Summary of sub-prime write-downs in Q4

Citigroup $18.1 bln
UBS $13.7 bln
Merrill Lynch $11.5 bln
Morgan Stanley $10.3 bln
Bank of America $5.3 bln
HSBC $3.4 bln
Deutsche Bank $3.1 bln
Barclays $2.7 bln
Royal Bank of Scotland $2.6 bln
Credit Agricole $2.3 bln
Credit Suisse $2.3 bln
Bear Stearns $1.9 bln
JP Morgan Chase $1.6 bln
Goldman Sachs $1.5 bln
Wachovia Bank $1.1 bln
Lehman Brothers $0.8 bln
SunTrust Bank $0.6 bln
Total: $82,800,000,000 and counting!

Keep in mind ... this is just in one quarter...

CMBS write-down coming at Wachovia?

Analysts say Wachovia may have losses lurking in an area that has garnered less investor attention. Wachovia has in recent years aggressively tried to add market share by underwriting commercial mortgage-backed securities. Demand for such securities has slid amid credit concerns, leaving dealers struggling to unload loans whose quality might be perceived as less sound than investors now demand. Analysts have estimated Wachovia's net CMBS exposure at about $9 billion. They say Wachovia could face a related fourth-quarter write-down as large as $1.5 billion. "CMBS-related write-downs may wipe out earnings" in the quarter, wrote Howard Mason, an analyst at Sanford C. Bernstein & Co.

More Bad News about Citi

Goldman Sachs

Citigroup could write off as much as $18.7 billion in the fourth quarter, wrote Goldman Sachs analysts William Tanona, Betsy Miller and Neil Sanyal in a note to investors late Wednesday. If it does, they say, the bank may be forced to lower its dividend by 40%. Citi has about $55 billion in exposure to subprime mortgages.

Wall Street Journal

Citigroup is considering sales, the WSJ reported today, citing analysts and unnamed executives. Citi could sell 80%-held Student Loan Corp, its North American auto-lending unit, its 24% stake in Brazil credit card operation Redecard, and its Japanese consumer finance business. New Citigroup CEO Vikram Pandit is also considering laying off as many as 20,000 employees and shedding business lines.

Time to Short AAPL

Apple closed at a 52-week high of $202.96 yesterday; has it peaked? I think so!

Home Prices Down 6.7%

Yeah, I know some of you may have seen 6.1% instead, but that is not really correct. All the news articles seem to be focusing on the S&P Case-Shiller Composite 20 Index which consists of 20 large metropolitan areas. That index dropped 6.1% between October 2006 and October 2007. However in that same report S&P publishes the Case-Shiller Composite Index which includes all real estate in the country. That index dropped 6.7% between October 2006 and October 2007. And what nobody is talking about is that November was much much worse than October, so 6.7% is probably an understatement.

Some of the largest drops:
Miami -12.4%
Tampa -11.8%
Detroit -11.2%
San Diego -11.1%
Las Vegas -10.7%
Phoenix -10.6%
Los Angeles -8.8%
Washington -7.0%
San Francisco -6.2%

My own Atlanta area dropped only 0.7%. Charlotte, Portland and Seattle actually posted gains.

A picture's worth a thousand words, so here's a graph for ya...

History Repeats Itself

Excessive and inappropriate reliance on mathematical models has led to...

1) October 1987 - crash caused by portfolio "insurance"

2) September 1998 - LTCM Collapse

3) October-December 2007 - Subprime CDO collapse

For guys that are supposed to be so smart, the quants sure do make the same stupid mistakes time and time again, don't they?

Merry Christmas

Merrill Lynch will sell up to $5 billion in shares to Singapore's Temasek Holdings, $4.4 billion immediately, with an option to buy another $600 million later. If Temasek exercises its option, it will be right at the 9.9% foreign ownership limit. Merrill Lynch is selling another $1.2 billion in shares to asset manager Davis Selected Advisers. Both investors bought their stakes at $48 a share, or more than 13% below where the stock closed on Friday. News of the discount, not to mention the 13% dilution to existing shareholders due to this investment, pushed Merrill shares 3% lower. The announcement of these deals is likely a prelude to another large write-down for Merrill Lynch in the fourth quarter, with some analysts estimating the hit will be bigger than the $8.4 billion write-down Merrill recorded in the third quarter. (Sources: Yahoo, The Australian)

In related news, Merrill Lynch Capital, the middle-market commercial finance business of Merrill Lynch, is being sold to GE Capital. Terms of the deal with the GE unit weren't disclosed, but Merrill Lynch said the deal will enable it to redeploy about $1.3 billion into other parts of its business.

http://www.cnn.com/2007/BUSINESS/10/24/merrill.mortgages/index.html

Chrysler "operationally bankrupt"

Chrysler, the troubled automaker bought by private equity just four months ago, is scrambling to sell assets amid indications of huge losses, as access to cash becomes increasingly scarce. "Someone asked me, 'Are we bankrupt?'" the WSJ quoted Chrysler boss Robert Nardelli telling employees at a meeting earlier this month. "Technically, no. Operationally, yes. The only thing that keeps us from going into bankruptcy is the $10 billion investors entrusted us with." To raise money, Chrysler is looking to sell over $1 billion in land, old factories, and other holdings, even if it has to let those properties go for under book value, the Journal said.

More Write-downs

French bank Credit Agricole said it's increasing its write-downs on super-senior CDOs and because of the situation at ACA Financial Guaranty, resulting in a 1.6 billion euro ($2.3 billion) hit to 2007 results.

Bear Stearns posted its first-ever quarterly loss as the company's mortgage-related write-down grew to $1.9 billion after credit markets worsened last month. They reported a fourth-quarter loss of $854 million, or $6.90 a share. Consensus was they would come in at a loss of $1.80 a share. D'OH!

Morgan Stanley write-down

Morgan Stanley said Wednesday it's writing down an additional $5.7 billion of mortgage-related assets, taking the total fourth-quarter loss to nearly $10 billion in the latest sign that the credit crunch is worsening.

Morgan Stanley lost $5.8 billion or $3.61 a share. Analysts polled by Thomson Financial had forecast a loss of 39 cents a share.

D'OH!

To Roth or Not To Roth, that is the question

MarketWatch has a debate going on this all-important question.

Roth IRA is the surest route to retirement-savings success

Investors will watch their dollars grow faster in a deductible account

Slipping into the swamp of moral hazard

My very own government is treating me as a sucker ... As some of my friends and neighbors seemed to prosper without end in reward for their doubling-down of high personal leverage and asset concentration, I began to wonder how to explain to my children why their dad was such a, well, loser. I kept telling myself that the once-a-generation correction (the same one that stung my grandparents in the 1930s, and my parents in the 1970s) would eventually validate my own choices as a reasonable personal strategy. Now I wonder. The net effect of these bailout activities is to reward the people who took wild risk and ignored generations of wisdom about debt and gambling. It leaves me trying to explain why I chose a higher-rate fixed mortgage and a modest house and modest consumer debt, with a higher proportion of my investment in low yield supposedly "safe" mutual funds.

Citi appoints new CEO and new chairman

Former hedge-fund manager Vikram Pandit was named CEO of Citigroup. Pandit replaces Bischoff, who has filled the top post on an interim basis since former CEO Charles Prince was forced out.

Citigroup also named Win Bischoff chairman, replacing Robert Rubin, who will return to his previous duties as a director and chairman of the executive committee of the board.

Potkettleblack much?

J.P. Morgan Chase and Bank of America were downgraded to hold from buy, and Wachovia was cut to sell from hold at Merrill Lynch. J.P. Morgan is one of the largest U.S. consumer lenders and will be hard-pressed to avoid a consumer recession, Bank of America will be hurt by higher-than-expected credit losses and Wachovia will see a significant rise in net credit losses.

Stocks fall over 2%

Stocks fell off a cliff today afer the Fed cut shaved both its Fed funds target and discount rates by 25 basis points. What the heck were markets expecting?

DJIA Index down 2.14%, S&P 500 Index down 2.53%, Nasdaq Composite Index down 2.45%

Financial stocks were particularly hard hit: American Express down 5.24%, JP Morgan Chase down 3.12%, and Citigroup down 4.43%, Washington Mutual down 12.37%, H&R Block down 3.26%.

WaMu Troubles

WaMu is trading at 18.44, down 1.44 or 7.2%.

WaMu said it will stop lending through its subprime channel, close roughly 190 of its 336 home-loan centers and sales offices, shut down nine home-loan processing and call centers, and cut about 2,600 home loan positions and 550 corporate and support employees.

It will also cut its quarterly dividend to 15 cents a share from 56 cents.

"We believe the fundamental news at Washington Mutual is significantly worse than the company and we had previously expected," Bear Stearns said.

"The company is probably now a candidate for takeover but the number of potential buyers is very limited with J.P. Morgan Chase being the only realistic name at the moment," Punk Ziegel analyst Dick Bove said.

UBS Writing Down $10B

UBS will write down the value of its subprime mortgage holdings by a further $10 billion, leading to a loss in the fourth quarter and potentially wiping out all its profits for the year.

CompUSA shutting down operations

CompUSA will close its store operations (all 103 stores) after the holidays following sale of the company to Gordon Brothers Group LLC, a restructuring firm. CompUSA stores plan to run store-closing sales during the holidays. Privately held CompUSA, controlled by Mexican financier Carlos Slim Helu, said discussions were under way to sell certain stores in key markets. Stores that can't be sold will be closed. Gordon Brothers will also try to sell the company's technical services business, CompUSA TechPro, and online business. It would be up to the buyers whether to continue the CompUSA name.

"The Mother of all Bad Ideas" by Patrick Schiffer

Without question, the Bush administration’s mortgage rescue plan will exacerbate, not alleviate, the problems in the housing market. As the plan will sharply reduce the ability of new buyers to make purchases, it really amounts to a stay of execution and not a pardon.

Although there are mountains of uncertainty as to how the plan will be structured and implemented, there is no question that as lenders factor in the added risk of having their contracts re-written or of being held liable for defaulting borrowers, lending standards for new loans will become increasingly severe (higher down payments, mortgage rates, and required Fico scores, lower loan to income ratios, and perhaps the death of adjustable rate loans altogether). The result will be additional downward pressure on home prices, despite the fact that in the short term fewer homes will be sold in foreclosure than what might have been without the rescue plan.

Most homes temporarily saved from foreclosure will continue to depreciate as new buyers fail to qualify for loans. As a result, lenders will be on the hook for more losses than had the foreclosures taken place sooner. Of course, as these chickens will likely come home to roost after the next election, that’s a trade-off incumbent politicians will happily make.

Compounding the problem is that subprime borrowers with frozen payments on loans that exceed the values of their homes will likely choose not to pay property taxes, condo or homeowners fees, or maintain the condition of their properties. Were these properties to be sold in foreclosure now, at least their new owners would have financial incentives to maintain the value of their investments. Upside-down subprime borrowers will have no incentive to throw money down a rat hole: why make additional payments on properties in which they have no equity and which they will likely lose to foreclosure anyway? When these homes do go into foreclosure, back taxes and other fees on dilapidated properties will inflict even greater losses on lenders.

Also, subprime borrowers with frozen resets will be unable to either borrow additional money against their homes or sell them. As rising credit card payments, higher food and energy bills, and stagnating wage growth or unemployment make even paying the frozen rates increasingly more difficult, this lack of flexibility will prove fatal. Also, the moral hazard inherent in offering help to only those who can demonstrate an inability to afford the reset rates, or restricting the bailout to borrowers with low credit scores, guarantees that borrowers will alter their circumstances to qualify for the aid. Therefore more loans will be frozen than are currently forecast, and the financial circumstances of the borrowers will be that much more impaired as they endeavor to pile on added debt or reduce their incomes to conform to the requirements of the bailout.

Lost in current discussion is the fact that few subprime borrowers have any skin in the game in the first place. Having put nothing down or having extracted equity in previous refinances, most subprime borrowers will lose nothing if their homes go into foreclosure. In some cases the teaser rates were so low that borrowers actually paid less than what they might otherwise have paid in rent. In fact, those who have already extracted equity have received huge windfalls from their homes and will leave their lenders holding the bag.

Also missing from the dialogue is the fact that those individuals and companies that sold these homes to subprime borrowers in the first place pocketed large sums of money they never would have received if these exotic loans were not available. Is anyone going to ask them to give some of that money back in order to compensate the lenders for their losses?

Finally, it’s the camel’s nose under the tent that is the most troubling. Delinquencies on auto loans are now at record highs, and with no home equity left to extract and a weakening economy, this problem can only get worse. What is next, a moratorium on car payments? Of course if the government can “require” private parties to rewrite contracts, what about the government’s obligations to re-pay its debts? After all, the Federal government is the biggest subprime borrower of all and it has committed the American taxpayer to the mother of all adjustable rate mortgages. With the majority of our near 10 trillion dollar national debt financed with short-term paper, what happens when interest rates rise? Will the government extend the maturities of one-year treasury bills, tuning them into 10-year treasury bonds, forcing holders of government debt to accept below market returns for extended time periods? These are real risks that will not go unnoticed by a world already saturated with depreciating U.S. dollar denominated debt.

Ostensibly, this plan is being offered in an attempt to stem the tide of foreclosures that might otherwise cause further weakness in home prices. The reality of course is that current home prices are still too high, having been a function of the lax lending standards and rampant real estate speculation that got us into this mess in the first place. A return to prudence in lending also means a return to prudence in pricing. Everyone seems to agree that a return to traditional lending standards is a good idea, but no one seems willing to accept a return to rational prices as a consequence. The government’s attempt to orchestrate such an outcome is doomed to failure, as it is impossible to maintain bubble prices after the bubble has burst!

The final absurdity is the Government’s attempt to portray their plan as voluntary. Of course the authorities point out that if their “suggestions” are not adopted by lenders, much more draconian legislation will surely follow. Let freedom ring.

RAGE!!!!

The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled subprime home loans, according to people familiar with the negotiations. An accord could reassure investors and strapped homeowners, both of whom are anxious as interest rates on more than two million adjustable mortgages are scheduled to jump over the next two years.

Exactly which borrowers will qualify for the freeze and how long the freeze would last are yet to be determined. Under one scenario, the freeze could run as long as seven years.

Borrowers whose loans are resetting are likely to have a tougher time sidestepping the rising payments by refinancing or selling their homes. Lending standards have tightened and many borrowers can't qualify for refinancing. And falling home prices mean that many borrowers have little or no equity in their homes. Some owe more than their homes are worth.

Well, boo f'ing hoo! Things like this make me so outraged I can hardly see straight. These people (and I mean both the borrowers and the lenders) took huge risks because they thought they were going to make outrageous profits; their idiotic bets didn't pay off. And now those of us who did NOT take those risks (and did not earn any profit) are forced to subsidize the risky decisions and prevent losses to those who took the risks? What the bloody hell?! There are not enough bad words in the English language to describe my outrage! ¡Me cago en todos ellos!