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Would you trade these?


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2006 Dec 19, 6:40am   18,024 views  154 comments

by Patrick   ➕follow (55)   💰tip   ignore  

Goldman Sachs says they're going to create a market in derivatives for housing:


Goldman building market for home price derivatives

The problem with that is not mentioned in the article. The problem is that the housing market is opaque. There is no public scoreboard for the market for housing, with clear bid and ask and sale prices. In the stock market, you can easily look and see what any stock is trading for, so you know what its derivatives (options) should be trading for. Not so in the housing market.

Housing statistics are manipulated by those with an interest in making the market look higher (or sometimes lower) than it really is. Who is going to bet real money on manipulated statistics?

Come to think of it, American housebuyers do that all the time...

Patrick

#housing

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1   Peter P   2006 Dec 19, 6:40am  

What happened to the CME housing contracts?

2   Patrick   2006 Dec 19, 6:42am  

This seems to be related somehow, since Goldman is talking about using Standard & Poor's Case-Shiller Home Price Indices, which is what they use in Chicago, right?

3   skibum   2006 Dec 19, 8:32am  

This smells to me like the management at Goldman trying very hard to maintain their "stellar profits" and justify their massive bonuses by constantly escalating the risk they are willing to take on for their clients, while looking for the next big money making venture.

On a related note, who else wonders if the hedge fund industry is due for a meltdown at some point? The combination of lack of SEC oversight, a generally high risk tolerance among managers, and a bit of a bubble mentality (everyone and their brother wants to be part of a hedge fund).

4   astrid   2006 Dec 19, 8:38am  

SFWoman,

"nd pension funds have no business investing in any of these."

Amen to that! Hedge funds traditionally made some sense as a part of a hedging effort to ensure payouts in good times and bad, but now they're just used to chase returns even though nobody knows their actual risk profile (since there's no disclosure).

"I can guarantee that half the people I hear bragging about their hedge fund or private equity performance would be on the phone trying to dig up a litigator if they lose their money."

Well, that's why your husband gets paid the big bucks to make sure these people won't win, even in front of a krazy Kalifornia judge.

5   Michael Holliday   2006 Dec 19, 8:47am  

Here's some stats, though not quite on the target topic of this thread:

Report Reveals 2.2 Million Borrowers Face Foreclosure on Subprime Home Loans

Billions of Home Ownership Wealth to be Lost by Minority Americans

WASHINGTON, Dec. 19 - A new Center for Responsible Lending (CRL) study reveals that 2.2 million American households will lose their homes and as much as $164 billion due to foreclosures in the subprime mortgage market. Titled, "Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners," the CRL study is the first comprehensive, nationwide review of millions of subprime mortgages originated from 1998 through the third quarter of 2006.

CRL's research suggests that risky lending practices have triggered the worst foreclosure crisis in the modern mortgage market, projecting that one out of five (19.4%) subprime loans issued during 2005-2006 will fail.

"In the subprime sector, the most vulnerable borrowers are sold the most dangerous loans," said Mike Calhoun, CRL president. "At $164 billion, the losses from foreclosures could pay for the college educations of four million kids. For families who lose their houses because their loans fail, savings and economic security will be way out of reach."

The report discusses a number of factors that drive subprime foreclosures -- in the majority of cases, borrowers receive high-risk loan features, packed into an adjustable rate mortgage with a low start rate, that is approved without considering whether the homeowner can afford to pay the loan after the rate rises. Etc...

You get the picture.

6   ric   2006 Dec 19, 8:55am  

SFWoman said - "I can guarantee that half the people I hear bragging about their hedge fund or private equity performance would be on the phone trying to dig up a litigator if they lose their money. “Oh, but I didn’t know it was so risky, nobody explained that to me."

"Half"? SFWoman - you are much too kind. More like 99% in the overly zealous litigious irresponsibly speculative blame everyone but yourself society we somehow find ourselves a disgruntled part of.

My hat is truly off to your husband for fighting off those that will ruin themselves without aid. There are probably several more "attorneys" within a radius of 1 mile that will welcome them with open arms.

It is difficult, in these times, to maintain ethics and morality.

7   ric   2006 Dec 19, 9:45am  

The thing that sucks about it, is that for at least the last five years, the repurcussions never came, and millions and millions were fleeced, and over time even the careful, the conservative, and the astute were dragged in.

As Buffet once said (or something akin to it anyway) "It is only when the tide goes out, that you discover who has been swimming naked."

8   Different Sean   2006 Dec 19, 10:12am  

I'm holidaying in Melbourne for about 3 weeks over Xmas, staying down on the Mornington Peninsula, about 40 km south of the city. People seem a lot happier here, housing is cheaper, and certainly of better quality than in Sydney. Urban planning, architectural quality, quality and width of roads, etc, is much better, and the overall social settlement is a lot better than in Sydney. It always amazes me that people even want to stay in Sydney and pay 50% more for housing, inferior roads, pollution and stress... (I'm only staying for relationship reasons...)

9   skibum   2006 Dec 19, 10:38am  

SFWoman,

Sounds like you have a level-headed attorney for a husband. As an example, the fallout with Larry Sonsini going on right now is exactly the situation it sounds like your husband wants to avoid. Not that I know much of the details, but it seems to me that Sonsini advised these execs about option back-dating partly out of hubris and partly out of greed. Now he's been exposed to potentially huge amounts of liability.

10   ric   2006 Dec 19, 10:51am  

Hey BigTime, your name says it all. Your renter "friends" must think very highly of you. Enjoy the fleeting remnants. My guess is you are swimming naked, the water is getting mighty cold, and you'll soon feel mighty small.

11   ric   2006 Dec 19, 11:36am  

...and then start his own blog about it. Casey, Casey, are you there? Casey?

"If he weren’t worried, he wouldn’t be here. " Exactly!

12   Paul189   2006 Dec 19, 11:58am  

Let me try to understand all of this-

Goldman pays huge bonuses to the huge traders who in turn buy huge properities which influence the price of the housing futures for which the traders make markets which provide huge profits for huge bonuses for huge purchases of properties in WAIT.... Doesn't Goldman run the US Treasury too?

13   Michael Holliday   2006 Dec 19, 12:00pm  

BigTime Says:

Hello!

You guys giving up yet with this housing crash nonsense? Comps in my neighbhorhood in SF are up about 8% from last year...

Sometimes, you just have to face reality and move forward...
_____

Sometimes you just have to put down the Crack pipe
and pull your head out of your a--.

14   Michael Holliday   2006 Dec 19, 12:47pm  

Ha ha, what I love about your posts is the brevity.

Bravo for brevity!

15   chuckleby   2006 Dec 19, 1:21pm  

hmm, these ginormous goldman bonuses feel like a cake topper to this freakonomy. wonder if history will see it that way?

16   FormerAptBroker   2006 Dec 19, 1:43pm  

skibum Says:

> SFWoman, Sounds like you have a level-headed attorney
> for a husband. As an example, the fallout with Larry Sonsini
> going on right now is exactly the situation it sounds like
> your husband wants to avoid. Fenwick & West

I know Larry’s son and daughter in law through friends and I have just briefly met Larry a couple times. Both Larry and his Stepford/Trophy wife give me the creeps…

Years ago a friend that works at Fenwick & West told me that Larry is one of the best attorneys he has ever met, so good that he is the guy he would hire if he did something illegal…

17   StuckInBA   2006 Dec 19, 1:46pm  

Hahahaha Says:

U guys still in denial?

In one word : No.
In two words : Never were.

18   FormerAptBroker   2006 Dec 19, 1:53pm  

Different Sean Says:

> I’m holidaying in Melbourne for about 3 weeks
> over Xmas, staying down on the Mornington
> Peninsula, about 40 km south of the city.

Most Americans are lucky to take a DAY or two off around the holidays while it seems like the average Australian takes a WEEK or two (or even three)…

> People seem a lot happier here, housing is cheaper,
> and certainly of better quality than in Sydney.

Sydney has a lot of good looking women, but Melbourne has more good looking women than any major city I’ve been to (an on average the women are about 30 pounds lighter than Portland, OR women despite being on average 3 inches taller…)

19   ozajh   2006 Dec 19, 2:19pm  

FAB,

When I was taking a coach tour through Switzerland earlier this year with my mother, we were really surprised at the number of US folk we met who had taken a single week off work to do the same tour. They had flown from the US to Zurich on Saturday, done the tour (8 nights/7 days), and were flying back to the US on the following Sunday to start back at work the next day.

You should also remember that Christmas in Australia is mid-summer (and the major school/university break), so a lot of Australians at that time of year are taking their main annual holiday rather than just Christmas.

20   Brand165   2006 Dec 19, 2:42pm  

The reason why bonuses were huge on Wall Street this year is the M&A activity. Private equity was particularly huge in 2006. And where did all that "rain" come from? Debt.

Hmm. Where do firms like KKR, Blackstone and their pals get financing? A lot of it appears to be Asian. So at the end of the day, yet another American company has been partially sold to Asian interests on a "rent to own" basis.

By the way, this is one way that U.S. dollars flowing overseas might repatriate themselves indirectly. Not that I object to foreign investment, either, but I do find the trade alarming. In exchange for cheap T-shirts and plasma TVs for the masses, some Asian magnates are gaining ownership in excellent American firms. I would prefer if we were holding out for something more valuable in return.

21   surfer-x   2006 Dec 19, 5:55pm  

They print it. Wee black vans deliver it under cover of Cobra gunships. Oh how we love the green linen. Fuck. Sould out. Better to push a fucker aside that help them up. Thank you boomers. Remember if a human is on fire your piss could be used otherwise. Crash I say, layoff abound. All I can say is a hearty "fuck you". 3-4th quarter 07 I'll be offering on $hitboxes, I'll have my homegirl research the title, and then offer 15% below selling price. I'll then contact the "seller" directly and indicate the incompetence/malfeasance of the asspacking no talent assclown realtwhore. And then I'll back out just before signing the papers. Fuck the fucking fucks.

22   surfer-x   2006 Dec 19, 5:56pm  

HARM et al. wee fiesta in $B over the holidaze?

23   Different Sean   2006 Dec 19, 6:11pm  

FormerAptBroker Says:
Most Americans are lucky to take a DAY or two off around the holidays while it seems like the average Australian takes a WEEK or two (or even three)…

hmm, yep, I've accumulated 8 weeks leave, I'm taking about 4 of them in total... (allowance is 4 weeks a year) there's a comparison out there somewhere of different countries' leave allowances. I've got a mate here who has accumulated a year's leave or something, I don't know how he's ever going to take it, they may pay him out, if he ever resigns...

Sydney has a lot of good looking women, but Melbourne has more good looking women than any major city I’ve been to

hmm, I'm beginning to think so too, and very young demographic in the outer burbs... very 'anglo' down here also, unlike sydney... 60% of immigrants to Oz remain in Syd, apparently...

24   Different Sean   2006 Dec 19, 6:12pm  

Interesting point about 'peak debt', ha ha, as a study of kondratiev-type waves...

25   Different Sean   2006 Dec 19, 6:17pm  

Let me quote my favorite economist, Joseph Schumpeter, “One of the results of our historical sketch will, in fact, be that the failure of the banking community to function in the way required by the structure of the capitalistic machine account for most of the events which the majority of observers would call “catastrophe.”"

Exactly. That asshat Bernanke 'saluted' Friedman for his brilliant 'insight' that it was supposedly Reserve Bank activity that caused the Depression, along with New Deal policies, and promised 'never to repeat those mistakes'. No way. The system screwed itself.

26   ozajh   2006 Dec 19, 8:07pm  

OT, but I've seen educational results quoted frequently as significant RE factors both on this blog and in the UK.

We are at the end of the school year in Oz, and in NSW (the most populous Australian State, albeit only about 6 million) the main local paper applies an achievement measure across all schools with more than 20 final-year pupils.

I'm not fully convinced that their measure is perfect (percentage of final-year students with at least one 90%+ exam result), but it's consistent from one year to the next and one school to the next.

Anyway, the breakup of the "top" 20 schools this year is Public=18, Private=2. No change from last year in the overall split, and still dominated by the selective Public high schools (16 of the 20), but a couple of interesting ins and outs.

Does anyone do a similar exercise for CA?

27   salk   2006 Dec 19, 10:30pm  

The Goldman tentacles are very lengthy. Roman Abramovich, the Russian gas tycoon worth over 15 billion$, needed to wash his money. Fortunately there was Goldman. How ? Invest in an English soccer team that was organized and managed by Goldman. Billions being cleansed thru it courtesy of Goldman. What does Goldman charge to clean 15 billion$?

28   DinOR   2006 Dec 19, 10:48pm  

Matt,

Excellent points (and glad to have you aboard btw!)

I don't think anyone here is objecting to the legitimate use of properly run hedge funds (least of all me). Where many institutional accounts are concerned the $'s just keep rolling in and frankly they have to spend the money on "something". The big difference (in my mind anyway) is that the pensions at least have an investment policy statement and a TON of fiduciary responsibility! If you're really bored check out www.fi360.com for some incredibly dry material pertaining to fid. resp.

I tend to side w/ SFWoman and her husband's firm. In many cases the lack of updating the criteria to qualify as an accredited investor will become a nightmare and I've no doubt that many participants that boast now will sue at the drop off a hat and my guess is they will, in part have a legitimate claim. Most (not all) HF's are not AIMR compliant. Hmm? Funny that. Well yeah, I find all that "accounting stuff" a drag too but I stand tall for audit once a year! With Quadriga's new low low entry point of like 5k? I suspect they are appealing to the wrong crowd. I think Christian Bale got his start....... managing for relatives (typical entry point for most HF guys). Right there that tells me the whole thing got started off on the wrong foot. Like SFWoman's husband I'm constantly bombarded by guys that want to start HF's and I've never been 'that' desperate for a free drink.

29   DinOR   2006 Dec 19, 10:59pm  

Bap 33,

My friend, those numbers are scary indeed. Please to notice again that the majority of the "pain" will be concentrated in Cali. And Saginaw, MI! (How the hell did they get in there?)

Is there any way you can post the link (not that I doubt you) but this may well become important for posterity.

30   DinOR   2006 Dec 19, 11:44pm  

Uh, I'd always thought the use of that saying was as it pertains to corruption and fraud, not investments?

To "follow the money" (as I can only imagine it's errantly being applied here) is to say "chase returns"? Silly me. All these years I'd been mislead to believe that prudent and rewarding investment was the result diligent research and effort applied *prior* to mainstream acceptance.

O.K, one last time. Momentum players are a lot like dogs that chase cars. They make a lot of noise, attract a lot of attention BUT unfortunately don't live that long.

31   FormerAptBroker   2006 Dec 20, 12:01am  

Hahahaha Says:

> A 30 year old making $500,000/yr is very typical,
> and they are everywhere.

I know 30 year olds that make over $500K but there are not many of them, they just seem to be "everywhere"...

The Enzo Ferrari originally sold for over $500K and they seem to be "everywhere" (I've personally seen over a half dozen this year and it seems like one crashes every couple months)...

There are actually less then 500 Enzo Ferraris in the WORLD. I bet there are more Enzo Ferraris than 30 year olds in CA making $500K/yr...

32   skibum   2006 Dec 20, 12:15am  

Follow the money. Why go against the money if you can follow the money? Multiplier effect. Watch where that money goes.

Hahahaha (aka ConfusedRealtor, aka MarinaPrime, aka FaceReality), so why haven't YOU done this? Instead, you're trying to sell real estate in SF after failing as an investment analyst and trolling around RE blogs.

Loser.

33   Ed S.   2006 Dec 20, 12:17am  

Ha Ha,

Great post. One small historical note, however. Ford's claim to fame was paying his workers the (then unheard of) salary of $5 per day. He realized that they needed a sufficient salary to buy his cars.

The creator of installment debt was none other that San Francisco's own A.P. Giannini, founder of Bank of America. The following is from Time Magazine,

" Most bank customers today take for granted the things Giannini pioneered, including home mortgages, auto loans and other installment credit. Heck, most of us take banks for granted. But they didn't exist, at least not for working stiffs, until Giannini came along. "

http://tinyurl.com/y3kxcx

BTW, agree with your thougth 100%.

34   DinOR   2006 Dec 20, 12:36am  

Ha Ha,

Housing Bubble

1997-2005

RIP

I once read that when Lawrence Fishburne played Ike Turner, Ike insisted that he portray him exactly as he'd been in real life. The drugs, the spouse abuse, jail, everything! Ike told him (from jail), "If you're going to do it, you'd BETTER do it right son!"

35   astrid   2006 Dec 20, 1:30am  

Nigel Swaby,

"100 year amortization?"

Won't affect home prices. There are already negative amortization products on the market, those have lower payments than 100 year amort or even interest only products.

"3 year, no payments?"

That might do it, depending on the terms and who can get money. If the product is offered to people who can truly afford the homes and terms, maybe it won't be so bad - this is only a plausible scenario with people with extensive but illiquid assets as a wealth planning strategy.

"380 credit scores?"

Like loan sharking without the physical threat? Or lending money to Casey Serin? Quick - buy some Jamba Juice stocks!

36   astrid   2006 Dec 20, 1:33am  

SFWoman,

Congratulations on being married to someone who is both talented enough to get more demand than he can handle and smart enough to turn most of that demand away. Far more attorneys fail on both accounts.

37   FRIFY   2006 Dec 20, 1:45am  

My husband knows people who were working on earthquakes derivatives a few years ago. Earthquake derivatives. Why not just have a little spinning wheel with red and black numbers and call it ‘gravity derivatives’ or something? Or maybe people can pick six out of 42 numbers, plus one more and we can call these ‘numerical derivatives’.

Derivatives are just a tool to transfer risk from one party who doesn't want it to another party who's willing to take it on for a premium. Why not have derivatives on earthquakes? It's easy to think of parties who would be interested. There's plenty of worse derivative products out there, like the ones that sunk Orange County (derivatives related to the cube of the interest rate or some other such noose-hanging nonsense).

By the way people, there's a lot of dick-length comparison on this thread (from males and females). It's the holiday season; surely the discourse can be improved.

38   salk   2006 Dec 20, 2:10am  

Remember hanging out with some newbie goldman sachs IB's in Miami Beach about 10 years ago. Columbia B School and Harvard undergrad level guys. I was completing my professional training in Miami and new the area well. These Goldman guys were the biggest partiers, drunkards, womanizers, back-stabbers, a-holes I have EVER met. Turn your back and they are working your girlfriend. Where is so and so- face down in the sand. Not particularly bright or educated. No way are they the best/brightest. Since the majority of the large IPO's are now created in London, I guess I was right.

39   skibum   2006 Dec 20, 2:19am  

doc1,

Good points. First, the higher risk/yield areas of IBanking naturally attract a risk-taking, "alpha male" aggressive phenotype. It's a stereotype, but knowing traders vs. managers vs. analysts, the stereotypes really do play out. On top of that, the guys I know in the field have an underlying sense of "we work our butts off, so we get to go ape$hit when we're partying. Generally, these guys are not the reflective, introspective type.

The London thing is also spot on. If you read the Goldman bonuses stories carefully, much of the money is going to people working out of their London offices, rather than NY or much less the IB hinterlands of SF.

40   skibum   2006 Dec 20, 2:26am  

Lintel,

Thanks for the input. The housingderivatives blog link has some reasonably useful stuff on it. Based on the number of comments per post, it doesn't seem to be popular. Is this Fritz Siebel guy a real "player" who knows what he's talking about?

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