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Chris Whalen On The Upcoming "Worst Economic Contraction Since WWI (Forget WWII)"

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From Chris Whalen at Institutional Risk Analytics

Exposure at Default: Does Bank American Have Any Alternatives for Countrywide?


The erosion of the profitability of
the U.S. banking industry over the past two years under the glorious
Summers-Geithner-Bernanke rescue scheme is the proverbial fly in the
ointment for both major political parties. Democrats and republicans
alike are going to be fed into the meat grinder over the next several
years as the banking sector deals with literally hundreds of billions of
dollars in direct and indirect expenses from the deflation of the
mortgage bubble. For the economy, this slow process of muddle along
championed by Summers and Geithner will ensure that Barack Obama becomes
the Herbert Hoover of the Democratic Party.

The economic carnage that will causes these losses, as we described in a recent post in Reuters,
"Double Dip or Global Deflation?,"
is
going to represent the worst economic contraction since WWI. Forget
WWII. Think "shrinkage" to use the Gilded Age description for economic
deflation. And frankly nothing that either the Fed or Treasury does in
the near-term can change this basic economic fact of restructuring.
Banks such as Ally, which is the owner of the ResCap legacy portfolio as
we all know, can impose moratoriums and issue press releases, but the
losses remain. It is only a question of when they are recognized.

Thus we turn the pages back to August of 2008, when we were just returning from our annual Maine fishing trip with David Kotok of Cumberland Advisors. In our comment
“Is Countrywide Financial Headed for Bankruptcy?,”
we described the lawsuit by Bank of New York Mellon (Q2 2010 BSI Rating: "A+") to force Bank of America (JPM/Q2 2010 BSI Rating: “C”) to
formally take responsibility for the debt of Countrywide Financial. BAC
management had made statements to investors during conference calls
that Countrywide was being kept “bankruptcy remote” from the BAC parent.

Since then, most talk of a bankruptcy by
Countrywide has been squelched because of the legal and practical
obstacles involved. We’ll be going into these issues in detail for
subscribers to the IRA Advisory Service later this week. Suffice to say
that while the legal situation may seem clear and mitigate against a
bankruptcy filing by Countrywide to limit legacy claims, both liquidated
and unliquidated, the economic situation at BAC and among all of the
legacy zombie banks continues to worsen. No amount of bullshit from
Washington changes the fundamental economic situation inside the largest
U.S. lenders.

In earlier comments,
'An Involuntary Transaction: Why BAC + CFC May Never Close', May 6, 2008
and
'Update: Are Countrywide Financial Bond Holders Bankruptcy Remote?', May 1, 2008,
we
had further described the shenanigans by BAC management with respect to
the Countrywide acquisition in that year. And as we wrote then and we
remind one and all now, the decision by former Treasury Secretary Hank
Paulson, Fed Chairman Ben Bernanke and OCC Head John Dugan to slam
Countrywide and Merrill Lynch into BAC, Wachovia Bank into Wells Fargo & Co (WFC/Q2 2010 BSI Rating: “B") and Bear Stearns into JPMorgan (JPM/Q2 2010 BSI Rating: “C”) was a fundamental error -- and one that is only creating the precursors for the next systemic crisis.

The difference between the Lehman Brothers
bankruptcy and the JPM acquisition of Bear Stearns is that the
unliquidated claims against the former firm for securitization and other
exposures are all being managed by the U.S. Bankruptcy Court for the Southern District of New York.
Jamie Dimon and his shareholders are on the hook for all of the claims
against the legacy Bear Stearns securitization business, but Dimon is
fortunate compared to his counterparts at WFC and BAC. The claims
against Washington Mutual, for example, are sitting in the U.S. Bankruptcy Court in Wilmington -- except, of course, for the covered bonds issued by WaMu and conveyed to JPM via the FDIC receivership. Wonder if our friend Meredith Whitney has noticed this issue yet...


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Wed, 09/22/2010 - 11:00 | 597226 Dr. Richard Head
Dr. Richard Head's picture

DAMNIT ALREADY THE RECESSION IS OVER!!!!  Our lords have decreed this, so be it. 

Go buy a Kindle or something already.  Real estate is a good bet too, this is a buyer's market ya know.

Wed, 09/22/2010 - 11:46 | 597377 PlausibleDenial
PlausibleDenial's picture

I agree, the recession is over, I have seen this, it is true...

http://www.blackbottom.com/watch.php?v=9f96e04e964f3f436e7ceba77ea24ae5ea20a24f

Wed, 09/22/2010 - 20:38 | 598892 StychoKiller
StychoKiller's picture

Go long with "Shrinky Dinks!"  Because good things come in small "packages." :>D

Wed, 09/22/2010 - 11:02 | 597227 Tense INDIAN
Tense INDIAN's picture

worst economic contraction since WWI......dnt tell that to the future MBAs here in India....some of my friends will pass out in 2012...!!!!! ...2012????!!!!!...i wonder what will the economic situation around the world be till then......................???

 

one of the primary reasons for the success of the outsourced JOBS in INDIA is the exchange rate....1 dollar ===45 rupees......whats gonna happen when the dollar collapses??

Wed, 09/22/2010 - 11:12 | 597265 Rusty Shorts
Rusty Shorts's picture

East Indian Coolies : Part Deux

Wed, 09/22/2010 - 11:36 | 597350 septicshock
septicshock's picture

Inda will be fine. The call center jobs are actually moving back to the united states as it is now cheaper here. The high tech jobs are moving to India. The coolie will be here... :(

Wed, 09/22/2010 - 15:03 | 598006 LowProfile
LowProfile's picture

I look forward to the sweet national revenge of hundreds of millions of Indians being forced to deal with Americans giving crappy tech support in heavily accented Hindi.

Wed, 09/22/2010 - 21:44 | 599001 maddy10
maddy10's picture

Dream on!!!
1 billion "intelligent"people
Can't even have their own social networking site
150 million Indians on facebook making Zuckerberg a billionaire!!!!!
Zuckers!Go write some software for 10$ a week!

Wed, 09/22/2010 - 11:41 | 597365 Thunder Dome
Thunder Dome's picture

The kickoff to the shit show will be May 2011 according to Martin Armstrong.

Wed, 09/22/2010 - 23:03 | 599097 maddy10
maddy10's picture

Wrong
He has been telling "within six months " for past six years!!!!!!
Just like Celente ,Schiff, Prechter et al
Broken Clocks???!!

Wed, 09/22/2010 - 11:02 | 597232 SheepDog-One
SheepDog-One's picture

I disagree with the premise, the demicans and republicrats (same 2 headed 1 party system) will not allow themselves to be fed into the meat grinder, theyll pull it like building 7 before elections. This was all planned years ago. Theyre not going to participate in their own demise.

Wed, 09/22/2010 - 11:06 | 597251 Spitzer
Spitzer's picture

How a debt backed dollar survives this I will never know.

Wed, 09/22/2010 - 11:09 | 597259 Dr. Richard Head
Dr. Richard Head's picture

This is something where I agree with you 100%.  That 100% is of course levereged to the gills as well.

Wed, 09/22/2010 - 11:21 | 597293 Clayton Bigsby
Clayton Bigsby's picture

cuz we're the world's drug dealer and we've got everyone hooked on this incredible new crack called the USD - and we're the most heavily armed - but when people really decide to kick the monkey off their back, watch out below...

Wed, 09/22/2010 - 11:27 | 597313 SheepDog-One
SheepDog-One's picture

'USD crack is being rejected outright more and more. Malaysia drops USD for trade and buys Chinese bonds. I think the count of number of countries that no longer accept the USD is up to 20 or so. A relative just got back from Europe, Spanish banks will not accept the USD exchange except with a 50% or so discount from set ex rate.

Wed, 09/22/2010 - 12:14 | 597496 HardwoodAg
HardwoodAg's picture

T-shirt/bumper sticker statement worthy

Wed, 09/22/2010 - 11:24 | 597262 virgilcaine
virgilcaine's picture

1130 S&P is key we break  that with conviction were going to 1040.  I don't see 1040 support holding this time around.

This could happen soon.  Now to Oct.  940-880 is tgt.  Swift mkt action.  After the summer crawl.

 

The vix is as low as it was in 07 .. Ton of complacency.

Wed, 09/22/2010 - 11:30 | 597324 SheepDog-One
SheepDog-One's picture

Virgilcaine I think it all hinges on whether or not they can pump up their gutter approval ratings before about mid Oct. If they cant, I see them going to plan B 'fear and panic market trouble, war, to rally the people 'round Obama' which will also fail of course but I conclude thats their plan.

Wed, 09/22/2010 - 15:24 | 598094 rosiescenario
rosiescenario's picture

...have you ever seen a computer that was not complacent...of course there are tons of complacencey....humans are not doing the trading, the algos are...they are emotionally neutral....they also have tunnel vision.

Wed, 09/22/2010 - 23:08 | 599105 maddy10
maddy10's picture

How dare you write against Lord munger's God given word to be rich for ever
Suck up you peasants!!!

Wed, 09/22/2010 - 11:44 | 597374 Something Wicke...
Something Wicked This Way Comes's picture

The truth is always "perceived" rather what "is." That's what we are really talking about.

As long as there is the perception that everything is fine, then that becomes reality and truth. That is the perception that the FED is desperately trying to maintain. And it has been working. That's why the readers here are so fucking frustrated.

The pending economic crash is going to occur. When I don't know. But one giant angry mob is going to come looking for heads. I clipped a piece, the summary of an article, that truly captures the essence of what is coming. The numbers, well, left me breathless...

 

Adding all of these together, we come up with a total of roughly 6.97 million residences that are almost certainly going to be thrown onto the resale market as distressed properties at some point in the not-too-distant future. This massive number of homes will put enormous downward pressure on sale prices. To believe that prices are firming now is to completely ignore this shadow inventory. Ignore it at your own risk. Read Minyanville’s “Housing Isn’t Really Dead.”

Wed, 09/22/2010 - 12:24 | 597525 Things that go bump
Things that go bump's picture

Me and my gold have been waiting for that.  

Wed, 09/22/2010 - 12:24 | 597528 Fearless Rick
Fearless Rick's picture

While I cannot and will not argue with the bulk of your comment, Suggesting to read the article at Minyanville was your Waterloo. The linked article, like almost all others on that enormously stupid site, is a load of fresh, stinking BS.

Thanks for making me go look and waste five minutes of my life, because I will never read another article on that wasteland of unlimited internet space ever again.

Wed, 09/22/2010 - 15:33 | 598135 Something Wicke...
Something Wicked This Way Comes's picture

Sorry Rick. I just pasted the whole paragraph. But I think he was being sarcastic...that's why he put the link in there. That's the shit we're being told- that was his point.

Wed, 09/22/2010 - 11:46 | 597381 Village Idiot
Village Idiot's picture

gas anyone coined "cope and change" yet?

Wed, 09/22/2010 - 11:53 | 597405 taraxias
taraxias's picture

I prefer "suck it up", more to the point I think

Wed, 09/22/2010 - 12:52 | 597474 Village Idiot
Village Idiot's picture

Yes, I see your point.  No pun intended.

 

Suck it up and change - that's gross.

Wed, 09/22/2010 - 11:50 | 597393 DonnieD
DonnieD's picture

Mr Whalen, CNBC on line 2. You're upcoming guest appearance has been cancelled.

Wed, 09/22/2010 - 11:55 | 597410 ZeroPoint
ZeroPoint's picture

Is the author seriously blaming Summers/Geithner/Bernake for the downfall of banks? The banks made their own bed ffs.

Wed, 09/22/2010 - 12:32 | 597556 frugalman
frugalman's picture

Real estate had pretty much gone up in value, year after year, for 70 years or so.  Banks besides being depositories were supposed to make money by making loans and pocketing the margin between interest paid on deposits and interest paid on loans.  The government is involved because account deposits are FDIC insured.  So when the real estate bubble popped, it really wasn't the bank's fault, other than they didn't insure themselves against the possibility of their loan assets receiving a 20 to 40 percent haircut.  It just wan't supposed to happen.  Of course, the haircut has gone unrecognized.  Loans are only determined to be impaired after being 90 days delinquent.  But this is about to accelerate.

Wed, 09/22/2010 - 14:12 | 597826 Nels
Nels's picture

So when the real estate bubble popped, it really wasn't the bank's fault, other than they didn't insure themselves against the possibility of their loan assets receiving a 20 to 40 percent haircut.

I don't follow your logic here.  The banks should have required 20% down, which would have in a few years of inflation put most houses 30% above the value of the mortgage.  By not requing money down, the banks helped drive the bubble, by bringing folks into the market who really could not afford a house.

Bubbles pop, that just happens at some point.  There need not be anyone who 'broke the bubble'.  We do always have folks who caused the bubble to grow.  And the banks certainly have their share of fault in that.

Wed, 09/22/2010 - 23:21 | 599121 maddy10
maddy10's picture

Don't tell me the finest brains in the world didn't know what was coming!
They did know that it would end badly but solely relied upon the "Goldspan"-Bernanke Backstop which was proven right yet again

Remember Nov 2008 when Bush had to send the GM gang back for a pittance of 4 billion$
Nowadays a trillion here a trillion there won't matter
A trillion is a rounding error now
Look at every spitting analyst talking about 2-3 trillion QE2
Do they even realise how much money it is???
They don't care as long as they are making money
I see all of them in caribbean by 2012,riding in yachts and maseratis ;writing books on business management and intellectually analysing how the next guy screwed the world.

Wed, 09/22/2010 - 12:58 | 597630 AccreditedEYE
AccreditedEYE's picture

While I wouldn't even compare my brain to the analytic supremacy of Lord Whalen, I believe I can say that he means despite the amount of Hype/Spin/Inventive Funding Programs that came out of government in order to reassure the average American (and reassure the market at large) that all is well and contained, the holes in the bank balance sheets remain gaping and very problematic to the Keynesian Cult.  

Wed, 09/22/2010 - 11:56 | 597417 goldmiddelfinger
goldmiddelfinger's picture

Don't see this as "news". No one has really taken a hit yet. Not upside down home"owners" nor their lenders. Simply a timebomb with an uncertain timer.

Wed, 09/22/2010 - 19:36 | 598786 RockyRacoon
RockyRacoon's picture

Then it's not a timer, it's a trip-wire.  Boom!  It's over.

Wed, 09/22/2010 - 12:09 | 597477 Something Wicke...
Something Wicked This Way Comes's picture

I never could figure out why we just can't take our medicine in this country. Why when we fuck up, do we always pretend that we didn't and ultimately end up making it far worse than it would have been?

It is about illusions. And desperate men. And millions running for the exits.

I don't particularly care about the great national political debate. But I think I have isolated the reason that Obama will be an epic fail. He simply doesn't possess the key ingredient:

 

http://thecivillibertarian.blogspot.com/

Wed, 09/22/2010 - 20:49 | 598926 lumen ex lumine
lumen ex lumine's picture

+1000

 

a great encapsulation of the monumental failure that is Obama. Nobel Peace Prize ? WTF ? "Health care" legislation. VOMIT. Summers / Geithner ??? DOUBLE VOMIT.

 

What a f*cking loser.

Wed, 09/22/2010 - 12:42 | 597568 Miles Kendig
Miles Kendig's picture

Ya, it's almost a reverse 1873 once more and I wonder which venerable institution will go the way of Jay Cooke & Co.  Given the ambient noise coming from Mort Zuckerman and other interested players in the CRE space I suspect we have seen our replay of Grant/Gould from 1869.  Given the current dynamics of paint the whole into the corner it may well be the whole rather than one or two significant parts a la 1873.

Wed, 09/22/2010 - 12:46 | 597604 MAGICWIZARD
MAGICWIZARD's picture

simply put, we're all fked

Wed, 09/22/2010 - 14:01 | 597795 Ripped Chunk
Ripped Chunk's picture

B of A failed in July. No one noticed.

So this Counrywide fly in the ointment will mean zero. Just keep increasing the size of the jar of ointment..............

Extend,   pretend,  extend,  pretend

Sat, 09/25/2010 - 23:06 | 605031 CL1
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