Monday, June 02, 2008

Interesting day

Today is my wife's birthday and we just got back from a family dinner out (did our part to stimulate the downturning LV economy tonight), so I really don't have much time to post up.

On that note, it was quite an interesting day on Wallstreet. A significant equities downturn was led by the financials once again... And the bad news was exacerbated by Treasury Secretary (and PPT leader) Paulson who added to the glum mood with a downbeat statement, saying it will be months before the problems end.

Note: For him to say such things, I imagine the looming "credit crunch phase-2" is worse than feared and he's making an attempt to prime the masses...

US STOCKS-Wall St ends lower, hammered by bank woes

NEW YORK, June 2 (Reuters) - U.S. stocks ended lower on Monday as financial shares slid on fears of more fallout from the mortgage crisis after Standard & Poor's cut debt ratings of three big securities companies and Wachovia, the fourth-largest U.S. bank, ousted its chief executive.


Morgan Stanley, Merrill, Lehman Ratings Cut by S&P

Morgan Stanley, Merrill Lynch & Co. and Lehman Brothers Holdings Inc. declined in New York trading after Standard & Poor's lowered credit ratings for the investment banks, saying they may have to book more writedowns on devalued assets.

Morgan Stanley, the second-biggest U.S. securities firm by market value, was cut one level to A+ from AA-, S&P said today in a report. Merrill Lynch, the third-biggest, was also cut one level to A from A+, as was Lehman Brothers, the fourth-biggest. Goldman Sachs Group Inc., the largest of the group, was affirmed at AA-. The outlook on all four New York-based companies remains negative, S&P said.

The downgrades may make it harder for the banks to sell derivatives such as credit-default swaps that are tied to bonds or loans, said Brad Hintz, an analyst at Sanford C. Bernstein in New York. Single-A rated firms are less desirable as trading counterparties for fixed-income derivatives that extend longer than five years, he said.

``You'll see derivatives profitability drop off over a period of time,'' Hintz said of the three downgraded investment banks. ``We estimate somewhere around 1 percent to 1.5 percent of fixed- income revenues are at risk.''

The firms are also likely to have to post more collateral on the trades they've already made with other parties, raising their costs, Hintz said.

Collateral

In its last quarterly filing, Merrill said a one-notch downgrade of its credit rating would require it to post an additional $3.2 billion of collateral on over-the-counter derivative trades.

Morgan Stanley estimated in a regulatory filing that a single level downgrade would mean posting an extra $973 million. Lehman said a one level downgrade requires about $200 million of additional collateral.

Morgan Stanley spokeswoman Mary Claire Delaney declined to comment, as did Merrill spokeswoman Jessica Oppenheim and Lehman spokesman Mark Lane.

Morgan Stanley, Merrill and Lehman sank in New York Stock Exchange composite trading. The cost of insuring against a default on each of the companies' debt jumped initially and then retreated later in the day.

Lehman fell $2.98, or 8.1 percent, to $33.83 in NYSE composite trading, while Merrill lost $1.30, or 3 percent, to $42.62. Morgan Stanley dropped $1.13, or 2.6 percent, to $43.10. Goldman declined $4.07, or 2.3 percent, at $172.34.

Writedowns

The S&P rating ``actions reflect prospects of continued weakness in the investment banking business and the potential for more write-offs, though not of the magnitude of those of the past few quarters,'' Tanya Azarchs, an S&P analyst, said today.

S&P suggested the banks may have to sell more stock to help offset the charges, according to Hintz. The report said financial institutions have raised too much capital in the form of so-called hybrid securities, exceeding S&P's limits on such instruments.

``The risk of further equity dilution probably has gone up,'' Hintz said.

The biggest banks and securities firms have booked about $387 billion of writedowns and credit losses since the beginning of last year, as the collapse of the subprime mortgage market prompted a contraction in credit markets worldwide. So far, the firms have raised about $270 billion of capital.

`Negative Outlooks'

S&P revised its outlook on Bank of America Corp. and JPMorgan Chase & Co. to negative. Citigroup Inc. was taken off review for a downgrade and given a negative outlook, while Wachovia Corp. was placed on review for a downgrade.

Wachovia shares fell to the lowest level since July 1995 after the bank ousted Chief Executive Officer Kennedy Thompson today, signaling the company may report a second-quarter loss.

``The outlooks on the large financial institutions sector in the U.S. are now predominantly negative,'' S&P said in today's statement.

Best regards
Randy

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3 Comments:

At 6/03/2008 5:35 PM, Anonymous Anonymous said...

Hi Randy,
What Jim didn't mention in this small quip is that there are currently two more $75 billion
Fed auctions still to come in June...Pretty soon this becomes big money! And didn't I read somewhere that the Fed's balance sheet is $800 billion? Just curious.
Thanks,
David

In The News Today

Author: Jim Sinclair


Dear CIGAs,

The Fed announced another $75 billion of so called auction give away money for the Begging Bowl loan facility.

As problems worsen and assuming that these Fed donations need to be made weekly, we are speaking of a yearly rate of $3,900 billion. That sounds like $3.9 trillion dollars of economic injection and liquidity.

Think about the CONSEQUENCES.

 
At 6/03/2008 7:57 PM, Anonymous Justin_n_IL said...

I watched another set of Lindsey Williams videos tonight. It's titled "Syndrome of control". Another fascinating load of info. If you haven't yet watched these be sure to.

Justin

 
At 6/03/2008 9:47 PM, Blogger Randy said...

David,

I've seen the same information: $800B.

Appreciate the Sinclair info --that's Huge!

Justin,

I'll take a look when I have time available. thanks for the insight.

Randy

 

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