It turns out that my sneaking suspicion about who's zooming who was reversed. Chances are that Paulson, that clever devil, is going to make the government a TON of money. Conversations into the evening with Mr. Jones, my neighbor and friend from Morgan Stanley were quite enlightening.
Mr Jones' kid, my son's best friend, had a birthday party last night chez lui. So I sped across the city from Pasadena to get back to the South Bay listening to Vitamin Dub without once thinking about listening to the debate scheduled for six. By the time I thought about it, they were rambling on about the importance of Afghanistan and Pakistan. You know I really hate it when they say Tal ee bahn. Whatever to the Taliban for now, we've kind of got some domestic issues. (And Oregon State beat USC!!)
Here's the thing. As I was writing yesterday, the very idea that JP Morgan Chase could scoop up Washington Mutual at fire-sale prices had be seething with envy. My guess at timing that stock was right on time, this time. But I know better than to trust my day trading instincts. Jones did exactly the same thing - bought at 1.70 but got burned during the day. Apparently what happened is that the company went belly up and the government 'bought' some part of it and then JPMorgan Chase bought the other part. The end result being this - for a couple billon that JPMC had lying around, they get to sit on possibly 100B worth of assets. It's impossible for them to go any cheaper - the thing is that JPMC had the cash. Now they can just sit on those assets until they're worth something. What are the chances that they'll be worthless forever - they're all collateralized loans, the collateral is real estate which may be undervalued but is never worth nothing.
However if you were a bondholder for WaMu, you got zilch. I mean nothing. And of course Jones' stock is now worthless. It's exactly as if George Bush via Paulson nationalized the company. All of your base are belong to us. No other claims count.
This, my fellow citizens, is not a bailout. This is a fire sale. The government is buying the assets of Fannie and Freddie just like JP Morgan Chase bought Washington Mutual. Nobody else can claim any part of it and the government stands to make, according to Mr Jones, anywhere from 1 to 1.5Trillion in profit. The thing about panic is that it tires you out after you're done with the adrenaline. Once everybody stops panicking (and they will because everybody still has jobs, and everybody is still going to celebrate Halloween, Thanksgiving and Christmas), they are going to realize that the physical assets don't go away, we just percieve them differently. And when all is said and done, it's all going to be valuable again. The government makes out.
In the mean time, nobody has credit. Private equity firms are sitting on a pile of cash they don't want to move. No deals are being done until Paulson's deal is done. The correction is still correcting, but make no mistake, there is still a huge amount of wealth out there, just not in the financial sector. Unless you're a Lehman employee, chances are you still have your job and your company is doing fine. P/E ratios are in the single digits meaning almost every stock in the market is trading at historical lows.
Jones also says that if your 401K was wiped out because of holdings in financials, then you had better prepare yourself for retirement on skid row. If your portfolio was killed in this debacle, there's nothing you can do - interest rates are way too low for anything else. Maybe you have some gold already... But we are at or very near the bottom, if you got hammered then you have to start over. If you're upside down in a house, all you can do is hang on, hope and pray - for twenty years. There is some real ruination out there.
The Paulson + deal seems to be going through this weekend. Jones said that it's going to take a while before the credit mess is sorted out. If the deal fails to satisfy, or fails to go through, there is an outside chance that nobody gets any credit. Again, it matters that people trust that mortgage backed securities - now, what 99% owned by the government - can float credit. Jones said something about the Feds 'parking them over at HUD for a few years' and then come out smelling like a rose. But there's still the outside chance that there's a dealbreaker, in which case we actually do have a nightmare scenario which is this. No credit for anyone. No credit for anyone means it takes 20 years to get our society back running like normal. That means you go back to living like you did when you were a kid using Christmas Club and layaway.
Here's what I hope.
I hope that somebody has the bright idea to allow the public to participate in the enormous profits that the Fed is going to realize once the panic is over and the markets agree that those mortgages have fungible value again. I wish the Fed would issue some new security based on the Fannie & Freddy holdings and that we could buy into the long-term value of these mortgages when they come back around.
In the meantime, I'm sitting on my cash, and I'm putting it in Bank of America. Well, some of it, the WaMu part of it that the Spousal Unit was holding is now in JP Morgan Chase. That's not going anywhere.
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