Joined Feb 3, 2009
1,759 Blog Posts
No Rays Where You Goin’ Biatch
Comments »By David Scheer and Karen Gullo
June 4 (Bloomberg) — Former Countrywide Financial Corp. Chief Executive Officer Angelo Mozilo and two of his top deputies were sued by regulators for allegedly hiding the home lender’s deteriorating finances as the subprime mortgage crisis unfolded.
While publicly reassuring investors about the quality of his loans, Mozilo issued “dire” internal warnings and engaged in insider trading accelerating stock sales to reap about $140 million, the agency said in the suit at Los Angeles federal court. In one e-mail, he described a “particularly profitable subprime product as ‘toxic.’” He also wrote that Countrywide was “flying blind” and had “no way” to determine the risks of some adjustable-rate mortgages, the SEC said.
“Each of the defendants was aware, but failed to disclose, that Countrywide’s current business model was unsustainable,” the agency wrote in the suit, which also named former Chief Operating Officer David Sambol, 49, and former Chief Financial Officer Eric Sieracki, 52. All three defendants denied the agency’s claims.
Mozilo, 70, is the most prominent executive targeted by U.S. regulators examining the subprime mortgage crisis. Mozilo co-founded Countrywide in 1969 and built it into the nation’s biggest mortgage lender, helping trigger the subprime bubble by offering loans to customers with below-average credit scores. Mounting loan defaults slashed the company’s stock price, prompting its sale to Bank of America Corp. last year.
Increasingly Risky Loans
The lender had expanded its underwriting guidelines and wrote increasingly risky loans from 2005 through 2007, even as it reassured investors it focused mainly on so-called prime quality mortgages, the SEC said.
“This is the tale of two companies,” SEC enforcement chief Robert Khuzami said. “Concealed from shareholders was the true Countrywide, an increasingly reckless lender assuming greater and greater risk.”
The SEC wants the court to levy unspecified fines, force the defendants to forfeit profits, and bar them from serving as officers or directors. Mozilo’s stock-sale profit came while exercising stock options from November 2006 until August 2007, the agency said.
‘Without Merit’
“The complaint does not tell the whole story of either internal communications or the public disclosures,” and the SEC’s claims about the stock sales are “without merit,” Mozilo’s lawyer, David Siegel, at Irell & Manella LLP in Los Angeles, said in a statement. “The mix and risks of Countrywide’s loan portfolio and its underwriting standards were well disclosed to and understood by the marketplace.”
The agency filed its case because of political pressure after its own “well-publicized enforcement failures,” said Walter Brown, Sambol’s attorney, in a statement. “Making groundless allegations and losing in court will not help the SEC restore its reputation.”
Countrywide made detailed credit risk disclosures, Brown said, and investors and rating companies knew that the company had “liberalized” its lending practices, as had almost all other lenders at the time. Sambol provided information that the SEC now says was absent from Countrywide’s filings, Brown said.
Sieracki denies wrongdoing and bought, rather than sold, Countrywide stock during the period the SEC claims he believed the company was withholding information from the market, said his attorney, Shirli Weiss.
“No one, not the government nor the most sophisticated of market analysts, foresaw the precipitous and pervasive economic crisis that affected virtually all markets and businesses in the country, including Countrywide’s,” Weiss said in a statement. “Mr. Sieracki’s actions and statements are completely inconsistent with fraud, a fact the SEC will not be able to contradict.”
Editorial: What Does The Oracle of Omaha Really Think About The U.S.
Less bullish than most thought
Comments »by Alice Schroeder
June 4 (Bloomberg) — To the unschooled ear, Warren Buffett’s reassuring words that “America’s best days lie ahead” and that he’s buying U.S. stocks sound prescient, not preposterous.
But fair warning — he’s not as bullish as he sounds.
Buffett has been right so often that what his words mean, and whether he is right now, are important questions. His skill as a forecaster has a lot to do with his psychology: a buoyant optimism tempered by extreme caution that let him score killings on stocks such as Geico and American Express Co. while steering clear of speculative bubbles, leverage, subprime mortgages, and trying to figure out a rescue for his pal Hank Greenberg’s company American International Group Inc.
In temperament, he could be the son of Woody Allen and Doris Day.
His reputation as a seer took a hit in the public’s mind last October when the market tanked after his New York Times op- ed, “Buy American: I Am.”
Was he just talking his book?
It doesn’t really matter. As much as he loves money, Buffett loves his reputation a whole lot more. He never risks going on the record unless he is pretty sure he won’t be found wrong later.
What makes him so certain? He has explained his ebullient view of the economy using historical analogies instead of economic data. He has said that trying to call the bottom of the market is futile; buy into fear. The U.S. has surmounted worse troubles before, and it will survive this, too: “Your children and grandchildren will live better and better” than you.
Nostalgia Investing
Buffett seems to hearken back to mid-20th century America, when each decade brought us a higher living standard. The concern has been whether he is extrapolating from his own experiences rather than analyzing the future.
There’s evidence, though, that Buffett is awake to America’s problems. He says there will be no quick rebound in consumer spending, the economy has “fallen off a cliff,” and we are now “fighting a war.” Berkshire Hathaway Inc.’s real- estate arm just estimated that the backlog of unsold houses is double the official figures.
The state run by Buffett’s friend, Arnold “Governator” Schwarzenegger, is broke. Peter Kiewit Sons’ Inc., the company that occupies every floor of the building Buffett works in except his own, is getting rich repairing America’s decayed infrastructure. Buffett himself is part of the headwind blown by our aging population against gross-domestic-product growth.
No Fun
Buffett doesn’t enjoy watching Berkshire labor under the burden of U.S. regulations and litigiousness, pay taxes that fund expensive military commitments overseas, and struggle against the financial quicksand of the health-care system. Recently, Berkshire’s profits have been hurt by a U.S. economy with too few jobs and over-reliance on debt-driven consumer spending.
Buffett and his partner, Charlie Munger, touched on this point at the Berkshire shareholder meeting when they referred to labor concessions being made to save jobs and described what they view as China’s inexorable economic expansion. Rather than dwell on his belief in Ricardian theory of comparative advantage, under which U.S. workers have little bargaining power to increase their incomes, Buffett, as is typical, framed this issue positively: A recovery will come from “unleashing human potential,” that is, productivity gains.
That’s a rational perspective. I believe Buffett’s optimism about the country is genuine. It’s a big-picture sort of optimism, though. Economists who are debating whether there will be a recovery in 2010 are living in a different world than Buffett, whose comparisons to periods as traumatic as World War II and the Civil War should sober anyone who thinks we are going to turn the economy on a dime.
Buffett’s Ace
Somebody could have said: “Your children and grandchildren will live better than you” in 1932, and that would have been reason to buy stocks, as well as reason to be nervous.
Buffett has also got an ace in the hole: inflation.
His advice for protecting against inflation is, first, to increase your earning power. That’s sort of difficult these days for most of us.
Second, invest in businesses or stocks. Even if the nominal profits from a business are gouged by inflation, a good business provides some real return over time.
He’s put his money where his mouth is. While he counsels long-term investing, he trades his personal account more actively — this is how he keeps his restless predatory instinct sated. Last year he began moving out of bonds into U.S. stocks.
But if inflation is such a problem, why only U.S. stocks? Is he just patriotic, or shilling for President Obama?
Hard to Separate
Buffett doesn’t shill for anybody but himself, but with him it’s also hard to separate patriotism from prudence. He has been slow to invest outside the U.S. and has always described major U.S. stocks as global enough for most investors.
Moreover, he always advises that the financially naïve should act with even more caution than he displays himself. Years ago, he recommended only municipal and government bonds as investments for divorced women. It’s inconceivable that he would tell the Average Joe it’s OK to buy global when he isn’t.
Once you disentangle all these strands — the cautious Buffett who tends his reputation, Buffett the long-term optimist, Buffett the realist about economics, Buffett the hawk on inflation, and Buffett the domestic investor — it turns out that Buffett is bullish, but not as bullish as he sounds. His optimism is long-term in nature, and inflation is his hedge.
Consider yourself warned.
A Double Dip With Doug Kass on The Banks Doubling or Tripling From Here
Initial Claims: Prior 623k / Mkt Expects 620k / Actual 621k…GDP Productivity Revision: Prior 0.8% / Mkt Expects 1.2% / Actual 1.6%…Unit Labor Costs: Prior 3.3% / Mkt Expects 2.9% / Actual 3%
Retail Sales Turn in A Mixed Bag
Comments »By Jessica Wohl
CHICAGO (Reuters) – Shoppers searched for bargains and basics in May, leading several retailers to miss sales expectations on Thursday even though the bar was set pretty low for most chains.
While there have been early signs of stabilization such as improving consumer confidence, issues such as unemployment and the troubled housing market have led many Americans to take on a thriftier attitude.
At Costco Wholesale Corp (COST.O) same-store sales fell 7 percent, worse than analysts’ expected, hurt by the stronger U.S. dollar and lower gasoline prices, which deflated its fuel sales.
Costco is now the largest member of the revenue-weighted Thomson Reuters same-store sales index since Wal-Mart Stores Inc (WMT.N) decided to no longer report monthly sales. Wal-Mart, the world’s largest retailer, had accounted for about half of the Thomson Reuters index.
So far, seven of 12 retailers have reported worse-than-expected same-store sales, or sales at stores open at least a year, according to Thomson Reuters data.
Overall, May same-store sales were expected to fall 4.1 percent from a year earlier at companies tracked by Thomson Reuters, compared with a 1.1 percent rise in May 2008. Such a decline would be smaller than the year-to-date average of a 4.5 percent drop.
In May 2008, before the financial crisis was declared a recession, retailers felt the benefit of consumers starting to spend their stimulus rebate checks.
FOOD SELLS AT COSTCO
Excluding sales of gasoline, Costco’s same-store sales rose 1 percent. Food was one of the best sellers, with shoppers scooping up deli meats, frozen food and candy. While electronics sold well, average prices in the category were down 39 percent, the company said.
In the teen category, Hot Topic Inc (HOTT.O) said late on Wednesday that its same-store sales fell 6.4 percent in May, steeper than analysts’ forecast for a 4.3 percent decline.
One bright spot was Buckle Inc (BKE.N), which surpassed forecasts with a 13.4 percent jump in May same-store sales.
Results from smaller retailers such as Buckle may receive more attention now that Wal-Mart has stopped reporting monthly sales, analysts said.
Without Wal-Mart’s impact, investors will get a clearer picture of how other discount chains, department stores, apparel retailers and drugstores are faring in the recession.
At Buckle, which caters to teens with more basic merchandise, women’s and men’s denim and accessories sold well. Buckle said it even sold some more expensive items than a year earlier, with prices up about 3 percent in the women’s category, which accounts for the majority of its business, and up about 8 percent on the men’s side.
While Wal-Mart did not issue monthly sales data, investors will watch for any general comments it makes about sales as it talks to members of the media on Thursday and addresses shareholders and analysts at meetings on Friday.
