When Can We Start Breathing Again? 15 comments
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The Bank of America (BAC) deal to buy Merrill Lynch (MER) is the first bit of unambiguously good news we've received all weekend. Of the four big independent investment banks, Lehman (LEH) is toast; Morgan Stanley (MS) and Goldman Sachs (GS) are safe; and Merrill (MER) is, well, not an independent investment bank any more. So in terms of investment bank failures, that's probably it, for the time being.
But Lehman alone is interconnected enough for its failure to start a nasty chain reaction and cause a systemic crisis all on its own. Everybody's trying their hardest to ensure that doesn't happen, since it's in nobody's best interest. But when will we know that disaster has been averted?
The answer, I'm afraid, is not particularly reassuring.
This isn't like Y2K, when if computers were still working at 1am, you knew that they'd survived the test. If AIG (AIG) hasn't collapsed after New York markets open and the broader stock market is down less than 5%, all that will mean is that there hasn't been a systemic meltdown yet. It's going to take a long time to liquidate Lehman and unwind all of its positions, and nobody has a clue how that's going to play out. Specifically, there might well be a levered-to-the-eyeballs multi-billion-dollar hedge fund or two with enormous Lehman Brothers counterparty risk, and if they start defaulting on their derivatives contracts, delayed contagion could spread very quickly indeed.
It's not just hedge funds, either, which could end up being the vector by which crisis is spread. It could be a big insurance company, or it could be a series of failures of small and medium-sized banks. Or it could come out of left field entirely: the "shadow banking system" is now so big and so global that for all we know a series of bad decisions by a mid-level technocrat in Kazakhstan could precipitate cataclysm across America and the world.
If we've learned one thing this weekend, it's that regulators are playing catch-up, and they've pretty much run out of ammunition. I have a lot of respect for the New York Fed, but ultimately it's a sub-national arm of a single country's central bank: it has neither the ability nor the mandate to keep an eye on all the possible risks that the world's financial system poses. And neither does any other regulator.
So as Monday rolls past, we'll all be keeping our fingers crossed that the inevitable volatility doesn't metastasize into genuine chaos. But even if we survive Monday, and Tuesday, and Wednesday, it'll be a good while yet until we're really out of the woods.
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At the same time, one wonders if this is to be the high-water mark of this particular disaster. Surely there are many more bank failures to come, and some hedge fund collapses. But 2 major i-banks in one weekend (only one in a succession of increasingly scary weekends), AIG's epic collapse, and veterans like John Jansen calling the events "FINANCIAL SCIENCE FICTION" suggests to me that this may finally be the worst we'll see. We may see more equally bad episodes before it's over, but it's going to be hard to top this. Ballsy contrarians with hefty sacks of gold ought to be tempted a bit tomorrow. I know I will be.
Reminds me of the Japanese bubble and Japanese investments in US trophy real estate. As that unwound, 15 cents on the dollar was the norm.
Now BOA pays 30 per share a neat 76% profit on the 7bn committed. This is the 2nd time around when Thain cuts a suspicious deal to a ML counterparty after the 22 cents on the dollar MBS sale to Lone Star.
This guy is a crook. What is the DOJ doing???
There are reported to be over 750 thousand homes in the U.S.A. that are currently lender owned, commonly refered to as Real Estate Owned ("REO"). This means that the homes were foreclosed by a lender, no one out bid the lender at the foreclosure sale, and the lender ended up owning the home in place of holding a performing loan. There are reportedly 10 million homeowners who owe more on their 1st morgtage that their home is now worth as result of the fallen demand for homes in the U.S.A. Many of these 10 million homeowners will be tempted to walk away from thier homes because the debt they owe is more than the value of thier property. How many will be an important question that must be addressed by any "economist" who is trying to determine when the end of the housing problem will bottom out. In addtion the overall economy has suffered with many people not able to make thier mortgage payments because of job loss, business failure and/or other changes brought on by the housing bust. Just consider all those realtors, mortgage borkers, and construction workers who purchased homes duing the housing boom and are now jobless.
Anyone who thinks this housing problem is near the bottom is probably the same person who didn't see it coming 3-4 years ago. Wall Street created a false demand for housing by pretending that every Tom, Dick and Harriet could qualify for a mortage loan, when in fact they really could not. Then they took this questionable debt, packaged inot "trusts" and then sold bonds from these trusts to investors around the world. Everyone on Wall Street and the Beltway got rich while the scheme lasted. Now despite lulling by Wall Street and the beltway crowed the chickens have come home to roost. However no one on Wall Street or the Beltway seems know how few chickens there are vs. how many there should be. So bondholders and prospective investors are we are left to GUESS what the asset values are of thousands of "trusts" that were created to hold this questionable debt. We do know that a LOT of debt has defaulted and been converted to homeownership by these lender trusts and or Fanne and Freddie Mac. We also know that a lot more of the debt is going to default. But we don't know how much will default or when.
Wall Street and the Beltway keep coming up with ways of concealing the actual value of these home loans or homes which back the bonds. Like "rescuing" Bear Stearns or forcing Fannie Mae and Freddie Mac into a "conservatorship"! We never get to see how good or bad these assets really are.
I think the first order of business in that so-called "conservatorship" should be to determine how much bad debt Fannie Mae and Freddie Mac are holding, how many REO'S they hold, and how much debt that they sold to outsdie investors which they guarantied that is also in defualt. The fact that Fannie Mae and Freddie Mac have foreclosed and now hold thousands of REO homes around the country is a bit hard to see from the legal new papers and country records because 12 years ago Fannie and Freddie along with Countrywide Financial set up a Delaware Corporation called Mortgage Electronic Registration Inc., commonly refered to as "MERS". MERS is named as a front or "nominee" on mortgages which are supposed to be securing Fannie, Freddie and Countrywide mortgages. Therefore you rarely ever see Fannie, Mae, Freddie of Countrywide PUBLICALLY listed as the foreclosing party when a Fannie Mae, Freddie Mac and Countrywide loan defaults. MERS was set up so the big three mortgage, and a few of thier smaller friends could origninate, securitize and then flip these onto the financial markets faster, while concealing who was actually making the olans from the public. Faster is always better when your a senior executive who is looking for reported profits to bolster stock prices and his or her bonuses.
I think we have a long way to go before this housing market bottoms out. I firmly beleive that the American public is still being defrauded into thinking this is just a run of the mill economic down turn with a recovery right around the corner. When in fact the economy is shaking as a result of the greatest top to bottom financial fraud ever perpetrated by Wall Street. I don't think a bunch of manipulations by the U.S Treasury or its financing arm the Federal Reserve will fix or cover up this mess anytime soon.
interesting play out. more like watching poker tournamant ! 8 )
Would they be 'too big to fail?'
Or are they big enough to take down the financial system if they went, or the Fed if it tried to bail them?
This is world historically stupid. Shrinking the money supply in 1932 stupid. Blind, ideological drivel stupid.
The Fed and the Treasury have placed a call option on the future production and earnings capacity of the American public. Most of that public had nothing to do with the current financial crisis. They were merely going about their everyday business, paying down their mortgages, educating their children, saving for retirement and paying their taxes. Now the government is drawing on their future in amounts the size of which the people have no concept. Do you think their so-called "leaders" in Congress are going to tell them they truth? No, since Congressmen themselves don't know the answer. They believe in the Printing Press, since it has always worked. Do you think politicians will tell the people that they have to pay much higher taxes in order to bail out the system problems that they had not part in creating? No, because that politician would lose his job. The only way Washington sees its way out of the problem is to print dollars and inflate it away. But, that won't work this time, because it is DEFLATION, NOT INFLATION, that is coming.
Does anyone honestly believe that the Government will ever be able to repay its debts and service all of its off-budget guarantees and unfunded mandates?
There is a point coming when the People will say Enough is Enough!
The fight over who shall bear a loss does not allocate the loss, it multiplies it 10 and 20 fold without settling the question.
You want Lehman to pay instead of the government. OK, so the treasury forces Lehman into bankruptcy. You can cheer and say, see, enough it enough. And what does Lehman pay? It files bankruptcy. Bankrupts do not pay their debts.
Meanwhile the moralizing Fed just had to inject $95 billion in new credits to keep every bank in the country from failing at the close. The ECB and Bank of England added $55 billion more. This is roughly 10 times what it would have cost to keep Lehman alive, not independent and misrun but merged with Barclays and reformed in an orderly manner.
This idiotic decision is going to cost us at least an extra $500 billion and probably more like an extra $2-3 trillion before it is over.
As long as shorters are earning $10 billion a week annihiliating institutions with the full blessing of the US treasury, the entire financial press, and all the baying moonbats, they will go right on destroying capitalism until there is nothing left at all.
And then you will be stuck not just with a tab, but with a smoking crater where the US economy that used to pay for it all, used to be. But hey, you can moralize about it and say it is someone else's fault, and that's the important thing, right? Right? Right?!
Idiots...
you are so right!just like picking football.don't get me wrong.there is alot more data to pick from than sports;but no matter how they try to polish it up with guys in fancy suits&gals more beautiful than the other;no one can pick the bottom'much less a good stock.bottom line.
bottom line.THEY'RE ALL FULL OF YOU KNOW WHAT!
Sounds like the pitiful bleatings of someone who forgot to get himself some gold. It's not too late, though. Amazingly enough, there are still plenty of people willing to accept your dollars and give you real money in return. Not sure how long that will last, so take advantage while you can. No one with gold will ever stand in a "soup line" as you so eloquently put it, no matter how staunch a supporter of free market capitalism he may be. That privilege is reserved for those who insist on socialising risk and are forced to learn once again that they cannot quite manage to force others to pay for their bad choices.