patrick.net

skibum :

I had mentioned it as well a few threads back. Many BA people HELOCed and bought in central valley, Sacramento even Florida and San Diego. There are no stats on this, but anecdotal evidence is convincing enough.

I realized the HELOC problem is going to bad, when my friends HELOCed and bought condos in Banglore. RE so easily became the new daytrading. The guy who coined the term "irrational exuberance" made sure that it never goes away.

StuckinBA,

Excellent observation! It's important to make that distinction up front. I don't wanna hear 3-6 months out or down the road on how it's was all the subprime dirtbags that derailed their well laid plan for early retirement.

Gosh, I'm sorry I didn't realize that some delinquent illegal in Chula Vista made you late on YOUR prime mort. payment in the BA?

Another parallel meltdown that will come of this subprime implosion is what will happen with hedge funds and brokerage houses. As all the MSM outlets are now breathlessly reporting, many old-line houses have been caught with their hands in the subprime cookie jar - HSBC, Bear Stearns, UBS, etc:

From today's WSJ:

"Massachusetts Subpoenas Bear, UBS Over Research of Subprime Lenders"
By JED HOROWITZ
March 13, 2007 4:21 p.m.

Bear Stearns analyst Scott Coren upgraded New Century's stock to "peer perform" from "underperform" on March 1 after the troubled mortgage lender said it was curtailing new loans and restating past results because of accounting errors.

There's also this WSJ article stating how several large hedge funds have also relied a bit to much on this asset class to boost returns:

"Hedge Funds'Risky Bets Come to Roost"
...Subprime InvestmentsAre Starting to Hurt, Highlighting Volatility

skibum,

What the problem is?

NEW (rather NEWC) is performing right in line with it's peer group!

SFWoman:
“Just believe strongly enough and you’ll get lots of good stuff’. All the greed but none of the guilt. Why would you feel guilty, you’re not getting this stuff because you are greedy or living beyond your means. This stuff is yours (on easy monthly payments) because you believed strongly enough."

I know! It's just like watching Deal Or No Deal. Often the supporters (friends and family) of the contestants would shout out to encourage "You know you can do it" or "I have faith in you". They seem to have no understanding that at every decision point (Deal or No Deal), the offer reflects exactly the amount given the probability, regardless how much he/she believe in him/herself.

Speaking of hedge funds (DinOR, you should love this), the SEC is trying to set the bar a bit higher for folks who want a piece of this pie. The masses, of course, are apopletic. So the question remains, does stupidity have an economic threshold?

Since 1982, to invest in these unregistered and largely unregulated vehicles, an individual or married couple has needed at least $1 million in net worth or a certain amount of annual income -- $200,000 in each of the past two years for individuals or $300,000 for couples. Had those amounts been indexed for inflation, they would have nearly doubled by now. The rule does not exclude home equity from net worth.

Under the proposed rule, individuals or married couples would have to meet the old standard plus a new one. They would also have to have at $2.5 million in "investment assets" -- excluding equity in a home or business property -- to qualify as an accredited investor eligible to participate in many private offerings.
....
In 1982, according to the SEC, 1.9 percent of the U.S. population could have qualified as accredited investors. By 2003, thanks largely to home-price appreciation, 8.5 percent would have qualified. The proposed rule would reduce the eligible universe to 1.3 percent.
http://sfgate.com/cgi-bin/article.cgi?f=/chronicle/a/2007/03/11/BUGC2OHQIU1.DTL

By the way, there is such a thing as a negative feedback loop.

Yes there is and we have experienced many negative loops. For instance, as prices have been rising, fewer people were able to buy, as fewer people are able to, it puts negative feedback on prices (subprime lenders have tried to attenuate this negative feedback by loosening their standards) until the negative feedback overcomes the output as it has.

I am against regulating hedge fund (or that 25K "daytrading" rule). Such regulations are all counter-productive.

The SEC should enforce integrity, not suitability. If an "unsuitable" investor comes along willingly after learning all facts, he should be allowed to lose his shirt and then some.

All I can say about today is WOW!

EBGuy,

Typically to find material that dry you'd have to be on the NASD web-site! But it IS important stuff. Just yesterday I heard some HF mgr. on CNBC (wearing a bandana no less) making the same pitch that Angelo Mo made for subprime.

For too long the dream of_____ (insert your product here) has been confined to the wealthiest_____ (insert percentage here) and we're just trying to bring that dream.... that vision come true the masses!

So.... very much a "soapbox preach'n" approach that makes everything... o.k.

It's like dozens of Enrons all over the place!!!

What a sight today to have the head of Countrywide on CNBC all day saying that the market is over reacting after he sold 140 Mil. of stock over the last year. He then turns and says we haven't seen the worst of it. Which is it dude?

Perhaps Bear Sterns can help clarify for us?!?! WTF

Peter P,

In principle I'll agree, but it's one thing to blow up your OWN account (and quite another to have some else do it for you!) Especially after touting a "great track record".

Paul,

But that's WHY he was smiling! :)

@ DinOR - agreed!

In principle I’ll agree, but it’s one thing to blow up your OWN account (and quite another to have some else do it for you!) Especially after touting a “great track record”.

I have lost money with brokers before. I hated myself and no one else.

People just need to have realistic expectations.

I did hear the Shrek-look-alike head of Countrywide say that there would be no soft landing in his industry.

I am against regulating hedge fund (or that 25K “daytrading” rule). Such regulations are all counter-productive.

I have to disagree. Not all regulations are counter-productive by definition --mainly the problem lies in the specific type of regulation. Namely, the ones that work against optimal, efficient markets by creating huge moral hazards, attempting to price-fix, and/or promising to "protect" a particular interest group or industry by creating a taxpayer subsidy (generally at the expense of other taxpayers).

Some regulations work to the general public's advantage, by outlawing destructive/immoral behavior (legal child rape? extra Chromium-6 in your drinking water, anyone?), creating greater market transparency (Sarbanes-Oxley), and curbing anti-competitive anti-consumer monopolistic power (Sherman Antitrust Act).

I would put imposing sensible reserve requirements and requiring full balance sheet disclosure for hedge funds & derivatives on the "good regulations" list. I would further recommend an outright ban on neg-am/option-ARM loans, as these loans do far more economic harm than good for the vast majority of people. Requiring full income/assets documentation and a return to the historical 20% down payment would also be a good regulatory move in the right direction.

DinOR, I agree. THE most irritating thing in his interview was his shameless plug for helping the minorities, the downtrodden, the poor and what not. Angle Angelo wants us to believe CFC is a charity organization and will still keep making profit. Maria of course wasn't keep on pointing out the contradictions.

Oh, and how about that "little matter" of the government getting the f*ck out of the mortgage underwriting business by de-chartering Fannie & Freddie?

PAR :

That bloomberg news ties the previous thread (Bailout) nicely with this "Subprime" thread. That's one fast politician. Why is the bailout only for subprime ? That's discrimination I say. Doesn't his heart bleed for the non-subprime folks who may also lose their homes ?

Fortunately, the story also had an opposing sensible view about ... WHO is going to fund this bailout.

Here's an excellent intro for Patrick.net newbies on the "how to regulate?" issue:

How does one regulate “well” ?

I would put imposing sensible reserve requirements and requiring full balance sheet disclosure for hedge funds & derivatives on the “good regulations” list.

That is probably too much. Once their positions are known, they will be traded against and they will not be able to operate.

HFs are investment partnerships and they should be treated as such. Investors have the full force of their freewill to accept or decline any involvement.

Moral hazard is not problem of deregulation. It is all about improper incentivization.

Microsoft had pretty much the entire PC market in the 1990's, yet they were never anti-consumer.

In many cases, competitions can be bad. Just look at the subprime mess. They are going to say "competitions made me do it."

hmmm...this does feel like a tipping point, especially since the psychological safety nets have been falling like dominoes, one by one. But it's simply incredible that it took so many years to reach, like so many Wile E. Coyote cliff dives.

Typically to find material that dry you’d have to be on the NASD web-site!
I know we have gone around the mulberry bush on this one so I thought it would be nice to see what the real (and propsed) limits are. Here's one of the pithy quotes from the comments on the SEC site.

Stephen Bruhn of Orland Park, Ill., wrote, "This is another example of government assuming that American investors are not smart enough to weigh the risks of investing their money. Why not set artificial thresholds for investing in stocks, bonds or homes?"

Note also:
Any company that offers securities to the public must register them with the SEC and provide continuing disclosures about their performance, fees, management and other issues. There are certain exceptions to this requirement. One is if the securities are offered to no more than 35 non-accredited investors.

Moral hazard is not problem of deregulation. It is all about improper incentivization.

I never disagreed with this view.

Peter P,

My primary beef w/HF's has been that we really now have (2) markets. One regulated, the other not. One with Reg. FD and another that operates under a cloak of secrecy.

It was wrong for the "wires" to upgrade the subprimes with likely full knowledge of their impending disaster. They will hear about it. Believe me.

Just recently several "former" employees at the wires are being accused of leaking info to HF mgrs. Oh!!! So THAT's how they've been getting those great returns! In ways it's like the old joke about the woman that complained about her MD's "unorthodox" examination as she exclaimed "I'll SUE!" So the guy says, go for it lady, I'm not really a doctor!

Bad, I know but you get the idea.

It was wrong for the “wires” to upgrade the subprimes with likely full knowledge of their impending disaster. They will hear about it. Believe me.

Perhaps the market is too dependent on the "wires." :)

My primary beef w/HF’s has been that we really now have (2) markets. One regulated, the other not. One with Reg. FD and another that operates under a cloak of secrecy.

This is a valid concern. But what is the real difference between a HF and a restaurant partnership?

What is the "real" difference?

In my mind the primary difference is that you and I can't circumvent the FDA and local health inspectors just b/c we decided we were only going to offer our food to a select group of people?

In many cases, competition can be bad. Just look at the subprime mess. They are going to say “competition made me do it.”

Peter P,

Again, we disagree. I would respond to subprime lenders: "Competition had nothing to do with it and you damned well KNOW it. The Fed's 1% + GSEs' massive injection of cheap mtg. money + Yen/Yuan carry-trade + Congress's 24-month club incentives had EVERYTHING to do with it." Remove the massive government manipulation, moral hazards and mis-incentives and *poof* goes housing bubble.

Remove the massive government manipulation, moral hazards and mis-incentives and *poof* goes housing bubble.

True.

The bond market has been doing very well this week, with the yield curve becoming even more negative. So the bond market is not predicting inflation, on the contrary, now they have priced in a Fed cut in August. At this rate, it will be a 1/2 point cut, instead of a 1/4 point.

An anecdotal note to rising lending standards: for some time now, I have been rolling over $30k from one "one year no interest" teaser rate credit card offer to another. This makes me ~$1500/yr in interest income before taxes, but mostly it amuses me to act like a bank and make money on the "carry trade." Last week, I got turned down for the first time on a credit card offer since college. So I checked my credit score and it is 770, still pretty prime. They said I had too much debt to income.

NV,

All I can say is that if you're a MB AND a realtor that "qualifies" his/her own clients.....LOOK OUT! It may be easy enough for some guy that got tired of driving the Frito-Lay delivery truck to write subprime mortgages for da' big bucks to wash his hands but Lord help the those on both sides of these transactions.

The incentives to pencil whip that are just too rewarding. And too easy to identify.

@NV,

Again, I think that it all depends on imposing the right KIND of "regulation". Some forms of regulation create worse moral hazards than the problem they were supposed to "cure".

If the market predicts a rate cut, the spring bounce may be a silent one.

I remember the boom really took off when the Fed started raising interest rate. With an expectation of falling interest rate, market participants may as well just wait.

Today's charts of the selloff was actually pretty interesting. Compare it to the massive drop before and you'll see there wasn't a lot of volatility to this sell off. Check the Nasdaq, S&P, and Dow, and what you'll see is a drop from the previous night's close that holds steady in the morning, and then a very orderly sell off during the day. No peaks and valleys as people jump between buying and selling, and no 'end of the day bounce' you see in most other big sell offs.

Well, if the subprime woes are not contained, which I don't think will be, a massive bailout is just going to happen, and this is how democracy works. I've never lived through S&L bailout, but I'd like to hear first hand experience from people who went through it.

The US government will eventually have to face the choice of
1) trashing the last bit of credibility of USD by cutting interest rate, in an inflationary environment (wait for the oil manipulation is gone and oil is back on rising track again)
2) saving the economy - the effort will prove futile, nevertheless, voters want jobs and politicians have to look as if they were doing something to help

Fed is finding itself between a rock and a hard place, but I believe that we will have to opt for route 2). Funding the bailout is never an issue, considering how much money we've already printed. Btw, our printing press has been slowing down since 2006 compared to other parts of the word, US monetary growth was only 9%, compared to 13% in Australia, and 18% in China!!!