The Stock Market Crash: Ahead of Us or Behind Us?

Morgan — Wed, 29 Oct 2008 00:03:00 +0000

Another guest post from MG who went from Wharton to Wall St. to real estate to Blown Mortgage.

Today?s reverse crash resulted in the Dow up $889.35 to close at $9,065.12. From peak to recent trough, the Dow has moved from its all-time high of $14,164 on October 9, 2007 to a low of $8,176 on October 27, 2008. That?s a decline of $5,988 or 42%. It earned back about 10% of that today.

So, let?s try to figure out what caused all this exuberance and determine if it?ll hold.

Over the weekend it was reported that emerging markets? debt, currencies, and stocks are crashing, a series of events that the US will be relatively unscathed by, for a change. **not much bearing on the Dow unless there?s more to this story, but go on**

Then there was the Washington Mutual CDS auction, which settled at 57 cents with less than a billion of net open interest. One way or the other, the counterparties are good for it; the Fed will give them the money. **under the radar, next**

OK, this is a biggie: the commercial paper market unfroze. The Fed has invoked Depression era power to buy short-term debt directly from issuers. Yesterday, companies sold a record of $232 billion in commercial paper, of which a record $67.1 billion was out 80 days or more, compared with a daily average of $6.7 billion last week, according to Fed data. This is good news since it?s frequently the inability to obtain short-term funding that pushes companies into bankruptcy. **now you?re talking, two thumbs up**

However, there?s a little catch. **uh oh** According to Adolfo Laurenti, a senior economist at Mesirow Financial Inc. ?The central bank probably absorbed about $60 billion out of the $67.1 billion of total 80+ day paper.? Also of interest is that General Electric, the largest issuer of commercial paper and the parent company of CNBC, sold commercial paper as ?a test? and a ?show of support? for the Fed?s program. Another first, The Korea Development Bank, borrowed directly; however, it did not beat around the bush making lame excuses, it just needed the money. It now has a line with the Fed for $830 million. **this casts a different light on the term ?unfreezing? but go on**

No, none of these are big enough to turn around the crisis. Au contraire, upon second glance, the commercial paper thing could be a negative. The root cause of this crisis, from the standpoint of the US, is derivatives counterparty risk and that?s where there could be big change. **now you?re talkin?**

From Bloomberg, ever at the ready: ?The Federal Reserve has given US futures exchanges until Oct. 31 to present written plans on how they’ll make the $55 trillion credit swaps market less risky . . . The Fed is pressing the industry to set up a central counterparty that would absorb losses should a market maker fail, a step that might have avoided last month’s bankruptcy of Lehman Brothers Holdings Inc.? **they should have thought of this sooner**

But wait, who will absorb the losses when a counterparty fails? No one has said, so I guess it will be the Fed then, who else.

And now, for those still with me who are dying to learn the answer to the question, is the stock market crash ahead of us or behind us?the answer is . . . ahead of us.

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What if Insurance Companies Don?t Pay?

Morgan — Mon, 27 Oct 2008 15:49:51 +0000

Another guest post from MG who went from Wharton to Wall St. to real estate to Blown Mortgage.

Let?s hope your policy is with an insurance company that has ruinous trading losses and heavy exposure to derivatives. That?s what it took for AIG to be rewarded with a direct government bailout.

In something of a creative interpretation of the mandate given by Congress to continue funding the so-far-failed bailouts of banks, Bloomberg reports on Oct 24: ?The Treasury is considering taking stakes in insurers . . .? which ?would widen the scope of Secretary Paulson?s Troubled Asset Relief Program (TARP) as the credit crisis deepens. ?Capital adequacy has been a major concern among investors? in insurance companies, said Morgan Stanley analyst Nigel Dally. ?If the Treasury were to purchase preferred equity stakes in some insurers, it would help calm these concerns.”

Purportedly, insurance companies, primarily life so far, have approached the Treasury for direct investment, or in the vernacular, a bailout. As would be expected in their line of work where the welfare of others is a hallmark of their business model, they want all life insurers to be on the receiving end of the government?s largesse. The reason, the companies state, is to lessen the embarrassment, or to cover up*, or to fool the public, if you will, for the few that actually need an investment, or bailout, and have been turned down, or laughed at, or shunned by private investors. (*The actual term used was cover up. I?m not making this up, just ask Jeff Matthews.)

Insurance Company Watch List

Insurance company third-quarter results are starting to come out. One company that had been rumored to be on shaky ground, The Hartford, announced a $2.5bn capital investment by Allianz SE, the reduction of its dividend and pre-announced a third-quarter loss. Prudential also pre-announced third-quarter losses, as did a number of other life insurers.

MetLife, in a bit of a departure from the others, pre-announced third-quarter results in the Tehran Times. The Tehran Times also reported that ?the insurer . . . plans to offer 75 million common shares to supplement the company’s capital position. ? We?ll let you know how that goes; however, the Tehran stock market is doing quite well this year.

MetLife and The Hartford were put on negative watch by Standard & Poor?s earlier this month. The CDSs of both companies ?were trading upfront, a sign of distress and heightened worry of a potential default.? By way of explanation, Chairman, President and CEO Mr. C. Robert Henrikson said, ?MetLife continues to be a strong, stable leader in the financial services industry during a challenging environment.?

In agreement with Mr. Henrikson about the challenging part, Standard & Poor’s said it is revising its outlook on the US life insurance sector to ‘negative’ from ’stable.’ It expects higher-than-usual credit losses and lower fee-based revenues as a result of the current turmoil in financial markets.

Now?s the time to amend living wills and revoke those do-not-resuscitate clauses if you, or an insured loved one, anticipate death anytime soon. And by all means, don?t jump, at least not until this matter is resolved.

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The Stock Market Crash: Ahead of Us or Behind Us?

What if Insurance Companies Don?t Pay?

Insurance Company Watch List