Seattle Bubble Forum Archive

Just read this this article from the nytimes: http://www.nytimes.com/2008/05/06/busin ... e-web.html

The key points that scare me:
- Cushion of 83 billion for 5 trillion in assorted debt
- Capital Surplus requirement reduced from 30% to 20% and potentially reduced more to 15%.
- Already have 19 billion in "unrealized losses" that are not reflected in both companies earnings (these are separate from the 6 billion loss that they reported in the last quarter). The losses are "unrealized" because the housing market is just going to rebound in 2010. Yeah right and when it tanks further, 19 billion will jump to 30 billion.
- This one is the best. "Both companies have also recently changed their policies on delinquent loans, which they previously recorded as impaired when borrowers were 120 days late. Now, some overdue loans can go two yearsbefore the companies record a loss." Oh yes, you need two whole years to confirm that the loan is delinquent. Credit card companies dont even give you 60 days before they start slamming fees (not forgetting just how much house loans are leveraged and at what amounts).

All this leads me to believe that they are just putting off reporting current losses and not reflecting how truly bad the current market is.

If these companies go under, we are going to have a serious serious credit crunch. Forget 20% reductions, I think even 50% wont be enough IF they fail. Thats a big IF of course since supposedly the "Government" will just step in and save them. I wonder how the govt thats currently running a close to 700 billion dollar deficit is going to help them though.

What is truly sobering:

They are $46.1B away from the trigger point (below 3% of capital reserves) of U.S. Gov't. intervention. They are admitting to $20B in 'unrealized losses' (in the current market outlook). This is assuming the housing market will stabilize or not worsen, and how likely is that? With foreclosure rates accelerating each month, how long will that $26.1B remain viable?

These two entities account for 81% of the home mortgage arena now, so they are truly the linch pin of the housing market in this country. If they have to pull back or slow down for a 'restructuring, where will the financing for any home sale, regardless of tier, price point, regional market, or willingness to buy come from?

The engine that has driven the housing market is down to its last two cylinders, and they appear to be running on fumes.

Eleua's prediction of 80% mark downs is looking less and less fringe each month.

Another way to look at it: The remaining $26.1B in viable reserves represents one half of one percent, .52%, of total liabilities. This with $717B in sub prime and alt-a in their portfolio.

Somebody check my math and reasoning. That tells me that out of a portfolio of $5T if bad debt increases by 1/2 a percent they have to raise a substantial amount of new capital from the private sector or by gov't. bail out.

Of course the Fed's cash window is still wide open; but wow! How long can you borrow money just to pay your bills (retain minimum reserves?) The US consumer has been doing that and we know the end results of that.