Lenders on the Block

Story Notes:

• Several troubled lenders look like they will be bought out.
• Though headlines focus on the lenders requiring a rescue, the bigger news is other banks have enough capital available to make acquisitions. Banks are seeing opportunities others are having trouble seeing.
• Firms also have been getting capital infusions from overseas. Despite banks being unwilling to lend to riskier institutions, there is still ample liquidity available.

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Markets took a hit today as Merrill Lynch announced another asset write down and several lenders look like they're going on the auction block. For those already convinced Financials trouble will usher in recession, a bear market, boils, and plagues, this might look like more evidence in favor of a Doomsday scenario.

But are Financials really so imperiled? Recall, asset write-downs aren't losses. They are accounting maneuvers to deal with tough-to-value illiquid assets. Just as many Financials firms were likely too optimistic earlier in valuing their assets, the write-downs could be a conservative under-statement of the underlying assets. (For more on asset write-downs, see "Writing Off Write-Downs," 11/13/2007.) But what about the troubled lenders?

(Editor's Note: MarketMinder does NOT recommend individual securities; the below are simply examples of broader themes we wish to highlight.)

Countrywide Rescue: $4 Billion
By David Ellis, CNNMoney.com
https://money.cnn.com/2008/01/11/news/companies/boa_countrywide/index.htm?postversion=2008011109

Is Countrywide getting "rescued?" Or is the big news that Bank of America is in a comfortable enough place to buy them? And it looks like another lender might be similarly "rescued."

Washington Mutual Rises on JPMorgan Sale Speculation
By Elizabeth Hester, Bloomberg
https://www.bloomberg.com/apps/news?pid=20601087&sid=ad6u0L7aMQnQ&refer=home

This may seem risky to a Financials-shy public who see nothing but danger ahead, but consider it this way: Firms buying troubled lenders aren't paying huge premiums. They're getting these businesses at bargain prices. Plus, how likely is it a Financials CEO is going to do something risky right now? They're all under electron microscopes already. Bank of America is buying Countrywide because they perceive a huge opportunity. CEOs don't pay $4 billion to acquire other firms out of some bizarre sense of cosmic responsibility.

An interesting feature to today's credit fears is as of yet, no major players have gone bankrupt—whereas in true major financial crises past, you always see a slew of major names going belly up. Now, we might argue some of them should go bankrupt. If they took on too much risk and poorly executed their business strategy, they should go. But in effect, that's what will happen when they get bought out! The businesses will be absorbed and perhaps get a shot in the arm by the acquirer.

Folks have long been fretting a credit crisis—fearing liquidity has dried up, dampening global growth. But it's a testament to the vast sources of global liquidity that banks haven't been going under—rather, those particularly troubled can simply get bought out. Just the fact banks are able to buy each other is prima facie evidence they're not in as bad shape as you'd gather from headlines.

But everyone's saying we're in a credit crisis! How can vast liquidity be available? Because it is—the developed world's central bankers have acted, in our view, appropriately in ensuring capital is available. Banks aren't as willing to lend to institutions they view as risky right now—but that's a far cry from not having liquidity available. And let's not forget—we live in a global economy. Troubled banks have also gotten capital infusions from overseas.

Let Markets Sort Out SWF Investment
By John Tamny, RealClearMarkets
https://www.realclearmarkets.com/articles/2008/01/let_markets_decide_the_role_of.html

The preceding article details why Sovereign Wealth Funds (SWFs) aren't a fearsome beast and actually help keep the world awash in liquidity. Folks fret foreigners "buying up" America—that they're somehow propping up our economy and you and I personally will have to write a check to pay them back somehow. Nonesense. Foreign investors will get "paid back" when their investments pay off. Or maybe not! When you make an investment, you do so expecting that investment to appreciate. If it doesn't, you lose money, accept that was the risk you took, and move on. You don't demand America's tax payers pay you back for an investment you, a consenting adult, made that went awry! (Well, some investors do, but they don't understand the whole capital markets thing.)

One year ago, when firms were busy acquiring each other at a busy pace, no one would have fretted Bank of America buying Countrywide. Today when it happens, many fear it's a sign of malevolent forces at work—when really it's just a sign Bank of America and many other Financials firms are functioning healthily.