Category: bubble

What is the Bailout Fund?

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It seems rather complex, and I’m having a problem wrapping my head around the finer points, so I started with a principle that has never failed me, that it is a Bush initiative, so it will be a failure.

I am drawing on what is to my mind the single wisest thing written thus far this millenia, by one Daniel daves, this is a truism about the Bush and His Evil Minions™:

But it does inspire in me the desire for a competition; can anyone, particularly the rather more Bush-friendly recent arrivals to the board, give me one single example of something with the following three characteristics:

  1. It is a policy initiative of the current Bush administration
  2. It was significant enough in scale that I’d have heard of it (at a pinch, that I should have heard of it)
  3. It wasn’t in some important way completely fucked up during the execution.

So I start from the assumption that it’s screwed up. Then I looked at what was going on with this fund, and it appeared that banks were investing in their own brokerage funds, which is generally not allowed in the US, and was a primary cause of Japan’s financial crisis that ran over a decade, and I am even more convinced that this will be ineffective at best, and harmful at worst.

Then I asked myself the question that Nouriel Roubini, has been asking, “Is this this a liquidity crisis, or an insolvency crisis?” I.E. Is the problem that the money has stopped moving because of fear, and when things get back to normal, everything will be fine, or is the underlying value of the assets in these funds far less than previously reckoned?

Obviously, if it is the former, it’s a matter of reassuring markets with some sort of capitalist WD-40, but if it is the latter, then these funds, and some of the companies, will go bust no matter what is done, and any bailout scheme is simply an attempt to pass the losses off on unsuspecting rubes.

I lean toward the the latter, particularly since there is SIGNIFICANT federal support of the plan, because the Treasury department had to waive significant regulations regarding cross-ownership to allow this plan to come into being.

Then I read Dr. Roubini’s analysis on the bailout fund, “Super-Conduit or Super-Bailout Shell Game?“, (warning: it’s a bit dense), and he seems to agree: this is about attempting to pass the losses downstream.

Deficit Balloons, Treasury Sales May Soar, Upping Interest Rates

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The deficit is ballooning, and as a result, sales of Treasuries may increase by 50%.

This kind of shock to an already precarious bond market could send interest rates skyrocketing, as public and private compete in the market for capital.

If correct, and I am not an economist, we could see s significatn (more than 1%) increase in interest rates in the next 6 months.

Bushonomics.

Money Supply Explodes, Hyper Inflation Inevitable

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Barry Ritholtz at the big picture has a post showing that the money supply grew at an astonishing 24.3% according to the St. Louis Fed’s financial data.

Note that this number does not include the Fed’s rate cut or the emergency injection of money by the world’s central banks to stabilize the dollar.

More dollars chasing the same amount of goods equals inflation, in this case, it looks like double digit inflation, and probably the dollar falling of a cliff in currency markets.

The Grim Future of Real Estate?

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Here is a story that we will see repeatedly over the next few years, entire neighborhoods blighted by foreclosures.

In this case, you have half million dollar homes that people have simply walked away from, and police have to patrol in order to prevent squatters. There are swimming pools that have moved from assets to West Nile and Malaria infested health risks.

We are going to see a lot of this, and a lot of people trapped in their homes because the entire neighborhood is illiquid, because no one wants to live there at any price.

Pleasant picture this.

Luckily, I live in an old neighborhood, built in the 1960s, so we won’t see as many exotic mortgages, and hence foreclosures.

Countrywide CEO Dumped Stock Before Crash

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And it looks like he might very have gotten away with it. Where are Fred, Daphne, Velma, Shaggy, and Scooby when you need them.

Basically, he handled his shares through a trading plan, a sort of high level document which one gives to a broker, which is intended to avoid even the appearance of insider trading.

However, Countrywide Financial Corp. Chairman and CEO Angelo Mozilo revised the plan repeatedly in the summer of last year, at about the time that he would have been aware that Countrywide was circling the drain.

….

If a guy is changing his plan around, I would think that would send up a red flag. I wouldn’t allow my clients to do it,” said Thom F. Carroll, a financial planner with the Baltimore wealth management firm Carroll, Frank & Plotkin.

Mozilo adopted a new trading plan, added a second one and then revised it while the housing and mortgage industry slumped, the Times reported, citing regulatory findings.

The changes allowed him to sell hundreds of thousands of additional shares before Countrywide stock plunged.

Sandy Samuels, Countrywide’s chief legal officer, said Mozilo’s stock sales were all “in accordance with company policy.”

….

Yeah, right.

FDIC Shuts Down NetBank

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This will be the first of many, and proves that online business (NetBank was an online bank) obey the same economic laws as other businesses.

NetBank Inc., an online bank with $2.5 billion in assets, was shut down by the government on Friday because of an excessive level of mortgage defaults.

It was the largest savings and loan failure since the tail end of the industry’s crisis more than 14 years ago. Federal regulators appointed the Federal Deposit Insurance Corp. as a receiver for Alpharetta, Ga.-based NetBank.

This is just the beginning.

Rating Agencies and Appraisors and Free Market Failure

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It appears that Congress is getting ready to bash the rating agencies. We’ve seen similar things with real estate appraisers, though more at the local level.

What we are seeing here is a basic failure of a largely unregulated part of the market. Moody’s, S&P, and your local appraiser are all in a similar situation. If they look too closely, their customer will go to another appraiser or rating agency, hence you have unrealistic ratings on securities and unrealistic appraisals on houses.

The financial markets cannot police themselves.

Why Markets Cannot Be Relied on to Police Themselves

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Prudent Bear has put it better than I ever could* in his post, When markets lose their mind.

His point:

Subprime mortgages themselves exemplify irrational markets, yet the participants’ activities at each stage were economically in their own rational interest:

  • Low income consumers took on mortgages they had no prospect of affording because they believed from the experience of others that house prices would rise sufficiently to bail them out. In any case being often near bankruptcy the potential profit from successful speculation appeared to them greater than the potential loss from default.
  • Mortgage brokers sold subprime mortgages because they got a commission for selling them and were not responsible for the credit risk.
  • Investment banks packaged the subprime mortgages into multiple-tranche mortgage backed securities because they received fat fees for doing so and again had no real responsibility for the credit risk.
  • Rating agencies gave the upper tranches of mortgage debt favorable ratings, because they made a great deal of money from providing ratings for asset backed securities, needed to keep in the favor of the investment banks who brought them this attractive business, and had mathematical models (either their own or the investment banks’) “proving” that the default rate of the securitized mortgages would be low.
  • Investment bank and rating agency mathematicians produced models “proving “ that default rates would be low, ignoring the real-world correlations between defaults on low quality consumer debt, because they were well paid to do so – the alternative was to return to a miserable cheese-paring existence in academia.
  • Finally the investors bought asset backed securities because they could achieve a higher return on them in the short term than their borrowing costs, and could tell their funding sources (in the case of hedge funds) or bosses (in the case of foreign banks) that they were taking very little risk because of the securities’ high rating.

I do think that his post is incomplete in one area, which is in explaining how so many people with decent credit got caught up in this too.

Sunday Foreclosure Chart Extravaganza | Piggington’s Econo-Almanac | Southern California Housing Bubble News and Analysis

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Well, Rich Toscano does it again, with a series of charts that reflect how bad things are in San Diego.

Yep, you read that chart right, notices of default (NOD) are higher than house sales. Notices of trustee sales (NOT—Foreclosure auctions), and real estate owned (REO, basically no one would buy at the foreclosure auction) are skyrocketing too.

Truth be told, San Diego was one of the 10-20 most over heated markets in the country, but it’s effects are nationwide.

You see accelerated NOD, NOT, and REO levels in places as “un-overheated” as Toledo, and you see people who have used their equity in overheated markets to make investment and vacation home purchases in cheaper areas, which inflate prices everywhere.

Fannie Mae and Freddie Mac, in particular, and the mortgage resale market in particular, have made real estate markets more national, and even global.

Good Proposal by Chris Dodd on the Subprime Mess

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Chris Dodd, chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, has put forth interesting proposals on the current housing/mortgatge* mess.

  • Require lenders to assess borrowers’ ability to pay the mortgage even after a rate reset if they’re signing up for an adjustable-rate loan.
  • Require lenders to verify subprime borrowers’ income with documentation. Earlier this year, the Federal Reserve
  • Prohibit pre-payment penalties and yield spread premiums (YSP) in subprime loans. A pre-payment penalty is the fee some lenders charge if you end up paying off your mortgage early, including if you choose to refinance. It sometimes can be as high as six months’ worth of mortgage payments. A YSP is the difference between the the lowest interest rate a borrower qualifies for, and the actual rate he gets. A broker’s fee may be based on it.
  • Prohibit steering borrowers to more expensive loans when they qualify for lower cost ones.
  • Hold lenders liable for appraisals and for brokers’ actions when the broker is paid based on yield spread premiums.

These are good policies, and they would have been much better had they been implemented, or at least proposed, 2 or 3 years ago. to the degree that these can be made retroactive, they should be (you could make prepayment penalties immediately illegal, for example).

More importantly, it places much of the onus upon those who profited through their highly leveraged, and ruinous, financial products.

It’s taken him up a notch in my view of the presidential candidates.

*To all but the blind, this horse has left the subprime stables, and is roaming the prairie.

How the Credit Crunch Has Wider Consequences

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It just 86ed a deal to Carlyle Group to sell a cable company.

The bidders could not raise the necessary money.

The Washington Post reported the problems in the sale of Insight Communications, which Carlyle Group purchased for about $2.1 billion in 2005. Bidders including Time Warner Cable, had difficulty getting enough bank financing, according to the report.

Seriously, owning a cable company is about as near as you can come to legalized theft in this country, and Time F&^%ing Warner could not find financing?

Merger and acquisition activity in the US is very close to collapsing.