Thank the “self regulating” Bush administration for the fact that banks are refusing or unable to present a comprehensive schedule of fees at their office, as is required by law.
Category: Finance
Wikileaks Takedown Order Reversed
The federal has reversed himself on the takedown order for Wikileaks.
It’s being lauded by civil libertarians, but the initial take down order was less of a ruling on the internet than it was a consent decree between a domain registrar, Dynadot, and the owner of a money laundering operation in the Caymans, Julius Baer.
Economics Update: Housing Edition
There is a lot of news, so this one is just housing.
Mortgage rates are climbing, despite the Fed rate cuts. As I’ve said before, with the expectation of inflation and greater risk of defaults, there is nothing that the Fed can do to keep the rates down.
It does not help that Standard & Poors is looking at cutting ratings on new tranches of mortgage backed securities, this time Alt-A, to the tune of 1,887 classes, which are supposed to be higher quality than subprime.
In the San Diego area home prices are in free fall, having fallen 3% last month, and 9.14% in the last three months.
Finally, we are beginning to see foreclosure self help websites. The link is “You Walk Away” dot com.
Economics Update
We have bad news on income and spending. If you go to the link it says that they are both up slightly, 0.3% and 0.4% respectively, but this is less than inflation, which means that it is a real drop.
We also have oil at or near all time highs, and the dollar at or near all time lows.
We have a new estimate of total losses among financial firms from the meltdown, $600 billion. I think that they are off by at least one zero.
Insurance is continuing to unwind in a most unpleasant manner.
MBIA is not doing much in the way of business, because bond issuers don’t trust them to be solvent in the future.
Perhaps of more concern is that this is beginning to effect the reinsurance market, with Swiss Reinsurance Company posting an 87% drop in profits.
If this market goes south, it takes most of the insurance market with it.
Of course, we have the Fed shoveling out more money to the investors. It will auction off another $60 billion in March.
I don’t even want to think what the money supply is doing right now.
The credit crunch is also interfering with things like reorganizations, with Delphi unable to find the loans necessary for it to reorg under bankruptcy.
Finally, earnings fell across the market, with the S&P 500 companies’ earnings falling 4.2%, as opposed to the 10% increase forcast at the beginning of 2007.
Massachusetts Judges Rules Some Mortgages “Structurally Unfair” Under State Consumer Protection Law
This is interesting. The judgehas basically ruled that this business model is fradulent and illegal:
A Suffolk Superior Court judge has issued a potential landmark order slowing down thousands of Massachusetts foreclosures and declaring whole classes of subprime mortgages “structurally unfair” under state law.
“It is both imprudent and unfair to approve mortgage loans that the borrowers cannot reasonably be expected to repay if housing prices were to fall,” Judge Ralph Gants wrote in a preliminary injunction against notorious subprime mortgage lender Fremont Investment and Loan. “Just because we as a society failed earlier to recognize that (many subprime loans) were generally unfair does not mean that we should ignore their tragic consequences and fail now to recognize that unfairness.”
My guess is that it will either be overturned on appeal, or the foreclosures will resume after 90 days, or both.
Economics Update
First and most importantly, GDP increased at an annual rate of 0.6% in q4. Seeing as how prices are increasing at an annual rate of greater than 4%, I would call this a contraction in real dollar terms.
Also, Initial jobless claims rise 19,000 to 373,000.
Moody’s is looking at downgrading Fannie Mae. Right now, it’s B+, which may be fine for a grade, but not so good for a financial institution.
Moody’s is probably thinking that they at risk of having problems if there is something like a margin call, as Thornburg Mortgage Inc. currently is. It looks like they will take a $300 million hit.
We also have a q4 loss of $2.5 billionfor Freddie Mac This goes along with Fannie’s $3.6 billion loss that I reported a few days back.
And just to show you that it isn’t limited to real estate, the credit crunch is forcing the Pennsylvania student loan program will stop making loans, at least for now, because the credit crunch is making money too expensive.
Another Day, Another Alphabet Soup Collapse
A few days ago, I was wondering what a VIE (variable interest entity) was, and why they were collapsing.
Well, the Wall Street Journal now has the answer. VIEs are basically bonds where the interest rate is periodically refigured at auction.
Municipalities like them, because the interest rates are lower, both because they are more liquid, and because if interest rates rise, then they will follow.
They are basically the same as adjustable rate mortgages, only for bonds.
The problem is that no one is buying at auctions, and the banks have to cover the unpurchased bonds.
The difference between these and auction rate securities is that the banks have to purchase these from whoever wants to sell.
The interest spike is not as bad, these typically go up to prime, so it’s a jump from around 2% to around 6%, but the maturity date gets kicked up too, with 30 year bonds becoming 5 year bonds.
Expect to see more municipal bankruptcies as a result.
Senate’s Reid Dares Bush to Veto Foreclosure Bill
I believe that this may be the fruits of the house telling Bush to pound sand on Telco immunity.
They did this, and then they went home, and the feedback from constituents was overwhelmingly positive, so now Harry Reid has found some guts on the foreclosure bill.
I think that Reid may finally get opposing that a president with a 19% approval rating, which makes Bush as popular as a home root canal kit, is a winning strategy.
Besides, this is something that is easily understood: It prevents foreclosures from creating instant slums, and it puts some of the onus on the banks, who were more financially knowledgeable than their victims.
Loan Portfolio Limits Eased on GSEs. Disaster to Follow
As a result of their accounting scandals Fannie Mae and Freddy Mac had their portfolios capped about 725 billion dollars, but regulators have now removed the caps.
This is, to quote Nietzsche, “Like the bite of a dog into a stone, it is a stupidity”.
The head of OFHEO, James Lockhart, will be eliminating the caps this week, and it looks like he will be reducing their capital requirements below the current 30% too.
Mr. Lockhart is an ass. At a time when the 2nd and 3rd largest borrowers in the world, after the US government, are facing a collapsing market, allowing them to go further out on a limb that is being sawed through is insane.
Economics Update
The dollar has flirted with crossing the $1.50:€1.00 for months, and not that it has crossed the barrier, it’s continuing to weaken to new lows, with it currently around $1.51:€1.00.
Of course, it doesn’t help that Alan Greenspan is suggesting that the Gulf states drop their pegs to the dollar. I guess that he’s shorting the dollar or something now that he is “retired”.
On the bright side, the falling dollars is attracting overseas investors to US real estate, as it is now cheaper to buy.
In California, we have the California association of realtors reporting that new home sales are down 29.8%, and median price is down 21.9%.
Make no mistake this is a blood bath, and the numbers would be worse if they corrected for home size. The housing market is collapsing from the bottom up.
It will get worse, Fannie Mae has posted a $3.6 billion q4 loss, and I would expect something similar from Freddie, and we are still very early in the collapse of the housing bubble.
We may very see the collapse of Fannie and Freddie in the next 3 or so years.
This may explain why new home sales nation wide are at a 13 year low and why Mortgage application volume is falling off a cliff.
It doesn’t help that mortgage rates are no longer following the Fed rates because of inflation fears.
As the big sh^%pile continues to collapse, we are starting to see the inevitable lawsuits, with HSH Nordbank deciding to file suit against UBS, alleging that, “UBS’s management of the portfolio has been in breach of its contractual obligations and fiduciary duties and that substitutions were made solely for the benefit of UBS”.
We’ll be seeing a lot more of this.
Testifying before Congress, Ben Bernanke is expressing concern about both inflation and recession, aka “stagflation”, though the Fed is still shoveling money out the door, with another $30 billion auction of cash for garbage.
In the world of more real world finance, where people make money by making things, durable goods orders fall 5.3% last month, but oil is down a bit after getting above $102 a barrel.
Naomi Kline Nails It
She has an article in the nation, Disowned by the Ownership Society, or as I like to refer to it, the Pwn3rsh1p society.
Go read it.
Here is a sample:
In November Nasdaq joined forces with several private banks, including Goldman Sachs, to form Portal Alliance, a private equity stock market open only to investors with assets upward of $100 million. In short order yesterday’s ownership society has morphed into today’s members-only society.
BTW, this private market will crash and burn, because there is no small investor left to hold the bag when the bubble bursts.
Economics Update
The Consumer confidence index has dropped to 75, the lowest number since 2003, the expectations Index, which is on hop people see the future declined to 57.9, the lowest number since 1991.
In real estate, January foreclosures are up 57% from one year ago, the fall in house prices is accelerating, with the Case-Shiller home price index falling 9.1% year over year.
It appears that home improvement is stalling, with Home Depot having its first drop in sales ever. People don’t want to improve a depreciating asset.
Inflation (stagflation) is rearing its ugly head too, with Wholesale prices rising 1% for the month of January, and 7.4% in 2007.
In insurance, MBIA will stop writing policies for asset based securities for at least the next 6 months. Additionally, it is looking at spinning off its municipal bond business, and announced that it had eliminate its quarterly dividend.
In general investment news it appears that yet another complex obscure financial instrument will give the world heartburn, something called a “variable interest entity” (VIE). It appears to be another asset structured to keep sh&^ty investments off the balance sheets.
FDIC
Well, it looks like the FDIC is gearing up for bank failures.
It’s looking to bring back some retirees from its receivership division, and it’s looking for bids from private companies to handle mortgages, commercial loans, and student loans for the failed banks.
They are estimating 100 bank failures over the next 12-24 months, but I think that they are behind the curve.
H/t to Calculated Risk.
Socialism for the Rich
You know the old saying, “Capitalism for the Poor, Socialism for the Rick”, and in that vein we have the large multinational banks lobbying congress for a bailout.
Bank of America is circulating a legislative proposal to create “a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates”.
It’s a bailout for the banks more than anything else, and the author of the article, NY Times reporter Edmund Andrews, notes he irony when he says:
A confidential proposal that Bank of America circulated to members of Congress this month provides a stunning glimpse of how quickly the industry has reversed its laissez-faire disdain for second-guessing by the government — now that it is in trouble.
These folks made their bed, and they had the computers and models, let them lie in it. Any bailout should be to the people at the bottom of the pyramid, not the top.
No Downgrade for Monoline Insurers….Yet
Standard & Poor’s has decided not to downgrade MBIA and Ambac at this time.
So, the monoline bond insurers dodged a bullet, for now.
I wish that I’d had an hour’s notice. I’d have bought stock, and sold it an hour after.
That being said, I still think that these companies are insolvent.
Prediction: Visa IPO Will Fall Short
Visa is expecting an IPO in the range of $15-$19 billion.
I don’t think that they will make even $15 billion.
According to the Houston Chronicle, the IPO will be priced on March 19, with the IPO on March 20.
Yes, I know, I’m the worst prognosticator in the biz.
What’s your prediction?
Credit Crunch May Kill Private Sale of Clear Channel’s TV Unit
Wachovia is suing their own client, Providence Equity Partners, to get out of funding the buyout.
The buyout deal has been restructured, and Wachovia is now saying that it is no longer required to provide the capital.
This is because the credit crunch has made reselling this debt much more difficult, and hence more uncertain.
Economics Update
It looks like the US dollar is trending downward on the expectation of further weakness in the US economy.
And in the late to the game category, business economists are finally predicting a recession.
This is not surprising, as Fed rate cuts are no longer effecting longer term rates, because people are expecting inflation to pick up, and do not wish to be repaid in devalued dollars.
It won’t help that bond insurer Ambac may be downgraded even if it manages to raise $3 billion in new capital.
The problem is that people are increasingly unable to sell their homes, as shown by a 23.4% year-over-year drop in existing home sales. That’s a collapse in the market.
So now, investors are lawyering up to go after corporate boards, on the theory that the guys on the boards are supposed to be professionals and to show a modicum of competence.
Pass the popcorn on this last one.
Home Equity Lines Being Cancelled
Banks are now cancelling or freezing existing home equity lines in areas with formerly frothy markets, because they believe that the homeowners owe more than they can pay.
Economics Update
In local finance, we have King County, Washington potentially losing all of a $207 investment, the county claims that they will “only” lose 83 million, the state says all of it.
This will be repeated, and given that the auction rate bond market has collapsed, and localities are fleeing that instrument, their ability to issue bonds will be significantly diminished.
Don’t expect any new money to spent on roads, schools, water, sewer, fire, or police for the next 5-10 years.
In real estate we should note that 8.8 million homeowners, or 10.3% of all home owner are under water. They owe more than they can sell their houses for.
Gas prices hit are way up, which is an ill wind for consumer spending, which counts for 70% of the US economy.
Analysts are warning of risks to Fannie Mae and Freddie Mac, which makes the decision to allow them to finance even larger mortgages appear even stupider.
Fitch Ratings is saying that life insurance companies may take an $8 billion dollar hit on subprime and alt-A real estate investments.
It also looks like we will be seeing downgrades on the monoline insurers within a week or so.
And in hedge funds, we have D.B. Zwirn & Co. seemingly on the path to shutting down. It has shuttered its Special Opportunities Fund, a $4 billion hedge fund. Once it unwinds this, and it may take a while, they have less than $1 billion under management.
We also have Clifford Asness’ AQR Capital Management showing that mathematics based strategies are not working:
Asness’ AQR Capital Management has notified investors that its Absolute Return Fund, long one of Wall Street’s most stellar performing quantitative hedge funds, lost 15 percent of its value through mid-February. The slide follows an 11.9 percent drop through the end of November.
Bloomberg reported Friday that AQR flagship hedge fund now manages $2.9 billion, down from $4 billion.
I think that its clear, and should have been clear after LTCM went belly up nearly a decade ago, that these model based hedge funds don’t work.
The models break down when you get significant swings.