The Right Thing To Do For The Borrowers’ Sake
Some housing bubble news from Wall Street and Washington. Bloomberg, “U.S. banking regulators told mortgage lenders to tighten standards for subprime home loans in a belated effort to end abuses that led to a surge in defaults and the highest foreclosure rate in five years. Lenders, in most cases, should verify income levels instead of relying on borrowers’ statements, the Federal Reserve and other banking regulators said in guidelines issued today.”
“They also said banks should account for potential interest-rate increases in scrutinizing whether homebuyers can pay off loans.”
“‘This guidance on adjustable-rate mortgages underscores that the Federal Reserve and other banking regulators expect lenders to make sure subprime borrowers not only can afford their monthly payments while the introductory rate is in effect, but also after the interest rate resets,’ Fed Governor Randall Kroszner said in an e-mailed statement. ‘It is the right thing to do for the borrowers’ sake.’”
“Fraud increased and lending standards fell as Americans borrowed $2.8 trillion for home loans from 2004 to 2006, the largest mortgage boom of any three-year period on record.”
“Banking regulators issued their guidelines even as the market for subprime mortgages is contracting. Subprime loans fell 10.3 percent to $722 billion in 2006 from a record $805 billion in 2005, according to JPMorgan Chase & Co. Credit Suisse Group predicts loans will fall as much as 60 percent this year.”
From Reuters. “Subprime borrowers should not be penalized for refinancing out of a mortgage before the interest rate resets to a higher level, according to a statement of principles issued by the regulators. The guidelines also call for lenders to warn borrowers when a reset is coming and grant them at least 60 days to refinance.”
From MarketWatch. “The new rules do not include a ’suitability standard.’ That is, borrowers will continue to be responsible for making sure that they choose appropriate loans for their needs and circumstances.”
“The regulators noted that they will take action against institutions that exhibit predatory lending practices, violate consumer protection laws or fair lending laws, engage in unfair or deceptive acts or practices, or otherwise engage in unsafe or unsound lending practices.”
“The Fed has been criticized by consumer advocacy groups and some lawmakers for not taking action sooner.”
“American Home Mortgage Investment Corp. forecast a second-quarter loss late Thursday because of rising delinquencies on some of its mortgages.”
“The company, which offers fixed-rate and adjustable-rate mortgages and so-called Alt-A loans, also withdrew its full-year guidance and said it obtained an investment from $9 billion hedge fund firm Marathon Asset Management LLC.”
“Charges related to delinquencies on mortgage loans will be ’substantial’ during the second quarter, American Home explained.”
“American Home shares have been hit hard by a jump in mortgage delinquencies, falling 40% so far this year. The company…has specialized in adjustable-rate mortgages and Alt-A loans, which often require less or no documentation of a home buyer’s income. See story on first-quarter results.”
“American Home said late Thursday that credit problems have mainly been caused by its strategy of offering three-month ‘timely payment’ warranties to investors who bought stated-income loans with high loan-to-value ratios from the company.”
“As more borrowers fell behind on payments quickly, American Home has had to buy back those loans from investors.”
The Journal Sentinel. “Allco Credit Union posted a loss of more than $5.2 million in the first quarter of this year and is facing a wave of delinquent loans, a report by regulators shows.”
“Many of the soured loans are related to mortgage loans. Allco board Chairman Eric Hofhine said in a written statement that ‘Allco has not been immune from the effects of subprime lending.’”
“Allco, which has about 6,600 members and assets of $75 million, was listed in the quarterly report by the National Credit Union Administration, or NCUA, as ’significantly undercapitalized.’”
From Business Week. “It’s white-knuckle time on Wall Street as firms try to prevent the subprime mess from spreading. The hedge fund blowup has suddenly thrown the world’s biggest financial institutions into a game of brinkmanship.”
“A shotgun sale of poorly performing securities would provide Wall Street with a true price for valuing the slumping assets. ‘Nobody wants to officially acknowledge the worthless nature of these products,’ says Peter Schiff, president of Euro Pacific Capital.”
“If Bear’s holdings were auctioned off at, say, 60 cents on the dollar and other firms marked down their so-called collateralized debt obligations (CDOs): complex bonds often backed by subprime loans accordingly, losses would spread. Firms would start dumping their CDOs to get what they could for them. Thus would begin a quick, brutal crash.”
“There’s another force bearing down on CDO holders: credit rating agencies such as Moody’s Investors Service and Standard & Poor’s. If the ratings agencies were to downgrade the CDOs, it would force holders to mark down their values accordingly, potentially igniting the same sort of disaster scenario.”
“Standard & Poor’s, Moody’s Investors Service and Fitch Ratings are masking burgeoning losses in the market for subprime mortgage bonds by failing to cut the credit ratings on about $200 billion of securities backed by home loans.”
“Almost 65 percent of the bonds in indexes that track subprime mortgage debt don’t meet the ratings criteria in place when they were sold, according to data compiled by Bloomberg.”
“Downgrades of CDOs ‘could finally force the hand of ratings-sensitive holders,’ Morgan Stanley analysts led by Vishwanath Tirupattur in New York wrote in a reported dated June 28. ‘Our worry is that this selling would be very unbalanced, with no established taker of risk on the other side, even at current market levels.’”
“More than 15 percent of the mortgages in the securities are at least 60 days delinquent and another 8 percent are in foreclosure, according to the bond trustee.”
“Ratings downgrades in CDOs containing asset-backed securities ‘are inevitable and material,’ the Morgan Stanley analysts said in the report. ‘The shoe is still waiting to drop.’”
“A total of 11 percent of the loan collateral for all subprime mortgage bonds had payments at least 90 days late, were in foreclosure or had the underlying property seized, according to a June 1 report by Friedman, Billings, Ramsey Group Inca. In May 2005, that amount was 5.4 percent.”
“CDOs aren’t required to disclose the contents of their holdings to the U.S. Securities and Exchange Commission and most can change them after the bonds are sold.”
“‘A lot of these should be downgraded sooner rather than later,’ said Jeff Given at John Hancock Advisors, who oversees $3.5 billion of mortgage bonds. The ratings companies may be embarrassed to downgrade the bonds, he said. ‘It’s easier to say two years from now that you were wrong on a rating than it is to say you were wrong five months after you rated it.’”
“‘We remain nervous about the end of the week, when many leveraged investors in the CDO markets will have to mark down their positions,’ debt strategists at Barclays Capital in New York said in a June 28 report. ‘The worry is that this will be large enough to trigger margin calls which, in turn, will cause other liquidations and so on.’”
“Some investors say the ratings companies are waiting too long before downgrading the mortgage bonds and the CDOs that contain them. They noted that S&P and Moody’s maintained their investment-grade ranking on Enron Corp. until days before the Houston-based energy trader filed for bankruptcy.”
The Financial Times. “Dealers and investors who trade US subprime mortgage derivatives have rejected a proposed change to the terms of derivatives contracts from a hedge fund group concerned about possible manipulation of their value by investment banks.”
“Tess Weil, partner at law firm Purrington Moody, said: ‘The fear of a lot of participants is that [Paulson’s] approach goes well beyond securities laws protections and would have the effect of chilling the market just when it needs transparency and efficiency.’”
“Michael Waldorf, a senior VP at Paulson, told the Financial Times that manipulation of mortgage derivatives could occur when banks purchase bad loans out of mortgage-backed bonds.”
“‘Mortgage-backed securities are supposed to be passive vehicles, so injecting cash into them in this way is nothing less than fixing the outcome,’ said Mr Waldorf.”
From Realtor Magazine. “Consumers are hearing a lot in the media about the correction in housing, and they’re understandably concerned about whether now is a good time to get into the housing market. To a great extent, we can thank steady media coverage of the real estate market ‘correction’ for unfounded consumer concerns.”
“But there’s no real correction where consumers are concerned. The media aren’t making the distinction between what’s happening to you, fewer home sales, fewer homes coming online, and what’s happening to consumers, more buying opportunities. But you can make that distinction for your customers.”
2007: “The media aren’t making the distinction between what’s happening to you, fewer home sales, fewer homes coming online, and what’s happening to consumers, more buying opportunities. But you can make that distinction for your customers.”
20052: “The media aren’t making the distinction between what’s happening to you, easy money, rich commissions, and new cars and boats, and what’s happening to consumers, a soaring cost of living, a lower quality of life and, eventually, bankruptcy. But you can make that distinction for your customers.”
But will probably choose not to.
Clever…and true…
Note how he puts “correction” in quotes to imply that the media simply made it up. Maybe it’s time to fit Larry for a tinfoil hat.
Also see:
The Challenger “disaster”
The Chernobyl “meltdown”
The 1929 “crash”
The “Holocaust”
“The media aren’t making the distinction between what’s happening to you — fewer home sales, fewer homes coming online — and what’s happening to consumers, more buying opportunities. But you can make that distinction for your customers.”
Presumably “fewer homes coming online” refers to declining housing starts (so as not to cross the line from fudging to outright lying), but it’s probably okay with him if you misinterpret that as declining inventory.
Sheesh. It’s only the most brain-dead realtor right now who has failed notice that something may be “up” in the RE market. If I was an uninformed realtor this week, I’d take a day or two to do some investigating as to what’s going on in the credit markets and then, based on that info, start advising clients that either 1) now is not an ideal time to buy or 2) if you must buy now, lowball like heck.
I don’t see how they can keep any clients in the years to come if they fail to act resposibly and honestly at this crucial juncture.
Unless of course the goal is to just make one last large commission before getting out of the field altogether, in which case heed the advice of Realtor Magagzine and convince those buyers that everything’s hunkey dorey!
Who wants to work for those deadbeats anyway. It’s not like they can price their current house to sell in order to buy anything I’m showing them anyway…
You missed one of the more what-tha!!! quotes from the Yun article in Realtor Magazine…
“If there’s a correction in markets today, it’s in home sales volume and housing starts, not in home prices. ”
Perhaps it’s just his perspective because he obviously sees nothing wrong with how prices are totally out of whack with incomes.
“Even a relatively large price decline, such as the 12 percent drop we saw in Sarasota, Fla., cannot reasonably be called a correction when that market had a 150 percent price increase during the boom.”
“When today’s consumers look at real estate markets, they need to use the same analytical approach as investors in the stock market. Those buyers aren’t generally concerned about the volume of stock trades on a given day. Why should they be? They’re focused on price trends. And by that measure, now is a great time for consumers to be in the housing market: Prices have steadied, and inventories are healthy.”
Maybe economists just get paid too damn much…. I always thought there was something fishy about an academic practice where you can leave just about anything out of your formulas by calling it an externality. Wake up Lawrence, reality is calling.
“When today’s consumers look at real estate markets, they need to use the same analytical approach as investors in the stock market. Those buyers aren’t generally concerned about the volume of stock trades on a given day. Why should they be? They’re focused on price trends…”
Not so. Only unsophisticated stock market investors ignore volume.
Exactly….volume always preceeds price in my stocks…and lack of volume at/near a high or low can signal a reversal…so, Mr. Yun, with this in mind, will you at least try to be straightforward with the public?…so few days as the voice of the NAR and already trying to skew the less informed….or maybe he really is as dumb as his comments imply…..
“Not so. Only unsophisticated stock market investors ignore volume.”
true .. and i’m sure he knows this.
But he’s not talking to the smart ones.. they are a hopeless cause as far as RE sales are concerned. He’s addressing whatever remains of the GFs sitting on the fence.
I have this theory that media is setup to efficiently separate stupid people from their money. Maybe the people that run the media companies believe it’s for the good of the country. That’s the only conclusion I can draw after reading this stuff.
No, media is setup to efficiently separate advertisers from their money. Stupid people are incidental.
… part of the business model
Re: Realtor magazine…
“no real correction where consumers are concerned.”
Did I really read this?
Really? If so, then why in the hell the fascination with interest rates going up. If consumers are continuing as is, with debt loads, buying and consuming goods and services and incomes are steady, then why the fixation on interest rates and what the Fed is doing? Why is the National Mortgage Brokers assn. up in arms about interest rates and the meetings/lobbying with Congress regarding loan suitability and disclosure standards?
Ughh…going to go chop some wood.
Your comment reminds me of the SNL skit “Oh Really?!” about Michael Vick.
So, Mr Yun, You’re trying to convince renters that now is a perfect opportunity to buy? Really?! With tightening credit, skyrocketing inventories and plummeting sales, even my dumbest high school friends know that prices will continue to fall, and they know nothing about economics and LOVE debt!
So you put a deposit down on a high-rise condo in Miami, REALLY? Did you not look around at the other 50,000 high rise condos going up all around you, and think “How am I ever going to sell this thing at a profit?” Did you not wonder how the local economy could support incomes enough to buy all these units IN MIAMI?!
So you decided to use a cash-out refinance to get money to pay your mortgage? REALLY?! If you can’t afford to pay your smaller loan amount and interest rate with your income, how did you think you could afford to pay a bigger mortgage with even more interest on that same income?!
And then you went and HELOCed the house to buy a new Lincoln Navigator. So you took out a loan on one depreciating asset, the house, to pay for another depreciating asset.
Really.
This is the motto:
“I want to borrow money just until….I’m…’significantly undercapitalized.”
Man that is an absolutely Classic post-horse-exit barn-door slam. Anybody see “Idiotocracy”?
Beat me to it! The child drowns and then the fence goes up around the pool.
I am reminded of the story about the town where kids kept falling over a cliff. The elders all pondered a solution to this dangerous situation, and finally built a hospital at the bottom.
That’s priceless. Describes Greenspan’s approach perfectly, doesn’t it?
…“Fraud increased and lending standards fell as Americans borrowed $2.8 trillion for home loans from 2004 to 2006, the largest mortgage boom of any three-year period on record.”
Bugs: “eh, Daffy… come see how I remodeled my rabbit hole.”
Daffy: “Hey Bugs, is a that real granite jacuzzi” ?
I thought these guys were out of business. And WTF, what is a hibird option ARM? LOL
http://www.optionarmsdirect.com
” 1% Start Rate / 40 Year Term / 10 year Payment Caps!
100% CLTV / 5 Yr. Fixed Rate 125% Re-cast Rate!
Hibird Option ARM & Pay Option ARM Loans!
Home Equity Lines of Credit up to 100% CLTV!
Stated Income/No Ratio/Non-Owner/Cash-Out.
Option ARM Loans up to $7,000,000. !
We can save you money by lowering your mortgage payments!
Since 1986″
hibird option ARM = albatross
There is a vulture known to have reach 37,900 feet.. where it was sucked into a jet engine.
It’s spelt “hybrid.”
Not on their Website, it isn’t. That was the point of the humor.
U.S. banking regulators told mortgage lenders to tighten standards for subprime home loans in a belated effort to end abuses that led to a surge in defaults and the highest foreclosure rate in five years.
Here’s what a Las Vegas mortgage lender is touting.
No Money Down
No Income - No Assets
Up To 107% Financing
Hope those banking regulators aren’t holding their breath!
Ah, look on the “bright” side…..his customers won’t be competition for you in 2009.
ROTFL
40% of the people who buy in 2007 will be out on the streets in 2009. They’re just destroying their credit/lifestyle due to their late imbibing of the cool-aid.
Eventually prices will get sane enough to “catch the knife.” The best deals (for prime properties) only occur when everyone is afraid to buy.
But we’re not talking 2007… or 2008 here. So if I’m wrong on the timeframe, we have over 18 months to chew popcorn and debate.
For I’m certain any error/bias is towards too short of a timeframe…
Got popcorn?
Neil
who catches falling knives? I’d rather pick one up off the kitchen floor.
My question is who will they sell these worthless mortgages to? Could the foreigners, pension funds, and University endowments still be that stupid?
I heard a home loan company on the radio this morning. No credit checks, loan approval within 7 days.
Come on! Suckers who take that bait deserve financial ruin.
I doubt credit score matters as much in terms of ability to repay as income. Income must be verified and the loan amount limited based on income or there will be future foreclosures. Remember folks with bad credit used to have good enough credit to get in trouble to begin with.
Anyone else notice the flashing banner ad on the realtor.org page?
“Hispanic Homebuyers want a trusted advisor.”
“That’s where you come in.”
No shame.
WE have “Mi Casa” magazine catering specifically to that market, here in Portland. I need to grab a copy and read.
“Trusted advisor”. Yeah, just like that hispanic realtor who sold a $720,000 house to a Mexican strawberry picker.
“BY LAWRENCE YUN, NAR SENIOR ECONOMIST…To a great extent, we can thank steady media coverage of the real estate market “correction” for unfounded consumer concerns”
Larry, you are an economist…did you not read the above mentioned article “S&P, Moody’s Mask $200 Billion of Subprime Bond Risk”? Are you not aware that prices are way out of whack vs. incomes? Are you aware that credit was free-flowing during the boom times, and now it’s drying up? Are you aware that renting in some areas only costs 1/2 as much as purchasing, FOR THE EXACT SAME HOUSE?
Forget about the “full employment” and “Goldilocks economy argument” already. The sub-prime mess (defaults, foreclosures, etc.) has happened DESPITE Goldilocks. Maybe it’s time for you and other economists to sit back, eat some popcorn, and LEARN from this whole mess, as we are doing. You might become better at your craft by observing than by denying it’s happening.
Remember…Goldilocks economy…record defaults.
…Goldilocks economy…record defaults.
….Goldilocks economy…record defaults.
Something is obviously happening that you are not taking into account…media bias doesn’t lead to record defaults during a Goldilocks economy.
“Maybe it’s time for you and other economists to sit back, eat some popcorn, and LEARN from this whole mess, as we are doing. You might become better at your craft by observing than by denying it’s happening.”
But then they wouldn’t make money. Can’t make money in a Ponzi scheme warnng about the Ponzi scheme.
As an Econ major these idiots really piss me off. Real Economic forecasting involves calculations and proven assumptions about how a markets react. Not changes in the weather and the boogie man.
Something is happening here, but you don’t know what is, do you Mr. Yun!
You hand in your loan app
And you go watch the underwriter
Who immediately walks up to you
When he hears you speak
And says, “How does it feel
To be such a idiot?”
And you say, “Impossible”
As he hands you a bone
Last line should be “As he hands you a loan”.
Wait a minute Mr Yun. You have to learn to take the smooth with the rough. We didn’t hear a word from you about the steady media coverage during the run up. Are you advocating media censorship or what? You may not realise it but your cover has been blown sky high because you are nothing but a salesman masquerading as an economist.
‘This guidance on adjustable-rate mortgages underscores that the Federal Reserve and other banking regulators expect lenders to make sure subprime borrowers not only can afford their monthly payments while the introductory rate is in effect, but also after the interest rate resets,’
That’s silly…or the death nail for sub-prime the market going forward since most resets rates are at higher than 30 year-fixed rates. So if you can afford the loan at the reset rate, why not just get the 30 year-fixed.
> if you can afford the loan at the reset rate, why not just get the 30 year-fixed
Cash flow. If you have good reason to believe that you will earn more in two or four years down the road, like a physician and lawyer fresh out of school, a low starting payment makes sense. This would be true for how many of the resetting mortages: 1%? 0.1%?
From Realtor Magazine. “Consumers are hearing a lot in the media about the correction in housing, and they’re understandably concerned about whether now is a good time to get into the housing market. To a great extent, we can thank steady media coverage of the real estate market ‘correction’ for unfounded consumer concerns.”
A statement born of contempt for fiscal prudence and overt arrogance fostered by enormous monetary contributions to a morally bankrupt governmental political system.
Real estate is indeed the gutter trash of all professions.
I hate the way they portray Americans as “consumers” and “Market”
Like were all a bunch of Homer Simpson’s and Paris Hiltons.
‘It is the right thing to do for the borrowers’ sake.’
As Wilford Brimley would say, “It’s the right thing to do.”
Was that for oatmeal or insurance? I can’t remember.
Oatmeal I believe.
It was indeed for oatmeal. I remember those commercials well. The consumption of oatmeal was equated with some sort of moral imperative.
The other memorable Wilfred Brimley quote was some movie he was in where he says “Shut the hell up, you sound like a f$cking nut.” Classic coming from the lovable old Quaker Oats guy.
dang, i have a death nail in my left front tire now.
‘Cause a death knell would be unpossible!
Yun: “Even a relatively large price decline, such as the 12 percent drop we saw in Sarasota, Fla., cannot reasonably be called a correction when that market had a 150 percent price increase during the boom.”
He’s right. After the 150 percent increase, 12 percent decline is just the tiny beginning of the correction.
Try 20% minimum for same-house, same-neighborhood comparisons in Sarasota.
Even 20% seems too small to me, after all it’s Florida. I recall reading about the auction in Florida where houses were sold for 150k that previously were going for 290k. Or should Saratosa be different?
Bill, sorry for misunderstanding you. I think now that you meant to correct Yun that the correction was actually 20% not 12%. I thought first that you suggested 20% as the total size of the “correction”.
Actually it’s -30% in South Gate. This according to a realtor’s report in the monthly neighborhood rag “South Gator”.
Exactly. Two things -
1. It wasn’t 12%, it was 20%
2. It’s not over
what mr. yun is doing is putting 150 next to 12 so it doesn’t look like that big of a drop. that probably doesn’t impress anyone who bought and is down 12%.
True. Also, the percentage changes on the way down aren’t the same as on the way up. (If you had $100k and it increased by 50%, then it decreased by 50%, you’d be at 75k, down 25% from where you started). He is extremely irresponsible.
“But there’s no real correction where consumers are concerned. The media aren’t making the distinction between what’s happening to you, fewer home sales, fewer homes coming online, and what’s happening to consumers, more buying opportunities. But you can make that distinction for your customers.”
These are the same idiots who informed realtors that the way to make money is by flipping houses during the past few years. The credibility of this article and of the NAR has been severly damaged due to this BS. They (NAR and the Realtor Magizine) need to understand that the consumer no longer believes their spin due to their lost credibility! This group is worse than car sales people!
From Reuters. “Subprime borrowers should not be penalized for refinancing out of a mortgage before the interest rate resets to a higher level, according to a statement of principles issued by the regulators. The guidelines also call for lenders to warn borrowers when a reset is coming and grant them at least 60 days to refinance.”
Translation: Party on boys, we wont twist your arm
Refinance into WHAT??
How does that prepayment penalty fly as well?
The guidelines also call for lenders to warn borrowers when a reset is coming and grant them at least 60 days to refinance.”
Most of the borrowers in the past couple of years would not even qualify for a car loan let alone a refinance of a flippers loan.
I just sent out my newsletter to lenders we work with daily. I give it about 2 hours when the phone starts.
This is the time when the wheels comes off the locomotive. We are talking a real estate ice age. The world economies could collapse overnight if the highly leveraged, (borrowed on) funds collapse and they will. It is only a matter of time. The word I got is noone made any offers on Bear stearn auction. 60% is a pipe dream as they are leveraged and the only real money is the 10-20% original captial backed by inflated appraisals on properties, many of which are empty and have no chance of generating income.
When the funds collapse, the liquitdity will dry up thus making the sale of the assets impossible. It is a massive ponzi scheme promoted by wall street and the first guy in has received his last check. Those were the huge bonuses those asshats paid themselves at the end of last year.
From here on I suggest you lock and load.
Jack
“If Bear’s holdings were auctioned off at, say, 60 cents on the dollar and other firms marked down their so-called collateralized debt obligations (CDOs): complex bonds often backed by subprime loans accordingly, losses would spread. Firms would start dumping their CDOs to get what they could for them. Thus would begin a quick, brutal crash.”
“There’s another force bearing down on CDO holders: credit rating agencies such as Moody’s Investors Service and Standard & Poor’s. If the ratings agencies were to downgrade the CDOs, it would force holders to mark down their values accordingly, potentially igniting the same sort of disaster scenario.”
dimedropped, I am assuming you are in the lending industry. If so, care to inform us of the types/quality of loans/lenders you have been seeing lately. Is the atmosphere on the ground getting tighter for borrowers? It should be…
“If Bear’s holdings were auctioned off at, say, 60 cents on the dollar and other firms marked down their so-called collateralized debt obligations (CDOs): complex bonds often backed by subprime loans accordingly, losses would spread. Firms would start dumping their CDOs to get what they could for them. Thus would begin a quick, brutal crash.”
“There’s another force bearing down on CDO holders: credit rating agencies such as Moody’s Investors Service and Standard & Poor’s. If the ratings agencies were to downgrade the CDOs, it would force holders to mark down their values accordingly, potentially igniting the same sort of disaster scenario.”
———-
And THIS is what the PPT is for. Many think that it’s the PPT at work any time a down market bounces back up. But I doubt this.
The PPT is created EXACTLY to prevent the “volatility” described in the above quote. IF Bear Stearns had to liquidate, THEN we’d see a rapid repricing of these toxic financial WMDs, and THEN a crash. IF Moody’s or S&P downgraded these, THEN we’d see the same crash.
However, if someone could get all of the major involved parties together and make each realize that they all have much to lose if this unwinds haphazardly, but that instead survival would be guaranteed with cooperation, THEN you could potentially avert disaster.
Of course losses would still occur, but they could be orchestrated and the firms would all survive. later they could be made “whole” again by secret handshakes and deals.
This is what happened with LTCM. Greenspan made the big boys coooperate. They all took big losses, but all made it through and thirved more than before LTCM even happened. Even Merriwether and the idiots of LTCM went on to extreme riches AFTER nearly ruining our economy.
Secret handshakes. It didn’t cost a dollar of taxpayer money (up front). Just a lot of inflation later-an even more insidious threat.
Same thing here. These are highly illiquid products. The true value is nearly impossible to know. Thus, it would be very easy BY COLLUSION to figure out a way to unwind these in a methodical way to limit losses allowing all firms to survive. Later, reward them for coooperation.
this is what the President’s Group on Financial Markets is about (PPT)
sorry, should be the “Presidents Working Group on Financial Markets”
They’d better hope that it doesn’t happen again…and again…and again.
One LTCM is containable. Are 3? Are 5?
Of course it will happen again… that’s why we’re where we are.
The big boys know they are “too big to fail”. thus, they engage in reckless behaviour, and then as soon as the SHTF they cry to Uncle Sam.
They are bailed out covertly, enhancing the “too big” argument, and the thus engage in riskier behaviour in the future.
same reason why Fannie Mae is where they are today. They are too big to fail. Ever wonder why Fannie isn’t delisted? any other company that couldn’t produce financials for 5 YEARS would be.
But the bailout works both ways. Once the big boys are bailed out, now they owe uncle sam. In the future, if uncle sam covertly says “buy this toxic POS from Bear Stearns” then you buy it, because you know you’ll be made whole again covertly later, and you know that if you don’t buy it you’ll be “out” of the club… don’t wanna be out of the club…
This is the power of covert manipulation by a cartel/oligopoly. It is intensely insidious and difficult for any one person to grasp the full complexities (I certainly can’t)… so much worst than the Fed simply buying indexes to keep the stock market afloat… it is collusion to the highest degree by those with the most guns…
This is why I PROMISE YOU, the Bear Stearns situation will somehow magically resolve itself. There will be big losses, all around, but sustainable losses. The MBS market will tighten, because the PPT will say NO MORE (behind the scenes) and the big boys will obey, because you do not cross the PPT.
and then in 5-10 years we will see another crash of some sort… and behind the scenes you will see another covert bailout. Not with taxpayer money… but mysteriously a few years later food costs will have gone up 15%…
Yes, but maybe this time “too big to fail” will meet The Black Swan.
Will foreign central banks also have secret handshakes with the FED? I don’t know, but I think the situation is now out of control.
red pill…
so weird… I was just thinking about writing: “are you ready to take the red pill” and then you posted.
The situation may be out of control… it is difficult to know, as it’s hard to know what exactly is going on. I doubt anybody actually can tell what’s going on, thanks to recent “financial innovation”.
The PPT are neither omnicient or omnipotent… but they can intervene and cause striking results (good or bad, depending on perspective).
at some point we will hit the “Black Swan” event, and the PPT will be powerless… I’m not so sure we’re there yet.
The Bear Stearns event will be “solved” however, that is unlikely to be beyond PPT abilities. The question is what happens downstream after the Bear “solution”…
it’s like whack a mole… but each mole is getting bigger… and has fangs… and rabies… and intelligence…
all I know is that the PPT is clearly involved in the Bear Stearns fiasco…
and also, we have a cartel of financial companies that control the lion’s share of our financial system. This is what allows the PPT to be effective.
“it’s like whack a mole… but each mole is getting bigger… and has fangs… and rabies… and intelligence…”
This is my favorite analogy of the day. Good stuff. I love laughing as I read about unmitigated disaster.
“Will foreign central banks also have secret handshakes with the FED?”
You bet. http://wallstreetexaminer.com/blogs/winter/ covers that.
” and behind the scenes you will see another covert bailout. Not with taxpayer money… but mysteriously a few years later food costs will have gone up 15%… ”
So true and so disgusting isn’t it.
Actually for you conspiracy theory types I have an interesting story to relate.. I have a friend who owns a gas station. He claims if he’s robbed the police will show up but not right away. However if he calls because he’s caught someone passing phony bills, he claims the cops show up almost instantly. Needless to say he fills my ear with babble that the Feds are always johnny-on-the-spot to protect their interests. I find the whole thing amusing because what constitutes “real money” is actually conterfeit as well. Not doubting what he says though, who knows?
Where does antitrust enter the picture?
If the bailouts work both ways, how is it that Bear was able to “opt out” of the LTCM bailout? Is contributing to a bailout optional?
You do realize that once the crisis passed the positions ended up in the black. The banks that bailed out LTCM generally made a profit on their bail out. Greenspan mostly kept them from all trying to knife each other in the back (Ironically Bear was the last one to put down the dagger). The big difference was that LTCM’s positions generally made sense (arbing off the run treasuries is a pretty good strategy if you have a little additional capital to weather shocks like that-or better yet double down), Bear’s funds much less so.
“You do realize that once the crisis passed the positions ended up in the black. The banks that bailed out LTCM generally made a profit on their bail out.”
Yes, but the ONLY way this could have happened is if everybody worked together EXACTLY as demanded by Greenspan. And they all did, EXACTLY the correct way. They were secretly assured that their principal was not at risk… otherwise none of them would have put up the money.
To collude for profit (a la LTCM) is the same mechanics as to collude to avoid destruction.
If the firms realize that they are ALL in trouble, that they MAY fail, then they will deal… even if it means a loss… it may be a lower loss than otherwise.
I’m not saying the PPT is all powerful, or all knowing… simply that this is how they best work… behind the scenes using covert power just as much (if not more) than simple purchasing of securities/assets
I think what bluto meant is that LTCM was able to be fixed because the liquidity enabled the fund to keep from liquidating less liquid assets during a TEMPORARY blip in the market for their assets.
The Bear asset values are NOT temporarily down, the fundamentals are catching up with all these MBS pools, values are actually tracking more or less the ability of the borrowers to make the payments. The ability for a borrower to make a payment on these loans was the temporary situation, not their inability to do so… It’s an unfixable problem–all cash infusions are delaying the inevitable.
I agree bluto–as I note in my response to HIC below, the way for the problem to be fixed is for cash infusions to postpone the forced sales of the assets AND for the market to somehow believe again that the borrowers can make their payments on the underlying mortgages.
You can do the first (cash infusions). The second will be incredibly hard, especially in the face of ARMs adjusting en masse. There is an interesting story in WSJ online today about the problems inherent in trying to “fix” all these loans–many divergent interests, servicers being able to postpone the inevitable temporarily only, not permanently.
They may be able to drag out the slide downward and drying up of liquidity, but it’s coming regardless of their efforts.
Yeah in LTCM most of the credit risk was US treasury not rediculously stretched subprime borrowers.
There are a lot of preverse incentives in the mortgage market as it is structured currently.
Bluto
If memory serves me correctly the LTCM demise was caused by the default of Russian bonds.
Sorry-Para 2 is the body of the newsletter
“A shotgun sale of poorly performing securities would provide Wall Street with a true price for valuing the slumping assets. ‘Nobody wants to officially acknowledge the worthless nature of these products,’ says Peter Schiff, president of Euro Pacific Capital.”
LOL
What a bunch of fools. Wall Street should be shutdown.
For some reason I am thinking it would be a lot easier to stop this crap before it starts instead of trying to contain it afterwards.
But those Wall Street bonuses were so good last year! Better to get them FIRST and then admit the scam.
Shut down Wall Street. It is just a bunch of gangsters.
We can’t. Our economy depends on the financial system.
“We can’t. Our economy depends on the financial system.”
You are right. We had no economy before CDOs/REMICs/MBS… yep, before the mid 80s it was all subsistence farming and hunter-gathering in the US.
You don’t trust Gambino Sachs?
Sarbanes-Oxley is already doing a good job of shrinking its global influence. NOT a good thing.
“Some investors say the ratings companies are waiting too long before downgrading the mortgage bonds and the CDOs that contain them. They noted that S&P and Moody’s maintained their investment-grade ranking on Enron Corp. until days before the Houston-based energy trader filed for bankruptcy.”
Relax already, they’re waiting till all the special interests and CEOs get repositioned, then they’ll downgrade. What is this guy, dumb?
Enhhh….we got nothing to worry about this is all poppycock.
“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.”
“It doesn’t pose a risk to the economy overall,” he said.
I mean he is with the treasury department how can he be wrong, we are at the bottom people can’t get worse.
Paulson is so wealthy and so detached from mainstream people’s lives, problems and day to day living requirements that he has no idea what he is talking about. He is the classic Ivory Tower economist type, in his world, all is wonderful. If he were to step outside that gilded cage he might be surprised.
If he stepped outside the cage, he might get eaten.
The first time Paulson acknowledges a “major correction” is when he states the correction is behind us.
Paulson knows better; the media knows he knows better.
“‘This guidance on adjustable-rate mortgages underscores that the Federal Reserve and other banking regulators expect lenders to make sure subprime borrowers not only can afford their monthly payments while the introductory rate is in effect, but also after the interest rate resets,’ Fed Governor Randall Kroszner said in an e-mailed statement. ‘It is the right thing to do for the borrowers’ sake.’”
The right thing to do would have been to deny the homedebtor the loan in the first place. Oh well. Act in haste, repent in leisure.
Just as real estate brokers will soon go the way of the dinosaur, so will the stock broker. When the air clears, and it will, the blame will attach where it should. Asshats with other peoples money earning big fees for bad deals. All those California teachers and the like will be working 7-11’s as opposed to retiring.
This thing has the potential of bringing light to a basically corrupt sub-society of financial vampires. I see pitchforks and torches in the distance.
This thing has the potential of bringing light to a basically corrupt sub-society of financial vampires. I see pitchforks and torches in the distance
People in this country don’t have a clue.
They watch their standard of living slide in the dumpster, and simply go get another $5000 limit credit card, or another HELOC.
Albeit, enough got stirred up to stop their politico’s from passin’ that immigration bill.
So maybe their is a glimmer of hope.
Unfortunately, people are so intimitated by the home buying/selling process that they willingly pay for hand-holding - even if it’s a salesman doing the holding.
We can hope for a complete overhaul of the REI, along the lines of what happened to travel agencies, but perhaps the best we will get in the short term will be a rise in discount and fee-for-service brokers.
I will not be surprised to see Mortgage Brokers totally blown up and all such activity will be through regulated financial institutions. B of A is positioning for just such a scenario and the bankers will push for this like they did the stock sales area. They will get it too. Now that is a lobby, the guys with the gold.
Guys,
Yun (or whomever the NAR economist is) will never stop spinning until the Ponzi sceme is over. A ponzi scheme is basically a pyramid, but upside down (hence why it’s also called a pyramid scheme), thus basically unstable. In fact the only way you can keep it going is by SPINNING it like a top. Thus the NAR spin meisters….
Oh how ironic, just looking at the web page of one of my customers, check this out.
# It’s Everywhere, In Everything: The First Truly Global Bubble - Jeremy Grantham
Grantham Mayo Van Otterloo & Co
I think they are telling the truth like Pimco.
All those mortgages out in the rest of the country sure are hurtin’.
But it can’t affect us in New York City, since Wall Street bonsues support ongoing 20% housing price increases indefinately. Even to the point where housing cost 1,000 times more here than it does 20 miles away. It’s different here.
BTW, those hurtin’ mortgages won’t affect the bonuses, will they?
The only difference between an affordability product to help the poor and predatory loans was 24 months. It must suck trying to appease the shifting whims of politicians.
I think the wild card in this whole propmeup and I will you is the fact that the WORLD is in this and we have no special fuzzy feelings going on out there for us. We know that they would like to see us in a big hole in the ground they do not want to follow us over the cliff.
However, when it comes to their money I don’t see everyone lining up for our dose of kool aid. I suspect it will end up internationally uglier than one might suspect.
One thing for sure if I were in Brazil with a housing plan on the boards for all those easy Europeans I would shelve it and quick. Those folks are going into the same wall we are.
40 minutes to market close and Dow is going into dumper. And in nearly 2 hours on West Coast Larry Goldilocks is going to tell us about full employment, low interest rates and how everything is just great.
What I’m worried about is having to wake up one morning to find that more buildings have been knocked down and more civil liberties disappear as we slide closer and closer to another “Great Depression”… Anyone recall hearing anything about that whole WWII thing..?
“‘This guidance on adjustable-rate mortgages underscores that the Federal Reserve and other banking regulators expect lenders to make sure subprime borrowers not only can afford their monthly payments while the introductory rate is in effect, but also after the interest rate resets,’ Fed Governor Randall Kroszner said in an e-mailed statement. ‘It is the right thing to do for the borrowers’ sake.’”
They don’t give a damn about the borrowers. If they did, the lax “standards” of the past few years would never have existed in the first place. All they care about is a potential meltdown on Wall Street.
http://tinyurl.com/2n2h9l
“That seemingly well-contained subprime mortgage meltdown might be leaking out into the broader financial markets after all.
Days after it was forced to bail out one of its two struggling hedge funds and abandon hopes of saving the other, Bear Stearns (nyse: BSC - news - people ) forced out the head of its investment management unit.
It is bringing in Jeffrey Lane, from rival Lehman Brothers (nyse: LEH - news - people ), to be chairman of Bear Stearns Asset Management, the unit that oversees the two hedge funds that collapsed last week. The funds suffered losses and margin calls in leveraged positions in mortgage-related bonds.
Lane succeeds Richard Marin, who gets the courtesy title of senior adviser to the division.”
So I Googled “Richard Marin” to see how may billions his Xmas bonus was last year. The quote below explains a lot…… I was borrrn ina East LA…..:
“The team began to take shape in the late 1960s when, after entering show business as a guitarist in a rock band, Chong established City Works, a wild improvisational troupe later joined by Richard “Cheech” Marin. When City Works dissolved, Cheech and Chong continued as a duo, formulating a musical comedy act.”
“Allco Credit Union posted a loss of more than $5.2 million in the first quarter of this year . . . “Allco, which has assets of $75 million, was listed in the quarterly report by the National Credit Union Administration, or NCUA, as ’significantly undercapitalized.’”
Since capitalization at most banks should be 8-10% of assets, after this kind of loss, they are nearly bankrupt.
Depositors of Allco . . . start the run, because your CU is done!