The shutting down of WAMU no doubt is hastening the takeover of Wachovia. Talk about denial, insiders disputing how close it was to failing...That is simply incredible. WAMU had a portfolio of Option Arms, by far the most toxic mortgage instrument on the market today. They simply couldn't unload these assets on the open market for a price that would've allowed them to stay in business.
WaMu's desperate last days
http://seattletimes.nwsource.com/html/businesstechnology/2008210320_wamu28.html
Regulators and insiders paint a picture of a deeply troubled bank that only reluctantly put itself up for sale, though they dispute how close it was to failing.
Monday, September 29, 2008
Saturday, September 20, 2008
Why Now?
So what caused Secretary Paulson and Fed Chairman Bernanke to act now, as opposed to next week, next month, after the election?
I believe you'll find the answer in these charts.
Wednesday, September 17, 2008
Collapse and Capitulation
On September 2, see blog entry below, we warned that "we are directly in front of a major financial hurricane". Obviously, this is exactly what has occurred. Today, we are in the front end of the hurricane. This market has the potential for a full-fledged meltdown.
After the government bridge loan of $85 Billion to AIG, a loan the government tried desperately to avoid making, you've really got to ask: "Are we out of money." My guess is, there are no further bailouts coming, simply because the government cannot afford any more bailouts. Heck, I don't think they could afford this AIG bailout. They were damned if they did, and damned if they didn't.
And today's market selloff, the Nasdaq is currently -3.26%, certainly has the potential to continue to accelerate down.
Critical Long Term Support
Below is a chart illustrating an absolutely critical long term support line for the Nasdaq, connecting the October 1990 lows with the October 2002 lows. This critical support line is currently at 2037, roughly 90 points away from the current level of 2122.
After the government bridge loan of $85 Billion to AIG, a loan the government tried desperately to avoid making, you've really got to ask: "Are we out of money." My guess is, there are no further bailouts coming, simply because the government cannot afford any more bailouts. Heck, I don't think they could afford this AIG bailout. They were damned if they did, and damned if they didn't.
And today's market selloff, the Nasdaq is currently -3.26%, certainly has the potential to continue to accelerate down.
Critical Long Term Support
Below is a chart illustrating an absolutely critical long term support line for the Nasdaq, connecting the October 1990 lows with the October 2002 lows. This critical support line is currently at 2037, roughly 90 points away from the current level of 2122.
Interest Rates
Interest rates for the safest governement bonds are coming down rapidly. The rate on the government 10 Yr. Note hit 3.25% early in the trading session before climbing significantly higher, with a closing high at 3.496%. Tremendous volatility. Yesterday's low at 3.25% actually was below the January low for rates which was at 3.28%.
Today, interest rates are headed lower again, current at 3.368%.
Below is a one year chart of the 10 yr bond index.
Mortgage rates are very grudglingly following Treasury rates lower. For example, at the low in the 10 Yr in January, the 30 yr mortgage rates were actually at 4.875% at par for a brief moment (approx. 4 hours) in January. Today, they sit at 5.50%. Spreads have widened.
I am strongly recommending that those looking to refinance into a 30 year fixed rate, anything at 5.50% or lower looks extremely attractive historically. This is no time to play footsy with interest rates, there is far too much volatility in the interest rate market, and far too much uncertainty in the markets in general.
Monday, September 15, 2008
Lessons of Bear Stearns
Terrific blog entry by Barry Ritholtz at The Big Picture:
The Terrible Lessons of Bear Stearns
As Lehman Brothers (LEH) turns into a single digit financial midget on its way to zero, as Washington Mutual (WM) works its way towards a buck, as Wachovia (WB) drops more than 80% over a year, as Fannie Mae (FNM) and Freddie Mac (FRE) become divisions of the United States of America, and are now priced in pennies -- we need to reflect upon the ongoing lessons learned from all these interventions by Treasury, Congress and the Federal Reserve.
The lesson from the Bear Stearns' bailout -- $29 Billion in Federal Reserve bad paper guarantees -- are quite stark:
• Go Big: Don't just risk your company, risk the entire world of Finance. Modest incompetence is insufficient -- if you merely destroy your own company, you won't get rescued. You have to threaten to bring down the entire global financial system. The fear and disruption caused by a Bear collapse is why it was saved. (AIG has the right idea on this)
• If you cant Go Big, Go First: Had Lehman collapsed before Bear, then the same fear and loathing of the impact to the system might have worked to their advantage. But having been through this once before, the sting is somewhat lessened -- especially for a smaller, lets interconnected firm like LEH. (First mover advantage!)
• Threaten your counter-parties: Bear Stearns had about 9 trillion in its derivatives book, of which 40% was held by JPMorgan (JPM). Some people have argued that the Bear bailout was actually a preventative rescue of JPMorgan. Its a good strategy if your goal is a bailout -- risk bringing down someone much bigger than yourself.
• Risk an important part of the economy: If your book of derivatives is limited to some obscure and irrelevant portion of the economy, you will not get saved. On the other hand, if Mortgages are important, credit cards and auto loans are too. Securitized widget inventory is not. To use a dirty word, Lehman's exposure is "contained."
• Balance Sheets Matter: Focus on the media, complain about short sellers, obsess about PR. These are the hallmarks of a failing strategy -- and a grand waste of time. Why? Its call insolvency. ALL THAT MATTERS IS THE FIRMS' BALANCE SHEET. Lehman's liabilities exceed its assets, and they are now toast. Merrill Lynch got a lot of the junk off of its books, and got a takeover at 70% premium to its closing price. And Credit Suisse, who dumped much of its bad paper many quarters ago, is in a better tactical position than most of its peers.
• Unintended Consequences lurk everywhere: When the Fed opened up the liquidity spigots via its alphabet soup of lending facilities, the fear was of the inflationary impacts. But the bigger issue should have been Complacency. The Dick Fulds of the world said after Bear, these new facilities "put the liquidity issue to rest." Lehman got complacent once liquidity was no longer an issue -- perhaps they acted to slowly to resolve their insolvency issue in time.
Unfortunately, Moral Hazard has created terrible lessons in 2008 -- via Bear Stearns (BSC), Lehman (LEH), Fannie Mae (FNM) and Freddie Mac (FRE).
The Terrible Lessons of Bear Stearns
As Lehman Brothers (LEH) turns into a single digit financial midget on its way to zero, as Washington Mutual (WM) works its way towards a buck, as Wachovia (WB) drops more than 80% over a year, as Fannie Mae (FNM) and Freddie Mac (FRE) become divisions of the United States of America, and are now priced in pennies -- we need to reflect upon the ongoing lessons learned from all these interventions by Treasury, Congress and the Federal Reserve.
The lesson from the Bear Stearns' bailout -- $29 Billion in Federal Reserve bad paper guarantees -- are quite stark:
• Go Big: Don't just risk your company, risk the entire world of Finance. Modest incompetence is insufficient -- if you merely destroy your own company, you won't get rescued. You have to threaten to bring down the entire global financial system. The fear and disruption caused by a Bear collapse is why it was saved. (AIG has the right idea on this)
• If you cant Go Big, Go First: Had Lehman collapsed before Bear, then the same fear and loathing of the impact to the system might have worked to their advantage. But having been through this once before, the sting is somewhat lessened -- especially for a smaller, lets interconnected firm like LEH. (First mover advantage!)
• Threaten your counter-parties: Bear Stearns had about 9 trillion in its derivatives book, of which 40% was held by JPMorgan (JPM). Some people have argued that the Bear bailout was actually a preventative rescue of JPMorgan. Its a good strategy if your goal is a bailout -- risk bringing down someone much bigger than yourself.
• Risk an important part of the economy: If your book of derivatives is limited to some obscure and irrelevant portion of the economy, you will not get saved. On the other hand, if Mortgages are important, credit cards and auto loans are too. Securitized widget inventory is not. To use a dirty word, Lehman's exposure is "contained."
• Balance Sheets Matter: Focus on the media, complain about short sellers, obsess about PR. These are the hallmarks of a failing strategy -- and a grand waste of time. Why? Its call insolvency. ALL THAT MATTERS IS THE FIRMS' BALANCE SHEET. Lehman's liabilities exceed its assets, and they are now toast. Merrill Lynch got a lot of the junk off of its books, and got a takeover at 70% premium to its closing price. And Credit Suisse, who dumped much of its bad paper many quarters ago, is in a better tactical position than most of its peers.
• Unintended Consequences lurk everywhere: When the Fed opened up the liquidity spigots via its alphabet soup of lending facilities, the fear was of the inflationary impacts. But the bigger issue should have been Complacency. The Dick Fulds of the world said after Bear, these new facilities "put the liquidity issue to rest." Lehman got complacent once liquidity was no longer an issue -- perhaps they acted to slowly to resolve their insolvency issue in time.
Unfortunately, Moral Hazard has created terrible lessons in 2008 -- via Bear Stearns (BSC), Lehman (LEH), Fannie Mae (FNM) and Freddie Mac (FRE).
Sunday, September 14, 2008
Lehman Brothers - RIP 2008?
It certainly looks like Lehman Brothers is going under...The govt is drawing a line in the sand, no backstopping of Lehman debt.
Barclays Walks from Lehman Deal
In Frantic Day, Wall Street Teeters
Special Resk Reduction Trading Session Called by ISDA Re Lehman Bankruptcy
ISDA confirms a risk reduction trading session is taking place between 2 pm and 4 pm New York time today (September 14) for OTC derivatives. Product classes involved are credit, equity, rates, FX and commodity derivatives. The purpose of this session is to reduce risk associated with a potential Lehman Brothers Holding Inc. bankruptcy filing. Trades are contingent on a bankruptcy filing at or before 11:59 pm New York time, Sunday, September 14, 2008. If there is no filing, the trades cease to exist. These trades are subject to a protocol which is being distributed by ISDA (International Swaps and Derivatives Association). Traders should execute the protocol and email a copy of the signature page to Mark New at ISDA (mnew@isda.org) with LEHMAN PROTOCOL in the subject line. Click here for Protocol Text. An explanatory statement regarding the Protocol can be found here.
MARKET PARTICIPANTS HAVE INDICATED THAT THEY ARE WILLING TO TRADE UNTIL AT LEAST 6:00 NEW YORK TIME. PARTIES SHOULD COMMUNICATE WITH EACH OTHER AS TO THEIR WILLINGNESS TO TRADE LATER THAN 6:00.
International Swaps and Derivatives Association - Lehman Risk Reduction Trading Session Protocol
Bank of America walked away from Lehman, and is in talks with Merrill Lynch.
Bank of America In Talks To Buy Merrill Lynch
This news is going to hit all markets.
In my opinion, the reason that the stock market has not gone down more, until now, has been the belief that the government was going to backstop nearly every financial failure. That assumption has been taken away. First with the Fannie/Freddie deal, and now with the apparent Lehman failure, the government safety net for equity holders is gone.
We spoke a couple of weeks ago about the Elliot Wave formation calling for an upcoming stock market collapse. The last two weeks we've seen some deterioration, but, imo, the collapse begins in earnest this week (tomorrow). It could get very, very ugly.
Barclays Walks from Lehman Deal
In Frantic Day, Wall Street Teeters
Special Resk Reduction Trading Session Called by ISDA Re Lehman Bankruptcy
ISDA confirms a risk reduction trading session is taking place between 2 pm and 4 pm New York time today (September 14) for OTC derivatives. Product classes involved are credit, equity, rates, FX and commodity derivatives. The purpose of this session is to reduce risk associated with a potential Lehman Brothers Holding Inc. bankruptcy filing. Trades are contingent on a bankruptcy filing at or before 11:59 pm New York time, Sunday, September 14, 2008. If there is no filing, the trades cease to exist. These trades are subject to a protocol which is being distributed by ISDA (International Swaps and Derivatives Association). Traders should execute the protocol and email a copy of the signature page to Mark New at ISDA (mnew@isda.org) with LEHMAN PROTOCOL in the subject line. Click here for Protocol Text. An explanatory statement regarding the Protocol can be found here.
MARKET PARTICIPANTS HAVE INDICATED THAT THEY ARE WILLING TO TRADE UNTIL AT LEAST 6:00 NEW YORK TIME. PARTIES SHOULD COMMUNICATE WITH EACH OTHER AS TO THEIR WILLINGNESS TO TRADE LATER THAN 6:00.
International Swaps and Derivatives Association - Lehman Risk Reduction Trading Session Protocol
Bank of America walked away from Lehman, and is in talks with Merrill Lynch.
Bank of America In Talks To Buy Merrill Lynch
This news is going to hit all markets.
In my opinion, the reason that the stock market has not gone down more, until now, has been the belief that the government was going to backstop nearly every financial failure. That assumption has been taken away. First with the Fannie/Freddie deal, and now with the apparent Lehman failure, the government safety net for equity holders is gone.
We spoke a couple of weeks ago about the Elliot Wave formation calling for an upcoming stock market collapse. The last two weeks we've seen some deterioration, but, imo, the collapse begins in earnest this week (tomorrow). It could get very, very ugly.
Sunday, September 7, 2008
A First Look Inside the Fannie / Freddie Bailout Plan
A First Look Inside the Fannie / Freddie Bailout Plan
http://seekingalpha.com/article/94304-a-first-look-inside-the-fannie-freddie-bailout-plan
Paul Kedrosky
posted on: September 07, 2008
Details on the just-announced Fannie/Freddie bailout plans were initially scant, but the OFHEO and Treasury websites now have most of what you're looking for.
http://seekingalpha.com/article/94304-a-first-look-inside-the-fannie-freddie-bailout-plan
Paul Kedrosky
posted on: September 07, 2008
Details on the just-announced Fannie/Freddie bailout plans were initially scant, but the OFHEO and Treasury websites now have most of what you're looking for.
Here is the gist:
1. The two mortgage giants will open Monday under Treasury control
2. New CEOs and boards are inbound
3. Common shareholders are being massively diluted as preferred of a preferred/warrant deal that is being held out as offering taxpayers upside.
4. The U.S. is now buying MBS securities direct from GSEs in the open market, and there is no explicit limit specified.
5. The U.S. just added a planet-sized new (red) line item on its national balance sheet.
For those of you who like more words, here is OFHEO's description of the bailout's key elements:
There are several key components of this
conservatorship:First,Monday morning the businesses will open as normal,
only with stronger backing for the holders of MBS, senior debt and subordinated debt.Second, the Enterprises will be allowed to grow their guarantee MBS books without limits and continue to purchase replacement securities for their portfolios, about $20 billion per
month without capital constraints.Third, as the conservator, FHFA will assume the power of the Board and management.
Fourth, the present CEOs will be leaving, but we have asked them to stay on to help with the transition.
Fifth, I am announcing today I have selected Herb Allison to be the new CEO of Fannie Mae and David Moffett the CEO of Freddie Mac. Herb has been the Vice Chairman of Merrill Lynch and for the last eight years chairman of TIAA-CREF. David was the Vice Chairman and CFO of US Bancorp. I appreciate the willingness of these two men to take on these tough jobs during these challenging times. Their compensation will be significantly lower than the outgoing CEOs. They will be joined by equally
strong non-executive chairmen.Sixth, at this time any other management action will be very limited. In fact, the new CEOs have agreed with me that it is very important to work with the current management teams and employees to encourage them to stay and to continue to make important improvements to the Enterprises.
Seventh, in order to conserve over $2 billion in capital every year, the common stock and preferred stock dividends will be eliminated, but the common and all preferred stocks will continue to remain outstanding. Subordinated debt interest and principal payments will continue to be made.
Eighth, all political activities -- including all lobbying -- will be halted immediately. We will review the charitable activities.
Lastly and very importantly, there will be the financing and investing relationship with the U.S. Treasury, which Secretary Paulson will be discussing. We believe that these facilities will provide the critically needed support to Freddie Mac and Fannie Mae and importantly the liquidity of the mortgage market.
One of the three facilities he will be mentioning is a secured liquidity facility which will be not only for Fannie Mae and Freddie Mac, but also for the 12 Federal Home Loan Banks
that FHFA also regulates. The Federal Home Loan Banks have performed remarkably well over the last year as they have a different business model than Fannie Mae and Freddie
Mac and a different capital structure that grows as their lending activity grows. They are joint and severally liable for the Bank System’s debt obligations and all but one of the 12 are profitable. Therefore, it is very unlikely that they will use the facility.
And more here from the WSJ, straight from Treasury's description of the shareholder-diluting PSPA:
The Treasury said its senior preferred stock purchase agreement includes and
upfront $1 billion issuance of senior preferred stock with a 10% coupon from
each GSE, quarterly dividend payments, warrants representing an ownership stake
of 79.9% in each firm going forward, and a quarterly fee starting in 2010.
Lots more details to come, I have to think. The market is going to initially swoon for this, but Tuesday will be interesting as the ripple effects hit.
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