Wall Street Breakfast: Must-Know News

• Treasury takes GMAC stake. The Treasury will buy a $5B stake in GMAC (GKM), owned by General Motors (GM) and Cerberus, and give GM a $1B loan so the automaker can help the lender reorganize as a bank holding company. The much-needed injection of capital will help GMAC expand its lending after a cash shortage earlier this year forced it to limit loans only to people with the best credit. GMAC, which financed around 35% of GM's retail customers last year, promised to put the funds to work 'right away.' This is good news for GM, as GMAC's failure could mean the loss of up to 40% of GM's 6,500 U.S. dealerships. (Read the Treasury's press release)
• Madoff moves to court. The federal court in Manhattan will begin hearings on the Madoff scam on Wednesday in a trial that is sure to be followed closely by both investors and an angered public. Louis Stanton, the judge handling the civil case against Madoff, is being urged to consider expanding the protections normally accorded to investors in the face of the 'devastating' circumstances of Madoff's scam. The civil case comes in addition to a federal criminal case accusing Madoff of securities fraud. Congress will begin its own investigation starting Monday as to why the SEC failed to discover Madoff's Ponzi scheme.
• Dow struggles after JV deal scrapped. Dow Chemical's (DOW) stock fell over 17% yesterday after Kuwait backed out of a planned joint venture, while Rohm & Haas (ROH), Dow's acquisition target, fell over 16%. Dow will now have to greatly increase its debt to proceed with the Rohm acquisition. As such, S&P cut Dow's credit rating to two notches above junk territory, while Moody's cut Dow's rating to three notches above junk. Dow may also be forced to cut its dividend as its borrowing costs could potentially soar to $2B from $500M. Alternately, the company could try to renegotiate the price of the Rohm deal or cancel the acquisition altogether.
• Merrill relies on legal suit. Merrill Lynch (MER) is suing Reliant Energy (RRI) for cancelling a $300M line of credit, claiming Reliant defaulted on an additional agreement that guarantees the power company's collateral obligations to trading partners. Reliant has said it believes it has the right to terminate the contract without triggering a default of the additional agreement, and has promised to fight Merrill's suit.
• Kerkorian speeds away from Ford. Billionaire investor Kirk Kerkorian has finished selling off his remaining shares in Ford (F) at a loss that could reach into the hundreds of millions of dollars. Earlier this year, Kerkorian's Tracinda Corp. held a 6.5% stake in the automaker, buying its stake at an average price per share of $7.10 and boosting investor enthusiasm in the stock. Since then, Ford's shares have continued to face downward pressure, and closed at $2.22 on Monday.
• BoJ may buy bad loans. The Japanese government and the Bank of Japan are considering a ¥10T ($110.3B) plan to buy bad loans and other financial assets from banks, the Japanese daily Sankei Shimbun reported. The program could be up and running by the end of March.
• Battered banks. U.S. banks and savings institutions are headed for their first overall quarterly loss since 1990, despite unprecedented federal help. Market conditions have severely deteriorated since Q3's combined profit of $1.7B, a 94% drop from the year before. "The earnings power for this industry has absolutely collapsed."
• Manufacturing tumbles. Manufacturing in the U.S. Midwest fell to its lowest in almost 12 years in November as steel and machinery production declined. The Chicago Fed's Midwest factory index dropped 1.6%, and fell 10.8% vs. a year ago. Bucking its recent trend was auto production, up 1.1%. More bad news came out of Dallas, as factory activity deteriorated further in December, according to the Texas Manufacturing Outlook Survey. New orders and capacity utilization fell precipitously, with declines outnumbering increases 5 to 1.

Today's Markets

• Asia markets closed mixed. Hang Seng -0.65% to 14,235. Shanghai -1.0% to 1,833. BSE +1.9% to 9,716. Nikkei +1.3% to 8,860. Closed tomorrow, the Nikkei ended 2008 with a 42% loss.
• In Europe at midday, London +0.8%. Paris +0.7%. Frankfurt +1.6%.
• U.S. futures: Dow +0.25%. S&P +0.4%. Nasdaq +0.6%. Crude -2.2% to $39.11. Gold -0.4% to $871.50.

Tuesday's Economic Calendar

• 7:45 ICSC Retail Store Sales
  8:55 Redbook
  9:00 S&P/Case-Shiller Home Price Index
  9:45 NAPM Chicago Business Barometer
  10:00 Consumer Confidence
  11:00 Kansas City Fed Mfg Survey
  3:00 PM Farm Prices
  5:00 PM ABC Consumer Confidence Index

Seeking Alpha editor Eli Hoffmann contributed to this post.

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Comments

[NOWHEREMAN:]

GMAC is going to put the loans to work right away?

Come on, GMAC has problems with Toxic Mortgages which DiTech put on its books, this will help but not ensure that the Bond holders will go along with any reorganization. Especially now that the Government is ahead of them on the Chow line.

This probably spells GMAC's demise. IMO

2008 Dec 30 07:55 AM

[texas cowboy:]

In the midst of the global financial crisis, it has been revealed that Canada has the most secure banking system in the world.

A report conducted by the World Economic Forum (WEF) has placed Canada at the top of the pile, just above the likes of Sweden, Luxembourg and Australia.

The statistics have been compiled based on information provided by 12,000 corporate executives throughout the world. A system of rating the banking systems of individual countries was conducted by participants answering a number of questions and rating the banks on a scale of one to seven, one being in need of government support seven being entirely healthy.

Canada’s baking system, lead by Royal bank, CIBC, Scotiabank, TD Bank, Bank of Montreal and National Bank, received the highest rank in the world, scoring 6.8 on the rating scale.

The top 10 safest countries for banking are currently as follows:

Canada (6.8)
Sweden (6.7)
Luxembourg (6.7)
Australia (6.7)
Denmark (6.7)
Netherlands (6.7)
Belgium (6.6)
New Zealand (6.6)
Ireland (6.6)
Malta (6.6)

2008 Dec 30 07:55 AM

[axelrod608:]

>> "Battered banks. U.S. banks and savings institutions are headed for their first overall quarterly loss since 1990, despite unprecedented federal help. Market conditions have severely deteriorated since Q3's combined profit of $1.7B, a 94% drop from the year before. "The earnings power for this industry has absolutely collapsed." >>

If this is the result of MASSIVE bailouts, just exactly how much more would it - theoretically - take to return the bank biz to health ?

Keep in mind that virtually ALL of them are still holding mortgage backed securities in some form. I see a zero percent probability of "recovery" and a virtual certainty that the US bank biz will soon resemble the zombie banks of Japan.

Public policy is being made without a shred of consideration to the fact that the world is awash in $1.3 Quadrillion face value of derivatives, many of which are mortgage backed and are losing value and going to BAD debt as time elapses. And since those toxic "assets" (and I use that term loosely) are carried off the books, nobody can tell who's carrying how much of this trash.

What are the idiots in DC thinking ? The blind, deaf, but highly vocal leading the sheeple. This is public policy made in HELL.

2008 Dec 30 09:59 AM

[a. palmer jr.:]

As far as GMAC and the banks go...why would they ever have loaned money to anyone that couldn't repay; I still don't get it.
As for business..I don't see anything secure except funeral homes and the lawyers who draw up the bankruptcy papers.
All this bad news is probably good for us in the long run. It will teach us to live within our means like most people used to do.
I remember back when I was just starting school that when a neighbor bought something new such as a car or major home appliance it meant that he was doing well. When I see a neighbor doing that today it means to me that he has refinanced his loan.
In the future I hope loans will be harder to get and interest rates will rise so that people will only buy what they can afford and the rest of us won't be called upon to pay their loans off for them.

2008 Dec 30 10:36 AM

[NOWHEREMAN:]

Pawn Shops are very secure at this time, EZPW for example.

2008 Dec 30 11:17 AM

[bbowen7:]

Why is good news interpreted as bad?
- The Schiller-Case home price index fell in October is now about 19% below last year. Excellent - the bubble in prices must be taken out before people with incomes and downpayments can/should buy.
- GMACs loans have been at a credit score of 700 - with the national average being about 730. So we loan them $5 billion so that they can go lower on the credit-worthy scale.
- GM might lose up to 40% of their dealers. They have about 7300 compared to Toyota's 1500.

All of this represents pain for those caught in the downdraft; but it is pain that has to come if we are to get back to a healthy economy dependant upon its own strength rather than trillions of government tranquilizers.

2008 Dec 30 02:37 PM

[User 315905:]

"The much-needed injection of capital will help GMAC expand its lending after a cash shortage earlier this year forced it to limit loans only to people with the best credit."
this is greate news?! so the loans should be available for people with bad credit. Did not that already get us into this mess?

2008 Dec 31 01:36 PM