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Dallas, TX
May 18, 2010, 08:00 EST |
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Dr. Joe Duarte's Market I.Q. |
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The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy For Traders and Investors
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An Obscure FDIC Related Case In Florida May Be Pandora's Box For Wall Street
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What's Hot Today: |  |
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U.S. stock index futures were pointing to a higher opening. The Euro
remained above 1.24, overnight. Asian markets recovered and Europe
bounced. Wall Street also recovered on Monday. These are all signs
that some kind of bounce attempt is on the way.
News For Thought
Ooops! Prime Time candidate fibs about Vietnam service and other
things says The New York Times. And he's a Democrat. According
to The New York Times: "Richard Blumenthal, a Democrat running for the
U.S. Senate from Connecticut, told veterans he “served in Vietnam.” But
he did not." How can this be so? According to The Times: "Mr. Blumenthal,
a Democrat now running for the United States Senate, never served in
Vietnam. He obtained at least five military deferments from 1965 to 1970
and took repeated steps that enabled him to avoid going to war, according
to records. The deferments allowed Mr. Blumenthal to complete his studies
at Harvard; pursue a graduate fellowship in England; serve as a special
assistant to The Washington Post’s publisher, Katharine Graham; and ultimately
take a job in the Nixon White House."
The Times caught up to Mr. Blumenthal, and reported: "what is striking about
Mr. Blumenthal’s record is the contrast between the many steps he took that allowed
him to avoid Vietnam, and the misleading way he often speaks about that period
of his life now, especially when he is speaking at veterans’ ceremonies or other
patriotic events. Sometimes his remarks have been plainly untrue, as in his speech
to the group in Norwalk. At other times, he has used more ambiguous language,
but the impression left on audiences can be similar. In an interview on Monday,
the attorney general said that he had misspoken about his service during the
Norwalk event and might have misspoken on other occasions. “My intention has
always been to be completely clear and accurate and straightforward, out of respect
to the veterans who served in Vietnam,” he said. "
But Mr. Blumenthal gets an au contraire, mon frere. As the Time points out: 'an
examination of his remarks at the ceremonies shows that he does not volunteer
that his service never took him overseas. And he describes the hostile reaction
directed at veterans coming back from Vietnam, intimating that he was among them.
In 2003, he addressed a rally in Bridgeport, where about 100 military families
gathered to express support for American troops overseas. “When we returned,
we saw nothing like this,” Mr. Blumenthal said. “Let us do better by this generation
of men and women.”'
In fact, it's a lot like what a former president said on two occassions. One
was the "I didn't inhale" remark. The other was the more infamous "I never had
sex with that woman." Of course if things turn out the same for Mr. Blumenthal,
he'll be elected and will be highly regarded, at least once he leaves office.
Oh yeah. We forgot this part of the story. According to The Times: "On a less
serious matter, another flattering but untrue description of Mr. Blumenthal’s
history has appeared in profiles about him. In two largely favorable profiles,
the Slate article and a magazine article in The Hartford Courant in 2004 with
which he cooperated, Mr. Blumenthal is described prominently as having served
as captain of the swim team at Harvard. Records at the college show that he was
never on the team."
To Mr. Blumenthal: Dude, that's like, totally dishonest, and downright not right.
To The New York Times: See, you can report stuff that damages careers on both
sides of the aisle. |
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An Obscure FDIC Related Case In Florida May Be Pandora's Box For Wall Street
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CDO's: The Wall Street Phenomenon That Won't Go Away
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The FDIC is home to $400 million worth of "toxic assets" and
is looking to start suing the investment banks that issued the now worthless
paper, reports The Wall Street Journal.
The source of the toxic assets are the mortgage backed Credit Default Obligations
(CDO's) that the FDIC has inherited after it has taken over the never seeming
to end banks that continue to fail throughout the U.S. According to The Journal: "The
Federal Deposit Insurance Corp., and by extension the U.S. taxpayer, owns more
than 250 collateralized debt obligations that were purchased by small institutions
that later failed. Although the bonds have a book value of more than $400 million,
they are a headache for the agency as it grapples with the toxic assets flowing
from many banks around the country." More daunting is the fact that the number
of CDOs keeps climbing, according to Miguel Browne, an assistant director in
the FDIC's division of resolutions and receiverships.
And a recent bust and seizure by the FDIC has led to a point where "The FDIC's
mountain of bad securities has grown even bigger in recent weeks following the
failure of Riverside National Bank of Florida, a small firm that had stuffed
its investment portfolio with 27 CDOs known as trust preferred securities. Although
it was a community bank with 58 branches in Florida, its pile of CDOs has almost
doubled the notional value of bonds owned by the federal agency." Aside from
the recent additions "The agency has inherited such securities from about two
dozen banks that have failed in the current crisis, including Omni National Bank
in Atlanta, Venture Bank in Lacey, Wash., and San Diego National Bank."
CDOs are the bundles of subprime mortgage backed securities that investment banks,
like Merrill Lynch, Goldman Sachs, and Lehman Brothers, among others were selling
to investors on one end of the deal while selling credit default swaps (CDSs)
to short sellers. Some banks, including Goldman eventually sold short the CDOs
themselves, which is the central tenet in the SEC's civil suit against Goldman.
The central question is whether Goldman sold the CDO's to investors knowing that
the securities were almost certainly going to end up worthless, and knowing that
fact, continued to sell them while selling them short themselves.
The Journal, diplomatically notes: 'The problem is that it is difficult to pin
down the value of something for which there may be no market. According to FDIC
estimates, that the book value of the CDOs that the agency now holds is more
than $400 million. But "a lot of these things will have little or no market value," Mr.
Browne said.' In fact, Mr. Browne is correct. These CDO's are not likely to be
worth any more than the paper that they are printed on, as they are essentially
bundles of empty promises. Promises that the mortgage owner would actually make
payments. But, since those who bought the mortgages are long gone, and the houses
are most likely to be sitting empty, some of them reportedly in areas that were
never even inhabited, the value is zero, or nearly zero.
So the U.S. government is stuck with $400 million dollars worth of book value
that has dwindled to zero. And now the FDIC, having essentially bailed out the
depositors in the banks who were fooled into paying money for air, wants its
money back. So things may get even more interesting for Goldman, Merrill, and
the rest of the CDO peddlers.
According to The Journal: "The agency hopes to auction off any CDOs that have
value this summer. If it can't unload them, the FDIC could be forced to write
off their value, saddling taxpayers with the losses." Yeah, we'd love to put
one of those certificates on a wall. Wonder if a $5 bid could get us one?
All cynicism aside, this is a huge problem for taxpayers, but is only the tip
of the iceberg, compared to the billions that Fannie Mae and Freddie Mac has
been spending to buy outright defaulted loans from mortgage companies since February.
Here's how it worked. As The Journal points out: "Many of the 200 bank failures
since the beginning of 2009 have been accelerated by losses in trust preferred
securities, which are a hybrid between debt and equity. More than 1,500 banks
issued such securities between 2000 and 2008 after regulators ruled that they
could be counted as capital, making their balance sheets appear healthier."
Next "Wall Street brokerage firms then bought the securities from individual
banks that had issued them and packaged them into CDOs. The brokerage firms then
sold slices of the CDOs to other small banks. Community banks bought roughly
$12 billion of these trust preferred CDOs between 2000 and 2008, according to
Red Pine Advisors LLC, a New York firm that values illiquid investments."
In other words, a bank made a loan to a questionable customer. Wall Street bought
the loan, packaged it into an instrument with other bad loans and sold them to
the greater fool. It's the greater fool that the FDIC has bailed out, and that
has stuck the bill to the taxpayer.
Here's what should be of concern to all citizens. If the FDIC only has $400 million
worth of CDOs on its books, then there is a potential $11.6 billion worth of
the "toxic" stuff out there waiting to land in Uncle Sam's open hands, which
may eventually find its way to the tab that the FDIC may present to Wall Street
investment banks who engineered the whole mess.
Follow us here. Unless, we're missing something, these are the same banks bailed
out by TARP, many of which have paid back the TARP loans. Yup, if the FDIC gets
its way, the investment banks may have to pay back more money, than what they
already paid back with regard to TARP.
Riverside has an outstanding lawsuit against 6 Wall Street firms ongoing. The
FDIC wants to replace Riverside as a plaintiff.
Conclusion
This could be Pandora's box for Wall Street.
Let's for a second, assume that the FDIC replaces Riverside in the lawsuit. That
would presumably bring some heavy hitter lawyering to the proceedings. And yes,
Wall Street is known for the lawyers that it can bring to bear on any legal proceeding.
But, this is the government, and it's pretty p.o.'d in an election season. You
don' think the FDIC would want to win this one? And what of the precedents?
The SEC's case against Goldman Sachs would be tinker toys if the FDIC proved
to a court that Wall Street banks sold Riverside a bill of goods, with bad intentions.
Yup, you got it. The FDIC, not the SEC may have something here. Not too many
shareholders of the big houses on Wall Street may have given this some thought,
just yet.
We'll be on Twitter
some time today before the market closes with some updated comments.
Know when to sell and how to make money when the market falls. Get
a detailed trading plan in your pocket. Read Dr. Duarte's All
NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for
All Seasons. Also Available As Kindle Books. |
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Market Moves - Stock Of The Day
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Select Sector SPDR Financial Select Index ETF (NYSE: XLF) Looks To Bounce
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The Select Sector
SPDR Financial Select Index ETF (NYSE: XLF) has lost nearly
10% of its value since April 15th, but may have found some
support.
Chart Courtesy of StockCharts.com
Bank stocks are poised for some sort of bounce, based on
the charts. But that doesn't mean that investors should
be making big short term bets. In fact, the overall outlook
for banks is fairly unfavorable, according to Meredith
Whitney, the only analyst who correctly predicted all of
the problems for the financial sector before the subprime
mortgage crisis broke and spread.
Whitney told CNBC that the financial reform law means trouble for banks. According
to the report: "Investors should "avoid financials at all costs, particularly
in the banking sector" because the Senate's financial reform bill will end up
restricting credit and hurt bank earnings, well-known banking analyst Meredith
Whitney told CNBC."
CNBC added: "Whitney cited two new credit card rules in the Senate bill as particularly
onerous. One would force banks to comply with individual state caps on credit
card interest rates. The other would regulate how much credit card issuers could
charge merchants for using their cards."
According to Whitney, since the credit card caps vary from state to state, some
are lower than others and that would set up a situation in which banks may not
wish to lend in certain states. The report further added "In addition, the proposed
rule on merchant charges—instead of benefiting consumers—will price community
banks out of the market, Whitney said, restricting credit even more."
To us it looks as if Wall Street's failure to water down the financial regulation
bill, despite an all out lobbying effort will prove to be its biggest failure
for the next several years. It's not a big victory for consumers or businesses
either. In fact it's a victory for politicians, who probably got away with a
lot more by putting together the legal climate that spawned the subprime mortgage
crisis, and now are getting to say that they've remedied the situation by passing
a bill that will have unintended consequences.
Be careful when buying on the dips in XLF.
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