Wall Street Breakfast: Must-Know News

• IndyMac's backdating scandal. The Treasury has launched a formal probe into the Office of Thrift Supervision after discovering a senior bank regulator let IndyMac backdate its records just weeks before it was seized by the government. OTS supervisors allowed IndyMac, once the nation's 10th-largest mortgage lender, to record $18M of a $50M capital injection made on May 9 as if it had been carried out before the end of Q1 in March. This leeway made IndyMac appear to cross the threshold of a 'well-capitalized' institution when in fact it was only 'adequately capitalized.' Federal regulators seized the mortgage lender in July at a cost of $8.9B to the government's deposit-insurance fund.
• Investors flee bailed-out auto firms. General Motors (GM) closed down 21.6% yesterday as investors bet the troubled automaker's bailout won't be enough to keep the company afloat. Credit default swaps on the company’s bonds jumped 2%, while S&P reduced GM's unsecured debt to C and forecast a 'high' likelihood of bankruptcy. In the event of a default, S&P added, creditors should expect 'negligible recovery.' As for Chrysler, some analysts believe the government's bailout money will most likely be used to prepare the country's No. 3 automaker for an orderly winding down of its assets. S&P lowered Chrysler's corporate credit rating to CC, a junk status just two notches above default.
• Madoff litigation mess begins. At least two separate lawsuits are underway related to Madoff's $50B scam and at least one more is potentially on the horizon: 1) Investors are suing Fairfield Greenwich Group for failing to protect their assets, and for jeopardizing investors’ interests while collecting 'millions of dollars in fees.' Between two funds, the hedge fund firm had $7.5B invested with Madoff. 2) An investor who lost nearly $2M with Madoff filed an administrative claim against the SEC for negligence in failing to detect a decades-long fraud. An administrative claim is the first step in filing a lawsuit against the government. 3) Perhaps most controversial is the possibility that previous investors will be sued for some or all of their profits or principal, even if they pulled out of Madoff's fund as long as six years ago, in order to spread out losses more evenly among current investors. Irving Picard, the trustee appointed to liquidate Madoff’s brokerage, is authorized to recover money that was distributed as part of a fraud and to share it among the victims. Picard declined to comment on whether he intends to pursue this course.
• CIT becomes a bank. CIT Group (CIT) received approval from the Federal Reserve to become a bank-holding company, clearing the way for it to access up to $2.5B in capital from the government's financial rescue program. CIT doesn't plan to acquire another depository institution at this time, the Fed said in its approval.
• Yields fall on T-notes. The Treasury sold $38B in two-year notes at 0.922% yesterday, the lowest yield on record and the first time in history that two-year notes have gone for under 1%. Still, the yield was higher than the 0.912% forecast.
• China's rate cut. China cut interest rates for the fourth time since September, to 5.31% from 5.58%, and dropped banks' reserve requirement ratio by 50 BPs. Despite the moves, and a recent 4T yuan stimulus, analysts say growth will continue to slow.
• U.K. GDP contracts. The U.K. economy contracted 0.6% in Q3 from Q2, the most since 1990, vs. an expected 0.5% contraction. Mortgage lending dropped to the lowest in 14 years. The pound has lost almost a quarter of its value against the currencies of the U.K.’s biggest trade partners this year. "It’s going to get worse before it gets better," warned economist Ross Walker.

Earnings: Monday After Close

• Red Hat (RHT): FQ3 EPS of $0.24 beats by $0.06. Revenue of $165M vs. $166M. Shares +8.6% after hours. (PR)
• Tibco Software (TIBX): Q4 EPS of $0.23 beats by $0.04. Revenue of $185M vs. $196M. Shares +8.1% after hours. (PR)

Today's Markets

• Asia markets closed broadly down. Hang Seng -2.75% to 14,221. Shanghai -4.55% to 1,897. BSE -2.4% to 9,687. Kospi -3.0% to 1,144. Nikkei closed.
• In Europe at midday, markets are up slightly. London +0.3%. Paris +0.03%. Frankfurt +0.3%.
• U.S. futures: Dow +0.1%. S&P +0.2%. Nasdaq -0.1%. Crude +0.03% to $39.90. Gold -0.3% to $844.90.

Tuesday's Economic Calendar

• 7:45 ICSC Retail Store Sales
  8:30 Corporate Profits
  8:30 GDP (final)
  8:55 Redbook
  10:00 University of Michigan Consumer Sentiment
  10:00 Existing Home Sales
  10:00 New Home Sales
  10:00 State Street Investor Confidence Index
  5:00 PM ABC Consumer Confidence Index
• Notable earnings after Tuesday's close: MU

Seeking Alpha editor Eli Hoffmann contributed to this post.

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Comments

[JCCIII:]

How Obama and the Democrats in Congress handle the Big 3 could be a turning point in the current financial mess and the future of US capitalism. Will they cave in to the UAW due to the contributions they have accepted? Will they impose real, and fair, structural changes (on all parties; management, labor, investors, suppliers, dealers, etc) that will make the US auto industry competitive in the global economy? For the sake of all, I hope they make the right moves.

2008 Dec 23 09:51 AM

[Prudy:]

For them to make the right moves now would require them to act contrary to how they have acted thus far in this mess. I doubt that will happen.


On Dec 23 09:51 AM JCCIII wrote:

> How Obama and the Democrats in Congress handle the Big 3 could be
> a turning point in the current financial mess and the future of US
> capitalism. Will they cave in to the UAW due to the contributions
> they have accepted? Will they impose real, and fair, structural
> changes (on all parties; management, labor, investors, suppliers,
> dealers, etc) that will make the US auto industry competitive in
> the global economy? For the sake of all, I hope they make the right
> moves.

2008 Dec 23 10:25 AM

[axelrod608:]

>> "How Obama and the Democrats in Congress handle the Big 3 ...hope they make the right moves. " >>

Wishful thinking. There is NO "right" way to handle the mess the US automakers have been building for years, no, decades. NO painless way. NO magic formula for turning this sow's ear into a silk purse.

It is absolutely necessary to cut legacy costs from the parent companies for them to have any chance at viability. Switching UAW retirees from pension and health insurance to Social Security and Medicare will be messy. There will be chaos in the auto parts markets and dealer networks.

To think that there is some magic program that can be implemented that will "solve" the problem is naive. To saddle the incoming President with the expectaion that he can wave his magic wand and fix it all is totally unfair to him.

The US automaker mess will get messier and more chaotic regardless of what this or the next President or Congress do.

2008 Dec 23 10:53 AM

[Fed up:]

How can anyone save the Detroit 3 from themselves? The UAW has killed the golden goose over the last 35 years despite it being obvious they were bleeding them to death, but they didn't care. Like petulent children they demanded more and more and would pitch a fit if anyone dared point out their businesses were dying and costs were out of control. Now, all of a sudden some "program" or "restructuring" is going to save them? Good luck with that. As long as the UAW gets its pound of flesh from someone (taxpayers now?), they could care less.

2008 Dec 23 11:41 AM

[axelrod608:]

>> "The UAW has killed the golden goose..." >> Not solely their fault. There's plenty of blame to go around. I grew up in a "Chevy town" and management sucked even back in the 50's. My father worked for GM pre-war, and the workers NEEDED a union to protect them. Do not saddle the UAW with all the blame.

The US auto "Big 3" are the world's largest dysfunctional family and have been for decades.

2008 Dec 23 12:00 PM

[BerkeleyBob:]

As if the Big 3 management bargaining teams were innocent rubes taken advantage of by the big bad UAW. In reality, the Big 3 were always willing to give away the store on future benefits in exchange for short term concessions. I doubt there was serious consideration given to the long term but these were contractual obligations and I don't think the Big 3 were the only corporations to focus on quarterly earnings to their detriment. Even a Chap. 11 restructuring and partial reduction of retiree benefits will simply impact other programs. The fed's pension guarantee fund is neither a guarantee nor adequately funded...

2008 Dec 23 12:07 PM

[BUGGS:]

Say what you will, fact of the matter is the "Big Three" must become and very quickly competitive and profitable again. Too large a portion of our economy is based on auto sales, service and production to believe other-wise. Chapter 11 really is not an option for obvious reasons. Change with-in the industry is needed but must come over a specific period of time and in line with increased production and sales. Our government and the con-sumers created this "three headed dragon" and the issue at hand should be how to legally control it without slaying!

2008 Dec 23 12:43 PM

[secmaven:]

The US government must become the buyer of last resort by purchasing millions of GM and Chrysler autos and parking them in the Arizona desert along side of all the Boeing products stored there.

2008 Dec 23 12:49 PM

[woodsey:]

If congress and Obama don't support the pension tnsurance there will be hell to pay.

2008 Dec 23 12:50 PM

[jackooo:]

Obama will set us free.....................

2008 Dec 23 01:42 PM

[xmichaelx:]

It only costs $1000 more to build an American car than a Korean/Japanese one. That's $16 per month over the average loan span of a car.

Those who believe the talk radio hosts and "conservative" politicians -- that the current disaster is a result of the UAW driving up costs -- really should try looking at the numbers involved. You don't even have to read the balance sheet, just go to www.edmunds.com/)

Yes, the UAW is a very small part of the problem, but to believe that Americans buy foreign cars over American because of price is ridiculous.

American cars are less reliable in the size/price class dominated by Honda, et al. Saturn could have turned that around, but the marketing wasn't there. And if you didn't hear all the head-scratching when Ford canceled the Taurus, then you just weren't listening.

It's only partially shocking that this site is so full of people with complete lack of business understanding. Then again, it's possible (and I hope it's the case) that most of you are high school kids who don't even invest.

2008 Dec 23 01:49 PM

[bbowen7:]

The only commonality between the three in 2008 is the UAW. Chrysler is owned by a vulture capital firm that made a bad bet. GM is run by a group that is still in denial - and who see the problem in political rather than business terms. Ford started a major restructure three years ago, has a good product pipeline, and had the foresight to line up financing before they needed it. (disclosure: I recently bought some Ford stock, anticipating them to be the only survivor.)
Biden was right that Obama will be tested by our enemies in his first months in office. It's just not Ahmedinejad, it's Gettlefinger. Hopefully, the Senate Republicans will hold together and actually force change that we can believe in.

2008 Dec 23 02:39 PM

[notsosmart:]

its all ponzi.im not a union person but if the uaw worked free then gm would still foldasthey should.its still ok as the sheeples are still swilling beer(consumption up) as they are getting fleeced.the stadiums are filled & sports are the most important events.

2008 Dec 23 03:28 PM

[xmichaelx:]

Right in SF says: "The only commonality between the three in 2008 is the UAW."

No - the other commonality is piss poor marketing of the class of cars that still (somewhat) sell. Cheap, smaller cars haven't seen the level of drop-offs that SUVs have, so companies with smaller cars (which are all foreign companies) aren't doing as poorly.

The American companies didn't bother marketing the few low-end smaller cars they do have, and so are doing poorly. Simple supply and demand.

The UAW is a broken organization that needs massive restructuring -- if not DE-structuring -- but scapegoating them while missing the obvious supply-and-demand issues shows a dangerous myopia. The problem now belongs to the taxpayers, and just fixing the UAW problem isn't going to accomplish anything.

2008 Dec 23 08:05 PM