September 30th, 2008What Comes After The Bailout?
The bailout bill failed to gain enough votes yesterday, but all indications predict that a substantial package will pass both houses in the coming days or weeks. But even if the bailout bill does pass, what’s next? The Commerce Department recently reported on September 24th, that sales of new homes dropped by a seasonally adjusted 11.5% from July to August. Year over year sales were down 34.5% from August 2007 to August 2008, and inventory of unsold homes still sits at 10.9 months.
Even if the entire financial industry is wiped clean of all their existing bad debt, they still face the grim prospects of how to garner new business going forward. The old game is over. Consumers are wise to the crooked real estate agents, rating agencies, banks, builders, appraisers and mortgage agents. They are also terrified of continued weakness and falling prices. The ones not scared are just not qualified to borrow substantial sums of money to buy a house. Housing prices, especially in past runaway appreciation markets like California, Florida, Seattle, New York, Chicago, Las Vegas and other large cities are destined to see continued weakness. With weakness comes more foreclosures, more walk aways, more short sales, and more bank losses.
It took a decade or more to get into this mess, and it sure is not going to be over with a single $700 billion check!
September 30th, 2008 at 12:31 pm
Hey Ed,
I have a question regarding what’s currently happening in the financial market that I thought you might be able to answer. The question is what happens to a financial institution after it fails. Let’s use WaMu as an example in the past week it has dropped from 3.72 to .16. Basically it has become worthless, so what happens to that entity at this point? How do it’s assets, control, and the money that shareholders have invested in it get transferred and to whom? Where does it all go? For example if one company decides to buy another, do the stock holders of the company being sold, get their stocks rolled into the new company or some other sort of compensation? Does it make any sense to buy up the stocks of a failing company who’s price is falling, if you know they are going to be bought out by a larger company who’s doing well financially? Does this apply to financial institutions as well as opposed to companies in other sectors?
October 1st, 2008 at 10:00 am
For every question you have, I could probably come up with three more questions, but nonetheless, here is a shot at a few answers:
Let me first start my referring you a writeup in the Seattle PI regarding WaMu:
http://seattlepi.nwsource.com/business/381253_wamu01.html
Washington Mutual is essentially worthless, but not exactly so. The stock still trades, but the stock no longer represents the banking enterprise it once did. When it became clear to federal authorities that WaMu was not going to make it (about 5 years after it became clear to me!), they seized the operations, and found a suitor to take control of the deposit accounts and other REAL assets. That suitor is JP Morgan. The “leftovers” (i.e. extremely over leveraged worthless debt) remains in the holding company, and that worthless pile of crap is what is now trading in the pink sheets under new symbol WAMUQ.PK. If you currently own shares of WaMu, then you can either dump them now, or wait to hear from the bankruptcy courts as to what, if anything, you are entitled to. It will likely drag on for years and I wouldn’t count on receiving much. Perhaps if you are lucky, you will receive a nice 8×10 portrait of John McMurray, the chief enterprise risk officer.
I can’t speak for what it makes sense for you to do, but with my money, I will not be buying shares of the pink sheets WaMu. But for every seller there is a buyer. There are plenty of people dumping their pink sheet shares for 16 cents, and there are plenty of corporations buying it at 16 cents. Those buyers are probably much better versed in the bankruptcy courts then I am.
As for other bank/financial failures, they all need to be evaluated separately. In the case of Bear Sterns, I believe they were purchased out right from JP Morgan for close to $10 per share, so the stockholders were entitled to that entire $10. But in that case, JP Morgan was willing to take Bear in its entirety due to significant government guarantees. With WaMu, there were no government guarantees, so JP Morgan essentially only took the ASSETS, and the share owners are left with the GARBAGE.