Transcript Update Credit Crisis June 08

Update on Credit Crisis:
Daryl Montgomery
June 11, 2008
Copyright 2008, All Rights Reserved
The Off-Balance Sheet Godzilla
for U.S. Banks
• SIVs
1.Became public in Oct 2007.
2. $400 Billion was considered so big a problem
that the U.S. government attempted a bailout
which failed.
• VIEs (variable interest entities, aka conduits, aka
special purpose vehicles)
1. It was revealed in Feb 2008 that there were
$800 Billion of them.
2. Estimated to be worth 27 cents on the dollar.
• June 2008 – FT reports bank Off-Balance Sheet
items estimated at $5000 Billion.
Is Lehman the Next Bear Stearns?
• Recent Earnings: Expected to lose 55 cents per
share, lost $5.14 (similar to Bear the quarter
before it went under).
• Multiple capital raising including recent $6 billion
in common (insolvent financials have to
frequently raise capital).
• Has sold off 20% of credit crisis loans in last
quarter. Did it lend purchasers the money to buy
them as UBS did?
• Massive put positions that only pay off if Lehman
goes under (similar to Bear Stearns).
Lehman One-Year Daily
Bond Insurers Downgraded
• MBIA and Ambac lose their top credit ratings:
1. MBIA fired Fitch when it tried to downgrade it.
2. S&P downgrades both in June 2008
3. Moody’s will downgrade them soon.
• All bonds backed by these companies will
consequently have lower ratings.
• Current ratings just below the highest, should be
just above the lowest.
• ACA downgraded from A to junk on
Dec 19, 2007 (see chart next page).
• SCA downgraded to A in March 2008.
Stock Chart for ACA
There is no chart. The stock was delisted
on December 19, 2007
One-Year Daily Chart for SCA
Green Arrow when downgraded
Two-Year Weekly Chart for Ambac
Green Arrow S&P Downgrade
Two-Year Weekly Chart MBIA
Green Arrow S&P Downgrade
The Latest Economic Statistics
• Employment report for May:
1. Unemployment rate rose to 5.5%, biggest increase since
the 1980s.
2. Loss of 49,000 jobs in May.
3. Job Loss every month this year, total = -324,000.
• Trade Deficit for April:
1. Increases to $61 billion in April ( up 7.8%)
2. Deficit up by $4.4 billion, oil imports up$4.3 billion
(average price of oil $98.68).
• CPI for April/GDP Q1:
1. Food up 0.9%, but gas prices reported as down 2% even
though government found them up 4.2% instead of the
actual rise of 12% (huh?).
2. Total up 0.2%. (3.9% year over year).
3. Q1 GDP revised up from 0.6 to 0.9.