Friday, April 11, 2008

Goldman Sachs Starts a Bear Raid?

Two days in a row over 50 degrees! Spring had finally made its final approach. It was a long winter. Congratulations to loyal reader G, as he has secured new employment. I hope all is well with you G, and all who peruse this blog.

Bill Gross Rapidly Becoming a Shill
I imagine in the future there are going to be many financial commentators that will look pretty silly due to their inability to see, and later analyze, the housing bubble. Bill Gross, who runs PIMCO's largest bond funds, is rapidly becoming transparent in his repeated calls for government intervention to support house prices.
From Bloomberg (story by Deborah Finestone):
"April 10 (Bloomberg) -- Pacific Investment Management Co.'s Bill Gross lifted holdings of mortgage debt in the world's largest bond fund to the highest since 2000, while putting on the biggest bet against government debt since at least the same year. "

So on one side Mr. Gross is adding mortgage debt to his holdings, while he simultaneously calls for some kind of floor to be put artificially under home prices to protect his investments. If that was not sad enough, Mr. Gross then doubles down by betting against government debt, as he must know that any major home price bailout will trash that market as a consequence. This behavior resides in the baseless shill arena, and Mr. Gross should keep his plans and investments to himself to avoid looking like one.

Lehman Brothers Knows No Shame
So one of the major issues with the banking system is that banks do not trust each other, and thus will not readily lend to each other. Hence the alphabet soup of FED lending facilities (TAF, TSLF,etc) to ensure market movement by standing in as the lender of last resort. I always find it comical that the mainstream media will report something like "banks are wary of lending to other bank" and stop there. A great follow-up topic may be, well, why are they so scared? Inquiring minds want to know.

I have repeatedly warned that the problem the FED is going to have by opening up their balance sheet to the investment banks is that the FED has ZERO idea how craven and sneaky these entities are. They would sell their own mothers for a buck. Forget the major issue of moral hazard (that is so last year!), the biggest risk for the FED is that they will get used like a fool if the IB"s are given a chance. Case in point, Lehman Brothers takes their crap to the FED:
Lehman makes move to turn unsold debt to cash
Friday April 11, 2:59 pm ET
NEW YORK (Reuters) - Lehman Brothers Holdings Inc, looking to raise cash, packaged $2.8 billion of unsold loans into bonds, then used some of the securities as collateral to borrow from the Federal Reserve, people familiar with the deal said Friday.
Lehman transferred loans that included some risky leveraged buyout debt into a new investment entity called Freedom, which then issued securities, about $2.26 billion of which were rated investment-grade, they said.
The bank used a relatively small amount of those securities as collateral for a low-interest, short-term cash loan from the Federal Reserve.
The move should give Lehman more money to finance its activities but also raises questions about the quality of the collateral the Federal Reserve is receiving from dealers to which it lends money.
"There's a significant hazard to the Federal Reserve taking poor assets onto its balance sheet," said James Ellman, president of hedge fund Seacliff Capital in San Francisco.
At this point, it's not clear how many of the Fed's loans to investment banks have been collateralized by assets like subprime mortgage bonds or loans used to finance leveraged buyouts.
But if the perception arose that the Federal Reserve's balance sheet featured too many bad assets, the dollar could weaken. And banks might be emboldened to take more risks if they believed the Fed would bail them out.
Lehman declined comment on the Freedom transaction.

This was my point a while ago. Give the IB's an inch in an effort to save their lives, and they will take a mile and try to leverage up as well. This is truly a sickening practice and one can only hope that Mr. Bernanke will be asked directly about this practice ASAP. At least the program is named correctly. The moniker "Freedom" must mean freedom from class, freedom from common sense, freedom from responsibility, and freedom from shame. LEH gets my vote to get torpedoed by renegade shorts.

Goldman Sachs Starts a Bear Raid?
Analysts are a funny bunch. While they should be unbiased data crunchers and conservative forecasters, they are instead paid hacks by the industry to praise stocks and promote buying. Even Enron was a "strong buy" until the morning they blew up, and the they were downgraded to "pretty strong buy" (I made that up!). The worst rating most stocks will ever have is "hold" and a "sell" rating usually means after the fact failure.

With this in mind, Goldman Sachs today not only lowered the boom on Washington Mutual with a rare "sell" rating, they also recommended SHORT SELLING the stock! Oh, the humanity!:
Goldman recommends short-selling Washington Mutual
By Steve Goldstein
Last update: 8:23 a.m. EDT April 11, 2008
LONDON (MarketWatch) -- Goldman Sachs recommended short-selling Washington Mutual Inc in a note to clients on Friday, and cut its price target to $10 from $12. "The bad news is that our new product-by-product analysis of its mortgage portfolio suggests $17 billion to $23 billion of embedded losses in WaMu's current book of business, of which only $3 billion have been absorbed so far; subsequently, we forecast a $14bn provision charge in 2008," the broker said. The good news is that it believes WaMu's $7 billion capital raise should be sufficient, seeing a year-end tangible-equity-to-tangible-assets ratio in excess of 7%.

The only thing more amazing than an outright shorting call, was the last sentence of this note. read it again:
"The good news is that it believes WaMu's $7 billion capital raise should be sufficient, seeing a year-end tangible-equity-to-tangible-assets ratio in excess of 7%"
So WM is going to lose another 17-23 Billion dollars, and the stock should be shorted, BUT GS thinks the stock should be at $10 instead of $12!? GS also thinks the 7 Billion that WM just got will be just dandy!? GS looks a little all over the place here. Just another strange day in the never ending credit saga we all know and love.

Friday Entertainment
After a strange market day it is time to get into the weekend mode.
Funny Pic
Bad kitties go to jail I guess:

humorous pictures
see more crazy cat pics

Great Movie Clip
Beatrix versus O-Ren Ishii from the film Kill Bill Vol. I. Great music, great swordfighting, great on all levels:

Rock Blogging

I had heard this song in the car a while back and it was driving me crazy that I did not know who the band was! I finally figured it out today. Check out Concrete Blond with "Joey"

Not sure what ever happened to this band, but I really loved this song when it came out a long time ago! Try Big Wreck with "That Song":

I was thinking of The Wallflowers today and their song "One Headlight":

Have a good night.


Anonymous said...


"Spring had finally made its final approach. It was a long winter."

That's what I thought too but after the 1' of snow, winds up to 40 mph, from Thursday morning to this afternoon along with 12 hours without power I may have to change my mind. It wasn't all that cold really so I guess that was a plus. Now the forecast is for 70 degrees by Tuesday. I think mother nature is bouncing around like these markets.

Bernanke is the sucker at the poker table no doubt about it.

As for Goldman Suks and Wamu I think the pot is calling the kettle black. Short all of them is what I think.


watchtower said...

As you know Frontier airlines is in a spot of trouble.
I was listening to the radio at work today and they said it wasn't the high cost of fuel that put them in that position, it was because of "credit card" holdback which they linked to the sub prime credit crisis.
That sounds pretty ominous to me but I haven't seen much on it today. I guess I'm always looking a little too hard for another one of those "straw that breaks the camel's back" moments.

And tonight I'm watching CNBC's Larry Kudlow talk about the need for a strong dollar...wasn't this guy wanting the Fed to cut awhile back? Did I slip into some kind of "opposite universe"?
Or maybe it's that universe where you get your cake and you get to eat it too.

Loved your piece on Lehman, can't help thinking that our founding fathers probably would have tarred and feathered these people and ran them out of town on a rail. Then they would have cut a switch and went after the public for letting it happen.

silver spartan said...

I have some receivables from a printing broker that went bankrupt 2 years ago, can I trade them to the fed for some t-bills?

Anonymous said...

Thank you for the honorable mention.


PS: I start Monday and be thankful for good friends these days.