UAL gyrates wildly on false bankruptcy report; Fannie, Freddie dive on U.S. takeover

By Paul Deckelman

New York, Sept. 8 - UAL Corp. shares hit huge turbulence Monday, rapidly losing altitude as headlines flashed across the newswires proclaiming that the Chicago-based airline giant had gone bankrupt - for the second time this decade. Those stories were then just as quickly pulled back when it was discovered to have all been a bizarre mistake, the origins of which are still unclear. Although the shares battled back after that from their early plunge, which on paper had wiped out most of their value, they still ended off more than 10% on the day.

There was meantime no such reprieve for the shares of Fannie Mae and Freddie Mac, which also did in fact lose most of their respective value early on, but never got any of it back, on the all-too-real news that the federal government was stepping in to take control of the two troubled government-sponsored enterprise mortgage companies, which will essentially mean the elimination of all of their common and preferred stock value.

While Fannie and Freddie shareholders were crying, holder of most other financials were sighing - with relief - on the prospect that Uncle Sam's dramatic step will finally stabilize the troubled market in mortgage securities and ease the more-than-year-long credit crisis that has decimated the financials' bottom lines.

Savvy investors believe there's money to be made even now in the troubled sector, and there probably are very few who are savvier than John Paulson, head of the eponymous $35 billion hedge fund. Weekend news reports said that although he remains "extremely bearish" on the financials overall, his fund plans to start taking long positions in some financials in restructuring scenarios, if the price is right.

Outside of the developments which roiled the financial world, merger and acquisition news was bubbling on several fronts.

Altria Group Inc. and UST Inc. officially announced what much of the market already knew on Friday - that the two companies, which each separately control a big segment of the overall tobacco industry, will unite with Altria's nearly $70 per share acquisition of UST.

Construction and agriculture equipment maker Gehl Co.'s shares more than doubled in price after it agreed to be acquired by 14% holder Manitou BF SA in a $450 million deal.

Overall, Wall Street was on a Fannie-Freddie-induced high, with the Dow Jones Industrial Average pushing up almost 350 points intraday; while the bellwether market barometer eventually gave back a big chunk of that early advance, it still ended up a handsome 289.78 points, or 2.58%, to end at 11,510.74. Broader stock market gauges were also up, with the Standard & Poor's 500 index solidly higher by 25.48 points, or 2.05%, to 1,267.79, and the Nasdaq composite index ahead by a more modest 13.88 points, or 0.62%, to 2,269.76.

A rough flight for UAL

The Street was even able to survive the panic that hit shares of UAL Corp., the parent company of Number-Two U.S. airline carrier around mid-morning, when news screens flashed the bulletin that United - which had reorganized for several years under Chapter 11 earlier in the decade before finally emerging from it in February 2006, was seemingly going back into bankruptcy.

That caused parent UAL's shares to nosedive faster than an airliner with suddenly dead engines being sucked down towards the Bermuda Triangle - within a matter of minutes, volume spiked as investors bailed out and dumped millions of shares, which shed some three-quarters of their value, rapidly descending from above the $12 mark all the way down to $3, when trading was halted, not to resume until later in the day.

UAL hastily declared that it was in no way even considering a "Chapter 22" repeat bankruptcy - even though the whole airline sector had been hit hard for much of the year by rapidly escalating fuel costs, the same problem which had driven United itself and such rivals as Northwest Airlines and Delta Air Lines to seek court protection several years ago.

When trading resumed, the shares finally pulled out of their death spiral once it became obvious that the whole thing was as a result of the apparent posting of a six-year-old Chicago Tribune story about UAL's slide into bankruptcy back in December 2002 on the website of a Florida newspaper - presumably as a result of some computer glitch, although UAL has demanded a formal retraction and an investigation into what exactly happened. The story gained legs after an internet content provider ran across it - and upstreamed it to the Bloomberg news service, where countless readers in trading rooms across the United States and the world saw it and then swung into action. Tribune and the content provider clashed over who was to blame for the fiasco.

Richard Lehmann, the president of Income Securities Investor, a Boca Raton, Fla.-based investor information service, told Prospect News that his company "has reporters that basically search the web every morning for distressed news stories," which it provides to its own subscribers under the name of Income Securities Advisor, and then also provides to Bloomberg, whose subscribers can access a menu of such stories by punching in a designated code. He said his ISA reporters "did a Google search this morning under 'bankruptcy 2008' - and the top story was the [supposed] United bankruptcy filing," which had allegedly appeared sometime late Sunday on the website of the South Florida Sun-Sentinel, owned by Tribune Co. and a sister publication to Tribune's flagship namesake Chicago paper. "The story appeared under today's date, with regard to that this morning, United Airlines filed for bankruptcy. We put that story out, and of course, there was immediate reaction." Carrying ISA's identifier, BIA, the headline read "United Airlines: Files for Ch. 11, to cut costs by 20 pct."

He said that the Sun-Sentinel story was "a full re-do of the story that had supposedly appeared in the Chicago Tribune, with the names of the reporters and everything on it."

After that, the spit quickly hit the fan. Lehmann said that "the minute the phone started ringing around here, it came to my attention, and I knew that there weren't any hot rumors [in the market] about United filing for bankruptcy, so we immediately asked Bloomberg to pull the story."

Lehmann said that his understanding was that had transpired was that the Sun-Sentinel "said that it was in their archived files, which were not supposed to be accessible from the outside, and they don't know how this story ended up as a Sept. 8 current story, or even how it got onto Google for the search purposes." He said that when the paper "found out that they were the source of this thing, they immediately pulled the story and checked into it."

However, Tribune issued a statement Monday which appeared to contradict Lehmann's version of what had occurred and assign ultimate blame for the monumental goof to ISA, contending that the story was "apparently picked up by an investment advisory and research firm and republished as though it was current. The story was located in the archive section of the website of the Sun Sentinel in South Florida. The story contains information that would clearly lead a reader to the conclusion that it was related to events in 2002. In addition, the comments posted along with the story are dated 2002.

"To be clear, no story appeared today or over the weekend on the Sun Sentinel website or any Tribune website regarding United Airlines' filing for bankruptcy."

Despite the fact that there had been no prior indications that UAL was even considering a bankruptcy filing and the company on Monday strongly and heatedly denied having any such intentions, as well as the fact that the story hit the wires as a result of a mistake on someone's part, the shares still did not rebound back to their pre-news levels but finished well down on the day - a possible sign, a market source said, of investor unease with the whole airline sector, whose well-being depends on a continuation of moderating fuel costs - no sure thing.

UAL (NYSE:UAUA) ended still down $1.38, or 11.22%, at $10.92, on volume of 54.6 million shares, almost triple the norm.

Fannie, Freddie in freefall

While UAL's shares at least came part of the way back from its great initial depths when the story pushing the shares lower was proven to be a mistake, shareholders of twin mortgage giants Fannie Mae and Freddie Mac had no such luck. Each swooned by more than 80% in extremely heavy trading, falling from the get-go on the news, reported over the weekend, that the federal government will step in and put the two troubled quasi-governmental entities under a conservatorship, ousting previous management. The federal takeover of the two GSE companies is expected to wipe out common stockholders, and according to some observers, could force preferred shareholders as well to take a severe haircut.

The shares of the two companies had recently been firming on market speculation that such a bailout and concurrent equity wipeout might not be needed. However, both had already fallen sharply in after-hours trading on Friday on news stories indicating that such a takeover might be announced over the weekend, and the shares slid even further from the opening bell on Monday after that proved to be the case.

Fannie Mae (NYSE:FNM) plunged $6.31, or 89.63%, to end at 73 cents. Volume of 585.9 million shares was nearly eight times the usual turnover. Freddie Mac (NYSE:FRE) plummeted $4.22, or 82.75%, to end at 88 cents. Volume 370 million shares was four times the average daily handle.

While Freddie and Fannie were fizzling, most other financials were sizzling, on investor expectations that the long-awaited federal intervention might finally be the magic pill that would calm the jittery markets after more than a year of credit-crunch angst sparked by the mortgage market meltdown that began last summer. There was also a feeling that the takeover could open up opportunities for some of those larger financials to fill the vacuum that will inevitably be left as Fannie and Freddie - which currently own or back about half of all mortgages in the United States - are trimmed down to a more manageable size.

Analyst Richard Bove of Ladenburg Thalmann said in a research note that investment banks and large national banks will be in the best position to take advantage of the government move. "They will gain control of the industry. They will benefit meaningfully."

For instance, he said that Bank of America Corp. - now the biggest non-government mortgage entity following its recent acquisition of Countrywide Financial Corp. - could find itself filling Fannie and Freddie's shoes. Noting that "there's nothing that [the GSE companies] do that Countrywide doesn't also do," B of A's newly expanded Calabasas, Calif.-based mortgage unit "has a tremendous opportunity to increase its market share by simply establishing guarantees and second market facilities." Bank of America (NYSE:BAC) was up $2.50, or 7.76%, to $34.73, on volume of 164 million shares, about twice the usual.

Bove also wrote that the perception of renewed stability in the financial markets following the government takeover of the GSEs "is particularly important if foreign buyers of dollars expand their purchases to include financial instruments . . . I would buy a bank stock today."

Paulson may play in bank stocks

Another influential name who also appears to now be taking a somewhat more favorable view of the financials sector is hedge fund kingpin John Paulson, who famously went against the grain and bet against the then-burgeoning subprime mortgage business last year - a canny investment that allowed his fund to make a profit on its fall estimated by various observers at anywhere from $3 billion to as much as $10 billion.

With the shakeout well under way, Paulson was reported by the Financial Times to have told investors on a conference call last week that while he is still wary about the financials overall, he is now "prepared to take long positions across mortgage securities, banks and finance houses" as prices continue to fall.

The paper said that his Paulson & Co. plans to launch its new Recovery fund on Oct. 1, and will take the unusual step of letting investors immediately switch investments out of his existing $11 billion Credit Opportunities funds to the new fund, bypassing the usual procedure of making them wait until year-end to transfer cash between the funds.

The paper said that Paulson's willingness to plunge into the roiling financial sector is as significant sign that the markets could be nearing an opportunity to go long in these names without huge risks.

Altria, UST to unite

Apart from the developments shaking the turbulent financials sector, investors were focusing on some M&A-related situations.

Tobacco industry powerhouses Altria Group and UST Inc. formally announced that Richmond, Va.-based Altria, the maker of the iconic Marlboro brand cigarettes, among others, will acquire UST, the leading player in the rapidly growing smokeless segment of the tobacco market in an $11.7 billion deal which includes the assumption of $1.3 billion of debt. Stamford, Conn.-based UST's shareholders will receive $69.50 per share in cash, a 3% premium to UST's closing price Friday of $67.55. However, built into that price is the 25% jump which US' s shares took on Friday when news of the pending deal began circulating around the market following a New York Times report.

UST (NYSE: UST) rose another $1.35, or 2%, on Monday, to $68.90, on volume of 29.6 million shares, over 13 times the usual volume.

Gehl goes up on buyout bid

And West Bend, Ind.-based construction and agricultural machinery maker Gehl Co.'s shares bulldozed their way sharply higher on the news that it has agreed to be acquired by its largest shareholder, 14.4% investor Manitou BF SA.

The French materials handling equipment maker will buy the 85.6% of Gehl which it does not already own for $450 million, or $30 per share, in an all-cash tender offer beginning Monday and ending Oct. 20. That's a good deal for the Gehl shareholders, according to BMO Capital analyst Charles Brady, who opined in a research note Monday that "given the current [soft] environment, particularly in the U.S. and Western Europe, I don't think that Gehl was going to get to $30 on its own anytime soon."

Gehl (Nasdaq:GEHL) zoomed by $15.86, or 116.11%, to close at $29.52. Volume of 6.4 million shares was nearly 38 times the norm.

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