Monday, 17 March 2008 01:00

This is going to be an exciting, and scary morning

JP Morgan bought Bear Stearns for $230 something million, about 7%
of its closing price Friday, and about 2% of what it was trading for 2
weeks ago. On top of it, this was an all stock deal with the government
funding more tha 100% of it (the Fed will be financing $30 billion of
non-liquid BSC securities, the back stop that I said would happen).

To
put this into perspective (I'm a NYer, so I am quite familiar with the
landscape), the BSC headquarters is worth at LEAST $1 to $2 billion.
Between the clearing infrastructure, asset management, structured
product assets and real estate, there is at least a $1.5 billion
immediate gain here. How much that will be offset by litigation risk is
an unknown. The CEO got up on CNBC and clearly told the world that BSC
had no problems. Lawyers must be getting a boners in real time.

I
will admit to a big mistake that I made. I hedged my gains at $35
Friday to lock in the profts. Those calls are literally worthless now.
I shouldn't be complaining since my gains as of this post are averaging
over 800% on this trade, it was the largest position in my portfolio,
and that was after taking profits last week. Just thought I would be
honest and let everyone know that I am far from perfect, thus as I have
said so often, no one should be taking anything I say as investment
advice.

Now, as for Monday's trading.... I am not a trader, and
I believe in medium to long term investment horizons, but there is a
LOT of opportunity to be had here. Lehman is probably going to get a
drubbing. Morgan Stanley is being overlooked by the Street. Citibank
will get no love. I already covered on WaMu, with all of the
opportunities abound, I don't believe that I should be trying to dabble
below $10 when I have ridden shares down from last year in the $30's.

I
fear Goldman will be seeing a lot of devaluation. Don't forget the
companies that we have covered earlier in the blog. There financing is
damn near gone. GGP, the builders, etc.

The Fed is working hard
to help the country. That is undeniable. They have cut rates, extended
financing directly to non-banks, cut more rates - but, and as I
thought, the markets are ignoring these actions and driving financials
down and commodities up.

Lehmans asset make up will make it a
target in US trading. I will probably attempt to expand my position and
will be willing to pay premiums. My small position is quite profitable
already. I will attempt to expand the financials on my list in
aggregate, and MS (who is my 2nd largest position in the financials)
will be expanded as well.

Last modified on Monday, 17 March 2008 01:00

52 comments

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  • Comment Link Stephen Marshall Wednesday, 19 March 2008 00:54 posted by Stephen Marshall

    Interesting comment from Lehman on the call. Of the total residential mortgage holdings of "Prime and Alt-A" of $14.6 billion, about $1 billion is prime, rest is Alt-A... company should probably re-label that to "Alt-A and Prime" heh, though according to the company they are pretty hedged on residential side of things...

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  • Comment Link Reggie Middleton Tuesday, 18 March 2008 11:06 posted by Reggie Middleton

    That is how I understood you. I just want to know where you got the info from, if you can reveal it. If you can't reveal, i understand.

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  • Comment Link naif denali Tuesday, 18 March 2008 10:57 posted by naif denali

    Sorry poor English. Leh hasn't lost 5 billion dollars of clients money. They just lost some major clients who held over 5 billion usd in there accounts.

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  • Comment Link Reggie Middleton Tuesday, 18 March 2008 10:28 posted by Reggie Middleton

    @vlal21,
    What is your source for Leh losing $5 billion of clients?

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  • Comment Link naif denali Tuesday, 18 March 2008 09:49 posted by naif denali

    Looks like the whispers where right about LEH losing 5 billion worth of clients. To bad the earnings reports where better then everyone believed. Thats why I only trade forex I don't trust earning reports.

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  • Comment Link Tim Steady Tuesday, 18 March 2008 05:32 posted by Tim Steady

    Downey Financial (Symbol DSL) just reported their monthly report. Non-performing assets as a percent of total assets went from 9.14% last month to 10.93%. This is significant, even more so in the light that not all their assets are loans. We are going to be in for a rude awakening.

    http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/03-17-2008/0004774867&EDATE=

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  • Comment Link Reggie Middleton Tuesday, 18 March 2008 05:07 posted by Reggie Middleton

    [i]The default rate for 2/28 hybrid ARMs as of December 31, 2007 was 38.6% compared to 16.0% as of December 31, 2006. The significant majority of 2/28 hybrid ARMs were insured by PMI in connection with non-agency RMBS transactions.[/i] and [i]Alt-A loans-The default rate for Alt-A loans was 13.9% as of December 31, 2007 compared to 5.7% as of December 31, 2006. Risk in force from Alt-A loans represented 22.8% of PMI's primary risk in force as of December 31, 2007 compared to 19.9% as of December 31, 2006[/i]

    These numbers appear to already surpass the assumptions used by the rating agencies in their last go around of model modification. If this is so, then the premise behind the monoline survival has already been shot down. This means we are back to the point where these guys will default on some of their CDS, causing a chain reaction. We are approaching a 40 - 50% default rate and this process has just gotten started.

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  • Comment Link Jason Iob Tuesday, 18 March 2008 00:36 posted by Jason Iob

    PMI Group posts $1 billion Q4 loss. Interesting snippets from their 10K:
    • Losses and LAE. The significant weakening of the U.S. residential mortgage, housing, credit, and capital markets negatively affected our U.S. Mortgage Insurance Operations' financial condition and results of operations in 2007 and will continue to do so in 2008. PMI's losses and loss adjustment expenses ("LAE") increased to $1.1 billion in 2007 from $263.0 million in 2006. We increased PMI's net loss reserves in 2007 by $733.8 million as a result of the increase in PMI's default inventory (discussed under Defaults below), higher claim rates and higher average claim sizes. Higher claim rates have been driven by home price declines and diminished availability of certain loan products, both of which constrain refinancing opportunities, and result in a decrease in the percentage of the default inventory that is returning to current status. The increase in PMI's average claim sizes has been driven by, among other things, higher loan sizes and coverage levels in PMI's portfolio, and declining home prices which limit PMI's loss mitigation opportunities. We expect PMI's losses and LAE to be higher in 2008 than 2007.

    • Defaults. PMI's primary default inventory increased to 63,197 as of December 31, 2007 from 39,997 as of December 31, 2006. PMI's primary default rate increased to 7.9% as of December 31, 2007 from 5.6% as of December 31, 2006. The increases in PMI's primary default inventory and default rate in 2007 have been driven by a number of factors including:

    Declining home prices-Declining home prices have made it significantly more difficult for certain borrowers to refinance their mortgages or sell their homes, and are negatively affecting PMI's default inventory and default rate.

    Decline in cure rate-As discussed above, the significant decline in the percentage of defaults that cure has also negatively affected PMI's default inventory and default rate. The declines in the percentage of defaults that cure have resulted from, among other things, a slowdown in the time to resolution of defaults (either through cure or claim payment), some of which is attributable to significant backlogs in workout activity by loan servicers attempting to resolve delinquencies and prevent foreclosures.

    Above-97s-PMI has experienced higher than expected levels of delinquent Above-97s in its flow and structured channels. As of December 31, 2007, risk in force from Above-97s in all book years represented 24.6% of PMI's primary risk in force compared to 17.6% as of December 31, 2006. The default rate for Above-97s in PMI's primary portfolio as of December 31, 2007 was 9.1% compared to 6.6% as of December 31, 2006. PMI's 2007 book which is still in its initial stage of loss development, has been particularly affected by high levels of delinquent Above-97s. Above-97s represented approximately 35.3% of PMI's primary risk in force for the 2007 book year.



    --------------------------------------------------------------------------------
    Alt-A loans-The default rate for Alt-A loans was 13.9% as of December 31, 2007 compared to 5.7% as of December 31, 2006. Risk in force from Alt-A loans represented 22.8% of PMI's primary risk in force as of December 31, 2007 compared to 19.9% as of December 31, 2006.

    2/28 hybrid ARMs-PMI's 2005 and 2006 structured finance books have been particularly affected by delinquencies of 2/28 hybrid ARMs. As of December 31, 2007, risk in force from 2/28 hybrid ARMs in all book years originated through PMI's structured finance channel represented 3.3% of PMI's primary risk in force compared to 6.2% as of December 31, 2006, with the decrease reflecting underwriting guideline changes we issued in late 2006. The default rate for 2/28 hybrid ARMs as of December 31, 2007 was 38.6% compared to 16.0% as of December 31, 2006. The significant majority of 2/28 hybrid ARMs were insured by PMI in connection with non-agency RMBS transactions.

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  • Comment Link Bill Laird Monday, 17 March 2008 18:17 posted by Bill Laird

    The shorts made their run at LEH today, and it recovered nicely. Will the shorts have enough ammo to make another run at LEH or MS? We'll see. It would take some monster bad news - like massive, unexpected writedowns, some other part of the crisis to start unfold (alt-a,counterparty blowups, etc.) or some other rumor to be started to increase the fearmongering. However, I do believe - if nothing else - on a valuation basis - the whole sector will be heading lower - as evidenced by today's price action. Thus, the risk reward ratio still seems in favor of playing the short here. Checkout the double inverse SKF and get ..."long in the shorts". LOL

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  • Comment Link Reggie Middleton Monday, 17 March 2008 16:50 posted by Reggie Middleton

    There stock has become a trading vehicle. Once that happens, volatility (read cost of capital) shoots through the roof and price movement detaches even further from the fundamentals. Look at the all of the other companies that have had that happen, CFC, Builders, Bear Stearns...

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  • Comment Link ken Monday, 17 March 2008 16:43 posted by ken

    should have covered Leh at 21 and went long. Instead, 1/3 of the gains I had vaporized. Looks like those March put buyers got it wrong up to this point. We shall see..... still I managed to preserve a 1/3 of the gains from the shorts I put in. I knew I had to be nimble - with that VIX in the 30's the funds automatically start their buy program

    Think, I'll quit making too much noise here and just observe, and soak some more of the blog up.

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  • Comment Link Reggie Middleton Monday, 17 March 2008 15:52 posted by Reggie Middleton

    I was planning on taking a trip over there to see how things work. I believe they are a little bubbly as well, just not as bad as Asia/Europe/US. I must admit that I know very little about Sharia though.

    I hear the first of many law suits against BSC was just filed.

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  • Comment Link naif denali Monday, 17 March 2008 15:48 posted by naif denali

    I was talking with a fellow fund manager about the possible rewards of investing in mainstream islamic banks via share/bonds at this time. Ones from places such as the UAE, Saudi, Bahrain, Kuwait seem strong.

    Reasons

    1. No subprime morgage exposure
    2. Backed by physical assets
    3. No captial gains or income tax
    4. Projected growth of 15% a year
    5. Tough regulations to the benefit of share holders
    6. Leverage Restrictions

    This seems like a low risk high reward market compared to whats happening in the West and Europe.

    Are the Islamic banks teaching us in the west a lesson? If so why isn't wall street talking about this? Whats your thought Reggie?

    Note: I hold no posistions in any banks plus i'm as ahiest as one can get.

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  • Comment Link Reggie Middleton Monday, 17 March 2008 15:24 posted by Reggie Middleton

    I think GS, LEH and MS are going to announce some big writedowns. LEH holds a lot of CMBS, and if you have read my research on the topic, the market is really underestimating the damage being done there.

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  • Comment Link ken Monday, 17 March 2008 15:11 posted by ken

    The shorts in Lehman tooks their profits around 11:00 pst (typically) and squeezed it up. I'm going in the close with 1/2 position. The volume on those March 25's has me thinking Lehman has nearly 100% chance of being well under 20 by Friday. Of course I could be very wrong. What do you think?

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  • Comment Link Reggie Middleton Monday, 17 March 2008 14:48 posted by Reggie Middleton

    I'm glad you're having a good day. Stay humble though. A lot of people are losing their homes and life savings. Let's keep it in perspective. I have been through hard times, and trust me, it ain't no fun!

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  • Comment Link Reggie Middleton Monday, 17 March 2008 14:37 posted by Reggie Middleton

    CNBC made an enlightening comment. The Yankees paid more for A Rod than Jamie Dimon paid for Bear Stearns, the nations 5th largest investment bank and a Midtown Manhattan Skyscraper.

    I just don't see the shareholders letting this go through. As an employee, I would consider my 2% of stock value left as a put option to force a better value. The price was so low that it doesn't give the employees a reason not to fight back. Particularly since it is know most will be fired anyway. Whenver you do a deal, always make sure the other side gets to walk away with something.

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  • Comment Link ken Monday, 17 March 2008 14:33 posted by ken

    This is the second biggest trading day I've ever had $$ wise. My 1st was in Jan 2000 when a stock that I had a big postion went up 600% in 3 days. What address do I send the check to Reggie?

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