Surprises Continue To Pop Up
Some housing bubble news from Wall Street and Washington. BBC News, “Bear Stearns has posted its first quarterly loss in the company’s history, as bets on risky sub-prime mortgages in the US turned sour. It revealed it had written down $1.9bn in the period due to these woes. This was more than the $1.2bn it had earlier suggested, and reflected the reduced value of its sub-prime mortgage-related securities.”
The Associated Press. “‘We are obviously upset with our 2007 results,’ said CEO Jimmy Cayne.”
“Bear Stearns’ fiscal fourth-quarter loss, and collapse of two hedge funds it managed during the summer, prompted Cayne to pass on his 2007 bonus. Members of the company’s executive committee also will not receive year-end bonuses.”
“Bear Stearns has undergone three waves of layoffs since two hedge funds it controlled collapsed during the summer. Some 1,500 jobs have been eliminated from its staff of around 15,500. The company, one of the nation’s biggest underwriters of mortgage-backed bonds, may be the Wall Street investment bank most directly exposed to this year’s credit squeeze.”
“It faces a number of legal actions related to the funds’ collapse, including a suit filed by investor Barclays PLC.”
The Business. “Barclays has accused beleaguered investment bank Bear Stearns of using one of its two collapsed sub-prime hedge funds as places to offload troubled assets. The British bank called the funds’ combined $1.6bn collapse ‘one of the most high-profile and shocking hedge-fund failures of the past decade.’”
“In one of its harshest criticisms, Barclays accuses Bear Stearns of using one of the funds as a place to ‘unload excessively risky or troubled assets’ that it could not sell on to other investors.”
Dow Jones Newswires. “SunTrust Banks Inc. disclosed plans to buy $1.4 billion in securities Thursday held by two of its structured investment vehicles to prevent investor losses in ‘this unique environment.’”
“On the operating side, SunTrust anticipates $170 million net charge-offs on loans for the fourth quarter, with the loan-loss provision exceeding that by $ 190 million. As a result, loan-loan reserves are seen making up 1.06% of loans. The company’s net charge-off rate is seen rising to about 0.56% from the third quarter’s 0.34%.”
The Ottawa Business Journal. “Canadian Imperial Bank of Commerce is warning that it may have to take another $2-billion charge related to its U.S. subprime investments in its first quarter.”
“‘Although CIBC believes it is premature to predict the outcome, CIBC believes there is a reasonably high probability that it will incur a large charge in its financial results for the first quarter ending Jan. 31, 2008,’ the bank’s statement read.”
“The announcement came after news that Standard and Poor had reduced the credit rating of bond insurer ACA Financial Guaranty Corp – a hedge counterparty to Toronto-based CIBC – from ‘A’ to ‘CCC.’”
“CIBC said ACA’s insurance on subprime holdings was worth about $2 billion as of Nov. 30, and that it has hedged about $3.5 billion of its U.S. subprime real estate exposure with the New York-based company.”
“‘It is not known whether ACA will continue as a viable counterparty to CIBC,’ the bank said.”
From Reuters. “One analyst said a $2 billion charge likely isn’t enough to clear CIBC’s subprime exposure, which is held via complicated structured finance deals called collateralized debt obligations, most of which are hedged.”
“‘There was a collective sigh across (financial centers) Toronto and Montreal, but it wasn’t a sigh of relief,’ when CIBC’s statement came out, said Genuity Capital Markets analyst Mario Mendonca.”
“‘It is unfortunate that the bank has decided to bleed that out. They should take a charge so that most investors will say it really can’t be any larger than that,’ Mendonca told Reuters.”
“The New York Times reported on Wednesday that Merrill Lynch & Co Inc, Bear Stearns Co Inc and other large banks were in talks about bailing out ACA, citing two people briefed on the situation.”
“But Mendonca said that even if ACA is bailed out, those who it owed money would have to ’suck up some loss.’ ‘To say a bailout would reduce the possibility that CIBC would lose money is very simplistic,’ he said.”
“CIBC, with some $11 billion tied to subprime mortgages, has by far the largest exposure to this market of Canada’s banks.”
The New York Times. “Citing deepening problems in the mortgage market, Standard & Poor’s cut the rating of one troubled bond insurer on Wednesday and assigned a negative outlook to four other companies that guarantee debts linked to home loans.”
“S.& P. affirmed AAA ratings for MBIA, Ambac, XL Capital and Financial Guaranty Insurance, but assigned a negative outlook to them. And it left unchanged the ratings of five other bond insurers.”
“ACA has insured about $26 billion in mortgage-related collateralized debt obligations, some of them considered at high risk of loss as more homeowners fall behind on payments and end up in foreclosure.”
“Derrick Wulf, a portfolio manager at Dwight Asset Management, said investors were trying to price bonds assuming that the insurance on them was worthless. ‘Given the fact that so much depends on what the ratings agencies ultimately decide, which can be very difficult for investors to forecast,’ he said, ‘there isn’t a heck of a lot of trading.’”
From Bloomberg. “MBIA Inc. tumbled the most since 1987, and the risk of default soared after the world’s biggest bond insurer revealed that it guarantees $8.1 billion of collateralized debt obligations repackaging other CDOs and securities linked to subprime mortgages.”
“‘We are shocked management withheld this information for as long as it did,’ Ken Zerbe, an analyst with Morgan Stanley in New York, wrote in a report. ‘MBIA simply did not disclose arguably the riskiest parts of its CDO portfolio to investors.’”
“‘How is confidence expected to return to the capital markets when these types of surprises continue to pop up?’ said Peter Plaut, an analyst at New York-based hedge fund manager Sanno Point Capital Management.”
“MBIA said its total exposure to bonds backed by mortgages and collateralized debt obligations is about $30.61 billion. Included in that exposure is a pool of about $8.14 billion in CDOs backed by a combination of other CDOs and mortgages, which some analysts consider the riskiest part of an investment portfolio.”
“Fitch Ratings on Thursday changed its outlook on Bank of America Corp to negative from stable, indicating that a downgrade is more likely in the next one to two years.”
“The change in Bank of America’s outlook ‘reflects the fact that (its) earnings have a significant level of sensitivity to trends in the deteriorating residential mortgage market,’ Fitch said in a news release.”
“Moody’s Investors Service on Wednesday cut its rating for home builders D.R. Horton Inc and Ryland Group Inc to junk status, citing persistent troubles in the U.S. housing market.”
“‘Moody’s does not see a sector recovery beginning before well into 2009 at the earliest, with any housing recovery likely to be very measured for some time thereafter,’ the bond-ratings firm said in a news release.”
“The size of the U.S. commercial paper market suffered its biggest weekly shrinkage since late August, after credit market turmoil first erupted, the Federal Reserve reported on Thursday.”
“The overall U.S. commercial paper sector shrank $54.7 billion to a total $1.784 trillion outstanding in the week ended Dec. 19; a development that was likely to increase concerns that strains in short term lending markets are intensifying at year end.”
“The U.S. asset-backed commercial paper market, which has been hard hit by its exposure to subprime mortgage securities gone bad in the U.S. housing slide, shrank for a 19th straight week.”
“The asset-backed commercial paper segment, which had once helped to fuel the housing boom, fell $27.5 billion to $763.5 billion following last week’s $10.3 billion fall. The size of the ABCP market is the smallest since August 2005.”
“As storm clouds gathered over New York on July 10, Standard & Poor’s started a 10 a.m. conference call to discuss why the credit rating company was about to take its most dramatic action in more than two years.”
“S&P analysts said they might cut ratings on $12 billion of the world’s worst-performing subprime mortgage bonds, some of them less than a year after they had been given investment-grade designations.”
“Blessed by the biggest credit rating companies as safe investments, these instruments offered higher returns than government bonds with the same ratings. Investment banks including Bear Stearns Cos., Deutsche Bank AG and Lehman Brothers Holdings Inc. sold $1.2 trillion of these securities in 2005 and 2006, said Brian Bethune, director of financial economics for Global Insight Inc.”
“None of this could have happened without the participation of Wall Street’s three biggest arbiters of credit — Moody’s Investors Service, S&P and Fitch Ratings. About 80 percent of the securities carried AAA ratings, the same designation given to U.S. Treasury bonds.”
“‘The rating agencies had an almost God-like status in the eyes of some investors,’ says Sylvain Raynes, a former Moody’s analyst. ‘Now, that trust is gone. It’s been replaced with a feeling of betrayal.’”
“Many institutional investors’ own rules, in addition to state or national laws, bar them from buying securities that don’t carry investment-grade ratings.”
“Issuers got guidance from rating companies on how to shape their subprime securities to win the ratings, says Joshua Rosner, managing director of the New York-based research firm Graham Fisher & Co. Investment banks used software distributed by the ratings companies to show them how to meet the requirements, then paid the companies to have the securities rated, he says.”
“‘The idea that the rating agencies are impartial in the world of structured finance is a joke,’ Rosner says. ‘The issuers use the publicly available model to structure a pool and then sit down with the rating agencies to fine-tune it until they reach the desired rating.’”
“One $720 million loan pool created by Tokyo-based Nomura Holdings Inc. was rated Baa3, an investment-grade rating, by Moody’s when issued in 2006. Now, it’s rated Caa1, seven levels deep into junk-bond territory, and priced at 32 percent of the original value after 29 percent of the mortgages defaulted.”
“Almost 40 percent of the loans in the pool were originated by Costa Mesa, California-based Quick Loan Funding, run by Daniel Sadek, a broker who started the subprime company in 2002 with the motto: ‘You can’t wait. We won’t let you.’”
“In coming months, subprime losses will reach into almost every home in the U.S. as pension funds reveal setbacks, the former Moody’s analyst Raynes says. ‘The smallest investor, not Wall Street, is the one who will pay the ultimate price because he trusted the fund managers who blindly followed the rating agencies,’ Raynes says.”
“Jose Sepulveda worked 34 years as a reading teacher and elementary school principal in southern Texas towns along the banks of the Rio Grande. Now retired, he says he thought he was as far as he could be from the mortgage crisis roiling markets in New York, London and Tokyo.”
“He wasn’t far enough. The Austin-based Teacher Retirement System of Texas, the manager of Sepulveda’s retirement money, holds $6 billion of securities backed by assets that include subprime mortgages, most of it rated AAA, according to a report on the fund’s Web site.”
“‘How could anyone think that investments backed by subprime loans were safe?’ Sepulveda says.”
The Kansas City Star. “Media coverage of housing trends often gives the impression that the market is worse off than it really is, according to the chief economist for the National Association of Realtors.”
“Lawrence Yun, in presentations Wednesday to Kansas City area real estate agents, said the media’s biggest mistake was too much reporting on nationwide real estate trends. National trends alone, he said, don’t apply to many parts of the country, and reporting of them usually lacks perspective.”
“For instance, Yun reported that the national median (or midpoint) home price this year was on its way to its first overall decline since the Depression. Already, he said, the media drumbeat is repeating the word ‘depression,’ thus depressing consumer confidence and keeping potential homebuyers out of the market.”
“Yun noted a recent newspaper article about the high level of foreclosures in Ohio.”
“‘People read it and think the situation here is the same as there,’ Yun said. ‘All real estate is local, and what’s occurring nationally, particularly on the coasts, may not be indicative of what’s happening locally.’”
“Metropolitan Kansas City, he said, has never seen the extreme ups and downs of coastal markets, and the median price decline in the area this year is ‘marginal.’”
“He also sought to disprove some forecasts calling for home prices to continue falling nationally next year. He suggested that such predictions were based on a widening gap between fast-rising home prices and slower-rising incomes.”
“To Yun, though, that widening gap is misleading because mortgage rates have fallen over time, so the same income today buys more house than in the past.”
My hat’s off to Bloomberg for another in a great series on the subprime problem. You guys should read it in full.
Also, more bubble billions gone and no bail-out. As a matter of fact, from the AP:
‘On Wednesday, Morgan Stanley Inc. reported a $9.4 billion writedown from bad bets on mortgage debt — almost triple what it originally expected. That triggered its first loss as a public company for the nation’s second-largest investment bank. It also unveiled a $5 billion investment from China’s state-run investment vehicle. Bear Stearns agreed in October to a $1 billion investment from China’s government-controlled Citic Securities Co.’
So they sell a little stock, boo hoo. Nobodys gonna bail-out a $50 billion corporation, IMO, especially when the country is broke and they can raise it elsewhere:
‘The subprime mortgage crisis will create more opportunities for sovereign funds to invest their growing wealth in some of the world’s best-known banks, a leading investment banker said on Wednesday.’
‘There are a number of financial services companies that will have to fill a hole,’ Lazard Deputy Chairman Gary Parr told Reuters. ‘They were overexposed to these asset classes and they’re taking hits. Fortunately, there is a market for this. There are places in the world interested in investing.’
“In one of its harshest criticisms, Barclays accuses Bear Stearns of using one of the funds as a place to ‘unload excessively risky or troubled assets’ that it could not sell on to other investors.”
And yet this Cioffi guy is supposedly raising money for another fund. What kind of idiot would put $$$ with him?
These guys always seem to get another chance. IIRC a couple of the LTCM guys did the same thing.
Bear Stearns have always been known as the fast-buck risky-business cowboys of Wall Street.
“Also, more bubble billions gone and no bail-out.”
You forgot one word at the end there - “yet”.
I know you’re optimistic about the prospects of our government letting these big boys spiral into bankruptcy and insolvency, but call me skeptical. I, too, believe that this is too big of a mess to be fixed by the mother of all bailouts, but that won’t stop our fearless leaders from trying.
You guys have been saying this for a year and a half or more, while I show the bubble deflating daily. there is no credibility in your ‘yets’ anymore.
Ben:
How much of the lack of bailouts is due to your coverage of the housing bubble and taking away the excuse that no one could have seen this coming?
I think without the various bubble blogs, (Ben’s being the biggest) there may have been a bailout already.
God knows, they tried. M-LEC, Super SIV, TAF, Paulson’s freeze, etc.
Liquidity can’t really help an insolvency crisis.
That’s what I personally believe, and why I keep that bottle of lotion within ARM’s reach on my desk.
I don’t understand Prof Bear’s post.
I will restate mine. I generally agree with Ben but it is bit more complex than he lets on.
I believe that there are 3 reasons in no particular order.
1. Information - Ben’s blog takes away the excuse that no one could have seen this coming. That takes away a big premise for a bailout.
2. Rabid anti-bailout sentiment - somewhat unsavory but useful side effect of #1.
3. Ben is right. There is no true bailout that is possible, it is too big! What is in all of our best interests is a controlled liquidation. However, interested self-dealing parties will try to turn controlled liquidation more towards a partial bailout for their industry.
That is where I believe the value of #2 - RABID anti-bailout sentiment should be channeled to ensure the controlled liquidation is open, transparent & as fair as possible.
“…what I personally believe…” = “…the lack of bailouts is due to your coverage of the housing bubble…”
I have no way to verify whether anything that is posted here has policy influence, but one can certainly hope.
It’s hard to disagree with this one sentence, though: “I, too, believe that this is too big of a mess to be fixed by the mother of all bailouts, but that won’t stop our fearless leaders from trying.”
There have been many RE bubbles in history. Has even one ever been bailed out? Or how about the stock bubble? Or the tulip bubble? Or the beanie baby bubble?
Is there anything, anyone could have done to prevent drkoop.com from falling? Again, no one can repeal the laws of supply and demand, if a market is large enough.
Have you seen the farm bill?
Ben,
Most of the previous RE bubbles didn’t threaten the existance of the banking industry. This is what mandates a bailout, because the bankers/investment firms run the country through the pols. Now, it may be that the bailout isn’t out in the open, and it may take an unconventional form. But the jist of it will be pols screwing over the middle class to help the elitist class.
As you point out, this thing is too big for a bailout to actually work, so the bailout is doomed to failure. And the pain will be that much greater than if the government hadn’t intervened.
Mentioning the stock, tulip, “beanie baby” bubbles and a failed internet site is a strawman argument that is inapposite to the discussion.
It’s certainly your prerogative to address the potential issue of a bailout in such a manner, but like the other poster, I believe it’s not beyond the realm of reason to expect our inept politicians to attempt a bailout. They’d fail in doing so, but success would not be their underlying goal.
Look at any of the big IB balance sheets and you will see they have plenty of equity. These cash infusions are merely so they meet regs that allow them to pay dividends. Keep in mind, they made money, lots of it, selling these securities. It’s the suckers that bought them that are stuck, and rightly so. Let them sue Moodys. The small amounts (relatively) that they are having to eat now, well, they can stomach it. They are almost done, IMO. MS did their ‘kitchen sink’ quarter just now, and with the Chinese cash, their stock went up.
Most of this stuff is in Europe and the Caribbean, IMO. Tough luck yield chasers.
‘It’s certainly your prerogative to address the potential issue of a bailout in such a manner’
I guess so since I’m paying for it. Again, when has a RE bubble, or any bubble, been bailed out?
Ben, I don’t know if it’s really even possible to “bail out” a bubble successfully. If it gets bailed out once, the bubble continues to expand, and an even bigger bailout will be needed later.
It’s like trying to keep a Ponzi scheme afloat.
If the pols don’t engineer a bailout it’ll be because the masses rise up and threaten to burn them at the stake. Short of that, there’ll be some sort of bailout. Maybe not as bad as some fear, maybe worse. But it’s what the pols do - they’re bought and paid for by their buddies who put them in office for that very purpose.
A bailout implies a plan to mitigate the effects of the situation. But what if the situation is too big? What if there are too many competing interests? Which master do you serve? Big financial institutions (campaign contributors) at the expense of the voting public? The US dollar vs mortgage rates vs inflation?
All this financial engineering is new. The unintended consequences are just beginning to show themselves. Even when they are known, the way out is clear as mud.
The river is rising and the flood is coming. No one can decide where to put the sand bags or what needs to be saved.
Bailouts will be attemted, but will, by and large, fail.
Les Miserable ones will erect barricades to allow them to stay, but not pay.
Since my memory is faulty, how bad was the S&L debacle in comparison to the subprime situation ? My hazy recollection was the S&L bailout was small potatoes in comparsion to this mess. More understandable, limited to the USA, less complex by far, and at that level we could afford to throw money at it to make it go away.
I’m going to go over this for the 50th time cuz it doesn’t seem to sink in. It isn’t optimism nor pessimism, it realism.
I was on this nationwide radio show in August, 2005. By some measures the top of the US housing bubble. When asked how it would burst, I told the host regionally and that it would be accompanied by cascading defaults. By then I had already educated myself on how the bubble had been financed and who the various players were so it wasn’t hard to see that coming.
But most of all, I had seen this movie before. I was a real estate major and an economics minor studying in the largest bubble metro in the world during the oil/RE bust; I watched the whole thing happen day after day.
The host asked me if there would be a bail-out (in reference to Fannie Mae, which was the big story at the time.) I said no, it was too big. Now, will there be a RTC like deal come down the pipe? Maybe. But as I’ve explained many times before, that was a controlled liquidation more than anything, even though the press went on and on about a S&L bail-out. Anybody could participate in carving up the remains of that bubble and many did.
And I have also mentioned before, things got so tough we didn’t have the energy to worry that all the banks were going under, who was benefitting, etc. But they were just gobbled up by other banks. Prices fell and eventually life moved on. Heck, Texas has had at least one bubble come and go since! I don’t know why people forget history so easily, but they do.
Ben, I don’t think you can compare the S&L fiasco with the current mess we’re in. The CitiGroups and Bank of Americas weren’t in jeopardy of failing. The S&L’s were allowed to fail because they didn’t affect Wall Street.
Because young-ens don’t remember. 1989 was almost 20 years ago. So there are plenty of 30-somethings that were too young at the time.
I work with someone who sells RE part time and is still in denial. I asked him during lunch how it was going and he told me that “they’re saying” things would “pick back up” in the spring. I told him that I was hearing that it would take between six and ten years, but I’m not going to argue with the guy.
Been saying that myself for three years here now. Next year will hopefully be the year experience is worth something.
Citi and BOA aren’t in danger of failing. I posted the link that shows there are giant stashes of cash available to them, in exchange for stock. In fact they are already tapping them. This is all happening right in front of everyones faces, yet some refuse to see.
The S&L weren’t ‘allowed’ to fail. They were part of one of the biggest RE bubbles in history, full of fraud, speculation, etc. It wasn’t oil loans that put every major bank in Texas under, it was RE.
“…yet some refuse to see.”
Would this include investers buying the dip on their shares?
It seems we have two financial issues going on at once that are somewhat tied, but moving in separate timezones, so to speak. We have the housing bubble and we have the credit crunch - they overlap, but also have some independent aspects. Any plan to bail out housing, won’t have much effect on the credit crunch or solvancy issues. Any plan to bail out the banks, won’t have much effect on housing because of affordability issues. I think emotionally it’s frustrating to see any suggestion of bailouts for any cheats, scammers, morons, fatcats, etc. I tend to have a visceral reaction to them, but when I take the time to think it through, I have to agree with Ben that none if it will really happen anyway. My question is, and maybe it would be better as a weekend topic is what is next? What will this all look like 90 days, 6 months, 1 year down the line to the average person just trying to live life.
“Citi and BOA aren’t in danger of failing.”
That remains to be seen, Citigroup took some unusual actions to keep its tier one levels above 7.5%. Citigroup now has the weakest book of any major money center bank. Citigroup is short $55B in CDO puts that are not recorded on their balance sheets. Bank Of America has exposure to CDO puts and “hedged CDOs” that in the event of default of the counterparties make BAC insolvent. Bank of America’s hedged CDO exposure is $39B. (figures are from Nov 28, 2007).
Do I think they will go under? NO! But I think their lending and profitability has been dampened for the next 5 years.
Awesome 8/05 interview which proved remarkably prophetic when viewed through the rear view mirror through which our Fed likes to view bubbles.
Ben Jones, whose voice sounds like a calmly confident Prof. Shiller w/ a Texas drawl, was followed by an honest and extremely nervous Boston Realtor who was worried about a ratio of 6 cancelled listings for every 10 that sell.
Interviewer says: “They aren’t making any more Bostons, but they are making more Flagstaffs.”
That is a classic!
(What is that cancellation-to-sales ratio these days — about 10 to 1 or so?)
And then Professor DeLong weighs in — “Happy to be here — It’s probably a bubble, but there are four fundamental factors driving the residential real estate markets:
1. Looking out my office window across to the Golden Gate, they aren’t making any more views. For 70 years, location was not that important. Until recently, there haven’t been huge location premiums which we can get to in our car for less than an hour.
2. Up until 1970 or so, US cities were consortiums for enrichment of developers. Now we have NIMBYs standing in the way of urban expansion (protecting homeowners who are already living there against massive density increases). Particularly affects housing prices in NE and CA.
3. Amazingly, unbelievably low interest rates (1/2 what they were 10 years ago) implies the same monthly payment today buys more house than a decade ago.
4. Real estate financing market in Boston, SF, LA, NY, DC etc is insane.”
In retrospect, it looks like fundamental item number 4. proved to be most important of all. Now we get to see how good our central bankers really are…
Sweeny Texas:
Actually CitiBank did almost fail during the S&L crisis. I worked at the FDIC at the time in the Division of Liquidation, and we were put on standby to close it. The only thing that kept CitiBank from being closed was the FDIC forced sale of its credit card servicing, which at the time was its only viable asset.
You will note, though, Ben, that the big cheeses are daily looking for a spot to insert the prybar. They just haven’t been fast enough…yet.
The Fed just recently joined the party. It’s still early, the puch bowl is about to be spiked and there’s plenty more write downs coming. If the Fed doesn’t bail out the financials then the Chinese, Arabs, Etc will end up owning 50% of said institutions. IMHO
And who said globalization wasn’t a good thing??
Example:
-Master of the Universe type blows up hedge fund doing something criminal, or stupid, or both.
-New Chinese or Arab owners of the Investment Bank have him fly over for a “consultation”
-Said M.o.t.U. is immediately arrested, and subject to the mercy of the Middle Eastern or Chinese court system.
I keep hearing this mantra that we are “…a forgiving country…” Personally, I wish we would be a little less forgiving, and more of a mind to start dealing out some Joshua trees instead of gerbils.
“Also, more bubble billions gone and no bail-out.”
Stop the trillion dollars going to Iraq, and solve the USA’s economic woes. What a concept. Congress gives the president $50 billion for a “black hole” in Iraq, and we face rescession and inflation at home, and nobody connects the dots.
Including your woman and I use that term with trepidation.
But David,
You’ve got to realize that a majority of Iraq funding never even leaves the US. It gets paid to military/defense contractors and their employees, so that money is direct-deposited into their accounts here, even if they are physically working in Iraq at any given moment. So this $ is actually helping to keep our economy going (not saying I agree with the war or funding it, BTW).
Never, even leaves the U.S.? Who are they borrowing the money from, who receives the interest paid on the money borrowed, and who are they supposed to pay the principal back to?
Hoz writes: Do I think they will go under? NO! But I think their lending and profitability has been dampened for the next 5 years.
So why would Citi be a short, having already fallen by almost 50%? You’ve got to think the situation is much worse than what you say to still want to short it here. Remember, as interest rates decline, stocks become more valuable, other things being equal. This is what the stock uber-bears are missing. Theoretically, if you give me a certain stream of earnings, no matter how small, in a zero-interest rate environment, the value of the stock is infinity. Citi is already over halfway to being nothing more than a call option on non-bankruptcy - short at your own risk.
“Media coverage of housing trends often gives the impression that the market is worse off than it really is, according to the chief economist for the National Association of Realtors.”
Yun is spinning so much that if you gave him plates and an appearance on the Ed Sullivan Show, he would do very well.
The banks and investment firms are writing down this paper ,but they still hold this paper ,and this paper is transferable to another loan program if the borrower hasn’t defaulted yet . Also I think the set up for the government programs is in case the prime re-sets start causing problems .Why would they want to raise the limits to 700k if it wasn’t for re-writing current risky high loan amounts ?
Bingo, Wiz.
Housing bailout comes in the form of FHA, HUD & GSEs. It won’t be able to stop the implosion, but they will sure use our (tax) money for their political gain.
Because I have been in this blog community for nearly 2 years and I think those who have followed me have mentioned I have pretty much been right on everything I’ve said, I’ll give you guys the warning (because it seems it hasn’t been discussed here).
The ACA news is the canary in the coal mine. The monoline insurers are worthless pieces of sh!t. MBIA’s announcement today is tantamount to fraud, IMO.
There can be no “bailout” until you know the value of securities. However, the size of these companies’ insured portfolio coupled with the opaqueness of investment bank balance sheets, makes this a modern day Tsunami.
How the equity market is not down 10% on this news alone is beyond me.
Furthermore, anybody who thinks that Goldman Sachs’ gains are realizable given the problems with the bond insurers. Well I have a 3 bed2ba tract house in the Inland Empire to sell you for $600k.
MBIA - worthless
Ambac - worthless
ACA - already worthless
Best of luck.
How the equity market is not down 10% on this news alone is beyond me.
Perhaps because everybody knew it already? In even if not, equities do not have to go down far in a low-interest rate environment to fully discount really bad news.
As I
Low interest rate environment…like Japan? Their stock market sold off by almost 80% over a 13 year period while the Bank of Japan tried every monetary trick in the book, including lowering interest rates to zero. You are indulging in an “invincibility” fantasy, my little bull.
Some of you posters here will just never consider that maybe, just maybe, price supports are used to prop up the stock market. Our govt has historically used price supports high and low to control the price of gasoline, food, consumption goods, sugar, program crops, overnight lending rate, etc., but the stock market’s level is set by the actions of independent buyers and sellers — a veritable free market. Take a look at your logic and ask yourself whether it makes an ounce of sense.
I guess our definition of bailout is very different. When I think bailout I think of the government either using taxpayer money, or reducing tax collections, to assist people that acted recklessly. In this way our government is bailing people out, or at a minimum softening the downside.
So…let’s see….
Tax forgiveness
The tax laws state that if you get the bank to forgive a portion of the loan in a short sale, that forgiveness is taxable. It was last year. It was the year before that. But now our government wants to change that. Got passed in Congress. Chimp said he was going to sign it. And just like that billions of dollars that should have gone to the government to use for a wide variety of purposes just went puff. But wait, there’s more! The corporations are STILL going to be able to write off the losses. So we get less tax revenue from them too.
Who pays for this bailout Ben? We do. All of us. Please explain to me why you do not consider this a bailout. In my book it clearly is.
Tax forgiveness doesn’t bother me for a few reasons. One, it makes prices fall faster. Two, these are really accounting earnings. They didn’t make the money, its just how the tax code is set up. Three, many of these folks would probably dodge the bullet anyway by making themselves insolvent. Four, I don’t like taxes.
Hard to know where to start with that last post, Ben.
“One, it makes prices fall faster.”
Agree. But that is really beside the point. It’s still a bailout, whether it works or not.
“Two, these are really accounting earnings. They didn’t make the money, its just how the tax code is set up.”
But they really did make the money Ben! Your net worth went from negative “several hundred thousand dollars” to NOT negative “several hundred thousand dollars”. And the corporation is going to get a tax refund / tax reduction for those “several hundred thousand dollars”. It is real. Nothing BS about it.
“Three, many of these folks would probably dodge the bullet anyway by making themselves insolvent.”
You cannot go BK on tax obligations. The IRS will garnish your wages forever, if needed.
“Four, I don’t like taxes.”
Does anyone? But don’t we all have an obligation to pay taxes to support our country? After all, we all consider ourselves patriotic, right? If you don’t like taxes, I guess someone else should be paying our troops in Iraq, right? Maybe you dislike the roads you drive on? Who should pay for them? Incidentally without taxes you might want to pick the bridges you drive over. Some seem a little shaky IMO. And all those public schools shouldn’t get any money either, right? They all take taxes.
If you don’t like taxes how do all these things get paid for? Are the rest of us supposed to pay your share too? I have no problem paying my fair share of taxes. I just expect everyone else to do the same. Seems pretty patriotic to me.
Happy holidays.
“I guess someone else should be paying our troops in Iraq”
We borrow the money from the Chinese, Etc to pay the troops. No need for taxes, though we need to come up with a plan to screw the Chinese, Etc. so we don’t ahve to pay them back. Devaluing the dollar is a good start. Capitalism at its’ finest.
I think most of the bailout has already occurred: the operators of subprime brokers took there millions before BK, IBs and money center CEOs/managers got years of bonuses, insiders at the builders took out millions through sales. I would wager that most of the people that made most of the money off the current financial crises have collected their $200, passed go and left the game. The bailout has allowed these players to get theirs - it doesn’t matter if the government doesn’t spend a dime from now on (although our leaders will step in and commit the full faith and credit of the US government to back insolvent firms - for our own good) because the bailout already occurred and we all have to live with the results.
Right - The bailout shifted from the taxpayers to the share holders.
The silent bail out is already happening:
http://www.ft.com/cms/s/0/13c04ba2-af29-11dc-880f-0000779fd2ac.html?nclick_check=1
Some quote from Financial Times article
Insight: A vital safety valve for US lenders
By Gillian Tett
….
This is a part of the US financial system which few outside the US know much about. What the FHLB essentially does is raise money cheaply, by virtue of having an implicit state guarantee. It then uses this to provide loans to other financial institutions, against their mortgage collateral.
The important point to grasp is that these loans have quietly ballooned in recent months: as my colleague Krishna Guha recently noted, the Fed’s Flow of Fund data shows that the FHLB system issued new loans to mortgage lenders at an unprecedented annualised rate of $746bn in the third quarter of this year. That was up from practically nothing in the second quarter. And while the FHLB does not name the lucky recipients of this largesse, the cash almost certainly went to institutions no longer able to fund themselves in the normal way – ie through the capital markets.
..
But there is a nasty sting in the tail. Since the FHLB enjoys an implicit government guarantee, taxpayers will be on the hook for any future losses. And while such losses have not yet occurred, regulatory oversight of this sector is thin. The FHLB safety valve, in other words, may yet produce some nasty surprises further down the road.
..
Bennett on Minyanville, one of my favorite commentators says we have reached the tipping point where money creation no longer stimulates economic growth. He says we can expect REAL volatility next year, not this make believe stuff we have now, and that 2008 will separate the men from the boys (lol, don’t know where I fit in there). I cannot wait. I traded every day through the wild stuff in 1997 - early 2003 but I’ll bet a lot of today’s WS heroes were still in college.
chick,
When you (or Mr. Bennett) say real volatility, what do you mean? Lots of more violent up and down swings? Lots more down action in various sectors at various times? Something else?
I don’t have the time or expertise to join you full timers in your exploitation of market volatility, but I sure enjoy watching from the side lines (and preserving capital).
When it is up they don’t call it volatility. I think it will be mostly down, with a sucker rally here and there.
For the non-traders among us, the question is when are stocks/houses/bonds safe to own at current prices/interest rates?
55 Vix like in 1998. People like Cramer saying “get out of the market” at the very bottom.
When the papers lifestyles sections has articles:
“50 Ways to Cook Squirrels.” or
“Novel Ways to Wok Your Dog”
Then it will be safe to buy.
“Novel Ways to Wok Your Dog”
Monitor, please?
I am not surprised by this. I know my stock knowledge is weak, but using the market as an analogy, and realizing it is a rough one at that, here goes. Just look at the Dow. This thing is up and down like a heart monitor. On top of that, it struggles to maintain 13,200-13,250 every day.
I don’t know who you guys and gals play this thing. If that was my interest-bearing bank account, I would be a mess on a daily basis. Not that I am not already, but that is for other reasons (just kiddin’)!
I think what we have reached is what we have called on this board before: Peak Debt. Since money creation is just that, debt , and we have reached the maximum output, growth rise of this creation, we have reached, Peak Debt.
Oh well, end of western civ as we know it. The sky is falling. Depression on the way. Bank holidays around the corner. Country owned by the Chinese. Nothing to see here people. Move along. Go back to your foreclosed homes or non-existant jobs. Or, if you have a job, go back to flipping burgers for min. wage. Hope you can make the mortgage this month.
Man, you gotta love this country!
“Oh well, end of western civ as we know it.”
If the status quo is allowed to continue, your cynical take on our future will be right on. Everything in this country is fu*ked up, from our economy to our education system to our diplomatic relations with the rest of the world to our basic priorities in life.
But we created this mess, and we can fix it. We just need to grow some balls.
IMO, the first step is to vote every incumbent sum bitch out of office in the coming elections. Maybe we need to start a nationwide petition for people to pledge to vote against all incumbents. Vote for whichever party you like, just vote for someone new.
SUPPORT YOUR LOCAL MILITIA!
“IMO, the first step is to vote every incumbent sum bitch out of office in the coming elections.”
If you are just blindly voting against who’s in office not much will be accomplished. Both parties are working in lockstep against the citizens of this country, publicly ranting at each other to polorize the electorate and make them think they have a real choice. All a charade to fool the unwashed masses into believing candidate A is different than candidate B.
Our current system is very similar to the Soviet system. Under the U.S.S.R. those elegible to vote could vote for comrade A or comrade B, not that it made any difference. They had an openly one-party system, we have a disguised one-party system.
SUPPORT YOUR LOCAL MILITIA!
Is it just me or does seem like a post that totally sterotypes Texas? (Sorry, txchick…)
At any rate, My husband would be severely disappointed if I grew some huevos.
Leave it to this blog to give me my daily vitamin L.
L = Laughter
Don’t apologize to me. I hate this place.
We did have real volatility for a couple weeks in late july and early august. Especially when loooked at sector-by sector and day-by-day.
But at this point, there needs to be an event, and something bigger than oil going up a few bucks or a lousy economic number. Someone big needs to go default or something.
Remember this?
http://www.thestreet.com/comment/wrong/32200.html?puc=_tscs
I did my first naked put sell that day. Sold the OEX Oct. at the money IIRC at 38 bucks each. Scared me to death.
BTW, for those of you who weren’t in the market at the time, this was the bottom of the LTCM liquidation. The vix was 55 or so. Total panic. The market bottomed about an hour after Cramer wrote this. He’s never been able to live it down
Remember it? I was standing between the S&P 500 futures pit and the options pit. Wildest moment I ever witnessed, other than fights between traders, was when the Fed did the intermeeting 50bp cut that month and the futures instantly shot up 50 points.
So whatcha doin’ tonight?
Have you heard that the world’s gone crazy
Young Americans listen when I say …
There’s people puttin’ us down
I know they’re sayin’ that we’ve gone lazy
To tell you the truth we’ve all seen better days
Don’t need no fast buck, lame duck, profits for fun
Quick trick plans, take the money and run
We need long term, slow burn, getting it done
And some straight talking, hard working, son of a gun.
Whatcha doin’ tonight? I got faith in our generation
Let’s stick together and futurize our attitudes
I ain’t lookin’ to fight, but I know with determination
We can challenge the schemers who cheat all the rules
Come on take pride, be wise, spottin’ the fools
No more big shots, crackpots, bending the rules
A fair shot here for me and for you
Knowing that we can’t lose
And we’ll be rockin’ in Paradise
Rockin’ the Paradise tonight
Rockin’ in Paradise
Rockin’ the Paradise tonight
Tonight, tonight…
STYX
Good one, Aqius.
d’Cayne of western fiscalization…
“Bear Stearns’ fiscal fourth-quarter loss, and collapse of two hedge funds it managed during the summer, prompted Cayne to pass on his 2007 bonus. Members of the company’s executive committee also will not receive year-end bonuses.”
It astounds me that all of these people grossing over $1M a year got caught with their pants down with this sub prime mess. HOW COULD NOBODY BUT US SEE THIS COMING?!?! Are they really that stupid, or just claiming ignorance so that they don’t get in trouble for riding the gravy train all the way down?
I nominate Ben for the next Fed chief.
(Are they really that stupid, or just claiming ignorance so that they don’t get in trouble for riding the gravy train all the way down?)
They are stupid about housing prices not continuing to rise to the point where people pay 100 percent of income. But they can hardly say their plan was to give people loans they couldn’t pay back, such them dry for while, and then foreclose and sell at higher prices, and lower prices blew the whole thing.
Most straw-buyer scam artists fear going to jail…
Their rhythm method failed them.
I once had a boss who liked to sing, “I’ve got rhythm, I’ve got children.”
A little off beat
Forget FICOs, down payments, insurance and taxes, maintenance, and everything else we all know about mortgages for just a moment.
Let’s go to math 101, shall we.
Assume a family with a household income of 100K. Resonable, esay to work with, covers all the liars out there, etc. This family wants to go for broke, literally and figuratively, so they look at that 850K McMansion. Assuming this family took the entire 100K home and paid a 0% mortgage, it would still take 8.5 years to pay that sucker off.
So, in response to your question, yes, they are using ignorance. Look, some fine innocent people got caught in this mess of toxic mortgages. And sure, we can fault the public education system for not teaching people how to pencil out a math problem that any of us could do in the minute it took me.
HOWEVER, there is no question these CEOs and pigmen knew exactly what was going to happen. The real question is…Would they ever have made these loans if they had to hold them? My answer to that is a resounding NO!!!!!
You see that was the whole key to this mess. By not holding the loans they were able to get away with everything we have mentioned on this board for 3 years. Well, if the rate freeze goe through or they have to buy these loans back, kiss our system goodbye.
It has been put better here. Read this and you just might think twice about that CD you have even in your local bank…
http://www.financialsense.com/fsu/editorials/martenson/2007/1217.html
JJ — that baffles me, too. I suppose it is because most people don’t read enough. In an e-mail exchange with a skeptical buddy today, I calculated today that I have spent over 4,000 hours reading this stuff. It became an obsession for me partly because of the point you make — how can so many people be “asleep?” I think it also helps to be able to use a spreadsheet, which many people apparently cannot do. It makes it a lot easier to see how bad assumptions like 20% annual price increases not only could not go on forever, they could not go on for long at all.
I don’t think you have to read much if you have a little (un)common sense. I didn’t read a bunch of news articles and decide something was wrong. I just got some major vague red flags, like:
That seems like an awful lot to pay for an apartment.
That seems like a pretty big mortgage payment for what you’re making.
Yeah but, isn’t that payment going to go up in three years?
You’re counting on getting a raise? huh?
I/O? How is that different from renting?
Sure, they said you could refinance, but what if something comes up?
and the big one for me..
Ya know, they’re going to physically run out of buyers at some point no matter how easy the money is, and then what?
It astounds me that all of these people grossing over $1M a year got caught with their pants down with this sub prime mess.
The assumption is that these are guys are all super-smart and paid to think about the future — not so.
Most of them are follower-sheep with a herd mantality in an aggressive sales culture — make as much money as possible this week, this month, this quarter. That’s how they get paid, that’s how they get bonuses.
If you show caution when no-one else does, and nothing bad happens, you fall behind your peers and get fired. Systemic risk? Not their problem. If everyone goes down together, then no-one can be blamed.
“HOW COULD NOBODY BUT US SEE THIS COMING?!?!”
Apparently blindness can be highly lucrative under the right circumstances.
They obviously were getting $1million because of what they were doing. Doesn’t seem stupid to me at all. Kind of sucks morality wise. But thats not too much of an issue in the US. Possibly why I just accepted a job outside of this step on everyones head to get a lame luxury SUV country.
What’s the paraphrased Sinclair quote: It’s hard to get a man to understand something if his year-end bonus depends on not understanding it.
“The announcement came after news that Standard and Poor had reduced the credit rating of bond insurer ACA Financial Guaranty Corp – a hedge counterparty to Toronto-based CIBC – from ‘A’ to ‘CCC.’”
ACA got axed…
Dominos keep falling in front of one another.
“The announcement came after news that Standard and Poor had reduced the credit rating of bond insurer ACA Financial Guaranty Corp – a hedge counterparty to Toronto-based CIBC – from ‘A’ to ‘CCC.’”
ACA got axed…
Dominos keep falling in front of one another.
Short Sales are going to happen like crazy. Why? Bush just signed a bill that waives taxes on forgiven debt until December 31, 2009.
So they said this is going to solve the problem if falling house prices? Get ready for them to fall even more now that people are willing to sell houses for a loss and not worry about taxes.
Incorrect official explanations aside, I don’t view this as a bad thing. Prices are going to fall and this should help speed the process.
All the better. Besides, the IRS doesn’t have the people to try to collect the taxes from the FB’s. It would have to do into the program that outsources certain collections to private companies. They (the companies, not the individual worker) can get paid 20 to 30 cents on the dollar for doing it. It just seems like such a natural place for the unemployed mortgage brokers to go. I’d rather see them in fast food or as Walmart greeters, or maybe something from that dirty jobs show.
I for one would rather former RE pukes not go into fast food sales, as I occasionally enjoy a Wendy’s double w/cheese and don’t want my order screwed up.
We’re talking a level of attention to detail here that these people are plainly not capable of fulfilling.
So if you got cashback at closing or you HELOC’d, you are good to go with your cars illgotten toys and everything without even paying taxes?
That’s great. What a country.
C’mon man, ease up. It’s an ownership society now. Get with the program, will you?
Much better to be in the non-ownership society……..where is that exactly?
“It’s an ownership society now.”
Ahh yes. The center piece of the smirking chimps hollowed out credit card economy. What a friggin failure.
Do ya think W or the folks at the Fed understand that the measures announced this week are likely to accelerate the crash?
Would this remotely be termed a bailout by the tax payers? The gov is under water as it is = another shortfall in tax revenue. Who ulimately pays the lost tax revenue? Does the FB in the end pay his/her share?
The banks that purchased these loans should fail. They had all of the tools, expertise, and training to know that they were taking on enormous risk. This risk was not sudden, but gradually getting more dangerous over years yet they kept buying like heroin addicts. I am much more upset with the banks than with the moronic FB’s or crap-packaging scammers like Countrypuke. Which of our politicians will stand up and say “no bailout for any of them” - my pen and checkbook are ready when they do…
I say eFF them all.
When everyone profits as a ‘middle-man’, who watches the bottom line?
I frankly hope and pray that the banks are bailed out - sadly, I just do not see anyway to do it. If it means devaluing the dollar another 50% next year, so be it. I have no wish for depression redux.
Hoz - why do you hope that the banks will be bailed out? Should all of the investors who lost money in dot com be bailed out. I agree, a recession/depression will be hard, but at least it will get it over with (so that we can start new bubbles?). I have saved for a house only to see the dollar devalued to crap (I am not very financially clever and have no idea what to do with 100k of dollars which seem to become worth less and less each day). I feel like I am being double screwed - once for not investing on the way up, and a second time for saving while the shit hits the fan.
RE: (I am not very financially clever and have no idea what to do with 100k of dollars which seem to become worth less and less each day
Guns, a chestful of American Silver Eagles, and a Stihl Pro chainsaw…Keep your pecker hard-your powder dry and you’ll be OK.
“All real estate is local…Metropolitan Kansas City, he said, has never seen the extreme ups and downs of coastal markets.”
Anyone know what line Yun uses in New York, Florida, California and Detroit?
Seems like the NRA spokesperson was always talking from the coasts during the run-up. Now during the bust, he’s making his statments from the interior of the country.
Bingo. It is exactly like the president making speeches in front of screened audiences. He probably get 5 times as many invitations as he can possibly accept. They decide what message they want to tout and choose the speech location to be one that will like the message.
good point, Cincy Dad
…where he can see the angry mobs coming from a distance and has time to prepare a defensive position…
Your acronym mistake gave me a brief visual of Yun going abruptly quiet amongst a volley of pink misted geysers on some sun drenched podium…
Nope Kansas won’t have seen the same huge rises in prices.
Pretty easy to figure out why - no one would live there who had any choice!
I had to spend a week in Kansas about 2 years ago (dog shows) and couldn’t wait to get back on the plane. Yuck! Boring flat ugly….looney people whose ideas about science stopped around 100 AD……
Problem is that the states which are crashing and burning just happen to comprise most of the population of the US.
The top-10 states for foreclosures in Nov have 39% of the population of the US. (And then there are the other 40….)
I can’t resist . . . Did you win?
More Vitamin L(OL) for Slim…
lol
LOL. (Took me 10 seconds to figure out.)
Metropolitan Kansas City is over 80% in Missouri. And states like Kansas and Iowa consistenly outpace the national average, and certainly Michigan, in SAT scores. But, hey, it works into the AS template.
W is singing the bailout soon
at least the tax” forgiveness” folks
lets see if Paulson et. al say there’s no taxpayer’s money in this deal
These folks can’t cough up $1200/ month how is the IRS going to extract tens of thousands from them? This could actually end up saving taxpayer money.
How about debt forgiveness for the borrower, but that the banks can’t take the loss on the loan until 2009 either? Net $0 to the non-participants in the mess in the near term rather than letting the non-participants carry the shortfall in the meantime. Banks take the losses (less tax revenue), borrowers DON’T take the gains (not more tax revenue), is a bad outcome for all of us.
Perhaps though, in 2009/10, tax rates will be higher, so those people will be paying more anyway, just paying later…
The 3 Writers of the Apocalypse…
“None of this could have happened without the participation of Wall Street’s three biggest arbiters of credit — Moody’s Investors Service, S&P and Fitch Ratings. About 80 percent of the securities carried AAA ratings, the same designation given to U.S. Treasury bonds.”
RE: “None of this could have happened without the participation of Wall Street’s three biggest arbiters of credit — Moody’s Investors Service, S&P and Fitch Ratings. About 80 percent of the securities carried AAA ratings, the same designation given to U.S. Treasury bonds.”
Ain’t no dif from the legions of rubber stampin’ appraisers fudging the numbers and distorting the facts for a secondary grouping of underwriters who did what they were told by upper management.
Layer upon layer of incompetence and corruption.
And Greenslime hadn’t a clue.
FUBAR for sure.
More information on the Barclays lawsuit against Bear Stearns.
Can you say Enron to the ^ 2nd power?
Barclays, in a lawsuit filed last night in New York’s federal court, is seeking to recoup losses and damages from Bear Stearns Asset Management (BSAM), its chief operating officer Matthew Tannin and the recently departed Ralph Cioffi.
Barclays was the sole shareholder in one of the two funds, the Enhanced Leveraged fund, having lent Bear Stearns what is understood to be between $300 and $400m to allow it to provide a leveraged return for its investors in two smaller feeder funds.
Later in the document, Barclays provides what it claims is evidence of discussions between its bankers and those from Bear Stearns, with Mr Tannin allegedly writing in an email on February 22, 2007, that: “Despite the sell-off in the sub-prime mortgage market - our fund continues to do well, quite well, in fact.”
It continues: “BSAM and Tannin repeatedly and fraudulently? misled Barclays and utterly failed to provide the total transparency? that the BSAM defendants promised to Barclays.”
In one of its harshest criticisms, Barclays accuses Bear Stearns of using one of the funds as a place to “unload excessively risky or troubled assets” that it could not sell on to other investors.
Mr Cioffi, a former adviser who left last week, is being investigated by the US Attorney’s office and the SEC over whether he withdrew $2m from one of the two funds ahead of their collapse.
A Bear Stearns spokesman said the suit was unjustified and without merit.
to the suits at barclays—–CAVEAT EMPTOR. and the judge says to the suits at bear stearns, “Did you do due diligence before investing or were you defrauded by BS”? Or did they get kickback to invest in BS hedge funds but soon found out that the perceived kickback was to be many magnitudes lower than their actual losses. All-in-all how could the financial savvy gurus at barclays make such a bonehead investment? But the main thing is this…..the boneheads in suits will still get their christmas bonuses.
“To Yun, though, that widening gap is misleading because mortgage rates have fallen over time, so the same income today buys more house than in the past.”
The same income today buys more house than 2 years ago at the peak of the bubble, but not nearly as much home as 10 years ago or 20 years ago. Prices are still much, much too high.
“One $720 million loan pool created by Tokyo-based Nomura Holdings Inc. was rated Baa3, an investment-grade rating, by Moody’s when issued in 2006. Now, it’s rated Caa1, seven levels deep into junk-bond territory, and priced at 32 percent of the original value after 29 percent of the mortgages defaulted.”
’seven levels deep into junk-bond territory’
What’s that?
The basement of a toilet?
And it still bugs me that they just don’t rate these things from 0-100 like my high school report card. Oh, wait, then everybody would understand it, and we can’t be having any of THAT.
President Butch just defeated our HBB code. No taxes for foreclosures.
Someone please cheer me up.
Will this be the case only for original loans, or does this apply when someone sucks the equity out of an over inflated, over appraised home, and pockets the dough?
I was thinking the same thing. All the toys that was bought from these HELOCs are free? WOW! I fell stupid not buying a home. I missed the boat…..
And I did buy a house. But I didn’t do the HELOC thing, and am feeling like I missed out. Dang.
Shoulda got one of those 125% loans they were giving away.
Could of bot a mcmansion for 1.2 million and used the extra 200k for a new ferrari and short sold. Can’t you see me driving away in my new car to my new mcmansion rental tax free? Booya!
The only way this can be done, and maintain a plausible degree of fairness would be to forgive the tax on short sales where the loan amount was no larger than the original sales price of the home.
Otherwise these scum bags get to not only write off the interest while they are making payments, but pocket non taxed income.
I have more respect for a bank robber. At least they put themselves at risk.
REO for everyone!
To cheer you up: 1/20/2009
Here’s your poster boy to blame things on…
May I present to you: Quick Loan McGraw
“Almost 40 percent of the loans in the pool were originated by Costa Mesa, California-based Quick Loan Funding, run by Daniel Sadek, a broker who started the subprime company in 2002 with the motto: ‘You can’t wait. We won’t let you.’”
Hey wait, isn’t this guy Mr. 450-and-under-FICO?
–
“‘How is confidence expected to return to the capital markets when these types of surprises continue to pop up?’ said Peter Plaut, an analyst at New York-based hedge fund manager Sanno Point Capital Management.”
There were plenty of surprises to some of us Cassandras on the way up, but they were hidden, or suppressed. Now, they are popping up like popcorns, not all at the same time.
Got no popcorn!
Ja
“S.& P. affirmed AAA ratings for MBIA, Ambac, XL Capital and Financial Guaranty Insurance, but assigned a negative outlook to them. And it left unchanged the ratings of five other bond insurers.”
What’s S&P’s point here? These insurers are still AAA now, but maybe not in the future? Sloppy damage control.
Priceless Wall Street Ivy league grads> ” We are shocked management withheld this infro” , i guess when it is 72 degrees in your office but you know outside is 15 degrees you better grab a coat or else, what is so shocking?
“‘It is not known whether ACA will continue as a viable counterparty to CIBC,’ the bank said.”
What does that mean?
The house is on fire and the insurance company says it has no money left.
Oh, my! Surely this is isolated to CIBC and does not pose any kind of system risk to other bong holders.
OOps! The centipede drops another shoe.
Dec. 20 (Bloomberg) — Credit Agricole SA, France’s second- biggest bank by assets, will take a further 2.5 billion euros ($3.6 billion) in writedowns as the U.S. subprime crash roils debt markets.
The Paris-based bank said it will write down investments in collateralized debt obligations, securities created by bundling together bonds, by a further 1.3 billion euros before tax, and take 1.2 billion euros of provisions linked to a ratings downgrade of bond insurer ACA Financial Guaranty Corp.
Bong holders! that’s rich…
People, stop it! I’m getting way too much vitamin L(OL) from this thread.
But it goes deeper, here’s the wicked cycle, that I think someone posted before (and I reiterated a while back):
1. Probability of individual homeowner default goes up;
2. Value of RMBS #1 goes down, triggering insurance claims to Insurance Company #1;
3. Insurance claims trigger downgrade in Insurance Company #1;
4. Downgrade in IC #1 triggers value decrease of RMBS #2, since it’s value was in part propped up by being insured by what was once a higher rated IC #1:
5. Downgrade in RMBS #2 triggers Insurance Company #2 to be downgraded since it ALSO insured parts of RMBS #2.
Rinse, repeat.
These losses will ultimately need to land somewhere, and I think that the group that will end up without a chair when the music stops will be the investors. I’m guessing that there will be lots of people looking up “counterparty risk” in the coming months…
“The Austin-based Teacher Retirement System of Texas, the manager of Sepulveda’s retirement money, holds $6 billion of securities backed by assets that include subprime mortgages, most of it rated AAA….”
Yikes!
Right, and the pensions are guaranteed but public services are not. Prepare to pay more for less.
“the pensions are guaranteed”
Ok, they can affirm that the pensions are guaranteed, but since many public pensions are currently underfunded, and with tax revenues falling will continue to be underfunded, even absent losses in the fund’s securities, what mechanism exists to actually pay those pensions when they ain’t got the money.
I expect many of those pension promises to be breached–whether by reducing payouts and eliminating health care benefits, or by means testing.
Hi. All, I have been reading this blog now for five days in utter facination. As one of those people who has been scratching my head over how people could afford a house ten times their income and why any legitimate Mortage company would ever approve such a proposition, I would like to ask one question for someone who knows more than I. What has been the role of Mortage Insurerers in this whole debacle? Do most of these sub primes not have it and why would they issue it in the first place on these risky propositions? Does it not still require 20 percent equity to get out of it and If so, at what point will this industry need a bailout if they actually have to pay for any of these defaults? I say this in the belief that Mortage and Title insurance is pretty much an utter scam anyway. Isabel.
Very few of the problem loans have mortgage insurance. Insured depository institutions can only lend 80% of the purchase price so the no-money-down loans went into investment pools. Or a bank would make an 80% first mortgage loan while a finance company would make a 20% second mortgage loan. The second mortgage loan would then go into an investment pool. As a result of this the PMI companies were getting very little new business. So what they did was to insure the securities that were created by the uninsured loans. This is where the PMI companies are getting burned - they insured securities suported by crap loans (loans they never would have insured directly).
Nowadays, the conventional secondary mortgage loan market is dead. To get a home loan you either have to put 20% down (loan to be held by an insured institution), or get PMI, or go FHA/VA. Hardly anyone has the money to put 20% down and the PMI companies, FHA, and VA will only OK the loan if you are able to pay it back (P&I not more than 28% of income). Hence a lot fewer people than before can now buy the home they want to buy. They have to settle for the home that they can afford.
Isabel, that is a very good question. Many mortgage insurers are in deep doodoo, certainly, but in this lending boom, traditional mortgage insurance, paid by the borrower to insure his own mortgage balance against default, was not commonly used.
Instead, people were allowed to borrow at high loan-to-value (LTV) levels using the “financial innovation” (snickering) du jour. Specifically, people were given “piggyback” loans to cover the traditional downpayment. So they had two mortgages, one for 80% of the “value” of the house, the other, “piggyback” for as much as 20% more. Lenders would even lend up to 110% and give the borrower the extra cash.
What got people out of having to buy traditional mortgage insurance was the rate on the “piggyback” loan - abnormally high. The lenders felt the high rate compensated for the risk (snickering again) and didn’t require insurance. Make sense? The piggyback lenders are now suffering and at further risk of 100% loss. One hundred percent.
Most of the news about insurers now is the BOND insurers, the guys that insured the securitized loan packages that have been going into massive default.
Google “80/20 mortgage” 100% financing. There’s part of your answer concerning how many people got around using PMI. Even so, the insurers are taking huge losses on the garbage that they did insure. With widespread fraud and use of liar’s loans in the past few years (aka - stated income or NINA), they probably didn’t have much idea, or possibly didn’t want to know exactly what they were underwriting in many cases.
About 80 percent of the securities carried AAA ratings, the same designation given to U.S. Treasury bonds.”
“‘The rating agencies had an almost God-like status in the eyes of some investors,’ says Sylvain Raynes, a former Moody’s analyst. ‘Now, that trust is gone. It’s been replaced with a feeling of betrayal.’”
——————————————————————————-
The company I currently work for is neck deep into Sarbanes Oxley compliance (snicker, snicker…) all the while we witness on going corruption in the financial system. I’m beginning to think that Enron was small potatoes compared to what’s coming.
There are many Enrons like entities out there. I call them Bernies, walking dead (Weekend at Bernie’s).
anyone have a ZESTimate on the amout taxpayers will have to pony up to cover the”foregivness”?
REPUBLICRATS
man ,it would be fun to be Ron Paul right now
Bear Stearns has posted its first quarterly loss in the company’s history, as bets on risky sub-prime mortgages in the US turned sour.
Suck it up guys, you decided to gamble and you lost. Sometimes you win, sometimes you lose. Remember this the next time you decide to try gambling again.
But aren’t these guy supposed to be financial gurus who move and shake the market? Aren’t they supposed to take care of the money deposited with them and help it to grow?
If I wanted my pension funds to be gambling fodder, I’d have placed it all on black in Las Vegas.
http://news.yahoo.com/s/ap/20071220/ap_on_bi_ge/bush_mortgage_crisis;_ylt=ArPqpOlWIE3TVbi.btdFoMZu24cA
“WASHINGTON - President Bush on Thursday signed a measure to provide financial relief for financially strapped homeowners facing foreclosure or in bankruptcy……The bill gives a tax break to homeowners who have mortgage debt forgiven as part of a foreclosure or renegotiation of a loan. No taxes would be owed on the value of any debt forgiven or written off. Currently such debt forgiveness is taxable income”
So now millions can just walk away from their underwater properties which they brought for 0 down and teaser rates , borrowed to the max on it, and now can simpy walk out without any IRS tax penalties.
Looks like the rules for penalizing borrowers and debtors are shifting in favor of the debtor classes. Better to go out and borrow and max out your Cc’s and that new home purchased for next to nothing down, then default on it all and let the gov’t bail U out.
This nation is screwed!
Looks like it just got a lot easier for FB’s to send jingle mail as a holiday gift to the lender.
Happy Holidays Everybody
funny everyone was mad at W when he signed the BK laws- guess this is payback
he’s a lefty on the lose
What if your are Homeowner, bought your house a couple years back, making good on your payments, but HEY! my credit is not that great, I like the house but I don’t want to make anymore payments because “I believe it’s a little high”, I can start fresh, SO I’ll stop paying the mortgage and foreclose. My only baggage is bad credit which I may have already.
I’m seeing borrowers making good just walking.
Awww.. SOB.. That just really burns my a**, I was enjoying nothing more then seeing all those stories of “investors” who walked from 10 homes and now suddenly “discovered” that they owe a ton of taxes… Ala Casey Serin..
However, on a serious note, I think that this might accelerate the decline… Without the tax penelty, I don’t see any resistence left to walking away from the home once your underwater on your MTG.
Unfortunately those of us with assets still have to protect them. Only those people with nothing to lose to begin with (those who created this mess) have anything to gain. Isabel
It’s a great time to either have a whole lot of assets or none at all. Those of us in the middle are basically hosed.
RE: Unfortunately those of us with assets still have to protect them
Yup, all those customer copy HELOC drive-by appraisals done in ‘02 thru ‘06 might just as well be considered fire starter.
Previous real estate holding estimates might just be a “tad” over optimistic (snicker).
Hell is a 3 alarm crap, when the toilet paper gets all wet…
“The U.S. asset-backed commercial paper market, which has been hard hit by its exposure to subprime mortgage securities gone bad in the U.S. housing slide, shrank for a 19th straight week.”
What about when you run out of TP? What kind of hell is that?
Grassroots hell.
“I think what we’re doing is avoiding a market failure that would have forced housing values down in a way that was not in the investors’ interest, and in a way that the market wasn’t intended to work,” Paulson told the paper. — Posted on Yahoo http://tinyurl.com/32lfpb
I’m beginning to actively dislike this idiot!
Cut him some slack — he is not an economist, so it is not reasonable to expect him to talk like someone who understands the concept of market failure.
India doesn’t want our dollars.
http://www.bloomberg.com/apps/news?pid=20601109&sid=a4zLUifSh7pg&refer=home
In a way, one could say that as much as Americans need to get used to the idea of not having an infinate supply of cheap goods and services, those elsewhere need to get used to not having an infinate supply of idiot American customers.
Sounds like I’d better get a computer that doesn’t require so much damn tech support.
More b.s from Lawrence Yun of the NAR, now blaming the mess on the media, stating they are not seeing the big picture. Says Yun, “All real estate is local.” Not in a national recession it ain’t - and that’s where we are headed despite the opinion of Bahgdad Ben Bernanke.
“For instance, Yun reported that the national median (or midpoint) home price this year was on its way to its first overall decline since the Depression. Already, he said, the media drumbeat is repeating the word ‘depression,’ thus depressing consumer confidence and keeping potential homebuyers out of the market.”
- As I reported on the early morning thread - it was time for more ‘Larry Yun Speak’ …. it’s all local and things are good.
‘I am shocked, shocked to find that gambling is going on in here!’
‘Play it again, Sam.’
“‘We are shocked management withheld this information for as long as it did,’ Ken Zerbe, an analyst with Morgan Stanley in New York, wrote in a report. ‘MBIA simply did not disclose arguably the riskiest parts of its CDO portfolio to investors.’”
That statement is BS. MBIA disclosed what it was required to disclose, just as Morgan Stanley disclosed what it was required to disclose. Did Morgan Stanley disclose its riskiest parts? Not a chance. Has Morgan Stanley even bared its books for outside inspection, not likely. The analyst is doing typical CYA crap.
Commercial RE crash
http://www.portfolio.com/views/columns/2007/12/17/Commercial-Real-Estate-Crisis
My ICF short, opened this summer, is 14% in the black. My target is 33%. I was satisfied to close out my HB shorts on a 50% drop (not greedy). My bank targets are for an 85% drop. I should close out my IMB position now but I have too many short-term gains this year. I’ll do it January 2.
1995, $15.7 billion worth of commercial-mortgage-backed securities were issued. Through the third quarter of 2007, $196.9 billion was issued”
=WOW
I’ve alerted the pols, but they’ll act surprised in 08
“A few weeks ago, a hedge fund manager emailed me a PowerPoint presentation on the commercial-real-estate market. It opened with a typically dry title: “2008 C.M.B.S. Forecast.”
I clicked through to the first page, “Capital Markets.” It had a picture of a derailed train. The next page, “Credit Fundamentals,” included a photo of a bridge collapsing in a hurricane. Next came “Property Values,” featuring an imploding skyscraper. The fourth page was “Economic Outlook”—a ship run aground on the rocks.
And the slide titled “Conclusion”? A photo of the exploding Hindenburg.
Wow
“In one of its harshest criticisms, Barclays accuses Bear Stearns of using one of the funds as a place to ‘unload excessively risky or troubled assets’ that it could not sell on to other investors.”
Was that one the GFF (Greatest Fool’s Fund)?
That’s the whole mentality of the lenders and investment firms these days is to pass the hot potatoes ,and it will be no different when programs become available that they can pass risky paper to .With a straight face these past the buck firms act like in a declining market that any of these current loans are loanable . As a lender your not suppose to make a loan on a up-side -down property .
Wall Street in Flux; Tech Jumps but Banks Decline-from CNBC-LOL
Ben-you may have to rename the blog going forward..
“The Wall Street Fluctchu-Asians Blog”
The other shoe drops
http://biz.yahoo.com/ap/071220/earns_discover_financial.html
Credit card debt not getting paid.
Well, I just paid my balance down to zero. Just like I do every month.
Looks like the Limeys don’t pay their C. Card debt, Imagine that.
My wife send this, found it on a forclosure website.
I’m not a speculator but got myself in a big bind. We bought a house in July ‘07 thinking we could then put up our current house for sale. We refi’d the whole thing and now we can’t sell our current house let alone afford payments on either. The specifics: current house for sale at $1,237,500. Mortgage is $952,000 w/ a 5yr 5.875% I/O ARM. Closing costs if sold will be -$86,000 netting $1,151,500. Newly bought house cost $921,000. Borrowed $184,200 from current house to put 20% down. Mortgage is 3yr 6.50% I/O ARM. Combined Mortgage Payments add up to $9,200 I/O. I have 2 HELOCS that I draw this monthly payment from. I run out of these HELOCS making this payment in 30 months. My other income goes to live and pay other bills. I have a 764 credit rating. My hope was to pay down the mortgage of the new home by pulling equity from the sale of the current home. Every month that I do not sell (let alone get the asking price I seek) it lessens the amount of equity to put in the new home to lower the payment to a mere $4000/mo. Believe me, I ain’t rich now, I wasn’t rich last summer, but every month I’m feeling that I could be poor real soon if I can’t get out of this excessive I/O payment. I need to sell my home. Can anyone unlock this Jam? Maybe I should strip the current house of the remaining Equity I can get my hands on thru its HELOC and get foreclosed on. If I did this, and took approx $120,000 that’s left does anyone know if the mortgage or HELOC lender could come after this money if I buried in the new home mortgage?
And the poor dear says he’s “not a speculator.” Sigh . . .
Is “speculator” becoming a dirty word?
764 FICO and he’s considered a better credit risk than me, who could bail him out for cash.
I have a 764 credit rating.
It shouldn’t be long before this is also “adjusted”…
Some background may be helpful here.
11 U.S.C. sec. 523. Exceptions to discharge.
(a) A discharge . . . under this title does not discharge an individual debtor from any debt —
* * *
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained, by —
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;
Pulling, er, “stripping” — to use or intrepid hero’s term — equity out of one’s property by taking out a loan he has no intention whatsoever to repay would seem to meet the defintion of actual fraud. In all likelihood, when (not if) he files BK down the road, this transaction will come back to haunt him.
Wow. This person is a scumbag. So casually talking about committing fraud against their lender. Just “borrow” the money, knowing you won’t pay it back. Isn’t that really just stealing?
And at the same time this POS acts like they are such a good, honest person. They just had some bad luck.
Yeah, right! It’s called KARMA asswipe. You SHOULD be on the street. I just hope it isn’t a street anywhere near me.
“I’m not a speculator but” “I am not a crook” “I did not have sexual relations with that woman”
BS dude, you are a speculator. You ain’t rich but you signed off on $2MM worth of houses!!
Please, no one should help this loser out! Let him get the JT treatment he deserves.
So he has enough to pay for 30×9200 worth of payments that he heloc’d to get plus the 180K that he refied for a down, to the total of 500K and he wants to walk away from it? NICE!
So in HELOC money he has left (30mo. times $9200) = $276,000 line of credit if they continue to let him draw on it, plus a minimum payment of interest on that line of credit. I love the way he says that selling one would reduce a monthly house payment to a ‘mere $4000′ which I’m sure is also IO. He won’t even be able to refi out of that as he has less then 3yrs left of what will be a falling asset. Thanks for the laugh!
>>”My other income goes to live and pay other bills.”
This is my favorite part. Emphasis on the word ‘other.’
He considers his HELOC debt to be income.
and another……..
Bought a townhouse in ‘06 at CA for $440K (with 1st mortgage for 340K, as purchased loan & 2nd loan for 100K). Currently, same townhouse for sale in the area is selling for $359K, which means - most likely I don’t have any equity. My rate will reset soon & won’t be able to afford the new mortage amt. If I do foreclosure or short sale (for sure less than the loan amount 440K), can there be a deficiency judgement against me? Please help. This is driving me insane. Thank you.
No help for you either, just the JT treatment you deserve.
But apparently Bush IS going to help him in the form of no taxes on the deficiency.
Anyone have a link on Bush signing the tax forgiveness? I can’t find news on this in the MSM.
In the US, Congress makes tax laws, not Bush. THe president is not an absolute monarch, he just signs the bloody thing he gets from the demo Congress.
Flatlander -
I agree with your sentiments, but what is “JT treatment”?
Having a Joshua Tree branch used on you as a rectal suppository.
(Long-standing blog in-joke.)
Market justice rains down like water from the WH…
Bush tells Wall St to shoulder hits now
By Demetri Sevastopulo and Krishna Guha in Washington and Ben White in New York
Published: December 20 2007 18:41 | Last updated: December 20 2007 18:41
George W. Bush on Thursday urged US financial institutions to take any write-downs resulting from the housing crisis “now” and to give investors more information about their financial health.
“Wall Street needs to . . . put it all out there for everybody to see. They need to have . . . the off-balance sheet [items] . . . put out there for investors to take a look at,” the US president said at his year-end press conference. “And if there’s some write-downs to be done, they need to do it now.”
http://www.ft.com/cms/s/0/879ff216-af29-11dc-880f-0000779fd2ac.html?nclick_check=1
aha..ahahahahaha
Yeah right like they’re all going to announce they’re insolvent at the same time.
This gets better by the minute. I forecast a severe popcorn shortage for 2008, and a doubling of popcorn prices to boot.
It’s credit and it’s crunchy.
http://www.youtube.com/watch?v=br8mOmH9frE&feature=related
“To Yun, though, that widening gap is misleading because mortgage rates have fallen over time, so the same income today buys more house than in the past.”
So then when mortgage rates go up home prices will go down and everyone will stay happy because they can buy just as much house as in the past?
“No taxes would be owed on the value of any debt forgiven or written off. Currently such debt forgiveness is taxable income”
Wow, another great weekend topic. This is the Congress’s solution to torch the housing. Legal arson. When the sheeple connect the dots housing should implode rather quickly as they walk away en masse. After a quick dip we can then let the dead beats repurchase at the lower valuation and start bidding wars anew. I don’t care (not quite a true statement here, I pisssssed) if they want to ‘forgive the debt’ for IRS purposes but these people should have to put a minimum 30% down to get back into the game, 30 yr. fixed, documented income,and not allowed to purchase anything over 2X net income.