Bits Bucket for May 12, 2012
Post off-topic ideas, links, and Craigslist finds here.
The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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Name:Ben Jones
Location:Northern Arizona, United States
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The attached link from the Albany Times Union in upstate NY shows how far banks will reach to avoid foreclosure in judicial process states.
http://www.timesunion.com/local/article/Home-loan-solutions-3553263.php#photo-2927612
The mobile command center - it cracks me up..
Imagine that. Deep in the heart of economically crumbling DumbAss Country aka upstate NY. WTF.
Happy Mother’s Day in advance to all of you who have lovingly raised children. I’m going to complete the coast to coast trip tomorrow to visit my own mother and won’t get the chance to chime in tomorrow.
Nothing like a couple thousand miles driving a Uhaul to make one appreciate home! My daughter and grandson are back home with me after a year of courts, cops, lawyers and anxiety. He will make a fine deckhand. Life is good and the water is open ahead of us.
That sounds like quite the parental rescue operation!
Reminds me of a time my carpool partner and I were stranded in the middle of nowhere, somewhere on the road between the Central Valley and the Bay Area, at about 1am when her car broke down on the way back from a rehearsal. She called her aging parents, who drove 60 miles through the middle of the night to help us get her car towed and bring us back home.
Her later comment to me on the rescue remains fresh in mind: “Parents are the salt of the earth.”
Best of luck to you, Blue. This is a long journey that you’re beginning.
My family experienced something unfortunate and bizarre after rescuing my oldest sister from her abusive husband in Indiana: after my sister got settled in the Rochester area, my other sister stepped in as the abuser because she really enjoyed seeing the abused sister suffer and made every effort to block her happiness. Even going as far as to suggest the new husband is a sex-abuser (he’s not). As a result, we no longer have family get-togethers at holidays. My parents must schedule separate time with each family member. I’ve suggested to my angry sister that she see a psychologist to deal with her hate, but she refuses. The abused sister has now morphed into a professional victim, which is also challenging.
Now? I avoid both sisters.
I could not have predicted this, and it probably doesn’t happen to many people, but it’s the kind of self-inflicted misery that makes no sense.
I’ve suggested to my angry sister that she see a psychologist to deal with her hate, but she refuses. The abused sister has now morphed into a professional victim, which is also challenging.
God bless you for being in the middle of that. My family is nuts. I could go on but let’s just say it was ugly and I put an end to the ugliness for the sake of my children.
Even if it is for the best it leaves a hole in your heart where your family used to be. Every time I think about maybe contacting them, all I think of is I’ll be inviting all that negativity back into our lives again and I just can’t do it. I must say I have never lived so well (as far as happiness quotient) since we stopped interacting with them.
I wish you luck w/that situation in the future as well as Blue with his family. Life can get tough but there are ways to claw back control if you put good and loving people around you.
“I must say I have never lived so well (as far as happiness quotient) since we stopped interacting with them.”
Unfortunate for sure, but sometimes you have to draw lines…
Oh, Blue. Good for you guys! I’m so happy that you’re all back together again. It’s been a long haul indeed. Happy Sailing.
a
Thanks all. I don’t think we will have any bad interactions between her and her siblings. The loss of their mother long ago kind of forced us to be glued together very tightly. We will do fine I believe.
Oxide:
“your fundamentals are useless”
DC did not take a double dip like the rest of the major metros. It has only had a flesh wound. The assumptions that rents can only go up and that employment with the FedGov can only go up are things that you are not guaranteed.
“EVEN IF MY HOUSE PRICE DROPPED TO ZERO, buying would still put me ahead.”
LOL, if losing $25K per year on the house value, while paying on that principle, plus taxes, interest, maintenance and insurance is cheaper than rent, you were living some crazy kind of lifestyle!
I’m trying to wrap my head around Oxide’s statements. She talks about how fast throwing money away on rent adds up, but neglects to talk about throwing the money away on interest. Did she pay cash?
I believe she suffers from the misconception (promulgated by Realtards) that if you make a large downpayment to reduce your monthly below the rent on a comparable property, it magically becomes “cheaper” to own than to rent.
Of course, the flaw in this argument is that it ignores the opportunity cost of the downpayment, which most likely could be invested more productively than in a real estate money pit.
Of course, the flaw in this argument is that it ignores the opportunity cost of the downpayment, which most likely could be invested more productively than in a real estate money pit.
I’m curious about this investment opportunity; where?
In bad times many of the honest money handlers eventually turn bad unless they have no debt and real savings to see them through a financial drought. These money handlers are used to easy money, and they are often without craft skills and effeminate too narrowing the options in a severe crunch.
ITIM (interest, taxes, insurance, mortgage) is pure waste. This hardly needs any debating!
There’s an additional factor that seldom gets discussed.
Opportunity cost of capital.
Even if you make money “eventually”, you must weigh that against what you could’ve done with it alternately.
You guys are wasting your breath. She’s made her bed. Let her sleep in it.
“Opportunity cost of capital.”
Can’t disagree with you there, bro’!
Opportunity cost? What can you get, maybe 2.5% with not too much risk? So on a $100K down payment you’re forgoing $2,500 a year.
A bit over $200 per month, which should be added to the true monthly cost of ownership.
For those in flyover country, your down payment is maybe $40K, so you’re forgoing $1,000 per year, or $84 a month added to the cost of ownership. Big whoop.
This analysis is simplistic (not to mention st00pid) to the core.
You are foregoing $2,500 at the moment with potential to forego a lot more if suitable opportunities come your way.
Opportunity cost literally means what it means.
You can’t quite quantify it the way you are doing for fairly obvious reasons.
That’s the problem….. this notion that everything is static. It’s not nor will it ever be.
“You are foregoing $2,500 at the moment with potential to forego a lot more if suitable opportunities come your way.”
You are also locking up $100K (under the given scenario) in a lumpy, undiversified ‘real estate investment’ which could do worse than cash under a number of plausible scenarios, including a double-dip recession (some analysts already believe this is in the cards), a drop in federal spending inside the Beltway, a complete meltdown of the Euro resulting in ‘worse than expected’ spillover effects on U.S. capital markets (like we already saw last week, only far worse) or a future curtailment of fairly direct efforts by the Federal Reserve and GSEs to put a floor under U.S. housing prices.
All told, the downside risks to future housing prices appear to still outweigh the upside risks, and the $100K (or whatever amount) downpayment is fully exposed.
“…downpayment is fully exposed…”
Let me nuance that statement a bit, as it actually understates the risk of making a large downpayment when U.S. housing prices may be in the middle of a two-decade period of decline (reference case: Japan, 1990-2012; read Shiller’s Irrational Exuberance if you want to know why I believe it may not be different here in the U.S.).
For simple illustration of how leverage can really bite in a housing market downturn, suppose the downpayment amount was $100K (20%) on a $500K purchase price. A mere 10% further decline in housing prices (a scenario that some experts have suggested to be quite likely) would knock the market value of the home down to $450K. Now suppose you either wanted or had to sell the home, and as the seller, had to pony up, say, 8% of the sale price in transactions costs (6% realtor commission + 2% for everything else):
8% of $450K = $36,000. After selling, the former owner has lost $50,000 + $36,000 = $86,000, which is an 86% loss on the highly-leveraged downpayment she made.
I’m guessing the New York Times writers did not pencil out a calculation like this, to consider downside risk of buying now?
This analysis is simplistic (not to mention st00pid) to the core.
Your opinion of his analysis is what you’ve just described his analysis.
You are foregoing $2,500 at the moment with potential to forego a lot more if suitable opportunities come your way.
Or the potential to lose some, most, or all of it.
“She’s made her bed. Let her sleep in it.”
Most people I know don’t talk so much in their sleep.
May be she sleep talks.
Sorry I couldn’t pass it up.
……. but but but….. you renters pay all that in your rent!!
This is the first and only response from LyingRealtor/LoanOwners and is clearly complete BS considering landlord expenses are never automatic pass through costs to end users.
How many thousands or tens of thousands of underwater landlords are there again? Or even hundreds of thousands?
The fact Oxy continues to persuade everyone else that her decision was sound and well thought tells us more about her than anything else.
The fact Oxy continues to persuade everyone else that her decision was sound
Sound decisions rarely need justification.
I’ll amend that principle only by the fact that during a bubble, you will actually need to expend emotional energy fighting the tide.
Sorry, we’re way past that point now. No energy need be expended any more. The collective group opinion here is solid (if a bit kooky and spooky and sometimes downright goopy!)
“Sound decisions rarely need justification.”
Which reminds me of my opinion about people who go about repeating the phrase, ‘I know this Church is true.’ The phrase begins to ring hollow when everyone keeps repeating it to each other over and over again. By contrast, what I personally know to be true never requires the affirmations of others to convince me.
The collective group opinion here is solid
Solid on what opinion? That no one should ever buy a house ever anywhere even if it pencils out?
I do not think that is the collective opinion here.
He means his own little circle of wagons.
ITIM (interest, taxes, insurance, mortgage) is pure waste.
It’s not pure waste. She gets to live in her house for the house payment.
Opportunity cost of capital.
Where’s this great opportunity the past 12 years for the average person? The stock market? Baseball cards? Most people don’t want to start a business. “Opportunity” can also diminish assets. Besides her house payment already gives her opportunity-the opportunity to live in her house.
Fact: She could pay that house off in 15 years for the cost of renting.
It is indeed fact. In fact, for $200 LESS than the cost of renting, I will pay it off in 22 years. I haven’t arranged it formally, but that’s how the monthly check looks.
Wow, just wow.
Nobody here said it but I bet many here thought it.
You bet on 22 years for a measly $200? Seriously?!?
Plus, downpayment.
You’re the stupidest b1tch that a Realtor can buy!
You bet on 22 years for a measly $200? Seriously?!?
That’s $200 a month, no?
$200*22*12 = $52,800 U.S. dollars — chump change over a 22-year time horizon.
$52,800 U.S. dollars —chump change over a 22-year time horizon.
Of course she could invest that money over that time period, and have the ‘opportunity’ of making it a lot more, right?
Puss, et al,
What works for you folks didn’t work for Oxy in her particular situation, and understanding it, I don’t blame her one bit for her decision– SO LAY OFF!
She did the right thing for her and her son. Sometimes the autonomy is worth than the money. Those of you with mothers ought to realize this….
SHEESH. Give the lady a break wouldja?
“SO LAY OFF!”
This is not exactly the best forum on the planet to seek affirmations, especially if you can’t resist aiming smug barbs at the renters who post here. I am 99% confident that there is a Realtor® blog out there where Oxide could receive accolades unlimited for her housing purchase decision.
We would like to give Oxy a break, and it is OK that she wanted to go get a house. The catch is that she is claiming that her debts will make her rich, that HBBers are liars, that rent is cash in the trash, & etc., day after day.
She’s underwater for now. Expects to break even in 22 years. Yesterday it was 15 and the day before 10. Doesn’t realize that you have to keep repairing a house to hold it even. Is going to do a huge renovation and does not add the cost of that into the math. Bets on rents going up forever and also the FedGov’s benefits for the worker bees. Frankly, she expects what we have had for the last 40 years. Personally, I think that is the least likely outcome.
There it is. Succinctly stated truth.
I don’t have a son, Allena.
It was eastcoaster who had the son, and she wisely left the blog soon after buying.
Just trying to be discrete.
But to some of us, having a house (without a mortgage, of course) is worth the “opportunity costs” we’re “losing”. It’s not an investment to us, it’s a purchase.
I never gotten that oxy was trying to sell anyone on anything, merely attempting to explain her reasoning. But then, I’m not on board every day, and must miss quite a bit of the convo.
Pax.
Expects to break even in 22 years. Yesterday it was 15 and the day before 10
You are FOS. She was just running different numbers.
Carl, I put in a much longer post, but my PITI is still $500 lower than my rent was. In other words, “throwing away” money on interest — and taxes and insurance too — is already included in my calculations. And please do not tell me I “neglected” to mention it: I have said P.I.T.I. many times.
P-bear, I put 10% down. I could have scraped 20%, but chose to keep that 10% reserved as a cash emergency fund. That’s not a huge amount.
Faster, the opportunity cost DOES get discussed, in the NYT calculator (it’ll show up in a little bit). The NYT calculator takes opportunity cost of the down payment, AND the opportunity cost of the money “saved” by renting over owning, into consideration. But since I didn’t put much down, and my PITI is less than my rent, there’s not that much capital saved to accrue opportunity profit on.
But, for the heck of it, just to please all of you, I plugged in my old rent and new PITI, and
1. House price remains level 0%
2. Rent increases 3%
3. 10% down
4. Oppotunity cost rate of return at 8% [remember, even the union goons can't get 8%]
Calculator says that buying is still better after 3 years. Yikes, I’m sure that failed to please you. Let me try again.
1. House price DROPS 10% a year.
2. Rent increases 0%
3. 10% down
4. Oppotunity cost rate of return at 8%
Calculator says that buying is better after 15 years. Yes, that’s a long time to stay in the house, but good lord do you really expect house prices to drop to $0 or for rent to stay the same, or for the stock market to increase 8% every year?
At this point, you may question the NYT methodology. But consider this: even the worst-case scenario favors buying before the mortgage is even half done. Can you find enough fault with their methods to overcome such a safety margin?
Also consider, this: at least the NYT put together a comprehensive calculator. What did HBB do in the way of calculations? Other than parrot “housing is going to drop 65%” with no support? Or post articles from Japan, or “national average” fundamentals? Or assume that I can commute from Los Baños to Maryland?
Housing prices are falling. This truth you seem to run from.
I couldn’t care less what you do, thus, you don’t need to expend resources to convince me as I know what the truth is. The dilemma is yours and yours alone.
“housing is going to drop 65%”
I don’t recall anyone saying that here; please cite an example so we will know you aren’t just manufacturing straw men.
That said, it would only take a 10% price decline to wipe out 100% of a 10% down payment (see my illustrative discussion of leverage above). With all the talk of reining in federal government spending, a 10% drop in DC area housing prices seems to me like an entirely plausible scenario.
“I don’t recall anyone saying that here; please cite an example so we will know you aren’t just manufacturing straw men.”
That’s RAL’s line, often repeated: “Why buy a house now? Buy later, after prices crater for 65% less.”
“Why buy a house today when you can buy one tomorrow for 65% less?”
Realtors are liars/pondscum has said that many times. Do I have to google everything for you?
And yes, it WOULD take only a 10% house decline to wipe out a 10% downpayment. And it would only take 3 years to make up for it by the increases in rent alone. Now, it’s entirely probably that prices will drop 10% in the “DC area.” But, are they houses that I would want? Or does that include moldy McMansions in the sticks and foreclosed condos by the dozen?
See, this is the problem, P-bear. You are all looking for some kind of “return on investment” on my house within one or two years, just like the short-sighted hit-the-numbr CEOs you so love to mock. And so if my house value drops the slightest little bit, you can all declare victory over me and ask when I’ll mail in the keys.
I am looking ahead to when I’m 68 and retired and my income drops in half. Will I still be able to afford rent 30 years from now? If I rent for 25 more years would I be able to save enough to buy a house outright?
And I have to see any of you address this long-term picture, except for vague notions about opportunity cost on a tiny down payment and on money I would “save” by paying rent. Did I mention that my PITI is lower than my rent?
Seems to me that the opportunity cost is on the buying side.
By the way, there have already been drops in Federal funding inside (or near) the Beltway. My own section is struggling with a bit of that. They are making up for it by cutting out bonuses, streamlining and cutting contractors , trying to get dinosaurs to retire, cutting travel, and cutting back on hiring. The last thing they cut is people, and even then, those would tend to be salary cuts, not eliminating jobs.
Circa 2005, Florida/Arizona/Nevada
“Housing prices never fall and if they ever do it will be a few percent and keep going up again”.
We don’t have to “wait and find out who is ‘right’”. Housing prices are falling. Builders are building and selling under resale prices. Reality is right in front us.
You are all looking for some kind of “return on investment” on my house within one or two years, just like the short-sighted hit-the-numbr CEOs you so love to mock.
To the contrary by underwater friend. It is YOU who is looking for a “return on investment”.
Housing has never been an investment, nor will it ever be. It is a depreciating asset. It is a loss, month after month until you’re in your grave.
Have you not learned anything here?
‘“Why buy a house today when you can buy one tomorrow for 65% less?”
Realtors are liars/pondscum has said that many times. Do I have to google everything for you?’
You are the one who decided to plug a 10% annual loss for 10 years assumption into the NYTs rent-versus-own calculator. It works out to a 10-year loss of
(0.9^10 - 1) = -65%.
Housing has never been an investment, nor will it ever be. It is a depreciating asset. It is a loss, month after month until you’re in your grave.
But you’re looking to buy a house, too, aren’t you?
Not really. Not when prices are falling.
You are the one who decided to plug a 10% annual loss for 10 years assumption
For a smart guy, sometimes you miss the whole point.
Calculator says that buying is better after 15 years.
Calculator says that buying is still better after 3 years.
Of course her house could decline in value but with those numbers she just ran, there is nothing irrational or “stupid” about her decision. To me it’s no big deal.
It was easy for me to buy a house too over renting, not that I had any problem with my apartment before I bought, and would be fine with renting again.
Mine was 4X the space for about 2X the cost, with the purchase price 1.3X my yearly income, all while moving closer to work.
I only put like 15% down, but I refied after 1 year to get rid of PMI (yeah my house increased $50k in 1 year - sure might as well use false appraisals to my own advantage) and only have like 14 years left on my mortage after only owning for about 3.
My only regret is my house is kind of a dump, and I’d spend more to buy a nicer house architectually next time, but I can swing a hammer and fix this one to my liking myself.
My wife and baby don’t let me boose and carouse, so it’s not like I have anything better to spend the reno money on!
Yes, rents are “crazy” in this area. As I said (repeatedly), when I tried to negotiate my rent down, they “invited” me to find a lower price elsewhere. And sure enough, there were no other lower prices elsewhere, not worth moving for. When you went to the ApartmentFinder site to look up rents in my area, you found different numbers than I did?
As for government employment never going up — well, do you truly expect it to go down? Most of our tax money is simply handed out in the form of SS, SSI, Medicare, etc. Paying actual employees is not a huge part of the government budget. Even if they do RIF, they start with the near-retirees, not the younger folks. I’m not too worried about it.
As for losing house value, here again is the excellent NYT rent vs. buy graphic calculator:
http://www.nytimes.com/interactive/business/buy-rent-calculator.html
I really recommend people use this calculator, because it has a lot of variables and covers a lot of scenarios. The slidebars for the change in house prices and rent changes are very valuable. Make sure to click on the blue “advanced setting” box for even more options.
Here are some scenarios I plugged in:
1. the price of my new house price (3/2 on 0.2 acre),
2. the rent on my old place (3/2.5 townhome),
3. a 5% yearly increase in rent,
4. a 10% yearly decrease in house prices.
NYT says that buying would still pay off after 10 years.
Hmm, try again:
3. a 3% yearly increase in rent (this is the county recommendation, which NOBODY follows.)
NYT says buying would pay off after 12 years.
It’s funny, I made that post last evening BEFORE I looked on the NYT site. Then when I plugged it in, they gave me the same 10-year number!
As I said late yesterday, the keys to this buy advantage are that my PITI was already $500 less than my rent — WHY does everyone conveniently forget this??? — and the interest rates are low, and will stay low until 2014 as per the Bernank. Those two factors will (eventually) overcome almost any price drop. And that’s only over the life of the 30-year mortgage. I anticipate another 10 years at least of rent-free living after that.
If my house value DOES drop to $0, then my mortgage would effectively become, if nothing else, 30 locked years of no rent increases. Remember that my PITI was already $500 less than my rent, so I locked in ahead of the rent game, even before rent begins to go up. That’s why I come out ahead even of renting even if the house price drops to $0.
I guess this answers the question as to whether I would ever walk, now doesn’t it? Given enough time in the house, even if I’m 100% underwater, it’s still better to buy!
Unfortunately, the calculator does not allow for the worst-case scenario, where house prices would drop 100% in one year and rent never increases. Even then, at the 30 year mark, shouldn’t buying and renting turn out to be about equal?
I may have taken a few digs at your purchase. But who cares? You don’t have to justify to anyone. Enjoy your house and even if it’s a loss, so what? We are allowed to make a mistake. I bought my house at the tender 29 and sold it in 2008 after 4 years. I took a small loss but wasn’t a big deal. I am still in the neighborhood renting and saving. I do look up my old house in Zillow once in a while. The price has gone down it seems if Zillow to be trusted. Different city, different story, different circumstances. Also, there’s some price to be paid for the enjoyment you derive from your house.
I agree Butters….When I bought my current motor home (1st one I ever bought new) I knew I would lose 30% of the value when I drove it off the lot…So what…
I wanted it…I could afford it…For Christs-Sakes then buy it…I did…
“I wanted it…I could afford it…For Christs-Sakes then buy it…I did…”
I get that… I just think the Oxy scenario gets to the heart of the matter at this blog; we discuss many things, and I’ve learned a lot, but it mostly gets back to, “when and why are you going to buy a house?”
It’s important to think it over because, you may have noticed, housing is costly and for many of use the most expensive item in our budget.
FWIW, the most costly item in my budget is daycare.
Thank you butters. And actually, the house I bought dropped from 2008 to 2012 too. That’s why I bought it… I hope it’s done dropping!
Muggy, I think the reason I caused such a stir is because I’m actually arguing my case, and putting up targets to shoot at.
Well said, butters!
5% rent increases year-over-year are unsustainable. In the town I grew up in, rent on a 3 bedroom house was $750 in 1990. On the same house today, it’s $1000. You also make the critical mistake of comparing your purchase price to the price of the house at the peak. You should never do that. You compare it to the price pre-bubble.
comparing your purchase price to the price of the house at the peak.
I did no such thing. I compared the purchase price to the past. The purchase price was ~2003. Adjusted for inflation, the price was ~2001. Those are pre-bubble prices.
If you would like to point out the holes in my posts, go for it. But you know, I don’t know if I’ll have the strength to answer you along with everyone else. I’ve been posting numbers and rebuttals for weeks and all I get is vague attacks in return which they call a “victory.” I’m tired.
I got out my financial calculator and did some real world calculations of rental rates.
Duplex bought in 1978 - the rents went up 4% and 3.6% over 34 years.
Another place increased 3.3% over 31 years
Another was 3.1% over 20 years.
In Grizzly’s example the rents went up 1.3%.
So of course the increases will vary from place to place. I am in flyover country - basically oil city with a university.
I’m not trying to glorify or justify my situation. It’s a job most people aren’t suited for, but it’s what I’ve wanted to do since I was 17 yrs old.
Just thought I’d throw in some real world numbers you all can use in your calculations.
Thx for the data-points, Localandlord!
Oxide, I havent been reading the blog for a few weeks. As a fellow Montgomery County townhouse renter-looking-to-buy-a-single-family house, let me say Congrats on your purchase. If you don’t live in this area, it is difficult to truly comprehend the high rents on sad, minimally maintained properties — or the ridiculous prices on any single family houses that are remotely livable.
Your reasoning seems sound to me. There will always be more government types wanting to live in Bethesda, Potomac and similar environs than can afford them — thus pushing prices up for the top tier real estate, which pricing then percolates down to the more middle class suburbs. The area is NEVER going to be affordable by traditional metrics. Didn’t the Wash Post run an article in the last year reassuring that even a dirty bomb explosion in the center of DC would reduce only so many square miles to inhabitability? A mere flesh wound for metro DC housing prices were such a thing to happen.
Until DC runs out of money, everyone will be paying through the nose to live here. Maybe it’s not fair, maybe it’s not reasonable, but it is reality. I’m just aggravated to still be looking, having been beat out on a couple of properties by double incomes and deeper pockets.
Until DC runs out of money, everyone will be paying through the nose to live here. Maybe it’s not fair, maybe it’s not reasonable, but it is reality. I’m just aggravated to still be looking, having been beat out on a couple of properties by double incomes and deeper pockets.
I understand completely being raised in San Jose, CA. I still think that if the GSE mortgage support were removed, and banks once again relied on income and tax receipts, that prices would drop accordingly.
I gave up on the idea of buying in the SF bay area many years ago; the spread between income and real estate prices is just too wide to close with wages.
“Here are some scenarios I plugged in:
1. the price of my new house price (3/2 on 0.2 acre),
2. the rent on my old place (3/2.5 townhome),
3. a 5% yearly increase in rent,
4. a 10% yearly decrease in house prices.
NYT says that buying would still pay off after 10 years.”
I’m trying to imagine a state of the world where rents increase 5% a year and house prices decrease 10% a year over a period of ten years. I can’t imagine it, and I don’t believe you could find a single instance over the course of history to back up these assumptions. For instance, 10 years of 10% annual housing price declines would imply a 10-year total housing price decline of (0.9^10-1)*100% = -65%. It’s not very likely.
The old adage about analytical results appears to apply here: garbage in, garbage out…
Of course those assumptions are not realistic, and I pointed that out myself. The realistic break even point was 2-3 years, not 10.
price decline of (0.9^10-1)*100% = -65%. It’s not very likely.
Don’t tell RAL that!!!
I didn’t say it was impossible, though.
The old adage about analytical results appears to apply here: garbage in, garbage out…
I think you missed oxy’s point here, Prof. She was trying to show that even with ridiculously pessimistic assumptions, her purchase still made sense within a reasonable time horizon.
Her break-even should occur much sooner than that.
How does one “break even” when prices are falling? (or are you going to run from that problem too…)
Um, are you serious, RAL?
It’s a simple equation; breakeven would occur at some time t, when:
capital loss (on purchase) + PITI x t + maintenance = rent x t
It’s pretty simple algebra if rent is constant. The formula can be extended to account for rent changing at some rate over time, of course. Then the RHS would be rent x (1 + monthly rate of rent increase) ^ t
Do you really not get that?
Prices are falling. Do you not get that?
“Prices are falling. Do you not get that?”
You seem to asking from the point of view that as long as prices are falling, it’s best to wait. Maybe. But the math does show that even if oxide’s house loses value, she will come out ahead anywhere from ten to twenty years from now as a result of having bought now, as long as renting increases at 2% a year or more. Of course, we haven’t considered a long-term freefall of rental prices in this discussion. Don’t know how likely that is, but that would theoretically change things.
Indeed it would. And rental rates in price per square foot are falling everywhere, generally speaking.
These are the Mongomery County voluntary rent guidelines. My building told me they generally followed them, but that was a lie. They seem to follow them as long as they are 4% or over - you can get 3% on the second year of a two year lease.
http://www.montgomerycountymd.gov/dhctmpl.asp?url=/Content/DHCA/housing/landlord_t/rent_guide.asp
That is for the entire county. You are unlikely to find numbers like that in the closer in areas (closer to most of the jobs) and the areas with good access to public transportation.
See wants to own and she consider non finacial inputs as well. Leave her in peace.
Nobody put a gun to her head and forced here to post on the HBB in hopes of hearing golf claps for her decision to buy.
LOL….
I was saddened when I read that post by oxide yesterday. It had more holes than a log full of termites. It was something I’d expect from a lying realtor, not oxide.
The announcement late this week of a $2 bn derivatives loss at J.P. Morgan must have seemed like a godsend to Thomas Hoenig!
The comparison of banking industry concentration in 1913 (very low) to the present (very high) suggests America’s once-competitive banking sector has evolved into a highly-concentrated, noncompetitive, too-big-to-fail oligopoly under the Fed’s oversight.
Break up big banks, FDIC director says
They’re too big to fail and ‘going to invite new problems,’ the Iowa native says.
9:35 PM, Apr. 26, 2012
The U.S. should break up its largest banks by forcing them to spin off their investment banking and securities businesses, newly confirmed FDIC director Thomas Hoenig said Thursday.
Preaching to a choir of community bankers gathered in downtown Des Moines, Hoenig renewed his call for the government to intervene and destroy the hegemony of the nation’s five largest banks. They hold more than half of all U.S. assets and enjoy a policy-driven competitive advantage over their smaller counterparts.
“How do you level this playing field?” said Hoenig, who was confirmed as one of five directors of the FDIC at the end of March. “The only way I think you can do that, and make Dodd-Frank more effective, is to break up the largest institutions.”
The Dodd-Frank Act was passed in 2010 to overhaul the U.S. financial system.
Today, the top five banks hold about 60 percent of all bank assets, Hoenig said. In 1913, the top five banks held 2.7 percent of all assets.
“As much as you may have disliked J.P. Morgan, he wasn’t as big as you might have thought,” he said of the 19th-century New York financier.
JPMorgan Chase, the bank named after the financier, is today the largest bank in America. It holds $2.3 trillion in assets. The holding companies of Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs hold about $6.6 trillion in assets in the U.S., according to the Federal Financial Institutions Examination Council.
Hoenig said these banks have truly become too big to fail. They have benefited and ballooned thanks to the safety net of the Federal Deposit Insurance Corp. and the official repeal of the Glass-Steagall Act in 1999, which allowed commercial banks to get into the businesses of investment banking and securities trading.
“It’s not because they’re bad or good, it’s because the incentives are wrong, they are going to invite new problems, they’re going to invite new crisis, and they’re going to be as hard to deal with next time as they were, because they’re larger today than they were before the crisis,” Hoenig said.
And the risks fall on the shoulders of taxpayers, Hoenig said.
He said banks should be forced to spin off lines of business like investment banking, certain types of proprietary trading, and asset management. The big banks will object, arguing it will hurt them in the global market, Hoenig said, but he fires back that financial companies that specialized in commercial banking or investment banking were more innovative and influential in the post-World War II era than they are today, now that the same companies are doing both.
…
Quote of the week;
Prof. Simon Johnson @ MIT….
“How could Jamie Dimon have this kind of loss, keep this position open, if it were not for the fact that he is backed by a unconditional credit line from the Federal Reserve…Thats what it means to be to big to fail in modern America”….
the solution? just regulate them more.
nooo…remove the effin backstop dammit!
kinda like creating policies that greatly exacerbate the income disparity and saying the solution is to just tax the rich more.
If that happened in China then Jamie Dimon would be pushing up daisies by now.
Breaking up the Wall Street Megabanks would eliminate the too-big-to-fail problem entirely and restore competition to a moribund, bloated financial sector. Where is the downside?
the solution? just regulate them more….nooo…remove the effin backstop dammit!
What’s wrong with both? It isn’t always all or nothing.
Before the deregulatory Gramm-Leach-Bliley Act and The Commodity Futures Modernization Act of the late 90’s we’d had no similar Banking crises for 70 years.
I have not looked into it much but The Commodity Futures Modernization Act might have enabled JP Morgans current loss.
nooo…remove the effin backstop dammit!
That doesn’t seem possible.
Note that there WAS no explicit or implicit backstop before the crisis, and yet the government stepped in.
In other words, even with there supposedly being no “backstop” in the future (if we were to say so now), the risk would still be borne by the taxpayers. And in a pinch, the same thing would happen.
The only solution:
BUST THE TRUSTS!!!
nconditional credit line from the Federal Reserve
If you bailout, they will squander.
If you offer bailouts as a reward for failure, they will fail and collect their reward.
I don’t know why I remember this chapter when I hear more of these aloof CEOs. Seems like they are only great at bull$hitting.
Society must go on, I suppose, and society can only exist if the normal, if the virtuous, and the slightly deceitful flourish, and if the passionate, the headstrong, and the too-truthful are condemned to suicide and to madness. But I guess that I myself, in my fainter way, come into the category of the passionate, of the headstrong, and the too-truthful. For I can’t conceal from myself the fact that I loved Edward Ashburnham–and that I love him because he was just myself. If I had had the courage and virility and possibly also the physique of Edward Ashburnham I should, I fancy, have done much what he did. He seems to me like a large elder brother who took me out on several excursions and did many dashing things whilst I just watched him robbing the orchards, from a distance. And, you see, I am just as much of a sentimentalist as he was. . . .
A paragraph not a chapter.
Jamie is late to the party. Franklin Raines of Freddie fraud fame figured this out — and took full advantage — in 2004.
if JP was in receivorship like Freddie and Fannie this loss would be “for the greater good”.
+1 Bonuses, health insurance and $125k/mo retirement checks means he can afford to drink micro-brew.
J.P. Morgan’s bad bet sparks firestorm over regulation
10:00 PM, May. 11, 2012
A New York City police officer stands outside the lobby of JPMorgan Chase headquarters Friday in New York. JPMorgan Chase, the largest bank in the United States, said Thursday that it lost $2 billion in the past six weeks in a trading portfolio designed to hedge against risks the company takes with its own money. AP PHOTO/MARK LENNIHAN
Written by KEVIN G. HALL
WASHINGTON — J.P. Morgan Chase & Co.’s stunning after-hours announcement Thursday of a $2 billion loss on a complex bet sent shock waves through the nation’s capital Friday, as lawmakers blamed financial regulators for continuing to allow the same risky activity that nearly sunk the global financial system four years ago.
J.P. Morgan had been considered the healthiest of U.S. banks, emerging from the 2008 crisis largely unscathed. CEO Jamie Dimon, boyishly handsome with a thick New York accent, is often referred to as “the king of Wall Street.”
But on Friday, investors humbled the king, sending the bank’s share price down by $3.78, or 9.28 percent, to $36.96. Other big-bank stocks sunk as well.
The massive blunder on the part of a bank perceived as the nation’s healthiest also cast an unwanted spotlight on the same federal regulators found to be asleep at the switch in the run-up to the 2008 financial crisis.
In the aftermath of that crisis, the Federal Reserve was given greater supervisory responsibility for large investment banks, which had transformed themselves into bank-holding companies in order to enjoy greater taxpayer support amid the crisis. Fed staffers now are located in the biggest banks and were supposed to be policing their risk-taking to protect the financial system.
“We can’t discuss supervisory information,” said Barbara Hagenbaugh, a Fed spokeswoman.
The Securities and Exchange Commission also was given greater powers to ensure that large banks properly disclosed risks from complex investments to their investors. Lawmakers said that J.P. Morgan did not fully disclose the risks from its soured bet in its annual report for 2011 or its report filed for the first quarter of 2011.
“It ought to be a concern to the SEC. They are the ones who ought to have a concern about that,” Sen. Carl Levin, D-Mich., said in a conference call with reporters. “The SEC should surely take a look at it.”
Levin heads the Senate’s Permanent Subcommittee on Investigations. His panel was instrumental, after the fact, in piecing together much of the malfeasance that led to the financial crisis. On Friday, though, Levin called it premature to determine whether he’ll hold hearings on J.P. Morgan.
The SEC regulates broadly on investor protection, but it narrowly regulates J.P. Morgan’s broker-dealer operations, and the losses appeared to be in an area of the bank regulated by the Fed. SEC spokesman John Nester declined to comment.
The Office of the Comptroller of the Currency regulates J.P. Morgan’s commercial banking activities and was mum, too.
“We don’t comment on specific bank supervisory matters,” said spokesman Bryan Hubbard.
The course of events Thursday night and Friday were all the more shocking because Dimon has been the leading industry critic of the Dodd-Frank Act, passed in 2010 to revamp financial regulation. Dimon dubbed the act Dodd-Frankenstein, alleging it would cost upward of $400 million to comply with the array of new rules designed to curb bad behavior on Wall Street.
The co-architect of the legislation, Rep. Barney Frank, D-Mass., noted in a statement that “J.P. Morgan Chase, entirely without any help from the government, has lost, in this one set of transactions, five times the amount they claim financial regulation is costing them.”
…
So……….the missing 1.6 billion from MF Global is traced to JPM.
Sooon to be followed by a 2 billion dollar “loss” at JPM
Whack-a-Mole, Wall Street version.
WSJ dot com’s inside look at the markets
May 11, 2012, 2:39 PM
J.P. Morgan’s London Whale, and Other Disastrous Trades
By Paul Vigna
The London Whale has probably sealed his fate in Street lore, but the history of traders, sometimes rogue, sometimes not, making huge bets and having them blow up in their face is a long one. Sometimes they are isolated incidents, sometimes they take down banks, sometimes they take down markets.
But they have always happened, and likely will always happens. What follows is a timeline of some of the more infamous trades gone awry (feel free to clip out, save, and add to as time marches on. The Whale won’t be the last, we assure you.)
1907: The Panic of 1907 was sparked when Augustus Heinze tried to corner the market in his own United Copper Company. Because Heinze’s interests comprised an “intricate network of interlocking directorates among bank, brokerage houses and trust companies in New York City,” according to an Atlanta Fed paper, when the scheme failed, it led to other bank failures and a complete market meltdown. Heinze was wiped out, and the panic was halted by J.P. Morgan himself, who pledged his own fortune to back the banking system. The aftermath of the Panic led to the creation of the Federal Reserve.
1995: Singapore-based Barings trader Nick Leeson made and later tried to hide a series of derivatives trades on the Japanese stock market. The bad trades led to a $1.3 billion loss, which was big enough to take down the 200-year old merchant bank.
1998: Long Term Capital Management made a huge bet on Russian debt that went bad after the nation defaulted on the debt. The bad trade led to a $4 billion loss that, because of the increasingly interlocked nature of the markets, threatened to spark a widespread meltdown. With direction from the Fed, a dozen banks bailed the firm out while it liquidated its positions. Some have argued the incident gave rise to the notion of “too big to fail.”
2007: Two hedge funds within Bear Stearns, run by Ralph Cioffi and Matthew Tannin, collapsed in the summer of 2007, costing the firm $1.6 billion. It sparked the crisis that led to Bear Stearns’ forced sale to J.P. Morgan and was a sign of what was to come.
2007: In what ranks as one of the biggest losses in Wall Street history, Morgan Stanley trader Howie Hubler costs the firm $9 billion when a huge bet on the housing market implodes. The loss leads to Hubler’s ouster, as well as other high profile executives like Zoe Cruz (in the news lately for her own hedge fund’s failure), but some say the loss was a needed wake-up call that forced the firm to undertake defensive maneuvers that would save it in the Panic of 2008.
2011:Jon Corzine’s MF Global collapses after a disastrous $6 billion trade on European sovereign debt, instituted by Corzine himself. More than $1 billion in customer money was “missing,” and they’re still trying to figure out how to get it back.
2012: London-based J.P. Morgan trader Bruno Michel Iksil, nicknamed the London Whale, costs the firm $2 billion when derivatives trades on European corporate debt go awry.
According to the MarketWatch people, a one-day loss of 9.3% ’tis a mere flesh wound, not a rout. Happily, although we have a WaMu zombie zero-fee checking account with J.P. Morgan-Chase, we own none of their stock shares.
May 11, 2012, 3:00 p.m. EDT
Dimon, J.P. Morgan defy punishment
Commentary: Shares are still up from the start of 2012
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J.P. Morgan leads banks down on bad bet
By MarketWatch
NEW YORK (MarketWatch) — Friday was shaping up to be a bad day for Jamie Dimon and those whose fortunes rise and fall at J.P. Morgan Chase & Co.
The “London whale” trading scandal was the morning’s fresh headline. Critics including Simon Johnson, the former chief economist of the International Monetary Fund, were calling for Dimon to resign. Analysts were lowering their expectations. There were rumors, that later proved to be true, that investigations were in the works.
Meanwhile, the market was about to open and J.P. Morgan (JPM -9.28%) shares looked to be in for a rout.
Except that the rout never really happened. After opening down nearly 10%, the shares stabilized. They were trading 8.3% lower as of this writing, and had spent most of the morning down just 7%.
…
Well, rents are definitely going up here in New York.
Mine is up 10%. I can afford it so it’s not really an issue but something overall doesn’t seem right because it makes no sense.
In my building, they also fired the super who had worked here forever and was well liked so there’s something funky going on which I can’t quite put my finger on.
With 250,000 layoffs on Wall St. and a weak economy overall, it doesn’t compute.
“Manhattan Apartment Prices Decline”
http://www.bloomberg.com/news/2012-04-03/manhattan-apartment-prices-decline.html
Well, rents are definitely going up here in New York ??
Ditto here in Silicon Valley….Reminds me of the dot-com days…They are trying to build apartments at a furious pace…Buyers climbing all over each-other…High density apartment land goes for $100. per square foot in good locations…The players are typically Wealth Management Companies although the big public company builders are also in play…KB Homes for example…….
So far it seems DC, NYC and Bay Area are doing quite well. What’s the connection with Bay Area? Does the cheap money flows there sooner than rest of the country?
What’s the connection with Bay Area? Does the cheap money flows there sooner than rest of the country ??
Well, I can’t speak for the rest of the country but I can for Silicon Valley….Being simplistic here but its the shear size of the wealth in this Valley and it comes from all over the world…
Example;
I have a good friend that is a landscape contractor…He is working on a large residential..The project apparently has been ongoing for several years…Acres upon Acres of professionally landscaped property..In the mountains…All contractors are required to park “OFF” the property and are shuttled in…They can only go on the property to drop off tools,materials or equipment…There are security personel scattered throughout the site…The only vehicles that are seen going to & from the main house are limousines or SUV’s with totally blacked out windows…Oh, almost forgot, no cell phones are allowed on the property either…Reason given is they do not want any pictures taken..Scuttle-butt is that its the Russian Investor in Facebook…
Long winded…Sorry…Bottom line is there is unimaginable wealth here…Old wealth…New wealth created here…And wealth coming here from all over the world…
Tech manias are easy to fund with speculative cheap capital.
Can you imagine a speculative wave in steel manufacturing? Or coal? Or oil?
That illustrates my point.
Incidentally, everyone needs to read their history about interest rates in the 60’s and how it set off a complete “-tronics” mania (a logical precursor to the dot-com bubble.)
Key word: low fixed costs.
Key word: low fixed costs ??
And the perceived store house of value…
Can you imagine a speculative wave in steel manufacturing? Or coal? Or oil?
Now look at the areas where those industries were centered. Heh….
Buffalo is another perfect example of industry putting a city on the map and a city in a multi-decade decline after the speculation evaporates.
“Why Renters Rule U.S. Housing Market”
http://www.bloomberg.com/news/2012-02-22/why-renters-rule-u-s-housing-market-part-1-a-gary-shilling.html
It didn’t exist back then and it doesn’t exist now.
Tell it to the Spaniards in the 16th century who had their entire world upended by the flood of gold (= inflation) from the New World!
Children, gentle children, do try to grow up.
Even the gold standard is a fantasy. When the time comes to honor the gold standard, the government will default. We’ve seen this for more than three millenia now. And yet dupes be dupes?
It didn’t exist back then and it doesn’t exist now..Children, gentle children, do try to grow up ??
What part of the definition of “perceived” do you not understand my child ??
The part where I misunderstood it? **giggle**
Just put my A’s tickets on Stubhub for your vaunted
Yankee’s for next weekend…People are actually paying over $200. per seat out here to get up and personable…I will watch on TV….Go A’s… 
So the A’s go over the antenna and the ticket stubs go under the teevee?
This is making no sense whatsover.
Go TeeVee! Or A’s! Or the Antenna!
I don’t care.
FWIW, the most costly item in my budget is daycare ??
I completely understand Muggy…
I don’t care ??
Yeah, I did not suspect that the “cat” was much of a baseball fan…Just gave it a try since you are in NY…
I enjoy baseball. I was just going for comedy.
Even the gold standard is a fantasy. When the time comes to honor the gold standard, the government will default.
Gold-backed PAPER money is a fantasy.
But if everyone were walking around with a pocket full of gold coins, it is much harder for the government to renege by refusing to exchange paper for gold—because the gold is already in the hands of the people.
Only if you have never read history.
Nobody ever carried around gold coins because they would get stolen by thieves.
That’s how “letters of credit” started in the first place.
We have evidence about this from Babylonian times.
In fact, we know EXACTLY what interest rates were charged back then.
What are you smoking? Don’t Bogart it, pass it over!
Nobody ever carried around gold coins because they would get stolen by thieves.
I never suggested that one should carry around all of their wealth.
But pocket coinage has a pretty long history, and yes, coins were used in everyday transactions. Typically smaller denominations were more common metals such as copper and silver. But the principle is the same.
Maybe its all those Afghannis Indians Pakistanis Chinese with lots of drug money can pay more then you????
Did the super have apartment 1A the one with access to the back yard? $$$$$$ free market rent…. Guess they could put the next one in the basement or like they did in our old building on 1st ave…give him an old rent controlled 15 amp fused apartment in a 4th floor walkup, and now he had to cover their 3 buildings all within 3 blocks.
“Well, rents are definitely going up here in New York.
Mine is up 10%. ”
Compression from the 50 years of shadow supply?
Somebody bought your building? Somebody’s brother-in-law took over the lease?
Is JPMorgan “too big to manage”?
Fri, May 11 2012
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Thu, May 10 2012
Surprising JPMorgan loss hits stock market late
Thu, May 10 2012
By Alexandra Alper and Karey Wutkowski
WASHINGTON | Fri May 11, 2012 4:41pm EDT
(Reuters) - JPMorgan’s surprising $2 billion trading loss begs a post-financial-crisis question: Are America’s biggest banks simply too big to manage?
Washington policymakers have largely focused on whether banks are “too big to fail” or whether they are so huge and interconnected that their failure would threaten the greater financial system as when Lehman Brothers collapsed in 2008.
But JPMorgan Chief Executive Jamie Dimon’s seeming failure to gauge the riskiness of the trades at the heart of the loss is shifting the debate to “too big to manage”.
“In hindsight the new strategy was flawed, complex, poorly reviewed, poorly executed, and poorly monitored,” Dimon said during a conference call late on Thursday about the trades designed to hedge the company’s overall credit exposure.
The loss, which Dimon said could grow by another $1 billion, does not appear to pose a threat to JPMorgan’s overall financial stability.
It is, however, fueling a debate about whether regulators or executives can really get a handle on the biggest financial companies when a complex trading strategy can lead to a multi-billion-dollar loss.
…
If anyone’s interested, I can explain what kinda trade (most likely since we’re extrapolating from very little data), JPMorgan must’ve made.
It’s mind-bogglingly complex to say the least.
Incidentally, it’s almost guaranteed once you understand it that this is not the end of the losses for them.
For once, they are the ones getting squeezed, and the hedge-funds are gonna make out like bandits.
I am interested. I think it’s the Silver or Gold trade.
Not to be totally offensive but you’re out of your (intellectual) league here.
Only considered opinions may apply.
None taken. Granted I don’t understand the intricacies of the world finance (read casino) nor I have a desire to, I was curious if it had anything to do with JPM’s supposed silver manipulation.
Not to be totally offensive but you’re out of your (intellectual) league here.
You would have made an excellent investment banker. With your arrogant ways.
This is too complex for the 99% to understand. The 99% need to step aside and let the investment banks take care of this.
Polly could probably stomach, it, faster.
Does it have anything to do with the price of gold minus silver divided by the number of Taliban monks into the cube root of the swiss franc, levered 30 time by the value of land owned by the Mexican drug cartel? and as a power ball number the relative value of moms delicious all natural apple pie?
One could imagine that it involves assumptions of unlimited rescue by the European heavyweights, with leverage. I understand better a house of sturdy foundation that can stand against a wind.
Please explain the trade if you have the time and energy; I’m especially interested in (1) the likelihood of further losses ahead for JPM; (2) the chances that other Wall Street Megabanks are in the same boat.
you’re out of your (intellectual) league here. I can explain what kinda trade…JPMorgan must’ve made….It’s mind-bogglingly complex
Many of us are not impressed. It’s the Wall Street/Bank finance clowns who think they’re so d@mn smart who caused most of the financial mess - them and their “mind-bogglingly complex” BS products and trades.
Their failures haven’t put a dent in their hubris which indicates to me that they’re actually pretty d@mn dumb.
I would be very interested. Someone posted higher up the bucket that it has to do with European debt. I’ve seen that it is synthetic, though that means little more than that they don’t need to have gotten their hands on a real asset to get started.
So, as I said, I’d love to see a god guess about what it is.
And did you see Metamoposes in NYC using a pool of water as the main stage set? I saw a production this afternoon. It was sort of adorable in a not annoying way. I liked it.
Oh, you already did it. Thanks.
Here’s what most likely the JPMorgan trade, and the evidence for it. (Just keep in mind that I’m not really a bond expert but I know my way around the scene.)
Firstly, losses of this size simply do not happen. It’s a bit like getting a perfect D in all your classes. Somewhere, somebody will give you a C-. Contrary to popular perception, it’s impossible to lose even a million dollars without someone noticing.
Secondly, JPMorgan is primarily at its heart a credit derivatives shop. They know their credit cold.
Thirdly, bets of this size means away from the regulators so it has to be an OTC (over-the-counter) bet.
The evidence, mes amis et mes dammes, points overwhelmingly to the CDS market.
Now, what could the bet have been?
They wanted to “hedge” credit risk and they are always long credit risk and they (like most reasonable people) think that there are short-term risks but the central banks will come through in the long-term.
Chances are overwhelming that they put on a “credit-flattener trade”. They are betting that short-term yields will rise (prices fall) and long-term yields (prices rise) will come down.
So they sold CDS protection for the long-term and bought short-term CDS.
This is the technical part (so bear with me!)
You can’t do this as stated above. You need to make sure that you match the durations so that you are only betting on the curve not the duration.
So you must buy a lot more short-term CDS than you sell long-term CDS to make all the bond-math work out.
Most importantly, since as each month goes by, the short-term changes faster than the long-term, you must keep buying protection.
Now, the trade was outsized to start with (refer point [1]) and almost everyone figured out the “London Whale” was a little oversized.
They must buy more and more CDS as each month rolls over. Guess what happens when you “must” buy something, and the counterparties figures it out?
That is the story so far.
Now they need to unwind (bad idea!) or be unhedged (equally bad idea!)
More losses, without a doubt.
Thanks. I think I got the second half. My questions are somewhat general in nature.
1. So, what happens to the people (trading desks) involved in making these bets?
2. Could it be possible that Dimon knew nothing?
3. Lately, every 6/8 months we hear these kinds of major losses happening, rogue trades or not. What does it tell about the Risk Management of these firms?
Here we enter the arcane world of corporate politics about which I know nothing so take these remarks with a mountain of salt.
As I understand it, it was the Chief Investment Office that made these bad bets. The head thereof will almost definitely be fired. You are not allowed to make mistakes of this scale.
It is entirely possible even very likely that Dimon did not know the details. The general of the army should not be required to know every army position. That’s why he has people under him in the first place.
Oh, your last question must be a joke. Risk management simply doesn’t exist in the intellectual sense that it can’t be done. If only people understood how difficult these things really are.
“If only people understood how difficult…”
It is really pretty simple to understand how much an idiot thinks of himself after winning a few rolls of the dice.
Let’s see. With that comment, did you:
[1] illuminate any obscure fact?
[2] educate anyone?
[3] try and correct any misconceptions?
No, you made a slogan. A fairly worthless one, in my opinion. (Also meaningless but let’s not heap scorn upon the fallen!)
That makes you different from the politicians that you claim to despise, how exactly?
It is really pretty simple to understand how much an idiot thinks of himself after winning a few rolls of the dice.
As they say in Brazil on TV:
Gooooooooooooooooooaaaaaaaaaaallll !!!!!!!!!!
Well Puss, I expect the difference is I try to express a simple truth which helps me get a perspective, politicians express a simple lie to alter my perspective, and you are guessing a lot about what you know little. The rest of us read the news too.
“…and you are guessing a lot about what you know little.”
Watch out when FPSS puts on his smartypants act.
If only people understood how difficult these things really are.
Difficult for its own good, I suppose. Is it difficult in nature like Rocket Science or Brain Surgery? Or, is it difficult because of the unpredictability of human behavior and the laws that keeps on piling?
On other note, if more facts become available on JPM, please keep us posted. I appreciated it.
Now the rain is cleared. Gotta get me some vitamin D. Enjoy your weekend, folks.
You’re asking extraordinarily intellectual questions (and I don’t think you understand that.)
These financial products don’t exist in a vacuum.
They are subject to laws of the suitable jurisidiction but even more they are subject to basic economic truths.
Human behavior throws a curveball as you might expect but people try to guess ahead of time. Anybody with half a brain should be able to guess ahead of Aunt Mabel and her idea that education is “good debt”!
So………who hired the CIO?
Too bad Hitler didn’t have a Wall Street lawyer. He could have used the “Third Reich is too complicated to understand, and I didn’t know what Heinrich and Reinhard were doing” defense. He’d be retired in Paraguay, making a living from the lecture and book signing circuit.
Or he would be retired from a successful post-WWII career as a Wall Street investment banker.
Puss,
So who do you suppose are the “counter parties” who pulled the plug on them?
Again, I’m guessing.
There have been an awful lot of articles in the press by hedge funds about the Whale (long before this thing even showed up.)
Arguably, the hedge funds got really screwed by the initial trade because it kept going against them. However, they were right, and for once, they are all going to make it all back and then some.
Now, they know they have the screws on JPMorgan, and chances are they will make a lot of money.
You won’t have to guess forever. If Yale’s endowment has a blockbuster year, then their hedge funds were on the right side of the trade.
Gads you two are coy.
Thanks, though
“2. Could it be possible that Dimon knew nothing?”
That defense hasn’t panned out very well for other CEOs, but perhaps Jamie has a thicker teflon shield than most?
Your idiocy meter is unsurpassed.
I don’t care about Dimon one way or the either but I do care about accuracy and truth.
As opposed to polemics and sloganeering.
Read above why it’s extraordinarily unlikely that the CEO knew what was happening.
I’ve provided evidence whereas all you have done is sloganeer.
(Incidentally, I have never been employed by JPM nor have ever held any position in JPM or any of its securities. I simply don’t care.)
“Your idiocy meter is unsurpassed.”
One’s idiocy meter gives readings. It might peak or clip.
Only one’s idiocy can be unsurpassed.
Unless you’re just saying he has a very high-quality idiocy meter.
Nice, very nice.
You are someone that I can hold close because you someone in my own image.
Thanks for nitpicking my nitpickings.
Your idiocy meter is unsurpassed.
Your jerk meter is pegging.
What do you expect for a gay chef? They tend to get a little fussy every now and then.
“Read above why it’s extraordinarily unlikely that the CEO knew what was happening.”
I couldn’t care less about JPM, either, as long as the FDIC makes good on our checking account balance in case they blow up.
But your point is not taken. Firms that are too big to manage would best be broken up into manageable-sized firms. Coase and Hayek knew this decades ago; perhaps you should have read more when you were in graduate school.
Are megabanks too big to manage?
By Jennifer Liberto @CNNMoney May 11, 2012: 2:44 PM ET
JPMorgan Chase’s blunder raises questions about whether the big banks are just too big.
WASHINGTON (CNNMoney) — JPMorgan Chase’s $2 billion hedging blunder is adding fuel to those who think the megabanks are just too big.
JPMorgan Chase (JPM, Fortune 500) is in no danger of failing, thanks to much larger capital cushions mandated by the Dodd-Frank Act. But its mistake could have outsized repercussions in the global financial system, due to the sheer size of megabanks and the inter-connectedness of the global financial system.
On Friday, stocks of all the big banks — including Morgan Stanley (MS, Fortune 500), Citigroup (C, Fortune 500) and Goldman Sachs (GS, Fortune 500) — were lower, as the JPMorgan Chase news undermined investor confidence in other Wall Street firms. U.K. regulators are reportedly looking into trades that transpired at the bank’s London office.
“It does make you wonder — this is one of the best managed banks in the country. What’s going on at these other institutions?” said Sheila Bair, former chief of the Federal Deposit Insurance Corp., in an interview with CNN’s Your Money to air Saturday. “Are they just too big to manage, even with very good managers?”
Economist Simon Johnson said the JPMorgan Chase episode highlights why U.S. regulators need to shrink big banks. He said the banks are so big and their trades are so complicated that even the Federal Reserve had no idea when it completed recent stress tests that JPMorgan could be facing these kinds of losses.
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“Your jerk meter is pegging.”
Yes it is.
It must take quite an IQ to lose 2 billion dollars. Without the mathematicians and computer scientists these clowns would be shining shoes…or at best selling them. They are no better than the guys at the horse track, they just have access to billions of dollars of OPM to play with.
You give me 3 months in one of those financial chop shops and I could take the Pepsi Challenge with those highly intellectual “traders”. I would think my years of experience at the Vegas craps tables would put my resume at the top of the list.
Pete, Puss,
That last little exchange is why I read this blog. Blessings.
“You are someone that I can hold close because you someone in my own image.”
You someone who know how to post in Ebonics. Congratulations on your outstanding language skills.
“CDS market”
Perhaps the CDS in question had something to do with a mistaken assumption that the Eurozone debt crisis was fully contained?
Oops…
Finance
JPMorgan Chase loses big in derivatives gamble
The biggest bank in the US has squandered $2 billion (1.54 billion euros) in an investment aimed at profiting from the eurozone debt crisis. The mistaken gamble has thrust the regulation question back into the spotlight.
The huge loss had emerged over the past six weeks in an investment portfolio originally designed to help the bank control financial market risks, JPMorgan Chase announced late on Thursday.
Admitting that there were “many errors, sloppiness and bad judgment” involved in managing the portfolio, JPMorgan’s Chief Executive Jamie Dimon told a hastily scheduled news conference that the investment “proved to be riskier, more volatile and less effective as an economic hedge than we thought.”
“We will admit it, we will learn from it, we will fix it, and we will move on,” Dimon said, adding that the bank would seek to unload the portfolio in a “responsible manner” to limit damage to its shareholders.
However, analysts told the AP news agency they were skeptical that the investment had been designed to protect against financial market risks, and that the bank appeared to have been betting for its own profit.
A case of casino capitalism
According to an article in the Wall Street Journal last month, JP Morgan was heavily invested in an index of so-called credit default swaps (CDS), which are products to ensure against default by debt issuers.
In addition, Bloomberg News reported in April, that a single JPMorgan trader in London, known in the bond market as ‘the London whale’ was moving prices through exceptionally large trades. Chief Executive Jamie Dimon admitted that the loss was “somewhat related” to that story.
Presumably in connection with the Greek debt swap completed in April, the CDS index had lost value, forcing JPMorgan to sell its investments at a loss.
“These instruments are not regularly and efficiently priced, and a company can wake up one day, and find out they’re in a terrific hole,” Michael Greenberger, a professor at University of Maryland, told AP news agency.
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Are you actually st00pid or do you just play one over here?
Did you not read what I wrote above?
You are really full of p!ss and vinegar today. I was merely confirming that your CDS theory was already all over the MSM — not quite the brilliant piece of original analysis your post insinuated.
Don’t be absurd, Bear. What pussycat described is a lot more complicated and detailed than just saying “it was credit default swaps.” Very much like the difference between saying “it was the software” and pointing out the exact code with the logical error in it.
Oh puhleaze… FPSS’s post offered vague hunches about a possible mismatch between JPM’s purchases of insurance on short-term and long-term bonds. If that qualifies as rocket science in an attorney’s world, then so be it.
And so far as your assertion that cutting the yield from 2% down to 1% would double the value of a zero-coupon bond, I hope you understood from my very detailed explanation yesterday why you were in error.
Speaking of playing st00pid, do you really believe the dumbass defense is gonna fly for Jamie Dimon?
I don’t.
A black mark for JP Morgan CEO
Updated 5h 51m ago
“It puts egg on our face, and we deserve any criticism we get,” Dimon said on a conference call with investors to reveal the losses.
By Paul Sakuma, AP
NEW YORK (AP) – The reputation that Jamie Dimon honed for decades on Wall Street has been severely damaged in a matter of days.
In the 1980s and 1990s, he was the protege of banking industry legend Sanford Weill. In the early 2000s, he took over Bank One, an institution few believed was fixable, and restored it to a profit.
And in 2008 and 2009, at JPMorgan Chase, Dimon built a fortress strong enough to stay profitable during the financial crisis.
His zeal for cost-cutting and perceived mastery of risk did more than keep JPMorgan strong enough to bail out two failing competitors, Bear Stearns and Washington Mutual. It gave him a kind of street cred during the post-crisis years, when he lashed out at regulators who sought to rein in banks, and Occupy Wall Street protesters who raged against them.
Now all that is on the line.
Dimon had to face stock analysts and reporters on Thursday and confess to a “flawed, complex, poorly reviewed, poorly executed and poorly monitored” trading strategy that lost a surprise $2 billion.
The revelation caused traders to shave almost 10 percent off JPMorgan’s stock price the following day and brought a shower of complaints from industry observers and lawmakers who said banks needed tighter scrutiny.
Making the black eye worse for Dimon, the loss came in derivatives trading, the complex financial maneuvering that — on a much greater scale — led to large losses and dissolved banks during the financial crisis.
Dimon “staked so much of his reputation on creating this perception of being the ultimate, infallible risk manager,” said Simon Johnson, a former chief economist of the International Monetary Fund who is now a professor at MIT. “And along comes this huge mistake.”
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These instruments are not regularly and efficiently priced
Why not? Aren’t they in one of those glorious, perfect, ‘free’ markets? Free of government interference and regulation all that?
Almost sounds like you need regulation for markets to perform efficiently. Who’da thunk?
All these news stories about bidding wars is very interesting. I think a dead cat bounce or two will really get put some more nails in the housing bubble coffin.
Loved Polly’s suggestion yesterday to cancel Liberty Mutual insurance policies. Mine is up for renewal. I’ll see who else is available. There is GEICO here. But I rather give the business to LM than Let’s tax all the rich people but me Warren Buffett.
Speaking of insurance attended a presentation on where the medical spend dollars go in the US.
41% doctors
30% hospitals
10% Pharma companies
9% governent (NIH and the like)
6% insurance companies
Maybe 6% is too high. But if your opeartion is $100K ($10K in India + airfare and hotel) maybe there are other bigger targets than the mean nasty greedy insurance companes. (P.S. I don’t work or have vested interest in insurance. )
Might want to check out Amica. I’ve used them since I first went off my parent’s policy when I graduated. They’re very thorough as long as you don’t mind using the phone vs face to face.
6% insurance companies…Maybe 6% is too high.
About 1/2 of US healthcare spending is public, meaning no insurance companies are involved.
50 million Americans have no health insurance meaning no health insurance companies are involved.
When you take those things into consideration the 6% figure totally understates the reality of health insurance’s costs to the system.
I do agree with you other point of there being other targets as well.
Where did you get these figures, Anon? Link?
Your presenters had their numbers wrong:
“According to the World Health Organization (WHO), total health care spending in the U.S. was 15.2% of its GDP in 2008, the highest in the world.[3] The Health and Human Services Department expects that the health share of GDP will continue its historical upward trend, reaching 19.5% of GDP by 2017.[26][27] Of each dollar spent on health care in the United States, 31% goes to hospital care, 21% goes to physician/clinical services, 10% to pharmaceuticals, 4% to dental, 6% to nursing homes and 3% to home health care, 3% for other retail products, 3% for government public health activities, 7% to administrative costs, 7% to investment, and 6% to other professional services (physical therapists, optometrists, etc).[28]“
wikipedia
Friday, May 11, 2012 11:00 AM PDT
Romney’s Jamie Dimon problem
JPMorgan’s $2 billion blunder makes Mitt’s pledge to repeal Obama’s bank reform look dumb
By Andrew Leonard
Here is the most important sentence in Jamie Dimon’s Thursday afternoon conference call discussing JPMorgan’s colossal trading screw-up: “Just because we’re stupid doesn’t mean everybody else was.”
If you’re looking for the most easy-to-understand breakdown of how JPMorgan managed to lose $2 billion, read Marketplace reporter Heidi Moore’s fabulous explainer. Readers who fancy themselves financially sophisticated can ponder DealBreaker’s Matt Levine’s analysis. If all you want is a guide to the critics “flaying” Dimon’s hide, check out the New York Times’ DealBook.
But for our purposes right now, all you need to concern yourselves with is Dimon’s monumentally disingenuous self-castigation. Because Dimon is not stupid. Under his tenure, JPMorgan has been the best-run of the big banks. So Dimon’s self-criticism gets it all backward. The fact that JPMorgan was so very stupid is so very scary because we can rest assured that just about everybody else is doing things even more idiotic.
The whole point of the infamous “Volcker Rule” included in the Dodd-Frank bank reform act is to restrict the banking sector’s ability to clobber the economy by doing dumb things. As the Huffington Post’s Mark Gongloff noted, if a strict version of the Volcker rule had been in place, JPMorgan, quite possibly, would have been prevented from making a bet that would lose the bank $2 billion — or more.
However, the Volcker Rule is not yet in effect. The final details are still being hammered out, and the brutal truth is that financial sector lobbyists have almost undoubtedly ensured that the kind of “hedging” bet JPMorgan just made would be technically legal under the new rules. There’s a remote possibility that the blowback from Morgan’s disaster might strengthen the final version of the rule, but don’t hold your breath. The worst financial crisis in 80 years resulted in bank reform that at best can be categorized as tepid and perhaps fatally compromised. One bad stumble by JPMorgan that, lucky for us, doesn’t seem likely to ignite a system-wide crash isn’t going to make a dent in Washington regulatory policy.
On the other hand, there could well be real political repercussions. Because if anyone is going to come out of this mess looking even stupider than Jamie Dimon, it’s got to be Mitt Romney — the presidential candidate actively campaigning on a pledge to repeal Dodd-Frank.
Barack Obama has been rightly dinged from the left for his soft approach to Wall Street, but there’s a reason why Big Capital is shunning him and pouring money into Romney’s campaign. Romney’s answer to the financial meltdown is to do absolutely nothing; to abandon even any pretense of reining in Wall Street bad behavior, to return us to the pre-crash regulatory status quo.
That’s suicidal. The U.S. economy may well skip over JPMorgan’s folly without any serious long-term damage. But that’s not the point. What we learned from the financial crisis is that the real danger inherent in Wall Street’s endless orgy of speculative trading is the prospect that multiple bets could go bad simultaneously when there is a big external shock to the system — like the housing bust. That’s when a downturn becomes a crash.
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