Tuesday, May 13, 2008

'Enormous Bank Losses' Lie Ahead.Carlyle's Rubenstein Says

Voltron says: another dose of truth from Mr. Mortgage.

We all know the banks want to push out their write-downs and losses as long and far as possible.  Most assume they are lying with every word they speak, but accept what they say as gospel, quarter after quarter. For the past nine months, I have heard commentators on Bubblevision say ‘this is the Kitchen Sink quarter’. Q1, 2008 was no exception. This line of thinking has lead to yet another stock market rally and renewed optimism that ‘the housing and credit crisis’ are over’.

I guess where they all come from (a little Island where apartments cost $25 million) most have several kitchens with many sinks. But, where most of us come from, this has become an absolute joke, if not a crime. 

Every few months since April 0f 2007 the real estate and mortgage collapse has suddenly gone away, and the light at the end of the tunnel shines as bright as can be. Financial stocks begin to soar with many of them getting back to 2006 levels, when money was cheap, all credit was rated AAA (or at least traded as if so), and there were more revenue streams than most CEO’s knew even existed.  Then one day the ‘right’ piece of news breaks and everything spirals back to Earth as another crisis unfolds suddenly.

But, what most fail to realize is that it is not a new crisis, but the same old crisis that never went away. It is funny how stock market participants truly believe that the tape dictates economic reality. Haven’t you learned by now, after almost a year and a half of financial stocks falling from the sky any given Monday, that there has been one constant; that the housing market, the mortgage market and the overall credit markets keep getting worse.

It is no wonder there is a crisis of confidence, when you hear banks lie month after month, quarter after quarter. The new fad is for banks to take gains on their liabilities being written down like Lehman did in March. As a matter of fact, DJ reported today that ‘MBIA’s loss would have been $7.1 Billion if it were not for a $3.6 Billion gain on the drop of its own credit guarantees’.  Morgan Stanley and Goldman Sachs revealed similar ‘gains’ in their recent earnings reports. CONTINUED…

They have all done this i n the past but now the ‘gains’ (actually losses) have become massive. If not for the $600 million Lehman took in Q1, which allowed them to post nearly a $500 million profit, they might not be around right now. These are not quality earnings. This is a sham. Given earnings reports such as these, who can trust anything they say?

Well, here is a little ditty from the Carlyle Group’s Rubenstein, just released. He talks about ‘enormous losses not yet realized for the bank’ and where this is all headed. He says, ‘it will take at least a year before all losses are realized, and some financial institutions may fail’. Hey, that is FOUR MORE KITCHEN SINK QUARTERS!  Moving right along he says ‘the sovereign wealth funds are not likely to jump into the fray again to bail out these institutions’ and ‘many financial institutions aren’t going to be able to survive as independent institutions’. There is much more where this came from. I could add to his report by mentioning the $5.5 TRLLION in Level 2 and 3 assets not yet marked appropriately in most cases.

Now, the pumpers will say ‘how can you believe a guy who was leveraged 25:1 in the mortgage bond arena and who just got crushed. ’ In my opinion, that is the very person you should listen to. He has had to accept reality the hard way.

Don’t misunderstand this post…I have no problem when stocks soar based upon solid fundamentals. But in the past year all of the speculation and cheer-leading about ‘the end of the housing crisis’ that comes along every few months backed up by the major financial television channels, hurts the longs the most. 

You hear over and over again by certain TV personalities about ’shorts getting crushed’ in short squeezes and how happy they are about this. But, in reality there are very few shorts in the market compared to longs. When that certain news hits and the market decides to come back to Earth in a very short period of time once again, the longs that are all piled into the same financial stocks are the ones will that get hurt the most. These are the very people the TV personalities say they are trying to help!

Maybe for once with respect to the financials, the market actually has it right for a change. Just like it did when the tech bubble burst. - Best, Mr Mortgage



jameshuefner@yahoo.com said...

Great article. Every time I convince myself to go buy some puts on LEH, I check the stock price and get discouraged when I see it has gone up in the last week. But your articles give me faith. I read something that said LEH was among the top 5 shortest stocks in the last month. Question for you: When a large majority all short the same stock around the same time, the move by brokers to find this stock for their short sellers can drive the price up, without relevance to the companies performance? yes?

Gerard said...

no, it would always drive the stock down. What drives it up is people trying to squeeze the shorts out.