Three Reasons Why I'm Going Short and Buying Puts

Empire of Debt I: The Great Unraveling Begins

Here are a few predictions:
1. The Dow Jones Industrials will drop hundreds of points in a day, very soon, losing at least 3,000 points within the next few weeks.
2. The Shanghai stock market will lose half its value, dropping from 5,800 to under 3,000.
3. Major banks will be declared insolvent.
4. Major lay-offs will occur as U.S. retail, auto and house sales plummet.
5. The tech high-fliers (RIMM), (GOOG) and (AAPL) will fall precipitously

The Bear's Lair: Level 3 Decimation?

Level 3 assets have only unobservable inputs to measure value and are thus valued by reference to the banks’ own models.

There has been no rush to disclose Level 3 assets in advance of the first quarter in which it becomes compulsory, probably that ending in February or March 2008. Figures that have been disclosed show Lehman with $22 billion in Level 3 assets, 100% of capital, Bear Stearns with $20 billion, 155% of capital and J.P. Morgan Chase with about $60 billion, 50% of capital.

The Next Worry: Bond Insurers

[ACA Capital (ACA)] claims it has $1 billion in capital it could use for potential payouts if the CDOs it insures go bad. Yet it has sold coverage worth nearly $16 billion, with most policies written for CDOs created in the past couple of years.

MBIA, the world's largest bond insurer, with nearly $3 billion in revenues, is at the center of the growing mess. In late October the Armonk (N.Y.) firm announced a $36.6 million loss for the third quarter.

Disclosure: Shorting/Buying Puts: DB, GS, MER, C, JPM, AIG, ACA, and ABK.

Comments

[rotten son:]

RUN! The sky is falling, the sky is falling!

2007 Nov 07 04:12 PM

[Matthew Gan...:]

Thanks for the links to the articles. They were great reads. Just one question about the second one though, why is November 15th important with regard to the SFAS157 regulation? I thought the disclosure of level 3 assets was required by the end of the first quarter of 2008. Thanks.

The Bear's Lair- Level 3 Decimation
"From November 15, we will have a new tool for figuring out how much toxic waste is in investment banks’ balance sheets. The new accounting rule SFAS157 requires banks to divide their tradeable assets into three “levels” according to how easy it is to get a market price for them. Level 1 assets have quoted prices in active markets. At the other extreme Level 3 assets have only unobservable inputs to measure value and are thus valued by reference to the banks’ own models."

2007 Nov 07 09:01 PM

[Matthew Gan...:]

Thanks for the links to the articles. They were great reads. Just one question about the second one though, why is November 15th important with regard to the SFAS157 regulation? I thought the disclosure of level 3 assets was required by the end of the first quarter of 2008. Thanks.

The Bear's Lair- Level 3 Decimation
"From November 15, we will have a new tool for figuring out how much toxic waste is in investment banks’ balance sheets. The new accounting rule SFAS157 requires banks to divide their tradeable assets into three “levels” according to how easy it is to get a market price for them. Level 1 assets have quoted prices in active markets. At the other extreme Level 3 assets have only unobservable inputs to measure value and are thus valued by reference to the banks’ own models."

2007 Nov 07 09:01 PM

[Roger Enright:]

120640: Nov. 15 is the beginning of the first period in which institutions will be required to use this rule. From the FASB website: "This Statement [SFAS157] is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years."

2007 Nov 07 09:28 PM