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Why financial stocks will dive this week on the Freddie / Fannie bailout news
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This Link is located in the Public Channel Housing Bubble and Bear Links.
Posted by ian 300 days ago (youtube.com). Views: 688
Tags: credit crisis banks fannie mae freddie mac |
| Related Tags: economics stock market housing bubble recession bailout gold wall street |
Logically, a serious selloff in financials is what we should get. Here's why:
* Preferred is basically worthless, as is common. You get an 80% position (effectively) by the government, and no dividends on either, the premium for preferred stock disappears for all intents and purposes, and the common may as well be delisted. Since both Presidential candidates have said that these firms will not be allowed to exist in present form, buying or owning either is idiotic. If there's no stampede to the door on these shares at the bell Monday, I officially crown the Equity Markets "Dunce Of The Universe."
* Any institution that holds preferred just got it in both holes. Common has been basically worthless for a while, but preferred has been holding up much better, only losing ~30-50% of its value (instead of 90%). Forget that as of Monday. This will force more lending standard tightening across the board in community and midsize banks.
* The existing GSE MBS is not guaranteed, and the "back door" interest coupon payments along with refusal to recognize losses will immediately end. Treasury will probably inject however much capital they need to prevent those losses from being recognized, however. Senior and Subordinated corporate debt is being explicitly supported. This is, effectively, a "take over" of $7 trillion worth of this debt onto the US Balance Sheet. Treasuries are likely to NOT like this - at all.
* The total losses from this boondoggle to be "eaten" by the Taxpayer are likely to exceed $500 billion over the next couple of years. The spread on new MBS issuance will mitigate this, but not by much - these firms might (MIGHT!) earn $20 or $30 billion over the same time. Hell, give 'em $50 billion. That's still ten percent or less of the loss that will be absorbed. You are going to eat it.
* How did this happen? Simple - Morgan came in and "reclassified" some of their so-called 'temporary' impairments into permanent ones, wiping out their capital. Now, the question you better ask, is how many other financial institutions have similarly not taken writedowns on similar positions? "What is every major financial, Alex?"
* Got Level 3 assets? Guess what? You're at risk of having the same thing done by Treasury. All of you. This is positive? Uhhhhhh...
* Paulson has been proven a liar. Two months ago he said he was going to keep these firms in their present form. He lied.
* The bond market should react by forcing treasuries much higher in yield. Yes, the spread will narrow to near nothing, but it should happen by the Treasury market treating this as a doubling of the debt of the United States - because it is. This, if it occurs, will force all borrowing costs higher, which is exactly what Paulson said he was "a-feared" of if Fannie and Freddie collapsed.
More analysis by Karl Denninger.
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ian said |
| 300 days ago |
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Not protecting the $36 billion in preferred stock = toast for financial stocks
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadv...
Not protecting the $36 billion in preferred which was mostly owned by the banks is a huge negative for financial equities. Here is a quote from the Treasury today.
There is definitely some nervousness. From the statement:
'The agencies encourage depository institutions to contact their primary federal regulator if they believe that losses on their holdings of Fannie Mae or Freddie Mac common or preferred shares, whether realized or unrealized, are likely to reduce their regulatory capital below "well capitalized." The banking agencies are prepared to work with the affected institutions to develop capital restoration plans consistent with the capital regulations.'
Also, given this part and the fact that the ambiguity has moved from FNM/FRE to the treasury in terms of how much this is going to cost you'd think treasury yields will have to climb:
"Our nation has tolerated these ambiguities for too long, and as a result GSE debt and MBS are held by central banks and investors throughout the United States and around the world who believe them to be virtually risk-free. Because the U.S. Government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and MBS."
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ian said |
| 300 days ago |
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Pesky Facts
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_U/threadv...
BSC, survived the great depression, now gone. The government came in to help.
FNM and FRE, the backbone of our troubled housing and mortgage system, shareholders incinerated. The same government is moving in to help.
IndyMac, gone. CFC, gone (absorbed).
FDIC list of banks in danger grew 20% last month. The more money the government uses on bailouts, the more companies are lining up for theirs.
Banks are selling off whatever they can to raise cash. While LEH was negotiating a sale with a Korean group, one of the commodity funds they were heavily invested in went belly up. The Koreans walked away.
In spite of all the government help, the Dow is down 3,000 points in less than a year and we are still in official bear market territiory.
Unemployment flew through 6% and those who closely watch this believe it will go higher. Cheaper mortgage rates are not what they need.
We are losing jobs at the fastest rate since the depression. GM, Ford and Chrysler are burning through more cash than the budget of many medium sized countries around the world.
Some people have been waiting for the magic turnaround because they refuse or are incapable of seeing or believing in facts, maybe for political reasons, I don't know. Their epiphany may be the black swan event. They rush in to buy every time the magic bullet is fired from the starters gun that signals we have seen the bottom and the financials are now healthy. Then we have rallies in financials that last for a few days, usually less than a week.
There have been 7 or 8 of these rallies just this year. In that time UYG has gone from $73 to $21.
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