Category: words to the wise?

Tony Deden on the credit crunch

Despite the indifference and bullishness that permeates the stock markets, we continue to have considerable concerns about the impact that the real economy is likely to suffer as a result of the untangling of such momentous financial mess. In fact, we view these shocks not as a result of some specific malaise, such as the subprime fiasco, as much as tremors that precede the collapse of a phoney monetary order. — Anthony Deden, The Edelweiss Fund Monthly Review, October 3, 2007

Bank writeoffs: Is the worst behind us?

As reported, today Merrill Lynch joined the subprime hit parade with a $5.5 billion writedown. They join Citigroup and Deutsche Bank earlier this week ($9.8 billion) and Bear Stearns, Goldman Sachs and Morgan Stanley last month ($4.3 billion).

Investor response, so far, has been remarkably positive:

But the mood among bank CEOs has been one of optimism. Executives from firms like Merrill and Citi have said that other areas of their businesses continue to perform well and that there have been signs that credit conditions are improving.

“Have a little confidence – we do,” Bear Stearns CEO Jimmy Cayne implored investors following a half-day meeting Thursday.

So far, investors have been quick to embrace the writedowns, sending shares of Merrill, Citigroup and UBS higher on the belief that the worst of the credit crisis is behind them.

Not everyone is convinced:

Punk, Ziegel & Co.’s Richard Bove labeled that kind of thinking as “deluded.” Mortgage and derivatives businesses at many of these firms have taken a wallop and may not recover for several quarters.

“The assumption that by writing off the stuff, these business will turn around and become vibrant is almost insane,” said Bove. “It’s not going to happen.”

My comment: We are clearly in the Bove camp. The U.S. has over $10 trillion in mortgage debt with half taken on from 2001-2005, a period of the greatest housing/credit bubble this country has seen. And the damage is going to be limited to $50 billion or so? No way.

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