07:12 C Citi confirms deal reached with Treasury (2.46)
Based on the maximum eligible conversion, the government would own approximately 36% of Citi’s outstanding common stock and existing shareholders would own approximately 26% of the outstanding shares. All investors’ new stakes will be determined following the exchange. Citi will offer to exchange:
Interim securities and warrants for privately held convertible preferred securities;
Interim securities and warrants for U.S. government-held preferred securities; and
common stock for publicly held convertible and non-convertible preferred securities. end
The shareholders of Citibank voted by unloading their stock. It plummeted all the way down to 1.50 per share. No new dollars were sent to Citibank but they did save huge amounts on dividends that they would have been forced to pay out. Many believe that more money will be needed as losses continue to mount at Citibank.
The Dow sank by 119 points yesterday. The big news of the day was the release of the GDP figures for the last quater of 2008 and it was negative 6.2% on an annual basis. the economy is contracting big time. Here is the story:(note the huge fall in exports..the only supposedly bright light to the usa economy)
2. USA economy shrinks by 6.2%
U.S. economy shrank at 6.2 pct rate in 4th-qtr
WASHINGTON, Feb 27 (Reuters) - The U.S. economy contracted more sharply than initially estimated in the fourth quarter, government data showed on Friday, as exports plunged and consumers cut spending by the most in over 28 years amid a severe recession.
The Commerce Department said gross domestic product, which measures the total output of goods and services within U.S. borders, fell at an annual rate of 6.2 percent in the October-December quarter, the deepest slide since the first
quarter of 1982. The government last month estimated the drop in fourth-quarter GDP at 3.8 percent.
The weaker GDP estimate reflected downward revisions to inventories and exports by the department.
The decline was worse than analysts' expectations for a 5.4 percent contraction in fourth-quarter GDP. The economy expanded 1.1 percent in 2008, the slowest pace since 2001, the department said.
Consumer spending, which accounts for more than two-thirds of domestic economic activity, dropped at a 4.3 percent rate, the biggest fall since the second quarter of 1980, as household wealth plunged. That compared with a 3.5 percent fall estimated last month.
Exports, until recently one of the few pillars supporting the distressed economy, tumbled at a 23.6 percent annual rate, the steepest plunge since 1971. That was revised from the 19.7 percent drop estimated in last month's report.
Inventories, which minimized the fall in GDP last month after being estimated up a surprising $6.2 billion, were revised to show a $19.9 billion decline in the fourth quarter.
Business investment fell at a 21.1 percent rate, the largest drop since 1975, from a previously estimated 19.1 percent. Residential investment fell 22.2 percent in the fourth quarter.
The deteriorating economy is dampening inflation pressures, with the personal consumption expenditures price index diving a record 5 percent. Excluding food and energy, prices rose 0.8 percent in the fourth quarter, the smallest advance since a matching increase in 1997.
3. Eastern European Plight:
Throughout the night, we were greated with stories from Bloomberg on the plight of Eastern European nations. The Hungarian foreign minister was seeking loans of 230 billion dollars for the entire region from the IMF...funds that it does not have.
I saw one commentary where the German government must make a decision to go against the ECB and loan money to bail out Eastern European countries or abandon the Euro altogether.
I guess Germany has reached the crossroads. As Yogi Berra once said: "when you reach a fork in the road..take it".
Germany has reached this important crossroad in the short 10 year life span of the Euro. My bet? they will abandon the Euro and go alone!!. end
This is what Jessie has to say on the GDP and the economy in general:
GDP Number Far Worse than Expected by Most Economists (But Not Here)
The Fourth Quarter GDP number came in at a negative 6.2% versus the original negative 3.8 percent announcement earlier this year.
That is not a big adjustment. It is a HUGE adjustment. That first number was so obviously cooked by a high side inventories estimate and a lowball chain deflator that it was a knee-slapping howler to anyone who is following this economy closely.
This decline did not happen overnight. It is merely being reported that way.
There should be little doubt now in most people's minds, by now we would hope, that Bernanke, Greenspan, Paulson, and many in the Bush Administration were deceiving us about the state of the economy, for years, almost routinely as a matter of course.
That is important to understand. This was no act of God, no hurricane or meteor strike. And a lot of folks on Wall Street and in Washington playing dumb now knew what was coming. You can decide their motives for yourself, but fear and greed should be high on the top of your list.
The economy has been rotten for a long time, since at least 2001 if not before, and as it worsened more and more money was taken off the table by the Bush Administration and their corporate cronies through no bid contracts and welfare for the wealthy. Coats of paint were slapped over the growing problems, fraud and corruption....
After receiveing terrific news on the GDP front and on Eastern Europe's plight, we got word on the Fannie Mae's earnings. They lost 25 billion dollars in the quarter and their liabilities exceeded their assets. They need to draw on the 200 billion line of credit given to them by the Fed. Here is the story:
4. Fannie Maes loses $4.47 per share and calls on 15.9 billion line from the Government:
17:44 FNM Follow-up: Fannie Mae reports Q4 EPS ($4.47) (0.49)
FNM's mortgage credit book of business increased to $3.1 trillion as of December 31, 2008 from $2.9 trillion as of December 31, 2007. The company expect that the current crisis in the U.S. and global financial markets will continue, which will continue to adversely affect financial results throughout 2009. FNM expects mortgage debt outstanding to shrink by approximately 0.2% in 2009 and continue to expect the level of foreclosures and single-family delinquency rates to increase further in 2009. Following a decline of approximately 9% in 2008, FNM expects that home prices will decline another 7% to 12% on a national basis in 2009. The company continues to expect its credit loss ratio (which excludes SOP 03-3 fair value losses and HomeSaver Advance fair value losses) in 2009 will exceed its credit loss ratio in 2008.
17:46 FNM Follow-up x2: Fannie Mae reports Q4 EPS ($4.47) (0.49)
At December 31, 2008, the company's total liabilities exceeded its total assets by $15.2B. The Director of FHFA submitted a request on February 25, 2009 for funds from Treasury on its behalf under the terms of the senior preferred stock purchase agreement to eliminate its net worth deficit as of December 31, 2008. FHFA requested that Treasury provide the funds on or prior to March 31, 2009.
5. General Electric cuts dividend:
At about 2:30 General Electric notified Wall Street that it was cutting its dividend to 10 cents per quarter instead of 1.24. They were saving 9 billlion dollars per year as they needed to shore up their GE capital division. Here is the story:
14:19 GE General Electric confirms cutting quarterly
dividend by 67.7% to $0.10 from $0.31 (9.00 -0.10) The press release confirms the earlier reports on CNBC, says the dividend cut is effective for 2H09 and will preserve appx $9B for GE on an annual basis. Jeff Immelt says the decision is the right precautionary action at this time to further strengthen GE for the long-term, while still providing an attractive dividend. Immelt says GE continues to execute well and generate strong cash flow. Immelt says GE has achieved all of its capital and liquidity goals ahead of plan, including lower commercial paper, reduced leverage ratios and solid debt funding. Immelt says GE currently does not have any plans to raise more equity. Recall GE had said at its 6-Feb it would evaluate the dividend in 2H09.
The street initially liked the plan but cooler heads prevailed and the rush to sell stock prevailed. GE succumbed to its low for 19 years at $8.58.
6. Bonds Plummet:
The real story was totally overlooked by Wall Street. The bonds collapsed with the long bond trading down by 1 and 2/3 points to 123.36 from 1.2516. Usually we have bonds moving in opposite directions to the Dow. Not yesterday: the Dow and the bonds plunged together.
Also remember that the 10 year is used to supply mortgages to our beleaguered mortgagees. Its yield climbed above 3% to 3.03%. Mortgage rate money is climbing instead of falling which is going counter to Obama's plan.
7. Berskire Hathaway Disappoints Wall Street:
Warren Buffet is not feeling to well these days. His earnings released at the close yesterday fell all the way down to 76.00 dollars per share from year earlier figures of 1,906.00 per share. Berkshire stock has fallen by 44% so far this year. To boot, Buffet is underwater on his derivatives.
Mr Buffet described derivatives as financial weapons of mass destruction and yet he went into them. He purchased S and P derivatives betting the Dow rises over the next 10 years. If the Dow plummets to zero he loses 35.4 billion dollars. Here is some of the story:
Berkshire Results May Be Worst Ever, by Buffett Gauge
Feb. 27 (Bloomberg) -- Berkshire Hathaway Inc. may report its worst results since Warren Buffett took over in 1965, based on a measure the billionaire chairman cites on the first page of his firm’s annual letter to shareholders.
Losses in Berkshire’s stock portfolio and writedowns on derivative bets tied to equity markets may have caused book value per share, a measure of assets minus liabilities, to fall by 8.5 percent, according to Gary Ransom, an analyst with Fox- Pitt Kelton Cochran Caronia Waller. That ratio declined only once before on Buffett’s watch, falling 6.2 percent in 2001…
And this from bloomberg:
Berkshire Profit Plunges 96% on Stock Market Bets (Update1)
By Erik Holm and Andrew Frye
Feb. 28 (Bloomberg) -- Warren Buffett’s Berkshire Hathaway Inc. posted a fifth-straight profit drop, the longest streak of quarterly declines in at least 17 years, on losses from derivative bets tied to stock markets.
Fourth-quarter net income fell 96 percent to $117 million, or $76 a share, from $2.95 billion, or $1,904 a share, in the same period a year earlier, the Omaha, Nebraska-based firm said in its annual report.
Berkshire, where Buffett serves as chairman, chief executive officer and head of investing, suffered as the benchmark Standard & Poor’s 500 Index turned in its worst year since 1937. Liabilities widened on derivatives linked to world equity markets, though the contracts don’t require Berkshire to pay out until at least 2019, if at all.
“This is an abnormal time,” said Tom Russo, a partner at Gardner Russo & Gardner, in an interview before the earnings were released. The derivatives, Russo said, “are pegged to a market that’s declining, so you’re going to see some losses on those.”
Berkshire shares have fallen 44 percent in the past year as the value of the firm’s top stock holdings dropped and losses increased on the derivatives. Nineteen of the top 20 stocks in Berkshire’s U.S. portfolio, valued at $51.9 billion as of Dec. 31, declined last year. Coca-Cola Co., Berkshire’s top holding, dropped 26 percent. American Express Co. plunged 64 percent. Oil producer ConocoPhillips fell 41 percent.
Book value, a measure of assets minus liabilities, fell 9.1 percent in the three months ended Dec. 31 to $109.3 billion on the declines in the equity and fixed-income portfolios and the derivatives writedown. Berkshire’s liability on equity derivatives grew about 49 percent in the quarter to $10 billion.
“Derivatives are dangerous,” Buffett said in his annual letter to shareholders that accompanies the yearend results. “Our expectation, though it is far from a sure thing, is that we will do better than break even and that the substantial investment income we earn on the funds will be frosting on the cake.”
Book value per share slipped 9.6 percent for all of 2008, the worst performance since Buffett took control in 1965. The only other annual decline was a 6.2 percent drop in 2001.
In his “owner’s manual” for Berkshire shareholders, Buffett says he considers book value to be an objective substitute for the best, albeit subjective, measure of a firm’s success: a metric he calls intrinsic value. Buffett doesn’t provide a number for intrinsic value.
Net income fell 62 percent to $4.99 billion for all of 2008, with storm claims from Hurricanes Ike and Gustav contributing to the decline. Industrywide, insurers faced $25.2 billion in claims on natural disasters in 2008, the most since the record storm season of 2005, a trade group said last month.
Berkshire’s derivative contracts were sold to undisclosed buyers for $4.85 billion as of Sept. 30. Under the agreements, Berkshire must pay out if, on specific dates starting in 2019, four market indexes are below the point where they were when he made the agreements. Buffett, recognized as one of the world’s pre-eminent investors, gets to use the money in the interim.
The worldwide recession and global contraction of the credit markets is giving Buffett, 78, opportunities to invest some of the firm’s cash hoard, which was worth more than $30 billion on Sept. 30.
Berkshire agreed in the past six months to purchase preferred shares of General Electric Co. and Goldman Sachs Group Inc., and made deals to buy debt in firms including motorcycle- maker Harley-Davidson Inc., luxury jeweler Tiffany & Co. and Sealed Air Corp., the maker of Bubble Wrap shipping products.
Berkshire is commanding yields as high as 15 percent at a time when potential rivals are no longer able to make such investments.
“He’s been able to put a lot to work,” said Russo, whose largest holding is Berkshire stock.
The derivatives are tied to four stock indexes -- the S&P and three others -- that would all have to fall to zero for Berkshire to be liable for the entire amount at risk, which was $37.1 billion as of November and can fluctuate with currency valuations. The liabilities on the derivatives are accounting losses that reflect the falling value of the stock indexes, not cash Berkshire has paid out.
Ice Cream, Jets
Buffett built Berkshire over the past four decades with dozens of acquisitions, buying companies that make candy, sell ice cream and lease corporate jets. The firm typically gets about half its profit from insurance operations, which Buffett has said are attractive because they offer a similar business model to the derivative agreements, allowing him to invest policyholder premiums until the money is needed to pay claims.
Declining investments and falling property and casualty rates caused fourth-quarter profit declines or losses at 21 of the 22 companies in the KBW Insurance Index that reported results so far.
Last Updated: February 28, 2009 09:29
8. Two banks succumb as FDIC closes banks in Nevada and Illinois:
This just came in: two banks were foreclosed last night:
By Ari Levy
Feb. 28 (Bloomberg) -- Banks in Nevada and Illinois were seized by regulators, bringing this year’s tally to 16, as tumbling home prices and surging unemployment caused more borrowers to fall behind on loan payments.
Security Savings Bank of Henderson, Nevada, and Heritage Community Bank of Glenwood, Illinois, with combined assets of $471.2 million, were shut by state regulators and the Federal Deposit Insurance Corp. was named receiver, the FDIC said yesterday. Bank of Nevada in Las Vegas is assuming Security Savings’ $175.2 million in deposits, while Heritage Community’s $218.6 million will go to MB Financial Bank of Chicago.
“Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage,” the FDIC said.
As regulators wrap up the busiest month for bank failures since 1993, they’re preparing to replenish the FDIC’s insurance fund, which dwindled by 45 percent in the fourth quarter from the previous three months to $18.9 billion. The FDIC said it will charge U.S. banks a one-time assessment and increase other fees amid estimates that bank closures could cost the fund $65 billion through 2013.
The FDIC shuttered 25 banks in 2008, including Washington Mutual Inc., the biggest U.S. bank to fail last year, and IndyMac Bank Inc., the second-largest. The 10 banks closed in February were in Oregon, California, Florida, Nebraska, Illinois, and Georgia and Nevada as foreclosures rose across the country.
“We’re taking steps today to ensure that the deposit insurance system remains sound,” FDIC Chairman Sheila Bair said yesterday during FDIC’s board meeting at the agency’s Washington headquarters.
The one-time emergency fee of 20 cents per $100 in insured deposits would be collected in the third quarter and would generate $15 billion, according to FDIC staff members. In December, the FDIC said it would double premiums banks pay in an effort to replenish the fund. First-quarter premiums were increased by 7 cents for each $100 of insured deposits to rates ranging from 12 cents to 14 cents per $100 at most banks.
Closing Security Savings and Heritage Community will cost the insurance fund an estimated $100.7 million, the FDIC said.
The number of banks on the FDIC’s “problem list” rose 47 percent to 252 in the quarter. The FDIC doesn’t divulge the banks’ names.
The FDIC regulates banks and insures deposits at 8,305 institutions with $13.9 trillion in assets. As many as 1,000 U.S. banks may fail in the next three to five years as losses mount on commercial real estate loans, RBC Capital Markets analysts said in a Feb. 9 report.
The U.S. banking industry posted its first quarterly loss since the savings-and-loan crisis, losing $26.2 billion in the last three months of 2008. Financial firms worldwide have posted more than $1.1 trillion in losses and writedowns since 2007 on soured loans and related securities. Unemployment climbed to 7.6 percent in December from 7.2 percent the previous month, and housing prices in 20 U.S. cities declined 18.5 percent from a year earlier, the fastest drop on record.
The FDIC is selling loans held by failed banks at a discount to entice buyers amid fears of increased losses as the recession worsens. Through Feb. 20, the assets of four community banks had been sold this year to healthier rivals at a combined discount of $107 million, the FDIC said, compared with only one such deal last year.
MB Financial agreed to acquire $230.5 million of Heritage Community’s assets at a discount of $14.5 million. Bank of Nevada is purchasing $111.3 million of Security Savings’ assets.
It seems that that the CFTC is getting a little antsy about concentration. Enforcement in getting into the act concerning oil:
Federal agency opens investigation into oil sale
Friday February 27, 12:11 am ET
…The Commodity Futures Trading Commission said Thursday it was closely monitoring trades on Nymex, including activities by the fund.
The fund typically sells the contracts it holds for a particular month in one day then buys into the next month's contract, a maneuver that is called a "roll."
"CFTC enforcement staff are investigating the trading activity of multiple market participants, including United States Oil Fund LP, in crude oil markets concerning the February 6, 2009 roll," Stephen J. Obie, acting director of the CFTC Division of Enforcement, said in a statement…
And I would hope we will hear some comments from the CFTC then about closely monitoring the silver trading by JP Morgan Chase.
Here are some prices on closing for financial issues:
Some examples of the spread of this flesh eating bacteria today, with many firms racing towards a price of zero...
*Citigroup: $1.50, down 96 cents, a new low.
*Bank of America: $3.95, down $1.30, back at its lows.
*GE: $8.58, down 59 cents, new low close.
*Metropolitan Life: $18.46, down $5.53 and not from a low.
*AIG: 42 CENTS, A NEW LOW CLOSE AND DOWN A DIME!
The Federal Debt was just released and it shows a whopping gain from Wednesday:
the new Federal Debt is as follows:
This is basis Feb 26.09
On Feb 25.09 is was:
The printing press is on 24/7.
I would also like to point out to you that the 3rd auction on the bonds went badly and that was the reason for the bond yields rising and bond prices falling.
We also got word that the derivatives at JPMorgan is smoldering as those interest rate swaps are burning up and the smoke suffocating the off-balance sheet of Morgan.
Here is some of the passages on this subject shared with Bill Murphy from a source inside JPMorgan:
As to JPM (J. P. Mortgage?), I spent five hours with a guy from a peer institution who told horror stories and wrote a summary for limited distribution (pasted below). His explanation of JPM is compelling and consistent with your own. I believe he was being fully truthful...
…How did we go so far off the tracks? He offered a few nuggets that seemed to explain the credit bubble. To reiterate, there really was no adult supervision. The guys putting these packages together certainly had some sense that they were crazy but nobody said stop. Government regulators being paid $100k couldn't tell guys making $20 million to take a hike. The senior managers loved the money flows. Cubicles--millions of cubicles--were staffed with engineers, chemists, physicists, and mathematicians from the best colleges in the country with no knowledge of the history of markets, fat tails, and past human follies, only how to financially engineer.
Several critical mutations occurred over time:
1. The average career age in the business is something like 7 years. A twenty year veteran is a very old man. The creators of these new-fangled products understood the toxicity at some level. As they retired, however, the next generation of twenty somethings had zero sense of risk. They were simply told which button to push and which lever to pull to make money. Nobody was driving the cab at all.
2. The money overwhelmed the system. It was like when the computers gained consciousness in Terminator. The money pushed all regulations aside. It bought deregulation, politicians, and anything else necessary to keep the money machine growing. Nobody dared yell stop because so damned much money was being made.
3. Greenspan became a believer--he lost consciousness....
So where are we now, and where are we heading? This is the bad part: I thought I was the pessimist. Sheesh. He was describing a system infected by flesh eating bacteria. Every day looks more dire than the previous day. The solutions being proposed look feeble, and the Fed looks both powerless and confused. The good bank/bad bank model that lit up the market yesterday was suggested to be flawed because the good banks would turn bad soon thereafter. When asked about seemingly stable local banks, he suggested they too would become infected.
I expressed shock that JPM not only didn't bring the system to its knees but was the last bank standing. That Jamie Dimon is quite a guy, eh? Apparently, I inferred from the answer (am nervous about explicitly attributing by quote) that JPM is on a don't ask/don't tell policy; the Fed simply cannot handle another mega-catastrophe while they wrestle with the fully-insolvent Citigroup and Bank of America. I suspect that JPM was told to keep everything looking peachy to buy time. (Maybe this was what caused the delayed reaction of Bank of America when it should have been gagging on its own vomit months ago.)
Jack Welch got very low grades for engineering his balance sheet, moving to shorter duration debt to make GE profitable. The car industry is DOA. Germany and the UK are battling for the bottom rung of the sovereign ladder (above Iceland hopefully.) Why has the NYC housing market held up?
Supposedly, it is only a matter of time: "New York may look like Detroit in ten years." When peers claimed housing would bottom after a 40% drop, he asked "Why will it stop there?" No answer. Last but not least, the failed German bond auction was deemed catastrophic: Who is gonna buy up our trillions? No answer.
In short, he sees no way out of this mess without serious pain. Despite a deflationary slant today, he sees inflation and spiking interest rates as the risk going forward.
In summary, we have bonds falling as we have no foreign takers for our bonds. The usa must resort to buying their own debt with printed money.
All major companies are faltering. Even "King" General Electric is down to $8.58. Eastern Europe is in turmoil as their deficits are monstrous!!
If you were to take all the 500 S and P today and total all their supposed earnings for the first quarter of 2009, it will be negative for the year. If you take out all of the negative financial stocks and include them just as a zero, earnings for the year will be no more than 8.00.
If you give a multiple of 10 x , you have a total S and P then at 80.
It closed at 735.00. The Dow has a long way to go and the bottom is nowhere to be seen.
I have another visit on Monday with my Dentist ( and a fellow reader) and then a big dinner meeting with our group on the economy. I will deliver late and a little sore.
Speak to you on Monday