Clearly Lehman (LEH) is on the brink of disaster. I talked about that on Tuesday in Lehman In Deep Trouble.
On Wednesday, the Financial Times was reporting Lehman’s secret talks to sell 50% stake stall.
Lehman
Brothers, the beleaguered US investment bank, held secret talks to sell
up to 50 per cent of its shares to South Korean or Chinese parties in
the first week of August but failed to reach agreement with either.
The
South Koreans and Chinese walked away after concluding that Lehman was
asking too high a price, said New York-based people familiar with the
potential buyers. Lehman declined to comment. Fannie and Freddie Are Collapsing
Fannie
Mae (FNM) is trading at $4.85 with a market cap of $5.19 billion and
Freddie Mac (FRE) is trading at $3.16 with a market cap of $2.04
billion. Freddie Mac has promised to raise $5 billion in equity.
Clearly that is not going to happen without a government bailout. The
only question now is "How big will that bailout be" given that Fannie, Freddie Have An Enormous $223 Billion Debt Rollover Problem.
Washington Mutual (WM) Is On The Brink
Washington
Mutual has announced it has "no plans to raise capital". The reality is
Washington Mutual cannot realistically raise capital. I talked about
this in Death Spiral Financing at WaMu, Merrill Lynch, Citigroup.
Minyan Peter had some interesting comments about Washington Mutual in Wells Fargo, WaMu Can't Ignore Credit Crunch.
Last fall, in Coming Bank Themes: Whispers From the Confessional
I shared with Minyanville readers that Washington Mutual (WM) had, to
use the company's own word, "opportunistically" moved a large portion
of its "held for sale" mortgages into its "held to maturity" portfolio.
At
the time, management suggested that the reason was because of the
attractive pricing that it saw on the loans. As I wrote then, and
continue to feel now, I believe that the real reason was the difference
in accounting for banks between "held for sale" and "held to maturity"
assets.
Put simply, for banks, "held for sale assets" must be
marked-to-market every quarter, with the changes in unrealized gains or
losses flowing through comprehensive income – and I would note up
front, not net income.
While "held to maturity" assets remain at
cost (or market value as of the day of reclassification, if moved to
"held to maturity" from "held for sale") and, like other loan assets,
only when management is certain of cashflow impairment, are they
written down.
As I have seen in a number of second quarter bank
10-K’s and in financial media, it now appears that banks are moving
other assets at a rapid pace from "held for sale" to "held to
maturity." Specifically, the assets that banks moved most during the
second quarter appear to be largely trust preferreds as well as CDO’s
from pooled trust preferreds issued by other financial institutions. Washington
Mutual, Wells Fargo and other banks are playing valuation games with
"assets held to maturity". They really want to sell this garbage, but
they can't except at prices that will cause them to raise more capital.
From here on out, any assets banks or brokerages move to the "assets held to maturity" class is extremely suspect.
Merrill
Lynch (MER) set the tone for what such assets might be worth when it
shocked everyone by announcing it sold CDOs at 22 cents on the dollar.
The reality was much worse. Merrill Lynch actually got 5.5 cents on the
dollar as noted in Ratchet Provisions Soak Merrill Lynch, Will Sink WaMu.
Beyond Fannie, Freddie: Three More Problem Children
Minyanville professor Bennet Sedacca noted his favorites in Beyond Fannie, Freddie: Three More Problem Children?
While
everyone focuses on Fannie Mae (FNM) and Freddie Mac (FRE), in my
opinion there are 3 other possible disasters waiting in the wings.
1. Regions Financial (RF): The company needs to raise $2 billion, says Sanford Bernstein. What are their options for doing so?
They
can sell debt. The problem here is that I believe you couldn't sell
debt if you wanted. The last reported trade in RF paper was 2 weeks
ago, nearly +700 to the 30 year or close to 12%. The company's
preferred trades at 10%. And the stock is now a 'single digit midget'
near $8 a share. So, as I see it, if you could get a deal done,
shareholders could get a 50% haircut.
2. Washington Mutual (WM):
WaMu trades as if it's in deep trouble. Its bonds trade in the 20%
range and no way can they issue a preferred.
3. Lehman Brothers
(LEH): This is my favorite and sits as my 'most likely to fail' problem
child. Its stock is now on its way to being a single digit midget and
just stuck investors with 143,000,000 shares at $28 a share in June of
this year. I don't believe many folks are willing to buy more at $12.
Also, its preferred stock trades are a not awe-inspiring 16%. More Than The FDIC Can Handle
That is already more than the FDIC can handle which is exactly why the FDIC Is Passing Around The Collection Plate.
Poor, poor FDIC - ever the Treasury Department’s whipping boy.
The
latter gets to smack the former around like a badminton birdie because
the FDIC’s primary responsibility is to clean up the Treasury’s messes.
And these days, there are messes aplenty.
It goes like this: The
Treasury oversees a regulatory body called the Office of Thrift
Supervision, or OTS, that’s tasked with keeping tabs on federal thrifts
(which are just mortgage companies moonlighting as federally chartered
banks).
Until recently, the OTS was responsible for monitoring
IndyMac Bancorp, which collapsed last month under the weight of
misplaced mortgage bets. The FDIC is now sorting out the mess. The OTS
also oversees such thriving institutions as Washington Mutual (WM),
BankUnited (BKUNA) and Downey Savings (DSL).
Since the OTS’s
idea of regulation is apparently to wake up late, sip a latte and spend
the day diligently ignoring the wildly unsafe lending practices of its
member banks, the FDIC is up to its ears in barely solvent financial
institutions.
The FDIC charges deposit-taking institutions fees
about $0.05 per $100 in deposits to display the group’s goofy logo
(which dates to its Depression-era roots). This is meant to assure
customers their money's safe, even if the bank’s risk management
policies aren't.
Now, the FDIC's challenge is to raise
sufficient funds to cover the coming wave of bank failures - without
putting undue stress on the already shaky banking system or igniting
fears that it would need to tap taxpayers' money to protect, well,
taxpayers' money. Add Wachovia And Corus Bank To The List
Wachovia
(WB) has made a horrendous mess out of things with its pick-a-pay
mortgages, inherited from the infamous acquisition of lender Golden
West at the height of the housing boom in 2006. But that's not all.
Wachovia has made so many mistakes that I am asking Can Wachovia Do Anything Right?
Corus Bank's (CORS) Yahoo! Finance Profile
is enough to tell its story of bubble lending gone mad. "The company's
loan portfolio comprises commercial real estate loans, including
condominium construction and conversion loans; residential real estate
loans; and other commercial loans. It focuses its lending activities in
various metropolitan areas in Florida and California, as well as in
Atlanta, Las Vegas, New York City, and the District of Columbia."
Let's not forget the monolines, Ambac (ABK) and MBIA (MBI)
Financial Entities On The Brink
Lehman (LEH)
Washington Mutual (WM)
Fannie Mae (FNM)
Freddie Mac (FRE)
Corus Bank (CORS)
BankUnited (BKUNA)
Downey Savings (DSL)
Wachovia (WB)
Regions Financial (RF)
MBIA (MBI)
Ambac (ABK)
On
account of deflation, I had to throw in a bonus 11th. Everyone wants
more for their money these days, even when things like this are free.
I
am quite sure there are many more deserving candidates that should be
on the list. An excellent case can be made for Ford (F) and GM. They
are really not manufacturing companies but rather financial lending
disasters.
The key here is there is virtually no chance the Fed
can save them all, or even most of them. The list is simply Too Big To
Bail. Originally posted at: http://globaleconomicanalysis.blogspot.com/
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