patrick.net

Duke,

I had a conversation with my broker, an old hand, on the subject of IBs yesterday morning. He believes the banking system will get through this. Conglomerates like Citi or BoA, he says, will take the necessary steps - spinoffs, stock dilution, write downs, even the BK of overburdened subsidiaries - in order to maintain the solvency of core banking operations. In his view, a much-changed financial landscape will emerge, but the banking system will remain intact here.

Well, I hope he's right. Feel a little better?

Bruce,

That was pretty much my take on it as well. I'd read that H&R Block was bitin' the bullet on their ill fated "Option One" mortgage arm and they are *not having fun right now. It seems to offer something of a glimpse into what these other firms will confront. Perhaps though the big difference is that H&R is really showing a desire to get it over with?

No brow beating the Fed or calls for changing legislation, just taking their lumps like a man.

I agree that Merrill and Citi are only so scary. Kinda like scary versions of Enron and WorldCom.

Awww... c'mon guys, why all the gloom-n-doom?

Just remember: Every time you say you don't believe in real estate, a Realtor® dies. All you need is trust and a little bit of pixie dust!

Everyone join in now (in your best Monty Python voice): "Always look on the briiight side of life..."

Bruce and DinOR,
Thanks! But I need *more* bucking up.
For me, its not about whether or not the banking system will survive. It will. Even after doing an amazingly crappy job the world must have a finance system. And they will get a large dose of regulation and like it, thank you very much.
What scares me still is the magnitude of the economic problem. The devaluation of the American dollar, foreign loss of confidence in US debt, the potential decapitalization of stock markets, the resulting political ramifications of the 'lost wealth'. When you are talking $2 trillion to as much as $60 trillion dollars of problem (which is quoted is some areas) we are talking about a massive, global recession. They say transperancy is the best disinfectant, but too much transparency after too much opacity might be a bigger problem. Best I can come up with is to cover my ears, shout "lalalalala" at the top of my lungs and close my eyes for the next 2 years.

I wonder what kind of world I will wake up to?

Some great comments guys. Seems like after a long time we have a vibrant thread.

DinOR :

It was my fondest desire to keep “the unraveling” as sector specific as possible. Early on (before the broader implications were widely known) I was very confident there would be “containment”. Now? I’m not so sure.

Stealing a line from a comment I read at some other housing bubble blog

The containment is spreading !

Look Who Still Can't Sell His Home! (Hint, He's In The Industry)
Posted By:Diana Olick
Topics:Housing | Real Estate

I’ll admit right at the top here that what I’m about to do is cheesy, but honestly, I just can’t resist. A little over a year ago, mid-September 2006, there was a little blurb in the Washington Post about the then-president of the National Association of Realtors, Tom Stevens, not being able to sell his Virginia home. It was really the beginning of our coverage of the housing downturn, and so we found it marvelously ironic.

The house had been on the market for a year, with an unchanged price of $1.45 million. Being the annoying reporter that I am, I cornered him after a hearing on the Hill, just to needle him a bit and see what he’d say: “I didn't listen to my agent. That's what consumers need to do. They need to listen to their agent. If the agent says you need to adjust the price, then you need to adjust that price, we're in a different market today,” Mr. Stevens admitted politely.

And it’s an even more different market today. Stevens, who is a Senior VP of NRT, the nation’s largest residential real estate brokerage, still can’t sell the house. I have to give a shout out to whoever is behind the handle soldatthetop@xxx who pointed out the info in www.paper-money.blogspot.com (I’m so netty!).

Mr. Stevens pulled the house off the market in early 2007, and now it’s back for $1.285 million. So if you start from the top, that’s approximately 766 days on the market, $165,000 price cut, and still no bites. Talk about a REALTY CHECK!!

Someone Wrote:

> The typical home-owning household in California
> has about $200,000 less in home equity than it
> thought it had.

Then Rob Dawg Says:

> Oh, please oh please let it only be $200,000.
> Wait… I’m special. Oh, please oh please let it
> only be $500,000…

I was talking to my Dad last night and he said that (according to Zillow) the house I grew up in is down in value by almost a million since early 2006. So it looks like Zillow is actually reporting drops in the Bay Area (94010)…

Here's something that I have been pondering:

What rule did the last 20 years of banking deregulation play in the bubble? Would an SIV even have been possible without it?

As for Bill Gross, maybe he should change his day job to playing poker in one of those B-list celebrity poker tournaments in Las Vegas.

SFWoman Says:

> Where are all the trolls who used to come on and
> berate people as being jealous? You know, the ‘the
> Bay Area is different, we can never have a downturn
> here, they aren’t making anymore land’ types?
> Where are our Marina realtors (TM)?

I think there were a lot of Realtors™ sitting around at open houses Blogging on their Treos that don’t have time to Blog when they are working at Target…

http://marinrealestatebubble.blogspot.com/2007/10/owners-face-selling-at-loss-now-that.html

PS - By the way, I'll share an anecdote with you all. I was up at the Novato Target the other day (because I am too cheap to pay South Marin prices if I don't have to) and guess who I saw working at a cash register? A former Marin real estate agent acquaintance of mine. How sweet it is! I didn't have the heart to ask if she still had the leased Lexus.

Justme,
To my mind its not banking de-reuglation. Usually there is a funny game of chase in the US. Market manipulators (and fraudsters) 'innovate' and then along comes the regulator to test the innovation and say yea - or ney. In this case, Mr. Ayn Rand, sorry, Alan Greenspan, decided that by NOT regulating the market we would get the best of all possible results. What we received was entirely predictable. The very few rule makers made hundreds of millions and 'retired' and the rest of us watched as the world wealth rose up paper mache foundations only to be burned down when the hedging and over leveraging and off balance sheet liabilities caught fire.
When that one banking institution (was is Sachs?) made more on its hedge then it lost on its bad CDOs it did not take a rocket scientist to think, "Man, the hedging company cannot pay out like that and stay solvent", then think "Um, that is going to mean a lot of people who thought they were hedged were not and wow are we in trouble.
So, the real legacy of Greenspan will be just how much abuse Wall Street was able to pack into the 18 years that no-one was regulating for prudence and the public good. I am not normally anti-Greenspan, but the post-mordum on this sad economic chapter will read like Upton Sinclair's The Octopus. "Banks, emboldened by the lack of regulation, paid themselves hefty bonuses predicated on magnified gains coming from massive over leveraging. Risk was mispriced as hedging models failed to account for a general broad downturn. This, of course, would have been obvious to a regulator given the relatively recent experience of Long-Term Capital Management, except that the Fed did not think regulation was its job. This the Great Unwinding of 2008 was born."

Bleh. Who want to live the part of the suffering masses scripted by a lack of oversight?

"approximately 766 days on the market"

I mean, that's funny all by itself. What a stooge.

OO and FormerAptBroker,
Ahhhhhh. There IS a twinkle of justice in the universe.

Hey Patrick,
Can you find some more moderate articles and post links to them as well? Not the Henry Paulson "It will all be okay" articles, but maybe something like Krugman or Kotlikoff making reasoned proections of the magnitude of the problem?

Duke,

I'm afraid that for many it truly is about whether or not a street-level banking system will survive, since that's by no means a given. Most of us here are well aware of the events to date and the forces at work and, for me at least, attention is now focussed on what can be salvaged and what on the plane of the individual can be preserved more or less intact.

So I'm encouraged to hope that depositories at least are a part of the collective future. I don't think I'd manage very well without them. An understatement.

Will we see a return to first principles? What do you think?

SFWoman Says:

> Where are all the trolls who used to come on and
> berate people as being jealous? You know, the ‘the
> Bay Area is different, we can never have a downturn
> here, they aren’t making anymore land’ types?
> Where are our Marina realtors (TM)?

It looks like prices are not just dropping in Marin and on the Peninsula but Pacific Heights (94115) as well.

As a predicted a few years back things will REALLY start to get ugly in SF when all the TICs start to implode when they can not be refinanced…

http://sfarmls.rapmls.com/scripts/mgrqispi.dll?APPNAME=Sanfrancisco&PRGNAME=MLSPropertyDetail&ARGUMENTS=-N351287625,-N214872,-N,-A,-N11032868

It’s a “lender owned” condominium “in need of renovation” two blocks off of Alta Plaza park in Pacific Heights. And while it appears that 2990 Clay Street #1 last changed hands for $1,061,444 on 6/6/2007 (in the sale to the lender) and prior to that for $1,490,000 on 5/31/2006, it’s now on the market for $699,900.

Bruce,

What we did see back in the late 80's in OR (and imagine elsewhere as well) was the return of "seller financing". Many homes changed hands when the renter "built up enough equity" to form a down payment and then made his house payments directly to the owner.

This go 'round I'm not so sure that will be all that viable? How many recent owners have any margin of safety to play that game? That aside, I'm seeing more and more "seller carry" listings on C/L etc.

Dunno.
I have just been thinking about Nixon's price fixing. Or Carter's gas rationing. This thing seems like it is big enough that something trippy will have to happen sooner then later. I sure as heck know that Paulson isn't the right guy.
Let's see: Asian Financial Crisis = US bailout, Russian Financial Crisis = US bailout, Latin American Financial Crisis = US bailout, Mexican Financial Crisis = US bailout. Who in the heck bails out a US Financial Crisis? China, Japan and Europe? I think Robert Rubin needs to spend less time at Citi and more time at the White House.

Duke,

My understanding is that even while Sec. Treas. Rubin only had an apt. in DC and went home every weekend. Just how much he like the place I guess? And no, Hank is no Bob Rubin!

Well.

I'm confident sectors of the American economy will continue to distinguish themselves. We've been on something of a tangent lately, whether structuring finance or exporting democracy. So an economic intervention (euphemism) should help us to focus on our own affairs more sharply.

There's historic precedent showing that global economic downturns break up global interdependence. Whether you see that as xenophobia or good housekeeping is a matter of personal bias, I think.

That aside, I’m seeing more and more “seller carry” listings on C/L etc.
Forgot about those seller incentives in the used home market (another case for price stickiness). Nothing like a fixed revenue stream for retirees who are downsizing -- until the overextended borrower (yes, there was a reason no bank would give them a second) defaults a couple of years down the road. Ya can take your pain now... or later. Not that seller financing can't work (say, like in the high interest 80's), but I have a feeling most sellers in today's market will go for the dollars and not properly vet the buyers. Lease options don't seem viable to me (not yet), at least, with the current price to rent ratios.

Just read the first entries in the thread. DS, good to see you're still here! We get much too comfortable with our socioeconomic assumptions without you.

FAB said: As a predicted a few years back things will REALLY start to get ugly in SF when all the TICs start to implode when they can not be refinanced…
Do you think there are a lot of "old school" TICs out there sharing a mortgage? I would imagine most people these days have the new fangled "fractionalized TIC loans". Personally, my bets are on the old timers (and probably some speculators) who are converting to TICs to get out of the rental business. Eventually, TIC inventory starts to grow, and for these folks, there is no turning back. They will price to move their inventory. I suppose the other scenario is that the condo towers will put "pricing pressure" on the TICs from above. Really curious to see how the Ess Eff market eventually implodes (maybe the old fashioned with with foreclosures?)

EBGuy,

Oh I have no doubt! But what an incredible turn of events? We've gone from "everyone qualifies" to "you're on your own"! Some of these people are going to go from having multiple loans with WaMu or Citi to making their payments to a retired teamster selling his 3/2?

I still believe there is potential for lease options but it's too soon to say for sure.

I personally won't write off America. People here (including FB's) are much more resilient than given credit for.

I personally won’t write off America.

Because America (the continent) includes Canada.

1 Singapore dollar = 0.689655 U.S. dollars

With continued Fed interventions, which of the following currencies will perform best?

AUD, EUR, CAD, SGD, SFR

Peter P,

I'll go with Swiss franc. Pretty stable. Should rise with SFR carry trade unwind. Can purchase easily with ETF (FXF) on the American exchange.

I’ll go with Swiss franc. Pretty stable. Should rise with SFR carry trade unwind. Can purchase easily with ETF (FXF) on the American exchange.

Thanks.

Are there signs that carry trades (both SFR and JPY based) are unwinding?

GM to Take $39 Billion Charge for Deferred Taxes

A few billion here, $39 billion there... pretty soon we're talkin' about real money.

Peter,

No. No sign. What I hear is 'certain to unwind - no timetable'. Won't happen until players exhaust liquidity or are insolvent.

GMAC Attack!

It can be difficult to keep in mind that no matter how complicated this gnarly mess gets it's all simply the result of lending out more than the homes were ever worth. Oh, then add leverage.

Had homes (as AG hoped) continued to appreciate would this have derailed anyway... as people failed to keep up with their payments? If borrowers were able to stay in step with their reset payments would prices have simply leveled off? Was fraud so widespread it was bound to have an impact? Was any of this real?

Another thought. JPY is tracking the dollar, so not much use for devaluation hedge. You'd have to be looking for that unwind and be patient.

The franc looks pretty good for both.

I like the currencies I could see myself using if/when I leave the USA. Those would be Canadian and/or Euro. Of course, my gold will be accepted globally so that is the preferred money these days!

Duke,

"Innovation" in the field of finance is usually a sign of bad things to come :-)

Another thought. JPY is tracking the dollar, so not much use for devaluation hedge. You’d have to be looking for that unwind and be patient.

So... what do you think about the AUD/JPY "carry trade" ? :)

Hedging and income at the same time?

Not investment advice

Silver still looks attractive because it is not as high-flying as gold. I still like gold though.

Which would you prefer: Canadian currency or Canadian stocks?

FAB,

That place on Clay Street reminds me of when I was looking in '94. Owned by a bank that just wants to get rid of it. In a year or so there will be nice places 'For Sale By Creditor'.

Peter P:

I like AUD and have a position in FXA. It will be affected when the carry trade unwinds. But it's also a currency of a country that has lot of "stuff". The stuff keeps getting more and more valuable as we approach ZIRP.