I Fought the Wall Street, and the Wall Street Won

If you are a frequent taster of our lovely website, you might sense a note of sarcasm here or there - or perhaps more than a sense. You might in fact sense derision or scoffing ... or in fact outright cynicism. Dear friend, if you are a newer acquaintance of the stock market you would indeed believe it is somewhat of a level playing field, with a small advantage to the big boys (like the folks in Vegas). But the longer you stick around - the more you see the games that are played. I've been having fun in the Wild Wild West atmosphere since the mid 90s and each year that goes by, with all I've seen, the lack of sheriffs is quite startling. Unfortunately, it is the only game in town so this seedy underbelly is all we have, even as it is paraded (most years) as glitzy and glamorous. Indeed, under the surface is a convoy of snake oil salesmen duking it out with used car salesmen in their Armani suits. Actually, that is a dismissive comment to those professions ... snake oil salesmen and used car salesmen have far higher morals; I apologize.

I certainly don't catch everything, but even with what I do figure out - it is a quite startling one sided game. I can only imagine what I miss or am out of the loop of. If the dirt we've seen the past 15 years is what is "easily seen", I can only image what is at the bottom of the shoe. Thankfully, our politicians have helped to look out for the little guy by an incredibly industrious and analytical SEC, and through stronger regulations and oversight by the likes of Phil Gramm......... what's that? Oh.

Nevermind.

So we're out here on our own. Well we once had Elliot Spitzer - granted everything he did was in self interest for political gain but he actually struck fear into the nefarious folk since he was a bulldog. Whatever happened to good ole Spitzer?

So not only are we fighting Wall Street chicanery on a daily basis, we now are (through the generosity of government) helping to both subsidize and backstop their activities. We are a generous folk. So in return for these endeavors the Gods of Wall Street shall allow us to partake by our Etrade accounts and 401ks jumping $8200 this year. See how this works? Billions upon billions for them - backstopped and subsidized by you. In return for these billions, we shall bestow upon you - dear peasant class - that warm feel when your account ripped to shreds over the past decade, once again bounces 28%. Remember, Wall Street and Main Street are in this together. (repeat this line every time someone question's are hundreds upon hundreds of billions of giveaways until peasant class finds new thing to focus short term attention span on)

Since I am mostly an equity guy, and an equity guy pressed for time at that - I miss a lot of the non normalized chicanery that goes on. Or perhaps I've become immune to the "asking price" to play in the biggest casino on Earth. Thankfully we have some formerly on the inside happy to share information with the unwashed masses. Our buddy "Tyler" over at ZeroHedge is one such turncoat. I enjoy perusing his website for the many stories on the credit/bond side - since this world is relatively arcane to me. Many of his posts are like a Dennis Miller rant - I don't get 30% of it, but I know someone really smart is laughing somewhere. The 70% I do understand is a good read and often enlightening. So after my whipping in our commercial real estate shorts, I did enjoy reading how exactly the big boys fleeced me. Even more impressive - is the "too big to fail banks" now have combined into "even more too big to fail" entities, who now can cross pollinate their stealing... I mean cross pollinate their services to shake loose nickels out of the pockets of us all. Of course, we should backstop and subsidize them to loot us because (all together now) "we're in this together!". Except I don't seem to profit very much from this togetherness.

• If as you read this article and you are not familiar with Jack Grubman, may I refer you to this article
• If you are not familiar with what a Chinese wall is, may I refer you to this
• If you are not familiar to the activities of Wall Street analyst set who were selling dot com merchandise with egregious buy signals while internally emailing to each other what a pile of dung these stocks were, may I refer you to.... well nevermind, you just had to live through the debacle that was 2000-2002.

Only the names and faces change - the game really never does. Thankfully, new (hopeful) suckers whispered songs of "the only way to retire is through the stock market" are created each and every day.

Now as to myself, I would love to see Mr. Craig Schmidt's internal Merrill Lynch/Bank of America emails (and text messages) for the 10 days prior to this glorious upgrade bestowed upon us Friday. But unfortunately Mr. Spitzer seems to be out of the limelight - thankfully he no longer can do any damage to the only folks who really matter in America.

So without further comment, let me reproduce in full context (sung to the tune of Hank Williams - "I Fought the Law") "Tyler's" connect the dot moment. I am sure this was just a case of "happenstance" as the folks at Merrill and Bank of America will also disclose to us when anyone asks. Happenstance happens a lot...

ZeroHedge: Wall Street Back to its Criminal Ways

There was a time on Wall Street when insider trading was rampant, when sellside analysts would pump stocks under the guidance of their superiors only to have their corporate finance colleagues do an equity offer shortly after, when the amount of money a bank's corporate clients paid would determine its rating, and when analysts said in internal emails a company is worthless, only to issue reports claiming the company was the next sliced bread. Then things changed for the better briefly, when Spitzer came on the stage. However, with his thunderous fall from grace in an act of utter hypocrisy, the behavior he fought so hard to curb started gradually coming back.

Yesterday, Wall Street's shadiness came back with a vengeance.

As Zero Hedge disclosed yesterday, mall REIT Kimco decided to dilute its equityholders by issuing over $700 million (including the green shoe) in new shares which would be used to buy back the company's debt, as KIM has $735 million in debt maturities over the next 3 years, and a $707 million currently drawn on its secured credit facility. One look at the company's equity prospectus reveals that the lead underwriter is non other than "scandal-central" investment bank Merrill Lynch.

This is where visions of Jack Grubman should resurface. While Zero Hedge will not speculate over the efficiency of the Chinese Wall at Merrill Lynch, aka Bank Of America, something in this transaction stinks to high heaven.

Let's walk through the sequence of events:

1) First Merrill Lynch/BofA gets clients to subscribe to a massively diluting equity offering (105 million new shares out of 271 million pre-offering shares, or 39% dilution). The offering prices at $7.10/share, a 6% discount to the previous day closing price of $7.49. In the process Merrill pockets an underwriting fee likely equal to 3% of the offering or around $20 million.

2) Minutes after the offering Merrill REIT analyst Schmidt comes out with a report, changing the recommendation on the stock from a Sell to a Buy, thereby getting the vanilla money which makes critical fiduciary decisions merely based on what some sell-side analyst will recommend. As a result Kimco stock rises throughout the day and closes at $9.40, a 25% premium to the closing price, and a 30% premium to offering price of $7.10, which closed that very same day.

3) Notable here is that Schmidt had come out with a Sell (aka Underperform) report on the company less than two months ago, on February 5, titled "Write-downs drove the miss." Among Schmidt's concerns were the following very salient points:

Write downs, not Q4 operating metrics, are the issue

KIM’s Q4 operating metrics took a back seat to write downs in the quarter as the company reported a sharp drop in FFO as it booked $111.8mn in non-cash impairment charges. These write-downs included $83.1mn for securities investments, $22.2mn for the equity investment in JVs with Prudential and $6.5mn for development projects in addition to $4mn of severance charges due to a reduction in headcount. While Kimco’s shopping center operations held up reasonably well in Q4 (rent spreads remained positive and same-store NOI was +1.4%), the company expects far weaker results in 2009 which is common theme running through the REIT industry.

Transaction income non-existent; lowering estimates

With the extensive write-downs, KIM’s reported 4Q08 FFO of $0.04 was $0.21 below our estimate. Looking to ’09, we expect NOI to decline 3% which includes a 300bp decline in vacancy by YE09. Given the impact of deteriorating operating metrics combined with a sharp reduction in transaction activity, we are reducing our ’09 FFO estimate from $2.15 to $1.74 while our ’10 estimate drops from $2.14 to $1.60.

Lowering PO to $12.50

Due to lower projected NOI growth for ‘09, we reduced our forward NAV for KIM from $17.04 to $14.13 and as a result our PO falls from $15.50 to $12.50 which is roughly a 10% discount to forward NAV. Given the weakness in retail spending and cautious leasing environment combined with a sharp erosion in Kimco’s noncore business segments we are maintaining our Underperform rating until we gain better visibility on the retail landscape.

4) Even assuming Merrill's Chinese Wall is fully operational, it would be curious to see how the company managed to "sell" to its clients a stock offering in which its very own analyst had a Sell rating: the cynics among us would presume these very clients would have no problem buying into the offering if they knew or anticipated a change in recommendation (especially one from a Sell to a Buy), and knew they could flip the stock they bought through the offering for a 30% gain in one day!

5) And now for the piece de resistance. The company said in its prospectus it would use the offering proceeds to pay down its revolver. "We intend to use the net proceeds from this offering for debt repayment and for general corporate purposes. Our U.S. revolving credit facility is scheduled to mature in October 2011 and accrues interest at LIBOR plus 0.425% per annum. Affiliates of certain of the underwriters are lenders under our U.S. revolving credit facility and will receive their pro rata share of repayments thereunder from the net proceeds of this offering." That last bit is critical. The company's $1.5 billion credit facility, on which it had $707 million outstanding as of December 31, will be the direct beneficiary of the offering as the entire $707 million amount would be paid down with the proceeds. And what entity benefits from this paydown: none other than Bank Of America, otherwise known as Merrill Lynch!

Ah, good old circular conflicts of interest. To summarize: i) Merrill, which is probably not too happy with having lent out Kimco $707 million on its credit facility, underwrites a $720 (including a 15% overallotment) stock offering for which it gets $20 million, ii) Merrill's analyst changes the stock from a Sell to a Buy, causing it to pop 30% in one day, and allegedly allowing participants in the offering to sell their shares at a 30% gain in a day, a mindblowing annualized return, iii) Kimco uses to proceeds to repay Merrill's credit facility, cleaning out any credit risk exposure Merrill might have with respect to Kimco's underperforming properties and operations.



Lyrics supplied by Hank - liberally replacing "the Law" with "Wall Street"

A breakin'THESE rocks in the hot sun I
fought Wall Street and Wall Street won
I fought Wall Street and Wall Street won
I wanted money cause I had none I fought Wall Street and Wall Street won
I fought Wall Street and Wall Street won
I left my baby and I feel so bad I guess MY race WAS run
She WAS the BEST THING I ever had I fought Wall Street and Wall Street won
I fought Wall Street and Wall Street won

A HOLDIN' UP people with a six-gun I fought Wall Street and Wall Street won
I fought Wall Street and Wall Street won
I LEFT MY BABY AND good fun I fought Wall Street and Wall Street won
I fought Wall Street and Wall Street won
YES,I left my baby AND I FEEL SO BAD I GUESS MY RACE WAS RUN
SHE WAS THE BEST THING I EVER HAD
I fought Wall Street (and Wall Street won)
I fought Wall Street (and Wall Street won)
I FOUGHT Wall Street (Wall Street WON)
I FOUGHT Wall Street (Wall Street WON)