Boyd responded to the rejection of its offer to buy Station Casino’s OpCo assets by reaffirming its offer. Station’s Board rejected BYD’s offer last week, citing concerns surrounding BYD’s financial position and the risk of sharing sensitive financial information with a competitor.

This situation is not likely to be settled soon and the decision will ultimately reside with STN’s bondholders. The most important near term takeaway, however, may be the strength of BYD’s financial position as discussed in BYD’s response filed as an 8k with the SEC yesterday:

“Boyd Gaming reiterates that it has sufficient liquidity under its credit facility to finance a cash transaction, and contemplates that no amendment to its credit facility would be required under the proposed transaction structure.”

What should be noted here is that BYD would not require any amendment to its credit facility to complete the transaction. This is critical to the BYD story. Clearly, unlike the Street, BYD is comfortable with its covenant situation, and more importantly, so are the banks. I’m pretty sure the banks were consulted, and gave their consent, before the offer was made.

I recognize the challenging fundamentals facing BYD this year. However, given the increasingly apparent strength of its financial position, the stock probably should not trade as an option. The regional markets are stabilizing and there is reason to be optimistic about the Las Vegas locals market in 2010. Picking off some of the Station assets would be gravy.


"Gentlemen Prefer Bonds"
-Andrew Mellon
With all due respect to Mr. Mellon's legacy of philanthropy, I'll continue to take the other side of that "safety" trade in 2009. I'm not lending my money to the US government and US Corporates. They have resorted to begging for the world to buy into that old saying... it is un-American, and quite sad altogether.
Both US corporate bonds and now US Treasury bonds have gone from shaking in my macro model to breaking. For some time now, I've expressed our short thesis on what Wall Street storytellers call "corporate high yield" (it is actually junk) via a short position in the LQD (corporate bond ETF). I am also short shorter-duration US Treasuries (1-3 year bonds) via the SHY exchange traded fund. While plenty of gentlemen are still long these bonds, they aren't working out for them like they have forever.
Today, the US government will issue another staggering $34B worth of 3-year Treasuries. This is the other side of Paulson and Geithner's free money program - it doesn't come out of thin air. As the said leaders of this country continue to socialize Wall Street's losses with debt issuance, bonds are breaking down, and yields are breaking out.
As yields breakout from their longstanding low cost of capital Trend line, over-geared business models start to Shake and Break. While it has the same ring to it, do not mistake this for Will Farrell's "Shake and Bake" move in 'Talladega Nights' - this isn't a go to move for those addicted to leverage! This is more like a leading indicator for their investment vehicles getting wrecked.
As cost of global capital continues to accelerate and the access to it continues to tighten, you end up with a marked-to-market value of equity that is lower than what it was before. Whether that equity is "Private" or GE's, it doesn't matter - returns go down on said "equity" when your financing costs go up.
No, this isn't that complicated to understand, but it's very difficult for those who lust for leverage to explain. For the last 25 years, the cost of capital in America was conveniently politicized (decreased) at every sniff of an economic growth yellow flag. The go to "Shake and Bake" move by many executives was simply to step on the gas, raise more equity, and pile it on top of losing positions, and/or sell it high to some other poor soul at a private equity shop who didn't do global macro who was perfectly willing to earn a fee to do the same...
Ask the folks in the fur coats up in Iceland how this scheme ends. When the debt burden starts to Shake and Break, it's over. Iceland's stock market is obviously a gong show that comes into focus from time to time. Yesterday, it crashed for another -15% down move. These Icelandic guys once fancied themselves as capitalists, like the old American kind who are watching West Texas crude oil breakout of its base alongside these higher interest rates (we're long Oil)... but make no mistake, there is nothing that focuses the mind like a good ole fashioned hanging used to in the wild West ... Shake and Break anyone?
The worst part about the Shaking and Breaking in the Treasury market is that we have an incompetent team running the US Treasury (or is there anyone on the team - they can't seem to find Timmy any teammates). No wonder why the deer in headlights (Timmy Geithner) has only found one US market savant to support him (Jimmy Cramer).
I wrote an Early Look called "Jimmy and Timmy" a few weeks back, and poor Cramer felt obliged to bust out his Shake and Bake move of an op-Ed in the New York Times - for those of you who'd like to hold Jimmy accountable, I am sure you can find a reprint of that wonderful piece of whatever that was...
The New Reality is this: The New York Times ran a headline article on the US Dollar's strength yesterday, and that was equally as relevant, from a contrarian's perspective, as Cramer getting air time on making a macro call - when these things happen, in unison, at a bare minimum, get out of the way.
As the US Treasury market continues to break down, the US Dollar (and support for Timmy) will wane. This is good. As the US Dollar strength loses its momentum, US stocks should continue to lose their downward price momentum - on the margin, this is one more reason why stocks are looking to put in an immediate term bottom here.
To be clear, this is a Trading bottom. Especially in raging bear markets, bottoms are processes, not points. As the US stock market's volume readings continue to decline, and volatility (VIX) continues to dampen, we're getting closer to that Shake and Bake move called the short squeeze.
Immediate term price momentum in the US Dollar index will break at the 88.53 line. We have tested and tried the 89.00 US$ Index level on 3 separate occasions in 2009 - a third failure to break-out of that sound barrier will force people to look at this through our cross asset class lenses...
My immediate term upside target in the SP500 is 711. If we close above that line in the face of a US Dollar finally being de-valued (and you're short this market), my advice would be to make sure you have your chin strap done up. Above that line, the short seller of US equities is going to Shake and Break.
Gentlemen, start your engines...


EWA - iShares Australia-EWA has a nice dividend yield of 7.54% on the trailing 12-months.  With interest rates at 3.25% (further room to stimulate) and a $26.5BN stimulus package in place, plus a commodity based economy with proximity to China's H1 reacceleration, there are a lot of ways to win being long Australia.

USO - Oil Fund- We bought oil on Friday (3/6) with the US dollar breaking down and the S&P500 rallying to the upside. With declining contango in the futures curve and evidence that OPEC cuts are beginning to work, we believe the oil trade may have fundamental legs from this level.
QQQQ - PowerShares NASDAQ 100 - We bought QQQQ on a down day on 3/2 and again on Friday of last week.

SPY - SPDR S&P500- We bought the etf a smidgen early, yet the market indicated close to three standard deviation oversold.

CAF - Morgan Stanley China fund - The Shanghai Stock Exchange is up +18.5% for 2009 to-date. We're long China as a growth story, especially relative to other large economies. We believe the country's domestic appetite for raw materials will continue throughout 2009 as the country re-flates. From the initial stimulus package to cutting taxes, the Chinese have shown leadership and a proactive response to the credit crisis.

GLD - SPDR Gold- We bought gold on a down day. We believe gold will re-find its bullish trend.

TIP - iShares TIPS- The U.S. government will have to continue to sell Treasuries at record levels to fund domestic stimulus programs. The Chinese will continue to be the largest buyer of U.S. Treasuries, albeit at a price.  The implication being that terms will have to be more compelling for foreign funders of U.S. debt, which is why long term rates are trending upwards. This is negative for both Treasuries and corporate bonds.

DVY - Dow Jones Select Dividend -We like DVY's high dividend yield of 5.85%.

VYM - Vanguard High Dividend Yield -VYM yields a healthy 4.31%, and tracks the FTSE/High Dividend Yield Index which is a benchmark of stocks issued by US companies that pay dividends that are higher than average.


LQD -iShares Corporate Bonds- Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates in the back half of 2009 that bonds will give some of that move back. Moody's estimates US corporate bond default rates to climb to 15.1% in 2009, up from a previous 2009 estimate of 10.4%.

SHY -iShares 1-3 Year Treasury Bonds- On 2/26 we witnessed 2-Year Treasuries climb 10 bps to 1.09%. Anywhere north of +0.97% moves the bonds that trade on those yields into a negative intermediate "Trend." If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yield is inversely correlated to bond price, so the rising yield is bearish for Treasuries.

UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. The Euro is up versus the USD at $1.2688. The USD is down versus the Yen at 98.3480 and down versus the Pound at $1.3834 as of 6am today.

PSS: Thoughts Into the Quarter

Here’s our detailed EPS/Margin Walk highlighting the puts and takes to watch out for vs. last year. Fundamentally, this is a name that will be tough to ignore in 2Q/3Q.

Here’s our margin walk for PSS, which reports after the close tomorrow. This name has been one of our favorites for a while fundamentally (Rubell is one of the best CEOs in retail), but the price has not aligned with our timing/sizing models. I’ll let Keith speak separately on the price, but I think we’re getting closer to the point where this story is tough to ignore. I think PSS will start beating EPS expectations more consistently, and that estimates for the upcoming year will prove too low (we’ve got EPS growth of 10% vs. the Street at -2%). Most of the juice in the model starts in 2Q/3Q – when the duplicative DC comes off line at the end of Q1, Saucony and Sperry benefit from investments made in ’08, direct sourced and branded product hit more of a critical mass in the stores, and we start to anniversary poor P&L and Cash Flow numbers. In the meantime, I think the quarter tomorrow looks good relative to expectations (i.e. the number should be abysmal, but ‘less toxic’ than the Street is modeling). See our overview below and call me for any follow up on the assumptions.

Casey Flavin

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.67%

MCD – Slowing Global Sales Trends

MCD reported February same-store sales that came in better than street expectations in every geographic region except APMEA. That is where the bulk of the good news ended.

On a sequential basis from 4Q08, average underlying comparable sales trends for 1Q09 (adjusted for both the January and February calendar shifts) have slowed in every region except the U.S. Globally, same-store sales in January and February have slowed to 5.3% from 7.2% in 4Q08. This slowdown was driven by a 3.0% and 3.8% sequential decline in Europe and APMEA, respectively, while the U.S. has held in at about 5%.

Going forward, the March numbers will continue to be impacted by timing/calendar shifts, which will hurt results in each region by approximately 1.0% to 1.8%. Additionally, the timing of Easter, which falls in April this year versus March last year, will hurt Europe comparable sales by about 2% and should help U.S. numbers by less than 0.5%. For reference, MCD is lapping its easiest monthly and quarterly U.S. same-store sales comparison from 2008 in March and 1Q so MCD’s U.S. numbers should continue to look good in the near-term. I continue to believe, however, that the company’s McCafe strategy will not provide the incremental sales necessary in the U.S. to maintain this level of sales strength throughout 2009.

U.S. margins have been negative for the past 8 quarters and I expect this trend will continue as the company drives increased foot traffic with its dollar menu at the expense of average check (mix was negative each quarter in 2008) and margins. As stated in today’s sales release, commodity costs are expected to continue to pressure margin comparisons in the first quarter, which could further increase the declines in the U.S.

MCD reported that Europe’s February results were hurt by weakness in Germany, which is a trend that is continuing from the fourth quarter. For reference, Europe was MCD’s largest geographic region on a sales basis in 2008, representing 42% of total company sales, and France, Germany and the U.K. accounted for 55% of Europe’s revenues. That being said, the sequential slowdown in reported quarter-to-date same-store sales in Europe is of significance. During MCD’s 4Q earnings call, management stated that about 40% of Europe’s comparable sales number has been driven by traffic, which implies that average check makes up the remaining 60%. We knew going into 1Q09, that average check in Europe could come under pressure as management stated that it would not implement the same level of pricing in 1H09 that it typically would “because you’ve got to consider how the consumer is feeling and during these times the consumer is looking for deals and we want to make sure that we’re out there.” Specifically, management stated that the “German consumer is very sensitive to pricing.”

MCD attributed APMEA’s underperformance to weakness in China, which the company said was impacted by the timing shift of the celebration of the Chinese New Year (fell in January this year versus February last year). Although I am sure the timing shift did impact the YOY comparability, I would expect that underlying trends in China, which slowed during the fourth quarter, have remained weak. We learned in early February that MCD, like its competitors in China, cut its prices by more than 30% in response to the economic slowdown. I don’t think the company would have cuts its prices so drastically if demand was holding up.

Management also stated in its press release today that “unprecedented volatility in foreign currency exchange rates and commodity costs will continue to pressure revenue and margin comparisons in the first quarter.” The company stated that if foreign currency rates remain at current levels, that currency translation will negatively impact EPS results by $0.07-$0.09. The company had previously said that it expected the 1Q09 currency impact to be similar to that of 4Q08 when it hurt EPS by $0.07. The negative currency impact on total company systemwide sales has grown sequentially from 4Q08 through February. At the same time, however, systemwide sales growth on a constant currency basis has slowed rather significantly in February to 3.2% from 9.1% in January. This caused reported systemwides sales growth to turn negative in February.

Eye on Value: Companies Trading at a Discount to Net Cash

This weekend we did a screen to find U.S. traded companies that had a negative firm value. That is, companies where the net cash (cash + short term investments less total debt) was greater than the fully diluted market capitalization of the company. We removed companies that did not appear to have a real business, or were trading at high multiples of revenue, and those companies that appeared to have accounting issues. We also only screened companies north of $50MM in market capitalization.

The screen produced 19 companies that are currently trading at less than the net cash on their balance sheet. In most instances, we excluded long term investments. The assumption would be that many of the companies are either not profitable or have a very high burn rate of cash, so the implied future cash balance is a much lower number. While in some cases this is true, in many of the cases these companies are both profitable and not burning cash based on recent results.

We’ve outlined the list below and wanted to caveat that we do not cover these companies and are obviously not recommending the purchase of these stocks without further due diligence. Also, obviously, many of these companies have small market capitalizations ($50 - $200MM), so they may not be practical for large portfolios. In addition, we did not fully investigate off balance sheet obligations such as pensions, leases, and the like. Caveats aside, when a company is trading at a discount to the cash on its balance sheet, it should pique the interest of any value investor worth his salt.

The companies that we have highlighted in green appear the most promising based on this screen. They are trading at a discount to net cash, generated positive EBITDA in the last twelve months, and generated cash (so net cash increased) sequentially in the last two quarters. Interestingly, is on this list, despite positive EBITDA in the last twelve months. From a purely academic perspective, the implication may be that Jim Cramer has a negative net present value to his company. Booyah anyone?

If any of the companies below pique your interest, let us know and we’d be happy to work with you on a deep dive of the company.

Daryl G. Jones
Managing Director

Eye On Re-Regulation: Where There’s Smoke… Notes for the Week Ending Friday, March 6, 2009

Knock-Knock Joke
“Who dat?”
“Who dat say ‘Who dat’?”
“Who dat say ‘Who dat’ when I say ‘Who dat’?”

The SEC has just issued Release 2009-39 “warning investors and financial services firms about con-artists who may use the names of actual SEC employees to mislead potential victims. The agency also is providing information to help potential victims protect themselves from SEC impersonators.”

This is nothing new, but like other frauds that take advantage of disarray in the financial markets, it crops up with greater frequency when there is confusion in the air. We are aware of a number of instances over the years where trading desks have received phone calls during from individuals identifying themselves as being from Market Surveillance –whether SEC, NASDAQ, or NYSE. Head traders receive calls during market hours from someone using the name of an actual market regulator, and stating they are performing a market sweep. We have heard of traders being asked to run down their entire options or futures books over the phone, or to reveal the size of their long and short positions in a number of large stocks, or that day’s trades in certain names. Any instrument is fair game if you are looking to trade against a large desk’s liquidity.

For a private investor, the possible scope of fraud that can be perpetrated once someone gets your brokerage account and bank information makes our head spin.

As a public service, we provide the following information, from the SEC release: If a person contacts you claiming to be from the SEC, ask for their name, the SEC office in which they work, and their direct telephone number. Then call the SEC Personnel Locator Telephone Number: and ask to speak directly with the person who contacted you.

A tip: do not ask for a written request. While it may seem like a good way to establish identity – an SEC letterhead with a fax number by way of identification – it also creates a written record, which may unintentionally escalate a routine question to a formal inquiry. In fact, most phone calls purporting to be from the SEC are actually from the SEC. If a telephone inquiry is handled quickly and efficiently, that is often the end of it. A letter escalates the matter on the SEC’s own radar, and may end up taking up much more of your time and resources. Once you receive a letter from the SEC, you can not un-receive it.

You Get What You Pay For
What we obtain too cheap, we esteem too lightly.
- Thomas Paine

SEC budget for 2008: $913 million. Proposed increase for 2009: $119 million.

CFTC budget for 2008: $111 million. Proposed increase for 2009: $35 million.

The two government agencies charged with ensuring the transparency and stability – one might go so far as to say the Sanctity – of the US investment markets will be given a total of less than $1.2 billion to do a job that has been disastrously mishandled for a decade or more. Millions For Tribute But Not One Penny For Defense, as we toss more and more money at the stockbrokers, AIG and Citi, while nickel and diming our regulators.

And most of the nickels that will be given to Chairman Schapiro will likely be earmarked for junior lawyers. All of the work being done now to streamline the SEC’s process looks like Business As Usual on steroids. We are glad to see Chairman Schapiro bringing in people like Kayla Gillan (see our item from Friday 20 February, “She’s Baaaaack!”) but we fear there may not be enough political will in all Washington to upset the number of applecarts that will be required before the SEC becomes an effective regulator.

There are legitimate industry groups in the financial world, and Ms. Schapiro needs to identify the ones with the most credibility and cultivate relationships in order to create a real partnership with the industry. Otherwise she will accomplish nothing more than streamlining the inefficiencies of the old system.
This is no way to regulate the world’s most important marketplace.

Liar, Liar, Pants On Fire
“Young man, for this job we are looking for someone who is very responsible.”
“Then I’m your man, Sir. The last place I worked, whenever anything went wrong, I was responsible!”

There goes that pesky Sheila Bair again, not being a Team Player and referring publicly to the condition of imperial dishabille. This time around, she has offered a comment on President Obama’s proposed mortgage bailout. And since she is on her home turf, we think she should be listened to.

President Obama’s mantra looks less and less like “Yes we can”, and increasingly like “Ahammena-hammena-hammena…” His latest assurance to the markets, that only Responsible People will be rescued by the proposed Foreclosure prevention program, is too much Politics and not enough Policy. Pace Rush Limbaugh, we fear it won’t work.

We recognize that leadership requires deft footwork, and that what appear to be Presidential missteps may be head fakes. It is astute politics, for example, to have the debate about nationalizing the banks play out by having various high-profile figures ponder publicly the virtues of one side or the other. Chairman Greenspan, Aye. Chairman Bernanke, Nay. But the markets are not comfortable that President Obama is actually directing the process. We would have greater comfort in the President’s ability to gauge and manipulate public opinion – one of the key jobs of a leader – if not for the Bozo-gate that attended his Cabinet nominations, a first impression that will continue to dog his administration.

The normal political process entails sending up trial balloons, testing public sentiment, launching pilot programs, and listening to the push-me-pull-you of Congressional debate. In this fashion, a new president tries out public consensus and gauges how far he can push his programs in the face of majority sentiment. Today’s markets, however, are calling for immediate action that is strong, decisive and unambiguous. President Obama, please take note: the world will follow if you will lead decisively. It’s New Dealer’s choice, and it is America’s hand to lose.

In response to Big Picture Obama’s assurance that “Liar Loans” will not be bailed out, Ms. Bair said it is “simply impractical” to review old mortgage applications in an effort to determine which were legitimate, and which fraudulent. If Congress decides to take this political ball and run with it, we might as well write finis to the American banking system.

Before Treasury Secretary Geithner pulls out the Long Knife, we recommend you ask your compliance officer what is involved in this kind of review. Having a loan officer approve a mortgage app – as they are called in the biz – is one process; having credit experts perform a forensic investigation of a decade’s worth of old mortgage apps is quite a different matter.

First, how should this politically charged process run? Should the credit officers who originally approved the mortgages be required to re-paper them? In many cases this will mean bringing people back to prior places of employment and opening up files that are anywhere from two to… ten?... years old. And most of those files will have been sent to physical storage, in conformity with various record-keeping requirements.

President Obama’s program is described as benefitting up to 9 million homeowners. How many mortgage files will have to be vetted to identify nine million kosher loans for the program to assist? The physical work of retrieving several million cardboard boxes full of paper files – then identifying the files and routing them to the proper location for review – bringing in teams of reviewers – taking existing staff off their day-to-day responsibilities to run the support function for this extraordinary audit – all this represents a human and logistical task on the order of the building of the Pyramids.

Obviously, regulators are not going to manually review nine million files – although with the government in charge you never know. There will be a sampling process which, as it will be designed by regulators and signed off on by politicians, will not identify anything but the most egregious violators. Locating a single fraudulent mortgage file will lead them to dig deeper at the same lending institution. The way the vetting is likely to be set up, if a pattern of bad mortgages is discovered, the program will probably have to bypass the institution altogether and issue an Enforcement referral against the lender.

This means that legitimate mortgages could be swept aside, as the entire loan portfolio of the suspect institutions is classed as potentially fraudulent. This is potentially good news for lawyers who wish to file class action lawsuits against the government for legitimate borrowers who took out good faith mortgages from cheesy lenders, only to be automatically bypassed by the President’s homeowner bailout. The story of Keeping A Roof Over America’s Head has not even begun, and we already know it will not work.

The Wall Street Journal, in a recent editorial, (2 March, “Call Them Irresponsible”) quotes the following statistic: “Mortgage fraud exploded during the housing boom and appears to have continued even as home prices fall. In December the Mortgage Asset Research Institute reported that mortgage fraud increased 45% in the second quarter of 2008, compared to a year earlier. The Treasury's Financial Crimes Enforcement Network reports a similar rise for the full year ended in June of last year.”

Fraud thrives on bureaucratic inefficiency. Stepping up the pace and bringing in a forensic team will do nothing, as long as they are committed to promoting a politically attractive oversight model focused on getting the Bad Guys. In any agency, the sheer volume of day-to-day work that needs to be processed is overwhelming. Assigning new forensic investigators will create added burden on existing staff who, in addition to processing thousands of current files a day, will now also have to retrieve and assist in the review of millions of old files. Chairman Bair’s statement that this is “simply impractical” is worthy of an Oscar for Most Understated Utterance by a Government Official.

The FDIC actually has experience in running these accelerated reviews. In August of last year, the agency brought some eighty seasoned bank work-out professionals out of retirement, bolstering the staff of approximately 4600. These former agency staffers were formed into SWAT teams and sent across the country to address the spike in problem banks by identifying problems in loan portfolios and reassuring the public that their deposits are safe.

Viewers of CBS News’ “60 Minutes” were treated to a glimpse into the world of the FDIC in Sunday’s broadcast (8 March, “Your Bank Has Failed: What Happens Next?”). The news team followed an actual bank takeover, and interviewed FDIC staff as it was happening. To all appearances, the FDIC process was characterized by care, confidentiality, thoroughness and thoughtfulness. FDIC personnel, from Chairman Bair to the accounting staff on the ground, recognize that they are dealing with the most fragile, and most critical part of the Capitalist system: the individual whose money is on the line.

Chairman Bair related how painful it was to her to watch news broadcasts of frightened depositors standing in line outside of IndyMac branches, and agency staffers are well aware of the irony that big banks get bailed out, while small ones get wiped out. Ms. Bair was making our case on prime time: institutions that, by their very size, pose systemic risk, are not Too Big To Fail. They are Too Big To Regulate. Ms. Bair made the observation that Congress may be gearing up to legislate limits to the size and scope of financial institutions.

While this may sound like Communism at work, we used to have a law like that on the books. It was called Glass-Steagall. Not only did it work reasonably well, we trace the roots of the current global crisis to the process that undid that law’s restrictions. It was not that people all of a sudden got greedy. It was rather that the Government – from Congress, to the Presidents, to the Federal Reserve – all decided that Greed Was Good and should no longer be subject to legislative restrictions.
Chairman Bair and her agency come off looking more professional, more level headed – and certainly more truly concerned for the well-being of the people affected by this crisis – than anyone in Government, including the President.

For a bit of perspective on what the FDIC’s staffing and resources requirements are going to be: the program to temporarily bolster the FDIC staff was put in place to address the upsurge in bank failures. Three banks failed in 2007, while in 2008, there were 25 failures, costing the FDIC $18 billion. Reports indicate (, 27 February, “Bank Failures May Cost FDIC $80 Billion”) the agency is on a pace to seize one hundred banks in 2009, for which the $22 billion it has already budgeted may be far too little.

The good news: this is not taxpayer money. Yet. Chairman Bair has announced a stiff premium increase for the banks, in the face of the very real possibility that the agency could be wiped out before the end of 2010. She told “60 Minutes” that the agency has budgeted to lose $65 billion on bank closings over the next five years, but everyone assumes that is an extremely conservative figure.

The decision before the President is how to get the best result out of the agencies of his Administration. Abuses in the marketplace go largely unreported until there is a crisis. Unsuitable and unauthorized trading in retail brokerage accounts during the ‘nineties did not become an issue until the dotcom meltdown, when a rash of arbitrations and lawsuits were unleashed. Similarly, the Financial Times (4 March, “FDIC Braced For Surge In Mortgage Fraud”) reports “a 44% rise in reports of suspicious mortgage-related activities”. The tip of the iceberg of past years’ fraud is breaking the surface. And new fraud is charging ahead, with people gaming the government’s new emergency financing facilities. It’s going to get ugly. We hope President Obama will not permit the ugliness to spin out of control by forcing Chairman Bair into an impossible course of action for questionable political gain. Not when she is so well on course to get some real results.

President Obama is no longer Candidate Obama. He now has the political backing to address hard facts bluntly. The hard fact here is that these Liar Loans are largely water under the bridge. Unless they come to light through investigation of the rash of complaints flowing into the FDIC, no targeted review program will be effective in rooting them out.

Hard decisions must be made, and hard facts need to be put before America and the world. The markets are clamoring for it, and the world is waiting for the US to make its move. It will be better for all, and more effective in carrying out the real work of government, if President Obama takes the lead in pushing hard facts in our face.

On a related note, bank robberies in New York City are up more than 25% over last year. Caught on tape, one hapless bank robber hit three Chase branches without success before wandering into a TD Bank branch. Unlike Chase, TD tellers are not shielded by bulletproof partitions. The robber walked out with a fistful of cash and proceeded to hit other TD branches, where he repeated his success. TD management says it is unfair to single them out, though they must admit that they have certainly lived up to their advertising slogan: “America’s Most Convenient Bank”.


You are entitled to your uneducated opinion, just the same as Henry Kaufman is entitled to his uneducated opinion.
- Weintraub

Ken Lewis is flagellating himself over taking your money to pay for Merrill Lynch, saying it was a bad idea because B of A doesn’t need it, and has ended up with its activities being curtailed as a result. Mind you, in a show of confidence, Mr. Lewis spent two million dollars of his own money to buy 400,000 B of A shares in January and February. His dedication notwithstanding, Lewis is now being targeted for removal. CtW Group, an advisor to nearly $2 trillion in pension money, has sent a letter to Bank of America Lead Director O. Temple Sloan calling for Mr. Lewis to be sacked.

The CtW letter refers to a meeting held one year go, at which B of A’s directors promised CtW explicitly that they would responsibly oversee Mr. Lewis’ activities. Here’s a snippet: “… we indicated our intent to oppose the directors' re-election at BAC's 2008 annual meeting. In response, you invited us to a meeting in Charlotte during which you assured us the board was diligent in its oversight of management and had already taken steps to substantially improve risk management. Based on these assurances, we did not oppose the election of any BAC directors.

The board, however, subsequently allowed Mr. Lewis to take outsized, reckless risks by acquiring Merrill Lynch.” Heaven forefend anyone should actually be punished for this egregious violation of public trust – CtW is quick to lay aside any grievance against Sloan and other B of A directors for lying to them about holding Lewis to a responsible course of action. What the letter implies is, if you give us Lewis’ head, we won’t clamor for yours. In the world of market Realpolitik, this might be the best that B of A shareholders can hope for.

Meanwhile, Lewis has just announced that he will stay until the government money is paid back. Lest we take this as Mr. Lewis shouldering the burden, bear in mind that, as a Bailout recipient he can’t take a multi million-dollar bonus. He has now reassured us that he’s going to hang in there until he can. This matter remains for B of A and its squeaky-wheel shareholders to duke out, but overall it does not look good for the marketplace. B of A, as we mentioned last week, holds over 11% of all deposit money in the US. Wanna start somethin’’? Maybe not.

Meanwhile, lest you think the Government is having second thoughts about having given our money to Mr. Lewis so he could take down a size block of stockbrokers, we have just heard the ultimate sales pitch.
“What you’re now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal, if you’ve got a long-term perspective on it.”

We don’t know who is supervising Registered Representative Obama’s sales activities, but the compliance officer in us responds favorably to expressions such as “starting to get to the point”, “potentially”, and “long-term”. A balanced presentation. Bullish, yet without puffery.

With the President’s roots in Chicago, home of the Mercantile Exchange, we wonder whether we can ask them to list Kool-Aid futures. There seems to be a spike in demand for the underlying.

So tell us, Barack. What do you like in here?


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