I haven’t had the opportunity, in a long time, to cobble together some real thoughts. However, here are a few quick takes on what is going on recently…
1. Citi continues to shuffle deck chairs. Now, I don’t know what they could be doing right now to fix their situation. The problem they are facing is that they need to control costs in an environment rife with morale problems. As one commenter on Dealbook pointed out, I don’t know who believes that Jamie Forese is asking a subordinate to become his equal–indeed that’s probably not even within his power to do. I also don’t know why there is such a massive use of management consultants–in a large bank with an everything-needs-signoff-from-the-C.E.O. culture it’s hard to imagine someone who runs a department of 200 people can go out and hire McKinsey … Those managers can’t even upgrade their own travel arrangements to first or business class! Anyway, the real issue with these measures is that the worst abusers are powerful and find their way around these policies and senior management’s time is better spent doing other things than approving new computers and offsite meetings.
IRONY ALERT: As I was writing this post, I saw this item from Research Recap:
McKinsey sees considerable scope for investment banks to cut their noncompensation costs – possibly up to $2 billion in recurring savings.
McKinsey said its experience indicates that data, printing, supplies, delivery and professional services usually yield the fastest results; restructuring real estate and IT spending may take longer but generate much larger savings.
McKinsey said its analysis suggests that “executives can embark on this additional belt tightening without harming a bank’s culture and morale.”
Of course, morale at most investment banks is already so low that a further whack at expenses is unlikely to make it any worse.
Honestly, you can’t make this stuff up…
2. Lehman is approaching a deal to sell a stake in it’s asset management unit, Neuberger Berman, to a private equity firm. This is a good start for a relationship, of the kind I have already opined on, between Lehman and a business that should be looking for disintermediation. I would, if I were Mr. Fuld, look to sell a stake in the asset management unit, get an equity investment in Lehman itself, and form a permanent J.V. with whatever top-shelf private equity firm will be winning the auction. Maybe Lehman can try cross-selling … “Mr. Kravis, I see you own a part of our asset management division, can I interest you in some cheap real estate debt? With gas prices so high who couldn’t use some hard assets?” Feel free to fo read my prior post–I go into a lot more detail there about the nuances of what the structure, in an ideal world, should look like.
3. Fannie and Freddie are falling … in slow motion! I have no idea, none at all, why the failing and bailout of Fannie and Freddie are both taking so long. Guess what? If Fannie and Freddie are woefully undercapitalized now then what’s the catalyst for things to get better? There is none. This whole situation doesn’t make sense. Are they waiting for the G.S.E.’s to be insolvent? We already know they are leveraged instutions completely concentrated in markets that are dead, dying, or woefully sick. I guess I don’t understand the rationale for waiting to take action… From the WSJ:
The Treasury probably doesn’t need to make a decision imminently unless the companies lose their ability to tap debt markets at reasonable costs, said Joshua Rosner, a managing director at research firm Graham Fisher & Co.
If the Treasury is forced to inject capital into Fannie and Freddie, though, that is likely to be part of a restructuring that would likely wipe out the value of previously issued common and preferred shares and lower the value of subordinated debt.
[Obligatory paragraph about what the stock did today.] …
Fannie increased its holdings of “liquid” investments, cash and short-term securities that can easily be sold, to $103.6 billion, up 43% from June. The move gives the company more flexibility to reduce its future borrowings if market conditions worsen, company officials said.
In what world is $100+ billion of anything easily sold? Simply stupid. Especially with the Fed pressuring the Treasury Department to ease up on wiping out certain equity holder because of the destruction wiping out parts of the G.S.E.’s capital structure would cause. Have any of these people ever seen markets function in the face of uncertainty? Oh, right … the last year or so. Well, at least that’s going well…
4. The next big problem is here: distressed companies. People expect that this will be the next set of losses and economic distress. Corporates have been fairly resilient, as a sector, to this economic downturn. Part of this is the lag that corporates have from the time consumers start tightening the purse strings to the time that effect is seen on the bottom line. Nothing else to say, really, the numbers are all moving in the same direction.
5. Random Assortment of other things…
A. Remember the rating agencies? Well, now one is going to sell you something that will tell you how much you’re going to lose on the C.D.O. paper you bought because they said was safer than it actually was after using their flawed ratings methodology… Apparently the part of their suite that worked was the part that picked out the downgrade candidates.
B. In a slight nod to my political views, there is finally hard data that we, as a society, have a vested interest in investing in those amongst us that have the least.