Capital Stacking, Cross-guarantees, and Surplus Notes After the difficulties with securities lending, the next issue reminded me a lot of the first company I worked for: Southmark.  A two-time loser in chapter 11, in their second trip of insolvency, they interlaced the capital of their subsidiaries, forcing them to do business on a thin capital base.  Subsidiary A would own stock of subsidiary B, and B would own stock of A.   They would both look more solvent, but would not be any more solvent.  Neither “asset” could be tapped for liquidity purposes.  In AIG’s case, most of the capital stacking was not so crude.  Most of it was operating subsidiaries owning shares in other subsidiaries, without another transaction going the other way. Capital stacking increases leverage in a hidden way.  Say Subsidiary A owns Subsidiary B.  The surplus of B not only supports B’s[More...]

UPGRADES
8x8 EGHT MDB Capital Group Neutral » Buy
Varian Medical VAR Soleil Hold » Buy
Werner Enterprises WERN BB&T Capital Mkts Hold » Buy
Cavium Networks CAVM Needham & Co Hold » Buy
Broadcom BRCM Needham & Co Buy » Strong Buy
Human Genome HGSI Leerink Swann Mkt Perform » Outperform
Mediacom Comm MCCC Pali Research Sell » Neutral
Amgen AMGN Lazard Capital Sell » Hold
Cardinal Financial CFNL Keefe Bruyette Mkt Perform » Outperform
McCormick & Schmick's MSSR Morgan Joseph Hold » Buy
Centerplate CVP Piper Jaffray Neutral » Buy
Amazon.com AMZN Citigroup Hold » Buy
Lubrizol LZ JP Morgan Neutral » Overweight
Becton Dickinson BDX JP Morgan Neutral » Overweight
Humana HUM CIBC Wrld Mkts Sector Perform » Sector Outperform
priceline.com PCLN JP Morgan Neutral » Overweight
Green Bankshares GRNB Keefe Bruyette Mkt Perform » Outperform

DOWNGRADES
Tomotherapy TOMO Soleil Buy » Hold
Deckers Outdoor DECK Wedbush Morgan Buy » Hold
Trane TT Sterne Agee Buy » Hold
Amphenol APH Stifel Nicolaus Buy » Hold
ResMed RMD Caris & Company Buy » Above Average
Robt Half RHI BMO Capital Markets Outperform » Market Perform
Manpower MAN BMO Capital Markets Outperform » Market Perform
Comsys IT Partners CITP BMO Capital Markets Outperform » Market Perform
OptionsXpress OXPS BMO Capital Markets Outperform » Market Perform
Team TISI BB&T Capital Mkts Buy » Hold
Realty Income O Citigroup Hold » Sell
Kilroy Realty KRC Citigroup Buy » Hold
Gen Growth Prop GGP Citigroup Buy » Hold
Duke Realty DRE Citigroup Hold » Sell
Camden Property CPT Citigroup Hold » Sell
AvalonBay AVB Citigroup Hold » Sell
Fossil FOSL Piper Jaffray Buy » Neutral
ResMed RMD Wachovia Outperform » Mkt Perform
Respironics RESP Wachovia Outperform » Mkt Perform
Diamond Offshore DO Credit Suisse Outperform » Neutral
Starbucks SBUX Bear Stearns Outperform » Peer Perform
UnitedHealth UNH CIBC Wrld Mkts Sector Outperform » Sector Perform
InterActive IACI Citigroup Buy » Hold
Baker Hughes BHI JP Morgan Overweight » Neutral
Norfolk Southern NSC JP Morgan Overweight » Neutral
FedEx FDX JP Morgan Overweight » Neutral
BJ's Wholesale BJ JP Morgan Overweight » Neutral
LSI Logic LSI Banc of America Sec Neutral » Sell
Analog Devices ADI Banc of America Sec Buy » Neutral
Advanced Micro AMD Banc of America Sec Neutral » Sell
National Semi NSM Banc of America Sec Neutral » Sell
Power Integrations POWI Banc of America Sec Buy » Neutral
Texas Instruments TXN Banc of America Sec Buy » Neutral
Semtech SMTC Banc of America Sec Buy » Neutral
Intel INTC Banc of America Sec Buy » Neutral
Harte-Hanks HHS Deutsche Securities Hold » Sell
Hess HES UBS Buy » Neutral

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