The Housing Bubble

Is Merrill’s kitsch-and-sink CDO fire sale a harbinger of more to come from other subprime mortgage lending kingpins? And what are the implications (if any) for home prices on Main Street USA?

Finance & Economics
Merrill Lynch
Thain takes the pain
Jul 31st 2008 | NEW YORK
From The Economist print edition
An unexpected fire-sale could mark a turning-point

… On July 17th, after Merrill announced its fourth quarterly loss in a row and the sale of its cherished stake in Bloomberg, a financial-information firm, Mr Thain said he believed the bank was in a “very comfortable spot” in terms of capital. Eleven days later Merrill unveiled another whopping write-down of mortgage-linked assets and further steps to shore up its finances with an $8.5 billion share offering.

Merrill’s news doubtless helped confirm the Federal Reserve in its decision, announced on July 30th, to extend its emergency lending facility for Wall Street firms until January (it also lengthened loan periods for commercial banks). But amid the red ink and the flip-flopping, there is also a hint of hope. The write-down stems mainly from a deal to sell collateralised-debt obligations (CDOs) with a face value of $30.6 billion to Lone Star, a vulture investor with a track record of buying distressed financial assets (see article), for a mere 22 cents on the dollar. A market-clearing price may finally be being established for the most toxic assets on banks’ books, albeit at a very low level. And after several false dawns (see chart) Merrill may be able to start looking past its immediate woes.

Slump hits vacation homes in Costa Rica

http://www.canada.com/calgaryherald/news/calgarybusiness/story.html?id=812fa0aa-8e81-4f9e-87c8-8de2ded42360

Prices for some vacation houses and condominiums in the Central American country have dropped as much as 40 per cent from their peak a few years ago and sales have slumped at least 30 per cent over the past six months, they say.

“Most of the sales to Americans are in cash after they take out a second mortgage on a property or mortgage a property they have clear title to,” said real estate broker Iris Mailloux.

“I’ve only had seven sales that were (locally) financed in the 15 years I’ve been here.”

Krugman raises a point which I am guessing has not crossed the minds of a vast majority of U.S. homeowners.

Op-Ed Columnist
A Slow-Mo Meltdown
By PAUL KRUGMAN
Published: August 4, 2008

A year ago, as the outlines of the current financial crisis were just becoming clear, I suggested that this crisis, unlike a superficially similar crisis in 1998, wouldn’t end quickly.

It hasn’t.

The good news, I guess, is that we’ve been experiencing a sort of slow-motion meltdown, lacking in dramatic Black Fridays and such. The gradual way the crisis has unfolded has led to an angels-on-the-head-of-a-pin debate among economists about whether what we’re suffering really deserves to be called a recession.

Yet even a slo-mo crisis can do a lot of damage if it goes on for a year and counting.

Home prices are down about 16 percent over the past year, and show no sign of stabilizing. The pain from this bust is widely spread: there are millions of American families who didn’t buy mortgage-backed securities and haven’t lost their houses, but have nonetheless been impoverished by the destruction of much or all of their home equity.

Economics
Up, Up and Away …

Half the world is living with double-digit inflation, as boom gives way to bust.
By Rana Foroohar | NEWSWEEK
Published Aug 2, 2008
From the magazine issue dated Aug 11, 2008

Important point raised here: Not only are inflation expectations endogenous, but they are very persistent, and painful to eradicate once they take root. Bernanke apologists take note.

Even if the inflation handwriting is clearly inscribed on the wall in bold letters, I expect no preemptive action from the Bernanke Fed, as the temptation to do nothing rather than potentially precipitate a harder, faster landing will overwhelm them.

Learn the right inflation lessons from the 1970s
Published: August 1 2008 03:00 | Last updated: August 1 2008 03:00
From Mr Edwin M. Truman.

Sir, Mark Gertler (“America must not act rashly over inflation”, July 29) correctly reminds the Federal Reserve not to overreact to rising headline inflation in the US as necessarily presaging a return to the 1970s. However, as someone who lived through that period on the staff of the Federal Open Markets Committee, I believe it is important to learn the right lessons and not to underreact either.

First, Prof Gertler knows but did not state that inflation expectations are endogenous. As long as market participants believe that the Fed will do the right thing, inflation expectations will remain well anchored, as they appear to be at present. However, they remained anchored well into the late 1970s, as demonstrated by a negative inflation premium in 10-year interest rates. It was replaced by a substantial positive inflation premium that persisted into the late 1980s.

Methinks they may also need to come up with some more credible inflation statistics on which to hang their policy target.

Mishkin calls for Fed to adopt inflation objective
By Krishna Guha in Washington
Published: July 29 2008 03:00 | Last updated: July 29 2008 03:00

The Federal Reserve should adopt a specific numerical inflation objective, outgoing governor Frederic Mishkin said yesterday, saying it would help the US central bank deal with financial -crises and other economic shocks.

The real deficit and how we came to it

The Bush Administration is projecting the deficit for the next White House will be about half a trillion. But Allan Sloan takes Scott Jagow through the numbers and explains why it’s probably closer to $900 billion.

http://www.nytimes.com/2008/08/04/business/04lend.html?hp

I know this has been talked about on this blog before, but it’s the first time that I’ve seen something like this in the NYT. Housing problems are not limited to sub-prime.

“The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.”

“Defaults are likely to accelerate because many homeowners’ monthly payments are rising rapidly. The higher bills come as home prices continue to decline and banks tighten their lending standards, making it harder for people to refinance loans or sell their homes. Of particular concern are “alt-A” loans, many of which were made to people with good credit scores without proof of their income or assets.”

“Subprime was the tip of the iceberg,” said Thomas H. Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. “Prime will be far bigger in its impact.”

Amazingly some are still arguing that what is going on in the housing markets is no big deal.

http://www.washingtonpost.com/wp-dyn/content/article/2008/08/03/AR2008080301572.html

“We conclude that declines in house prices are highly likely to remain small. Our analysis reveals, unsurprisingly, that foreclosures and home prices have negative effects on each other over time, but this does not imply a vicious cycle of collapsing prices. Our models predict that as foreclosures continue to climb in many states, house prices will remain flat or decline in those states — but will not collapse.

One reason for this is that the effect of foreclosure shocks on house prices is small. Furthermore, other fundamental factors (such as employment growth and a slowing of the growth of the housing supply over the past year and a half) will cushion the impact of foreclosures.”

Scary thought when the insiders expect prime defaults to triple in the coming MONTHS!

Housing Lenders Fear Bigger Wave of Loan Defaults

The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building.

Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults.

In a conference call with analysts last month, James Dimon, the chairman and chief executive of JPMorgan Chase, said he expected losses on prime loans at his bank to triple in the coming months and described the outlook for them as “terrible.”

Has there ever been another point in U.S. economic history when it was so easy for the guys at the top of the economic pyramid to screw those below them and get away with it?

PAGE ONE
Companies Tap Pension Plans
To Fund Executive Benefits
Little-Known Move
Uses Tax Break Meant
For Rank and File
By ELLEN E. SCHULTZ and THEO FRANCIS
August 4, 2008; Page A1

At a time when scores of companies are freezing pensions for their workers, some are quietly converting their pension plans into resources to finance their executives’ retirement benefits and pay.

Much like other benefits-consulting firms, Watson Wyatt Worldwide Inc. markets the Qserp, or “qualified” supplemental executive retirement plan, as a way to give top officers bigger benefits from the regular pension plan “without [necessarily] increasing staff benefits at all.” Read a page from Watson Wyatt’s Web site on the “quirky executive perk.”

In recent years, companies from Intel Corp. to CenturyTel Inc. collectively have moved hundreds of millions of dollars of obligations for executive benefits into rank-and-file pension plans. This lets companies capture tax breaks intended for pensions of regular workers and use them to pay for executives’ supplemental benefits and compensation.

The practice has drawn scant notice. A close examination by The Wall Street Journal shows how it works and reveals that the maneuver, besides being a dubious use of tax law, risks harming regular workers. It can drain assets from pension plans and make them more likely to fail. Now, with the current bear market in stocks weakening many pension plans, this practice could put more in jeopardy.

A plague of black swans descends on Wall Street…

MORE
INVESTING IN FUNDS
After a Tough First Half, Pros Say Where They Went Wrong
By DIYA GULLAPALLI
August 4, 2008; Page R1

It’s treacherous out there: Mortgage giants Fannie Mae and Freddie Mac face losses so potentially steep that the Treasury Department has taken steps to prop them up. Household-name banks and giant Wall Street firms are selling family jewels to shore up their capital.

Home values keep falling, oil prices are punishingly high, and consumer confidence has taken a dive. For investors, it’s easy to go wrong — even if you are a veteran fund manager with one of the best long-term records around.

The average U.S. diversified stock mutual fund was down 11.7% for the first seven months of the year, the worst showing for that period since the tough bear market of 2002, according to preliminary Lipper Inc. figures.

http://www.seacoastonline.com/apps/pbcs.dll/article?AID=/20080724/NEWS/807240439

City suicide attempts double

PORTSMOUTH — When police officers spent 90 minutes persuading a man not to jump from the Piscataqua River bridge early Saturday morning, it was the 56th suicide-related call in the city during the past year.

“Epidemic” is how police and fire department chaplain Father Angelo Pappas describes the escalating number.

“For a small town, I can’t believe the number of suicides. I’m baffled,” he said. “And this is a problem that is going to get worse, especially as the economy gets worse.”

On a brighter note, some people are trying to solve the housing affordability problem in Portsmouth:

http://www.seacoastonline.com/apps/pbcs.dll/article?AID=/20080803/BIZ/808030311/-1/ARCHIVE

“The couple attributed (a friend)’s death to the fact that, like many other employees in Seacoast communities, the fire lieutenant could not afford to live in the community where he worked and had to travel on sometimes treacherous roadways just to earn a living. They decided immediately to turn the apartment they were building in their new home for extra income into one that would be rented for a much less to others whose income did not allow them to live in the town where they worked.”….

“That was the birth of Teach a Man to Fish, a private, for-profit company that is focused on rehabilitating housing on the Seacoast where those who serve the region’s communities in either municipal or service industry jobs can afford to live.

So far, the couple owns and manages two other work-force housing projects: a 10-unit building in Dover and a seven-unit building in South Berwick, Maine.”

In US, gas prices mean more riders, fewer buses

http://news.yahoo.com/s/ap/20080804/ap_on_re_us/mass_transit_gas_prices

According to a May survey by the American Public Transportation Association, about one in five of the nation’s transit agencies have cut service over the past year. They include Cleveland; Corpus Christi, Texas; and San Diego, which has seen one of the largest increases in bus ridership in the country.

The cutbacks come at a time of increasing interest in public buses and trains: The transportation association says people took 2.6 billion trips on public transportation nationwide in the first three months of 2008 — almost 88 million more than last year.

I wonder if the same corporate lobbies that demand land subsidies, tax abatements and taxpayer financing where there to support the people in their demands for a continuation of a bus route.

Got stagflation?

latest news
U.S. PCE inflation up 4.1% in past year, most in 17 years

ECONOMIC REPORT
Planned job cuts up 33% this year
July’s announcements rise to 103,312, led by airlines
By Rex Nutting, MarketWatch
Last update: 7:31 a.m. EDT Aug. 4, 2008

WASHINGTON (MarketWatch) — U.S. corporations have stepped up the pace of layoffs this year, according to an unscientific survey released Monday by outplacement firm Challenger Gray & Christmas.

After seeing planned job cuts rise to 103,312 in July, corporate announcements of layoffs have risen 33% so far in 2008 compared with the same period a year ago. Corporations have announced the elimination of 579,260 jobs so far this year.

July’s total of 103,312 is up 26% from June and up 141% from last July.
Transportation companies, such as airlines, announced 17,051 layoffs in July, followed by 15,517 in the financial services.

So far financial firms have said they’ll eliminate 100,775 jobs this year.

“We have seen job cuts increase in the majority of industries that we track, indicating that the downturn, which was isolated to the housing and financial sectors just a few months ago, has spread throughout much of the economy,” said John Challenger, CEO of the firm that released the survey.”

Inflation-adjusted consumer spending falls as prices surged by largest amount since 1981

http://biz.yahoo.com/ap/080804/economy.html

The Commerce Department reported Monday that consumer spending dipped by 0.2 percent in June, after removing the effects of higher prices, the poorest showing since a similar drop in February. The higher prices reflected a big surge in gasoline costs and helped to drive an inflation gauge tied to consumer spending up by 0.8 percent in June, the biggest increase since a 1 percent rise in February 1981.

The blight of abandoned homes.

http://www.heraldtribune.com/article/20080804/ARTICLE/808040344/2055&title=Nobody_wants_derelict_duties

http://www.cnbc.com/id/15840232?video=812131553

Meredith Whitney on CNBC talking about her past direct hit predictions and making some new ones for the housing and credit industries.

NEW YORK (Fortune) — The credit crisis is far from over, star analyst Meredith Whitney tells Fortune magazine in its upcoming issue.

She also argues that banks need to “get real” about how they’re valuing their problem mortgage-related debt, much as Merrill Lynch has now done. Merrill recently sold a large package of toxic mortgage debt for just 22 cents on the dollar.

Whitney’s idea of “real” is pretty drastic. Whereas most banks are estimating 20% to 25% peak-to-trough declines in housing prices, the Case-Shiller housing futures traded on the Chicago Mercantile Exchange portend a much steeper 33% decline, she points out.

In fact, Whitney thinks the actual declines will be worse - closer to 40% - because of the loss of the securitization market and the paucity of mortgage credit available. And that means more defaults: “The consumer’s ability to refinance his way out of trouble has diminished greatly.”

Stupid financial markets comment of the decade? Everyone and his dog knows the Fed is going to stand pat on interest rates this week.

August 4, 2008 9:37 A.M.ET
BULLETIN
Wall St. tips to early losses

Trading kicks off on a weaker note as investors key their strategies to the Fed’s interest-rate decision on Tuesday.

Sounds like the omnipotent Fed badly needs some Viagra.

U.S. ECONOMY
Worst inflation in 27 years

Inflation-adjusted consumer spending dips 0.2% in June, as personal incomes rise and overall inflation runs hotter than anticipated.
• Stagflation rears ugly head (24/7 Wall St.) | Fed unlikely to adjust rates

CNBC reporting Wall Street bonuses could be down 30% to 40%. I believe our NY governor was preparing us for a rough patch based on a 20% cut of Wall St. bonuses.

My apologies if this was posted earlier.

At least the Boston Globe stops cheerleading long enough to print some reader opinions:

“Hackles rising over bailout

I have an idea for a piece the Globe should write (”Inside Congress’s housing repair kit,” July 31): an analysis of two buyers who bought roughly the same house in the same neighborhood for the same price (say $500,000) at the peak of the market. The first buyer does things the right way: 20 percent down, documents income, fixed interest rate, mortgage = 28 percent of monthly income. The second puts nothing down, lies about his income, gets a negative amortization adjustable rate mortgage that resets so that he now pays 40 percent of his income. Home prices drop 20 percent since they bought.

The first guy has lost all his equity. The second guy gets to participate in Barney Frank’s and Chris Dodd’s great bailout plan. He negotiates his loan down to $360,000 and gets a lower fixed rate than the first guy since his new mortgage is subsidized by the Federal Housing Administration (read: the US taxpayer). He is rewarded for stupidity and lying.

Do I have this right? Is this still the USA we live in?

I have never in my life been more sickened by a piece of legislation than this one.”

http://www.boston.com/business/articles/2008/08/03/overlooking_a_teeny_fact/?s_campaign=8315

peter schiff:

http://www.safehaven.com/article-10887.htm

Gold and Silver seem to be flirting with their 200DMAs. Sort of looks like something has to give, by October maybe. About a year ago, it was a breakout toward the moon.

BTW, my busines is having a great year riding a huge Titanium Sponge boom and solar cell manufacturing investment. As of July already sold more equipment by 2x than any previous year. All of a sudden, it is quiet enough to hear a pin drop.

Word is that WCI is in Chapter 11 and will likely default on 1 billion + of debt. I seem to remember the consensus on this blog was that that WCI was doomed (I agreed). Out of the blue, Carl Icahn stepped in and a few people thought perhaps he knew something we didn’t.

Seems not. Even the masters of the universe sometimes get burnt.

WCI is trading at $0.60. Ha!

Aug. 4 (Bloomberg) — WCI Communities Inc., the homebuilder whose chairman is billionaire investor Carl Icahn, plans to file for Chapter 11 bankruptcy protection after failing to obtain new financing and losing 90 percent of its value in the past year.

Roubini on CNBC at the moment. He might as well have been wearing a black cloak and holding a scythe. He wasn’t telling us anything we didn’t know, but there was almost an audible “gulp” from the co-hosts.

Banks are going to start fire sales by the end of August.

If anybody wants to write to “our” Ahansen, email me and I will forward to her. Her strory is nothing short of legendary and I bet she would like to hear from Prof Bear!
It sounds like she kept her powder dry and has a lot of reconstruction surgery ahead. She is in great spirits. Gentlemen and ladies get out your pens and write her a note of encouragement.

annmoorman@att.net

Singapore Home Prices set to fall.
http://www.youtube.com/watch?v=UqmmBST_Tes

On another Lowered Expectations
http://www.youtube.com/watch?v=GxL1uXwSrdU

First National Bank (one of South Africa’s “big four” banks) is cancelling mortgages that have already been approved but not paid out yet.

Nice little graff on how meaningless AAA rating is

http://www.bloomberg.com/apps/data?pid=avimage&iid=iQUy2GaasArs

“…The 66-year-old Mr. Hu’s appearance before foreign reporters Friday was a rare move into the public spotlight for a leader who has long shunned it. Mr. Hu has never given a news conference in China or abroad….”
WSJ

“…Here’s a rather representative list of sites that are now available in China, which include newspaper, magazine and NGO web sites previously hard blocked. This is taken from some that were sent on a recent Great Firewall list, and some I’ve added.

* 西方媒体：(Western media)
o 路透社 http://cn.reuters.com/
o 维基百科 http://zh.wikipedia.org/
o 自由亚洲电台 http://www.rfa.org/mandarin/
o 美国之音 http://www.voanews.com/chinese/
o 华尔街日报 http://chinese.wsj.com/gb/index.asp
o 金融时报中文 http://www.ftchinese.com/sc/index.jsp
* 香港媒体：(Hong Kong media)
o 明报新闻网 http://www.mingpaonews.com/
o 明报月刊 http://www.mingpaomonthly.com/cfm/main.cfm
o 亚洲时报 http://www.atchinese.com/
o 亚洲周刊 http://www.yzzk.com/cfm/main.cfm
o 南华早报 http://www.scmp.com/portal/site/SCMP/
o 南华早报中文 http://olympics.scmp.com/GCO_Simpchi_Index.aspx
o 苹果日报 http://www1.appledaily.atnext.com/template/apple/sec_main.cfm?
* 台湾媒体：(Taiwan media)
o 联合新闻网 http://udn.com/NEWS/main.html
o 中国时报 http://news.chinatimes.com/mainpage.htm
o 自由时报 http://www.libertytimes.com.tw/index
* NGOs
o Human Rights Watch http://www.hrw.org
o Reporters Sans Frontiers http://www.rsf.org (Chinese site unblocked only in Olympics media center)
o Amnesty International http://www.amnesty.org
”
Andrew Lih

The Olympics are doing more to ease tensions than I could possibly have expected. I expected a lot.

The mopes that worry about a 3rd war with China are looking at the wrong data. China does not care what the business makes or does just as long as it does not criticize the government. China cares about creating at least 5MM jobs every year.

Was Credit Stress in 2Q the Bottom? Few Think So

“…A review of earnings releases by the country’s 18 largest banking companies with retail operations showed their provisions rose 20% from the first quarter — when the previous record was set — and a stunning 296% from a year earlier, to $33.3 billion. These companies, which hold the majority of the country’s banking assets, served as a reliable bellwether of overall industry performance in the past….

Credit losses related to falling house prices produced high-profile hits for residential construction portfolios, prime mortgages, and home equity loans, but deterioration is increasingly evident in all lending types.

“Delinquencies are rising across the board. That’s what happens when you go into a downward swing of a business cycle,” said Kevin Blakely, the chief executive of the Risk Management Association. “We can expect continued asset quality deterioration for a period of time. We are in the early stages.”…

The question dogging the industry is the loss content of the bad assets, and there is little in public disclosures to provide clarity on that score. That has led executives into a rhetorical battle to convince investors and regulators that the bank has lent more prudently than its competitors, and that relatively stronger underwriting standards and stronger collateralization will mitigate exposure in the case of default.

Outsiders are largely at the mercy of executives, so trust ultimately plays a strong role in market valuation. About the only consolation — and a slim one for investors — is that the truth will ultimately come out. In the meantime, determining loss content without access to credit files is a sucker’s game….

“Only 14% of NPAs is in other real estate owned, and during the last real estate cycle that number peaked in the mid-30s in 1993,” said Mr. Davis. “We are still in the early stages of these banks foreclosing, taking title, and getting ready for resale. That process is still really getting under way.”

All of which means the second quarter’s unhappy record is unlikely to remain a record for long.

“Most of the folks we talk to are looking to ‘09 or ‘10 for the equilibrium to come back into the housing market,” Mr. Blakely said. “We have been dealing with the consumer credit cycle for a year already. Maybe it takes another year for things to begin settling down to the point where we see definite improvement.”….

American Banker

A quick WAG in 1993 RE was peak to trough down 6%, Standard and Poors is projecting a 17% decline in the next 8 months. So NPAs went to the mid 30s in 1993 and at this time NPAs are only 14%.

This is just starting to get ugly.

http://www.itulip.com/forums/showthread.php?t=4728

Scroll down to the youtube screen for:

Trailer for the movie IOUUSA which is premiering at Sundance.

Easy commission loan biz has dried up, so what’s a guy to do?

This:

“The FBI has announced that a former Countrywide employee and his accomplice were arrested on charges related to “illegal access of computers containing personal information,” and “illegal sale of the data.” A criminal complaint filed last Friday alleges that one of the men, Rene L. Rebollo Jr., a senior financial analyst for Countrywide Home Loan’s subprime mortgage division (who was let go in July), had been harvesting data from Countrywide’s computers for the past two years — downloading and storing the information on personal flash drives.”

“Rebollo would then sell these “leads” to another man,Wahid Siddiqi, for $500 per batch. The FBI says that Mr. Rebollo admitted that he profited approximately $50,000 to $70,000 from selling the data, which included the Social Security numbers of as many as 2 million mortgage applicants.”

“The LA Times says:

Rebollo would copy information on about 20,000 customers at a time on Sunday nights by using a [Countrywide] computer that did not have the same security features that other machines in the office had, according to the affidavit by FBI Special Agent Richard P. Ryan.”

“At that rate, the U.S. attorney’s office said, Rebollo would have compromised up to 2 million customer profiles for about 2.5 cents each — an astonishingly small amount considering the importance of the material. Mortgage leads are among the most expensive for sale because of the potential payoffs to intermediaries when loans are made.”

http://www.cbsnews.com/stories/2008/08/03/sunday/main4317458.shtml

Can someone please tell me why Ben Stein is still given a forum, any forum? To me this reads like, yeah I was wrong, but so were a lot of other people. I’ve recently seen him discussing real estate on Fox Business and his current advice is something like, “I don’t know what’s going to happen in the market, but if you find a house you love, buy it”.

My favorite Ben Stein moment was when he was on CNBC with Peter Schiff and he excoriated Schiff for suggesting that Merill Lynch was in a lot of trouble (Stein evidently had a lot of Merrill stock). This was a little bit over a year ago, and we know what has happened since. Another good one was a column he wrote for the NYT criticizing the chief economist at Goldman Sachs for saying that real estate could fall another 30% nationally. Yet no matter how many times he is wrong, no matter how idiotic and unsupportable his positions are people keep printing his columns and inviting him on talk shows. Where can I get a gig like that?

So the BBC bit yesterday suggested that the CDS market has increased to 62 trillion, hard to imagine people are still willing to continue with this given counterparty risk. Given that much of this is circular betting what kind or real losses are likely? Bonds or CDO’s are overrated due to insurance that may or may not be there when times get tight. Banks own a boat load of this stuff and provided the insurance. I’m sure pensions insurance companies and Mutual funds are full of this stuff as well. Some will be winners, some will be winners that don’t get paid, some will be losers, and some will be losers that go bankrupt and never pay out, but an absolute # on losses due to CDS failures is harder to come by. Hard to measure something in a black box I guess.

When you buy a short fund, I imagine they buy credit default swaps. Is this the explanation for the growth in CDS to 62 trillion???

Repel the calls to contain competitive markets
By Alan Greenspan
Published: August 4 2008 18:54 | Last updated: August 4 2008 18:54
…
The insolvency crisis will come to an end only as home prices in the US begin to stabilise and clarify the level of equity in homes, the ultimate collateral support for much of the financial world’s mortgage-backed securities. However, US home prices will stabilise only when the absorption of the huge excess of single-family vacant homes that emerged as the US housing boom peaked in 2006 is much further advanced than it is now. New single-family home completions are currently barely under the rate of home demand generated by household formation and replacement needs. Only later this year will the current suppressed level of housing starts be reflected in completion levels consistent with a rapid rate of liquidation of the inventory glut, and this, of course, assumes that current levels of demand for housing hold up.
…

I saw this add to entice savers on the tube last night. It looks like savers may be about to get some revenge.

Isn’t the law of cause and effect wonderful. 41Cadillac

Was in Beaverton and Hillsboro OR this weekend lots of homes for sale but prices staying high…. reminds me of Phoenix 2.5 years ago.

Combotechie, looks like others want cash too. Surprisingly enough they didn’t ask for gold. Go figure.

“Icahn, chairman of WCI’s board, said the filing was necessary because the Bonita Springs, Fla.-based developer’s entire $1.8 billion debt may soon be in default. Icahn said this was confirmed when some holders of $125 million convertible notes insisted on being paid in cash in full on Tuesday.”

There’s an amusing/infuriating graph on p. 12 of this week’s Business Week. (8/11)

“Higher Rates make Homes Less Affordable”, drawn up by our friends at the NAR.

It tries to “prove” that raising the interest rates now would be a disaster for housing.

Of course, this graph is one big lie! Plenty of people bought homes in 1984 and 1985 when mortgage rates were over 10%. House prices were simply cheaper! I was working on Long Island at that time for Eaton Airborne Instruments Labs (making Air Traffic Control systems!). Ordinary co-workers, making 50K, with wives that brought in 10K or so with a p/t job were easily buying houses in Bethpage, Farmingdale, Babylon, etc. House prices were at best 2x income, and many were available for 1x or 1.5x. Of course these weren’t McMansions. The cheaper houses were generally from the 30s and the more expensive ones from the 50s.

Maybe more people were getting the title for homes in 2005, but they certainly weren’t more affordable than they were in 1985!

This graph from the NAR is one big lie, and BW printed it w/o question!

NY Times
Housing Lenders Fear Bigger Wave of Loan Defaults

The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building.

Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults.

The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.

…
“Subprime was the tip of the iceberg,” said Thomas H. Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. “Prime will be far bigger in its impact.”

In a conference call with analysts last month, James Dimon, the chairman and chief executive of JPMorgan Chase, said he expected losses on prime loans at his bank to triple in the coming months and described the outlook for them as “terrible.”
…
http://www.nytimes.com/2008/08/04/business/04lend.html?em

“Milwaukee man faces foreclosure because he didn’t pay parking fine ”

http://www.jsonline.com/story/index.aspx?id=779234

Talk about predatory lenders. This guy got a ticket for having his own car parked in his own driveway, but with no license plate. Now they want the house.

Greedy bastards. Governments cry and whine about foreclosures only because it cuts into their tax base. This is their chance to prove otherwise. It was a $50 ticket and they want the house. A bank lends $500,000 to some jerk who lies on his mortgage application and they cry a river for him.

Article from CNN about how BHO wants another stimulus!

http://money.cnn.com/2008/07/31/news/economy/stimulus2/index.htm?postversion=2008073117

It’s hard for me to understand how his plan to put everyone on Welfare will help America.

test

You know… the top executives and the brain trusts in the financial industry are probably well on their way to figuring out to inflate the next bubble.

“The insolvency crisis will come to an end only as home prices in the US begin to stabilise and clarify the level of equity in homes, the ultimate collateral support for much of the financial world’s mortgage-backed securities.”
from “Repel the calls to contain competitive markets”

By Alan Greenspan
http://www.ft.com/cms/s/0/3aaef4f6-623f-11dd-9ff9-000077b07658.html?nclick_check=1

An incredible number of economists did see this crisis coming as long ago as 1999 and even you commented about the housing bubble in 2001. The Atlantic Monthly wrote about the problem in 2002.

Mr. Greenspan your solution failed and merely transferred wealth from those that could least afford to lose it to the rich.

“Robert Barro of Harvard University and Stanford University’s Hoover Institution talks about disasters–significant national and international catastrophes such as the Great Depression, war, and the flu epidemic in the early part of the 20th century. What do we know about these disasters? What is the likelihood of a catastrophic financial crisis in the United States? How serious is the current economic situation in the United States? The conversation also includes discussions of economic stimulus, tax policy, and the recent worldwide rise in commodity prices.

A one hr podcast

Aug 4, 2008
http://www.econtalk.org/archives/2008/08/barro_on_disast.html

“…Barro points out that the demand for risk-free assets is high, as indicated by the low yields on treasury-indexed securities. See William J. Bernstein. That, along with the boom in commodity prices, may indicate that investors have an unusually high probability of a disaster….”

He also points out what happens when foreign owners of Treasuries lose faith in the US government.

Question to think about:

China’s Olympics start Friday. China financial government offices are closed. The US is auctioning $35B in Bonds this week. Soince CHina will not be a buyer, how much will treasury interest rates rise?

Taxes have a place in economic policy
By Edward Lotterman

” …Blanket no-new-taxes pledges reflect an inane political fetish that has harmed our nation’s economy for 20 years. …The nation faces its most difficult economic challenges in 80 years. We have increased our gross national debt by 70 percent in the past eight years. An unprecedented fraction of that debt is now held by foreigners. The administration itself projects a half-trillion-dollar deficit for next year. The economy is slowing and the Fed struggles to juggle recession and unemployment. The dollar’s value is near record lows abroad. Our balance of payments remains unsustainably skewed.

These developments are not unrelated to simplistic anti-tax rhetoric. Government borrowing has contributed to a national savings rate that is near zero. We invest little in public infrastructure and not enough in private plants and equipment. Long-term productivity suffers. Fed-engineered money growth pumps consumption but creates asset bubbles.

We cannot solve these problems long term without putting federal government finance on a sustainable basis. And we cannot do that without increasing taxes or imposing spending cuts both parties rejected in the past. Would we rather repeal the Medicare drug benefit? Should we pull all U.S. forces back home to save money? Will we finally abolish all farm subsidies to make a small deficit reduction?

At this historic juncture, do we really want a candidate who swears not even to consider an important policy option for four years?

Great economies do not enter into decline because of factors beyond their control. They do so because their political systems generate self-destructive policies. In democracies those usually result from collective self-delusion. If we choose candidates based on the single issue of no tax increases, we deserve what we inevitably will get….”
http://www.twincities.com/lotterman/ci_10077143?nclick_check=1

Common sense from Minnesota

“Blanket no-new-taxes pledges reflect an inane political fetish that has harmed our nation’s economy for 20 years.”

Actually 28 years. But fiscal restraint would be better. Bread and circuses and fiddle while the nation burns is the vote du jour.

This is really off-topic, but how come it seems no one can get a handle on the oil supply? Just today there are articles about how the latest oil supply report shows an increase that no one expected, which caused the stock market to rise. Why does it take a government report to ascertain how much oil supply there is? Just curious.