Tuesday, December 2nd, 2008
From Energy and Capital
ReportIf you're like me, you're pissed off at the financial crisis... or what we're calling the "Cluster-Fluge of the Century." You deserve to know who's accountable.
In part one of our exclusive "take no prisoners" report below, we not only reveal some of the most guilty players involved...
Regards,
Brian Hicks
Publisher, Energy and Capital
Angel Publishing Research Report
Part 1, published 12-01-08, Baltimore, MD
They took greed and incompetence to all-new levels...
"It's so difficult to pinpoint one person or two people [for the economic meltdown]. It really was the whole system."
-- Georgetown University finance professor Reena Aggarwal
Introduction
The financial markets' collapse -- broken down -- is a disgusting tale of enablers, exploitation, and ignorance...
... The wheels of which were set in motion over 31 years ago with the 1977 passing of the Community Reinvestment Act (CRA).
In short, this Act was designed to encourage FDIC insured commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods.
It sounded like a wonderful plan. It meant well. And like many things, it looked great on paper... when you first glanced at it. After all, everyone should have access to some credit, and this law was meant to better our deteriorating cities.
Except, instead of banks freely choosing who they would give credit to, and determine the amount of credit the borrower would be approved for, the CRA--in a sense--held hostage the banks, forcing them to give borrowers as much money as the borrower needed, not deserved or could pay for.
In other words, this law kept banks from operating responsibly by only issuing enough credit/money that a person could pay back. It doesn't take more than a little common sense to foresee the financial trouble awaiting those institutions down the line.
Today, it remains the forgotten catalyst for loosened lending standards, rolled-back regulation, and an increasingly blurred line between nonprofit government and the for-profit private sector.
It's this much-decreased oversight that allowed for some to bank unfathomable wealth by inventing complicated financial instruments... and advancing them by exploiting loopholes in a wrecked system. As well, there were those -- in power -- who did nothing to prevent our slide to economic mayhem.
And now we're all left holding the bag.
What's worse -- some of the same clowns who opened the gates to the financial crisis are in control of fixing it... many of them with full immunity!
It's high time, then, to take a step back... and take stock of the "pointmen"... the players at the table in a trillion-dollar bet that led to the financial Collapse of the Century.
From the financial "mad scientists" who concocted the toxic instruments in the first place... to the brokers who peddled them... to the mortgage companies that baited wanna-be homeowners of all stripes... to the politicians and lawmakers who enabled the death vortex that the housing crisis would become... to the SEC, which left the door wide open.
On display below are some of the villains themselves... their crimes, abuses, mistakes, and ignorance... and their subsequent "golden parachutes."
But most importantly, I want to show you how these Architects of Destruction could not only make you back every last dollar you've lost in the crisis... but also how "playing" them could stuff your portfolio with more money than you ever dreamed.
So here we go...
America's Hall of Shame: Crooks of the Crisis
Part 1: The Pusher, The Cartel, and the Side Bet
Public Enemy #1:
Angelo "Mascot of the Housing Panic" Mozilo
Former Countrywide Financial CEO
His Crimes:
In 2006, one out of five U.S. mortgages was financed by Countrywide Financial... at a value of roughly 3.5% of U.S. GDP. Good times for Angelo and his troups.
One year later, amid swirling questions over a looming mortgage crisis, Countrywide assured the world it had ample capital and liquidity to stay in business... having disclosed $35.4 billion in reliable liquidity. Another disclosure: "...sufficient liquidity available to meet projected operating and growth needs and significant accumulated contingent liquidity in response to evolving market conditions."
Suckers!
While Mozilo and crew rope-a-doped investors with lie upon lie, Countrywide managed to burn through the $2 billion Bank of America cash infusion, an $11.5 billion credit line used to ease liquidity issues, numerous Fed cash injections... AND a $50 billion "cushion" they went on record as having:
"Our mortgage company has significant short-term funding liquidity cushions and is supplemented by the ample liquidity sources of our bank. In fact, we have almost $50 billion of highly reliable short-term funding liquidity available as a cushion today. It is important to note that the company has experienced no disruption in financing its ongoing daily operations, including placement of commercial paper."
Just seven days after that spirited media performance, the company announced it was facing "unprecedented disruptions" in debt and mortgage markets.
Finally, in December '07, after months of spiraling anguish, Mozilo threw in the towel and left Dodge. Come July, Bank of America and Countrywide had officially inked the shocking takeover. It was an all-stock deal that, for Countrywide, shook out to less than 20% of the company's $24 billion market value just one year prior.
Meanwhile, job cuts at beleaguered Countrywide have reached five-figure territory, as employees wait it out, day by day, on the chopping block.
"Friends of Angelo" (FOAs):
A June 2008 Conde Nast Portfolio expose' revealed a number of influential lawmakers and politicians who became beneficiaries of "favorable mortgage financing" from Countrywide. The list of FOAs includes Senate Banking Committee Chairman Christopher Dodd, Senate Finance Committee Chairman Kent Conrad, and former Fannie Mae CEOs Franklin Raines and Jim Johnson.
According to the report, Senator Dodd's arm was twisted to the tune of a $75,000 reduction in mortgage payments from Countrywide on his two homes... at rates reportedly well below market!
Golden Parachutes:
How One Small Group of Investors Played the Countrywide Debacle Into Triple-Digit Gains:
It all started in early February 2007...
That's when the first cracks in the foundation of the mortgage market emerged, most noticeably in subprime. Countrywide, while trying to convince shareholders it had plenty of liquidity, knew the writing was on the wall... leaking the following comment, "We've got eight, nine, 10, 12 months of headwinds. You're seeing 40 to 50 subprime companies a day throughout the country going down in one form or another."
So when an already overvalued Countrywide leapt to $44.67 on a buyout rumor, our small band of investors immediately went to work.
We bought "put" options on Countrywide... betting on its share price to nosedive.
And fall it did. In fact, each time Countrywide announced everything was OK (causing naive investors to bid up the stock price), we bought more puts... for a grand total of five trades.
Eventually, the stock dropped under $2, and our team turned around enormous profits. The biggest gainer was the Countrywide January 2008 27.50 put option, which earned members of our nimble investment club a tidy 203% return in mere days.
"Most of our businesses are beginning to rebound."
-- James Cayne
Public Enemy #2:
James "Let Them Fail" Cayne
Former CEO, Bear Stearns; world-class bridge player
His Crimes:
At a 1969 New York bridge tournament, pro card player Jimmy Cayne found himself hired on the spot by future Bear Stearns CEO Alan "Ace" Greenberg. By 1993, Cayne would become CEO; by 2001... Chairman of the Board.
Fast forward to March 2007, with rumors flying of Bear's unraveling. Cayne denies rumors of poor liquidity, reporting the company had a $17 billion cushion. Investors actually cheered the news and sent Bear Sterns stock up.
In its next major miscue, Bear Stearns plunks down over $3 billion in a collateralized loan to bail out a hedge fund created specifically for subprime mortgages: the Bear Stearns High Grade Structured Credit Fund (along with negotiations to bail out a second Bear fund mixed up in subprime).
Here's shocker # 1: Just one month later, Bear clients are notified of "effectively no value" in the two hedge funds, which would soon file for bankruptcy.
Then in December, just when Bear investors thought it couldn't possibly get worse, the first quarter loss in the institution's 85-year history was announced... in what would add up to an $854 million monkey on its back from mortgage-related write-downs.
The firm's foray into subprime lending finally caught up with it... and within the span of a week or so, Bear Stearns -- the stalwart, bulletproof institution founded in 1923 -- was all but dismantled. The legendary investment bank would be sold to competitor JPMorgan Chase for a bargain-basement price of $2 a share, or $236.2 million.
Meanwhile, according to reports, "In July, as Bear Stearns executives futilely attempt to prop up two hedge funds that ultimately collapse amid the subprime meltdown, CEO James Cayne spends ten of 21 workdays out of the office, playing golf and competing in a bridge tournament in Tennessee."
(In a now-ironic twist, Cayne's Bear Stearns was the single investment-bank holdout in 1998's Wall Street-fashioned rescue of Long Term Capital Management, a collapsed hedge fund. "Let them fail," Cayne reportedly quipped.)
In the end, Cayne is largely blamed for two things: NOT selling the firm when he had the chance, and NOT pursuing the cash injection it desperately needed in the aftermath of the firm's collapsed hedge funds, and its "in-the-dark" liquidity.
Golden Parachute: After the legendary financial institution crumbled (including roughly $1 billion in net worth of Bear Stearns' stock down the drain), Cayne cashed in his entire stake in the company for a cool $61 million.
How We Leveraged the Bear Stearns Backlash into a Windfall:
By scrutinizing the Bear debacle, we successfully played its fallout... pinning down and cashing in on the next financial dominos to fall, including:
◊ Lehman Brothers January 2009 10 put option: 72%, 172% and 188% average gains,
◊ Morgan Stanley January 2009 25 put option: 71% and 13% gains, and
◊ XLF January 2009 13 put option: This Exchanged Traded Fund (ETF) play returned our members 62% in one day (as we closed 50% of our position), then 221% in 7 days as we closed the remaining 50%.
Public Enemies #3 and #4:
Dick "There's a Reason I'm Not Called Richard" Fuld, CEO, Lehman Brothers
Erin "The Best Accessorized CFO on Wall Street" Callan, Ousted Lehman CFO
Their Crimes:
Dick Fuld: The "scariest man on Wall Street," Dick Fuld was at the top of his game... annointed "America's Top Chief Executive" in 2006 by Institutional Investor magazine.
Then that pesky subprime mortgage situation began to unravel. And suddenly, this giant financial institution -- supposedly impervious to ruin -- came under fire. Fuld and company suffered unprecedented losses... the direct result of having held onto its massive subprime positions for too long.
By the third quarter of this year, 73% of Lehman's stock value had vanished in the grips of a tightening credit market.
How did Master of the Universe Dick Fuld respond?
With outright denial, despite repeated warnings. Fuld, in Congressional testimony, seemed to blame everyone but himself for Lehman's collapse. "A victim of his own success," some Wall Street insiders now suggest... rolling the dice on subprime like a jacked-up casino troll, taking risk to all-new levels... over and over, until it was simply too late.
Fact is, Lehman might have averted bankruptcy had Fuld acknowledged the reality of Lehman's situation sooner. After all, there were offers on the table to snatch up Lehman whole. Fuld, however, refused to budge. And when the bottom fell out, nothing was left to leverage.
All said and done, Lehman would become the largest corporate bankruptcy in U.S. history. Fuld, saving face:
"Lehman Brothers was a casualty of the crisis of confidence that took down one investment bank after another."
Erin Callan: With zero experience in the company's treasury and just six months into the job, tax lawyer turned rookie CFO Erin Callan drew national ire as Lehman's public face and bullish mouthpiece during its fall from grace. There seemed no end to Callan's sugarcoating, which couldn't possibly reflect the reality and depth of Lehman's desperate situation. In fact, after the firm sold off a nightmarish 50% of its stock value, she remained "optimistic" about the company's future.
In other words, she'd either never seen a ledger in her life, or she outright lied to everyone.
Fittingly, in early June, when Lehman painfully announced a horrific $2.8 billion quarterly loss, Callan could no longer shove transparency aside and distort the facts.
Just like that, Lehman's head cheerleader was relegated to the JV squad... then shown the door.
The old corporate axiom -- "Management compensation is largely tied to how its performance is reported" -- no longer applied. Wall Street's head female honcho was abruptly replaced by co-chief administrative officer Ian Lowitt... and Callan quickly pulled the rip cord to her golden parachute (see below).
File This Side Note Under "Greed and Delusion"
Just days before Lehman's collapse, executives at Neuberger Berman (a Lehman subsidiary) sent emails urging Lehman's top brass to do away with their seven-figure-plus bonuses... in order to "send a strong message to both employees and investors that management is not shirking accountability for recent performance."
And if you thought Lehman's execs couldn't be more arrogant or disconnected, consider this dismissive quote from Lehman Brothers Investment Management Director George Herbert Walker IV (second cousin to outgoing President Bush) to fellow members of Lehman's executive committee:
"Sorry team. I am not sure what's in the water at Neuberger Berman. I'm embarrassed and I apologize."
Meantime, Richard Fuld and Erin Callan, along with 10 other Lehman executives, are facing subpoenas as federal prosecutors investigate whether the bank misled investors in the run-up to bankruptcy filing.
Just in the last few weeks, the San Mateo County (California) Investment Pool formally filed suit against Fuld, Callan and other top Lehman execs, seeking reimbursement for financial losses after Lehman's fall to bankruptcy. The San Mateo lawsuit is among the first in the country to go after Lehman's top brass... and the $1 billion-plus in bonuses they were able to siphon off before the firm tanked.
According to the lawsuit, the Lehman case "represents the worst example of fraud committed by modern-day robber barons of Wall Street, who targeted public entities to finance their risky practices and then paid themselves hundreds of millions of dollars in compensation while their companies deteriorated."
Golden Parachutes:
How Our Team of Investors Turned Lehman Bros. Into a "Grab Bag" of Profit-Taking:
We knew Lehman was in trouble. Lehman knew it was in trouble. But foolish investors backed up the boat, as the bank issued one assurance after another. But how could its financial health possibly improve? Option ARMs would soon reset, and the credit, housing, and financial markets were still in a bind.
But we still needed confirmation before trading Lehman... and we got just that after the stock broke below its technical descending triangle under $13.
It paid off beautifully. We bought and exited LEH put options three times, as the stock would soon plummet under $2. Not helping the LEH cause, Oppenheimer raised its Q3 and full year loss estimates, as the Financial Times reported that the Royal Bank of Canada was abandoning consideration of an LEH buyout.
On September 10, one day after one of our recommended trades was initiated, Lehman tried to convince investors it absolutely didn't need new capital to survive... and that its real estate portfolio was valued properly. We recall the old adage... "People lie. Stocks don't." With that in mind, and with a recommended January 2009 10 put in hand, our group of investors walked with average gains of 72%, 172% and 188% in just days. Chalk another one up for the Options Trading Pit crew.
Public Enemy #5:
Martin "Just Put It on the Tab" Sullivan
CEO, AIG
His Crimes:
On December 5, 2007, AIG head Marty Sullivan told investors, "We are confident in our marks and the reasonableness of our valuation methods... [We] have a high degree of certainty in what we have booked to date."
But here's what the CEO of the world's largest insurance company failed to mention in his shareholder discourse...
Just six days earlier, Pricewaterhouse Coopers -- AIG's outside auditor -- issued a private warning to Sullivan on the matter of swaps and risk management. Pricewaterhouse "raised their concerns with Mr. Sullivan... informing [him] that PWC believed AIG could have a material weakness relating to the risk management of these areas."
AIG suddenly found itself swept into the financial vortex. On the brink of complete collapse, AIG pulled out its ace card... an $85 billion bailout handed out by Treasury Secretary Hank Paulson.
Soon after the bailout was reported, AIG allegedly took 70 of its "top performers," including 10 senior executives, on a week-long California boondoggle... courtesy of you, the taxpayer. Incredulously, the AIG execs ran up a $442,000 bill, including $200,000 for rooms, $150,000 for meals, and $23,000 for spa treatments.
Golden Parachute: Despite horrific company losses under his leadership, Sullivan managed a cool $19 million safe landing, including a $5 million "performance bonus," plus a new contract with a $15 million parachute... all after misleading shareholders on the stability of AIG's finances. Sullivan's parachute has since been frozen by AIG in an agreement with New York Attorney General Andrew Cuomo. (At present time, Cuomo is investigating AIG for "unwarranted and outrageous" executive payouts after the company pocketed billions in taxpayer rescue money.)
Here's How We Played "Can't-Miss" AIG... Racking Up Even More Gains:
Rumors of an AIG bailout had just surfaced. And we knew AIG was "too big to fail." After all, the risk of AIG failing was simply too great... considering the inevitable, catastrophic trickle-down effect on financial and insurance companies across the board.
We traded speculation and hype surrounding the $700 billion bailout plan... and recommended AIG call options on Sept. 17. We concluded -- as soon as AIG got bailed out and the $700 billion was in place -- AIG would pop off of extremely oversold conditions and head straight back up.
We waited, patiently, for all the bad news to be priced in... then pounced and rode the "dead cat bounce" for AIG call gains.
End result: a 100% gain as we closed 50% of our position... and then a 125% gain on the remaining 50%... all in under 12 days.
In Part 2 of our report, we'll hit up the other Crooks of the Crisis, including The Bank, The Idealogue, and other members of the Cartel. Meantime, have a look at our...
Dishonorable Mentions (Part 1):
A Short List of Those Who Pitched In To Help Bring the Country to its Knees
David "Baghdad Bob of Real Estate" Lereah, Former Chief Economist for the National Association of Realtors (NAR); Current President, Reecon Advisors, a D.C.-based Real Estate Advisory Firm
This former head cheerleader for the real estate industrial complex was one of the chief spin meisters and influence peddlers of the U.S. housing bubble... having publicly called for the bottom in the housing market no less than five times in 2007.
"After reaching what appears to be the bottom in the fourth quarter of 2006, we expect existing-home sales to gradually rise all this year and well into 2008," Lereah advised in February 2007.
Even more folly... Lereah authored the regrettably titled book, "Why the Real Estate Boom Will Not Bust - And How You Can Profit From It."
Shockingly, he changed his tune--a stunning reversal of opinion--after leaving his post at NAR, though his "soft landing" argument for housing makes us wonder if he's still got a spot on the NAR payroll.
The Securites & Exchange Commission (SEC)
The SEC has no one to blame but itself with regard to the financial meltdown. At least that's what former SEC official turned whistleblower Lee Pickard alleges...
According to Pickard, "A rule change in 2004 led to the failure of Lehman Brothers, Bear Stearns, and Merrill Lynch."
In the rule change, that is, the SEC would allow five firms -- the collapsed trio of Lehman, Bear and Merrill, plus Goldman Sachs and Morgan Stanley -- to more than double the leverage they were allowed to keep on their balance sheets.
Franklin Raines, former Chairman/CEO, Fannie Mae
Does a guy making $20 million a year really need a bargain?
When Countrywide head Angelo Mozilo hand picked his "FOAs," he allegedly made sure there was a big mortgage at a super-cheap rate in it for them. One of those reported Friends of Angelo?... Fannie Mae CEO Franklin "Fred" Raines.
Raines, who had served as Bill Clinton's budget director before heading the country's largest lender, loosened lending standards to get more low-income Americans into homes. It's a noble goal by itself, but not so sweet when it came out that Raines overstated earnings by up to $6.3 billion... which undoubtedly helped juke his bonus plan.
His golden parachute? The Associated Press reported that Raines will receive a pension of $114,000 per month for life, plus health and life insurance benefits. And according to documents filed with the SEC, Raines has deferred compensation of $8.7 million to be paid out through 2020.
And not to be outdone... According to the SEC filing, "Mr. Raines has asserted" to Fannie Mae that his retirement was effective June 22. So, by retiring before he could be dismissed, he'd receive -- in this scenario -- an extra $600,000 in salary. Fannie Mae, for its part, nixed the deal.
Chuck Prince, Former CEO, Citigroup
By the time Prince resigned from Citigroup, he'd left the bank with total losses worth up to $11 billion that would be written off, on top of a $6.5 billion write down in the previous quarter. And that's in addition to mounting loan and credit losses.
His departure came shortly after he told investors, four days after a management shake-up, that the board believed Citigroup had a "good, sustainable plan," and that further management changes were not needed.
"It is my judgment that given the size of the recent losses in our mortgage-backed securities business, the only honorable course for me to take as chief executive officer is to step down," he later said. "This is what I advised the board."
For shareholders, it was nothing less than disconcerting to watch a company's stock fall some 50%, and then watch as the CEO walks with millions. Prince walked with total pay, perks, and share payout worth just under $100 million. This included a pro-rata cash "incentive" estimated to be around $12 million.
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Phil Writing : This is an extract from an investment newsletter which highlights the anger most Americans feel about whats going on and also the mindset of professional investors who are looking for advantage even in the direst of times. It says a lot about American Capitalism, its pragmatism and the need to carry on no matter what.
Feeding off the carcass of dead or dying companies mirrors nature, it is savage and unrelenting. Calling for social change to advance civilisation and the condition of its participants is a worthy cause. Understanding and dealing with those who cause civilisation to regress is part of the solution.
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