Tuesday, December 23, 2008

Wall Street Breakfast: Must-Know News

Wall Street Breakfast: Must-Know News

by SA Editor Rachael Granby


  • IndyMac's backdating scandal. The Treasury has launched a formal probe into the Office of Thrift Supervision after discovering a senior bank regulator let IndyMac backdate its records just weeks before it was seized by the government. OTS supervisors allowed IndyMac, once the nation's 10th-largest mortgage lender, to record $18M of a $50M capital injection made on May 9 as if it had been carried out before the end of Q1 in March. This leeway made IndyMac appear to cross the threshold of a 'well-capitalized' institution when in fact it was only 'adequately capitalized.' Federal regulators seized the mortgage lender in July at a cost of $8.9B to the government's deposit-insurance fund.
  • Investors flee bailed-out auto firms. General Motors (GM) closed down 21.6% yesterday as investors bet the troubled automaker's bailout won't be enough to keep the company afloat. Credit default swaps on the company’s bonds jumped 2%, while S&P reduced GM's unsecured debt to C and forecast a 'high' likelihood of bankruptcy. In the event of a default, S&P added, creditors should expect 'negligible recovery.' As for Chrysler, some analysts believe the government's bailout money will most likely be used to prepare the country's No. 3 automaker for an orderly winding down of its assets. S&P lowered Chrysler's corporate credit rating to CC, a junk status just two notches above default.
  • Madoff litigation mess begins. At least two separate lawsuits are underway related to Madoff's $50B scam and at least one more is potentially on the horizon: 1) Investors are suing Fairfield Greenwich Group for failing to protect their assets, and for jeopardizing investors’ interests while collecting 'millions of dollars in fees.' Between two funds, the hedge fund firm had $7.5B invested with Madoff. 2) An investor who lost nearly $2M with Madoff filed an administrative claim against the SEC for negligence in failing to detect a decades-long fraud. An administrative claim is the first step in filing a lawsuit against the government. 3) Perhaps most controversial is the possibility that previous investors will be sued for some or all of their profits or principal, even if they pulled out of Madoff's fund as long as six years ago, in order to spread out losses more evenly among current investors. Irving Picard, the trustee appointed to liquidate Madoff’s brokerage, is authorized to recover money that was distributed as part of a fraud and to share it among the victims. Picard declined to comment on whether he intends to pursue this course.
  • CIT becomes a bank. CIT Group (CIT) received approval from the Federal Reserve to become a bank-holding company, clearing the way for it to access up to $2.5B in capital from the government's financial rescue program. CIT doesn't plan to acquire another depository institution at this time, the Fed said in its approval.
  • Yields fall on T-notes. The Treasury sold $38B in two-year notes at 0.922% yesterday, the lowest yield on record and the first time in history that two-year notes have gone for under 1%. Still, the yield was higher than the 0.912% forecast.
  • China's rate cut. China cut interest rates for the fourth time since September, to 5.31% from 5.58%, and dropped banks' reserve requirement ratio by 50 BPs. Despite the moves, and a recent 4T yuan stimulus, analysts say growth will continue to slow.
  • U.K. GDP contracts. The U.K. economy contracted 0.6% in Q3 from Q2, the most since 1990, vs. an expected 0.5% contraction. Mortgage lending dropped to the lowest in 14 years. The pound has lost almost a quarter of its value against the currencies of the U.K.’s biggest trade partners this year. "It’s going to get worse before it gets better," warned economist Ross Walker.

Earnings: Monday After Close

  • Red Hat (RHT): FQ3 EPS of $0.24 beats by $0.06. Revenue of $165M vs. $166M. Shares +8.6% after hours. (PR)
  • Tibco Software (TIBX): Q4 EPS of $0.23 beats by $0.04. Revenue of $185M vs. $196M. Shares +8.1% after hours. (PR)

Today's Markets

  • Asia markets closed broadly down. Hang Seng -2.75% to 14,221. Shanghai -4.55% to 1,897. BSE -2.4% to 9,687. Kospi -3.0% to 1,144. Nikkei closed.
  • In Europe at midday, markets are up slightly. London +0.3%. Paris +0.03%. Frankfurt +0.3%.
  • U.S. futures: Dow +0.1%. S&P +0.2%. Nasdaq -0.1%. Crude +0.03% to $39.90. Gold -0.3% to $844.90.

Tuesday's Economic Calendar

Seeking Alpha editor Eli Hoffmann contributed to this post.


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