Friday, September 14, 2007

Countrywide Disclosure Challenged

Countrywide (CFC) according to many credible media reports has done a financing deal for $12 Billion. No details were announced. The news made the market so happy the stock popped rather nicely.

You have to read CFC's Sep 13 press release announcing Aug operational information. The $12 Billion deal is included as another line item. Given the nervousness in the market it would not have hurt to throw the market a little bit of meat on the bone. After all the lenders know what the terms are. CFC finance guys know what the terms are. But investors are not allowed to know. So if you believe in disclosure the dots are not connecting.

The press release covered how they have improved their business and are now focused on the quality end of the business. Undoubtedly this is the result of conditions imposed on them by lenders. So why not let the market know what the other conditions are. Can you make a positive spread?

I know some of the mortgage lenders are not used to documentation but if you are going to be a survivor and stay in the quality side of the business you need to communicate with the investor. Right now its just gamblers who are betting on perceptions.

Thursday, September 13, 2007

Will Auto Worker Health Care Costs Really Come Down?

The Detroit 3 (formerly called Big 3) are negotiating with the United Auto Workers to reduce the cost of health care. General Motors (GM)Ford (F) and Chrysler all need the same thing lower costs. The UAW needs to deliver lower costs or watch a round of financial distress, reorganizations and other strategies designed to blow of their membership.

Many commentators assume that the union will take on some kind of health care trust. This will remove the costs from the car makers. The numbers should look better once it all washes through.

Will this health care trust be financially solvent? If the health care costs are inadequately funded when held on the books of the car makers, how will they be adequately funded when held by the union? Will the actuaries sign off on the financial structure?

What you are doing is creating an major insurance company out of the blue. In addition to staffing problems how will a normally sober insurance regulator view this new structure? Insurance companies need capital, reserves, reinsurance and premium flows which are correctly priced. This cannot be constructed within the context of a tense labor-management contract negotiating session.

If management claims to have punted out the entire cost problem after this round of contract negotiations I would be highly skeptical. The modern day executive is more financial engineer that operation executive. The devil will be in the details. Who will ultimately stand behind the structure and pay the bills.

This may be the first major union contract that will need to be an SEC document so that investors will be able to scrutinize. Can you imagine executives going on conference calls and explaining to investors how the cost structure has been truly fixed. At the same time union leaders go to their membership and recommend ratification because the new deal still provides the same protection.

If both sides point to some shinny castle on the horizon we will all need a damn good open house for everyone to poke around. Ultimately if the union does not give something that will work it can kiss more jobs good-bye.

Wednesday, September 12, 2007

Boeing White Knuckle Approach

Boeing's (BA) CEO Jim McNerney voiced confidence Tuesday that the airplane maker will be able to deliver the first 787 on time next May but acknowledged that there is now no margin for error in order to keep to that schedule. The comments were made at a Morgan Stanley conference in Dana Point, Calif. It has been six days since Boeing said the first test flight was pushed back to mid-November or mid-December due to complications with final assembly and finalizing flight-control software.

Jim McNerney also said Is there room for major glitches at this stage? The answer is no,...We're tight. ... We're down to the program having to go by the book."

Aircraft are incredibly complex products. Aircraft manufacturers cannot tolerate a scrap rate like other manufacturing entities. Undoubtedly the delays were unexpected. Delays are always unexpected. If you were expecting a problem you would have adjusted the schedule for them.

Why set the stock up for a disappointment? Everything has to go absolutely right from now on. If they pull it off then the stock shrugs and says well of course. If there are future problems everyone remembers management saying no problems its going to be OK and then it was not OK. Stocks do not go up in value when news of this nature comes out.

The major problem revolves around bolts made by Alcoa (AA)and others. The bolts are called fasteners and are made from Aluminium and Titanium. The problem has been publicly discussed for the past six months and is still a problem.

Scott Carson ,chief of Boeing's commercial plane unit, is saying the fastener industry consolidated post 9/11 and did not predict the rise in aircraft manufacturing. But airline orders are huge business news and usually trumpeted to the high heavens. Everyone that needs to know knows when you guys get an order for one of those babies.

By the way when the first 787 was rolled out for the world to see it had fake fasteners on it. These fasteners are still being removed and replaced by proper fasteners. So the con was on.

These guys are one glitch away from disclosure investigations and lawsuits. There is always a glitch in a big project. Hence the white knuckles. Someone did not check supply or was lied to about two years ago. Did someone tell his boss and did it get up the management chain properly. Airbus cannot believe their luck.

Tuesday, September 11, 2007

Beware Bear Stearns White Knight

Bear Stearns (BSC) finds itself with a new shareholder. Currently holding position 369 on Forbes 400 Joseph C Lewis has accumulated approximately 7% of the outstanding shares according to reports filed with the SEC. Shares were purchased between Aug 6 to Sep 4.

If you look at the share price it popped slightly starting Aug 6 but has continued to decline. So with a major buyer absorbing 7%, the stock still tumbled dramatically, which shows you how badly investors wanted to dump. When the news came out, share prices increased 2%, which relatively speaking for Bear Sterns is a pittance.

Bear Stearns could probably better use the capital internally to help rebuild its tattered image and get into some profitable lines of business. Mr. Lewis elected to buy in the secondary market. This is telling. Yes the stock is off tremendously and the currency trader part of him looks at a chart and maybe the dollar signs popped up.

Bear Stearns will need to restructure. Who does not restructure after these kinds of problems? Will Mr. Lewis start advocating for specific changes? Seat on the board? Change management perhaps? His holding company Tavistock Group holds interests in approximately 150 companies according to the New York Times. Could he deliver a huge pipeline of share and debt offerings and create a gravy train of fees?

He has to act like a long term investor and not a trader. There is enough Bear Stock for sale. If as and when it gets better at Bear the knowledge that one single investor wants to off load 7% of the float will cause everyone else to shoot at him.

His long term participation may be perceptually problematic to other investors. It would be better for all involved if Joseph Lewis makes a few comments about his intentions and expectations. Warren Buffet makes comments about his expectations for investments and his style of investing.

The more Joseph Lewis stays quiet the more uncertainty other investors will have. The history is that he made his wealth in currency trading. This is a secretive world that does deal with disclosure issues.

Monday, September 10, 2007

AIG Revamps Directors Liability Insurance Offer.

AIG (AIG) recently announced that they are changing some of the ways they are offering the critical Director's and Officers (D&O) Liability insurance coverage. The corporate press release claims that they are not changing the policy itself. They are just changing how and where the product is being offered. They claim that the new procedures will help remove confusion from less savvy buyers.

Given the current focus on governance the D&O policy should be receiving a great deal of scrutiny. I find it hard to believe that any corporate board with a pulse does not look at their D&O to see what it really is covering and how. Professional advisers, lawyers, auditors, compliance experts and savvy business people who want their butt covered must be scrutinizing the policy.

So when AIG announces a new way to do business I assume there must be market place pressures that they are attempting to deal with. The risk management types and insurance brokers probably knew where to go to get the policy. This one is here to help AIG more than their customers.

In almost the same time frame it was announced that Hank Greenberg would now be testifying in matters relating to AIG's accounting problems that were uncovered by New York's then Attorney General Eliot Spitzer. AIG paid huge billion dollar fines and Hank Greenberg took the fifth amendment and refused to testify at the time. Many feel that the move is tactical on the part of Hank Greenberg as he attempts to soften the blow of future proceedings.

Hank Greenberg to date has claimed he did not know about the accounting irregularities.

AIG must have the best experience in this type of governance issue. So if they are insuring you, you have to believe that they will be the best at this risk. What does best mean?