Why John Paulson Is Still Bearish On Financials [Housing Tracker]

Link of the Day

“Ninety per cent of the mortgage market is supported by two private companies losing vast sums of money operating with no equity.” Hedge fund manager John Paulson, on why he’s pessimistic about Fannie Mae and Freddie.Mac.  (Financial Times, June 18^th)

Link of the Day

Bloomberg's chart delineates the $396 billion of writedowns and credit losses for the world’s biggest banks and securities firms. It also describes the $302 billion raised by those institutions to offset the losses suffered in the U.S. mortgage market. (Bloomberg, June 18^th)

Subprime Fallout 

Thornburg Mortgage Says Survival in Doubt.  “SEC filing: Thornburg Mortgage (TMA)  Inc. said in a federal filing that the future of the home-mortgage finance company as a viable business remains in doubt, despite a fund-raising plan announced two months ago that rescued it from bankruptcy at the time. Like other mortgage lenders, Thornburg has been under pressure during the housing crunch as the value of mortgages has fallen precipitously. But Thornburg's troubles have been of particular interest because it specialized in loans to relatively wealthy, credit-worthy borrowers -- not subprime loans.”  (WSJ, June 19^th) 

Morgan Stanley Earnings Plunge Despite Asset Sales.  “Morgan Stanley (MS) has said quarterly earnings dropped by more than 50% on trading losses and a slowdown in investment banking, even after the investment bank realized US$1.43 billion of pretax gains from asset sales… Analysts questioned the sustainability of the bank's earnings, which came mainly from selling businesses. The second-largest US investment bank reported income from continuing operations of US$1.03B, or $0.95/share, for its FQ2,down from US$2.36B, or US$2.45/share, in FQ2’07. Net revenue fell 38% to US$6.5B from FQ2’07… part [from] a contrarian bet on energy that didn't pan out and actions by a London trader.”  (Stuff.co.nz, June 19^th) 

Morgan Stanley In Rogue Trade Probe.  “Morgan Stanley on Wednesday became the latest financial group to be hit by the actions of a suspected rogue trader after revealing that a London-based credit derivatives trader had incorrectly valued his positions, forcing the company to take a $120m revenue hit. The trader, identified by market participants as Matt Piper, is suspected of increasing the value of his derivatives book to present his performance in a better light, according to [sources]… The mis-markings could also have been human error. A trader at a rival firm said [Piper] had been involved in short-term trading of credit index options on the CDX index.”  (Financial Times, June 18^th) 

MBIA Debt Is Setting Up a Quandary.  “Will regulators let MBIA (MBI), the big bond insurance company, renege on a promise to shore up a crucial unit with $900 million in capital[?] MBIA has written $137 billion in swaps, which are privately traded insurance contracts that let people bet on companies’ financial health. Most of these contracts stipulate that if MBIA’s bond insurance unit becomes insolvent or is taken over by state regulators, buyers can demand payment immediately. But [then] MBIA would have far less money to pay policyholders and owners of municipal bonds backed by the company. NY State Insurance Commissioner Eric R. Dinallo [wants] MBIA to bolster its insurance unit with the $900M.” (NY Times, June 18^th) 

Washington Mutual Ends 2 Types Of Complex Mortgages. “Washington Mutual Inc. (WM) will discontinue two complex mortgage products [and] add $1 billion to the subprime mortgage borrowers assistance program announced in April 2007… WaMu, the nation's largest thrift, said it would end all negative-amortizing loans (when the loan payment for any period is too small to cover interest charges, thus causing the loan's outstanding balance to increase.) It also is halting WaMu Mortgage Plus loans, which combined a first mortgage and a home equity line of credit into a single loan.”  (DJ via CNN Money, June 18^th) 

State Hit In Bear Stearns Collapse.  “Michigan's state pension funds lost more than $62 million on Bear Stearns (BSC) (JPM) stock from Dec. 14, 2006, through March 14, according to state officials. Michigan is hoping to take the lead role in an effort to recoup losses for individual and institutional investors who join a pending class action against Bear Stearns. Attorneys estimate damages for the group at several billion dollars. The lawsuit alleges that Bear Stearns and individual defendants broke securities laws by misleading investors about the firm's exposure to subprime mortgages from Dec. 14, 2006, through March 14.”  (Detroit Free Press, June 16^th)

Seeking Alpha's Housing Tracker is a collection of housing-related excerpts from various sources, grouped by topic. Feel free to post any interesting links on the subject in the comments section below.

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Comments

[Ishortyou]

In respect to Ambac and MBIA, they need to keep and save their cash they already have and any cash coming into their coffers, deleverage from annoying debts, obligations and risks, stop paying dividends to increase their book value and once their book value is adequate and sound reinstate their triple A ratings again to start writing down new public bonds insurance only in low risk areas of the market. This strategy in itself is the best advertisement to recruit new business because the new clients will precieve that " if these folks were able to survive the credit crisis then they can survive anything".

AMBAC and MBIA are already doing this strategy, so now its a matter of time for their book value to appreciate quarter by quarter to reinstate their triple A again, you dont have to be a rocket science to figure this out.

[helplessobserver]

Judy,
The final chapter of BCS is yet to be written. It will take awhile but the courts will order remedies in favor of investors who lost all in the BCS collapse.