Will History Be Kind to Wall Street?

In hindsight, will this period in history become known as “the decade of greed”? It will likely be known as the decade when corporate America and Wall St demonstrated the worst of capitalism. We still have scar tissue from the downfall of corporate giants like Enron - being the first of the titans to implode in 2001, followed by WorldCom in 2002. There were countless others to follow suit. In fact, there were over 430 securities fraud cases in 2000 and 500 such cases in 2002. Just when the ills of capitalism was beginning to fade from the public psyche, the financial crisis ripped through the economy like a tornado. Bear Stearns’ near collapse, and the Lehman Brothers meltdown were monumental events that represented a serious underlying problem in the system. We all know what eventually transpired, amounting to historic losses, a disastrous housing market and a broken economy. Although Wall Street fraud cases dropped 87 percent by 2008, the cloud of distrust remains thick. Quite frankly, a drastic drop in securities fraud cases may simply mean reduced effort to investigate financial firms, as in the case with ponzi King, Bernie Madoff and Allen Sanford. Public perception is unfavorable to say the least. Numerous ponzi schemes have come out of the woodwork since Madoff, only to further taint the image of the financial industry.
The fall out of deregulation and securities fraud, sparked a call for Wall Street reform and tougher regulations from the White House and Capital Hill. The trouble is, the members of the sub-committee responsible for writing new legislation for Wall Street don’t seem to have strong enough knowledge of the inner workings of sales and trading. This was painfully apparent as I watched the senators grill Goldman’s CEO, Lloyd Blankfein. Anyone working as a trader, analyst, fund manager, or even sales clerk knows that detailed information and credit ratings for securities are fully disclosed in the official statements, but this point seems to have escaped the senators interogating the Goldman CEO.

There’s a negative perception of Wall Street and an overall feeling of distrust on Main Street. This is certainly justified, given a decade of seemingly endless instances of fraud and deception. I can only imagine how this period will be perceived in the history books in years to come. Hopefully, the national and global lessons derived from the past 10 years will serve to keep us from repeating our mistakes. With the swift actions of the White House and the Treasury Secretary, the Country managed to avert the worst case scenario - and we are actually starting to see an economic turnaround. We may not be so lucky the next time around.

For details on the Goldman Sachs probe click Here

K. Reilly
Cohn-Reilly Report

Goldman On Trial

The Securities and Exchange Commission filed a civil suit against Goldman Sachs accusing Goldman of “defrauding investors by misstating and omitting key facts" about a financial product based on subprime mortgage-backed securities. As everyone knows by now, this type of security was a major contributor to the financial crisis of 2008.

The charges are believed to be the first brought against a Wall Street firm for speculating on the collapse of the housing market, which is still struggling to emerge from one of the steepest declines in history. The SEC is accusing Goldman of failing to tell investors that a major hedge fund, Paulson & Co, had helped put together the controversial financial product known as collateralized debt obligation (CDO), and was at the same time betting against it.The transaction occurred in 2007. CDO's are sophisticated financial tools that repackage loans into a product that can be sold on the secondary market. They are called mortgage-backed securities if the loans are mortgages. If the mortgages are made to those with a less than prime credit history, they are called subprime mortgages.

Goldman claimed it lost 90 Million dollars for its own investment in the security and said it would "vigorously contest them (the SEC) and defend the firm and its reputation." The lawsuit also named Fabrice Tourre, then a vice-president at Goldman who allegedly knew of Paulson & Co.'s undisclosed short interest and role in the collateral selection process, according to the SEC. He was said to be the creator and salesman of the product, which caused investors to lose about one billion dollars. Analysts said a long courtroom battle could now be expected.

Goldman is also facing a potential backlash in Europe; Britain's Prime Minister Gordon Brown called for authorities there to investigate and accuse the investment bank of "moral bankruptcy." In Germany, the Welt am Sonntag newspaper quoted Chancellor Angela Merkel's spokesman, UIrich Wilhelm, as saying that German regulator BaFin will ask the U.S. Securities and Exchange Commission for detailed information.

Although Goldman reported strong earnings this week, nearly double from the same period a year ago, investors focused on the charges, and sold off the stock by two percent, with a decline of $13 billion over a three day period.

Goldman’s gain from the alleged fraud was $15 Million - not a huge figure for this financial giant. However, SEC fines could be $70 Million plus $1.20 for each share, which could bring the total penalty to near $700 Million, a significant dent into Goldman’s capital. Furthermore, many large institutions, as we know, were involved with transactions of this type, and this could just be the tip of the iceberg.

C. Cohn
Cohn-Reilly Report

Bernanke Goes to Washington

The DOW surpassed 11,000, for the first time since June of 2001. If nothing else, the benchmark boosts investor sentiment. So what does this mean? The market is soaring, and up more than 60% since March of 2009. That is a remarkable showing of market strength. We may well see the DOW vacillate below 11,000 and flirt with the benchmark a while before we can expect to settle in. It is important to note that the market is merely 6 percent below the all time high set in 2000, before the DotCom bubble burst.

According to recent polls, most Americans still believe the economy is in worse shape than a year ago. The financial markets seem to tell a different story. On the surface, the market milestone is an indication that the recession will soon be referred to in past tense. This theory could be further supported by consumers spending surge in the past 5 months. Not so fast….. there are too many other facets of the economy to be considered before we falsely assert “Mission accomplished!”. Let this be a glimpse of how complex interpreting the status of our economy can be. Perhaps we can better appreciate the Chairman's dilemma. When the economy is in better shape, economists, traders and analysts are pretty good as reading the tea leaves and advising on where the trend is heading. The events of the last 24 months have been pretty drastic, yeilding an unusual set of circumstance. The turn of events has has left scores of experts scratching their heads as to what happened, how it happened, and how to fix it.

The Federal Reserve Chairman will go to Capital Hill on Wednesday to give his perspective on the state of the economy. It’s a “good news, bad news” message he’s expected to deliver. Yes, the economy is recovering, but No, it won’t be completely turned around anytime soon. Bernanke will warn Capital Hill that the economy will continue to recover at a sluggish pace.

Therefore, in spite of the DOW industrial average closing above 11,000, and consumer spending increasing for 5 straight months, the lagging economic factors (housing values, unemployment, tight credit)will unfortunately impede the process. The 3rd quarter of 2009 was the turning point for the economy, following four straight quarters of grave losses. In contrast, the 1st quarter of this year showed promise, as job creation for the month of March tipped the scale at 162,000.

Bernanke faces the daunting, but delicate task of ensuring that the economy stays on track amid fading stimulus programs. So, my fellow Americans, there will be no celebrating for quite some time, since unemployment is still regretably 9.7 percent nationwide. According to economists, unemployment is expected to remain high for another 3-4 years before we see 6 percent or less. So why is the market seemingly on fire. Is this a bubble that will correct itself in the months to come – or perhaps later? It just doesn’t add up from where I'm sitting. The market is pumped up, and effectively doing its job to build investor confidence, and sending the global message that the U.S. is "Back". Nevertheless, I somehow feel the stock market is growing too much faster than the economy.

Unwavering in his perspective, the Federal Reserve Chairman‘s concerns are the high unemployment, weak housing values, stagnant wages, tight credit, and the second wind of foreclosures. This is an election year, thus the state of the economy will likely be the focus of many campaigns - you can just imagine how the Republicans will spin the slow churning recovery.


K. Reilly
Cohn-Reilly Report

Will Verzion Really Get the iPhone?

This week we saw the Wall Street Journal claiming that Verizon will get Apple’s iPhone sometime this year, regardless of the current exclusivity agreement with AT&T. The story does not name anyone as the source of this information and provides no further evidence, beyond the nameless people. This is not a new rumor, having surfaced since 2008 and continuing many times in 2009.

The CEO of Verizon stated last spring that Apple would not likely want to bring the iPhone to the company until its 4G network was in place, which is still relatively early in development. The carrier said it doesn't expect to reach even a 66-percent coverage level in America until sometime in 2012. An updated WSJ article suggests Apple “changed its mind as it realized Verizon’s upgrade would take longer than expected”. Apple’s exclusivity agreement with AT&T has long been shrouded in mystery. Some guess that the deal will expire sometime in 2010, but there has never been confirmation. Many analysts believe that the odds of this happening are low, especially with the launch of the iPad likely to extend the two company’s exclusivity pact.

There are other factors that may burst Verizon’s bubble. Although AT&T has been the exclusive carrier for over 2 ½ years, the iPhone has not done much for its stock price. Even if Verizon did get it, the company would not enjoy the monopoly status AT&T has used to build a significant lead over Verizon in U.S. smartphone market share. A research note from Morgan Keegan (a regional full-service investment banking, securities brokerage and wealth and asset management company) stated that Apple could choose to partner with Sprint, China Telecom and SK Telecom, instead of Verizon. Each one of them makes smart phones that use the Qualcomm CDMA chip that Apple will be using for the next iPhones.

Financially, if Verizon does partner with Apple, it will have to invest heavily in a new major capital project to build out its 4G network, even as it is completing its $23 Billion rollout of FIOS. As of now, the company would not fully reap the benefits of an iPhone deal, because it only owns 55% of Verizon Wireless. Vodaphone owns the rest, and it is unclear what will happen to that partnership in the long run.

Customers seem elated at the prospect of jumping on board with Verizon, because of the service complaints launched at AT&T. However, as I stated in a prior article, no one could have anticipated the load that the iPhone brought to existing network technology and Verizon or anyone else could not have done any better.

C. Cohn
The Cohn-Reilly Report

Sources: PC world, Barrons, The Wall Street Journal

Housing Market: Finding its Way Back (Part 2)

Although the housing market is lagging behind the economy, there are particular states with several markets that are lagging behind the national housing recovery ; i.e., Florida, Las Vegas, California, Michigan, Arizona, Illinois, New Jersey . The first quarter of 2010 is looking more glum than experts anticipated. Homes which Banks have started foreclosure or repossessed is up 2.2% year over year. That number increases 5 times that rate in some of the aforementioned markets. Keep in mind that the government programs to save home owners from the dreaded foreclosure were targeting low-income home owners, which left the middle class home owner hanging with little or no assistance. According to the First American Core Logic, (data firm that tracks 97% of U.S. Mortgage Transactions) there are 5 million mortgages that are delinquent, and 36% of them are over 180 day late. Further 1 out of 14 homes meet the criteria for foreclosure. That marks a fairly steep increase from 1 in 22 homes during the same period last year. We are facing the second wave of foreclosures, and appear to be in the eye of the storm. Lastest numbers out last week indicate that there are 11 million home owners who currently owe more on their home than they are worth. America, we should prepare ourselves for an even longer road to recovery where the housing housing is concernec.

Help is on the way. This past Friday, the federal government announced that they were adding a new series of programs to assist struggling home owners who have run out of options. David Stevens, commissioner of the Federal Housing Administration stated “We’re walking that delicate balance to make sure these solutions are sustainable and not temporary,” speaking of the new efforts the FHA is taking to get the housing market back on its feet, while helping homeowners stay in their homes. The programs are extensive, but there is a vital program that addresses the upside-down mortgage issue facing millions of Americans. With this Program. homes will we refinanced at 97% of the home actual values, which will significantly lower mortgage payments for homeowners. Will will also mean forgiveness of debt, which in essence homeowners bailout. Who says the government only thinks about saving the large corporations?
F.H.A. will likely use the $14 billion pay for mortgage insurance and cover a large portion of the write downs, so that lenders are not carrying the loss. There quite a few new programs on tap to help numb the pain for home owners. Nevertheless, the initial reaction to the refinancing program among lenders is less than enthusiastic. The F.H.A. may have to sweetin' the deal for lenders bolster their interest in making it work. Lets face it, if the lenders are not on board, it's just hot air. As the general economy gradually bounces back, the housing industry will need a lot more time to find its way back. see Part 1


K. Reilly
Cohn-Reilly Report

Greek Crisis Update

The latest on Greece is the country may leave the euro zone and adopt a new currency -- a Greek euro - something of a cross between a drachma and a euro to be used only internally. Some humorous economists have jokingly given the new money a nickname: the "Gyro."

A bailout from the European Union or its partner countries is growing increasingly unlikely. German Chancellor Angela Merkel just stopped all possibilities of future discussions of this topic at the upcoming EU Summit. While the International Monetary Fund is ready to help, it is unlikely the EU would allow its aid, and stigma, to affect the other Euro nations. As a member of a currency union, Greece is "stuck in a eurozone straightjacket," writes economist Desmond Lachman of the American Enterprise Institute. Its options to dispose of its debt are limited: a default is not politically viable, a restructuring is unworkable, and currency devaluation to make the mess go away -- a tactic Argentina used in 2001 -- is impossible. To remain in the EU, Greece must accept its rules in good times, and in bad. If Greece thinks it's trapped in a bad marriage, it could choose to leave the eurozone, but that would be a shocking development, one that Prime Minister George Papandreou insists is not on the table.

As the crisis deepens, Greece's "leaving the Euro area, though still a low probability scenario, can no longer be ruled out," says Uri Dadush, the director of Carnegie International Economics Program. "It's a painful route, but a lot less painful than others." Greeks are starting to wonder what a euro-less future might look like. One possible roadmap: copying California's 2009 debt solution of issuing warrants later redeemable for dollars. The proposal by London School of Economics' Charles Goodhart and Oxford Said Business School's Dimitrios Tsomocos, would introduce a new way to pay debts inside Greece. The same may hold true for the other countries in crisis such as Spain, Portugal, and possibly Italy while leaving the euro in place for international transactions. Interestingly, along with Greece, these countries combined are known appropriately as P.I.G.S. in certain circles.

Public unrest in Greece over the austerity measures is increasing in intensity: “They’ve ruined us, these measures,” complained Thanassis Apostolakis, a mover, referring to the government’s austerity plan. “Even these are getting expensive,” Mr. Apostolakis said, tossing a half-smoked cigarette — now subject to higher tobacco taxes — in the gutter next to his truck.
There is no question that Greece is in for several years of slumping incomes, slower growth and social strife as the government slashes spending to reduce its huge budget deficit. Anastassios Haros, who owns a women’s clothing store in Athens, said his sales had fallen by about half over the past few months. “Consumers have been bombarded by messages of doom,” he said. “Even if they have some cash in their pocket they’re not going to spend it.” Alexandros Douvanas, a 38-year-old nurse — and union leader — at a public children’s hospital in Athens, said he might be forced to consider a job in the private sector if things got much worse. He is facing a wage freeze and a 12 percent cut to vacation pay, as well as higher costs of living because the value-added sales tax is going up by two percentage points, to 21 percent. “I make €1,100 a month,” he said, an amount equivalent to $1,490. “I don’t have a lot room for maneuver.”

The Greek Central Bank warned Monday that growth this year could slump 2 percent. The runaway spending that provoked Greece’s debt crisis and unsettled markets worldwide is a symptom of much deeper problems, including an uncompetitive economy, rampant tax evasion and a bloated civil service that invites corruption. However, though it is barely visible from today’s perspective, there may also be an upside to Greece’s predicament: Things are so bad that even a little reform would go a long way to stimulate economic growth — if the government can maintain public support. Greek leaders, who were slammed by the debt crisis shortly after taking office late last year, insist the country is ready for change.

C. Cohn
The Cohn-Reilly Report

Sources: CNN, The New York Times

Housing Market: Finding its Way Back

Much ink has been usurped on articles, reports and analysis about the housing market over the past 18 months. Like many other industry speculators, I’m inclined to believe the worst is behind us with respect to the economy. As far as the housing market is concerned, an industry come back is much more complex. Why….simply because we have to consider so many factors before we can to determine where the Industry is headed - for example: home values, the credit availability, interest rates, government programs,tax incentives, and unemployment. All of these elements impact the home owners ability to pay their mortgage, or the borrower’s access to credit, and their ability to purchase a home, or keep the one they’re in.

It has been reported that over two trillion dollars in bad mortgages will never be repaid. As housing prices continued to fall, analysts speculate that recovery in the housing market may be nearly five years away. Investors are not likely to want mortgage-backed securities from Fannie Mae - particularly if their loans are risky. Therefore, days where banks blindly loaned to home buyers with low credit criteria are long gone. This is not exclusive to subprime loans. All mortgages will be difficult obtain for while.

Much like the Cash for Clunkers program, the housing program offering an $8,000 tax credit to First-Time Home Buyers, was a great success. Increased housing sales in 2009, may have initially created false hope that the market was on the rise. As it turns out, 80% of FHA mortgages were First-Time Home Buyers taking advantage of the tax incentive. We can expect that once the First-Time Home Buyers program expires, home sales will fizzle. The Spring season normally renews hope in the housing market as sales and home values tend to increase during this time. Unfortunately, the market is not illustrating any signs that this trend will be realized this spring season. Part 1-of-2

- K. Reilly
Cohn-Reilly Report