The Big Ugly Secret Of This Market
Some housing bubble news from Wall Street and Washington. The Charlotte Observer, “More Charlotte-area homebuyers are suing Beazer Homes, alleging a litany of misdeeds and claiming the company ‘fraudulently qualified’ them for loans they couldn’t afford. They misrepresented assets and debts on loan applications, the suit says, and concealed important information from buyers. They also concealed inflated sales prices of homes to cover fees and expenses, according to the suit.”
“Buyers have suffered a decline in property values, as Beazer’s practices led to rampant foreclosures in Oak Hill, the suit says. ‘People are trapped in their homes because their values have dropped below what they owe,’ says…legal partner Daniel Grist. ‘All the foreclosures have flooded the neighborhood with cheap houses.’”
“At least 14 of 98 homes in Oak Hill have fallen into foreclosure, a 14 percent foreclosure rate, an Observer analysis shows. Oak Hill’s foreclosure rate is not among Beazer’s highest in Charlotte. The Observer found 10 Beazer subdivisions with rates of 20 percent or higher.”
From Reuters. “Tax preparer H&R Block Inc. said the subprime mortgage unit it is selling has lost a credit line, lowering its borrowing capacity closer to the minimum needed for the sale to go through.”
“In a late Tuesday filing with the U.S. Securities and Exchange Commission, H&R Block said Lehman Brothers Holdings Inc. did not renew a ‘warehouse’ facility with the subprime unit, Option One Mortgage Corp., after it expired June 28.”
From Fortune. “While Bear Stearns is the most recent financial institution to find itself caught up in the subprime-mortgage quagmire, the three credit-rating agencies; Standard & Poor’s, Moody’s, and Fitch, may be the next ones to see their good names dragged through the mud.”
“The reason? Ohio attorney general Marc Dann is building a case against them based on the role he believes their ratings played in the marketing of risky mortgage-related securities.”
“‘The ratings agencies cashed a check every time one of these subprime pools was created and an offering was made,’ Dann told Fortune, referring to the way the bond issuers paid to get their asset-backed securities (ABSs) and collateralized debt obligations (CDOs) rated by the agencies.”
“These ratings run from AAA for debt with the lowest risk of default all the way down to noninvestment- grade bonds, which many pension funds are prohibited from purchasing in their charters. ‘[The agencies] continued to rate these things AAA . [So they are] among the people who aided and abetted this continuing fraud,’ adds Dann.”
“Dann and a growing legion of critics contend that the agencies dropped the ball by issuing investment-grade ratings on securities backed by subprime mortgages they should have known were shaky. To his mind, the seemingly cozy relationship between ratings agencies and investment banks like Bear Stearns only heightens the appearance of impropriety.”
“According to experts in structured finance valuations, the ratings agencies are the central drivers, particularly in the riskier areas of asset-backed securities markets. The pool of buyers would be much smaller without a rating because pension and mutual funds hold only investment-grade bonds, says Christopher Whalen, who sold asset-backed securities at Bear Stearns.”
“‘The rating drives everything,’ adds Sylvain Raynes, a former Moody’s analyst and currently a principal at a firm that examines these securities.”
“Regardless of whether a lawsuit materializes, the ratings agencies already seem to be policing themselves. Of the pool of securities created from 2006 subprime mortgages, Moody’s has downgraded 19 percent of the issues they’ve rated and put 30 percent on a watch list.”
“As Whalen puts it, ‘The Street dragged everyone into increasingly bizarre and illiquid instruments, and there was huge profitability there, but what it did was buy itself a lot of trouble.”
From Bloomberg. “Delinquencies and defaults on U.S. subprime mortgages will keep rising as problems in the housing market persist, said Robert Parker, vice chairman of Credit Suisse Asset Management.”
“‘It’s naïve to assume the worst is past us in the U.S. subprime market,’ Parker said at a bond market conference today. ‘At least over the balance of this year, the subprime default rate will rise.’”
“In the U.K., lenders are providing mortgages to customers who don’t need them and might not be able to afford them, practices that may lead to ’serious wider consequences,’ the country’s Financial Services Authority said in a report released on July 4.”
“All the subprime-mortgage lenders examined failed to apply responsible lending standards, and five of 34 intermediaries are being investigated and may be punished, the regulator said.”
“The number of Britons entering bankruptcy rose to a record in the first quarter as consumers buckled under higher borrowing costs. Individual insolvencies in England and Wales increased 24 percent from a year earlier to 30,075, the Department for Trade and Industry said. The number of insolvencies was the highest since records began in 1960.”
“Private equity firms led by New York-based KKR and Blackstone Group LP need to borrow $300 billion this year to pay for acquisitions, according to Bear Stearns Cos. More than a dozen companies abandoned borrowing plans in the past two weeks as investors demanded higher yields.”
“Investors are demanding a 288 basis-point premium to buy junk bonds rather than Treasuries, the most since December, according to Merrill Lynch & Co. global index data. Spreads widened 53 basis points in the past month, the fastest increase since General Motors Corp. lost its investment grade ratings in 2005. A basis point is 0.01 percentage point.”
“‘Private-equity firms will carry on refinancing until the economy slows and operating profits thin out,’ said Edward Eyerman, head of leveraged finance at Fitch Ratings in London. ‘By then it will be too late as current debt loads will look unsustainable. The bill comes one day, that’s the problem.’”
The Financial Times. “Investors in the worse-hit of two stricken Bear Stearns hedge funds are offering to sell their holdings for as little as 11 cents on the dollar but still finding no buyers, according to unfilled trades on a secondary market for funds.”
“The best bid for Bear Stearns High-Grade Structured Credit Strategies Enhanced Leveraged Fund, the more geared of the two, is just 5 cents on the dollar. ‘There are buyers but they can’t agree on price,’ said Jared Herman, co-founder of Bahamas-based Hedgebay.”
“The Enhanced Leverage Fund’s net assets of $638m were more than 10 times geared in March, meaning a drop of just 10 per cent in the value of its holdings would wipe out investors. Market participants estimate the CDOs the Bear funds held would sell for at least 10 per cent less than the values calculated by lenders.”
“‘Where things transact is still many points below where dealers have been marking them,’ said one manager of CDOs and hedge funds. ‘That is the big ugly secret of this market.’”
From MarketWatch. “Of the top five industries, only the financial sector cut more jobs in the first half compared with the same period last year.”
“‘The financial sector is clearly affected by the significant housing slowdown and subsequent collapse in the subprime lending market,’ said John Challenger, CEO of the employment firm, in statement.”
“Cuts in the financial sector doubled in June to 9,800 compared with May and were up 131% in the first six months of the year to 64,825.”
“The Mortgage Bankers Association said its mortgage applications index rose 0.1 percent to a seasonally adjusted 619.4 in the week ended June 29, nearing its lowest level since mid-February.”
“The refinancing applications gauge dropped 2.6 percent to this year’s low of 1,687.2 on a seasonally adjusted basis.”
“Many economists doubt U.S. housing will emerge from its slump before next year, predicting further price cuts to lure buyers to the huge supply of unsold homes. ‘We’ve got a huge amount of inventory to work through, particularly of existing homes,’ said David Kelly, economic advisor at Putnam Investments in Boston.” ”
“Pending sales of existing homes sank to their lowest level in more than 5-1/2 years in May, the National Association of Realtors said last week. There are almost 5 million new and existing homes on the market, and ‘that’s got to be very depressing for a Realtor,’ said Kelly.”
Moody’s and Standard and Poor better clean up their act and FAST other their names will be referred in similar ways to Arthur Anderson.
If the rating firms cannot be trusted then the whole issue of trust, markets and credit/debts is like a fog…unknowable….that will be considered when someone tries to find the true value of a company or security.
I like that point about Moody’s and S&P.
At one time I was mystified - wondering what they were doing - during the bubble.
I guess the answer is “just about nothing.”
Why do something when doing nothing pay sooooooo well?
…and also “makin’ boatloads of cash” apparently…
FYI - apologies if posted before - a “Hedge fund Failometer”:
http://wasatchecon.blogspot.com/2007/06/hedge-fund-failometer.html
Its probably too late. If they actually downgrade massively people will say WTF and sue. If they dont - the same!
They will probably try to minimally downgrade and play both side which might work for a while so they can cut large bonus checks and the peons can steal pencils for a little longer.
WE have a ratings Company in our tiny little town….The collection of stuff comes in and moves down a conveyor belt, each in turn picking and sorting out the various “valuable” items…
Here’s the catch, as you begin the process of training mentally challenged workers to do this type of work, SORTING AND RATING GARBAGE there has to be some Management oversight…
Same for the Ratings agencies in Debt…..when sorting through and rating garbage, its best to use a conservative approach as opposed to a rubber stamp style.
“their names will be referred in similar ways to Arthur Anderson”
My thoughts exactly.
Just to help save their good name………..
it’s “Arthur Andersen”. It was originally mis-spelled by the printer and was kept that way because they couldn’t afford to change the stationary.
It’s pretty hard to change something that’s stationary.
lol - you meant “stationery”, perhaps?
Love the anecdote!
oh, capitol!
Their you go again!
I’m going to loose my mind!
Your a jerk.
None of these complaints about the ratings companies is new and there has never been anything significant done about it, not after the Savings and Loan crisis in the 80’s, the dot come bubble in the 90’s, Enron and World Com in the early 00’s and now the bond market.
These guys didn’t downgrade Enron until the day before Enron filed for bankruptcy. They will not voluntarily clean up their act and the general public has to little idea of how they are involved in help create prior market collapses to force real over site.
Those borrowers need to do their own research before taking creative financing. They probably won’t see a dime if they sue.
*first comment*
The best bid for Bear Stearns High-Grade Structured Credit Strategies Enhanced Leveraged Fund, the more geared of the two, is just 5 cents on the dollar. ‘There are buyers but they can’t agree on price,’ said Jared Herman, co-founder of Bahamas-based Hedgebay.”
“The Enhanced Leverage Fund’s net assets of $638m were more than 10 times geared in March, meaning a drop of just 10 per cent in the value of its holdings would wipe out investors. Market participants estimate the CDOs the Bear funds held would sell for at least 10 per cent less than the values calculated by lenders.”
“‘Where things transact is still many points below where dealers have been marking them,’ said one manager of CDOs and hedge funds. ‘That is the big ugly secret of this market.’”
********
Hey!
All you hedgie and banker Pig Men: “How’s your model looking today?”
Due to all the leverage, what this really means when they are offering only 5 cents on the dollar is that there is little hope if any that these funds are above water at all. Actual worth of these funds is negative if they are forced to liquidate them.
How are they worth even 5 cents? I dont get it.
The securities will pay coupon interest for a little while. They look like I/O’s.
Assuming there’s liability protection, it means somebody thinks there’s a reasonable chance that it could recover to a real value. Or the bidder is an insider trying to keep the game alive for a while longer.
Either way getting valure depends on avoiding liquidation. There’s also the chance the bidder is a creditor hoping to get a big enough share to force liquidation before it gets even worse. Or maybe they’re just nuts.
As long as there are assets somebody will find a reason to want them at a low enough price.
Or maybe they want the so they can sue Arther A…I mean Moodys/SandP! cha-ching!
The buyerz are attorneyz.
is there ANYONE on Wall St who is not a greedy, slimy pig using quasi-legal tactics?
“Is there ANYONE on Wall St who is not a greedy, slimy pig using quasi-legal tactics?”
NO!
Yes, but they were fired for being honest and ethical!
The theory is that if you have the patience to wait, the funds will have value. Not all CDOs are going to go bad, not all derivatives of the tranches are worthless.
If you think of the fund as a stock that has dropped 70% in value and the only thing that the stock has is questionable cash (CDOs & derivatives against the CDOs), looking at the positions liquid or illiquid will give an outside investor a means of determining value.
To give you an example Mr. Warren Buffet is still long Enron bonds that he purchased. Mr. “Buffett said he bought $82 million of euro-denominated Enron bonds in 2002 and 2003 — and this led to a $270 million gain.” 2006 Berkshire Hathaway report.
If you can evaluate the risk…. that is the hard part.
sounds like blind-folded knife catching to me.
When things look bleak, cash is king.
It wouldn’t surprise me one bit if the 5% bidder wants to in some way gain control of the whole thing, recapitalize the entire fund with less leverage, and click along at a 10%+ return for a while.
They’d be choosing to make a long term investment in the strength of the CDO itself, when the short term perception is most negative. Would this make sense?
Absolutely.
The Merrill Lynch’s of the world who hold some of the Bear Stearns hedge fund debt would gladly get back less than 100 cents on the dollar in exchange for a quiet transaction that wouldn’t reprice the entire market. So, the new investor pays the hedge fund investors 5 cents on the dollar (0.5% of the whole original capital stack), and the investment banks 80 cents on the dollar (72% of the capital stack).
On the whole, they buy $100 worth of original notes for $72.50. If the original coupon on this debt (some good pieces, some bad) was, say, 7.5%, they now earn slightly over 10% on their investment (unleveraged). If they leverage it 50% at, say 7%, meaning that 77.5% of the original value needs to get wiped out before the lender is touched, they can bring their leveraged yield to just over 13.5% on their equity investment.
If I’m a pension fund, this is a damn good investment.
BUT (a very important but), you need to understand the collateral, and believe that the actual losses on the CDOs you’re buying is going to be less than the perceived loss.
This is a long way of saying that 5 cents could be worth it to someone who is trying to buy control of the entire fund.
In a buyout like this the following would happen to the players involved:
1. The original hedge fund investors get screwed;
2. The banks who lend to the hedge fund originally get back 80 cents on the dollar and do not subject other, similar loans to the repricing that would happen with a true auctioning of the assets;
3. The new hedge fund investor will get about 13.5% annually on their investment;
4. The new lender to the new investor would get almost 200bp spread over the 10-year, and know they are only levering up ~35% of the original cost of the CDOs.
I can see how such a transaction could make sense for all but the original hedge fund investors, but they’re in trouble anyway. Blood in the water will bring out the sharks…
The market says the toxic debt is worth less than 5 cents on the dollar. What does the “mark to model” valuation method say it is worth?
its not even mark-to-model anymore,
theses CDO’s are mark-to-sugary sweet lollipop fantasy world market…so they ARE marked to market!!!
It all makes sense now.
Look at the smoke emanating from the VAR models…
Run, she is gonna blow.
So imagine you are a multi-millionaire investor sitting lazily by your pool, sipping coffee while eating a croissant and reading the newspaper when you come across this article. Also imagine that you have a few million sitting with a hedge fund manager who dabbles in subprime CDO’s ANYWHERE in the world. Do you:
A). Shake your head while muttering “what a mess” and turn to the comic section?
B). Decide to catch the rest of the story later on and jump into the pool for a few laps?
C). Yell “HOLY SH*T”! and immediately speed dial your hedge fund manager while praying that you can get your redemption order in ahead of the pack?
I know which answer I am picking!
Exactly, Bill Fleckenstein mentioned this on his pay-site at the beginning of this mess. He would know, he has run a hedge fund for years, and a call asking for a redemption is the worst call you can get. I can only imagine how many of these types of calls were made over the past few weeks. Problem is, we almost never hear about them.
“Problem is, we almost never hear about them.”
No joke! Wouldn’t it be nice if we did not have to supplant the lazy financial journalist pool’s collective effort with our own voluntary substitute?
If he’s a non swimmer, plan B might be the best choice…… and do the right thing for your heirs and make it look like an accident.
All you hedgie and banker Pig Men: “How’s your model looking today?”
You, sir, are heartless, malicious, and cruel. Please marry my sister.
The model is looking like the Hindenburg after it exploded.
There are almost 5 million new and existing homes on the market, and ‘that’s got to be very depressing for a Realtor,’ said Kelly.”
But not so depressing for those on HBB. Let them get on with the careers they are trained for: cleaning floors and waiting tables!
why would this be depressing for a Realtor? With 5 million homes available, there’s NEVER been a better time to buy!
It sounds like there is no shortage of homes to sell. Get busy, Realtwhores.
Bwahaha…
If they could get there heads out of there asses and start promoting lower prices they wouldn’t be so bad off.. If I was a realwhore I would be explaining to sellers why they need to drop there prices 15-20% now to avoid having to drop them 30-40% in a couple of years.
Kind of hard to convince people to lower prices, when the only people who REALLY need to sell now are the self-same schmucks you suckered into buying two years ago. Oh, and you got them to buy then by convincing them that…
“Prices always go up!!!”
“Pending sales of existing homes sank to their lowest level in more than 5-1/2 years in May, the National Association of Realtors said last week. There are almost 5 million new and existing homes on the market, and ‘that’s got to be very depressing for a Realtor,’ said Kelly.”
These are also thousands of people moving to Florida every month based upon the spin put forth by the realtors. With a realtors spin and great sales skills they should have no trouble moving the highly overvalued inventory they created with their savey sales spins. However, the new excuse is most of the realtors are now working in the fast food industry thus leaving a shortage of realtors to move the inventory!
“a shortage of realtors to move the inventory’
might sound funny but i agree.. a genuine salesman with the necessary skills would have a field day in this (or any) market . With no effective competition.. all the way to the bottom and back up again.
even amid falling prices, buyers are there. So, alls he’s gotta be expert at is knowing how to coax sellers to lower their prices.
Cheers for Dunn and Ohio!
Maybe the money they get back will represent 10% of the monies to be lost on CDOs by the Ohio pension fund…
Marc Dunn for President!
Marc Dunn for President!
Marc Dunn for President!
Speaking of running for president, I saw a large “Ron Paul - Revolution” (paraphrase) banner stretched out on a pedestrian bridge across Eastbound I-80 in the Berkeley / Emeryville area yesterday. Thousands much have seen it…
I’m not as familiar with him as others here, but I was surprised to see that in this area.
I saw that one in a remote area of oxnard, while I was looking for parking to see the fireworks at channel -Island Harbor.
SF jack,
take a moment to check him out…we will need some honesty in govenment as this mess unravels.
May be, but I’m not ready to toss out all the social programs.
“May be, but I’m not ready to toss out all the social programs.”
I am. They are not even constitutional.
Same on I-15 runnning through Salt Lake City.
“Speaking of running for president, I saw a large “Ron Paul - Revolution” (paraphrase) banner stretched out on a pedestrian bridge across Eastbound I-80 in the Berkeley / Emeryville area yesterday”
It is surprising, since Berkeley has traditionally been economic conservative (by that I mean socialist, as opposed to classical liberal free market).
That’s pretty interesting. Truthfulness appeals to just about everyone, it seems.
RuPaul, maybe
He’s my candidate. If he’ not on the ballot, I won’t vote.
RuPaul, maybe.
OK help me out on this one…are you saying someone offered just $32 mill for $638 mil of bonds?
Or they offer $320 mill on $6.3 bilionl for $630 million bonds that were leveraged 10 to 1?
“OK help me out on this one…are you saying someone offered just $32 mill for $638 mil of bonds?
Or they offer $320 mill on $6.3 bilionl for $630 million bonds that were leveraged 10 to 1?”
I am also very interested in the answer to this question. Also, just to be clear, if the media says Hedge Fund Fubar lost 10% and that fund had, say, 10 million that was leveraged up to invest in a total of 100 million, that’s 10% of the 100 million, right? They are broke?
Yes. They are broke.
If they leverage 90% ($90MM of debt to $10MM of equity), and buy $100MM of assets (bonds), and the bonds trade at 90 cents on the dollar, the equity is wiped out.
If the bank that lent money to the hedge fund feels like they their collateral is impaired and seize the bonds to sell them on the open market to try to repay their loan to the hedge fund, it’s a “margin call”. If when they try to sell those bonds, but the best price they can get is 5 cents on the dollar, they can either:
a) Choose to sell them, be wiped out, impact the rest of the market where they may have other such loans; or
b) Try to keep the pricing as quiet as possible, confuse the market as to the real value of the bonds, and hope that the CDOs continue to pay as contracted
Most banks would opt for “b”–as long as the CDOs are paying. In the meantime, the hedge funds are probably in default of one sort or another, so they are probably using 100% of CDO cash flow to pay the lenders (at a higher interest rate than before).
Equity guys are wiped out, which is why people are offering them 5 cents on the dollar for their pieces of the hedge funds…
Some of these accounts are on margin as well. I read an article the other day where a hedgefund manager was talking about a conversation he had with a client who was underwater to the tune of 12Million in MARGIN losses. Ouch!
These are offers for shares of the hedge funds. The hedge funds are highly leveraged so it’s likely that there is no equity. For example $1,000 million in face amount CDOs that were purchased by the fund with $900 million in bank loans and $100 million in hedge fund investor money. If the CDOs are worth only $900 million then there is no equity in the hedge fund and the investors’ shares are worth 0. If the CDOs are worth less than $900 million then the bank lenders take losses also.
I think offering $32 mill would be more logical, because the 32mil is very likely worth zero in the future. Someone who is willing to take the risk is betting on the turning of the house market, even if the chance is little (maybe 5% in their mind).
Don’t know if anyone’s posted this from The UK Telegraph:
“…The banks halted the sale before “price discovery” set off a wider chain-reaction. “It was a cover-up,” says Charles Dumas, global strategist at Lombard Street Research….”
More from that:
“Leveraged deals are running at 5.4 debt/cash flow ratio, an all-time high. As the BIS warns, this debt will prove a killer when the cycle turns. ‘The strategy depends on the availability of cheap funding,’ it said.
Why has such excess happened? Because global liquidity flooded the bond markets in 2005, 2006, and early 2007, compressing yields to wafer-thin levels. It created an irresistible incentive to use debt.
What is the source of this liquidity? Take your pick. Goldman Sachs says oil exporters armed with $1,250bn in annual revenues have been the silent force, sinking wealth into bonds; China is recycling $1.3 trillion of reserves into global credit, a by-product of its policy to cap the yuan; Japan’s near-zero rates have spawned a “carry trade”, injecting $500bn of Japanese money into Anglo-Saxon bonds, and such; the Swiss franc carry trade has juiced Europe, financing property booms in the ex-Communist bloc. And, all the while, cheap Asian manufactures have doused inflation, masking the monetary bubble.
The deeper reason is the ultra-loose policy of the world’s central banks over a decade. They “fixed” the price of money too low in the 1990s, prevented a liquidation purge to clear the dotcom excesses, then kept rates too low again from 2003 to 2006. Belated tightening has yet to catch up.
Don’t blame capitalism. This is a 100pc-proof government-created monster. Bureaucrats (yes, Alan Greenspan) have distorted market signals, leading to the warped behaviour we see all around us.”
***********
Warped behavior! That explains it.
Thanks to Alan Greenspan and the “Do Nothing” Fed!
How will he explain that away in his memoir?
This appears to be another piece of dubious financial reporting by Mr. Evans-Pritchard. Although my sentiments are with Mr. Evans-Pritchard, he does not have to embroider economics with misquotes and statements taken out of context.
The scariest thing from the BIS was as Mr. Evans-Pritchard noted “In fact each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest a ‘new era’ had arrived.” But from the report: “The consensus view for the current year is for a continuation of the broad-based economic expansion – although at a slightly slower pace than in 2006 – easing inflation pressures and gradually receding current account imbalances. This scenario is supported by growing evidence of a classical recovery in the euro area and Japan, with export growth leading to rising investment, and in turn to rising employment and consumption. Healthy domestic demand in major emerging economies is also encouraging.”
BIS Annual report
http://tinyurl.com/2vb2q2
Hoz — we need to have some continuing friendly exchange about your view of Ambrose’s work versus my own. What is your take on this article:
http://tinyurl.com/3dg3of
Hoz — more — check Mish’s post today of the article that I believe you dissed yesterday — Ambrose’s one about the BIS analysis. I’ll find more support for my beliefe in him as a reliable, accurate and hard-hitting reporter and invite you to do the same to prove the opposite, or less, depending on your position.
“More Charlotte-area homebuyers are suing Beazer Homes, alleging a litany of misdeeds and claiming the company ‘fraudulently qualified’ them for loans they couldn’t afford.”
Statements like this continue to raise my BP. Only because someone in the game (Ponzi) yelled foul and the game stopped do we see the maligned making waves.Let’s see them go to LV and pull the money off the tables when the dice have been thrown.
‘People are trapped in their homes because their values have dropped below what they owe,’ says…legal partner Daniel Grist. ‘All the foreclosures have flooded the neighborhood with cheap houses.’”
Trapped? I am getting very short tempered when I see this tripe appear in the MSM presentations.
“As Whalen puts it, ‘The Street dragged everyone into increasingly bizarre and illiquid instruments”
Yes, yes, I do seem to remember hearing them screaming and kicking all the way. Ah, what MSM outlet aired it? BS! And what’s with this ‘everyone’ crap, you got a frog in your pocket?
“Yes, yes, I do seem to remember hearing them screaming and kicking all the way”
I hear you, bruddah! This cr@p reporting will go on for a long time, so it’s best to take a deep breath, realx, and repeat to yourself “some day reporters will *investigate* stories, some day reporters will *investigate* stories…”
I was talking to a cousin of mine who works for the Chicago Trib about this very problem. He too is mystified by the laziness of reporters in general, and also frustrated that so many reporters come into the field with no real-life experience or expertise. He complained further that the media grad schools that feed the major papers are so specialized that many reporters only get training in very limited fields, i.e., business news people only get training in business news.
“many reporters only get training in very limited fields, i.e., business news people only get training in business news.”
Lionel, you gotta talk to your cousin again. Very few “business” reporters have shown any ability to research stories, or even to find useful and unbiased sources. And how many seem to be innumerate, or even to find readily available material like the much-loved Credit Suisse reset chart from Ivy Zelman? All we get are quotes from “experts’ like RE agents, sob stories to feed the victim mythology, and running commentaries on the obvious like…there are a lot of vacant homes and the grass is growing REALLY HIGH.
Seriously, motivated sixth-graders could do a better job for My Weekly Reader.
Spike, he’d agree with you. I probably wasn’t clear, but his point was that they’re trained in the reporting part, yet they don’t really know how it all works in the real world. Many of the teachers who teach business news aren’t people who have worked in the real word, they’re reporters who have worked strictly in newspapers. It’s similar to the gap between someone studying econ in college and then having to actually make money at a business.
Lionel,
In fairness to your cousin and his profession, the world was a different place before most major news outlets were bought by 6 or so major conglomerates. A reporter needs an editor who will back him/her spending time researching a story that may not meet with corporate ownership’s approval or the publisher’s advertisers. The networks, the mjor newspapers and newsweeklies, and even radio are part of corporate structures, and those few regional independents are relying on revenue from local retail and real estate interests.
Without the blogosphere, even our Ben Jones would be hard pressed to find an outlet for his views.
Actually, I’ve read that the very best reporters are … believe it or not … the sports reporters.
Talent always goes to the places that add the most value, why is this a surprise? Newspapers don’t do much besides sports reporting anymore.
“the very best reporters are … believe it or not … the sports reporters.”
You know, that’s true. Keith Olberman comes to mind.
Sports reporters can’t just make stuff up and hope no one will notice. Someone will, almost immediately, and the reporter will be called out and disgraced in the eyes of his readers.
The lawyer’s are coming! The lawyer’s are coming!
Another leg down in this debacle.
“Investors in the worse-hit of two stricken Bear Stearns hedge funds are offering to sell their holdings for as little as 11 cents on the dollar but still finding no buyers”
WOW. It’s all fun and games until someone loses an eye.
“The Enhanced Leverage Fund’s net assets of $638m were more than 10 times geared in March, meaning a drop of just 10 per cent in the value of its holdings would wipe out investors.”
Oops, missed the part where someone lost an eye…
These same specuvestors will probably sue, claiming they were mislead about the risk. If you can’t figure out that an “Enhanced Leverage Fund” is risky just by the name, you have no business putting money in anything more sophisticated than a piggy bank.
Basically, the answer is, never, never trust anyone who is getting paid on commission. Their interests are very seldom aligned with those of the person actually paying that commission, or anyone else involved in the transaction for that matter. Seems like about 50M Americans (and apparently a lot of Europeans, Australians, and others) are about to learn this the very hard way.
LOL
Great statement.
But, but, but….real-eastate never goes down in value! But, but, but…
I am a headhunter. I get paid on commission. The company paying the commission hates me, but they do it because I bring valuable skill sets to their company. The person getting the position doesn’t seem to mind. In fact, they are proud of the fact that a company would pay somone else to locate and evaluate them, even if they are held to a higher standard than their peers due to the “price on their head”…… I feel I can be trusted.
Well, that makes one of you that feels someone on commission can be trusted.
The one honest salesman! Ask a realtor if they can be trusted, what answer do you think you will get? And I wouldn’t trust one to wash my car. There are plenty of hourly professionals that I can say the same thing about.
I was under the impression that headhunters were used mostly for hiring the top talent of your competition. Its a way to get at them without going there yourself, and keeping your own hands clean.
Certainly trolling the competition is somtimes the case. Companies don’t want to advertise they are looking for a particular skill set for various reasons(replacing an existing employee, have internals that would be undermined if it was known publicly, inept internal hiring methods, or just busy/lazy, yes, we have busy/lazy clients and they know it). Some just like the replacement guarantee.
Actually, the only attorneys I trust fully to be on my side are the PIs and others who work on the come, or those who flat rate a legal matter. Hourly rates are not an incentive to bring matters to a close.
You know what they call an honest Salesman?
BROKE!
I don’t pretend to be an expert on these things, but not finding buyers at 11 cents sounds like a disaster either way. If they do sell at that price its a disaster in that every MBS just got “marked to value” in a really bad way. If they don’t sell at that price, its a disaster in that every MBS just got marked as totally ill-liquid.
I’d love to know when these chickens are coming home to roost so I can stock up on chicken feed. Literally.
11 cents on the dollar for the hedge fund interest is different than 11 cents on the dollar for the underlying securities.
I think a bid of 11 cents on the dollar essentially means that the hedge fund holding is worthless, and the 11 cents represents some people who think the CDOs won’t fail, or have the clout to buy out the whole fund.
The market is saying therefore that the underlying collateral of a 90% leveraged fund is worth somewhere between 0 cents on the dollar, and 90 cents on the dollar. You can’t read much more into it.
Rating agents are just like the appraisers who rubber stamped house prices. Whatever it takes to do the deal.
It’s times like this that I think that maybe it’s a good thing that I have 401K funds, and not a pension…at least I can control what I invest in, and not rely on pension funds that invest in (supposedly) “investment grade” paper. I wonder how many pension funds will be severely depleted when this whole thing plays out.
Even more, watch how many public pension funds, searching for high yields to make up for years of underfunding, are about to take a bath? Teachers, cops, firemen, how many counties and states are going to take a bath on this?
Lots.
Apparently though, not Calsters. One of their senior execs was recently on one of the financial channels saying that they didn’t invest in this stuff, and (more importantly) said that they even looked to the underlying assets of other instruments to make sure that they didn’t even have indirect exposure to these instruments.
Whether it’s true or not is a different story. I think many of the less sophisticated pensions are in trouble though.
I would mind just a little bit less if the people who hawked these products had to give back the fees and commissions they made on the product that lost money. But watching them sail away in their expensive new yachts is too much to take. Could you imagine paying your roulette-wheel spinner 2% of your bet plus 20% of your winnings and no downside for the spinner?
“Teachers, cops, firemen, how many counties and states are going to take a bath on this?”
CalSTRS will (California State Teachers’ Retirement System).
I saw today now these douche bag companies are attacking the messenger, looks like implode-o-meter is getting sued now. Sad…
Seriously, Implode-o-Meter is being sued? For what?
Can’t wait to hear about this drama.
Yahoo dping some real estate pumping…
“Rates on 30-Year Mortgages Drop to Lowest Level Since Early June”
http://biz.yahoo.com/ap/070705/mortgage_rates.html?.v=4
Wow. The lowest rates since…what, 4 weeks ago? And this story gets rotated on Yahoo’s front page?
I can’t get over anyone proclaiming “the lowest prices since LAST MONTH!” Where do I sign?
LOL. That IS pretty funny. How about “The lowest price since yesterday!!!”
“heightens the appearance of impropriety.”
appearance!!!
APPEARANCE!!!!
These bonds are worthless and had AAA ratings!!
APPEARANCE!!!!
Appearance, gimme a f’in break. They just ran over a buncha kids coming home frome school with a cement truck and play the monty python “tis but a fleash wound” crap!!!
Appearance indeed!
The bonds are not worthless. The hedge funds are worthless. The bonds will still have a real, tangible value. The funds will be liquidated because of their higher margin requirements (or as in the case of Bear Stearns) - raising moneys to meet the margin requirements. The investors in the funds are the bagholders. The new investors in the CDOs (that will be sold by liquidation of the hedge funds) will be making a profit. The APY of these soon to be liquidated items may approach 13% with a ytm of 16%. There is quantifiable risk, the Sharpe ratio is ~1.30. As a risk/reward investor I will take those odds and wait.
Bear Stearns upset a lot of the Street in 1997…payback is painful.
I particularly liked that part — sorta’ like watching an NVA blow away a VC.
I think people are missing your point Hoz. I understand it and agree with you. If I could buy a lower tranche (non “equity”) piece of a CDO/MBS pool at a price that gave me a yield in the mid teens (15-17%), and 25% of home value would have to be shaved off (and homes sold) for me to lose my money, I’d probably invest.
With this investment, you could withstand a 50% foreclosure rate on the pool, AND a 50% reduction in values. you lose if it gets worse than that. It’s a bet I’d make.
I’m not sure those mid pieces give you that much cushion though, so the decision may not be that easy.
“At least 14 of 98 homes in Oak Hill have fallen into foreclosure, a 14 percent foreclosure rate, an Observer analysis shows. Oak Hill’s foreclosure rate is not among Beazer’s highest in Charlotte. The Observer found 10 Beazer subdivisions with rates of 20 percent or higher.”
I can’t imagine what living in a subdivision with 20% of houses in forclosure. Add in the folks who, seeing the carnage, may also be trying to flee the subdivision, and you could have easily have 30 or 40% of the subdivision for sale, right? That sounds brutal, both economically and socially.
And the 10 year climbs .1% today on more hedge fund problems.
“And the 10 year climbs .1% today on more hedge fund problems.”
And thus worsening the hedge fund problems. The wicked spiral downward continues.
‘“The Enhanced Leverage Fund’s net assets of $638m were more than 10 times geared in March, meaning a drop of just 10 per cent in the value of its holdings would wipe out investors. Market participants estimate the CDOs the Bear funds held would sell for at least 10 per cent less than the values calculated by lenders.”
“‘Where things transact is still many points below where dealers have been marking them,’ said one manager of CDOs and hedge funds. ‘That is the big ugly secret of this market.’”’
Yikes. Are there no comparables to these assets that are being traded at all? The fund’s assets are essentially fully illiquid? Or, are they using a very, very narrow definition of a comparable and hiding behind the fact that there haven’t been transactions in that narrow definition recently?
What are the odds that Bear (the Ibank) get’s its principal back w/interest from the troubled fund that it runs?
They may have called it a loan, but shame on them if they did. It was a gift. It should raise serious concerns about the balance sheet treatment of such a hedge fund operated by a larger institution.
“Investors in the worse-hit of two stricken Bear Stearns hedge funds are offering to sell their holdings for as little as 11 cents on the dollar but still finding no buyers, according to unfilled trades on a secondary market for funds.”
Remember when all the rage a few months ago was about the government bailing out the FB mortgage holders?
Now we see who really was behind all the bailout talk in DC and various states. If those darn legislators would have just organized a massive taxpayer-funded bailout of the FBs, then maybe Bear Stearns and others wouldn’t be in the pickle they’re in. Willingness of the government to add cash to some of these MBSs would no down influence their market value.
Well, we can’t say Senators Dodd and Clinton didn’t do their darnedest to save some of these hedge funds from melting down.
“The fund’s assets are essentially fully illiquid?”
Well, it seems to me that if an asset is fully illiquid; and I cannot eat the asset, and the asset does not shelter me from the rain, and the asset does not keep me warm in the winter…then that asset is worthless.
If no one wants to buy something you’re selling, the value is $0.
Sounds like it’s a matter of price, there are some people willing to pay 5 cents on the dollar. Not entirely worthless, but essentially worthless…
The assets are self-liquidating. They pay interest and eventually principal.
“More Charlotte-area homebuyers are suing Beazer Homes, alleging a litany of misdeeds and claiming the company ‘fraudulently qualified’ them for loans they couldn’t afford. They misrepresented assets and debts on loan applications, the suit says, and concealed important information from buyers. They also concealed inflated sales prices of homes to cover fees and expenses, according to the suit.”
——————————————————————————-
…and yet, had these same homes continued to appreciate in value, they would have been heralded as saavy “investors”! Fraudulently qualified them for homes they couldn’t afford!!? Is this like saying, the car dealer forced me to buy that Lamborghini? LOL
So where does this leave that 750 Trillion dollar notional value of the derivative trade? And are the hedge funds using any rules whatsoever to run these things? I seem to remember some article saying that they were unregulated and also there are no rules. Makes for some pretty good opportunity for some really sharp crooks. This isn’t over with by a long shot, and it won’t be contained either, unless you mean contained to the planet earth.
contained to the planet earth. I think so unless Omicron Persei 8 has its pension plan invested, in that case forget about the lawyers and prepare for invasion
Love Futurama, perhaps Lurr can feast on a few Realtors during the invasion celebration.
Speaking of getting duped …. I learned a helluva lessons years ago.
When used-car shopping, I let the wife test drive a fairly recent model Honda Civic. Didnt bother to test it myself.
You’d think ” Honda ” would pretty much assure a decent car, right?
WRONG !
Whomever had this one really abused it, which I didnt realize until AFTER the papers were signed and I was driving it home, with a mildy slipping automatic transmission. Couldnt blame it on the wife, it was hard to detect, but nonetheless was there.
Long story short, after a few check engine lights during the succeeding 6 months, I called the finance company to come pick it up.
I didnt bitch n piss n moan to the rip-off local automall dealer. It was MY responsibility to make sure the deal was ok before we signed.
Of course the finance co. was pissed as hell about the voluntary repo, but hey, thats the system of YOUR making, I just decided not to play.
I didnt make the rules, but I played by ‘em and I’ll accept any fallout.
Black mark off my record now & that was the LAST time I EVER bought anything on credit over a few hundred dollars.
All of my vehicles since are paid in full at purchase- cash! No worry, no stress, and savings of full coverage insurance & loan interest doesnt hurt.
Sure, I drove some plain jain fixers for awhile but it was my choice to drop out of the rigged comsumer rat race.
Never regretted it either.
I have been investing in the stock market for about 25 consecutive years and I have NEVER bought into these REITs or Mortgage Backed Securities.
I could never reconcile in my mind how aging buildings go up, up, up in value. The demands for maintenance resources always increases with age, and building lifespans slowly tick away into oblivion. But there is a possibility that I may start investing in REITs in five years or so, when they will probably be way undervalued.
As for the debt-backed securities - I never liked debt. I don’t like to see it in my personal life nor on a corporate balance sheet. I have never had a mortgage, and never will.
The thing that has scared me the most about DBSs is the incredible leverage. When you use this much leverage and you roll enough times then it is only a mater of time when the dice turn up snake eyes. And the way the ratings games are played. This is not the first time an entire sector of the economy has been undermined by the ratings agencies, and it won’t be the last.
I always figured there is simply too much bad debt everywhere. My nieces and nephews are all overextended, and for what - to drive new cars and “own” a house? These people are in their twenties. To be signing up with the Devil and his debt slavery when you are so young…
Today when driving home from my six mile run in the park I drove by a lawnmower store advertising with very large banners on their parking lot “1.9% financing, 0 down, six months same as cash.” A lawnmower shop for Pete’s sake. If people can not pay cash for a lousy lawnmower anymore then this is because people are soooo overextended as it is.
Life goes on, I watch out for myself, but I continue to be bewildered by what other people do.
Got 10% down?
“I always figured there is simply too much bad debt everywhere.”
And so we come back to Japan nearly two decades ago…
I would try to buy anything at this point with $0 down and 0% interest for 1 year. Why not? It truly is cheaper as long as it gets paid off and its really 0% interest. Divide by however many months and pay that a month. Then put the rest in the bank earning interest the very least.
HELOC - Dont call it a loan
The cost of financing $0 down and 0% interest is built into the retailers prices. The other thing that I always figured is that there is no such thing as a free lunch.
Got 10% down?
Hmmm… Here in Maryland, we’ve been seeing an ever increasing number of: lawyer ads (for “your right to sue”), desperate mortgage shills trying to convince people to either remove whatever last equity they still have or learn about the “opportunities” in foreclosures (no doubt on previous people who thought that “real estate only goes up!”), and places like Rent-A-Center, where you can RENT computers, sofas, etc. Insane… Things are really heading downhill for the American “consumer.”