I'm beginning to get a major kick out of this "it's all ML" meme.

Oh, and Mr. Marvin? You are annoyed by "irrational" credit markets? I'm so sorry to hear that. If you'll hold for a moment, I'll see if a Schadenfreude Specialist in our Real Economy Without Capital Investment Department can take your call . . . please enjoy the violins on the hold music . . .

What is Merrill's exposure? To read the internet these days, you'd have to conclude that ML is exposed to the entire universe. Being as how they're the only one making any margin calls and stuff.

Hell, the best thing I've ever heard about LEND is that they have eight different warehouse lines. (That said, I haven't trotted off to EDGAR to see what the dollar amounts are, so I don't know how big a share ML's "one-eighth" is.) It's all these jokers with exactly one line--or one line with more than a trivial balance--who have been going up in flames, and if ML was willing to be the only warehouse lender in the shop, then yes, ML has major exposure and ML gets to tell you how to run your business and which radio station you get to listen to. What did these people think Merrill was going to do?

Tanta,

I just happened to be looking at the constituent names to the ABX 07 BBB- and guess what appeared on the list:

C-BASS 2006-CB6 Trust

Looks like MTG and RDN decided they couldn't resist joining the origination party.

Tanta,

Talk about a dog's breakfast. Who is Wilmington Finance?

Tanta, looks like being a Schadenfrude Specialist will be one of the great job growth engines going forward. Are the job requirements such that the post can be filled by unemployeed construction workers? Have a friend who might be perfect for the job, you know who is hiring?

A wharehouse lender can stay irrational longer than you can stay solvent.

I know, I know. No Keynes quotes allowed, but turning the platitudes on the dealers in platitudes is too much to resist. This is, afterall, the American Dream we are talking about!

Fullcarry,

I don't follow international flows much and when I look at a series I'm unfamiliar with I look at a month vs. recent history and months in previous years to account for seasonal variations. Nothing fancy. December is not a particularly low month for net capital flows.

Trader Walt referenced Brad Setser's post on the TIC report and Setser specializes on international flows.

Treasury's TIC page is at U.S. Treasury - Treasury International Capital System -
Home Page

By my count, there have been eight months since 2000 with net negative flows. So the December report is unusual, but not unique. All the others were standalone events, so it will be interesting to see the January report to see if the net bounces back into positive terrain.

DID made an interesting point in touting foreign investment targets (BRIC, et al.) Part of the story in the negative December TIC was Americans investing abroad (vs. domestic) at a higher rate.

Here's Stephen Roach's take on the TIC:
Morgan Stanley - Global Economic Forum

Also, read this on petrodollar recycling:
Morgan Stanley - Global Economic Forum

The one-month does not make a trend still applies.

"It's time to dive and put up the scope." ~mp

Sounds like fun. Please let us know more...

ResMAE also says that Merrill thinks it has the right to put loans back to the company for an "unlimited" period of time.

Well, I don't have the purchase agreement in question in front of me, but I'll point out that I have never seen one with reps, warranties, covenants, remedies, indemnities, obligations, or anything else that did not survive purchase, sale, transfer, liquidation of loans, or termination of the agreement, without limitation. There may be contracts out there that limit the period of time in which the buyer may demand repurchase of the seller, but I have never seen one. (And, frankly, if I did, I'm not sure I'd sign it, on the theory that a moron for a counterparty is not a recipe for success.) Nor do I believe, for a moment, that any party as savvy as Merrill Lynch would enter into an agreement to buy loans with 30-year terms (or more) that limits the period in which it can demand remedy for breach. Perhaps some of our attorney friends will comment on the likelihood that ML's counsel let a "survivability" problem like this past them.

Nonprime mortgage executives say that after the loan is funded and delivered certain Street firms screw up the paperwork. Is this just excusing making? Merrill, by the way, owns a "scratch and dent" servicer called Wilshire. How large is Wilshire's portfolio? No one knows because Merrill, after it bought Wilshire, stopped disclosing those figures to NMN and its data-collecting competitors. Merrill also owns a mortgage banking unit in Florida. How much does that operation fund? We don't know because Merrill doesn't disclose those numbers.

Producer, you get to counter me, if you can, with “facts.” The above, however, is a series of unanswered questions. I have some unanswered questions of my own: What does the size of Wilshire’s portfolio have to do with the issue of whether it “screws up the paperwork”? What does the volume of its Florida fundings have to do with that? How does any of this prove that ResMAE is or is not full of shit?

Of course I’m willing to believe that certain Street firms screw up the paperwork. I’ve never, actually, been anywhere near a bulk loan deal that didn’t have something screwed up in it. And if Merrill is just trying to “undo” a stupid investment by unfairly invoking covenants on “technicalities,” well, then I hope the bankruptcy judge shoves it down their throats. On the other hand, if ResMAE is just trying to crawl out from under its own stupidity in having all its eggs in one warehouse/loan sale basket—i.e., putting itself at immense counterparty risk by having nowhere to go if ML’s terms become unacceptable—then I hope the BK judge has the sense to realize that that doesn’t obviate ML’s claims.

I am reminded of one of the late Molly Ivins’ famous lines: you dance with the one that brung you.

they are killing their competition in a space that will be shrinking, but will eventually be quite profitable again.

What I have been trying to say--obviously not very clearly, I'm too amused by the shock over the gambling in the casino to be clear, I guess--is that these outfits that are imploding are not ML's "competition." They are ML's counterparties in loan purchase and warehousing arrangements, and some of them appear to have had NO BUSINESS PLAN except "sell it to Merrill." OK, fine. So it was a great run for as long as it lasted. No "business plan" like that ever lasts forever; the funding source can go away like it came. I mean, there's actually a question--in the "real world," not necessarily the legal world--of the extent to which these outfits were actually independent mortgage bankers, as opposed to brokers for Merrill. If you want to survive in the mortgage banking business, you diversify your funding sources and you diversify your take-outs, for exactly the reason we are seeing: when you become too much risk concentration for someone else, someone else can cut you loose.

"And if Merrill is just trying to “undo” a stupid investment by unfairly invoking covenants on “technicalities,” well, then I hope the bankruptcy judge shoves it down their throats."

Tanta, he won't. I don't doubt that ML is essentially undoing a stupid investment, but a covenant breach is a covenant breach, "technical" or not.

Do I have the framework correct? ML's portfolio suffered EPD's that were subsequently "cured"? Too bad for ResMae unless the docs contain specific language allowing for the cure, which does not appear to be the case. It sounds more to me that ResMae is barking up an equitable relief wall, one it can't scale in a contract matter. Even if it could get past preliminary objections, ML can argue that EPD's are indicators of future defaults, and that equitable relief is therefore unwarranted.

ML wins. Place your bets!

Oh yeah, and if someone tells me that ResMAE wasn't charging late fees to the borrowers, because they're not really a loan servicer and they just intended to transfer the loans over to ML so fast that they'd never have to take a payment, my response is uh-huh, and people get burned by trying to do that. You go tell a judge that you both 1) had the capacity and willingness to abide by your contractual covenants and 2) didn't have the capacity or willingness to charge late fees for any payments that might have gone delinquent while you were still, technically, the owner of the servicing rights of the loan. The judge will be unimpressed. Nobody I know of is impressed by what ends up being the standard excuse of all check kiters: but I intended this one to clear before that one did.

WSJ Editorial

This is noteworthy. The editorial board of the Journal is one of the last groups to put on a hair shirt and fret about the economy. They sound worried:

"How Expansions Die
February 17, 2007;
Since the current expansion really started to cook in 2003, any number of overwrought reasons have been offered to predict that disaster was imminent: the budget deficit, energy prices, the trade deficit, the "tapped out" consumer, and so on. The economy has weathered them all.

However, we finally have a threat that really does bear watching -- namely, a potential credit crunch precipitated by the housing downturn and rising default rates. As Federal Reserve Chairman Ben Bernanke noted in his Senate testimony this week, the economic damage from the real-estate slide has so far been contained to housing. But in addition to the pain that homebuilders have experienced, banks and mortgage brokers are increasingly feeling the pinch, especially in the sub-prime sector...

This accumulation of bad loans represents a crack in the foundations of the recovery. Typically, a housing downturn and the credit problems that accompany it are a result of underlying economic weakness, rather than their cause. The economy slows, people lose their jobs and are forced to sell under duress lest they default. The distressed selling drives prices down. But in this case, it may work the other way around...

Now the housing market is flat to down across most of the country and loans with adjustable rates are adjusting upward. So even with unemployment low and the economy still humming, marginal buyers can suddenly find themselves forced to sell. And if they had little equity to begin with, they may not have much money left after they sell -- if they can sell at all. If they can't, they fall behind on their payments and the banks have to book the loans as delinquent.

Thus does a virtuous circle caused by easy money turn vicious, and interest rates aren't even all that high -- at least not yet...

We aren't joining the partisans at certain newspapers who have predicted recession each of the last four years. The labor market remains healthy, the consumer resilient, business investment robust and equity markets buoyant. But this certainly is no time for Congress to add to the risks of a credit crunch by committing such policy blunders as raising taxes, imposing trade barriers or punishing foreign investment in the U.S. Secretary Hank Paulson has prudently been adding financial plumbing capacity at Treasury, and he will need it to limit any credit fallout.

As for the Fed, we hope the tale Mr. Bernanke told Congress this week about perfect "soft landings" was right. But we also suspect that the Fed chief has his fingers crossed that the rest of the economy, at home and abroad, is strong enough to withstand the housing credit woes that the Fed did more than its share to inspire."

How Expansions Die - WSJ.com

Unless someone is willing to tell me that the dollar is not sensitive to interest rates.

That is actually bass ackwards... a run on the dollar would drive interest rates - especially the long bond - sky high... not a change in interest rates cause a run on the dollar.

At least the way things are 'structured' now.

In short if dollars flow out of the long bonds, watch out... There's when your liquidity goes poof.

But for that to happen it would require the FCBs join in that stampede and basically giving up on USD manipulation & their country's export trade with the US.

But it might not be that simple... it would also increase the 'opportunity' for independent carry trade... Non-FCB intervention.

Say the dollar tanks because FCBs just aren't willing to suffer dollars anymore via their acquisition of USD denominated long debt... that shift could start the vicious cycle which builds on itself.

Say the yield on the 10 year shoots up (price collapses)... Say we see 7% or so.

Then a whole lot of other currencies besides just the yen make nice vehicles for carry trade.

Borrow short in another currency with lower rates & buy MUCH higher yielding dollar treasuries. Enough of that happens and the dollar rebounds - at least some. Then maybe FCBs feel brazen enough to step back in (especially if their export industries are screaming loud enough).

Sure treasury yields fall again (and prices with them - a loss in dollars) BUT relative to the currency exchange maybe not so bad. Depends on how the carry flow affects the USD & if the CBs come back or not.

There are all kinds of feedback mechanisms in int'l carry trade & FCB manipulation that will make it very difficult to 'predict' the course of events. The smartest guys in the room won't be smart enough... lucky might work better.

And that is nothing new - after all consider the 'conundrum'.

DaveL wrote:
Isn't the real question running here whether the credit crunch spreads beyond sub-prime ? And outside real estate ?

Well, with all of these lenders now trying to go Alt-A, it's already gone beyond subprime. There just isn't enough legit Alt-A to sustain what they need to write, so they will likely be risk-layering Alt-A to the point that it creates average losses equivalent to subprime lately. That could take another six months to a year, but don't think those on the back end of these deals won't be watching and checking for it.

It's not that subprime in itself is bad. You can write subprime safely and well, but you can't write subprime loans with big resets safely and well without ratios, verified incomes and verified assets. The same is true for Alt-A - if you ignore the issue of whether the loan can be repaid without a sale, in this environment you get relatively high defaults and higher average losses than you do with conservatively underwritten subprime.

Plus, now that the subprime got tighter the Alt-A that gets into trouble won't be able to refi out with subprime. Every time you cut off an underwriting rung you induce more defaults in the rung just above it.

A couple Alt-A lenders I know of have already gone out of business, and I assume the Class of Alt-A 2007 will not have a good graduation rate.

as the resident stock bull for much of 2006, i have to mention that i cashed out around 12.5k on the dow.

dc even I haven't cashed out & I'm no bull - I'm still at least 50% in the market with about 30% bonds & 20% cash. I'm looking at moving the cash in but slowly - DCA. I don't have time to do the research & 'shop' so I drip a little here and there into my mufu's... its worked pretty well... been doing it since the mid-80s.

On the other hand if the market dropped a bunch - I'd pump the cash in pretty fast.

The stock market reflects PROFITS

Sort of.

More accurately... the net present value of current tangible net worth (hard assets minus liabilities) plus the sum of the estimate of discounted future net earnings.

Its always that last term... the estimate of future earnings and appropriate discount factor... that is the problem. The fact that profits have been great in the past doesn't feed the dog tomorrow unless those profits were (1) monetized and (2) were converted into some kind of hard asset (the first term of that equation) that can carry value regardless of future revenue & earnings... And that's pretty tough to do, easier for management to focus on making sure there will be future earnings.

This is why I'm not a raving bull - I get to see too much of the sausage being made on the operations & execution side of businesses to have a whole lot of blind faith in management's ability to deliver (without tons of luck to float some pretty low draft boats).

Some firms are fantastic & turn lead into gold - many seem to be adequate in boom times - some seem to not be able to get out of their own way even in boom times.

My guess is the fantastic guys even do well in recessions (I've sure seen it in the past) while the adequate ones cease to be adequate and the losers are gone before the game even starts to get rough.

A recession would be a wonderful buying opportunity but you will have to have done your homework first. Most will not have, myself included.

Well, since this is now a market thread…..

The epiphany that I had since I started reading CR is that, with the equity in our rental houses, we are effectively very long on the dollar.

We were 100% invested in the market since last summer. Mostly US stocks. So in our current rebalancing, I've moved into money market, international, gold and silver. Our mutual funds are value funds that can invest domestically or internationally.

Most commentators on the current bull market indicate that the retail investor has not entered the market, so the bull has time to run. I'm wondering if, since this is so close to the last market bust, if a lot of folks are deciding to sit this one out.

I'm wondering if, since this is so close to the last market bust, if a lot of folks are deciding to sit this one out.

Or at least determined to stay diversified. That would be most of the people I know. They have plenty enough in the market right now - thank you very much - never a bad idea to have a little something rat holed elsewhere.

In fact if folks have a lot of debt & money in the market - probably be a wise thing to focus on the debt reduction first even if they had to sell equities to do it. Take some off the table & pay visa.

Bulls, especially wealthy bulls, do not understand the risks middle class people face who don't have those same assets.

The closer one is to the edge, the more carefully they need to walk. Potential opportunity loss from not being fully invested prior to a bull run up causes far less havoc to them them than if their savings are savaged in a bear market. Heck those savings might end up being their meal ticket if they lose their job in the 'bear market'.

It is all about risk-reward. The fact that there is that much cash out there in MMFs should make the bulls even more bullish - as any down turn will likely be moderated since there will still be at least SOME reserves for consumption... the biggest factor in GDP.

There is a problem of who is holding the MMFs. There may be lots of $$$s for intangables, but if somewhere along the line it don't end up at Walmart or Target, it is not going to help.

dryfly, et.al. - haven't looked lately but most FCB flows are into short-term instruments not the l.t. end of the curve.

No, no, no. Read Setser he goes into it pretty well. I haven't seen one single source where he breaks it all down but bits and pieces here and there.

Like the recent TIC report wrap up... here.

It it you will note he mentions short end transfers by the Russians (out mostly) and some of both long & short by the Chinese... with their intervention in the long end larger than the short end. You get hints like that all over.

I think the Asian 'merchantilists' act very different than the more traditional FCBs used to act. I think what you said was right in the past but not anymore... and that was the root cause of confusion surrounding the 'conundrum'.

The Chinese and others buy our debt to hold as an anchor to fasten their currencies to de facto pegs. Churning short money makes that very difficult & 'labor intensive'.

Other FCBs have completely different motives (but also don't have the reserves the Asians do).

Dave think about it - the Chinese are sitting on a trillion dollars in reserves. It is assumed they hold about 80% or more in USD denominated assets ~ $800B. If the average maturity was six months that would mean on average $1.6T comes due every year ($800B twice a year). That would work out to $133B they would have to re-buy every month just to stay even. Add to that the $20-30B net accumulation every month (new reserves). Just moving the paper gets to be a nightmare.

Now if they have a mean maturity of say five years... then the churn falls to $160B per year or $13B per month... add in the $20-30B accumulation of new reserves and you get an almost manageable number.

LOL. If only we had that problem.

I sure don't know the mix of maturities in the portfolio of the merchantilists but I can assure you it isn't what we used to see say 5-10 years ago.

On the otherhand that isn't to say they won't liquidate tomorrow either. Out fate is to a great extent in their hands.

"Our fate is to a great extent in their hands"

And many of their exports in american hands. Exports, jobs...thus, who depends on who?

Imagine the social problems around Shangai or Guangdong if the US or european consumer does not longer consider necessary to buy the stuff they make.

And the peasant relatives that depend on money supplied from the coastal regions...

That would be another dark side of globalisation.

"The Chinese hold slightly less than 5% of our T's. A position which the FMOC is very comfortable with and which puts the Chinese holding "the short stick" in any theoretical exit on their part."

1)how much of the current treasuries are bougth by the PBoC?
2)could you estimate by how much would increase T's yields if such entry stopped suddenly.

Here's another interesting way to look at how short their stick is... from macroman...

The sums that we are dealing with here are very considerable indeed. The rate of reserve accumulation of the key players has been virtually parabolic in recent years. The chart below shows the combined currency reserves of just four countries- China, India, Russia, and Taiwan. Note the absence of countries like Korean and Malaysia, as well as the assets that have accrued to Middle Eastern investment authorities. Observe the scale on the left hand side of the chart. At the beginning of 1996, these countries had $235 billion in currency reserves. As recently as January 2002, their combined reserves were $452 billion. As of this September, their combined reserves totaled $1.65 trillion.

In less than five years, therefore, these four countries have essentially pumped $1.2 trillion into global fixed income markets. To put that number in perspective, it is essentially identical to the entire growth of US M2 during the same period!!!! Even if the bulk of the money is put on deposit or enters the 2-5 year sector of the curve, it is very difficult to believe that this does not have a knock-on impact at the back end as well. This is especially the case given that a growing number of reserve assets are being farmed out to private sector asset managers with a benchmark duration that might well be higher than those of the central banks’ direct bond purchases. This, Macro Man believes, is one of the principal solutions to the bond market conundrum and the concomitant lack of volatility.

macroman's reads are almost as entertaining as CRs... almost.

I've read that there are somewhere near 300-400 million Chinese living at or near subsistence levels in the interior. Peasants basically.
from dry.

Soooo a slowdown here, could be revolution there.

What Accredited and Resmae are alluding to is the loans were not boarded in a timely fashion so any payments made by the borrowers were not applied. If the servicer for the IB has not officialy matched a payment to a loan, it is "technically" a early payment default, even if the originator has the payment, seen the payment and has passed it along to the servicer, or has confirmed the borrower mailed the payment to the servicer and it's in the black hole.

OK, let's assume that that's true. What I can't figure out, then, is why ResMAE is telling it to a BK judge, rather than having a spiffy RESPA class action lawyer telling it to a different judge on behalf of those borrowers who are getting screwed by Merrill's servicer. I've seen RESPA class standing certified for more trivial violations.

I do have to wonder whether ResMAE really doesn't want to open up the RESPA can of worms.