Stephen’s Posterous

The purchase of more than eight million Citigroup shares by company insiders would be a more positive sign if the company were more clearly in control of its own future, an observer of insider transactions said.

Anthony Marchese, general partner of Insiders Trend Fund LP, is encouraged by the purchases at Citi, but he said insider buying is less reliable as an indicator when outside influences, which in this case include public sentiment, government policy and the world economy loom large. Still, Mr. Marchese said, he believes insiders see several scenarios in which Citigroup shares rise.

"Why they go higher, I don't think [insiders] could care less, whether it's because the government doesn't take them over, business turns up or the world as we know it calms down," he said.

Citigroup Chief Executive Vikram Pandit wasn't one of the buyers, but he argues that the future is brighter. In a memo to employees disclosed Tuesday, March 10, Mr. Pandit said he is disappointed with Citi's stock price and misperceptions about its finances, but that over time "the markets will recognize the many strengths of Citi."

Mr. Pandit said the company was profitable during the first two months of the year, and shares rallied on Tuesday. A company representative declined to comment further. The purchases last week by four Citigroup insiders came days after the government agreed to a third rescue of the New York company, one that would allow taxpayers as much as a 36% stake in the firm.

Roberto Hernandez Ramirez, chairman of the company's Mexican banking operation, made the largest purchase, buying six million shares for $7.5 million. Manuel Medina-Mora, chief executive of Citigroup's Latin America and Mexico unit, bought 1.86 million shares, Vice Chairman Lewis B. Kaden bought 100,000 shares and Controller John Gerspach bought 65,000 shares.

The insiders paid $1.24 to $1.45 a share, well below the stock's 52-week high of $27.35. Citigroup's stock price has plunged amid the economic downturn and fears that the government will take over the company, wiping out shareholders. Bernard Sussman, chief investment officer at Spectrum Asset Management, of Stamford, Conn., said he thinks the government won't fully nationalize Citigroup and, given time, the recent insider purchases will prove timely.

Mr. Sussman said he believes the purchases are a show of confidence rather than a public-relations move, because the insiders have put up their own money to buy shares at a time when their personal wealth has probably suffered significantly with Citi's beaten-down stock price.

"With the stock trading at $1 a share, they don't have much downside," Mr. Sussman said. The buying at Citi reflects a pattern of insider buying at large financial firms, including Bank of America Corp. and J.P. Morgan Chase & Co. Purchases by those insiders haven't yet proved prescient, Mr. Marchese said.

"I would look at this as a high-risk bet," he said.

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In House of Cards, William D. Cohan calls the collapse of Bear Stearns a "tale of hubris and wretched excess on Wall Street."

Of course, tales of hubris and excess on Wall Street are nothing new, fueled by large bets with other people's money. What was new in March 2008, and what still amazes even former Bear employees, is that government officials somehow talked themselves into rescuing the bettors.

A year ago next week, the Federal Reserve committed $30 billion in taxpayer funds to engineer the sale of Bear Stearns to J.P. Morgan Chase. The Fed's action protected all of Bear Stearns's creditors against losses and ultimately allowed Bear stockholders, who might have received nothing in bankruptcy, to receive $10 a share.

The taxpayer exposure was later reduced to $29 billion. The Federal Reserve estimates that, as of Dec. 31, 2008, taxpayers are sitting on a paper loss of roughly $3 billion.

That America could not survive the loss of Wall Street's fifth-largest investment bank was a fairly novel idea. Investment banks were traditionally seen as riskier enterprises than commercial banks, which hold FDIC-insured consumer deposits. It was generally understood that investment banks could go bust and sometimes did. In 1990, the government allowed Drexel Burnham Lambert to fail, and markets continued to function.

Ranked by assets, Bear Stearns was not even in the top 10 of U.S. financial firms. But in Washington there were fears of so-called systemic risks, even if such risks were not completely understood. Mr. Cohan quotes Timothy Geithner, then the president of the New York Fed and now Treasury secretary, opining that "there's no rulebook for these things. By their nature, they're always different. They occur in areas where nobody's got some terrific plan for dealing with them."

But while Bear's top executives aggressively sought the federal lifeline, not everyone at the firm thought that such help was deserved. "There were voices," reports Mr. Cohan, "that the free market should be the one to render judgment on the firm's years of strategic and tactical choices, among them the decisions to finance itself with short-term borrowings, to pack its balance sheet with hard-to-sell and hard-to-value mortgage-backed securities, and not to diversify its revenue either geographically or by product."

Mr. Cohan quotes a senior managing director at the firm: "My personal view is that [Bear Stearns] should have been made more of a victim. I don't think it should have been saved. I don't buy the argument that the whole system would have unraveled and collapsed. I really don't. I think it's a terrible precedent. I don't think the Fed should be in the business of assuming this kind of risk. I think it would have been a much better wake-up call for everybody had things followed their course."

Meeting the characters in "House of Cards," it's not easy to conceive of people less deserving of federal assistance. In 1997, Bear Stearns helped pioneer the subprime mortgage-backed security by serving as co-underwriter on a $385 million offering.

By the mid-2000s, Bear was the leading issuer of such securities and a leader in collateralized debt obligations, which offered even less transparency to investors. Bear was a vertically integrated manufacturer of mortgage chaos, making individual loans to home buyers, servicing the loans, bundling them into pools for investors, marketing the securities and also borrowing huge sums to finance internal hedge funds that held onto these dodgy assets.

Mr. Cohan describes the succession of government policies that encouraged Bear and others to invest so heavily in mortgage finance, from the Fed's easy money to Clinton-era changes to the Community Reinvestment Act requiring more loans to low-income borrowers. But the firm itself deserves the lion's share of the blame for its own collapse. Suggestions to sell some of its risky mortgage assets, or to raise capital, or to consider merger partners were brushed aside in the years and months leading up to the debacle.

Paul Friedman, chief operating officer of Bear's fixed-income division, tells Mr. Cohan that "we did this to ourselves. . . . It's our fault for allowing it to get this far, and for not taking any steps to do anything about it."

Apparently there were opportunities to take those steps until almost the moment of collapse. According to Mr. Cohan, Bear rejected a significant investment just hours before it received its Federal Reserve bailout via JP Morgan Chase. Cash was flying out the door on Thursday, March 13, 2008, as large hedge-fund customers pulled money out of Bear's prime brokerage and the firm struggled to line up the $75 billion in overnight loans it needed every day to stay in business.

That morning, a Bear Stearns managing director received an email from a colleague in Saudi Arabia saying that the Saudis were willing to make an immediate investment in the firm. The gist of the message, according to the Bear executive: "They want to give us a significant amount. We can set it up. They want to do it now. They can act quickly."

Struggling to get senior managers to focus on this potential lifeline, the banker decided to approach Bear Stearns's chief executive, Alan Schwartz, after the regularly scheduled lunch with the firm's top 50 executives.

Mr. Cohan quotes the banker: "I said, 'Alan, I just want you to know, the Saudis want to give us money.' He said, 'We don't need capital.' " That night, officials from the Fed and the SEC began arriving at Bear Stearns. SEC staff members determined that the firm's cash balance had dwindled to $2 billion from $18 billion during the day. It was clear to all that the firm would be broke the next morning, barring a massive new source of liquidity.

At 2:00 a.m. on Friday, Mr. Cohan tells us, Mr. Geithner called Donald Kohn, the vice chairman of the Federal Reserve, and told him that he "wasn't confident that the fallout from the bankruptcy of Bear Stearns could be contained."

Taxpayers reading this fascinating tale may wonder whether the fallout from the government's intervention can be contained and, if so, at what cost.

House of Cards
by William D. Cohan
Doubleday, 468 pages, $27.95

Source.

Although its largest rival has bitten the dust, Bed Bath & Beyond could still short-sheet investors. The stock is down 50% over the last two years as the recession and a busted housing market dragged down profits. But it could easily fall further in the months ahead.

To be sure, Bed Bath is a well-run retailer, with plenty of fans on Wall Street who expect the housewares emporiums to inherit many customers from the now bankrupt Linens 'n Things, which finished closing stores last month. It's clear that analysts have overestimated how much business Bed Bath will actually gain from its fallen competitor. And that could dash widely held hopes that profits will start growing again later this year.

"This is a great company, but not a great stock," says Christopher Horvers, an analyst with J.P. Morgan Securities. "The valuation is expensive. The Street's earnings for the coming year are still too high, and they expect too much from the demise of Linens 'n Things."

His is not the only cautious voice on the stock. Goldman Sachs cut its rating to Neutral last month. Piper Jaffray expects the share price to drop 25% over the next 12 months to $16. As of Feb. 13, the short position exceeded 31 million shares, or 12.6% of Bed Bath's float.

"I wouldn't buy right now," says David Abella, a portfolio manager for Rochdale Investment Management. "Retail sales could get worse. Meanwhile, consumers are trading down, and Bed Bath is not where shoppers go for deep bargains."

Founded in 1971, Bed Bath is the nation's biggest merchant focused on home furnishings, a fragmented $124 billion retail market that includes Pier 1 Imports, discount giant Wal-Mart Stores, home-improvement emporium Home Depot and department stores like Macy's and J.C. Penney.

Bed Bath also runs the Christmas Tree Shops chain of stores, the Harmon and Harmon Face Values beauty-supply stores and a string of baby stores. The company gets 90% of its revenues from its more than 900 flagship Bed, Beth & Beyond stores and controls 6% of home-furnishing sales, according to J.P. Morgan's Horvers.

For years, it was a success story. New stores, enviable margins and a strong housing market fueled double-digit profit growth. Bed Bath lured shoppers with coupons offering up to 20% off a single item in stores. And customers often spent more than they initially planned, says George Van Horn, a senior analyst with IBISworld, a market research firm.

Cash-strapped consumers are now focused on buying basics and hunting for bargains. That's been a big boon for Wal-Mart and other discounters. But Bed Bath has never cultivated an image as a place to find bargains, says Howard Davidowitz, chairman of Davidowitz & Associates, a retail consulting and investment banking firm.

Department stores, meanwhile, are discounting like mad. And liquidation sales at Linens 'n Things last year lured lots of shoppers away from Bed Bath. As a result, same-stores sales are expected to fall around 2.5% during the fiscal year scheduled to end on Feb. 28 (this Saturday). And profits should fall for the second consecutive year to $1.53 a share.

Bed Bath has assured investors that it will gain market share now that Linens 'n Things has closed its doors. The Street expects profits to stay almost flat in the coming fiscal year, which ends in February 2010, with quarterly earnings finally starting to climb again later this year.

Neely Tamminga, an analyst at Piper Jaffray, says those estimates imply that Bed Bath will gain 46% of the $1.7 billion in sales that belonged to Linens 'n Things. That accounts for about $786 million, out of the $7.4 billion in revenues Bed Bath is expected to generate in the next 12 months.

However, if shoppers instead flock to discounters, Bed Bath stands to gain just 10% of Linens 'n Things' sales, or $170 million, Tamminga says. If that's true, Bed Bath's same-store sales could fall 1.6% in the coming year and operating profits could fall to $1.42 a share, she adds.

Either way, the stock is no bargain. Based on consensus earnings estimates for the next four quarters, the stock trades at 13.7 times forward profits, a 13% premium to the broader stock market. And based on Tamminga's estimates, the stock trades at 15 times forward earnings.

Bed Bath's prospects could be stronger than we think. Thanks to conservative management, the company has no long-term debt and a pile of cash. It's still opening new stores, though at a slower pace, and controlling costs.

The stores are popular. And bulls say that if the economy and housing market turns around, the company remains well positioned to cash in when shoppers loosen their purse strings.

Those are very big ifs. Investors could end up getting soaked. So to avoid buyer's remorse, leave Bed Bath for another time.

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General Electric hasn't kept pace with the plunging banks. But its shares have still dived more than 42% this year on doubts over its finance subsidiary. A trawl through GE Capital's balance sheet shows why investors should remain wary.

On the surface, the unit looks enviably positioned. It retains a triple-A rating, has no meaningful exposure to U.S. residential mortgages and enjoys one of the highest tangible-common-equity ratios in the financial sector -- a meaty 4.9% at the end of last year, against, for instance, J.P. Morgan Chase's 3.8%.

Dig a little deeper, however, and the uncertainty mounts. One reason: GE Capital has large concentrations of other real-estate assets, commercial exposures and foreign residential mortgages, that could lead to large losses in a deep recession. Another: Despite some changes, GE Capital still looks like a classic wholesale finance company, relying on market funding. This is a drawback when credit markets are skittish and large amounts of long-term debt, $133 billion this year and next -- are coming due.

On the asset side, a big source of jitters is GE Capital's $36.7 billion in commercial-real-estate investments. These are equity-type investments, the first to absorb any losses. As a result, most firms are currently applying big haircuts to this type of asset.

In its fourth quarter, Goldman Sachs Group, using mark-to-market accounting, took a 25% write-down, totaling $961 million, on its commercial-real-estate equity investments. GE Capital, which values its holdings using estimates of future cash flows rather than marking them to market, took $300 million of impairments last year, equivalent to less than 1% of the equity investments.

That is even more surprising given that GE has booked sizable unrealized losses on its book of securities backed by commercial real estate, which the company does mark to market. These bonds, senior to equity in the investments they fund, are written down by 23%. Admittedly, they are in different deals from GE's equity investments. But the huge divergence in the accounting hits understandably rings alarm bells with investors.

In GE's defense: Marks on the debt securities may be exaggerated by extreme stress in the market for such securities. Second, unlike some other investors, GE operates most of the properties in which it has equity-like investments, arguably giving them a higher value.

Also, in the vast majority of the equity deals, GE itself provided the debt funding, not third-party investors, meaning there could be less immediate refinancing risk to the individual deals. Finally, GE does flag the risks by disclosing in its annual report that its real-estate equity investments' "estimated value" is $4 billion less than the value on the balance sheet.

But since GE was a big commercial-real-estate equity investor in the frothy years, it added $12.6 billion of these assets in 2007 alone, investors should watch this portfolio very closely.

Attention should also be paid to GE Capital's $59.6 billion of overseas residential mortgages, many of which are based in troubled markets like the U.K. Some $3.3 billion of these mortgages are more than 90-days past-due, but GE Capital's loan-loss reserve is equivalent to only 11.5% of the past-due total, up only slightly from 10% at the end of 2007.

Cross-bank comparisons should be treated warily because of differences in loan-portfolios. But, for example, Bank of America's reserve for residential mortgages in the U.S. is far higher at just under 20% of nonperforming residential assets.

The need to clear up uncertainties about future credit losses at GE Capital is key, not just for stock investors and creditors, but also for the ratings firms. Going by GE's credit-default-swap spreads, the market expects the triple-A rating to go. How much lower depends on how many losses are lurking in the balance sheet -- and the amount credit markets will charge to keep supporting wholesale-funded businesses.

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Nonprofits already face the prospect of fewer donations amid turmoil at Wall Street firms and other companies. Now, they could face another donation deterrent: Washington's plans to curb executive pay. Americans gave more than $300 billion to charity in 2007, according to the most recent figures. Some of the largest gifts from that pot have come from wealthy Wall Street bosses.

Now nonprofit leaders, especially in and around New York's financial hub, are worried these big donors could feel squeezed further amid government edicts to limit pay packages.

The economic stimulus package President Barack Obama is expected to sign Tuesday includes a measure barring any firms that have received federal bailout money from paying top earners bonuses exceeding more than one-third of their total yearly compensation.

The measure also empowers the Treasury Secretary to "claw back" previous bonuses in certain instances if they're deemed excessive. It remains unclear exactly how the rules will be implemented, raising questions about corporate America's future compensation practices.

"As long as there is uncertainty about what's going to happen with executive compensation, that could really hold a lot of people back from giving, and not just on Wall Street," says Melissa Berman, president and chief executive of Rockefeller Philanthropy Advisors.

Of course, Wall Street executives, and employees lower on the ladder, still have more resources to give than many Americans. But they, like everyone else, are feeling less wealthy these days amid the financial crisis. In some cases, they're telling charities they can't be as generous as they've been in the past. The new compensation regulations could give them another justification for scaling back giving.

Jilly Stephens, executive director of City Harvest, a New York charity that combats hunger, says giving isn't driven solely by how much people earn. But, she says, it remains her "job to be worried" about finding alternative funding sources as dependable Wall Street bonuses dry up.

Many New York-area charities depend on both big gifts from executives and smaller donations from mid-level bankers to fuel their operations. The deepening recession has already trimmed revenue for these charities just as demand for services skyrockets.

"I hope we don't vilify everybody in the financial services sector," says Lisanne Finston, the executive director of Elijah's Promise, a New Jersey soup kitchen. Ms. Finston depends in part on Wall Street bankers' bonuses to fund her operations. She says her donations for food programs, typically $400,000, fell 19% last year, while the number of meals served jumped by about 15,000, or 15%.

Wall Street's biggest players have been among the largest benefactors for food pantries, antipoverty initiatives, museums and universities. Many declined to comment on their gifts or whether they may reduce them. Recipient charities, too, often are reluctant to discuss donors for fear of upsetting benefactors.

But many big Wall Street donors funnel money through private foundations, which must document annual grants through tax forms that offer a window into their charitable habits.

Morgan Stanley Chief Executive John Mack and his wife gave more than $8.6 million to charity in 2007 through their family foundation, according to the latest tax documents. Their gifts have gone to hospitals, historic preservation and charities aiding inner-city poor.

Morgan Stanley received $10 billion in federal assistance last year after its stock-price tumbled amid broader market fears. The year before, Mr. Mack received an $800,000 salary and realized about $8 million in exercised options. He hasn't taken a bonus in the past two years. He declined to comment through a spokeswoman.

Top executives at other banks that have received aid have also given at least several hundred thousand dollars to charity annually in recent years, including Goldman Sachs Group Inc. Chief Executive Lloyd Blankfein and J.P. Morgan Chase & Co. Chief Executive James Dimon. Spokesmen for Messrs. Blankfein and Dimon didn't return messages seeking comment.

Exactly how donors will react to new rules affecting their pay remains to be seen. But the emerging political climate could make many of them hesitant to dole out cash when their compensation remains uncertain. However the rules are implemented, boardrooms -- even at companies that haven't received bailout money -- appear poised to revise pay policies to reflect new political realities.

The evolving compensation landscape isn't limited to Wall Street. General Motors Corp., the cash-strapped Detroit auto giant, will likely need more government aid to avoid bankruptcy after already receiving billions of dollars in loans.

GM Chief Executive Rick Wagoner lowered his annual salary to $1 and relinquished any bonus for 2008 and 2009 as a condition of that aid. In response to lawmakers' fury over big executive paydays, GM also cut total cash compensation for its next four senior executives by 50%.

Detroit's cultural institutions, homeless shelters and other nonprofits are already cutting back as the city's auto makers retrench and scale back giving. Pay curbs on top of the Motor City's economic pain "will certainly have an impact," on giving, says Peter Remington, president of The Remington Group, a nonprofit consulting firm in Beverly Hills, Mich.

A GM spokesman declined to comment on executives' giving plans, saying "individual charitable giving is a private matter."

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The increased demand from investors that last week carried platinum to its highest level since September 2008 could mean further gains for the metal. But industrial demand remains soft, and some industry observers say this could limit the bounce from the lows reached in October 2008.

The front-month April platinum futures hit $1,095.80 an ounce Thursday, February 12, 2009, on the New York Mercantile Exchange, their strongest level since Sept. 29, 2008. At that level, the contract was up 44% from the $761.50 low hit on Oct. 27, a day when commodities broadly tumbled. Worries about the softening economy and auto demand also pressured platinum, which is mainly used for catalytic converters.

Friday, February 13, 2009, the contract fell $16.90 to settle at $1,061 on profit-taking. It gained $56.70, or 5.6%, on the week. Analysts have linked the recent gains to a spillover of the haven buying underpinning gold, hopes that the U.S. stimulus package will lead to greater auto sales and chart-based buying after a technical breakout above the January highs.

"This rally looks like it could have some potential," said Sterling Smith, vice president with FuturesOne. "But I would be more impressed with platinum if it could continue to rally if gold stagnates."

At the moment, much of the strength appears to be flight-to-safety buying with gold and bargain hunting, rather than any heavy industrial buying, he said. J.P. Morgan analyst Michael Jansen said in a report that he is hesitant to buy into the view that auto demand is turning up significantly.

"As such, we believe that investors need to be very wary about getting on board this platinum rally," he said. "Technically the market looks like it has another $50-$80 in it yet but we would see this as a market to sell, unless gold maintains its upward momentum, allowing platinum to push higher on a relative-value basis."

On Thursday, Ferbuary 12, 2009, gold hit its highest level since July as investors continued to flock to the metal amid financial and economic uncertainty. There might be signs that the macroeconomic environment is stabilizing, Mr. Jansen said. He cited a pickup in global auto sales in January to 40.2 million units, from 39.5 million in December. Observers also cited reduced output at a time of lower prices, particularly by Anglo Platinum.

"The industrial side still looks quite weak, and that could limit the upside," said Bill O'Neill, one of the principals with Logic Advisors." But while industrial demand is weak, it may at least be bottoming out, FuturesOne's Mr. Smith said. MF Global analyst Tom Pawlicki said he looks for further gains for platinum in part because of the potential for a pickup in auto demand.

"Platinum is undervalued," he said. "Once the economy finally gets going and [the auto sector] starts building cars again, platinum could rise pretty high."

Source.

With yet another surge of Wall Street bankers buying company stock, a reminder is in order: Almost every recent foray by insiders into financials has ended in disappointment. Bank of America Corp.'s Kenneth Lewis and J.P. Morgan Chase & Co.'s James Dimon last week disclosed spending millions of dollars buying stock as their companies' shares tested lows.

According to a regulatory filing, Mr. Dimon bought 500,000 shares of J.P. Morgan stock for $11.5 million, or $22.93 a share. A J.P. Morgan executive vice president also bought 3,600 shares, a separate filing showed. Mr. Lewis, who purchased 200,000 shares of his Charlotte, N.C., bank for $1.2 million, wasn't the only Bank of America insider who bought. Regulatory filings show he was joined by seven of the bank's directors and two executives, who collectively purchased another 477,600 shares.

Thursday, a Goldman Sachs Group Inc. director purchased $1 million of the bank's shares, according to another filing. Representatives for Bank of America, J.P. Morgan and Goldman Sachs declined to comment.

Observers typically interpret large numbers of insiders buying big amounts of stock as a sign that insiders believe there is money to be made. The buying at Bank of America was so sudden and so concentrated, analyst Alex Romayev of Form4Oracle said, he wonders if it really was seen as an investment opportunity.

"I don't know if this is an investment or a statement," said Mr. Romayev, whose Somerville, Mass., firm tracks insider activity. Managers at companies in crisis know that investors and the media are scrutinizing insider transactions, Mr. Romayev said, and those managers will sometimes make "show-of-faith" purchases that have little to do with investment goals.

"On paper, I think this looks pretty good," Mr. Romayev said, but he said he is suspicious that Bank of America insiders acted in concert to allay market anxiety. In another move that suggests a certain lack of foreknowledge, John Thain, the former chief executive of Merrill Lynch & Co., was among last week's Bank of America buyers, purchasing nearly $500,000 of company shares Wednesday. The next day, he was ousted by Mr. Lewis. Source.