Tuesday, December 4, 2007

Tuesday Bad News Tsunami

Another late night due to the tough game the New England Patriots were in last night. That makes two weeks in a row that I saw a team play totally beyond their capabilities (Ravens last night, Eagles last week) and still come up short. This Patriots team is very, very good.

Compare and Contrast
The current debacle is accelerating towards a very ugly collapse. What can and should be done through various outlets is difficult to know for sure. Compare and contrast two different viewpoints from two authors that I respect very much. First up is Nouriel Roubini, who was WAY ahead of the mortgage blowup:
http://www.rgemonitor.com/blog/roubini/230471
Roubini call for aggressive rate cuts throughout the world banking system. He does not think this will forestall a US recession, but believes the cuts will limit the damage.
Second up is Karl Denninger at Market Ticker:
http://market-ticker.denninger.net/2007/12/welcome-to-d-word.html
Denninger advocates a total cleansing of the system through price discovery and loss honesty.
Two very different ideas. I lean more towards the second (Market Ticker) plan. Yes, it would be very painful indeed, but is there really any other way to cleanse the issues at hand? I suggest reading both posts and thinking about what YOU would do.

Bad News Tsunami
The hits just kept on coming today! It has long been my working thesis that the market participants were trying to hold on until the new year to really let the fur fly but the news keeps coming fast and furious! To the headlines:
AP
Fannie Cutting Dividend, Selling Stock
Tuesday December 4, 5:47 pm ET
Fannie Mae Cutting Dividend 30 Percent, Selling $7 Billion in Preferred Stock to Raise Capital
WASHINGTON (AP) -- Mortgage finance giant Fannie Mae on Tuesday announced it was cutting its dividend 30 percent and selling $7 billion in special stock to raise additional capital.
"Special" stock huh? That must mean the ultra exclusive fairy land shares that might be worth something someday. A 30% cut in the dividend as well. Fannie is in trouble, and there is no other way to look at it.

from Reuters:
Subprime bond losses to climb to 20 pct -analysts
"DANA POINT, Calif., Dec 4 (Reuters) - Expected losses for troubled mortgages known as Alt-A loans are now more than double earlier forecasts and losses for subprime bonds originated in 2006 may climb to 20 percent or more, analysts said on Tuesday.
Moody's Investors Service on Tuesday raised its forecast for expected losses for U.S. mortgages known as "Alt-A" residential mortgage debt. Loss estimates for Alt-A bonds reviewed by Moody's increased by an average of 110 percent from initial expectations, with some loss estimates up by as much as 270 percent, Moody's said in a report.
Alt-A mortgages are made to borrowers with credit scores above subprime but who have other risky attributes, such as no proof of income or lack of an equity stake in the property."

This story goes a long way towards explaining why the banks and the FED/Treasury are so frenzied about the housing market. The "Subprime Containment" song was always a ruse, and now we are starting to see that loans that were packaged as high quality are in fact bogus beyond belief.

From Bloomberg:
Citi's Losses `Greatly Exceeded' Profits for Subprime (Update1)
By Gonzalo Vina and Sebastian Boyd
Dec. 4 (Bloomberg) -- Citigroup Inc., the biggest U.S. bank by assets, lost more money than it made from financial instruments based on U.S. subprime mortgages, a senior company executive said in a meeting at the British Parliament.

William Mills, chief executive officer of Citigroup's markets and banking division in Europe, said his bank had suffered "reputational damage'' from the fallout even though the New York-based company had made "adequate disclosures'' to customers who were trading subprime-related securities including collateralized debt obligations.
"Our losses greatly exceeded the profits we made in this field over several years,'' Mills said at a hearing of the Treasury Committee today.

Reputation damage? Who asked you to do them a favor and lend out billions of dollars to people that did not provide income statements, that made no down payment, and that had no intention of ever paying you back? I'm sorry the FED did. I apologise.

Something Has to Give
Right now the markets make no sense. The banks, the FED, the Treasury, the government, and Wall Street are running around like chickens without heads trying to do something, anything to stop what is going to happen. The DOW and Nasdaq continue on as if everything is all right. Something has to give. The FED is preparing a slash and burn move on interest rates, and the markets are UP solidly for the year. You cannot have stock prices move up in anticipation of FED easing, when they never were down to reflect a troubled economy in the first place! The dollar and Gold cannot seem to make up their minds about anything. Things are disjointed right now, and nothing is making sense. This cannot go on too much longer, but again I think it will until the New Year. 2008 promises to be exciting from day 1.

Have a good night.

5 comments:

Watchtower said...

You know what scares me?
I`m afraid that when we really start to go down, something out of the ordinary will happen, and then we will see a time that makes the Great Depression look like it wasn`t so bad. (trust me, the older generation that I have talked to said it was not a picnic, but at least they were more self reliant back then)

Anonymous said...

Ditto!

G

misanthrope said...

I think that rather than a bust to this boom, the economy will be micromanaged with bailouts behind the scenes and political spin from the talking heads.

TPTB know that we have a nation of nervous dependent children with little knowledge of how things work economically. Their grandparents and gret-grandparents had a sense of self-sufficiency and personal accountability that is largely absent in our modern populace. We will have to be coddled and reassured so that we don't riot and so that we keep spending what little we have until the next boom comes along.

So, I think instead of catching Ebola and bleeding out, the economy will be infected with the flesh-eating virus. We'll lose a lot of skin and a fair amount of muscle, but the patient will live and eventually run again.

Anonymous said...

That could be true! But in most cases a patient that gets a nasty flesh eating virus ends up an amputee. Mind you it beats death but that depends on what part of your anatomy was severed off.

G

watchtower said...

@ Misanthrope, I hope your right, but I can`t help from wondering what Russia and China are thinking about our current situation.
I do not believe that they are our friends.