Just as some companies seem to be recidivists as far as getting into financial trouble is concerned (Citi, First Boston before it was finally absorbed by Credit Suisse), so to are some investors.
Orange County’s latest escapade apparently isn’t as serious at the one visited upon them by former treasurer Robert Citron, namely, $1.6 billion in losses. In this case, the county has money funds of $3.5 billion, with $837 billion of SIV debt, all but $152 million of which is being reviewed for possible downgrade. That means roughly 20% of the fund is at risk.
But no one at Orange Country seems particularly worried. From Bloomberg:
Finance officials with the Orange County Treasurer’s office said the SIV debt it holds continues to meet its obligations and there is virtually no exposure to risky mortgages in them. All the debt still carries top ratings.
“We don’t have the same kind of debt that Florida has,” said Paul Cocking, the chief portfolio manager for the county. “They’re all highly rated assets.”
Haven’t we heard that one before?
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Hey Amigo,
Everyone wants to put this economic speedbump behind us and thus recognize that our fathers have sinned. We need to get onto the next leg of the journey and look at declining earnings and the impacts to GDP and the dollar. In the meantime, as losses continue to mount, unfold and inflate hyper-dimensionally, we will be able to look back and thank these type of Orange County gurus for contributing to our lack of well being.
old story:
In another fallout from Orange County’s subprime mortgage industry collapse, Brookstreet Securities Corp., an Irvine broker dealer, shut its doors and laid off 100 local employees because it could not meet margin calls on complex securities backed by faltering mortgages, company spokeswoman Julie Mains said.
Mains said Brookstreet went from $16 million in capital Friday to being $3 million under water Wednesday because its clearing firm, National Financial Services, demanded payment for securities bought on margin.
Heres the real poop:
http://www.treasurer.ca.gov/cdiac/LAIG/guideline.pdf
Section 53601.7 (e)(6)(B) and 53635 (a)(3): These subdivisions (applicable to a local agency that is a county or a city and county, or that pools with other local agencies) have been revised to remove the requirement that eligible commercial paper may not represent more than 10 percent of the outstanding commercial paper of a single issuing corporation. Section 53601.7 (i): This subdivision has been revised to extend the sunset date of January 1, 2007 to January 1, 2011 for permissible investments under Section 53601.7. Sections 53601.8 and 53635.8: These new sections authorize, until January 1, 2012, theinvestment of up to 30 percent of a local agency’s surplus funds in certificates of deposit at a commercial bank, savings bank (savings and loan association), or credit union that uses a private sector entity that assists in the placement of certificates of deposit under specified conditions. Sections 53635(a)(2): This subdivision has been revised to state that no more than 10 percent of the total investments held by a local agency may be invested in any one issuer’s commercialpaper (formerly, this section stated that 10 percent of a local agency’s money may be invested in the outstanding commercial paper of any single issuer).
Government Code Sections 16429.1, 53601, 53601.6, 53601.7, 53601.8, 53635, 53635.2, 53638, and 53684 include a number of requirements on how and where public money may be invested. Figures 1 and 2 provide a synopsis of the permitted securities and conditions for using them. Prohibited investments include securities not listed in Figures 1 and 2, as well as inverse floaters, range notes, interest only strips derived from a pool of mortgages, and any security that could result in zero interest accrual2if held to maturity, as specified in Section 53601.6. Consensus recommendation: Include the list of permissible securities in the investment policy,and modify the list to meet the unique needs of the local agency. These modifications may include additional restrictions on the type and amount of specific authorized investments to reflect the risk tolerance of the agency.
e. No more than 30 percent of the agency’s money may be in Bankers’ Acceptances of any one commercialbank. f. “Select Agencies” are defined as a “city, a district, or other local agency that do[es] not pool money indeposits or investment with other local agencies, other than local agencies that have the same governing body.”g. No more than 10 percent of agency’s money may be invested in any one issuer’s commercial paper. h. Issuing corporation must be organized and operating with the U.S. and have assets in excess of$500,000,000.i. “Other Agencies” are counties, a city and county, or other local agency “that pools money in deposits orinvestments with other local agencies, including local agencies that have the same governing body.” Localagencies that pool exclusively with other local agencies that have the same governing body must adhere to the limits set for “Select Agencies,” above. j. No more than 10 percent of the of the agency’s money may be invested in the Commercial Paper of any one corporate issuer. k. No more than 30 percent of the agency’s total funds may be invested in CDs authorized under Sections53601.8, 53635.8, and 53601 (h) combined.
This is of interest (no pun):
commercial paper may not represent more than 10 percent of the outstanding commercial paper of a single issuing corporation. Section 53601.7 (i): This subdivision has been revised to extend the sunset date of January 1, 2007 to January 1, 2011 for permissible investments under Section 53601.7. Sections 53601.8 and 53635.8: These new sections authorize, until January 1, 2012, theinvestment of up to 30 percent of a local agency’s surplus funds in certificates
Much of this subprime pension crash is related to yield enhancement, thus we need to look at the inverse relationshipe of yield decreases, declines and deflation.
enhanced, enhancing
1. To improve or increase the value, quality or intensity of something (especially something already good).
Thesaurus: improve, embellish, better, enrich, expand, augment, enlarge, lift, raise, magnify, intensify, elevate, augment, boost, escalate, heighten, amplify; Antonym: decrease, minimize.
http://www.hedgefolios.com/read/2007/12/
So I got to thinking this morning….We are focusing on the ABCP and related effects on the banks and investment banks and SIVs and lately, pension funds and state investment funds. I haven’t heard anyone talking about how much of this crap is still in the often overlooked category called “Cash and Cash Equivalents” at regular companies.
All too often, bulls hype how much cash is sitting in corporate coffers. It’s a common claim to pump up the idea that buybacks will be a plus for stocks or M&A is easily funded. So if there are record amounts of Cash and Cash Equivalents….then how much of it is in the form of ABCP?
I decided to look a little closer and do some sampling. Where to start? Let’s start with companies beginning with an “A”. Let’s pick some familiar ones. How about Apple and Amazon?
Click here for Apple’s most recent 10-K and see for yourself. Here’s the relevant excerpt:
The Company’s U.S. Corporate securities consist primarily of commercial paper, certificates of deposit, time deposits, and corporate debt securities. Foreign securities consist primarily of foreign commercial paper issued by foreign companies, and certificates of deposit and time deposits with foreign institutions, most of which are denominated in U.S. dollars.
As of September 29, 2007, Apple had $5.6 billion in US Corporate securities and $2.8 billion in Foreign Securities that they accounted for as Cash Equivalents. Additionally, they had $4.7 billion in US Corporate securities and $957 million in Foreign Securities that they accounted for as Short-term Investments. I am not sure how much of this is in CP but I doubt it’s zero.
Click here for Amazon’s most recent 10-K and see for yourself. They had $1.894 billion in Cash and Cash Equivalents as of 12/31/06 – $347 million of that (or 18.3%) was in Asset Backed Securities.
Note that I did not look at all the companies in the S&P 500. All I did was look at two companies, both of which had stuff that caused me to write this post. Maybe they have no problems with the commercial paper or asset backed securities on their balance sheet. Maybe no one else is worried about this because it’s just not a problem. I’ll let you decide. Just pick any stock and look at their financial statement footnote to see how much of their “Cash and Cash Equivalents” are in “Asset Backed” or “Commercial Paper.” Does “Mark-to-Market” apply? What does the company say? Is there a problem?