Media and politicians are hyping Freddie’s $2 billion of debt offerings as a big win. They even go so far as to say this means that there is less likelihood that Fannie and Freddie will be nationalized. Click here for the hype.

I don’t see it the way they do. If you believe the government is going to take over, there is minimal risk to buying the debt at higher yields. I might be impressed if the Treasury came out a few minutes before the offering and said “We will not nationalize Freddie Mac” and then debt investors bought the debt anyway at market interest rates for 3-month and 6-month paper. But that is not what happened.  I might be impressed if they sold equity without a discount even though a bailout would wipe out that new equity. But that is not what happened. They offered new debt at high yields. That is not impressive to me. I don’t see this offering as any evidence that a government takeover is less likely.

I was going to write a new post about how pathetic it is that Merrill raised capital again under desperate terms despite all the previous claims that it didn’t need more than it already had. Then I realized I had written stuff like that already…several times. So to avoid wasting my time trying to write an original post about a story that it seems most investors love to ignore or only see the “positive side”… here is a bunch of snippets from related posts in chronological order.

From March 12, 2007 about the Subprime Ripples that I was expecting:

But it really doesn’t stop there, subprime divisions became popular at quite a few companies when the housing bubble was throwing off huge returns. Morgan Stanley’s acquisition of Saxon last August might not turn out so great and Merrill Lynch’s $1.3 billion purchase of First Franklin Financial looks like it will be a charge to 2007 earnings compared to the original accretive claim. In addition to direct operating units, Wall Street firms have benefitted greatly from the securitization of these loans and from lending to them directly. So, I am looking forward to the earnings reports coming from Wall Street in the next week and will be paying a lot of attention to guidance from the impacts of subprime.

And then in closing….

But despite what you might hear elsewhere - subprime is not a small problem and it has ripple effects thoughout our economy and markets.

From June 21, 2007 about being Afraid Of What We Do Not Understand and how Merrill Lynch’s pressure on the Bear Stearns hedge funds over a few billion dollars would create a cascade of problems for the markets.

As I expected, Bear Stearns and Merrill found a way to temporarily avoid a huge meltdown from the marking to market of these products. But what has been exposed in the process is extremely threatening to almost every aspect of the markets and now that the genie is out of the bottle, it will be tough to shove CDOs back into the junk drawer or under the rug. CDOs are too complex for people that are not investing in them and the majority of investors don’t play in this game. So when they hear that CDOs are a threat to their assets, it’s a dangerous situation.

Did Bear Stearns draw the short straw? That’s what a group does to pick the unlucky guy that needs to sacrifice himself for the good of the team. I keep looking at this BSC hedge funds / CDO / subprime fiasco and feel like they either were the only ones to make a mistake or they drew a short one.What’s curious to me is the odd way this got exposed. I seriously doubt that Merrill didn’t contemplate the consequences of their actions before telling the market of their plans to pressure BSC and more importantly, the entire CDO market. Wednesday’s afternoon drop gave a very quick measure of letting this Pandora all the way out of the box. It should surprise no one that Merrill backed off. It was much better for the team when “CDO” were just three letters that other investors heard and tried to use in a sentence at cocktail parties.When no one ever really liquidates an asset and all we see is a product category that has expanded past $1 trillion, it’s easy to just assume lofty pricing that will only head higher. Now that we had this little episode, the players in this crowd and anyone who is giving this some thought will know the risk of trying to sell it. And that is a scary point - if a small group is getting nervous about products that they can only sell to each other, what do you do? Somehow a CDO ETF doesn’t sound so good. So it looks like the guys that created these products will have to find a way to deal with them on their own.If the CDO market is entirely stable other than this one problem at BSC and with subprime mortgage risk, everything is okay. If not, I’d hate to have to draw straws and be the next member of the team to take a hit.

I have a new suggestion for solving the Subprime problems and the housing market price declines. You ready? I bet each of those houses has at least two sinks(bathroom and kitchen) and depending on whether they were jumbo mortgages with lots of bathrooms the foreclosure fortresses might even have 5 or more. So each troubled homeowner should remove their sink(s) preferably with the help of a plumber but if you are a do-it-yourselfer you could click here for some instructions. Once removed, the homeowner should promptly throw it in the front yard and then make a public announcement to all the neighbors that the worst is behind them. This strategy seems to be working exceedingly well with financial stocks like C, UBS, MER, and WM so I thought it might do the same to make troubled homeowners feel better and increase the value of their home. Of course, I am joking and I don’t want to see sinks in the front yards of America. However, I have a sinking feeling that the tactics of our financial sector is a big joke as well.

In light of the BankAtlantic vs. Dick Bove lawsuit, I decided to have some fun and dig around the Internet to see if I could find any stories over the past few years where BankAtlantic may have received some positive speculation about their stock by an analyst or the media. Since the stories would be old, we have the chance to use hindsight and find out whether the analyst was right or wrong. After all, BankAtlantic is apparently suing Bove because they said he was wrong and he refused to adopt their opinion and “correct” his view to match their own. So it appears that accuracy of analyst speculation is very important to BankAtlantic.

After a few seconds, a Google search provided a few old stories to evaluate (provided after this paragraph). When you read the following links, ask yourself whether the analyst was correct that BankAtlantic would be a good M&A candidate. Just look at the actual results and the positioning of their operations in the few years that have passed. I think it is safe to say that the analyst would have had a belief that the bank was sound back then and didn’t suggest that they would be where they are today. Was he right? Remember BankAtlantic is upset enough about an analyst being wrong that it is willing to sue.

March of 2004

December of 2005

Did BankAtlantic sue anyone when there were rumors that they were going to be acquired or merged? I looked and could not find any mention of the bank suing the analyst, can you?

When a rumor is supportive to stock prices, it seems that it is very convenient for a company to make itself unavailable for comment or to just say “We don’t comment on rumors”. Those seem to be acceptable actions as long as those rumors pump up the stock price. I have never seen a company sue to stop wrong speculation when it helps the stock. No surprise there!

I realize there is a difference between speculating about who might go the way of IndyMac and who might be acquired. It’s a big difference. It’s a difference between stocks going up on speculation which most people seem to love and have no problem with versus stocks going down on speculation which people seem to hate and are willing to fight. It’s part of human nature I guess. It’s part of human nature to be hypocritical. If the issue for BankAtlantic management is the accuracy of an analyst, then I suggest their prior actions with regards to analysts that were wrong are relevant. Has an analyst ever been wrong about BankAtlantic? Does it matter what the analyst is wrong about? Does it matter if the analyst being wrong makes the company look good or makes it look bad? Did they ever sue an analyst before?

Where do we draw the line with analysts? If being wrong is the standard, there will be a ton of lawsuits. What if a company doesn’t like the analyst’s downgrade? Sue? What if a company thinks the analyst’s price target is too low? Sue? What if a company thinks the analyst’s estimate is too low? Sue? Would they sue for an upgrade, a ridiculously high price target, or an estimate they didn’t like if those things made the stock go up or made the company look good even though management knew it was wrong?

I am not a Dick Bove fan and I get really tired listening to his back-and-forths on financials. Other than his desire to appear on CNBC or any other media outlet that is willing to put his mug and comments on air, I am not sure what makes Bove (or any other individual analyst) an authority on stocks. Let me clarify, I am not a fan of Wall Street analysts in general. I am “analyst agnostic.” I don’t love them…I don’t hate them..I don’t believe them much. Certainly there are a few good ones. Certainly there are a few terrible ones. Certainly there are a bunch of overpaid ones who are irrelevant and may be either good or bad, but irrelevant anyway.

However, I do care about freedom of expression and the right to have an opinion, whether right or wrong, as an analyst or as an American. Last week, Dick Bove wrote a piece based upon his own analysis of banks that may be at risk for failure (a la IndyMac.) I haven’t read the report and I find it irrelevant for what I do. Personally, I think it is irrelevant just like I used to think it was irrelevant when analysts pumped up stock prices a year ago by creating lists of stocks that would be acquired by Private Equity. But I do hope that he did better with his list than the FDIC did with their list, especially considering that the group that is responsible for protecting depositors found a way to keep IndyMac off their list.

Regardless of whether Bove was right or wrong about who is in trouble, he has a right to have an opinion and a list. Just as a bank and their management team has a right to be wrong about how they manage their bank. In both cases, shareholders have a brain (or should have a brain) and an ability to do their own analysis and determine whether a company is worthy of their investment.

I remember Colin Devine of Smith Barney being critical of Conseco and all the threats he had to endure. For the record, Devine turned out to be right about a stock that became worthless and a company that went down as one of the largest bankruptcies in American financial history. Bove is in good company….if he turns out to be right. If he turns out to be wrong, he is in the same company as he exists now. Herb Greenberg commented on this topic a few months ago in this very good article.

But where is the damage to BankAtlantic? Did they get their feelings hurt? Poor babies. As for the stock…on the day that Bove put BankAtlantic on his list (July 13, 2008 was a Sunday), the stock opened at $1.20 per share (on Monday July 14, 2008) ….now it’s at $1.89 per share…ABOUT 60% HIGHER! Seems to me that investors decided that Bove was wrong. That is what they should do with any analyst. Make their own decision regardless of what the analysts say and regardless of what the company says.

For the record, maybe it would have been better if Bove had published his list over a year ago in January of 2007. BBX, BankAtlantic stock was about $13 per share back then. Sorry to point out the obvious here but who the hell should be sued for causing BBX to go from $13 to $1.30 per share? I don’t think Bove or any other analyst did that. Let me get this straight…Bove makes a list and the stock goes up almost 60% in a week and that is harmful to BankAtlantic, their management and their shareholders. Meanwhile….someone else went without being sued as the stock dropped 90% in 18 months. Okay….I got it.

For the record, I had an UP signal on BBX from 6/23/08 until Bove’s list came out. I was wrong on that to the tune of -33% in 3 very bad weeks. I didn’t get a thank you for my optimism and didn’t want one. What I think is going to happen to BBX has nothing to do with Bove.   I make up my own opinion as everyone should.  We are right sometimes and we are wrong sometimes. All of us. Investors, analysts and yes, executive management.

Analysts analyze. If they are wrong, their employer and the market holds them accountable. That’s the way it should be. Companies manage their business. If they are wrong, the market holds them accountable. That’s the way it should be. I just don’t see how Bove defamed anyone. If he was wrong or sloppy, his reputation and the reputation of his firm will receive the appropriate punishment by the market.

I suspect companies have been emboldened by the SEC and other government support to blame short sellers and anyone who dares be negative. I get that, but when we attempt to stifle any critics, we are running down a very dangerous path. I’d really like to see the company find a diplomatic way to remove the lawsuit and get back to managing their bank. As for Bove, I really don’t care what he says.

Lately, I have been hammering on the analysts of financial stocks and their proclivity for dropping estimates in advance of the earnings reports and then allowing everyone who wants to claim that as a beat.  So my apologies to the analysts who cover American Express….you did not do that with their earnings and have held at around 84 cents per share for the past 90 days and I hope I didn’t insult you by throwing you into an unfair generalization.  OOPS!  Maybe you should have dropped earnings like the other guys.  AXP came out with 56 cents per share vs. 83 cents.  First point…..where was the preannouncement/warning from American Express management?  Second point….beware any stock that did not benefit from a massive decline in analyst estimates over the past few weeks or months.

Bank of America doesn’t intend to guarantee Countrywide debt - nice.   I wonder who will help things out if the debts don’t get paid at maturity?

My opinion on BAC earnings??????…..see the previous post. Nice pattern by the analysts of financials….pump up estimates at the onset of a quarter…then drop them significantly before the earnings season and a few nice things happen 1) companies do not preannounce / warn and 2) everyone that wants to can claim that the companies beat estimates. Great Stuff!

Earnings estimates were whacked from about 90 cents per share 90 days ago… only 30 days ago, estimates were hovering at about 71-73 cents per share. Go ahead and call it a beat when they come in at 72 cents per share today.

I was impressed by a few tactics I saw/heard…

Make sure you don’t close the Countrywide acquisition until the quarter closes so you don’t have to lump their crap into yours….Great Stuff!

Then say how you expect the Countrywide losses you didn’t want to include this quarter will be less than you had expected in future quarters….Great Stuff!

Then say how you expect Countrywide will be accretive in 2008….Great stuff!

Then say how you are not going to cut your dividend….Great stuff!

Then throw in a few nice comments about an economic recovery in 2009….Great stuff!

Best of all….this from CEO Ken Lewis “We are not in denial.”

ACA Holdings got its sixth forbearance agreement yesterday at the last moment.  More of the same nonsense.  I guess they are still making lots of progress negotiating with their counterparties.  What a joke!

Some things have real deadlines. Requiring a deadline to resolve a big problem with a “permanent” solution sounds definitive and ominous. Unless of course you are ACA Holdings (ACAH on the pinks). Their deadlines are “permanently temporary”. I have written about this $7.7 million market cap company and its relevance to the ongoing credit crisis a few times in the past (click here). June 20, 2008 was previously imposed as a deadline for coming up with a “permanent” solution to their liquidity solvency survival as part of 4 previous forbearance agreements with its creditors. At the last moment…. only 3 hours before the deadline of 6:00 pm (New York time) was set to expire…..it was extended. WHHHHEWWW! I was really surprised by that! (NOT) This is not about ACA and hasn’t been for months. In my opinion, it’s about avoiding the complications in the financial industry for all the structured credit products that ACA provided financial guarantees for. It’s not about ACA and what its shareholders have to lose. It’s about the people that have so much more to lose by finally and “permanently” dealing with this mess. Since it’s not comfortable to do that - the interested counterparties much prefer to permanently temporarily provide the fifth forbearance agreement.

Here’s a snippet from KeyCorp’s most recent 10-Q  filed on May 6, 2008 for the period ending March 31, 2008.

Capital adequacy. Capital adequacy is an important indicator of financial stability and performance. Key’s ratio of total shareholders’ equity to total assets was 8.47% at March 31, 2008, compared to 7.89% at December 31, 2007, and 8.37% at March 31, 2007. Key’s ratio of tangible equity to tangible assets was 6.85% at March 31, 2008, above Key’s targeted range of 6.25% to 6.75%. Management believes Key’s capital position provides sufficient flexibility to take advantage of investment opportunities, to repurchase shares when appropriate and to pay dividends.

In that same filing, they said their Tier 1 capital was 8.33%.

Only a month has gone by since Key’s last report, but a lot has changed. Here’s a summary of their decision on June 12, 2008 to cut the dividend in half and raise $1.65 billion. The press release (click here) indicates that an adverse IRS ruling of about $1.2 billion caused management to pursue this capital. I don’t think the market that whacked the shares by over 20% believes them that this is the sole problem with capital. Raising $400 million extra with highly dilutive offerings might be one clue. Cutting the dividend by 50% to save $200 million per year might be another clue.

I doubt that management still believes what it believed just a month ago that their “capital position provides sufficient flexibility to take advantage of investment opportunities, to repurchase shares when appropriate and to pay dividends.”

I have written repeatedly about my dislike of buybacks when they are done for the wrong reasons. Okay, so Key didn’t buy any shares in the last two quarters, but they bought 16 million shares in the first 3 quarters of 2007. Back then, the stock traded between $31 and $40 per share with an average of about $35/sh. Not only were those purchases expensive compared to today’s $11.73, but wouldn’t it be nice to have the $500-600 million in the capital they spent on themselves? Was that a good opportunity to “repurchase shares when appropriate”?

So what about their dividend policy decisions? They raised quarterly dividends in 2007. In 2006, it was $0.345/sh. In 2007, it was $0.365/sh. And they raised them a few months ago to $0.375/sh. Small raises really, but raises nonetheless. They had to (I guess) to keep up their record of 43 years of consecutive dividend increases. After one quarter and a one-time tax ruling, they decide to cut dividends by 50%. So much for the record.

Key is not alone. Many banks have spent their capital in prior years on buybacks and dividends and expensive acquisitions (aka “investment opportunities”). During that time, stocks were heading higher and there appeared to be no downside. Now, the reverse is true.

I know people far smarter than me have assured everyone that the worst is behind us. They apparently know more about the key to capital than I do.