Some housing bubble news from Wall Street and Washington. BBC News, "Bear Stearns has posted its first quarterly loss in the company's history, as bets on risky sub-prime mortgages in the US turned sour. It revealed it had written down $1.9bn in the period due to these woes. This was more than the $1.2bn it had earlier suggested, and reflected the reduced value of its sub-prime mortgage-related securities."

The Associated Press. "'We are obviously upset with our 2007 results,' said CEO Jimmy Cayne."

"Bear Stearns' fiscal fourth-quarter loss, and collapse of two hedge funds it managed during the summer, prompted Cayne to pass on his 2007 bonus. Members of the company's executive committee also will not receive year-end bonuses."

"Bear Stearns has undergone three waves of layoffs since two hedge funds it controlled collapsed during the summer. Some 1,500 jobs have been eliminated from its staff of around 15,500. The company, one of the nation's biggest underwriters of mortgage-backed bonds, may be the Wall Street investment bank most directly exposed to this year's credit squeeze."

"It faces a number of legal actions related to the funds' collapse, including a suit filed by investor Barclays PLC."

The Business. "Barclays has accused beleaguered investment bank Bear Stearns of using one of its two collapsed sub-prime hedge funds as places to offload troubled assets. The British bank called the funds' combined $1.6bn collapse 'one of the most high-profile and shocking hedge-fund failures of the past decade.'"

"In one of its harshest criticisms, Barclays accuses Bear Stearns of using one of the funds as a place to 'unload excessively risky or troubled assets' that it could not sell on to other investors."

Dow Jones Newswires. "SunTrust Banks Inc. disclosed plans to buy $1.4 billion in securities Thursday held by two of its structured investment vehicles to prevent investor losses in 'this unique environment.'"

"On the operating side, SunTrust anticipates $170 million net charge-offs on loans for the fourth quarter, with the loan-loss provision exceeding that by $ 190 million. As a result, loan-loan reserves are seen making up 1.06% of loans. The company's net charge-off rate is seen rising to about 0.56% from the third quarter's 0.34%."

The Ottawa Business Journal. "Canadian Imperial Bank of Commerce is warning that it may have to take another $2-billion charge related to its U.S. subprime investments in its first quarter."

"'Although CIBC believes it is premature to predict the outcome, CIBC believes there is a reasonably high probability that it will incur a large charge in its financial results for the first quarter ending Jan. 31, 2008,' the bank's statement read."

"The announcement came after news that Standard and Poor had reduced the credit rating of bond insurer ACA Financial Guaranty Corp – a hedge counterparty to Toronto-based CIBC – from 'A' to 'CCC.'"

"CIBC said ACA's insurance on subprime holdings was worth about $2 billion as of Nov. 30, and that it has hedged about $3.5 billion of its U.S. subprime real estate exposure with the New York-based company."

"'It is not known whether ACA will continue as a viable counterparty to CIBC,' the bank said."

From Reuters. "One analyst said a $2 billion charge likely isn't enough to clear CIBC's subprime exposure, which is held via complicated structured finance deals called collateralized debt obligations, most of which are hedged."

"'There was a collective sigh across (financial centers) Toronto and Montreal, but it wasn't a sigh of relief,' when CIBC's statement came out, said Genuity Capital Markets analyst Mario Mendonca."

"'It is unfortunate that the bank has decided to bleed that out. They should take a charge so that most investors will say it really can't be any larger than that,' Mendonca told Reuters."

"The New York Times reported on Wednesday that Merrill Lynch & Co Inc, Bear Stearns Co Inc and other large banks were in talks about bailing out ACA, citing two people briefed on the situation."

"But Mendonca said that even if ACA is bailed out, those who it owed money would have to 'suck up some loss.' 'To say a bailout would reduce the possibility that CIBC would lose money is very simplistic,' he said."

"CIBC, with some $11 billion tied to subprime mortgages, has by far the largest exposure to this market of Canada's banks."

The New York Times. "Citing deepening problems in the mortgage market, Standard & Poor’s cut the rating of one troubled bond insurer on Wednesday and assigned a negative outlook to four other companies that guarantee debts linked to home loans."

"S.& P. affirmed AAA ratings for MBIA, Ambac, XL Capital and Financial Guaranty Insurance, but assigned a negative outlook to them. And it left unchanged the ratings of five other bond insurers."

"ACA has insured about $26 billion in mortgage-related collateralized debt obligations, some of them considered at high risk of loss as more homeowners fall behind on payments and end up in foreclosure."

"Derrick Wulf, a portfolio manager at Dwight Asset Management, said investors were trying to price bonds assuming that the insurance on them was worthless. 'Given the fact that so much depends on what the ratings agencies ultimately decide, which can be very difficult for investors to forecast,' he said, 'there isn’t a heck of a lot of trading.'"

From Bloomberg. "MBIA Inc. tumbled the most since 1987, and the risk of default soared after the world's biggest bond insurer revealed that it guarantees $8.1 billion of collateralized debt obligations repackaging other CDOs and securities linked to subprime mortgages."

"'We are shocked management withheld this information for as long as it did,' Ken Zerbe, an analyst with Morgan Stanley in New York, wrote in a report. 'MBIA simply did not disclose arguably the riskiest parts of its CDO portfolio to investors.'"

"'How is confidence expected to return to the capital markets when these types of surprises continue to pop up?' said Peter Plaut, an analyst at New York-based hedge fund manager Sanno Point Capital Management."

"MBIA said its total exposure to bonds backed by mortgages and collateralized debt obligations is about $30.61 billion. Included in that exposure is a pool of about $8.14 billion in CDOs backed by a combination of other CDOs and mortgages, which some analysts consider the riskiest part of an investment portfolio."

"Fitch Ratings on Thursday changed its outlook on Bank of America Corp to negative from stable, indicating that a downgrade is more likely in the next one to two years."

"The change in Bank of America's outlook 'reflects the fact that (its) earnings have a significant level of sensitivity to trends in the deteriorating residential mortgage market,' Fitch said in a news release."

"Moody's Investors Service on Wednesday cut its rating for home builders D.R. Horton Inc and Ryland Group Inc to junk status, citing persistent troubles in the U.S. housing market."

"'Moody's does not see a sector recovery beginning before well into 2009 at the earliest, with any housing recovery likely to be very measured for some time thereafter,' the bond-ratings firm said in a news release."

"The size of the U.S. commercial paper market suffered its biggest weekly shrinkage since late August, after credit market turmoil first erupted, the Federal Reserve reported on Thursday."

"The overall U.S. commercial paper sector shrank $54.7 billion to a total $1.784 trillion outstanding in the week ended Dec. 19; a development that was likely to increase concerns that strains in short term lending markets are intensifying at year end."

"The U.S. asset-backed commercial paper market, which has been hard hit by its exposure to subprime mortgage securities gone bad in the U.S. housing slide, shrank for a 19th straight week."

"The asset-backed commercial paper segment, which had once helped to fuel the housing boom, fell $27.5 billion to $763.5 billion following last week's $10.3 billion fall. The size of the ABCP market is the smallest since August 2005."

"As storm clouds gathered over New York on July 10, Standard & Poor's started a 10 a.m. conference call to discuss why the credit rating company was about to take its most dramatic action in more than two years."

"S&P analysts said they might cut ratings on $12 billion of the world's worst-performing subprime mortgage bonds, some of them less than a year after they had been given investment-grade designations."

"Blessed by the biggest credit rating companies as safe investments, these instruments offered higher returns than government bonds with the same ratings. Investment banks including Bear Stearns Cos., Deutsche Bank AG and Lehman Brothers Holdings Inc. sold $1.2 trillion of these securities in 2005 and 2006, said Brian Bethune, director of financial economics for Global Insight Inc."

"None of this could have happened without the participation of Wall Street's three biggest arbiters of credit -- Moody's Investors Service, S&P and Fitch Ratings. About 80 percent of the securities carried AAA ratings, the same designation given to U.S. Treasury bonds."

"'The rating agencies had an almost God-like status in the eyes of some investors,' says Sylvain Raynes, a former Moody's analyst. 'Now, that trust is gone. It's been replaced with a feeling of betrayal.'"

"Many institutional investors' own rules, in addition to state or national laws, bar them from buying securities that don't carry investment-grade ratings."

"Issuers got guidance from rating companies on how to shape their subprime securities to win the ratings, says Joshua Rosner, managing director of the New York-based research firm Graham Fisher & Co. Investment banks used software distributed by the ratings companies to show them how to meet the requirements, then paid the companies to have the securities rated, he says."

"'The idea that the rating agencies are impartial in the world of structured finance is a joke,' Rosner says. 'The issuers use the publicly available model to structure a pool and then sit down with the rating agencies to fine-tune it until they reach the desired rating.'"

"One $720 million loan pool created by Tokyo-based Nomura Holdings Inc. was rated Baa3, an investment-grade rating, by Moody's when issued in 2006. Now, it's rated Caa1, seven levels deep into junk-bond territory, and priced at 32 percent of the original value after 29 percent of the mortgages defaulted."

"Almost 40 percent of the loans in the pool were originated by Costa Mesa, California-based Quick Loan Funding, run by Daniel Sadek, a broker who started the subprime company in 2002 with the motto: 'You can't wait. We won't let you.'"

"In coming months, subprime losses will reach into almost every home in the U.S. as pension funds reveal setbacks, the former Moody's analyst Raynes says. 'The smallest investor, not Wall Street, is the one who will pay the ultimate price because he trusted the fund managers who blindly followed the rating agencies,' Raynes says."

"Jose Sepulveda worked 34 years as a reading teacher and elementary school principal in southern Texas towns along the banks of the Rio Grande. Now retired, he says he thought he was as far as he could be from the mortgage crisis roiling markets in New York, London and Tokyo."

"He wasn't far enough. The Austin-based Teacher Retirement System of Texas, the manager of Sepulveda's retirement money, holds $6 billion of securities backed by assets that include subprime mortgages, most of it rated AAA, according to a report on the fund's Web site."

"'How could anyone think that investments backed by subprime loans were safe?' Sepulveda says."

The Kansas City Star. "Media coverage of housing trends often gives the impression that the market is worse off than it really is, according to the chief economist for the National Association of Realtors."

"Lawrence Yun, in presentations Wednesday to Kansas City area real estate agents, said the media’s biggest mistake was too much reporting on nationwide real estate trends. National trends alone, he said, don’t apply to many parts of the country, and reporting of them usually lacks perspective."

"For instance, Yun reported that the national median (or midpoint) home price this year was on its way to its first overall decline since the Depression. Already, he said, the media drumbeat is repeating the word 'depression,' thus depressing consumer confidence and keeping potential homebuyers out of the market."

"Yun noted a recent newspaper article about the high level of foreclosures in Ohio."

"'People read it and think the situation here is the same as there,' Yun said. 'All real estate is local, and what’s occurring nationally, particularly on the coasts, may not be indicative of what’s happening locally.'"

"Metropolitan Kansas City, he said, has never seen the extreme ups and downs of coastal markets, and the median price decline in the area this year is 'marginal.'"
"He also sought to disprove some forecasts calling for home prices to continue falling nationally next year. He suggested that such predictions were based on a widening gap between fast-rising home prices and slower-rising incomes."

"To Yun, though, that widening gap is misleading because mortgage rates have fallen over time, so the same income today buys more house than in the past."