Category: Economy

Who NOT to Bailout of the Mortgate Debacle

No Comments

Dean Baker has a very good take on many of the bailout schemes for the mortgage debacle*.

His point is very basic, that, “the hedge fund crew is doing what all good capitalists do when things go badly: run to the government.”

What’s more, he argues, rather convincingly, that they don’t want the problem fixed, but rather that they want enough time to sell these assets to less sophisticated investors.

He gives the actions of Citibank with regards to Enron as an example. They tried to get the Fed and the Treasury to lean on the ratings agencies not to downgrade Ken Lay’s pyramid scheme.

There actually was an effort at a federal bailout of Enron. A former Treasury secretary, who had taken a top job at Citibank, called a Treasury staffer to see if he could stop the credit rating agencies from downgrading Enron’s debt. At the time Citibank held several hundred million dollars of Enron debt. While the staffer refused to intervene, if Citibank had gotten its wish, it would have had the opportunity to dump its Enron debt on less informed investors before the price collapsed.

These examples should frame the debate on a bailout. If the assets held by the hedge funds are sound, and it’s just an issue of stemming a momentary panic, then the Fed should step in as lender of last resort and try to stabilize the market. However, if the issue is just one of giving the hedge fund crew time to dump their bad debts, then the Fed has no business getting involved.

*It’s not just subprime…It’s everything in housing, it’s just moving first in subprime.

Krugman on the crash

No Comments

Hopfully, Times Select will shortly be free, but I found this from last Friday by Paul Krugman elsewhere:

Very Scary Things

Very Scary Things
By PAUL KRUGMAN
Op-Ed Columnist
The New York Times
August 10, 2007

….

What’s been happening in financial markets over the past few days is something that truly scares monetary economists: liquidity has dried up. That is, markets in stuff that is normally traded all the time — in particular, financial instruments backed by home mortgages — have shut down because there are no buyers.

This could turn out to be nothing more than a brief scare. At worst, however, it could cause a chain reaction of debt defaults.

….

But when liquidity dries up, the normal tools of policy lose much of their effectiveness. Reducing the cost of money doesn’t do much for borrowers if nobody is willing to make loans. Ensuring that banks have plenty of cash doesn’t do much if the cash stays in the banks’ vaults.

….

Let’s hope, then, that this crisis blows over as quickly as that of 1998. But I wouldn’t count on it.

Would someone please get him a Nobel?

This is Not Just Mortgages.

No Comments

It’s clear that even with the massive infusion of cash last week, people are finding it VERY difficult to borrow money.

Lenders in general are pulling back, and highly leveraged operators are holding paper that no one wants to buy.

If the Fed cuts interest rates, it’s likely to boost the Yen, which cause losses and resulting liquidations of people playing the Yen carry trade.

Over the past 35 years we have moved from a production and investment economy to a consumption and leverage economy, and at some point the music will stop, and it will get very ugly, possibly Argentina crash ugly.

A Collection Economic Disaster News

No Comments

Home sales tumble in response to credit crunch. Just so you know, that’s what the National Association of Realtors is saying, so that’s the sunniest possible outlook.

Stocks tanked yesterday because a French Bank said that it had to freeze funds for lack of liquidity. Basically the meltdown is going global, and the securities that they hold are illiquid. They are not normally bought and sold, so there is no market for them.

When Bear Stearns funds went out for sale, they were getting less than 10 cents on the dollar as offers.

The European Currency Board (ECB) and the Federal Reserve have injected billions in liquidity to prevent a collapse. While this is not an extraordinary action for the Fed, this resembles things like the LTCM bailout, it is for the ECB.

The ECB’s scope is far narrower than that of the Fed. They are not charged with anything but controlling inflation, at German insistence (there are still a few Germans alive remember needing a wheelbarrow of money to buy a loaf of bread).

The Vultures Have Arrived Looking for Dead Meat Investments.

No Comments

It appears that noted vulture investor Wilbur Ross is looking at the mortgage meltdown.

He’s made a fortune picking through the bones of failed steelmakers, textile mills and coal miners. Now billionaire investor Wilbur Ross is taking aim at another beleaguered industry: subprime mortgage lenders.

He took his first step on Monday by providing $50 million in debtor-in-possession financing for American Home Mortgage Corp (AHMIQ.PK: Quote, Profile, Research), which filed for bankruptcy earlier in the day.

He buys things like coal mines and steel companies on the cheap, and resells them to people who kill coal miners and default on retirement and health insurance guarantees.

Lovely fellow, and he’ll have a lot of work in the immediate future.

Adventures in Thievery: Bear Stearns Caymans Bankruptcy Filing

No Comments

When people call for the unfettered free market, they are really calling for these sorts of larcenous behaviors.

One of the little observed parts of the 2005 bankruptcy law allows American firms to go venue shopping for places with phony tax laws, phony regulation and phony courts to avoid any consequences of their actions.

Creditors may argue that the main case should proceed in the U.S. To do so they must show the U.S. bankruptcy judge that the hedge funds had their “center of main interests” in the U.S, said Robin Phelan, of Haynes & Boone, who represented hedge fund InverWorld Inc. in its 1999 liquidation in the Caymans.

Because the two hedge funds were incorporated in the Cayman Islands, that’s presumed to be the center of main interests, according to Phelan.

Of course, the plaintiffs are not angels either, investing in predatory lending as a way to make money.

If there were only a way for both sides to lose.

Evil Incompetent Executives Failing Up

No Comments

I see this as a classic market failure. Bob Nardelli being named head of Chrysler is an indication of how corrupt and self serving our “manager” class has become. (Full disclosure, I worked for this guy when I was at GE Transportation Systems working on locomotives, but I never met him).

Here is a guy who engineered massive stock losses at Home Depot, and walked away with bonuses as a result….Great steward of shareholder value there…huh?

He’s gotten the job because it’s a way for other managers to guarantee that they fail upward too.

This is corrupt, plain and simple.

He said he hoped his own compensation would not become an issue in Chrysler’s ongoing contract talks with the United Auto Workers union.

Yes, I sure you don’t want that to be an issue, you contemptible greedhead.

Nardelli said Chrysler’s established restructuring plan is adequate but added that as a private company the automaker will look to move quickly to monetize some assets, with a focus on cash flow rather than reported earnings.

That one’s pretty easy to read: Cerberus bought Chrysler for what amounts to a few magic beans, and they are going to treat it like a chop shop treats a Lexus.

Our system of values in the US is more f%$#ed up than Osama bin Ladens.

A Very Good Insight Into the Group Mind of Economists

No Comments

Dan Rodrik has a very good post on a fundamental difference in the economist community.

Essentially, it comes down to those who believe that theory as it now exists explains how the economy behaves, and any divergence from the theory as noise, and those who who see the noise as significant to a degree that textbook theory cannot be realistically applied.

Speaking as a non economist, I would see Milton Friedman (he got a Nobel for monetary free market theory) falling in the first category, and Joseph Stiglitz (he got his for his descriptions of how information asymmetry distorts free markets) in the second category.

There is a third category I think that he missed between the “first-best economists” and “second-best economists”, those who will revisit their theory on the basis of real world observations, where I would put Keynes, who I admire far more than Friedman.

Criminally Incompetent Greenspan Has Given Us This Meltdown

No Comments

Well, first we have Steven Pearlstein’s (WaPo Business Columnist) comments about recent events.

It’s not just about subprime mortgages anymore.

The turmoil we’re witnessing in global financial markets is nothing less than the popping of an enormous credit bubble that built up over the past five years, artificially inflating the market prices of stocks, bonds and real estate. It created a bonanza for Wall Street investment houses and private-equity funds and fueled the longest and strongest period of global economic growth in modern history.

While this characterization is generally accurate, it is FAR too limited.

I would refer you to an analysis of Greenspan’s tenure in the European Tribune post which is in turned based on an editorial from the Financial Times (subscription, which I do not have, required) calling Greenspan a “a serial inflationist, willing to slash interest rates to bail out investors who should not need rescuing from themselves”, while doing his best to keep wages low.

Such is to be expected for one who was a confidant of Ayn Rand. For her, wage earners are weak people, and the indivicualist capitalists are all that is good in society.

This is where Mr. Pearlman is wrong. This has not been going on for 5 years, but closer to 20 years, since Alan Greenspan flooded the market with liquidity to bail out those who were caught in the 1987.

In fact, it’s deeper than that, as evidenced by his bailout of Long Term Capital Management, where a less lucrative market driven buyout was sabotaged.

Alan Greenspan was the most enthusiastic cheerleader of bailouts for investors, while aggressively working to knock the pins out from stability and protections of ordinary people.

If something big went wrong, he would open the money tsunami, and if something went smaller went wrong, he would arrange for private bailouts.

He has created an economy with very little risk, and the high liquidity has produced very in the way of reasonable returns for conventional financial instruments.

In so doing, he has created a situation where insane levels of risk have become ordinary, and so more people have taken these risks.

Needless there a number of other people bear responsibility, Jimmy Carter, who started the rollback of Depression era regulations, Reagan who accelerated it to alarming (savings and loan debacle) levels, and both Bush I and Clinton have been instrumental in deregulating the economy to a dangerous degree.

That being said, when the meltdown occurs in the next few years, it will be Greenspan, whose policies are most responsible for these problems, who gets the lions share of the blame.

Anatomy of a Collapse: Bear Stears

No Comments

It’s clear to me that Bear Stearns is complete toast.

They have just halted redemptions on a third hedge fund. This fund had less than “0.5 percent of its assets in securities linked to loans to subprime borrowers”.

People are losing confidence in the market, and in Bear Stearns in particular.

My prediction: in one year, Bear Stearns will cease to exist. It will either be forced to liquidate, or it will be bought out in a fire sale. I’ve already written a post dated blog post for August 1, 2008 (it’s a year short, but 2008 is a leap year, so it’s 365 days, and August 1 is a nice round date).

Eating Our Seed Corn: The Minnesota Bridge Collapse

No Comments

In staring at the rubble that was a bridge on CNN today, the question is “why?”

Speaking strictly as an engineer, I can say that there was either a point load, or a tensile load (the strength of ceramics over time in tension is zero) leading to a failure.

That misses the big picture.

The big picture is that at least since the 1970s, the United States has created prosperity, or the illusion of prosperity, through eating its seed corn.

Eating one’s seed corn is a metaphor. It refers to a farmer eating seed that is reserved for planting the next year. It feeds his belly now, but creates a disaster the next season.

Through the systematic dismantling of protections on things workers rights and speculative investments, along with literally running infrastructure constructed over 40 years ago into the ground, we have created a little pop.

Things seem fine, but at some point, the poper must be paid.

Ha Ha!!!!!!!

No Comments

My heart bleeds borscht for this muthaf#$@&^!

Subprime hedge fund manager forced to put yacht up for sale – Jul. 30, 2007

…..

John Devaney, the CEO of United Capital Markets, a fund that specializes in buying and selling bonds that are backed by the mortgage payments, particularly adjustable rate subprime mortgages, has put his 142-foot yacht “Positive Carry” up for sale, according to a yacht broker’s Web site.

Devaney’s fund has run into trouble lately. A spokesman for the firm told Reuters on July 3 that it had stopped honoring request from some of its investors for redemptions, or withdrawal, of investments.
…..

Devaney told Money magazine this spring that despite problems that the loans cause for borrowers, the assets backed by them provided a good return for his fund.

“The consumer has to be an idiot to take on those loans,” he said. “But it has been one of our best-performing investments.”

I hope he gets cancer.

According to the yacht broker’s listing, the yacht has accommodations for 10 passengers in its five staterooms, along with space for a crew of seven. Its amenities include his and her baths in the master suite, and four guest bathrooms with Jacuzzi tubs and showers and cherry wood interior throughout.

It has two 2,250-horsepower engines and a range of 3,500 nautical miles.

The New York Post reported Monday that Devaney is also seeking to sell a home in Aspen for $16.5 million.

The Aspen Times reported in November that he bought that house, for $16.25 million, and that property includes a 16,000-square-foot main house and carriage house which include 16 bedrooms, 18 full bathrooms, two fireplaces, three kitchens and two caretaker bedrooms with bathrooms.

Unfortunately, this #$@&ing vulture is still rich.

Whiskey Foxtrot Tango??? Housing Bubble Bust in Anchorage??? Anchorage????

No Comments

Well, it looks like the housing bubble is bursting in Anchorage Alaska.

That’s right Anchorage, which is pretty remote, unless you live in Ketchikan.

Time on market has more than doubled.

Same thing with Hawaii, which geographically is one of the most remote locations on earth.

This is not a real estate crash. This is an easy credit, blood the economy with liquidity crash. That’s why this is not local.

People don’t buy houses on price, they buy it on monthly payments, and mortgages are still about 3% lower than historical norms.

The difference from 2 years ago is that the low rates created a frenzy, where people were afraid that they would never own if they did not buy right now.

Now there are people who believe (correctly) that if they wait, they will get a better deal.

That’s why you are seeing this in places like Anchorage, Honolulu, Wichita, and Indiannapolis. It’s a nation wide phenomenon.

It’s Not Just Subprime Home Loans

No Comments

It appears that many of the companies that borrowed through the subprime market will take it on the chin.

The report shows that about $680bn of loans will mature between 2008 and 2011 compared with only $180bn of maturing high-yield bonds.

Mariarosa Verde, head of credit research at Fitch, said the loan market was “critical to the wellbeing of these companies”.

Many highly leveraged firms rely on their ability to roll over existing loan debt into new loans rather than repay it when it matures, which they often cannot do.

The basic calculus is this:

  • Longer term loans are far riskier to the lender. It ties up the capital for a longer period, and there is a greater risk that the interest fall below market rates.
  • Risk requires greater return, so long term bonds are more expensive
  • Companies that get junk bonds cannot afford the rates of longer term loans, so they get short term ones, and roll them over at the end of the term.
  • When these loans come due, they refinance.
  • If rates have increased significantly, they take it on the chin, bankruptcies and liquidation.
  • This increases the risk, and hence the interest rates, putting more companies at risk.

Greenspan’s policy of flooding the market with liquidity after the dotcom crash will have dire consequences in the next few years.

US Subprime Markets a “Dangerous Cocktail”

No Comments

Moodys Investor Services described the US subprime marketas a“relaxation of risk management and underwriting standards combined with the growth of little understood debt derivatives, many of them based on US sub-prime mortgages, had proved to be “a dangerous cocktail” yesterday.

You think?

A governor of the Bank of England said that, “there were still troubles ahead in the sub-prime sector and that the losses of large investors made it difficult to decide where borrowing costs should move next due to the volatility it created in financial markets.”

This is why I think that this is heading to an illiquid state. Exotic high risk instruments are coming home to roost, and when they do, prices will drop, because these instruments monitized (drove up the price) of residential real estate.

With people owning highly leveraged homes that are falling in value, they will be under water, owing more than they have in equity, and they will be unable to sell the homes.

Prime Mortgages Going Bad Too

No Comments

The refrain of the NAR, and other people pimping for real estate has been that the meltdown will be confined to sub-prime mortgages.

Coffin, meet nail.

Countrywide feels pain of ailing mortgage market – Los Angeles Times
CEO reports that even ‘prime’ borrowers are having more trouble making payments. Company’s second-quarter profit slides 33%.
By Annette Haddad
Times Staff Writer

2:25 PM PDT, July 24, 2007

Shares of Countrywide Financial Corp. tumbled today after the nation’s biggest mortgage lender signaled that rising defaults and delinquencies were spreading beyond the troubled sub-prime market to higher-quality “prime” loans.

The Calabasas-based company reported a 33% drop in its second-quarter profit and slashed its outlook for the rest of the year, citing an “increasingly challenging” housing market.

“We expect difficult housing and mortgage market conditions to persist,” said Countrywide Chief Executive Angelo Mozilo.

During the quarter ended June 30, softening home prices in many areas of the country caused delinquencies and defaults to rise for Countrywide borrowers with all kinds of mortgages, Mozilo said.

…

People paid more than they could afford for houses because they were afraid that rising prices would lock them out forever, and they paid too much, and got mortgages that were too bkg.