Markets live chat transcript for the chat ending at 15:39 on 20 Nov 2008. Participants in this chat were: Neil Hume, FT (NH) Stacy-Marie Ishmael, FT (SMI)
NH:
Good morning (or afternoon, depending in which time zone you’re in)
NH:
Thanks for joining Stacy and I for this impromptu ML
SMI:
Yeah, we’re doing (yet another) test of our software ahead of launch
SMI:
To sort out any bugs. Hopefully we won’t crash everything this time
SMI:
Neil, can you give me a quick update of the latest in London
NH:
It’s got worse. Much worse
NH:
chin strap notch up to 4
NH:
FTSE 100 down 163 points at 3,842
NH:
through last month’s five and half year low
NH:
of course we are only tracking Wall Street
NH:
which hasn’t bounced back from yesterday’s fall
SMI:
Yep. There was a serious rout in Asia overnight, after that late and dramatic sell-off in the US – which looks to be continuing today
SMI:
Dow down more than 2 per cent at 7819
SMI:
11,000 was just a memory
SMI:
Poor jobs data really didn’t help sentiment
SMI:
Jobless claims rose by 27,000 last week, much higher than expected and the highest level in 16 years.
NH:
Grim. Any positive news?
SMI:
Well depends on what you make of this Citi news
NH:
Yeah, CNBC saying Citi raised $50bn in private capital
NH:
which sounds bonkers to me
NH:
The big C is only valued at $34bn now
NH:
surely the $50bn refers to cash they have raised previously
NH:
And then Prince Alwaleed bin Talal put out a statement saying he plans to raise his stake in Citi to 5 per cent
SMI:
Didn’t he say Citi was being ‘dramatically undervalued’?
NH:
and they are even more dramtically undervalued now
NH:
seen the price?
NH:
off another 15% at $5.41
SMI:
Yikes.
SMI:
But investors are rightly concerned about Pandit’s ability to deal with a collapsing share price, a deteriorating balance sheet (not helped by having to consolidate SIVs) and more big writedowns. I wonder why the Prince is so confident.
NH:
nothing is working
SMI:
Speaking of ugly, let’s take a quick look at the carmakers
NH:
jeepers – GM off21.5% at $2.20
NH:
this will be a penny dreadful soon
NH:
and Ford
NH:
off a more modest 14% at $1.08
SMI:
Hopes for a bailout dashed yet again
SMI:
I’ve got a note from BNP, but on GMAC
NH:
The Big Three walked away from Washington empty-handed and are unlikely to reconvene in December. While we believe that some form of government support is required and likely, we believe that any package will come with pre-conditions, but unlikely to occur this week, but only in January once the new President takes office. The question is could they survive until January? And could a pre-packaged Chapter 11 be a solution. Ford has confirmed that it has the cash it needs to wait until 2009. It had cash balances of $18.9bn at the end of Q3 which along with its committed (but undrawn) facilities of $10.7bn gives it some breathing room. GM had $15.9bn of cash and $3.1bn of lines giving it a total liquidity position of $19bn. With cash burn that averaged around $2.0-$2.5bn a month (or $7.0-$7.5bn a quarter), or twice expectations, and some debt maturing in early 2009, its situation appears much tighter. Although Chrysler does not explicitly provide its financials, the FT this morning indicates that they have about $6.1bn in cash with a burn rate of $1bn a month. Given expectations of very poor Q4 sales, we expect the burn rate to be even higher in Q4. The $10bn figure – regarded as the minimum to meet operational requirements could well be reached by January 2009. So on balance the liquidity situation for GM and Chrysler looks dire.
NH:
The other question could new money follow some sort of pre-packaged bankruptcy. This is quite possible as a pre-packaged bankruptcy would realign the capital and cost structure of the automakers (shareholders get wiped out, bondholders take a massive haircut, healthcare and pension benefits get renegotiated) making them as competitive as the Japanese and Asian automakers, which has to be the long term goal of any restructuring. The new money could then be used specifically restructuring making the auto chain more efficient via rightsizing. The automakers claim that auto sales will drop as customers will not buy cars from a bankrupt manufacturer, but that is unproven, especially if the commitment to building “cars what people want” continues and the companies have made a significant amount of progress in this respect (according to both JD Powers and Harbor reports). The stock prices of the GM & F certainly fell sharply (10% & 25%) reflecting such growing concerns. From a bondholders perspective, the key to note is that the level of credit exposures to the Big 3 (and the supply chain) is significant (loans, bonds, CDS) – leading to continued write-downs should this scenario playout.
NH:
bickie
Reminder to readers – if you arrived late and want to stop the dialogue ‘jumping’ as you catch up, hit the ‘pause auto-scrolling’ tab at the bottom right hand corner
SMI:
Makes for grim reading, like everything else these days
SMI:
Just on GMAC
SMI:
One of the reasons the carmarkers are so cash-strapped is because those mini banks of theirs haven’t been able to securitise all those car loans
SMI:
They’re holding on to a lot of paper they’d rather not have
SMI:
So in that context, getting all TARP-y through bank holding companies makes sense
3:13PM
NH:
NH:
Market melting down before our eyes
NH:
FTSE now off 183 points
NH:
looking a 10% fall in two days
NH:
horrific
NH:
intersting S&p fact
SMI:
go for it
NH:
a third of the entire index is not even qualified to be in the index — 186 stocks have market caps under $4 billion, the minimum value for consideration for S&P 500 membership.
SMI:
wow
SMI:
that’s insane
NH:
hang on
NH:
some comments coming out of the RBS EMG in Scotland
NH:
and it looks like someone might have actually said sorry
SMI:
(Neil is having computer problems)
NH:
Sir Tom McKillop
NH:
says
NH:
The seriousness of this moment is clear to us all and in particular to me, as the Chairman of the Group
The seriousness of this moment is clear to us all and in particular to me, as the Chairman of the Group
NH:
which is a relief
NH:
As shareholders, however, you deserve to hear the Board’s view on the events leading to today and on how our company became vulnerable as the global financial crisis intensified. I will address this now
NH:
In over forty years of my working life I have had many difficult experiences but none like this.
The challenges we now must address as an institution, as a country, and indeed as part of the world’s financial system, are unprecedented.’
‘In the early part of the year the Board took action to rebase the Group’s target capital position in light of the increasingly difficult environment which was developing in financial markets and led to the Rights Issue which shareholders agreed to in May.’
NH:
y the time of our Interim Results in August, the economic and financial climate remained difficult but our underlying trading performance in most businesses was acceptable, and our capital ratios were progressing towards the targets we had set ourselves.’
‘However, within a matter of weeks a very severe further deterioration in financial market conditions occurred.’
‘The consensus amongst market participants is that the main trigger for this was the collapse of the investment bank Lehman Brothers.’
NH:
‘In retrospect, the higher exposure to assets, which later became very difficult to trade, and the need to fund an enlarged balance sheet as access to liquidity became increasingly difficult, increased the short-term vulnerability of the Group to the financial crisis as it intensified this year.’
‘But let me be clear, the acquisition of ABN AMRO may now be seen with hindsight as having increased our exposure to the emerging crisis, but it did not cause it. We would have needed to strengthen our capital position in any event as is also evident from the capital raisings being undertaken by the majority of our UK competitors and other banks around the world.’
NH:
feel this sincerely, on a number of levels and for a variety of reasons but I want to highlight just a few.’
‘I am sorry about the very real financial and therefore human cost that those who have invested in us now feel and recognise how seriously this has impacted shareholder confidence in RBS. And I am also sorry if any of our customers have suffered anxiety as a result of the situation.’
‘But, I am also acutely aware – every day – of the fact that thousands of our employees, past and present, have believed so much in their company that they gave more than their labour to it.’
‘They bought shares, Share-save options and Buy as You Earn often from very modest incomes. They were proud of what RBS had achieved and were delighted to be associated with it.’
‘The anxiety they now feel is of great concern to the Board, the Executive and to me.’
NH:
he buck stops with me as Chairman and with the leadership of the Group. Accountability has been allocated and fully accepted.’
‘For my part, I will retire as Chairman at the 2009 AGM when the new Board structure is in place.’
‘Our Chief Executive, Sir Fred Goodwin steps down from his post and from the Board today and the Board would like to thank him for his years of service to the Group.’
SMI:
A quasi-apology! Imagine!
SMI:
Think we’ll see that from anyone else, or is this a one-off?
NH:
one off
NH:
and it looks like he is trying to re-write history
SMI:
Speaking of one off’s, what this about the UK bailing out Iceland???
NH:
ah
NH:
Looks like Brown’s going to lend Iceland 2.2bn as part of the IMF loan package
SMI:
Something about the maths isn’t working though
SMI:
Even the GBKrona worth what it is
SMI:
This is what the FT reported this morning
SMI:
Iceland on Thursday finally secured a $5.1bn bail out, comprising a $2.1bn loan from the International Monetary Fund and additional loans of up to a total of $3bn from Denmark, Finland, Norway, Sweden, Russia and Poland and the Faroe Islands.”
SMI:
No mention of the UK at all – so is this 2.2bn quid going to now constitute the bulk of the non-IMF lending?
NH:
looks like it
NH:
sorry just been distracted by some RAW
NH:
aussie press says that it is hypovereinsbank that has withheld cash from babcock & brown
SMI:
Haven’t some more RAW regarding small countries with banking issues?
NH:
I have. not sure I believe it. but here it is
NH:
-Rumours doing the rounds that three overseas
institutions and one domestic player are taking a 40% stake in BKIR. JC
Flowers is also rumoured to be on the share register with a view to
getting involved in any deal.
institutions and one domestic player are taking a 40% stake in BKIR. JC
Flowers is also rumoured to be on the share register with a view to
getting involved in any deal.
NH:
that was from a broker
SMI:
A reminder – RAW is untested, unverified market rumour
NH:
talking of RAW rumours, Mecom up 65% this afternoon. still no statement though
SMI:
Are we expecting one?
NH:
well Paul is
NH:
Citi update
NH:
down 20% – ouch
SMI:
Serious ouch
NH:
looks like it might $50bn of capital after all
SMI:
There’s also a lot of hurt in the credit markets
SMI:
Miles Johnson alerted the office this morning that the iTraxx Crossover and the iTraxx Europe had hit all time highs
SMI:
They’d come off a bit but flirting with those levels again
SMI:
CDX investment grade (you know, the ‘good’ stuff in North America) still at a high though, around 256bp
NH:
Didn’t we also have a story about the spike in junk bond yields? Investors are beginning to worry about a wave of defaults
SMI:
Yep, written by Nicole Bullock in NY. Makes for scary reading
SMI:
Average yields on US junk bonds have topped more than 20 per cent for the first time amid rising concerns about a protracted recession and a wave of corporate defaults.
The spike in yields could have a dramatic impact on economic activity, making new debt prohibitively expensive for companies with credit ratings below investment grade. Such junk-bond issuers account for 17 per cent of the S&P 500 and nearly half the corporate bond market, according to Standard & Poor’s.
SMI:
The yield on the benchmark Merrill Lynch US High-Yield index rose to 20.27 per cent on Tuesday, the latest data available. The previous high was 18.66 per cent in January 1991. The risk premium, or spread over comparable Treasuries, is nearly double what it was in 1991 when Treasuries were yielding more than 8 per cent
SMI:
GM bonds yielding more than 50 per cent!! Madness
NH:
what
NH:
50%
SMI:
Yep – read it and weep – http://www.ft.com/cms/s/0/5d6960f2-b6a5-11dd-89dd-0000779fd18c.html
SMI:
Gah, CDX IG at 260 now. Yet Another Record
SMI:
The CDX Xover, which is the risky stuff, really is screaming armageddon – 517bp
NH:
so this what the end of the world feels like
SMI:
absolutely. Can you just give us an update on London?
NH:
well, the insurance sector is being absolutely burried
NH:
and I mean burried
NH:
forget the banks
NH:
look at this
Aviva (AV:LSE): Last: 285.75, down 66 (-18.76%), High: 341.50, Low: 285.75, Volume: 9.85m
Prudential (PRU:LSE): Last: 244.25, down 49.75 (-16.92%), High: 279.75, Low: 240.00, Volume: 9.74m
Legal and General Group (LGEN:LSE): Last: 61.00, down 8.7 (-12.48%), High: 68.40, Low: 60.70, Volume: 8.11m
SMI:
What on earth is going on?
NH:
capital fears mainly
SMI:
(ctagg – people are whimpering!)
NH:
reall worries that the trouble in the CMBS market – where Aviva has been a big player – could force them to go to shareholders cap in hand
NH:
also the fall in corporate bonds not good for the Pru
SMI:
CMBS is finally getting some attention as another problem area
NH:
and Aviva is very interesting as a result
NH:
it has a lot of this stuff which is used to write business
NH:
not sure exactly how it works but am talking to our insurance people soon
3:30PM
NH:
right, must dash have column to write and I am all on my own – Bryce is away
NH:
see u all this evening
SMI:
Right – good luck with the end of the world as we know it
NH:
cya
3:31PM
NH:
a description of the insurers this afternoon
NH:
Hecatomb
NH:
look it up on Wiki
SMI:
Wikipedia, FTW
SMI:
Just noticed there’s a debate raging in the comment of the CDS post
SMI:
Sam’s described trying to price equities as ‘sorcery’ and Mika Kevo has invoked Nietzsche
SMI:
Standard for FT Alphaville, then
SMI:
Thanks to all of you for joining us
SMI:
Abbreviated session – save your energy for the TARP-y
SMI:
Would have loved to be there
SMI:
Let me leave you with some levels
SMI:
Dow coming back a bit – off ‘just’ 90 ppoints now
SMI:
Around 7,906; still well below 8.000
SMI:
So-called resistance levels are being dismissed out of hand
SMI:
Will be an interesting session – as PM always says, watch those last 30 mins of trade
SMI:
The word – the steno pad is a VAST improvement on my assigned avatar!
SMI:
Later all – TARP-y hearty