Some housing bubble news from Wall Street and Washington. MarketWatch, "Hovnanian Enterprises Inc. reported a widened fourth-quarter loss, as home builders continue in vain to search for a bottom in the residential housing market. Hovnanian said it incurred a total of $383 million in pretax charges including land and intangible impairments. The company said similar charges in the same period a year earlier totaled $322 million."

"The company said its net loss for the period ended in October increased to $466.6 million. 'Our industry is currently experiencing a cyclical correction,' said CEO Ara Hovnanian. 'While the factors that created this downturn are different than any other throughout our 48-year history, we know that stronger demand for new homes will return. What is not known is how long the market will take to rebound.'"

"Hovnanian delivered 19% fewer homes during the October quarter compared to the year-earlier period. The cancellation rate rose quarter-over-quarter to 40% of gross contracts, up from 35%."

The Associated Press. "Morgan Stanley, the No. 2 U.S. investment bank, reported a $9.4 billion writedown on Wednesday from bad bets on mortgage-related debt, leading it to take a $5 billion infusion from an arm of the Chinese government."

"The writedown, nearly triple what Morgan Stanley warned of in November, pushed the investment house to the first quarterly loss in its 73-year history."

"Morgan Stanley said it had about $1.8 billion worth of subprime mortgage exposure left on its books at the end of the quarter on Nov. 30, down from $10.4 billion at Aug. 31. The equity units the Chinese fund purchased from Morgan Stanley will yield 9 percent per year before they are converted into common shares."

"The company's total announced write-downs since the third quarter now stand at $10.3 billion, a sum that ranks third among banks taking losses stemming from the turmoil in the mortgage market."

"Morgan Stanley blamed the $9.4 billion total write-down on 'the continued deterioration and lack of liquidity in the market for subprime and other mortgage-related securities since August.' About $7.8 billion of the fourth-quarter loss came from U.S. subprime trading positions."

The New York Times. "Officials from Merrill Lynch, Bear Stearns and other major banks are in talks to bail out a struggling bond insurance company that has guaranteed $26 billion in mortgage securities, according to two people briefed on the situation, because the insurer’s woes could force the banks to take on billions in losses they had insured against."

"The insurer, ACA Capital Holdings, which lost $1 billion in the most recent quarter, has been warned by Standard & Poor’s that its financial guarantor subsidiary may soon lose its crucial A rating."

"If it did, the banks that insured securities with the ACA Financial Guaranty Corporation would have to take back billions in losses from the insurer under the terms of the credit protection they bought from the company."

"The troubles at ACA could also serve as the first real test for credit default swaps, the tradable insurance contracts used by investors to protect, or hedge, against default on bonds."

"'The hedge is only as good as the counterparty, or the other party, to the hedge,' said Joseph R. Mason, a finance professor at Drexel University and the Wharton School. 'This is part and parcel of the financial innovation that has grown very rapidly in recent years.'"

"Analysts note that about $10.7 billion of the mortgage-related C.D.O.’s the company has insured contain lower-rated, or mezzanine, securities that are most vulnerable to losses from falling home prices and rising foreclosures."

"'Some of the ratings that were being used don’t reflect the true credit quality of these various securities,' said Sean Egan, a managing director at an independent credit-ratings firm."

"Mr. Egan and other analysts also note that ACA more than doubled its credit default business in the last 12 months; it had contracts outstanding on $70 billion in bonds on Sept. 30, up from $30 billion a year ago."

"The timely use of credit default swaps this summer helped large investment banks like Goldman Sachs and Lehman Brothers avoid huge losses on mortgage securities as others had billions in losses."

"'It’s a zero-sum game,' said Jim Keegan, a portfolio manager at American Century Investments, noting that the gains at the investment banks buying the protection have to eventually result in losses for the firms they hedged with. 'If you put trades on that worked so well that you bankrupt your counterparty, you will not collect on those trades.'"

From Bloomberg. "More than $174 billion U.S. of collateralized debt obligations tied to U.S. mortgages were under review for downgrades by Moody's Investors Service at the start of this month, according to the ratings company, suggesting the subprime crisis may deepen."

"Moody's downgraded $50.9 billion of CDOs made up of structured-finance securities in November, or about 9.4 per cent of the total, the New York-based company said. Standard & Poor's, which yesterday lowered ratings on $6.7 billion of the debt, has so far downgraded or placed under review $57 billion of the debt."

From Business Week. "When is the last time 'central banker' and 'creative' appeared in the same sentence? The global credit crunch that originated in the U.S. housing market is forcing them to try things they've never tried before."

"This week, the central banks of both Europe and the U.S. took a shot at brand new ways to thaw the freeze in lending between banks. On Dec. 18, in an operation that was both huge and unprecedented in its design, the European Central Bank made 16-day loans of $500 billion worth of euros to European banks." "The significance of 16 days is that it means the banks won't have to borrow again until after Jan. 1."

"'Central banks here, quite frankly, are experimenting. They're in a little bit of uncharted territory,' says ays Joshua Feinman, chief economist at the mutual fund division of Deutsche Bank Asset Management."

"Bert Ely, a banking consultant in Alexandria, Va., who's known for his irreverent declarations, puts it differently: 'These guys are flying by the seat of their pants.'"

"ECB President Jean-Claude Trichet said the coming weeks may be 'challenging' for financial markets. 'Given the uncertainties, the adjustment process in the financial system in the coming period may be challenging and we have to be prepared to the materialization of risks at any time,' he said."

"The bank's attempts to ease financial-market volatility and deliver price stability would remain separate, Trichet said. 'These two responsibilities are clearly distinct and should not be mixed.'"

Dow Jones Newswires. "Sumitomo Mitsui Banking Corp. President Masayuki Oku implied that his institution won't be participating in the U.S. subprime rescue fund as requested by its U.S. backers, according to published reports."

"'We must consider this matter extremely carefully,' he said at a regular news conference for the Japanese Bankers Association, which he heads. In Japan, use of such phrases often indicates that no action will be forthcoming."

"Japanese bankers are far from novices when it comes to subprime loans and credit crunches. The Japanese financial world underwent its own real-estate-centered crisis after the property bubble burst in 1989. Japan's banks were unable to raise funds in the short-term money markets and were forced to cut lending to corporate clients."

"Japanese companies weren't able to borrow from banks or raise funds in the capital markets, and the economy entered what is now known as 'The Lost Decade' of stop-and-go sluggish growth and contraction, until a banking-sector cleanup began in earnest in 2002."

The Washington Times. "The Federal Reserve Board yesterday voted unanimously to ban 'liar loans,' inflated home appraisals and other abusive practices that led to the housing bubble and today's foreclosure crisis."

"In its first major rewrite of consumer-protection laws since the 1970s, the Fed laid down nine tough principles that lenders nationwide must follow."

The Palm Beach Post. "On Tuesday, the Federal Reserve announced new regulations for the mortgage industry. The news isn't the plan. The news is that Alan Greenspan didn't do any of these things. Maybe he was reading his press clippings."

"(Also) on Tuesday, The New York Times finally began to deflate the myth of Mr. Greenspan that Beltway helium had kept pumped up for so long."

"The paper reported how other members of the Federal Reserve, Treasury Department officials and members of not-for-profit groups regularly warned Mr. Greenspan about the growing subprime mortgage loan crisis and the housing bubble and urged him to intervene. But the Fed chairman who retired in January 2006 - just as the bubble he created began to burst - did nothing."

"The man whom author Bob Woodward called The Maestro, the man whom two Princeton economists said could be 'the greatest central banker' in history, protested to the Times that the Fed was not set up to regulate lenders. In fact, the Fed had been given new powers to do just that."

From Elliott Wave International. "The guy had been in retirement going on two years. Even so, the media was still repeating the same abysmally stupid cliché as recently as this past September: 'For 18 years as chairman of the Fed, financial markets hung on his every word, and in both major policy pronouncements and brief utterances, Greenspan could literally move markets.' (ABC News)."

"That quote is now three months old, having appeared in a story about Greenspan popping up everywhere to promote his book. And of course, at that time the media was clueless about the scale of the subprime debacle."

"But that was then. Now the time has come to point fingers instead, and America's newspaper of record did exactly that in today's page one story, 'Fed Shrugged as Subprime Crisis Spread.'"

"Here's most of what you need to know about the article: 'Mr. Greenspan and other Fed officials repeatedly dismissed warnings about a speculative bubble in housing prices. In December 2004, the New York Fed issued a report bluntly declaring that 'no bubble exists.' Mr. Greenspan predicted several times -- incorrectly, it turned out -- that housing declines would be local but almost certainly not nationwide.'"

"Yes, the New York Times has un-deified the deity it helped create (like when it ran a columnist in January 2006 who said, 'If we had been lucky enough to have Alan Greenspan at the Fed in the fall of 1929, there might well have been no Great Depression')."

From Marketplace. "Scott Jagow: There just isn't an easy solution to the subprime mess. And they're probably shouldn't be. No pain, no gain, as they say. But let's talk about some of the proposed 'solutions.'"

"Christopher Thornberg: 'Most of the people who look for this kind of help actually don't qualify for the help, because they cannot be refinanced. When you actually look at their income, look at how much they borrowed. It's clear that these people can't afford these houses, period.'"

"Thornberg says for homeowners whose loans can be made manageable, there could be a whole different problem: 'You've saved this person from being foreclosed on, and as a result of that, they lost 20 percent of their equity and they're in a deeply underwater position. Have we really helped this person?'"

"Thornberg says we can expect to see up to $3 trillion of home equity disappear over the next few years."