July 19, 2008
New Short Rule Causes Technical Problems
The new technical rule on short sales has technical problems. Small banks, not covered by the rule, wonder whether it will drive short sellers their way. Market makers, exempted by the rule, wonder have the exemption works. A short sale is a contract between a lender and a borrower. The details of the contract's execution are now subject to new mandatory federal provisions. A better set of rules would focus on title, something the government bestows, recognizes and enforces, be: 1) You cannot sell stock to which you do not have legal title in fee or as a tenant in fee (a borrower has legal title) unless you are acting as a licensed market maker and 2) You cannot loan stock more than once at any given time.
July 16, 2008
New "Emergency" Short Sale Rules
There is an advantage to having Cox, a politician, as head of the SEC. When a false crisis is in the press he knew to respond with a largely symbolic answer that the press can trumpet as well -- emergency short sale rules and promised to prosecute false rumor purveyors. The NY Times put it on the front page (the acid test for success of a chimera) and even Drudge picked it up. The "new" rules redefine naked short selling, which is largely illegal unless one is a market maker, to include cases in which a borrower of stock and the loaner of stock are casual in identifying the stock so loaned. Now the stock must be identified specifically, making it more difficult for some stock owners to loan stock more than once (there is little data on how serious a problem this is). Big whoop. He also promises to crack down on negative false rumor mongers, a crime equal in theory to positive false rumor mongers. Cox will find one, who has left a smoking gun in his email box, and sacrifice him or her. I am grateful that he is not doing more to regulate short sales or other "speculators" in oil futures and the like. Traders know that one can short a stock by selling futures or call options, buying puts, or taking the short side in swaps. Even the small fry get in. I have been shorting financial by simply buying an ultra short ETF traded on AMEX, call numbers SKF. The point -- short sales of stock are a drop in the short side bucket. The higher transactions costs of a true short sale will cause traders to use the other devices. The illusion of control seems to make an ignorant, alarmist press happy and politicians know how to manipulate it -- as Cox does.
July 15, 2008
Wait for It, Wait for It...
August Busch IV announced that Anheuser-Busch would never be sold to a foreign buyer "on his watch." He is now extolling the virtures of the new deal with InBev. We know he gets a seat on the InBev board of directors, rare in a cash deal, and wait for it, wait for it, wait for it .... we will soon find out how much severance money (or its equivalent, consulting, new salary, etc) he will collect.
July 14, 2008
Short the Regional Banks
The national banks get all the news but the real rot is in the small regional banks. They hold bad paper and have much less cushion to survive the hard times. caveat emptor
Fannie Mae and Freddie Mac
Well, the other shoe has finally dropped. Fannie Mae and Freddie Mac, government sponsored entities, are essentially bankrupt and Paulson is trying to figure out how to keep them afloat. They are "too big to fail" because they are too interlinked into too many other financial institutions. The companies hold or guarantee a huge chunk of the country's residential mortgages and many, many banks hold securities issued by the companies backed by mortgages (ABSs). Recall that both companies had severe financial accounting scandals in 2003 and 2004. It is no secret that the had been poorly run for years, paying heartily for political protection. Now what to do?? Bail them out and impose more regulation, that's the ticket. Some even want to nationalize the companies. The bail out presently proposed seems doomed -- more, cheap loans -- this is only a very temporary salve. The companies still will have to pay the new debts back and it will still be underwater on the old debt. The only solid solution is to take the existing equity to zero, sell new equity and give some existing subordinated debt holders equity in place of debt. The government may even have to buy the new equity. What the government does not want to do is give the subordinated debt holders and the equity holders a free ride on whatever new capital comes in -- Paulsen has yet to declare fully on this.
We are in a era when any financial trough leads to calls, often successful, for more regulation. If this continues we will ratchet regulation upwards with each new financial reversal. Regulation is very, very hard to reverse once it is in -- examples are few and they take decades. Government officials add regulation in the false hope that they can solve the problems. What political wants to admit she or he can do nothing to solve a crisis??
Dow Chemical Signals that Big Deals are Still Being Done
On Thursday, Dow Chemical Co. announced that it will buy rival Rohm and Haas Co. for $18.8 billion. Financing for the acquisition includes an equity investment by Berkshire Hathaway and the Kuwait Investment Authority in the form of convertible preferred for $3 billion and $1 billion, respectively.
InBev Negotiates to Buy Anheuser-Busch
Early Monday, Anheuser-Busch agreed to a $52 billion buyout by Belgian brewer InBev. When reporters called me about the case and asked for predictions they were always a bit disappointed by my view that the buyout would go through at a higher price that the $65 offer -- they wanted a fight and a prediction on who would win the fight. The only problem left are some of the ridiculous allegations in the Anheuser-Busch lawsuit against InBev that could get the attention of regulators -- I'm sure the lawyers for Anheuser-Busch were proud of themselves (too proud) over their "Cuba connection" allegation that they claimed would make the acquisition illegal. The lesson -- sellers better learn to control the zeal of their lawyers in these lawsuits.