The banking crisis

[texaspackerbacker]

TXPB,
Technically, it isn't as much of a banking crisis as it is a lending crisis. Stupid lenders gave out too much $ in the rich sub-prime market without thought to the possible consequences. This is similar to Ford and their going overboard on the SUV production. They took short term profits over long term financial solvency. Then the over-inflated housing market bubble popped and so did those profits.

Problem is that many regional banks jumped on this lending gravy train too (as much of their way of staying afloat is in the real estate market) and they don't nearly have the backing that the big lenders (Wells Fargo, Citi, etc) do. Hell, WaMU pulled out of big sections of the lending industry and Countrywide isn't far behind. A prolonged poor housing situation is extremely bad for those smaller banks.

Saying that the banking industry isn't in trouble though is not accurate. It's akin to saying that when Enron went down there wasn't much of an effect in energy companies given they were only 1 company in the many, many out there. You have to look at the size of the failures. IndyMac alone is 3.5x the bailout cost of the combined losses of the other 31 failed banks since 2000. There may not be as many failures as during the S&L crisis, but IndyMac's failure is 20% of the S&L losses all by itself. That's significant.

Tyrone, exactly what are you expecting me to "change my tune" about--in the extremely unlikely event that Obama wins?

Craig, you are wrong in several ways. There is no "lending crisis" either--just a moderate correction from lenders getting a little too carried away with the easy money of the last few years. You know, they don't just conjure up that money that they lend. The money is a product of a lot of investors wanting to lend, and consequently, accepting low rates of interest/return on their money. To a great extent, that situation continues, and THAT does not constitute a crisis. It is, rather, a good thing.

Seeing "trouble" in the banking industry is not accurate either. A very tiny minority of banks have failed, and the FDIC has done its job and made sure depositors didn't take a beating even in the miniscule number of failures. True, the one comparatively large failure is RELATIVELY significant, but as part of the macro-economic picture, it is nothing. Several times in recent decades, there have been a lot more failures and a lot more poured into bailouts than this.

[HowardRoark]

A little dated, but well worth reading:

http://bigpicture.typepad.com/comments/files/interview_with_sy_jacobs.pdf

[Scott Campbell]

Extremely interesting read. He was short on Wells at the time of the article, and the price has moved up 20% since then. I wonder if he's still shorting it.

[Scott Campbell]

The article listed 5 stocks. 3 were shorted, 2 were long positions. Since the article was published the 2 longs have gone down, and 2 of the 3 shorts have gone up.

I didn't check to see how his fund was doing, but this article would seem to imply that they've had a pretty tough year.

[HowardRoark]

Extremely interesting read. He was short on Wells at the time of the article, and the price has moved up 20% since then. I wonder if he's still shorting it.

Like I say, a little dated, but good information. Here is a WFC chart, so if he covered he did OK.

http://finance.yahoo.com/echarts?s=WFC#chart2:symbol=wfc;range=3m;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on

BBT

http://finance.yahoo.com/echarts?s=BBT#chart1:symbol=bbt;range=3m;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

The whole "naked short" restriction that went on the past few weeks I think has had an impact. It expired yesterday.

[Scott Campbell]

Like I say, a little dated, but good information. Here is a WFC chart, so if he covered he did OK.

I don't profess to be a pro at this stuff, but I don't think there's enough information to know whether or not they did ok. If and when they covered, and at what price did they go short at.

All we know for sure is that at the time the article was published they were short at ~25, and it trades today at ~30.

Or am I missing something?

[HowardRoark]

Like I say, a little dated, but good information. Here is a WFC chart, so if he covered he did OK.

I don't profess to be a pro at this stuff, but I don't think there's enough information to know whether or not they did ok. If and when they covered, and at what price did they go short at.

All we know for sure is that at the time the article was published they were short at ~25, and it trades today at ~30.

Or am I missing something?

I guess I would say that I think the article gives a very in depth look at what is and has gone on. I read it and acted on some of the ideas at that time.

People I know who manage hedge funds and have done extremely well over the past year on the short side did cover quite a bit in mid July. The risk/reward was no longer there.

There has been some re-loading lately.

Bottom line.....I agree with your original thought on the value in some of these stocks. In the long term in particular. But don't be surprised if they re-test some lows.

Also, where will revenues come from? No lending.

[HowardRoark]

Meredith last week:

http://www.youtube.com/watch?v=42mVTnFkuus

[Scott Campbell]

Like I say, a little dated, but good information. Here is a WFC chart, so if he covered he did OK.

I don't profess to be a pro at this stuff, but I don't think there's enough information to know whether or not they did ok. If and when they covered, and at what price did they go short at.

All we know for sure is that at the time the article was published they were short at ~25, and it trades today at ~30.

Or am I missing something?

I guess I would say that I think the article gives a very in depth look at what is and has gone one. I read it and acted on some of the ideas at that time.

People I know who manage hedge funds and have done extremely well over the past year on the short side did cover quite a bit in mid July. The risk/reward was no longer there.

There has been some re-loading lately.

Bottom line.....I agree with your original thought on the value in some of these stocks. In the long term in particular. But don't be surprised if they re-test some lows.

Also, where will revenues come from? No lending.

I'm fine with long term as I've never been a short term investor. I'm also not interested in trying to call the exact bottom. I'm willing to bet that while there is no lending at the moment, eventually these morons will realize they've over reacted to the housing bubble mess and start lending again. That's their business.

And I'm also thinking that a company like Goldman makes much of their revenue from fees, and not dependent on lending.

I've also been thinking about doing a little hedging by trying to find and short a lousy hotel stock. I think hotels are likely to suffer collateral damage from the airlines because of a downturn in business travel due to higher fuel costs and corporate layoffs.

I only want to be in 3 positions max. Long on 2 bank/finance stocks, and short on 1 hotel stock. I know its risky to have all your eggs in so few baskets, but I just can't follow much more than that.

[Cheesehead Craig]

TXPB,
Technically, it isn't as much of a banking crisis as it is a lending crisis. Stupid lenders gave out too much $ in the rich sub-prime market without thought to the possible consequences. This is similar to Ford and their going overboard on the SUV production. They took short term profits over long term financial solvency. Then the over-inflated housing market bubble popped and so did those profits.

Problem is that many regional banks jumped on this lending gravy train too (as much of their way of staying afloat is in the real estate market) and they don't nearly have the backing that the big lenders (Wells Fargo, Citi, etc) do. Hell, WaMU pulled out of big sections of the lending industry and Countrywide isn't far behind. A prolonged poor housing situation is extremely bad for those smaller banks.

Saying that the banking industry isn't in trouble though is not accurate. It's akin to saying that when Enron went down there wasn't much of an effect in energy companies given they were only 1 company in the many, many out there. You have to look at the size of the failures. IndyMac alone is 3.5x the bailout cost of the combined losses of the other 31 failed banks since 2000. There may not be as many failures as during the S&L crisis, but IndyMac's failure is 20% of the S&L losses all by itself. That's significant.

Tyrone, exactly what are you expecting me to "change my tune" about--in the extremely unlikely event that Obama wins?

Craig, you are wrong in several ways. There is no "lending crisis" either--just a moderate correction from lenders getting a little too carried away with the easy money of the last few years. You know, they don't just conjure up that money that they lend. The money is a product of a lot of investors wanting to lend, and consequently, accepting low rates of interest/return on their money. To a great extent, that situation continues, and THAT does not constitute a crisis. It is, rather, a good thing.

Seeing "trouble" in the banking industry is not accurate either. A very tiny minority of banks have failed, and the FDIC has done its job and made sure depositors didn't take a beating even in the miniscule number of failures. True, the one comparatively large failure is RELATIVELY significant, but as part of the macro-economic picture, it is nothing. Several times in recent decades, there have been a lot more failures and a lot more poured into bailouts than this.

Appreciate your point of view Tex. However, this is far more than a moderate correction. The Fed doing a temporary non-conforming loan limit from 417k to 729,500 so that people can borrow more and give them a break of over 1% on their rate has not been done before. That's a huge bailout for lenders to get more people in the door to get a loan.

Large banks writing off $8B in mortgage loans in a quarter is not some lender getting a little carried away. It's happening to a good number of companies. As I said before, some major lenders have all but pulled out of the home loan origination. If that's not a sign there's a crisis, I don't know what is.

The regional banks going under will continue as more ARM mortgages come due and go into forclosure thus causing big writeoffs for these banks that cannot absorb them. Yes, the numbers now are small, but we are just at the beginning of this. We can see what's going to happen and ignoring it won't change what's happening.

[MJZiggy]

I'm not completely awake yet, I thought the thread title was baking crisis. Thought we ran out of flour or something...

And now I shall go to work..

[HowardRoark]

Large banks writing off $8B in mortgage loans in a quarter is not some lender getting a little carried away. It's happening to a good number of companies. As I said before, some major lenders have all but pulled out of the home loan origination. If that's not a sign there's a crisis, I don't know what is.

The regional banks going under will continue as more ARM mortgages come due and go into forclosure thus causing big writeoffs for these banks that cannot absorb them. Yes, the numbers now are small, but we are just at the beginning of this. We can see what's going to happen and ignoring it won't change what's happening.

This year will be bad for ARMs adjusting, you are right.

Splitting hairs, but it is a very big differrence.....the loans are written down, not off.

It is still bad, but these balance sheets can improve if this debt ever gets a bid.

[bobblehead]

The article listed 5 stocks. 3 were shorted, 2 were long positions. Since the article was published the 2 longs have gone down, and 2 of the 3 shorts have gone up.

I didn't check to see how his fund was doing, but this article would seem to imply that they've had a pretty tough year.

He got screwed by the market realizing there would be a gov't prop up delaying the inevitable. Our markets overreact to any news nowdays.

[bobblehead]

Banks/Finance stocks are on sale right now. I don't know if they've bottomed out yet, but I do know that banks aren't going the way of the Dinosaur in my lifetime. Anyone have any opinions on the best value plays in the sector?


I'm told that Wells is the best of the breed, but their shares haven't really been battered. I'm thinking about Fifth Third as a regional play, and Goldman.

If you want my free advice, don't buy in weak sectors. If you are looking for stock get into something healthcare oriented right now.

[bobblehead]

Large banks writing off $8B in mortgage loans in a quarter is not some lender getting a little carried away. It's happening to a good number of companies. As I said before, some major lenders have all but pulled out of the home loan origination. If that's not a sign there's a crisis, I don't know what is.

The regional banks going under will continue as more ARM mortgages come due and go into forclosure thus causing big writeoffs for these banks that cannot absorb them. Yes, the numbers now are small, but we are just at the beginning of this. We can see what's going to happen and ignoring it won't change what's happening.

This year will be bad for ARMs adjusting, you are right.

Splitting hairs, but it is a very big differrence.....the loans are written down, not off.

It is still bad, but these balance sheets can improve if this debt ever gets a bid.

Not positive on accounting but I think the banks can value the asset reposessed at the prior loan value until they sell it. If so, they won't be written down until the bank sells the house.