In my last post, I went over a very, very basic lesson in how money is made--created basically out of thin air by bank practices.
Today, class, we have an case study in how money is destroyed. Vaporized. Blasted with that ol' Star Trek phaser which leaves nothing behind but a greasy residue and a deep sense of shame.
Yes, I know everyone and their brother is talking about Fannie Mae and Freddie Mac. But let's put a little back-of-the-envelope work to figure out exactly what the damage is to the major players.
For our work, we're going to be taking the data from here and here. And the two subjects of our investigation are Washington Mutual and Citigroup.
According to Yahoo! Finance, WM and C had the following holdings (...I know, there are subdivisions and groups and lions and tigers and bears....but they mostly answer to the same bosses who sweat the bottom line for everyone.) as of June, 2008:
Invested in FNM:
-- Washington Mutual Investors Fund: 25,572,700 shares valued at $498,923,377
--Citigroup Inc: 47,593,082 shares valued at $928,541,029
Invested in FRE:
--Washington Mutual Investors Fund: 7,807,900 shares valued at $128,049,560
--Citigroup Inc: 28,955,791 shares valued at $474,874,972
Break out those envelopes, Oh Best Beloved; it's time to do some adding. (We'll get to the subtraction in a moment)
As of June, just over a month ago, both companies had the following total value tied up in FRE and FNM:
Washington Mutual: $626,972,937
That's a lot of dough! But let's plug in the value at today's closing price of $0.73 for FNM and $0.88 for FRE.
Washington Mutual: $25,539,023
Do you see that, class? Washington Mutual lost over $600 million in a single day! Citigroup lost almost $1.3 billion!!!!!
Is there any other way to express how badly this hit them? How about these little tidbits:
--Citigroup just lost about 38% of their net income for 2007...in a single day!
--Washingtom Mutual was operating at a loss already for 2007, so how about this: They lost an amount equal to 8% of their total market cap.
Where's the money? *poof* It's gone. Some of it disappeared into other people's pockets; they sold, WAMU and Citi were left stuck with their shares. Most, however, has pretty much evaporated. As far as total assets on the books, that value is gone forever.
(This, of course, is going on the assumption that major shareholders can't just up and sell like a day trader. On the other hand, we'll see if anything fishy...*ahem*..."interesting" comes up in the next quarterly report.)
Even more importantly, they weren't the only (or even biggest) shareholders. I don't even know who Capital Research Global Investors is, but, whoever they are, they are probably dowing antacid like Christmas candy. (Hmmm....who makes Prilosec and Rol-aids? Maybe they'll get a short term bump...)
State and corporate retirement funds, individual investors. All of these folks have taken a huge hit. Enron was important because of something along the same lines: People were left holding the bag with worthless stock.
Yes, they could hold on (or even double-down) and try to make money from a future rise in price. But we here at CAPS call that foolish, not Foolish, investing, right?
And there, my Beloved Students, is the corollary to making money: Losing Money. Market values are determined by lots of things, but one of the primary influences is faith. Faith that the stock is worth it. It can be backed up by research, analysis, guru-speak, or even eyewitness accounts. Heck, you could even throw in astrology and reading chicken livers. But in the end, it's the belief that a thing has value that gives it that value. Especially in the stock market.
That belief was dealt a major blow, and now it's a matter of time to wait and see how it plays out. It might be good in the end. "Too big to fail" (or allow to) is something the history books will have to judge. In the mean time, a lot of people are going to be able to retire when they thought they should. A lot of state pension funds are going to have to be re-worked. A lot of taxes that might have been paid won't be.
And a lot of companies and investors who are celebrating this masterful stroke by the government are going to be gnashing their teeth come quarterly report time.
Thus endeth the lesson. Papers are due by the Friday next week.