The talk of a bailout has finally been realized (as if there was ever a doubt). On Monday, the Federal Government will explicitly guarantee the debt of Freddie Mac and Fannie Mae by lending it money and by buying billions of dollars in mortgage debt held by the two giants. Treasury Secretary Hank Paulson asked for Congress’ permission to take the unprecedented step to ensure the viability of the GSEs which have bought or financed roughly half of the country’s $12 trillion in mortgage debt.
Like you couldn’t see this coming. In fact the $300 billion homeowner rescue plan will pale in comparison to what the government will have to do to shore up the ailing mortgage giants. Now, no matter who you are, if you’re paying taxes you’re footing the bill for the greed and excess that was the housing bubble. You’re welcome.
Just because it’s really bugging me, I’ll just say this once to get it off my chest: What a fucking travesty that in the world’s most supposedly free capital market this toxic government-sponsored duopoly exists. I wish I felt like I would live enough to read history books where people laughed at the absurdity.
From Bloomberg:
Treasury Secretary Henry Paulson swung the weight of the federal government behind Fannie Mae and Freddie Mac, the beleaguered companies that buy or finance almost half of the $12 trillion of U.S. mortgages.
Paulson, speaking on the steps of the Treasury facing the White House, asked Congress for authority to buy unlimited stakes in and lend to the companies, aiming to stem a collapse in confidence. The Federal Reserve separately authorized the firms to borrow directly from the central bank.
The announcement followed crisis talks between the firms, government officials, lawmakers and regulators, after Fannie Mae and Freddie Mac lost about half their value last week. Paulson and Fed Chairman Ben S. Bernanke are trying to prevent a collapse in the companies that would exacerbate the worst housing recession in 25 years and deepen the economic slowdown.
Paulson’s proposal, which the Treasury anticipates will be incorporated into an existing congressional bill and approved this week, signals a shift toward an explicit guarantee of Fannie Mae and Freddie Mac debt. The two shareholder-owned companies are government-sponsored enterprises, giving investors the indication of an implicit federal backing.
And some more from the New York Times:
As part of the plan, the administration will also call on Congress to raise the national debt limit, people briefed on the plan said. And it will ask Congress to give the Federal Reserve a role in setting the rules for how big a capital cushion each company must hold. Giving the Fed a consulting role in the companies’ oversight is seen as yet another way to reassure nervous markets.
Treasury officials declined to comment on the plan but indicated that a statement would be issued later on Sunday. It was described by lawmakers and officials at other agencies that have been briefed on it.
They said that the Bush administration was hoping that Congress would adopt it quickly as part of a measure intended to help the housing markets and overhaul the regulation of Fannie and Freddie. Last Friday, the Senate approved the measure, and the House is hoping to take it up this week.
Announcement of the plan on Sunday evening was intended to send a sharp signal to both stock markets and debt markets that the government was standing behind the beleaguered companies.
Google, Inc. (NASDAQ: GOOG) may be a company based on reality after all. In addition to the company’s search market share and increasing brand awareness worldwide, its lavish employee perks and working conditions have earned it an enviable position among IT and software workers. Free bus rides to work, free food and drink and other nice perks are part of working for the internet giant. Just don’t ask about its daycare facilities.
Google announced last week that it would be raising the prices of its infant care services by almost 75%. This after bringing in employees to tell them of the change in advance and gauge their collective feedback. Although many parents were left in awe (as in, how could Google do this!), the company decided to implement the plan gradually over five quarters and reduce the price increase. The annual daycare costs for two kids would have risen from $33,000 per year to $57,000 per year (it’s not clear how much the increase was reduced). Is Google doing evil here? Nope — just joining reality.
The comedown from employees as Google starts implementing policies that most (if not all) public companies already have will be harsh. If you are a Google shareholder, do you like all that dough being used to pamper Google employees with all those freebies? Does it make the company more competitive and allows workers to be as productive as possible? In many ways, it does. Google doesn’t do things like this out of the goodness of its heart. It’s all about wringing the best work from each worker. If those perks start getting stripped away, Google may join the ranks of “normal” public companies. Its workers don’t want that.
After having monitored blogs and news of the iPhone 3G launch all morning and afternoon, the general feeling I get is that the launch of the iPhone 3G could be considered nothing less than a disaster. Blame Apple Inc. (NASDAQ: AAPL), blame AT&T Inc. (NYSE: T) — but if you were brave enough to “have to have” an iPhone 3G on launch day, you may have a need for a stress ball by now.
It appears that Apple’s integration with AT&T’s activation system didn’t fare so well on this day. Both companies should have known, like June of last year, that it would be a super-busy day for the iPhone universe. In what seems like a commonplace event on large product launches, activation servers crashed, software updates failed (even for the older iPhone owners who wanted to updated to the newer software) and scores of customers were left without working iPhones as the in-store activation process was completely fubar’ed by both companies.
For Apple to have such an awesome piece of hardware and software in the iPhone 3G, working with an aging and piecemeal telecom carrier was unfortunately a necessity. After all, Apple does not own a national wireless network with high-speed data capability. But the customer process failed miserably today — something that zealous and exuberant iPhone 3G buyers should not forget. Did you really, really need that iPhone 3G today? If your answer is yes (yeah, right), you should have expected a nightmare. For many of you, that was delivered rather nicely. Hope you kept up with your pulse, eh?
The Office of Federal Housing Enterprise Oversight (OFHEO) has issued a statement today on the stability and solvency of the GSE’s in response to the unprecedented run on their stock prices as increasing turmoil in the housing market drives loan losses skyward.
From the OFHEO:
For Immediate Release
July 10, 2008
STATEMENT OF OFHEO DIRECTOR
JAMES B. LOCKHART
“OFHEO has been monitoring and continues to monitor closely Fannie Mae, Freddie Mac and the mortgage and financial markets. As one would expect, we are carefully watching the Enterprises’ credit and capital positions.
As I have said before, they are adequately capitalized, holding capital well in excess of the OFHEO-directed requirement, which exceeds the statutory minimums. They have large liquidity portfolios, access to the debt market and over $1.5 trillion in unpledged assets.
At the time of our March 2008 capital agreement with the Enterprises I said: `OFHEO will remain vigilant in supervising the safe and sound operations of these companies, and will act quickly to address any deficiencies that may arise. Furthermore, we recognize the need to ensure that their capital levels are strong, protecting them from unforeseen risks as the market recovers.’
Including the $7.4 billion Fannie Mae raised in May in accordance with our March agreement, the Enterprises have raised over $20 billion in capital. They are using it to continue to grow and to play a critical role in the mortgage markets, which we expect them to continue to do. To support their mission, Freddie Mac is committed to raising an additional $5.5 billion, which they will do given appropriate market conditions. At a very difficult time in the market, the Enterprises have the flexibility and sound operations needed to support their mission.”
And as regular commenter Don asked - why would the government try to pass a bill to put more risk on these institutions? A great question indeed unless you simply realize that the $300 billion bail out bill is really just a red herring to the massive trillion-dollar bail out that is in the works to save Fannie and Freddie.
T. Boone Pickens has been in the national media quite a bit lately. The Texas oil billionaire, who now commands a hedge fund in Dallas, has given hundreds of millions to his alma mater — Oklahoma State — and now is spending nearly $58 million of his own money to convince the U.S. to get off foreign oil and into alternative energy. Pickens is 80 now — he is obviously not doing this for the money. Should we listen to him? Based on his outstanding business history, I’d say yes.
The oilman with decades of experience in energy futures and hedging predictions seems like he has turned his back on oil — the precious juice that made him his fortune. But when someone with the successful past of Pickens says that the U.S. can’t drill its way to success with more oil, we should probably listen.
Pickens began lighting up the media this week with advertisements on radio, in newspapers, on television and even a Facebook page and a complete YouTube channel. Picken’s Plan is to reduce American dependence on foreign oil by one-third over the next ten years — and he’s fronting a good start off with his own money, which he’s pouring mostly into wind energy. In fact, Pickens announced the world’s largest wind farm last year, which he plans to build in Texas. Pickens, never one to not speak his mind, said “This whole thing, all it can do is get worse … the only thing that could turn it around is global recession.”
From the people I talk to who buy online advertising it looks like Google (NASDAQ: GOOG)’s YouTube has been a bust: the video ads are expensive and the results are iffy. Such things are the opposite of what Google is best known for (isn’t it about brutally scientific performance?)
Well, in today’s Wall Street Journal, there’s an excellent piece on the topic. Even though the video site may attract one billion views per day, the monetization has been lackluster — it looks like annual revenues will be about $200 million or so.
There are a variety of reasons for all this. First of all, major advertisers want to protect their brands from being associated with racy content. Also, Google must deal with a copyright infringement suit from Viacom (NYSE: VIA) and so it is focusing on approved content, which in turn limits the number of advertising opportunities.
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In addition, the video revolution is in the early stages. Remember, when internet ads started to emerge during the 1990s, the main buyers were upstart — not traditional — companies.
Then, there are also technical and execution problems. Google’s ad system is quirky and somewhat of a hodgepodge — not surprising given Google’s quick growth and entrance into many new markets.
Still, despite all the problems, it’s critical that Google demonstrates success with YouTube. By and large, the company has had a tough time going beyond its highly successful text-based advertising platform. However, in order to continue the growth, Google needs to show its prowess in other critical areas, such as radio, TV, display ads and … video.
Genentech Inc. (NYSE: DNA) to report Q2 earnings; conference call at 4:45 pm.
Tuesday, July 15
PDUFA date for Sciele Pharma, Inc. (SCRX)’s NDA for Aquelle for the treatment of head lice by asphyxiation.
Johnson & Johnson (NYSE: JNJ) to report Q3 earnings; conference call at 8:30 am.
Senate Finance Committee: International Enforcement of Intellectual Property Rights meeting at 10:00 am with Sony Corp. (NYSE: SNE) and Pfizer Inc. (NYSE: PFE) appearing.
The foreclosures numbers for the month of June did not give us any hint of a second half recovery. The lunacy of some of the politicians out there is simply baffling. Apparently the current recession is now all in our heads:
“(CNN) Obama was responding to comments from Phil Gramm, a former Texas senator and a co-chair of McCain’s presidential campaign who told the Washington Times that America has “become a nation of whiners” and the country is in the midst of a “mental recession.”
We have sort of become a nation of whiners. You just hear this constant whining, complaining about a loss of competitiveness, America in decline,” he said. “You’ve heard of mental depression; this is a mental recession.”
Maybe Fannie Mae and Freddie Mac falling through a sinkhole is just in our imagination. The 35% housing median price decline in California is a figment of our imagination. Let us click our heels twice and we’ll be fine. This is the same genius that repealed the Glass-Steagall Act with his Gramm-Leach-Bliley Act in 1999. The problem with keeping up pretenses is pathetic and simply ingenious. How can someone say this is a mental recession? What in the world is that anyways? This is the same delusional Horatio Alger mantra of pulling yourself from your bootstraps; but that only works when you have a government looking out for you and not selling out your country to the highest bidder (by the way, you can now call the Chrysler building the Abu Dhabi building). This isn’t a free market. This is a free market for those with $5 million+ in a Wall Street investment bank. Why didn’t Phil tell Bear Stearns to suck it up and deal with their “mental recession” - instead, if you are a middle class American you need to suck up the fall in the dollar, the declining housing market, and higher fuel prices.
California has the highest foreclosure rate in the entire country. Of course we would have the highest number simply because of our size but now, we have the highest percentage with 1 out of every 192 homes being in some sort of distress. Here are the raw numbers as provided by RealtyTrac:
Notice of Defaults: 37,989
NTS: 10,053
REO: 20,624
1/every x HH in trouble: 192
Percent increase from 2007: 76.97%
Now if you want to see how these numbers look for the nation, take a look at this graph:
Even Ken Lewis, CEO of Bank of America is pessimistic on California which is rather “shocking” given they just bought uber mortgage stunt dummy Countrywide who had nearly 40 to 50 percent of their mortgage portfolio in the state. Here is what Ken Lewis had to say:
“(LA Times) But he added that Wall Street clearly didn’t believe him on those issues, given how far Bank of America’s stock has fallen in recent months. It fell $1.48 to $22.06 on Wednesday, and is down 46% year to date.
As for the housing market, Lewis said Bank of America’s latest forecast called for a further 15% decline in home prices nationwide, with the decline going into at least the first quarter of next year.
In the case of California, Florida and other markets that had the biggest booms, a further 20% decline is more realistic, he said.”
So you just bought a lender with nearly half their portfolio in the state you are predicting to go down by an additional 20%? Smart move. No wonder why Bank of America stock is being punished:
You need to remember that much of that REO count isn’t in the MLS. For some reason it seems like lenders are artificially keeping these things off their books to make their 1st half earnings look stronger. From a few sources and agents I have heard that lenders are simply not putting some listings into the MLS. Let us look at the current Southern California market:
Current Inventory: 140,867
Distressed MLS Number: 21,286 (15%)
May 2008 Sales: 16,917
But what about that 20,624 number? The massive disruption here is that inventory numbers have been steadily decreasing and those 20,000+ REOs simply do not appear in that overall MLS inventory number. What a freaking shocker. You may get a few replacing the current sales but the numbers do not jive. I would venture to say that come this fall, there is going to be this massive correction that is going to overwhelm the system.
Recently I’ve also noticed that the e-mails about people wanting to buy have gone silent. During the first 3 months of the year, every day I would get an e-mail about “is this the bottom” or “I think it is a good time to buy right now.” Those e-mails are no longer coming. Now I get more e-mails asking about wealth preservation and protecting your current assets. Want to see what people are starting to search for:
I also took a quick glance for the last 10 days and did not see coupons in any of the top 100 trends. Maybe people are feeling the pinch? I wonder if they are searching for virtual coupons to be used in their make believe recession?
The market is much worse than it appears but all the above numbers are all in your head. It turns out all we need to make this better is a shrink and two Prozac pills.
By all accounts, the educational market in China looks particularly bright — with favorable demographics and growing wealth. For example, according to the China Statistical Yearbook, there are about 686 million people between the ages five and 39. Plus, the Chinese population living in urban areas has gone from 36.2% in 2000 to 43.9% in 2006.
So, one of the beneficiaries is China Distance Education Holdings Limited (CDE), which offers a range of online education offerings and test prep courses. In fact, the company has recently filed to go public on the New York Stock Exchange (the proposed ticker is “DL”).
The primary focus of CDE is on professional categories, such as in accounting, law, healthcare, constructions and so on. The courses include a mix of media, such as audio-video lectures (streamed on the Net), online communities and proprietary content. There are currently 14 websites.
No doubt, CDE has been growing at a rapid rate. From 2005 to 2007, revenues have spiked from $3.8 million to $11.8 million. Net income was $5.4 million.
During this time frame, total course enrollments went from 233,000 to 504,000.
Actually, a few years ago, another Chinese educational provider — New Oriental Education & Technology Group (NYSE: EDU) - had a successful IPO. The market cap now stands at about $2.3 billion.
After having monitored blogs and news of the iPhone 3G launch all morning and afternoon, the general feeling I get is that the launch of the iPhone 3G could be considered nothing less than a disaster. Blame 
From the people I talk to who buy online advertising it looks like 
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By all accounts, the educational market in China looks particularly bright — with favorable demographics and growing wealth. For example, according to the China Statistical Yearbook, there are about 686 million people between the ages five and 39. Plus, the Chinese population living in urban areas has gone from 36.2% in 2000 to 43.9% in 2006.
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