Financial Fricassee

From The Financial Times:

Citigroup, Merrill Lynch and UBS, the banks most exposed to Ambac and MBIA, could face further writedowns of up to $10bn after the bond insurers last week lost their fight to retain their triple A credit ratings.'

My comment - I'd guess that further writedown number is a lowball estimate. Maybe they mean in the first week only?

"The prospects of further writedowns related to bond insurers, also known as monolines, could deepen concerns over the financial health of US and European banks.'

My comment - In light of what Kudlow, Cramer and the rest of the guys on CNBS and Faux Business are saying, there aren't any concerns at all. Why, some analysts even say the Financials are a "generational buy" right now. Remember this now infamous rant from Cramer just a few days before the Bear Stearns dive from $62 down to, what did Chase buy them for? Oh yeah, $2.

"UBS, Citigroup and Merrill Lynch declined to comment.'

My comment - I bet! Oh, and I know many people are shorting both Merrill and UBS as I write.

"The value of CDOs and mortgage-backed bonds has plunged amid soaring foreclosure rates in the US. This week, CDOs in default crossed the $200bn mark, according to specialist publication Total Securitization. Many of these bonds had triple A ratings when they were issued and large amounts were retained by banks."

My comment - You may wish to read previous articles Mispricing of Risk, Pitfalls of Derivatives and Insurers in Trouble. Do read them. $200 Billion could be a very low number.


The Telegraph out of London is reporting this:

RBS issues global stock and credit crash alert

By Ambrose Evans-Pritchard, International Business Editor

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks. "A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.

"Cash is the key safe haven. This is about not losing your money, and not losing your job," said Mr Janjuah.


Next, this also from the Telegraph:

Barclays warns of a financial storm as Federal Reserve's credibility crumbles

"US central bank accused of unleashing an inflation shock that will rock financial markets.

'Barclays Capital has advised clients to batten down the hatches for a worldwide financial storm, warning that the US Federal Reserve has allowed the inflation genie out of the bottle and let its credibility fall "below zero".

My comment - The hens are coming home to roost. This problem, risk of a global financial meltdown, has been building in plain sight, for all to see. For the last few years, every contrarian who spoke on CNBC, or Fox Business about the increasing securitization of debt was stopped. The response was always immediate, "You are so wrong because none of 'our' experts (Kudlow, Cavuto and Cramer) have ever said anything like that."

It is not a "liquidity" problem, it is a "solvency" problem.

Most of the big banks, if they were forced to sell all level 3 assets today, would have losses exceeding their net worth by several times.

They can't sell any of the derivatives because there are no buyers. The buyers would be other banks and large financial institutions. They all know these things are now garbage. This is the heart of the "liquidity" problem.

To add, this 'problem' isn't going away, as a matter of fact, it will get worse.

This from Businessweek "The next wave of foreclosures is expected to gather strength when the million or so option ARMs start resetting in large numbers next spring."

"According to a recent analysis by Lehman Brothers, option ARMs that originated in 2006 performed about as well as fixed-rate Alt-A debt for the first 12 months. But by the time they were 2 years old, about 2.1% of performing loans were going 60-days delinquent each month. Compare that to a 1.2% of current loans going delinquent with other Alt-A loans. The rate of increase in delinquencies is even beginning to approach that of subprime, which is about 2.5%."

"Option ARMs originated in 2006 make up about $140 billion of the $350 billion of outstanding option ARMs and 45% to 50% of them are expected to default. The 2007 option ARMs, which were originated just as home prices began falling, are expected to perform similarly badly."

The Banks and many financial institutions have been hiding, in level 3 accounting, massive losses on financial derivatives all bought with invested or borrowed money. In many cases, the amount paid for these derivatives is lost. Across the board, it is very easy to assume a 40-60% loss on all debt based derivatives over the next few years.

This is no where close to the message we get from mainstream media. To be sure, there are sprinkles of bad news among the leading publications. These sprinkles have increased a little, but it can hardly be called a "rain" of bad news.

I just hope it doesn't become a deluge.