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Wall Street Breakfast: Must-Know News

by: SA Editor Rachael Granby September 24, 2008 | about stocks: AIG / BBBY / BMY / BRK.A / DIA / FNM / FRE / GLD / GOOG / GS / IMCL / MSFT / MTU / NKE / NMR / PAYX / QQQQ / RHT / SPY / TWX / USO / WOR / YHOO    
Rachael Granby

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Rachael Granby

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  • Buffett to the rescue. Goldman Sachs (GS) gets a vote of confidence in the form of a $5B investment from Warren Buffett's Berkshire Hathaway (BRK.A) in exchange for perpetual preferred stock with a 10% dividend. Berkshire will also receive warrants to buy $5B of common stock at $115/share at any time during the next five years, which already nets Berkshire a $437M paper profit from yesterday's $125.05 close. Goldman, which will try to sell at least $2.5B in common stock to the public, saw its shares jump 7.8% in after-hours trading.
  • Sumitomo may join peers with Goldman stake. Japanese media say Sumitomo Mitsui Financial Group [SMFG] plans to take a stake of 'several percent' in Goldman Sachs (GS), investing up to $2.8B; the two have a long-standing alliance. However a source familiar with the matter says that while SMFG would consider an injection if asked, no request has been made. Earlier this week, Mitsubishi UFJ Financial Group (MTU) agreed to pay up to $8.5B for a stake in Morgan Stanley (MS), while Nomura (NMR) bought Lehman's Asia and European operations.
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  • Lawmakers uneasy about Paulson's plan. Congress had promised quick, bipartisan approval for the Treasury's $700B rescue plan but the first day of Congressional testimony yesterday made clear the plan has opponents on both sides of the political aisle and approval will be anything but speedy. Democratic leaders want to include homeowners support and capped executive pay, and are weighing possible revisions, including limiting the rescue to an initial $150B or preventing the Treasury from using the full $700B before Pres. Bush leaves office in January. Republican leaders, concerned about a sky-high budget-deficit, say serious questions remain and refuse to simply "rubber-stamp" the bill. With elections six weeks away, many lawmakers are hesitant to back a Wall Street bailout that a majority of Main Street voters don't support.
  • An uphill Hill fight. Facing broad skepticism in Congress, Treasury's Paulson and the Federal Reserve's Bernanke stressed the critical nature of an expedient rescue plan, with Paulson saying the bill needs to be passed this week. Bernanke warned that failure to act could push the economy into a recession, and already-fragile markets could become even less stable. Bernanke admitted that the "best design" for executing a rescue is still unknown, but Paulson said the plan needs to be large, loosely restricted and intentionally vague to have maximum impact on the economy. Meanwhile, the dollar continued to fall against the euro and pound as the rescue plan delay fueled market uncertainty, and U.S. stocks sank in the afternoon. Both Paulson and Fed's Bernanke are scheduled to testify again today. [Read yesterday's testimonies - I, II]
  • FBI launches subprime probe. In an investigation of the collapse of the subprime mortgage market, the FBI has begun reviewing 26 companies, including Fannie Mae (FNM), Freddie Mac (FRE), Lehman Brothers and AIG (AIG), for possible signs of mortgage fraud. With over $500B in losses and writedowns for global financial firms, the FBI has been under pressure to hold companies accountable. FBI Director Robert Mueller testified in Congress last week that he would "pursue these cases as far up the corporate chain as necessary to ensure those responsible receive the justice they deserve."
  • Yahoo rekindles AOL talks. Meeting for the first time in a long time, Yahoo's (YHOO) board approved a new round of discussions with Time Warner's (TWX) AOL. CEO Jeff Bewkes says he hopes to reach a decision on AOL's future soon, as the unit continues to weigh on TWX's performance. Still, new YHOO board member Carl Icahn seems fixated on a Microsoft (MSFT) deal, telling CNBC last week Yahoo has "to do something with Microsoft or Google (GOOG) is going to kill them." Some see Microsoft's recent $40B share buyback announcement as a signal to Yahoo that if it still wants to deal, now's the time.
  • Bristol-Myers rebuffed, again. ImClone (IMCL) chairman Carl Icahn knocked Bristol-Myers (BMY) improved bid of $4.7B, or $62/share, calling the $2/share bid increase "absurd." He reiterated that a large Pharma company is offering $70/share, subject to due diligence which will wrap up this Sunday.
  • More global liquidity. The Federal Reserve pumped a combined U.S. $30B into Australia, Sweden, Denmark and Norway.
  • BoJ injects $30B. The Bank of Japan offered to supply U.S. $30B to the short-term money market in one-month funds, the first time it has ever injected U.S. dollars. The move is intended to ensure liquidity after markets tightened following recent Wall Street upheaval, and comes after the BoJ's $60B swap agreement with the Fed last week.
  • Retail sales weaken. ICSC retail chain-store sales fell 1% from a week ago, and gained 1.3% Y/Y. Concerns about the recent financial turmoil held back already-weak consumer spending. Redbook showed national chain store sales fell 1.2% in the first three weeks of September vs. the previous month, but gained 1.2% vs. a year ago.
  • Investor confidence ebbs... The State Street Investor Confidence Index showed investor confidence at its third-lowest level in ten years. The September reading was taken before the $700B rescue plan was announced. It's unclear whether confidence will go up or down as Congress debates the terms of the rescue.
  • ...as consumer confidence holds steady. ABC's Consumer Comfort Index remained at -41 this week. While no worse than last week's readings, it marks the 59th consecutive week of negative double-digits, and is a far cry from the 20-year average of -10.
  • U.S. home values fall. Ofheo's House Price Index fell 0.6% in July, bringing the twelve-month total to -5.3%.
  • Manufacturing drops. The Richmond Fed's Manufacturing Index fell to -18 in September from -16. Among the index's components, shipments were -3 to -16, new orders -1 to -23, and jobs -1 to -13.
  • Recession hits Europe. Data released yesterday shows the Euro-zone has entered at least a technical recession with two quarters of GDP contraction, as private sector output shrank in September for the fourth month in a row. The survey data alone is consistent with stagnation but the results excluded hard-hit construction and retailing sectors.

Earnings: Tuesday After Close

  • Worthington Industries (WOR): FQ1 EPS of $0.94 beats by $0.39. Revenue of $913M (+20.3%) vs. $916M. [PR]

Today's Markets

  • Asia markets closed slightly up. Nikkei +0.2% to 12,115. Hang Seng +0.5% to 18.962. Shanghai +0.7% to 2,217. BSE +1.2% to 13,729.
  • In Europe at midday, London +0.01%. Paris -0.2%. Frankfurt -0.1%.
  • U.S. futures: Dow +0.6%. S&P +0.8%. Nasdaq +0.8%. Crude +2.2% to $108.98. Gold +0.4% to $894.50.

Wednesday's Economic Calendar

Seeking Alpha editor Eli Hoffmann contributed to this post.


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This article has 35 comments:

  •  
    Sep 24 08:16 AM
    Same message, different story. We MUST pass the Patriot Act NOW. Saddam has WMD - we MUST act NOW to protect America. The financial markets are falling - we MUST act NOW to save America. The town that heard the "WOLF !!" cry only took two fake calls to realize they were being conned. What about us and our "leaders" in DC ?? How many of these BS scares will it take to realize they're blowing smoke again ? The Empire of George II falls back to its most successful ploy - act now or be destroyed. And anybody opposed is anti-American.

    Answer me this, Hank and Ben - if Congress throws a couple trillion dollars after the stupid losses financial institutions have blown, will you GUARANTEE it will fix the problem ? Will you sign over your personal wealth to the US government to help pay for your plan's failure ? The two most important questions are:

    If we don't accept your proposal, is a crash certain ?
    Will this plan fix the problem and avert a crash ?

    And therein lies the true question. Nobody that I know has said a crash is certain whether or not a "bailout plan" is carried out. Similarly, nobody I know of has certified that a "bailout" plan would fix the problem. It all boils down to credibility. And the administration of George II has none. Paulson in my book, who was head of Goldman Sachs during its massive increase of leverage, has none. And clearly, Bernanke's opening of the Fed discount window has averted nothing and perhaps aggravated the situation.

    Let the mismanaged financials fail and their assets get bought up by more ethical competitors. Let the fools who bought overpriced real estate using idiotic mortgage plans rent. Let the law of logical consequences solve this problem. Sure, some of Hank and Ben's country club buddies may have to sell the house in the Hamptons, but hey, fair is fair. Bailouts aren't.

    It is not a slap in the face to people like me - it's a right cross and a low blow by people who are in positions of trust who cannot be trusted. I worked hard, saved, invested wisely, never bought a new car, paid my bills and lived within my means. How dare you spoiled Wall Street brats tell me I should be responsible for scalawags such as you ? Millions of RESPONSIBLE Americans are NOT losing our homes to foreclosure because we bought homes we could afford. How dare you swindle us into paying for the irresponsible people who wrote loans to people who you KNEW couldn't pay and the ignorant ones who bought more house than they could afford.

    This plan in every aspect is UNAMERICAN. The FAIR way to solve this mess would be to sieze the assets of the offending financial institutions and use the proceeds to protect responsible Americans from the ill effects of the greedy financiers who caused this mess. The FAIR way to ensure it never happens again is to ban the officers and directors of the companies that created this mess from ever working in a financial company again.

    But hey, socialists have never really cared what's fair. Or Capitalists, for that matter. And former capitalists who want to socialize losses after pocketing profits couldn't care less about the poor shmucks they con into paying for their irresponsible behavior.

    I do not believe one word Paulson or Bernanke say. I believe a shakeout is the only thing that will scour the scum out of a largely dysfunctional financial sector that operates without ethics and is more casino gambling than responsible investing.

    In 1929, the perps jumped out of windows. In 2008, the perps get a golden parachute. We've come a long way, baby, and it isn't all for the better.

    Reply
  •  
    Sep 24 08:45 AM
    I continue to be "amazed" that none of these so called experts has proposed removing/changing the pressure points on these stock prices and institutions: SARBANES/OXLEY & FASB 157 & UPTICK RULE. Assets would immediately be MARKED UPWARD & STOCK PRICES WOULD RISE! Little tax payers money required as problem self corrects...........
    It's as if a man bleeding to death goes to ER and is fitted with continuous pints of blood infusions, while allowing the hemmoraging to continue unrepaired>>>...

    Genius' of Morons?????????
    Reply
  •  
    Sep 24 08:45 AM
    Loans, si. Bailout, no. Loan the bad bettors the money, let them cleanup the mess. If companies get to big to fail, then there should be limits on how big a company should get.

    Taxpayers will be lucky to get 20 cents on the dollar under the present plan. There is no incentive for the crooks to do any better.

    No doubt that the neocons and the con artists are using 911 scare tactics to steamrolller the opposition. Conservatives should act conservative, and not rush the bailout bill. It took these clowns 8 years
    to create this mess, so we shouldn't expect the problem to be solved in a week.
    Reply
  •  
    Sep 24 08:48 AM
    I could not have said it better! My thoughts exactly!
    Reply
  •  
    Sep 24 08:53 AM
    gwb should be referred to as king george iii (the insane).....!
    Reply
  •  
    Sep 24 08:55 AM
    there is no longer any trust to be found.our voting choices are dismal.the crooks,skimmers,scamme... are not held accountable & laugh all the way to their swiss banks.the sheeples are waking up too late.
    Reply
  •  
    Sep 24 08:58 AM
    This is another hurry up an approve open ended free check for some priviledge few, Watch for all the pork they will be attaching to this Bill, It would not surprise me that money for more missiles defense is attached to this bail out.
    Reply
  •  
    Sep 24 09:15 AM
    Axelrod608 --- Well said !!! This needs front page placement, not just comment blog.
    Reply
  •  
    Sep 24 09:18 AM
    The seizing of the markets the previous week were the worst I have seen in the last 25 years of being an investment professional. While I still expect the market to continue to fall, the folly of not providing a bailout will be greater. We must learn from the depression that metting out punishment will lead to empty satisfaction.
    Reply
  •  
    Sep 24 09:22 AM
    Money is needed for a missle to send this toxic worthless paper debt to the outer limits of space.


    On Sep 24 08:58 AM yolosetodo wrote:

    > This is another hurry up an approve open ended free check for some
    > priviledge few, Watch for all the pork they will be attaching to
    > this Bill, It would not surprise me that money for more missiles
    > defense is attached to this bail out.
    Reply
  •  
    Sep 24 09:49 AM
    Don't you find it typical AND despicable, that Sen. Dodd, recipient of $133,900 Fannie and Freddie lobbies dollars from 89-08, and Chairman of the Senate finance committee, would not let the 2005 oversight reform bill pass in the Senate? And here is is now demanding an investigation into why all this happened? Dick Morris' book "Outrage" has a very nice write up on this. McCain expressed concern re FNM and FRE in early 06 and wanted more oversight. the Dems are simply insane.
    Reply
  •  
    Sep 24 10:01 AM
    Uh, Dick Morris is an authority now? I'd be insane to believe that.
    Reply
  •  
    Sep 24 10:06 AM
    Watching the hearings on the bailout has me very worried! Not only are the idiots who got us in this mess, not being open and forthright about how much they need but also what they need it for[other than to save the present system that is on the brink of collapse]. Then they say this will not guarentee that. They do not say who is being saved and adamently refuse to answer what is being saved,because that secretsy will help ensure success. If this gets approved we deserve everything that this ensures will be eventually come tumbling down our way. This just helps the present system to bail out our foreign holders of our worthless debt at the expense of the american taxpayer. HOW MUCH LONGER CAN WE IN GOOD FAITH SCREW OVER OUR FUTURE GENERATIONS FOR THE BENIFITS OF US AT THE PRESENT? ENOUGH IS ENOUGH!!!!
    Reply
  •  
    Sep 24 10:08 AM
    "John McCain's campaign manager and Freddie Mac essentially had what amounts to a secret half a million dollar lay-a-way plan. For almost three years and as late as last month, Freddie Mac made secret, monthly payments of $15,000 to Rick Davis's firm, apparently in exchange for providing special access to a future McCain White House. If McCain knew about this, his presidential campaign should be in serious trouble. If he didn't know about it, he ought to fire Rick Davis immediately," said David Donnelly, Director of Campaign Money Watch.
    Reply
  •  
    Sep 24 10:10 AM
    Kudos to Axelrod...well said and fully agree with his proposal. Protect the honest, hardworking, ethical...penailze the greedy Wall Street crooks and the stupid, overextended on the other end. Those of us in the middle, the majority of honest, hardworking, rationale Americans, should not have to pay for greed or stupidity.
    Reply
  •  
    Sep 24 10:33 AM
    So Bernanke and Paulson are worried about recession. Since when was recession such a bad thing? Are these two guys not capitalists? The economy needs to fluctuate through cycles in order to grow. We can't have periods of growth without the recessions that precede them. A recession should be welcomed because the only way out of this joint is to pay our tab.
    Reply
  •  
    Sep 24 10:38 AM
    POCKYCLIPS said it: If companies get to big to fail, then there should be limits on how big a company should get.

    When they get to the size of Freddie and Fannie they are too big to help.
    Reply
  •  
    Sep 24 10:38 AM
    too <G>
    Reply
  •  
    Sep 24 10:55 AM
    It's my limited understanding that credit (loans to industry/citizens) will shrink to unsustainable levels for the economy if the Congress doesn't fund the Paulson/Bernanke tag team proposal. Major lenders/investors will go bankrupt and their assets sold off to the private sector. Is this correct so far?

    Now, I believe the US treasury will still have the capacity to print inflated fiat dollars, unlike the depression of the '30's which limited the printing due to the gold standard. So inflation will rise, but money will still be available to the rest of the lenders who are not part of the problem. That means regional banks as an example, through their state charters potentially could receive federal treasury loans to offer to industry/citizens.

    I am suggesting all is not loss for the world economy due to a credit 'freeze', but only that high profile financial companies will suffer the consequences of their own actions.

    I would like to explore this scenario, if only to educated myself as to other options the Congress could consider instead of trusting what the former CEO of Goldman Sachs is saying.
    Reply
  •  
    Sep 24 11:06 AM
    Repeal Sarbanes Oxley and the stringent mark to market rule and this problem would fix itself. There are some influential people advising this, but as you can hear, none of the Congresscritter are talking about it. Not sexy enough, no power involved, no money to throw around.
    Reply
  •  
    Sep 24 11:21 AM
    Why repeal the mark to market rule. Why not just repeal accounting standards? By the way we can say the failed securities are worth hundreds of times their current value while we are at it and all of a sudden we have no problem and we can all go along our merry way with our heads in the sand as we have for so long now, at the expense of our future generations!
    Reply
  •  
    Sep 24 11:43 AM
    Just write the check!!! This display by Sen. Dodd is a farce.
    We all know it will go through.
    Reply
  •  
    Sep 24 11:49 AM
    Rudyard Kipling - "If you can keep your head when all about you are losing theirs...". Obviously there are a lot of people who cannot.
    There is a serious problem - and it is not just that we may enter a normal recession. The heart of the problem is that the finance/mortgage industry ran amock - with plenty of blame to go around - for the past 20 years or so. The short term solution involves some manner of taking care of this huge trove of toxic mortgage-based debt. The Treasury can buy it at a discount and sell it once markets have stabilized. Now, what is the best mechanism to do that?
    Reply
  •  
    Sep 24 11:52 AM
    Hooray Axelrod608, Great job! Well said, I'd vote for you for Fed Chief but we've stuck with a bunch of idiots that I doubt can be stopped. When are folks going to wake up and realize they've been had?

    Remember G.W.'s good pal "Kenny Boy" better known as Ken Lay from Enron? I am affraid they have more then just bike riding in common.
    Reply
  •  
    Sep 24 12:49 PM
    axelrod608 for President 08!
    Reply
  •  
    Sep 24 01:03 PM
    Axelrod, I hope you don't mind a full copy your comment to be published on my blog. It's just that I couldn't express it better myself. Thanks you.
    Reply
  •  
    Sep 24 01:38 PM
    Call it what it is: The Mussolini Plan--all three pages. I am in charge.There is no time to waste or we are all lost. And please no peeking. There are no details because it is only 700 billion--and if we need more, we'll just take it
    See you at the forum...
    martinj
    Reply
  •  
    Sep 24 01:41 PM
    Has it occured to anyone there is a much simpler way out of this mess than bailing out ''Investment Banks'' (brokerage firms) that created the mess with $700 billion?

    If, as Paulson and Bernanke assert, if they aren't bailed out money will not be available to make consumer and business loans, then why not make the $700 billion available for traditional banks (i.e. FDIC banks that existed BEFORE Wall Street ''Investment Banks'' were created by the repeal of the Glass-Steagall Act).

    According to the FDIC chairman traditional banks are in fairly good shape. If so, then make the $700 billion available as 'emergency loan funds' at, say, half of the fed discount window rate so the banks can make the loans that Paulson and Bernanke are worried will collpase the economic level of activity.

    The traditional banks could also, if they want, cherry pick the Investment Banks mortgage portfolios, and buy them at a price determined by the banks, and not by the government or the Investment Banks, both of which are likely to be way too high.

    Then let the Wall Street probably-should-have-s... ''Investment Banks'' deal with the mortgage securities no one wants, and deal with the FBI.

    Bernie Bicoy
    Reply
  •  
    Sep 24 01:48 PM
    Recycled.
    The obscene executive compensation payments are major part of the problem, as it was exposed by this financial crisis as outright fraud.
    Generally speaking, no executive is worth getting paid more then the ultimate CEO, the US president.
    No one, no matter how clever or educated, should be allowed to rob their employees and shareholders as shamelessly as the executives do nowadays. The irony of it is, it's all done legally, under the regulators' watchful eye; highway robbery nevertheless. That needs to stop, in the name of fairness, and in order for the investor to regain confidence in our financial structure and business concept.
    Since companies cannot do it themselves, Congress needs to cap executive compensation by law at about the US president's salary level, and index it for inflation. At the very least, executive pay maximums should be tied to a reasonable multiplier of their lowest paid employees’ compensation. If we don't want people to revolt against being robbed by the government too (read heavily taxed) in order to bail out these shameless executive thieves, and keep them doing more of the same, Congress needs to act now. Not until some sort of cap is implemented, we shall see abuses and excesses disappear.
    Reply
  •  
    Sep 24 02:03 PM
    Reprint it antwhere. Get the word out. This crisis is a CREDIT crisis. Period. The only way Wall St could bloat their leverage is by using the tsunami of liquidity that Greenspin flooded the nation with to make idiotic "investments"...

    Fixing a credit problem with more credit and more liquidity is like taking the AA meeting to the tavern for happy hour. Then again what should we expect from a proposed solution made by one of the chief architects of the problem, Hank Paulson.

    The reason why banks aren't loaning money to one another is simple - THEY know their competitors are insolvent and unable to pay the loans back. That's why they want the government to provide the loans.

    As for the critics that claim not doing anything will result in another depression, prove it.

    Japan had a similar problem 19 years ago. They bailed out the banks with massive amounts of government funds. And today, 18 years later, you can still buy real estate and stocks there for half or less than 19 years ago.

    Pouring more money into the US financial sector at this point is like pouring more liquor into the punchbowl after half the guests have already passed out. It makes no economic sense. No logical sense. No political sense. But it would preserve the jobs of thousands of idiot financiers who created this mess.

    Do we really want to keep these folks at work in the financial sector ?
    Reply
  •  
    Sep 24 02:23 PM
    We have to depend on Congress to put the bailout on firm footing. But is congress equal to the task? Can they even be trusted? Congress started the thing. In 1980 congress (rep-dem) passed a law that effectively overrode state anti-usury laws (like here in takes us). This was the signal from the government that greed is OK. From there on it was laisser-faire (rep-dem); regulation is bad. Woodsey
    Reply
  •  
    Sep 24 02:38 PM
    The acrimony and nastiness of some of these posts is disappointing and unsophisticated. This is not a bailout of Wall Street. The owners of Fannie, Freddy, Bear, AIG and Lehman certainly don't feel bailed out. Their ownership interests are worthless. This is simply preserving the financial system, the owners of CDSs, many of which are foreign central banks on which we rely to hold our debt, and the ability of average Americans to get a mortgage or a car loan.
    Reply
  •  
    Sep 24 03:42 PM
    Au contraire. This IS a bailout of Wall St. We have perfectly good bankruptcy courts. We could add a couple dozen more judges and handle this in the way the system is set up to handle it.

    Lehman is back in business, at least the part that was bought and reopened. 10,000 employees are back at work. The ONLY reason Wall St insiders and the legislators are conspiring to use the taxpayers to avoid bankruptcy is to maintain as many of the lucrative jobs as possible for the folks who created this mess.

    Who wins ? New York city and state depend heavily on finco tax receipts. But those are in the toilet regardless - you gotta make money to pay taxes. Shareholders of the many insolvent finco's get at least some of their investment protected by bailing out failed businesses.

    Who loses ? Let's see the hands of every taxpayer who honestly believes that this sale of assets will produce a profit and the gummint will send us all a big check and a thank you note for letting us use our money for the bailout. Seeing no hands raised, I can say that this plan IS sophisticated and expected. I would have expected no less from the administration of George II.

    The Patriot Act was a scam. The Iraq war was/is a scam. This is a scam. The only way a con game can work is if the mark has confidence in the scammer. Do you really have any confidence whatsoever that this group of people can fix this problem ? I spend hours a day reading, investigating, investing and trying to synthesize what's going on into understandable, credible theses. This one doesn't make any sense whatsoever except if you view it from an insider's game to preserve the status quo. On that level, it makes perfect sense.

    We are all going to pay dearly for the fraudulent excess that got our financial markets into this mess. Do we really want to leave the same folks in charge ?
    Reply
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