Monday, September 15, 2008

Liquidations Flood Wall St.

Good Evening Everyone


Before you read this post, PLEASE watch this interview of Meredith Whitney today.

You have seen Meredith on here many times before. She is the best financial analyst on the street IMO. Here is a wonderful explanation as to why we are not out of the woods and in deep trouble. As you can see, Meredith has now increased her peak to trough in housing from 30% up to 40-45%.

She also commented that banks like Citibank and others are expecting 20-25% losses in housing. You know what this means folks: All of the CDO's the financials are sitting on will be worth much less than they expected or planned for. This will trigger another string of writedowns for the financials.


I didn't have a full grasp of how crushing these liquidations are for the financials until I watched Meridith today. When you are forced to liquidate like Lehman and others, you have no leverage to negotiate fair pricing. As a result, assets are sold well below market value. This is simply devastating to the banks that hold the same assets.

Massive liquidations is why you saw oil go under $100/barrel today. The toxic loans that are on the banks balance sheet just got a little more toxic as Lehman is forced to mark to market and dump all of those sh*t sandwiches. Commercial real estate also got killed because Lehman holds huge amounts of commercial assets that will now have to be sold at bargain basement prices.

I am sure Donald Trump wanted to puke after watching this slaughter in commercial.


Folks, if AIG does not get funding tomorrow, run as fast as you can for the exits. Here is the story from Bloomberg:

"Sept. 15 (Bloomberg) -- American International Group Inc. is seeking a loan for as much as $75 billion through Goldman Sachs Group Inc. and JPMorgan Chase & Co. after the Federal Reserve balked at providing funding for the insurer, according to people familiar with the situation.
Representatives of Wall Street's biggest firms convened at the New York Fed for a fourth consecutive day, this time to discuss the funding crisis at AIG. The Fed urged AIG to seek private capital and discouraged the insurer from expecting a loan from the central bank, according to two people with knowledge of the discussions.

New York-based Goldman and JPMorgan are working with AIG to determine how much the insurer needs, said two more people, all of whom declined to be identified because negotiations are private. The loan would involve temporary financing, a so-called bridge loan, through a syndicate of banks, the person said, adding that there's no assurance an agreement can be worked out.

``We're still working on a number of alternatives,'' said Nicholas Ashooh, spokesman for New York-based AIG. JPMorgan's Brian Marchiony and Goldman's Lucas van Praag declined to comment.

AIG fell $7.38, or 61 percent, to $4.76 at 4:15 p.m. in New York Stock Exchange composite trading, bringing its loss for the year to 92 percent"

My Take:

AIG is big enough to take this whole market down my friends. They have a $1 trillion balance sheet. That makes them almost twice the size of Lehman. The stock dropped 61% today and now trades under $5. This is unbelievable. AIG is one of the USA's great companies. To see them in total shambles is a travesty.

When push comes to shove IMO, the Treasury is going to be forced to come to the rescue here if Wall St. fails to lend them the $75 billion they are asking for.

Anyone notice how the dollar amount on this loan keeps growing? Last night they supposedly only needed $40 billion. Now we are at $75 billion. The problem AIG has is I am not sure there is $75 billion left to borrow on Wall St.!

Bottom Line:

We are at sticksave levels folks. There is a FOMC meeting tomorrow and a rate cut would not surprise me. In fact, I wouldn't be surprised to see a half point cut. The strengthening of the dollar along with the commodity drop has given the Fed enough room to drop rates.

If a ratecut doesn't happen, expect something creative tomorrow by the Fed in an attempt to shore up the markets. The DOW was gushing red during the last hour of trading on very high volume. This was an ugly way to go out today. Market crashes occur at times like these although I am not predicting one.

As a result, expect more fireworks and a sticksave on Wed. This could lead to a bounce. Also, keep an eye on WAMU. They dropped under $2 today and could fail tomorrow. The FDIC loves to clean these messes up on a Friday.

If the Fed decides to make a "No More Bailouts" statement tomorrow to Wall St. and decides not to lend AIG any money then I have one piece of advice: Run for your life!


Jeff said...

Just picked this up. Check out this link.

Banks tossed $123 billion of mortgage garbage that even the Fed refused to accept. This paragraph is startling to me:

"Credit markets showed few signs of relief. The Fed-funds rate traded as high as 6.5% Monday, well above the central bank's 2% target as demand for cash far outstripped supply. The shortage forced the Fed to inject a massive $70 billion cash via its daily repurchase-agreement operation, which helped bring down the rate to 3.5%.

Traders said that various Wall Street firms offered a staggering $173 billion in mortgage-backed paper to use as collateral for repo agreements, but the Fed only accepted about $49 billion of it -- a sign that much of that debt remains too toxic for the Fed to assume on its books."

Anonymous said...

S&P just downgraded AIG. If they don't get some big deal put together tonight they are gone tomorrow. They probably don't have time though.

Jeff said...


I just saw that...Holy S*** thats bad. Futures are down 14 handles on the S&P.

It looks like we see some more tankage tomorrow. This is getting really scary.

The market is collapsing like a house of cards.

Nikkei is down 580 points.

S. Korea futures market just shut down the futures market due to extreme volatility.

All hell is breaking lose!

Jeff said...

CNBC's Marc Faber just reported:

According to sources, AIG will declare bankruptcy on Wed. if they cannot secure $75 billion in funding tomorrow.

AIG employs over 100,000 people. Largest insurer in the world.

I cannot believe what I am watching. Lets all hope we find a way out of this.

Jeff said...

Oops I meant David Faber above!

waubay said...

The few comments I have seen concerning an AIG bk hint at armageddon for Wall Street. Doesn't seem like the Fed could do anything for them, AIG is not a bank. Do you think Paulson will come up with some pseudo-legal way of giving them $100 billion?

Jeff said...


They could facilitate a loan behind the scenes via the banks.

The Fed seems to be making up their own rules as they go. I never thought they would start accepting garbage CDO's at the discount window so anything is possible.

God Asia is cratering tonight. 5-6% losses across the board.

Jeff said...

It looks like the Fed is pressuring Golman Sachs and JP Morgan to get a loan done for AIG.

Here comes the sticksave. Lets see if they can get the deal done:

"Federal Reserve officials were in urgent talks with Goldman Sachs and JPMorgan Chase on Monday to put together a $75 billion lending facility to stave off a crisis at the American International Group, the latest financial services company to be pummeled by the turmoil in the housing and credit markets.

The talks, which began last week and continued through the weekend, added to the sense of agitation in the stock market Monday, as investors grappled with the implications of the bankruptcy of Lehman Brothers, which, like A.I.G., was a large counterparty to derivatives contracts held by countless financial institutions.

Shares in A.I.G. tumbled more than 60 percent on Monday morning as concerns grew that the firm lacked capital to withstand cuts to its debt rating, which were borne out later in the day. The company’s potential write-offs are mounting and may reach $60 billion to $70 billion, according to two people briefed on the situation.

The day started off with news that A.I.G. had requested a $40 billion bridge loan from the Fed, a request that was rebuffed, and ended with the word that its need had soared to $75 billion. The firm suffered several credit-rating downgrades Monday evening, including cuts by Standard & Poor’s and Moody’s."

Jeff said...

Lots going on today!

Pretty flat after being down early. I have some things to do this morning. I will have something up this afternoon.


Jeff said...


The Treasury Sales to foreigners were released today and they are horrific. NEgative outflows in treasuries.

I will post it today. Foreigners are pulling back on buying treasuries. This is a very bad sign!

FOMC in 10 minutes

johndaniels said...

all this and the markets UP over 150 i guess its gov't printed funny money coming into the market? where is this capital coming from?

Jeff said...


Check out my new post and read that TIC report.

The world is about to turn the money spiggot off. I about fell out of my chair when I read this.