Joseph Lewis has acquired a 7 percent stake in Bear Stearns.
You will see more of this, and I stand by prediction that by August 2, 2008, Bear Stearns will no longer exist as an independent entity.
Category: bubble
A Good View of the Coming Downturn
Nouriel Roubini has a very bleak picture of where the US economy is going. He is predicting a 15% drop in house prices in the nest two years (I predict at least that much), and there is downward pressure on auto sales and other consumer spending.
And then there is this:
Unfortunately, financial globalization together with securitization and mushrooming of complex credit instruments has lead to greater opacity and less transparency in the financial system. And this lack of transparency breeds unmeasurable uncertainty rather than priceable risk. Risk can be priced as you have a distribution of probabilities on various events. But unmeasurable uncertainty causes higher risk aversion under conditions of market distress. This generalized uncertainty is now coming from two sources: first, we do not know the size of the overall losses in credit markets: sub-prime alone could lead to losses of $100 billion or much higher depending on how much home prices will fall. And other losses from other illiquid financial instruments remain unmeasured in a world where institutions were marking to model rather than marking to market and where credit rating agencies were mis-rating complex credit instruments. Second, as securitization implies that financial risks have been spread out of banks and to the corners of the global financial system we do not know which firms are holding the toxic waste and thus which firms will go belly up next. It is like walking blind in a minefield where you have no idea of where the mines are. This uncertainty breeds large fear – after the massive greed of the previous credit and asset bubble has now burst – and lack of trust of financial counterparties, even otherwise respected ones: everyone want to hoard liquidity and hold the safest assets as even large financial institutions do not trust each other and are unwilling to lend to each other. This greater opacity of financial globalization and securitization implies that the re-pricing of risk that we have observed in the last few weeks is a permanent rather than a transitory phenomenon. And the sharp spike in the cost of credit will further weaken an already weakened economy. This is thus the first real crisis of the new world of financial globalization and securitization.
Translated into ordinary English, he’s saying that the global finance system has become so opaque and so byzantine that risks cannot be evaluated and assets cannot be valued. The world financial system is no better than a game of 3 card Monte.
I Have Become Incapable of Perceiving Sarcasm
Michael Lewis, the author of , has an essay, A Wall Street Trader Draws Some Subprime Lessons.
His treatise? This is what happens when you lend money to poor people.
For the life of me, I can’t figure out if he’s joking or not.
I read it, and I was incensed, and then I thought, “What wonderful snark”, and then I thought, “I hear Republican talking points like this all the time.”
Either he’s got one of the blackest hearts on wall street*, or a marvelous sense of snark, in which case I am completely pwn3d†.
I just can’t tell which.
For the sake of the world I hope that it’s pwnage.
*Which is saying something.
†Owned
Remember What I Said About Currency?
I said that an downturn would force the Fed to push interest rates down, and that this would hose the dollar, leading to a falling dollar, and from there import driven inflation, as the cheap crap we buy from Chins becomes more expensive. Well, Richard X. Bove, a respected analast for Punk Ziegel & Co.has just written the same thing.
He’s saying that cutting interest rates to help salvage mortgage lenders will not save them because, “Lower interest rates will send the dollar into a tailspin and wreak havoc in the job market.”
Nice catch 22, but it gets worse, Chinese inflation is surging, it just hit 6.5%, the highest rate in 11 years.
This means that their central bank is going to have to boost interest rates, which will strengthen the Yuan.
Of note, food was a primary component, 18.2% year over year (Pork 49, cooking oil 34.6 %, eggs 23.6 %, fresh vegetables 22.5 %), and this will lead to civil unrest, probably to coincide with the Olympics, unless they reign this in aggressively.
This is going to get ugly.
Alan “Bubbles” Greenspan Becomes the “I Didn’t Do It” Kid
After 20 years of bailing out excessive and speculation, Alan Greenspan is now saying that there is “no way to confront bubbles“.
You know, when an organization like the Federal Reserve bails out intemperate professional investors, it encourages unwise risk taking and bubbles.
That would be you.
McMansions Become ‘McApartments,’
It should be noted that this phenomenon happened with Brownstones too.
These days, they are 3-4 apartments.
McMansions don’t seem as readily adaptable to dividing into apartments, but a lot of them are going to end up as such, because there is no market for them.
It will have the effect of “urbanizing” those neighborhoods though, exactly the opposite of what was intended by the folks who bought and live in such homes.
A Sensible Fix for the Mortgage Mess
David Laibson has a good start, outlawing the prepayment penalty.
The prepayment penalty allows for “loss leader” loans, because it it offers an incentive to provide “loss leader” loans, because it makes it prohibitively expensive to get out of those abusive loans.
I would add outlawing, or severely limiting, points, which provide a similar incentive.
Congress could do this tomorrow, and it would help a lot of people now and in the future, while not bailing out bad actor lenders.
Bush to Offer Proposals To Ease Mortgage Crisis – washingtonpost.com
Bush has proposals for mortgage crisis.
The question is who is he paying off with this? Is it poll driven or contributor driven?
Dean Baker has some good analysis.
Basically, his plan is to allow poor people to get even further over their heads by waiving the 3% FHA equity requirement, and to forgive the taxes on the forgiven debts that are foreclosure, which benefits the richest families (higher tax bracket) more than the poor ones.
There is also the inevitable jawboning about going after bad players in the market.
Bush and His Evil Minions™ have a good record on going after evil doers. Where’s Osama bin Laden again?
So, it will make things worse, and benefit the rich….Any Questions?
More Panic Borrowing from Central Banks
It’s the Moral Hazard, Stupid
CNN has an article on the mess that Bear Stearns has Found themselves*.
They go into a number of reasons, but at its core, Bear Stearns*, and the rest of Wall Street have fallen victim to one of the favorite bogeymen of the right wing, moral hazard.
The right wing insists that things like minimum wage laws make us lazy, and public health care delivery makes us hypochondriacs.
While it is certain that minimum wage laws raise the cost of low value employees, and that there would be more use of the healthcare system if it were sane, the most extreme case illustrating the risks moral hazard is in the financial markets.
It turns out that Alan “Bubbles” Greenspan did the same with financial markets: There was never a market failure that he would not bail out over the past. As a result, people have become far more accepting of risk in the pursuit of greater return.
Whether it be the bailout of LTCM, or the floodgates being opened after the crash of 1987, or the dotbombs, Alan Greenspan has insulated people from the consequences of their decisions, and so we have people loaning dogs money to buy a house.
FWIW, I do not think that this serves as a good argument against socialized healthcare, which I support (I support a NHS over a single payer), but it is a good argument against socialized capitalism.
*Just to remind you, I have predicted that Bear Stearns cease to exist as an independent entity sometime before August 2, 2008.
And the Winner in the “So Stupid They Can’t Cut Thier Own Meat” Category
Rich Karlgaard, who thinks that comparing a Democratic candidate with Franklin Delano Roosevelt is somehow a slur.
It isn’t, not in the general election, and particularly not in the Democratic primary.
It’s easy to see why he’s so profoundly misinformed, as he tells us with self assurance that only comes from being an economic knuckle dragger, who are in no short supply at Fortune magazine, that the investment class “went on strike” in 1937*.
I guess that would explain the soaring mattress sales at the beginning of that year, they had to put their money somewhere.
While it is clear that criminals bury their money in low return investment when the heat is on, most investors are law abiding and moral individuals, who continue to invest. Tax and regulatory policy can determine where they invest, but not how much.
*In reality based economics, what happened was that Roosevelt thought that the depression was over and he backed off the new deal, for example cutting the WPA funding by half.
Debt Resellers Knew That They Were Buying and Selling Bad Paper
This should surpirse no one, that the big CDO (Collateral Debt Obligation) resellers knew that they were passing bad paper.
Why, you ask, would professional traders do this?
The answer is quite simple: DEAL FEES. I gotta keep buying collateral, in order to keep issuing these transactions as a CDO manager. Its my job: I gotta keep accumulating collateral, and I gotta issue the liability against that collateral.
Welcome to 3rd world Klepto-Capitalism, Wall Street style.
Fire Sale Begins
One thing that you can be sure of is that any news story on real estate will be mindlessly optimistic. There is too much ad money out there for it to be otherwise.
In this case, they talk about rising new home sales, but ignore the following:
- New Home sales are upon signing the contract, not closing, so you have cancellations that are not reported.
- The sales are up because home builders are starting to dump their inventory. This is the early stages of the slump, not the end.
We are still very early into this.
In Which I Disagree With Brad Delong
Brad Delong quotes Lawrence Summers, who asks “Why Haven’t the Conforming Mortgage Cap Amounts Been Raised?”, and Mr. Delong further says, “These are wise questions. I don’t understand why the conforming mortgage dollar caps have not already been raised substantially.”
Let’s be clear here. They are probably both smarter than I am. They definitely both have far more training in economics.
That being said, I think that, in a world where economic policy is run by sane competent men*, that any sort of recovery should answer some questions first:
- Who is the target of the bailout. I would argue that distressed homeowners are the target, in which case it’s necessary to derive a targeted solution which maximizes the homeowners relief, and minimizes the amoung to which we indemnify the investors, loan companies, etc. Capitalism must allow for failure to be capitalism.
- What regulatory changes must be made in order to prevent this from recurring, seeing as how any bailout increases the belief in further bailouts, and hence destructive risk taking. I think that much of this problem has its roots in the deregulation from the late 1970s through to the present day, so I recommend re-adoption of New Deal era regulations.
In terms of what I would suggest for initial steps:
- An aggressive push to allow borrowers to negate loans due to violations of the truth in lending act, which allows buyers to rescind the loans and void the mortgages. (they still owe the money, but it becomes an unsecured loan, and the debtors have far more rights in terms or restructuring in bankruptcy).
- A law invalidating all pre-payment penalties.
- Reregulation of the lending industries to prevent further abuses.
*Yes, I know, that’s not the case right as long as Bush is in office.
This is bad…This VERY VERY Bad.
The Federal Reserve is allowing CitiGroup and Bank of America to make massive transfers to their brokerage sides.
Jesus H. Christ on Toast!!! Doesn’t anyone remember what happened during the depression???? It’s why, until the mid 1990s, banks were forbidden to own brokerage houses.
This unusual move by the Fed shows that the largest Wall Street firms are continuing to have problems funding operations during the current market difficulties, according to banking industry skeptics. The Fed’s move appears to support the view that even the biggest brokerages have been caught off guard by the credit crunch and don’t have financing to deal with the resulting dislocation in the markets. The opposing, less negative view is that the Fed has taken this step merely to increase the speed with which the funds recently borrowed at the Fed’s discount window can flow through to the bond markets, where the mortgage mess has caused a drying up of liquidity.
These rules are not for good times, they are for times like now. They are there to prevent the financial system from going down the drain as good money follows bad.
Helicopter Ben has made a very bad move.
More about deceptive loans
Remember when I wrote about how imporper disclosure may invalidate many of the sleazy subprime loans because of the truth in lending act?
Well, it’s not just blogs like the Big Picture covering this now, it’s on Yahoo, via CNN Money.
We are going to see millions of the suits, literally.
How To Get Out of a Deceptive Mortgage
(Via the Big Picture)It appears that failure to disclose loan terms according to the Truth-in-Lending laws can change the loan status.
It turns out that there is a provision in the Truth-in-Lending Act that allows debtors to rescind their loan and void their mortgages if the terms of the loan are not clearly spelled out.
You still owe the money, but they are now just another creditor, at the back of the line, and protections from homestead provisions and bankruptcy would still apply.
One wonders how *chough* Alan Greenspan ignoring the Fed’s role in mortgage lending *cough* the lenders could have screwed up so badly on something that was both cheap and easy.
Job Cuts Surge in Financial Industry
There is a report from Challenger, Gray & Christmas showing job cuts in the financial industry skyrocketing this year. There have been about 88K redundancies so far this year, as versus about 50K for all of last year. Extending the numbers out, it looks like there will be 104+K job losses this year in the industry.
The question of course is, now that we don’t actually make anything here, what are we going to do when people cannot get jobs selling houses or financial instruments to outselves?
The Onion Strikes Again, Subprime Edition
Foreclosures Rise, and Business Can’t Get Cash to Run or Expand
Well, here’s a quick lowdown on financial news.Foreclosures in the US rise 9% June to July, and 93% YoY. House prices are no longer rising, so people cannot sell to get out from under.
This has put a more general squeeze on credit, so companies are increasingly unable to get credit for expansion or even normal operations. Commercial paper, and the bond markets are moving less than George Bush after eating a pretzel, with results like this:
- Hertz isl struggling to get low-rate loans for rental-fleet purchases.
- Deere is “putting the brakes” on production of construction vehicles.
- Countrywide Financial on Thursday had to tap its entire $11.3 billion emergency funding line.
- Home Depot is rethinking a plan to borrow money for a stock buyback, and the debt shutdown may stop the sale of its wholesale supply business.
- Media giant Quebecor canceled a $750 million debt offering.
The money quote here is, “The market for investment-grade bonds — or money lent to companies with great credit — has virtually stopped for the past few weeks“.