So would Dr. Bernanke advocate reducing the principal of CRE loans in order to "keep developers in their projects" like he advocates principal reductions for mortgage holders?
Instead of sending everyone "tax rebate checks", if the .gov wanted to make us all spend the stimulus, they should have just sent everyone a gift certificate to Best Buy, Home Depot, or Lowes.
So I'm going to ask a slightly ill-formed question, but maybe someone will know what I'm getting at.
Why do banks have capital reserves?
(Actually my question is not quite so dumb as it sounds--bear with me)
Are the reserves primarily intended as insurance against everyday fluctuations, or insurance against extraordinary events?
If the former, then even if your capital reserves can somehow weather the huge losses (of CRE, or MBS, or whatever else), then most likely everyday fluctuations will no longer have reserves and will wipe you out.
If the latter, then CRE losses that left a bank damaged but not wiped out might have a chance.
I believe that these guys are throwing around ideas so that we think they are trying to fix the problem. Obviously, they cannot be serious. Could they be?
Andrew, my understanding is that the reserves are for extraordinary events. Say a bank has a normal 4% default rate on its loans. These normal losses should be covered from the profits.
As an interesting contrast to the downward trend of construction, I was informed this morning that Nucor subsidiary Vulcraft has just raised prices for roof deck and open web steel joists by 43%. This reflects an approximate 6 month look-ahead on pricing for steel--the jobs they price today will gnerally deliver in 6 months.
Fun, fun, fun...
Mr. McGuire: I want to say one word to you. Just one word.
Benjamin: Yes, sir.
Mr. McGuire: Are you listening?
Benjamin: Yes, I am.
Mr. McGuire: Plastics.
Benjamin: Just how do you mean that, sir?
World commodities (including steel)are the new plastics.
I'm not that worried about the high amount of loans in CRE. If the banks didn't make those loans, they would have found another equally troubled sector to loan to instead.
OT: Hope some of you followed my advice this past weekend to short or at least to get out of fertilizers like CF, MOS, POT and the AG space in general (MON down over $5 as I write this).
I don't have the articles in front of me, but in fairness to the regulators, they have been warning about CRE exposuper the original post:re for over a year now. I want to say that I first saw a report on it around just as the residential market was begining to look iffy in 2006.
Andrew, my understanding is that the reserves are for extraordinary events. Say a bank has a normal 4% default rate on its loans. These normal losses should be covered from the profits.
Normal or anticipated losses are booked into "loan loss reserve" accounts. If the bank estimated correctly, the anticipated losses never show up on the balance sheet in the profit or losses column.
Of course, it was tempting for bank managers to over-estimate losses in good times and under-estimate losses in bad time. This had the impact of smoothing earnings. With less volatility, investors were willing to pay a premium for the stock.
A few years ago, the SEC started putting the screws down on this practice. The SEC required that banks book loan loss reserves based on recent history (instead of the full cycle). So, in good times (when losses were low) the banks booked less into loan loss reserve accounts and more into profits.
From the SEC perspective, it was just an accounting issue. Money was moved from one place to another on the balance sheet. On the upswing there would be less money going in the loan loss reserve accounts and more in retained earnings. On the downswing, there would be more money going into the loan loss reserve accounts and less into retained earnings. Earnings would be more volatile, but over the full cycle, the profits and loss should be the same.
The problem is that the there is a major difference between loan loss reserves and retained earnings when it comes to the ability of banks to grow their balance sheets. All that extra "profit" meant banks could very aggressively expand their balance sheets. With an ballooning credit market, no loans would ever bad because troubled borrowers could always get new debt to pay down old debt. (It wasn't bad for banker's bonus plans either).
Now that we are on the downside, the cycle is going into reverse. Banks are going to have to increase the amount they are holding in loan loss reserve accounts and are going to take a hit to retained earnings (capital). This means that banks will be under tremendous pressure to restrain (or at least slow) balance sheet growth.
I don't have the articles in front of me, but in fairness to the regulators, they have been warning about CRE exposuper the original post:re for over a year now. I want to say that I first saw a report on it around just as the residential market was begining to look iffy in 2006.
Just remember that Robert Shiller started warning regulators in 1996 that we were heading down the same path as Japan.
Nothing was done.
In fact we were basically encouraged by our economic overseers to bankrupt ourselves.
"I think it's a mistake to have your biggest customer's economy to slow down -- or your biggest customers' economies slowing down -- as a result of high energy prices," Bush said.
"My advice to OPEC -- of course they haven't listened to it -- my advice to OPEC is understand the consequences of high energy prices, because I do," Bush said.
"Not only is high energy prices having a macro effect on our economy, it's affecting a lot of our families, which troubles me as well."
Thought the war in Iraq was going to fix this oil problem
Maybe Bush needs to have a war with Iran and Venezuela to teach them a lesson.
"
Despite the generally satisfactory performance of commercial mortgages in securitized pools, spreads of yields on BBB-rated commercial mortgage-backed securities over comparable-maturity swap rates soared, and spreads on AAA-rated tranches of those securities have risen to unprecedented levels. The widening of spreads reportedly reflected heightened concerns regarding the underwriting standards for commercial mortgages over the past few years, but it also may be the result of increased investor wariness regarding structured finance products. "
At the triple-A level anyway, wider spreads have a lot more to do with the absence of, and liquidations by, SIVs than with credit concerns as such. The triple-B widening, however, is definitely credit related.
DUBAI, United Arab Emirates (AP) -- Citigroup shares dropped more than 6 percent Tuesday after the head of Dubai International Capital said that Mideast sovereign wealth funds may fail to save Citigroup unless more cash is pumped into the bank
Mishkin_On_Skis: can you link to your comments or do you remember the thread?
Question from last thread: If securitized mortgages have already been revalued down, and the servicers reduce principal on the mortgages in the securities, and the mortgages are then paid off over the life of the loan, then are investors really losing anything in the long term that they have not already lost with the current price drops in the securities?
Also, if GW is handing out 150 Billion in rebates couldn't he just give $100,000 each to 1.5 million homeowners with underwater mortgages?
Thought the war in Iraq was going to fix this oil problem
The oil angle for going into iraq like we did was a generational-scale play -- namely, replacing the French and Russians in Iraq's oil biz.
It was a no-brainer save for the fact that asymmetric warfare amidst a hostile civil population of 20M+ is horribly expensive to fight, let alone damn difficult to fight right.
Standard & Poor's Ratings Services said Tuesday it cut its long-term counterparty credit rating on Fremont General Corp. (FMT:Fremont General Corporation FMT 0.41, -0.29, -41.3% to CC from CCC-. CC is S&P's most speculative rating. S&P said the rating remains on a negative credit watch. "The downgrade is based on Fremont's announcement that it has received a notice of covenant default on guarantees associated with the sale of its subprime loans," said Adom Rosengarten, a Standard & Poor's credit analyst, in a statement
In regard to commercial expansion, I just looked at:
Las Vegas Sands Corp.
They have a P/E of like 233, which to me says a little something about the earnings yield of the money they have in the vault and the hope for lots of tourists burning lots of cash. In other words, the cash burn they have will stop them like a freight train and that cash burn will be like a fireball from hell after they have a tourism crash linked to stagflation.hyperinflation.
Oh sure, there may be a mass rush of people that say screw it, let's go run up the credit cards and burn it all up in one last vacation.....but I think when faced with excess cash burn at home, linked to commodity inflation, a crashing bond and stock market with earnings yield collapsing, a lot of these suckers are gonna face the choice between food and rent, and a trip to vegas is not gonna be in the cards! Ditto that global, as we all go into The Debt Trap and hope we have a nice summer in the backyard!
"Under questioning from Sen. Richard Shelby, the committee's top Republican, Kohn acknowledged that the Federal Reserve did not anticipate hefty mortgage-market losses.
"I don't know that we fully appreciated all these risks out there." Kohn said. "I'm not sure anybody did.""
While rising prices at the pump have kept us distracted, another gas shortage has crept up on us: a worldwide helium crunch.
Unless you're a scientist or the owner of a party planning store, you probably haven't heard about the global helium shortage. But the lack of gas is real - and nearing crisis mode.
For months, several of the world's 16 helium plants have been running at reduced capacity, crippled by bad weather and maintenance problems. But that's just scratching the surface. Truth is, helium's a lot like oil: a finite, irreplaceable resource and one we're quickly running out of.
The global helium shortage affects more than just Snoopy parade balloons and the Goodyear blimp. Protracted scarcity could bring both high-tech industry and the scientific community to its knees. And, of course, provide investors with significant upside.
Three Cheers for Fed Member Fisher (Voting member)
Here's some goood quotes (i.e. the ones I agree with):
Dallas Fed President Fisher, only central bank policymaker to vote against latest rate hike, says 'easy money' is major problem for economy.
...
"Talk of 'cheap money' makes my skin crawl," he said in his prepared remarks. "The words imply a debased currency and inflation and the harsh medicine that inevitably must be administered to purge it."
"So you should not be surprised that I consider the perception that the Fed is pursuing a cheap-money strategy, should it take root, to be a paramount risk to the long-term welfare of the U.S. economy," he added.
Fisher points out that yields on long-term bonds have risen, not declined, in the wake of the Fed rate cuts, a sign of growing concern about inflation - although he conceded that traders could be mistaken about the effect of the cuts on prices.
Re: "I don't know that we fully appreciated all these risks out there." Kohn said. "I'm not sure anybody did.""
Yah, we thought most average prices would continue to climb at an average range of between 25 to 50% year over year for the next 3 decades. We had no clue that the average price of $120,000 would balloon to $300,00 and then not go to $500,000, we were just doing our best job to keep inflation under control........uhhh and ahhh, wait, wait, I mea
Once again, I hate to harp on something related to the decline of CRE and the economy as a whole, but I cant get off my mind, the fact that we have so much nepotism in our government. Sure its always been there, but with the complexity of the world today, do we really need a few 30 year old punks running The Fed? Im close to 50, so it amazes me that someone that has very little experience, and has been provided with a fast track to his position, should now be a person that helps dictate matters that are ruining America. This nepotism should have limits and the reason these people climb this ladder of distorted nepotistic success is because no one was in place to challenge the wisdom of this retardation!
Re: Warsh, 35, who has served on Bush's National Economic Council for the past four years, is a special assistant to the president for economic policy.
This kid was Bush's hot boy at about the age of 28, helping run America into the ground and among the members of The Bush Coup that were asleep at the wheel, with everyone else there...and now this little bastard is going to do what, help restore faith in a system that gave him a jib he knew nothing about???
Just remember that Robert Shiller started warning regulators in 1996 that we were heading down the same path as Japan.
ac
I hope this guy was fired immediately and given the the economic rasberry price for the most wrong prediction in history of economics. Or at least he shared it with Mr. Krugman.
In history and political science, to purge is to remove people considered by the group in power to be "undesirable" from a government, political party, a profession, or from community or society as a whole, often by violent means. Restoration of people from a purge is known as rehabilitation.
Before everyone jumps to the next thread, can anyone address my question from earlier...is there much difference between taking losses from reducing mortgage principal and the losses already taken from lower CDO prices?
Also, would a housing bailout really be that bad if the government is just going to hand out 150 Billion in rebates here and there? What is the difference between cutting taxes and bailing out banks/homeowners? We will all pay for it in the end. Moral hazard aside.
I know! I was just using that as retort of some kind, however, while I have you on the chatline....
Warsh replaced some other buffoon, so I would like to study the process of who these types of people can be purged from The Fed.
In regard to what Dallas Fed President Fisher said about purging, should it not begin in his own home? We have a Fed that has been out of control and we need to purge these insider plants that have conflicts of interest ASAP, as in a Congressional Hearing ASAP! They need to resign or face charges of Treason!
Kohn took office as a member of the Board of Governors of the Federal Reserve on August 5, 2002 for a full term ending January 31, 2016. On May 18, 2006, the White House announced that Kohn had been nominated by President George W. Bush to replace Roger W. Ferguson, Jr. as the new vice chairman of the Federal Reserve System for a four-year term. The United States Senate approved his nomination, and Kohn began serving his four-year term as Vice Chairman of the Board of Governors of the Federal Reserve System on June 23, 2006.
Warsh joined the Federal Reserve Board on February 24, 2006, to fill an unexpired term ending January 31, 2018.
Optimistic Joe writes:
Just remember that Robert Shiller started warning regulators in 1996 that we were heading down the same path as Japan.
ac
I hope this guy was fired immediately and given the the economic rasberry price for the most wrong prediction in history of economics. Or at least he shared it with Mr. Krugman.
O-Joe
Damn straight! E-con-omic growth (which can be unbroken and infinite) has been based upon solid fundamentals for the last 12+ years, not on cheap money-based asset speculation. HH savings rates have never been higher, bank non-borrowed reserves have never been bigger, and HH debt-to-DPI ratio has never been lower. Peak Debt, my ass!
Real wages for the bottom 90% or so have clearly been rising. I just got my 20% COLA increase this week! Heck, with all the H1-Bs and outsourcing going on, my bargaining position as domestic labor has never been stronger.
I hear what you are saying Wheat but anyone smart and ambitious enough to rise to a level of consideration for these government posts is going to have a long list of conflicts. The best any administration can do is try and select qualified people who have strong character. We should appreciate that anyone would even want to be a public servant with today's media. At this point in the American experiment there are no easy answers at a federal level except increased regulation.
J"ust remember that Robert Shiller started warning regulators in 1996 that we were heading down the same path as Japan.
Nothing was done.
In fact we were basically encouraged by our economic overseers to bankrupt ourselves."
Yeah, way to nail that, Shiller...you know in investing it's not that you're right eventually, it's being right at approximately the right time. Put on your trade shorting the Cash Shiller Index from 1996 to today and see what your return is, or better yet when you went out of business.
Many public services, such as universities or federal independent agencies are created as corporations owned by the government.
'The Federal Reserve System is not "owned" by anyone and is not a private, profit-making institution. Instead, it is an independent entity within the government, having both public purposes and private aspects.
Board of Governors
7 members serving staggered 14-year terms
Appointed by the U.S. President and confirmed by the Senate
Oversees System operations, makes regulatory decisions, and sets reserve requirements
Once a member of the Board of Governors is appointed by the president, he or she functions mostly independently. The Board is required to make an annual report of operations to the Speaker of the U.S. House of Representatives.[19] The law provides for the removal of a member of the Board by the President "for cause."[20] The Board of Governors is responsible for the formulation of monetary policy. It also supervises and regulates the operations of the Federal Reserve Banks, and US banking system in general.
See 12 U.S.C. § 242.
Re: ... each member shall hold office for a term of fourteen years from the expiration of the term of his predecessor, unless sooner removed for cause by the President.
The Board shall order an annual independent audit of the financial statements of each Federal reserve bank and the Board.
Whenever a vacancy shall occur, other than by expiration of term, among the seven members of the Board of Governors of the Federal Reserve System appointed by the President as above provided, a successor shall be appointed by the President, by and with the advice and consent of the Senate, to fill such vacancy,
...wherever any power vested by this chapter in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.
I would like to address the qualifications of Wonder Boy, in regard to this chapter:
TITLE 12 > CHAPTER 3 > SUBCHAPTER II > §
§ 244. Principal offices of Board; chairman of Board; obligations and expenses; qualifications of members; vacancies
This Chapter does not address the discretionary nature of qualifications for a board member??
Congressional report
The Board shall, concurrent with each semi-annual hearing required by this section, submit a written report to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Banking and Financial Services of the House of Representatives, containing a discussion of the conduct of monetary policy and economic developments and prospects for the future, taking into account past and prospective developments in employment, unemployment, production, investment, real income, productivity, exchange rates, international trade and payments, and prices.
Although its name has become synonymous with intrigue, conspiracy, disloyalty and assassination, it could be argued that for the first two centuries of its existence the Praetorian Guard was, on the whole, a positive force in the Roman state. During this time it mostly removed (or allowed the removal of) cruel, weak, and unpopular emperors while generally supporting just, strong, and popular ones. By protecting these monarchs, thus extending their reigns, and also by keeping the disorders of the mobs of Rome and the intrigues of the Senate in line, the Guard helped give the empire a much needed stability that led to the period known as the Pax Romana.
Thanks for setting the record straight, O-Joe!
HARM
I'm not sure what your rant (excuse me) has to do with a wrong economic prediction, namely Japan-style deflation. Or did your home lose 80% of its value since 1996?
(*Because appointments of members are staggered there are currently only five members on the board.)
All current members of the Board of Governors have taken office during the presidency of George W. Bush.
People, this is important, this is historic and needs to be watched, this is corruption and collusion and this is the nepotism destroying our country. We do need to purge this cancer! There is no way that The Fed should be this unbalanced! This is so close to treason.....for real! Wake up patriots!
In law, treason is the crime that covers some of the more serious acts of disloyalty to one's sovereign or nation.
Congress has, at times, passed statutes creating related offenses which undermine the government or the national security, (such as sedition in the 1798 Alien and Sedition Acts, or espionage and sabotage in the 1917 Espionage Act) which do not require the testimony of two witnesses and have a much broader definition than Article Three treason.
The difference between sedition and treason consists primarily in the subjective ultimate object of the violation to the public peace.
The Cold War saw frequent associations between treason and support for (or insufficient hostility toward) Communist-backed causes.
Ok, just a purge will do, but that better happen before summer, or entropy will help put this into a new shape anyway...so be it, screw it!
To belabor the point one step further, no purge within Washington will occur until we have a new president, so no changes will occur beween now and next January, and even then, do you think change will occur on the scale which it should? Yes, some nut like Obama could replace the entire Fed Board, for "cause' and then of course replace every person in Washington. I hope to God these crooks are preparing to have yard sales and I hope we see every person up for election, voyed out of office in November.
Yes, we need to purge!!
vomitorium (plural: vomitoria) is a passage situated below or behind a tier of seats in an amphitheatre, through which crowds can "spew out" at the end of a performance.
It has been a long time since I read Shiller's exact words, but IIRC, roughly 12 years ago he made that "irrational exuberance" remark to Greenspan about the stock market, techs in particular. Turns out, his call was way too early, but essentially right. Even then, they were overvalued, based on traditional PE & ROI measures, as the post-2000 NASDAQ has shown.
I seriously doubt he was predicting Japan-style housing deflation way back then, as the housing bubble didn't even exist in 1996. But perhaps you have the links to back up your bold claim?
We have also developed and started to deliver targeted examiner training so that our supervisory staff is equipped to deal with more serious CRE problems at banking organizations as they arise.
Its inconceivable that Fed Reserve examiners and supervisory staff are not equipped to handle serious CRE problems. Has all their advanced training been directed toward holding company exams and supervision?
let me see if i have this correct:
the AAAs are so illiquid and dislocated that the pricing is messed up and means nothing about value,...but the BBB space is where the liquidity runs deep and thus the levels reflect true implied value?
Well, it's odd but true sometimes, ES. If we know that the BBB tranche is toast, we might be able to value it as an interest-only security. Whereas who the hell knows what a more secure tranche is worth.
i get the io idea, and i agree that the BBBs levels are closer to a potential loss scenario than AAAs if you think the BBBs are toast early enough. but i just dont think it has anything to do with a deep enough market to value them. the liquidity in AAAs is so thin you can fart and move it, and the BBBs - they make the AAAs look like a huge party.
i think Levels today are driven by
1) people shorting cmbx, either by choice (hedge funds who hit the ABX lottery, or hedge funds who missed the ABX lottery) or by force (banks etc). the BBB shorts are out of gas at a 30 px, and defaults at 0.5%. thats why people pay 250 on AAA.4 for protection. to get your money back on that trade would require losses 4 times worse than 1986 loans. who's model is valuing that trade? that is a desperate shorter right there.
2) leverage,..this problem is up and down the stack, but it has a huge effect on spreads.
3) alternatives, there is so much cheap quality paper available out there.
either way, the next few years will be interesting to see. this is the first huge test for derivatives giving people the ability to express a short view so easily.
I think that there is more to the CRE defaults than meets the eye. Many (most?) securitizations had large dollops of multi-family included to make them palatable for purchase by Freddie. Rumor has it that there was a threshold of 20 something percent to make the bonds tasty enough. This resulted in inflation of the multi-family housing segment of CMBS - and the associated refinancing cycle.
It may well be that defaults are concentrated in multi-family, but at lower incidence for other segments, such as office, industrial, hotel, retail and so on... These defaults will also vary by geography. No two CMBS pools are created alike - you have to read the prospectus.
I have no doubt that with evidence of an economic slowdown these other sectors will also be impacted - but my guess is that multi-family gets hit hardest.
What? No comments? I guess nobody cares what the Fed says anymore.
So would Dr. Bernanke advocate reducing the principal of CRE loans in order to "keep developers in their projects" like he advocates principal reductions for mortgage holders?
OT:
Instead of sending everyone "tax rebate checks", if the .gov wanted to make us all spend the stimulus, they should have just sent everyone a gift certificate to Best Buy, Home Depot, or Lowes.
Or just sent all $150 billion to China directly.
can you say death spiral???
Ciao
MS
Wells Fargo Incurs $39 Mln Loss from Money Funds
| Reuters
Coming to a money market fund near you? Will your bank support the buck? Can your bank support the buck?
At 0% interest, we're all fine (just like Japan).
So I'm going to ask a slightly ill-formed question, but maybe someone will know what I'm getting at.
Why do banks have capital reserves?
(Actually my question is not quite so dumb as it sounds--bear with me)
Are the reserves primarily intended as insurance against everyday fluctuations, or insurance against extraordinary events?
If the former, then even if your capital reserves can somehow weather the huge losses (of CRE, or MBS, or whatever else), then most likely everyday fluctuations will no longer have reserves and will wipe you out.
If the latter, then CRE losses that left a bank damaged but not wiped out might have a chance.
Just wondering which case we're in.
Would you let the medical team that screwed up your surgery fix you again?
I believe that these guys are throwing around ideas so that we think they are trying to fix the problem. Obviously, they cannot be serious. Could they be?
Just woke up from a bad nightmare...have a great day.
Andrew, my understanding is that the reserves are for extraordinary events. Say a bank has a normal 4% default rate on its loans. These normal losses should be covered from the profits.
As an interesting contrast to the downward trend of construction, I was informed this morning that Nucor subsidiary Vulcraft has just raised prices for roof deck and open web steel joists by 43%. This reflects an approximate 6 month look-ahead on pricing for steel--the jobs they price today will gnerally deliver in 6 months.
Fun, fun, fun...
Mr. McGuire: I want to say one word to you. Just one word.
Benjamin: Yes, sir.
Mr. McGuire: Are you listening?
Benjamin: Yes, I am.
Mr. McGuire: Plastics.
Benjamin: Just how do you mean that, sir?
World commodities (including steel)are the new plastics.
I still say about the US CRE drop;
STEEP, DEEP AND LONG.
"This graph shows the number of institutions ... where the construction loans exceed total capital."
Are there a bunch hiding out at just under 100% of capital? Any way to run construction loans vs. capital across the whole industry?
I'm not that worried about the high amount of loans in CRE. If the banks didn't make those loans, they would have found another equally troubled sector to loan to instead.
Commercial real estate is another area that requires close supervisory attention.
That's right.
We need the people who supervised what may be the greatest financial disaster in history to supervise CRE with a unique degree of scrutiny.
The audacity is astounding.
The fact that people put up with it is even more astounding.
Here's a related piece.
Bank failures expected to rise, but that's not worst problem - Mar. 3, 2008
Cheers,
A lot of people selling everything today.
CRB off 1.53%, S&P 1.21.
Wonder who's getting margin calls today?
Cheers,
OT: Hope some of you followed my advice this past weekend to short or at least to get out of fertilizers like CF, MOS, POT and the AG space in general (MON down over $5 as I write this).
I don't have the articles in front of me, but in fairness to the regulators, they have been warning about CRE exposuper the original post:re for over a year now. I want to say that I first saw a report on it around just as the residential market was begining to look iffy in 2006.
Andrew, my understanding is that the reserves are for extraordinary events. Say a bank has a normal 4% default rate on its loans. These normal losses should be covered from the profits.
Normal or anticipated losses are booked into "loan loss reserve" accounts. If the bank estimated correctly, the anticipated losses never show up on the balance sheet in the profit or losses column.
Of course, it was tempting for bank managers to over-estimate losses in good times and under-estimate losses in bad time. This had the impact of smoothing earnings. With less volatility, investors were willing to pay a premium for the stock.
A few years ago, the SEC started putting the screws down on this practice. The SEC required that banks book loan loss reserves based on recent history (instead of the full cycle). So, in good times (when losses were low) the banks booked less into loan loss reserve accounts and more into profits.
From the SEC perspective, it was just an accounting issue. Money was moved from one place to another on the balance sheet. On the upswing there would be less money going in the loan loss reserve accounts and more in retained earnings. On the downswing, there would be more money going into the loan loss reserve accounts and less into retained earnings. Earnings would be more volatile, but over the full cycle, the profits and loss should be the same.
The problem is that the there is a major difference between loan loss reserves and retained earnings when it comes to the ability of banks to grow their balance sheets. All that extra "profit" meant banks could very aggressively expand their balance sheets. With an ballooning credit market, no loans would ever bad because troubled borrowers could always get new debt to pay down old debt. (It wasn't bad for banker's bonus plans either).
Now that we are on the downside, the cycle is going into reverse. Banks are going to have to increase the amount they are holding in loan loss reserve accounts and are going to take a hit to retained earnings (capital). This means that banks will be under tremendous pressure to restrain (or at least slow) balance sheet growth.
I don't have the articles in front of me, but in fairness to the regulators, they have been warning about CRE exposuper the original post:re for over a year now. I want to say that I first saw a report on it around just as the residential market was begining to look iffy in 2006.
Just remember that Robert Shiller started warning regulators in 1996 that we were heading down the same path as Japan.
Nothing was done.
In fact we were basically encouraged by our economic overseers to bankrupt ourselves.
CRE--another fine investment that worked like helium in an up market but works like a concrete block in a down market.
Bankrupting "ourselves' has been done thuout history.
The Mathematical Economics of Compound Rates of Interest - Part 2 - by
Michael Hudson - financial economist and historian
ac,
"In fact we were basically encouraged by our economic overseers to bankrupt ourselves."
Well said.
Cheers,
Updating appraisals. Isn't that like marking securities to market? To be avoided at all costs.
OT
Bush Presses OPEC on High Energy Prices
"I think it's a mistake to have your biggest customer's economy to slow down -- or your biggest customers' economies slowing down -- as a result of high energy prices," Bush said.
"My advice to OPEC -- of course they haven't listened to it -- my advice to OPEC is understand the consequences of high energy prices, because I do," Bush said.
"Not only is high energy prices having a macro effect on our economy, it's affecting a lot of our families, which troubles me as well."
Thought the war in Iraq was going to fix this oil problem
Maybe Bush needs to have a war with Iran and Venezuela to teach them a lesson.
"
Despite the generally satisfactory performance of commercial mortgages in securitized pools, spreads of yields on BBB-rated commercial mortgage-backed securities over comparable-maturity swap rates soared, and spreads on AAA-rated tranches of those securities have risen to unprecedented levels. The widening of spreads reportedly reflected heightened concerns regarding the underwriting standards for commercial mortgages over the past few years, but it also may be the result of increased investor wariness regarding structured finance products. "
At the triple-A level anyway, wider spreads have a lot more to do with the absence of, and liquidations by, SIVs than with credit concerns as such. The triple-B widening, however, is definitely credit related.
Sbarrkum@ 116:
And now Abu Dhabi says that it probably won't inject more funds into Citi.
Either they know more than we do - Duh - or they're telling us where to get off.
DUBAI, United Arab Emirates (AP) -- Citigroup shares dropped more than 6 percent Tuesday after the head of Dubai International Capital said that Mideast sovereign wealth funds may fail to save Citigroup unless more cash is pumped into the bank
Expired
C down 5.10%
Mishkin_On_Skis: can you link to your comments or do you remember the thread?
Question from last thread: If securitized mortgages have already been revalued down, and the servicers reduce principal on the mortgages in the securities, and the mortgages are then paid off over the life of the loan, then are investors really losing anything in the long term that they have not already lost with the current price drops in the securities?
Also, if GW is handing out 150 Billion in rebates couldn't he just give $100,000 each to 1.5 million homeowners with underwater mortgages?
Thought the war in Iraq was going to fix this oil problem
The oil angle for going into iraq like we did was a generational-scale play -- namely, replacing the French and Russians in Iraq's oil biz.
It was a no-brainer save for the fact that asymmetric warfare amidst a hostile civil population of 20M+ is horribly expensive to fight, let alone damn difficult to fight right.
Three Cheers for Fed Member Fisher (Voting member)
!!!
Fed officials spar over inflation versus recession risks - Mar. 4, 2008
Standard & Poor's Ratings Services said Tuesday it cut its long-term counterparty credit rating on Fremont General Corp. (FMT:Fremont General Corporation FMT 0.41, -0.29, -41.3% to CC from CCC-. CC is S&P's most speculative rating. S&P said the rating remains on a negative credit watch. "The downgrade is based on Fremont's announcement that it has received a notice of covenant default on guarantees associated with the sale of its subprime loans," said Adom Rosengarten, a Standard & Poor's credit analyst, in a statement
In regard to commercial expansion, I just looked at:
Las Vegas Sands Corp.
They have a P/E of like 233, which to me says a little something about the earnings yield of the money they have in the vault and the hope for lots of tourists burning lots of cash. In other words, the cash burn they have will stop them like a freight train and that cash burn will be like a fireball from hell after they have a tourism crash linked to stagflation.hyperinflation.
Oh sure, there may be a mass rush of people that say screw it, let's go run up the credit cards and burn it all up in one last vacation.....but I think when faced with excess cash burn at home, linked to commodity inflation, a crashing bond and stock market with earnings yield collapsing, a lot of these suckers are gonna face the choice between food and rent, and a trip to vegas is not gonna be in the cards! Ditto that global, as we all go into The Debt Trap and hope we have a nice summer in the backyard!
"Under questioning from Sen. Richard Shelby, the committee's top Republican, Kohn acknowledged that the Federal Reserve did not anticipate hefty mortgage-market losses.
"I don't know that we fully appreciated all these risks out there." Kohn said. "I'm not sure anybody did.""
Expired
Get the rope.
Maybe Citi can merge with MBIA's CDO insurance biz. A trillion in assets might cover payouts and keep the system mostly whole.
Citi gets broken up or goes to zero.
Speaking of helium, send in NO MORE CLOWNS:
While rising prices at the pump have kept us distracted, another gas shortage has crept up on us: a worldwide helium crunch.
Unless you're a scientist or the owner of a party planning store, you probably haven't heard about the global helium shortage. But the lack of gas is real - and nearing crisis mode.
For months, several of the world's 16 helium plants have been running at reduced capacity, crippled by bad weather and maintenance problems. But that's just scratching the surface. Truth is, helium's a lot like oil: a finite, irreplaceable resource and one we're quickly running out of.
The global helium shortage affects more than just Snoopy parade balloons and the Goodyear blimp. Protracted scarcity could bring both high-tech industry and the scientific community to its knees. And, of course, provide investors with significant upside.
Helium: Investing in the Loner Element - Features and Interviews - Hard Assets Investor
Peace baby and may your balloon be popped!
Three Cheers for Fed Member Fisher (Voting member)
Here's some goood quotes (i.e. the ones I agree with):
Dallas Fed President Fisher, only central bank policymaker to vote against latest rate hike, says 'easy money' is major problem for economy.
...
"Talk of 'cheap money' makes my skin crawl," he said in his prepared remarks. "The words imply a debased currency and inflation and the harsh medicine that inevitably must be administered to purge it."
"So you should not be surprised that I consider the perception that the Fed is pursuing a cheap-money strategy, should it take root, to be a paramount risk to the long-term welfare of the U.S. economy," he added.
Fisher points out that yields on long-term bonds have risen, not declined, in the wake of the Fed rate cuts, a sign of growing concern about inflation - although he conceded that traders could be mistaken about the effect of the cuts on prices.
Did he say "purge"?
Re: "I don't know that we fully appreciated all these risks out there." Kohn said. "I'm not sure anybody did.""
Yah, we thought most average prices would continue to climb at an average range of between 25 to 50% year over year for the next 3 decades. We had no clue that the average price of $120,000 would balloon to $300,00 and then not go to $500,000, we were just doing our best job to keep inflation under control........uhhh and ahhh, wait, wait, I mea
Is there any way to find the list of 2,368 banks that are higher risk, and the subset of which that have construction loans exceeding total capital?
FISHER IS GOD!
He is calling out Bubble Ben and the rest of the easy money crew.
"I don't know that we fully appreciated all these risks out there." Kohn said. "I'm not sure anybody did."
long-winded Fedspeak for hoocoodanode?
Giant buildings full of number crunchers and the best they can come up with for lame excuses is "hoocoodanode?" Get the rope.
Once again, I hate to harp on something related to the decline of CRE and the economy as a whole, but I cant get off my mind, the fact that we have so much nepotism in our government. Sure its always been there, but with the complexity of the world today, do we really need a few 30 year old punks running The Fed? Im close to 50, so it amazes me that someone that has very little experience, and has been provided with a fast track to his position, should now be a person that helps dictate matters that are ruining America. This nepotism should have limits and the reason these people climb this ladder of distorted nepotistic success is because no one was in place to challenge the wisdom of this retardation!
Re: Warsh, 35, who has served on Bush's National Economic Council for the past four years, is a special assistant to the president for economic policy.
This kid was Bush's hot boy at about the age of 28, helping run America into the ground and among the members of The Bush Coup that were asleep at the wheel, with everyone else there...and now this little bastard is going to do what, help restore faith in a system that gave him a jib he knew nothing about???
Does that piss anyone off, or am I alone in this?
Just remember that Robert Shiller started warning regulators in 1996 that we were heading down the same path as Japan.
ac
I hope this guy was fired immediately and given the the economic rasberry price for the most wrong prediction in history of economics. Or at least he shared it with Mr. Krugman.
O-Joe
In the upcoming remake of The Prince And The Pauper, the Prince robs the pauper, beats him to a pulp and throws his a$$ in Debtors' Prison.
Purge:
In history and political science, to purge is to remove people considered by the group in power to be "undesirable" from a government, political party, a profession, or from community or society as a whole, often by violent means. Restoration of people from a purge is known as rehabilitation.
Please God, allow this man to purge!!!!
I heard that Bush had to get Warsh into the administration so he wouldn't get shipped out to Iraq with his National Guard unit.
W
No shit!
That was just a joke wheat.
Before everyone jumps to the next thread, can anyone address my question from earlier...is there much difference between taking losses from reducing mortgage principal and the losses already taken from lower CDO prices?
Also, would a housing bailout really be that bad if the government is just going to hand out 150 Billion in rebates here and there? What is the difference between cutting taxes and bailing out banks/homeowners? We will all pay for it in the end. Moral hazard aside.
I know! I was just using that as retort of some kind, however, while I have you on the chatline....
Warsh replaced some other buffoon, so I would like to study the process of who these types of people can be purged from The Fed.
In regard to what Dallas Fed President Fisher said about purging, should it not begin in his own home? We have a Fed that has been out of control and we need to purge these insider plants that have conflicts of interest ASAP, as in a Congressional Hearing ASAP! They need to resign or face charges of Treason!
Kohn took office as a member of the Board of Governors of the Federal Reserve on August 5, 2002 for a full term ending January 31, 2016. On May 18, 2006, the White House announced that Kohn had been nominated by President George W. Bush to replace Roger W. Ferguson, Jr. as the new vice chairman of the Federal Reserve System for a four-year term. The United States Senate approved his nomination, and Kohn began serving his four-year term as Vice Chairman of the Board of Governors of the Federal Reserve System on June 23, 2006.
Warsh joined the Federal Reserve Board on February 24, 2006, to fill an unexpired term ending January 31, 2018.
Unexpired term from who?
Optimistic Joe writes:
Just remember that Robert Shiller started warning regulators in 1996 that we were heading down the same path as Japan.
ac
I hope this guy was fired immediately and given the the economic rasberry price for the most wrong prediction in history of economics. Or at least he shared it with Mr. Krugman.
O-Joe
Damn straight! E-con-omic growth (which can be unbroken and infinite) has been based upon solid fundamentals for the last 12+ years, not on cheap money-based asset speculation. HH savings rates have never been higher, bank non-borrowed reserves have never been bigger, and HH debt-to-DPI ratio has never been lower. Peak Debt, my ass!
Real wages for the bottom 90% or so have clearly been rising. I just got my 20% COLA increase this week! Heck, with all the H1-Bs and outsourcing going on, my bargaining position as domestic labor has never been stronger.
Thanks for setting the record straight, O-Joe!
I hear what you are saying Wheat but anyone smart and ambitious enough to rise to a level of consideration for these government posts is going to have a long list of conflicts. The best any administration can do is try and select qualified people who have strong character. We should appreciate that anyone would even want to be a public servant with today's media. At this point in the American experiment there are no easy answers at a federal level except increased regulation.
Do not feed the trolls
Cheers,
prat
J"ust remember that Robert Shiller started warning regulators in 1996 that we were heading down the same path as Japan.
Nothing was done.
In fact we were basically encouraged by our economic overseers to bankrupt ourselves."
Yeah, way to nail that, Shiller...you know in investing it's not that you're right eventually, it's being right at approximately the right time. Put on your trade shorting the Cash Shiller Index from 1996 to today and see what your return is, or better yet when you went out of business.
Many public services, such as universities or federal independent agencies are created as corporations owned by the government.
'The Federal Reserve System is not "owned" by anyone and is not a private, profit-making institution. Instead, it is an independent entity within the government, having both public purposes and private aspects.
Board of Governors
7 members serving staggered 14-year terms
Appointed by the U.S. President and confirmed by the Senate
Oversees System operations, makes regulatory decisions, and sets reserve requirements
Once a member of the Board of Governors is appointed by the president, he or she functions mostly independently. The Board is required to make an annual report of operations to the Speaker of the U.S. House of Representatives.[19] The law provides for the removal of a member of the Board by the President "for cause."[20] The Board of Governors is responsible for the formulation of monetary policy. It also supervises and regulates the operations of the Federal Reserve Banks, and US banking system in general.
See 12 U.S.C. § 242.
Re: ... each member shall hold office for a term of fourteen years from the expiration of the term of his predecessor, unless sooner removed for cause by the President.
US CODE: Title 12,242. Ineligibility to hold office in member banks; qualifications and terms of office of members; chairman and vice chairman; oath of office
This is good: US CODE: Title 12,SUBCHAPTER II—BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
TITLE 12 > CHAPTER 3 > SUBCHAPTER II > § 248b
The Board shall order an annual independent audit of the financial statements of each Federal reserve bank and the Board.
Whenever a vacancy shall occur, other than by expiration of term, among the seven members of the Board of Governors of the Federal Reserve System appointed by the President as above provided, a successor shall be appointed by the President, by and with the advice and consent of the Senate, to fill such vacancy,
...wherever any power vested by this chapter in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.
praetorian, You don't mean me do you?
whoops, sorry wheat just unloaded. Sorry.
I would like to address the qualifications of Wonder Boy, in regard to this chapter:
TITLE 12 > CHAPTER 3 > SUBCHAPTER II > §
§ 244. Principal offices of Board; chairman of Board; obligations and expenses; qualifications of members; vacancies
US CODE: Title 12,244. Principal offices of Board; chairman of Board; obligations and expenses; qualifications of members; vacancies
This Chapter does not address the discretionary nature of qualifications for a board member??
Congressional report
The Board shall, concurrent with each semi-annual hearing required by this section, submit a written report to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Banking and Financial Services of the House of Representatives, containing a discussion of the conduct of monetary policy and economic developments and prospects for the future, taking into account past and prospective developments in employment, unemployment, production, investment, real income, productivity, exchange rates, international trade and payments, and prices.
Although its name has become synonymous with intrigue, conspiracy, disloyalty and assassination, it could be argued that for the first two centuries of its existence the Praetorian Guard was, on the whole, a positive force in the Roman state. During this time it mostly removed (or allowed the removal of) cruel, weak, and unpopular emperors while generally supporting just, strong, and popular ones. By protecting these monarchs, thus extending their reigns, and also by keeping the disorders of the mobs of Rome and the intrigues of the Senate in line, the Guard helped give the empire a much needed stability that led to the period known as the Pax Romana.
Thanks for setting the record straight, O-Joe!
HARM
I'm not sure what your rant (excuse me) has to do with a wrong economic prediction, namely Japan-style deflation. Or did your home lose 80% of its value since 1996?
So much for highly paid professors.
O-Joe
PURGE
PURGE!!!!
People, this is important, this is historic and needs to be watched, this is corruption and collusion and this is the nepotism destroying our country. We do need to purge this cancer! There is no way that The Fed should be this unbalanced! This is so close to treason.....for real! Wake up patriots!
In law, treason is the crime that covers some of the more serious acts of disloyalty to one's sovereign or nation.
Congress has, at times, passed statutes creating related offenses which undermine the government or the national security, (such as sedition in the 1798 Alien and Sedition Acts, or espionage and sabotage in the 1917 Espionage Act) which do not require the testimony of two witnesses and have a much broader definition than Article Three treason.
The difference between sedition and treason consists primarily in the subjective ultimate object of the violation to the public peace.
The Cold War saw frequent associations between treason and support for (or insufficient hostility toward) Communist-backed causes.
Ok, just a purge will do, but that better happen before summer, or entropy will help put this into a new shape anyway...so be it, screw it!
To belabor the point one step further, no purge within Washington will occur until we have a new president, so no changes will occur beween now and next January, and even then, do you think change will occur on the scale which it should? Yes, some nut like Obama could replace the entire Fed Board, for "cause' and then of course replace every person in Washington. I hope to God these crooks are preparing to have yard sales and I hope we see every person up for election, voyed out of office in November.
Yes, we need to purge!!
vomitorium (plural: vomitoria) is a passage situated below or behind a tier of seats in an amphitheatre, through which crowds can "spew out" at the end of a performance.
O-Joe
It has been a long time since I read Shiller's exact words, but IIRC, roughly 12 years ago he made that "irrational exuberance" remark to Greenspan about the stock market, techs in particular. Turns out, his call was way too early, but essentially right. Even then, they were overvalued, based on traditional PE & ROI measures, as the post-2000 NASDAQ has shown.
I seriously doubt he was predicting Japan-style housing deflation way back then, as the housing bubble didn't even exist in 1996. But perhaps you have the links to back up your bold claim?
We have also developed and started to deliver targeted examiner training so that our supervisory staff is equipped to deal with more serious CRE problems at banking organizations as they arise.
Its inconceivable that Fed Reserve examiners and supervisory staff are not equipped to handle serious CRE problems. Has all their advanced training been directed toward holding company exams and supervision?
let me see if i have this correct:
the AAAs are so illiquid and dislocated that the pricing is messed up and means nothing about value,...but the BBB space is where the liquidity runs deep and thus the levels reflect true implied value?
are you kidding me?
Well, it's odd but true sometimes, ES. If we know that the BBB tranche is toast, we might be able to value it as an interest-only security. Whereas who the hell knows what a more secure tranche is worth.
i get the io idea, and i agree that the BBBs levels are closer to a potential loss scenario than AAAs if you think the BBBs are toast early enough. but i just dont think it has anything to do with a deep enough market to value them. the liquidity in AAAs is so thin you can fart and move it, and the BBBs - they make the AAAs look like a huge party.
i think Levels today are driven by
1) people shorting cmbx, either by choice (hedge funds who hit the ABX lottery, or hedge funds who missed the ABX lottery) or by force (banks etc). the BBB shorts are out of gas at a 30 px, and defaults at 0.5%. thats why people pay 250 on AAA.4 for protection. to get your money back on that trade would require losses 4 times worse than 1986 loans. who's model is valuing that trade? that is a desperate shorter right there.
2) leverage,..this problem is up and down the stack, but it has a huge effect on spreads.
3) alternatives, there is so much cheap quality paper available out there.
either way, the next few years will be interesting to see. this is the first huge test for derivatives giving people the ability to express a short view so easily.
best
I think that there is more to the CRE defaults than meets the eye. Many (most?) securitizations had large dollops of multi-family included to make them palatable for purchase by Freddie. Rumor has it that there was a threshold of 20 something percent to make the bonds tasty enough. This resulted in inflation of the multi-family housing segment of CMBS - and the associated refinancing cycle.
It may well be that defaults are concentrated in multi-family, but at lower incidence for other segments, such as office, industrial, hotel, retail and so on... These defaults will also vary by geography. No two CMBS pools are created alike - you have to read the prospectus.
I have no doubt that with evidence of an economic slowdown these other sectors will also be impacted - but my guess is that multi-family gets hit hardest.
Just a thought!
This isn't the end, but I believe you can see it from here.