The Market Ticker

Let's start with where we left off yesterday.

Right here you will find the 8K from CountryFried on their "Convertible" offering. Note the following:

"Under the terms of the Convertible Preferred Securities, set forth on the Certificate of Designations of 7.25% Series B Non-Voting Convertible Preferred Stock of Countrywide Financial Corporation (the “Certificate of Designations”), holders are entitled to cash dividends, payable quarterly, at the rate per annum of
7.25% of the Liquidation Preference per share of $100,000. The initial amount of dividends payable on each share of the preferred stock outstanding for each full dividend period will be $1,812.50. Dividends are cumulative and if dividends are not paid for six quarters, holders of the preferred stock are entitled to designate two directors to the Company’s Board of Directors until dividends have been paid for two consecutive quarters.

With respect to dividends and distributions upon the liquidation, winding-up or dissolution of the Company, the Convertible Preferred Securities rank in priority senior to the Company’s common stock and to each other class of capital stock or series of preferred stock (where the terms of the stock do not expressly provide that it ranks senior to or on parity with the preferred stock) and on parity with any additional Convertible Preferred Securities and any other class of capital stock or series of preferred stock. Convertible Preferred Securities each have a Conversion Price of $18.00, which may be adjusted upon the occurrence of certain events."

Oh oh.

Read that last part of that last sentence.

Then read the rest. Several times.

By the way, there is nothing prohibiting BAC from hedging off the risk. And they either have or will. Believe me.

This sort of preferred, issued with a coupon well over LIBOR, and with a conversion price well under the current trading price, screams SHORT ME INTO THE GROUND PLEASE!

What "certain events"? Let me guess - "if the shares trade at under $18"?

That'd be known as "death spiral financing" if so.

How come there's no more color on those "events"? You have to wonder.....

Oh, and Moody's is going to love the additional debt too, which means more downgrades are coming. Once that starts then you can forget the commercial paper market for these guys too, because their cost of financing is over the margin they can sell mortgages at to consumers.

Say "Good Morning" to "Countrywide America", which I predict will be the new name of the company once BAC swallows it - for $2 billion. Savvy guys those BAC raiders...... Common CFC Equity Holders? So sorry, so sad, have a nice day.

Mozillo's interview on CNBC was, IMHO, nuts for him. He was frankly stupid to appear, and Maria nailed him pretty good with questions about "how come no discount window." Answer? "The bank didn't have the assets to hit the discount window." Oh oh.

And "He doth protest too much" about the Merrill analyst. "Totally irresponsible and baseless" eh? Irresponsible eh? Well, "we're a much stronger company today than we were a couple of weeks ago"? Hehehehehehe.... we shall see. "The business environment is not getting better" he says.... so how's what work, exactly?

And when asked "can you categorically say you will avoid bankruptcy"..... she got a dodge... and a "well, nobody can say that" and "I don't see any higher chance now than six months ago."

Of course that's why he stepped up his share sales about six months ago, right?

Ooook. You want my opinion? "The Tan Man Doth Protest Too Much".... and the more he talks, the more the market tanks! You have to love it. And then he says that housing is going to take us into recession - ON NATIONAL TELEVISION!

And if that's not bad enough, when asked if he talked to other major banks, he said he did and they told him "they were dealing with their own problems" (!)

(Here's another guy who never learned the first lesson of dealing with reporters - shut the fuck up! Anything you say can and will screw you straight up the ass!)

Oh, and the piece of data that nobody is paying attention to on CFC? This one:

"The repurchase obligations are discussed in Countrywide’s prospectuses and pooling and servicing agreements that cover about $122 billion worth of mortgages packaged and sold to investors from early 2004 to April 1 of this year.

The agreements said that Countrywide Home Loans, a unit of Countrywide Financial, would buy back mortgages in the pools if their terms were changed to help borrowers remain current. Such changes are known as loan modifications. In general, it is difficult for homeowners to get loans modified if they are in a securitization pool.

It is unclear how many modified loans are involved.

But it would cost $1.2 billion for the company to repurchase 1 percent of the loans in the pools at issue. Repurchasing 5 percent would cost $6.1 billion. When such buybacks are made, the original amount of the loan is paid into the pool and divided among the investors. "

Oh that could suck. Badly. As in "wipe you fucking out" suck. 5%? Try 10 or even 20% in my view of what will have ultimately be done in order to avoid foreclosures. Suck isn't quite the right word here.

How come that shit isn't being talked about by Bloomberg and the Wall Street Journal? Not on CNBS either. Why? Hmmmmmmm....

You think this is a pipe dream? Uh, no its not:

""We want [OTS] to go back to Countrywide, and we want them to say 'We are going to require you to restructure loans,'" Marks said."

Heh heh heh.....

By the way, there are a lot of folks saying that a "workout" under the PSA doesn't trigger this. Ok, fine enough, but the OTS forcing the issue sure as hell will! (Updated)

Oh, and you think the Commercial Paper market is ok? Uh, no:

"Coventree Inc., Canada's biggest non-bank issuer of asset-backed commercial paper, said it couldn't sell any of the $399 million in debt that matured yesterday.

Since the correction began in the non-prime mortgage loan market, about $5.5 billion in notes issued by Coventree-sponsored bodies have matured, the company said in a press release yesterday."

Gee, that's got to be a problem too, don't you think?

Speaking of which, let's spend a bit more time on this. Commercial Paper is the "blood" of commercial finance. These are short-term debt instruments (typically for only a couple of months) which are "rolled over" - that is, renewed. They are normally thought of as very low-risk, because there's just not much time during which they're "open" for you to get hosed, and if you get uncomfortable with the company, you just stop rolling it.

Of course that instantly hoses thee company that gets in trouble. This, in fact, is what ultimately shoved Enron under the bus - they failed to roll their paper, scrambled trying to find a substitute, failed and..... Boom!

Now here's the problem - "asset-backed securities" - including derivatives - have made their way into this stuff! Yes, you're not necesarily buying a "call" option on, for example, the building that a corporation owns any more when you buy their paper. There might only be 5 or 10% of real assets behind these things nowdays, with the rest being in the form of some sort of swap - that is, a derivative contract! This is being done to, of course, allow corporations to lever up beyond their actual free cash flow and have "outstanding" cash well beyond what they can actually FUND at instant in time.

This little ditty, however, destroys the foundation of SAFE when it comes to commercial paper. After all, the premise is that if you fail to pay I can just come seize your building, trucks, etc.

But what if you implode and come to do that, only to find that what I really bought was a default swap contract from some Hedge fund headquartered in the Cayman Islands, and they wrote $1 trillion worth of that crap but only have $500 million in assets?

THIS REALIZATION is what is now roiling the commercial paper markets - people actually started to READ the documents instead of just "trusting people", and they found that this was yet ANOTHER place that corporations are finding a way to "gear it up!"

You think this is going to get fixed easily or go away quietly? Hahahahahahahha.... wrong!

WHEN (not if) these things detonate it will be extremely un-funny, because this paper is EVERYWHERE. Money markets, for example. Places that people regard as extremely safe.

Guess what?

The Wall Street Alchemists lied to you (again)!

Oh, and if you think the builders will be ok, Moody's disagrees (a little late there guys?)

"Moody's Investors Services on Tuesday placed the credit ratings of three leading homebuilders under review for a possible downgrade, after the two-year housing slump worsened in recent weeks amid a collapse on the mortgage market.

Moody's said it was reviewing Centex Corp., Lennar Corp. and Pulte Homes Inc. because of a "materially weaker operating environment facing homebuilders.""

So, uh, where were you six months ago Moody's? Oh, wait, we know how this works - you wait for the company (or instrument) to implode, then you downgrade it. Got it.

Never mind that this is not just a US story, and those who tell you it is are lying:

"The European Central Bank's first ever emergency injection of three-month funds was swamped with demand from banks on Thursday, but brought little relief to an interbank lending market beset by credit worries."

Uh, that'd be bad, right?

You know that the "R" word has gotten mainstream coverage when it shows up on the front page of http://www.msnbc.com/. And today, it did.

In fact, that nice Recession call showed up almost instantly everywhere. MSNBC, Bloomberg (multiple times), CNBC (multiple times); hell, I bet its on the front page of the Wall Street Journal in the morning.

That ought to wake up Joe Six Pack and not in a way that people are likely to appreciate when it comes to the equity markets!

Oh, and don't believe that the mostly-flat close today is somehow good. It is most definitely not, considering that the futures were up nearly a full percent overnight and 3/4% this morning before we opened, with both Asia and Europe bright green. In truth this is fairly significant loss - far bigger than it looks - given where we were pointing this morning.

Reversal day? Not willing to say that, because the technicals just don't support it - but this much is evident - it doesn't change a thing about the technicals, and the amusing part is that the pump monkeys were all over the CountryFried news last night thinking it would be good for a huge pop today.

Uh, no dice there - in fact, CFC finished up a whole 20 cents, and if you were on top of that spike and shorted into it, you made a nice chunk of cash today.

Congratulations.

So we sit with a "sideways" signal still posted on the major indices from a technical perspective, and tomorrow is setting up to be a key day - not only do we have the obvious - coming off a flat day today - but also the fact that it is a Friday, and people have to choose - do I go into the weekend long, short, or flat?

Have a good evening!