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When It Rains, It Pours

by: Felix Salmon September 26, 2008 | about stocks: DIA / JPM / QQQQ / SPY / WM    
Felix Salmon

Felix Salmon

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This is really, really bad.

In a nutshell: The bailout package, which everybody thought was a done deal, has been undone by some combination of Republican recalcitrance and the heat of the presidential campaign. At the same time, WaMu's gone under, with not only its stockholders but also its bondholders being largely wiped out.

Remember how Lehman's (LEH) default precipitated the this whole crisis in the first place: Lehman's debt was a substantial part of some money-market funds, which then "broke the buck", and all manner of chaos ensued. Now, $30 billion of WaMu (WM) debt is going very close to zero, and there could be similar effects. Not to mention the fact that this credit event risks roiling the CDS market at a time when counterparty-risk fears are at an all-time high. Then, add in the fact that House Republicans have come out of nowhere to declare that they want their bailout to come for free -- and suddenly the $700 billion that the market was counting on is thrown into jeopardy.

No one is a winner here. Yes, JP Morgan (JPM) looks as though it's got itself a good deal for WaMu -- basically buying the bank for $1.9 billion unencumbered by any corporate debt or preferred stock. JP Morgan also now owns the bank that was largely responsible for reinventing retail banking over the past decade, and WaMu's abilities on that front will be very valuable for the Chase brand. But unless House Republicans start getting constructive on bailout negotiations today, no financial institution is going to look very healthy. (And top management at Goldman Sachs (GS) will look like geniuses for raising $15 billion just before everything fell apart.)

The vague sketch of the House Republican proposal in the NYT shows something miles removed from the bailout as it has been understood until now. Bush, Paulson, Bernanke, Obama, House Democrats, and the Senate all seem to be on board with Plan A; only House Republicans are supporting Plan B. And where McCain stands on all this is anybody's guess. If House Republicans thought they were doing him a favor by waiting for him to turn up before blowing up the negotations, they miscalculated badly.

The results of all this? Well, for one thing, dollar Libor seems to be well over 4% and the TED spread is over 300bp.

Yves Smith sums up:

Hope you like the smell of napalm in the morning. Otherwise, this will not be your sort of day.

Brace yourself.

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This article has 35 comments:

  •  
    Sep 26 09:08 AM
    May be the stock markets think it is a pity that for now the deal is off. But don't forget; the total US financial sector picked up (as a whole) 1500 more billion US$ new debt in the first year of the credit crisis.

    Needless to say; the bailout package was for toxic debt done in 2005 and so. This new 1500 billion US$ will grow toxic in the future.

    And once you start picking up toxic debt, where will it end?

    The US financial sector has far over 100% of GDP as her debt size (about 120% of GDP) and the interest obligation only are above the combined profits of that sector.

    __________

    But lest wait; may be the deal is still not off the hook...
    Reply
  •  
    Sep 26 09:09 AM
    again, a doomsday scare article...no need for this...
    Reply
  •  
    Sep 26 09:11 AM
    napalm is a soap
    burning money laundering

    agent orange
    defoliant kills greenback
    but will it save ing?
    Reply
  •  
    Sep 26 09:20 AM
    Say NO to Paulson's "welfare for billionaires" plan. The WaMu model from last night is the way to go.

    Under Paulson's plan, the taxpayer would have purchased mortgages from WaMu and close to full value to reliquify the bank and take them off the books. That would free WaMu to make more loans and ease the credit crunch. Uh huh. That also would have bailed out Bonderman and others who made foolish investments in these zombies. I think Paulson can't bear to see his beloved Goldman Sachs, leveraged 25:1, go BK. It's this taxpayer bailout of fat cats that has everyone but the rent seeking politicians against it.

    Here's what to do. Make failure a prerequisite for taxpayer money. the government acquires the assets, then auctions them off to the highest bidders. Stock and bond holders should get wiped out. Will this cost money? Sure, but I don't think it will be as much as Paulson's plan, but the benefits go to the innocent creditors, and people who are willing to risk their own money have an opportunity to pick up assets on the cheap. This will work especially well for mortgage backed securities, which no one says they can accurately price. Let's auction them off after failure to people spending their own money, that establishes no fooin' prices for these securities.

    If your insolvent, too bad, lights out, no more gravy train. It doesn't matter who you are. We're going to take you over and sell your assets to people putting their own capital into the market.
    Reply
  •  
    Sep 26 09:31 AM
    Reported Buyout by JP Morgan during Kudlow last night, as "Breaking News" Buyout means price goes up on WM!!!! Price Jumps Up as everyone tries to get some! Can't get ahead of the Buy!! Finaly do get some just in time for the "Story to Change" !! Not a Buyout but a Take over siezure but FDIC and Sell to JP Morgan! Big difference !!!Everyone tries to ball as price circles the drain!!!!! I think what was reported should have been Checked before reported as Fact!!! This cost me and many others alot of Money in a Very Short Time!!!! Someone should at least Appologize for This Big ERROR!!!!!
    Reply
  •  
    Sep 26 09:32 AM
    Hey genius, guess what? House Democrats don't need the Republicans to pass the bill. Pelosi never cared what the minority thought before, why should it matter now? If the bill fails, it won't be because of House Republicans. It will be because Pelosi has no spine.
    Reply
  •  
    Sep 26 09:33 AM
    dcx, your naive view of the markets is sadly probably above average for the citizens of the US. Which is exactly why we don't need to be listening to the public in times like this. This group of Republicans is simply being obstructionist in what amounts to the biggest game of chicken that has ever been played. You think banks failing is the fallout of inaction? That's like worrying about the dents on your car if you run over your kid. The banks are just the first casualty. You will get to see mortgage rates at values last seen in the 80's, many, many corporate defaults as they cannot refinance the debt they carry at 2% because rates are closer to 15%, millions of jobs lost, the dollar become the equivalent of the Kansas City Chiefs of the world's currency markets and your personal assets decline in value by anywhere from 20-40%.

    Please, keep your pedestrian, partisan crap in yoru head where it belongs.
    Reply
  •  
    Sep 26 09:34 AM
    The taxpayers who aren't subsidizing wealthy stockholders in financial insitutions are winners. I'm a winner because hopefully I'll be able to buy stocks at more realistic prices. Everyone who wants to buy a home in the next few years is a winner because the housing bubble won't be re-inflated. People who don't want to see a repeat of the same catastrophe are winners. BB&T, SunTrust, CityBank of Washington, M&T Bank, and other well run banks are probably winners as well.

    I'm glad WaMu finally collapsed. That entire bank was a scheme. I banked there for about a year and hated it. No one knew what was going on and they had the most ridiculous inane rules on everything. It deserved to go down.
    Reply
  •  
    Sep 26 09:37 AM
    However, I should amend my statements to say that all the "winners" I mentioned won't end up being "winners" because the bailout is going to go through one way or another. The Administration is going to do some arm-twisting on the GOP side and the Democrats are going to do their usual cower-in-a-hole/handou... deal.
    Reply
  •  
    Sep 26 09:48 AM
    Hi jcrash, you have swallowed the bait hook, line and sinker.

    I'm not signing on to the House Republican plan in full either. And how is opposing a plan proposed by a Republican treasury secretary and supported by a Republican president being obstructionist? If you want to talk politics, the Democrats have the votes to pass this if they want. But they have no clue either, the reason they want the "fourth leg" is so they can blame others when it fails.

    What I am proposing is basically the way the RTC worked, and worked well in the 1990's. Remember that?
    Reply
  •  
    Sep 26 10:07 AM
    This is what I like to see happen. Bankers need to pay for their mistakes, not taxpayers.
    Reply
  •  
    Sep 26 10:15 AM
    I'm thinking of an old saying: "Bulls and bears make money, pigs get slaughtered".

    I for one have been sharpening my knife. NO BAILOUTS FOR THE RICH!!!

    Let the market create itself, though it take time, it is so much better than the short cited boneheads on these forums that are in a rush because they are losing money.

    Also, get rid of the Federal Reserve. It was created decades ago to be the "watchdog" of which it has failed miserably over a generation. In it's ashes, create an agency that isn't a private bank that profits in both financial peril AND prosperity. Erect an institution that not only is transparent, but fulfills the successful duties of the "old Fed" without the protectionist prosperity they enjoy with the lock on our money.
    Reply
  •  
    Sep 26 10:17 AM
    I can't help but think when articles like this are written that it marks some kind of bottom. I have never seen such fear and doomsday scenarios played out by everybody across the board.
    Reply
  •  
    Sep 26 10:21 AM
    This deal wasn't undone by Republican recalcitrance but by the will of the American people who wouldn't let their representative's phone stop ringing.
    Reply
  •  
    Sep 26 10:30 AM
    The strangest thing about a lot of the comments along the lines of 'let the bankers have it!' and 'No bailout for fatcats' is that the reason these institutions have been bailed out is because of their tendrils in so many different parts of the economy. Punishing the perpetrators can wait, plus, the people who have made a killing from irresponsible borrowing will lose their second house and maybe have to sell one of the Bentleys if these institutions go bust, everyone else will be much worse affected.

    Also, in terms of dcx's comments about bond and stockholders, a lot of these will be pension funds and 'average joes' who rely on dividend payments for their retirement.

    www.nytimes.com/2008/0...
    Reply
  •  
    Sep 26 10:34 AM
    To My Fellow Seakers:

    The financial markets are a mess...chaos, failures, depressed prices. Congress is reflective of America. Why do readers of this service think Congress sets these issues aside? Calls AGAINST this are 100-1. I know you all think they're idiots, but believe me, they can count phone calls. You should hear what voters are saying.

    The electorate looks at Paulson and thinks Wall Street. They have little confidence in Bush, and frankly he hasn't given Americans a reason for this level of federal involvement. Americans also hear a "worbly" professiorial Bernanke. They don't understand these guys. They think...this is a bail-out for Wall Street. They do NOT see this as anything involving Main Street.

    This article is naive. I stopped reading after the phrase...everybody thought this was a done deal. This was never a done deal...never. Any statements by Dodd and Frank were only one side of the story! When Senator Shelby takes himself out of the negotiations on the first day and the only Republican present on the House side is just an "obverser," which Barney Frank knew...there are no negotiations...there is no deal.

    Bush let Paulson and Bernanke run this show. That is another in a long list of mistakes this President has made. McCain really did come back because he knew there was a vacuum here. And, while we're at it, Dodd and Frank didn't do Obama any favors...they've been leaking details of this plan constantly. They probably told Obama they had a deal.

    What we've lost here is valuable time because of mis-calculations by the managers of this process...all of them.
    Reply
  •  
    Sep 26 10:38 AM
    @User270558

    You are an idiot, that is obviously mad because you are losing money. This is about elitist protectionism, not main street paychecks, though they ARE related, and there is a substantial problem.

    "Bush let Paulson and Bernanke run this show"

    Again, you are simply towing the incompetent self-preservationist line here... Bush, Paulson and Bernanke are the wolves in the hen-house... Let them rot, do away with the Federal Reserve and quit spouting partisan garbage.

    What we have lost here is nothing but money, get over it.
    Reply
  •  
    Sep 26 10:51 AM
    JohnJohn, now you're reverting to the class warfare line, some groups are more priveleged than others. I stopped reading the New York Times article after they starting crying about the woman who is living on $50K in dividends per year. By my reckoning, she must have a least a one million dollar stock portfolio.

    Someone has to take a hit for these failures. The best and fairest way to ensure this doesn't happen in the future is to make those pay who enabled it to happen.
    Reply
  •  
    Sep 26 10:58 AM
    Jcrash - your attack on dcx is the pedantic arrogance that I am sick and tired of hearing. Your view is that only the politicians in D.C., the geniuses on wall street and the select few (including yourself) understand this problem. While you may not be aware of this, there are many people outside of wall street and D.C. who run "real" businesses and understand the credit crises. So, far your team of geniuses got us into this mess, has continued to be wrong at every step of the way in responding to this problem and now demands that we get onboard because we are too stupid to understand the problem.

    Hmmmm - sorry, but not buying your position. At lease dcx's position seems to be working (including the buying up of Lehman's assets). No bailout!
    Reply
  •  
    Sep 26 11:11 AM
    The Paulson plan was a joke! It's a damn *good* thing that the House GOP put up some resistance to a runaway bandwagon. What's wrong with Paulson? 1) AIG alone could eat through 500B. 700B is not enough. 2) Contrary to marketing for the plan, it will *not* make taxpayers money. When has government *ever* done anything more cheaply than the private sector could do it? Those going to buy mortgage bonds from the new federal agency down the road know they can get them for a song...it's what happened with RTC. It would happen again. 3) It does not address the core problem - the oversupply of housing vs. demand by buyers, and which is only going to get worse as boomers retire and downsize to smaller houses or condos/apartments. 4) Additionally, the mortgage affordability problem is caused by the overwhelming tax burden shouldered by American citizens...and growing government, as Paulson's plan does, only adds to that.

    The real solution: 1) Do away with "mark to market" accounting. Go to some blended formula...Newt Gingrich suggests a 3-year rolling average for valuation. I'm sure we can come up with something better than the "noone currently wants it, therefore it's worth $0" notion. 2) Massive tax cuts and downsizing of government. This is to make mortgages affordable by giving the American worker back their own money...but is needed even moreso to restore basic freedom for Americans to have control of the bulk of their own finances again! When over 40% of one's gross goes to the Feds right off the top...and another 10% in sales & property taxes later...is it any flippin' wonder that our economy is in trouble?? Let's do a reset of the tax and government, not a reset of bank balance sheets!!
    Reply
  •  
    Sep 26 11:13 AM
    Ron Paul was right

    newteevee.com/2008/09/.../
    Reply
  •  
    Sep 26 11:15 AM
    @Felix: And by the way, Felix, "sudden populism" is quite inaccurate - the House GOP has long been the bastion looking out for the people. The fact that they didn't fall in lockstep with the likes of entrenched banking interests (Paulson, Bernanke, Bush, Frank, Pelosi, etc) is a d@mn good thing for the people of this country! Try looking at the alternative plan...it gets the job done and is better for the people - and last time *I* checked, that's the point.
    Reply
  •  
    Sep 26 11:19 AM
    Unless the "Socialist takeover" plan involves:

    A) The dismantling of the FED and the arrest and charge of those employed by it.

    B) The return of the dollar to a value based currency based on gold or silver, or platinum for all I care.

    C) The allowance of all these companies to FAIL and allowing the free market to WORK, which it is trying to if everyone will STOP interfering with it, and reduce housing prices from their super incredibly over inflated prices.

    Without the above, the plan is no plan at all and will only delay the oncoming destruction of the dollar and the economy as we know it.
    Reply
  •  
    Sep 26 11:25 AM
    @DCX

    It's a fair point about the woman, I did wonder at the time exactly what she was whinging about. However, the fact is there is time to punish these bankers later, and make sure it is just them that are punished, otherwise it's a case of cutting off your nose to spite your face as everyone else who has already undeservingly suffered becomes embroiled in the collateral damage as these firms collapse.

    The other point worth mentioning is that if this plan works out (big if) the government (and by extension the taxpayer) will have a share in some of these very firms that screwed up in the first place, when they start to generate cash again (again a big if). Seems like taking the property of the so called 'fatcats' is a pretty good place to start if you want payback.
    Reply
  •  
    Sep 26 12:07 PM
    Stop this Bailout. Since those of us who pay our mortages on time are really more valuable than thought previously. This whole mess started with greedy bankers and mortgage brokers offering obsurd rates and adjustable loans (some of which were interest only) and lent money to those who could fabricate any kind of income in order to make a purchase (greedy borrowers)

    My solution: Reduce the interest rate by 1% on all existing mortgages thus lowering the payments for those of us who read the fine print and only but things that we can afford. It will also leave more discressionary funds available most of which would end up back in the economy and be a number higher than anyamount the a bailout could create. Then, let those companies fail that got themselves overloaded with all of this toxic crap

    If you or I make a high risk investment hoping to make huge gains and it turns out that if something looks too good to be true it usually is there is noone there trying to make a backroom deal to save us.

    All of this occurring just prior to an election and the alarm bells don't ring inside the brains of most of you.

    This is probably too simple of a solution because there would be no way for the politicains, lobbyists and the over-compensated CEO's to line their pockets at our expense.
    Reply
  •  
    Sep 26 01:47 PM
    I think people who get burned by relying on the media to break the news deserve to get burned. A true investor would have done the research and made sure the news was fact before jumping in. That is part of the risk in dealing with stocks that are on the brink of going insolvent and those who are actual viable buys. Trying to pick up a few bucks on a buyout breaking news story is, in my opinion, not a true investors buy signal.
    Reply
  •  
    Sep 26 03:50 PM
    hey wyosteven, here's a rich pig for you:
    the company’s new chief executive, Alan H. Fishman, was in midair, flying from New York to Seattle at the time the deal was finally brokered, according to people briefed on the situation. Mr. Fishman, who has been on the job for less than three weeks, is eligible for $11.6 million in cash severance and will get to keep his $7.5 million signing bonus, according to an analysis by James F. Reda and Associates. WaMu was not immediately available for comment.
    Reply
  •  
    Sep 26 04:15 PM
    You have to love the Fishman story ... it's emblematic of the whole rotting corpse. The average business professional makes $3-4M in a lifetime (salary, bonus, etc.). I'm all for pay-for-performance, but pay for malfeasance and non-performance is wrong. The bailout vs. workbout goes against everything we teach our children and what firms try to instill in their employees. Own up to your responsibilities and take some accountability for your actions. The bailout mindset is like a virus that eats away at personal responsibility and blows-up the whole risk-reward profile that finance is based on. The moral hazard is ripe and smells bad. Too much leverage + too many exotic derivative instruments + too much living beyond one's means = a poor outcome.
    Reply
  •  
    Sep 26 05:28 PM
    the auther thinks the republicans are to blame for negotiation problems?
    maybe the american public just does not want another "up the ---", financial obligation put forth by the dems and wall street. Yes it is bad. But let's remember that Barney Frank and his washington jack--- friends insisted that fannie and freddie buy up every mortgage handed to them. Since when did owning a house become a right?! About 1992 when big Bill came into office....put blame on someone else!! author!!!
    Reply
  •  
    Sep 26 05:34 PM
    in 1992 it became a right and not a priviledge to own a home. Who's idea was that...the Dem's...the jack--- bunch in washington demanded that fannie and freddie buy every mortgage presentede to them the last 10yrs....Barney Frank and his cronnies had that great idea....the republicans negotiating now are being realistic in questioning the "up the ---" politics and policy of the greenspan fed and paulson's GS buddies.........blame the whole rotten bunch...the dems can pass this heist without the republicans on board....it is a platform for Barrak and Mccain to speak from and we all get tossed in the mean-time......don't blame the debaters this is America, remember? any other better ideas out there???
    Reply
  •  
    Sep 26 05:37 PM
    How about paying the american public 250 billion pre-tax...we could pay of our mortgages and buy gold bullion?!!....why give the money to knuckleheads...
    Reply
  •  
    Sep 27 12:25 AM
    Ok, I was going to comment but after reading through all the comments, I only have one thing to say: good job people, on both sides, very interesting perspectives. Alot better than the mainstream media.
    Reply
  •  
    Sep 27 10:26 PM
    Keep your face to the sunshine and you cannot see the shadow. Let's stop the headline-grabbing negativity. Does this guy consider himself some sort of prophet? What are his credentials?
    Reply
  •  
    Sep 27 10:32 PM
    dcxavier -- try PRIVILEGED, NOT priveleged. Misspelled words rob you of any credibility you may have...or think you have.
    Reply
  •  
    Sep 29 02:16 AM
    Blondino & M.P: "Mr. Fishman, who has been on the job for less than three weeks, is eligible for $11.6 million in cash severance and will get to keep his $7.5 million signing bonus, according to an analysis by James F. Reda and Associates"

    Well the rabble rousers are hard at work. The Reda & Associates analysis was done before the WaMu bankruptcy filing. I'm sure there will be little or no $ available to make that severance payment. Fishman should also worry about the $7.5 million signing bonus. The bankruptcy court will also review that payment. The good news is that the court will also get to review any payment made to Killinger as well.

    Wouldn't it be nice if major corporations could get competent executives to leave their positions and come work for endangered companies as a community service. Blondino & M.P, I'm sure you would do it, but I said competent.
    Reply
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