News&Notes: LEH's CDS unwind, Rule changes, Iceland update & Alt. Energy

Quote of the day: "Real wisdom is being stored away in the subcellars by the misers of learning."
Henry Miller

RCM Comment: Interesting link that discusses the fallout from the LEH bankruptcy with regards to the Credit Default Swap maket. http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3211647/Fears-of-Lehmans-CDS-derivatives-haunt-markets.html

Bank-equity program gets accounting fix - WSJ
WSJ reports the Bush administration is expected to allow banks that participate in the government's $250 billion capital-injection program to avoid triggering an accounting rule that could have hurt the banks' finances. The program, announced last week, is intended to encourage banks to lend again by having the government take equity stakes in the institutions so they can rebuild their capital levels. But in its rush to get the program under way, the administration overlooked a key detail involving the potential issuance of stock, people familiar with the matter said. Under the initial plans, participating banks will sell the government a certain amount of preferred stock. But they are also required to issue warrants, which give the government the right to purchase a bank's common stock at a certain price. However, the $700 billion rescue legislation passed by Congress requires that the warrants be treated as a liability on their balance sheets. That could force the banks to record a loss and thus impair their capital levels -- the very opposite of what the government is aiming to accomplish. The SEC and the Financial Accounting Standards Board are expected to issue guidance telling the banks participating in the program that they can consider the warrants "permanent equity" under generally accepted accounting principles, people familiar with the matter said. Under such guidance, the problem would be resolved because the warrants wouldn't be considered a liability and wouldn't trigger "mark to market" accounting that forces them to price them at their currently diminished value, the people said.
RCM Comment: This story has it all! We have been writing for weeks about the unintended consequences of the government intervention which, let's be honest, was a nice way of saying the stupidity of the current leadership was boundless. But to make this story even more delicious, it comes gift wrapped with another example of rule changing to suit the powers that be. The current leadership continues to run rough shod over accounting rules to cosmetically fix problems.

EU banks get leeway on making write-downs - WSJ The Wall Street Journal reports European banks could soon find it much easier to avoid write-downs thanks to changes in accounting rules being pushed through by European policy makers. In moves that analysts say could boost earnings but make it harder to discern the financial health of banks, the European Union and international accounting standard-setters are loosening so-called mark-to-market accounting rules, which require banks to value investments at the price they would get if they sold them immediately. The changes will allow banks to reclassify some assets as long-term investments, a shift that will grant them a great deal more leeway in deciding what those assets are worth -- and how much they have lost in the latest bout of financial turmoil. The new accounting rules are "one of the many weapons being deployed to fix the banking crisis," Belgian Finance Minister Didier Reynders said in an interview. Analysts say it is difficult to estimate how much banks could reclassify among their hundreds of billions of dollars in loans and other investments. Yet not having to value some assets at the current market price "could have a material impact on earnings," said Morgan Stanley analyst Michael Helsby.
RCM Comment: So, apparently the Europeans have joined the other patients in the asylum and are refusing the swallow the medicine. Can you imagine how nice the world would be if we could all just change rules whenever we wanted? The next time I get pulled over for speeding I will be sure to tell the police officer the rules have changed, he now must hold on to that ticket because in the future the speed limit will go up and I will no longer be in violation. On a more serious note, we have written over the last week or so that cash flow and dividends may replace EPS as the key metrics for investing going forward. For a long time EPS and growth stocks have been the sexy ideas on Wall St., but as accounting standards continue to get bastardized we may see a shift back the 1950s way of thinking where dividends and cash flow were king, A company can manipulate EPS with fancy accounting, but dividends are tangible and they may begin to draw a premium as we come out of this bear market.

Update: Iceland to announce $6 bln IMF-led rescue package - FT FT reports Iceland is poised to announce a $6 bln International Monetary Fund-led rescue package alongside a number of other central banks to help stabilise its economy after its banking system collapsed earlier this month. People with knowledge of the talks between Iceland and the IMF said the IMF is expected to contribute just over $1bn with central banks from the Nordic region and Japan contributing the rest. It is unknown whether Russia will participate in the rescue plan. No official invitation from Iceland to the IMF has been made yet, but it is understood an official letter will be sent by the Icelandic government either later on Monday or Tuesday.

Winds shift for renewable energy as oil price sinks, money gets tight - WSJ
WSJ reports the prospects of renewable-energy companies soared with oil prices, but the global credit crunch and the easing of energy costs have brought them back to earth with a thud. With banks reluctant to lend and their stock prices tumbling, many green-energy concerns are struggling to find the long-term funding they need to expand in a capital-intensive industry. In the past three months, global renewable-energy stocks tracked by New Energy Finance, a London-based consultancy, have dropped about 45%, compared with a 23% decline in the Dow Jones Industrial Average over the same period. The sector's problems have been compounded by the skid in oil prices to below $70 a barrel last week from more than $147 in July. The sudden reversal in crude prices has removed -- at least temporarily -- a key rationale for investors to pump billions of dollars into alternative fuels, industry analysts say. The result: At least in the short term, a slew of projects from palm-oil-based biodiesel plants in Indonesia and Malaysia to wind farms and solar projects across the U.S. and Europe may not be able to get funding.
RCMComment: For those of you who have asked us about this sector, the above story may shed some light.