"We're looking at somewhat immature markets that are going through a growth phase," Ralph Cioffi, senior managing director of Bear Stearns Asset Management, said at a bond conference in New York in February, Reuters reports. "There is a catharsis and a cleaning-out process."
We're looking at somewhat immature markets that are going through a growth phase," Ralph Cioffi, senior managing director of Bear Stearns Asset Management, said at a bond conference in New York in February, Reuters reports. "There is a catharsis and a cleaning-out process."
Something for Banker and Sebastian and others in the "nothing to see here, just keep moving right along" crowd:
Think about all the "AAA" MBS, CLO and CMBS paper out there. "They" say it would take a repeat of the Great Depression (literally) for losses to affect this paper. So its safe, right?
Okay, assume the "Great Depression" hypothesis is true. How much leverage would you use if you held the paper? 2:1? Come on! We're talking NEXT TO IMPOSSIBLE here. Asteroid-hit odds! 10:1? Now you're talking. How about 50:1? A little risky. Gutsy, in fact. I like it.
Welcome to the way hedge fund America thinks. You guys have to understand that all "safe" assets have been levered to the hilt, rendering them now "unsafe". That includes even MBS backed by POP (Plain old Prime) mortgages.
So what leverage would you use on AAA CDO's? Let us know, so we can see if you are as bullish as the crowd that holds this paper. If you're not, I'd be worried if I were you.
WASHINGTON (AP) - Treasury Secretary Henry Paulson said Wednesday he personally initiated his department's role in a Supreme Court case that could hurt shareholders' efforts to recover losses in securities fraud lawsuits.
Paulson's acknowledgment came at a House Financial Services Committee hearing where Rep. Maxine Waters, D-Calif., focused on the plight of investors who lost billions in the collapse of Enron, a Texas energy firm whose executives were convicted of fraud.
At Paulson's request, Treasury this month cautioned the Justice Department's solicitor general about enabling investors to sue firms that do business with scandal-ridden companies.
The issue arose because of a shareholder suit before the Supreme Court that seeks to recover money in a securities fraud case against two suppliers to a cable TV company. The outcome likely will determine whether a similar lawsuit by Enron investors against Wall Street investment banks is allowed to proceed.
The Securities and Exchange Commission urged the solicitor general to file a brief in support of investors.
But President Bush, Treasury, the Federal Reserve and the Office of the Comptroller of the Currency weighed in on the opposite side of the issue, which is referred to as third-party liability.
The solicitor general, who represents the Bush administration's views in the Supreme Court, decided not to side with investors. In several weeks, the solicitor general's office will decide whether to file a brief in support of defendants in the case.
``I am very surprised to find out that our government, this administration and you have decided that you are more interested in protecting those with third-party liability as it relates to Enron than you are in protecting the citizens who got ripped off,'' Waters told Paulson.
I am a very strong advocate of protections against security fraud,'' Paulson replied.I asked the Treasury Department to send a letter to the solicitor general'' on the separate case before the Supreme Court because ``I thought it had enormous implications for the U.S. economy.''
Paulson said supporting such lawsuits ``could create a very uncertain legal environment that is ultimately harmful to our economy and to the workers.''
Well, most of subprime borrowers, instead of living in crappy apartments had spent two years in good houses, without investing a dime of money. Now they will just return back to crappy apartments.
I don't think they really lost anything at all, just opposite - they had some good times.
"Well, most of subprime borrowers, instead of living in crappy apartments had spent two years in good houses, without investing a dime of money. Now they will just return back to crappy apartments."
Depends. If they screwed up their credit rating on the way down, most landlords in my neck of the woods wouldn't rent to them. Even in "crappy" apartments. Illegal garage conversions with dangerous heating and wiring? Maybe.
Aside from that, there's the issue of scraping up first, last and deposit, which is the buy in for most Calif. metro areas. Will they have it? Or will they live in an RV in Mom's driveway?
If they screwed up their credit rating on the way down, most landlords in my neck of the woods wouldn't rent to them.
I certainly wish that this doesn't happen. I hope that the time of picky landlords will be gone soon with all that overbuilding and everybody will get a good cheap rental.
I have all the reason to believe that my hopes will fulfill.
"Well, most of subprime borrowers, instead of living in crappy apartments had spent two years in good houses, without investing a dime of money. Now they will just return back to crappy apartments."
I predict a race out of the gate for those apartments. Assuming parents of 35 yr. olds and their families really aren't going to be able to stand all the company for long, I predict apt. rents going up.
Well, most of subprime borrowers, instead of living in crappy apartments had spent two years in good houses, without investing a dime of money. Now they will just return back to crappy apartments.
Well, now, there's my idea of a productive economy. Take some people who merely live in "crappy" apartments, extract thousands of dollars in transaction costs and interest from them, and then send them back to the "crappy" apartments after they've been allowed to have such a good time playing Homeonwer for Two Years.
Sweetheart, we are no longer worried about the zero-down never-made-a-payment crowd. They are in foreclosure and will be returned to the crappy apartment market eventually. When we discuss forthcoming rate resets on a 2/28 vintage, we are by definition talking about loans that are still on the books on which payments have heretofore been made. Yes, there was probably very little if anything in the way of an "invested" downpayment. But if you think all subprime borrowers have never made a payment, you are suggesting that these bonds we're talking about have never had cashflow.
In reference to the securities lending article above from businessweek, check with your favorite pension and ask if they are "in the business of securities lending" and then, ask specifically what they hold as collateral.
Do not underestimate the harm to individuals.I spoke to a 60 year old woman this week who went to a Trump seminar,believed what she was told,and will be losing the home she once had paid off.There will be many personal tragedies resulting from this massive bubble,including suicides,and people who thought their retirements were secure who will be living under bridges eating catfood.
"Investors: If you can't tell who is having the catharsis, you're the catharsis."
HA! Tanta, you are more than eloquent.
On the less humorous side, it annoys me terribly that the fund managers have made a mint off of nothing more than gambling and losing with OPM. If that affected them and only them, I'd be okay with that. But unfortuately, it affects every conservative and rational investor and homeowner out there, who wouldn't have dreamed of taking such ludicrous risk.
On the question of crappy apartments vs new houses, remember that the number of buildings is relatively constant and the number of people who want to live in them is also relatively constant. To move from a house to a crappy apartment leaves a house vacant, which then either distorts the house market or turns into a rental, distorting that market.
It is a fluid situation.
Tanta, yesterday on one of the links you posted some information about a securitization that is on the block.
You mentioned that it is a "rescuritization" (I think, although I can't find the comment now). If that is correct, what does that mean? Thanks for this and all comments.
First, when guys like Paulson start talking about "the workers" as anything other than a commodity, the workers need to try and get their back against a wall, because helping workers is not on the Treasury Secretary's agenda.
Second, the question of who exactly will be enjoying this catharsis is a great one. Since hedgies cater to the high end "sophisticated" investor, we're talking about people who don't expect losses, despite all the official warnings, and I've got a feeling they are not going to react well.
Muffy's got a problem, and she's not good with problems.
RC said. "In reference to the securities lending article above from businessweek, check with your favorite pension and ask if they are "in the business of securities lending" and then, ask specifically what they hold as collateral."
I submit that 99% of pension funds are involved in securities lending. They repo out their collateral and reinvest the proceeds into higher yielding instruments.
They're usually very cautious about the credit quality of the stuff they buy. On occasion, however, they do get caught. The recent LBO of Sallie Mae being an excellent example of "getting caught."
And, with credit spreads as tight as they have been, it's almost a case of nickels in front of steamrollers.
Depends. If they screwed up their credit rating on the way down, most landlords in my neck of the woods wouldn't rent to them. Even in "crappy" apartments. Illegal garage conversions with dangerous heating and wiring?
I highly doubt at this stage of the game Landlords care less about credit and more about the monthly nut to cover their own mortgage liability so renting should not be a problem as long as you can cover first and last months..plus security deposit if applicable.
And the FB I am sure has that covered as well..if you don't pay your mortgage for a few months before the inevitable happens you can accumulate a good down payment for an apartment. A foreclosure does not just happen over night...one can see the writing on the wall months prior.
calvert, it's impossible to say without more information that I don't have about the CDO in question. It's either a "CDO squared"--a derivative of tranches of a CDO, which is itself a derivative of tranches of an asset-backed security--or it's a CDO backed by paper that was previously sold out of a prior CDO issue either voluntarily on the portfolio manager's part or "involuntarily" through a clean-up call on the original underlying ABS. I couldn't tell you. I have asked, idly, what happens to a CDO if the underlying junk is subject to a clean-up, but I've never gotten an answer to that. It's possible that the entire CDO market is sufficiently, um, "immature" that it has never been subject to a clean-up call.
FYI, a "clean up call" is a provision in an MBS that the issuer can call or buy out the security when it is down to some very low balance, usually 10% or less of original balance. That keeps servicers and trustees and bondholders and everyone from having to deal with three remaining loans for 26 years after everything else paid off or liquidated. The loans that are taken back by the issuer in a clean-up are generally "resecuritized" in a "seasoned loan" deal.
Who knows what this will trigger in another hedge fund,'' said Barry James, who manages $2 billion at James Investment Research in Xenia, Ohio.There's a lot of this kind of stuff going on today, I don't think any of us know how much of an impact that will have when it unwinds.''
I don't know what scares me more: The amount of leverage some of the hedgies are playing with, or that someone from Xenia, Ohio can run $2billion of OPM.
Have the bright-eyed, bushy-tailed CR groupies noticed this? On June 18, 2007, the Federal Reserve Board stopped using Fitch Investors Service as a credit rating source. Classification as AA or A2/P2 for rate calculations and classification as Tier-1 or Tier-2 for outstanding calculations are done using Moody's Investors Service and Standard & Poor's.
Easy appraisal review process (ordered on fewer than 50% of the loans)
Loan amounts up to $1,350,000 with $500,000 cash out.
Fast, reliable Pre-approvals."
We received this add via e-mail today from First Franklin. Merrill Lynch's Sub-Prime Company.
This may explain some of ML's motivation in pushing Bear Stearn on the Hedge Fund issue. They may view this as a way to increase sub-prime market share going forward.
Or maybe borrowers aren't being strategic after all. They're simply overcome by the debts they face, in particular rising payments on adjustable-rate mortgages whose teaser rates are expiring and whose underlying index is going up. "I don't know about this notion that consumers are being so calculating about this," says Allen Fishbein of the Consumer Federation of America. "This explosion of subprime loans has just overwhelmed them."
Again, i refer everyone back to the excellent Bloomberg piece on just how little anyone knows about the value of the residuals---the Bear Stearns auction/non-auction shows that to be absolutely true. The ratings agencies are tremendously culpable in this nonsense--- the lawsuits are just a matter of time.
On the topic of those who borrowed who maybe shouldnt have we have the issue of all those homes. There already is a huge over supply of homes in some areas where an artificial demand driven by loaning money to anyone who could walk and chew gum at the same time gave home builders a false sense of high demand. They are still building on the lots they bought to fulfill that false demand. We already have to many dwelling units for the number of households.
This country went from a long historical average of around 64% household homeownership to around 70%. Most of this addition IMHO was done with easy access to money to unsophisticated, undereducated households who were offered something they could little understand and less afford. How in the world can a family pay 50% or more of its income for housing and have money left over for maintenance, repair or emergencies. If they could never save a down before, why would anyone think they could save for repairs or emergencies? Then add in higher fuel and food costs and medical and education.
So now we will have millions of homes back on the market, or to come back on the market when we already have a very large inventory of unsold home? Who is it that will be stepping up to buy all these homes? What happens when inventories rise and are unsold? From what I have read we already have a couple million vacant homes and a high rental vacancy rate. This means we have more inventory than households. Add in stricter qualifications for getting a loan and some higher interest rates to reflect the real risk. My economics education suggests that prices will fall and fall a lot. How many second homes do you need? Remember you have to maintain them and pay taxes on them even when you arent using them. I personally dont want any as I would rather go different places and see different things and it is cheaper to do this than own a vacation home.
Who is it that will be stepping up to buy all these homes? What happens when inventories rise and are unsold
Doug S
The cynic would suggest that in some markets that they would become secton 8 housing so housing stock closer to city cores could be bought on the cheap and redeveloped.
Because there is little trading in the securities, prices may not reflect the highest rate of mortgage delinquencies in 13 years. An auction that confirms concerns that CDOs are overvalued may spark a chain reaction of writedowns that causes billions of dollars in losses for everyone from hedge funds to pension funds to foreign banks. Bear Stearns, the second-biggest mortgage bond underwriter, also is the biggest broker to hedge funds.
Meanwhile over at Doom, jmf dropped us the following link that on the surface doesn't look that relevant. However, this Irish furball is another SPV getting unwound. Perhaps it wouldn't take too many more like this to start an irreversible chain reaction in Fin 140 counter-party space.
``The debtors were formed as special purpose vehicles to invest in life insurance policies in the life settlement market,'' said Ritchie's Chief Restructuring Officer Fred Caruso in a statement filed yesterday in U.S. Bankruptcy Court in Manhattan.
DJ is reporting that MER sold only $100MM of the assets taken from the Bear funds because that was enough to pay off their loans. The credulity of reporters apparently knows no bounds. There is no way MER walked off with $850MM in collateral to cover a $100MM loan. More likely the bids they got last night were horrific and they've decided not to cut their own throats. Apparently they are contemplating a securitization of the remaining collateral. Stay tuned.
Most of this addition IMHO was done with easy access to money to unsophisticated, undereducated households who were offered something they could little understand and less afford:
Sure not that they were duped or that Doc's were changed without their notification, or incomes were overstated without their knowledge or older folks were prayed upon ....Take your sophisticated, educated, opinion and shove it up your ass...
strictly form a very educated, and sophisticated person.
Thank you Kevin and Lindsey for being on the right page with the Office that Hank holds and basically the conflict of interest that qualifies him so much better than his predecessor to fulfill those obligations.
The bifurcation of rich and poor is a crude sketch of the real stratification, but highlighting Hank here helps us see that not only is that Office paying lip service to workers but the SEC, the Supremes, those elected representatives, those Presidential candidates that can only qualify with $100 M campaigns...
One of the things that the bears seem unaware of is that holding "illiquid, esoteric" securities is not only not a new phenomenon, but stock mutual funds do it, too, and it's been going on for years.
A fund might hold a large position in a thinly-traded stock with no idea what the "mark-to-market" price might be if it suddenly had to unload a big piece of it.
However, these things don't come home to roost until times of significant economic or financial stress...which we don't have, however often the MSM screams that we do.
"So what's it going to be for those subprime borrowers? Just another day at the circus?"
I'd say they got a free call option on their home's value, combined with the pleasure of living for several years in a more expensive residence than they could actually afford. Ultimately, the bondholders who provide the capital lose the money, and the borrowers move back to their crappy subprime apartments, where they probably should have been all along (unless, like most Americans, you feel that every citizen is automatically entitled to a spacious suburban home).
If things are so good, why are foreclosures doubling at Countrywide, and others? I need to really understand this. Is it just related to the product type (2/28 Option ARMs), for example. Or is it just flat out fraud on the part of mini-Trumps buying and destroying entire neighborhoods? Or is lack of jobs? A combination?
A fund might hold a large position in a thinly-traded stock with no idea what the "mark-to-market" price might be if it suddenly had to unload a big piece of it.
Ah, now we know where all Sebastian's delisted shares of NEW went.
Caprice and Rondo is the title of a novel by Dorothy Dunnett. Today is "literary allusion day" here at Calculated Risk.
I know I shouldn't turn this into a literature blog, but since Dorothy Dunnett has been mentioned more than once on CR, please recommend a specific title. I am looking forward to it.
An REO creative re-use idea from the 2006 Bulwer-Lytton contest:
"There was an old woman who lived in a shoe who had so much equity (because our story, dear children, is set in Miami's hot real estate market) that she upgraded the exterior to blue suede siding as a tribute to her idol, Elvis, moved her kids to a bootee out back, and then reopened the place as the "Are You Lonesome Tonight?" motel (but you'll have to wait until you're 18 to read any further)."
Joe Mortgage asked: "If things are so good, why are foreclosures doubling at Countrywide, and others? I need to really understand this..."
The reason why foreclosures are high is a critical factor. Some reasons are less important and transitory, but some are significant and long-lasting.
Here's the difference. In an expanding economy, if foreclosures are rising because of ARMs resets that run mortgage payments up higher than the current homeowners can afford, there's still a good pool of better-qualified people who could buy the homes.
In a recession, that pool of better-qualified potential home-buyers is much smaller, because so many of them have lost their jobs and no longer have that good income.
Some of the bears here don't think there's a difference, and they're partially right. It doesn't make any difference to the person who's losing their house, but it makes a big difference in whether the overall housing market is going to recover quickly or slowly.
calvert, Dunnett did two lengthy series of historical novels: the Lymond Chronicles (early-mid 16th century Scots patriot with a witty tongue and Very Bad Attitude) and the House of Niccolo series (mid-late 15th century Flemish anti-patriot with a witty tongue and Very Very Bad Attitude, fictional ancestor of Lymond). The Lymond Chronicles were published first, so most people read them first (first novel is The Game of Kings). But there's no reason you couldn't read the Niccolo series first (first novel is Niccolo Rising).
Dunnett has a tendency to leave untranslated snippets of medieval French and stray illusions to Rennaisance papal politics in the text. So if it's been a while since European Culture 102 for you, you might consider one of the Dorothy Dunnett Companion books by Elspeth Morrison. They're a treasure trove of historical, literary and political miscellany and helpful for looking up the allusions.
I love the books, but I will concede that most people I know would not consider them leisurely summertime reading.
For leisurely summertime reading, I recommend anything by Edward George Bulwer-Lytton.
I said: "A fund might hold a large position in a thinly-traded stock with no idea what the "mark-to-market" price might be if it suddenly had to unload a big piece of it."
To which Tanta replied: "Ah, now we know where all Sebastian's delisted shares of NEW went."
BINGO!
"...What has been is what will be,
and what has been done is what will be done;
there is nothing NEW under the sun..."
Here's the difference. In an expanding economy, if foreclosures are rising because of ARMs resets that run mortgage payments up higher than the current homeowners can afford, there's still a good pool of better-qualified people who could buy the homes.
If the home ownership rate was anywhere near the historical averages you'd be right, but it's not: The pool of "better qualified" people are already in homes unless they decided to skip the run up completely and decide to buy just off the top.
Huh? Are you kidding? The MSM is hailing the latest number as heralding the better times ahead. April was revised up and May advanced and came in better than expected.
Never mind that 1/2 of the indicators don't really lead at all.
Most hybrid ARMs - nicknamed "explosive ARMs" - are subprime products, but, according to Doug Duncan, MBA's chief economist, they can be useful tools for borrowers hoping to repair bad credit histories.
This is above all the most bullshit statement i have herd in the lending field to get you to sign on the dotted line....what the hell does a lender care about my credit history or my credit repair?? utter bullshit...please sign here.
How long before BS runs out of cash to buy back seized assets from the lending banks? I'd guess sometime between the end of the June and the end of the summer. Even as these IBanks stop seizing assets, they're not likely to continue lending the money that the lifeblood secruitizers like BS.
Alec said: "...If the home ownership rate was anywhere near the historical averages you'd be right, but it's not: The pool of "better qualified" people are already in homes unless they decided to skip the run up completely and decide to buy just off the top."
That would also have been true when the homeownership rate hit historical highs of 59%, 63%, 67%, etc., yet here we are in the area of 69%-70%.
I just heard on Bloomberb radio that Merrill Lynch has backed away from its plans to sell.
Now they have an update on it:
Merrill Sells Portion of $850 Million Bear Funds, Person Says
By Jody Shenn
June 21 (Bloomberg) -- Merrill Lynch & Co. backed away from its threat to dump about $850 million of securities it seized from Bear Stearns Cos. hedge funds, according to a person with knowledge of the firm's plans.
Merrill Lynch sold a small portion of the collateralized debt obligations through an auction, said the person, who declined to be identified because the decision hasn't been announced. The firm plans to hold onto the remaining securities for now, the person said.
The threat by Merrill Lynch to sell all the securities had sent shudders across Wall Street because it would have forced banks, brokerages and owners of similar securities to revalue their assets.
Collateralized debt obligations, or CDOs exceed $1 trillion and comprise the fastest-growing part of the bond market.
Merrill Lynch spokeswoman Jessica Oppenheim declined to comment.
"That would also have been true when the homeownership rate hit historical highs of 59%, 63%, 67%, etc., yet here we are in the area of 69%-70%."
Say what? Is not 70% not just an historical high, but an all-time high? What point am I missing? Are you saying that an historical high was once 59%, but now is 70%, proving that home ownership rates can go up, implying that something higher than 70% lies ahead?
Tanta, Thanks, I will try Niccolo Rising. If nothing else it will distract me from the fate of Bear Stearns' Highly Leveraged Fund Invested in Assets of Dubious Quality.
Just throwing in an ancedote ... it seems like I'm hearing more radio ads now, from merchants claiming to be "overstocked" and offering discounts. Especially luxury car dealers, RVs, furnitire, and home siding companies.
Summer is usually a good point in most business cycles. But I'm starting to think CR's "coin flip" is more like a bread slice, that will be landing butter side down by the end of the year.
One trader we spoke to described the outcome as a cartoon moment.
As long as Wiley Coyote doesnt realize hes run off the cliff, he wont fall, he said. These guys dont want to look down because they are afraid there may be no there there.
I guess Sebastien has never walked on a frozen lake in December-just because you an walk out 10 feet onto the ice doesn't mean that at 15 feet won't get you wet.
I guess what he is saying is that all of the people who got negative equity loans were just concealing their truly sound financial status, which they will reveal to us in the next few months by moving up to the next step in McMansions.
Shiny bubbles of pure horsehit blowing in the wind.
Say what? Is not 70% not just an historical high, but an all-time high? What point am I missing?
There's just a fundemental disconnect here for Sebastian: Lenders have been cooking up new and even more exotic ways to get people into homes, that's why home ownership rates are where they are.
The top is in, these new and exotic loans are no longer being issued, yet he thinks there's this mystery group of Nomads who're sick of traveling and have decided to settle down with their sacks of gold and buy all these homes that are now on the market.
And from the "slump stops here" comments
looking at the non adjusted current population numbers, from the peak to today we'd be down 317k in construction/extraction jobs. However, The denominator has shrunk(while flattening) while the numerator is not shrinking as much from its peak, suggesting that people are finding jobs in other sectors.
OK I'll bite at that one Sebastian: Where did you obtain the information that there are sufficient first-time buyers to counter the ARM foreclosures?
Nationwide, 15% of subprime ARMs are in arrears and very few (percentage wise) have reset.
Just for full disclosure, a family member just left one of the nationwide homebuilders and reported exactly the opposite to what you stated. SpecificallY, "We think we have a sale, then we do a credit check and, oh my God, all the recent bankruptcies, repo'd cars, no cash...then we start over again the next weekend."
winjr said: "Say what? Is not 70% not just an historical high, but an all-time high? What point am I missing? Are you saying that an historical high was once 59%, but now is 70%, proving that home ownership rates can go up, implying that something higher than 70% lies ahead?"
Homeownership rates have been steadily rising for decades. The 59% level was at one time an all-time high, and now we're up to 70%. Why should 70% be "the" limit?
Maybe it will be and maybe it won't, but there's nothing "magic" about the number.
bfatz: "This is above all the most bullshit statement ..."
Nope.
As HousingWire reported a week ago, after which I ranted here, Doug Duncan blithered on about how default experience isn't too bad if you would just exclude California, Florida, Nevada and Arizona, or a couple of other states depending on whether you wanted to falsify delinquency rates, or just the increases thereof. That load of codswallop echoed around the MSM for days.
Clearly that BS trumps the one you cite. The MBA's chief econ would seem to have been busy lately.
lama asked: "OK I'll bite at that one Sebastian: Where did you obtain the information that there are sufficient first-time buyers to counter the ARM foreclosures?"
I didn't, and you're misquoting me. I said that however many potential home-buyers there are, there are far fewer in a recession than during an expansion.
In short, by flinching from auctioning off the CDOs, JP Morgan and the other banks that reached deals with Bear Stearns may have prevented what some feared would become the much heralded systemic event in which the collapse of one hedge fund brings down all the others. But the cost of doing so appears to be keeping the actual market values of many of these assets more or less financially illegible. And keeping markets and regulators illiterate when it comes to reading the risks of these products.
Yeah, well the risk hasn't gone away has it? And did anyone relly think the losses had been exported to Mars? These confidence games don't work when the marks stop believing the shills.
How about that one, Tanta? There isn't anything a bear likes more than a poor little bull (Goldilocks, in this case) who can't find its way. Woof! Woof!
"I submit that 99% of pension funds are involved in securities lending. They repo out their collateral and reinvest the proceeds into higher yielding instruments.
They're usually very cautious about the credit quality of the stuff they buy. On occasion, however, they do get caught. The recent LBO of Sallie Mae being an excellent example of "getting caught."
And, with credit spreads as tight as they have been, it's almost a case of nickels in front of steamrollers."
I believe you need to spend more time researching the "quality" that you alledge they are buying and also the parties on the other side of the trade/loan.
on another note-
so, now we have merrill potentially holding onto the bulk of the seized collateral so as not to upset pricing...
when will everyone wake the hell up, so, this shit sticks around at grossly inflated valuations that everyone is aware of and overbills the holders of hedge assets....
what a freakin mess and where in the hell are the lap-dog fiduciaries?
That would also have been true when the homeownership rate hit historical highs of 59%, 63%, 67%, etc., yet here we are in the area of 69%-70%.
While I tend to agree with Sebastian 's "not yet" comments, I must take issue with this one. IMHO, the difference this time is the ownership spurt was accomplished not by raising incomes, but by risky lending practices. That is why I think that there will be a decline in home ownership rates when (if?) those practices are discontinued. As long as the rest of the world is throwing a $trillion/year at us - risky home loans are probably as decent a bet as risky commercial loans.
sebastian..have a look at the break out of the "ownership" rate, and also, think about what it really means. First, you can see a more rapid rise in racial groups that didnt rise so fast earlier...why do you think that is? And also, notice that for many groups it is already heading back down. Why do you think that is? And then, imagine we gave a 100% financing to all renters, and interest only terms at teaser rates, and then counted them as "owners" and sent the rate up to 100%. Would that make you happy. At least then you couldnt say it couldnt go any higher. But you still probably wouldnt understand why it would be heading lower after that.
Your literary prose is as outstandingly good as your poetry. I was going to suggest that "you've missed your calling", but you're also awfully good at your regular job too.
Sebastian writes, "Homeownership rates have been steadily rising for decades."
That simply isn't true. From the early '80s through to the early '90s they were falling from the peak reached at the end of the wild real estate boom of the late '70s. The stats are there on the Census Bureau web site for all to see.
Sebastian,
Sorry, my misquote was an attempt to give you more credit than was warranted.
If you didn't make an attempt to quantify the offset, you have made no point.
For example, there are more buyers of gold in an ecnomic expansion, but the price has had no relationship whatever to either economic conditions (nor population growth).
Sebastian writes, "Homeownership rates have been steadily rising for decades."
to which jm responded: "That simply isn't true. From the early '80s through to the early '90s they were falling from the peak reached at the end of the wild real estate boom of the late '70s. The stats are there on the Census Bureau web site for all to see.
Nice, call me a liar and don't provide a link to the data. Here it is:
Homeownership rates:
1965 - 1995 experienced a 2.7% rise (on base 1965 rate), or .09% per year rise.
1995 - 2005 experienced a 6.0% (on base 1995 rate), or .6% per year rise.
The last 10 years' increase in homeownership grew at an annual rate 6.7 times the prior 30 years' annual rate.
Sebastian, I've provided links to that data here numerous times in the past. I've hardly ever seen you provide a link to any data. In almost all cases, you merely pontificate and imply the others here are fools. And the data is easy to find on the Census site even without a direct link, as you just proved.
I strongly urge all readers to follow the link Sebastian provided and, yes, do please judge for yourselves whether the values show a "steady rise over decades".
You'll see that the ownership rate for the under-30 age groups fell quite dramatically from the early '80s through to the early '90s.
Because the large baby boom cohorts were moving into their prime home-buying years during the '80s, the underlying demographic pressures were (superficially) such as to favor a rise in the ownership rate. Since ownership rates rise for all cohorts as they age, the general aging of the population should naturally increase the ownership rate. That the rate was declining or moving sideways for so many years perhaps reflected the fact that the '70s boom pulled a lot of demand forward -- exactly because the under-30 ownership rate had risen so high in the '70s, there were that many fewer first-time buyers in the decade that followed, and the rate actually declined.
As the recent boom has been much more intense than that of the '70s, we should not be surprised to see an even greater decline in the ownership rate over the next decade.
It floats up from '65 to '83 (from around 63% to 65.5%) then it floats down to 63.7%-64% until 1994-1995 when it effing rockets up to 69.1% and promptly bounces off that top in 2005.
Hrm.. 2005 when the housing market began its decline.
Anyway, my guess is that homeownership will flop back down to 63% - 64%.
Granted.. who knows what will really happen until it happens...
[Which is not to say that it yet tells the truth in New Yorklet alone Washington, D.C.]
what a freakin mess and where in the hell are the lap-dog fiduciaries?
The superfluous and inefficient regulators, I presume? If there's a silver lining to this debacle, it's that it might be too big for the usual cleaner squads, and we'll have an end to "pure" free market talk for a generation or so. Kind of like the crack epidemic.
forbes, if it is to be trusted, is confirming my reverse-buffett interpretation:
Forbes.com File Not Found
The value of the assets in these types of funds is difficult to determine because there is no active market setting prices. Once there is a sale of similar securities, though, funds have to re-value their assets based on those prices. A fire sale of Bear assets likely would trigger lower asset values on the books at numerous funds.
One option is for the firm to buy the assets itself and hold onto them until they mature
I think this is what will happen for now. Totally frozen market, no sales, no panic, creditors get Bear to take over their assets, bogus valuation levels remain, loss of apetite for CDOs.
Further:
Let's say more hedge funds get into trouble. What is different between Bear's funds and other funds though is that Bear has tons of capital to buy back these assets. Other fund managers maybe not. Investment banks will make the fund managers buy back the assets, until they no longer can. At that point, it's liquidation Merrill-style. If Merrill etc are serious about their liquidation threats, there will be an overall MTM systemtic event. If not (i.e. if it turns out they are all scared of this, and not serious) then they will eat up themselves. In other words, the IBs may eventually have to continue to hold crappy paper at bogus valuations and eat the losses, as a direct consequence of the CDO monster that they created. This includes all assets seized from failed hedge funds.
If this is the future, then we have an entire future of calm, illiquid markets, padded by IB who hold crap to maturity. Still, such a world would be devoid of appetite for CDOs, which eventually means less liquidity for various things. And, hasn't this already begun this week?
To prevent implosion, financial engineering firms lock up a significant portion of their nuclear waste, meaning that not only will liquidity seize up, even after it recovers(whenever that is) it will be at way lower volumes(for an extended period) due to the impairments?
Please excuse the pitch for help here.. this is Matt over at the Register, with Mortgage Insider. We need help figuring out what's going on with Brookstreet Securities in Irvine. This is on topic, because Brookstreet, a broker dealer, allegedly placed clients' money in CMOs and now the company can't or their clients can't meet margin calls. Details are very sketchy. Anyway, check out the posting on my blog: Mortgage Insider : The Orange County Register
or email me at mapadilla@ocregister.com and/or
lead writer on this story John at jgittels@ocregister.com
thanks.
I don't know what scares me more: The amount of leverage some of the hedgies are playing with, or that someone from Xenia, Ohio can run $2billion of OPM.
Further to my comment above on analysis of the Census Bureau's "Household Estimates for the United States, by Age of Householder, ...", the stats indicate that in 1991 householders under the age of 35 owned 9.66 million homes. In 2006, in contrast, householders under 35 already owned 10.65 million homes.
Since those age cohorts don't differ much in size, and rising living standards in China and India can be expected to reduce immigration of well-paid professionals into the current under-35 cohort, we can expect about one million units less first-time-buyer demand from this cohort going forward compared to what they would have generated had not the bubble pulled sales forward.
At the other end of the age scale, householders 50-59 in 1991 owned 10.1 million homes, but in 2006 that cohort owned only 9.2 million, divesting 0.9 million homes. If this divestiture rate holds also for the 1.6-times larger cohort that was 50-59 in 2006, then by 2021 they will have returned about 1.5 million homes to the market.
Meanwhile, since the large age cohorts in between these two age ranges are already at high ownership rates, their contribution to new demand over the next 15 years will be much less than it was over the last 15.
Thus, even if it were not for the enormous glut of vacant housing now waiting to be absorbed, underlying demand going forward will be fundamentally less than in the 1991-2006 boom years.
jm, is there a way to look at the number of 2nd homes and investment props being returned to the market? my take is that a ton of the fcls are frauds in the "i'm going to rent this single family prop down the street from me" variety. at least based on the loans i've personally reviewed.
There are some highly detailed vacancy stats for "owner-occupied" and rental housing units (some broken down by number of units in structure, which is informative) on the same Census Bureau web page as the tables referenced above. Most of the vacancy data is also broken down by intended use (whether vacation property, etc).
Be sure to read the accompanying info on the methodologies they use -- and you can probably email or phone the experts who put the data together -- contact info is given.
Note that although the fraction of householders calling reporting that they are owners seems to be directly measured by survey, the "number of households" is estimated, and the estimates have been subject to revisions (e.g., in 1993) which while small relative to the total number are large relative to the year-over-year changes, and so are disruptive if you are trying to look at time trends (but keep in mind that between the revisions the methodology is consistent, so the errors probably are, too).
I believe the ownership ratios and vacancy fractions are the most reliable elements in this data, much more reliable than the absolute numbers, because (if I understand correctly) the way they collect the data is to directly survey a fairly large number of households and dwelling units and then get the absolute numbers by applying the measured ratios and fractions to their less directly measured figures for total households and dwellings. For example, I find that the ownership ratios I compute from the Table 15 data do not change significantly across the large 1993 revisions in numbers of households in various age cohorts.
When you leave that ur-pig outside in the sunlight it can start to get alittle pungent, can't it.
When you leave that ur-pig outside in the sunlight it can start to get alittle pungent, can't it.
Spot on Jim...smells just like bacon.
Remember, investors: it isn't "ham" until it's been "cured." Failing that, it's just aging ur-pig.
I really appreciate putting yesterday in a humorous context. Thanks.
Hey! If I can't laugh, I don't want to be part of your hedge fund meltdown.
Tanta-
if you really want to participate...
start charging 2 and 20 to access your site.
start charging 2 and 20 to access your site
Yes, but to avoid regulation I could only do that if I had "qualified readers."
Do you want me to go there?
"Yes, but to avoid regulation I could only do that if I had "qualified readers."
Now, that was hilarious!
Pension fiduciaries pay it and we could argue about the grey matter that floats between the holes in their heads all day.
Merrill sells assets seized from Bear Stearns - Jun. 21, 2007
"We're looking at somewhat immature markets that are going through a growth phase," Ralph Cioffi, senior managing director of Bear Stearns Asset Management, said at a bond conference in New York in February, Reuters reports. "There is a catharsis and a cleaning-out process."
Heh heh.
interesting- where does the exposure lie?
think your not participating, think again.
Criminal Probe Snares Morgan Stanley VP
H&R Block Reports $85.5 Million 4Q Loss on Struggling Mortgage Lending Arm
Expired
We're looking at somewhat immature markets that are going through a growth phase," Ralph Cioffi, senior managing director of Bear Stearns Asset Management, said at a bond conference in New York in February, Reuters reports. "There is a catharsis and a cleaning-out process."
Binging and purging, maybe?
Brilliant post!
Something for Banker and Sebastian and others in the "nothing to see here, just keep moving right along" crowd:
Think about all the "AAA" MBS, CLO and CMBS paper out there. "They" say it would take a repeat of the Great Depression (literally) for losses to affect this paper. So its safe, right?
Okay, assume the "Great Depression" hypothesis is true. How much leverage would you use if you held the paper? 2:1? Come on! We're talking NEXT TO IMPOSSIBLE here. Asteroid-hit odds! 10:1? Now you're talking. How about 50:1? A little risky. Gutsy, in fact. I like it.
Welcome to the way hedge fund America thinks. You guys have to understand that all "safe" assets have been levered to the hilt, rendering them now "unsafe". That includes even MBS backed by POP (Plain old Prime) mortgages.
So what leverage would you use on AAA CDO's? Let us know, so we can see if you are as bullish as the crowd that holds this paper. If you're not, I'd be worried if I were you.
I have to admit, I find this rather thrilling to watch live from the sidelines.
I just hope I don't get hit with ricocheting bullets and shrapnel.
[ducks]
WASHINGTON (AP) - Treasury Secretary Henry Paulson said Wednesday he personally initiated his department's role in a Supreme Court case that could hurt shareholders' efforts to recover losses in securities fraud lawsuits.
Paulson's acknowledgment came at a House Financial Services Committee hearing where Rep. Maxine Waters, D-Calif., focused on the plight of investors who lost billions in the collapse of Enron, a Texas energy firm whose executives were convicted of fraud.
At Paulson's request, Treasury this month cautioned the Justice Department's solicitor general about enabling investors to sue firms that do business with scandal-ridden companies.
The issue arose because of a shareholder suit before the Supreme Court that seeks to recover money in a securities fraud case against two suppliers to a cable TV company. The outcome likely will determine whether a similar lawsuit by Enron investors against Wall Street investment banks is allowed to proceed.
The Securities and Exchange Commission urged the solicitor general to file a brief in support of investors.
But President Bush, Treasury, the Federal Reserve and the Office of the Comptroller of the Currency weighed in on the opposite side of the issue, which is referred to as third-party liability.
The solicitor general, who represents the Bush administration's views in the Supreme Court, decided not to side with investors. In several weeks, the solicitor general's office will decide whether to file a brief in support of defendants in the case.
``I am very surprised to find out that our government, this administration and you have decided that you are more interested in protecting those with third-party liability as it relates to Enron than you are in protecting the citizens who got ripped off,'' Waters told Paulson.
I am a very strong advocate of protections against security fraud,'' Paulson replied.I asked the Treasury Department to send a letter to the solicitor general'' on the separate case before the Supreme Court because ``I thought it had enormous implications for the U.S. economy.''
Paulson said supporting such lawsuits ``could create a very uncertain legal environment that is ultimately harmful to our economy and to the workers.''
404 Page not found
Nice to see Hank is concerned about the workers. Hank you funny.
I think enough cards were shown over the past few days to guess the strength of the hands.
Bets going forward will be placed accordingly.
Well, most of subprime borrowers, instead of living in crappy apartments had spent two years in good houses, without investing a dime of money. Now they will just return back to crappy apartments.
I don't think they really lost anything at all, just opposite - they had some good times.
U.S. weekly initial jobless claims rise 10,000 to 324,000 - MarketWatch
One of the best posts ever here.
"Well, most of subprime borrowers, instead of living in crappy apartments had spent two years in good houses, without investing a dime of money. Now they will just return back to crappy apartments."
Depends. If they screwed up their credit rating on the way down, most landlords in my neck of the woods wouldn't rent to them. Even in "crappy" apartments. Illegal garage conversions with dangerous heating and wiring? Maybe.
Aside from that, there's the issue of scraping up first, last and deposit, which is the buy in for most Calif. metro areas. Will they have it? Or will they live in an RV in Mom's driveway?
I certainly wish that this doesn't happen. I hope that the time of picky landlords will be gone soon with all that overbuilding and everybody will get a good cheap rental.
I have all the reason to believe that my hopes will fulfill.
"Well, most of subprime borrowers, instead of living in crappy apartments had spent two years in good houses, without investing a dime of money. Now they will just return back to crappy apartments."
I predict a race out of the gate for those apartments. Assuming parents of 35 yr. olds and their families really aren't going to be able to stand all the company for long, I predict apt. rents going up.
Well, most of subprime borrowers, instead of living in crappy apartments had spent two years in good houses, without investing a dime of money. Now they will just return back to crappy apartments.
Well, now, there's my idea of a productive economy. Take some people who merely live in "crappy" apartments, extract thousands of dollars in transaction costs and interest from them, and then send them back to the "crappy" apartments after they've been allowed to have such a good time playing Homeonwer for Two Years.
Sweetheart, we are no longer worried about the zero-down never-made-a-payment crowd. They are in foreclosure and will be returned to the crappy apartment market eventually. When we discuss forthcoming rate resets on a 2/28 vintage, we are by definition talking about loans that are still on the books on which payments have heretofore been made. Yes, there was probably very little if anything in the way of an "invested" downpayment. But if you think all subprime borrowers have never made a payment, you are suggesting that these bonds we're talking about have never had cashflow.
That would be news to the bond market, for sure.
In reference to the securities lending article above from businessweek, check with your favorite pension and ask if they are "in the business of securities lending" and then, ask specifically what they hold as collateral.
From Marketwatch: Jobless claims rose 10,000 from 311,000 to 324,000.
What they are smoking? *&$#g C-graders.
Do not underestimate the harm to individuals.I spoke to a 60 year old woman this week who went to a Trump seminar,believed what she was told,and will be losing the home she once had paid off.There will be many personal tragedies resulting from this massive bubble,including suicides,and people who thought their retirements were secure who will be living under bridges eating catfood.
"Investors: If you can't tell who is having the catharsis, you're the catharsis."
HA! Tanta, you are more than eloquent.
On the less humorous side, it annoys me terribly that the fund managers have made a mint off of nothing more than gambling and losing with OPM. If that affected them and only them, I'd be okay with that. But unfortuately, it affects every conservative and rational investor and homeowner out there, who wouldn't have dreamed of taking such ludicrous risk.
This cleaning out seems like a huge enema, with no toilet in site.
On the question of crappy apartments vs new houses, remember that the number of buildings is relatively constant and the number of people who want to live in them is also relatively constant. To move from a house to a crappy apartment leaves a house vacant, which then either distorts the house market or turns into a rental, distorting that market.
It is a fluid situation.
theoxylandr: certainly in areas with alot of overbuilding, landlords won't be able to afford to be overly choosy.
"There is a catharsis and a cleaning-out process."
I can handle the catharsis, but the cleaning out is the painful part...
ETA Press Release: Unemployment Insurance Weekly Claims
Report
Question for Tanta, a little OT:
Tanta, yesterday on one of the links you posted some information about a securitization that is on the block.
You mentioned that it is a "rescuritization" (I think, although I can't find the comment now). If that is correct, what does that mean? Thanks for this and all comments.
First, when guys like Paulson start talking about "the workers" as anything other than a commodity, the workers need to try and get their back against a wall, because helping workers is not on the Treasury Secretary's agenda.
Second, the question of who exactly will be enjoying this catharsis is a great one. Since hedgies cater to the high end "sophisticated" investor, we're talking about people who don't expect losses, despite all the official warnings, and I've got a feeling they are not going to react well.
Muffy's got a problem, and she's not good with problems.
RC said. "In reference to the securities lending article above from businessweek, check with your favorite pension and ask if they are "in the business of securities lending" and then, ask specifically what they hold as collateral."
I submit that 99% of pension funds are involved in securities lending. They repo out their collateral and reinvest the proceeds into higher yielding instruments.
They're usually very cautious about the credit quality of the stuff they buy. On occasion, however, they do get caught. The recent LBO of Sallie Mae being an excellent example of "getting caught."
And, with credit spreads as tight as they have been, it's almost a case of nickels in front of steamrollers.
My compliments Tanta, but you left out Condoleeza Rice's inimitable:
Birth pangs of a new Middle East.
These are the birth pangs of a new financial system.
Depends. If they screwed up their credit rating on the way down, most landlords in my neck of the woods wouldn't rent to them. Even in "crappy" apartments. Illegal garage conversions with dangerous heating and wiring?
I highly doubt at this stage of the game Landlords care less about credit and more about the monthly nut to cover their own mortgage liability so renting should not be a problem as long as you can cover first and last months..plus security deposit if applicable.
And the FB I am sure has that covered as well..if you don't pay your mortgage for a few months before the inevitable happens you can accumulate a good down payment for an apartment. A foreclosure does not just happen over night...one can see the writing on the wall months prior.
calvert, it's impossible to say without more information that I don't have about the CDO in question. It's either a "CDO squared"--a derivative of tranches of a CDO, which is itself a derivative of tranches of an asset-backed security--or it's a CDO backed by paper that was previously sold out of a prior CDO issue either voluntarily on the portfolio manager's part or "involuntarily" through a clean-up call on the original underlying ABS. I couldn't tell you. I have asked, idly, what happens to a CDO if the underlying junk is subject to a clean-up, but I've never gotten an answer to that. It's possible that the entire CDO market is sufficiently, um, "immature" that it has never been subject to a clean-up call.
FYI, a "clean up call" is a provision in an MBS that the issuer can call or buy out the security when it is down to some very low balance, usually 10% or less of original balance. That keeps servicers and trustees and bondholders and everyone from having to deal with three remaining loans for 26 years after everything else paid off or liquidated. The loans that are taken back by the issuer in a clean-up are generally "resecuritized" in a "seasoned loan" deal.
Muffy's got a problem, and she's not good with problems.
snort
Stock Plunge on Higher Yields
Who knows what this will trigger in another hedge fund,'' said Barry James, who manages $2 billion at James Investment Research in Xenia, Ohio.There's a lot of this kind of stuff going on today, I don't think any of us know how much of an impact that will have when it unwinds.''
I don't know what scares me more: The amount of leverage some of the hedgies are playing with, or that someone from Xenia, Ohio can run $2billion of OPM.
Have the bright-eyed, bushy-tailed CR groupies noticed this?
On June 18, 2007, the Federal Reserve Board stopped using Fitch Investors Service as a credit rating source. Classification as AA or A2/P2 for rate calculations and classification as Tier-1 or Tier-2 for outstanding calculations are done using Moody's Investors Service and Standard & Poor's.
"There's a new sheriff in Refi-town!
No Verification of Mortgage
Unlimited 30, 60 and 90 day lates on mortgages - o.k.
No Bankruptcy Seasoning.
Rapid Refi - Stated income - No appraisal - as low as 10 bps over our Full Doc pricing
30, 40 and 50 year terms
Collections can stay open
12 months bank statements = Full Doc
540 = 85 ltv; 560 = 90 ltv; 600 = 95 ltv; 620 = 100 ltv
Easy appraisal review process (ordered on fewer than 50% of the loans)
Loan amounts up to $1,350,000 with $500,000 cash out.
Fast, reliable Pre-approvals."
We received this add via e-mail today from First Franklin. Merrill Lynch's Sub-Prime Company.
This may explain some of ML's motivation in pushing Bear Stearn on the Hedge Fund issue. They may view this as a way to increase sub-prime market share going forward.
Or, they may just be very stupid.
This would relate to the above discussion of Joe Sixpack's decision on whether to actually make his monthly mortgage payment.
"Time to Give Up the House? A new study finds that, in a shift from the past, subprime borrowers are paying their credit cards before their mortgages", by Peter Coy, BusinessWeek, June 21, 2007.
Delightful post.
Heavy PPT action underway.
PPT is losing.
Criminal wall street bankers and the criminal Bush administration will not stop this meltdown.
They can't.
The revolution is here, it is waiting for participants.
"... the Federal Reserve Board stopped using Fitch Investors Service as a credit rating source."
Whoa! Is it my imagination or have Fitch reports been pulling fewer punches lately too?
Thanks Tanta, that helps.
Again, i refer everyone back to the excellent Bloomberg piece on just how little anyone knows about the value of the residuals---the Bear Stearns auction/non-auction shows that to be absolutely true. The ratings agencies are tremendously culpable in this nonsense--- the lawsuits are just a matter of time.
"The weakness in the market is a function of the stories that are coming out of Bear Stearns"
Emerging-Market Bonds Fall on Concern About Hedge Fund Losses - Bloomberg.com
On the topic of those who borrowed who maybe shouldnt have we have the issue of all those homes. There already is a huge over supply of homes in some areas where an artificial demand driven by loaning money to anyone who could walk and chew gum at the same time gave home builders a false sense of high demand. They are still building on the lots they bought to fulfill that false demand. We already have to many dwelling units for the number of households.
This country went from a long historical average of around 64% household homeownership to around 70%. Most of this addition IMHO was done with easy access to money to unsophisticated, undereducated households who were offered something they could little understand and less afford. How in the world can a family pay 50% or more of its income for housing and have money left over for maintenance, repair or emergencies. If they could never save a down before, why would anyone think they could save for repairs or emergencies? Then add in higher fuel and food costs and medical and education.
So now we will have millions of homes back on the market, or to come back on the market when we already have a very large inventory of unsold home? Who is it that will be stepping up to buy all these homes? What happens when inventories rise and are unsold? From what I have read we already have a couple million vacant homes and a high rental vacancy rate. This means we have more inventory than households. Add in stricter qualifications for getting a loan and some higher interest rates to reflect the real risk. My economics education suggests that prices will fall and fall a lot. How many second homes do you need? Remember you have to maintain them and pay taxes on them even when you arent using them. I personally dont want any as I would rather go different places and see different things and it is cheaper to do this than own a vacation home.
Corporate debt risk jumps on concern over Bear Stearns funds
Corporate Debt Risk Retreats as Bear Stearns Fund Concerns Ease - Bloomberg.com
"There is a catharsis and a cleaning-out process." -- Ralph Cioffi at a bond conference
it appears the attendees did not understand that it was their wallets that were to be cleaned out.
Who is it that will be stepping up to buy all these homes? What happens when inventories rise and are unsold
Doug S
The cynic would suggest that in some markets that they would become secton 8 housing so housing stock closer to city cores could be bought on the cheap and redeveloped.
Jay Weinstein: "Again, i refer everyone back to the excellent Bloomberg piece ..."
I thought this bit from it was pretty compelling.
"Bear Stearns Fund Collapse Sends Shock Through CDOs", by Mark Pittman, Bloomberg, June 21, 2007.
Meanwhile over at Doom, jmf dropped us the following link that on the surface doesn't look that relevant. However, this Irish furball is another SPV getting unwound. Perhaps it wouldn't take too many more like this to start an irreversible chain reaction in Fin 140 counter-party space.
"Ritchie Funds File Bankruptcy After $700 Million Loss", by Tiffany Kary and Jenny Strasburg, Bloomberg, June 21, 2007.
Merrill sells off assets from Bear hedge funds
IMO, this is an excellent summary of the issues.
Merrill sells off assets from Bear hedge funds
| Reuters
Only a Tanta post would begin w/ "It was a dark and stormy night"
DJ is reporting that MER sold only $100MM of the assets taken from the Bear funds because that was enough to pay off their loans. The credulity of reporters apparently knows no bounds. There is no way MER walked off with $850MM in collateral to cover a $100MM loan. More likely the bids they got last night were horrific and they've decided not to cut their own throats. Apparently they are contemplating a securitization of the remaining collateral. Stay tuned.
Brian- "Apparently they are contemplating a securitization of the remaining collateral."
If true, not a good omen.
Most of this addition IMHO was done with easy access to money to unsophisticated, undereducated households who were offered something they could little understand and less afford:
Sure not that they were duped or that Doc's were changed without their notification, or incomes were overstated without their knowledge or older folks were prayed upon ....Take your sophisticated, educated, opinion and shove it up your ass...
strictly form a very educated, and sophisticated person.
Thank you Kevin and Lindsey for being on the right page with the Office that Hank holds and basically the conflict of interest that qualifies him so much better than his predecessor to fulfill those obligations.
The bifurcation of rich and poor is a crude sketch of the real stratification, but highlighting Hank here helps us see that not only is that Office paying lip service to workers but the SEC, the Supremes, those elected representatives, those Presidential candidates that can only qualify with $100 M campaigns...
"Only a Tanta post would begin w/ "It was a dark and stormy night"
Journeyman"
And that is why we love her.
One of the things that the bears seem unaware of is that holding "illiquid, esoteric" securities is not only not a new phenomenon, but stock mutual funds do it, too, and it's been going on for years.
A fund might hold a large position in a thinly-traded stock with no idea what the "mark-to-market" price might be if it suddenly had to unload a big piece of it.
However, these things don't come home to roost until times of significant economic or financial stress...which we don't have, however often the MSM screams that we do.
Sebastia
I think I see a black swan driving that steamroller, and it looks pissed!
I would love to listen in on some of the conversations happening in Greenwich recently.
Tanta said: "Every caprice needs a rondo."
I knew you could write great prose, but didn't realize you were a poet, as well.
S.
"So what's it going to be for those subprime borrowers? Just another day at the circus?"
I'd say they got a free call option on their home's value, combined with the pleasure of living for several years in a more expensive residence than they could actually afford. Ultimately, the bondholders who provide the capital lose the money, and the borrowers move back to their crappy subprime apartments, where they probably should have been all along (unless, like most Americans, you feel that every citizen is automatically entitled to a spacious suburban home).
Sebastian,
If things are so good, why are foreclosures doubling at Countrywide, and others? I need to really understand this. Is it just related to the product type (2/28 Option ARMs), for example. Or is it just flat out fraud on the part of mini-Trumps buying and destroying entire neighborhoods? Or is lack of jobs? A combination?
"Only a Tanta post would begin w/ "It was a dark and stormy night"
Or Snoopy, if he was a blogger.
A fund might hold a large position in a thinly-traded stock with no idea what the "mark-to-market" price might be if it suddenly had to unload a big piece of it.
Ah, now we know where all Sebastian's delisted shares of NEW went.
Caprice and Rondo is the title of a novel by Dorothy Dunnett. Today is "literary allusion day" here at Calculated Risk.
"I think I see a black swan driving that steamroller, and it looks pissed!"
That's a good one.
Or Snoopy, if he was a blogger.
On the internet, no one knows you're a dog.
"Or Snoopy, if he was a blogger.
On the internet, no one knows you're a dog."
LOL! Then I'd say your prose has improved dramatically from the days Schultz was doing your ghost writing.
Arf! Arf!
To:Tanta
In re: apologies to Bulwer-Lytton
Biggest grin ever.
Tanta,
I know I shouldn't turn this into a literature blog, but since Dorothy Dunnett has been mentioned more than once on CR, please recommend a specific title. I am looking forward to it.
Thanks.
An REO creative re-use idea from the 2006 Bulwer-Lytton contest:
"There was an old woman who lived in a shoe who had so much equity (because our story, dear children, is set in Miami's hot real estate market) that she upgraded the exterior to blue suede siding as a tribute to her idol, Elvis, moved her kids to a bootee out back, and then reopened the place as the "Are You Lonesome Tonight?" motel (but you'll have to wait until you're 18 to read any further)."
Barbara Bridges
Sierra Madre, CA
how about the sub-primes that heloced because of the rapid escalation in property value. do they get to keep their plasma's and escalades?
Joe Mortgage asked: "If things are so good, why are foreclosures doubling at Countrywide, and others? I need to really understand this..."
The reason why foreclosures are high is a critical factor. Some reasons are less important and transitory, but some are significant and long-lasting.
Here's the difference. In an expanding economy, if foreclosures are rising because of ARMs resets that run mortgage payments up higher than the current homeowners can afford, there's still a good pool of better-qualified people who could buy the homes.
In a recession, that pool of better-qualified potential home-buyers is much smaller, because so many of them have lost their jobs and no longer have that good income.
Some of the bears here don't think there's a difference, and they're partially right. It doesn't make any difference to the person who's losing their house, but it makes a big difference in whether the overall housing market is going to recover quickly or slowly.
Sebastia
Here's a good one. Arf, arf! woof, woof?
"The hauntingly empty lobby of Bear Stearns"
Dealbreaker: Page Not Found
calvert, Dunnett did two lengthy series of historical novels: the Lymond Chronicles (early-mid 16th century Scots patriot with a witty tongue and Very Bad Attitude) and the House of Niccolo series (mid-late 15th century Flemish anti-patriot with a witty tongue and Very Very Bad Attitude, fictional ancestor of Lymond). The Lymond Chronicles were published first, so most people read them first (first novel is The Game of Kings). But there's no reason you couldn't read the Niccolo series first (first novel is Niccolo Rising).
Dunnett has a tendency to leave untranslated snippets of medieval French and stray illusions to Rennaisance papal politics in the text. So if it's been a while since European Culture 102 for you, you might consider one of the Dorothy Dunnett Companion books by Elspeth Morrison. They're a treasure trove of historical, literary and political miscellany and helpful for looking up the allusions.
I love the books, but I will concede that most people I know would not consider them leisurely summertime reading.
For leisurely summertime reading, I recommend anything by Edward George Bulwer-Lytton.
the leading indicator is not improving
The Conference Board Leading Economic Index™ (LEI) for the U.S. Increases Again
How about this one, Tanta?
"Vultures Circle Bear Stearns Hedge Funds"
Bits of News - Vultures Circle Bear Stearns Hedge Funds
I said: "A fund might hold a large position in a thinly-traded stock with no idea what the "mark-to-market" price might be if it suddenly had to unload a big piece of it."
To which Tanta replied: "Ah, now we know where all Sebastian's delisted shares of NEW went."
BINGO!
"...What has been is what will be,
and what has been done is what will be done;
there is nothing NEW under the sun..."
S.
"...What has been is what will be,
and what has been done is what will be done;
there is nothing NEW under the sun..."
You got that right. Greed, avarice, and marshmallows.
Here's the difference. In an expanding economy, if foreclosures are rising because of ARMs resets that run mortgage payments up higher than the current homeowners can afford, there's still a good pool of better-qualified people who could buy the homes.
If the home ownership rate was anywhere near the historical averages you'd be right, but it's not: The pool of "better qualified" people are already in homes unless they decided to skip the run up completely and decide to buy just off the top.
the leading indicator is not improving
Error Occurred While Processing Request? cid=1
Up .3 isn't an improvement?
Not that I pay much attention to the LEI, but since you brought it up.
"the leading indicator is not improving"
Huh? Are you kidding? The MSM is hailing the latest number as heralding the better times ahead. April was revised up and May advanced and came in better than expected.
Never mind that 1/2 of the indicators don't really lead at all.
Most hybrid ARMs - nicknamed "explosive ARMs" - are subprime products, but, according to Doug Duncan, MBA's chief economist, they can be useful tools for borrowers hoping to repair bad credit histories.
This is above all the most bullshit statement i have herd in the lending field to get you to sign on the dotted line....what the hell does a lender care about my credit history or my credit repair?? utter bullshit...please sign here.
How long before BS runs out of cash to buy back seized assets from the lending banks? I'd guess sometime between the end of the June and the end of the summer. Even as these IBanks stop seizing assets, they're not likely to continue lending the money that the lifeblood secruitizers like BS.
Philly Fed says things are just great:
Business & Financial News, Breaking US & International News | Reuters.com
Alec said: "...If the home ownership rate was anywhere near the historical averages you'd be right, but it's not: The pool of "better qualified" people are already in homes unless they decided to skip the run up completely and decide to buy just off the top."
That would also have been true when the homeownership rate hit historical highs of 59%, 63%, 67%, etc., yet here we are in the area of 69%-70%.
S.
well for me it's sluggish
I just heard on Bloomberb radio that Merrill Lynch has backed away from its plans to sell.
Now they have an update on it:
Merrill Sells Portion of $850 Million Bear Funds, Person Says
By Jody Shenn
June 21 (Bloomberg) -- Merrill Lynch & Co. backed away from its threat to dump about $850 million of securities it seized from Bear Stearns Cos. hedge funds, according to a person with knowledge of the firm's plans.
Merrill Lynch sold a small portion of the collateralized debt obligations through an auction, said the person, who declined to be identified because the decision hasn't been announced. The firm plans to hold onto the remaining securities for now, the person said.
The threat by Merrill Lynch to sell all the securities had sent shudders across Wall Street because it would have forced banks, brokerages and owners of similar securities to revalue their assets.
Collateralized debt obligations, or CDOs exceed $1 trillion and comprise the fastest-growing part of the bond market.
Merrill Lynch spokeswoman Jessica Oppenheim declined to comment.
"That would also have been true when the homeownership rate hit historical highs of 59%, 63%, 67%, etc., yet here we are in the area of 69%-70%."
Say what? Is not 70% not just an historical high, but an all-time high? What point am I missing? Are you saying that an historical high was once 59%, but now is 70%, proving that home ownership rates can go up, implying that something higher than 70% lies ahead?
Tanta, Thanks, I will try Niccolo Rising. If nothing else it will distract me from the fate of Bear Stearns' Highly Leveraged Fund Invested in Assets of Dubious Quality.
check page 5
http://www.conference-board.org/pdf_free/economics/bci/lei0607.pdf
for me it's flat as hell, we are on Q1 basis
Just throwing in an ancedote ... it seems like I'm hearing more radio ads now, from merchants claiming to be "overstocked" and offering discounts. Especially luxury car dealers, RVs, furnitire, and home siding companies.
Summer is usually a good point in most business cycles. But I'm starting to think CR's "coin flip" is more like a bread slice, that will be landing butter side down by the end of the year.
mp (12:22),
The DealBreaker story you link to ends with this Looney Tunes allusion.
"I just heard on Bloomberb radio that Merrill Lynch has backed away from its plans to sell."
What a bunch of scaredy cats. Well, it may be time to put away the marshmallows. We'll see.
I guess Sebastien has never walked on a frozen lake in December-just because you an walk out 10 feet onto the ice doesn't mean that at 15 feet won't get you wet.
I guess what he is saying is that all of the people who got negative equity loans were just concealing their truly sound financial status, which they will reveal to us in the next few months by moving up to the next step in McMansions.
Shiny bubbles of pure horsehit blowing in the wind.
...and so the bond rating agency (or appraiser) says, "Who are you going to believe, me or your lying market?"
Say what? Is not 70% not just an historical high, but an all-time high? What point am I missing?
There's just a fundemental disconnect here for Sebastian: Lenders have been cooking up new and even more exotic ways to get people into homes, that's why home ownership rates are where they are.
The top is in, these new and exotic loans are no longer being issued, yet he thinks there's this mystery group of Nomads who're sick of traveling and have decided to settle down with their sacks of gold and buy all these homes that are now on the market.
And from the "slump stops here" comments
looking at the non adjusted current population numbers, from the peak to today we'd be down 317k in construction/extraction jobs. However, The denominator has shrunk(while flattening) while the numerator is not shrinking as much from its peak, suggesting that people are finding jobs in other sectors.
OK I'll bite at that one Sebastian: Where did you obtain the information that there are sufficient first-time buyers to counter the ARM foreclosures?
Nationwide, 15% of subprime ARMs are in arrears and very few (percentage wise) have reset.
Just for full disclosure, a family member just left one of the nationwide homebuilders and reported exactly the opposite to what you stated. SpecificallY, "We think we have a sale, then we do a credit check and, oh my God, all the recent bankruptcies, repo'd cars, no cash...then we start over again the next weekend."
On the rise in the LEI
The four top up components are:
Weekly initial unemployement claims=.21
Stock prices=.12
Building permits=.08
Consumer sentiment=.05
And how do these components look this week? Not as positive in all four instances.
Bubble, bubble, toil and trouble.
It's not yet time to put away the marshmallows.
Corporate Debt Risk Retreats as Bear Stearns Fund Concerns Ease - Bloomberg.com
ok, i've just checked the lei archive those indicators don't lead anything
winjr said: "Say what? Is not 70% not just an historical high, but an all-time high? What point am I missing? Are you saying that an historical high was once 59%, but now is 70%, proving that home ownership rates can go up, implying that something higher than 70% lies ahead?"
Homeownership rates have been steadily rising for decades. The 59% level was at one time an all-time high, and now we're up to 70%. Why should 70% be "the" limit?
Maybe it will be and maybe it won't, but there's nothing "magic" about the number.
Sebastia
Ok, so let's put it straight - Merrill L. can't sell this stuff. Got no bids or ridiculously low bids.
The story is far from over. Though I don't think we'll know all the details on time...
"ok, i've just checked the lei archive those indicators don't lead anything"
Exactly right, Max. Mish did a great analysis some time ago that proved how terrible these indicators were in predicting recessions.
"Maybe it will be and maybe it won't, but there's nothing "magic" about the number."
Yeah, except that it represents a high since the beginning of time, pushed by lending practices that are currently collapsing.
For the forseeable future, the percentage is going down.
bfatz: "This is above all the most bullshit statement ..."
Nope.
As HousingWire reported a week ago, after which I ranted here, Doug Duncan blithered on about how default experience isn't too bad if you would just exclude California, Florida, Nevada and Arizona, or a couple of other states depending on whether you wanted to falsify delinquency rates, or just the increases thereof. That load of codswallop echoed around the MSM for days.
Clearly that BS trumps the one you cite. The MBA's chief econ would seem to have been busy lately.
lama asked: "OK I'll bite at that one Sebastian: Where did you obtain the information that there are sufficient first-time buyers to counter the ARM foreclosures?"
I didn't, and you're misquoting me. I said that however many potential home-buyers there are, there are far fewer in a recession than during an expansion.
Sebastia
From the Dealbreaker article...
In short, by flinching from auctioning off the CDOs, JP Morgan and the other banks that reached deals with Bear Stearns may have prevented what some feared would become the much heralded systemic event in which the collapse of one hedge fund brings down all the others. But the cost of doing so appears to be keeping the actual market values of many of these assets more or less financially illegible. And keeping markets and regulators illiterate when it comes to reading the risks of these products.
Yeah, well the risk hasn't gone away has it? And did anyone relly think the losses had been exported to Mars? These confidence games don't work when the marks stop believing the shills.
"Wall Street can't find its way"
How about that one, Tanta? There isn't anything a bear likes more than a poor little bull (Goldilocks, in this case) who can't find its way. Woof! Woof!
CNNMoney.com Market Report - Jun. 21, 2007
gab-
"I submit that 99% of pension funds are involved in securities lending. They repo out their collateral and reinvest the proceeds into higher yielding instruments.
They're usually very cautious about the credit quality of the stuff they buy. On occasion, however, they do get caught. The recent LBO of Sallie Mae being an excellent example of "getting caught."
And, with credit spreads as tight as they have been, it's almost a case of nickels in front of steamrollers."
I believe you need to spend more time researching the "quality" that you alledge they are buying and also the parties on the other side of the trade/loan.
on another note-
so, now we have merrill potentially holding onto the bulk of the seized collateral so as not to upset pricing...
when will everyone wake the hell up, so, this shit sticks around at grossly inflated valuations that everyone is aware of and overbills the holders of hedge assets....
what a freakin mess and where in the hell are the lap-dog fiduciaries?
That would also have been true when the homeownership rate hit historical highs of 59%, 63%, 67%, etc., yet here we are in the area of 69%-70%.
While I tend to agree with Sebastian 's "not yet" comments, I must take issue with this one. IMHO, the difference this time is the ownership spurt was accomplished not by raising incomes, but by risky lending practices. That is why I think that there will be a decline in home ownership rates when (if?) those practices are discontinued. As long as the rest of the world is throwing a $trillion/year at us - risky home loans are probably as decent a bet as risky commercial loans.
Woof!Woof! should have been Grr!Grr!, but I don't have any writing help this morning.
sebastian..have a look at the break out of the "ownership" rate, and also, think about what it really means. First, you can see a more rapid rise in racial groups that didnt rise so fast earlier...why do you think that is? And also, notice that for many groups it is already heading back down. Why do you think that is? And then, imagine we gave a 100% financing to all renters, and interest only terms at teaser rates, and then counted them as "owners" and sent the rate up to 100%. Would that make you happy. At least then you couldnt say it couldnt go any higher. But you still probably wouldnt understand why it would be heading lower after that.
Let's look @ home ownership rates, shall we?
2007 2004 . 2000 . 1990 . 1980 1970
68.4% 69% 66.2% \t64.2% \t64.4% \t62.9% \t
What changed, when, shall we?
In 1970 it was 20% down, 30 yr fixed @ 15%
In 1980 it was 20% down @ 20%
In 1990 it was 10% down @ 10%
In 2000 it was 10% down @ 8%
In 2004 was the explosion of ARM loans, 10% down @ 6%
2005 was zero down, neg-am @ 6%
So you think homeownership rates rise about 69% Unless they start giving away these houses for free?
Tanta, it was fun, as always. As for me, I'm off to Grandma's house to toast some marshmallows and eat some bits of popped balloon. Grr! Grr!
Or, may Caw!Caw! What kind of sound does a vulture disguised as a dog in bear's clothing make?
Risk Capital said...
"...where in the hell are the lap-dog fiduciaries?"
I'll bet they are trying to figure a way out of this near-term crisis that doesn't throw a wrench into the whole market.
did you guys see that ?
St. Louis Fed: Series: PSAVERT, Personal Saving Rate
What kind of sound does a vulture disguised as a dog in bear's clothing make?
I know! BODACIOUS! BODACIOUS!
What kind of sound does a vulture disguised as a dog in bear's clothing make?
Vultures only make a hissing sound. Sort of like the air coming out of a balloon.
Your literary prose is as outstandingly good as your poetry. I was going to suggest that "you've missed your calling", but you're also awfully good at your regular job too.
Sebastian writes, "Homeownership rates have been steadily rising for decades."
That simply isn't true. From the early '80s through to the early '90s they were falling from the peak reached at the end of the wild real estate boom of the late '70s. The stats are there on the Census Bureau web site for all to see.
I meant home ownership rising above 69% unless they give houses away
Sebastian,
Sorry, my misquote was an attempt to give you more credit than was warranted.
If you didn't make an attempt to quantify the offset, you have made no point.
For example, there are more buyers of gold in an ecnomic expansion, but the price has had no relationship whatever to either economic conditions (nor population growth).
Sebastian writes, "Homeownership rates have been steadily rising for decades."
to which jm responded: "That simply isn't true. From the early '80s through to the early '90s they were falling from the peak reached at the end of the wild real estate boom of the late '70s. The stats are there on the Census Bureau web site for all to see.
Nice, call me a liar and don't provide a link to the data.
Here it is:
Homeownership Rates for the U.S. and Regions: 1965 to Present
Judge for yourselves whether the numbers for a slow-moving data-set like this constitutes "steadily rising for decades" or not.
Sebastia
Homeownership Rates for the U.S. and Regions: 1965 to Present
Declined from 81-86 then moved sideways from 86-94 then rose back up to the 81 value by 99.
Declined for the most recent two years.
Homeownership rates:
1965 - 1995 experienced a 2.7% rise (on base 1965 rate), or .09% per year rise.
1995 - 2005 experienced a 6.0% (on base 1995 rate), or .6% per year rise.
The last 10 years' increase in homeownership grew at an annual rate 6.7 times the prior 30 years' annual rate.
Re: ownership ratio.
I think this ratio should actually have had fallen given the increasing income inequality in the last several years.
Sebastian, I've provided links to that data here numerous times in the past. I've hardly ever seen you provide a link to any data. In almost all cases, you merely pontificate and imply the others here are fools. And the data is easy to find on the Census site even without a direct link, as you just proved.
I strongly urge all readers to follow the link Sebastian provided and, yes, do please judge for yourselves whether the values show a "steady rise over decades".
I see that while I was writing some others have indeed judged for themselves and come to the same conclusions as myself.
Sebastian,
Are you a partner at KPMG?
So you think homeownership rates rise about 69% Unless they start giving away these houses for free?
Houses for nothing, and your risks for free.
The sad thing is, Sebastian read our posts, re-rexamined the census data and arrived again at his original conclusion.
Book Club, Damn it, BOOK CLUB!!!
When are we going to get Tanta' Book Club and summer reading list?
Opra got nothin' on CR & Tanta.
Much more relevant than the Census Bureau Table 14 to which Sebastian linked are the ownership rates by age cohort you can get from Table 15. Household Estimates for the United States, by Age of Householder, by Family Status: 1982 to present
if you clipboard the data over into Excel and set up columns to compute Owner/Total.
You'll see that the ownership rate for the under-30 age groups fell quite dramatically from the early '80s through to the early '90s.
Because the large baby boom cohorts were moving into their prime home-buying years during the '80s, the underlying demographic pressures were (superficially) such as to favor a rise in the ownership rate. Since ownership rates rise for all cohorts as they age, the general aging of the population should naturally increase the ownership rate. That the rate was declining or moving sideways for so many years perhaps reflected the fact that the '70s boom pulled a lot of demand forward -- exactly because the under-30 ownership rate had risen so high in the '70s, there were that many fewer first-time buyers in the decade that followed, and the rate actually declined.
As the recent boom has been much more intense than that of the '70s, we should not be surprised to see an even greater decline in the ownership rate over the next decade.
If you chart the home ownership data..
It floats up from '65 to '83 (from around 63% to 65.5%) then it floats down to 63.7%-64% until 1994-1995 when it effing rockets up to 69.1% and promptly bounces off that top in 2005.
Hrm.. 2005 when the housing market began its decline.
Anyway, my guess is that homeownership will flop back down to 63% - 64%.
Granted.. who knows what will really happen until it happens...
Judge for yourselves whether the numbers for a slow-moving data-set like this constitutes "steadily rising for decades" or not.
So that 13 year gap between 81-94? Was that a slow, steady climb?
What color is the sky on Bizarro world, rose colored?
"When are we going to get Tanta' Book Club and summer reading list?"
Dryfly - You know how Tanta has been scarce lately? Well, I'll wager she's working on her masterpiece!
Okay Tanta - fess up.
I saw one of the assets sold to one of the hedge funds being bought back by my firm today. It was high quality stuff.
(for it is in London that our scene lies)
[Which is not to say that it yet tells the truth in New Yorklet alone Washington, D.C.]
what a freakin mess and where in the hell are the lap-dog fiduciaries?
The superfluous and inefficient regulators, I presume? If there's a silver lining to this debacle, it's that it might be too big for the usual cleaner squads, and we'll have an end to "pure" free market talk for a generation or so. Kind of like the crack epidemic.
forbes, if it is to be trusted, is confirming my reverse-buffett interpretation:
Forbes.com File Not Found
The value of the assets in these types of funds is difficult to determine because there is no active market setting prices. Once there is a sale of similar securities, though, funds have to re-value their assets based on those prices. A fire sale of Bear assets likely would trigger lower asset values on the books at numerous funds.
One option is for the firm to buy the assets itself and hold onto them until they mature
I think this is what will happen for now. Totally frozen market, no sales, no panic, creditors get Bear to take over their assets, bogus valuation levels remain, loss of apetite for CDOs.
Further:
Let's say more hedge funds get into trouble. What is different between Bear's funds and other funds though is that Bear has tons of capital to buy back these assets. Other fund managers maybe not. Investment banks will make the fund managers buy back the assets, until they no longer can. At that point, it's liquidation Merrill-style. If Merrill etc are serious about their liquidation threats, there will be an overall MTM systemtic event. If not (i.e. if it turns out they are all scared of this, and not serious) then they will eat up themselves. In other words, the IBs may eventually have to continue to hold crappy paper at bogus valuations and eat the losses, as a direct consequence of the CDO monster that they created. This includes all assets seized from failed hedge funds.
If this is the future, then we have an entire future of calm, illiquid markets, padded by IB who hold crap to maturity. Still, such a world would be devoid of appetite for CDOs, which eventually means less liquidity for various things. And, hasn't this already begun this week?
Greenspan himself labelled those recently added 5% of homeowners as "at risk".
just in - lehman distributes bid list for BSAM funds
So is this picture taking shape?:
To prevent implosion, financial engineering firms lock up a significant portion of their nuclear waste, meaning that not only will liquidity seize up, even after it recovers(whenever that is) it will be at way lower volumes(for an extended period) due to the impairments?
"Muffy's got a problem, and she's not good with problems."
Yes, and I think Paris Hilton just gave us a taste of the coping skills of the rich and hedged.
"It's not fair!!!"
Please excuse the pitch for help here.. this is Matt over at the Register, with Mortgage Insider. We need help figuring out what's going on with Brookstreet Securities in Irvine. This is on topic, because Brookstreet, a broker dealer, allegedly placed clients' money in CMOs and now the company can't or their clients can't meet margin calls. Details are very sketchy. Anyway, check out the posting on my blog:
Mortgage Insider : The Orange County Register
or email me at mapadilla@ocregister.com and/or
lead writer on this story John at jgittels@ocregister.com
thanks.
Seb, sorry for the dog pile. take a knee.
lama, Robert, Alec, eli, et.al- thanks for the data confirming my overall gut on where the housing market and economy in general is headed.
I don't know what scares me more: The amount of leverage some of the hedgies are playing with, or that someone from Xenia, Ohio can run $2billion of OPM.
That's great, having seen this
Takes place in Xenia, turns out it was filmed in Nashville though.
Further to my comment above on analysis of the Census Bureau's "Household Estimates for the United States, by Age of Householder, ...", the stats indicate that in 1991 householders under the age of 35 owned 9.66 million homes. In 2006, in contrast, householders under 35 already owned 10.65 million homes.
Since those age cohorts don't differ much in size, and rising living standards in China and India can be expected to reduce immigration of well-paid professionals into the current under-35 cohort, we can expect about one million units less first-time-buyer demand from this cohort going forward compared to what they would have generated had not the bubble pulled sales forward.
At the other end of the age scale, householders 50-59 in 1991 owned 10.1 million homes, but in 2006 that cohort owned only 9.2 million, divesting 0.9 million homes. If this divestiture rate holds also for the 1.6-times larger cohort that was 50-59 in 2006, then by 2021 they will have returned about 1.5 million homes to the market.
Meanwhile, since the large age cohorts in between these two age ranges are already at high ownership rates, their contribution to new demand over the next 15 years will be much less than it was over the last 15.
Thus, even if it were not for the enormous glut of vacant housing now waiting to be absorbed, underlying demand going forward will be fundamentally less than in the 1991-2006 boom years.
jm, is there a way to look at the number of 2nd homes and investment props being returned to the market? my take is that a ton of the fcls are frauds in the "i'm going to rent this single family prop down the street from me" variety. at least based on the loans i've personally reviewed.
There are some highly detailed vacancy stats for "owner-occupied" and rental housing units (some broken down by number of units in structure, which is informative) on the same Census Bureau web page as the tables referenced above. Most of the vacancy data is also broken down by intended use (whether vacation property, etc).
Be sure to read the accompanying info on the methodologies they use -- and you can probably email or phone the experts who put the data together -- contact info is given.
Note that although the fraction of householders calling reporting that they are owners seems to be directly measured by survey, the "number of households" is estimated, and the estimates have been subject to revisions (e.g., in 1993) which while small relative to the total number are large relative to the year-over-year changes, and so are disruptive if you are trying to look at time trends (but keep in mind that between the revisions the methodology is consistent, so the errors probably are, too).
I believe the ownership ratios and vacancy fractions are the most reliable elements in this data, much more reliable than the absolute numbers, because (if I understand correctly) the way they collect the data is to directly survey a fairly large number of households and dwelling units and then get the absolute numbers by applying the measured ratios and fractions to their less directly measured figures for total households and dwellings. For example, I find that the ownership ratios I compute from the Table 15 data do not change significantly across the large 1993 revisions in numbers of households in various age cohorts.
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