It appears that some lenders are filing foreclosure, but not taking possession, so as to avoid property taxes and fines for not properly maintaining the property.
We have a cancer here, and the Senate sell out bill is not going to fix this.
Category: bubble
Economics Update
People are not feeling confident right now, Conference Board’s consumer confidence index fell to 64.5, and the expectations index fell to 47.9, the latter being the lowest since December 1973.
Not surprisingly, the dollar is down as a result, though the fact that the Federal Reserve continues to run those printing presses like they were making toilet paper for rancid burrito day may have contributed.
In real estate, Freddie is seeing mortgage delinquencies increasing.
We are also seeing an explosion in payday loans, which means people are being abused by the system just as Bear shareholders are getting a freebie courtesy of the Federal Reserve.
Economics Update
It’s Purim, so let’s lead off with currency.
First, the dollar is a bit stronger vs the yen, but I think that the trend, and the underlying fundamentals, are in the other direction. No secrets here, just the combined federal and balance of payments deficit, along with the rise of the Euro as a reserve currency (brief primer here on what a reserve currency is), will push the dollar down.
There is an article in CNN Money about why there will be no bailout of the greenback by other nations central banks, but it misses an important point, that this bailout has been ongoing for over a decade.
The dollar is now falling in spite of the best efforts of the central bankers.
And in the “economists are always late to the game” news, the Economic Cycle Research Institute (ECRI) says that we are definitely in a recession.
Not to worry though, as majority of Americans think economy will turn around in 2009. I expect that the predictive powers of the American public will not be as good as mine.
We are looking at a deep and long recession, as credit contracts, and the stagnant wages of the past 30 years catches up with us. This will be worse than 1982, when unemployment broke 10% (Ronnie added the military to the count to keep the number below 10%), and real (i.e. subtracting inflation) interest rates in excess of 6%.
I think that it will be worse.
In the short term, the Visa IPO that I erroneously derided seems to have given a lot of banks some breathing room. It’s generated a significant amount of cash, which should help with upcoming liquidity issues….for a while, at least.
Still, banks will be leery of making loans even to exemplary credit risks, for some time to come.
In the world of companies in trouble, S&P is considering downgrades to Goldman and Lehman, and it has downgraded National City’s outlook rating.
However, this is all pretty mild compared to where Thornburg Mortgage which, in order to prevent margin calls (people demanding their loans be paid back now) for the next year, gave its creditors the following:
- To generate liquidity, it will issue “convertible bonds paying 12 percent annual interest”.
- The bonds can be converted to stock at about $0.72/share.
- This means that existing stockholders will have their equity diluted by a factor of 9.
- Without conversion, the interest rate would be in the 25% range (!!!)
- The assets that it is protecting through these bonds yield somewhere around 6%, but they cannot be sold now. They hope that the market will improve in a year.
Economics Update
Jobless claims
378,000, up 22K from the previous week, and the leading economic indicators fell for the 5th straight month by 0.3%.
Oil dropped nearly $4.00/bbl, and the dollar is up versus the Euro.
These are both driven by what is seen as reduced demand for oil, and a rate cut from the Fed which was around 25 basis points (0.25%) less than expected.
Still, it does not appear that the banks are optimistic Citi is looking to cut 2,000 jobs in their securities division (investment banking and trading). This is in addition to the 4k announced in January.
Just to remind you, it’s not just sub-prime, as Alt-A delinquencies and foreclosures are spiking too, and are trashing the related mortgage backed securities.
Finally, the Federal Reserve continues its extended bout of anilingus with the brokerage houses, making $75 billion in treasury securities available to investment banks.
Subprime Mortgage Meltdown Renews Urban Blight: Gene Sperling
It looks like people are noticing a new side effect of the housing crash urban, and suburban, blight, as vacant houses, unkempt lawns, squatters, and the occasional crack house turn middle class neighborhoods into slums.
A Big Wet Kiss, With Tongue, and Possibly on the Genitals, to the Upper Management of Bear Stearns, Courtesy of the New York Times
Maybe I’ve grown hard hearted in my middle age, but somehow, the plight of upper management at Bear Stearns does not inspire the empathy in me that it does Landon Thomas Jr. of the New York Times.
Bear Stearns has always been one of the shadier brokerages, with line fuzzing being a part of their investment strategy, so I’m just not upset that James E. Cayne “billionaire just over a year ago when Bear’s stock soared past $160, his 5.8 million shares are now worth about $28 million at Monday’s closing price of $4.8”.
Nor am I distressed that, “Some executives had moved quickly, putting their weekend homes on the market”.
Because of their work there are now people with no home at all.
And then there are the poor investors, “Bear executives were not the only big losers. Joseph Lewis, the Bahamas-based financier, invested $1 billion at prices above $100 last year, and top institutional investors like Morgan Stanley, Legg Mason and Barrow, Hanley, Mewhinney & Strauss, a value investor in Dallas, have been recent buyers of the stock.”
Boo F*&%ing Hoo.
Bear Stearns Share Holders Consider Lawsuit
You know, when you sold the cow for those magic beans, no one guaranteed you that the beans were magic. A lawsuit is just sour grapes.
Bear Stearns have been the “Bad Boyz” of Wall Street for years, and you knew what your were buying.
Krugman Says Bailout In Evitable, We Need to Go Swedish
I think that it is likely that a taxpayer funded bailout would be the only viable option, as Paul Krugman says in his NY Times OP/ED. He also notes that while the whether to bail out is settled, the how is not:
The U.S. savings and loan crisis of the 1980s ended up costing taxpayers 3.2 percent of G.D.P., the equivalent of $450 billion today. Some estimates put the fiscal cost of Japan’s post-bubble cleanup at more than 20 percent of G.D.P. — the equivalent of $3 trillion for the United States.
If these numbers shock you, they should. But the big bailout is coming. The only question is how well it will be managed.
As I said, the important thing is to bail out the system, not the people who got us into this mess. That means cleaning out the shareholders in failed institutions, making bondholders take a haircut, and canceling the stock options of executives who got rich playing heads I win, tails you lose.
In his NYT blog, he also notes that when one looks at financial meltdowns, the Swedes handled it best, with the handling of their financial problems in the early 1990s”.
He points us to Justin Fox of Time, who in turn quotes Merrill Lynch Economist David Rosenberg from his “morning call notes” (sorry, can’t find a link, any hints?):
The Japanese credit crisis is usually cited as the benchmark for what not to do. But few cite Sweden’s crisis as a template on what might actually work. … the Swedish authorities realized early on that a banking crisis cannot be resolved until the problem is properly defined. That means assessing who the “bad” and “good” houses of issues are and be willing to allow the “bad houses” to fail (as an aside, “good houses” do not necessarily imply “big” houses).
… Sweden established a Bank Support Authority to undertake “reality testing” on the loan books of Sweden’s largest banks and had a “board of valuation” experts go in and value the assets on the books of all the lenders. Call it invasive if you will, but then again, the government was doing the work that market players could not or would not do – value the collateral and do it quickly. This is similar to what Barney Frank is proposing in the US mortgage sector today. …
It should also be noted that it was Sweden’s equivalent of the US Treasury, and not the central bank, that played the primary role in this crisis management stage (though the Riksbank maintained an accommodative monetary stance and lowered interest rates right through to December 1993, more than a year after the markets had bottomed). And, it obviously required the heavy hand of government intervention; there are solid grounds for this when there is market failure in the private sector, in this case, insufficient information regarding the quality of financial sector balance sheets. …
I would add that my post on Dean Baker’s proposal of a stock transaction tax, along with my suggestion that it more generally cover financial instruments (here) is both a good way to cover the budget hit and a good way to discourage excessive arbitrage.
Economics Update
It’s late, and I’m lazy, so basically, it’s Bear Stearns, the dollar hits a record low vs the Euro and a Dollar sinks to near 13-year low vs. yen – Mar. 17, 2008, and the cost of a barrel of oil is bouncing around like a frog on a hot plate.
Tomorrow, when the Fed meets, will be really interesting.
The End is Nigh, One of My Predictions Has Come True
Yep, it’s the end of the world, I got a prediction right. On August 2, 2007, I predicted that, “Bear Stearns will cease to exist. It will either be forced to liquidate, or it will be bought out in a fire sale”.
I never get my predictions right. I look at my predictions on the HD-DVD/Blu-Ray fight.
So, after the Fed lends Bear Stearns $200 billion, JP Morgan buys Bear for 236 million, and they look to be ditching off the risk on the Federal Reserve:
Shareholders of New York-based Bear Stearns will get stock in JPMorgan equivalent to about $2 a share, compared with $30 at the close on March 14, the two companies said in a statement today. The U.S. Federal Reserve will provide financing for the transaction, including support for as much as $30 billion of Bear Stearns’s “less-liquid assets.”
Normally, when I say the end is nigh, I’m joking. I’m not joking now, and it has nothing to do with whether or not I got a prediction right.
It has to do with the fact that in Asia, where it’s Monday already, markets imploded. The Nikkei the Hang Seng have so far fallen by more than 4%, and the Korea Composite Stock Price Index by more more than 3%.
What’s more, on this side of the international dateline, the Fed cut the discount rate by 25 basis points, from 3.5% to 3.25%:
The central bank approved a cut in its lending rate to financial institutions to 3.25% from 3.50%, effective immediately, and created another lending facility for big investment banks to secure short-term loans. The new lending facility will be available to big Wall Street firms on Monday.
That was done on Sunday. When the last time that you’ve heard of the Fed doing anything on a weekend, much less a Sunday.
People are now talking about this in terms of being 1929 bad, not 1970s bad:
Wall Street fears for next Great Depression
….One UK economist warned that the world is now close to a 1930s-like Great Depression, while New York traders said they had never experienced such fear. The Fed’s emergency funding procedure was first used in the Depression and has rarely been used since.
….
In the UK, Michael Taylor, a senior market strategist at Lombard, the economics consultancy, said on Friday night: “We have all been talking about a 1970s-style crisis but as each day goes by this looks more like the 1930s. No one has any clue as to where this is going to end; it’s a self-feeding disaster.” Mr Taylor, who had been relatively optimistic, has turned bearish: “It really does look as though the UK is now heading for a recession. The credit-crunch means that even if the Bank of England cuts rates again, the banks are in such a bad way they are unlikely to pass cuts on.”
I think that they are very nearly right on this, at least for the US.
Unlike during the great depression, the US is no longer an exporter of oil, nor does it have the most vibrant and advanced manufacturing base in the world.
It may be bad world wide, but it’s going to be hideous here.
Books I Need To Read: Greenspan’s Bubbles
I read an interest review of Greenspan’s Bubbles by William A. Fleckenstein:
… He sets out to deflate Alan Greenspan’s reputation by parsing Greenspan’s own comments during his tenure as chairman of the U.S. Federal Reserve. His conclusion?
“Greenspan bailed out the world’s largest equity bubble with the world’s largest real-estate bubble,” he writes. “That combination easily equates to the biggest orgy of speculation and debt creation the United States (and the world) has ever seen.”
Bernanke was left to sweep up after the debauch while Greenspan rewrote history in The Age of Turbulence.
I’m not sure that there is a whole bunch to learn from his book, so I’ll wait until it hits the library.
What I find interesting, and well deserved, is that Greenspan will find himself increasingly reviled in the final years of his life.
In a very real way, this is more than a repudiation of Greenspan, but it is also a repudiation of Ayn Rand’s Objectivism.
The fact that Greenspan endorsed the worst excesses of the market for ordinary people, but rushed to bail out the “noble entrepreneur”, is a direct consequence of his experience of Ayn Rand’s acolytes.
Economics Update
In terms of market stability, Carlyle Capital share prices have tripled after Carlyle Group co-founder David Rubinstein said that it was looking at ways to compensate investors.
I’m not sure how much it means. The collapse of Carlyle Capital, that was so yesterday….hold it….it actually WAS yesterday.
Today, it’s Bear Stearns, which gets its own thread for reasons of personal ego.
Inflation in February was 0%, largely due to some moderation in food and energy, which won’t happen in March, given that oil is still at around $110/bbl, and the dollar is still tanking.
In insurance, it appears that losses are approaching the levels of Katrina, though we are probably less than 1/3 of the way through this.
The Bush Administration Punts on the Mortgage Debacle
According to Forbes, it’s “tighter standards”, but by the standards of any thinking human being, it’s a big wet tongue kiss on the mouth of the bad players in this drama.
The only substantive proposal is better licensing of mortgage brokers, the rest is voluntary, and it’s clear that Paulson, and the rest of Bush’s cronies, are not interested in reform when they say, “The objective here is to get the balance right — regulation needs to catch up with innovation and help restore investor confidence but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it.”
Let me explain this in very simple terms, the so-called “innovation” that Paulson is looking to preserve, is deception, complexity, fraud, self dealing, and general corruption.
These “innovations” did not make housing less expensive, or easier to get. They caused housing inflation, and threatened the stability of our housing market, banking system, and society.
This so-called innovation is not something we need to protect. We need to put a stake through it’s black heart.
Economics Update
It’s been a busy day today, largely due to the imminent collapse of Carlyle Capital, the investment bank of the Carlyle group.
Lenders are seizing its assets:
By yesterday the fund had defaulted on $16.6 billion of debt and said it expected to default soon on its remaining debt. The fund’s $21.7 billion in assets were exclusively in AAA mortgage-backed securities issued by Fannie Mae and Freddie Mac, traditionally considered secure and conservative investments, which it was using as collateral against its loans.
They could not meet margin calls, and their share price has fallen 90%. See also here.
Paul Krugman has a very amusing comment, that the “Carlyle Group should have stuck to what it knows. It’s great at the merchant of death thing; at investment banking, not so much“.
It’s not entirely accurate, but still really funny, I used to work for the Carlyle Group, but they sold me to buy Dunkin Donuts. Seriously. They sold United Defense, where I worked 2003-2006, to BAE Systems.
In any case, the collapse of the Carlyle Capital has the market worrying about other possible collapses, with the Times of London reporting that, “Several hedge funds with assets of more than $4 billion (£2 billion) were on the brink of collapse last night or had halted withdrawals, despite moves by the US Federal Reserve“.
This has also hit US currency with the dollar falling to a 12 year low vs the yen and an all time low vs. the Euro, see here, and here.
The Yen has fallen below ¥100:$1.00, ant the Euro hit a new record of €1.000:1.5625. We are talking big time ugly, and there is still the Yen carry trade, where people borrow low interest Yen and invest the money at higher interest elsewhere, that takes a hit when the Yen strengthened.
The falling dollar also drove the price of oil up to a new record, over $111/bbl, and is part, if not most of the reason that gold broke $1,000.00/oz as a part of the flight from the dollar and concerns about inflation.
There will be more pain.
Speaking of pain, retail sales fell in February by the largest month to month amount in 5 years, 1.1%. The preliminary numbers showing an increase that I reported a week ago were apparently just that, preliminary.
Note that this does not correct for inflation, so it’s even worse.
In it efforts to restructure, Chrysler is completely shutting down for 2 weeks in July, that’s everyone who is getting the vacation, not just the guys on the line for retooling. They are claiming that it will, “boost productivity and efficiency”, but my guess is that a lot of folks people will have their vacations extended to forever.
Finally, no monoliner insurer bad news today, or perhaps I missed in in everything else going on, but Countrywide Financial continues to see climbing foreclosures, with the Frbruary rate of 1.64% being more than twice that of a year ago of 0.80%.
I really think that the deal for Bank of America to buy them will fall through, because what looked like a decent deal a few months ago is increasingly looking like a significant overpayment.
Economics Update
Well, gasoline prices hit all-time high today, and oil prices hit another record too.
Interesting thing though, at the start of the day, prices were down on increased inventories.
Oil Prices are rising because the dollar is falling now.
In the ever entertaining world of monoliner insurance, MBIA and Fitch Ratings are in a pissing contest. MBIA dropped them as a ratings service, because Fitch thinks that they should be downgraded.
MBIA and AMBAC’s debt is junk in reality, no matter what S&P, Moody’s, or Fitch says.
Speaking of Moody’s, they are forecasting a big drop in earnings, down from $2.17-$2.25/share to $1.90-$2.00, which tanked their stocked.
The GSE’s stock tanked too, with Fannie Mae falling 6% and Freddie Mac falling 3%. It turns out that the relaxed lending limits has the market spooked that this will lead them into more losses, which, of course, it will.
If I had to make a bet between Fannie and Freddie, I’d go with Freddie though. their CEO has a good grasp on reality, he thinks that the housing market is only 1/3 of the way to the bottom.
I’m a bit more of a bear than he is, but I think that Richard Syron is a member of the reality based community.
Despite the rate cuts, and the talk out of the Fed about more rate cuts, mortgage rates are up, and applications are down as a result.
In the more general doom and gloom scenarios, I present the following:
Citigroup is having to pump $1 billion into six of its internal hedge funds. I guess that they have to sell another piece of themselves to some Arab sovereign wealth fund.
Finally, we have ING New Zealand suspending withdrawals from two of their CDOs.
New Zealand???? New F#$@ing Zealand? Whisken Tango Foxtrot.
The meltdown is now fully global.
Economics Update
I’m not sure if it even qualifies as news any more, but
oil hit a new record today, topping $107/bbl. Gasoline prices are following this trend, with prices rising $0.09/gallon over the past two weeks.
When this is combined with the fact that houshold wealth fell by $533 billion, (3.6% apr), in q4 of 2007. That’s without considering inflation.
When inflation is taken into account, all of 2007 is down.
In the ever entertaining world of the monoliner insurance, MBIA, is asking Fitch to stop rating its insurance units. They think that Fitch’s model is inaccurate, because Fitch is still considering a downgrade.
MBIA is insolvent, Fitch gets it, and S&P and Moody’s don’t.
As a result of this, we are seeing more of the non-profit and state run college lenders unable to secure financing, and hence unable to make loans.
Remember, these loans cannot be discharged by bankruptcy, and they are federally guaranteed, and no one will buy the paper.
This might explain why Lehman Bros. is cutting 5% of its workforce, about 1400 jobs.
One bit of good news is that China’s trade surplus dropped 63% in February, though one wonders how much of that is currencies readjusting, how much is a slowdown in the world economy, and how much is the winter storm that shut down the country for about a week.
BTW, its official, Malaysia is a Kleptocracy. That’s the only way to explain why, following a defeat that kept the National Front in the majority, but at less than 2/3, that the Kuala Lumpur Composite Index fell so sharply that they had to shut down trading.
This wasn’t even a change in party rule, just a drop below 2/3, and everyone was scrambling to get out because their business positions were predicated on corruption.
O happy day.
For what it’s worth, things are not much better in the US, where hedge funds are seeing margin calls on US treasuries. If treasuries go bad, forget the Honda full of silver, you need ammunition and canned goods.
Did Lack Of Regulation Cause This Mess?
Mish’s Global Economic Trend Analysis: Did Lack Of Regulation Cause This Mess?
Yes.
This has been another episode of stupid answers to stupid questions.
But Mike “Mish” Shedlock seems to think that it’s the FDIC which has caused all thi, because no one would have put a dime into countrywide in 2004 if not for the FDIC insurance, which created a moral hazard allowing people to place their money at risk, despite the fact that in 2004, Countrywide was golden with soaring stock.
Additionally, most of the money that Countrywide to bury itself was not the sub $100k investments of ordinary account holders. It was many times that from Wall Street investors, who had no guarantee at all, even for the first $100K.
This is mindless Randroid Objectivist claptrap, and it is actually the purveyors of this mindless Randroid Objectivist claptrap, most notably Alan Greenspan, who has never passed up an opportunity to deregulate a market, or to bail out a major capitalist bigwig, who created this mess.
Mr. Shedlock is therefore wanker of the day.
Krugman Has a Good Point, So Nu?*
Krugman notes that while the capital infusions of the Fed are in the $200 billion range, outstanding mortgages are in excess of $ 11 trillion, so the Fed bailout is about 1.8% of the mortgage market, and the number rapidly dwindles when examined in the context of other markets also in trouble.
The idea is not that the Fed will save these markets, but rather that the it will “slap the market in the face” to calm it down from hysteria, much like those old film noire detective movies.
Thing is, the Fed has done this twice, and it’s not working. What’s more, the interest rates that really matter to the economy, “The rates that matter most directly to the economy, including rates on mortgages and corporate bonds, have been rising”, because people are having to price an unknown level of uncertainty into their lending.
This is what is meant when it is said that the Fed is, “Pushing on a string”. It can lower rates all it wants, but the rates paid by businesses and individuals are now rising.
One of the things that I harp on, but that Krugman does not have the space to deal with in the constraints of a New York Times editorial, is the effect of the strength of the dollar on the Fed, and the effect of the Fed on the strength of the dollar.
Specifically, when the Fed cuts rates, it reduces the returns on the US dollar, which makes the currency less attractive, which drives the currency price down.
While this does help exports and reduces the advantages of imports, it also raises prices, because foreign dollars compete more for US products, like groceries (I posted about this in yesterday’s economics update).
So we are in a situation where we cannot win, and we cannot get out of the game.
*It’s one of the few Yiddish idioms that I grasp as a 3rd generation America Jew. Nu literally means yes, but, “so nu” means, “So tell me something I don’t already know”?
Economics Update
It looks like people are starting to notice that the cost of groceries are going through the roof. According to the article, Bush’s dumbass corn-ethanol program, increased demand from overseas because the dollar has fallen, and increased energy costs are the primary drivers.
Then we have experts saying that Banks face a “systemic margin call” to the tune of nearly half a trillion dollars, according to analysts at JP Morgan.
“Systemic Margin Call” is a nice way of saying that the credit markets are imploding.
Thornburg Mortgage is teetering on the edge of liquidation as a result of more specific margin calls. They do not have the capital to repay their loans, and this will lead to more of their loans becoming non-conforming, resulting in more capital.
Thornburg is not the first, and it’s nowhere near the last.
They Sold Me To Buy Dunkin Donuts, and They Have Defaulted
Not joking. I used to work at United Defense, and the Carlyle Group sold us BAE to buy Dunkin Donuts, at DFA meetings, I’d introduce myself, and say, “I work for the Carlyle Group”, just to see the double takes.
It now appears that the
Carlyle Capital Corp. division has defaulted on about $21 billion in loans.
They invested in “high quality” mortgage backed securities from the GSEs (Fannie and Freddie), but they have not been able to sell them in order to pay some notes coming due.
Not surprising. $21.7 billion backed by $670 million in equity is a 32.3:1 leverage, which means that if things tend down about 3%, you are broke.