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Note the graph below that shows the bank borrowng from the Fed over the last century. A picture is worth a thousand words. Imagine imposing a 10 year (mean time between recesssions, roughly) over this graph. The NBER official recessions are the gray bars on the chart. This speaks volumes. Although the Fed has seeming declared itself the checks and balances are of the government opposite the Administration and the Legislature by donning the powers to change the very nature of Fed lending,they have done so nonetheless. This means there was a percieved grave need for such. This need apparently never manifested itself during the previous 19 recessions over the last 100 years or so. 'Nuff said.

 To think, some actually argue whether the banking crisis is over or not.

Here is the chart of non-borrowed researves.

 More of the same glaring evidence of a truly unprecedented disruption. In short:

Non-borrowed Funds

As a result of increased counterparty risk inter-bank borrowings between the banks had dried up. In response, Federal Reserve (Fed), in December 2007, announced Term Auction Facility (TAF) to facilitate banks to borrow directly from Fed against a wide range of collaterals. The interest rate on the borrowing was decided to be determined through an auction process.

A plunge in non-borrowed reserves (total reserves minus borrowed reserves) since January 2008 has attracted a lot of attention in the financial community to argue if it signaled distress in the US banking system.

One would need to understand the flow of money to assess the underlying essence of transaction. The money was lent to banks, and for each dollar lent through the TAF the Fed was careful to liquidate a dollar of its holdings of Treasury bills and bonds to keep its overall balance sheet unchanged. The money borrowed by banks under TAF by Fed was classified as borrowed funds, the figure of which was subtracted from total reserves.

Essentially, it amounted to indirect lending by banks to each other through Fed. To understand clearly, please see the diagram below. Bank 2 borrows from Fed under TAF against collaterals. Fed sells an equal amount of Treasury bills to Bank 1 to raise an equal amount. As a result, the amount received from Bank 1 is being used to lend to Bank 2. The TAF didn’t add to the money supply in the economy as Fed liquidates its holdings of Treasury bills for amount of dollar lent through the TAF. The figure of negative non-borrowed reserves in Fed’s balance sheet is represented by issuance of treasuries and bonds to banks.


Intermediately role of Fed



Now, as the Fed launders this bank money, one must call into question the need to do so to such a dramatic extent in relation to this nations history. The answer is found in my asset securitization crisis series. Take a look at how we got to where we are now:

The Asset Securitization Crisis Analysis road-map to date:

  1. Intro: The great housing bull run - creation of asset bubble, Declining lending standards, lax underwriting activities increased the bubble - A comparison with the same during the S&L crisis
  2. Securitization - dissimilarity between the S&L and the Subprime Mortgage crises, The bursting of housing bubble - declining home prices and rising foreclosure
  3. Counterparty risk analyses - counter-party failure will open up another Pandora's box (must read for anyone who is not a CDS specialist)
  4. The consumer finance sector risk is woefully unrecognized, and the US Federal reserve to the rescue 
  5. Municipal bond market and the securitization crisis - part I
  6. Municipal bond market and the securitization crisis - part 2 (should be read by whoever is not a muni expert - this newsbyte may be worth reading as well)
  7. An overview of my personal Regional Bank short prospects Part I: PNC Bank - risky loans skating on razor thin capital, PNC addendum Posts One and Two
  8. Reggie Middleton says don't believe Paulson: S&L crisis 2.0, bank failure redux
  9. More on the banking backdrop, we've never had so many loans!
  10. As I see it, these 32 banks and thrifts are in deep doo-doo!
  11. A little more on HELOCs, 2nd lien loans and rose colored glasses
  12. Will Countywide cause the next shoe to drop?
  13. Capital, Leverage and Loss in the Banking System
  14. Doo-Doo bank drill down, part 1 - Wells Fargo
  15. Doo-Doo Bank 32 drill down: Part 2 - Popular
  16. Doo-Doo Bank 32 drill down: Part 3 - SunTrust Bank
  17. The Anatomy of a Sick Bank!
  18. Doo Doo Bank 32 Drill Down 1.5: Wells Fargo Bank
  19. GE: The Uber Bank???
  20. Sun Trust Forensic Analysis
  21. Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street
  22. Goldman Sachs Forensic Analysis
  23. American Express: When the best of the best start with the shenanigans, what does that mean for the rest...
  24. Part one of three of my opinion of HSBC and the macro factors affecting it



Thursday the July inflation estimate was released: up 0.8%, due to rising food, energy, airline and apparel prices, and up 5.6% from the level 12 months ago, for the highest jump in 17 years. Meanwhile, S&P 500 earnings were down about 22% in the second quarter, after falling 16% in the first, with most of that damage in the financials. With a global slowdown under way, the likelihood is that S&P 500 profits will show further quarterly drops, perhaps for the next six to 12 months.


The Real Effects of the Credit Crunch On EMU Member CountriesAug 14, 2008


Non-Investment Grade Corporations: Current State and Historical Context Aug 18, 2008

These people, and others, who were largely ignored during the hey day of the debt financing bonanza of the past few years, are turning out to be right

Leveraged Loans and CLOs versus High Yield Debt: How Do They Differ?Jul 16, 2007



Please find attached the initial screener for companies in the UK industrial / manufacturing sector. In this, we have covered 209 companies and comparing them on the basis of profitability, leverage, valuation and balance sheet ratios.


As you had mentioned during the call, we have broadly covered all the important metrics and focused more on EBITDA margins, Net profit margins, ROA, ROCE, D/E ratio, Interest coverage ratio, Current ratio, Price to earnings, EV/EBITDA and Free cash flow per share in this analysis. We have also prepared a scoring mechanism based on the above mentioned parameters and ranked these companies on a rating of 1-4 with 1 being the strongest and 4 the weakest on these financial metrics. We have also done a consolidated weighted average ranking for these companies after assigning weights to the above mentioned parameters based on their relative importance. However, this is just an initial attempt in rating / ranking these companies and we will refine it after consulting with you on the same.


Additionally, we have used the Altman Z score from Bloomberg to cross check our findings from this exercise. This will help us in further finding out the companies which could be potential short candidates.


Please let us know your comments / feedback on the same. Also, can we have a call to discuss and refine this further on August 18, 2008 (Monday) since we have a holiday tomorrow on account of Independence Day.


Please find attached list of 20 companies in the US industrial and manufacturing sector. These companies have been shortlisted based on the following parameters:



We have followed the following methodology for shortlisting:



Of the total 20 companies we had selected, we have shortlisted the following 4 companies:


Navistar International Corporation


The company has huge debt liabilities ($6.8 bn) and negative shareholders equity of $562 mn. Its debt liability currently stands at approx. 60% of its total assets.

Recently S&P gave Navistar’s debt a below investment grade BB- rating -- with a negative outlook. All the company's competitors, including Paccar Inc, Volvo AB and Scania AB, earn investment grade ratings from S&P

The company is also in financing activities (for financing sale of trucks) and has around 50% of assets in the form of finance receivables. The current provision stands at mere 1.7% of the total receivables. Given the current problems in the consumer credit environment, the company can have double whammy from slow-down in sales and higher credit losses. Higher crude oil prices have had a denting impact on its revenues in recent quarters.

The company witnessed a 13.4% decline in its 2007 revenue off continuing subdued demand for automotives, and its operating margin declined to 2.6% in 2007 compared to 5.0% in 2006 off rising input cost and inelastic product prices.

Its interest coverage ratio is less than one, indicating insufficient cash flows to service its interest payments

The Company recently got relisted on NYSE after 16 months. The Company’s valuation multiples seem higher compared to its peers despite the fact that its operating margins are much lower.

The Company’s stock has witnessed a decline of nearly 14% in last 5 trading days


Crown Holdings Inc.


Crown has adjusted equity of negative $2 bn. Its current debt outstanding is at significant level of $3.8 bn, comprising nearly 70% of its total adjusted assets (excluding intangibles)

Based on its recent quarterly results, the company generated cash from operating activities of around $100 mn. This, on an annual basis, would amount to around $400 mn, which could prove to be grossly insufficient to repay its outstanding debt of $3.8 bn in next 7-8 years.

Its share price has witnessed an increase of 14% in last 52 weeks.

The company could witness bankruptcy as it doesn’t seem to have adequate asset to repay its liabilities.


Encore Wire Corporation


Slowdown in construction industry and rising copper costs had a negative impact on its revenues and operating margins, respectively. Its revenues declined 5.2% in 2007 while its gross margin nearly halved to 9.4% in 2007 from 19.6% in 2006. For its recent quarter, gross margin and operating margins were 6% and 0.8% as against 12.6% and 7.5% in the previous quarter this year.

Although the sales in the current quarter recovered as compared to the previous quarter, these were lower than the same quarter last year. Volumes have got hit in the six months ended June 30, 2008, decreasing 9.7% versus the same period in 2007

Declining new home unit sales and steeply sliding home prices have impacted the sales for the company. With housing sector not to expected turnaround in the near-to-medium term, the slowing revenues along with rising input cost is expected to seriously impact the Company’s margins


Wabash National Corporation


Revenues in 2007 declined 16%.

Although the company was able to improve its margins in the second quarter of 2008 as compared to first quarter of 2008 off better operational efficiency and production planning, the same is not likely to sustain in the future with rising raw materials costs. The pressure is evident from the decline in margins in the first six months of 2008 compared to the margins in the first six months of 2007. Gross margin fell to 4.6% from 8.7% and the operating margin fell to  a negative 3.3% from 2.7%

Volumes are dipping with macroeconomic and residential housing slowdown. Not only the results have been poor for the first two quarters of 2008, the company has also revised its sales guidance for the rest of the year. The company expects 32,000 to 33,000 new trailers sales for the whole year against the previous estimate of 38000