Opening Bell: “Pretty Crazy”

Dwarf-toss news leavens otherwise depressing day; monolines, economy not good; oil is nutty

The price of oil hit a new high yesterday and President Bush lashed out at OPEC for deciding not to boost production.

The New York Times on page one says OPEC lashed back, blaming high prices in part on “mismanagement” of the U.S. economy and saying it would not boost oil production because the weak American currency is forcing higher prices.

“OPEC is angry that President Bush wants them to increase production while the dollar is sinking and the administration is doing nothing about that,” said Fadel Gheit, an oil analyst at Oppenheimer & Company in New York. “It’s really not surprising that they have ignored him.”

The Wall Street Journal on A3 says that energy prices have become untethered from market realities.

Yesterday’s rise underscored the market’s many contradictions. Despite the price increase and drop in overall U.S. commercial inventories, gasoline supplies hit a 15-year high amid increasing signs that fuel prices are cutting into American driving habits.

U.S. benchmark crude jumped $5, or 5%, to finish at $104.52 a barrel on the New York Mercantile Exchange.

“It’s pretty crazy, isn’t it?” said Exxon Mobil Corp. Chief Executive Rex Tillerson, speaking at an investor conference in New York.

Yes it is, Rex.

The WSJ quotes oil guru Daniel Yergin as saying oil prices these days are “as much about the supply and demand for dollars as the supply and demand for oil”, though Bloomberg puts emphasis for the hike yesterday on the troubles in South America, where Colombian rebels took out an oil pipeline and big oil exporter Venezuela is threatening to attack the country.

The Financial Times reports that Bush said high oil prices are making it harder for regular Americans to make ends meet. Well, yeah, but if George were honest he’d take some blame for the trillion-dollar wars, tax cuts, and resulting deficit spending that have sunk the dollar, boosted inflation, and are as much responsible for the high price of oil as any new pressure on supply or demand.

“America’s got to change its habits; we’ve got to get off oil,” Mr. Bush said at a conference on renewable fuels in Washington. “Until we change our habits, there’s going to be more dependency on oil.”

That bit of blather wins our Captain Obvious Quote of the Day.

Bond insurers stagger around

The business pages report that Ambac Financial, the troubled (is there any other kind?) monoline bond insurer, said it would raise $1.5 billion in new capital, or only half of what markets had been expecting and abandoned its plan to split into two companies— one “good” and one “bad.” Its shares lost nearly a fifth of their value.

Markets had been figuring on a bailout by the banks whose bond holdings Ambac insures. Bloomberg reports that instead, the company will raise capital by selling stock. That increases already rife skepticism that the company won’t be able to maintain its AAA debt rating, something that would in turn devalue more than a half a trillion dollars in bonds that the company insures—an event that could lead to $70 billion in new write-downs on Wall Street and raise the cost of borrowing for local governments.

The FT leads its front page with a report that the original bank-funded plan (which it pegs at $2 billion) foundered on its own legal complexity:

Eight banks led by Citigroup and UBS—between them bought the most guarantees from Ambac—had been prepared to inject up to $2bn into the insurer under a plan that would have split its operations into a triple-A rated municipal bond insurance business and a lower-rated structured finance business.

However, the complexity of the scheme led to its rejection by credit ratings agencies and Ambac, people involved in the negotiations said.

The WSJ reports on C1 that several of the banks involved in that plan have agreed to buy the shares if there isn’t enough market demand, while the NYT says on its C1 that investors worry new capital will have to be raised as losses increase. Bloomberg says banks would lose up to $70 billion if top-rated bond insurers lose their credit rating. Just what they need.

Hedges get trimmed

The FT reports that a huge Texas hedge fund is struggling to stay afloat after taking big losses in January. The $40 billion Highland Capital Management, which invests primarily in leverage-buyout debt, is trying to convince investors not to run on the bank:

Like other investors, it has been hammered by the falling prices of leveraged loans. Highland’s main hedge funds, investing in distressed debt and other credits, were down 11.5 per cent to 14 per cent in January. While it is not clear how it fared in February, Highland’s recent performance contrasts with gains of 30-40 per cent in 2006 and 2007.

As a result, Highland executives, led by co-founder Mark Okada, are engaged in an intense dialogue with investors to discourage them from withdrawing their money.

The hedge funds outfoxed the credit crunch longer than we expected them to, but it looks like the dominos are hitting them on the rear end now, too.

Dwarf toss of the day

The SEC nailed Fidelity’s Peter Lynch for accepting tickets from brokers the firm did business with. It’s part of a much bigger scandal at the Boston mutual-fund company that will cost it $8 million in fines, the WSJ says on C1. Apparently Lynch liked U2, the Nutcracker, and the Ryder Cup. That’s embarrassing, taste-wise.

The Los Angeles Times reports that Lynch knowingly violated the rules, asking Fidelity traders to solicit tickets from brokers who were seeking to do business with Fidelity, a no-no because the firm has a fiduciary duty to seek the best trading price for its clients and to not be influenced by what could essentially be viewed as bribes. Fidelity employees accepted some $1.6 million in illegal gifts.

The NYT on C1 has the best story of all the papers, with good context on industry practices as well as the history of the case. Its story also has one of our favorite ledes in some time:

Days at Wimbledon. Nights at U2 concerts. Flights aboard the Concorde.

And a dwarf to toss.

Wall Street brokers were willing to give all that and more to win lucrative business from Fidelity Investments, the world’s largest mutual fund company.

That credit crisis thing

The WSJ’s page one has a nice overview of what’s going on in short-term interest-rate markets. Long story short: they’re going haywire even more than they have been.

In one interesting anecdote, the Journal reports that the cost of insuring Citigroup debt against default is up 1,900 percent since June.

The Federal Reserve and other central banks have used a variety of measures to calm the short-term lending markets since the credit crisis started disrupting them last summer, including interest-rate cuts and special injections of cash into markets. Yet a wave of risk aversion is tightening the availability of credit even as the Fed tries to make credit more ample. That suggests new, or deeper, remedies could be in store.

“There is still very much a liquidity crisis,” says Dominic Konstam, head of interest-rate strategy at Credit Suisse. “Banks don’t want to keep lending against bad collateral when they’re worried that they’ll need the money themselves.”

Houses at everyday low prices

The LAT reports that California homebuilders are beginning to slash the sale prices of their newly constructed houses and finding that in some cases they can actually sell them. With all the bad news and economic wreckage caused by the housing bust, it’s easy to forget that it’s good news for people wanting to buy a home.

In San Bernardino County—one of the hardest-hit areas—one developer is selling its homes at a 35 percent discount.

Look out below

In economic news, the WSJ says on A2 that the Federal Reserve is likely to cut interest rates sharply again in two weeks.

A gauge of non-manufacturing activity rebounded somewhat from what the Journal called a “shockingly low” January report. The number still showed an economy shrinking, or at least not growing.

Most of the day’s other economic news was bad. Factory orders fell by the most in five months, a payroll processing firm reported fairly sharp job losses in February, and orders for non-defense capital goods (excluding aircraft) fell.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.