The Beach Boys' iconic song about a drag race between a "Fuel Injected Stingray" (Chevrolet Corvette) and a "413" (Dodge Coronet) harkens back to the glory days of General Motors and Chrysler. Today, these once storied manufacturers are miss-firing badly, so badly that the government has stepped in and has grabbed hold of the wheel.
Over the weekend the government stated its requirements for further aid for GM and Chrysler. GM CEO and Chairman, Rick Wagoner has been ask to remove himself from his place of employment. That request came from the government. Chrysler, once the domestic small car leader and creator of the last profitable domestic small cars (the original Neon) has been ordered into a partnership with Italian auto giant, FIAT. FIAT left our shores in the 1980s after decades of mostly underwhelming products (X 1/9 and Spider excepted), mediocre reliability and poor dealer network. Oh how the mighty have fallen.
Initial responses from market participants were of relief that Chrysler and GM avoided bankruptcy. I would not be so quick as to dismiss bankruptcy. Part of the plan for GM is to negotiate deals with the UAW, parts suppliers and creditors (bondholders), deals which would result in these parties not receiving full payment for their obligations. The government also announced that it would guarantee Chrysler and GM warranties. This could be a dead give-away that a government sponsored, pre-packaged bankruptcy is on the way. After all, customer warranty concerns was a main argument against bankruptcy.
Since a bankruptcy, de-facto or actual, appears to be unavoidable, what does this mean for bondholders? There is no way to know how many cents on the dollar bondholders would receive in a settlement. GM senior notes were trading at prices in the high teens today. There is some speculation that creditors may receive more substantial compensation in a settlement, but little if any of that compensation is likely to come in the form of cash.
What about GMAC bonds? GMAC does not now, nor had it prior to its 51% spin-off to private equity firm, Cerberus, share cross-default provisions with GM (the same if true of Ford and Ford Motor Credit). Therefore, a GM bankruptcy filing does not include GMAC. If GMAC were to file for bankruptcy, it would have to be in a separate filing. However, if GM is to recover and survive, a functioning GMAC is necessary. GMAC not only provides dealer financing, it provides financing for dealer inventories. This is the main reason that GMAC was granted bank holding company status last December. Technically, GMAC can issue FDIC-guaranteed TLGP bonds. If GM can in fact be saved, GMAC may finally issue TLGP debt.
The government's reorganization plans will probably result in GM and Chrysler living to race another day, but I am not optimistic for their long-term profitability. Already the government is flexing its muscles with regard to product planning and business models. This reminds me of British Leyland of the 1970s. British Leyland was formed in 1968 of struggling British automobile manufacturers. In 1975, British Leyland was partly nationalized (sound familiar?). The politically-motivated British government, which knew little about the auto industry, but much about placating labor unions, ran British Leyland into the ground. The British government decided what to build and how many. This is the road the U.S. automobile industry is heading down and a bumpy road it is. I would not be a long term investor in auto-related debt. I would not go out past (she's real fine) 2009.
Monday, March 30, 2009
Saturday, March 28, 2009
Tim Geithner and the PPIP
The debate continues over how much the new Public-Private Investment Program will help in the recovery of the U.S. financial system. The pessimists insist that asset managers will only pay fire sale prices for toxic assets. The optimists insist that the result will be a mass writing-up of toxic asset values. As with most things in life, the truth is somewhere in the middle.
Thus far, the focus of mark to market has been with toxic asset-backed securities. Securities are subject to MTM accounting. Of course, some banks insists that no market exists for some securities and places them in a so-called Level-III assets bucket. This is the home of securities which are too illiquid or esoteric to properly value (or so the banks say). Some banks have substantial sums of Level-III assets. One large New York-based banked moved $80 billion of toxic assets to Level-III in November. Even considering Level-III the PPIP could (should) be helpful to banks and the capital markets. However, its effectiveness could be limited by the toxic loan portion of the plan.
Loans are not marked to market. They are usually considered as being held to maturity and are not marked. Many of these loans are not worth 100 cents on the dollar, nor will they ever be. Gains obtained by selling toxic securities at prices higher than where banks have them marked could be moderated (but not necessarily offset) by falling loan values, should the government force banks to sell their most toxic loans as some expect.
Why sell loans at depressed prices when they can be held and worked out over time? Because investors (institutions such as hedge funds and asset managers) will not fully commit to investing in banks until toxicity is acknowledged and then removed from bank balance sheets. The result could be more capital injections into banks with the most PPIP losses and, in extreme cases, a change to the corporate structure (divestitures) of some banks. I do not believe we see outright failures of large U.S. banks.
Some banks, such as PNC, could experience significant write-ups as a results of its acquisition of National City. When one bank acquires another, the assets, including loans, of the acquired bank are valued at the time of acquisition. The results is that PNC has marked down the values of NCC loans. PNC could experience price recovery on both asset-backed securities and loans. Banks such as Wells Fargo may not experience such recovery as many of the loans it acquired in the Wachovia deal were pay-option ARMs. A pay-option ARM permits the borrower to set monthly payments within a stated range. Many such loans have experienced negative amortization as borrowers have not made payments sufficient to reduce principal. Couple that with declining home values and it is apparent that the values of these loans are low. Impaired asset values is why Moody's issued a report stating that BAC and WFC could be forced to undertake a preferred to common equity exchange similar to Citi. This may be necessary in spite of the PPIP and possible changes to MTM accounting.
Many equity cheerleaders have credited potential changes to MTM accounting as the reason for the latest bear rally in the equity markets. Although this has helped, the rally began in earnest when Treasury Secretary Tim Geithner announced details of the PPIP. The announcement placated some of the bank vigilantes, but not all of them.
Although the stock market has experienced its sharpest recovery since 1982, the bank and finance sector of the corporate bond market has only experienced modest gains. The credit default swap market has actually worsened with the price to purchase protection rising. What could cause such a divergence of opinion? Speculation and apprehension are the most likely causes. Some market participants are apprehensive to become bullish on the banks because they are concerned that bank losses via the PPIP could be worse than expected. They are also concerned that changes to MTM could make it so banks do not have to acknowledge many of their losses on toxic assets thereby rendering the PPIP impotent. The vigilantes want the toxicity of the balance sheets. Leaving the glow-in-the-dark assets on bank balance sheets will be viewed as a negative by the credit markets. Why trust the banks' valuations of toxic assets. They are not exactly impartial parties.
Does this mean fixed income investors should avoid bonds and trust preferreds of large money center U.S. banks? Not at all. The government has taken extraordinary measures to ensure that these institutions remain solvent and out of default. If one can tolerate volatility one can obtain attractive yields on senior and subordinate debt.
Following my piece on foreign bank leverage, a reader responded with information that a certain German bank had leverage of over 50 time as of last autumn. I have heard similar stories about a number of European institutions, but have been unable to verify actual numbers. I am often asked about other shoes to drop. One large shoe could be the European banks. That may be a sector that all but speculative investors should avoid.
Thus far, the focus of mark to market has been with toxic asset-backed securities. Securities are subject to MTM accounting. Of course, some banks insists that no market exists for some securities and places them in a so-called Level-III assets bucket. This is the home of securities which are too illiquid or esoteric to properly value (or so the banks say). Some banks have substantial sums of Level-III assets. One large New York-based banked moved $80 billion of toxic assets to Level-III in November. Even considering Level-III the PPIP could (should) be helpful to banks and the capital markets. However, its effectiveness could be limited by the toxic loan portion of the plan.
Loans are not marked to market. They are usually considered as being held to maturity and are not marked. Many of these loans are not worth 100 cents on the dollar, nor will they ever be. Gains obtained by selling toxic securities at prices higher than where banks have them marked could be moderated (but not necessarily offset) by falling loan values, should the government force banks to sell their most toxic loans as some expect.
Why sell loans at depressed prices when they can be held and worked out over time? Because investors (institutions such as hedge funds and asset managers) will not fully commit to investing in banks until toxicity is acknowledged and then removed from bank balance sheets. The result could be more capital injections into banks with the most PPIP losses and, in extreme cases, a change to the corporate structure (divestitures) of some banks. I do not believe we see outright failures of large U.S. banks.
Some banks, such as PNC, could experience significant write-ups as a results of its acquisition of National City. When one bank acquires another, the assets, including loans, of the acquired bank are valued at the time of acquisition. The results is that PNC has marked down the values of NCC loans. PNC could experience price recovery on both asset-backed securities and loans. Banks such as Wells Fargo may not experience such recovery as many of the loans it acquired in the Wachovia deal were pay-option ARMs. A pay-option ARM permits the borrower to set monthly payments within a stated range. Many such loans have experienced negative amortization as borrowers have not made payments sufficient to reduce principal. Couple that with declining home values and it is apparent that the values of these loans are low. Impaired asset values is why Moody's issued a report stating that BAC and WFC could be forced to undertake a preferred to common equity exchange similar to Citi. This may be necessary in spite of the PPIP and possible changes to MTM accounting.
Many equity cheerleaders have credited potential changes to MTM accounting as the reason for the latest bear rally in the equity markets. Although this has helped, the rally began in earnest when Treasury Secretary Tim Geithner announced details of the PPIP. The announcement placated some of the bank vigilantes, but not all of them.
Although the stock market has experienced its sharpest recovery since 1982, the bank and finance sector of the corporate bond market has only experienced modest gains. The credit default swap market has actually worsened with the price to purchase protection rising. What could cause such a divergence of opinion? Speculation and apprehension are the most likely causes. Some market participants are apprehensive to become bullish on the banks because they are concerned that bank losses via the PPIP could be worse than expected. They are also concerned that changes to MTM could make it so banks do not have to acknowledge many of their losses on toxic assets thereby rendering the PPIP impotent. The vigilantes want the toxicity of the balance sheets. Leaving the glow-in-the-dark assets on bank balance sheets will be viewed as a negative by the credit markets. Why trust the banks' valuations of toxic assets. They are not exactly impartial parties.
Does this mean fixed income investors should avoid bonds and trust preferreds of large money center U.S. banks? Not at all. The government has taken extraordinary measures to ensure that these institutions remain solvent and out of default. If one can tolerate volatility one can obtain attractive yields on senior and subordinate debt.
Following my piece on foreign bank leverage, a reader responded with information that a certain German bank had leverage of over 50 time as of last autumn. I have heard similar stories about a number of European institutions, but have been unable to verify actual numbers. I am often asked about other shoes to drop. One large shoe could be the European banks. That may be a sector that all but speculative investors should avoid.
Thursday, March 26, 2009
Do You Want To Know a Secret
Lost in all the speculation over what toxic assets may "really" be worth is how banks came to acquire such large quantities of toxicity. I am not referring to various events of default which sent distressed asset-backed securities and loans boomeranging back onto bank balance sheets, but rather how banks and investment banks acquired sufficient capital to engage the acquisition of large pools of toxic assets. I am talking about leverage.
Traditionally, commercial banks would lever up between 10 and 15 to 1. Investment banks would carry about 20 to 1 leverage. However, firms such as Bear Stearns and Lehman were said to carry leverage ratios of 30 to one or more. One research piece I read today states that European banks may be significantly levered up due to European bank leverage accounting rules. Could the European banks be the next shoes to drop? It is certainly possible.
Foreign or domestic, banks will be reluctant to sell assets at fire sale prices, not just because doing so would result in realized losses, but also because they wouldn't be able to successfully unwind leverage. After all, loans must be paid back (at least that had been the case in the past). Look for the banks to get nudged by the government to sell asset-backed securities and loans to buyers via the PPIP. If such sales result in losses, look for the government to inject yet more capital into the banks, possibly with strings attached.
Moody's added two banks to its list of banks raising concerns. Moody's downgraded the bonds and preferreds of BAC and WFC. Not only has Moody's downgraded BAC and WFC credit ratings, it hit very subordinate securities very hard. This is especially true of non-cumulative preferred stock. Moody's believes that BAC and WFC may have to take Citi-like measures to raise tangible common equity. Depending on exactly what transpires, BAC and WFC preferred shares could become very volatile. Could their be arbitrage strategies which cause prices of preferred shares to rise? Sure, but who is to say that, if such an exchange happens at all, that the exchange terms are as generous as those offered by Citi. Also remember, that if Citi has its way, the dividends on the non-cumulative preferreds will be permanently wiped out and the securities delisted. Those speculating on preferred exchanges re doing so in the purest sense of the word.
GDP data was downright ugly. With the exception of somewhat better home sales data the other day, there are few bright spots among the economic data. Right now the plan is to play defense. Names like Comcast and Viacom offer yield outside of bank and finance sectors. The best financials continue to be JPM, GS, PNC and USB. The GE Capital panic was overdone, but calmer heads are prevailing. Still good values remain among GE Cap bonds and PINEs preferreds. Callable agency bonds and Agency MBS also offer attractive values. High Yield appears to be cheap, too cheap. When something is too good to be true, it probably is. According to most high-yield experts, corporate defaults are expected to rise. Stay away for now. I will discuss the auto debacle this weekend. I need time to go over the disaster that is the rescue plan.
The government had better soon realize that the "repaired" economy will not look like the bubble-based economies of the past 20 years fueled by an ever-lower interest rate pyramid scheme. As Citi's technical analysts stated:
"While this might seem a ridiculous comment we honestly still think that people do not get the seriousness of this “economic de-leveraging” taking place."
"People still seem focused on the idea that this is just a financial de-leverage of the last 5 or 6 years of financial excess while we believe it is an economic de-leverage of the last 25 to 30 years worth of excess."
Traditionally, commercial banks would lever up between 10 and 15 to 1. Investment banks would carry about 20 to 1 leverage. However, firms such as Bear Stearns and Lehman were said to carry leverage ratios of 30 to one or more. One research piece I read today states that European banks may be significantly levered up due to European bank leverage accounting rules. Could the European banks be the next shoes to drop? It is certainly possible.
Foreign or domestic, banks will be reluctant to sell assets at fire sale prices, not just because doing so would result in realized losses, but also because they wouldn't be able to successfully unwind leverage. After all, loans must be paid back (at least that had been the case in the past). Look for the banks to get nudged by the government to sell asset-backed securities and loans to buyers via the PPIP. If such sales result in losses, look for the government to inject yet more capital into the banks, possibly with strings attached.
Moody's added two banks to its list of banks raising concerns. Moody's downgraded the bonds and preferreds of BAC and WFC. Not only has Moody's downgraded BAC and WFC credit ratings, it hit very subordinate securities very hard. This is especially true of non-cumulative preferred stock. Moody's believes that BAC and WFC may have to take Citi-like measures to raise tangible common equity. Depending on exactly what transpires, BAC and WFC preferred shares could become very volatile. Could their be arbitrage strategies which cause prices of preferred shares to rise? Sure, but who is to say that, if such an exchange happens at all, that the exchange terms are as generous as those offered by Citi. Also remember, that if Citi has its way, the dividends on the non-cumulative preferreds will be permanently wiped out and the securities delisted. Those speculating on preferred exchanges re doing so in the purest sense of the word.
GDP data was downright ugly. With the exception of somewhat better home sales data the other day, there are few bright spots among the economic data. Right now the plan is to play defense. Names like Comcast and Viacom offer yield outside of bank and finance sectors. The best financials continue to be JPM, GS, PNC and USB. The GE Capital panic was overdone, but calmer heads are prevailing. Still good values remain among GE Cap bonds and PINEs preferreds. Callable agency bonds and Agency MBS also offer attractive values. High Yield appears to be cheap, too cheap. When something is too good to be true, it probably is. According to most high-yield experts, corporate defaults are expected to rise. Stay away for now. I will discuss the auto debacle this weekend. I need time to go over the disaster that is the rescue plan.
The government had better soon realize that the "repaired" economy will not look like the bubble-based economies of the past 20 years fueled by an ever-lower interest rate pyramid scheme. As Citi's technical analysts stated:
"While this might seem a ridiculous comment we honestly still think that people do not get the seriousness of this “economic de-leveraging” taking place."
"People still seem focused on the idea that this is just a financial de-leverage of the last 5 or 6 years of financial excess while we believe it is an economic de-leverage of the last 25 to 30 years worth of excess."
Tuesday, March 24, 2009
Tunnel of Love
"I put a hand upon the lever said let it rock and let it roll
I had the one arm bandit fever there was an arrow through my heart and my soul." - Dire Straits - Tunnel of Love.
Treasury Secretary, Tim Geithner is certainly pulling the handle of the slot machine that is the Private Public Investment Program. Although the plan has potential and is along the lines of what the so-called Bank Vigilantes have been demanding (the removal of toxic assets from bank balance sheets), there are some road blocks. Not surprisingly, the road blocks could come from the world of accounting.
Within the myriad of discussions of toxic assets and how they should be valued, there continues to be the misconception that banks have already marked their toxic assets to market and need only to mark assets up to their "real" values (yeah right). It turns out that the majority of toxic assets on bank balance sheets are loans. It also turns out that loans are not subject to mark to market accounting. Because many banks have not marked down their loan value much, if at all, selling loans to asset managers via the PPIP is problematic for banks. It is problematic because in many instances the result could be realized losses for banks.
Another accounting road block could come from the FASB. The FASB is supposed to decide by April 1, 2009 whether or not to modify mark to market accounting. Although many equity-oriented investors and strategists are hopeful that MTM accounting is modified or eliminated, the bond market would take a dim view of such a decision. The bond market wants the garbage taken out. If the glow-in-the-dark assets remain on bank balance sheets, value at dubious levels set by the banks (kind of like a no-documentation situation in which we are relying on the honesty of the bank to value its health and capital ratios, yeah right) the bond market will at best continue to trade banks at somewhat distressed levels or at worst send credit spreads wider putting more stress on bank borrowing costs. The bond market takes a deeper view of corporate health. It is not always correct, but fixed income strategy goes beyond tracking trends and forecasting reversions to some arbitrary mean value.
I have been an outspoken critic of a suspension of MTM accounting. An editorial in today's Wall Street Journal authored by James S. Chanos (chairman of the Coalition of Private Investment Companies and founder and president of Kynikos Associates LP) echoes my concerns. Mr. Chanos states:
"Mark-to-market (MTM) accounting is under fierce attack by bank CEOs and others who are pressing Congress to suspend, if not repeal, the rules they blame for the current financial crisis. Yet their pleas to bubble-wrap financial statements run counter to increased calls for greater financial-market transparency and ongoing efforts to restore investor trust."
"We have a sorry history of the banking industry driving statutory and regulatory changes. Now banks want accounting fixes to mask their recklessness. Meanwhile, there has been no acknowledgment of culpability in what top management in these financial institutions did -- despite warnings -- to help bring about the crisis. Theirs is a record of lax risk management, flawed models, reckless lending, and excessively leveraged investment strategies. In the worst instances, they acted with moral indifference, knowing that what they were doing was flawed, but still willing to pocket the fees and accompanying bonuses."
"MTM accounting isn't perfect, but it does provide a compass for investors to figure out what an asset would be worth in today's market if it were sold in an orderly fashion to a willing buyer. Before MTM took effect, the Financial Accounting Standards Board (FASB) produced much evidence to show that valuing financial instruments and other difficult-to-price assets by "historical" costs, or "mark to management," was folly."
"The rules now under attack are neither as significant nor as inflexible as critics charge. MTM is generally limited to investments held for trading purposes, and to certain derivatives. For many financial institutions, these investments represent a minority of their total investment portfolio. A recent study by Bloomberg columnist David Reilly of the 12 largest banks in the KBW Bank Index shows that only 29% of the $8.46 trillion in assets are at MTM prices. In General Electric's case, the portion is just 2%."
"Why is that so? Most bank assets are in loans, which are held at their original cost using amortization rules, minus a reserve that banks must set aside as a safety cushion for potential future losses."
'MTM rules also give banks a choice. MTM accounting is not required for securities held to maturity, but you need to demonstrate a "positive intent and ability" that you will do so. Further, an SEC 2008 report found that "over 90% of investments marked-to-market are valued based on observable inputs.""
I didn't highlight Mr. Chanos' article to create a kind of mutual admiration society between he and I, but to highlight the fact that the chairman of the Coalition of Private Investment Companies (A.K.A. hedge funds, which can exert much more influence over the financial markets than myself) is voting "no" on eliminating MTM accounting in the banking world. Private investment companies can move markets by causing credit spreads to widen and push share prices lower by engaging in strategies which result in much share selling. Mr. Chanos may be the chief "vigilante"
"And the big wheel keep on turning neon burning up above
and I'm just high on the world
come on and take a low ride with me girl
on the tunnel of love" - Dire Straits
I had the one arm bandit fever there was an arrow through my heart and my soul." - Dire Straits - Tunnel of Love.
Treasury Secretary, Tim Geithner is certainly pulling the handle of the slot machine that is the Private Public Investment Program. Although the plan has potential and is along the lines of what the so-called Bank Vigilantes have been demanding (the removal of toxic assets from bank balance sheets), there are some road blocks. Not surprisingly, the road blocks could come from the world of accounting.
Within the myriad of discussions of toxic assets and how they should be valued, there continues to be the misconception that banks have already marked their toxic assets to market and need only to mark assets up to their "real" values (yeah right). It turns out that the majority of toxic assets on bank balance sheets are loans. It also turns out that loans are not subject to mark to market accounting. Because many banks have not marked down their loan value much, if at all, selling loans to asset managers via the PPIP is problematic for banks. It is problematic because in many instances the result could be realized losses for banks.
Another accounting road block could come from the FASB. The FASB is supposed to decide by April 1, 2009 whether or not to modify mark to market accounting. Although many equity-oriented investors and strategists are hopeful that MTM accounting is modified or eliminated, the bond market would take a dim view of such a decision. The bond market wants the garbage taken out. If the glow-in-the-dark assets remain on bank balance sheets, value at dubious levels set by the banks (kind of like a no-documentation situation in which we are relying on the honesty of the bank to value its health and capital ratios, yeah right) the bond market will at best continue to trade banks at somewhat distressed levels or at worst send credit spreads wider putting more stress on bank borrowing costs. The bond market takes a deeper view of corporate health. It is not always correct, but fixed income strategy goes beyond tracking trends and forecasting reversions to some arbitrary mean value.
I have been an outspoken critic of a suspension of MTM accounting. An editorial in today's Wall Street Journal authored by James S. Chanos (chairman of the Coalition of Private Investment Companies and founder and president of Kynikos Associates LP) echoes my concerns. Mr. Chanos states:
"Mark-to-market (MTM) accounting is under fierce attack by bank CEOs and others who are pressing Congress to suspend, if not repeal, the rules they blame for the current financial crisis. Yet their pleas to bubble-wrap financial statements run counter to increased calls for greater financial-market transparency and ongoing efforts to restore investor trust."
"We have a sorry history of the banking industry driving statutory and regulatory changes. Now banks want accounting fixes to mask their recklessness. Meanwhile, there has been no acknowledgment of culpability in what top management in these financial institutions did -- despite warnings -- to help bring about the crisis. Theirs is a record of lax risk management, flawed models, reckless lending, and excessively leveraged investment strategies. In the worst instances, they acted with moral indifference, knowing that what they were doing was flawed, but still willing to pocket the fees and accompanying bonuses."
"MTM accounting isn't perfect, but it does provide a compass for investors to figure out what an asset would be worth in today's market if it were sold in an orderly fashion to a willing buyer. Before MTM took effect, the Financial Accounting Standards Board (FASB) produced much evidence to show that valuing financial instruments and other difficult-to-price assets by "historical" costs, or "mark to management," was folly."
"The rules now under attack are neither as significant nor as inflexible as critics charge. MTM is generally limited to investments held for trading purposes, and to certain derivatives. For many financial institutions, these investments represent a minority of their total investment portfolio. A recent study by Bloomberg columnist David Reilly of the 12 largest banks in the KBW Bank Index shows that only 29% of the $8.46 trillion in assets are at MTM prices. In General Electric's case, the portion is just 2%."
"Why is that so? Most bank assets are in loans, which are held at their original cost using amortization rules, minus a reserve that banks must set aside as a safety cushion for potential future losses."
'MTM rules also give banks a choice. MTM accounting is not required for securities held to maturity, but you need to demonstrate a "positive intent and ability" that you will do so. Further, an SEC 2008 report found that "over 90% of investments marked-to-market are valued based on observable inputs.""
I didn't highlight Mr. Chanos' article to create a kind of mutual admiration society between he and I, but to highlight the fact that the chairman of the Coalition of Private Investment Companies (A.K.A. hedge funds, which can exert much more influence over the financial markets than myself) is voting "no" on eliminating MTM accounting in the banking world. Private investment companies can move markets by causing credit spreads to widen and push share prices lower by engaging in strategies which result in much share selling. Mr. Chanos may be the chief "vigilante"
"And the big wheel keep on turning neon burning up above
and I'm just high on the world
come on and take a low ride with me girl
on the tunnel of love" - Dire Straits
Monday, March 23, 2009
Assets For Sale
Treasury Secretary Tim Geithner announced the details of his plan to purge balance sheets of toxic assets. The program provides for the selling of legacy loans held by banks and legacy securities backed by toxic mortgages which are decaying bank balance sheets. Treasury stated that it will sell the toxic assets to up to five asset managers "with a demonstrated track record of purchasing legacy assets," but it could add more asset managers if necessary.
The question remains: What will assets managers pay for the toxic assets? The probable answer is: Not much. This could discourage banks from participating. That may be fine for the stronger banks (stronger banks generally do not have problematic exposure to toxic assets), but banks who have received multiple rounds of government assistance could have their arms twisted. This could keep the pressure on some banks. Treasury Secretary Geithner and FDIC Chairman Sheila Bair agree. Secretary Geithner stated that banks could remain under "acute pressure" and Chairman Bair stated that the plan to remove toxic assets from balance sheets may be too late to save some lenders.
Banks may be forced to sell toxic assets at depressed prices and some lenders may not survive, why did the markets (mostly the stock market) respond as positively as it did today? Because the assets finally appear to be leaving the banks. As I stated previously, no one will board a ship with a breached hull, regardless of the number of pumps employed to keep the ship of float. Passengers want the holes fixed before boarding and investors want the toxic assets gone before they invest in the banks.
Why hasn't the bond market jumped on board? Because if toxic assets are sold at relatively low prices, the balance sheets of some banks may not warrant current credit ratings (never mind better ratings). Corporate bond prices are all about credit quality, real or perceived. This creates buying opportunities among the biggest and best banks. JPM, PNC and USB appear to be the best of the bunch, but opportunities can also be found with GS, MS and WFC bonds. In fact, it is unlikely that senior note holders of ANY large U.S. financial institution will be harmed in the long run. Investors looking for yield, but an added bit of safety, why not buy bonds within the TLGP period, which has been extended until December 2012. Note: I am not suggesting buying TLGP FDIC-backed bonds for retail investors. Small investors needing FDIC insurance can do better with CDs. Buy uninsured senior notes issued by large TARP banks and you should be just fine.
What about mark-to-market? The FASB vote in the issue by April 1, 2009. Some investors are hoping that mark to market will be suspended or modified for banks. They had better be careful of what they wish for. If banks are encouraged to hold onto toxic assets because they do not have to acknowledge losses, many large investors will once again avoid investing in banks. That is, if the government really gives the banks a choice of participating or not. Basically, take TARP money, sell your assets.
The question remains: What will assets managers pay for the toxic assets? The probable answer is: Not much. This could discourage banks from participating. That may be fine for the stronger banks (stronger banks generally do not have problematic exposure to toxic assets), but banks who have received multiple rounds of government assistance could have their arms twisted. This could keep the pressure on some banks. Treasury Secretary Geithner and FDIC Chairman Sheila Bair agree. Secretary Geithner stated that banks could remain under "acute pressure" and Chairman Bair stated that the plan to remove toxic assets from balance sheets may be too late to save some lenders.
Banks may be forced to sell toxic assets at depressed prices and some lenders may not survive, why did the markets (mostly the stock market) respond as positively as it did today? Because the assets finally appear to be leaving the banks. As I stated previously, no one will board a ship with a breached hull, regardless of the number of pumps employed to keep the ship of float. Passengers want the holes fixed before boarding and investors want the toxic assets gone before they invest in the banks.
Why hasn't the bond market jumped on board? Because if toxic assets are sold at relatively low prices, the balance sheets of some banks may not warrant current credit ratings (never mind better ratings). Corporate bond prices are all about credit quality, real or perceived. This creates buying opportunities among the biggest and best banks. JPM, PNC and USB appear to be the best of the bunch, but opportunities can also be found with GS, MS and WFC bonds. In fact, it is unlikely that senior note holders of ANY large U.S. financial institution will be harmed in the long run. Investors looking for yield, but an added bit of safety, why not buy bonds within the TLGP period, which has been extended until December 2012. Note: I am not suggesting buying TLGP FDIC-backed bonds for retail investors. Small investors needing FDIC insurance can do better with CDs. Buy uninsured senior notes issued by large TARP banks and you should be just fine.
What about mark-to-market? The FASB vote in the issue by April 1, 2009. Some investors are hoping that mark to market will be suspended or modified for banks. They had better be careful of what they wish for. If banks are encouraged to hold onto toxic assets because they do not have to acknowledge losses, many large investors will once again avoid investing in banks. That is, if the government really gives the banks a choice of participating or not. Basically, take TARP money, sell your assets.
Wednesday, March 18, 2009
Can't See The Forest For The Trees
During the past several days I have been inundated with calls and e-mails asking why CprP and CprM have not rallied in response to the price increase of C common. The most popular secondary question is: "Have the exchange terms changed?" Although the terms are preliminary (nothing is set in stone until the SEC completes its review. The review is expected to be complete sometime between the end of April and the end of June), nothing has changed. The problem lies not in a change of exchange terms, but in the price of Citi common.
In the equity-centric world of retail investing, the knee-jerk reaction is to believe the equity price is fundamentally correct and that the preferred price is incorrect. It had not dawned on a single person who contacted me that the problem lies not with the preferreds, but with the common.
The only reason CprP and CprM are trading above $2 is that there is an arbitrage to be had. Once the arbitrage is over, there will be no bid support. One may say that CprP and CprM are trading in the teens for technical reasons. After all, without the arbitrage they are non-cumulative, non-paying preferreds. The arbitrage is that if one purchases CprM and CprP in the $13.00 area and C common is better than approximately $1.80 at the time of the exchange, the arbitrage will be successful. Because of uncertainty and the cost of hedging (shorting and borrowing C common or creating synthetic shorts using options), C preferreds had been trading at roughly a 10% discount to the conversion calculation. During the past week, the disconnect has widened to over 30%.
This is for two reasons. First: The market does not believe in the $3+ C common price. Secondly: Citi shares which can be borrowed have fried up. This is creating a short squeeze. In a typical short squeeze, the share price of the stock in question will spike as shorts are covered. Once that has been accomplished, the bid support for the stock disappears. One need only look to Volkswagen's wild ride last October. The arbitrageurs, not being able to short the common and not believing in the $3+ C share price, do not bid up CprP and CprM.
I mentioned last week that the corporate bond market had not shared in the stock market's optimism because nothing had fundamentally changed. I later acknowledged that bank bond prices performed a bit better after Treasury Secretary Geithner announced his desire to rid bank balance sheets of toxic assets. With the TALF experiencing a tepid response and few positive signs in the economic data, bank bond prices have fallen once again. In fact, prices of C bonds have fallen as its share prices have rallied. Professional fixed income investors are no all that optimistic. Similarly, CprP and CprM have become provinces of institutional investors, such as hedge funds, who are the largest participants in the arbitrage. To me it appears as the problem lies on the common side. Equity prices are among the least reliable indicators in the investment world due to their potential attractiveness as speculation vehicles.
The Fed surprised the markets today and announced that it would purchase up to $300B of U.S. treasury in an attempt to lower mortgage rates. This is an example of quantitative easing. This flies in the face of yesterdays TIC flows which indicated fewer foreign purchases of U.S. securities. Although $300B is not a large number in relative terms, it demonstrates the Fed's desire to hold borrowing costs low in an attempt to jumpstart the economy. Although inflation is likely to arise down the road (probably sometime in 2010), long-term treasury yields are unlikely to respond, yet. There is no rush now to buy ETF TBT.
In the equity-centric world of retail investing, the knee-jerk reaction is to believe the equity price is fundamentally correct and that the preferred price is incorrect. It had not dawned on a single person who contacted me that the problem lies not with the preferreds, but with the common.
The only reason CprP and CprM are trading above $2 is that there is an arbitrage to be had. Once the arbitrage is over, there will be no bid support. One may say that CprP and CprM are trading in the teens for technical reasons. After all, without the arbitrage they are non-cumulative, non-paying preferreds. The arbitrage is that if one purchases CprM and CprP in the $13.00 area and C common is better than approximately $1.80 at the time of the exchange, the arbitrage will be successful. Because of uncertainty and the cost of hedging (shorting and borrowing C common or creating synthetic shorts using options), C preferreds had been trading at roughly a 10% discount to the conversion calculation. During the past week, the disconnect has widened to over 30%.
This is for two reasons. First: The market does not believe in the $3+ C common price. Secondly: Citi shares which can be borrowed have fried up. This is creating a short squeeze. In a typical short squeeze, the share price of the stock in question will spike as shorts are covered. Once that has been accomplished, the bid support for the stock disappears. One need only look to Volkswagen's wild ride last October. The arbitrageurs, not being able to short the common and not believing in the $3+ C share price, do not bid up CprP and CprM.
I mentioned last week that the corporate bond market had not shared in the stock market's optimism because nothing had fundamentally changed. I later acknowledged that bank bond prices performed a bit better after Treasury Secretary Geithner announced his desire to rid bank balance sheets of toxic assets. With the TALF experiencing a tepid response and few positive signs in the economic data, bank bond prices have fallen once again. In fact, prices of C bonds have fallen as its share prices have rallied. Professional fixed income investors are no all that optimistic. Similarly, CprP and CprM have become provinces of institutional investors, such as hedge funds, who are the largest participants in the arbitrage. To me it appears as the problem lies on the common side. Equity prices are among the least reliable indicators in the investment world due to their potential attractiveness as speculation vehicles.
The Fed surprised the markets today and announced that it would purchase up to $300B of U.S. treasury in an attempt to lower mortgage rates. This is an example of quantitative easing. This flies in the face of yesterdays TIC flows which indicated fewer foreign purchases of U.S. securities. Although $300B is not a large number in relative terms, it demonstrates the Fed's desire to hold borrowing costs low in an attempt to jumpstart the economy. Although inflation is likely to arise down the road (probably sometime in 2010), long-term treasury yields are unlikely to respond, yet. There is no rush now to buy ETF TBT.
Sunday, March 15, 2009
It's Getting Better
The opinion that toxic assets must come off bank balance sheets is becoming more popular (remember you heard it hear first). G20 Officials agreed that steps must be taken to rid banks of their toxic assets.Canadian Finance Minister told Bloomberg News that until banks are cleansed and resume lending, other stimuli, such as lowering interest rates and cutting taxes will have little effect.
Finance officials from around the globe are beginning to realize that many bank assets are permanently impaired. Changing mark-to-market would be like putting a band aid on a bullet wound (and would also encourage bad behavior by making it easier to take risk). They also realize that investors will not board the cruise ship that is the banking system until the hulls are repaired. Pumps are not enough.
This does not mean that losses are behind the banks. I have stated many times that some banks have not marked many of their assets to market. The belief that banks have marked all their assets to "market" and will benefit when the are able or permitted to mark their assets up either do not understand nature of the toxic asset situation or have agendas.
I am not pulling the opinion that banks have not marked the majority of their assets to market. Bloomberg News' David Reilly reports: "Of the $8.46 trillion in assets held by the 12 largest banks in the KBW Bank Index, only 29 percent is marked to market prices, according to my analysis of company data."
Mr. Reilly continues: "Altering mark-to-market rules wouldn't staunch that flow of red ink. Worse, it would make investors even more distrustful of bank balance sheets."
Mr. Reilly also notes that banks are blaming mark-to-market to deflect attention from the real problem. reckless lending. Bond holders of large bank debt should be alright. Equity holders will probably take it on the chin as the losses are realized.
Finance officials from around the globe are beginning to realize that many bank assets are permanently impaired. Changing mark-to-market would be like putting a band aid on a bullet wound (and would also encourage bad behavior by making it easier to take risk). They also realize that investors will not board the cruise ship that is the banking system until the hulls are repaired. Pumps are not enough.
This does not mean that losses are behind the banks. I have stated many times that some banks have not marked many of their assets to market. The belief that banks have marked all their assets to "market" and will benefit when the are able or permitted to mark their assets up either do not understand nature of the toxic asset situation or have agendas.
I am not pulling the opinion that banks have not marked the majority of their assets to market. Bloomberg News' David Reilly reports: "Of the $8.46 trillion in assets held by the 12 largest banks in the KBW Bank Index, only 29 percent is marked to market prices, according to my analysis of company data."
Mr. Reilly continues: "Altering mark-to-market rules wouldn't staunch that flow of red ink. Worse, it would make investors even more distrustful of bank balance sheets."
Mr. Reilly also notes that banks are blaming mark-to-market to deflect attention from the real problem. reckless lending. Bond holders of large bank debt should be alright. Equity holders will probably take it on the chin as the losses are realized.
Wednesday, March 11, 2009
Fixing A Hole
Yesterday's equity rally in the financial sector was not replicated in the fixed income market. Unlike the equity market, which is subject to alternate bouts of euphoria and despair, the fixed income market (specifically the corporate bond and CDS markets) tend to react to substance or lack thereof. Yesterday's stock market rally was driven by one bank CEO stating that his firm had a good first two months and renewed calls for a suspension or modification of mark-to-market accounting. The fixed income markets were having none of it. However, the fixed income markets reacted today to something possibly of substance.
On March 8, 2008 I compared the economy / banking system to a ship with a breached hull. The breached hull representing bank balance sheets containing toxic assets. I compared asking investors too invest in banks with toxic assets based on government promises of support to booking passage on a ship with a gash in its hull based on promises by the company to use as many pumps as required to keep the ship afloat. My belief is that investors would not jump on the banks' bandwagons unless the toxic assets left bank balance sheets and the damage could be assessed. Today, Treasury Secretary Tim Geithner announced that the government's rescue plan will involve giving needy banks even more capital to "encourage them to sell toxic assets (possibly to the street at "market" prices). Following Mr. Geithner's comments, bank bond credit spreads began to tighten and CDS spreads improved, even though the banks may have to finally realize losses.
Why would bond market cheer banks taking realized losses? Because unlike the equity markets filled with cheerleaders, such as my former colleague Larry Kudlow, bond market participants under stand that some banks have truly impaired balance sheets and that many of their assets are permanently impaired. However, they also know that many large banks will survive this, either intact or by being divided into smaller, more manageable entities. The bond market wants to know the truth and not to be shielded from the truth using shady accounting practices (marking to model, etc.).
Does Mr. Geithner's announcement mean that is time to invest in the banks? Possibly, but as we have experienced with TARP from the beginning, the rules can change before they are ever implemented. Also, the additional cash infusions may come with strings attached which could be detrimental to shareholders. However, bonds issued by large banks which have not received multiple TARP injections (one injection is ok). Although I believe that bonds issued by JPM, GS, MS, PNC and USB will probably be money good regardless of maturity, investors wanting an added measure of protection should invest in bonds maturing within the Temporary Liquidity Guarantee Program period. My thinking is that since a default on one bond is a default on all bonds, the government would be on the hook for $10s billons of bonds (principal and interest). If necessary, the government would likely order a troubled bank to sacrifice investors lower on the capital structure to ensure that bond repayments are made. TLGP makes bonds of a recently-hammered institution a possible buying opportunity.
GE Capital has been battered in the fixed income markets. Even the normally-rational fixed income markets have pounded GE Capital bonds and CDS. The probable reason for this is that the fixed income market wants GE CEO Jeff Immelt to strengthen GE's implicit, but not legal, backing of GE Capital. In spite of being a bank holding company, being TARP eligible and issuing TLGP bonds, GECC debt prices have plummeted. This appears to be the work of the bond vigilantes. The vigilantes know full well that GE is not going to spin off GECC. It would cost them $10s of billions of capital and an advance announcement (some say as much as three years) to do so. As GECC provides GE with approximately 40% of its revenue, it is more cost effective for GE to support its finance unit. Besides, the government is likely to force Mr. Immelt to support GECC with the significant amount cash it has on its balance sheet. Also, GECC has $37B in cash, continued access to TLGP (approximately another $70B) and $54B of CD deposits (source Citi Investment Research). Although continued economic negativity could continue to deteriorate GECC's results, credit downgrades, not debt defaults, appear to be the most likely outcome.
The inherent volatility makes GECC debt most suitable for sophisticated investors with moderate risk tolerances or aggressive investors. There is no reason to extend very far out on the yield curve. Either a prolonged economic downturn or higher long-term interest rates make investing within the TLGP period (June 2012) the best risk vs. reward strategy.GE Capital Global Sr. Notes 6.00% due 6/15/12 was priced today (net) at 93.67 8.257%. This represents an attractive investment for investors who want high yield with volatility, but probably not viability risk.
Earlier I mentioned that banks may sell assets at market values after receiving more government funds. This takes the debate over mark-to-market off the table, if this is how it plays out. I would like to mention that although many (equity-oriented) pundits are advocating a suspension or modification of MTM accounting, the fixed income market has been against doing so. Although not perfect, MTM can help to keep banks "honest" Imagine how deep banks could have dug themselves of marking to market did not expose their troubled assets. Those who want to modify or eliminate MTM want to do so for their own gains (or to minimize their losses). Having to 'fess up helps to reign in risk taking. We have an example of what a lack of transparency can look like.
Many of the most toxic assets were held in off-balance sheet structures such as conduits or SIVs. As these were off balance sheet, the assets never had to be marked to market. They were usually set up of sure (some in the Channel Islands, mimicking Enron) where there is no oversight. As the collateral began to fail it caught investors by surprise. When collateral failed (notice I said fail, not simply marked-to-market), this resulted in events of defaults triggering mechanisms which brought these assets back onto bank balance sheets. At that time they had to be marked (sometimes). According to an analyst friend of mine, there is at least one large bank which has only marked a relatively small portion of its assets to market.Give banks a free ride not to mark assets and they don't even have to go through the trouble of creating off-balance sheet entities. They would be able to hold God-knows-what on their balance sheets. The next crisis could dwarf the current crisis. This is as bad as the current policy of trying to fix the past easy loan bubble with a new easy loan bubble.
Speaking of crisis, the data is indicating that the economic crisis has spread beyond housing. Loans and credit cards are likely to weigh heavy on the banks in the coming months. Announcement of bank profits may be tempered by loan, credit card and more mortgage losses as the crisis spreads from irresponsible home buyers to responsible consumers who cannot make their payments because they lost their jobs (a trend expected to continue). The next round of this bout is about to begin.
On March 8, 2008 I compared the economy / banking system to a ship with a breached hull. The breached hull representing bank balance sheets containing toxic assets. I compared asking investors too invest in banks with toxic assets based on government promises of support to booking passage on a ship with a gash in its hull based on promises by the company to use as many pumps as required to keep the ship afloat. My belief is that investors would not jump on the banks' bandwagons unless the toxic assets left bank balance sheets and the damage could be assessed. Today, Treasury Secretary Tim Geithner announced that the government's rescue plan will involve giving needy banks even more capital to "encourage them to sell toxic assets (possibly to the street at "market" prices). Following Mr. Geithner's comments, bank bond credit spreads began to tighten and CDS spreads improved, even though the banks may have to finally realize losses.
Why would bond market cheer banks taking realized losses? Because unlike the equity markets filled with cheerleaders, such as my former colleague Larry Kudlow, bond market participants under stand that some banks have truly impaired balance sheets and that many of their assets are permanently impaired. However, they also know that many large banks will survive this, either intact or by being divided into smaller, more manageable entities. The bond market wants to know the truth and not to be shielded from the truth using shady accounting practices (marking to model, etc.).
Does Mr. Geithner's announcement mean that is time to invest in the banks? Possibly, but as we have experienced with TARP from the beginning, the rules can change before they are ever implemented. Also, the additional cash infusions may come with strings attached which could be detrimental to shareholders. However, bonds issued by large banks which have not received multiple TARP injections (one injection is ok). Although I believe that bonds issued by JPM, GS, MS, PNC and USB will probably be money good regardless of maturity, investors wanting an added measure of protection should invest in bonds maturing within the Temporary Liquidity Guarantee Program period. My thinking is that since a default on one bond is a default on all bonds, the government would be on the hook for $10s billons of bonds (principal and interest). If necessary, the government would likely order a troubled bank to sacrifice investors lower on the capital structure to ensure that bond repayments are made. TLGP makes bonds of a recently-hammered institution a possible buying opportunity.
GE Capital has been battered in the fixed income markets. Even the normally-rational fixed income markets have pounded GE Capital bonds and CDS. The probable reason for this is that the fixed income market wants GE CEO Jeff Immelt to strengthen GE's implicit, but not legal, backing of GE Capital. In spite of being a bank holding company, being TARP eligible and issuing TLGP bonds, GECC debt prices have plummeted. This appears to be the work of the bond vigilantes. The vigilantes know full well that GE is not going to spin off GECC. It would cost them $10s of billions of capital and an advance announcement (some say as much as three years) to do so. As GECC provides GE with approximately 40% of its revenue, it is more cost effective for GE to support its finance unit. Besides, the government is likely to force Mr. Immelt to support GECC with the significant amount cash it has on its balance sheet. Also, GECC has $37B in cash, continued access to TLGP (approximately another $70B) and $54B of CD deposits (source Citi Investment Research). Although continued economic negativity could continue to deteriorate GECC's results, credit downgrades, not debt defaults, appear to be the most likely outcome.
The inherent volatility makes GECC debt most suitable for sophisticated investors with moderate risk tolerances or aggressive investors. There is no reason to extend very far out on the yield curve. Either a prolonged economic downturn or higher long-term interest rates make investing within the TLGP period (June 2012) the best risk vs. reward strategy.GE Capital Global Sr. Notes 6.00% due 6/15/12 was priced today (net) at 93.67 8.257%. This represents an attractive investment for investors who want high yield with volatility, but probably not viability risk.
Earlier I mentioned that banks may sell assets at market values after receiving more government funds. This takes the debate over mark-to-market off the table, if this is how it plays out. I would like to mention that although many (equity-oriented) pundits are advocating a suspension or modification of MTM accounting, the fixed income market has been against doing so. Although not perfect, MTM can help to keep banks "honest" Imagine how deep banks could have dug themselves of marking to market did not expose their troubled assets. Those who want to modify or eliminate MTM want to do so for their own gains (or to minimize their losses). Having to 'fess up helps to reign in risk taking. We have an example of what a lack of transparency can look like.
Many of the most toxic assets were held in off-balance sheet structures such as conduits or SIVs. As these were off balance sheet, the assets never had to be marked to market. They were usually set up of sure (some in the Channel Islands, mimicking Enron) where there is no oversight. As the collateral began to fail it caught investors by surprise. When collateral failed (notice I said fail, not simply marked-to-market), this resulted in events of defaults triggering mechanisms which brought these assets back onto bank balance sheets. At that time they had to be marked (sometimes). According to an analyst friend of mine, there is at least one large bank which has only marked a relatively small portion of its assets to market.Give banks a free ride not to mark assets and they don't even have to go through the trouble of creating off-balance sheet entities. They would be able to hold God-knows-what on their balance sheets. The next crisis could dwarf the current crisis. This is as bad as the current policy of trying to fix the past easy loan bubble with a new easy loan bubble.
Speaking of crisis, the data is indicating that the economic crisis has spread beyond housing. Loans and credit cards are likely to weigh heavy on the banks in the coming months. Announcement of bank profits may be tempered by loan, credit card and more mortgage losses as the crisis spreads from irresponsible home buyers to responsible consumers who cannot make their payments because they lost their jobs (a trend expected to continue). The next round of this bout is about to begin.
Sunday, March 8, 2009
The Wreck of the U.S. Economy
As with the late great ship the Edmund Fitzgerald, the U.S. economy was a source of pride for Americans. However, the U.S. economy more resembles the plight or the Titanic than the most famous of Great Lakes shipwreck. It is similar because, like the Titanic, the U.S, economy has a severe gash in its hull. The severe gash in the hull of the U.S. economy is the banking system.
When a ship is taking water there are to ways to keep it afloat. One way is to repair the gash. The other is to turn on the pumps in an attempt to pump the water out faster than it can come in. The government has decided to try the latter to some positive affect. The government's various liquidity programs, such as the Term Auction Facility (which expanded the banks' ability to tap the Fed Discount Window) and the Term Securities Lending Faculty (which enabled investment banks and securities dealers to use investment grade securities as collateral to borrow from the Fed) encouraged interbank lending. TARP added capital to bank balance sheets. However, none of these efforts solved the real problem. All they did was act as emergency pumps. The gash in the hull are the toxic assets on bank balance sheets.
Deutsche Bank economists Peter Hooper and Torsten Slok published a report on the state of the banking system. Their belief is that government intervention has stabilized the banks, but has not repaired them. They state that credit will not flow freely until the government ease fears of bank failures. Mr. Hooper and Mr. Slok believe that can be achieved buy either removing bad assets from bank balance sheets or infusing even more capital into the banks. In other words, repair the gash or add more pumps. Although either method may keep banks afloat, only removing bad assets (hundreds of billions of dollars of which have not been marked to reflect even their "hold-to-maturity" values, if at all) will attract investors.
Only confident investors and their capital will repair the banking system. Asking investors to commit their capital to banks with assets of unknown quality and value is like asking passengers to buy tickets for passage on a ship being kept afloat by pumps and promises by the captain to add more pumps if necessary. No one will book passage on a ship which is structurally unsound, but this is what the government is asking investors to do. The market is having none if it.
There is one way to test how structurally sound the banking system is, shut down the TAF and the TSLF. This will not happen. The Fed knows full well that the banks significantly impaired and if it turns off the pumps some ships will sink. Other banks know that too. Without Fed liquidity interbank lending would dry up and we would be facing a crisis similar to last March. If you recall last March, interbank lending seized up as banks would not lend to their peers for fear of not being repaid. There is nothing to indicate that banks are any more healthy this year. In fact, all signs point to the fact that they are more fundamentally impaired. The banks will not lend to each other unless the Fed is their to ensure repayment. A similar situation exists in the credit markets where many investors will only purchase FDIC-guaranteed TLGP corporate bonds. Others will only buy non-guaranteed bonds at comparatively-high yields.
Why doesn't the government or the banks simply disclose what assets are on bank balance sheets. Although I cannot say for sure, but it appears as though they are afraid. Could it be that these assets are so toxic that some institutions would be judged to be insolvent? Could be, but there is no way to know until balance sheets are opened to review.
There is one group of investors who may have a good idea of what the banks may be holding. They are hedge funds. Many hedge funds invested in various asset-backed structures. Hedge funds obviously know the condition of their investments so it is conceivable that they have good ideas of the damage some banks may have taken. The result has been a relentless attack on share, bond and CDS values of certain financial institutions.
At some point banks and the government will probably have to come clean. It is unlikely street participants will go long shares of troubled banks. After all, they are not foolish enough to book passage on a ship with a breached hull being kept afloat by pumps.
When a ship is taking water there are to ways to keep it afloat. One way is to repair the gash. The other is to turn on the pumps in an attempt to pump the water out faster than it can come in. The government has decided to try the latter to some positive affect. The government's various liquidity programs, such as the Term Auction Facility (which expanded the banks' ability to tap the Fed Discount Window) and the Term Securities Lending Faculty (which enabled investment banks and securities dealers to use investment grade securities as collateral to borrow from the Fed) encouraged interbank lending. TARP added capital to bank balance sheets. However, none of these efforts solved the real problem. All they did was act as emergency pumps. The gash in the hull are the toxic assets on bank balance sheets.
Deutsche Bank economists Peter Hooper and Torsten Slok published a report on the state of the banking system. Their belief is that government intervention has stabilized the banks, but has not repaired them. They state that credit will not flow freely until the government ease fears of bank failures. Mr. Hooper and Mr. Slok believe that can be achieved buy either removing bad assets from bank balance sheets or infusing even more capital into the banks. In other words, repair the gash or add more pumps. Although either method may keep banks afloat, only removing bad assets (hundreds of billions of dollars of which have not been marked to reflect even their "hold-to-maturity" values, if at all) will attract investors.
Only confident investors and their capital will repair the banking system. Asking investors to commit their capital to banks with assets of unknown quality and value is like asking passengers to buy tickets for passage on a ship being kept afloat by pumps and promises by the captain to add more pumps if necessary. No one will book passage on a ship which is structurally unsound, but this is what the government is asking investors to do. The market is having none if it.
There is one way to test how structurally sound the banking system is, shut down the TAF and the TSLF. This will not happen. The Fed knows full well that the banks significantly impaired and if it turns off the pumps some ships will sink. Other banks know that too. Without Fed liquidity interbank lending would dry up and we would be facing a crisis similar to last March. If you recall last March, interbank lending seized up as banks would not lend to their peers for fear of not being repaid. There is nothing to indicate that banks are any more healthy this year. In fact, all signs point to the fact that they are more fundamentally impaired. The banks will not lend to each other unless the Fed is their to ensure repayment. A similar situation exists in the credit markets where many investors will only purchase FDIC-guaranteed TLGP corporate bonds. Others will only buy non-guaranteed bonds at comparatively-high yields.
Why doesn't the government or the banks simply disclose what assets are on bank balance sheets. Although I cannot say for sure, but it appears as though they are afraid. Could it be that these assets are so toxic that some institutions would be judged to be insolvent? Could be, but there is no way to know until balance sheets are opened to review.
There is one group of investors who may have a good idea of what the banks may be holding. They are hedge funds. Many hedge funds invested in various asset-backed structures. Hedge funds obviously know the condition of their investments so it is conceivable that they have good ideas of the damage some banks may have taken. The result has been a relentless attack on share, bond and CDS values of certain financial institutions.
At some point banks and the government will probably have to come clean. It is unlikely street participants will go long shares of troubled banks. After all, they are not foolish enough to book passage on a ship with a breached hull being kept afloat by pumps.
Thursday, March 5, 2009
Drive My Car
Tonight the Wall Street Journal is reporting that GM is "more open" to a bankruptcy filing. After taking billions of taxpayer dollars with no meaningful restructuring, it is nice of GM to finally acknowledge reality. This is what happens to a company which has enough capacity (and workforce) to supply approximately 50% of the U.S. auto market, but barely holds a 20% market share. GM is finally acknowledging reality after its auditors expressed serious doubts that the former American icon could avoid a restructuring.
What kind of restructuring might it be? My guess is it will eventually be a pre-packaged deal in which terms are agreed upon by GM, creditors, suppliers and the unions before the plan is filed with the bankruptcy court. This would result in a speedy turnaround. However, look for the old guard within the UAW to make a stand (with help from members of Congress). This time however, members of the UAW and Congress will discover that the laws of mathematics apply to them as well as everyone else. What may bondholders expect to receive in a bankruptcy? The very unofficial estimate I have heard around the street has been about 50 cents on the dollar for GM senior debt (paid in a combination of cash and new shares). This is the only color I have.
Note: This does not necessarily affect GMAC bonds. There are not now, nor have there ever been, cross default protections between GM and GMAC (or between Ford and Ford Motor Credit). As long as GM is building vehicles, GMAC will have something to finance (both consumers and dealers) and may survive this debacle. GMAC is a bank holding company and can issue FDIC-backed TLGP bonds. If GM survives, albeit through bankruptcy, GMAC may get the go ahead to issued TLGP bonds thereby remaining well-capitalized.
Thanks to Detroit outsider CEO Alan Mulally, Ford has been the most forward-looking and proactive of the Detroit Three throughout the recession and credit crisis. Mr. Mulally mortgages facilities while doing so was possible and drew down bank lines of credit while they were still available to keep Ford afloat. In spite of his valiant efforts Ford announced that it needs to attempt to retire some of its debt below par. Ford Motor Company is attempting to retire approximately 40% of its outstanding debt at 27 cents on the dollar (30 cents if one tenders early). Details can be found on the Ford website.
Here is the link: http://media.ford.com/images/10031/table_of_Ford_notes.pdf
Note: Ford Motor Credit Bonds are unaffected.
There is much misunderstanding regarding what is going on in the markets. I still receive call sand e-mails suggesting that of mark-to-market was eliminated that all the banks' problems would be solved. Unfortunately the cat is out of the bag. The market knows that much of this collateral is never going to be worth par (possibly nothing close to par). What is doesn't know is precisely how bad bank balance sheets may be. The "Bank Vigilantes" want to know the extent of the damage and how and when these assets will leave bank balance sheets.
There is also a misconception that the banks have already marked all of their assets to market and are being beaten up because of the resulting damage. This belief also states that these prices are lower than what the assets maybe worth of held to maturity. Although it may be true that assets marked to the current market may be worth more when all is said and done, this ignores the fact that hundreds of billions (or more) of so-called Level III assets (assets too complex or illiquid to properly value) have never been marked down a dime. Since these assets may be the worst of the bunch, losses to some banks may be much more severe than what has already been acknowledged.
If it was as simple as the government buying assets from banks at prices reflecting their held to maturity value, The Treasury probably would have done so during the first round of TARP. Instead, then Treasury Secretary Hank Paulson decided to inject Tier-1 capital into the banks to permit them to take losses (hopefully pairing them off versus operating profits in the future) over time. The markets are having none of it. Many of the hedge funds know the deal because they hold some of the same (or similar) toxic assets, albeit on a smaller scale.
Has anyone noticed that the market hates the Presidents response to the deep recession? This is because mortgage relief programs which forgive principal could result in the failure of mortgage-backed and asset-backed securities. If the underlying mortgages are not being paid back in full, then the security containing these mortgages will be paid in full. This can create an event of default for CDS insuring MBS and ABS. With unemployment rising (wait until the effects of GM, Ford, and Chrysler are felt in throughout the economy), the bank losses will probably rise. This is why strong banks such as JPM and PNC have voluntarily slashed equity dividends in preparation for tough sledding ahead. We appear to be still on the downward slope of this recessions.
Lastly, before panic-selling preferreds please be sure you understand the structures. I have observed investors selling GE Cap preferreds because they do not appear to be cumulative. This is because all of the GE Cap preferreds are senior notes. They interest payments cannot be halted short of a bankruptcy filing. Although credit downgrades are probable, bankruptcy is note. Why do I say this? Because GE Cap is a bank holding company, has access to TARP, can issue TLGP bonds and participates in the Fed's Commercial Paper program. Since GE Cap has a deep-pocketed parent (albeit with no legal obligation to back GE Cap debt), it is likely that, if necessary, the government would pressure GE to support GE Cap rather than risk a default. A default would put the government on the hook to repay (principal and interest) on outstanding GE Cap TLGP bonds. Mr. Geithner and Mr. Paulson would probably give GE CEO Jeff Immelt the Ken Lewis treatment rather than have GE Cap go under.
Have a good night and brace yourselves for tomorrows employment data.
What kind of restructuring might it be? My guess is it will eventually be a pre-packaged deal in which terms are agreed upon by GM, creditors, suppliers and the unions before the plan is filed with the bankruptcy court. This would result in a speedy turnaround. However, look for the old guard within the UAW to make a stand (with help from members of Congress). This time however, members of the UAW and Congress will discover that the laws of mathematics apply to them as well as everyone else. What may bondholders expect to receive in a bankruptcy? The very unofficial estimate I have heard around the street has been about 50 cents on the dollar for GM senior debt (paid in a combination of cash and new shares). This is the only color I have.
Note: This does not necessarily affect GMAC bonds. There are not now, nor have there ever been, cross default protections between GM and GMAC (or between Ford and Ford Motor Credit). As long as GM is building vehicles, GMAC will have something to finance (both consumers and dealers) and may survive this debacle. GMAC is a bank holding company and can issue FDIC-backed TLGP bonds. If GM survives, albeit through bankruptcy, GMAC may get the go ahead to issued TLGP bonds thereby remaining well-capitalized.
Thanks to Detroit outsider CEO Alan Mulally, Ford has been the most forward-looking and proactive of the Detroit Three throughout the recession and credit crisis. Mr. Mulally mortgages facilities while doing so was possible and drew down bank lines of credit while they were still available to keep Ford afloat. In spite of his valiant efforts Ford announced that it needs to attempt to retire some of its debt below par. Ford Motor Company is attempting to retire approximately 40% of its outstanding debt at 27 cents on the dollar (30 cents if one tenders early). Details can be found on the Ford website.
Here is the link: http://media.ford.com/images/10031/table_of_Ford_notes.pdf
Note: Ford Motor Credit Bonds are unaffected.
There is much misunderstanding regarding what is going on in the markets. I still receive call sand e-mails suggesting that of mark-to-market was eliminated that all the banks' problems would be solved. Unfortunately the cat is out of the bag. The market knows that much of this collateral is never going to be worth par (possibly nothing close to par). What is doesn't know is precisely how bad bank balance sheets may be. The "Bank Vigilantes" want to know the extent of the damage and how and when these assets will leave bank balance sheets.
There is also a misconception that the banks have already marked all of their assets to market and are being beaten up because of the resulting damage. This belief also states that these prices are lower than what the assets maybe worth of held to maturity. Although it may be true that assets marked to the current market may be worth more when all is said and done, this ignores the fact that hundreds of billions (or more) of so-called Level III assets (assets too complex or illiquid to properly value) have never been marked down a dime. Since these assets may be the worst of the bunch, losses to some banks may be much more severe than what has already been acknowledged.
If it was as simple as the government buying assets from banks at prices reflecting their held to maturity value, The Treasury probably would have done so during the first round of TARP. Instead, then Treasury Secretary Hank Paulson decided to inject Tier-1 capital into the banks to permit them to take losses (hopefully pairing them off versus operating profits in the future) over time. The markets are having none of it. Many of the hedge funds know the deal because they hold some of the same (or similar) toxic assets, albeit on a smaller scale.
Has anyone noticed that the market hates the Presidents response to the deep recession? This is because mortgage relief programs which forgive principal could result in the failure of mortgage-backed and asset-backed securities. If the underlying mortgages are not being paid back in full, then the security containing these mortgages will be paid in full. This can create an event of default for CDS insuring MBS and ABS. With unemployment rising (wait until the effects of GM, Ford, and Chrysler are felt in throughout the economy), the bank losses will probably rise. This is why strong banks such as JPM and PNC have voluntarily slashed equity dividends in preparation for tough sledding ahead. We appear to be still on the downward slope of this recessions.
Lastly, before panic-selling preferreds please be sure you understand the structures. I have observed investors selling GE Cap preferreds because they do not appear to be cumulative. This is because all of the GE Cap preferreds are senior notes. They interest payments cannot be halted short of a bankruptcy filing. Although credit downgrades are probable, bankruptcy is note. Why do I say this? Because GE Cap is a bank holding company, has access to TARP, can issue TLGP bonds and participates in the Fed's Commercial Paper program. Since GE Cap has a deep-pocketed parent (albeit with no legal obligation to back GE Cap debt), it is likely that, if necessary, the government would pressure GE to support GE Cap rather than risk a default. A default would put the government on the hook to repay (principal and interest) on outstanding GE Cap TLGP bonds. Mr. Geithner and Mr. Paulson would probably give GE CEO Jeff Immelt the Ken Lewis treatment rather than have GE Cap go under.
Have a good night and brace yourselves for tomorrows employment data.
Wednesday, March 4, 2009
Strange Days Indeed
These are not "normal days in the capital markets. Current conditions are not typical even of bear markets and economic recessions. Contrary to what some pundits insist, today's economy is not similar to the banking crisis and depressed home values of the early 1990s. However, I have not come to rehash this argument, but to address some a-typical occurrences and discuss their causes.
Many financial advisers have asked me: "Why are the trust preferreds of several large banks (C) trading lower when they are paying their dividends"?
The reasons are two-fold. First, if an insufficient amount of preferred equity is exchanged into common, TRUPs and E-TRUPs investors may be permitted to participate (at the same 7.30768 common shares per preferred share). How does one coerce trust preferred owners to convert? One way is to suspend dividends (interest payments). Notice how the trust securities are trading at similar prices as the non-cum CprP and CprM? Another reason is that they are rated CC by S&P. That is forcing some investors to sell their shares.
Some advisers have asked me what will happen to investors who choose to neither convert nor sell CprP or CprM? They would then own non-paying, non-cumulative preferreds. It is unlikely that trading levels would remain in the $8 area. $1 or $2 Would be more likely. Owners of non-cum preferreds of the C, BAC and even WFC may want to move higher on the respective capital structures or simply move onto other investors. One could make the case for selling into any strength and move on to other investments
Some advisers and investor have expressed concerns that GE may spin off GE Capital. Although this is possible it is unlikely GE would spend more money to sufficiently capitalize GECC as a stand-alone company than it will to prop it up. Also consider that GECC is a bank holding company and has access to TARP and can issue more TLGP bonds. Some estimates state that GECC could issue another $70b worth of TLGP bonds. With the government on the hook for already-issued TLGP bonds I believe that GE CEO Immelt will be encouraged by the government to continue to support GECC (which has already received $9.5B from GE).
Why the big sell off in GE shares and GE bonds? It is due to fear and speculation. A very simple summary of what is happening to GE in the equity and CDS markets. GE shares are selling off out of concern that GE will expend large amounts of cash to support GECC. These cash expenditure concerns are also causing investors to seek default protection in the CDS market. This pushed up the cost of protection. The equity market sees this and sells off GE common. As the common price falls, the demand for credit protection rises. The equity market sees this and trades GE common lower. It is a fear-driven (with some initial substance) negative feed back loop.
Ford is reportedly seeking agreements with creditors o pay some bonds off at 28 cents on the dollar. The proceeds would be paid in cash and stock. This does not affect Ford Motor Credit which is responsible for its own debt. It is becoming decreasongly likely that any of the Detroit automakers will survive the recession (or worse) intact.
Many financial advisers have asked me: "Why are the trust preferreds of several large banks (C) trading lower when they are paying their dividends"?
The reasons are two-fold. First, if an insufficient amount of preferred equity is exchanged into common, TRUPs and E-TRUPs investors may be permitted to participate (at the same 7.30768 common shares per preferred share). How does one coerce trust preferred owners to convert? One way is to suspend dividends (interest payments). Notice how the trust securities are trading at similar prices as the non-cum CprP and CprM? Another reason is that they are rated CC by S&P. That is forcing some investors to sell their shares.
Some advisers have asked me what will happen to investors who choose to neither convert nor sell CprP or CprM? They would then own non-paying, non-cumulative preferreds. It is unlikely that trading levels would remain in the $8 area. $1 or $2 Would be more likely. Owners of non-cum preferreds of the C, BAC and even WFC may want to move higher on the respective capital structures or simply move onto other investors. One could make the case for selling into any strength and move on to other investments
Some advisers and investor have expressed concerns that GE may spin off GE Capital. Although this is possible it is unlikely GE would spend more money to sufficiently capitalize GECC as a stand-alone company than it will to prop it up. Also consider that GECC is a bank holding company and has access to TARP and can issue more TLGP bonds. Some estimates state that GECC could issue another $70b worth of TLGP bonds. With the government on the hook for already-issued TLGP bonds I believe that GE CEO Immelt will be encouraged by the government to continue to support GECC (which has already received $9.5B from GE).
Why the big sell off in GE shares and GE bonds? It is due to fear and speculation. A very simple summary of what is happening to GE in the equity and CDS markets. GE shares are selling off out of concern that GE will expend large amounts of cash to support GECC. These cash expenditure concerns are also causing investors to seek default protection in the CDS market. This pushed up the cost of protection. The equity market sees this and sells off GE common. As the common price falls, the demand for credit protection rises. The equity market sees this and trades GE common lower. It is a fear-driven (with some initial substance) negative feed back loop.
Ford is reportedly seeking agreements with creditors o pay some bonds off at 28 cents on the dollar. The proceeds would be paid in cash and stock. This does not affect Ford Motor Credit which is responsible for its own debt. It is becoming decreasongly likely that any of the Detroit automakers will survive the recession (or worse) intact.
Monday, March 2, 2009
Bits and Pieces
Today, the details regarding the conversion of publicly-owned preferreds CprP, CprM, CprI (convertible, $50 par) and the $1,000 par C 8.40% perpetual preferred. According to the official terms CprP and CprM shareholders would receive 7.30769 shares of C common in exchange for each preferred share. CprI shareholders would receive 13.0769 shares of C common. Owners of the $1,000 C 8.40% will receive 292.30769 shares of C common. TRUPs and E-TRUPs owners would also receive the same 7.3069 shares of common should they decide to convert.
This begs the question: Should preferred owners convert? If one wants to be on the lowest possible place on the capital structure. If one wants the lowest possibility of receiving a dividend. If someone wants to risk further dilution should C need even more assistance then yes, convert to common equity. All other investors should move up the capital structure or move on to another name altogether.
The popular question has been: Why have prices of the preferred shares rallied into the $8.00 area. It is really quite simple. There is an arbitrage to be had should one want to speculate. We know that CprM and CprP holders will receive 7.30769 shares of common for each preferred share. C common closed at $1.20 per share. A simple calculation tells us that 7.30769 shares at $1.20 per share equals a preferred share value of $8.77. So, if one purchase CprP or CprM at a price which is advantageous versus the exchange (we don't know what C common will be worth at the time of the exchange - hence the speculation) there may be profit to be had. Of course, guess wrong and you just overpaid to own a pile of manure. Of course their are ways to hedge oneself by shorting the common or buying puts or selling calls, but this is not what most traditional preferred holders want. They want dividends. Unfortunately, they have come to the wrong place.
You see the ratings agencies have performed a dirty deed on good ol' C. The downgraded C preferreds to the bottom of the junk world. Your eyes do not deceive you, C preferreds are rated Ca by Moody's and C by S&P. TRUPs and E-TRUPs are now rated Baa3 / CC. The ratings agencies are telling us that they are concerned that cumulative Trust Preferred dividends may not be secure,
So now we know what the preferred shares are worth to speculators, what will the be worth after the exchange period is over. Without a dividend or any immediate prospects of paying one CprP and CprM are probably not worth the time it takes to punch in a quote. More disconcerting is that BAC and WFC could be right behind C.
The street consensus is that the government will want banks to have tangible common equity of 4.00% of total assets. C was 1.5%. BAC and WFC are between 2.6% and 2.8%. It is unlikely that either bank will be able to initiate equity IPOs any time soon. An exchange of preferred for common could be in the cards. Suspending of preferred dividends could once again be used to coerce sovereign wealth funds and other institutional investors to convert their holdings to common shares.
My former Schroder colleague, Larry Kudlow had as a guest this evening strategist Dick Bove'. Mr. Bove' once again downplayed the troubles at the banks. He did so last March, right before Bear Stearns imploded (causing me to call him out on the topic). Once again, he made comparisons between today's crisis and the early 1990s (as he did last year) ignoring the vast differences between the two events. His strategy is to buy equities, especially banks, because it is only a matter of time until the "93% of Americans who have jobs begin to spend." Is Mr. Bove' blind, deaf or clueless?
The 93% of Americans who are employed are busy paying their own debts and are getting ready to pay the debts of those who cannot by way of higher taxes and tighter lending standards instituted by banks to protect themselves from onerous government-instituted lending laws. Does he not understand that the economy of the past 20 years was fueled by cheap credit and a lack of inflation due to productivity gains and outsourcing? These employed Americans will not spend has they had in the recent past. Sure, there will be replacement spending and while that will help slow the slide, it will not turn around the economy. In fact, an economy based on income, rather than borrowing, will probably be the norm for a number of years, if not longer.
This begs the question: Should preferred owners convert? If one wants to be on the lowest possible place on the capital structure. If one wants the lowest possibility of receiving a dividend. If someone wants to risk further dilution should C need even more assistance then yes, convert to common equity. All other investors should move up the capital structure or move on to another name altogether.
The popular question has been: Why have prices of the preferred shares rallied into the $8.00 area. It is really quite simple. There is an arbitrage to be had should one want to speculate. We know that CprM and CprP holders will receive 7.30769 shares of common for each preferred share. C common closed at $1.20 per share. A simple calculation tells us that 7.30769 shares at $1.20 per share equals a preferred share value of $8.77. So, if one purchase CprP or CprM at a price which is advantageous versus the exchange (we don't know what C common will be worth at the time of the exchange - hence the speculation) there may be profit to be had. Of course, guess wrong and you just overpaid to own a pile of manure. Of course their are ways to hedge oneself by shorting the common or buying puts or selling calls, but this is not what most traditional preferred holders want. They want dividends. Unfortunately, they have come to the wrong place.
You see the ratings agencies have performed a dirty deed on good ol' C. The downgraded C preferreds to the bottom of the junk world. Your eyes do not deceive you, C preferreds are rated Ca by Moody's and C by S&P. TRUPs and E-TRUPs are now rated Baa3 / CC. The ratings agencies are telling us that they are concerned that cumulative Trust Preferred dividends may not be secure,
So now we know what the preferred shares are worth to speculators, what will the be worth after the exchange period is over. Without a dividend or any immediate prospects of paying one CprP and CprM are probably not worth the time it takes to punch in a quote. More disconcerting is that BAC and WFC could be right behind C.
The street consensus is that the government will want banks to have tangible common equity of 4.00% of total assets. C was 1.5%. BAC and WFC are between 2.6% and 2.8%. It is unlikely that either bank will be able to initiate equity IPOs any time soon. An exchange of preferred for common could be in the cards. Suspending of preferred dividends could once again be used to coerce sovereign wealth funds and other institutional investors to convert their holdings to common shares.
My former Schroder colleague, Larry Kudlow had as a guest this evening strategist Dick Bove'. Mr. Bove' once again downplayed the troubles at the banks. He did so last March, right before Bear Stearns imploded (causing me to call him out on the topic). Once again, he made comparisons between today's crisis and the early 1990s (as he did last year) ignoring the vast differences between the two events. His strategy is to buy equities, especially banks, because it is only a matter of time until the "93% of Americans who have jobs begin to spend." Is Mr. Bove' blind, deaf or clueless?
The 93% of Americans who are employed are busy paying their own debts and are getting ready to pay the debts of those who cannot by way of higher taxes and tighter lending standards instituted by banks to protect themselves from onerous government-instituted lending laws. Does he not understand that the economy of the past 20 years was fueled by cheap credit and a lack of inflation due to productivity gains and outsourcing? These employed Americans will not spend has they had in the recent past. Sure, there will be replacement spending and while that will help slow the slide, it will not turn around the economy. In fact, an economy based on income, rather than borrowing, will probably be the norm for a number of years, if not longer.
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