Dave’s Daily
by David Fry - November 25th, 2008 12:00 am
MARKET COMMENT
November 24, 2008. Courtesy of Dave Fry, at ETF Digest.
What’s so good about putting up $7.4 trillion of taxpayer money to backstop stupid banks? Then it’s said Obama wants a $700 billion stimulus plan immediately. These amounts are beyond mind-numbing. But you know something; I’m no different than you--ticked off.
I wonder how much Citigroup stock Sandy Weill and Robert Rubin have sold over the past few years. Whatever misbegotten gains they’ve received should be turned over to taxpayers. But doing so would involve the Treasury recycling it back to Citigroup. Silly me!
Okay, all this isn’t my job. Let’s move to the markets where investors were overjoyed by the prospects of more bailouts that should lead to future inflation. Always remember when deflation presents itself politicians and policy makers will choose inflation over tough love every time.
Today’s bullish action is follow-through from Friday’s end-of-day options expiration/Geithner rally combined with the Citigroup bailout. Remember, stocks can inflate from reckless policy decisions and with markets deeply oversold a rally shouldn’t shock anyone.
Surprisingly, volume was just better than average. Breadth may have put in a positive 90/10 day which others will make a big deal about. But we can’t tell from the data below yet.
Yeah, who are they kidding? Everyone’s upset by this rush to bailout every crummy company. And, the amounts of money and stimulus are really overwhelming. Just when you think there isn’t any more cash in the vault up pop more proposals to spend more.
The Far Side has it right.
Some were wondering why we’re carrying so much cash. It’s days like the last two that serve to remind us how lethal these markets can be. Oversold bear market rallies are usually the most dramatic and the past day [plus the last hour on Friday] reminds us why we’re parked on the sidelines. It’s too soon to be long and still too oversold to be short. Eventually the time to invest will present itself if we remain patient and disciplined.
Let’s see who gets bailed out next.
Have a pleasant evening.
Disclaimer: The ETF Digest has no positions.
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NY Job Losses
by ilene - November 24th, 2008 7:10 pm
Here’s a note by Mish on the loss of financial jobs in New York. Good Riddance.
New York May Lose 225,000 Financial Jobs
Courtesy of Mish.
Bloomberg is reporting New York May Lose 225,000 Jobs, Comptroller Says.
New York may lose as many as 225,000 jobs and $6.5 billion in securities industry-related tax revenue over the two-year period ending in October 2009, state Comptroller Thomas P. DiNapoli said.
In a report published today, he predicted financial- industry job losses may total 38,000 by October, with 10,000 more jobs lost in banking, insurance and real estate. Those losses could spread throughout the private sector, taking out as many as 225,000 positions statewide, he said.
“Wall Street is the engine that drives the economies of New York state and New York City, but the global credit crunch has slowed that engine down,” DiNapoli said in a news release. “This year is on pace to be one of the worst years ever on Wall Street.”
Wall Street’s importance to the economy is so great that for each financial sector job lost, two positions will vanish in other industries in New York City and 1.3 jobs will disappear elsewhere in the state, DiNapoli’s report stated.
Is This A Problem Or A Blessing?
Most of those jobs are financial engineering jobs that should never have existed in the first place. The IPO mania, merger mania, covenant lite deals, toggle bonds that paid back debt with more debt, SIVs, and the lend to securitize models, all with 40 times leverage are dead and not coming back. Enormous profits were made by executives selling such trash to pension plans and unsuspecting customers.
Now taxpayers who never participated in the party have to pay for the cleanup of the mess. So forgive me for not crying about the loss of those jobs. It is best if those jobs never come back.
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Government bailout sends financials north but option trading in Citigroup shows mixed feelings
by Andrew Wilkinson - November 24th, 2008 4:57 pm
Today’s tickers: C, JPM, ITU, NUE, GCI & VIX
C – Citigroup Inc. – What’s the option markets verdict to the government bailout at Citi? Well, that’s pretty inconclusive. The option volume at 486,000 contracts is massive, but the flows have been evenly balanced between buyers and sellers as to muddy the picture. We can’t say for sure that today’s 54% leapfrog in the share price to $5.85 is causing an abandonment of freshly hatched bearish bets on the stock at the December 2.5 and 5.0 strikes. One gets a sense that the jury is out and despite the clear sigh of relief across the broad market today. Many of the call options traded today in the December contract were sold at those same strikes while our observation of the volume at the 10.0 strike is that the larger chunks were bought at some of the lowest prices of the day. For example around half of the 27,000 lots traded was bought at prices between 16-22 cents, while the remainder was traded at prices as high as 80 cents. In the January contract puts at the 2.5 and 5.0 strikes were actively bought.
JPM – JPMorgan Chase – An 11% gain to $25.27 in sympathy with the relief brought on by Citi’s bailout spurred high volume in JPM options. In the January contract 17,000 lots were traded largely initiated by buyers at the 30.0 strike while put buying was healthy at the 20.0 strike while put sellers emerged – likely as part of a spread – at the 10 strike.
ITU – Bank Itau Holding ADRs – While the US financial system took a step to exit the woods today, we’re wondering if investors don’t feel the same for Latin American issues. The weight of strain on corporate balance sheets migrating from the US elsewhere is likely to be just as devastating to emerging market economies, whose health is partially determined by the state of the commodity sector. In option activity today an investor appears to have bought a straddle on Bank Itau using the December 10 strike. ADRs representing shares stand 9% better at $9.90, while we noted two blocks of 5,000 lots trade on both calls and puts earlier. We see the puts were bought while the jury is out on the call direction. The gross premium of 3.25 would require a share price move beyond the borders…
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Citigroup Bailout
by ilene - November 24th, 2008 4:36 pm
Not too much happiness going around over the C-Bailout Details. Here’s more, courtesy of Mark Thoma, at the Economist’s View. 
The Citigroup Bailout
It’s bailout time. Let’s start with Paul Kedrosky:
Good Bank, Bad Bank, and F—ed Bank: Apparently Citibank and the U.S. government (i.e., we taxpayers) have reached a deal whereby we will backstop something like $300-billion in screwed assets on Citi’s balance sheet. … Here is the gist:
Citi will carve out $300-billion in troubled assets, which will remain on its balance sheet
- The first $37-$40-billion in losses on those assets will go to Citi
- The next $5-billion in losses will hit Treasury
- The next $10-billion in losses will go to the FDIC
- Any more losses will go to the Fed
- There will be no management changes at Citi, because, you know, they are all fine and upstanding people who have done nothing wrong
- There will be some compensation limitations, but those have not yet been made clear
To be clear, this is not a "bad bank" model. Assets are not, apparently, being taken off the Citi balance sheet and put into another entity walled off from the Citi biological host. Instead, they are being left on the Citi balance sheet, but tagged and bagged for eventual disposal via taxpayers. …
I’ll have more when there is more, and I know the equity futures markets like it — it’s admittedly less terrifying that letting Citi fail — but so far I’m not impressed. …
Yves Smith:
WSJ: US Agrees to Bail Out Citi (Updated): …Note key element of the deal is that the Federal government will guarantee $300 billion of Citi assets, a much bigger number than had been leaked earlier, with a rather convoluted loss-sharing arrangement, but the bottom line is that Citi is at risk for at most $40 billion. Citi also gets a $20 billion equity injection, on slightly more onerous terms than the initial TARP investments, but still more favorable than Warren Buffett’s investment in Goldman. Oh, and it appears there will be NO management changes.
I do not see how GM can be denied a rescue now (not that that outcome is really in doubt, merely how much pain will
…
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Not Far Enough
by ilene - November 24th, 2008 3:09 pm
Roger Ehrenberg’s shares his thoughts on the C-Bailout — he’s not happy about the details. 
Citigroup Bailout: Not Far Enough
Courtesy of Roger Ehrenberg at Information Arbitrage.
After reviewing the "Term Sheet" and the write-ups in the press I am not happy. The U.S. Government didn’t go far enough. I’m not convinced that we won’t be exactly in the same position I was worrying about with direct cash injections and no Good Bank/Bad Bank structure. Liabilities could well exceed Citigroup’s losses plus the second and third loss guarantees. The deal is exceptionally complicated, without full transparency for either the Government or the U.S. taxpayer. The fact that equity holders are getting bailed out – at least temporarily – offends me, given that the U.S. taxpayer is bearing the lion’s share of the risk. This looks and feels like AIG redux – except perhaps worse. Transparency. Simplicity. Avoidance of moral hazard. Will we ever learn?
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Just Another Manic Monday
by Phil - November 24th, 2008 8:18 am
![[Citibank]](http://s.wsj.net/public/resources/images/OB-CS348_citi11_D_20081124021218.jpg)
$326Bn for Citigroup – Yippee!
That was a real painful one to ride down and I was getting really concerned that I was wrong and the government was actually crazy enough to let C fail. We decided to stick with them and roll the adjustments (see Friday morning’s post) to bring our net down to $4 but that didn’t make us feel much better with the stock below that mark. On top of that, our decision mid-week to switch to UYGs as they fell below $4 should also work out well!
Under the non-TARP portion of today’s bailout, Citigroup and the government have identified a pool of about $306 billion in troubled assets. C will absorb the first $29 billion in losses in that portfolio. After that, three government agencies — the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. — will take on any additional losses, though C could have to share a small portion of additional losses. In exchange for that protection, Citigroup will give the government warrants to buy shares in the company. Just for good measure, C will also get $20Bn of TARP funds – just in time for holiday shopping…
90-95% of these assets are part of C’s $2Tn in assets that are "on balance sheet," the bank has another $1.2Tn of assets that are not reflected in their books, many of which are tied to mortgages that will still need to be addressed down the road. The assets affected under the government plan are largely loans and securities backed by residential and commercial real estate. "With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy," the Treasury Department, Fed and FDIC said in a joint statement issued late Sunday.
Whether this is enough to inspire long-term confidence in US financials or whether is leads to panics out of banks that are not given $300Bn by the government remains to be seen but the immediate upshot of this is it is finally occurring to investors how far the US is willing to go to save the markets. Just looking at the mechanism put in place on the C deal and we can now see that $300Bn in TARP money can be leveraged by the Fed and Treasury into $4.5Tn of bailout funding WITHOUT further Congressional approval. The net effect of this is that…
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Le Citi Toujours Dormer…
by ilene - November 24th, 2008 12:53 am
Here’s another perspective on the Citigroup Crisis. Courtesy of Brad DeLong at Grasping Reality with Both Hands: The Semi-Daily Journal of Economist Brad DeLong.
Le Citi Toujours Dormer…
Why oh why can’t we have a better press corps? Eric Dash and Julie Creswell write that:
- Citigroup had poor risk controls.
- As a result, the bank owned $43 billion of mortgage-related assets that it incorrectly thought were safe.
- They weren’t.
- And so as a result the market value of Citi has collapsed by a factor of ten: from $200 billion to $20 billion.
To which the only appropriate response is: "Huh?" How can losses out of $43 billion of optimistically overvalued asserts eliminate $224 billion of value? Eric Dash and Julie Creswell don’t answer that question. They don’t even seem to recognize that it is a question that they should be interested in. That they were given this story to write, and that no editors said "wait a minute! this doesn’t add up!" is yet another signal that the New York Times is in its death spiral: not the place to go to learn anything about an issue.
Here they are:
The Reckoning – Citigroup Saw No Red Flags Even as It Made Bolder Bets: In September 2007… Citigroup’s chief executive, Charles O. Prince III, learned for the first time that the bank owned about $43 billion in mortgage-related assets…. [M]any Citigroup insiders say the bank’s risk managers never investigated deeply enough. Because of longstanding ties that clouded their judgment, the very people charged with overseeing deal makers… failed to rein them in…. Citigroup’s stock has plummeted to its lowest price in more than a decade, closing Friday at $3.77. At that price the company is worth just $20.5 billion, down from $244 billion two years ago….
The bank’s downfall was years in the making and involved many in its hierarchy, particularly Mr. Prince and Robert E. Rubin, an influential director and senior adviser…. For a time, Citigroup’s megabank model paid off handsomely, as it rang up billions in earnings each quarter from credit cards, mortgages, merger advice and trading. But when Citigroup’s trading machine began churning out billions of dollars in mortgage-related securities, it courted disaster….
From 2003 to 2005, Citigroup more than
…
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Rescue Plan Update
by ilene - November 23rd, 2008 11:45 pm
Here’s a quick update on Citigroup.
Plan to Rescue Citigroup Begins to Emerge
Excerpt:
Federal regulators were nearing approval of a radical plan to stabilize Citigroup on Sunday in which the government would soak up tens of billions of dollars in losses at the struggling bank, according to people briefed on the discussions.
The plan, which emerged after a harrowing week in the financial markets, would mark the government’s third effort in as many months to contain the deepening economic crisis. While the negotiations were in flux on Sunday night, the proposal, if applied to other banks, could set the precedent for other multibillion-dollar financial rescues.
Citigroup executives presented a plan to federal officials on Friday evening after a week-long plunge in the company’s share price threatened to engulf other big banks. In tense, around-the-clock negotiations that stretched through the weekend, it became clear that the crisis of confidence had to be defused now or the financial markets could plunge further.
Whether this latest rescue plan will help calm the markets is uncertain, given the stress in the financial system caused by escalating losses at Citigroup and other banks. Each previous government effort initially seemed to reassure investors, leading to optimism that the banking system had steadied. But those hopes faded as the economic outlook has worsened, raising worries that more bank loans were turning sour.
President-elect Barack Obama was also working over the weekend to shore up confidence in the rapidly faltering economy. Mr. Obama signaled that he would pursue a far more ambitious plan of spending and tax cuts than he had outlined during his campaign and planned to announce his economic team on Monday. Some Democrats in Congress, meantime, were calling for the government to spend as much as $700 billion to stimulate the economy over the next two years...
Under the proposal, the government would shoulder losses at Citigroup if those losses exceeded certain levels, according to people briefed on the talks, who spoke on the condition that they not be identified because the plan was still under discussion.
If the government should have to take on the bigger losses, it would receive a stake in Citigroup that could potentially hurt existing shareholders…
It was unclear on Sunday
…
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The Moral Dimension
by ilene - November 23rd, 2008 7:15 pm
This is a fascinating topic. 
Within the framework for our government, checks and balances were put in place to prevent concentration of power in one branch or one individual — analogous principles could be applied to our economic system. What evidence is there that laws and regulations relying on morality are ever effective?
"The Moral Dimension of Boom and Bust"
Courtesy of Mark Thoma, at Economist’s View. Excerpt from The moral dimension of boom and bust, by Robert Skidelsky, Project Syndicate, at the guardian.co.uk.
"This monstrous conceit of contemporary economics has brought the world to the edge of disaster":
The moral dimension of boom and bust, by Robert Skidelsky, Project Syndicate: After the first world war, HG Wells wrote that a race was on between morality and destruction. Humanity had to abandon its warlike ways, Wells said, or technology would decimate it.
Economic writing, however, conveyed a completely different world. Here, technology was deservedly king. … In the economists’ world, morality should not seek to control technology, but should adapt to its demands. Only by doing so could economic growth be assured and poverty eliminated.
We have clung to this faith in technological salvation as the old faiths waned and technology became ever more inventive. Our belief in the market – the midwife of technological invention – was the result. We have embraced globalisation, the widest possible extension of the market economy.
For the sake of globalisation, communities are denatured, jobs offshored, and skills continually reconfigured. We are told by its apostles that the wholesale impairment of most of what gave meaning to life is necessary to achieve an "efficient allocation of capital" and a "reduction in transaction costs". Moralities that resist this logic are branded "obstacles to progress". …
That today’s global financial meltdown is the direct consequence of the west’s worship of false gods is a proposition that cannot be discussed, much less acknowledged. One of its leading deities is the efficient market hypothesis – the belief that the market accurately prices all trades at each moment in time, ruling out booms and slumps, manias and panics. Theological language that might have decried the credit crunch as the "wages of sin", a comeuppance for prodigious profligacy, has become unusable. …
Mathematical whizzkids
…
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Buffet Put Watch?
by ilene - November 22nd, 2008 10:49 pm
Adam Warner reports on a transaction in which Warren Buffett sold naked puts in 2007, betting that world markets would be higher in 15 to 20 years.
Buffett Put Watch?
Courtesy of Adam Warner at Daily Options Report
So guess who beat the rush to do some naked put shorting?
And I mean really beat the rush, like 2007 and mid teens VIX "beat".
This, from Jon Markman.
Shares of Warren Buffet’s insurance holding company are on the ropes this month, plunging 30% in part because the fabled investor dabbled in an area of the market he has long publicly derided: derivatives. And due to a tangled web of financial relationships, they may be taking Goldman Sachs shares down with them.
Investors are concerned about a $37-billion bet that Buffett made last year that U.S. and world equity values would be higher in 15 to 20 years than they were then, when the Dow Jones Industrials were trading around 13,000. Through his firm, Berkshire Hathaway, Buffett sold option contracts, known as "naked puts" to an undisclosed group of investors for around $4.85 billion, reportedly using Goldman as broker.
The buyers saw the puts as a type of insurance that would pay off royally if stocks fell over the next decade. They were seen by Buffett as an easy way to pocket a quick $4 billion-plus, which was booked much like an insurance premium, even though he is famous for scoffing at derivatives as "weapons of mass financial destruction."
As Jon notes, there are rumors that part of The Oracle’s "investment" in GS was de facto collateral on the trade.* Becky has no comment.
How bad is the trade?
Without knowing exactly when he put it on, what volatility he got, the exact length, et. al., it’s a little rough. Jon had some numbers. And there’s huge margin of error going out that far in time, as among other things, what volatility do you use?
So throwing all those disclaimers into the hopper, best guess was that these puts may have tripled in value against Buffett. And that’s possibly conservative as I pretty much took the lows of 2007 as his starting price, and didn’t run a particularly high…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(