Global Financial Crisis (Was: Subprime Meltdown)

[ewmayer]

[Edit - 5:30pm EST: It'll be very interesting to see whether the late-day news reports that several banks are near an agreement on details of a bailout for bond insurer Ambac Financial - which caused a wild market swing from minus to plus - will prove to have meat behind it, or be just like the last half-dozen such rumors, i.e. nothing but a sucker's rally. Stay tuned.]

Originally Posted by cheesehead

Before we give free rein to cynicism, let's take a moment to note that there are legitimate politically-neutral reasons for revising CPI formulas.

True enough, but you'll admit the numerous revisions have a tendency to get ignored when we hear stuff like "although rising inflation is a worry, we are nowhere near the levels seen during the stagflation era of the Carter years..." from the economic all-is-well crowd. If using the same CPI formula as during the Carter era indicates an inflation rate approaching double-digits, to me that is big news.

Also, I stand by my assertion that the plunge protection team has both strong motive and opportunity to fiddle the various numbers in order to impart a rosier-than-warranted tinge to the big picture. And of course there may be non-cynical reasons for them to do such as well - e.g. to avoid a panic in the markets - but I'm less interested in what their motives may or may not be than I am in what's really going on with economy in terms of market fundamentals, that much-ignored bastard stepchild of the Greenspan era.

Now, on to today's "cynically bad or merely very bad?" news:

Hedge Fund Expert: Exotic Financial Markets May Collapse Next: Possible problems in the gargantuan "credit default swap" market could cause further drastic credit-tightening and interest rate-hikes.

Fannie, Freddie Fall Anew on Analyst Downgrade: Investors dumped shares of Fannie Mae (FNM) and Freddie Mac (FRE) Friday after a Wall Street analyst warned that both stocks could hit new lows as investors come to appreciate the depth of problems in the financial sector.

Florida Schools, California Convert Auction Debt as Investors Stay Away: California, Florida schools and the operator of John F. Kennedy International Airport joined a growing list of municipal borrowers exiting the U.S. auction- rate bond market as record failures push taxpayer costs higher.

Bloomberg.com: Banks Lose to Deadbeat Homeowners as Loans Sold in Bonds Vanish: Joe Lents hasn't made a payment on his $1.5 million mortgage since 2002.

hat's when Washington Mutual Inc. first tried to foreclose on his home in Boca Raton, Florida. The Seattle-based lender failed to prove that it owned Lents's mortgage note and dropped attempts to take his house. Subsequent efforts to foreclose have stalled because no one has produced the paperwork.

``If you're going to take my house away from me, you better own the note,'' said Lents, 63, the former chief executive officer of a now-defunct voice recognition software company.

Judges in at least five states have stopped foreclosure proceedings because the banks that pool mortgages into securities and the companies that collect monthly payments haven't been able to prove they own the mortgages. The confusion is another headache for U.S. Treasury Secretary Henry Paulson as he revises rules for packaging mortgages into securities.

``I think it's going to become pretty hairy,'' said Josh Rosner, managing director at the New York-based investment research firm Graham Fisher & Co. ``Regulators appear to have ignored this, given the size and scope of the problem.''

More than $2.1 trillion, or 19 percent, of outstanding mortgages have been bundled into securities by private banks, according to Inside Mortgage Finance, a Bethesda, Maryland-based industry newsletter. Those loans may be sold several times before they land in a security. Mortgage servicers, who collect monthly payments and distribute them to securities investors, can buy and sell the home loans many times.

Each time the mortgages change hands, the sellers are required to sign over the mortgage notes to the buyers. In the rush to originate more loans during the U.S. mortgage boom, from 2003 to 2006, that assignment of ownership wasn't always properly completed, said Alan White, assistant professor at Valparaiso University School of Law in Valparaiso, Indiana.

``Loans were mass produced and short cuts were taken,'' White said. ``A lot of the paperwork is done in the name of the original lender and a lot of the original lenders aren't around anymore.''

More than 100 mortgage companies stopped making loans, closed or were sold last year, according to Bloomberg data.

Not surprisingly, the mortgage-industry shills beg to differ:

Requiring banks to produce the paperwork at a foreclosure hearing is a nuisance, said Jeffrey Naimon, a partner in the Washington office of Buckley Kolar LLP.

``It's a gigantic waste of time,'' Naimon said. ``The mortgage may have transferred five, six, eight times. It's possible that you don't have all the pieces of paper, but it was enough to convince the next guy in the chain. There's no true controversy over whether the owner owns the loan.''

Nuisance for whom exactly, Jeff? Waste of time for whom? Controversy in whose mind? You're talking about people's homes here - it's your *job* to at the very least have the paperwork in order. You're more than happy to take a million-dollar home mortgage and slice and dice and resell and derivatize it beyond all recognition, but now you want to repossess that home and you can't produce a simple title deed? "Hoist by your own petard" would seem the apt expression.

Not that I'm saying some homebuyers aren't abusing the system - but the banks set themselves up for that by way of their own greed, and a bit of turnabout seems richly deserved in this situation.

[As to the accuracy of my admittedly cynical "shill" characterization, Buckley Kolar LLP advertise themselves as "Lawyers for the Financial Services Industry", so I leave to the reader to decide which side of the foreclosure fence they are likely to be standing on.]

[ewmayer]

Predatory Lending Exposed: Dominion Homes "at work" in Columbus, Ohio

Seeing the dots - nearly 12,000 of them - scattered across the county was jaw dropping. It did not seem possible in prosperous and stable Columbus, Ohio.

Foreclosures were predictably concentrated in poor, inner-city neighborhoods. But, surprisingly, clusters of dots circled the outskirts of the city, in the newest subdivisions of suburbia.

It soon became obvious suburban foreclosures were disproportionately in neighborhoods built by Dominion Homes, a publicly traded company based here that serves as the mortgage broker for its customers.

...

A federal database called Neighborhood Watch that tracks default rates among lenders who make Federal Housing Administration loans proved to be a smoking gun. The database (www.hud.gov/offices/hsg/sfh/lender/nw_home.cfm ) showed Dominion led the state in the number of homeowners who defaulted on FHA mortgages within two years of closing on the loans.

It also allowed us to discover that Dominion had the worst default rate in the nation among its peers - builders with their own financing divisions.

U.S. Department of Housing and Urban Development audits, which took six months to obtain through a Freedom of Information Act request, documented Dominion's questionable lending practices.

The company gave loans to buyers with shaky credit, income and savings. Dominion shielded from customers its ownership in a title agency that closed their loans.

The Dispatch also found that Dominion's "free" down payments also contributed to foreclosures among its customers.

Dominion rolled the cost of the freebie into the price of the house. The company funneled the down payments through a national charity that did nothing but collect a processing fee and issue the down payment "gift."

In a sidebar, we profiled the California-based charity, Nehemiah Corp. of America, and its partnership with Dominion.

Because these were FHA loans, an insurance fund bailed out lenders when the mortgages went bad. Dominion faced no financial consequences when foreclosures hit.

[More sordid details of NY-based Stillwater Capital, which specialized in "flipping frenzy" buys and sells, elided]

Ohio's lack of oversight also allowed both [Dominion Homes and Stillwater Capital] to flourish in a way they probably could not have otherwise.

...

Borrowers in Ohio are especially vulnerable because the state hides from consumers key information about brokers, does not require appraisers to be licensed and does not cover mortgage lending under a law prohibiting deceptive sales practices.

Further, Ohio is one of only two states to exempt mortgage lending from its consumer-protection law. And, while the state runs criminal background checks of mortgage brokers, we learned convicted felons can - and do - get licenses. State investigators had a huge and growing backlog of complaints against appraisers.

[Full Article]

Five Things You Need to Know: How Extraordinary

Just how extraordinary is this downturn in housing? Well consider that former Federal Reserve Vice Chairman Alan Blinder wrote a piece for the New York Times over the weekend advocating the resurrection of the Home Owners’ Loan Corporation (HOLC).

What is this Home Owners' Loan Corporation and why do we supposedly need it? The HOLC was part of the Home Owner's Refinancing Act, a Franklin D. Roosevelt New Deal agency established in 1933... during the Great Depression. The purpose of the HOLC was to provide homeowners with refinancing to prevent foreclosure.

Part of its legacy was the extension of mortgage payments from a then-standard 15 year term to 30 years. As Blinder notes in his op-ed piece, HOLC at one point owned nearly one in every five mortgages in the U.S. Almost 20% of those borrowers defaulted anyway, leaving the HOLC with the titles on about 200,000 houses.

Expect more of these proposals resurrecting New Deal agencies and bailouts to pop up in the months and years ahead. What is extraordinary is not merely the fact these agencies are being proposed in the first place, but that no one seems to bat an eye about advocating a return to economic policies last implemented during the Great Depression! Are we the only ones who find this stunning?

We're not heading into a recession. We're already in a Stealth Depression.

[ewmayer]

Home price plunge accelerates: S&P Case/Shiller Home Price index down nearly 10% in 2007
Largest annual drop in its 20-year history, 4x larger than in 1991 recession. Still has a long way to go to get back in line with the long-term historical average.

Bloomberg.com | VIEs: The next writedown storm on the horizon?
In related news, Standard & Poors "reaffirmed" the AAA credit ratings of the troubled bond insurers Ambac and MBIA yesterday. However, it used the weakest language imaginable, and ... it's not like a AAA rating from S&P has meant much in past few years, except by way of encouraging suckers to buy overpriced, risk-underplayed CrapSecurities. But ... markets up big-time on this great news! All must be well!! Fundamentals, shmundamentals! Those are for old fogeys...

Classic quote from a Lehman Bros. spokestool in the above article:

``We believe our actual risk to be limited because our obligations are collateralized by the VIE's assets and contain significant constraints,'' Lehman said in the filing. Spokeswoman Kerrie Cohen wouldn't elaborate.

"We believe our actual risk to be limited..." where have we heard that before? Oh yeah - it's what just about every major bank that invested heavily in subprime-backed CDOs said in the past year, ofetn just in advance of a monster writedown announcement? Nice to see the above Bloomberg piece closing with a healthy dollop of reality-based skepticism:

The securities in the VIEs may be worth as little as 27 cents on the dollar once they're put back on balance sheets, according to David Hendler, an analyst at New York-based CreditSights. Hendler based his estimate on the recent sale of $800 million of bonds by E*Trade Financial Corp.

Predictions for losses vary widely because banks aren't required to specify the type of assets being held in the VIEs or how much they are worth, said Tanya Azarchs, managing director for financial institutions at S&P.

``The disclosure on VIEs is hopeless,'' Azarchs said. ``You have no idea of the structure or how that structure works. Until you know that you don't know anything. It's like every day you come into the office and another alphabet soup has run off the rails.''

On the plus side, it's probably an excellent time to short financials...[I just bought more SKF@105, by way of "put my money where my mouth is" disclosure.]

p.s.: To give you an idea of just how nutty the rating agencies can be, have a look at this article, especially the charts with the comparative financials of Pfizer and MBIA. It's just mind-boggling...but there I go, invoking "fundamentals" and dubious technical measures like "profitability" and "debt to income ratio" again ... sorry, we "fundamentalists" are alas narrow-minded in that respect.

[ewmayer]

Der Spiegel | BayernLB Concealing True Extent of Subprime Losses

According to one Frankfurt banker's assessment of the bank's accounting tricks, "BayernLB is pushing along a giant wave of concealed losses, which, when the figures are disclosed in one year, will inevitably reach the shore."

Bush: Housing bill would 'bail out lenders anfd speculators': President reiterates his objection to a proposed change to help homeowners in bankruptcy and the creation of a $4 billion fund to let agencies buy foreclosed homes.

"The Senate is considering legislation that would do more to bail out lenders and speculators than to help homeowners keep their homes," he said. "The Senate bill would actually prolong the time it takes for the housing market to adjust and recover, and it would lead to higher interest rates."

Dubya's still an idiot, but I'm with him on this on. OTOH, given that Fannie Mae and Freddie Mac [the 2 huge Federally-backed mortgage loan agencies], after having just reported multi-billion-dollar losses for the past year, have gotten rewarded by having been given the green light to take on massive amounts of more toxic debt, $4B is probably gonna wind up looking like a drop in the bucket.

[ewmayer]

This dealership is just a few miles down the road from me - meaning that I've gone by it, shaking my head in disbelief, many times:
San Jose Mercury News: Silicon Valley Hummer to close: Victim of rising gas prices, dispute with GM

Silicon Valley Hummer traces its roots back to Hummer of Los Gatos, which sold the massive Hummer, a barely civilized version of the military Humvee. When GM bought the Hummer brand from AM General in 1998, the Los Gatos store got a franchise.

By late 2002, a front-page story in the Mercury News chronicled the hottest-selling vehicle in the nation - the Hummer H2. Local dealers couldn't keep it in stock.

It was a status symbol, with its square shoulders, chrome grille and huge tires. "This is the new Harley Davidson," Battistella said at the time.

Now, five years later, the Hummer has become a different kind of symbol. Concerns about global warming, the war in Iraq and rising gas prices have combined to create a new green movement - one that considers the Hummer a target, not a toy.

Silicon Valley Hummer opened on Stevens Creek in 2003. Gas was selling for $1.41 a gallon then. It's now $3.44 on the West Coast. The Hummer H2 gets 12 mpg in the city and 16 mpg on the highway, according to the American Council for an Energy-Efficient Economy.

For most of 2007, the Toyota Prius was the bestselling car in Silicon Valley. A sharp contrast with the Hummer, the gas-electric hybrid Prius gets the best fuel economy of any car sold in the United States.

I seem to recall the Los Gatos Hummer being only a couple blocks from the local Lamborghini dealership (formerly Los Gatos Ferrari) ... not that there's any excess SiVal cash floating around Los Gatos, or anything.
[Sorry, can't be too overtly disdainful - that's where my boss lives, so shhhh...]

AIG Says Financial Unit Head Leaving After $11B Losses on Derivatives

Feb. 29 (Bloomberg) -- American International Group Inc., the largest insurer by assets, said Joseph Cassano will step down from running the financial products unit after $11.1 billion in losses on guarantees sold to fixed-income investors.
...
AIG reported the biggest quarterly loss in its 89-year history yesterday after writing down the value of so-called credit-default swaps. The New York-based company said for the first time in yesterday's statement that realized losses on the portfolio ``could be material'' to quarterly earnings. The fourth-quarter net loss was $5.29 billion.

He could always join Alan Greenspan and Robert Rubin and start a hedge fund...

As far as "containment" of the credit crisis [and now-rapidly-worsening inflation problem] goes, this next bit is anecdotal but jibes with numerous other reports I've seen in the past few months about the Asian economy, in especial the Chinese:

OK, No BS or spin. just spent a week in china and went to four cities. My overall findings are as follows:
1) Housing has slowed dramatically. Many many feel market could fall because of the mortgage rates. SURPRISE #1. All mortgage rates in China are variable. I was shocked, no fix rate mortgages! The gov is raising rates, not good. Housing prices are no longer going up. It is flat at best. Everyone feels the prices are way too high.
2) Commercial is really dropping off. Big time outside of shanghai. Many buildings sitting empty. Over built condition.
3) Gas is hurting them, just like us. It is hard for even the little guy to keep up with $100 oil. Oil is the real issue with the global economy more then subprime in places like china.
4) Inflation is out of control. period.
5) Business moving to INDIA and S.Asia. Chinese are very concerned.
6) Min wage hikes by gov! This is real. Costs are going up.
7) People are very concerned about US market. many people feel we are going to have recession and they are very conservative also.
8) Shanghai is still doing OK, this city is great! By far the showcase of Asia.
9) Outside Shanghai & Beij, my view is simple, the economy is slowing fast, period. In fact talking with many people, that is what the gov wants and it is happening. Stock markets are WAY OVERPRICED.
EWM: Specific equity recommendation redacted - we only accept paid adverts around here]

And lastly, a bit of Friday humor - of the now-usual gallows variety. Spotted on a Yahoo! Finance message board:
Re: Bernake does not anticipate stagflation

Picture for yourself our economy (and probably the global economy) as Wile E. Coyote situated near the edge of a cliff overlooking a vast canyon. He has a bunch of balls and chains (subprime mortgages, Alt-A mortgages, interest only mortgages, CDOs, CMOs, RMBs, CMBS, credit cards, auto loans, consumer loans, small business loans, VIEs, SIVs, ARSs, bank collapses, bond insurers, etc., etc.) tethered to him. As each one falls off it pulls him towards the edge of the cliff. Then, he is over the cliff but hanging in mid air (as Wile E. Coyote is prone to do). Some of the balls are still on the cliff. So, Wile E. Coyote pulls out an Acme rope and and lassoes it around a HUGE boulder still up on the cliff (let's call this the $500 trillion+ derivatives market) to help anchor himself and prevent him from falling. But, since he is Wile E. Coyote, as more of the remaining balls fall off the cliff, the big boulder starts moving towards the edge of the cliff. Finally, all the balls are off the cliff, pulling Wile E. Coyote downward. He frantically scrambles with his legs trying to get leverage to move up the cliff, creating a small cloud of dust. The boulder teeters towards the edge and back on a halfway pivot. Wile E. stops in mid air, puts up a "HELP" sign, hangs in mid air for a second, then descends downward into the canyon, pulling the humongous boulder on top of him.

[ewmayer]

In plural this time, no less - a new entry in our ongoing series of "Fed Official[s]: [Insert ever-more-dire-economic-language here]" series:

Fed officials: Housing crisis critical: In a conference on solutions to the slumping housing market, two Federal Reserve officials say the problem must be solved soon.

[jasonp]

Originally Posted by ewmayer

By late 2002, a front-page story in the Mercury News chronicled the hottest-selling vehicle in the nation - the Hummer H2. Local dealers couldn't keep it in stock.

It was a status symbol, with its square shoulders, chrome grille and huge tires. "This is the new Harley Davidson," Battistella said at the time.

I read somewhere that the Hummer H2 actually is an ordinary truck body with a custom Hummer shell on top. At least the original Hummer had the original military suspension that made it really nice for off-roading.

In unrelated news, the local Mercedes dealer is starting to carry stock of smart car, which I'd convinced myself was too utterly adorable to ever be sold in the US.

[ewmayer]

Realized yesterday that I had neglected to announce the weekly, much-coveted MOTW [pronounced "Moe-Twee"] award for last week. I apologize to you, dear readers - all two of you - for the lapse. But enough groveling ... drumroll please ... the retroactive MOTW for last week goes to Mr. Robert Toll, CEO of homebuilder Toll Brothers:

Chief Executive Officer Robert Toll said on a Feb. 27 conference call, "This drumbeat (about recession), coupled with concerns over mortgages, the direction of home prices, and foreclosures, has kept pent-up demand on the sidelines."

Now that may well be true, but the implication [if you read the full CC transcript] was that all that pent-up demand was about to burst, which, together with raising of the limit on conforming-rate mortgages which Fannie and Freddie are allowed to take on and the new! improved! now even higher! mortgage interest rates resulting [in truly contrarian whodathunkit bear-market fashion] from the Fed's desperation rate-cutting, would unleash a Spring 2008 homebuying frenzy. A worthy MOTW if ever there was one. Now we realize that Mr. Toll has a large vested interest in pumping up the prospects of the housing market at every turn, thus he may technically be a shill rather than a moron, but such fine distinctions are alas lost on us market-fundamentalist Neanderthals here at Subprime Meltdown Central.


Ambac Bogus Bailout Rumor Update: I wrote, late afternoon Friday-before last, after the latest rumor of a bailout for moribund monoline bond insurer Ambac came out, kicking off a wild 3-day-long Bad News Bear rally which fizzled predictably and spectacularly at the end of last week:

Originally Posted by ewmayer

[Edit - 5:30pm EST: It'll be very interesting to see whether the late-day news reports that several banks are near an agreement on details of a bailout for bond insurer Ambac Financial - which caused a wild market swing from minus to plus - will prove to have meat behind it, or be just like the last half-dozen such rumors, i.e. nothing but a sucker's rally. Stay tuned.]

Well, shucks and awww, golly geewillikers, looks like somebody got cold feet after having been lured within a few feet of the wedding altar:

Billionaire Ross to put up to $1 bln into rival to Ambac, MBIA

[S485122]

Originally Posted by ewmayer

Realized yesterday that I had neglected to announce the weekly, much-coveted MOTW [pronounced "Moe-Twee"] award for last week. I apologize to you, dear readers - all two of you - for the lapse.

Two readers ? There have been replies or comments by 16 people. You just cover the field quite extensively, there is no need to add a lot more. I do read this thread with interest (and consternation.)

Jacob

[ewmayer]

http://finance.yahoo.com/q/bc?s=SCA

[ewmayer]

An analyst from Moody's - one of the major rating agencies [the other two of the "Big Three" being Standard & Poor's and Fitch] which colluded in the massive bond-ratings fraud which helped enable the speculative subprime bubble - was a guest commentator on PBS Nightly Business Report last night, urging for a taxpayer--funded bailout of the real estate market. Have they no shame?

Speaking of the crooked ratings agencies, there is an article on Mich Shedlock's Global Economic Trends blog describing the growing revolt by muni bond issuers against paying protection moneys to the monolines as a result of the "unfairly low" ratings consistently given by the Ratings Rackets to historically low-default munis: the same agencies [e.g. S&P] which recently had no trouble "reaffirming" the bogus AAA top rating of their partners-in-crime the monoline insurers, almost never give top rating to a muni bond issued even by the best-run city or state agency, thus driving up the rates the issuers must pay the bond buyers. An interesting read, containing a startling admission from one of the big ratings agencies itself, which I quote:

California calls muni insurance waste of taxpayer money

Sadly, Moody's, Fitch, and the S&P continually fail to do their job. Moody's has even expressly stated so in blunt terms: "Moody's has no obligation to perform, and does not perform, due diligence."

Truer words were never spoken (See Fitch Discloses Its Fatally Flawed Rating Model for the origin of the quote). In light of the above, it should be clear the big three serve no legitimate economic purpose at all.

Seems like as good a time as any to check in on one of our old big-finance friends, Citigroup. [I hope you didn't load up on BofA when t was still in the mid-40s back in November, Paul, and I made my "What are they smoking?" comment. post #15] :P

On a more humorous Citi-related note: As ever, Yahoo! Finance message boards prove an endless source of deadpan wit: check out this little exchange:

User: brusc36746
Topic: Is Bernanke for real? he wants banks to...

lower the principal of mortgages owed to the dirtbags that are not paying them? I am getting screwed twice. Once by the finacials I owned in this bullsh*t market and now they are basically telling us that we have to pay for peoples mortgage because they bought something they cant afford! Am I understanding this right

User: okayride
Topic: RE: Is Bernanke for real? he wants banks to...

but you still have your dignity

And some funny posts from Shorty Mantle, a recently-added contributor [who likes to wax poetic talking about "Reamtors" who want to sell you a subprime "Mrotgouge" - but I digress] to the Wall Street Examiner blogsite:

The High Price of Gold: Tooth-Equity Loans Gaining in Popularity

Consumers Walking Away from High Grocery Bills