The Gilmore response to Everquest was changed – for the worse

Amidst the whirl and rush in the blogosphere, the folks at Roanoke Red Zone noticed that Gilmore changed his initial response on Everquest’s “earnings.”  Initially, it was “$100 million in revenue” (WSLS) - an utterly meaningless statistic.  After some folks starting noticing and asking questions, hesto presto, it’s now “$100 million in profit.”

As I said last night, I’d love to see Everquest’s books; that would settle the matter.  Outside of that, though, we do have one other piece of evidence that make’s Gilmore’s “correction” look like something else again – the initial story itself.  Take a look at what Everquest’s current CEO had to say about the firm’s situation (WSLS):

Gilmore remains chairman of Everquest, a private corporation whose CEO, Michael J. Levitt, said generated about $100 million in revenue for about a dozen shareholders last year.

There’s that word again: revenue – not profit - and from a fellow who was likely just trying to find the best spin for Everquest, not expecting the Chairman to order a rewrite to keep his U.S. Senate campaign afloat.

The more anyone looks at the Gilmore campaign’s reaction to this, the worse it gets.

I told you someone would propose an ARM rate freeze

Senator Hillary Clinton has presented her plan for America’s “mortgage crisis.”  In a move that should surprise no one, she “wants to “freeze” interest rates on hundreds of thousands of adjustable-rate mortgages, which would prevent them from resetting to higher rates over the next five years” (National Review Online).

Stephen Spruiell, who wrote the NRO piece, focuses on a glaring hypocrisy on Clinton’s behalf:

Mortgage servicers that go along with her plan would in many cases be breaching their contracts with investors in mortgage-backed securities, so Clinton proposed legislation that would shield them from any resulting lawsuits.

Just a few weeks ago, Clinton was in the news for opposing legal immunity for telecommunications companies that cooperated with the Bush administration’s terrorist-surveillance program. If you needed to illustrate the Democrats’ priorities right now, it would be hard to find a better example.

That is an excellent point, but it’s not the first one that crossed my mind.

I’m guessing that Spruiell, Clinton, et al don’t know anyone with an ARM these days.  That isn’t so surprising; less than 7% of all American households have an ARM.  More importantly, of those who do, far fewer actually have an idea where their rate is headed.  Most simply assume it will go up – as will nearly everyone who doesn’t have an ARM.  However, the main index used to set the adjustable rate from year to year has plummeted over the last six months.  In fact, it has fallen so far that a large number of ARMs still at the “teaser rate” will likely have their rates fall this year; those ARMs which have already adjusted to the market will certainly have lower rates this year than last.

Therefore, Clinton hadto get this out early – if she waited until fall, the majority of ARMs slated for a reset would have already shifted, and the average American’s confidence in their finances may very well be soaring by then (existing home sales were up – yes, up – last month, Virginia-Pilot).  Meanwhile, don’t be surprised if at least one of the big mortgage service providers jumps on board this thing; they know more than anyone else just what the ARMs will do over the next few months.

Supporters of the free market must be ready to beat this back.  It will help that most homeowners will actually benefit from lack of government interference; they just don’t know it, yet.  It’s time to inform them.

More Gilmore and Everquest Odds and Ends

So now the Gilmore people are insisting Everquest made a profit last year (RRZ).  Well, then, I look forward to seeing the opened books on that.  Now, the Gilmore people can probably ignore me on that one, but when every single Democrat in America starts demanding the books be opened, he may have to listen.

As for the Richmond Times-Dispatch editorial that tries to come to Gilmore’s defense, it appears that the editors don’t have anywhere near the entire picture.  Again, this was a firm with one purpose: ball up the most risky and overvalued Bear Stearns firms; “sell” them to Everquest for stock shares; then unload the shares “on the usual chumps” – i.e., ordinary investors.  I get the feeling the folks at the RTD don’t get that.

What hurts the most is that this is Jim Gilmore – the only politician in the history of the Commonwealth to begin, command, and lead a tax revolt to victory.  The current GOP chairman owes his four years as Lieutenant Governor to that tax revolt (which also gave the GOP operational control of the Senate, which they held for a decade).  To see him reduced to this is truly painful to watch.  Unfortunately, pity is a luxury in politics, one we cannot afford.  If we want to keep this Senate seat in November, we have only one choice – Bob Marshall.

Why Gilmore’s responses on Everquest don’t cut it

After basically ripping Gilmore’s involvement,in Everquest Financial – or as my Wall Street buddy called it, ”the garbage truck for Bear Sterns,” I can’t exactly ignore his response.  Moreover, I didn’t think it was fair to bury said response at the end of the previous post, so I gave him one all his own – not that it make him look better.

These are the five “corrections” Gilmore had on the initial Everquest story (WJLA), courtesy Scott’s Morning Brew:

1. Everquest Financial is not, and has never been, “subsidiary” of Bear Sterns. It is an independent company.

2. Everquest has not and does not “market” high risk securities. It does not market securities; it buys and holds them in its portfolio.

3. The primary holdings of Everquest Financial are assets based on sound corporate loans.

4. Everquest is an asset management corporation. It is not a “hedge fund” and it does not operate a hedge fund.

5. As a result of sound management, Everquest is thriving and has earned $100 million in revenue for its shareholders.

Let’s take these one at a time:

Everquest Financial is not, and has never been, “subsidiary” of Bear Sterns. It is an independent company.

This is a fig leaf.  Everquest was not, technically, a BS subsidiary; it was worse – it was a holding company for the riskiest of BS hedge fund assets, and was run in part by the same fellow who managed the risky hedge funds.  Frankly, it would have been better if it were a subsidiary, rather than a toxic spinoff.

Everquest has not and does not “market” high risk securities. It does not market securities; it buys and holds them in its portfolio.

That was exactly the problem.  Everquest wasn’t scandalous because it was marketing high-risk securities; it owned the high-risk securities.  The idea was that the Bear Stearns funds would dump their interests in Everquest on unwitting investors, thus ensuring said investors (and not Bear Stearns) were left holding the bag (i.e., stock in a company with overvalued and now worthless “assets”).

The primary holdings of Everquest Financial are assets based on sound corporate loans.

Assuming that’s true (and I’m skeptical, more on that later), that’s not the point.  What matters are the assets Everquest held at the time of the IPO, which were the subprime-loan-based assets Wall Street had already started calling “toxic.”

Everquest is an asset management corporation. It is not a “hedge fund” and it does not operate a hedge fund.

Again, this isn’t the point.  The point was that the two hedge funds owned a majority stock in this firm by “selling” it their riskiest assets, and hoped to unload the stock “on the usual chumps.”

Finally, the coup de grace:

As a result of sound management, Everquest is thriving and has earned $100 million in revenue for its shareholders.

This is where the cat is let out of the bag for savvy market watchers to see.  Note the use of the term revenue; note the far more critical term that is not used – profit.  If Everquest had actually earned a profit for its partners (don’t be confused by “shareholders,” either – it’s still a privately held company not listed), don’t you think Gilmore would have mentioned it?

He didn’t, and I’m, all but certain that’s because there was no profit to be had from this firm.

The fact is, all five statements are part of a collective dodge in the hope that rural Virginians and political addicts in Northern Virginia aren’t as financially savvy as the folks on Wall Street.  Down here, talk of CDOs, IPOs, and everything else is just alphabet soup.  Up there, of course, politics is just as confusing to your average stockbroker.

But Gilmore?  Here’s how my Wall Street buddy put it: “I don’t know how anyone with any intelligence would ever vote for that man.”

Harsh?  Sure it is, but it won’t be the last we hear of it if the party nominates Gilmore.  If we want to avoid this disaster, our only choice is to nominate Bob Marshall.

The Everquest Financial Fiasco makes it clear: Jim Gilmore cannot be the nominee

With this post, I may very well burn to ashes half the friendships I have made in the blogosphere.  The Gilmore-Marshall Senate race has lead to many arguments (not a bad things), a lot of snark (which need not be bad either), and a good deal of informed discussion.  It has been largeyl focused on issues, as it should be.  I would like nothing more but for it to stay there.  Unfortunately, Jim Gilmore’s association with Everquest Financial has forced the debate to move to personal reputation – or to put it another way, Gilmore’s position as Chairman of Everquest means he cannot be the nominated this May, or the party will suffer incalculable and perhaps irreparable damage.

To understand why, we have to go back a year – to early 2007, when Everquest was preparing for its Initial Public Offering (sale of stock shares).  At the time, it was basically a holding company for a bunch of Collateralized Debt Obligations (CDOs), which is a fancy name for an asset group made up of a bunch of loans.  The trouble is, the CDOs Everquest had were largely based on subprime mortgages, the very mortgages that at the time were driving Wall Street crazy because they were providing default notices instead of investment returns.  

How and why did Everquest come by the subprime mortgages?  Here’s where it gets worse: Bear Stearns’ riskiest and most subprime-exposed hedge funds sold them to Everquest in exchange for stock in the company (Securities and Exchange Commission)- stock which when sold to the public would have effectively transferred all of the risk from Bear to unwitting stickholders.

Now, some will say that no one really knew just how bad things were in the subprime market back then.  Well, they’d be wrong.  Check out what Business Week thought of the Everquest adventure:

Never underestimate the ability of a Wall Street investment firm to find a new way to pawn off risky assets onto retail investors. The latest example? The initial public offering for Everquest Financial.  Everquest is a fledgling financial-services company that has been buying up equity interests in risky bonds backed by subprime mortgages from hedge funds managed by Bear Stearns . . .

Even worse, Everquest admitted that the sale of these CDOs were “not negotiated at arm’s length,” which as BW noted, ” is an indication of just how beholden the company is to the interests of Bear Stearns.”

In fact, as noted in the SEC documentation, one of Everquest’s co-Chief Executive Officers was none other than Ralph Cioffi, who just happened to manage to two Bear Stearns hedge funds that sold most of the CDOs to Everquest and owned a majority of the firm’s stock between them.

It took roughly a month for all of Wall Street to wise up on this little farce (as you can see above, some were already on to this), and the IPO was withdrawn, but that didn’t stop Time from listing it on the Top 10 Worst Business Deals of 2007.  Bill Saporito’s summary is as accurate as it is devastating (emphasis added):

Call it the IP-No. When the market for collateralized debt obligations (CDOs) began to melt down in the spring, Bear Stearns found itself sitting on billions of dollars of the stuff. What to do? How about this: Package the toxic, untradeable CDOs (securities backed by subprime mortgages) into a public company — Everquest Financial — and unload it on the usual chumps. That had been the plan all along, but by the time Bear tried to float this lead balloon in June you had to be living under a rock in Siberia not to know this junk wasn’t sellable. The IPO was withdrawn.

Naturally, such a move required a fresh face to make it all look above board.  Who better than a presidential candidate?  Which presidential candidate, you ask?  Why, none other than Jim Gilmore (SEC).

If Gilmore had quit Everquest, admitted that he had learned a lesson, and moved 0n, I wouldn’t be so worried.  It would still be a problem, but not as large.  Instead, he is not only still the Chairman, but he actually tried to defend this.  Each of his five points, in fact, conceal more than they reveal, as I’ll explain in a later post.

What we have, then, is a candidate who will become the poster-boy for the subprime crises – not because he made a subprime loan (he didn’t), not because he broke any law (he didn’t), but because he became the de facto front man for what is now a bailed-out firm’s hedge funds in their attempts to spin off their riskiest assets on unwitting investors (that, he did).  The Democratic ads practically write themselves.

Moreover, if the GOP nominates Jim Gilmore, he will force every Virginia Republican candidate to face questions on this.  McCain and his running mate will end up avoiding him like the plague.  Not only would this pave the way for mark Warner, it would also put Frank Wolf and Thelma Drake at risk, ensure the Dems take the 11th, and even give them a good shot at our presidential electors.

In other words, Jim Gilmore could make Virginia bluer than a medieval Scotsman at war.  Odds are it wouldn’t end there, either.  Democrats around the country will be able to tell their voters that their Republican opponent belongs to “the party of Jim Gilmore, the party of Everquest, the party of Bear Stearns.”  This is a disaster waiting to happen.

This is why the lefty blogs have been completely silent on this, despite mentions from Shaun Kenney and Brandon Bell.  The leftosphere knows full well what a gold mine this is, if Gilmore gets the nomination.

We can’t let that happen.  I know many in the blogosphere do not agree with me on the merits of Bob Marshall, but this is the inescapable fact – Bob Marshall is the only thing standing between the Republican Party of Virginia and certain disaster.

Next post: Gilmores’ responses, and why they don’t say much.

New China e-Lobby posts up

From today and yesterday; Tibet is the lead story, with some interesting sidebars on how the “riots” that the Communists claim they are putting down are not what they seem.

Thus endeth the Corey Stewart campaign

From WAVY-10 in Hampton Roads:

Republican Lieutenant Governor Bill Bolling says he will seek re-election next year, foregoing an anticipated run for governor.

. . .

Former state Senator Jay O’Brien of Fairfax County, Delegate Timothy Hugo of Fairfax County and Prince William County Board of Supervisors chairman Corey Stewart had considered a run for lieutenant governor, but today threw their support to Bolling.

This is why the Corey Stewart banner has come down.

Truth be told, had Stewart stayed in the race, I would have stayed with him.  It took a lot of guts to oppose HB3202 when everyone else was drinking the Kool-Aid (including Bolling), and honestly, the GOP will desperately need someone who can show Northern Virginia and Hampton Roads that it has learned from that debacle.

So now it’s McDonnell, Bolling, and Insert-NoVa-politician-here.

If I have time, I have my thoughts on this later today.

Will Obama pull out of Afghanistan, too?

Barack Obama made the most troubling statement I have ever heard in Campaign 2008 (CNN):

This war has now lasted longer than World War I, World War II or the Civil War

First of all, as nearly anyone outside the United States can confirm to the Audacity of Hype, World War II was a six-year war, not a four-year war.  Our refusal to engage in direct hostilities until December 1941 does not erase the rape of Poland, the fall of France, Dunkirk, the Battle of Britain, and the invasion of the Soviet Union.

Even more worrisome to me, however, is Obama’s fascination with time, and his explanation for why the Iraq theatre of the WBK War was essentially not worth the trouble in his view:

“Nearly 4,000 Americans have given their lives. Thousands more have been wounded. Even under the best-case scenario, this war will cost American taxpayers well over a trillion dollars,” he added. “And where are we for all this sacrifice? We are less able to shape events abroad.”

If Obama’s concern is nothing but being “able to shape events abroad” – what happened to protecting our citizens, Barack? – such logic can easily be extended to Afghanistan as well.  Again, outside of the United States, Afghanistan is a very controversial endeavor.  Even here in the U.S., public support for the Afghan mission has been weak (as in below 60%).  The next American President will hear loud calls for a withdrawal, and feel a ton of pressure for the same, coming from many of our own allies.  It will take tremendous political courage just to keep the WBK War ongoing, let alone the Iraq theatre.

Obama has not shown this kind of courage.  In fact, this most recent statement confirms my worst fears about the Democratic Party.  Should either Clinton or Obama win, I predict (as I have predicted before) that Americans will not only leave Iraq without victory, but Afghanistan as well.  I am now all but certain of this should the Democratic nominee be Obama.

For anyone wondering where I’ve been for the past few days

I brought my oldest blog (the China e-Lobby) back to life.

 Have a look.

McCain’s lead is translating into battleground states, too

For the last three days, John McCain has held a six-point lead over both of his Democratic rivals (Rasmussen).  That lead is now starting to show up in some of the battleground states that will decide this election.

Among the tidbits from Rasmussen are these:

• McCain leads both Democrats by six in Ohio
• McCain has erased Obama’s lead in Colorado, and leads Clinton by double digits there
• McCain leads both Democrats in New Hampshire (carried by Kerry in 2004)
• McCain leads both Democrats in Pennsylvania (also carried by Kerry in 2004)
• As of one month ago (before his post-Super Tuesday II rise in the polls) McCain led both Democrats in Missouri

If these numbers were to hold through to November (and that is one mammoth-sized “if”), McCain defeat Clinton in every state Bush carried in 2004, plus Pennsylvania, New Hampshire, and a slew of other states.  Against Obama, McCain would carry every state Bush carried except New Mexico, Colorado, Iowa, and Nevada (the first two are a ties), while winning Pennsylvania, New Hampshire, New Jersey, and Washington.

In either case, were the election be held today, John McCain would win.

Of course, the election isn’t today, and with seven-and-a-half months to go, anything can happen.  Still, the Democrats began this campaign all but certain that they would be coasting to victory.

That certainty is now gone.