I Blame the French

The American public demands answers from CEOs, Federal Reserve Governors, Congress, House of Representatives, U.S. President, Personal bankers, and Alan D. Schwartz on: How did we get into this mess????

So lets recap on what has happened in the past 3 months:

Write Downs

• Disclosed estimated total write downs 150 billion (Total expected 285 billion)

FOMC

• Dec 2007- Fed Fund Rate 4.25%; March 2008 2.25% (Irresponsible monetary policies)

Overseas

• Societe Generale Trader loses 7 billion dollars overnight (French guy who beat Nick Leeson )

Domestic Financial Institution

• After 85 years, Wall Street's Fifth-largest securities firm goes belly up. One day worth approximately $60 per share and the next day worth about $2.84 per share. (If you bought at $2.84 and sold at $10.85 like ex-CEO Cayle, you would have been happy with the return)


• Almost every major bank decreases in equity value by more than 30 percent. (Citigroup value per share was trading at $17.99, as low as People's United Bank shares but with larger risk than People's, BUY PBCT and C)

U.S. Economy

• Core inflation rose to 2.3 % ( Still within Feds comfort zone of 2-3 percent)
  
• 170 Billion Bipartisan "stimulus" package (Encourage spending for Americans)
  
• 3 trillion federal government budget (OUT OF CONTROL)


• Gold trades over $1,000 (sign of recession)


• Oil trades over $111 a barrel ( I need a donkey or horse)

Everyone is going GREEN

• Euro 1.58 for every dollar(not going to Europe anytime soon)


• Pound 2.10 for every dollar(not going to England either)
  

In August 2007, the Federal Reserve Bank lowered its discount rate to encourage borrowing from major U.S. banks. During this time period, foreign capital was flowing into our financial system by the truck loads and major banks did not want to borrow from the Feds for fear of showing weakness. The federal reserve is known as the "lender of last resort," which carries a negative perception for banks who borrow funds from the discount window. Although the major banks felt this would have a negative view on their financial health, they borrowed the funds. What is ironic is that major banks felt "pressured" to borrow about 500 million dollars from the central bank's discount window after the FEDs cut the discount rate(J.P. Morgan, Bank of America, Wachovia, and Citigroup). Only to use tax payer money to bail out companies such as Countrywide days later after borrowing the funds(BofA). Economist Ed Yardeni wrote to clients explaining,"The Government of Last Resort is working with the Lender of Last Resort to shore up the housing and credit markets to avoid Great Depression II." Unfortunately, the Feds nor the government could save the inevitable of what would happen to the financial markets.

In the 4th quarter of 2007, a popular term known as "write-downs"would be introduced and used by major hedge funds, banks, and brokerage companies. The first company, which I recall using the term write-downs, would be Bear Stearns. Around June 2007, two of Bear Stearns' Hedge funds, took aggressive bets on mortgage back securities, said to be valued at peak $16 billion, only to lose all of it and be rescued by Bear Stearns with a 1.6 billion dollar infusion. Bear Stearns' then CEO Cayle, reasures investors that everything is under control. Bear Stearns stock had been down 14 percent, trading at $134, after the news had broken out to their investors during this time period. After Bear Stearns reported that two of their hedge funds were in financial distress due to leverage taken on mortgage back securities, other banks and brokerage houses followed in suit. Merrill lynch, Citigroup, Bank of America, RBS, UBS and Goldman Sachs all reported problems with mortgage back securities being held in their portfolios. One by one, they would report numbers to their shareholders that seemed to come from the top of their heads; for example, Merrill lynch reported one week $5.5 billion and the following $8.4 billion. The total damage done by the housing market for the 4th quarter would be 150 billion dollars. According to the streets consensus we "only" have 135 billion dollars more to go before its all over.

The federal reserve have implemented irresponsible monetary policies. During the 1st quarter of 2008, the FOMC lowered rates three times, totaling 200 bases points (2.00 percent). In late January 2008, the Fed Fund rate was lowered twice in less than 9 days by more than 125 bases point (1.25 percent) in order to prevent the market from crashing. Only to find out days later, after implementing a rate change, that a French trader from Societe Generale unwinded 7 billion dollars into the global market disrupting markets across the world. Is it the FOMC's responsiblity to help Wall Street? The responsiblities of the federal reserve are to keep inflation under control and control money supply for the broad U.S. economy. The baby boomers are not able to keep up with inflation. The younger generation is spending between 40 to 50 percent of their payroll checks on fueling their vehicles. The average U.S. household is consuming less which will not help GDP. Who is Bernanke going to sleep with at night?

How did we get into this mess?

Is it time to change a financial system that was created during the Civil War? Paulson thinks so!!!

Quote:
By Brian Wesbury of the WSJ

"In the Great Depression, the Federal Reserve allowed the money supply to collapse by 25%, which caused a dangerous deflation. In turn, this deflation caused massive bank failures. The Smoot-Hawley Tariff Act of 1930, Herbert Hoover's tax hike passed in 1932, and then FDR's alphabet soup of new agencies, regulations and anticapitalist government activity provided the coup de grace. No wonder thousands of banks failed and unemployment ballooned to 20%."

Optimus SubPrime

According to an article by Rick Brooks and Ruth Simon, "...a significant number of borrowers with top-notch credit signed up for expensive sub prime loans...," exposing the fact that the borrowers with poor credit are not the only ones being bailed out. Across the U.S. people are searching for answers to who is to blame for this mess. Is it the financial institutions (the originators) or the borrowers?

A recent debate between colleagues on sub prime led to one saying, "There are only two parties responsible...the originators ( mortgage brokers/lenders) and the person that took out the mortgage.," which I agree to an extent. Taking this view point, I agree that the individuals who signed up for these mortgages were aware of the responsibility of taking a mortgage of 300,000+ with an annual salary of 30,000 a year. At the same time, the originators were also aware of the consequences of giving this loan to such individuals could only lead to a disaster in the future. As Bill Watterson states, "To make a business decision, you don't need much philosophy, all you need is greed, and maybe a little knowledge of how the game works."

Another colleagues states "As a licensed sales agent of anything( mortgage, securities, insurance) it is incumbent on you to make sure your customer understands every last thing they sign. The court cases have proven time and again, the consensus is you are the expert and the customer cannot be expected to know anything that you have not fully explained." During a closing of a home loan, the parties who are present could be the borrower and representative of the bank or a lawyer with the party he represents (borrower) and seller with their lawyer. That day, which is the most important part of your life is normally summed up in 30 to 45 minutes of anxiety to get the keys to your home with little in mind on what you are signing. All you are aware of is the dream becoming reality, of owning your first home, vacation home, or investment property. Again, the borrower is well informed on what they are signing to an extent. If it's a complicated product like sub prime loans, the 30,000 dollar a year individual is normally not educated enough to know what they are signing but the lawyer they are paying is aware and "he would never lead them the wrong way." Which brings it back to the opening line, it was not only these sketchy credit individuals, it's top-notch creditworthy individuals. Financial institutions do not care if a person is black, white, hispanic, asian, or middle eastern. The bottom line is the future return.

But who's at fault PM.Banker? EVERYONE!!! Top to bottom. But admit your mistakes and find solutions and move forward. Let me leave you with a short story on Optimus SubPrime.

Optimus SubPrime organizes the evacuation of home owners and the relocation of U.S. households to the road of renters not owners. Although a stern and methodical leader is SubPrime, it is compassionate to wealthy and middle class households who are deeply impacted and have a major ruling in the overall economy. At first, SubPrime is firmly opposed to interact with the poor middle class families who have been facing a rate increase during a time of devaluation of homes. SubPrime soon realizes that it is to his benefit to help them gain hope by freezing the rates. SubPrime transforms to a fire engine to stablize the wave of fire, and coverts into a secondary mode called SIVs or merges into a family of investment class that will be known as Superfund heros. At the end all we will remember is Optimus Subprime's impact on the U.S. economy.

Sub-Prime Mortages, SIV, and Write-downs

I believe it is safe to say that the housing market bubble has a leak and is in the process of bursting. The Dow Jones has shed about 800 points since Oct 1, which is about 4 percent. Let's all take the time to give a special thanks to irresponsible financial companies who issued overvalued mortgage securities. The past couple of weeks major financial companies have reported a total of about 30 to 40 billion dollars in write downs tied to mortgage securities. Financial companies are laying off employees and closing out mortgage securities departments. Major banks are facing difficult times, but Wall Street will find a way to make money, and to the rescue is SIVs, which stands for structure investment vehicles. The SIVs sole purpose is to issue short-term debt and buy assets that generated higher returns. Alright enough words, lets get down to the numbers.

UBS- (Public, NYSE:UBS)- trading around $47 a share. Down approximately 22 percent since January. Write down about 3.55 billion.

Citigroup Inc- (Public, NYSE:C)- trading around $34 a share. Down approximately 38 percent since January. Write down about $3.55 billion and expects to write-down as much as $11 billion in the 4th quarter. Taking applications to replace CEO Prince.

Merrill Lynch & Co-(Public, NYSE:MER)- trading around $55 a share. Down approximately 41 percent since January. Write down of $7.9 billion and taking applications for new CEO.

Morgan Stanley- (Public, NYSE:MS)- trading around $55 a share. Down approximately 32 percent since January. Write down of 3.7 billion.


Superfund to the rescue. Bankers from Citigroup, Bank of America Corp. and J.P. Morgan Chase
have joined forces to create a $100 billion to prevent a fire sale of assets which is tied to SIVs. Banks particpating in the plan would receive a fee structure of .75 percentage point to 1 % of assets. If you want to learn more about SIVs, read an article by John Mauldin "Taking Out the SIV Garbage".

Now get back to work or go find a job. The economy needs you more than ever so get your credit cards out and start Christmas shopping. December's data on consumer spending, retail data and durable goods will be the deciding factor whether or not I'm moving to Dominican republic in 08'.

Cut rates one more time?

The consensus are in for Wall Street, and there will be a quarter percent rate cut on the fed fund rate on Halloween. This will be a treat for hedge fund, while being a trick for American households. The Federal Open Market Committee (FOMC) will make their announcement at 2:15pm on Wednesday, October 31.

The 1/2 of point rate cut of last meeting was a aggressive move by the Feds. Since than, Oil price have gone through the roof with record settlement of $93.53 a barrel this past Monday. The housing market continues to remain on a slump and mortgage rates have not drop to any level that would increase home sales. The Dow Jones Index has closed at a all time high of 14164(up 14% from a year ago). Gold futures are at 785 for Dec 07.

The majority of Americans want another rate cut, which will only lead to more debt for American households. For example, if rates are down, Americans will tap their homes for equity to extract more funds to help fuel holiday spending. But to their surprise, they will be denied this year by banks. With tighter credit markets, people will not be approved and the other reason is that home appraisals will come in much lower than a year ago. Let's not forget, home prices have dropped by more than 30 percent in the past year. On the other hand, a rate cut will benefit those who have variable rate loans tied to prime rate because it will help ease the payments on their loans, which translates to more income to spend for the holidays.

Will the feds cut rate? Yes, but not approved by PM.Banker. Inflation remains a risk, just look at Oil prices, and the value of the dollar. Rate cuts should be paused for the remainder of the year and based on data received after the holidays, the feds should than implement a more responsible monetary policy. The next FOMC meeting will be on Dec 11. 2007.

I won't be in on Monday

Merrill Lynch & Co., CEO Stan O'Neal decides to leave Merrill lynch. This is after recent news of the company reporting this past week $8.4 billion in write-downs associated with mortgage securities, which three weeks ago was reported to be $5 billion. The CEO also went behind the backs of the Board of Directors to meet with Wachovia CEO G. Kennedy Thompson in the past week to see whether Wachovia would be interested in a combination with Merrill.

E. Stan O'Neal is the first African American to head a major Wall Street brokerage firm. He earned a Harvard M.B.A and was working in Finance at GM when he was recruited by Merrill's investment bank in 1986. By 1998, Mr. O'Neal was CFO. During Mr.O'Neal term as CEO, he was able to contract a deal of 49% stake in BlackRock.

E. Stanley O'Neal
Salary: $700,000
Bonus: 18.5 million

Candidates for the Job

Laurence Fink, Chief Executive of BlackRock Inc
Gregory Fleming, Merrill's co-president
Bob McCann, head of Merrill's huge brokerage arm

Now this is what I imagine happened:

On his way to watch the Giants play Miami in London, Mr. O'Neal calls Mr. Fleming and says, "I won't be in on Monday."

It's not for his health?

Most of us think of exercise as a way to stay in shape or to get into shape. This is not what executive vice president of People's United Financial Inc meant when he recently exercised options of about 96,746 shares of common stock, according to a SEC filing. I did the math for all of you who do not have a calculator available to you, it's value at about 1.8 million dollars.

On Oct 26, 2007, People's United Financial Inc. reported nine executives were granted stock options and restricted stocks valued at more than $133 million as part of two executive bonus plans.

• 133 other employees awarded more than 4 million shares, valued at more than $72.5 million
• Philip R. Sherringham, EVP and CFO, more than 1.29 million shares valued at $23.5 million
• Robert R. D'Amore, EVP, 844,823 shares valued at $15.2 million
• Brian F. Dreyer, EVP, 731,097 shares valued at $13.2 million
• William T. Kosturko, EVP and General Counsel, 519,891 shares valued at $9.4 million

John Klien, chairman, president and CEO, removed from the above list because he was awarded 2.45 million stocks and options valued at more than $44.4 million. Must be nice!!!

According to a recent FORBES article "In a Form 4 filed Wednesday with the SEC, Brian F. Dreyer reported he exercised Monday and Tuesday for $4.78 to $12.02 a piece and then sold a total of 99,148 shares on the same days for $17.89 to $18.29 a piece."

Now that's a secret to adding some muscles weight. Add that to part of your healthy diet.

The Countrywide Roller Coaster

The nations largest mortgage lender, Countrywide Financial Corporation reports 3rd quarter with some bad news with a twist of good news.

Chairman and Chief Executive Angelo stated fourth quarter will bring profitability, which created a uproar in the market sending CFC above 30 percent.

The bad news would be to employees who are not certain if they will be receiving the red slip on Monday since 12,000 jobs will be cut by year end.

According WSJ acticle, Standard & Poor's, the bond-rating agency, cut its ratings on Countrywide following its earnings release. "Over the near term, CFC will be operating with a lower volume of loan production and production concentrated in the lower margin segment of the market" for prime loans eligible for sale to government-sponsored mortgage-finance companies, S&P said, "which will likely limit a rebound to past profitability levels."

Are you going to jump on this roller coaster or do you not meet the height requirement?