'It could be structured by cows and we would rate it,' said a Standard & Poor's analytical staffer in an inter-office e-mail exchange with another staffer concerning a newly assembled structured mortgage debt product. Another staffer's in-house e-mail chimes in with: '....Let's hope we are all wealthy and retired by the time this house of cards falters.;O).' All of this, according to a story in today's Wall Street Journal.
Its pretty darn clear folks, that there was a systematic breakdown of checks and balances througout the financial system at pretty much every juncture. And it was all caused by moral hazard due to the abdication of responsibility and total lack of proper risk controls all in the name of profit motives. Meanwhile, as this mess unfolds, those in charge of protecting the public good are chasing their own shadows; tracking down innocent scapegoats. The U.S. Securities and Exchange Commision and its Commissioner, Christopher Cox, in particular, have totally lost its moorings.
As Cox goes rooting around everywhere exept where the crimes have occured, he concerns himself with evil short-selling speculators, many of whom have done a tremendous public service by voicing their concerns about the U.S. banking system's house of cards, the real perpetrators of the history's most obcesne credit bubble go mostly unpunished. Additionally, as Merrill Lynch (MER) announces this past week its plans for a massive new round of capital raising, after reporting earnings just weeks ago, the U.S. Congress and Senate are busily holding hearings in efforts to track down evil speculators in the oil futures market. Another dysfunctional effort by many of the folks more responsible for skyrocketing oil prices than anyone that has ever actually purchased a crude oil futures contract. All of this, as Merrill Lynch and its CEO, John Thain, quite possibly violated SEC disclosure laws by failing to report the disclosure of material events.
Specifically, Merrill Lynch (MER) said on Monday, unexpectedly, that it is selling more than $30 billion in mortgage assets, specifically “super-senior” tranches of CDOs, at 22-cents on the dollar to private equity firm, Lone Star Capital. Merrill is financing 75% of that purchase which equates to receiving just 5.5% of its original $30-billion notional value in cash. Imagine what non-super junior tranches of the same crap may be worth and what this may mean for many banks and brokers that were hoping to “mark-to-market” said crap at a rate that may go unnoticed by yours truly and my ilk (evil short sellers). In essence, given that Merrill is financing 75% of Lone Star’s purchase, it can almost be viewed as putting this asset out on consignment. Merrill also said it plans to raise about $8.5 billion in new common stock. This is also an onerous maneuver given that an earlier issuance of stock this year to Temasek Holdings, a Singapore state-owned investment company, had stipulated that compensation would be due in the event that Merrill went to market at a lower price. Temasek Holdings sunk $6.2 billion in Merrill stock at $48 a share earlier this year. Its closing price yesterday is $26.85—equates to a tidy 44% haircut. Merrill said at the time that if it sold stock at a lower price within 12 months, it would compensate the $48-a-share investors. According to Bloomberg, the compensation to Temasek will cost Merrill Lynch another $2.5 billion. However, Temasek has apparently agreed to “average down” and has agreed to dump the punitive sum back into Merrill’s latest offering. The incredible and surprising capital rasining effort coupled with a purging of $30-billion in notional value toxins not only smacks of desperation, given the heavy toll of the maneaver, but more incredible (and unlikely) is that Mr. Thain did not see this coming. Even on its conference call roughly two weeks prior, following its earanings announcement, Thain declared that he was in a "comfortable spot" in terms of capital. Furthermore, Thain said that "Our core franchise continues to perform well despite the extremely challenging market environment." Indeed, its performing so well, that two weeks later, Thain and his company resort to just about the most onerous form of capital raising effort conceivable. Of course, shares of Merrill Lynch rallied to as high as $34/share in the week following Thain's polyanish utterances. Were you romanced into making a purchase during that week, at prices as much as 50% higher than what Thain himself was able to purchase for himself on July 29th (500,000 shares at $22.50 each)? Well too bad, becasue the U.S. Securities and Exchange Commission couldn't give a rat's ass about anyone stupid enough to beleive John Thain.
Perhaps Mr. Cox might actually find some wrong-doers if he looked in the places where the misdeeds have actually occurred, i.e. the investment banks, instead of chasing after the folks that now appear to have gotten it right, "evil" short sellers. Isn't that the way capitalism is supposed to work? Reward dilligence, intelligence and ingenuity and punish greed, mismanagement, stupidity and the total abdication of responsibilty? Profiting at the expense of these firms’ misdoings and horrendous management of risk controls, Mr. Cox, is just all part of a system that you profess to admire so much.
Its pretty darn clear folks, that there was a systematic breakdown of checks and balances througout the financial system at pretty much every juncture. And it was all caused by moral hazard due to the abdication of responsibility and total lack of proper risk controls all in the name of profit motives. Meanwhile, as this mess unfolds, those in charge of protecting the public good are chasing their own shadows; tracking down innocent scapegoats. The U.S. Securities and Exchange Commision and its Commissioner, Christopher Cox, in particular, have totally lost its moorings.
As Cox goes rooting around everywhere exept where the crimes have occured, he concerns himself with evil short-selling speculators, many of whom have done a tremendous public service by voicing their concerns about the U.S. banking system's house of cards, the real perpetrators of the history's most obcesne credit bubble go mostly unpunished. Additionally, as Merrill Lynch (MER) announces this past week its plans for a massive new round of capital raising, after reporting earnings just weeks ago, the U.S. Congress and Senate are busily holding hearings in efforts to track down evil speculators in the oil futures market. Another dysfunctional effort by many of the folks more responsible for skyrocketing oil prices than anyone that has ever actually purchased a crude oil futures contract. All of this, as Merrill Lynch and its CEO, John Thain, quite possibly violated SEC disclosure laws by failing to report the disclosure of material events.
Specifically, Merrill Lynch (MER) said on Monday, unexpectedly, that it is selling more than $30 billion in mortgage assets, specifically “super-senior” tranches of CDOs, at 22-cents on the dollar to private equity firm, Lone Star Capital. Merrill is financing 75% of that purchase which equates to receiving just 5.5% of its original $30-billion notional value in cash. Imagine what non-super junior tranches of the same crap may be worth and what this may mean for many banks and brokers that were hoping to “mark-to-market” said crap at a rate that may go unnoticed by yours truly and my ilk (evil short sellers). In essence, given that Merrill is financing 75% of Lone Star’s purchase, it can almost be viewed as putting this asset out on consignment. Merrill also said it plans to raise about $8.5 billion in new common stock. This is also an onerous maneuver given that an earlier issuance of stock this year to Temasek Holdings, a Singapore state-owned investment company, had stipulated that compensation would be due in the event that Merrill went to market at a lower price. Temasek Holdings sunk $6.2 billion in Merrill stock at $48 a share earlier this year. Its closing price yesterday is $26.85—equates to a tidy 44% haircut. Merrill said at the time that if it sold stock at a lower price within 12 months, it would compensate the $48-a-share investors. According to Bloomberg, the compensation to Temasek will cost Merrill Lynch another $2.5 billion. However, Temasek has apparently agreed to “average down” and has agreed to dump the punitive sum back into Merrill’s latest offering. The incredible and surprising capital rasining effort coupled with a purging of $30-billion in notional value toxins not only smacks of desperation, given the heavy toll of the maneaver, but more incredible (and unlikely) is that Mr. Thain did not see this coming. Even on its conference call roughly two weeks prior, following its earanings announcement, Thain declared that he was in a "comfortable spot" in terms of capital. Furthermore, Thain said that "Our core franchise continues to perform well despite the extremely challenging market environment." Indeed, its performing so well, that two weeks later, Thain and his company resort to just about the most onerous form of capital raising effort conceivable. Of course, shares of Merrill Lynch rallied to as high as $34/share in the week following Thain's polyanish utterances. Were you romanced into making a purchase during that week, at prices as much as 50% higher than what Thain himself was able to purchase for himself on July 29th (500,000 shares at $22.50 each)? Well too bad, becasue the U.S. Securities and Exchange Commission couldn't give a rat's ass about anyone stupid enough to beleive John Thain.
Perhaps Mr. Cox might actually find some wrong-doers if he looked in the places where the misdeeds have actually occurred, i.e. the investment banks, instead of chasing after the folks that now appear to have gotten it right, "evil" short sellers. Isn't that the way capitalism is supposed to work? Reward dilligence, intelligence and ingenuity and punish greed, mismanagement, stupidity and the total abdication of responsibilty? Profiting at the expense of these firms’ misdoings and horrendous management of risk controls, Mr. Cox, is just all part of a system that you profess to admire so much.
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