Monday, December 15, 2008

Wall Street Breakfast: Must-Know News

Wall Street Breakfast: Must-Know News

by SA Editor Rachael Granby

  • The Mad Hatter and his tea party of losses. The true extent of Madoff's $50B Ponzi scheme grew clearer over the weekend as banks, charities and a slew of individual investors began to reveal their expected losses from the scam's fallout. Among those with heavy exposure are Banco Santander (STD) ($3.1B), HSBC (HBC) (around $1B), Royal Bank of Scotland (RBS) ($601M), Nomura Holdings (NMR) ($302M) and BNP Paribas (BNPQY.PK) (up to $472M). The far-reaching scope of Madoff's scheme raises questions about prior investigations by the SEC and whether the agency should have caught on to the scam years ago. Madoff's accounting firm is now under investigation by a New York State prosecutor, though investors facing losses can justifiably say too little, too late. Yet to be determined is how much money, if any, duped investors will get back, and whether investors who pulled out their funds in recent years will have to return some of their profits.
  • Auto bailout stalls again. Automakers breathed a sigh of relief last week when President Bush promised to prevent a 'precipitous collapse' of the industry, but perhaps automakers should have continued to hold their breaths awhile longer. White House officials say an announcement on an auto rescue is not imminent and that there is no timetable for a decision. In the meantime, the White House must make several key decisions about what terms to attach to the bailout and how to raise the necessary funds which could be as much as $10B-$40B or more.
  • Tenants find a friend in Fannie. Fannie Mae is finalizing a national policy that will protect tenants from eviction even if their landlords go into foreclosure. The landmark policy, effectively transforming Fannie into a national landlord, goes into effect January 9 and extends indefinitely an earlier decision to suspend tenant evictions during the holiday season. Freddie Mac has not yet announced similar measures, though a spokesperson says they are 'currently evaluating additional actions.'
  • Unemployment funds go broke. Mounting joblessness is causing widespread pressure on state unemployment funds, forcing some states to turn to the federal government for loans or to raise corporate taxes to make payments. Funds in Indiana and Michigan have already dried up and both states are borrowing from the federal government. Thirty other states could see the funds that pay unemployment benefits become insolvent over the next few months. States are advised to keep at least one year of peak-level benefits in their trusts, but many have not, and last week jobless benefits rose to 573,000, the highest reading since November 1982.
  • Apollo is called off the hunt. Chemicals maker Huntsman (HUN) terminated its $6.5B agreement to be bought by Apollo Management's Hexion Specialty Chemicals. Apollo had tried to back out in June, saying the deal, which was struck just as the credit crisis began in 2007, was funded 100% by debt and would leave the companies insolvent. However, a judge ruled in September that the transaction should move forward. Huntsman's decision to terminate the agreement instead of proceeding with litigation comes down to economic conditions and the weakening chemical sector. As part of the termination agreement, Apollo will pay Huntsman $425M in cash, buy $250M of convertible notes and Hexion will provide a $325M breakup fee.
  • GMAC still pushing for bank status. Still set on becoming a bank-holding company, GMAC (GKM) is racing to raise $2B in fresh capital to qualify for Federal Reserve backstopping of the company's finances. Existing shareholders have already ponied up $750M, but are unlikely to help with the remaining $1.25B. Late Friday, lenders agreed to amended terms of a $38B restructuring of debt obligations, allowing GMAC to focus on talking with potential investors, including private-equity firms.
  • Siemens settles. Siemens (SI) is expected to settle a long-standing bribery inquiry with U.S. authorities by paying a record $800M fine and admitting to inadequate internal controls and doctoring its books. The company won't formally plead guilty of bribery charges. Following the settlement, Siemens could face a separate fine of several hundred million dollars from German authorities. The company allegedly spent up to $1B bribing government officials around the world to win infrastructure contracts in recent years. Shares +3.1% in Frankfurt, on relief the settlement wasn't any larger.
  • Chinese liquidity. China will boost the amount of money circulating in its economy by 17% next year in a new effort to spur consumer spending and shield the country from a global downturn. As of the end of November, China's money supply had grown at its weakest pace in more than three years.

Today's Markets

  • Asia markets closed up. Nikkei +5.2% to 8,665. Hang Seng +2.0% to 15,045. Shanghai +0.5% to 1,964. BSE +1.5% to 9,832.
  • In Europe at midday, London +0.8%. Paris +0.6%. Frankfurt +1.7%.
  • U.S. futures: Dow -0.1%. S&P -0.2%. Nasdaq +0.25%. Crude +5.0% to $48.60. Gold +0.9% to $828.

Monday's Economic Calendar

Seeking Alpha editor Eli Hoffmann contributed to this post.

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