Mark Moran

Citi, Merrill, WaMu: Death Spiral Financing

Not to be picayune, but this is not what was commonly known as "death spiral" financing during the heyday of that instrument. A death spiral was a security whose conversion price was based on a discount to the stock market price; so if a company initially issued a convert at $50, when the stock fell to $40, the convert price fell to $40, and when the stock fell to $10, the convert price fell to $10. NYSE and Nasdaq essentially put an end to these, or at least put a floor under most of them. What these banks face is a "full ratchet" provision in which any subsequent issuances at lower prices triggers more shares issued to the prior purchaser. But at least the issuer remains fully in control over whether another issuance gets done; with the true death spiral, once the instrument was issued, a plunging stock price acquired its own momentum, and there was little the company could do about it.

Yikes, But Duh: Housing Bottom Could Be Two Years Off

Rising rates will not bail out this market. Right now, the problem of ARMs adjusting higher has been muted by the drastic rate cuts; as these cuts are reversed, the number of forced sellers will only increase. Further, tighter lending guidelines will mean fewer people able to get a mortgage, particularly to buy a home at today's still inflated prices. The only thing that will eventually turn the market around is when deep pocketed speculators come in, and they wait till there is blood in the streets, and when the cost of carrying a house again begins to remotely resemble the amount for which they can be rented, and prices have a good bit to fall before either of these is the case.