Mauled Monday
Right around noon there was a huge high-volume sell off in Lehman. In addition several other financials - including Fannie, Freddie and Wachovia - got shellacked.
Why?
Look at MTG. Down 20%. AGO in the tank, etc.
Mortgage insurers. Shortly followed by bond insurers?
This is bad folks. Really bad. As in "you'll be fisted so hard that your tonsils will get grabbed from underneath" bad.
Unfortunately its also what I have been predicting for quite some time - a year or so - in this regard, going back to when the Radian deal was originally announced.
MBIA said it has enough assets it can sell to meet its collateral posting requirements:
"``MBIA is not in a `tenuous situation','' Chief Financial Officer C. Edward Chaplin said today in a statement."
This time. The problem is that this is unlikely to be a one-time event, as I've pointed out. Selling assets dilutes your capital ratios which means you are subject to getting hit with another downgrade, which requires more postings. This spiral, once it starts, is very difficult to get under control.
Their claim is somewhat akin to the guy who falls out of an airplane minus a chute and on the way down he remarks that its really not bad at all - in fact, the breeze is refreshing and he needed to dry his hair anyway - it rained on him while he was getting in the plane.
Of course he's not talking about the last 1/8".... that sucks.
There is nothing that Bernanke can do about the situation at this point in time. As I pointed out in the weekend Ticker, he made his bet that the housing market would turn within a year back last summer when he decided to throw half The Fed's balance sheet into the market in a futile attempt to prop up prices.
The ivory tower man thought he could "jawbone" the housing market. But unfortunately for him, just like in the 1930s, the underlying problem is that the consumer - the buyer of all this crap, including houses, is overlevered and can't take on more debt to "reflate" the housing (or any other) bubble. There is neither the income capacity to service the debt nor the asset base to pledge as good collateral behind it.
The wiser choice would have been to tell Bear Stearns and the rest of them to eat their own cooking back in August of 2007. We would have gotten a huge selloff in the stock market, but we wouldn't have gotten the huge ramp in commodities and, I'd argue, we'd be better off net-on-net.
Instead, what we've managed to do is destroy the bond insurance companies and trash the municipal bond business. Have you had a look at the higher-quality closed-end mutual funds lately? IQI, for one? Oh my God. 30% losses over the last year?! Yow. That will leave a mark. I follow that fund because it happens to be one of my favorites for safe tax-free income, but as I noted last year I bailed on it precisely over these concerns, which now appear to be coming to fruition.
Never mind that OPEC is rather pissed off at the prospect of their dollar holdings being destroyed. If you think $140 oil is about speculators you are wildly mistaken. $140 oil is about the currency used to purchase that oil coming under attack as a direct consequence of the actions and inactions of our government, including Paulson, Bernanke and Congress.
Notice how neither of the Presidential candidates are talking about the economy in any sort of concrete fashion? Neither is making a campaign issue out of the rampant fraud in our financial system? Neither is threatening to investigate, prosecute and jail all those who engaged in it, from Wall Street down to the mortgage brokers who "jiggered" income and appraisals? Does that have to do with the fact that back in 2001 a petition was circulated by Property Appraisers and Congress ignored it? That Congress was explicitly warned after the S&L scandal that removing the Glass-Steagall protections would lead to this outcome in formal, under-oath testimony? That both parties have so much Wall Street PAC money "given" to them that they have been effectively bought and paid for? That both Democrats and Republicans literally have the financial blood of American households on their hands, and if they acknowledge this, they will sink themselves? That telling Americans that they can't have that new IPOD, Plasma TV or Cruise Vacation has become equivalent to shoving Grandma down the stairs? That they have become aware that its too late to fix it, having sat by and let petitions like the Appraisers, and the ones that Tickerforum ran last year go by unanswered?
Hmmm.
Well guys and dolls, as Kirk said to Khan, "here it comes."
PS: Still expecting a bounce in here somewhere. I'm just curious if it will happen before or after we have a few financial institutions implode!
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