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I think an obvious question is will this cause aggressive short covering in some of the smaller cap financials. FMD (student loan facilitation business); CCRT ( subprime/smaller accounts creidt cards); PRAA ( purchaser of defaulted debt and collections). PRAA and CCRT had almost 50% of the float short in August! I never understood the PRAA short on a credit markets basis. (I own all of these). It would make sense to me to cover the short of an IMB; I don’t know if I would buy it when larger (and in all probability) higher asset quaility institutions can be found. In the real world it will take several years to clean-up the residential mess and it would make sense to stay away from institutions that will need to make sales of forclosed residential/developed properties. As an aside I am an investor of “low end” properties in Central Iowa; price point about $75,000 (we buy real trash and clean up/rebuild). Banks have turned off financing to our buyers and I’ve become a landlord! I think we have a year before these buyers can borrow again.
Dave,
I can’t resist anymore… told you so!
lol
but seriously, the market was telegraphing this with blinking red lights, church bells, spinning neon signs and a megaphone 🙂
You win, Babak. Good job, and yes, I got it wrong. The numbers you cited were the right way to view it this time, rather than the statistics I used. 🙂
Paul, the question to ask on any financial company is how exposed are they to any likely credit losses in a scenario where residential real estate reprices 15% lower. I would be skeptical on IMB. CCRT is a coin flip to me, and I would expect PRAA to be okay, but I really don’t know any of the names that well.
Authers at FT.com writes: “The Fed did this for reasons of game theory. They did not want to cut rates at all. But the credit squeeze meant they had to act. Therefore, the logic went, it made most sense to act drastically and take the market by surprise. That maximised the chance for their action to have the desired effect.” I don’t particularly buy that. Rather I thought they should have lowered 25bp at the previous meeting and subsequent events supported that view, so 50bp now is for 25bp then and 25bp now. Still, I was surprised by that they believed in 50bp now, so I’d like to know what statistics you guys are saying would have predicted this.
I agree on IMB which is why I have avoided it; too tough for me. In the past at least credit card defaults and unemployment rates are related; CCRT also had excess capital deployed in a leveraged CDO fund so who knows the final tally on damage. It would have been better spent on a dividend or share buyback in hindsight. David; I have redoubled efforts reveiwing baalnce sheets; great advice given to me by you earlier this year and I won’t forget it! Thanks