Gambling Too Much On The Right Side Of Risk
Some housing bubble news from Wall Street and Washington. Bloomberg, “Housing starts in the U.S. dropped in February and building permits fell to the lowest level in more than 16 years. Builders broke ground on homes at an annual rate of 1.065 million, the Commerce Department said today. WCI Communities Inc., a Florida homebuilder, reported its fifth straight quarterly loss on March 17. The company’s cancellation rate was 110 percent in the period and new orders dropped more than 300 percent because of ‘defaults’ on sales contracts.”
Las Vegas Now. “Kyle Canyon Gateway in the northwest, the Cosmopolitan Resort right on the Strip and Inspirada in Henderson are all facing the same problem, empty pockets and too much debt.”
“No one from Inspirada or the Cosmopolitan Resort would comment about the financial troubles. A representative from Toll Brothers, one of the builders in Inspirada said no comment and that they wanted to keep it quiet.”
“Bank of China Ltd., the nation’s biggest subprime mortgage investor, tumbled below its initial public offer price for the first time in Hong Kong, capping a five-month slide that’s wiped out $88 billion in market value.”
“Investors including Goldman Sachs Group Inc. and Bank of America Corp. have seen their investments in China’s banking industry erode as rivals including Industrial & Commercial Bank of China Ltd. followed Bank of China lower. ICBC, the world’s largest bank by market value, has fallen 33 percent in Hong Kong since Nov. 1. Goldman owns 4.9 percent of ICBC.”
“Goldman Sachs Group Inc., the world’s biggest securities firm by market value, reported first- quarter profit dropped the most since 1999, reduced by $1 billion of writedowns for high-yield loans and a $135 million decline in the value of its stake in Beijing-based Industrial & Commercial Bank of China Ltd. Losses on mortgage loans and related securities were about $1 billion.”
“Lehman Brothers Holdings Inc., the fourth-biggest U.S. securities firm, reported earnings were depressed by a $1.8 billion writedown caused by the slump in the mortgage market. Reducing the value of those assets pushed fixed-income revenue 88 percent lower.”
From Reuters. “After Lehman Brothers announced a fall in revenue but beat fearful expectations, its credit default swaps traded at 360 basis points. That makes protecting its debt pricier than protecting that of Turkey or Nigeria, traders say.”
“‘You could say Lehman is riskier than Nigeria,’ one trader said, asking not to be named. ‘But it’s not a trade or a comparison people often try to make.’”
“In credit derivative swaps markets, Turkey was trading at the same level as British bank HBOS, while healthy Brazil…was roughly level with Royal Bank of Scotland, BB Securities said.”
“Liquidity in global debt markets remains poor with the world’s largest banks suspecting each other of not coming entirely clean on losses in the U.S. mortgage market, and many analysts saying more bad news is to come.”
“‘I think with Africa people feel they know what they are dealing with,’ said Razia Khan, head of Africa economics at Standard Chartered in London. ‘In contrast, everything else is a great unknown.’”
The New York Times. “The shouts, hoarse and high-pitched, rang out in the cavernous boardroom late Sunday at Bear Stearns’s headquarters on Madison Avenue. Just like that, some people’s stakes of $100 million or more in Bear were ravaged, and senior executives…were furious.”
“For James E. Cayne, the firm’s chairman and former chief executive, holding on to his Bear stock was a point of pride, and he rarely, if ever, sold. A billionaire just over a year ago when Bear’s stock soared past $160, his 5.8 million shares are now worth about $28 million at Monday’s closing price of $4.81.”
“Across the firm, executives and employees declined to speak publicly, a reflection of the fluid events as well as a reluctance to anger their prospective bosses from JPMorgan who were already on the premises Monday, appraising their new investment.. Privately they expressed raw dismay, their voices heavy with sadness and shock.”
“‘My life has been flushed down the drain,’ said one person. There was talk Monday that with their life savings nearly depleted, some executives had moved quickly, putting their weekend homes on the market.”
“‘Basically we’re all wondering first, if we’ll keep our jobs, second, if we’ll get severance if we don’t,’ said an investment banker outside Bear’s headquarters, declining to give his name. ‘And then we’re hoping that Lehman won’t go under because then there will be way too many bankers looking for jobs.’”
The Globe and Mail. “Shortly before markets closed on Friday, traders at Bear Stearns Cos. Inc.’s New York headquarters did something that had never happened in the Wall Street firm’s 85-year history: They left.”
“Hundreds drifted away from their trading desks on the 8th floor of the firm’s Madison Avenue office tower and walked out of the building. Why? Because there was nothing for them to do.”
“A firm that had survived the Depression, the Second World War and numerous stock market collapses faced the humiliation of a government-assisted takeover by rival investment bank JPMorgan Chase & Co. that will likely vaporize most of the personal wealth of the firm’s executives and cost the jobs of more than half of its 14,000 employees.”
“‘It’s a tragedy,’ said Christopher Whalen, a former Bear Stearns banker. ‘There are thousands of people who are going to lose their jobs and their financial security because of this idiocy.’”
“How did one of Wall Street’s toughest firms, with a prized reputation for betting on the right side of risk, become synonymous with idiocy? The simple answer is that Bear Stearns placed a bigger bet than any competitors on subprime mortgage loans.”
The Staten Island Advance. “For the average Staten Islander, the bargain-basement sell-off of Bear Stearns to JPMorgan Chase & Co. means it’s time to reassess investment portfolios, tighten belts and take some heart that interest rates will fall again, experts said yesterday.”
“‘I’m afraid I’m going to lose my house,’ said a Staten Island woman, who called the Advance to say her husband works at Bear Stearns and she feared for her economic survival.”
“John Coffee, a business law professor from Columbia University, said that less mortgage money would be available with the market for mortgage-backed securities discredited.”
“Bear Stearns is largely believed to have failed when the value of its mortgage-backed securities, which included an unknown number of problematic subprime loans, plunged.”
“‘Less credit to borrowers means lower prices to sellers and some decline in home prices,’ Coffee said. ‘No one can quantify the magnitude of these changes and the market is likely to be volatile for some time.’”
From USA Today. “‘The market is at least reassured that there won’t be another run on a primary dealer,’ says David Rosenberg, chief North American economist for Merrill Lynch.”
“But the Fed did nothing Sunday that would alleviate the cause of the financial crisis: an economy that had binged on debt. ‘Nothing the Fed did Sunday will prevent residential real estate prices from falling further,’ Rosenberg says.”
The Wall Street Journal. “The best thing about Sunday night’s Federal Reserve-inspired sale of Bear Stearns to J.P. Morgan Chase is the price. At $2 a share for a total of $236 million, this was less a ‘bailout’ than a Fed-mediated liquidation sale. Bear wasn’t too big to fail after all.”
“The hard capitalist truth is that Bear’s most senior managers have mainly themselves to blame. They bought their second or third homes with fabulous bonuses during the good times, and they must now endure the losses from Bear’s errant investment bets.”
“Bear…let its standards slide in the hunt for higher returns during the mortgage mania earlier this decade. There’s no joy in seeing a venerable firm expire, but it has to happen if financial markets are going to have any discipline going forward.”
“Bear Stearns‘ forced sale days after the SEC chief’s reassurances is raising questions about the vigilance of the top U.S. securities regulator, which is charged with making sure Wall Street firms have enough cash to survive a crisis.”
“U.S. Securities and Exchange Commission Chairman Christopher Cox was asked on March 11 if he was concerned about the financial condition of Bear Stearns Cos. ‘We have a good deal of comfort about the capital cushions at these firms at the moment,’ Cox told reporters.”
“‘It’s really speaking to the lack of good supervision by the SEC,’ said David Hendler, an analyst at CreditSights Inc. in New York. ‘They’re not really a real regulator staying on top of things.’”
“The SEC, as part of its supervision of Bear Stearns and its rivals, tries to ensure that the industry has adequate funds to meet expected obligations for at least one year during periods of ’stress,’ according to the agency’s Web site.”
“Cox said on March 11 the SEC was monitoring firms’ capital levels on a ‘constant’ basis and sometimes daily in response to the subprime-loan meltdown that triggered the crisis. The agency’s oversight abilities were overwhelmed by the speed of events in the Bear Stearns collapse, said Christopher Whalen, managing director of financial consulting firm Institutional Risk Analytics.”
“‘None of the SEC’s stress testing began to anticipate’ what happened, Whalen said. ‘This is a systemic breakdown where people are running away from banks,’ he said.”
“In a statement on March 14, after the Fed announced it would provide funding to Bear Stearns, the SEC reiterated that the firm had ‘a substantial capital cushion’ on March 11, citing information the company provided to the agency.”
“‘Beginning on that day, however, and increasingly throughout the week, lenders and customers of Bear Stearns began to remove funds from the firm,’ the SEC said. ‘As a result, Bear Stearns’ excess liquidity rapidly eroded.’”
“The SEC and the Fed ‘are both equally guilty on regulatory blame for being asleep at the switch,’ said Anthony Sabino, a business-law professor at St. John’s University in New York and head of a securities litigation firm.”
“‘The smart move would have been two years ago to tell these firms to shape up, you’re not telling the market enough, you’re gambling too much,’ Sabino said, citing the firms’ investment in securities tied to subprime mortgages.”
Dow Jones Newswires. “The Bear Stearns deal highlights the need for faster action on legislation to enable the widespread modification of bad loans, consumer advocates say, and the importance of improving related asset quality.”
“‘It’s almost stunning to witness the shoring up of a major financial institution, but not addressing the problem that the quality of housing assets is deteriorating with each minute we wait,’ said said Jim Carr, chief operating officer of the National Community Reinvestment Coalition.”
“‘There has to be a plan that addresses the loans that are increasingly upside down,’ Carr said. ‘Every day that we wait more and more people’s home loans become upside down because housing prices continue to fall.’”
“Danilo Pelletiere, research director at the National Low Income Housing Coalition, said there has not been enough attention and action on helping low- income homeowners in trouble.”
“‘The folks that are very likely to need to be bailed out are those that were brought into homeownership and invested all their wealth,’ Pelletiere said.”
“In his Saturday radio address, President Bush said the government can help ‘responsible homeowners weather this rough patch,’ but that some actions could have unintended consequences and hurt some homeowners.”
“‘For example, one proposal would give bankruptcy courts the authority to reduce mortgage debts by judicial decree,’ Bush said. ‘This would make it harder to afford a home in the future, because banks would charge higher interest rates to cover this risk.’”
“The president also opposes proposals that would ‘artificially prop up home prices,’ reasoning that delaying a correction would prolong problems.”
“‘We are focused on helping a targeted group of homeowners — those who have made responsible buying decisions and could avoid foreclosure with a little help,’ Bush said.”
“Dean Baker, co-director of the Center for Economic and Policy Research, said a number of proposals that are geared toward helping homeowners facing foreclosure will actually benefit banks and other holders of bad mortgage debt, institutions that could ‘earn tens of billions of dollars at taxpayer expense.’ He added that owning can be much more expensive than renting.”
“‘It’s really infuriating for me that we pushed low- and moderate-income people to buy overpriced houses with really bad mortgages,’ he said. ‘And even now, after it’s proven so disastrous, you have politicians that still can’t take two minutes and think for a second that maybe it’s not a good idea for everyone to be homeowner regardless of what price they’re buying at.’”
75 basis points only? what happened?
Someone needs to explain to me the 100 pt oscillation that is going on in the DJIA. Apparently I’m not a Suave enough investor to get it.
Got Popcorn?
Neil
The Fed has outlawed death.
Whatever happened, dow closed at 417.
it will probably be down 200 tomorrow
MG - I agree with that, based on nothing more than what I’ve deduced from blog threads.
Google shows it closed up 420. Hmmmmm 420….. Yes, Wall street is definitely smoking something.
I dunno. But I made my bets to the downside before the announcement. This is JABA (just another band-aid) that can’t last. The fundamental problems are still out there, looking worse than ever. I’ll buy puts on the pops and hope they pay off down the line.
Squeezing the shorts out of people. Dow up nearly 400.
could have made some nice $$ today on the other hand if i had bought yesterday with my luck uncle ben would have come out and raised rates and trigger a total market collapse
so in the interest of national security i stayed on the sidelines
By not writing anything to its true value, Lehman reported better earnings and triggered the massive rally. Has anybody seen my brain? I think it leapt out my ear at about 3:43 p.m. EST.
‘Has anybody seen my brain? I think it leapt out my ear at about 3:43 p.m. EST. ‘
…and rolled straight down to the nearest pub to have a bath in Jim Beam. It’s there right now, balanced precariously on a grubby barstool, sloshing lugubriously about in the glorious Jim Beam nectar and singing ‘Somewhere Over The Rainbow’ loudly and off-key.
Lehman up 46.43% today.
Zoiks.
Jack Daniels
LOL, Olympia! And I’m glad I wasn’t eating or drinking when I read your comment.
Jack Daniels
Like you can still tell after the first five.
RE: It’s there right now, balanced precariously on a grubby barstool, sloshing lugubriously about in the glorious Jim Beam nectar and singing ‘Somewhere Over The Rainbow’ loudly and off-key.
You forgot the “wiggle-bum” adjective.
“..lugubriously..”
double-word score!! Niiice.
Jack Black on the rocks, please. Make it a doub– triple.
sloshing lugubriously
As sleepless states, Nice double word score.
Gotta figure out ways to use that word from now on.
Oh yeah — Get Shorty, again…
CptnCreditCrunch, don’t you mean “downcline” !
..”made my bets to the downside before “..
‘Danilo Pelletiere, research director at the National Low Income Housing Coalition, said there has not been enough attention and action on helping low- income homeowners in trouble. ‘The folks that are very likely to need to be bailed out are those that were brought into homeownership and invested all their wealth,’ Pelletiere said.’
Why is it that many of these ‘low income’ ‘consumer advocates’ are so full of it on these housing issues?
They’re full of it for the same reason that most of the other pro-homeownership are full of it. During the past decade, there has been far too much focus on investing in buildings, be they commercial or residential. This took the form of new construction and home improvement.
The focus should have been on investment in the improvement of the people within the buildings. In other circles, this is called “human capital.”
Perfectly said, Slim.
I was always told by my parents that, first and foremost, owning home was putting a roof over your head. The second thing they taught me was that home ownership was lots and lots of hard work and dedication. Not once did they ever refer to owning a home as the “American Dream”.
Isn’t the American Dream really about working hard, being a productive member of society and, because of that, waking up everyday feeling good about yourself and the world around you?
Anyway. Does this Bear thing scare the crap out of anyone else?
The “American Dream” is leaving a better more prosperous nation to one’s children or the next generation. It’s NOT owning a home. And it’s been dead for at least a decade.
“The folks that are very likely to need to be bailed out are those that were brought into homeownership and invested all their wealth,’ Pelletiere said.’”
I like the use of the passive voice, that the low-income buyers were “brought into” buying…and that they invested all their “wealth”. Sure, with their no-downpayment, teaser-rate mortgage loans, yeah they just tied up all their wealth.
These neighborhood counselors are part of the poverty industry…they are well funded by politicians with taxpayer dollars in return for making sure their clients turn out to vote.
No way. Did you see the earnings announcements this morning?
Sarcasm off.
Q: What’s the best way to keep away a run on your bank days after Bear Stearns collapses?
A: Bury your writedowns for one more quarter.
True. The issue is accurate asset valuation. Stale earnings is noise.
“Stale earnings is noise.”
So is stale inflation data.
(1) “American Dream” The word ‘dream’ is defined as “: a visionary creation of the imagination ….. b: a state of mind marked by abstraction or release from reality…..”
Guesss if fits.
(2) Does this Bear thing scare the crap out of anyone else?
Do you mean ’scare’ as terrify, frighten, cause a heightened state of fear and concern?
Now why would that ever happen just becasue the Fed
(1) reached back and employed a statute that hasn’t been used in close to 75 years and that was created to deal with the massive banking collapse that started in late 1929 and continued through ealy 1933; and which failed then to stem the collapse; and
(2) has given investment banks (including foreign investment banks) unprecdented access to the the Federal Reserve funds even though such banks are not subject to audits by the Federal Bank examiners as are regular banks which means the Fed does not have the slighest idea of what the financial position of these investment banks is beyond what the banks claim it is…… (Talk about a NINJA loan to end all NINJA loans!)
(3) and extended the repayment of such borrowing from the Fed to an astounding 90 days from the regular 28 days
Now why would that worry me?
If you will excuse me, I have to go finish getting the box out of all my old texts and reference books on the history of economic policy and events in the 1920’s and 1930’s.
Then I need to go figure out where I am going to raise vegetables this summer instead of my usual masses of perennials, and where I could put a large freezer…….
Thanks for the insightful post.
Yes, Ann, thank you for yet another of your many valuable posts!
RE: Does this Bear thing scare the crap out of anyone else?
First domino…eom.
It should scare AND reassure. If they hadn’t bought them out at $2 per share, the GLOBAL financial markets would quickly have frozen while ALL Bear transactions were painstakingly sorted through in bankruptcy court.
Think how long that would take. Think how the global financial markets now move in milliseconds, where minute delays cause huge disruptions.
And those responsible for their idiotic bets took the biggest hit. 1/3 of Bear shareholders were employees.
Apparently the NYT is shocked - I tell you ’shocked’ - at the financial straits to which the top honchos at Bear Sterns shall be reduced:
(1) For James E. Cayne, the firm’s chairman and former chief executive, holding on to his Bear stock was a point of pride, and he rarely, if ever, sold. A billionaire just over a year ago when Bear’s stock soared past $160, his 5.8 million shares are now worth about $28 million at Monday’s closing price of $4.81.
(2) Alan D. Schwartz, the chief executive of Bear Stearns has 1.02 million shares, ($4,906,200 at $4.81) Plus last December Mr. Schwartz sold some stock $6 million.
Guess that sucker is down to applying for food stamps and housing assistance.
(3)There was talk Monday that with their life savings nearly depleted, some executives had moved quickly, putting their weekend homes on the market.
Poor babies -they just have to slum with the rest of us and rent a hotel room or go camping.
(4) the firm sent an e-mail message to employees Monday assuring them that Bear was still in business and that they would get their salaries — cold comfort to bankers who receive upward of 90 percent of their compensation in a year-end bonus.
Right - the same 90% of their income upon which they ONLY PAID 15% capital gains tax rather than having it treated as earned income (like the rest of us have to pay.) I have a strange definition of ‘earned income’, to wit: if you have to be on the payroll and show up and do work to get the money or compensation, it is “EARNED” and should be taxed as such.
Honestly, I would expect the WSJ to bewail the reduced circumstances of multi-millionaires and those who received “bonuses” (read: most of their salary) in amounts in upper 6 figures to 7 figures, but the NYT?
I can feel sorry for the clericals and low level staff but not these extremely wealthy die-hard neo-con free-market Republicans.
Too bad the Fed and Morgan rescued them. I was so hoping for a repeat of 1929 involving high buildings and window ledges.
Now I have to get back to my current projects
(1) the food pantry which is out of food
(2) the need for money to pay heating bills for people where requests for help have gone up five-fold this winter
(3) trying to figure out what can be done to create housing that is affordable for the regular workers in my county - a place that is infested with 2nd homeowners who have driven the median price to $389,000 when the local median income is $43,000. (With any luck, some of the 2nd home people are from Bear Sterns and they will have to dump the properties and help bring prices down.)
Corporate welfare indeed.
A new convert to the Democratic party will now be a Republican who has gone down the tubes financially.
I am not sure why you feel that most of the Bear employees are “Neo-Cons”. Most of the financial services employees I have met over the years couldn’t care less about politics, other than how it affects their bottom line.
As far as your desire “to create housing that is affordable”, I think the market is taking care of that without your help. Aside from that if people in your county have a median income of $43k, they have no business owning homes. There is no shame in renting.
Before you start babbling on, you might have wanted to be around this blog for awhile. I have mentioned this problem a LOT in the context of this county’s location, demographics and and economic structure.
Try this on for size before you spout off:
Rural county - NO APARTMENTS unless you think a 60-70 mile round trip for a job that pays $8-10 an hour makes sense. So rent WHAT? A Tent? Houses are the only rental option (and good luck with so many being rented but on weekly base for 3 months of the year to tourists) and to rent a house STARTS at $700 plus all utilities.
Surrounded by US National Park which means tourists and summer people
Jobs are sevice and retail (tourism economy and the cherry frms don’t exactly pay high wages either) - and that means modest incomes
There are TWO types of housing around here - that which the summer people buy (those were 5000 sq ft summer homes) and the modest homes owned by permanent residents.
The 2nd home buyers with their funny money loans have driven the prices for anything and everything through the stratosphere; and the tourists have made it more lucrative to rent a house out on a short-term weekly basis rather than annually.
Some 2nd homes are slamming into foreclosure - but that is in the price ranges of $500,000, 800,000 and yes $2,000,000.
Waiting for some bank to get bored enough to start slashing those prices so they drive down lower priced housing into a range the workforce can afford will take a very long time.
In the meantime, we all find it quite useful to be able to keep the fire department staffed, the EMT squad staffed, have law enforcement officers, have employees in the businesses that provide the services and stuff to the tourists, have teachers in the schools……just minor things like that!
DO NOT offer opinions when you DO NOT know the underlying facts - or did you completely miss the reference to (tourists and cherry farms?)
As far as the political views of the financial services types, oh please!! I represented those types before I retired from practicing law in a major urban area.
Just say “regulation” or “pay taxes on those ‘wages-disguised-as-bonuses’ at an earned income rate’ and watch how fast they are on the phone to the RNC to protect them.
“DO NOT offer opinions when you DO NOT know the underlying facts”
So, in your world, the only time anyone can have an opinion is when they know everything? Since that’s technically impossible, no one but God is thereby allowed to have an opinion…
Actually, only Ann Scott is allowed to have an opinion. Oops, I just expressed an opinion.
Yup, I left that opening just for you, tresho.
Holy smokes, the venom she holds for anyone who dares question her…takes my breath away.
I’ve got several relatives like her, some are attorneys, who also came from Leelanau county. Must be something in the water.
No I only get really really annoyed when someone who has no idea of things that have been covered ad nauseaum waltzes in and spouts off cliches and does it in a patronizing manner.
Never seen a whole lot of point in sufferring superficial glibness lightly.
Good rule is if you don’t know have all the fact, silence is a really really good option.
How clueless can you get? I had SAID the econmy was tourists and cherry farms.
No I only get really really annoyed when someone who has no idea of things that have been covered ad nauseaum waltzes in and spouts off cliches and does it in a patronizing manner.
and
Good rule is if you don’t know have all the fact, silence is a really really good option.
The irony of your posts is one of the greatest sources of entertainment on this blog. It’s really high art to have this much lack of self awareness.
You seem that it is a right to live somewhere you can’t afford. If the place is so bereft of employment and affordable places to live my suggestion would be to go somewhere where the situation is different. Also, you are thinking of carried interest not bonuses. Bonuses are taxed as income.
Why should the people who have lived here for generations have to leave because they are being pushed out by greedy ‘gotta have more’ 2nd home bueyrs?
If they want to remain where their families have always lived and would be just fine ‘but for’ the 2nd home people, why shouldn’t they?
zzzzz………what!
Sorry, I normally fall into a doze when people start telling others that thier opinions have no weight, because they haven’t been posting for long enough
Mmmm, must go make some tea.
Who would staff all the places “you” would want to visit and vacation? Only the wealthy can live near where they work? Vail, Aspen, and many many other places have the same problem. Nothing available to rent year round. It all goes to seasonal.
Same in my neck of the woods. Anything affordable for service industry people or big enough to have a family ie: more than 500’sf, is seasonal. Not all but many.
Just in my community development are 30 condos that are not lived in year round. In fact, 2 right across the st are empty but one week per yr, so far in 4 yrs. This week.
There is a serious need for affordable rentals or homes for service industry workers in high end areas. Otherwise, who is going to serve you your high cost dinner, or give you your skiis?
RE: In the meantime, we all find it quite useful to be able to keep the fire department staffed, the EMT squad staffed, have law enforcement officers, have employees in the businesses that provide the services and stuff to the tourists, have teachers in the schools……just minor things like that!
Spoken like a true flatlander.
If the communities in question have a problem attracting those people pay increases are always a solution. My guess is that the area you are talking about still has a functioning police department, hospitals etc. If not I would suggest looking for greener pastures.
Trot on up here into the National Park, fall down the Dunes and break your leg.
You will be screaming for our EMTs fast enough.
Shall we just tell you ’so sorry - don’t have any. They can’t afford to live here’?
FIne with me. I can afford to live here but I really do like having EMTs, nurse practitioners, and the other necessary services.
If that applied here, so does it apply to NYC,DC, LA, San Francisco and all the other places where those with incomes less than $85,000 (75% of the country) can not afford to live but whose services you desperately require.
BTW, save your stupid jokes. Unitl my marriage I was pure East Coast and DC. Took my family from 1620 to 1987 to get from Plymouth Rock to any point past PA.
HD… Considering my fathers genre originated the term “flatlander” in my home state to describe sneaker-wearing MetroFlunkies, I’d have to say the Ann doesn’t even come close to original characteristics of the term. My OPINION is that the class warfare knife cuts both ways and Ann’s razor sharp perspective of it unhinges those who believe in the lie that if they just work a little harder, they too will be part of the millionares club.
Amen ex. “if they just work a little harder”…
“Also, you are thinking of carried interest not bonuses. Bonuses are taxed as income.”
Hey Frank,
The fact that you’re right and she’s wrong only sends her into a frenzy. Your reasonable tone is lost on her. As is the fact that you’ve been posting here longer than she has.
My suggestion is to ignore her.
A. S.
Just move !
Yeah, the democrats are going to save us from this mess! Write down all the loans of the FB’s and reward stupidity in true Demmie style. I’m not saying that the investment bankers should be rewarded either, but I don’t think greed really knows any party boundaries.
Most of the financial services employees I have met over the years couldn’t care less about politics, other than how it affects their bottom line.
You mean like Bush and Cheney? Sounds like a pretty concise definition of neocon to me.
If it makes you feel better, UBS chairman just got a 90% pay cut from 2006 to 2007:
http://www.bloomberg.com/apps/news?pid=20601208&sid=aAQ2mUlXOqHg&refer=finance
Bet he has a bundle in paid off homeS, and vacations, and cars and offshore investments and schools paid for ….
So, even with a hair cut, he is pretty darn well off.
*GASP* The poor CEO’s!!!! A pay cut!! The audacity of it all!!! Gee…. I bet they’d trade places with you Brandon.
So, banks bonuses now are taxed at 15%? My understanding is that the only money taxed at 15% is when the underlying source of that income is a capital gain event (selling an asset after holding it for more than 12 months). The bonuses are generally based on trading fees and deal-making fees–all ordinary income, taxed at the highest marginal rate. Not 15%.
No that has been a hot issue over the past couple years. It has become a common practice to structure the ‘bonuses’ as a gain in the stock or stock options held by the employees. There are some other ways the bonuses have been tied to what would be considered investments that yield income that is treated as capital gains.
Bill was introduced in Congress last year that would have defined the Wall St ‘bonuses’ (the ones that make the news every year) as ‘earned income’ rather than a ‘capital gains.’ Bush threatened to veto and the Senaate republicans blocked it.
You have confused bonuses with management fees.
The bonuses (ie “the ones that make the news every year”) are performance awards. They are taxed as normal income.
Management fees are a percentage (often 20%) of the gain on managed capital. (A typical fund will take 2-3% annually of managed capital + 20% of the gains.)
It was the management fees that were under scrutiny by congress.
We’re talking about three different animals here.
1. Wall Street bonuses - taxed as ordinary income.
2. management fees for private equity - 2% of assets under management - taxed as ordinary income. Occasionally, people would get creative with tax structures to take the 2% as additional carried interest (according to #3 below), and to do this is quite complex–you need to hire very expensive attorneys to figure this out.
3. Incentive interest (carried interest) - 20% of profits on a venture (sometimes over a hurdle rate–called a preferred return, if you don’t perform, you don’t get paid)- can be taxed as long term capital gain, so long as the gain comes from the sale of underlying assets that have been held for more than 12 months. You don’t get paid unless you perform, and you don’t get long term capital gain, unless the gain you have generated for the investor is capital gain.
Congress wants to turn #3 into all ordinary income.
So, it works like this–if you find an investment, and you put someone else’s money in it on the condition that if it works, you get 20% of the profit. It works, and 5 years later, you sell the asset. The cash investor pays capital gain on his 80% of the profit, you pay ordinary income rates on your 20%.
As of right now, you would also pay capital gain on the profit. The shenanigan’s surrounding turning #2 into gain needs to stop, but #3 is purely performance based…not guaranteed, not payroll.
Good explanation and yes, that’s correct. It’s the carry that is taxed at 15%.
I incorrectly lumped the carry into management fees (from the point of view of the investor, they’re both money out of my pocket), but the two are separate.
And many bod’s pay the taxes on the ceo’s etc bonuses etc, so the ‘guy’ reaping all the rewards, doesn’t pay the piper so-to-speak.
I have a modest well under $100K income. I have no problem with people who make 100s thousands or even millions paying 15%. The actual amount they pay is still more than most earn. It’s their money.
RE: It’s their money.
Depends if they stole it or not.
And theft today may not be by standard definition.
“It’s their money.”
Oh really???? But 20.5% of the money I earn above and beyond the 15% that puts me in the 35.5% bracket isn’t mine even though I earn far less than those paying 15% rate??? Get a grip my friend before those paying 15% on their millions squeeze you any tighter.
Decades ago, in northern Michigan, seasonal businesses typical of the tourist economy would provide housing for their seasonal employees as part of their compensation package. If paid work isn’t adequate to support the population, they’d be better off leaving for better prospects. My mother, born & raised there, did that in 1934 when she moved to Traverse City for high school and then out of the area for the rest of her life. She actually warned me not to live in Leelanau County even though we’ve got a ton of relatives & old friends up there, she referred to a hostile environment for people of our kind. The old friends are mostly underground now. The younger relatives are now at the 4th & 5th cousin level.
As for the local businesses, some may be forced to curtail their activities to match the availability of workers willing to accept the compensation offered, or raise the compensation. I think you’re attempting the impossible, “housing that is affordable for the regular workers in {Leelanau] county”. The affordable housing for regular Leelanau workers seems to be located in other counties and states. Good luck!
We are making a lot of progress. You see the
(1) business owners such as restaurants, hotels, and tourist stuff finally clued in that they can’t have businesses without employees. They are the biggest supporters of devoping methods to attract and keep a workforce. (And the US National Park as a major employer ranks among them.)
Staffing for businesses is a critical problem. They can get enough employees for year round (just) but struggle to get enough staff to deal with the 1.5 million tourists. The problem of getting and retaining staff is then exacerbated when they are have to endure the screaming and abuse from the tourists who want their meal served NOW and their purchases rung up NOW rather than waiting in line. Most businesses have simply resorted to telling them to shut up and get out when they behave like that.
(2) How do you ‘curtail’ the remaining businesses? Close up everything and everyone leaves? That would literally mean vacating the place. (Of course that would get rid of the tourists -no where to stay, no place to eat…..)
(3) Oh right. Now there is a useful suggestion. Raise all the wages in businesses such as restaurants, retail, grocery stores….. Yep, they would really be able to survive with wage rates that had to cover a $300,000 mortgage.
(4) Part of the solution has been to raise the property tax rate and just slam the 2nd home people -the ones with the $500,000 ski condos and the $2,000,000 beach house. A millage increase does not hurt the permanent residents anywhere near as much sine (a) their homes are far far more modest and (b) the homestead exemption is 50% off.
We are looking at using such tools as (a) inclusionary zoning (b) mansion tax and (c) a land trust into which income from the first 2 would feed and which could then be used to do ‘buydowns’ for those who enter into an agreement to live and work in the area. There are planning approaches to help deal with the problem.
How do you ‘curtail’ the remaining businesses? I never suggested you or I had any responsibility in the matter. The business owners are perfectly capable of making those decisions.
That would literally mean vacating the place. Nah, give it back to the Indians.
Not unlike Monroe County (the Keys) Florida, where the only “affordable” housing is the southern exurbs of Miami, or the tony island communities of New England, or certain ski resorts. Not to mention most large cities. Just as common, if not more so, in foreign countries, too. Nothing strange, unusual, or even pitiable about all this - it’s just life.
Ann,
As far as the political implications of the collapse of Bear Stearns, I think the lower 80% of the 14,000-person work force - and especially the 50% or more who are going to be axed - will come away with an abiding bitterness and distrust toward not only their venal, incompetent management, but also the various regulators that were asleep at the switch. When they look at either political party they will see nothing but desolation - both major parties are equally devoid of principles or integrity, and are perpetrating the same swindles on the American Sheeple. I repeat, both parties suck, and that point is about to be driven home in true DELIVERANCE fashion to even the most rabid and mindless fanboys of the DNC or GOP as this mess unfolds.
Think: We Won’t Be Fooled Again. Of course, most people are stupid and wil be fooled repeatedly. But of those thousands of suddenly jobless or “asset-stripped” Bear Stearns employees, I’m wagering that several hundred are going to come out of the pit of dispair and anger with a cold contempt for the Wall Street overlords and the political dilettantes who cravenly “service” them while turning a blind eye to their depredations and swindles. Suddenly these “redundant” and no-longer-well off Bear ex-employees might start feeling some long-overdue solidarity with the millions of American workers whose jobs have been exported to India or China or taken over (especially in the building trades) by slave-labor Mexican immigrants. They might FINALLY have the motivation, not a minute to soon, to ponder how predatory, unchecked capitalism is destroying the American middle and working classes - America itself, in other words. And they just might be pissed off enough to start agitating for real change of the sort this country so desperately needs.
One hopes so, anyway.
Amen Sammy. Amen.
Too bad that “Amen” is exactly what the robber barons will be saying when they throw the last bit of dirt on what will be left of the middle class in this country.
No - the robber barons will do no such thing. If the middle class disappears, it’s because average Joe and Jill-6 will continue to live beyond their means as they do today.
It’s amazing how Everything is everyone else’s fault. Grow up. Deny immediate Toddler-Hood gratification and pay cash. Middle class is easy to for many attain once they rid themselves of their Entitlement Feelings.
I’m so *ucking sick of the whining! There are Tivos, big screens, cell phones, I-Pods, Disneyland vacations, ClubMed, washing machines, dryers, the Internet, $4 pharamceuticals at Walmart - and a shitload of individuals the world over with so much leisure time on their hands that they can visit blogs such as this one for hours at a time!!!!
I wonder how many whiners are whining when they ought to be working.
What does your second paragraph have to do with the first? pStrange editorializing. Sammy, people the world over ALWAYS have lost jobs to those who would do the same job for less, no matter if they were in India or in the neighboring town.
In this thread at least, you are coming across as a Sheeple yourself.
What we have is far from Capitalism - the monetary policy that got is into this trouble is nothing more than a form of socialism for the rich / fascism, and it is the #1 factor behind America’s decline (#2 being overconsumption and the lack of savings, which is also driven very much by #1)
Too bad the Fed and Morgan rescued them.
Since when is closing down a company (Bear Stearns), rescuing them?
The rescued the bond holders (of all their “bad” debt). For now, they don’t have to mark the assets to market — they can keep the “wishing prices” on their (now JPM’s and/or the Fed’s) books…temporarily.
Las Vegas Now. “Kyle Canyon Gateway in the northwest, the Cosmopolitan Resort right on the Strip and Inspirada in Henderson are all facing the same problem, empty pockets and too much debt.”
“No one from Inspirada or the Cosmopolitan Resort would comment about the financial troubles. A representative from Toll Brothers, one of the builders in Inspirada said no comment and that they wanted to keep it quiet.”
ROTFLMAO
No HELOC money means no HELOC’d investments nor Vegas luxury vacations. Las Vegas is going to be like Florida in the 1930’s, a state that discovers that dependence on discretionary spending is hit extra hard in a downturn.
US air is downsizing rapidly in Lost Wages. Partially due to Southwest doing well, partially due to a consolidation in Phoenix, but also due to the overall market declining. If you have two hubs close to each other in two bubble markets… they have to cut costs. That means cutting jobs.
Got Popcorn?
Neil
Just read this today:
“As Traffic Swells, Vegas’ McCarran Airport Continues Growth
Terminal 3, a $1.8-billion, 14-gate complex, with six for international gates, will stand three stories high, with its own ticketing, baggage claim, security and a 6,000-space parking garage, is scheduled to open in 2012. It is the largest part of the airport’s nearly $4 billion capital improvement program, known as McCarran Vision 2020, said Randall Walker, director of the Clark County Department of Aviation, which operates McCarran.”
http://www.btnonline.com/businesstravelnews/headlines/destinations_display.jsp?vnu_content_id=1003726461
If they don’t get this one right, there will be quite the revenue shortfall to pay off the $4 billion investment. LAS needs to grow, but $ billion is a chunk of change.
Pavlovegas doesn’t have the vaguest idea, what’s about to hit it.
Once you break the cycle of reinforcement that it was built upon, game over.
I’m in Chicago this week. Everyone, that I’m talking to here, seems to now believe that the that housing “market” here is completely dead.
Many have told me that they don’t believe that it’s coming back anytime soon. It’s a lot different than the “bottom is here” or “it’s cyclical” stuff that I was subjected to over the last two or three years from my wife’s Chicago friends and relatives.
On thing that I have noticed is that everyone here now claims to have seen “it” coming. People that would argue with me over the last couple of years about my views (negative) over the bubble now have no memory of their prior optomistic opinions. Could this mean that the acceptance “stage” is now in play?
Las Vegas. I have noticed over the last month that about 2 miles north on I-15 past the Raceway there has been a double tractor-trailer sign put up which says “Auction here May 15-19″. It’s an auction for all kinds of construction equipment. The area has been leveled (it was rolling desert) and is lighted at night. At first there was just a small number of Construction equipment on the site. However, the inventory has grown to be quite impressive. I wonder how much more to expect before the Auction actually gets underway?
Las Vegas airport has to be the most gawdforsaken airport ever. The TSA security lines are incredible and ridiculous. Period.
What a mess that place is, and they are going to Add to it?
ick.
“‘The smart move would have been two years ago to tell these firms to shape up, you’re not telling the market enough, you’re gambling too much,’ Sabino said, citing the firms’ investment in securities tied to subprime mortgages.”
No, no, no. The smart move would have been for these firms to have followed responsible lending procedures that have long been in existence. Of course with all of these high salaried individuals losing jobs I’m sure NY RE’s will rush out and buy their property for a premium, after all RE only goes up in NYC.
“The best thing about Sunday night’s Federal Reserve-inspired sale of Bear Stearns to J.P. Morgan Chase is the price. At $2 a share for a total of $236 million, this was less a ‘bailout’ than a Fed-mediated liquidation sale. Bear wasn’t too big to fail after all.”
Oh yeah? Then why didn’t they just allow it to fail, and go BK? I don’t care what they call it, it’s government intervention. Why not just stay the hell out of it and let Bear fail like the small business on the corner?
Because then JPM may have to mark their 7.5 trillion in credit derivatives to market ?
Fed’s got a market cap of $900Bn - JPM may be too big for even the fed to bail out.
yep.. with that kind of leverage, if Bear wasn’t bailed out this week we’d see the real global credit crisis.. not just the U.S.
it could be a good thing though, a complete cleansing of the system
Going BK means you have to show your cards. Gonna be hard to keep things civil if all of a sudden you find out that everybody at the table is holding a pair of 2’s.
None of the bagholders is going to be Bk’ed. In BK you have to show the judge what you own and what it is worth.
It was a bailout of creditors and customers; shareholders and executives ate the dust. At this point, at least publicly, the bailout was by JPMorgan-Chase. The only open question is whether there were any government guarantees to JPMorgan-Chase with respect to liabilities of Bear Stearns.
For commercial banks the FDIC will often assist an acquiror of a troubled bank either through the purchase of troubled assets at par or a promise to purchase assets that fail within a specified time period. The rationale behind this is that it’s cheaper for the FDIC than a liquidation and payout. As far as I know there is no statutory authority for the Fed or Treasury to do this with investment banks. But then again I’m no expert.
Then why didn’t they just allow it to fail, and go BK?
Because their customers were leaving in droves, and if they went to BK there would be no business left.
Bear Stearns was totally relying upon the repo market…no not that kind of repo…this kind -
In repo transactions, securities are exchanged for cash with an agreement to repurchase the securities at a future date. The securities serve as collateral for what is effectively a cash loan and, conversely, the cash serves as collateral for a securities loan.
Do the math, 236 million is a nominal price given the previous frothy value. The federal reserve is chartered to protect the banking system, the lubricant of capitalism.
http://www.cnbc.com/id/15837671/site/14081545/
The video link on this page is unreal…Are Cramer and CNBC in the dark or what?
Didchya see Cramer lampooned on the Daily Show last night?, a surreal montage of financial talking heads and ‘lil Bush. Amazing…
Saw it at the link above. Jon Stewart is ultra low bandwidth — Humor for Dummies.
Humor is in the AppleEye of the Beholder.
There was talk Monday that with their life savings nearly depleted, some executives had moved quickly, putting their weekend homes on the market.”
This is why the housing market is no where near bottoming out. Inventories are going to keep rising for at least a year or two yet. Plus, when the fed has reduced the rate to zero, what are they going to do. Pay banks to borrow money.
Has the FEDs ever lowered interest rate below 1%?
According to this source, the lowest Fed Funds Rate was 1 point in 2003.
http://useconomy.about.com/od/monetarypolicy/p/Past_Fed_Funds.htm
but Dolly Lenz, ubderbroker of ridiculously overpriced NYC apartments, was on CNBC promising the Bear Stearns sinking would have no effect:
“A lot of this has already been factored into the market. I think we’re going to be perfectly OK, if not possibly better off.”
http://www.cnbc.com/id/15840232?video=687405542&play=1
“A lot of this has already been factored into the market. I think we’re going to be perfectly OK, if not possibly better off.”
dolly lenz=pond scum
I love that clip…
They talk as if everything is just peachy…Kurt Rappaport says that there is very little inventory over $10 million right now…
Way to go, CNBC. Way to present a great real estate discussion to a mass audience…
We’ve been ‘dollyd’ up.
RE: some executives had moved quickly, putting their weekend homes on the market.”
So much for just the small fry takin’ it on the chin.
Depressions know no boundaries.
It appears that no matter how dismal these big banks earnings reports are, as long as the news is not worse than expected, it’s time to rejoice, and pump up the stock price. Whatever happened to dividends?
Indeed what happened to dividends.
I got a feeling they’ll be back in the medium term.
Dividends, you ask…Hah! What happened to earnings…..infinite P/Es
Who needs dividends when you had tech stocks returning 30% per annum? Oh wait….
Still feeling quite bearish- so I have a question:
The mortgage mess has been all the talk in the news- we know all about the troubles. Will commercial RE be the next shoe to drop? I ask because commercial has boomed along with housing.
Looking at a local level, Boise has two big projects in downtown that has gone into BK. A nearby resort is facing foreclosore. To and from work I drive by six new and completely empty strip shopping malls. Dirt continues to be turned on new shopping centers even though just built centers are not fully leased yet. I assume the picture is the same across alot of the country. Do we have a commercial RE bubble and when is it going to pop? Opinions?
Personally, I think that commercial RE is vastly overbuilt. And, yes, I think we do have a bubble there.
Too bad there hasn’t been more investment in the noggins that work inside the commercial RE. We could use a lot more innovation in this country.
Where is commercial RE overbuilt? Everywhere?
What about industrial on Oahu, HI? It’s less than 3% vacant, is that overbuilt?
How about medical office in the Bay Area near Stanford Hospital (where they are tearing down medical office to expand), overbuilt there too?
What about the retail corner surrounded by 20,000 new residents that don’t yet have a grocery store in their neighborhood? Should no one build a grocery anchored retail center there?
The list goes on, and on, and on.
Is there overbuilding? Yes. Some product types in some locations got way out in front of their skis (Orange County office anyone?).
Can you say that commercial real estate is overbuilt as a blanket statement? No, you can’t.
Is leased real estate overvalued? I think there is a strong argument to say that a lot of real estate was/is overvalued (driven by cheap money). It doesn’t mean that there was overbuilding.
LOL. “It’s different there.” Try driving your beemer to some places that are slightly less fancy than your favorite OC/Hawaiian shopping mall, like Sacramento, the IE, the entire state s of Utah and Nevada. If only I could find the blog that did a drive around of the Sacto area, literally hundreds of acres of empty commercial RE, photographed, leaves swirling in the parking lots.
But if you really need a better source than a blog, how about the WSJ which has had several articles about the glut of retail space over the past couple months. A 5 second google search helps.
http://blogs.wsj.com/developments/2007/10/10/the-contagion-spreads-to-strip-malls/
Someone else now the link for this…..
Per Capita Retail Foor Space. The US is leaps and bounds higher than any other G7(8). Last I saw we were over 20 SF while most of Europe is below 5 SF.
Sure you can argue the aisles have to be 3 times wider for our arses. But come on, 4 times the space?????
It depends on the situation.
Commercial RE is FAR more diverse than residential RE, and it is much more difficult to make blanket statements about whether it is overbuilt/underbuilt, etc. Each market truly is different with respect to supply/demand.
Where there is broad linkage is cap rates–without cheap debt available, cap rates will rise, dropping terminal values of assets–which, depending on who you are matters a lot, or not at all.
If you are developing an office building where you are the only game in town in a market that is
Damn, used the “less than” sign again.
To hell with it. Here’s the synopsis–commercial real estate is not as bad as residential, and the pain will be felt disproportionately depending on the particulars of the asset.
Low vacancy in your market, with modest leverage, you’ll be fine.
High vacancy in your market, with high leverage, you’re screwed.
If you own your asset with reasonable debt and good tenancy, who cares what the value is? You collect your rent check and play golf.
However, it is starting to show some cracks. This just in from one of America’s hottest commercial RE markets…
Tucson brokers forecast slowing commercial real estate market
I’m seeing the same thing happening in the Phoenix east valley (Chandler and Gilbert). They almost seem to spring up overnight. Most are entirely vacant and each time I pass another, I can’t help but wonder how many years it will be before it will be occupied.
You have to define overbuilt, just like in the housing market we have overbuilt Luxury and have a big shortage of average, same in commercial. i see nice old buildings with parking going empty and the luxury class A buildings with no parking sold out. Ego still wins in NYC
Can one of the many market gurus here explain how all of these rate cuts, and the overall intervention in the marketplace, is helping J6P? What’s in it for the average household, aside from skyrocketing energy and food prices?
Wells Fargo just announced they are lowering their prime rate (HELOC) by the full fed funds rate drop. That will help.
Silly me Captain, I forgot that households HELOC’d to the gills were the norm these days. Perhaps I should have asked what’s in it for the responsible citizens, as endangered a species as they are…
But who can qualify for the HELOC money? I can say confidently almost no one. Between falling home prices and way tight underwriting standards, no one can get to the dough. Only folks who currently have a HELOC will benefit.
Downey Savings New accts mgr was helping a senior citizen figure out where to put their small savings, what vehicle etc.
Overheard was the mgr stating ‘oh yes, banks are all different, the reason you can get a higher interest rate at Countrywide is that they are desperate for funds, so they will pay you 1% more. ‘…Empathy for the senior as this senior obviously was not that well off, not like those Bearstearns LEH guys with pockets full of cash. This situation is not good for many folks that we never talk about.
I don’t think there’s much in it for J6P. Methinks that, ever so slowly, J6P is waking up to the fact that spending isn’t wealth. Neither is borrowing.
I think the answer (aside fromm keeping the banking sysem from immediately freezing up in one fell swoop) is what Joe gets out of it is somewhere amounts to somewhere between ’slim and none’ and slim just saddled up and road out of town.
“More so than other firms on Wall Street, Bear had encouraged its employees, from secretaries to top executives, to be long-term holders in the company’s stock, and the employees own over 30 percent of the company. ”
Why O why God, do they still do this…
Why O why God, do they still do this… It must have made sense to them at the time.
At my husband’s old company, Praxair, you got the company match on your 401K if you invested it in Praxair stock, and not otherwise. Of course you could convert it and move it later, but how many of their truck drivers and air separation technicians are, do you think?
I wasn’t too happy with Praxair when I contracted with them when I first bought my clinic. I switched to a local O2 delivery service for much lower cost and more reliability. Definitely not a stock I’d want to have all my eggs in.
“A firm that had survived the Depression, the Second World War and numerous stock market collapses faced the humiliation of a government-assisted takeover by rival investment bank JPMorgan Chase & Co. that will likely vaporize most of the personal wealth of the firm’s executives and cost the jobs of more than half of its 14,000 employees.”
BWAHAHAHAHAHAHA, HAHAHA, HAHAHA…
Wait, wait… hold on…
BWAHAHAHAHA, HAHAHA, HAHAHA…
Can’t help it, sorry.
Though, I should make it clear I’m laughing about the executive’s ill-gotten fortunes vaporizing, not about the 14,000 employees about to be on the street. That part really sucks.
And of course, “nobody could have seen this coming.”
Suuuure. Riiiiight.
Even TXchick saw this and made over $12k shorting those fools. Thats a nice downpayment right there for her to buy a Texas mcmansion when prices drop some more
I think Ms. TxChick would buy a frozen chunk of tundra before buying in Texas. lol
Then why does she rent and live in Texas? She almost spent $250k on a house that later sold for $350k which she suspects was an illegal $100k kickback mortgage fraud. That house will get foreclosed and maybe she can buy it for $125k from the bank
She was ‘a tryin’ to suck in some mope like me to get her out of her position.
I can see her act in El Paso with Marty Robbins…
Just for a moment I stood there in silence,
Shocked by the FOUL EVIL deed I had done.
Many thoughts raced through my mind as I stood there;
I had but one chance and that was to run.
“Out in the West Texas town of El Paso
I fell in love with a Mexican girl
Nighttime would find me in Rosa’s cantina
Music would play and Felina would whirl…”
I grew up listening to Marty Robbins music. My parents favorite album was the Gunfighter Ballads.
Financial institutions are highly leveraged, by nature. In fact, they are actually somewhat better capitalized today than they were 30 years ago, using GAAP. Problem is, their asset quality isn’t as good. In the old days, boutique investment banks often had no better than 1% net worth, banks around 2%. People were gasping at Bear’s 33-1 gearing (3%), but the problem wasn’t the equity to liabilities, it was the quality of the assets. The more the hedges and derivatives have come along the riskier the strategies have become. The fixed-income firm I worked for made it through the early Volcker years and then lost all of its meager capital in a few months in the mid-80s (after I left) due to inadequate management and bad bets on one small trading desk.
Bottom line is that any financial institution can fail if there is a crisis of confidence and counterparties stop doing business. They don’t ring a bell; it happens suddenly. There’s probably at least a 25% chance it will happen to LEH or MER in the next 30 days, requiring another backstop by the Fed. At Enron, it happened within a month.
So, no, in general, it is very hard to SEE it coming. You go on for years and decades with the same basic capital structure and then all of a sudden it stops working. It’s the nature of banking and always will be.
No… it’s the nature of fractional reserve banking.
Banking in a system of 100% reserves, and loans only given out on timed deposits, gives very little chance for a crisis of confidence for any bank, and no sane bank or individual would loan out such hard money to a highly leveraged investment bank.
“There was talk Monday that with their life savings nearly depleted, some executives had moved quickly, putting their weekend homes on the market.”
That’s awful. They’ll probably have to list their third homes next weekend.
Naw they will sell their plane and Bently first.
You have me rolling here at work with that comment…
people were pushed into loans”
why don’t they push back?
sissy nation
Your handle just made me spit cheeseburger all over my screen!
“taxmeupthebooty”
Every American has this taped on his or her back.
“Every American has this taped on his or her back.”
Only the workin’ schmuck. The wealthy elite don’t pay taxes.
Fannie and Freddie will be buying their own mortgage bonds to push mortgage rates even lower. They are trying to refi as many good and bad peeps as possible and try to prop up real estate market as well. It’s a big defeat for the savers like myself.
They could go bankrupt next then.
If they do, the taxpayers will pay to bail them out too….
So… enormous inventory, wishing prices, nothing moving?
The FNM, FRE thing really ticks me off, but on the other hand, if they keep prices up, I’ll keep renting and bank the rest. With the amount of inventory in the pipeline, rent is not going up any time soon.
It’s too late for this market, IMO. Just look at all the out of work Bear Sterns execs flooding the NYC market. And with the awful inflation, the economy is getting a much worse kick in the pants than it should have. Get ready for some truly awful unemployment.
“It’s a tragedy…There are thousands of people who are going to lose their jobs and their financial security because of this idiocy.”
The idiocy is where many of the jobs and much of the wealth came from to begin with.
Here is another old book where the story sounds s-o-o-o familar.
http://www.mises.org/books/bubbleworld.pdf
It is “A Bubble That Broke The World”
Here are some salient quotes:
(1) This is a delusion about credit. And whereas from the
nature of credit it is to be expected that a certain line will
divide the view between creditor and debtor, the irrational
fact in this case is that for more than ten years
debtors and creditors together have pursued the same deceptions. In many ways, as will appear, the folly of the
lender has exceeded the extravagance of the borrower.
The general shape of this universal delusion may be indicated by three of its familiar features. First, the idea that the panacea for debt is credit.
(2) a social and political doctrine, now widely accepted,
beginning with the premise that people are entitled to certain betterments of life. If they cannot immediately afford them, that is, if out of their own resources these betterments cannot be provided, nevertheless people are entitled to them, and credit must provide them. And lest it should sound unreasonable, the conclusion is annexed that if the standard of living be raised by credit, as of course it may be for a while, then people will be
better creditors, better customers, better to live with and
able at last to pay their debts willingly.
Now as credit fails and the standards of living tend to fall from
the planes on which credit for a while sustained them, there is political dismay. You will hear that government itself is in jeopardy. How shall government avert social chaos, how shall it survive, without benefit of credit? How shall people live as they have learned to live, and as they are entitled to live, without benefit of credit? Shall they be told to go back? They will not go back. They will rise first. Thus rhetoric, indicating the emotional
position. It does not say that what people are threatening to rise against is the payment of debt for credit devoured. When they have been living on credit beyond their means the debt overtakes them. If they tax themselves to pay it, that means going back a little. If they repudiate their debt, that is the end of their credit. In this dilemma the ideal solution, so recommended even to the creditor, is more credit, more debt.
(3) Third, the argument that prosperity is a product of credit, whereas from the beginning of economic thought it had been supposed that prosperity was from the increase and exchange of wealth, and credit was its product. This inverted way of thinking was fundamental. It rationalized the delusion as a whole. Its most astonishing imaginary success was in the field of international finance, where it became unorthodox to doubt that by use of credit in progressive magnitudes to inflate international trade the
problem of international debt was solved. All debtor nations were going to meet their foreign obligations from a favorable balance of trade. A nation’s favorable balance in foreign trade is from
selling more than it buys. Was it possible for nations to sell to one another more than they bought from one another, so that every one should have a favorable trade balance? Certainly. But how? By selling on credit. By lending one another the credit to buy one another’s goods. ….the question was sometimes asked: “Where is the profit in trade for the sake of which you must lend your customers the money to buy your goods ?” The answer was: “But unless we lend them the money to buy our goods they cannot buy them at all. Then what should we do with our surplus?”
Right! When you have an entire economy based on people signing up for debt they can’t service so they can sell condos to each other, it’s not that tragic when it comes to a halt.
Anyone post this yet? Crazy.
http://www.theatlantic.com/doc/200803/subprime
Bah, ‘The Atlantic’ is another wordy magazine that takes too long to make a simple statement. In this case, that no one wants to live in shoddy construction on treeless lots.
Harpers, New Yorker, Atlantic = It takes a forest.
New York Times too. Especially the Sunday Magazine.
I compared the weight of the Jacksonville phone book to a roll of toilet paper. 7 ounces (TP) vs. almost 4 pounds. In other words, my total toilet paper consumption in a year is about equal to a phone book, two max. The lunacy of Sheryl Crow’s “one square of toilet paper per bathroom trip” plea still galls me. . .
Bah Humbug, not everyone wants to read USA Today baby food. Too many words, waaaahhh.
Yes. He uses the subprime mess to push the urbanist agenda.
“A structural change is under way in the housing market—a major shift in the way many Americans want to live and work.”
Ie, we’re dying to live in denser neighborhoods closer to town, ride bikes or take urban transit. I don’t think he establishes that but they don’t hesitate to use whatever crisis arises to push their agenda.
I’m a little suspect myself: how convenient that the sprawl boom may be ending, now it’s time to move everyone again.
The author is an RE developer.
(generational snipe alert)
I do, however, like the idea of boomers having to confront the fugliness of the world they built.
This guy is confused as to which ass his head is up.
While this statement in itself may be a tad confusing to you, dear reader, especially initially, our friend the RE developer understands the statement implicitly.
I’ve been bearish since 2004, when I started seeing things here in Florida that seemed fundamentally wrong to me, and began telling acquaintances, often at the cost of my credibility, that this would collapse worse than anything any of us had ever seen in our lives. All the same, I never would have predicted what’s happened in the last week. Not only did the market value of Bear Stearns fall 99% in ten days, but the company was sold for less than the value of A-Rod’s contract. One thing I’m discovering is that being right about the housing bubble doesn’t make me any less uneasy about this country’s future.
“No one from Inspirada or the Cosmopolitan Resort would comment about the financial troubles. A representative from Toll Brothers, one of the builders in Inspirada said no comment and that they wanted to keep it quiet.”
All Quiet On The Western Front…
Ho Hum, Another rate cut. Stock goes up big. We all know what is going to happen next.
Big drop in a few more days.
Throw in a large company going into baknruptcy because of the credit crisis.
Fed’s talking to another company pleading them to buyout the bankrupt company.
CNBC analysts talking about “market already priced it in” (whatever that means)
Numbers from QTRLY reports to economic indicators still dropping.
sigh… another normal week in wall street.
Up nearly 400 points? Wasn’t the sky falling yesterday? Have fundamentals even changed?
Each rate cut causes stocks to soar for a few days then crash. It’s like a druggie’s next fix making him high for hours or days then he crashes and looks for another fix. Repeat.
Once the FEDs go down to 1%(I heard this is as low as they can go) it’s game over.
This bipolar market behavior is a precursor to much greater nastiness. Today was another ‘denial’ rally.
I still can’t believe the markets didn’t get spanked yesterday for the Bear Stearns fiasco.
take a look at BSC closing price today. Over $6, and over $8 on intraday high. And JPMorgan is supposed to buy them for $2. unreal.
Old Nigerian Letter: Scammy Advance Fee
New Nigerian Letter: Scammy Advance Loans
“‘You could say Lehman is riskier than Nigeria,’ one trader said, asking not to be named. ‘But it’s not a trade or a comparison people often try to make.’”
I think of it as more of a Zimbabwae situation.
With a huge smile on my face:
I’ll sell 2 Lehman for 1 Nigeria. Sell the air keep the oil.
A princeling of the Lehman Brothers fortune needs your assistance, and if you will just kindly provide all of your banking information/codes, you will be entitled to 6% of 123 Million Dollars.
My standard agio for out of countries transactions is the ‘Lehman formula’ 5% of the first 100MM then whatever I can steal.
I’m waiting for the Nigerian 419 scammers to file a defamation lawsuit seeking punitive damages for comparing them to Lehman.
Yesterday: Talk that Lehman was the next to go.
Today: Best day for Lehman stock in their history.
What’s the real story?
LEH is down about 30% YOY. Day trader noise does not cover up that trend.
Major shareholders in Lehman trying to stave off as much “bargain basement” as they can?
It would be good money after bad, but if they can keep it to an 85% discount as opposed to a 93% discount…
Does anyone remember Greenspans conundrum? Raising short term rates, but long term rates would not follow. Since BB and the GSE’s may buy mortgage treasuries to lower rates, they are basically manipulating the bond market. If this is correct, why didn’t Greenspan manipulate it when he had the famous conundrum so that mortgage rates would rise.
Something fishy going on here…
“‘It’s really infuriating for me that we pushed low- and moderate-income people to buy overpriced houses with really bad mortgages,’ he said. ‘And even now, after it’s proven so disastrous, you have politicians that still can’t take two minutes and think for a second that maybe it’s not a good idea for everyone to be homeowner regardless of what price they’re buying at.’”
While I understand the sentiment, and I certainly agree that it doesn’t pay for many–if not most–people to be home owners on a pure economic basis, I don’t like the proposition that people were “forced into” buying homes!
It’s still a hassle to buy a home! Lots of papers to sign, and a formal “closing” where you have someone representing the transaction, every opportunity to have hired a lawyer, and a final chance to re-read all the paperwork.
It’s no hassle at all if you don’t read the paperwork & let others do all those tedious procedures.
yes who can be bothered with reading when you are about to have a bbq in your shiny new mcshitbox and have your h2 in the driveway because you garage is full of ‘toys”
silly rabbit
Lawyers are not commonly employed for real estate transactions in CA; the practice is to use an RE agent. However, I can’t for the life of me figure out why.
So let’s say you needed to make Bear Stearns go away, but in a messy fashion…
You’d “sell” it a @ sweetheart deal price of $2 a share, knowing that price would cause unrest amongst the shareholders, letting a month or 2 pass, before you had to cover it up again, with some other mess.
A rolling stock gathers no loss…
Just to put things in perspective, look at the volitity in this chart. You can change the years by clicking on Prev or Next at the bottom.
This shows, to me, that today was just another “dead cat bounce”.
Dow Jones Industrial Average (1920 - 1940 Daily)
http://stockcharts.com/charts/historical/djia19201940.html
And I lived (as a broker) through the end of this cycle.
Dow Jones Industrial Average (1960 - 1980 Daily)
http://stockcharts.com/charts/historical/djia19601980.html
Those were tough years.
Yes sir, fellow cheese head by birth, in Madison. I about left the business. But, the years after, we did just fine.
Confirm with me also, sir, that the manipulation has been in the market since they sat under the tree.
There was a lot more manipulation in the market in the 60’s and 70’s than in the 90’s and today. I have not seen much intentional manipulation for a profit as much as the manipulation to generate activity. The revelations revealed in Bloomberg et al tonight about BSC manipulations is disturbing. (BSC would have gone down no matter what the traders did, just taken a little longer). It is important to realize how much Bear was hated, their financial difficulties gave an excuse to not trade with them.
That’s why I said yesterday that if you stay in this game any length of time, you become very bearish. The manipulation is rampant and daily. The trick is to learn which way it’s going and ride along.
Don’t shoot me. I ended up a little short in Bear at the close and saw no need to even think of covering. It is tiring to day trade!
But your words have kept my finger off the trigger on BAC,C, WB, WFC, WM, et al.
I really did not mean it abiout what I said above post about you and the frozen tundra, jusyt kiddin.
I think the length and size of this rally is going to shock all of you. I’m long and strong as they say on the Yahoo boards. LOL
Didn’t you say that last time, txchick? Sounds like your long-term predictions aren’t quite as accurate as your daily ones.
TxChick, I’m going to have to disagree with you on this one. I believe this sucker rally will falter and collapse before the end of the week as more grim news rolls in.
Sammy, I love ya anyway.
To the other tool - don’t you have somewhere to go and brag about your IQ?
Chick - I confirm you to be strong money. You’ve hardly set a foot wrong in the last 12 mos. and have done it boldly but without excessive bravado. Well done.
Cool chart. The 1973-1975 episode is an eye popper. Makes me wary of the risk of catching falling knives (though another part of me suspects the risk might be contained).
I’m wondering who went “all in” at 41.22, the lucky dog.
I’m surprised I saw no comments on this:
“The president also opposes proposals that would ‘artificially prop up home prices,’ reasoning that delaying a correction would prolong problems.”
Wait - so he ‘understands’ that housing prices are way out of value, and action taken to stop the return to reason would be detrimental to the short and long term health of our economy??
HOLY CRAP! Now we’re seriously screwed - - if he’s getting it right, it’s gotta be the seventh sign of the apocalypse.
I know. For some reason, when he says something that actually makes sense, his idiotic swagger/drawl/self-absorbtion starts to seem kinda likeable.
I dislike almost everything about W, but must admit to a new admiration for him when he talks like this.
Who’s whispering in his ear? Or does he actually **get it**?
http://www.bloomberg.com/apps/news?pid=20601087&sid=a3K784kZkB1Q&refer=home
Shocking: SEC Opens Bear Stearns Stock Manipulation Inquiry, People Say
“March 18 (Bloomberg) — U.S. regulators are investigating whether traders illegally sought to force Bear Stearns Cos. shares into a tailspin last week by spreading false information about the firm’s finances, two people familiar with the inquiry said.”
More from my visit in TN. This is my next to last day visiting here. Anyhow, I stepped into a cafe today and picked up a local RE sales magazine. To preface, I’ve always viewed TN as a possible alternative in which to relocate to from CA since I’m from here and the cost of RE has always been insanely less expensive compared to CA.
But after reading the RE magazine and looking at a number of homes for sale in the area,(Knoxville), the prices are honestly approaching bubble levels if they haven’t already. We’re talking 180-250k for typical subdivision homes that aren’t what I’d call very attractive. 250-300k for a historical craftsman in a nice neighborhood. 350-400k for one of the Mcmansion developments.
After being here for a week, I can see that the area has drastically changed. I can’t help but get the feeling that the majority of these homes are for out of state buyers and investors. 400k for a house is way the hell too much here or anywhere for that matter. It’s sort of depressing to start thinking of my very home town as being expensive and also makes me wonder what I might have to do in order to afford something decent. That might mean looking elsewhere eventually… unless those places too simply get turned into more Mcmansion developments.
I just saw that the DOW was up 400 points because the Fed is lowering interest rates… again, further helping to piss away my money. What crap.
Don’t worry, prices will continue to drop. The DOW will reverse tomorrow. As exnnvmtgbrkr sometimes says, “Stop hand-wringing or I’ll JT you”.
Jetson - I recall we had that conversation a year or so ago about houses under 100K in Nashville or being able to commute in 15 to 20 minutes to downtown Nashville from a nice, cheap nearby farm. Things have changed a bit, eh?
I grant you can still find the serviceable 1200 sq ft house in dodgy sections north and east of the river for under 100K, but I can tell by your posts that that’s not really jetson boy living.
“the quality of housing assets is deteriorating with each minute we wait”
Idiot…except for the few homeowners pouring concrete down foreclosed homes’ drainpipes, the quality of housing assets is the same. The PRICE, however, is retreating to the long term trend line.
Doesn’t anyone “out there” get it? HOUSE PRICES DOUBLING IN THREE YEARS WERE NOT BASED ON FUNDAMENTALS. PRICES ARE NOW RETURNING TO WHAT THEY SHOULD BE, PRICES BASED ON INCOMES, NOT ULTRA LOSE LENDING STANDARDS. THIS IS A GOOD THING.
Idiots. Idiots the lot of them.
California East Bay HBB Party:
An HBB party will be held this Saturday, March 22nd at 7 PM (NOT at 2 PM) at El Burro (3100 Newpark Mall) in Newark. They have OK food and stuff and they make margaritas. Who wants to go?
“U.S. Securities and Exchange Commission Chairman Christopher Cox was asked on March 11 if he was concerned about the financial condition of Bear Stearns Cos. ‘We have a good deal of comfort about the capital cushions at these firms at the moment,’ Cox told reporters.”
The balance sheet of BSC as of November 30, 2007, shows short-term liabilities more than twice short-term assets ($248 bil v. $116 bil) while book net worth, $12 bil, represented only 3% of total assets. The SEC considered this level of capital adequate for BSC’s liquidity risk. I suspect liquidity risk was even more elevated if you took into account off balance sheet items (buy-back pledges, OTC derivatives, and open credit lines).
By the way, the $12 bil in net worth was only 4% of long-term investments (book value). If BSC sold $120 bil of its $270 bil long-term portfolio at just a 10% loss BSC would have reported a balance sheet insolvency.
In the near future, any similar statements by an SEC official will tempt me to buy puts on the subject broker-dealer.
Fed Funds Cut, the Dollar, and T-Bonds
If I was a central banker for a major country whose currency was falling fairly sharply and I planned to reduce the target for short term interest rates, there are certain precautions that I would take. Before announcing the target cut I would line up an intervention pledge from central bankers in other countries. The other central banks would commit, very short term, to intervene in the FX market to prop up the subject currency, intervene in the gold market to lower the subject currency gold price, and intervene in the bond market to increase the price of the subject country’s medium and long-term government bonds. This would be the sensible thing to do.
After the announced Fed target cut of 75 BPs the Dollar rose in general by 1% (nearly 3% against the Yen), the dollar price of gold dropped by 2%, but medium and long-term Treasuries dropped in price (5-year yield up 25 BPs, 30-year yield up 7 BPs) when they should have rose in price. Something to think about.
What we got today is not a rate cut, it’s a rate increase. That’s because it will result in a further increase in the amounts Americans will now spend on food, gas, electricity and other daily expenses because of the further devaluation of the dollar and inflation. Add up all that on the debit side and look at the credit side. Have mortgage rates gone down? Have corporate credit spreads gone down? Will the cut leave more money in your pocket? Will this not mean less money left over to pay the mortgage? Thanks Mr Bernanke, you are a real genius and you deserve a standing ovation for that sneaky rate increase.
How can a company with an $80 book value sell for $2. How can we trust any financial statement especially a Wall Street statement?
Book value is an accounting term that is generally defined as Cost Basis - Accumulated Depreciation - Liabilities.
Book value generally has nothing to do with liquidation value or the value of a firm as a going concern. For example, Mickey Mouse, the name and picture, and the Disney name have a book value of close to $1; the market value of these two trademarks/tradenames: priceless.
Note that once an auditor determines that a firm is no longer a going concern the auditor accounts for balance sheet items on a liquidation basis and not on a historic cost basis. So if you assume that BSC is a going concern its book value could be $80; assume it’s not a going concern and its book value could be 0.
It’s not rocket science - If you’re leveraged 50-1 and the value of your assets suddenly falls by 2%, your book value goes from to 0. Or, if mortgages are 20% of your assets and they suddenly “fall” by 10%, same result.
Running a bank or an investment bank is like riding a bike - the pedals have to keep turning or you fall down, go boom. Problem is, in banking it’s the riders around you who determine whether or not you get to keep turning the pedals.
Addendum/clarification: the $80 and the $2 confuses the issue. The operative numbers are and 0. It doesn’t matter if a company has book value 10,100, or 1000. If they are equally risky, they have equal chance of going to 0. To see this, just imagine that Bear split its shares 10 for 1 on Friday.
Thanks for the explanation. In essence, accounting book value means very little.
Regrettably, you are correct. The unfortunate thing is that other valuation methods are so subjective that they increase the odds that you are reading a work of fiction. It’s something like democracy, the other approaches are so much worse.