The widespread suspicion that the government of President Nestor Kirchner has manipulated inflation data and the likelihood that his wife Cristina Fernandez de Kirchner will succeed him are transforming the Argentine bond market into a financial bloodbath.
Argentina's benchmark inflation-linked bonds have tumbled 24 percent this year, making the country's debt market the worst performer in the world, according to data compiled by JPMorgan Chase & Co. and Bloomberg.
Polls show that Fernandez is the front-runner to replace Kirchner in next week's elections. She rebuts claims by government statisticians that Kirchner's administration forced them to tamper with consumer price data to hide the extent of inflation. Merrill Lynch & Co., the world's biggest brokerage, estimates prices may be rising at a 17 percent annual pace, double the official rate.
I checked the referneces to see if they sourced your blog, and momentarily thought they might have as a match for "Calculated Risk" was found. However it was not in reference to this blog:
53 Michael D. Calhoun, President for the Center for Responsible Lending, statement on Calculated Risk: Assessing
Non-Traditional Mortgage Products before the Senate Committee on Banking, Housing and Urban Affairs,
Subcommittee on Housing and Transportation and Subcommittee on Economic Policy, September 20,
2006, pp. 7-8.
They did reference Robert Schiller's "Irrational Exuberance" website.
MAKE SURE ALL BORROWERS UNDERSTAND THE TERMS OF THEIR
MORTGAGES
The current subprime mortgage crisis has made it clear that the mortgage finance system does
not require that borrowers understand how their loans work... Policymakers should consider requiring that all mortgage lenders disclose
the basic facts about the mortgage loan that they underwrite for the borrower. This form
should be easy to understand and not exceed one page in length.
The borrower should receive this one-page form from the lender well before the closing of his
or her loan. At a minimum, the form should require that the borrower know the amount of
the loan, the propertys appraised value, the term of the loan, the payments at each reset date,
and todays estimate of how much the rate will increase (the fully indexed rate), as well as the
maximum possible rate on the loan. Other disclosures would include, in plain language, any
prepayment fees and other estimated costs and fees due at closing.
Napolean
Thanks, I'm sure there might be something in the report we didn't already know from CR & TANTA, like who paid for it(who cares). Run for cover, I'm off to bury a few peso & dollars in the back yard of my Central Valley rental.
Thanks CR & TANTA
jo6pac
Figure 1 of the report is an update of a graph from Shiller's book. Look at the substantial divergence between house prices and building costs. For those of you economically inclined, now think of Tobin's Q. This is why I maintain that homebuilding won't go deep into the toilet until prices come way down (I said homebuilding, not homebuilders, some of whom will be killed by leverage). So long as prices remain way above the cost of construction, some builder somewhere will find it in his (her?) interest to keep building.
Market is due for a real bloodbath soon at this rate!!! How can anybody in the financial sector who owns this sewage price it?
Are we talking about 50 cents on the dollar? Or are we talking about mils on the bid side?
I can't wait to see how the fed handles this mess next week! I believe a rate cut has to be forthcoming, but Wall Street still doesn't fully appreciate the consumer impact of this fiasco!
Corporate bond downgrades are next- after all they made similar bets with them;-}
$92 a barrel oil- a drop in the dollar next week, record sustained commodity prices- I guess we should all just sit back and enjoy the inflation in the pipeline.
Nemo: I tend to agree that having borrowers understand the loan would not be that much of a help. If a broker told them exactly what would happen and then went on to "encourage" them to go ahead, far too many would just go ahead. Compulsive risk-taking has become a style of life, very widespread.
Tanta,
How long till a big player in the swaps market goes under? Counterparty risk becomes a serious issue if you swapped mortgage paper returns for treasuries and you are concerned about the underlying portfolio risk. With the ABX market all but defunct, can this be hedged in anything like a Basel secure manner? Or will they have to mark to whatever market exists and make huge loss provisions?
Truth In Lending Act (TILA? or something like that) require that the borrower have the important "details" explained and that theya e given written documentation that should be simple and easy to understand...?
I'm sorry, but a minimum-wage worker who decided to buy a $300,000 house is not a "victim". I don't care how many polls there are of such people claiming they "didn't know" their interest payments would go up. Give me a break.
As I said, the legitimate victims of fraud can take their cases to court, as always. But you, I, and everyone else knows darn well those are a miniscule fraction of the loans. The vast majority of borrowers knew exactly what they were doing, and they did it anyway because "house prices only ever go up".
This Congressional report's entire purpose is to provide cover for the inevitable bail-out, and as a taxpayer who actually saves responsibly I am going to be wicked pissed when it happens.
I don't think these people really care about pricing. They care about their paychecks. If they go around talking about the need for accurate pricing and the importance of mark to market, they probably won't be receiving a paycheck.
Quincy- the bonuses are shot, the rats are jumping ship rapidly, the only question is how much more sewage will be coming up through the floorboards as the ship sinks.
ML CEO is just the first, and tanman is dancing fast to avoid Laying an egg in the federal pen. Tan man could always check out before sentencing.
Now comes a huge day of reckonning.
I can hardly wait.
It will make the world of finance a very different place in five years.
But meanwhile I have to calculate when the local gas price will hit $3.25 so I can collect my winnings from a counterparty who was foolish enough to take a wager I thought was much better than even up.
Nemo and Napolean
Your comments are fine but unrealistic. When have you even seen a reduction in the paperwork for any transaction. I get 2ft. of paper receipt from Lowe's when I buy 1 drill bit and 1 plant. Educating the masses to the complexities of all the various loan programs would be like teaching Asians to dance...impossible(am I going to take heat for that?).
There is a very easy solution to the loan default problem going forward. Eliminate all loan programs that are designed to be refinanced. That's it, it's sooo simple.
Have a nice weekend and I really like Asians.
Countrywide really upped the ante in their demands for rate cuts and bank bailouts today. Their conference call was very insightful as to their full expectation for FED rate cuts, and lots of them. The game of mutually assured destruction was escalated today. Should be interesting.
Napolean
Thanks, I'm sure there might be something in the report we didn't already know from CR & TANTA, like who paid for it(who cares). Run for cover, I'm off to bury a few peso & dollars in the back yard of my Central Valley rental.
Thanks CR & TANTA
jo6pac
jo6pac | 10.26.07 - 6:32 pm | #
Yes, I'm sure. After this report is fully vetted by all the members of the JEC, they will all come to realize the magnitude of this problem. And with the gravity of the situation being what it is and needing some form of decisive action, the JEC will form and appoint a new committee or task force. There the real heavy lifting will get done! As the task force to Go Over Delinquent Home Expenditures & Loans & Peculiar Uses of Subprime (GODHELPUS), appointed by the Joint Economic Committee, will reccommend that another task force be formed. This one to be composed of and formed by the industry. But above all it will need to work under the purview of the GODHELPUS task force.
Out of these workgroups, after hundreds of man hours spent by industry professionals and observers, and after everyone gets a turn at the microphone before the committees, we will finally receive our comprehensive "9/11 Commission Report" like tome. Filled from cover to cover with detailed policy prescriptions on just how this whole mess, and others like it, can be avoided in the future. It will then be delivered to Congress which will deliberate on the matter and get to work right away implementing the neccessary changes.
I'll ask again: What legitimate loss have borrowers who put little or nothing down sustained? Their investment in curtain rods, perhaps? And on what line or reasoning do the few who realistically qualify as "victims" lack an adequate legal (or equitable) remedy? There is no lack of lawyers willing to take meritorious claims on a contingency basis. But do we award the status of "victim" to the multitudes who lied about their resources on their applications?
In the "Wealth Destruction" computations, they omit an important intangible loss: the affected people will lose Confidence in the economic system, i.e. they may lose "Hope". This is what I think the much ballyhooed loss of "American Dream" is all about. It is difficult to run a healthy economy with 50 million depressed people who have no stake in the nation.
It's astounding that for all the problems we now have caused by cutting interest rates to "improve" the economy, we're still cutting interest rates to "improve" the economy.
The only thing that genuinely distresses me is to see people not learning from their past mistakes.
Current circumstances are almost irrelevant, on balance, when weighed against the propensity and ability of a culture to learn and be aware, and then to modify their behavior accordingly.
On an economic basis, I don't see that we're doing that. And that tells me the economy may be in great danger far beyond that posed by housing or the "subprime crisis".
Nil, I'm going to try and respond to your questions and I will try to not sound elitist, or arrogant. But basically the answer is a lot of people just don't get it. It sounds as though many people were put in mortgages they neither understood the terms of nor could they afford the payments after the teaser period ended. But what these people do know and understand is you need a home.
I know people who got themselves into this situation. They did not lie on their apps, they wouldn't know where to begin to lie. The mortgage broker set it all up for them so they could get into their house. They made all their payments like any good homeowner; then the teaser period expired.
Now granted, besides their credit rating these people had nothing to lose should they walk away. But they didn't want too! This is their home! They frantically sought help from anyone and everyone and eventually, for some of them, the mortgage holder extended the teaser period another two years. With the option to renew it for another two year period two more times in the future. Imagine their joy!
Yes, they have no equity and will simply be renting at a very high price. But they don't get it, and they don't seem to care.
I prefer to go with debilitating personal attacks:
Your argument fails to take into account the potential effects of the rapid accumulation in foreign reserves suddenly being reversed and I saw your fiancee drunk and making out with some guy last night at that bar you're always talking about.
" I just noticed one little snippet while I was skimming that answers a question I had a while back. In 2006, 29% of all mortgage loans were originated through mortgage brokers, but 63% of all subprime mortgages were originated through brokers (page 17)".
Tanta, in remarking on the same data, Gramlich in his monograph says:
"Brokers have become pervasive and operate in virtually all communities, but they are especially plentiful in areas underserved by old-line commercial banks and thrifts, such as minority communities." [p. 19; my emph]
and a bit later: But the brokers have minimal incentives to find the cheapest mortgage for borrowers, and only indirect incentives (through repeat business possibilities) to minimize repayment risks for lenders. [p. 20]
(Most federal agencies define subprime loans strictly as high-price loans so, say, three points over a benchmark interest rate or whatever would be considered subprime regardless of borrower characteristics. Gramlich follows this practice in his book.)
So you have a set of agents who have at the same time every incentive to make loans it's their only business, after all and no incentive to worry about to whom the loans are made, so long as they don't hear back too much from angry financers. These agents operate in areas where there will be little competition from other types of originators, and where the consumer base, even before the market becomes loaded up with products with which no one is familiar, has higher shopping costs due perhaps to a shallow experience base as well as isolation from sources.
It's straightforward economics theory to predict that this situation would result in consumers paying more, and where the product is not competely standardized, getting a less satisfactory deal. Looking at actual data and being able to say confidently that yes, this is exactly what happened is, of course, a much harder chicken-egg proposition, but this is the germ of the case. Then it might also be true in other, less commercially isolated communities, that as houses became less affordable and loan types claiming to deal with that issue proliferated, the shopping costs for potential borrowers in them also rose and they turned to brokers who claimed to be able to evalutate the possibilities for them. Or, is there a tendency for serial refinancers eventually to find that their regular bank would rather not deal with them?
There may or may not be a chart showing the losses per capita (broken down by state) of the "Impact of Subprime Foreclosures on Home Equity, Property Values and Property Taxes" as seen in Figure 5 on my homepage. winkwink
I'm just saying you never know. Charts appear sometimes.
Last I checked we still elect our politicians. Pages 13 and 14 are going to be gasoline on the political fire.
Various parts of the lending industry have been battling the state regulators since (at least) 1999 when NC passed the first predatory lending law. Just how long did the industry think they could keep running wild in the subprime market before the chickens came to roost?
I know accountants and lawyers (who deal in finance issues) with good credit who got adjustable rate mortgages to shave $50/month of their payments. If they have absolutely no concept of the historical volatility of interest rates, and how it might interact with housing price volatility, how on earth do you expect the general public to understand it? Or how the even more complicated teaser rates and optional payment levels might factor in?
"As I said, the legitimate victims of fraud can take their cases to court, as always. But you, I, and everyone else knows darn well those are a miniscule fraction of the loans. The vast majority of borrowers knew exactly what they were doing, and they did it anyway because "house prices only ever go up"."
Nemo | Homepage | 10.26.07 - 6:55 pm |
I can attest to this personally. As an originator the past seven years, I saw every different stripe. In a certain way I was lucky and the company I worked for was A credit only.
However, I had friends that in 2003 were bartenders in Georgetown, DC at the Daily Grill that got hired at a subprime shop that were morons that made huge money.
The modus operandi there was to make contacts with individuals like me that woudn't touch sh$t like that.I would refer it out and my buddy would toss me a point after close.
Getting to the point though, he didn't
care if they picked cotton, he had a deal for them. Stated/Stated was the way to go. As long as the applicant could prove 2yrs of self emplyoment and a credit score over 580, deal was done.
And the statement "The vast majority of borrowers knew exactly what they were doing, and they did it anyway because "house prices only ever go up"." Is exactly right. His number one selling point.
Nemo:
A whole bunch of finance geeks at the lenders/ratings agencies/banks didn't figure out that the borrowers couldn't afford the loans.
Contending that the borrowers themselves are to blame for not figuring out that they couldn't afford the loans would seem a little unfair, wouldn't it?
"50 million depressed people who have no stake in the nation."
Really, so the American Dream has devolved to the point that owning a mortgage on some crummy tract house comprises all the the promise and benefits of the Republic?
Well, good to know. Perhaps we can direct these folks to Romania or Kazahkstan, where their devalued dollars and shot credit will still enable them to purchase some shack with a couple of plants. And good riddance.
I'm a rentor who declined to buy during the mania because prices were nuts. Simple as that. A business decision.
The Constitution and the Bill of Rights comprise the American Dream. The marketing effort to convince folks that RE is the Dream, is smoke and mirrors, convenient for politicians and hustlers--whether ibanks, mortgage brokers or RE agents.
The housing crash is the best news possible--time for folks to stop walking around like mortgage zombies and rejoin reality. The counry needs a citizenry who are wide awake...and angry is just fine too.
Nemo:
A whole bunch of finance geeks at the lenders/ratings agencies/banks didn't figure out that the borrowers couldn't afford the loans.
Contending that the borrowers themselves are to blame for not figuring out that they couldn't afford the loans would seem a little unfair, wouldn't it?
4runner | 10.26.07 - 8:58 pm | #
4runner;
If you believe for one minute that these folks (finance geeks/lenders etc) gave a rats ass, or didnt know if the creative products they were selling would all ever get paid back. I have a bridge to sell you. Come on. Its all about GREED! Whats done is done. Sit back and watch the fun.
Good lord, with the exception of just 2 (3A 06, 2A 06), every one of the ABX indices are at new LOWS tonight...even triple AAA. How'd you like to lose 20% on triple AAA debt and nearly 50% on AA. Won't even talk about A or BBB. Kiss your coupons good bye. They're all worthless..... yet carried on books at par in all likelihood by 99% of holders. We're still only a fraction the way through the mortgage resets. 100% guaranteed recession as capital shock ripples come to an economy near you. Buy your tickets now.
Stuart: The Feds have their own mark to model problem this from a prior CR thread:
"Let's look at these projected U.S. household real estate losses. Currently (end of Q2) U.S. household real estate was valued at $20.997 Trillion (Fed: Flow of Funds report). So a $2 Trillion dollar loss is about a 10% decline in total U.S. household real estate value. A $4 Trillion dollar loss is a 20% decline."
The real deal is that until and if a house sells the so called value is so much speculation and bullshitting by all concerned. The only value that matters is the debt in this case around 10 trillion dollars.
Now really its the financial investors banks, MBS holders, who put up the 10 trillion bucks to finance all this RE buying that is at risk,while homeowners equity is strictly a number pulled out of one's arse by various bean counters.
And with this, the mortgage insurers are taking it on the chin the past few days. What was it that Tanta opined, it isn't a housing crisis until one of the mortgage insurers goes under. To wit, I opined Q1 '08. Good chance I was a bit too generous. Something in the air smells and its getting more foul by the day. Acceleration events??
"The Constitution and the Bill of Rights comprise the American Dream."
And what a dream it is, the government is bought and paid for by special interest groups,lobbyist write the laws and they are rubber stamped by the politicians who are basically bribed with generous campaign contributions.
The country needs a citizenry who are wide awake...and angry is just fine too.
This is America not some foreign country where people actually drag lying politician out in the street and beat them. All we have here for the most part is a bunch of complacent fat asses looking for a handout or trying to figure out how to game the system.
has to be triggering "events" in all sorts of places. Some CDOs,not on downgrade but on certain tests failing must be deleveraging by now.
Anybody holding them like SIVs, Hedgefunds in the portfolios are having to mark them down. Pension funds can't hold them and have to sell out.
I've read pages of Moodys announcements, cross-referenced to SEC filings to see who AND when might be going down - but I tell ya - its really hard to track this - but everything I read of "events" - puts AAA ratings and "tests" at the center of things.
This really is the first hard evidence I see for things going belly-up, fast. Somebody deep in the biz will no doubt set me right ?
The case of the 'minimum-wage worker who decided to buy a $300,000 house illustrates the difference between demand in the economic sense of the term, and need in the human sense.
Everyone needs shelter every day, but half the world has such limited access to cash that they cant exert effective demand for adequate housing.
Theres enough mud to make enough bricks to build a nice home for everyone. The obstacles are ideology and policy.
Sometimes capitalism gets what it deserves, despite the efforts of government to intervene in it's behalf. However, those with the deepest pockets and most acute access to the levers of power will exit any crisis of capitalism richer than before. The general population...the suckers...will wonder what happened to their lives. Their children will be taught that their parents lived through a great historical epoch that tested the soul of the nation and which they triumphed over due to their uniquely American spirit. Ken Burns will the produce a plodding, inspid documentry, rife with fiddle music and...we fade to commercial.
Watson,
I agree.
I thought the Tsunami (in Sri Lanka) would push (back) toward using earth as a building material.
It turned out to be to the contrary.
The flood of donor/donations and the changed perception of the locals (I am a local). The locals realized that money was being made on their misery.
i.e There was a manager of the funded money to build houses. The managers money was paid assuming he got the houses built. The locals demanded cement block housing.
Since underwriting deteriorated from 2001 to 2005, and the accelerating housing price boom was giving subprime borrowers important help(see Part II), a cautious analyst might have questioned whether the improvements in subprime performance could be sustained. The financial intermediaries who expanded the supply of these loans were apparently not troubled by this issue. The reasons for their lack of curiosity may lie in the strong incentives they had for expanding the subprime market.
That Houston TWAT team was lucky. I have known more than few guys who are heavily armed, combat vets with PTSD who have assumed their lives would end in a shootout with the government. I'm not joking. These guys would be tough to take down if the cops came for their house.
Contending that the borrowers themselves are to blame for not figuring out that they couldn't afford the loans would seem a little unfair, wouldn't it?
I think you are responsible for the legal documents you sign. I think if you do not understand a legal document, you should not sign it. I think I-the-taxpayer, who do not sign documents I do not understand, should not be on the hook if you do.
I think I am stating the obvious.
I think there is plenty of blame to go around, from the borrowers to the brokers to the hedge funds to the banks, and I want every last one to pay the price they signed up for. It is called taking responsibility for your own actions. I realize that now that every race/gender/class is a "victim", this actually sounds like a radical concept.
$92 a barrel oil- a drop in the dollar next week, record sustained commodity prices- I guess we should all just sit back and enjoy the inflation in the pipeline.
What is the connection between commodity prices and inflation? For example, the price of gold is now still below the 1980 price peak. Does that mean prices are lower than 27 years ago? Oil prices fell from ~1991 to ~1998. Does that mean we had deflation during those seven years? The price of tea went down more than 20% in the last 5 years. What determines inflation more now?
To deduct inflation from commodities seems to have nothing to do with economic reality. Yet I hear it over and over on this blog.
I also hear statements like the FED only counts inflation when you don't drive or eat. What a crap. The FED's models state that the general trend of inflation as measured in the CPI trends from core inflation, not the volatile energy & food part. In other words, food and energy inflation follows core inflation and not vice versa. This model currently indicates that with core inflation lower than the volaitle part, the CPI in general will trend lower. Now, I'm not an expert of the timelines in this model, but we can expect food and energy prices to go down at some point in the future (unless the core rate goes up all of a sudden- which is not in the cards right now).
Surely you are aware that defrauding people through the "fine print" of contracts has been the oldest of professions, well almost. The market will work itself out and disaster, if it happens, will be proportional to privilege as history has shown. To argue enthusiastically in favor of screwing the least among us is just an exercise in typical conserative masterbatroy-sadism. Wash your hands and go to sleep
I believe I was in kindergarten when I was taught "always read the fine print". How old were you?
Determining which contracts are justly enforceable is as old as law itself. In short, I suspect the courts can sort it out without assistance from our little rats in Congress.
As for "the least among us", they can rent an apartment like I do. I know, what a sadist I am!
By all means, label me a "conservative" simply for believing people should be responsible for the predictable consequences of their own actions. After all, you cannot have a "victim" without an "oppressor"; might as well lay it on people like me.
What did people lose? well...along with their credit,they paid a LOT more for their housing.my exwife and I leased a home for $2k a month that would sell for $1.2mm conservatively.so i we had put $200k down,and financed with an I/O loan at 6%,added taxes at 1.25% per annum,added insurance and maintenance.WOW we could have spent 3.5 times as much per month,and lost all of our equity in only 2 years!not counting the opportunity cost on the DP or the $ we saved by renting.
Since I am on topic for a change, I put up some more charts of the data within this JEC report. It includes my version (adjusting the data for state populations and personal incomes) of a map of the USA showing the hot spots.
The JEC puts Texas in red on their map, but in my opinion that's only because Texas has so MANY people in it (so the dollar amounts get larger).
i know, i know i think the government should put the curbs also on RE prices, i mean the curbs worked for the stocks and meanwhile they go only up. should be no problem to set it up for the RE
The euro is telling us that somebody, somewhere is afraid of the dollar.
Perhaps that is only the thought that the Fed will cut.
Perhaps it is more than that.
And, stop and think, Europe is, in its leading elements, a basically socialist enterprise. They must be awfully afraid of the dollar.
Because the American worker is no good?
Because American universities are no good?
Because American infrastructure is no good?
Or perhaps is it because the American "financial industry" has destroyed the American economy, hand in hand with its deformed off-spring, the war in Iraq.
So our distressed borrowers typically made down payments of something like 20%? And it is of no consequence that they typically misrepresented their incomes? Spin, spin, spin. Just for laughs, maybe you neoBolsheviks would like to identify the countries which have economies structured to your complete satisfaction. How does Fidel handle housing assignments, anyway? Is a nice little house in the suburbs considered a "right"?
To deduct inflation from commodities seems to have nothing to do with economic reality. Yet I hear it over and over on this blog.
And in all blogs around. It's very counter-intuitive that price of oil is almost unrelated to inflation, so people just don't believe you when you try to explain.
O-Joe, I think your explanation was pretty good, let wait and see if anyone gets it.
My addition would be to ask people if they think that 4.5% yield on 10-year bonds sounds like an inflationary warning? See you at 3%.
I'm in the short-term deflation camp even with $92 oil and a falling dollar for what it is worth, not that I feel comfortable betting on it directly.
My long-term TIPS (treasury inflation protected treasuries) have been doing just fine as interest rates fall, but the non-inflation protected versions have done fine too.
My addition would be to ask people if they think that 4.5% yield on 10-year bonds sounds like an inflationary warning? See you at 3%.
To me, it is just a yield. The 4.5% yield in late 1965 didn't offer much warning of the coming inflation. The 14% yield in 1982 didn't offer much warning of the coming disinflation.
I'm leaning towards deflation in the short-term primarily because the housing market peaking implies deflationary forces are on the way. How long they last and how strong they are is yet another debatable topic though. No idea.
There's no way I'd risk locking in a long-term rate on a long-term 4.5% treasury bond though. I can't predict inflation one year from now, much less ten.
All I'm trying to do is lock in a real yield I'm comfortable with (by using TIPS). And yes, that implies I trust the CPI much more than most seem to (both of you may be happy to know).
There are two very powerful forces at play in my opinion. There's the deflationary effect of debt for some. There's the inflationary effect of too much money for others. So much money has been made in the last 20+ years on interest alone. I'm talking a real positive return on passive investments (simple interest bearing accounts).
We'll never resolve which force is stronger, except by using the rear view mirror more than likely. Once you acknowledge that you can't/don't know, you just might end up being a rather wimpy paper stagflationist (TIPS). I think I see slower growth coming (that's half of it) and I'm not sure about the other half (deflation or inflation).
Let's say after a softball game it is just you, me and a water vendor. You only have a buck and the bottle of water costs three. No sale unless the water vendor takes less. You borrow ten from me & the water seller sees you borrow the money and now he wants five. Your really thirsty so you buy even though your pissed, did the amount of money in the system affect the price of water?
As far as bonds go are speculators buying bonds ahead of the fed rate cut which will go up in price and ignoring the detachment of our currency from reality? Just askin do not know.
how much of this subprime and credit market mess can be smoothed by a rapid drop in the Fed Funds Rate?
I've realized that I clearly don't understand how this all works...
hypothetical example:
Fed drops rates 50 basis points this week (so we're down to 4.25%) and then continues with 50-100 basis point drops in rapid succession. Let's say they got down to 2% FFR by early next year.
would this save the positions of the SIVs and the MBS/CDS/CDO/(insert letters here) market? would it get rid of the losses?
Help me understand this... CAN a rapid drop in FFR "help".
It will destroy me, unless I move to all gold or something I guess...
O-Joe says In other words, food and energy inflation follows core inflation and not vice versa
I feel the two scenarios to higher inflation are
1] High job participation rates coupled with high income growth. People have more money so they don't care a lot about price increases.
2] The other is through resource constraint. Global economic boom causes 3 billion (BRICs - half of world population) more people to start bidding up on essential resources. Everyone is forced to pay high price on resources.
I have a feeling that in the previous economic cycle, scenario number 1 played out causing food + energy to follow core. The current economic cycle is experiencing inflation because of scenario 2. In this case food+energy will be the leading indicator of future core inflation.
Do you have core inflation Vs headline inflation graphs for the late 70s period when gas prices hit a record high?
Some of you guys are missing a key variable in how low the Fed can cut. We're in a global economy now, for better or worse, and the rest of the world is experiencing faster growth and inflation that the US.
There are real limits to how much "help" the Fed can try to give the housing market right now; at some point they risk weakening the dollar and the appeal of US treasury bonds to the point where a mass exodus out of US stocks and treasury bonds by foreigners occurs, resulting in a financial crisis that would make the current one look like popsicle stand in Pensacola going out of business.
I don't know what the tipping point is, but this scenario has to be on Heliben's mind even if he won't admit it.
Say it with me, nils nemo -- can you stop hammering the unfortunate long enough to remember that mantra that this boiler-room scam of a bubble used to strike fear into buyers?
If these buyers truly knew what they were getting into, why would they have signed the papers? These were very complex loans --whose terms were purposely concealed -- in order for brokers and bankers to collect fat fees -it's that simple. There were terms on these loans to mute statisticians and mathemeticians.
You know what all this nils nemoish "blame the mark not the con man" noise is about, right? It's about trumpeting a "free" market at any cost - even after the village has been pillaged and razed. Stupid villagers.
And the best part of this ayn rand fantasyland is thinking that the amok market didn't affect those of us who saved money, didn't sign up for the bubble and worked hard. Grow a clue -- they've come for your village too.
The Countrywide writeoff of $1.1b is laughable considering the following observation by Egan Jones via Barron's:
Egan-Jones carries a triple-B-minus rating, a notch above junk. This independent rating company noted "a disconnect" in the Countrywide report. "CFC has $209 billion of assets and took charges of $1 billion; a 5% charge equates to $11 billion compared to equity of $15 billion."
Even a 5% haircut would be modest, based on the plunge in prices in the ABX index of credit-default swaps on asset-backed securities. The price of the ABX triple-B-minus tranche (backed mainly by subprime mortgages), originated in the first half of 2007, hit a record low of 18.57% of par, extending its headlong plunge of the past two weeks. At the start of the year it was in the high 90s, which shows how much the low end of the mortgage market has sunk.
OK OTS/OCC/FDIC, what are you going to do about it?
I don't think I'm personally missing your (very important) point.
however, I have been continually surprised by the sheer stupidity of the machinations of those in power.
Who would have thought that the Fed would have dropped to 1%, held for so long AND allowed such degradation in lending standards?
Who would have thought that the Fed would immediately bail out the banks at the first hint of a loss (most haven't even lost anything yet, at least on paper!)
Thus, I'm keeping my mind open to future central planning stupidity. If it can be conceived, it can be implemented (regardless of stupidity).
I personally could imagine the Fed dropping to 1% (or lower) if the BOE and Eurozone also drop to those levels. It would be a race to the bottom. A concerted Central Bank effort could pull this off, no?
The BOE has their reason to hold (northern rock) and they have their hidden issues as well. they could drop if need be.
Eurozone also has their skeletons (BNP Paribas, 2 German Banks, Spanish housing market)
Canada is not immune (huge housing bubble themselves, despite their unwillingness to see it... Vancouver, Alberta, Toronto especially)
"I'm sorry, but a minimum-wage worker who decided to buy a $300,000 house is not a "victim". I don't care how many polls there are of such people claiming they "didn't know" their interest payments would go up. Give me a break."
I have to disagree with this. This person was a victim of a central banker who encouraged citizens to use ARMS and a dishonest currency (notice I didn't say money). If gold were used as money, house prices would not be $300K. The entire system in the US is fraudulent. It's the honest man that loses.
Something very important just came to my attention about SIVs.
Excerpt:
The average net asset value of SIVs rated by Fitch fell to 73 on Sept. 28 from more than 100 in July. A 0.5 percent drop in value of assets is equivalent to a 7 percent decline in the so- called NAV, Fitch said.
Once an SIV's net asset value falls below 50, a clause is typically triggered requiring the fund to liquidate.
The rate of decline in the average NAV for these SIVs has been very steady from July thru September (like a straight line). The chart on this Web page shows it:
The key point I want to emphasize is that if you extrapolate the NAV decline on this chart, the average NAV for these SIVs will pass BELOW 50 BY LATE NOVEMBER.
This will trigger the nightmare SIV forced liquidation of ABS that Wall Street is desperately trying to prevent (because it threatens to expose their insolvency).
Make no mistake, Ben is now a patsy for wallstreet. Regardless of whther he cuts next week which I assume he will, we are headed for a prolonged, very difficult period in the economy. He has buckled to pressure from those that have taken excessive risk and seems more than willing to further the speculation in the capital markets. The longer the inevitable recession and correction is postponed the more severe the eventual outcome and length of duration. The losses due to low grade corporate defaults, mortgage related securities, and commercial loans will be extreme in aggregate. I presume the ultimate fall guys will be the ratings agencies and the finger pointing will amaze everyone. As Ben caves to the whining on the street, the unfortunate consequence is the growing inability to address future crisis, and based on the growing possibility that the next 5 years will be extremely difficult, this could potentially pose serious problems. What is particularly disturbing today is the rampant speculation in the commodity markets with no attempt at curbing the current partices, the end result highly detrimental to the consumer. With nearly all metrics in regard to the consumer in decline, credit clearly to tighten further, and anemic cap ex it is clear that recession is unavoidable. Make no mistake, at some point commodities will collapse and at that point, it will be too late for ben to address the fallout in the capital markets due to the overexposed, one-sided, herd mentality of over-leveraged vehicles. Until the inflection point, kool-aide is being served everyday, and likely that every mid twenties hedge fund manager has their hand on the trigger....knowing that they will be first through the exit on the illiquid stuff(LOL).
The euro is telling us that somebody, somewhere is afraid of the dollar.
I don't think folks are scared of the dollar - its that they are sick of them.
There are just way too many dollars floating about the planet compared to what world consumers can buy with them. If foreigners want to buy products from somebody and the person they want to get those products from already has more dollars than they would like also... Guess what? The price in dollars for that trade goes up and the value of those dollars relative to other medium of exchange which aren't in such huge supply goes down.
The reason there are so many dollars floating about worldwide is because we run such massive deficits for so damned long we've flooded the market.
That' where we are at and it isn't terribly difficult to understand I don't think. What's harder is finding a way out of this or accepting it and moving on - that's where the 'arguments' occur.
"To deduct inflation from commodities seems to have nothing to do with economic reality. Yet I hear it over and over on this blog."
I can, and do, see monetary inflation in commodities.
I also see supply+demand in commodities.
I also see currency valuations in commodities.
I also see climate issues in commodities.
I also see manipulation in commodities.
But with a bowl-of-spaghetti-view of commodities and it's intermingled relationships, it is nearly impossible for me to extrapolate at any given time in matter and space exactly how the percentages by ingredient are allotted.
Inflation in commodities... yes, along with a lot of other dark matter.
Did you any of you catch former Teasury Secratary John W Snow (chairman of Cerberus Capital) on CNBC yesterday morning saying that the fall in the dollar "was a part of a neccesary process to correct our trade imbalance". And that as long as it was "orderly" there would be no problem. He also quoted current CPI data to say he "didn't think that the falling dollar would cause an inflation problem"???????
The 15% for the Fed funds rate as the "high" shows that some member institution has to pay 15% due to the poor quality of assets that they are using for the FED Repo (TOMO operations).
The Effective FED funds rate, in the first left hand column, is the average for all of the inter-bank loans made. This is the number that the FED tries to influence by doing REPOs or reverse-REPOs.
Yearning to Learn:
The FED can cut very low, but that is only a target rate. They try to influence the rate that banks lend money to each other for reserves this way.
The FED cannot influence the yield curve unless they get the Treasury to start buying back bonds.
The last time the FED cut, LIBOR and the 10 year yield both rose. This means that most mortgage rates rose as well.
Snow's statement about the falling dollar and inflation isn't quite so disingenuous as it sounds. In the past, when FX moved against us, there was some willingness on the part of foreign suppliers to reduce their profits in order to retain US market share - and also a move to locate a part of their manufacturing base here if that was practical.
Inflated non-essentials will, I think, find no market as US household non-discretionary spending approaches 100%, so his point is moot.
god i hate it when people throw that greenspan quote about ARMs around like he told everyone to go get an ARM
what he clearly said was for those who WERE INCLINDED TO MANAGE INTEREST RATE RISK THEMSELVES ARMS were a valuable tool in doing so
here is the quote:
American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home."
1) if you had an ARM since 1982 or whenever you did great.
2) if you had a fixed rate and wanted to refi each time rates went down, you're spending a ton on transaction costs
3) WILL TO MANAGE THEIR OWN INTEREST RATE RISKS - geeze - thats a massive qualifier no one ever listens to. I wanted to manage my own interest rate exposure so i used an arm and then when the time was right i refi'ed to a 30 yr fixed.
4) fixed rates MAY be an expensive way to finance a home. of course, its the MOST expensive
Skepticism Scarce in Countrywide's Rally
By RANDALL W. FORSYTH
IN A TOUCHING DISPLAY OF FAITH-BASED investing, Countrywide Financial's debt and equity securities soared Friday despite dramatic evidence of mortgage- credit deterioration severe enough to induce the Federal Reserve to cut short-term interest rates again.
Even though the company reported a $1.2 billion loss for the third quarter as a result of $3 billion of credit-related losses, its securities exploded higher. In the debt markets, the cost of insuring against default by the nation's largest mortgage lender plunged an astounding 100 basis points, or one percentage point, to 377.5 basis points for its credit-default swaps. Yields on Countrywide's bonds plunged as much as 40 basis points on the earnings news.
Among equity securities, the common (ticker: CFC) soared 32% while Countrywide Capital preferred's (CFCpfdA and CFCpfdB) jumped 22%. And the Calabas, Calif., company also declared its regular 15-cent dividend on the common, which might have been in jeopardy given its scramble to raise cash during the quarter. That, of course, featured the placement of $2 billion of convertible preferred with Bank of America (BAC) during August's dire days
Still, the rebound in all these securities and derivatives was not spurred by the dismal results but by Countrywide's declaration that the third quarter marked the trough and profitability would return in the current quarter.
But given the many premature calls in the past year that the bottom of the housing and mortgage markets had been reached, Countrywide's declaration that the worst is over might be worthy of more skepticism, not least because of Chief Executive Anthony Mozilo's huge sales of stock, which the Securities and Exchange Commission is investigating.
More likely, the recovery in all of Countrywide's securities Friday reflected a monster short-covering rally.
But the green-eyeshade types in the credit market took a more jaundiced view of Countrywide's results. Standard & Poor's lowered its credit rating to triple-B-plus, the third investment grade from the bottom, from single-A-minus.
Egan-Jones carries a triple-B-minus rating, a notch above junk. This independent rating company noted "a disconnect" in the Countrywide report. "CFC has $209 billion of assets and took charges of $1 billion; a 5% charge equates to $11 billion compared to equity of $15 billion."
Even a 5% haircut would be modest, based on the plunge in prices in the ABX index of credit-default swaps on asset-backed securities. The price of the ABX triple-B-minus tranche (backed mainly by subprime mortgages), originated in the first half of 2007, hit a record low of 18.57% of par, extending its headlong plunge of the past two weeks. At the start of the year it was in the high 90s, which shows how much the low end of the mortgage market has sunk.
OK, as someone who does not want to bail out distressed homeowners, but does want to ensure the government does anything it needs to to smooth existing market forces towards potentially "agreeable" solutions, I really resent being called an Ayn Randian (because she and her friends are nutballs).
I think the problem in these discussions is not "who was at fault". Clearly: everyone. But rather, both prospective and retrospectively what will we do. Prospectively, I have no doubt at all that new regulation will require a standard of care different from the one we've been seeing. In particular, we will see regulation that will attempt to enforce the behavior that people like Tanta and MaxedOutMama did by default to protect their clients and their employers. Can there be any question that this happens and that it's first iterations will be painful?
The problem is the retrospective side. There is not a reasonable financial-blame-placing-model based on the clearly shared blame which does not involve the homedebtors. The financial institutions are going to experience pain - they are going to eat 25% of the loan value in many cases, sometimes worse. The homedebtors deserve the other part of the remaining pain: the requirement to move, a blemish on their semi-permanent record, etc. When people make mistakes this big in other parts of the world, their life changes forever, in the US, not so much. Which is (on balance) good.
It's not Ayn Rand, it's distribution of pain. It makes me sad that more people in this business didn't behave like the people who comment here, but I see no economically and politically reasonable way to retrospectively hold them accountable.
The 15% for the Fed funds rate as the "high" shows that some member institution has to pay 15% due to the poor quality of assets that they are using for the FED Repo (TOMO operations).
Thanks. So that's where the 15% came from ( the intraday high ) ! I went and looked and I only saw the 4.86 daily rate. I checked and over the past year that's the only one that's so high. The only number remotely close is 8% - just once in the past year. It makes ya wonder though - who had ONLY such crappy assets to pledge for an overnight imbalance trade ? Isn't it rational to use your good assets to get good rates if you can ?
Worth checking back in on Monday and subsequent days.
"A core issue is whether BAC will continue to support CFC. The $2 billion preferred share investment helps, but unless conditions improve, more will be needed."
On that score, Bank of America so far is likely showing a loss on that preferred. Even with the rebound in Countrywide common, to 17.30, it ended below the $18 conversion price on the converts -- which, it might be recalled, was a discount to the market at the time, a highly unusual concession for an issuer of such securities.
"On the liquidity side, the high cost (over 5%) for short-term paper is unsustainable," Egan-Jones adds. "[Countrywide's] business is built on short-term rates below 3%."
I noted the exact trendline extrapolation in the Fitch report, it will be interesting to see how that plays out as it was the average of the SIV's covered in the report...it would be nice to see each SIV broken out.
i know, i know i think the government should put the curbs also on RE prices, i mean the curbs worked for the stocks and meanwhile they go only up. should be no problem to set it up for the RE
Prior to 1983(?), home prices were included in the CPI. That created implicit curbs on the price of homes because higher home prices -> higher inflation -> higher interest rates.
Home prices were removed under Reagan and replaced by owners equivalent rent. Since home prices were dropping in the early 80's this increased the CPI and gave Volcker the cover needed to raise rates and stomp out the 70's rampant inflation/speculation.
Fed drops rates 50 basis points this week (so we're down to 4.25%) and then continues with 50-100 basis point drops in rapid succession. Let's say they got down to 2% FFR by early next year.
Banks make money on the spread between short term and long term rates. Dropping the Federal Funds rates to 2% in the face of strong inflation expectation would increase banks earnings and allow them to repair any damage to their balance sheets (at the expense of depositors).
If you're holding cash, you should be watching SOMA like a hawk.
The 15% for the Fed funds rate as the "high" shows that some member institution has to pay 15% due to the poor quality of assets that they are using for the FED Repo (TOMO operations).
The FFR is "the federal funds rate, which is the interest rate at which depository institutions lend balances to each other overnight". The TOMO is done to influence these operations in the aggregate. So the 15% we saw was some institution charging some OTHER institution for overnight lending against its crappy assets. Wouldn't I love to know who it was.
Tell me what haircut you think is appropriate at quarter end of one of the worst quarters in mortgage history. Here is the Countrywide 10-K from 6/30:
Cash: $1.2b
Mtg loans held for sale: $34.1b
Trading Securities at fair value: $19.3b
Trading securites pledged as collateral $3.5b
Securites purchased under agreements to resell, securities borrowed & federal funds sold: $26.4b
Loans held for investment net of allowance for loan losses of .5b: $74.1b
Investments in other financial instruments, at fair value: $26.6b
Mortgage Servicing Rights at fair value: $20.1b
Premises & Equipment: $1.6b
Other assets: $10.0b
Total Assets: $216.8b
Looks like we have de facto "too big to fail" if the feds don't enforce GAAP accounting.
Does anyone not think that there's a serious problem with people being exploited that would be almost impossible to fix just with improved disclosures? To me, the borrowers culpability isn't the main driver of this issue. It's the attempt to displace the responsibility of a poor decsion from the most savvy (IBs, lenders, brokers, etc) to the least. The only way to seriously curtail this type of exploitative behaviour is to hold those enabling it responsible as well.
Oakbitter, I just can't bear -- and neither, I think, can our economy, the tired,old, red-herring "crafty welfare-mother" argument made in connection with the bubble. Any bile spewed against the losers in this game is bile misplaced.
Do we want to make sure this doesn't happen again? Then it's not about engaging in fantasic assumptions that all homebuyers should be mathematically and financially savvy enough, and emotionally unencumbered enough, to suss out the terms of every exotic loan thrust on them by a fee-grubbing banking system -- or else they get what they deserve. Or the even more fantasic assumption that what they deserve won't cause any collateral damage. This monster was not made by, or for the beneifit of, homebuyers -- it was created as a con by loan-makers -- who went ahead with it -- economy and their own long-term survival be damned.
This report is junk. I hope there wasn't much taxpayer money spent on it. Is this supposed to be final version? Here are a few of the problems. 1. They use the OFHEO numbers for housing appreciation in states where a huge portion of the homes are over the conforming limit. The Case-Shiller indexes would have been better for that. 2. They make dumb statements like "Home production has outpaced demand". The accompanying graph shows that the months supply of newly built homes was quite low through 2004, and was around its historic average even in early 2007. The problem wasn't that production exceeded demand in 2004-2006. The problem was the large portion of demand which was speculative. Many of the homes and condos being purchased didn't have anyone living in them. They were sold by the builders to someone who didn't live in them and then was trying to flip it. 3. Some years show up twice in their graphs (Fig 11 and Fig 13), other years only once. Get some actual proofreaders. I think the data is correct, but if they had someone who knew how to modify the axis in Excel, each year would be displayed once. 4. I have to dig a bit to see how far off the forecast is, but if $2-4 trillion of housing wealth will disappear as home prices drop, I find it hard to believe that foreclosures will only cause $71 billion of that.
what? i wasn't trying to say their write-down was appropriate or not. i have no idea what their write-down should be based on that info, what's your guess?
That' where we are at and it isn't terribly difficult to understand I don't think. What's harder is finding a way out of this or accepting it and moving on - that's where the 'arguments' occur.
Your post makes me think "cashless". As in, cashless society. As in elimination of differing currencies, and some system of electronic credits taking that place. No more problems with dollars. We trade in credits.
Do you think that's a terrificly off-base perception?
If gold were used as money, house prices would not be $300K. The entire system in the US is fraudulent. It's the honest man that loses.
-SB
Anonymous
can you define what an ounce of gold 'should ' buy?
historically?
a unit of two buy fours?
a yard of concrete
a pallet of shingles
10 bushels of corn
a mans labor for a week
???
when we were on a gold system, all the gold still ended up in the hands of the shrewd...
The fiduciary quote of a lifetime and likely commonplace in the not-so-distant-future
"Citron, who could be pretty imperious when he was on top, later admitted that he really didn't know what he was doing. He was just another unsophisticated investor."
Clyde, is there more detail in that article? i don't think it's right to think of the charge as a % of total assets.
I am in the 5% camp with Eagan. Mortgage & MBS pricing will not come back for several quarters at the earliest. Mortgage pricing is basically locked-in for the 4th quarter because their is no catalyst for recovery. If we don't get a return to more normal credit conditions by the end of March, then we are probably into the summer.
If Countrywide was to mark to today, I would say that 5% is aggressive accounting according to GAAP. Egan agrees. You might not like Eagan though, he is the only bond-rater that gets paid by investors, not issuers.
Clyde, you've clearly put more thought into this than me, which is to say, some. my only point was they don't have $210B of MBS, and not all of their assets are supposed to be marked to market. here's this:
page 14 and 15 has some detail. again, i don't have the foggiest notion of whether or not this is appropriate, i don't know enough about their assets. if you're right, though, shouldn't somebody shoot their accountants?
Do you think that's a terrificly off-base perception?
Outsider - I think we are so close to it now as to be there already and we just don't yet know it.
My guess is we will find ourselves in a de facto Bretton Woods or Bretton Woods III scenario where the dollar shares 'reserve status' with euros, yen and possibly rubles & yuan.
Not that the dollar is worthless but rather 'coupled'.
The idea being that no one currency dominates anymore & they truly do float in tightly coupled trading... with arbitrageurs enforcing 'discipline'...
In that world if you want your citizens to have purchasing power to be able to buy global commodities like food, energy and even 'capital' - you better take good care of your fiat system or be prepared to offer up something 'solid' in exchange - gold reserves, oil and/or other commodities, or be able to run sizable trade surpluses based on globally tradable services or goods.
Otherwise you currency will tank and even America & dollars won't be immune to this process.
My guess is it will all be electronic and you will be able to work in a number of currencies... just about anywhere like foreigners do now (Europeans traveling or Japanese housewives & their carry trades).
Americans are just the last ones to catch on. American's still think its 'Morning in America' and it's not... time's moved on.
when we were on a gold system, all the gold still ended up in the hands of the shrewd...
And we still had crashes and panics when on the gold standards - worse that now. Late 1800s were full of them...
Personally I think pure fiat systems are best so long as individuals retain the right to own gold, silver, etc., as a check & balance on those running the fiat system. The current price run up of gold is a 'vote of confidence' on the 'full faith & credit' of the dollar.
I am unfamiliar with how mortgage or bond insurers position themselves, but it strikes me as pretty lame to be selling insurance to protect against loss on mortgages and at the same time investing in the derivatives on the same product (for yield, I guess). That is simply guaranteeing a double-hit on the first hint of declines, something insurers should be the first to describe as a no-no. Am I missing something?
It's that time again!! Time for the newcomer, Ben Bernanke, to punish those stodgy conservative savers and reward the high stakes infinite leverage gamblers!
Welcome to the worlrd's biggest casino, the US Economy, where you're forced to press your bets until the house caves in.
I think the system is working well. If the markets seize up it is because the investors finally have had it with junk and they are afraid. JUNK if finished. Nothing wrong if the junk market seizes up. Perhaps those who do not undertstand that investors do not want junk should try to understand this rather trying to get the junk market going again.
Well, if the USD is going to relinquish reserve status to a "basket" of currencies then there's still way too many dollars out there (both real & digital) that'll be dumped for something else.
So we need an officious cadre of Alos to make these decisions for "the masses" (broadly defined to include lawyers, accountants and suchlike)--is that the general drift of it? Not Big Brother, but Big Mama--all sweaty, suffocating, 300 pounds of her.
Your post makes me think "cashless". As in, cashless society. As in elimination of differing currencies, and some system of electronic credits taking that place. No more problems with dollars. We trade in credits.
Then the hackers unleash the first wave of counterfeit credits.....
Well, if the USD is going to relinquish reserve status to a "basket" of currencies then there's still way too many dollars out there (both real & digital) that'll be dumped for something else.
Make that WAY WAY WAY too many dollars out there and a lot of them held in SWFs that really don't know what to do with them.
At the end of the day we will have to consume less, produce & save more and receive weaker less valuable dollars for our efforts. That's just the way it will be... at least for a while until we get back into the practice of producing value others want to pay 'real money' for.
Then the hackers unleash the first wave of counterfeit credits.....
No different than now... there is almost NO real money out there - it's almost all electronic already.
The difference will be we in the US might not even be using USD only... buy a Toyota and get a 'discount' if you pay with yen, buy a Mercedes and pay with euros... etc. The car loans could also in yen, euros, whatever. You take the up front discount using 'their' currency of choice and assume the currency risk yourself.
Lotsa folks all over the world do that now. I can see Americans joining that club if the dollar continues to slide. I'm not saying it will be 'better' for Americans but they might not have a choice if the rest of the world tires of dollar hegemony.
"I'm sorry, but a minimum-wage worker who decided to buy a $300,000 house is not a "victim". I don't care how many polls there are of such people claiming they "didn't know" their interest payments would go up. Give me a break.
As I said, the legitimate victims of fraud can take their cases to court, as always. But you, I, and everyone else knows darn well those are a miniscule fraction of the loans. The vast majority of borrowers knew exactly what they were doing, and they did it anyway because "house prices only ever go up".
Confidence games depend on the greed of the mark. Just because the "client" is greedy doesn't mean it's not a con.
Put another way: Just because your customers are idiots doesn't mean it's ethical to make billions selling them overpriced products they can't afford and then insulate yourself from the inevitable fallout.
I personally could imagine the Fed dropping to 1% (or lower) if the BOE and Eurozone also drop to those levels. It would be a race to the bottom. A concerted Central Bank effort could pull this off, no?
They certainly could pull it off, but whether it would have the intended effect (rescuing the housing market) is another matter. Unless all of these economies enter a recession (as defined by NBER) I don't see it happening, though I could be wrong and I agree that the current US Fed is arrogant and duplicitous if not outright stupid.
However, I also think that the Fed gets too much blame for the housing bubble in certain quarters. I would characterize them as accomplices rather than the main perpetrators of this economic and social crime.
The reason I say this is that IMO low rates were a necessary but not sufficient condition to cause the bubble. Other contributing factors include the breakdown of ethics in both lenders and borrowers, "innovations" in mortgage lending that allowed clearly unqualified borrowers to get into way more house than they could handle, and a mania characterized by a general obsession with housing along with material things in our culture. Right after 9/11 folks were encouraged to overspend as a patriotic duty, this still sticks in my craw.
I believe also that the press played their usual role in things, encouraging and egging on the public to participate in the bubble, then predictably turning around and looking for villains when it inevitably popped.
And that leads to my final point, which is that the press will provide some strong headwinds to any housing recovery in the next 1-2 years. Once they get a hold of a story, they tend to work it like a bulldog. I can see plenty of negative stories coming on housing and the economy in general, especially since it will dovetail nicely with the "Bush and the GOP are incompentent" narrative. This will have the effect of driving home the point that housing prices have topped to the general public. People may be greedy but they aren't so stupid, no one wants to be a bagholder. This will become self-reinforcing, leading to more declines and more stories about housing pain.
I think we all agree it's nearly impossible to forecast inflation realiably. Evne the T-Bond yield exploded in the 1960s "out of nowhere", while gold and oil stagnated until ~1970. I think even the FED cannot forecast inflation more than 6 months ahead. Like Theroxyland, I use the Long Wave, or Kondratiev cycle for long term predictions. I combined this with astrological indicators to come up with the seasonal turning points in the K-cycle. My model tells me the turn from winter to spring was in April 2003 and the turn from spring to summer will be in ~2020. From there, I deduct we're in a similar phase as in the 1950s right now. This means I expect slowly raising inflation and interest rates together with a strongly expanding economy and a long lasting stock bull market. In this period, all the work that was left undone in the last fall and winter period will have to be worked thru like the rebuilding of the infrastructure, implying strong wage gains but also higher higher taxes as well. In the past, it was easier for capitalists than employees. I expect this to change.
Here's some trivia for you. Roughly 5.4% of the population of Nevada apparently has a subprime loan outstanding. Note that I said population. That includes babies, babies who need a vacation home, toddlers too young to bet in casinos, kids looking to expand their imaginary friends, and children who wish to expand their treehouses. Well, maybe. But what do I know?
What happens in Vegas stays in Vegas. Nobody's talkin'.
Just can't seem to pull my eyes away from the JEC report.
And a strongly expanding economy? You are indeed an optimist.
If you acknowledge that the economy is currently slowing and put those strong wage gains in China (as has been the case, since they are trying to catch up to us), then you are pretty much reading straight from the stagflationist handbook (which also would have said to buy oil, gold, and silver as in the 1970s).
For the record, if all I wanted to do was advertise my site I would be spewing my links all over the Internet. Since I have only posted them at Calculated Risk and maxedoutmama (my two favorite blogs), it should be pretty clear I'm not in it for self-promoting purposes.
So, after further consideration, I've decided that until CR or Tanta tells me I'm out of line, I'm going back to doing what I have been doing.
It does seem silly to have to post my nearly endless banter in the comment section when I could just as easily supply a one line link to my nearly endless banter elsewhere.
The Neighborhood Economic Development and Advocacy Project provides maps (pdf) that illustrate this extreme paucity of bank branches in minority. Revealing the financial geography of New York City, these images convey the operation of racial oppression. The wholesale rejection of minority communities by full-service banks indicates their invisibility to the financial establishment. In our capitalist society, credit has served since the outset as an indicator of civic responsibility and moral worth. continue reading at Radical Negative: No Banks for Blacks and Hispanics: Finance and the Making of Subprime Citizens
How much money and time did they spend on this report? They simply could have come to Calculated risk.
The widespread suspicion that the government of President Nestor Kirchner has manipulated inflation data and the likelihood that his wife Cristina Fernandez de Kirchner will succeed him are transforming the Argentine bond market into a financial bloodbath.
Argentina's benchmark inflation-linked bonds have tumbled 24 percent this year, making the country's debt market the worst performer in the world, according to data compiled by JPMorgan Chase & Co. and Bloomberg.
Polls show that Fernandez is the front-runner to replace Kirchner in next week's elections. She rebuts claims by government statisticians that Kirchner's administration forced them to tamper with consumer price data to hide the extent of inflation. Merrill Lynch & Co., the world's biggest brokerage, estimates prices may be rising at a 17 percent annual pace, double the official rate.
Argentine Debt Devastated by Data Suspicion, Election (Update2) - Bloomberg.com
Sounds an awful lot like another country we all know and love.
I checked the referneces to see if they sourced your blog, and momentarily thought they might have as a match for "Calculated Risk" was found. However it was not in reference to this blog:
53 Michael D. Calhoun, President for the Center for Responsible Lending, statement on Calculated Risk: Assessing
Non-Traditional Mortgage Products before the Senate Committee on Banking, Housing and Urban Affairs,
Subcommittee on Housing and Transportation and Subcommittee on Economic Policy, September 20,
2006, pp. 7-8.
They did reference Robert Schiller's "Irrational Exuberance" website.
MAKE SURE ALL BORROWERS UNDERSTAND THE TERMS OF THEIR
MORTGAGES
The current subprime mortgage crisis has made it clear that the mortgage finance system does
not require that borrowers understand how their loans work... Policymakers should consider requiring that all mortgage lenders disclose
the basic facts about the mortgage loan that they underwrite for the borrower. This form
should be easy to understand and not exceed one page in length.
The borrower should receive this one-page form from the lender well before the closing of his
or her loan. At a minimum, the form should require that the borrower know the amount of
the loan, the propertys appraised value, the term of the loan, the payments at each reset date,
and todays estimate of how much the rate will increase (the fully indexed rate), as well as the
maximum possible rate on the loan. Other disclosures would include, in plain language, any
prepayment fees and other estimated costs and fees due at closing.
Good Luck!
Napolean
Thanks, I'm sure there might be something in the report we didn't already know from CR & TANTA, like who paid for it(who cares). Run for cover, I'm off to bury a few peso & dollars in the back yard of my Central Valley rental.
Thanks CR & TANTA
jo6pac
Figure 1 of the report is an update of a graph from Shiller's book. Look at the substantial divergence between house prices and building costs. For those of you economically inclined, now think of Tobin's Q. This is why I maintain that homebuilding won't go deep into the toilet until prices come way down (I said homebuilding, not homebuilders, some of whom will be killed by leverage). So long as prices remain way above the cost of construction, some builder somewhere will find it in his (her?) interest to keep building.
I am still on the intro, but this reads like some populist propaganda piece.
How many borrowers knew full well they were taking out mortgages they could not afford to buy houses they could not afford? I imagine close to 100%.
And a foreclosure does not "destroy" wealth any more than bubble-driven price appreciation "creates" wealth. What a load of cr*p.
Foreclosure is not destruction. Foreclosure is the bank taking back a house from a greedy deadbeat.
NO GOVERNMENT BAIL OUT. Let the victims of fraud prove it in court, the rest can rot, recession or no.
ABX showed 17 new lows today!!!
Market is due for a real bloodbath soon at this rate!!! How can anybody in the financial sector who owns this sewage price it?
Are we talking about 50 cents on the dollar? Or are we talking about mils on the bid side?
I can't wait to see how the fed handles this mess next week! I believe a rate cut has to be forthcoming, but Wall Street still doesn't fully appreciate the consumer impact of this fiasco!
Corporate bond downgrades are next- after all they made similar bets with them;-}
$92 a barrel oil- a drop in the dollar next week, record sustained commodity prices- I guess we should all just sit back and enjoy the inflation in the pipeline.
Someday this war's gonna end...
I imagine
It's easy to win arguments that way, isn't it?
Nemo: I tend to agree that having borrowers understand the loan would not be that much of a help. If a broker told them exactly what would happen and then went on to "encourage" them to go ahead, far too many would just go ahead. Compulsive risk-taking has become a style of life, very widespread.
Tanta,
How long till a big player in the swaps market goes under? Counterparty risk becomes a serious issue if you swapped mortgage paper returns for treasuries and you are concerned about the underlying portfolio risk. With the ABX market all but defunct, can this be hedged in anything like a Basel secure manner? Or will they have to mark to whatever market exists and make huge loss provisions?
risk risk risk!!!
What is in your swap portfolio?
Someday this war's gonna end...
Truth In Lending Act (TILA? or something like that) require that the borrower have the important "details" explained and that theya e given written documentation that should be simple and easy to understand...?
rt
It's easy to win arguments that way, isn't it?
I'm sorry, but a minimum-wage worker who decided to buy a $300,000 house is not a "victim". I don't care how many polls there are of such people claiming they "didn't know" their interest payments would go up. Give me a break.
As I said, the legitimate victims of fraud can take their cases to court, as always. But you, I, and everyone else knows darn well those are a miniscule fraction of the loans. The vast majority of borrowers knew exactly what they were doing, and they did it anyway because "house prices only ever go up".
This Congressional report's entire purpose is to provide cover for the inevitable bail-out, and as a taxpayer who actually saves responsibly I am going to be wicked pissed when it happens.
Thanks Tanta!
AllenM-
I don't think these people really care about pricing. They care about their paychecks. If they go around talking about the need for accurate pricing and the importance of mark to market, they probably won't be receiving a paycheck.
Quincy- the bonuses are shot, the rats are jumping ship rapidly, the only question is how much more sewage will be coming up through the floorboards as the ship sinks.
ML CEO is just the first, and tanman is dancing fast to avoid Laying an egg in the federal pen. Tan man could always check out before sentencing.
Now comes a huge day of reckonning.
I can hardly wait.
It will make the world of finance a very different place in five years.
But meanwhile I have to calculate when the local gas price will hit $3.25 so I can collect my winnings from a counterparty who was foolish enough to take a wager I thought was much better than even up.
Someday this war's gonna end...
is there any updates for the MEW ?
Nemo and Napolean
Your comments are fine but unrealistic. When have you even seen a reduction in the paperwork for any transaction. I get 2ft. of paper receipt from Lowe's when I buy 1 drill bit and 1 plant. Educating the masses to the complexities of all the various loan programs would be like teaching Asians to dance...impossible(am I going to take heat for that?).
There is a very easy solution to the loan default problem going forward. Eliminate all loan programs that are designed to be refinanced. That's it, it's sooo simple.
Have a nice weekend and I really like Asians.
Countrywide really upped the ante in their demands for rate cuts and bank bailouts today. Their conference call was very insightful as to their full expectation for FED rate cuts, and lots of them. The game of mutually assured destruction was escalated today. Should be interesting.
Napolean
Thanks, I'm sure there might be something in the report we didn't already know from CR & TANTA, like who paid for it(who cares). Run for cover, I'm off to bury a few peso & dollars in the back yard of my Central Valley rental.
Thanks CR & TANTA
jo6pac
jo6pac | 10.26.07 - 6:32 pm | #
Yes, I'm sure. After this report is fully vetted by all the members of the JEC, they will all come to realize the magnitude of this problem. And with the gravity of the situation being what it is and needing some form of decisive action, the JEC will form and appoint a new committee or task force. There the real heavy lifting will get done! As the task force to Go Over Delinquent Home Expenditures & Loans & Peculiar Uses of Subprime (GODHELPUS), appointed by the Joint Economic Committee, will reccommend that another task force be formed. This one to be composed of and formed by the industry. But above all it will need to work under the purview of the GODHELPUS task force.
Out of these workgroups, after hundreds of man hours spent by industry professionals and observers, and after everyone gets a turn at the microphone before the committees, we will finally receive our comprehensive "9/11 Commission Report" like tome. Filled from cover to cover with detailed policy prescriptions on just how this whole mess, and others like it, can be avoided in the future. It will then be delivered to Congress which will deliberate on the matter and get to work right away implementing the neccessary changes.
I'll ask again: What legitimate loss have borrowers who put little or nothing down sustained? Their investment in curtain rods, perhaps? And on what line or reasoning do the few who realistically qualify as "victims" lack an adequate legal (or equitable) remedy? There is no lack of lawyers willing to take meritorious claims on a contingency basis. But do we award the status of "victim" to the multitudes who lied about their resources on their applications?
In the "Wealth Destruction" computations, they omit an important intangible loss: the affected people will lose Confidence in the economic system, i.e. they may lose "Hope". This is what I think the much ballyhooed loss of "American Dream" is all about. It is difficult to run a healthy economy with 50 million depressed people who have no stake in the nation.
It's astounding that for all the problems we now have caused by cutting interest rates to "improve" the economy, we're still cutting interest rates to "improve" the economy.
The only thing that genuinely distresses me is to see people not learning from their past mistakes.
Current circumstances are almost irrelevant, on balance, when weighed against the propensity and ability of a culture to learn and be aware, and then to modify their behavior accordingly.
On an economic basis, I don't see that we're doing that. And that tells me the economy may be in great danger far beyond that posed by housing or the "subprime crisis".
Nil, I'm going to try and respond to your questions and I will try to not sound elitist, or arrogant. But basically the answer is a lot of people just don't get it. It sounds as though many people were put in mortgages they neither understood the terms of nor could they afford the payments after the teaser period ended. But what these people do know and understand is you need a home.
I know people who got themselves into this situation. They did not lie on their apps, they wouldn't know where to begin to lie. The mortgage broker set it all up for them so they could get into their house. They made all their payments like any good homeowner; then the teaser period expired.
Now granted, besides their credit rating these people had nothing to lose should they walk away. But they didn't want too! This is their home! They frantically sought help from anyone and everyone and eventually, for some of them, the mortgage holder extended the teaser period another two years. With the option to renew it for another two year period two more times in the future. Imagine their joy!
Yes, they have no equity and will simply be renting at a very high price. But they don't get it, and they don't seem to care.
Napolean, if the note holders agree upon the work out then why not. It will depend on loss forcasting if it is the right route to take.
"I imagine"
It's easy to win arguments that way, isn't it?
Tanta
I prefer to go with debilitating personal attacks:
Your argument fails to take into account the potential effects of the rapid accumulation in foreign reserves suddenly being reversed and I saw your fiancee drunk and making out with some guy last night at that bar you're always talking about.
" I just noticed one little snippet while I was skimming that answers a question I had a while back. In 2006, 29% of all mortgage loans were originated through mortgage brokers, but 63% of all subprime mortgages were originated through brokers (page 17)".
Tanta, in remarking on the same data, Gramlich in his monograph says:
"Brokers have become pervasive and operate in virtually all communities, but they are especially plentiful in areas underserved by old-line commercial banks and thrifts, such as minority communities." [p. 19; my emph]
and a bit later:
But the brokers have minimal incentives to find the cheapest mortgage for borrowers, and only indirect incentives (through repeat business possibilities) to minimize repayment risks for lenders. [p. 20]
(Most federal agencies define subprime loans strictly as high-price loans so, say, three points over a benchmark interest rate or whatever would be considered subprime regardless of borrower characteristics. Gramlich follows this practice in his book.)
So you have a set of agents who have at the same time every incentive to make loans it's their only business, after all and no incentive to worry about to whom the loans are made, so long as they don't hear back too much from angry financers. These agents operate in areas where there will be little competition from other types of originators, and where the consumer base, even before the market becomes loaded up with products with which no one is familiar, has higher shopping costs due perhaps to a shallow experience base as well as isolation from sources.
It's straightforward economics theory to predict that this situation would result in consumers paying more, and where the product is not competely standardized, getting a less satisfactory deal. Looking at actual data and being able to say confidently that yes, this is exactly what happened is, of course, a much harder chicken-egg proposition, but this is the germ of the case. Then it might also be true in other, less commercially isolated communities, that as houses became less affordable and loan types claiming to deal with that issue proliferated, the shopping costs for potential borrowers in them also rose and they turned to brokers who claimed to be able to evalutate the possibilities for them. Or, is there a tendency for serial refinancers eventually to find that their regular bank would rather not deal with them?
The bottom line is that some of ya'll have been trying to extrapolate a partisan "talking point" from a sow's ear.
There may or may not be a chart showing the losses per capita (broken down by state) of the "Impact of Subprime Foreclosures on Home Equity, Property Values and Property Taxes" as seen in Figure 5 on my homepage. wink wink
I'm just saying you never know. Charts appear sometimes.
Last I checked we still elect our politicians. Pages 13 and 14 are going to be gasoline on the political fire.
Various parts of the lending industry have been battling the state regulators since (at least) 1999 when NC passed the first predatory lending law. Just how long did the industry think they could keep running wild in the subprime market before the chickens came to roost?
I know accountants and lawyers (who deal in finance issues) with good credit who got adjustable rate mortgages to shave $50/month of their payments. If they have absolutely no concept of the historical volatility of interest rates, and how it might interact with housing price volatility, how on earth do you expect the general public to understand it? Or how the even more complicated teaser rates and optional payment levels might factor in?
"As I said, the legitimate victims of fraud can take their cases to court, as always. But you, I, and everyone else knows darn well those are a miniscule fraction of the loans. The vast majority of borrowers knew exactly what they were doing, and they did it anyway because "house prices only ever go up"."
Nemo | Homepage | 10.26.07 - 6:55 pm |
I can attest to this personally. As an originator the past seven years, I saw every different stripe. In a certain way I was lucky and the company I worked for was A credit only.
However, I had friends that in 2003 were bartenders in Georgetown, DC at the Daily Grill that got hired at a subprime shop that were morons that made huge money.
The modus operandi there was to make contacts with individuals like me that woudn't touch sh$t like that.I would refer it out and my buddy would toss me a point after close.
Getting to the point though, he didn't
care if they picked cotton, he had a deal for them. Stated/Stated was the way to go. As long as the applicant could prove 2yrs of self emplyoment and a credit score over 580, deal was done.
And the statement "The vast majority of borrowers knew exactly what they were doing, and they did it anyway because "house prices only ever go up"." Is exactly right. His number one selling point.
Nemo:
A whole bunch of finance geeks at the lenders/ratings agencies/banks didn't figure out that the borrowers couldn't afford the loans.
Contending that the borrowers themselves are to blame for not figuring out that they couldn't afford the loans would seem a little unfair, wouldn't it?
What did they have to lose?
"house prices only ever go up"."
Looking back fifty years it is hard to see why people feel that way.
"50 million depressed people who have no stake in the nation."
Really, so the American Dream has devolved to the point that owning a mortgage on some crummy tract house comprises all the the promise and benefits of the Republic?
Well, good to know. Perhaps we can direct these folks to Romania or Kazahkstan, where their devalued dollars and shot credit will still enable them to purchase some shack with a couple of plants. And good riddance.
I'm a rentor who declined to buy during the mania because prices were nuts. Simple as that. A business decision.
The Constitution and the Bill of Rights comprise the American Dream. The marketing effort to convince folks that RE is the Dream, is smoke and mirrors, convenient for politicians and hustlers--whether ibanks, mortgage brokers or RE agents.
The housing crash is the best news possible--time for folks to stop walking around like mortgage zombies and rejoin reality. The counry needs a citizenry who are wide awake...and angry is just fine too.
Nemo:
A whole bunch of finance geeks at the lenders/ratings agencies/banks didn't figure out that the borrowers couldn't afford the loans.
Contending that the borrowers themselves are to blame for not figuring out that they couldn't afford the loans would seem a little unfair, wouldn't it?
4runner | 10.26.07 - 8:58 pm | #
4runner;
If you believe for one minute that these folks (finance geeks/lenders etc) gave a rats ass, or didnt know if the creative products they were selling would all ever get paid back. I have a bridge to sell you. Come on. Its all about GREED! Whats done is done. Sit back and watch the fun.
Good lord, with the exception of just 2 (3A 06, 2A 06), every one of the ABX indices are at new LOWS tonight...even triple AAA. How'd you like to lose 20% on triple AAA debt and nearly 50% on AA. Won't even talk about A or BBB. Kiss your coupons good bye. They're all worthless..... yet carried on books at par in all likelihood by 99% of holders. We're still only a fraction the way through the mortgage resets. 100% guaranteed recession as capital shock ripples come to an economy near you. Buy your tickets now.
Products and Services Overview
Stuart: The Feds have their own mark to model problem this from a prior CR thread:
"Let's look at these projected U.S. household real estate losses. Currently (end of Q2) U.S. household real estate was valued at $20.997 Trillion (Fed: Flow of Funds report). So a $2 Trillion dollar loss is about a 10% decline in total U.S. household real estate value. A $4 Trillion dollar loss is a 20% decline."
The real deal is that until and if a house sells the so called value is so much speculation and bullshitting by all concerned. The only value that matters is the debt in this case around 10 trillion dollars.
Now really its the financial investors banks, MBS holders, who put up the 10 trillion bucks to finance all this RE buying that is at risk,while homeowners equity is strictly a number pulled out of one's arse by various bean counters.
And with this, the mortgage insurers are taking it on the chin the past few days. What was it that Tanta opined, it isn't a housing crisis until one of the mortgage insurers goes under. To wit, I opined Q1 '08. Good chance I was a bit too generous. Something in the air smells and its getting more foul by the day. Acceleration events??
"The Constitution and the Bill of Rights comprise the American Dream."
And what a dream it is, the government is bought and paid for by special interest groups,lobbyist write the laws and they are rubber stamped by the politicians who are basically bribed with generous campaign contributions.
The country needs a citizenry who are wide awake...and angry is just fine too.
This is America not some foreign country where people actually drag lying politician out in the street and beat them. All we have here for the most part is a bunch of complacent fat asses looking for a handout or trying to figure out how to game the system.
Can anyone explain this surprising observation?
Why is Fed funds rate 15% on Oct 25?
Federal Funds Rate Data - Federal Reserve Bank of New York
The downgrading of AAA rated MBS', their associated CDS' and THEIR associated CDOs by Moodys
Moodys.com
Moodys.com
has to be triggering "events" in all sorts of places. Some CDOs,not on downgrade but on certain tests failing must be deleveraging by now.
Anybody holding them like SIVs, Hedgefunds in the portfolios are having to mark them down. Pension funds can't hold them and have to sell out.
I've read pages of Moodys announcements, cross-referenced to SEC filings to see who AND when might be going down - but I tell ya - its really hard to track this - but everything I read of "events" - puts AAA ratings and "tests" at the center of things.
This really is the first hard evidence I see for things going belly-up, fast. Somebody deep in the biz will no doubt set me right ?
-K
The case of the 'minimum-wage worker who decided to buy a $300,000 house illustrates the difference between demand in the economic sense of the term, and need in the human sense.
Everyone needs shelter every day, but half the world has such limited access to cash that they cant exert effective demand for adequate housing.
Theres enough mud to make enough bricks to build a nice home for everyone. The obstacles are ideology and policy.
Sometimes capitalism gets what it deserves, despite the efforts of government to intervene in it's behalf. However, those with the deepest pockets and most acute access to the levers of power will exit any crisis of capitalism richer than before. The general population...the suckers...will wonder what happened to their lives. Their children will be taught that their parents lived through a great historical epoch that tested the soul of the nation and which they triumphed over due to their uniquely American spirit. Ken Burns will the produce a plodding, inspid documentry, rife with fiddle music and...we fade to commercial.
404 Error, No such article | Chron.com - Houston Chronicle
And the night is young...
Watson,
I agree.
I thought the Tsunami (in Sri Lanka) would push (back) toward using earth as a building material.
It turned out to be to the contrary.
The flood of donor/donations and the changed perception of the locals (I am a local). The locals realized that money was being made on their misery.
i.e There was a manager of the funded money to build houses. The managers money was paid assuming he got the houses built. The locals demanded cement block housing.
Earth construction
I am always optimistic.
this is my favorite part:
Since underwriting deteriorated from 2001 to 2005, and the accelerating housing price boom was giving subprime borrowers important help(see Part II), a cautious analyst might have questioned whether the improvements in subprime performance could be sustained. The financial intermediaries who expanded the supply of these loans were apparently not troubled by this issue. The reasons for their lack of curiosity may lie in the strong incentives they had for expanding the subprime market.
Freddy...
That Houston TWAT team was lucky. I have known more than few guys who are heavily armed, combat vets with PTSD who have assumed their lives would end in a shootout with the government. I'm not joking. These guys would be tough to take down if the cops came for their house.
4runner:
Contending that the borrowers themselves are to blame for not figuring out that they couldn't afford the loans would seem a little unfair, wouldn't it?
I think you are responsible for the legal documents you sign. I think if you do not understand a legal document, you should not sign it. I think I-the-taxpayer, who do not sign documents I do not understand, should not be on the hook if you do.
I think I am stating the obvious.
I think there is plenty of blame to go around, from the borrowers to the brokers to the hedge funds to the banks, and I want every last one to pay the price they signed up for. It is called taking responsibility for your own actions. I realize that now that every race/gender/class is a "victim", this actually sounds like a radical concept.
does it even matter if the minimum wage worker knew what he was doing? the lender should have known better and not given him the loan.
AllenM,
$92 a barrel oil- a drop in the dollar next week, record sustained commodity prices- I guess we should all just sit back and enjoy the inflation in the pipeline.
What is the connection between commodity prices and inflation? For example, the price of gold is now still below the 1980 price peak. Does that mean prices are lower than 27 years ago? Oil prices fell from ~1991 to ~1998. Does that mean we had deflation during those seven years? The price of tea went down more than 20% in the last 5 years. What determines inflation more now?
To deduct inflation from commodities seems to have nothing to do with economic reality. Yet I hear it over and over on this blog.
I also hear statements like the FED only counts inflation when you don't drive or eat. What a crap. The FED's models state that the general trend of inflation as measured in the CPI trends from core inflation, not the volatile energy & food part. In other words, food and energy inflation follows core inflation and not vice versa. This model currently indicates that with core inflation lower than the volaitle part, the CPI in general will trend lower. Now, I'm not an expert of the timelines in this model, but we can expect food and energy prices to go down at some point in the future (unless the core rate goes up all of a sudden- which is not in the cards right now).
O-Joe
Nemo
Surely you are aware that defrauding people through the "fine print" of contracts has been the oldest of professions, well almost. The market will work itself out and disaster, if it happens, will be proportional to privilege as history has shown. To argue enthusiastically in favor of screwing the least among us is just an exercise in typical conserative masterbatroy-sadism. Wash your hands and go to sleep
Gareth --
I believe I was in kindergarten when I was taught "always read the fine print". How old were you?
Determining which contracts are justly enforceable is as old as law itself. In short, I suspect the courts can sort it out without assistance from our little rats in Congress.
As for "the least among us", they can rent an apartment like I do. I know, what a sadist I am!
By all means, label me a "conservative" simply for believing people should be responsible for the predictable consequences of their own actions. After all, you cannot have a "victim" without an "oppressor"; might as well lay it on people like me.
What did people lose? well...along with their credit,they paid a LOT more for their housing.my exwife and I leased a home for $2k a month that would sell for $1.2mm conservatively.so i we had put $200k down,and financed with an I/O loan at 6%,added taxes at 1.25% per annum,added insurance and maintenance.WOW we could have spent 3.5 times as much per month,and lost all of our equity in only 2 years!not counting the opportunity cost on the DP or the $ we saved by renting.
Since I am on topic for a change, I put up some more charts of the data within this JEC report. It includes my version (adjusting the data for state populations and personal incomes) of a map of the USA showing the hot spots.
The JEC puts Texas in red on their map, but in my opinion that's only because Texas has so MANY people in it (so the dollar amounts get larger).
i know, i know
i think the government should put the curbs also on RE prices, i mean the curbs worked for the stocks and meanwhile they go only up. should be no problem to set it up for the RE 
The euro is telling us that somebody, somewhere is afraid of the dollar.
Perhaps that is only the thought that the Fed will cut.
Perhaps it is more than that.
And, stop and think, Europe is, in its leading elements, a basically socialist enterprise. They must be awfully afraid of the dollar.
Because the American worker is no good?
Because American universities are no good?
Because American infrastructure is no good?
Or perhaps is it because the American "financial industry" has destroyed the American economy, hand in hand with its deformed off-spring, the war in Iraq.
Of course, the solution is simple: bomb Iran.
I don't see our treasury bond market to perform badly, just opposite.
You can't cheat bond traders about inflation with statistics. They don't see any inflation ahead.
So our distressed borrowers typically made down payments of something like 20%? And it is of no consequence that they typically misrepresented their incomes? Spin, spin, spin. Just for laughs, maybe you neoBolsheviks would like to identify the countries which have economies structured to your complete satisfaction. How does Fidel handle housing assignments, anyway? Is a nice little house in the suburbs considered a "right"?
What ??????????????????????????????????
A mistake probably? Or only the low rate counts?
Someone please explain!
And in all blogs around. It's very counter-intuitive that price of oil is almost unrelated to inflation, so people just don't believe you when you try to explain.
O-Joe, I think your explanation was pretty good, let wait and see if anyone gets it.
My addition would be to ask people if they think that 4.5% yield on 10-year bonds sounds like an inflationary warning? See you at 3%.
I'm in the short-term deflation camp even with $92 oil and a falling dollar for what it is worth, not that I feel comfortable betting on it directly.
My long-term TIPS (treasury inflation protected treasuries) have been doing just fine as interest rates fall, but the non-inflation protected versions have done fine too.
TIP: Basic Chart for ISHARES BARCLAYS TIP - Yahoo! Finance
theroxylandr (& O-Joe),
My addition would be to ask people if they think that 4.5% yield on 10-year bonds sounds like an inflationary warning? See you at 3%.
To me, it is just a yield. The 4.5% yield in late 1965 didn't offer much warning of the coming inflation. The 14% yield in 1982 didn't offer much warning of the coming disinflation.
I'm leaning towards deflation in the short-term primarily because the housing market peaking implies deflationary forces are on the way. How long they last and how strong they are is yet another debatable topic though. No idea.
There's no way I'd risk locking in a long-term rate on a long-term 4.5% treasury bond though. I can't predict inflation one year from now, much less ten.
All I'm trying to do is lock in a real yield I'm comfortable with (by using TIPS). And yes, that implies I trust the CPI much more than most seem to (both of you may be happy to know).
One more thought while I'm at it. What the heck.
There are two very powerful forces at play in my opinion. There's the deflationary effect of debt for some. There's the inflationary effect of too much money for others. So much money has been made in the last 20+ years on interest alone. I'm talking a real positive return on passive investments (simple interest bearing accounts).
We'll never resolve which force is stronger, except by using the rear view mirror more than likely. Once you acknowledge that you can't/don't know, you just might end up being a rather wimpy paper stagflationist (TIPS). I think I see slower growth coming (that's half of it) and I'm not sure about the other half (deflation or inflation).
Theroxylandr
Let's say after a softball game it is just you, me and a water vendor. You only have a buck and the bottle of water costs three. No sale unless the water vendor takes less. You borrow ten from me & the water seller sees you borrow the money and now he wants five. Your really thirsty so you buy even though your pissed, did the amount of money in the system affect the price of water?
As far as bonds go are speculators buying bonds ahead of the fed rate cut which will go up in price and ignoring the detachment of our currency from reality? Just askin do not know.
It is difficult to run a healthy economy with 50 million depressed people who have no stake in the nation.
Yes, I worry that the US has a repeat of the 70s in its near future. A Dog Day Afternoon everyday would get disruptive.
A question:
how much of this subprime and credit market mess can be smoothed by a rapid drop in the Fed Funds Rate?
I've realized that I clearly don't understand how this all works...
hypothetical example:
Fed drops rates 50 basis points this week (so we're down to 4.25%) and then continues with 50-100 basis point drops in rapid succession. Let's say they got down to 2% FFR by early next year.
would this save the positions of the SIVs and the MBS/CDS/CDO/(insert letters here) market? would it get rid of the losses?
Help me understand this... CAN a rapid drop in FFR "help".
It will destroy me, unless I move to all gold or something I guess...
O-Joe says In other words, food and energy inflation follows core inflation and not vice versa
I feel the two scenarios to higher inflation are
1] High job participation rates coupled with high income growth. People have more money so they don't care a lot about price increases.
2] The other is through resource constraint. Global economic boom causes 3 billion (BRICs - half of world population) more people to start bidding up on essential resources. Everyone is forced to pay high price on resources.
I have a feeling that in the previous economic cycle, scenario number 1 played out causing food + energy to follow core. The current economic cycle is experiencing inflation because of scenario 2. In this case food+energy will be the leading indicator of future core inflation.
Do you have core inflation Vs headline inflation graphs for the late 70s period when gas prices hit a record high?
I'm just trying to learn.
Thank you.
Some of you guys are missing a key variable in how low the Fed can cut. We're in a global economy now, for better or worse, and the rest of the world is experiencing faster growth and inflation that the US.
There are real limits to how much "help" the Fed can try to give the housing market right now; at some point they risk weakening the dollar and the appeal of US treasury bonds to the point where a mass exodus out of US stocks and treasury bonds by foreigners occurs, resulting in a financial crisis that would make the current one look like popsicle stand in Pensacola going out of business.
I don't know what the tipping point is, but this scenario has to be on Heliben's mind even if he won't admit it.
Buy now or be priced out forever
Buy now or be priced out forever
Say it with me, nils nemo -- can you stop hammering the unfortunate long enough to remember that mantra that this boiler-room scam of a bubble used to strike fear into buyers?
If these buyers truly knew what they were getting into, why would they have signed the papers? These were very complex loans --whose terms were purposely concealed -- in order for brokers and bankers to collect fat fees -it's that simple. There were terms on these loans to mute statisticians and mathemeticians.
You know what all this nils nemoish "blame the mark not the con man" noise is about, right? It's about trumpeting a "free" market at any cost - even after the village has been pillaged and razed. Stupid villagers.
And the best part of this ayn rand fantasyland is thinking that the amok market didn't affect those of us who saved money, didn't sign up for the bubble and worked hard. Grow a clue -- they've come for your village too.
The Countrywide writeoff of $1.1b is laughable considering the following observation by Egan Jones via Barron's:
Egan-Jones carries a triple-B-minus rating, a notch above junk. This independent rating company noted "a disconnect" in the Countrywide report. "CFC has $209 billion of assets and took charges of $1 billion; a 5% charge equates to $11 billion compared to equity of $15 billion."
Even a 5% haircut would be modest, based on the plunge in prices in the ABX index of credit-default swaps on asset-backed securities. The price of the ABX triple-B-minus tranche (backed mainly by subprime mortgages), originated in the first half of 2007, hit a record low of 18.57% of par, extending its headlong plunge of the past two weeks. At the start of the year it was in the high 90s, which shows how much the low end of the mortgage market has sunk.
OK OTS/OCC/FDIC, what are you going to do about it?
central scrut:
I don't think I'm personally missing your (very important) point.
however, I have been continually surprised by the sheer stupidity of the machinations of those in power.
Who would have thought that the Fed would have dropped to 1%, held for so long AND allowed such degradation in lending standards?
Who would have thought that the Fed would immediately bail out the banks at the first hint of a loss (most haven't even lost anything yet, at least on paper!)
Thus, I'm keeping my mind open to future central planning stupidity. If it can be conceived, it can be implemented (regardless of stupidity).
I personally could imagine the Fed dropping to 1% (or lower) if the BOE and Eurozone also drop to those levels. It would be a race to the bottom. A concerted Central Bank effort could pull this off, no?
The BOE has their reason to hold (northern rock) and they have their hidden issues as well. they could drop if need be.
Eurozone also has their skeletons (BNP Paribas, 2 German Banks, Spanish housing market)
Canada is not immune (huge housing bubble themselves, despite their unwillingness to see it... Vancouver, Alberta, Toronto especially)
"I'm sorry, but a minimum-wage worker who decided to buy a $300,000 house is not a "victim". I don't care how many polls there are of such people claiming they "didn't know" their interest payments would go up. Give me a break."
I have to disagree with this. This person was a victim of a central banker who encouraged citizens to use ARMS and a dishonest currency (notice I didn't say money). If gold were used as money, house prices would not be $300K. The entire system in the US is fraudulent. It's the honest man that loses.
-SB
A very interesting post from RGE Monitor blog
Something very important just came to my attention about SIVs.
Excerpt:
The average net asset value of SIVs rated by Fitch fell to 73 on Sept. 28 from more than 100 in July. A 0.5 percent drop in value of assets is equivalent to a 7 percent decline in the so- called NAV, Fitch said.
Once an SIV's net asset value falls below 50, a clause is typically triggered requiring the fund to liquidate.
O'Neal's Subprime Shakeout Shows Peril of SIV Bailout (Update8) - Bloomberg.com
The rate of decline in the average NAV for these SIVs has been very steady from July thru September (like a straight line). The chart on this Web page shows it:
http://alphaville.ftdata.co.uk/lib/inc/getfile/311.jpg
The key point I want to emphasize is that if you extrapolate the NAV decline on this chart, the average NAV for these SIVs will pass BELOW 50 BY LATE NOVEMBER.
This will trigger the nightmare SIV forced liquidation of ABS that Wall Street is desperately trying to prevent (because it threatens to expose their insolvency).
You might want to make a note on your calendar.
Make no mistake, Ben is now a patsy for wallstreet. Regardless of whther he cuts next week which I assume he will, we are headed for a prolonged, very difficult period in the economy. He has buckled to pressure from those that have taken excessive risk and seems more than willing to further the speculation in the capital markets. The longer the inevitable recession and correction is postponed the more severe the eventual outcome and length of duration. The losses due to low grade corporate defaults, mortgage related securities, and commercial loans will be extreme in aggregate. I presume the ultimate fall guys will be the ratings agencies and the finger pointing will amaze everyone. As Ben caves to the whining on the street, the unfortunate consequence is the growing inability to address future crisis, and based on the growing possibility that the next 5 years will be extremely difficult, this could potentially pose serious problems. What is particularly disturbing today is the rampant speculation in the commodity markets with no attempt at curbing the current partices, the end result highly detrimental to the consumer. With nearly all metrics in regard to the consumer in decline, credit clearly to tighten further, and anemic cap ex it is clear that recession is unavoidable. Make no mistake, at some point commodities will collapse and at that point, it will be too late for ben to address the fallout in the capital markets due to the overexposed, one-sided, herd mentality of over-leveraged vehicles. Until the inflection point, kool-aide is being served everyday, and likely that every mid twenties hedge fund manager has their hand on the trigger....knowing that they will be first through the exit on the illiquid stuff(LOL).
The euro is telling us that somebody, somewhere is afraid of the dollar.
I don't think folks are scared of the dollar - its that they are sick of them.
There are just way too many dollars floating about the planet compared to what world consumers can buy with them. If foreigners want to buy products from somebody and the person they want to get those products from already has more dollars than they would like also... Guess what? The price in dollars for that trade goes up and the value of those dollars relative to other medium of exchange which aren't in such huge supply goes down.
The reason there are so many dollars floating about worldwide is because we run such massive deficits for so damned long we've flooded the market.
That' where we are at and it isn't terribly difficult to understand I don't think. What's harder is finding a way out of this or accepting it and moving on - that's where the 'arguments' occur.
"To deduct inflation from commodities seems to have nothing to do with economic reality. Yet I hear it over and over on this blog."
I can, and do, see monetary inflation in commodities.
I also see supply+demand in commodities.
I also see currency valuations in commodities.
I also see climate issues in commodities.
I also see manipulation in commodities.
But with a bowl-of-spaghetti-view of commodities and it's intermingled relationships, it is nearly impossible for me to extrapolate at any given time in matter and space exactly how the percentages by ingredient are allotted.
Inflation in commodities... yes, along with a lot of other dark matter.
SB
Did you any of you catch former Teasury Secratary John W Snow (chairman of Cerberus Capital) on CNBC yesterday morning saying that the fall in the dollar "was a part of a neccesary process to correct our trade imbalance". And that as long as it was "orderly" there would be no problem. He also quoted current CPI data to say he "didn't think that the falling dollar would cause an inflation problem"???????
Clyde, is there more detail in that article? i don't think it's right to think of the charge as a % of total assets.
Theoxylandr and lostintranslation:
The 15% for the Fed funds rate as the "high" shows that some member institution has to pay 15% due to the poor quality of assets that they are using for the FED Repo (TOMO operations).
The Effective FED funds rate, in the first left hand column, is the average for all of the inter-bank loans made. This is the number that the FED tries to influence by doing REPOs or reverse-REPOs.
Yearning to Learn:
The FED can cut very low, but that is only a target rate. They try to influence the rate that banks lend money to each other for reserves this way.
The FED cannot influence the yield curve unless they get the Treasury to start buying back bonds.
The last time the FED cut, LIBOR and the 10 year yield both rose. This means that most mortgage rates rose as well.
The market sets the interest rates, not the FED.
um.
Bad Reporter
Tennis8,
Snow's statement about the falling dollar and inflation isn't quite so disingenuous as it sounds. In the past, when FX moved against us, there was some willingness on the part of foreign suppliers to reduce their profits in order to retain US market share - and also a move to locate a part of their manufacturing base here if that was practical.
Inflated non-essentials will, I think, find no market as US household non-discretionary spending approaches 100%, so his point is moot.
god i hate it when people throw that greenspan quote about ARMs around like he told everyone to go get an ARM
what he clearly said was for those who WERE INCLINDED TO MANAGE INTEREST RATE RISK THEMSELVES ARMS were a valuable tool in doing so
here is the quote:
American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home."
1) if you had an ARM since 1982 or whenever you did great.
2) if you had a fixed rate and wanted to refi each time rates went down, you're spending a ton on transaction costs
3) WILL TO MANAGE THEIR OWN INTEREST RATE RISKS - geeze - thats a massive qualifier no one ever listens to. I wanted to manage my own interest rate exposure so i used an arm and then when the time was right i refi'ed to a 30 yr fixed.
4) fixed rates MAY be an expensive way to finance a home. of course, its the MOST expensive
Skepticism Scarce in Countrywide's Rally
By RANDALL W. FORSYTH
IN A TOUCHING DISPLAY OF FAITH-BASED investing, Countrywide Financial's debt and equity securities soared Friday despite dramatic evidence of mortgage- credit deterioration severe enough to induce the Federal Reserve to cut short-term interest rates again.
Even though the company reported a $1.2 billion loss for the third quarter as a result of $3 billion of credit-related losses, its securities exploded higher. In the debt markets, the cost of insuring against default by the nation's largest mortgage lender plunged an astounding 100 basis points, or one percentage point, to 377.5 basis points for its credit-default swaps. Yields on Countrywide's bonds plunged as much as 40 basis points on the earnings news.
Among equity securities, the common (ticker: CFC) soared 32% while Countrywide Capital preferred's (CFCpfdA and CFCpfdB) jumped 22%. And the Calabas, Calif., company also declared its regular 15-cent dividend on the common, which might have been in jeopardy given its scramble to raise cash during the quarter. That, of course, featured the placement of $2 billion of convertible preferred with Bank of America (BAC) during August's dire days
Still, the rebound in all these securities and derivatives was not spurred by the dismal results but by Countrywide's declaration that the third quarter marked the trough and profitability would return in the current quarter.
But given the many premature calls in the past year that the bottom of the housing and mortgage markets had been reached, Countrywide's declaration that the worst is over might be worthy of more skepticism, not least because of Chief Executive Anthony Mozilo's huge sales of stock, which the Securities and Exchange Commission is investigating.
More likely, the recovery in all of Countrywide's securities Friday reflected a monster short-covering rally.
But the green-eyeshade types in the credit market took a more jaundiced view of Countrywide's results. Standard & Poor's lowered its credit rating to triple-B-plus, the third investment grade from the bottom, from single-A-minus.
Egan-Jones carries a triple-B-minus rating, a notch above junk. This independent rating company noted "a disconnect" in the Countrywide report. "CFC has $209 billion of assets and took charges of $1 billion; a 5% charge equates to $11 billion compared to equity of $15 billion."
Even a 5% haircut would be modest, based on the plunge in prices in the ABX index of credit-default swaps on asset-backed securities. The price of the ABX triple-B-minus tranche (backed mainly by subprime mortgages), originated in the first half of 2007, hit a record low of 18.57% of par, extending its headlong plunge of the past two weeks. At the start of the year it was in the high 90s, which shows how much the low end of the mortgage market has sunk.
Egan-Jones further observes:
"A core issue is whether BAC will continue to su
OK, as someone who does not want to bail out distressed homeowners, but does want to ensure the government does anything it needs to to smooth existing market forces towards potentially "agreeable" solutions, I really resent being called an Ayn Randian (because she and her friends are nutballs).
I think the problem in these discussions is not "who was at fault". Clearly: everyone. But rather, both prospective and retrospectively what will we do. Prospectively, I have no doubt at all that new regulation will require a standard of care different from the one we've been seeing. In particular, we will see regulation that will attempt to enforce the behavior that people like Tanta and MaxedOutMama did by default to protect their clients and their employers. Can there be any question that this happens and that it's first iterations will be painful?
The problem is the retrospective side. There is not a reasonable financial-blame-placing-model based on the clearly shared blame which does not involve the homedebtors. The financial institutions are going to experience pain - they are going to eat 25% of the loan value in many cases, sometimes worse. The homedebtors deserve the other part of the remaining pain: the requirement to move, a blemish on their semi-permanent record, etc. When people make mistakes this big in other parts of the world, their life changes forever, in the US, not so much. Which is (on balance) good.
It's not Ayn Rand, it's distribution of pain. It makes me sad that more people in this business didn't behave like the people who comment here, but I see no economically and politically reasonable way to retrospectively hold them accountable.
============================
re: Gmak
The 15% for the Fed funds rate as the "high" shows that some member institution has to pay 15% due to the poor quality of assets that they are using for the FED Repo (TOMO operations).
Thanks. So that's where the 15% came from ( the intraday high ) ! I went and looked and I only saw the 4.86 daily rate. I checked and over the past year that's the only one that's so high. The only number remotely close is 8% - just once in the past year. It makes ya wonder though - who had ONLY such crappy assets to pledge for an overnight imbalance trade ? Isn't it rational to use your good assets to get good rates if you can ?
Worth checking back in on Monday and subsequent days.
-K
Egan-Jones further observes:
"A core issue is whether BAC will continue to support CFC. The $2 billion preferred share investment helps, but unless conditions improve, more will be needed."
On that score, Bank of America so far is likely showing a loss on that preferred. Even with the rebound in Countrywide common, to 17.30, it ended below the $18 conversion price on the converts -- which, it might be recalled, was a discount to the market at the time, a highly unusual concession for an issuer of such securities.
"On the liquidity side, the high cost (over 5%) for short-term paper is unsustainable," Egan-Jones adds. "[Countrywide's] business is built on short-term rates below 3%."
Stuart,
I noted the exact trendline extrapolation in the Fitch report, it will be interesting to see how that plays out as it was the average of the SIV's covered in the report...it would be nice to see each SIV broken out.
i know, i know
i think the government should put the curbs also on RE prices, i mean the curbs worked for the stocks and meanwhile they go only up. should be no problem to set it up for the RE 
Prior to 1983(?), home prices were included in the CPI. That created implicit curbs on the price of homes because higher home prices -> higher inflation -> higher interest rates.
Home prices were removed under Reagan and replaced by owners equivalent rent. Since home prices were dropping in the early 80's this increased the CPI and gave Volcker the cover needed to raise rates and stomp out the 70's rampant inflation/speculation.
Fed drops rates 50 basis points this week (so we're down to 4.25%) and then continues with 50-100 basis point drops in rapid succession. Let's say they got down to 2% FFR by early next year.
Banks make money on the spread between short term and long term rates. Dropping the Federal Funds rates to 2% in the face of strong inflation expectation would increase banks earnings and allow them to repair any damage to their balance sheets (at the expense of depositors).
If you're holding cash, you should be watching SOMA like a hawk.
================================
re: Gmak
The 15% for the Fed funds rate as the "high" shows that some member institution has to pay 15% due to the poor quality of assets that they are using for the FED Repo (TOMO operations).
O yeah, while I'm at it, I don't think the 15% was in a Fed Repo operation ( Temporary Open Market Operations - Federal Reserve Bank of New York
The FFR is "the federal funds rate, which is the interest rate at which depository institutions lend balances to each other overnight". The TOMO is done to influence these operations in the aggregate. So the 15% we saw was some institution charging some OTHER institution for overnight lending against its crappy assets. Wouldn't I love to know who it was.
-K
bacon dreamz (and wake up OTS, OCC, FDIC),
Tell me what haircut you think is appropriate at quarter end of one of the worst quarters in mortgage history. Here is the Countrywide 10-K from 6/30:
Cash: $1.2b
Mtg loans held for sale: $34.1b
Trading Securities at fair value: $19.3b
Trading securites pledged as collateral $3.5b
Securites purchased under agreements to resell, securities borrowed & federal funds sold: $26.4b
Loans held for investment net of allowance for loan losses of .5b: $74.1b
Investments in other financial instruments, at fair value: $26.6b
Mortgage Servicing Rights at fair value: $20.1b
Premises & Equipment: $1.6b
Other assets: $10.0b
Total Assets: $216.8b
Looks like we have de facto "too big to fail" if the feds don't enforce GAAP accounting.
Does anyone not think that there's a serious problem with people being exploited that would be almost impossible to fix just with improved disclosures? To me, the borrowers culpability isn't the main driver of this issue. It's the attempt to displace the responsibility of a poor decsion from the most savvy (IBs, lenders, brokers, etc) to the least. The only way to seriously curtail this type of exploitative behaviour is to hold those enabling it responsible as well.
Oakbitter, I just can't bear -- and neither, I think, can our economy, the tired,old, red-herring "crafty welfare-mother" argument made in connection with the bubble. Any bile spewed against the losers in this game is bile misplaced.
Do we want to make sure this doesn't happen again? Then it's not about engaging in fantasic assumptions that all homebuyers should be mathematically and financially savvy enough, and emotionally unencumbered enough, to suss out the terms of every exotic loan thrust on them by a fee-grubbing banking system -- or else they get what they deserve. Or the even more fantasic assumption that what they deserve won't cause any collateral damage. This monster was not made by, or for the beneifit of, homebuyers -- it was created as a con by loan-makers -- who went ahead with it -- economy and their own long-term survival be damned.
This report is junk. I hope there wasn't much taxpayer money spent on it. Is this supposed to be final version? Here are a few of the problems. 1. They use the OFHEO numbers for housing appreciation in states where a huge portion of the homes are over the conforming limit. The Case-Shiller indexes would have been better for that. 2. They make dumb statements like "Home production has outpaced demand". The accompanying graph shows that the months supply of newly built homes was quite low through 2004, and was around its historic average even in early 2007. The problem wasn't that production exceeded demand in 2004-2006. The problem was the large portion of demand which was speculative. Many of the homes and condos being purchased didn't have anyone living in them. They were sold by the builders to someone who didn't live in them and then was trying to flip it. 3. Some years show up twice in their graphs (Fig 11 and Fig 13), other years only once. Get some actual proofreaders. I think the data is correct, but if they had someone who knew how to modify the axis in Excel, each year would be displayed once. 4. I have to dig a bit to see how far off the forecast is, but if $2-4 trillion of housing wealth will disappear as home prices drop, I find it hard to believe that foreclosures will only cause $71 billion of that.
what? i wasn't trying to say their write-down was appropriate or not. i have no idea what their write-down should be based on that info, what's your guess?
That' where we are at and it isn't terribly difficult to understand I don't think. What's harder is finding a way out of this or accepting it and moving on - that's where the 'arguments' occur.
Your post makes me think "cashless". As in, cashless society. As in elimination of differing currencies, and some system of electronic credits taking that place. No more problems with dollars. We trade in credits.
Do you think that's a terrificly off-base perception?
If gold were used as money, house prices would not be $300K. The entire system in the US is fraudulent. It's the honest man that loses.
-SB
Anonymous
can you define what an ounce of gold 'should ' buy?
historically?
a unit of two buy fours?
a yard of concrete
a pallet of shingles
10 bushels of corn
a mans labor for a week
???
when we were on a gold system, all the gold still ended up in the hands of the shrewd...
Money market funds betting on SIVs may have broken law - Oct. 26, 2007
The fiduciary quote of a lifetime and likely commonplace in the not-so-distant-future
"Citron, who could be pretty imperious when he was on top, later admitted that he really didn't know what he was doing. He was just another unsophisticated investor."
Think Enron, Not Citron, in County Investment Loss: Joe Mysak - Bloomberg.com
Clyde, is there more detail in that article? i don't think it's right to think of the charge as a % of total assets.
I am in the 5% camp with Eagan. Mortgage & MBS pricing will not come back for several quarters at the earliest. Mortgage pricing is basically locked-in for the 4th quarter because their is no catalyst for recovery. If we don't get a return to more normal credit conditions by the end of March, then we are probably into the summer.
If Countrywide was to mark to today, I would say that 5% is aggressive accounting according to GAAP. Egan agrees. You might not like Eagan though, he is the only bond-rater that gets paid by investors, not issuers.
Clyde, you've clearly put more thought into this than me, which is to say, some. my only point was they don't have $210B of MBS, and not all of their assets are supposed to be marked to market. here's this:
http://about.countrywide.com/presentations/docs/3Q07%20Earnings%20slides%20-%20FINAL%2010-26-2007.pdf
page 14 and 15 has some detail. again, i don't have the foggiest notion of whether or not this is appropriate, i don't know enough about their assets. if you're right, though, shouldn't somebody shoot their accountants?
oops i meant $210B of MBS or loans HFS...
The only problem with this report is that this report has the old premise that the economic problems are confined to "subprime" and "contained".
It is clear that the monies created and generated by subprime underpinned the entire growth of the new milleneum.
The subterranean rumblings in the financials over the last few months presage the eruption to follow in the next months.
This report will have the same relevance in a few months as a report on the increase in itching of flea bites after the plague becomes manifest.
I mentioned a week or two ago that Case & Shiller updates have become leading Yahoo Finance news. It's not just for wonks anymore.
Now the JEC of the Senate is quoting Case & Shiller.
It's fascinating to watch how vindication is (slowly) achieved.
Do you think that's a terrificly off-base perception?
Outsider - I think we are so close to it now as to be there already and we just don't yet know it.
My guess is we will find ourselves in a de facto Bretton Woods or Bretton Woods III scenario where the dollar shares 'reserve status' with euros, yen and possibly rubles & yuan.
Not that the dollar is worthless but rather 'coupled'.
The idea being that no one currency dominates anymore & they truly do float in tightly coupled trading... with arbitrageurs enforcing 'discipline'...
In that world if you want your citizens to have purchasing power to be able to buy global commodities like food, energy and even 'capital' - you better take good care of your fiat system or be prepared to offer up something 'solid' in exchange - gold reserves, oil and/or other commodities, or be able to run sizable trade surpluses based on globally tradable services or goods.
Otherwise you currency will tank and even America & dollars won't be immune to this process.
My guess is it will all be electronic and you will be able to work in a number of currencies... just about anywhere like foreigners do now (Europeans traveling or Japanese housewives & their carry trades).
Americans are just the last ones to catch on. American's still think its 'Morning in America' and it's not... time's moved on.
when we were on a gold system, all the gold still ended up in the hands of the shrewd...
And we still had crashes and panics when on the gold standards - worse that now. Late 1800s were full of them...
Personally I think pure fiat systems are best so long as individuals retain the right to own gold, silver, etc., as a check & balance on those running the fiat system. The current price run up of gold is a 'vote of confidence' on the 'full faith & credit' of the dollar.
counterparty risk.
I am unfamiliar with how mortgage or bond insurers position themselves, but it strikes me as pretty lame to be selling insurance to protect against loss on mortgages and at the same time investing in the derivatives on the same product (for yield, I guess). That is simply guaranteeing a double-hit on the first hint of declines, something insurers should be the first to describe as a no-no. Am I missing something?
CDO pricing calculator:
CDO Price Calculator
It's that time again!! Time for the newcomer, Ben Bernanke, to punish those stodgy conservative savers and reward the high stakes infinite leverage gamblers!
Welcome to the worlrd's biggest casino, the US Economy, where you're forced to press your bets until the house caves in.
GOLD
I think the system is working well. If the markets seize up it is because the investors finally have had it with junk and they are afraid. JUNK if finished. Nothing wrong if the junk market seizes up. Perhaps those who do not undertstand that investors do not want junk should try to understand this rather trying to get the junk market going again.
Well, if the USD is going to relinquish reserve status to a "basket" of currencies then there's still way too many dollars out there (both real & digital) that'll be dumped for something else.
So we need an officious cadre of Alos to make these decisions for "the masses" (broadly defined to include lawyers, accountants and suchlike)--is that the general drift of it? Not Big Brother, but Big Mama--all sweaty, suffocating, 300 pounds of her.
Your post makes me think "cashless". As in, cashless society. As in elimination of differing currencies, and some system of electronic credits taking that place. No more problems with dollars. We trade in credits.
Then the hackers unleash the first wave of counterfeit credits.....
Well, if the USD is going to relinquish reserve status to a "basket" of currencies then there's still way too many dollars out there (both real & digital) that'll be dumped for something else.
Make that WAY WAY WAY too many dollars out there and a lot of them held in SWFs that really don't know what to do with them.
At the end of the day we will have to consume less, produce & save more and receive weaker less valuable dollars for our efforts. That's just the way it will be... at least for a while until we get back into the practice of producing value others want to pay 'real money' for.
Then the hackers unleash the first wave of counterfeit credits.....
No different than now... there is almost NO real money out there - it's almost all electronic already.
The difference will be we in the US might not even be using USD only... buy a Toyota and get a 'discount' if you pay with yen, buy a Mercedes and pay with euros... etc. The car loans could also in yen, euros, whatever. You take the up front discount using 'their' currency of choice and assume the currency risk yourself.
Lotsa folks all over the world do that now. I can see Americans joining that club if the dollar continues to slide. I'm not saying it will be 'better' for Americans but they might not have a choice if the rest of the world tires of dollar hegemony.
"I'm sorry, but a minimum-wage worker who decided to buy a $300,000 house is not a "victim". I don't care how many polls there are of such people claiming they "didn't know" their interest payments would go up. Give me a break.
As I said, the legitimate victims of fraud can take their cases to court, as always. But you, I, and everyone else knows darn well those are a miniscule fraction of the loans. The vast majority of borrowers knew exactly what they were doing, and they did it anyway because "house prices only ever go up".
Confidence games depend on the greed of the mark. Just because the "client" is greedy doesn't mean it's not a con.
Put another way: Just because your customers are idiots doesn't mean it's ethical to make billions selling them overpriced products they can't afford and then insulate yourself from the inevitable fallout.
Americans are just the last ones to catch on. American's still think its 'Morning in America' and it's not... time's moved on.
I can hear the faint sound of shackles clanging in the distance...
O-Joe:
Did you read the story I linked just ahead of your post?
Can you ice your Mary Poppins schtick long enough to acknowledge that already, people are shooting it out with the police over foreclosures?
Hmm, when in American history have we seen that sort of thing happen?
404 Error, No such article | Chron.com - Houston Chronicle
I personally could imagine the Fed dropping to 1% (or lower) if the BOE and Eurozone also drop to those levels. It would be a race to the bottom. A concerted Central Bank effort could pull this off, no?
They certainly could pull it off, but whether it would have the intended effect (rescuing the housing market) is another matter. Unless all of these economies enter a recession (as defined by NBER) I don't see it happening, though I could be wrong and I agree that the current US Fed is arrogant and duplicitous if not outright stupid.
However, I also think that the Fed gets too much blame for the housing bubble in certain quarters. I would characterize them as accomplices rather than the main perpetrators of this economic and social crime.
The reason I say this is that IMO low rates were a necessary but not sufficient condition to cause the bubble. Other contributing factors include the breakdown of ethics in both lenders and borrowers, "innovations" in mortgage lending that allowed clearly unqualified borrowers to get into way more house than they could handle, and a mania characterized by a general obsession with housing along with material things in our culture. Right after 9/11 folks were encouraged to overspend as a patriotic duty, this still sticks in my craw.
I believe also that the press played their usual role in things, encouraging and egging on the public to participate in the bubble, then predictably turning around and looking for villains when it inevitably popped.
And that leads to my final point, which is that the press will provide some strong headwinds to any housing recovery in the next 1-2 years. Once they get a hold of a story, they tend to work it like a bulldog. I can see plenty of negative stories coming on housing and the economy in general, especially since it will dovetail nicely with the "Bush and the GOP are incompentent" narrative. This will have the effect of driving home the point that housing prices have topped to the general public. People may be greedy but they aren't so stupid, no one wants to be a bagholder. This will become self-reinforcing, leading to more declines and more stories about housing pain.
Theroxyland, Stagflationary Mark,
I think we all agree it's nearly impossible to forecast inflation realiably. Evne the T-Bond yield exploded in the 1960s "out of nowhere", while gold and oil stagnated until ~1970. I think even the FED cannot forecast inflation more than 6 months ahead. Like Theroxyland, I use the Long Wave, or Kondratiev cycle for long term predictions. I combined this with astrological indicators to come up with the seasonal turning points in the K-cycle. My model tells me the turn from winter to spring was in April 2003 and the turn from spring to summer will be in ~2020. From there, I deduct we're in a similar phase as in the 1950s right now. This means I expect slowly raising inflation and interest rates together with a strongly expanding economy and a long lasting stock bull market. In this period, all the work that was left undone in the last fall and winter period will have to be worked thru like the rebuilding of the infrastructure, implying strong wage gains but also higher higher taxes as well. In the past, it was easier for capitalists than employees. I expect this to change.
Just my idea.
O-Joe
CDO pricing calculator:
CDO Price Calculator
cal
I agree with his thesis conclusion entirely. Very well done.
dotcommunist,
Hahaha!
Here's some trivia for you. Roughly 5.4% of the population of Nevada apparently has a subprime loan outstanding. Note that I said population. That includes babies, babies who need a vacation home, toddlers too young to bet in casinos, kids looking to expand their imaginary friends, and children who wish to expand their treehouses. Well, maybe. But what do I know?
What happens in Vegas stays in Vegas. Nobody's talkin'.
Just can't seem to pull my eyes away from the JEC report.
O-Joe,
So let me get this straight. You believe:
Rising inflation.
Rising interest rates.
Strong wage gains.
Higher taxes.
And a strongly expanding economy? You are indeed an optimist.
If you acknowledge that the economy is currently slowing and put those strong wage gains in China (as has been the case, since they are trying to catch up to us), then you are pretty much reading straight from the stagflationist handbook (which also would have said to buy oil, gold, and silver as in the 1970s).
But hey, that's just my opinion.
astrological indicators?
Stuart wrote, re: SIVs:
"A 0.5 percent drop in value of assets is equivalent to a 7 percent decline in the so- called NAV, Fitch said. "
Does that make sense to anyone?
Stag Baby:
What happens in Vegas stays in Vegas. Nobody's talkin'.
I have a friend (Sheriff of a county nearby) who wished that were true.
dilbert dogbert,
I have a friend (Sheriff of a county nearby) who wished that were true.
Serves me right for "believing" commercial advertising.
I put up yet another map of the subprime home prices. This one uses the mean and colors the states by the deviation from the mean.
Subprime Home Value Map v.2
For the record, if all I wanted to do was advertise my site I would be spewing my links all over the Internet. Since I have only posted them at Calculated Risk and maxedoutmama
(my two favorite blogs), it should be pretty clear I'm not in it for self-promoting purposes.
So, after further consideration, I've decided that until CR or Tanta tells me I'm out of line, I'm going back to doing what I have been doing.
It does seem silly to have to post my nearly endless banter in the comment section when I could just as easily supply a one line link to my nearly endless banter elsewhere.
The Neighborhood Economic Development and Advocacy Project provides maps (pdf) that illustrate this extreme paucity of bank branches in minority. Revealing the financial geography of New York City, these images convey the operation of racial oppression. The wholesale rejection of minority communities by full-service banks indicates their invisibility to the financial establishment. In our capitalist society, credit has served since the outset as an indicator of civic responsibility and moral worth. continue reading at
Radical Negative: No Banks for Blacks and Hispanics: Finance and the Making of Subprime Citizens