No Retreat for Wall Street as Robert Steel Burns the Boats
Holy shitshow.
Are we having fun yet? The issues of the past few months have violently metastasized in less than a week. There is much to discuss, but we will have to start with Robert Steel, the undersecretary of Treasury who is fresh meat, and perhaps the only guy not under his desk at Treasury:
Wall Street securities firms are unlikely to face the borrowing limits imposed on commercial banks even if the US financial system emerges from the credit crisis with a single regulator, a top Treasury official said on Wednesday.
Robert Steel, US Treasury undersecretary and a former Goldman Sachs executive, told the Financial Times that any overhaul in regulation was likely to maintain a distinction between investment banks and deposit-taking institutions.
“For years, we have made a distinction between depository and non-depository institutions,” said Mr Steel, Treasury secretary Hank Paulson’s right-hand man during the credit crunch. “I don’t think [future regulation] will be the same as for a depository institution.” FT
Commercial bankers have been pressing regulators, such as the Federal Reserve, to put the brokers on an equal footing with them, which might be a pipe dream given the Treasury Department is run by Goldman alums. And while Goldman's stock is teetering at crucial technical support, last seen on April 15th, its valuation premium to its peers actually expanded today, given the stock was off less.
Apparently Goldman is the only bank and broker in the known universe that does not need to raise money. Ken Griffin was singing their praises at the Milken Conference, and maybe having sharp clients to talk to all day paid off for Goldman as a select few got on the right side of the trade, and hedged their exposure correctly. Hats off if its true, and we will find out on June 17th when Goldman reports.
Meanwhile, the recapitalization theme that PIMCO has been running with has left you out of harms way, assuming you paid attention. If you are thinking about taking a flyer on a bank or broker, pick your spots carefully:
If you are a bond holder, you want to be ahead of a recapitalization. If you are an equity holder, you always want to come in after. When people have been pushing the financial sector, they haven’t made the distinction between what is is good for the bondholder and what is good for the equity holder.
The equity holder wanted to buy emerging markets after they recapitalized in the late 1990’s, U.S. corporates after after they recapitalized in 2002 and 2003 on the back of Enron, Worldcom, etc. The timing is critical. For the bondholder’s it’s the other way around because a recapitalization lowers risk and therefore brings in spreads. And the people who are diluted are equity holders. Mohamed El-Erian/PIMCO
The massive dilution apparently just dawned on the analysts who scrambled to downgrade Lehman over the past 36 hours. Lehman’s capital raise has been a given for weeks, if not months now. But the minute the stock cracked $28, the price the deal went off it, it was lights out. That is the oldest trading rule in the book, and now Lehman is flopping around like a dead fish.
While inconsistencies coming from the Fed and Treasury are taking their toll, these comments from Robert Steel should set you straight:
Mr Steel stressed that the borrowing window for investment banks was a temporary measure. When asked if the window would remain open beyond its September deadline, as is widely believed on Wall Street, Mr Steel said: “I stressed the word temporary.”
Mr Steel also rebuffed calls for a change in “fair value” accounting, which has been blamed by some executives for huge writedowns at banks.
“We have burned the boats on fair value accounting,” he said.
The regulators don’t appear to have any life preservers left on the sinking ship that is the U.S.S. America, and Lehman is sinking into shark infested waters.
Tim Geithner’s speech on Monday, in which he said that all banks and brokers should operate under a unified framework, also saw Vikram Pandit push his agenda for a level playing ground, and were likely responsible for part of the selloff in the brokers Tuesday and Wednesday. True, there are many negatives, and fear, but it was likely responsible for part of the slide.
But Steel’s comments might help them bounce, or at least stabilize, Thursday, if the smart money picks up on this rebuttal, and fear subsides that the brokers will be treated like banks. Treasury might be behind the unified framework, but will resist calls for equal footing within it, which might come as a relief to the brokers and their shareholders.
_____________________________________________________________________
Charlie Gasparino, who was MIA today, caught a bit of grief last week after speaking about an internal memo at Lehman. But David Faber probably won’t catch any grief for these statements, which clearly defended Goldman as the grapevine spit out another rumor. The situation is certainly different, but a bit hypocritical in my book.
Of course, Goldman and Faber are like Caesar’s wife, and beyond reproach.
_____________________________________________________________________________________
Einhorn is clearly winning his crusade, but the “cult of the value investor” I had written about several times, apparently left some people confused. Hopefully Einhorn’s legacy lasts for an eternity, but many of the same people that have hopped on his bandwagon were touting these folks a few years ago. The “cult of the value investor"meant the genre, not Einhorn per se.
There are some great value investors out there, but lets get real for a minute. It is not the only way to approach investing.
2003
Eddie Lampert is the next Buffett
2006
Whitney Tilson is an up and comer
_____________________________________________________________
Top Treasury official eases Wall St fears
Financial Times
Big brokerage firms may be regulated like banks
Marketwatch
Mohamed El-Erian Knows When to Buy the Financial Stocks
1440 Wall Street
----------------------------------------------------------------------------------------------------------
The content contained in this blog represents the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Position
Comments:
Next entry: Epic US Open on Tap at Torrey Pines
Previous entry: Flip Flop at the CFTC
