There Might Be Something Better Coming Down The Line
Some housing bubble news from Wall Street and Washington. CNN Money, “Merrill Lynch has seized about $800 million of assets from troubled hedge funds managed by Bear Stearns, throwing in doubt the chances that the funds will survive. The assets, which were collateral for underperforming loans made by Merrill Lynch to the two funds, are mainly bonds backed by other securities that are now expected to be sold off later in the day, a person familiar with the situation told CNNMoney.com Wednesday morning.”
“The two funds suffered double-digit losses through April after making bad bets on securities backed by subprime loans, Reuters reported.”
“Just a few months back, an industry insider had warned of a ‘catharsis’ and coming collapse in the bond market. ‘We’re looking at somewhat immature markets that are going through a growth phase,’ Ralph Cioffi, senior managing director of Bear Stearns Asset Management, said at a bond conference in New York in February. ‘There is a catharsis and a cleaning-out process.’”
“Cioffi warned investors attending a CDO and Credit Derivatives conference about inexperienced managers who may not understand the risks of the market. ‘Up until now, any CDO manager, primarily new CDO managers with light staffing, very little technology and unbalanced capability, was able to get a CDO done,’ Cioffi said at the time. ‘I don’t see that going forward.’”
The Street.com. “Observers fear the dissolution of the Bear funds could spell bad news for other hedge funds and managers of so-called collateralized debt obligations, pools of debt including leveraged loans and mortgages, because it may force a broad repricing in those largely illiquid mortgage securities.”
From Reuters. “The CDOs for sale are mostly rated ‘AAA,’ but at least one is rated ‘BBB,’ according to the lists.”
The New York Post. “As a Bear Stearns internal hedge fund begins collapsing, all of Wall Street is wondering if other funds might follow suit.”
“One hedge fund portfolio manager at a $4 billion fund told The Post that auctioning off the assets of Bear’s High Grade Structured Credit Strategies Enhanced Leverage fund would unleash Wall Street’s dirty secret.”
“‘These CDOs [collateralized debt obligations] are probably marked 30 percent higher than where they should be,’ he said.”
From Bloomberg. “Bear Stearns Cos., the biggest broker for American hedge funds, offered to provide $1.5 billion in loans to help rescue a money-losing fund run by its asset-management unit, a person familiar with the situation said.”
“Bear Stearns, seeking to stave off liquidation of the fund, made the commitment Monday in a meeting with creditors after losses forced the sale of $4 billion of mortgage bonds last week.”
“Merrill Lynch and JPMorgan had planned to sell another $800 million of bonds of so-called collateralized debt obligations owned by the fund this week, the person said.”
“‘It’s tough to tell whether this was an isolated event or whether there will be other funds like this that have bought this type of paper and are facing mark downs or redemptions,’ a product portfolio manager who runs the CDO business at Smith Breeden Associates Inc, Peter Nolan, said. The firm manages about $34 billion in fixed-income assets, about a third of which are asset-backed bonds.”
“The bond market’s most battered players, the hedge funds and trading desks specializing in mortgage-backed securities, now have to handle a total of $2 billion or more hitting a market that is still licking its wounds from the first burst of sub-prime woes.”
“The sales are likely to force a serious re-pricing of billions of dollars worth of highly complex and often illiquid securities called collateralized debt obligations, or bonds made from other bonds.”
“Held by both Wall Street firms and hedge funds, the CDOs stocked with sub-prime bonds have not collapsed in price alongside other sub-prime bonds.”
“‘They haven’t collapsed in price because they are often mismarked or just don’t get traded,’ said one hedge fund executive who has evaluated the Bear fund’s positions. ‘That is going to change in a big way today at 4 p.m., when the [Merrill] auction ends.’”
The Associated Press. “Some homeowners in California, Florida and the southwestern U.S. now face more than a 60 percent chance their property will be worth less in two years, according to the PMI U.S. Market Risk index.”
“The index found that 15 of the nation’s 50 largest metro areas have a greater than 50 percent chance of seeing price drops. Eleven of those markets are in California and Florida, including Los Angeles and Miami. The riskiest of all markets are Riverside, Calif., Phoenix, Las Vegas and West Palm Beach, Fla.,each with a greater-than-60 percent chance of depreciation.”
“‘What the markets with the greatest risk of decline have in common is a history of price volatility: rapidly rising rates of price appreciation above the long-term average followed by a recent sharp slowdown in the rate of appreciation,’ said Mark Milner, PMI’s chief risk officer.”
“Applications to buy and refinance homes dropped last week, an industry trade group said on Wednesday, the latest sign that U.S. housing remains mired in a downturn.”
“‘We’re not through with this correction,’ said Gregory Miller, chief economist at SunTrust Banks Inc. in Atlanta. ‘Price correction is an absolute necessity, affordability got way out of hand.’”
“The jump in 30-year mortgage rates by more than a half a percentage point in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers.”
“The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, according to the National Association of Realtors.”
“‘It’s a blood bath,’ said Mark Kiesel, executive VP of Pacific Investment Management Co., the manager of $668 billion in bond funds. ‘We’re talking about a two- to three-year downturn that will take a whole host of characters with it.’”
“The recent increase in mortgage rates is the biggest spike since 2004. The change means buyers can afford 8 percent less house than they could five weeks ago, Kiesel said. ‘Prices are going lower,’ he said.”
“In addition to their primary mortgages, homeowners had $913.7 billion of debt in home equity loans in 2005, more than double the $445.1 billion in 2001, according to a paper by former Federal Reserve Chairman Alan Greenspan and James Kennedy on equity extraction issued by the Fed three months ago.”
“About a third of that money, extracted as home values surged 53 percent from 2000 to 2005, was used to buy cars and other consumer goods, according to the paper. The interest rate on those loans doubled to 8.25 percent in 2006 from 4 percent in 2003.”
“The share of mortgages entering foreclosure rose to 0.58 percent in the first quarter, the highest on record, from 0.54 percent in the final three months of 2006, the Mortgage Bankers Association said in a report last week.”
“Prime loans entering foreclosure increased to 0.25 percent, the highest in a survey that goes back to 1972.”
“The share of people taking out all types of adjustable-rate home loans averaged 29 percent during the past three years, compared with the 17 percent average of the prior three years, according to Freddie Mac.”
“Higher fixed mortgage rates and stricter lending standards mean some of those borrowers won’t be able to refinance into fixed-rate loans. Many of them have seen their home’s value drop even as their interest rates adjust higher.”
“‘When all these people see their mortgage payment and it’s up 40 or 50 percent, they’re going to say, ‘We can’t stay in this house,’ Pimco’s Kiesel said. ‘And there are millions of people in this situation.’”
“Higher mortgage rates and a glut of unsold homes are prompting many would-be buyers to hold off on purchasing as they await further price declines. The Mortgage Bankers Association’s report, along with figures yesterday showing a decline in home starts, adds to evidence that the housing slump will linger, economists said.”
“‘The message I’m getting is that maybe only about two- thirds of those cases do the builders consider the incentives, even the price cuts, to be effective,’ David Seiders, chief economist of the National Association of Home Builders, said in an interview June 18. ‘In some cases it’s actually making the buyers think ‘wow, there might be something better coming down the line.’”
“Just a few months back, an industry insider had warned of a ‘catharsis’ and coming collapse in the bond market. ‘We’re looking at somewhat immature markets that are going through a growth phase,’ Ralph Cioffi, senior managing director of Bear Stearns Asset Management, said at a bond conference in New York in February. ‘There is a catharsis and a cleaning-out process.’”
*******
I love this!
Cioffi intially managed that crap fund that’s going down (right?) and he was predicting his own fund’s demise back in February.
Ha!
“crap fund” = High-Grade Structured Credit Strategies Enhanced Leverage fund
More from the link Ben provided:
“What is striking about the troubled Bear Stearns fund is the vast experience of the team assembled in 2003 to create a hedge fund with $25 billion in assets.
Cioffi spearheaded the initial structured credit efforts at Bear Stearns, according to Fitch Ratings analyst Vincent Matsui. Cioffi has been with Bear Stearns Asset Management since 1985, when he first started in fixed-income sales with a specialty in structured finance.
Ray McGarrigal, a senior managing director who has been with Bear Stearns since 1997, is another lead manager, along with Matthew Tannin, a senior managing director who has been with Bear Stearns since 1994 on the Collateralized Debt Obligation structuring desk.
CDOs are pools of bond securities that are grouped together to help diversify risk. Cioffi warned investors attending the February CDO and Credit Derivatives conference about inexperienced managers who may not understand the risks of the market.
“‘Up until now, any CDO manager, primarily new CDO managers with light staffing, very little technology and unbalanced capability, was able to get a CDO done,’ Cioffi said at the time. ‘I don’t see that going forward.’”
*******
Apparently, all that experience never checked out the HBB.
Too bad for them - and their investors.
Someone correct me if I am wrong, but the problems associated with this hedge fund is brought on by the management’s forecast that sub prime would melt down faster and steeper than it did. The ABX index nosedived for a couple months and then recovered. The recovery is what caught the B/S fund short.
The irony may be that Merrill’s actions of seizure and auction could open up the sub prime to more scrutiny and mark to market pricing! Too bad B/S would not benefit, since their assets now belong to the lender!! How does that go? Bwhahhahahaha!
That’s been my take as well, given the timing of when they had trouble (Mar-Apr), it looks that way. If it were the loans it would have been Feb.
Really? Because B/S was the one called out by other hedge funds who were shorting the ABX for manipulating the index by buying up those bad mortgages.
Or is it just coincidence?
Anyway, too bad we won’t get the auction afterall. I was looking forward to some big headlines.
ha, I posted that dealbook link a few weeks back. unbelieveable, isn’t it
ajas,
Perhaps the right hand does not know what the left hand is doing? You link clearly shows B/S was crying foul.
BTW, your second link is the same as the first link, but I gather the auction is called off?
From May 22, 2007
Financial news online
“Bear Stearns also lost a senior executive from its hedge fund business when Leonard Feder, co-head of prime brokerage, left the firm for personal reasons after only two months in the role. Feder’s predecessor, Jeff Dorman, left the bank in February to become global head of North American finance at Deutsche Bank.”
I adore it when the honcho quits prior to the nightmare.
Actually, it looks like JPMorgan Chase decided not to sell off their $400M of bonds, but Merrill Lynch went ahead with it?
Sorry about that second link,
here’s a bloomberg link to make up for it.
Overheard at the auction were some disgruntled Bear Stearns fund managers: “You’ve got to be kidding me, dude. IT’S NOT FAIR!” One commented that he was “really mad, really upset, really hurt” by the actions of Merrill Lynch “just trying to dump the bonds to get what they can out of em.”
New buyers may be getting a steal, but current CDO holders feel like they’ve been ripped off. “Merrill Lynch promised us that they were not going to go below the market value.”
———————————
Anyone that doesn’t know what I’m talking about needs to watch this immediately.
How long before these hedge fund managers are dragged from court to jail, in Paris-style hysterics, screaming “Mom! It’s not right!”
Awesome, Ajas. I knew what you were talking about right away. Florida townhomes half off? Let me know when they get to Barney’s Annual Santa Monica Airport Hanger Sale prices.
“Merrill Lynch promised us that they were not going to go below the market value”
So even fund managers don’t understand the very basic concept of “market value”. Does B/S recruit fund managers from the RE industry?
Apparently, all that experience never checked out the HBB.
Maybe not, but remember fund managers perform based on the structure of incentives. They are scooping up huge percentages of extraordinary returns and yet lose little except prestige when those returns become losses. So there is “no lesson to be learned” in the sense that the talking heads on CNBC lament; the lesson is that the structure of compensation on Wall Street encourages extreme risk taking.
with OPM of course. not their own
Exactly. It seems to me like “experience” in this case is just figuring out that before you retire you’re only going to get a couple of chances to game the system HARD and then get out rich (and you probably figured this out at the time you missed the first opportunity), so when the next opportunity shows up, be ready and don’t screw it up! THAT’s the voice of experience :-).
since 1997.
Give me a freaking break. That’s what is wrong with this whole shooting match. Give me someone “since 1967.”
Guys. This just in. JP morgan just cancelled the sale of their part of the BS MBS’s.
http://tinyurl.com/29j8v5
Could it be that ML did not get much for them?
By the way, this brings up an interesting question, what is the worse signal to the market:
1. That you’re selling an overleveraged hedge funds assets for a margin call; or
2. That you have the right to sell the hedge funds assets to cover a margin call, but decide not to because the price is too low.
I don’t think either is a great signal, but #2 might make people more scared. Uncertainty of how low is a real problem. If there is a price, at least there is a known price…
I think #2 is worse. It just adds to the supply. Like housing inventory, prices tend to go down when supply goes up and demand down.
This is Wall Street with a special message for the housing bubble blog.
Please ignore the Bear Stearns news. It is too complicated for you to understand. Please go back to obsessing over the daily peccadilloes of real estate spokespeople as if they were your personal Paris Hilton or Brittany Spears.
Thank you.
LOL!
A truer statement never was said.
This is the Housing Bubble Blog with news for Wall Street. The concept of affordable housing is clearly too simple for you to understand. Go back to your computer models and hedgefunds and try to save some of your bonus. You will need it when you are unemployed next year.
Breaking News:
Merrill Sells Bear Stearns Fund Assets
“Multiple people familiar with the auction, speaking on condition of anonymity because they were not authorized to discuss it publicly, confirmed that it took place despite last-minute speculation it might be canceled.”
Just confirmed in a couple of different stories, they did NOT call off the auction, no word on how much it went for–I’m sure Wall Street is not happy, but the results are going to get out sooner or later, and a lot of Assets on Balance Sheets could see a repricing . . .
Old Panic of ‘07: J.P. Morgan steps in to save the day
New Panic of ‘07: J.P. Morgan sells to avoid the fray
LOL. Bravo.
OFHEO uses about 10000 words to say: we’ll keep the SFH conforming limit at $417k:
http://www.ofheo.gov/media/pdf/confloanlimguidance62007.pdf
big gov - cost you 10k per word
and they’ll all get raises !
With unpleasant news (to the REIC and overleveraged FBs) like that, they have to try and bury it.
Hmm… NYSE closing bell at 4 PM, the auction will end at 4 PM, no time for the market to really react during normal trading hours. Shall we open a pool for likely results tomorrow morning?
My only regret is that it’s not quite July yet.
‘That is going to change in a big way today at 4 p.m., when the [Merrill] auction ends.’”
Awesome. Wish I could be ringing that bell today.
LOL, scenes we’d like to see: Instead of ringing the bell, maybe they could have the folks from Bear Stearns and Merrill Lynch come out with a chorus of kazoos. Even better, whoopee cushions.
LOL!
And I wonder what terms of endearment each side has used in discussions with each other since Friday.
My guess is that the investors from this failed fund would like to shove that bell up Cioffi’s ass and then take turns “ringing” it at today’s 4pm close. Hope CNBC covers it.
they got theirs. don’t worry, it’s the “investors” who will eat this garbage.
The sinking housing market will be hit again by the auction result.
‘We’re looking at somewhat immature markets that are going through a growth phase,’
wtf ?
‘…and by growing, I mean shrinking. Like a wee wee in its first bath of ice water…’
“like a scared turtle”
“It shrinks?!?”
“like a frightened turtle”. hahaha. Great episode. You were close, zee.
LOL!, Just like the Seinfeld episode “The Hamptons”
Elaine: I don’t know how you guys walk around with those things. (edit)
George: Do women know about shrinkage?
Elaine: What do you mean, like laundry? (edit)
George: I was in the POOL! I was in the POOL! (edit)
http://www.tv.com/seinfeld/the-hamptons/episode/2325/trivia.html
This HBB topic sure contains some severe ugliness when you read thru all the obfusticating financier BS.
I’m surely appreciating all the beauty inherent in the HBB and other blogs predicting long ago much of the “severe ugliness” of late.
Listening to cnbc about the hedge fund fiasco.Bear sterns is in deep sh@t. All the sliceing and diceing of the loans is catching up to these clowns.I wonder who is going to tell chinese investors their money is gone? They might punish us and dump a bunch of treasuries and really screw us over.
“I wonder who is going to tell chinese investors their money is gone? They might punish us and dump a bunch of treasuries and really screw us over.”
No one has to tell the Chinese, they know already. Yep, they might dump a bunch of treasuries and that would be a good thing, IMHO. Lot of pain, yes, even for the prudent folks. But it has to happen. Something to show that globalization is THE WORST. IDEA. EVER.
Something to show that globalization is THE WORST. IDEA. EVER.
You can roger that one, Big P!
I disagree, globalization is good for humanity, see e.g. “Why Globalization Works” by Martin Wolf.
I’m tellin’ ya, hd, of all the ideas anyone ever came up with, globalization is the one that is really stinking out the joint. I’m all for people “doing their own thing”, but that’s the point of different countries. If you don’t like how people are doing their thing where you are, you can go somewhere where people are doing their thing like you. We shoulda stayed friendly to the world, but had no involvement in the affairs of other countries, except to intervene in the event of potential nuclear catastrophe.
Globalization is not really the idea of governments or people, but of multi-national corporations. Fook-it. It ain’t working out, not even for the multi-nationals. Even they are getting into pissing matches.
“I disagree, globalization is good for humanity, see e.g. “Why Globalization Works” by Martin Wolf.”
Well, good on ya, cobber, yer entitled to yer own opinion. However, this blog and events on the ground in our communities are illustrating perfectly why GLOBALIZATION. BITES. THE BIG ONE.
Sure. It works. For multi-nationals. For a time. And then it doesn’t.
Does “comparative advantage” mean something to you?
> However, this blog and events on the ground in our communities are illustrating perfectly why GLOBALIZATION. BITES. THE BIG ONE.
When did greed ever need gloabalization to make a bubble? The Great Depression was another bust after a greedy bubble, not caused by globalization but, on the opposite, made worse by an attempt to reduce globalization (Smooth-Harley).
Peter:
Do you mean the difference between a Hindu educated software engineer making 30K a year, and a US educated software engineer making 90K a year? From a bean counters POV he would hire the hindu in a heart beat. Untill you find out that it takes both the Hindu making 30K a year coding crappy software with no notations, and a 120K a year engineer to “clean” up the mess.
Trust me on this one, it is not working. On paper there are savings, but in reality there are little to no advantages to outsourcing work. In fact, you are doing yourself a disservice, as fewer people want to work with you as they know that they are being replaced with “cheaper” labor overseas.
So if comparative advantage means anything, it means that it costs us more to live thanks to sky high RE prices and rents, comparatively speaking with other countries, although that difference is quickly dissipating as our dollar falls against them, and they have their own RE bubbles….
Yeah, I get a “comparative advantage” over FBs by reading this blog and using my common sense. Illegal immigrants get a “comparative advantage” when they come to the US and the gov forces me, at the point of a gun and threat of jail, to pay money (in the form of taxes) to subsidize them. Oil multinationals get a “comparative advantage” when they can use US forces to take over oil fields in foreign lands, on the taxpayer dime and on the blood of the vets. Oh, and then, the oil multinationals can use our blood and our money to get the “comparative advantage” of jacking up prices at the pump.
How’m I doin’? Sorry if I’m falling below your elitist intellectual standards. Which “stink tank” funds Wolf?
pinch-a-penny, I agree with you that some outsourcing is stupid. My workplace, by the way, depends on outsourcing going not too far.
Peter T, you are not alone. I am a fan of unbridled world trade. I just want higher tariffs to even the playing field and at the same time abolition of all income taxes, sales taxes, and capital gains taxes, to name a few. Heck, abolish all internal taxes on American citizens and just have tariffs. Those other guys here in this thread did not learn from the Smoot-Hawley act, that made the depression the “Great Depression.”
“I just want higher tariffs to even the playing field and at the same time abolition of all income taxes, sales taxes, and capital gains taxes, to name a few. Heck, abolish all internal taxes on American citizens and just have tariffs.”
Yeah, well, Bill, it’s like this: globalization as it stands today comes with heavy taxation that isn’t going away. Which is why it is THE WORST. IDEA. EVER.
Tell Bono I already gave at the office.
I’m thinking the reason for globalization is to level living standards between the major trading countries involved. This would be done so that a single currency or maybe 3 could be introduced and be workable. I’ve not thought through all the ramifications and reasoning but I thought that would be the most likely purpose for it.
What is a “Hindu educated software engineer” ? Do you perhaps mean a software engineer who was educated in India? Hinduism is a religon and not a country. There seem to be plenty of US-educated software engineers who are Hindus.
There should be free markets and “globalization” is part of it. There is no free lunch with outsourcing. Even a menial task like outsourcing customer service doesn’t work well when it is done in India because the people have cultural issues and are often poorly trained. I have had good experiences with Ireland (10 years ago) and the Philippines.
Globalization didn’t cause the bloody housing bubble. That’s like saying that we should not have evovled from living in caves.
Qpointe. I believe that the word can be used for those that come for india, as well as for the religion. Pardon me if it is insulting a religion, to say that those that come from that area are not the end all and be all of software programming. In fact most programming that comes out of the subcontinent is very buggy, and needs to be rewritten. If you think that MS has QC issues, I have some nightmare stories of software comissioned to TATA. In the end it would have been cheaper, and the software much better if it had been written in Basic by a 10 year old in 1985.
There is no “free trade”, per se. There is freer trade, but event that has limitations. Check, if you like, the import regs. and limitations that Japan has for food imports from the US. Both nations are members of the WTO. Or, instead of freer trade, there’s outright theft…China declines to recognize intellectual property, and the Red Army finances itself to a great extent by pirating US made movies, TV shows, video games, music and software. India declines to recognize intellectual property re pharma…and pirates drugs invented, researched and tested by Western companies. Us producers lose 10s of billions and the mercantilist policies of these countries protect their thievery.
Defining Globalization as free trade is inadequate…it also implies the free movement of labor…goodbye national boundaries, national sovereignity, national laws and traditions. It also means labor can be bargained down to the lowest possible price…and labor means everyone, including professionals, like doctors, CPAs, engineers, designers, etc.
Works out really well for multinationals, whose majority owners are shielded from the fallout…sucks for everyone else in the First World.
“I am a fan of unbridled world trade. I just want higher tariffs to even the playing field ”
Bill, could you explain what you mean? Unbridled free trade implies the absence of tariffs.
“There should be free markets and “globalization” is part of it.”
Fine. “Free” markets, as long as the multinationals give me everything they’ve got, for free. Now THAT’S a free market!
P-a-P - although Hinduism is the majority religion in India, there are also Muslim, Christian, and other religions present. There’s even an old Jewish quarter of the city formerly known as Goa (can’t remember what it is now). Plus, there are Hindus in quite a few other countries.
Geez Pinch… you really need to be more globalized than you are - read some books from around the world and understand what you type. Talk of clueless
Jeez Yensoy what is up with the ad-hominem? Maybe I hurt some sensibility? If so, I still stand with my comments. I have seen first hand the results of outsourcing projects to India. I worked at a company that banked their future on software that Tata was coding, and they were sold that Tata was the new IBM. Unfortunately for my former company, the software was extremely buggy, did not work as promised, and cost 3 times as much to debug. needles to say the product was a failure, not because of the original specs (on paper the product looked great, and their largest customers pre bought hundreds of units). Once the first units arrived, they had severe issues, and would not even comply with the basic Telecom standards. This product, and its hasty replacement doomed the company, to what it is now, a shadow of its former self.
As far as being ignorant, I just know that I know nothing….
Jeez Yensoy,
How does one become “more globalized”? The statement is nonsensical. You may have a point to make, but I suggest you use clear, grammatical English.
You might take a look at Pinch’s post, and see that she uses language effectively. That you did not understand the substance of her post is not her problem.
“unbridled” Okay. I’m wrong. I want fair tariffs. The problem is who defines what is “fair?” I want only tariffs, lotteries, and donations (keep laughing) as funding sources for the US government. So I’ll dispense with “unbridled.” Until then, I invest heartily in overseas stocks and don’t give a hoot about fairness. I profit when foreign stocks profit. I always wondered about people who just b*&ch and moan about companies (or countries) making profits when they instead could invest in their stocks and shut the *$@* up.
You nailed it! Great article but makes one wonder now how fast things are going to start unraveling now that they can’t hide it from public viewing. How deep is it going to go in the banking world, especially the smaller institutions, pension funds, etc?
what happened to the ‘Entity’ Bear Stearns created last september to pawn off $400 million of these CDOs and do a IPO, i remember reading something about it last week.
When is that IPO coming?
got cash?
“got cash?”
I do, but what’s it really worth? And should it be under my mattress instead of in the bank?
http://www.larouchepub.com/other/2007/3418bids_dem_candidate.html
Speaking of Bear Stearns’ owned entities and “pawns”, B/S has joined the bidding war for the 2008 Democratic Presidential candidates.
??? remeber when interest was roughly half the cost of owning
what factor is this guy using ???
The change means buyers can afford 8 percent less house than they could five weeks ago
By my calculations, a 1% rate increase leads to a 10% increase in monthly payment (assuming a 30 year fixed).
I must admit that I do not fully understand all this stuff about hedge funds and bond markets and such. But you know something, I’m smarter than the suits that do understand what this stuff means and bought crap anyway. I’m no Warren Buffet, but I know not to buy someone elses problem. The people at Bear Stearns and Merrill Lynch had to know the junk quality of those securities and bonds. What were they thinking?
Plus did you catch that all of this is leveraged to the hilt. The original investment was something like $600 million that was used to buy overt $6 billion of this CDO stuff. So it won’t take long for the original money to be wiped out.
This also means that all the other hedgies who have been doing the same thing are going to suddenly start facing their own problems as this stuff gets written down by 30% or more.
Unfortunately investors in any market are probably going to be collateral damage in the near future as a result.
“Plus did you catch that all of this is leveraged to the hilt. The original investment was something like $600 million that was used to buy overt $6 billion of this CDO stuff. So it won’t take long for the original money to be wiped out.”
CDO/MBS are probably already going for less than 85 cents on the dollar, if they are going at all (exception might be Freddie Mac, Fannie Mae and Ginnie Mae). At 10-1 leverage, this fund probably has negative value. It’s gone. It is just a matter of who is going to get reamed for the losses- the banks that lent to B.S. or B.S. itself. Anyone who buys anything at 10-1 leverage better be using their Vegas money. I would think that heads will roll at the bank- they waited a tad too long for their margin call, methinks.
Reading some of the other links, it looks like M-L would be happy to get 50 cents on the dollar today for some of the crap on offer. And they will probably get a better price than anybody who follows.
It’s also possible that others will buy at a better price than they are worth just to prop up their own holdings until such time as they can get rid of them. It’s just that eventually you run out of potential bagholders. So we will find out soon enough if M-L was the one that started the run or if everything can be levitated for a while longer.
Umm, the suits you refer to probably hold interests in both companies. They’re just sacrificing the weaker one.
The people at Bear Stearns and Merrill Lynch had to know the junk quality of those securities and bonds. What were they thinking?
Interesting question…
At what point DID the system recognize that the MBS game had evolved into a pre-conceived series of lies and deceptions beginning from the mortgage application and moving right on down thru the appraisal report process.
At face value, if everyone was doing their job properly, then WTF.
The system endures as the charters of the GSE’s intended.
So again, we are back to the smug, arrogant, conceit of the Wall Street high rollers, who by their crass removal from the “hoi-poli” on the street chose to ignore the deterioration of the lending environment.
The warning flags went up from the beginning, and everybody chose to do their deals and set up the foreign bank accounts because the take was so huge.
Man, this debacle is gonna be something to watch.
Those who forget history are doomed to repeat it.
Watch for wheelbarrows full of money ala the Weimar Republic
when the FED has to massively inflate to try to get out of all this
and pay off for the Gulf wars.
Not much to be said for American Idol Nation.
Good post, hd. But don’t forget where American Idol came from. I like the Beatles and that’s about where it ends from me. Cut off diplomatic relations with England and pull the rug out from under their crappy Bank of England and everything will be just tickety-boo. Pip-pip and all that rot.
Partial repeat of post above: Fund managers perform based on the structure of incentives. They are scooping up huge percentages of extraordinary returns and yet lose little except prestige when those returns become losses. That’s what they were thinking.
No kidding. This stuff makes my head spin, and I consider myself a very intelligent person. The only answer I can come up with is that it’s confusion by design.
“The people at Bear Stearns and Merrill Lynch had to know the junk quality of those securities and bonds. What were they thinking? “
They were thinking that they were making lots of money.
What they were not thinking was long term, instead they were thinking was “what can I do to make the most in fees to give me the biggest end of the year bonus”. The few who do think long term probably have a long term plan to be smarter and faster and get out of the market with their money if the wheels come off the wagon. However this is the same plan that the smart people in the house flipping, house building, house mortgage business had as well and many are finding that they were not as smart and as fast as they had hoped.
I’m no Warren Buffet, but I know not to buy someone elses problem.
Clearview, I agree. Would it be possible for someone to post a layman’s explanation of this mess so I can become a little less ignorant in these matters? Thanks.
RE: Would it be possible for someone to post a layman’s explanation of this mess so I can become a little less ignorant in these matters? Thanks
I wouldn’t worry about it cass. A few years ago Morley Safer from 60 minutes put up a derivative formula on a blackboard and asks this prominant PhD in finance & world economics standing next to him to explain it.
The guy puts his hand to his chins, thinks for a minute and responds to Safer, ” I haven’t the foggiest idea what any of this means”.
So even the heavyweight ain’t got a clue.
Scarey isn’t it.
Scary isn’t it.
Sure is, shouldn’t they at least have been supposed to figure out the math?
I will try:
Suckers buy into Bear Sterns hedge fund. Money from the suckers is taken to the bank as a 10% down payment on a bank loan to buy 10X that amount worth of CDO securities.
CDOs, I think, are toxic mortgage backed securities which are bundled together in large packages and then diced up. They were hyped as being “safer” because many crappy loans are a part of the package, instead of only 1 or 2. Much like a 1999 dot.com mutual fund was “safer” because many tech stocks are part of the package. “Diversification.”
Then there are CDO Squared (bundles of CDOs) and CDO Cubed (bundles of CDO squared.)
I can’t believe they got away with gaving this toxic crap “AAA” ratings.
http://realtytimes.com/rtcpages/20070620_muddymortgage.htm
A test of more than 800 recent mortgage customers, half of whom read current disclosure forms, found among those reading current mortgage disclosures:
# Approximately 20 percent could not identify the annual percentage rate (APR), the amount of cash due at closing, or the monthly payment and whether it included escrow (holding account) for taxes and insurance.
# More, 25 percent, could not identify the amount of the settlement costs.
# About 33 percent could not identify the interest rate or which of two loans was less expensive.
# One third also did not recognize that the loan included a large balloon payment or that the loan amount included money borrowed to pay for settlement charges.
# Half could not correctly identify the loan amount.
# Two-thirds did not recognize that they would be charged a prepayment penalty if in two years they refinanced with another lender.
# Nearly 75 percent did not recognize that substantial charges for optional credit insurance were included in the loan.
# Almost 80 percent did not know why the interest rate and APR of a loan sometimes differ.
# Approximately 90 percent could not identify the total amount of up-front charges in the loan.”
Note that this is addition to the 50% that didn’t read the form at all…..
Doesn’t surprise me one bit.The average joe is clueless about money.They are just told to get a job and pay your bills.This enables wall street and other savy money people to screw them over big time.Why don’t they teach finances in high school? Rich just keep getting richer off the system.
It is only going to get worse. As a high school guidance counselor, I can tell you that because of NCLB, courses and topics covered such as balancing a budget and other financial basics are NOT covered on state standardized testing (PSSA in PA, MCAS in MA, etc). When stuff ain’t covered, it gets the ax for more math and reading which is covered.
“because of NCLB, courses and topics covered such as balancing a budget and other financial basics are NOT covered on state standardized testing..it gets the ax…”
Cue Church Lady: “Well, isn’t that convenient!”
Hows that algebra class doing?
being lazy can get expensive.
i just don’t feel sympathy for anyone who doesn’t take the time to educate themselves into what they are getting into. a few minute, ok maybe 1/2 hr., on the internet at the local library , if you’r on the wrong side of the digital divide, and one can learn quite a bit about what’s involved in getting a mortgage.
got cash?
And tack on the following from: http://www.editorandpublisher.com/eandp/news/article_display.jsp?vnu_content_id=1003600551
Gallup adds: “For the first time this year, a majority of Americans are negative about the employment market, saying it is a bad time to find a quality job.”
The 70% negative rating is up 10 points since April. Also, just in the past month, there has been a significant five-point drop, from 28% to 23%, in the percentage saying conditions are getting better.
“When asked about the most pressing financial problems their family faces today, Americans mention healthcare costs, lack of money or low wages, and oil and gas prices,” Gallup reports. “Healthcare costs are mentioned by 16% of Americans while 13% say low wages and 11% say oil and gas prices. These percentages are virtually unchanged from last month.”
Hmm…the unemployment rate here in Phoenix is 3.3%.
This is why state government’s getting away with their massive bonds floats to pay current expenses.
The av. US moron don’t have a clue.
What more can you expect from a country whose most newsworthy story for a month is Paris Hilton and her jail time.
This is why state government’s getting away with their massive bonds floats to pay current expenses.
The av. US moron don’t have a clue.
What more can you expect from a country whose most newsworthy story for a month is Paris Hilton and her jail time.
Years and years ago like…’96… I get a flyer in the mail offering refi. We knew interest rates had dropped, so call the guy up and let him in…. Like a vampire, you should never invite a refi guy in.
Anyway, this fast talker clearly was hoping I was less intelligent and less informed than I am. I’d been checking my current lenders web site where they list their rates, points, etc.
So he comes in and wants to give me a higher rate loan than available elsewhere, for more buy-down points… and here is the kicker.
He tried to collect his “fees” twice.
On page one, there is a detail listing of all these fees that he’s going to pay, and roll into the loan. Cost of appraisal, cost of points for funding fees, title insurance, etc… AND those values get added into the loan.
Then we switch to page 2 and the amount from page one is carried forward…. Then there is this big charge for “out of pocket” that is sub divided into cost of appraisal, buy down points, origination fee, title insurance, etc.
I ask what this is… Oh, that is where all the fees get added into the price of the loan.
No, no, no says I. You added them in on page 1…. No, they just got listed out in page one. I make him flip back to page one and show they’re added in. They are added up there, but not into the loan there, says he. So I run through the math dollar by dollar showing he’s added the fees twice. He then tried to argue with me more. I told him to get out of my house NOW!!!!
I’m sure he moved down the street to prey on someone that can’t do basic arithmatic.
Reminds me of free tickets to a crique show I got in Vegas last year from sitting through a time share thing. They kept running through an example of why it was such a great deal, and I kept pointing out all the costs they were leaving out of their example that made it a horrid deal… “I must not be explaining this right, because it is a really great deal”, says sales person #3 they are throwing at me. “No”, says I, “you’re explaining it fine, and I’m sure most fools would be signing a check about noe. But I’m smart enough to see through your lies to the real deal.” “So, you think you are smarter than the tens of thousands of people that have already bought into our great investment oppertunity?” “No, I don’t think I’m smarter… I know it! And I’m smarter than you too, or you wouldn’t have to lie to people for a living.”
Wehn I went to the show with the free tickets, I was sat in a section full of others there on free tickets from the time share place. I was SHOCKED that nearly everyone we talked to bought into it!!!! My GAWD!!!! It was such a horrid deal if you just took a little time to really understand what it would cost you!!!
I went to a time share pitch in Fiji a few years back and man, was it scary. Talk about a hard sell. Not scary for us because my wife is a financial nerd and, like you, kept making the sales guy look stupid with his crack-ass numbers. But scary because we saw how many other people were buying into it. Unfortunately, I have more than one family member that is currently stuck with one of these time-shares. I think it’s one of these things that people are so embarrassed about doing (how could I have been so stupid?) that they don’t complain or file suit afterwards.
“As a Bear Stearns internal hedge fund begins collapsing, all of Wall Street is wondering if other funds might follow suit.”
Two big questions are:
1) Is the PPT up to the task of putting enough lipstick on this pig to hide it from consensus perceptions?
2) How much more buildup of systemic risk can the system sustain before the thicket of hedge fund undergrowth finally suffocates itself?
Two Big Funds At Bear Stearns Face Shutdown
By Kate Kelly, Serena Ng and David Reilly
Word Count: 1,763 | Companies Featured in This Article: Goldman Sachs Group, Bank of America , UBS
Two big hedge funds at Bear Stearns Cos. were close to being shut down last night as a rescue plan developed over several days fell apart in a drama that could have wide-ranging consequences for Wall Street and investors.
…
“Noone in the subprime business wants to ask the question of whether they need to re-mark all the assets. That would open the floodgates,” said Janet Tavakoli, president of Tavakoli Structured Finance, a consulting firm in Chicago. “Everyone is trying to stop the problem, but they should face up to it. The assets all may be mispriced.”
The problems can be exacerbated because many hedge funds invest in CDOs with the help of borrowed money. To buy a triple-A rated CDO note for $1000, it is common for a hedge fund to put down only $100 of its own money and borrow the other $900 from a bank to finance the purchase.
http://online.wsj.com/article/SB118230204193441422.html?mod=hpp_us_pageone
See? It was excessive leveraging which crashed the market in 1929 and the leveraging back then is an absolute fly-speck compared to today’s leveraging. Seat belts, please!
“No one in the subprime business wants to ask the question of whether they need to re-mark all the assets. That would open the floodgates,” said Janet Tavakoli, president of Tavakoli Structured Finance, a consulting firm in Chicago. “Everyone is trying to stop the problem, but they should face up to it. The assets all may be mispriced.”
My understanding is re-marking would create a firesale for these “assets”, especially among pension managers, who are only allowed to hold certain securities. If a pool is re-marked from AA to BB, that pension fund manager is forced to sell those securities. I think this is the “floodgate” mentioned in this quote.
Yes - I say: “BB pools of securitized POS for everyone!”
This paper must have some value. How can we all profit off of the coming fire sale?
the only value I can fathom: Passive losses to offset gains. This stuff is junk.crap.org
“My understanding is re-marking would create a firesale for these “assets”, especially among pension managers, who are only allowed to hold certain securities. If a pool is re-marked from AA to BB, that pension fund manager is forced to sell those securities. I think this is the “floodgate” mentioned in this quote.”
It is worse than that. The whole premise of the CDO/REMIC is that a complex and flaky investment (mortgage pools) with low liquidity can be transformed into ’simple’ bonds, simple in the sense that they act like high-grade corporate bonds. The default rate has to be assumed near zero, prepayment rates fairly predictable. To be liquid, a critical component was the trust that was put in rating companies to properly rate these securities, making them palatable to investors who do not have the expertise to price these based on the properties of the mortgage pools (an almost intractable problem, really). It is psychological- the liquidity of these investments is dependent on the trust placed by investors in the rating companies. If the rating companies downgrade these, most investors will refuse to buy them, and the entire CDO apparatus will come crashing down. A question I have is what happens if the securitizers become insolvent? They ‘own’ the mortgages, but they pass almost all of the money from the mortgages on to the bond holders, they may be dependent on regularly issuing new securities on new mortgage pools. If the latter dry up, the securitizers might explode, resulting in a nightmare for bondholders.
Can anyone figure out exactly what the “assets” were that BS used for backing?
‘…what the “assets” were…’
Maybe just BS?
LOL. I was hoping for names, companies, tickers…
I’m pretty sure it is just other bonds. Get $500 mil from investors and buy some truely safe bonds with it. Use those bonds as collateral to borrow $5 bil. Buy some very risk heavy bonds with the $5 bil (or sell naked). If the bonds go up 1%, that is 10% profit to the investors. If the bonds go down 1%, that is 10% loss. (or flip these if you were short).
So, bonds go down 10%… suddenly you hold $4.5 bil in risky bonds and $500 mil in safe ones, and you owe $5 bil to the bank. The bank issues a margin call. You can’t show that you still have the $5.5 bil in assets that the loan agreement stipulates, so the bank makes you sell the $4.5 bil in risky bonds (or buy back if you were short) and takes you $500 mil is safe assets since you can’t pay back the full $5 bil from sale of the high risk stuff.
Investors are left with $0 when they assumed they were investing in fairly low risk, high rate of return stuff.
The REAL cause is the inflated real estate market. The sub-prime bonds were supposed to be fairly safe becasue you could foreclose onthe house and sell it for what you are owed. Unfortunatly, they are having a hard time selling those foreclosures whithout mass losses.
nice explanation… thanks
got cash?
Mortgaged backed securities. MBS’s. These are bonds backed by home loans. The risky parts are backed by 2nd mortgages and rated as junk (trading now at $.10 on the $1.00?). The first mortgages are “tranched” or segregated. Say you have $100 loan secured by a home. I will buy the first $75 of the loan (AAA tranch). You get the top $25 (BBB rated tranch). If the borrower defaults, I don’t care, unless the home sells for less than $75. You, Mr. BBB bagholder, took the high risk first loss piece.
No one cared when $100 loans foreclosed on houses selling for $120. Unfortunately, with fraud, sub prime, market collapse, etc., the $100 loan seems to be against a $50 house.
I think the B/S fund saw the collape and “shorted” the bond market for 2nd’s and sub prime mortgages. Unfortunately for B/S, the market recovered a bit after the first meltdown a few months ago. Remember the dead cat bounce phrase everyone tossed around about 6 months ago. Well, the dead cat bounced right on Cioffi. There are many ways to get hurt in a volitile market. The fun is just beginning.
Your last paragraph is not what I considered to be the case in this situation.
Subprime woes came to public light for the first time at the end of February…. and certainly Cioffi could have made that short play before that time.
Maybe this explans in part his February comments (quoted way above) at the CDO and Credit Derivatives conference… perhaps his position was taken by then.
I think the B/S fund saw the collape and “shorted” the bond market for 2nd’s and sub prime mortgages.
??? If they shorted the 2nds, they should be sitting pretty, no? Maybe you meant they went long?
My guess is that they put up AAA to borrow for BBB. Some financial wonk billed it as profiting from the spread. And it might have worked in older financial world.
Hmmm, “something better” might be a whole lot worse than we want to think about. It looks as if this is the SNL crisis transferred to the
Was that crisis… about when it stopped being funny and relevant?
HAHAHA…yes. About, what, 1991?
With a the BS hedge fund about to blow up, will this mean that the credit screws will begin to tighten in earnest, for real now? If banks have a tougher time selling off their junk mortgage crap, will they be forced to revert to more “traditional” standards, i.e. high FICO, downpayment, steady employment, etc?
I wonder if this hedge fund mess will be the tipping point we’ve been waiting for.
“I wonder if this hedge fund mess will be the tipping point we’ve been waiting for.”
I think so. Now, be vigilant, because if that is the case, this IS the opening for the Amero.
Banks only have so much money to lend. If they can’t sell off some of their loans, they will be making a lot less loans, period.
Or maybe start really selling their REO propeties? That would be a nice start.
REOs abound, but prices remain competitive with fair market value…we have to wait till they’re dumping them at any price just to get ‘em off their books.
I’m seeing lots up here in bubble country (Sacramento) along with their redheaded step child, Short sale. They are working to bring the prices down, it’s just slow. Purchase perimeters that I could only get with a lowball offer are now hitting my ziprealty searches regularily, even in prime Davis.
What I want is all of the CFC, Wells, HBSC etc inventory that hasn’t been released to hit the MLS. Then we’re cooking with gas. Dixon, Woodland, and Winters will hurting.
Good point!
“With a the BS hedge fund about to blow up, will this mean that the credit screws will begin to tighten in earnest, for real now?”
The factor which makes this very hard to assess is the effect of the Fed’s behind-the-scenes efforts to make it all good again.
That’s what makes this such an interesting development. This is certainly giving off all of the same smells as the New Century meltdown.
continued from last post- Hedge fund industry. “Asset-liability mismatch”. Except this time, there are a lot more adjustable-rate mortgages than last time, on properties that have been massively overassessed.
“Another factor was the efforts of the federal government to wring inflation out of the economy, marked by Paul Volcker’s speech of October 6, 1979, with a series of rises in short-term interest. This led to increases in the short-term cost of funding to be higher than the return on portfolios of mortgage loans, a large proportion of which may have been fixed rate mortgages (a problem that is known as an asset-liability mismatch). Zvi Bodie, professor of finance and economics at Boston University School of Management, writing in the St. Louis Federal Reserve Review wrote that “asset-liability mismatch was a principal cause of the Savings and Loan Crisis.”
This is just too funny: “and was awarded a risk management award in 2004 from Risk Magazine”
http://www.nypost.com/seven/06202007/business/subprime_street_is_feeling_the_heat_business_roddy_boyd.htm
“Already, Highland Financial Holdings Group’s $125 million Special Opportunities Fund has decided to shut down after a disastrous series of bets in mortgage bonds. Sources told The Post that the fund dropped over 20 percent.
Highland managed a total of about $900 million, and was awarded a
risk management award in 2004 from Risk Magazine.”
“‘These CDOs [collateralized debt obligations] are probably marked 30 percent higher than where they should be,’ he said.”
Mark them to market and let’s crash this pig.
Elegantly and succinctly put.
Mark them to market and let’s crash this pig.
Elegantly and succinctly put.
Not particularly elegant, but very succint…
mmmmmmm, pig.
Link to mortgagae reset graph.
Seems we will be close to bottom beggining 2012. That may be the time to start thinking of buying.
http://www.autodogmatic.com/forum/viewtopic.php?p=1226
I love that chart. It’s my fave graphic of the bubble. But I can’t wait until 2012. I’m gonna start looking for roadkill at the beginning of 2008. Really, I’m sick of renting. It sucks, but right now is better than the alternative. Just wanna pay cash for a little POS concrete block shack and enjoy life.
2008 seems mighty premature to me, but if you spread a very wide net and base your offers on pre-bubble valuations + inflation, you might get lucky and find a really motivated seller. As an alternative, have you considered renting a free-standing house with yard, garage & the works? Apartments aren’t the only game in town.
You might be safe on new stuff much sooner than 2012, but I’m looking for rentals not home. The builders are not under the gun of getting a price based on their overpayment to the point of those owners depicted in the graphic. New may be safe as early as the end of 08′, but my bet would be more toward the end of 09′ into 10′ for the new stuff to bottom.
The only way this unwinds faster is if the forclosures overwhelm all demand for investment housing. With the advent of so much leverage now there might not be enough real money left to buy all these REOs at anywhere near real value. If they overwhelm the absorbtion capacity we may see 50 cents on the dollar or lower after the first big lump ending on 09′. This all depends on how many overpaying knife catchers (with real cash) come out to play. If many come to play the year or so between lumps may cause one fantastic dead cat bounce that will decimate the catchers =). It’s almost worth having overpriced RE for another 2 years just so we can laugh at all the shrewd knife catchers in forclosure =)
With the two lumps so close together there may be no let up in REO property for sale till 2012. It will just flow out like one big nasty, sticky, bloody, stenchfull, painfull death shit that will assure everyone in the US the RE is the worst investment ever.
I printed the report that this came from a few days ago and went through it fairly briefly. What is interesting is this–from the day you stop paying, to the day of the trustee sale is give or take 180 days.
This train has yet to start rolling in earnest. Foreclosures are going to be really bad in the latter half of 2007 and all of 2008…
“‘It’s a blood bath,’ said Mark Kiesel…”
Bloodbath, now there’s a word I’ve read on this board a “few” times as a prediction.
We keep getting good news. Life has been so enjoyable these days. A while back I wished to see a quick crash. But now I think this is even better. The screw tightens a little bit every day. The best part is that in all likelyhood there will be a global meltdown of the housing market!
http://www.foreclosureforum.com/stats.html
…has started predicting the Trustee Deeds numbers based on data half way through the month. Last month the prediction was pretty accurate. Now he’s predicting 838 for June! (May ‘07 was 614, ‘06 monthly ave. was 171, ‘05 monthly ave. was 47…..
“Some homeowners in California, Florida and the southwestern U.S. now face more than a 60 percent chance their property will be worth less in two years, according to the PMI U.S. Market Risk index.”
Raise your hand if you think > 60% = 100%
Hey! Down in front!
Absolutely. There may be a few esoteric homes that are excluded from this, so I would put the figure at 99.9%. Further I would say that a good 60% will see reductions in the range of 30 - 60% in the next 2 - 5 years. Any worthless area like Riverside county where prices skyrocketed 4 X will most likely see reductions in the 60% range. I remember seeing homes in Lake Elsinore at $129K in 98 which are now listed at $500K +. If anyone has looked at the foreclosure map for that area, it is packed with foreclosures.
Greater than 60% chance of a dorp…. of 50% or more.
Look.. I finished it for them!
From the Bloomberg link regarding Bear Stearns CDO autcion, http://www.bloomberg.com/apps/news?pid=20601009&refer=bond&sid=aDi24Z.IUi0o,
-“It’s tough to tell whether this was an isolated event or whether there will be other funds like this that have bought this type of paper and are facing mark downs or redemptions,” said Peter Nolan, a product portfolio manager who runs the CDO business at Chapel Hill, North Carolina-based Smith Breeden Associates Inc.-
Yeah, it’s tough to tell whether these there are trillions of dollars of awful loans which were only written to collect fees, and made to people who could never pay them back, which are backed by assets which are losing value at an increasing pace, or whether most of the lending has been real prudent and these Bear Stearns Bonds are just having isolated problems, like maybe they were left on the table and someone spilled water on them.
There are some contrarian views to all this.
Reported by Bloomberg today.
From The CEO of BofA comes this,
“Bank of America Corp. Chief Executive Officer Kenneth Lewis, the leader of the world’s second-biggest bank by market value, says U.S. growth is about to accelerate because the worst housing slump since 1991 is coming to an end.”
He is either the smartest guy in the room,or he is clearly not playing with a full deck.
Giannini is rolling over in his grave…
http://en.wikipedia.org/wiki/Bank_of_Italy_(USA)
bear is off a whole 1%
wow
trust me. they’re not on the hook for anything (yet) unless some plaintiff lawyer comes up with something
Watch your 401k… I just re-balanced (out of SP for a while) and almost went into a ’stable capital fund’ until I read that it’s bond area is heavy on MBS and CMBS and CDO’s. Make sure you don’t react to this by BECOMING the bag holder.
But the problem is, there is nothing to go into within my 401K that doesn’t make me a bag holder. I can go U.S. stock, which will crash as interest rates climb. I can go into global stocks, which will take with the devaluing dollar. Or I can go into bond funds that are packed with mortgage backed (in)securities.
But the problem is, there is nothing to go into within my 401K that doesn’t make me a bag holder. I can go U.S. stock, which will crash as interest rates climb. I can go into global stocks, which will take with the devaluing dollar. Or I can go into bond funds that are packed with mortgage backed (in)securities.
Nope. The global funds will go up with a devaluing dollar. That’s why I have my 401k funds in the Fidelity International Growth fund (FDIVX). Of course, owning any stocks is risky, but owning international stocks is a lot less risky than owning US stocks, precisely because the dollar is toast.
Exactly, I just dumped my Fidelity Managed Income Fund. Supposedly lots of T-bills (80%), but then loaded with RMBS. Went from $155,000 to $152,000 over one month before I closed it out two weeks ago. Garbage loans getting to us all. I went to Vanguard. 100% T’s for now.
‘In some cases it’s actually making the buyers think ‘wow, there might be something better coming down the line.’
Does he mean POTENTIAL buyers?
Maybe there are some smart renters in this bunch…
Here’s a question. The market’s down today, supposedly because treasuries are going up. Yet if you look at history this seems to be a fairly new relationship. In the 80’s for instance when treasury yields and mortgage rates went through the roof the stock market wasn’t affected. Even over the last 5 years the correlation has been slim to non-existent.
Why the difference now? I’m sure it has something to do with the housing bubble, but I’m not connecting the dots.
they are usually inverse in the short run
Rising bond yields are supposed to lead to a falling stock market. In theory these are two investment classes competing with each other for capital - as one increases it’s returns through higher interest rates money will go there instead of stocks.
Of course, as you all know, we don’t live in anything approaching rational times so who the hell knows what is going to happen and why!
Classic yesterday: I had lunch with a CDO manager here in NYC - he seems to think as long as the Fed cuts 50 basis points all will be well again.
Since he was a client, I silently guffawed - hopefully, he mistook this for agreement. Oh yes, and I picked up the check!
Interesting few minutes coming up. The stock market is falling rapidly just as the public auction of the BS MBS portfolio is coming to an end. I wonder what they know that we don’t (yet)?
I’m surprised that bonds haven’t fallen more today, rates seem to only be up a bit.
Did I read this right? There was only $600 million from investors in the Morgan Stanley hedge fund and Morgan Stanley had to prop it up with $1.2 billion and it still may be liquidated? M.S. double the amount in it and it is still bad? Definitely won’t be the last if this is the case.
Well, yes and no. The fund was leveraged 10-1, so BS borrowed $6BN making the fund “worth” $6.6BN. Obviously, if the fund overall falls more than 10% they are into their borrowed money for which they have put up collateral.
Heavens, imagine what awful things might happen if the market value of the collateral and fund assets was only 60 cents on the $.
Oops.
http://www.atimes.com/atimes/Global_Economy/IF21Dj03.html
Since 2000, Wall Street has created more than $1.8 trillion of securities backed by subprime mortgages, according to industry newsletter Inside Mortgage Finance.
“No one in the subprime business wants to ask the question of whether they need to re-mark all the assets. That would open the floodgates,” said Janet Tavakoli, president of Tavakoli Structured Finance, a consulting firm in Chicago.
Everyone is trying to stop the problem, but they should face up to it. The assets may all be mispriced. The problems can be exacerbated because many hedge funds invest in CDOs with the help of borrowed money. To buy a triple-A rated CDO note for $1,000, it is common for a hedge fund to put down only $100 of its own money and borrow the other $900 from a bank to finance the purchase.
Hmmm … $1.8 trillion of securities manufactured from the raw material of subprime. And the so-called Triple-A tranches of the stuff, held at some very hefty leverage levels, looks more radioactive each day as it becomes increasingly clear ratings agencies made some very bold “bull market assumptions”, to steal a phrase from analyst Jim Grant, who has continued to warn about CDOs.
To buy a triple-A rated CDO note for $1,000, it is common for a hedge fund to put down only $100 of its own money and borrow the other $900 from a bank to finance the purchase.
That just made the blood drain from my face…
Market down almost 150 today…..BearStearns Effect?
Got popcorn Neil, tomorrow should be interesting.
OK - the market finished down 150 points and bonds were down a bit. The BS MBS auctioned closed at 4.00PM as well as the NYSE, no word yet but tonight’s financial news will be very interesting to watch.
Some good questions:
How liquid were these securities?
How much did they have to be marked down?
Will similar portfolios now have to be remarked?
Are the Rating Agencies watching?….hell, is anyone even there?
Are the regulators watching?
and who WAS that guy who did the short sell on Moody’s a few weeks ago? The same one that found Enron while it was still over $50 a share?
Interesting follow up article on WSJ. Basically, they are saying the the instruments that they are trying to sell are so complex and esoteric that it’s going to take some time for investors to come up with prices that they’d be willing to pay.
In other words. The 4:00pm deadline was for the bids, but SOME people are thinking that the auction will take longer since every serious bidder will demand more time to understand what is being sold. Otherwise, the sale would result in far lower pricing than what could otherwise be achieved.
They expect results in a week or two.
Among the securities being sold… “CDO squareds”, or CDOs of CDOs (akin to fund of funds).
In any event, even IF the deadline is met, it will take time to sort through the bids and execute trades.
In other words, no results today, worst case a couple of weeks. Best case in the next few days.
BWAHAHAHAHAHA!
And so we finally see the downside of “financial innovation” and “flexibility”. Every drop of today’s so-called liquidity was just stolen from the future, and it will all evaporate as the financiers try to cash in. Which they can’t really do, because the “value” was just an illusion hidden by extreme complexity. (And don’t those CDOs of CDOs just remind you of the investment pools of the late 1920’s?)
Today may mark the beginning of the end of this bubble in credit craziness, when the history books are written.
Thanks for the article summary, RW.
bad bets on securities backed by subprime loans
“bad bets” / “subprime loans” — is it just me or is that redundant? Sounds like “bad bets on securities backed by IOUs from unemployed gambling addicts.”
Maybe not so much news, but a good summary:
http://www.financialsense.com/editorials/daily/2007/0620.html
“The markets seem to be waking up to the fact that the housing market is nowhere near the bottom. Borrowers are being squeezed by the treasury markets’ recent sell off, which has increased 30-year mortgage rates the most since 2004. The National Median Home price is poised for its first annual decline since the Great Depression. An executive at the giant bond fund PIMCO said it best: “It’s a blood bath. We’re talking about a two to three year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock markets and corporate profit.” The U.S. housing market has provided the economy with support through the creation of wealth and the seemingly endless ATM of price increases. The recent increase in yields, along with the subprime mortgage meltdown is going to kick this support right out from under the economy, and the dollar is going to be drug down along with it.”
A new angle:
http://www.financialsense.com/fsu/editorials/drhousing/2007/0620.html
“Housing is consuming a large part of American’s discretionary income and has become a major source of financing spending on consumer goods. This relationship is important to note. Since income is not keeping up with housing costs and other expenses, the ability to withdraw home equity and create additional streams of credit has given consumers the ability to sustain this bubble for a longer period. In many high cost metropolitan areas housing is now consuming 40 to 50% of a family’s net income, a far cry from the conservative 28% which most financial experts suggest. As we are facing a housing led recession, will consumers adjust their spending habits in accordance with declines in home equity? I argue that they will not because of the Duesenberry Effect and the relationship is not a direct one.
Duesenberry Effect
Loss of productivity does not necessarily go hand in hand with a loss of appetite for high consumption. No one will doubt that as a society, we are the world’s large consumers. Our saving rate is negative. The average credit card debt an American carries is $9,200. The Duesenberry Effect argues that once folks get accustomed to a way of life, for example Plasmas and BMWs, a $1 decrease in productivity does not equate to $1 reservation from spending. If anything, on the way down things will accelerate because people will try to maintain their style of life regardless of the loss of income or equity in their home. It is a fall from grace. Financial prudence isn’t the forte of the American public and this massive readjustment and recession will cause a lot more pain than many are envisioning.
No rational argument can demonstrate that a stagnating home market and wages will force individuals to readjust their spending habit. If our national trade deficit is any indicator, we are only becoming more hungry on ways to finance our appetite via credit. The reason the subprime implosion is so crucial and important is because this funding source is now evaporating. Wall Street is not happy with Collateralizing any more funny money debt; the idea of mixing feces in a large sea of good money. Investors gathered that if the pool of funds was large enough, bad and risky debt would be hedged into the matter and mixed in to the point that any drop would be supported and not noticed. This was all in good when the subprime market was tiny. But given that we have over $1.2 trillion in subprime debt originated in the past two years, we are now swimming in a black pool of our own consumption.
Insiders Out. Public In.
In each bubble, there is a privilege being in the know. Those that have insight and the fortitude to jump out early make out like bandits. Examining insiders selling of companies like Toll and New Century Financial, we see that large percentages of top officers sold at peak prices in 2005 and 2006.”
“Loss of productivity does not necessarily go hand in hand with a loss of appetite for high consumption.”
Could it be then that we are far more valuable to our nation as consumers - then we could ever be as soldiers?
“The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, according to the National Association of Realtors.”
With 114 million U.S. households, there is a current supply of 1 unsold home for every 27 households.
Even more interesting, what is the current ratio of vacant unsold homes to households? 1 in a hundred? 1 in 50? THis is like musical chairs in reverse, one chair will be empty at the end of the game.
I know the number re total homes: 2.8%, an all time high.
But Paulson said last month that the worst is behind us. Now he is saying
it is at or near bottom. This guy keeps predicting the bottom every month.
From Marketwatch:
Subprime woes will take time, won’t hurt economy: Paulson
By Greg Robb
Last Update: 4:21 PM ET Jun 20, 2007
WASHINGTON (MarketWatch) — Treasury Secretary Henry Paulson said that woes in the subprime mortgage sector will take time to unfold and will cause losses, but won’t derail the U.S. economy. Asked about that two Bear Stearns hedge funds have been battered by turmoil in the subprime mortgage market, Paulson said he would only comment in general terms. “I tried to make clear we will be dealing with the subprime issue for some time and that there will be losses along the way. It is a natural outgrowth of what we’ve seen in the housing market and certain lending practices,” Paulson said. “As mortgages continue to reset, this will take time to work its way through the system,” he said. “But I continue to believe that this risk is largely contained. It doesn’t pose a significant risk to the economy overall,” he said. Paulson said the housing sector “is at or near the bottom.”
“We have heard that lenders have already reduced the amount that they are willing to lend against C.D.O.s,” said Timothy Rowe, a portfolio manager at Smith Breeden Associates.
Still, analysts note that credit remains easy by historical standards and the market seems to be weathering the current storm well.
“Yes, there was too much leverage in the market. Yes, there was too much appetite for risk and yes, that risk was underpriced,” said Mark Adelson, a senior analyst at Nomura Securities in New York. “But there has not been a lick of spillover of this situation in the corporate bond market or stock markets so I don’t think people need to start hoarding food, water and ammunition because the end is coming.”
Contained, huh? Someone better tell Hank Paulson it takes only one or two foreclosures per neighborhood to drag everything down. How do you contain that?
– The Judge
“We have heard that lenders have already reduced the amount that they are willing to lend against C.D.O.s,” said Timothy Rowe, a portfolio manager at Smith Breeden Associates.
Still, analysts note that credit remains easy by historical standards and the market seems to be weathering the current storm well.
“Yes, there was too much leverage in the market. Yes, there was too much appetite for risk and yes, that risk was underpriced,” said Mark Adelson, a senior analyst at Nomura Securities in New York. “But there has not been a lick of spillover of this situation in the corporate bond market or stock markets so I don’t think people need to start hoarding food, water and ammunition because the end is coming.”
Yu think
years ago poor blacks lived on the Arkansas River, the state raised taxes and forced them off the land. Developers came in and Yuppies bought Mcmansion. So what you say? Tornadoes love to follow the Arkansas River. Gee I’m so brilliant with my MBA, I can’t figure out why no one ever built on this scenic property before… or used all this neg am, I/O, ARM teaser rate funding before either. I’m so smart with my MBA and job on Wall St, I figured out all this stuff that no one else ever figured out before, blah blah blah.
Goes to show education and “smarts” are two different things.
The even more criminal thing regarding the Bear Stearns hedge fund and other hedge funds who will be blown up because of the sub-prime market is that they will still walk away exceedingly wealthy and because of their resumes and contacts probably open up another fund in short time. Just look at the Amaranth guys and the LTCM guys. Brian Hunter lost several billion dollars for Amaranth and still walked away with over $70MM (and he’s only in his early 30s). Now he has started his own hedge fund. These Bear Stearns fund managers have made millions in fees and will be back at it in no time. Meanwhile their investors get the shaft. Some of these fund managers are just the same as mortgage brokers except they make thousands of times more money and have expensive Ivy League educations — but they are still just making a fast buck by fleecing other people.