My 2008 Predictions for Financial Catastrophe

I’m not much for predictions (because they are usually bad), but I thought I’d give it a try. Here is how financial Armageddon could come to pass this year.

February: Lenders and counterparties give up on ACA Capital Holdings (ACA), the smallest and weakest monoline bond insurer. It declares bankruptcy. The bailout of the other bond insurers fails. Ambak (ABK) [$11.13 0.00%, market cap: $1.130B], already in run-off mode, is downgraded to junk. MBIA (MBI) [$14.85 0.00%, market cap: $1.862B] survives a bit longer. Harry Macklowe loses much of his real estate empire when he fails to refinance his short-term debt. Rents decrease in Manhattan for the first time in years.

March: Ambak becomes insolvent. MBIA is downgraded to junk.

April: MBIA declares bankruptcy. Towards the end of the month, the homebuilders report more huge writedowns. Several banks surprise everyone by calling loans on a teetering Standard Pacific Homebuilders (SPF) [$3.27 0.00%, market cap: $238.0M]. It declares bankruptcy. Several smaller, private, homebuilders are likewise pushed into bankruptcy by their lenders.

May: Losses to banks from the failure of ACA alone top $20 billion. Analysts estimate that the major banks will have to write down $250 billion as a result of the failure of the other bond insurers. Citigroup’s (C) [$27.65 0.00%, market cap: $138.1B] stock is now down over 50% in the last 6 months alone. The Bank of America (BAC) [$41.20 0.00%, market cap: $182.8B] acquistion of Countrywide Financial (CFC) [$5.95 0.00%, market cap: $3.443B] falls through and Countrywide declares bankruptcy. On a personal note, I finally sell my house, which I've owned for almost four years, for a 25% loss. House prices in St. Louis are down 30% from their peak. In parts of California, house prices are down over 50%.

June: Several regional banks based in California are paralyzed by bank runs, and declare bankruptcy. The FDIC estimates that the bailout of their depositors will cost $30 billion.

July: Forgotten by almost everyone, pushed to collapse by banks’ unwillingness to refinance its debt, Chrysler (DCX) declares bankruptcy. Several small companies also join it there.

August: By this time house prices have fallen over 60% in California from their peak prices. It is now impossible to obtain a mortgage with a FICO score below 600, a smaller than 20% down payment, or an income at least four times the mortgage payment (including insurance and taxes).

September: A large insurer reveals write downs due to mortgage-backed security losses equal to its book value. Its stock drops 90% in one day, leading the S&P 500 down 8%. Mortgage insurer Radian (RDN) [$8.74 0.00%, market cap: $702.7M] declares bankruptcy. It is joined in bankruptcy by competitor PMI Group (PMI) [$9.35 0.00%, market cap: $758.5M].

October: Google’s (GOOG) profit increases 70%. Citigroup’s book value is now down 50% over the last two years.

November: Hillary Clinton wins the U.S. election even though 80% of the population hates her. She decides to play the role of Franklin Roosevelt and her policies look to drive the U.S. into a depression.

December: The unemployment rate hits 6% in the U.S., and the country continues a recession that started back in the spring.

Disclosure: I have no position in any stock mentioned above. I am actually not pessimistic enough to believe that much of the above will occur.

Comments

[Trim Finance:]

Catastrophe??? I think you meant Armageddon....

2008 Jan 29 10:59 AM

[erniem:]

I'm stocking up on popcorn and couches.

2008 Jan 29 11:24 AM

[Rich4REITs:]

Except November prediction, I hardly can refute all above...

2008 Jan 29 01:37 PM

[suhaas:]

You said first that Predictions are not your forte. You should have then shut up. Your article is baseless and unresearched. What makes you think you have the right to spew nonsense and waste our time?

2008 Jan 29 04:18 PM

[d_sander:]

"What makes you think you have the right to spew nonsense and waste our time?"

He has a right to spew any nonsense he wishes. He does not have a right to waste your time. Any wasting of time you eagerly assumed, as a privilege.

As far as the predictions go, barring regulatory/federal bailout, bond and mortgage insurers can not survive, and, if they fail, they will drag many big players in the banking industry right along with them. So, should the federal government bail out these ill-functioning behemoths with our pocketbooks when the vast majority of the losses to be incurred with their failures will be borne by those who currently own the vast majority of these companies and their assorted derivatives, the super wealthy? Sure, many little guys will also get tossed in the melee, but, by and large, it's big capital the federal government and its owners, Wall Street, really only care about. So, what's to be done?

Again, barring massive federal/regulatory intervention, the bond and mortgage insurance industry as we know it, along with the mega-banks whose portfolios they insure, will cease to be, to be replaced, naturally in the evolutionary process, with something that, for the time being then, will work better. During the shakeout, the vast majority of "Joe and Jane Blows" will largely not feel a thing. They will have continued to trudge on through their daily struggles of making it, or not, from paycheck to increasingly uncertain paycheck (regardless of whether corporate coffers are flowing with billions or hemorrhaging them).

So, again, what’s to be done?

It looks increasingly like the rich (no, not you, who own a few thousand shares of x and y securities, and, only in your unbridled egotism, consider yourself rich; the super-rich, whose exclusive world you can’t begin to imagine) will, once again, “take care of its own” with our hard-earned dollars.

2008 Jan 29 05:01 PM

[rocky:]

I will vote for an as yet unnamed Libertarian or independent candidate before I vote for Hilary. The writer is correct, she has very high negatives. I hope Michael Bloomberg runs and spends some of his millions trying to educate the public about the financial problems facing the US government and state/local governments as well.

2008 Jan 29 06:15 PM

[whisperonth...:]

IF Hillary and Billary win, I believe these predictions will come true.

2008 Jan 29 07:08 PM

[helplessobs...:]

Insurance only works when insured losses are small and not concentrated. Neither of the above apply to today's credit derivative swaps situation. Swap owners, your paper is in peril as the counterparties shed their responsibilities in bankruptcy.

2008 Jan 29 07:17 PM

[forest:]

We won't see anything this dramatic happen. Markets would be halted and heads of industry/government would meet behind closed doors to work things out. Interesting read though.

2008 Jan 29 08:23 PM

[what the ?:]

you have a very interesting forecast!

My forecast:
Bond insurers will be nationalized and the credit system restored with lots of stricter regulations.
Lots of smart people with huge money in real etate and banks
will set up corporations to hold foreclosers for slow release.
Luckily there are plenty of people smarter than me who will
find good/bad solutions to this mess until greed gets them again.
The economy will weaken and markets will suffer greatly but
will survive with the poor continuing to be poor and the rich etc blah
blah blah.

2008 Jan 30 12:24 AM

[Michael Goode:]

Please note that I do not necessarily think the above will happen. I view it more as a possible, worst case scenario.

2008 Feb 07 10:56 AM