Corporate Headwinds (wsj)

This story in yesterdays Journal has been getting some play and if you will allow Moishe to rant for a second, it's a little annoying how public companies all jump on the bandwagon and use an event be it "sub prime" "katrina" "cold weather" "Warm weather" etc etc and use it as an excuse for bad earnings or slowing sales or whatever when the event in question is completely unrelated to the companies business. ok, Moishe is done ranting.

America's captains of industry are starting to talk like, well, sailors.

At a Goldman Sachs conference in December, G. Kennedy Thompson, chairman and chief executive officer of Wachovia Corp., informed investors that the bank and its competitors were facing "headwinds."

An audience member asked the logical question: "So, how big a headwind should we think about in '08?"

"Well, right now, it's a big headwind," Mr. Thompson replied.

As the U.S. economy slows, chief executives and chief financial officers have taken to slinging around a word more commonly heard on the decks of ships. To hear executives tell it, headwinds ...

Moishe: This is not a Good Cocktail Party Conversation Piece with Kudlow

Food stamps offer best stimulus - study
Moody's study suggests extending unemployment benefits, increasing food stamps fastest ways to stimulate economy.
WASHINGTON (CNN) -- As Congress and the White House consider a $150 billion stimulus package that includes tax rebates and tax incentives for business, a report released Tuesday suggests that other methods would do a better job of infusing money into the flagging economy and doing it fast.

The industry research firm Moody's Economy.com tracked the potential impact of each stimulus dollar, looking at tax rebates, tax incentives for business, food stamps and expanding unemployment benefits.

The report found that "some provide a lot of bang for the buck to the economy. Others ... don't," said economist Mark Zandi.

In findings echoed by other economists and studies, he said the study shows the fastest way to infuse money into the economy is through expanding the food-stamp program. For every dollar spent on that program $1.73 is generated throughout the economy, he said.

"If someone who is literally living paycheck to paycheck gets an extra dollar, it's very likely that they will spend that dollar immediately on whatever they need - groceries, to pay the telephone bill, to pay the electric bill," he said.

Link via the great site Wall Street Jackass

Another high ranking Merrill Lynch Axing - Ahmass Fakahany, co-president, Peace out

Merrill officials had no immediate comment, but Fakahany is widely regarded as one of the key architects of Merrill's strategy of ramping up balance sheet risk by holding risky bonds packed with subprime mortgages that led to its writedown of more than $14 billion.

Meanwhile, CNBC has learned that the firm is now looking to cut costs. Merrill's Brokerage Department Chief Robert McCann is conducting a massive review of the brokerage-department's costs that will likely lead to layoffs in the department, according to one person with knowledge of the matter. The layoffs, however, aren't expected to touch at least initially the firm's 16,610 brokers, but will focus on other personnel, this person said.

Great editorial piece by Andy Kessler on the state of banks

WSJ: What's Next for the Banks

If you want to know what's going to happen to the big banks and investment banks, you've got to go back to early 2003, when the seeds of destruction were planted.

It had been a year or so since a couple of trillion dollars of investor wealth had been wiped out. The Dow was 8000 and dropping, and the stocks of big institutions from Citi to Merrill Lynch to Morgan Stanley were at multiyear lows. Bank lending was down, but no one was really worried. The old "borrow short, lend long and pocket the difference" game had been around for millennia, and banks had weathered worse than this mild economic slowdown.

What was not at all clear was how investment banks were going to make money going forward. Wall Street had piles of capital and no place to go. Stock trading and large parts of bond trading had gone electronic. Decimalization of the stock market wiped out markups. IPOs were down, mergers were down and, gasp, bonuses were way down.

Stocks were out and investors wanted yield -- safe, predictable returns -- but there wasn't much profit in that. Some, especially hedge funds and international investors, insisted on even higher yields than plain old government bonds.

So Wall Street, as it always does, gave investors what they wanted -- excess yield in the form of derivatives, asset-backed, mortgage-backed, collateralized debt obligations (CDOs), basically funky amalgamations of lots of other pieces of paper. Done right, no one but you knew how to value these exotic instruments, so you could mark them up way more than a penny and generate huge fees, profits and bonuses. Win-win.

Low interest rates from the Federal Reserve and a rising housing market meant the subprime flavors of these CDOs took off like wildfire. Merrill Lynch and Bear Stearns and everyone else raced to package up these CDOs with pretty bows and sell them off as high rated goodness to those hungry for yield.

Banks loved it because they could sell off loans, generate fees and go make some more. It wasn't enough. Billion-dollar hedge funds popped up overnight to buy these things, with leverage on leverage to generate even higher returns. Savings & Loan banks were long gone, so by 2006, armies of mortgage brokers, many just online, answered the call to feed the beast with loans.

Until it went on for too long. By 2006, it was a one-way trade. Banks, especially Citigroup and State Street, couldn't resist the sweet siren's call, especially with "borrow short, lend long" in their DNA. Off balance sheet, they set up conduits, so-called SIVs, to use leverage and buy up lots of these subprime CDOs -- $100 billion worth for Citi -- breaking Wall Street's unwritten "sausage" rule that you sell this stuff to clients, but never own it yourself.

Wall Street's unwritten "sausage" rule is that you sell this stuff to clients, but never own it yourself.

SIVs were mostly invisible yet huge money makers, which makes me question how much money the plain old bank was making. Not much, it turns out. And in the end, neither did these SIVs. Others like Merrill Lynch and UBS got caught with inventory of these CDOs, having packaged them but not able to sell them off fast enough. Goldman Sachs smelled spoiled meat and shorted enough of the market to minimize the hit to their capital structure.

When the inevitable blowup came, most holding the toxic sausage required new capital from a government bailout to survive. No not from the Fed, but from the governments of China, Singapore, Abu Dhabi, Kuwait and New Jersey. Without their cash, Citi and Merrill stocks would halve again.

But that's old news. What about going forward? First, no one, and I mean no one, is going to buy a package of loans without knowing what each and every one of them is, what the risk of default is, etc. Rating agencies can no longer be trusted. The good news is that the same computer technology used to create CDOs can easily be extended to offer this needed transparency, loan by loan. But the bad news for investment banks: The packaging game just won't be as profitable.

So who has the strong hand? As always, it's a capital game, whoever accumulates the most will be best positioned for what's next.

Banks? Sure, they're slow and steady, but lending is dull, not that profitable, as we have seen, so growth is limited. While Citigroup fiddles, JP Morgan is the model, as one of the few big banks to not load up on CDOs to enhance earnings. Instead, it has been quietly accumulating billions in hedge fund assets.

Investment banks? Balance sheets are now mostly cleaned up, but outside of Goldman Sachs, management teams are under scrutiny to see who can come up with the right business model away from CDOs. It won't be until that model becomes clear that their stocks can go up enough to raise serious capital to compete. Not all will.

How about hedge funds or private equity? Lots of money will be made buying distressed debt at the bottom of this cycle, but most of it by firms that are small partnerships on a relative basis, and I don't see them gearing up huge sales forces to become big players. But that can be fixed.

My view is that firms that successfully combine banking and investment banking will walk away with the prize, by being able to offer a full range of services to clients -- short-term loans against assets or receivables as well as bonds and equity for long-term projects, the kind of underwriting and trading that requires large amounts of capital. The inevitable consolidation that should have occurred after Glass-Steagall (the 1933 law that separated banks and investment banks) was repealed in 1999 had been on hold while everyone chased easy profits. But now the shakeout is here.

Goldman Sachs will own a bank, maybe even Citigroup (Goldman's $85 billion market capitalization might be able to swallow Citi's $125 billion value) and strip it down to what it needs. JP Morgan should reunite the House of Morgan by merging with Morgan Stanley, and become a full-service powerhouse. But JP Morgan could buy Merrill or Lehman or Bear Stearns instead. Bank of America will merge with who's left. But don't count out others who have done well with capital. Fortress Investment Group, despite a rocky IPO a year ago, has a powerful real estate arm that could own loan origination and servicing and enough assets to buy its way into the banking or investment banking business. Same for the Blackstone Group.

Capital flows a lot more fluidly around the globe these days. Expect consolidation to start now. The real winners on Wall Street will be the ones with huge stockpiles of capital who listen to the market, and who are fleet of foot enough to smell out and deploy their capital creating instruments that global growth companies need, rather than false profits from eating their own sausage.

The Big Five?: Goldman CitiSachs, House of Morgan, Bear of America, Fortress Lehman Lynch and Blackstone Suisse.