patrick.net

It's like they are begging for 12,000, like it's some magic number or something.

Krugman piece is overly optimistic in my opinion. He does a fine job of documenting what has occurred to date, and stating the obvious projections forward.

Many factors and inputs he ignores or does not speak to, in typical academic economist fashion. He mentions other shoes dropping, but misses the point that it is entire shoe store falling. All the credit verticals will go pop, all of the consumer flavors - auto credit card home equity education etal; all the leveraged commercial real estate in all flavors; all the unfunded pension issues; and the governmental debt state local and fed.

Job losses necessarily will cause a cascade of credit default. It is unavoidable now. Next Q’s earnings should start the employment contraction in earnest.

Oh, and then there is this thing called confidence and trust. The US has lost its shine relative to inward offshore investment flow.

What happens in that scenario, Mr Krugman?

And did I forget about the high likelihood of geopolitical instability that is a short term foregone conclusion in more than one part of the world? Fossil aquifers are drying, food scarcity crisis is real. (Including the Ogallala in the US, btw. It irrigates our breadbasket, and is a non-replenishing source) Chances are 100% the US military will be engaged in another significant conflict within the next 10 years. North South conflicts are coming. Pakistan is a mess. Many around the world are not real happy with the USA, for a variety of reasons.

Krugman states that it is different this time due to the fact “we know more now”. While this is valid in a few respects, such as preventing a market crash where I think without the new tools (PPT) we would have seen a full panic by now, and possibly preventing cascading counterparty default such as Bare maneuvers, it’s ignores basic economic reality.

Krugman has his head in his ass.

Hope in one hand and shit in the other. See which one fills up first fellas.

It’s like they are begging for 12,000, like it’s some magic number or something.

All numbers are magical as they carry different energies.

Richmond Says:
March 18th, 2008 at 10:37 am
"And as a matter of fact, I did have to prove where my down payment came from, way back when."

It used to be that 25% or more were pretty much no questions asked loans. They weren't even liar loans, they were no qualifying loans, no questions asked. Anything else, even 20% down was a hassle. You would have had to show the money sitting in your bank account for a couple of months. Even that was just a small obstacle, just move the money from a credit card and let it sit there for a couple of months. That's kind of why I think chasing and knitpicking otherwise qualified borrowers who lenders want to lend to is somewhat futile.

Malcom,

The down payment police needs to be put in place. One thing I have seen in this mess is even if it is someones personal money being loaned out, they will get bailed out with "our" collective money when things get bad. The credibility of FED and allowing people to fail is gone.

I hate the whole notion of socialism, but prefer it to the system we have now. I can't even think of a word to describe the system we have now. It resembles a hybrid mixture that combines all the bad characteristics of the other systems. I am tired of private profit and public risk. Why should we have rewards for a small part of the system in return for everyone paying when they make bad bets?

If a guy has 20% of his own skin in the game where upon default I get it. I would be much more willing to lend him money.

I see your point. And a good one it is. If a person is a qualified borrower, than the only impedence is time. A small price to pay for quality. It's not like interest rates are going up.

In a normal market that was sufficient. The problem happens when the guy borrowed the 20%, and then the overpriced houses started snowballing and bringing other prices down with each additional foreclosure.

Google has posted a primer on the subprime mess. It's worth a look.

http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true&pli=1

The BS appraisal is the biggest threat. I'm still not sure how that could have been prevented. Many times the high appraisals were substantiated with comps. This then drove the frenzy in ever more decreasing loan standards to win market share. Historically I think it will be viewed as a very interesting set of events that came together.

I sent that to Patrick and I guess he had no way of posting a PowerPoint.

Patrick, you need to add that link from Dennis in the main links section. It is hysterical.

just move the money from a credit card and let it sit there for a couple of months

That trick would show up in your credit report. Not only would it show the phony savings, it would lower the amount you qualify to borrow.

In the days Richmond is refering to, it was very difficult to borrow your down payment. If the banker saw any indication your down payment was borrowed, he would deny the loan. "Nothing dow, bankers frown." This strict downpayment requirement is why FHA and VA loans came about in the first place.

"Bad assumption my frigid Norwegian ass!" LOL LOL LOL

I was shocked at how the give back loans skewed the comps.

Let's say I want to buy your house. You say it's 250. I say ok, but I don't have the down. So, I say that I'll give you 275 and you give me 25 back. The first holder doesn't check, I have my fake down that I owe and the sale records at 275. Do that ten times in a neighborhood and you can see another reason prices went up so fast.

Yes, the amount would increase what shows on the credit report. Qualifying was based on the minimum monthly payments to your creditors, so an extra $10,000 is easily masked. But yes, your point is true, each monthly dollar of debt payment, reduces your borrowing ability by roughly twice the amount in mortgage payment.

That's basically my take on what happened. That was the systemic flaw, they were real comps, they just masked the kickbacks and that made the sheep all chase a bogus trend.

FHA guidelines used to have a front and back end ratio. The front end was just what your house payment relative to your income is. The back end is for total debts including the house payment. People would qualify for a loan with a 45% back end ratio on FHA loans. To me that is insane since taxes can make up close to 30-40% for lower income borrowers. Therefore someone buying at the max guidelines is basically committing 70-80% of their paycheck each month. Not really smart normally, but in some cases it really paid off.

Let’s say I want to buy your house. You say it’s 250. I say ok, but I don’t have the down. So, I say that I’ll give you 275 and you give me 25 back.

In the old days, an appraiser would have said the house was worth only $250k based on recent sales, and he bank would want to see the unborrowed $50k down payment. The loan paperwork had a phrase like "source of funds for down payment" and a question like "Is any of the down payment borrowed?"

The appraisal used to be the control. It screws the whole model up when you can't rely on it.

# skibum Says:
I and others were predicting this last year - I recall several, including Randy, who claimed VC money had some degree of immunity from overall economic hard times, as that is mostly private equity wealth. So much for that claim.

I was one of the guys talking about a bad startup-funding scenario - it was not much of a "prediction", because I was reporting on actual observation with maybe a little extrapolation into a liquidity-crunched future - not very hard to predict. The reality is that after the Y2K bust, VC funding in internet/tech was never as reckless as it used to be from '95-'99 anyway.

This is not to say that Randy wasn't right - his point still stands in that private-equity wealth will be immune. However, what it does mean is that VC's will be very selective in their approach. As the prospects for IPO and acquisition become dimmer and/or distant, VC's look for lower risk, experienced management track-record, existing customer/revenue base and proven business models - and expect more equity in return for their money.

While the _obvious_ result is tighter funding for new startups, the true Oh Shit moment is when _existing_ start-ups with _existing_ employees go looking for another round of funding - and find that there is nothing there. Watch for that, because it will translate into large numbers of pink slips for burnt-out, highly-specialized, senior-level techies making over 1 HAHA - exactly the kind of staff that no one is looking to hire soon.

Gold is crashing.

true Oh Shit moment is when existing start-ups with existing employees go looking for another round of funding - and find that there is nothing there. Watch for that, because it will translate into large numbers of pink slips for burnt-out, highly-specialized, senior-level techies making over 1 HAHA - exactly the kind of staff that no one is looking to hire soon.

Totally agreed. Smart portfolio companies are soon planning the austere budget, many optimistic ones will face a serious surprise. Proactive layoffs coming near term.

The environment for small companies and entrepreneurs is about to cycle through a very, very difficult period. Manage revenues to support the burn or die.

Existing investors will keep their portfolio on life support, but make them cut off an arm or leg. Expensive resources are in trouble.

Anybody getting the feeling this whole mess is orchestrated? Our markets are not acting "free" by any stretch.

What is the motivation of the string-pullers this time?

Whoever it is seems to want the dollar trashed. Everything is pointing to that fact. Think someone might be forcing our hand to adopt the euro?

There is a big play at work here. Much bigger than housing or Bear Stearns. And it's threatening to rip apart the fabric of our country.

@sp,

Maybe Randy and others can correct me, but there's a difference between true private wealth and your typical private equity firm (Carlyle, Blackstone, Cerebrus, etc.) The latter still use a huge amount of leverage to get deals done. I'm just not sure how much leverage is used to fund VCs and in turn startups. My guess is not much, as why borrow money to throw into a 2-5 year investment?

Peter P,

this is a great chance to swap your paper position into a physical position because the absolute mark-up will be lower. I am planning to go physical 100%.

GLD can be borrowed for shorting, and since it is Wall Street, we know naked shorts happen. Well, if I am holding physical, I don't care what your manipulated paper price is. When all shit hits the fan, we will see if gold or USD toilet paper goes further in buying anything.

Speaking of leverage, did anyone else catch one of yesterday's WSJ articles about BSC? Turns the balance sheets on all these Wall Street firms is incredibly leveraged. The talk in the news is how Lehman is the one on shaky ground b/c of it's degree of leverage, but Lehman is right about 32x leveraged, comparabe to BSC, while the "beacon of hope" on Wall Street, Goldman Sachs is "merely" 26x leveraged.

That's frightening.

skibum,

Carlyle, Blackstone are not VCs, they fall into the category of private equity group which typically play financial gains of doing LBOs, privatizing and later on bringing the same privatized company public. In doing so, they typically resort to cheap financing through issuing bonds or taking on bridge loans (which now become pier loans). They create no value, they are just the mother of all arbitrages of value (or the mother of packaging up). They buy *existing businesses*, turn them around in accounting sense to dress up for a bigger sale to dumber investors.

I have had pleasure to do business with one of those groups in my previous position. I have to say they add no value whatsoever for the world, except for playing the arbitrage to pocket the "arbitraged value" for the partners. The management employed by these private equity groups are usually accounting experts in making the company look good on paper, but in fact, the enterprise value is destroyed in the long term, but they've cashed out so they don't care.

GLD seems to track spot gold prices reasonable well for now. I may go physical, but I need a way to hedge easily.

GC actually has pretty good action at night, have you looked into your hedging options? (I also notice that the Asian session seems to be more optimistic about higher gold price lately. Gold futures can go up $10 just to be beaten down by the gorram New Yorkers.)

I hope the Asian session will be lower because that's when I buy physical.

Can you do that during the short Aussie-only session?

The whole thing about Wall Street can be summarized in the following:

Put a value on future expected (perceived) cash flow and cash out today.

It is ok to do so when one needs to buy or sell a company or a portion of a company. But this mentality has gotten out of whack, so everyone wants to cash out TODAY. No one wants to wait for tomorrow for the value to prove itself. No, we want it TODAY. Not only that, we want to tweak the *perception* of future cash flow so that we get a higher value TODAY.

So Wall Street is really a story-telling machine. To tell a good story, you need to line up the different components, the numbers need to look good (in accounting sense only), the management needs to look sharp, the general business environment needs to look upbeat. But story cannot divert too much from the reality. Eventually realty will shine through.

I can only do that during the Aussie-only session, because that's when the Mint accepts my order and parks my physical PM.

So Wall Street is really a story-telling machine.

All successful businesses are.

Gah. 32x and 26x. If those leverage values are against MBS, CDO, etc then they are insolvent.

If BSC was 30b to the Fed, Goldmnan and Lehman will be something like 100b?

Time to create a Fed burn clock. They are tracking towards insolvency.

Delta airlines just offered severance to 50% of it's employees, 30,000 of 'em.

Fed has another $500B to burn without turning on the press full speed. But we have MER, C, LEH and perhaps Wamu waiting in the pipeline for part of that $500B, I say the press will go on full speed before the end of summer.

Successful businesses have to backup its story-telling skill with real products. Wall Street's product is the story itself, a moneyed version of Hollywood.

I can only do that during the Aussie-only session, because that’s when the Mint accepts my order and parks my physical PM.

The market is thin and quiet after NY closes and before Hong Kong opens. You may be able to find a good deal.

Not investment advice.

Successful businesses have to backup its story-telling skill with real products.

Successful executives on bonuses and stock options don't have that requirement.

Carlyle, Blackstone are not VCs, they fall into the category of private equity group which typically play financial gains of doing LBOs, privatizing and later on bringing the same privatized company public.

oo,
You misread my post. I realize these guys are private equity. I was making the point that these guys provide a lot of the cash sloshing around our economy by "freeing up" that cash through leverage. They add no real value, I agree, but their contribution to all the free-flowing money in our economy will become apparent as they continue to not get the loans needed to complete these deals.