Friday, September 28, 2007

Bank Of Nova Scotia Gets Bopped by CI

Bank of Nova Scotia (BNS) is involved in a stutter step style, maybe its going to be a take over, deal. Dundee Wealth (TSX:DW) ran into some trouble with its wholly owned bank as a result of asset securitization that blew up in their face. They needed help. Bank of Nova Scotia steps in and buys out the problem child bank and also buys approximately 20% of Dundee. Not what Ned Goodman had in mind but there was a problem.

The rationale for BNS is excellent. The problem child is small enough and BNS is big enough to allow BNS to hold their nose and gulp the problem down with minimal gag reflex complications. The sugar that made the deal go down was the equity stake in Dundee. BNS is way behind its other rivals in mutual funds, financial advisers and wealth management.

Therefore a foothold into Dundee makes all the strategic sense in the world. Except, to potential competitors; some of whom very much appreciated the fact that BNS was a weak participant in the field.

Enter CI. CI is a corporation controlled by CI Financial Income Fund, an income trust listed on the Toronto Stock Exchange under the symbol CIX.UN. The CI Financial group of companies had approximately $95.4 billion in fee-earning assets as of Aug 31, 2007.

CI offers a 52% premium. At first the deal was structured with BNS going away. After discussions between Dundee and CI it became apparent that Dundee was contractually obliged to sell the problem bank. This also means that BNS is contractually obliged to buy the problem bank.

CI amends the offer and now has decided that BNS participation is really a very good thing. You can follow the wisdom. CI has just positively established the market valuation for itself by buying a major competitor at a 52% premium. BNS cannot leverage a third party difficulty and reduce shareholder wealth at CI. BNS which has had a reputation of being slow, must now pay a huge premium if it wants more of Dundee or pray tell CI.

BNS incorrectly focused on deal points hoping to capitalize on a problem situation. They did not look around to survey the potential motivations of other market players. BNS cannot steal the asset.

Sometimes you just have to stop and watch a good fist fight.

Wednesday, September 26, 2007

Moody's Makes It's Excuses to Congress

Moody’s (MCO) made the requisite trip to Congress for the requisite spanking and reprimands. Michael Kanef Group Managing Director testified in front of the US Senate Committee on Banking, Housing Urban Affairs.

Moody’s is saying that they cannot smell the financial BS that issuers and interested parties can serve up. They are also saying that unless people stop lying to them they will continue to be unable to identify the terrible odour of BS.

The role of rating agencies will be debated for a long time. But if Moody’s feels that they have been lied to and have been unwittingly forced to rely on fraudulent representations then they should start some lawsuits. If they do not start to sue then they must think the representations were OK so why propose changes. Follow the quotes and see if you can spot the hypocrisy.

Very early in his prepared remarks he made the following comment:

“Moody’s has always been clear and consistent in telling the market that our ratings should not be used for any purpose other than as a gauge of default probability and expected credit loss. We have discouraged market participants from using our ratings as indicators of price, as measures of liquidity, or as recommendations to buy or sell securities. “

He then went on to say

“It is important to note that, in the course of rating a transaction, we do not see individual loan files or information identifying borrowers or specific properties. Rather, we receive only the aforementioned credit characteristics provided by the originator or the investment bank. The originators of the loans and underwriters of the securities also make representations and warranties to the trust for the benefit of investors in every transaction. While these representations and warranties will vary somewhat from transaction to transaction, they typically stipulate that, prior to the closing date, all requirements of federal, state or local laws regarding the origination of the loans have been satisfied, including those requirements relating to: usury, truth in lending, real estate settlement procedures, predatory and abusive lending, consumer credit protection, equal credit opportunity, and fair housing or disclosure. It should be noted that the accuracy of information disclosed by originators and underwriters in connection with each transaction is subject to federal securities laws and regulations requiring accurate disclosure. Underwriters, as well as legal advisers and accountants who participate in that disclosure, may be subject to civil and criminal penalties in the event of misrepresentations. Consequently, Moody’s has historically relied on these representations and warranties and we would not rate a security unless the originator or the investment bank had made representations and warranties such as those discussed above.”

On the very same day Moody’s issues a press release that starts with the paragraph

“Moody's Investors Service is proposing a series of enhancements aimed at bringing greater transparency to the securitization process for non-prime residential mortgage-backed securities (RMBS). The proposed changes include third-party oversight of the accuracy of loan information and making loan-level performance information available to transaction participants. In addition, Moody's proposes that issuers provide stronger and more uniform representations and warranties to investors regarding loan information, and that a third party be responsible for monitoring and enforcing the representations and warranties. These proposals reflect conversations Moody’s has had with market participants, industry trade organizations and oversight authorities.”

Moody’s web site continues to state

“Moody's Investors Service is among the world’s most respected and widely utilized sources for credit ratings, research and risk analysis. Moody’s commitment and expertise contribute to stable, transparent and integrated financial markets, protecting the integrity of credit.”

Moody’s wants to stay up in the stratosphere above the fray. It is clear that when it comes to structured financings Moody’s has allowed themselves to be outwitted to the point where the very nature of credit ratings for structured deals has been rendered useless.

Global Payments Needs To Impress

Global Payments (GPN) has been announcing a few deals here and there. The stock has been gaining some ground but the insiders are selling consistently into the rise. Carl Williams President Worldwide Payments Processing, James Kelly the COO, Suellyn Tornay EVP and Head Lawyer, and Joseph Hyde CFO are all exercising and selling. These are all senior people and should have a pretty good insiders view on what’s happening. The institutions have been exiting the stock lightening their load by some 20%. Carl Icahn reported that he has a new position.

In July they gave guidance that revenues would grow by 10-15% and earnings would grow 5-10%. This essentially means that they are growing increasingly inefficient. This explains why Carl Icahn is taking up a position and why the senior managers are selling into a rising stock price.

Earnings conference call is set for Sep 27 at 5:00pm ET after the earnings have been released for one measly hour. The investor needs to hear something of substance because the two cents a share dividend is a joke. Perhaps the insider selling is the best guidance to date.

Tuesday, September 25, 2007

Dell in China More Problems Sooner

Dell (DELL) announced an interesting deal with Gome to enter the Chinese domestic market through what is most likely the largest retailer in China. Well that sounds pretty good. Chinese sales of computers are expected to grow rapidly whereas US sales are very slow. So China sounds very good. Right place and right time are very important.

The Chinese electronics consumer is beginning to become sophisticated as various offerings compete against each other. OH OH. Here is the problem. Dell lost its stature because other PC offerings had better features. Head to head toe to toe consumers who had choices increasingly moved away from Dell to HP (HPQ) and others.

Yes they will get some sales in a market that is becoming increasingly prosperous. But if they do not have the goods the Chinese consumer will also come to the same conclusion. Dell is probably looking at India to tap into someone big for the same reasons. Indian consumers will also be relatively informed and therefor sophisticated.

If Dell cannot crank up the quality of their offering and learn to match or surpass HP and others then the Gomes deal will just serve to highlight more problems for Dell. They will just get there faster.

Monday, September 24, 2007

UAW and GM Both Hypocritical

On Monday Sep 24 at 1100 ET UAW members struck GM (GM) plants. Ford (F) and Chrysler continue to churn out cars that not enough people want. The Big Three in Detroit and the union need to solve the health care issues before it consumes all of them forever. GM has an ugly unfunded health care liabilities of approximately $50 billion and climbing on their balance sheet.

The union could not bring itself to reach a deal in probably the most important negotiations they have ever had. The membership understands there is an ugly problem but they do not want to face reality.

The company needs cover to point to a difficult union situation. This will take the spotlight away from management problems such as design and market share.

The union is saying they want security. But the current working membership of UAW is a fraction of what it was ten or fifteen years ago. Those are real job loses and the union only now wants to go on strike.

Management needs to say we tried but they would not listen to reason. There are two groups which have taken the pain over the past ten or so years. The common worker and the common shareholder. So far the prescription of pain seems to be continuing.

Both management and the union have pulled the pin on the hand grenade and are passing it back and forth; hoping that the sweat on your hand .....well you know.

As negotiators they need someone to impose a deal. In the meantime the foreign car maker with plants in the US will continue to eat Detroit's lunch.