Yes, "contained" not "spilled-over" is a lost cause...so time to fess up?
Not a chance. Switch to a lower gear and/or easier terrain: claim "discounted"...not "discounting" and "sinking".
"Until that moment, investors had been willing to trust companies claiming to have limited exposure to the credit mess. But Merrills third-quarter results made clear that such confidence must now be earned, not presumed."
Now that's some funny stuff by Morgenson. But I'm not entirely sure if it was intentional.
"Henry Paulson, the US Treasury Secretary, is seeking to persuade the White House to offer financial compensation to American mortgage lenders that try to help troubled homeowners by renegotiating the terms of their loans."
"The Times has learnt that Mr Paulson is lobbying President Bush to provide funds so that mortgage lenders can reduce the loss that they would incur from either reducing the rate of an adjustable home loan or extending the life of the mortgage to make it cheaper for the property owner."
So just why do the proposed mods require taxapayer funding? Can somebody clarify the agenda here? Also: Are they also going to suspend the no-doc prohibitions as long as this keeps the borrowers from defaulting?
If Condi Rice is Ms. International Busybody telling any nation she can buttonhole how they should run their affairs, Paulson has to be Mr. Inter...Busybody. After repeatedly going to China to tell them what to do with their currency (to which they turned a deaf ear) he is now in India telling them to get cracking on a nuclear agreement the US wants them to ratify. Why? Well I suppose he is telling them it is "for their own good" but really he just wants to forestall India's getting its gas via a pipeline from Iran. If I were India, Russia, etc., etc., I tell this pair to take a hike.
I am with a small tech outfit in silicon valley, not exposed directly to mortgage/financials. We seem to be doing OK so far (to my surprise, I must add). A couple of summer months looked like it was going to get nasty, but there was a comeback in September, and October is ahead of plan.
Then I see Google/Microsoft earnings, and they are actually doing well. Even the losing Yahoo delivered a decent quarter.
I can't say what to make of all this. The housing market in the bay area does seem to be faltering.
Banca Monte dei Paschi di Siena SpA is seeking international partners to manage and improve its bad loans portfolio, according to a report on Saturday's Il Sole 24 Ore.
Among the possible candidates are Lehman Brothers, Goldman Sachs, ABN-Amro and possibly Merrill Lynch, the daily added.
According to the daily, the first step of the project envisages the sale by BMPS of 30 pct of MPS Gestioni Crediti, its unit that recovers bad loans, to the international partner in order to improve its track record in this sector.
BMPS will then sell to a newly created company some 3 bln eur of gross bad loans that will be managed along with the international partner. In the final phase of the project a new company that will be majority owned by the international partner will be created to buy bad loans from other banks.
Merrill is still profitable fergawdsake. First the profits AND the bonuses and then the stockholders and and then the tax benefits and then only after all those wells are dry should we consider additional taxpayer money. How many billions in taxes did Merrill save with this "loss?"
Here's a gem form an article published in the Financial Times on 8/24/07:
"SIV's are differentiated from conduits and other structured products because by design they are never forced into rapid sales of assets and always have options. If they need to delverage, they can do so in a slow, controlled and orderly manner."
It seems to me we are losing all credibility in the global finance world. After this is over expect 20% interest like the other bananna republics have.
The head of the German unit of Goldman Sachs Group Inc, Alexander Dibelius, told Spiegel magazine that he was against the proposed creation of special emergency funds discussed at the last meeting of the IMF to deal with the fallout of the sub-prime credit crisis.
The proposed funds would use money from international lending institutions to save certain credit vehicles that might be on the edge of collapse due to the after-effects of the US credit crisis.
"Sometimes it is just better to swallow a sour pill all at once, so that the recovery is started more quickly," Dibelius told the magazine in response to a question on whether it might not be better to write-off underperforming credit vehicles rather than trying to save them.
Dibelius added, however, that some credit institutions are simply not able to the absorb such large losses.
How do so many people figure that this is only the beginning?
Because what got this mess started was house prices declining, and all available evidence suggests they have a long way to go.
Right now there seems to be some multibillion-dollar game of Old Maid going on. It would be better to get it over with quickly.
vader --
I am pretty much a "marketofascist", and the only thing that would piss me off more than a bail-out of homeowners would be a bail-out of mortgage lenders. Or worse, a bail-out of Wall Street (spit).
This is so much fun to watch. I can't wait to see what the next shenanigan the idiots in charge will try. It is like watching a dinosaur thrash around in a tar pit. I bet they bomb Iran if things get bad enough. It's never their fault, it must be Iran's. LMAO!
"Henry Paulson, the US Treasury Secretary, is seeking to persuade the White House to offer financial compensation to American mortgage lenders that try to help troubled homeowners by renegotiating the terms of their loans."
The funny thing is that for some reason as I was skimming this paragraph I subliminaly read "renegeing" for "renegotiating". Pretty much the same thing I guess, hehe.
You'd think that Paulson, after coming up with the stupid super-SIV idea, would be a little chastised. Unfortunately, since the super-SIV idea isn't working, it seems like he's onto an even worse idea, a government bailout of those who made bad loans.
Because what got this mess started was house prices declining, and all available evidence suggests they have a long way to go.
Nemo,
Remember that Goldman is already predicting 15% declines over 2 years and the consensus is starting to be that houses will go down much more than they have so far. So to an extent the market already knows some of what's about to happen to housing prices. I think it's gonna be even worse than the market thinks. But how much worse, and what does this say about writoffs on CDOs which are derivatives of derivatives....anyway. probably we have more to go. But I'm trying to put my finger on something other than common sense
Exactly. When the Wise Men were talking about "containment" earlier this year, they were referring to the effect of the housing correction on the broader economy. They did not anticipate the ensuing credit crunch.
To be fair, neither did this blog (nor Roubini nor any of the other perma-bears). All along the pessimists have focussed on consumer spending, MEW, etc.; the first time any of them even mentioned ABCP -- or any kind of liquidity crisis -- was after the disaster was already underway. (At least, that is what I recall. I would be interested if anyone can post a link proving me wrong.)
So I do think it is somewhat disingenuous for the bears to make fun of the crisis not being "contained", since the kind of containment both they and their critics were talking about is not the kind that has failed -- so far.
On the other hand, the optimists have consistently underestimated just how poorly the mortgages would perform once house price appreciation started running in reverse -- and what effect that would have on the asset-backed securities. Seeing AAA securities downgraded to junk and the AAA tranches of the ABX falling off a cliff is mind-boggling. Plus Merrill Lynch has given no indication that $8 billion is the limit of their damage, nor even that they have a grip on what their damage is. It seems improbable that they are alone.
In the end, I guess you are right that it is mostly common sense. And if Gretchen Morgenstern is writing about it in the NYT, it is probably way, way too late to make a buck betting on it.
"The head of the German unit of Goldman Sachs Group Inc, Alexander Dibelius, told Spiegel magazine that he was against the proposed creation of special emergency funds discussed at the last meeting of the IMF to deal with the fallout of the sub-prime credit crisis.
The proposed funds would use money from international lending institutions to save certain credit vehicles that might be on the edge of collapse due to the after-effects of the US credit crisis.
"Sometimes it is just better to swallow a sour pill all at once, so that the recovery is started more quickly," Dibelius told the magazine in response to a question on whether it might not be better to write-off underperforming credit vehicles rather than trying to save them."
(He forgot to mention that sometimes one man's bitter pill is another man's feast...)
How Goldman Sachs defies gravity
While the credit markets went sour, one investment bank made a huge, shrewd bet - and seems to have won big.
Fortune's Peter Eavis explains the stunning strategy.
By Peter Eavis, Fortune writer
September 20 2007: 5:46 PM EDT
NEW YORK (Fortune) -- It is one of the most stunning bets Wall Street has seen in decades.
As the credit markets fell apart over the summer, causing the prices of hundreds of billions of dollars of mortgage-backed bonds to plunge, Goldman Sachs (Charts, Fortune 500) had already positioned itself so that it would profit massively from a decline in those securities. Thursday, Goldman reported earnings for its fiscal third quarter that were far above expectations.
While several businesses were surprisingly strong in a difficult period, the chief contributor to the earnings blowout were trades that made money from price drops in mortgage-backed securities. Goldman indicated this in its press release when it said that "significant losses" on certain bonds were "more than offset by gains on short mortgage products...Goldman Sachs showed an ability to not only protect itself from the problems in the market but also to capitalize on them," says Mike Mayo, banks analyst at Deutsche Bank (Mayo rates Goldman a buy.)
When asked on a public conference call Thursday, Goldman's chief financial officer David Viniar declined to give a number for the amount of money Goldman made on its mortgage short in the third quarter.
In terms of making a buck on it, it depends where, if you're talking about some of the IBs (Citi, Bear) and the ABX, then yes. But clearly there is more to go in the financial sector as a whole, due to credit cards, MEW, bank liquidity issues etc'. Not to mention retailers manufacturers etc'. Plus spread widening should occur in bonds of various types. I would be surprised if we've seen the worst.
How are all these defaults going to change Barra and KMV measures. If you factor these default probabilities in you come up with substantially different universe of possible defaults.
Take the other side of the trade then.
Anonymous |
disconnected ideas and ramble
the other side is not signing his petition... or whatever he calls it
which i had contemplated, before i read his stance...it's lik a congressional bill, it's got's some bullshit and pork that needs weeding
paulsons siv plan fails...abx tanking...short rollovers looming...the insiders see a tsunami coming...paulson goes to plan b...since blatant price fixing failed, let's try the bail out...panic clearly rising...can he save it?...dunno, major backstops in trouble mgic and ambac...insufficient reserves, lotta leverage and off book accounting...enron writ large? wouldn't shock me....time to go for the lifeboats, still have a few weeks headstart....id get off the beach people
I'm begining to think they did see this coming. That's what that awful bankruptcy bill was about. Be thankful that Social Security "reform" didn't happen. Where would all those diverted dollars go? Probably to prop up the mortgage market further, ensuring an even bigger bubble and more CARNAGE and PAIN after it POPS.
I don't recall CP getting early,specific mention, though someone is now certain to find citations.
While the focus in comments here is often on the domino du jour, it has seemed to me that the weakness in many areas has been exposed, at least by implication. We haven't, for example, looked specifically at the potential fallout from defaults on auto and equipment leasing. By identifying them as components of ABS and their derivatives, CR and Tanta invite readers to consider whether a significant slowdown in the economy subjects these components to greater than usual risk. Which I read as an invitation to connect the dots on my own and to look out for fresh data. Same with CDS and revolving credit.
My happiness doesn't depend on perfect foresight from all bears. But I think a number of readers here are pretty good at recognizing implications while, at the same time, preferring to leave the commentary to the professionals among us.
"To be fair, neither did this blog (nor Roubini nor any of the other perma-bears). All along the pessimists have focussed on consumer spending, MEW, etc.; the first time any of them even mentioned ABCP -- or any kind of liquidity crisis -- was after the disaster was already underway. (At least, that is what I recall. I would be interested if anyone can post a link proving me wrong.)"
you're wrong, I told you it was going to be a major problem. you just weren't listening. corporate hy defaults will work their way to double digits...
please don't make the same statement when we are there.
How low would MER (or IMB or CFC or... take your pick) have to fall, exactly, before you would agree the losses actually have been "discounted"?
Or do I misunderstand what you are making fun of?
Anonymous | 10.28.07 - 2:19 pm
Other will have a different take, but for me, part of what this crisis is opening to is a mega-crisis of trust and predictability. I imagine there are some on this list who would think 0 is a good price for Countrywide.
Hence the popularity of gold among deep bears-- that's the only trustworthy thing in a crisis,they say.
And I'm coming to believe they may have a point.
When all the resets come due in 2011, where we will be in terms of
further climate disasters (in my opinion the San Dieg fires, Atlanta/Southeast drought, Britain floods are all climate related, as was Katrina. We'll "know" for sure in 30 years, I suppose.)
Peak Oil, and high oil prices furthering the inevitable (post-bubble) recession
credit card debt and second mortgages that aren't payable (esp. when people are unemployed)
the impact of oil-exporting countries wanting payment in Euros instead of unreliable dollars [with this switch, as with all the situations above, what was a bad problem will turn into a worse problem]
All that said, where does the bottom lie? At what price are stock or housing prices trustworthy?
At what about all those people who say they know the answer to this, and then are proved overly optimistic?
Lots of questions, answers to follow as the crisis plays out.
The following online
published in 1933 details relationships between credit crunches and real estate crashes.
The credit crunch has been predicted for years by many.
Including Bill Gross in Pimco, & Ableson in Barron's. It's not exactly a surprise. The exact timing of future events is always an unknown, but plenty saw the credit crunch coming and wrote about it, and continue to write about it. It's not exactly a secret, or something that just started getting discussed in June/July.
It's been picked up by MSM since the meltdown got going and not before, but yes, the "permabears" and non-permabears have discussed the cycle for years. Centuries, even.
Of course real estate and credit cycles are connected, in the sense that easy credit leads to questionable mortgages leads to real estate booms lead to real estate busts leads to tighter credit. This sort of unwinding is no surprise and is nothing new.
But it also has nothing to do with what I am talking about. I am talking about the contagion from mortgages to the credit spreads on debt in general, especially corporate commercial paper. The transition to this general credit and liquidity crisis was not predicted by any of the pessimists I read, from Roubini to this very blog.
"risk capital" says he has been warning about it, but then fails to provide the link I requested. Also, one voice in the wilderness does not prove much... Many of the pessimists who are now crowing about "being right all along" did not, for the most part, predict anything like the current crisis. They may yet be right about the residential real estate collapse leading to a broader recession... But the evidence for that is limited, so far.
emo is right, no one specifically called abcp or sivs but nemo is wrong overall. many people here called leveraged derivative trouble as a result of housing melt down leading to a crisis that could threaten the financial system, citing comments from buffett to roach to fleck and most famously and accurately doug noland...his credit bubble watch anticipated this quite clearly and he is still the most accurate and informed in seeing the scope of the current crisis. which, btw, is unprecedented, as was the inciting growth of the derivatives ( a catch- all term meaning, essentially, " leverage") that spawned it.
Nemo needs to search out the early calls for transparency as were expressed here. The concern was that much of what was being called commercial paper was in fact a box of MBS with a pretty ribbon of respectability.
I think I must not understand the question here. It's a credit cycle. It's not "Oh, cool, I was right!" It's not "Who could have foreseen!?" It's just a credit cycle.
The only questions concern how it will manifest itself this time and what is its scope.
I already defined the scope of the August crisis prior to it happening as a potential 3 standard deviation event.
You are correct in that credit cycles play out over very long periods and we are at the beginning.
As I had previously predicted, credit will continue to tighten over the intermediate term "across the board", this "temporary" so-called improvement is just that, "temporary", and not really much of any improvement.
As I had said previously, there will be an unprecedented flight to quality and we will see a 3-handle on the 10 year, hy defaults will see double digits, and the economy will likely enter recession, my current probability of recession is an 80% chance. The only question at this point for me is timing of the "official" start.
I also believe that mortgage rates may not move lower due to the continued repricing of risk, that many may be disappointed with the expectation of another refi-cycle.
Paulson can beg his boss all he wants, but the last time I checked the constitution (what a novel idea) CONGRESS disposes funds, the executive branch can only propose. And that will be one heck of a battle, you can count on it. Election year politics will turn it into a quagmire.
Unless they try some stunt like declaring all of the major bubble markets Federal disaster areas, Congress must approve any bailout. On second thought, keep that one secret; better to not give the bastards any ideas.
Not exactly laying the whole thing out, but a pretty damn good hintfest a coupla years ago. But no one can really lay it all out ahead of time, though. If you're really drunk and get behind the wheel, I don't know exactly where you'll veer or what your car and you will look like at the end of the trip, but I know you shouldn't be pressing upon that gas pedal.
"Unless they try some stunt like declaring all of the major bubble markets Federal disaster areas, Congress must approve any bailout. On second thought, keep that one secret; better to not give the bastards any ideas."
The city of Toronto tried that one a few years back with homelessness. They were seeking federal disaster relief money.
The idea was that it doesn't really make any difference to a man whether he lost his home to a tornado or a bank.
Bill Fleckenstein has been talking about a real-estate credit crunch for a long time. Ill give you one example from September of last year.
But while CDOs and CDSs are hard to fathom, a disruption in these risk-filled markets would become all too comprehensible to average folks -- as the aftermath would bring serious turmoil in real estate and the economy I believe that the CDO and CDS markets (the lower-grade tranches in particular) will be ground zero in any financial dislocation. Voodoo debt and the coming recession - MSN Money
Many bloggers / pundits including Eric Janszen, of itulip, Robert Precter, and others have foreseen a U.S. debt crisis for which RE would be the trigger.
Jane Doe - a bit out of my depth here, but a couple of thoughts:
1.) Derivative contracts are zero sum, meaning that for someone to win someone else has to lose. Taking on tens (hundreds?) of trillions of dollars of exposures is almost certain to result in some significant losses somewhere, unless you believe that JPM has 100% accuracy and foresight in their investing.
2.) Along the same lines, one person's hedging activity is another person's speculation - really difficult if not impossible to suss out which is which until the dust settles. Which brings us to....
3.) Visibility is zero - these things are so far from OTC it's another universe entirely - completely off balance sheet, often beyond the purview of the risk management teams, many of which are constrained by models so overburdened with theoretical assumptions that they have no relevance to derivatives based on assumptions based on other derivatives.
In other words, this stuff is (as Buffet put it in other words) f***ing nuts in many cases, which would be a lot less scary if the number of zeroes involved were smaller.
With regard to the scant relationship between the second/third/fourth-order derivatives and the collateral they are allegedly based on, I think Tim Price of UBP still has the all-time best post on his blog:
Now Nemo states the bears didn't see this. Bullshit. The broad events have been projected and discussed for years now; only the details, timing and sequence have ever been in question.
Before Nemo stated that nobody knows what the future holds. Also bullshit. When you've got a house of cards and you blow out the bottom level, it doesn't take a genius to know the whole house is coming down.
Contained? Discounted?? Hardly -- the show's only just begun.
"I have been expecting for at least 8 months now, the beginning of a substantial credit crunch. A credit crunch will come from 1 or 2 sources. The first being the tightening of credit availability (banks taking write-downs and are forced to restrict lending to riskier customers) which we have yet to see in a meaningful way despite the rumblings and bumblings to that effect, and the second being a rise to the cost of extending credit.
The past few years has seen credit extended in some of the poorest of circumstances. And, at the lowest rates to boot. Worst of all, spreads between high-quality credit (such as treasuries) and low-quality credit (junk bonds) are some of the lowest in a very, very long time. The world, it seems is awash in a sea of liquidity."
I first mentioned a potential credit event at least 6 months prior to that. And, frankly, I was just one of many blogging on the topic. If you're reading blogs that just regurgitate news, no, noone mentioned it, but read the really cutting edge ones, and you would have known about it way before it happened.
"Contrarian Chronicles"
9/25/2006 12:00 AM ET
"Voodoo debt and the coming recession"
Bill Fleckenstein.
"I believe that the CDO and CDS markets (the lower-grade tranches in particular) will be ground zero in any financial dislocation"
(look at the date, 13 months ago, long before credit issues "surprised" us.)
In later articles, he talks about conduits, and how they will likely face problems. He also talks about the ABCP problem before it happens.
As with all contrarians, he sometimes gets the timing off (early) and not exaclty the correct order, but many people predicted the credit mess we are in.
Also: Mish's blog talks almost exclusively about CREDIT deflation and has for years. and most posters over there discuss the housing bubble as a credit bubble...
I think most of you guys are not even reading what Nemo said. One of you says:
The first being the tightening of credit availability (banks taking write-downs and are forced to restrict lending to riskier customers) which we have yet to see in a meaningful way despite the rumblings and bumblings to that effect, and the second being a rise to the cost of extending credit.
Well, this is EXACTLY what Nemo is saying, that we all predicted a lot of pain, but the TYPE of pain that we predicted has not ocured yet, except maybe Fleck is an exception with ABCP. But even thosee who predicted ABCP pain, most of them did not know anything about SIVs. I have been predicting disaster for 4 years and I had no clue about SIVs but I did look at charts of ABCP and understood what it means.
Here's what Nemo said: "All along the pessimists have focussed on consumer spending, MEW, etc."
This is true. Although we also focused on derivatives, but not ALL the way. We focused on hedge funds, but we didn't know that the failed hedge funds would be ironically from an investment bank (bear stearns). Another example: we all talked about what a disaster it would be when teaser ARMs reset, only to find out that the mortgage disaster was prompted by EPDs. Furthermore, ALMOST NO ONE predicted that the subprime lenders would implode in the way that they have as result of EPDs (being a refinancing machine). The way in which they just all blew up in early march, within days, was quite a spectacle. It was expected that hedge funds might blow up like that, but not lenders. How many people truly wrote essays upon essays about the fact that warehouse LOCs are a flimsy type of financing that the IBs will pull right away? Why... even after it happened to the subprimes, I was surprised to see it happen so quick in July to the non-subprimes (AHM, LUM etc).
So...Yes we have to pat ourselves on the back for understanding that this was a ponzi scheme as outlined perfectly by Doug Noland, but can't congratulate ourselves [at least not to the same extent] over the specific events. Look at how Doug Noland writes. Very abstract, very general. That's because he simply doesn't know what will happen, he just knows it'll be bad.
Warren Buffett once said something to the effect that there will be a big storm for sure, but it won't necessarily come exactly from where everybody thinks it will. And that is the truth.
For all the posters here who claim (or know others who have claimed) to have accurately forecast current conditions in either/both of credit markets/housing: What's been the result? What have you gotten for being "right?"
An economy that continues to expand, low inflation, low unemployment, rising earnings, a stock market making new highs, and recession as elusive as bin Laden.
This has always been the weakness in the bearish arguments. They can be very convincing, very well-researched---but ultimately of limited value unless you were very careful about how the information was used.
If it was used to avoid buying a house in Southern California in the past couple of years you might have made out great (avoided overpaying). If you had used it to avoid buying a house in NC, though, you'd wind up paying more today than if you'd bought two years ago.
If you had shorted the homebuilders, mortgage lenders, or other entities involved you would have made out great. On the other hand, if you had tried shorting the overall market in anticipation of a recession you might not have done so well.
Sebastian, I don't want to speak for all others but, thankfully, I have made serious money off of this and I know that certain others have as well. Some did not, other don't have the acumen or the balls or the means to short all kinds of stuff. And besides, Goldman also made money in Q3 by shorting. So... that's it. A lot of people made money, it's nothing special.
Many people have noted the basic dynamics in play since 2004 and earlier. Even Greenspan, though the issue at the time was fannie and freddie.
First, in little more than a decade, Fannie Mae and Freddie Mac have gone from handling one trillion dollars in mortgages to four trillion, with virtually no changes in oversight. Second, their dominance of the mortgage market has profoundly undermined the discipline that once kept housing prices in check.
Once banks knew they could automatically hand off the mortgages they wrote to Fannie and Freddie with basically no risk, the old incentive system dissolved. "Banks and other mortgage lenders are not watching home prices carefully because they rarely hold onto the mortgage paper they create--they just sell it upstream to mortgage investors," John R. Talbott, a housing researcher at UCLA's Anderson School of Business, has argued. "It is a dangerous situation indeed when neither home buyers nor the institutions that finance them are concerned with the ultimate price being paid for the housing asset."
"Within the next year or so," The Economist argued in a May 2003 editorial, these regional "bubbles are likely to burst, leading to falls in average real home prices of 15-20 percent" across America.
Studies have shown that they exercise twice the effect on consumer spending as comparable declines in stock prices. So, a 20 percent drop in housing prices would have the same, shriveling effect on the economy as a 40 percent crash in the stock market.
The goal of most of the debate in Congress has so far been how to ensure the GSEs financial viability; there has been very little talk about how to reduce their role in the housing markets.
That job fell to Greenspan: Finally, on Feb. 24, testifying before the Senate Banking Committee, he came clean about the risks of the housing market, in a speech reminiscent of his 1996 warning about "irrational exuberance" in the stock market. ...he warned that the GSEs weren't just unstable, but also posed a "systemic risk" to the economy of the United States. He suggested debt caps, to reduce Fannie and Freddie's role in the market, and urged stricter regulation.
The chairman's proposals were both brave and right, the best plan for resolving the structural problems with GSEs that's been put forward yet. But given the political situation, his reforms won't be enacted anytime soon. The day after his testimony, his suggestions were brushed off by everyone from Fannie and Freddie's chief executives to Republicans and Democrats on the Hill. Oh, it's just Greenspan.
Maybe they can put O'neal in an SIV and avoid anymore writedowns?
Yes, "contained" not "spilled-over" is a lost cause...so time to fess up?
Not a chance. Switch to a lower gear and/or easier terrain: claim "discounted"...not "discounting" and "sinking".
Will Merrill promote healthy lifestyles too?
New 5K's coming to a bank/brokerage near you(Robert W Armijo)
Good stuff at The Spoof
"Until that moment, investors had been willing to trust companies claiming to have limited exposure to the credit mess. But Merrills third-quarter results made clear that such confidence must now be earned, not presumed."
Now that's some funny stuff by Morgenson. But I'm not entirely sure if it was intentional.
Paulson presses for taxpayer funded bailout:
"Henry Paulson, the US Treasury Secretary, is seeking to persuade the White House to offer financial compensation to American mortgage lenders that try to help troubled homeowners by renegotiating the terms of their loans."
"The Times has learnt that Mr Paulson is lobbying President Bush to provide funds so that mortgage lenders can reduce the loss that they would incur from either reducing the rate of an adjustable home loan or extending the life of the mortgage to make it cheaper for the property owner."
Henry Paulson presses for aid to sub-prime lenders - Times Online
No wonder whu CFC was up 32percent on Friday.
How do so many people figure that this is only the beginning? The ABX going down... Ok... that could be a good reason. What else?
benpaulso
benpaulson
The only good thing is that the marketofascists may be exposed as terrorists.
So just why do the proposed mods require taxapayer funding? Can somebody clarify the agenda here? Also: Are they also going to suspend the no-doc prohibitions as long as this keeps the borrowers from defaulting?
If Condi Rice is Ms. International Busybody telling any nation she can buttonhole how they should run their affairs, Paulson has to be Mr. Inter...Busybody. After repeatedly going to China to tell them what to do with their currency (to which they turned a deaf ear) he is now in India telling them to get cracking on a nuclear agreement the US wants them to ratify. Why? Well I suppose he is telling them it is "for their own good" but really he just wants to forestall India's getting its gas via a pipeline from Iran. If I were India, Russia, etc., etc., I tell this pair to take a hike.
After repeatedly going to China to tell them what to do with their currency
China would rather slow cook the frog then micowave it they get tough when you cook them like that.
"If I were India, Russia, etc., etc., I tell this pair to take a hike."
In so many words (and deeds), they are.
I am with a small tech outfit in silicon valley, not exposed directly to mortgage/financials. We seem to be doing OK so far (to my surprise, I must add). A couple of summer months looked like it was going to get nasty, but there was a comeback in September, and October is ahead of plan.
Then I see Google/Microsoft earnings, and they are actually doing well. Even the losing Yahoo delivered a decent quarter.
I can't say what to make of all this. The housing market in the bay area does seem to be faltering.
Banca Monte dei Paschi di Siena SpA is seeking international partners to manage and improve its bad loans portfolio, according to a report on Saturday's Il Sole 24 Ore.
Among the possible candidates are Lehman Brothers, Goldman Sachs, ABN-Amro and possibly Merrill Lynch, the daily added.
According to the daily, the first step of the project envisages the sale by BMPS of 30 pct of MPS Gestioni Crediti, its unit that recovers bad loans, to the international partner in order to improve its track record in this sector.
BMPS will then sell to a newly created company some 3 bln eur of gross bad loans that will be managed along with the international partner. In the final phase of the project a new company that will be majority owned by the international partner will be created to buy bad loans from other banks.
Business finance news - currency market news - online UK currency markets - financial news - Interactive Investor
Merrill is still profitable fergawdsake. First the profits AND the bonuses and then the stockholders and and then the tax benefits and then only after all those wells are dry should we consider additional taxpayer money. How many billions in taxes did Merrill save with this "loss?"
Here's a gem form an article published in the Financial Times on 8/24/07:
"SIV's are differentiated from conduits and other structured products because by design they are never forced into rapid sales of assets and always have options. If they need to delverage, they can do so in a slow, controlled and orderly manner."
Wow, what a relief.
It seems to me we are losing all credibility in the global finance world. After this is over expect 20% interest like the other bananna republics have.
Thanks Shrub
Joe! I was looking for a reason NOT to go house hunting!
The head of the German unit of Goldman Sachs Group Inc, Alexander Dibelius, told Spiegel magazine that he was against the proposed creation of special emergency funds discussed at the last meeting of the IMF to deal with the fallout of the sub-prime credit crisis.
The proposed funds would use money from international lending institutions to save certain credit vehicles that might be on the edge of collapse due to the after-effects of the US credit crisis.
"Sometimes it is just better to swallow a sour pill all at once, so that the recovery is started more quickly," Dibelius told the magazine in response to a question on whether it might not be better to write-off underperforming credit vehicles rather than trying to save them.
Dibelius added, however, that some credit institutions are simply not able to the absorb such large losses.
Business finance news - currency market news - online UK currency markets - financial news - Interactive Investor
probert --
How do so many people figure that this is only the beginning?
Because what got this mess started was house prices declining, and all available evidence suggests they have a long way to go.
Right now there seems to be some multibillion-dollar game of Old Maid going on. It would be better to get it over with quickly.
vader --
I am pretty much a "marketofascist", and the only thing that would piss me off more than a bail-out of homeowners would be a bail-out of mortgage lenders. Or worse, a bail-out of Wall Street (spit).
The NYT via BigPicture has this example of the general economy decoupling not) from the housing sector: - NY Times
This is so much fun to watch. I can't wait to see what the next shenanigan the idiots in charge will try. It is like watching a dinosaur thrash around in a tar pit. I bet they bomb Iran if things get bad enough. It's never their fault, it must be Iran's. LMAO!
Benpaulson wrote:
"Henry Paulson, the US Treasury Secretary, is seeking to persuade the White House to offer financial compensation to American mortgage lenders that try to help troubled homeowners by renegotiating the terms of their loans."
The funny thing is that for some reason as I was skimming this paragraph I subliminaly read "renegeing" for "renegotiating". Pretty much the same thing I guess, hehe.
Denninger is wrong on so many counts , it was embarrassing to read.
disconnected ideas and ramble
i cant support his conclusions
"i cant support his conclusions"
Take the other side of the trade then.
Stan walks the plank
O'Neal Out as Merrill Reels From Loss - WSJ.com
CR (or anyone, really) --
How low would MER (or IMB or CFC or... take your pick) have to fall, exactly, before you would agree the losses actually have been "discounted"?
Or do I misunderstand what you are making fun of?
You'd think that Paulson, after coming up with the stupid super-SIV idea, would be a little chastised. Unfortunately, since the super-SIV idea isn't working, it seems like he's onto an even worse idea, a government bailout of those who made bad loans.
Banker --
He probably just wants to pursue other interests.
He wants to spend more time with his lawyers.
Because what got this mess started was house prices declining, and all available evidence suggests they have a long way to go.
Nemo,
Remember that Goldman is already predicting 15% declines over 2 years and the consensus is starting to be that houses will go down much more than they have so far. So to an extent the market already knows some of what's about to happen to housing prices. I think it's gonna be even worse than the market thinks. But how much worse, and what does this say about writoffs on CDOs which are derivatives of derivatives....anyway. probably we have more to go. But I'm trying to put my finger on something other than common sense
probert --
Exactly. When the Wise Men were talking about "containment" earlier this year, they were referring to the effect of the housing correction on the broader economy. They did not anticipate the ensuing credit crunch.
To be fair, neither did this blog (nor Roubini nor any of the other perma-bears). All along the pessimists have focussed on consumer spending, MEW, etc.; the first time any of them even mentioned ABCP -- or any kind of liquidity crisis -- was after the disaster was already underway. (At least, that is what I recall. I would be interested if anyone can post a link proving me wrong.)
So I do think it is somewhat disingenuous for the bears to make fun of the crisis not being "contained", since the kind of containment both they and their critics were talking about is not the kind that has failed -- so far.
On the other hand, the optimists have consistently underestimated just how poorly the mortgages would perform once house price appreciation started running in reverse -- and what effect that would have on the asset-backed securities. Seeing AAA securities downgraded to junk and the AAA tranches of the ABX falling off a cliff is mind-boggling. Plus Merrill Lynch has given no indication that $8 billion is the limit of their damage, nor even that they have a grip on what their damage is. It seems improbable that they are alone.
In the end, I guess you are right that it is mostly common sense. And if Gretchen Morgenstern is writing about it in the NYT, it is probably way, way too late to make a buck betting on it.
The Recessionary Macro Effect of the Worst U.S. Housing Bust Ever
RGE - The Recessionary Macro Effect of the Worst U.S. Housing Bust Ever
"The head of the German unit of Goldman Sachs Group Inc, Alexander Dibelius, told Spiegel magazine that he was against the proposed creation of special emergency funds discussed at the last meeting of the IMF to deal with the fallout of the sub-prime credit crisis.
The proposed funds would use money from international lending institutions to save certain credit vehicles that might be on the edge of collapse due to the after-effects of the US credit crisis.
"Sometimes it is just better to swallow a sour pill all at once, so that the recovery is started more quickly," Dibelius told the magazine in response to a question on whether it might not be better to write-off underperforming credit vehicles rather than trying to save them."
(He forgot to mention that sometimes one man's bitter pill is another man's feast...)
How Goldman Sachs defies gravity
While the credit markets went sour, one investment bank made a huge, shrewd bet - and seems to have won big.
Fortune's Peter Eavis explains the stunning strategy.
By Peter Eavis, Fortune writer
September 20 2007: 5:46 PM EDT
NEW YORK (Fortune) -- It is one of the most stunning bets Wall Street has seen in decades.
As the credit markets fell apart over the summer, causing the prices of hundreds of billions of dollars of mortgage-backed bonds to plunge, Goldman Sachs (Charts, Fortune 500) had already positioned itself so that it would profit massively from a decline in those securities. Thursday, Goldman reported earnings for its fiscal third quarter that were far above expectations.
While several businesses were surprisingly strong in a difficult period, the chief contributor to the earnings blowout were trades that made money from price drops in mortgage-backed securities. Goldman indicated this in its press release when it said that "significant losses" on certain bonds were "more than offset by gains on short mortgage products...Goldman Sachs showed an ability to not only protect itself from the problems in the market but also to capitalize on them," says Mike Mayo, banks analyst at Deutsche Bank (Mayo rates Goldman a buy.)
When asked on a public conference call Thursday, Goldman's chief financial officer David Viniar declined to give a number for the amount of money Goldman made on its mortgage short in the third quarter.
Goldman Sachs' breathtaking bet pays off - Sep. 20, 2007
Nemo,
In terms of making a buck on it, it depends where, if you're talking about some of the IBs (Citi, Bear) and the ABX, then yes. But clearly there is more to go in the financial sector as a whole, due to credit cards, MEW, bank liquidity issues etc'. Not to mention retailers manufacturers etc'. Plus spread widening should occur in bonds of various types. I would be surprised if we've seen the worst.
How are all these defaults going to change Barra and KMV measures. If you factor these default probabilities in you come up with substantially different universe of possible defaults.
"i cant support his conclusions"
Take the other side of the trade then.
Anonymous |
disconnected ideas and ramble
the other side is not signing his petition... or whatever he calls it
which i had contemplated, before i read his stance...it's lik a congressional bill, it's got's some bullshit and pork that needs weeding
you freaking tard
paulsons siv plan fails...abx tanking...short rollovers looming...the insiders see a tsunami coming...paulson goes to plan b...since blatant price fixing failed, let's try the bail out...panic clearly rising...can he save it?...dunno, major backstops in trouble mgic and ambac...insufficient reserves, lotta leverage and off book accounting...enron writ large? wouldn't shock me....time to go for the lifeboats, still have a few weeks headstart....id get off the beach people
I'm begining to think they did see this coming. That's what that awful bankruptcy bill was about. Be thankful that Social Security "reform" didn't happen. Where would all those diverted dollars go? Probably to prop up the mortgage market further, ensuring an even bigger bubble and more CARNAGE and PAIN after it POPS.
Nemo,
I don't recall CP getting early,specific mention, though someone is now certain to find citations.
While the focus in comments here is often on the domino du jour, it has seemed to me that the weakness in many areas has been exposed, at least by implication. We haven't, for example, looked specifically at the potential fallout from defaults on auto and equipment leasing. By identifying them as components of ABS and their derivatives, CR and Tanta invite readers to consider whether a significant slowdown in the economy subjects these components to greater than usual risk. Which I read as an invitation to connect the dots on my own and to look out for fresh data. Same with CDS and revolving credit.
My happiness doesn't depend on perfect foresight from all bears. But I think a number of readers here are pretty good at recognizing implications while, at the same time, preferring to leave the commentary to the professionals among us.
"...offer financial compensation to American mortgage lenders that try to help troubled homeowners..."
"Try"? There is no "try". Do or do not.
emo-
"To be fair, neither did this blog (nor Roubini nor any of the other perma-bears). All along the pessimists have focussed on consumer spending, MEW, etc.; the first time any of them even mentioned ABCP -- or any kind of liquidity crisis -- was after the disaster was already underway. (At least, that is what I recall. I would be interested if anyone can post a link proving me wrong.)"
you're wrong, I told you it was going to be a major problem. you just weren't listening. corporate hy defaults will work their way to double digits...
please don't make the same statement when we are there.
you freaking tard
I got your panties bunched up so it's all worth any insults you care to hurl at an anonymous poster. LOL
CR (or anyone, really) --
How low would MER (or IMB or CFC or... take your pick) have to fall, exactly, before you would agree the losses actually have been "discounted"?
Or do I misunderstand what you are making fun of?
Anonymous | 10.28.07 - 2:19 pm
Other will have a different take, but for me, part of what this crisis is opening to is a mega-crisis of trust and predictability. I imagine there are some on this list who would think 0 is a good price for Countrywide.
Hence the popularity of gold among deep bears-- that's the only trustworthy thing in a crisis,they say.
And I'm coming to believe they may have a point.
When all the resets come due in 2011, where we will be in terms of
further climate disasters (in my opinion the San Dieg fires, Atlanta/Southeast drought, Britain floods are all climate related, as was Katrina. We'll "know" for sure in 30 years, I suppose.)
Peak Oil, and high oil prices furthering the inevitable (post-bubble) recession
credit card debt and second mortgages that aren't payable (esp. when people are unemployed)
the impact of oil-exporting countries wanting payment in Euros instead of unreliable dollars [with this switch, as with all the situations above, what was a bad problem will turn into a worse problem]
All that said, where does the bottom lie? At what price are stock or housing prices trustworthy?
At what about all those people who say they know the answer to this, and then are proved overly optimistic?
Lots of questions, answers to follow as the crisis plays out.
@Nemo -
The following
online
published in 1933 details relationships between credit crunches and real estate crashes.
The credit crunch has been predicted for years by many.
Including Bill Gross in Pimco, & Ableson in Barron's. It's not exactly a surprise. The exact timing of future events is always an unknown, but plenty saw the credit crunch coming and wrote about it, and continue to write about it. It's not exactly a secret, or something that just started getting discussed in June/July.
It's been picked up by MSM since the meltdown got going and not before, but yes, the "permabears" and non-permabears have discussed the cycle for years. Centuries, even.
jus me --
Of course real estate and credit cycles are connected, in the sense that easy credit leads to questionable mortgages leads to real estate booms lead to real estate busts leads to tighter credit. This sort of unwinding is no surprise and is nothing new.
But it also has nothing to do with what I am talking about. I am talking about the contagion from mortgages to the credit spreads on debt in general, especially corporate commercial paper. The transition to this general credit and liquidity crisis was not predicted by any of the pessimists I read, from Roubini to this very blog.
"risk capital" says he has been warning about it, but then fails to provide the link I requested. Also, one voice in the wilderness does not prove much... Many of the pessimists who are now crowing about "being right all along" did not, for the most part, predict anything like the current crisis. They may yet be right about the residential real estate collapse leading to a broader recession... But the evidence for that is limited, so far.
"The Times has learnt...." What a crock.
emo is right, no one specifically called abcp or sivs but nemo is wrong overall. many people here called leveraged derivative trouble as a result of housing melt down leading to a crisis that could threaten the financial system, citing comments from buffett to roach to fleck and most famously and accurately doug noland...his credit bubble watch anticipated this quite clearly and he is still the most accurate and informed in seeing the scope of the current crisis. which, btw, is unprecedented, as was the inciting growth of the derivatives ( a catch- all term meaning, essentially, " leverage") that spawned it.
Nemo needs to search out the early calls for transparency as were expressed here. The concern was that much of what was being called commercial paper was in fact a box of MBS with a pretty ribbon of respectability.
I think I must not understand the question here. It's a credit cycle. It's not "Oh, cool, I was right!" It's not "Who could have foreseen!?" It's just a credit cycle.
The only questions concern how it will manifest itself this time and what is its scope.
burnside-
I already defined the scope of the August crisis prior to it happening as a potential 3 standard deviation event.
You are correct in that credit cycles play out over very long periods and we are at the beginning.
As I had previously predicted, credit will continue to tighten over the intermediate term "across the board", this "temporary" so-called improvement is just that, "temporary", and not really much of any improvement.
As I had said previously, there will be an unprecedented flight to quality and we will see a 3-handle on the 10 year, hy defaults will see double digits, and the economy will likely enter recession, my current probability of recession is an 80% chance. The only question at this point for me is timing of the "official" start.
I also believe that mortgage rates may not move lower due to the continued repricing of risk, that many may be disappointed with the expectation of another refi-cycle.
Tough period ahead.
BTW, just how do the derivatives fit in here? Aren't these guys supposed to be hedging with derivatives to limit their losses (OK discounts).
If anyone can point me in the direction of any good explanatory sources for derivatives, that would be much appreciated.
In regards to me Nemo is right. I thought banks still owned the loans until I found this site. I thought WWI was fought in the tranches.
Nemo, I don't have the link, but rc did call the liquidity crisis; actually kind of hard to forget!
Paulson can beg his boss all he wants, but the last time I checked the constitution (what a novel idea) CONGRESS disposes funds, the executive branch can only propose. And that will be one heck of a battle, you can count on it. Election year politics will turn it into a quagmire.
Unless they try some stunt like declaring all of the major bubble markets Federal disaster areas, Congress must approve any bailout. On second thought, keep that one secret; better to not give the bastards any ideas.
Very interesting shit going on in the credit markets, have a look.
The Market Ticker
Risk Capital:
"3-handle on the 10 year"
what does that mean?
Nemo, meet Warren:
Buffett and Munger warn of real estate 'bubble' - May. 2, 2005
Not exactly laying the whole thing out, but a pretty damn good hintfest a coupla years ago. But no one can really lay it all out ahead of time, though. If you're really drunk and get behind the wheel, I don't know exactly where you'll veer or what your car and you will look like at the end of the trip, but I know you shouldn't be pressing upon that gas pedal.
"Unless they try some stunt like declaring all of the major bubble markets Federal disaster areas, Congress must approve any bailout. On second thought, keep that one secret; better to not give the bastards any ideas."
The city of Toronto tried that one a few years back with homelessness. They were seeking federal disaster relief money.
The idea was that it doesn't really make any difference to a man whether he lost his home to a tornado or a bank.
It didn't work.
Still, good times...
"3-handle on the 10 year"
what does that mean?
A 3 point something yield on the 10 year treasury bill.
Nemo,
Bill Fleckenstein has been talking about a real-estate credit crunch for a long time. Ill give you one example from September of last year.
But while CDOs and CDSs are hard to fathom, a disruption in these risk-filled markets would become all too comprehensible to average folks -- as the aftermath would bring serious turmoil in real estate and the economy I believe that the CDO and CDS markets (the lower-grade tranches in particular) will be ground zero in any financial dislocation.
Voodoo debt and the coming recession - MSN Money
Many bloggers / pundits including Eric Janszen, of itulip, Robert Precter, and others have foreseen a U.S. debt crisis for which RE would be the trigger.
Jane Doe - a bit out of my depth here, but a couple of thoughts:
1.) Derivative contracts are zero sum, meaning that for someone to win someone else has to lose. Taking on tens (hundreds?) of trillions of dollars of exposures is almost certain to result in some significant losses somewhere, unless you believe that JPM has 100% accuracy and foresight in their investing.
2.) Along the same lines, one person's hedging activity is another person's speculation - really difficult if not impossible to suss out which is which until the dust settles. Which brings us to....
3.) Visibility is zero - these things are so far from OTC it's another universe entirely - completely off balance sheet, often beyond the purview of the risk management teams, many of which are constrained by models so overburdened with theoretical assumptions that they have no relevance to derivatives based on assumptions based on other derivatives.
In other words, this stuff is (as Buffet put it in other words) f***ing nuts in many cases, which would be a lot less scary if the number of zeroes involved were smaller.
With regard to the scant relationship between the second/third/fourth-order derivatives and the collateral they are allegedly based on, I think Tim Price of UBP still has the all-time best post on his blog:
Junk Debt Crisis: “Lake Tahoe Housewife To Blame” - The price of everything
Risk Capital, nice to see you 'round!
Now Nemo states the bears didn't see this. Bullshit. The broad events have been projected and discussed for years now; only the details, timing and sequence have ever been in question.
Before Nemo stated that nobody knows what the future holds. Also bullshit. When you've got a house of cards and you blow out the bottom level, it doesn't take a genius to know the whole house is coming down.
Contained? Discounted?? Hardly -- the show's only just begun.
Nemo,
I started blogging about a credit crunch last year as well...
I wrote one in January titled "2007 Credit Event 1.0"
Southern California Real Estate Bubble Crash Blog » Blog Archive » 2007 Credit Event 1.0
"I have been expecting for at least 8 months now, the beginning of a substantial credit crunch. A credit crunch will come from 1 or 2 sources. The first being the tightening of credit availability (banks taking write-downs and are forced to restrict lending to riskier customers) which we have yet to see in a meaningful way despite the rumblings and bumblings to that effect, and the second being a rise to the cost of extending credit.
The past few years has seen credit extended in some of the poorest of circumstances. And, at the lowest rates to boot. Worst of all, spreads between high-quality credit (such as treasuries) and low-quality credit (junk bonds) are some of the lowest in a very, very long time. The world, it seems is awash in a sea of liquidity."
I first mentioned a potential credit event at least 6 months prior to that. And, frankly, I was just one of many blogging on the topic. If you're reading blogs that just regurgitate news, no, noone mentioned it, but read the really cutting edge ones, and you would have known about it way before it happened.
Chuck Ponzi
@Nemo:
You are wrong.
From Moneycentral.msn.com
"Contrarian Chronicles"
9/25/2006 12:00 AM ET
"Voodoo debt and the coming recession"
Bill Fleckenstein.
"I believe that the CDO and CDS markets (the lower-grade tranches in particular) will be ground zero in any financial dislocation"
(look at the date, 13 months ago, long before credit issues "surprised" us.)
In later articles, he talks about conduits, and how they will likely face problems. He also talks about the ABCP problem before it happens.
As with all contrarians, he sometimes gets the timing off (early) and not exaclty the correct order, but many people predicted the credit mess we are in.
Also: Mish's blog talks almost exclusively about CREDIT deflation and has for years. and most posters over there discuss the housing bubble as a credit bubble...
oops... didn't see that bystander already posted my link... sorry...
anybody who has been reading Fleck had heard about conduits and ABCP and CDO's etc before they imploded.
It's where I first heard "Asset Backed Paper" (some of it may have been in his daily letter though, not on the msn site)
YTL
Nemo,
Exactly when did you start reading Calculated Risk?
I think most of you guys are not even reading what Nemo said. One of you says:
The first being the tightening of credit availability (banks taking write-downs and are forced to restrict lending to riskier customers) which we have yet to see in a meaningful way despite the rumblings and bumblings to that effect, and the second being a rise to the cost of extending credit.
Well, this is EXACTLY what Nemo is saying, that we all predicted a lot of pain, but the TYPE of pain that we predicted has not ocured yet, except maybe Fleck is an exception with ABCP. But even thosee who predicted ABCP pain, most of them did not know anything about SIVs. I have been predicting disaster for 4 years and I had no clue about SIVs but I did look at charts of ABCP and understood what it means.
Here's what Nemo said: "All along the pessimists have focussed on consumer spending, MEW, etc."
This is true. Although we also focused on derivatives, but not ALL the way. We focused on hedge funds, but we didn't know that the failed hedge funds would be ironically from an investment bank (bear stearns). Another example: we all talked about what a disaster it would be when teaser ARMs reset, only to find out that the mortgage disaster was prompted by EPDs. Furthermore, ALMOST NO ONE predicted that the subprime lenders would implode in the way that they have as result of EPDs (being a refinancing machine). The way in which they just all blew up in early march, within days, was quite a spectacle. It was expected that hedge funds might blow up like that, but not lenders. How many people truly wrote essays upon essays about the fact that warehouse LOCs are a flimsy type of financing that the IBs will pull right away? Why... even after it happened to the subprimes, I was surprised to see it happen so quick in July to the non-subprimes (AHM, LUM etc).
So...Yes we have to pat ourselves on the back for understanding that this was a ponzi scheme as outlined perfectly by Doug Noland, but can't congratulate ourselves [at least not to the same extent] over the specific events. Look at how Doug Noland writes. Very abstract, very general. That's because he simply doesn't know what will happen, he just knows it'll be bad.
Warren Buffett once said something to the effect that there will be a big storm for sure, but it won't necessarily come exactly from where everybody thinks it will. And that is the truth.
For all the posters here who claim (or know others who have claimed) to have accurately forecast current conditions in either/both of credit markets/housing: What's been the result? What have you gotten for being "right?"
An economy that continues to expand, low inflation, low unemployment, rising earnings, a stock market making new highs, and recession as elusive as bin Laden.
This has always been the weakness in the bearish arguments. They can be very convincing, very well-researched---but ultimately of limited value unless you were very careful about how the information was used.
If it was used to avoid buying a house in Southern California in the past couple of years you might have made out great (avoided overpaying). If you had used it to avoid buying a house in NC, though, you'd wind up paying more today than if you'd bought two years ago.
If you had shorted the homebuilders, mortgage lenders, or other entities involved you would have made out great. On the other hand, if you had tried shorting the overall market in anticipation of a recession you might not have done so well.
Sebastia
What have you gotten for being "right?"
Sebastian, I don't want to speak for all others but, thankfully, I have made serious money off of this and I know that certain others have as well. Some did not, other don't have the acumen or the balls or the means to short all kinds of stuff. And besides, Goldman also made money in Q3 by shorting. So... that's it. A lot of people made money, it's nothing special.
Many people have noted the basic dynamics in play since 2004 and earlier. Even Greenspan, though the issue at the time was fannie and freddie.
First, in little more than a decade, Fannie Mae and Freddie Mac have gone from handling one trillion dollars in mortgages to four trillion, with virtually no changes in oversight. Second, their dominance of the mortgage market has profoundly undermined the discipline that once kept housing prices in check.
Once banks knew they could automatically hand off the mortgages they wrote to Fannie and Freddie with basically no risk, the old incentive system dissolved. "Banks and other mortgage lenders are not watching home prices carefully because they rarely hold onto the mortgage paper they create--they just sell it upstream to mortgage investors," John R. Talbott, a housing researcher at UCLA's Anderson School of Business, has argued. "It is a dangerous situation indeed when neither home buyers nor the institutions that finance them are concerned with the ultimate price being paid for the housing asset."
"Within the next year or so," The Economist argued in a May 2003 editorial, these regional "bubbles are likely to burst, leading to falls in average real home prices of 15-20 percent" across America.
Studies have shown that they exercise twice the effect on consumer spending as comparable declines in stock prices. So, a 20 percent drop in housing prices would have the same, shriveling effect on the economy as a 40 percent crash in the stock market.
The goal of most of the debate in Congress has so far been how to ensure the GSEs financial viability; there has been very little talk about how to reduce their role in the housing markets.
That job fell to Greenspan: Finally, on Feb. 24, testifying before the Senate Banking Committee, he came clean about the risks of the housing market, in a speech reminiscent of his 1996 warning about "irrational exuberance" in the stock market. ...he warned that the GSEs weren't just unstable, but also posed a "systemic risk" to the economy of the United States. He suggested debt caps, to reduce Fannie and Freddie's role in the market, and urged stricter regulation.
The chairman's proposals were both brave and right, the best plan for resolving the structural problems with GSEs that's been put forward yet. But given the political situation, his reforms won't be enacted anytime soon. The day after his testimony, his suggestions were brushed off by everyone from Fannie and Freddie's chief executives to Republicans and Democrats on the Hill. Oh, it's just Greenspan.
here