Black Monday?

Last night, I received a particularly alarming article posted in the Mountain Sentinel that wrote:

Monday, October 1st is the day of fiscal reckoning. October 1st is New Year’s Day for businesses, and on that day all the banks are required to open their books and honestly assess their current standing. The fear for the last couple months is that more than a few banks may close their doors. On Monday, we will find out for sure.

For several years now, the banks have been playing wide and loose with loans and investments. Spurred by low interest rates, they lured in consumers and home owners into mortgages and loans that they simply could not afford. It used to be that a bank would underwrite and fund every loan it made. But in the past decade, banks have developed the practice of making loans, storing them on their balance sheets for a short period of time and then packaging them into derivatives called collateralized debt obligations (CDOs). These CDOs were then sold off to investors expecting a high rate of return on the investment. Through this mechanism, the banks did not tie up their own collateral with the loans they issued, so they could issue more and more loans.

The article predicts that “a dollar crash is nearly inevitable,” as it has already lost so much value and other nations cannot follow the Federal Reserve’s recent interest rate cut. According to the article:

For many years we have depended on foreign investors to support our economy by stockpiling our currency. These foreign investors cannot hold onto their dollars for much longer. Already they have lost over 40% of their investment. They will have to cut their losses and divest.

So today is October 1, and a story in the New York Times reports that Citigroup “estimat[ed] a 60 percent drop in third-quarter earnings because of write-downs for securities backed by subprime mortgages and loans tied to corporate takeovers, . . . UBS, Europe’s biggest bank, predicted an unexpected loss in the third quarter because of a $3.42 billion write-down for the value of mortgage-backed securities.”

Citigroup’s warning comes as other Wall Street firms have hinted they will face serious profit declines. Last month, Merrill Lynch warned that its third-quarter results would suffer, and Bank of America’s financial chief said the turbulent markets would have a “meaningful impact” on third-quarter results. J. P. Morgan Chase has not publicly commented on its third-quarter results, but executives there have acknowledged tougher market conditions, which will likely have an effect.

So far, Wall Street investment houses that have announced their third-quarter results have run the gamut. Goldman Sachs powered through the turmoil in the credit markets to post a 79 percent increase in profit, its third-best quarter ever. At Bear Stearns, earnings fell 61 percent on sharp losses related to its hedge funds and exposure to subprime investments. Third-quarter profit was down 3 percent at Lehman Brothers and 7 percent at Morgan Stanley, but the performance at both companies was stronger than expected.

According to the Wall Street Journal, the dollar held its own against the euro, gaining .14% to close at 1.4238. And Michael Connolly, in an e-mail newsletter, expresses the mere concern that Citigroup’s “$5.9 billion stumble” might “cost Chief Executive Charles Prince his job.”

A Reuter’s story includes the news that “Credit Suisse Group also said its third quarter results would be ‘adversely impacted’ by the credit market turmoil but said it would remain profitable in the third quarter.”

Investors are now bracing for more bad news from other banks. “I don’t think we are out of the woods. I don’t think it’s over,” said an analyst with a major British bank.

Persistent worries about the health of the banking system have weighed on financial markets around the world.

Financial markets appeared to greet the announcements with relief after weeks of uncertainty among many investors who have been trying to work out exactly what the exposures of the world’s largest banks are to subprime.

The Mountain Sentinel article, however, predicts a far more grim scenario:

A Black Monday will likely be followed by a bloody Tuesday as the banking news leads to a route on the stock market. In this climate, the dollar is likely to plummet even farther as foreign investors hurry to divest themselves of their shrinking dollars. It could all be over for the US economy before the week is out. And we may well see our once vain public standing in soup lines by the beginning of November.

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