Long Term Volatility Index - VIX

Time to start thinking about short term oversold and a dead cat bounce.

NY Fed Hires Morgan Stanley to Evaluate AIG Alternatives. Who Will Evaluate Goldman?

Is the NY Fed going to hire Morgan Stanley to develop solvency options for Goldman Sachs when its day of reckoning arrives?

You could put those meetings on Pay-Per-View for the investment community.

Ok, Floyd, er Lloyd and you too Dave, let's see your books, chop chop. Oh yeah and top off my Chivas would'ya? We've got a VIP table reserved at Scores for a conference tonight and YOU'RE paying for it. Oh yeah and we need a list of the recent comps for your traders too. We're drawing up a short list for some special overseas clients.

We'd suggest it take place at Madison Square Garden, in a cage match.

Fed Hires Morgan Stanley to Evaluate A.I.G. Options
September 15, 2008, 1:56 pm
Dealbook

The Federal Reserve has hired Morgan Stanley to advise it on potential lifelines for the American International Group, the large insurance company, people briefed on the matter said Monday.

The investment bank will help evaluate the risk that A.I.G. poses to the already battered financial system, and help the Fed negotiate possible solutions, which may include a $20 billion bridge loan to the insurer, these people said.

The Fed’s move may signal that it considers A.I.G.’s faltering financial health a significant threat to Wall Street. It would also be a remarkable move for the Fed after it declined to extend additional help to Lehman Brothers.

A.I.G. has already won approval from New York regulators to borrow $20 billion from its subsidiaries, as it seeks to shore up its capital base for the possibility that its vital credit ratings will be downgraded.

The firm has become one of the largest providers of insurance to complex mortgage securities, leaving it heavily exposed to the sagging housing market. Major credit ratings agencies have threatened to downgrade A.I.G.’s debt, a move that could prompt its trading partners to demand more capital in their transactions — and threaten the firm’s solvency.

A.I.G. has already raised $20 billion this year. But even that amount of capital has not averted a crisis.

Beyond seeking help from the Fed, A.I.G. is also considering selling off assets like its auto business. It rejected an offer by the private equity firm J. C. Flowers & Company to buy $8 billion in preferred shares — a bid that included an option to buy the whole firm at a discounted price. And two other buyout firms, Kohlberg Kravis Roberts and TPG, withdrew offers to buy preferred shares on Sunday because a Fed backstop seemed unlikely to materialize.

The firm’s sickly financial health was a prominent topic in weekend talks among Wall Street chieftains who gathered at the Federal Reserve Bank of New York to discuss the potential collapse of the investment bank Lehman Brothers. A.I.G. had become one of the biggest underwriters of complex debt securities known credit default swaps, used as insurance for a wide range of products, including the mortgage instruments that have been the bane of Wall Street for the past year and a half.

PIMCO, Vanguard and Japanese Banks Face Billions in Losses on Lehman Bonds

Many firms are holding hurried meetings today over these losses, to assess the impacts with respoect to money market funds, mutual funds, and pension plans. Legg Mason, Fidelity, Axa SA, Franklin Advisers, Vanguard and Pimco are among the largest stakholders.

This is minor compared to what some other failures might look like such as Goldman, Morgan Stanley, AIG, or a major bank like Washington Mutual and Wachovia.

The thing about commercial banks is that there is a well established mechanism for sweeping them into the money bin as long as the dollar and Treasury bonds hold up. Not so for insurance companies and investment banks, which are messy.

Interesting as well that it was Lehman and Bear that took it in the necks, as they were the two big bond houses.

If it is true that they are allowing banks to use depositor's funds to recapitalize their investment activities, then we have come full circle back to 1929 and all that implies.


Pimco, Vanguard Are Biggest Lehman Bond Fund Losers
By John Glover
Bloomberg News

Sept. 15 (Bloomberg) -- Pimco Advisors LP, Vanguard Group Inc. and Franklin Advisers Inc. are among investment companies that may face losses of at least $86 billion stemming from the collapse of Lehman Brothers Holdings Inc., the biggest bankruptcy in history.

Mutual fund companies' filings show they hold more than $143 billion of bonds, led by Newport Beach, California-based Pacific Investment Management Co., manager of the world's biggest bond fund, and Valley Forge, Pennsylvania-based Vanguard, according to data compiled by Bloomberg as of June 30.

``The losses look set to be widespread, hurting the public through their mutual and pension funds,'' said Ciaran O'Hagan, a credit strategist at Societe Generale SA in Paris. ``It's clearly a disaster for public confidence.''

While bond investors will recover different amounts based on their ranking in Lehman's capital structure, models of credit-default swaps assume lenders will recoup 40 percent of their loans overall in a bankruptcy. Investors may receive less than that, based on prices for Lehman's senior bonds of as little as 35 cents on the dollar from price provider Trace.

Pimco holds Lehman bonds in at least 12 of its funds, including the $134 billion Total Return Fund. Bill Gross, manager of the fund and co-chief investment officer of Pimco, was buying Lehman bonds as recently as June, Bloomberg data show. ...

Vanguard holds Lehman bonds among the $450 billion of fixed income it manages, spokesman John Woerth said. An outside spokeswoman for Pimco in London, who asked not to be named, said the company had no immediate comment, Lisa Gallegos, a spokeswoman for Franklin in San Mateo, California, wasn't immediately available.

New York-based Lehman, which filed for protection from creditors today, owes its 10 largest unsecured creditors more than $157 billion, according to the Chapter 11 filing in U.S. Bankruptcy Court in New York. The largest single creditor is Aozora Bank Ltd. in Tokyo, with $463 million in a bank loan. Other top creditors include Mizuho Corporate Bank Ltd., owed $382 million, and a Citigroup Inc. unit based in Hong Kong, owed an estimated $275 million, according to the filing.
Lehman listed total debts of $613 billion and $639 billion of assets in the filing.

Axa SA, Europe's second-biggest insurer, and unnamed affiliates, own 7.25 percent of Lehman's equity, according to the filing. Clearbridge Advisers LLC, the asset manager that Baltimore-based Legg Mason Inc. acquired from Citigroup Inc. in 2005, held 6.33 percent, according to the filing. Boston-based FMR LLC, the parent of Fidelity, the world's largest mutual fund company, held 5.9 percent, the filing said.

Wall Street Journal
Several Japanese Banks Are Top Lenders to Lehman
By YUKA HAYASHI
September 15, 2008 11:29 a.m.

TOKYO -- Several Japanese banks -- flush with cash and relatively unscathed by the global credit crisis -- are among the top bank lenders to Lehman Brothers Holding Inc., which filed for bankruptcy protection on Monday with $613 billion in debt.

Aozora Bank, a mid-sized Tokyo bank, was No.1 on the list of largest bank lenders with a loan of $463 million, followed by Mizuho Corporate Bank, with a $289 million loan, according to court documents submitted with Lehman's Chapter 11 bankruptcy filing. Mizuho Corporate Bank is the wholesale banking unit of Mizuho Financial Group, Japan's third-largest bank by market value. Other big Japanese lenders to Lehman included Shinsei Bank, another mid-sized Tokyo bank, and Mitsubishi UFJ Financial Group, Japan's largest bank.

For big Japanese banks like Mitsubishi UFJ and Mizuho, which have huge balance sheets, the loan losses related to Lehman may appear modest.

But smaller banks like Aozora and Shinsei may have a tougher time absorbing the losses. The two banks have been turned around by private-equity investors after collapsing during Japan's bad-loan crisis. But their performance has been weak in recent quarters. Faced with powerful competition from Japan's giant banks, they have forayed deeper into riskier business areas.

On Friday, Aozora said it expects to swing to a net loss of four billion yen in the fiscal first half ending Sept. 30, compared with a previous forecast of a 15.5 billion yen profit, as it changed the timing of write-downs related to its investment in GMAC LLC, the unprofitable finance arm of General Motors Corp. Aozora invested in this business alongside Cerberus Capital Management, its largest investor.

The long list of Japanese names on the list of bank lenders underlines how these banks are playing an increasingly important role as providers of capital in the global financial market battered by a credit crunch. Unlike many of their U.S. and European peers that have been forced to scale back lending because of big losses related to risky mortgage securities, Japan's top banks like Mitsubishi UFJ and Sumitomo Mitsui Financial Group still enjoy healthy balance sheets and have been vying to expand their presence overseas recently. These banks have stayed shy of investing in risky securities, in part due to a lesson learned from their own bad-loan crisis during the 1990s and early 2000s.

The filing doesn't necessarily mean the loans extended by these banks would go sour. Lehman said it had $639 billion in assets, which will be liquidated and eventually distributed among creditors during the process of liquidation. Aside from billions of dollars in loans borrowed from banks, the Wall Street firm owes over $150 billion to bond holders, who tend to come behind bank lenders when collecting debts in bankruptcy cases.

The Carry Trade Currencies

From Chris Gaffney in The Daily Pfennig:

The best performers over the weekend were the Japanese yen and Swiss franc, both traditional funding currencies of the carry trade. As Chuck [Butler] has explained several times in the past, when market volatility increases, traders typically start to exit the carry trades which are only profitable during times of relative calm in the markets.

The reversal of the carry trades means investors sell the emerging markets and high yield currencies and use the funds to pay down loans which they had taken out in the low yielding 'funding' currencies of Japanese yen and Swiss francs. The Japanese yen strengthened as much as 3.4% vs. the US dollar overnight, and the Swiss franc had the biggest one day gain in six months.

We think that gold is also being used as a carry trade 'currency' as well, as the central banks lease their gold bullion cheaply to the commercial banks, similar to the low interest rates carried by the yen and Swiss franc.

The gold is sold off, probably to the ETFs and the metals markets, and is largely not returnable to the central banks in many cases. This is one of the reasons why the gold price is becoming so volatile; the 'printing' of gold by central bank leasing does not really create anything, it only distorts the market longer term.

Some day that volatility may become breath-taking.

Chris Gaffney continues:

I have to say I am surprised Treasury Secretary Paulson stayed away from helping another bunch of his Wall Street buddies. I read where Paulson said Wall Street has been aware of Lehman's troubles for a long time and had time to prepare for any crisis at the company. I know we closed out all of our currency trades with Lehman a couple of months ago, and hopefully most other prudent companies did the same.

I hope this weekend's events are an indication that some sanity has returned to the Treasury department, and a line has been drawn after the widest expansion of federal safety nets to the financial system since the Great Depression. Its about time we quit guaranteeing the losses at these huge financial firms.

More likely Lehman was a token gesture to free markets as we had suggested last week it might very well be. Paulson and Company appear to be willing to do whatever it takes to control the situation and the markets, to 'inspire confidence' in the system, to feed the bull market in insensible complacency.

In the short term this is a viable strategy, but at the cost of a disabling of the free market system, and significant unintended consequences down the road.

We wish them well, but don't think they have the right motivation and character to achieve a sustainable solution hat would involve systemic reform. They are creatures of the status quo.