patrick.net

Isn't it just possible that "liquidity is a coward"? If the timing isn't right, why roll it out?

Love to stay and chat but I have to "pre-flight" the helicopter. :(

Time to kick the tires and light the fires!

> I wonder if the money I invested in those two books of Forever stamps is
> going to turn out to be a smart investment?

If they get honored in the future, they're a great inflation hedge. Buy all the stamps you will need for the rest of your life. OTOH, the post office could "default" and say "Forever? We meant a couple of years..."

Re: vodka, I think that literally means "little water" and voda means water. I took one term of Russian, taught in German. A nightmare. Only class I ever failed.

Do any of the Chinese speakers have an interest in translating the main crash.html, crash2.html, and crash3.html into Chinese? I have them all in Spanish and 2/3 in Russian now.

VC typically loads new companies up on debt as it maximizes tax releif. VCs typically use a lot of leverage, and yes, leverage is hard to come by these days. You can 100% bet that VC money in BA is going way down as at lot more actual capital, not just borrowed money, has to go into the pot. This intensifies the risk and a lot more business ideas just will not make it past the hurdle. The article that stated biomedica looks oka for now is right on. Health will be one of the last ideas to fail the start-hurt hurdle. In the end, the pension funds, and VC pools of capital have no problem taking their money off the shelf and into somethng safe, say the Euro, until the can reset their risk models and be certain of adequate capitalization. A lot of good ideas will be shelved until such time as we are down with the monetary contraction.

Hey, welcome to the business cycle.

do they have to leverage personal assets?

Maybe the present casual attitude toward debt will go out of fashion. Then we will see a return of the less flattering terms for pledging ones assets toward a loan.

"leveraged personal assets" will become "further into hock"

"liberated equity" will be "pawning the house"

Any form of morgage should be refered to "the house is still in hock"

OO was asking why anyone was buying BSC at 4 dollars. You can see why now.

Today's link to the article, how bad is this mortgage crisis goign to get should be mandatory reading.

Kruegman is very good.

He is estimating 25-50% declines in home prices, 20 million homes (nearly1/4 of all homes) will go into negative equity, he i betting we are in recession and will not feel a recover until June 2010, or later.

However, he points to the advantages to a weaker dollar. Which are signifacnt. My only insight that was left out of this artcle is this: the fixed income crowd is getting hurt by this finaincial crisis. We may see large 'un-retirement' parties, and delayed retirement from the workplace.

Duke,

If your scenario plays out, someone who packed savings into a bank (not stocks) for a house purchase should do OK.

Silver appears sick today.

Justme

importing them to exploit them in our pyramid schemes?

Well said and I agree completely. I certainly would not want to be a han chinese or east indian living in this country today. And in any event, their next generation gets assimiliated through our system of public education and media brainwashing. Those raised here become more here than there, to the consternation of their parents.

One benefit of the coming elimination of wage arbitration and a new wave of onshoring will be an reduction in the simmering resentment against those imports. Or at least one might hope.

Duke,

I think we're already seeing 'un-retirement parties'. Remember, a lot of these boomers fully planned on retiring after the last (tech) bubble in huge waves. Most weren't ready anyway. The only reason they stuck around was for all the toys that came out of the house ATM. Now...?

I hope Duke's scenario plays out as well. I want very tough new regulations in place on the way money is loaned out. Now that the Fed has basically bailed out the guilty, I think the whole notion of a free market system has been proven wrong. I say require 20% down on all future purchases for cars or houses. If you don't have the 20% down, keep renting till you can get it.

I also want a scarlet letter to be placed on the credit reports of the people walking away. They gambled with our collective money and lost. I think a 50% down requirement on their next home purchase would be fair.

*3/4 point cut on the Fed rate*

What about people who would willingly lend their own money to those people with less down? Are you going to also suggest a 'source of downpayment' police?

Malcolm,

That's fine as long as it is calculated into the DTI as money owed.

We were waited on last night by a very humble boomer at Outback last night. He was a nice guy, but I could tell he had once been at a much higher status level. I felt sorry for him until I realized I had worked an hour and a half to basically pay his tip.

And as a matter of fact, I did have to prove where my down payment came from, way back when.

This is so funny, cut 3 quarter pts and the market is down because the Fed didn't cut a full percent.

I suggest that Bernanke just cut to 1% and get it over with. We will get to 1% by end 2008 anyway, if we are lucky, we might already get there before summer.

Time to load up ultrashorts.

Then what's the point? If their debt to income at 100% LTV is acceptable, what difference does it make if they play the same 80/20 borrowing game?
I think a better solution is just to remove some of the government safety nets, and maybe regulate the insurers closer. Actually prosecuting people who break the law (I know this is America and we are selective about who and when in determining the nature of a crime) is a radical notion, but I think it would have had an impact.

Did you guys notice how quickly the Fed moved on the Bear Sterns fiasco? Wow, there was never any room for anyone to debate the merits of the bailout. That is very telling on how serious this is all getting.

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.