'Uncategorized' Archive
Banks are desperate to move CDOs, those dangerous collateralized debt obligations that are backed by subprime mortgages, off their books. The problem is, who is brave, or stupid, enough to buy them?
In Merrill Lynch ’s case, that would be Lone Star Funds. But Lone Star was far from stupid — they agreed to the deal because Merrill Lynch funded most of the transaction. Lone Star Funds is buying the CDOs for $6.7 billion, and Merrill is financing the purchase up to $5 billion. It’s better than being on the hook for the estimated $11 billion that Merrill Lynch says the investments are still worth — a dubious estimate at best, since for all intents and purposes, the CDOs are worthless. Merrill Lynch is basically paying Lone Star to take them off its hands and its books. It originally valued the package at $30 billion (it’s hard to tell if that’s what it paid for the investments, since none of these figures are crystal clear).
What is Lone Star going to do with this hot potato? The company is no stranger to distressed assets. Those are its bread and butter. Maybe it’s hoping that the government’s bailout of Freddie and Fannie and the homeowner relief plan will stabilize the underlying mortgages and it won’t be left holding the bag. Most likely they will be collecting on the underlying debt. (Hey, it might just be a few pennies on the dollar, but after a while, it adds up.)
In the meantime Merrill Lynch still hasn’t extricated itself from these investments, it’s just moved them from one column to another. It’s a good move and a necessary one, but as the company is finding out, that’s one sticky hot potato.
With oil futures prices flirting with $150 a barrel, and world demand outstripping supply, governments, scientists, and energy companies are casting about, looking for both short- and long-term solutions for future energy sources. An emerging consensus (the drill more oil in more places — ANWR, the Federal lands, and the Continental Shelf — lobby notwithstanding), is to diversify the energy supply source base beyond hydrocarbons.
Green energy technologies such as wind turbines and solar-powered batteries are being steadily integrated into the energy mix. Texas, for instance, has emerged as a leading implementer of wind-powered generating plants. Three of the five largest wind farms in the US are located there. The world’s largest wind farm, Horse Hollow Wind Energy Center, was completed by FPL Energy (a unit of the FPL Group) in late 2006. Other power companies with wind energy interests in Texas include American Electric Power, AES, Austin Energy, Catamount Energy, and Edison Mission Energy.
Solar energy also has gained a solid foothold in the worldwide energy matrix, through such companies as BP Solar International, Suntech Power, Q-Cells, and Solarworld.
A lesser known power source, and one of the oldest, is tidal power. Tide mills date back to Roman times, and operated much like windmills, but with the tide rather than the wind powering the turning a wheel that rotated a millstone that ground grain into flour. Augustinian Canons operated one in Woodbridge in the east of England in the 12th century. By the 18th and 19th centuries there were as many as 750 tide mills operating on both sides of the Atlantic, with about 300 in North America, 200 in the UK and Ireland, and 100 in France.
The main advantage was in the technology. Unlike windmills or even river-powered watermills (whose effectiveness was impaired by calm weather or droughts), the tidal mills could reliably operate 365 days a year.
Fast forward to today. Recent advances in turbine technology (a byproduct of wind turbine development) hold out the promise of using large-scale turbine arrays in high-velocity areas where natural and strong tidal current flows are concentrated — such as the coasts of Canada, the Straits of Gibraltar, and the Bosporus Straits — to generate significant power.
Some examples of what those advances have brought:
- In the US, Pacific Gas & Electricity teamed up in 2007 with the City and County of San Francisco and Golden Gate Energy to study harnessing the tides in San Francisco Bay to create a new source of renewable electric power.
- In the UK, E.ON and Lunar Energy (a British tidal power company), announced plans that year to develop a tidal stream power scheme of up to 8MW in the sea off the west coast of the UK, capable of producing enough power to service about 5,000 homes.
- In March 2008, Harland and Wolff (the shipbuilder famous for building the Titanic) completed construction of the world’s first commercial tidal stream turbine, for Marine Current Turbines. The installation of the 1.2 MW SeaGen Tidal System took place in the fast flowing narrows of Strangford Lough in Northern Ireland in April.
- This year, a joint venture between Lunar Energy and Korea Midland Power Company, was formed to create a tidal power scheme in the Wando Hoenggan waterway, expected to power 200,000 homes by 2015.
With tidal power technology only a few years behind the wind power generation systems that are becoming a regular part of utilities’ operations in the US and elsewhere, generating power from fast-moving ocean currents is about to become mainstream.
It’s just a matter of going with the flow.
The ignominious demise of Bear Stearns is the latest in a long line of similar obituaries. The histories of Hoover’s financial services company records are littered with the names of firms that once ruled Wall Street. It’s like playing six degrees of separation, only with E.F. Hutton (“When E.F. Hutton talks, people listen.”) instead of Kevin Bacon.
So what actually happened to E.F. Hutton? Well, it became part of Shearson Lehman in 1988, was acquired by Travelers, and now is part of Citigroup.
Shearson Lehman? They were the result of an acquisition/combination of Shearson and Lehman Brothers. The Shearson part was dropped, and now we have Lehman Brothers.
Remember Morgan Stanley Dean Witter Discover? So 1998. It became plain Morgan Stanley in 2001.
Salomon Brothers? This was a huge old firm, acquired by Travelers and merged with Smith Barney in 1997. Smith Barney had been acquired by Travelers in 1993. Now where are they? Now they are Citigroup Global Markets and exist as brands only.
First Boston became part of Credit Suisse in 1978 — now it’s Credit Suisse (USA). More than 20 years later, Donaldson, Lufkin Jenrette also became part of Credit Suisse (USA).
ING Groep picked up the pieces after the venerable Barings Bank failed so spectacularly and noisily in 1995. Less dramatically, Wasserstein Perella, jauntily nicknamed “Wasserella,” became the staid Dresdner Kleinwort Wasserstein when Dresdner Bank bought it in 2001.
Remember Manufacturers Hanover? Sure you do. It was acquired by Chemical Bank in 1991. Remember Chemical? Chemical acquired Chase Manhattan in 1996, but took the more illustrious Chase name. Remember J.P. Morgan? Chase acquired J.P. Morgan in 2001 to form JPMorgan Chase. Remember Bear Stearns …
Many of these firms were founded in the 19th century or in the early days of the 20th. Their names were the names of the men who drove capitalism, for good or ill, in a time when the Wild West wasn’t just a metaphor and when an “anything goes” mentality ran amok in the financial world. Now only their ghosts remain. In the graveyard of the banking world, Bear Stearns is being laid to rest in good company.
The latest addition to the list of vulnerable retailers pushed into bankruptcy by the crappy retail environment is Linens ‘n Things, which has joined Sharper Image, Lillian Vernon, and others in receivership. As widely expected, on Friday the nation’s #2 home goods chain (behind Bed Bath & Beyond) voluntarily filed for Chapter 11 Bankruptcy protection. Its now-ex CEO Robert DiNicola, who has been replaced by a restructuring expert, cited “significant deterioration in the mortgage, housing and credit markets and the resulting impact on the retail marketplace” as the reason for the chain’s slide into bankruptcy.
Truth be told, Linens ‘n Things has been battling declining same-store sales and profitability for years and was in pretty bad shape prior to the economic downturn. (Sales at stores open at least a year are considered the best indicator of a retailer’s performance.)
DiNicola blamed the current retail malaise for overwhelming the operating and merchandising improvements he’s made since joining Linens ‘n Things in 2006 when the already-struggling firm was acquired by Apollo Management. Upon taking charge he launched a “long-term, three phase multi-year plan” to turn the company around. Improvements included beefing up the selection of higher-end merchandise to differentiate Linens ‘n Things from mass market competitors (such as Target and Wal-Mart) and cost cutting. But alas, it was all too little too late for Linens ‘n Things, whose bankruptcy filing is a black eye for both DiNicola, a retail industry veteran, and Apollo.
The chain’s current woes demonstrate how hard it is to be #2 in a hyper competitive market and unforgiving retail economy. The fix Linens n’ Things finds itself in is not unlike that of ailing Circuit City, which trails its much larger rival, Best Buy, in the consumer electronics retail market. (Circuit City is the target of an arguably ill-advised hostile takeover by the video rental firm Blockbuster, which my colleague Larry Bills detailed in April.) Indeed, both Best Buy and Bed Bath & Beyond appear to be thriving in spite of the lousy housing market and decline in consumer spending.
Linens ‘n Things, which had added more than 100 stores since 2005, said in a court filing that it will shutter about 120 locations as part of its restructuring. While store closings may help put the company back on the road to profitability, I’m skeptical that a smaller Linens ‘n Things will ultimately be able to compete successfully in the market with Bed Bath & Beyond’s nearly 900 locations (and counting).
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