Spin Citi

The never-ending hesitation on the Citi case has been rattling the market, in spite of Bernanke's "no nationalisation" statements today. I don't want to cause further anguish, but those assurances remind me of the answer a chief executive of a soon-to-fail Icelandic bank when asked whether deposits were safe - you guessed it, the response was a cheery "Of course!".

Now, I'm not saying that depositors should pull their cash out of Citi (unless they are above the government guarantee limits, of course). But the assumption that the banks are even close to being out of the woods is simply pie in the sky.

The bane of Thain

It just doesn't stop - now we find out that Bank of America and their (sorely missed?) former employee John Thain have been interfering with an investigation by the New York attorney general.

You'd think that with everything else going (including Citi doing an ever more convincing "dead bank walking" routine), cooperation with the government might be a smart move. Trust Merrill/Bank of America to miss that. Then again, coming back to my "chercher le Merrill" theorem, perhaps I shouldn't be surprised

The Banker's bonus problem...solved!

Rest assured, I have found a way of sorting out the banker's bonus debate in a way that satisfies all parties. Rather than get paid in cash, why not pay them in CDOs, CLOs and leveraged loans - preferably the ones they advised on! If the deals are as sound as they say, surely they'd be happy to have a slice of their own action? Freescale debt anyone?

Where Madoff leads, others follow

Just when you thought all the rats had left the sinking financial ship, along comes another (at time of writing unconfirmed) fraud. That being said, this case is truly amateurish in scale compared to Herr Madoff, at a mere $8Bln. Why, that's a rounding error on Turbotax Tim's never-ending wave of bailout plans.

Step forward Sir (!) Allen Stanford, who is alleged by the SEC to have committed a multi-billion dollar investment scheme fraud. The US marshalls swooped in on Stanford Financial Group, and assets are being frozen.

Strange, as Stanford himself was relatively low profile until he decided to splash some cash in world cricket. A couple of english players were hired for million dollar rates - I hope they took it in advance.

Real escape

In spite of the many train wrecks in the financial sector, today's news from Morgan Stanley's fund management wing takes some beating. The revelation that someone in their real estate division was bribing Chinese officials is a clanger - particularly as this falls into the Foreign Crimes laws. That call to the DoJ must have been great fun!

Bankers have taken much of the limelight till now. Yet the press hasn't really talked about the catastrophe taking place in the large leveraged real estate funds (be it Morgan Stanley or others). Crazy gearing, lax property analysis and flaky deal makers - a toxic brew.

One can only hope that this crisis will finally sweep away these asset managers. They grew on the coat tails of an investment banking parent, fed by easy debt. Even if they didn't break the letter of their mandates, they've clearly broken the spirit behind them.

Fixed Incoming

An increasingly well-trodden path in the investment press is the suggestion that corporate bonds (particularly investment grade) offer "historical value". This rests on the fact that the yield spread of investment grade bonds is wide enough to represent a good risk-adjusted option.

A few comments on that. First, the spread was much wider in Q4'08, as the credit crunch and financial sector implosion accelerated. So some of that potential return is gone. That doesn't mean that there isn't value there - but bear in mind another "catastrophe" would spike the yields back up again.

Second, you have to recognise that a large part of the investment grade fixed income market is based on debt issued by financials (banks, insurers etc). Granted, government is unlikely to let a major bank fail, but there's always the risk they could wipe out holders of junior bonds (they can certainly do it for shareholders!).

So how do you take a position in investment grade credit? The quickest route (and cheapest) is still an ETF. The issue with those is that they are based on indices that are, you guessed it, dominated by financials. If you're happy with some exposure to financials, why not though.

I'm very cautious on active managers, as they tend to be expensive and average bond pickers. Whether you go down the ETF or active fund route, please make sure you download the fact sheet of the fund, and look up the index information (it should show a sector breakdown of what the fund holds).

In these troubled times, it's really worth investing that extra half hour to read the ingredients of what you're actually buying. Happy bond hunting!

Sorry is the hardest word....

....not anymore, at least over in the UK! Today was a true pardon-fest, with the great (and recently rescued) bankers from RBS and HBOS testifying before a Treasury select committee. Every other sentence seemed to be an apology - although it was always a "collective" one.

However the more interesting revelation is that someone in HBOS (in risk management, believe it or not) raised the alarm about balance sheet risks as early as 2005. After a brief inquiry (or witch hunt, to be more precise), the person in question was duly sacked. The chief executive at the time, who dealt with this minor problem, is now one of the most senior members of the UK financial regulator. Keeping it within the family, clearly.

Amazing - and you thought the SEC had problems!

Las Vagrants

Talk about a neon car-crash. It's been general knowledge for a while that the Las Vegas real estate market was heading for a hard landing. Yet today's announcement that house prices in that area have collapsed by 41% since their 2006 peak is quite stunning.

Into this mix of falling prices and soaring unemployment steps Station Casinos, which is announcing a proposed pre-packaged bankruptcy today. For information, this crazily leveraged deal was backed by Colony Capital, and unsuccessfully tried to do a debt for equity swap back in December.

Still, I don't think Colony needs to feel alone. The informal newsflow trickling into my firm about various private equity real estate funds is pretty horrifying. Talk of debt facilities maturing in the next few weeks which are not being refinanced, falling occupancy rates and rising capital expenditure requirements are joining the deleveraging party.

Of course, these real estate funds wouldn't be in this mess if they'd have a modicum of common sense in their deal underwriting. Even today, a fund updated me with a 50% drop in equity values. And yet they still think that by 2012, prices will have not only recovered, but doubled from their purchase price in the boom years of 2006-2007. Proof that people can always dream in Vegas...

Federal Depress

Like an addict getting its fix, the Federal Reserve has decided to extend its liquidity facilities and foreign exchange swaps by another six months. Whilst I don't have an issue with the FX swap lines, the "liquidity facilities" include a morass of relief packages to impaired entities (including Wall Street).

Given all the news flow, a more measured approach would be to extend the FX swap lines, and start reeling in some of that precious liquidity propping up the commercial bank's toxic loan books. We all know those loans are worth a few cents on the dollar - having the Fed prop up valuations is of no help to anyone at this point.

Money for almost nothing

As the new US administration prepares its "big bang" financial rescue plan (a description they might come to regret), opinion is increasingly divided on the creation of a so-called "bad bank".

Perhaps it would help to outline what this actually entails. The assumption is that lending can only return to "normal" if banks have some stability in their capital base. As a result of their recent recklessness, banks currently have over a trillion dollars (a conservative estimate) in loans and related securities that no one can price - in many cases they are worthless in all but name.

The argument for a "bad bank" is to create a government sponsored entity (with taxpayer funds) to buy up these assets from these banks, in effect cleansing their balance sheet. The risk that these assets go to zero transfers from the banks to the government. So banks can happily lend again, as the logic goes.

The perma-optimists (no doubt including that awful Anatole Kaletsky) would argue that the government may make a profit, assuming that the "bad bank" buys up the assets cheaply enough. A pretty heroic assumption - after all, if these assets were of some value, wouldn't a bank want to keep hold of them?

The end game is unfortunately likely to be as follows: the banks get a clean balance sheet, and go right back to their bad old habits. Meanwhile, the taxpayer "bad bank" gradually accumulates those losses. As a result, taxes will have to rise, and in a few years time the banks' balance sheets will be just as toxic as before this crisis started.

An afterthought - why are so many politicians pressing for banks to return to "pre-2006" lending standards. Come on, that is what got us into the mess. If this plan goes ahead, China's criticism of the western model will sadly be fully justified. This is not a political point (I broadly support the Obama administration) - however this "toxic bank" idea is just asking for trouble.