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first to troll.
where is everybody??????
Third to troll
To which industry's "value proposition" are ratings so important?
Moody's industry.
Tanta,
Please put some lipstick on this! I'm surprised it made it out in public in such condition.
where is everybody??????
Out in the library, of course, trying to get CR's autograph!! It's a rare, not-to-be-missed chance.
Tanta's location is still undisclosed.
The bond insurers. What they sell is downgrade protection as much as default protection -- ratings with teeth, if you will.
Moody's is last out of the gate on this one. S&P issued their study on Aug. 2, saying all the monolines were OK on a subprime-stressed basis:
ACA, Radian, Other Bond Insurers, Pass S&P Subprime Stress Test - Bloomberg.com
Fitch did theirs on Sept. 7, targeting FGIC and CIFG of the AAAs and AA Radian (well, Fitch had also just cut Radian to A+).
Cite to Fitch's announcement was somehow cut:
FGIC, CIFG Capital Fall Short in Fitch Subprime Test (Update1) - Bloomberg.com
My apologies -- can't even blame my ISP.
My new guillotine factory is about to start production - buy one now and beat the rush!
(eezy finance available 0% down etc etc)
A long time ago I said watch the yen.
The yen is strengthening.
That is very bad news for the dollar. The yen has been used as a means to borrow dollars. If the yen strengthens, it means people don't want to borrow dollars. It means the asset-based economy is dead.
Bonds? Well, yields long term are headed up...up...up.
Watch the yen.
I wonder how many more downgrades we have left to see from the agencies at the end of H1 of 2008. Probably not to many more because they always get everything right
Out in the library, of course, trying to get CR's autograph!! It's a rare, not-to-be-missed chance.
I hope you all realize how much that man loves you. Running out to the library to post for you because his ISP was out.
Had it been me, I'd have simply gone back to bed.
Where is everybody?
Well, if they work on a mortgage-related desk for an investment bank they're probably busy cleaning out their desks and being escorted out of the building by security about now.
So Roubini says that housing prices would need to fall 50% in order to reach historic price-rent ratios (previous thread). Doesn't this mean that the "most stressful scenario" of 14 percent losses may be a bit optimistic?
Is the world soon to relearn the meaning of the words "counterparty risk"?
arbogast: not to be sceptical, but the yen has been putzing around between 113 and 116 for the last month and is now in the middle of that range. I keep waiting for the wheels to come off the carry trade, but even a 50 bp cut hasn't done it. Is the JCB about to run out of ammo? Do the hedgies have enough capital to drag it around the dancefloor one more time. What am I missing?
Moodys? Moodys? Bwahaha!! I'm sure they are respectable now, not like before, when they wuz hoze.
So, "Turmoil Insurance Bonding" has made landfall and is Cat 4 upgrade from Cat 3. This means the price of CDO insurance gaurantees is about to go way up to cover these losses and protect against future loss and pay higher premium to their investors who have now lost faith in Aaa ratings.
Yeah, great. This is exactly the results the 50bp liquidity impetus was supposed to prevent. Talk about negative feedback loops.
Misean
Order 4 lemon drop martinis tonite!
i just noticed a typo in the title. it reads:
Undercapitalized Bond Insurers?
but it should read:
Undercapitalized bond insurers?
"may need to raise capital"
That's enough to make one shot snot out of their nose. That funny.
Checker:
Correct me if Im wrong, but for historic price-rent ratios to reach historic levels, either home prices would have ot come down or rents would have to rise, which they are. Or some combination of both would have to happen.
Because ratings are so important to the industry's value proposition,
Must be the entertainment industry because everybody knows they aren't supposed to be used for investment decisions.
I also believe, and this is only intuitive, that had we not had a boom, real estate prices would have, probably increased at the historical rate of 5% per year since 2002. So the nominal difference between what should have happened and what did happen is what I think the drop will be. I dont have any numbers on this, but just what I think will happen. Im not including the huge amount of ARM resets in the coming year. If inventory blows up to 1 or more years, then I think it will just kill that theory.
Arbogast-
I'm with mbartv. You've been telling us to watch the yen for seems like ages, and it's been under 116 for some time, but noone seems to be paying much heed.
What should we be watching for?
I hope you all realize how much that man loves you. Running out to the library to post for you because his ISP was out.
thanks, CR! you are too good to us!
FDIC
Deposit Insurance Seminars
Nationwide Series of Free Seminars for Bank Employees on Deposit Insurance Coverage
The FDIC will host two identical series of telephone seminars for bankers on the FDIC's rules for deposit insurance coverage.
FDIC: Error 404 - Page Not Found
"Correct me if Im wrong, but for historic price-rent ratios to reach historic levels, either home prices would have ot come down or rents would have to rise, which they are. Or some combination of both would have to happen."
True, but how much will they rise? And will they continue to rise?
I look at high rents in San Francisco and the Silicon Valley area, and I put most of the blame on a concentration of high-paying jobs in those areas.
In a recession brought on by deflation of the real estate bubble and scarce credit, I wonder how many of those jobs will vanish? And how strong an inhibiting effect on rents there might be. It definitely happened back in the early 90s in Silicon Valley: prices dropped, and so did rents. People left the area.
And in areas where the economy is not hot even now, rents will be constrained by the ability of people to pay. In a recession, that ability will not rise.
Brian23 - Actually I was assuming an approximately 40 to 45% reduction in home prices based on Schiller's "A History of Home Values" chart (200 - 120 or 110). This assumes that the norm is represented by the 1955 to 1997 era and that it's not "different now." With respect to rents, I think the recent overbuilding of housing units plus the coming recession will lead to a moderation in rent increases or maybe even reductions (?). Regardless, it seems like no one is really taking into account the impacts of that extreme event - reversion to the mean. Aren't a lot of the new "stricter" mortgages with 5% down also going to be upside down?
Bob Dobbs and Checker:
You both make valid points. I think affordability is the key. If people cant afford a home or rent in the long run, then they wont do it. Another scenerio that could happen is both rents and prices could fall with house prices seeing an accelerated downturn. Here in the NY housing market, I think bonuses play a bigger role in house prices than any other market. I also dont think rents would decrease here, although nationaly, it could be possible. Right now the average person cant afford the average home in the burbs in Northern NJ, Long Island or Westchester. Even these homes are, to some extent driven by the bonus pool. I can see the housing going down between 7-10 percent in the burbs and, at best, stagnant in NYC, which makes me ask the question, what will happen to affordibility in the rest of the country?
Please excuse the spelling mistakes, asIm trying to do 5 things at once.
Seem to recall something from Pershing Square about this.
So moody's thinks that 14% loss puts AMBAC in trouble, but not MBIA.
Now, they're just being coy. surely one of their unternerds has calculated the level of loss required to sink MBIA.
According to their sophisticated models, of course.
Checker:
I dont know if 5% down will be enough in some areas, especially when you take into account the credit crunch. If the market corrects itslef, like its supposed to, then, in the near future, individuals may need 10% or more to qualify. The worse the credit, the more the downpayment. This would put further downward pressure on home prices, especially in high cost areas like the northeast and Cali.
On the question of rents rising, will there not also be a very big and growing supply of rental units which could suppress prices?
Real Estate and Housing Industry Outlook
September 23, 2007
www.treasure-coast.us
The historic value proposition of bond insurers, going back to the 70s, has been that if the issuer pays a little premium to them, they will slap a guarantee on it that turns an A-rated bond into triple A for the life of the bond. Their own triple A rating attaches to the bond, in effect. The insurance is permanent and covers both interest and principal in the event of a default.
From the beginning, this insurance has been an accident waiting to happen. Effectively, it would take a cataclysm in the bond market to blow up insured bonds, but that event would blow up so many that the insurers, too, could go under. For 35 years, they've been raking in profits waiting for the volcano to blow.
By some estimates a little over 40% of all muni issuance is insured. That would make about $1 trillion of total insured muni bonds.
Hedge funds are very active in insured munis. Here's one description:
"There are two central components of the muni hedge or 'arb' strategy. The first is leverage, the second is hedging. The leverage associated with the muni hedge is a traditional debt carry trade where the fund borrows at the short-end of the maturity spectrum at a floating rate and then invests in longer-maturity fixed-rate securities. The spread between short borrowing and long investment rates is the positive carry. The muni spread trade remains positive because of the continued (historic) steepness of the muni curve. In addition, the ner-elimination of credit risk by firms leverging with AAA and AAA- insured municipal bonds helps focus risk into smaller compartments.
Deja vu?
Until now, it obviously hasn't been munis that are getting the insurers into trouble. It's CDOs. But it could be the munis that get slammed, and then the hedgies that have leveraged into these "near-elimination of credit risk" instruments. And then, of course, Mom and Pop who own munis.
Look out...
This is not really a surprise...every other sector related to the credit markets has had to confess to the unpleasant reality that they were not planning for the type of crunch/deleveraging that we are seeing now. The bond insurers used the historical models just like everyone else and are now going to take it in the shorts just like everyone else.
With respect to the yen, I don't see it moving much in either direction anytime soon. The interest rate differential is too great even though the US has cut some and other central banks may cut as well. The Bank of Japan is not going to raise its rate as Japan's domestic economy is slowing again and a rate hike leading to a strengthening of the yen would crush the Japanese export sector, which is already feeling the effects of the US downturn. See Japan Economy Watch
for elaboration.
From Standards and Poor, August 2, 2007:
(quote)
U.S. Bond Insurers Withstand Subprime Stress
Despite the well-documented deterioration in the world of subprime mortgages, this sector does not appear to be a threat to the rating stability of the bond insurers. We come to this view as the result of the insurers' underwriting standards, which typically target deals rated in the 'A' category or higher; their sound risk management practices, which have limited the exposure to subprime mortgages to typically 1% to 3% of total exposure; and their conservative capital management strategies, which result in cushions that allow for adverse development without jeopardizing their capital adequacy.
(end quote)
Not quite 60 days from the publication of this fine analysis to the current revised analysis.
Chalk up another win for the pessimists in the great game of "How Fast Can You Eat Your Words?"
I agree 100% with rich..."a volcano waiting to blow" nails it right on the head...
sterlingerl. Also people (young r.e./mortgage brokers e.g.) moving back in with Mom or doubling up.
Good Grief,muni bonds are safe? have ANY of these jokers looked at the finances of the cities and counties in california? or the state?.I know several counties that almost look solvent if you do not consider the unfunded liabilities or the income assumptions involved...almost.
I don't know if this has anything to do with yen strengthening but it can't be good. I think BB will have a little dilemma next month but it must be comforting for him to know there's only one street in America he has to protect.
(Oman is not cutting rates either)
No interest rate cut for Oman | 2007 | AMEinfo.com
Off topic:
With all the bad news, why does the stock market hold up so well?
I look at high rents in San Francisco and the Silicon Valley area, and I put most of the blame on a concentration of high-paying jobs in those areas.
Heaven forbid that a Katrina-level catastrophic event would come along and upset that strong economy (in the bay area). At least with Katrina, people had some warning, and at least half a chance to get out of the way. Something like an earthquake would be unexpected and unpleasant.
Tom Stone,
Good Grief,muni bonds are safe?
Keeping Your Cool in a Choppy Market (Suze Orman)
Besides, that 5 percent tax-exempt yield is nothing to sneeze at. I would have to earn more than 7.5 percent in a taxable investment to match that. Anything that earns that much is going to carry a whole lot more risk than my municipal bonds.
See, everything earning 7.5% is risky, well, except for municipal bonds that is. They're special. They are pumping out plenty of somethin' for nothin' goodness!
That Suze, what a hoot!
Undercapitalized Bond Insurers?
The entire financial system is undercapitalized. It's going to be some long, hard hours for poor Benny at the discount window spinning that "capital" into gold.
Brian, etal,
With incomes rather stagnant and real cost increases in food, fuel, health care, property taxes, etc. above the phoney CPI that the gobbermint uses. People only have so much income to pay out and the stats show that they have been paying out more than they take in for a while now. Something will have to give.
Also inventories of vacant houses are extremely high and builders are still building, from what I read, still in excess of the actual new household formation.
So to many wiggets or houses and less and less disposable income that can be used to buy that wigget or house means a lowering of house prices. When you have to many of something and want someone to take it off your hands, be it a rental or a house or a house you cant sell and have to rent, you will get what you can. That is Adam Smiths real invisible hand. The cycle has reversed! They call them cycle for a good reason.
With disposable incomes actually declining due to the effects of previous monetary inflation, with off shoring of jobs and unrestricted illegal immigration keeping wage increases down, the end result will be deflation in most cases. Only thing holding this off will be another rabbit pulled out of the silk hat. Your guess about that is as good as mine. It will only be temporary if they can find another rabbit IMHO.
That would be typical for a business cycle. Boom way above, over production, crash back below the mean and eventually things level out at a lower price unless production keeps growing and then prices continue to fall until it is no longer economically feasible to produce and balance is finally established.
We have three very negative forces here at work. To much inventory, a real lowering inflation adjusted incomes, and tightening lending standards due to losses from people who couldnt keep up and lowering asset values which are the equity for the lending. So less money to purchase a bloated inventory with less available credit to bridge the gap. What else but lowered housing values, eventually including rents. Business Cycle 101.
The bonuses of Wall Street got slashed in the 1980's in the last big correction of the wall street firms and that would be a likely scenario again. It may not be for a few years or it might be sooner. But what goes up eventually comes down. Excesses do eventually have consequences. We just haven't seen them for a while. We will. It is inevitable.
Bear Stearns Cos Inc said on Tuesday it snared three executives from rival companies to expand services to hedge fund clients.
Bear Stearns' reputation took a hit this summer when two of its hedge funds collapsed on wrong-way bets tied to risky subprime mortgages. The New York investment bank said Douglas Stern, a Morgan Stanley veteran, will help manage Bear's prime brokerage sales team, focusing on the firm's largest hedge fund customers.
Joseph Aurilio and Ted Post, from UBS and Banc of America Securities, respectively, will concentrate on developing new business for Bear's prime brokerage operations.
Bear Stearns hires execs for hedge fund business
| Reuters
A new batch of crap shovelers at Bear bet they have some real bargins.
I work with structured securities and the repricing of risk, and Bear Stearn is still putting out shit. They easily have the worst underwriting on the street.
Tom Stone,
What will happen to the Ca. state, county, city revenue streams when home prices (property taxes) fall 30 - 40%?
There's some high-income seniors who will get a rude surprise from their muni bonds in two years' time. They will find out that part of that "tax-exempt" interest was 100% taxable.
Here's how: Starting this year, high-income Medicare recipients are paying higher Part B premiums if their AGI is over certain levels. There are four "brackets" and although they are narrow, 100% of the income that falls in these brackets is confiscated; i.e., goes to pay higher Part B premiums. Muni income is included in the Part B AGI test. If your "last dollar earned" happens to fall into those brackets, then 100% of your muni income could be taxable
But you won't pay the higher Part B premiums on this year's AGI until 2009. It's weird.
rich,
There's a surprise every time the flashlight comes out. Then things just scurry back under the fridge it seems.
Value Proposition,
Seems to be an issue with mendacity.
When two parties have a fiduciary responsibility to a third or others, often the value proposition for the two parties with inside information is different than the value of the third parties.
If the third party is the investing public well....
This is coed for we take care of us, but the others are .....
What will happen to the Ca. state, county, city revenue streams when home prices (property taxes) fall 30 - 40%?
RThomas | 09.25.07 - 6:42 pm | #
Not as bad as elsewhere, for the following reason....Prop 13 throttles tax increases on homes such that only newly purchased homes are reset to a new tax level, while the rest creep up at the 2% limit while home prices went double digits.
So it'll suck, but there are still a lot of Californians who are paying taxes based on an appraised value that's way behind the resold price increases.
Their taxes will continue to increase 2% even as prices decline, until the appraisal and prices meet again.
Seniors paying "extra" taxes on their munis??? Perrrrrfect! Now they can help pay their own tab. Medicare expansion was the bribe the AARP put to Bush and to Kerry for the election. "Whoever can expand our entitlements the most will get Boomer and Senior Cit. votes".
After running even more shorts out of the market, there will even fewer "natural" buyers when we head lower. That should make it faster and make it hurt more.
WSJ 9/26/2007
Moody's, S&P Answer Critics Over Bond Calls / Rating Firms to Explain Their Mortgage Miss; Reformin the System
Moody & S&P Execs to speak at Capitol Hill hearings today & tomorrow. Lets discuss!
Moody's, S&P Answer Critics Over Bond Calls - WSJ.com
What will happen to the Ca. state, county, city revenue streams when home prices (property taxes) fall 30 - 40%?
Arnie will step down to star in Terminator 4 to "fullfill the wishes of fans" xD
Brian23, one way to look at the price that people are willing to pay to buy a home is to divide it into two components. Owner Equivalent Rent(OER) x rent-own multiplier. Now alot goes into the rent-own multiplier: most obviously, interest rates. But there's credit availability, speculative premium, and other factors also. The I-want-to-own-so-I-can-paint-whatever-color-I-want premium is a constant, but the others that I have listed have all gone down recently.
Now since most renters have a lease that comes up for renewal every year, rather than a 30 year mortgage, rents are generally much more responsive to the supply/demand of housing than prices, and are much less affected by speculation. Places like FL and exurbs in CA where supply has skyrocketed stand to have OER PLUMMET. This will be a double whammy for house and condo prices. OTOH, places like Manhattan where the supply hasn't changed much will only be affected by the change in the rent-own multiplier and stand to drop less severely.