Saturday, March 8, 2008

Banks face $325 billion dollar systemic margin call

ReutersBanks face "systemic margin call," $325 billion hit: JPMSaturday
March 8, 9:24 am ETBy Walden SiewNEW YORK (Reuters) - Wall Street banks are
facing a "systemic margin call" that may deplete banks of $325 billion of
capital due to deteriorating subprime U.S. mortgages, JPMorgan Chase & Co
(NYSE:JPM - News), said in a report late on Friday.JPMorgan, which sent a
default notice to Thornburg Mortgage Inc. (NYSE:TMA - News) after the lender
missed a $28 million margin call, said more default notices and margin calls
were likely. The Carlyle Group's mortgage fund also failed to meet $37 million
in margin calls this week."A systemic credit crunch is underway, driven
primarily by bank writedowns for subprime mortgages," according to the report
co-authored by analyst Christopher Flanagan. "We would characterize this
situation as a systemic margin call."

The JPMorgan report included a revised bleaker forecast for subprime-related home prices. The bank now sees prices falling 30 percent, from its prior 25 percent forecast. Those prices have declined 14 percent since mid-2006, JPMorgan said.

My take:

The bad news just keeps on coming. JP Morgan is now predicting a 30% drop in home prices. The credit crisis keeps getting worse. Thornburg is pretty much BK now as they failed to meet a margin call.

What is happening is the banks are holding onto CDO's that keep dropping in value. This forces them to sell good bonds in order to cover margin calls. when they run out of good paper to sell they are forced to come up with cash in order to shore up the bad debt. The new accounting rules are forcing them to come up with the cash(aka margin calls).

Thornburgs CEO explains it here in Fortune magazine:

"The company’s CEO, Larry Goldstone, blamed a quirk of fair value accounting for Thornburg’s plight. “The turmoil in the mortgage financing market that began last summer continues to be exacerbated by the mark-to-market accounting rules which are forcing companies to take unrealized write-downs on assets they have no intention of selling,” he said Monday. “In this environment, the current market price of assets has become disconnected from their underlying recoverable value, resulting in increased volatility and imprecise quarter-to-quarter comparisons of asset valuations.”

Under these new accounting rules, banks are now forced to come up with cash to shore up the near worthless AAA CDO debt as well as good assets that are falling in value due to detiorating credit market thats scared to death and doesn't want top buy. These new accounting rules are making it costly for banks to hold onto this bad debt.

The reason the banks don't want to sell these CDO's is because they will either be forced to take the full loss on the CDO, or the CDO is worth more then what it can be sold for but because their is so much fear in the credit markets no one will offer fair value. As a result they would rather face margin calls then sell these bad or good assets because they might be worthless or they are worth more then what they are selling for in a frightened marketplace. My guess is if some of these banks had to write down all of their loans they would essentially be insolvent because they own so much bad debt.

The fact that these margin calls have risen to 325 BILLION dollars tells me we are getting close to the point where these CDO's will all be sold because the banks can't continue to face margin calls like this. There will be a point where the banks will be forced to sell all of this paper so we can start over with a healthy credit market and affordable homes. It will be a systemic reset of the whole housing system.

The problem is when this happens, you will see a systemic disaster that will be a financial event unlike anything any of has ever seen seen before. Banks will go under, lending will come to practically to a halt and housing is going to get crushed.

When this is all done my prediction is loans will only be done by banks and the lending will go back to the way it was. A 20% down payment with a good credit/job history. These homes are nowhere near priced where they need to be when these old lending standards are put in place.

Sit back and enjoy the trainwreck we are watching in the housing market. Watch your investemnts and check out the strength of your bank We are getting very close to the housing time bomb explosion and prices will be in a freefall soon. This 325 billion dollar writedown just takes us one step closer to the explosion.

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