Let's go surfin' now
Everybody's learning how

"More than 80% of borrowers who are current on these loans make only the minimum payment, according to UBS."

That is that stat I wanted to know. Yep, this is going to blow up real big.

It is a good thing WAMU has better underwriting standards than CFC. Else WAMU would have to start worrying about their large portfolio of option-arms too.

God bless America:

There is no inflation and no need for government involvement;

1. Issuing a fresh warning that inflation was headed toward dangerous heights, China ordered nationwide price controls Tuesday - March 2007
2. Russia issues control of food prices to A sudden surge in food prices ahead of elections has the Russian government digging deep into its bag of tricks, including a few from Soviet days, to prevent discontent from spilling into the voting booth.

There is NO inflation in the US - God Bless America - unless you of course you have to buy food or gasoline.

CR,

Have you seen this chart and post regarding SIV values? Pretty interesting, especially re: Citibank at the end of the text.

FT Alphaville » Blog Archive » The point of M-LEC

Hat tip to:

immobilienblasen 

dryfly, I'm with you. I'd like to be more optimistic - we are living in an incredible period of innovation and globalization. If there weren't so many bad loans made during the last few years, I'd be very positive right now.

That sums it up for me.

BTW - I'm still more concerned about the LBO corporate debt thing than RE. And not the pier loans as much as the baggage the actual operating entities carry - I really worry about can they operate with all that baggage. I don't see how they can. I think their only realistic exit strategy is to 'flip' just like RE specs had to flip out quickly from under their debt loads - or perish.

If they hit the wall - they'll shed jobs like we haven't seen since rust belt. I was there for that - as a kid - but still remember. Then we see how all these bad loans perform in the real world.

I just put up a "what if" experiment on Rising Debt vs. Falling Interest Rates for anyone interested.

"How odd. No CFC filings with the SEC. Maybe this is all an illusion"

Reminds me of that old song - how does it go?

Breathe deep the gathering gloom
Watch light fade from every room
Roach and Fleckenstein look back and lament
The consumer's last equity withdrawal is spent
Impassioned Cramer has Bill Poole on the run
Orange man sells stock until he has none
Citigroup suckles its mutant SIV son
Alan Greenspan wishes he were young
Cold hearted hedge funds rule the night
Steal the pensioned widow's mite
With CDOs that are covenant lite
But Tanta decides which is right
And which is an illusio

The LBO guys will get drilled on returns, but will the debtholders really take that much of a hit?

Understand I work with the complete other end of the horse than you do. I'm not worried about the 'debt holders' or the LBO PE firm... I'm worried about the operating companies that were bought with that debt money - the Chrysler's of the deal.

I've been in sales meetings for some of these firms - make no mistake, they told us right up front they intended to 'flip' the companies and quickly... for big capital gains. 3-5 year targets. Either IPO or sell off to another PE. Lipstick on the pig and fast.

And these guys had an almost unlimited pot of revenue to draw from to 'renovate'... I've seen some wise decisions (invested in people, process & capacity) but also a whole lot of the industrial equivalent of 'granite counter tops'.

If they can't flip in a couple years then they'll have to 'clamp down' and make these companies make money - or else. At the debt loads most really aren't 'facilitated' to doing this anymore than a flippers condo can cash flow rent.

But cash flow they will try and that means lay offs & cut backs big time - its the only real costs they can cut when they can't refi or sell assets at what was previous par.

They won't all fail - but even the survivors will feel like they did. Then we see what the economy looks like with increasing unemployment. So far its been a joy ride... if a lot of companies start cutting the joy ride is over and the hand basket ride begins.

Personally I think that is why the fed will continue to cut rates even in the face of inflation... but not until the unemployment & output data indicates that risk is real. So far it isn't, it only lives in the recesses of a few folks twisted brain - like mine. I'd be real happy if it stayed there.

Um, yeah... innovative mortgage products financed by foreigners. Otherwise, not so much.

We've had that argument - don't get me started on that one or I'll start describing product development & supply chains from the 1970s vs now.

BTW did I ever tell you about the summer I spent as a parts expediter at farm machinery factory in the Midwest circa 1976? A little different than today...

It's one thing to discount the 'fake' innovations (innovation isn't a new shade of pantyhose or flavor of tooth paste - certainly some mortgage innovation is like this)... but there has been an almost unimaginable level of REAL innovation. It continues though possibly is slowing a la Schumpeter cycle.

Good operating assets will always have a ready buyer and from an overall economic perspective, changing ownership structure isn't all that important. Broken balance sheets don't bother strategic guys as long as the time frame involved is short enough to not have ruinously constrained investing, ruined morale or otherwise permanently damage the operations.

Operating assets can be ruined almost over night in some cases (steel mills for example if the hearths cool)... but most take years to be thoroughly worn down and 'mined out'.

The trouble with debt is that it is precisely the best mechanism to effect that result. To save money today they forgo maintenance and investment. That and lay off 'unessentials' like design engineers and R&D (the folks bringing future revenue stream to fruition). My father who ran huge factories for large rust belt conglomerates in the 60s called it 'mining the factory' - nothing changes under the sun, same today as ever was.

I've seen it with my own eyes since my old man's days - often at companies that have been heavily leveraged via PE acquisition. Its almost suicidal from an operational perspective once its been mined.

I'm not talking down 10% or anything like that, just a 2% ish bloodbath. (Now the rational poster here immediately goes long)

I hear ya banker - could happen. And if it did two percentish sounds about right.

But I think it is just as 'rational' that Mr. Market thinks the 'worst is out' now and with a sigh of relief goes for a random walk to the upside.

That's why I love watching the markets - almost as much fun as watching hockey.

Think about it -- the effects of productivity used to enhance our overall standard of living, but now it just means fewer people doing the same amount of work.

No. Its fewer folks producing more... and not just more stuff, better stuff. Way better stuff.

We have a LOT higher standard of living - our problem is our appetites are larger still.

If you lived in a neighborhood like mine where 1950s homes were the 'new ones' (mine is circa WWI)... you'd realize how much more shit most folks have today.

Hell if we lived like we did in the 70s even - fewer cars per person, crappier cars, smaller house, no cappuccinos, vacations to local state parks not Hawaii, etc.) there wouldn't be an 'affordability' problem for most of us. We have met the enemy and he is us.

Medical care would be pretty cheap too - folks would just die of heart disease & cancer (no expensive by passes). So maybe thats not the answer.

I understand your point and personally don't plan on going back voluntarily - got high speed internets & digital TV full of channels I've never even watched - but I don't blame a lack of 'productivity' on some of the dumb choices I and others have made on how to apply that productivity.

And the biggest productivity gains are occurring in the services or mfg support, not actual mfg. This story is just beginning.

Hockey will be as much fun once again when they take the helmets off players and make bringing your stick above your waste (except when shooting) a major penalty.

I had boys in hockey - I'm glad they wore helmets but I was a parent then. When I was young we played 'pond hockey' with a bunch of rural knuckleheads back in Minnesota... call your own foul (none got called) and some how survived. Most of us even have teeth though I saw a few knocked out. There is no red as bright as blood on fresh snow.

I bet you got similar stories from New England.

Heck, if it wasn't true, we couldn't have literally half the US dependent (directly or indirectly) on government checks... IOW, dependent on the other half.

I look at a lot of corporate bureaucracy as being not much different than gov't bureaucracy - i.e. dependent on the 'other half' too.

And that's not all bad - think how unproductive we'd be if they were out on the factory floor and in our way... probably couldn't get anything done right or on time.

Don't feel so bad Banker, I once was a productive member of the production floor (engineer) then turned in my membership and went over to the dark side in later life. :-} Frankly, it paid better.

If you pardon a bit of sour grapes, the hard reality is that only a few of guys from the floor, like tj and dryfly, are ever really listened to. In corporate America, Tech people get treated like most rude people would treat the mechanic or plumber. Told to do a job and not given a lot of choice in how it gets done, with the prospect of being the scapegoat if it goes wrong. The laurels and respect goes to the management, marketing and deal makers.

And people wonder why we don't produce enough scientists and engineers here.

What was the old saw - "The people who can manage people manage the people who manage only things, while the people who manage money manage all."

NY Times - Merrill Lynch to Report $2.5 Billion in Added Loss for $7.5 Billion Total - Largest Charge in 93 year history
Merrill Lynch Set to Report $2.5 Billion In Added Loss - NY Times
Bloomberg -Merrill to Increase Writedowns by $2.5 Billion, N.Y. Times Says
Merrill Charges Rise by $2.5 Billion, N.Y. Times Says (Update3) - Bloomberg.com

Caribbean Banking Centers (+33B)
and
UK (+33B)

were the only major buyers of Treasury securities in Aug.

http://www.ustreas.gov/tic/mfh.txt 

Other telling paragraphs from that WSJ article:

"CEO Was 'Shocked'

Mr. Mozilo told investors in September 2006 that he was "shocked" so many people were making the minimum payment. He called a sampling of borrowers to find out why. The "general answer...was that the value of my home is going up at a faster rate than the negative amortization," he said. "I realized I was talking to a group...that had never seen in their adult life real-estate values go down."

The temptation to use these loans was strong. A borrower with a $520,000 mortgage at a 30-year fixed rate of 6.05% would pay $3,134 monthly. With an option ARM carrying a 1% introductory rate, the minimum payment in the first year plummets to $1,673."

And this:

"In one California branch office, employees could win prizes, such as a trip to Hawaii, for selling the most option ARMs, says Cindy Lau, who worked for the company for more than six years. Only a small portion of borrowers "understood the loan and knew what they were getting themselves into," Ms. Lau adds. She says she was fired in August for low production."

Glengarry Glen Moz

Link:
Merrill Lynch Reports Loss on $8.4 Billion Writedown (Update7) - Bloomberg.com

This is what happens when you let them hand out at the poolhall with a bunch of subprime friends.

--
From a forum comment:

“What we had in the last bubble, was carelesseness, the ultimate moral hazard - otherwise known as OPM on the street (other people's money). You see, if it ain't your monies at risk, you are much less likely to care if the loans are good or bad. That is why the most popular buzzword in the media is a misnomer - "subprime". There was no subprime contagion, for subprime was never the problem of the bubble or the bust. It was the careless underwriting standards borne by banks that did not have to face the consequences of just giving out money to anyone (at least past their one year risk retention stipulations, hence the popularity of 2 year ARMs). Thus, it is prime, subprime, alt a, alt b, and everything in between where the actual problems will manifest. Those who follow the media buzzwords or actually believe the BS of the ratings agencies who were compensated by the entities they were rating on a basis that was contingent on a favorable rating, are bound to be surprised by an apparent "contagion", again and again, and again, and again, and...... “

Safe Haven | Preservation of Capital |

Being able to loan OPM can turn into fraud real easily and that is what did happen in the US.

Jas

--
Q3 OC auto sales plunge 15% - OC Business News : The Orange County Register

Q3 OC auto sales plunge 15%
October 23rd, 2007

New car registrations fell 15.3 percent in Orange County in the third quarter of this year, the Orange County Automobile Dealers Association reports.

Year-to-date registrations have fallen 9.8 percent in Orange County, compared to a nationwide drop of 3.2 percent through September, the auto dealers report.

For all of 2007, the auto dealers forecast a 7.9 percent drop in sales, following a 6.1 percent drop in sales in 2006. The dealers expect sales to fall in 2008 by 1.7 percent, before rebounding in 2009.

...

Housing problems are "contained" and "no recession yet?"

Jas

Caribbean Banking Centers (+33B)
and
UK (+33B)

were the only major buyers of Treasury securities in Aug.

Nuclear option ... or they figured out that US T-Bills are not as solid as they once believed ?

It now appears that many borrowers who moved into option ARMs were attracted by the low payments...

Ya think?

The trip to the confessional is turning out to be like a Columbo movie, "Oh, and just one more thing Father..."