Today it happened:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aTAYVgs5054k

Today morning the bonds were in full crash mode and now they are climbing back. But not enough to cancel the yesterday crash.

You should expect more rate hike talks in the nearest future.

Read this:

http://calculatedrisk.blogspot.com/2008/05/feds-hoenig-serious-inflation-risks.html

I told you

It’s derivative exposure is like, $10 trillion? $20 trillion? Of course all those derivatives cancel each other and the total exposure is tiny as long as the institution itself is bulletproof. They receive profit in term of spreads between derivatives.

And CW exposure is what? $100 billion? It’s just another Enron, nothing happened when Enron collapsed.

Please develop!

According to PF we broken the buy-signal at 1416 for the ESM8 – next stop 1450. What´s you call?

Yes, many times less important. Like 10x.

http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=278

http://www.bloomberg.com/apps/news?pid=20601087&sid=aD0MRS4NxKJg&refer=home

First, it becomes clear, to us at least, that BAC is unable to close the CFC transaction due to uncertainty regarding the target’s liabilities. We know nothing new or specific here, but the delay added to the continuing disclosure to the effect that BAC cannot accept responsibility for the liabilities of CFC adds up to one thing, in our view: BAC (and its lawyers and accountants) is not willing to do a deal that leaves BAC shareholders facing a potentially staggering loss. A future write-down and likely restatement would ensure even more litigation and end the career of CEO Ken Lewis.

Second, run the numbers. If you accept that none of the funds of CFC’s $120 billion asset bank unit are available to repay parent company liabilities, except the $9 billion or so in book value representing the CFC equity in the sub, then the calculus comes down to about $50 billion in debt, vendors and other liabilities vs. the remaining assets of the parent, roughly a similar amount of loan servicing rights, conduit and investment assets, and whatever CFC can get for the bank unit.

Thus two billion dollar questions:

1) What is the estimated haircut for the ex-bank assets of CFC?

2) What is the estimated cost of settling all pending litigation?

Now obviously, it is in the best interest of CFC bondholders to get BAC to swallow the entire meal whole. But given that the extant civil litigation pending against CFC is vast and other civil and criminal inquiries also are pending, there seems to be no way for BAC to quantify the downside risk of CFC for its own shareholders, thus in our view no deal – at least as currently structured.

For the CFC bond holders, the best outcome other than the outright sale to BAC is a sale of the bank unit alone to BAC or another buyer at the best possible price. The remaining company could then be placed into Chapter 11 with the general agreement of current creditors in order to bring all of the litigation to a halt and force an immediate resolution of all current and unliquidated claims.

Under such a scenario, the resolution for CFC bond holders and general creditors might be better than that received by the holders of The New York Title and Mortgage Paper, but not much. Just consider what the eventual settlement amount is on claims against trillions of dollars of securitization and servicing flow originated and/or managed by CFC over the past half decade.

For BAC, a risky but better strategy than the course at hand may be to withdraw from the CFC merger, pay the $160 million breakup fee, and allow the entire company to slide into a managed default. As CFC’s funding runs away, the OTS will be forced to invoke its statutory authority to appoint the FDIC as receiver of the insured bank subsidiary, thus precipitating a bankruptcy filing by CFC.

In the event, BAC and no doubt a crowd of other suitors will be standing by, waiting to bid for some or all of the bank’s assets and liabilities in a competitive regulatory sale. But the claimants on the CFC bankruptcy estate would have to await the resolution of the bank receivership to see whether there were any net amounts from the sale of the bank that could be reclaimed.

To that point, while retail depositors of Countrywide Bank FSB have little or no reason to be concerned in such a scenario, the jumbo depositors of CFC above the insured limit- if any remain – should take advice about their options. The jumbo deposit holders may or may not be paid immediately by the FDIC depending on their assessment of the bank’s condition at the point of seizure.

Given the outline above, our view is that the equity of CFC is worth $0. This just again illustrates the point that price and value are not the same! The main point of this purely hypothetical discussion, however, is to illustrate the limited rights of shareholders and liability holders of bank holding companies, namely that the bank is subject to conservatorship by federal regulators in order to safeguard depositor funds. Bank depositors and the FDIC insurance fund are the senior creditors of any bank holding company, period. This places the full weight of losses at the parent holding company level on holders of equity and debt securities, in that order.

So right about now, if you are a fully cognizant bond holder of CFC, perhaps somebody who bought the convergence thesis from S&P and is now long and wrong, then you might be getting a little indignant at the prospect of CFC equity holders being paid anything until bond holders have been made whole. If you appreciate that the net assets of the bank unit will be available to the bankruptcy estate and also understand that the equity holders are essentially toast, then as a bond holder you need to ask yourself a question:

What are you waiting for?

If the BAC deal is not happening, then the only logical course is to pull the plug on the impossible dream of Ken Lewis, shoot the equity holders and get on with the CFC restructuring. In terms of similar scenarios, take a look at the involuntary filing by Highland Capital Management in February 2001, another “surprise” event that forced Bridge Information Systems into an involuntary liquidation. As Highland Capital CEO James Dondero told the BBC:”…we felt creditors’ interests were best served by an immediate filing.”

Just imagine the fun: Fed folks jaw boning, investors yowling, journalists wide eyed. A Chapter 7 against CFC will make for days of great headlines, maybe even congressional hearings and an interview with Maria on CNBC.

And a Chapter 7 filing by a creditor of CFC will prove once and for all that a large bank holding company can go through a market-based resolution without a subsidy from Washington. For that reason alone, we’ll buy dinner at Sparks Steakhouse for the holder of CFC debt that pulls the trigger first.

Personally I think BAC and CFC situation is quite tenuous. In case of bank failure, FHLB stands first in line to recover its loan – even ahead of FDIC (or insured deposits at that institution):

http://stlouisfed.org/publications/re/2002/d/pages/insurance_sidebar.html

(And that’s from St. Louis Fed.)

So, the Fed is trapped – can’t let CFC fail (FHLB), but can’t guarantee debt either.

So, I think it is critical that BAC purchases CFC, but the final transaction is going to be quite different than what it has been proposed so far.

This is a very tricky and it may create another BSC-type of situation. (Just speculating here – my thinking – absolutely no other basis.)

What’s the Solution? I think they should wipe out the shareholders and ask bondholders (not FHLB loan) to take steep haircut. This probably would perturb equity market, but I think this is a step in the right direction.

Over the next few months, I expect this to be played out multiple times. Most I-banks in my estimation are insolvent. (Look at their Level 3 assets which can’t be valued.) But running over an I-Bank is easier than running over a bank – not so good politically.

John D – I don’t think the Government will bail out Fannie/Freddie. Between the banks and Fannie/Freddie, they’ll probably help bank depositors as opposed to F/F shareholders.

Conde Nest Portfolio magazine had an article regarding how we are now facing protracted downturn and also outlined the experience of Swedish/Norwegian/Finnish authorities in handling the crisis.

What is needed is for the Fed/Treasury to face the truth – wipe out shareholders and let equities correct.

Having said this, I am sure they’ll think of something to make matters worse.

- Shankar

http://www.capitalstool.com/forums/index.php?showtopic=8948&st=100

Will you buy T at 3.9% or Citi at 8.5%? Big question…

From your list only (a). The market participants don’t worry about (b) and (c) yet.

d. Credit crunch. The credit market is competing for shrinking funds.

Some AA+ – rated corporations are shopping for money and are giving nice premium over T-bonds.

http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s1id=DAAA&s1range=5yrs

AAA rates are currently above 5.5%

http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s1id=DBAA&s1range=5yrs

BAA (still investment grade) almost 7%.

Who wants 3.8% for 10Y T notes?

Shankar takes the view that the FED and US Govt cannot afford to sacrifice CFC (if I understand correctly).

But what do you see driving the breakdowns in T-Bonds:

a. Record Federal deficit (ex-further bail-out/stimulus)
b. Looming bail-out of Fannie/Freddie
c. Further deterioration of FED balance sheet through more JPM-BSC-like deals
d. All of the above

What would you add?

Note who’s borrowed the most!!!