understanding what happened · understanding what happened atlanta presentation package september...
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Understanding What HappenedAtlanta Presentation Package
September 25, 2008
Long-Term Interest Rates - 1900 to 2007
Bianco Research L.L.C.An Arbor Research & Trading Affiliated Company
Independent · Objective · Original———————————————————————————————————————————————————————————————————————
Bianco Research, L.L.C September 25, 2008 2
Summary/Conclusion – The Beginning Of The End
Comment - Everyone loves analogies ... An asteroid hit in early July and all the dinosaurs are dying ... Fannie/Freddie, Lehman, Merrill, AIG, and now Morgan Stanley and WaMu.
After the asteroid hit, the only food left are those financial institutions that are light on mortgage holdings and get their funding from a retail deposit base. Either get with a food source or die.
We believe this is the final capitulation process. It is "the beginning of the end." Within the next three months the low price and high spread should be in place. However, between now and then it will not be pleasant. See the charts below. Both the High Yield and Investment Grade option-adjusted spreads (OAS) have widened by a similar amount, over 100 basis points in the last week!
The objective is to stay in business over the next 90 days, and as the list of those that have not survived over the last two weeks attests, it's not as easy as it sounds. If you are still standing when this capitulation process is over, that will be the time to make money.
Then comes the ice age. This will constitute a period of low returns, higher inflation and where risk-taking is regulated from the marketplace.
Modified From A Newsclips, Originally Written Thursday Morning, September 18, 2008
Bianco Research, L.L.C September 25, 2008 3
The Epiphany About Fannie
Last Friday after the close, both Fannie and Freddie made statements saying they were properly capitalized and had enough liquidity. On Bloomberg TV Thursday we were interviewed alongside Eileen Fahey of Fitch and she reiterated the view that they were properly capitalized. Senator Chris Dodd (D-CT) said it again this morning on CNBC. If everyone keeps saying these two companies are properly capitalized, why does the market think otherwise?
We believe the answer lies in Fannie and Freddie's financial statements themselves. Recall that both Fannie and Freddie were involved in an accounting scandal. As part of the settlement with their regulator OFHEO, they were required to present a "fair value" balance sheet (a balance sheet marked at market prices and not at their "model prices"). To the left we show Fannie Mae’s fair value balance sheet and on the next page we show Freddie Mac’s.
To be fair, the section displaying these balance sheets (which the link takes you to) has pages of notes and explanations which attempt to say they are meaningless.
When looking at the balance sheets, one can see why the GSEs would want you to believe they are meaningless. They present Fannie Mae and Freddie Mac in a bad light. According to Fannie Mae's "fair value" balance sheet, "net assets” (net equity) collapsed to $12.2 billion on March 31, 2008 from $35.8 billion on December 31, 2007. Given the worsening housing situation, this fair value balance sheet could show a negative equity position as of June 30, 2008 when it is released later this quarter. … Continued on next page<Original is here, page 52>
Bianco Research, L.L.C September 25, 2008 4
The Epiphany About Freddie<Original is here, page 33>
… continued from previous page …
Freddie Mac's position is far worse (to the left). As the summary below shows, Freddie was at a negative equity position on March 31, 2008.
Let us repeat, Freddie Mac was insolvent by this measure on March 31, 2008. Q1 financial statements detailing this were released on May 14. So, it is not a secret and technically it is not new. What appears to be new is the epiphany the market had in the last several weeks. See a chart of Freddie Mac’s stock, it plummeted from about $27 on May 14 to $7.75 on Friday.
Maybe the emotional move is not the selling of the last two weeks. Maybe it was the optimism about these companies until two weeks ago. If so, regulators and company officials need to explain why the market is wrong to use the fair value balance sheet as a "leading indicator" of their upcoming financial statements. So far, they have not touched this topic.
When the GSEs were nationalized, the reasons given were essentially confirmation of all the negative rumours that pushed down these stocks. Why do the rumours continue? Maybe because they are often proven correct (also see Ackman and monolines and Einhorn and Lehman).
Bianco Research, L.L.C September 25, 2008 5
The Chinese Stop Buying GSE Paper? Have They Returned?The Wall Street Journal - (Sept. 3) China Pulls Back From Fannie, FreddieChina's big banks, having trimmed their holdings of U.S. mortgage-related debt, are facing increasingly difficult decisions about how to invest their sizable foreign-currency holdings. The Financial Times – (Aug 27) Bank of China flees Fannie-FreddieBank of China has cut its portfolio of securities issued or guaranteed by troubled US mortgage financiers Fannie Mae and Freddie Mac by a quarter since the end of June. The Wall Street Journal - (Sept. 8) Pulling the Trigger for Fannie and Freddie? Fed data offer circumstantial evidence of, if not of a run, then of a steady walking away from Fannie and Freddie securities. The Wall Street Journal - (Sept. 11) Fan-Fred Turmoil Made Chinese Bankers NervousRecent turmoil at mortgage giants Fannie Mae and Freddie Mac sparked major concerns among Chinese bankers before the U.S. guaranteed payment on the firms’ debt, a former Treasury Department official told a congressional panel WednesdayAsahi.com – (Sept. 13) U.S. requests help on mortgage bondsU.S. Treasury officials urged Japanese financial institutions not to dump bonds issued by ailing U.S. mortgage giants Fannie Mae and Freddie Mac to prevent a tailspin in financial markets, sources said Friday. The extremely rare requests from U.S. government officials came following the announcement Sunday of a federal bailout of the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corp. (Freddie Mac), which have been hit hard by the U.S. subprime mortgage crisis, the industry sources said. According to the sources, senior Treasury Department officials, including Undersecretary David McCormick, phoned executives of Japanese megabanks and the Life Insurance Association of Japan on Wednesday and Thursday.
Net Purchases of U.S. Government Agency Securities by All Foreign Countries(Monthly Flows)
-60
-50
-40
-30
-20
-10
0
10
20
30
40
50
Billio
ns o
f Dol
lars
-60
-50
-40
-30
-20
-10
0
10
20
30
40
50
Billio
ns o
f Dol
lars
Net Purchases of U.S. Government Agency Securities by All Foreign Countries(12-Month Rolling Sum)
-20
0
20
40
60
80
100
120
140
160
180
200
220
240
260
280
300
Mar
-83
Nov
-84
Jul-8
6
Mar
-88
Nov
-89
Jul-9
1
Mar
-93
Nov
-94
Jul-9
6
Mar
-98
Nov
-99
Jul-0
1
Mar
-03
Nov
-04
Jul-0
6
Mar
-08
Nov-
09
Billio
ns o
f Dol
lars
-20
0
20
40
60
80
100
120
140
160
180
200
220
240
260
280
300
Billio
ns o
f Dol
lars
Bianco Research, L.L.C September 25, 2008 6
Killing The Preferred Stock MarketFannie Mae Preferred Stock
(Series S, 8 3/4 Coupon, issued at $25 on December 6, 2007)
9/5/2008
0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
12/3
1/20
07
1/17
/200
8
2/5/
2008
2/22
/200
8
3/11
/200
8
3/28
/200
8
4/15
/200
8
5/1/
2008
5/19
/200
8
6/5/
2008
6/23
/200
8
7/10
/200
8
7/28
/200
8
8/13
/200
8
8/29
/200
8
9/17
/200
8
10/3
/200
8
0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
Freddie Mac Preferred Stock(Series Z, 8 3/8% Coupon, issued at $25 on November 29, 2007)
9/5/2008
0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
12/3
1/20
07
1/17
/200
8
2/5/
2008
2/22
/200
8
3/11
/200
8
3/28
/200
8
4/15
/200
8
5/1/
2008
5/19
/200
8
6/5/
2008
6/23
/200
8
7/10
/200
8
7/28
/200
8
8/13
/200
8
8/29
/200
8
9/17
/200
8
10/3
/200
8
0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
Wachovia Hybrid & Preferred Securities Financial Index (WHPSFI)Underlying Index for the PowerShares Financial Perferred Portfolio ETF (PGF)
9/5/20088/16/2007
3/17/2008
7/15/2008
9/17/2008
500
600
700
800
900
1,000
1,100
1,200
1,300
6/30
/200
3
12/1
8/20
03
6/14
/200
4
12/2
/200
4
5/25
/200
5
11/1
4/20
05
5/9/
2006
10/2
7/20
06
4/24
/200
7
10/1
2/20
07
4/7/
2008
9/25
/200
8
500
600
700
800
900
1,000
1,100
1,200
1,300
This is a market capitalization total return index of 30 publicly traded financial preferred securities. As of June 30, 2008 it included Lehman but not AIG, Fannie Mae or Freddie Mac.June 30, 2003 = 1,000
Largest Decline Ever - 42% In 7 Trading Days!
Wachovia Hybrid & Preferred Securities Financial Index (WHPSFI)Underlying Index for the PowerShares Financial Preferred Portfolio ETF (PGF)
3/17/2008
7/15/2008
9/17/2008601.36
9/19/2008837.53
9/5/20081,040.36
500
600
700
800
900
1,000
1,100
1,200
1,300
12/3
1/20
07
1/30
/200
8
2/28
/200
8
3/28
/200
8
4/25
/200
8
5/23
/200
8
6/23
/200
8
7/22
/200
8
8/19
/200
8
9/17
/200
8
10/1
5/20
08
500
600
700
800
900
1,000
1,100
1,200
1,300
Lost Over 42% In 7 Trading Days!
This is a market capitalization total return index of 30 publicly traded financial preferred securities. As of June 30, 2008 it included Lehman but not AIG, Fannie Mae or Freddie Mac.
Bianco Research, L.L.C September 25, 2008 7
The Demise Of Lehman And AIG
Lehman 5-Year CDS
9/9/2008322.500
5/21/2008156.716
3/14/2008, 425.139
9/12/2008, 641.911
100
200
300
400
500
600
700
1/4/
2008
1/24
/200
8
2/13
/200
8
3/4/
2008
3/24
/200
8
4/13
/200
8
5/3/
2008
5/23
/200
8
6/12
/200
8
7/2/
2008
7/22
/200
8
8/11
/200
8
8/31
/200
8
9/20
/200
8
Bas
is P
oint
s
100
200
300
400
500
600
700
Basi
s P
oint
s
AIG 5-Year CDS
9/19/2008991.100
9/16/2008, 3500.300
3/18/2008, 242.051 5/12/200896.921
9/8/2008437.624
9/12/2008, 858.112
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
1/4/
2008
1/24
/200
8
2/13
/200
8
3/4/
2008
3/24
/200
8
4/13
/200
8
5/3/
2008
5/23
/200
8
6/12
/200
8
7/2/
2008
7/22
/200
8
8/11
/200
8
8/31
/200
8
9/20
/200
8
Bas
is P
oint
s
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Basi
s P
oint
s
The Financial Times – (Sept. 10) KDB suspends talks with Lehman BrothersKorea Development Bank on Wednesday confirmed that it had suspended talks to invest in Lehman Brothers, just hours before the beleaguered US bank is set to announced its third-quarter results. In a statement, the government-run lender said the decision was “due to disagreements over transaction terms and in consideration of the state of financial markets at home and abroad.” Lehman shares plunged 45 per cent the day before on worries it would be unable to raise capital to bolster its balance sheet. A newswire report cited on Tuesday an unnamed Korean government official as saying that KDB had decided not to invest in Lehman, although Korea’s financial watchdog initially denied the news
Bianco Research, L.L.C September 25, 2008 8
Money Markets Break The BuckMoney Market Funds (seasonally adjusted)
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2007
2008
billi
ons
of $
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
billi
ons
of $
Heavy Blue Line = Retail FundsLight Red Line = Institutional Only Funds
Total Money Market Funds (seasonally adjusted)
4/18/20051,768.50
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
2,600
2,800
3,000
3,200
3,400
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2007
2008
billi
ons
of $
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
2,600
2,800
3,000
3,200
3,400
billi
ons
of $
•The Wall Street Journal – (Sept. 18) Breaking BuckFriday, the Reserve Primary Fund had $62.6 billion in assets, making it one of the largest money-market funds. Then investors noticed this supposedly safe repository of their cash also held a scary batch of debt securities from Lehman Brothers, the teetering titan du jour. Lehman Brothers Holdings Inc. filed for Chapter 11 bankruptcy protection on Monday. At least a dozen large investors pulled out almost $40 billion of their money Monday and Tuesday, two-thirds of Primary Fund's formidable asset base. This modern-day run on the bank has left a husk of a once-proud money fund. The withdrawals meant the Primary Fund had to "break the buck." That is, its net asset value sunk below the time-honored standard of $1 a share...The cruel irony is that the founder of the money-market fund concept more than three decades ago, Bruce Bent, is Reserve Management's chief -- and Mr. Bent, 71 years old, has long trumpeted the funds as avatars of sober-minded investing. •The Wall Street Journal – (Sept. 18) Money-Fund Assets Fall by $89.38 BillionInvestors to money-market funds withdrew $89.38 billion in the week ended Tuesday, bringing total net assets to $3.446 trillion, according to the Money Fund Report, published by iMoneyNet Inc. Institutional investors withdrew $93.57 billion, while individual, or "retail," investors added $4.19 billion. Assets in taxable money funds decreased by $80.71 billion to $2.931 trillion.
Bianco Research, L.L.C September 25, 2008 9
TARP – Troubled Asset Relief ProgramThe original proposal (released Saturday) was only three pages and can be found here. It is not an RTC 2, in fact it is the opposite of the original RTC. Also, there is not a new agency, it is an expansion of the U.S. Department of Treasury. This means more new Treasury debt.
http://www.nytimes.com/2008/09/21/business/21draftcnd.html?ref=business
Highlights(a) Authority to Purchase.--The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.(b) Necessary Actions.--The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation: (d) Application of Sunset to Mortgage-Related Assets.--The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.Sec. 6. Maximum Amount of Authorized Purchases.The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one timeSec. 8. Review. Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.Sec. 9. Termination of Authority.The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.Sec. 10. Increase in Statutory Limit on the Public Debt.Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.
U.S. Treasury Widens Scope of Bad-Debt Plan Beyond Mortgages2008-09-22 00:51:43.140 GMTBy Dawn Kopecki
Sept. 21 (Bloomberg) -- The Bush administration widened the scope of its $700 billion plan to avert a financial meltdown by including assets other than mortgage-related securities.
The U.S. Treasury submitted revised guidance to Congress on its plan, referring to its proposal to purchase so-called troubled assets, a change from its original plan for investments tied to home loans, according to a document obtained by Bloomberg News and confirmed by a congressional aide.
The change suggests the inclusion of instruments such as car and student loans, credit-card debt and any other troubled asset.
Firms that are headquartered outside the U.S. will now be eligible, in another change from the guidance sent to Congress yesterday, according to the document. The size of the plan remains unchanged.
Bianco Research, L.L.C September 25, 2008 10
Treasury Has Two Other “TARPs” – Fannie and Freddie
Freddie Mac (Net) Mortgage Portfolio
450
500
550
600
650
700
750
800
850
Dec
-97
Apr
-98
Aug-
98D
ec-9
8Ap
r-99
Aug
-99
Dec
-99
Apr
-00
Aug-
00D
ec-0
0Ap
r-01
Aug
-01
Dec
-01
Apr
-02
Aug-
02D
ec-0
2Ap
r-03
Aug
-03
Dec
-03
Apr
-04
Aug-
04D
ec-0
4Ap
r-05
Aug
-05
Dec
-05
Apr
-06
Aug-
06D
ec-0
6Ap
r-07
Aug
-07
Dec
-07
Apr
-08
Aug-
08
$ B
illion
s
450
500
550
600
650
700
750
800
850
$ Bi
llions
Detail as of July 2008(Net) Mortgage Portfolio = $798.24 Billion
Fannie Mae (Net) Mortgage Portfolio
Oct-03$906.99
Nov-04$907.23
300
350
400
450
500
550
600
650
700
750
800
850
900
950
Dec
-97
Apr
-98
Aug-
98D
ec-9
8Ap
r-99
Aug
-99
Dec
-99
Apr
-00
Aug-
00D
ec-0
0Ap
r-01
Aug
-01
Dec
-01
Apr
-02
Aug-
02D
ec-0
2Ap
r-03
Aug
-03
Dec
-03
Apr
-04
Aug-
04D
ec-0
4Ap
r-05
Aug
-05
Dec
-05
Apr
-06
Aug-
06D
ec-0
6Ap
r-07
Aug
-07
Dec
-07
Apr
-08
Aug-
08
$ B
illion
s
300
350
400
450
500
550
600
650
700
750
800
850
900
950
$ Bi
llions
As of July 2008Mortgage Portfolio = $758.1 Billion
Fannie Mae & Freddie Mac Total Amount of Mortgages Guaranteed
Jul-084,392
3,000
3,100
3,200
3,300
3,400
3,500
3,600
3,700
3,800
3,900
4,000
4,100
4,200
4,300
4,400
4,500
Jan-
04
May
-04
Sep-
04
Jan-
05
May
-05
Sep
-05
Jan-
06
May
-06
Sep-
06
Jan-
07
May
-07
Sep-
07
Jan-
08
May
-08
Sep-
08
Bill
ions
of D
olla
rs
3,000
3,100
3,200
3,300
3,400
3,500
3,600
3,700
3,800
3,900
4,000
4,100
4,200
4,300
4,400
4,500
Bill
ions
of D
olla
rs
Bianco Research, L.L.C September 25, 2008 11
The Original “TARP” - Federal Reserve Credit
Total System Repo And TAF Outstanding
9/19/2001
1/5/2000
0
50
100
150
200
250
300
350
10/1
3/19
99
4/26
/200
0
11/8
/200
0
5/23
/200
1
12/5
/200
1
6/19
/200
2
1/1/
2003
7/16
/200
3
1/28
/200
4
8/11
/200
4
2/23
/200
5
9/7/
2005
3/22
/200
6
10/4
/200
6
4/18
/200
7
10/3
1/20
07
5/14
/200
8
11/2
6/20
08
Billi
ons
Of D
olla
rs
0
50
100
150
200
250
300
350
Billi
ons
Of D
olla
rs
"Sept. 11"
Y2K
TAF Auction
Total Federal Reserve Bank Credit
350
400
450
500
550
600
650
700
750
800
850
900
9501/
5/19
94
7/20
/199
4
2/1/
1995
8/16
/199
5
2/28
/199
6
9/11
/199
6
3/26
/199
7
10/8
/199
7
4/22
/199
8
11/4
/199
8
5/19
/199
9
12/1
/199
9
6/14
/200
0
12/2
7/20
00
7/11
/200
1
1/23
/200
2
8/7/
2002
2/19
/200
3
9/3/
2003
3/17
/200
4
9/29
/200
4
4/13
/200
5
10/2
6/20
05
5/10
/200
6
11/2
2/20
06
6/6/
2007
12/1
9/20
07
7/2/
2008
1/14
/200
9
Billi
ons
Of D
olla
rs
350
400
450
500
550
600
650
700
750
800
850
900
950
Billi
ons
Of D
olla
rs
Treasuries As A Percentage Of Total Federal Reserve Bank Credit
9/17/2008, 51.52%
9/19/2001, 77.80%1/5/2000, 75.50%
3/26/1986, 78.63%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
100%
1/16
/198
0
6/24
/198
1
12/1
/198
2
5/9/
1984
10/1
6/19
85
3/25
/198
7
8/31
/198
8
2/7/
1990
7/17
/199
1
12/2
3/19
92
6/1/
1994
11/8
/199
5
4/16
/199
7
9/23
/199
8
3/1/
2000
8/8/
2001
1/15
/200
3
6/23
/200
4
11/3
0/20
05
5/9/
2007
10/1
5/20
08
Billi
ons
Of D
olla
rs
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
100%
Billi
ons
Of D
olla
rs
Y2kSep-11
Japanese Long-Bond Squeeze
Federal Reserve Open Market PurchasesAll Securities Repos - All Terms
9/14/01, 81.25
9/18/08, 105.00
11/15/07, 47.25
0
10
20
30
40
50
60
70
80
90
100
110
7/7/
00
12/2
9/00
6/18
/01
11/1
4/01
4/30
/02
10/1
8/02
3/14
/03
8/4/
03
12/2
2/03
5/13
/04
9/28
/04
2/14
/05
6/27
/05
11/4
/05
3/24
/06
8/3/
06
12/1
5/06
4/27
/07
9/7/
07
1/18
/08
5/23
/08
9/26
/08
Billi
ons
of D
olla
rs
0
10
20
30
40
50
60
70
80
90
100
110
Billio
ns o
f Dol
lars
Bianco Research, L.L.C September 25, 2008 12
The Original “TARP” - Discount Window & Securities Lending
Discount Window Borrowings - Banks Only(Daily Average For The 7 Day Week)
9/12/2001, 11.837
8/22/1984, 9.037
7/20/1988, 4.22412/4/1985, 4.378 1/2/2008, 5.77
0
2
4
6
8
10
12
14
16
18
20
22
24
1/2/
1980
12/2
/198
1
11/2
/198
3
10/2
/198
5
9/2/
1987
8/2/
1989
7/10
/199
1
6/23
/199
3
5/24
/199
5
4/30
/199
7
3/31
/199
9
2/28
/200
1
1/29
/200
3
12/2
9/20
04
11/2
9/20
06
10/2
9/20
08
Billi
ons
of D
olla
rs
0
2
4
6
8
10
12
14
16
18
20
22
24
Bill
ions
of D
olla
rs
Continental Bank Crisis
Computer Breakdown At Bank of New York Clearing Operations
Large Number of Bank Failures (most since the Great Depression)
Discount Window Borrowings - Including Brokers(Daily Average For The 7 Day Week)
7/9/200813.014
9/17/2008, 47.969
4/2/2008, 45.139
1/2/2008, 5.7712/4/1985, 4.3787/20/1988, 4.224
8/22/1984, 9.0379/12/2001, 11.837
0
5
10
15
20
25
30
35
40
45
50
1/2/
1980
12/2
/198
1
11/2
/198
3
10/2
/198
5
9/2/
1987
8/2/
1989
7/10
/199
1
6/23
/199
3
5/24
/199
5
4/30
/199
7
3/31
/199
9
2/28
/200
1
1/29
/200
3
12/2
9/20
04
11/2
9/20
06
10/2
9/20
08
Billi
ons
of D
olla
rs
0
5
10
15
20
25
30
35
40
45
50
Bill
ions
of D
olla
rs
Continental Bank CrisisComputer Breakdown At Bank of New York Clearing Operations
Large Number of Bank Failures (most since the great depression)
Dealers Borrow From The Window
Treasuries Securities Lent By The Fed
7/16/2008104.27
4/23/2008, 169.68
0
20
40
60
80
100
120
140
160
180
12/2
5/20
02
7/9/
2003
1/21
/200
4
8/4/
2004
2/16
/200
5
8/31
/200
5
3/15
/200
6
9/27
/200
6
4/11
/200
7
10/2
4/20
07
5/7/
2008
11/1
9/20
08
Billi
ons
Of D
olla
rs
0
20
40
60
80
100
120
140
160
180
Billi
ons
Of D
olla
rs
Bianco Research, L.L.C September 25, 2008 13
Past Unintended Consequences•Congress raises conforming limits on Fannie/Freddie to help unfreeze the mortgage market. Result: agency spreads skyrocket, bringing down Bear and a host of hedge funds. Mortgage markets still remain frozen.
•Fed opens TSLF to unfreeze mortgage market(chart on previous page)Result: Carlyle goes bankrupt as people rapidly arbitrage the difference between holding MBS in firms that can and can't access the new credit facility. Mortgage markets remain frozen.
•GSE nationalization kills preferred stocks. (Chart on page 6)Result: crash of financial preferred stock market that accelerates Lehman’s demise.
•Lehman not bailed out.Result: Liquidity squeeze that forced Merrill into the arms of BofA, AIG to go under and money fund break the buck that forces the Government to guarantee them.Friday’s action has been described as the “mother of all bailouts”. Then it probably will result in the “mother of all unintended consequences.”
From Naked CapitalismRichard Bookstaber discussed at length in his book, Demon of OurOwn Design, this sort of unintended consequence is precisely what you'd expect to see in a tightly coupled system, such are our financial system. Tight coupling occurs when processes move from step to step so rapidly that intervention is well-nigh impossible. Bear Stearns and Lehman are classic examples. A downgrade of their debt beyond a certain level meant that their counterparties could no longer trade with them, because that exposure would get them downgraded too. Thus a move (or threatened move) beyond a trigger point kicked off a sequence of unstoppable events.
Jumbo 30-Year Fixed Mortgage Rates vs.Conforming 30-Year Fixed Mortgage Rates
5.00%
5.25%
5.50%
5.75%
6.00%
6.25%
6.50%
6.75%
7.00%
7.25%
7.50%
7.75%
5.00%
5.25%
5.50%
5.75%
6.00%
6.25%
6.50%
6.75%
7.00%
7.25%
7.50%
7.75%
Jumbo Mortgage Rates(More Than $417,000)
Conforming Mortgage Rates(Less than $417,000)
The Difference Between Jumbo 30-Year Fixed Mortgage RatesAnd Conforming 30-Year Fixed Mortgage Rates
1/23/2008
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
8/1/
2004
11/5
/200
4
2/14
/200
5
5/23
/200
5
8/29
/200
5
12/5
/200
5
3/16
/200
6
6/22
/200
6
9/28
/200
6
1/4/
2007
4/12
/200
7
7/19
/200
7
10/2
6/20
07
2/1/
2008
5/9/
2008
8/15
/200
8
11/2
4/20
08
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
Source: Bankrate.com
Bianco Research, L.L.C September 25, 2008 14
Potential Unintended ConsequencesGuaranteeing Money FundsThe New York Times – (Sept 19) Rescue Plan for Funds Will Come at a Cost But the guarantee plan also drew immediate attack from the American Bankers Association, whose members compete with the money fund industry. The A.B.A.’s leaders warned that the plan could encourage investors to withdraw money from an already stressed banking system to seek higher yields in money funds while the guarantee is in place. U.S. Treasury – (Sept. 22) Treasury Provides Further Clarity For Guaranty Program for Money Market FundsThe U.S. Treasury Department is continuing to develop the specific details surrounding the temporary guaranty program for money market funds that was announced on September 19, 2008. 3. The temporary guaranty program will be designed to provide coverage to shareholders for amounts held by them in such funds as of the close of business on September 19, 2008.4. Further details on other aspects of the temporary guaranty program and the required documentation for funds to participate will be provided in the coming days
Ban On Short Selling
Barron's - Short-Sale Ban Hurts Hedgers Until the government makes any decisions that would ease the short-selling ban, the options market will be a tough place for all but the most sophisticated investors to navigate. The ban already has caused a "massive disconnect" in stock indexes that include large percentages of financial stocks, says Jon Najarian, who once owned a major Chicago Board Options Exchange market-making firm, and now runs optionmonster.com, a trading advisory.
What If It Does Not Work?
CQ Politics - CQ Transcript: Treasury Secretary Henry Paulson Interviewed on ABC’s “This Week with George Stephanopoulos”STEPHANOPOULOS: It wasn’t enough. And what if this new plan doesn’t work? Someone who was briefed by your team said this plan was described as the last wrench in the tool box. What if it doesn’t work?PAULSON: Well, this is something that has to work. I very much believe it will work. You know, George, we work our way through these situations as a people. We always get through these situations, and we will get through these situations. And the key here is to get through this with as little negative impact on the American people as possible.
Bond Market LeveragePrimary Dealer Net Borrowings
7/16/20081,294.94
4/2/2008, 1,562.31
-100
0
100
200
300
400
500
600
700
800
900
1,000
1,100
1,200
1,300
1,400
1,500
1,600
1,700
6/11
/198
0
12/2
3/19
81
7/6/
1983
1/16
/198
5
8/6/
1986
2/17
/198
8
8/30
/198
9
3/13
/199
1
9/23
/199
2
4/6/
1994
10/1
8/19
95
4/30
/199
7
11/1
1/19
98
5/24
/200
0
12/5
/200
1
6/18
/200
3
12/2
9/20
04
7/12
/200
6
1/23
/200
8
8/5/
2009
Billi
ons
Of D
olla
rs
-100
0
100
200
300
400
500
600
700
800
900
1,000
1,100
1,200
1,300
1,400
1,500
1,600
1,700
Net LendingNet Borrowing
Date Amount Diff.4/2/2008 1,562.31
7/16/2008 1,294.94 -267.379/10/2008 1,343.31 -219.00
3/26/2008 3.907/16/2008 104.27 100.379/17/2008 125.67 121.77
3/26/2008 807/16/2008 150 709/17/2008 150 70
3/26/2008 07/16/2008 0 09/17/2008 26.37 26.37
4/2/2008 1,562.317/16/2008 1,549.60 -12.719/17/2008 1,645.35 83.04
"Net" Borrowings
Reduction in Deale r Levera ge
TSLF
TAF
Deale r Window Borrowing
Chart: Preventing Deleveraging
Bianco Research, L.L.C September 25, 2008 15
The Problem Is Loss of Capital, Not Liquidity
Who Is Not On the List?Keep in mind these losses are for financial intermediaries (banks and brokers) only. Not included on this list are "Other financial firms" such as:•Fannie Mae and Freddie Mac,•Monoline and other insurance companies (AIG),•Finance companies (GE Capital and CIT),•Hedge funds•Private equity firms and,•Other financial institutions such as pension managers and endowments.
The list populating the table above has been restricted to financial intermediaries for purposes of consistency over time. Those firms not accounted for do not change the directional conclusion: Combine the financial sector losses of $600 billion with another $200 billion for the other financial firms and we estimate that $800 billion of losses have been booked already.
From A Recent CommentaryFirm Loss Capital Raised DifferenceCitigroup 55.1 49.1 (6.00)Merrill Lynch 52.2 29.9 (22.30)UBS 44.2 27.7 (16.50)HSBC 27.4 5.1 (22.30)Wachovia 22.7 11.0 (11.70)Bank of America 21.2 20.7 (0.50)Washington Mutual 14.8 12.1 (2.70)IKB Deutsche 14.4 11.9 (2.50)Morgan Stanley 14.4 5.6 (8.80)JPMorgan Chase 14.3 9.5 (4.80)Royal Bank of Scotland 13.8 22.5 8.70Lehman Brothers 13.8 13.9 0.10Deutsche Bank 10.2 3.2 (7.00)Credit Suisse 10.1 2.7 (7.40)Wells Fargo 10.0 5.8 (4.20)Credit Agricole 8.6 8.3 (0.30)European Banks Not listed 8.2 2.9 (5.30)Barclays 7.5 17.5 10.00Fortis 7.0 6.8 (0.20)Canadian Imperial (CIBC) 7.0 2.7 (4.30)Bayerische Landesbank 6.8 0.0 (6.80)HBOS PLC 6.6 7.0 0.40ING Groep 6.5 4.6 (1.90)Societe Generale 6.4 9.2 2.80Mizuho Financial Group 6.0 0.0 (6.00)Other Asian banks (excluding Mizuho, Nomura) 5.5 8.9 3.40National City 5.4 8.9 3.50Natixis 5.2 11.6 6.40IndyMac 4.9 0.0 (4.90)Lloyds TSB 4.6 4.8 0.20LB Baden Wuerttemberg 4.6 0.0 (4.60)West LB 4.5 7.2 2.70Dresdner 3.8 0.0 (3.80)BNP Paribas 3.8 0.0 (3.80)Goldman 3.8 0.6 (3.20)Etrade 3.6 2.4 (1.20)Rabobank 3.4 0.0 (3.40)Nomura Holdings 3.3 1.2 (2.10)Bear Stearns 3.2 0.0 (3.20)Bank of China 3.1 0.0 (3.10)Other US Frims 2.9 4.7 1.80HSH Nordbank 2.7 1.8 (0.90)DZ Bank 2.6 0.0 (2.60)Landesbank Sachsen 2.5 0.0 (2.50)Unicredit 2.4 0.0 (2.40)Commerzbank 2.2 0.0 (2.20)ABN Amro 2.2 0.0 (2.20)Royal Bank of Canada 2.1 0.0 (2.10)Fifth Third Bankcorp 1.9 2.6 0.70Mitsubishi UFJ 1.6 1.6 0.00Dexia 1.6 0.0 (1.60)Bank Hapoalim 1.5 2.4 0.90Alliance & Leicester 1.4 0.0 (1.40)Marshall & Ilsley 1.4 0.0 (1.40)US bancorp 1.3 0.0 (1.30)Caisse d'Epargne 1.2 0.0 (1.20)Bank of Montreal 1.2 0.0 (1.20)KeyCorp 1.2 1.7 0.50Hypo Real Estate 1.1 0.0 (1.10)Gulf International 1.0 1.0 0.00Sovereign Bancorp 1.0 1.9 0.90Sumitomo 0.9 4.8 3.90Sumitomo Trust 0.7 1.0 0.30National Bank of Canada 0.6 0.9 0.30Other Canadian banks (excluding CIBC) 0.4 0.0 (0.40)DBS Group 0.2 1.0 0.80Total* 511.7 360.7 (151.00)
Total Banking System Losses & Capital Raised
Source: Bloomberg L.P.
Billions of U.S. DollarsAs of September 10, 2008
Q3 2008Losses Capital Losses Capital Losses Capital Losses Capital Losses Capital Losses Capital Losses Capital
America 265.2 184.3 18.2 22.5 70.4 71.0 69.4 59.9 75.9 30.1 30.1 0.8 1.2 0.0Europe 232.4 158.2 0.0 24.4 42.0 85.6 90.4 23.6 82.3 15.3 14.8 9.3 2.9 0.0Asia 23.9 22.1 0.0 4.9 3.5 13.8 9.4 3.4 10.7 0.0 0.3 0.0 0.0 0.0Worldwide 521.5 364.6 18.2 51.8 115.9 170.4 169.2 86.9 168.9 45.4 45.2 10.1 4.1 0.0Source: Bloomberg
In Billions of DollarsTotal Q2 2008 Q1 2008 Q4 2007
Worldwide Financial System Losses and Capital RaisedAs of September 22, 2008
Q3 2007 Prior
Insitution BillionsAIG $36.3Fannie Mae $8.3Freddie Mac $7.9MBIA $7.9Ambac $7.5XL Capital $2.9E*Trade $2.2FGIC $2.0Thornburg $1.5Hypo Real Estate $1.2Swiss Re $1.2GMAC $0.5Total $79.4
Non Bank/Broker LossesAs of 9/18/2008
Bianco Research, L.L.C September 25, 2008 16
Will ABX Tell Us It Is Working?
ABX Indices Aaa Prices
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
100%
105%1/
19/0
7
2/16
/07
3/19
/07
4/16
/07
5/14
/07
6/12
/07
7/11
/07
8/8/
07
9/6/
07
10/4
/07
11/2
/07
12/4
/07
1/3/
08
2/1/
08
3/3/
08
4/1/
08
4/29
/08
5/28
/08
6/25
/08
7/24
/08
8/21
/08
9/19
/08
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
100%
105%
07-01ABX-HE Aaa
06-02 ABX-HE Aaa
06-01ABX-HE Aaa
07-02 ABX-HE Aaa
Bianco Research, L.L.C September 25, 2008 17
Will Credit Spreads Tell Us It Is Working?High Yield Spreads
The Option-Adjusted Spread (OAS) of the Merrill Corporate Master Index
9/23/2008921
9/18/2008, 983
9/5/2008855
6/17/2008640
3/17/2008, 862
1/23/2008748
12/4/2007589
6/5/2007, 241
9/10/2007, 479
10/15/2007381
3/11/2005, 273
5/18/2005, 455
200
300
400
500
600
700
800
900
1,000
6/25
/200
4
9/13
/200
4
12/2
/200
4
2/20
/200
5
5/11
/200
5
7/30
/200
5
10/1
8/20
05
1/6/
2006
3/27
/200
6
6/15
/200
6
9/3/
2006
11/2
2/20
06
2/10
/200
7
5/1/
2007
7/20
/200
7
10/8
/200
7
12/2
7/20
07
3/16
/200
8
6/4/
2008
8/23
/200
8
11/1
1/20
08
200
300
400
500
600
700
800
900
1,000
Fed Hikes from 1.00% to 1.25%
GM & FordDowngrade
SubprimeCrisis
Investment Grade SpreadsThe Option-Adjusted Spread (OAS) of the Merrill Investment Grade Corporate Master Index
9/23/2008409
9/18/2008, 440
9/9/2008, 324
6/17/2008248
3/20/2008, 305
3/14/2005, 79
5/18/2005, 111
2/26/2007, 86
9/17/2007, 158
10/15/2007139
50
100
150
200
250
300
350
400
450
6/25
/200
4
9/13
/200
4
12/2
/200
4
2/20
/200
5
5/11
/200
5
7/30
/200
5
10/1
8/20
05
1/6/
2006
3/27
/200
6
6/15
/200
6
9/3/
2006
11/2
2/20
06
2/10
/200
7
5/1/
2007
7/20
/200
7
10/8
/200
7
12/2
7/20
07
3/16
/200
8
6/4/
2008
8/23
/200
8
11/1
1/20
08
Basi
s Po
ints
50
100
150
200
250
300
350
400
450
Basi
s P
oint
s
Fed Hikes from 1.00% to 1.25%
Agency Spreads: 10Year FNMA/TSY Spreads
9/12/2008
9/5/2008
3/14/2008
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.101/
30/2
002
6/18
/200
2
11/4
/200
2
3/26
/200
3
8/12
/200
3
12/3
1/20
03
5/19
/200
4
10/6
/200
4
2/25
/200
5
7/14
/200
5
12/2
/200
5
4/24
/200
6
9/8/
2006
1/29
/200
7
6/14
/200
7
10/3
1/20
07
3/21
/200
8
8/6/
2008
12/1
8/20
08
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
Freddie Mac 30-Year Mortgage Spreads
8/18/2008
1/23/08
8/16/2007
11/20/2007
5/8/2008
3/6/2008
9/5/2008
9/15/2008
0.80
1.00
1.20
1.40
1.60
1.80
2.00
2.20
2.40
2.60
9/29
/200
6
11/3
/200
6
12/8
/200
6
1/16
/200
7
2/20
/200
7
3/26
/200
7
4/30
/200
7
6/4/
2007
7/9/
2007
8/10
/200
7
9/14
/200
7
10/1
9/20
07
11/2
6/20
07
12/3
1/20
07
2/5/
2008
3/11
/200
8
4/14
/200
8
5/16
/200
8
6/19
/200
8
7/23
/200
8
8/26
/200
8
9/29
/200
8
0.80
1.00
1.20
1.40
1.60
1.80
2.00
2.20
2.40
2.60
Bianco Research, L.L.C September 25, 2008 18
Will Funding Stresses Tell Us It Is Working?
Outstanding Levels of Asset-Backed Commercial Paper
9/17/2008708.32
8/8/2007, 1,210.60
650
700
750
800
850
900
950
1,000
1,050
1,100
1,150
1,200
1,250
6/14
/200
6
7/26
/200
6
9/6/
2006
10/1
8/20
06
11/2
9/20
06
1/10
/200
7
2/21
/200
7
4/4/
2007
5/16
/200
7
6/27
/200
7
8/8/
2007
9/19
/200
7
10/3
1/20
07
12/1
2/20
07
1/23
/200
8
3/5/
2008
4/16
/200
8
5/28
/200
8
7/9/
2008
8/20
/200
8
10/1
/200
8
Billi
ons
of D
olla
rs
650
700
750
800
850
900
950
1,000
1,050
1,100
1,150
1,200
1,250
Billio
ns o
f Dol
lars
30 Day AA-Rated Commercial Paper Rates
1.75
2.00
2.25
2.50
2.75
3.00
3.25
3.50
3.75
4.00
4.25
4.50
4.75
5.00
5.25
5.50
5.75
6.00
6.25
6.50
4/17
/200
7
5/15
/200
7
6/12
/200
7
7/11
/200
7
8/8/
2007
9/6/
2007
10/4
/200
7
11/2
/200
7
12/4
/200
7
1/3/
2008
2/1/
2008
3/3/
2008
4/1/
2008
4/29
/200
8
5/28
/200
8
6/25
/200
8
7/24
/200
8
8/21
/200
8
9/19
/200
8
10/1
7/20
08
1.75
2.00
2.25
2.50
2.75
3.00
3.25
3.50
3.75
4.00
4.25
4.50
4.75
5.00
5.25
5.50
5.75
6.00
6.25
6.50
Financial
Non-Financial
Asset Backed
3-Month Libor vs. 3-Month T-Bills
3.204%
0.07%0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
3-Month T-Bills
3-Month Libor
The Difference Between 3-Month Libor And3-Month Treasury Bills or TED Spread 9/18/2008, 3.133%
8/15/19881.570%
8/20/20072.40%
10/20/19873.00%
10/16/19981.604%
0.00%
0.25%
0.50%
0.75%
1.00%
1.25%
1.50%
1.75%
2.00%
2.25%
2.50%
2.75%
3.00%
3.25%
12/6
/198
4
5/20
/198
6
10/1
4/19
87
3/14
/198
9
7/23
/199
0
11/2
8/19
91
4/7/
1993
8/12
/199
4
12/1
9/19
95
4/22
/199
7
8/25
/199
8
12/2
8/19
99
5/3/
2001
9/5/
2002
1/8/
2004
5/12
/200
5
9/15
/200
6
1/21
/200
8
5/25
/200
9
0.00%
0.25%
0.50%
0.75%
1.00%
1.25%
1.50%
1.75%
2.00%
2.25%
2.50%
2.75%
3.00%
3.25%
Bianco Research, L.L.C September 25, 2008 19
Will Bank Credit Tell Us It Is Working?
Difference Between Corporate Master and IG Banks OAS
9/23/2008, 1.12%
10/20/1998, 0.06%
9/18/2008, 1.26%
10/10/2002, -1.15%-1.20%
-1.00%
-0.80%
-0.60%
-0.40%
-0.20%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1/2/
1997
9/18
/199
7
6/2/
1998
2/11
/199
9
10/2
1/19
99
6/30
/200
0
3/13
/200
1
11/2
6/20
01
8/8/
2002
4/22
/200
3
12/3
1/20
03
9/10
/200
4
5/25
/200
5
2/3/
2006
10/1
6/20
06
7/2/
2007
3/12
/200
8
11/2
0/20
08
Diffe
renc
e
-1.20%
-1.00%
-0.80%
-0.60%
-0.40%
-0.20%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
Diff
eren
ce
Merrill Corporate Master and Merrill Investment Grade Banks OAS
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
5.50%
6.00%
Opt
ion-
Adj
uste
d Sp
read
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
5.50%
6.00%
Opt
ion-
Adju
sted
Spr
ead
Merrill Corporate Master Index Spread (Red Line)
Merrill Investment Grade Banks Index Spread (Blue Line)
Difference Between HY Master 2 and HY Banks OAS
10/31/2002, -5.84%
9/23/2008, 9.96%
Jan 18 19990.32%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
1/2/
1997
9/18
/199
7
6/2/
1998
2/11
/199
9
10/2
1/19
99
6/30
/200
0
3/13
/200
1
11/2
6/20
01
8/8/
2002
4/22
/200
3
12/3
1/20
03
9/10
/200
4
5/25
/200
5
2/3/
2006
10/1
6/20
06
7/2/
2007
3/12
/200
8
11/2
0/20
08
Diffe
renc
e
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Diff
eren
ce
Merrill High Yield Master 2 and Merrill High Yield Banks OAS
1%2%3%4%5%6%7%8%
9%10%11%12%13%14%15%
16%17%18%19%20%
Opt
ion-
Adj
uste
d Sp
read
1%2%3%4%5%6%7%8%
9%10%11%12%13%14%15%
16%17%18%19%20%
Opt
ion-
Adju
sted
Spr
ead
Merrill High Yield Master 2 Index Spread (Red Line)
Merrill High Yield Banks Index Spread (Blue Line)
Bianco Research, L.L.C September 25, 2008 20
Worst Home Market Since The DepressionCase- Shiller Nominal Home Price Index
2006188.65
19334.41
19256.34
2008166
1
10
100
100018
90
1896
1902
1908
1914
1920
1926
1932
1938
1944
1950
1956
1962
1968
1974
1980
1986
1992
1998
2004
2010
Nom
inal
Hom
e Pr
ice In
dex
1
10
100
1000
Nom
inal
Hom
e Pr
ice
Inde
x
30% Decline - Largest Ever
17.3% Decline - Second Largest Ever(And Still Not Over)
Case-Shiller Real Home Price Index
June2008
1946
2006
1997
50
75
100
125
150
175
200
225
1890
1896
1902
1908
1914
1920
1926
1932
1938
1944
1950
1956
1962
1968
1974
1980
1986
1992
1998
2004
2010
Rea
l Hom
e Pr
ice In
dex
50
75
100
125
150
175
200
225
Real
Hom
e Pr
ice
Inde
x
Case-Shiller Nominal Home Price IndexAnnual Change
200412.09%
1900-9.79% 1914
-12.78%
1921-19.81%
1932-22.02%
2008-10.75%
194719.47%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
1891
1897
1903
1909
1915
1921
1927
1933
1939
1945
1951
1957
1963
1969
1975
1981
1987
1993
1999
2005
Annu
al C
hang
e
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Annu
al C
hang
e
Case-Shiller Real Home Price IndexAnnual Change
1905-14.34%
1896-14.60%
189434.33%
194621.37%
1948-7.42%1941
-9.68%
1991-8.04%
200512.34%
2008-14.38%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
1891
1897
1903
1909
1915
1921
1927
1933
1939
1945
1951
1957
1963
1969
1975
1981
1987
1993
1999
2005
Annu
al C
hang
e
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Annu
al C
hang
e
Bianco Research, L.L.C September 25, 2008 21
Measures That Might Lead A Bottom In Home Prices
Difference Between HY Master and HY Homebuilders OAS12/28/2007, 4.20%
6/26/2002, -4.86%-5.00%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
12/3
1/19
96
9/15
/199
7
5/25
/199
8
1/31
/199
9
10/6
/199
9
6/13
/200
0
2/20
/200
1
10/3
1/20
01
7/11
/200
2
3/20
/200
3
11/2
6/20
03
8/3/
2004
4/13
/200
5
12/1
9/20
05
8/29
/200
6
5/8/
2007
1/16
/200
8
9/23
/200
8
Diffe
renc
e
-5.00%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
Diff
eren
ce
Merrill High Yield Master and Merrill HY Homebuilding OAS
9/18/200811.33%
3/17/2008, 11.89%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
11.00%
12.00%
Opt
ion-
Adj
uste
d Sp
read
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
11.00%
12.00%
Opt
ion-
Adju
sted
Spr
ead
Merrill High YieldHomebuilders (Red Line)
Merrill High Yield Master(Blue Line)
Housing Opinion Versus RealityHomebuilder Index Versus Home Starts
0.80
1.00
1.20
1.40
1.60
1.80
2.00
2.20
Mar
-85
Jan-
86
Nov
-86
Sep-
87
Jul-8
8M
ay-8
9
Mar
-90
Jan-
91
Nov
-91
Sep
-92
Jul-9
3
May
-94
Mar
-95
Jan-
96
Nov
-96
Sep-
97
Jul-9
8M
ay-9
9
Mar
-00
Jan-
01
Nov
-01
Sep-
02Ju
l-03
May
-04
Mar
-05
Jan-
06
Nov
-06
Sep-
07
Jul-0
8
May
-09
Hou
sing
Sta
rts (6
Mon
th A
vera
ge) -
Thi
n R
ed L
ine
(In M
illion
s)
15
20
25
30
35
40
45
50
55
60
65
70
75
80
Hom
e Bu
ilder
s In
dex
- Thi
ck B
lue
Line
Correlation = 75%
Housing Starts3 Month Average
(Left Scale)
Homebuilder Index (Right Scale)
S&P 500 Homebuilding Index
7/15/08, 218.491/9/08, 269.28
1/11/06, 1,279.08
200
300
400
500
600
700
800
900
1000
1100
1200
1300
10/3
/05
11/2
9/05
1/27
/06
3/27
/06
5/23
/06
7/20
/06
9/15
/06
11/1
0/06
1/11
/07
3/12
/07
5/8/
07
7/5/
07
8/30
/07
10/2
6/07
12/2
4/07
2/22
/08
4/21
/08
6/17
/08
8/13
/08
10/8
/08
200.00
300.00
400.00
500.00
600.00
700.00
800.00
900.00
1,000.00
1,100.00
1,200.00
1,300.00
Bianco Research, L.L.C September 25, 2008 22
Measuring Home PricesChanges In The OFHEO Index
6/30/2008, -2.00%
6/30/2005, 12.31%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
Feb-
86
Feb-
87
Feb-
88
Feb-
89
Feb-
90
Feb-
91
Feb-
92
Feb-
93
Feb-
94
Feb-
95
Feb-
96
Feb-
97
Feb-
98
Feb-
99
Feb-
00
Feb-
01
Feb-
02
Feb-
03
Feb-
04
Feb-
05
Feb-
06
Feb-
07
Feb-
08
Feb-
09
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
Quarter-over-Quarter Change
Year-over-Year Change
Changes In The Case Shiller Composite-10 Home Price Index
6/30/2008-3.08%
4/30/1991-6.33%
8/31/200420.40%
6/30/2008-17.00%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Mar
-88
Mar
-89
Mar
-90
Mar
-91
Mar
-92
Mar
-93
Mar
-94
Mar
-95
Mar
-96
Mar
-97
Mar
-98
Mar
-99
Mar
-00
Mar
-01
Mar
-02
Mar
-03
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
Mar
-09
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Quarter-over-Quarter Change
Year-over-Year Change
Median Existing Sales Price of Houses Sold6 month moving average
0
20
40
60
80
100
120
140
160
180
200
220
240
Thou
sand
s of
Dol
lars
0
20
40
60
80
100
120
140
160
180
200
220
240
Thou
sand
s of
Dol
lars
6/30/2008-7.63%
8/31/1979, 15.90%
1/31/1991, 0.28%
11/30/200514.35%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
6/30
/196
8
12/3
1/19
70
6/30
/197
3
12/3
1/19
75
6/30
/197
8
12/3
1/19
80
6/30
/198
3
12/3
1/19
85
6/30
/198
8
12/3
1/19
90
6/30
/199
3
12/3
1/19
95
6/30
/199
8
12/3
1/20
00
6/30
/200
3
12/3
1/20
05
6/30
/200
8
Ann
ual R
ate
of C
hang
e
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
Ann
ual R
ate
of C
hang
e
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