What plausible justification is there for rewarding the top management in a massive screw-up? Certainly not because of increasing shareholder value in the last year. Kind of like the medal they gave Tenet. Perhaps it's more to buy their silence for a few years.
In one simple form of a swap, a derivatives dealer, often an investment bank, agrees to pay a counterparty, say a hedge fund, the change in the market price of a stipulated security. In return, the dealer receives payments tied to something else, often a benchmark interest rate.
Suppose a hedge fund wants to bet that IBM stock will rise. Under the SEC rule governing margin lending, the fund couldn't borrow more than $50 for every $100 of IBM stock it buys. A "total-return swap" on $100 of IBM shares would cost $5 or less for many hedge funds, at least initially. If IBM shares were to rise, the return per invested dollar would be better than if the hedge fund bought the IBM shares outright using a margin loan. If IBM shares were to fall, however, the derivative leverage would work in reverse: The hedge fund would have to pay the counterparty an amount equal to the decline in share value -- plus the agreed-upon fee.
Mr. Buffett contends that the proliferation of such swaps is dangerous. "Total-return swaps make a mockery of margin requirements," he says. The widespread use of swaps, he maintains, makes the leverage that preceded the 1929 crash "look like a Sunday-school picnic."
Hedge funds are under no obligation to publicly disclose derivatives transactions or borrowing levels. But Citadel Investment Group, a $13.5 billion Chicago hedge fund run by Kenneth Griffin, had to do so when it sold bonds last year. A bond offering document said the fund's leverage ratio -- the value of its assets compared to its capital from investors -- stood at 13.5 to 1, due in part to its use of derivatives. That raised eyebrows in an industry where 5-to-1 leverage is considered aggressive. Citadel's filing noted that once certain other financial agreements were taken into account, the leverage ratio was about 7.8 to 1.
What kind of leverage maneuvers was Citadel using? Its filing provided one example: It used a total-return swap on a $400 million basket of securities "to provide leverage" to the fund. That swap, negotiated last October, entitled the fund to collect payments equal to what it would have gained if it actually owned all those securities. Citadel paid a negotiated fee to the swap's counterparty, HSBC Corp.
Mr. Paulson, who runs New York's Paulson & Co., used a different form of swap to play his hunch that trouble was coming for companies that lend aggressively to home buyers with sketchy credit. Figuring that bonds backed by subprime mortgages would fall in value, he invested $1 billion in credit-default swaps. In essence, he bought insurance against losses on about $10 billion worth of bonds held by other investors. When those bonds decline in value, Mr. Paulson collects from his counterparties an amount equal to those declines. The subprime market unraveled earlier this year, and Mr. Paulson's fund notched about $1 billion in paper profits, as of early March.
When swap wagers go bad, however, investors sometimes have to
But some regulators worry that competition between derivatives dealers could lead dealers to loosen collateral requirements too much. Hedge funds routinely shop around Wall Street to find the derivatives deals that require them to post the smallest amount of collateral. In a speech to bankers last year, Annette Nazareth, an SEC commissioner, said that regulators want to stave off "an environment that encourages a competitive 'race to the bottom' concerning margin."
Dealers such as Credit Suisse and J.P. Morgan don't disclose the amount of total-return swaps on their books. That's "trouble in the making," argues Janet Tavakoli, a Chicago consultant specializing in derivatives. The collateral provided by hedge funds to secure swaps could be difficult to trade, she says. In a market downturn, attempts to unwind such positions could lead to a vicious cycle of selling that would feed on itself, she says. Representatives of Credit Suisse and J.P. Morgan declined to comment.
Wall Street itself is one of the biggest users of leverage. Last year, the nation's four largest securities firms financed $3.3 trillion of assets with $129.4 billion of shareholders' equity, a leverage ratio of 25.5 to 1, according to research firm Sanford C. Bernstein & Co. In 2002, those same firms financed $1.59 trillion of assets with $72.7 billion of equity, a ratio of 21.9 to 1, it said.
Among the big firms, Goldman Sachs Group Inc. pumped up leverage by the largest degree in recent years. Goldman says it was just trying to catch up to the levels of its competitors after it shifted from a partnership to a public corporation. Its ratio of assets to shareholders' equity, one common measure of borrowing, climbed to 25.2 to 1 in 2006, from 17.7 to 1 in 2002, according to analyst Brad Hintz of Sanford C. Bernstein. (Goldman says it has a pool of easy-to-sell securities valued at more than $50 billion that it could tap if market conditions require it to raise cash.) Goldman's 2006 profit of $9.54 billion was tops on the Street. Mr. Hintz estimates the increased leverage accounted for 20% of the additional pretax profits.
[David Viniar]
One way Goldman ratcheted it up is through a joint venture with Bank of New York Co. involving repurchase, or "repo," agreements. Goldman uses stock from the accounts of its own traders and its hedge-fund clients, selling the stock temporarily and agreeing to buy it back later. In effect, the cash it receives is a temporary loan. Under the program, Goldman has effectively jacked up debt secured by stocks held for customers and its traders from 90% of the value of those shares to as high as 95% to 98%, people familiar with the program say. More than $50 billion of stocks is involved.
Rating agencies keep an eye on debt levels on Wall Street, and the credit ratings they assign can affect investment banks' cost of borrowing. Several years ago, Goldman said it planned to lend more money to hedge funds, a move that would inc
Said Richard Schlesinger, managing director of Ceebraid-Signal: "I don't think there is anything that we are doing that is inappropriate."
"These are not situations where a woman bought a unit and she's now a widow and can't pay," he said. "These are people who don't want to close because they can't flip and make $100,000."
"These contract results reflect a continued challenging operating environment in most of the Company's markets, which were exacerbated by recent problems in the sub-prime mortgage market. The adverse publicity surrounding the sub-prime market has further damaged home buyers' psychology, resulting in decreased demand and leading to continued use of sales incentives. As a result of this challenging operating environment, consolidated net contracts in March and April declined approximately 30% from the prior year, as compared to a 3% year-over-year increase in February, which was previously reported."
Risk Capital, we do want to avoid reposting copyrighted material that is behind a paywall. Excerpting slightly with a link (for subscribers to use) is fine. But Worried is right that we don't want to get into it with those who control public access to their information.
I hope you won't be offended, but I think I'll shorten your posts to a quick exerpt, OK?
Brief musing on bloomberg that jobs report not hindering futures.
Perhaps all market analysis at this point is moot unless it factors in the debt-addiction part of the equation -- i.e. -- that those who profit from the debt bubble can and will pile on as much debt as they can to keep the party going, until it all falls down.
Is anyone else here very put off by the term "bankruptcy bonus?"
It reminds me of the spoiled kids in school who demanded the new car from their parents even though they brought home straight FAILs on their report cards.
giacutter, I was once paid a fairly handsome "stay bonus" by a company which had decided to liquidate itself (not BK). I demanded it, or else I was going to walk off and take a job with a company with a future. The company needed people like me to stick around and oversee the horrors of trying to wind-down a mortgage operation. I hardly thought it was greedy on my part to want that bonus (and I demanded, by the way, that it be paid up front, and that the check clear, before further heroic efforts on my part were going to take place). It helped, of course, that I knew that company was in trouble before I took the job in the first place, having been recruited as part of a "turnaround team," and having gotten a contractual guarantee of 18 months of employment that the company violated by deciding to shut down 8 months after hiring the turnaround team.
I can see the wisdom of handing out BK bonuses to key operational people. You have to keep someone around to preserve whatever assets are there to be preserved.
Handing out big bucks to the same bozos who created the mess in the first place, of course, is a different story.
They could have called it a retention bonus or better, retention pay. Or liquidation pay. But they called it a bankruptcy bonus, and that gives us a window into the soul of the New Century executive: Someone without an ounce of concern over how things look to outsiders; someone who cares only about personal income and not about borrowers, investors, builders or taxpayers.
For the New Century executive, it's all about me me me.
Morrice's voice was quivering because he was stifling a laugh. The deep kind that sounds like, "Bwooo ha ha ha!"
Interesting quibble about proprietary information and what can and cannot be copied in whole or in part...I'm sorta with Ella, but in this case not sure if the sample is good enough to entice me to subscribe to WSJ (ie 'risk capital' is working prolly without pay for WSJ) or bad enough to keep me thinking that overall, it's still not worth it.
Now this blog OTOH is definitely worth that WSJ subscription rate...and yet there is no fuss about "proprietary information" here. No, we are priceless and shall reject any and all offers by sleazebag Rupert Murdoch and his ilk.
The boomers and yuppies version of, "Let them eat cake".
Prince and princesses who never wanted to do genuine work like their grand parents.
Unregulated capitalism (which is the wrong form for a modern economy by the way) and its wake of devastation once again.
Long past the Great Depression, 70s Oil & war costs,S&L thieves, dot com liars bubble bust, Junk Bonds debacle, LTCM red flag re Derivatives & Hedge Funds, Amarenth, and now...
Hey, a boiler room full of salesmen with an unknown degree of liability to buy back loans, in a business with few barriers to entry and a market that is cratering. I'm SHOCKED that they couldn't find a buyer. I suspect that the greater fools with easy money who want to M&A their way to market share are an endangered species. Back in Feb, they probably could have found a buyer, but it's probably too lante now.
Calmo, I admire anyone who liberates content from the WSJ, and that includes Risk Capital.
But one, I don't want to get caught up in fair use vs. republishing issues.
And two, I don't want to encourage anyone to start posting the freakin' WSJ editorial page. The news department is one thing, but I get enough mouth-breathing from other sources.
Tanta, the following is an attempt to rehabilitate myself from yesterday and ask a relevant question (I went back into the previous comment threads of yesterday, all I can say is wowza, thanks for not going postal on us).
Going off your one of your previous comments on the difficulty of adjusting or getting workout agreements for loans bundled into MBS bonds (due to the multiple bondholders and the securitization instrument) and off Jim a's comment about the undesirability of buying up New Century's origination business --
1) How long can this go on before we reach a crisis point where things finally get started being done. In other words, how many of those borrowers you were talking about yesterday that could be salvaged and swing the loans if they had an adjustment go under, and how many origination and/or servicing firms need to crash and burn before Wall Street gets the idea they need to deal with this as a traditional lender/bank would.
2) Do you see any apparent mechanism for the necessary loan workouts and adjustments happening? Short of an RTC-like agency.
Andrew, I thought you were making perfect sense yesterday. I also will not go anywhere near that thread again; I looked at it first thing this morning and that's really all the exposure I need to the Sock Jock infestation.
One of the troubles I think lies ahead is that this idea of making regulatory changes so that REMICs can modify loans without screwing up the Q election is getting into uncharted tax law territory. I'm not an expert on that issue, but I think there may be parties who would incline toward relief for homeowners who are nonethess frightened of re-writing REMIC law on the fly. (And by and large, of course, we all hate laws written on the fly. But there it is.) I suspect that what will happen is mostly arm-twisting with the depositories and GSEs to offer to refi those loans, rather than deal with the whole modification mess.
I can't believe we'll be getting to an RTC-like entity any time soon; that's a great deal more of a MAYDAY MAYDAY! scenario than I'm thinking right now. The RTC wasn't in the business of modifying loans; it was in the business of liquidating the assets of failed institutions. Certainly there could be formed a governmental or quasi-governmental agency to buy out those REMICs and cope with the loans, but I don't think that's very likely. We are dealing with a government who couldn't respond to the loss of an entire American city in a hurricane, and too many people spent too much time blaming New Orleanians for having been in a disaster. So I can't quite think they'll take the high road on this.
I do, though, think that certain persons who happen to be Federal Reserve Governors and Chairs will be having some side conversations with some banks in which certain carrots will be offered on that refi thing. We have to hope they don't give away the farm on this. I think we can pretty much guarantee that the banks will get a Papal Indulgence offering Remission of CRA Obligations for the next ten years out of it. That's how this kind of thing usually works.
Thanks Tanta, that confirmed a few of my uneducated guesses. The organizational dynamics of this all seemed to be leaning towards a muddle through approach of general avoidance and band-aids. I've always been a big believer in "watch what they do, not what they say" in helping determine motivations and likely future actions.
You also make a very good point on the raison-d'etre of the RTC, it was not there to do work outs and we are probably not near that situation yet. Creating an agency like that in the first place is tantamount to admitting that things are extreme and dire, it is human nature to ignore an issue until you can no longer do so and then scramble to fix it amid the cries of "why wasn't something done sooner?"
On the Sock Jock infestation, I'll second one of the motions made yesterday, look at it like it's a vote of confidence that you and CR are doing a damn good job and this is hitting a few nerves. Thanks for the great job.
I'd predict that at some point, either the GSEs or some other government catspaw will buy alot of these bonds at pennies on the dollar to do workouts and to "save the market". I'd hope that there's some way to get past the "class warfare" aspects that you have talked about to get to a point where we can have efficient workouts of this poo. Short sales can be quicker and more efficient than foreclosures. But if the problem is the RE market as a whole, not just a FB's ability to pay, than it may be more efficient to simply allow the borrower to refi WITH THE SAME LOWER PRINCIPAL that a short sale would generate. Yes, those of us who haven't been probligate idiots would scream, but that's not the issue. The issue for lenders is minimum losses.
Many years ago I put a dumb Sicilian CEO in jail. He used Peat, Marwick and Mitchell as their public auditor. In five years, they never figured out his fraud. I found it in five days. Figured out what he did and traced the transaction all the way through the bank and back to the company. At discovery, he kept asking me, "Do you work-uh for Peat-uh, Marwick, and uh-Mitch?"
KPMG? I'm really impressed. Thirty-five years later. More of the same. Same culture. Same everything. The only thing that changes are the names.
I am not going to say that if you've ticked off KPMG, you've really been and gone and done it. That would be rude, for Peat's sake
Was I the only one who did a double take on reading that ? I started to say.. Jeez.. its PETE's for Pete's sake - then it clicked.. somebody still remembers what the P in KPMG stood for - how clever !
But as I see from the earlier post - with this eclectic readership most likely everybody BUT me got it first time round - no double take needed.
Still, very good Tanta.
K, I've been snarky about Peat Marwick since back in the thrift days. Peat was a big thrift auditor. That worked out so well.
I would ask, rhetorically, what a bunch of "forensic accountants" cost these days, but I'm afraid someone would take me literally and tell me and then I'd know. I already have a fair idea what NEW was paying KPMG.
What plausible justification is there for rewarding the top management in a massive screw-up? Certainly not because of increasing shareholder value in the last year. Kind of like the medal they gave Tenet. Perhaps it's more to buy their silence for a few years.
Or maybe it's to buy a stock of silk for the future lonely farts.
In one simple form of a swap, a derivatives dealer, often an investment bank, agrees to pay a counterparty, say a hedge fund, the change in the market price of a stipulated security. In return, the dealer receives payments tied to something else, often a benchmark interest rate.
Suppose a hedge fund wants to bet that IBM stock will rise. Under the SEC rule governing margin lending, the fund couldn't borrow more than $50 for every $100 of IBM stock it buys. A "total-return swap" on $100 of IBM shares would cost $5 or less for many hedge funds, at least initially. If IBM shares were to rise, the return per invested dollar would be better than if the hedge fund bought the IBM shares outright using a margin loan. If IBM shares were to fall, however, the derivative leverage would work in reverse: The hedge fund would have to pay the counterparty an amount equal to the decline in share value -- plus the agreed-upon fee.
Mr. Buffett contends that the proliferation of such swaps is dangerous. "Total-return swaps make a mockery of margin requirements," he says. The widespread use of swaps, he maintains, makes the leverage that preceded the 1929 crash "look like a Sunday-school picnic."
Hedge funds are under no obligation to publicly disclose derivatives transactions or borrowing levels. But Citadel Investment Group, a $13.5 billion Chicago hedge fund run by Kenneth Griffin, had to do so when it sold bonds last year. A bond offering document said the fund's leverage ratio -- the value of its assets compared to its capital from investors -- stood at 13.5 to 1, due in part to its use of derivatives. That raised eyebrows in an industry where 5-to-1 leverage is considered aggressive. Citadel's filing noted that once certain other financial agreements were taken into account, the leverage ratio was about 7.8 to 1.
What kind of leverage maneuvers was Citadel using? Its filing provided one example: It used a total-return swap on a $400 million basket of securities "to provide leverage" to the fund. That swap, negotiated last October, entitled the fund to collect payments equal to what it would have gained if it actually owned all those securities. Citadel paid a negotiated fee to the swap's counterparty, HSBC Corp.
Mr. Paulson, who runs New York's Paulson & Co., used a different form of swap to play his hunch that trouble was coming for companies that lend aggressively to home buyers with sketchy credit. Figuring that bonds backed by subprime mortgages would fall in value, he invested $1 billion in credit-default swaps. In essence, he bought insurance against losses on about $10 billion worth of bonds held by other investors. When those bonds decline in value, Mr. Paulson collects from his counterparties an amount equal to those declines. The subprime market unraveled earlier this year, and Mr. Paulson's fund notched about $1 billion in paper profits, as of early March.
When swap wagers go bad, however, investors sometimes have to
But some regulators worry that competition between derivatives dealers could lead dealers to loosen collateral requirements too much. Hedge funds routinely shop around Wall Street to find the derivatives deals that require them to post the smallest amount of collateral. In a speech to bankers last year, Annette Nazareth, an SEC commissioner, said that regulators want to stave off "an environment that encourages a competitive 'race to the bottom' concerning margin."
Dealers such as Credit Suisse and J.P. Morgan don't disclose the amount of total-return swaps on their books. That's "trouble in the making," argues Janet Tavakoli, a Chicago consultant specializing in derivatives. The collateral provided by hedge funds to secure swaps could be difficult to trade, she says. In a market downturn, attempts to unwind such positions could lead to a vicious cycle of selling that would feed on itself, she says. Representatives of Credit Suisse and J.P. Morgan declined to comment.
Wall Street itself is one of the biggest users of leverage. Last year, the nation's four largest securities firms financed $3.3 trillion of assets with $129.4 billion of shareholders' equity, a leverage ratio of 25.5 to 1, according to research firm Sanford C. Bernstein & Co. In 2002, those same firms financed $1.59 trillion of assets with $72.7 billion of equity, a ratio of 21.9 to 1, it said.
Among the big firms, Goldman Sachs Group Inc. pumped up leverage by the largest degree in recent years. Goldman says it was just trying to catch up to the levels of its competitors after it shifted from a partnership to a public corporation. Its ratio of assets to shareholders' equity, one common measure of borrowing, climbed to 25.2 to 1 in 2006, from 17.7 to 1 in 2002, according to analyst Brad Hintz of Sanford C. Bernstein. (Goldman says it has a pool of easy-to-sell securities valued at more than $50 billion that it could tap if market conditions require it to raise cash.) Goldman's 2006 profit of $9.54 billion was tops on the Street. Mr. Hintz estimates the increased leverage accounted for 20% of the additional pretax profits.
[David Viniar]
One way Goldman ratcheted it up is through a joint venture with Bank of New York Co. involving repurchase, or "repo," agreements. Goldman uses stock from the accounts of its own traders and its hedge-fund clients, selling the stock temporarily and agreeing to buy it back later. In effect, the cash it receives is a temporary loan. Under the program, Goldman has effectively jacked up debt secured by stocks held for customers and its traders from 90% of the value of those shares to as high as 95% to 98%, people familiar with the program say. More than $50 billion of stocks is involved.
Rating agencies keep an eye on debt levels on Wall Street, and the credit ratings they assign can affect investment banks' cost of borrowing. Several years ago, Goldman said it planned to lend more money to hedge funds, a move that would inc
Geez, get your own blog if youve got so much to say, Mr. Risk Capital
Neal,
He's copying that from some finance page.
I think I'll copy Don Quixote (unabridged) into Haloscan in case anyone missed it in high school.
lama an neal, my apologies for the long copy, it was from the wsj.
Although, I might add that the amount of leverage in the system effects everyone and should be an area of interest.
So, it all ends with squabbling. From the Wall Street Journal this morning, As Market Cools, Home Buyers Seek a Way Out
Said Richard Schlesinger, managing director of Ceebraid-Signal: "I don't think there is anything that we are doing that is inappropriate."
"These are not situations where a woman bought a unit and she's now a widow and can't pay," he said. "These are people who don't want to close because they can't flip and make $100,000."
on a related, "debt bubble" note..
Money Lending Standards Have Created Debt Bubble
That was a highly leveraged post! The URL would suffice...interesting read though.
"lama an neal, my apologies for the long copy, it was from the wsj.
Although, I might add that the amount of leverage in the system effects everyone and should be an area of interest."
Risk Capital
WSJ material is presumably copyright I wonder what risks a blogger has by posting copyrighted material or what risks a blog owner might have?
Besides do we not all understand here already the danger of leverage and contagion?
And double besides your post has nothing to do with the thread topic and just creates distractio
Hovanian preannounces April results:
Net contracts down 21% y/y
Cancellation rate 32%
Here's the money quote from the release:
"These contract results reflect a continued challenging operating environment in most of the Company's markets, which were exacerbated by recent problems in the sub-prime mortgage market. The adverse publicity surrounding the sub-prime market has further damaged home buyers' psychology, resulting in decreased demand and leading to continued use of sales incentives. As a result of this challenging operating environment, consolidated net contracts in March and April declined approximately 30% from the prior year, as compared to a 3% year-over-year increase in February, which was previously reported."
Risk Capital, we do want to avoid reposting copyrighted material that is behind a paywall. Excerpting slightly with a link (for subscribers to use) is fine. But Worried is right that we don't want to get into it with those who control public access to their information.
I hope you won't be offended, but I think I'll shorten your posts to a quick exerpt, OK?
Cherry picking. Obscene cherry picking.
Show me a usurer who has profited excessively from the woes brought down on an entire industry by mendacious borrowers!
Bailouts are needed, and I believe I know who needs them. And it isn't a bunch of sweaty "Americans" speaking in broken "English".
Morrice is trying as hard as he can to keep his end up as an American consumer: the bedrock of American success. And he gets criticized!
Who is going to buy those BMW's? Who? Do you have an answer? I thought not.
Brief musing on bloomberg that jobs report not hindering futures.
Perhaps all market analysis at this point is moot unless it factors in the debt-addiction part of the equation -- i.e. -- that those who profit from the debt bubble can and will pile on as much debt as they can to keep the party going, until it all falls down.
I feel more scared than frustrated at this point.
Risk: I think a link here would have been enough.
Financial Armageddon
Is anyone else here very put off by the term "bankruptcy bonus?"
It reminds me of the spoiled kids in school who demanded the new car from their parents even though they brought home straight FAILs on their report cards.
giacutter, I was once paid a fairly handsome "stay bonus" by a company which had decided to liquidate itself (not BK). I demanded it, or else I was going to walk off and take a job with a company with a future. The company needed people like me to stick around and oversee the horrors of trying to wind-down a mortgage operation. I hardly thought it was greedy on my part to want that bonus (and I demanded, by the way, that it be paid up front, and that the check clear, before further heroic efforts on my part were going to take place). It helped, of course, that I knew that company was in trouble before I took the job in the first place, having been recruited as part of a "turnaround team," and having gotten a contractual guarantee of 18 months of employment that the company violated by deciding to shut down 8 months after hiring the turnaround team.
I can see the wisdom of handing out BK bonuses to key operational people. You have to keep someone around to preserve whatever assets are there to be preserved.
Handing out big bucks to the same bozos who created the mess in the first place, of course, is a different story.
Tanta,
"......Handing out big bucks to the same bozos who created the mess in the first place, of course, is a different story."
This is the group I had in mind with my post.
Good riddance to NEW Century and their den of thieves and dimwitted minions. They had a hand in this travesty.
Impossible loan turns dream home into nightmare
Risk Capital,
I was very interested to read your post. One of the reasons that I read the posted comments is to learn new information.
Thanks
They could have called it a retention bonus or better, retention pay. Or liquidation pay. But they called it a bankruptcy bonus, and that gives us a window into the soul of the New Century executive: Someone without an ounce of concern over how things look to outsiders; someone who cares only about personal income and not about borrowers, investors, builders or taxpayers.
For the New Century executive, it's all about me me me.
Morrice's voice was quivering because he was stifling a laugh. The deep kind that sounds like, "Bwooo ha ha ha!"
Oh, Tanta.
If only we could roll back the clock to the last century, yet remember what we have to our sorrow learned!
Interesting quibble about proprietary information and what can and cannot be copied in whole or in part...I'm sorta with Ella, but in this case not sure if the sample is good enough to entice me to subscribe to WSJ (ie 'risk capital' is working prolly without pay for WSJ) or bad enough to keep me thinking that overall, it's still not worth it.
Now this blog OTOH is definitely worth that WSJ subscription rate...and yet there is no fuss about "proprietary information" here. No, we are priceless and shall reject any and all offers by sleazebag Rupert Murdoch and his ilk.
The boomers and yuppies version of, "Let them eat cake".
Prince and princesses who never wanted to do genuine work like their grand parents.
Unregulated capitalism (which is the wrong form for a modern economy by the way) and its wake of devastation once again.
Long past the Great Depression, 70s Oil & war costs,S&L thieves, dot com liars bubble bust, Junk Bonds debacle, LTCM red flag re Derivatives & Hedge Funds, Amarenth, and now...
Hey, a boiler room full of salesmen with an unknown degree of liability to buy back loans, in a business with few barriers to entry and a market that is cratering. I'm SHOCKED that they couldn't find a buyer. I suspect that the greater fools with easy money who want to M&A their way to market share are an endangered species. Back in Feb, they probably could have found a buyer, but it's probably too lante now.
Calmo, I admire anyone who liberates content from the WSJ, and that includes Risk Capital.
But one, I don't want to get caught up in fair use vs. republishing issues.
And two, I don't want to encourage anyone to start posting the freakin' WSJ editorial page. The news department is one thing, but I get enough mouth-breathing from other sources.
Tanta, the following is an attempt to rehabilitate myself from yesterday and ask a relevant question (I went back into the previous comment threads of yesterday, all I can say is wowza, thanks for not going postal on us).
Going off your one of your previous comments on the difficulty of adjusting or getting workout agreements for loans bundled into MBS bonds (due to the multiple bondholders and the securitization instrument) and off Jim a's comment about the undesirability of buying up New Century's origination business --
1) How long can this go on before we reach a crisis point where things finally get started being done. In other words, how many of those borrowers you were talking about yesterday that could be salvaged and swing the loans if they had an adjustment go under, and how many origination and/or servicing firms need to crash and burn before Wall Street gets the idea they need to deal with this as a traditional lender/bank would.
2) Do you see any apparent mechanism for the necessary loan workouts and adjustments happening? Short of an RTC-like agency.
Andrew, I thought you were making perfect sense yesterday. I also will not go anywhere near that thread again; I looked at it first thing this morning and that's really all the exposure I need to the Sock Jock infestation.
One of the troubles I think lies ahead is that this idea of making regulatory changes so that REMICs can modify loans without screwing up the Q election is getting into uncharted tax law territory. I'm not an expert on that issue, but I think there may be parties who would incline toward relief for homeowners who are nonethess frightened of re-writing REMIC law on the fly. (And by and large, of course, we all hate laws written on the fly. But there it is.) I suspect that what will happen is mostly arm-twisting with the depositories and GSEs to offer to refi those loans, rather than deal with the whole modification mess.
I can't believe we'll be getting to an RTC-like entity any time soon; that's a great deal more of a MAYDAY MAYDAY! scenario than I'm thinking right now. The RTC wasn't in the business of modifying loans; it was in the business of liquidating the assets of failed institutions. Certainly there could be formed a governmental or quasi-governmental agency to buy out those REMICs and cope with the loans, but I don't think that's very likely. We are dealing with a government who couldn't respond to the loss of an entire American city in a hurricane, and too many people spent too much time blaming New Orleanians for having been in a disaster. So I can't quite think they'll take the high road on this.
I do, though, think that certain persons who happen to be Federal Reserve Governors and Chairs will be having some side conversations with some banks in which certain carrots will be offered on that refi thing. We have to hope they don't give away the farm on this. I think we can pretty much guarantee that the banks will get a Papal Indulgence offering Remission of CRA Obligations for the next ten years out of it. That's how this kind of thing usually works.
Thanks Tanta, that confirmed a few of my uneducated guesses. The organizational dynamics of this all seemed to be leaning towards a muddle through approach of general avoidance and band-aids. I've always been a big believer in "watch what they do, not what they say" in helping determine motivations and likely future actions.
You also make a very good point on the raison-d'etre of the RTC, it was not there to do work outs and we are probably not near that situation yet. Creating an agency like that in the first place is tantamount to admitting that things are extreme and dire, it is human nature to ignore an issue until you can no longer do so and then scramble to fix it amid the cries of "why wasn't something done sooner?"
On the Sock Jock infestation, I'll second one of the motions made yesterday, look at it like it's a vote of confidence that you and CR are doing a damn good job and this is hitting a few nerves. Thanks for the great job.
I'd predict that at some point, either the GSEs or some other government catspaw will buy alot of these bonds at pennies on the dollar to do workouts and to "save the market". I'd hope that there's some way to get past the "class warfare" aspects that you have talked about to get to a point where we can have efficient workouts of this poo. Short sales can be quicker and more efficient than foreclosures. But if the problem is the RE market as a whole, not just a FB's ability to pay, than it may be more efficient to simply allow the borrower to refi WITH THE SAME LOWER PRINCIPAL that a short sale would generate. Yes, those of us who haven't been probligate idiots would scream, but that's not the issue. The issue for lenders is minimum losses.
Many years ago I put a dumb Sicilian CEO in jail. He used Peat, Marwick and Mitchell as their public auditor. In five years, they never figured out his fraud. I found it in five days. Figured out what he did and traced the transaction all the way through the bank and back to the company. At discovery, he kept asking me, "Do you work-uh for Peat-uh, Marwick, and uh-Mitch?"
KPMG? I'm really impressed. Thirty-five years later. More of the same. Same culture. Same everything. The only thing that changes are the names.
RE:
I am not going to say that if you've ticked off KPMG, you've really been and gone and done it. That would be rude, for Peat's sake
Was I the only one who did a double take on reading that ? I started to say.. Jeez.. its PETE's for Pete's sake - then it clicked.. somebody still remembers what the P in KPMG stood for - how clever !
But as I see from the earlier post - with this eclectic readership most likely everybody BUT me got it first time round - no double take needed.
Still, very good Tanta.
-K
K, I've been snarky about Peat Marwick since back in the thrift days. Peat was a big thrift auditor. That worked out so well.
I would ask, rhetorically, what a bunch of "forensic accountants" cost these days, but I'm afraid someone would take me literally and tell me and then I'd know. I already have a fair idea what NEW was paying KPMG.