The Beginning Of The Great Unravelling?
Readers suggested a widening of the hedge fund problems for a weekend topic. “Is the Bear Stearns hedge fund situation the beginning of the great unravelling?” A reply, “But…..But……it’s all contained!!!!!!”
Another, “I’d like to see a topic on the ‘unwinding.’ I’d like people’s thoughts on what will happen and how it will happen.”
One points to history, “I’d recommend reading Adam Smith’s The Wealth of Nations. He describes what happened to other nations, and I see very little difference today.”
“The whole book is 1200 pages. It is definitely worth every page, but you can cherry pick certain parts that directly deal with our situation today. Coincidentally, he published it in 1776. Our founders used it is a basis, along with other works, for the constitution (1787). It is so enlightening to see how far we strayed, and where we’re headed.”
One focused on a specific fund, “I wonder how the wonder boys who run the hedge fund at Yale U. are gonna weather this storm. Much has been written said about their astute business acumen, now we get to find out. Are there any public disclosures these guys have to do periodically? It would be interesting if somebody could kindas start tracking them.”
Another, “The rich and wealthy would like to keep everyone out of their ’special’ areas - you know, ones where one doesn’t trip over hobos or dead bodies on a daily basis, but in the end all prices will come down for the many reasons we’ve discussed before.”
“I wonder when the real fallout from the crumbling hedge funds will begin… perhaps it has begun? We’ll see…”
One looks at securities, “Wondering about the back and forth we are seeing now between US and China. For years now US MBS have been selling into Chinese hands despite the questionable nature of the underlying loans. For years some, not all, but some of the Chinese exports flowing into the US have been, let’s be diplomatic, less than the highest quality. Now things seem to be worsening. tainted consumables vs deteriorating investments/securitized packages, CDOs, etc.”
“Is this going to get worse or will both sides figure out that doing things the right way really is better for all involved?”
One looked at the most recent casualty, “Brookstreet Securities Corp. I’m curious about the 100 employees laid off. What kind of cars were they driving? What kind of toys did they have? I’m sure some had boats. Where were they living? Obviously they would have higher end salaries and I’m just curious what types of hedging they employed to protect their financial future.”
The LA Times. “Anxiety intensified Friday about the toll the sub-prime mortgage meltdown is taking on the financial industry at large, as Bear Stearns Cos. pledged to lend $3.2 billion to rescue a hedge fund battered by rising defaults on home loans.”
“‘We know that these holdings are not unique to Bear Stearns,’ said Drexel University professor Joseph R. Mason, co-author of a recent study warning of dangers in securities backed by home loans to high-risk borrowers. ‘It would be hard to find a Wall Street firm that hasn’t created similar funds.’”
“Stock investors weren’t comforted. ‘We are selling on fear and lack of information,’ said David Brady, president of Brady Investment Counsel in Chicago. ‘We’ve got a heavily leveraged hedge fund in trouble, and that’s got the market spooked.’”
“All industry groups were hit, said Gary Schlossberg, economist with Wells Fargo Capital Markets in San Francisco. That’s partly because the market simply doesn’t know what other problems might be out there, he added.”
“The big fear, Schlossberg said, is that hedge funds have borrowed too heavily in an effort to pump up their returns. But borrowing amplifies losses too and can fuel selling as asset values decline. ‘There is a concern about a ripple effect,’ he said.”
“‘It’s similar to what happened in February, when the first round of sub-prime fears started to rock the market,’ Brady said. ‘People sell first and ask questions later. And the selling can really snowball.’”
“Mason, the Drexel University professor, expressed greater concern about the potential damage from sub-prime mortgages. Bear Stearns is relying ‘on the implicit assumption that recovery is right around the corner, when in fact it looks like we’re in for a summer of increased defaults,’ Mason said.”
“What’s worse, he said, is that the biggest investors in mortgage-backed debt are not hedge funds. Instead, they are banks, asset managers, pension funds and insurance companies that serve mainstream Americans and have put their money at risk by buying exotic mortgage securities, he said.”
“Kurt Eggert, a Chapman University professor who testified to Congress in April about the complexities of such securities, said it was unsettling that Bear Stearns, which has a reputation on Wall Street as ‘the smartest guys in the room,’ was unable to manage the bonds’ risks. He, too, said the threat from the sub-prime market was wider than many realized.”
From CNN Money. “Bear Sterns said Friday that it’s bailing out one fund to the tune of $3.2 billion, and is still working on a rescue plan for the other. News of the bailout spooked investors.”
“‘This is not over yet,’ said Jim Awad, Chairman of Awad Asset Management. ‘We don’t know who’s involved, who’s not. The whole recovery has been built of confidence, leverage and cheap money. This has the potential to be widespread in terms of seizing up capital.’”
The New York Times. “It is the biggest rescue of a hedge fund since 1998 when more than a dozen lenders provided $3.6 billion to save Long-Term Capital Management.”
“The crisis this week from the near collapse of two hedge funds managed by Bear Stearns stems directly from the slumping housing market and the fallout from loose lending practices that showered money on people with weak, or subprime, credit, leaving many of them struggling to stay in their homes.”
“Bear Stearns is negotiating with banks to rescue the second, larger fund started last August, which has more than $6 billion in loans and reportedly holds far riskier investments. Those negotiations were continuing yesterday, and it was unclear whether they would be successful.”
“‘We don’t think it is over,’ said Girish V. Reddy, managing director of Prisma Capital Partners, which invests in other hedge funds. ‘More funds will feel the pain, but not many are as leveraged as the Bear fund.’”
“As Bear Stearns worked to manage the crisis, many on Wall Street speculated about how the firm could let the funds get in such a precarious position. In fact, executives at Bear Stearns Asset Management had debated last summer whether to start the second hedge fund.”
“The Bear Stearns funds, like so many others, had invested in collateralized debt obligations, or CDOs, which invest in bonds backed by hundreds of loans and other financial instruments. Wall Street sells CDOs in slices to investors.”
“Last year, $316.4 billion in mortgage-related CDOs were issued, about 77 percent more than the year before, the Securities Industry and Financial Markets Association said.”
“One investor, who asked not to be identified because he was trying to recover his investment, said that when he moved to get his money out, he was told investors had tried to redeem 10 percent of the fund. ‘They didn’t realize this was Katrina,’ the investor said. ‘They thought it was just another storm.’”
“Bear Stearns is bailing one of the funds out because it is worried about the damage to its reputation if it stuck investors and lenders with big losses, said Dick Bove, an analyst with Punk Ziegel & Company.”
“‘If they walked away from it, investors would have lost all their money and lenders would have lost all of the money,’ Mr. Bove said. But ‘if they did that to everyone in the financial community, the financial community would have shut them down.’”
“One investor, who asked not to be identified because he was trying to recover his investment, said that when he moved to get his money out, he was told investors had tried to redeem 10 percent of the fund.”
is this the part where investors lose 5 mill? is this the part with the 500K margin call? how many “big guys” had a bad weekend ?
not enuf to make me happy
Hedge funds are by their nature risky.
Tip of the iceberg? We’ll see, but unfortunately I think we all know the answer to that. You know, I made the comment on some thread over a year ago that most came to this blog in an effort to solidify their belief in a housing bubble with hopes of one day buying again cheap. But, as the unwary traveled deeper down the “rabbit-hole”, unwittingly some came to realize that there’s something far greater to worry about than whether or not housing will be affordable again. As for me, investing in real estate at some future date is the last thing on my mind right now. Preparing for something historic is the first.
Seriously what are you preparing for?
“Seriously what are you preparing for?”
…a run on the bank…. The Grand Depression…
I agree with you EX…..
It will get much worse, this is beyond just housing.
Um, I think I read here on Friday that BofA has quite a bit of exposure to this. I don’t know if that’s true, but if so, I’m not so sure I’d be comfortable if I had accounts there. Or, are they just too big to fail?
It’s more a matter of who survives…
I don’t think Wells or BofA will collapse.
I got laid off about 18 months after September 11th. It took that long for the lay offs to perk their way up through the operating companies of my gigantic multinational employer to hit headquarters. I am a tax lawyer and that job followed time in the tax departments of some big NYC law firms. While a bunch of friends (other lawyers, but not necessarily tax people) who were also laid off from other places eventually got new jobs with big NYC firms or hedge funds, I wanted to go the non-profit route. It took a while, but I am now a federal employee in a severely understaffed department of a major agency. We work with non-profits. My experience on Wall Street (OK, actually we were south of Wall Street, but same thing) is nearly unique here and has been valuable. While down here (I will always think of DC as the south), I finished my LLM in tax law. My position is protected by a collective bargaining agreement and I belong to the union. Feds still have pensions (though no where near as good as the old system pensions) which, I believe, are backed by the full faith and credit of the United States of America. We are also in Social Security (for whatever that is worth for a gen-Xer) and get matching on up to 5% of our 401Ks. The other benefits aren’t as good as they were in private practice, but the hours are better. I don’t have the protection that my brother will have if he gets tenure next year, but it is pretty darn safe. The LLM means that it will be next to impossible for someone else who is subject to a RIF (reduction in force = government speak for lay off) to claim to be more qualified than me and kick me out of my job.
I got through the last lay off pretty much OK. I burned through a lot of savings, but I had them to burn. Nothing came out of retirement savings - actually I used a low income/high tax credit year to convert some regular IRA money to a ROTH at no cost. I’ve saved up enough to almost make up for what I used while out of work. The salary is low for my experience - I made the same amount in 1994 I think, but I actually LIKE this job.
So that is how I have prepared. I’m in about as safe and stable a job as I can get, and it is one I am happy to stay in for a good long while. I hope that my friends who have jobs that could evaporate if the hedge funds and the economy explode will be spared if another downturn comes. I really, really do. But I don’t think there is a magic formula out there to make these derivatives unravel without a vast contraction in the market they depend on for their livelihood. Maybe they will just be lucky and dodge the bullet. But I’m not that good at dodging, so I found a foxhole instead.
Oh, and I’m trying to find some meaningful volunteer work that I can do long term to help those less fortunate. There may be a lot more of those around in the next couple of years. Some of them will have brought it on themselves through bad decisions, but I can donate some time to help with my particular skills. I don’t have the money to spare.
hi Polly,
would you please answer one question?
if i give my non-resident wife a first time gift in july of $125000, how soon can i give her a gift again next year?
(jan. 1st, 365 day, etc. etc)
it will be my first gift to family.
thank you..
p.s. sorry if this post show up twice as i’m posting it from 2 different browsers since it looks like the first one didn’t take.
A tax lawyer posts on here, and you ask for free tax advice? Tacky.
TJ,
Disclaimer - this should not be considered tax advice to you. Please consult your tax advisor.
OK, that’s out of the way. Very often the best place to go for tax information (especially the practical kind) is the instructions for the applicable form. For you, check out the instructions for the gift tax return - Form 709.
Here: http://www.irs.gov/pub/irs-pdf/i709.pdf
Look at page 2 under the heading “Gifts to Spouse” and the heading “Annual Exclusion” and on page 3 the “Note” at the top of the first column that specifically talks about gifts to spouses that are not US citizens and the instructions for part 4 line 4 on page 9. Better yet, just read the whole thing. The exclusion amount cited is $120K, but that is for 2006. All the references are to an annual exclusion which would mean a calendar year - the exclusion “renews” on January 1st.
Warning - estate and gift tax is not my area of expertise, not by a long shot, but the instructions and forms are a great resource.
Oh, and whenever you are making gifts subject to an upper limit, give yourself a bit of wiggle room. Undershooting by a thousand bucks or two is a great idea. And you might want to file the form, even if it isn’t required.
hi Polly,
thanks for the advice.
i’ve already read 709. i still can’t seem to find how soon i can make another gift after the first one.
at any rate, thank you for taking the time to try to help. i appreciate it very much.
best regards,
tj
TJ, it’s an annual exclusion. You can do it once a year. As long as the first gift is in one tax year and the next one is in another tax year, the law doesn’t care how far apart they are. Check with someone who specializes in this stuff, by all means, but believe your own eyes. If there was an additional rule that the gifts had to be a certain number of days or months apart, it would say so in the instructions.
Promise.
P.S. I used to print out the instructions for forms to bring to open book exams. They are that good.
thanks Polly! that’s the exact answer i was looking for!
i’ve been doing internet searches and reading the 709s and such for months and couldn’t find the answer.
now i will be able to make plans accordingly.
i’ll remember to leave myself some ‘wiggle room’ also as you advised.
i’ll also fill out the form and hire a tax professional when the time comes. you’ve saved me a lot of time and touble.
thanks again,
tj
Yes. Our thanks go to the private federal reserve printing money with no limits or concerns of responsibilty are coming to light.This play/game has been done before. History tells us the ending but majority “its differant now, a new economy” are in for a surprise.
Dude, relax, the sky isn’t falling. Neither are prices, at least not here.
The world doesn’t begin and end in West LA. Expand your mind.
I’m sorry, you cannot call it a “Great Unravelling” without any declines in WLA, it doesn’t work that way. Fresno is not exactly the center of CA’s real estate universe.
Between 1991 and 1996 prices in my West LA neighborhood dropped from $1.4 million to $850K. People said it couldn’t happen then too. Prices finally recovered in about 2003. At that time things were moving very slowly and then prices doubled almost overnight. What was the justification? If it was largely easy money and money gets tight then whatch out below!
I’m sorry, you cannot call it a “Great Unravelling” without any declines in WLA, it doesn’t work that way. Fresno is not exactly the center of CA’s real estate universe.
relax sweet-cheeks, you’ll get yer unraveling soon enuf
First of all, we weren’t talking about prices. I thought the topic of this thread was about all this bad paper floating around and the finacial implications of billions and billions of dollars melting away due to defaults, of which we’ve only seen the beginning. I don’t care what prices do in LA, if this thing goes systemic, there won’t be anywhere you won’t feel it. This is not an isolated event. Did you not read the LA Times quote “What’s worse, he said, is that the biggest investors in mortgage-backed debt are not hedge funds, whose investors are supposed to be wealthy enough to withstand losses. Instead, they are banks, asset managers, pension funds and insurance companies that serve mainstream Americans and have put their money at risk by buying exotic mortgage securities, he said.” So sorry sweetie, you’re mssing the point.
Secondly, I said “prepared”. I’m not running down the street screaming “the end is nigh”. But no one will deny there is ominous storm cloads on the horizon, and it’s better to have a house built of bricks when the wind starts to blow.
“the biggest investors in mortgage-backed debt are not hedge funds, whose investors are supposed to be wealthy enough to withstand losses. Instead, they are banks, asset managers, pension funds and insurance companies that serve mainstream Americans and have put their money at risk by buying exotic mortgage securities,”
The money quote. I was wondering if anyone thought that perhaps the mortgages will not re-set in the fall? Maybe to stave off disaster?
Then who pays the difference in the rates? When these mortgages when taken out rates were much lower. Now with the real rate up around 5.5-6% who is going to eat this difference? Even if they did not reset some bank is still going to lose.
I agree, some bank is still going to lose, but assuming your debtor can handle the current payment but not a reset, some money coming in would be better than a foreclosure, wouldn’t it?
The MBS buyers bought those bonds with a contract that said they would be paid xx% each period. It is not up to the banks to decide if those rates will reset or not. If the bond sellers decide to pay the difference in the note, then all is well. I doubt the MBS issuers wil be that generous.
Dude, relax, the sky isn’t falling. Neither are prices, at least not here.
This is the general attitude here, that it can’t happen here. Very, very myopic views in L.A. I’ve lived here most of my life, and the feeling that “it’s somehow different here”, has never been more prevalent than today. Think “Hotel California” by the Eagles, and especially the song, “The Last Resort”. One of my top 5 albums of all time. Funny how most people living here claiming to be Eagles fans, and a knowledge of the album, haven’t listened to the lyrics, which include,“you call someplace paradise, kiss it goodbye…”
Think “Hotel California” by the Eagles,
———————————————————–
The real Hotel California of the song is actually in Todos Santos near Cabo San Lucas, Baja California Sur, Mexico. I was there about 4 years ago, the hotel was abandoned and in disrepair. Nice place to visit, though.
I like that storytoo, however, it’s not true.
Henley denies it…
http://www.todossantos-baja.com/todos-santos/eagles/hotel-california.htm
Apologize in advance for prolonging this…
The University of California Channel Islands campus used to be the Camarillo Mental Hospital, and during that time was the inspiration for the Eagles song, Hotel California. The building with the belltower was featured on the album cover. A number of lines in the song are references to hospital history. Before alcohol rehab programs were started in 1969 each patient received a glass of wine before bedtime to settle them down, prompting of course, the line, “we haven’t had that spirit here since 1969″.
Here’s the specifics from the song - “I Called up the captain, please bring me my wine. He said, ‘We haven’t had that spirit here since 1969′.”. According to the former Assistant Administrator of the Camarillo Mental Hospital (who claims to have walked Don Henley and Glenn Frey through the place while they were gathering background info for the song), they used to serve each patient a glass of wine at bedtime to settle them down. In 1969 they started doing alcoholism treatment programs, and for obvious reasons the evening wine service went away.
The album cover shot is the Beverly Hills Hotel on Sunset Blvd.
very cool link, thanks
Dude, you know, uh, like, it sounds like she already is! Relax? Not when the sh!t is about to hit the fan. no. way. jose.
The sky is firmly in place here in Arizona, but it is a matter of perspective. Just this past week, the MBA reported that defaults in Ohio, Michigan and Indiana are already higher than what Texas experienced in the 80’s bust. That was a shocker to me because it was a very painful time there.
oil bust should remind folks that the last RE bust was in stages starting in 85
this time its all in one shot
Don’t get me wrong, something’s obviously going on, I just think ex-nv is overreacting.
If you are going to panic, be sure you panic first.
I think LA prices will fall substantially, about 30% over the next few years from today’s prices. But LA has jobs, universities, and climate (near the beaches). Long term is golden for LA, San Diego, Orange County, and the SF bay area. But that’s my own biased opinion. Short term (5 to 7 years) I think the high paying jobs will still be there and the affordability issue will still be there. Renting and consulting will be very lucrative for mobile people in the golden state. Homeowners there (who bought since 2001) will be going through hell.
Too bad you can’t drink all that water in the Pacific, then LA would really have a bright future.
Renting and consulting will be very lucrative for mobile people ??
Its already beyond that Bill….We have police & firefighters who live in other states and commute in….
Long term California will be swamped by illegal aliens and their devil gangbanger spawn.
“Too bad you can’t drink all that water in the Pacific, then LA would really have a bright future.”
Actually, you can. Large-scale desalination is quickly becoming a reality. Western Australia is the pioneer. We’ll eventually be able to get as much usable water from the oceans as needed. Downside: converting it requires large facilities and a lot of energy. But all the technology exists.
The energy for desalineation can come from the ocean itself with undersea turbines that use ocean currents and tidal flows. They are much more reliable than wind power and have unlimited power.
What about solar?
Excuse me but didn’t Santa Barbara build a desalineation plant back in the 80’s during a drought?
Maybe prices will hold up better there. Ha Ha!!!!!
Solar is more expensive to build and does not produce enough power to run a large desalineation plant. Current solar panels can only absorb 40% of the sun’s light. The ocean has enough energy to run most of the planet without producing any CO2 after the initial investment to build the turbines. After that, it is clean, cheap energy for the masses. The oil companies won’t like it too much though.
What is the cost of anchoring these turbines? Has to be very high working under the waves. You are correct about current solar panels, however in a few years solar panels will be able to pick up all of the wavelengths of visible light and then they will be much more efficient.
Got ROYGBIV
a better solution would be for people to learn to live with less water. If people were happy with a smaller house and smaller yards, that would be less water and less energy. If people had a modest home closer to work, thats less energy for commuting. If people had smaller cars, thats less energy, and less water for car washes. If people had less children., we wouldnt need to constantly build new housing tracts. If there was less immigration similarly less need to keep building building building. Untill society as a whole can be happy just to be here, and not need more more more, bigger bigger bigger. we will be doing stupid things like mcmansions in the desert, turning coal into C02 to make water.
We can say on and one how the desal plant is gonna be powered by winds waves or solar. but if these were realistic on a large scale they would allready be done. The reality is that the incremenatal energy used by a desal plant will be powered either by coal or nuclear.
Most of the growth in CA is from in-migration, both from within the U.S. & from other countries. It is not because of births to native Californians.
it was a very painful time there ??
It was very depressing….I think most who think that this housing debacle will be contained within itself have not experienced serious downturns (1981)…I for one hope there is no serious spill over into our National economy because most will not like it much…Its one thing to say that “I am a renter” so it won’t effect me and its quite another to say “I am a renter” but I don’t have a job….Seems to me that the renter and the FB would be in the same position IMO….
‘the renter and the FB would be in the same position IMO’
There were still jobs in Texas after the crash started and rolled on. But most paid less and many had to move to take advantage of them. One reason so many houses were foreclosed on was they sat far from the post-boom job centers. Orange County, CA may end up that way.
Renters can pack up and move to the jobs with credit intact.
Point taken Ben….Good credit however did not mean much in 1981…..Nobody wanted to borrow @ 13% and no business wanted to try to expand with the prime @ 18%…..
what jobs, Ben? I thought most US manufacturing went overseas. Did I miss something?
Borrow at 13%? How about lock in CDs, treasuries at 13%…?
Death_spiral - so all we do is manufacturing in the U.S.? I thought we were in the information economy. Maybe I’m just dreaming.
You need to actually go into the MLS and look at recent sales that confirm that the only properties selling are short sales and price reductions in the 10%-20% range. LA is taking a “shit” except nobody seems to notice except phucked borrowers, mortgage “brokers” (used car salesmen) and hungry RE Agents. Furthemore LA is still in LALALA Land, San Diego, OC, & IE are already toast.
“LA is taking a “shit” except nobody seems to notice except phucked borrowers”
Have you read the Homes section of the LA Times today? $4,000,000 is the new $1,000,000.
Have you read the Homes section of the LA Times today? $4,000,000 is the new $1,000,000.
Until the excess global liquidity dries up. Which is beginning to happen as interest rates rise. Do you seriously believe that the lower to middle to upper-middle class underpinnings to this structure can erode and melt away, leaving only the uber-rich to trade one anothers houses to one another for $1M to $4M to who knows how much $$$$$ ?!!? This over-reaching will result in a faster/harder fall for L.A. The foreclosures at the sub-prime portend what is soon to happen at the Alt-A. As consumer spending slows, (75% of GPD. Probably 90% here) just where do you think the cash will come from to perpetuate this game? Real estate has always been based on a ladder system. You can’t remove the middle rungs, there has to be sequential steps. It’s happening in the entry level areas; what will hold up the $1M+ properties?
“Do you seriously believe that the lower to middle to upper-middle class underpinnings to this structure can erode and melt away, leaving only the uber-rich to trade one anothers houses to one another ”
Man how it bugs me how many SOB’s living large think that they are somehow above all when it comes to the housing crisis. Thye are either unwilling or unable to see the daisy chain which makes it all work.
Lots of folks drinking the “high end will never crash” Kool-Aid, even in San Diego.
Funny that the high end moved up with the low end, but somehow won’t move down with it. Nice logic.
Believe your right, it’s more than home prices at stake, its about the fall of an over leveraged financial system. Soon to find out that Debt is not Money. That house of cards trumps a normal house. Move towards hyperinflation IMO
Let’s put things into perspective. In 1998, the Fed and the financial system got spooked when a hedge fund threatened to take the whole system down the toilet. Hedge funds has gotten more monstrous since then. Now this subprime disaster is affecting all financial institutions on wall street as well as main street in term of pension fund, 401 k, etc. Remember the vicious cycle, it is going to spin this into the mother of all financial Katrina. But , but it hasn’t seem to affect the wider economy….
“Hedge funds has gotten more monstrous since then.”
That is a direct consequence of the LTCM too-big-to-fail bailout, IMO. Lots of financial wizards realized that the Fed was offering a free implicit too-big-to-fail insurance policy, and a thicket of new hedge fund growth and unbridled increase in systemic risk was the logical consequence.
The story between the Bear funds and LTCM are nearly identical: massive leverage on illiquid bonds.
Bonds have this property that their returns are extremely skewed and fat-tailed on the downside. Almost all the time, they are slightly positive (interest) and every once in a few years or decades they are extremely negative.
If you fit your models on data from good years, you see very little variance, and the “answer” from the asset allocation says: “lever up boys.”
Equity hedge funds are probably less vulnerable—since everybody knows equities are risky the intrinsic day to day variance is much more.
The huge difference is that LTCM bets made sense (and were in the black after the crisis), while the Bear funds, um don’t.
“Soon to find out that Debt is not Money.”
Soon to find out that there really is no good debt after all. Not in this decade and not in the next decade.
“Move towards hyperinflation IMO”
Exactly what I’m afraid of, hyperinflation.
I couldn’t agree more. February was the first “resistance level” when we watched the Sub-Prime lenders crater. Now we’ve hit the second “resistance level” in our flight to the bottom. Inflection points are tough on financial models. Even the most sophisticated monte carlo driven trading models have can break down when the momentum changes directions - and that’s what just happened to Bear Stearns. Their model incorrectly assumed a constant inverse relationship between two variables…and those two moved in tandem a bit too long for Bear to hold it all together. In any other industry - a meeting like the one that bailed out LTCM or the ones convened to do the same for Bear would be viewed as collusion…but not when Wall Street is involved because the stakes for our entire economy are just too high… Keep moving…there’s nothing to see here folks! This will spread…and cheap housing is the very least of our problems.
“On http://absnet.net (free registration required), you can see the performance of these securities. And those backed by second liens are in a bloodbath mode.
The most ‘nuclear’ I found is Goldman Sachs Mortgage Company Trust 2006-S3. It’s on its 13 month and it has already 13.20% cumulative loss. The whole overcollaterization and lower tranches are wiped. M-7 certificate, originally rated BBB-, is gone, and M-6 (originally rated BBB) is half lost. Losses in A tranches are almost certain, AA are likely and AAA are possible. It has gone from OK to “nuclear” in roughly 6 months.
I wonder how quickly the rating companies reacted.”
Thanks to poszi at Calculated Risk on Fitch and Moody downgrading some second lien, RMBs on Friday. It ain’t just Bear.
One thing that hasn’t been mentioned in the press coverage of Bear Stearns fiasco is one interesting aspect of the assets underlying the various CDO’s that are certainly parked in other hedge funds and investment pools. As we all now know, the assets in the CDOs are made up of thousands of individual subprime loans. The meltdown began because the defaults on these loans are higher than the models predicted.
The unusual aspect is that the interest rates on the underlying mortgages are reseting up in earnest over the rest of the year, cue the Credit Suisse showing the resets on a monthly basis over the next few years and showing the resets concentrated in the subprimes this year. The subprime borrowers who can refinance out the of the subprime reset into a better or different loan will exit the asset pool that underlies the CDOs that are still out there. What will be left in the CDOs is the subprime borrowers who can’t refinance into a different loan and are stuck with the higher payment.
Now we all know that as the interest rate rises, the payment goes up disproportionately, and with property values falling, even slightly, there is a much greater risk of deliquency and foreclosure. In other words, the quality of the assets underlying the CDOs continues to deteriorate as time goes by, they will be composed of the weakest borrowers who couldn’t refi, in part because they had the least equity.
The BS bailout may work for BS, but there are much weaker hands out there that will surely get shaken out. The important point is that RISK has been suddenly reintroduced into this asset class, and if ANY new money is directed into subprime lending going forward, it will be at rates which reflect this new risk premium.
Higher rates and less funding, this is where it all ends.
Right on, Ex. I think many of us have undergone that transition in our post-bubble plans. I could buy today if I wanted to, but I’ve been thinking I would keep renting until 2009. But now, I’m thinking seriously about “flying under the radar” for even longer.
Don’t forget: when the bubble ramifications really hit the fan, states and municipalities are going to have serious shortfalls of tax revenues to which they’ve grown addicted over the past decade. Where are they going to make up that revenue? Ah-ha! From “homeowners.”
Hmmm. Maybe I’ll sit this out a lot longer than I had planned.
– The Judge
ex-nnvmtgbrkr; I hope you’re wrong about America heading in an ‘historic’ (negative) direction, economically speaking. Yet, I have this queasy feeling that we may be in store for some financial pain that will be widespread and systemic throughout our financial systems, affecting even the savers and long-time homeowners.
While I have known that the housing market is in for some serious correction, and have taken some small measure of schadenfreude at the local housing scene, the impending implosion of the U.S. financial markets are no laughing matter. The U.S. needs to take decisive and corrective action in containing this subprime mess from going any further in the financial markets. I hate to use the bailout word, but I suspect that may be the direction U.S. may be headed towards in this instance. If it means increasing inflation by just a little, maybe that’s the price we all have to pay for the excesses in the financial bubble, and one mainstream America can live with. Any other alternative suggesting widespread financial ruin is simply unacceptable.
I agree that you probably don’t want it to happen - unfortunately that’s the situation.
I’d accept it. Hungry kids make good students. It’s the cell phone/iPod/Gameboy kids that are the most disrespectful and learn very little. Lately, most of the kids fall into the second group. We need a depression to straighten out society.
Actually, hungry kids do not make good students. Docile students perhaps, but studies have shown that students that miss meals–especially breakfast–or who are suffering from malnutrition do not learn as well.
If a child is sufficiently underfed, he or she may become listless, and therefore not disruptive, but not disruptive does not equal learning something.
The U.S. needs to take decisive and corrective action in containing this subprime mess from going any further in the financial markets. I hate to use the bailout word, but I suspect that may be the direction U.S. may be headed towards in this instance. If it means increasing inflation by just a little, maybe that’s the price we all have to pay for the excesses in the financial bubble, and one mainstream America can live with. Any other alternative suggesting widespread financial ruin is simply unacceptable.
IMO, unacceptable or not, “widespread financial ruin” is going to happen. You can’t repeal the laws of economics any more than you can repeal the laws of physics, and one of the laws of economics is “Inflation cannot be a permanent policy, and the attempt to make it so will result in the destruction of the currency.” We will have either a deflationary depression or a hyperinflationary one.
“The U.S. needs to take decisive and corrective action in containing this subprime mess from going any further in the financial markets. I hate to use the bailout word, but I suspect that may be the direction U.S. may be headed towards in this instance. If it means increasing inflation by just a little, maybe that’s the price we all have to pay for the excesses in the financial bubble, and one mainstream America can live with. Any other alternative suggesting widespread financial ruin is simply unacceptable.”
I’d like to see some serious prison sentences handed down if a bail-out is in the works.
“The U.S. needs to take decisive and corrective action in containing this subprime mess from going any further in the financial markets. I hate to use the bailout word, but I suspect that may be the direction U.S. may be headed towards in this instance. If it means increasing inflation by just a little…”
————————
NOOOOO! It is precisely this kind of thinking that got us into this mess in the first place!!!! The “bailing out” of one financial fiasco after another is what caused everyone to completely ignore risks and it caused major dislocations in the global economy.
What we NEED is to let things fall where they may. We WILL be experiencing hard times in the future, but it is the medicine we need to take in order to cure the debt disease. We need to begin valuing WORK again (instead of financial “manipulations”). We’ve become a society where athletes, entertainers and Wall Street “wizards” earn millions — even billions — of dollars while doctors (yes, I think most doctors are underpaid and over-worked), teachers, builders, craftsmen, etc. are paid far, far less. WTH is wrong with this picture?????
Yes, it’s time to re-prioritize in this country. We’re way off-track.
>”If it means increasing inflation a little bit maybe that’s the price we have to pay”
What? Inflation is a tax on you, me and everyone in America. It takes all of your cash holdings and reduces their value — thereby siliently and invisibly TAKING MONEY FROM EVERYONE.
Why on earth should I pay the price for other people’s stupidity? Why on earth should I pay the price for other people’s windfall profits? So if people invest in high risk ways, they keep the profits, but if they lose massively — they get their money back?!
Absolutely not. If they crash — LET THEM CRASH. Let the bank suffer a massive scar to its credibility.
I’m a free market capitalist. Once you start playing god with financial markets, a) you lose all credibility of the fairness of the market … b) you invariably create imbalances (and injustices) elsewhere.
I’ll be damned if I support a bailout which involves saving the banks at the expense of every man, woman and child in America. And don’t for one second tell me that they are in some way the beneficiaries of a bank bailout –> LOL.
…here’s something far greater to worry about than whether or not housing will be affordable again.
Dead on, ex-nnv. Anyone that’s only fretting about housing prices simply doesn’t see the big picture.
“Tip of the iceberg? We’ll see, but unfortunately I think we all know the answer to that.”
Yep. Funny how to most people out there this was just another week. I’ll bet the big players, behind closed doors and with scotch in hand, are realizing that maybe a 100 billion dollars of virtual wealth vaporized last week…
“Bear Stearns is relying ‘on the implicit assumption that recovery is right around the corner, when in fact it looks like we’re in for a summer of increased defaults,’ Mason said.”
Now that’s frightening. Where in the hell are they (Bear Stearns) getting their information? Quotes like Masons could set the stage for panic selling.
Interesting to see the opening bell on Monday.
“panic selling”
Check out Bloomberg, they’re dropping all sorts of positive guesses about recovery and what not. I wonder if it’s because they’re worried about a rocky opening on Monday.
“Finally, the government will probably boost its first- quarter growth estimate”
At some point people are going to wise up I’d guess.
“Where in the hell are they (Bear Stearns) getting their information?”
Paulson: Housing slump near end
By Martin Crutsinger,
Associated Press
Washington | The major slump in the housing market is nearing an end and should not have a significant impact on the overall economy, Treasury Secretary Henry Paulson said Wednesday.
Paulson refused to comment specifically on the market impact of troubles confronting two large Bear Stearns hedge funds that invested heavily in subprime mortgages - loans made to borrowers with spotty credit histories.
“We have had a major housing correction in this country,” Paulson said in an interview with a small group of reporters at the Treasury Department. “I do believe we are at or near the bottom.”
Paulson said he realized there would be losses along the way but said he believed those losses have been “largely contained.”
“It doesn’t pose a risk to the economy overall,” he said.
Paulson’s comments echoed remarks by Federal Reserve Chairman Ben Bernanke, who said in a June 5 speech that he believed the slump in housing would last longer than expected but that so far, “we have not seen major spillovers from housing onto other sectors of the economy.”
http://www.wilmingtonstar.com/article/20070621/NEWS/706210366/1002
GS- I’ve got to say that I admire your ability to dig this stuff up almost effortlessly. I think I’ve already read this article, but I would have never been able to go back and find it. Amazing that heavy hitters like Bear Stearns actually bought into this tripe.
Yes! Of course Paulson has to be a cheerleader and say all is well, thats part of his job. But why do so many smart Wall street types believe it. Thats what is mind blowing.
I believe the expectation for bailouts (either announced or otherwise) must be quite high. Otherwise, I see no reason to take encouragement from cheerleading on high.
I hope that you are wrong - but something tells me probably not. I don’t want to pay for this mess. Let the chips fall and lets get on with it.
Google news is your friend.
“paulson” and “subprime” are your search terms.
P.S. I guess you would need to have known that Paulson (head of the PPT) and fellow PPT cheerleader Bernanke were encouraging everyone that “subprime is contained” in order to realise “paulson” and “subprime” would work well as search terms.
The major slump in the housing market is nearing an end and should not have a significant impact on the overall economy, Treasury Secretary Henry Paulson said Wednesday.
Joseph “The Wonder Weapons are Coming” Gobbels said that all was well even as the Russian barbarians stormed down the blvd. to the Reichstag.
Human nature doesn’t change.
It’s just a different place in a different time.
The Russians weren’t barbarians. Rather than pull all the Jewish men and boys out of rural villages and shoot them, they took Jews into protective custody and sent them to Siberia ahead of the German/Lithuanian death squads…
Of course, they did keep a machine gunner behind their lines to shoot deserters…
Was it BS that put out the Buy on New Century (a few months ago) a week or so before they tanked? What ever became of that? It smelled of fraud to me.
Don’t worry. All the Wall Street gangsters got away with the cash. They will all live very nice lives, laughing at what they did to everyone.
Isn’t this country awesome?
Some rise by sin, and some by virtue fall.
I’ve been saying this for months. Is as if we all of a sudden have a mafia mentality in business. If you take away the fact that they don’t follow the rules, the mafia is just another legitimate business.
i think the mafia is just our corporate kings minus the excessive violence…
i mean plus not minus!
I liked it better the first time.
The H in KirkH is for House, my last name. I’ve just been ashamed to admit it until now.
From what I can here’s a summary, please correct where necessary:
Bear Stearns borrowed a ton of money and bet it on sub-prime mortgages(CDOs (Collateralized Debt Obligations)).
Because they don’t sell very often it’s hard to figure out what the CDOs are worth. The Ratings agencies are a lot like real estate agents so they won’t admit problems until after the fact.
The mortgages are blowing up but the CDOs haven’t been repriced to reflect the death of sub-prime. If they were repriced all hell would break loose because this is a $1Trillion market with all sorts of gambling and leverage afoot.
The people who lent Bear the money want it back before it evaporates but if Bear auctions the CDOs in order to repay lenders the true price of the CDOs will become apparent.
To keep the true price hidden Bear Stearns is working deals this weekend to prevent an auction while somehow repaying its debt to lenders. It might have to use it’s own money which is why the Bear stock is down.
That’s massively simplified but that’s what I can decipher.
If you read the article it states that several exec’s at Bear Stearns put up a total of $40 million into both funds. So if they didn’t bailout the fund they were personally going to lose their money. So…bailout the first fund, get your money back, and let the shareholders take it on the chin.
Kirk: 100% right! IMHO.
Amplification on the need to bail out the fund with their own capital: No banker would lend them 1 cent, and their own funds (really the SHAREHOLDERS) had to brought to the altar, to most likely be slaughtered.
One big issue still left unglued for BS is:
They are only bailing out the smaller of the two failed funds. The conclusion they came to is the 2nd bigger (and highly leveraged fund) will be left twisting in the breeze. The big clods discovered it is full of even more toxic waste than its smaller sister.
Can’t wait till the mark-to-market party begins.
Neil, I’m putting you in charge of the popcorn.
“The people who lent Bear the money want it back before it evaporates but if Bear auctions the CDOs in order to repay lenders the true price of the CDOs will become apparent.”
That’s when the tsunami hits. If they have to re-mark their CDO’s, then questions arise about what the other banks and hedge funds are sitting on. They would be required to re-mark as well.
Once this crap starts to get marked down to reflect increased risk, the floodgates open. A lot of pension fund / mutual fund managers would have to sell this crap. And credit would tighten overnight.
If 5% downpayments are coming into vogue now, we could be at 10% later in the year, then 20% next year. Then the price drops will get serious.
if that is the worst of it - tightening lending stds, i am ok - and i am sure you all agree that it is what has to happen. but i fear that is just a small piece of the vast changes to occur.
Kinda the way I feel about it ex-nnvmtgbrkr. I have felt all along that pension funds , insurance companies ,and lenders /investment companies were they heavy players in these mortgage backed investments because these have always been the players in loan paper .In the past lending cycles these MBS’s have been a very solid investment but not lately with the crazy low down lending . What were they thinking ? Still think the ratings on this junk loan paper sucked . I want Wall Street to bail out the mess .
When these various blow-ups have occurred, it is always difficult to size up the importance at first, IMO. I recall many here wondered out loud in 2006, how could these subprime firms keep making these loans with inverted yield curve and flat to declining values. Turns out, they could only do so at a loss. And look at how one or two bankruptcies turned into dozens.
Now it spills over into the MBS/derivative market. Kinda predictable, really.
I didn’t know until recently how much investors were so highly leveraged in this MBS’s /CDO junk .Leveraged loan paper investing in leveraged junk loan paper is just a bad combo IMHO.
It’s so predictable, you almost have to suspect that these wizards of Wall Street were banking on some kind of transfer of the toxic loan liabilities off the balance sheets of the super rich and into the endangered middle-class taxpayer’s hands. Sorry, boyz, you can’t squeeze blood out of a turnip.
I agree Stucco. As much as we criticize the Wall Street guys, the truth is that some very smart people appear to have acted very dumb throughout this mess. That tells me they were/are expecting to be made whole at the end of the line. How that bailout occurs is up for debate, but it will be made to appear like a non-bailout, when it is really a third- or fourth-generation bailout on the backs of savers. Yep, that’s you and me, folks. They’ll find a way to bail out Wall Street, and we’re going to pay the bill, one way or another.
– The Judge
Other points that I find shocking / a real eye opener was the boyz had jacked up the value of the equity tranches when RE was kited to the moon. This kited the hedgies results, bringing in more FI (F!%^k Investors
) and FBs
The refusal to mark to the REAL market price after subprime implosion, is what BS is sweating through now. They couldn’t admit it till now, since the hedge fund’s insane returns would evaporate along with their BONUSES. IMHO.
Its always about fees, etc. for the Wall St boys. Now their house of cards are about to fall. Guess they will go elsewhere to play if they can.
If you see a roach in your kitchen, you should know that there are many more where it came from. I think we can expect to see some big fat roaches in the months to come.
“In the past lending cycles these MBS’s have been a very solid investment but not lately with the crazy low down lending . What were they thinking ?”
That housing prices would go up forever or, at least, housing prices would never go down. David Lereah said so.
“I want Wall Street to bail out the mess.”
Based on BS’ bailout actions, it looks like investment banking history may indeed repeat itself. According Galbraith’s The Great Crash, during the late 20’s, the big houses repeatedly tried unsuccessfully to support investment prices. In the end, confidence was lost and most of them were wiped out.
Better that Wall Street pay for some of the loss than the tax payers . Liar loans , liar ratings from Wall Street ,fraud and the whole mess should be paid for by the parties that profited by this foolish investment scheme .I want to see all the greedy players (including greedy borrowers ) get wiped out before the taxpapers have to pay or parties that were deceived .
Most definitely agree. We should demand it of our representatives.
I want Wall Street to bail out the mess
The Mazzholeland state pension sharpies have been pullin’ in returns in excess of 16% for their contributors.
Wonder how much of hedgie MSB derivative junk their holdin’ to get these outta site numbers.
Gotta all be linked together.
absolutely…
Maybe when the pension system collapses they won’t be able to hand golden parachutes to politician’s friends forced out of their no-show jobs.
Not.
Had you going there for a minute there, didn’t I?
The hard part is that everyone of us is affected via pension funds or 401k funds. For eg. I checked my vanguard funds, 2 out of 5 have strong exposure (read 17-20% of value) to bank stocks. Invariably these are BofA, Citi and JP morgan chase. No wonder the vanguard stock is down.
Anybody know how deep is the exposure for fidelity funds etc.?
i have fidelity and their SVF option is 30% MBS, according to their pie chart illustration
I am SO pissed off that our co. pension funds have such volume of MBSs in them. Even if mainly AA or AAA rated, I say they all suck. But if the mkts fall, other funds won’t be much better.
Pension funds for example are easy set-ups for this. The search for higher yields drives them…counties and cities across the country have massively underfunded public pensions, and they need money.
And witness the prior bankruptcy of OC, the people in charge of the finances are not necessarily the sharpest knives in the drawer.
I hate to say it, but this is one of the risks of a pension. Pension fund managers have complete control of the money, and people trust that that pension will be there when it comes time to retire with very little incentive to save in their own retirement accounts.
Those of us who don’t have a pension get to manage our own money in a 401K or IRA, which may still be a mess if the markets slide, however at least we’re able to choose how we want to invest.
In early 2003, Warren Buffett wrote about derivatives in his annual letter to shareholders.
Here is the link (PDF) file.
http://www.berkshirehathaway.com/letters/2002pdf.pdf
Consider these quotes from Buffett and the current subprime situation?
- We view them (derivatives) as time bombs, both for the parties that deal in them and the financial system.
- Errors wil usually be honest, reflecting only the human tendency to take an optimistic view.
- But the parties to derivatives also have enormous incentives to cheat in accounting for them…often there is no real market and “mark to model” is utilized. This substitution can bring on large-scale mischief.
- The marking errors … have favored either the trader was eying a multi-million dollar bonus…
- Derivatives also create a daisy-chain risk.
- Large amounts of credit risk have been concentrated in the hands of relatively few derivatives dealers…the troubles of one could quickly infect the others.
This is from early 2003!
he is spot on…we all know people act in their best self-insterst and that hey get caught up in the ‘everyone is doing it’, ‘I deserve it’ way of thinking that is adequate justification to them for the full scale obfuscation and outright fraud in this ponzi scheme….
If we do go into a real Depression, I think the middle class needs to stage some kind of revolt and remove these hucksters from their posts.
Just got Maxed Out on net flicks, it lays out the business plans of American banks, I wanted to barf, tons of credit to people who just can’t afford it. An interview with a pawn shop owner who says he can’t compete with the pay day loan people. Pretty sick when main stream lenders are getting criticized by pawn shops for being bottom feeders.
Anyway, seeing who is getting all this credit and what their assets are, I could see how this might be profitable at first but of course would have to blow up in the end.
This situation is nasty.
No one is holding a gun to the borrower’s head.
A lot of pawn shop and check cashing customers have drug and alcohol and gambling problems. As a stockholder I would rather see Wells Fargo (Maxed Out says they are behind the biggest check cashing chain) get the money than the Lottery, the liquor store, the Indian casino, the drug dealer.
What makes a loser a loser? Bad decisions.
That is true most of the time. Over the long run, personal decisions have a much bigger effect than bad luck or anything else.
That is really not the point, the point is that the people behind the CDO and MBS have zero chance of paying them off. We have moved from a productive to a gambling economy and that is nasty.
See the movie then tell me what you think.
The point is there is no chance these loans will be repayed. Watch the movie and then tell me what you think.
One makes their luck through good well thought out decisions.
but there are enough exceptions both ways… a loser despite good decisions and a winner despite bad ones
Losers are part of the game. The only question is what the penalty for being a loser in our society will be. I suspect the answer is a question: How much can you convince the loser that it is their fault?
America is loaded with people who make bad decisions, but the thing that usually dictates which of those people pay for those decisions and which don’t is their rung on the socioeconomic ladder. A good example of this is our current President, who has never had to accept responsibility for any of his very poor “management” decisions and who will doubtless die a very wealthy man — and his children, who from all accounts have the very same alcohol, drug and motivational problems as your average slacker child of middle-class or working class parents, will also die very wealthy.
People who are born into our society with an inherent advantage quite often fail to see this, or perhaps they find it easier on their consciences to believe that somehow, their success has nothing to do with their family. Nope, it’s all due to their “hard work”, intellect, and superior moral/spiritual values.
Having traveled across the spectrum from poverty to professional income levels in my life, I can tell you that in my experience, there is zero difference percentage-wise in how many members of certain social classes abuse drugs, each other, sex, etc.
IOW, most of the people getting money from payday loans aren’t drug addicts or alcoholics. They are simply poor people who will always, and have always, paid a higher percentage of their income for the basics and lack the “leverage” that most of us take for granted.
Amen
(mostly)!!
Good post, Cmyst!!!
Some of their customers are surely druggies, drifters, illegals, whatever, but some of them are military families with kids, people who have jobs but don’t have much financial education, etc. Some are those with no impulse control who have to see the money now and can’t wait for it to deposit in the bank.
The sad thing is that you can take your paycheck and open a checking account on the spot, and the bank will give you a certain amount of cash back, fee free. Plus they will give you a bank card (they will even be evil and try to talk you into a credit card). If your parents never had a checking account or if you were already burned by monthly account charges or NSF’s, though, you may be motivated to avoid banks.
Check cashers make huge profits from fees collected on low risk government checks. They are parasites, pure and simple. Payday loans? Loan sharks. More than one military family has been destroyed by taking out a payday loan.
One looked at the most recent casualty, “Brookstreet Securities Corp. I’m curious about the 100 employees laid off. What kind of cars were they driving? What kind of toys did they have? I’m sure some had boats. Where were they living? Obviously they would have higher end salaries and I’m just curious what types of hedging they employed to protect their financial future.”
There is a book called ‘Where Are the Customers’ Yachts? or A Good Hard Look at Wall Street.’
A broker is showing someone all the big yachts in the harbor. He says, ‘These are all owned by brokers.’ The friend replies, ‘Where are all of the customers yachts?’
In early 2003, Warren Buffett wrote about derivatives in his annual letter to shareholders.
(My earlier post with the link out to the Berkshire Hathway got eaten by the spam filter? Go to the Berkshire Hathaway’s site. Look for letters from Warren. Then click on 2002.)
Consider these quotes from Buffett and the current subprime situation?
- We view them (derivatives) as time bombs, both for the parties that deal in them and the financial system.
- Errors wil usually be honest, reflecting only the human tendency to take an optimistic view.
- But the parties to derivatives also have enormous incentives to cheat in accounting for them…often there is no real market and “mark to model” is utilized. This substitution can bring on large-scale mischief.
- The marking errors … have favored either the trader was eying a multi-million dollar bonus…
- Derivatives also create a daisy-chain risk.
- Large amounts of credit risk have been concentrated in the hands of relatively few derivatives dealers…the troubles of one could quickly infect the others.
This is from early 2003!
When these derivatives are marked to market, which seems to be in the works now, look out below.
The trades are infrequent, so the market price and value is whatever the trader says it is, and it stays on the books that way. It is also interesting that both sides of the trade book it as a profit. If it seems too good to be true…..
We had a friend over for the weekend and was trying to explain CDO’s to her and i’ve come up with the tomato seed model…
Plant 100 tomato seeds, and book the maximum potential profit, just after planting…
On the basis, that each seed would end up being a bountiful plant, bearing dozens of tomatoes.
Buffett has also talked about the derivatives which Gen Re owned when he bought them. It took forever (i.e. years) to unwind them, and cost him plenty of money, and this was in a stable market! When the owners of all this leveraged crap all run for the exits at once, we’re likely to see a total lockup of the system IMO.
Buffett on derivs:
http: //news.bbc.co.uk/2/hi/business/2817995.stm
(remove the space)
http://news.bbc.co.uk/2/hi/business/2817995.stm
okay
LOL, thanks — I’m never sure when this spam filter is going to eat my posts because of a link.
Of course the market can always be depended on to correct itself and it is. Unfortunately, the market correction will the total self-destruction of the market.
I wonder how the wonder boys who run the hedge fund at Yale U. are gonna weather this storm.
Does anyone have a link to this hedge fund? (Couldn’t find it with a quick trip to Google.) I have heard of Yale’s endowment having investments in other hedge funds, but not one that is actually run from Yale.
TIA.
zJP,
David Swensen runs the endowment investments at Yale…has an incredible track record…he just published a new book, available at amazon.Google Paul Farrell at Marketwatch…he tracks Swensen’s portfolio year by year. Here’s a general article on Swensen,from the NYTimes… http://www.nytimes.com/2007/02/18/business/yourmoney/18swensen.html?ex=1329454800&en=f136d62758b79ec6&ei=5088&partner=rssnyt&emc=rss
“‘We know that these holdings are not unique to Bear Stearns,’ said Drexel University professor Joseph R. Mason, co-author of a recent study warning of dangers in securities backed by home loans to high-risk borrowers. ‘It would be hard to find a Wall Street firm that hasn’t created similar funds.’”
It sounds like the PPT has lots of protecting ahead of it.
My personal prediction is for 10 million foreclosures nationwide in the next 8 years. Based on current rates, 1.4 million foreclosures are “in the bag” for 2007. Assuming about 100 million homes, that is 10% of all of them.
Prices wont hit bottom for 3 more years (2010). Although prices will fall about 60% in california bubble areas, this will be acomplished with 30% nominal price cuts and 30% inflation between 2005 to 2010.
If you look at the price of homes in terms of Euros, Gold Ounces, Barrells of Oil, Gallons of Milk; house prices have allready dropped 20% to 40% since 2005.
Assuming we do get 10 million foreclosures, with an average loan balance of $250k; and a the loans on average are able to recover 70% after bank sale. this will ultimately be $750 BILLION in losses for the banks, MBS holders, hedge funds, pension funds, wall street firms. The $3B in losses from Bear Sterns represents just the first 0.4% of the ulitmate losses to be suffered. Before this is over there will be 100 more blowups just as bad as the BS blowup last week.
The losses will be passed on to the taxpayers via HUD/FHA/GSE and other ways the myopic masses will never know of in the form of inflation and more inflation.
You’re right about the losses. It’s amazing how Wall Street analysts could read in the newspapers for months about rising home loan delinquencies and foreclosures and not figure out where the losses would be realized.
some of them aren’t stupid, some are smart. Makes me wonder what they have been doing behind the scenes to ensure THEY pesonally would be ok.
“Prices wont hit bottom for 3 more years (2010).”
Too soon, IMO. Ivy Zelman’s reset chart shows that Alt-A and prime ARM resets don’t peak until four years out (2011).
Right! ALT-A is where the big problem will be. Worse, by the time these loans begin to default en-masse prices will be considerably deflated, and the job economy will almost certainly have weakened severly. This problem is not about loans to folks with bad credit. It is about loans to folks they cannot afford to repay. This includes a large percentage of the loans made in bubble areas over the past 5 years.
Correct. People always focus on the worst parts of a bubble and think that it is the cause of the bubble rather than just an effect. People always remember the really vivid stories. In the housing bubble’s case, the subprime gets more than its share of attention (including here) because the stories have some entertainment value in their excess. They are the peak of bubble lunacy.
But in reality, bubbles need a lot of players working in concert. The housing market was in a bubble before subprime lending really took off. Subprime lending was just the last hurrah.
And so the general populace and media look at these really over the top stories and start to rationalize in isolation. “Oh, well of course, these subprime loans were bad. They were strawberry pickers, deadbeats with bad jobs and low salaries, people with bad credit, etc.” Ie, these were people of an inferior socioeconomic cut. We should blame them (what business did they have taking out those loans) or feel sorry for them (they’re too stupid to know any better). But in any case, it was their fault and those who helped them (institutional buyers, lenders, brokers, appraisers, etc.)
And then, people can feel confident that housing will stabilize soon because these undesirables have been cut out of the game that they never should have been part of in the first place.
But as bubbles pop, the first ones to feel the pain are the worst of the worst. So, subprime blew away in a hurry. But again, that’s just the peak of the bubble. To get to peak lunacy, you have to climb a mountain of ever decreasing legitimacy. But you just can’t start at peak lunacy. Bubbles of this size don’t form like that.
The legitimacy comes from the people who aren’t supposed to be credit risks. The Alt-A and prime with good credit (albeit not tested at these mortgage levels), ranging from middle class to beyond. These were people with decent salaries, reliability, equity from their homes, etc. They don’t scream “low financial class.” They’re sleeper zombies that you can’t pick out right away. Maybe they’re investors, home equity lines of credit, re-financing to “free up equity”, first time home buyers, etc. Doesn’t really matter. They have access to the same tricky financial options as the subprime did. And they most definitely leveraged themselves to the same degree in the same fashion for all practical purposes (does it really matter if you borrow 6x or 20x your income if your real equity to debt ratio is pretty close to 0?)
But they’re there. They’re laughing at the subprime situation with you and then going home sweating out what happens next and then irrationally blaming the subprime crowd for ruining their no-brainer “investment(s)”.
You’re right, it’s not about loans to people with bad credit. It’s really all about repayment. And repayment isn’t a function of your education, your salary level, how long you’ve owned your home, etc. It’s a function of how much you have vs. what you owe and the volatility and liquidity of both sides.
These people are your second wave of loan resets. They’re not the worst stories of the housing bubble. But they were the foundation that made the bubble seem legitimate. They’re why the housing bubble can’t be contained to subprime. Even without subprime, these people were pretty much toast. Subprime lending actually bought them some extra time even though they will end up pointing fingers at subprime lending too. Ingrates.
They can tread water whereas the subprime lender simply drowned once the water got too high. But 3-5 years is a long time to keep treading water. People get tired.
The legitimacy comes from the people who aren’t supposed to be credit risks. The Alt-A and prime with good credit (albeit not tested at these mortgage levels), ranging from middle class to beyond. These were people with decent salaries, reliability, equity from their homes, etc. They don’t scream “low financial class.” They’re sleeper zombies that you can’t pick out right away. Maybe they’re investors, home equity lines of credit, re-financing to “free up equity”, first time home buyers, etc. Doesn’t really matter.
You’re right, it’s not about loans to people with bad credit. It’s really all about repayment. And repayment isn’t a function of your education, your salary level, how long you’ve owned your home, etc. It’s a function of how much you have vs. what you owe and the volatility and liquidity of both sides.
——————-
Whatever….what should be worrisome to everyone is: nicefixed rate mortgage, 3X salary, no HELOC, no real debt……………and then NO JOB as thousands get caught up in massive layoffs in legit, supposed stable, professions. You can have a 780 FICO score and go straight down to the abyss if you have no income and no good hope of getting a job due to a severly contracted workforce. It just depends on how long your savings lasts. Then even awesome credit becomes a default.
Unless the economy goes into the toilet. Then many of those Alt-a and prime mortgages could default before four years. We’ve been assuming that these mortgages won’t start defaulting in earnest till they reset.
Unless the economy goes into the toilet.
Unless??? You’re kidding, right?
A reset doesn’t mean a foreclosure, and is less likely for a prime. For example, if the reset occurs after 5 years, there have been 5 years of wage increases. Right there, it puts the prime borrower in a better position than the subprime. The prime borrower also has a better history of bill payment, so we might expect the prime borrower to be have more modestly and be more likely to weather a reset. You might also expect that the prime borrow is more likely to read the writing on the wall and refinance(d) into a 30-yr fixed and is less likely to be heloced to death.
Of course, the potential turd in the punch bowl are the Libor rates. If the mortage rests from 5% to 9%, then we’re going to have a bunch of people in trouble.
…in a better position than the subprime borrower with a rest after a year or two.
but if the prime borrower is a californian with a $800,000 loan on a house now worth $500,000; there is serious incentive to walk away. Plus he wont be able to refi if his house is underwater. Prime borrowers may be better at financial management, but they are also smart enough to see that jingle mail can be a prudent financial strategy.
Subprime is just a preview for what’s coming in ALT A. Those who bought irresponsibly with an Alt A loan generally purchased at a higher price point than subprime. Consequently they have more home equity fumes to burn, but those are starting to run low. I think we will begin to see problem “not contained” within another year or so.
Based on this week’s articles, fear is building on Wall Street. If it could happen to Bear Stearns, it could happen to anyone. They are experts! How could this happen? As a result, confidence is waning.
Wall Street firms better bail these funds out because they will get lawsuits if they don’t .
“One investor, who asked not to be identified because he was trying to recover his investment, said that when he moved to get his money out, he was told investors had tried to redeem 10 percent of the fund. ‘They didn’t realize this was Katrina,’ the investor said. ‘They thought it was just another storm.’”
My son is a weather buff. He was showing me his 2003-vintage book about the weather yesterday which claimed that at $45 billion in 2005 US dollars, Hurricane Andrew was the most costly natural disaster in U.S. history. I showed him information on the internet about how Katrina’s damage total of $81.2 billion (2005 U.S. dollars) in damage made it the most costly natural disaster in U.S. history.
I am wondering whether the ultimate cost of the manmade subprime disaster and follow-on blowback into the hedges will eclipse the total costs of Andrew and Katrina put together. Any musings on this?
http://en.wikipedia.org/wiki/Hurricane_Andrew
http://en.wikipedia.org/wiki/Hurricane_Katrina
The cost of a major natural disaster is nothing compared to what’s going on in housing now.
For example, look at the latest inventory of REO for Countrywide:
http://tinyurl.com/38nfts
Asking price is nearly $1.8 trillion. If they cover 70 percent of this amount, they’re still out $540 billion - nearly 7 Katrina’s!
The impact of the housing crash is going to far more costly and far more extensive than any one major natural disaster or even several major natural disasters.
It looks like $1.8 billion to me. Still a lot, of course.
Thanks for the catch. Though Countrywide is big and has a lot of exposure, numbers in the trillions did seem large. That puts current potential losses between a an “Andrew” and a “Katrina”. Plenty bad, still.
Any time I’ve mentioned Countrywide to anyone in the area of real estate the past couple of months, the comments they’ve made makes me believe Countrywide’s losses in the San Diego area are continuing to climb.
Someone needs to start an Implode-o-meter website for Securities Frims dealing in CDOs, CMOs, MSBs, and other derivative time bombs.
http://www.ocregister.com/ocregister/money/subprime/article_1740651.php
In another fallout from Orange County’s subprime mortgage industry collapse, Brookstreet Securities Corp., an Irvine broker dealer, shut its doors and laid off 100 local employees because it could not meet margin calls on complex securities backed by faltering mortgages, company spokeswoman Julie Mains said.
Mains said Brookstreet went from $16 million in capital Friday to being $3 million under water Wednesday because its clearing firm, National Financial Services, demanded payment for securities bought on margin.
The securities, known as collateralized mortgage obligations, lost value as Wall Street confidence in mortgage-backed securities collapsed. The most prominent collapse was this week’s demise of two Bear Stearns & Co. hedge funds worth $20 billion that invested in collateralized mortgage obligations, which are mortgage-backed securities with varying maturity dates, risk and yields.
increase in # of homes for sale in Torrance in week increased from 523 to 566 and for Redondo Beach from 323 to 361 from ZipRealty. Both cities being in Los Angeles area.
However in Palos Verdes Estates increase was only 1 and not much more if any for Rolling Hills and Rolling Hills Estates.
Man spots a roach in his kitchen. He steps on it and then figures his whole house is vermin free. What he does not realise is that even roaches have parents, brothers, sisters, aunts and uncles, with a biological capacity to reproduce. That is why the subprime crisis has only just started and why the major players erroneously think it has been contained. My main concern though is that these guys may well panic when the dam bursts as it inevitably will. Now that is something to worry about.
Anyone have any thoughts on where to run? I have been puzzling about where one might invest during the fallout?
I have close to 500k in savings (including a 403b), and at this stage in my life I am looking for asset preservation, not necessarily growth. I have some in GLD, some in ‘Prudent Bear Fund’ and some Muni/CD’s ….. what are your thoughts?
Traditionally, precious metals and oil industry stocks are a hedge against inflation. Treasury notes and bonds are a hedge against deflation. Scott Burns (financial columnist at Dallas Morning News) prefers 50% in a stock index fund and 50% in T-notes and bonds. Stocks are an inflation hedge. So these things will smooth out the dips and spikes, help you in deflation and help you in inflation. If I did not like gold and platinum, I would be 50% Vanguard total market index fund and 50% in the vanguard long term bond fund.
‘I would be 50% Vanguard total market index fund and 50% in the vanguard long term bond fund.’
U.S. T-bonds and stocks have both done incredibly well from 1980 or so (when l-t Treasury yields topped 14%) up until the recent bottoming out of l-t Treasury yields. They might both do commensurately badly as the great conundrum unwinds.
Check out this article: http://www.contraryinvestor.com/mo.htm
They make a good technical case for the end of the bond bull.
GS, I agree. Two years ago, I sold all my stocks and put all my assets into U.S. govt bonds and T-bills. I had so many people tell me (politely) I was dumb for doing so, that I should at least put my money in CDs and money mkts. But I figured I’d be prepared just for the kind of situation that is occurring now.
Vanguard Prime money market for me.
i suggest energy stocks, and other commodity related. Check out the Vanguard Energy ETF (VDF) and the Vanguard Materials ETF (VAW), or the vanguard specialized mutual funds.
I have not been too impressed with Prudent Bear performance. I would take Hussman if you want a well hedged equity fund.
I’m gonna go waaaaay out on a limb and predict that Wall Street bonus checks will be smaller this year
Remember that there is no limit on the amount of liquidity the Fed can potentially supply to Wall Street in case there is a crisis (is there???).
PPT, warming up in the bullpen.
Some truly scary stuff going on right now. I am starting to wish that maybe I was even more careful with how I spent my money. This could get real nasty real fast! Having an extra ten or fifteen thousand in the bank would make me feel a little bit better about some of the worst case scenarios.
At this point you may as well be calm. That is the best way to do your personal finance thinking. Lots of predictions have been made of doom and were wrong. How many times was Christ supposed to show up in the last 40 years? LOL (I’m an atheist). Moving slowly in personal finance is the smartest way in investing. All other ways are just pure greed.
Things looked bad back in 1991 when I had $10,000 net worth. The first Gulf War was going on. Doug Casey had a book about Crisis Investing for the 90s. It was pushing metals, of course. Actually in retrospect if you followed his advice in 1997 and bought up gold, you would be very happy now.
Over all those years, the sun kept coming up the next morning. Money still rolled in, jobs were great, and I still accumulated.
What if (theoretically), some outside factor occurred and the financial nightmare just does not show up for another ten years? You have that time to accumulate. Great opportunity.
My advice is to keep low debt and diversify. build up not months of expenses in T-bills and notes, but years. But don’t get completely lopsided in your portfolio.
I think your right, Bill (except for the atheist part). If the whole thing comes crashing down next year (too soon), in 2011 with the Alt-A resets, or sometime in the future, the best thing is to just keep plugging away. Get out of debt, manage your savings wisely, and consider future tax implications.
Future tax implications are very important, after the first two, and I don’t think that people give them enough thought. Gary North had a good article on Lewrockwell.com regarding municipal bonds, pension funds, and other local gov’t liablities that require a large future tax income stream to pay off.
What will politicians do when social security busts? I’ll bet they change at least two sections of the tax code, among others.
My guess is these sections will have titles such as 401(k) and 403(b).
After all, “Why should the fortunate few have good retirements, while seniors who relied on gov’t promises eat cat food?” {/sarcasm}
It is best to realize that as far as politicos go, we are all sheeple, to be sheared at their convenience, even though some of us keep our eye on the wolves.
Paul
Probably the worst thing I’ve ever done in my life was to be pessimistic during the 70s. I didn’t do much for my future because I figured it was all going to end in nuclear war. Since then I’ve tried to be more optimistic because things generally work out well in this country. We’ll see what happens.
I tend to agree with Bill in Phoenix and not just because I am an atheist too. The sun will come up tomorrow and the next day as well. Millions of people will get up and go to work. Some won’t have to however. I think that when the rubber band breaks it will be good for the country. There will be lots of pain to go around and the markets may not be good to invest in for many years. But eventually things will get better (2020). I believe that manufacturing will also come back and we can start sending things to the upper middle class of China. We will have a positive trade balance and no longer be a debtor nation.
WAman, 2020 is also my guess when the next golden age in America occurs. Oddly, we’re in a mini boom, which is artificial and near an end. Anytime now the wiley coyote is going to look down and find out he’s running in the air over the cliff. I’m dollar cost averaging all the way through the next 13 years though. No matter what my job or income level.
Very well stated, Bill.
2020 is also my guess when the next golden age in America occurs.
Peak oil and 1.2 billion Muslims say you’re wrong.
Peak oil isn’t necessarily bad for the US.
Even detroit could profit, if GM comes out from under its rock and rolls out the EV-1 again. Batteries are so much better now that private individuals are actually retrofitting existing cars with batts. Someone needs to fire all of Detroit’s middle management and upper execs and replace them with folks who won’t leave money on the table.
Sorry, I should have pointed out that the US has oil, it’s just more expensive to extract than the cheap oil of Saudi Arabia, etc.
The reserves in the Middle East are widely considered to be inflated. What happens when they run dry and other continents stop buying ME oil (because local oil is cheaper again)? Unlike Turkey, Pakistan, and Israel, they failed to industrialize. They have nothing now, and they will still have nothing, except that their sheiks won’t be so wealthy any more either.
Not many good prospects in the ME right now.
I like this scenario. Thanks for the perspective.
2020? I will be OLD!!!! lol
Hey Crazy Credit, if you were your current age and this was 60 years ago, you would be old now! 50 is the new 40. Every morning I work out very early and there are lots of middle aged people working out. A generation ago you would not see people at that hour in the morning in a gym doing those workouts in their middle age. Aside from there being an epidemic of obesity in America, the thin people are healthier than their counterparts a generation ago. They look younger too. Better health habits are to “blame.” If we keep that certain political party from controlling pharmaceuticals, we will likely get a cure for cancer, heart disease, and/or alzheimer’s disease in another 12 years.
Bill,
You will never get a “cure” for these diseases as long as the pharma companies are in it for profit. What you will get is “treatments” to mask symptoms or control the disease only as long as you take their medicines.
Capitalist healthcare systems ***profit from sickness***. They have NO INCENTIVE to cure!!!!
The greatest “cures” came from people who had personal reasons to find cures (not profit). Either a close friend or family member had a disease, or they lived during a time when there were epidemics or they had an intrinsic reason to find the cure.
Not everyone is motivated by profit. I would argue that the BEST minds are motivated by the challenge of finding solutions to problems & genuine altruism.
Also, with a socialized healthcare system, the GOAL would be to CURE people, as there would be no profit in keeping them sick. The system would benefit most by actually curing the patients and ensuring they live healthy lives.
I politely disagree that the profit motive discourages cures. Nevertheless, I do contribute to the American Cancer Society.
I think it’s a little more complicated than that. Big Pharma would love to have pills to cure every disease. The problem is that to be profitable, they have to be pills (not shots), patentable (ie, not unpatentable, like human estrogen), and marketable.
There’s a safe technique out there to cause male infertility for 18 months by soaking in a bath of a specific temperature for a specific period of time. It’s quite effective according to academic studies. It isn’t widely known because there’s no angle in it. How do you make money off that?!? (Sell thermometers?) But pills–sure!
If you look at all the times that “cures” were kept from the public, it’s typically because it wasn’t profitable for anyone. Human hormone replacement could be very beneficial for some older women, but FDA testing is paid for by drug companies, and without patentability, human hormone would be a commodity. Thus, no-one wants to pay to get it approved.
So, the problem may not be the profit motive itself. (Profit motive is more responsible for Big Pharma pushing dangerous or ineffective drugs.) The problem is inefficiencies in the entire system, the interaction of the medical community, the universities (which also have a profit motive these days), the NIH, the FDA, the hospitals, and the drug companies.
There has to be a more rational way to deliver and develop health care, I agree.
not a gator & Bill,
Thanks for your responses!
BTW, did you know that Metamucil (or its generic equivalent) really helps with GERD?
The reason nobody knows about it is because they can’t patent the fiber. Also, P&G would have to go through the FDA & all that entails…
So, most people think it’s “just a laxative” (which I don’t think accurately describes its benefits).
Imagine if people knew this…there goes all the money behind all the Tagamet, Zantac, Immodium, etc. (going from memory, but you get the gist). Lots of money in meds for acid reflux. Interesting that many people could also be cured (truly cured) via some minor surgery. But that wouldn’t make the pharma companies happy, now would it?
All I know it, I’m already seeing the unravelling in my neck of the woods. When we (ex and I) moved here in 2000, South Hillsborough County (Tampa, Florida area) was a quiet, semi-rural area with a mix of retirees, working folks, relatively small number of illegals who came and went. Traffic was light and getting to Tampa relatively fast and easy. There was open green space, some agriculture, small older homes along the Little Manatee River, good fishing, canoeing and low cost living and boating. Hillsborough County didn’t much care what happened here and only a couple of developers were at work. It was relatively crime free and quiet.
In a few short years, massive development has taken place, we’ve been flooded with illegals working construction and are now on the hook for the health and education of their anchor babies, not to mention the local county park on the bay is jammed with illegals and their families on weekends and holidays, trashing the place, lots of agricultural land and open space has disappeared (no smell of orange blossoms this past spring), prices skyrocketed and most of the less expensive mom and pop rental property disappeared, public boat ramps have disappeared, we’ve had an influx of Section 8 residents re-located from Tampa and St. Pete, violent crime and gangbangers are on the rise, there are partially populated developments all over the place and they’re still building more and two formerly pleasant older middle class neighborhoods that I am familiar with have been trashed. One of them I used to live in. WalMart has already abandoned their long time bix box store in one plaza in favor of an even larger big box store in a new shopping center we don’t need. People’s tempers seem to flare more often. We’ve also had an influx of what appear to be more prosperous people, too, although I’m sure for some it is a false front. Nevertheless, these tend to be pushn’shove asshats throwing their weight and false prosperity around. Although traffic and accidents have increased, it is still not as bad as other parts of Hillsborough, though. The development, for the most part, looks like faux stucco sh*t. A lot of the retirees around here who used to be able to live fairly well on a fixed income are having a hard time of it. So when the whole Wall Street/hedge fund shebang unwinds, I wonder just how much more this area is really going to decline, because it ain’t too pretty now.
That’s very sad to hear, palmetto.
Unfortunately, we’ve seen the same thing on the west coast. This bubble has destroyed so many things.
This is the best informative article I have seen to date regarding the CDO crisis, a longer read than most but detailed and easy to read:
http://www.nakedcapitalism.com/2007/06/bear-stearns-hedge-fund-fallout.html
Subprime getting richer? Not going to happen…a trillion is a very scary number
“Officials at ratings agencies have said in the past that their ratings reflect their estimates of future performance, not market pricing. So the agencies are also marking to model. And that keeps people playing the fantasy game about values, especially in hard-to-analyze collateralized debt obligations that are essentially pools of other asset-backed securities. Some $1 trillion of C.D.O.’s have been issued. (Yep, C.D.O.’s were in the troubled Bear funds.)
“The C.D.O. sector is still extremely rich versus where the underlying collateral is trading,” said Albert Sohn of Credit Suisse on the conference call. “Either subprime has to get richer or C.D.O.’s have to get cheaper.”
http://www.nakedcapitalism.com/2007/06/bear-stearns-and-vagaries-of-models.html
EXCELLENT article.
I have been coming to this blog for somewhile. I am not a “doomer”, but the housing bubble, last weeks events at Bear Stearns and the chill it has sent out is just a symptom. The symptom of a disease that these instruments of paper be it bonds, derivatives, hedges funds and all manner of fudiciary instruments just might fail us.
Couple this with the clouds of Peak Oil, wars large and small around the planet and we are going into a different and new world that may have very little relation to what has happened for the last 75-90 years.
Mankind will prevail in one form or another and still think we are going to the stars.
This should get interesting. Bear Stearns, along with more than a few others, are trying desperately to avoid having everyone realize that mark-to-market up until now has been mark-to-model. It’s not the first time models don’t come close to the real world.
Had to be out and around all day — I’m really glad this topic was a thread. Can’t wait to see what happens in the coming weeks.
I am not an expert at reading reports, however it appears that the stock markets in Asia, India and Brazil are suffering declines per the BBC and Bloomberg.
I for one would like to see Wall Street implode. Nothing but crooks.
LAinvgal:
“Don’t get me wrong, something’s obviously going on, I just think ex-nv is overreacting.”
He wasn’t overreacting. He feels what others of us feel and that is that we now know that this wasn’t just a housing bubble but a liquidity bubble, and the ramifications for the latter run much wider and deeper than we are able to understand at this point. Will the final chapter be historic, yes. When I first came to this blog I was happy to have my sanity validated as to my views on housing being a bubble or Ponzi scheme in which builders, RE, mortgagees, appraisers, bankers were acting in collusion; however, along the way I came to realize the fly in the ointment now is ‘not when to buy’ but ‘how do I protect my savings’. The bond issues of this past week will travel to the banks, pension funds, insurance co’s, etc and how will that effect you and I? I have no clue but I am trying to move my investiments into what I hope will be safe havens and buy a home at this time is not a blip on the radar screen.
Yep, it seems pretty obvious now looking back on it all that all of those huge commissions to the Realtor, mortgage broker, Bond broker and countless others were too good to be true. Take that into account with the wonderful ATMs that people happened to live in was just too much.
Unfortunately, what goes up must come down. All of those commissions, bonuses and dividends have long been spent. Just like the opportunity to live in an un-affordable house has been spent. As soon as the re-set comes or the roommate, family member or whatever moves out it soon becomes easier to give it all back to the bagholder, whomever that might be.
To second (or thirteenth) what ex-nnvmtgbrkr said…
Buying a house has not been on my radar for quite a while.
I think it’s interesting that as the cycle moves forward, ALL OF US who were affected by the bubble will see our goals shift.
Even the bears were bitten by the housing bubble bug, as the primary reason so many came here was to “watch the FBs burn” (can’t deny a bit of this, myself) and sit like a vulture, waiting for the market to “bottom” so we could ride the gravy train right back up again.
Ultimately, many (most?) came here with the hopes of buying a house. As the perception changes, the bears will also be affected & see housing as a “losing” investment.
Just interesting to see those who were eager to buy in 2007 now change their focus & timeline. We’re seeing a lot more of the 2012 timeline these days (and 50%+ drops). That was rare even 6-12 months ago.
The fog of the bubble is lifting…
Well, they still haven’t explained completely what happened. What CDOs were these? Which mortgages? Who made the margin call? Who suddenly decided that these securities considered overvalued and why? There are tons of questions unanswered here and the articles just read like a chinese written english digital camera manual.
I am going to take a guess that it will be a bloodbath this week as this unravels across the board. This will taken down the global market liquidity likity split.
As U.S. home-loan defaults rise, bondholders stand to lose as much as $75 billion on subprime mortgage securities, according to an April estimate from Pacific Investment Management Co., manager of the world’s largest bond fund. Investors in all mortgage bonds will probably take about $100 billion in losses, according to a March report from Citigroup Inc. bond analysts.”
http://www.bloomberg.com/apps/news?pid=20601087&sid=aKRwwilm31Bk&refer=home