Friday, October 26, 2007

Escalation of the ARMS Race at Countrywide

On October 20th I likened the situation between the banks and the FED to a game of chicken:

Along these lines, Mish took the theme one step further and framed the confrontation as Mutually Assured Destruction:

I must admit, his analysis was closer to the truth of heart of the matter. I am not going to rehash the disaster that was the Countrywide (countryfried?) earnings report today. It was horrendous, even worse than expected. I think the major event to focus on is that Countrywide has escalated the confrontation with the FED and other banks.

Countrywide came out swinging today, and ratcheted up the pressure through economic brinkmanship. Brinkmanship is defined on Wikipedia as:
"The practice of pushing a dangerous situation to the verge of disaster in order to achieve the most advantageous outcome. This maneuver of pushing a situation to the brink succeeds by forcing the opposition to back down and make concessions."

The escalation comes on three fronts. The first was made known during the conference call with investors. Mark Gongloff of the Wall Street Journal was kind enough to live blog the call. You can view his report here:
The salvo is fired at around the 2:11pm mark and is entered on the blog as:
2:11: In response to a question about when the market may stabilize, Mozilo says youhave to remember” that if negative housing scenarios play out, you would have to expect rate cuts from the Fed, while noting that the company has tried to be conservative with its projections. Executives seem at pains to say that the company’s forecast takes into account continuing deterioration in the housing market.

In essence, Countrywide is stating that they fully expect more rate cuts from the FED. Countrywide knows full well that housing will continue to deteriorate and so they make their demands clear up front.

The second front of the Countrywide blitzkrieg involves extending their tentacles into as many banks and credit lines as possible. You may recall the Bank of America deal a while back which gave CFC a cash infusion with a convertible set at $18. The stock, even up 30% plus today is still under that price. Countrywide assures the street today that they have about 34 Billion in "reliable" liquidity. The message is clear enough, Countrywide has tons of cash from many banks and you do not want to see those sums of cash written down across the financial industry do you? As Mish wrote, Countrywide is playing the MAD card well.

The final line of attack is the silly forecast of profitability next quarter, and a call for a profitable year in 2008 as a whole. Anyone with even a casual understanding of the housing bust knows that is a pipe dream. Why would CFC say it then? Escalation gives us the answer. Countrywide is moving tons of their crap paper into their own bank. Perhaps they intend to join the Superfund as well through that entity. Countrywide is going to try and hide all ther losses through off balance sheet shenanigans just like the big boys. The forecast for a profit has two threats implicit:
  • We will be able to make this move without any hindrance
  • If CFC is not profitable, the stock will tank and necessitate more FED rate cuts and possibly a monster bailout that will be intricate due to the tangle of credit lines they have secured

Countrywide has now made it clear what they expect from the FED and the banks. They will not, as Dylan Thomas wrote, "go gentle into that good night." It is brinkmanship at its finest. Unfortunately this game is probably going to get worse going forward. Again, from Wikipedia: "In order for brinkmanship to be effective, the threats used are continuously escalated. However, a threat is not worth anything unless it is credible; at some point, the aggressive party may have to back up its claim to prove its commitment to action. The further one goes, the greater the chance of things sliding out of control. The chance that things may go out of control is a key element in providing credibility to this threat."

Its like a game of steroid-rage induced chicken armed with thermonuclear economic bombs. It sure will be interesting.

Enough thinking, its Friday!

Football preview time is at hand. Another 2 great calls from last week for the Patriots and Colts game. Maybe I should move to Vegas? This week the Patriots take on the Washington Redskins. The Skins have a really good defense, and Clinton Portis is the real deal. This game will be a hard fought one, and much closer than people think. The Patriots have a bit too much though, an they win 34-17 in a game that is allot closer than the final score would indicate. Never count out Joe Gibbs.

Friday Rock Blogging to get you all fired up:

"Hanger 18" from Megadeth. Great guitar work is always a good thing:

"Cherry Bomb" from Joan Jett. That lady just rocks! Song starts at the 25 second mark. Did you know Joan Jett was in a "Highlander the Series" episode?

With the MAD and economic combat theme, "Aces High" from Iron Maiden:

Have a good night.

1 comment:

Anonymous said...

FED cut means weaker purchasing power for the American consumer, which is maybe what is intended. Devaluate the currency to reduce the trade imbalance.

I'm not much of an economist though. Since China currency is pegged to the dollar it wouldn't affect the trade balance with them.