Part One
WE ALREADY HAD A 'SUBPRIME' MORTGAGE CRISIS, THIS IS THE SECOND IN A ROW
In his recent op-ed, Paul Krugman wonders aloud about our "Ponzi era", about how we all could have not noticed, basically, about financial services in general. He concludes, in essence, that we lived an era of post hoc, ergo propter hoc, regarding those looking the part in money management. {But read the comments section for the good stuff}
Many others, including the ever-readable Martin Wolf, have looked in detail at how "we" missed it, how the latest junk-credits from Wall Street went undetected until it was too late.
Greenspan himself has indicated that he relied on the collective wisdom of market participants, ending up shocked that they failed to secure the (long-term?) interests of shareholders.
For my own part, I initially underestimated what would become the full scope of the problem. I think it is because I didn't imagine that Green Tree Financial had left the collective conscience.
REMEMBER GREEN TREE FINANCIAL?
Well apparently, not too many people do. I remember it vividly, however.
Did the quantitative people in the departments at the ratings agencies (Moody's, S&P) have more than a degree? Did someone from the "real" credit area take an elevator down to look over the shoulder of their proverbial CDO Queen? Was there a risk-policy committee? God knows, the implication of Green Tree made it to the radar screen of leading economists (and, as best I recall, Greenspan's purview. Update: yes, see here).
There should be more hearings, right?
Anyway, here is the story of Green Tree Financial and the manufactured housing bust.
I've pulled some quotes, that make it rather plain just how much it looks like the very same sub-prime crisis that eventually grew to $700-1,800 billion.
The question becomes, how did we have two sub-prime crises in a row, in rapid succession, even?
A Boom Built Upon Sand, Gone BustFrom 1991 to 1998, annual sales of manufactured homes more than doubled, to 374,000 from 174,000.
One company, one man and one accounting rule drove that growth.
The rule, a rarely used accounting convention called ''gain on sale,'' encouraged Green Tree to make as many loans as possible and allowed it to report more than $2 billion in profits that never existed.In their rush to lend, Green Tree and its rivals made loans to borrowers who had little chance of paying them back. Tens of thousands of those people have already defaulted and have been evicted. Conseco alone has repossessed 25,000 homes so far this year, after a record 28,466 in 2000. By the time the industry's hangover ends later this decade, hundreds of thousands more low-income borrowers will lose their homes. They will wind up with huge debts and ruined credit because their homes are worth far less than what they owe.
Securitization provided Green Tree with ready access to capital from the bond buyers, and that enabled it to finance as many loans as it wanted. At the same time, gain-on-sale accounting allowed Green Tree to record income from every loan that it made.
On April 28, 2000, with the company's shares at $5.63, Mr. Hilbert quit. He received a $72 million severance package, including the right to use Conseco's private jet up to 20 times a year. All told, Mr. Hilbert's pay from 1993 to 2000 was $530 million.
Mr. Coss did not do quite as well. His pay, tied to Green Tree's reported profits, totaled about $200 million from 1993 to 1998, including a $30 million severance package.
More references:
April, 19998:
April, 2000:
[This one reads like a bad omen for the Bank America and Merrill "merger", yes?]
December, 2002:
Friday, December 19, 2008
It Was Not an 'Act of God', Part II
The Panic In Pictures - Merrill Uplift Edition
It was a good time to be in "fixed" income in mortgages at Merrill:
A peek at what may show up on the 'expenses deed' of a CDO:
Merrill Lynch collected about $5 million in fees for concocting Costa Bella, which included mortgages originated by First Franklin.
Thursday, December 18, 2008
For the record ...
John Steel Gordon with the long view on Ponzi schemes.
Still, no one has the data on the longest running - biggest means nothing. (In fact, no one knows how long Madoff was running his, exactly. It may have been a regular fund for a while.)
Wednesday, December 17, 2008
A mysterious demand for housing
By postulating that there is a demand for housing, in an economy rapidly shedding jobs, tightening credit requirements, and casting a huge number of citizens into the 'no-credit-at-all' category (bankruptcy/foreclosure), Hubbard and Mayer conclude:
A reduction of mortgage interest rates to 4.5% (or, given yesterday's Fed action, to a lower level) is superior to other proposals that focus only on stopping foreclosures, or on reforming the bankruptcy code to keep people in their homes. Stopping foreclosures, however meritorious, may not limit the dangerous decline in house prices as much as proponents claim. It could work the other way. Stripping down mortgage balances in bankruptcy would likely raise future mortgage interest rates and lower the availability of mortgages, reducing house prices.
Loan modifications are a reduction in interest paid, right? They also directly and quickly affect the structural challenges. An interest-rate only mechanism could extend the 'debt-depression' for years.
There is a
Given the problem is so serious, why 'bet the farm' that an artificially reduced rate will bring the desired equilibrium? Given all the hope-for-the-best approaches that have already failed, across a range of problems, wouldn't the direct approach, modifying some loans, actually be more robust?
The Businessweek study:
That's especially true in California. In the second quarter of 2008, seven in 10 existing-home sales in San Joaquin and Merced counties were of properties that had gone through foreclosure in the previous 12 months, according to DataQuick, a La Jolla (Calif.) real estate information company. In Sacramento County, six in 10 sales involved foreclosures.
It's no wonder that prices in these markets are tumbling: Distressed sales have a way of dragging prices down for entire communities. Aaron Smith, senior economist at Moody's Economy.com, says markets in which foreclosed homes dominate listings suffer from a kind of "negative feedback loop."
More Ratings Agency Voodoo?
So, Moody's has a double barrel this week, downgrading both Goldman and Morgan Stanley to A2 from A1.
Goldman has $110 billion in excess liquidity on a balance sheet of $885 billion. They've cut compensation by $10 billion (in half).
Goldman's competitive position has never seemed stronger, with the competition boxed-in, and the idea that "investment banking" (or even trading) is finished for good is pretty radical.
Accordingly, it looks like the ratings agencies are practicing a bad voodoo.
Tuesday, December 16, 2008
'Everything I had, I gave to Madoff'
Well, the stories are coming out.
Q: If someone with high liquid net worth comes to you and says, "here is all the money I have in the world", what do you do? Do you turn them away, in whole or in part?
Unless I intended to provide them with a significant diversification, I would, right? You?
Fed hits rock bottom
POLICY AT POINT OF MAXIMUM DEPARTURE - FLAPS AT FULL
0.0% to 0.25% as a target for funds, discount rate down to 0.5% and "excess" reserves at 0.25%
There is a case that zero is not a good rate of interest.
Dividend and credit rates are overwhelmingly attractive now.
[Remember the summertime and the ideologues who were issuing statements that the Fed needed to fight inflation? How ridiculous was that, in hindsight...]
THE RETURN OF THE CARRY TRADE - WE'RE ALL ON THE DOLLAR NOW?
The cost of hedging yen is nearly zero. The Euro is probably not far behind.
That means there is a huge reservoir of liquidity available for sensible risk, credit or otherwise.
Housing Set to Overshoot
New building is set to go to zero, apparently. Permits for new construction clocked a measly 616K, s.a.r., which is nearly 50% below a year ago and an all-time low.
The impact of this on employment is material.
On both scores, housing prices look set to overshoot to the downside, without a plan to smooth over this adjustment from the "boom" period.
Construction job losses - across all segments - account for some 30% of all job losses so far.
Bank Health - Goldman's Temperature
Goldman took its balance sheet down a whopping $200 billion in the quarter, to $885B.
Still, if Goldman was a key counterparty for the new Treasury/Fed "program" for AIG, it didn't show up in so-called "Level III" assets, which were down just $2B.
Monday, December 15, 2008
The Good Life
Another fraud, who has the special joy of being ... out-done this week (and, therefore, out of sight?). Mr. Dreier.
As one bank-examiner noted long ago during the Milken junk-bond fiasco, "look for the bankers with the Italian shoes."
He has a triplex apartment on the East Side of Manhattan, along with a house near the beach in Southampton, N.Y., and a 120-foot yacht. The walls of his Park Avenue office drip with expensive modern art, and he kept three personal assistants busy.
He peddled false notes to eager hedge fund investors, among others, so says the NYT, to the tune of $113 million.
These things are fascinating, because they are so far beyond the realm of my constitution to even conceive of such a scheme. It's like looking at a different world - and I don't mean the yacht, etc.
Hyperbole Reins
Former SEC chair Breeden calls Madoff "gang" activity "speechless cruelty".
You'd think the guy committed genocide...
I can't help but think that the vehement furor over the SEC is a ploy to find ... deep pockets to pay back a bunch of silly investors.
Cramer: Shorts Took Down Bank Stocks
Based on data from the NYSE, Cramer said today that bank stocks had been the subject of a classic "bear raid", focusing his criticism on the repeal of the up-tick rule and ... the SEC (?).
No word on naked shorts. The figures appear to reflect just intra-day trading volume.
Quote for the Day
Well, the day hasn't begun, but here it is:
What card issuers have really cared about for a very long time is _raising_ credit limits to boost throughput so they could pinch off more dough from the financial system. Yes, the _financial system_, which was the real customer for card issuers. We card holders are just hazel stumps to be coppiced and sold as wands for the magicians of finance.
-Commentor, Naked Capitalist
There are a lot of people stressed because the notes from the card companies make it sound like they did something wrong or could have done something better.
And, sadly, there are prominent, TV-enabled financial planners who encourage that view, if only because they get a lot of calls from people who really have not managed their credit well.
Anyway, ... I'd like to know who holds the residuals in the Card Master Trusts. I think the card companies take a hit in some of these securitizations - it's not just a pass off.
Charity Redux
I am supposed to feel particularly sad for charity Boards who put large sums of money to work in loosely regulated "strategies", like Madoff?
Isn't there something inherently repugnant about people, very wealthy people, clamoring - clamoring - to "get in" on a money-management strategy that could be replicated by a computer?
How much more protection do you get from regulated entities, one wonders.. Do rules to follow, public filings, etc., show a meaningful reduction in fraud cases or size of fraud cases?
