What Lehman's Collapse Would Have Wrought

From The Big Picture

Today's must read MSM article is a page 1 article in WSJ on the impact of Lehman's collapse on the global financial markets:

"Two weeks ago, Wall Street titans and the government's most powerful economic stewards made a fateful choice: Rather than propping up another failing financial institution, they let 158-year-old Lehman Brothers Holdings Inc. collapse.

Now, the consequences of that decision look more dire than almost anyone imagined.

Lehman's bankruptcy filing in the early hours of Monday, Sept. 15, sparked a chain reaction that sent credit markets into disarray. It accelerated the downward spiral of giant U.S. insurer American International Group Inc. and precipitated losses for everyone from Norwegian pensioners to investors in the Reserve Primary Fund, a U.S. money-market mutual fund that was supposed to be as safe as cash. Within days, the chaos enveloped even Wall Street pillars Goldman Sachs Group Inc. and Morgan Stanley. Alarmed U.S. officials rushed to unveil a more systemic solution to the crisis, leading to Sunday's agreement with congressional leaders on a $700 billion financial-markets bailout plan.

The genesis and aftermath of Lehman's downfall illustrate the difficult position policy makers are in as they grapple with a deepening financial crisis. They don't want to be seen as too willing to step in and save financial institutions that got into trouble by taking big risks. But in an age where markets, banks and investors are linked through a web of complex and opaque financial relationships, the pain of letting a large institution go has proved almost overwhelming."

Fascinating stuff . . .


Source:
Lehman's Demise Triggered Cash Crunch Around Globe
Decision to Let Firm Fail Marked a Turning Point in Crisis
CARRICK MOLLENKAMP and MARK WHITEHOUSE in London, JON HILSENRATH in Washington and IANTHE JEANNE DUGAN in New York
WSJ, SEPTEMBER 29, 2008
http://online.wsj.com/article/SB122266132599384845.html

Related Posts :

1. Are the Credit Markets Still Healthy?
2. Hedge Funds Battle To Save Billions From Lehman (LEH) Bankruptcy
3. Lehman(LEH) Becomes A Penny Stock

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

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Money Flow Reversals: One Reason This Market Has Been So Tricky

From Traderfeed.blogspot.com

Readers of this blog know that I keep tabs on an indicator called "money flow", which measures the dollars moving into and out of individual stocks. Each trade is tracked for whether it occurs on an uptick or downtick. If the former, the dollar price of the transaction times the volume is added to a daily cumulative total. If the latter, the dollar price of the transaction times the volume is subtracted from the cumulative total. The final figure at the end of each day reflects the dollar volume (or "money flow") that has moved into the stock (if the total is positive) or out of it (if the total is negative). My research takes the 30 Dow Jones Industrial stocks and calculates the money flow each day for each one and then sums the daily figures to provide a money flow measure for the entire index.

I just took the figures from 2008 and examined all two-day occasions in which net money flows across the thirty Dow stocks were positive (N = 44). Two days later, the Dow Jones Industrial Average (DIA) was down by an average of -.69% (14 up, 30 down). Across all other occasions, the Dow averaged a two-day loss of -.01% (64 up, 74 down).

So far this year, bouts of buying have been met with significant selling in the short term. That has made trading this market quite tricky, particularly if you're trying to identify and follow trends. With Friday's money flow numbers solidly positive, sustained buying on Monday on the heels of any rescue plan news would once again set up a positive two-day money flow period. The market's ability to follow up on any such strength will provide us with useful information about whether bulls find much rescue in the plan.

Related Posts :

Calm Before the Storm...

Please Note!
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Wachovia…gone

From The Bank Implode-O-Meter

I didn’t even get a chance to write a post about WaMu being the largest bank failure in history. Continental Illinois, during the S&L crisis, had held the record for 14 years until last Friday, when the FDIC took out WaMu and forced a sale to JP Morgan. Continental had $30-$40 billion of assets when it failed. WaMu had $310 billion of assets as of June 30th. But WaMu only held the record for a single business day.

Wachovia, with $812 billion of assets on the balance sheet, blows WaMu out of the water. Today the FDIC seized the bank and forced a sale to Citigroup. (Not all of those are banking assets, but you get the point that Wachovia is massive.)

Citigroup will acquire the banking operations of the Wachovia Corporation, the Federal Deposit Insurance Corporation said Monday morning, the latest bank to fall victim to the distressed mortgage market.

Citigroup will pay $1 a share [in Citigroup stock], or about $2.2 billion, according to people briefed on the deal.

The F.D.I.C. said that the agency would absorb losses from Wachovia above $42 billion and that it would receive $12 billion in preferred stock and warrants from Citigroup in return for assuming that risk.

“Wachovia did not fail,” the F.D.I.C. said, “rather it is to be acquired by Citigroup Inc. on an open-bank basis with assistance from the F.D.I.C.”

Under the deal, Citigroup will acquire most of Wachovia’s assets and liabilities, including $400 billion in deposits and will assume senior and subordinated debt of Wachovia, the F.D.I.C. said. Wachovia Corporation will continue to own the retail brokerage firm AG Edwards and the money management arm Evergreen.

“There will be no interruption in services and bank customers should expect business as usual,” the F.D.I.C. chairman, Sheila C. Bair, said.

Points to FDIC for saving taxpayer dollars on this and the WaMu deal. In the case of Wachovia, FDIC will be sharing losses with Citigroup, which agrees to absorb the first $42b of losses on Wachovia’s loan portfolio. WaMu’s failure apparently won’t cost FDIC anything. Some think the deal put in place to protect FDIC was borderline illegal.

Ever larger banks are failing as the confidence crisis grows larger. Citigroup will try to raise $10b of capital by selling stock today, which it will need to repair its own balance sheet. Only a few months ago, Citigroup was thought to be in deep trouble. Now it looks relatively strong compared to WaMu and Wachovia.

The hope now must be that Treasury will pump capital back onto Citigroup’s balance sheet, buying back Wachovia’s (and Citi’s) toxic loans at above-market values.

Related Posts :

1. Calm Before the Storm...
2. Citigrop Grabs Wachovia On The Cheap

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.

Calm Before the Storm...

From Econompicdata.blogspot.com

The new bailout package does remove some of the stigma associated with selling securities to the taxpayer (bailed out companies will still have a tough time hiring new talent after they use the bailout, but it encourages current management to do so) AND I was wrong that prices paid by the taxpayer will be remotely near intrinsic valuations - click here for more details. Additionally, it does mention helping homeowners and perhaps the most important change, it includes a clause that allows the Fed to pay interest on reserves (which should open up the floodgates for further Fed liquidity - for the why, go here).

However, it does have many additional holes (per Professor Roubini via Naked Capitalism):

1. The plan is inefficient (i.e., it doesn't discriminate between who ought to be saved or not, and in fact rewards those who created dud assets)
2. It runs counter to the best models of how to deal with this sort of problem
3. It does not punish current shareholders or management

In other words, we have not learned from policy mistakes made in the past as this bailout seems to help out those that are in the worst shape, the most. Per the NY Times:

The Asian crisis teaches us that it is imperative that U.S. policy makers tell us which financial institutions will survive; and which not. This could possibly involve blanket government guarantees to unfreeze money markets. Until this uncertainty is resolved, financial institutions will be reluctant to deal with each other.

In other words, beware any post-bailout optimism (although futures are currently not optimistic in the least down 200+ pre-open... per Financial Ninja):

Out of 42 systematic banking crises across 37 countries, despite the implementation of a wide range of policies, all resulted in the re-allocation of wealth AWAY from taxpayers and towards debtors (banks). None avoided recessions and all recessions were SEVERE.

Source: Table 3 IMF Report (Table 3)

Related Posts :

Subprime, Alt-A Delinquencies Rise

Please Note!
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Subprime, Alt-A Delinquencies Rise

From Creditwritedowns.com

Clayton Homes, now owned by Berkshire Hathaway and called Clayton Holdings, has warned that Subprime and Alt-A delinquencies in the U.S. are still rising. This suggests that the fundamental problem underlying the banking crisis has not been addressed.

At its core, the credit crisis is the result of excessive lending against inflated residential property assets. Banks have been forced to write down over $500 billion in order to reflect losses on this lending. However, as recently as July, Jamie Dimon of JPMorgan Chase warned that residential mortgage losses were seeping into higher quality credits (see story here).

Now Housing Wire is reporting that Clayton confirms this continued deterioration in delinquencies and eventual mortgage-related losses in the U.S.

Performance in recent vintages of both subprime and Alt-A mortgages continued to deteriorate during August, according to data released recently by Clayton Holdings, Inc. The company’s monthly InFront report noted that 60+ day delinquencies for both Alt-A and subprime mortgages had increased, while cure rates had decreased; interestingly, however, roll rates — which measure the percentage of loans that worsened in delinquency status — decreased in most areas.

For 2006 subprime first liens, the 60+ day delinquency percentage reached 40.24 percent, a jump of 5.49 percent from the prior month; for 2007 vintage loans, 30.82 percent were 60 or more days delinquent, up 6.05 percent. Relative to other comparable vintages, both the 2006 and 2007 subprime vintages continue to perform significantly worse than other recent peers.

Alt-A loans fared comparitively worse, with 2006 vintage first liens recording 60+ day delinquencies of 25.26 percent, up 9.44 percent from the prior month; the 2007 vintage saw delinquencies rise a whopping 16.43 percent to 22.65 percent, Clayton said.

Related Posts :

1. Are the Credit Markets Still Healthy?
2. TED Spread: Back in "Credit Hell".

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.

Citigrop Grabs Wachovia On The Cheap

From Creditwritedowns.com

Wachovia Corporation has agreed to be bought out by Citigroup in a deal supported by the U.S. government. Exact terms of the deal are still forthcoming, but this could be seen as a best case scenario for a bank which was increasingly under stress due to the global credit crisis.

In 2006 Wachovia's shares changed hands for nearly $60. On Friday they were trading hands for $10 a share, a loss of more than 80% in two short years. As with the WaMu-JP Morgan deal, the U.S. government is looking to recapitalize the banking sector by allowing shares in distressed financial institutions to fall to near zero and then arranging a buyout by a bigger, better capitalized bank. In my opinion, these are sweetheart deals for the likes of JPMorgan and Citigroup.

However, this may be one of the last such of these types of deals as the largest institutions, Citigroup, JP Morgan Chase and Bank of America have become absolutely gigantic institutions.

Wachovia, the fourth-largest US bank, is being bought by larger rival Citigroup in a rescue deal backed by US authorities.

Wachovia customers were told the action would provide "full protection for all their deposits", and that the bank would continue to operate as normal.

Under the deal, Citigroup will absorb up to $42bn (£23bn) of Wachovia losses.

US authorities said the decision to back the sale had been made "under extraordinary circumstances".

The comment came from the Federal Deposit Insurance Corporation (FDIC), the government body that guarantees the safety of banking deposits.

"This action was necessary to maintain confidence in the banking industry given current financial market conditions," said FDIC chairman Sheila Bair.

Mortgage debt

Citigroup is taking on $312bn of Wachovia loans.

Any debts on these loans above the $42bn Citigroup will absorb will be taken on by the FDIC in return for $12bn in Citigroup stock and other share options.

Wachovia is just the latest bank that has needed to be rescued as a result of high levels of bad mortgage debt and the wider turmoil in the global financial sector.

Analysts said much of its problems were caused by its 2006 purchase of mortgage lender Golden West for $25bn at the height of the then US housing boom.

Rose Grant, of Eastern Investment Advisors, said it seemed a good deal for Citigroup.

"One thing that Citigroup has been wanting to do for a while is to expand its retail operations because they are in very limited areas so this would basically allow them to do that," she said.
-BBC News

Related Posts :

1. Meredith Whitney: Bailout Won't Do Jack, Cutting Estimates
2. A New Hundreds of Billions Dollar of Debt Coming Due
3. 50 SPX Stocks Down > 50%

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

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Please, cite the actual/original source. I would be grateful if you could link back.

Gold and silver dealer reports an ‘unprecedented’ shortage of metals

By David Clerkin, Markets Correspondent,
The Sunday Business Post Online, September 28, 2008

A surge for demand in gold and silver has resulted in an unprecedented shortage of the metals for retail investors in recent days, according to Gold and Silver Investments, a Dublin-based firm that allows retail investors to speculate on movements in the value of precious metals.

Gold and Silver Investments director Mark O’Byrne said the supply of gold and silver available for small retail investors suffered a dramatic deterioration within hours on Friday, as wholesalers reported that government mints and refiners, the primary suppliers of the metals, had stopped offering new supplies.

‘‘It’s absolutely unprecedented,” said O’Byrne, who said the shortages were likely to drive up the costs of gold and silver in the secondary market.

‘‘This did not happen even in the 1930s and the 1970s, and will result in markedly higher prices in the coming months.”

According to O’Byrne, gold and silver were now only easily accessible in the primary market, which consisted of central banks and other major traders of the precious metals.

However, he said that minimum transaction sizes in this market were out of reach for most retail investors - at approximately $350,000 for gold and $135,000 for silver.


Source : The Sunday Business Post Online

Related Posts :

1. Dollar Rally Could be Short Lived
2. Seven Stocks That Went Up, Despite Market Drop
3. Gold Stock's Profit and Margin Charts
4. Three Reasons Why Gold Will Move Higher

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.