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Five Things You Need to Know: Why Nobody Wants to Ride Mustang Sallie; Minyanville Presents: Know Your Emotional State; Hey Everyone, We Just Bought 1,000 More Houses!; The China Food Panic of 2007!; Who Needs a $50,000 Mattress?


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


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

1. Why Nobody Wants to Ride Mustang Sallie

A group led by the private equity firm JC Flowers on Wednesday threatened to pull out of its $25 billion deal to buy Sallie Mae (SLM), the largest US student lender, citing pending legislation that could hurt business.

  • Makes sense, right? After all, the news of the day certainly seemed to corroborate the story of the consortium of SLM buyers led by JC Flowers, Bank of America (BAC) and JP Morgan (JPM).
  • The House of Representatives voted to cut $19 billion in federal subsidies to student lenders over five years yesterday. Sounds grim!
  • Meanwhile, the Senate is expected to pass similar legislation later this month that would reduce federal subsidies to lenders by $18.3 billion. Also grim!
  • And although President Bush opposes some measures outlined in the House and Senate bills, his own proposal would cut subsidies to student lenders by $16 billion.
  • Sallie Mae was quick to go on the defensive against the consortium's hand-wringing.
  • In a government filing yesterday, SLM said it "strongly disagrees with [the buyers'] assertion."
  • Further, SLM said it planned to proceed with the sale and "take all steps to protect shareholders' interests," which could include forcing a $900 million cancellation fee if the buyers back out.
  • So what's going on here? A $16 to $19 billion haircut in federal subsidies sure sounds like cause to rethink the merger plans by the buying consortium, doesn't it?
  • Well, here's the real story.
  • Legislation doesn't magically appear overnight. Are we really expected to believe that since this deal was first announced in April (10 weeks ago?) that the JC Flowers consortium suddenly woke up yesterday to potential legislative risk facing Sallie Mae?
  • According to the New York Times, a report by the Congressional Research Service found that small and medium-sized lenders would probably be hardest hit, and would actually face difficulties competing with industry giants like Sallie Mae.
  • Some have suggested the legislation is being used as a bargaining chip by the consortium to negotiate a better price. That's actually rather optimistic.
  • The reality may be that banks are telling private equity that they have no intentions of honoring the underwriting commitment and risk what has become an increasing number of hung deals.
  • SLM will now be forced to re-work the deal at a lower price.
  • Bottom Line: Liquidity is drying up as risk preferences shift.

2. Minyanville Presents: Know Your Emotional State

When reading the news each day it's hard to know whether to pay more attention to "bullish" headlines or " bearish" headlines. For example, take a look at two headlines from this morning... on the very same story and data.

US June Home Foreclosures Drop From 30-month Peak - Reuters

US Home Foreclosures Increase 87% - Bloomberg

Hmmm, which story to choose. Which to choose? Only you know your emotional state, so below we've created a positive spin story and a negative spin story for you to choose from. It's the same story, but spun differently! Pick the one that matches your mood today.

Foreclosure Data Improves in June

  • RealtyTrac's June 2007 U.S. Foreclosure Market Report showed a total of 164,644 foreclosure filings reported during the month, down 7% from the previous month.
  • "Foreclosure activity subsided somewhat in June after hitting a 30-month high in May," James J. Saccacio, chief executive officer of RealtyTrac said.
  • "And the drop in activity was fairly broad, with 33 states reporting month-over-month decreases."

Foreclosure Data Paints Grim Picture of Despair

  • The number of U.S. properties in foreclosure climbed 87% last month from a year earlier, according to RealtyTrac.
  • James Saccacio, the company's chief executive officer, said foreclosure rates in most states "remained substantially above last year's levels."
  • RealtyTrac expects U.S. foreclosures to reach 1.8 million by year's end, Rick Sharga, a spokesman for the company, said.

3. Hey Everyone, We Just Bought 1,000 More Houses!

The Massachusetts Housing Finance Agency, using funds from Fannie Mae (FNM), is establishing a $250 million program to refinance the mortgages of people facing foreclosure, according to Bloomberg.

  • To qualify, homeowners must show they were put into "unaffordable and unsustainable'' subprime mortgages, "where abusive practices may have been used by the lender,'' according to Bloomberg.
  • About 1,000 people are expected to qualify for the program, officials said.
  • The Massachusetts Housing Finance Agency will sell $60 million in bonds to fund the program, and Fannie Mae, the largest provider of money for U.S. home loans, will contribute $190 million.
  • New York and New Jersey are among the states considering establishing similar bond programs to aid homeowners facing foreclosure.
  • Meanwhile, the Ohio Housing Finance Agency began making refinancing available to at-risk homeowners in April with financing coming from $100 million in bonds.
  • In other words, Congratulations taxpayers on successfully closing on $160 million (so far) in new homes.

4. The China Food Panic of 2007!

Slowly, but surely, we are all being poisoned by tainted products from China.

  • The latest tainted product from China? Fake pork buns!
  • Fake steamed buns made from up to 60% waste paper and cardboard have become the latest food to join a growing list of health scares in China.
  • Tainted pet food, fake cancer drugs, toothpaste with anti-freeze as an ingredient, even fake water!
  • Where will it end!?
  • A better question is "Where did it begin?"
  • The New York Times back in April, in a story on pet food from China with the toxic ingredient melamine as a filler, that "for years, producers of animal feed all over China have secretly supplemented their feed with melamine, a cheap additive."
  • Yes, that's right. FOR YEARS!
  • Meanwhile, today the Times reports that federal inspectors have stopped more food shipments from India and Mexico in the last year than they have from China.
  • So why does it matter now?
  • Pete Kendall's Sociotimes commentary site explains:
    - "The news is not the use of melamine in dog food, but the emergence of a new fearful mood, one that closely resembles similar mass fears about food that hit in the early stage of bear markets."
  • Kendall cites the establishment of the Food and Drug Administration as the result of a similar mass fear over food supplies.
  • Another was the health food craze of the 1960s.
  • Food is a very emotional topic. It carries deep associations to nationality, ethnicity, regional identity, family and behavior.
  • Not surprisingly, as risk preferences begin to shift and overall fear grows, food is among the most high profile worries.

5. Who Needs a $50,000 Mattress?

The New York Times this morning has a shocking SHOCKING! expose on the luxury mattress business!!!

  • The Swedish mattress maker Hastens is offering a mattress with a price tag of $59,750.
  • A company called Magniflex is selling a $24,000 mattress.
  • Hollandia, an Israeli company, is offering one for $50,000.
  • What is the calculus - economic or otherwise - that brings a mattress to the $50,000 price level, the Times asks.
  • "Because it's there!' " exclaimed Pamela Danzinger, author of (seriously), "Let Them Eat Cake: Marketing Luxury to the Masses - as Well as the Classes" and "Why People Buy Things They Don't Need."
  • "Those making over $250,000 a year are the fastest-growing households by income in the country. We know that from our survey," Danzinger said.
  • Sure, that kind of money for a mattress sounds ridiculous on the surface, but stop and think about it for a moment.
  • According to the Bureau of Labor Statistics, the average American spends a little more than 8 hours a day sleeping.
  • Even if you live in Los Angeles, you have to ask yourself, how much time do you spend driving? Is it two hours a day? Three?
  • Yet people don't think twice about buying a car that costs $25,000 - every four or five years!
  • A good $25,000 mattress should last at least 10 years, some claim to be capable of supporting your sleep habit for up to 20 years.
  • Also, you don't have to put gas in your mattress! Or at least you shouldn't.
  • See, it's all about priorities.
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