Credit crunch, crunch, crunch

http://www.theglobeandmail.com/servlet/story/RTGAM.20071123.wrfairfaxmarket23/BNStory/Business/

I just like Prem Watsa's clear talk on all this subprime fiasco: "If I'm an investor, why would I ever buy something where the credit decision has been delegated?"
Almost makes me want to buy FFH... almost.

But I guess I'm not quite as bearish as Mr Watsa, or Mr Minyan, (or Mr. Lam?) ;)
Don't hold your breath waiting for some bank to go belly-up. The whole point of CDO's is to spread the risk to any and all institutions willing to take on the risk for yield. So the loans are off the lenders' balance sheets, and the loses are spread around everywhere, from BNP Paribas to HSBC to Northern rock, etc. So unless some bank has been blatantly ignored their BaselII requirements and putting all their eggs in these SIVs, I highly doubt any big bank will go down.
Unfortunately, the ratings agencies were too cozy with the makers of the products which put them in a position of conflict. There will be a shakeup the ratings agencies, and the way they price the structured products, if the market still exists going forward.

Yes, liquidity has dried up for structured products which makes valuations difficult, but it doesn't mean they are worthless. Foreclosed mortgages are backed real/hard assets: the homes. Yes, there is a US housing slump but the homes are not worth $0. I heard Gerry at Onex has hired 3 really, really smart guys in distressed debt to value and buy these assets. (also, he needs something to do since private equity has dried up too.) Almost makes me want to buy Onex... almost.

I believe the Economist estimated that the size of sub-prime mortgage business was about $450Bil with losses of about $150Bil. By my rough calc, the market cap of US banks which make up the S&P Financials total $2000Bil, after a drop of 25% from the summer. That means roughly $660Bil of market cap has been wiped out in the US banks. So including all the banks around the world, that's at least $1Trillion in market cap wiped out in the past 3months. Now this doesn't take into account the credit contagion and the costs of a recession (which is much higher) but $1Trillion is alot of market cap down the drain for a one time (non-recurring) loss.
So if you accept my premise that the value of a company is the NPV of all future earnings, then this is an over-reaction.
The one thing that always makes me suspicious about permabears like Minyan and Watsa is they say this downward spiral is going to last 15years, without giving the precise reasons why. In down markets like this, I always recall the wisdom of W. Buffet "... through 2 world wars, a great depression, Vietnam, OPEC oil embargo, stagflation, junk bonds, hyperinflation etc. the market has perservered..." to generate significant economic returns. Is it "different this time"?

If there's anything harder than picking the bottom, it must be predicting the shape of the bottom! :) I have no idea whether it's going to be a V, U or W, but by my rough calcs, I see significantly better than market returns in 1 year time frame for XLF. The bears have already missed a 8% bounce in the past two days, I suggest we buy on weakness in the coming days.