Sacrificing the Future for the Present

UBS Reports SF830 Million Loss on Debt Writedowns (Update4): “UBS AG, Europe's largest bank by assets, reported its first quarterly loss in almost five years after declines in the U.S. subprime mortgage market led to $4.4 billion in losses and writedowns on fixed-income securities.

The third-quarter net loss was 830 million Swiss francs ($712 million), or 49 centimes a share, compared with net income of 2.2 billion francs, or 1.07 francs, a year earlier, Zurich- based UBS said in a statement today. UBS shares fell as much as 1.9 percent after the loss exceeded analysts' estimates.”

UBS is trading below both the 200 day and 50 day EMA near important support around the $51 area. Failure to hold this area will set the stage for further price weakness in UBS specifically and the entire financial complex in general. Pay close attention.

“The slumping U.S. housing market, which cost the world's biggest securities firms and banks more than $30 billion in bad loans and trading losses in the quarter, may lead to further writedowns, UBS reiterated today. Chief Executive Officer Marcel Rohner, who replaced Peter Wuffli four months ago, said losses at the investment bank outweighed record earnings at UBS's wealth management operation, the world's biggest.”

The US housing market still has to get significantly worse AND the same real estate bubbles in Europe, such as in Spain and in the UK, have yet to burst. Therefore, expect rapidly deteriorating earnings and balance sheets from the entire financial industry as they were all involved in the easy credit party.

S&P/Case-Shiller Home Prices Fell 4.4% in August (Update1): “Home prices in 20 U.S. metropolitan areas slumped in August by the most in at least six years, a private survey showed today.

Values dropped 4.4 percent in the 12 months that ended August, an eighth consecutive decline, according to the S&P/Case-Shiller home-price index, which has data back to 2001.

The figures reinforce the view among Federal Reserve officials and Treasury Secretary Henry Paulson that the housing slump has further to go. Near-record inventory levels suggest sellers will continue to lower prices, posing a threat to consumer spending because homeowners will have less equity to borrow against.”

The fall in home prices is showing no real signs of a slowdown or turnaround. Recent price cuts are not enough… these prices are NOT market clearing. Inventory continues to accumulate rapidly. Only further price declines can resolve this situation, both by completely discouraging the construction of new supply and by luring side lined buyers back into the market.

U.S. Tosses Lifeline to Lenders Using Home Loan Banks (Update1): “Banks shut out of the market for short-term loans are finding salvation in a government lending program set up to revive housing during the Great Depression.

Countrywide Financial Corp., Washington Mutual Inc., Hudson City Bancorp Inc. and hundreds of other lenders borrowed a record $163 billion from the 12 Federal Home Loan Banks in August and September as interest rates on asset-backed commercial paper rose as high as 5.6 percent. The government-sponsored companies were able to make loans at about 4.9 percent, saving the private banks about $1 billion in annual interest.”

Governments always make bad situations worse:

“To meet the sudden demand, the institutions sold $143 billion of short-term debt in August and September, according to the FHLBs' Office of Finance. The sales pushed outstanding debt up 21 percent to a record $1.15 trillion, an amount that may become a burden to U.S. taxpayers because almost half comes due before 2009.

The home loan banks, known as FHLBs, are increasing risks to taxpayers by assuming the role as a lender of last resort, said Wallison. That's the job of the Federal Reserve, he said.”

The Federal Reserve is much worse… they just ‘tax’ you a little bit differently. Its just called INFLATION.

“A loss of confidence in the companies could prompt investors to dump FHLB debt, potentially causing the collapse of one or more banks, according to Wallison and lawmakers including Representative Richard Baker of Louisiana. If others were unable to meet the liabilities, taxpayers would be on the hook, they said.”

Then the Fed would cut rates, inject liquidity and RE-INFLATE everything… the only thing you’d lose is your home, your purchasing power as the US dollar vaporizes and your life’s savings…

O'Neal Writedown Erased 20% of Shareholder Equity (Update1): “At Merrill Lynch & Co., a lot more was lost than the $2.24 billion, or $2.82 a share, former Chief Executive Officer Stan O'Neal said would be subtracted from the third quarter.

The real damage to shareholders came with Merrill's $8.4 billion writedown. It is the biggest in the history of Wall Street and wiped out four quarters of growth in shareholders' equity, according to Merrill's published figures. The charge, mostly for collateralized debt obligations and subprime mortgages, left the New York-based company with $38.8 billion of assets minus liabilities.

Losing “20 percent of shareholders' equity in one fell swoop is a serious blow,” said Robert Willens, the accounting analyst at Lehman Brothers Holdings Inc. in New York. “It might take them two to three years to earn that capital back.””

The most immediate impact is the rather sudden reduction in activity, especially risky activity, which a 20% reduction of shareholder equity will force on Merril Lynch. Since this equity is leveraged many many times over, this reduction in equity will result in a curtailing of activity many many times larger. Multiply this out through the entire financial industry as one player after another is forced to do the very same thing and you have yourself a sudden reduction in BOTH liquidity and activity. Let the global de-leveraging begin!

In a vain attempt to avoid this necessary rebalancing and retrenchment, the Federal Reserve will blindly continue to sacrifice your economic future to prolong the present ‘high’.

(I'm still looking into the mysterious spike in the Fed Funds rate on 10/25/07.)