Tuesday, 08 April 2008 01:00

Builder Bailout Recap

When I get the time, I (or one of my astute readers) will revisit this homebuilder bailout issue (for the third time) since it appears it has cleared the Senate.

For past opinions, see The Government Bailout of the Homebuilders May Not Work and Interesting Response to the Government Homebuilder Bailout

Be aware that if this provision becomes law, it will incentivize builders to dump assets at levels and prices that were previously imprudent and economically unfeasible in an attempt to reclaim cash in the form of back taxes. This will exacerbate the strain on the financial sector since it is the devalution of real assets that triggered much of this mess in the first place. Property values will drop faster, property value led defaults will accelerate, and MBS and related securities, products and pools will get hit that much faster and harder as well.

I commented on this last year in the Builders, Banks and Bubbles series. For a gander of how deserving the builders are of a tax break that dwarfs the tax break given to actual homeowners, see Voodoo, Zombies, Lennar’s Off Balance Sheet Accounting and Other Things of Mystery & Myth.

Published in BoomBustBlog

This is the update to my forensic deep dive analysis of Morgan Stanley. It is still, in my opinion, the "riskiest bank on the street". A few things to make note of as you browse through my opinion and analysis:

  • Morgan Stanley still has the most illiquid assets as a proportion to net tangible equity of any bank on the Street, save Bear Stearns.
  • I believe Morgan Stanley still has the most net counterparty exposure
  • Morgan Stanley has significant exposure to loss through off balance sheet vehicles
  • Morgan Stanley has misleading accounting profits through FAS 159 which allowed it to overstate its economic profit by roughly 50%
  • The investment banking industry's high leverage, high risk, high compensation, low liquidity, low transparency business model was ripe for disintermediation though a significant credit crisis. What we have here ladies and gentlemen, is a severe and significant credit crisis.
  • This is my thoroughly researched opinion, and is in no way intended to be, or should be taken as, investment advice.

My "uber buyside", outside the box, realistic perspective of leverage, risk, and solvency produced the Breaking the Bear analysis in January which, in hindsight, turned out to be quite prescient. I am just as confident in my outlook on Morgan Stanley as I was on Bear Stearns. That's pretty much my 50 cents. No, I am not that wanna be hip hop guy. It was initially my 2 cents, but I levered up 25X! Now, let's get on with the analysis. For those who want to view it in full fidelity with all pro formas intact, download the pdf: icon Morgan Stanley_final_040408 (1.38 MB), otherwise, read on...

Published in BoomBustBlog
Friday, 04 April 2008 01:00

Funny CLO business at Lehman

From Bloomberg, we have a case where Lehman has quickly degrading assets that are producing significant losses which it is selling to a shell entity type that has caused tens of billions of losses for other banks - all in an order to get this trash off of their balance sheets (althouth the risk is still with the company). Follow closely:

Lehman Creates CLO to Get Buyout Loans Off Its Books

Lehman Brothers Holdings Inc., seeking to get high-risk, high-yield loans off its books, created a $2.8 billion collateralized loan obligation. Oh no, here we go again!

Freedom CLO contains 66 loans, including debt the fourth- largest U.S. securities firm underwrote for buyouts, according to the indenture filed last week. New York-based Lehman will hold a piece of the $565 million subordinated note, the riskiest portion, according to the term sheet. Here come those losses that no 1one saw coming, again... The bank sold $2.2 billion of bonds with investment-grade ratings. Oh No, here we go again. Doesn't anybody learn there lessons. Investment grade ratings on junk bond debt. Lawyers, you guys are not on the ball. There has to be some litigation in here somewhere.

Lehman joins Deutsche Bank AG and Credit Suisse Group in creating CLOs to reduce loans on their books without selling them in the open market. But wait a minute. How do you reduce loans on your books without selling them to the market. Oh! Silly me. Just take them off of your books. Duhhh!!!Whose gonna know except for a couple of nosy investors and bloggers. Hey, the highly accomodative government has been letting us get away with this nonsense for years, despite the fact it's blowing up the economy. Banks have $200 billion of buyout debt they can't easily sell after the price of leveraged loans tumbled to 88.8 cents on the dollar from 100 cents on the dollar last June, according to Standard & Poor's.

``Banks are focused on managing their exposure,'' said J. Paul Forrester, the Chicago-based head of the collateralized debt obligation practice at law firm Mayer Brown LLP. ``Balance sheet CLOs allow them to reduce the risk to the size of the subordinated tranche they are holding.'' And exactly how is that risk reduced. I mean, it has to go somewhere, doesn't it. Did they sell the assets to the CLO above market value? If so, then the CLO is starting out underwater. Are they selling tranches out of the CLO to investors? If so, who would be stupid enough to buy tranches of cashlow from assets that nobody wanted in the first place and were purchased by the trust at inflated prices? Oh, who indeed... I am sure the "equity" tranche held by Lehman will be eaten up nigh immediately once the corporate defaults start coming down the pike - and they will start coming as soon as the inability to refinance junk comes home to roost amid our current recession/economic hard landing/productivity and growth pullback/credit crisis/housing bust or whatever the hell you want to call it. Then again, I guess Lehman says once we take our 100%, $565 million subordinated note loss, we can wash our hands of this stuff - except for the fact that the risk had to go somewhere. Did they actually find somebody dumb enough to take on that much risk after all that has happened in the CDO market, knowing leveraged loas are next? Did Lehman offer the financing to this CLO in order for it to buy these assets? Did Lehman provide a backstop credit line? If so, then isn't the economic risk still inherent in Lehman's stock despite the charade of "moving" it off of the balance sheet? Hey, I'm just a neophyte asking simpleton questions in a quest of elucidation and clarification.

A Lehman spokesman in New York, Randall Whitestone, declined to comment.Oh, but of course!

Deutsche Bank created two balance sheet CLOs, both named Genesis, in September and November, according to Bloomberg data. Credit Suisse formed the $1.7 billion Integral Funding in September.

First Data, TXU

Freedom contains loans to buyouts including KKR's First Data Corp., the Greenwood Village, Colorado-based payment processor, and power producer TXU Corp. of Dallas, purchased by KKR and TPG Inc. TXU was renamed Energy Future Holdings Corp.

The portfolio also has loans that couldn't be sold to investors (so they sell them to the CLO with Lehman financing and attempt to sell the cash flow tranches to some sucker, or maybe not - exactly how are they offsetting that risk and those bad assets again???), including Sequa Corp., purchased in December by the Carlyle Group, and bank lines for companies such as Countrywide Financial Corp. (Hey, where's the prospectus, now that's a deal I want to get a piece of. For any creative bankers out there, email me - I want to know if you can short the Freedom CLO tranches), the largest U.S. mortgage lender, and Imperial Tobacco Group Plc, the maker of Davidoff and West cigarettes, according to the prospectus.

Loans for First Data trade below 90 cents on the dollar. The Countrywide five-year revolving bank line is priced at 79.5 cents on the dollar, according to the prospectus. Like I stated earlier, this sounds like one hell of a deal!

Freedom CLO sold the bonds in a private placement. The $2.2 billion in notes will pay interest of 2.25 percentage points above the three-month London interbank offered rate. That debt is rated A2 by Moody's Investors Service, the sixth level of investment grade, and an equivalent A from Standard & Poor's. Oh yeah, investment grade junk. Is that how you spell oxymoron? Moody's and S&P are very good at rating this stuff. Look what they did for the MBS CDOs. Here's an interesting excerpt from Financialweek : "None of the 80 AAA securities in ABX indexes that track subprime bonds
meet the criteria S&P had even before it toughened ratings
standards in February, according to data compiled by Bloomberg. A bond
sold by Deutsche Bank in May 2006 is AAA at both companies even though
43% of the underlying mortgages are delinquent.
Sticking to the rules would strip at least $120 billion in bonds
of their AAA status, extending the pain of a mortgage crisis that's
triggered $188 billion in write-downs for the world's largest financial
firms. AAA debt fell as low as 61 cents on the dollar after record home
foreclosures and a decline to AA may push the value of the debt to 26
cents, according to Credit Suisse Group.
“The fact that they’ve kept those ratings where they are is
laughable,” said Kyle Bass, CEO of Hayman Capital Partners, a hedge
fund that made $500 million last year betting lower-rated
subprime-mortgage bonds would decline in value. “Downgrades of AAA and
AA bonds are imminent, and they’re going to be significant.

Private Equity

The unrated subordinated note pays interest generated by investments in the loans after the rated debt has been repaid. The loans pay an average coupon of 3.5 percentage points above three-month Libor, currently 2.73 percent.

Blackstone Group, Apollo Management LP and Kohlberg, Kravis Roberts & Co., all based in New York, were among the private equity firms that negotiated more than $370 billion in financing to back acquisitions before losses on subprime-related mortgage securities spread to loans, bonds and CDOs.

CDOs, which have helped fuel $232 billion in bank writedowns since the beginning of 2007, repackage assets into new securities with varying risks. CLOs, a type of CDO, repackage buyout loans into new securities.

CLOs bought 60 percent of buyout loans before credit markets froze last year, said Mark Shafir, the global co-head of mergers and acquisitions at Lehman, in an interview last week on Bloomberg Television.

Debt Backlog

Unable to sell primarily to CLOs, banks have reduced the buyout debt backlog by selling loans at discounts to face value to hedge funds and private-equity firms. Several transactions have also failed, such as J.C. Flowers & Co.'s $25.3 billion acquisition of SLM Corp., also known as Sallie Mae. An acquisition of San Antonio-based Clear Channel Communications Inc. may be canceled over a dispute about bank financing.

This year, banks have sold $28.5 billion of CDOs backed by high-yield, high-risk loans, versus $62 billion for the first quarter of last year, according to JPMorgan Chase & Co. data. Lehman's CLO accounted for 40 percent of total March volume, according to an April 2 report from Wachovia Corp. analysts led by Brian McManus.Wow, would you want to buy into a vehicle that almost cornered the market in junk debt that nobody wanted?

Lehman reduced its LBO backlog by $6.1 billion to $17.8 billion since the beginning of the year, Chief Financial Officer Erin Callan said on a conference call with investors on March 18. The bank booked losses of $500 million on leveraged loans during the quarter, she said.

Lehman this week sold $4 billion of convertible preferred shares to shore up capital depleted by the U.S. housing slump.

Published in BoomBustBlog

John Hussman of the Hussman Funds writes :

The provision of a "non-recourse" loan is outside of the Fed's mandate under the Federal Reserve Act. Specifically, the Fed agreed to provide a $30 billion “non-recourse loan” to J.P. Morgan, secured only by the worst tranche of Bear Stearns' mortgage debt. This is not in fact a loan - if it were, J.P. Morgan would be required to pay it back, unless J.P. Morgan itself was to fail. Instead of a loan, this is a "put option," which protects J.P. Morgan from losses on the collateral, regardless of J.P. Morgan's own financial status. You've heard an iteration of this from me several times.

2) The effect of the Fed's guarantee is not to protect the public, but to protect Bear Stearns' bondholders. By purchasing Bear Stearns, J.P. Morgan will take on the responsibility for paying off about $75 billion in claims to the short- and long-term bondholders of Bear Stearns. Yet J.P. Morgan requires only $30 billion from the Fed do this. This suggests that Bear Stearns' "book" of positions (excluding liabilities to Bear's own bondholders) would be worth at least $45 billion if transferred, netted, or otherwise settled. There is no reason that the public should take a loss at all. Rather, the book should indeed be sold to JPM or a competing acquirer, and the proceeds (probably far in excess of $45 billion) should be used to pay the senior claims of bondholders. Any excess over $75 billion would be a residual for stockholders. Simply put, the bondholders of Bear Stearns, not the public, should absorb any loss.

The deal is being defended on the notion that the global financial system would have "failed" had Bear Stearns not been rescued. But the orderly transfer, netting and settlement of financial derivatives and other "qualified financial contracts" (QFCs) is precisely what Title IX of the Bankruptcy Act of 2005 was written to facilitate. In effect, the Federal Reserve and the Treasury decided to ignore existing law and provide a bailout to the benefit of Bear Stearns' bondholders at public expense.

The clear historical role of the Federal Reserve has been to manage the composition of Federal liabilities (by varying the mix of Treasury securities and monetary base - currency and bank reserves - held by the public). The recent transaction is a dangerous break from that role, in which unelected bureaucrats are committing public funds to facilitate private business transactions and selectively defend the holders of corporate securities. Only Congress has the Constitutional right, by the representative will of the people, to commit public funds. The Bear Stearns deal is a dangerous precedent and a dilution of Congressional prerogative.

Investors should not be in constant fear that the global financial system will “melt down” in the event of the bankruptcy of one large financial company or another. Though Bear Stearns apparently had the highest gross leverage (total assets to shareholder equity) among the large financials, and thereby provided a thin wall of defense for its stockholders, there was never a significant risk that the company would default on its obligations to customers and counterparties. Large U.S. financial companies are sufficiently well-capitalized that even in the event of outright bankruptcy, the only parties subject to loss are the stockholders and the bondholders of that particular company. The only instance in which this would not be the case is if the book value of the company was negative even after zeroing out all stockholder equity, long-term debt, and unsecured short-term debt.

In short, investors should have confidence in the ability of the capital markets to function without the need for government bailouts at public expense.

Click the link to see the rest of his commentary.

Published in BoomBustBlog
Friday, 04 April 2008 01:00

Lehman TV

I am impressed by the energy of this Mr. Mortgage guy! He's right about Lehman's lending practices as well. Unlike Bear, they were vertically integrated and actually underwrote loans to feed thier MBS pipeline. They were quite generous in giving out mortgages as well. Remember, I used to be a residential real estate investor in the NYC metro area. I know much of this from first hand experience. Methinks Lehman is next for a full scale forensic analysis. I will post a full blown forensic of Morgan Stanley, pt. 2 in a few housrs, including a decent amount of their so-called hedged level three assets, as granular as the CUSIP numbers for the securities.

writeFlash({src:'http://www.youtube.com/v/tebO2v3qBVY&hl=en',wmode:'transparent',bgcolor:'#ffffff',width:'425',height:'350'});

Published in BoomBustBlog
Thursday, 03 April 2008 01:00

Super SIV, part deux

All of these schemes and machinations... Why don't they just take their medicine and sell them at market value - to the market! From FT Alphaville:

Wall St banks to ring-fence bad assets

Wall Street banks are drafting plans to separate troubled assets from the rest of their businesses in efforts to ring-fence problems and restore confidence in the financial sector. A number of US firms are looking to follow the example set by UBS, which this week put securities linked to US mortgages into a separate subsidiary with a view to reducing its exposure to the troubled assets, which have been responsible for more than $30bn of losses so far. The banks – among them Lehman Brothers - aim to move at least some troubled assets off their balance sheets by selling large stakes in the funds to outside investors.

Let's hear your opinions. Will it work this time around?

Published in BoomBustBlog

Sporting a haircut of about 55%, Centex sells land for less than half of book value to get the tax refund, ala Lennar. This should go to show you how much the actual book of these companies are worth. This is two companies now, and counting. I think it's safe to mark all homebuilder book down 55%.

______________________________

Item 1.01 Entry into a Material Definitive Agreement.
(a) Credit Agreement. The information set forth under Item 2.03 of this Current Report on Form 8-K is hereby incorporated in this Item 1.01 by reference.
(b) Sale of HomeTeam Services. Centex Corporation, a Nevada corporation (“Centex”), does not view the asset purchase agreement (referred to in Item 8.01) to be a material definitive agreement within the meaning of Item 1.01 of Form 8-K. If it is determined, however, that such agreement is a material definitive agreement within the meaning of Item 1.01, the text of Item 8.01 describing such agreement is incorporated in this Item 1.01 by reference.
(c) Sale of Land Portfolio. On March 31, 2008, Centex Corporation, a Nevada corporation (“Centex”), announced that Centex Homes, the principal subsidiary through which Centex is engaged in homebuilding activities (“Centex Homes”), sold a portfolio of developed, partially-developed and undeveloped properties to a joint venture, Corona Land Company, LLC (“Corona Land Company”), that is led by RSF Partners, Inc., and includes funds under management by Farallon Capital Management, L.L.C., Greenfield Partners, LLC and certain of their affiliates (“Corona Investor”). The transaction was effected in a multi-step transaction.
On March 29, 2008, Centex Homes entered into a Contribution Agreement with a subsidiary of Corona Land Company (“Corona Real Estate”) pursuant to which it transferred to Corona Real Estate the outstanding equity interests in 27 special purpose entities that hold a diversified portfolio of residential land and related assets that will yield approximately 8,500 partially developed or finished lots in 27 communities located throughout the United States (the “Corona Properties”). On March 31, 2008, Centex Homes entered into a Member Interests Purchase Agreement with Corona Land Company pursuant to which Corona Land Company purchased all outstanding equity interests in Corona Real Estate from Centex Homes for a sales price of approximately $161 million, exclusive of transaction costs, subject to certain adjustments. Under the terms of these agreements, Corona Real Estate generally assumed all liabilities and obligations relating to the Corona Properties, including future development obligations and all liabilities in respect of bonds and letters of credit securing obligations to perform work related to the Corona Properties but excluding specific liabilities that the parties have agreed will be retained by Centex Homes. These agreements contain customary representations and warranties, including representations and warranties by Centex Homes relating to the Corona Properties. Centex Homes has agreed to indemnify Corona Real Estate against losses arising from breaches of such representations and warranties, subject to certain limitations.

Published in BoomBustBlog
Friday, 28 March 2008 01:00

Subprime 101, in stick figure simplicity

This is actually pretty funny, most likely because I am short and not long this stuff. If you have Powerpoint or a free Powerpoint player, download pps what_happened_in_stick_figure_simplicity 2.44 Mb.

Published in BoomBustBlog
Wednesday, 19 March 2008 01:00

KB Home and Phantom JVs

This was submitted by BoomBustBlog member, Christopher Alleva. See supporting documentation for download here: pdf Crown Village Deed of Trust KB-Centex-LaSalle (3.41 MB) and pdf KB Home Crown Farm Sale Deed (4.64 MB).


Nagging questions persist about the depth
and breadth of the homebuilders' exposure to special purpose affiliate
joint venture land development liabilities. Be forewarned, discussions
of financial accounting are rather dry. Oliver Wendell Holmes, it's
not. Reviewing KB Home’s disclosures for Q3 and the 11-2007 annual
reports, it appears that they reduced debt in JVs by $180 million to
$1.54 billion and reduced their guarantee exposure by $130 million.
Tellingly, the JV asset value disclosure shown in the Q3 report was
left out of the annual report. Presumably, this omission was
made because total JV liabilities now exceed the assets (see SEC
Reports Excerpts Below).

These disclosures prompt several important
questions: KB states that guarantees extended to JVs allow them to gain
more favorable terms. While it is unclear from the SEC disclosures, it
appears that there is approximately $1.2 billion in non-recourse JV
debt as of 11-30-2007. Is there an implicit guarantee from KB on these
loans? Did KB hold themselves out as a backstop to induce the lender to
make these loans? It is beyond my comprehension how a reader of these
financial statements can make meaningful qualitative judgments
regarding the financial condition of KB Home.

While KB's SEC disclosures are wholly
inadequate, I uncovered details of a JV transaction in suburban
Washington D.C. that offers a window into the phantom JVs. Through land
records, news accounts and other sources I have pieced together the
details of a large JV they undertook with Centex. In the halcyon days
of 2005, KB purchased 180 acres in Gaithersburg Montgomery County with
Centex. Amidst the hoopla, now ousted CEO Bruce Karatz wowed the media
with the company's recreation of the TV Simpson family's neighborhood
in Las Vegas and a celebrity endorsement deal with home decor diva
Martha Stewart. All this hype and above all the sensational land
transaction intended with one purpose in mind- zoom the stock price.

Eventually the property will be entitled
for 2200 units. When the KB JV took title, it was not much more than
well-located raw land. It will take at least three years to finish
subdividing and another year after that before any unit deliveries. The
transaction was recorded at $137 million but they actually bought it
for $200 million because they took it on an assignment. There are at
least another $25 million in exactions associated with the approval of
the subdivision. At 10% interest, they will have another 80 million of
interest and $8 million in taxes during the 4 years before any
deliveries. Throw in another $12 million in professional fees for
engineering, legal and planners, and you can adduce that they will have
$325 million in the ground before dollar one of revenue.

Selling at 220 units a year it will take
10 years. Imputed interest over this period at 10% works out to $165
million bringing their basis to $223,000 a lot. Add civil work at
$52,000 a unit and your all in lot cost is $275,000 a unit. A barely
acceptable lot cost ratio is 33%, which means the actual homes have to
sell for at least $775,000. That's almost 10X the median Montgomery
County income.

All that said, rumor has it that KB and
Centex are dumping out of this mess of their making. LaSalle has a $200
million note. My guess is that it's worth between $75 and $100
million. Of course, this is one of those off b/s JVs, a $50 million
liability apparently not disclosed anywhere. This is just one market at
50/50 KB and Centex they have at least $50 million of exposure each.
In addition, this is cash exposure. Are the rest of the JVs similarly
situated? Enquiring minds want to know. Is this specific JV indicative
of the others land deals? Will KB be compelled to recognize and
liquidate large off balance sheet liabilities to survive. For
investors, the alarming prospect is not knowing how much and when these
obligations will return to the nest.

Footnotes

1.) KB Homes 10K Annual Report

The Company conducts a portion of its land
acquisition, development and other residential activities through
unconsolidated joint ventures. These unconsolidated joint ventures had outstanding secured construction debt of approximately $1.54 billion
at November 30, 2007 and $1.45 billion at November 30, 2006. In certain
instances, the Company provides varying levels of guarantees on the
debt of unconsolidated joint ventures. When the Company provides a
guarantee, the unconsolidated joint venture generally receives more
favorable terms from lenders than would otherwise be available to it.
At November 30, 2007, the Company had payment guarantees related to the
third-party debt of two of its unconsolidated joint ventures. One of
these unconsolidated joint ventures had aggregate third-party debt of
$320.4 million at November 30, 2007, of which each of the joint venture
partners guaranteed it’s pro rata share. The Company’s share of the
payment guarantee, which is triggered only in the event of bankruptcy
of the joint venture, was 49% or $155.2 million. The other
unconsolidated joint venture had total third-party debt of $6.2 million
at November 30, 2007, of which each of the joint venture partners
guaranteed it’s pro rata share. The Company’s share of this payment
guarantee was 50% or $3.1 million. The Company’s pro rata share of
limited maintenance guarantees of unconsolidated entity debt totaled
$103.8 million at November 30, 2007. The limited maintenance guarantees
only apply if the value of the collateral (generally land and
improvements) is less than a specific percentage of the loan balance.
If the Company is required to make a payment under a limited
maintenance guarantee to bring the value of the collateral above the
specified percentage of the loan balance, the payment would constitute
a capital contribution and/or loan to the affected unconsolidated joint
venture.

2.) KB Homes Q3 2007 10Q Report

The Company conducts a portion of its land
acquisition, development and other residential activities through
participation in unconsolidated joint ventures in which it holds less
than a controlling interest. These unconsolidated joint ventures
had total assets of $2.75 billion and outstanding secured construction
debt of approximately $1.72 billion at August 31, 2007.
In certain
instances, the Company or its subsidiaries provide varying levels of
guarantees on the debt of unconsolidated joint ventures. When the
Company or its subsidiaries provide a guarantee, an unconsolidated
joint venture generally receives
more
favorable terms from lenders than would otherwise be available to it.
At August 31, 2007, the Company had payment guarantees related to the
third-party debt of three of its unconsolidated joint ventures. One of
the unconsolidated joint ventures had aggregate third-party debt of
$450.6 million at August 31, 2007, of which each of the joint venture
partners guaranteed its pro rata share. The Company’s share of the
payment guarantee, which is triggered only in the event of bankruptcy
of the joint venture, was 49% or approximately $218.5 million. The
remaining two unconsolidated joint ventures had total third-party debt
of $14.6 million at August 31, 2007, of which each of the joint venture
partners guaranteed its pro rata share. The Company’s share of these
payment guarantees was 50% or $7.3 million. The Company’s pro rata
share of limited maintenance guarantees of unconsolidated entity debt
totaled $126.3 million at August 31, 2007. The limited maintenance
guarantees apply only if the value of the collateral (generally land
and improvements) is less than a specific percentage of the loan
balance. When the Company is required to make a payment under a limited
maintenance guarantee to bring the value of the collateral above the
specified percentage of the loan balance, the payment constitutes a
capital contribution and/or loan to the affected unconsolidated joint
venture and entitles the Company to receive a greater aggregate amount
of the funds any such unconsolidated joint venture may distribute.

Published in BoomBustBlog
Wednesday, 19 March 2008 01:00

Something stinks!

As far as I can discern, Lehman effectively had a run on the bank Monday. They admitted portions of it in the WSJ article I linked to earlier, and word is that many clients left to the tune of several billion dollars. They same appears to be happening in the UK, this is after:

  • one of their largest mortgage banks faced a run and had to be nationalized,;
  • The biggest US investment banks, numbers 1, 2 and 5 just ran to the government for emergency funds and investment bank 5's shareholders just got wiped out.
  • Investment banks 1 and 4 reported 50% drops in earnings and revenue, but rallied because analysts dropped expectations enough to say that they were beat;
  • They then started to recommend "buys" on each other;
  • The mechanism used by the Fed to prop up the I banks was used only once before, and that was during the worst economic period in the history of this country - the "Great Depression".

It doesn't take a detective to figure out all is not well in Smallville! There is probably a big negative waiting in the near future for the financial sector. The problem is that I have not fully deduced what it is, yet. I am growing extremely suspect of the Fed's move. I definitely understand why they felt they had to do it, the issue is the true facts surrounding the move and what the repercussions are. I think the US tax payers can kiss that $30 billion dollar back stop goodbye.

Published in BoomBustBlog