I’m not much for predictions (because they are usually bad), but I thought I’d give it a try. Here is how financial Armageddon could come to pass this year. I do not think it will happen, but it is possible.
February: Lenders and counterparties give up on ACA Capital Holdings, the smallest and weakest monoline bond insurer. It declares bankruptcy. The bailout of the other bond insurers fails. Ambac [[abk]], already in run-off mode, is downgraded to junk. MBIA [[mbi]] survives a bit longer. Harry Macklowe loses much of his real estate empire when he fails to refinance his short term debt. Rents decrease in Manhattan for the first time in years.
March: Ambac becomes insolvent. MBIA is downgraded to junk.
April: MBIA declares bankruptcy. Towards the end of the month, the homebuilders report more huge writedowns. Several banks surprise everyone by calling loans on a teetering Standard Pacific Homebuilders [[spf]]. It declares bankruptcy. Several smaller, private, homebuilders are likewise pushed into bankruptcy by their lenders.
May: Losses to banks from the failure of ACA alone top $20 billion. Analysts estimate that the major banks will have to write down $250 billion as a result of the failure of the other bond insurers. Citigroup’s [[c]] stock is now down over 50% in the last 6 months alone. The Bank of America [[bac]] acquistion of Countrywide Financial [[cfc]] falls through and Countrywide declares bankruptcy. On a personal note, the author of this blog finally sells his house, which he had owned for almost four years, for a 25% loss. House prices in St. Louis are down 30% from their peak. In parts of California, house prices are down over 50%.
June: Several regional banks based in California are paralyzed by bank runs. They declare bankruptcy. The FDIC estimates that the bailout of their depositors will cost $30 billion.
July: Forgotten by almost everyone, pushed to collapse by banks’ unwillingness to refinance its debt, Chrysler declares bankruptcy. Several small companies join it there.
August: By this time house prices have fallen over 60% in California from their peak prices. It is now impossible to obtain a mortgage with a FICO score below 600, a smaller than 20% down payment, or an income at least four times the mortgage payment (including insurance and taxes).
September: A large insurer reveals write downs due to mortgage-backed security losses equal to its book value. Its stock drops 90% in one day, leading the S&P 500 down 8%. Mortgage insurer Radian [[rdn]] declares bankruptcy. It is joined in bankruptcy by competitor PMI Group [[pmi]].
October: Google’s profit increases 70%. Citigroup’s book value is now down 50% over the last two years.
November: Hillary Clinton wins the US election even though 80% of the population hates her. She decides to play the role of Franklin Roosevelt and her policies look to drive the US into a depression.
December: The unemployment rate hits 6% in the US and the country continues a recession that started back in the spring.
Disclosure: I have no position in any stock mentioned above. I hate Hillary Clinton. I am actually not pessimistic enough to believe that much of the above will occur.
0 thoughts on “My Prediction for 2008: Financial Armageddon”
Michael, as a test for you, why not write a sister piece to the pessimistic commentary, and do one on optomistic prediction? Then those of us in the public and compare the actual at the end of the year and see how you did. I made a comment in a meeting one time that economist (not that you are one) had a great job in that no one looked back to see how their predictions turned out. I checked for a period years ago and it turned out that most of the predictions they made were were totally incorrect.
Good call bro seems like you saw it coming. I got out of the mortgage business in August 2007 and predicted that this would happen a year from this time. And yes it happened.
Things turned out worse than predicted. Us banks and insurance companies socialized! Massive creidt freeze. Worse than Great Depression. 2009 will be far worse. Car manufacturers Ford/GM ask for massive taxpayer bailout for whitecollor jobs: to send blue collar jobs and facilties to China!