Category: bubble

Home Prices Sliding

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This Wall Street Journal article makes a slight increase in home salse its lead, but it misses the bigger picture:

The median price of a previously owned home fell 3.3% to $210,200 in November from $217,300 in November 2006.

Sales up slightly, but prices down…both an artifact of potential house sellers being willing to cut prices. There are a lot of people out there who are waiting to sell homes, and believe that this downturn will be short term, and as more and more people see the falling prices as a longer term trend, they will move to sell sooner.

I’ve never seen a real home price drop that (not month to month, but a real one) that lasted less than 4-5 years. This one has even farther to go.

Economic Update, Housing Crash, Exotic Financial Instruments

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In real estate, we have new home sales at a 12 year low, and we have the phenomenon returning of people just walking out on their homes. The pertinent quote is, “Lewis’ comments came as a new expression – “jingle mail” – referring to the growing trend where Americans mail the keys to their homes to the lenders before vacating, entered the US lexicon.”

With all the news, the financial press is finally noticing that maybe, just maybe, those predictions of a quick rebound are a bunch of bullsh@$.

All in all, this is not surprising. News gathering is paid for by ad revenue, sales and subscriptions really only pay for ink and paper, not the words and pictures made with the ink and paper. Given the huge role that real estate pays in ad revenues, it’s unavoidable that the news media, notwithstanding the “Chinese Walls” will be the biggest boosters of real estate this side of Remax.

And in the department of the blindingly obvious, the Journal has an article saying that thecomplex financial instruments have magnified the credit crunch.

Well, duh. As much as people want to talk about innovation and the free market, much of that innovation has a seamy side.

The first man to rob a train was an innovator, and in financial markets we have a long (over 200 years just in the US) tradition of both fraud, and complex activities to benefit one entities, and transfer the downside of these activities to another.

At some point, society has to say that certain activities, like dope dealing and unsafe financial practices, are simply too damaging to society and they must be regulated.

Economic update

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Nouriel Roubini sees the following signs of an upcoming recession (I consider them to be signs of a current recession, but I’m not an economist):

  • Initial unemployment claims at 2001 recession level.
  • Durable and capital goods orders falling.
  • Consumer confidence down.
  • Oil prices closer to $100 than to $90/bbl.
  • Retail sales falling after accounting for inflation.
  • Residential real estate going down, and accellerating.
  • Commercial real estate starting down (more below).
  • Various leading indicators falling, as are corporate earnings.
  • Credit markets not only staying seized up, but getting even more seized up. (Dr. Roubins bullet points this out into about 5-7 items)
  • Unstable world environment.

In terms of more specific news, we have mortgage applications falling off a cliff, despite a rate cut, Fitch saying that it may downgrade residential mortgage backed securities (RMBS) because the insurers for these bonds are basically insolvent, Goldman-Sachs is predicting that Citigroup may be forced to cut its divident (implying that there is more bad news to come), the Chinese Director of the State Administration of Foreign Exchange saying that the US should not cut rates any more because it will “hammer” the dollar, there is increasing evidence that commercial real estate is starting to tank too (It typically lags residential real estate by about ½ year), and residential real estate prices have fall by 6.7% year over year (and at about an 11.7% rate for the past quarter).

Making 1929 Look Like a Walk in the Park

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Interesting article in the Daily Telegraph, Crisis may make 1929 look a ‘walk in the park’.

Bullet point summary:

  • Liquidity doesn’t do anything in this situation,” says Anna Schwartz, the doyenne of US monetarism and life-time student (with Milton Friedman) of the Great Depression, “It cannot deal with the underlying fear that lots of firms are going bankrupt. The banks and the hedge funds have not fully acknowledged who is in trouble. That is the critical issue,” she adds.
  • Spreads on three-month Euribor and Libor – the interbank rates used to price contracts – are stuck at 80 basis points even after the latest blitz.
  • That an implosion of the credit markets is months away.
  • The 4% inflation mirrors what happened in Japan just before their meltdown.
  • When the Japanese discount rate was lowered to 0%, it did no good.
  • Not a single junk bond has been issued in Europe since August. Every attempt failed.
  • Increase sentiments for restoring national currencies in the EU. (Interestingly enough, this would provide a potential boost to the dollar, as it would make the Euro less attractive as a reserve currency)

As I’ve said, we are seeing a breakdown of the Ango-Saxon model of capitalism, where minimal regulation is really an excuse for klepto-capitalism.

I do not see a solution to this except through a devaluation of currencies, particularly the $US.

More Troubling Economic News

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First, the index of leading economic indicators falls for the third time in four months in November, dropping 0.3%, and it turns out that no one wants to buy into the mega-sh$@ pile that was supposed to buy up Structured Investment Vehicles (SIVs) to prevent fire sale prices on these assets.

It turns out that no one was interested in contributing to the fund. I think that “the market” has recognized that this was an attempt to shift to cost of bad decisions from the makers of those decisions to the ordinary investor, and while Wall Street typically likes this setup, they realized that even the most naive investor was already onto the game.

Mainstraem Journalism Finally Recognizes that “Incentives” Distort Reported Home Price

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The fact that “sales incentives” are really stealth price cuts has has finally been noticed by the Wall Street Journal.

Buyers, sellers and other market participants typically monitor fluctuating home values through sale records that legally have to be listed with county clerks. But incentives offered to buyers — ranging from free cars or furniture to cash rebates — are making those prices less reliable as a sign of what buyers actually paid, netting out the giveaways. And that may be misleading lenders and people shopping for homes, some real-estate lawyers and appraisers warn.

Well, duh.

That is the purpose of these incentives, along with artificially inflating realtor’s’ commissions. (If the price were cut instead, the realtors would typically take a hit on their commission of over $1000)

Monetary Policy Driven Inflation on Horizon

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Barry Ritholtz’s The Big Picture economics blog shows us a rather interesting picture:

The “continuation” bit is there because Federal Reserve under Alan “Bubbles” Greenspan stopped reporting the statistic, saying that it was not a “useful” statistic.

Rolling the Wiki, we get the following:

  • M0: The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency.
  • M1: M0 + those portions of M0 held as reserves or vault cash + the amount in demand accounts (“checking” or “current” accounts).
  • M2: M1 + most savings accounts, money market accounts, and small denomination time deposits (certificates of deposit of under $100,000).
  • M3: M2 + all other CDs, deposits of eurodollars and repurchase agreements.

So, all the big money transfers and currency injections in the market over the past few months, they are no longer counted by the Fed, but we can see that the overall money supply is increasing at double digit rates over the past year or so.

We’ve already had nearly a trillion dollars dumped into the credit markets over the past month.

Money is being shoveled out the door to attempt to resolve a liquidity crisis. The problem is that it is an insolvency crisis, though hyper inflation may bail that out.

More Trouble for Anglo-Saxon Capitalism: UK Defisit Soars

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The current account deficit has increased 50% to £20 billion in the 3rd quarter.

That’s double what was expected, and it is largely as a result of the credit crunch.

My take is that there were a lot of revenues generated by phony deals on phony securities, and the time to pay the piper is now coming due.

It should push down the Sterling a bit, which is one reason that my year end predictions now look increasingly unlikely.*

*There is also the fact that I can’t predict my way out of a paper bag.

Banks Starting to Worry About “Jingle Mail”

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Jingle Mail for those of you who don’t know is what banks get when mortgage holders send the keys back.

Calculated Risk has an interesting post on the subject. Basically, there are a lot of people who are underwater on their mortgages because of home price drops, and even though they can still pay, renting is cheaper, and people might start to walk away from their homes and mortgages.

The folks at CR are estimating that , “somewhere between 10 million and 20 million U.S. homeowners will owe more on their homes, than their homes are worth.”.

I think that the number will be greater, BTW.

Monoliners Heading for a Crash?

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This post is kind of an extension of my previous post about ACA and MBIA.

First, a definition, care of The Daily Telegraph:

Monoliners are specialist insurers who earn fees by lending their AAA ratings to US states, counties, and cities for bond issues – the safest corner of the credit industry.

The nasty twist is that most have ventured into mortgage debt to spice returns. They now face enough losses to threaten their AAA standing.

A downgrade means that every bond bearing their guarantee must be downgraded pari passu. Pension funds and institutions will be forced to liquidate sub-AAA holdings. A fresh cascade of distress sales will ravage the $2,400bn ‘muni’ market.

The unthinkable now looms. Moody’s said it was “somewhat likely” that top insurer MBIA would fall below the AAA capital requirement: Fitch warns of a “high probability” that CIFG Guaranty and Financial Guaranty will be placed on negative watch.

Does this sound familiar? It does to me.

Remember the people who were renting their credit to people with poor credit so that they could qualify for loans? It got shut down 6-12 months ago by all the major credit report agencies.

This is pretty much the same, only multiplied by about 100 million.

As Nouriel Roubiniputs it:

The forest issues is simple: a business – the monoliners’ insurance of securities and holding of risky ABS securities – that is fundamentally based on having a AAA rating is a business that does not deserve a AAA rating in the first place: it is clear to all that if a monoliner were to lose its AAA rating the essence of its business model would fail and such monoliner would have to close shop. But in any industry you have firms that can do business and thrive with an AA or A or even lower rating, even among major financial institutions. Here we have instead an industry that would go bankrupt as soon as its AAA rating is lost: by definition this is not an industry that can deserve a AAA rating. So the issue is not one of how sound these monoliners are managed or whether they have enough capital or whether they can raise new capital to maintain their AAA status. There is a fundamental and conceptual flaw in a business model that is conditional on a AAA rating and that is in a business that insures assets and firms that do not have a AAA rating. This is analogue to the voodoo finance of taking subprime and BBB mortgage backed securities and turning them into AAA by the black magic of CDO tranching.

This is not as the good Doctor Roubini admits, a painless process. This would involve losses in excess of $200 billion, but it is clear that this is a fraudulent practice, and the fact that the ratings agencies are giving these folks time to raise capital before a downgrade is merely supporting a “rotten business model”.

Bailouts of Bond Insurers

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Calculated Risk: Banks Studying Bailout of ACA

ACA, which insures $26 billion in bonds is insolvent, and the banks are looking at bailing it out. Bailing out an insolvent company generally makes no sense, but if they don’t then the banks have to record the non-uninsured bonds on their balance sheets.

Then we have MBIA, the largest bond insurer in the world, being threatened with a downgrade by Fitch, if it does not rais $1 billion in cash in the next 4-6 weeks.

While these companies in and of themselves are not very large, the consequences are staggering:

The insurer, ACA Capital Holdings, which lost $1 billion in the most recent quarter, has been warned by Standard & Poor’s that its financial guarantor subsidiary may soon lose its crucial A rating. If it did, the banks that insured securities with the ACA Financial Guaranty Corporation would have to take back billions in losses from the insurer under the terms of the credit protection they bought from the company.

The troubles at ACA could also serve as the first real test for credit default swaps, the tradable insurance contracts used by investors to protect, or hedge, against default on bonds. In June, the value of bonds underlying credit default swaps rose to $42.6 trillion, up from just $6.4 trillion at the end of 2004, according to the Bank for International Settlements.

“The hedge is only as good as the counterparty, or the other party, to the hedge,” said Joseph R. Mason, a finance professor at Drexel University and the Wharton School of the University of Pennsylvania. “This is part and parcel of the financial innovation that has grown very rapidly in recent years.”

In other words, phony money and real debt.

If MBIA loses its AAA ratings, more than $2 TRILLION in securities would lose its AAA ratings too.

We are still on the downslope of this collapse, so it has got a ways to go before we turn a corner.

Barclays Sues Bear Stearns

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So, now the lawsuits start:

Barclays sues over sub-prime losses

British bank says hedge fund losses were hidden

Andrew Clark

Barclays’ exposure to America’s sub-prime mortgage fiasco took a dramatic turn last night as the bank sued the Wall Street firm Bear Stearns for fraud and deception over the loss of hundreds of millions of dollars in an ill-fated hedge fund.

In a lawsuit filed in New York, Barclays accused Bear Stearns of systematically hiding losses in a fund which swallowed $400m (£200m) of the British bank’s money. The fund had to be bailed out in June after reaching the brink of collapse following a disastrous series of investments in mortgage-backed securities.

Barclays described the fund’s demise as “one of the most high profile and shocking hedge fund failures in the last decade”. The suit alleges that up to the last days before the bail-out, Bear Stearns executives engaged in a cover-up to hide the slump in its value.

…

This is going to get worse. We are going to see more lawsuits, and some very big jury verdicts.

With proper regulations, you stop this sort of stuff before it gets out of hand. Without it, you just have lawsuits after the fact.

Fed Shrugged as Subprime Crisis Spread

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The hed above is straight from The New York Times article about how the Federal Reserve under Alan “Bubbles” Greenspan ignored the warning signs of the real estate bubble.

It’s a clever turn of phrase. Greenspan was an acolyte of Rand’s and what was likely his first publication in the Times was his defense of Atlas Shrugged against a brutal review of the work. He argued that it was actually a “celebration of life and happiness”.

While the authors of the article rarely write the headline, it is clearly an attempt to cast the failures of the Fed to deal with the problems in the credit markets generally, and the housing market specifically as a result of Greenspan’s Randroid ideas.

It clearly shows that Greenspan was never the genius that he was viewed as in, say, 2000.

To my mind, the high opinion that many people had of him was an artifact of low oil prices and the cooking of the books with regard to inflation figures.

Read the article. It’s a hoot.

Prosecutors Investigating Bear Stearns

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Fortune has an article, somewhat amusingly titled titled Prosecutors loaded for Bear, looking into allegations of insider trading.

Specifically, it is alleged that senior fund manager Ralph Cioffi pulled his money out of Bear’s mortgage backed funds about 2 weeks before they imploded.

Drip, drip, drip…I stand by my prediction on Bear Stearns: They will cease to exist as an independent entity before August 2, 2008.

Federal Reserve to Tighten Lending Regulations

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This good, but I need to say three words: barn door cow.

The high points:

  • Prohibit giving people unaffordable loans.
  • Restrict use of “liar” loans.
  • Prohibit or limit prepayment penalties.
  • Curb or better disclose broker incentives.
  • Require or encourage escrowing of taxes and insurance.
  • Prohibit coercion of appraisers.
  • Prohibit loan servicers from engaging in unfair practices.
  • Require better disclosure overall.

Of course, half of these should be done already by anyone who wants to operate for more than a few years and then leave town ahead of the police.

Japanese Bank on Big Sh%$pile Bailout Fund: F$%# You White Man

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It appears that the major Japanese banks are getting government pressure to help bailout subprime financial instruments, and they are profoundly disinterested in doing so.

Japan big banks reluctant to pay for subprime fund
Mon Dec 17, 2007 5:44am EST

By Nathan Layne and Taro Fuse

TOKYO (Reuters) – Japan’s top three banks are expected to resist a request to put up a total of $15 billion for a U.S.-led subprime rescue fund, a move that could further cloud prospects for the bailout plan.

Sources told Reuters last week that Mitsubishi UFJ Financial Group (8306.T: Quote, Profile, Research), Mizuho Financial Group (8411.T: Quote, Profile, Research) and Sumitomo Mitsui Financial Group Inc (8316.T: Quote, Profile, Research) had each been asked to pony up $5 billion, and to give an answer this week.

…

But the issue could yet become political, the megabank executive said. Japanese banks are eager to expand their presence overseas and will not want to be seen as turning a blind eye to the health of the global financial system.

“What did America do when we had our non-performing loan problem? They just pushed us into the corner. European banks also ran away. Why should Japan now shoulder this burden?” said the megabank executive. “But this is a decision made at a high political level and could end up defying logic.

Part of this is the fact that the rest of the world pretended not to know them during the Japanese crisis, but another, larger part is the fact that the Japanese banks have largely cleaned up their act. The lack of transparency, cozy relationships, and self dealing in the subprime debacle mirror their experience 15 years ago.

What’s more, they understand that this bailout will interfere with reform, because it will largely serve to allow the worst miscreants to dump their investments on someone further down the economic knowledge chain (you know, teachers’ retirement funds, etc).

Quick Economic Update

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Citigroup just took a $49 Billion charge after deciding to take a bunch of exotic, and well below par, investments and put them on its books.

My guess it that they think that they will have to account for this piece of the big sh#@pile sooner or later, and that sooner is the better option.

And there are inflation worries, that are making Treasurys tumble. If this is a part of a trend, then we can see interest rates going way up.

Fannie Mae CEO expects home prices to fall 4 to 5 percent more in 2008.

I think that he is an optimist. My house is (according to Zillow) down 5% so far this year already.