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angusthermopylae (37.59)

Destroying Money



September 09, 2008 – Comments (11) | RELATED TICKERS: WAMUQ.DL , C , FNMA

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

   Citigroup:   $1,403,416,001

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

  Citigroup:   $60,224,045.94

Do you see that, class?  Washington Mutual lost over $600 million in a single dayCitigroup 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 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.

11 Comments – Post Your Own

#1) On September 09, 2008 at 1:50 AM, angusthermopylae (37.59) wrote:

sorry--the 3rd paragraph from the end, it should say "...a lot of people aren't going to be able to retire..."

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#2) On September 09, 2008 at 4:22 AM, jester112358 (28.17) wrote:

Absolutely great post and analysis.  And treasuries are back by the full faith and taxing power of the US government.  How much longer will that faith hold?

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#3) On September 09, 2008 at 10:37 AM, alstry (< 20) wrote:

Ding Ding Ding!!!!!!

You get it.

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#4) On September 09, 2008 at 11:46 AM, rd80 (96.52) wrote:

Good post.

I think the 'Washington Mutual Investors Fund' is a mutual fund not affiliated with WaMu.  Even if it was, it's FNM losses would be to the share holders of the fund, not WM.  Regardless, the point about intertwined holdings is well made.

The tougher piece to track down is info on who holds how much FNM and FRE preferred and how big a hit they're taking.  WFC announced a write down related to their preferred holdings.  Haven't seen any other announcements, but I'm sure they're out there or coming.

I read where Treasury is concerned about mark downs in FNM and FRE preferred pushing some banks below well capitalized but don't have a link handy.

Very good point about pension funds taking a hit from this.  Suspect we'll see more stories like the hit Legg Mason Value Trust took in the days ahead.  The major holders lists read like a who's who of mutual funds and institutional investors.

Thanks for your comment on my blog.  I decided to jump in the deep end with a small position in Fannie at 86 cents. 

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#5) On September 09, 2008 at 12:31 PM, LordZ wrote:


Faith is the bottom line

When CEO are able to walk on water and turn water into wine.

thats the company to invest ahemn

put your faith into


Is there a money heaven ???

or is it a hell ???


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#6) On September 09, 2008 at 4:06 PM, angusthermopylae (37.59) wrote:


Egg on my face--I agree that Washington Mutual Investors Fund is not part of WAMU.

I should have done the due diligence to check that--they would have made a better example of the mutual fund/pension plan problems.

Notice that Citigroup is hurting today...hmmm....

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#7) On September 11, 2008 at 12:24 PM, mycasino (< 20) wrote:

Questions teach?  Why not let the "market" take care of businesses that are in demise, especially the biggies with major liquidity to pay off debt and who ever?

Who is the next big business the government is going to bail out or take over? Do we have that much faith in the government and not the market? 


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#8) On September 11, 2008 at 2:36 PM, cdp3416 (42.29) wrote:

Those companies are lining up, empty pockets turned out and hands reached forward as they ask the kind, benevolent Uncle Sam for a handout.

 Why look it is GM, Ford, the Airline Gang, and those mischievious Lehman Brothers

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#9) On September 13, 2008 at 6:45 PM, angusthermopylae (37.59) wrote:


Personally, the problem with "just letting the [market or government] take care of business" is this:  Both sides have opposing short-term goals.

Think of it this way:  The Government's short term goal is to keep the people happy...the largest number of people.  As long as there aren't news stories a la Enron with thousands jobless and old people eating cat food, then the Government is doing it's job.

On the other hand, the members of the Market want to stay in business.  Screw those retirees and employees!  As long as my company is (more or less) intact, we can continue onward and start making money again.

(Note that, at heart, both goals are about survival.  If too many people are unhappy, the incumbent office holders do not "survive"--they are voted out.  If a business can't stay afloat, it "dies" also.)

But that's why the current situation is so screwy and sensitive:  The symptom is that businesses are going under.  The first cause of this symptom is weakness in the financial sector.  That weakness is so pervasive that, like mountain climbers tied to each other, if one goes he's going to take a few others down.

However...and here's where Government has a can't save everyone.  Their resources are limited, and if they save the wrong company early, they won't be able to help someone whose demise will really bring the whole financial sector down...

Hmmm.....which makes me suddenly start wondering who else is in big trouble that no one else knows about.

Any suggestions, people?

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#10) On September 17, 2008 at 12:02 PM, f3ihoty47gn9 (25.81) wrote:

Well considering that so far there's been the (half or total) failure of:

 - CFC (do you remember them? Mozilo etc)

- fannie & freddie

- Most of the major US banks

- Nearly all of the public builders

- The largest insurance company

  There isn't really much left to shake the investors' confidence :D

I think after this week the panic has really spread and it's becoming time for shopping..particularly in totally unrelated markets like brazil (SBS for example: why should a company that sells water in Brazil lose 30% market share?)

Institutions are capitulating and selling totally unrelated assets for liquidity and that's what the small guy should be waiting for: inefficiency

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#11) On September 17, 2008 at 10:55 PM, TMFDiogenes (91.68) wrote:

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...)



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