Froth, Unscrupulous Lenders And Greedy Borrowers
Some housing bubble news from Wall Street and Washington. Bloomberg, “Barclays Plc, the U.K.’s third- biggest bank, wrote down about 1.3 billion pounds ($2.7 billion) of credit-related securities tied to the U.S. subprime-mortgage market collapse. Barclays booked a gross writedown of 1.7 billion pounds on subprime-related assets and loans for leveraged buyouts.”
“The charges and writedowns in October reflected ‘rating agency downgrades on a broad range of CDOs and the subsequent market downturn,’ the bank said.”
“‘We have taken the opportunity to draw the line’ on the bank’s riskiest credit-related securities, Barclays President Robert Diamond said. ‘The issues in subprime are deep.’”
“Barclays has marked its securities to markets ‘where we can find them,’ said Finance Director Chris Lucas said on the call. The bank has ‘ongoing exposure” to U.S. subprime assets, Lucas said. ‘Where there is no market, it has valued them at fair value, he said.”
“The writedown of 800 million pounds in October is to accommodate ‘triggers’ that may result in further declines in the value of credit-related securities later this year and in 2008, Diamond said.”
From MarketWatch. “Subprime mortgage lender NovaStar Financial Inc. reported a $598 million quarterly net loss late Wednesday and said that its shares may be de-listed from the New York Stock Exchange.”
From Reuters. “In its quarterly report filed with securities regulators, Kansas City, Missouri-based NovaStar outlined several scenarios under which it might seek bankruptcy protection for creditors. These included a failure to extend a waiver expiring November 30 of a net worth covenant under its financing agreements with Wachovia Corp.”
“They also included margin calls, big legal expenses, and other ‘unforeseen adverse liquidity events (that) could cause the company to exhaust its cash balances.’”
The Kansas City Business Journal. “With the loss, the company’s shareholder equity figure was at a deficit of $80.7 million. As of Tuesday, the company said it owes $83.9 million to Wachovia. NovaStar said there is no assurance it can obtain additional waivers or be able to repay its outstanding debt to Wachovia, which could cause NovaStar to file bankruptcy.”
“‘Accordingly there can be no assurance that we will be able to continue as a going concern,’ NovaStar said in the SEC filing.”
“Outside investors have pulled $600 million from a General Electric Asset Management fund struck by losses in mortgage-backed securities, the company said Thursday… leaving GE’s pension the sole participant in the fund with an unrealized loss of $200 million.”
From Barron’s Online. “Outside institutional investors therefore face a 4% loss on their holdings. Based on information on GE Asset Management’s Website, the enhanced cash fund has about 27% of its assets in home-equity asset-backed securities, 23% in residential mortgage securities.”
“In response to the Barron’s inquiry, GE Asset Management said in an e-mail statement that it has ‘ceased taking new investments’ in the fund “based on our belief that recent extreme conditions in the credit markets, including liquidity concerns and value dislocations, will continue in the foreseeable future.”
“Finance company GMAC’s Residential Capital home mortgage unit may be close to violating certain debt covenants due to a plunge in its net worth, the Wall Street Journal reported in its online edition on Thursday. ResCap is the second-largest independent U.S. mortgage lender after Countrywide Financial Corp.”
“ResCap is now burdened with loans that are rapidly declining in value, the Journal said, adding the situation has triggered concerns its lenders will demand immediate payment or force the unit into bankruptcy protection if GMAC or its owners don’t step in with an equity injection or other measures.”
“A Bear Stearns investment fund hurt by the decline in the subprime mortgage market and facing creditors’ complaints about its management asked a Delaware judge to allow it to dissolve and liquidate its assets.”
“‘The partnership can no longer operate in the manner contemplated’ by the agreement that created it, Bear Stearns lawyers said in their request.”
“Bear Stearns said in securities filings that the company’s losses from funds included a $200 million write-off of its investment in the fund and anticipated fees. Other investors may have lost more than $600 million as a result of the funds’ meltdown.”
“Sumitomo Trust & Banking Co., Japan’s fifth-largest bank by market value, said first-half profit fell 41 percent on higher provisions for bad loans, including credits linked to defaults on U.S. mortgages.”
“Losses linked to the record defaults in the U.S. mortgage market will probably increase to about 20 billion for the full year, from 9 billion in the first half, Yutaka Morita, president of Sumitomo Trust, said. The bank added 36.1 billion yen to provisions for loan losses in the period.”
From Fortune Magazine. “Investors might want to take a closer look at Fannie Mae’s latest earnings report. Lost in the unsurprising news of the mortgage lender’s heavy losses was a critical change in the way the company discloses its bad loans, a move that could mask that credit losses that are rising above levels that the company predicted just three months ago.”
“It all comes down to what’s known as the credit loss ratio. The credit loss ratio expresses bad loan losses as a percentage of Fannie Mae’s loans.”
“Management acknowledges that credit losses are mounting. During an analyst call last week, Fannie Mae CEO Daniel Mudd warned that the company’s loss ratio could rise to eight to 10 basis points in 2008, due to a worsening housing market. It’s not clear whether that forecast is based on the old or new methodology.”
“The company may already be exceeding that 2008 guidance. Based on the old methodology for calculating the loss ratio for the third-quarter alone, the company’s annualized loss ratio is already at 14 basis points. If so, Fannie Mae’s mounting losses are disturbing.”
“Yesterday, following a month of inquiries by Bloomberg News to Florida officials, Governor Charles Crist held a public meeting disclosing that 4 percent of the state’s short-term investments, including those in the state pool, had been downgraded by credit rating companies.”
“State officials have no business putting taxpayer money into debt investments that have baffled even the most seasoned Wall Street executives, says Joseph Mason, finance professor at Drexel University and a former economist at the U.S. Treasury Department.”
“‘Municipalities shouldn’t be playing like they’re expert investors, squeezing the last penny out of SIVs,’ Mason says. ‘They’re making a giant jump into a new product area which has unknown, unforeseen risks.’”
Dow Jones Newswire. “Michael Milken, widely regarded as the founder of the junk bond market, believes defaults from mortgages will be greater than in high-yield bonds.”
“‘Today many AAA-rated mortgage securities will have higher default rates than single-B industrials,’ Milken said.”
“The crisis of confidence in bond insurers may cost investors as much as $200 billion. The AAA ratings of MBIA Inc., Ambac Financial Group Inc. and their five smaller competitors are being reviewed by Moody’s Investors Service and Fitch Ratings.”
“Without guarantees, $2.4 trillion of bonds may fall in value and some issuers would get shut out of the capital markets.”
“‘We shudder to think of the ramifications,’ said Greg Peters, head of credit strategy at New York-based Morgan Stanley, the second-biggest U.S. securities firm by market value. ‘You have politicians, taxpayers, municipalities, states. It just opens up a Pandora’s box. That is a huge destabilizing force.’”
“TOUSA, Inc. today reported a net loss for the three months ended September 30, 2007 of $619.7 million. Adversely impacting net income is $530.6 million of pre-tax charges resulting from goodwill impairments and the write-down of assets.”
“Of this amount, $63.3 million of inventory impairments are related to active communities, $441.2 million are related to land impairments, deposit write-offs and abandonment costs.”
“The Company’s gross profit margin, excluding impairment and related charges, decreased to 17.7% in the third quarter of 2007 from 22.8% in the third quarter of 2006. Home sales gross profit was primarily impacted by higher incentives, which increased to $45,300 per delivery for the third quarter of 2007.”
“The Company’s sales orders cancellation rate was approximately 47% for the three months ended September 30, 2007. The Company attributes the unusually-high cancellation rate to the dramatic tightening of the credit markets, buyer’s inability to sell their existing home, diminished consumer confidence, the oversupply of new and existing homes available for sale, increased foreclosures and downward pressure on home prices.”
“As of September 30, 2007, the Company had stockholders’ equity of $48.3 million. Based on the foregoing, the Company believes there is substantial doubt about its ability to continue as a going concern.”
The Street.com. “With the heat on from its creditors, troubled Florida condo developer WCI Communities is scrambling to look as healthy as possible. While the company can’t hide its weak cash flows, it may be employing unusual accounting assumptions to delay large land impairment charges that would reduce book value further.”
“Nearly all of WCI’s impairments to date have been for finished home, not raw land or homes/communities under development. This differs from many other homebuilders such as Lennar and D.R. Horton, which have recorded meaningful impairments of raw land and communities under development.”
“For example, in its most recent quarter D.R. Horton said about 75% of its impairment charges nationally were recorded to residential land and lots and land held for development.”
The Associated Press. “Wells Fargo & Co. President and Chief Executive John Stumpf said Thursday the housing market is experiencing its worst decline since the Great Depression.”
“Stumpf said…that rapidly declining housing prices are likely to put even more pressure on delinquencies and defaults. ‘I don’t think we’re in the ninth inning of unwinding this,’ Stumpf said, relating the declining housing market to a baseball game. ‘If we are, it’s going to be an extra-inning game.’”
“Stumpf said the downturn resulted in part from ‘froth, unscrupulous lenders, (and) borrowers who got too greedy. In 2006 the music stopped.’”
“Barclays has marked its securities to markets ‘where we can find them,’ said Finance Director Chris Lucas said on the call. The bank has ‘ongoing exposure’’ to U.S. subprime assets, Lucas said. ‘Where there is no market, it has valued them at fair value, he said.”
“The writedown of 800 million pounds in October is to accommodate ‘triggers’ that may result in further declines in the value of credit-related securities later this year and in 2008, Diamond said.”
=================
Can someone please translate the following?
(1) “…there is no market, it has valued them at fair value…”
(2) “…accommodate ‘triggers’ that may result in further declines…”
Thanks
1) “…there is no market, it has valued them at fair value…”
ie: On any paper which hasn’t yet been proven by the markets to be “toxic waste”, we’re going to continue pulling prices out of our rear end, which we think is “fair”, don’t you?
“We aren’t willing to sell our toxic waste assets for what the market says they are worth. We would rather say there is no market in order to give policymakers good cover for providing a bailout to ‘restore liquidity.’”
I have noticed that there is no market for my dogs poo poo, I wonder what fair market value would be?
Great question! I wish the finacial reporters ask Chris Lucas this precise question so that the dumb investors of Barclays can make sense of what he is trying to say to them.
may be a new market is developing for gas production…..probably some basic value, but very little per stool.
Poop of any kind is an asset that’s obviously marked to Bernanke.
“Subprime mortgage lender NovaStar Financial Inc. reported a $598 million quarterly net loss late Wednesday and said that its shares may be de-listed from the New York Stock Exchange.”
Just a crummy 6/10’s of a Billion Dollars quarterly loss, we probably should have told you during trading hours, but thought bettor, of it.
Looks like the traders have caught up.
“Outside investors have pulled $600 million from a General Electric Asset Management fund struck by losses in mortgage-backed securities, the company said Thursday… leaving GE’s pension the sole participant in the fund with an unrealized loss of $200 million.”
This is how revolutions begin…
They wiped out a lot of people’s retirement, yesterday.
And unless GE pony’s up sufficient dollars to cover that loss, current pay-outs from the fund will simply confine those losses to a smaller pool. Without positive cash flow, it’s a Ponzi scheme, boys. Marking to market is painful but absolutely necessary.
GE’s shareholders might be a bit irked if they did that.
Is the pension integrated into GE the company? I thought they had to be entirely separate legal entities (to qualify as pension funds for the IRS) and also so that the retiree’s money wasn’t on the line in case GE went bankrupt.
Bet this story doesn’t get a lot of play on CNBC today….
“If the value is there it’s a tremendous opportunity.”
“In 1981 prime mortgage securities were trading at 50 US cents in the dollar.” The collapse in South America started in 1985, Bank of America, Citigroup and other banks took it on the chin. Major restructuring to stay open. Finally 11 years later, it became profitable to own the crap. Yep, sounds about right. I’ll wait 8 more years.
there’s gotta be some way to cherry pick this stuff..
The BKs haven’t even started yet!
Patience.
hoz, 56.25B in temporary ops by the FED today seems a bit high for “rollover” activity.
comments?
See my comments in Bits part towards the bottom, the key is what the Federal Reserve does tomorrow. There are $19.25B in 1 day repos. And the figure is $47.25B not 57.25B
$40.25 was rollover (previously pointed out earlier this week). $7B is new! The first injection since August.
maturing 40.5B
138B submitted
56.25B is sloshing
Interestingly: NYT reporting that Fink made “full accounting of subprime exposure” a prerequisite of taking the job at Merrill. And then the job went to Thain:
http://tinyurl.com/25hkol
“What do you mean you wish to run an ethical business?” Mr. Fink was stealthily asked.
I read that. Smart move on Fink’s part, but even more interesting, they declined and said “NEXT!”
“Lost in the unsurprising news of the mortgage lender’s heavy losses was a critical change in the way the company discloses its bad loans, a move that could mask that credit losses that are rising above levels that the company predicted just three months ago.”
“It all comes down to what’s known as the credit loss ratio. The credit loss ratio expresses bad loan losses as a percentage of Fannie Mae’s loans.”
More accounting gimmicks at Fannie Mae raise a few issues:
– Is this loss-hiding strategy legal?
– What is the magnitude of the losses thereby hidden?
– Doesn’t this represent a step in the wrong direction, towards greater opacity, at the very moment when BB has announced a New Era of greater transparency?
– Are there any implications for the recently-announced plan to force the U.S. taxpayer to guarantee GSE-securitized loans up to $1m?
This sounds like a bad idea when there is a cloud of doubt still hanging over Fannie Mae’s balance sheet.
“But now influential members of Congress, including Senator Charles Schumer, want Fannie Mae’s watchdog, the Office of Federal Housing Enterprise Oversight (OFHEO), to temporarily lift the portfolio limits on the company and its rival Freddie Mac. Legislators want both lenders to buy more subprime mortgages to help stave off foreclosures.
Fannie Mae already holds a substantial amount of risky mortgages in its $2.4 trillion mortgage book — and the recent shift in how it discloses a much-watched credit yardstick disguises just how quickly bad loans may be rising.”
I’ve said it before and I’ll say it again.
The top end of the market is the most profitable. Higher fees and lower defaults…. no such thing as Alt-A for GSE conforming. No 10-1 debt to income loans for GSE conforming.
I think this move to lift the limits is an effort to keep Freddie and Fannie SOLVANT!!!! They need the higher fees!
If you don’t like the message your numbers are sending, then by all means change the calculation to make them look more acceptable, while claiming the change in the calculation offers greater transparency.
“The company may already be exceeding that 2008 guidance. Based on the old methodology for calculating the loss ratio for the third-quarter alone, the company’s annualized loss ratio is already at 14 basis points. If so, Fannie Mae’s mounting losses are disturbing.”
I’m shocked, SHOCKED I tell you, that such a fine, upstanding pillar our Ponzi-conomy like Fannie Mae could stoop to such blatant financial gimmickry. I mean, it’s not like they’re just following the lead of other institutions and government agencies, like the BLS –in the way it calculates the CPI or unemployment, or the government –in the way it calculates… just about everything.
Come to think of it, there’s so much data manipulation and numbers-pulled-from our-asses lying at all levels of the economy today (tacitly encouraged by the government), why should anyone bother to report the truth any more? Wouldn’t that put any company that does tell the truth at a competitive disadvantage to all its competitors –who lie their asses off and get away with it?
And they shall say in the future - we were told by the government to up our limits and lower our standards to help all those poor sheeple that walked into mortgages they couldn’t afford and needed to refinance to avoid foreclosure - very convenient when they have to explain away huge losses!
Now you’re treading into the way the software industry works.
Back in the day companies would give honest appraisals of cost and expense to write custom apps or modify existing apps to meet customer needs. Then, along comes an 800 lb gorilla that goes into evey bid with impossibly low numbers. I won’t give a name, but it starts with Oracl.
Suddenly, EVERYONE has to lie, or no one but Oracl. gets any work.
So, a job we now is going to cost $20 million and take 2 years, we bid out at $10 million and 1 year. At the end of the year, we have to say give us another $10 million and another year, or go to someone else that will tell you $10 million and a year, but really it will take them $20 million and 2 years….
It’s not just the software industry. When I was working as a sub in fixed institutional furniture, we were generally in the mid range of bids and always delivered on budget. There was one competitor that started lowballing. They’d get partway through the job and hold the client hostage for what it should have cost in the first place. I know this, because we’d get frantic calls from the clients who had turned our bids down in favor of the lowballer, wanting to know if we could finish up the job. Of course we couldn’t, products were just different enough to be incompatible. And it wasn’t feasible to start from scratch, so they had to put up with the add ons. The trick is to hook the job, let the client get into you for so much that they have to continue with you.
Also this is a big ploy in insurance, and people wonder why insurance rates are so high. The adjusters are every bit as bad as government contractors when it comes to restoration work, I know some people who would have come out ahead and so would the insurance company if they’d just negotiated a settlement, plowed under the burned out house and sold the land. But the restoration company comes in with a lowball and almost a year later, final cost twice as much as the original quote.
The trick is to hook the job, let the client get into you for so much that they have to continue with you.
Ditto for the publishing industry. The contractors lowballed, your manager gave them the job, then the staff like me were scrambling to catch the contractors’ messes and the contractor got to charge more to fix the messes they had made in the first place. That taught me a lot about the way business works. Cheap stuff ends up being expensive…
RE: Are there any implications for the recently-announced plan to force the U.S. taxpayer to guarantee GSE-securitized loans up to $1m?
Great question for ‘08 Prez candidates forums.
Do you favor raising the GSE current $417k loan cap to one million dollars. Yes or no.
This will expose the banking whores.
“Stumpf said the downturn resulted in part from ‘froth, unscrupulous lenders, (and) borrowers who got too greedy. In 2006 the music stopped.’”
In August 2007 the stereo system was destroyed in the uncontained wildfire of a credit crunch.
“the music stopped”
you mean like this?
http://tinyurl.com/2ralja
local governments having problems due to bad investments?
deja vu from the late 1980’s when some local governments came close to bankruptcy due to derivatives. I think Orange County in California was in very big trouble at the time
Mark Baldassare
When Government Fails
The Orange County Bankruptcy
Buy Paperback$27.50, £16.95 paperback
978-0-520-21486-6
In stock–ships in 2-3 days
320 pages, 6 x 9 inches, 86 tables, 1 map, 1 line figure
Published June 1998
Available worldwide
Categories: Economics & Business; Politics; American Studies; Sociology; Law; California & the West
“Mark Baldassare lays out the riches-to-rags-to-semisolvency story of the nation’s wealthiest county . . . Extensively researched.”–Los Angeles Times
“A thorough academic study of the biggest government bankruptcy in U.S. history.”–Kirkus Reviews
DESCRIPTION (back to top)
When Orange County, California, filed for Chapter 9 protection on December 6, 1994, it became the largest municipality in United States history to declare bankruptcy. In the first comprehensive analysis of this momentous fiscal crisis, Mark Baldassare uncovers the many twists and turns from the dark days in December 1994 to the financial recovery of June 1996. Utilizing a wealth of primary materials from the county government and Merrill Lynch, as well as interviews with key officials and players in this drama, Mark Baldassare untangles the causes of this $1.64 billion fiasco.
http://www.ucpress.edu/books/pages/8246.html
“this $1.64 billion fiasco.”
Peanuts, compared to the kind of numbers we’re working with now. On the other hand, since that money is all made up anyway, who cares?
‘Where there is no market, it has valued them at fair value, he said.”
Fair value to who? Why is this any better than mark to model (fantasy)?
Well, it sounds much better, I will give them that.
Kind like a “correction” rather then a “crash” or “collapse”. They must be reading the NAR playbook.
“Outside investors have pulled $600 million from a General Electric Asset Management fund struck by losses in mortgage-backed securities, the company said Thursday… leaving GE’s pension the sole participant in the fund with an unrealized loss of $200 million.” I read earlier - but cannot find the link now - that their Money Market fund broke the “buck”. Meaning that the long held belief that each MM share = $1…that was the attraction to these safe and boring vehicles. Turns out they are neither…who is next? This is an unwanted milestone…I know nothing is guaranteed, I take that risk daily with stocks and mutual funds. I guess I didn’t plan on risk and/or substantial loss a possible outcome with my safety vehicle: Money Market funds….
Got out of MMs completely about 4 months ago. When NAV hits 0.99, it’s as good as gone because people will immediately start to move their money. When a MM loses 30% of its “deposits” in a few days, there’s nothing they can do other than refuse redemptions - and that leads to total panic. Sometimes the mattress or T-bills are the only way to go.
RE: This is an unwanted milestone…
It shows you how deep the rot is.
And the economist think tank talking heads here in New England are telling the media the mortgage mess will be squared away in the second quarter of ‘08.
Where the hell are the firings and arrests in all this?
I read earlier - but cannot find the link now - that their Money Market fund broke the “buck”.
That was posted on Mish’s Global Economic Analysis website as today’s read…………
A run on the banks caused the Great Depression. So, we created FDIC and we limited what banks could invest in. The result was that banks paid very low interest rates….
So, people went looking for places with better returns. Those returns were because of riskier investments and no FDIC insurance.
So, instead of a run on the banks, this coming depression will be from a run on the money markets, the sivs, the hedge funds, the MBS and CDOs, etc., etc.
Stumpf Speech
“Wells Fargo & Co. President and Chief Executive John Stumpf said Thursday the housing market is experiencing its worst decline since the Great Depression.”
R.I.P., Wells Fargo & Co. 1852-2007 (or maybe 2008?)
Don’t be naive. They are setting themselves up for a runup….
LOL
From 1985 to 1990, over 2,500 lending institutions went under. The problems at that time were 1/20th the size of the problems today. Albeit, the banks look on surface to be stronger today, there is a question as to the value of assets. I am not writing Wells Fargo is going under, however I certainly question their assets and their asset valuation. Wells Fargo is intimately tied to RE, defaults in California will hit them harder than any other bank. At this time, any “runup” in financial stocks will be a shorting opportunity.
i was inside. they did quality..not quantity. their servicing is self sustaining and makes the bank money. they dont need originations to survive….
they didnt play the game because they didnt have the product.
and Wells Fargo stuck someone else with most of the risk.
And Wells Fargo has the greatest loan loss reserves.
Wells Fargo is the last AAA rated bank in the US. They kept that ranking for a reason. I’m not saying they won’t lose money, but if Wells goes under you’ve already lost: Countrywide, Wamu, BofA, Citibank, and quite a few others.
By the time Wells needs a bailout, they’ll be given it. Yes, I do realize some of Wells’ other business will take a spanking in a recession (aircraft leasing among other side businesses).
Let’s first get the tan man in an orange suit.
Got popcorn?
Neil
Why did I see that WFC was the #1 subprime originator, then, if they didn’t have the product?
Wells Fargo is a ‘Portfolio Bank’ - keeping their own loans and not selling them, hence they were much more careful about who they lent money to.
Q3 report shows an increase of 100% in the amount of non performing assets over 2006. This is before any problems from August, September or October. Another 150% increase in non performing along with declining valuations on REO makes ownership of the stock risky and hazardous to ones pocket book.
the problem products are not related to just subprime. they are combinations of programs/products. The first cra-p program is the neg am..on anything. the second is the ridiculous option arm garbage. hit those up with little to no downpayment and no income verification you have a garbage loan. you guys dont realize these loans were written to subprime and A credit borrowers. ITS ACROSS THE BOARD. The littlest hiccup sends the A guy over to the subprime side.
I guess I am the only one in the country that reads quarterly reports.
“Almost half of the increase in net credit losses from second quarter 2007 was concentrated in the home equity portfolio, where losses accelerated in the quarter given the steeper than anticipated decline in national home prices”
“Loans 90 days or more past due and still accruing totaled $5.53 billion, $4.99 billion and $3.66 billion at September 30, 2007, June 30, 2007 and September 30, 2006, respectively.”
“credit losses in the home equity portfolio are likely to increase in fourth quarter 2007 and remain at elevated levels into 2008″
“Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them to reflect changes that occur after that date….There are a number of factors that could cause results to differ significantly from our expectations, including further deterioration in the credit quality of our home equity, real estate, auto or other loan portfolios, or in the value of the collateral securing those loans, due to higher interest rates, increased unemployment, a decline in home or auto values, or other economic factors.”
Let’s see credit deterioration, value of the collateral, a decline in home value….not to worry everything is fine. There is no credit bubble and Wells verified everything. Until I am proven wrong, I’ll keep doing what I am doing.
short it… i gave you stuff thats not in print.
I did about 20% higher.
The play for you stock guys….“The growth in their loss reserve has not kept up with the growth in their loan portfolio,” Mitchell said. “That’s not to say the reserve they have is inadequate, but when you grow reserves more slowly than the loans, you have less of a cushion from which to cover future potential net-charge-offs.” He said this issue is even more crucial in today’s difficult economic environment, ongoing problems in the housing markets will only increase unexpected costs.
10 year bond
10 year bond = 3.90%…portfolio squeeze will be on.
US Treasuries are in a corporate bond flight to safety, once that ends in 2 -3 months, yields should go above 5%. The caveat is that US Treasuries have a captive buyer in the social security system - they have intervened before , they can intervene again. At these prices and low yields expect to see foreign selling of US treasuries.
i take that back. it really could be a good short play-more of a sympathy play in the sector. could be good down and back up.
A long play or/a short play in US treasuries is is not favorable. There is negative risk/reward on either side of the trade.
oil, gold, Brazil, China….
thats the other side of the US trade.
well now, Johnboy- you are right about that. The first pitch just went out. We are indeed, not in the 9th inning of the game. game just started. grab some popcorn, a cozy chair and sit back and watch the show.
Thank you Athena for making me laugh! I agree first inning in a long game. In fact I suspect we are still in warm up hitting fungo balls.
“Outside investors have pulled $600 million from a General Electric Asset Management fund struck by losses in mortgage-backed securities, the company said Thursday… leaving GE’s pension the sole participant in the fund with an unrealized loss of $200 million”
HAHAHAHEHEHEHOHOHO, the chickens just might come home to roost at the NBC MSM.
You’re too funny, Palmy.
I bet the GE pensioners are real happy with that bit of news.
Is Jack Welch a GE pensioner?
I ask because recently I was struck by how Mr. Welch and his wife (through their Business Week column 9/17/07) were saying “Opportunity is Knocking”.
Here’s a quote:
“Forget Chicken Little. Think ‘Holy Cow!’ That’s what you’ll be saying when you see the once-in-a-lifetime deals that are suddenly popping up all over the place. The strategic acquisitions that never seemed possible before. The warehouses of assets selling at massive discounts. Every economic, industry, or business crisis inevitably spawns such extraordinary opportunities. You just have to be looking for them and the guts to grab them. Look, we’re not saying you shouldn’t be worried about the current unsettled environment…”
[I noted at the time that "Chicken Little" is the same term used by two neighborhood hag realtors here in SF to describe renters]
Interesting, to me anyway, was the example Welch used to illustrate the point: BofA’s $2 billion investment in Countrywide… expanding “its market share and enhanced industry profile, basically changing its competitive position.”
I think we’ll have to wait and see how this one works out.
And althought it’s not a lot of money to GE, does having a pension shortfall (if only temporarily) limit their ability to act strategically, as Mr. Welch intimates one should?
I think Welch is right, but early. There will be tremendous opportunities that arise over the next 18 months. Just keep your eyes open, and your powder dry…
Well, actually, I’m not.
Don’t worry, folks. It’s all contained:
Builder bankruptcies…
Lender bankruptcies…
Buck-breaking commercial money funds…
Bond insurer downgrades…
Government money funds…
Foreign investors…
and the GSEs…
How things have changed in the past year. At this time last year there wasn’t the daily need for the “Wall Street” compilation that Ben puts together. And, in the past few months the “wall street” section has become downright scary.
WASHINGTON (Reuters) - Consumer prices rose briskly last month on energy costs, but outside volatile energy, inflation was largely contained, leaving room for the Federal Reserve to cut interest rates to bolster a slowing economy.
**************************
FED cut is contained in a box with bow just in time for the Holidays. Precious momments.
seriously, these clowns are gonna keep cutting rates until such time that the technology treadmill of lower prices reverses, and then its gonna be too late to change the course….
When you think the news about housing and credit cant get worse, stick around….. blood is flowing, and its gettin worse.
Pardon my ignorance here, but I have a question regarding all these SIV and what-nots…
For every dollar loaned in mortgage originations, how much debt was created by all these securities… 1:2, 1:10, more?
Anyone want to guess?
I think it is 1:5
my latest reading is that the ratios go to 1:20.
It’s the biggest pile of leveraged crap to hit the USof A, including the 1920’s build-up to the big fall.
MARGIN CALLS are coming.
It depends on the instruments credit rating:
it can be as low as ~.5% to a high of ~ 5%; reasonable investors keep margin around 20%. See Basel II margin agreements
The big whacks occur when ratings are changed. Even though you may still be well over minimum margin required, the change in margin position ties up a lot of capital and reduces the ability to participate in market abnormalities.
It is becoming more and more apparent from these announcements and stalling techniques that people behind the scenes are panicking. And after digging through the numbers and business and finance. . .um. . .”practices”, I panicked early, last year.
However, the general population around me does not know what is going on and does not seem close to panicking. “Yes, yes, it is not the best time to sell a house right now”, is about it.
Is there any part of the country where general sentiment is one of serious concern?
I mean, wow, the above list that Ben compiled is devastating!
Speculation: the masses do not generally follow Wall Street stuff because it doesn’t effect them much. Wall Street is very much a separate world from the rest of our economy (iTulip has an excellent theory called the FIRE economy to explain the phenomenon.)
I suspect panic will set in when a)enough buyers have been turned down for mortgages that up until recently “were in the bag” and b)pension funds start sending out notices to retirees and soon to be retirees that there just isn’t enough money to fund their retirements.
Semi-insane lending hasn’t totally stopped and until it does, I don’t think J6P will make the connection. In other words, I don’t think there’s been enough personal pain yet for the masses to take notice yet.
“I suspect panic will set in when a)enough buyers have been turned down for mortgages that up until recently “were in the bag” and b)pension funds start sending out notices to retirees and soon to be retirees that there just isn’t enough money to fund their retirements.”
I agree, Vermonter. Add to that, things like layoffs, being unable to find another job, higher energy prices, higher food prices, higher taxes and then the masses will awaken. If I was an illegal in this country, I’d be heading homeward and fast. Because its gonna get ugly and Joe Six can’t get at Wall Street or Washington, but he sure can get at Juan Six standing in front of him at the clinic with four anchor babies. A little tin foil hat, but if things get really ugly like I think they will, the politicians will be up on their hind legs reversing course big time on the illegal immigration issue, to divert attention from their own corruption. Today Mrs. Clinton dropped a big time bomb by opposing Spitzer on the license issue. Shows that sentiment is turning. Let the populace fight amongst themselves and maybe they won’t notice what the pols did.
sigh. I’m no fan of illegals by any means, they are the wrong but convenient targets for the coming misery.
Hey Palm, Look see what the FBI and Treasury boys were up to today. Think they are getting antsy about folks taking a shine to gold & Silver?
http://news.goldseek.com/GATA/1195158450.php
Palmy,
Spitzer has dropped any plans to issue licenses of any description to illegals..the state was in revolt, with county clerks saying they would go to jail first. Hillary doesn’t know because she is not a New Yorker and has no clue about the state. She talks up illegals but she’ll go where the wind blows her. Also, Spitzer dumped a plan to tax internet sales…again, facing statewide fury. Spitzer has gone from overwhelming victory a year ago to a loser in record time.
The media hasn’t really picked up on it yet as a hot topic, and if you’re not looking for it here or in the financial sites, you won’t hear much about it. BUT this morning my wife (who doesn’t follow any of this, but here’s me rant at the TV or newspaper on occasion) told me in a “I think you’re on to something” manner that she heard on NPR that the safest place to put your money these days is under you mattress. That’s the sort of plain talk that will get people to start paying attention.
See my comment above - the mattress or T-bills. If the US gov’t “goes under”, then the only things that will matter are fresh water and lead.
Panic sets in when the job cuts spread. Right now it is mostly construction, construction supplies, mortgage and furnature. Much of the construction downturn has been made up through commercial sucking up workers and illegals taking the brunt.
When commercial construction stops, when more people hit max on their credit cards, when a lackluster Christmas is over and retail starts taking lay offs, as service sector makes layoffs, as governments are forced to make cuts, as transportation cuts back, and the govt is no longer able to pretend that there is no unemployment….
Panic will set in.
“With the heat on from its creditors, troubled Florida condo developer WCI Communities is scrambling to look as healthy as possible. While the company can’t hide its weak cash flows, it may be employing unusual accounting assumptions to delay large land impairment charges that would reduce book value further.”
(Spit). Whoever is approving this accounting sleight of hand, maybe they’ll get a pharmacist who steps on medication to make a little extra profit. Or a car mechanic who skimps on that fancy brake line repair.
“Investors might want to take a closer look at Fannie Mae’s latest earnings report. Lost in the unsurprising news of the mortgage lender’s heavy losses was a critical change in the way the company discloses its bad loans, a move that could mask that credit losses that are rising above levels that the company predicted just three months ago.”
(Double spit, with terbaccky juice and a hawker)
Palmy -
That would be fitting justice indeed! I’ve noticed that people tend to get their come-uppance sooner or later.
Take the morally corrupt rich, for example, who seem to have every advantage while stepping on the backs of others with no qualms but yet kismet gives em sickly kids that no amount of money can cure . . . while the teeming masses of poor, fit as a fiddle, always seem to self destruct over bad habits that can be fixed with just a little self discipline.
Aqius, anytime I’ve tried to fudge things the least little bit in my life, I end up like Earl (on My Name Is…). Karma really does work in strange ways, I’ve seen it happen. Most of us never get to see it, but these guys always end up “getting theirs” one way or another, and it always seems to be some variation of or on the subject of what they did to others, like the guy in my sis’s office who was crowing about ripping off unemployment and then totally outraged when his house was burgled two months later.
Palmy: I learned never to wish ill of others - just wish they get what they deserve in life - then I don’t get rebound Karma. You appear to have a wonderful noggin for $ issues so I’ll pose this quetstion to you: Wouldn’t it be better for my kids to stop extra paying down of debt (mostly student loans) and start conserving cash cushion for the immediate future? Later they will pay back debt with cheaper $. I’m concerned they are cash poor while using all extra income on debt paydown. Similar problem with Brother that is maxing his 401K contributions, but is also cash poor. My thinking is that this is an unusual monetary situation that may require unusual strategy. At least they all resisted the housing boom and are happy renters.
I think a 6 month cash safety net in this environment is a lot more important than paying down long term debt.
I do, too, Devildog.
This is a violation of SOX! Where are the F’n regulators? We don’t need more regulation we just need to enforce the ones already in place!
Sigh, crispy, that’s so true in so many areas, not just financial. Make the lies and the crimes so widespread that it is completely unconfrontable for anyone to take on. However, it wouldn’t be a bad WPA project for the coming depression. Lots of us could get in on that one. Deputized to go after the bad guys.
What we need is real penalties for white collar crime. Period. No fines, no confiscation of licenses, no house-arrests — but real jail time, in real jails.
When bankers have to worry about being locked up and “married” to a guy named bubba for 10 years, maybe then we’ll see compliance with the law.
Thank you, No. I prefer the ceremonial slap on the wrist. Much less expensive than maintaining the tennis courts and swimming pools without such items prison would be cruel and unusual punishment.
So Fl gov aka ” Good Time Charlie Crist” (good nickname by Palmetto) has revealed, only after media pressure, that FL state govt has been investing in speculative ventures? Hmmm ………..
Wonder what other campaign skeletons might be exposed that ol charlie promised to get elected? Or looked the other way?
(Crist always reminds me of a smaller, shriveled, version of David Copperfield, with his huge sunken gaunt eyes radiating empathy . . . much like a heroin junky, always jonesing for that public adoration & approval fix.)
Good characterization, Aqius. He does need that approval so badly. He actually is trying to do something positive in terms of jobs and trade for the state, but I’m afraid he just doesn’t have what it takes to really confront tough situations and make the state take its medicine. He’s just not made that way and frankly, was a disaster as Attorney General, with violent crime in the state spiking on his watch. He’s a “nice guy”. Period, nothing more. And he can’t control a very torn and partisan legislature, so he just goes off and does his own thing. In a way, maybe it is for the best. I like gov most when it is totally gridlocked and can’t “do” anything that can harm the constituency.
One person’s “triggers” are another person’s “dominoes”, Diamond.
“The writedown of 800 million pounds in October is to accommodate ‘triggers’ that may result in further declines in the value of credit-related securities later this year and in 2008, Diamond said.”
It’$ Witchcraft
“Finance company GMAC’s Residential Capital home mortgage unit may be close to violating certain debt covenants due to a plunge in its net worth, the Wall Street Journal reported in its online edition on Thursday. ResCap is the second-largest independent U.S. mortgage lender after Countrywide Financial Corp.”
RE: GMAC
During my tenure in the appraisal biz, the loan dudes for GMAC were some of the real heavy hitters relative to the coercing of appraisers.
One low number for GMAC and you were shit-canned in a hurry.
These boys orignated a lot of crap in my neck of the woods.
So, if you happen to have a low rate, fixed GMAC home loan (credit union originated) does this affect you in any way?
Could they call it in a cash crunch?
Anyone knows whats going on with SO CA RE developer http://www.championdevelopmentgroup.com/ ?
I don’t, but to my understanding, Bob Champion is a pretty smart cookie. The question will be whether he is overleveraged on his condo deals, or personally guaranteed any of that debt…
“Fannie Mae’s latest earnings report. Lost in the unsurprising news of the mortgage lender’s heavy losses was a critical change in the way the company discloses its bad loans, a move that could mask that credit losses that are rising above levels that the company predicted just three months ago.”
Congress, get off yer butt and allow Fannie to handle $1,000,000 mortgages. It should work out well.
“Congress, get off yer butt and allow Fannie to handle $1,000,000 mortgages. It should work out well.”
Federal government is a joke and a rudderless ship. Buncha overpaid, corrupt hacks changing their underwear between visits from lobbyists, with a little swipe of deoderant in the armpits.
“Federal government is a joke….”
Maybe if I wasn’t getting screwed by them I would find the situation more humorous.
“disclosing that 4 percent of the state’s short-term investments, including those in the state pool, had been downgraded by credit rating companies.”
If the new ratings aren’t consistent with the state’s guidelines, do they have to “fire sale” them to divest themselves of them, sell them off slowly, or can they keep them and “grandfather” them in? In other words, will there be some forced liquidation as pension fungs, etc., encounter this problem?
“Stumpf said…that rapidly declining housing prices are likely to put even more pressure on delinquencies and defaults. ‘I don’t think we’re in the ninth inning of unwinding this,’ Stumpf said, relating the declining housing market to a baseball game. ‘If we are, it’s going to be an extra-inning game.’”
The only problem with baseball metaphors is…
The season is over.
if i were ceo of one of these bad boys i would take my medicine right now…be on the bottom for one quarter…and when everyone is struggling reporting i would be clean and in the clear of any bad news going forward. But thats just logic i guess. Never one to run with the herd……..
I recall learning that one-time announcements of bad news (by companies), no matter how bad, versus several announcements over time (dribbling out… but equaling the initial bad news in total) is “better” for damage control of your stock price.
This may have even been backed up by academic research.
If it can be managed this way, “smarter” leadership at companies will find out their full exposure to this crap and then bring it out all at once.
Provided it can be done that way and the losses are not so large they lose their job - a la Mr. O’Neal.
Well… unless, of course, they’re actually aiming for that golden parachute!
For clarification - by “initial bad news” I mean the initial example above versus the latter.
In other words, I’m talking about a whole lotta “bad news” in one annoucement versus several smaller announcements - each being equal to one another in terms of the total financial underperformance.
The problem the financials are facing right now is that a “one time” honest reporting of true asset values would show many of them to be insolvent. They would love to take a “big bath” and come out clean, but the water is so deep they would drown.
So these guys have no choice but to stall and dribble out the bad news every month, hoping that either they will make enough money in the other sectors to balance out the losses or the rules of the game will be changed in the 5th inning (e.g. govn’t bailout).
Or the game will be called, on account of a rainout of debt?
IMHO, financial institutions would probably love to be able to take their lumps at one time. But to take their losses, they have to find a buyer. Not an easy thing to do.
A Yen for losing money.
“Losses linked to the record defaults in the U.S. mortgage market will probably increase to about 20 billion for the full year, from 9 billion in the first half, Yutaka Morita, president of Sumitomo Trust, said. The bank added 36.1 billion yen to provisions for loan losses in the period.”
Comment by joesixpack
2007-11-15 12:11:55
‘I have noticed that there is no market for my dogs poo poo, I wonder what fair market value would be?’
You must not be managing your assets properly.
How about you go make up some market models, using that fancy math stuff we learned in high school, or if that fails, use the numbers on the back of a Campbell’s soup can, and then you and me can trade on dog poo poo futures! First I have to go borrow a dog, in order to engender some asset production. Maybe I’ll just go steal a dog, so that startup costs are minimized and exciting results are produced in an expedited fashion.
What’ll we call our investment fund? Enhanced Scoopy Craptastic LP?
We’ll be rich, man! We’ll be paying millions of dollars for shite produced by Jeff Koons in no time at all!
You may have something there. We could create a market by selling our dog poo to each other, at higher and higher prices, once this is noticed, and greedy speculators see that there is money to be made, they will start bidding up the price of this poo and we can get out at a profit.
Why not - they sell moose poo in Alaska as tourist trinketts - even make it into necklaces.
Just buy an option on somebody else’s dog, resell the option, then short the option. Then you avoid all the mess in your yard. Problem solved.
This sculpture by Mr. Koons looks like it could be a poop from a Giant Robot Dog:
Le big red turd
Maybe once your venture gets off the ground, you can do some cross-branding with Mr. Koons.
OT…
NEW YORK, Nov 15 (Reuters) - The U.S. Federal Reserve added a total $47.25 billion of temporary reserves to the banking system on Thursday in its biggest combined single day infusion since September 19, 2001.
Kind of crazy how many BILLIONS of dollars the Fed has put into the syetem. It almost makes me wonder how much money they could give to each individual person rather than flush it down the toilet on the stock market. That’d probably be more useful.
Weird. Something’s up. What the hey. They just write that figure down in a book and it’s off to the races. I mean, when you think about it, it’s just too funny. “Hey, Bernanke, whatcha say we put a little liquidity in the system”. “No problem, I’ve just written it down here with my MontBlanc. $47.25 billion, coming up.”
They really do that. I know it is hard to believe, but those billions are nothing more than figures written in a book.
jeezo petes, you’d think the market would be having a gazm over this. Ungrateful wretches. Well, tomorrow’s another day…of course, we still have 45 minutes to go.
I am trying to remember — was there anything unusual going on in September 2001?
BTW, is one likely result of adding temporary reserves to mitigate stock market losses? If so, it does not seem to be working very well…
http://www.marketwatch.com/tools/marketsummary/
It’s easy - the Fed is monetizing the slime Wall Street created, nothing more, nothing less. Otherwise, all the boyz would be publicly bankrupt, and BB would look bad.
Oh well hey, I guess there’s nothing to worry about after all…..
http://www.detnews.com/apps/pbcs.dll/article?AID=/20071115/UPDATE/711150479/1361
How much debt cord would you need, to blow up the motor city?
“‘Today many AAA-rated mortgage securities will have higher default rates than single-B industrials,’ Milken said.”
This is like telling the valedictorian that he didn’t get straight AAA’s, instead he failed every class he’d been in.
Milken should know.
Junk and Disorderly driving, while under impairment.
“For example, in its most recent quarter D.R. Horton said about 75% of its impairment charges nationally were recorded to residential land and lots and land held for development.”
Knee deep in big muddy, across the pond…
“‘We have taken the opportunity to draw the line’ on the bank’s riskiest credit-related securities, Barclays President Robert Diamond said. ‘The issues in subprime are deep.’”
I just love the greedy flippers they are still out their in droves. Case point :the guy tells me i’m taking a bath just lowered it again 200k, is that so i told him, but didn’t you put it up for 400k more then you paid well yes i did he said so i said you got 175k still to go till you start that bath water i would imagine, dead stare follows?
It is lucky i’m in pretty decent shape still because i can’t help but tell the flippers what i think of them, so far nobody has taken a swing at me but my wife thinks it is coming?
“Without guarantees, $2.4 trillion of bonds may fall in value and some issuers would get shut out of the capital markets.”
And here’s the final score, a shutout…
Bankruptcy: 7 (chapter)
Guarantees: 0
I agree with motepug.