Financial troubles in major U.S. banks

joyfulguyMarch 17, 2008

U.S. banking system in trouble.

Investment banks can now access Fed credit.

Bear Stearns were claiming that they were solvent.

Share prices were $80.00 last month, $70.00 early last week, closed Friday at $30.00.

Bear Stearns haven't enough reserves to continue.

Several billion of credit allowed to J P Morgan Chase over the weekend to bail our Bear Stearns Investment Bank.

J P Morgan are buying Bear Stearns ... shareholders are to get $2.00 for each share.

I think that they said that the Fed has reduced the intrest rate another 0.25% ... and that they expect that there will be another reduction in rate early in the week.

More fallout from the lousy mortgage issuing troubles over recent years.

With all of the foreclosures in progress, and with almost a certainty that there will be a tight mortgage market for some time, likely housing prices will not see bottom for a while.

World stock markets down overnight.

Early trading in the Dow down about 200 points.

That Canadian bank that I've been complaining about, with share prices about $62.50 a week ago?

Closed under $60.00 on Friday ... down just under 45%.

Keep your money in your jeans for a few days, I think, folks.

Hope you have a reasonably happy late-winter week, everyone.

ole joyful

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Consolidation in the upper tier of banks has been going on for decades - sometimes faster than other times, but the squeeze is inevitable.

In the late 1980's three huge names on Wall St. went under the hammer: Drexel Burnham, Kidder Peabody, and Salomon Bros. Along with the Resolution Trust Corp. liquidating or selling 747 S&L's deemed insolvent, a lot of bankers would have been throwing themselves out of the windows except that they'd already been laid off.

JPMorgan Chase jumped first at buying Bear Stearns since not only does the US taxpayer guarantee the portfolio, but it's said that Bear's building on Wall St. is worth $4/share by itself. It's a can't lose proposition for them.

Will the taxpayer lose? Maybe. Maybe not. Many people forget the government actually MADE money on the Resolution Trust Corp.

Are we at the bottom of the market? No, I think some of it still has to unwind. The market is objecting to the uncertainty of pricing the underlying assets. That these assets have SOME value is unarguable, it's just a question of how much.

I think it's amusing how everybody kept saying, "the market's due for a correction, the market's overdue for a correction." Then when the correction happens, everybody jumps ships and becomes a bear.

Just saw the "Fast Money" show on TV and one of the guest speakers (I didn't catch his name, sorry) gave an interesting counterpoint to the rising noise about taxpayer bailouts. He pointed out that the US's debt relative to GDP is 65th in the world, so the government could bail out a lot of banks before we'd be reaching the top level of debtor nations. He also said that the majority of mortgage holders are paying on time (which is true; and in fact 25% of homeowners don't have any mortgage debt). So even if the foreclosure rate rose to 20%, then the discount on the asset portfolios should be 80 cents on the dollar. Even allowing for a larger margin discount, you still wouldn't get anywhere close to the $2/share price paid for Bear Stearns.

The financial world is full of sharks, and in bad times they're quite happy to eat one another. Realistically, 20K (7K from Bear and ?? from any other failures, like maybe Lehman) added to the unemployment rolls bumps it up a notch, but overall it's still way under the level of unemployment I saw in the early 1970's.

Keeping your money in your pocket means it's losing 4% to inflationary pressures, exacerbated by the weakening dollar.

Look long-term and continue to buy regularly. Dollar-cost averaging is your friend in market gyrations.

    Bookmark   March 17, 2008 at 6:40PM
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"I think it's amusing how everybody kept saying, "the market's due for a correction, the market's overdue for a correction." Then when the correction happens, everybody jumps ships and becomes a bear."

And history proves that the average Joe who tries to time the market with purchases/sales almost always misses the opportunities. I'm with you jkom, dollar cost average is definitely my friend.

    Bookmark   March 18, 2008 at 5:48AM
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Back in the 1970's, my first mortgage was at a 13% interest rate! Yep, that was worse than now, IMHO. And, it was very difficult to get a mortgage. It was required to put 20% cash down and then it was still difficult to get a mortgage. We were buying a house on 17 acres and no bank wanted to touch a "farm" property back then. We had to go to the Federal Land Bank. Of course, when things got better, we refinanced at a lower rate.

Over the last 6-7 years, I've seen house prices skyrocket (and I live in NC, not CA). The bubble had to burst. Unfortunately, banks granted mortgages, credit lines, etc. much too freely at sub-prime rates. A lot of people in the financial business got creative to make money (greed). A lot of people bought above their means, often starting out with a mortgage along with another loan for the down payment. Many people "wanted it all" much too quickly instead of having the patience to work/save/invest until they could afford a house and other things. People used their homes like ATM cash machines to buy "things".

IMHO, this is a correction due to greedy behaviors. It had to happen. Hopefully, a lesson will be learned. The economy will recover slowly (after it hits bottom) and come back even stronger.

    Bookmark   March 18, 2008 at 8:46AM
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I don't see this as just another 'bump' when the Fed is bailing out banks like it hasn't done since the 1930's. I do not object to their doing it, but alone, it isn't enough. We need Congress to pass legislation for bank examiners to go into banks and sort out the good debt from the bad -- and let the bad banks fail. This is a strategy I gleaned from a newsletter put out by Merrill Lynch.

The newsletter discusses the different approaches used by Japan and Sweden when each had a situation similar to our current one.

The 'see no evil' approach by Japan's government left their economy to suffer for 12 years (still suffering).

Sweden's approach put an end to the problem in a little over two years. Sweden sorted out the bank debts: good debt with REAL collateral; bad debt with overvalued phoney mortgages, etc. Their economic policy kept liquidity, but their GOVERNMENT also acted. This had the effect of certifying good banks while letting others reap the rewards of poor practices.

It's going to be painful either way. The question is whether our Congress has the guts to do more than chat about the situation.

    Bookmark   March 18, 2008 at 10:37AM
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The bank I worked for in the 80s did exactly what you've described...went through the entire bank's portfolio dividing up good & bad assets. Then, a totally separate bank subsidiary was created (known as the 'bad' bank) to liquidate underperforming assets. My DH headed, hired a staff of almost 300 people, & completed the workouts of the 'bad' bank's asets. Because we couldn't work in the same division...I remained in the 'good' bank but my function was 'Work-Out Officer'. I ploughed through a couple thousand bad real estate loans (both commercial & residential). It took four years to liquidate the 'bad' bank's assets & wind down those filtering into my portfolio. Some were written off entirely with no recovery; others we salvaged between 20%-60%. A few were restructured & were moved back into the 'good' bank as performing assets after seasoning. It was ugly once banks started really marking to market. My bank tanked & was purchased by a foreign bank. A full 80% of the bank's assets were bad. Add to that the old "insubstance foreclosure" accounting rules & it was a disaster. Anyway, I've no doubt that some percentage of today's 'bad assets' have zero worth after allowing for foreclosure & holding costs for six months. Banks need to just bite the bullet & foreclose them off at absolute auction & move on to the next loan. Maybe, on that one, they'll recover 40% or 50%. Then, take the next one. The point I'm making is the longer they wait bemoaning their plight the less those assets are going to be worth. Looking to the Fed to bail everybody out isn't the answer. The banks, ultimately, have to pay the piper & clean-up their balance sheets. It's going to be painful for management, staff, & shareholders. My DH is currently navigating a large institution's entire lending portfolio (commercial, real estate, consumer, everything...) through these trecherous market conditions. They never wrote an unqualified sub-prime loan in their history yet they are witnessing their AAA prime loan delinquencies rise. It remains to be seen if they'll get through unscathed. Right now, they're holding their own with total delinquencies under .75%. This debacle is not over yet though...needs another 18 months to move everything through the pipes.

The Fed's rate cuts are a lot like s@x...exhilerating at first but it takes nine months to see the full consequences.


    Bookmark   March 18, 2008 at 1:14PM
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>>The Fed's rate cuts are a lot like s@x...exhilerating at first but it takes nine months to see the full consequences. Oooh, that was funny, tricia! I laughed out loud on that one, hee hee.

    Bookmark   March 18, 2008 at 2:02PM
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Yes - that was fun ... but ...

... full consequences after nine months?

You've never had kids, right?

How about something like 50 - 70 years?

Both markets (i.e. Dow Industrials and TSE S&P 60, both in the 12,000 area) are up today.

But the Dow Industrials were up yesterday (Monday) about 50, figuring that the over-the-weekend maneuvering fixed things ... but the TSE 60, heavier linked to financials and resource stuff, was down about 300 (about 450, intra-day).

And my bank stock that I was crying the blues over when it went down from the 80s into the 70s, then the 60s (from 106, last May) ... descended into the 50s (down 46%).

Is it time to buy more?

Maybe - but I think that it'd be a different bank! They've goofed more than once in recent years.

jlom51, I agree about the wisdom of dollar cost averaging for most of us, as I've said on occasion, and recently referred here to my actions in recent months as an indicator: bought in November, bought in December, bought in January.

But not in February ... I guess because I thought that things were bound lower.

Which makes me a market timer, at that time.

And I've been a market timer for some time, I guess, for I had bought only sporadically for quite an extended period in recent years (being retired and living on pensions, but still putting together some savings from time to time).

I still have enough for a couple of purchases for cash (so I had developed a certain kitty in the meantime).

I can make some more purchses using a line of credit, as well.

Plus expect that a buyout (largest in Canadian history, including Canada's largest phone co.) that's to conclude in a few months, ought to put some more cash in my pocket available for later purchasing.

At present I'm aiming at investing periodically through year-end ... but may have some more share certificates issued, if the market isn't into recovery by then, enabling me to build larger assets underlying my line of credit. Actually, I think that much of it is available without issuing the certificates, as the bank that carries the line of credit (plus some accounts) is the home of the discount broker that I use, so they are inter-related.

If I borrow from the brokerage using margin account, usually the interest rate is about 1% higher. At an issue cost of $35. - 50., it takes a while to save the cost of issuing in interest saving, unless the certificate represents a fairly large amount of asset. But it helps if you don't figure to sell the asset for a while. However ... crowding age 80 - how long may "a while" turn out to be?

And I haven't sold anything in recent years except several that I've been forced out of due to their being sold, in one instance being taken both private and foreign-based ... and the current one partly so.

We've had a vibrant mining and resource-based system, but during the past few years several of our majors have been taken over, on most occasions by foreign companies.

Brascan, Noranda, Inco, Falcombridge, Dofasco, Alcan and Ipsco, among others ... it's to cry over.

The Australians, in a similar boat, weren't so stupid, as several of their mining companies have become major world players, BHP Billiton, for one. Several years ago, BHP was Broken Hill Proprietary (a gold miner?).

We're like a farmer, selling off his farm, ten acres at a time.

I'm going away to cry in a corner, for a while.

Good wishes for an adventuresome week, everyone. Keep your powder dry!

ole joyful

P.S. You've heard of the Golden Rule in the business and financial game ... well, the political one, as well, I think ... "Them wot has the gold ... makes the rules".

o j

    Bookmark   March 18, 2008 at 11:10PM
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Socialism for the wealthy (being bailed out by government), but

private enterprise for the poor (suckers).

ole joyful

    Bookmark   June 5, 2008 at 1:17AM
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Socialism for the wealthy (being bailed out by government), but

private enterprise for the poor (suckers).

ole joyful

    Bookmark   June 5, 2008 at 1:22AM
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joyfulguy-"Socialism for the wealthy (being bailed out by government), but private enterprise for the poor (suckers). "

I agree.......and so did these people.

"I see in the near future a crisis approaching that unnerves me and
causes me to tremble for the safety of my country. As a result of the war, corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavour to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed." : Abraham Lincoln

"The real truth of the matter is, as you and I know, that a financial
element in the large centers has owned the government of the U.S. since the days of Andrew Jackson." : Franklin D. Roosevelt

"Fascism should more appropriately be called Corporatism because it is a merger of State and corporate power." : Benito Mussolini

We're not a democracy. It's a terrible misunderstanding and a slander to the idea of democracy to call us that. In reality, we're a plutocracy: a
government by the wealthy." : Ramsey Clark, former U.S.
Attorney General

"Of all forms of tyranny the least attractive and the most vulgar is
the tyranny of mere wealth, the tyranny of plutocracy" :John Pierpont

"I hope we shall crush in its birth the aristocracy of our moneyed
corporations, which dare already to challenge our government to a trial of strength and bid defiance to the laws of our country." : Thomas

    Bookmark   June 5, 2008 at 11:12AM
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