The CREDIT CRUNCH

Posted by Noah Rosenblatt on January 11, 2008 at 11.44 AM-
http://www.urbandigs.com/

A: Like I said numerous times, this is NOT A SUBPRIME PROBLEM. This is an overall mortgage + debt problem that extends to alt-a, prime, heloc's, option arm's, cosi/cofi loans, negative amortizing loans, credit cards, auto loans, etc.. Whether you like it or not is an entirely different story. This cycle must play out and that means more pain before we get better. Think of it as a very sick patient that must go through numerous surgeries and rehab before they can get back to normal. Well, we are about to get our 3rd of X number of surgeries and we haven't started rehab yet! When I wrote the Reset Storm post, I tried to explain that we are about enter a painful period where affordability becomes more of a problem as mortgages reset higher, which will further pressure housing, which in turn will further pressure wall street and the securitization of all types of debts: While most are aware of the coming adjustable rate mortgage resets in 2008, I feel like the anticipated severity of the problem is being under-estimated. At a time when new home sales are at a 12 year low, inventories and months supply at highs, we are about to enter a period of time when many struggling homeowners will be hit with payment shock. This is an outright affordability problem both for homeowners & prospective buyers alike; a rare combination. While the second half of 2007 saw many banks/brokerages/lenders/insurers visit the confessional and announce write-downs, 2008 will most likely see the consumers visiting the confessional as they no longer can meet their debt obligations and become delinquent.So far, we only saw the credit crunch sparked by subprime. Now we are starting to hear from credit card companies. As for the Countrywide buyout, I think Hank Greenberg is dead on by stating the fed was behind the deal. If Countrywide had to declare banktrupcy, which they most likely would have been forced to do, it would have been a huge shock to both the tradable markets and consumer confidence. The fed knows this and to think of this deal happening a few years ago, brings regulatory anti-trust questions that likely would have blocked the deal. Not so in today's environment. Lets get to the headlines. AMEX + CAPITAL ONE TO MISS EARNINGS ON CARD LOSSES American Express Co (NYSE:AXP) and Capital One Financial Corp (NYSE:COF), the largest independent U.S. credit card companies, projected profits below analyst forecasts on Thursday, citing mounting consumer loan losses as the U.S. economy slows. The forecasts show how the housing slump, tighter credit, high oil prices and rising unemployment have made it harder for many consumers to pay their bills. This has caused credit problems to widen beyond mortgages and affect other forms of debt, including credit cards and auto loans.MERRILL LYNCH REPORTEDLY FACING MASSIVE WRITE-DOWN The nation's largest brokerage firm, Merrill Lynch & Co., is expected to report losses of $15 billion stemming from soured mortgage investments, according to a published report Friday. The New York Times, citing people who have been briefed on the broker's plans, said the losses would come in nearly double its original estimate, prompting the firm to raise additional capital from outside investors. The losses are expected to be disclosed when the brokerage reports earnings next week, those people said. Merrill is likely to write down the value of its CDO and subprime mortgage-backed security exposures by $10 billion next week, Bernstein Research estimated. Such hits have increased concern that banks and brokerage firms may not be capitalized well enough and sent many companies in search of fresh cash.BANK OF AMERICA TO BUY COUNTRYWIDE FINANCIAL FOR $4 BILLION Bank of America Corp. said Friday it's purchasing Countrywide Financial Corp. for $4 billion, effectively doubling down on a previous investment in the troubled firm and catapulting the buyer into the top spot among mortgage lenders and loan servicers in the U.S. The stock-swap deal will put an end to the independence of the troubled California lender headed by Angelo Mozilo, and represents an increase from the Charlotte, N.C., bank's August investment of about $2 billion.The fact that Countrywide is selling out at these levels indicates serious distress; and BAC already has a vested interest of $2B at $18/share! Hank Greenberg reported yesterday that the Fed was behind the Bank of America / Countrywide deal as bankruptcy rumors started swirling for the troubled lender. Could you imagine the shock to the tradable markets and to consumer confidence that would have occurred if Countrywide declared bankruptcy? They are the nations largest retail lender! According to Greenberg's Marketblog: We’ll know it soon enough, but with the leak that Bank of America is near acquiring Countrywide, several things would appear apparent (at least while we’re playing the guessing game): 1. The Fed is behind the deal.2. The Fed is behind the deal because the rumors yesterday of a near bankruptcy were probably true.3. As part of the deal, the government likely agrees to guarantee BofA against Countrywide-related losses.4. Lost in the in the noise yesterday was that Moody’s downgraded the ratings on 30 (count ‘em — THIRTY!) tranches of Countrywide’s mortgage debt by more than a few notches. They did something similar before American Home Mortgage filed for bankruptcy.5. Investors bid the stock higher assuming a premium when it’s likely that BofA still needs to fully assess the value of the assets before the deal’s full value will be known.6. Big question, of course, is what Countrywide investors will get.7. Rule of thumb with bankruptcies: Stocks often double on their way to zero.8. BofA gets a free bank and a put to the government. This writer agrees that the fed may have been behind this as that would have been news that would have rocked the markets; the last thing we need after an 11% correction!