Yesterday, Kenneth S. Rogoff jumped on the bandwagon, warning that not ONLY will we see many mid-sized banks go belly-up in the months ahead; we’re about to see one of the biggest banks or investment banks in the nation crash and burn!
Rogoff, former Fed governor and Chief Economist of the International Monetary Fund and currently professor of economics at Harvard University, went even farther; warning that — and I quote ...
“Fannie Mae and Freddie Mac are not going to exist in their present form in a few years.”
As if to validate Mr. Rogoff’s warning, financial stocks plummeted AGAIN yesterday. Lehman cratered a staggering 13% in a single session — and Morgan Stanley, Merrill Lynch, Citigroup and Bank of America plunged in tandem.
And late yesterday, Goldman Sachs slashed its third-quarter forecasts on most Wall Street banks, pushing financials even lower after hours.
This is terrible news for anybody who owns the stock of America’s largest banks, brokers and insurance companies. BUT ...
So who’s next? Where’s our next opportunity to go for large gains as the weakest institutions falter?
For crisis opportunity hunters like us, this is definitely a target-rich environment.
Everywhere we look, we see major U.S. financial institutions mortally wounded ... in their death throes ... desperately trying to sell the only assets that are making them money ... and finding few buyers. Here are just four examples:
Lehman Brothers is on life support: In the second quarter, Lehman lost $2.8 billion, mostly in residential real estate investments. Now, JPMorgan Chase says the firm may have to write-down $4 billion in assets in the third quarter to cover mounting losses from bad bets made in the mortgage market.
There’s no doubt Lehman is in a panic to offload assets; including a portfolio of up to $60 billion worth of troubled commercial real estate assets, according to investors involved in that sale.
It’s not going well. Recently, Lehman Chief Executive Dick Fuld nearly struck a deal to raise almost $5 billion from South Korean wealth funds and institutions but the pact has now disintegrated, reportedly because Lehman needed more money than was offered.
And just yesterday, Wall Street was rocked by news that Lehman has invited offers for its highly prized asset management unit that includes Neuberger Berman.
If the deal goes through, it could turn out to be the worst possible news for Lehman. Neuberger Berman is one of the ONLY assets Lehman owns that is actually profitable. The company would become little more than a cesspool of rotting assets. Investors would probably slaughter Lehman stock.
Plus ...
Bank of America is suffering huge loan losses: When BofA bought Countrywide, it was thought that the big bank would save the subprime lender from failure. Now, it’s looking more like Countrywide could bring Bank of America to its knees.
The mess at Countrywide was far worse than anyone could have guessed: A staggering 83% of the “option ARM” mortgage loans in its portfolio were made with little or no verification of borrowers’ incomes!
Now, one in eight of those borrowers are at least 90 days behind on their payments. A whopping 72% of them are not even making full interest payments — much less payments on their principal.
American International Group – America’s largest insurer — is on the ropes: AIG plunged 5.9% yesterday after Goldman Sachs warned that the company may have to pay $20 billion on credit-default swaps, suffer ratings-downgrades on its debt and have to raise capital on a “large scale.”
CapitalOne is headed for disaster: Just this Monday, shares of Capital One Financial plunged nearly 5% after the credit card lender released data showing loan losses in its auto finance and international divisions are soaring.
There's never a “sure thing” on Wall Street. You can lose money even in the best of investments. But with giant companies like Lehman Brothers, ING or Bank of America having difficulties ... with huge, supposedly “safe” companies like Freddie and Fannie falling dramatically in value ... and with so many banks loaded with their stocks and bonds ... you don't have to be a financial genius to spot the sectors that are being hammered the hardest.
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