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Ow, looks like word on the street is spreading quick and Monday is likely to be a very nasty day for the financials, the market in general, and definitely the housing outlook. I just dont see how this doesn't turn into a massive cut in house prices that feeds through to wealth, reduced MEW, lower consumer spending and a nasty deflationary recession by year end.
CR, when are you updating your recession chanceometer?
Geoff, I've been asked that question a few times over the last few days - for obvious reasons. I was expecting another round of tightening, and another down turn for the housing market, but I've been surprised by how quickly the mortgage markets have tightened this time. Back in February it was a much slower process.
As far as a recession, I think we need to watch the consumer and probably CRE. I'll try to update my recession odds soon.
As an aside, I'm definitely not as negative on the economy as some people that comment here. I'll try to explain why over the next few weeks.
" apologize for appearing overly dramatic. But this evening I have feelings that for me recall the disturbing emotions following the terrible 9/11 tragedy. I know the world has changed and changed for the worse yet I recognize that I dont know how and to what extent. I fear for our markets, our economy, our currency and our system."
Looks like Syron is for the aplication of some tough medicine.
I say bring it.
CR, I have been reading your blog for about a year now and I have grown to respect your opinion and analysis quite a bit.
My wife and I are working hard in the lower to mid tranches of the middle class. Most here are working too hard to lift their head and really study what is going on.
I am fortunate enough to have been able to look around.
The big securities firm also plans to oust Warren Spector, Bear's powerful chief of stock and bond trading and one of the firm's two presidents, according to a person familiar with the matter. Mr. Spector, 49 years old, had been widely viewed as a leading candidate to become the firm's next chief executive. Bear's board is set to meet Monday to discuss Mr. Spector's departure, the person said.
It is hard to overstate how shocking this is. A couple of thoughts:
1) IB Head Alan Schwarz and Spector have been sparring for many years over who would ultimately replace Cayne when the time came and I'll bet Alan found the right time to bury the knife;
2) I can't see how this is anything but horriffic news for Bear for two reasons A) He's only ever worked at Bear and has a near-mythical cultural status within the organization and B) He is among the most intelligent people I have ever been in a room with.
3) It is unlikely this is a precursor to the firm being sold as Spector is widely seen as one of Bear's great assets.
If anyone cares I'll get some pretty good scoop over the next few days.
There are some interesting nuggets in there and for those who aren't familiar with how companies communicate with analysts in real time, here is an example.
I must admit, I thought most of the questions were pretty softball.
It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change. - Charles Darwin
I get a WSJ login screen when I go to the link.. No worries if its a pay-thing..
Of course I'm interested - from "Accidental Death of an anarchist" - Dario Fo - "Gossip ! We Love it ! Its like the smell of.. " - I'll cut off the quote there
Street cred? Someday you're going to wish you had never typed that.
I think my argument about intelligence is one about balance rather than one that insists one person is right and the other wrong
For some time you have been telling people here that they dont understand but meanwhile you in your gated community have seen it all before and we simpler folk have no reason to worry. LTCM was so much worse and so forth etc.
Now quite suddenly you are talking about being in the Bankerdome fiddling with amunition?
Trust me superstar, we could sift back through your comments in the past weeks, speaking facts only, and clearly assert that most were complete and utter nonsense.
I would suggest you keep your finger-pointing to a minimum in light of your own weaknesses.
I keep thinking about the German bank bailout - 13 billion euros? Also FT had some dour thoughts about Turkey, Eastern Europe, some others. Think about the hyper inflated Irish and Brit RE markets.
And the Mortgage disaster has a feedback loop - the more funds are unavailable or overpriced, the worse the CA and other markets get, the worse the MBSs are, the less funds etc. THe IB's stuck eating their own pier loans, all this on top of a hedge fund leveraged, carry traded, repo'd system. Do I think the central banks will be able to hold it together, more or less, yes. But like '29 this really will spread to the real economy, deprived of the home equity cash machine. Not an alarmist, but count my vote for a good solid recession.
I'd like to put a vote in for CR's essay on the broader economic effects these developments in the finance industry are likely to have. That sounds really interesting, because I'm surprised to hear that he's not very pessimistic about them.
The typical reasoning I've read about this is that cheap credit has been keeping the consumer economy going, so if the credit dries up, retail sales will sag. Since they are such a large component of the GDP, that is supposed to lead to a recession. Is there another likely scenario?
It might be fair to say at this point that the 'gloom and doom' bears over the last 2 years who predicted the eventual meltdown of the 'credit bubble' are smiling today. Those who continue to see a benign outcome of the current slide, again may prove to be too optimistic.
Perhaps it really was not different this time around after all. As it never is.
Recession late 2007, 2008? Seems like all of this mess will not end with a whimper but with a bang.
Latino USA's Maria Hinojosa speaks with Wade Henderson, president of the Leadership Conference on Civil Rights, on how ethnic communities are hit hard by home foreclosures.
Apparently around half of subprime mortgages were made to minorities and they are facing foreclosures as resets hit their mail boxes.
Here are some quotes:
(1:15) Housing and mortgages is one of the pressing civil rights? ... (1:22) having a home ... is about having access to quality education and ... jobs and meaningful job opp.
(2:00) the merican dream is built on homeownership.
(2:20) potentially the greatest lost of wealth between African American and Latino's ever recorded in our country
(5:00) it's about conventional lenders having abandoning their responsibility to these communities, leaving them simply vulnerable to subprime lenders. And because many of the Latino and African American borrowers that we rare talking about lack the kind of financial information and sophistication that would be needed to protect their interests, they are more vulnerable than other borrowers.
Alex: The typical reasoning I've read about this is that cheap credit has been keeping the consumer economy going, so if the credit dries up, retail sales will sag. Since they are such a large component of the GDP, that is supposed to lead to a recession. Is there another likely scenario?
Alex, a recession isn't the worse thing that can happen, and occasionally they have to happen. As long as banks have reasonable amounts of money to lend at a reasonable profit margin, the economy will not lock up tight. And if we need to do it, we can put money back into the lending system through any one of the mechanisms that are already there.
Actually, a drop in property values will boost the Florida and California economies going forward. One of their severe problems is that companies have trouble hiring people to work there, because those prospective workers coming in from the outside can't afford to buy in.
Four months after Katrina, the local banks had an interesting problem. They had plenty of deposits but no loan prospects, and they were begging other banks nationally for participations. That's what we need to prevent, AND THAT IS WHAT HAS BEEN HAPPENING in many mortgage markets. The funny-money loans were driving out the reasonable lenders. There are plenty of people out there who have money and have been sitting on the sidelines. As things rationalize, they'll get into the market. If you prevent the rationalization, you enforce economic stagnation in too many areas.
Decent corporate deals will still work going forward, and reasonable mortgages will too. Yes, there will be an interim and unpleasant period of adjustment, but at this point it's the only way forward.
People still have money and they still want to invest it. What they are not going to get is 20% safe returns on their money annually, but that's not necessary to have a strong economy.
Retail sales have already sagged, with 2nd quarter non-durable sales coming in lower than in the first.
It is time for Congress to rethink the bankruptcy bill, however.
Also, the pain for the individual borrowers who have any realistic chance of paying reasonable loan terms won't be as bad as everyone thinks. Right now, they are in the driver's seat. If they choose to work with their creditor, the creditor will work with them. Nothing and no one can save those borrowers who signed up for loans with principal balances that were 7-10 times their annual income, so why even try?
"It might be fair to say at this point that the 'gloom and doom' bears over the last 2 years who predicted the eventual meltdown of the 'credit bubble' are smiling today."
Yes sir, we are smiling with the satifaction of seeing the house burning down after having warned Johnny for years not to play with matches. Now he's leaned a lesson, but where are we going to sleep next?
Unless we have an economic event horizon Monday, I don't see the Fed lowering rates. They may lean toward neutral, but they won't be easing, and the market will drop further in the coming weeks, thus forcing us to find out once and for all... is the Fed for stable prices or jobs???
If they're for stable prices, then we go into recession, and potentially suffer a financial meltdown. If they're for jobs, then we get inflation, and eventually recession, and maybe a dollar crash to boot.
"Actually, a drop in property values will boost the Florida and California economies going forward. One of their severe problems is that companies have trouble hiring people to work there, because those prospective workers coming in from the outside can't afford to buy in."
A related problem: industrial plants in the coastal regions have shut down and moved away because even skilled blue-collar work doesn't pay enough to buy a house or raise a family in this area; their prospective labor forces left town. So these outfits -- good employers, some of them -- have shut local factories and consolidated their operations in lower-priced areas of the country (or overseas).
Lower prices won't make those jobs come back any time soon.
MOM, I agree. There is a lot of liquidity; rates are not high. (Hey, I've got some cash and I don't see any wonderful offers being made for it. Damned if I'm going to throw it in a loser fund run by somebody like Banker's "most intelligent guy").
Given that, you have to conclude that neither lowering rates or increasing liquidity would have any effect for either the housing market or the investment banks.
It is time for Congress to rethink the bankruptcy bill, however.
Great post Mom...
I agree with about everything you wrote there especially bankruptcy re-reform.
I certainly don't want to re-institutionalize irresponsible borrowing (which was the so called reason for BK reform - real reason was Citi & BoA wanted to have legal authorization to try to squeeze blood from stones)... but we need to make the code more 'credit rehabilitation' friendly and less punitive. 'Yes' clear out the losses & wipe out the assets of the losers... but then instead of locking them up in debtor's prison design a system that REALLY allows them back - slowly, responsibly - into the economic mainstream again. That was the whole idea behind BK originally.
Then as prices reset & people lose homes, it isn't a decades long ordeal.
It might be fair to say at this point that the 'gloom and doom' bears over the last 2 years who predicted the eventual meltdown of the 'credit bubble' are smiling today
For all who saw this coming, this is a pyrrhic victory at best, no occasion for smiles or self-satisfaction.
i don't think the GSEs have any obligation to help, but no one that i know of is asking them to provide liquidity for the loans that never should have been made. but there's also very little liquidity for new loans that should be made, if they're not agency eligible and that's the market that needs to start functioning again.
PS Tanta, i thought after all the downgrades started happening u said u thought investors would STILL buy anything with a 700 FICO, and i said u were more cynical than me...i wish u were right...
I'm not coming to anyone's defense, but Banker's perspective is too valuable to flame over a personal, insider observation.
Look, I'd be the first to bet that 95% of the folks at BSC couldn't change a flat tire, replace a garbage disposal, keep a score book for a baseball game, make a salad, etc. But intelligence comes in flavors. My uncle's a mailman and can name almost any world leader and provide an overview of geopolitical situations in nearly any country. Still, he is financially clueless.
Point is that people inside look to folks like this for leadership, esp. during tumultous times. Employees aren't comfortable with anarchy, coups, and mutinies - in general.
Even though I've never been in a room with them, Risk Capital and Worried are the two most intelligent people I've ever known . Keep the scoop coming Banker.
There are others here much more informed than I, maybe someone can offer some insights...
I keep waiting to hear what is happening with all of the derivatives floating around out there. We get plenty of info about CDO and MBS, but what about some of the more esoteric stuff that I have read about in the past. Seems there must have been lots of "bets" made that need to be settled. In the past, questions have been raised as to who was really on the other side of these trades (Madam Meriweathers Mud Hut?) and how the whole mess would be settled if there was some sort of dislocation. Even the Fed was complaining that record keeping was not adaquate, etc. Well, we've had the dislocation, aren't parties out there looking to collect on their billions (trillions) of wagers?
but there's also very little liquidity for new loans that should be made, if they're not agency eligible and that's the market that needs to start functioning again.
well not really, but i wish they would start considering nonprime again...
Good Grief BD! The smoke hasn't even cleared yet and the embers are still hot... and you want folks to move back into the burning house?
This will all work out - in time. I am firmly convinced secondaries will start buying once they have assurances that what they buy is credit worthy & will return as promised. That has to be done first - just sayin' it on the internets won't be sufficient... they are going to have to prove it before folks will buy it... they've been burned, eh?
bacondreamz - there's also very little liquidity for new loans that should be made, if they're not agency eligible and that's the market that needs to start functioning again.
Oh, they will start functioning as normal once those overinflated $700k houses drop the price to, say, $417k. You know, the price they should have never gone over in the first place. No special clauses are required, just some simple discounting. It was built into the bubble, let the damn thing deflate already!
Then the agencies can help. Otherwise, the greedy irresponsible lenders should be left to pop.
dr digits - Point is that people inside look to folks like this for leadership, esp. during tumultous times. Employees aren't comfortable with anarchy, coups, and mutinies - in general.
At this point, I don't think we should really care one iota about the Bear employees, the ones whose greed created, propelled, and now imploded this credit mess. If this is the kind of work they are experts in, I guess they should be unemployed.
Dryfly,
I think bankruptcy reform (rollback to prior standards) will encourage more responsible lending. There are always plenty of people who will borrow irresponsibly when given the chance. Take away the incentive to lend to them and mitigate the problem.
lama I mostly agree with you - the one reform that needs to remain is the limits people can shelter via real estate exclusion.
I heard of some of my peers (biz guys) who lived in states that allowed them to exclude something like a million dollars or more in personal real estate... excuse was we wouldn't want widows and orphans to lose their homes... so as soon as these guys smelled trouble they funneled all their available assets & wealth into their RE & then filed... sticking all the others with unsecured losses but protecting a million worth of 'net worth' for themselves.
The courts should be able to force them (as is the case in my state) to liquidate most of that 'protected equity'. Maybe they keep the house but no more than $100K net equity (on a million dollar home force them to refi to 90% CLTV minimum).
That would remove a lot of the prior abuses in BK... almost all in fact.
"At this point, I don't think we should really care one iota about the Bear employees, the ones whose greed created, propelled, and now imploded this credit mess. If this is the kind of work they are experts in, I guess they should be unemployed."
There's your typical generalisations, spewed forth again. Don't you have lazy tustafarian anarchist blogs you could dedicate more time to? Thanks.
To climb out of the bust to come we need more productive consumers and less dispirited debt slaves.
BTW, the new law, though a real pain, is nowhere near as strict as many people believe.
From the numbers of people calling my office asking for advice about giving up their homes, or 4 homes, or 15 homes, I'm not very optimistic about real estate here in LA.
The increase in the jumbo rates from 6.87% to 8% will soon spread the pain to nicer areas of town where people thought they were immune from the havoc in the Inland Empire.
The courts should be able to force them (as is the case in my state) to liquidate most of that 'protected equity'. Maybe they keep the house but no more than $100K net equity (on a million dollar home force them to refi to 90% CLTV minimum).
That would remove a lot of the prior abuses in BK... almost all in fact.
dryfly | 08.04.07 - 12:50 pm | #
All those jobs that american's won't take??? hmmm
I guess those who declare shouldbe willing to, this is , after all, america ....
Bootstrap yourself back to prosperity... starting with nothing
Creative D... If you can say, what are you seeing in LA? Admittedly I'm no insider... but if there's any fear here, I don't really see it. Listing prices are still insane, and anything that's priced maybe 5-10% off peak seems to sell pretty quick. Buyers appear clueless. The smug "it can't happen here" attitude among realtors and sellers still prevails.
From all I read here and elsewhere, you'd think people would be starting to feel some pain, but outwardly it's not very evident. There's evidence of pretty serious trouble coming out of almost every major city in the country... LA? Crickets... Denial runs strong here, just looking for anything that hints that it "will" happen here. Sorry for the OT post, and TIA!
Point taken Dry. People are always gaming the system. I'll bet they were taking big salaries as their companies went south. I've seen that. You could also blame the people who made the laws with loopholes.
In the '90's we had tremendous growth even as entire sectors had to retrench. I have the feelng that this era wil be the inverse, with stagnaton at best even if entire sectors are humming along. It's a great time to be working in the Iron Range or Silicon Valley, notsogood if you swing a hammer, work in a truck plant or sell real estate.
yes, i want people to start buying properly underwritten alt-a; 5/1s, 7/1s, whatever. why not? occasional pools of option arms isn't enough for a functioning market.
if u have money with a fund manager who happily bought the investment grade pieces of subprime/alt-a deals in 05/06 but now refuses to look at private lable mbs because he got burned, u better get your money back and run for the hills. managers are paid to make money, not hold petty grudges. for that matter, if the fund manager is blaming lenders, instead of owning up and saying he made a stupid investment, take your money and run for the hills.
tax break for short sellers (don't tax the difference between short sale and amount owed as income) to encourage as close to an organized liquidation of bad paper as possible and to cushion the social effects of dislocation (unless you want to return to wastelands and riots).
Regulations and sunshine laws for the financial markets, including derivatives and hedge funds.
regulation of lending, from mortgages to credit cards, (won't solve current problems but a societal commitment to keep it form happening again will help hold people together socially and psychologically as the bad debt is digested).
tax reform to restore at least a little progressiveness (e.g., tax hedge fund managers on income, not for capital gains, a sensible tax structure for CEOs, etc) which will encourage financial responsibility as well as fund needed public sector programs, which include not only wise and moderate regulation of financial markets but also:
infrastructure! This is a structurally deficient country, not just the bridges!
good public education for all (a nation of idiots is more easily fleeced than a flock of sheep).
and more, such as health care.
Let's not forget how this disaster (these disasters) happened. No quick fix to the economic problems, but time to begin the long hard slog of rebuilding the country on a sounder structural footing.
Oh. Let's go back to some basic principles, too, like trial by jury, habeus corpus, one person one vote, etc
Liar's loans, Liar's war, Liar's Dept of Justice, etc.
JBR- what makes me nervous is that my clients are walking away from houses not because their rates reset- they're generally walking away because they can't afford their teaser rates on their subprime or neg-am loans, and they've lost the ability to refi.
A year ago people came to me to save their homes- now they come to me to give up their homes.
Most eager to get away are people with numerous cash-flow negative investment homes in the Inland Empire- but the pain is not 'contained'.
Clients have been showing me notices that their payments on their neg am 1st will go from $2700 to $7200 in a year's time. (How else could someone making 100k a year afford a million dollar house?)
The end of Alt-A and the spike in jumbo rates will bring the pain to formerly smug LA. It will also end the straw-man cash-back to buyer scams common in certains wealthy parts of town.
I find it sickening that loan brokers were able collect a $30,000 yield spread premium (kick-back) for putting someone in a million dollar option ARM they had little prospect of repaying.
Dryfly, you really don't want to get me started on that bankruptcy bill, because I'll write comments longer than Tanta's posts....
Yes, there were a few good provisions, but in reality quite a few people will have to file bankruptcy and the negatives outweigh the positives. It will hurt everyone if most of these people can't clear their debts. Barring some of the fraud/sheltering provisions, I favor a return to most of the prior status quo.
I also agree wholeheartedly that the bill encouraged irresponsible lending. It won't really increase most recoveries, though.
I don't want to offend Tanta and CR by turning their excellent blog into an endless M_O_M rant about that pernicious bill, but I would like to point out with no little wrath the stupidity of making the payoff dependent on the prior year's income. Consider the huge number of contractors and small businesses whose prior year's income has no relationship to this year's income, and I think anyone will get the point.
It was a stupid bill that has already had bad economic effects and will now really bite us in the butt if not adjusted to reality.
usually you aren't worth acknowledging, but since you have similar knowledge about Marblehead as you do other things you might wish to ask someone who knows about the veteran's housing on Broughton Road.
Creative D... That makes sense. I found my way to this blog a couple years ago after getting a pre-approval for a million $ mortgage (I was starting to look for a place).
Now, I make a comfortable 6 figures, and I looked at the payments (80/10/10, IO 1'st, fixed 2'nd), and looked at what I could get for that $$, and... well, I'm not looking anymore. Not that I couldn't "afford" it, but paying close to 3/4 of my net income for a cramped little cottage, (not counting tax breaks which don't help my monthly cash flow), just seemed insane.
Since then however, I've had to endure the "why don't you buy", "RE only goes up", "LA is different", "everyone here is rich" mantra. Hell, by many peoples standards I'm rich, but I'm not propping this thing up. I've got better uses for my money for now. But I would like a place of my own to, ya know.... live in. It's maddening.
I take no pleasure in the fact that people will be in financial pain, but it needs to happen IMHO. It'll be interesting to see who's swimming naked, that's for sure. Sorry to all for veering OT!
Averages for the 2004 tax year for zip code 01945, filed in 2005:
Average Adjusted Gross Income (AGI) in 2004: $135,766 (Individual Income Tax Returns)
Here: \t $135,766
State: \t $62,877
Bluecollar, eh?
Students in private schools in grades 9 to 12 (high school): 322
Here: \t 27.3%
Massachusetts: \t 12.2%
I remember when my neighbor (who had just had his wife become a realtor and who was talking about buying a franchise real estate office)tried to talk me out of selling my house because I would make 10% a year for the rest of my life in real estate. That was two years ago. Now I rent and wait.
Except in a general sense about cultural conformity that very very few people are TOTALLY immune to I don't have much sympathy for people who took out 2/28, teaser rate, neg-am or interest only mortgages - there was tons of information out there telling people what the pitfalls were - just in case you couldn't use your own common sense or rely on tried and tested aphorisms like "if its too good to be true.. ".
I remember well, when Greenspan tried to persuade people that ARMS could be a good idea, that Liz Pulliam-Smith(LA Times) , Suzy Orman (CNBC), Jane Quinn(NewsWeek) said very plainly that that interest rates were so low that they only place next was UP and ARMS was a stupid idea.
So if people are sexist enough to ignore these fine ladies or sooo out of it not to read and watch any of those standard magazines/newspapers they get mugged.. So sad - so it goes
I'm new to reading the comment. Can you share a little about your line of work? And locations served? Can't quite tell what end of finances or real estate you're in. This is probably known to regular readers already. Hope you don't mind the request.
w... trying to veer back on topic... A lot of folks are waiting, thing is, unlike me and probably you, not many of them can afford to buy here at these prices without creative lending. That's why I hope Syron's attitude prevails.
Even though the market is slower, people are still buying these places. The events of the last few days, at least in the LA market, is going to remove a lot of buyers from the pool. I mean, I was at an open house last week for a million dollar fixer (just for laughs). Not a complete teardown, but literally falling apart. This week... pending. We'll see how that works out...
No more alt-a/ low interest Jumbos.... buh bye "high end" LA RE market...
I dropped in on the agent we have been working with early this week and he showed me some houses way out of our price range and when I commented on that he said that it was okay because he figured they would not sell that high. I am talking $300,000 out of our range. They have already dropped that much over the last 1/2-1 year they have been listed. Then he showed me a contingent sale and commented that it may still be available because the last 4 deals he had fell through due to financing or buyers asking for a reduced price.
because I'll write comments longer than Tanta's posts....
Impossible!
banker, despite differences of opinion, I always read what you write.
risk capital, how's your bunker coming?
dryfly, you know, I always that new BK law would backfire on the people pushing it. What better way to wean people off easy credit than to throw them into Ch13 for a decade? It worked for me.
Joe-I'm a consumer bankruptcy attorney in LA- our firm is very big so we have clients all over the state.
People are responsible for their actions- but I feel a lot of sympathy for people suckered into bad loans.
Today I spoke to a 69 year widow who refied last year into a neg am loan, to take some cash out to help family and do some improvements on the property. I had to break the news to her that when she hits the neg-am cap and the loan recasts, her payments will skyrocket (and she'll lose the house she's had for many years.) Some broker probably got 15-20k in YSP of this deal- I doubt she would have taken the loan had it been explained to her in terms she could understand.
I'm in LA, too, and have seen evidence of what you describe. Defaults and foreclosures are not just hitting new buyers, but many who refinanced long owned homes. From the outside (looking only at the NOD lists) one cannot tell whether the refi was to live the highlife or, as in many cases like the one cite, to pay medical bills, etc.
I agree with you that anger should mostly be directed at the lending and securitization institution that made out like bandits, and that sympathy is indeed appropriate to many who got screwed by deceptive brokers.
But I also think it is important to distinguish between sympathy and social policy.
Even if many or most of those who will be losing houses do not merit sympathy (no doubt a mix), there are reasons to still cushion the fall of individuals, no matter whether their own bad judgment played a role in creating their hurt.
As social policy, quite distinct from matters of sympathy, we need to take a cold hard look at society, and what we will all be living if such large numbers of people are tossed out of houses and hurled into ever-deepening debt under current bankruptcy laws. That will be a disaster for all of us, even those who will be making a bundle off of smart real estate deals in the coming decade or so. Being rich is nice, but not so nice in a climate of social chaos.
I appreciate your posts and the information they convey from the ground level.
Pardon my saying so, but you seem to prove that not all lawyers are jerks. A point for us all to remember.
Aren't these the same Personal Responsibility, Limited Government types who are always trying to get gov't off of our backs? But now that they have behaved in the most irresponsible way by creating this derivatives monster, NOW they want a gov't handout to bail them out ie Freddie and Fannie buying their garbage.
Indeed, big capital has always wanted it both ways: free market, except for when they need govt subsidies; free trade, except for when their industry can be protected; etc.
Remember the 1970's song about changing my name to Chrysler and getting on the welfare line?
But Joe Shmoe gets into trouble and he is out on the street . . .
This Joe is no Shmoe, and I'm quite solvent, thank you.
But there are going to be an avalanche of Shmoes in the coming couple of years. It's time for some sensible social policy and wise regulation of the financial markets.
Hard thinking needs to be done if it seems Stearns is about to be eaten by his own Bears. No sympathy for them, but concern for societal impact. If they are the only firm effected, then they can rot. But there is every reason to think the market tanked on Friday because "it" knows that the Bear Stearns story represents the epidemic that is going to rush around the block (or, to put it more properly, has already become pandemic among financials).
Ossama Bin Laden is laughing away. What a bunch of monkeys we are.
In the immortal words of Pogo, We have met the enemy, and he is us.
i say get all the rich who've benefitted from this runup to return all their speedboats, learjets, Hampton homes, jewelry, & Picassos and then we can start talking about gov't bailouts.
seriously, those who profitted so outrageously from this mess have to be forced to financially participate in a larger way than the common folk who did nothing more than go to work everyday to feed their families.
All the FED has to do is pump liquidity, cut rates and meet with all the Bankers (ALL BANKERS- Mortgage Bankers, Investment Bankers, and Depository Institutions).
Force Wall Street to quit "margin calling everything" for a short time. Slowly sell quality assets (this obviously won't eliminate the pain as there are alot of non investment quality assets) into the system over a period of time.
Instead of what's happening "Fire Sale"- with NO bidders wanting to catch the proverbial falling knife.
There will still be major carnage to IB's and Hedge funds, with some being "forced" to close.
Something similiar to this worked before and It will again.
This will not create a "NEW" bubble as the damage has been to severe this time. Not just the Mortgage Market has been damaged but the IB's, Hedge funds and who knows else.
I think we all wish it were that simple, but the losses lead to a credit crunch, which leads to lower home prices, which leads to bankruptcies, which leads to lower consumer spending, which leads to recession, which leads to job loss, which leads to more bankruptcies.
If the Fed tries to pump liquidity into the system to cover for all of these losses, god help us. We'll be on our merry way to Zimbabwe.
Yea, the avg. Joe will feel some pain, but in the long run this may be good for the rest of the country. The avg. Joe has not seen his wages rise all that much, yet he keeps piling on the debt. The end result is a tiny percentage of the population reaps an enormous amount of money, while the avg. Joe just gets deeper and deepr into debt and farther and farther behind. Shame on the avg. Joe for going along with this clearly unsustainable arrangement.
We will still have the rich and the working class, I have no problem with that. But we must get back to a more sane arrangement that is less centerd on debt and speculation and more centered around saving money, living within our means, and making things "that you can drop on your foot," and not "derivatives" and other such pieces of paper that we pretend are wealth.
"I think we all wish it were that simple, but the losses lead to a credit crunch, which leads to lower home prices, which leads to bankruptcies, which leads to lower consumer spending, which leads to recession, which leads to job loss, which leads to more bankruptcies.
This is all going to happen anyway. It's the severity which will be softened by the act.
Ve hav vays to prop up the dollar.
I think that just draws out the pain and makes it worse. I really believe that sometimes it's just best to take your medicine. I hope Bernanke agrees, because IMO it's the quickest way for us to get back to monetary sanity. Economically I think many Americans have lost an understanding of duality, that up cannot be up without down, good without bad, yadda yadda yadda
The street wants to have their cake and eat it too. They have plenty of liquidity. They are scared for what they have sewn is a giant mess, and no one fully understands the implications.
The latest Wall Street Journal/NBC poll showed that 2/3rds of Americans believe we are in a recession or will be in the next year. Meanwhile, all the cheerleading by the fed heads and econonic experts has produced a loss of credibility as main street knows in their gut that something ain't right.
The preznit has no credibility left, and congress is quickly losing any goodwill they had at the beginning of the year.
The more these guys (Kudlow, etc.) tell us how great things are, the more the credibility slips away.
I'm sure we'll hear Abbey Joseph Cohen and other permabulls talk about the supertanker economy...but they too lost credibility years ago.
I haven't been a goldbug, but as the U.S.'s debt and fed's proclamation of 'sub-prime contained' rings hollow, that loss of credibility will continue to pressure the dollar to multi-decade lows, confidence in our 'leaders' will deteriorate further, social unrest among the have-nots begins to fester...then precious metals will indeed be precious.
"They are scared for what they have sewn is a giant mess, and no one fully understands the implications."
That no one understands the implications is the most frightening thing of all.
In the end, it could all be overblown, but when I think about the layers upon layers of leverage that were piled on with these derivatives, it makes me very worried for us.
Slowmo, we have had 25 years of almost all up markets. Asset prices now are more than 10 times what they were back in 1982. During that period, the Fed and everyone else studied their bellybuttons when asked if they should act to deflate the asset bubbles. Now markets drop by 5 or 10% over one month, and you think a big Fed/SEC/FASB... bailout is necessary? Forgive us if we are skeptical.
Moral hazard has proliferated. It needs to be removed gently but firmly. If that means some IBs get taken over, then so be it. it can be done with pain to the senior managers who let it get out of control, but without system collapse. And if reducing the moral hazard for all requires that some nice people who did dumb things have to get punished by a bankruptcy law with teeth, then so be it.
From Southern California, where I am, the asset price mania seems severe enough to require a severe response, and this is the right time for it.
There are other loans that probably should never have been made and providing more liquidity will make that situation worse in the long term.
Exactly.
What would you guys say the average loss is for an average subprime and alt-a mortgage-backed securitiy issued in 2005, 2006, and Q1 2007?
The press says no new subprime and alt-a mortgage bonds are getting sold, but what is happening in the secondary markets?
press the punic b:
http://www.brokeruniverse.com/grapevine/thread/?thread=436319
Jeez CR,
You should never have retired. O...H wait, you didn't. well, I for one feel much better knowing you are here. 10:20 LA time
CR,
Be sure and register Syron under "no rate cut" in your poll!
Ow, looks like word on the street is spreading quick and Monday is likely to be a very nasty day for the financials, the market in general, and definitely the housing outlook. I just dont see how this doesn't turn into a massive cut in house prices that feeds through to wealth, reduced MEW, lower consumer spending and a nasty deflationary recession by year end.
CR, when are you updating your recession chanceometer?
From the Economist:
"A good time for a squeeze
Tighter credit conditions are just what the markets need"
Premium content | Economist.com
I hope this leader is in front of the subscription wall.
Geoff, I've been asked that question a few times over the last few days - for obvious reasons. I was expecting another round of tightening, and another down turn for the housing market, but I've been surprised by how quickly the mortgage markets have tightened this time. Back in February it was a much slower process.
As far as a recession, I think we need to watch the consumer and probably CRE. I'll try to update my recession odds soon.
As an aside, I'm definitely not as negative on the economy as some people that comment here. I'll try to explain why over the next few weeks.
Best Wishes.
As an aside, I'm definitely not as negative on the economy as some people that comment here. I'll try to explain why over the next few weeks.
You better hurry, otherwise events may change your outlook (just like your recession odds).
Wow, this is some real doom from Doug Noland at PrudentBear:
Credit Market Dislocation
" apologize for appearing overly dramatic. But this evening I have feelings that for me recall the disturbing emotions following the terrible 9/11 tragedy. I know the world has changed and changed for the worse yet I recognize that I dont know how and to what extent. I fear for our markets, our economy, our currency and our system."
Looks like Syron is for the aplication of some tough medicine.
I say bring it.
CR, I have been reading your blog for about a year now and I have grown to respect your opinion and analysis quite a bit.
My wife and I are working hard in the lower to mid tranches of the middle class. Most here are working too hard to lift their head and really study what is going on.
I am fortunate enough to have been able to look around.
We are in for some really tough times.
Common sense?!? This just won't do. Off with Syron's head.
http://www2.standardandpoors.com/portal/site/sp/en/us/page.article/3,1,1,0,1148446444276.html
"25 Ratings On Six Cash Flow, Hybrid CDO Transactions Lowered, Off Watch Neg; Five Affirmed" - Some AAA CDOs in there.
http://fitchratings.com/corporate/events/press_releases_detail.cfm?pr_id=363298
Fitch U.S. Subprime RMBS Rating Action Recap: Aug. 3, 2007
"--Affirmations: 526 classes (outstanding balance: $46 billion);
--Downgrades: 291 classes (outstanding balance: $5 billion)."
Downgrade Friday continues its long and glorious tradition!
I know it was only a week ago but can I change my guess on resale homes sold this year. I want to lop off about a million.
Bonfire Of The Builders
By rushing into the mortgage business big-time, homebuilders helped fuel the housing crisis
Bonfire Of The Builders
.
I know it was only a week ago but can I change my guess on resale homes sold this year. I want to lop off about a million.
If they are counting bank REO I want to add a million... so maybe we balance out.
HOLY SH*T
Market Swoons As Bear Stearns Bolsters Finances - WSJ.com
The big securities firm also plans to oust Warren Spector, Bear's powerful chief of stock and bond trading and one of the firm's two presidents, according to a person familiar with the matter. Mr. Spector, 49 years old, had been widely viewed as a leading candidate to become the firm's next chief executive. Bear's board is set to meet Monday to discuss Mr. Spector's departure, the person said.
It is hard to overstate how shocking this is. A couple of thoughts:
1) IB Head Alan Schwarz and Spector have been sparring for many years over who would ultimately replace Cayne when the time came and I'll bet Alan found the right time to bury the knife;
2) I can't see how this is anything but horriffic news for Bear for two reasons A) He's only ever worked at Bear and has a near-mythical cultural status within the organization and B) He is among the most intelligent people I have ever been in a room with.
3) It is unlikely this is a precursor to the firm being sold as Spector is widely seen as one of Bear's great assets.
If anyone cares I'll get some pretty good scoop over the next few days.
If anyone cares I'll get some pretty good scoop over the next few days.
Whatever you feel comfortable releasing - I'll read.
Yes please Banker. Another helping of scoop please.
The transcript of the BSC conference call is in full below.
http://online.wsj.com/documents/transcript-bsc-20070803.pdf
There are some interesting nuggets in there and for those who aren't familiar with how companies communicate with analysts in real time, here is an example.
I must admit, I thought most of the questions were pretty softball.
"He is among the most intelligent people I have ever been in a room with."
I think this is the basis of the current problem though.
People measure intelligence in a way that is unintelligent. The ordinary guy has more commonsense and street cred and life knowledge.
This whole leveraged credit excess where people could even imagine that these products created less risk was very very unintelligent.
What were they using to think with?
People have been blinded by greed.
Its a kind of half wit intelligence that cannot see the bigger picture of what is going to happen.
Naturally only enormously intelligent people could possibly understand all of these sophisticated new financial innovations.
What a load of cobblers!
Worried,
People measure intelligence in a way that is unintelligent. The ordinary guy has more commonsense and street cred and life knowledge.
I grew up the bluest of blue collar and I've seen both sides. Your assertion is nonsense.
Street cred? Someday you're going to wish you had never typed that.
It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change. - Charles Darwin
Here's a bank that can handle the change.
First Citiwide Change Bank
All the time our customers ask us, "How do you make money doing this?"
The answer is simple. Volume.
hey Banker -
I get a WSJ login screen when I go to the link.. No worries if its a pay-thing..
Of course I'm interested - from "Accidental Death of an anarchist" - Dario Fo - "Gossip ! We Love it ! Its like the smell of.. " - I'll cut off the quote there
-K
Banker
I think my argument about intelligence is one about balance rather than one that insists one person is right and the other wrong
For some time you have been telling people here that they dont understand but meanwhile you in your gated community have seen it all before and we simpler folk have no reason to worry. LTCM was so much worse and so forth etc.
Now quite suddenly you are talking about being in the Bankerdome fiddling with amunition?
Banker,
you said-
" Your assertion is nonsense. "
Trust me superstar, we could sift back through your comments in the past weeks, speaking facts only, and clearly assert that most were complete and utter nonsense.
I would suggest you keep your finger-pointing to a minimum in light of your own weaknesses.
1929 Lite
I keep thinking about the German bank bailout - 13 billion euros? Also FT had some dour thoughts about Turkey, Eastern Europe, some others. Think about the hyper inflated Irish and Brit RE markets.
And the Mortgage disaster has a feedback loop - the more funds are unavailable or overpriced, the worse the CA and other markets get, the worse the MBSs are, the less funds etc. THe IB's stuck eating their own pier loans, all this on top of a hedge fund leveraged, carry traded, repo'd system. Do I think the central banks will be able to hold it together, more or less, yes. But like '29 this really will spread to the real economy, deprived of the home equity cash machine. Not an alarmist, but count my vote for a good solid recession.
I'd like to put a vote in for CR's essay on the broader economic effects these developments in the finance industry are likely to have. That sounds really interesting, because I'm surprised to hear that he's not very pessimistic about them.
The typical reasoning I've read about this is that cheap credit has been keeping the consumer economy going, so if the credit dries up, retail sales will sag. Since they are such a large component of the GDP, that is supposed to lead to a recession. Is there another likely scenario?
My thoughts this morning are with the ARM reset chart for the coming months. A giant chunk of these loans lost any chance of refiing in the past week.
It might be fair to say at this point that the 'gloom and doom' bears over the last 2 years who predicted the eventual meltdown of the 'credit bubble' are smiling today. Those who continue to see a benign outcome of the current slide, again may prove to be too optimistic.
Perhaps it really was not different this time around after all. As it never is.
Recession late 2007, 2008? Seems like all of this mess will not end with a whimper but with a bang.
OT, mortgage woes as civil rights issue.
NPR had: [MP3 audio] LATINO HOME OWNERSHIP [August 3, 2007]
Latino USA's Maria Hinojosa speaks with Wade Henderson, president of the Leadership Conference on Civil Rights, on how ethnic communities are hit hard by home foreclosures.
Apparently around half of subprime mortgages were made to minorities and they are facing foreclosures as resets hit their mail boxes.
Here are some quotes:
(1:15) Housing and mortgages is one of the pressing civil rights? ... (1:22) having a home ... is about having access to quality education and ... jobs and meaningful job opp.
(2:00) the merican dream is built on homeownership.
(2:20) potentially the greatest lost of wealth between African American and Latino's ever recorded in our country
(5:00) it's about conventional lenders having abandoning their responsibility to these communities, leaving them simply vulnerable to subprime lenders. And because many of the Latino and African American borrowers that we rare talking about lack the kind of financial information and sophistication that would be needed to protect their interests, they are more vulnerable than other borrowers.
(the whole MP3 is 7 minutes.)
Alex: The typical reasoning I've read about this is that cheap credit has been keeping the consumer economy going, so if the credit dries up, retail sales will sag. Since they are such a large component of the GDP, that is supposed to lead to a recession. Is there another likely scenario?
Alex, a recession isn't the worse thing that can happen, and occasionally they have to happen. As long as banks have reasonable amounts of money to lend at a reasonable profit margin, the economy will not lock up tight. And if we need to do it, we can put money back into the lending system through any one of the mechanisms that are already there.
Actually, a drop in property values will boost the Florida and California economies going forward. One of their severe problems is that companies have trouble hiring people to work there, because those prospective workers coming in from the outside can't afford to buy in.
Four months after Katrina, the local banks had an interesting problem. They had plenty of deposits but no loan prospects, and they were begging other banks nationally for participations. That's what we need to prevent, AND THAT IS WHAT HAS BEEN HAPPENING in many mortgage markets. The funny-money loans were driving out the reasonable lenders. There are plenty of people out there who have money and have been sitting on the sidelines. As things rationalize, they'll get into the market. If you prevent the rationalization, you enforce economic stagnation in too many areas.
Decent corporate deals will still work going forward, and reasonable mortgages will too. Yes, there will be an interim and unpleasant period of adjustment, but at this point it's the only way forward.
People still have money and they still want to invest it. What they are not going to get is 20% safe returns on their money annually, but that's not necessary to have a strong economy.
Retail sales have already sagged, with 2nd quarter non-durable sales coming in lower than in the first.
It is time for Congress to rethink the bankruptcy bill, however.
Also, the pain for the individual borrowers who have any realistic chance of paying reasonable loan terms won't be as bad as everyone thinks. Right now, they are in the driver's seat. If they choose to work with their creditor, the creditor will work with them. Nothing and no one can save those borrowers who signed up for loans with principal balances that were 7-10 times their annual income, so why even try?
"It might be fair to say at this point that the 'gloom and doom' bears over the last 2 years who predicted the eventual meltdown of the 'credit bubble' are smiling today."
Yes sir, we are smiling with the satifaction of seeing the house burning down after having warned Johnny for years not to play with matches. Now he's leaned a lesson, but where are we going to sleep next?
Unless we have an economic event horizon Monday, I don't see the Fed lowering rates. They may lean toward neutral, but they won't be easing, and the market will drop further in the coming weeks, thus forcing us to find out once and for all... is the Fed for stable prices or jobs???
If they're for stable prices, then we go into recession, and potentially suffer a financial meltdown. If they're for jobs, then we get inflation, and eventually recession, and maybe a dollar crash to boot.
Tough choice really
MOM says:
"Actually, a drop in property values will boost the Florida and California economies going forward. One of their severe problems is that companies have trouble hiring people to work there, because those prospective workers coming in from the outside can't afford to buy in."
A related problem: industrial plants in the coastal regions have shut down and moved away because even skilled blue-collar work doesn't pay enough to buy a house or raise a family in this area; their prospective labor forces left town. So these outfits -- good employers, some of them -- have shut local factories and consolidated their operations in lower-priced areas of the country (or overseas).
Lower prices won't make those jobs come back any time soon.
I really see no reason to panic about excessively tight lending standards just yet. At least not if you want to borrow from LEND:
Accredited Home Lenders
MOM, I agree. There is a lot of liquidity; rates are not high. (Hey, I've got some cash and I don't see any wonderful offers being made for it. Damned if I'm going to throw it in a loser fund run by somebody like Banker's "most intelligent guy").
Given that, you have to conclude that neither lowering rates or increasing liquidity would have any effect for either the housing market or the investment banks.
Thanks for the analysis, M.O.M.
"Stocks fluctuate, next question."
-Alan Greenberg , CEO Bear,Stearns & Co, in response to questions about the crash, October 22, 1987
It is time for Congress to rethink the bankruptcy bill, however.
Great post Mom...
I agree with about everything you wrote there especially bankruptcy re-reform.
I certainly don't want to re-institutionalize irresponsible borrowing (which was the so called reason for BK reform - real reason was Citi & BoA wanted to have legal authorization to try to squeeze blood from stones)... but we need to make the code more 'credit rehabilitation' friendly and less punitive. 'Yes' clear out the losses & wipe out the assets of the losers... but then instead of locking them up in debtor's prison design a system that REALLY allows them back - slowly, responsibly - into the economic mainstream again. That was the whole idea behind BK originally.
Then as prices reset & people lose homes, it isn't a decades long ordeal.
Thoughts?
CDO's ,CLO's
Hey ,I wonder if we try this , will people buy it....
Y guys, it works, it's great...
ooooops, I guess we should'nt have
It might be fair to say at this point that the 'gloom and doom' bears over the last 2 years who predicted the eventual meltdown of the 'credit bubble' are smiling today
For all who saw this coming, this is a pyrrhic victory at best, no occasion for smiles or self-satisfaction.
i don't think the GSEs have any obligation to help, but no one that i know of is asking them to provide liquidity for the loans that never should have been made. but there's also very little liquidity for new loans that should be made, if they're not agency eligible and that's the market that needs to start functioning again.
PS Tanta, i thought after all the downgrades started happening u said u thought investors would STILL buy anything with a 700 FICO, and i said u were more cynical than me...i wish u were right...
well not really, but i wish they would start considering nonprime again...
I'm not coming to anyone's defense, but Banker's perspective is too valuable to flame over a personal, insider observation.
Look, I'd be the first to bet that 95% of the folks at BSC couldn't change a flat tire, replace a garbage disposal, keep a score book for a baseball game, make a salad, etc. But intelligence comes in flavors. My uncle's a mailman and can name almost any world leader and provide an overview of geopolitical situations in nearly any country. Still, he is financially clueless.
Point is that people inside look to folks like this for leadership, esp. during tumultous times. Employees aren't comfortable with anarchy, coups, and mutinies - in general.
Even though I've never been in a room with them, Risk Capital and Worried are the two most intelligent people I've ever known
. Keep the scoop coming Banker.
dd
There are other loans that probably should never have been made and providing more liquidity will make that situation worse in the long term.
I guess that would be a "NO" vote for Dick. No more liquidity, please, Ben. Listen to Dick, not the dickhead.
"For all who saw this coming, this is a pyrrhic victory at best, no occasion for smiles or self-satisfaction."
Speak for yourself. There are plenty of reasons to smile.
I have said it before and I say it again - it is the speed and severity. Its nice to have others concur!
Fitch U.S. Subprime RMBS Rating Action Recap: Aug. 3, 2007
"--Affirmations: 526 classes (outstanding balance: $46 billion);
--Downgrades: 291 classes (outstanding balance: $5 billion)."
Looks like 10 more weeks of downgrade material right there.
If they are counting bank REO I want to add a million... so maybe we balance out.
Don't forget that the $300 billion in ARM resets of H2 2007 will not be REO's until 2008. Just restating the obvious for the lurking bottom callers.
I grew up the bluest of blue collar and I've seen both sides.
Marblehead MA banker, eh? Not quite a blue collar neighborhood from what I recall. Unless you're counting the household help.
There are others here much more informed than I, maybe someone can offer some insights...
I keep waiting to hear what is happening with all of the derivatives floating around out there. We get plenty of info about CDO and MBS, but what about some of the more esoteric stuff that I have read about in the past. Seems there must have been lots of "bets" made that need to be settled. In the past, questions have been raised as to who was really on the other side of these trades (Madam Meriweathers Mud Hut?) and how the whole mess would be settled if there was some sort of dislocation. Even the Fed was complaining that record keeping was not adaquate, etc. Well, we've had the dislocation, aren't parties out there looking to collect on their billions (trillions) of wagers?
but there's also very little liquidity for new loans that should be made, if they're not agency eligible and that's the market that needs to start functioning again.
well not really, but i wish they would start considering nonprime again...
Good Grief BD! The smoke hasn't even cleared yet and the embers are still hot... and you want folks to move back into the burning house?
This will all work out - in time. I am firmly convinced secondaries will start buying once they have assurances that what they buy is credit worthy & will return as promised. That has to be done first - just sayin' it on the internets won't be sufficient... they are going to have to prove it before folks will buy it... they've been burned, eh?
bacondreamz - there's also very little liquidity for new loans that should be made, if they're not agency eligible and that's the market that needs to start functioning again.
Oh, they will start functioning as normal once those overinflated $700k houses drop the price to, say, $417k. You know, the price they should have never gone over in the first place. No special clauses are required, just some simple discounting. It was built into the bubble, let the damn thing deflate already!
Then the agencies can help. Otherwise, the greedy irresponsible lenders should be left to pop.
dr digits - Point is that people inside look to folks like this for leadership, esp. during tumultous times. Employees aren't comfortable with anarchy, coups, and mutinies - in general.
At this point, I don't think we should really care one iota about the Bear employees, the ones whose greed created, propelled, and now imploded this credit mess. If this is the kind of work they are experts in, I guess they should be unemployed.
Dryfly,
I think bankruptcy reform (rollback to prior standards) will encourage more responsible lending. There are always plenty of people who will borrow irresponsibly when given the chance. Take away the incentive to lend to them and mitigate the problem.
lama I mostly agree with you - the one reform that needs to remain is the limits people can shelter via real estate exclusion.
I heard of some of my peers (biz guys) who lived in states that allowed them to exclude something like a million dollars or more in personal real estate... excuse was we wouldn't want widows and orphans to lose their homes... so as soon as these guys smelled trouble they funneled all their available assets & wealth into their RE & then filed... sticking all the others with unsecured losses but protecting a million worth of 'net worth' for themselves.
The courts should be able to force them (as is the case in my state) to liquidate most of that 'protected equity'. Maybe they keep the house but no more than $100K net equity (on a million dollar home force them to refi to 90% CLTV minimum).
That would remove a lot of the prior abuses in BK... almost all in fact.
"At this point, I don't think we should really care one iota about the Bear employees, the ones whose greed created, propelled, and now imploded this credit mess. If this is the kind of work they are experts in, I guess they should be unemployed."
There's your typical generalisations, spewed forth again. Don't you have lazy tustafarian anarchist blogs you could dedicate more time to? Thanks.
Bk re-reform would be a great idea.
To climb out of the bust to come we need more productive consumers and less dispirited debt slaves.
BTW, the new law, though a real pain, is nowhere near as strict as many people believe.
From the numbers of people calling my office asking for advice about giving up their homes, or 4 homes, or 15 homes, I'm not very optimistic about real estate here in LA.
The increase in the jumbo rates from 6.87% to 8% will soon spread the pain to nicer areas of town where people thought they were immune from the havoc in the Inland Empire.
Bankruptcy reform, as usual, was yet another sham.
The unlimited homestead exemption still exists in Florida and Texas.
But MBNA managed to make it more time-consuming, inconvenient, and burdensome for all the average folks having to file bk.
IT's still mathmatically impossible to turn 5% loans into 15-18% annual returns, without someone getting hosed...
Do not confuse charisma with intelligence...
Terminolgy shift---
Inland Empire
now
Inland Shanty
Don't you have lazy tustafarian anarchist blogs you could dedicate more time to? Thanks.
It isn't the anarchists who have created this problem. It's the bankers and real estate slime who are at fault.
Maybe you should consider getting a respectable job.
Disagree
The courts should be able to force them (as is the case in my state) to liquidate most of that 'protected equity'. Maybe they keep the house but no more than $100K net equity (on a million dollar home force them to refi to 90% CLTV minimum).
That would remove a lot of the prior abuses in BK... almost all in fact.
dryfly | 08.04.07 - 12:50 pm | #
All those jobs that american's won't take??? hmmm
I guess those who declare shouldbe willing to, this is , after all, america ....
Bootstrap yourself back to prosperity... starting with nothing
in NY , I think they allow $2500
Creative D... If you can say, what are you seeing in LA? Admittedly I'm no insider... but if there's any fear here, I don't really see it. Listing prices are still insane, and anything that's priced maybe 5-10% off peak seems to sell pretty quick. Buyers appear clueless. The smug "it can't happen here" attitude among realtors and sellers still prevails.
From all I read here and elsewhere, you'd think people would be starting to feel some pain, but outwardly it's not very evident. There's evidence of pretty serious trouble coming out of almost every major city in the country... LA? Crickets... Denial runs strong here, just looking for anything that hints that it "will" happen here. Sorry for the OT post, and TIA!
Point taken Dry. People are always gaming the system. I'll bet they were taking big salaries as their companies went south. I've seen that. You could also blame the people who made the laws with loopholes.
Hard to imagine the current administration, or congress, creating any kind of bailout program that would bring positive relief.
Even if they could pull a rabbit out of their hat, given the current political environment it'll never happen.
Even with one party in control of both houses of congress and the WH, what relief was brought to the Katrina victims? Zip.
We're not even close to that kind of pain in the housing/lending implosion.
We need some more pain.
Then they'll act.
And really fork it up.
In the '90's we had tremendous growth even as entire sectors had to retrench. I have the feelng that this era wil be the inverse, with stagnaton at best even if entire sectors are humming along. It's a great time to be working in the Iron Range or Silicon Valley, notsogood if you swing a hammer, work in a truck plant or sell real estate.
yes, i want people to start buying properly underwritten alt-a; 5/1s, 7/1s, whatever. why not? occasional pools of option arms isn't enough for a functioning market.
if u have money with a fund manager who happily bought the investment grade pieces of subprime/alt-a deals in 05/06 but now refuses to look at private lable mbs because he got burned, u better get your money back and run for the hills. managers are paid to make money, not hold petty grudges. for that matter, if the fund manager is blaming lenders, instead of owning up and saying he made a stupid investment, take your money and run for the hills.
bankruptcy reform.
tax break for short sellers (don't tax the difference between short sale and amount owed as income) to encourage as close to an organized liquidation of bad paper as possible and to cushion the social effects of dislocation (unless you want to return to wastelands and riots).
Regulations and sunshine laws for the financial markets, including derivatives and hedge funds.
regulation of lending, from mortgages to credit cards, (won't solve current problems but a societal commitment to keep it form happening again will help hold people together socially and psychologically as the bad debt is digested).
tax reform to restore at least a little progressiveness (e.g., tax hedge fund managers on income, not for capital gains, a sensible tax structure for CEOs, etc) which will encourage financial responsibility as well as fund needed public sector programs, which include not only wise and moderate regulation of financial markets but also:
infrastructure! This is a structurally deficient country, not just the bridges!
good public education for all (a nation of idiots is more easily fleeced than a flock of sheep).
and more, such as health care.
Let's not forget how this disaster (these disasters) happened. No quick fix to the economic problems, but time to begin the long hard slog of rebuilding the country on a sounder structural footing.
Oh. Let's go back to some basic principles, too, like trial by jury, habeus corpus, one person one vote, etc
Liar's loans, Liar's war, Liar's Dept of Justice, etc.
Joe Shmoe
JBR- what makes me nervous is that my clients are walking away from houses not because their rates reset- they're generally walking away because they can't afford their teaser rates on their subprime or neg-am loans, and they've lost the ability to refi.
A year ago people came to me to save their homes- now they come to me to give up their homes.
Most eager to get away are people with numerous cash-flow negative investment homes in the Inland Empire- but the pain is not 'contained'.
Clients have been showing me notices that their payments on their neg am 1st will go from $2700 to $7200 in a year's time. (How else could someone making 100k a year afford a million dollar house?)
The end of Alt-A and the spike in jumbo rates will bring the pain to formerly smug LA. It will also end the straw-man cash-back to buyer scams common in certains wealthy parts of town.
I find it sickening that loan brokers were able collect a $30,000 yield spread premium (kick-back) for putting someone in a million dollar option ARM they had little prospect of repaying.
Dryfly, you really don't want to get me started on that bankruptcy bill, because I'll write comments longer than Tanta's posts....
Yes, there were a few good provisions, but in reality quite a few people will have to file bankruptcy and the negatives outweigh the positives. It will hurt everyone if most of these people can't clear their debts. Barring some of the fraud/sheltering provisions, I favor a return to most of the prior status quo.
I also agree wholeheartedly that the bill encouraged irresponsible lending. It won't really increase most recoveries, though.
I don't want to offend Tanta and CR by turning their excellent blog into an endless M_O_M rant about that pernicious bill, but I would like to point out with no little wrath the stupidity of making the payoff dependent on the prior year's income. Consider the huge number of contractors and small businesses whose prior year's income has no relationship to this year's income, and I think anyone will get the point.
It was a stupid bill that has already had bad economic effects and will now really bite us in the butt if not adjusted to reality.
anoninCA-
There are many here that feel the way you do, you just can't fall for the bait. Anyone with that much anger should be avoided.
dotcommie,
usually you aren't worth acknowledging, but since you have similar knowledge about Marblehead as you do other things you might wish to ask someone who knows about the veteran's housing on Broughton Road.
Creative D... That makes sense. I found my way to this blog a couple years ago after getting a pre-approval for a million $ mortgage (I was starting to look for a place).
Now, I make a comfortable 6 figures, and I looked at the payments (80/10/10, IO 1'st, fixed 2'nd), and looked at what I could get for that $$, and... well, I'm not looking anymore. Not that I couldn't "afford" it, but paying close to 3/4 of my net income for a cramped little cottage, (not counting tax breaks which don't help my monthly cash flow), just seemed insane.
Since then however, I've had to endure the "why don't you buy", "RE only goes up", "LA is different", "everyone here is rich" mantra. Hell, by many peoples standards I'm rich, but I'm not propping this thing up. I've got better uses for my money for now. But I would like a place of my own to, ya know.... live in. It's maddening.
I take no pleasure in the fact that people will be in financial pain, but it needs to happen IMHO. It'll be interesting to see who's swimming naked, that's for sure. Sorry to all for veering OT!
Marblehead stats
Averages for the 2004 tax year for zip code 01945, filed in 2005:
Average Adjusted Gross Income (AGI) in 2004: $135,766 (Individual Income Tax Returns)
Here: \t $135,766
State: \t $62,877
Bluecollar, eh?
Students in private schools in grades 9 to 12 (high school): 322
Here: \t 27.3%
Massachusetts: \t 12.2%
Marblehead racial integration
Median price asked for vacant for-sale houses in 2000: $433,300
In 2000, that was one special bluecollar family.
And, poor Gamma, still defending Ayn Rand and Greenspan with logical fallacies. Yep, house-cleaning time can't come soon enough.
JBR
I remember when my neighbor (who had just had his wife become a realtor and who was talking about buying a franchise real estate office)tried to talk me out of selling my house because I would make 10% a year for the rest of my life in real estate. That was two years ago. Now I rent and wait.
Except in a general sense about cultural conformity that very very few people are TOTALLY immune to I don't have much sympathy for people who took out 2/28, teaser rate, neg-am or interest only mortgages - there was tons of information out there telling people what the pitfalls were - just in case you couldn't use your own common sense or rely on tried and tested aphorisms like "if its too good to be true.. ".
I remember well, when Greenspan tried to persuade people that ARMS could be a good idea, that Liz Pulliam-Smith(LA Times) , Suzy Orman (CNBC), Jane Quinn(NewsWeek) said very plainly that that interest rates were so low that they only place next was UP and ARMS was a stupid idea.
So if people are sexist enough to ignore these fine ladies or sooo out of it not to read and watch any of those standard magazines/newspapers they get mugged.. So sad - so it goes
-Shantanu
To Creative Destruction
I'm new to reading the comment. Can you share a little about your line of work? And locations served? Can't quite tell what end of finances or real estate you're in. This is probably known to regular readers already. Hope you don't mind the request.
Schumpeter was a smart guy.
Joe Shmoe
w... trying to veer back on topic... A lot of folks are waiting, thing is, unlike me and probably you, not many of them can afford to buy here at these prices without creative lending. That's why I hope Syron's attitude prevails.
Even though the market is slower, people are still buying these places. The events of the last few days, at least in the LA market, is going to remove a lot of buyers from the pool. I mean, I was at an open house last week for a million dollar fixer (just for laughs). Not a complete teardown, but literally falling apart. This week... pending. We'll see how that works out...
No more alt-a/ low interest Jumbos.... buh bye "high end" LA RE market...
"can afford to buy" should read "can't afford to buy"... oops...
Aww crap... I was right the first time... nevermind. Sorry for the noise...
I dropped in on the agent we have been working with early this week and he showed me some houses way out of our price range and when I commented on that he said that it was okay because he figured they would not sell that high. I am talking $300,000 out of our range. They have already dropped that much over the last 1/2-1 year they have been listed. Then he showed me a contingent sale and commented that it may still be available because the last 4 deals he had fell through due to financing or buyers asking for a reduced price.
because I'll write comments longer than Tanta's posts....
Impossible!
banker, despite differences of opinion, I always read what you write.
risk capital, how's your bunker coming?
dryfly, you know, I always that new BK law would backfire on the people pushing it. What better way to wean people off easy credit than to throw them into Ch13 for a decade? It worked for me.
Joe-I'm a consumer bankruptcy attorney in LA- our firm is very big so we have clients all over the state.
People are responsible for their actions- but I feel a lot of sympathy for people suckered into bad loans.
Today I spoke to a 69 year widow who refied last year into a neg am loan, to take some cash out to help family and do some improvements on the property. I had to break the news to her that when she hits the neg-am cap and the loan recasts, her payments will skyrocket (and she'll lose the house she's had for many years.) Some broker probably got 15-20k in YSP of this deal- I doubt she would have taken the loan had it been explained to her in terms she could understand.
Creative Destruction,
Thanks.
I'm in LA, too, and have seen evidence of what you describe. Defaults and foreclosures are not just hitting new buyers, but many who refinanced long owned homes. From the outside (looking only at the NOD lists) one cannot tell whether the refi was to live the highlife or, as in many cases like the one cite, to pay medical bills, etc.
I agree with you that anger should mostly be directed at the lending and securitization institution that made out like bandits, and that sympathy is indeed appropriate to many who got screwed by deceptive brokers.
But I also think it is important to distinguish between sympathy and social policy.
Even if many or most of those who will be losing houses do not merit sympathy (no doubt a mix), there are reasons to still cushion the fall of individuals, no matter whether their own bad judgment played a role in creating their hurt.
As social policy, quite distinct from matters of sympathy, we need to take a cold hard look at society, and what we will all be living if such large numbers of people are tossed out of houses and hurled into ever-deepening debt under current bankruptcy laws. That will be a disaster for all of us, even those who will be making a bundle off of smart real estate deals in the coming decade or so. Being rich is nice, but not so nice in a climate of social chaos.
I appreciate your posts and the information they convey from the ground level.
Pardon my saying so, but you seem to prove that not all lawyers are jerks. A point for us all to remember.
yours
Joe
But I would like a place of my own to, ya know.... live in. It's maddening.
Ahhhh... good ol emotions....
that's when they've set the hook...
just a little tug on the cord now, and your done
A 30 year commitment
bahahhahahahhha rof
Aren't these the same Personal Responsibility, Limited Government types who are always trying to get gov't off of our backs? But now that they have behaved in the most irresponsible way by creating this derivatives monster, NOW they want a gov't handout to bail them out ie Freddie and Fannie buying their garbage.
What a bunch of hypocrites!
Pete
Indeed, big capital has always wanted it both ways: free market, except for when they need govt subsidies; free trade, except for when their industry can be protected; etc.
Remember the 1970's song about changing my name to Chrysler and getting on the welfare line?
But Joe Shmoe gets into trouble and he is out on the street . . .
This Joe is no Shmoe, and I'm quite solvent, thank you.
But there are going to be an avalanche of Shmoes in the coming couple of years. It's time for some sensible social policy and wise regulation of the financial markets.
Hard thinking needs to be done if it seems Stearns is about to be eaten by his own Bears. No sympathy for them, but concern for societal impact. If they are the only firm effected, then they can rot. But there is every reason to think the market tanked on Friday because "it" knows that the Bear Stearns story represents the epidemic that is going to rush around the block (or, to put it more properly, has already become pandemic among financials).
Ossama Bin Laden is laughing away. What a bunch of monkeys we are.
In the immortal words of Pogo, We have met the enemy, and he is us.
Joe Shmoe
i say get all the rich who've benefitted from this runup to return all their speedboats, learjets, Hampton homes, jewelry, & Picassos and then we can start talking about gov't bailouts.
seriously, those who profitted so outrageously from this mess have to be forced to financially participate in a larger way than the common folk who did nothing more than go to work everyday to feed their families.
Dotcommie,
Still too dumb to figure out Broughton Road huh? No sweat, I'll just add it to the list.
3,142,594
Prudent Bear is wrong.
All the FED has to do is pump liquidity, cut rates and meet with all the Bankers (ALL BANKERS- Mortgage Bankers, Investment Bankers, and Depository Institutions).
Force Wall Street to quit "margin calling everything" for a short time. Slowly sell quality assets (this obviously won't eliminate the pain as there are alot of non investment quality assets) into the system over a period of time.
Instead of what's happening "Fire Sale"- with NO bidders wanting to catch the proverbial falling knife.
There will still be major carnage to IB's and Hedge funds, with some being "forced" to close.
Something similiar to this worked before and It will again.
This will not create a "NEW" bubble as the damage has been to severe this time. Not just the Mortgage Market has been damaged but the IB's, Hedge funds and who knows else.
idoc,
Like it or not, that will come with the Democrats in control next year. Higher taxes are on the way. Everyone gets to pay for this mess.
As Ron Paul said, "they privatized the profits, and then they will socialize the losses"
slowmotion,
I think we all wish it were that simple, but the losses lead to a credit crunch, which leads to lower home prices, which leads to bankruptcies, which leads to lower consumer spending, which leads to recession, which leads to job loss, which leads to more bankruptcies.
If the Fed tries to pump liquidity into the system to cover for all of these losses, god help us. We'll be on our merry way to Zimbabwe.
Joe Schmoe
Yea, the avg. Joe will feel some pain, but in the long run this may be good for the rest of the country. The avg. Joe has not seen his wages rise all that much, yet he keeps piling on the debt. The end result is a tiny percentage of the population reaps an enormous amount of money, while the avg. Joe just gets deeper and deepr into debt and farther and farther behind. Shame on the avg. Joe for going along with this clearly unsustainable arrangement.
We will still have the rich and the working class, I have no problem with that. But we must get back to a more sane arrangement that is less centerd on debt and speculation and more centered around saving money, living within our means, and making things "that you can drop on your foot," and not "derivatives" and other such pieces of paper that we pretend are wealth.
Sorry for the rant.
"that's when they've set the hook...
just a little tug on the cord now, and your done"
Naah... I'm too much of a cheapskate to get sucked in that easily.
Eric said,
"I think we all wish it were that simple, but the losses lead to a credit crunch, which leads to lower home prices, which leads to bankruptcies, which leads to lower consumer spending, which leads to recession, which leads to job loss, which leads to more bankruptcies.
This is all going to happen anyway. It's the severity which will be softened by the act.
Ve hav vays to prop up the dollar.
Slowmotion,
I think that just draws out the pain and makes it worse. I really believe that sometimes it's just best to take your medicine. I hope Bernanke agrees, because IMO it's the quickest way for us to get back to monetary sanity. Economically I think many Americans have lost an understanding of duality, that up cannot be up without down, good without bad, yadda yadda yadda
We'll see though...
Marblehead stats
Looks like the blue collar community I grew up in. I cant't (or won't) afford to live there now. Get a grip.
I agree with Erik.
The street wants to have their cake and eat it too. They have plenty of liquidity. They are scared for what they have sewn is a giant mess, and no one fully understands the implications.
The latest Wall Street Journal/NBC poll showed that 2/3rds of Americans believe we are in a recession or will be in the next year. Meanwhile, all the cheerleading by the fed heads and econonic experts has produced a loss of credibility as main street knows in their gut that something ain't right.
The preznit has no credibility left, and congress is quickly losing any goodwill they had at the beginning of the year.
The more these guys (Kudlow, etc.) tell us how great things are, the more the credibility slips away.
I'm sure we'll hear Abbey Joseph Cohen and other permabulls talk about the supertanker economy...but they too lost credibility years ago.
I haven't been a goldbug, but as the U.S.'s debt and fed's proclamation of 'sub-prime contained' rings hollow, that loss of credibility will continue to pressure the dollar to multi-decade lows, confidence in our 'leaders' will deteriorate further, social unrest among the have-nots begins to fester...then precious metals will indeed be precious.
It's the severity which will be softened by the act.
Just like liquidity softened the blow from dotcom? Yeah, that worked so well!
Dustdevil said,
"They are scared for what they have sewn is a giant mess, and no one fully understands the implications."
That no one understands the implications is the most frightening thing of all.
In the end, it could all be overblown, but when I think about the layers upon layers of leverage that were piled on with these derivatives, it makes me very worried for us.
Slowmo, we have had 25 years of almost all up markets. Asset prices now are more than 10 times what they were back in 1982. During that period, the Fed and everyone else studied their bellybuttons when asked if they should act to deflate the asset bubbles. Now markets drop by 5 or 10% over one month, and you think a big Fed/SEC/FASB... bailout is necessary? Forgive us if we are skeptical.
Moral hazard has proliferated. It needs to be removed gently but firmly. If that means some IBs get taken over, then so be it. it can be done with pain to the senior managers who let it get out of control, but without system collapse. And if reducing the moral hazard for all requires that some nice people who did dumb things have to get punished by a bankruptcy law with teeth, then so be it.
From Southern California, where I am, the asset price mania seems severe enough to require a severe response, and this is the right time for it.