the audit

Opening Bell: Bear Stearns Saga, In Three Acts

Journal says firm could have saved itself; housing bargains; car trouble; truckers feel the pain; etc.
May 27, 2008

The Wall Street Journal kicks off a three-part series on “The Fall of Bear Stearns” with a story, accompanied by comic-book style illustrations, that says the firm missed several chances to save itself.

The missed chances included execs ignoring traders and company wise man Ace Greenberg, who urged them to lower the company’s mortgage exposure; talks with KKR and J. Christopher Flowers to buy big stakes in the firm that would have given it much-needed cash went nowhere because execs turned them down for fear of looking weak. But they were weak—so weak that the Securities and Exchange Commission at one point set up daily briefings with Bear to make sure it had enough cash.

Perhaps the biggest “d’oh!” decision was recommended by Greenberg himself. Bear Stearns actually had a massive bearish bet against the housing sector that it unwound in the fall.

Reporter Kate Kelly, who last year reported that CEO Jimmy Cayne was smoking pot and playing golf while his company burned, continues to unload on him, reporting that he was “particularly angry” that a top executive who oversaw two hedge funds that collapsed that summer was at a bridge tournament with him while they fell. Pot meet kettle. Perhaps Cayne was just mad that the executive won the tournament; anyway, he forced him out when others were less sure he should go.

Applaud the Journal for devoting the resources required for a big series like this. We’re looking forward to parts two and three.

Subprime cars

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The New York Times on page one reports that the car industry is getting “sideswiped” by the credit crunch and says “parallels are striking” to the housing bust. The piece jumps off from a page-one WSJ story last week, though the Times is careful to say the pain in the auto business likely won’t be as bad.

Auto lenders and banks, closing their wallets, have prevented hundreds of thousands of consumers from obtaining the financing for a car. Home equity loans, which had been used in at least one of every nine deals, when lenders were more generous, are no longer a source of easy money for many prospective buyers. And used-car prices have fallen nearly 6 percent as repossessed cars and gas-guzzling trucks and S.U.V.’s flood auction lots…

Borrowers are falling behind on their car payments at a rate faster than in other recent downturns. And losses are considerably worse. Auto lenders sustained losses on about 3.4 percent of their loans in the first quarter, a rate about 30 percent higher than in 2002, according to data from Moody’s Even some of the most creditworthy borrowers are stressed.

Just as in housing, the car industry has something called the subprime borrower. The Times says one big subprime car lender has scaled back its lending by more than two-thirds since last year. And areas of the country hit hard by the housing bust are seeing car repossessions soar and financing become more difficult. That’s in no small part due to the fact that in places like California, some 30 percent of new car sales were financed with home-equity loans.

One man’s loss…

In good news for that whole housing-bust thing, the Journal reports on A3 that prices are rising “sharply” in many of the worst-hit markets, as slashed prices draw in bargain hunters. But it’s quick to note:

That doesn’t mean housing is poised for a quick recovery. In much of the U.S., there is still a huge glut of homes for sale, and foreclosures continue to dump more property on the market. Realtors reported that the number of single-family homes on the market in April was enough to last 10.7 months at the current sales rate, the highest since 1985. During the housing boom of the first half of this decade, the supply typically was four to five months.

We’d seen a similar number before and thought it must be a misprint, but the Journal reports that the average sale price in Detroit proper this year is just $20,514, adding a disclaimer apparently for skeptics like us that the “average is so low because many of the sales involve decrepit homes in neighborhoods with few jobs.” That number is down 56 percent from last year and has drawn sales, which are now up 48 percent.

The Journal reports that most of the sales in Detroit are foreclosures that lenders have chopped prices on and says that’s what’s leading to the sales increases in other hard-hit markets. In the Las Vegas area, sales are up 30 percent, while in Sacramento County, they’re up 41 percent.

The NYT on C1 reports on the growing horde of contractors making a living cleaning and fixing up abandoned homes, and avoids the flawed reporting that has plagued other publications—which have bought mortgage-industry explanations about “trashouts” that say as many as half of foreclosed homes are vandalized by their former owners—by saying it’s not clear who damages them.

Sign o’ the times

The Financial Times goes page one with a scoop that private-equity firms Blackstone Group and Apollo Management are talking about buying chemical company Chemtura “in what would be one of the bigger US buy-outs this year.”

That’s a sign of how far private equity has fallen so quickly. Chemtura’s market capitalization is just $2 billion. Toss in its debt and that increases to about $3.1 billion, or less than 8 percent of what Blackstone paid for just one of its deals last year, the Equity Office Properties buyout. Last year, this deal would have barely made the paper, much less hit the front page.

And the FT says the talks have been ongoing for months, but have been “moving slowly not only because of the tight lending environment but also because of its own weak earnings trends.” Still, though the paper doesn’t say it, the buyout talk is a sign that private-equity firms, which have been continued to raising billion of dollars in new funds, have lots of cash.

Truckers’ lament

The NYT takes a look on C1 at the withering toll the price of fuel is taking on truckers. Diesel is up over $4.50 a gallon, and the paper leads with a Georgian who owns seven rigs but can’t afford to run any of them these days. It’s the “biggest shakeout since trucking was deregulated in 1980.”

Still, 70 percent of the nation’s freight tonnage moves over the highways on trucks, much of it in the diesel-powered tractor-trailers of the nation’s 350,000 independent operators, each with a fleet of up to five vehicles, one usually driven by the proprietor. Profit margins, notoriously thin in good times, are minuscule now, and each rise in fuel prices pushes more truckers into the red.

More than 45,000 vehicles, or 3 percent of the tractor fleet, have disappeared from the highways since early last year, according to America’s Commercial Transportation Research in Columbus, Ind. That surpasses the last great shakeout, in the early 1980s, when deregulation, along with a recession, high interest rates and the second Arab oil embargo, took out 33,000 tractors.

Big trucking companies are going bust at a pace about 2.5 times that of last year. The paper writes that air-cargo haulers are also feeling the pinch, while railroads are benefiting because of their greater fuel efficiency.

The Journal reports on A5 that the apocalypse really may be nigh: Americans drove less in March (compared to the previous March) for the first time in twenty-nine years. The 4.3 percent drop is the biggest year-over-year decrease in sixty-six years of recorded history. That comes to 11 billion fewer miles.

Bloomberg reports that high prices are spurring gas bootlegging. But its lead example is a conviction from three years ago and while the story seems to make sense the reporting really doesn’t prove anything.

Office perks

The NYT on C1 reports on an HP-like scandal at Deutsche Telekom that erupted over the weekend after a report in Der Spiegel that it had “tracked thousands of phone calls to identify the source of leaks to the news media about its internal affairs.”

The phone company hired a data-mining firm to try to track down who was leaking reports of layoffs to reporters.

Minding Fannie and Freddie

The Journal’s Heard on the Street looks at what Fannie Mae and Freddie Mac’s new regulator will be up against. The two government-sponsored mortgage backers are a linchpin of the entire economy, and the WSJ’s piece does not inspire confidence:

It all gets down to Fannie and Freddie’s balance sheets, specifically the amount of capital they have relative to the amount of assets they hold. Problem is, these balance sheets look something like the Augean Stables, and it would take a financial and political Hercules to clean them out. A look at three of the knottiest areas shows why.

The paper says the two companies need to increase their reserves for loan losses, account for nearly $20 billion in unrealized losses, and write down deferred tax assets that it is unlikely to ever get access to.

Lots of nasty accounting problems, so what’s Freddie’s response? Flackspeak Quote of the Day:

“We feel very comfortable about how we’re operating our business under the current regulatory environment.” A Fannie Mae spokesman declined to comment.

Translation: we’re going to be screwed when the new sheriff comes to town.

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.