| randallscott35 |
03-06-2009 07:52 AM |
Quote:
Originally Posted by randallscott35
Seems like as good a time as any for an update since a few weeks back.
Since then, you had a hysterical display by Bank of America (my bank by the way) last week throwing good money at bad. In the last installment we looked at the fact that they bought into the company in August and after a 75% haircut they decided they might as buy the whole damn thing. The CEO had egg on his face for the purchase and this was a way to claim victory and call it value. Mind you since the announcement, CFC stock has gone from 8 back to 5.75. My call is that this deal never actually closes. BAC is taking on basically all the future litigation by states and individuals against CFC for an equity in a company in the death spiral. It makes zero sense and just shows that financial companies are still not coming clean about their problems. Understand the FED said "they were aware of the talks between the two companies." Translation = we are quite happy someone took CFC(the largest mortgage company in the U.S.) from going bankrupt. A wink and a nod and BAC and their shareholders take one for the team.
Then we get to this morning with Citigroup who back in August showed a strange balance sheet. Well they write down some of their losses, not nearly enough, and the market laughs and chops another 7% off the largest bank in the U.S...Did I mention that on page 11 of their release they said they may have 230 billion is suspect loans to home borrowers. What did they write down, 10 billion this morning? This is beyond best case scenario. Sure they cut the dividend but they didn't cut it enough. This company is fighting for survival whether anyone realizes it or not. For the second time in months they needed a huge capital infusion just to keep chugging along. Realize something shareholders of these banks getting the infusion, they are giving equity(yours) and diluting the shares you own by giving % of the company away or giving notes worth high interest rates. I keep hearing how nice it is and this will stop the bleeding. No it won't. It prolongs the bleeding. The patient, especially in the case of a Washington Mutual and CFC are dead. You can plug holes and another one opens.
What happened? CDO is a collateralized debt obligation and essentially means that there are supposed to be assets backing them(a range of assets with different credit qualities) and giving investors a return on their investment. The problem is these were rated as safe investments with superior AAA standings in some cases. Would you eat a filet mignon with a tiny piece of feces on it? Probably not, but people bought into these not realizing that piece of these were backed by mortgages that were bound to fail. And then you are screwed b/c they become worth less and less and banks can't price them because they don't know the ultimate end with regard to bad loans. They are guessing. No one wants them.
The worse the housing market gets the more likely people with prime mortgages will default. Why? Not necessarily because they can't make the payments but b/c it makes sense. Watch closely the next 6 months and count the number of times you hear the expression "jingle mail" on TV or in the newspaper. If you put 50k down on your home and its lost 100k in value you have negative equity in your home. At a certain point you are better off mailing the keys back to your bank and taking the credit beating than holding onto your home. An ugly choice and not one I envy people making.
An aside here for a second on the mortgage market. I have a friend who has given loans for the past 2 years at a mortgage company. He said basically if you had a pulse 2 years ago you could get 400k loan. NINJA--no income, no job, no assets.....no problem!! Haha. Well thats fine and dandy when prices go up but the effect when they decline is pernicious(SAT word). The market was kept artificially high by allowing anyone with a first name to come in and purchase a home with funny money. It is the opposite effect when people can't get financing.
And this is why the magical rate cuts coming won't work! All they will do is weaken the dollar and cause commodities to go up even more. Banks don't want to lend and people don't want to borrow when a recession is coming and banks already have no idea what their ultimate damage will be on writedowns. Gold is talking here. Sure I took shots early in this thread for a call on a shiny metal. Made sense since it has underperformed for decades but times change and monetart policy gets dicey and bang...People aren't buying more jewelry, the price is going up because of inflation and nothing more. I am not a nut who thinks we will be paying for things in gold coins 5 years from now. You can't put the genie back in the bottle. I do, however, believe that taking your medicine and allowing some of the weaker financial institutions to go bankrupt is a better idea than pissing away people's savings through dollar depreciation.
Make no mistake this is now and is going to be ugly. No, the sky isn't falling but a recession is not priced into the stock market or the general economy at large. And since I don't buy government numbers let your "soul be your pilot." You know what you feel and see, no matter what you do for a living. So think for yourself and be smart going forward here. For the record all this happening is good in the long run. Banks will be regulated and the ones that survive will be stronger...There will be a time to take on debt also. If you think that other than a short bounce in the dollar the trend will continue to go down there comes a time when you should take on debt. Why? Well because you will be paying back that debt, mortgage or other(not credit cards--bad!) with dollars that are worth less as time goes on. Good for you, not for them....But we aren't there and I wouldn't tell you to do it yet.
I know this was a mishmash by the way…I'll stick to one topic next time since I was all over the place today. Sorry about that. I will tackle energy and more to the point "ethanol" and what a serious misjudgment this country made by promoting it. Long term consequences that people aren't talking about! Randall
|
Amazing what has gone on in this country from when this thread was started to now. The only asset class up in the roughly 2 years since I started this thread is in fact gold, despite the Chicken Little ribbing I took. And for those who think I am simply talking my book, I have no physical gold so I didn't take my own advice.
First off, the writing was on the wall over a year ago in my last post. Fraud is fraud. When you read reports like the ones Citigroup put out 2 years ago you knew what the outcome would be. I'm surprised the outrage isn't similar to Enron b/c the differences are minute. For instance the people in AIG who took on half a trillion in liability and put up no collateral are criminals, no different than anything that went on at Enron. Yet these people are allowed to keep their jobs at most levels. People at Merrill and BAC should be in jail. The fact that they are stonewalling an investigation into the bonuses given out under the tax payer's noses is disgraceful. But enough about the past, lets look at the future.
I'd like to be positive about some of this but I can't be. There are 2 choices facing this country, neither of them a happy outcome. One is to stop saving insolvent companies, including a more than half the banks in this country and sell off their assets to healthy banks at firesale prices. That would be a start.
As an aside notice that the negative savings rate has reversed, something people thought the US consumer would never do.
Ironically the dollar weakened to a staggering 1.62 against the Euro last summer and has since strengthened to the point of 1.26. Be clear, this is an example of being the prettiest ugly girl at the dance. The rest of the world is in worse shape if that can be imagined. Eastern European defaults are on the horizon because the European Union isn't "United" but more like puzzle pieces. And the PIGS, Portugal Italy Greece and Spain have debt to GDP issues that Germany doesn't want to help.
Hyperinflation vs. deflation---simply put we are a bankrupt country who is more bankrupt by the day with the policies of this administration. IF they monetize treasuries, aka buy bonds they are printing money and it will result in a dislocation in the bond market and likely a plunge in the currency within hours. Remember the bond market dwarfs the stock market. While Bernanke has hinted he would do this, he will in fact not do it. The truth is hyperinflation destroys governments. Deflation actually strengthens currencies but at the cost of imploding the general economy and setting off debt time bombs all over the place....The risks to the government and the Treasury are in fact real. In fact, allowing the stock market to continue to plunge is what they should do. The flight to safety in the bond market is needed in order to sell the massive amounts of treasuries needed to fund our deficit and the programs they are initiating. That capital has to come from somewhere or else we get a failure in a government bond market auction and you have no idea what that would do....Capital and credit were never the same thing, all we did in the country for decades is pull consumption ahead by borrowing against the future. Well the future is here. And it isn't pretty. |
