Wall Street Breakfast: Must-Know News

• Lawmakers aim to curb Fed powers. Rep. Barney Frank said he's planning legislation to restrict the Federal Reserve's ability to make emergency loans and to require a 'complete audit' of the bank. Frank, who has been working with Rep. Ron Paul on draft language, said the audit could be arranged in such a way as to preserve the Fed's monetary policy independence. Separately, Fed officials said the bank has made a $14B profit on loans extended to financial institutions, though that figure includes only some of the Fed's loan programs and hasn't been audited or risk-adjusted.
• ILFC chief may buy part of AIG unit. AIG (AIG) CEO Robert Benmosche has said he won't be rushed into asset sales, a promise that has pleased many investors but left some company executives dissatisfied. In particular, Steven Udvar-Hazy, the CEO of AIG's aircraft-leasing business, is frustrated by the nearly year-long delay in the unit's sale, and is in early discussions to buy around $2B of the company's aircraft portfolio to start a rival business. If Hazy leaves the International Lease Finance Corp. to set up his own company, a move that would require both government and AIG approval, sources said Middle East and Chinese interests will likely provide the necessary funding. Shares -7.4% premarket (7:00 ET).
• Baker Hughes buys BJ Services. Baker Hughes (BHI) agreed to acquire BJ Services (BJS) in a cash-stock deal worth $5.5B. BJ Services' shareholders will get 0.4 shares of Baker Hughes and $2.69, marking a 16.3% premium over Friday's close. Baker Hughes says the deal will result in annual savings of $75M in 2010 and $150M in 2011, and "further enhances its position as a top-tier global oilfield services company." BHI -2.1%, BJS +13.1% premarket (7:00 ET). (Read the companies' press release)
• Lehman claims could reach $100B. The U.K. branch of Lehman Brothers may claim as much as $100B against the collapsed bank, with a large part of the claims resulting from guarantees issued by the parent company to its subsidiaries. PriceWaterhouseCoopers, the U.K. liquidator, said it's working to sift through the claims of 'more than 100' Lehman units that are connected to the London branch in a way which will "reduce the likelihood of affiliates suing each other in pursuit of amounts that are owed between the different Lehman estates."
• FDIC faces mounting bank failures. The FDIC closed three more banks on Friday, with an expected cost to the FDIC's deposit insurance fund of $446M. The closures bring this year's total failures to 84 and mark the fastest pace of bank closures in 17 years. To encourage potential buyers of failed banks, the FDIC has agreed to numerous loss-share transactions, assuming most of the risk on $80B in loans and other assets. The agency said it expects around $14B in future losses on the agreements signed so far, but its total exposure is about six times the $10.4B left in its insurance fund. (Read the FDIC's bank closure press releases I, II, III)
• Cerberus investors flee. Investors are pulling out of hedge funds run by Cerberus Capital Management en masse, leaving management surprised by the size of the requested withdrawals and prompting plans for Q4 fundraising. Investors have asked for the return of over $5.5B, or nearly 71% of the hedge fund assets. Nor are the heavy withdrawals limited to Cerberus; in the nine months that ended June 30, investors withdrew around $300B from hedge funds, contributing to a marked contraction in the once-booming industry.
• PetroChina boosts capacity. After posting a 7.2% fall in H1 profit last week, PetroChina (PTR) unveiled plans to increase its capacity. The planned investments, totaling $3.2B, include buying a stake in a Turkmenistan gas field from parent company China National Petroleum Corp. for $1.2B, and buying ten of CNPC's petrochemical refineries in China for $1.6B. PetroChina President Zhou Jiping said he hopes to maintain double-digit growth in natural gas output over the next few years.
• Freedom going bankrupt. Freedom Communications, which owns over 30 daily newspapers and 8 TV stations, reportedly plans to declare bankruptcy this week and has reached debt restructuring agreements with its lenders. Private-equity firms Blackstone Group (BX) and Providence Equity Partners, which paid $460M in 2004 for a 40% stake in Freedom, have both written down the value of their investment to zero.
• France goes after tax evaders. Not to be left out, France has obtained the names of up to 3,000 suspected tax evaders with Swiss bank accounts worth around €3B ($4.3B). Budget minister Eric Woerth said if the individuals don't come forward voluntarily, then "we will bring them to justice. We are in the process of constructing a post-crisis capitalism, and the banks are an essential link in this change."
• Study lifts new AstraZeneca drug. A medical study covering 18,000 patients in 43 countries found Brilinta, AstraZeneca's (AZN) experimental anti-clotting drug, was 16% more effective in preventing heart attacks, strokes and deaths than treatment with Plavix, a blockbuster drug from Sanofi-Aventis (SNY) and Bristol-Myers Squibb (BMY). The study firmly positions Brilinta as a rival to Plavix and the nearly $10B in annual revenue it generates. A new Eli Lilly (LLY) drug called Effient also outperformed Plavix but at the price of increased bleeding risk.
• GM forges China JV. General Motors agreed to a 50-50 joint venture with Chinese automaker FAW Group. GM will invest 2B yuan ($293M) to make light-duty trucks and vans in the northeast China city of Changchun, primarily for sale in China though some could be exported in the future.
• Yen rises on election landslide. As was widely expected, the Democratic Party of Japan won a landslide victory against the Liberal Democratic Party which had governed for fifty years. The news helped lift the yen, which strengthened for a fifth day against the euro and gained versus all 16 major counterparts, but failed to buoy the Nikkei, which turned negative after hitting an 11-month high.

Earnings: Friday After Close

• Sun Microsystems (JAVA): FQ4 EPS of -$0.20 misses by $0.14. Revenue of $2.6B (-31%) vs. $2.9B. (10-K)

Today's Markets

Concerns about possible liquidity tightening and new share-issuances prompted heavy selling in China, and the Nikkei gave back its gains after getting a post-election lift. European markets and U.S. futures are showing moderate losses.

• In Asia, Nikkei -0.4% to 10,493. Hang Seng -1.9% to 19,724. Shanghai -6.7% to 2,668. BSE -1.6% to 15,667.
• In Europe at midday, Paris -0.8%. Frankfurt -0.8%. London closed.
• Futures: Dow -0.6%. S&P -0.5%. Nasdaq -0.7%. Crude -2.2% to $71.14. Gold -0.3% to $956.

Monday's Economic Calendar

• 9:45 NAPM Chicago Business Barometer
  3:00 PM Farm Prices
• Notable earnings after Monday's close: SINA

Seeking Alpha editor Eli Hoffmann contributed to this post.

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Comments

[markfl:]

"The FDIC closed three more banks on Friday, with an expected cost to the FDIC's deposit insurance fund of $446M. The closures bring this year's total failures to 84 and mark the fastest pace of bank closures in 17 years."

Reuters wrote last week that "[a] prominent banking analyst said on Sunday that 150 to 200 more U.S. banks will fail in the current banking crisis, and the industry's payments to keep the Federal Deposit Insurance Corp afloat could eat up 25 percent of pretax income in 2010."

I wonder at what point the pace of closures increases to a rate of 20 per month over the next ten months. Are we supposed to expect a weekly loss of 3 or 4 every Friday through 2010, or is the rate of failure set to spike? At what point does this undermine confidence in the banking system?

Aug 31 07:34 AM

[doubleguns:]

Barney is just maneuvering for re-election. Ron Paul is the one that really got this started Barney just sees the opportunity to ride the coat tails.

Marfl asks a good few points: ":Are we supposed to expect a weekly loss of 3 or 4 every Friday through 2010, or is the rate of failure set to spike?"

I think we can expect a spike with ARMS and CRE failures increasing.

Marffl wrote "At what point does this undermine confidence in the banking system?"

I already have no confidence. They have become crooks!!!!

Aug 31 08:06 AM

[robert.b.fe...:]

doubleguns: Greetings. I agree that they have all gotten crooked with Barney and Dodd the head crooks. As for confidence in the banking system it evaporated awhile back at least for the major players. I wonder what has prompted the run on hedge funds? Do those folks know something we mere mortals don't?

Aug 31 08:44 AM

[Old Trader:]

robert.b.

At least in the the case of Cereberus, these are "funds of funds" and according to an article on Blooomberg, the cause for the withdrawals is a need for liquidity, similar to the problems that have hit the endowment funds. A brisk secondary market has developed in hedge and PE funds LP units.


On Aug 31 08:44 AM robert.b.ferguson wrote:

> doubleguns: Greetings. I agree that they have all gotten crooked
> with Barney and Dodd the head crooks. As for confidence in the banking
> system it evaporated awhile back at least for the major players.
> I wonder what has prompted the run on hedge funds? Do those folks
> know something we mere mortals don't?

Aug 31 08:53 AM

[Mr. Yukos:]

Media nature, like human nature, is to try find an easy fix and answer to problems, even complex problems.

Just like we see everyday in the news, "markets drop because of renewed doubt in economic recovery" - duh fool, it isn't always that though, its an event.

So Old Trader, it isn't "just liquidity", there is always a catalyst. Liquidity needs don't just zap a funds 71% of assets. Something occurred concerning management, or the company's portfolio in general.

Aug 31 09:23 AM

[don miguel:]

Unfortunately many of their thirty+ regional/local papers have not followed their Libertarian principles.

While this is an over-simplification for their present condition...editorial content remains a primary force in readership.

Mr Hoils must be turning over in his grave!

Aug 31 09:26 AM

[axelrod608:]

It's not just the 3 or 4 banks a week that are failing. The FDIC's watch list ( of weak banks) has grown into the hundreds. It used to be less than 50 in good times.

With commercial RE prices still falling and a new wave of mortgage resets starting in November the future for small and regional banks is not rosy.

Aug 31 10:03 AM

[Joseph L. S...:]

"...in the nine months that ended June 30, investors withdrew around $300B from hedge funds..."

It's worse than we think if this story is accurate and investors actually << withdrew >> $300 billion. Not long ago, I addressed the annual GAIM Fund of Funds (hedge funds) conference and uncovered a little-known facet of hedge fund management. The hedge funds have FAR more than this $300 billion in liabilities to their investors.

Once a hedge fund investors "requests withdrawal" the hedge fund has a contractual obligation to refund anywhere from x months to x years. However, the hedge fund then effectively becomes a liquidating trust. It cannot buy anything with the funds earmarked for refunds but must only hope for a rising market in order to get the best price for assets earmarked for refund.

In other words, they have every reason to hype, fabricate and cheerlead stocks higher but no ability to fan the flames of a higher market with actual purchases.

If $300 billion is already withdrawn, there is at least that much ready to be sold at the first hint of lower prices...

Aug 31 11:14 AM

[Jan Paul:]

In the 30's, the banks were separate banks and most only had one bank.

Now, when they close "a bank" they may be closing over 100 banks that were under the umbrella of the home office. Over the decades we have merged more and more banks into the larger chains and thus, it is hard to get as clear a picture just from the number posted for bank closure.

As others have pointed out, we still have ARMS, Alt-A's and Commercial loan defaults ahead of us. We are far from being out of the woods in our financial system.

Aug 31 11:19 AM

[hamsami:]

Bring back the Glass Steagall Act, keep merchant bankers as merchant bankers and commercial bankers as commercial bankers. Right now nobody knows what each other hands are doing and my guess is there is whole lot of stealing and lying going on.

Aug 31 11:27 AM

[Buckoux:]

There are way too may banks. Yesterday evening while going to dinner with my wife, we counted four different brand bank branches on the four corners of a street intersection. It was like gas stations in the 1950's and '60's! One on every corner. Since the 1998 deregulation of banks this phenomenon of overcapacity has been the unintended consequence. All these banks has been like herding cats, regulatory wise. Better that they are gone and replaced, for the moment, by the "mega-banks" that should eventually be deconstructed. The only pressing question would be; who should do the deconstruction. Not Congress. Not Fed. Not lobbyists. Not Wall St. The deconstruction of this nations whole financial problem is the eventual pertinent question: Is there an honest broker in the country? I doubt it!


On Aug 31 07:34 AM markfl wrote:

> I wonder at what point the pace of closures increases to a rate of
> 20 per month over the next ten months. Are we supposed to expect
> a weekly loss of 3 or 4 every Friday through 2010,....
> At what point does this undermine confidence in the banking system?

Aug 31 11:37 AM

[Buckoux:]

AMEN!


On Aug 31 11:27 AM hamsami wrote:

> Bring back the Glass Steagall Act, keep merchant bankers as merchant
> bankers and commercial bankers as commercial bankers. Right now nobody
> knows what each other hands are doing and my guess is there is whole
> lot of stealing and lying going on.

Aug 31 11:40 AM

[notsosmart:]

just face it. the crooks & liars are in control as there are no penalties for their actions.now if you are one of these insiders you are not about to give up such a good position.great income with political & taxpayer backup is the glue that holds this mess together.as long as the tide was raising all boats,nobody cared & nobody could have stopped it.now the folks living with family(by need),in tents,intheir cars,cant do anything as the tide has gone out & the boats are sitting in the mud.confusion reigns supreme as you can read on this site & others.what dc & wall st have done to this country is a sad story.

Aug 31 11:50 AM

[bbowen7:]

Lots of negatives on banking - much legitimate. Unfortunately, this is frequently construed as business in general. There is a huge difference between Wall Street and Main Street.

Aug 31 07:00 PM

[Old Trader:]

Mr. Yukos,

The fund in question is the one that had the stakes in Chysler and GMAC. Cerberus has a number of funds, and in fact, is closing, or has just closed a new fund with $1B in capital to invest in distressed debt. While certainly a black eye for Cerberus, they're a fair ways away from closing shop.


On Aug 31 09:23 AM Mr. Yukos wrote:

> Media nature, like human nature, is to try find an easy fix and answer
> to problems, even complex problems.
>
> Just like we see everyday in the news, "markets drop because of renewed
> doubt in economic recovery" - duh fool, it isn't always that though,
> its an event.
>
> So Old Trader, it isn't "just liquidity", there is always a catalyst.
> Liquidity needs don't just zap a funds 71% of assets. Something occurred
> concerning management, or the company's portfolio in general.

Aug 31 07:08 PM

[Rick S.:]

I have accounts in one of the banks closed over the weekend, Affinity Bank in Ventura California. Nothing fancy about their leverage or loans. Simply a lot of mom and pop commercial development loans that went sour because of the overall economy. It happens when development comes to a screeching halt as it did last year, developers go bankrupt, and the banks that loaned them money find themselves with an asset that has essentially zeroed out. It's a stepped process that takes time, but it eventually hits a bank's bottom line of reserves.

Ron Paul, Barney Frank, Wall Street crooks, Glass and Steagal have a lot to do with a lot of things, I'm sure. But they had little to do with the banks that closed last weekend.

Sep 01 06:13 PM