecast retail sales to rise 0.6 percent while sales ex autos were also projected to increase by 0.6 percent.

However, part of the increase was fueled by mounting energy prices, with gasoline sales spurting 6.8 percent higher in November, which was the largest monthly gain since September 2005 in the wake of Hurricane Katrina.

Still, sales excluding gasoline and autos gained 1.1 percent in November after growing just 0.1 percent in the previous month.

First-time claims for U.S. unemployment benefits eased by a slightly more-than-expected 7,000 last week, a Labor Department report showed.

New applications for state unemployment insurance benefits fell to a seasonally adjusted 333,000 in the week ended Dec. 8 from an upwardly revised 340,000 the week before. Analysts polled by Reuters were expecting claims to ease to 335,000 from the previously reported 338,000.

This means the fed still sees no slack in the labor markets.

The four-week moving average of new claims, which smooths out week-to-week fluctuations, fell slightly to 338,750 from a revised 340,750 the prior week.

The number of people continuing to receive jobless benefits after an initial week of aid rose to 2.64 million in the week ended Dec. 1, the most recent week for which statistics are available. Analysts had forecast claims would hold steady at 2.60 million.

The four-week moving average of continued claims rose to 2.61 million, the highest level since the week ended Jan. 7, 2006.

Not good, but not anywhere near bad enough to offset the other numbers reported.

Yesterdays is up 0.9% export number adding to US income and aggregate demand supporting retail sales as well.

Inflation per se is good for nominal equity prices, while the fed fighting inflation with higher rates hurts valuations.

A perceived stronger than expected economy and diminished odds of future rate cuts also likely to shift portfolio allocations back toward the $.

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