CNN has a reports Banks tightening mortgage standards.
They are not just tightening mortgage lending, they are tightening ALL lending. And as businesses find that they cannot get the credit that they depend upon for cash flow, this drive what is already a moribund economy down.
So, the meltdown has claimed Citigroup CEO Charles Prince, and Robert Rubin will be replacing him temporarily.
How reassuring. Rubin asked for intervention in the Enron affair so that his clients could screw less savvy investors for some breathing time, and now he his heading Citigroup, which has now written down something like $11 billion in losses, so far.
I have no clue as to what this means, but it can’t be good.
I guess that this turn around should be real soon now.
Matthew Padilla on his Mortgage Insider Blog, has this little gem:
|
Location |
% of Interest Only Loans in in 1st 3 Months of 2007 |
|
|
58.6% |
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|
66.6% |
|
|
59.2% |
|
|
59.2% |
|
|
52.8% |
Calculated Risk has the following pictures:
The total number of California notices of default
And these are notices of default as a percentage number of houses in California.
Both ways, it’s the highest ever, with about 1/30 ownde occupied houses in default. Not pretty.
The San Francisco Chronicle also has some pretty pictures:
Foreclosures are skyrocketing.
Seeing as how pictures are worth 1000 words, I think that I have written enough.
I remember when this was occurring routinely with the job reports. For a while, it seemed as regular as a ticking clock, the previous numbers were revised down, and the current numbers were a big gain over the revised numbers. This slight of hand that only convinces the truly dense and economics reporters* served primarily to boost Bush’s numbers.
Well, it appears to have happened again, this time with Housing. New home sales are reported to have 4.8% to a seasonally adjusted annual rate of 770,000 from a revised 735,000 (it was originally 795000) in August. Very convenient how all those revisions work.
So, we were down by 25,000 from the first reported number, but it’s an increase because the number was corrected downward.
Anyone want to guess if this happens next month?
*But I’m repeating myself.
It just gets better and better.
It not appears the Merrill Lynch will take losses of at least $8 billion, up $3 billion from a few weeks ago, they are predicting 2 million foreclosures, 4x the estimate of the Bush administration, and housing inventories are at their highest in 20 years.
This neglects the fact that it’s not just subprime though, so it will get worse.
This has been todays bit of sunshine.
This getting a bit of mainstream play, because it is on CNN:
But one observer, Tom Schlesinger, the founder and executive director of the Financial Markets Center, a think tank that has followed the Federal Reserve closely for the past decade, believes the blame for the crisis falls squarely on the Fed and accuses the central bank of “regulatory foot-dragging” that has harmed the public.
Schlesinger maintains the Fed’s prevailing regulatory philosophy has shifted from that of 20 or 25 years ago, which in essence was “here is the line between right and wrong, don’t cross it,” to a current underlying policy that “anything and everything that might be called financial innovation ought to be embraced.”
…
He points specifically to the opposition to government regulation that flourished at the U.S. central bank under former Fed chief Alan Greenspan and has continued unabated under his successor Ben Bernanke.
(Emphasis mine)
The article mentions Greenspan’s Randroid* inclinations as an aside though, when they are actually the source of the problem.
He found anything that created disasterous bubbles to be an artifact of man at his most noble.
*He was one of Ayn Rand’s inner circle and bought into her nutzo worldview.
Dr. Roubini reminisces aboutr how he was thought a lunatic in his latest blog post. A governor of the Chilean central bank commented “Usually at this kind of meetings I used to hear that the views of Nouriel Roubini about an impending financial and real hard landing are from the Moon. But this year there are plenty of “lunatics” around!“
Just so you know, these were the good doctors predictions form a year ago:
I would also note, that I have been predicting much the same since before December 2003, and additionally, I’ve been commenting on the downward pressure on the dollar, which I believe will lead to sever (double digit) inflation, though this may already have occurred, given how much the BLS and other governmental entities collude in tweaking the numbers to generate low numbers.
I can’t give an exact date and time, but I expect the dollar to weaken to more than $1.50:1.00€ before years end. 5 Years ago it was about $0.95:1.00€, and a few years befoire that, it was $0.72:1.00€.
So the dollar has fallen 50%.
Down 8%, they were expecting a 4% drop. Don’t let anyone tell you that this is over.
Here is the chart: 
As the folks at calculated risk explain, the subprime resets will be done with in a year or two, but then the Alt-A and Option ARM mortgages kick in.
Alt-A may not be that bad, it’s basically the bottom end of prime, kind of like being slightly pregnant, but the Option ARM mortgages are a different story. A lot of these folks are paying the minimum, which means that they are going deeper and deeper into debt as we speak.
This will get uglier before it gets better.
Banks are continuing to take losses and write down loans.
Poor quarterly results from banks across the US over the past two weeks suggest credit problems once confined to high-risk mortgage borrowers are spreading across the consumer landscape, posing new risks to the economy and weighing heavily on the markets.
This is not a problem limited to one portion of the market. It is wide spread, and it is systemic, driven by the Fed’s, specifically Alan “Bubbles” Greenspan’s, decision to create a credit bubble to address the dotcom meltdown of 2000-2001.
Too many people owe too much money, and much of this money should never have been lent out in the first place.
For a while, I have been talking a bit about the dangers of highly complex and highly leveraged financial instruments, and how they might contribute to a crask.
It appears that some folks at Barron’s Magazineare now beginning to have the same concerns.
Let’s give some background on how a lot of these instruments work:
Investing on Margin:
What happens here, is that you borrow money from your broker to purchase stock, which is the collateral to the loan. Let us assume that you want to purchase stock for a company, you have $10,000 to spend.
If the costs $10/share, you can buy 10,000 shares. If the price goes to 11, you make $1,000.
Let us assume that you were to buy those shares on margin. The current US margin limit is 50% (correct me if I’m wrong), so with your $10,000, and the borrowed $10,000, you could buy 20,000 shares, and when they went to $11, you would make $2000, which after loan and margin fees would be around $1700.
The problem is that if the stock drops to $5.00, you will have lost all of your money.
If the stock drops to $3.00, you owe money to your brokerage.
Leverage can improve the upside of investments, but at the risk of significantly larger downside risks.
Securities Futures:
These are similar to commodities futures, except that deal with entities rather than stocks and bonds. They lack the justification that commodities futures do: If a tire manufacturer gets a large OEM contract from General Motors, there is a real business case for them to lock in the price of rubber with a futures contract, but a stock future’s contract is just speculation.
You make money with an appreciating stock by purchasing a contract to sell a stock purchased today at a later date, and you make money with a depreciating stock by purchasing a contract to sell a stock today that you are buying at a later date.
Generally, you only have to put down the cost for the contract, and ;”>not the cost of the security, so where a typical margin purchase may be 50% leveraged, stock futures might be more than 90% leveraged.
Obviously, if one is in possession of ;”>inside information both of margin purchasing and futures can greatly increase the return on this information for an unethical broker.
Just so you know, leverage has increased markedly over the past few years, see below for a picture of the roughly 300% increase in Margin since 1990.
It should be noted that the use of leverage, specifically margin purchasing, was one of the major causes of the stock market crash of 1929. It forced people who got margin calls to unload into a collapsing market. It is why the loan to value rate was set to about 75% in the 1930s (and subsequently lowered to 50% in the mid 1970s).
It should be noted that none of these techniques aid ;”>investors, they aid ;”>speculators, and they provide perverse incentives for people to cheat in some manner or another.
The repackaged loans that are currently weighing on the market are a rather similar sort of leverage, where the idea was that by packaging a large number of loans together, you would spread the risk of any individual loan defaulting, which allowed people to trade these securities in a brisk, and potentially lucrative manner, particularly for the brokers, who got a commission on each sale.
If we have a 1929 style crash in the stock market, or worse, a 1987 style crash in the stock market (it was a worse one day drop), the swings will be exacerbated by people who will be forced by their brokers to sell on the drop on a roller coaster ride.
If we were to return to the Depression era regulations that FDR implemented, much of the instability and speculation that causes this risk would be eliminated, but it would take years for the exotic financial instruments to work their way out of the market, so it is likely too late now.
This is no surprise. The question is never been whether this would start, it has always been where, and when, and how much, and how fast it moves across the country.
There are very few places in the country that will be untouched by the real estate meltdown, and now the first three questions have been answered, and the 4th question is in process:
On average, a foreclosed property sells 20.3 percent below its market value. The median discount level is slightly lower in Orange County at 19.6 percent compared with 21 percent in Los Angeles County.
The real estate folks are saying that it won’t depress the market because it is only 6% of sales right now, but if 1 of every 17 house sales is at a 20% discount, it will have an effect, particularly as that number goes up, both in terms of percentage of sales, and in terms of discount.
I remember this joke from the 1989-1992 real estate crash in Massachusetts:
Q: Which of these things do not belong:
A: Gonorrhea. You can get rid of it.
What, the CEO of Countrywidemay have dumped his stock when he got advance notice in violation of insider trading law???
Don’t make me quote Claude Rains in Casasblanca.
Here is the CEO in an industry that has largely depended on a pump and dump mantality, and has increasingly relied on the ignorance of its customers for its business, and we are supposed to be Suprised when it turns out that there are indications that perhaps the senior management did not scrupulously follow the rules????
Well, knock me over with a sledge hammer.
Martin Wolf has a fascinating essay on how the “mixture of crony capitalism and gross incompetence” in the Anglo-Saxon Model of capitalism (Basically the sort of high finance practiced in the US and the UK, is headed for a fall.
His points:
I agree with him that these presage long term changes in the financial markets:
Experience teaches that big financial shocks affect patterns of lending and spending across the world. Originating, as it does, at the core of the world economy, this one will do so, too. The question is how stable and dynamic the world economy that emerges will be.
Go to his article to see the graphs.
The Dollar has hit a new low vs. the Euro, it broke $1.43, and is not sitting at $1.4291:€1.
At the rate that this is going, the dollar will break $1.50:€1 by year’s end.
This will force interest rates up, and the credit crisis will get much uglier.
The US had net sales of minus $69.3 billion in August, a positive sales of $60 billion. To put this in perspective, the last time that net sales of long-term securities such as bonds, notes and equities was this bad was when Russia defaulted on its debt.
The dollar is near ist historic low versus the Euro, and the weakness of the dollar is also driving higher oil prices.
This will place further upward pressure on interest rates, to pull the money back, which could make the current situation even more precarious.
Not surprising. Were I a home builder right now, I’d be in the fetal position shrieking, “Tekeli-Li!”.
It’s the lowest number ever, but I still expect the Fed and Wall Street to be Surprised when it gets worse.