Dash to the Crash

Now that we have Citigroup in liquidation mode, with further information coming tomorrow with Vikram Pandit set to release “earnings” with a projected $10B writedown, we can turn our attention to who is next.

It’s too close to call right now. Ken Lewis’ Bank of America is neck-and-neck with Jamie Dimon’s JPMorgan Chase.

Dimon released actual earnings today, 7 cents a share, which translates into 28 cents for a year and where would that put JPM’s stock price. JPM earned $1.37 for ’08. JPM also took a $2.9B writedown.

JPM would have taken a 28 cents loss for the quarter without closing a joint venture. Dimon mentions in the release that all the risk the bank took to bailout Bear Stearns have impacted the bank’s balance sheet.

Not to be outdone BofA came out yesterday and said it needs Uncle Sam to take most of the losses associated with its $19.4B buyout of Merrill Lynch.

Lewis was said to be balking about closing the deal last month, but Treasury told him to close the deal and we will back you up, because the alternative was much more dire for the financial markets.

BofA’s earnings call is scheduled for Jan. 20th with the bank set to announce its first losing quarter in 17 years. Treasury will probably absorb some losses on Merrill’s assets and place a cap the bank’s liability aka JPM’s deal for Bear.

BofA’s biggest concern in my view is the liabilities on Countrywide – the subprime slime generator – and its position of passing along the costs to bondholders.

If the Countrywide bondholders file a class action suit and win, which is highly likely, this hit to the balance sheet could take BofA under.

So who will take second place in the Dash to the Crash? Not sure but both should arrive at the finish line by July of ’09.

New Marshall Plan

European countries are teetering on the brink of default on their sovereign debt issues. Ireland, Greece, Portugal, Spain, Italy and Slovenia all have rising risk on defaulting on their debt obligations and the added costs of generating new debt.

Credit default swaps have risen from 20 percent to 70 percent on these countries in the last quarter, showing the growing risk seen on these smaller EU countries.

The ECB is scheduled to lower its prime-lending rate to 2 percent today in an attempt to bolster the euro zone. Many see the ECB as being so far behind the curve in the race to zero interest rates that its inflation-focused policy needs to be abandoned.

As I said in my 2009 preview, the euro will be under tremendous pressure this year and I would not be surprised to see Germany making noise about moving out of the troubled currency as it moves toward a more nationalistic posture to keep its economy from cratering.

Just yesterday, China surpassed Germany to become the No.3 global economy.

With trade wars escalating through ’09, Germany will need to have more control over its currency as China, Russia and other developed countries devalue their currency to add stimulus to their manufacturing and bolster trade balances.

See you tomorrow for Citi’s earnings or lack thereof.


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