I bet you are wondering how home prices falling in February is a good thing. Well, it’s simple, it fell month to month, but rose on a year over year basis, for the first time since December, 2006.
I call a dead cat bounce, with a 3 cushion shot because of the February snowpocalypse, though it is still good news, as is the durable goods order number, which were down overall, but up when aircraft sales are factored out.
As to currency and energy, the reduced fears over Greece following their request for external aid pushed the dollar down, and the housing numbers drove oil higher.
Additionally, defaults and foreclosures fell in California, though one wonders whether this is a real improvement, or if it’s just that we’ve basically run out of non-delinquent/foreclosed houses.
L’affaire Goldman seems to the primary mover in oil, with strong Goldman earnings driving oil prices higher, while the juxtaposition of the Goldman numbers and the uncertainty about Greece left the dollar mixed.
[on edit] The Canadian Ddollar has broken the 1:1 ratio with the US dollar, hitting $1.0012 U.S today.
The oil and currency numbers are really about the Goldman Sachs enforcement action by the SEC, which raised concerns about the economy, and this uncertainty has pushed oil down, and the dollar up, on a concern about demand and demands for safe havens respectively.
This is not true. It was Paulson & Co. Inc., run by John Paulson, the protagonist of the book The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History, about his fabulously successful shorting of the subprime market.
My guess is that he’s going to seem a Paulson, no relation to the former Treasury Secretary, will find his star dimmed a bit, particularly since the SEC has made it clear that he is under investigation as well.
I guess he sounds a bit less like a brave hero now.
The SEC has charged Goldman Sachs and one of its VPs with, “defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.”
It sounds to me like they assembled a particularly crappy CDO at the request of a hedge fund, most likely the now infamous Magentar:
The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.
“The product was new and complex but the deception and conflicts are old and simple,” said Robert Khuzami, Director of the Division of Enforcement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”
So it sounds like Goldman Sachs assembled CDOs, a form of mortgage backed security, at the request and to the specifications of the hedge fund Magetar, which demanded that the CDOs that it funded be as crappy as possible so that it could win on bets against high rated tranches.
This was apparently fairly common knowledge on the street, and Goldman did it anyway, and then sold the instruments as being “rock solid”. Oopsie
Background, and links to Pro Publica‘s and This American Life‘s stories on Magnetar’s, “burn down your neighbor’s house for the insurance money,” investment strategy are here.
There are two potential outcomes:
A tepid settlement followed by an inconsequential fine.
That the string is being pulled, and a whole lot of stuff comes unraveled.
I hope for the latter, but I expect the former.
*Alas, I cannot claim credit for the bon mot describing Goldman Sachs as a, “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” This was coined by the great Matt Taibbi, in his article on the massive criminal conspiracy investment firm, The Great American Bubble Machine.
Full complaint and embedded PDF of the filing are after break:
Washington, D.C., April 16, 2010 — The Securities and Exchange Commission today charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter. Additional Materials
The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.
“The product was new and complex but the deception and conflicts are old and simple,” said Robert Khuzami, Director of the Division of Enforcement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”
Kenneth Lench, Chief of the SEC’s Structured and New Products Unit, added, “The SEC continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress.”
The SEC alleges that one of the world’s largest hedge funds, Paulson & Co., paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.
According to the SEC’s complaint, filed in U.S. District Court for the Southern District of New York, the marketing materials for the CDO known as ABACUS 2007-AC1 (ABACUS) all represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (ACA), a third party with expertise in analyzing credit risk in RMBS. The SEC alleges that undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio.
The SEC’s complaint alleges that after participating in the portfolio selection, Paulson & Co. effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure. Given that financial short interest, Paulson & Co. had an economic incentive to select RMBS that it expected to experience credit events in the near future. Goldman Sachs did not disclose Paulson & Co.’s short position or its role in the collateral selection process in the term sheet, flip book, offering memorandum, or other marketing materials provided to investors.
The SEC alleges that Goldman Sachs Vice President Fabrice Tourre was principally responsible for ABACUS 2007-AC1. Tourre structured the transaction, prepared the marketing materials, and communicated directly with investors. Tourre allegedly knew of Paulson & Co.’s undisclosed short interest and role in the collateral selection process. In addition, he misled ACA into believing that Paulson & Co. invested approximately $200 million in the equity of ABACUS, indicating that Paulson & Co.’s interests in the collateral selection process were closely aligned with ACA’s interests. In reality, however, their interests were sharply conflicting.
According to the SEC’s complaint, the deal closed on April 26, 2007, and Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing ABACUS. By Oct. 24, 2007, 83 percent of the RMBS in the ABACUS portfolio had been downgraded and 17 percent were on negative watch. By Jan. 29, 2008, 99 percent of the portfolio had been downgraded.
Investors in the liabilities of ABACUS are alleged to have lost more than $1 billion.
The SEC’s complaint charges Goldman Sachs and Tourre with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties.
# # #
For more information about this enforcement action, contact:
Lorin L. Reisner Deputy Director, SEC Enforcement Division (202) 551-4787
Kenneth R. Lench Chief, Structured and New Products Unit, SEC Enforcement Division (202) 551-4938
Reid A. Muoio Deputy Chief, Structured and New Products Unit, SEC Enforcement Division (202) 551-4488
Well, so much for a recovery in employment, initial unemployment claims rose by 24,000 to 484,000, with the 4-week moving average rising by 7,5000 to 457,750, and continuing claims rose by 73,000 to 4.64 million.
How reliable are these numbers? The PRC tends to encourage lower level bureaucrats to over-report growth, and these numbers tend to filter up the chain.
If these numbers are anywhere near reality, what is driving it, and will it be like Wile E. Coyote discovering that he is standing in thin air when something more sustainable hits?
Chinese real estate is clearly with a bubble, with some areas experiencing appreciation in excess of 50% (!) over the past year.
One of the things driving this is the fact that the Yuan is under-valued: It makes foreign assets more expensive, which drives up demand for local investments, like real estate.
If their currency appreciates, and it does appear to be in the cards in the not-too-distant future, we could see money flowing to non-Chinese assets, and their bubble burst.
This could be yet another shoe to drop (there are many out there) in the current downturn, even though we currently appear to have found a bottom.
On the down side, the National Federation of Independent Business’ index of small business optimism fell in March, and since this is where most jobs are created, it does not bode well for jobs in the near term.
In real estate, mortgage applications fell for the 6th straight week, which is not surprising, as mortgage rates have been trending higher and the FHA has started to charge more for mortgage insurance to replenish its depleted reserves.
Note that there are 8 chapters, so you may want to link to the This American Life broadcast, (about 40 minutes) which is less encyclopedic, but rather more streamlined.
Basically, at the end of 2005, it appeared that the housing bubble was moderating, which made people were less interested in investing in the mortgage backed security known as the CDO, because without double digit increases in home prices, the risk levels were higher, and the potential rewards were less.
What Magnetar did was to get banks to write more CDOs by agreeing to buy the worst tranches, the riskiest 3-5% of these instruments, and then everyone else, seeing as how the scum at the bottom of the barrel was taken, would snap up the “higher quality” stuff.
At one point, Magnetar was covering about ½ of the CDO market, and betting against everything that they could get their hands on with credit default swaps (CDS).
And the financial industry noticed their moves into the field, even if they did not know of the CDS bets, to the degree that Business Week predicted that they would be, “shredded”.
So, why did Morgan do it anyway? Because the people who bought the CDOs generated commissions at the front end, and were then given huge bonuses based on this, so by the time it all went pear shaped, the individual traders had a few tens of millions of dollars in the bank.
This is deeply and perfidiously corrupt and well organized, and I cannot see why RICO isn’t being applied to anyone who touched this.
But seriously, read the whole thing. It is stunning in its scope and corruption, but this boggles the mind.
This is not taking out insurance on your neighbor’s house and burning it down. Paying for the road out to a sub development so that people will buy houses, and then using a squadron of B-52s to firebomb that development, only that development is our economy.
Some of this may be hiring from prior months that was delayed because of the various snowpocalypse weather events that occurred.
Long term unemployment increased.
Involuntary part time employment increased (largely why U6 is up)
About 8 million people have lost jobs in this recessions, and at a NFP payroll increase of 162K a month, it would take more than 50 years for everyone who lost their jobs to get another job, so while it is an improvement, things are at best treading water, but the trend does appear to be getting better.
And once again, it’s a swing and a miss, because once again, it’s an attempt to use the carrot on banks, a rather generous payout for principal reductions, along with giving banks an incentive to shovel their most toxic mortgages to the FHA, as opposed to a stick, in the hope that house prices somehow recover.
They won’t ever that is what “post bubble” means.
But once again, Larry Summers* and His Evil Minions™bailing out the banks, not the homeowners. The goal is to keep the toxic nature of the mortgages off of the banks’ books.
Little things, like banning prepayment penalties, which lock people into bad mortgages, and allowing mortgages to be modified in bankruptcy (cram down), would give lenders the incentive to deal fairly.
The less noisy 4 week moving average fell by 11K to 453,750, and continuing claims fell by 54K to 4.65 million, the lowest number in 1¼ years.
All in all, good news, but we are still not at a number where we would see real job growth.
In the intersection of real estate and finance, we have 13.6% of US mortgages being delinquent in the 4th quarter of 2009, up by 0.9% from the 3rd quarter.
Last week, the Federal Home Loan Bank of San Francisco sued a throng of Wall Street companies that sold the agency $5.4 billion in residential mortgage-backed securities during the height of the mortgage melee. The suit, filed March 15 in state court in California, seeks the return of the $5.4 billion as well as broader financial damages.
Not also that the quasi-governmental GSEs, Fannie Mae and Freddie Mac, are suing too:
Fannie Mae and Freddie Mac may force lenders including Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. to buy back $21 billion of home loans this year as part of a crackdown on faulty mortgages.
Interesting times.
Full FHLB statement below fold:
Statement Regarding PLRMBS Litigation March 15, 2010
Today the Federal Home Loan Bank of San Francisco (Bank) filed complaints in the Superior Court of California, County of San Francisco, against nine securities dealers in relation to certain of the Bank’s investments in private-label residential mortgage-backed securities (PLRMBS). The Bank is seeking to rescind its purchases of 134 securities in 113 securitization trusts, for which the Bank originally paid more than $19.1 billion. The Bank’s complaints allege that the dealers made untrue or misleading statements about the characteristics of the mortgage loans underlying the securities.
All of the PLRMBS in the Bank’s mortgage portfolio, including those identified in the complaints filed today, were rated AAA when purchased, based on the information provided by the securities dealers. The Bank employs conservative criteria and guidelines for all its MBS investments. The Bank invests in high-quality financial instruments to facilitate its role as a cost-effective provider of credit and liquidity to its member financial institutions. These investments support the Bank’s mission of promoting housing, homeownership, and community development by providing the Bank with greater financial flexibility in helping members meet the credit needs of their communities during all economic times and in funding the Bank’s Affordable Housing Program and other programs that create affordable housing and promote community economic development.
In filing these complaints, the Bank seeks to continue supporting its mission and to protect the interests of its member shareholders, which include over 400 community banks, credit unions, and savings institutions headquartered in Arizona, California, and Nevada that serve millions of consumers.
Well, it looks like real estate will be the suck for some time to come, as new home sales falling to an all time low, while inventory rose to 9.2 months, up from January’s 8.9 months.
The snowpocalypse might have had a little to do with this, but it has nothing to do with the fact that the Architecture Billings Index falling, since that is all about future residential construction.
On the brighter side, durable orders rose, largely on civil aircraft purchases.
In the “why the hell is this happening?” division, treasuries fell and yields rose in the most recent bond auction, despite the fact that the Greek meltdown would normally encourage a flight to safety, which would bid T-bills up.
The news in in real estate so far this week, with U.S. commercial real e3state prices rising for the 3rd straight month, though, as the Graph pr0n clearly shows, if you own commercial property, and you need to roll over your 5 year mortgage, you are still in a world of hurt, as you are at least 30% under water.
It’s Jobless Thursday, and initial jobless claims fell by 5,000 to 457,000, which is less bad, you need to be under 400K for any real job growth, and the less volatile 4 week moving average fell, though continuing claims fell slightly.
Meanwhile, the CPI was flat in February, with a 0.1% increase in the core inflation rate, which omits food and energy.
The Fed speak is that economic conditions, “warrant exceptionally low levels of the federal funds rate for an extended period,” this means that they will not raise rates at their next meeting or probably the one after that.
Most likely you will see at least, and possibly 2 statement changes from the Fed before they raise rates, but they are closing the taps a bit by, “closing the special liquidity facilities that it created to support markets during the crisis,” and it reaffirmed that it will be closing the TALF will on June 30.
Release Date: March 16, 2010 For immediate release
Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.
With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
In light of improved functioning of financial markets, the Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability. 2010 Monetary Policy Releases
Basically, he has an idea so good, that I don’t care that he wrote it in The New Republic.
He notes that obvious, that the various ways that the government has attempted to deal with home foreclosures are inadequate, and what’s more, the banks aren’t cooperating with the program in any significant way.
The Obama plan, by contrast, has misunderstood the calculus faced by homeowners facing foreclosure. An underwater homeowner has little incentive to save their home from foreclosure, even if the monthly payment is reduced. Mortgage modifications that reduce the principal are far more successful than modifications that reduce the interest rate. A homeowner with equity to protect will find a way to pay the mortgage. In contrast, for underwater homeowners a mortgage payment is just expensive rent.
…………
Also, roughly half of troubled mortgages now have “second liens,” a second mortgage or a home equity line of credit. Second liens are secured by the value of the home in excess of the first mortgage. Home values in many markets have declined by well more than the amount of most second liens. A reduction of principal on the first mortgage would often just be a gift to the second lien holder, still leaving the homeowner with negative equity in their home.
…………
That’s why there’s a need for a much stronger government role in this crisis. Some in the financial industry may be more willing to sell mortgages to the government at a discounted price than they are to modify mortgages themselves. Servicers fear that if they offer affordable mortgage modifications to struggling homeowners, many more homeowners will stop paying and wait for an offer. Selling a mortgage to the government may avoid that problem because the government would modify the mortgage, not the servicer.
But for many of the same reasons that the financial industry has not modified mortgages voluntarily, others in industry would not likely sell many mortgages voluntarily either, at least not at a realistic discount. So how can a new HOLC [Home Owners’ Loan Corporation, an entity created by Roosevelt to help homeowners by buying and managing mortgages duringthe Great Depression] work if mortgage holders will not voluntarily sell mortgages?
The new HOLC could buy mortgages by eminent domain. Eminent domain powers are most commonly used to purchase land for highways or public buildings, but also to renew “blighted” neighborhoods or clean up contaminated land. And existing law allows the use of eminent domain to purchase property interests other than the outright ownership of land.
Some uses of eminent domain have resulted in public wariness and resentment. The Supreme Court’s 2005 decision in Kelo v. City of New London allowed the condemnation of family homes for an “economic development” project from which private developers profited. A mortgage in a securitized pool is no one’s castle.
The toxic assets backed by mortgages are impossible to value. The concern that taxpayers would get fleeced buying toxic assets from the financial industry was well justified. Whole mortgages are not hard to value at all. There are frequent, well-publicized auctions of mortgages with a sufficient number of informed, sophisticated buyers. The auctions are an almost perfect pricing mechanism. The problem for the financial industry is not the difficulty of valuing troubled mortgages; the problem is that many mortgages are not worth much. There are obviously many considerations in the price, but distressed mortgages generally sell for about 30 to 50 cents on the dollar at auction. And any honest valuation of many second liens would be pennies on the dollar.
Your mouth to Obama’s ear.
He is right on the law: In eminent domain, one is obligated only to pay market value, not par.
It won’t happen though, because Geithner and Summers would shoot it down, even it is legal, because, of course, it’s bad for the banks, and what’s bad for the banks is, to them, bad for America.
To be fair though, it should be noted that while Geithner and Summers may be financial Cossacks, it is also true, as Professor Delong is wont to say, “The Cossacks work for the Czar.”
