Strange Days Indeed

Nobody told me there'd be days like these
Nobody told me there'd be days like these
Nobody told me there'd be days like these
Strange days indeed -- strange days indeed ~ John Lennon


The Fed came in and bought $7 billion worth of U.S. treasuries causing prices of U.S. treasuries to decline. You can stop re-reading or rubbing your eyes. What I have just written is not a mistake. In the markets perception is everything. In this case, government bond traders were betting that the Fed would be more aggressive. True to its word, the Fed stayed within the 7-10 year range of the yield curve. This caused a healthy selloff of nearly a point. Rates on the long end of the curve could be stuck around current levels for a while as the countervailing forces of Fed purchases (it has bought on the long end before) and copious amounts of government debt issuance and dollar printing exert their effects. I still like JPM, GS, USB, PNC and GE Cap bonds as far out as 10-years. Eventual credit spread tightening could (should) make up for much of the effects of higher treasury benchmark yields.

President Obama's Automotive Task Force has decided to meet with GM bondholders. Thus far, GM bondholders have been excluded from government / GM discussions. This is a good idea if the Obama administration seeks to avoid a GM trip to bankruptcy court. However, this is just what bondholders may want.

Last week, GM announced that it will make an all equity settlement offer to GM bondholders. Speculation on the Street puts the compensation level at between 10 and 20 cents on the dollar. GM bondholders were not happy. A group of GM bondholders (who have become the defacto negotiators) had suggested a settlement of 33 cents on the dollar consisting of stock, bonds and cash. GM is insisting on all stock. Bondholders may be crazy, but they are not dumb. They know that owning stock in a suspect GM with a recalcitrant UAW is not an optimal situation. They also know that they would be in the best position of all parties in terms of compensation. The Obama Administration knows that the UAW would be at a severe disadvantage and the Administration doesn't want that. GM bondholders who want all cash should probably sell here. Those who want a chance at a higher return, but are not as concerned with how they are compensated, may want to hold and see how it all plays out.

Investors should note that GMAC bonds and bondholders are not involved with this process. GMAC has (and has always had) a separate capital structure. GMAC is not part of these negotiations. The government is very much incentivized to keep GMAC functioning (out of bankruptcy) if GM is to survive.


Here are the facts:

GMAC is a TARP bank holding company.

GMAC has (with government approval) the ability to issue TLGP bonds guaranteed by the FDIC.

GMAC is responsible for most (upwards of 90% by some accounts) of dealer inventory financing. No dealers = no GM = no UAW.

Although I cannot guarantee it (especially with the UAW involved with GM), GMAC bonds should be ok in the near future (2009 and maybe 2010). After that it is anyone's guess as GM's survival may not be so politically important in the future.

Citi conducted its annual shareholder meeting. Many investors vented their frustrations. Management was somewhat more humble, but the dysfunction continues.

The DJIA rallied after Tim (my story is ever-changing) Geithner stated that the "vast majority" of U.S. banks are well-capitalized. He is probably accurate when small local banks are included. However, some larger banks are only well capitalized because of government programs. Others (some quite large) are probably not well capitalized even with government liquidity programs. Thus far the government's TALF and PPIP plans have not been able to attract private investors, although retail brokers continue to call my place of employment stating that they have clients ready to invest. These investors should look around and see what institutions are investing along side them. They will discover that TALF and PPIP are lonely places.

Meanwhile bank CDS continues to trade at wide levels. The more suspect the bank, the wider the CDS spread. The bank vigilantes want to know the extent of the toxic assets on bank balance sheets and the want to know the damage and when they will be removed from bank balance sheets before the invest their capital in most, if not all banks. Oh yeah, whatever happened to the expected benefits of the change to mark to market accounting?


Until next time, stay safe in the markets. Not much makes sense these days.