Wednesday, December 19, 2007

Loans Gone Wild - The Frustration is Starting to Show

A slightly better weather day up here in Massachusetts. By days end though, it was raining and that has changed over, yet again, to snow. Tomorrow is my last day of work until January 3rd, so I can do one more day. Last year my wife bought me a wool scarf. I thought it was more of a fashion thing than useful, but let me tell you those things work wonders. Last winter and this winter my trusty scarf helps me stay warm immensely. A great gift idea if you are running behind!

Even More Once in a Lifetime Scenes
Last night I put up a small list of one in a lifetime events going on in the world in general. Today we have another great example. Morgan Stanley reported their WORST quarter ever and will post their first operating loss ever this year. For a firm as old as MS, that is a big news item. Even more troubling is the story behind the company:
Morgan Stanley write-downs grow by $5.7 billion
China sovereign fund invests $5 billion; CEO Mack will forego a bonus
By John Spence, MarketWatch
Last update: 2:42 p.m. EST Dec. 19, 2007

BOSTON (MarketWatch) -- Morgan Stanley said Wednesday it's writing down an additional $5.7 billion of mortgage-related assets, taking the total fourth-quarter loss to nearly $10 billion in the latest sign that the credit crunch is worsening.
On another front, the Wall Street giant joined a string of rivals announcing investments from foreign governments as it unveiled an agreement with a Chinese sovereign fund that will inject $5 billion in fresh capital through equity units with mandatory conversion into common stock.

Morgan Stanley shares rose 3.6% to $49.81 in afternoon trading. The China investment helped buoy the stock, along with hope that the big fourth-quarter write-down may leave fewer nasty surprises for 2008.
Morgan Stanley's management essentially "kitchen-sinked" the quarter, according to analysts at Banc of America Securities.
"The bull case is that the company now has just $1.8 billion in reported net ... subprime exposure, having taken their medicine, and now it can look forward to a clean 2008," they wrote in a report to clients.
"The bear case is that this magnitude of loss impairs investor trust and raises questions about the judgment and competence of the leadership.," the analysts added.

What a mess! By now the numbers are so large and so hard to wrap your head around 10 Billion may seem like no big deal. Maybe it is not, as the stock rose in the face of what the CEO called "embarrassing" earnings. As always, I use this article to show what kind of things to look for and ask yourself when reading any news piece. Based upon my red highlighting, there are a few things that bother me here:
  • Another foreign government steps in and provides capital. China in this case. I have written before about the major problem China represents, and how we may have to let Taiwan be destroyed by the Chinese due to how much of our debt they hold. A cash infusion from a COMMUNIST COUNTRY is nothing to be proud of. The selling off of major stakes in a US company is nothing positive.
  • Again we are hit with the "worst is over" line. Commentators note that MS has only 1.8 Billion of subprime paper left, so the worst might be over. Wait, that's 1.8 Billion of REPORTED subprime exposure, and that is a big difference. Also, it has been shown beyond all doubt that the mortgage meltdown is affecting all paper, not just subprime. The worst is over? Doubt it.
  • Analysts say there is a chance of reduced confidence in management and a possible perception of a lack of competence. You think? I can lose 10 Billion dollars easy, that is why I am not a CEO. It takes real genius to lose that kind of dough! I have every confidence that MS will continue to lose money, so there is no uncertainty there.

Loans Gone Wild - The Frustration is Starting to Show

Folks, we have a rare treat today. There will be very few times that you will get to see how public officials and business leaders really think and feel. Today Sallie Mae, a student loan service company (yes, also backed by the good old USA) reported a truly terrible quarter. The company had a failed buyout a while ago, and of course loan losses are mounting! You didn't think it was just mortgages did you? Anyways, the CEO of SLM, Albert L. Lord, was on the conference call today and lets just say it did not go very well. After a tough session, a lull occurred near the end of the call. Turn up your volumes and listen to the last 40 seconds for pure comedy:

In case it was hard to hear, the direct transcript is Lord saying to the investor relations head named Steve "There's no questions. Let's get the fuck out of here." At least he was honest! This encapsulates the usual problem big CEO's have. They think they know everything and should not be bothered by questions from the peanut gallery. It is always revealing to see such frank moments. Frustration across all lending areas is now showing. I predict conference calls will be listened to in record numbers from now on by people looking for that special "Lord" moment!

You want more problems in the loan repayment area? No problem, coming right up!

Here is a bunch of headlines that should send shivers down the spine of the financial world:

S&P cuts ACA to "CCC" junk, acts on 6 bond insurers-Your Insurance called and said he can't pay you for any of the mortgages you thought were insured. He left no call back number.

D.R. Horton Credit Ratings Cut to Junk Status by Moody's-The bad news is your credit is JUNK, the good news is so is everyone Else's!

S&P Cuts Alt-A Mortgage Bonds; Analysts Warn on Prime-Wait a second! That is not SUBPRIME? What is going on here? I accepted the August is the worst of it baloney, fell for the subprime will drag to the end of 2007, but now the ALT-A and PRIME paper may be no good too? OOHHH the HUMANITY! (Exploding Hindenburg reference)

When loans go wild it is far worse than seeing your daughter (or wife) flashing some strangers with cameras on vacation (girls gone wild). In a debt based economy money velocity is key, and debt must constantly be expanded. Credit expansion gets pretty iffy when you know beyond a shadow of a doubt that it will not ever be paid back. We are getting to that point.

The FED and the ECB can pump whatever amounts of funny money into the system they desire. The problem is that when even funny money cannot be paid back by other funny money things get REAL serious quick. The acceleration of events is amazing given the end of the year timing. Prepare accordingly for 2008.

Wednesday Funny

I propose the mortgage industry start practicing their proverbial death scene, like in the films or plays. Here is some inspiration:

funny pictures
moar funny pictures

Or perhaps waiting for Santa on Christmas is your thing:

funny pictures
moar funny pictures

Thanks for all the comments on last post. I know everyone is pressed for time, but even a few observations and comments really helps me try my best.

Have a good night.


Sherlock said...

Thanks for your posts. Great stuff. I read you regularly, along with Urban Survival and Mish.
What I fear most is that when TSHTF big time, the web will mysteriously be down. No better way to control the masses than to cut off information and disrupt online networks.
On the other hand, I wonder if maybe TPTB aren't as dependant on bloggers as anyone else to figure out what the H is going on?

watchtower said...

My daughter (8 yrs old) gives the cat pictures two thumbs up, and your post on Sallie Mae was interesting. I`m not for sure, but I was thinking that you couldn`t declare bankruptcy on student loans (but I guess if you don`t have it to pay, then you just don`t have it).

getyourselfconnected said...

Lets hope things do not get so bad as to find out if you are right.
Glad your daughter liked the pics, that site cracks me up. You are correct, student loans cannot be written off, but they do offer almost infinite defferals.
thanks for coming once again!

Anonymous said...

Maybe these guys know the funny money jig is up.

Harvard’s new financial aid policy dramatically reduces the amount families with incomes below $180,000 will be expected to pay. Families with incomes above $120,000 and below $180,000 and with assets typical for these income levels will be asked to pay 10 percent of their incomes. For those with incomes below $120,000, the family contribution percentage will decline steadily from 10 percent, reaching zero for those with incomes at $60,000 and below. For example, a typical family making $120,000 will be asked to pay approximately $12,000 for a child to attend Harvard College, compared with more than $19,000 under existing student aid policies. For a typical family with $180,000 of income, the payment would be approximately $18,000, compared with more than $30,000 today. The new standard reduces the cost to families by one-third to one-half, making the price of a Harvard education for students on financial aid comparable to the cost of in-state tuition and fees at the nation’s leading public universities. The new initiative also establishes a standard that students and their families can easily understand.


Anonymous said...

Found your web site from a link at Mish's. You now have become a daily read.

Like your take on the headline news, especially after hearing the spin from CNBC and Fox Financial. Intuitive insight considering your vocation is biology.

Further topics of interest for me would be gold, inflation vs. deflation. Seems the guys over at Mish view the world through a single lense, favoring a deflationary collapse. Being of age during the seventies, the same end of the world prognosis was prevasive then as it is now. Belive me, what should have happened then and umpteen times to the present day has been delayed, postponed, mitigated and always another rabbit is pulled out of the hat.

The system is not going down without a fight. Certainly, it is no one's best interest. There are too many vested players to let that happen, and they will do what ever is necessary to the extreme to prevent it. Expect more of the same as we grind forward. Will this time be different?

Afferent Input said...

Great YouTube clip. I think if anything sums up this whole mess, it's "There's no questions. Lets get the fuck outa here."

Sparhawk said...

Hey, just wanted to leave a well-deserved "your blog kicks ass" note here. I read it often.

I also live in Massachusetts (Cambridge), late 20s engineer working in consumer electronics.

Friends of mine have recently bought real estate; I've tried to tell them not to but it's like talking to a brick wall. "It always goes up", I hear, while condos similar to the one I'm renting sell for ~$410,000 while the rent implies prices of ~$320,000.

Meanwhile some of them don't even have enough cash for an emergency fund and I watch as they become inexorably mired in credit card debt and it becomes increasingly apparent that they are underwater on their homes.

I work in consumer electronics, so I'm directly in the path of this recession, but I've got money saved, and besides, consumers will continue to spend until the credit card is ripped from their hands. Oddly, I suspect consumer electronics might be one of the last things to go...

Debbie B said...

Thanks for another great post.

Mentalic said...

Good post!!

getyourselfconnected said...

Thanks for all the kind words. I am glad so many come by often and find the content useful.
Anon, the deflation vs inflation debate is a hot one everywhere. To be honest, I need a bit more time and data to make a case for what I think, but the preliminary thought I have is the dreaded stagflation thing where you have both inflation and deflation in various sectors. You see it already in the markets with many sectors in bona fide bear markets, yet the indices are trading up year over year.
How are the sidewalks in Cambridge this morning? Tons of fun walking from the garage to my building! I think you may be right about electronics being the last thing to go, gadgets of all sorts seem more important to people now than even their morning coffee!
Thanks again to all.

Anonymous said...

Well it's almost time for me to bug out for the holidays. Wonder what will happen Friday and most of next week? Hopefully the metals hold their position through the new year.

Just a funny non economic thought/joke.

Q: Why did the Vice President's office catch fire the other day?
A: Because he was burning torture tapes to keep warm!