Archive Page 4 of 40
September 23, 2008 5:20PM
By Alexis Glick
It’s only a matter of days. This deal is going to happen whether we like it or not. It’s time to wake up and smell the coffee.
Today Bernanke, Paulson and Cox testified in front of the Senate Finance Committee. They got skewered by members of both parties. Some of the most outspoken critics were Senator Shelby, the ranking Republican, and Senator Jim Bunning who said, “It’s financial socialism, and it’s un-American.”
The rhetoric may have been tough, and I must admit I was surprised the markets held in there for them, essentially buying Congress and the panelists more time to talk about the plan; but, the clock is ticking and everyone knows it. Bernanke stated the facts. He is not a Wall Street guy and never has been. He’s a historian who spent most of his career studying the Great Depression. He knows what happened and understands the ramifications of the New Deal. He put it out there in plain English today when he said, “I believe if the credit markets are not functioning, that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover.” That is all the American taxpayer needed to hear. It was loud and clear. The Fed Chair doesn’t have an agenda. He doesn’t want this to happen. He needs to turn this around.
Tomorrow, the gentlemen I mentioned above will go in front of the House and experience another bashing session. The rhetoric will be fierce. This is every ranking Democrat’s and Republican’s opportunity to cry foul. Here’s the thing… they say they will not go on recess Friday if they need to remain in session to get this done. But you know Congress — they went on recess for five weeks while oil prices were at historic levels despite calls to stay and sign an energy bill. They will do it again.
This bill or plan or whatever you want to call it, will get done and my money is betting that it will happen late Thursday evening. The markets will react on Friday. Congressional members stand for re-election in a little over 30 days. All members of the House and one-third of the Senate need to return home to their constituents and say ‘we did it.’ They have no choice. The longer they fight over the details, the more the markets will react negatively and the bigger the consequences.
This is an opportunity for one of these two presidential candidates to step up and say do it. If one of them can appear to orchestrate the deal and get their respective party to cross the line and shake hands on it, they will declare victory.
Don’t forget there is a debate on Friday night. Who stands to lose going in to that debate if nothing has been accomplished?
September 22, 2008 5:51PM
By Alexis Glick
How often can you say that you spoke to two former Federal Reserve governors in one day? That happened today starting with Former Fed Governor Lyle Gramley this morning on The Opening Bell. He was a Fed Governor for 5 years from May 28, 1980 to September 1, 1985.
Just to be clear, there are seven members of the Board of Governors of the Federal Reserve. They are nominated by the president and confirmed by the Senate. A full term is 14 years. One term begins every two years, on Feb. 1 of even-numbered years.
Lyle Gramley today said the following in response to the bailout.
“In the first quarter the flow of credit to consumers and businesses declined by 40%, in the second quarter it declined by 35% more, it was headed down into the third quarter. We were heading for a catastrophe – something had to be done. The root of the problem has been these toxic mortgages out there. ”
Here he is.
In the early part of the afternoon I took a trip up to Columbia University to interview Frederic Mishkin, a former Fed governor and Columbia University Business School professor on a first on FOX Business. He stepped down as Fed governor about three weeks ago due to a potential conflict in updating his No. 1 best selling text book called, “The Economics of Money, Banking and Financial Markets.” This was always the plan. In his two years as Fed governor he witnessed and participated in an unprecedented period of time for the financial markets. In past speeches he predicted the unwinding of the financial markets and on many occasions, compared the current situation to the Depression Era.
“I don’t think it is far off the mark to characterize the turmoil of the past year as one of the worst financial shocks that the U.S. has confronted since the Great Depression.”
He said this on July 2 at a forum in Israel.
Look at what he told me today about how this financial crisis is different than the Depression, why Bernanke is the right guy, how the investment banking model failed, and how the Federal Regulatory System will be changed.
September 22, 2008 6:28AM
By Alexis Glick
How could it be? Last week I felt like I was living in a dream or, better yet, a nightmare. I have never been more shocked by what I experienced, witnessed, heard and saw. As many of you know, I spent the lion’s share of my career at Goldman Sachs and Morgan Stanley. At Morgan Stanley, I was an institutional equity trader for five years, trading the banks, brokers, insurers, asset managers and government agencies. I ran those books and that desk. Traded hundreds of millions of dollars in those names. I knew them better than anyone. I was on the desk when Long Term Capital happened and the dot-com bubble burst. I was there for 9/11 when the markets wreaked havoc on all of us following the unconscionable terror attacks. This I did not see coming.
When I wrote a blog on September 11th entitled “Here’s the Problem: No One Knows How Bad it Will Get,” I meant it. The more I talked to Fed officials, economists, Wall Street executives and colleagues, the more convinced I was that no one knew the level of pain that was about to rear its head. Back to back quarters of writedowns and capital raises became endemic in the financial sector. It got to the point where we could no longer say, “This is the kitchen-sink quarter.” It was like owning a home and each week a plumber, a contractor, an electrician, a painter had to come in because it constantly needed repairs. You’ve heard the phrase “the money pit.” It was the quintessential money pit. You didn’t know who was going to cry fire in a crowded room. We became numb to it. And remember when I wrote this blog on July 15th, “Scary Times?”
Toward the end of last week, all I kept saying was “remarkable.” How could it be? How could our country bail out the entire financial sector to the tune of trillions of dollars? How could it be? How could the boards of directors miss this? How could it be? How could the regulators allow this to happen? How could it be? How did we allow the hands of a few to control the fate of hundreds of millions of people? How could it be? How did we allow rules and regulations to bury the companies that are as iconic as baseball and peanuts in the United States of America? How could it be? The United States of America!
I can’t begin to predict what will happen from here. The markets will thank Paulson and Bernanke for a plan that simply moves the risk off the banks and brokers balance sheets onto the governments. Yes, I know that we have made money in the past and that we may do it again, but I am very bearish. I am not a financial planner, an analyst, or an economist, but I fear we haven’t seen the worst of it. Artificially inflating the market with a short-term ban on short sales on 799 financial companies? Not brilliant, but embarrassing! What would make us think that that is going to work? What happens when the short-term rule expires? We need to get on the regulators to change the FASB rules (accounting rules) and reinstate the uptick rule. I don’t know what else, in the short term, can help these markets. Perhaps we shouldn’t help these markets? Perhaps it’s time to live in a free market and let them work. What would have happened had we not rescued Bear Stearns? Would we have been in the mess? Who knows, we will never know. This time, we have taken it too far. The price, the cost, to you and me, you ain’t seen nothing yet.
September 19, 2008 6:06PM
By Alexis Glick
As the week comes to a close and the nations wisest economists, legislators and politicians debate the need for a modernized Resoultion Trust Corporation, I thought it might help to see what some of the pro’s and con’s are to a government plan as big as this. In the two interviews below a former FDIC chairman weighs in, a global economics editor, a banking regulatory specialist and a financial economic analyst. A wide range of experts, one of which, wrote an op-ed in today’s Wall Street Journal denouncing the plan.
FIXING A BROKEN SYSTEM
By William M. Isaac*
I’m astounded and deeply saddened to witness the senseless destruction in the U.S. financial system, which has been the envy of the world. We have always gone through periods of correction, but today’s problems are so much worse than they needed to be.
The SEC and the bank regulators must act immediately to suspend the Fair Value Accounting rules, clamp down on abuses by short sellers, and withdraw the Basel II capital rules. These three actions will go a long way toward arresting the carnage in our financial system.
During the 1980s our underlying economic problems were far more serious than the economic problems we were facing this time around. The prime rate exceeded 21%. The savings bank industry was more than $100 billion insolvent if we had valued it on a market basis, the S&L industry was in even worse shape, the economy plunged into a deep recession, and the agricultural sector was in a depression.
These economic problems led to massive credit problems in the banking and thrift industries. Three thousand banks and thrifts ultimately failed and many others were merged out of existence. Continental Illinois failed, many of the regional banks tanked, hundreds of farm banks went down, and thousands of thrifts failed or were taken over.
It could have been much worse. The money center banks were loaded up with third world debt that was valued in the markets at cents on the dollar. If we had marked those loans to market prices, virtually every one of our money center banks would have been insolvent. Indeed, we developed contingency plans to nationalize them.
At the outset of the current crisis in the credit markets, we had no serious economic problems. Inflation was under control, GDP growth was good, unemployment was low, and there were no major credit problems in the banking system.
The dark cloud on the horizon was about $1.2 trillion of subprime mortgage- backed securities, about $200-300 billion of which was estimated to be held by FDIC-insured banks and thrifts. The rest were spread among investors throughout the world.
September 19, 2008 6:32AM
By Alexis Glick
Yesterday I got the phone call that sent shivers down my spine. Never have I listened so intently to someone speak. I took my time writing this note. Lives were affected, jobs were lost and more tales will be told. I can only tell you what I was told. I have no agendas. My job is to report the news. This is what I am doing, based on an interview with a source who had an inside look at the week Lehman Brothers was allowed to die.
On Monday, September 8 Lehman Brothers had $40 billion in cash. One week before they filed for Chapter 11. They were in the process of doing two things: one, they were in the process of raising more cash, and two, they had opened up the books to Neuberger Berman and their investment management business to interested parties to bid on a percentage of that business. They did not want to sell the investment management business. They knew the value of the stand-alone business and that by selling that business they were giving up future earnings power. They explored the sale to formulate a price in the event that they needed to sell it, but they did not want to give it up. At best, as Dick Fuld mentioned on that conference call on the morning of Wednesday, September 9, they were willing to sell a majority stake.
In the days leading up to the earlier-than-expected earnings announcement, they thought they would be able to survive the turmoil. But in the course of hours, things began to unravel. Rating agencies began downgrading their debt that Tuesday, September 9. By the end of the day Tuesday, the bank’s stock was down 45%. Wednesday night September 10, Moody’s held a conference call in which they said Lehman needed to complete a transaction with a strategic partner that would have the “effect of calming the markets.” The $40 billion in cash, the additional equity investment they thought they were going to get, was gone.
As the credit default swaps (insurance purchased to hedge default risk of Lehman Brothers debt) began to widen as much as 135 basis points to 610 basis points, the highest level seen on Lehman paper, the shorts piled on and the counterparties demanded more. In simple terms, to insure $10 million of debt, the insurance cost $610,000 dollars to protect that investment. One bank, in the wake of the Fitch downgrade and subsequent Moody’s downgrade, required $5 billion of collateral to do business with them. Each of the counterparties was asking for more and more money and the well went dry.
I asked this source if we knew that Moody’s and others suggested, including Dick Fuld himself, that a deal was pending to sell a majority interest in the Investment Management business, why didn’t they do it in those final days? Why didn’t they announce a sale on that Thursday, September 11, or that Friday, the 12? At that point, sources tell me that the $3 billion for that 60% stake was meaningless. It would not have saved the bank. Remember that Thursday the stock was down another 41%, closing at $4.22. At the same time, Washington Mutual, the giant savings and loan bank was crumbling, down 30% on Wednesday and 21% on that Thursday.
Last weekend, September 13and 14, and the days leading up to that weekend, Lehman was in deep discussions to sell the bank to Bank of America or Barclays Bank. They were close to selling the bank to Barclays. A deal was all but done and the Fed would not help. Barclays did not want some of the residential and commercial portfolio (the problem assets). How much is unclear. At the time Lehman planned to spin off $30 billion dollars worth of these assets. How many of those assets Barclays was willing to take isn’t clear. Lehman needed the Fed to step in, agree to allow the Spinco deal to happen and authorize the deal. The Fed would not do it. Lehman needed a little help. If Spinco worked, they could spin off the problem assets from their residential and commercial portfolio into a separate company. Barclays would buy the bank and get the guarantee that they did not have to buy the assets that they did not want. The Fed would not step in.
Lehman did not know that Bank of America was simultaneously talking to Merrill Lynch. Reportedly word was starting to percolate that Merrill Lynch by Friday was out of cash and was going to be next. Merrill CEO John Thain pursued a deal with BofA’s Ken Lewis while Lewis courted both parties. Ken Lewis and Bank of America had the choice, and the Fed needed them to rescue one of these banks. Lewis had always shown interest in Merrill Lynch and the synergies made sense. The Lehman team did not know to what extent Bank of America was working with the Fed to get a deal done with Merrill Lynch.
On the Sunday before Lehman filed for Chapter 11, Sunday, September 14, the Fed told Lehman to file for Chapter 11. Lehman was given no choice, sources tell me. The Fed was the only one lending them money at that point. They knew they were doomed and it became clearer through that Sunday that Merrill and Bank of America were about to announce a deal. They were made to be an example. The Fed knew one investment bank needed to be rescued that weekend or more would fail and allowing Lehman to fail, which the markets had already priced in, would not have had huge ramifications for the market.
I am also told that Lehman Brothers NEVER had a firm bid from the Korea Development Bank or any other party in the months leading up to the bankruptcy filing. The rumors, the articles, the stories about what Fuld did not do with the KDB were not true.
As you have read in countless articles or witnessed in the days leading up to that weekend, federal officials did not want any more public funds used in the wake of the Fannie Mae and Freddie Mac plan and the rescue of Bear Stearns. AIG at the time had to raise between $30 and $40 billion, according to rating agencies. The wheels were coming off the bus. Hindsight is 20/20, but one will never know. What if all these events didn’t collide on the same weekend? Would Lehman Brothers still be around? Was Lehman made to fail in the weeks leading up to the bankruptcy? Were they the blood on the street that I talked about in past blogs? The Government was taking on too much taxpayer risk and they needed to send a signal, Lehman may have very well been that signal.
I report this now not because I am defending Dick Fuld. I still can’t help but think about what he could have done to sell this company and rescue these lives. He will be the poster boy for excess and the demise of one of the greatest financial institutions in the world. What he was thinking, we may never know. But, what this story tells you is that short sellers, credit default swap markets, rating agencies and fear have taken over asset quality, earnings, history and pedigree. Just knowing what happened to Lehman in that last week explains what is happening to John Mack at Morgan Stanley and why he is fighting for his life. People will say the SEC changed the short-sale rules to accommodate Goldman Sachs and Morgan Stanley while they profited the most from naked short selling but would leaving the rules in place have been better? Mack is lobbying because he knows that the shorts, the swaps and the rating agencies have been dictating his fate. The more he loses his equity, as he has seen erode in the past four days, the more he loses the power to pay his counterparties to stay in business. This is how far we have allowed traders and short sellers to unwind our multi-billion dollar Wall Street investment banks.
September 18, 2008 6:19PM
By Alexis Glick
On September 9th, I wrote a blog called “Bailout and the Taxpayer: Where Do You Stand?” In that blog, I posted an interview with former HUD Secretary Henry Cisneros who recommended bringing back the Resolution Trust Corporation, a government-owned asset management company established in 1989 to help liquidate housing inventory, mortgage loans and financial assets that were taken over or inherited due to the failure of so many thrifts. Cisneros was the first person to suggest the Resolution Trust on my shows and I took note. Since then, I have seen articles everywhere. This morning, I asked him to return to the show. A lot had changed in nine days. I wanted to know if he still thought the RTC was a viable solution given what has happened. Look at what he said. So far he’s been ahead of the curve.
It is now 6 p.m. and every network is talking about the Resolution Trust Corporation. Late this afternoon, rumors circulated from a deputy within the Treasury Secretary’s office, that Paulson was considering a “modernized version of the RTC.” It caused the market to rally over 400 points today.
Here’s the problem: we don’t know what it will look like. It will help banks and broker dealers take risk of their balance sheets but won’t it simply offset that risk to the taxpayer? Do we need more risk or are we at a point where the government has no other choice?
September 18, 2008 6:03PM
By Alexis Glick
In my last blog, I wrote a story, from a source, about why Washington Mutual is too large to fail. In that story, I mentioned the amount of FDIC insured deposits, $181 billion dollars, at Washington Mutual. I also talked about a loan that the Federal Home Loan Bank of San Francisco gave Washington Mutual to the tune of $58 billion dollars. The Federal Home Loan Bank of San Francisco sent me the following note in response to two points that I made in my last blog.
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As a spokesperson for the Federal Home Loan Bank of San Francisco, I would like to correct two factual errors about the Bank that appear in this news story.
You state, “The Federal Home Loan Bank of San Francisco is losing money.” In fact, the Bank’s net income for the second quarter of 2008 was $223 million, for the first six months of 2008 was $463 million, and for 2007 was $652 million. The Bank’s net income has been positive every quarter and every year since 2000, as indicated in financial disclosures posted on the Bank’s website at www.fhlbsf.com.
You also state, “If Washington Mutual were allowed to fail, they [the Federal Home Loan Bank of San Francisco] would have no protection against the money they lent to Washington Mutual.” In fact, by statute, all advances from the Bank are required to be fully collateralized by eligible collateral.
Amy Stewart
Vice President, Corporate Communications
Federal Home Loan Bank of San Francisco
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I’d like to address the two points made above and some of the commentary posted on the last blog. One, their net income is solid. In the story I broke, I should have clarified when I said the Federal Home Loan Bank is losing money, that they are reportedly losing money on the collateral used to back the loan. Two, the Federal Home Loan Banks are protected first and the FDIC insured depositors are insured second. They are absolutely right and I stand corrected. I should have clarified that. Although, that makes me even more concerned about the health and well-being of the FDIC.
Karen Petrou of Federal Financial Analytics in Washington D.C. sent my colleague the piece below. It explains the risks much that better than I can explain them. When reading her note, keep in mind, that there are 12 Federal Home Loan Banks or GSE’s (Government Sponsored Entities) which function like Fannie Mae and Freddie Mac. Like Fannie and Freddie, they provide local lenders with liquidity which help them offer mortgages at the lowest possible rates to consumers. They do this mainly by advancing funds to lenders, and in advancing funds, they ask for collateral and protection from default. One way to get protection is to ask for a claim on a lender’s assets, called a “lien.” In an interview this morning with a former FDIC CFO he told me that the FDIC (the entity which insures our deposits), has $46 billion dollars and access to a $30 billion dollar loan from the Federal Reserve Bank, should they need it.
Here is the report:
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GSE Activity Report
September 18, 2008
Wading Through WaMu
Summary
In the midst of market mayhem, many have lost sight of the Federal Home Loan Banks. Here, we turn again to them and posit the System’s prospects in light of WaMu’s problems. As before, we think the System’s prior lien poses significant FDIC risk, and we wonder if the San Francisco and Seattle Banks will push the point if there is a WaMu failure or instead make use of the new Treasury liquidity facility to handle any short‐term funding problems.
Analysis
When Indy Mac failed, we noted that the San Francisco FHLB took out about double its advance exposure in exercising its prior lien against the failed‐bank’s
assets in the FDIC’s hands. In essence, the FDIC’s initial recovery was halved by the prior lien, sharply increasing the projected loss to the FDIC and making certain the pro‐cyclical premium hike set for October. WaMu is a far larger Bank customer and, as a result, its problems will have strategic impact not only on the FDIC, but also on the FHLB System.
First, to the FDIC. WaMu’s most recent data show outstanding advances of $58 billion. If the Home Loan Banks similarly covered all possible risk by exercising a prior lien over double this total, the Banks would hold a prior lien on $116 billion or about 37 percent of WaMU’s total assets of $310 billion. This would, of course, have grave consequences for the FDIC, leading Congress in the next GSE‐reform round to end the Banks’ prior lien in the course of still more dramatic structural reform of the Home Loan Bank System.
Recognizing this, we expect the Banks with WaMu exposure to look for alternatives that will at least ease the pain to the FDIC. Options here are sorely limited, but a significant one is the new Treasury GSE liquidity facility. Importantly, the San Francisco Bank has completed all the paperwork necessary to access the fund if needed; Seattle has said it doesn’t expect to use the facility, but we expect that it nevertheless is similarly completing the administrative work just in case.
The Federal Reserve has already told San Francisco what to expect in the new facility: a 13% discount on advances posted as collateral. This is a significant hit to funds presumably fully secured by current, high‐quality mortgages and we think it reflects the Fed’s all‐too‐clear understanding that a lot of Bank collateral is, in fact, anything but. The Fed too is counting on the system’s prior lien in its discount calculation, but still refusing to back dollar‐for‐dollar support from Treasury. This position complicates the value of the Treasury facility to the Banks and could well force them to exercise the prior lien in full in the event WaMu fails to find a buyer.
Now, to the second issue: the Banks’ future. Even if WaMu finds a buyer, it isn’t going to be the big FHLB borrower it’s been for years. In the short run, the rescued WaMu will, like many other institutions, be forced to rely on the System because liquidity elsewhere is hard to come by outside the Federal Reserve’s facilities – it currently accounts for 17% of total System capital stock. In the near term, though, a WaMu buried in a bigger bank like Wells or Citi will use FHLB advances far more strategically and in considerably lower amounts. WaMu holds 29% of Seattle’s advances and 19% of San Francisco’s. Taking them out of the Bank to even a minor degree takes a very big customer out the door.
Outlook
As noted, we think the FHLBanks are going to get a strategic overhaul along with Fannie and Freddie when Congress gets down to a GSE‐charter rewrite next year. We know many in the Bank System think its cooperative structure will save them, but we don’t. The Banks have too much risk backstopped by too much money from the FDIC with too few customers to remain a viable liquidity system going forward – and that’s not even taking into account the revised mortgage market and the new role of Fannie and Freddie once Congress gets done with them.
September 17, 2008 11:40AM
By Alexis Glick
This morning a source tells me that Washington Mutual, the 6th largest bank and largest savings and loan bank in this country, cannot legally fail. Here is why:
They have $181 billion in deposits with the average bank account balance of $5,200. The FDIC is responsible for those deposits. How much or what percent of those deposits is unclear. We don’t know for sure. Just this morning I saw a statistic that said only 60% of bank deposits are FDIC insured nationally and the average recovery is 72%. Who knows given where we are today? After all, we do have 8,000 banks in this country.
Washington Mutual borrowed $58 billion from the Federal Home Loan Bank of San Francisco. The Federal Home Loan Bank of San Francisco is losing money. If Washington Mutual were allowed to fail, they would have no protection against the money they lent to Washington Mutual. What does this mean? The government would foot the bill. The government would have to come up with the bulk of the money and pay back the Federal Home Loan Bank of San Francisco.
So what are we talking about? We’re talking about risk to the depositor and to the Federal Home Loan Banks of $239 billion. Let me remind you that the FDIC or the Federal Deposit Insurance Corporation has $45 billion. We are talking about a bank with $181 billion of deposits. They cannot afford to let this bank fail.
My source tells me they have one option, an assisted merger. Washington Mutual would be merged into another bank. That bank would be given protection or a guarantee by the government that the losses above a certain number would be capped, much like the Bear Stearns scenario, only in this case the number or level of risky assets assumed by the newly merged bank would be negotiated.
Who might consider this assisted merger? The number one bank mentioned is JPMorgan. JPMorgan expressed interest earlier this year apparently making an overture to the tune of an $8 bid. Clearly the stock is no where near that level and the deal would be much cheaper. The deal this time around also involves debt that is much more distressed than it was six months ago.
As we speak, Washington Mutual’s debt is at junk status. The government legally has little to no choice. If Lehman, Merrill Lynch, AIG are now behind us, we now turn our attention to Washington Mutual and the FDIC. Can we rely on the FDIC to insure our deposits? How could $45 billion be enough? This is just one bank. What about the others?
September 15, 2008 6:02PM
By Alexis Glick
As we speak, the market appears to be closing at its lows. Frankly, I am not surprised. The action in the market today has been far too complacent. This afternoon, Treasury Secretary Paulson hosted a press conference at the White House. He looked exasperated. There is no doubt in my mind that the history books will be changed because of today. What happened over the past year will change the way banks do business and how they are regulated. Things have to change. I could sit here and list the many reasons why this happened and point the fingers at the SEC, the bank regulators, Wall Street, the Fed, the FASB rules that helped bury this industry, the Treasury or the architects behind this unwinding of leverage. What good will that do? As I said in my last blog, no one knows how bad it will get. Today, I am more convinced of that than ever.
This morning, I was invited on to The View to talk about what happened over the weekend. It was my first time sitting with Whoopi, Barbara, Elisabeth and Sherri. What a treat! I wish it could have been under better circumstances, but there is no doubt in my mind that what happened over the weekend isn’t just a business news story — it’s a personal story that affects every one of us. We talked about many of the issues I documented in a blog on July 15th, entitled “Scary Times.” I wrote that blog in reaction to the failure of IndyMac and the stress priced into the capital markets of a Fannie Mae (FNM) and Freddie Mac (FRE) failure. In that blog, which you can read by clinking on the link above, I talked about the protection guaranteed by the FDIC and the SIPC to protect your assets whether they are with a commercial bank or an investment bank.
If you are not sure what to do or how to diversify, read that blog. Do not take what has happened today lightly. This is your final wake up call: DIVERSIFY, DIVERSIFY, DIVERSIFY.
This is a day that I sensed was coming, and yet I am still in shock. The hardest part is knowing that the worst is not behind us. There will be more writedowns, further shocks to the system and a tightening of credit for every party involved. We need to brace ourselves for what is ahead. Markets will recover, assets will get re-priced and, a year or two for now, we will look back and wonder how we made it through this difficult time.
Here is what we do know, as opposed to what we don’t know.
1. How banks, investment banks and insurance companies are regulated will drastically change–and with good reason.
2. The SEC will need to revisit leverage ratios and the uptick rule. How did they allow companies to sell stock short without a locate?
3. The de-levering process will force another massive round of writedowns.
4. FASB rules requiring mark-to-market accounting will be revisited and scrutinized to death for aiding and abetting this collapse.
5. The Fed will play a much more integral role in the health, well being and capitalization of the credit markets.
6. Morgan Stanley (MS) and Goldman Sachs (GS), two of the last independent investment banks, will likely merge with a commercial bank or buy one to diversify risk and have access to deposits.
7. Unemployment numbers will get worse. Much worse.
8. We will have another quarter of negative GDP like 4Q of 2007. It’s simply a matter of whether it will be 4Q of 2008 or 1Q of 2009, or both.
9. Credit will be much harder to come by, and rates will not decline as favorably as the Fed hoped a week ago by bailing out FNM and FRE. Hence, borrowing money at lower rates to fuel the housing market will take longer.
10. We will wake up tomorrow morning, do this all over again, and we will come out of this stronger and smarter.
