Monday, November 24, 2008

Wall Street Breakfast: Must-Know News

Wall Street Breakfast: Must-Know News

by SA Editor Rachael Granby

  • Citi gets saved. The federal government agreed to rescue Citigroup (C) late Sunday night, after Friday's trading saw the beleaguered bank close at a paltry $3.77/share. Together with federal officials, Citigroup identified $306B in troubled assets. Citigroup will absorb the first $29B in losses from that portfolio, while the Federal Reserve, Treasury Department and FDIC will take on the majority of any further losses. Citigroup will also receive a $20B capital injection from the Treasury in addition to the $25B it has already received as part of the broader banking bailout. In exchange, the government will receive $7B of preferred stock with an 8% dividend, will restrict the payment of common stock dividends, and will have the right to approve or deny executive compensation packages in the company. Despite the unprecedented size of the rescue, some worry the $306B portfolio may not be enough as Citi holds over $3T in assets. (Joint statement from the Fed, FDIC and Treasury, and terms of the deal (.pdf))
  • Paulson flip-flops on TARP reserve. As recently as last week, Treasury's Henry Paulson said he wouldn't use the $410B of remaining TARP funds, preferring to save the money for unforeseen emergencies and to allow the new administration flexibility. Apparently, things have changed since then, as Paulson is now considering a more active role for his final weeks in office and may use the second half of the TARP funds to roll out new programs after all. Sources say that as market conditions deteriorate, Paulson is looking for ways to stem foreclosures and to make it easier for households to borrow money. A Treasury spokesman confirmed "we're looking at a variety of programs to support the market and we'll implement them as soon as they're ready," and said Paulson had never ruled out tapping the remaining funds. The Treasury is also considering another capital-injection program aimed at financial institutions beyond banks.
  • Obama's oh-so-big stimulus plan. President-elect Obama is crafting an aggressive economic stimulus plan that could see $500B-$700B in federal spending and tax cuts over the next two years, according to several of his senior aides. Lawrence Summers, a recent addition to Obama's economic team, indicated a stimulus of that magnitude was indeed possible, adding any stimulus will need to be "speedy, substantial, and sustained." He also warned that "we're going to need impetus for the economy for two to three years." Democrats are hoping to rush a stimulus bill through Congress after New Year's so Obama can sign the bill immediately after his January 20 inauguration. Obama is expected to release more details of his plan during a press conference later today to introduce Tim Geithner as his choice for Treasury Secretary.
  • Builders ask for billions. Automakers struck out, but that hasn't deterred home builders from trying to get government rescue money. The builders' lobby is pushing for a $250B stimulus package it calls "Fix Housing First," arguing financial markets won't recover until housing markets stabilize. The package includes tax credits for home purchases and a federal subsidy on mortgage rates. Critics say the proposal is too expensive and overemphasizes home purchases vs. loan modifications, and warn that any government intervention will have to find a way to stimulate housing demand without artificially propping up property values.
  • GM tries to shape up. Sources say troubled carmaker General Motors (GM) will negotiate a cut in its debt levels and seek new union work rules to boost its chances at a federal loan. GM will also try to delay a $7B payment to a union retiree health fund, drop additional brands and rework a deal with GMAC (GKM). The moves come as CEO Rick Wagoner prepares for a Dec. 2 deadline to show Congress how he will change operations at the company to be eligible for a possible industry rescue. Even if GM does receive government help, it will still have to significantly reduce its $43B in debt. To save money, GM is finding that no cost cutting is too trifling. Recent cost saving efforts include: shutting down escalators at 7pm, allowing office clocks to slowly stop working (to save maintenance fees), buying cheaper pencils and using cleaning towels with a lower 'cost per wipe.'
  • Beer giant plans share offering. Anheuser-Busch InBev plans to sell €6.36B ($8.05B) of stock to fund the transaction that formed the company. The sales was originally planned for last month but was postponed because of falling share prices. Anheuser-Busch InBev, now the world's largest brewer, will offer the shares at €6.45 each, 69% less than Friday's closing price of €20.60.
  • U.K. stimulus expected. The U.K. will likely announce today a cut in its sales tax and full details of an economic stimulus package. Media reports estimate the tax cuts could cost the government between £15-£20B. Prime Minister Gordon Brown refused to comment on the size of the stimulus plan, but said additional spending will be "temporary, timely and targeted" and that "to do nothing would be irresponsible." Opposition leader David Cameron criticized Brown for trying to "borrow your way out of a borrowing crisis."
  • APEC's high hopes for Doha. Leaders from 21 Pacific Rim countries warned against protectionism, and said the global financial crisis might be able to force a breakthrough on global trade talks that have been stalled for seven years. The Asia-Pacific Economic Cooperation (APEC) members met over the weekend and held out hope that the "crisis may turn into an opportunity for world leaders to resolve the Doha Round," with the World Trade Organization's talks scheduled to resume next month. Though pledging to take "all necessary economic and financial measures to resolve this crisis," the annual APEC summit failed to produce any new initiative to address the weakening global economy.

Today's Markets

  • Asia markets closed in the red. Hang Seng -1.6% to 12,458. Shanghai -3.7% to 1,897. BSE -0.1% to 8,903. Nikkei closed for a public holiday
  • In Europe at midday, markets are broadly up. London +4.9%. Paris +4.4%. Frankfurt +3.9%.
  • U.S. futures: Dow +1.8%. S&P +2.9%. Nasdaq +2.1%. Crude -8.1% to $49.62. Gold +3.4% to $818.50.

Monday's Economic Calendar

Seeking Alpha editor Eli Hoffmann contributed to this post.

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