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.
