Some housing bubble news from Wall Street and Washington. New York Times, "For all the pain in the mortgage market, investors who hold bonds backed by risky home loans have continued to receive their monthly interest payments — until now. Collateralized debt obligations — made up of bonds backed by thousands of subprime home loans — are starting to shut off cash payments to investors in lower-rated bonds as credit-rating agencies downgrade the securities they own, according to analysts and industry executives."

"'At this point, it’s fair to say that everybody expects this shoe will drop,' said Mark Adelson, an independent mortgage securities consultant and analyst. 'It’s a foregone conclusion. But when it happens, there will be a market reaction to it.'"

"Investment banks issued some $486 billion in debt obligations linked to mortgages in 2006 and the first half of 2007. In the last two weeks, leading investment banks have written down about $20 billion, much of it in collateralized debt obligations and mortgage-related securities."

"Most mortgage securities have not yet had significant losses, which are only recorded when homes are foreclosed and sold. Up to two years can pass between a borrower’s falling behind on payments and an auction."

"'As far as the security is concerned, it’s only once the property is effectively sold that a loss is recorded,' said Nicholas Weill, chief credit officer at Moody’s. 'The process of foreclosure is a long process. It doesn’t just happen overnight.'"

From Reuters. "Barclays and Royal Bank of Scotland have lined up emergency funds of up to $30 billion from the U.S. Federal Reserve to bail out American clients caught up in the global credit crunch, a paper said."

"The banks would have to put up assets as collateral with the Fed to gain access to the credit line, which has been set up as a contingency and may not need to be used at all, the report said."

From MarketWatch. "Royal Bank of Scotland is in exclusive talks to purchase the assets of Cheyne Finance, a structured investment vehicle, or SIV, that entered receivership last month, people familiar with the matter said Monday."

"It wasn't immediately clear how much RBS is offering for the assets. S&P marked all of Cheyne Finance's assets to 'D,' or default, said the book value of the portfolio is $6.19 billion plus $948 million in cash equivalents."

"On Wednesday, the vehicle stopped repaying its maturing debt after the receivers determined there had been an insolvency event. Two people familiar with the situation said junior capital noteholders would likely get nothing while mezzanine lenders will get some of their investment back."

The Wall Street Journal. "The real-estate slowdown that hit the U.S. is spreading to Europe. Home prices in some of Europe's hottest markets are falling after a decade of double-digit-percentage increases. The reasons resemble those across the Atlantic: higher interest rates, faltering confidence and tighter lending standards."

"'A year ago it was all, 'no problem,' but now they're making us jump through hoops,' said Iciar Caro, a 29-year-old school psychologist in Spain who can't find a bank to give her a mortgage on a €236,000 ($337,000) house in a northern suburb of Madrid."

"The housing boom was a global phenomenon, affecting virtually every developed country outside of Japan during the past 10 to 15 years."

"Tomas Gonzalez bought a spacious, three-bedroom apartment in downtown Madrid last fall, with help from his in-laws. He and his wife felt monthly payments of €800 on a 35-year, €200,000 loan were manageable."

"Now, the payments have risen €200 a month after the European Central Bank's gradual lifting of interest rates, which it began in 2005. Plus, the Gonzalezes fear their home is worth less than they paid for it. One set of neighbors have repeatedly cut the price of their home in a yearlong effort to sell."

"Mr. Gonzalez has stopped eating out and curtailed his purchases of books and music. 'We are trying to save something for the lean times ahead,' he said."

From Bloomberg. "Commerzbank AG, Germany's second- largest bank, dropped in Frankfurt trading after Chief Executive Officer Klaus-Peter Mueller warned of larger-than-expected losses related to U.S. subprime investments."

"Mueller told the Financial Times Deutschland that the original 80 million euros in provisions set aside for writedowns on 1.2 billion euros of subprime-linked investments 'won't be enough,' spokesman Peter Pietsch confirmed today. Analysts forecast subprime-related losses of 100 million euros to 450 million euros, according to M.M. Warburg's Andreas Plaesier."

From China Daily. "Autumn is usually the best time of year in Beijing, but for the city's property developers, the season may already feel like a chilly winter."

"After raising the down payment and mortgage rates for second home buyers on September 27, the government has now further tightened the screws on property developers by requiring them to pay land-use fees in a lump sum rather than in installments."

"'Developers before could get loans from banks once they acquired the first certificate. Sales from the first block were then used to finance the development of the remainder, which meant they could embark on several projects with limited capital,' says Peter Pan, CEO of Care Property Holdings."

"Insiders say it was a common practice for developers to postpone paying the government for rights acquired at high prices. Some even privately negotiated about the payment process."

"'In that case, most of the risks are transferred to financial institutions,' says Pan. 'Once one of the links goes wrong, banks may foot the bill.'"

The China Post. "Sweating in the bright afternoon sun, the men and women stand on the sides of the roads like homeless people clutching wrinkled cardboard signs. Waving the boards, the real estate agents call out to cars zooming by."

"'Come take a look.' 'You're welcome to visit.' 'Over here!'"

"Surrounding the agents in this upscale neighborhood are vast swaths of empty apartments that just a few months ago were selling at record high prices."

"China's central bank has raised interest rates five times this year and upped reserve requirements for commercial lenders eight times. 'What China is doing nowadays can be described as crossing a river by fumbling for stones. The Chinese government is in fact fumbling for the right path for Chinese economic development,' said Huo Deming, an economics professor at Peking University."

"An unusually high degree of risk-taking across asset classes made recent financial market turmoil all but inevitable, former Federal Reserve Chairman Alan Greenspan said on Sunday."

"'The financial crisis that erupted on August 9th was an accident waiting to happen,' Greenspan said in a speech on the sidelines of the International Monetary Fund and World Bank meetings. 'Credit spreads across all global asset classes had become suppressed to clearly unsustainable levels. Something had to give.'"

"'If the crisis had not been triggered by a mispricing of securitized U.S. subprime mortgages, it would eventually have erupted in some other sector or market,' Greenspan said."

"'Central banks around the world have essentially lost control over the markets beyond maybe three or four or five years out. In other words, there is no evidence that we at the Fed had the capability of affecting mortgage interest rates,' he said, noting that even when the U.S. central bank began raising rates in 2004, mortgage rates remained low."

From AFP. "'Credit spreads across all global asset classes had become compressed to clearly unsustainable levels,' Greenspan said."

"Greenspan noted that housing bubbles had emerged in nations throughout the globe where the Fed does not control interest rates."

"'If indeed, it is short-term interest rates that created the bubble in the US, what created the bubble' in Europe, Australia and other parts of the world, Greenspan asked."

"Former Federal Reserve Chairman Alan Greenspan said the dollar's depreciation may reflect growing unwillingness among foreigners to buy U.S. debt."

"'Obviously there is a limit to the extent that obligations to foreigners can reach,' Greenspan said. The dollar's decline to its lowest since 1997 may be 'an indication America is approaching this limit.'"

"Greenspan's warning came after the U.S. Treasury reported last week that international investors sold a record amount of U.S. financial assets in August. Total holdings of equities, notes and bonds fell a net $69.3 billion after an increase of $19.2 billion in July."

"The dollar has declined about 8 percent against the euro this year and 4 percent against the yen."

"Greenspan was critical last week of a plan by some of the U.S.'s biggest banks to help revive the asset-backed commercial paper market, which seized up because of investor concern that too much of the paper was backed by securities containing subprime loans."

"Greenspan was quoted as saying that he was unsure 'the benefits'' of the plan 'exceed the risks.'"

"'These peculiar financial structures that have become very prominent in the past four or five years are about to disappear from the scene,' Greenspan said, citing 'various variations' of collateralized debt obligations and 'special' investment vehicles as examples."

"'They have been tried and they have failed,' Greenspan said. 'The failure is the basic way that investors have been misled as to what the value of these products is.'"

"Greenspan questioned whether there was any longer a market for such 'peculiar' assets. He noted that demand for sales of debt backed by subprime mortgages has dried up."

"It pains me to say this, but this time Alan Greenspan is right about housing. His latest pronouncement, that the market rescue plan being pushed by Henry Paulson, the Treasury secretary, is likely to make things worse rather than better, looks all too accurate."

"Supposedly safe investments suddenly turned into junk bonds when the housing bubble burst. High profits reported by hedge funds...turn out to have been based on wishful thinking."

"Thus, when two hedge funds run by Ralph Cioffi of Bear Stearns imploded last summer, it came as a huge shock to many investors, and helped trigger a market panic. But a recent BusinessWeek report shows that the funds were a disaster waiting to happen. The funds borrowed huge amounts, and invested the proceeds in questionable mortgage-backed securities."

"Even worse, 'more than 60 percent of their net worth was tied up in exotic securities whose reported value was estimated by Cioffi’s own team.' We’re profitable because we say we are — just trust us. That hasn’t ever caused problems, has it?"

"Mr. Greenspan’s take, expressed in an interview with the magazine Emerging Markets, seems broadly similar. 'If you believe some form of artificial non-market force is propping up the market,' he said, 'you don’t believe the market price has exhausted itself.'"

"Translated: this rescue scheme could be seen as an attempt to hide the bad debts everyone knows are out there, and as a result could delay any return of trust to the markets."

"Bankers remain wary of plans to launch a massive investment rescue fund to soften the blow of the U.S. subprime meltdown, saying it could interfere with a market recovery and stall a resolution to the credit crisis."

"'It might be better to let the markets work it out. Trading platforms like that are always a difficult task,' Carl Stalberg, executive chairman of Swedbank, told Reuters on the sidelines of a banking conference."

"Despite the U.S. government's active role in seeking support for the plan, many bankers and investors remain cautious, with some saying they have nothing to gain by participating."

"'Markets are rather suspicious about that policy. It could interfere with the market mechanism and introduce biases,' said Olivier Garnier, deputy general manager at Societe Generale Asset Management."

"The scope of the losses won't be clear until buyers regain confidence, he said, and then the holders of the assets will likely have to face up to losses."

"'Once liquidity returns and impaired assets can be marked to market, some investors or financial institutions will see the true losses and will be forced to sell and deleverage further,' Garnier said."

"The markets from some complex derivatives remain broken and may recover only gradually, said Randall Kroszner, a governor of Federal Reserve Board on Monday."

"'I would suggest that....the recovery may be a relatively gradual process and these markets may not look the same when they re-emerge,' Kroszner said in a speech to the Institute of International Bankers."

"Trading in some derivatives, such as collateralized loan obligations, or CLOs, and collateralized debt obligations, known as CDOs, has ground to a virtual halt since August."

"Kroszner said these markets broke down because investors didn't do sufficient due diligence and the products were complex and opaque. 'Put simply, investors suddenly realized that they were much less informed than they originally thought,' Kroszner said."