Thursday, December 20, 2007

Who is going to own who when this is all said and done?

In 2005 and 06 $1.2 trillion in sub-prime mortgages were sold to somebody.

OK this week we had Morgan Stanley and Bear Sterns report in excess of $10 billion in write-downs of sub-prime mortgages. So far, including this week, about $50 billion has been written down. Moody’s said yesterday that they were reviewing about $173 billion in mortgage-backed securities for possible down grades. Investment banks including Bear Stearns Cos., Deutsche Bank AG and Lehman Brothers Holdings Inc. sold $1.2 trillion of these securities in 2005 and 2006.

The most recent number as to the size of the problem in the sub-prime markets I saw was upwards to $500 billion. If there has been reported about $50 billion in write offs then we have only see 10% of the potential problem. Citibank and Morgan, in order to replace some of their lost capital, sold to Asian and Middle Eastern investor’s minor ownership interest in their firms.

What concerns me is if the number of $500 billion is reasonably correct then we still have $450 billion or so to go, who is going to own who when this is all said and done? The European central banks loaned out this week $500 billion dollars to provide liquidity. The rumor on the street is that a major European bank is in deep trouble because of their exposure to the sub-prime market. I think it is important to understand that the problems in the mortgage market are not isolate to the United States.

Cheap money and skyrocketing real estate price was a global opportunity or perceived to be opportunity. The chickens are coming home to roost and are bringing home with them all the debt that has to be paid off and the money is not there to make the mortgage payments. We as Americans want tings over and done with so we can move on to the next thing whatever it is. The problem with sub-prime loans is that it does not matter how much we want the sub-prime problem to be over with it, but it just will not go away.

The other rumor on the street is that the additional write down for Merrill Lynch, to be reported by the end of the month, could be an additional $8 billion to $15 billion. When you couple the $8 billion already announced at the high end that would take the loss to $23 billion dollars—if correct then Merrill would be forced to find additional capital.

I bring this to your attention because the credit markets and the world central banks know there is a huge problem and they are trying to keep it contained. I believe the pressure is building for a major credit collapse on a global basis, which I believe, will lead to a recession late next year.

Dan Perkins

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