Some housing bubble news from Wall Street and Washington. Associated Press, "Shares of American International Group Inc. hit a new 52-week low Monday after the insurer said in a regulatory filing that auditors have found material weakness in how it reports the value of certain credit default swaps. In a filing with the Securities and Exchange Commission on Monday, AIG said it would need to alter the way it values credit default swaps involving collateralized debt obligations."

"CDOs are funds that contain slices of bonds, some of which are backed by mortgages. Back in August, AIG called exposure to subprime debt 'minimal.' In November, it maintained that despite some losses due to mortgage-backed bonds, its exposure to the debt remains 'high quality,' with 'substantial protection.'"

From Bloomberg. "AIG, the world's largest insurer by assets, said auditors found a 'material weakness' in how the company values its credit- default swap portfolio. The stock fell the most in 20 years."

"The contracts declined by about $4.88 billion in October and November, according to data in a regulatory filing today. The drop was confirmed by company spokesman Chris Winans. AIG had said in December that the value of the 'super senior credit derivatives' fell by about $1.1 billion in those two months."

From MarketWatch. "Shares of IKB Deutsche Industriebank tumbled more than 20% Monday, retreating after weekend reports that the struggling German bank needs a further 2 billion euros ($2.9 billion) in capital to cover its subprime-mortgage risks."

"But German newspaper Frankfurter Allgemeine Sonntagszeitung reported Sunday that KfW, which holds some 40% of IKB, cannot afford to provide any further capital and that the other banks that participated in the rescue have so far refused to increase credit lines."

"The newspaper said the additional capital is needed in light of IKB increasing its view of the risk from assets on its balance sheet, to 3.3 billion euros from 1.35 billion euros."

"The bank also has about 8.1 billion euros of exposure through its off-balance-sheet Rhineland Funding. The investment vehicle borrowed money by issuing short-term commercial paper and invested in longer-term debt, including subprime mortgages."

From Reuters. "CNA Financial Corp, a commercial insurer whose majority owner is Loews Corp, said on Monday fourth-quarter profit fell 50 percent, hurt by losses related to subprime fixed-income investments."

"Net realized investment losses totaled $61 million, reflecting what CNA called a 'decline in credit market conditions including credit spread widening and exposures to sub-prime collateral in our fixed-income securities.'"

"Banks are driving the cost of protecting corporate bonds from default to the highest on record as they seek to hedge against losses on collateralized debt obligations, according to traders of credit-default swaps."

"'Banks have taken losses, spreads are going wider and they are just cutting positions,' said Andrea Cicione, a senior credit strategist at BNP Paribas in London. 'Lenders are probably reducing risk positions in a deteriorating credit environment by unwinding CDOs.'"

"Contracts on the benchmark Markit iTraxx Crossover Index soared 17 basis points to 547 at 12:50 p.m. in London, according to JPMorgan Chase & Co. The Markit iTraxx Asia Ex-Japan Series 8 Index soared the most in one day, rising 15 basis points to an all-time high of 144.5, according to BNP Paribas SA."

"The Group of Seven estimates banks worldwide will suffer writedowns of $400 billion on home loans, German Finance Minister Peer Steinbrueck said at a weekend meeting of officials and central bankers in Tokyo."

From Realty Check. "You just can’t make this stuff up. Apparently even a big builder’s daughter can’t seem to keep faith in the Florida housing market."

"According to an SEC filing, Wendy Topkis, daughter of Toll Brothers co-founder and Vice-Chairman Bruce Toll, is walking away from a Florida condo, just like everyone else. A Toll Bros. condo!! The Palm Beach Post says it best: Et Tu Wendy?"

"Daddy is quoted as saying she just changed her mind because she had another child and the place would be too small, but I’m guessing the 13 percent drop in Florida prices was screaming at her a little louder than the baby. So Wendy just adds to the company’s 61 percent cancellation rate in the Sunshine State."

"The daughter of Bruce Toll informed the company last month that she and her husband 'did not intend to make settlement' on a $2.47 million home they had previously agreed to purchase, the company said in a regulatory filing."

"Toll Brothers went on to say that it intends to pursue its rights under the agreement of sale with Toll's daughter, Wendy Topkis."

The Chicago Tribune. "But when I called TCW Group Chief Investment Officer Jeffrey Gundlach this week...he was fixated, and agitated, about information anyone could interpret. 'Listen to this,' he said as he read a headline from a CNNMoney.com article: 'Homeowners: Can't pay? Just walk away.'"

"'People have decided that it's acceptable to default on mortgages,' said Gundlach, a top bond fund manager who was singled out by Morningstar Inc. as a 'Manager of the Year' in 2006 and predicted the current housing mess early in 2007."

"'It's acceptable to default!' Gundlach emphasized, his voice a mixture of dread and disgust. 'They even have a new term for it: 'Jingle mail.' 'We are in a growing culture of default,' Gundlach said."

"The way Gundlach sees it, this is one of the biggest threats to the economy. He sees the potential of a dangerous spiral of nervous lenders and a housing glut. And the risk in this spiral is clear: Fewer people will qualify to get loans, so more houses will sit on the market and prices will slump more."

"Lehman Brothers economist Michelle Meyer noted that Toll Brothers, a luxury home builder, reported this week a 37 percent year-over-year decline in signed contracts in the fourth quarter. And the average price per home dropped from $730,000 during the first quarter last year to $634,000."

"Builder D.R. Horton recently reported a 52 percent drop in sales, and 44 percent of the sales that were arranged ended up being canceled."

The Washington Post. "For a time, the snow-dusted forests ringing this picturesque mill town might as well have been made of gold."

"Eager U.S. construction companies scooped up Canadian lumber in record volume during the great American housing boom of the middle of the decade. As prices spiked, sawmills cashed in, spending millions to increase production."

"They upgraded factories and enticed laborers with salaries upward of $80,000 a year, adding third shifts to pump out wood for McMansions in Miami and instant subdivisions in Phoenix, 24 hours a day."

"The lumber bubble brought to this sleepy town of 4,500 people about 600 miles north of Vancouver a rush of wealth, still easily visible in the freshly minted Ski-Doo snowmobiles and $60,000 pickup trucks, now idle in driveways."

"'Everybody went out and bought new toys,' said Mackenzie's no-nonsense mayor, Stephanie Killam. 'Nobody thought it would ever end. They were wrong.'"

"As the ripple effect of the U.S. subprime-mortgage collapse spreads around the world, the boom times for Mackenzie and dozens of other towns built on the legacy of the Canadian lumberjack have come crashing down as fast as you can say 'timber.'"

"With wood demand and prices plummeting along with U.S. housing starts, three of Mackenzie's five sawmills have shut down indefinitely and others have cut shifts -- propelling the town's unemployment rate from single digits to more than 70 percent since August."

"Similar events are playing out across the Canadian hinterlands, where at least 139 sawmills, many of which depend on the U.S. market for most of their sales, have been forced to close indefinitely or reduce shifts over the past 18 months, according to Canadian government statistics."

"Thousands of forestry workers are jobless, creating what analysts are calling the industry's worse shakeout in modern history."

"'They were selling $250,000 houses [in the United States] to guys who worked at McDonald's, and guess what, they couldn't afford them,' said Gerald Girard, a laid-off Mackenzie lumber worker. 'So now, who's paying the price for it? It's not just them, aye. I'll tell you who. It's us.'"

The New York Times. "For more than half a century, Americans have proved staggeringly resourceful at finding new ways to spend money. By the 1980s, millions of Americans were entrusting their savings to the booming stock market, using the winnings to spend in excess of their income. In recent years, millions more exuberantly borrowed against the value of their homes."

"But now the freewheeling days of credit and risk may have run their course, at least for a while and perhaps much longer, as a period of involuntary thrift unfolds in many households. With jobs shrinking, housing prices plummeting and debt levels swelling, the same nation that pioneered the no-money-down mortgage suddenly confronts an unfamiliar imperative - more Americans must live within their means."

"'We don't use our credit cards anymore,' said Lisa Merhaut, who lives in Leesburg, Va., and whose family last year ran up credit card debt they could not handle. Today, Merhaut manages her money how her father did. Despite a household income reaching six figures, she uses cash for every purchase. 'What we have is what we have. We have to rely on the money that we're bringing in.'"

"The shift under way feels to some analysts like a cultural inflection point, one with huge implications for an economy driven overwhelmingly by consumer spending."

"The unraveling of the real estate market appears to have left millions of families with little choice, yanking fresh credit from their grasp."

"'The long collapse in the United States savings rate is over,' said Ethan Harris, chief U.S. economist for Lehman Brothers. 'People are going to start saving the old-fashioned way, rather than letting the stock market and rising homes values do it for them.'"

"For the 34 million households who took money out of their homes over the past four years by refinancing or borrowing against their equity, roughly one-third of the nation, the savings rate was running at a negative 13 percent in the middle of 2006, meaning they were borrowing heavily against their assets to finance their day-to-day lives, according to Moody's Economy.com."

"By late last year, the savings rate for this group had improved, but just to negative 7 percent and mostly because tightened standards made loans harder to get."

"'For them, that game is over,' said Mark Zandi, chief economist at Economy.com. 'They have been spending well beyond their incomes, and now they are seeing the limits of credit.'"

"Not long ago, Elena Gamble would have looked at the Cadillac parked across the street from her modest home in Elk City, Okla., and felt a twinge of jealousy."

"'We live in a small town, and everybody looks at your clothes and what you drive and where you have your hair done,' said Gamble, who earns about $2,600 a month as a grievance counselor at a local prison. 'Everybody wants to be rich.'"

"Now, she and her husband - a prison guard who brings home $2,000 a month - are grappling with $10,000 worth of high-interest debt. They no longer go to the movies or out to eat, except for the occasional visit to McDonald's. They dropped their Internet service. Last May, their car was repossessed."

"'What we say now is, 'If we can't afford it, we can't buy it,' Gamble said. 'It stays on the shelf.'"

The Marin Independent Journal. "As our economy falters because of the housing bubble and the erosion of the dollar's value, there is less faith in this country's economic soundness by our creditor nations."

"A clear lesson is that we have for too long been living far beyond our means as a people and as a nation. We can no longer consume so much more in value than we produce."

"Many in Marin are lamenting that real estate prices are skidding. We are 'losing money.' If we're honest, we know that much of the equity in our overvalued real estate is 'funny money' based not on real values but on the speculative furor of the past decade."

"Losing some of our shaky home equity is not the medicine we want. But perhaps it's needed. It's as true as ever that it's better to live within our means and not go too much in debt - especially if it's for all the wrong reasons."