I haven't talked much about hostile take-unders since I warned on CFC going bust, their stock still the darling of Wall St, on news of a convertible bond backed by the Federal Reserve. Then there was WAMU. What a shame. HTUs are alive and well today, only on a much larger scale.
For newer readers, an HTU occurs when any entity gets themselves in financial trouble, and a prince laden with cash rides up on a white horse. The prince graciously offers a timely bailout to the ailing owners of the company.
Overcome with emotion, the humbled Board of Directors asks respectfully, "What do you want in return?" "Why, I want nothing!" the prince responds with a smirk. "Nothing but a stake in your future success," he smiles, "that's how much I believe in you."
The destitute stock holders look at one another in solemn shock, then suddenly, erupt in laughter and rejoice. We are SAVED! Beer flows like wine. Money has dropped from Heaven!
After the celebration, it's time for the pesky paperwork.
The prince begins, "Your stock is down 50%, but it is still worth $20 because you have talent. I am prepared to give you a $100 million bond, all I ask is a fair share of preferred stock when your stock price inevitably hits $30. Then, I'll tear up this silly bond and we will all be wealthy. In the mean time, I ask a paltry 4% return on capital. Not a lot, after all, your future success is now in my best interest. You won't get a better rate from a proper bank. We are in this together!"
Signatures fly. The rest is stock market history. The prince watches the stock price shoot to $27.79 on the news. Everyone is overjoyed.
Then with a sigh, the prince texts his broker,
sel shrt $93m XYZ @ $28
r u thirsty?
drinks on me
The prince has created a $100 million covered short in ailing XYZ, with a 40% pumped price. If he can't knock the price down, the bond converts to long shares to cover. If he is successful is wiping out the stock price, he gets the shareholder equity, plus the interest on his bond, plus the interest on his shorting proceeds. When XYZ goes belly up, he gets preferred rights to liquidated assets.
Why is an HTU discussion timely, again?
Because the Fed is buying 85% of our Mortgage Backed Securities, with a taxpayer guaranteed return of principle and interest due. All they ask, with a smirk, is a fair stake in our very bright future.
They've already covered their interest and their capital, now they can steal America's home equity as they short real estate prices to $0. If they can foreclose, they get the property and the security guaranty. If not, they live off the interest payments, the short proceeds and its associated interest. And it's all rising in value from their raging deflation.
FDR,
ReplyDeleteCould you please further explain with precise financial figures the process on which this take under functions?
I'm getting that the Prince receives $2.8B from the short selling (100,000,000 shares X $28 / share) while only "investing" $100MM. Is this correct?
If so, profits would amount to $2.7B!!!!!
Also, I would imagine that in order to short sell $2.8B worth of stock, anybody must really have a good chunk of capital at a brokerage firm to do so.
Lastly, a short-selling of this magnitude would be noted by all markets participants, wouldn't it??
Please help me thoroughly understand this concept since ever since you first talked about it on the [CFC / BAC] and [WAMU / TPG] "deals" I have struggled to fully understand it. Specially, since the terms of the deals seem to be "reasonable" to the average person.
Thanks a lot.
"Please help me thoroughly understand this concept since ever since you first talked about it on the [CFC / BAC] and [WAMU / TPG] "deals" I have struggled to fully understand it. Specially, since the terms of the deals seem to be "reasonable" to the average person."
ReplyDeleteI once wrote this explanation for a Fed-backed convertible, maybe it will help...
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Your cousin Vinnie gets himself in deep debt by compulsive betting on that horse who never loses, "CDO Surprise".
Vinnie-the-Pimp is in trouble. He needs cash bad. He needs bling to show the merchandise, support his drug habit, and pay the girls what they need to survive. He's in deep on a bulletproof Bimmer with a white package under the spare, he bought it to drive the kids to school. It seemed like a good idea at the time.
So Vinnie knocks on Guido-the-Shark's door at 3am, desperate for a hit and 200 Gs to get back in good standing with the gangbangers calling.
Guido tells Vinnie he shouldn'ta lost all the money he floated him the past 5 years. But he likes him. He's like family. So Guido tells Vinnie to visit Paulie-the-Dealer.
Paulie knows he's coming, so he has a briefcase w/2,000 Franklins wrapped and ready. The deal is 10% a year until he pays it all back, plus they want a free escort every year to the Police Chief's Ball. No kidding around, this is a big favor. Plus Paulie wants a few racing tips for his boys, Christmas is around the corner.
Vinnie knows it's a hard deal but he has no choice. He's gonna have to work harder than ever pay back the family that saved him in his darkest hour. He takes the case.
As soon as Vinnie Bimmer peals out, Paulie calls Guido. Guido calls Joey-Repo. Joey goes and picks up Vinnies hot Bimmer at midnight and parks it in Guido's garage. Guido pawns it for $45 G's. Times are tough all over.
Now Vinnie doesn't even have a car to drop off his girls. What bad luck.
A week later, Guido calls, Paulie wants his first payment. Vinnie doesn't have it. Guido invites Vinnie over to play cards that night with Paulie and Joey. They want to size up if Vinnie's business outlook is better than his life insurance.
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Bottom line:
Any time you take a loan in exchange for better performance, you better be sure the lender doesn't slice your Achilles.
TARP is about to get ugly.
So they're either hedging or raping the banks they're supposedly helping. I think your example is brilliant, but how do you short real estate? Isn't it too broad? Also, if they indeed wanted to crash real estate, why haven't they raised interest rates? Now would be the perfect time as inflation seems to be the result of a crashing dollar. They could raise rates and then look at the cameras and tell us how we need to prepare for inflation. They aren't interested in this right now. I think the Fed is corrupt, don't get me wrong, but that evil?
ReplyDeleteMaybe I'm just missing something, so please help me connect the dots.
"They aren't interested in this right now. I think the Fed is corrupt, don't get me wrong, but that evil?"
ReplyDeleteThe Fed is evil on a magnitude few Americans realize. Consider their main objective and primary prize: to finance both sides of a major war. Since the FBUS/SBUS/Fed, starting wars has been the ultimate focus of central banks.
I agree with you the Fed is aching to raise rates, and setting up political cover to hike as soon as possible.
Your key to connecting the dots is that a rate increase can either continue to accommodate inflation or cause a swing to deflation. They depend on this thinly veiled distinction to camouflage their rape of American children and to confuse Congress.
All that matters is the Fed rate RELATIVE to the market rate for real money--that is, a similar duration T-bill. Since the Fed only lends for 30-60 days, the 3-M Treasury is a good relative measure. That is why the Fed rate ALWAYS chases (+/- their desired effect) that core rate.
If the Fed interest rate is above the 3-M T, they are deflating. If they are below it, they are inflating. The relative rate is what matters. This simple trick is what confounds 99.9% of the world's economists.
So what?
So the Fed can raise rates and still rake in hefty premiums on freshly printed inflationary cash, IF their hikes remain below the market's own interest rate increase (ref 2002-2007 where the Fed hiked underneath the rising 3-M T).
The MARKET is what increases interest rates as economic activity picks up, because the govt has to pay more to attract the necessary amount of operating cash. People want to take risks, so banks can charge more in response to a high demand for cash. In a central bank driven monopoly, commercial banks do little more than arbitrage Fed rates and market rates.
On the opposite side of the same coin, the Fed has been executing a massively deflationary policy as they've been "cutting" rates from 2007 through today, because their rate has consistently stayed 200% to 10,000% above the market rate for short term cash, the zeroed-out 3-M T.
That is why stock and real estate prices have been crushed while Fed rates have fallen. Keeping their rate way too high, is the subversive way the Fed rakes-in stock and real estate equity causing prices to fall.
To determine macro stock and real estate market direction, all you need to determine is the difference between these two rates. That's all you need to know to rake in perpetual gains right next to the Fed, and profit from their inflationary/deflationary pendulum.
The only reasons the fed would want to kill the goose who laid the golden eggs is if the goose was done laying eggs or if the goose was a threat to the fed. Perhaps the goose has h5n1.
ReplyDeleteSo, which is it?
So what is the upshot here? It looks like the parasite (FED) is about to kil it's host (average consumer) ...
ReplyDeletePlease read The Currency Scam, linked above.
ReplyDeleteNice post ! Evil, very.
ReplyDeleteA few weeks ago we talked about how there was a good chace the FED will fail at some point, and the US GOV too.
I am trying to conect the dots on their future failure when they can pull off events like this.
I don't think the majority of the sheeple are smart enough to uprise and demand a end of the FED. Can they just implode?
An organization cannot be evil. Only people can be evil.
ReplyDeleteThe people who work for the fed are only doing their jobs. Make money.
I would say the term evil should be applied to those who know something is wrong and won't change it because they are benefiting from it.
"An organization cannot be evil. Only people can be evil."
ReplyDeleteThe concept of central bank is pure socialism (the masses are forced to give everything to the few) so the Federal Reserve Corporation, as an organization, is pure evil in the darkest sense of the word.
Plank 5 of 10, Marx's Communist Manifesto:
"Centralization of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly."
Most of the people who work there day-to-day don't know they are working for the devil incarnate, they don't understand who the shareholders are, since the Fed is above US law and refuse to submit to a Congressional audit.
So you are right, the janitor is certainly not evil, he knows not what he does.
In general, the politically appointed board of governors are hand-picked and approved because they are samples of our most stupid and ineffective people, but that also isn't the same as profiteering by intentionally creating maximum American suffering.
The honor of the most evil, dangerous men (no women are permitted in these circles) in the world today the Fed's, and other world banks, elite club of private shareholders--old european central bank money, middle east sheikdoms and red chinese communists--just follow what used to be our money.
FDR, please your take: are we going to break through 10,000 or not?
ReplyDeleteAll that matters is the Fed rate RELATIVE to the market rate for real money--that is, a similar duration T-bill.
ReplyDeleteCan you explain why the 3M T-bill is the market rate? That's the rate at which the USG is able to borrow -- I understand that the banks can make a riskless spread if they can borrow below this rate & lend to the USG. But what role does that rate play in the rest of the loan markets? E.g., if the Fed Funds rate is at 1%, the 3M T-Bill is at 1.25%, and a 30Y mortgage is at 6%, how is that situation differ (inflationary vs deflationary) when the FFR is 0.25%, 3M T is 0.1%, and a 30Y is at 5%?
Are guns evil or is just way they are used by certain people?
ReplyDeleteCouldn't the fed / central bank be the referee in competitive banking / currency system that benefits mankind instead of repressing them?
"Can you explain why the 3M T-bill is the market rate?"
ReplyDeleteThe 3M-T is the market rate because it is about the same term, and it is auctioned. That simple. It represents the fence between what huge money will take or leave with respect to risking capital in the economy.
Great economy = lot's of smart risk takers = high T yields.
Depression = no smart risk takers = 0% or even negative T yields.
The Fed has no say whatsoever with respect to "setting" interest rates. The market does that.
But the Fed can feed banks by peddling their inflationary reserves a little below the market rate, or they can suffocate banks by making reserves too expensive for resale.
With asset inflation reaching a pace never before seen, is the FED a success here. 401k's are flying while products are getting cheaper to buy. Best of both worlds, but doesn't make much sense. The DOW appears to headed for at least 11,000 by christmas and will probably break the old highs by next summer unless some event causes deflation before then. This is all crazy of course, but it is just like the dot com bubble. it will end bad for the longs, but it will end horribly sooner for the shorts. I recommend waiting till spring to short the DOW over 12,500 or you will not be able to hang. Inflation is killing the deflationists and the Elliot Wavers keep changing their count. P2 becomes P3 when the market falls one day, then becomes P2 again when the market takes out new highs. When the DOW breaks 15k, what count will we be in then?
ReplyDeleteFDR, what is your forecast for the rest of this trading week in respect of Dow / S & P?
ReplyDelete"Couldn't the fed / central bank be the referee in competitive banking / currency system that benefits mankind instead of repressing them?"
ReplyDeleteUhm, no. The Federal Reserve is pure evil, because they are the ultimate monopoly.
The central bank is a private corporation, their only duty is fiduciary, that being, to steal as much wealth as inhumanly possible from The People.
All corporations are the same, that way, and that is a very good thing in a free economy.
The problem is that the central bank, by definition, owns a privileged currency monopoly. So they make all the rules to expedite a maximum transfer of wealth from Americans to their private shareholders.
That simple. It represents the fence between what huge money will take or leave with respect to risking capital in the economy.
ReplyDelete"Huge money" is distinct from the commercial banks, right? But aren't the banks currently able to borrow from the Fed at 0.25% and lend to consumers at 15%+ on credit cards, etc.? So what do they care what "huge money" will lend to the USG at?
So FDR, what do you think about going back to days of colonial script.
ReplyDelete"So FDR, what do you think about going back to days of colonial script."
ReplyDeleteThe nation functioned perfectly without a central bank, from 1836 to 1913. Over the entire time, we had a cumulative inflation rate of 0%.
Jackson's execution of the central bank spawned the Industrial Revolution.
""Huge money" is distinct from the commercial banks, right?"
ReplyDeleteIt is anyone who cares to bid--the sum total of individuals, companies, countries.
Still, aren't the banks currently able to borrow from the Fed at 0.25% and lend to consumers at 15%+ on credit cards, etc.? So what do they care what "huge money" will lend to the USG at?
ReplyDelete"Still, aren't the banks currently able to borrow from the Fed at 0.25% and lend to consumers at 15%+ on credit cards, etc.?"
ReplyDeleteTo some extent banks can issue small predatory loans and try to survive by feeding on fees and penalties, but the most predatory banks are also in the most trouble or gone. The market rules in the end.
Sorry, I still don't get the mechanics of this. Suppose the Fed set the Fed Funds at 0% (or -1%) tomorrow. How would this change the situation for the banks that are currently in trouble? And how would it be inflationary -- who would borrow that can't right now?
ReplyDelete"How would this change the situation for the banks that are currently in trouble?"
ReplyDeletePaying banks to take money was already tried and failed. It didn't work because the Fed, though incompetence or malice, has already killed all the borrowers dead. Yes, I believe one can be an incompetent criminal, too.
Clearly a prerequisite to lending of any sort is an economy worthy of leverage.
"How would this change the situation for the banks that are currently in trouble?"
ReplyDeletePaying banks to take money was already tried and failed. It didn't work because the Fed, though incompetence or malice, has already killed all the borrowers dead. And of course it was a drop in the ocean of levered up bank debt worth negative 100s of trillions (last guestimate I saw was $500T).
Clearly a prerequisite to lending of any sort is an economy worthy of leverage.