Financial, Real Estate, Stock Markets Trends and Current Affairs

In the news late tonight, 10/09/08, we have:

Those who followed the site were first warned about Morgan Stanley, Bear Steans and Lehman in January (February for Lehman brothers) - a full eight to nine months ago with the stocks trading in the 50's, 130's and 50's respectively. You were warned about Goldman in July with the stock price in the 180's. These were specific warnings with 20 page plus analyses. Why didn't the ratings agencies severely downgrade Bear Stearns and Lehman until AFTER they ceased being viable ongoing concerns. I mean, after all, if I were a paying client I would seriously ponder this as I nursed that gaping hole in my portfolio commonly known as a LOSS! How about Morgan and Goldman??? It appears that the monoline fiasco and the threat from the NYS attorney general wasn't enough to light a real fire under their collective asses. After all, I warned about the monolines LAST YEAR (with their stocks trading in the $60's as opposed to the low single digits now) - plenty of time for them to do their own due diligencel. We won't even mention GGP, where I wrote a veritable novel of explicit warnings starting last year (it was in the $60s then, it is about $3 now) detailing EXACTLY what was to be expected - see GGP and the type of investigative analysis you will not get from your brokerage house . Someone should gift the ratings agencies an institutional subscription to the blog. Seriously guys, there is this concept known as credibility...

From the WSJ :

Struggling mall giant General Growth Properties Inc. suspended its dividend and announced that one of the chief architects of the company's debt-heavy growth strategy has been replaced.

The Chicago-based company gave no reason for the sudden departure of Chief Financial Officer Bernard Freibaum, who joined General Growth in 1993 and played a key role in acquisitions that left the company with a $27 billion debt load. In a written statement, General Growth noted that he sold nearly three million shares to satisfy margin calls on Thursday.

Mr. Freibaum and other company executives have been dumping millions of shares in recent weeks as General Growth's stock has tumbled 80% in the past year, forcing them to meet margin calls. The company came under criticism for the practice after it joined the New York Stock Exchange's "no-short" list on Sept. 23. That prohibited short sellers from selling General Growth, while executives were still allowed to unload shares -- if only to pay off their margin loans.

...

The company struggled to shore up its balance sheet in the past year but ran out of options as the credit crisis intensified. Suspending its dividend will save $600 million in the next year, roughly enough to cover an equivalent amount of unsecured bonds coming due in March and April, according to JP Morgan Chase & Co. analyst Michael Mueller.

General Growth said it is current on all its debt obligations. Friday, Moody's Investors Service lowered its rating on $5.9 billion of General Growth bonds by one notch to Ba3, three notches below investment grade

Until the recent margin calls, Mr. Freibaum had never sold a share of General Growth stock. He had amassed 7.6 million shares, or a 3.1% stake in the company. He has sold more than 6.4 million shares since Sept. 18, or roughly 84% of his holdings.

Must read content tie-ins from last year and earlier this year. GGP is a good example of the the time frame necesary to nurse an idea to fruition. I held GGP from November of '07 to September of '08, often having it as both my biggest position and my most underwater position. It paid off, going from the mid-50's to the single digits.

GGP analyses

• Will the commercial real estate market fall? Of course it will.
• Do you remember when I said Commercial Real Estate was sure to fall?
• The Commercial Real Estate Crash Cometh, and I know who is leading the way!
• Generally Negative Growth in General Growth Properties - GGP Part II
• General Growth Properties & the Commercial Real Estate Crash, pt III - The Story Gets Worse
• More on GGP: A Granular View of Insider Selling and Lease Rate Growth
• GGP part 5 - The Comprehensive Analysis is finally here
• My Response to the GGP Press Release, which seems to respond to blogs...
• For those who were wondering what sparked that silly press release from GGP...
• GGP: Foreclosure vs Asset Sale
• GGP Refinancing Sensitvity Analysis
• GGP part 7 - Share value under the foreclosure analysis
• GGP part 8 - The Final Anaysis: fire sale of prime properties
• Analysis of GGP's recent Q1 results
• GGP Conference Call
• Reader's legal observation on GGP
• GGP Can't Afford its Dividend
• Press release announcing new equity financing - something that I didn't explicitly model in my own analysis, but after reviewing information without the benefit of official documentation, there were no surprise nonetheless...

• We did find some surprises, and my blog readers chimed in with their expertise and opinions...

• GGP and the type of investigative analysis you will not get from your brokerage house

Note to GGP management: don't take this personally, but...
(Reggie Middleton's Boom Bust Blog/MyBlog)

GGP Shenanigans?
(Reggie Middleton's Boom Bust Blog/MyBlog)

The Wall Street Journal has run a story on GGP management and their massive margin calls.

Senior executives at General Growth Properties Inc. built up the mall owner by loading it with debt and amassed their own wealth by borrowing heavily to buy its shares.

Now, both high-risk strategies have come crashing down. General Growth's stock has cratered some 73% in the past year as investors have worried about the company's ability to repay its $27 billion in debt. Since early August, Chief Financial Officer Bernie Freibaum, Chief Operating Officer Bob Michaels and seven other executives have sold a collective 5.6 million of their shares -- for roughly $112 million. Most of those sales were made to meet margin calls, according to Securities and Exchange Commission filings. Others were made to prevent further margin calls during October, when executives' stock trading is prohibited in advance of General Growth's third-quarter earnings report.

For those who are new to the site, GGP was my first major foray into shorting the commercial REITS. The research performed was extensive.

I have another major real estate project coming online soon for subscribers, and I expect it to yield the same results that GGP did (the short position began in the $50's and ended at about $14).

Here is the GGP history for newcomers.

I received a few emails about this monkeybusiness.com blog, and as it turns out - I like them.

Hears an excerpt:

"It appears that AIG needed to post $20 billion of collateral on credit default swaps with Goldman and they didn't have the cash!

Remember when Hank Paulson did an immediate about face on lending
AIG somewhere between $70 and $85 billion? Turns out he had a meeting
September 15 with Lloyd Blankfein, CEO of Goldman Sachs. Mr. Blankfein
was the only bank CEO in attendance. Imagine that. I'm sure he was
there because as the head of Goldman, he was obviously smarter than
everyone else. Couldn't have had anything to do with Goldman going
down the toilet if AIG went down right? Of course Treasury and Goldman
are completely denying it. Richie and I have been scratching our heads
for over a year now because we KNEW that Goldman was a huge player in
AAA rated CDO's and they did TONS of negative basis trades (buying
monoline wrapped AAA CDOs paying L+50 and then buying credit default
insurance from SOMEONE and paying then L+10). We assumed it was Ambac
and MBIA, but when those guys got downgraded, nothing really happened
to Goldman. Who the hell did they lay the risk off with? Now we
know. It was AIG!

When AIG was taken into conservatorship the Fed appointed Edward
Liddy, a member of Goldman's board (he resigned upon his AIG
appointment), to run AIG!! AIG immediately drew $37 billion to meet
collateral calls. We are told $20 billion was due to Goldman Sachs. I
honestly don't think I can do another Goldman Superheroes! What a
joke. All the talk and all the articles about how superior Goldman is
and how their risk management is so fantastic. All a bunch of
bullsh*t. They get the jump on everyone because they know the plays
ahead of time."

See also "The Goldman Superheroes, parts 1 and 2", funny enough.

I have had a few readers caution me on shorting Goldman, because Goldman has effectively convinced the world that their Sh1t doesn't stink. Well, guess what my loyal readers. It smells the same as just about everybody elses. The Goldman trades are approaching one of the most profitable for this year. There is still 20 or 30 points of potential profit.

For those who don't know my position on Goldman, see:

1. Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street
   
2. Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis
3. 
   Reggie Middleton on Goldman Sachs Q3 2008
4. Goldman Sachs valuation update: Buffet's strategic investment and public offering

Note to Commissioner Cox: You have doomed the last
two independent investment banks. Congratulations. By actually trying
to directly manipulate the US capital markets by literally banning the
short selling of a certain cadre of stocks (while allowing the long
buying of those same stocks) you have upset the natural equilibrium of
our capitalistic environ. You must learn to wrap you mind around, and
grasp the difference between, price and value. The short sellers were
driving the prices of these investment banks down to match their value.
Now, with your short sighted intereference, you have allowed - no,
let's be more accurate, you have overtly facilitated the divergence
between price and value.

For one, you
cannot prevent astute investors from taking bearish positions on a
company. You preside over the most advanced, and complex financial
markets in the history of the world, not some third world nation that
is just opening its first exchange as an extension of the town food
market!

Word has it that the clients of
Morgan Stanley are fleeing, despite (or maybe even because - due to the
drastic socialist nature of) your actions. Because you have allowed
longs to bid prices up way above their intrinsic economic value, you
have injected an unprecendented amount of volatility into the system.
This increases the cost of capital, my friend, not decrease it. When
the truth meets reality, what do you think will happen to share

prices?
That's right, they will fall that much more. A market needs two sides
to a trade, not just one. I hear you plan on preventing investors from
selling stocks at a loss next, which will be music to the ears of those
at the IRS!

From FT Alphaville:

This is a pretty stunning line to read:

"We need a merger partner or we're not going to make it,"
Mr. Mack told Mr. Pandit, according to two people briefed on the talks.
Mr. Pandit, a former senior investment banker at Morgan Stanley, said
Citigroup was not interested.

What might Mack have had on his mind? Afterall, only the other day
he was supposedly telling MS employees that everything was just fine,
notwithstanding the destructive antics of rumour-mongering short
sellers.

Ban on short-selling

US: The Securities and Exchange Commission on Friday issued an emergency order temporarily banning short selling in the shares of 799 financial institutions until midnight on October 2, 2008. The SEC said it may extend the order if it's necessary to protect investors, but it won't last more than 30 days. In a pre-trading market GS and MS have gained 10%.

The U.S. Securities and Exchange Commission may require hedge funds to disclose their short-sale positions and plans to subpoena the funds' communication records. The SEC would hedge funds and investors managing more than $100 mn to publicly report their daily short positions. SEC has also made it a securities fraud when sellers deceive brokers about delivering shares to buyers. The SEC would also impose penalties on brokers if their clients haven't delivered shares to buyers within three days of a short sale. The SEC also approved a rule drafted in March 2008 that it would amount to be a fraud for investors to lie to their brokers about locating shares to be sold short. Currently, brokers rely on their customers' assurance that they had located shares that could be used to cover a sale.

UK: Britain's Financial Services Authority has imposed temporary ban on investors from taking new short positions in financial stocks from midnight on Thursday, September 18. The ban has been imposed until January but would be reviewed each month.

In reading an article in the NY Times just now, I came across this poignant statement:

The Treasury secretary, Henry M. Paulson Jr.,
who won authority from Congress last month to use taxpayer money to
bolster the companies, always maintained that he hoped never to use
that power. But, as the companies’ stocks continued to languish and
their borrowing costs rose, some within the Treasury Department began
urging Mr. Paulson to intervene quickly.

Then, last week, advisers from Morgan Stanley
hired by the Treasury Department to scrutinize the companies came to a
troubling conclusion: Freddie Mac’s capital position was worse than
initially imagined, according to people briefed on those findings. The
company had made decisions that, while not necessarily in violation of
accounting rules, had the effect of overstating the companies’ capital
resources and financial stability.

Indeed, one person briefed on
the company’s finances said Freddie Mac had made accounting decisions
that pushed losses into the future and postponed a capital shortfall
until the fourth quarter of this year, which would not need to be
disclosed until early 2009. Fannie Mae has used similar methods, but to
a lesser degree, according to other people who have been briefed.

Is
anybody truly surprised? These companies used massive leverage to write
and/or insure trillions of dollars of loans, many of which were written
on top of the largest real asset and credit bubble in modern history.
It was bound to happen. I have went through this in excruciating detail
(see The Asset Securitization Crisis).

Does
anybody truly think that "real" privately owned and publicly traded
banks operated any differently. Reread the NY Times quip above, then
visit my findings (yes, I was the first) on Wells Fargo accounting
proclivities below. An excerpt:

Increasing provisions and chare-offs

· In
1Q2008, WFC’s NPAs increased to over 1.16% of total loans from 1.01% in
4Q2007. Overall NPAs increased to $4.5 bn from $3.9 bn in 4Q2007. NPAs
in real estate construction loans witnessed highest increase of 49% to
$438 mn in 1Q2008. NPAs of C&D loans stood at 2.32% of total
C&D loans, followed by real estate 1-4 family mortgage (1.91%) and lease financing (0.83%)

· Wells Fargo’s gross charge offs increased to 0.46% of total loans compared to 0.37% of total loans in 4Q2007. C&D
loans witnessed the highest increase in charge-offs with an increase of
nearly three-fold to $29 mn in 1Q2008, showing signs of increased
stress in these loans. Real estate 1-4 family junior
lien mortgage, credit card loans and Other revolving credit and
installment had charge-offs of 0.61%, 1.68% and 0.98% to total loans,
respectively.

· However
despite increase in NPAs and increase in charge offs, Wells Fargo
provision for credit loss sequentially declined to $2.0 bn in 1Q2008
from $2.6 bn in 4Q2007. (0.52% of total loans in 1Q2008 from 0.68% of
total loans in 4Q2007) raising concerns over possible inadequacy of
provision amount.

· From
April 1, 2008 onwards, Wells Fargo has changed its home equity
charge-off policy to 180 days from 120 days previously. Amid current
deteriorating credit markets with residential sector showing no signs
of recovery, it is quite understandable that the bank has changed the
policy in a bid to defer recognition of provision and charge-offs.

Regarding the financial projections for Navistar.

Although we do no rely entirely on company’s guidance while making
financial projections and instead take into account the overall macro
economic picture, global and industry trends and company’s competitive
position within the industry, we do give reasonable consideration to
management guidance as well. We do not altogether ignore the
management’s discussion and statements about future industry and
company scenario and critically examine management’s guidance in light
of current environment to see if the company could meet the guidance.

Based on our independent analysis of the auto
industry and Navistar, following is the variance between the financial
projections for Navistar and company’s guidance.

The following
stemmed from a conversation I had with a financial journalist for a
prominent international finance rag after her perusal of my two blog
articles: Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis and Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street.
The converstation ended up centering around the "alleged" deleveraging
of UBS and their shedding of risk. The following highlights the UBS
situation in more detail...

From http://uk.reuters.com/article/businessNews/idUKL2112783220080521

UBS AG provided 75
percent of the funding used by U.S. asset manager Blackrock to buy a
$15 billion (7.63 billion pounds) portfolio of distressed U.S. real
estate assets from UBS, the bank said on Wednesday.

UBS provided
$11.25 billion in loans to Blackrock, the Swiss-based bank said in a
statement. Blackrock raised $3.75 billion in equity from investors to
pay for the rest of the package, UBS said...

... The face value of the portfolio was $22 billion, meaning UBS received about 68 cents to the dollar on the sale.

This means
that UBS effectively financed $18.25 billion dollars of the purchase,
or 83%, a good portion being absolutely non-recourse since it was given
in the form of a seller's concession (eg. a discount). I have not seen
the full terms of the deal, but other similar deals appear to have
additional non-recourse characteristics. This is a very sweet situation
for the buyer, but as I said, it is not an absolute transfer of risk
from UBS balance sheet or an elimination of said risk for UBS
shareholders.