Saturday, 13 September 2008

US Financial Crisis Goes from Bad to Worse

Let's have a look at the main stories on Friday from the US. I could link any number of articles on Lehman butwhat is the point? They're gone, whether that is being bought out, or selling off assets or bankruptcy remains to be seen but they're gone.

Also, Washington Mutual's problems are being compounded by those ever behind the curve ratings agencies.

Fitch Downgrades Washington Mutual to 'BBB-'; Outlook Negative

Fitch Ratings has downgraded the long- and short-term Issuer Default Ratings (IDRs) of Washington Mutual, Inc. (WaMu) as follows:

--Long-term IDR to 'BBB-' from 'BBB';

--Short-term IDR to 'F3' from 'F2'

Fitch has also taken the following rating actions on Washington Mutual Bank (WMB):

--Long-term IDR affirmed at 'BBB''

--Short-term IDR downgraded to 'F3'
from 'F2'.

The Rating Outlook is Negative.

Today's actions reflect Fitch's expectation for continuing asset quality challenges amidst market conditions that are considered the most difficult in several decades for U.S. retail banks, particularly those with a concentration in residential mortgage assets.

Washington Mutual is adamant that they are OK and do not think the downgrade is justified. If that were the case, you have to wonder why they are in 'advanced talks' with JP Morgan.

JPMorgan Chase in Advanced Talks to Buy Wamu: Sources

JPMorgan Chase is in advanced discussions to buy Wamu, sources said Friday. While a deal has not been struck, and could fall apart, talks are ongoing at the highest levels ...

Whilst the media seems to be obsessing about Lehman, I think WaMu is much more important. If WaMu were to go down the toilet, it would be by far the biggest bank failure in history. A failure of this company alone would force the FDIC to go hat in hand to the Tresaury for more money to cover the insured deposits at WaMu.

At the end of 2Q08 WaMu had $25 billion in capital, that might sound like a a lot but with potentially $40 billion in losses coming down the pike over the next few years it's just a matter of time before these guys fold.

The good news is that there are suitors circling. I think the balance of probabilities suggests that neither Lehman nor WaMu file for bankruptcy, they both have assets that other financial companies want. However, there is no doubt that these institutions will not exist in the current form in the near future.

But we are not done yet. Also on Friday, AIG, formerly the largest insurance company in the world by market value fell -31% as the cost of their credit default swaps rose to record levels, prompting them to hold a conference call this coming Monday:

AIG May Hold Analyst Call As S&P Threatens Downgrade

On Friday, credit-ratings firm Standard & Poor's threatened to downgrade American International Group Inc., citing the significant decline in the company's share price and the increase in credit spreads on the company's debt. Meanwhile, AIG will likely hold an analyst call Monday morning and could announce a series of steps aimed at reassuring investors, including possible asset sales, a person familiar with the matter said.

And last but not least, Merrill Lynch stock fell -38% this week. As Lehman gets taken out the market has decided that it's next victim is Merrill.

We have consistently heard over the last 6 - 9 months that the worst is over and the botom is in but things continue to deteriorate. As I said back in August, this will not be resolved in a year, it will be several. The real question that everyone would like to know the answer to is 'when does the stockmarket price it all in?' I wish I knew, but from where I sit there still seems to be too much denial and complacency out there to signal a bottom just yet.