I think Washington Mutual will likely be the next to fail. I hate recommending stocks on or near their lows but I am afraid the bounce I was hoping for will never materialize. Although the seizure of FRE and FNM is going to help the mortgage market it won't be enough in my opinion. Standard and Poors recent downgrade just points out how dire things really are. It will be very difficult for them to raise more capital in this environment and there is no way for them operationally to dig their way out of the hole they are in. I expect you will see them seized near term by the FDIC. If there is any bright spot here I don't see it. I expect this stock to go to zero but I will likely cover once it breaks a buck like I did on FRE and FNM.
When considering weather bottoms are in or not you should first try to understand what is driving the madness. To put it simply the market is wringing the leverage out of the market. The problem with the financial stocks is that they run highly leveraged balance sheets. Since the model is to borrow short and invest long the absence of available credit is causing leveraged balance sheets to contract. Libor spreads have blown out meaning banks aren't lending to banks. The commercial paper market is frozen up so companies cannot roll their CP when it comes due. For companies that must roll CP they have an immediate and sometimes (AIG, LEH, BSC) contraction. How low can they go? The answer is zero because if you have for example a 20 billion equity cap but a 100 billion balance sheet that is short term financed and you can't roll your cp then you rapidly become illiquid. Lenders who are senior to the equity see their debt becoming impaired so they buy CDS and short equity to try to limit their exposure. Since the dollars on the debt side are so large in comparison to the equity the equity gets squished. So just because GS and AIG are fundamentally sound given a normal operating environment they aren't in an environment where credit is unavailable. This can and will get a lot worse. Don't be quick to jump in because it will be hard to tell who was dumber the person who lost the first 90% or the person who jumped in just in time to lose the last 10%. This is no time to be speculating in the equity of highly leveraged balance sheets. This isn't a bottom it is the edge of the abyss.
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