Monday, July 7, 2008

Financial stocks losses-$1.3 trillion

The most bearish estimates for the writedowns for the financial stocks are weighing in at $1.6 trillion. So far, the financials in the S&P 500 has lost about $1.3 trillion in market cap since it's highs last October. So a fair amount of the doomsday scenario in the financials is being priced in.,1,1065115.story

After the close, IndyMac announced it is effectively shuttering it's doors. They can't sell any of their assets. Look at this snippet from their press release tonight:

Yet in this environment, where either there are no bids for most of IMB’s mortgage loans and securities or the bid/ask spreads are abnormally wide, “fire-selling” assets would actually deplete capital further.

Regulators said that IndyMac was no longer "well-capitalized." Which means at June 30 at the end of Q2, IndyMac was well capitalized. That is convenient for the FDIC. 50 days after the end of the quarter, when the FDIC publishes their Quarterly Banking Profiles, their "problem bank" statistics won't include IndyMac. If you care to read last quarter's it is below.

Today, Goldman Sachs got hit for nine points, after it's 10Q was released. These have to be published 40 days after the quarter. Goldman got hit as they sold their Level 3 assets down from $98 billion, down to $78 billion, with a net exposure level of $67 billion. Goldman says their Level 3 assets are only 6% of total assets. Which sounds better than saying their Level 3 assets are 150% of their $44 billion of capital!

The point is, if Goldman got hit on this news, what is going to happen when Lehman reports their 10Q? Or Merrill? Or Citigroup? Well these firms will probably follow the Fed's lead, who said that Bear Stearns assets on it's books that JPM pawned to them are worth $28.8 billion, if sold in "an orderly market." No "fire sale" prices just like IndyMac! Which is why this statement of baloney is not even under their press releases!

But you can find it here if you check under Maiden Lane LLC.

Back in the 1920's, Maiden Lane was the storage building for the Federal Reserve. Now it's the storage building for Wall Street paper!

But soon you'll have some more paper. Look at this beauty that Morgan Stanley has come up with. They want people to sell their TIPS, and buy "swaptions" options on interest-rate swaps!

Investors should purchase derivatives that exploit concerns about inflation more efficiently than TIPS, Morgan Stanley advises. So-called swaptions allow investors to buy the right to purchase an inflation swap, in which one party agrees to pay a fixed rate in exchange for the inflation rate. Even if the CPI doesn't immediately rise, the instrument gains value on expectations for future increases.

Many investors prefer TIPS because they're backed by the government, while derivatives depend on the credit quality of the firm that issues them, he said.

So Morgan Stanley wants people to trade in their Treasury backed TIPS, for swaps with a brokerage firm backing them? Are you kidding me? Haven't these investment banks learned anything from this mess? Anyone wonder why these structured products all look good on paper? It's because they have such nice rips in them for the broker hawking the product! My Tip is to stay away!

At least it appears that the financials are getting closer to the doomsday scenario. Which means you probably can get another short covering rally in the next day and a half.

The only problem is, you have to get thru the next day and a half before you get the rally!

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