Wednesday, April 28, 2010

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

Wednesday, April 21, 2010

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

Wednesday, April 14, 2010

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

Sunday, April 4, 2010

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