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Five Things You Need to Know: Paulson on Super-SIV: "Anything Worth Trying"; E*Trade Fighting for Survival; Countrywide Too; Also, Beazer; Keep Hope Alive!


What you need to know (and what it means)!


Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Paulson on Super-SIV: "Anything Worth Trying"

The country's three biggest banks have reached agreement on the structure of a backup fund - the so-called "Super-SIV" - to help stabilize credit markets, according to the New York Times.

  • The agreed upon plan is supposedly far simpler than the structure of the Super-SIV as first outlined, but so far no one in a position to speak about the structure has bothered to say exactly how it is simpler.
  • The Times quoted a "person not authorized to speak for the group" as the source for the new plan's simpler structure.
  • What is known is this:
    1) The structure must be in place by the end of the year because the SIVs (structured investment vehicles) cannot currently obtain short-term credit to finance their higher-yielding investments.
    2) As many as 60 financial institutions will be asked to participate once the structure and term sheet is released, perhaps sometime in the next week or two.
  • Also becoming clearer, is that the intention of the Super-SIV is more psychological than functional.
  • How so?
  • Currently the standoff in credit markets is so severe that a freeze has occurred among institutions.
  • There is simply no one willing to step in to bid for SIV assets.
  • The purpose of the fund is to provide at least the appearance of a backstop in order to kick start trading.
  • "This is something that is not a savior," U.S. Treasury Secretary Henry Paulson told the Times.
  • "Anything at the margin that will speed up liquidity is worth trying," he added.
  • Anything? What about accupuncture?

2. E*Trade Fighting for Survival

Also after closing time on Friday, E*Trade (ETFC) reported still more write-downs... and an informal SEC inquiry.

  • Today the shares of ETFC are down more than 50% as talk of bankruptcy begins to swirl.
  • Rating cuts on $208 million of asset-backed securities last month spurred a bigger-than-expected reduction in their value, E*Trade said in a regulatory filing after the close of official trading on Friday.
  • Citigroup Inc. analyst Prashant Bhatia, in a report titled, "Bankruptcy Risk Cannot be Ruled Out," wrote that "the extent of poor risk management in our view, has put
    the viability of the franchise at risk."
  • What is stunning is the speed with which E*Trade has reached this point.
  • The company reported its first quarterly loss in five years just last month.
  • As of the end of June, E*Trade had 4.7 million brokerage and banking accounts.

3. Countrywide Too

Remember back during the heat of the tech unwind in 2000 and 2001 when the favorite reporting time for bad corporate news was "anytime after 4 p.m. on Friday"? It's a lesson that has apparently been well learned by banks, broker and homebuilders.

  • In a quarterly filing with the Securities and Exchange Commission late Friday, Countrywide (CFC) warned that additional cuts in its credit ratings to junk-bond levels could "severely" limit its ability to raise money in public debt markets and cause it to lose bank deposits, the Wall Street Journal reported.
  • The company's long-term debt is rated Baa3, the lowest investment-grade level, by Moody's Investor Service... for now.
  • All three ratings agencies have placed CFC debt ratings on some form of negative outlook.
  • The situation at CFC is increasingly taking on an air of desperation.
  • First, the company is relying more heavily on loans from the Federal Home Loan Banks System.
  • CFC and other lenders borrowed a record amount - $163 billion - from the 12 FHLBs in August and September. (We looked at FHLB's in-depth in Five Things on October 31).
  • Second, CFC has been promoting above-average interest rates on certificates of deposit to attract new funds.
  • According to, Countrywide Bank is currently offering the highest rate available on three-month, six month and one-year certificates of deposit.

4. Also, Beazer

Citing "unprecedented conditions" in the homebuilding industry, particularly in Florida and the Southeast, Levitt and Sons, a division of Levitt (LEV), announced Friday that the company and 37 of its subsidiaries filed for bankruptcy, according to Builder Online News Service.

  • This isn't some fly-by-night operation.
  • Levitt & Sons was founded in 1929... ironically enough.
  • The company began laying off employees in September, and shortly thereafter stopped making debt payments and paying subcontractors.
  • The reason this is important because we ran across an article in the Charlotte Observer reporting that Beazer Homes (BZH) will delay paying subcontractors in Nashville, TN.
  • The newspaper said it obtained a letter dated Nov. 5 and signed by Beazer Nashville division President David Hughes, which said "effective immediately" the company would hold up payments.
  • "It is unfortunate, but we cannot continue the prompt payments you have received in past years," the letter stated.

5. Keep Hope Alive!

Ever heard of Northgate Minerals (NXG)? Northgate Minerals is a gold and copper mining and exploration business headquartered in Canada; a decent business to have been involved in over the five to seven years.

  • So this morning Minyan JB forwards us the following press release from the company issued November 5 with a rather innocuous title: "Northgate Reports Strong Quarterly Production and Record Low Cash Cost."
  • So?
  • Buried deeper in the release was this:
    "Northgate maintains a portion of its investments in AAA rated Auction Rate Securities (ARS)."
  • Yeah, so?
  • Well, remember the Super-SIV issues we were talking about in today's Number One? This is related.
  • Auction Rate Securities are floating rate securities that are marketed by financial institutions with auction reset dates at 7, 28, or 35 day intervals to provide short-term liquidity.
  • According to the company, "Beginning in August 2007, a number of ARS auctions began to fail and the Corporation is currently holding $72,600,000 in ARS, which currently lack liquidity."
  • Those ARS investments were originally structured and marketed by "a major investment bank in the United States."
  • "Due to the high credit worthiness of its ARS investments, third party valuation reports which value these investments at 100% of par value, and management's assessment that the liquidity issues surrounding the specific ARS securities held by the Corporation will be resolved within the next twelve months, these investments continue to be classified by the Corporation at September 30, 2007, as available for sale short-term investments at their original par value, which is equal to their fair value."
  • That means they are listed at "par value" on the Northgate books even though the securities are impossible to trade.
  • Northgate believes liquidity will return to the market within the next 12 months.
  • And right now Northgate "does not anticipate that the lack of liquidity for its ARS investments will adversely affect its ability to conduct its business."
  • Keep hope alive.
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