Skip to main content

Econorama - Sub prime mortgage

I've been playing with the math on sub prime. I can easily come up with $50 billion of total announced write-downs - and I'm sure that I don't have them all. However, I'm skeptical of two things: first, that the losses will really be this big; and second, that the losses are entirely related to mortgages.


If we assume that the typical sub-prime loan is $250,000, then 200,000 homeowners would have to default, pay nothing, and the houses sell for less than the disposal cost - i.e. - so that the bank receives none of its principal back, for the losses to be $5o billion.


I can see more than 200K homeowners defaulting, but it is harder to imagine that they (that is, the lenders) get zero proceeds from foreclosure sales. In researching this, one thing kept coming up - it isn't clear that all the loans that are being reserved are related to mortgages. The terms in the bank and security firm press releases and filings are more than a little murky. So, don't be surprised if it eventually comes out that some of these reserves actually covered other bad loans - e.g. LBO's etc.


Or, as the markets gradually recover over the next 2-3 years, that banks get to take some of this back into income. Not an unusual tactic: e.g. the stocks have already been hit; no matter what performance you as a bank CEO turn in, the market will overlook it because your group is out of favor, so take the biggest reserve you can justify. This will juice results in future periods because your reserves are so flush that you don't have to reserve as much, say, in 2008-2010, raising earnings in those years, and further, if those reserves prove unwarranted, release them back into earnings in a future year.....

If I'm right, then the beaten-down banks should be a good play - except that they are sourcing new capital at extraordinary costs. I'll post on that in a bit.

FD: I'm long JPM, MS, WB, and BAC.

Comments

Popular posts from this blog

Book Review: What Matters Now by Gary Hamel

Interview of Eric Schmidt by Gary Hamel at the MLab dinner tonight. Google's Marissa Mayer and Hal Varian also joined the open dialog about Google's culture and management style, from chaos to arrogance. The video just went up on YouTube. It's quite entertaining. (Photo credit: Wikipedia ) Cover of The Future of Management My list of must-read business writers continues to expand.   Gary Hamel , however, author of What Matters Now , with the very long subtitle of How to Win in a World of Relentless Change, Ferocious Competition, and Unstoppable Innovation , has been on the list for quite some time.   Continuing his thesis on the need for a new approach to management introduced in his prior book The Future of Management , Hamel calls for a complete rethinking of how enterprises are run. Fundamental to his recommendation is that the practice of management is ossified in a command and control system that is now generations old and needs to be replaced with somethi

Manage Your Blood Pressure While Young to Have a Big Healthy Brain Later

Anatomy Refresher The brain accounts for around 2 percent of body weight but gets as much as twenty percent of blood pumped by the heart. There are about 370 miles of tiny “microvessels” in the brain. Those vessels deliver oxygen and nutrients throughout the brain. Blood Pressure and Brain Health Two recently-released studies reveal the importance of blood pressure management to brain health. More importantly, the researchers discovered the importance of managing blood pressure in one’s forties, or even younger. Dr. Matthew Pase, PhD, and Research Fellow in Neurology at the University of Boston School of Medicine, and Dr. Charles DeCarli, Professor of Neurology at the University of California Davis, presented a paper at the Alzheimer’s Association International Conference in July. (We’ve mentioned Pase in previous newsletters and posts. He used the highly-regarded Framingham Heart Study to produce the now famous, and famously disconcerting, study on the deleterious affe

Researchers Say Do This to Make Your Brain 10 Years Younger

Do your parents or grandparents keep a pot of coffee brewing all day? Do they spend the morning sipping a cup of coffee while working Jumble and the crossword puzzle in the newspaper? “Just because there is no evidence that it works doesn’t mean that it doesn’t work. It just means that no one has paid for research to determine whether or not it works.” That was my response to one of the earliest subscribers to our newsletter. He is fond of crossword puzzles and was hopeful that solving them would help build cognitive reserve. At that point we hadn’t seen any research that indicated that word puzzles were useful. Guess what: our subscriber and your family members are on to something. There now is research to support that individuals regularly working puzzles are building some serious brain strength. Crossword Puzzles and Fast Brains Here’s a quote from Professor Keith Wesnes at the University of Exeter Medical School: “We found direct relationships between the frequency