Search results matching tag 'Morgan Stanley'

TARP recipients abuse borrowers

Jim Van Meerten — Mon, 05 Oct 2009 15:23:00 GMT

Over the weekend, McClatchy Newspapers had two powerful articles entitled "Help with mortgages is difficult to come by" and "Some firms with spotty pasts get tax dollars."

The articles expose how firms like Bank of America (BAC), Citigroup (C) and Morgan Stanley (MS) -- firms who were bailed out from the brink of bankruptcy by TARP with billions of taxpayer dollars -- are now abusing mortgage borrowers who are in trouble. The Treasury is doing little, if anything to monitor the situation.

In one case, Ronnie Fruia was about to lose his home when he, his mother and son were all hospitalized. He was recovering from a stroke and couldn't talk, but CitiFinancial sent someone to his hospital room to sign modification papers that didn't even cut his interest rate. State regulators had to step in to get his rate changed from 11.5% to a reasonable 5%.

In another case, Countrywide, a subsidiary of Bank of America, put a woman in default while she was being treated for breast cancer. Her church had raised money to keep her mortgage out of default but Countrywide refused to take a payment from the church.

Saxon Mortgage Services, a unit of Morgan Stanley, was sued by the attorney general of Missouri when he found that Saxon failed to properly credit loan payments to accounts even after the borrowers had proved that the payments had cleared their bank accounts. They even charged late fees though the mortgages were current.

The Government Accountability Office (GAO) in July found that the Treasury was short-staffed and had hired only half of the employees necessary to monitor the loan modification program.

Taxpayer dollars bailed out the banks from bankruptcy. Now the banks are on track to pay big bonuses while at the same time foreclosing on the very taxpayers who bailed them out. They have only worked with 12% of the mortgage holders that qualify for the Treasury's mortgage modification program.

Isn't it ironic that the bailout money goes to the very firms that invented these adjustable loans that got borrowers into this mess -- and now they turn their backs on borrowers trapped in their predatory lending schemes?

Jim Van Meerten is an investor who shares his opinions on financial matters on Financial Tides, MSN Top Stocks Blogs and Seeking Alpha. Please leave your comments below or email FinancialTides@gmail.com.

Disclosure: I hold no positions in the companies mentioned in this post.

JPMorgan auction not as transparent as it seems

Minyanville — Mon, 10 Aug 2009 16:13:00 GMT

This article was written by Minyanville's Megan Barnett

Since the downfall of Lehman Brothers, many of the biggest Wall Street banks have moved in lock step, as if to assume there is safety in numbers. Everyone took the bailout money at the same time (not that they had much choice), and now everyone wants to pay it back.

But now that the worst is behind the banking industry, or so many of them hope, at least one bank is finding reason to zig when everyone else zags. JPMorgan Chase (JPM) is taking the unusual step of auctioning off the warrants held by the U.S. government, instead of buying them back for a price negotiated privately with Treasury officials, according to the New York Post. The auction will be held in the open market and conducted by the Treasury Department.

(See also: Megan Barnett's "The Small Price to Pay for Financial Fraud")

It's different. It's transparent. It's fair. It makes sense.

It's also suspicious.

Here's how it works: When the banks took bailout money from the government's TARP program, they gave the government warrants. Those warrants give the owner, in this case the U.S. Treasury, the right to buy shares of the banks' stock at a later date for a discounted price. In returning the bailout money to the U.S. Treasury, the banks are also buying back those warrants. So far, the deals with other big banks like Goldman Sachs (GS) and Morgan Stanley (MS) have been struck behind closed doors, with the banks buying back warrants for prices determined in closed negotiations.

One finance professor who spoke to the Post likened it to selling your house back to the person who sold it to you. Maybe you'd have gotten a better price if you put it on the open market.

Since this is the taxpayers' money, critics argued, those negotiations should be out in the open. How are we to know that Morgan Stanley's warrants, which it bought back from the government for 68 cents on the dollar, were sold for the right price? Maybe someone else was willing to pay more for those warrants, giving more money back to the taxpayers' coffer. We'll never know.

Elizabeth Warren, the Harvard professor charged with public oversight of the troubled TARP program, estimates that taxpayers have lost about $2.7 billion on it so far.

Enter JPMorgan's Jamie Dimon, with the idea of letting the market determine the price of the warrants instead of striking a deal with Washington officials in a shroud of secrecy. Sure, JPMorgan may very well end up paying more to redeem those warrants than we would if we bought them back ourselves, but it's so much more fair than the way Goldman Sachs, Morgan Stanley, American Express (AXP) and the others did it.

You can just imagine the talks around the boardroom. "Hey, I've got an idea! Let's potentially lose money by letting the public bid on our warrants instead of just lowballing the Treasury like everyone else did. It would be so much more fair to Americans."

Forgive the cynicism, but fairness has never been a driving factor in dealmaking before, so it's tough to see why now is the time for it to start. It's also difficult to imagine how the bank officials expect to get a better deal from the auction than they would by spending an afternoon with Treasury officials.

Perhaps JP Morgan executives believe in karma, hoping that the goodwill accumulated by this stunning public relations coup will translate into more checking accounts and customer loans. Perhaps it's all part of a bigger effort to give Americans a warm and fuzzy feeling when they see the Chase sign down the street.

And perhaps they're right to do so. After all, how many $33 overdraft fees does it take to make up for the potential losses from a fair and open warrant sale?

No positions in stocks mentioned

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Robot wars hit Wall Street

Minyanville — Wed, 15 Jul 2009 13:28:00 GMT

It's hard to keep track of the untold spin-offs of the original Terminator movie -- but I wouldn't be surprised if the next installment is set on Wall Street.

Why, you ask? Because computers are now running the economic show, and they -- like the Terminator's eponymous robots -- seem to be engaged in a pitched battle to the death.

Dramatic market moves have become commonplace, and those looking for a fundamental explanation are missing a significant structural change: The majority of stock trades now originate with so-called “high frequency” funds, which use computers programmed with obscure mathematical correlations to execute trades. The computers trade in and out of stocks at light speed, sans human intervention -- no trader, no economist, no chart tracker. These funds argue that computers aren’t swayed by emotion, and naturally move much faster than a person ever could.

Ushered out is the model of fundamental investing that lasted a century. Still, humans must program the computers, and they’re not infallible (see the 1998 collapse of Long Term Capital Management).

These funds are generating almost three-quarters of all US equities trading volume, the Tabb Group, a consultancy, recently estimated. Five years ago, the fraction of total trades carried out in this way amount was estimated as less than one-quarter. Some of the funds are household names -- Renaissance Technologies and Goldman Sachs (GS) are 2 of the biggest players -- but others, like GETCO, Peak6, RGM Advisers, and Hudson Bay, aren't. Many are based in Chicago, and emerged from the city’s options trading pits. Other hedge funds run by the likes of Bank of America (BAC), Morgan Stanley (MS), Citigroup (C), and
UBS (UBS) also have used the strategy.

Their presence has expanded quickly following the start of the bear market: Hedge funds and money managers lost money and dropped out in droves. They use trading strategies that arbitrage minute differences in share prices and trading speed -- known as latency -- between exchanges and other trading venues.

“They are, as a rule, secretive, stealthy, smart, and relatively unknown,” Robert Iati, a partner at Tabb, told the Financial Times. “The incredible capabilities offered by technology have given meteoric rise to a relatively few high frequency proprietary trading firms that now wield far greater influence on the markets today than most people recognize,” he added.

Since the firms are so secretive, they closely guard their complex computer algorithms. Last week, US federal prosecutors charged Sergey Aleynikov -- a former Goldman Sachs computer programmer -- with stealing computer code from the bank’s high-frequency trading business.

While defenders of these firms say they increase liquidity and efficiency in the way markets move, their critics are plenty. As a recent article on the Wall Street Journal’s website pointed out, the stock market is more prone than ever to large, seemingly random intraday moves. Computers don’t analyze the news and they're not forced to justify their trades.

Rick Bookstaber, author of A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation, recently wrote on his blog that the rising computer tide was without social benefit. He asked:

“Does anyone really get a benefit in having the latency of their trade cut by milliseconds -- except for the fact that their competitor is also spending the money to cut his latency? Should anyone care if a news event hits market prices in 29 milliseconds rather than 30 milliseconds? Does it do anything to make the markets more efficient? Does it add any value to society?”

One answer is clear: The conventional broker or investor seems to be at the mercy of these firms, their arsenal of computers, and their decisions. Whiplash from intraday moves is a surefire case of collateral damage.

Top Stocks blogging partner Todd Harrison is founder & CEO of Minyanville.com. This post was written by Minyanville Contributor Ryan Goldberg.

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US Bancorp: A top analyst's best idea

Ken Kam — Tue, 14 Jul 2009 19:11:00 GMT

With today's news of Goldman Sach's (GS) strong second-quarter results, it is becoming clear that the financial industry's survivors are going to be big winners. To find out which companies are worth evaluating, I asked one of Marketocracy's mFOLIO Masters, Eugene Groysman, for his best idea. mFOLIO Masters are the creme of the crop at Marketocracy.com, I've tracked Groysman for the past 6 years, and over that time he averaged 21.8% a year. That's why we started making his portfolio available for clients in our managed account program.

He surprised me by picking US Bancorp (USB) over better-known rivals Goldman Sachs, Bank of America (BAC), Citibank (C), Morgan Stanley (MS) and JP Morgan (JPM). I'm going to let him explain in his words why US Bancorp is his pick.

US Bancorp (USB)

By Eugene Groysman

When one thinks of banks, the first gut reaction would be to run for the hills. Who in their right mind would buy stock in any banks today, right? Well, you would be wrong. There are many banks that are solid players in the financial recovery we are seeing. One of them is US Bancorp, which has been solid throughout the entire banking fiasco. It's true they took TARP money, but have paid off TARP funds' equaling about $6.6 billion, and the company has never failed to pay a dividend to stockholders. US Bancorp is considered a spend thrift type of company; it rarely spends money other than to acquire other banks or to pay stockholders.

It is true US Bancorp took TARP monies in November 2008, but on the 22nd of the same month US Bancorp was able to purchase two small regional banks in Arizona and California, Downey Financial Corp, and PFF Bank &Trust. These acquisitions helped increase market share for US Bancorp in those two states. The ability to acquire new assets during these sets of circumstances shows that the company is being run in the stock holder's best long-term interests.

The stock price itself is looking more and more attractive. The 52-week trading range for this stock is from $8.06 to $42.23. That is large trading range, nearly 500%. In my opinion, the only reason the stock even got to that low was due in most part to the over-all financial debacle. The current price is right around $18, and has been pretty steady in a nice trading range in the last month. peaking at about $19 and bottoming at $17. The highs and lows for this stock are getting tighter and tighter, and I forsee a breakout into the high 20s. By the first quarter of next year, it could break into the mid-30s.

The during the bleakest moments of the this latest market fall and with its price falling to all time lows, US Bancorp continued to pay $1.40 per share. For a company to be able to do that means that it has spare cash laying about after all is said and done. After taking TARP monies, it decided to slash dividends to preserve capital so it would be able to pay off TARP sooner than later. This measure proved prudent, because as of the beginning of June, US Bancorp was able to repay the $6.6 billion it received from the Fed. With TARP repaid, it looks like US Bancorp will be the first large bank to meaningfully boost its dividend. However, it might not hit the high notes just yet, but with recovery comes a brighter out look for dividends.

This stock is poised for a solid run in the next couple of years. With sound judgments by management, stock growth and the likelihood of meaningful dividend increases, this stock is a solid long-term play. Anytime you can pick up a solid company trading off its high by 42% heading into a recovery, with the sights set on higher dividends, it would be wise to buy.

Ken Kam is president and CEO of Marketocracy.com

5 things to know for the week ahead

Minyanville — Fri, 12 Jun 2009 18:14:00 GMT

This post was written by Minyanville Executive Editor Kevin Depew.

1). Credit crisis abating

Last week I talked about rising bond yields affecting equity prices and how the most-watched events of the week would be the Treasury auctions. I was wrong. I began this week fiercely determined to remain awake long enough after churning out one of these daily columns to closely monitor three days' worth of Treasury auctions; the 3-year, 10-year and 30-year auctions collectively known as "refunding," a *** misnomer that was probably once an inside joke that just happened to stick. So much for that. The action isn't in Treasury funding at all, but corporate issuance.

On Tuesday, the following note on Anadarko Petroleum (APC) scrolled across my Bloomberg screen:

* ANADARKO PETROLEUM TO SELL $750 MILLION OF 5-, 10-YR DEBT

But that's not what happened. As it turned out, demand was so strong APC boosted the size of its sale from $750 million to $900 million. As well, the spread (the difference in yield for this debt above Treasurys) estimated to be in the 305-337.5 basis point range, actually came in lower, 295 to 325 basis points.

OK, that's one company, but all told there were more than $2.2 billion in corporate bonds issued last Tuesday, in spite of a record $71 billion the Treasury is raising over the next couple of days.

This means only one thing: The credit crisis, for now, is abating. It doesn't matter what stocks think, not right now. What matters is that the credit market is seeing new demand for debt issuance. This credit buying will eventually spill over into equities, as happened in 2003. Of course, at the end of the day the debt crisis remains, but that's a story for another day.

2. TARP paybacks

If you don’t remember TARP, it stands for Troubled Asset Relief Program. The idea behind the program was the U.S. government would buy equity in financial institutions in order to keep them from going under during the financial crisis.

The government set aside $700 billion for this program. The good news is that after more stimulus from the government -- printing money -- the banks -- well, some of the banks anyway -- can now pay the government back the money it loaned them.

The Treasury is allowing 10 banks to repay up to $68 billion. These TARP repayments will begin Wednesday when JPMorgan Chase (JPM), Morgan Stanley (MS) and American Express (AXP) are expected to make payments.

Now, this has been seen as a non-factor by Wall Street, but combined with signs the credit crisis is abating, don’t underestimate the positive psychological signals being sent here.

3. 944.43

Having said that, 944.43 has been the S&P 500 battleground over the past nine consecutive sessions.

944.43 is the TD Absolute Retracement level from the March 6 low. See chart here.

What we have been watching for is a qualified break of that level to signal the SPX is ready to put that in the rear-view mirror and attempt to scale to a new level above 1,000. Thursday's higher close following a prior down close "pre-qualified" that level as a potential breakout, but in order to meet all the requirements we needed for Friday's open to be above Thursday's close. That was not the case, so the battleground level remains.

Meanwhile, note that Thursday's high, 956.23, finally met the TD Propulsion Up Exhaustion level at 954.12 (shown in light blue on the chart).

All of this increases the probability that the significance of 944.43 remains valid as a ceiling, and that the churn is closer to wearing out buyers than eliminating sellers.

4. Dude, Dell is making a deal

On Thursday, Dell (DELL) CEO Michael Dell said his company is interested in making an acquisition in servers and other corporate data services. Dell said, “We are focused on data centers, service, software, servers and storage. Those are likely areas for Dell to use its capital for non-organic growth.”

Now that we know Dell is on a shopping spree, who will it possibly buy?

Research firm Kaufmann came out with a note of potential acquisition targets, saying it would make more sense for Dell to acquire a smartphone maker, such as Palm (PALM) and Motorola (MOT). The firm said Dell should look this direction -- instead of the one mentioned by the CEO -- because it would be a bold step allowing Dell to go head to head with Apple (AAPL) and Research In Motion (RIMM) in the fast-growing smartphone market.

Whoever Dell buys, expect the deal to come sometime this summer.

5. The socionomics of pandemics

The main tenet of socionomics is that social mood drives social action, not the other way around. This view upends traditional causality and how events are presented in the media. For example, it would be a natural assumption by most people that pandemics, such as the rapid spread of the H1N1 "swine flu" virus, would cause people to become more negative and fearful. The reality, however, may be that negative social mood trends make people more susceptible to pandemics.

This thesis was recently outlined in a new publication from the Socionomics Institute, called "The Socionomist."

"Socionomics posits that the trends in social mood -- widely shared feelings including those of optimism and pessimism -- unfold in a hierarchical pattern of similarly shaped waves that are visible in charts of stock prices, our most sensitive meter of social mood. Major epidemics occur near lows in social mood -- often near significant, fearful bottoms in stock prices -- and can persist well into the subsequent uptrend."

The silver lining here, if there is one, is that the potential peak of the spread of the H1N1 pandemic, which the CDC believes may occur later this year and early next during the typical flu season, will likely coincide with a significant low in stocks, if we have not already seen it.

Take a look at the charts here compared side-by-side. The first chart, from Realty Trac, shows a map of incidence of foreclosure. The second one shows incidence of H1N1 spread via MSNBC.

Top Stocks blogging partner Todd Harrison is founder & CEO of Minyanville.com. This post was written by Minyanville Contributor Kevin Depew.

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BAC to break $30?

Minyanville — Thu, 11 Jun 2009 16:05:00 GMT

In February, when Bank of America (BAC) was below $4, some folks scoffed when I said it was worth at least $30.

I know some may think I'm some sort of loony tune, or might suspect I make outrageous claims just to attract attention. Quite the contrary: I do serious analytical work, and I take my reputation as an analyst very seriously.

Why do I bring this up? I wrote a report in which I presented a model showing that Bank of America was probably worth at least $30. I was called everything from ignorant to a stooge of the government.

On May 8, in an article entitled The Crisis is Over -- For Now, I shared the fact that I'd updated my model and believed that, based on SCAP assumptions, Bank of America was worth $40. People scoffed again.

I was therefore particularly pleased to read today's very in-depth report by Morgan Stanley’s (MS) bank analyst Betsy Graseck. I came to the report by chance; I'd read that she increased her second-quarter earnings estimates this morning, and I was curious to see what Ms. Graseck has been thinking lately. I consider her to be probably the best bank analyst on Wall Street. Nobody's more thorough, technically competent, and more analytically sound in terms of modeling and valuation methodology than she.

Ms. Grasek and I don't know each other. However, she's arrived at 2010-2013 earnings estimates that are very similar to my own. According to Ms. Graseck’s estimates, Bank of America is trading at 3.5 times 2011 EPS, 2.8 times 2012 EPS, and 2.4 times 2013 EPS. Additionally, the company is trading at 0.8 times Tangible Book Value -- which is absurd for a franchise that will be producing a tangible ROE of over 20% by 2011.

Her price target for Bank of America: $32. I find this extraordinary, since we all know that Wall Street analysts are under a great deal of pressure not to issue price targets too far ahead of the market. But Bank of America is Ms. Graseck’s top pick. And -- based on extensive conversations with the heads of every major division at Bank of America (which she summarizes in detail in her report) -- Ms. Graseck increased her 2009 EPS estimate for the company by about 20%.

With respect to Bank of America, it looks like I now have somebody to take ursine derision with.

Top Stocks blogging partner Todd Harrison is founder & CEO of Minyanville.com. This post was written by Minyanville Contributor James Kostohryz.

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Vultures descend on mortgage market

Minyanville — Wed, 10 Jun 2009 18:29:00 GMT

In early 2006, when subprime powerhouse New Century went bust, vulture investors began to salivate at the opportunities a collapsing mortgage market would offer up like manna from the trading gods. They started raising money. And lots of it.

Billions were poured into so-called "mortgage opportunity funds," which planned to pick through the wreckage of the once-high-flying housing market. Some investors aimed to focus on mortgage-backed securities, hoping to buy in at pennies on the dollar so just a few bond payments would reap sizable returns. Others, however, delved into the realm of whole loans, buying troubled mortgages from floundering banks.

As noted in the Wall Street Journal this morning, an investment strategy that seemed like a slam dunk on paper -- buying distressed mortgages on the cheap, and working out equitable arrangements with borrowers -- has proven extremely difficult to execute.

The prevailing wisdom was that, as delinquencies rose, and banks amassed a seemingly limitless portfolio of troubled loans, the likes of JP Morgan Chase (JPM), Bank of America (BAC) and Citigroup (C) would be forced to unload assets at firesale prices. Because they were buying at super-low prices, investors expected to have the necessary cushion to forgive principal, lower interest rates, or otherwise get borrowers back on track. They would, of course, earn a hefty profit for the effort.

But the housing market, which tumbled further and faster than all but the most pessimistic experts thought possible, had other plans.

Throughout 2007, any player that dipped a toe into the market lost a foot. Property value declines accelerated, securities prices tumbled, and economic conditions continued to deteriorate. Sellers, hoping for a rebound, were reluctant to accept lowball prices. Few trades were executed, and the lack of liquidity drove the market to new lows.

Then, in 2008, as delinquencies began to spread from the subprime to the prime market, home prices continued to slide, and it became clear there would be no easy fix to the housing market's woes, big banks recognized their need to raise capital by selling assets.

The market for distressed loans began to flourish as liquidity entered the market: Sellers accepted painfully low prices, and investors started deploying more capital. Prices for pools of mortgages in various stages of default began to stabilize, typically around $.50-$.60 on the dollar. As 2008 rolled along, the wheels of the financial markets truly lost their grip on the road, Washington stepped in with the Troubled Asset Relief Program (or TARP) in October. In the distressed mortgage market, uncertainty became the rule of the day, as buyers and sellers alike ceased trading in expectation of new clearing prices created by an asset purchase program that never came.

Traders then sat on the sidelines as the election played out, waiting to see how front-runner Barack Obama's promised foreclosure moratorium would impact the housing market.

Meanwhile, Uncle Sam poured capital into banks to try and jumpstart lending. With taxpayers bailing out the market's most leveraged players, Morgan Stanley (MS), Goldman Sachs (GS) and other Wall Street firms got a reprieve from bets gone awry.

Distressed investors hoped banks would finally be willing accept low prices for their assets. Not so. Just when it looked like a few select sellers were going to test the waters of the distressed market, the new Treasury Secretary Tim Geithner announced the Public-Private Investment Program (or PPIP).

The PPIP -- a bastardized version of TARP that employs leverage, and is purported to profit both taxpayers and private investors -- is yet to materialize.

The distressed whole loan market remains largely frozen, as sellers hope for higher prices from buyer's backed by cheap government money. Buyers, meanwhile, remain cautious, since, despite recent "positive" datapoints coming out of the housing market, real-estate prices remain volatile in most markets.

The private market for delinquent mortgages once held the potential for a market-based solution to the country's housing woes. It was no magic bullet, to be sure. But by fostering an environment where private capital could seek out advantageous investments, housing markets would have started down the path towards true price discovery.

As it happened, however, massive government intervention into the market via TARP, the foreclosure moratorium, the PPIP, and other programs forestalled the inevitable, pushing the date of the eventual recovery years into the future.

This is good news for banks that survived the maelstrom of financial market turmoil, albeit based largely on trumped-up earnings and unrealistic asset prices still on their balance sheets. For homeowners, consumers, and the public in general, however, true hope for a legitimate stabilization in housing markets, and the economy in general, has been pushed further along the curve.

Top Stocks blogging partner Todd Harrison is founder & CEO of Minyanville.com. This post was written by Minyanville Contributor Andrew Jeffery.

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Financials use artificial rally to issue real equity

Minyanville — Tue, 12 May 2009 16:59:00 GMT

Not surprisingly, and very wisely, it isn’t just banks raising equity these days. I’m not the biggest fan of Tim Geithner, but I’m starting to think he’s a heck of a trader. Some of the biggest shots around would've been proud to have engineered his short-squeeze (formally known as a “stress test”), into which banks like Wells Fargo (WFC) and Capital One (COF) have been selling. Geithner seems to have understood the performance anxiety he could generate, and to have taken full advantage. Frankly, he deserves a lot of credit for pulling it off.

OKy, let me stop digressing. Smart companies (like Bank of New York (BK) and Morgan Stanley (MS)) are taking advantage of this arguably artificial rally to raise equity without difficulty. A couple of months ago, some of these firms might not have been able to sell stock at any price, let alone today’s prices. It’s yet another testament to the power of like-minded thinking by portfolio managers: I’ll buy it if you’re buying it, but not otherwise. (Now comes another shameless plug for my upcoming book, "The Undoing of Cowardice," which talks about this tendency and suggests ways for investors to recognize and profit from it.)

When companies issue new equity, it’s a two-run homer for convertible arbitrageurs. Convertible arbitrageurs are long bonds and short stock. The issuer’s credit quality has clearly improved (with the added equity cushion improving the first line of defense against losses, shielding bondholders) and the stock goes down. Good for the long, bad for the short.

When convertibles are highly equity-sensitive and the underlying stocks are well above the conversion prices, new equity offerings don’t matter much, because the convertibles essentially are acting like stock already. But when credit quality is an issue -- as it is, as a very general rule, for convertibles trading at or below par value -- new equity issues are a very big deal. And even with the recent run-up in stocks, almost all convertibles (other than those issued in the last couple of months) are still trading well below par.

I'd expect the spate of equity issuance to continue. Not only are corporate financial managers subject to some of the same "me, too" mind-set as professional investors, but it happens to be a really good idea. It isn’t every day the secretary of the Treasury engineers a giant short-squeeze that lifts the weakest stocks the most. Issuing stock now is sort of like playing a "Get Out of Jail Free" card. And convertible holders will be prime beneficiaries.

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The popularity of the big bank print

Minyanville — Mon, 11 May 2009 16:10:00 GMT

During my days as a convertible hedge-fund manager, one of the humorous, though important, regular events was the pricing of a new deal. I say humorous because a remarkably small amount of the time spent discussing the new deal went into the deal’s actual merits.

Far more important -- if you were a convertible manager -- was how the deal was going.

“Oh, it’s three times oversubscribed already, let me put you in for $100 million if you really want $10 million." That was the mantra of the convertible salesman.

“But I don’t want $100 million. I only want $10 million.”

“Everybody else is going in for 10 times what they really want.”

“Not me.”

Other calls would be something like, “Oh, this one's really going well. Lots of buyers. Lots of outright buyers.” Rarely did they go, “This is cheap. This is a good credit. This company has a good plan for using the money to grow and pay off more expensive debt.”

Of course, in the heyday of convertible hedge funds, one of the big misconceptions was that if a deal was “placed” with outright funds -- funds that were buying the convertible as a way of playing the stock’s upside, not trying to isolate relative value between the convertible and the stock the way hedge funds do -- the convertible issue would be less susceptible to “flipping.” Flipping is, as you probably know, when someone buys a new deal and immediately looks to resell it for a quick and nearly risk-free profit.

Hedge funds, according to the general lore, were more inclined to flip for quick profits. In my experience, the opposite was true: The supposedly long-term outright accounts took advantage of their benign reputations (which helped them get the best allocations on the most desirable new issues) and flipped like cooks at a crowded IHOP on a Sunday morning.

Anyway, the recent flurry of bank issues -- think of Wells Fargo (WFC), Morgan Stanley (MS), Goldman Sachs (GS), or JPMorgan Chase (JPM) -- made me think of all this.

It’s no mystery that lots of people have been short, or at least underinvested, in the bank names, leading to the violent upward gaps.

If you're short something or are underinvested in it, a big print where you can buy at the same price as everyone else is manna from heaven. (Note: The rules won’t let you cover a short within the past week by buying newly issued stock, preventing you from trying to run ahead of a deal. But an old short is OK.)

You don’t have to close your eyes and put in a market order knowing you’ll probably get a horrible fill. You get the same price as everyone else, and you probably get close to what you really want. You don’t have to worry about getting a worse execution than your competition. In this sad world, where relative performance is often more important than whether you’re actually making or losing money, that’s an important benefit to your garden-variety money manager.

The popularity of these big bank prints, then, should surprise no one. As long as we live in a world where performing in-line with benchmarks is more important than how you really do, where people in theoretically fiduciary roles funnel money to Bernie Madoff and take pride in not knowing how he generates his returns, then being comfortably surrounded by your peers is more important to job preservation than actually deciding whether this is the right time to be buying.

This process is central to my forthcoming book, "The Undoing of Cowardice." Keep an eye out for updates.

Top Stocks blogging partner Todd Harrison is founder & CEO of Minyanville.com. This post was written by Minyanville Contributor Bill Feingold.

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Minyanville — Tue, 05 May 2009 18:22:00 GMT

To believe some in the press, this week’s stress test carries comparable weight to President Franklin D. Roosevelt’s bank holiday in 1933; that is, the test will signal the bottom of our current banking crisis.

With all due respect to the parties involved, as Mae West would say, “I may have been born yesterday, but I’ve been up all night.” You can fool me once, maybe twice. But if I use Citigroup (C) as the sample, announcing the stress test as the bottom would be, by my count, the eighth time.

This morning, just for fun, I went back and looked at all of the capital-raising done by Citigroup over the past 18 months and the comments from management. And while a lot has changed in the economy over this period of time, unless the regulators announce hundreds of billions in new capital going into Citigroup and the other major banks in the system, it's very hard for me to see how Thursday night’s announcement will be anything more than yet another insufficient, albeit needed, step in the process.

So at the risk of going down memory lane…

In November 2007, Citigroup raised $7.5 billion in mandatorily convertible preferred stock from the Abu Dhabi Investment Authority, and at the time, Win Bishoff, Citi’s then acting CEO said:

“This investment, from one of the world's leading and most sophisticated equity investors, provides further capital to allow Citi to pursue attractive opportunities to grow its business. It builds on a series of actions we have taken over the past several months to strengthen our capital base, which have included sales of certain non-strategic assets, the issuance of trust preferred securities, and the previously announced plan to use common stock to purchase 32% of Nikko Cordial in Japan.” (Author's note: Last week Citigroup announced that it was selling 100% of Nikko Cordial.)

Then In January 2008, it raised $14.5 billion in additional convertible preferred stock, cut the dividend to $0.32, announced the sale of “non-core assets” and at the time, new CEO Vikram Pandit said:

"We are taking comprehensive action to position Citi for the future with the capital strength that will allow us to refocus on earnings and earnings growth. In an uncertain environment, these actions put us on our ‘front foot,' focused on capturing opportunities that earn attractive returns for our shareholders." Then in April 2008, Citigroup raised $4.5 billion in common stock, and at the time, CFO Gary Crittenden said: "We were pleased to increase the offering size to $4.5 billion in response to strong demand from a broad base of investors. This optimizes our capital structure and further strengthens our balance sheet."

After announcing the sales of CitiStreet to State Street (STT) and its German banking operations in the summer of 2008, Citigroup obtained $25 billion in preferred stock in October as one of the original nine TARP banks.

In November, Citigroup added “$40 billion of capital benefit” through the issuance of another $27 billion in preferred stock to the Treasury and the FDIC, and obtained a government guarantee on $306 billion in assets backed by residential and commercial real estate. At the time, Mr. Pandit said:

"This weekend, the US government and Citi worked together in an unprecedented way to address market confidence and the recent decline in Citi's stock price. We reached an agreement based on an innovative market solution to further strengthen our capital ratios, reduce risk, and increase liquidity. We appreciate the tremendous effort by the government to assure market stability. We are committed to streamlining our business and providing outstanding banking services to our clients around the world. We will continue to focus on opportunities and alternatives to further enhance the company's overall position and value.”

In January of this year, Citigroup announced that it will be combining its brokerage arm, Smith Barney, with Morgan Stanley (MS), creating $6.5 billion in tangible common equity.

In February, Citigroup announced that it would “exchange preferred securities for common, increasing tangible common equity to as much as $81 billion.” And at the time, Mr. Pandit said:

“This securities exchange has one goal - to increase our tangible common equity. While we believe Tier 1 capital remains the most important measure of the financial strength of banks, we recognize that the markets also view Tangible Common Equity as an important measure. This transaction -- which requires no additional investment from US taxpayers -- does not change Citi's strategy, operations or governance. Our clients and partners will not be affected and will continue to receive the high level of service they expect from Citi around the world."

Top Stocks blogging partner Todd Harrison is founder & CEO of Minyanville.com. This post was written by Minyanville Contributor Minyan Peter.

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