Bernanke Testimony and Bank of America

The following is an excerpt from Bernanke's prepared remarks to the House Oversight Panel:

In responding to Bank of America in these discussions, I expressed concern that invoking the MAC would entail significant risks, not only for the financial system as a whole but also for Bank of America itself, for three reasons. First, in light of the extreme fragility of the financial system at the time, the uncertainties created by an invocation of the MAC might have triggered a broader systemic crisis that could well have destabilized Bank of America as well as Merrill Lynch. Second, an attempt to invoke the MAC after three months of review, preparation, and public remarks by the management of Bank of America about the benefits of the acquisition would cast doubt in the minds of financial market participants--including the investors, creditors, and customers of Bank of America--about the due diligence and analysis done by the company, its capability to consummate significant acquisitions, its overall risk-management processes, and the judgment of its management. Third, based on our staff analysis of the legal issues, we believed that it was highly unlikely that Bank of America would be successful in terminating the contract by invoking the MAC.

As for the first point, we'll never know. If Bank of America was truly a sound institution (it wasn't/isn't), they could have reaped windfall gains from a "systemic" event (they would not have been allowed to fail). As for the third point, I'm not a lawyer, but it seems odd that a marked deterioration of a target company's financial situation wouldn't be considered a material adverse event. It, of course, depends on the precise wording of the MAC clause.

I find the second point simply absurd. It was well-recognized in the market that this deal was rushed and that there was no way that any significant due diligence could have been performed before the deal was announced.

Shareholders and bondholders would expect a couple of things in such an instance. First, Bank of America should have put its army of lawyers to work in drafting an agreement with Merrill that provided Bank of America the ability to walk away cheaply if significant problems arose during the continued due diligence (the MAC clause). Recall, Merrill would have likely been out of business by the next morning if the deal wasn't announced. Merrill needed Bank of America more than Bank of America needed Merrill. Bank of America was in the driver's seat and should have been controlling the terms of the deal.

Second, stakeholders would have expected Ken Lewis to walk away from the deal or lower the deal price if further due diligence discovered serious problems. Bernanke claims that walking away would have raised serious doubts about the competence of management. He has it completely backwards. Walking away after a more thorough analysis would have increased the credibility of management. Financial market participants would have more confidence that management was actually managing the company for its stakeholders as opposed to embarking on an empire building ego trip.

It's crucial to remember that this deal was rushed by the Fed and Treasury out of a fear that Merrill (and possibly the entire financial system) would be next to collapse if a "white knight" wasn't immediately found. Given the complexities of Merrill's balance sheet, it was never possible or reasonable to expect adequate due diligence to be performed on such short notice, and the market was aware of this.

I'm in no way defending Mr. Lewis or Bank of America. Whether he was threatened or compelled to complete the deal by the Fed and/or Treasury, it's difficult to argue that he acted in the best interest of his shareholders, and for that he should be removed.

---

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

An Eternal Debtors Prison?

I love the title of this piece from The Moscow Times: "Church Calls on Debtors to Repay or Face Hell." We'll see if this leads to increased debt repayment or an increase in atheism.

Court marshals are putting their faith in the Russian Orthodox Church to ease their workload as a growing number of people default on debts amid the economic crisis.

The Federal Court Marshals Service and the Moscow Patriarchate have signed an agreement under which priests will denounce the failure to repay debts as a sin in sermons and during private meetings with debtors organized by court marshals, the court marshals service said Wednesday.

"Priests will say that unpaid debt is the same as theft in Christianity," a spokesman for the court marshals service told The Moscow Times on customary condition of anonymity.

Regional court marshals have "occasionally" involved Orthodox priests, as well as Muslim and Buddhist religious leaders, in their efforts to encourage people to make good on their debts in recent years, but the new agreement will take the cooperation with the Orthodox Church nationwide, the spokesman said.

Talks with Muslim and Buddhist religious leaders to sign similar agreements are under way, he said.

In Islam, an indebted person can't make the hajj, the pilgrimage to Mecca in Saudi Arabia that every Muslim has to make at least once in his life, the spokesman said.

Buddhists, who teach reincarnation, believe that people's debts remain with them in each of their afterlives and "burden their karma," he said.

Some Orthodox believers, who face the prospect of hell if their unpaid debts are counted as unforgiven sins, expressed disdain with the church's involvement in the court marshals' debt collection drive.

"It is not the church's business to make people return their debts," said Gennady Titov, 37, a Moscow office manager with an outstanding bank loan. "Court marshals have no right to use the church for this."

A request for comment left with the Moscow Patriarchate's department on cooperation with military forces and law enforcement agencies, which signed the agreement, went unanswered Wednesday.

Court marshals have said their workload has increased amid the crisis.

Twenty-six percent of Russian families have outstanding debt, according to a survey conducted by state-run VTsIOM this month. A total of 52 percent of respondents said the economic crisis had made it more difficult to repay their debt, while 41 percent said the crisis had not affected their ability to pay.

The church has cooperated with the authorities in the past. In December, Orthodox priests took to the streets with Penza region traffic police and preached to violators who were flagged down, Noviye Izvestia reported at the time.

In February 2007, priests in a Tolyatti church integrated traffic rules into their sermons at the request of the traffic police, Noviye Izvestia said.

---

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Weekly Claims and Weekly Noise

Weekly initial unemployment claims were just released and they offer a good lesson when it comes to economic statistics - don't extrapolate too much from any one data point. If you'll recall, last week all of the green shooters were celebrating the news that the number of people collecting unemployment plunged by 148,000 for the week, the largest decline since November 2001. I raised the overlooked question as to whether this decline could be attributed to people going back to work or people having exhausted their benefits. It was also odd that the weekly number of initial claims had remained above 600,000 if the employment situation had truly improved so dramatically (link to last week's post).

Fast forward to 15 minutes ago, and we find that the latest weekly claims figure shows an increase of 15,000 to 627,000. Also, last week's initial figure was revised higher from 608,000 to 612,000. Furthermore, the number of people collecting unemployment insurance jumped by 29,000. Clearly, there is no sign of employment improvement in this picture. Let's see how the green shooters try to spin this one.

---

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Quote Of The Day: Crop Circles Explained!

A quote from Lara Giddings, the attorney general for Tasmania:

"We have a problem with wallabies entering poppy fields, getting as high as a kite and going around in circles. Then they crash. We see crop circles in the poppy industry from wallabies that are high."


Link to BBC article

---

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Indiana Treasurer Follow-Up Email

The following is from Indiana State Treasurer, Richard Mourdock, who waged a lonely, principle-based, but ultimately-doomed effort to see the rule of law upheld in the Chrysler bankruptcy proceedings. We could use a few more Mourdocks at the national level.

June 22, 2009

Dear Friends & Supporters:

Now that all of the media attention and inquires have lessened, I wanted to thank all of you for the supportive phone calls, kind notes, and encouraging e-mails regarding Indiana’s involvement in the Chrysler, LLC bankruptcy proceedings. I have tried to respond to each of you individually, but given the enormous number of letters, calls, and emails have made that impossible. Forgive me for this impersonal note, which may read like a form letter, but please know that I have been personally touched by the incredible response of kindness by all of you.

From the beginning, Indiana’s legal challenges to the Chrysler, LLC bankruptcy dealt with the federal government throwing away the rules of bankruptcy law to benefit a select few. Indiana’s retired state police officers, retired teachers, and Hoosier taxpayers were victimized by illegal acts of the federal government, which was wrong. Let me be very clear, we never once suggest that Chrysler, LLC had broken the law. In reality, Chrysler, LLC, like any other corporation, could not have ignored 150 years of bankruptcy law like the federal government did.

I hold as a point of pride -- despite all the attacks by a couple of newspaper editorials, Chrysler, LLC, Indiana Congressman Joe Donnelly, Indiana Senator Evan Bayh, and some others -- no one EVER challenged us on the points of law. In the New York Bankruptcy Court, the New York District Court, the United States 2^nd District Court of Appeals, and even the United States Supreme Court, no attorney for either the federal government or Chrysler, LLC, ever attempted to dispute our legal arguments. Even in the denial of our request to halt the bankruptcy proceedings by the Supreme Court of the United States, Madame Justice Ginsburg stated, “This denial of stay is not a decision on the merits on the underlying legal issues.” In essence, the Supreme Court prohibited our case from being heard on a technicality therefore deciding not to rule on the points of law that we raised.

The bankruptcy proceedings are finished and most of Chrysler, LLC is now the Chrysler Group. I hope to see them be productive, profitable, and prosperous.

Thank you again for your words of encouragement and for your support of my efforts to protect Indiana’s retirees and taxpayers.

Sincerely,

Richard E. Mourdock

Indiana Treasurer of State

---

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Bankruptcy and Capitalism

This is clearly a self-serving position for Branson to take, but his point is exactly right. Bankrupt firms should be allowed to fail. It is how capitalism works. Capitalism doesn't guarantee success. It rewards success and punishes failure.

In the U.S., capitalism is under attack. However, capitalism is failing because of Washington. For example, by supporting the large and technically-insolvent banks, our politicians are picking the winners, rather than leaving that job to the market. The failed large banks have been bailed out while smaller successful banks that avoided the financial disaster are further disadvantaged. These small "winners" should be taking market share from the failed banks and growing, but instead they find themselves subjected to higher FDIC insurance premiums, relatively higher funding costs, and ever more regulation. It's Washington that's broken.

---

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Iran: Quote Of The Day

From a New York Times piece:

Quoted by Press TV, Abbas Ali Kadkhodaei, the spokesman for the authoritative Guardian Council — a 12-member panel of clerics charged with certifying the vote — denied claims by another losing candidate, Mohsen Rezai, that irregularities had occurred in up to 170 voting districts.

“Statistics provided by the candidates, who claim more than 100 percent of those eligible have cast their ballot in 80 to 170 cities are not accurate — the incident has happened in only 50 cities,” Mr. Kadkhodaei said.


Rubbernecker:
C'mon guys! What's the big deal? Only 30% of the vote was a fraud. Amazing. Best of luck to the Iranian people. It's nice to see some group stand up for themselves and their rights. The American taxpayer could learn a thing or two from our Iranian friends.

---

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Good News On Weekly Claims?

There are plenty of positive headlines this morning about the decline in the number of people collecting unemployment insurance. Here are the opening paragraphs of a Bloomberg article:

The number of Americans receiving claims for unemployment benefits dropped for the first time since January, adding to evidence the job market is starting to thaw.

The number of people collecting unemployment insurance plunged by 148,000 in the week to June 6, the most since November 2001, to 6.69 million, the Labor Department said today in Washington. Initial claims rose by 3,000 to 608,000 in the week ended June 13, in line with forecasts.

The average number of claims over the last four weeks fell to the lowest level in four months, an indication that the U.S. economy is stabilizing after the worst recession in half a century. Even so, companies are likely to be slow to hire new employees, sending unemployment rates higher, analysts said.

It never ceases to amaze me how articles are spun based upon prevailing psychology. When the market is rising, all news is good news and vice versa.

In fairness, perhaps this is evidence that the labor market is beginning to thaw. However, there is another explanation that isn't being discussed. Unemployment insurance doesn't last indefinitely. Maybe what we're seeing is people falling out of the program because they've exhausted their benefits. This is no less plausible than the bullish spin, yet it has tremendously different implications for the economy.

It's interesting to note that the weekly claims number did not fall. Shouldn't we expect to see this if the labor market is thawing?

---

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Andy Xie Is Spot On

Terrific commentary from Morgan Stanley economist, Andy Xie:

“While rational expectation is returning to part of the investment community, most are still trapped in institutional weaknesses that make them behave irrationally. The Greenspan era has nurtured a vast financial sector. All the people in the business world need something to do. Since they invest with other people’s money, they are biased towards bullish sentiment. Otherwise, if they say it’s all bad, their investors will take back the money, and they will lose their jobs. Governments know that and create noises to give them excuses to be bullish.”

This institutional weakness has been a catastrophe for people who trust investment professionals. In the past two decades, equity investors have done worse than owning bonds in the U. S. market, lost big in Japan and emerging markets in general. It is astonishing to see how a value-destroying industry has lasted for so long. The bigger irony is that the people in this industry have been 2-3 times as well paid as in other industries. The key to its survival is volatility. As markets collapse and surge, it creates the possibilities for getting rich quickly. Unfortunately, most people don’t get out when markets are high like now. They only go through the ride.”

---

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Cartoon Break

You have to chuckle, particularly when you realize that Obama's compensation czar comes from a law firm that counts many of the large banks as clients.




Click here if the clip isn't visible.

---

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Investment Banking Brain Trust

Almost all large corporations involved in a merger, acquisition, or divestiture hire investment bankers to help with the process. These are the experts who help to value businesses, drum up buyers or sellers, and help ensure that the process runs smoothly. In exchange, they are paid handsomely for their efforts. Now, I understand that the sale of Lehman to Barclays was consummated in a rather hasty fashion. Still, it seems that Wall Street's best and brightest should have been capable of clarifying who owned the furniture and umbrellas.

From Bloomberg: "Lehman to Pay Barclays $6 Million for Its Own Desks, Chairs"

Lehman Brothers Holdings Inc., nine months after selling its brokerage to Barclays Plc while in bankruptcy, is still in disputes with the British bank over who owns what, including the investment bank’s own furniture.

Lehman, once the fourth-largest investment bank, asked a bankruptcy judge in New York last week to let it pay Barclays $5.9 million to buy back desks, chairs, tables, cubicles, audio- video equipment and security paraphernalia it currently uses in a building at 1271 Avenue of the Americas in Manhattan.

The repurchase is necessary because “Barclays has asserted that certain of the office furniture, fixtures and equipment that is located in the building and used by the debtors was previously sold to Barclays,” Lehman said in a June 4 filing in U.S. Bankruptcy Court in New York.

The New York-based investment bank’s disputes with Barclays have ranged from whether the liabilities assumed by Barclays were less than what the parties assumed in setting the purchase price to who owns Lehman-logoed umbrellas.

Lehman, which filed the biggest bankruptcy in U.S. history in September with assets of $639 billion, is trying to cut its overhead including lease costs as it liquidates. Its landlord has agreed to cut Lehman’s rent by $305 million to $21 million on an existing lease, partly in exchange for getting the furniture, according to the filing. Lehman first has to buy it back from Barclays, the third-biggest U.K. bank by assets.

The lease will be shortened and Lehman will rent less space under the proposed arrangement, a court filing shows.

Brandon Ashcraft, a Barclays spokesman, declined to immediately comment. Kimberly Macleod, a Lehman spokeswoman, declined to comment.

---

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Nice While It Lasted

The Supreme Court has lifted its stay on the Chrysler deal. It had been a pleasant 24 hours, thinking that just a touch of sanity still existed. It is both disheartening and frightening to see all three branches of our government ignore the rule of law "for our own good." I had hoped that the Supreme Court would shine a light on the Administration's legal steamrolling. That little Pollyannaish flicker of rationality has been snuffed.

link to Bloomberg article

In another legal development today, Obama proposed making "pay-as-you-go" the law. This would require Congress to offset any increased spending with an equal amount of cuts elsewhere. After pushing through a record massive "stimulus" package that is leaving us with a record massive deficit and after embracing trillions in government loans and guarantees, the Administration wants us to believe that it is and has always been fiscally conservative.

In his speech announcing the proposal, Obama said, "Paying for what you spend is basic common sense." The mind reels.

---

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.

Some Supreme Sanity

Late yesterday, the U.S. Supreme Court issued a stay of the "sale" of Chrysler to Fiat. Justice Ginsburg issued the temporary order so as to give the court a little more time to decide whether or not to hear the case. Let's hope that the court does give the Indiana state pension and construction funds their day in court. The proceedings thus far have made a mockery of our legal system and the contractual rights of company stakeholders. The people of Indiana are fortunate to have Richard Mourdock as their state treasurer.



Click here if you can't see the video.

Sowing the Seeds

Too few people understand the role that the Federal Reserve has played in creating the bubbles of the past decade. Loose monetary policy, which is once again being heralded as an economic panacea, is creating a perceived improvement in short-term conditions at the expense of longer-term economic soundness. This game of kicking the can down the road can not continue indefinitely. Federal Reserve "success" will only lead to an even larger mess before long. As was the case in 2001, the necessary and inevitable readjustment will be less painful if it occurs sooner rather than later.





Click here if the video is not visible.

---

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.