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Here is a quip from an email that I recieved earlier that prompted me to explain how I fell about the I banking industry now:


Longer term, politically the Fed may be forced to cut them off --- but we are obviously quite a ways away from that happening just yet. (referring to the I banks that just got access to the Fed window)

Great call on Bear. If these guys can now submit almost anything to the fed window --- munis, mortgages, etc. and fund at FF+25, doesn't that take funding off the table and then really it becomes an issue of the credit quality of the collateral. In past banking cycles --- low Fed funding almost always reliquified the banks, and I assume it will work again this cycle.

Is it time to move on to the next stage --- companies that are going to experience credit issues on assets but can not fall into the arms of the central bank?


Well, to begin with the I banks are holding a lot of stuff they can’t submit to the Fed. They were also starving for liquidity despite what they said (ex. Bear Stearn’s Schwartz on CNBC, who is bound to get sued for those statements). This is why they all hit the window the day after it was opened. The industry in general is heading for a downturn. Many can’t be patient, but a macro bet against the investment banking business is not a bad bet at all, particularly if you catch it after a euphoric rally like we just had. Look at GS and LEH stock already, less than 24 hours after “beating the Street”. MS is moving lower too.

I am having my analysts look into exactly where the Fed assistance will or will not help the banks and I will probably post my findings some time late next week. The fed has mitigated the Bear Stearns style run on the bank, but all is still not well. There is a lot of counterparty credit risk abound, and the I banks shoulder most of it. They are the ones exposed to the parties that cannot run to the Fed!

If I were a Bear Stearns employee or shareholder I would opt to force the firm into bankruptcy protection over selling for 1.25% of last year’s share price. At $2, the sales price is analogous to an under priced put option for the shareholders to hold the threat of bankruptcy over the Fed’s head. Once in bankruptcy protection, the prime brokerage clients and CDS counterparties will try to run for cover and all hell will break loose with the other banks. I think you realize there are a lot of under capitalized CDS counterparties abound that in no way could pay off on these things. These are the guys that use one CDS to hedge against another. Once the domino effect gets going…

With all of that being said, you are right about looking for the other weak credit companies. I need to find the TMAs and Carlyle Capitals. Theoretically, the I banks should extend their new found credit to these companies, but I doubt it would happen.

In addition, I listen to the talking heads on CNBC who say that we need to stabilize housing prices in order to move forward, blah, blah, blah.... I consider this to be total nonsense and indicative of extreme ignorance in regards to what the problems are in the macro sector and how we got here in the first place.

These many issues that we see around us will not go away until housing prices go back to historical norms. If you stabilize prices before prices go back down to where they should be, you will simply have another bust - on top of the one that we just had.

It is as simple as this. People are not going to buy houses until they can afford to buy houses. Housing prices have outstripped real incomes by multiples. This relationship is what must be stabilized and reversed.