Wall Street Breakfast: Must-Know News

• U.K. bulks up bank bailout. The U.K.'s initial £500B ($740B) rescue plan failed to prevent the economic downturn from worsening and bank stocks have continued to face heavy losses. So British Prime Minister Gordon Brown, refusing to 'sit idly by and let people and businesses go to the wall,' has expanded the bailout by insuring banks against loan defaults in exchange for them promising to lend more money and paying a fee. Called the Asset Protection Scheme, the government will commit an extra £100B ($142B) to the industry. Royal Bank of Scotland (RBS) is one of the bailout's primary beneficiaries (read more below).
• RBS in royal trouble. The U.K. government will increase its holdings in Royal Bank of Scotland (RBS) to almost 70% from 58% after agreeing to swap its preference shares for ordinary ones, while RBS has promised to make £6B ($8.7B) in loans available to U.K. borrowers and will sign a binding agreement about how much it will lend and under what terms. The government's added intervention comes as the bank forecasts a 2008 loss of £22B-£28B ($31.8B-$40.5B), primarily from goodwill charges associated with its 'disastrous' acquisition of ABN Amro and from trading losses. RBS CEO Stephen Hester explained the losses (sort of) by saying 'we doubled up at the wrong time,' while PM Brown expressed anger at the bank for taking 'irresponsible risks.' Hester didn't rule out the possibility of complete nationalization, but said it's a move that both RBS and the government want to avoid. Shares -66.8% premarket.
• Slim's fat profits on NYT. New York Times Co. (NYT) will pay a steep 14.1% for a much-needed $250M investment from Mexican billionaire Carlos Slim. Slim will receive warrants that can be converted into 15.9M common shares at a strike price of $6.36, a slight discount to where the shares closed on Friday, and the 14.1% notes are due in 2015. Considering NYT's pressing need for cash, its dwindling options for raising money and the deteriorating advertising market, $250M may not be enough to allow the company to survive as an independent firm. It's not clear whether Slim is interested in acquiring full control of the company but the Ochs-Sulzberger family, which holds about 19% of NYT's equity and controls the publisher through super-voting shares, said it's not interested in selling. If he exercises the warrants, Slim will control around 18% of the company.
• Satyam's forged bank letters and inflated workforce. Sources close to the Satyam (SAY) investigation say the disgraced Indian outsourcer used forged documents from at least four major banks when it claimed to have a cash balance over $1B. Satyam had forged letters confirming its account balance at HSBC (HBC), Citigroup (C), HDFC Bank (HDB) and ICICI Bank (IBN). According to the Economic Times, Satyam also managed to siphon off money by reporting a staff headcount 15-20% higher than it actually was and paying the fictitious workers 'salary payments.' The investigation into Satyam's fraud has been expanded to include two firms connected to the company's jailed founder, and one of Satyam's biggest clients has canceled its contract. Other clients are likely to follow suit.
• Treasury toughens TARP oversight. Under pressure to increase lending and to tighten oversight of the government's rescue program, the Treasury is demanding monthly reports from the banks that received the most capital under TARP. Kashkari sent letters to Citigroup (C), Bank of America (BAC) and 18 other banks asking for data on business and consumer loans, as well as details on purchases of mortgage-backed and asset-backed securities. The first reports, due at the end of January, will cover transactions from October-December, while subsequent reports will be monthly. The results will be made public. (The other 18 banks that received letters: JPM, WFC, GS, MS, PNC, USB, STI, COF, RF, FITB, BBT, BK, KEY, CIT, CMA, STT, MI and NTRS.)
• Chrysler-Fiat deal. Fiat will take a 35% equity stake in Chrysler in a tentative agreement that needs U.S. Treasury approval. The no-cash deal will give Chrysler access to Fiat technology, helping Chrysler make vehicles with fewer harmful emissions. The move would provide both companies with greater economies of scale and geographical reach. Daimler, meanwhile, says it's still looking to sell its 19.9% stake in Chrysler.
• More gloom and doom from Roubini. Nouriel Roubini sees financial losses in the U.S. from the credit crisis reaching as much as $3.6T, suggesting the banking system is 'effectively insolvent.' The system is 'bankrupt' in Europe too, says Roubini. He expects commodities to fall another 15%-20%.
• French automakers get a lift. The French government plans to provide 'massive' aid to its automobile industry, in the amount of €5B-€6B ($6.6B-$7.9B). Prime Minister Francois Fillon said the industry is facing its worst crisis in decades and aid recipients will have to guarantee they will maintain their industrial operations in France.

Earnings: Tuesday Before Open

• Logitech (LOGI): FQ3 EPS of $0.22 misses by $0.21. Revenue of $627.5M (-15.7%) vs. $699.3M. (PR)
• Suncor Energy (SU): Q4 EPS of $0.46 beats by $0.14. "We've had a challenging 2008," said CEO Rick George, and the company is working at "achieving higher, more stable production rates in 2009 and beyond."(PR)

Today's Markets

• Asia markets closed mostly down. Nikkei -2.3% to 8,066. Hang Seng -2.85% to 12,960. Shanghai +0.4% to 1,994. BSE -2.45% to 9,101.
• In Europe at midday, London -0.5%. Paris -0.2%. Frankfurt -0.45%.
• U.S. futures: Dow -1.0%. S&P -1.1%. Nasdaq -1.2%. Crude -6.8% to $34.01. Gold +1.6% to $853.20.

Tuesday's Economic Calendar

• 9:00 Bank of Canada Announcement
  10:00 State Street Investor Confidence Index
  11:30 Inauguration Day
  5:00 PM ABC Consumer Confidence Index
• Notable earnings before Tuesday's open: AMTD, FAST, FRX, JEF, JNJ, LOGI, PCP, PH, RF, STT, SU
• Notable earnings after Tuesday's close: CREE, CSX, FULT, IBM, PKG

Seeking Alpha editor Eli Hoffmann contributed to this post.

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Comments

[axelrod608:]

>> "Nouriel Roubini sees financial losses in the U.S. from the credit crisis reaching as much as $3.6T, suggesting the banking system is 'effectively insolvent.' " >>

Finally someone with the guts to say the words describing "the emperor's new clothes". Of the nation's top megabanks, it is likely that not one is solvent. Worse, pouring a few billion or even a few trillion dollars into them won't make any significant long term difference.

As for the proposal to buy up "troubled assets", the "masters of the universe" created and distributed over a $QUADRILLION - that's a thousand trillion - in face value of derivatives, much ( most ? ) of which is backed by real estate values, which continue to fall. So the bottom line question is, "How many tens or dozens, of $trillions will it take to buy up these bad assets ? Whatever the number, we don't have it. And I suspect Roubini's esimate of $3.6T is far less than the ultimate tab.

It's not that I hate optimists. No, it's more related to the third part of the "alcoholic's prayer" - the wisdom to know the difference. The idea that we can reconstruct the dysfunctional credit market of 2006 is absurd. That market was a huge unsustainable bubble, inflated by two decades of easy, cheap, unlimited credit.

Humpty Dumpty fell. He's not coming back, no matter what extreme measures are taken. Let the Constitution handle the cleanup. Bankruptcy is the only Constitutional method of handling it. Let's take the pain and learn to not try to do anything this foolish ever again. And stop paying incompetent bankers millions of dollars a year to gamble with other peoples' money.

Jan 20 10:46 AM

[a. palmer jr.:]

I don't think when the founding fathers drew up the constitution, that they had any idea of the amount of corrupt, stupid people that would follow in future generations.

Jan 20 10:55 AM

[AndrewBaker:]

Both comments above I have rated as "thumbs up." We need reality and pragmatism now more than ever, yet we are letting more and more inept greedy self-seeking individuals run the things that really matter, running them into the ground as they go.

Our banks and many financial institutions are bankrupt and all the (tax-payers) money in the US, and probably the world, that is being heaped onto them will not be enough to bring things around. If we manage to inflate our way out, it will still take years and much pain for all.

Cannot we now take stock and change the way we live such that we don't continually look for unlimited growth in production, material wealth and possessions of all kinds? Let's use what we have in a way that retains our high standards of living whilst at the same time properly valuing what we have. A good home that gives us shelter can be improved and repaired when necessary instead of striving for a bigger new home that we can't really afford and which we pay for with far more than just the extra the capital and interest on the loan. And then the bankers and their friends can find something useful to do with the money they get to look after, like loaning it to a real business that makes something that helps us all, rather than re-arranging what is already there so they get more out of it.

Jan 20 02:08 PM

[auto44:]

Don't forget the part the gov't played in this debacle,starting with Jimmy Carter and moving on down the line until the present day. As long as we keep electing stupid people and letting the mainstream news use us all as dupes we will continue to pay the price. Not to mention that the public at large should have known better.

Jan 20 04:47 PM

[secmaven:]

Save the depositors. Let the banks go. The depositors will place their money with the managers of banks that survive because they are more well run.

Jan 20 06:34 PM

[regionswork:]

The growth of the financial engineering, since its first vehicle in 1972, is covered by Kevin Phillips, in: “Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism.” He wrote:

“Between 1987 and 2007, debt—in all flavors, from credit card and mortgage to staid U.S. treasury and exotic Wall Street—became one of the nation’s largest, fastest-growing businesses. Over those two decades, so-called credit market debt roughly quadrupled from nearly $11 trillion to $48 trillion. This was abetted by a revolution in marketing, packaging, and propaganda—in reality, public debt wasn’t the big ballooner, private debt was. Without much publicity, the financial services sector—banks, broker-dealers, consumer finance, insurance, and mortgage finance— muscled past manufacturing in the 1990s to become the largest sector of the U.S. private economy. By 2004–6, financial services represented 20 to 21 percent of gross domestic product, manufacturing just 12 to 13 percent. And finance enjoyed an even bigger share of corporate profits.

“Risky” doesn’t begin to describe this new focus in the American economy. Bingeing on debt is reckless, and financialization has a long record of being an unhealthy late stage in the trajectory of previous leading world economic powers. Moving money around instead of making things is always dicey, and the U.S. transformation has been the most grandiose to date."

I wish I'd read this when it was first given to me as a publisher review copy in 2007. As it was, I learned about the contents from his In Depth BookTV interview on December 7, 2008
www.booktv.org/watch.a... and didn't read the work until last month. There is a one hour show from May 9, 2008 on BookTV at www.booktv.org/watch.a...
The paperback with an update will be released on Mar 31, 2009.

Jan 20 06:51 PM

[GloomBoom.com:]

This is getting really scary. Enough with this bailout crap. Help!!!!!!

Jan 21 12:44 PM