The financial media are again harbingers of more doom and gloom today, citing a Barron’s article and host of so called “experts” predicting that the financial crisis is not only far from over but could actually get much worse, bringing more big shocks to the US economy and stock markets. Among the predictions: the failure of some of the country’s biggest financial institutions, the collapse of 1,000 banks and a possible government bailout of GSE mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE).
An article in Barron’s said it is “growing increasingly likely” the government-sponsored mortgage companies will need a taxpayer-funded bailout in coming months. Jonathan R. Laing writes that the government is pushing the companies to raise more capital, but he says the firms could soothe the markets only by raising at least $10 billion each – an outcome he deems unlikely given that Fannie is currently worth just over $8 billion to shareholders and Freddie $4 billion. What’s more, with the pace of house price declines picking up and mortgage losses mounting, the proceeds from even a big capital raise could soon evaporate. “With credit losses surging at both agencies,” he writes, “$20 billion in new common equity wouldn’t last long.” Some experts say that were it not for government aid and backing of the GSE’s – Fannie and Freddie – would have already had to declare bankruptcy, because they are technically insolvent.
“I think the financial problem is halfway through the cycle,” David Kotok, chairman and chief investment officer from Cumberland Advisors, told CNBC. “There’s another shoe to drop ahead of us and it could be more severe.” Kotok thinks Merrill Lynch (MER), Wachovia (WB) and other financial companies are at risk of failure as the cost of raising capital soars at a time when the banks need to pay settlements over auction rate securities. The cash companies need to shore up bad investments, “is up to about $50 billion and will probably top $100 billion before it’s over,” he added. Each dollar of bank equity that gets lost takes out about 12 or 13 dollars of loans so there’s a tremendous magnifier effect of small changes in bank equity.
Morgan Stanley co-President Walid Chammah, who told a German newspaper that the financial crisis will probably not end until next year. “We will likely see more insolvencies among small U.S. regional banks that have focused on mortgage business,” Chammah said.
All I can say for now is, put on your seat belts again and enjoy the roller coaster ride in the next chapter of the thriller/horror story that is the Financial Crisis. For your safety another government bailout maybe on the way, thanks once again to the ever suffering American tax payer. Of course the investment banks and wall street vultures (i.e. hedge funds) will continue to make money shorting the shares of these financial companies as they go down, and also when they have their obligatory spike in a couple of days.