Balance Sheet Death Spiral
Fifty cent... Morgan Stanley announced an investment joint venture to acquire, develop, manage and sell residential real estate.
Lennar agreed to sell the venture a diversified portfolio of land valued at $1.3 billion for $525 million.
Fifty cent since June... Moody's last week said it may lower ratings on $105 billion of debt sold by SIVs...
after the average net asset values of those sponsored by firms including Citigroup declined to 55% from 71% a month ago. The assets were valued at 102% in June.
Florida Fund Update or Join the Club...
Montana's $2.2 billion fund has 25%, or $550 million, invested in SIVs. The pool has already had $250 million of withdrawals since the fund's $90 million holding of Axon Financial was cut to "D" or default, by S&P last week.
Connecticut's $5.8 billion Short Term Investment Fund, which invests cash for state agencies and municipalities, is holding $300 million in debt issued by SIVs and holds $100 million in defaulted SIV notes issued by Cheyne Finance.
How bad was Q3 for corporate America? Q3 YOY EPS earnings per share plunged 28%. The largest YOY decline in 5 years.
YOY Operating earnings per share Q306 +11.6%; Q207 +9.6%; Q307 -8.5%. Q2 to Q3 operating earnings dropped 12.4%, the worst sequential change since 1989.
Corporate profits fell at an annual rate of $19.3 billion in Q3 vs Q2, as domestic earnings dropped by $41.2 billion.
How bad is the economy doing? Consumer discretionary companies (builders, automotive and retail).
In Q3, a YOY 39% decline in earnings. Banks and financial-services, comprising 33% of the market capitalization of the major indexes, a YOY 33% earnings decline.
Another Fed cut? The Interbank lending rate rising...
widening the spread between itself and Fed Funds as credit tightens... Mid Nov. Fed Funds at 4.5%, Libor at 4.66%. Nov 30, Libor at 5.236%.
The Nattering One muses...
Amidst all this good news regarding Q3 financial results, something we have mused and warned about in the past...
the multiplier effect working in reverse (credit contraction), rising reserve requirements and a financial solvency death spiral.
When borrowers default, debt quality gets downgraded, bad debt write downs and reserve requirements increase; What happens to the balance sheet?
From the Economist: "First, net losses eat directly into capital.
Second, since capital ratios are typically calculated on the basis of how risky a bank's balance sheet is, the ratings downgrades add to the amount of rainy-day money banks need to set aside.
Third, assets are growing as banks take on the financing of more off balance sheet vehicles, which again adds to the capital they need".
What can be done to preserve or raise the necessary capital? Suspend leveraged buy outs & share buybacks, sell non core assets, cut dividends, or issue new shares. All of which have been witnessed in the last 90 days by various entities.
Does anyone remember Freddie & Fannie's 30% stock debacle the other week? FHLMC announced it needed to raise more capital to meet regulatory requirements.
In order to raise that capital, Freddie proposed cutting its dividend by 50%.
If the dividend cut fails to raise enough capital to meet regulatory requirements, Freddie says it will consider slowing purchases in its mortgage portfolio. Read that again, very slowly.
Since August, subprime, no down, limited doc Alt-A, interest only and Jumbo (over 417K) have all but dried up.
And if conditions continue to deteriorate, Freddie and Fannie may purchase fewer mortgages. Read it again, so it sinks in.
That is less of the bread and butter standard conforming FHLMC or FNMA, full doc loan under $417K.
Home loan lenders like Countrywide can no longer sell MBS mortgage backed securities to the secondary market. Why? No one will buy them.
What happens to lenders like Countrywide that are reliant on the last source of loan funding (FNMA & FHLMC) when both GSE's purchase fewer mortgages?
Or for that matter any business caught in this short term asset solvency death spiral ?
Answers in order: Reduced access to mainstream funding, less business, less revenue, further downgrades of debt rating for on and off book assets, higher reserve requirements, forced liquidations, bankruptcy or buy out.
Once again we warn, any LBO or stock buy back in the last few years that borrowed leveraged money...
might be unable to service its debt in the upcoming recession, watch em for shorting opportunitys.
Further, it can only get worse for the financials, mortgage lenders and the real estate market. Hope you've been shorting it and...
waiting for the underlying asset "value" (housing) to fall even further into the abyss, which is the only place these "values" and the debt laden economy can go.
Lennar agreed to sell the venture a diversified portfolio of land valued at $1.3 billion for $525 million.
Fifty cent since June... Moody's last week said it may lower ratings on $105 billion of debt sold by SIVs...
after the average net asset values of those sponsored by firms including Citigroup declined to 55% from 71% a month ago. The assets were valued at 102% in June.
Florida Fund Update or Join the Club...
Montana's $2.2 billion fund has 25%, or $550 million, invested in SIVs. The pool has already had $250 million of withdrawals since the fund's $90 million holding of Axon Financial was cut to "D" or default, by S&P last week.
Connecticut's $5.8 billion Short Term Investment Fund, which invests cash for state agencies and municipalities, is holding $300 million in debt issued by SIVs and holds $100 million in defaulted SIV notes issued by Cheyne Finance.
How bad was Q3 for corporate America? Q3 YOY EPS earnings per share plunged 28%. The largest YOY decline in 5 years.
YOY Operating earnings per share Q306 +11.6%; Q207 +9.6%; Q307 -8.5%. Q2 to Q3 operating earnings dropped 12.4%, the worst sequential change since 1989.
Corporate profits fell at an annual rate of $19.3 billion in Q3 vs Q2, as domestic earnings dropped by $41.2 billion.
How bad is the economy doing? Consumer discretionary companies (builders, automotive and retail).
In Q3, a YOY 39% decline in earnings. Banks and financial-services, comprising 33% of the market capitalization of the major indexes, a YOY 33% earnings decline.
Another Fed cut? The Interbank lending rate rising...
widening the spread between itself and Fed Funds as credit tightens... Mid Nov. Fed Funds at 4.5%, Libor at 4.66%. Nov 30, Libor at 5.236%.
The Nattering One muses...
Amidst all this good news regarding Q3 financial results, something we have mused and warned about in the past...
the multiplier effect working in reverse (credit contraction), rising reserve requirements and a financial solvency death spiral.
When borrowers default, debt quality gets downgraded, bad debt write downs and reserve requirements increase; What happens to the balance sheet?
From the Economist: "First, net losses eat directly into capital.
Second, since capital ratios are typically calculated on the basis of how risky a bank's balance sheet is, the ratings downgrades add to the amount of rainy-day money banks need to set aside.
Third, assets are growing as banks take on the financing of more off balance sheet vehicles, which again adds to the capital they need".
What can be done to preserve or raise the necessary capital? Suspend leveraged buy outs & share buybacks, sell non core assets, cut dividends, or issue new shares. All of which have been witnessed in the last 90 days by various entities.
Does anyone remember Freddie & Fannie's 30% stock debacle the other week? FHLMC announced it needed to raise more capital to meet regulatory requirements.
In order to raise that capital, Freddie proposed cutting its dividend by 50%.
If the dividend cut fails to raise enough capital to meet regulatory requirements, Freddie says it will consider slowing purchases in its mortgage portfolio. Read that again, very slowly.
Since August, subprime, no down, limited doc Alt-A, interest only and Jumbo (over 417K) have all but dried up.
And if conditions continue to deteriorate, Freddie and Fannie may purchase fewer mortgages. Read it again, so it sinks in.
That is less of the bread and butter standard conforming FHLMC or FNMA, full doc loan under $417K.
Home loan lenders like Countrywide can no longer sell MBS mortgage backed securities to the secondary market. Why? No one will buy them.
What happens to lenders like Countrywide that are reliant on the last source of loan funding (FNMA & FHLMC) when both GSE's purchase fewer mortgages?
Or for that matter any business caught in this short term asset solvency death spiral ?
Answers in order: Reduced access to mainstream funding, less business, less revenue, further downgrades of debt rating for on and off book assets, higher reserve requirements, forced liquidations, bankruptcy or buy out.
Once again we warn, any LBO or stock buy back in the last few years that borrowed leveraged money...
might be unable to service its debt in the upcoming recession, watch em for shorting opportunitys.
Further, it can only get worse for the financials, mortgage lenders and the real estate market. Hope you've been shorting it and...
waiting for the underlying asset "value" (housing) to fall even further into the abyss, which is the only place these "values" and the debt laden economy can go.
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