I only queston how long before this causes total seizure of the housing lending markets.
I no longer question that this is leading to massive systemic risk throughout the entire credit market system and will only be repaired through massive losses and socialization of some of those losses.
I can hardly wait for reality to dawn on the political classes of the breathtaking depth of this crisis.
I note that our foreign debtholders would be wise to sell into a flight to quality that we are undergoing as they begin to unwind our insane levels of leverage.
I see no reason any American saver should accept anything but "free market terms" just like the Dubai investors received from CITI. Socialization of losses and privatization of profits? NO WAY.
I think we are seeing the beginnings of the cascade effects - it will be waaaay too interesting if this blows and we explore the limits of counter-party risk in the CDS market - which may reveal the assumption of netting exposures against each other didn't fully consider that eventuality.
The CDS market is the scariest story of all. Whenever I read about it, I want to overweight my "boys in the hood" portfolio: Gold (aka bling), guns and pit bulls.
I'm even more confused and also a bit angry with the reportage.
If the old estimate was a 1% hit to a product previously yielding 9% and the new estimate was a 110% increase in that loss I'm still getting 7.9% right? I can even live with a 270% increase in losses to make my return a mere 6.4% or so.
Or maybe my principle is only worth some odd cents but still returns the 9% on the original value?
I know I'm stupid. Don't rub it in. Just tell me what these loss estimate increases mean in terms of principle and return. I'd like something that said for every $100 invested expecting 9% per year the new value is $75 yielding 12% per year.
One should ALWAYS overweight guns...and twinkies, lots of twinkies!
Energyecon,
The tempo has definately picked up...so why isn't MLEC dead????? More Seriously we are now seeing a pattern of bottom feeding/bailouts, Abu Dabi/Citadel/MS-Lennar etc. I actually think it is good news on balance that the paralysis period seems to be ending...of course I think most things are good news.
Hey, all is good until the olympics next summer, then the chinese will most likely revalue their currency and use the money taken from silly traders to improve their internal economy sufficient to generate enough internal demand to retain the massive exports that were scheduled for Xmas '08.
At least that is what I would do, as the closing ceremonies wind down, so does their commitment to those pesky dollar reserves.
Contemplate that for an interesting election in '08. Plan for the worst, hope for the best.
Disinterested third party playing is how I differentiate. Morgan Stanley Lennar is clearly unforced as was Citi Abu Dabi...from the buyside that is. If you are asking were Citi and Lennar "forced" to do something to raise capital? You betcha.
Thinking a bit more about tempo, perhaps we shouldn't be surprised, it is December after all. Wouldn't senior management of all the players, from RA's to banks to IB's to hedgies etc. generally prefer to get as much as possible jammed into what is already a terrible fiscal year and clear the decks (to the degree possible) for 2008????
OT, but I put together some charts that I wanted to share.
I took the Case Shiller composite data since 1987 and used the last peak-trough cycle to project out where prices may go. Looking at the NYT plot of the inflation adjusted index since the late 1800s, I saw that the bottom in the mid-90s was about 10% above the bottom in the mid-80s. So I took the same shape/timeframe of the 90's cycle, and scaled it to the 2006 peak to get down to 110% of the 1997 low. I used historical full CPI for inflation adjustment, and assumed 2.5% for inflation going forward for the projections. The prediction has real prices down 52% and nominal prices down 42% at the end of 2013.
I also did the same for LA prices (since I live there). Here I assumed a return to 125% of the previous low (a little more conservative). Real declines are 57% and nominal 46%. That equates to a SFR median price of $300k in 2013!
A couple of points... in the national charts, there is a sort of "double peak". I projected out from the second peak, although it was slightly lower than the first. Also, even though there is only a year overlap in the post-peak predictions and the actual data, the trends are strikingly similar. I'll be updating these on an ongoing basis.
20% already and this is still just the starting phase.
And remember none of these numbers include the effects of rising unempmloyment or all of the ridiculous loans made to 'Prime' home-owners. We've seen nothing yet.
So Banker, have you hedged your forward deliveries of Pom and caviar?
I forsee the dollar bottom that folks are calling might be premature, as folks begin selling their toxic waste to get something out of this mess. Small towns in Norway, excepted of course.
Seriously, Banker what happens when this crisis goes systemic? Will the feds reactions tend to drive foreign investment out of our markets due to fears of devaluation? Will we have to raise rates to stem a panic run on the dollar?
There is no surprise here. We all know Alt-A is just larger loan subprime. Unless there was significant skin in the game (30% plus), most recent Alt-A is headed toward default. The only thing that will solve this mess is an unmanipulated market correction/cleansing. Gov't intervention will just prolong the problem and probably make it worse.
I agree about CDS -- probably the most important threat to the financial system, and yet not well understood.
CDS is really the "root of all evil" in the credit markets, when you think about it.
It was CDS demand that brought down credit spreads to bubble levels. Just a bunch of speculators charging "nickels" for insurance on an "impossible" event. They ended up insuring some $45tr of risk -- much more than the outstanding debt being insured.
The resulting decline in spreads sent a price signal to the markets: Default risk has evaporated! Reach for yield! Lever at will! The chain reaction led all the way to risk layering in subprime mortgages.
And now, out there, somewhere, the writers of this insurance are effectively bankrupt. They have little or no reserves. They are the failed counterparties that will vomit their trades back on the brokers' books; and when that happens, the brokers will buy every put option in sight to hedge their ballooning exposure.
A bit sensationalist, I know, but the chances are high.
20% already and this is still just the starting phase.
Caution. the last 15-20% was "froth." Meaning an unstable mix. On one one person in the entire US bought at the top. The last 15-320% wasn't price discovery it was more of a case of outlying exceptions being exposed as the body of the price curve retreated.
You don't this situation is "systemic" already? The dollar has gotten pretty beaten up already too. What we seem to be learning is that all of the foreigners who bought US Treasuries over the past decade have a great deal of skin in the game and seeimngly will act to protect that skin. Now could the Fed and the gov screw up from here?????
This whole thing reminds me of my uncle and his neighbor who earned $200 a week by selling the same stray dog back and forth between them every friday, raising the price $200 each week. Alas, the dog got run over, killed dead, when worth $4800 on the previous sale.
As all the sales had been financed by the seller, they finally agreed to split the original cost of the dog (zero) and let the paper evaporate, and each deducted capital losses of about $2,400 each against gains in that new fangled Microsoft thing they'd put real money into.
So many people are going to lose money on this fiasco, and they did it on purpose. hahahaha!!! I can't wait until the people who didn't participate in the housing fraud start realizing they lost money. hahaha!! The whole system is gutless and weak, and everyone who stood by while the chimp looted our gubbermint deserve to suffer for it. hahaha!!
Lennar is apparently mothballing a huge portion of Central Park West, which will be a hell of a blight on Irvine. See the WSJ stub article here
Very close to home:
Lennar is selling its interest in a hotel complex in Long Beach, CA back to original investor.
More generally:
Lennar sells $1.3 billion of land to a Morgan Stanley land venture for $525 million and a stake in the venture. The South Florida Business Journal article is here
Banker,
Serious question: What would be some clues to look for that would indicate the credit market is returning to normal?
PS: As I've said before, there's no available evidence as to what exists within the mortgage based instruments. A grab bag is usually free....hmmm, maybe the Wall St. firms can have a holiday swap? Might be some regifting.
On November 27, 2007, Moody's completed a review of all outstanding non-Option ARM Alt-A RMBS rated in Q4 2005 and in 2006. As a result of the review, a total of 222 securities issued in 2005 and 1,247 securities issued in 2006 were downgraded and/or placed under review for possible downgrade. The affected tranches issued in 2005 have an original balance of $1.5 billion, representing 0.4% of the original dollar volume of Alt-A RMBS rated by Moody's in 2005. The original balance on affected tranches issued in 2006 totals $10.2 billion, or 2.5% of Moody's-rated Alt-A RMBS from that year.
The methodology Moody's used to update its loss estimates for the reviewed transactions was to separately project ultimate losses for the delinquent and non-delinquent portions of the loan pools.
For the delinquent portions of the pools, Moody's applied roll rates of 25%, 65%, 90%, and 100% to 60-day delinquencies, 90+-day delinquencies, foreclosures, and REO, respectively, and applied severities of 25% to 30%, to forecast expected pipeline losses. For pools with less than 18 months of seasoning that had growing delinquency pipelines, Moody's projected delinquencies, foreclosures, and REO out to 18 months and then applied the roll-rate analysis described above.
For the non-delinquent portion of the pools, estimated losses were driven by Moody's new Alt-A rating methodology that was adopted in August. Estimated losses were also informed by overall issuance shelf performance.
As a result, Moody's lifetime loss estimates on the pools included in the review increased by as much as 270% over initial expectations, with an average increase of 110%. Moody's intends to publish shortly its revised expected loss estimates on a transaction by transaction basis.
$100B here, a $100B there, and you're talking real money.
Honestly this has just got silly.
Banker may be right that these clowns are loading up on the bad news now to clear the desks. The problem is the poop on the desks is rising up from the holds, and they aren't nearly empty yet.
Think of it this way Misean. Dubai et al will make some initial investments, to keep certain "reputable" firms from going under. For them, it's a drop in the bucket. And they will extract some hide in terms of terms. Through these actions, they will try to create a bottom. If it doesn't work, so what? They've got tons of money, dollar cost down when the firm looks like it's on the ropes again, and squeeze some more blood. Eventually, you've got yourself a 1st rate US IB at a super discount. No place to go but up from there.
Loading up on the bad news? Are you sure they're not just reporting on things as they're discovered, and there's just an increasing amount of bad news to report??
Serious question: What would be some clues to look for that would indicate the credit market is returning to normal?
Someone asked me this in August and I answered with a series of hurdles that began happening in late October and I looked smart...right up until the train ran off the tracks again
There will be things no outsiders can see that will happen like trading desks getting allocated more capital to work with, regular secondary trading in leveraged loans, HY bonds and super senior MBSW and the narrowing of risk premia on each of them. The things we WILL be able to see will be lagging indicators including a bundle of new issues in each of those markets. I don't think those of us on the outside will really know until a couple of weeks after things begin to improve. The bigger problem is that, just like a troubled market doesn't mean much unless it is for an extended period, neither does a rallying one. A bigger question is when will we know that improving credit markets are at least stable with some measure of reliable liquidity???? Your guess is as good as mine as to how we measure that. Sorry.
Given all the states, countries and private money markets that have been burned, it's difficult for me to see how ABCP is going to sell again for a long time to come.
In fact, the whole concept of securitization seems very much in doubt right here.
When you take a poop in the punch bowl, you generally don't get invited back to a party for a while.
Wasn't the whole "cathartic disclosure of all the losses and bad news" by the Wall Street firms supposed to happen last quarter? I guess it'll be true eventually.
Yep so will a stopped clock. The predictions of, whew, well there goes the last of the bad news, are simply attempts to bouy confidence in this con game. MHO.
Where are the Japanese, Chinese and other Asian financial institutions in all this? I haven't really heard any confessions from them and they have to be bagholders on a lot of this crap. Right?
Dec. 4 (Bloomberg) -- Orange County, California, the county that in 1994 was bankrupted by bad bets on interest rates, has about 20 percent of a fund it runs invested in structured investment vehicles that may face credit-rating cuts.
In the $2.3 billion short-term fund, the county holds a total of $837 million of SIV debt, including $460 million under review for a possible downgrade, officials with the county treasurer's office said. All the debt still carries a top rating. None of it is held in the $3.5 billion of money-market type funds the county operates, they said.
That's a pretty good barometer, or one of them anyway, but here's the bigger question: For how long do they have to be at a particular level (TBD) before you feel comfortable exhaling?
Orange County Says 20% of Fund in SIV Debt, Faces Rating Review
By William Selway and Michael B. Marois
Dec. 4 (Bloomberg) -- Orange County, California, the county that in 1994 was bankrupted by bad bets on interest rates, has about 20 percent of a fund it runs invested in structured investment vehicles that may face credit-rating cuts.
In the $2.3 billion short-term fund, the county holds a total of $837 million of SIV debt, including $460 million under review for a possible downgrade, officials with the county treasurer's office said. All the debt still carries a top rating. None of it is held in the $3.5 billion of money-market type funds the county operates, they said.
A Florida local-government investment pool lost half its $27 billion in assets before managers froze the fund after cities and school districts withdrew their money after learning it held downgraded and defaulted commercial paper sold by SIVs.
Finance officials with the Orange County Treasurer's office said the SIV debt it holds continues to meet its obligations and there is virtually no exposure to risky mortgages in them.
We don't have the same kind of debt that Florida has,'' said Paul Cocking, the chief portfolio manager for the county.They're all highly rated assets.''
SIVs are typically offshore companies created by banks and other firms to sell low-yielding short-term debt, using the proceeds to buy higher-yielding mortgage securities, some backed by subprime mortgages, and finance company bonds.
Robert Coté, there is frustrating lack of details in the Reuters report. Hopefully we will get some more details soon.
Best Wishes. CalculatedRisk
I'm not as sanguine. All this talk of 110% loses, 270% loses and all that is wrong. Obviously you cannot talk about more than 100% loses to expected return. That means they are talking about some form of either margin call (very very bad) or redemption freeze (very bad) or asset revaluation (just plain old bad). But that isn't true either is it? There is leverage and there are strips and tranches and insurance and more. I'd like a set of numbers that let me establish a valuation. Some unanchored loss ratio doesn't do that. I'm getting the feeling that we don't see the actual values because the people responsible for the reportage haven't protected themselves yet.
World Food Prices to Jump The last time the world experienced such food price increases was in 1973 to 1974 ... but today the situation is completely different.
Quite the Tuesday Tsunami of bad news! I was thinking that things will stay afloat until the new year, but not if the headlines keep screaming like they have the last 2 weeks. It still tickles me that the FED is setting up for a slash and burn campaign on interest rates when the markets are POSITIVE for the year. Somebody has something wrong, and its becoming clearer every day.
There were various hedge funds bottom fishing all last year. Heck, the Cerebus deal was exactly that. People willing to call a bottom and jump in. Why is the CFC, etrade, Lennar or Citi deals any different? Scale? The people involved? Just the fact that they are happening?
Somebody has something wrong, and its becoming clearer every day.
Time Magazine: Gloomy Holidays--and Worse Ahead, December 9, 1974 Though the economy has been drifting down all year, the slide has been so gentle for so long that the Nixon and Ford Administrations felt it possible to deny that the nation was in a recession at all. As recently as October, Commerce Secretary Frederick Dent asserted that the economy was only going through a period of "sideways waffling." Now, though, the slide has suddenly become something more like a nosediveby some measures, the worst since the 1930s.
...
When the new Administration unpacked its bags last summer, its economists reckoned that the blowouts in housing, auto and retail sales would take place gradually over a period of many months. None foresaw that so much damage would be compressed into the first three months of the Ford presidency.
I don't think the commercial paper market, if it survives, will have the size necessary to serve as much more a predictor than licking your thumb and sticking it in the air is for weather prediction.
I've been out since lunch (2 fish tacos, homemade chips & 1 crab cake, water w/lemon for under $10 w/20% off coupon).. On to Target and Kohl's to Christmas shop (Ugh) and was surprised by the lack of shoppers especially in Kohl's even with big discounts and 15% off for senior citizens like me. I had never been in a Kohl's before and was pleased enough with the selection and prices to pretty much finish my holiday shopping without ever stepping into a mall. I also received a $20 'cash' Kohl's coupon good 12/9 to 12/20. I'm now @ the PC w/J&B. What did a miss? Yikes!
The desire to believe that things are improving - and at some point they will be - I just don't think we have hit the blood in the streets capitulation. And whomever makes that correct bottom call is going to do fabulously well. And if you are making the bet with OPM, well why not?
My immediate impression was that was the percent increase from the original loss estimate - say N billion, is now 1.1N or 2.7N - which still represents some fraction of the size of the original investment (albeit larger).
I can hardly wait to see the Timeline of bad news plotted against the stock market and housing data. I guess it's a little premature since we still have yet to see the resets of '08. Add a stacked bar for announced and total losses (in billions! no less) and you've got yourself a doozy,.....not that I'm trying to make work for anyone.
For how long do they have to be at a particular level (TBD) before you feel comfortable exhaling?
That is probably unknowable; everything could always fall apart at any moment. Obviously, I was wrong to exhale in Sept .
Since what set this whole thing off was home prices ceasing to appreciate, I guess I will exhale when those prices return to a more believable ratio to rents and incomes...
Misean --
I don't think the commercial paper market, if it survives, will have the size necessary to serve as much more a predictor than licking your thumb and sticking it in the air is for weather prediction.
Once the land mines are defused, the commercial paper market will return. There is nothing fundamentally crazy about CP, even asset-backed CP. SIV-issued paper backed by CDOs backed by other CDOs... yes. But CP in general?
Heck, I would argue the entire problem is the collapse of CP, which real-life companies use as their lifeblood. If a bunch of financial firms lose hundreds of billions in purely financial assets, who cares? Let 'em rot in the bed they made. It's only a real problem to the extent it infects the real economy, and the collapse of CP is one of the most obvious transmission mechanisms. If/when it normalizes, I think we will be most of the way through this thing.
Barf. Nobody wants to invest they all want a lottery ticket.
Speculation like this is pretty much proof the system is in deep crisis, because we are all at the gaming table, not the stock market as in buying a piece of a company market.
Ugh. I can't believe it is cheaper to borrow on my credit cards than on margin with Scottrade. 3.9% plus $75 to borrow about 10k for roughly seven years. How can they make a dime off of these offers? Why give them to me, someone who has proven adept at paying consistently and on time?
Homo rationalis has left the building, and we have truly entered the twilight zone. The only explanation is that subconsciously we are all fleeing the dollar and are willing to gamble to get enough to drop into a meaningful investment that will retain something through the change that may be approaching.
Of course the four people left in America under the age of 60 who are solvent and are commenters on this board deign to lend us their hard earned real savings.
Gearing is fatal if you can't service it and avoid crisis in repayment confidence. Okay, we got that message, but now we need a conduit to take investment dollars and put them to work providing mortgages that will be paid. How about a national cram down on all mortgage taken out over the last three(five?) years to the value of the property in 2004(2002?)?
Make them all suffer for this foolishness, and allow homeowners to bear proportionately, not disproportionately.
Of course, that would require socializing the mortgage system, but with a basically nonfunctioning mortgage system anyway, we will shortly have nothing left to lose.
The bigger the problem, the worse and bigger the solution will be to those who have to bear it.
Dodd's presidential committee was sending emails to reporters on Tuesday to raise the matter.
The article, by columnist Ben Stein, said Goldman also was selling the securities short. It said a Goldman Sachs spokesman told the newspaper it "routinely shorts the securities it underwrites and said that this is disclosed."
Paulson headed Goldman Sachs until taking over Treasury last year.
CMOs pool prepayment risks on mortgages and can be bought and sold.
Dodd said he was concerned because it appeared that Goldman Sachs was "aggressively pushing subprime mortgages that they knew to be of concern while simultaneously shorting collateralized mortgage obligations."
....
This time it is different, in that the world population has nearly doubled, and it is now fashionable to grow crops for fuel instead of food. Also, this time the energy costs aren't going back down.
All this talk of 110% loses, 270% loses and all that is wrong. Obviously you cannot talk about more than 100% loses to expected return.
Robert Cote, all it means is that if their initial expected lifetime cumulative net losses on an alt-a deal they rated was say 125bps (ie $12.5M on a $1B pool of loans), that dollar amount of expected lifetime losses to the pool has now been increased by up to 270%.
Link to this video was posted on Greg Mankiw's blog. It is on subprime mortgages and SIV. Should be interesting for readers of this blog, too. John Bird and John Fortune
While I am here, thank you CR and Tanta.
Bush will kill us all! Spiritually, physically, financially. Raines, Mozilo, Paulson, Bush, Cheney, and thousands of others, should be in chains. Instead they are running the friggin' gubbermint! We are friggin' doomed! Doomed!
Okay, okay. I'll take the other side. It won't be so bad. Sure we'll have a hard times, but a lot of those who lived through the Great Depression had a lot of fond memories of overcoming adversity. The only way people will starve is if they can't let go of the all mental chains that keep them running in a rat race they can't win, keeping ahead of those mythical Jones. Maybe getting food should be a higher priority than a Hummer. Maybe we'll see more compassion actually evinced for the other Third World people. Let's face it, most of the commenters are going to be better off relative to the rest of humanity, even if the worst happens. What you're facing is psychic pain from having your economic views put to the test.
I spent the first 35 years without much money and really only had money problems once I had some. Take a deep breath, you guys are going to be fine.
You know I am getting a little pissed off about all the talk about a liquidity crisis. Freddie $6B & now Fannie $7B will end up selling their preferred without a problem. That's a lot of liquidity and no one has to do a jig or host a carnival show to pull it off.
There's no shortage of cash. There might be a shortage of willingness to blow cash on a sure losing deal, but the Fed isn't going to change that dynamic with a few rate cuts.
I think the fed should hold and let the IBs eat cake. The same one they baked.
"There's no shortage of cash. There might be a shortage of willingness to blow cash on a sure losing deal, but the Fed isn't going to change that dynamic with a few rate cuts"
The problem now is that buyers and sellers of crappy asset cannot agree to a price. Liquidity is fine, the market is not.. Buyers cannot afford to sell their asset at what buyer offer because it will bk the companies. So instead of making a transaction, they try to hold onto the asset as much as they can.
What Fed is doing by cutting rate is to help these people by increasing the value of the crappy asset in their book (financial asset become more valuable as the fed rate go down) and make the buyer alternative of investing in Treasury less attractive. The hope is that the seller is more willing to cutting the price and the buyer is more willing to raise the price and the market will unfrozen.. Would it work? Who know. But you can't blame the Fed for trying. There is not much alternative. A frozen market could force a lot of big institution go BK and our entire economic transaction stop (just think that all the BK institution can reject previously unprofitable contract in BK court and payment need to go through BK court etc. What kind of impact will it have to the counter parties and our economy as a whole).
I think you missed the point of my heckle. I was arguing that comparing this period to the 1970s does not make the situation necessarily all that much different. The 1970s were a horrible stagflationary mess.
barely, you are right about liquidity being fine as Fannie and Freddie get their deals done. There have been quite a few bonds issues in the last week or so, including a few large ones by the major banks. They are getting placed just fine as long as they are cheap enough. The levels to me seem reasonable for both borrowers and investors right now. Nothing wrong with some risk premium in the system.
Just shows you that the Fed only really cares about bailing the Street out of bad investments.
Stipanovich, whose brother J.M. ``Mac'' Stipanovich is a Tallahassee lobbyist and Republican strategist who ran former Governor Jeb Bush's campaign for governor in 1994, was appointed executive director of the state board in 2002. - Bloomberg link from Risk Capital
Why Stipanovich for the job? The FEMA post was already filled.
xo, I understand the problem. I don't think risking raging inflation to bail out the market participants that built the debt crisis, by cutting rates to address some crappy assets is a wise choice. Let a few of them fail and the strong survive. Let them do public offerings, like FNM & FRE and see what happens.
The IBs & mortgage lenders are holding the country hostage by not trading and the wimpy fed is letting them dictate monetary policy. Have you heard the tan-man talk it up like it's everyone's best interest for the government HUD, FNM FRE... & FED rate cuts to prop up property prices to bail him out so he can sell more shares and douchebags like Maria Bartiromo endulge his scumbag ass.
For how long do they have to be at a particular level (TBD) before you feel comfortable exhaling?
No matter how good the dope or how tall the bong... at some time or other you have to exhale. I think a few market participants are about to that point. I just hope they don't drop the bong.
Dec. 4 (Bloomberg) -- Orange County, California, the county that in 1994 was bankrupted by bad bets on interest rates, has about 20 percent of a fund it runs invested in structured investment vehicles that may face credit-rating cuts.
I must agree that there is nothing inherently wrong with commercial paper, and it will come back. It just seems that periodically people get cocky and stretch for a little extra yield, and then they get burned. When that happens, everyone draws in their horns and the market disappears for a while. I am thinking Penn Central and Lockheed. Those were both disasters waiting to happen, yet the lenders continued to buy their paper until the last minute - long after it was manifestly clear that there was little chance that the money would be paid back. And then all the other viable commercial concerns got tarred with the same brush and couldn't borrow on the cp market for a while. Short term interest rates shot through the ceiling, until the lender sorted out who was good for the money and who wasn't.
One reason the banks got in so deep on PC and Lockheed was there was an implicit belief that the government would bail them out - they were both supposedly essential to national defense. In the end, the government let PC sink and bailed Lockheed. I wonder if the same attitudes will come into play with Fannie and Freddie. It will be interesting to see how much Fannie has to pay for it's $7 billion - surely not as much as Citi did...
NY Times - Fund Crisis in Florida Worrisome to States - Mr. Stipanovich said he made the decision to resign while driving to yesterday's board meeting. In an interview, he declined to discuss the fund's investment decisions on the record. "I'm not going to go there," he said. "We're in the move-on stage." (Don't you just hate guys like that?) Fund Crisis In Florida Worrisome To States - NY Times
News Flash: Buffett buying H&R Blocks Option One Lender... oops he already owns it. Scratch that- New Flash: Paulson anounces Prince Abudabi investment fund buying Option One... sheesh all is well.
I heard that a BB randomly laid off some of their 1st yr bankers in their restructuring process. Can you imagine what a career bummer that is? where are they gonna go now that the market is so bad?
sbarrkum - that was like reading Monster Tech Forum circa 1999... like Pets.com is a really cool place to work, right?
My father used to say that nothing has fundamentally changed in business since the time the Phoenicians started paddling around the Mediterranean selling blue cloth until now. A forum like that proves he was right.
That nytimes writer comes to a slightly different conclusion - that the top rated effectively got sold at 60cents in the dollar whereas Brian put some value on some other assets and came up with 50 cents.
NB: Nope, I'm not making accusations of plagiarism - that's Brian's call. I'm just glad this has hit the MSM.
It's too bad the blog didn't get a mention. CR and Tanta deserve recognition for what they contributed to the discussion of this mess we are all trying to slog through.
You know that every business writer there covering the mortgage meltdown is reading this blog, they just can bring themselves as an institution to concede there is a point of view beyond the paper of record (oh, and Gretchen has threatened to castrate any reporter that points readers in Tanta's direction!)
£234bn of mortgages put in trusts supposedly for the benefit of good causes
.....
A dozen of the country's best-known banks and financial institutions have raised funds on the back of £234bn-worth of home loans over the past seven years, using trusts which have charitable status but rarely give anything to charity.
Officials of the Charity Commission are already examining Northern Rock after the Guardian reported last week that it was using the name of a small charity for children with Down's syndrome. That inquiry now looks likely to be expanded, with the activities of up to 11 more banks coming under scrutiny, and the commission seeking to establish whether any have breached UK charity law.
The trusts were all set up during an elaborate process known as securitisation, which has increasingly replaced the traditional mortgage model in which banks made loans to home buyers and held on to the loans until they were paid off.
Over the last seven years, banks have been pooling many of their loans and turning them into mortgage-backed securities which can then be sold to large investors.
The banks have been doing this through trusts which they can control without owning, isolating financial risks, and keeping their liabilities off their balance sheets in a way that makes them appear more profitable. By giving the trusts a charitable status, they can be operated indefinitely. The trusts are not obliged to make any payments unless they are eventually wound up, and even then the amount any charity might receive would be only a small fraction of the sums raised.
Of the 12 institutions investigated by the Guardian
Was it the 60's. The air (make whatever you mean out of that) that made us (or it seemed a majority) want to be a field that made a difference. maybe naivete.
I must agree that there is nothing inherently wrong with commercial paper, and it will come back.
I'd say about half of the ABCP market was garbage at it's peak. From 2001-2004 the ABCP market was pretty steady at 600B. Then, it almost doubled in 3 short years before it collapsed.
I have a hard time believing that Wall Street just happened to find 500B in quality assets to spin into securities after 2005.
I believe, a large part of the explosion of the ABCP market was tied to the explosion in credit default swaps (CDS). Credit default swaps were a common form of credit enhancement used to secure the credit ratings needed to issue paper into the ABCP market.
Conduits could "reduce risk" by buying credit default swaps against the very securities they were holding. In effect, it was as if a company could improve its credit ratings through issuing debt and then buying insurance against defaulting on that debt.
As demand for CDS increased and vehicles like CPDOs were introduced into the market the cost of buying protection decreased dramatically between 2002-2003.
I believe that CDS premium were underpriced from 2003-07 and that this distorted the markets in many ways. Corporate bond yields were compressed. It became easier for risky companies to get funding so defaults dropped. That decreased the defaults and further dropped the cost of buying protection in the CDS market. The LBO market bloomed and equities rallied. A "virtuous" cycle.
And the ABCP market exploded as conduits could increase leverage through buying cheap insurance in the CDS market.
Of course, everything works until it doesn't. Once the price of credit default swaps bottomed and turned in early 2006 the cost of the credit enhancements got more expensive. Less could be purchased and conduits had to decrease leverage. As assets started to trickle onto the market they found little interest from direct buyers and the prices for those assets dropped. Dropping asset prices drove up default risk and the costs of protection for the companies that were creating those assets.
Amazing that we are seeing cascade effects.
I only queston how long before this causes total seizure of the housing lending markets.
I no longer question that this is leading to massive systemic risk throughout the entire credit market system and will only be repaired through massive losses and socialization of some of those losses.
I can hardly wait for reality to dawn on the political classes of the breathtaking depth of this crisis.
I note that our foreign debtholders would be wise to sell into a flight to quality that we are undergoing as they begin to unwind our insane levels of leverage.
Someday this war's gonna end...
AllenM,
I see no reason any American saver should accept anything but "free market terms" just like the Dubai investors received from CITI. Socialization of losses and privatization of profits? NO WAY.
AllenM,
I think we are seeing the beginnings of the cascade effects - it will be waaaay too interesting if this blows and we explore the limits of counter-party risk in the CDS market - which may reveal the assumption of netting exposures against each other didn't fully consider that eventuality.
and is it just me or does it seem like the tempo of this sh!t is picking up...
Moody's, ha! I wouldn't listen to a MF thing any of those maggots have to say. They are summarily full of crap and always have been.
Geez edgar, would you stop beating around the bush and tell us what you really think?
Energyecon,
The CDS market is the scariest story of all. Whenever I read about it, I want to overweight my "boys in the hood" portfolio: Gold (aka bling), guns and pit bulls.
--
Fannie Mae (FNM) -- a gift that keeps on giving.
I had tons of FNM puts that I sold and was able to buy some back on the bounce in the Scam.
FNM and FRE are some of the better Scams to profit, on the short side, from America's criminalized financial system.
It would be interesting to see how the faith in the system holds up during the depression.
Jas
I'm even more confused and also a bit angry with the reportage.
If the old estimate was a 1% hit to a product previously yielding 9% and the new estimate was a 110% increase in that loss I'm still getting 7.9% right? I can even live with a 270% increase in losses to make my return a mere 6.4% or so.
Or maybe my principle is only worth some odd cents but still returns the 9% on the original value?
I know I'm stupid. Don't rub it in. Just tell me what these loss estimate increases mean in terms of principle and return. I'd like something that said for every $100 invested expecting 9% per year the new value is $75 yielding 12% per year.
"and is it just me or does it seem like the tempo of this sh!t is picking up..."
Today has been intense. If tomorrow and the next day are like today, or nearly, then yes, I'd call it a trend.
ow CR, can't u spread this shit out alittle bit?
MAB,
One should ALWAYS overweight guns...and twinkies, lots of twinkies!
Energyecon,
The tempo has definately picked up...so why isn't MLEC dead????? More Seriously we are now seeing a pattern of bottom feeding/bailouts, Abu Dabi/Citadel/MS-Lennar etc. I actually think it is good news on balance that the paralysis period seems to be ending...of course I think most things are good news.
Jas Jain |
yeahe baby. i was shorting on the way up too but was sweating bullets on the 3rd an 4th day of the bounce. now sweet.
You're gonna lose the younger crowd if you keep talking so much about Beaver and the Freddie.
Beaver doesn't mean what it used to.
idoc, re: "yeahe"
The silent 'e' is brilliant.
Hey, all is good until the olympics next summer, then the chinese will most likely revalue their currency and use the money taken from silly traders to improve their internal economy sufficient to generate enough internal demand to retain the massive exports that were scheduled for Xmas '08.
At least that is what I would do, as the closing ceremonies wind down, so does their commitment to those pesky dollar reserves.
Contemplate that for an interesting election in '08. Plan for the worst, hope for the best.
Someday this war's gonna end...
Banker, how can we tell the difference between bottom feeding and force feeding?
Alo,
Disinterested third party playing is how I differentiate. Morgan Stanley Lennar is clearly unforced as was Citi Abu Dabi...from the buyside that is. If you are asking were Citi and Lennar "forced" to do something to raise capital? You betcha.
Hmmm, maybe I don't understand the question
Thinking a bit more about tempo, perhaps we shouldn't be surprised, it is December after all. Wouldn't senior management of all the players, from RA's to banks to IB's to hedgies etc. generally prefer to get as much as possible jammed into what is already a terrible fiscal year and clear the decks (to the degree possible) for 2008????
OT, but I put together some charts that I wanted to share.
I took the Case Shiller composite data since 1987 and used the last peak-trough cycle to project out where prices may go. Looking at the NYT plot of the inflation adjusted index since the late 1800s, I saw that the bottom in the mid-90s was about 10% above the bottom in the mid-80s. So I took the same shape/timeframe of the 90's cycle, and scaled it to the 2006 peak to get down to 110% of the 1997 low. I used historical full CPI for inflation adjustment, and assumed 2.5% for inflation going forward for the projections. The prediction has real prices down 52% and nominal prices down 42% at the end of 2013.
Real: Flickr: Image
Nominal: Flickr: Image
I also did the same for LA prices (since I live there). Here I assumed a return to 125% of the previous low (a little more conservative). Real declines are 57% and nominal 46%. That equates to a SFR median price of $300k in 2013!
Real (LA): Flickr: Image
Nominal (LA): Flickr: Image
A couple of points... in the national charts, there is a sort of "double peak". I projected out from the second peak, although it was slightly lower than the first. Also, even though there is only a year overlap in the post-peak predictions and the actual data, the trends are strikingly similar. I'll be updating these on an ongoing basis.
You're gonna lose the younger crowd if you keep talking so much about Beaver and the Freddie.
Beaver doesn't mean what it used to.
Yes it does, it just squeems out the youngers to think we fossils know what it means.
On topic, I'm still wondering what "loses" mean in this context. Loss to return? Principal? NPV of the combined? Mark to Market regardless of return?
20% already and this is still just the starting phase.
And remember none of these numbers include the effects of rising unempmloyment or all of the ridiculous loans made to 'Prime' home-owners. We've seen nothing yet.
So Banker, have you hedged your forward deliveries of Pom and caviar?
I forsee the dollar bottom that folks are calling might be premature, as folks begin selling their toxic waste to get something out of this mess. Small towns in Norway, excepted of course.
Seriously, Banker what happens when this crisis goes systemic? Will the feds reactions tend to drive foreign investment out of our markets due to fears of devaluation? Will we have to raise rates to stem a panic run on the dollar?
Someday this war's gonna end...
There is no surprise here. We all know Alt-A is just larger loan subprime. Unless there was significant skin in the game (30% plus), most recent Alt-A is headed toward default. The only thing that will solve this mess is an unmanipulated market correction/cleansing. Gov't intervention will just prolong the problem and probably make it worse.
Energyecon,
I agree about CDS -- probably the most important threat to the financial system, and yet not well understood.
CDS is really the "root of all evil" in the credit markets, when you think about it.
It was CDS demand that brought down credit spreads to bubble levels. Just a bunch of speculators charging "nickels" for insurance on an "impossible" event. They ended up insuring some $45tr of risk -- much more than the outstanding debt being insured.
The resulting decline in spreads sent a price signal to the markets: Default risk has evaporated! Reach for yield! Lever at will! The chain reaction led all the way to risk layering in subprime mortgages.
And now, out there, somewhere, the writers of this insurance are effectively bankrupt. They have little or no reserves. They are the failed counterparties that will vomit their trades back on the brokers' books; and when that happens, the brokers will buy every put option in sight to hedge their ballooning exposure.
A bit sensationalist, I know, but the chances are high.
20% already and this is still just the starting phase.
Caution. the last 15-20% was "froth." Meaning an unstable mix. On one one person in the entire US bought at the top. The last 15-320% wasn't price discovery it was more of a case of outlying exceptions being exposed as the body of the price curve retreated.
For every downgrade these ratings agencies make, they should be forced to explain why they rated it AAA in the first place.
Seriously, Banker what happens when this crisis goes systemic?
It went systemic a year ago.
Please, try to keep up with the rest of the tour group!
AllenM,
You don't this situation is "systemic" already? The dollar has gotten pretty beaten up already too. What we seem to be learning is that all of the foreigners who bought US Treasuries over the past decade have a great deal of skin in the game and seeimngly will act to protect that skin. Now could the Fed and the gov screw up from here?????
Are you seriously asking that
Oh no Broward, we are not anywhere the realization that it is systemic.
That realization dawning on the fed, the big wall street folks, congress, and finally main street will lead to unbelievable changes in the system.
We are nowhere near that revelation, and if the fed and poulsan can somehow manage containment.
I think they will fail, but then I have been wrong many times before...
But still...
Someday this war's gonna end....
Surely Ben Stein can offer some BS on how this is just 0.002% of the accessible wealth in the universe or something.
This whole thing reminds me of my uncle and his neighbor who earned $200 a week by selling the same stray dog back and forth between them every friday, raising the price $200 each week. Alas, the dog got run over, killed dead, when worth $4800 on the previous sale.
As all the sales had been financed by the seller, they finally agreed to split the original cost of the dog (zero) and let the paper evaporate, and each deducted capital losses of about $2,400 each against gains in that new fangled Microsoft thing they'd put real money into.
So many people are going to lose money on this fiasco, and they did it on purpose. hahahaha!!! I can't wait until the people who didn't participate in the housing fraud start realizing they lost money. hahaha!! The whole system is gutless and weak, and everyone who stood by while the chimp looted our gubbermint deserve to suffer for it. hahaha!!
OT, but close to home:
Lennar is apparently mothballing a huge portion of Central Park West, which will be a hell of a blight on Irvine. See the WSJ stub article here
Very close to home:
Lennar is selling its interest in a hotel complex in Long Beach, CA back to original investor.
More generally:
Lennar sells $1.3 billion of land to a Morgan Stanley land venture for $525 million and a stake in the venture. The South Florida Business Journal article is here
Wow. That's some quick work to stop the bleeding.
Robert Coté, there is frustrating lack of details in the Reuters report. Hopefully we will get some more details soon.
Best Wishes.
Banker,
Serious question: What would be some clues to look for that would indicate the credit market is returning to normal?
PS: As I've said before, there's no available evidence as to what exists within the mortgage based instruments. A grab bag is usually free....hmmm, maybe the Wall St. firms can have a holiday swap? Might be some regifting.
from mad-eye (sorry no link):
On November 27, 2007, Moody's completed a review of all outstanding non-Option ARM Alt-A RMBS rated in Q4 2005 and in 2006. As a result of the review, a total of 222 securities issued in 2005 and 1,247 securities issued in 2006 were downgraded and/or placed under review for possible downgrade. The affected tranches issued in 2005 have an original balance of $1.5 billion, representing 0.4% of the original dollar volume of Alt-A RMBS rated by Moody's in 2005. The original balance on affected tranches issued in 2006 totals $10.2 billion, or 2.5% of Moody's-rated Alt-A RMBS from that year.
The methodology Moody's used to update its loss estimates for the reviewed transactions was to separately project ultimate losses for the delinquent and non-delinquent portions of the loan pools.
For the delinquent portions of the pools, Moody's applied roll rates of 25%, 65%, 90%, and 100% to 60-day delinquencies, 90+-day delinquencies, foreclosures, and REO, respectively, and applied severities of 25% to 30%, to forecast expected pipeline losses. For pools with less than 18 months of seasoning that had growing delinquency pipelines, Moody's projected delinquencies, foreclosures, and REO out to 18 months and then applied the roll-rate analysis described above.
For the non-delinquent portion of the pools, estimated losses were driven by Moody's new Alt-A rating methodology that was adopted in August. Estimated losses were also informed by overall issuance shelf performance.
As a result, Moody's lifetime loss estimates on the pools included in the review increased by as much as 270% over initial expectations, with an average increase of 110%. Moody's intends to publish shortly its revised expected loss estimates on a transaction by transaction basis.
$100B here, a $100B there, and you're talking real money.
Honestly this has just got silly.
Banker may be right that these clowns are loading up on the bad news now to clear the desks. The problem is the poop on the desks is rising up from the holds, and they aren't nearly empty yet.
Cheers,
Think of it this way Misean. Dubai et al will make some initial investments, to keep certain "reputable" firms from going under. For them, it's a drop in the bucket. And they will extract some hide in terms of terms. Through these actions, they will try to create a bottom. If it doesn't work, so what? They've got tons of money, dollar cost down when the firm looks like it's on the ropes again, and squeeze some more blood. Eventually, you've got yourself a 1st rate US IB at a super discount. No place to go but up from there.
Loading up on the bad news? Are you sure they're not just reporting on things as they're discovered, and there's just an increasing amount of bad news to report??
we are not anywhere the realization that it is systemic.
Okay, I'll buy that. I half suspected it was systemic when the mortgage lenders were BOOOOOM all at once.
But even I am surprised by 20%+ mortgages underwater within another quarter or two.
Oh Lama,
Serious question: What would be some clues to look for that would indicate the credit market is returning to normal?
Someone asked me this in August and I answered with a series of hurdles that began happening in late October and I looked smart...right up until the train ran off the tracks again
There will be things no outsiders can see that will happen like trading desks getting allocated more capital to work with, regular secondary trading in leveraged loans, HY bonds and super senior MBSW and the narrowing of risk premia on each of them. The things we WILL be able to see will be lagging indicators including a bundle of new issues in each of those markets. I don't think those of us on the outside will really know until a couple of weeks after things begin to improve. The bigger problem is that, just like a troubled market doesn't mean much unless it is for an extended period, neither does a rallying one. A bigger question is when will we know that improving credit markets are at least stable with some measure of reliable liquidity???? Your guess is as good as mine as to how we measure that. Sorry.
TJ,
Are you sure they're not just reporting on things as they're discovered, and there's just an increasing amount of bad news to report??
Nope. But the timing does give one pause.
Given all the states, countries and private money markets that have been burned, it's difficult for me to see how ABCP is going to sell again for a long time to come.
In fact, the whole concept of securitization seems very much in doubt right here.
When you take a poop in the punch bowl, you generally don't get invited back to a party for a while.
Wasn't the whole "cathartic disclosure of all the losses and bad news" by the Wall Street firms supposed to happen last quarter? I guess it'll be true eventually.
Is this bad for DSL, FED and/or BKUNA?
Don,
"I guess it'll be true eventually."
Yep so will a stopped clock. The predictions of, whew, well there goes the last of the bad news, are simply attempts to bouy confidence in this con game. MHO.
Cheers,
over the top panic from the CR faithful. what else is new.
Where are the Japanese, Chinese and other Asian financial institutions in all this? I haven't really heard any confessions from them and they have to be bagholders on a lot of this crap. Right?
Oh no Broward, we are not anywhere the realization that it is systemic.
Exactly - its still 'contained' to sub-alt-prime... sort of the financial equivalent of ctrl-alt-del...
Banker (and Lama) --
Won't the <a href="http://www.federalreserve.gov/releases/cp/>commercial paper spreads give a good hint of when things are stabilizing?
Deja vu all over again!
Orange County Says 20% of Fund in SIV Debt, Faces Rating Review
By William Selway and Michael B. Marois
Dec. 4 (Bloomberg) -- Orange County, California, the county that in 1994 was bankrupted by bad bets on interest rates, has about 20 percent of a fund it runs invested in structured investment vehicles that may face credit-rating cuts.
In the $2.3 billion short-term fund, the county holds a total of $837 million of SIV debt, including $460 million under review for a possible downgrade, officials with the county treasurer's office said. All the debt still carries a top rating. None of it is held in the $3.5 billion of money-market type funds the county operates, they said.
[snip]
Nemo,
That's a pretty good barometer, or one of them anyway, but here's the bigger question: For how long do they have to be at a particular level (TBD) before you feel comfortable exhaling?
Back to the future!
Orange County Says 20% of Fund in SIV Debt, Faces Rating Review
By William Selway and Michael B. Marois
Dec. 4 (Bloomberg) -- Orange County, California, the county that in 1994 was bankrupted by bad bets on interest rates, has about 20 percent of a fund it runs invested in structured investment vehicles that may face credit-rating cuts.
In the $2.3 billion short-term fund, the county holds a total of $837 million of SIV debt, including $460 million under review for a possible downgrade, officials with the county treasurer's office said. All the debt still carries a top rating. None of it is held in the $3.5 billion of money-market type funds the county operates, they said.
A Florida local-government investment pool lost half its $27 billion in assets before managers froze the fund after cities and school districts withdrew their money after learning it held downgraded and defaulted commercial paper sold by SIVs.
Finance officials with the Orange County Treasurer's office said the SIV debt it holds continues to meet its obligations and there is virtually no exposure to risky mortgages in them.
We don't have the same kind of debt that Florida has,'' said Paul Cocking, the chief portfolio manager for the county.They're all highly rated assets.''
SIVs are typically offshore companies created by banks and other firms to sell low-yielding short-term debt, using the proceeds to buy higher-yielding mortgage securities, some backed by subprime mortgages, and finance company bonds.
Robert Coté, there is frustrating lack of details in the Reuters report. Hopefully we will get some more details soon.
Best Wishes. CalculatedRisk
I'm not as sanguine. All this talk of 110% loses, 270% loses and all that is wrong. Obviously you cannot talk about more than 100% loses to expected return. That means they are talking about some form of either margin call (very very bad) or redemption freeze (very bad) or asset revaluation (just plain old bad). But that isn't true either is it? There is leverage and there are strips and tranches and insurance and more. I'd like a set of numbers that let me establish a valuation. Some unanchored loss ratio doesn't do that. I'm getting the feeling that we don't see the actual values because the people responsible for the reportage haven't protected themselves yet.
energyecon,
Deja vu all over again!
World Food Prices to Jump
The last time the world experienced such food price increases was in 1973 to 1974 ... but today the situation is completely different.
Yeah, uh huh, completely different.
Quite the Tuesday Tsunami of bad news! I was thinking that things will stay afloat until the new year, but not if the headlines keep screaming like they have the last 2 weeks. It still tickles me that the FED is setting up for a slash and burn campaign on interest rates when the markets are POSITIVE for the year. Somebody has something wrong, and its becoming clearer every day.
Banker,
There were various hedge funds bottom fishing all last year. Heck, the Cerebus deal was exactly that. People willing to call a bottom and jump in. Why is the CFC, etrade, Lennar or Citi deals any different? Scale? The people involved? Just the fact that they are happening?
JJL,
Somebody has something wrong, and its becoming clearer every day.
Time Magazine: Gloomy Holidays--and Worse Ahead, December 9, 1974
Though the economy has been drifting down all year, the slide has been so gentle for so long that the Nixon and Ford Administrations felt it possible to deny that the nation was in a recession at all. As recently as October, Commerce Secretary Frederick Dent asserted that the economy was only going through a period of "sideways waffling." Now, though, the slide has suddenly become something more like a nosediveby some measures, the worst since the 1930s.
...
When the new Administration unpacked its bags last summer, its economists reckoned that the blowouts in housing, auto and retail sales would take place gradually over a period of many months. None foresaw that so much damage would be compressed into the first three months of the Ford presidency.
Nemo,
I don't think the commercial paper market, if it survives, will have the size necessary to serve as much more a predictor than licking your thumb and sticking it in the air is for weather prediction.
Cheers,
Amazing that this inept asshole was allowed to resign-
Florida Investment Chief Quits; Fund Rescue Approved (Update4) - Bloomberg.com
I've been out since lunch (2 fish tacos, homemade chips & 1 crab cake, water w/lemon for under $10 w/20% off coupon).. On to Target and Kohl's to Christmas shop (Ugh) and was surprised by the lack of shoppers especially in Kohl's even with big discounts and 15% off for senior citizens like me. I had never been in a Kohl's before and was pleased enough with the selection and prices to pretty much finish my holiday shopping without ever stepping into a mall. I also received a $20 'cash' Kohl's coupon good 12/9 to 12/20. I'm now @ the PC w/J&B. What did a miss? Yikes!
Cal,
The desire to believe that things are improving - and at some point they will be - I just don't think we have hit the blood in the streets capitulation. And whomever makes that correct bottom call is going to do fabulously well. And if you are making the bet with OPM, well why not?
Robert C,
My immediate impression was that was the percent increase from the original loss estimate - say N billion, is now 1.1N or 2.7N - which still represents some fraction of the size of the original investment (albeit larger).
I can hardly wait to see the Timeline of bad news plotted against the stock market and housing data. I guess it's a little premature since we still have yet to see the resets of '08. Add a stacked bar for announced and total losses (in billions! no less) and you've got yourself a doozy,.....not that I'm trying to make work for anyone.
Banker --
For how long do they have to be at a particular level (TBD) before you feel comfortable exhaling?
That is probably unknowable; everything could always fall apart at any moment. Obviously, I was wrong to exhale in Sept
.
Since what set this whole thing off was home prices ceasing to appreciate, I guess I will exhale when those prices return to a more believable ratio to rents and incomes...
Misean --
I don't think the commercial paper market, if it survives, will have the size necessary to serve as much more a predictor than licking your thumb and sticking it in the air is for weather prediction.
Once the land mines are defused, the commercial paper market will return. There is nothing fundamentally crazy about CP, even asset-backed CP. SIV-issued paper backed by CDOs backed by other CDOs... yes. But CP in general?
Heck, I would argue the entire problem is the collapse of CP, which real-life companies use as their lifeblood. If a bunch of financial firms lose hundreds of billions in purely financial assets, who cares? Let 'em rot in the bed they made. It's only a real problem to the extent it infects the real economy, and the collapse of CP is one of the most obvious transmission mechanisms. If/when it normalizes, I think we will be most of the way through this thing.
CR,
Here is the Moodys report released today, you have to have a Moodys account to see it I believe:
Moodys.com
OPM- well why not?
That about sums it up in a nutshell.
2 and 20 and pray and slay.
Barf. Nobody wants to invest they all want a lottery ticket.
Speculation like this is pretty much proof the system is in deep crisis, because we are all at the gaming table, not the stock market as in buying a piece of a company market.
Ugh. I can't believe it is cheaper to borrow on my credit cards than on margin with Scottrade. 3.9% plus $75 to borrow about 10k for roughly seven years. How can they make a dime off of these offers? Why give them to me, someone who has proven adept at paying consistently and on time?
Homo rationalis has left the building, and we have truly entered the twilight zone. The only explanation is that subconsciously we are all fleeing the dollar and are willing to gamble to get enough to drop into a meaningful investment that will retain something through the change that may be approaching.
Of course the four people left in America under the age of 60 who are solvent and are commenters on this board deign to lend us their hard earned real savings.
Gearing is fatal if you can't service it and avoid crisis in repayment confidence. Okay, we got that message, but now we need a conduit to take investment dollars and put them to work providing mortgages that will be paid. How about a national cram down on all mortgage taken out over the last three(five?) years to the value of the property in 2004(2002?)?
Make them all suffer for this foolishness, and allow homeowners to bear proportionately, not disproportionately.
Of course, that would require socializing the mortgage system, but with a basically nonfunctioning mortgage system anyway, we will shortly have nothing left to lose.
The bigger the problem, the worse and bigger the solution will be to those who have to bear it.
Someday this war's gonna end...
Sen Dodd questions on Paulson's role at Goldman
Dodd's presidential committee was sending emails to reporters on Tuesday to raise the matter.
The article, by columnist Ben Stein, said Goldman also was selling the securities short. It said a Goldman Sachs spokesman told the newspaper it "routinely shorts the securities it underwrites and said that this is disclosed."
Paulson headed Goldman Sachs until taking over Treasury last year.
CMOs pool prepayment risks on mortgages and can be bought and sold.
Dodd said he was concerned because it appeared that Goldman Sachs was "aggressively pushing subprime mortgages that they knew to be of concern while simultaneously shorting collateralized mortgage obligations."
....
Stag mark-
This time it is different, in that the world population has nearly doubled, and it is now fashionable to grow crops for fuel instead of food. Also, this time the energy costs aren't going back down.
Peak Oil == Peak Food.
"Time Magazine: Gloomy Holidays--and Worse Ahead, December 9, 1974"
I'd love to see a Time cover like that now -- it would tell me we're close to a bottom.
I think Moody's knows a thing or two about how to boil a frog.
Thanks to the tadpoles here at CR to keep us mindful of the temperature around here.
All this talk of 110% loses, 270% loses and all that is wrong. Obviously you cannot talk about more than 100% loses to expected return.
Robert Cote, all it means is that if their initial expected lifetime cumulative net losses on an alt-a deal they rated was say 125bps (ie $12.5M on a $1B pool of loans), that dollar amount of expected lifetime losses to the pool has now been increased by up to 270%.
Link to this video was posted on Greg Mankiw's blog. It is on subprime mortgages and SIV. Should be interesting for readers of this blog, too.
John Bird and John Fortune
While I am here, thank you CR and Tanta.
Bush will kill us all! Spiritually, physically, financially. Raines, Mozilo, Paulson, Bush, Cheney, and thousands of others, should be in chains. Instead they are running the friggin' gubbermint! We are friggin' doomed! Doomed!
geez, I thought I had BDS . . .
Nemo,
You're pretty sure "this thing" is a temporary situation, eh? Soon to be contained.
Okay, okay. I'll take the other side. It won't be so bad. Sure we'll have a hard times, but a lot of those who lived through the Great Depression had a lot of fond memories of overcoming adversity. The only way people will starve is if they can't let go of the all mental chains that keep them running in a rat race they can't win, keeping ahead of those mythical Jones. Maybe getting food should be a higher priority than a Hummer. Maybe we'll see more compassion actually evinced for the other Third World people. Let's face it, most of the commenters are going to be better off relative to the rest of humanity, even if the worst happens. What you're facing is psychic pain from having your economic views put to the test.
I spent the first 35 years without much money and really only had money problems once I had some. Take a deep breath, you guys are going to be fine.
You know I am getting a little pissed off about all the talk about a liquidity crisis. Freddie $6B & now Fannie $7B will end up selling their preferred without a problem. That's a lot of liquidity and no one has to do a jig or host a carnival show to pull it off.
There's no shortage of cash. There might be a shortage of willingness to blow cash on a sure losing deal, but the Fed isn't going to change that dynamic with a few rate cuts.
I think the fed should hold and let the IBs eat cake. The same one they baked.
Subprime Rate Five Year Fix Eyed by U.S. Regulators, Lender "Five years sounds about right." 2012? 2020 more like it...
Subprime Rate Five-Year Fix Eyed by U.S. Regulators, Lenders - Bloomberg.com
"There's no shortage of cash. There might be a shortage of willingness to blow cash on a sure losing deal, but the Fed isn't going to change that dynamic with a few rate cuts"
The problem now is that buyers and sellers of crappy asset cannot agree to a price. Liquidity is fine, the market is not.. Buyers cannot afford to sell their asset at what buyer offer because it will bk the companies. So instead of making a transaction, they try to hold onto the asset as much as they can.
What Fed is doing by cutting rate is to help these people by increasing the value of the crappy asset in their book (financial asset become more valuable as the fed rate go down) and make the buyer alternative of investing in Treasury less attractive. The hope is that the seller is more willing to cutting the price and the buyer is more willing to raise the price and the market will unfrozen.. Would it work? Who know. But you can't blame the Fed for trying. There is not much alternative. A frozen market could force a lot of big institution go BK and our entire economic transaction stop (just think that all the BK institution can reject previously unprofitable contract in BK court and payment need to go through BK court etc. What kind of impact will it have to the counter parties and our economy as a whole).
Florida Just First to Face National Run on the Bank...
Florida Just First to Face National Run on the Bank: Joe Mysak - Bloomberg.com
Recession, Energy Worries Turn Americans Gloomier, Poll Finds...
Recession, Energy Worries Turn Americans Gloomier, Poll Finds - Bloomberg.com
Matt,
I think you missed the point of my heckle. I was arguing that comparing this period to the 1970s does not make the situation necessarily all that much different. The 1970s were a horrible stagflationary mess.
Peter Principle,
I'd love to see a Time cover like that now -- it would tell me we're close to a bottom.
No kidding. In sharp contrast, here's the November 25, 2007 cover.
The Luxury Index
Here's the September 16, 2007 cover.
The Global Luxury Survey
Hope
May not be warranted at this point.
Perfect for Asset Strippers
barely, you are right about liquidity being fine as Fannie and Freddie get their deals done. There have been quite a few bonds issues in the last week or so, including a few large ones by the major banks. They are getting placed just fine as long as they are cheap enough. The levels to me seem reasonable for both borrowers and investors right now. Nothing wrong with some risk premium in the system.
Just shows you that the Fed only really cares about bailing the Street out of bad investments.
The $42 Billion Bomb Citi Doesn't Want You to Know About
The $41B Bomb Citi Doesn't Want You to Know About -- Seeking Alpha
Goldman mortgage desk conference call today: 16 weeks of a frozen jumbo mortgage market, and counting.
Private-label (non-Fannie,Freddie) MBS spreads are now wider than in August.
Stagflationary Mark,
That's so awesome. Looks like we're at the top! Long way down I imagine.
Nemo,
"There is nothing fundamentally crazy about CP, even asset-backed CP. SIV-issued paper backed by CDOs backed by other CDOs... yes."
Yes but that is my point. Without the exclusions you make the market will be decidedly smaller. That was my point exactly.
Cheers,
Stipanovich, whose brother J.M. ``Mac'' Stipanovich is a Tallahassee lobbyist and Republican strategist who ran former Governor Jeb Bush's campaign for governor in 1994, was appointed executive director of the state board in 2002. - Bloomberg link from Risk Capital
Why Stipanovich for the job? The FEMA post was already filled.
xo, I understand the problem. I don't think risking raging inflation to bail out the market participants that built the debt crisis, by cutting rates to address some crappy assets is a wise choice. Let a few of them fail and the strong survive. Let them do public offerings, like FNM & FRE and see what happens.
The IBs & mortgage lenders are holding the country hostage by not trading and the wimpy fed is letting them dictate monetary policy. Have you heard the tan-man talk it up like it's everyone's best interest for the government HUD, FNM FRE... & FED rate cuts to prop up property prices to bail him out so he can sell more shares and douchebags like Maria Bartiromo endulge his scumbag ass.
Why Stipanovich for the job? The FEMA post was already filled.
Lets wait and see if he gets a consulting gig with one of the IB's. /sarcasm
For how long do they have to be at a particular level (TBD) before you feel comfortable exhaling?
No matter how good the dope or how tall the bong... at some time or other you have to exhale. I think a few market participants are about to that point. I just hope they don't drop the bong.
Don;t know whether this has been posted:
Dec. 4 (Bloomberg) -- Orange County, California, the county that in 1994 was bankrupted by bad bets on interest rates, has about 20 percent of a fund it runs invested in structured investment vehicles that may face credit-rating cuts.
Orange County Says 20% of Fund in SIV Debt, Faces Rating Review
dryfly,
Well I'm not sure I disagree with the bong index assessment, but it brought to mind this. For all to enjoy, no?
Don't spill the bong water:
YouTube - Ozzy Osbourne Sweet Leaf & War Pigs
Cheers,
I must agree that there is nothing inherently wrong with commercial paper, and it will come back. It just seems that periodically people get cocky and stretch for a little extra yield, and then they get burned. When that happens, everyone draws in their horns and the market disappears for a while. I am thinking Penn Central and Lockheed. Those were both disasters waiting to happen, yet the lenders continued to buy their paper until the last minute - long after it was manifestly clear that there was little chance that the money would be paid back. And then all the other viable commercial concerns got tarred with the same brush and couldn't borrow on the cp market for a while. Short term interest rates shot through the ceiling, until the lender sorted out who was good for the money and who wasn't.
One reason the banks got in so deep on PC and Lockheed was there was an implicit belief that the government would bail them out - they were both supposedly essential to national defense. In the end, the government let PC sink and bailed Lockheed. I wonder if the same attitudes will come into play with Fannie and Freddie. It will be interesting to see how much Fannie has to pay for it's $7 billion - surely not as much as Citi did...
NY Times - Fund Crisis in Florida Worrisome to States - Mr. Stipanovich said he made the decision to resign while driving to yesterday's board meeting. In an interview, he declined to discuss the fund's investment decisions on the record. "I'm not going to go there," he said. "We're in the move-on stage." (Don't you just hate guys like that?)
Fund Crisis In Florida Worrisome To States - NY Times
FFDIC,
"(Don't you just hate guys like that?)"
Does wanting to bash a hatchet in their skulls repeatedly qualify as hate?
Cheers,
dryfly: I just hope they don't drop the bong.
A bong? I think they have been using a vaporizer.
Hey Dude, I've got some Purple Ito.
30 minutes later...
Dude, what if the whole financial system was like some big container, and price movements were like some molecules of gas.
Yeah, Dude, and then they collide and move like randomly.
Man, Dude, I think we can totally make some cash from this.
Let's do it, Dude!
dr strangemoney,
Can't do it...had a whole securitization of weed going...can't do it.
Cheers,
Subprime Rate Five Year Fix Eyed by U.S. Regulators, Lender "Five years sounds about right." - Bloomberg from FFDIC
Note the five year time frame... not four years or six years but five... like as in one day past the NEXT [mid-term] presidential election.
F-in' bastards. Just about the time I think I'm as cynical as a person can get I read something like this and discover I have a whole nuther gear.
Mise - thanks for the Ozzy hit. I needed that.
dryfly,
I have Super Colander Tin Foil Hats for sale. Join the club
Cheers,
News Flash: Buffett buying H&R Blocks Option One Lender... oops he already owns it. Scratch that- New Flash: Paulson anounces Prince Abudabi investment fund buying Option One... sheesh all is well.
site for young (maybe middlaged) IB
e.g. posts
by PoshMonkey (Chimp, 6 Banana PointsPoints) on 12/4/07 at 9:42pm
I heard that a BB randomly laid off some of their 1st yr bankers in their restructuring process. Can you imagine what a career bummer that is? where are they gonna go now that the market is so bad?
Goldfinger:
YouTube - YOU EXPECT ME TO TALK?
Devinely heavy;-}
Choose your next witticism carefully it might be your last.
Or a long term favorite:
YouTube
- view to a kill
Tanya Roberts before she started selling Vegas timeshares.
The beginning was stunning with the scenes with the ski chase in the Arctic.
But then:
Where has everybody gone?
I've got this feeling...
YouTube - Necros
Everybody's gone insane...
There is no time, there's no time at all!!!
Music to panic by;-}
I want to play General Koskov!!!
Wait, the plot could be reversed now, Afghanistan is our problem-
but never fear, for the line is true always:
Someday this war's gonna end...
sbarrkum - that was like reading Monster Tech Forum circa 1999... like Pets.com is a really cool place to work, right?
My father used to say that nothing has fundamentally changed in business since the time the Phoenicians started paddling around the Mediterranean selling blue cloth until now. A forum like that proves he was right.
AllenM,
OK, but this is HOT!
YouTube - Bond - James Bond theme
Cheers,
OT:
So, Brian's analysis of E*trade's portfolio that got batted around in this blog a few days ago hits the big time !
In E*Trade Deal, Pain Went Far Beyond Subprime - DealBook Blog - NYTimes.com
That nytimes writer comes to a slightly different conclusion - that the top rated effectively got sold at 60cents in the dollar whereas Brian put some value on some other assets and came up with 50 cents.
NB: Nope, I'm not making accusations of plagiarism - that's Brian's call. I'm just glad this has hit the MSM.
-K
OK, but this is HOT!
If my son had seen that he might have continued playing the cello... but um, his orchestra wasn't quite the same.
Night all,
And Dr. Evil thought he had some kind of ransom:
YouTube - Austin Powers - 100 billion dollars
Cheepskate.
Cheers,
sk,
It's too bad the blog didn't get a mention. CR and Tanta deserve recognition for what they contributed to the discussion of this mess we are all trying to slog through.
You know that every business writer there covering the mortgage meltdown is reading this blog, they just can bring themselves as an institution to concede there is a point of view beyond the paper of record (oh, and Gretchen has threatened to castrate any reporter that points readers in Tanta's direction!)
The fiddles and thievery amongst mortgage companies including NR during their securization process in the UK:
http://www.guardian.co.uk/money/2007/dec/05/banks.northernrock
Revealed: how UK banks exploit charity tax laws
£234bn of mortgages put in trusts supposedly for the benefit of good causes
.....
A dozen of the country's best-known banks and financial institutions have raised funds on the back of £234bn-worth of home loans over the past seven years, using trusts which have charitable status but rarely give anything to charity.
Officials of the Charity Commission are already examining Northern Rock after the Guardian reported last week that it was using the name of a small charity for children with Down's syndrome. That inquiry now looks likely to be expanded, with the activities of up to 11 more banks coming under scrutiny, and the commission seeking to establish whether any have breached UK charity law.
The trusts were all set up during an elaborate process known as securitisation, which has increasingly replaced the traditional mortgage model in which banks made loans to home buyers and held on to the loans until they were paid off.
Over the last seven years, banks have been pooling many of their loans and turning them into mortgage-backed securities which can then be sold to large investors.
The banks have been doing this through trusts which they can control without owning, isolating financial risks, and keeping their liabilities off their balance sheets in a way that makes them appear more profitable. By giving the trusts a charitable status, they can be operated indefinitely. The trusts are not obliged to make any payments unless they are eventually wound up, and even then the amount any charity might receive would be only a small fraction of the sums raised.
Of the 12 institutions investigated by the Guardian
....
-K
Ok, who put Koolaid in my bong?
Real Estate Investing Seminars in Los Angeles | Trump University Seminars
Beano
Can I get a hit too. Thats "too good to be true ".
dryfly, k,
Was it the 60's. The air (make whatever you mean out of that) that made us (or it seemed a majority) want to be a field that made a difference. maybe naivete.
barr
I must agree that there is nothing inherently wrong with commercial paper, and it will come back.
I'd say about half of the ABCP market was garbage at it's peak. From 2001-2004 the ABCP market was pretty steady at 600B. Then, it almost doubled in 3 short years before it collapsed.
here
I have a hard time believing that Wall Street just happened to find 500B in quality assets to spin into securities after 2005.
I believe, a large part of the explosion of the ABCP market was tied to the explosion in credit default swaps (CDS). Credit default swaps were a common form of credit enhancement used to secure the credit ratings needed to issue paper into the ABCP market.
Conduits could "reduce risk" by buying credit default swaps against the very securities they were holding. In effect, it was as if a company could improve its credit ratings through issuing debt and then buying insurance against defaulting on that debt.
As demand for CDS increased and vehicles like CPDOs were introduced into the market the cost of buying protection decreased dramatically between 2002-2003.
http://www.federalreserve.gov/pubs/bulletin/2007/articles/bankprofit/chart/cds_dfault_prem_17.gif
I believe that CDS premium were underpriced from 2003-07 and that this distorted the markets in many ways. Corporate bond yields were compressed. It became easier for risky companies to get funding so defaults dropped. That decreased the defaults and further dropped the cost of buying protection in the CDS market. The LBO market bloomed and equities rallied. A "virtuous" cycle.
And the ABCP market exploded as conduits could increase leverage through buying cheap insurance in the CDS market.
Of course, everything works until it doesn't. Once the price of credit default swaps bottomed and turned in early 2006 the cost of the credit enhancements got more expensive. Less could be purchased and conduits had to decrease leverage. As assets started to trickle onto the market they found little interest from direct buyers and the prices for those assets dropped. Dropping asset prices drove up default risk and the costs of protection for the companies that were creating those assets.
A viscous cycle ensued.....
Could be the start of a good book, circa 2012.
"What would be some clues to look for that would indicate the credit market is returning to normal?"
Look at 3 month Libor minus the Federal funds rate.
"I must agree that there is nothing inherently wrong with commercial paper, and it will come back."
When things started getting creepy back in August, I went over the holdings of my MMs with a fine-tooth comb.
Tell you something, it never touches a money market I hold again.
I am betting Florida, Montana, Connecticut, Canada, etc. all feel the same way.
No, it'll have to wait for a fresh generation of naive idiots.