Sep 15, 2008: Lehman Brothers was the 4th largest investment bank in the world. Why was Hank Paulson smiling the day Lehman Brothers was declared bankrupt? Did he play a role in the denial of US Govt support for Lehman Brothers at a critical juncture? Nobody knows that. But what one surely knows is that Hank Paulson is ex-Goldman Sachs and Goldman Sachs is a long term beneficiary of Lehman Brothers fall. Agreed that Lehman had much higher leverage (about 40x) than its peers (20x), so their balance sheet was much higher in risk. But if US Govt could support other large financial organizations like AIG, Fannie Mae and Freddie Max, maybe they should have offered some “short term support” to Lehman Brothers too. In credit crunch situation, time is all that one needs, and with a bit of time, Lehman could have got a chance to get sell some of its assets to raise capital or raise fresh capital from its long term investors globally. The US Govt’s/ Fed’s attitude of “not a single dollar to support you” towards Lehman Brothers was not logical and it harmed the global financial markets, including US economy.

Some people in Wall Street with influence over the US Govt and US Fed were thinking long term, and they saw a clear opportunity to eliminate one key player. Nobody puts such business strategy on power point slides. The timing was perfect, and when the economy picks up again, there will be one less competitor for the big deals. Think about it.

Barclays and Nomura bought valuable pieces of Lehman Brothers in the distress bankruptcy sale, and have made themselves stronger for the next upturn. Good show by them. They will be Goldman Sachs competition in future.

For information regarding the Chapter 11 Filing of Lehman Brothers Holdings, please visit www.lehman-docket.com

There have been some positive developments: The functioning of financial markets and the banking system in the United States has improved significantly. Manufacturing production in the United States has risen nearly 15 percent since its trough, driven substantially by growth in exports; indeed, the U.S. trade deficit has been notably lower recently than it was before the crisis, reflecting in part the improved competitiveness of U.S. goods and services. Business investment in equipment and software has continued to expand, and productivity gains in some industries have been impressive.

Nevertheless, it is clear that, overall, the recovery from the crisis has been much less robust than we had hoped. Recent revisions of government economic data show the recession as having been even deeper, and the recovery weaker, than previously estimated; indeed, by the second quarter of this year–the latest quarter for which official estimates are available–aggregate output in the United States still had not returned to the level that it had attained before the crisis. Slow economic growth has in turn led to slow rates of increase in jobs and household incomes.

The pattern of sluggish growth was particularly evident in the first half of this year, with real gross domestic product (NYSE:GDP) estimated to have increased at an average annual rate of less than 1 percent. Some of this weakness can be attributed to temporary factors. Notably, earlier this year, political unrest in the Middle East and North Africa, strong growth in emerging market economies, and other developments contributed to significant increases in the prices of oil and other commodities, which damped consumer purchasing power and spending; and the disaster in Japan disrupted global supply chains and production, particularly in the automobile industry. With commodity prices having come off their highs and manufacturers’ problems with supply chains well along toward resolution, growth in the second half of the year seems likely to be more rapid than in the first half.

However, the incoming data suggest that other, more persistent factors also continue to restrain the pace of recovery. Consequently, the Federal Open Market Committee (FOMC) now expects a somewhat slower pace of economic growth over coming quarters than it did at the time of the June meeting, when Committee participants most recently submitted economic forecasts.

Consumer behavior has both reflected and contributed to the slow pace of recovery. Households have been very cautious in their spending decisions, as declines in house prices and in the values of financial assets have reduced household wealth, and many families continue to struggle with high debt burdens or reduced access to credit.

Probably the most significant factor depressing consumer confidence, however, has been the poor performance of the job market. Over the summer, private payrolls rose by only about 100,000 jobs per month on average–half of the rate posted earlier in the year.

Meanwhile, state and local governments have continued to shed jobs, as they have been doing for more than two years. With these weak gains in employment, the unemployment rate has held close to 9 percent since early this year. Moreover, recent indicators, including new claims for unemployment insurance and surveys of hiring plans, point to the likelihood of more sluggish job growth in the period ahead.

Other sectors of the economy are also contributing to the slower-than-expected rate of expansion. The housing sector has been a significant driver of recovery from most recessions in the United States since World War II. This time, however, a number of factors–including the overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and the large number of “underwater” mortgages (on which homeowners owe more than their homes are worth)–have left the rate of new home construction at only about one-third of its average level in recent decades.

In the financial sphere, as I noted, banking and financial conditions in the United States have improved significantly since the depths of the crisis. Nonetheless, financial stresses persist. Credit remains tight for many households, small businesses, and residential and commercial builders, in part because weaker balance sheets and income prospects have increased the perceived credit risk of many potential borrowers. We have also recently seen bouts of elevated volatility and risk aversion in financial markets, partly in reaction to fiscal concerns both here and abroad.

Domestically, the controversy during the summer regarding the raising of the federal debt ceiling and the downgrade of the U.S. long-term credit rating by one of the major rating agencies contributed to the financial turbulence that occurred around that time. Outside the United States, concerns about sovereign debt in Greece and other euro-zone countries, as well as about the sovereign debt exposures of the European banking system, have been a significant source of stress in global financial markets. European leaders are strongly committed to addressing these issues, but the need to obtain agreement among a large number of countries to put in place necessary backstops and to address the sources of the fiscal problems has slowed the process of finding solutions. It is difficult to judge how much these financial strains have affected U.S. economic activity thus far, but there seems little doubt that they have hurt household and business confidence, and that they pose ongoing risks to growth.

Another factor likely to weigh on the U.S. recovery is the increasing drag being exerted by the government sector. Notably, state and local governments continue to tighten their belts by cutting spending and employment in the face of ongoing budgetary pressures, while the future course of federal fiscal policies remains quite uncertain.

To be sure, fiscal policymakers face a complex situation. I would submit that, in setting tax and spending policies for now and the future, policymakers should consider at least four key objectives. One crucial objective is to achieve long-run fiscal sustainability. The federal budget is clearly not on a sustainable path at present. The Joint Select Committee on Deficit Reduction, formed as part of the Budget Control Act, is charged with achieving $1.5 trillion in additional deficit reduction over the next 10 years on top of the spending caps enacted this summer. Accomplishing that goal would be a substantial step; however, more will be needed to achieve fiscal sustainability.

A second important objective is to avoid fiscal actions that could impede the ongoing economic recovery. These first two objectives are certainly not incompatible, as putting in place a credible plan for reducing future deficits over the longer term does not preclude attending to the implications of fiscal choices for the recovery in the near term. Third, fiscal policy should aim to promote long-term growth and economic opportunity. As a nation, we need to think carefully about how federal spending priorities and the design of the tax code affect the productivity and vitality of our economy in the longer term. Fourth, there is evident need to improve the process for making long-term budget decisions, to create greater predictability and clarity, while avoiding disruptions to the financial markets and the economy. In sum, the nation faces difficult and fundamental fiscal choices, which cannot be safely or responsibly postponed.

Returning to the discussion of the economic outlook, let me turn now to the prospects for inflation. Prices of many commodities, notably oil, increased sharply earlier this year, as I noted, leading to higher retail gasoline and food prices. In addition, producers of other goods and services were able to pass through some of their higher input costs to their customers. Separately, the global supply disruptions associated with the disaster in Japan put upward pressure on prices of motor vehicles. As a result of these influences, inflation picked up during the first half of this year; over that period, the price index for personal consumption expenditures rose at an annual rate of about 3-1/2 percent, compared with an average of less than 1-1/2 percent over the preceding two years.

As the FOMC anticipated, however, inflation has begun to moderate as these transitory influences wane. In particular, the prices of oil and many other commodities have either leveled off or have come down from their highs, and the step-up in automobile production has started to reduce pressures on the prices of cars and light trucks. Importantly, the higher rate of inflation experienced so far this year does not appear to have become ingrained in the economy. Longer-term inflation expectations have remained stable according to surveys of households and economic forecasters, and the five-year-forward measure of inflation compensation derived from yields on nominal and inflation-protected Treasury securities suggests that inflation expectations among investors may have moved lower recently. In addition to the stability of longer-term inflation expectations, the substantial amount of resource slack in U.S. labor and product markets should continue to restrain inflationary pressures.

In view of the deterioration in the economic outlook over the summer and the subdued inflation picture over the medium run, the FOMC has taken several steps recently to provide additional policy accommodation. At the August meeting, the Committee provided greater clarity about its outlook for the level of short-term interest rates by noting that economic conditions were likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. And at our meeting in September, the Committee announced that it intends to increase the average maturity of the securities in the Federal Reserve’s portfolio. Specifically, it intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less, leaving the size of our balance sheet approximately unchanged. This maturity extension program should put downward pressure on longer-term interest rates and help make broader financial conditions more supportive of economic growth than they would otherwise have been.

The Committee also announced in September that it will begin reinvesting principal payments on its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities rather than in longer-term Treasury securities. By helping to support mortgage markets, this action too should contribute to a stronger economic recovery. The Committee will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability.

Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy. Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector. Fiscal policy is of critical importance, as I have noted today, but a wide range of other policies–pertaining to labor markets, housing, trade, taxation, and regulation, for example–also have important roles to play. For our part, we at the Federal Reserve will continue to work to help create an environment that provides the greatest possible economic opportunity for all Americans.

It is estimated that Frank Quattrone now advises about 20 companies through his company Qatalyst Group, from giant Google to National Semiconductor, and smaller start ups. He was involved in the  deals, including EMC’s purchase of Data Domain. The Qatalyst Group is beleievd to be at no. 3, behind Goldman Sachs and Morgan Stanley, on technology deals above $1 billion so far this year. That’s very going indeed by someone who was almost written off a few years ago.

The volume of text messaging is set to increase significantly among the financial securities brokers, going by the general trends in text messaging usage. Many brokers today carry two mobile phones because their company-provided devices don’t allow texting. But things can change in future as new technology is helping texting restrictions evolve with adoption of enterprise grade text message archiving systems from companies like TextGuard. In this video, TextGuard founder Todd Cohan talk with Dow Jones Newswires’ Jennifer Hoyt Cummings.

Create a massive fall in the market large enough to trigger stop-losses typically set up at 5% drop, and then buy blue chip stocks at 30% less price before they recover, sell Put Options at 1000% gain, blame it all on computers and trading algorithms. Some person or some company somewhere has walked away with billions in profits after this event. It looks very well planned. This event was most probably an example of higest form of market manipulation, a bold master stroke, though illegal and unethical.

To find answers, we need to check the money-trail.
Who all bought millions of DOW 10500 Puts for pennies a few days back? Those Put options would have got sold at 10 dollars each, making billions of dollars. It is very unlikely that the organizer is within the US, otherwise the SEC/FBI can find ways to take back the money. The organizers are most probably hedge funds, outside the US, in offshore locations. The sponsors had enough capital, and NYSE/NASDAQ trading algorithm expertise, to make the initial 250 point dent, and then the market forces took over, pushing everything down in free fall.

To those who say that since the prices came back to pre-fall levels, and no real damage was done — they clearly are not traders or have market positions or investors who have put stop losses.  Many traders and brokerages got blown out of their positions because their stops were taken out after 5% drop in the Index.  Many futures and options traders squared loss making positions, and opened hedging positions, only to be caught in the pull-back few minutes later.  It was violent – a financial hurricane. Such extreme movement of stock prices has cascading effects on margin positions which impact other non-related trades, commodity positions and forex, because all these market are inter connected.

In the short term, the conflict between inflation and growth always exists. As of now, there is no case for raising interest rates, at least till inflation is below 5%. The food price pressure will remain for the next 2-3 months.

Rangarajan sees price pressures due to inflation from growth, and oil prices will play a key role. 9% GDP growth for India is possible after the world economy has come out of recession in FY 2011-2012 by when the global trade will pick up.

Bank of America needs $33.9 bn, Wells Fargo needs $13.7 bn and GMAC needs $11.5 bn. So these 3 banks (15% of 19) account for 78% of the capital gap. This is a classic case of Pareto law where we can see the 80/20 formation. 20% of the banks have 80% of the capital gaps.

Other banks like Citi and Morgan Stanley have smaller gaps in the  range of $1-5 bn, and many banks like Morgan Stanley are already planning to raise new capital through new stock issue.But the problem is the current capital market is not too keen to buy these banking stocks, so its a challenge even to sell/place $1 bn of banking stock today.

Overall, the stress test results can be seen as positive, as the capital gaps are not too large and not too wide spread.  It looks manageable.

Reference: http://finance.yahoo.com/news/Stress-tests-find-10-big-apf-15174824.html

Even a few months back, nobody could have thought of such low valuations, but today, it looks like the Citigroup stock could go further down. As the recession deepens, the problems facing Citigroup — souring loans and the impact of the recession — are only getting worse.

Now, the share price of an NYSE-listed company cannot remain below $1 for more than 30 consecutive days. If that happens, the company gets about 180 days to prove that it can boost its stock price.

One of the main questions we got is whether this price is makes the stock “cheap enough” to buy, and the answer is: we don’t know that!

We know how much money the US govt is pumping in the bank, and we know what assets Citigroup has worldwide, BUT we don’t know how big their liabilities are! And that’s taking the stock down.

Maybe some investors know more than others, and are selling while they can. But there is not much you can salvage with a penny stock.

Never could we imagine that one could not even buy a coffee with Citigroup share price. Today should serve us a warning of things to come ahead. We are in difficult times. Got to conserve cash.

The revelation comes just days after Temasek said Chief Executive Ho Ching, the wife of Singapore’s premier Lee Hsien Loong, steps down to be replaced by former BHP Billiton CEO Charles Goodyear.

The fund made a number of wrong moves under Ho Ching, including a $5 billion investment in brokerage Merrill Lynch in late 2007. And as you may know already, Merrill’s shares fell 78 percent in 2008 amid the global financial turmoil and it was bought by Bank of America Corp. on 1st Jan in a lifesaving deal.

Temasek Holdings also has large stakes in other financial companies such as Standard Chartered Plc, DBS Group Holdings Ltd and Barclays Plc. So it looks like Temasek financed a good chunk of the toxic mortgage securities in the US.

This is a learning for all of us. Warren Buffet invested $5bn in Goldman Sachs, and Temasek in ML. And the difference in the quality of decision making is clear.

Goldman Sachs has posted a quarterly loss of $2.1 billion, or $4.97 per share, on net negative revenue $1.58 billion, down from a profit of $7.01 per share in the same quarter last year. Results for the entire year weren’t actually all that bad; the i-bank posted a profit of $2.3 billion, or $4.47 per share, on revenue of $22.2 billion.

Though some may say its down from an $11.6 billion profit last year, but if you see it with a “grounded perspective”, most of Goldman Sach’s competition is in tatters, or buried already.

To us, a surviving and standing Goldman Sachs represents strength. And they have managed to be significantly less exposed to much of the sub-prime crisis and its toxic derivatives.

More than that, Goldman Sachs has the belief to battle it out. If anyone on Wall Street can do it, it has to be Goldman Sachs. And at their current valuation, they are still a ‘buy’!