Lehman stock shoots up after being beat up for a few days, probably incited by David Einhorns choreographed, publicized short selling campaign.
Reggie Middleton is an entrepreneurial investor who guides a small team of independent analysts, engineers & developers to usher in the era of peer-to-peer capital markets.
1-212-300-5600
reggie@veritaseum.com
and then...
Coincidentally, not a full 48 hours after the end of the Attorney General's stern talk, ratings agencies get religion and decide to declare what the entire world figured out some time ago - MBIA and Ambac probably don't deserve AAA ratings. Really!!!!????
As I type this, Lehman Brothers, Morgan Stanley are rallying. WHAAAT!!!!??? Don't these guys read my blog? Morgan and Lehman only have two ways to hedge multi-billion dollar assets, and neither are very reliable these days. Short a broad index and risk a lot of slippage and uncertain correlations, or pay a counterparty to accept a risk. You know, a counterparty like MBIA and Ambac. Let's revisit my "Who's holding the $119 billion bag" post from 4 months ago. If you don't want to read through the rest of my rather dated ramblings, it can be summarized in realizing how lucky Lehman is that they just closed the last quarter, for 14% of their gross equity (as calculated in February), is about to get downgraded, give or take.
This is post is primarily to document my assertions of self insurance by the banks in their alleged efforts to prop up the monoline (or should I say multilines?). Below you will find a chart with links that provide, in extreme detail, the insured holdings of a handful of banks and one homebuilder with a large mortgage operation (I do mean extreme detail, including asset name, CUSIP #, ratings by all major agencies, vintage, etc.). Let me add that I don't know how much of this is actually bank inventory versus what was sold off, but my guess is that the banks got stuck with the vast majority of everything from the last year or so. In addition, most of the underwriting banks can get stuck with the stuff that was found to violate the agreed upon underwriting guidelines (which is potentially a lot) for a certain period, even if it was sold off. This is something that can sink the smaller equity base banks such as First Franklin.
This is $120 billion dollars right here, and it is nowhere near comprehensive. These are RMBS, CMBS, and a smattering of consumer finance ABS insured by MBIA and Ambac. I know everybody thinks that we may be coming to the end of the writedowns from real estate related devaluations, but if that is what everybody thinks then everybody is wrong. This bubble took at least 6 years to build, it is not going to dissipate in 1 year. We are about 50% through the subprime crisis, but since this problem was never a subprime issue to begin with, we have lot more to go. There are all of the other classes of mortgages, the commercial real estate market, which I went over in detail , there is the consumer finance markets (recession, anyone?), then the big grand daddy of them all, the leveraged loan, junk bond CDO and CDS market - crashing at a financial institution near you. I am 50% through a forensic analysis that will expose the junk bond CDOs held by monolines that will probably knock your socks off. Alas, I digress...
This credit problem and real asset bubble is a result of combining very cheap money with the lax, "other people's money", moral hazard to be had whenyou don't need to be responsible for your own underwriting - otherwise known as the natural consequence of asset securitization. Why fret over due diligence when we're just going to sell the stuff off. The following are a sampling of whose holding the bag...
The Partial Cost of Monoline ABS Failure Par Equity Exposure Ratio Bear Stearns $15,673,088,703 $11,793,000,000 132.90% BSC ABS inventory
Morgan Stanley $22,956,101,796 $31,269,000,000 73.41% Lehman Brothers $3,151,328,632 $22,490,000,000 14.01% Citigroup $8,100,028,623 $127,113,000,000 6.37% Countrywide $12,639,385,566 $15,252,230,000 82.87% Wells Fargo $4,700,835,231 $47,738,000,000 9.85% Goldman Sachs $18,673,869,328 $42,800,000,000 43.63% WaMu $7,658,982,498 $23,941,000,000 31.99% Merrill Lynch $10,224,387,634 $38,626,000,000 26.47% Centex $511,740,636 $3,197,130,000 16.01% Wachovia $5,328,228,928 $76,872,000,000 6.93% Totals $118,950,151,688 $477,918,010,000 24.89% First Frankin appears to have significantly more exposure than equity (a lot more, so much so that it actually through my Excel charts out of whack):
This chart is using gross equity as reported, not tangible equity or foresnically scrubbed equity which is bound to be a lower number. For examples of how we use forensic analysis to reconstruct reported numbers and financial statements, see the Lennar and General Growth Properties (with conference call update ) analyses.
I am short Morgan Stanley and Bear Stearns, for the very same reasons that they are numbers one and two on this list (excluding Countrywide, whose short position was covered a while back, although I still have a bear position on WaMu). To see my take on these two banks, read my overview on the industry: Banks, Brokers, & Bullsh1+ part and Banks, Brokers, & Bullsh1+ part 2 then read or download the full analyses: "The Riskiest Bank on the Street" and "Is this the Breaking of the Bear?".
