The Housing Bubble

WSJ reports today that the Fed is comforted with CPI in the wake of declining housing costs. Interestingly enough the costs didn’t matter when they were rising 10% a year, but now they matter when they are going down…hmmmmmm

“Rising delinquencies and foreclosures are creating personal, economic and social distress for many homeowners and communities — problems that likely will get worse before they get better,” Bernanke to Congress this morning

the groundwork being laid to lower rates…

“…the groundwork being laid to lower rates…”

That’s right. Never mind that collapsing $US value on the foreign exchange market — inflationary pressures are contained. (Will anyone other than MSM financial journalists be surprised when the Fed tries to respike later this year with lower rates?)

Help me wrap my thin little brain (like a tortilla) around the total losses in these 2 funds? There was the combined investors cash of about $1.5 billion, but then BS tried to rescue one fund with an infusion of $3.4 billion? Where did that money go and is there more?

Months ago it was reported that these funds were worth 25 billion. I am not sure if that is true - maybe that was before Merrill got out.

A lot of turds getting dropped on Wall Street over the past 24 hours. Looks like a sh!tstorm is about to hit Manhatten. Hope everyone has their umbrella…

Of course there’s more.

This is good. You may have to endure more of my company now that the top may be in.

http://www.minyanville.com/articles/S%26P-DJIA-BSC-GS/index/a/13386

This is from the NY Times”
“The more conservative of the two Bear Stearns funds was the older; established three years ago, it generated monthly gains of roughly 1 percent to 1.5 percent until March. Bear Stearns started the more leveraged fund last summer, just as the mania for mortgage securities was topping out. At their peak, the funds were valued at $16 billion, including the leverage that they used”.

I just love their timing - these guys are supposed to be smart how could they have not have known?

“What do you think the bonuses will be this year?”

The top hedge fund managers will be drawn and quartered.

“A lot of turds getting dropped on Wall Street over the past 24 hours. Looks like a sh!tstorm is about to hit Manhatten. Hope everyone has their umbrella…”

http://www.thedayaftertomorrow.com/

Sorry this story is a little stale…still amusing, though.

HEDGE HORROR
SUBPRIME MELTDOWN COULD WIPE OUT BILLION$
By PAUL THARP

July 12, 2007 — As home foreclosures ricochet through Main Street in rising junk mortgage meltdowns, Wall Street is facing a separate barrage that could swamp its first rich victims - hedge funds for the wealthy.

http://www.nypost.com/seven/07122007/business/hedge_horror_business_paul_tharp.htm

Beer & Cigar Guy:
Basically the Hedgefund takes the CDO/MBSs that are valued based upon a process called Mark to Market which is a fancy way of saying “We guessed at how valuable they would be if traded openly on the free market”.

The Hedgies then borrowed on the margin against this mark to market valuation to make other market plays, i.e. bets.

Then two things happened:
1-the bets went sour & margin calls were made.

2-The mark to market valuation was a joke in the first place, but then all the sub-prime loans that backed the marked to market assets (CDOs/MBSs) started going sour and were downgraded due to the higher risk associated with investing in them. This went to the point that no one wants then at all.

So guess what happens when you must sell an asset that no one wants to fulfill a margin call? The answer is what Bears announced today. Hope that helped.

‘“We guessed at how valuable they would be if traded openly on the free market”.

The Hedgies then borrowed on the margin against this mark to market valuation to make other market plays, i.e. bets.’

Mark-to-market-based borrowing = hedge fund liar loans

Mark to market was the Enron model.

I guess since the BSC funds have gone bust HedgeFundAnalyst has gone back to his job at Big Ten Tires…

Beer and Cigar Guy
It’s best to think of the fund as two levels which makes them very different from most mutual funds. In the older fund Investors invested $900 million. The fund managers then borrowed about $9 billion and bought $9.9 billion worth of CDOs along with other derivatives (that were supposed to minimize changes to the asset value). Until February the fund was likely earning about $70 million per month on their assets and paying about $50 million on their debt. (so the original investors were earning about 10-15 million after management fees of probably 3-5 million).
When the crisis hit, the banks that loaned the $9 billion wanted their money back. Bear loaned the fund $1.6 billion (they didn’t end up loaning the full amount) and it’s likely that some of the fund was unwound (Merrill seized collateral) so there’s now perhaps $6 billion in loans but only about $6.1 billion in assets so the original $900 million in investment is now worth about $100 million.

On the other fund, the assets are worth less than what is owed so the $600 million originally invested is worth 0, and some of the lenders will likely take a loss on their loan.

The top hedge fund managers will be drawn and quartered.

Keep dreaming. The managers will be kicking it somewhere on a private island in the Carribean.

“called Mark to Market which is a fancy way of saying “We guessed at how valuable they would be if traded openly on the free market”.”

Are you sure? I thought that that was called “Mark to Model”, as in “our economic models tell us that these illiquid instruments *should* be worth this ammount at this point in time”.

Also known as “Mark to Fantasy” or “Mark to Wishing Price”.

Excellent explanation for the rest of us. Thank you.

bluto and joe…

I know Beer and Cigar Guy asked the question, but just wanted to thank you for the clear and concise explanations - not all of us on this board know beans about investing (or whatever this is called)

Absolutely! More than I asked for and I enjoyed every bit of it. I intuitively knew that it was, in fact, a ‘violent ass-pounding’ (hat-tip to Auger Inn!), but the extent of the carnage was somewhat nebulous. Somewhere, someone is sobbing in their chardonnay…

The real problem is what happens when the Chinese figure out they are holding trillons of $$ worth of paper backed by worthless homes. Think they might come wanting some more collateral? How about an aircraft carrier or two?

I’ve gotta print this thread out for posterity. Future generations and all that . . . .

Arroyogrande - I think you are correct that bloggers should in this case say “mark to model” instead of “mark to market”.
Comment by arroyogrande
2007-07-18 07:42:05
“called Mark to Market which is a fancy way of saying “We guessed at how valuable they would be if traded openly on the free market”.”

Are you sure? I thought that that was called “Mark to Model”, as in “our economic models tell us that these illiquid instruments *should* be worth this ammount at this point in time”.

Also known as “Mark to Fantasy” or “Mark to Wishing Price”.

It is Mark to Model. The managers put together a chart of how prices have gone in the past. Decide that thats is the way it will always be and price it accordingly. Then they make a derivitive bet in case they are wrong. This bet is made as a hedge in case they get it wrong. The problem was this time they decided to keep selling and buying hedges on everything under the sun. It gets complicated after that thought, my head hurts.
Mark to Market is what happened when they went to sell this junk to someone else. When those folks offered pennies on the dollar that was the Mark to Market.

DEFINITIONS:
Mark-to-Model = Let’s pretend it’s worth this much, all agreed say BUY!

Mark-to-Market = How much do you want to give me for this?

Ben: Can you bump this to the top so no one is confused?

Heck, forget E-waves, this is the K-wave stuff. Economic winter is coming!!!

p.s.: Actually, K-waves and E-wave super-cycles align.

There is nothing more irritating than blog posters appointing themselves ‘internet site credibility judges’. I don’t give a flying F*** if the chart is posted on deathtoallamericans.com or nazi.com - either the INFORMATION is valid (and sourced) or it is not. Of course, Mr. Minatti and Hoz, if your looking for a credible LOOKING web site, you can always visit BearStearns.com.

LOL
I care for the very reason you point out
“the INFORMATION is valid (and sourced) or it is not”

There is plenty of factual information from around the world without having to read fiction.

Whether from a blogger or Caroline Baum, opinions are obviously different, since no factual data is required.

Amen.

(yes that was intentionally ironic.)

That’s funny. Two years ago, everyone following this site would have been considered “fringe lunatics”.

There is a fine line between “fringe lunatic” and “visionary.”

“That’s funny. Two years ago, everyone following this site would have been considered “fringe lunatics”.”

Speak for yourself. Some of us still are!

“Yes, SD RE Bear, the housing market has gone down a little. But it is IMPOSSIBLE for it to go down that far!” Then under breath “You psychotic fringe lunatic.”

(And that’s only predicting 40% off the top. Some of you are fringe, fringe lunatics!)

Point taken… {Sigh}

The fight should be against corporate domination of the media not against the media, per se.

Pump jockeys on CNBC doing their best to spin the market into the black. Hopefully Barney Frank takes the opportunity to give Bernanke a good cornholing today.

Very well stated Auger-inn. IMHO the media is in bed with the NAR and the rest of the gang to misguide the American people about what is really happening here. They’ve been instructed on what to report and how to spin it. They don’t want to loose their jobs, so they do as they’re told. Spin, spin, spin.

Yes I agree - How can these so called “experts” not see the facts? Have they not seen the CS chart that shows the tremendous number of resets that are about to happen? I don’t believe it for one second. Know I do think that some people do need to be cheerleaders, however this is not the time. Responsible people should call the news the way they see it and not mislead the sheeple.

I know Barney would enjoy it and I’m beginning to wonder if BB might too.

“Hopefully Barney Frank takes the opportunity to give Bernanke a good cornholing today.”

And if anyone knows how to give a good cornholing, it WOULD in fact be Barney Frank…

Last time I bought a Sunday paper (last summer) it was 3/4 ads, and at least 3/4 of those ads were for houses. So it’s quite clear that the media wouldn’t want to piss off their main constituents (advertisers), since they have already pissed off the buyers of the paper with too many ads and sensationalized stories.

The only paper I’ll ever buy is USA Today and WSJ.

(and local schools, hospitals, prisons, etc. ??

And therein lies your answer…Look at the three above and what do they have in common ?? You got it…Very strong Unions that have a vested interest in have all those immigrants here…

And CA agri-interests didn’t take a position on this one? Gee at least the ‘local’ taxpayers and small businesses, especially in So Cal, “benefit” from hiring illegals to work at the warehouses, watch the kids, do the landscaping upkeep, so small construction jobs and make the fast food for dinner. I’m not saying it’s right, it just is.

You want just ‘one’ story on the downside? Check out the North County Times/San Diego at :
http://www.nctimes.com/
on just about any day….

I am so sick of people saying the local citizens receive all these untold cheap benefits from illegal immigrant labor like cheap child care, yard work, and maid service. It is 100% bullshit. I’m not even 30 yet, but just 15 years ago, when i was a kid in high school (right here in SD county) the neighbors would pay us high school kids to mow lawns, and the girls had babysitting jobs all the time. So what did this cheap high school labor force get freed up to do now that there are a bunch of illegal immigrants working at these tasks like they are full time jobs, but without healthcare or paying taxes? The parents of those kids are still paying their healthcare, but now the kids don’t have extra babysitting or lawncare money. Hmm, I wonder why we seem to be getting kids beating homeless people to death at the same time because they have “nothing better to do”. Quit using ignorant arguments about illegals doing jobs no one else will do, and local citizens “benefiting”. The local citizens are also burdened with increased crime, health system load, infrastructure needs, and basic social services that these immigrants require. Is it any wonder that the city of San Diego is basically bankrupt? Yes I do know that the illegal immigration issue came nowhere near causing the funding issue for the city by itself, but it did contribute. For instance, if the police force was only required to be 80% of it’s current size without illegal immigrant crime, then we COULD afford to pay a good portion of the CRAZY benefits package the city employees receive. Please stop arguing that illegal immigration is OK. If it was OK, it wouldn’t be illegal! And yes, you citizens can VOTE to change immigration laws. I haven’t seen a SINGLE petition come out to open up our borders. These illegal immigrants, and the organizations that support them WANT the illegals to remain illegal so they don’t have to pay taxes, and get free health care from the gov’t, and also exploit them in their businesses. I have nothing but respect for the legal hard working US citizens who emigrated from Mexico. I am proud to have them as a part of my country. And I would welcome their brothers to come here legally as well. I support a culture of capitalistic entrepreneurship, and hard work, as opposed to abuse of the socialist gov’t beaurocracies that illegal immigrants flaunt in our faces.

I want mexican immigrants here. They improve our lives. I want them here legally, with rights as citizens. All you rhetoric filled socialist jerks out there, please stop telling me about how I benefit from illegal labor. It’s just a lie. Let me benefit from a real civilized immigration policy that is compassionate and welcomes the tired, the hungry, and the poor, to make a better life for themselves here in our great country.

“welcomes the tired, the hungry, and the poor,”

We have plenty of those already. And 47 million working americans who can’t afford basic health care. And you think we need more poor people?
That’s a 19th century bit of doggerel that was of some use when good manufacturing jobs were available…and a labor force was needed. Visit the rust belt and see all the Americans unemployed and underemployed..aka, the working poor. You want to shove them even further down the ladder?

“One of the most important features of making a free market work efficiently and fairly is transparent and easy access to historic prices.”

But that would undermine the NAR’s monopoly power, wouldn’t it?

I’d never buy a house again. Same argument with the realtors - “Well it looks like a $200,000 house to me so I’m not paying a penny more!” even though the last purchase price was $675,000. Of course, since I can’t see that price…….

Although I spend a lot of time today looking at houses bought for $675,000 and thinking they look like they’re worth $200,000 so even disclosing the price won’t help with a curmudgeon in the making like me.

“She then told me that the property would rent for “$6,500 to $8,000 per month”.”

Yeah, that’s ocean front property in La Jolla. Not buying it in Scottsdale. I would have just grinned knowingly, said ok and left. Why argue with the insane?

Exactly - a lot of the people crying “victim” here simply exchanged a ding on their credit for months of free rent. Many of them also HELOCed tens or even hundreds of thousands of dollars out of those homes before walking away! Am I supposed to feel bad for little Johnny who’s back to paying rent after extracting a new Hummer and plasma TV from the housing ATM?

Maybe it’s us bubble sitters who are victims, hostage to the idea that we’re actually supposed to honor our agreements and pay back what we borrow, and suckers for protecting our credit ratings and failing to fleece the banks for six figures like millions of other Americans have!

Otherwise, the only real victims here are the lenders, or MBS security holders, who will not be paid back on those loans, and the rest of us who will end up paying higher risk premiums on future mortgages because of these walk-aways. Today’s defaulting borrower is NOT the victim!

“Am I supposed to feel bad for little Johnny who’s back to paying rent after extracting a new Hummer and plasma TV from the housing ATM?”

You should feel sad that these idiots are allowed to breed.

Speaking of hummers…. I know this thread is probably dead for the day, but I couldn’t resist posting this:

Hummer Owner Gets Angry Message
Vandals Batter D.C. Man’s SUV, Slash Its Tires and Scratch In an Eco Note
http://www.washingtonpost.com/wp-dyn/content/article/2007/07/17/AR2007071701808.html?hpid=artslot

Nice, I’d drive by and laugh too.

32 year old goon still living with mommy. No wonder he can afford a HUMMER.

“Rents are starting to drop nationwide…”

But it’s different in Manhattan…

Manhattan rents at record highs, with studios around $2,000
The Associated Press
Published: July 13, 2007

NEW YORK: The average rent for a Manhattan studio is around $2,000 (€1,451), and a one-bedroom in New York’s most expensive borough goes for more than $2,700 (€1,959), according a report released Friday by the New York rental brokerage firm Citi Habitats.

The figures show “we’re the center of everything,” said spokesman Christopher Dente. “There’s a lot of relocation — thousands of people are coming in.”

http://www.iht.com/articles/ap/2007/07/13/america/NA-GEN-US-Manhattan-Rents.php

GetStucco,
Your snide remark, “But it’s different in Manhattan…” happens to be an accurate so far. No doubt rents will correct in the next recession, just like they did in 2002 and countless recessions before. But if a Manhattanite sold in 2003 or 2004, and sat out the market in a rental, as I know some “savy” Wall Streeters did. he would be sorry for selling too soon. He would have given up substantial appreciation, incured large transaction fees, transfer taxes and captial gains, and paid escalating rents to this day. Personally, I don’t believe in timing the market, although now might be an excellent time for Manhattanites to trade down to a smaller home. By the same logic, trading up to a larger home might make sense if we have a substantial correction.

It’s really hard to contain snide remarks in response to this kind of line: “we’re the center of everything,”

The figures show “we’re the center of everything,” said spokesman Christopher Dente. “There’s a lot of relocation — thousands of people are coming in.”

Same was said about Miami in 2005

It’s really hard to contain snide remarks in response to this kind of line: “we’re the center of everything,”

Just wait until Al-Qaeda pulls off their next doozy. If it isn’t in DC it will certainly be in NYC. The prolem with being the “Center of everything” is that you are basically wearing a huge “kick me” sign on your back.

All I am saying is that the bubble hasn’t busted yet in Manhattan, and some people were banking on a correction four years ago. Trust me, those people who sold in 2003 regret bailing so soon. When it comes, it will certainly be severe, but nothing as bad as Miami, because Manhattan is where millions of people in the outer boroughs would move to, if prices declined substantially. Not many places have that kind of shadow demand.

Again though you are using the ‘everyone wants to move here’ fallacy. The same was said about Miami, Tampa, and Florida in general. It’s simply not true. If everyone wanted to live there in Manhattan prices would never go down, but seeing that salaries are not rising so fast, prices cannot outpace salary for more than a short period of time. Some people would move to Manhattan if the prices lowered down, but then the prices would lower back where they came from, so the net effect is still a total lowering of prices.

“Trust me, those people who sold in 2003 regret bailing so soon.”

Why? Isn’t it smarter to get out of an illiquid, lumpy asset before crash day, rather than gambling on being able to get to the front of the exit queue when the theater is on fire?

“Trust me, those people who sold in 2003 regret bailing so soon”

“Why? Isn’t it smarter to get out of an illiquid, lumpy asset before crash day”

Of course it is. But sellers in 2003 left an 100% gain on the table, plus they paid escalating rents for 4 years. And we are still waiting for the correction, which may just be around the corner. If you hold one position long enough you will eventually be correct. But admit it, Manhattan sellers in 2003 made a bet that didn’t pay off as expected. I know how it feels to make a wrong bet. I traded down in 1998, thinking the real estate market, like the stock market at the time was getting speculative. The property market correction has yet to happen nine years later. Thank goodness I bought my new place, or I would have been priced out of my neighborhood a long time ago. Rents are conservatively 60% higher than they were nine years ago, which is more than I can afford.

“Just wait until Al-Qaeda pulls off their next doozy. If it isn’t in DC it will certainly be in NYC.”

Where’s the evidence for this assumption? They only came back to NY because they didn’t finish the job in ‘93.
With who know what just walking across the borders down there, and lots of military bases, I’d say you guys are just as likely in the line of fire as anybody.

…because Manhattan is where millions of people in the outer boroughs would move to, if prices declined substantially.

The fallacy in that logic is believing that those millions of people *could* move if prices declined substantially. There is no such thing as “pent-up demand” in real estate.

“There is no such thing as “pent-up demand” in real estate”

We’ll see if Manhattan falls less than the outer boroughs. Anyone want to place a bet?

The elephants are not hidden - they are in plain site. They are dissected by financial analysts world wide and fortunately not many people have put all the parts together yet.

The Federal reserve is SWAGging. (Stupid Wild Ass Guess)

“The elephants are not hidden - they are in plain site.”

In plain sight is an excellent place to hide elephants, provided the surrounding herd of sheep is too dumb to know one when they see it.