Bank of America is Now Mega Exposed to a Slowing Economy
Today the news of the BAC buyout of CFC (new ticker BARF?) was sort of fleshed out. I say sort of because very few details were given. This deal has an entire quarter to go before final close and any number of things can go wild until then. Rather than beat this horse to death I wanted to point out that BAC is now heavily levered to the consumer space in a time of economic slowdown and uncertainty. With the CFC mortgage exposure now factored in along with the credit card and other debt instruments BAC has out there, any real "credit event" may be amplified through BAC.
Keep this in mind when the talking heads repeat all this weekend that now is the time to buy financials. They have been saying that since August, and just because they were woefully wrong does not mean they will not stop saying the same crud. "The Song Remains the Same" to borrow a Led Zeppelin title. I imagine in the very long run that BAC will emerge as THE major credit and banking player. Short term time frame (which may be up to 5 years!) BAC is taking a risk things will not go too badly. Time will tell.
Bad Debt Fears - Only Now At the End Do You Understand?
"Young fool. Only now, at the end, do you understand. Your feeble skills are no match for the power of the dark side! You have paid the price for your lack of vision! " - Darth Sidious to Luke Skywalker as he directs Force Lightning at the young jedi.
After assuming all the defaults and debts gone bad were "contained" to the August credit scare, we were treated to the idea that huge bank writeoffs would only be a 1 quarter wonder. That led to another quarter. That lead to.. you get the idea. Now in the face of truly astonishing losses, we get this headline from today:
AP
Stocks Slammed by Bad Credit Fears
Friday January 11, 6:08 pm ET By Tim Paradis, AP Business Writer
Stocks Fall Sharply Amid Worries Over Investment Bank Writedowns, Anxiety About Earnings
NEW YORK (AP) -- Wall Street plunged again Friday amid renewed fears that the financial sector's troubles with bad credit won't soon end and that some consumers are buckling under the weight of a slowing economy. The major indexes each lost more than 1 percent, including the Dow Jones industrials, which finished down nearly 250 points.
Adding to investors' unease, Merrill Lynch might take a $15 billion hit from its exposure to soured subprime mortgage investments, according to The New York Times. The nation's largest brokerage is also said to be seeking another capital infusion to help shore up its balance sheet.
Investors also grew nervous after American Express Corp. warned that slower spending and more delinquencies on credit card payments will hamper profit throughout 2008. A profit warning from Tiffany & Co. added to Wall Street's unease about the fortitude of the consumer.
"When Amex comes out and says that some of their well-to-do cardholders are having problems making payments that's just not good news," said Brandon Thomas, chief investment officer of Portfolio Management Consultants, the investment arm of Envestnet Asset Management.
So now the market is worried about credit problems? Welcome to the party guys, grab a chair and a drink! Think the Merrill Lynch writedown is big? Charlie Gasparino reported on CNBC that sources inside the firm have told him the Citigroup write downs could be $24 billion when earnings are announced next Tuesday. Normally I do not like to quote CNBC media, but that guy has been pretty amazing with his accuracy as of late concerning possible writedowns.
While the somber realization of the problems across all kinds of debt is welcome, the almost comical reaction to what can only be termed bad news is still funny. Some random items from today:
- Washington Mutual is in so much trouble they too are looking for a buyer. That's a good thing? Another large bank with plenty of history is on the ropes and needs to be rescued and that shows things will improve?
- Citigroup is prowling the globe looking for handouts to shore up their capital base. Rumors include more money form a Saudi prince as well as possible Chines involvement. Would someone please stand up and yell out loud "Selling off major banks to hostile entities is not a good idea!" I really mean that. Saudi Princes? Communist China? I feel so much better knowing they are "saving" these banks. I am sure they will want nothing but a small percentage return on their money for their troubles.
- The multitude of stimulus package ideas is getting really silly. Let me run this through the laugh test: Americans have too much debt that they cannot ever pay back, so the fix is to create more government debt so the people can keep spending? Got that? If you do get it, leave a comment and let us all know how that works!
I should not complain too much. It has taken a year for the facts about housing and credit issues to actually be admitted to the general discussion. It may be longer until real solutions can be talked about. Keep this point in mind as the losses are nearing the One half Trillion Mark:
- A stack of $1000 bills measuring 4 inches = 1 Million Dollars
- A stack of $1000 bills measuring 67 MILES high = 1 Trillion Dollars (WOWZA!)
Note to Daytraders - Stocks go Up and Down All the Time
I was checking out some stock message boards ( I know they are dumb) and I could not believe the general mindset. Basically if a stock is going down it is soley because of "The Shorts". If a stock is going up it is because of "The Plunge Protection Team". Stocks go up and down all the time, but it is funny to watch people blame one of those two players for every tick of the tape.
Ok, time for football picks and Friday Rock Blogging!
Football Picks
The Patriots beat the Jags 38-20, in a game that is close for the first half. The Colts blowout the Chargers 31-10, in a game that is even more lopsided than the score would indicate. The Packers squeak out a win 28-24 over the Seahawks. The Cowboys return the Giants to reality with a 42-28 win.
Rock Blogging!
The Eagles with a live performance of 'Hotel California"
I have always loved The Red Hot Chili Peppers, try out "Otherside":
Meatloaf is always a good show, "Paradise by the Dashboard Lights":
I have a new poll up so leave a vote.
Have a good night.
Citigroup is prowling the globe... What is this saying that they are not finding funds here in the US? Obviously, no money here!
ReplyDeleteBARF says it all. Best comment I've seen.
Here is another take form James Sinclair at http://www.jsmineset.com/
Let us assume one of the largest mortgage entities, Countrywide, who would have certainly been a significant player in the credit derivative market, has a very major credit derivative position with Bank of America. Lets' assume that Countrywide was the entity that had the obligation to perform, but now clearly can't. If Bank of America was to buy the non-performing other side of the many transactions and Countrywide become one entity with Bank of America, as they would, would the transactions between them not evaporate in the merge? It absolutely would. What would you then have to mark down on those specific transactions? I believe NOTHING would have to be marked down any further as two sides of the transaction became one.
That would qualify the already invested $2 billion, plus whatever else needs now to be paid to Countrywide' stockholders. This would more than likely be paid in paper.
It might explain the inexplicable "why" of Bank of America putting $2 billion into Countrywide recently when Mickey Mouse could see that as a sketchy investment at best.
My comment: If you are going to take it in the shorts for the credit default swaps anyway, you might as well buy the company and hide the losses with accounting wizardry
I`ve been reading about "sovereign wealth funds" lately, some claiming that this would be what the banks need to survive the current turmoil.
ReplyDeleteOf course being a tin foiler, I cannot see this being a good thing for our nation's sovereignty in itself. After the uproar about the port deal, and this past summer's immigration bill, I would have thought that there would have been more clamor about this than what I`ve ran across.
Hey, it`s friday night, if I could add my "Star Wars" thoughts, it would be this...I remember being a kid, and waiting in line to see it, the line stretched all the way around the block (a real movie theatre, not a cineplex),and down the street for quite some distance (I was lucky, I was close enough to get in, and not be turned away).
When I was a kid, my life revolved around WWI fighting aircraft (I built models, collected literature, etc.), so when I first seen the "X wing fighter" it was like I died, and went to heaven.
The space "aerial" shots were completely off the charts, I had never seen anything like it before.
At the end of the movie, I floated out of the theatre, it was just so incredible at the time.
anon,
ReplyDeleteThanks for stopping bye and providing an excellent point of view. I love the comments section because even though I follow this stuff pretty closely, there is always more out there that can enlighten. Thanks for the content and please check back.
Watchtower,
ReplyDeleteI also remeber being a young lad (I am 31 now) waiting in line to see Empire Strikes Back. The electricity was palpable. The lightsaber duel between Luke and Vader was easily the most mesmorizing thing I have ever seen. Thanks for sharing your experience.
As a big Sinclair fan there is a question or two about cancelling out counter party risk. If BA had the risk and insured or sold it to CW, if CW held the risk then BA has just re-aquired it and it is the same as if CW went bk. If CW passed on the risk BA still has some insurance. So BA is at best no better off than it was. If CW had the risk and BA aquired it and held it, there is no change in BA's position. If BA passed the risk on there still seems to be no change in BA's position.
ReplyDeleteNow if CW was the risk generator which seems likely and parties other than BA are the counter parties that bought the risk, BA in assuming those positions has new counter parties that they did not originally sellect. If those counter parties fail when BA goes to collect when losses occur the losses will accrue to BA and no longer to the creditors of CW (assuming they really are bk), so if you are a creditor to CW you can sing a happy song.
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ReplyDeleteIl semble que vous soyez un expert dans ce domaine, vos remarques sont tres interessantes, merci.
ReplyDelete- Daniel