What the heck was that day?
We couldn't get anything done today. Much like the pre-market move I noted in the morning post, the Dow gyrated up and down all day, finishing nearer the low after the very brief test of 11,400 at 2:30. The financials were all over the place with a dip to the 2.5% rule at 11:30 followed by a plus 1.6% move, also at 2:30 before finishing the day down 0.7%. WM was today's villain as an accounting rule change made them less attractive as a takeover candidate. "The question becomes can it survive if it has billions and billions of dollars left to write down on those loans?" Ladenburg Thalmann analyst Richard Bove said. "What's going to keep it in business, what is going to keep it alive?"
Losses are expected to hit $19Bn in total (about $10Bn already on the books) and the company makes $3Bn in a good year with about $300Bn in assets under management. At $4Bn they are not a bad gamble but stricter standards mean a potential buyer would have to take a big hit on their books, making a rescue less palatable for another bank or cash-poor investment house. The FDIC is on the hook for most of that $300Bn so any shortfall the bank ends up with in a liquidation will ultimately be paid by the taxpayers.
We discussed in comments today how the government really bailed out the wrong people as coming to the aid of JPM (buying BSC) and bailing out FRE/FNM is just putting bandaids on the problem, which is all the people who cannot afford the homes they are in. If the government would focus on the problem of loans in default by really helping families to stay in their homes, then suddenly defaults are not a problem for any bank. Rather than taking on the responsibility of $30Bn for BSC here, $168Bn stimulus there and ??? on the $5Tn worth of paper the GSE's hold, wouldn't it have been smarter to just step in and help out with whatever percentage of the $390Bn a year that is paid on mortgages. Even if you had to pick up the entire tab on 20% of the homes while you helped people sell or refinance, that would only be about $80Bn – a bargain compared to what's being tossed out the window now.
At least we are getting some relief from the commodity markets. According to Bespoke investments, the average daily per capita cost of rising food and energy prices (vs. last year) peaked out a $4.77 per day (which is $1,700 per person or $6,800 for a family of four) on about July 2nd but has since come down to just .36 per day over last year as of last week. I've said for quite some time that the July data we are getting is a snapshot of our country at the breaking point and, while the falling prices may take a while to find their way into consumers' pockets, we are talking about a significant daily burden that is being lifted.
Bespoke also has a nice set of graphic charts if you like seeing what a global market melt-down looks like. The colors are pretty but the reality is very depressing! Another "fun" map is this Bank Closure Map, which shows us why Warren Buffett pulled the plug on Kansas this morning! Overall, it's not really that many but there is a cluster around Kansas and Missouri. This map also makes me realize how a clever graphics person can earn a nice living coming up with topical images and selling ad space…
One more from Bespoke that's really scary: As I mentioned this morning, FRE and FNM are being booted by the S&P, ostensibly for falling below the $5Bn market cap requirement for inclusion in the index. Well Bespoke points out that there are 119 other companies in the S&P 500 that do not make that cut. CIEN ($1.05 bln), DDS ($1.00 bln), and MTG ($0.93 bln) are all smaller than the GSEs. Fannie and Freddie fell 25% today and THEN got booted from the S&P at night, leaving the S&P 2 companies short until CRM and FAST join after the close on the 12th. To what extent this screws up that index I do not know but it's an interesting problem.
And speaking of oil companies screwing you over – According to the Washington Post, an investigation of the Interior Department found that government employees who were supposed to be collecting Billions of dollars of royalty-in-kind payments from oil companies steered the contracts to Shell, Chevron, Hess and Gary-Williams Energy Co in exchange for sex, drugs and other gifts!
Rep. Nick J. Rahall (D-W.Va.), the chairman of the House Committee on Natural Resources, said the findings "are so outlandish that this whole IG report reads like a script from a television miniseries — and one that can't air during family viewing time." Sen. Jeff Bingaman (D-N.M.), the chairman of the Senate Committee on Energy and Natural Resources, called the report "extremely troubling," adding that "this investigation raises very serious questions about management and organization at the Interior Department."
