Obsolete Certainty

We will be back soon with more posts for the blog. Sorry for the long absense.

Alabama’s largest county is making preparations for bankruptcy. Jefferson County, stung by rising debt service from $3 billion in bonds has asked their lawyers to begin the process if negotiations with creditors do not succeed. Should the county take this route it would be the biggest municipal bankruptcy since Orange County, California in 1994.

The problems began when the county issued the debt to pay for mandated sewer system upgrades, much of which was issued in the form of auction rate securities.

Ticor Title, a mortgage title insurance company, has sued Countrywide over the title claim to a Chicago home that was reportedly bought and sold THREE TIMES during a period where the previous owner, Randy Johnson, sat mummified in a chair next to his dead dog.

The 2007 loan in question is a $360,000 first mortgage loan on a Victorian on the south side of Chi-town in which Tricor insured title. However, Ticor argues Countrywide was “reckless and grossly negligent in its underwriting of the mortgage.”

It seems that the owner Johnson had grown up in the house but seemingly dropped off the face of the earth in 2005. Cook County officials then discovered that a fraudulent deed had been backdated to 1996, which improperly transferred the property from Johnson’s deceased mother to a woman named Rhonda Evans. Evans then “sold” the house to a Donald Franklin who borrowed the money from Countrywide. The loan reportedly soon went into foreclosure and was then sold to another owner who discovered the bodies of Mr. Johnson and his loyal pet.

The Royal Bank of Scotland, the second largest bank in the U.K., posted a net loss which was the first loss recorded by the bank since becoming a public company 40 years ago.  However, the apparent good news is that the company believes that the $11.4 billion (U.S.) in write-downs announced earlier this year may be the only markdowns needed for the remainder of 2008.  Of course that hasn’t been true for other large banks, so we will all have to wait and see.

Brett Favre, the small town Mississippi kid who spent 16 years playing football in the frozen tundra of Green Bay, is heading to the Big Apple. Or at least to New Jersey.  The Favre post-retirement saga has finally reached a conclusion that involves the Packers trading Brett to the New York Jets.

This also sets up an interesting scenario in which both New York NFL teams will likely have starting quarterbacks who played college football in Mississippi. It is a small world afterall.

The mortgage meltdown continues as Freddie Mac reported a worse than expected loss in the second quarter driven by a $2.5 billion dollar provision for loan losses.  The second quarter loss of $821 million or $1.63 a share was significantly worse than analyst expectations.  Freddie will now cut the third quarter dividend and continue to seek new ways to improve the mortgage giant’s capital position.

Bill Gross, who manages the world’s biggest bond fund, estimates that the total write-downs related to the current mortgage mess will hit a trillion dollars.  Gross, manager of the Pacific Investment Management Company (often referred to as PIMCO) states that the total investment in “risky assets”, such as subprime and Alt-A mortgages, total $5 trillion. He estimates that 25 million U.S. homes are at risk for negative borrower equity.

Gross wrote that “The problem with writing off $1 trillion from the finance industry’s cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets, a reduction in lending or both that in turn begins to affect economic growth.”

An interesting little piece by Matt Nesto on CNBC.com about the market capitalization of General Motors.  GM, which was once the biggest and baddest corporate creature on the planet, now has a market cap of only $7 billion dollars That is drastically down from a market cap of $56 billion in 2000.

To provide context to just how far the mighty have fallen, Matt compares the current GM cap to other U.S. companies.  For example, GM’s market cap is now just one half of that of Avon.  That’s right - Avon.  It is one fifth of the market cap of Ebay.  And it is 1/66 the size of Exxon.

Here is an interesting twist on things. Because of the growing foreclosure problem in Texas, Mexican citizens are finding the opportunity to take back Texas. Or at least little pieces of it.  As detailed in a Bloomberg exclusive article written by Thomas Black, the rising peso and the slumping U.S. real estate market have created an a rising interest in the acquisition of Texas foreclosures.

As one American wag has predicted elsewhere, “If things in the U.S. real estate and debt markets don’t improve soon, it will be Mexico that erects the fence…to keep us out.”

It appears that losing billions of dollars on bad mortgage loans wasn’t enough for Washington Mutual. The large thrift has decided to jump head first in the subprime credit card business in an attempt that could be best described as essentially playing a double or nothing bet. According to an article by Ari Levy in Bloomberg, WaMu has increased their credit card business by 56% since acquiring Providian Financial Corp. WaMu stated in its annual report that it seeks customers who “are often underserved by large prime/superprime-oriented credit-card issuers and who satisfy its underwriting criteria”.

Moshe Orenbuch, an analyst at Credit Suisse Group in New York is quoted in the article saying, ‘Lower earnings in the credit-card business are going to compound their earnings issues.” Well Duh!