Michael Terry

Response to the FOMC: Ya Think?

Depends on your definition of negative side effects. If you want the risk trade to continue, this is not a negative side effect. If you want to debase the dollar, this is not a negative side effect.

Developers Diversified: TALF Capital Raise Helps

Amen. The preferreds are the investment of choice in my humble opinion. Personally (being long two series of the preferreds, I say dilute away.


On Nov 22 06:33 PM malach hamovess wrote:

> the preferred still have quite a bit upside; they're trading at 200
> bps over other large-cap reit preferreds.
> Each reduction in debt or increase in common equity strengthens the
> preferreds
> the company could sell a half billion common shares, dilute the hell
> out of the common, and all that would happen is that the preferred
> would get even stronger

Bailout Nation: Have We Learned Nothing?

The increase in spending over income continues to show that the consumer has a hard time differentiating between needs and wants. I think that unlike the great depression generation, the consumer will not cut back the unchecked consumption they have been accustomed to. Its too bad and points to financial ruin.


On Nov 24 06:14 PM Old Trader wrote:

> Unfortunately, it seems the country, as a whole, has forgotten that
> there's no such thing as a "free lunch", and the Congress critters
> know that as long as they dole out largesse to all and sundry, their
> place in the Pantheon of Power is secure.
>
> It seems that Americans are able to be roused, but only for a limited
> period of time....not through a full election cycle, which would
> allow for a "new broom".

Bailout Nation: Have We Learned Nothing?

Perhaps we should study the fall of Rome and how it followed the depletion of the treasury. Maintaining an empire can be very expensive, especially when everyone has an interest in dipping into the treasury. Fiat money have an implied value of zero. Maybe that is why foreign centrals are buying gold.


On Nov 24 09:27 AM User 353732 wrote:

> The fake economy based on the fake dollar and fake debt becomes a
> bigger falsehood by the day. The US Regime must now resort to bribing
> consumers to buy homes, cars and appliances(via those tentacles of
> the State known as regulated energy utilities) , using revenues it
> does not have to induce people to spend money on things they cannot
> afford.
>
> Dishonest debt, unearned consumption and unaffordable imports financed
> by debased scrip are the reigning policy Idols of the current regime
> together with the other false gods of malicious regulations and vindictive
> penalties on work, savings and innovation.
>
> The US Regime has learned all it needs to learn. Its policies work
> and work well to:
> concentrate wealth and power
> pillage and enslave the middle class and small business
> institutionalize lying( Big Media), cheating(Big Money) and stealing(
> Big Govt)
>
> What more is there for the Regime to learn?

The Credit Markets: Too Far, Too Fast?

Having recently worked managing credit for an insurance company for over a decade, I agree that it is the only game in town, but you are also seeing the companies move in to alternatives - select ABS, government programs etc. Modest growth does not drive top line growth and credit fundamentals (micro and macro) do not support spread levels at pre-meltdown levels. While spreads relative to the risk free rate may seem attractive, one cannot reasonably expect rates to stay at these levels forever. The implied default rate in both cash credit and CDS spreads is, at best, optimistic.
Keep in mind that most companies run long their product duration and the combination of duration and spread duration risk are not being compensated for at +75-100 for "A" rated bonds.
You will also note that the negative arb you referenced typically forces insurance companies to increase both credit risk and duration at the wrong time. Hence the writedowns we have seen in the industry.

On Nov 24 12:57 PM djackson wrote:

> Several points. Insurance companies are taking in money faster than
> they can invest it. They are actually running negative arbs on fixed
> annuity products in anticipation of higher rates eventually bailing
> them out. They are not going back into structure any time soon,
> so credit, both IG and HY, is the only game in town.
>
> Next, while spreads look tight versus recent history, much of the
> credit spectrum is in the fair to cheap category IF you anticipate
> even sluggish nominal GDP growth. Given that better than sugglish
> growth, something on the order of 2.5 to 3% is the consensus, is
> anticipated, spreads will continue to contract until forecasts are
> proven wrong.
>
> Hope may not be a strategy, but forecasting is inherent in valuing
> any strategy. Wall of money plus educated belief economy will sustain
> modest growth equals tighter spreads unless the 'W' forecast becomes
> reality.

GM's Phony Bailout Repayment

With the UAW having a significant stake in the company (remember 2x the stake of bondholders for 0.5x the exposure), the company starts swimming with a lead life vest. Add the government - never met red ink it didn't like, and you have a recipe for disaster. You are absolutely right, the payment from escrow is a joke. The support for Opel from US/Canadian taxpayers is a bigger joke. The company is currently trying to strong arm the Euro governments by saying they want loans and will consider future cuts (read: no money, no plants). Actually, joke is being kind, this is a crime.

More AIG Controversy: Maiden Lane III

If you look closely into the situation, there was one bank that was willing to settle below par. When the rest of the banks refused (read Goldman), this bank obviously was not going to be the "chump". As well, the Europeans (read French) maintained that AIGFP could not settle for below par without being in bankruptcy. The Fed, sensing the geopolitical issues associated with a below par settle (you know, like the Merrill settle) and the impact on stressed US banks (yep, Goldman is a BHC), decided that it was easier to pay at par - especially as they were using someone elses money. This was a backdoor bailout of the banks - European banks used the insurance to lower capital requirements (a below par or bankruptcy option would make them pony up more capital, capital they didn't have and couldn't raise) and US banks would be forced to write down and further impair their own capital levels. Goldman, as it turns out from the report and other sources, was not fully hedged as they maintained at the time. This was nothing more than a scam, selling snakeoil to US taxpayers.

Risk Indicators Suggest That Risk Taking Is Alive and Well

The Fed is forcing the risk trade by keeping the risk free rate near zero. If you look at where HY and IG credit is trading, what justifies the spread levels or coupon levels. In the face of a continuing weak economy and increasing default rates, the risk/return profile is skewed against the investor (imagine that).

Barclays Launches No-Reset Leveraged ETNs (with Confusing Names)

Great article on some of the "devil in the details" nature of ETFs and ETNs. As well, love the disclosure - clean and clear.

Timber! The Best Way to Play a Change in Housing Sentiment

Something to keep in mind is the amount of pension selling going on in the market. These funds bought them as "uncorrelated assets" and are now trying to sell them. Prices at the stump remain depressed and sales are few and far between. The amount of timberland on the market is sizable. One thing working in the favor of timer is that when pensions sell, it typically means the bottom is here or near.

GM Looks to Use U.S. and Canadian Tax Money to Bail Out Opel

The GM situation continues to get more interesting. Fritz announced they were going to start paying back the government loans from an escrow account set up by the government. Yes, they are paying back the government with the government's money. Nice.

On Opel, if GM was serious about introducing small cars to the US, the Opel franchise could do it for them (remember, that is why we gave Chrysler to Fiat). It is a decent car that seems to sell well in Europe. Will GM think of this - probably not, why start thinking strategically now.

The $1.2B loss the company had this quarter was interesting as it came on the heels of the clunkers sub rosa bailout.

One Question for Sheila Bair

Felix, the WaMu move was criminal, pure and simple and shows our regulators have no understanding (or worse, concern) for the fallout or implications of their decisions.

A second question for Ms. Bair might be, how do you force the sale of Wachovia without informing the board or the CEO. I won't even touch the fact she tries to get the deal done with Citi (that shows her understanding of the financial condition of the entities she is charged with overseeing/regulating). Imagine selling Wachovia to Citi - Wachovia was in better shape.

CDS Regulation: Just One Simple Rule

Unfortunately, if a company relies on credit and it is not extended due to implied default rates of CDS, naked CDS can bring down the house - regardless of worth.


On Nov 11 05:49 AM SourcingMan wrote:

> KD is absolutely correct. No naked short seller brought down anyone.
> LEH is a case in point: they brought down themselves. In fact months
> before they went down, they knew their balance sheet was going up
> in smoke. With a leverage of >40:1 and undiversified exposure to
> the mortgage markets (as well as a massive bet on commercial RE)
> they had no chance. It took sometime to the market to realize that,
> but when it did, it brought down LEH with all its force, and large
> because it needed to go down as it was insolvent. Sorry for the good
> guys working there but their bosses ignore risk management.
>
> True naked CDS buying selling is a bet on a house about to burn down,
> and it might increase the bad feelings about it. But the if the house
> is not rotten the market will correct (see Buffet on GE / GS etc),
> likely at a discount. But what really brings down the house is the
> house owner itself.
>
> The rule proposed here are simple and fine. Actually, simple is fine
> by definition: it’s hard to game it and everybody can understand
> it.
>
> The big issue is getting the CDS sellers, the insurers under control.
> Firstly by having themselves collateralizing the obligations they
> write. Not the buyer, the seller should post collateral. This will
> strengthen their balance sheet and inherently limit their ability
> to write ad infinitum CDS. Secondly, and especially if the seller
> is an Insurance firm, by shifting from a two man and a dog regulator
> to a serious one. One that can look into their positions and stop
> the management to take unchecked, unmanaged risks.

CDS Regulation: Just One Simple Rule

KD, You are spot on. I have been involved in situations where firms long CDS stand to profit from the failure of a firm rather than a successful restructuring (one with a chance of actually working). Although a company hedged with CDS is, essentially indifferent to the outcome. Problem is, how is the position size to be monitored?

I also agree with the use of "naked CDS" positions. The only flaw with this argument is that if firms lean on a company through CDS, it can (and does) affect the cost of debt should they need to raise it. It can also constrain the availability of new credit as higher CDS levels (wider spreads) have a higher implied default rate.

Also not addressed are those firms that buy protection without owning bonds, but having senior claims against the company.

Due to length, I wont even address those firms that use the CDS to create synthetic positions (ever try to short an illiquid corporate???) or those that use them to hedge other parts of the cap structure (preferreds - PCDS notwithstanding or sub debt).

CIT: The Fleecing Continues

Shares are not worthless - yet. The company is preparing for the bankruptcy filing - then they will be worthless.


On Oct 30 03:51 PM JRScott wrote:

> So if I currently hold shares of CIT are they now worthless? If
> not, should I just hang on for a year and hope for the best?