NakedShorts

Too little, too late, no?

Those 2007 Merrill CDOs in foole

30 CDOs issued, 29 (and probably 30) in trouble

Derivatives consultant Janet Tavakoli landed an RPG on Merrill Lynch’s we-sort-of-got-the-garbage-off-the-books party yesterday, in a client letter strongly suggesting that more biohazards may be...ahem...lying in the weeds.

So, how did the CDOs that Merrill Lynch brought to market in 2007 perform? As expected, they are dreadful...

...As of June 10, 2008, of 30 CDOs totaling more than $32 billion in notional amount, 19 have declared an event of default, are in acceleration, or have been liquidated. Ten others are “toast,” as evidenced by downgrades of their “triple A” tranches to junk status, yet I could find no record of a declared event of default (EOD). The remaining CDO has “triple-A” tranches downgraded to junk, but the two topmost tranches are still rated investment grade (the topmost is Aa1 neg/ AAA neg and the formerly “triple-A” tranche below that is Baa2 neg/ BBB+ neg). The EOD may be undeclared due to documents that avoid that declaration so that investors cannot trigger acceleration or liquidation (or the declaration may be pending).

While the main point of Tavakoli’s missive was to point out that the securitization market will remain becalmed until investors regain some trust in the investment banks and CDO managers that gorged at the trough, the assay of Mother Merrill’s 2007 bowel movements is eye-watering. Two things:

• Merrill Lynch said that the stuff it loosely characterized as having “sold” to Lone Star was “US super senior ABS CDO, the majority of which comprises older vintage collateral – 2005 and earlier.” Interesting, as those older vintages were solid gold (although 2005 was probably only 9 ct) compared with the bags of wet newspapers issued in 2007.
• It’s impossible to tell from Merrill Lynch’s entirely legal but deliberately and utterly Delphic disclosures how much of that vintage 2007 vintage is still on the books, and where it’s marked. Good luck, Temasek, especially now you’ve given up death spiral part of the earlier deal!

Dead Calm: No One Trusts You
(Don’t miss the table on Page 3)
by Janet Tavakoli
Tavakoli Structured Finance Jul. 30 2008

Merrill Lynch Announces Initiatives to Further Enhance Capital Position
Press release
Jul. 28 2008

Denial-is-not-just-a-river-in-Egypt Day

FASB delays off-balance sheet rule change

So, after not having nailed the off-balance sheet loophole shut after Enron, FASB yesterday got around to letting the usual suspects carry on lying for another year anyway.

WILMINGTON, Del., July 30 (Reuters) - The Financial Accounting Standards Board, which sets US accounting rules, voted on Wednesday to delay accounting changes that would affect trillions of dollars in off-balance sheet assets at banks and financial companies.

Reversing an earlier decision to make some parts of the rule change effective at the end of this year, FASB members voted that the rule should take effect all at once, for reporting periods after Nov. 15, 2009...

FASB votes to delay off-balance sheet rule change
By Emily Chasan
Reuters (via The Guardian) Jul. 30 2008

Fred Reserve introduces long-lasting crack

Ecstasy (pun intended) for the kiddies at Drekk High School:

The Federal Reserve today announced several steps to enhance the effectiveness of its existing liquidity facilities, including the introduction of longer terms to maturity in its Term Auction Facility...Actions taken by the Federal Reserve include:

• Extension of the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF) through January 30, 2009.
• The introduction of auctions of options on $50 billion of draws on the TSLF.
• The introduction of 84-day Term Auction Facility (TAF) loans as a complement to 28-day TAF loans.
• An increase in the Federal Reserve's swap line with the European Central Bank to $55 billion from $50 billion.

Federal Reserve Actions
Federal Reserve Board press release
Jul. 30 2008

Earlier: Crack prices plunge—Fred Reserve

Pot admits Kettle obviousness

NakedShorts’ Obviousness Rule rule states that, even if things are obvious, they are not officially true until some official writes for, or talks to, an official news organization to tell everybody something that everybody already knows, but doesn’t dare say.

BAC goes oooops on Thain’s CDO “sale”

Maybe next time, and there will be a next time, the boneheads impersonating analysts at pretend investment bank Bank of America might read the whole press release before giving two thumbs up to one of its competitors for hitting the eject button on rapidly putrifying drekk.

Bank of America analysts, who said yesterday the sale “suggests the endgame” for banks’ CDO risk, today wrote they had overstated the “positive implications” of the transaction.

A drop in the value of the CDOs by about a further 5 cents would wipe out the equity from Lone Star and “leave Merrill back on the hook for the exposure,” said the analysts, led by Jeffrey [Four Short Planks] Rosenberg in New York. Lone Star bought “the upside of the underlying subprime assets in the CDO pools” while Merrill retained “most of the downside,” they wrote.

A spokesman for the US Securities and Exchange Commission, citing policy, declined to confirm or deny that an investigation has opened into Bank of America’s admission that it spread false rumors in the market. (Or, more precisely, the spokesman would have, but NakedShorts saved himself the price of that particular phone call.)

Merrill Gives Up Gains, Is `On Hook' for CDO Losses
by John Glover
Bloomberg Jul. 30 2008

An intriguing picture

The New York Times yesterday carried a mostly soporific tale of Barack Obama, fresh from rocking at least a couple of European capitals, meeting “with a group of 20 prominent economists, former government officials and business and labor leaders to discuss problems like vanishing jobs and rising food and fuel costs” blah blah blah.

But look more closely at the photo, showing Obama with former Clinton cabinet members Larry Summers and Robert B. Reich. In the background, a couple of familiar faces: Bush’s first Treasury secretary (and former Yankees outfielder) Paul O’Neill (seated, between Summers and Reich), and inflation’s nemesis, former Federal Reserve Board chairman Paul Volcker (standing, between Reich and Obama).

While O’Neill had his issues at Treasury, some arising from his stylistic variations on the “A strong dollar is in the best interests of the US” voice chip implant and others stemming from his refusal to gargle Rovian Kool-Aid, he did seem to be grounded in something resembling the real world. Volcker, of course, was the last Fed chairman with the testicular fortitude to remove the punch bowl for more than 20 minutes at a time.

Intriguing.

Candidates Return Focus to Economy and Jobs
by Larry Richter
The New York Times Jul. 29 2008

Cox is starting to calm down

Emergency order extended, but not widened

Move along, nothing to see here.

Washington DC, July 29, 2008 — The Securities and Exchange Commission today extended an order issued July 15 to enhance investor protections against naked short selling in the securities of financial institutions to which the Federal Reserve has granted temporary access to liquidity facilities on an emergency basis. The extended order will be in effect until 11:59 p.m. EDT on Aug. 12, 2008, and will not be further extended.

The Commission's decision to extend the order for a second 10-day period, in addition to furthering the purposes of the original order, will permit the Commission staff to collect and analyze additional data on the impact and effect of the order's provisions. Following expiration of the extended order, the Commission will proceed immediately to consideration of rulemaking which would become effective after public notice and comment. [Emphasis added].

The apparently unambiguous statement that the follow-up rulemaking will follow the conventional process, rather than the accelerated end game “final interim rule” strategy reported here yesterday, means....well, business as usual. And, remembering the average 10-month proposal-to-implementation cycle of earlier changes to Reg SHO means

• This one will run and run, and
• By the time whatever “other remedies for the broader marketplace to further protect investors from ‘distort and short’ artists” come along, the chairman’s office will more likely than not have a different name on the door.

One who may even grasp the simple concept that the stock of companies which dissemble about their financial condition (see: Thain, John; Stearns, Bear) will go down for reasons other than the nefarious plottings of The Sith Lord Cabal.

SEC Extends Order Limiting Naked Short Selling
US Securities and Exchange Commission press release
Jul. 29 2008

Maples & Calder's CNN closeup

Click to play video

It denies suggestions of tax evasion, saying that
international companies are trying to avoid
being taxed twice. They add, US taxes are paid
when earnings are distributed to US citizens.

Cough...cough...cough. (Clears throat). Excuse me. (Wipes eyes). In an unrelated development, they also take their responsibilities as company directors really, really seriously. Although the $1.5 million levy imposed for not opening envelopes in the PAAM Scam might have something to do with that.

Offshore tax havens
by Mary Snow
CNN Jul. 26 2008

Short Shoot first, ask questions later

The end game for the emergency order

[UPDATED Jul. 29 2:45 pm EDT] The end game for the US Securities and Exchange Commission’s emergency order, which currently prohibits the short selling of Phoney, Fraudy and the US-listed Fed primary dealers, will be an interim final rule — likely extending the emergency order’s “protections” to the entire market — that would be effective immediately, while being simultaneously published for public notice and comment.

The biggest uncertainty is when the rule will be published, although SEC chairman Christopher Cox told the House Finance Committee last week that he expected the rule to be ready “very soon.” The commission has announced that it will hold an open meeting tomorrow, Jul. 30, but has yet to release the agenda. [UPDATE: The agenda is now available and does not include any reference to short selling-related issues.]

The current emergency order, effective since Jul. 21, is set to expire 11:59 pm today (Jul. 29). Under the agency’s emergency powers, it can be extended to a maximum of 30 days from its inception. Whether or not the “final interim rule” is on Wednesday’s agenda, the SEC is expected to announce today that will extend the emergency order, and may expand it to include other sectors. (The Wall Street Journal yesterday reported that insurance, housing and a broader range of financial stocks may be added to the list).

Who’s really getting bailed out here

Phoney, Fraudy and HELOC Hell

This is not exactly new news for anybody following the plot, but a Deutsche Bank report that fluttered uninvited into NakedShorts’ inbox over the weekend — danke, David S. Products — put some numbers on just why Uncle Sam Hank ain’t gonna let the GSE’s debt go bad, no way, no how.

...the biggest holders of US agency securities are countries with some of the largest current account surpluses vis-à-vis the US...

The Cayman Islands? Aaahhh, yes. More precisely, Hedgefundistan, doubtless bolstered by the odd petrodollar or two. For those uncomfortable with large numbers, the $3.15 trillion total is a mere 420 Kerviels®, give or take.

These, folks, are our leaders

If a country gets the government it deserves, the eponymous Duncan Hunter (R-Cal.), ranking member of the House Armed Services Committee, just broke from the large field of contenders seeking the role of Exhibit A.

Hunter’s staff contacted the embassy in N’Djamena, Chad, last week to see whether Hunter could distribute food at a [refugee camp housing some of the 230,000 to have fled the genocide in Darfur]. Hunter wanted to put together an outing to hunt wildebeest and distribute the meat to refugees.

So, the killjoy bureaucrats at State Department stepped in:

Regarding the Congressman’s desire to hunt wildebeest and distribute the cured meat to refugees, wildebeest are not present in Chad.

Hunter, however, has the entire situation entirely under control.

Hunter’s office called State on Thursday and said he had decided not to go and that he was looking instead at commercial hunting expeditions in Kenya, Tanzania and Southern Africa.

Rep. Moron is doubtless fantasizing about the tiger he’ll kill.

And a Wildebeest in Every Pot
by Al Kamen
The Washington Post Jul. 23 2008

Things that go BOOM! in the night

Until now a little-known, though large, closely held partnership in Tulsa, Okla., SemGroup transports, stores and distributes crude oil and refined products. It filed for bankruptcy protection last week after losing more than $2.4 billion on energy contracts...Exactly what drove the company to that fate remains unclear, but clues have started to emerge amid court hearings and other ripples from the implosion.

After the jump:

News follows price

Another body in the Ritchie cemetery?

Was the hedger speculating?

Public shareholders, meet The Shaft

Now, Failure Friday!

It’s sort of like Merger Monday (more or less RIP). Only different.

Obviousness trumps short emergency

NakedShorts’ Obviousness Rule rule states that, even if things are obvious, they are not officially true until some official writes for, or talks to, an official news organization to tell everybody something that everybody already knows, but doesn’t dare say.

Wall Street executives expect the Securities and Exchange Commission to extend the temporary limits it has placed on short-selling and expand them to cover additional stocks beyond the 19 financial companies it targeted two weeks ago...

...A call with regulators on Friday gave the funds group “a fair degree of certainty” that the SEC intends to seek an extension of the emergency period, these people said. Regulators said an extension could be for as short as 60 days and could involve insurance, housing-industry and a broader range of financial stocks, according to these people. SEC Chairman Christopher Cox indicated last week the rules might be extended to all stocks.

Unquestionably a plot to promote the early fact (yes, the rumor started here) of a ProFunds/ProShares IPO.*

SEC's Assault on Illegal Short Selling Intensifies
by Jenny Strasburg, Kara Scannell and Randall Smith
The Wall Street Journal Jul. 28 2008

* For the elimination of doubt, given the number of defective and/or non-existent irony detectors wielded by certain more recent readers, NakedShorts TOTALLY. MADE. THAT. UP.

Arb that [expletive]!

With the Hank and Ben Show now centerstage, it’s gone ominously quiet on the Chairman Al front. Has Andrea finally had had the old coot bound, gagged and stuffed under the floorboards? Anyway,as a reminder that it really is all our own fault:

I know you believe you understand
what you think I said, but
I am not sure you realize that what
you heard is not what I meant

 

Also known in these troubled times as The Cramer Conditional Certainty Principle.

PS: If you, like me, declined contribution to the Greenspan 401(k) Plan by neglecting to purchase The Age of Turbulence, Barry is giving away free copies. Or something like that.

Memo to Volkswagen USA

Re: Stupid ‘Nobody Here’ Phone Calls

My be-it-ever-so-humble Jetta went in for a scheduled checkup on Jul. 16. So, for more than a week, I’ve been receiving 3-4 calls a day from a number that traces back to VW USA. Leading to justified suspicion that an auto-dialer is trying to set me up for another 15 minute Spanish Nuremburg inquisition concerning my satisfaction, or lack thereof, with the local purveyor of downmarket vorsprung durch technik.

But, when I pick up, there’s static, silence, and a click. So here’s the deal, dummkopfs:

• Please feel free to stop calling. Now.
• If I have a problem either with the car or the dealer, I will call you. You can take that um die bank.

I’m not the only one complaining.

And now, back to our regular programming.

Annals of In-Your-Dreams Comparisons

In this world, NakedShorts = The Financial Times

 

Offering a remarkable impersonation of MF Global’s first year as a public company, the Elbow Beach Hotel, Bermuda, bears the wounds of its encounter with Hurricane Fabian in Sep. 2003. MF will hold its annual meeting at what has since been upgraded to the Elbow Beach Resort on Monday. Image source

It’s no secret that rigging executive compensation is one of the biggest on-going entirely legal scams at US public companies. The racket works something like this:

1. Compensation committee hires outside compensation consultant to devise a “cohesive total compensation strategy,” paying undisclosed — but very sweet — fees.
2. Compensation consultant compares client’s practices with a group of hardly comparable companies, selected mostly for their generous compensation policies.
3. Consultant recommends “cohesive total compensation strategy” involving huge increases in salaries and hardly challenging at all incentives.
4. Compensation committee adopts recommendations.
5. Trebles all round! (© Private Eye).

So it’s no particular surprise that MF Global Ltd climbed aboard this train just three months after the IPO last year. For the Casey Jones role, it hired Mercer, a subsidiary of broken insurance broker Marsh & McLennan Cos (MMC). And who might Mercer have decided are the 11 “selected investment banks and other companies in the US financial services industry” whose compensation practices it plans comparing with those at mostly plain vanilla futures brokerage MF Global?

Megabanker JP Morgan Chase.  The four largest surviving investment banks (Goldman Sachs, Lehman, Merrill Lynch and Morgan Stanley). A coterie of boutique investment banks (Evercore Partners, Greenhill & Co, Jefferies, KBW Inc and Lazard Ltd). Along with inter-broker dealer GFI Group Ltd, which is, unlike the others, in a mostly comparable business and of roughly comparable scale.

According to MF Global’s Jun. 17 proxy statement, the Mercer “review did not have any impact on compensation paid for Fiscal 2008.” So, hopefully before Mercer does impact Fiscal 2009 compensation, NakedShorts would like to proffer an alternative cohort which, in terms of scale, business model and actual business operations, is somewhat more reality-based.

Wisdom Tree going straight?

An email late Thursday night announces that ETF provider Wisdom Tree (WSDT), long a non-reporting presence in the public markets

...will host its first corporate earnings conference call for the second quarter, ending June 30, 2008. The company will announce its financial results in a news release after market closes on Thursday, July 31, 2008...

Not that the link to the “newly launched Investor Relations website: www.wisdomtree.com/ir” was working at pixel-time. And posing the question to Edgar results in a ‘No matching ticker symbol’ response, strongly suggesting that, despite the alleged new investor relations website with matching debut earnings conference call, it’s not going that straight. Yet.

Rumors that not-so-young-anymore Jono will announce a new magazine called ‘Individual Dividend Investor,’ furiously pumping stocks included in the Wisdom Tree portfolios, are totally made up. Been there. Done that. And, surprisingly enough, a subject not raised in an incisively thrusting slobber-job in the June issue of Trader Monthly.

Memo to Trader Monthly: The statement, in the article linked below, that Jonathan Steinberg had never run a money-management company before Wisdom Tree’s current iterationis flat-out wrong. While he probably didn’t mention it in the interview, his hedge funds, which also carried the Wisdom Tree name, were quietly asphyxiated about a decade ago, in the general time-frame of a Jun. 22 1998 Fortune article Why Hedge Funds And Magazines Don't Mix pointing out the unnatural correlation between the stocks in their portfolios and the content of Individual Investor magazine (mercifully RIP).

So that bit about  “To say Steinberg wished to avoid the lure of beefy hedge-fund fee structures” is more unintentional comedy. The son of Saul Steinberg, widely credited with having invented greenmail, is one apple that landed very close to the tree. Let’s just hope his disclosures to the New York City Employees’ Retirement System (NYCERS) and the New York City Police Pension Fund were more, well, thorough.

Market Makers: The Wisdom Of Steinberg
by Michael Martin
Trader Monthly Jun. 2008

Wisdom Tree Wins Pension Mandates
Wisdom Tree press release
Jul. 21 2008

A laughing stock’s laughing stock

Nice to have that manipulation thing solved

[UPDATED & CORRECTED Jul. 27 2008]

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced today its case against Optiver Holding BV, two of its subsidiaries, and three employees, charging them with manipulation and attempted manipulation of New York Mercantile Exchange (NYMEX) Light Sweet Crude Oil, New York Harbor Heating Oil, and New York Harbor Gasoline futures contracts

during March 2007

And the price impact of this alleged vast conspiracy?

For context, 79 cents was 1.33 per cent of oil’s $59.58 closing price on Mar. 16 2007, and accounted for 36 per cent of intraday trading range; the 49 cents worth of alleged manipulation on Mar. 19 was 0.82 per cent (82 bps) of the $59.20 close, and 42 per cent of the intraday range.

On the RBOB trades, the movement attributed to the Optiver shenanigans amount to 1.4 per cent of the closing price and 53.5 per cent of the intraday range on Mar. 2; 1.65 per cent and 44 per cent on Mar. 16; and 1 per cent and 55.5 per cent on Mar. 20.

Three things:

• Manipulation is manipulation, and alleged manipulators should be arrested, given a fair trial and strung up at the corner of North End and Vesey;  
• To its great credit, NYMEX Compliance caught this shell game in a matter of days, and shut it down;
• But this was strictly small...ahem...potatoes (a reference that will be familiar to anyone with even passing knowledge of the history of the New York Mercantile Exchange).

CFTC Charges Optiver Holding BV...with Manipulation
Commodity Futures Trading Commission press release
Jul. 24 2008

More links after the manipulation

Time to hang some chads

Pending a so far sadly belated invitation to be King of the World, or similar, NakedShorts is a great believer in democracy. Except when it comes to voting his stock...except when it comes to MF Global Ltd, which holds its annual meeting next Monday in the friendly confines of the Elbow Beach Resort, Bermuda.  Three lucky directors drew the ‘Vote Withheld’ straw.

Chief executive Kevin Davis, for reasons blindingly obvious to any sentient mortal.

Bob Sloan, managing partner of S3, “a company which he founded that provides treasury and liability management services to hedge funds,” a director since Sep. 2007. Sloan has so far declined to reach into his amply endowed pockets to purchase shares, and further confirmed his faith in the company’s prospects by taking just 25 per cent of his $250,000 annual fee in stock, preferring the $187,500 balance in something more negotiable. (No other director took less stock, as a percentage of total compensation, than Sloan, according to the proxy statement.).

Martin Glynn, the former chief executive officer of HSBC USA, who was elected to the board last month but has not so far felt it necessary to join the stockholder Shippe of Foolles (although whatever impulses he may have in that direction are perhaps constrained by the company’s Fiscal 2009 Q1 ending Jun. 30).

His tenure was a huge success. It ran from 2003-2006, coinciding precisely with HSBC’s calamitous Household International Inc acquisition (the deal closed in Mar. 2003) through the disclosure, in Dec. 2006, that the shape of things had gone mostly pear-ish.  HSBC’s announcement was among the first pieces of solid evidence that the credit bandwagon’s wheels were starting to wobble.

Glynn stepped down...cough, COUGH...that month, presumably losing the $177,600 rent allowance and $150,000 tax gross-up that earned a mention in Michelle Leder’s Footnoted.

Hmmm...come to think of it, he’ll fit right in.

Disclosure: NakedShorts Falling Anvil portfolio remains long MF. (Bangs head on table)

Part of the problem?
by Michelle Leder
Footnoted Mar. 5 2007

Earlier: Kevin Davis Memorial Chart du Jour
NakedShorts Jul. 21 2008

Sophisticated crude humor

Click for larger image

Tug o’ the forelock:

How We Know Oil is Going Down
by Jeff Matthews
jeffmathewsisnotmakingthisup Jul. 23 2008