Santayana

The problem with banks right now is that nobody, inside or outside, knows what their assets are really worth. When your balance sheet is made up of a bunch of guesses because there is no bid for the assets you hold, no one can say whether or not the company is fairly valued.

Continue to hold and buy puts.

Now that's a statement I can agree with! Although, one way FFH has managed to have such great returns over the years is by making bets like this. Some may fail, but the ones that work out more than make up for the losses. In terms of generating inflation beating returns, I think that is easier over a longer period of time than a shorter one. That is you could make the statement about the next 20 more easily than the next 5. I'm sure that all the investors you mentioned with great historical returns would all say that 5 years is too short of a time frame for them to make any statement about their expected returns.

Ok, I guess I was just interpreting the word "assure" to mean a sure thing, and thus risk free. I really don't think that is nitpicking, but if that's how you feel, and aren't willing to justify/explain your comment further, then I guess you're right and there's nothing more to say.

FFH holds ABH debentures and other debt. ABH may be having to convert much of its debt to equity to stay afloat. This will leave FFH holding a large amount of common shares of ABH. The risk in this is far higher than the risk in the examples I cited. The whole thread gives the full context of our discussion. I have been following the rest of the thread, but was following up on your point of buying JNJ, PFE and LUK assuring you of 15% annualized gains. I agree they may be less risky than ABH, but still don't see the connection between that and basically saying you can double your money in 5 years risk free.

I thought you were talking about the common. Are you referring to some preferreds or convertibles with the downside protection?

What in the world makes you say this? There are no sure ways to double your money every 5 years!

Oops, guess my quote didn't work... Also, with those asset writedowns will come lower operating earnings as financial institutions have less capital to work with, and will be using less leverage to boot.

I don't know about the S&P500 as a whole, but Microsoft earnings dropped a "whopping" 10%. Big deal. It's a big deal if earnings contraction rather than growth becomes a trend for more than a couple of quarters.

50% cash 15% FFH 10% NLY 5% various long positions (MO, LINE, ORH, ...) 20% SPY puts of varying strikes/expirations

I remember when she was mocked on CNBC last spring for saying that Citi was going to have to raise massive amounts of capital. People on this board generally don't have the same relationship with credit as the broader public. The credit line reductions aren't being spread evenly across all types of customers, they're mostly affecting those people who actually use their full limit. Add in the higher fees and penalties for being late/overlimit, and people will cut back even more.

I don't know. I think the case could be made that nobody really deserves a AAA right now, and that could include the US govt. as well. Whether or not you believe we are headed for a depression, one has to recognize that there is a great deal of uncertainty in the financial markets these days. How many AAAs are still out there?

Well #5 is partly true right now. Too many executives have gotten away with publically misrepresenting their capital situation when they clearly knew better. This should be treated as fraud and people need to go to jail. The sooner this happens, the sooner confidence will return as investors will start believing they aren't being lied to.

I don't think we'll a 90% drop this time around, but I do have a target of Dow 4000, so another 40% from here. 1994/1995 is when many companies really started to increase leverage and prices and earnings started to go parabolic. I think we return to those levels and then start growing again, but this time at a more reasonable pace. Irrational exuberance is one of the few things Greenspan got right, and many people have just forgotten how insane valuations were looking in 96-97. To me the key isn't necessarily how far we'll drop, but how long it will take before we start to see growth again. Even if this is the bottom, or we're very close, it will be years before we see earnings growing at the same rate as the 90s. In the meantime there is money to be made by investing in companies that pay out earnings as dividends, don't have debt, and have consistent sales.

But that rally only came after a 90% fall. Even after the quadrupling between 32-35 most investors were still deeply in the red.

I didn't say anything was wrong with removing the hedges, it was adding new positions after they were removed that I question, especially in the financial space which has far too many questions abounding right now for me to believe that any margin of safety exists.

What you need is to have them trade on a exchange with some regulation. Just as you need to maintain margin to write naked puts, you should need the same to write naked CDS. Many of the problems we're having right now are due to institutions writing contracts that they could never cover. Hence the bottomless pit of govt. funds called AIG.

I know the short term moves are Mr. Market aren't necessarily meaningful, but I think it's worth noting that WFC and GE are both off nearly 50% since the time we were having this discussion. If they were 50 cent dollars when FFH made their Q4 purchases, are they 25 cent dollars now? I remain long FFH, but am increasingly convinced that Prem made a bad decision to remove the hedges *and* add additional positions.

I still have never seen any characterization of how any of the TARP banks were forced to do anything. Yes I've seen suggestions of that in the papers, but I also remember reading that the sub-prime problems were "well contained". I've seen numerous times since TARP that the institutions are welcome to pay back the money any time, there is no early pre-payment penalty. So if they were forced to take the money, why don't they just pay it back?

Can't read the full article without a subscription. How does it say they were forced to buy Merrill? Was their banking charter going to be revoked if they didn't? Nobody was "forced" to take the original TARP money. They just didn't like the alternatives, as in having their capital ratios subject to immediate review.

How was BAC "forced" to buy Merrill?

Well if you're going to use the 29-32 timeframe as the barometer of 100 year events, don't you have to allow for the possibility that this once is just as severe? The Dow was off about 90% peak to trough. I think it is worth noting that 47-48 and 73-74 were just about 50% declines also, so with where we are right now we're seeing something that has happened 3 prior times in the past 100 years.

I'm amazed how many people on this board have so quickly given up on the notion that we're entering a 1 in 100 year storm as Prem said a while back. From a time point of view I think we're still closer to the beginning than the end. We are witnessing a global deleveraging, and many parties are just now beginning to realize the situation. Panic? This isn't panic, this is an orderly decline. October 1987, now that was panic. I think we need to have panic before we can start to consider recovery. A day with a big enough drop to cause trading to be halted would be a clue that we're getting there.

How does the call protect your FFH downside?

I think that approach makes a lot of sense, but isn't quite hedging for "calamity" as the OP wrote. I would think that if by some chance you were assigned all those shares, that your FFH calls could end up finishing OTM as well, just because it would reflect a decimation of the equity market. Throw a few OTM S&P puts into the mix, and I think you're well insured, without having to pay too much. I figure if you end up owning all those shares, S&P 500 would likely be coming into play, and you can still protect against that fairly cheaply. If you get real lucky, the strong survive while the rest of the market dives, and all those bets pay off ;D