As someone who has 60% of their assets in SKF, I thought the margin call was great. I hope it happens to more banks, and it most likely will.

you have 60% of your assets in a levered short on financials? you are essentially 120% short financials. that takes stones. are you long anything to offset it?

Everything you said is true except its not JP Morgan's fault. They aren't the ones creating the current liquidity crisis. They are not setting the 'marks' forcing them into margin call territory. The market is determining what the 'fair value' is, even if it might be irrational (based on future cash flows of the mortgages and default risk/asset recovery value). Basically, they are throwing the baby out with the bath water. There are plenty of tranches of even subprime debt that will be made whole once this thing is sorted out. Its a very bad situation though, the credit markets have completely turned off. I'm an insitutional money manager but I only deal with equities and am very limited in my knowledge of financials in general. Most of them are 'black boxes' that have all sorts of things on their balance sheet that not even the CFO of the company can tell you with certainty what 'fair value' might be in 6 months. Thornburg is a perfect example...they paid a dividend just in december after previously shelving it. They would never have reinstituted the dividend if they thought they were going to be facing margin calls.

I agree with you though, they were one of the responsible ones and are suffering badly from a rush to the exits throughout all asset classes - not just mortgage backed securities. Look at the stock market today.

Is anyone/anything forcing JP Morgan to use mark-to-market accounting?

I wouldn't say the market determines fair value--all it determines is what people are currently willing to pay for it. The other problem is, a Thornburg security, because of its higher quality mortgages, might be worth more than a different lender's security, but mark to market ties the value of TMA's security to what other lenders' securities are selling for. It's absurd. JPM are really coming off as opportunists right now, and judging by the drop in stock prices across the board in finance, they're doing more harm than good by issuing the margin calls.

I wouldn't be shorting financials too much longer.

I was going to wait for the market to get to 11,000 before I started investing again, but it almost seems like everything is already priced into the markets.

Financials could go lower, but they have taken a SEVERE hit. And some people are starting to say that it was too much of a hit.

If I had hedged at the top, I would definitely feel comfortable getting out of that position now. They're not going to go down forever.

I don't think the financials have taken too much of a hit. It'd be much worse if the bond rating agencies weren't such a fraud and did their jobs.

Is there a "that went completely over my head" emoticon?

Thornburg's Double Double
By Morgan Housel March 13, 2008

3
Recommendations


Real investors rarely take daily stock movements seriously. What a stock does from day to day, month to month, even year to year, is at the mercy of emotional investors with serious short-term vision problems. Rationality is sometimes thrown out the window.

But this week, Thornburg Mortgage (NYSE: TMA) quadrupled in price, essentially doubling in value in two separate trading sessions. This is a big, big deal and a serious move for a company like Thornburg, with a market cap approaching $500 million. This isn't a Vegas-style penny stock.

What lies behind the two-day super surge?

The good, the bad, the worse
Thornburg is a good company focused on a horrible product in an even uglier industry -- jumbo mortgages (greater than $417,000) that can't be sold to Fannie Mae (NYSE: FNM) or Freddie Mac (NYSE: FRE).

Although it deals with products that, as we've seen lately, haven't held their merit, Thornburg claims it has done well over the years, considering the clients it dealt with, at keeping loans as conservative as possible. In a housing market that seems to crater deeper by the day, Thornburg says the credit performance of its loans ranks among the best in the industry.

Nonetheless, Thornburg relies on two factors outside its control: leverage from other financial institutions and a debt market gone haywire trying to provide market prices on its investments. As the market for anything that smelled like mortgage products came to a halt, the value of Thornburg's assets -- quality aside -- came crashing down. And since it used leverage to finance those assets, Thornburg's bankers lined up at the door demanding their money back.

Thornburg has a hard time selling its assets in the open market to raise cash -- the market for mortgage-backed securities has been in hibernation for months. The situation amounts to screaming "Fire!" in a crowded theater: Decent quality assets, no market to sell them in, and crowds of bankers with their hands out. Did I hear someone humming Taps?

As time ran out and margin calls couldn't be met, the rumors started about that word that makes every struggling company tremble: bankruptcy.

Do I hear the cavalry? All that changed Tuesday when the Federal Reserve agreed to take on $200 billion in mortgage debt, adding liquidity to a frozen debt market. That changes everything for Thornburg. If it can begin selling assets, it shouldn't have a problem raising ample cash to shore up its balance sheet and meet margin calls from JPMorgan (NYSE: JPM) and Morgan Stanley (NYSE: MS), among others. Stand down, grim reaper.

Cats aren't the only ones with nine lives
In any market shakeout, the strongest of the strong survive and perform well in the ensuing less-competitive market. Amazon.com and eBay proved the strength of their business models after the dot-com bust, going on to dominate a market cluttered with gravestones.

This credit crunch is likely far from over, but looking into who might make it out alive is a good idea. With the recent change of events, Thornburg could make that list.

Of course, Thornburg has a way to go. On Tuesday, it restated fourth-quarter net income, reversing what was once $0.33 per share in earnings into a loss of $4.74 per share. That's a pretty hefty about-face, and highlights just how out of whack the mortgage industry has become.

Truth be told, the recent turmoil will make a sizable dent in Thornburg's ability to create shareholder value. Being forced to sell assets at a serious discount will certainly hamper its future earnings power. Even after the market recovers, it will likely be drastically smaller in years to come.

A new shot at life
But with Fed chief Ben Bernanke now on its side, Thornburg will likely live to see another day. With shares still sitting about 70% below where they started the year -- even before today's dip -- there's still room for big gains in time.

Thornburg has dodged serious bullets in the past few days. It, and other conservative mortgage players such as Annaly Capital (NYSE: NLY), now have a new shot. For once, at last, good news in an industry loaded with fear.

Is there a "that went completely over my head" emoticon?

I didn't get most of that either. I have found that finance people, like sociologists, like to make up complicated terms to explain simple things so that they sound smarter than they actually is. Basically, Wall Street has made billions selling the anticipated profit from things like adjustable rate mortgages by packing large groups of them together and selling that grouping. That investor then packaged a bunch of those groupings together and sold that someone else by contract. This process can be repeated several times. Now that the real value of the original asset, the mortgages, is in trouble, investors and banks are starting to wonder just how these groupings of groupings of assets are worth, but since the whole thing is like a game of telephone, and not really regulated, no one is sure what the real value is or how much investors and traders are owed by the various contracts.

When they talk about shorting financials, they mean that they have bought the right to sell someone a stock at a particular price based on the idea that in the future the price of stocks in the finance industry will drop and they can make a profit when actually perform the selling transaction.

Or at least that what I think it means.