Interest Rate Roundup

Friday, February 29, 2008

The financial horror movie continues

Are you a fan of horror movies? You know, like the Friday the 13th series starring Jason Voorhees? I was more into Nightmare on Elm Street growing up, myself, but have long since stopped watching them. Or at least, I thought I did.

But these days, it's a veritable financial horror movie playing out in the markets. The credit problems -- like Jason, like Freddy -- just won't die, no matter what you throw at 'em. Fed cuts. Super-SIV bailout proposals. Interest rate freezes. Foreclosure postponement programs. Gobs of foreign capital from sovereign wealth funds. It doesn't seem to stem the bleeding.

Just look at what we're learning about this morning ...

* American International Group announced a $5.29 billion loss in the fourth quarter, the biggest quarterly flood of red ink in its 89-year history. Writedown on derivatives: $11.1 billion, pretax, though AIG maintains the mark-to-market losses are not indicative of what it will actually lose over time.

But the firm also took $2.63 billion in pre tax losses on its investment portfolio, plus $643 million in losses in one of its unit's available-for-sale investment security portfolio. The culprit: "significant, rapid declines in market values of certain residential mortgage backed securities in the fourth quarter for which AIG cannot reasonably determine that the recovery period will be temporary."

Royal Bank of Canada had its own $192 million writedown. And I'll have a post up soon about another troubling trend we'll probably be dealing with this year.

* UBS is out there with a forecast that financial companies will lose at LEAST $600 billion during this credit crisis. Bloomberg estimates there have been more than $160 billion in writedowns and credit losses to date.

* Private equity firms are starting to take their own beating, due to the decline in the value of bonds and loans tied to all the leveraged buyouts in recent years. A public buyout fund backed by Kohlberg Kravis Roberts & Co. slashed its investment in one chipmaker by 25% and a stake in a broadcaster by 27%. A stake in a German car-repair company was chopped to the tune of more than 80%.

* And how about those "walk-aways" (or the increase in "jingle mail," if you prefer)? Here's the lede from a New York Times story today (the topic was also covered in a WSJ story):

"When Raymond Zulueta went into default on his mortgage last year, he did what a lot of people do. He worried.

"In a declining housing market, he owed more than the house was worth, and his mortgage payments, even on an interest-only loan, had shot up to $2,600, more than he could afford. “I was terrified,” said Mr. Zulueta, who services automated teller machines for an armored car company in the San Francisco area.

"Then in January he learned about a new company in San Diego called You Walk Away that does just what its name says. For $995, it helps people walk away from their homes, ceding them to the banks in foreclosure.

"Last week he moved into a three-bedroom rental home for $1,200 a month, less than half the cost of his mortgage. The old house is now the lender’s problem. “They took the negativity out of my life,” Mr. Zulueta said of You Walk Away. “I was stressing over nothing.”

I am a huge fan of the work done by the folks behind the Calculated Risk blog, by the way. There was a good post over there recently on this topic that you can read here.


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