Foreclosures since late 2006
Foreclosures in Denver, care of The Big Picture
Category: Economy
Credit Default Swaps: A Primer
This article is far better than anything I could write, I learned some things.
BTW, of note is the fact that the CDS problem was addressed by regulation in 1746 by the Marine Insurance Act, so it’s not like we haven’t seen this problem before.
Economics Update
Jobless claims are back below 400,000, down to 357,000. This is a noisy number, and it appears that the Easter holiday may have effected this somehow.
In high finance, we are starting to see some of the sh%$pile being liquidated at steep discounts, with Goldman Sachs selling ½ billion of Chrysler debt at about 63¢ on the dollar, which comes to about a $185 million dollar haircut, and it has been revealed that Lehman liquidated about $1 billion in funds.
You can view this as an orderly unwinding of these highly uncertain financial instruments, or the first steps towards a rush to the exits. I’m not sure which, though the fact that the LIBOR-OIS and the TED spreads are up again.* might indicate that it is a rush to the exits.
Basically, the spread, or difference in interest rates, between what banks demand when they lend to each other is a measure of how skittish people are about debt. The higher the number, the worse fear.
After dropping briefly following the Bear bailout, the spread is heading back up, implying that there are a lot of people who don’t want to buy someone else’s debt.
In international trade, the Dollar hit a record low vs the Euro, $1.5912:€1.0000, and the Yuan strengthened to below 7 to the dollar for the first time ever.
On the brighter side, the trade deficit rose in February, which might indicate that the economy is strengthening somewhat, though it isn’t in the UK apparently, because the Bank of England cuts key British interest rate 25 basis points, to 5 percent.
The continental Europeans appear to be more worried about inflation though, as the European Central Bank left rates unchanged, which will put some more downward pressure on the dollar.
Seriously though, I really can’t make a whole bunch of sense in today’s data, there is too much noise in opposite directions, which is why a fair man is not too hard on economists, who deal with this all the time.
Luckily, I’m not a fair man, so to all you economists, Go away, or I shall taunt you a second time.
*As Paul Krugman puts it, “One is the spread between Libor and Treasuries, the other the spread between Libor and the futures price of the Fed funds rate; I tend to prefer TED spread, because fears of bank defaults should affect Fed funds as well as Libor; but I know that Fed officials prefer OIS. Anyway, both pointing in the same direction.”
Economics Update
The average consumer is smarter than Alan Greenspan and the rest of the economic glitterati, because consumer sentiment dropped to a long time low (also here).
In energy, gasoline prices have hit another all time high, and oil prices seemed to have settled comfortably about $110/bbl.
That being said, it’s not just oil imports, inflation in non-energy imports in March surged 1.1%, with a year over year increase of 5.4%.
That 1.1% number is the largest jump ever recorded.
There is a smidgen of bright news, the Fed’s excrement for cash exchange program did not sell out this time, with only $33.95 billion of the $50 billion offered being taken.
In real estate, we have US banks killing the no down payment loan, which is long overdue. Even with a small amount of skin in the game, home borrowers tend to be much better risks.
Housing is tanking overseas too, with UK mortgage rates going up, despite BoE rate cuts, so they are pushing on a string there too.
But’s it’s not just us Anglo-Saxons, because Dutch home sales are tanking too, and let’s not talk about Spain.
Also, GE released earnings, and they sucked, which surprised the experts, but not me.
People are scared and not buying stuff. GE makes stuff. Any questions.
Economics Update
Well, Citi looks headed for a wild ride, with predictions of $17 billion in write-downs for 1Q 2008, and rumors that it is in talks to sell $12 billion of dubious loans at a significant discount.
They were paper sold as part of LBO activity which they could not resell.
Insurers are sure to take a beating on S&P downgrading 4 of them, MGIC Investment Corp., Old Republic International Corp., PMI Group Inc., and Radian Group Inc.
In energy, oil is trading near an all time high on weak inventories, and in currency, the dollar is down, because the market expects further rate cuts.
Why We Need Real Financial Regulation
Because people like this wreck national economies for sport.
The Financial Times reports on how a booze soaked get together of international hedge fund managers was organized by Bear Stearns laid the groundwork for a conspiracy to destroy the Icelandic currency and economy.
Of interest is that Iceland made itself vulnerable to this as a part of its aggressive transition from a resource extraction (fishing, once more than 1/6 of the economy) to a banking economy, and right now they have 8.7% inflation, and the central bank has set rates at 15%, so fishing may stage a comeback.
It should be noted that Iceland is actually in a pretty good position. It’s banks are well capitalized, and it has been running budget surpluses for some time, though its current account deficit is large.
One wonders if JP Morgan might be left holding the bag on this.
Delong is Wrong and Krugman is Right
Brad Delong belives that a significant part of the housing bubble appreciation was due to a real lack of space, and thus he guesses that only about ½ of the appreciation will be lost, thinking that some of the appreciation is being driven by the , “location, location, location” factor.
Paul Krugman looks at the trajectories of rental and buying, and sees appreciating in housing but basically none in rentals, which would not be the case if there were actually a shortage of land in desirable locations.
Krugman is clearly right.
RGE – The US Recession: V or U or W or L-Shaped?
Nouriel Roubini is asking what will be the shape of the US Recession:
- V, recession followed by recovery.
- U recession with a dwell at the bottom.
- W double dip.
- L-Shaped, it just drops and stays there for a very long time, like Japan.
I find this irrelevant. What matters is that everything is going pear shaped right now.
Economics Update
Busy day in real estate, we have:
- The pending home sales index falling to 84.6, the lowest number since its creation in 2001. Home sales are down 21.4% year over year.
- We have the IMF estimating that the US real estate meltdown will cost $945 billion. Looks like we will hit the trillion dollar mark, because we haven’t hit bottom. (Just to pat myself on the back, I said “trillions” in July of 2007).
- In the UK, we are seeing a decline in house prices too, only for them this is the second time around (see here and here)
- It looks like the Bank of England may be forced to slash rates in order to keep the housing from dropping too sharply.
- Se are seeing short sales, where the house is sold for less than the principal owed skyrocketing.
- For example, In Las Vegas, More than half of Las Vegas home sales in March were foreclosures or short sales.
Of course with any of these situations, you will inevitably find the highly placed moron, and today’s is Morgan Stanley CEO John Mack, who is saying that he thinks that the credit crunch is, “in the final innings”. If you have money in Morgan, get it out now.
Why am I so certain about this? Because the Fed auctioned another $50 billion banks in their “crap for cash” program, which has now “auctioned” $310 billion to banks for their worthless mortgage paper.
If that doesn’t convince you, how about GMAC looking down the barrel of a ratings cut, which means that people who might want to buy a car will find it even more difficult to get a loan to do so.
Of course, Mack thinks that things are looking up because private equity firm TPG just put $7 billion into WaMu, which implies to him that private equity is on its way to a comeback.
Nope….Dead cat bounce. WaMu’s only virtue is that it’s better, and only a bit better, than Countrywide.
For an idea of how badly things are going, note that First Marblehead is at risk of imploding. Note that FM is a student-loan services provider. It should basically be impossible for them to lose money.
This is federally guaranteed, and cannot be discharged through bankruptcy, but given that their insurer, The Education Resources Institute Inc., just filed for bankruptcy, all bets are off.
Quote of the Day: Greenspan Worse than Nixon
When Richard Nixon tried to rehabilitate his reputation, he didn’t dispute the horrific errors of judgment he made while in office. He instead made useful, substantive intellectual contributions on other fronts. But Greenspan is an ideologue and intellectually bankrupt, so this option may not be open to him.
Emphasis mine.
Bogus Job Creation Data?
I would be stunned if the Bush Administration would take a nonpartisan collection of data, and massage it for political advantage. What if they did it on Global Warming Data ANWR Drilling Stem Cell Research Morning After Contraceptives Safe Sex Preventing AIDS Lead Paint Mercury Iraq
Well, it now appears that Bush and His Evil Minions™ are overstating job growth in the US, see Dean Baker and Barry Ritholtz.
Basically, it comes down to the fact that the BLS cannot get questionnaires regarding employment to all the businesses out there. A number of businesses, particularly newer and smaller ones, slip through the cracks.
It’s called birth-death adjustment, and in 2007, it guesstimated about 300,000 more jobs than were actually created.
Dean Baker notes that the BLS is showing that the restaurant sector is shown to have added 48,000 jobs in January and February, but restaurant spending is shown to have decreased by about 0.6% over the same period.
Barry Ritholtz notes that the B/D adjustment accounted for 80% of all new jobs in 2007, and he has a nice picture of 2008 adjustments:
Given Baker’s data on restaurants, I would circle hospitality too, but the idea that construction and financial services are surging is just loopy.
Economics Update
In the world of pipe dreams, we have the EU calling for a coordinated response to the credit squeeze.
The Euro-Wimps just don’t get it. This is America. We don’t do joint action based on a deliberate approach to everyone’s long term best interest. We shoot first, and ask questions later, and when the dead guy we shot doesn’t answer, we water board him, and then we bail out the bad actors, like Bear Stearns.
In the ever entertaining world of the monoliners, Fitch has cut MBIA’s rating to AA from AAA, because they are under capitalized (broke).
The disgrace here is that it took so long, though you knew that it was coming when MBIA asked Fitch to stop rating it about 3 weeks ago.
In the no surprise category, bankruptcies jumped 30% over in march 2007 year over year.
And for those of you who think that commercial real estate will be uneffected by the crash, vacancies at malls have skyrocketed.
Alan “Bubbles” Greenspan, the “I Didn’t Do It Kid”, Says that Housing is not His Fault
Yep, he’s claiming that the housing bubble, and subsequent bust are not his fault.
- He claims that evidence of any link between monetary policy and the bubble was “statistically very fragile”.
Let’s see, you nearly tripled the money supply before you stopped publishing M3 data in 2006, and that is “fragile”.
- He Claims that he is, “puzzled why so many commentators seek to explain the US housing bubble in terms of Fed actions when many other economies with different central banks and different monetary policies also saw rapid house price gains.”
M3 again baby, with all that money that you created, it all had to go somewhere.
- Mr Greenspan says, it is only with hindsight that it looks like the US economic recovery was well enough entrenched before 2004
Dude, that was you PIMPING yourself to George Walker Bush for the election, so you would get reappointed.
- Mr Greenspan reaffirms his long-held belief that central banks cannot effectively “lean against the wind” by setting monetary policy a little tighter than it would otherwise have been during asset price booms.
Dude, you have actively pumped up and bailed out every asset boom under your watch. You engineered bailouts, either through monetary policy such as low interest rates, or directly, as you did with the LTCM hedge fund.
- Mr Greenspan also takes issue with those who blame lax regulation by the Fed for allowing a serious deterioration in underwriting standards in the mortgage industry. The problem, Mr Greenspan argues, “is not the lack of regulation, but unrealistic expectations about what regulators are able to prevent”.
Which is why you did your best to effectively dismantle Glass-Steagall back when Paul Volker was Fed Chair.
- The former Fed chief says the core of the subprime problem “lies with the misjudgments of the investment community”. The scramble to invest in what were initially highly profitable subprime loans would have overwhelmed any regulatory effort to slow the growth of this sector, he claims.
You allowed, scratch that, you encouraged the repackaging of garbage into Byzantinely complex instruments, and you called them good.
Regulators are more than able to prevent this, you were simply completely unwilling to take even the most basic advisory steps to do so. Your whole hearted of so called financial innovations like “credit default swaps” which are too complex for the people who trade them to understand is clear.
The legacy of Ayn Rand, your mentor, is bad writing, ugly prose, and the impoverishment of all but the most dishonest.
Thanks asshole.
World Food Crisis Approaching
Paul Krugman notes that we are in the middle of a major food crisis, with the prices of staples such as wheat, corn, and rice skyrocketing, and he blames, along with weather and energy prices, biofuels.
As he so eloquently states, “People are starving in Africa so that American politicians can court votes in farm states”.
It’s a nice sound bite, but it is incomplete, which may be an unfortunate fact of life when one has only about 800 words to put forth an idea.
Simply put, there is much more to this problem than simply the currently minuscule demand for feed stock for bio-fuels.
First, he misses the very real possibility of worries regarding social unrest, possibly to the level of failed nation states from food riots, that may very result from this, which may be far more lethal the direct starvation deaths.*
Major exporters, such as China, India, Egypt, Vietnam and Cambodia have introduced export restrictions to forestall this, which, of course, worsens the problem for net food importers.
More interisting is a Bloomberg article showing the problems in the market being akin to the current credit crisis. The reporting is mind boggling simple here telling , “Bad countries interfering with the free market by regulating their exports so that poor people don’t starve“, story.
The reality, and it can be teased out from the article, is that there is a lot of arbitrage generating volatility. The quotes are from rice traders, and they are wringing their hands. Let’s look at the various non-producing players in the market that were listed:
- Pfaffikon, Switzerland-based Mother Earth Investments AG
- Morgan Stanley Global Wealth Management
- Singapore-based rice broker Hermes Investments Pte Ltd.
- Padiberas Nasional Bhd.
- Global Commodities Ltd. in Adelaide, Australia
- Diapason Commodities Management SA
To the best of my knowledge, ot one of these companies owns a farm, nor processes the grain, they make their by extracting fees on trades, and while that can be useful to buy a contract for future delivery, the reckless Anglo-Saxon trading model that is at the core of the current credit crunch, where numerous people buy and sell contracts to generate trade profits is making things worse.
In fact, until we move back to depression era regulators to reign in this activity, it will continue to get worse.
*Yes, I’m looking at this cold blooded construct, and realizing that it means for many people the end of the world as they know it.
Economics Update
Well, it looks like 80,000 jobs were lost in March, and the unemployment rate went up to 5.1%, see here, here, and here.
There was good news, at least by the standards of the hacktacular financual press, the ISM’s report on non-manufacturing businesses rose, from 49.3 to 49.6, when it was expected to be 48.5.
Note that while the headline on the story speaks of a rebound, it’s not. Any number under 50 is a contraction, so the contraction was slower than expected, but it was still a contraction.
Given these numbers it’s no surprise that the Federal Reserve is signaling more rate cuts.
It won’t work. We need to go Nordic on this problem and nationalize the insolvent institutions, for a time at least.
Give all this information, it should come as no surprise that we are getting reports of skyrocketing vacancies in commercial space, the stuff that all the “experts” said was not going to be a problem.
This is typical. Commercial space lags residential space.
It won’t help that Oil is back above $105/bbl.
It also looks like Delphi auto parts may be going under, Appaloosa Management LP is pulling out of a deal to invest 2.55 billion in the manufacturer.
This will leave GM on the hook for a lot, and they may have no parts for their cars.
Economics Update
First, we have a new peak in Jobless claims, 407,000, the highest level since Katrina hit New Orleans (here and here). Note, as always, that weekly jobless numbers are just a snap shot of a single week, and as such, there is a lot of noise, but this did not stop the dollar from retreating in response.
That being said, the fact that the IMF is predicting a global slowdown ain’t a good sign either.
Given that we have a consumer driven economy, the fact that people are falling behind on their debts at the highest rate in 15 years is a good indicator that we are already in a recession.
In energy, was down a buck, and gasoline hit a new record. Assuming that we are not at peak oil, there might be some moderation as the economy cools.
The markets are seeing a cooling economy too, driving Treasuries higher, because investors are looking for safe havens.
In real estate house prices fell in 21 metro areas, and foreclosures rose to record levels. Same old same old.
Finally, I’m beginning to feel like Keith Olbermann and Bill O’Reilly. I can’t make through a week without some insurer disaster intruding. In this case, it’s Triad Guaranty Inc., which is considering, “a plan to stop writing new business”, called a “run-off” in the insurance. Note that it’s business is mortgage insurance, as opposed to monoliner bond insurance.
Too many people defaulting on mortgages.
Did Greenspan Get a Fake PhD?
I came across a review of Robert Auerbach’s book, Deception and Abuse at the Fed: Henry B. Gonzalez Battles Alan Greenspan’s Bank.
It goes into my must read pile.
Auerbach is an outspoken critic of both the Fed and of Greenspan, and was an aide to one of Greenspan’s fiercest critics, Henry Gonzalez, former head of the House Banking Committee.
Basically, it appears that Greenspan got his PhD after stepping down from the Council of Economic Advisers. It happened in a very few months, and it was never published:
Exactly how Greenspan wrapped up his NYU studies in such a short period is unclear, but it appears that his thesis wasn’t especially time-consuming. Auerbach cites an earlier biography that says that Greenspan submitted — instead of a normal Ph.D. dissertation — some papers totaling 176 pages that he entitled Papers on Economic Theory and Policy. Among them was at least one he’d written earlier.
To say that this is irregular is an understatement. Dissertations are supposed to be public and available to people in the field, on the theory that it advances the area of study, even if that study is the “dismal science”.
The implication is not that he has lied on his resume, but rather that because of his connections, he was able to repackage a bunch of slop, and get his PhD anyway.
Sounds like Greenspan’s whole career.
OK, You Are Not Getting Any Sleep Tonight….
Yesterday, Marketplace had a store about a complex financial instrument called a “default credit swap“.
They try to explain what it is, and the best they can do is say is that it is some sort of complex financial transaction that serves as a sort of insurance against companies defaulting on their loans.
But that’s not what they are, that is their intended purpose.
This excerpt of the exchange may clarify a bit:
MOON: Well, this is where it gets tough, Kai, because a lot of people on Wall Street, even some of the leading economists in the academic world, don’t really understand exactly how these things work. A lot of them are whipped up with some computer wizardry, some advanced math — think of those fancy Greek letters turned on their sides. And there’s a lot of guesswork to this, too, about how much they’re really worth.
Boy…That makes it a lot clearer, doesn’t it?
So we have another derivative like instrument where there is no value that can be understood. In fact, most of the people who trade this stuff not only don’t know the value, they don’t know what it is.
It could be bellybutton lint futures for all we know, and for all Wall Street knows.
RYSSDAL: All right, so what’s the problem, though, if everybody agrees that they don’t know what they’re worth?
MOON: Well, the critics I’ve spoken to complain that they’re really nothing more than gaming instruments — gambling. Turns out that the big hedge funds that attract so much money from rich investors and big institutions, well, they’re playing the market on their own, and they don’t even need to have a stake in a particular company to do that.
RYSSDAL: I’m going to make the analogy here to a March Madness office pool, right? I go in, I pick a basketball team, and if they do great, that’s great, but I’m not vested.
It is. Except instead of wagering on UCLA and Auburn, these big bankers and brokers and hedge fund managers pick up the phone and they negotiate these wagers privately. Nobody really regulates this. They’ve created this incredibly enormous shadow financial system, if you will, that’s virtually hidden from investors and analysts and regulators.
You know when those high energy physicists do that complex stuff that explains how to smash two pieces of metal together to wipe out Hiroshima, I feel a bit more secure about this.
RYSSDAL: How big would “incredibly enormous” be?
Good question. I’d like to know how many billions of dollars are nothing more than fairy dust.
MOON: OK, I’m about to unload some numbers on you here, so I’ll speak slowly so you can follow this.
The value of the entire U.S. Treasuries market: $4.5 trillion.
The value of the entire mortgage market: $7 trillion.
The size of the U.S. stock market: $22 trillion.
OK, you ready?
The size of the credit default swap market last year: $45 trillion.
RYSSDAL: That’s a lot of money, Bob.
Ummm…why yes, it is. Doing math in my head 4.5×1013/3×108=1.5×105, or in normal notation, about $150,000.00 for every man, woman, and child in the United States of America.
MOON: It is, and the great unknown here is that these things get traded, or swapped, between the banks and hedge funds and other investors, and there’s really no one who oversees or regulates these trades to guarantee that the buyer actually is going to be able to make good on these if they have to. And these things end up being so interconnected that it’s not just like single line of dominoes falling, if one fails. Imagine one falling domino taking down two more, and those taking down four more, and eight, and so on.
I don’t know about you, but I’m spending this evening gibbering inconsolably.
Here is the full audio, including some comments from an expert on this that is even less reassuring, and the tid-bit that Alan “Bubbles” Greenspan loved these.
Trajectory of the Credit Crunch
Care of Calculated Risk, I really can’t add much to this:
From Bloomberg: Subprime Losses Reach $232 Billion With UBS, Deutsche: Table (hat tip Brian)
The following table shows the $232 billion in asset writedowns and credit losses since the beginning of 2007, including reserves set aside for bad loans, at more than 45 of the world’s biggest banks and securities firms.
See article for table.
Since Chairman Bernanke is testifying before the Senate Banking Committee tomorrow, here is a quote from last year:
“Some estimates are in the order of between $50 billion and $100 billion of losses associated with subprime credit problems.”
Chairman Bernanke, July 19, 2007
OK, maybe I can add a bit.
In less than 9 months, a 3-5 fold increase.
When I have the chance, I’ll post a quote from the Marketplace radio show that will curl your hair.
Economics Update
Let’s see, we have Bernanke, testifying before the Congress’s Joint Economic Committee, saying that there is just the slightest possibility that the US Economy might possibly be slipping into a recession, which is Fed speak for, we are totally boned.
Not surprisingly, the US dollar tumbles, because recession=further rate cuts.
Truth be told, given the current nature of the credit markets, the Fed could lower interest rates to zero and it wouldn’t lower short term rates. They are pushing on a string, and people are unsure about the amount of risk, so rates won’t go down.
On quick numbers, we have new mortgage applications falling 29% (refi is way down too), oil prices rising, up to about $101.20/bbl, and gas prices at a record high, $3.287/gal.
On the good news side, ADP’s private report is showing an increase in private sector payrolls, though I would rever the reader to this article on underemployment, which points to growing numbers of people working part time jobs, a sign of employment weakness, for some context:
Keith Hall, the commissioner of the Bureau of Labor Statistics, which prepares the monthly jobs reports, said in Congressional testimony last month that this broader measure [underemployment report] stood at 8.9% in February, up from 8.1% a year ago.
“We’ve clearly had a broad weakening in the labor market,” Hall said.
My perspective, and I am an mechanical engineer, which means that I value tangible goods in my world view, is that the fact that factory orders are still declining, -2.5% in January, and -1.3% in February, is a better indicator, though I also consider the fact that car sales tanked last month, including Toyota, significant too.
Of course, economists, and other such folks, tend to look at consumer spending, so the fact that Discover Financial Services reported that its consumer spending confidence index is down might be a bigger deal for them.
In real estate, we have Manhattan condo and Co-op sales collapsing. It appears that the market is now crushing, “location, location, location”.
And on the more surreal side of real estate, we are finding an epidemic of copper pipe theft from abandoned homes. The hed is a real eye catcher, “ Some homes worth less than their copper pipes“.
This makes the USA sound like it’s suffering from Baghdad level looting.