According to the spreads, anything other than the most senior bond holders are looking at at least a haircut.
I hear Pimco made a big bet on agency bonds. When all there is to catch is falling knives, even the best get hurt.
My guess is that equity holders will be wiped out and bondholders will be made whole. Why? Because so much of the debt is owned by foreign governments and it was bought on the understanding that it had the implicit backing of the US government. The US would have some very pissed off foreign governments to contend with if they wiped out bond holders.
If you look at the losses coming down the pike the equity is already worthless. That means the current share price is simpy a call option on the future.
I think the Treasury will step in and issue some kind of preference shares with their dutiful citizens money and nationalize these farcical instituitions once and for all.
here below is a detailed summary of the reasons for my views – as presented in this blog in the last few months - that this will turn out to be the worst financial crisis since the Great Depression and the worst US recession in decades (hyperlinks to my relevant recent writings are provided for each argument):
* This is by far the worst financial crisis since the Great Depression, not as severe as the Great Depression but second only to it.
* At the end of the day this financial crisis will imply credit losses of at least $1 trillion and more likely $2 trillion. The financial and banking crisis will be severe and last several years leading to a severe and persistent liquidity and credit crunch.
* This is not just a subprime mortgage crisis; this is the crisis of an entire subprime financial system: losses are spreading from subprime to near prime and prime mortgages including hundreds of billions of dollars of home equity loans that are worth little; to commercial real estate; to unsecured consumer credit (credit cards, student loans, auto loans); to leveraged loans that financed reckless debt-laden LBOs; to muni bonds that will go bust as hundred of municipalities will go bust; to industrial and commercial loans; to corporate bonds whose default rate will jump from close to 0% to over 10%; to CDSs where $62 trillion of nominal protection sits on top an outstanding stock of only $6 trillion of bonds and where counterparty risk – and the collapse of many counterparties – will lead to a systemic collapse of this market.
* Hundreds of small banks with massive exposure to real estate (the average small bank has 67% of its assets in real estate) will go bust.
* Dozens of large regional/national banks (a’ la IndyMac) are also effectively insolvent given their extreme exposure to real estate and will also eventually go bust. Most of these regional banks – starting with Wachovia and Washington Mutual – look like walking zombies in the same way IndyMac was.
# Even some major money center banks are also semi-insolvent and while they are deemed too big to fail their rescue with FDIC money will be extremely costly. In 1990-91 at the height of that recession and banking crisis many major banks – in addition to 1000 plus S&L's that went bust – were effectively insolvent, including, as it was well known at that time, Citibank. At that time the Fed and regulators used instruments similar to those used today – easy money and steepening of the intermediation yield curve, aggressive forbearance, creative – i.e. liar – accounting, etc. – to rescue these major financial institutions from formal bankruptcy. But at that time the housing bust and the ensuing decline in home prices was much smaller than today: during that recession home prices – as measured by the Case-Shiller/S&P index – fell less than 5% from their peak. This time around instead such an index has already fallen 18% from its peak and it will most likely fall by a cumulative 30% before it bottoms sometime in 2010. If a 5% fall in home prices was enough to make Citi effectively insolvent in 1991 what will a 30% fall in home prices – and massive defaults on many other forms of credit (commercial real estate loans, credit cards, auto loans, student loans, home equity loans, leveraged loans, muni bonds, industrial and commercial loans, corporate bonds, CDS) - do to these financial institutions? It challenges the credulity of even spin masters to argue that financial firms are not in worse shape today than they were in 1990-91 when a significant number of major banks were technically insolvent. So, not only hundreds of small banks and a significant fraction of regional banks but also some major money center banks will become effectively insolvent during this crisis.
# In a few years time there will be no major independent broker dealers as their business model (securitization, slice & dice and transfer of toxic credit risk and piling fees upon fees rather than earning income from holding credit risk) is bust and the risk of a bank-like run on their very short term liquid liabilities is a fundamental flaw in their structure (i.e. the four remaining U.S. big brokers dealers will either go bust or will have to be merged with traditional commercial banks). Firms that borrow liquid and short, highly leverage themselves and lend in longer term and illiquid ways (i.e. most of the shadow banking system) cannot survive without formal deposit insurance and formal permanent lender of last resort support from the central bank.
# The FDIC will for sure run out of money as hundreds of banks will go bust and their depositors will have to be made whole given deposit insurance. With funds of only $53 billion, already up to 15% of such funds will be used to rescue the depositors of IndyMac alone. Thus, the FDIC is already requesting to Congress that the deposit insurance premia should be raised to compensate for this shortfall of funding. Too bad that this increase in insurance premia – that should be high enough in advance (not ex-post) to ensure that deposit insurance is incentive-compatible and not leading to gambling for redemption via risky lending in banks – is now too little and too late and is requested when the damage is already done as the biggest credit bubble in U.S. history is now going bust. Also the FDIC has done a mediocre job at identifying which banks are at risk. So far there are only about 90 banks on its watch list; and IndyMac was not put on that list until last month! So if the FDIC did not even identify IndyMac as in trouble until it was too late, how many other IndyMacs are out there that that the FDIC has not identified yet? Certainly a few hundred but such honest analysis of banks at risk is nowhere to be found.
# Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.
# Massive amount of creative accounting and other forms of balance sheet window dressing is occurring to prevent banks from recognizing their true losses. First, most financial institutions are putting increasing numbers of assets in the illiquid buckets of Level 2 and Level 3 assets. While FASB 157 should prevent manipulation of the valuation of such illiquid assets, forbearance by the SEC, the Fed and other regulators allows a massive amount of fudging. An insider told me that in a major financial institution the approach is as follows now: top management decide in advance what the announced writedowns should be and folks dealing with the toxic/illiquid assets come up with totally ad hoc assumptions to make sure that such illiquid assets are valued consistently with the decided-in-advance amount of writedowns and losses. This is not earnings smoothing; this is active manipulation and falsification of financial results aimed at creating even more obfuscation of the true state of financial institutions. This obfuscation is actively abetted by the SEC, the Fed and all other regulators that are now in forbearance crisis management stage where the objective is to avoid at any cost anything that may trigger a financial meltdown. Thus, most of these earnings reports are not worth the paper they are written off.
The Wall Street Journal website reports that Freddie Big Mac and fried was forced to offer unusually rich terms to investors in a $3bn auction of its fries yesterday, fuelling concerns about a possible bailout for the mortgage giant and its sibling, Fannie Mae.
Cheers
..........Kauri
For some more dismal reading, Nouriel Roubini has been at it again.
http://www.rgemonitor.com/roubini-monitor/253378/the-worst-economic-and-financial-crisis-in-decades/
He called it early and he called it right. Definitely worth a read.
I thunk there is one more major bank in the good ole us of a that will fail!!!... not too far away neither.... and after the inevitable reaction... the yank tank may get the inside running in the G1. International Recovery Stakes.. aaahhh.. maybe more lemmings to the slaughter???.. now... who to short..
mmm :drink:...
Slainte
..............Kauri
More leemings to the slaughter... down 10% in todays trading already...
and I also wonder if Fred and Fan will go the way of Northern Rock????
Cheers
.............Kauri
Yep.... possibly more leemings to the slaughter.... turned out a nice short..
Cheers
............Kauri
Many called and referred to many of us as whank..s when we tried to point these matters out 12 months ago.
And I still disagree with one point. The sufferring and destitution of many people across the globe will be greater than the great depression. But of course the financial industry dont' count the human costs, only the bottom lines.
According to the spreads, anything other than the most senior bond holders are looking at at least a haircut.
I hear Pimco made a big bet on agency bonds. When all there is to catch is falling knives, even the best get hurt.
For some more dismal reading, Nouriel Roubini has been at it again.
http://www.rgemonitor.com/roubini-monitor/253378/the-worst-economic-and-financial-crisis-in-decades/
He called it early and he called it right. Definitely worth a read.
In a few years time there will be no major independent broker dealers as their business model (securitization, slice & dice and transfer of toxic credit risk and piling fees upon fees rather than earning income from holding credit risk) is bust and the risk of a bank-like run on their very short term liquid liabilities is a fundamental flaw in their structure (i.e. the four remaining U.S. big brokers dealers will either go bust or will have to be merged with traditional commercial banks)
This financial crisis signals the beginning of the decline of the American Empire; over time the relative economic, financial, military, geostrategic power of the US and reserve role of the US dollar will significantly decline.
Now before anyones get the wrong impression and I get an "enquiry" from the powers that be... this is all rumour.. if you act on it don't set the hounds onto me... my own personal reading has the forex $ crosses reacting by...
:arsch:
Cheers
..............Kauri
The FT-reported news Lehman Brothers held secret talks to sell up to 50% of its shares to South Korean or Chinese parties in the first week of August but failed to reach agreement with either is being touted as a factor in USD weakness. The Wall Street Journal website reports that the Fed quietly called Credit Suisse last month to see if it had pulled a line of credit from Lehman Brothers in response to a rumour.
Do you have a basis for that view? The GD hit Australia hard, and in Europe was a major factor in triggering WW II. If people are hungry enough, even being a soldier can sound like a good idea.
Do you have a factual basis for believing that this will be worse?
Got a link for us Kauri?
I thunk there is one more major bank in the good ole us of a that will fail!!!... not too far away neither.... and after the inevitable reaction... the yank tank may get the inside running in the G1. International Recovery Stakes.. aaahhh.. maybe more lemmings to the slaughter???.. now... who to short..
mmm :drink:...
Slainte
..............Kauri
The Wall Street Journal website reports that Freddie Big Mac and fried was forced to offer unusually rich terms to investors in a $3bn auction of its fries yesterday, fuelling concerns about a possible bailout for the mortgage giant and its sibling, Fannie Mae.
Cheers
..........Kauri
Hard tom link rumours...
butt..
you could try here..
and here..
Cheers
............Kauri
Well spotted, I take it you aren't a wsj subscriber?
Last night I flew on an interstate scheduled 737 flight that had just nine passengers, requiring us to sit in selected positions to spread the weight.
.
BOLLOCKS!!!
Wake up Australia... these idiots who call temselfs journalists need a reality check.. or will we keep sucking AND swallowing whatever they dish uP!!!
Apologies of course if you(the Journo) happen to be grossly, excessively, even obscenely, overweight...
Incredulous
................Krakatoa
Many asset purchase decisions made in the boom will look silly.
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