blog.thomaspan.com

It has been a while before last time, I bubbled about recession and real estate bubble burst again. The reason is very simply: nobody wants to face bad news all the time, which might sink one’s spirit into depression.

Today, we had the “wonderful” news, Bear Stearn, one of the top investment banks in US, agreed to sell itself to JPMorgan for $2 a share as a fire sale, which was close at $30 in last Friday. This is the first casualty among investment banks in this downturn. The real question is: how many will follow?

It might be the right time to revisit Nouriel Roubini’s 12 Steps to Economic Meltdown.

1. This is the worst housing recession in US history and there is no sign it will bottom out any time soon.
2. Losses for the financial system from the subprime disaster are now estimated to be as high as $250 to $300 billion.
3. The recession will lead – as it is already doing – to a sharp increase in defaults on other forms of unsecured consumer debt: credit cards, auto loans, student loans.
4. While there is serious uncertainty about the losses that monolines will undertake on their insurance of RMBS, CDO and other toxic ABS products, it is now clear that such losses are much higher than the $10-15 billion rescue package that regulators are trying to patch up.
5. The commercial real estate loan market will soon enter into a meltdown similar to the subprime one.
6. It is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt.
7. The banks losses on their portfolio of leveraged loans are already large and growing. The ability of financial institutions to syndicate and securitize their leveraged loans – a good chunk of which were issued to finance very risky and reckless LBOs – is now at serious risk.
8. Once a severe recession is underway a massive wave of corporate defaults will take place.
9. The “shadow banking system” or more precisely the “shadow financial system” (as it is composed by non-bank financial institutions) will soon get into serious trouble. This shadow financial system is composed of financial institutions that – like banks – borrow short and in liquid forms and lend or invest long in more illiquid assets.
10. Stock markets in the US and abroad will start pricing a severe US recession
11. The worsening credit crunch will lead to a dry-up of liquidity in a variety of financial markets, including otherwise very liquid derivatives markets.
12. Avicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction.

Now, according to Nouriel, we are officially at stage 9. Step 10 will follow with stock market crash. Let’s see whether Fed and Bernanke can save us this time. Though, historically, rate cut has never prevented the economy from a recession.

Here, there are more bad news from the big picture:

• CFOs: Recession Has Already Started: Combined with a much weakened dollar, 0.6% GDP growth in Q4 means negative growth. The difference between “slowdown” and “recession” is almost negligible.
• Why the Fed Bailed Out the iBanks: This confirms that we are at stage 9.
• Freddie Mac CEO: Home Price Drops Only 1/3 Done: For houses in Bay Area, there will be another $200,000 to go, in this 100-year storm in housing.
• AAA Paper? 92.5% Are Not
• Fed Rally on Garbage Paper!
• Federal Reserve: Household Equity at all time lows

There are actually more unnerving things happened recently, other than Microsoft acquiring Yahoo. I have encountered some technical difficulties to cancel my matured CDs. Further, conforming loan rate has jumped back to 6% for 30-year fixed mortgage last week. There could be big mortgage lenders or banks to declare bankruptcy any time soon. Finally, starting this week, major banks will report their earnings again. May God have mercy on them!