Market's fell yesterday on McCain's offer to suspend the campaign, including tomorrow's scheduled debate with Obama, until the TARP is passed. McCain, who is now nine points behind Obama in the capmpaign and presumably desperate said for any kind of favorable attention said:
"It’s become clear that no consensus has developed to support the administration’s proposal. I do not believe that the plan on the table will pass as it currently stands and we are running out of time.”
Most other members of the house, including majority leader in the Senate Nanci Pelosi appeared to indicate a narrowing of differences, citing agreement on increased oversight, executive compennsation and taxpayer protection. John Kerry said there was now a consensus on equity participation in those banks using the scheme. So notwithstanding McCain's attentions seeking it still looks to me as though a bill will be passed.
However, some of these details look far removed indeed from the recommendations put forward by Paulson and Bernanke. Bernanke's testimony yesterday was interesting. His view was that the $700bn was only being used to kick start a market where there isn't one. By shining some light into the darkest corners of banks' balance sheets uncertaintity would be removed as to exactly what capital posisions were. This would help in delevering, and to the extent that mismarked capital could marked up, in the recapitalisation process too. But the real intention would be to provide the transparency needed by the banks and potential investors to attract the fresh capital they needed to become economically viable once more. The key, then, is that the plan is primarily about creating a market.
The real risk in my mind is not that Congress don't pass something, but that they pass something stupid. The plan to create a market, rather than directly "bailing out the financial industry" seems too subtle a distinction for Congress to understand. Curbs on executive pay are fine if they are retrospective clawbacks of some of the most egregiosly golden parachutes (Stan O'Neil's $100m+ for leaving Merrill in a state which ultimately killed it as an independently viable institution springs to mind). But an incomes policy is crazy. Similarly, there appears to be mounting interest in drip feeding funding for the proposal rather than stump up the $700bn in one go. All this will do is politicise a process which will only work if it is run independently. Worst of all is the punishing of participating banks by taking equity stakes in their businesses which risks, I think, no banks actually participating and defeating the whole purpose of the bill. I watched Bernanke's pained attempts at trying to be understood by the point-scoring politicians yesterday and actually felt sorry for him ... like a guy herding cats with his life depending on it ...
The TED spread spiked back above 3 yesterday, to where it was at the height of last week's panic, and higher than it was going into the 1987 crash ... Chinese banks, meanwhile, have stoped entering into interest rate swaps with internation finance companies favouring only domestic counterparties. The Chinese regulator has denied reports that it has been leaning on the countries banks ...
Amid the fixation with developments in the US, the HBOS Lloyds deal has attracted little attention. But it's surely another disaster for the reeling UK housing market? NRK was doing 20% of the volume of new mortgages in the first half of 2007. When it hit the skids last year and was ultimately nationalised it ceased new lending. What happens to any market when you take out 20% of the supply? Mortgage rates rose, certainly helped and possibly even triggered the increasingly vicious housing slump and have been higher ever since ... fast forward to now and note that while Lloyds’ Cheltenham & Gloucester offshoot is renowned in the industry for its aversion to lending to buy-to-let, and buyers purchasing new-build houses, HBOS has traditionally given generous valuations and therefore bigger mortgages to new home customers. They also have a much higher proportion of first-time buyers than everyone else. Already tight conditions in the UK mortgage market are set to become tighter still.
Hong Kong, meanwhile, saw its first bank run since the Asian crisis as depositiors lined up at the Bank of East Asia. The HKMA stepped in with emergency funding while Li Ka-shing and the bank's CEO made a show of buying stock ... an investigation is now underway as to how the, er ... "malicious rumours" that the bank was in trouble were spread ...
On the bright side, Buffet clearly sees value in the market. Not only has spent $24bn in the past nine months but he's now taken this stake in Goldmans ... in an interview with CNBC he said he was approached by Lehman's in April's capital raising but wasn't comfortable with their marks. He is very happy with the Goldman Sachs marks. He is probably also very happy with the Goldman deal he just got. The $5bn paying 10% a year is senior to the other prefs. Not only that, but he gets a five year option on another $5bn of stock with a strike at $115 (current price $130). A large part of an options value is its time value, so a five year option is worth quite a lot. Plugging in the numbers to BBG's Black Scholes model gives those options a value of around $2.5bn. So the net outlay on the prefs is actually only $2.5bn, giving an effective yield of 20% ... nice work ...
Petrobras, trading on a PE of 8x (energy bubble??!) confirmed that there are "large" deposits of natural gas in the Jupiter (which GALP have a stake in) well and will give more details upon further analysis. Brazilian offshore looks as though it may contain as many as 50bn barrels of oil, and most of that will go to Petrobras. Already, they are one of the few integrated oil companies to show any production growth, yet they trade on a PE of only 8x ...
The Australian Agricultural Co said the market conditions for cattle were now improving. High feed prices have seen high slaughtering of herds as current prices aren't economic, but that process may now be over. Flat or declining beef output in China, Russua and the US were cited, along with evidence that Brazilian exports have peaked
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