There Are HUGE Losses That Have Not Been Disclosed
Readers suggested a topic around the recent changes in the secondary mortgage market. “Wall Street and investors. They are in control of this whole mess and usually have the final say if a loan can be modified or not. Right now, investors refuse to modify these loans because they stand to lose more by working with a borrower or agreeing to some type of short sale.”
“This situation is complicated by the fact that these Mortgage Back Security (MBS) holders (INVESTORS) have insured against defaults, and the insurance payout on a default is a better result for the investor than accepting reduced returns. So the investor may actually be better off with a default as opposed to a mod.”
“In this circumstance, the investor can take the position that a mod goes against their best interests and threaten suit against the servicer if mods are undertaken. Investors are screaming bloody murder about potential mods that will wreck their insurance payout.”
“Hedge funds by nature do not need to disclose their losses or net asset value. There are HUGE losses that have not been disclosed, including cities, counties, pension funds, and bank money market funds that are NOT FDIC insured.”
One replied, “Can the loan servicer be successfully sued for an action that limits the losses to its investment pool based on the conditions of a subsequent deal made by a bondholder?”
“Imagine I buy a property from you, then take out insurance against an unexpected defect in the property. When a defect is found, you decided to fix it with a less comprehensive fix than the insurance company could have been made to pay for to avoid being sued. Can I demand that you don’t fix it? Legal mess.”
One pointed out, “In a lot of cases it is also in the owners best interest to default rather than modify, from the purely financial perspective.”
Another said, “But, sometimes Insurance Companies will not pay off if fraud was involved in the loan package, (which I think includes loan application fraud ). I would think that the Insurance Companies are going to be checking these loan packages to see if they have to pay or not.”
One added, “RE: loan application fraud. You can throw appraisal fraud into the bucket also.”
“Given the open, rampant and notorious nature of both fraud and corruption in the lending biz for the last 5 years any pay-out by an insurance company could take years.”
A homeowner said, “Respectfully, I am a homeowner, and I don’t feel as I am ‘held hostage,’ primarily because I am in a housepayment I can easily afford.”
“To the extend that some people took a risk on a loan to get a bigger house, those people made their own bed. People take risks all the time. If you want to take a risk whether it’s skydiving or a neg am loan, then hey, it’s a free country right? But lets not pretend like the people for whom the risk caught up to them, and they may be getting forclosed on or whatever didn’t get their all by themselves.”
“Sure, investors may have provided the airplane and parachute, but those homeowners willingly signed up in droves, strapped it on and jumped right outta that plane.”
“Just leave them all alone to work it out amongst themselves. For the rest of us, there is going to be a good deal on real estate for the next 10 or more years.”
The New York Times. “The props holding up the values of risky mortgage securities finally started to give way last week. And that means the $30 billion in losses and write-downs taken by big brokerage firms in the third quarter are not likely to be the last.”
“Even as developments in the credit markets went from bad to worse this year, investors for the most part have remained upbeat about the values of the mortgage securities they held. One reason that they could keep their heads in the sand was that these complex securities are hard to value in good times, impossible during periods of stress.”
“After last week, however, it was no longer plausible to deny that mortgage loans, and the complex securities derived from them, had crashed — and caused a lot of damage in the process. First to face the music was Merrill Lynch, which stunned investors Wednesday with an $8.4 billion write-down, $7.9 billion of which was for mortgage-related assets.”
“The write-down was $3.4 billion more than it had warned investors about just three weeks before. Merrill’s decision to write down its holdings as it did gives a clear signal to other banks and brokerage firms that valuing similar assets at lofty levels is no longer acceptable or credible.”
“Then, on Friday, Moody’s Investors Service began downgrading C.D.O.’s. Despite the subprime turmoil, some of these securities had continued to carry high ratings, until Friday. Moody’s cut or placed on review for possible downgrade securities from dozens of C.D.O.’s, some rated as high as AAA. The C.D.O.’s that may be subject to a downgrade hold subprime mortgage loans worth $33 billion, and there are probably more to come.”
“‘We’ll definitely see a lot more write-downs,’ said Josh Rosner, an expert on asset-backed securities. ‘I think that the exposures that we are seeing and the announcement out of Merrill are the leading edge, not the end.’”
“One reason that Mr. Rosner expects more losses from banks and brokerage firms relates to the calendar. Intense auditor scrutiny comes once a year, and that is the period we are in now — fiscal years at many big brokerage firms, Morgan Stanley, Lehman Brothers and Bear Stearns, for example, end in November.”
“‘When it comes time for the auditors to attest, they are going to be very conservative,’ Mr. Rosner said. That means write-downs will have to reflect the reality in the market, not some rosy scenario.”
The Orange County Register. “As loan defaults and foreclosures rise, politicians and consumer groups have directed many of their attacks toward mortgage brokers. They say some brokers steered consumers into loans they couldn’t afford to earn a bigger commission.”
“Brokers, meanwhile, are firing back and say an entire industry is being blamed for actions of a few bad apples. And banks, not brokers, bear the ultimate responsibility for every single home loan, brokers say.”
“Brent King, senior VP in the mortgage division of Wachovia, said while his firm works with and values brokers, loans touched by brokers historically go into default more often than retail loans. The reason may be fraud, he said.”
“‘The more hands that touch the file, the greater opportunity for fraud,’ King said.”
“In Orange County in July, 2.47 percent of outstanding loans made by brokers were delinquent or in foreclosure vs. 1.21 percent of retail loans, according to First American LoanPerformance, which tracks about 80 percent of the market. Statewide the difference is greater with 5.88 percent of broker loans gone sour vs. 2.2 percent of retail loans.”
“The differences are small but telling. In Orange County, broker loans account for just 35 percent of outstanding loans but in July made up about twice as many loans in foreclosure.”
“‘We only give out the products that we have been given by lenders,’ said John Marcell, a broker in Upland and former president of the California Association of Mortgage Brokers. ‘The lenders create the products and say here are the products you can sell. If we didn’t have the products to sell, we wouldn’t have sold them.’”
“Raphael Bostic, a professor of real estate and associate director with USC’s Lusk Center for Real Estate, said banks didn’t carefully scrutinize brokers or their loans when most mortgages could be profitably sold.”
“That’s all changed amid a housing downturn two years long and still going. Banks are looking for the causes of costly defaults and finding the ’safety of broker loans is qualitatively different,’ Bostic said.”
“Wachovia’s King said the lending industry pendulum now is swinging against brokers, but not entirely. ‘I think it will end somewhere in the middle,’ he said. ‘It’s just heading in the other direction right now.’”
‘In all phases of the mortgage industry this week, from the people who make the loans to the people who insure them, the news was bad — and most of them expect it to get worse.’
‘The market turned quickly for mortgage insurer MGIC Investment Corp. as well, as the rising delinquencies forced the company to pay out more in claims in the third quarter. MGIC said it expects to lose money through 2008 because it estimates it will pay billions in claims.’
‘If your credit scores are low, your access to mortgage money has all but vanished,’ said Dan Green, a certified mortgage planning specialist.’
‘Nearly one in five subprime borrowers was at least two months’ payments behind in July, while one in 20 alt-A borrowers fell in the same category, according First American LoanPerformance.’
‘The tightening of underwriting standards will play a role in the steady drop in mortgage originations in 2008. The trade group Mortgage Bankers Association projects a 31 percent decline in mortgage origination volume between 2006 and 2008.’
And I’ll add 2006 is down by a trillion or more from 2003-2004.
I don’t understand several things in the SIV/CDO/MBS and insurance markets. They have “off the books” balances in several investment banks.
I think those run through semi independant hedge funds. Not sure how much liability the main bank has. When I heard that ML was using several billion of their own funds to bail out a hedge fund, I said “Ruh Roh Shaggy”.
That scared me because it might be the bank taking secued deposits to bail out wealthy investors; meanwhile the reserve situation for the bank goes to hell. So, risk is transfered to the taxpayers.
The other thing I don’t understand is the Neg Am loan booking. The banks are claiming a lot more income on these than is actually being made.
The other thing is California and Florida are different. Specifically the really expensive areas where values exceed the conforming loan limit. These areas might take a larger hit and react significantly different. Hopefully we will see substantial out migration. That will put the nail in the price coffin.
In regards to the big banks bailing out the hedge funds: remember corporations are run for the benefit of their managers. This is the bank managers bailing out their friends - and sometimes themselves - managing and owning the hedge funds. Exploiting taxpayers, depositors, and even stockholders (as far as they can get away with it) is their *job*.
Neg Ams are tricky to value. At book, they *have* made money. The problem is that the money is owed them by people who often will not be able to pay back - but since neg ams are relatively new, and completely untested in a market crash, there’s no standard for evaluating the risk. Even if the lenders were honest it would be tough to lower the valuations properly - they’d basically have to make up discounts, and it would be hard to resist the temptation to go with the nice precise book value over a wild-ass-guess discount. And, of course, they’re *not* honest, and they’re eager to stick with the book values, because the real values (whatever they are) would mean huge losses and them losing their jobs. See above.
“So, risk is transfered to the taxpayers.”
That may be all you need to understand for the way the mess plays out going forward. To whatever extent big banks and hedge funds do not take the hit for their stupid sump-prime investments, it will be due to successful efforts by our top economic policy makers to share the losses with taxpayers and anyone holding or owed payments in $US.
“The other thing I don’t understand is the Neg Am loan booking. The banks are claiming a lot more income on these than is actually being made.”
Grasshopper, have you ever heard of The Christmas Bonus?
James, I agree with you heartily, especially about Florida. The thing is, we don’t even need out-migration for prices to be impacted. Much of the illusory rise in Florida’s housing prices was based on the misguided belief that New Yorkers, Europeans and South Americans wanted to buy vacation or second homes here. Of course, since these phantom buyers can no longer pull equity out of their current homes in order to finance a Florida purchase (or they are too smart to be trapped in the plummeting market here) vacancies are rising and prices are going you-know-where.
As has been observed before, Florida is a cargo cult, or colonial state, and at the mercy of fickle outsiders to prop up the economy.
Ergo, it’s all Walt’s Fault.
‘The tightening of underwriting standards will play a role in the steady drop in mortgage originations in 2008. The trade group Mortgage Bankers Association projects a 31 percent decline in mortgage origination volume between 2006 and 2008.’
31%??????
Let’s review. Tighter mortgage lending=FICO 7+; 20% down; heavily documented loans. And they project 31%?
Based on what mathematical model…the savings of J6P?
Past originations? Man, why can’t they state how they arive at x or y? grrr.
That just smells bad.
Ya just can’t make this stuff up!
Leigh
“…the savings of J6P?”
I wonder how many people have 120K saved up for a home loan in Orange county? Or similar numbers for el-lay?
That has to be a really really small number. Probably under 10,000. So, a lot of move up purchasers have to appear.
RE: Dan Green, a certified mortgage planning specialist.’
New growth industry.
Advise chucks too stupid to understand their purchase & sale/financing contracts.
We are Wal-Mart Nation.
In business, once you lose credibility…
You are DONE.
“The write-down was $3.4 billion more than it had warned investors about just three weeks before. Merrill’s decision to write down its holdings as it did gives a clear signal to other banks and brokerage firms that valuing similar assets at lofty levels is no longer acceptable or credible.”
Actually, I give Merrill kudos for at least stepping up to the plate and making the first major “confession” of sins. I’m not saying O’Neal is any angel and he certainly did get a bit ahead of himself with the Wachovia thing, but I think he’s just looking for a way to allow his firm to survive. That’s how I see it, anyway.
Of course, being the first to admit to the true state of affairs is a lonely path, but I’ll at least give him points for it.
Merrill CEO to step down amid board pressure
Merrill Lynch & Co.’s beleaguered chief executive is expected to step down from his post, according to a report Sunday in the online edition of The Wall Street Journal.
The board of Merrill was still working on the details on handling Stanley O’Neal’s departure, including naming his replacement and arranging his separation package, according to the report, which cited an unnamed source familiar with the matter.
So Merrill Lynch becomes just another forgotten financial name…
Getting rid of the source of your cancer after it’s spread all over your body, is of no help.
There were more than a few of us here (some probably more than a year ago), who said that Merrill should get rid of O’Neal based simply on the strategies he was pursuing.
Perhaps he was being scrutinizing more by the HBB than by his board.
“scrutinized”
Also - maybe he would have stayed on had he not approached Wachovia on his own - but did anyone in the MSM really question what was going on at Merrill over the past couple years?
“Also - maybe he would have stayed on had he not approached Wachovia on his own ”
That’s what I’m thinking. His biggest mistake, in the eyes of the board, is that he bypassed them. I think it was inadvertant, probably he hoped to present the board with a viable solution all wrapped up.
I’m wondering what kind of golden handshake this guy gets.
Probably north of 10 million.
Man this country needs a wake up call.
I saw yesterday that O’Neal’s golden handshake is $137M.
Well.
He did a good job.
He could have lost 20-30 billion.
I’d really like to have a long session with the board of directors that rewards complete and utter incompetence with a 130 mil. Just explain that along with the Mozillo stock options for me.
Take the 250 million and spread that around to all the people that got taken in on this.
What details?? Just fire his a*s. That’s what would happen to any of us.
Maybe if the big banks keep writing down the bubble in $1bn-$10bn chunks, nobody will notice? Moreover, each time this happens, investers can drive up the share price of whatever company pretended to throw the whole kitsch-and-sink into the current financials? Because investers in this climate are bullish, and bulls are bovines, and bovines are DUMB.
If the underlying companies are still genuinely solvent, that will work. The question is - is this big enough to start dragging down big players? Given the amount of leverage, and the extent of “unanticipate” (by the big boys) losses, I figure there are a lot of big hedge funds leveraged to insolvency. When they go, it will all fall apart.
“When they go, it will all fall apart.”
Does it occur to you that if you and I realize this, then so do the top dogs at the Fed and the Treasury, who will use any means necessary to keep the elephant hidden from view under the living room rug?
Ben, this is a good article. Even if the writer is named ‘Ambrose.’
‘The sky has already fallen’.
http://tinyurl.com/2qeclu
‘…This means that the toxic BBB tier has lost almost four fifths of its value. Even the AA has lost a third.
Now, remember that the total stock of subprime and Alt-A (close kin) debt issued from early 2005 to early 2007 amounts to $2 trillion. Ben Bernanke’s estimate that losses would be $100bn looks wildly optimistic…All it will take now for a full-fledged rout (of the US dollar) is a move by the Saudi and Gulf states to break their dollar pegs, which they may have to do to prevent imported US inflation causing havoc; or for the Asian banks stop buying US Treasuries – as Vietnam, Singapore, Korea, and Taiwan, have gingerly begun to do.
What more do you want?’
“”Nauseating though Paulson’s MLEV — `Master Liquidity Enhancement Conduit’ – may be, it probably has to be done.
Connolly says the Fed-led pack of central banks have made such a mess of capitalism by blowing credit bubbles (with low rates in the late 1990s and 2003-2006) that they now have no alternative other than to relaunch the “Ponzi Scheme”, or risk depression.”"
What is gonna be?
purge the ill-gotten gains with pain or slash and burn the dollar for market ponzi gains?
“”Nauseating though Paulson’s MLEV — `Master Liquidity Enhancement Conduit’ – may be, it probably has to be done.”
How about Paulson himself is completely nauseating? WTF is THIS all about?:
http://news.yahoo.com/s/ap/20071028/ap_on_re_as/india_us_paulson
OK, this dick is the Secretary of the US Treasury. Would someone please tell me what he’s doing brokering a nuclear deal in a dangerous region? That’s a job for the State Department, not Treasury. The guy OUGHT to be attending to the financial health of this country, not brokering nuclear deals.
Better face it, this country truly is a rudderless ship. Nobody is doing their job, they’re doing everyone else’s job and not very well, either.
Since taxpayer-funded bailouts are apparently off the table, I guess the next-best thing is to give the big banks a toxic mortgage debt holding pool, where they can avoid selling or reporting on the magnitude of the bad debt indefinitely while the Fed has a chance to inflate the currency enough to share the cost of bailing out the big banks with anyone who is either currently long the $US, or with fixed future $US payments coming their way (e.g., pensioners on fixed pensions). It would just be wrong to make the big banks come clean on their actual Enronesque balance sheet picture any time soon.
What’s in it for Goldman, Hanky?
“This is a very important deal,” Paulson told reporters after a conference on bringing banking services to India’s impoverished masses. “We want the nuclear deal to move as quickly as possible.”
Palmetto,
Even this had me a bit scared WRT Paulson’s exploits:
“We have been working closely and intensely with our international partners to prevent one of the world’s most dangerous regimes from developing the world’s most dangerous weapons. Part of that strategy involves denying supporters of Iran’s illicit conduct access to the international financial system; these actors should find no safe haven in the reputable world of finance and commerce. The UN Security Council has required member states to freeze the assets of, and prohibit persons from doing business with, a number of entities and individuals supporting Iran’s nuclear or ballistic missile activities, including Iran’s state-owned Bank Sepah.”
http://www.munciefreepress.com/node/17843
“Now, remember that the total stock of subprime and Alt-A (close kin) debt issued from early 2005 to early 2007 amounts to $2 trillion. Ben Bernanke’s estimate that losses would be $100bn looks wildly optimistic.”
BB is coming around. Earlier this year, subprime was contained; at least he concedes there will be losses. The estimated size of the loss must be adjusted upwards gradually, or else all the bulls on Wall Street might stampede off the edge of the nearest cliff.
‘The estimated size of the loss must be adjusted upwards gradually, or else all the bulls on Wall Street might stampede off the edge of the nearest cliff.’
Lemmings, bulls…slap a pretty bow on the top of their pointy little vacant noggins and they all look the same. They’ll look even more the same all spread out down there at the bottom of this here big cliff.
Excellent article, and it lays out the motives for the SIV exactly as some of us have stated here. The Wall Street Gangsters are trying to hide their losses.
Here is a beautiful statement to which anyone who follows this blog can probably relate:
“If you are a bear, you must accept that you will always be wrong in polite society, and you will continue to be wrong all the way down to the bottom of recession. That is the cross that bears must bear.”
Truly, a great quote.
“To be a contrarian investor is not a path to popularity. During the good times people think you are an idiot. During the bad times they think you are a genius but hate you for it.”
I have actually just learned to keep my mouth shut in polite society, whether on the topics of sex, politics, religion or the housing crash. That way, I never have to worry about being wrong or politically incorrect in public.
This “housing bubble” become “mortgage crisis” is just the tip of a much larger iceberg. We are closer to a global credit implosion of some sort than most could imagine. It’s a real risk. Be watchful of unfolding events and conservative with investments.
This credit unwinding we are seeing is (IMO) still in the early stages. Even without a “push” (oil no longer priced in dollars, China selling, Saudi decoupling, grave act of terrorism, etc.) - the momentum already in play may be enough to bring it all down.
I just want people to be aware that we are very possibly in the beginings of much more than simply a cyclical severe housing price correction.
Many times people can only see a major movement for what it is after much of it has played out. As investors we need to see things before it’s apparent to most.
A place to follow intelligent speculation of the inside machinations. (I read this along with Ben’s blog.)
http://wallstreetexaminer.com/blogs/winter/
A link to one guy’s look at things — and his ideas stay with me, suggesting (to me) there’s a ring of truth.
http://articles.moneycentral.msn.com/Investing/SuperModels/AreWeHeadedForAnEpicBearMarket.aspx
There’s always been doomsayers, and they’re usually wrong. But that doesn’t mean the “impossible” (truely grievous economic distress for large percentage of people) - can’t happen. The current finacial fallout is already much bigger than I would have thought possible when I first discovered this blog close to 3 years ago - and, as most here know - were onIy at the start of a much bigger correction.
“For potential mortgage borrowers, the comments paint a sobering picture of the difficulty in getting a new home loan in the coming months.”
How about the coming YEARS? Like anything else, there’s nothing wrong with mortgages, when properly done. As a result of this godforsaken housing bubble, I could see a scenario where mortgages become verboten, as result of the fraud and jiggering.
Under normal circumstances, mortgages would be relatively stable investments. Now, they’re getting a bad name. And even good risks will now face anal probes, if they can even find a company willing to probe them.
That’s how you know the mania is coming to an end. Everything associated with the mania becomes radioactive. The houses, buyers, RE agents, brokers, lenders, products, cheerleaders, and so on are grow increasingly unpopular. Clearly, we are beginning the cleanup phase. Everybody wants out!
I’ve started describing the home buying market like a fine wine.
Its a waste to drink a fine wine after only one year of aging and its a waste to buy a home right now. Many people can afford to do both; but in both cases what could be great is cut off before its time.
As palmetto alludes to, “safe as houses” is about to get a new definition.
Got popcorn?
Neil
Well, Neil, we all know bathing is a good thing to do. But because of the way Rome treated Europe in its quest for empire, bathing, which the Romans were famous for, got a bad name and much of Europe went unwashed for hundreds of years. In other words, Rome was evil, therefore bathing was evil, being a Roman custom. People do get that nutty about things when they’ve been burned.
Nothing is wrong with homes and mortgages intrinsically, in fact I’d argue they can be a good thing under the right circumstances. But because of the massive fraud and misery wrought by the players over the past few years, a stench attaches to something that otherwise could be good.
You mean it’s cool to bathe again?
We’re always the last to find out in South Florida…
Excellent point, Neil.
“We Should Buy No House Before Its Time.”
http://repositories.cdlib.org/are_ucb/973/
RE: I could see a scenario where mortgages become verboten, as result of the fraud and jiggering.
I’m still in nirvana over that FBI appraiser sting.
“IF YOU GIMME THE NUMBER I NEED, I”LL SEND YOU MORE WORK!”
LMFAO!
No way are these insurance companies gonna pay-out for losses.
These “Musical Chairs” games are most entertaining. 1st it was the Flippers, FB’s and Con Artists scrambling for a warm seat.
Now it’s the it’s the RE Agents, Lenders and Appraisers and associated criminal riff raff scambling to AVOID being put into the “Hot Seat”
This next week should give us all a better idea of losses.
The major European banks earnings are reported. If Deutshce reports $3T in losses, with the European disclosure laws, then expect 10X that amount for each major US bank - Not what the US banks reported.
“…with the European disclosure laws,…”
Thank God a rule of law remains in at least some corners of the world.
‘then expect 10X that amount for each major US bank’
Any facts or concrete analysis to back this statement up?
careful what you wish for.
Go to the TIC data. It shows that only 10% of all MBS CDOs are held by foreigners. Ergo, the other 90% are held in the US. If they report losses as large as reported by the US, then the US banks and securities firms are cooking the books.
The opening post was an interesting description of the mess that we’re in with insurance. I guess that’s an interesting consequence of moral hazard.
The reason the retail loans are of better quality than those of the brokers is that the retail side probably gets paid salary plus commission, vs. purely on commission for the brokers.
Interesting reading today
http://www.cfo.com/article.cfm/10047962/c_10046596?f=home_todayinfinance
http://www.economist.com/finance/displaystory.cfm?story_id=10024679
quote from Street.com columnist today. Wow, whaddya think would happen if this occurs: Got to think this over, may put on a few puts for fun:
Although fed fund futures have fully priced in a quarter-point rate cut, there is a better chance than many observers think that the Fed doesn’t cut rates at all and instead waits to see the impact of the last rate cut.
“that the Fed doesn’t cut rates at all”
If I were gambling, I would bet on 1/2 pt cut again (surprise!).
not gonna happen, the fed will cut again. you can take it to the bank.
They are also likely to cut by more than the markets expect, to give Wall Street more bang for the (devalued) buck.
from the Economist article:
In a fat-tail world it is very hard to monitor how much risk you are taking on. Many banks use a “value at risk” approach, which tells them the maximum daily loss a portfolio might face, based on measures of past volatility. This requires a trader to cut his positions when volatility rises. But if all traders are trying to do the same, volatility will rise even further, well beyond the limits the models suggest.
The same difficulty faces investors who control their positions on the basis of daily market volumes. Ideally they want trading to be heavy so they can sell without shifting prices against them. When times are good, volumes are usually high; but when times are bad, they can be non-existent.
That suggests models should have been built on the assumption that liquidity can disappear overnight. But apart from the mathematical complexities involved, that would have created another difficulty. In the short term those using conventional models would take greater risks and earn higher returns for their clients. The cautious firm would lose business and see its star employees lured away to firms that can pay bigger bonuses. By the time the crisis occurred, and the cautious firm was proved right, it could be too late.
This is just Trading 101 stuff like the time I got caught long NSOL at 300 per share the day some prominent short seller declared it worth a 10th of that and it lost 140 points in two hours. In theory you should be able to get out but just try it when everyone’s panicking and there aren’t any bids.
Excellent reading on fat tails:
Traders Guns & Money, by Satyajit Das
Black Swan, by Nassim Taleb
The (Mis)Behavior of Markets, by Benoît B. Mandelbrot
And your documented track record of Fed prediction is where on the internet? Just take your no-backup statement and go bet big on the street my man. But just saying it doesn’t make it so around here.
That’s why I prefer to make my predictions after the fact
If you look back in the blog archives a few days before the last meeting, you can find my comments to the effect that I expected a 1/2 point cut. Now I admit that was a lucky guess, but it is a documented guess nonetheless.
Rate cuts as far as the eye can see.
The Fed risks capital flight with a 50 basis cut:
Capital flight, in economics, occurs when assets and/or money rapidly flow out of a country, due to an economic event that disturbs investors and causes them to lower their valuation of the assets in that country, or otherwise to lose confidence in its economic strength. This leads to a disappearance of wealth and is usually accompanied by a sharp drop in the exchange rate of the affected country.
…
In the last quarter of 20th century capital flight was observed from countries that offer low or negative real interest rate (like Russia and Argentina) to countries that offer higher real interest rate (like China).
http://en.wikipedia.org/wiki/Capital_flight
What makes you think they care about capital flight?
If they are trying to influence interest rates and the stock market, they should consider it. We’re a debtor nation. Comparatively low interest rates, together with a historically low and falling dollar, could create a stampede out of US assets, including the stock market.
all this talk gets my heart pumping for a volatile market..
spooky times, boo!
MWu-HA-HA….with the downside collars removed, FED doesnt cut…..market spins…. Capital Fight indeed.
“If they are trying to influence interest rates and the stock market, they should consider it.”
Isn’t it easier to just intervene directly, than to rely on foreign investors to carry the water?
“Imagine I buy a property from you, then take out insurance against an unexpected defect in the property. When a defect is found, you decided to fix it with a less comprehensive fix than the insurance company could have been made to pay for to avoid being sued. Can I demand that you don’t fix it? Legal mess.”
********
And the big “winners” eventually in all of this?
The lawyers, of course - they always win.
The lawyers don’t get diddily if there isn’t any do re mi on the table…
Money is being raptured away at a feverish rate already and we are only near the end of the 1st round, of a scheduled 12 round bout.
Pee Wee Herman (Wall Street) vs Joe Frazier
“The lawyers don’t get diddily if there isn’t any do re mi on the table…”
THAT is something I’ve been wondering about. We’ve spoken about how lawyers will benefit at all levels from this whole mess, but I, too, have questioned if there’s even any money to pay them, except at the very top levels.
I would bet that Lennar, for example, pays more for its lawyers than it does for materials (LOL, an exaggeration, but probably not too far from the truth) and therefore, any little schmuck homeowners’ association in one of its developments doesn’t have a prayer even if they’re drowning in defects. So the Lennar lawyers make out, but they’re on retainer anyway. The lawyer who represents the HOA, if they can even get one to take on the case, will give up, sooner rather than later, although he may get a few shekels from the HOA before shrugging his shoulder.
“Money is being raptured away at a feverish rate”
On the other hand, you just can’t lose what you never had, right? Fractional reserve banking = lending out “air dollars” and getting paid back in real dollars. Dust to dust.
…getting paid back in real wealth more like it…
True. We make it, they take it.
Oh, this is excellent. Speech by Clyde Harrison, Hoz will know who he is.
http://www.hamzeianalytics.net/
‘Last year if you had enough breath to fog a mirror you could get a home loan. Anyone who is over 30 knew last year when they saw the TV ads “will loan you 100 per cent of the price of your new home with no income verification,” there was going to be a problem.’
And now the opposite problem has emerged. Despite a considerable amount of bluster from Dodd and other D-rats who wanted to turn the FHA into a replacement for the collapsed private subprime lending industry (offering 100 percent financed mortgages with a taxpayer-funded guarantee to boot), their proposals appear to have strutted and fretted their loanly hour on the stage and then were heard no more. I guess it is up to the big banks and hedge funds to bail themselves out if Congress can’t figure out how to pass the tab on to taxpayers?
http://www.signonsandiego.com/uniontrib/20071028/news_1h28harney.html
Tax his land,
Tax his bed,
Tax the table
At which he’s fed.
Tax his tractor,
Tax his mule,
Teach him taxes
Are the rule.
Tax his cow,
Tax his goat,
Tax his pants,
Tax his coat.
Tax his ties,
Tax his shirt,
Tax his work,
Tax his dirt.
Tax his tobacco,
Tax his drink,
Tax him if he
Tries to think.
Tax his cigars,
Tax his beers,
If he cries, then
Tax his tears.
Tax his car,
Tax his gas,
Find other ways
To tax his ass
Tax all he has
Then let him know
That you won’t be done
Till he has no dough.
When he screams and hollers,
Then tax him some more,
Tax him till
He’s good and sore.
Then tax his coffin ,
Tax his grave,
Tax the sod in
Which he’s laid.
Put these words
upon his tomb,
” Taxes drove me to my doom…”
When he’s gone,
Do not relax,
Its time to apply
The inheritance tax.
Accounts Receivable Tax
Building Permit Tax
CDL license Tax
Cigarette Tax
Corporate Income Tax
Dog License Tax
Excise Taxes
Federal Income Tax
Federal Unemployment Tax (FUTA)
Fishing License Tax
Food License Tax
Fuel Permit Tax
Gasoline Tax (42 cents per gallon)
Gross Receipts Tax
Hunting License Tax
Inheritance Tax
Inventory Tax
IRS Interest Charges IRS Penalties (tax on top of tax)
Liquor Tax
Luxury Taxes
Marriage License Tax
Medicare Tax
Personal Property Tax
Property Tax
Real Estate Tax
Service Charge Tax
Social Security Tax
Road Usage Tax
Sales Tax
Recreational Vehicle Tax
School Tax
State Income Tax
State Unemployment Tax (SUTA)
Telephone Federal Excise Tax
Telephone Federal Universal Service Fee Tax
Telephone Federal, State and Local Surcharge Taxes
Telephone Minimum Usage Surcharge Tax
Telephone Recurring and Non-recurring Charges Tax
Telephone State and Local Tax
Telephone Usage Charge Tax
Utility Taxes
Vehicle License Registration Tax
Vehicle Sales Tax
Watercraft Registration Tax
Well Permit Tax
Workers Compensation Tax
STILL THINK THIS IS FUNNY?
Not one of these taxes existed 100 years ago,
and our nation was the most prosperous in the world.
We had absolutely no national debt, had the largest
middle class in the world, and Mom stayed home to
raise the kids.
What the heck happened? Can you spell “politicians!”
The common excuse against any of the social programs like medical in Europe was always that they pay so much more in taxes. It seems we pay just as much, but in dribs and drabs named something else. For all we pay, we don’t have medical care, they’ve used up all the money that was contributed for SS and medicare, our infrastructure is crumbling and we are contributing less towards education. I’m not sure we’re getting the better deal.
“‘We only give out the products that we have been given by lenders,’ said John Marcell…. ‘The lenders create the products and say here are the products you can sell. If we didn’t have the products to sell, we wouldn’t have sold them.’”
Although there were some scummy brokers out there, the lenders held most of the power. As soon as things started blowing up, investors stopped buying the junk packages and the lenders were forced to pull the plug NOT the brokers.
The lenders believed they created a risk transporter. They assumed by slicing and dicing these products, no matter how risky, they could transport the risk to another galaxy.
That assumption was clearly false. The risk transporter imploded. As a result, the radioactive risk matter went everywhere. It’s currently distributed throughout the global financial matrix. Today, the lenders, together with governments, are working on a risk catcher, FrankenSIV.
“‘We’ll definitely see a lot more write-downs,’ said Josh Rosner, an expert on asset-backed securities. ‘I think that the exposures that we are seeing and the announcement out of Merrill are the leading edge, not the end.’”
If $2t-$4t is a realistic estimate of the magnitude of bubble asset losses, I guess we could also say there are going to be maybe $2000bn-$4000bn in bubble asset losses, with X percent borne by large banks and hedge funds. How much of this kitsch-and-sink has already been written off, and how much lies ahead? I would guess the subprime fires are less than 10 percent contained at this point, just judging from the size of these numbers.
There has always been tolerated “Sins of Commission and Sins of Omission” in the dirty laundry of real estate/mortgage Industry.
It’s the current “Crimes of Commission and Crimes of Omission” that will PLAY HELL to wash out
“This situation is complicated by the fact that these Mortgage Back Security (MBS) holders (INVESTORS) have insured against defaults, and the insurance payout on a default is a better result for the investor than accepting reduced returns. So the investor may actually be better off with a default as opposed to a mod.”
When I was a repossessor I quickly learned that the lien holders were delighted when their vehicles turn-up destroyed or stripped-clean; the insurance companies were then “on the hook” for the balance due!
Speaking of banks, it seems to me that they have done little in the way of reigning in suspect lending. Just yesterday while researching a struggling condo complex I found all the recent buyers had used some type of ARM, interest only, piggyback, you name it. Any other deed diggers finding this to be the case? Wells Fargo seems to be leading the pack…
Yes. Still seeing some 100% deals and homes selling over list price. Not sure how/why it’s still happening.
It appears that not only banks and brokerages hold suspect asset backed securities. Many U.S. companies also hold a significant percentage of their cash and cash equivalents/short-term investments in these securities in an effort to earn a higher return on their cash reserves than other short term securities would provide.
The result of this could well mean that there could be significant losses and write-downs in U.S. companies that are not in any way related to the housing or mortgage industries. The extent of this problem has not be meaningfully explored by the media.
Question to financially savvy - how to protect one’s savings in the current murky situation? With dollar going down the drain, markets at all time high, what to do?
I own some shares in Merk Hard Currrency Fund (MERKX). They buy safe investments like government bonds in foreign countries. They also have some gold investments (10%?)
When the dollar drops 1%, MERKX goes up about 1 %. When the Fed lowers interest rates, the dollar drops, so MERKX makes up for the interest rate drop. I have lots of CD money which is maturing soon, so have about 20% of savings in MERKX as a low-risk hedge. In the last several months it’s up about 10% as the dollar drops.
For the gambler, try RYWBX, which is geared to go up twice as
fast as the dollar drops. But it’s all derivatives, so more risk.
Also, look at UDN.
Thank you, I will.
I’m more and more inclined just to bite the bullet and buy… An aparment in NYC, a house on Long Island - anything looks better than USD.
With all this cogent chatter we shouldn’t be surprised that the NAR is running ads telling people that “it is a GREAT time to buy”. Shame on them. Just trying to bait a whole new set of innocent homeowners. The real problem is the 12+ months of inventory that we have in so many markets around the country. With more foreclosures, tight credit, and rising inventories we are bound to see lower prices. Add to this the fact that as the agencies down grade the portfolios there are a slew of investors, like pension accts, that are unable to hold the junk that used to be AAA and the mess sets up a perfect storm…
The dominoes are falling and who knows where we will be 6-12 months from now…scary times!
These are horrible facts.