Global Financial Crisis (Was: Subprime Meltdown)

[ewmayer]

WSJ: Richmond Fed President Jeffrey Lacker, Suddenly Uncomfortable With These Fed Lending Facility Thingies

Richmond Fed President Jeffrey Lacker, in a speech — and later, an interview with the Wall Street Journal’s Greg Ip — says the acronym soup the Fed has created (TSLF, TAF, et al) to combat the credit crisis is distorting asset values and encouraging risky behavior. In essence, he has thrown the “moral hazard” flag on the various creative efforts undertaken by Mr. Bernanke & Co. to help markets that are frozen.

“The innovative credit programs and other things we’ve done have gone beyond previously accepted boundaries,” Mr. Lacker said in the interview. “We’ll be wrestling with the consequences.”

Bloomberg has a more-detailed news piece on this.


Toll CEO declares 'depression' in housing: Toll Brothers head says market could fall by 20% and recovery could be up to three years away.

PHILADELPHIA (AP) -- The chief executive of Toll Brothers Inc., the nation's largest luxury-home builder, said Wednesday the housing industry is in a "depression" and any recovery could be two or three years away.

In candid remarks at the JPMorgan Basics & Industrials Conference a day after reporting a second-quarter loss, Robert Toll said he's not ready to call a bottom yet since the housing market could still get worse.

"Can the market go down another ten or twenty percent? Sure," said Toll, whose Horsham-based company will sit on cash unless a bargain land deal comes along.

He said the current housing crisis is the worst he's seen since the mid-1970s, but back then the decline was relatively short-lived. The current downturn started in late 2005.

"Maybe '74 and '75 was just as bad, but it was so short," Toll said.

Buyers' lack of confidence that home prices will stop sliding is what's keeping them out of the market, rather than lack of access to credit, he said.

Actually, lack of access to the kind of ridiculously easy-to-get credit that helped create the housing bubble to begin with is a major contributory factor. But yes, even for that small remaining pool of would-be-homebuyers with the kind of sterling credit history and income lately needed to get e.g. a jumbo loan, the overall downward price trend is keeping many of them on the sidelines.

Anyway, so far, so good - a surprisingly frank assessment for a corporate CEO to make. But one can't expect a complete lack of delusional fantasy-spinning, and here it comes:

He said the underpinnings for a healthy housing market are still in place: low interest rates, a low jobless rate, increases in population and accumulation of wealth. Moreover, home prices have fallen to levels seen around 2002 and 2003, making them more attractive to buyers.

I would rephrase that slightly, as:

"...[artificially] low [fantasy teaser] interest rates, a low [pretend] jobless rate, increases in population [maybe we can import 30 million people to fill all those vacant homes?] and accumulation of [fantasy] wealth [whoops, that magically vanished along with the bubbleicious home prices]. Moreover, home prices have fallen to levels seen around 2002 and 2003, making them more attractive to buyers ['Now only 1.5x historical norms!']."


Another major U.S. homebuilder in the soon-to-be-out-of-business category, but only in part due to the housing market woes:

Hovnanian reports tenfold loss: Home builder's quarterly loss plummets to $5.29 a share, far more than expected.

TRENTON, N.J. (AP) -- Homebuilder Hovnanian Enterprises Inc. is reporting its seventh consecutive quarterly loss as the company faces the continuing struggles of the housing market.

The Red Bank-based company said Tuesday that after paying preferred stock dividends, it lost $340 million, or $5.29 per share, for the quarter that ended April 30. That's about 10 times greater than the loss of about $30 million, or 49 cents per share, in the same period a year earlier.

That loss equates to more than half the price of HOV shares at open today. Note that despite the fact that they're bleeding cash from every orifice, they're still paying a juicy preferred stock dividend. Screw the regular shareholders, screw the employees, but keep the execs and board members and big institutional investors who managed to snag some preferred shares happy. That preferred-stock dividend is likely the only thing keeping the stock above 0 - well, that, and the legion of pennies-per-post stock pumpers HOV has hired to spam the Yahoo Finance message board for HOV with "Stock will rocket upward!!! LOAD UP NOW!" posts. [Hint: look for the threads with titles in all-caps].

[only_human]

Originally Posted by ewmayer

That preferred-stock dividend is likely the only thing keeping the stock above 0 - well, that, and the legion of pennies-per-post stock pumpers HOV has hired to spam the Yahoo Finance message board for HOV with "Stock will rocket upward!!! LOAD UP NOW!" posts. [Hint: look for the threads with titles in all-caps].

I used to hang out on the Yahoo Finance message board for SCO back in the early days of their suing and saber rattling when my outrage burned very hot. Those boards are very wild and woolly with massive groupthink and solidarity in anger but every now and then one of those all cap messages would intrude with phrases like you suggested "GREEEEEN!! TO TEH MOOOON! BUY BUY BUY! GET BARGAIN PRICE AFTER MASSIVE CORRECTION!"

[ewmayer]

U.S. unemployment rate jump most in over 20 yearss

Former St. Louis Fed President William Poole said today that the increase in joblessness ``makes the Federal Reserve's job much more difficult.'' Given increases in consumer prices, ``what concerns me is the Fed has not been speaking of the possibility of a necessity of rate tightening policy despite'' the weakening economy, Poole said in an interview with Bloomberg Radio.

Apparently not even the Black Statistical Arts specialists at the BLS were able to put lipstick on this pig. Between Poole's comments and the ones from 2 days ago by the Richmond Fed President, it seems internal dissent in the Fed against Bernanke's rate-slashing and discount-lending policies is rising. But now the Fed's really in a bind - rampant inflation means they can't cut rates, but the spike in unemployment means they can't raise them in order to rein in inflation. I wonder if "caught in a pickle" is a term the economic ivory-towerites are familiar with?

Edit: Spotted this nice little comment [#15] on the BLS funny-numbering of the jobs numbers on this Wall Street Examiner posting:

Plantagenet wrote:

Further to the dismal jobs report: I have checked the BLS Net Birth / Death model, i.e., the fake jobs that get added in to reduce the apparent losses. The model added about 80k per month in 2005, rising to 100k jobs per month in 2007.

The BLS has now completely lost all shame. Look at the last four months:

Feb. +135,000
Mar. +142,000
Apr. +267,000
May. +217,000

May’s figure includes +42,000 new jobs in construction!

Posted on 06-Jun-08 at 10:37 am

Moron of the Week!

[I was tempted to pick ex-Tonight Show human laughtrack Ed McMahon for squandering all his millions on godknowswhat and now facing foreclosure on his Beverly Hills mansion, but given Ed's health woes, that would be too unkind...anyway, we have a far worthier candidate. BTW, make sure to check out the name of Ed's official spokesman in the article I linked. ]

An especially hearty "you earned it!" clap-on-the-back [followed by a swift kick in the pants - we wish] to this week's MotWee winner, none other than our Federal Reserve chairman, Ben "Ivory Tower Bennie" Bernanke:

Bernanke Says Rise in Price Expectations a `Concern'

June 4 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said while rising public expectations for inflation are a ``significant concern,'' there's little sign of the pressures that drove price increases above 10 percent in the 1970s.

You mean, like skyrocketing energy prices? Or do those only "count" if there's an actual 70s-style Arab oil embargo occurring?

``Some indicators of longer-term inflation expectations have risen in recent months, which is a significant concern'' for the Fed, Bernanke said today in a speech during a Class Day ceremony at Harvard University in Cambridge, Massachusetts. Policy makers ``need to monitor that situation closely.''

Signs of increasing prices compelled Bernanke and other Fed policy makers to signal in April they'll pause after reducing the benchmark interest rate by 3.25 percentage points since September. The Fed is trying to sustain economic growth and minimize harm from the collapse of the subprime mortgage market without impairing its credibility on inflation.

Typical academic blather ... instead of just focusing on "dey prices, what dey be doing?", it's about "longer term inflation expectations" - which is rather telling, because it confirms that for the govt wonks, it's not about reality, it's about "expectations", more specifically, the managing and manipulation thereof. Now, a less-couth observer than myself might be tempted to ask rhetorically, what "Fed credibility on inflation"? - but we are far too genteel for such crude jibes here.

Bernanke's remarks focused on the differences between the U.S. economy now and in the 1970s.

More of the academic/theoretical/paradigmatic/epistemological/[insert hifalutin-sounding throwaway descriptor here] approach - instead of focusing on "what is occurring", focus on "the differences between the U.S. economy now and in the 1970s". In that vein, allow me to suggest a few:

Difference #1: It's not the 1970s

Difference #2: It's not the 1980s

Difference #3: It's not even the 1990s!

Difference #4: Ben Bernanke is not Paul Volcker.

Difference #5: Neither was Alan Greenspan.

``Maintaining confidence in the Fed's commitment to price stability remains a top priority,'' Bernanke said. ``We see little indication today of the beginnings of a 1970s-style wage- price spiral.''

That is true enough - you see, in the 1970s, we had slow-to-zero real economic growth, and upward-spiraling prices and wages. Now, we only have slow-to-zero real economic growth and upward-spiraling prices, whereas wages are flat-to-negative and household debt-to-income ratios are a large multiple of what they were in the 1970s. So Bennie is exactly right - it's not the-1970s-all-over-again. Doesn't knowing that make you feel much better?

Of course, even if inflation in what-people-actually-pay-for-stuff-they-actually-buy terms were running wild, Bernanke and his cabal of fellow blinkered fantasy-economists would never see it, because all the useful measures of consumer price changes have been altered beyond recognition over the past several decades, and "reflecting reality" is a thing of the distant past.

[only_human]

Originally Posted by ewmayer

the useful measures of consumer price changes have been altered beyond recognition over the past several decades, and "reflecting reality" is a thing of the distant past.

Yes, but by removing all those pesky and volatile factors such as food and energy, we get nice stable numbers that don't wiggle and jiggle around inside once we swallow them.

There was an old lady who swallowed a fly
I don't know why she swallowed a fly - perhaps she'll die!
There was an old lady who swallowed a spider,
That wriggled and wiggled and tiggled inside her;
She swallowed the spider to catch the fly;...

http://www.rhymes.org.uk/there_was_an_old_lady.htm

[ewmayer]

Lehman posts $2.8B quarterly loss, shocking even the pessimists

Lehman said it expected to report a loss of $2.8 billion, or $5.14 per share, during the second quarter, blaming writedowns, trading losses and failed attempts to hedge its position. Monday's results mark the company's first quarterly loss since the firm went public in 1994.

Just a year earlier, the company reported earnings of $1.3 billion, or $2.21 per share.

To be sure, Lehman's results were far worse than Wall Street was anticipating. Analysts were expecting the company to report a loss of 22 cents a share on revenue of $2.62 billion, according to analysts surveyed by earnings tracker Thomson Reuters.

I wonder if some of those trading losses were related to LEH's recent attempts to manipulate its own share price? [See also any recent series of daily LEH charts, and look for the "daily 2:30 LEH pump". The trader Boyzz tried it again last Friday, but were overwhelmed by the tide of pessimism unleashed by the latest jobs report and the massive spike in oil prices.]


NAR: Pending home sales up 6.3%; prices seen falling: Index of homes under contract for April is at the highest level since October, but down 13% from last year, Realtor group says. Prices are expected to take an even bigger hit.

Now keep in mind these numbers are from the permabullish spinmeisters at the NAR, but assuming they are not completely fabricated [i.e. they at least got the sign right], it's an indication that there is no lack of willing buyers - at least at something more closely resembling non-bubble historic prices. However, it's unclear to what extent the bargain-basement-we-hope buying is on the part of RE speculators - even the NAR adds a note of caution to that effect. A lot of new hedge funds have spring up in the past 18 months looking to make money buy buying real estate "bargains" - I doubt many of them have made money on such bets so far, and most have likely suffered significant losses.


Conference Board: Unemployment will continue to rise

NEW YORK (CNNMoney.com) -- Unemployment is likely to continue to rise as companies cut more jobs, according to a new index from a respected business research group released Monday.

The Conference Board's Employment Trends Index (ETI) uses eight widely followed readings on employment and economic activity from both government and industry sources.

The Conference Board said the decline in the index's May reading suggests that the labor market hasn't yet hit bottom. The organization has computed the index readings back 35 years and found that it accurately predicts all turns in the labor market accurately during that period.

It said combining those eight factors gives a far more accurate reading on the employment outlook than looking at any of them alone.

"We forecast further softening in the labor market, a moderate rise in unemployment, and weaker wage growth over the next several quarters," said Gad Levanon, senior economist at The Conference Board. "Employers will find it easier to recruit and hire, and will be looking at slower growth in compensation costs. Workers will find it harder to get a job, a raise or a bonus - all of which will further rein in consumer spending."

...

Conference Board economists said the 5.5% unemployment rate may be overstating unemployment in the current economy due to the influx of teenagers into the work force who have not been able to find jobs.

They said the unemployment rate could decline later in the summer, even if the economy continues to lose jobs, as teenagers become discouraged and stop looking for a summer job.

Damn teens, actually believing they should get "jobs" on entering the workforce. If you have millions of teens entering the workforce who would normally be finding jubs and now aren't, how is that "overstating unemployment", praytell? I don't recall the experts citing the same yearly influx as "overstating *employment*" during the boom years. So, the official spin seems to boil down to "millions of jobless, discouraged teens = good for the economy." Our Dear Leader tried the same spin on Friday, only to have the markets resume selling off, hard. Not that Dear Leader Dubya "lacks credibility" or anything...

Anyway, the "teen angst" propaganda is a non-starter, because the BLS data clearly show that the biggest rise in unemployment was among 20-24-year olds ... calling them "teens" and expecting them to dutifully re-enroll in high school this coming Fall, are we?


NYT: 1 in 11 Mortgageholders face loan problems, up sharply YTD

The first three months of 2008 marked the worst quarter for American homeowners in nearly three decades, according to the report, issued by the Mortgage Bankers Association. The rate of new foreclosures and past-due payments surged to their highest level since 1979, when the group first started collecting the data.

All told, about 8.8 percent of home loans were past due or in foreclosure, or about 4.8 million loans. That is up from 7.9 percent at the end of December. (About a third of American homeowners do not have mortgages.)

Delinquency and foreclosure rates started rising from historically low levels in late 2006 and have picked up speed in nearly every quarter since. Analysts say at first past due mortgages represented mostly high-risk loans made to borrowers with blemished, or subprime, credit. Now, as the economy has weakened and home prices have fallen in many parts of the country, homeowners with better loans are also falling behind.

But note that it's still true, as the Realtor-sponsored housing pundits remind us, that "Over 90% of U.S. Mortgages are current". I'm sure "Over 90% of Death Row convicts actually committed the crime", as well. Comforting, that.

[only_human]

Originally Posted by ewmayer

NYT: 1 in 11 Mortgageholders face loan problems, up sharply YTD

(my bold emphasis) I am constantly struck by this little factoid that never seems to be examined. All the news likes to say "worst in nearly three decades" etcetera, but I've never seen them tacitly acknowledge that it might be even worse beyond the date first tracked. They should say "worst in at least 29 years." But that of course wouldn't sound as definitive as they want their wise heads to suggest.

Employment figures are in need of a thorough documentary style investigation. I wouldn't be surprised to find some real howlers in it, e.g. fired employees automatically considered to be discouraged.

[ewmayer]

Chinese Markets Battered By Beijing's Tightening

Forbes.com staff 06.10.08, 10:04 AM ET

HONG KONG - The Shanghai Composite index finished a battered session down 7.7%, at 3,072.33, its lowest level in a year, while Hong Kong's Hang Seng index slumped 4.2%, to 23,375.52, reacting to the People's Bank of China's move over the weekend to raise the reserve requirement on bank deposits by a full percentage point this month, to a record 17.5%.

The reserve ratio hike, the PBOC's fifth this year, was part of China's continuing efforts to bring down the nation's inflation rate, which is at its highest level in more than a decade.

"That is a very sharp rise. The market was expecting China to loosen its tight monetary policy due to the earthquake. This latest move dashed that hope. That is why the market sentiment has turned sour," said Yu Kei Lee, an analyst at Core Pacific-Yamaichi International. "This will be negative on banks' earnings because their lending capability will be restricted."

Trade deficit grows on oil imports: High oil prices helped to expand the nation's trade deficit more than expected in April, reaching levels not seen in over a year, according to a government report released Tuesday.

So much for the bizarre idea that debasing one's currency would make exports cheaper without affecting import prices...


FHA chief balks at taking on more bad loans: Federal Housing Administration Commissioner Brian Montgomery said a plan for his agency to take on two million at-risk loans could make the housing crisis worse.

Federal Housing Administration Commissioner Brian Montgomery told the National Press Club that Congress legislation proposing that the FHA back up to $300 billion worth of troubled mortgages - or about two million loans - would weaken the agency.

"This is a worrisome idea," Montgomery said. "FHA is designed to help stabilize the economy, operating within manageable, low-risk loans. It's not designed to become the federal lender of last resort, a mega-agency to subsidize bad loans."
New real estate realities

Montgomery also argued that the agency has been "hobbled by low loan limits and higher down payment requirements," adding that the FHA "was literally priced out of some housing markets."

He said that the new, higher loan limits announced in March - which range from $271,000 to $729,000 - opened up the market for FHA loans in high priced areas and have already helped about 100,000 homeowners. He argued that higher loan limits should be made permanent to help the housing market.

Montgomery noted that the FHA has already begun pricing the loans it makes according to borrowers' risk levels - a first in the agency's 74-year history - and said that this policy should also be made permanent.

The conventional wisdom had been that charging higher-risk borrowers more would hurt those who need help the most. But Montgomery said such a policy is actually in line with FHA's mission to provide home financing for low income and minority home buyers.

"Contrary to conventional wisdom, FHA families with the lower incomes have higher FICO scores," he said. The target FHA client, then, the lower income American, would pay a lower rate for an FHA loan under risk-based pricing.

I agree with much of what he says, although my sense is that many of the markets FHA was "priced out of" [e.g. California] were the ones where speculative price mania was most rampant, i.e. which are the least deserving of a propping-up. Amazing that the idea of risk-based pricing is a "recent innovation" as far as FHA is concerned. Let's just hope their risk assessments aren't based on ratings by S&P or Moody's... but apparently one market the FHA was *not* priced out of was the "Crap Mortgage" one:

NYTimes: FHA Faces $4.6 Billion in losses

Brian D. Montgomery, the F.H.A. commissioner, attributed the unanticipated losses primarily to the agency’s seller-financed down payment mortgage program, which has suffered from high delinquency and foreclosure rates in recent years.

The Federal Housing Administration expects to lose $4.6 billion because of unexpectedly high default rates on home loans, officials said Monday. The projected loss is the highest in the home loan program since 2004, and officials said the F.H.A. had to withdraw $4.6 billion from its $21 billion capital reserve fund in May to cover the costs. They said the agency, which is self-sustaining, would not need appropriations from Congress to remain solvent.

He said the mortgages had foreclosure rates three times those of traditional loans and would push the F.H.A. to the brink of insolvency.

“Let me repeat: F.H.A. is solvent,” Mr. Montgomery said on Monday in a speech at the National Press Club. “However, no insurance company can sustain that amount of additional costs year after year and still survive. Unless we take action to mitigate these losses, F.H.A. will soon either have to shut down or rely on appropriations to operate.”

"Unanticipated?" "Unexpectedly?" Are you smoking crack? This kind of outcome is GUARANTEED when you start taking on hundred of billions worth of high-risk mortgages issued during the height of the recent lax-lending-standards insanity. Reassuring to know FHA "has no liquidity issues", though - just a pesky little "solvency issue."


Treasury's Paulson: "Will not rule out currency intervention"

In order to - get this - "keep the dollar strong". As Mish Shedlock correctly notes in his commentary on the news story - unless the USGov actually makes a serious effort to rein in its exploding budget deficit, what could they possibly buy dollars with in order to prop the currency up? Maybe they could some of their vast stockpile of nuclear weapons to countries seeking to acquire them - bet they could easily get $1 Billion per nuke-tipped missile. Sell 10,000 of them and presto! No more budget deficit. Of course continuing the war in Iraq would require 1000 more per year after that, so you've got at most 4-5 years to "stay the idiotic frickin' course" before your entire nuclear arsenal is gone and you start having to sell other government assets, like the Capitol and the National Parks.

Hey, the Russians are flush with oil money - maybe we could sell Alaska back to them. Oh, wait -- that would prevent us from propping up our petroleum addiction by drilling the crap out the remaining Alaskan reserves. Tough choices, once the nukes are all sold. Also, if we flood the nuke markets with our stockpile, the price is surely bound to plummet - so to sustain that market we'd have to get the buyers to use them on each other, in order to keep demand strong.

[ewmayer]

Bob Pisani's Trader Talk | Huh?! Merrill's Moszkowski Reverses Lehman Call

Should we laugh or cry? Merrill Lynch financial analyst Guy Moszkowski has just downgraded Lehman Brothers [LEH], ONE DAY after affirming his BUY rating and ONE WEEK after raising the stock to BUY.

Huh?

Here's what he just said in a note to clients:
"Removing Buy a week later and 10 percent lower is not easy but scale of Q2 loss and capital-raise indicate lower ROE [Return on Equity] potential and lower confidence, esp. given LEH's remaining exposures."

On June 4, with Lehman at $31 and change, Moszkowski raised his recommendation on Lehman to Buy, saying "Share correction overdone in our view."

Lehman trading at $25.19 as of this writing.

[Ed. note: LEH closed at $23.75 - down nearly 14% today, down 33% in the past week, and 70% from this time last year. I was watching the LEH live ticker frequently during the last hour of trading today [and especially in the last 15 minutes], and it was scary, just in absolute free-fall in the last half-hour of trading - had dropped below $23 before an "invisible hand"^* intervened in the last few minutes. Really scary price and volume action. Daily chart attached below, to illustrate.]

Of course in his capacity as a paid CNBC stock-pumper, Bob has more than his fair share of bad calls and "Did I say 'buy'? I meant 'sell'" flip-flops on his résumé - but he's right to call "bullshit" on the MER analyst here.

The more-interesting twist on the recent plunge in LEH shares is that the markets seem to not be buying the "Oh, we're just doing another dilutive stock offering to raise capital we said we didn't need to replace losses we said we didn't have" scam anymore - Citigroup [among others] got away with it a few months ago, but only in a short-term sense, as their stock price is now reflecting. As many [except perhaps in the incestuous financial mass media] have pointed out, when the banks can no longer raise capital by suckering folks into buying newly-printed shares at a premium [relative to what the resulting dilution should warrant] price, it's game over for their ongoing fiscal smoke and mirrors show.

The other very real danger for Lehman at this point is that shareholders who have been repeatedly lied to and misled by LEH management will begin to assume the worst, and then perception can turn into reality, often in frighteningly quickly. This is the same kind of "run on the bank" that led to the demise of Bear Stearns. Market optimists will say, "but the Fed kept Bear from outright bankruptcy and made sure such an event can't happen again, via their discount lending facility and other innovations." Oh really? To be sure, the Fed's intervention probably prevented a major immediate-term meltdown in the financial markets. But one could argue that the Fed's unprecedented intervention simply replaced a brief, brutal correction with a slower bleeding-out of the patient. Also, without what would be equally-unprecedented action on the part of lawmakers to essentially give the Fed a blank check drawn on the U.S. Government [i.e. ultimately the taxpayers], the Fed has limited capital with which to bail out imploding banks - since the Bear debacle less than 3 months ago, they have already put up over half their $800 Billion reserve capital for troubled banks to exchange their illiquid securities for. If they have to bail out a player like Lehman - larger than Bear, but still much smaller than the really big players like Citigroup - they will be all out of fiscal bullets. Fittingly, in the case of Bear and Lehman and similar institutions dependent on easy access to capital, in the end it really does boil down to a "confidence game". And when the con is exposed, the game is over.


A more-recent Mish article on Lehman's self-inflicted woes is here.

On a related note, the aggregate in-hock-to-the-Fed-edness of U.S. banks just hit another record. Compare the latest total-borrowed amount to the size of the much-ballyhooed [and equally-drawn-on-credit] U.S. government fiscal stimulus package. In the space of the first 6 months of this year the banks will have bled more red ink than the size of the $150 Billion fiscal stimulus package, with no end in sight. Of course, you'll never hear about that on CNBC.

===

^* Note that this could have consisted of any or all of (i) the U.S. Treasury's Plunge Protection Team, (ii) LEH furiously buying back its own shares in order to prop up the price, (iii) short covering, (iv) would-be end-of-day bargain hunters trying to catch the proverbial falling knife.

[ewmayer]

Looks like another suckers rally in financials today - this one was just pathetically weak.

NYT | David Brooks: The Great Debt Seduction

The United States has been an affluent nation since its founding. But the country was, by and large, not corrupted by wealth. For centuries, it remained industrious, ambitious and frugal.

Over the past 30 years, much of that has been shredded. The social norms and institutions that encouraged frugality and spending what you earn have been undermined. The institutions that encourage debt and living for the moment have been strengthened. The country’s moral guardians are forever looking for decadence out of Hollywood and reality TV. But the most rampant decadence today is financial decadence, the trampling of decent norms about how to use and harness money.

I agree with the general theme, but disagree with Brooks on the specific timeframe - I'd say frugality in the U.S. [by way of contrast to e.g. Europe and Japan, which took at least a decade ow two longer to start "wanting to have it all", in no small part because their conomies and infrastructure were much more damaged post-WW2] pretty much went out the window in the immediate aftermath of WW2, but then pending insanity really went bonkers once the baby boomers reached adulthood and started having money to squander and mass-media-fueled materialist desires to match [and far-overmatch, as we see in the current culmination of the giant multidecadal credit bubble.] It is no accident that the boomers are often referred to as the "me" generation.

Of course Brooks is a baby-boomer himself, so it's probably not easy for folks like him to admit, "Ours is the most wasteful, selfish generation in U.S. history."


Lehman chief feels the heat

CEO Dick Fuld stays on, but his top two lieutenants step down as worries about the broker's financial health deepen.

By Roddy Boyd, writer

NEW YORK (Fortune) -- Lehman Brothers CEO Dick Fuld is running out of options.

The investment bank served up another shocker Thursday, shaking up its top ranks amid deepening concerns about the firm's financial health. Just before the market opened, New York-based Lehman (LEH, Fortune 500) said its president and the architect of its growth spurt in the middle of this decade, Joseph Gregory, will step down and be replaced by equity trading head Bart McDade. And the executive who has led Lehman's aggressive defense against questions about its accounting and balance sheet, finance chief Erin Callan, will step aside in favor of co-accounting chief Ian Mowitt.

...

The moves leave Fuld's hold on the firm intact for now, but will intensify the spotlight beaming down on the executive. He previously won praise for his work as a crisis manager in the wake of the firm's near-meltdown amid the 1998 Long Term Capital Management collapse and later for his effort relocating Lehman following the terrorist attacks of Sept. 11. And when rival Bear Stearns imploded back in March, Lehman benefited from a strong public relations push that highlighted the firm's superior liquidity, as well as the Fed's commitment to lend to investment banks at the core of the financial sector.

Looks like Fuld learned little from the LTCM debacle, because the term "overleveraged" seems to be absent from his personal lexicon. And for the N^th time (N >> 1) - for these firms, it's no longer an issue of liquidity, it's one of outright solvency. If it were a liquidity issue, the Fed's spate of rate-slashing earlier this year would have translated to [among other things] significantly lower mortgage rates for well-qualified borrowers [not even close, and we wouldn't have seen the LIBOR interbank lending rate [even the falsely low one resulting from the banks lying about their rates in their self-reporting of same] spike as we did, a clear sign that banks remain deeply wary of lending to each other despite the massive liquidity provided to them by the Fed's variously-acronymed discount loan facilities.

Take note, too, that as the credit market storm was gathering strength, Lehman was adding billions upon billions of dollars in assets. Savvy investors would likely be very interested to know what Lehman's top execs saw that led them to vastly expand their balance sheet even as other investors were backing away from risky debt.

In an e-mail Monday, a Lehman Brothers spokesman defended the firm's public statements about its balance sheet. "Our financial disclosures are among the most complete and transparent in the industry," he wrote.

Translation: "We don't lie any worse than our competitors do."


Housing: It'll get worse: Hard hit cities like Sacramento, Phoenix and Las Vegas are set for more steep losses. Some real experts are bracing for price drops of as much as 50 percent.

"The housing boom was unprecedented in U.S. history," said Michael Youngblood, a portfolio analyst with FBR Investment Management, "and the correction will be as well."

Many erstwhile bubble cities have sustained particularly brutal hits. The median-price of a home in Sacramento, Calif. was down 35% during the three months ended May 31 compared to the same period last year, according to the real estate web site Trulia.com. In Riverside, Calif. prices fell 29%, while San Diego prices dropped 26%.

Smaller cities in California`s Central Valley, such as Stockton (-39%), Modesto (-37%) and Bakersfield (-29%), also recorded steep declines.

Outside California, hard-hit markets include Phoenix (-18.8%), Las Vegas (-22%), West Palm Beach, Fla. (-32%) and Cape Coral, Fla. (-35%).

Youngblood expects that these markets will likely endure total price drops of 50% or more.

The smart money

Indeed, prices are falling faster and further than in any other post-war housing bust. During the bust in Austin, Tex., which started in 1986 and is one of the worst on record, prices fell 25%, according to Local Market Monitor, a financial data provider. And that cycle took four years to bottom out.

In other major downturns, prices in Los Angeles fell by 21% during a six-year period in the 1990s, and Honolulu home prices saw a decline of 16% in the five years starting in 1994.

Youngblood`s forecast "is quite plausible," said Nicholas Perna, of the economic consulting firm Perna Associates. He finds it especially significant that the smart money, investors in the S&P Case/Shiller Home Price Index, are still buying futures as if they expect prices to continue to plummet.

The index, which tracks the sale price of specific homes as they are sold and resold over the years, is considered to be one of the most accurate home price indicators.

"The people who are putting their money where their mouths are," said Perna, "are betting on more losses."

...
This correction was inevitable, in Youngblood`s opinion; home price gains had simply out-paced income by far too much to be sustained.

Historically, home prices have averaged about four times wages. Whenever homes got significantly more expensive, people could not afford to buy and home prices fell back.

But local price-to-income ratios are still out of whack even after steep price declines, which means prices have further to fall. In Los Angeles, where the ratio peaked at 22.7, according to Youngblood, it`s still in the high teens. Home prices would have to come down another 40% or so to get that ratio back into the single digits.

And it`s not just the housing fundamentals that lead Youngblood to expect more drops; he also cites the local economic conditions.

"Bubble cities are now seeing fleeing employment conditions," he said. In Miami, the unemployment rate rose 34.3% between April 2007 and April 2008, according to Youngblood. And the job picture in California cities, where many jobs were housing related, has been even more disastrous.

Housing was a key economic engine for towns like Riverside, Stockton and Modesto during the boom, according to Zandi. Builders, real estate salespeople, mortgage brokers and lenders, and even retailers, like Home Depot (HD, Fortune 500) and Lowe`s (LOW, Fortune 500), depended on growth in the sector.

"In all those deteriorating housing markets, it`s a double hit," he said.

Ten of the 11 cities with the highest unemployment rates in the nation are now in central California, with El Centro, at 18.4% in April, leading the way. Other double-digit disaster areas were in Merced (12.3%), Yuba City (11.8%), Modesto (10.7%), Visalia (10.3%), Hanford (10.2%) and Fresno (10%).

Many of these cities are also among the leaders in foreclosure rates. As more foreclosed properties hit the market, prices are further depressed.

A price-to-income ratio of over 20 - that`s nuts. Just unbelievably nuts. How could anyone delude themselves into thinking they could ever pay down that much debt, while at the same busily taking on even more, by way of tapping that HELOC, buying that new SUV and the 3 new plasma TVs for the McMansion, a new Nintendo Wii and iPhone for darling little brats, a new MacBook air for dad, expensive collagen treatments and boob enlargement for Mom, et cetera, ad nauseam? I can only imagine [or at least hope] that future generations - when they're not busy working their multiple jobs in order to make ends meet and pay off the millions in debt they inherited from grandpa and grandma - will look back on this period in history, shake their heads and rightly say, "What in God`s name were they thinking?"


Fortune | Citi shutters CEO’s hedge fund

Another day, another black eye for Citi (C). The big bank is shutting down the Old Lane Partners hedge fund once run by Citi chief Vikram Pandit. Citi, which paid $800 million last year for Old Lane, said it will buy the assets of the multistrategy hedge fund at fair value, allowing investors to redeem their holdings at July 31. The decision to shut down the fund was “reached in anticipation of redemptions by all unaffiliated, non-Citi employee investors,” Citi said. “The restructuring is designed to meet Citi’s objective to retain talent and create synergies among the company’s trading platforms.”

"Synergies blah blah" ... Translation: "Investors in the blown-up fund are of course royally screwed, but ol` Vikram made out like a bandit when he sold us the fund last year and pocketed a cool $165 million profit, not to mention the Citi CEO-ship and all the attendant perks and Golden Parachute." Strangely, Pandit-the-Bandit has made no mention of perhaps using some of his windfall profit to help defray investor losses. I`m sure he's just working out the details there with his tax advisers.

[Reply to Paul below: I actually think Bill has quite a handsome yearly income - he simply doesn't need to earn it by way of salary like most folks. What do you think the yearly dividend from his MSFT shares amounts to? Or simple interest on even 1% of his fortune? Anyway, I doubt a 30-year mortgage is quite his style...that would be like me getting a bank loan to buy a 42-cent first-class postage stamp.]

[xilman]

Originally Posted by ewmayer

A price-to-income ratio of over 20 - that`s nuts. Just unbelievably nuts. How could anyone delude themselves into thinking they could ever pay down that much debt

Warning: nitpicking ahead.

A price-to-income ratio of over 20 could be very easily supportable.

A debt-to-income ratio on the other hand ...

Some people are capital rich but (relatively) income poor. Consider Bill Gates for instance. His income is quite modest but even in these straitened times his wealth is still quite adequate.


Paul

[garo]

One for the Monty Python fans:

The economy has gone to meet its maker. It is no more | Comment is free | The Guardian