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Friday, February 1, 2008

Microsoft Buys Yahoo, Banks Bail Out Their Hedges

Microsoft Offers to Buy Yahoo for $44.6 Billion (Update1): “Microsoft Corp., the world's biggest software maker, made an unsolicited offer to buy Yahoo! Inc. for about $44.6 billion, or $31 a share.

The offer is 62 percent more than Yahoo's closing stock price yesterday, according to a Microsoft statement distributed by PR Newswire. Yahoo shareholders can choose cash or stock, Microsoft said.”

That was the big news this morning. Futures shot up, hitting resistance of 1390 on the S&P… where prices got slammed down hard into the close yesterday.

Hidden amongst all the excitement and noise of that deal, CNBC quietly mentioned that eight big banks have formed a consortium to bail out the monoline insurers. They are launching a ‘recovery bid’. (That’s all I know.)

The bank names being tossed around are:

PNP Paribas

Understand this: Every effort, both private and government, will be made to save the monoline insurers. Ultimately, they will be rescued. Somehow. The news will be instantly viewed as massively Bullish and risky assets will rally hard the world over. Wait for the rally to exhaust itself. It may take a while. Weeks. Maybe a month. Be patient. Then get short in a big way.

A bailout will not change the trends currently in place. A consumer lead recession will not be averted. This is just a big counter trend rally.

EDIT: (02/02/08) More details on the proposed bailout. 8 Banks Discuss Aid For Bond Insurers.

Subprime, CDO Bank Losses May Exceed $265 Billion (Update5): “Losses from securities linked to subprime mortgages may exceed $265 billion as regional U.S. banks, credit unions and overseas financial institutions write down the value of their holdings, according to Standard & Poor's.

S&P cut or put on review yesterday the ratings on $534 billion of bonds and collateralized debt obligations, many of which were rated as high as AAA. The action was the broadest by the New York-based firm in response to rising delinquencies among borrowers with poor credit. Moody's Investors Service and Fitch Ratings today said that they're also toughening assessments of the securities as home prices fall and the economy weakens.

While banks and securities firms such as Citigroup Inc. and Merrill Lynch & Co. accounted for most of the $90 billion in writedowns to date, S&P said the next wave may descend on regional U.S. banks, Asian banks and some large European banks. The ratings actions may create a “ripple impact” that further reduces debt prices, S&P said.”

$534 billion of bonds yesterday had their ratings cut. A rescue package for the monolines does not change that.

“Almost half the subprime bonds rated by S&P in 2006 and early 2007 were cut or placed on review, also potentially forcing credit unions and government-sponsored enterprises such as Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks to write down their holdings, S&P said. The securities represent $270.1 billion of subprime mortgage bonds and $263.9 billion of CDOs. About 35 percent of all CDOs comprised of asset-backed securities were put under review, S&P said.”

Subprime Bank Losses Reach $146 Billion as Europe Joins: Table: “The following table shows the $146 billion in asset writedowns and credit losses since the beginning of 2007, including reserves set aside for bad loans, at more than 25 of the world's largest banks and securities firms.

The charges stem from the collapse of the U.S. subprime mortgage market. The figures, from company statements and filings, incorporate some credit losses or writedowns of other mortgage assets that aren't subprime.

All figures are in billions of U.S. dollars, converted at today's exchange rate if reported in another currency. They are net of financial hedges the firms used to mitigate their losses.”

Hey, if you have to bail out the guys you used to hedge, is it really a hedge? Haha.