Bank of America's profits dropped 77% in the first quarter of 2008 (numbers just released today). The bank is the 2nd largest U.S. bank behind only Citibank. Citibank announced $5 Billion in losses for the 1st quarter as well. 

Bank of America is still planning to purchase Countrywide by the 3rd quarter of this year. Will they still move forward with the purchase if both B of A's and Countrywide's earnings continue to plummet?

Citibank announced that they posted a $5.11 Billion Loss for the 1st Quarter of 2008. They also announced that they took almost $16 Billion dollars worth of "writedowns" (or losses) from non-perfoming mortgages, auto, credit card, and other loans. Citi also announced that they will cut an additional 9,000 jobs to improve their balance sheets.

Many analysts were expecting "writedowns" of $18 Billion or more so this news was considered OK to some. It is bizarre that our expectations and our tolerance for record losses each quarter in a Post-Credit Crisis world may allow some people to view Bilions of dollars in losses in one quarter as "acceptable".

Standard & Poor's, however, placed Citibank on their "Negative" Credit Watch list this morning. If S & P, Moody's, or Fitch (the 3 major Credit Ratings Agencies) downgrade Citibank's credit ratings to "Junk" status (BBB or less), then Citi's borrowing costs may increase significantly and their stock values may plummet even further from the opening bell price of $26 per share.

Germany is so deep in this ongoing Subprime Crisis (and the overall Credit Crisis) that their entire national banking system is on the verge of collapse, according to the "This Is Money" website in the UK. Their national banks may be faced with up to $39 Billion (Euros) of total losses. 

This is at a time when the German economy is sluggish, and the overall unemployment numbers are very high. The last banking "crash" happened in 1929 (when America's Great Depression began as well). The economic collapes in 1929 helped propel the Nazi Party to power shortly thereafter as many German citizens were looking for other government options to help stimulate their economy.

There have already been billions of dollars of writedowns (or losses) from many German banks to date that purchased pools of U.S. Subprime (and Prime) mortgages in CDOs (Collateralized Debt Obligations), or other forms of packaged loans. Since the bulk of these CDOs were rated as AAA (the highest and safest credit rating) by one of more of the major Credit Rating Agencies (such as Fitch, Moody's, or Standards & Poor's), the German banks thought these investments were relatively "safe". AAA ratings are also given to U.S. Treasury Securities, and are considered the safest type of investment in the world.

It looks like these investments should not have been rated as AAA, and the entire German national banking system (along with many other countries' national banking systems including the U.S.) are in serious jeopardy right now.

Oil prices just surpassed $115 per barrel today. As energy costs tend to be the root of all inflation, how high will inflation go this year? As I drive to work, I see self service gasoline close to $4.40 to $4.50 per gallon. I am ready to start riding my bike to work as it is getting so costly to fill my tank.

We may be in the midst of a "deflationary asset/inflation bubble". This is when real assets like real estate continue to fall in value, yet rampant inflation persists for food and energy products, consumer staples, and other daily items.

The U.S. Dollar keeps declining in value due to the much needed rate cuts. The Fed may need to take short term rates all the way to ZERO as Japan did a few years ago in order to stimulate the economy. Inflation is better than deflation any day. However, inflation and deflation at the same time is the worst combination that the U.S. economy can experience.

Wachovia, the fourth largest U.S. bank, just announced they will be raising $7 Billion in new capital by selling both common and preferred stock to help offset recent losses. In addition, they will cut their dividends by up to 40%.

Wachovia is blaming many of their losses on properties based in California. Many of their loans were adjustable or short term fixed rates for prime and subprime quality borrowers. 

Expect more losses this week from major U.S. banks as more banks release their 1st Quarter '08 results.

Washington Mutual, one of the largest savings banks in the U.S., just received a $7 Billion cash infusion form a Private Equity Firm earlier this week. On the same day, Washington Mutual (WAMU) announced they were shutting down their national wholesale mortgage lending division as well as their satellite retail mortgage branches.

A Goldman Sachs analyst just predicted that WAMU may take up to another $23 Billion in mortgage related losses later this year. WAMU has a very high percentage of non-performing (or in foreclosure) 1st and 2nd loans in their portfolios. A very high percentage of their delinquent mortgages are based in California.

Look for more Private Equity, Hedge Fund, and foreign investment firms to try to bail out many of our nation's largest banks. As the Credit Crisis begins to worsen as time goes on, there may be some prominent banks that do not survive regardless of the Fed bailouts or potential investor interest from outsiders.

Iceland just raised their short term interest rates for the 2nd time in the past three weeks. In just the past few months, Iceland's currency (the Krona) has dropped 25% in value against the Euro. In addition, Iceland is battling runaway inflation so this is another reason why they have raised their interest rates so much recently.

Also, the three largest banks in Iceland had $157 Billion (in U.S. Dollars) in the form of combined assets. 87% of these assets were held by foreign investors. Iceland keeps raising their short term rates to continue to attract foreign investment capital.

Runaway inflation, a declining national currency, struggling national banks, and a large ownership interest by foreign investors sounds a lot like the U.S. Do you remember when Paul Volker (the Fed Chairman before Greenspan)? He raised the U.S. Prime Rate to 21.5% in order to "quash inflation" in early 1981. Let's hope our rates continue to stay low and not increase like they are in Iceland!!!

The International Monetary Fund (IMF) just made a statement that they believe credit losses from our ongoing Credit Crisis may approach $1 Trillion. These losses may stem from mortgages, consumer, and business loans. 

Initially, many economists thought the Credit Crisis may cause losses of ONLY a few hundred billion. Sadly, most people are not factoring the potential of leveraged losses over and above these estimated numbers. For example, many Hedge Funds leverage their investments 10 to 30+ times their investment amount (think Long Term Capital Management - Video #2 in our "Videos" tab section on this website).

Once the bad investments start unwinding and the banks and investment banks are forced to sell their assets for more cash, then the losses may be significantly higher than even the $1 Trillion estimate by the IMF. 

There are an estimated $45 Trillion of Credit Default Swaps (CDS) outstanding on our planet. These CDS instruments are a form of insurance protection for many companies. $45 Trillion is greater than the amount of all savings accounts on Earth. If these unwind, then we may be faced with serious problems (asset deflation, high unemployment, etc.) for many years.

Since most of the media tends to focus on the negative news on real estate, I thought that I would update readers on the latest news on the values of stocks. The Credit Crisis has caused revenues to drop significantly for many Dow Jones and S & P 500 companies of late. However, many of their stock values haven't dropped in proportion to the losses in earnings. 

Remember, Hedge Funds are some of the largest investors in the U.S. stock market these days. In some cases, they may invest and control up to 40% of the total overall stock investments in the U.S. Most Hedge Funds have a short term buy and hold strategy. Some days, they buy stocks "long", and other days they "short" certain stocks. A "short" is when you profit when the stock's value drops.

As of a few days ago, the Dow Jones' P/E (Price to Earnings Ratio) is slightly under 54. The P/E Ratio is the most basic form of measurement used by many people to determine the true current value of a company. If the P/E Ratios are too high, then the stock values may be too high. Let's take a look at past periods of time and their corresponding P/E Ratios:

* In 1929 (start of the Great Depression), the P/E Ratios for the Dow were just over 32. 
* In 1932, the Dow P/E Ratios hit an all time low of 5.6. 1932 was considered one of the worse economic years in the 20th Century.
* In 1966, the Dow's P/E Ratios were just over 24.
* In 1982, the Dow's P/E Ratios were close to 7. The average Dow stock prices were almost the same in 1982 as they were in 1966, but the earnings were substantially better.
* In 1987, the Dow P/E Ratios dropped from 18.3 to 13.4. Do you remember Black Monday (Oct. 17, 1987) when the market "crashed" for a short period of time?
* In 1999 (prior to the "Dot Com" & Telecommunications Stock Bubble Crashes), the P/E Ratios hit an absurbly high 44.2.

In years past, a P/E Ratio above 25 is considered RISKY. We are now more than double the RISKY Price To Earnings Ratio Guidelines. Where is the real bubble right now? Is it stocks, real estate, or both?

As I wrote in one of the chapters in my book (SIVs and SUVs), SIVs (Structured Investment Vehicles) are a central part of our ongoing Credit Crisis. Specifically, banks and investment banks used these "off balance sheet investments" to borrow with short term money (i.e. money market funds) and invest those same funds in longer term investments such as mortgages. 

When there weren't many buyers for these SIVs after the Credit Crunch began early last year, it caused much of the secondary markets around the world to "freeze". These "off balance sheet" investments usually were not reported by the banks or Wall Street investment banks. Whether these SIVs caused substantial losses or gains, the banks did not feel the need to report the current stauts of these investments. Didn't Enron do the same thing?

The Financial Accounting Standards Board (FASB) just removed the concept of QSPEs (Qualifying Special Purpose Entity) from the FASB's
set of regulations (Regulation #140) on Friday (April 4, 2008).  

As a result, banks and investment banks will have to add these "off balance sheet investments" back on to their bank balance sheets within the next 6 months or so (no later than the start of 2009). For some banks, their unreported losses may hurt their balance sheets significantly and cause their stock values to drop. For other banks, it may not be a big issue.

Off balance sheet investments should never have been allowed in the first place. This "shady" form of bookkeeping and investing is part of the reason why the we are in the Credit Crisis mess in the first place.