Empire of Debt I: The Great Unraveling Begins
Here are a few predictions:The Bear's Lair: Level 3 Decimation?
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
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.