The Factors That Created This Downturn Are Different
Some housing bubble news from Wall Street and Washington. MarketWatch, “Hovnanian Enterprises Inc. reported a widened fourth-quarter loss, as home builders continue in vain to search for a bottom in the residential housing market. Hovnanian said it incurred a total of $383 million in pretax charges including land and intangible impairments. The company said similar charges in the same period a year earlier totaled $322 million.”
“The company said its net loss for the period ended in October increased to $466.6 million. ‘Our industry is currently experiencing a cyclical correction,’ said CEO Ara Hovnanian. ‘While the factors that created this downturn are different than any other throughout our 48-year history, we know that stronger demand for new homes will return. What is not known is how long the market will take to rebound.’”
“Hovnanian delivered 19% fewer homes during the October quarter compared to the year-earlier period. The cancellation rate rose quarter-over-quarter to 40% of gross contracts, up from 35%.”
The Associated Press. “Morgan Stanley, the No. 2 U.S. investment bank, reported a $9.4 billion writedown on Wednesday from bad bets on mortgage-related debt, leading it to take a $5 billion infusion from an arm of the Chinese government.”
“The writedown, nearly triple what Morgan Stanley warned of in November, pushed the investment house to the first quarterly loss in its 73-year history.”
“Morgan Stanley said it had about $1.8 billion worth of subprime mortgage exposure left on its books at the end of the quarter on Nov. 30, down from $10.4 billion at Aug. 31. The equity units the Chinese fund purchased from Morgan Stanley will yield 9 percent per year before they are converted into common shares.”
“The company’s total announced write-downs since the third quarter now stand at $10.3 billion, a sum that ranks third among banks taking losses stemming from the turmoil in the mortgage market.”
“Morgan Stanley blamed the $9.4 billion total write-down on ‘the continued deterioration and lack of liquidity in the market for subprime and other mortgage-related securities since August.’ About $7.8 billion of the fourth-quarter loss came from U.S. subprime trading positions.”
The New York Times. “Officials from Merrill Lynch, Bear Stearns and other major banks are in talks to bail out a struggling bond insurance company that has guaranteed $26 billion in mortgage securities, according to two people briefed on the situation, because the insurer’s woes could force the banks to take on billions in losses they had insured against.”
“The insurer, ACA Capital Holdings, which lost $1 billion in the most recent quarter, has been warned by Standard & Poor’s that its financial guarantor subsidiary may soon lose its crucial A rating.”
“If it did, the banks that insured securities with the ACA Financial Guaranty Corporation would have to take back billions in losses from the insurer under the terms of the credit protection they bought from the company.”
“The troubles at ACA could also serve as the first real test for credit default swaps, the tradable insurance contracts used by investors to protect, or hedge, against default on bonds.”
“‘The hedge is only as good as the counterparty, or the other party, to the hedge,’ said Joseph R. Mason, a finance professor at Drexel University and the Wharton School. ‘This is part and parcel of the financial innovation that has grown very rapidly in recent years.’”
“Analysts note that about $10.7 billion of the mortgage-related C.D.O.’s the company has insured contain lower-rated, or mezzanine, securities that are most vulnerable to losses from falling home prices and rising foreclosures.”
“‘Some of the ratings that were being used don’t reflect the true credit quality of these various securities,’ said Sean Egan, a managing director at an independent credit-ratings firm.”
“Mr. Egan and other analysts also note that ACA more than doubled its credit default business in the last 12 months; it had contracts outstanding on $70 billion in bonds on Sept. 30, up from $30 billion a year ago.”
“The timely use of credit default swaps this summer helped large investment banks like Goldman Sachs and Lehman Brothers avoid huge losses on mortgage securities as others had billions in losses.”
“‘It’s a zero-sum game,’ said Jim Keegan, a portfolio manager at American Century Investments, noting that the gains at the investment banks buying the protection have to eventually result in losses for the firms they hedged with. ‘If you put trades on that worked so well that you bankrupt your counterparty, you will not collect on those trades.’”
From Bloomberg. “More than $174 billion U.S. of collateralized debt obligations tied to U.S. mortgages were under review for downgrades by Moody’s Investors Service at the start of this month, according to the ratings company, suggesting the subprime crisis may deepen.”
“Moody’s downgraded $50.9 billion of CDOs made up of structured-finance securities in November, or about 9.4 per cent of the total, the New York-based company said. Standard & Poor’s, which yesterday lowered ratings on $6.7 billion of the debt, has so far downgraded or placed under review $57 billion of the debt.”
From Business Week. “When is the last time ‘central banker’ and ‘creative’ appeared in the same sentence? The global credit crunch that originated in the U.S. housing market is forcing them to try things they’ve never tried before.”
“This week, the central banks of both Europe and the U.S. took a shot at brand new ways to thaw the freeze in lending between banks. On Dec. 18, in an operation that was both huge and unprecedented in its design, the European Central Bank made 16-day loans of $500 billion worth of euros to European banks.” “The significance of 16 days is that it means the banks won’t have to borrow again until after Jan. 1.”
“‘Central banks here, quite frankly, are experimenting. They’re in a little bit of uncharted territory,’ says ays Joshua Feinman, chief economist at the mutual fund division of Deutsche Bank Asset Management.”
“Bert Ely, a banking consultant in Alexandria, Va., who’s known for his irreverent declarations, puts it differently: ‘These guys are flying by the seat of their pants.’”
“ECB President Jean-Claude Trichet said the coming weeks may be ‘challenging’ for financial markets. ‘Given the uncertainties, the adjustment process in the financial system in the coming period may be challenging and we have to be prepared to the materialization of risks at any time,’ he said.”
“The bank’s attempts to ease financial-market volatility and deliver price stability would remain separate, Trichet said. ‘These two responsibilities are clearly distinct and should not be mixed.’”
Dow Jones Newswires. “Sumitomo Mitsui Banking Corp. President Masayuki Oku implied that his institution won’t be participating in the U.S. subprime rescue fund as requested by its U.S. backers, according to published reports.”
“‘We must consider this matter extremely carefully,’ he said at a regular news conference for the Japanese Bankers Association, which he heads. In Japan, use of such phrases often indicates that no action will be forthcoming.”
“Japanese bankers are far from novices when it comes to subprime loans and credit crunches. The Japanese financial world underwent its own real-estate-centered crisis after the property bubble burst in 1989. Japan’s banks were unable to raise funds in the short-term money markets and were forced to cut lending to corporate clients.”
“Japanese companies weren’t able to borrow from banks or raise funds in the capital markets, and the economy entered what is now known as ‘The Lost Decade’ of stop-and-go sluggish growth and contraction, until a banking-sector cleanup began in earnest in 2002.”
The Washington Times. “The Federal Reserve Board yesterday voted unanimously to ban ‘liar loans,’ inflated home appraisals and other abusive practices that led to the housing bubble and today’s foreclosure crisis.”
“In its first major rewrite of consumer-protection laws since the 1970s, the Fed laid down nine tough principles that lenders nationwide must follow.”
The Palm Beach Post. “On Tuesday, the Federal Reserve announced new regulations for the mortgage industry. The news isn’t the plan. The news is that Alan Greenspan didn’t do any of these things. Maybe he was reading his press clippings.”
“(Also) on Tuesday, The New York Times finally began to deflate the myth of Mr. Greenspan that Beltway helium had kept pumped up for so long.”
“The paper reported how other members of the Federal Reserve, Treasury Department officials and members of not-for-profit groups regularly warned Mr. Greenspan about the growing subprime mortgage loan crisis and the housing bubble and urged him to intervene. But the Fed chairman who retired in January 2006 - just as the bubble he created began to burst - did nothing.”
“The man whom author Bob Woodward called The Maestro, the man whom two Princeton economists said could be ‘the greatest central banker’ in history, protested to the Times that the Fed was not set up to regulate lenders. In fact, the Fed had been given new powers to do just that.”
From Elliott Wave International. “The guy had been in retirement going on two years. Even so, the media was still repeating the same abysmally stupid cliché as recently as this past September: ‘For 18 years as chairman of the Fed, financial markets hung on his every word, and in both major policy pronouncements and brief utterances, Greenspan could literally move markets.’ (ABC News).”
“That quote is now three months old, having appeared in a story about Greenspan popping up everywhere to promote his book. And of course, at that time the media was clueless about the scale of the subprime debacle.”
“But that was then. Now the time has come to point fingers instead, and America’s newspaper of record did exactly that in today’s page one story, ‘Fed Shrugged as Subprime Crisis Spread.’”
“Here’s most of what you need to know about the article: ‘Mr. Greenspan and other Fed officials repeatedly dismissed warnings about a speculative bubble in housing prices. In December 2004, the New York Fed issued a report bluntly declaring that ‘no bubble exists.’ Mr. Greenspan predicted several times — incorrectly, it turned out — that housing declines would be local but almost certainly not nationwide.’”
“Yes, the New York Times has un-deified the deity it helped create (like when it ran a columnist in January 2006 who said, ‘If we had been lucky enough to have Alan Greenspan at the Fed in the fall of 1929, there might well have been no Great Depression’).”
From Marketplace. “Scott Jagow: There just isn’t an easy solution to the subprime mess. And they’re probably shouldn’t be. No pain, no gain, as they say. But let’s talk about some of the proposed ’solutions.’”
“Christopher Thornberg: ‘Most of the people who look for this kind of help actually don’t qualify for the help, because they cannot be refinanced. When you actually look at their income, look at how much they borrowed. It’s clear that these people can’t afford these houses, period.’”
“Thornberg says for homeowners whose loans can be made manageable, there could be a whole different problem: ‘You’ve saved this person from being foreclosed on, and as a result of that, they lost 20 percent of their equity and they’re in a deeply underwater position. Have we really helped this person?’”
“Thornberg says we can expect to see up to $3 trillion of home equity disappear over the next few years.”
NEW YORK (AP) — “Deeply disappointing” fourth-quarter writedowns have Morgan Stanley Chief Executive John Mack bypassing his year-end bonus — and he is unlikely to be the only Wall Street CEO giving up tens of millions of dollars in holiday money.
http://biz.yahoo.com/ap/071219/wall_street_bonus.html?.v=1
Don’t underestimate the psychological effect of this on the NYC housing market. Doubt that even someone who did get a bonus is going to be in a mood to bid up property now.
Maybe the Russians and Arabs will save it.
nah it’s the irish carpenters who are snapping up all those jazzy condo’s haven’t ya heard!!
Err and go Broke…
From Bloomberg today on Ireland (and I remember that irish carpenter who bought a 750k place on Wall Street, with 11 spec houses unsold back in Ireland)…the Irish miracle is starting to crack.
As in the U.S. and Spain, the predictions for economic growth depend on Ireland’s ability to weather a housing recession.
Home prices are falling after eight interest-rate increases by the European Central Bank since late 2005 doubled borrowing costs. Prices declined 1.3 percent in October, the most in at least 11 years…
Irish shares are the biggest losers in the euro region this year.
“…he is unlikely to be the only Wall Street CEO giving up tens of millions of dollars in holiday money.”
boo-frickin’-hoo.
Please pass the kleenex.
I’m floored for two reasons,
1. That he even suggests that there is a bonus to turn down after a 5b loss at a company he’s CEO of and
2. That he is using the announcement of an enormous loss to show what a man of character he is. This is in poor taste. When you make a personal sacrifce and announce it to the press, I’m not sure it’s still a sacrifice.
Doesn’t have much choice. Such an decision would be considered a material event under Sarbanes Oxley and as such the company is required to disclose publicly.
Didn’t think of it from that angle. Thanks for the knowledge.
In that case, I would have prefaced it with As SOX demands…..
How I wish the majority of Americans had that kind of clarity to see through the madness…
‘Morgan Stanley, the No. 2 U.S. investment bank, reported a $9.4 billion writedown on Wednesday from bad bets on mortgage-related debt, leading it to take a $5 billion infusion from an arm of the Chinese government.’
Ahem. I guess I’ll point out that this is was real money, it is gone and not coming back. No helicopters. No bail-outs. They are forced to go to those who have saved and borrow at 9%, then to become stock. They need capital, not loans to stay in business.
This gets to my point about the myth of the all powerful central bank and government in our lives. Why did Japan go through this lost decade? Because they refused to take the losses. The Fed know this.
And look at the media dogpiling on the former media darling AG and those that worshipped him. Not so much The Maestro anymore.
“They are forced to go to those who have saved and borrow at 9%, then to become stock.”
Ben are you implying 9% yields on savings?
The lenders get 9% for the first year.
What lenders are getting 9% and why can’t individual investors get any more than 5% on savings?
The 5 bill from the commies…errr chinese has a 9% return requirement which can be converted to common stock at some point.
Sweet deal if you can qualify…
US bank debt is currently running between 7 - 28% apr. This is uninsured, your CDs and bank deposits are insured. China to get into the game paid up a little. The ones with the moneys dictate the terms, beggars cannot be choosers.
Ben’s talking about the Chinese infusion of $5B into Morgan Stanley. They can get 9% because they have $5B and can solve a problem quickly.
I suppose if they wanted, they could offer a 9% rate on savings accounts and draw in that money pretty quickly from the public, but depending on the entity that China bought into, that may not have been possible, even if Morgan wanted to…
“…your CDs and bank deposits are insured…”
Good point — that 9% rate includes an inflation/devaluation risk premium.
“…your CDs and bank deposits are insured…”
You imply that the 4% spread in interest rates is the rusult of the federal insurance. This means that the cost of insurance is 4%.
Morgan Stanley has a choice.
1. Pay 9% straight out to China
2. Pay 5% to the CD investors, and 4% to the insurer (US Gov?)
Something stinks, My guess it the government is forcing the low CD rates with extortion to the Banks with the threat of witholding the FDIC insurance. I am sure my guess is wrong, but there must be a reason CD rates are low.
“Something stinks, …”
The conundrum stinks to high heaven.
Ben,
So is that a “coupon” that gives the Chinese permission to short MS down to zero and then pick the best parts of the remaining carcass? Or am I just being optimistic?
Roidy
The house of cards stood up well for a long time because nobody bothered check its viability. Then a ‘perfect storm’ started to show its face, and there are signs of collapse. All the insurance companies are just BS. They have one dollar in their pockets and they insure one million!
“The downgrade of ACA will essentially not allow it to continue insuring bonds, since most people will not buy insurance on bonds from a firm that does not have top-quality ratings.
Downgrades of bond insurers can also lead to losses at the companies who use them. Only minutes after S&P’s downgrade of ACA, CIBC World Markets said insurance for $3.5 billion in securities it holds backed by subprime mortgages may no longer be viable.”
Actually, the death spiral is just starting. MS paid 9% for that money. Very expensive money. That expensive money will cut into their future earnings and make other investments harder to do. WIth a cost of capital of 9%, projects will have to return much more to be viable.
IMO, sacrificing future earnings is still going to get them. I would love to see some start up companies take these guys by storm.
A new company that isn’t weighted down by bad loans and bonds should be able to have higher profit margins and thereby hire better people and take away a lot of business from these guys.
Whether Alan Greenspan was the best Fed Chairman depends on your perspective. To the Chinese and Arabs, who can now afford to mop up our financial institutions at a slight premium to book value with their surplusses from the excesses of the U.S., AG is looking good indeed. To the populace (or is it “populous” as in “densely” populated) in the U.S., not so much.
Somewere, Greenspan has neighbors, and they should give his house good, old-fashioned teee-peeing.
Atlas Shrugged as Subprime Crisis Spread.
I’m glad you brought this up, as I have seen posters try to tie Rand stuff to AG. I’m no expert on objectivism, but they gave him the boot. I doubt they would accept the Fed’s existence, so why should his role as it’s chief be accepted? From what I have read, it is based on highly-defined morals, which we could use a little more of, IMO.
Objectivism is based entirely on the “moral” of self interest, from what I can gather that’s it.
I don’t hey would not recognize the FED, but they did not recognize family ties or any kind of charity either. I read Atlas Shrugged and concluded that Ayn Rand was a very lonely and unloved/unloving women.
I’ve never cared about the personal failings of a philosopher or a poet, really. But that isn’t how I remember the definition.
Ben, I agree.
Ayn Rand would be rolling over in her grave at Greenscum’s comments about how the Federal Government should give sub-prime borrowers cash to help them with mortgage payments.
True Objectivists detest government bailouts… Greenspan is certainly not one of them anymore. My guess is that he compromised his principles when he joined the Fed at the beginning.
I have a soft spot for Ayn Rand’s philosophy, but not where it has been taken.
In Atlas shrugged, the idea was that the captains of industry, those who forged the nation through hard work and insight, who built railroads, produced power, etc… should be rewarded for that effort and not controlled by the government. That there were contracts and honesty between employer and employed, between companies, and between governed and government.
Comparing the captains of industry to the captains of finance makes the latter come out a bit lacking. I’d say the real joke of objectivism is how people who are rich automatically think they deserve it. As far as I can tell, this country has been lacking a work ethic for years. If this housing bubble teaches us nothing, it should teach us that money doesn’t materialize out of thin air and then stick around.
Genius, or mentally bankrupt?
Al got his book out before TSHTF. Nice trade. I’m sure he was writing feverishly the past year or so
Okay, Chick, waddya say we start organizing truth squads to attend his book signings?
I volunteer.
Greenie flip-flopped his position long ago, when he decided to become Dr. Robert Stadler, in real-life.
Alan Shrugged: those interested in the tie between Rand and Alan’s inactions should read this article about one of his 1960s essays. Let the market do its thing and consumers will be better off, he believed.
http://www.bloomberg.com/apps/news?pid=20601039&sid=az1pRuJzktlk&refer=home
Acutally, wasn’t the point of objectism that morality was passe, it’s everyone for themselves, and may the superior thrive?
So their scientologists?
Bah! = They’re
–
Yes, always the “It is different this time” mantra. We can’t be blamed because there was no precedence?
Jas
Jas
‘the factors that created this downturn are different than any other throughout our 48-year history’
IMO, he is either directly or inadvertantly referring to the housing mania we just went through.
Oh Great…
20 minutes from now, they’ll be hungry again to borrow from the Chinese~
“Morgan Stanley, the No. 2 U.S. investment bank, reported a $9.4 billion writedown on Wednesday from bad bets on mortgage-related debt, leading it to take a $5 billion infusion from an arm of the Chinese government.”
Kinda like announcing ” THE EMPORER HAS NO CLOTHES ” after Greenspan has already finished his parade & is safely inside his castle. (retirement)
Predicatable, actually, how just only NOW that Greenspan in safely out to pasture, that anyone with an ounce of respectability and decision making power has the ” courage ” to finally denounce one of their own. Bandwagon jumpers are piling on by the bushel.
We have become a nation of lying, snivelling cowards. Especially white-collar desk sitters.
just my 2 ameros
‘We have become a nation of lying, snivelling cowards.’
Note to self: Aqius doesn’t speak for me.
Look, a destroyed reputation is about the best we can hope for when it comes to the Fed. I think it is important that the responsibility for this mess geos where it should. So those organizations will be scrutinized for reform when this thing gets really ugly.
Well, Ben, my comment speaks to those who cry, whine, backstab, snivel & drivel in private, but dont have the guts to say it outloud. My point is, and always has been, that those people who say one thing in private but change their tune to the popular theme in public, ARE gutless, spineless sheople, that deserve no sympathy later when the shiot hits the fan.
Remaining silent when you could have made a difference is the worst kind of hypocrisy, in my opinion.
just my 2 ameros
It’s bonars
continentals
“bonars”. hmmm interesting , had to Google that one. could have fit the ” I dont think that word means … ” category, heheh !
“Look, a destroyed reputation is about the best we can hope for when it comes to the Fed. ”
A great point. This is really wonderful, whatever is happening. The reason Fed became so powerful was that Paul Volcker built up its reputation. Once the sheen is lost, it will be less able to harm us.
‘The New York Times. “Officials from Merrill Lynch, Bear Stearns and other major banks are in talks to bail out a struggling bond insurance company that has guaranteed $26 billion in mortgage securities, according to two people briefed on the situation, because the insurer’s woes could force the banks to take on billions in losses they had insured against.”’
It is a good thing that cb’s are opening the spigots so wide, as there are an unlimited number of financial entities coming to the fore in search of bailout moneys.
Yeah, a 16 day loan is a bail-out. I’m watching this like all the rest of you guys. It looks to me like the CBs are just trying to get through a year-end credit squeeze, probably brought on by an accounting period ending. Otherwise, why not mid-December, or mid-January.
Also, I thought what Trichet said was telling .
A never-ending series of loan rollovers to prevent price discovery is a bailout in my book.
‘Morgan Stanley blamed the $9.4 billion total write-down on ‘the continued deterioration and lack of liquidity in the market for subprime and other mortgage-related securities since August.’ About $7.8 billion of the fourth-quarter loss came from U.S. subprime trading positions.’
‘Morgan Stanley said it had about $1.8 billion worth of subprime mortgage exposure left on its books at the end of the quarter on Nov. 30, down from $10.4 billion at Aug. 31.’
Price. Discovered.
Are you sure they are done?
Stock. Up.
http://www.marketwatch.com/tools/quotes/intchart.asp?symb=MS&time=1&freq=9&comp=&compidx=aaaaa%7E0&compind=&uf=0&ma=&maval=&lf=1&lf2=&lf3=&type=2&size=1&txtstyle=&style=&submitted=true&intflavor=basic&origurl=%2Ftools%2Fquotes%2Fintchart.asp
especially when those loans are collaterlized with worthless assets.
Probably trying to prevent a stock market crash too or having the major indices be down for the year.
Next year should be a good one for short sellers.
Tx,
I recently requested and received a pamphlet and DVD from a company called Optionetics. Have you ever heard of them??
No but I looked at the site. I wouldn’t pay for that. There’s a nice cheap book you can buy on Amazon called “Option Playbook” put out by Tradeking, and there is a lot of good free information on the net, such as on the CBOE site and blogs like Adamsoptions.
Excellent - thank you for your assistance.
If the names had been some Asian companies, wouldn’t everybody be crowing about “crony capitalism”?
This is a totally incestuous self-loop, propping up your supposedly arm’s-length counterparty so that you don’t have to actually bear the consequences of the true economic losses, at least legally on the books.
It’s organized lying.
has the FED announce free-er municipal bond insurance yet ?
“Officials from Merrill Lynch, Bear Stearns and other major banks are in talks to bail out a struggling bond insurance company that has guaranteed $26 billion in mortgage securities, according to two people briefed on the situation, because the insurer’s woes could force the banks to take on billions in losses they had insured against.”
Bond, Insurance Bond…
Secret agent, Chapter 007
Does Insurance Bond have a license to kill?
Or perhaps a license to drill, as with Joshua Trees?
“Thornberg says for homeowners whose loans can be made manageable, there could be a whole different problem: ‘You’ve saved this person from being foreclosed on, and as a result of that, they lost 20 percent of their equity and they’re in a deeply underwater position. Have we really helped this person?’”
And most of these “worked out” payments will still be more than comparable rent that they would have paid if they had been foreclosed upon. During the 1930’s rents actually went down right along with home values. Foreclosure is really not all that bad for the FBs, especially the ones who lied and didn’t get prosecuted for fraud.
Let’s see…
1) upside down to the tune of 20 or 30%; stuck paying on a loan that you can’t afford; all the while watching your home deteriorate due to unaffordable maintainance costs.
2) Living within your means in a rental at 1/2 to 1/3 of the cost of that alligator the mortgage holder so desperately wants you to bleed on.
To all upside down FB’s still in stupid land - Run, FB, Run!!
I can only hope that some of the borrowers that are conteplating taking the “rate freeze” bailout understand that they will be paying interest-only (probably neg-am) for 5 years on a home worth substantially less than the loan they have. And will probably not experience any significant appreciation during that time.
Probably too much to hope for…..
When is someone that doesn’t need to be re-elected call this for what it is, a bailout for the lenders, not the borrowers?
It must be awfully painful to pay interest through the nose on a loan whose underlying collateral has dropped by 15 percent or more, with the alternative of selling the devalued property at a 15 percent-or-more loss.
Which alternative sounds more attractive?
1) Hanging in there with an alligator loan on falling-knife collateral?
2) Discovering first hand what falling knives are selling for these days?
3) Just dropping off the key, Lee, and setting yourself free?
There must be 50 ways to leave your lender …..
forget the ramen, Jen,
go sign a lease, Reese,
don’t mow the lawn, Juan,
just get yerself free …
Fifty ways to leave your lover? Paul Simon?
Barclay is not in love with Bear Stearns any more. Bear’s famous letter to its 2 fund holders: Dear investors, there is nothing left in one fund and 40% left in the other. If we can be of further service..
This Bear’s letter should be framed, as it marked the start of
the “limited” subprime debacle.
Bad deal for the borrowers who are debt slaves on “underwater”, no equity houses. Lenders happy, Christmas bonus in place.
To my understanding, there is little paid for with the rate freeze from you and me (in other words, it’s a voluntary economic arrangement between the borrowers and lenders, brokered by the US gov.). I don’t know what kind of back of the office shenanigans are going on about future promises (legislation or lack thereof, etc.), but on its face, it’s not a taxpayer bailout.
Now, this whole question of allowing more tax free muni bonds by the states does hit my pocketbook–I’m not happy about that…
“voluntary agreement” = one which would occur anyway w/o govt meddling in free markets
Of course it will hit your pocket book. The tax free muni bonds are all toxic junk, just like everything else, but they will be jammed into our pensions, retirement accounts, mutual funds, etc. Then, in 5 years or less when they implode and go to zero, there will be much “confusion” since “nobody could have expected this.”
‘The hedge is only as good as the counterparty, or the other party, to the hedge.’
You might recall a company that tried to create a futures market without the hassle of an exchange with its guarantee of counterparty payment, since that guarantee comes with all those rules regulating members. Enron.
Of course insurance companies have rules, but they are state rules, enforced by $40K per year bureacrats who couldn’t get a better job.
Wonder how they didn’t notice the capital reserves were inadequate relative to the risk? “Mortgage bonds? Mortgages are safe, and isn’t there some kind of federal guarantee? Check.”
guy in FL was getting 180k
probably getting a raise too
“Thornberg says we can expect to see up to $3 trillion of home equity disappear over the next few years.”
I bid $5 trillion Chris.
$5 trillion? No prob… take a check?
Thornberg for Fed chairman!
And as much as we might nitpick. What economists besides Shiller, Thornberg, and Shilling called this? I can trash talk housing prices all day and not effect my professional reputation or income. Thornberg bit at the nose of the REIC when they were funding UCLA’s program. So I give him a lot of credit.
Got popcorn?
Neil
What about Lereah, Watts, Yun, Gin and Karevoll? All these guys deserve credit for the calls they made, don’t they?
Or recognition of discredit in their case.
Fleckenstein had it pegged and the guys at iTulip called the hosing bubble too (Jansen?).
Stephen Roach (sp?) at Morgan Stanley was warning by 2004, IIRC.
Schiff, Puplava, etc…quite a few, but nobody would listen to them.
I’m assuming that his measure is simply based on his expectation of home prices falling from their peak.
I wonder how much of his estimate of $3T is going to be borne by the new owners of the homes (lenders who have foreclosed) as opposed to homeowners who actually have equity in their homes?
3 trillion (3×10^12) divided by 300 million people (300 x 10^6) = 10,000 per capita. That is one heck of a haircut ! And a lot of that is debt that has to be repaid somehow.
Actually, I don’t buy those numbers. Lets say the average home has 3 people in it and there are 100 million homes. The value of the average home is going to fall about $50K, maybe a lot more.
100×10^6 x $50×10^3 = 5 trillion dollars. Could well be 10 trillion dollars too… homes have a long, long way to fall in some areas.
“‘The hedge is only as good as the counterparty, or the other party, to the hedge,’ said Joseph R. Mason, a finance professor at Drexel University and the Wharton School. ‘This is part and parcel of the financial innovation that has grown very rapidly in recent years.’”
A chain is only as strong as it’s weakest link.
The Hedge system is like a poker game where there are trillions of dollars in chips on the table, it all works great until people try to cash out and they find out that all the players together don’t have the trillions of dollars to cover the chips on the table.
Housing bubble vocabulary non grata:
- financial innovation
- SIV
- subprime
- CDO
- MBS
- any structured credit product with the word Enhanced in the name
Self-Full-Filling-Prophecy
“The timely use of credit default swaps this summer helped large investment banks like Goldman Sachs and Lehman Brothers avoid huge losses on mortgage securities as others had billions in losses.”
“‘It’s a zero-sum game,’ said Jim Keegan, a portfolio manager at American Century Investments, noting that the gains at the investment banks buying the protection have to eventually result in losses for the firms they hedged with. ‘If you put trades on that worked so well that you bankrupt your counterparty, you will not collect on those trades.’”
‘If you put trades on that worked so well that you bankrupt your counterparty, you will not collect on those trades.’
Heh heh, I wonder if they worked THAT scenario into their models.
Yeah they worked it in, they hedged it by buying into RE bonds since they knew that RE prices always go up.
This is just like the time I won a bet with a college roommate for a million dollars over some trivial issue. I think I eventually collected a beer as payment - or possibly even a whole pitcher ….. I don’t think I’ll be seeing the other $999,990 any time soon.
Dow Jones Newswires. “Sumitomo Mitsui Banking Corp. President Masayuki Oku implied that his institution won’t be participating in the U.S. subprime rescue fund as requested by its U.S. backers, according to published reports.”
“‘We must consider this matter extremely carefully,’ he said at a regular news conference for the Japanese Bankers Association, which he heads. In Japan, use of such phrases often indicates that no action will be forthcoming.”
Stop tap dancing around and screw the political correctness garbage . . . just say “No, I won’t participate because its a crappy idea and I don’t want to lose my a$$” (except, say it in Japanese)
In the Empire of Japan, one must save face and never talk directly of intentions, no matter the tension.
Yeah but, to some in the US, ‘We must consider this matter extremely carefully’ means “So your telling me there’s a chance”
I’m saying if they don’t want to drag this out and keep getting pestered to be involved, they should cut to the chase. A quick decline is much better than a long-drawn out tease, then decline.
More likely it means “We can tell you’re trying to cheat us we just want to make sure we really understand what you kleptomaniacs are proposing.”
As Archie Bunker used to say, “just throw a handful of silverware down the stairs” and you’ll get the idea.
LOL, never heard that version before. I heard that’s how they named their children.
Haven’t Japanese banks been trying to bail out their own RE bubble for the last 10 or 15 years? I guess they don’t want to get involved in papering over our RE bubble, they have had enough bad experience with their own.
Yep. And the whole time we lectured them about not taking their medicine quickly.
Insert foot in mouth.
A closed mouth gathers no foot.
LOL.
Tis better to keep one’s mouth shut and appear dumb, than to open it and remove all doubt.
He did. The correct Japanese for “you must be joking, you’re out of your mind if you think we’re going to waste any of our time even thinking about your clearly ludicrous proposal”, is “that would be very difficult”.
Their books about us, then point out ways to handle the resulting cultural confusion that inevitably results when american businessmen happily then try to find out what the difficulties are and how to resolve them.
I personally always thought that they actually found it all pretty funny.
“The man whom author Bob Woodward called The Maestro, the man whom two Princeton economists said could be ‘the greatest central banker’ in history”
“Yes, the New York Times has un-deified the deity it helped create (like when it ran a columnist in January 2006 who said, ‘If we had been lucky enough to have Alan Greenspan at the Fed in the fall of 1929, there might well have been no Great Depression’).”
“Now the time has come to point fingers instead, and America’s newspaper of record did exactly that in today’s page one story, ‘Fed Shrugged as Subprime Crisis Spread.’”
Poor Bob Woodward, first he sucked up to ‘lil Bush and then The Maestro. Guess it’s time for him to write another book…
Not to forget the Harvard guy that lost 50% of the school fund on subprime. Only Yale came out ahead.
Too bad UCLA let go of Thornburg.
Thornberg hit the nail on the head - why would anyone who owes 400K on an ARM refinance to a fixed “bailout” loan of 400K when the house is now worth 325K?? What part of the word “subprime borrower” do elected officials not understand? They don’t care about their credit ratings, they never HAD a credit rating, they got 100% financing on a liars-loan. . . .even Warren Buffet wouldn’t take a fixed loan for 400K on a 325K (and dropping) asset!!
“The paper reported how other members of the Federal Reserve, Treasury Department officials and members of not-for-profit groups regularly warned Mr. Greenspan about the growing subprime mortgage loan crisis and the housing bubble and urged him to intervene. But the Fed chairman who retired in January 2006 - just as the bubble he created began to burst - did nothing.”
Did nothing? He was busy planning his exit strategy. His total lack of ethics, morality and loyalty to our Country were astounding.
Mo Money…
http://biz.yahoo.com/ap/071219/fed_credit_crunch.html?.v=1
I would like to see someone ask where this $20B came from. Where did the $500B come from in Europe?
Printing press? Any coincidence inflation is raging?
Inflation in Europe is rising, and reached the highest level in decade. It will take a matter of time, before the economy will slow down there. I expect the inflation to rise higher in 2008 through much of Europe due energy/taxes/material/food price pressures.
“Thornberg says we can expect to see up to $3 trillion of home equity disappear over the next few years.”
That’s a lot of moneys, Mr. 6Pack.
The not so almighty ex-deity that wont go away…
“Yes, the New York Times has un-deified the deity it helped create (like when it ran a columnist in January 2006 who said, ‘If we had been lucky enough to have Alan Greenspan at the Fed in the fall of 1929, there might well have been no Great Depression’).”
Let me fix that NYT quote:
“If we had been un-lucky enough to have Alan Greenspan at the Fed in the fall of 1929, the Great Depression might never have ended and we would probably have a (more) socialist government now as a result.”
“Morgan Stanley, the No. 2 U.S. investment bank, reported a $9.4 billion writedown on Wednesday from bad bets on mortgage-related debt, leading it to take a $5 billion infusion from an arm of the Chinese government.”
You just know things have gone to shit when Wall Street free market capitalists are being bailed out by commies.
Now that’s rich!
So, now it can finally be told, China won the cold war without firing a shot! Who said the pen (that writes the checks) is not more powerful than the sword?
Why fire a shot when you can sit on the sidelines and watch 2 superpowers destroy each other?
I mean 2 ex-superpowers.
Strange that the Chinese government doesn’t see any part of its own country as being worthy of this $5 billion in investment, but must look to US financial corporations for such opportunities. Or maybe there is another reason.
Totalitarian regimes seldom make economically sound decision. The decision could be dictated by party, that tells them what to do and what is the best in party’s interest. I would not look out more meaning behind it. China is strongly depended on US consumers, and any fallout of demand from USA will hit China twice that hard. This is not difficult for Chinese communist to understand.
China needs to do something with all the dollars they have accumulated and continue to accumulate. They have some very intelligent and thoughtful folks working on putting their reserves to work. Like most countries they are encumbered by their political regime, but many of decision makers received their education at the finest schools in the US.
Totalitarian regimes can be very successfull in the short run. If you have a good leader, but eventually that leaders lazy no good son takes over. Note, our supposed free market has sure bungled things.
This point kills me
All the free market cheer leaders, who don’t want government regulation of anything. Sit back silently or actually go begging for foreign governments to buy up our companies. I mean isn’t this communism. When government owns business. It’s worse than communism because foreign governments own US companies.
I just heard a rumor that the NAR has contacted the NRA to see if they would be will to put hit on Christopher Thornberg. From what I understand they are blaming him for the housing market crashing in California. If what is being said is true then all of us bubble believers had better be ready to go underground until the whole thing blows over or up…depending on your point of view.
On another note….I also heard the NAR is contacted NASA to see if it’s true there might be life on Mars because that may be the last place to look to find qualified buyers.
Meanwhile, in Surprise, Arizona, a not-so-pleasant surprise for an out of state RE investor:
http://www.azstarnet.com/sn/hourlyupdate/216939.php
“Smuggling season starts mid-January.” Learn something new every day.
“Thornberg says we can expect to see up to $3 trillion of home equity disappear over the next few years.”
That’s 3,000 Billion, or 3,000,000 Million Dollars… for those of you scoring @ home.
Writedowns announced thus far have been what — about $60 bn or so? How does that look next to $3000 bn in equity at risk? It looks like about 2 percent to me…
So,it is true, we’ve barely gotten through the National Anthem stage. This game is going into overtime.
I just had to laugh seeing the headlines at http://finance.yahoo.com/:
Morgan Stanley Posts Loss, Sells $5B Stake to China- AP Fed Loans Banks $20 Billion to Help Ease Credit Crisis- AP S&P Downgrades ACA to Junk Status- AP Sallie Shares Plunge After CEO Talks- AP Hovnanian Shares Tumble 17 Pct. After Results-
Reuters Mortgage Crisis Rivals S&L Meltdown
And the markets are up. I’m confused. Buy the bad, sell the good?
I just saw the headlines too… I think the headlines are now coming out faster than this blog can keep up! Used to be a headline would last two or three days before the next major one.. .now its more like two or three hours.
S&P Downgrades ACA to Junk Status
Wednesday December 19, 3:32 pm ET
S&P Downgrades ACA Financial to Non-Investment Grade “CCC” Rating From Investment Grade “A”
“NEW YORK (AP) — A major insurer of bonds was downgraded to “junk” status on Wednesday, a move that could potentially cost banks and local governments billions of dollars.”
“Credit rating agency Standard & Poor’s slashed its credit rating for bond insurer ACA Financial Guaranty Corp. to a non-investment grade “CCC” from investment grade “A.” S&P cited concerns about increasing claims from defaults on mortgage-backed bonds, and the risk that those claims could drain the bond insurers of needed capital.”
Spot on! Housing bubble news has morphed from a slow moving river into a plunging torrent crossing the lip of a waterfall. It is hopeless to try to keep up!!
“Yes, the New York Times has un-deified the deity it helped create (like when it ran a columnist in January 2006 who said, ‘If we had been lucky enough to have Alan Greenspan at the Fed in the fall of 1929, there might well have been no Great Depression’).”
Well…there might not have been THAT great depression, but just imagine the doozy we could have had in about 1937 or so when he ran out of new ideas.
I found this at the end of a 19 Dec 07 WaPo article about the new Fed lending standards.
“On Capitol Hill, the House yesterday voted to prevent forgiven mortgage debt from being taxed as income. The Senate has already passed the bill, which can spare homeowners from taxes as high as 35 percent on canceled mortgage debt. White House press secretary Dana Perino told Bloomberg News that President Bush would sign it.”
http://www.washingtonpost.com/wp-dyn/content/article/2007/
12/18/AR2007121800194.html
No bailout here!
That’s too bad….I believe in adding injury to insult…or is it adding insult to injury?
Oh well, whatever it is why not just freeze the repossesion of cars while we’re at it? I believe car buyers who fall behind on the payment of their Corvette because their Jack in the Box paycheck can cover the monthly payment were tricked into buying the car by those unscrupulous carsalesmen just like the mortgage brokers tricked people into buying houses they couldn’t afford too.
Just makes it easier for people to walk. This should speed up price cuts because in theory, the more you lowered your price the more you were on the hook for the forgiven mortgage debt. No you’re not on the hook for that forgiven debt and should be able to price the house as low as you want.
Found the bill on Thomas. It is HR 3648. Passed the Senate on a unanimous vote 14 Dec, and then passed the House on a voice vote on 18 Dec. The bill is now off to the president for his signature.
There are no recorded votes, which means no one can be held personally accountable for it one way or the other. Clever little sods, aren’t they?
Here is the link to the bill text and summary, as well as the action on the floor:
http://thomas.loc.gov/cgi-bin/bdquery/z?d110:H.R.3648:
I work in the DC political arena, and many times you can glean quite a bit if you go through the Congressional Record after a debate.
Some other things to consider about this bill:
- It sunsets in three years. Members did talk about perhaps an extension in a few years.
- Extends the PMI deduction for three years.
Some notable quotes from the CR’s pages:
Lewis (D-KY): “It is unfair to tax people on phantom income, particularly when they have suffered serious economic loss and have less ability to pay the tax. The Mortgage Forgiveness Debt Relief Act would relieve this tax burden. The Andrews-Lewis provision states that no tax will be collected when a lender forgives part of the mortgage on the sale or disposition of a principal residence. This proposal has earned the support of the National Association of Home Builders, the National Association of Realtors and the United States Department of the Treasury.”
Blumenauer (D-OR): “If we see a 15-percent drop in housing values, which is projected by Goldman Sachs, we are talking about millions of families who can be in this situation of having phantom income. If it is a 20-percent drop, it is 3.7 million. And some people feel that 30 percent correction is not beyond question, and that would put almost 20 million American homeowners in this negative territory.”
Andrews (D-NJ): “Through the wisdom of the committee, we are fixing this law in such a way that will encourage people to work out an arrangement with their mortgagee to work out a way they can pay their loans and stay in their homes. And if they stay in their home, we won’t have that glut of supply in the housing market. If we don’t have that glut of supply on the housing market, prices will stabilize and not drop, which will mean more Americans have more home equity, more Americans have economic confidence, and our economy can rebound.”
Mr. Andrews should read this blog. Not having this tax sword over a FB’s head means they’ll bail out of a house much sooner, driving down prices even faster.
Interesting how they weren’t calling it “phantom” income when prices were going up…
“Hovnanian Enterprises Inc. reported a widened fourth-quarter loss, as home builders continue in vain to search for a bottom in the residential housing market.
Coming 2008 the “Hovnanianater”!! Worlds tallest roller coaster, A mindless, fearless, shoot from the hip smooth steady crawl to the summit where only the truly gullible dare. Then a dizzying, stomach crunching, upside down, inside out, shoot your dog, ride down the 6 year trench to a manageable, back to basics transition that will literally leave old and young alike crying.
Coming Soon to a Six Flags Theme Park near you.
Warning: This ride may cause some persons to loose their shorts. Not recommended for finacially savvy individuals. Those with certain credit ailments may need to seek professional guidance before attempting to ride. Persons whom are not associated with any type of contractual agreement may elect to observe others finish the ride before deciding on boarding. Persons bearing the NAR logo on opening day will be granted front row seats.
This conFEDeracy of Dunces can always be counted on, to do too little, too late.
“The Federal Reserve Board yesterday voted unanimously to ban ‘liar loans,’ inflated home appraisals and other abusive practices that led to the housing bubble and today’s foreclosure crisis.”
“Japanese bankers are far from novices when it comes to subprime loans and credit crunches. The Japanese financial world underwent its own real-estate-centered crisis after the property bubble burst in 1989. Japan’s banks were unable to raise funds in the short-term money markets and were forced to cut lending to corporate clients.”
Do I detect some bitterness here?
Alan Greenspan. Will someone please install an “off switch” in that old man. I’m really tired of hearing him.
Roidy
The factors should be obvious to everyone. Fraud is everywhere. It’s in the government not enforcing the laws they’re supposed to at all levels, it’s in the banks making up BS companies and investment, it’s in the people who lie on their mortgages and scam each other over for easy $$$ on everything else. This isn’t new, this has been going on for probably a very long time. Only now it comes to the surface. I remember back in the late 90s when I was still in high school seeing the obscene stuff in the economy. I thought housing was overpriced back then. I’m sorry but this is something hard to miss. The people in the media are all shills so nothing new there. YOu gonna have a lot of angry comrades when this stuff blows up.
I suppose people could start investing in dehydrated water.
Here is article from yesterday Washington Post, where FBI is investigating mortgage fraud through Northern Virginia.
http://www.washingtonpost.com/wp-dyn/content/article/2007/12/17/AR2007121701993.html
Once fraud investigations get rolling, it could be quite surprising to learn how widespread fraud really was as a driving force behind the bubble. In fact, I am wondering whether blanket immunity might not result from a fraud problem which proves to be “too big to prosecute?”