Default Rates Stabilizing...For Now.

Everybody can take a deep breath. According to an American housing official, "The default rate on U.S. mortgages is stabilizing". That may be a true statement today; will it be in four months? One picture can speak a million words:


The next few months will see an incredible amount of adjustable rate mortgages reset their monthly payments. There should be a four or five month lag time, but expect default rates to correlate closely to the reset schedule above. There will be no long-term stabilization in the near future.

Deja Vu?

The situation at Countrywide Financial has been described as a "bloodbath" recently:

"Countrywide, the nation’s largest and recently most-embattled mortgage lender, announced it was laying off as many as 12,000 people today, roughly one-fifth of its 61,000-strong workforce. In a letter to employees company founder and ceo Angelo Mozilo called the current slump 'the most severe in the contemporary history of our industry.' He said home price appreciation had 'stopped dead in its tracks,' that there had been increased delinquencies in 'far too many borrowers' and that the secondary market for jumbo loans and those that don’t qualify for government-sponsored insurance 'has become nearly illiquid.'"

Bloodbath...Where have I heard that before? Hmmmmm...

And They Said it Wouldn't Spread...

Five articles of subprime spread.

The first: Subprime May Be Hitting Credit Cards, Too:

"Fallout from the mortgage mess and lower home prices may have started to creep into the credit card arena, judging from July payments and some initial moves by issuers to tighten the screws on cardholders."

The second: Mortgage Woes to Hurt Auto Sales:

"The ongoing slump in new-home sales and turmoil in the subprime mortgage industry will continue to hurt U.S. sales of light vehicles for the rest of the year and into 2008, according to an automotive market forecasting firm."

The third: Asian currencies led by rupiah dip as subprime losses spread:

"Asian currencies dropped yesterday on speculation global funds are exiting emerging-market assets as losses linked to US subprime mortgages spread."

The fourth: Layoffs Grow in Mortgage Industry:

"Brian Jurvis of Hazel Park wasn't surprised when he was laid off late last week from Countrywide Financial Corp.'s subprime lending division."

"Jurvis joined more than 25,000 workers nationwide who have lost jobs in the financial services industry since the beginning of the month -- more than half of them eliminated since Friday."

The fifth: Subprime pain spreads into office market:

"As business volume plunges for real estate firms hurt by the housing slump, they and companies that service them are abandoning office space and leaving landlords and surrounding communities suffering".

So far subprime problems have affected five other sectors or markets: consumer credit, auto industry, Asian markets, labor market, and commercial real estate.

Where else will this colossal problem rear its ugly head? Time will tell, but one thing is certain: the bubble is yet to burst. From Finance Markets.co.uk:

"In a recent CNN interview, Nouriel Roubini pointed out that current Federal Reserve estimates of the problem may be extraordinarily undervalued at $100 billion."

"Instead, he points out that minority equity is bundled with debt, which is then leveraged against further higher debts, which can in themselves then be set up as collateral against even yet higher debts."

"Any loss of value on the original equity value - ie, sub prime mortgages - leaves only debt sustaining debt - a house of cards that we are only beginning to see unravel."

Holy Deadly Debt, Batman! Does that mean we're in trouble??

Bear Stearns Has More Problems

In a shocking(?) turn of events, a third hedge fund managed by Bear Stearns is in trouble. Yesterday, they halted investors from bailing out:

"Bear Stearns Cos., manager of two hedge funds that collapsed last month, halted redemptions from a third fund after a slump in credit markets prompted investors to demand their money back."

Today, more Bear Stearns' hedge funds filed for bankruptcy:

"Two Bear Stearns Cos. hedge funds heavily exposed to the flagging mortgage industry filed for bankruptcy protection late Tuesday, two weeks after the company told investors one was essentially worthless and the other had lost more than 90 percent of its value."

"The funds were squeezed after Bear Stearns made wrong-way bets on the home mortgage market and was caught as loans to risky investors began to default."

"Bear Stearns is the nation's fifth-largest investment bank and specializes in mortgage-backed securities."

Is it only a matter of time before the company goes belly up? The more news that comes out, the more it looks that way. Meanwhile, investors have deemed other investment bank assets "junk":

"On Wall Street, Bear Stearns Cos., Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Goldman Sachs Group Inc., are as good as junk."

"The highest level of defaults in 10 years on subprime mortgages and a $33 billion pileup of unsold bonds and loans for funding acquisitions are driving investors away from debt of the New York-based securities firms. Concerns about credit quality may get worse because banks promised to provide $300 billion in debt for leveraged buyouts announced this year."

I wonder what James Altucher thinks about all this? I bet he'll say that Goldman Sachs is a screaming buy.

Mortgage Deliquencies: Destined to Rise

A headline I saw today: "Mortgage Rates Could Soar". Could is not the word I would use. From the story:

"The already poor performance of many mortgage loans will worsen substantially through the rest of the year, according to an analysis released Thursday by Moody's Economy.com."

"The worst-hit loan category will be subprime adjustable-rate mortgages (ARMs). Economy.com expects foreclosures for those loans to hit 10 percent of that group by mid-2008. The foreclosure rate for that group is currently 4 percent and was as low as 2.5 percent in 2005."

When you consider the looming mortgage rate reset that's just starting out, it's illogical to think mortgage rates could soar. Could implies that it's a possibility or even a probability. It's way passed that. Mortgage rates will soar, perhaps into the realm of federal bailout. There will be a lot of people who will need a lot of financial help in the coming months and years and there will be a lot of people who lose their home. The population's current financial IQ is poor at best and it's something I think that will be a huge hindrance to our future economic growth.

A Bad Omen: Subprime Defaults Drop the "Sub"

It's not just a subprime problem anymore. Countrywide has reported that mortgage defaults are now starting to affect quality borrowers:

"The subprime mortgage meltdown has begun to spread to prime loans as even credit-worthy borrowers have started to fall behind on payments."

"'Unable to afford their own homes, [borrowers] turned to increasingly risky mortgage products,' said Amy Klobuchar, a member of the House of Representatives from Minnesota, speaking Wednesday before a hearing of the Joint Economic Committee examining the national foreclosure crisis."

"Some home buyers, caught up in red-hot markets and afraid of getting locked out of homeownership forever, overpaid for houses."

Home prices rose so high in the early part of this decade, that most people couldn't afford a traditional 30 year mortgage. Well, I guess they couldn't really afford non-traditional mortgages either.

The inability to live within your means and to recognize the limits of your means is going to make a relatively small problem (subprime defaults), a very big problem. This is the kind of widespread problem that could wipe out the middle class in this country: going into a loan based on highly inflated property values that then begin to deflate. As mortgage rates reset, more and more families will find themselves upside down in terms of property values versus loan balance. That will not be easy for the economy to iron out.

But wait, there's more:

"Analysts said the trend could continue, particularly in areas of the country that have been hardest hit by job losses in general or seen a decline in speculation-driven construction, such as South Florida, parts of California and Las Vegas."

Job loss? Rising mortgage payments? Rising energy costs? Rising food costs? This doesn't sound very good, considering consumerism accounts for over two-thirds of our economy.

More Metal ETFs and Indexes

Gold and other metals are poised to rise. Here's a few more recommendations for cashing in:

XAU: "The XAU is an index traded on the Philadelphia exchange. It consists of 11 precious metal mining companies."

HUI: "The AMEX Gold BUGS(Basket of Unhedged Gold Stocks)Index represents a portfolio of 14 major gold mining companies.The Index is designed to give investors significant exposure to near term movements in gold prices."

GDX: "Global Markets Vectors tracks the Amex Gold Miners Index, which includes a total of 37 large-, mid- and small-cap U.S. stocks and ADRs. It is heavily weighted with two Canadian firms, Barrick Gold at 14.45% of assets and Goldcorp at 9.45%, followed by Newmont Mining at 9.51%."

As the dollar continues to weaken and adjustable mortgage rates continue to reset (leading to more bad mortgage-backed securities), gold and other metals will continue to rise. And because mortgage-backed securities are illiquid, the bull market should be slow, long, and drawn out. Over time, a bubble could develop.

XAU ended trading at $158.26; HUI ended trading at $368.93; GDX ended trading at $42.99.

Fixing the Bond Market

When you don't like what you hear from one doctor, you get a second opinion. But how ethical is it to get a second opinion when you're talking about rating the creditworthiness of mortgage-backed securities? From Bloomberg:

"Moody's Investors Service has been excluded from rating 70 percent of new commercial mortgage-backed securities after toughening its guidelines. "

"'There's no doubt in my mind that it's because of the change' said Philipp, who included a chapter titled 'Rating Shopping is Alive and Well' in a report released today. 'Normally, we'd rate 75 percent of the issues, not 30 percent. I guess this is sort of like, no good deed goes unpunished.'''

Investors beware. You can put makeup on a pig, but it'll still be a pig.

Bear Stearns: WORTHLESS

It's being reported tonight that the riskier of the two Bear Stearns hedge funds is as good as worthless, while the other troubled fund is worth about NINE CENTS on the dollar. From the NY Times:

“'The preliminary estimates show there is effectively no value left for the investors in the Enhanced Leverage Fund and very little value left for the investors in the High-Grade Fund as of June 30, 2007,' according to the letter."

In a related story, Bloomberg reports that Goldman Sachs and JPMorgan are among a few bank who are unable to dump their debt:

"'The private equity firms, being very tough negotiators, are unlikely to let the banks off the hook,' said Martin Fridson, chief executive officer of high-yield research firm FridsonVision LLC in New York. 'They'll say that's your problem and that's why we're paying you: To take risk.'''

"'Those bonds are probably worth 94 cents on the dollar, or $43.5 million less than when they were sold on June 28', according to Justin Monteith, an analyst at high-yield research firm KDP Investment Advisors in Montpelier, Vermont."

I have a feeling that the faulty debt problems will be mostly contained within the banking industry. I can't see this affecting tech stocks very much, if at all. As for gold, these developments will only cause upward pressure on metal and metal stocks, especially if it gets bad enough for a federal bailout.

Investment banks beware. When the chickens come home to roost, the cock-fights will get bloody. Did you follow my advice? What about this? Are you covered?

(Edited 7/17/07 7:57 PM: edited to fix the NY Times link)

GE Ditches Subprime Sector (and Other Reasons to Buy)

It was recently announced that General Electric is in the process of getting out of the subprime mortgage industry:

"The Fairfield, Conn.-based company...announced it is exiting the U.S. subprime-mortgage business, and that it has already sold off $3.7 billion in loans to reduce its exposure to turmoil in that market."

"In the first quarter, GE laid off more than 460 WMC Mortgage employees and took a $500 million charge when it sold off part of its residential subprime assets. On Tuesday, Moody's Investors Service downgraded 399 subprime securities, including home loans originated from WMC Mortgage."

As the subprime mortgage industry continues to crumble, the smart players are positioning themselves for protection. That's precisely what GE has been doing. The company also reported a ten percent increase in profit for the second quarter:

"General Electric Co. shares notched a five-year high Friday after the conglomerate reported a 10% increase in second-quarter earnings, due in part to strong revenue growth in its infrastructure businesses, including aviation- and energy-equipment sales."

I want to focus on their energy-equipment sales. In his book, The Coming Economic Collapse, Stephen Leeb takes a few pages to discuss General Electric's alternative energy ventures. Leeb describes GE as being a leader in the area of wind:

"General Electric is the world's largest integrated wind company and the second-largest maker of wind equipment. Over the past three years, wind revenues, admittedly starting from a small base, have grown by 50 percent a year. [The edition I have was published in 2006.] The Street projects the percentage growth from this division will be in the low 20s over the next five years. We think it could easily exceed 30 or even 35 percent."

Leeb also touches on the fact that energy-related products and services make up 12 percent of revenue (in 2006). A quick glance at GE's most recent earnings report indicates that orders for energy related equipment increased by 72 percent in the second quarter of 2007. Furthermore, revenues from their energy business increased by 17 percent, while total profit in the energy business increased by thirty percent. Those are strong increases that should continue, even despite a possible market downturn. That's why I recommend buying GE. The company closed trading on Friday at $39.50.

S&P, Moody's to Downgrade Subprime Securities - World Stocks Falter

Well, it's about time. How long has it been since we've known about the risks? Months and months. Finally, the two credit ratings organizations are coming around:

"Credit ratings on 612 classes of residential mortgage-backed securities backed by U.S. subprime collateral have been put on CreditWatch with negative implications, S&P said. Beginning in the next few days, the agency said most of these classes will be downgraded."

"That covers about $12.078 billion in rated securities, or 2.13% of the $565.3 billion in U.S. RMBS rated by S&P between the fourth quarter of 2005 and the fourth quarter of 2006, the agency noted."

Meanwhile, in a related story:

"Moody's cut ratings on 399 subprime residential mortgage-backed securities, or RMBS, and said that it may downgrade another 32 because of higher than expected delinquencies on the underlying home loans."

I don't know how many more securities there are that are at risk, but I would bet there are more. Any literate investor should have known for weeks of the great risk associated with subprime mortgage securities; the looming interest rate reset will be devastating. Here's the simple picture:

"A lot of debt will be downgraded to junk status. A lot of that debt will have to be sold at fire-sale prices. A lot of pension funds and hedge funds that once thrived on the high returns they could get from investing in subprime junk will now lose a lot of money."

"S&P's announcement is a death warrant for the subprime industry. No longer will mortgage brokers be able to help buyers lie their way into a home. Fewer stressed homeowners will be able to refinance their mortgage, thus extending and exacerbating the housing bust."

Unwinding this tangled mess is taking time; along the way, it will affect more than just the mortgage industry. Of course it has already hurt the homebuild sector. Higher foreclosure rates have contributed to a rising supply of homes; also, looser loans standards helped fuel a housing boom which assisted in creating future projections that were grossly inflated.
And the subprime mortgage fiasco has not and will not be kind to the banking industry. Depending on who's holding what, investors could be rewarded greatly for making the right bets.

Another sector that could feel the hurt is retail. Fewer homeowners refinancing mean less being spent at home depot or at the mall. We've already seen home depot's hurt. Bed Bath and Beyond has also lowered it's expectations in the last few weeks. The housing downturn might be blamed as the number one reason, but subprime is not far behind. And as the noose tightens around lending standards, the infusion of cash that has helped fuel earnings in retail will evaporate.

Today, just one day after flirting with a record close, the Dow faltered by more nearly 150 points. Following the Dow decline, Asian markets followed suit. Something will act as the catalyst initiating a world-wide economic slowdown. It could be subprime, it could be something else. All that needs to happen is for a spark to start the wheel spinning. The next couple weeks should give us a decisive answer.

Mortgage Rates Set to Reset

The looming crisis is getting closer and closer:

"'In October alone more than $50 billion in ARMs will reset,' according to Mark Zandi, chief economist and co-founder of Moody's Economy.com. That's a record, according to Zandi."

"As a result, Doug Duncan, chief economist for the Mortgage Bankers Association (MBA), is expecting as many as 600,000 home owners will get into trouble with perhaps half of them actually losing their homes."

You read that right. Fifty billion dollars in October alone. With the help of Credit Suisse, I outlined the reset schedule here. It's looking true to form. In the tenth month of 2007, we can observe a spike in ARM resets. It will be a record. It will be ugly. It will get worse.

Appraisal Fraud

It's really sad that it's come to this:

"It's called 'hitting the number' - or inflating a home's value - and real estate appraisers who don't do it often enough can find it hard to make a living."

Yet another problem contributing to the housing boom/bust. So we combine appraisal fraud with relaxed lending standards and low interest rates and we get.........wait for it............

A Housing Bubble!

Gee! Who'd have thunk it:

In prepared testimony Tuesday before a Senate subcommittee on mortgage industry abuses, Alan Hummel, spokesman for the Appraisal Institute said 'Appraisers face pressure from various parties involved in mortgage transactions. They are told to doctor their appraisals or else never see work from those parties again.'"

It's absolutely unbelievable how irresponsible the mortgage industry has acted over the last five years. "Doctor your appraisals"? Unbelievable.

So this is what we have: we have previous appraisals that inflate the price. Then, people refinance their current mortgage because they have all that extra equity to play with. Except that their homes aren't really worth as much money as they thought. They spend their re-fi money on home improvements or vacations or big screen televisions or a new car, and then they decide to sell their house. An appraiser comes out again, no more than two years later and appraises the house at thousands of dollars lower than the previous one. And then you see people who own property with a market value at $350,000, yet they owe $700,000. These kinds of practices are causing the shift in wealth from the middle class to the upper class. It's truly unbelievable how irresponsible the markets act when there isn't any regulations or oversight!

Oh, but the oversight was just late arriving:

The National Association of Mortgage Brokers (NAMB) addressed the issue last year, changing its bylaws to prohibit pressure on any other players in the transaction, including appraisers.

Maybe I'm an old-school thinker, but doesn't it sound a bit criminal to influence appraisers in the first place? I thought that was called 'fraud'.

Exotic Security Classes, Balloon Payments, and Prepayment Penalty

This quote (from an article I referenced in my last post) caught my eye:

"CRL also found that more than two thirds of the subprime loans it looked at contained prepayment penalties. By charging borrowers up to six months of mortgage payments to retire mortgages, prepayment penalties lock borrowers into onerous loans by making it very expensive to refinance out of them and into a lower-rate fixed."

Prepayment penalties are a result of a CDO market making every attempt to minimize risk. Let's look at a couple of exotic securities available: IOs (interest only) and POs (principle only). Consider the following example: Bank 'A' created $100 million worth of mortgages. The mortgages are for 8 years at 8% with a balloon payment at the end. The bank takes those debt obligations, pools them together, and sells them to an intermediary who creates different asset classes depending on the cash flow expected from the borrower. The two equations below outline the yearly payment plan for two different asset classes. The top equation is the payment schedule for the investor who buys an IO security; the majority of their return comes from the interest paid by the borrower. The bottom equation is the payment schedule for the investor who buys a PO security; the majority of their return comes from the principle payment in the form of the balloon payment at the end of eight years.

You may have noticed that 43.5 and 55.7 is 99.2, not 100. In the example, the intermediary takes 0.8 as payment for administering the asset classes.
Prepayment penalties on mortgages are meant to reduce the risk. In our example, when borrowers refinance, the owners of the PO security class get their return without having to wait out the eight years, but the IO class is left with a bad investment as less interest is paid, causing a declining return on capital. Conversely, when the borrowers extend their loan, the IO class reaps the rewards as they continue to collect interest, while the PO class is forced to wait for their return.
What happens when the borrower defaults on the mortgage? A portion of the security becomes worthless. When there are record defaults, these securities will have big problems.
There's much more default risk undertaken by the PO class as 87 percent of their return depends on the balloon payment. There's default risk with the IO class as well, but that risk diminishes with each successive year.
There are some hedge funds that are heavily invested in these types of securities. The companies operating them will be the ones that suffer tremendously as foreclosure rates increase further, and they will. The beginning of the great mortgage reset has just begun and with more subprime mortgages being issued, the problem will continue.
At the beginning of this post, I referenced a CNN Money article that described a subprime mortgage market who hadn't learned their lesson. The lesson won't be learned until we reform the CDO market. Much like the illegal drug industry, as long as there is demand for these types of exotic investments, there will be a supply of exotic mortgages.

Subprime Mortgage Abuse Continues

Will they ever learn? The subprime vultures just won't quit:

"At a Senate subcommittee hearing on ending mortgage abuse this week, the Center for Responsible Lending (CRL) presented its findings on subprime loans included in 10 recent packages of mortgage backed securities."

"'A lot of the terms that make these loans so dangerous are still being used,' said Keith Armstrong, CRL's senior policy counsel. 'We had been told that these things are going away.'"

You can't teach an old dog new tricks? How much worse will this get? When will people finally learn their lesson? This new development is indicative of the fact that we've only just begun the shakeout; in fact, as long as the practices continue, the problems will continue.

The impression left from the last six months of subprime lenders becoming subprime companies wasn't really an impression at all.

"According to Doug Duncan, chief economist for the Mortgage Bankers Association, troubled lenders are aggressively making new loans for an infusion of cash. 'They're gambling,' said Armstrong, 'doubling down and that's a recipe for disaster.'"

Gasp! Gasp! The mortgage industry is running out of breath. They're desperate, and their desperation is producing ugly results. Where will it lead our economy?

Beazer Fires Chief Accountant

Wow. Simply wow. Beazer Homes is in deep:

"Beazer Homes USA Inc., a homebuilder that's under investigation by the FBI for potential fraud, fired its chief accounting officer for violating the company's ethics policy by attempting to destroy documents."

The investigation is a result of offering mortgages to prospective home buyers based on expected future earnings, which is prohibited. It's bad enough for the company that they happen to be a homebuilder in a slumping housing market. Adding the fact that the company is under investigation and the fact that the CAO just got canned for attempting to destroy documents makes for a tough case. On top of all that, inventory makes up around eighty percent of Beazer Homes' assets.

This is an easy one - sell Beazer (BZH). The company closed trading today at $28.54, which is at the lower end of the 52 week range ($27.32-48.60). Still, after all is said and done, I think the stock will be trading closer to $20 than to $30.

S-E-C: 12 Investigations Launched!

The SEC probe is much larger than just Bear Stearns:

"The Securities and Exchange Commission has launched about a dozen investigations related to securities backed by sub-prime mortgages, SEC Chairman Christopher Cox said Tuesday."

Twelve investigations is a lot and it helps to prove the point I made earlier in the week: the subprime CDO fiasco is going to be MUCH larger than most expect.

"Thus far in 2007, he said, the SEC has imposed fines in nine cases. The agency's record for cases with fines imposed in an entire year is 11."

I can't see how this year won't be a record-breaker. There's still six months of subprime unwind and defaults are on the rise. Plus, the SEC is defending itself against accusations that the commission favors business. Regardless of whether the accusations are true, the fact that they exist means there's a good chance the SEC will be unfavorable to business.

Another quick look at CDOs

It's finally come. The SEC is investigating securities fraud stemming from the sub prime loan debacle. Finally some accountability, though perhaps it's too little too late:

"Last week, Cox revealed in an interview that the SEC was looking into the problems at the two Bear hedge funds. Bear said last week that it would provide up to $3.2 billion in financing for one of the funds after the investment bank discovered that the underlying value of the assets was much less than it had believed.

Collateralized debt obligations are extremely illiquid and have no true market price. The sellers value the securities based on models that use ratings from the credit agencies to judge the risk that they will go sour. Buyers have little idea what the underlying assets are, or what they should be valued at."

Ahh, I see. The article continues, mentioning Blackstone:

"In a wide-ranging oversight hearing before the House Financial Services Committee, Cox and the other four SEC commissioners defended the agency on a host of issues ranging from reform of the Sarbanes-Oxley corporate governance law to the approval of a public offering by Blackstone Group LLP".

I have been wondering why the Blackstone Group went public when it did. The market's much closer to the top than it is the bottom. Prior to going public, the company unloaded a whole helluva lot of real estate in the Chicago area as well as the Western region. I suppose they wished to reduce debt, which in turn would make them more attractive for their IPO. A more attractive IPO means a higher bid price, which means they raise more capital which means the principals of the company reap massive benefits. Right? And if this company were heavily invested in the subprime mortgage fiasco, going public would be the best thing for the principals as all that investment money coming in would create upward pressure on the initial price of the stock. Maybe we will see the shortest lifespan ever of a public company, but I don't know.

Yesterday, I wanted to lump Blackstone in with the other four investment firms I previously mentioned. I had a feeling that Blackstone would drop immediately, but then I thought: no, it's a new stock, people will buy no matter the price because it's *NEW*. I guess I should have followed my instincts. Despite being priced below their IPO price, I think the stock will rebound considerably, regardless of market conditions. But I do think this company is suspect. At this point, I do not think a savvy investor would sell or short Blackstone. It is one that I will watch closely and I will give you an update as soon as I've jumped off the fence.

Mortgage Rate Reset

It's amazing the way things are unwinding: very slowly and very predictable. This could have served as a warning of things to come for Bear Stearns:

"Bear Stearns Funds Own 67 Percent Stake in Everquest"

"Funds run by Bear Stearns Cos. own two- thirds of Everquest Financial Ltd., a firm that invests in debt backed by subprime mortgages and buyout loans"

On May 11th, the same day the article was published, Bear Stearns closed at $156.40. At the end of trading today, Bear closed at $139.10; Bear has lost 11 percent of it's value since May 11. It will continue to drop, we'll see where the bottom is. This chart, found on page 47, is dated March 12, 2007:


Looking at the graph, we can see that the fifth month, May 2007, was about the starting point to a rough time for homeowners with adjustable rate mortgages. As if on cue, foreclosures jumped 19 percent from April to May. If this chart is an indicator of times to come, the late summer will see another spike in mortgage resets, which should lead to an increased foreclosure rate.

Financial institutions and hedge funds that hold those mortgages should get hit harder in a few months than they are right now. This article (which I've referenced before), implicates JP Morgan Chase, Citigroup, and Merrill Lynch in the Bear Stearns fiasco, which is just picking up speed. I'm bearish on all four. I've already recommended selling Bear Stearns. Now I recommend selling the other three. This article implicates Goldman Sachs. Sell Goldman Sachs. There will be companies that will end up with the bad debt - it doesn't just disappear. A bailout from the government, a possibility depending on the severity of defaults, would be very beneficial for gold (which I've previously recommended buying).

Citigroup (C) ended trading today at $51.69. Merrill Lynch (MER) ended trading today at $83.98. JP Morgan Chase (JPM) ended trading today at $48.36. Goldman Sachs (GS) ended trading today at $216.74

CDOs and Subprime Loans

Via Barry Ritholtz at Seeking Alpha comes this quote from Bloomberg regarding Merrill Lynch's sale of Bear Stearns' mortgage securities:

A sale would give banks, brokerages and investors the one thing they want to avoid: a real price on the bonds in the fund that could serve as a benchmark. The securities are known as collateralized debt obligations, which exceed $1 trillion and comprise the fastest-growing part of the bond market.

You see, it turns out that the securities' price figures really don't reflect their true value.

Because there is little trading in the securities, prices may not reflect the highest rate of mortgage delinquencies in 13 years. An auction that confirms concerns that CDOs are overvalued may spark a chain reaction of writedowns that causes billions of dollars in losses for everyone from hedge funds to pension funds to foreign banks. (Bold type is mine)

I guess that's why JP Morgan canceled a Bear fund asset auction. There is a needed price correction in the CDO market and it will happen eventually. Until then, high level executives will do everything in their power to delay the inevitable.