Wednesday, September 17, 2008

Batten Down the Hatches


What a morning. It looks like investors have finally gotten tired of the bailouts. I don't know where to begin today folks. The financial system is hanging by a thread. It seems to me like there is a run on the investment banks.

Morgan Stanley is supposedly considering their options in terms of whether or not they want to stand alone according to CNBC. Goldman Sachs is also getting pummeled today. Here is the story on the last men standing:

"Sept. 17 (Bloomberg) -- Goldman Sachs Group Inc. and Morgan Stanley, the two biggest U.S. securities firms, tumbled the most ever in New York after a government rescue plan for American International Group Inc. failed to ease the credit contraction.

Goldman fell as much as 23 percent on the New York Stock Exchange and Morgan Stanley plunged 44 percent, leading financial stocks to the lowest level in five years.

Morgan Stanley Chief Executive Officer John Mack and Goldman's Lloyd Blankfein are trying to navigate declining investor confidence that prompted emergency sales of Merrill Lynch & Co. and Bear Stearns Cos. and the bankruptcy of 158- year-old Lehman Brothers Holdings Inc. The turmoil spurred the U.S. government late yesterday to lend as much as $85 billion to AIG to prevent the insurer's collapse.

Markets are reacting to ``rumor and fear,'' Colm Kelleher, Morgan Stanley's finance chief, said yesterday after the New York-based company reported better-than-estimated earnings for the third quarter.

Morgan Stanley dropped $9.41 to $19.29, the lowest in almost 10 years, in composite trading on the New York Stock Exchange at 11:40 a.m. Goldman slumped $30.06 to $102.95, a three-year low. "

Quick Take:

All of the investment banks are just getting swallowed up by the massive deleveraging that is now hitting Wall St. These firms were so highly leveraged. They lent $30 for every one dollar in capital. That gives you a 30-1 leverage. When housing was going up, these firms made massive amounts of money with such high leverage.

However, leverage works both ways, so your losses are more severe when the game is over. When you are losing money at 30-1 leverage, it doesn't take much to wipe out your capital. I don't know if you will see an investment bank on Wall St. a year from now. That is unbelievable. Almost all of these firms navigated through the Great Depression. Is this a sign that this crisis is worse? Time will tell.

IMF: Worst of crisis lies ahead

Be worried when the IMF is worried:

"JEDDAH (Reuters) - The worst of the financial crisis may still lie ahead and more major financial institutions may face trouble in coming months, IMF director general Dominique Strauss-Kahn said on Wednesday.

"The roots of the crisis are behind us, the roots being the fall in housing prices. The consequences for some financial institutions are still in front of us. We have to expect that there may be in the coming weeks and coming months other financial institutions with some problems," he said.

Still, the world economy was very resilient and should rebound in 2009, Strauss-Kahn said to reporters after a meeting with Gulf Arab finance ministers and central bank governors."

Quick Take:

This is one of the most respected organizations in the world. Take note when they make such predictions.

Bloated Pig For Sale!

Regulators are shopping this pig around before they have to take them over. They have yet to find a buyer. Gee what a shocker. I am sure their balance sheet is in great shape! There is a reason this pig has been sitting at $2 for the last couple weeks. Here is the news:

"NEW YORK (AP) -- The U.S. government has been reaching out to large banks in an effort to organize a buyout of the beleaguered Washington Mutual Inc., according to a person briefed on the talks between regulators and banks
The obstacle, however, is that "no one knows what's in their books," the person said, speaking on condition of anonymity because of the sensitivity of the matter. There could be, he said, "a minimum amount of value there."

A New York Post report Wednesday citing unnamed sources said regulators have reached out to Wells Fargo & Co., JPMorgan Chase & Co. and HSBC Holdings PLC, among other institutions. The Post noted that no discussions of a deal between any of those banks and Washington Mutual were under way."

Quick Take:

this is the nations 6th largest bank. If the FDIC is forced to take them over, it will pretty much wipe out all of their capital. Don't worry, the way are government has been spending lately, I am sure they will throw them billions to fill up their coffers.

Money Market Fund Halts Redemption

I posted this in the comments section last night, but I felt it deserved a mentioning on here today:

"Sept. 17 (Bloomberg) -- Reserve Primary Fund, the oldest U.S. money-market fund, became the first in 14 years to expose investors to losses after writing off $785 million of debt issued by bankrupt Lehman Brothers Holdings Inc.

Shareholders pulled more than 60 percent of the fund's $64.8 billion in assets in the two days since Lehman folded. Losses on the securities firm's debt forced the fund to break the buck, meaning its net asset value fell below the $1 a share price paid by investors, New York-based Reserve Management Corp., its closely held owner, said yesterday in a statement. Redemptions were suspended for as long as seven days."


A second money market fund just broke the buck.

Quick Take:

I advised everyone last night to get into treasuries and CD's. If you like money market funds, Vanguard is the safest one out there. We are in a crisis folks and you really need to pay attention to your investments. Please be careful!

Gold Soars

When there is blood in the streets gold always reacts. I discussed a move in gold about a week ago but I didn't expect the biggest jump in 8 years! Then again I also didn't think we would lose almost all of our investment banks this week either! Here is the news on gold:

"Sept. 17 (Bloomberg) -- Gold surged the most in eight years as investors sought the safety of precious metals on concern that the credit crisis will deepen, leading more financial institutions to fail. Silver jumped more than 8 percent.

The U.S. government took control of American International Group Inc. in an $85 billion bailout to prevent the biggest financial collapse ever. The cost of borrowing dollars for three months jumped the most since 1999 as banks hoarded cash. In March, gold reached a record after the Federal Reserve backed JPMorgan Chase & Co.'s purchase of Bear Stearns Cos.

``Gold is going to be the beneficiary of a global move toward a safe haven,'' said John Licata, the chief investment strategist at Blue Phoenix Inc. in New York. ``There's a gigantic fear factor. Most people are concerned another bank is going to fail.''


Everyone knows about this by today but here is the story in case you missed it. This was the trigger to the selloff this morning.

Final Take:

I wanted to make this news oriented today because there is so much going on, and I realize people want to know why this is happening. IMO we are witnessing total contagion.

Our financial markets are extremely intertwined,and we are now seeing the fallout of three major events. In the past week we have seen our housing system nationalized, Lehman go Bankrupt, and our largest insurance company get taken over by the government.

Each of these events set off triggers all around the world. To say these are unprecedented times would be an understatement!

Stock are down almost 300 points. I am hearing reports companies failing to make payroll. Here is an example of one. I have a friend who just had the same problem.

Treasuries are now at their lowest levels in 54 years:

"Sept. 17 (Bloomberg) -- U.S. Treasury three-month bill rates dropped to the lowest since at least 1954 as a loss of confidence in credit markets worldwide prompted investors to abandon higher-yielding assets for the safety of the shortest- term government securities.

Investors pushed the rate to 0.0304 percent on concern that credit market losses will widen after the bankruptcy of Lehman Brothers Holdings Inc. and the federal takeover of American International Group Inc. In a sign of banks' reluctance to lend, the rates charged for short-term loans relative to Treasury bill rates rose to the highest at least since the stock market crash of 1987.

``It's scary,'' said E. Craig Coats Jr., who co-heads fixed income at Keefe, Bruyette & Woods Inc. in New York and started trading bonds in 1969. ``This is the worst it's ever been since I've been in the business. Nobody knows what's really going on. Systemic risk is here and there and everywhere.''

Bottom Line:

Batten down the hatches. We are in the middle of a systemic crisis. Things are real bad folks. My biggest fear is the Government might try to print out of this in a panic. I hear that the Fed is about out of money and needs to sell more treasuries in order to shore up its balance sheet. I need more hard info on this before I talk about it.

This is why you saw a moonshot in gold today. If we hyperinflate out of this, we risk losing everything including our government.

Stay tuned.


Minton Mckarkquey said...

I'm speechless. This could be the most significant week for the US economy in my lifetime.

I'm predicting some more govt intervention into trading very, very soon...

Good advice on treasuries, Jeff, though at this point sticking all the cash under the mattress is looking attractive too!

Jeff said...


I agree. I really didn't know where to start or what to say today.

The mattress is starting to look good. I hope the financial system makes it to Friday!

Can you imagine the lines at the bank if WAMU fails? I think you might see a run on the banks!!

Today is crazy. I knew at some point the market would start hating these bailouts. It looks like AIG was the trigger.

I think you are right on with more intervention. Geez what a day.

Minton Mckarkquey said...

Here's an interesting piece that I picked up about why MS may have bigger problems than people realize...

The Ultimate Wall Street Nightmare
by Martin D. Weiss, Ph.D. 09-15-08
* Big brokers are also loaded with derivatives. Merrill Lynch has $4.2
trillion. Morgan Stanley has $7.1 trillion. As best we can determine,
Lehman Brothers has significantly less — $729 billion. But in
proportion to its dwindling capital, its exposure seems to be among
the worst.
To understand why, put yourself in the shoes of a senior derivatives
trader at a big firm like Morgan Stanley (which has $7.1 trillion in
derivatives on its books and about $10 billion in capital).
Let's say you're personally responsible for $500 billion in
derivatives contracts with Bank A, essentially betting that interest
rates will decline.
By itself, that would be a huge risk. But you're not worried because
you have a similar bet with Bank B that interest rates will go up.
It's like playing roulette, betting on both black and red at the same
time. One bet cancels the other, and you figure you can't lose.
Here's what happens next ...
* Interest rates go up, reflecting a 2% decline in bond prices.
* You lose your bet with Bank A.
* But, simultaneously, you win your bet with Bank B.
* So, in normal circumstances, you'd just take the winnings from one
to pay off the losses with the other — a non-event.
But here's where the whole scheme blows up and the drama begins: Bank
B suffers large mortgage-related losses. It runs out of capital. It
can't raise additional capital from investors. So it can't pay off its
bet. Suddenly and unexpectedly ...
You're on the hook for your losing bet.
But you can't collect on your winning bet.
You grab a calculator to estimate the damage. But you don't need one —
2% of $500 billion is $10 billion. Simple.
Bottom line: In what appeared to be an everyday, supposedly "normal"
set of transactions ... in a market that has moved by a meager 2% ...
you've just suffered a loss of ten billion dollars, wiping out all of
your firm's capital.

Jeff said...


Great stuff. One slight reversal and you are toast! If this derivatives market blows up the game is over.

I am hearing that Morgan's credit spreads have gone through the roof. Goldman's are up too.

Once those spreads rise to a certian level you are pretty much toast.

I doubt Morgan makes it. Goldman will be the only one that has a chance.

I gotta say though, there is a part of me that thinks these ppigs got what they deserved.

I hate to see investors get slammed in the process. Especially baby boomers that are about to retire. How many people will have to keep on working now because their 401k's have been decimated?

johndaniels said...

"It seems to me like there is a run on the investment banks."

i started moving out of merrill when the stock was in the 50's. saw this coming; and I bet BAC weasles out of the merrill acquisition.

gold, baby. silver?.can't get it. nada. no supply.

Babsy said...

What about 401ks? Should we just let them be or reduce our contributions until the market improves???

Jeff said...


Nice move on Merrill. BAC overpaid IMO for MER and Countrywide. I hope you had some gold before the move today.

I have a fund that has a lot of gold so I am looking forward to seeing how much that moved tonight.

Quite a bounce midday here. Lets see how we finish.

Jeff said...


Tough call there. there is nothing wrong with a some diversification.

I still think we are going lower.

If your fund has some bond funds or money market funds I don't think it would hurt to put part of your 401k in their until things quiet down.

I also depends on your age. If you are near retirement I would definately get into some fixed income.


ZMonet said...

Jeff, Thanks for your advice on investments. My wife and I sold our house to make sure that we could pocket some of the equity and are now renting in AA County Maryland to make sure that we can survive the commute into DC. I'm glad I didn't put the sales proceeds into the stock market. We were going to buy a house about 6 months ago, but when we were in the final stages of negotiation (post-home inspection) I had my wife read the 12 steps of the unraveling of the financial system (by Roubinni) and when the seller wouldn't assist with $10K worth of structural repairs we walked. I would love to sit on the sidelines and rent, but we may not be permitted to resign at the end of our lease in 7 months. If that is the case, even with Roubinni's help I may not be able to convince my wife to make yet another move prior to buying our "longterm home".

Jeff said...


Use all of your charm to talk her into another year of renting!

Especially if you live up in this area. B-more and DC are just starting to break. Lots of downside to come.

Find a nice house to rent to help convince her. I think it would be a big mistake but I understand how significant others can be.

Who knows, at the rate the economy is falling apart, we might bottom in seven months.

Keep showing her Roubini and other bear blogs. I think you will regret it if you buy.

Good Luck!

Anonymous said...

On 9/18, at 6:45PM EDT a female news reader "Mary" someone" appeared on the Kudlow show to report that a Vanguard Money Market Fund had broken the Buck! Kudlow then said; "I thought it was Putman".
"Oh Yes", she said, "I was wrong - it was Putman"
Vanguard should sue CNBC and GE for $150 billion dollars and fire that idiot women! If she keeps her job it will prove CNBC should be banned.

Jeff said...


well said. don't worry about vanguard. thats the safest MM of them all