patrick.net

Is the Bad Bank or no Bad Bank the real issue here? I have been hearing lots of pros and cons on CNBC throughout the day.

I think it is being able to separate the fixed income securities into granular groups per their risk/return characteristics, in order to separate the “toxic” assets from the rest of them (based on whatever criteria of what “toxic” is). If one can do that, pricing will be quite easy.

The way pricing has been done on Wall Street prior to this crisis proved untenable. Not that the theoretical models were bad, but the structures/data used as inputs into the models was and still is extremely “dirty”. If not the data itself then it was the meta-data, the data that described it, which was “dirty”.
For instance, most Wall Street financial institutions and rating agencies do not have systems providing for the ability to drill all the way from RMBS instruments to the underlying loans to identify exposures. This is because the data models are not in line in terms of complexity with the structures of instruments they attempt at describing.

Pools statistics are also very sparse (that is, many of important composite statistics like distribution across geography & prime/sub-prime, superimposed, are simply missing) to be able to reliably estimate risk exposures based on them.
Imagine having a warehouse filled with candy. You know that 10% of the candy is poisoned with cyanide, but the rest of it is perfectly good. And you lost track of the process that resulted in the candy getting poisoned. Regardless how you separate the candy into multiple piles, and how you call the piles, if you cannot separate the bad ones from the good ones, nothing would help.
A theoretically feasible solution would be to go after the originators of the loans and issuers of the securities to determine which loan “feeds” which security, and under which circumstances (it is dependent on many factors, some of which change over time). But that would be extremely expensive. Using the above analogy, it is a little better than unwrapping and testing each candy.

Some “forensic” type of analysis could be done, but the challenge is to optimize the cost/benefit of a garden variety of approaches.
Hopefully, the next time around Wall Street will not be looking at raw data, reference data, data warehousing and business intelligence as nice-to-haves. As they loved to say, “if it was an ideal world, we could afford looking into that, but now we are after frying a bigger fish.” Looks like the “big fish” got a little “burned”.

Never heard of it.

Libertarian hawks, it figures, no contradiction in that one.

BINGO! I always tell the Ron Pauloids that a gold standard is always available to you, go ahead and buy in.

The Pauloids and Liber-tards seem to suffer from a shared delusion.

"If we just do X, everything will get better. Trust us!"

Where X is the Gold standard, legalizing machine guns or privatizing the police department.

Well, RP is at least a consistent libertarian, if nothing else.

WSJ Opinion: Why Be a Nation of Mortgage Slaves? Article

Preventing foreclosures has become a top priority of politicians, economists and regulators. In fact, allowing foreclosures to happen has merit as a free-market solution to the crisis.

If the intent is to help homeowners, then foreclosure is undoubtedly the best solution. Household balance sheets have been destroyed by taking on too much debt via the purchase of inflated assets. With so little savings, a household with negative equity almost implies negative net worth. Walking away from the mortgage immediately repairs the balance sheet.

Credit may be damaged, but homeowners can rebuild it. And by renting something they can afford, instead of the McMansion they cannot, homeowners are most likely to have some money left over each month that they can save toward a down payment on a house they can eventually afford.

If the intent is to help the credit markets, then foreclosure is undoubtedly the best solution. The securitization model has proven to be flawed. Slicing loans horizontally into tranches created asset classes that have conflicting interests in a dissolution strategy of the same underlying asset. The holder of a senior tranche would be agreeable to modification, since his position is secured; the holder of a junior tranche would essentially be wiped out. The lower tranches are worthless but are still legally an encumbrance, hindering any type of sale or work-out effort.

Consider a property that sold for $500,000 at the peak, financed with a $400,000 first lien and an $80,000 second lien, which is now worth $300,000. The second lien is worthless, but the lien will remain as a cloud which complicates any modification effort by the senior lien holder. There is no incentive for the junior lien holder to voluntarily agree to a modification. Foreclosure would be the best and finite action. It wipes the slate clean.

What is the market telling us? Dataquick recently released December sales data for Southern California, once the hotbed of speculative excesses supported by nontraditional financing. Foreclosures now dominate sales. Prices are down. Sales volume is up. New home construction is down. These are beautiful textbook illustrations of supply and demand driving price and market equilibrium.

Toxic financing abruptly stopped during the spring of 2007. By that summer, there were no more 100% financing, negative amortization option ARMs, piggyback seconds, or the now-infamous NINJA (no income no job no assets) loans. Even though real-estate prices have continued to decline, post summer 2007 purchases are by a different class of buyers financed by loans with much tighter underwriting guidelines. We are at a crossroads. The time line of the default and foreclosure cycle is about to hit 2007 vintage loans. If the default rate on them is lower than for loans made from 2004 to early 2007, it would be the confirmation of a turning point.

Foreclosures provide the foundation of recovery, both for Main Street and Wall Street. As properties are foreclosed, they can move from weak hands to strong hands. Households that have been foreclosed upon today are the buyers of tomorrow, when given a chance to recover.

The replacement of credit flow is not all about money. It is about a new system of delivery that will provide clean guidelines, so there will be a reliable source for borrowers based on sound underwriting standards and a product that fixed-income investors have confidence in buying.

With the government in total control of the Federal Housing Administration, Fannie Mae and Freddie Mac, this is the perfect opportunity to reform the secondary market.

Finally, loan modification is not only ineffective, it is evil. Coercing borrowers to continue paying a mortgage on a home that is hopelessly overvalued and not informing them of alternatives is predatory lending.

The media should interview those who had been foreclosed upon. Do they feel sorry or relieved? Are they rebuilding their credit, not to mention their lives? Do they miss the pressure of having to make payments they cannot afford on a McMansion that belongs to the lender?

The intent of modification programs to date is to create a generation of mortgage slaves. Fortunately, mortgage slaves can free themselves via foreclosure, and the masses are choosing to do so.

Mr. Su is a real-estate consultant and a former REO broker.

AP Investigation: Banks sought foreign workers
SANTA CLARA, Calif. – Banks collecting billions of dollars in federal bailout money sought government permission to bring thousands of foreign workers to the U.S. for high-paying jobs, according to an Associated Press review of visa applications.

The dozen banks receiving the biggest rescue packages, totaling more than $150 billion, requested visas for more than 21,800 foreign workers over the past six years for positions that included senior vice presidents, corporate lawyers, junior investment analysts and human resources specialists. The average annual salary for those jobs was $90,721, nearly twice the median income for all American households.

The figures are significant because they show that the bailed-out banks, being kept afloat with U.S. taxpayer money, actively sought to hire foreign workers instead of American workers. As the economic collapse worsened last year — with huge numbers of bank employees laid off — the numbers of visas sought by the dozen banks in AP's analysis increased by nearly one-third, from 3,258 in fiscal 2007 to 4,163 in fiscal 2008.

The AP reviewed visa applications the banks filed with the Labor Department under the H-1B visa program, which allows temporary employment of foreign workers in specialized-skill and advanced-degree positions.

It is unclear how many foreign workers the banks actually hired; the government does not release those details. The actual number is likely a fraction of the 21,800 foreign workers the banks sought to hire because the government limits the number of visas it grants to 85,000 each year among all U.S. employers.

During the last three months of 2008, the largest banks that received taxpayer loans announced more than 100,000 layoffs. The number of foreign workers included among those laid off is unknown.

Foreigners are attractive hires because companies have found ways to pay them less than American workers.

admin ... please take my post out of moderation ....

Just shocking... but this doesn't even start to address the corruption:

http://www.youtube.com/programmersguild

frank,

that was brilliant. Employers and immigration lawyers colluding to get H1B applicants approved and citizens excluded. I wonder how long before youtube has to take the video down, or is this work a parody and therefore protected?

Another thought: I think IEEE Spectrum magazine have been running the fake/bad-faith job ads for years now, maybe 20 years or more.

Should not IEEE and ACM refuse to run these ads in their publications?

can they tell the fake ads from the real ones?

For all you boomer-haters out there, I'd have to agree that the halftime show was lame and self-indulgent on the part of Bruce Springsteen. "Boss time" -- NOT!

Has he done anything useful since, oh, 1978??

Today we visited Kentwood Place, West San Jose (Cupertino school district). They are selling 1900 sq ft townhome for 850K.

What do you think, good deal?

http://www.braddockandloganhomes.com/communities/index.cfm?community_id=39

I dunno, personally I think those super-narrow 3-story townhouses are very impractical. And 850k in San Jose? I'd wait for it to be 600k max.

850K hmm.

I reckon the property tax will approach 10K per year on that one. Surely longtime residents (and renters) in that school district will be most grateful for your contribution.

>> I reckon the property tax will approach 10K per year on that one.

I plan to stay there for 8n years ... so 80K in property tax.
Is there a risk of getting zoned out of Monta Vista High School after buying. If so, it will be a disater .. at least 150K hit in finance.

>> Micheal Steele: hot or not?

I predicted this ... they needed him to counter Obama ...

Yes We Can!

Michael Steele, a black person the Republicans found somewhere, was elected leader of the Republican National Committee on Friday, after a daylong battle against traditional Republican party leaders (middle-aged white guys who dream of somehow owning slaves). America is healed.

Steele's victory is especially poignant because his main rival was an actual South Carolina plantation owner from one of those "whites only" golf clubs for the white racists.

This confederate country clubber, Katon Dawson, hoped to bring the party back to its White Power roots, but he was narrowly defeated by this legendary civil-rights leader, after hours and hours of grim-faced balloting by the RNC. This painful banquet-room contest between pinched-face cretins was, without doubt, the worst C-SPAN broadcast of all time.

Well if Monte Vista is what it's all about, that's only 4 yrs per kid, I'd pencil out the scenarios like renting in Monte Vista for those four years vs the cost of owning.

You could work Real Estate Only Goes Up in The Fortress into your scenarios, and future scenarios of the dollar vs Asian currencies which could dampen or amplify your Monte Vista projections, since in all likelihood the people you'd sell it to in 8 yrs will be wealthy Asians.

Sad news for chocolate fans.

Scharffen Berger Berkeley will be closed and moved to Illinois. I hope Hershey's is not going to shut it down eventually.

Permarenter,

the location is not bad, sandwiched between Cupertino and Saratoga, but that area seems to be a bit more commercial than residential.

I don't know about the school district, but why do you have to buy new? I'd be more worried about the HOA. HOAs of new condo/townhomes are running at $400-600 at least, that to me is a big turn off.

OO,

HOA is 195.00 per month ... material quality seemed to be good in model homes ...

>> Perma, did you write that?

No my style is to copy & paste ...... that I feel will cause debate ...

OO Says:
Sad news for chocolate fans. Scharffen Berger Berkeley will be closed and moved to Illinois. I hope Hershey’s is not going to shut it down eventually.

I was pretty outraged (at the bean counters in Hershey's) when I heard that on the news last week. The sad reality is that over time, one biz-school MBA reptile after another will chip away at the brand's quality - replacing suppliers, firing the original creators, "improving" manufacturing processes, etc. until there is nothing left but the carcass of a brand whose insides have been ripped out and restuffed with marketing bullshit. The final nail will be moving the factory to Mexico or China. Fucking Corporapists.

Hershey's might as well shut it down now - why the fuck will I want to pay extra for crappy corporate chocolate just because it has the Scharffen Berger name on it?

"Has he done anything useful since, oh, 1978??"

Uh... no. Evidently the SB "entertainment" guys have a knack for dredging up people who's careers should have long ended years ago. Janet Jackson, ZZ Top, Aerosmith ( who boy ) amongst countless others.

If it was up to me the stage would be set for true, hidden American gems and purists like Dick Dale ( King of the Surf Guitar ) or Mitch Ryder and the Detroit Wheels etc. I say bring on the folks that -started- a genre ( not the ones that ended it ) That or bring on some young guys that are starting up.

I didn't see any comments on the new forclosure data http://economybust.blogspot.com/2009/02/forclosures-data-for-california.html
Is this good or bad for us long term bubble sitters?

Sad news for chocolate fans. Scharffen Berger Berkeley will be closed and moved to Illinois.
News flash! Cost of doing business is high in the Bay Area. Companies moving production to flyover country. Who would have guessed?
FWIW, they (the evil Hershey empire) claim most of the Scharffen Berger products are already made in Illinois. That said, it was great place to run by as chocolate permeated the air... Sigh...

I seriously doubt how big of a labor cost difference it is between Berkeley and Illinois, particularly in a business where cocoa beans (materials) makes the most difference. Scharffen Berger is good because the cocoa content is highly concentrated, unlike the high-fructose-corn-syrup Hershey's with very watered down cocoa content. People who pay 3x the price for a small can of cocoa expect that kind of quality. They are also one of very few undutched cocoa suppliers, if they take away that SKU, I am outta there.

You provide high quality, you charge a high price, and even in a depressionary situation, there will be people who care enough and make enough to afford these things, especially for these little luxury that are sold at discount outfits like Trader Joe's. I cannot afford a personal jet, but I sure can afford some kick-ass chocolates to brighten up my days. I honestly see a brand already on its dying path.

Is this good or bad for us long term bubble sitters?

When more people are throwing money at the pit... you tell us if this is good or bad for the housing market in the medium to long term.

Scharffen Berger is good because the cocoa content is highly concentrated...
I believe that the Scharffen Berger folks are single-handly responsible for the cacao wars (that is, getting high end bar manufacturers to state cacao percentage on their labels). Quite frankly, they "spoiled" my taste buds, and I can no longer eat the cheap cr@p.

European chocolate bars have had the cacao percentage on them for a long time, more than a decade at least.

I'm a bit worried about Scharffen Berger quality since Hershey's bought them, but I assume they know full well that people won't be fooled by any reduction in quality. I have a cup of Scharffen Berger cocoa each morning, no sugar. It's really great. Valrhona tastes rather burnt.

From 2006:
With little fanfare, American chocolate companies have begun labeling their bars according to cacao (pronounced KA-cow) content, the blend of cocoa solids and cocoa butter that makes chocolate — and makes it so irresistible. Already common in Europe, this system brings to the industry a uniformity praised by bakers and chocolate experts.
Interestingly enough: "Too much emphasis is being placed on the number," says Robert Steinberg, co-founder of Berkeley, Calif.-based Scharffen Berger Chocolate Maker.

TOB, :-) (George likes his Kung-Pao chicken. George is getting upset!)

I'm good with some Fruit+Nut as well, works for me.

Some drastic predictions -

http://mises.org/story/3318

These new times are not the 1930s when a few eggheads in Washington could set most prices and wages and gather the captains of industry to cobble together business cartels. The economic and financial world moves at the speed of light and is so diffuse that no political authority can act quickly enough to control it. The establishment is going down. This is another reason that all believers in freedom have reason to rejoice today.

Twelve to 18 months from now, it will be obvious that there is nothing the new administration can do to patch things up. Obama will be humbled by the market just as Bush and Clinton were before him, but this time the humbling will overwhelm any attempts to patch things up or put a spin on the much-needed upheaval.

I agree with everything except his prediction about gold. Something along the lines of Paypal would be far more likely. Some sort of self regulating system of credits would be ideal.

Some drastic predictions ...

Wow, over-leveraged douchebags with a million-plus in debt are finally going to figure out negative equity.

Going back to a gold standard will just make things worse. There were more bubbles and panics when we had hard currencies; the last 70 years have been remarkably stable.

The solution is we need to put caps on federal, business and consumer debt; and make sure what new debt is created is secured against something tangible. Including the capacity for future work.

Bubbles are not bad or harmful. Overzealous policy reactions to bubbles are.

Really I don't see any way out for us except to devalue the dollar. But our friends in other nations won't let us do that in the race to the bottom.

So what's a girl to do? We'll have to devalue the dollar vs. gold, implying a return to the gold standard.

But this won't be your father's gold standard, which kept the dollar strong. The purpose of new gold standard would be to keep the dollar weak.

Or we just let the global leveraged asset bubble collapse and deal with a few years of high unemployment until the market soaks up all the excess.

Peter, are we back to these one liners again?

Don't you like them? :)

Really I don’t see any way out for us except to devalue the dollar.

Devalue against whom? It is all relative.