I had a strange feeling of deja vu as I left work on Friday. MF Global had dropped precipitously after a poor second quarter earnings report came out on Tuesday and there were numerous reports that they were looking to sell. Then on Friday word came out that ratings agency Fitch had downgraded their debt to junk status. (more…)
Two weeks ago we wrote about how Warren Buffett asked the government to “Stop Coddling the Rich,” in an op ed piece in the New York Times. While his piece angered some conservatives, the important point he made was that wealthy investors, like himsef, look for profitable investments and do not greatly alter their strategy due to tax policy. So those arguing against any increase in taxes for the top tier of earners or changes in the carried interest rules due to its impact on investment and job growth are making a false argument.
Recently he made news by investing in— or bailing out depending on your point of view — Bank of America. BofA stock had dropped significantly, to a low of $6.01, due to worries it still had a large exposure to mortgage backed securities and it lacked appropriate capital to back these positions.
Buffett’s firm Berkshire Hathaway, similar to deals he made with Goldman Sachs and GE in the heart of the credit crisis, pumped $5 billion into the struggling bank. Canaccord Genuity provided some details and based on what we have seen, we aren’t any more confident in BofA but we understand how Buffett got so rich.
If the details of the deal are correct it seems to underscore how desperate BofA is and also how Buffett has become so successful.
According to Canaccord Genuity, Buffett will receive a 6% annual dividend for the preferred stock, which BofA can buy back at any time by paying Buffett a 5% premium. Berkshire Hathaway will also receive warrants to purchase 700 million shares of BofA common stock at an exercise price of about $7.14 a share at any point over the 10 years following the closing date of the transaction.
That means if some time in the next 10 years BofA stock rises to say $27.50 per share, roughly half of its pre-crisis high of $55.08, Berkshire Hathaway and Buffet would profit roughly $14 billion. Heck the stock was above $15, more than double the exercise price, at the beginning of 2011.
The deal helped BofA stock rise 40% from its more than two-year low. Despite this BofA appears not to be in the clear as they continue sell off assets and others are seeing the details of Buffett’s investment and drawing similar conclusions.
Bloomberg reported on Monday that trading in credit default swaps on U.S. Government debt had increased 57% in 2011 according to Depository Trust & Clearing Corp. (DTCC) data. According to the story the market priced in a 4.56% chance of a default by September 2016. The cost to hedge that risk climbed 17 basis points since the beginning of April to 53 bps. (more…)
Today is the one-year anniversary of the Dodd–Frank Wall Street Reform and Consumer Protection Act. Funny as it only seemed like yesterday that we were trying to understand the various components of the massive legislation as Congress debated it.
There hasn’t been a piece of legislation so debated, maligned and blamed for negative consequences prior to most of the underlying elements of it going into affect since, well since the Obama Heath Care reform, the 2010 Patient Protection and Affordable Care Act, or PPACA.
Credit ratings agency Standard & Poor’s roiled the markets yesterday with a pronouncement that it has placed the United States of America’s “’AAA’ long-term and ‘A-1+’ short-term sovereign credit ratings on CreditWatch with negative implications.”
This comes on the heels of a possible Moody’s downgrade announcement a day prior. “Moody’s Investors Service has placed the Aaa bond rating of the government of the United States on review for possible downgrade given the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on U.S. Treasury debt obligations.”
We sometimes get too busy to comment on some important issues as was the case with last month’s announcement that Standard & Poor’s revised its outlook on the long-term AAA rating of U.S. debt to negative from stable. It caused a stir especially from tea party folks and GOPers who only discovered the budget deficit recently.
What struck me most about the announcement was the source. Frankly, I can’t give much credence to any of the official ratings agencies who arguably are the most guilty entity in our current economic crisis. They are the ones that slapped AAA ratings on the toxic subprime assets behind the crisis and who had conflicts of interests with those that created those securities. Turns out their current analysis may not be much better. Jay Feuerstein talks about how they are off the mark in a recent op ed piece titled “S&P is dead wrong about U.S. debt.”
In pointing out the ongoing difficult with the economy, Federal Reserve Board Chairman Ben Bernanke stressed high unemployment and foreclosure rates. The foreclosure rate comment is particularly disturbing in that the Fed had made a point with its various emergency liquidity actions during the crisis that returning a flow of credit to American families and businesses was a priority.
While the Fed made sure the banks got theirs, there has been no sign of diligence from the Fed on the rest. Why didn’t someone ask Ben specifically what have you done to “restore the flow of credit to American families and businesses” or more specifically, why didn’t you make the largesse you offered the banking sector conditioned on restoring that flow of credit.
Last night while channel surfing I came across CSPAN and saw Neil M. Barofsky, the special inspector general for the Troubled Asset Relief Program (TARP), testifying before a Congressional committee. The discussion was disturbing and the conclusions that were drawn were equally disturbing. The conclusions were basically that TARP succeeded in bailing out the large investment banks but failed in its other mission. Specifically in getting credit flowing to help small business and individual Americans—you know the folks who paid for it — and create jobs. (more…)
Mohamed El-Erian, chief executive and co-chief investment officer of PIMCO, wrote an op-ed piece for Reuters today stating that “the time has come for a more decisive European approach,” referring to the acute debt problems in peripheral European nations i.e. the PIIGS.
The occasion was yesterday’s action where Portugal’s parliament rejected the government’s austerity budget, which led to the government’s collapse as the Prime Minister resigned and new elections will be forthcoming.
“The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done. If we accept this notion, it will happen again…. It falls to us to make different choices if we want different results.”
These are the words of the task force that wrote the Financial Crisis Inquiry Report released in January. These 10 commissioners were tasked by Congress to determine what caused the 2008 financial meltdown. After hearing about possible exemptions of certain firms from the Dodd-Frank Act by those in Congress, I read this report. It irks me that some of those responsible are the loudest naysayers of reform. Even the task force notes: “Some on Wall Street and in Washington with a stake in the status quo may be tempted to wipe from memory the events of this crisis….” So let’s have at it…what were the group’s main conclusions? (more…)
