Category: regulation

Diving Deeper in the Financial Mess: Lehman and Bankruptcy Laws

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Well, it appears that while Lehman technically filed for chapter 11 reorg, because of changes to the laws the effect is much closer to that of a Chapter 7 liquidation, particularly with the 2005 changes to the bankruptcy laws.

The bullet points:

  • The holding company has filed for BK, but , its subsidiaries, “its brokerage-dealer subsidiaries, asset management unit, and investment management division”, continue to function.”
  • Lehman will try to sell off the good bits.
  • Under normal BK procedures, there is a stay on collecting debts, but, “most financial contracts — including securities contracts, swaps, repurchase agreements, commodities contracts, and forward trades — are unaffected by automatic stays.“
  • By declaring bankruptcies, it means the creditors can file to collect immediately.

So have this problem:

Now comes the downside potential. The risk is that lots of these commercial counterparties will choose to terminate their financial contracts with Lehman — say, for instance, credit default swaps — all at once, and then try to rehedge themselves all at once, causing the market to seize up.

But the market is already seized up.

The US financial system is in a pit of ugly, and no know knows which way is out.

Economics Update

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Obviously, with Merrill Lynch ceasing to exist as an independent entity, and Lehaman ceasing to exist completely, it has been a busy day.

This update, therefore just covers the more ordinary stories, as opposed to the 767s slamming into the US financial system, though many of these stories are in fact driven by the bigger stories.

Let’s start with one that has nothing to do with Lehman or Merrill, retail gasoline is up for the 3re time in 3 days, because Hurricane Ike has closed about 20% of US refining capacity.

We’ll see how this shakes out over the next few days, but we also now have another unrelated pice of news, that the New York Fed Manufacturing Index Decreased to -7.4 in September, indicating that it’s not just those Wall Street whores getting it up the ass, it’s all of us, which is why
credit card debt and delinquencies are up the past month.

And now on to the main show:

Eclipse 500 Certification Cleared by FAA

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There have been allegations that the Eclipse 500 was given a pass on issues in the FAA certification process, and an independent review team has just given the cert a clean bill of health.

There have been some issues with the aircraft since certification, trim, flaps, displays, and stall speeds, but there is no evidence that these showed up during the certification process, and were then swept under the rug:

The review came a little more than a month after congressman James Oberstar asked the Department of Transportation’s Office of Inspector General to investigate formal complaints that the aircraft was certified despite objections from FAA pilots and engineers working on the program, an allegation the review team did not find evidence of.

Of course, these problems still need to be addressed on some level, and Eclipse is still hemorrhaging money, so I’m firmly neutral on the future of the aircraft.

Economics Update

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Well, I guess that the lead story has to be Lehman Brothers, which appears to be collapsing Bear Stearns style, and looking for government funding of it’s eventual sale, Bear Stearns style, so negotions with potential buyers continue apace.

The Fed and the Treasury Department appear to be seriously twisting arms to make the deal go through, though they claim that there will be “no federal money” involved.

Seriously, all we are doing here is socializing losses. Nationalize the lot of them, throw out upper management, and go after their bonuses, otherwise, we will see more of the same.

Of course the fact that WaMu just had its ratings cut….again…Means that Paulson may have two things on his “to do” list this weekend.

There are already rumors that Washington Mutual is on the auction block.

In the real economy, the one that the rest of us live in, news ain’t great. The weekly job claims fell, but the 4 week moving average and the continuing claims, continue to rise.

Additionally, retail sales fell again in August, showing a continued weakening in the economy, as does the large gain in business inventory.

Real estate is looking worse and worse too, with foreclosures continuing to increase.

This has driven the dollar down, because it points toward the Fed cutting rates.

In energy, oil is continuing on a downward trend, because of hurricane Ike, selling briefly below $100/bbl (!), though the fact that it’s heading toward refineries is driving gasoline up.

I would note that this is actually normal market behavior. Knock out refineries, and the demand for oil decreases, and the price drops, but the demand for gasoline remains the same, so prices increase.

BTW, I’m not sure what is going on in insurance, but it is clear that American International Group is getting absolutely hammered, and when the subject of the short selling is the largest insurer in the world, something is whack.

Another Indictment of the LSI Concept

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Here is a good short article on the problems with the Lead System Integrator (LSI) concept from Bettina Chavanne , and I agree with his categorization of this as, “A Fox in the Henhouse”.

She raises the concern that she is , “not sure the military can run its own acquisition programs any better than private LSIs,” though, and I think that she is completely wrong here.

There is far greater accountability in the military, no golden parachutes, and the organizational imperatives are directed more towards military needs than to profits.

The real problem is that the entire defense procurement process is completely broken.

So, Now Bush and His Evil Minions&trade Are Claiming that the GSE Collapse is all the Fault of Congress

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What a group of WATBs.

But the White House blond bimbo, Dana Perino, is claiming that they could have fixed Fannie and Freddie, if not for those meddling kids Congress.

You know, this all occurred during a Republican controlled Congress…..You know….the folks who had their tongue so far up their ass that you never had to veto them even once.

Economics Update

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Seeing as how the nationalization-in-everything-but-name of the GSEs has been covered elsewhere on the blog, it won’t be here.

That being said, the response of the international markets, rising dollar and oil prices falling despite a hurricane pointed at the gulf, appear to be positive.

It comes from the fact that while shareholders will get F$#@ed, the foreign national banks and sovereign wealth funds which bought Fannie and Freddie paper are getting bailed out.

It also looks like the monoliner bond insurers are winners here too, at least that’s how their stocks reacted to the news.

This does not mean that the housing crisis is over, or even that it has bottomed out, which is why foreclosures hit a record high in Q2.

Additionally with the official unemployment rate spiking to a 5 year high, the rest of the economy sucks wet farts from dead pigeons too.

What’s more, as Krugman notes that the U6 numbers are positively grim.

The common reported number is U3, while U6 is:

Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons, as a percent of all civilian labor force plus all marginally attached workers

And U6 is higher than it was in the worst part of the 2001 recession:

It’s not just banking, real estate, or employment though; Paul Volker is saying that the current financial system, which relies on complex securitization, as opposed to conventional loans is very broken.

The best proof of this is that the bank of China is suffering a liquidity crisis, because its investments are illiquid.

Fannie and Freddie and Shady Accounting

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It appears that both firms grossly overstated their capital using accounting tricks, and the Morgan Stanley auditors hired caught the problems:

Indeed, one person briefed on the company’s finances said Freddie Mac had made accounting decisions that pushed losses into the future and postponed a capital shortfall until the fourth quarter of this year, which would not need to be disclosed until early 2009. Fannie Mae has used similar methods, but to a lesser degree, according to other people who have been briefed.

Some techniques used:

  • Not writing down their subprime and alt-A loans to market prices.
  • Counting deferred tax credits, which are worthless until a company generates a profit, as capital. (Only Fannie and Freddie have the right to do this)
  • Extending the default period on a loan before declaring a loss from 90 days to two years.

This is all stuff that only Fannie and Freddie could do. No other US bank is allowed to.

This is why the elimination of political and lobbying activities is important. The mess uncovered will become even bigger as normal accounting is applies.

It’s Official, GSEs Nationalized

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Upper management has been replaced, and Fannie Mae and Freddie Mac are under US government control.

They are calling it a conservatorship, but its nationalization.

Here is the story that everyone is missing though:

At the same time, dividends on both common and preferred shares will be eliminated in an effort to conserve about $2 billion annually. All of the firms’ lobbying and political activities will be halted immediately and charitable activities reviewed.

The GSEs dropping dividends is not surprising, to do otherwise would political suicide, but terminating their lobbying and other political activities changes the environment under which they operate, because it is their lobbying and other political activities that has allowed them to have such a favorable legislative and regulatory regime.

They are done.

Oh My God, They are Nationalizing Fannie and Freddie

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It appears that regulators have sent a letter notifying the GSEs of this, here and here, and the details will be announced tomorrow.

It won’t be called a nationalization, my money would be on “conservatorship”, but the share holders are rumored to get little to nothing, and management will be replaced by people who answer to the government

One of the interesting dynamics here, and one that is barely covered in the financial press is the fact that Fannie and Freddie have been aggressive lobbyists and soft money contributors (their employees are big hard money contributors) for years, and with a nationalization, that will stop.

This means that Congress will stop writing laws, and pressuring regulators, for the benefit of Fannie and Freddie, which is apt to lead to major changes in said laws, regulation, and oversight.

Comcast to Overturn FCC Order, and Lies About It’s Bandwith Limitations

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Comcast has filed suit in federal court, claiming that the FCC has no authority to require network neutrality.

Interestingly enough, one of their claims is that they had to institute their new hard bandwidth limitations because of the FCC ruling, which as Harold Feld notes, is another bald faced lie from them.

It turns out that the new 250 GB/month limit is as a result of a consent decree with the Florida Attorney General, who had taken action because Comcast was kicking off heavy users in an arbitrary and capricious manner.

As stipulated in the decree:

Comcast simply knocked off the highest 1000 users regardless of their actual bandwidth usage or geographic location.

While the top 1000 users out of 14.m million will doubtless be very high bandwidth users, the bell curve being what it is, this is a policy that is a complete mind f%$#.

Comcast is so evil that they make Verizon look nice.

And Now Phil “You’re All Whiners” Gramm Will Bankrupt the FDIC

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It appears that Gramm-Leach-Bliley created an instrument called a Certificate of Deposit Account Registry Service (CDARS) that allows you to deposit money in a one bank, and the CD is divided across a network, allowing for, “FDIC insurance on deposits of up to $50 million.”

Yet another way that Phill Gramm is a cancer on the body politic and the economic fabric of America.