Mod Note (Andy): #TBT Throwback Thursday - this was originally posted in August 2007 and it's scary how accurate @bondarb" was in predicting what was to come next:
bondarb...it is very possible that a big name like Bear or Lehman could flat go out of business like Drexel Burnham did in 1990.
I used to post here fairly often but haven't been here in awhile and popped in to see what was going on. The first thing that jumps off the screen is that this board generally is somewhat delusional about how bad things are currently getting at major broker/dealers and banks. To qualify myself, I am a prop trader at a large, top-tier bank (and our group is having a great year so I'm not saying this b/c I am specifically in danger). Let me just educate you guys about what is actually going on, department by department...
Sales/Trading: The structured products that have provided fat margins for dealers have stopped trading. They are sitting on the balance sheets of banks marked at levels that do not reflect reality awaiting painful mark-downs. CDO, MBS, etc. "traders" are literally sitting around surfing the internet all day. Now that buy-side clients have seen how illiquid these products become in times of stress it is unlikely they will return for years if at all. The profitable business of structured products is in for a large contraction. The hedge funds that used to buy these products are going out of business at a rate of several per day as the underlying collateral for many of these products is rapidly becoming worthless. It is only a matter of time before banks make large cuts and realize massive losses. Some suspect that the losses banks like Bear, Lehman, Goldman, RBS, etc. will face may be in the billions just on mis-marked structured products.
Asset Management/Prop Trading/Hedge Funds, etc.: The vast majority of buy-side traders have never lived through a period of high volatility and therefore the vast majority of buy-siders were caught off guard by this spike in volatility. Young geniuses and former "masters of the universe" are proving to be nothing more then glorified volatility sellers. Rumors fly constantly about massive losses at bulge bracket banks like Lehman and Goldman and of course hedge fund blow-ups are an every day occurrence. The entire model of hedge funds that trade structured products is being called into question as investors now realize that managers basically can invent their P&L month to month for years at a time. Many people think that the number of hedge funds could easily be cut in half as the "hedge fund bubble" deflates.
Private Equity: The cost of financing just went from non-existent to impossibly high in a matter of weeks as the high yield debt market is totally shut down. Deals that were already agreed upon like TXU, First Data, etc. are being called into question, pushed back or revised. The stock market prices a 50% chance that they won't get done at all. Banks that used to provide bride financing for deals are now stuck with massive portfolios of leveraged loans that they cannot sell. They will not take this risk again for a long time, making deals much harder to do. One could argue that the PE bubble is just as big as the hedge fund bubble and this industry also could contract very quickly. Worse, the PE guys are very young and have no clue how bad things are on the sell-side and so they think nothing is wrong and the game will be back on once they get back from summer vacation.
Investment Banking/M&A: See PE. No M&A activity can happen with the debt markets seized up. When will debt markets return to normal? Estimates range from "whenever the Fed eases" to "the fall" to "not for a long, long time".
Prime Brokerage: See hedge funds. The P.B. business will contract in tandem with the hedge fund business. An added problem is that many prime brokerage units have massive exposure to some of their hedge fund clients that are rapidly dissolving. Rumors are rife about massive losses at large PB's like Bear and Goldman.
...More generally, I think you guys are about to enter a very tough job market. Analysts have yet to be fired but history says analysts get axed when things get like this. In '94 it is said that Goldman axed 85% of their analyst class. I think that along with much of Wall St. you guys don't get how bad things are getting...it is very possible that a big name like Bear or Lehman could flat go out of business like Drexel Burnham did in 1990.
I think that in three months economic growth will have slowed substantially and the consensous view will be that we are headed for recession. I could write all night about why but the bottom line is that I think we are seeing a huge credit bubble deflate and when credit contracts rapidly it almost always ends in a reccession.
...man its hard to believe this post was five years ago...well im still in there swinging and a part of me is nostalgic for the chaos that was late 2007-early 2009. And no I wasnt particularly smart in realizing this, there were many many people who knew this story very very well....unfortunatelty many of the ones who knew it best never made any money on it b/c they lost their jobs waiting for it to occur in 2006-early 2007.
Most of you are so young you don't realize how amazing this post actually is....truly a bold call that was nearly 100% correct. Given the degree of confidence presented, I'm sure a lot of money was made by OP. This post should have the highest SB count in the history of the site. Throw some bananas you cheap fucks.
Slow clap....
Bravo.
This is incredible. SB'ed a whole bunch of posts and making sure to pay attention when Bondarb speaks.
Things I have been keeping an eye on - Small business lending. Fintech companies that are lending to Small Biz and securitizing the loans then flipping to investment firms immediately. Overnight loan approval, high interest rates, no collateral. Big expansion in this area in the last ten years. Not comparable to the housing market because the players are different but I've spoken with regional lenders who tell me the people taking advantage of these loans would never get approved at a bank.
Housing market. This might be contrarian since it's been exploding but as someone who is a member of the millennial generation, very few people have savings. Rent in big cities is high and people are generally dumb with their money, across the board. Articles keep popping up about how millennials "prefer experiences to things", which is an arrogant way of saying "I can't afford a house or a new car because I spend 30% of my paycheck on nightlife, paint parties and wine openers from Amazon with cute sayings on them". Obviously there are exceptions, but I'm seeing a lot of my peers making $1000 student loan payments, $400 car payments, $150 gym payments, $1500 rent, etc etc etc. I'm also seeing people who live at home buying $40k cars and going to the bar 5 nights a week. I'm anticipating this lack of savings will take a toll on the housing market in 5 years or so, but I am not sure. It could be a situation where investors make a fortune because everyone lives paycheck to paycheck and rents instead of buying, but this lack of savings and discipline is going to show up somewhere.
Shipping and Logistics. The average age of a long haul truck driver is something close to 60, and no new blood is filling out the bottom. If driver-less cars become a reality in time, the slack might never need picking up, but there is an imbalance in that arena so someone is going to win, and someone is going to lose. Intermodal logistics is a big business, and a driver shortage creates a bottleneck. Train shipments have been growing, DHL/CSX, Buffet has huge bets on railroads (he owns Burlington Northern). If the demand for drivers exceeds capacity, margins are going to compress for any business reliant on traditional distribution, especially these new subscription mail order businesses that keep popping up. We will see who loves their dog enough to spend $100 a month for a Bark Box. A lot of companies have the balance sheet to eat these costs or inelastic demand that can withstand price delta, so this could become a merger arbitrage situation where small fry companies get bought on the cheap, but it's worth paying attention to.
Maybe I'm just a pessimist.