Relax, Goldman’s CFO says the subprime mortage meltdown is orderly.  Whew, I know I am relieved.  What does this mean really?  Now David Viniar, CFO of GS,  says he can’t predict the future, an amazing revelation from a firm that banks most of its profits from trading.  He allows that the mortgage business is a small but strategic part of their business.  Huh, what does that mean?

Take a look at the charts of GS, LEH, MS or better yet XBD index.  The stocks of all these concerns are falling out of bed.  I suspect what is really happening is that GS is attempting to get out while they still can, shift their bad loans to someone still so naive that they think there is little danger here.  The idea that a meltdown is ‘orderly’ is of course a total oxymoron.

Our point here is that what people do speaks louder than what they say. GS and others are in the business of packaging paper and as your text says, securtizing it, to others. Whether there is really any security in the deal is of course not their problem. And saying otherwise would be bad for business don’t you see.

At one point in the movie Wall Street Michael Douglas taunts Charlie Sheen.  Come on, get me some information (the inside variety) instead of sending it to me.  Someday you could be a player, $40M, $50 M in the bank, your own jet. Hmmm…

The best eulogy I read to to Enzo Ferrari was penned by Carrol Shelby.  Shelby made the observation that Enzo was the only guy that ever got to have his own car company, no board of directors, no shareholders, no one he was beholden to.  It was all his baby. 

Well, those opportunities are still around, all you have to do is harness some money.  A British group just bought Aston.  Now, Jerry Flint dream of a new Chrysler.  It would be difficult, and I am not sure I agree with his idea to stay with the Dodge Durango and such, the one I saw last week was pretty outrageous in a time of $3 gasoline.  And he completely avoids the issue of the unions and making a deal on the pension and health care plans.  It seems to me one would want to somehow come out so that you were forcing say Texas and Georgia to bid on which would pay for your new southern plant, having shuttered the one in wherever Siberia, Michigan.  (Younger readers will want to click on the image of a 57 Chrysler Imerial, yes it had a hemi,  for a rear view of possbily the most outlandish tail fin combo ever put on a car by a factory, the closest competitor being hte equally outlandish 1960 Cadillac).   Believe it or not, at the time gasoline stations would engage in ‘gas price wars’ driving down the price of gasoline to say 29 cents and offering a free set of steak knives for a fill up.   

Anyway, here’s the chance to have your own car company. Now this would make an interesting capstone case.  Marketing, costing, playing states and countries off one another to get the business from you, who to sell to in the future.  Any ideas?

Here is another view of Ford’s sale of Aston Martin.  I suggested in the last post that I would rather run Aston with its new owners than Ford.  Read this article which also discusses the sale of Jag and possibly Volvo. You will recall that I handed out a column suggesting that Ford in fact, with its legacy pension costs, may not be worth anything.

So, stop and think! What are they doing? Think about what we study in terms of sunk costs, budgets, and future planning.  Is Ford selling the right assets to keep Ford afloat?  Or would the shareholders be far far better off if for example,

Ford broke itself into multiple groups.  The Premier Group might or could have included Jag, Aston, Volvo, and Land Rover.  Then you could create Ford Trucks, and finally Ford Cars with Mercury, Lincoln, and Ford.  Now, my choice would be to keep shares in Premier or preferred stock as Ford did in Aston, and firesale the rest of it, possibly to the UAW that is so proud of its contracts. Let’s move the headquarters of Premier back to London and open up shop in Dubai where people have money to buy these things and EXPECT to pay out the nose.  Let the UAW partner with the state of Michigan if they think so much of their contracts!  Great, let the state of Michigan bail out the Unions!  How about that one?  IF MI says yes, wonderful, let em have it.If MI says no, well gee unions now who ya gonna call?

What say you?

Well the fire sale continues. Ford has sold Aston Martin for about $850 M retaining a Preferred Stock Ownership bringing overall cap to $925 M. Not bad for a company that only moves 6500 units  a year. A British concern already invovled with Aston racing officially bought the company but I see that a Dubai concern, read deep pockets, is also in the buying group. 

Now will Ford put Jag on the auction block?  I mentioned in class Saturday that Jag now tops the J D Power customer satisfaction list. So why are we selling something we just fixed?  Cash is king in debt and pension strapped Detroit.  Remember those chapters on budget and planning in the cost class, turns out all that matters. Here you have Ford that has FINALLY done what it intended with both Aston and Jag, yet they are having to let someone else enjoy the fruits of their labors. 

Which would you rather run?  Let’s see at Ford, Toyota Dodge and Chevy are breathing down our necks in the gas guzzling pickup business, gas is back at 3 bucks, one day we are green with the Escape hybrid and the next we re badge the F 500 as the Taurus, and then there is the UAW to deal with or

At Aston we hob nob with the richest folks in the world backed up by Dubai money and Ford Technology what with their ps ownership, um a gee, er, I’ll have to get back to you on this one, tough decision…..

Oxford Analytica says that new methods of producing energy will not offset the decline in conventional energy sources.

Really, gee, I thought Daryl Hannah had all this figured out with ethanol and driving around on leftover Trans Fat French Fry Oil…….

So spake Poor Richard in his almanac over two hundred years ago.  Well, that advice is coming home to big banks that have lent to sub prime mortgage companies.  In intermediate I we study how companies allow for potential losses. We later study how companies allow for additional potential losses with reserves and notes to statements.  When banks think they have goofed, the text books in accounting refer to their handing off these dud loans as ‘securitazation or privatizing the loans, IE, the greater fool theory.  That being ‘these loan stink let’s hand them off to the customers. ‘  Okay I exaggerate, a bit.

Specifically, when banks hold these loans, if the loans really go bad before they can be re packaged and handed off to someone else, the banks will suffer for some losses. Now analysts are saying that is about to happen to everyone, both investment bankers and commercial bankers that stayed too long at the sub prime mortgage lending party.  Check out the list, how could all these smart companies loaded with MBAs be so foolish-Bear Stearns, Lehman, Bank of America!  Answer, the business cycle has not been repealed….the thing that make the next great crash is the absence of participants in the last one who have no memory of it happening.   

To see just how fast things can go wrong in the sub prime business, click on the chart of NEW Century Mortgage Lenders at left.  As you can see the stock has completely collapsed the last two weeks.  This is what a capital market meltdown looks like.  This is what 1929 looked like especially from the standpoint of the lenders. Back then the sub prime loans were broker call loans, one could buy stocks on 10% margin. You put up 10 cents, the bank loans you 90 cents. Obviously if the value of the stock falls more than 10% you have no equity. Recall back then that there was no FDIC bank insurance.  By March of 1930 it was obvious that many banks were underwater due to loans on securities that now had negative equity.  Within two years one third of all the banks in the US closed taking investor savings with them.  This collapse in the money supply is what really kicked off the  Great Depression, there was then no way to replace all that money that was sucked out of the economy. 

Now consider what has happened.  Banks have not just been making 10% margin loans, they have been making 0% margin loans. Little or nothing down, or worse, don’t bother to make principal payments, just pay the interest, the real estate will be sure to go up in value anyway.  This is why one of the bedrock principles of accounting is conservatism, not being optimistic in expressing value.  As you can see in the graph of NEW, investors are finally getting very conservative in their valuation of NEW. Please read the article and let’s discuss this in our classes as it combines accounting finance and economics.

On the heels of the SEC wanting to converge the FASB and IASB, now comes a conference sponsored by the US Treasury Dept.  On the heels of a report by the US Chamber of Commerce, no less than Warren Buffet and Mike Bloomberg are coming to town to speak their piece.  Accounting regs are on the table, so stay tuned. 

I recieved this e mail from a good friend, I think while it is somewhat tongue in cheek, it is perhaps right on about American Management, it follows unedited

Dennis Elam

A Japanese company (Toyota) and an American company (General Motors) decided to have a canoe race on the Missouri River.
Both teams practiced long and hard to reach their peak performance before the race.

On the big day, the Japanese team won by a mile.

The Americans, very discouraged and depressed, decided to investigate the reason for the crushing defeat. A management team made up of senior management was formed to investigate and recommend appropriate action. Their conclusion was the Japanese team had 8 people rowing and 1 person steering, while the American team had 8 people steer ing and 1 person rowing.

So American management hired a consulting company and paid them a large amount of money for a second opinion. They advised that too many people were steering the boat, while not enough people were rowing.

To prevent another loss to the Japanese, the American’s rowing team’s management structure was totally reorganized to 4 steering Supervisors, 3 area steering superintendents and 1 assistant superintendent steering manager. They also implemented a new performance system that would give the 1 person rowing the boat greater incentive to work harder. It was called the “Rowing Team Quality First Program,” with meetings, dinners and free pens for the rower. There was discussion of getting new paddles, canoes and other equipment, extra vacation days for practices, and bonuses.

The next year the Japanese won by two miles.

Humiliated, the American management laid off the rower for poor perf ormance, halted development of a new canoe, sold the paddles, and canceled all capital investments for new equipment.

The money saved was distributed to the Senior Executives as bonuses and the next year’s racing team was outsourced to India.

Here is an interesting article comparing High Tech and the Housing Bust.  I have made numerous posts about how the housing bust and those who that it would have a soft landing.  Such bubbles NEVER have a soft landing.  There is a good parallel in the article showing how Toll Brothers was much like Cisco in the last high tech bust, which frankly never has recovered, just look at Dell and Gateway or the reduced numbers of students majoring in IT at business schools.  The stock market is starting to sink now, consumer confidence is turning down, sub prime lenders are increasing loss reserves or going bankrupt, $300K condos in Miami go unsold, ‘investors’ that were oh so smart in real estate are now underwater, Alt A mortgage holders are facing reposssesion, can that R word (recession) be far round the corner?

Come on now I have posted this photo three times surely someone can ID this home….

One of the most famous lines in Hollywood movies comes from Casablanca. THe quote is-

What, Gambling in this Establishment, I’m Shocked! It is the understatement by Claude Rains, the French Vichy Commander in Casablanca after being informed by the Germans that gambling is occurring at Rick’s Cafe American. Upon making the startling revelation, a croupier hands Claude his winnings and he puts them in his pocket….

And so read SEC Probes TXU Option Trading. It seems several thousand call options that were out of the money were purchased JIT for the take over announcement by KKR.  Gee do you think someone might have acted on inside information?  We have studied derivatives in Intermed II, do you understand the terms call option, out of the money, expiration date?  Can you see why Barney Frank describes derivative valuation as somewhere between alchemy and astrology? Have you noticed that the same Big Three Investment Banks keep showing up in these deals, J P Morgan, Merrill, and Goldman?  Note that Goldman provided two Secy of Treasury in the last two administrations.  Is the fox guarding the henhouse?