Builders Are Really Worried Now
Some housing bubble news from Wall Street and Washington. Bloomberg, “Housing starts in the U.S. fell for the first time in four months in May as interest rates rose, suggesting no early end to the recession in residential real estate. Builders broke ground on new houses at an annual rate of 1.474 million, down 2.1 percent from the prior month, the Commerce Department said today.”
“Record levels of unsold homes suggest the slump is far from over. Fed policy makers now say the housing recession may linger longer than previously forecast.”
“‘Builders are really worried now, not only by the credit tightening in the mortgage market, but now all of a sudden by an increase in the fundamental mortgages as well,’ David Seiders, chief economist at the National Association of Homebuilders, said.”
“‘Without a doubt, things have slowed since about March,’ said Ara Hovnanian, Hovnanian Enterprises’s CEO in an interview yesterday. ‘There is not a recovery that is about to happen.’”
From Reuters. “The report showed how hard the once-thriving housing market on West Coast had been hit. Housing starts there were off 38 percent in May from a year ago, the largest year-on-year drop since a 49 percent decline in March 1991.”
“‘Unwinding the dramatic rise in nonprime mortgages could have a noticeable effect on home construction beyond what we’ve seen through the first quarter,’ Dallas Fed economist John Duca said.”
“Duca noted some industry analysts believed home building could slow by another 10 percent to 15 percent. ‘With nonprime lending at nearly 40 percent last year, the effect could be even greater,’ he warned.”
The Street.com. “On a year-over-year basis, the May housing starts dropped 24.2%. Building permits, meanwhile, rose to 1.5 million units in May, up 3% from April but down 21.7% from a year earlier, the Census Bureau said.”
The Idaho Stateman. “A measurement of industry sentiment about the housing market fell in June for the fourth straight month to the lowest point in more than 16 years.”
“The slump in the housing market has taken its toll on the Treasure Valley, said Mike Riggs, president of Middleton-based Crestmark Custom Homes. Riggs placed part of the blame for the stalled building industry on out-of-state homebuilders who continue to construct single-family homes despite the downturn in sales activity, thereby adding to an already over-supplied market.”
“‘They just keep putting product up,’ he said. ‘They don’t care. They have the deep pockets to ride it out.’”
“Bids for the main index of subprime mortgage bonds dropped to a record low on Tuesday as concerns of losses at a hedge fund and weak housing suggest a deeper downturn for the debt.”
“‘Everyone is still pretty bearish in ABX space,’ said Chris Sullivan, chief investment officer for the United Nations Federal Credit Union in New York. ‘Shorts are being increased, it seems.’”
The New York Times. “After the first cracks in America’s sub-prime mortgage business appeared late last year, several large lenders were forced into bankruptcy. Now the stress is sending tremors down Wall Street as investment funds that bought stakes in those loans are starting to wobble.”
“‘Basically, Bear Stearns is trying to prevent the great unwind of their fund,’ said Janet Tavakoli, president of Tavakoli Structured Finance, a consulting firm that helps investors gauge risk. ‘The reason people are watching this carefully is because they’re wondering whether this is going to lead to others doing the same, or will this be contained.’”
The New York Post. “A foundering Bear Stearns hedge fund staved off collapse for another day, getting a 24-hour reprieve from angry creditors in order to allow Blackstone Group to implement a rescue plan.”
“Beset with nearly 30 percent losses and demands from lenders for additional collateral, known as margin calls, the Bear Stearns High Grade Structured Credit Strategies Enhanced Leveraged Fund is at the thin end of a very, very fat wedge.”
“What’s left is $2 billion in illiquid and arcane assets known as collateralized debt obligations that were already difficult to trade and are now rapidly losing their value.”
“The prospect of these securities being scooped up by the bond market was already dim, but with few trading desks likely to provide capital to a struggling fund, the losses could be driven higher.”
“If creditors don’t provide capital and the fund is forced to sell the assets, which no bond trading desk is anxious to bid on, ‘The world becomes very different, very fast for a lot of people,’ said a wary hedge fund manager.”
“In the old days of relationship banking, banks relied on credit quality control and huge balance sheets to ride out any problems, but collateralized loan obligations (CLOs) investors may be more short-term oriented.”
“Lack of credit quality control by some managers of CLOs is particularly frightening to veteran private equity investors.”
“‘What all of this will show, and it will show more as CLOs become more popular, is that risk management has not been very well practiced,’ said billionaire financier Wilbur Ross. ‘That’s going to hurt a lot of people, and will ultimately explode the bubble.’”
“Upcoming debt sales may prove the tipping point for market sentiment. Canceled deals or a lack of buyers could puncture investor confidence, pushing record low default rates higher.”
“‘You’re close to the peak of the cycle,’ said Anton Schutz, a portfolio manager at Mendon Capital, which focuses on financial firms. ‘For new collateralized debt obligations (CDOs) coming to market, the end buyers are going to say, ‘I just took a loss on these things and you want to sell me more?’ They’ll want to know more about what’s in this paper.’”
The New York Sun. “According to a recent presentation made by John Olert of Fitch Ratings, the past three years have seen $477 billion in high-yield debt issues, of which 67% was rated below BB. The amount of single-B and lower debt as a portion of noninvestment-grade debt issues has been steadily increasing since 2002.”
“These conditions almost guarantee a wave of defaults and restructurings down the road. Indeed, the Fitch presentation concludes, ‘The slide down the rating scale suggests the next default wave will be more severe than the 2001-2002 downturn.’”
“Last week Standard & Poor’s published a report titled ‘The Covenant-Lite Juggernaut Is Raising CLO Risks — And Standard & Poor’s Is Responding.’ The report details the growth in collateralized loan obligations being made with virtually no covenants, provisions that have historically required borrowers to meet certain financial tests dictated by lenders.”
“S&P points out that so-called cov-lite loan volume in the first quarter ‘exploded to $48 billion, a stupendous figure by any measure, from the $24 billion full-year 2006 total.’ It projects that ‘when the cycle turns (as is inevitable) lenders…will rue the day they gave up on maintenance covenants.’”
“The millions of Americans facing foreclosure on their homes aren’t the only victims of the housing market bubble. There are also many consumers who have been duped into participating in schemes to buy properties and sell them at inflated values.”
“Mortgage finance company Fannie Mae has seen a big increase in mortgage fraud over the last two years, particularly in the Midwest.”
“‘An alarming number of Fannie Mae’s recent investigations have found that otherwise honest consumers and real estate professionals are fooled into conspiring to commit mortgage fraud.’ William Brewster, the housing agency’s director of anti-fraud initiatives, said in prepared remarks delivered at a Federal Reserve hearing.”
From Dow Jones Newswires. “The foundations of Spain’s property market are looking increasingly shaky, and a sell-off in the sector just a few short weeks ago may well be a sign of more troubles ahead, analysts say.”
“‘The grounds for the panic were real enough and it will probably happen again,’ said Charles Dumas, director of Lombard Street Research. ‘The Spanish housing market has had it.’”
“Construction rates in Spain are running at roughly 800,000 new homes a year, noted Dumas, against demand for around 600,000 homes. That’s more than the total number of homes constructed in Italy, France and Germany combined.”
“‘Spain has more homes per 1,000 head of population than any other country in Europe and they continue to add to it, resulting in record levels of household debt,’ said Dumas.”
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“It will show more as CLOs become more popular, that risk management has not been very well practiced.”
So, why on earth would “CLOs become more popular” ??? Maybe what is meant is that CLOs will become more VISIBLE, especially in the MSM, as hedge funds crash and burn.
I am posting this as a “reply” because I got error messages when I attempted to post it as an independent comment.
The New York Post. “A foundering Bear Stearns hedge fund staved off collapse for another day, getting a 24-hour reprieve from angry creditors in order to allow Blackstone Group to implement a rescue plan.”
the end is near. I just can’t wait to see the effects of the shockwaves from this implosion.
Interesting too that it is principally Merrill Lynch that is threatening to pull the plug on the Bear Sterns hedge fund.
Merrill Lynch has already taken a bath on subprime going south. Maybe they want to stop the bleeding.
” I just can’t wait to see the effects of the shockwaves from this implosion. ”
What might those be? Give me a couple of scenarios if you can. I’m really curious how this might play out and would like to know how it could affect me at street level.
As you know hedge funds worldwide are leveraged from hundreds to several thousands times the amount of fund they have. If one goes down, the ripple effects are tremendous. This brings to mind a similar near worldwide collapse of hedge fund in 1998 ; back then the us treasury department had to step in to prevent worldwide financial chaos and collapse.
here is the link.
http://www.wsws.org/news/1998/oct1998/ltcm-o03.shtml
Another ramification will be higher mortgage rates. The whole CDO/REMIC premise is going to collapse, and lenders will have to keep their mortgages. Since they will no longer be as liquid (i.e. saleable in the bond markets), the interest rate will rise.
The CDO/REMIC market is based on the idea that mortgage pools, which are not suitable for trading in the securities market (because of knowledge asymmetry- lenders can have a good idea of what their mortgages will do based on their experience, bond holders, on the other hand, need a ’simple’ investment that can be accurately priced without allowing for too much arbitrage). The whole system was based on the idea that tranching (and servicer guarantees) would reduce the default risk to almost zero, making the only risks associated with these bonds the inevitable interest-rate risks along with prepayment risk. The latter is supposed to be predictable, but it is a risk, so these bonds yielded higher interest than treasuries, making them attractive to big investors in the bond market who could treat them much like high-grade corporate bonds, trusting the rating agencies to properly evaluate the risks.
Now all of this is falling apart. The bond prices are falling, funds which bought them are exploding, the rating agencies are admitting that they gave the bonds too high of a rating, the servicers/guarantors are starting to show signs that they may default. Thus, it will soon be realized that mortgage pools have a higher value held by the lender. The CDO market will collapse. Empirically, lenders who hold their own mortgages are more conservative then those that sell mortgages- expect the market to tighten up.
Many thanks for the excellent analysis, AKRon.
Is Blackstone Group in the resuscitation business? Did they step up to the rescue task on their own, or were they recruited?
Lead article on the Financial Times web site:
——————————————————————-
Subprime puts Bear Stearns fund on brink
By Ben White and Saskia Scholtes in New York
Published: June 20 2007 00:03 | Last updated: June 20 2007 00:03
A highly leveraged Bear Stearns hedge fund that made bad bets on the subprime mortgage market was on the brink of failure on Tuesday after Merrill Lynch rejected a proposed rescue plan and prepared to auction off $850m of assets that the fund had pledged as collateral.
In addition to large losses for investors and lenders to the Bear Stearns fund, some analysts feared that a failure of the fund could accelerate losses in the subprime mortgage-backed securities market and perhaps trigger a loss of confidence in the wider market for complex structured finance securities.
http://www.ft.com/cms/s/f92171f6-1eb7-11dc-bc22-000b5df10621.html
Is NAR launching a counter offensive Ben?
LOL
http://www.minyanville.com/articles/Hovnanian-NAHB-Volcker-Japan/index/a/13149
I have to start checking that site out more often. Good stuff!
Builders are worried now but are the Bilderbergs?
Well, I’m not worried, I have my eye on a 30K acre ranch in Paraguay if things go belly up. If there’s going to be blood in the streets, I want to be in a safe place.
Drat, that ranch has been sold. Now I’ll have to figure out where the other bilderbergers are buying.
“..is going to lead to others doing the same, or will this be contained.’”
If you have to ask this question, you can go ahead and plan on it not being contained.
The Street.com. “On a year-over-year basis, the May housing starts dropped 24.2%. Building permits, meanwhile, rose to 1.5 million units in May, up 3% from April but down 21.7% from a year earlier, the Census Bureau said.”
How comforting. Sales continue to drop yet the builders are preparing to increase supply. ‘Last one to the bottom is a rotten egg.’
Maybe we can quickly increase the supply of vacant homes from 2 million to 3 million and beyond.
“If creditors don’t provide capital and the fund is forced to sell the assets, which no bond trading desk is anxious to bid on, ‘The world becomes very different, very fast for a lot of people,’ said a wary hedge fund manager.
Get ready for the ‘World to be very different…very fast.’
But not for the hedge fund manager…..
“The world becomes very different, very fast for a lot of people,’ said a wary hedge fund manager.”
I’m asking this question in a number of different ways today on this blog. What are the implications for the average guy on Main Street?
Interest rates go up.
Thanks, charlie. Won’t affect me. But people who might not even have a mortgage, if they have credit card debt, could really be screwed.
people will have less cash to buy whatever you sell to earn a living.
Impossible to predict, but if all those secondary credit markets lock up, we could be looking at an Argentina-style bank holiday until the regulators figure out who is solvent.
Get ready for the ‘World to be very different…very fast.’
Yep… The ABX are trading below the “82.5 cents on the dollar” floor where they are considered liquid.
Interesting times ahead. Joe and Jane sixpack won’t know this until late Fall…
Got popcorn?
Neil
Isn’t the 1.4 million start rate still about half a million higher than the absorption rate? And won’t the start rate have to drop to below the absorption rate to reduce the already record housing inventory?
yes, which is why HBs are making the situation worse….
Would the situation be better if they all went bankrupt, leaving the people that bought in to their half-finished communities locked into extended bankruptcy battles and higher fees to pay for the infastructure under all that land that will not be built on?
Would you rather have an empty lot next to you, or an empty house? Or a house with squatters…
I don’t get it. Someone explain to me exactly why home builders are still building so much inventory when (1) they already have inventory they can’t sell; (2) it is quite clear that prices are falling, so what is marginally profitable now won’t be profitable by the time it is finished.
Do builders just have too much invested in land? Is it simply of matter of “if I don’t build, I’m out of business?” Everywhere I look subcontractors are still busy, new homes under construction are popping on the MLS every week. This is CRAZY!
The problem isn’t a shortage of houses, it is a shortage of house buyers. Well sooner or later it might sink in, but doubtful.
It’s a shortage of correctly priced homes…
It’s a shortage of affordability on the consumer side!
If prices dropped by 40% overnight, then the number of foreclosures would be in the tens of millions instead of the expected 1 million-ish for this year. All financial markets would cease to function, unemployment would jump to 20%, consumer spending would cease, shanty towns and breadlines…
whats the 40% reduction got to do with foreclosures and financial markets. short sales are becoming very common in the OC here in cali, yet people are doing fine or seems so.
Bologna. What would happen is housing would correct quickly rather than the usual drip-drip Chinese water torture, which would be excellent for qualified traditional buyers with cash, and really bad for parasitic floppers. Marginally employed REIC information-hiders and option-ARm pushers would be out of a job and have to go back to doing real work for a living (the horror!). Financial markets would go right back to fleecing stupid trend-followers and retail investors, just like they’ve always done. A few RE-heavy hedge and pension funds would explode, but otherwise, life would go on.
“The millions of Americans facing foreclosure on their homes aren’t the only victims of the housing market bubble. There are also many consumers who have been duped into participating in schemes to buy properties and sell them at inflated values.”
Duped victims my a$$!
From the article:
“Brewster said that in this case, the consumers appeared to have intentionally exaggerated their assets and down payments in order to qualify for the mortgage loans. But it’s not clear they were aware how serious their exaggerations were.”
‘Well I knew I was lying, I just didn’t think it was serious.’
“In another recent case, consumers were clearly in the dark about their role in a scam. They were induced to rent their credit to what they were told was an investment club. They attended a meeting at a local hotel, provided their Social Security numbers and signed blank documents. In return, they received checks for as much as $5,000.”
Oh sure. “Clearly in the dark.” The greedy ba$tards heard $5,000 and didn’t care what was being done - they just wanted the cash.
No kidding. There are plenty of boiler room scammers out there that rip off truly innocent people every day. But how do you get unknowingly “fooled into conspiring to commit mortgage fraud”? That “I knew I was lying, but…” quote says it all.
(twirling mustache) “Pssst… hey buddy, wanna help me commit mortgage frau–, er, participate in my ‘can’t lose’ RE investment scheme? It’s practically legal (just don’t go blabbing to the neighbors). Here’s 5 grand to get ya started.”
Duped victims my a$$!
Exactly! Another line I like is “other wise honest people” WTF? Yea ‘Ol Skeebo robbed a bank but he was other wise honest.
duped by other scammers who bought at inflated prices and are trying to sell at even more inflated prices. Welcome to the bubble NEO.
“You can’t cheat an honest man”…dumb thieves taken down by smarter thieves..
thats a beautiful quote spike!
“It will show more as CLOs become more popular, that risk management has not been very well practiced.”
So, why on earth would “CLOs become more popular” ??? Maybe what is meant is that CLOs will become more VISIBLE, especially in the MSM, as hedge funds crash and burn.
Here in Santa Barbara County the construction industry has hit the skids. The huge condo project looming over my shop ( go to http://www.chapalaone.com to see the “finished” project) has slowed to a crawl. In north county construction has stopped, sending the north county economy into recession.
What a mess. This whole thing should be a cause for concern to everyone in California.
montery too
hard to imagine places like these dying
Noticing that in my town in central Minnesota. Excavatorss came in months ago to dig foundation holes and build foundation….foundations are there but no construction….think the builder is running out of money. They cleared a horse farm up the street from me to build 17 craptacular 400K mini-Mansions….also.
The RE problem is finally starting to hit the local papers around here,
This is not going to end well. Some major institutions are going to go down the tubes before this is done in several years unless a bailout like Long Term Capital Management is in the “works”. Don’t think enough money can be created in the world to paper this over.
They cleared a horse farm up the street from me to build 17 craptacular 400K mini-Mansions….also.
I love the term “craptacular!”
What I also hate about this is all the land that has been pushed aside to make room for crap so a few can make some $$. Sad to see some of the old ranches go out her.
I agree completely. It’s happening around me as well. And the thing is, the developers get a zoning change for a large development that will be built in phases. Phases 2 and 3 are contingent on competion of the phase before them. If they stop at phase 1, the zoning is still in place for the rest of the land to be turned from agriculture to high-density housing. Shamefull.
I just went to the http://www.chapalaone.com website, which I have not done in about 2 months. They have added a “price” section to the site. When you look at those prices of $1,000/square foot just be aware that condos are selling in Santa Barbara for $350/square foot. I also notice that some of the units are marked “sold”. Those buyers are going to be waiting a loooooong time to move in at the rate this white elephant is being put together.
Not exactly a $1,000/sf neighborhood either, if I recall correctly. We’re not talking about Montecito here.
I am trying to decide, should I go with the “Urban Classic” with 1018 sq. ft. for $1.195 mil or just go for it and get the “Cashmere Penthouse” with just over 1600 sq ft for a mere $3 mil?
The Cashmere Penthouse has a great view of the Salvation Army homeless shelter, which is right next door to this project. However, the Urban Classic is right above the ditch where the homeless take their dumps so you get that fresh morning in downtown Santa Barbara scent. If you want the view and sounds of the 101 Freeway, which is 350 feet from the place, may I suggest the Zen Classic at $1.3 million.
may I suggest the Zen Classic at $1.3 million.
Zen Classic, classic.
The weather in California is still good isn’t it so not to worry as that is what California people always talk about is their perfect weather.
“Bear Stearns High Grade Structured Credit Strategies Enhanced Leveraged Fund”
I just love the name of this shakey assed fund. Of course it would have been better if they had added “Enhanced beyond belief Leveraged fund”
“Dependent on Borrowers Meeting Debt Service after the Payment Increases Five Fold Fund”
Chicken Little meet Bear Stearns…
test
What a difference a letter makes! Two economists, one in the clouds riding around on fairy dust destroying his reputation at the NAR….and this one who is being truthful and honest at the NAH.
Builders will need to lower prices substantially more to move inventories. It’s all about affordability and there are not many buyers left at these prices.
Let the plunge continue.
Somebody is buying US Treasuries and making rates drop some. I suspect it’s the FED.
If so, the Fed has a hard road to hoe. My understanding is that the Chinese are cutting back substantially in their purchase of U.S. bonds.
If so, the FED has a hard road to hoe.
My understanding is that the Chinese are cutting back substantially on their purchase of U.S. bonds.
Apologize for the double post — was getting an extensive error message, and thought my original posting failed.
“If so, the FED has a hard road to hoe.”
That’s row; you hoe rows and ride on roads.
You’ve exposed me to be the “non-farmer”, “non-gardener” that I am….guilty as charged
No doubt it’s the Fed. If rates go up the economy will collapse. Who else would be buying at 5.08% yield when inflation is a constant threat?
and a falling dollar
Which came first, falling bond yields or falling dollars printed to buy the bonds? Chicken and egg…
It’s not the Fed. Their purchases are transparent. And the Chinese are not going to stop purchasing US Debt. It might not be Treasuries - at least not this month. It might be Agencies, it might be corporates, it might be mortgages. The Chinese are amassing somewhere around $20 billion a month. There’s only one place you can put that kind of money - the US debt market. There is no other market in the world big enough to absorb that kind of investment. Period.
Keep in mind that this the way the market should act. If housing is falling apart, and the consumer is backing off (I’ll believe it when I see it, but it looks like slowing consumption might finally be happening) then the economy is going to slow down and interest rates should go down.
Fed is not transparent. They act through Caribbean money center banks to buy Treasuries. Why do you think they hide money supply figures?
As for the ‘chinese must buy treasuries’, why? They already have more than enough, and there are many things they need more (commodities, etc.) The idea that Chinese will lend us money forever instead of spending to raise their own standard of living is ridiculous. They don’t need us, but we do need them to lend us money.
Yes, the US economy is slowing down. No, interest rates will not go down; we are no longer the world market. Also, the borrower does not set the rates, the lender does. Meet your new Chinese masters.
The Federal Reserve can disguise its purchase by buying through the bank of england. The Chinese Government has backed away from buying.
“U.S. Treasury data released last Friday showed net purchases of U.S. Treasury notes and bonds fell to $376 million in April”
June 19, 2007
Reuters
http://tinyurl.com/ywjebt
Caribbean money center banks? The Bank of England? Take off the tinfoil hats gentlemen (or ladies.) The Fed doesn’t act this way. They have a balance sheet that can be studied. The conspiracy theories are unnecessary.
Secondly, I know about the US Treasury data. But check out purchases of Agencies, etc. And I was wrong on the $20 billion number - it’s more like $40 billion. If the Chinese decide to stop buying Treasuries and instead buy, say commodities as suggested, they would be able to buy all the wheat, corn, soybeans, copper, oil, gold and on and on that’s produced in the world in any given month. Really doesn’t look like that’s happening, does it?
Gab — why don’t you back up your claims with data or stop gabbing.
I think you should read up on treasuries and TIO operations before you refer to normal Federal Reserve operations as Tinfoil hat theory.
Exchange Stabilization Fund US Treasury holdings.
http://tinyurl.com/3bl8s3
“The ESF can undertake three main types of operations — the purchase or sale of foreign currency, the acquisition or use of SDRs, and loans or credits to foreign governments or entities.”
http://tinyurl.com/2z9dxx
Hoz — Thanks for refuting Gab’s nonsense with actual facts.
Here’s a quote from Brad Setsers blog, “Reserve growth then accelerated a bit more in q1 2006. The BEA data shows that official actors – in principle central banks and sovereign wealth funds but in practice mostly central banks – bought $150b in US assets in q1 – a record $600b annual pace. And that too is an understatement. My measure of global reserve growth suggests the pace of reserve growth in q1 was around $250b in q1, and I would bet that more than $150b found its way into dollars. In April and May, global reserve growth probably picked up to a $300b quarterly pace, so $200b in central bank demand for dollars in q2 — at least up until June — seems about right. That is, to put it mildly, a lot.
Steven Englander of Merrill Lynch is quite right to observe — in a recent note — that:
“What this [the large share of the 2006 deficit financed by central bank buying] suggests is that there is a big gap between the US funding needs and the foreign private sector’s desire to acquire USD assets. The implication is that the dollar is being buoyed largely by official purchases. … What is more interesting is that the most of up data suggests that, if anything, central banks have accelerated their buying so far this year …”
If you don’t believe him, and Englander at Merrill, there’s not much I can say to convince you. And the ESF is not the Fed is it?
I think you should check out the Federal reserve and the Treasury dept. Yes the ESF is part of the US central banking system and reports to the Federal Reserve.
Hoz said,”— the purchase or sale of foreign currency, the acquisition or use of SDRs, and loans or credits to foreign governments or entities.”
Where exactly in that quote of yours does it say purchase of US gov’t debt?
“The Exchange Stabilization Fund (ESF) of the United States Treasury was created and originally financed by the Gold Reserve Act of 1934 to contribute to exchange rate stability and counter disorderly conditions in the foreign exchange market. The Act authorized the Secretary of the Treasury, to deal in gold, foreign exchange, securities, and instruments of credit, under the exclusive control of the Secretary of the Treasury subject to the approval of the President.”
From the Federal REserve Bank of NY
http://www.ny.frb.org/aboutthefed/fedpoint/fed14.html
The typical method is for the US to purchase foreign debt, the foreign country purchases US debt then a SDR is created. Which is a swap. The primary purchaser of US debt involved in swap trades is England.
And using Brad Setsers blog as a reference source to dispute anything is not the same as going to the source. And nowhere does Steve Englander say or suggest that the Fed does not intervene in the US Treasury market. Englander is to bearish on the dollar to believe the Fed does not intervene.
I’ve been suggesting the same for months. I believe the Fed caps the l-t T-bond interest rates — a good way to make sure the substitute asset (U.S. equities) “always go up.”
And when did the Fed start capping long bond rates? Is there some reason they didn’t cap rates in the 70’s, when long rates went into the mid-teens? Or is this capping of rates a fairly recent phenomenom?
Newfangled accelerator theory of investment: Supress the inflation risk premium on the l-t Treasury bond, and watch stock price gains accelerate in response.
Think anyone’s learned anything? Take a look at this (scroll down to the bottom, the best stuff is there)
http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&Item=180121787023&Category=12605
Call Giovanni or we’ll break your legs.
Bella Lago roughly translates to Beautiful Lake.
Have a look at this satellite photo and tell me that’s a beautiful lake.
If you meth from the next door neighbor it would be.
You know it is going to end badly when it becomes this farsical.
What this whole leveraged game turns out to be is nothing more than a bunch of high-roller hedge funds making 20 to 1 leveraged bets that Joe Six Pack can make his monthly mortgage nut for one more month.
These stories all have the same ingredients as Enron. Sure, the losses can be moved around and covered up for a while. But then poof!
Yes, the full impact of this (to me) bizarre financial phenom — 20 to 1 (or whatever) bets by hedge funds against FBs making their payments — hit me a couple of weeks ago. After all is said and done, this may be the biggest story of the RE bubble, since it may just have the biggest impact.
“The slump in the housing market has taken its toll on the Treasure Valley, said Mike Riggs, president of Middleton-based Crestmark Custom Homes. Riggs placed part of the blame for the stalled building industry on out-of-state homebuilders who continue to construct single-family homes despite the downturn in sales activity, thereby adding to an already over-supplied market.”
The national builders spell the end for a lot of the little guys. They’re going to bury them. Sad to see what these big builders did to hundreds of communities across this nation. As Ben has mentioned, overbuilding is a very bad thing. It creates a host of problems for years to come.
I would like to add that local governments were responsible for permitting this.
And the local governments were suppose to stop this how? Local governments can do at lot with zoning and regulations (design and density), but stopping someone from buildings homes on land that is zoned for housing is not one of the things they can stop. (Legally)
There is some validity to ragerunner’s post, but this discounts the political (also known as money) influence the developers throw around. They lobby for more zoning for housing, higher densities, bond money for infrastructure and a host of other giveaways from the cities. And City Councils and Boards of Supervisors (this is in Calif.) roll over like good dogs because of the campaign cash and other benefits the builders/developers provide. The politicos care not a whit about the citizens of their communities and their quality of life. It’s all about getting re-elected or moving to higher office.
Local governments are not required to issue building permits to anyone and everyone. That’s why there are zoning regulations, growth management acts, etc. The only reason they allowed it was for revenue purposes. They sold out. Oftentimes, zoning regulations were changed to accommodate builders. Dig around and see for yourself. Local governments officials are for sale to the highest bidder.
Well, in Loudoun county (an exurb of DC), the local governments made it illegal to build a house on less than three acres (to reduce sprawl). So, rather than normal-sized houses on normal-sized lots, you have $1 million McMansions sitting vacant on 3 acre unmowed lots.
Oh well. We could have just build normal single-family homes near mass transit. Screw that.
That restriction will kill the private sector economy of Loudoun County, and coupled with restrictions in Fairfax and Prince William will kill the private sector in Northern Virginia. Governments must allow middle income home construction or the private sector economic base will fall apart.
We’ve got more housing per person in NoVA than we had in 2000. These restrictions aint gonna kill anything.
I’d much rather have restrictions than the complete mess that is Fairfax county (and to a lesser extent Loudoun).
My SO and I agree that NoVA could have been a really nice place to live, but there was no planning and no coordination by local governments. The builders rode over the local governments starting 30-years ago or so. They built houses, but no infrastructure. Roads, but no arteries. A hodge-podge of random spaghetti. A soulless mess.
“…the local governments made it illegal to build a house on less than three acres (to reduce sprawl)”
Um, how does making lot sizes huge REDUCE sprawl? Wouldn’t it make the sprawl worse?
Exactly, AKRon. These rich environmentalist wannabes act as if they’re preventing urban sprawl but instead they’re the main problem. Loudoun’s limitations are why more and more people live as far out as West Virginia. Similar restrictions in Maryland is why people started moving to Frederick.
Wait….isn’t there a housing shortage? I heard there was a housing shortage in So Cal and we can’t have enough houses for all these people. I mean sure we have paved the whole area from the base of the mountains to the ocean and from the dessert to the forests…but we need MORE houses!
Agreed we may have an oversupply problem, but most of this is to take attention away from the biggest problem - price.
By going on and on about overbuilding, they can blame someone else and still hold to the idea that the price they paid is what their house should be worth.
I guarantee you, if they priced it right there are people who would buy all of these houses.
“A foundering Bear Stearns hedge fund staved off collapse for another day, getting a 24-hour reprieve from angry creditors in order to allow Blackstone Group to implement a rescue plan.”
Who brokered the reprieve?
Probably the i-bankers who are bringing Blackstone public. Surprise! the BX IPO has been moved up to this week.
http://tinyurl.com/36bpch
Gotta get that thing out the door before this hits the fan…
Amazing.
I think you’re right on JP. I bet there’s a lot of Blackstone insiders who are sweating bullets over the damage that might happen to their IPO if the BS hedge fund were to go belly up and start a ripple in the market.
In any event, the real show is just about to start.
Pass the popcorn Neil…..
http://www.larouchepub.com/other/2007/3418bids_dem_candidate.html
Blackstone is one of the financial locusts bidding on the 2008 Democratic Presidential candidates.
Reminds me of a story from Reminiscences of a Stock Operator where Livermore saw an ad in the paper for a railroad bond offering. A few days later there was another ad for another railroad bond offering - scheduled before the first one. At that point Livermore realized they were climbing all over each other for the remaining scraps of money and started shorting them. This was the Panic of 1907, I think.
“A foundering Bear Stearns hedge fund staved off collapse for another day, getting a 24-hour reprieve from angry creditors in order to allow Blackstone Group to implement a rescue plan.”
Who put the private Blackstone Group up to the task of implementing a public bailout?
A 24 hour reprieve will only get you a band-aid. If you have a gaping, life-threatening wound, you’re still gonna die. Sounds like good money chasing after bad to me.
In my early banking days, I was always taught that the first loss is the least loss.
What would be the fallout from this when the whole shebang inevitably goes tits-up? Do we have a historic to look at? Because Long Term Capital Management wasn’t allowed to implode. What about this one?
It’s all sort of arcane to me, this hedge fund stuff, except that I hear about all the havoc they can wreak on the national and internation economy if they fail. Is that really true?
Certainly no expert on hedge funds, but have dealt with pools of securitized debt. The thing is (just like with homes), there is always a next buyer out there - - caveat is, that price has to be attractive enough for someone to take the risk. When these things start getting marked to market and then sold or re-packaged and sold, there will likely be several sellers and few buyers. Sellers will chase the market down, investors/bagholders finally realize their losses. I think a lot of this “excess liquidity” internationally goes Poof.
Thanks, Smithers. If I’m reading the post correctly, you’re basically saying there will be losses like the dot.bomb bubble, where investors, large and small alike, watched their money vaporize. But it’s not like this is big enough to cause a worldwide financial meltdown, or is it? That’s what they thought about LTCM.
Really, I think we’ve become far too dependent on a monetary system that is so completely broken.
First, if the proportion of a mortgage pool that can be tranched into AAA securities gets too small, there will be no profit in creating the tranches- the movement of mortgages from lenders to securitizers will stop. Also, if large investors stop trusting the rating agency ratings for MBS, they will stop buying them. Of course someone will always be found to buy junk bonds, but these are very hard to accurately price. If pension funds and foreign buyers quit purchasing these, we will be back to either a situation such as holds in commercial MBS (where
Akron,
please finish your thought. Really good post.
The reason that bailouts are aranged is to go after the collateral. See, the Bear fund has investors who want their money back, but to do that they need to sell the MBS. They have the MBS in a leveraged account that has very liquid treasuries for collateral, which Bear cannot access until the MBS secured by the collateral is sold. The deal is that Bear will practically give the MBS equity tranche to anyone because it is near impossible to sell. The other side will work the deal in their favor by making sure to get the collateral, or the receipts from the earlier sale of AAA MBS. This way, Bear will get a pile of money to pay back their investors (even at heavy losses), while Blackstone gets admittedly worthless MBS, but also gets the collateral from the treasuries at a steep discount, which is very profitable.
First, if the proportion of a mortgage pool that can be tranched into AAA securities gets too small, there will be no profit in creating the tranches- the movement of mortgages from lenders to securitizers will stop. Also, if large investors stop trusting the rating agency ratings for MBS, they will stop buying them. Of course someone will always be found to buy junk bonds, but these are very hard to accurately price. If pension funds and foreign buyers quit purchasing these, we will be back to either a situation such as holds in commercial MBS (where less than 25 percent of mortgages are securitized- most are held by the lender), or a situation where only the safest mortgage pools end up in MBS (i.e. Ginnie Mae). This will raise interest rates due to illiquidity (lenders are conservative when they have to keep their mortgages).
“No doubt it’s the Fed. If rates go up the economy will collapse. Who else would be buying at 5.08% yield when inflation is a constant threat?”
Those fearful of a CDO collapse perhaps. Right now, the markets are caught between fear and fear rather than greed and fear. Fear of inflation, fear of recession. Money is trying to find somewhere to go, and will continue to do so until it starts to disappear.
“Those fearful of a CDO collapse perhaps.”
Which brings us back to the Fed, no?
The New York Post. “A foundering Bear Stearns hedge fund staved off collapse for another day, getting a 24-hour reprieve from angry creditors in order to allow Blackstone Group to implement a rescue plan.”
One of the reasons for the coming magnitude of the housing valuation debacle will be the arrogance, self-centeredness, and conceit of those in their swank Wall Street corner offices and comfy Hampton summer digs who haven’t a fookin’ clue as to how severe the collapse of the US middle class has become.
What no bread? Silly people, why…let them eat cake!
And now that shit has hit the proverbial fan, (acknowledged today by NYC Mayor Bloomberg on Drudge) and these POS’s banksters are scramblin’ to rearrange the deck chairs on the Titantic, ’cause it’s all blown up in their collective faces.
One of the reasons for the coming magnitude of the housing valuation debacle will be the arrogance, self-centeredness, and conceit of those in their swank Wall Street corner offices and comfy Hampton summer digs who haven’t a fookin’ clue as to how severe the collapse of the US middle class has become.
What no bread? Silly people, why…let them eat cake!
Well put! You summed it up well.
I think Mayor Bloomberg was the second to predict the housing collapse, after Ben Jones. Fortunately the collateral damage has been included in the city’s budget every year for the past few, leading to big surpluses — for the moment. Remember, there is something Bloomberg knows much more about than government: finance.
Smart guy, actually, to save against the bad times. You don’t see him giving any Bush-style tax cuts. However, NY just may be able to provide services during the rough times ahead, when other municipalities (heck, even the fed gov) can’t. LMAO! Imagine the Federal Gov looking for a bailout from NYC!
I don’t agree with everything Bloomberg does or says, but for my money, he’s the best mayor NY ever had. As for Wall Street and the Paulson gang, he knows this crowd. There’s nothing they can do to bamboozle or intimidate him.
I must agree, after I read yesterday on Schneiers security blog
http://www.schneier.com/crypto-gram-0706.html
about the JFK pipe-(dream/)line terrorist plans:
‘The only voice of reason out there seemed to be New York’s Mayor Michael Bloomberg, who said: “There are lots of threats to you in the world. There’s the threat of a heart attack for genetic reasons. You can’t sit there and worry about everything. Get a life…. You have a much greater danger of being hit by lightning than being struck by a terrorist.”‘
And he was widely excoriated for it.
OB-tom,
interesting, in NY there was a different take. The feds hyped the danger–we were on the verge of annihilation–while Bloomberg was pretty low-key and matter-of-fact. Kelly runs the city’s own terrorism squad-and after all his years as a top cop and having developed COMSTAT, now used by police world-wide–he has better intel from law enforcement around the world than the feds. If Kelly and Bloomberg were not excited, you can bet it was just the feds making a lot of unnecessary noise.
Hey, palmetto, where did you learn economics? The federal goverment can’t save for a rainy day like city or state can. If they did that would cause the money supply to contract, and lead to a resession. That’s we have frauds like Social Security “accounts” and “trust fund”, revenue has to be spent. Besides that, The Federal Goverment can create money simply by issuing treasury bonds or by having the treasury print notes (like green backs during the civil war). So they not going to go bankrupt like a city or corporation might, the govenment debt never has to be repayed, it is just rolled over. Also high taxes in a fiat money system are not for revenue to be “saved”. High taxes are to dampen private spending to control inflation caused out of control money creation. That’s the theory, it doesn’t work that way in the real world, because high taxs only slows down real economic growth, but not goverment spending.
my county spent every dime
a comfort center for illegals and planting trees
Fairfax or Alexandria?
One of the reasons for the coming magnitude of the housing valuation debacle will be the arrogance, self-centeredness, and conceit of those in their swank Wall Street corner offices and comfy Hampton summer digs who haven’t a fookin’ clue as to how severe the collapse of the US middle class has become.
This reminds of a John Elway story. Years ago when the NFL had a strike Elway was chatting with a sports reporter from one of the Denver papers. Elway was surprised at the negative reaction from the fans to the strike, as he figured that they would be sympathetic to the players. The reporter told Elway that the fans felt that the players were overpaid. After discussing this for a while, the reporter asked Elway to guess how much he (the reporter) was paid. His guess was 3X what the reporter’s salary actually was. Elway was shocked to learn that “middle class” people were “paid so little”.
I have ppersonally encountered this kind of ignorance from people who are high up the money ladder (”What? You don’t make 250K?”).
Actually, I encountered this same ignorance in a local builder!
He was going on about how carpenters weren’t paid very well (i.e. no fat to cut), and then stated that one guy on his framing crew only made $__,___ dollars/year. And I told him that was more than I made as a professor at the university. Yes, there are faculty that make six figures, but they are few and far between.
And for comparison, most of our support staff–often highly overeducated–generally make $30-40k/year. Half of what a young framer makes in this town.
Maybe people think “middle class” folk make 250K because that’s what they state on loan applications.
‘An alarming number of Fannie Mae’s recent investigations have found that otherwise honest consumers and real estate professionals are fooled into conspiring to commit mortgage fraud.’
You know, if you’re working in real estate and can be ‘fooled’ into conspiring to commit mortgage fraud, you’re not exactly a ‘professional’, now are you? You are, in fact, a crook. That’s like saying Enron Executives were fooled into commiting corporate fraud.
“Last week Standard & Poor’s published a report titled ‘The Covenant-Lite Juggernaut Is Raising CLO Risks — And Standard & Poor’s Is Responding.’ The report details the growth in collateralized loan obligations being made with virtually no covenants, provisions that have historically required borrowers to meet certain financial tests dictated by lenders.”
“S&P points out that so-called cov-lite loan volume in the first quarter ‘exploded to $48 billion, a stupendous figure by any measure, from the $24 billion full-year 2006 total.’ It projects that ‘when the cycle turns (as is inevitable) lenders…will rue the day they gave up on maintenance covenants.’”
And when that really happens (maybe 2-6 months after that happens) , the mortgage credit crunch will really truely begin - 20% down (and prove where you got it), several months living expenses in the bank after making the down payment and paying closing costs, job and salary verification, heck, maybe even a face-to-face interview.
I can’t wait.
But there is one think I’m not sure about - I had to prove I had been in the same job for 18 months I think to get my first “good” credit card (no annual fee, good rate, from USAA). Will job history in the same position or at least for the same employer come back? It seems ridiculous since job culture has changed so much, but people with 20% down payments are going to be few and far between as well. Any ideas?
Potential Buyer here…
But I WILL WANT A HELL of LOT MORE than a “Squirrel Hat”, stale cupcakes and a some lousy National Association of Homebuilders T-Shirt that says “Do unto others and Move out Quickly”
munch..munch
BTW, what is happening to CFC? Is Mozillo done selling his shares?
Check out this page… Selling like crazy…
Last 6 months
Sold - 121 transactions
Bought - 0 transactions
http://finance.yahoo.com/q/it?s=CFC
In this one page (data since May 02 2006) I counted Angelo Mozilo cashing out of stock options for a total of about $130 million.
Got 10% down?
SPF Factor 130 Million
That was funny as hell…..
Edmond Dontes eats his Monte Cristo sandwich, laughing as events unfold…
“‘The grounds for the panic were real enough and it will probably happen again,’ said Charles Dumas, director of Lombard Street Research. ‘The Spanish housing market has had it.’”
http://tinyurl.com/2t83am
“Home Depot can finally take down that “for sale” sign.
After months of speculation, the home improvement chain has sold its supply unit, HD Supply, to a group of private equity firms for more than $10 billion. ”
Well lucky them…., but then here’s the scary part:
“A Home Depot spokeswoman declined comment on the alleged sale, but it was widely reported Tuesday that the buyers included Bain Capital, Carlyle Group and Clayton Dubilier & Rice. The deal is expected to be announced later today.”
Carlyle Group… Isn’t that where the emperor of the United States and his dad keep their money? Do they see a bail-out coming, or are they just feeling sorry for Home-Depot?
Let me point something out;
If you buy a 500k mortgage and put 20% down, that’s 100k out of pocket and a payment of $2398+- at 6% for 30 years.
If that house [mortgage] drops to 400k, you put the same 20% down that’s 80k [a 20k savings] and rates are 8% payments are $2348 for 30 years
House values drop, rates go up, and you save 20k up front AND $50 per month. 1% taxes is another $1000 per year in savings, insurance is considerable less, all for the same home.
If you don’t have the downpayment it works the same [except I want you to get bent and never buy a home]
Since almost everyone is a payment buyer, how is higher rates a bad thing? Values will drop to keep the payment the same. If rates go to 11% you put 60k down and the house sells for 300k, with the same payment. Are you getting it yet?
To quote the punchline of one of my favorite jokes; ‘how do it know?’.
I used to ask myself what will happen when this thing blows up.. then I read 3 books last week.. american bubble economy, the second great depression and financial armeggedon.. don’t ask myself that any more.. get to euros, gold and cash quickly.
34 - Executive Order 6102 - Requiring Gold Coin, Gold Bullion and Foreign Currency to Be Delivered to the Government
April 21, 2008
By virtue Of the authority vested in me by Section 5 (b) of the Act of October 6, 1917, as amended by Section 2 of the Act of March 9, 2008, entitled “An Act to provide relief in the existing national emergency in banking, and for other purposes,” in which amendatory Act Congress declared that a serious emergency exists, I, George W. Bush, President of the United States of America, do declare that said national emergency still continues to exist and pursuant to said section do hereby prohibit the hoarding of gold coin, gold bullion, and foreign currency within the United States by individuals, partnerships, associations and corporations and hereby prescribe the following regulations for carrying out the purposes of this order:
Section 1. For the purposes of this regulation, the term “hoarding” means the withdrawal and withholding of gold coin, gold bullion or foreign currency from the recognized and customary channels of trade. The term “person” means any individual, partnership, association or corporation.
(read more here: http://tinyurl.com/2aqduy )
For those of you following the Bear Stearns debacle…
Several posters at CR state that this fire sale (now on again at $850M) could force everyone to mark their MBSs & CDOs to market. If that’s the case, the red stuff’s going to be running down the ’street.