NakedShorts

Turkeys denied Thanksgiving bailout

Cotton Crop Can't Weather Downturn

by Joe Barrett

The Wall Street Journal Nov. 25 2008

Self-effacing Quote du Crisis

Former Golden West chief executive Herb Sandler, disclaiming the roughly $2.4 billion he and his wife, Marion, collected from Wachovia in 2006, in one of the more impressively timed transactions during Merger Monday’s heyday. 

I did not see how problems in the subprime
market would roll into the mortgage market 
and then into the economy.
It was not like we enriched ourselves.

Wachovia, Golden West Investigated by Prosecutors, Regulators

by Karen Gullo and David Scheer

Bloomberg Nov. 20 2008

Wes Edens’ Obama Waterfall

To review: Fortress Investment Group’s IPO, on Feb. 9 2007, was priced at $18.50, opened at $35 and traded as high as $37 that day. But in case the last $2.06 (at Friday’s close, after the stock traded at a new all-time low of $1.80 intraday) evaporates, Wes Edens & His Merry Men know where the blame lies: a the feet of an administration that doesn’t take office for another 54 days.

If legislation were to be enacted by the US Congress to treat carried interest as ordinary income rather than as capital gain for US federal income tax purposes, such legislation would materially increase the amount of taxes that we and possibly our equityholders are required to pay, thereby reducing the value of our common units and adversely affecting our ability to recruit, retain and motivate our current and future professionals. Senator Barack Obama, the President-Elect, has publicly stated that he supports similar changes to the tax code.

Nothing to do with, say, threatened hedge fund redemptions, or over-paying for ski resorts and dodgy train tracks. Glad we got that clear. 

Fortress worries about Obama’s plans…

by Michelle Leder

Footnoted Nov. 19 2008

I may never leave the house

Wot? No dwarf-tossing?

Party animals kept Sentinel trader buying

It’s been all too long since failed futures cash manager Sentinel Management Group troubled these pixels, but it seems that bankruptcy trustee Fred Grede has not run out of people to sue. This week’s effort involves allegations that FTN Financial Services and a couple of its brokers unloaded highly dubious drekk on Sentinel head trader Charles Mosley by, inter alia, unlawfully showering...

...Mosley with vacations, tickets to sporting events, expensive meals, all-night drinking excursions, limousine rides, plane tickets, golf outings, and the use of condominiums and houses belonging to the brokers...

...These inducements went far beyond typical or acceptable levels of client entertainment measured by the value of the gifts and favors offered, the frequency of the offers, the proximity of the offers to sales, the implicit quid pro quo nature of this entertainment, and the extent of the debauchery involved in many of the events.

Grede regrettably fails to embellish the ‘debauchery’ allegation, but it certainly sounds like the lads had a whole lot of fun. 

• In approximately mid-April 2005...Folan offered Mosley a trip to Memphis, Tennessee, where FTN had its headquarters, and stated that he would try to get tickets for an NBA basketball game...
• On August 10, 2005, Folan offered Mosley tickets to Chicago Bears football games...  
• On August 15, 2005, Folan offered Mosley and his assistant the opportunity to stay at Folan’s vacation home at the Geneva National Golf Club in Lake Geneva, Wisconsin for lunch, dinner, entertainment and golf. This was one of at least three trips Mosley took to stay at Folan’s Lake Geneva home for parties and golf... 
• On September 12, 2005, Folan offered to pay for a trip for Mosley to New York in early November 2005. In October, Folan in fact purchased plane tickets and paid for hotel accommodations for himself and Mosley for the trip...
• On or about November 9, 2005, Folan paid for Mosley’s ticket to a Chicago Bulls basketball game.

You get the general idea. Then, the partying got serious. 

The planned dinner meeting between Folan, de St. Phalle and Mosley took place on March 1, 2006, at Entourage, a restaurant owned by a friend of Folan in Schaumburg, Illinois. At about 3:00 pm, Folan had a limousine pick Mosley up at his office in Northbrook and drive him downtown, where he met Folan at a bar in the Rush Street area for drinks. Then, Folan hired a limousine to take them to Entourage with de St. Phalle and others. After dinner, a limousine transported Mosley and the others back to downtown Chicago for a drinking binge that lasted until about 5:00 the following morning. And finally, Folan hired a limousine to take Mosley home to Vernon Hills.

Sounds like normal course for fixed income securities transactions in Chicagoland to these cynical ears, but several things:

Random recession datapoint du retail

cognative.dissonance@busted-carp-retail.com

To the mall. Not, I stress, to mount a one-man campaign against declining retail sales. But my eye is drawn to the garish sign.

Well, it’s hardly news that Steve & Barry’s have...ummmm...challenges of the extinction level kind. 

Several things:

1. The large sign is inoperative.
2. The smaller sign seems to make the biggest (and last) inventory liquidation somewhat problematic. The woman declined a conversation as to whether the disruption in credit card processing was really temporary or, as seems at least possible given the circumstances, caused by Steve & Barry’s card withdrawing coverage.  
3. At a rough guess, hedge funds Bay Harbour and York Capital Management may have skipped WARN Act due diligence, not to mention misplaced their common sense, before plunking down their $168 million to take Steve & Barry’s out of its earlier excursion into Chapter 11, less than three months ago. 

Source: Steve & Barry's expected to close this week

by Keiko Morris

Newsday Nov. 19 2008

Breaking: Steve & Barry's Layoffs Have Started, and So Have Lawsuits

by Zach Lowe

The AmLaw Daily Nov. 19 2008

Eddie Lampert’s waterfall

It’s been a week or two since anybody called Eddie Lampert “The next Warren Buffett.” And now, it seems, either Bill Ackman got the memo, or even value tramps (not a typo) have stops. From the 13F-HRs of Pershing Square Capital Management LP, vis-a-vis its long dance with Two-Wrongs-Don’t-Make-A-Right (SHLD): 

Jun. 30 2008 (Filed Aug. 14 2008)

Shares: 6,746,568; Value: $496.95 million

Sep. 30 2008 (Filed Nov. 13 2008)

Shares: 501,000; Value: $46.84 million

Ackman did well to scamper when he did. While SHLD ran up from $73.66 on Jun. 30 to $93.50 on Sep. 30 (including a brief sojourn over $100 that month), it closed tonight at $30.19. Oh well, on to the next Target. 

Whatever you do, don’t buy Sears

by Suzanne Kapner

Fortune Nov. 18 2008

MJM desperately seeking attention

Barely noticed amidst the hoopla over this weekend’s G-20 non-event, one Eliot L. Spitzer unleashed what looked suspiciously like an Obama administration job application — chairman of the SEC? That would do nicely — on The Washington Post’s op-ed section. 

President-elect Barack Obama will soon face the extraordinary task of saving capitalism from its own excesses, much as Franklin D. Roosevelt had to do 76 years ago.

A three point plan?

First, we must confront head-on the pervasive misunderstanding of what constitutes a "free market"...One of the great advantages U.S. capital markets have enjoyed over the decades has been the view — held worldwide — that there was an underlying integrity to the representations market participants made, because the regulatory framework in which they were made was believed to provide genuine oversight. But as we all know, the laws requiring such integrity are meaningless without a government dedicated to enforcing them... 

As opposed to a government dedicated to not enforcing the Mann Act (among others).

Second, our corporate governance system has failed. We need to reexamine each of the links in its chain. Boards of directors, compensation and audit committees, the trio of facilitators (lawyers, investment bankers and auditors) whose job it is to create the impression of legal compliance, and shareholders themselves all abdicated their responsibilities...

Finally, we need to completely overhaul the federal financial regulatory framework... 

Feel free to carry on without me. 

Although mistakes I made in my private life now prevent me from participating in these issues as I have in the past, I very much hope and expect that President Obama and his new administration will have the strength and wisdom to do again what FDR did. 

But the FBI has my number. If you need it. 

How to Ground The Street

by Eliot L. Spitzer

The Washington Post Nov. 16 2008

Foreclosure relief: $1 million apiece

ABOVE: Webster Bank executives help themselves to $400 million from the Kash’n’Kari Capital Purchase Program.

Connecticut is hardly unique in being littered with small-cap banks that have variously avoided the worst of the financial sector rout, lied more skillfully about their exposures, or — more likely, in the Nutmeg State — have the Mozilo paradigm in their future as formerly ‘prime’ borrowers now temporarily employed in the New York-Fairfield County financial axis start Googling ‘state unemployment offices.’

So Webster Bank (WBS) caught lots of local ink Friday for its Nov. 13 announcement of “a 90-day moratorium on home foreclosures for Webster-owned mortgages and the expansion of mortgage assistance programs aimed at keeping families in their homes.”

Michael Sheahan, senior vice president in charge of mortgage lending for Webster, said there are approximately 400 mortgages — worth $40 million to $60 million — that could qualify for the moratorium. “Roughly one-third or less are in some form of foreclosure,” he said. 

Very kind. But for the fact that Webster has been allowed to heist $400 million from Treasury’s Capital Purchase Program for, among other things, pursuing “opportunities for growth, including acquisition of like-minded partners that share Webster’s vision to be New England’s bank.” 

Nice work, if you can get it. Whicy you can, while paying out that spivvy divvy.

Webster to suspend foreclosures 

by Angela Carter

The New Haven Register Nov. 14 2008

Webster Suspends Home Foreclosures

Webster Financial Corp. press release Nov 13. 2008 

Webster to Participate in Treasury Department's Capital Purchase Program

Webster Financial Corp. press release Nov 7 2008

Probably Ron Insana's kennel

The final agenda for Thursday night’s meeting of the Green[r]ich Planning and Zoning Commission, available on the commission’s web site, states that Mr. Cohen...and his wife, Alexandra, are applying for a special permit to add another 1,145 square feet, give or take a few square inches, to their house on Crown Lane. 

For Steven Cohen, 35,000 Square Feet Isn’t Enough

DealBook (The New York Times) Nov. 14 2008

Earlier on NakedShorts

Insana upgrades, from Fort Lee to Scamford

Aug. 11 2008

Inadvertently precise headline du weekend

With the G-20 leaders assembled in the capital, The Washington Post advises: 

Shuttle Is Carrying Destiny's New Toilet

G-20 Statement Following Crisis Talks

PANIC!

Bart calls (another) bottom

Barton Biggs, the long-time Morgan Stanley global strategerist now doing a hedge fund manager impersonation, hit Fortune this week with a soft-core piece posing as  “the enlightened...opinions of aged participant about the unknown.” Without stopping to debate the highly arguable characterization of Biggs as a ‘Hedge fund star,’ or even the value of anybody’s opinions about “the unknown,” let’s move along to the underlying thesis: “Fears are overblown.”

Everyone’s worried that hedge fund investors will pull their money out en masse and ignite another market selloff. That's not how it looks to one insider. 

So let’s review some of Bigg’s notable early-rather-than-wrong calls of recent years.

July 2001

Barton M. Biggs believes “hedge-fund mania now grips the US and Europe.” It is “rapidly assuming all the classic characteristics of a bubble,” contended the chief global strategist and chairman of Morgan Stanley Investment Management Inc, New York, in a Global Strategy report to clients. [Emphasis added]

Two years later, and with the alleged “hedge fund bubble” having only inflated in the wake of the 2002-2002 bear market, Biggs established Traxis Partners.

August 2004

Hedge funds started a year ago by a leading investment strategist, Barton M. Biggs, have been stung by losses this year, partly because of a bearish bet on the price of oil at a time when the commodity’s prices are setting records...Yesterday, crude oil for September delivery settled at a record $48.70 a barrel on the New York Mercantile Exchange. Futures prices have climbed more than $10 a barrel since the end of June.

In his letter to investors, Mr Biggs said he thought the price of oil should be closer to $30 to $34 a barrel. So convinced is Mr Biggs of his investment thesis that he increased the size of his bet in July, even as prices were rising. “When the price of an investment goes against us, unless the fundamentals have changed, our inclination is to buy more,” he said in the letter. [Emphasis added]

May 2008

Well, not Biggs, but Cyril Moulle-Berteaux, described as “managing partner of Traxis Partners LP,” cooked up some housing recovery hash for The Wall Street Journal’s op-ed page featuring these among other gems:

Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won't stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market...

...We are of course experiencing a serious housing bust, with serious economic consequences that are still unfolding. The odds are that the reverberations will lead to subtrend growth for a couple of years. Nonetheless, housing led us into this credit crisis and this recession. It is likely to lead us out. And that process is underway, right now. [Emphasis added]

More disturbing yet: NakedShorts agrees with Biggs’ tenet that the worst of the hedge fund selling is probably done, and would further aver that reports of its contribution to the recent market declines have mostly been at least somewhat overblown.

But that bit about “The bottom of a bear market by definition has to be the point of maximum bearishness, and I think we’re there.” Not while Bart & The Bottom Callers are still flapping their gums. 

Jinx documentation after the lump.

The blind leading the liars

But it’ll never catch on

New York governor David A. Paterson has been in reality mode since a matter of minutes after he caught the bouquet from Eliot Spitzer, warning that the state’s budget is in big trouble. But his pitch hit an innovative note at a town meeting in Syracuse on Tuesday:

We have got to start telling people the truth.

That’s about the one thing nobody’s tried so far. Hank, Bernanke, Kash’n’Kari & Geithner might like to take note. 

At Forum on Budget Cuts, Blunt Talk From Paterson

by Jeremy W. Peters

The New York Times Nov. 11 2008

Academics: TARP shifts wealth to banks

Paulson’s Gyffte, from the Land of Lincoln Friedman

The Pointy-Head corollary to NakedShorts’ Obviousness Rule states that, even if something is obvious, is is not officially true until people with multiple letters after their names, and otherwise bereft of gainful employment, say so.

David S. Products, a proud graduate of the University of Chicago Graduate School of Business, stoops to explain the latest timely research emanating from his alma mater:

I know you are not a scholar but if you check with NakedShorts’ Ivory Tower division staffers, they just might be able to use the Obviousness Rule in reading this scholarly article. Apparently, the earth-shattering finding is that the TARP bailout was a net transfer of wealth from taxpayer to bank stakeholders, with some money lost on the margin due to friction costs.

He means this:

Abstract

We calculate the costs and benefits of the largest ever U.S. Government intervention in the financial system. We estimate that the revised Paulson plan increased the value of banks’ financial claims by $109 billion at a taxpayers’ cost of $112 -135 billions, creating no value in the banking sector. We compare the cost of Paulson’s plan with the costs of alternative solutions that would have achieved the same objective in term of solvency of the banking system. We find that the revised Paulson plan is the most expensive for the taxpayers, second only to the original Paulson plan. The biggest beneficiaries of this massive redistribution were the debtholders of financial institutions, especially those of the three former investment banks and of Citigroup. The equity holders just broke even. [Emphasis added]

And, for the benefit of the auld firm of Hank, Bernanke, Kash’n’Kari & Geithner, a model. Or, more precisely, an illustration of the model:

Paulson’s Gift (Preliminary Draft)
by Pietro Veronesi & Luigi Zingales

University of Chicago, NBER & CEPR

Nov. 5 2008

Goldman analysts ‘Conviction Sell’

Goldman Sachs Group Inc, the Wall Street bank that cut 3,200 jobs last week, identified six equity analysts fired by the firm, including William Tanona, who covered companies such as JPMorgan Chase & Co., and Deane Dray, who followed General Electric Co.

Charles Chon, Ajay Kejriwal, Lawrence Keusch and Peter Wahlstrom also left, according to a note the New York-based firm sent to clients. The companies they covered are being dropped, suspended or reassigned. Goldman announced the departure of seven other analysts in a Nov. 5 note.

Goldman Sachs Fires Analysts Including Tanona, Dray

by Eric Martin

Bloomberg Nov. 10 2008

Goldman Sachs Lays Off 13 Analysts Including Tanona

DealBook (NYT) Nov. 10 2008

 

Memo to Henry Waxman

Some mortgage insecuritizers for the slabbe

Henry Waxman’s Coroner’s Court — d/b/a the House Committee on Oversight and Government Reform — gets back to work this week with hearings on ‘The Regulation of Hedge Funds’ and ‘Is Treasury Using Bailout Funds for Foreclosure Prevention, as Congress Intended?’ scheduled for Thursday, Nov. 13 and Friday, Nov. 14 respectively. 

Following the intensely entertaining, and occasionally informative, hearings on the Lehman Bros (Oct. 6) and AIG (Oct. 7) kabooms, the credit ratting (Oct. 22) and regulatory (Oct. 23) failures, and with Phoney & Fraudy on the schedule for Nov. 20, having the amateur pathologists back on blunt instruments duty will certainly brighten the week.

But the committee has so far avoided one lumbering target: mortgage insecuritizers. So, purely in the interests of good governance, fact-finding and anatomical specificity, NakedShorts nominates the following ‘panel’ for dissection at some not-to-distant date:

Lew Ranieri: Having last week cost the FDIC an estimated $1.5 billion in the floppage of his Franklin Bank, while simultaneously plotting a $1 billion venture with ex-GMAC veterans to buy...delinquent mortgages, the man who “helped turn Salomon Brothers Inc. into Wall Street's most profitable firm in the 1980s by packaging mortgages and selling them as securities” could testify on the history of securitization, the advantages of getting on both sides of a trade, and the economic benefits accrued by lending huge amounts of money to people who can’t pay it back. 

Christopher Ricciardi: Reportedly preferring the accolade of “Grandfather of the CDO,” the record suggests “Johnny Appleseed of Toxic Waste” might be closer to the mark. While modestly declining credit (see sixth item) for his contribution to the incineration of Merrill Lynch, Ricciardi continues making waves in his latest gig as chief executive officer of Cohen & Company, whose Strategos Capital Management unit was earlier this year mentioned in dispatches as leading the “managers of CDOs in default” table with $14.2 billion to its name. His other areas of expertise include lobbying rating agency executives, and providing unsolicited advice to Treasury secretary Hank Paulson. 

Howard Rubin: One of the first ‘victims’ of an MBS blow-up, Rubin got the boot from Merrill Lynch in 1987 after getting on the wrong side, by an amount reported by various sources as being in the $250-$500 million range (known today as a “rounding error”) in an IO/PO trade; the event also earned him extensive coverage in Michael Lewis’s ‘Liar’s Poker.’ Rubin rehabilitated himself running the CMO desk at Bear Stearns before his retirement in 1999, and is now a director of several publicly-traded companies which share the common traits of omitting the words ‘Merrill Lynch’ from his biography and going to hell in a handbasket. Among them: Fortress Investment Group, an aggressive (if somewhat early so far) player in the distressed paper market, where his board colleagues include Daniel H. “My Name Is” Mudd, Phoney’s recently former chief executive. Rubin could doubtless offer many fascinating anecdotes about playas and their games, swapped over his various board room tables. 

Bruce Rose: The principal of Greenrich, Conn.-based Carrington Capital Management LLC securitized mortgages sold by some of the more malevolent sub-prime miscreants including Fremont General, H&R Block affiliate Option One, and New Century, a Carrington shareholder. Carrington also paid $188 million (or roughly $50 million more than it originally bid) for New Century’s mortgage servicing operation, which has doubtless given Rose the opportunity to modify at least several mortgages in an effort to keep people in their homes. As a pioneer in the now mainstream redemption phenomenon, he is also well-positioned to testify as to the fantabulous benefits accruing to his investors from declining to return their chips.

NakedShorts is convinced that these gentlemen would sincerely appreciate the opportunity to bring you and your committee up to speed on the value of their contributions to the nation’s financial progress. And these are only the ones whose last names start with R. 

Uh oh, there goes the bid in Treasuries

So they’re gonna spend it, instead of socking it away:

Two things: 

1. Maybe they’ll up the foreign aid budget and put the US on the list of eligible recipients.
2. Great. Their turn to buy their own carp (deliberate typo).

China Announces $586 Billion Stimulus

All over the place Nov. 9 2008

 

Failure Friday™ twofer takes down Ranieri

The Federal Deposit Insurance Corp got invigorated game Friday, closing Los Angeles-based Security Pacific Bank and Franklin Bank, Houston, which was controlled by the renowned Salomon Bros mortgage securitization warhorse Lew Ranieri. 

The FDIC estimates that the cost of [the Franklin Bank] transaction to its Deposit Insurance Fund will be between $1.4 billion and $1.6 billion.

Excellent work Lew. Not exactly WaMu or IndyMac but they had a head start — Franklin (not to be confused with Franklin National) was only founded in 2002 — and not bad at all for a shop with “assets” (Ho, ho, ho, who said Sheila doesn’t have a sense of humor?) of just $5.1 billion, and total deposits of $3.7 billion. Congratulations. 

Now, wipe that smirk off your face and get back to the mailroom. You’re giving the white-hair-and-a-beard crowd a bad rep (see Grinning Idiot at right). 

Related reading, including the most hilarious Bloomberg headline in years, after the jump. With a side of Failure Friday™ ketchup.

Amateur! Speculators! on bailout line

That ‘nation of whiners’ thing is really catching on.

The Independent Connecticut Petroleum Association joined a host of oil heat dealing associations in the region to ask for loans to help the dealers buy out expensive [heating] oil contracts purchased this summer and help consumers into lower-cost contracts...

...Eugene Guilford Jr., ICPA executive director and chief executive officer, said in a letter to Treasury Secretary Henry Paulson:

“We now have millions of consumers who locked-in their prices at over $4.50 a gallon this summer who now see a retail price substantially lower than that. The only way our retail companies can swap out their higher-priced wholesale futures contracts for newer, lower-cost supply agreements is to literally buy their way out of them and pay their wholesalers.”

Patience, little grasshoppers. We’re just a decent cold snap, a geopolitical thingamajig, China back in the game and Evil! Speculators! getting back their mojo away from the old highs. And anyway, losing money on your hedges is a good thing. Or so I’m assured.

Contrarian election news

So, on Tuesday, the home of free market (cough) capitalism (cough, cough) elects a black community organizer as its next president. Come Saturday, li’l ol’ New Zealand turfed out the Labour Party and a long-serving woman prime minister for the conservative National Party and its white male and reformed locust (he made his fortune trading currencies for Merrill Lynch (RIP)) leader John Key. 

Conservative? Not so much; this result was the political spectrum equivalent of Joe Biden beating up on Nancy Pelosi.

While pols come and go, some more important things are pretty much forever: New Zealand beat Scotland 32-6 in this weekend’s rugby international, keeping alive a 103-year unbeaten streak. 

New Zealand leader loses election to conservatives

by Rohan Sullivan

AP (via The Washington Post) Nov. 8 2008

Key’s Landslide New Zealand Election Win Fulfills Child’s Dream

by Tracy Withers
Bloomberg Nov. 10 2008