John Thain Takes a Shot and the UK situation
Jan 25, 2009
Posted by Jody Eisenman | Filed under Uncategorized
I play a little poker in my spare time. When you are in a tournament and you are low on chips, players will frequently look for an opportunity to “take a shot” and double up by moving all in (i.e. betting all your remaining chips) on a hand. Frequently, the player will gamble on a somewhat sub-par hand simply because they feel they don’t have much to lose at that point. Well, before John Thain completed his merger with BAC, the head of Merrill decided to make a wager on the sub-prime market. Instead of counting his blessings that he actually found someone to purchase his bankrupt company, Thain decided to take one more shot. Now, I’m not saying he did anything illegal; however, it seems that BAC was unaware of this risky bet and was none too pleased to find out that it cost them an additional five billion dollars. Of course, it didn’t help that Thain decided to prepay bonuses to Merrill employees(for what? losing money?) and spent over a million dollars redecorating his now vacant office. Now BAC is in big trouble on its’ own and these additional losses certainly didn’t help. You think anyone who purchased stock in the BAC secondary offering at $22 three months ago is happy now? BAC closed at $6.24 Friday, or down about 75% from the offering.
In world news, it seems that the UK is in even worse shape that we are. In fact, much worse. In an article from the Trumpet HTTP://www.thetrumpet.com/index.php?q=5872.4236.0.0, Robert Morley believes that UK banks have total liabilities which are more than 4 times the entire UK economy. The UK government has essentially decided to nationalize the banks as they have taken majority stakes in several of the larger ones. According to the Wall Street Journal, England is now on the hook for massive amounts of credit default swaps (CDS). The CDS were the primary reason that AIG needed over $100 billion from the US government after Lehman went under. Although it is unclear exactly what exposure these banks actually have, there can be no question that the chance of bankruptcy in many of the riskier credit risks has never been higher. The CDS market, which is still largely unregulated, totals in the tens of trillions of dollars. To put this number in perspective, the total US deficit is “only”10 trillion, which is itself an all time high. Basically, a large default could spell disaster to the entity that must make good on the CDS. At this point, that entity in the UK is probably going to be the UK government. Can they pay this potential debt off in case of a large default? Famed investor Jim Rogers doesn’t think so. He has urged everyone to get out of the Pound Sterling. The pound has declined from 2.1 to under 1.4 US dollars in just 3 months. It is important to realize that the US is contemplating doing exactly what our British counterparts have done. Should the US nationalize the money center banks, we would all be on the hook for potential massive losses. As long as the banking sector remains in this state, it is hard for me to get bullish on equities, other than for short term trades.
For the month of January, the Dow is down an additional 700 points, or about 8.5%. We have been bouncing off the 8000 range several times. Therefore, I think it is likely we could get another bounce on the upside here. However, should that support not hold, we could be down dramatically in a very short period of time. If you trade, use stop losses for protection.
