The Economy: Thoughts

[VolByBirth]

In light of the Lehman bankruptcy and an awful start to the market today I'm curious to hear some opinions on our economic state of affairs. The below caption was written last week by an economist (which I believe is a little extreme) in reference to the impending Lehman trouble. I'd be interested in hearing peoples thoughts now though.

"It is now clear that we are again – as we were in mid- March at the time of the Bear Stearns collapse – an epsilon away from a generalized run on most of the shadow banking system, especially the other major independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley, Goldman Sachs). If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch first but also in sequence Goldman Sachs and Morgan Stanley and possibly even those broker dealers that are part of a larger commercial bank, I.e. JP Morgan and Citigroup). Then this run would lead to a massive systemic meltdown of the financial system. That is the reason why the Fed has convened in emergency meetings the heads of all major Wall Street firms on Friday and again today to convince them not to pull the plug on Lehman and maintain their exposure to this distressed broker dealer."

 

[BigPapaVol]

almost 100% of this issue is credit weakness in the overblown housing market. Make big mistakes in the largest market in the world and there is apparently little forgiveness.

The wire houses will survive, but the current owners can't expect to survive intact. New owners will buy a bargain and make a freaking killing on the investment.

I'm sure much of the back and forth on last week's deal is trying to figure out the remaining risk in the portfolio and decide who gets it at what cost.

 

[VolsNSkinsFan]

The stock market is a BUY BUY BUY... This is the bottom not doubt. Volatility index hit 30 and LEH went bankrupt. Its like a fireworks show and this is the grand finale...

Warren Buffet says buy when others are selling

 

[VolByBirth]

almost 100% of this issue is credit weakness in the overblown housing market. Make big mistakes in the largest market in the world and there is apparently little forgiveness.

The wire houses will survive, but the current owners can't expect to survive intact. New owners will buy a bargain and make a freaking killing on the investment.

I'm sure much of the back and forth on last week's deal is trying to figure out the remaining risk in the portfolio and decide who gets it at what cost.

This reminds me of the BOA argument I've heard. One says they are buying cheap (CW and Merrill) for huge future gains while others argue, in light of the write-downs (including today), they are building sheer size to make sure they are rescued or bailed out (as they are too important to the overall economy). Thoughts?

 

[BigPapaVol]

This reminds me of the BOA argument I've heard. One says they are buying cheap (CW and Merrill) for huge future gains while others argue, in light of the write-downs (including today), they are building sheer size to make sure they are rescued or bailed out (as they are too important to the overall economy). Thoughts?

Both are probably correct. I'm talking about the new equity infusion that will be handing a massive cram down to the current equity holders. Not dissimilar to what one sees happen to initial equity investors in a startup when they tap the markets for round 2.

The sheer size argument for BofA is probably correct in theory, but that's not why they bought Countrywide. They bought Countrywide because it was cheap as hell and will make them jillions when the mortgage market crisis subsides. The Fed might look at BofA as a valuable and savable asset, but those guys aren't Fed folks because they're stupid. BofA doesn't have a blank checkbook to go do deals. The Merrill deal is clearly a great one for BofA. Using a massively undervalued stock to purchase another massively undervalued core operation. Sounds like a smoking homerun to me, assuming they get to avoid the CMBS assets altogether or limit exposure on that front.

The more troubling problem IMO is the AIG issue. I don't know what's driving that train, but know for sure that they are THE horse in that market.

 

[VolByBirth]

Both are probably correct. I'm talking about the new equity infusion that will be handing a massive cram down to the current equity holders. Not dissimilar to what one sees happen to initial equity investors in a startup when they tap the markets for round 2.

The sheer size argument for BofA is probably correct in theory, but that's not why they bought Countrywide. They bought Countrywide because it was cheap as hell and will make them jillions when the mortgage market crisis subsides. The Fed might look at BofA as a valuable and savable asset, but those guys aren't Fed folks because they're stupid. BofA doesn't have a blank checkbook to go do deals. The Merrill deal is clearly a great one for BofA. Using a massively undervalued stock to purchase another massively undervalued core operation. Sounds like a smoking homerun to me, assuming they get to avoid the CMBS assets altogether or limit exposure on that front.

The more troubling problem IMO is the AIG issue. I don't know what's driving that train, but know for sure that they are THE horse in that market.

AIG is a major problem. I haven't figured out the proposed bridge loan to oneself. Something about utilizing the cash position of it's subsidiaries to prop up the company. What's even more important is this bridge loan is specifically to run the day-to-day operations which means they have zero liquid cash. This is a much bigger deal than Bear or Lehman. And it's a bigger deal globally as AIG is well tapped in foreign markets (particularly Far East).

As for BOA -- I believe in the long-run the CW buy will pay off. But my cynical side tells me they had to. BOA became the lead investor on an $11B emergency credit line when CW first announced problems. They then bought $2B in stock at around $17. All-in-all their costs to purchase were really the acquistion price + the potential loss on their credit line if CW went belly up + the loss on stock price. They simply had more to lose by not purchasing CW. The Merrill deal sounds great. I'd be curious to hear the specifics.