The Market Ticker - Company Specific

The CISCO Hype Machine

nospam@example.com (Karl Denninger) — Tue, 09 Mar 2010 11:33:00 -0500

Cisco CRS-3, powered by Cisco QuantumFlow Array - a chipset architecture engineered in multiple dimensions of scale, services, and savings.

That's the announcement. It was the cause of all the hype. A "new dimension" that works within their existing CRS framework.

Basically, a faster version of the CRS-1.

CISCO claimed in his hype that:

The San Jose, Calif.-based Cisco had sent out invitations to analysts and the media for a "significant announcement" that it says "will forever change the Internet and its impact on consumers, businesses and governments."

Oh Jesus.

You'd think there was some new technology. Something that nobody had seen before. Something revolutionary.

You would be dead wrong.

Now don't get me wrong - more speed is good, of course. More capacity is good. More density - an increasing problem for various network folks, is never a bad thing, although there's no such thing as a free lunch - more capacity in a smaller space comes with higher power requirements and heat loading, which in turn invalidates assumptions made by carriers, ISPs and others on the adequacy of power and cooling systems in their machine rooms - sometimes with extremely expensive consequences.

But "forever change the Internet and its impact on consumers, businesses and governments"?

HORSECRAP!

This reminds me of the hype when the CISCO 7xxx carrier series routes were introduced in the 1990s. These were "going to change the Internet forever" too.

But that was a forced upgrade CISCO was able to capitalize on due to their near-monopoly position in the core routing space at the time.

What was only known to people who understood the Internet at the time (myself included) was that the reason that device garnered instant acceptance and huge order flow was that the Internet's routing table was exceeding the storage capacity of the CISCO AGS+ which was, at that point, mostly at the core of the network. Carrier routers were literally crashing as a consequence of running out of memory, and the architecture of the AGS+, which was roughly-based on the VME backplane architecture and the Motorola 68xxx processor line, did not allow for expansion of the address space.

In other words CISCO had painted itself into a corner and its response was to come out with a new, improved architecture that didn't have those limits - and the Internet's address space expansion effectively forced every ISP in the United States to buy their 7xxx series gear almost immediately.

But this is a different matter entirely. There is no "forced corner" that CISCO can exploit here, there is no monopoly position in the marketplace as there was with the AGS+ 20ish years ago and while this is obviously a step forward in performance-per-unit-of-density the firm's claims are, in my opinion, dramatically overblown.

I used to have respect for John Chambers. Not any more.

That John Chambers sees it necessary to resort to this sort of over-the-top hyperbole unfortunately causes me to have flashbacks of 1999 - when every "technology company" had their stock pumped day after day by releasing utterly overblown and outrageously hyped press releases, while the actual market impact of what made it to market was more akin to a mosquito biting an elephant's ass.

Let's hope what follows for those who buy into this bilge isn't March of 2000.

Disclosure: No position.

PS: Would you mind disclosing the particulars and performance of the off-balance-sheet financing you're carrying back for people - and the terms on that financing? (p63.) I'm just curious if there's been some, uh, "deterioration" in the credit quality in that nice black box. Thanks in advance for what I expect will be a non-answer.

GMAC Co-Mingling Custodial Funds?!

nospam@example.com (Karl Denninger) — Thu, 04 Mar 2010 15:56:00 -0500

What's this crap?

The rating company said GMAC commingled cash flows from multiple bonds in a single custodial account, Moody's said in a statement. This allowed GMAC to use cash from loans in one bond for principal and interest payments on another, it said.

By allowing the commingling, it "increases the likelihood that some RMBS deals may not be able to recover the amounts 'borrowed' by the servicer to fund advances or another RMBS deal if a servicer bankruptcy were to occur," Moody's said.

What?

Is that permitted? Legal?

When is a servicer not a fiduciary (effectively, a trustee) for the bondholder? It appears the answer, in this case, is whenever they feel like shuffling around funds and paying one bondholder with money that came in from a different deal.

Oh, we bailed them out too.

Several times.

So far.

Next question: Who else is doing this sort of thing? Or maybe the better question is "who's not doing this sort of thing?" The latter may be the shorter list.

How's this for "undisclosed risks"?

Microsoft: Blow Me

nospam@example.com (Karl Denninger) — Wed, 03 Mar 2010 14:23:56 -0500

Now this is hubris:

Today most hacked PCs run Microsoft's Windows operating system, and the company has invested millions in trying to fight the problem.

That's because the operating system was designed for backward compatibility with Windows 95 and 98 first (and 3.1 before it) which had no concept of permissions or privileges. It was (until Windows 7) thus inherently insecure and even Vista (and Win7) can be told to be insecure to deal with all those "legacy issues."

In short, these machines are infested (not infected, infested) because their operating system has historically been full of security holes (this has improved, especially in Windows 7, to be fair.)

So what does Microsoft propose?

So who would foot the bill? "Maybe markets will make it work," Charney said. But an Internet usage tax might be the way to go. "You could say it's a public safety issue and do it with general taxation," he said.

That's nice.

Sell an insecure operating system and then get someone else to pay a tax because they bought an arguably-defective product you sold?

How about this instead Microsoft?

For each computer infested, the publisher of the operating system sold to that user is assessed a fine of US $100,000 by the Department of Justice.

I bet that would get you to improve security quite a bit - or bankrupt your ass.

PS: Total number of viruses and other malware found on my rather-high-profile Freebsd servers in the last ten years? ZERO. Put that in your pipe and smoke it sir.

Medivation: Insider Trading Or Not?

nospam@example.com (Karl Denninger) — Wed, 03 Mar 2010 14:19:00 -0500

Medivation, if you've been under a rock this morning, announced bad results for an Alzheimer's drug (which Pfizer was involved with as well) and was destroyed this morning to the tune of 70%:

A quick check of option transactions yesterday shows that a lot of people were placing bets. Zerohedge put forward the premise (as did Livevol) that there was massive insider trading.

Maybe.

But it was Livevol's time & sales report that caught my attention. Specifically:

This sure smells bad. But that it was a spread does not necessarily mean that the trade was taken on inside information. Indeed, it might mean the opposite.

Consider that if both positions were sold then the trader got $14 + $17.50 = $31.50 per contract, assuming a 1x1. It actually looks like, however, a 1x2 (2x PUTs) with about 8,000 calls and twice as many PUTs.

So how does the trader win or lose?

Let's plot it out, assuming these contracts were sold:

This actually looks like a fairly reasonable trade going into a binary event like this. It loses under $13 or over $79, roughly, and makes the maximum profit at $40, with a couple of weeks to go. Yes, it has the potential to make $30 million smackers, which sure isn't shabby!

As of right now, with the stock trading $13.21 (as I wrote this), the trade is profitable - barely.

Insider trading or smart trading? Heh, that's a pretty good range! Even if the drug had hit, would it really have spiked up over $78 - and on a miss under $13?

Well, the trader probably thought not. So far he's right.

But a quick analysis of this trade doesn't appear to show a clear directional bias, which would have, given the money involved, been pretty clear evidence of inside information. Indeed, the "centroid" of the spread was right near the closing price yesterday.

This looks like a probability trade to me, which is exactly what you want to do when there's a news event and you think the options are rich at their implied volatility given what you think is going to happen. Indeed, I remember the Dendreon (DNDN) AC decision a couple of years ago during which I was doing spread trades like a madman, and made some nice coin doing it. I no more knew anything about the outcome of the AC than did the man in the moon but I saw an opportunity with a complex option spread and put it on. As the trade I put on had a defined risk I figured out how much I was willing to lose and stuffed size on as the decision approached - it sure looked big, but the net exposure, when it was all said and done, was reasonable.

I'm the first one to jump on an insider-trading scam if I see one, but this time, without more information to make me suspicious, I don't.

Disclosure: No, that trade wasn't mine - no position.
Disclosure #2: Nice analysis software eh? ThinkOrSwim folks. Really. And no, they don't pay me to say that :)

AIG Gets The Dreaded "Going Concern"

nospam@example.com (Karl Denninger) — Fri, 26 Feb 2010 08:51:00 -0500

Gee, who saw this coming... oh wait - not in the press release, is it?

NEW YORK--(BUSINESS WIRE)-- American International Group, Inc. (AIG) today reported a net loss attributable to AIG common shareholders of $8.9 billion for the fourth quarter of 2009, or $65.51 per diluted common share, compared to a net loss of $61.7 billion or $458.99 per diluted share in the fourth quarter of 2008. Fourth quarter 2009 adjusted net loss was $7.2 billion, compared to an adjusted net loss of $38.5 billion in the fourth quarter of 2008.

Blah blah blah blah look at the 10Q filed with the SEC:

AIG has been significantly and adversely affected by the market turmoil in late 2008 and early 2009, and, despite the recovery in the markets in mid and late 2009, is subject to significant risks, as discussed below. Many of these risks are interrelated and occur under similar business and economic conditions, and the occurrence of certain of them may in turn cause the emergence, or exacerbate the effect, of others. Such a combination could materially increase the severity of the impact on AIG. As a result, should certain of these risks emerge, AIG may need additional support from the U.S. government. Without additional support from the U.S. government, in the future there could exist substantial doubt about AIG's ability to continue as a going concern. See Management's Discussion and Analysis of Financial Condition and Results of Operations — Consideration of AIG's Ability to Continue as a Going Concern and Note 1 to the Consolidated Financial Statements for a further discussion.

Oops.

That's not a sentence you ever want to see in a quarterly report. It winds up in there because the auditors essentially make you do it - that is, the bean counters think you're a few beans short of a box.

Or maybe a lot of beans.

Mishkin is on CNBS this morning crowing that "clearly the recession is over."

Uh huh. And your buddies over at the NY Fed, along with The Fed in DC and CONgress, haven't fixed a damn thing.

Therefore the recession didn't do what recessions are supposed to do - that is, clear out crap companies and return balance to the economy.

Instead, we've subsidized, we've lied, we've cheated, and we've kept the debt in the system, all of which are disastrous going forward because unlike inventory recessions this has been and is a "balance sheet" recession.

That, by the way, is typical CNBS misdirection too. Words mean things. A "balance sheet recession" is a liars way of saying there is too much debt in the system, not too much inventory.

Of course the fix for a recession caused by too much inventory is to work some of the inventory down.

The fix for a debt recession is to default the excessive debt.

We have done everything in our power at all levels of government to avoid doing exactly that, and it is for this reason that you're going to continue to see the stress levels rise instead of fall, irrespective of the manipulation, until that excessive debt is extracted from the system - one way or another.

Our machinations have hidden an actual, ongoing depression. More than $2 trillion in direct spent support by the government - borrowed beyond tax receipts in the last 18 months, constitutes 14% of annualized GDP. On an annual basis this is about 10%, and a 10% top-to-bottom contraction in GDP is the economist's definition of Depression.

This is math, not pumper jizz games and makes clear what's actually happened. Any person who has lost their job and desperately clawed their head above water on a temporary basis by taking cash advances and using their plastic for a $2 bottle of soda at the local gas station "gets it" - you can play this game for a while, so long as your credit line holds up. You "win" that game if you manage to keep your head above water long enough to find a new job before your debt service requirements exceed your income - even with the new job. You "lose" if your card comes up "Really Declined" before then and are forced into bankruptcy, or if you wind up with so much debt that even finding a new job doesn't allow you to make the payments.

Nations don't quite do things the same way. Instead of "bankruptcy" they are forced into severe austerity measures when they are unable to borrow at attractive rates in the marketplace. If nations go too far down the hole and are unable to implement those measures the political system fails by either peaceful means (elections that sweep out the old ruling class and in a new one) or violent (mass civil unrest, revolt or war.)

So far that has not happened. But the machinations of The Fed have been met lockstep by Congress, which has absorbed and subsumed every penny of credit that The Fed has extended, neutering the ability of The Fed to stimulate the economy, and instead of stimulating the economy with its programs Congress has instead propped up failed businesses, effectively burning the money instead of putting it to work.

AIG is symptomatic of the fraud-laced financial disease in our nation - a disease that will soon enough consume us if we don't excise it from our economy.

Sadly not only does our government refuse to do this but the people of this nation refuse to recognize the bare mathematical underpinnings that are staring them square in the face.

With each passing day we go further into that hole, and at some point the ladder will no longer be tall enough to be able to climb back out.

Disclosure: No position; it is my considered opinion, however, that AIG was a zero two years ago - and still is a zero.

More Hand-Waving By The Vampire Squid

nospam@example.com (Karl Denninger) — Mon, 22 Feb 2010 13:07:00 -0500

Now comes Goldman Sachs trying to justify the Greek Debt Swaps....

Following Greece’s decision to join the European Monetary Union and adopt the Euro (which, under the criteria set by the European Union, included a debt-to-GDP ratio of less than 60%), reducing the size of foreign denominated liabilities became a priority for Greece, as it did for most European sovereign states.

According to the EU accounting framework, unhedged foreign currency denominated debt was required to be translated into Euro using the year-end exchange rate. The strengthening of the dollar or yen against the Euro in 1999 and 2000, created an unfavorable increase in Greece’s reported Euro debt levels.

Accordingly, Greece entered into a series of hedging agreements designed to transform foreign debt into Euro, a common practice undertaken by many European member states with foreign debt outstanding. By the end of 2000, Goldman Sachs had a portfolio of swaps hedging USD and JPY debt issued by Greece.

The firm goes on to make the case that the percentage changes involved in the debt outstanding were effectively immaterially small.

Of course that's not the question at hand. The question was the true intention of any such agreements and transactions by Greece (and Goldman's knowledge thereof, as "the smartest guys in the room.")

On that point the following is clear: When you pay off your VISA card with a cash advance on your Master Card, you appear to have less debt if only the VISA card is considered, but the fact remains that the essence of such a transaction is simply to shuffle the cards such that something you don't want to recognize now is put off until later - at a higher price.

Goldman of course benefited from these deals (and it is entitled to be paid for the work it does) but that leaves aside whether Greece's benefit was simply to reduce the "optics problem" of its debt while in fact increasing the magnitude thereof, and whether such a thing should be permitted by the EU - or, for that matter, by any other regulator.

PS: Did AIG write any CDS on Greek debt, and did Goldman buy said CDS from AIG?

Just curious.

Citibank: No More DDA Accounts

nospam@example.com (Karl Denninger) — Sat, 20 Feb 2010 14:23:00 -0500

I'm going to delve a bit into the Ticker from yesterday in which I advised people to get the hell away from Citibank (NYSE: C) based on a report that an "accidental" mailing of terms changes to all 50 states allegedly only applied in Texas.

Some rooting around on The Internet (along with a little help) disclosed this little gem:

Texas-only my ass.

Note that the date on that file is 12/28/2009 (by the name) with an effective date of January 1st, 2010, and there is nothing that indicates it is not the case everywhere.

Here's the issue.

Most checking accounts - that is, non-interest-bearing accounts against which one can write checks - are better known as "DDA" accounts in banking parlance. If you look back through your counter receipts for deposits into one (assuming you keep them) you will probably see the letters "DDA" on the detail line.

What is "DDA"? It stands for DEMAND DEPOSIT ACCOUNT.

What is a "Demand" account?

It is an account which the holder reserves the right to, and the bank agrees to comply with, demand any and all good collected funds in the account at any time up to the entire balance.

Now most banks will not allow you to walk in and demand $50,000 in cash at any instant, mostly because they don't have it, or if they do have it allowing that would severely deplete their cash amount on hand and they would not be able to transact routine amounts for other people. After all, it takes time (even if only a few hours) to order up an armored truck full of $100s and $20s.

But "withdraw" is not limited to cash.

You can get a counter (bank) check for the entire balance, you can write a check on your account (and give it to someone or deposit it somewhere else) and you can wire or ACH money in or out of the account. All are "withdrawals."

"NOW" (negotiable order of withdrawal) accounts are a different sort of animal. Those pay interest, and on those accounts the bank reserves the right (and always has) to require notice. Same with saving-linked sweeps (which, by the way, is what Alan Greenspan wildly expanded the authorization for early in his tenure as Fed Chairman, essentially destroying bank reserve requirements as this was instantaneously gamed to reduce actual held reserves almost to zero.)

What this "quiet" little change means is that Citibank has changed the character of all of its checking accounts. They no longer offer a "DDA" account, whether they did before or not.

The importance of this cannot be overstated. Without a "DDA" account the bank could at its sole discretion dishonor any check at any time, thereby hitting you with an overdraft fee as you didn't give them the requisite seven days notice. It could also prevent you from removing your funds to a more appropriate (for you) institution for that seven days, entirely at their whim and sole discretion.

ALL time deposits (savings accounts included, which have always contained this requirement) effectively are a loan of funds from you to the bank. That is, you don't "deposit" money there, you loan it to the bank which then charges other people to borrow it. This relationship isn't taught in our Goebbels Government Education System (not even in college!) but it is nonetheless true.

However, essentially all banks have maintained one type of account - a Demand Deposit Account - which in fact operates differently. A DDA account is an appointment of the bank as a custodian of your funds, not as a borrower of your funds. Said account never pays interest (per Federal Reserve rules - and common sense) yet it allows immediate, unrestricted access to your funds because you are not lending them to the bank, you are appointing them as a custodian of them.

DDA accounts are essential for the ordinary flow of commerce. There must be an option available to consumers and businesses alike in which they can place custody of funds they may need, up to the entire balance of that account, at any point in time without prior notice. Without this ability you are literally at the mercy of the financial institution in question, which can cause you to incur hideous "bounced check" and other similar charges as well as potentially exposing you to criminal liability for "uttering" (writing bad checks.)

This is NOT a trivial change in terms. I would never do business with an institution for my business or personal checking accounts that did not offer a true demand account, and you should not either. This sort of change is outrageously destructive to your rights as the funds you have on deposit in a checking account are not intended to be loaned to the bank to do with as they wish, but rather to be held for your immediate (if necessary or desired) use.

If you have a lick of sense you cannot hold such an account after this change. If you do, and get burned as a consequence at some point in the future, do not cry that you were not warned - you were, and it's your own fault that you failed to heed that warning.

GET YOUR MONEY OUT OF CITIBANK AND INTO AN INSTITUTION SUCH A CREDIT UNION NOW. THERE IS NO EXCUSE FOR THIS SORT OF ABUSIVE CHANGE IN TERMS THAT COULD EASILY EXPOSE YOU TO FINANCIAL OR EVEN CRIMINAL LIABILITY.

WWW = Wally World Whiff? (WMT)

nospam@example.com (Karl Denninger) — Thu, 18 Feb 2010 08:14:00 -0500

Hmmmm....

Sales by U.S. stores open at least a year fell 1.6 percent in the three months ended Jan. 31, the Bentonville, Arkansas- based company said today in a statement. Wal-Mart had projected sales to decline no more than 1 percent. The retailer reduced prices on laptop computers, along with turkeys and cranberry sauce for holiday meals, as job losses crimped demand.

"Price deflation is hurting sales" was one of the comments they made.

Price deflation eh?

I can confirm this is everywhere. Places that I don't expect to run sales at all are. Big. 2-for-1 (what is called "bogo" in the business, or "buy one get one"), 70% discounts and other similar schemes. The local Publix food retailer has, over the last couple of months, stepped up big with the discounting in what is pretty clearly an attempt to keep people in the stores.

Over President's Day weekend I was traveling and stopped in a significant regional mall. It was dead. Really, really dead. This same mall saw me over the holiday and at the time it looked like any ordinary weekend. This time, which was an "ordinary weekend" you could have fired a howitzer "up the middle" with the only casualties being the $40,000 cars they had parked in the walkways to try to entice people into even more conspicuous consumption (without apparent success, I might add.)

Bloomberg's story reports a 1.6% decline in same-store sales, but fails to mention the 2% decline in US Stores. Oops. AP's story leads with a "profit rises 22% in the 4th quarter!" screamer, but as usual the mainstream mess neglects to include in the first line of copy that this is expected, since the last quarter of the year includes this holiday we call Christmas.

So we have a bottom line beat and the top-line looks decent, but it's all new store adds (which of course cost money to put in.) Same store sales, which AP also neglects to point out fell 2% in US stores, were weak - and below expectations.

The pundits all are trying to spin this as "oh that's just their demographic", while forgetting that the majority of American households are in WalMart's "demographic" - that is, anyone other than Wall Street banksters who managed to asset-strip off tens of billions in bonuses last year.

Out in the real world, Americans are just as broke as they were a year ago, and perhaps more so. Job prospects stink and the economic picture is not bright - unless you're a bankster or their cronies in the mainstream media, of course.

The Peter Principle Lives On (CIT/Thain)

nospam@example.com (Karl Denninger) — Mon, 08 Feb 2010 08:09:00 -0500

They can't possibly be serious....

Feb. 7 (Bloomberg) -- John Thain, the ousted chief of Merrill Lynch & Co., was named to lead CIT Group Inc., the commercial lender that emerged from bankruptcy in December, after a nearly four-month search for a replacement.

Oh, they are serious.

The same John Thain that ran Merrill into the ground with, in part, basis trades (that is, proprietary trading) that blew up in his face? The same John Thain who failed to rein in his prop desk's "geniuses" and was ultimately forced to sell the company to Bank of America? The same John Thain who didn't know how much exposure he had on (otherwise the detonation wouldn't have happened, natch.)

So now Thain gets to run CIT, a company that is shut out of commercial paper market (because it is still on life support) - a firm that had as its core business factoring receivables (which is an idiotic thing for a small business to do, but when you're playing the leverage game this is just one small part of it) and was making nice money at it until it got seduced by subprime lending and the "great spreads" that could be "earned" there.

CIT, of course, didn't figure out that the reason for the "great spreads" was that the people borrowing the money didn't have the ability to pay, and thus those "great spreads" would blow up in their face. Just like Merrill didn't think there was much risk in the "great spreads" they were getting on those basis trades.

The company has been trying to move its small-business lending, trade finance and U.S. vendor finance operations to CIT’s Salt Lake City-based banking unit so it can use deposits as a source of cheaper funding for loans.

That sounds like an awesome idea! Why don't we lend to small businesses with no collateral using our retail banking deposits!

What could possibly go wrong with that plan?

Of course they have to get the FDIC to lift this pesky cease-and-desist order they slapped on the bank first. That could be a small problem.

Only in America can you lose $27.6 billion along with effectively getting fired as your firm is forced into a shotgun marriage and be rewarded with another CEO position. Oh, and let's not forget the $1.2 million Thain spent on his office at Merrill too - while the firm was losing money.

The Peter Principle is alive and well.

Toyota Cars: See, I Told You So

nospam@example.com (Karl Denninger) — Mon, 01 Feb 2010 09:42:00 -0500

Read this article carefully:

The company is making steel plates in Japan that will be used to fill a gap in the pedals and prevent the risk of sticking that triggered the recall, said John Hanson, a spokesman for Toyota’s U.S. unit. CTS Corp., which made the original pedals, is delivering modified pedals to Toyota’s North American plants to help restart idled assembly lines, he said.

“We have very high confidence in the durability of the field remedy, that it’s as good as the factory remedy,” Hanson said. “The kits are being produced in large quantities, and dealers may start getting them as early as Friday.”

This morning on CNBC Toyota USA's President had this to say - listen carefully:

In October and December Toyota blamed floor mats trapping the accelerator pedal and then "sticking" accelerator pedal parts. And if you remember there was a well-reported fatal crash blamed on this:

CHP Officer Mark Saylor, 45; his wife, Cleofe, 45; his daughter, Mahala, 13; and his brother-in-law, Chris Lastrella, 38, were all killed in the Aug. 28 crash in Santee.

Police said someone in the 2009 Lexus ES 350 called 911 just after 6:30 p.m. to report that the car's accelerator was stuck. The car was a loaner because Saylor had dropped off his regular vehicle for service.

Witnesses say the Lexus was going about 100 mph on northbound state Route 125 when it slammed into the rear of a Ford Explorer, plowed over a curb and went through a fence before hitting an embankment and going airborne.

The Lexus reportedly rolled several times before bursting into flames in the San Diego River Basin.

Toyota, which makes Lexus cars, recalled the "all-weather" floor mats in its 2008 version of that model because of complaints about them sliding forward and jamming the accelerator.

Later reports alleged that inspection of the vehicle showed that the brakes were destroyed - that is, the driver attempted to stop and the brakes overheated to destruction.

This sort of problem is exacerbated in modern cars without traditional ignition switches and/or electronic transmission controls. The two "traditional" ways of dealing with a runaway like this (and which was in fact covered back in my youth when I took driver's education) are to either turn off the ignition (one click only so you don't accidentally lock the steering column!) or shift to neutral. The former disables power steering so you may find it more difficult to steer to a safe place while the latter may be impossible with an electronically-controlled transmission (it may deny the shift under load irrespective of your command in an attempt to protect the transmission from destruction.) Shutting off an electronic ignition is difficult in a panic situation as electronic ignition switches require that you press and hold them for several seconds to command a shutdown when the car is in gear - not exactly something you're going to find easy to do when the gas pedal is mashed to the floor and you're trying to avoid collisions!

But not all cars can "run away" in this fashion, and it can be argued that none should. Indeed, it can be argued that that any vehicle with a drive-by-wire system MUST have a means of intuitively overriding an "un-commanded" acceleration in order to be considered reasonably safe and thus able to be certified for sale.

Guess what: Some cars with "drive-by-wire" throttles do have such a safety override.

VWs (I own a diesel Jetta) are indeed set up to prevent this sort of event from happening. If you press BOTH the gas pedal and brake on a VW the brake "wins" - the ECU (engine computer) sees the brake switch is "on" and reduces the engine to idle even if you are stomping the gas pedal - or it is stuck - at the same time.

This safety function has to be able to be overridden, especially in manual transmission vehicles, in order to be able to reasonably launch on an incline - or if there's a failure in the brake switch (lest the vehicle become immediately un-drivable.) VWs include that - it's documented in the owner's manual and ALSO quite intuitive - if you press the accelerator while the brake is applied the engine will not rev, but if you "double tap" the accelerator pedal the safety measure is overridden for the moment and you can accelerate as required. If the brake switch sticks on you can still drive the car - you do, however, have to "double tap" the gas pedal to command acceleration in this circumstance.

Note what's NOT in the "official" Toyota announcement by Toyota USA's statement above - any mention of a software change, as Toyota's President asserts that the software is perfectly ok - and safe.

But then we have Autonation's CEO, and this is what he said this morning - listen specifically at 6:00 into this clip - at 6:30 Autonation's CEO confirms that they're changing the software!

Why is it that Toyota USA's President didn't bother to mention the software?

Is Autonation (a Toyota dealer) misinformed or is Toyota trying to bury any mention of part of the fix - that it is changing ECU software?

You decide whether Toyota has been and is now being straight with people or not.

I'll keep driving my VW Jetta, which came from the factory with a documented intuitive safety override for any sort of "stuck accelerator" fault, along with a documented (in the owner's manual) means to override it should that become desirable - or necessary.

Disclosure: No position in Toyota or any of the parts manufacturers involved.

Cadbury/Kraft - Buffett Doesn't Like It But Goldman Does!

nospam@example.com (Karl Denninger) — Wed, 20 Jan 2010 13:20:00 -0500

This morning CNBC had Warren on making noise about Kraft and Cadbury - he doesn't like the deal at all (and neither do I, to be frank.)

My issue is the same as Warren's - too much dilution, too much debt to make the deal go, too much leverage involved and I think they're overpaying.

But out of the BBC came an interesting article pointing out a rather poignant conflict of interest - perhaps - with Goldman, Morgan and UBS:

"The amount of fees which would become payable to the banks in the event of a transaction being completed with Kraft (or another third party that makes an offer for the company during the offer period) are higher than those payable if no transaction is consummated".

What this means is that Goldman Sachs, Morgan Stanley and UBS - the banks hired to "defend" Cadbury against Kraft's hostile bid - are to be paid more for selling Cadbury to Kraft than for preserving its independence.

Well ok, but what was the intended purpose of that "defense"? Was it simply to get more money? If so, then in point of fact the bankers delivered exactly what they were contracted to do, and I don't see the problem.

But if the goal was to not do a deal at all then someone screwed the pooch here in terms of negotiating that agreement - and of course the question then must turn to "who did that?"

See, here's my baseline - there ain't a thing wrong with setting the goal of "X" for your engagement and then saying "if you can't accomplish X we'll pay you $X less something for secondary goal Y."

Indeed, as someone who has done work with investment bankers in the past, and paid them, that's precisely the sort of formula I put forward to them. I said "I would prefer goal #X, but if you can't get there, I'll take goal #Y - but its worth less."

Guess what? I got goal #X and they got paid.

So where's the beef?

The press coverage I have seen suggests that Cadbury shareholders were not necessarily opposed to a deal at any price, just that they didn't like the original offer.

If that ultimately is the position of the majority of shareholders then despite the kvetching about Goldman, Morgan and UBS' role in this deal I don't see the grounds for complaint. They were hired to do a job with the primary goal being "get more money", not "avoid the sale of the company", and they delivered exactly what they were paid to do.

This is even more true if it ultimately turns out that Warren (and I) are correct - that is, that Kraft overpaid. In that case Goldman, Morgan and UBS most certainly earned their fee - they will then have been proved to have obtained "the long end of the stick."

How The Hell Is This Legal? (Front-Running)

nospam@example.com (Karl Denninger) — Tue, 12 Jan 2010 15:11:02 -0500

This is flatly unbelievable.

A senior Goldman Sachs executive sent an e-mail message to clients on Tuesday disclosing that the firm’s Fundamental Strategies Group might have shared investment ideas with the firm’s proprietary trading group or some clients before sharing them with others.

Got that?

In other words, the firm reserves the right to effectively front run by using what looks to be a dodge around the law.

That is, they reserve the right to tell their own internal trading group that they're about to recommend that you buy or sell something before they tell you.

Is this legal? Probably.

Should it be? That's a different question.

If I call my broker and tell them "Buy 100,000 shares of Merck at the market" it is illegal for the broker to buy shares of the same security for its own account in front of (and with knowledge of) my order. The reason is that the broker could then sell that position to me (at a baked-in profit) or simply execute my order and then sell immediately behind it, taking advantage of the price ramp that my order creates.

How is this different? Well, Goldman doesn't know that its clients will act on these "Trade Ideas" that it "shares", for one.

But really.... is this anything more than a dodge around the law dreamed up by a bunch of hob-knobbers with law degrees combing the SEC rules and regs for ways to "creatively exploit" various loopholes?

Second, exactly why is it that Goldman (and I presume other big trading houses) share these "trading ideas" in the first place? Is it to make you money, or are they undertaking all this "work" to provide their prop desk with the ability to get in front of you and gain (yet another) advantage?

If you wondered why I believe that brokers should never, under any circumstances be permitted to run a prop desk and trade their own book, you now know why. You, the client are put at a disadvantage in that the broker both can and might (and in this case it is blatantly disclosed) trade directly in front of something they will then advise you to either buy or sell.

Thanks guys.

Nexus One: Nice Try Google

nospam@example.com (Karl Denninger) — Tue, 05 Jan 2010 14:20:00 -0500

You've got to be kidding.

Nexus One without service: $529
Nexus One with new, 2-year T-Mobile US service plan for new customers: $179
Nexus One with new, 2-year T-Mobile US service plan for qualifying existing T-Mobile customers who are adding data plans: $279
Nexus One with new, 2-year T-Mobile US service plan for qualifying existing T-Mobile customers who are upgrading their data plans: $379

Sorry, but with this pricing this thing is dead on arrival.

You get into the $300 area for an unlocked, "any network" device, you'll sell a metric ton of them.

At this price - which is just $20 cheaper than AT&T's 16GB iPhone 3GS - it's a net lose. Why? Because you have to add an SD card to the Nexus One.

They also, IMHO, made a huge mistake not insisting that the 3G frequency set be compatible with AT&T's frequencies. I understand the issue with trying to make it work with Verizon as well (which is on CDMA and thus totally incompatible with GSM) but the decision to not include the AT&T frequencies is, in my view, a huge mistake.

I was planning to buy one of these, as a current T-Mobile customer.

Not for $529 I won't, and I'm off-contract - nor will I lock for two more years at $379 either.

$350 no-contract, you own it, maybe. $299 no-contract, you own it, $OLD.

It won't matter how good it is at this price-point. T-Mobile has destroyed the contract model for mobile service with their "Even More Plus" plans and nobody in their right mind will be going back to an obligated plan in the future.

In addition watching the webcast was literally painful. This company - with a $623 per share stock price - put presenters on the stage that appeared to have EXTREME levels of stage fright, didn't know the product and what's worse, their camera-man (or men) were beyond incompetent and made the presentation look worse than the "Morning News" from my kid's grade school "broadcast TV!"

To be blunt I was stunned at how poorly this "announcement" was handled.

If this is indicative of what Google has become over the last two years their stock is overvalued by 95% or more.

It really was that bad.

Here Come The Lawyers! (Credit Suisse)

nospam@example.com (Karl Denninger) — Mon, 04 Jan 2010 14:43:00 -0500

Well well, now the game is afoot! Remember this article?

A Swiss bank that used its Cayman Islands’ branch to engage in what a US federal judge has branded “predatory lending practices” is being investigated by the US authorities.

Senior officials of Credit Suisse, Switzerland’s second largest bank, are facing claims that they pocketed millions of dollars by dishing out loans that were impossible to repay.

That was in relation to Yellowstone, a high-flying development that got into trouble and went boom.

It is reported that now property owners that bought land or homes at a number of developments (which appear to be related to and might include Yellowstone) are raising the following allegation:

Jan. 4 (Bloomberg) -- Credit Suisse Group AG was sued by property owners at ski resorts in Montana and Idaho who claim the bank made loans based on inflated appraisals so it could take over the resorts when the debts couldn’t be repaid.

....

The lawsuit alleges racketeering, breach of fiduciary duty, fraud and negligence. The lawsuit seeks $24 billion in damages, triple the $8 billion in alleged losses for property owners and names three Credit Suisse units and Cushman & Wakefield Inc. as defendants. Cushman & Wakefield provided appraisals, according to the complaint.

Oh my. Now that's the sort of thing I was expecting to see some time ago - property buyers who put 2 and 2 together and say "heh wait a minute, that should be 4 but someone claimed it was 6!"

Indeed.

There's no chance that anyone would ever pressure someone to fraudulently inflate appraisals, is there? Oh wait... what's this?

The concern of this petition has to do with our "independent judgment" in performing real estate appraisals. We, the undersigned, represent a large number of licensed and certified real estate appraisers in the United States, who seek your assistance in solving a problem facing us on a daily basis. Lenders (meaning any and all of the following: banks, savings and loans, mortgage brokers, credit unions and loan officers in general; not to mention real estate agents) have individuals within their ranks, who, as a normal course of business, apply pressure on appraisers to hit or exceed a predetermined value.

This pressure comes in many forms and includes the following:

the withholding of business if we refuse to inflate values,

the withholding of business if we refuse to guarantee a predetermined value,

the withholding of business if we refuse to ignore deficiencies in the property,

refusing to pay for an appraisal that does not give them what they want,

black listing honest appraisers in order to use "rubber stamp" appraisers, etc.

Gee, 11,000 signatures dating back several years....

I wonder, in addition, why the bank would put some of these deals through a Cayman Islands "blind" subsidiary (sans actual people or offices, of course), as was alleged in the previous article I cited.

Hmmmm....

If the plaintiffs can show that their allegations are true regarding intentionally-overvalued appraisals then this may have some legs.

Credit Suisse, for its part, says that it believes the lawsuit is without merit and "will defend itself vigorously."

I'm sure it will, and I'm also reasonably certain that the judicial record of the proceeding in the Caymans will wind up being a part of the exhibit list for the case.

This one will be interesting to watch.

Disclosure: Long lawyers for the next several years.

Who Set The Bomb Off? (Pimco's PHK)

nospam@example.com (Karl Denninger) — Wed, 30 Dec 2009 15:45:00 -0500

Hmmmm....

Someone smelled a bit of smoke yesterday, but the real fire sale was this morning.....

To put this in perspective that issue traded nearly 8 million shares today, against a normal volume of 1/10th that.

PHK is a closed-end PIMCO fund. What's in there? As of September 30th, Pimco disclosed the holdings - have a look....

There's a pretty good mix of "stuff", including a fair bit of mortgage-related exposure.

What would prompt "someone" to unload nearly $80 million bucks worth of this issue more-or-less "all at once" earlier today - and with what looks like a market order - a "get me out right now irrespective of price" sort of circumstance?

I have no clue, but this sort of closed-end fund doesn't normally see this kind of volatility, and a quick perusal of the credits in their latest disclosure leads one to wonder: does someone smell smoke - serious smoke - in enough of this fund's exposure to be willing to accept a price SOME TWENTY PERCENT OFF ITS CURRENT TRADING LEVEL to get out RIGHT NOW?

Sure looks that way to me......

(At a dividend yield of 11.8% it's pretty tough to argue that you're not taking significant risk in this thing. Bill Gross and PIMCO always seem to have the inside edge for some odd reason.... until they don't. Is this one of those times?)

Hattip Zerohedge for the original look....

There Is Never Only One... (Credit Suisse)

nospam@example.com (Karl Denninger) — Thu, 17 Dec 2009 08:04:00 -0500

This is a problem....

The Federal Reserve Board on Wednesday announced the issuance of a consent Order to Cease and Desist against Credit Suisse AG, Zurich, Switzerland. The Order requires that Credit Suisse improve its program for compliance with U.S. economic sanctions requirements on a global basis.

The Swiss Financial Markets Supervisory Authority, the home country supervisor of Credit Suisse, has agreed to assist the Federal Reserve in the implementation and supervision of the Order.

And....

Dec. 16 (Bloomberg) -- Credit Suisse AG agreed to pay $536 million to settle claims the bank helped process payments that let Iran and other nations avoid government sanctions and gain access to U.S. financial markets.

The Zurich-based bank entered into a deferred prosecution agreement in settling with the U.S. Justice Department, which said Credit Suisse made more than $1.6 billion in illegal transactions involving Iran, Sudan, Burma, Cuba and Libya from the mid-1990s through 2006, according to a court document filed in Washington today. The agreement also settles claims by New York prosecutors, the Federal Reserve and the U.S. Treasury Department, the bank said today in a statement.

WTF? How the hell do these people still have a banking charter valid in the United States?!

I am going to simply opine to the same effect as I have repeatedly.

AGAIN: IF YOU SEE ONE, THIS IS WHAT'S BEHIND YOUR CUPBOARD DOOR:

I'll tell 'ya what - I think there is nowhere near sufficient appreciation of the credit and regulatory problems that have been hidden from view and ignored by investors, especially those headquartered and primarily operating in Europe.

I will repeat what I have said across the board on this "financial mess":

IT IS NOT OVER, THE SYSTEM IS NOT STABLE, WE HAVE FIXED NOTHING AND IN FACT HAVE MADE THE SITUATION WORSE BY ALLOWING MORE HIDING AND LYING OF THE TRUTH. THERE WILL COME A DAY - AND NOT ALL THAT FAR IN THE FUTURE EITHER - WHEN WE WAKE UP TO LOCK-LIMIT DOWN AND ONE OR MORE MORE IMPLODED "TOO BIG TO SAVE/FAIL" BANKS.

Citigroup Gets "Sued" (Arbitration): Abu Dhabi

nospam@example.com (Karl Denninger) — Wed, 16 Dec 2009 08:02:00 -0500

Tee Hee..... I was wondering if they'd pay quietly:

Dec. 15 (Bloomberg) -- Citigroup reported that an arbitration claim was filed against it today in New York by the Abu Dhabi Investment Authority, which purchased equity units from the company in November 2007. The units obligate the authority to purchase a total of $7.5 billion of common equity on specified dates in 2010 and 2011. The arbitration claim alleges fraudulent misrepresentations in connection with the sale and seeks rescission of the investment agreement or damages in excess of $4 billion.

Let's remember when November 2007 was.

"There will be no recession": Ben Bernanke
"Subprime is contained": Ben Bernanke .et.al.
"The fundamentals of the economy are strong": Treasury and Bush

And of course lots more.

Let's also talk about what wasn't commonly known - off-balance sheet trash, HELOCs behind liar loans that only possible to pay off if the house price continued to go up yet were rated "AAA" and more.

Should Abu Dhabi have known about this? Maybe.

Was there fraud - that is, misrepresentations of known facts by Citigroup?

Here's what I said about the deal at the time:

Citibank gets roughly $8 billion in an equity infusion from the Arabs. But it is a convertible preferred offering, although they structured it in a way to not say that (calling it a sale of "unit investment trusts" instead) and was made at a Guido-style interest rate of 11%. While there are allegedly anti-hedging provisions in the deal, anyone who actually believes that the folks over in Dubai don't have an affiliate that they can hedge through has rocks in their head. Some or all of that risk will almost certainly be hedged off immediately, and that coupon is insanely lucrative - for Dubai. Oh, if you just want to look at this as a discounted stock purchase (that is, roll the coupon into the stock price) it marks Citibank's stock in the low to mid $20s. That's nice if you're a current shareholder, no?

When you have to pay a higher interest rate than some of us have available on our credit cards, something serious is going on in your company and it ain't good!

Looks like Abu Dhabi didn't hedge! I was wrong on that point - these folks are more stupid than I believed. So much for "Arab Intelligence"; this reflects rather poorly on the rest of Dubai and Abu Dhabi, unfortunately. If their diligence was as good on the rest as on this deal, well...... (and note that I called "BS" on it at the time!)

Read the rest of that Ticker and then tell me that it was a good time to buy Citibank stock - stock that was, at the time, trading right near $30/share.

It's $3.50 now - that's a damn fine loss you got there boyz!

By the way, for those who say that the Arabs couldn't have reasonably known about the embedded losses in HELOCs and other fun stuff (including the things that are sure to boomerang now that the FAS changes are taking effect) you might want to look at the ticker from just a couple days later in which I reported:

E*Trade gets a Guido loan and marks to market their entire ABS paper - at a SEVENTY PERCENT DISCOUNT!

I don't think anyone is (yet) understanding the impact of this.

Most of E*Trade's portfolio was HELOCs; there were few purchase-money firsts in there.

All I can do is shake my head. None of this stuff was a surprise to anyone with their ear to the ground - or a nose for digging around a bit.

How many of you toss $7.5 billion around like used toilet paper? Well these guys apparently did, and now they're bleating that they did what looks to be zero diligence or willfully and intentionally ignored that which was reported in multiple places, including in The Ticker.

They may win their arbitration case, as who knows what reps and warranties Citi offered. That will be the deciding point, I suspect.

But this much is certain - when you loan a supposedly "great credit risk" money at 11% - when the asset markets are open and high-quality credits are trading in the 6s and 7s - the borrower paid you an outsize return for some fundamental reason.

The reason is probably because they got stink-butt.

Eh, This Is "Good" News? (C)

nospam@example.com (Karl Denninger) — Mon, 07 Dec 2009 08:15:00 -0500

I dunno....

The fund converted preferred securities of Citigroup that it purchased for $3 billion last year into common shares and sold them, making a profit of $1.1 billion, KIA said in an e- mailed statement today.

Nice profit but....

The UAE has a chunk of "mandatory convertible" that is going to go off around $31. With the common at $4. That's not so smart.
Citibank allegedly has significant (high single-digit billions) exposure to Dubai - and that may be a zero. The fate of that position is, at present, unknown.

Now let's look at the facts here. Citi in 2007 - just before it all came apart - negotiated a capital raise from the Abu Dhabi sovereign wealth fund with that mandatory conversion "option." Those folks are going to get absolutely screwed on the conversion, buying $4 stock for $31. I'd be rather pissed.

Why?

Well, you don't think Citi was exactly straight with those folks as to their exposure, do you? It's not like they didn't know they had a metric buttload of off-balance sheet trash laying around, never mind all the other fun stuff like credit card lines and such.

I don't know what to make of all this, but if I had to guess the Kuwaitis know something's afoot here and have every intention of getting while the getting is good. If Citi stock was going to go back to $30 in the next couple years - or even only to $10 or $15 - they'd be nuts to sell it now.

Of course if it's going to zero, and they know that because one or more little birdies tweeted in their ear and expressed how upset they were at being flim-flammed.......

Anyway, this is all conjecture - I certainly have no inside track with Citibank or the Arabs. But this much is certain - with a 30% gainer and the potential for a 200% or more gainer if Citi stabilizes and prospers, why bail off in the entirety now?

I smell a rat.

Verizon ETF Warning

nospam@example.com (Karl Denninger) — Thu, 05 Nov 2009 13:22:00 -0500

If you have an "advanced device" on Verizon (or want one) be aware that there are rumblings of SERIOUS increases in ETFs should you be unhappy (or just run out of money and need to cancel.)

It appears that Verizon (from a little birdie that just tweeted in my ear) is increasing their ETF on these devices some time in the next two weeks to $350 (from $175) with a $10/month decline (from a $5/month decline) for "advanced devices" (e.g. Blackberries, Netbooks, etc) for all new contract signers or re-signers.

This is a rather curious change given that T-Mobile has effectively gotten rid of subsidies with their "Even More+" plan, and even better, has quantified the subsidy value to the customer ($10/month difference between subsidized and non-subsidized.)

This wasn't quite the reaction I expected from T-Mobile's announcement...... we'll see whether arrogance is an appropriate business model in this economic environment, and whether AT&T attempts to follow Verizon's lead.

Best guess as to intent: This is an attempt to prevent people from arbitrage'ing the ETF and some devices (e.g. the Blackberry Storm.)

I wish you luck Verizon.

Disclosure: No position.