Market Talk

We've got just the thing for over-indebted consumers: new cars.

The more I read about GM’s $3.5B acquisition of auto finance company AmeriCredit (ACF), the more confused I get.

The government-controlled GM is getting back in the subprime lending business only a few years after arguably the worst credit crisis since the Great Depression. Yet memory appears to be short-lived, at least for GM. From WSJ’s Sharon Terlop:

The deal gives GM an in-house auto lender for the first time since it sold control of its GMAC finance arm in 2006, leaving it the only major car maker without a so-called captive finance arm.

GM sees the acquisition as a way to drive up sales, which is critical as the company plans a return to the public stock markets as soon as this fall.

“Dealers and customers have said not having in-house finance arm hurts our ability to offer loans and leases,” GM Chief Executive Edward E. Whitacre Jr. said in a conference call with analysts and media. “We were not as competitive as we could be.”

Evidently, GM is convinced that heading down this road will make itself a more well-rounded company and one that should become more popular by the time it’s ready to go public again.

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Don't blame this guy's fat finger.

Regulators and exchange operators have begun testifying on Capitol Hill regarding what’s being dubbed the “flash crash,” as they hope to figure out what led to last week’s 1,000-point crash and what can be done to prevent it in the future. (Here’s MarketBeat’s live blog of the hearing).

Many pundits believe a trader with a “fat finger” should be blamed for the selloff, but so far, the evidence is inconclusive. From WSJ:

Securities and Exchange Commission Chairman Mary Schapiro said Tuesday that regulators haven’t yet found evidence of a “single cause” for last week’s market plunge, as federal regulators established a joint advisory committee to look into the causes of the drop.

The SEC and the Commodity Futures Trading Commission said in a joint statement that the advisory committee will look at emerging regulatory issues and place its initial focus on the factors that contributed to the nearly 1,000-point dive in the Dow Jones Industrial Average last Thursday.

Regulators have been unable to pinpoint the exact cause of last week’s market volatility, but they are taking steps to address possible factors. Monday, exchange officials met with the regulators and the Treasury Department and hashed out a “structural framework” for strengthening circuit breakers market-wide and those for individual stocks, people familiar with the meeting said.

Determining whether last Thursday’s plunge was a mistake or just the way the system works has been a hot-button issue. Finding a scapegoat for what seemed like an unimaginable selloff is the easy thing to do, but perhaps we need to sit back and realize this is just the way markets work in this day and electronic age. Period.

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Don't expect any of this from Blankfein anytime soon.

Goldman Sachs’ (GS) decision not to previously disclose the fact that the SEC was investigating it for fraud is raising some eyebrows, especially as the firm’s reputation takes hit after hit.

Various reports suggest the SEC issued a Wells Notice to Goldman back in July 2009, with the Journal even reporting Goldman knew as far back as August 2008 that regulators were sniffing around its controversial mortgage securities.

But Friday’s bombshell left industry watchers perplexed as to why Goldman failed to disclose anything in the first place, especially since previous disclosures would’ve lessened the blow from last week’s civil-fraud charges.

“As with a lot of things in SEC filings, it all boils down to an issue of materiality: was the existence of the Wells Notice material enough to Goldman that it required disclosure?” Michelle Leder ponders at Footnoted. “The rules on materiality are pretty vague and it’s now clear that Goldman’s attorneys came to the conclusion that the Wells Notice was not material, even if the market seems to disagree.”

Given Goldman’s size and the relatively small amount listed in the complaint, she says it’s reasonable to understand why Goldman wouldn’t consider the Wells Notice material.

Still, she notes GE, Bank of America (BAC), UBS, JPMorgan (JPM) and Berkshire Hathaway (BRKB), which are all over $50 billion in market cap, have all disclosed Wells Notices in the past.

“If disclosing a Wells Notice was material enough for these companies, why was it not material enough for Goldman?” Leder wonders.

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The criticism’s are already cropping up of the Volcker Rule, named after former Fed chairman Paul Volcker and championed by him this week in front of a relatively skeptical Senate banking committee, and not just from the banks that would be subject to it. One I came across today demands a response. Over at Reuters, Felix Salmon criticizes the proposed rule, saying there are two loopholes:

Firstly, the Volcker rule seems to apply only to depositary institutions: if you don’t take deposits, then you’re exempt. The result is that it’ll be easy for Goldman Sachs and Morgan Stanley to get around the rule just by returning their current (tiny) deposit base and voluntarily withdrawing from access to the Fed’s discount window.

That’s not a loophole. That’s the point.

As he made clear in his testimony, there is a “strong public interest” in protecting the deposits of the customers of commercial banks. No such interest exists for protecting speculative activities of the sort engaged in by banks’ proprietary trading desks.

If Goldman or Morgan Stanley wants to make billions worth of speculative bets, they are free to do so, and if those bets pay off, they will be fabulously wealthy, and God bless them. But if those bets go sour, the federal government will not rescue them. Let them go bankrupt. Let them wipe out the creditors, wipe out the bondholders. No more bailouts for recklessness. That is the entire point of the Volcker Rule. I’m not sure Salmon gets that.

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JPMorgan (JPM) shares are slumping, down about 2% today, even after reporting a better-than-expected quarterly profit. Explanations for the decline vary, but the move mostly seems the product of heightened expectations, reflected in a stock price run-up in the past couple weeks. The mega bank also fell short of revenue estimates, and when CFO Michael Cavanagh was asked to sum up prospects for the banking business this year, he said: “Cautious outlook, two words.”

But Reuters blogger Felix Salmon makes an awkward argument that shares are down because the interests of JPM and its shareholders “are not perfectly aligned.” From Salmon:

Let’s be clear about this: JP Morgan’s earnings today were very strong indeed. So why are the shares down? Simply because this is one of those instances where the interests of the bank and the interests of its shareholders are not perfectly aligned. Investor disappointment with the earnings is a function of the bank’s loan loss reserves, which are now a whopping $32.5 billion, or 5.5% of total assets. It’s entirely proper that JP Morgan should be treading cautiously when it comes to loan losses these days: the real economy is still very shaky. Shareholders would doubtless be much happier if the bank took a large chunk of those loan loss reserves and reclassified them as profit, but that’s not the responsible course of action.

To the contrary, we’d argue that JPMorgan’s caution reflected in building up a war chest of loan-loss reserves strongly aligns the company’s interests with those of its shareholders. Investors should be pleased with the bank’s caution at this stage, not be turned off by it. And if the provisions prove excessive, that cash should eventually find its way back to JPM’s bottom line as excess loan-loss reserves get reversed when credit quality improves.

And who’s to say that even if JPMorgan had reclassified more of its loan-loss reserves as profit, the stock price would be higher? JPMorgan’s $3.3 billion haul already exceeded analysts’ expectations, so how much more would it’ve taken to rally shares?

JPMorgan’s caution may very well be warranted, and the reserve building may help the bank avoid costly and dilutive capital raising down the road. We’d consider that very closely aligned with shareholders’ interests.

Treasury’s inability to sell any Citi stock has put the shares in quite a bind.

Institutions are reluctant to hold Citi — only 20% of the shares were held by them, Citi said recently — and analysts blamed investor fear that the US, as a large shareholder, could act capriciously. Selling 5% of Citi’s shares by Treasury yesterday would’ve reduced that fear, and for technical reasons allowed index funds to own more.

Now those benefits are delayed. Institutions dislike government ownership and are reluctant to buy; the government won’t sell unless the price goes up.

Citi’s secondary offering shows the big difference that long-term fundamental investors and short-term speculators have on the sustainability of a company’s stock price, Reuters blogger Felix Salmon says.

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The fact that Fritz Henderson couldn’t last a year as GM CEO is a tell-tale sign of who may be influencing major decisions at the automaker and what direction they want to take GM in the future.

GM Vice Chairman Bob Lutz said the automaker was “surprised and genuinely saddened” by Henderson’s departure, and added management wouldn’t have recommended his exit.  From Dow Jones reporter Sharon Terlep:

“None of us had any hint,” Lutz told reporters. “The board makes these decisions. [It's] not something [management] would have done.”

Reasons for Henderson’s fast exit are being widely debated this morning in the blogosphere. The Detroit News’ Daniel Howes suggests Henderson was asked to leave because his team didn’t move fast enough, “even if they were moving faster than any team in GM history,” he says.

“And speed, for the new GM, means everything,” Howes adds. “It’s the difference between success or failure, between readying GM for investors to buy new shares or not, between giving Team Obama an exit from an unpopular bailout with taxpayer money or giving its opponents a ready-made political club.”

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But wait, we've had a 60% stock market rally. Isn't the crisis over?

So much for a quiet Friday after Thanksgiving.

As Paul earlier noted, the Dubai debt crisis has one-upped all the Black Friday hoopla, as concerns about the credit crisis have re-appeared front and center. It’s still too early to determine what kind of impact Dubai will have on the global economy. But for now, analysts and bloggers fear that worries from last year’s crisis may return to global markets.

“We have been absolutely hammering home the fact that the ‘solution’ to the credit crisis was in fact, not a solution at all,” the Pragmatic Capitalist blogger says. “There remain massive debt issues home and abroad and Dubai is only the latest example of such.”

Dubai’s standstill shouldn’t cause worldwide panic; instead it’s a stark reminder of the unhealthy state of global real estate markets, blog says. “Whether this is a minor tremor in commercial real estate…has yet to be seen, but make no doubt – we are not out of the credit crisis woods.”

A big surprise as the crisis unfolds is the lack of support from Abu Dhabi, as well as the uncertainty of which foreign banks have exposure to Dubai World, says Miller Tabak equity strategist Peter Boockvar.

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This ought to be big enough, right?

That AIG bailout just keeps coming back to haunt, well, everybody, but lately it’s taking down the folks who engineered it in the first place.

A government audit released earlier this week shows the NY Fed caved in to demands by AIG creditors that they be paid in full for complex and risky securities they insured with AIG. WSJ has the details:

The audit, which was conducted by the special inspector general for the Troubled Asset Relief Program, faulted the New York Fed for not using its leverage as the regulator of some of these banks to get them to accept lower prices for more than $60 billion in credit-market bets, which were tied to souring mortgage-linked securities that had fallen in value.

The banks that were paid off in full included Goldman Sachs Group Inc., Merrill Lynch and large French banks Société Générale and Calyon, the investment bank unit of Credit Agricole Group, which were represented by the French bank regulator in negotiations with the New York Fed last November, the report said.

Not surprisingly, outrage has followed the report.

“There was absolutely no reason to pay 100%,” on the dollar, Yves Smith writes at naked capitalism.

“It’s simply embarrassing and pathetic,” Barry Ritholtz notes at The Big Picture.

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But wait, we're still jobless...

Most folks agree the September jobs data were pretty awful. But the impact of this report is still up for debate.

There’s nothing to celebrate in a report that shows 263,000 jobs were lost in September while the unemployment rate ticked closer to double-digit territory. Economy needs to gain at least 125,000 jobs just to match population growth, which seems like an unattainable short-term goal.

Despite the depressing data, many folks discounted the jobs reports, figuring a horrible labor market is a lagging indicator that’s already baked into the stock market. The September jobs report was “ugly,” BofA Merrill acknowledges, but the firm doesn’t consider it a signal of an economy teetering on the brink of double dipping back into recession.

“Instead, we regard it as a reminder of two things,” firm says. “First, this is going to be a relatively slow, choppy recovery…Second, the labor market is a lagging indicator.”

There is definitely a historical lag between recessions’ ends compared to peaks in unemployment, the Atlanta Fed’s macroblog points out. Last two recessions stand out as unemployment rate peaked more than a year after recovery began. “I am not offering a forecast, but instead a reminder that the dynamics of unemployment do not always follow the dynamics of recessions,” blog says.

Still, discounting the nonfarm payroll data as a lagging indicator when analyzing the economic recovery isn’t a smart move, FusionIQ CEO Barry Ritholtz says. From his blog:

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