patrick.net

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!!!

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

Peter P, are you a novice or what ? :-)

If rates are going down, buy now because prices will go up and you can refinance later if rates go down a lot.

If rates are going up, buy now and lock in a good rate.

I repeat, when Fed lowers their rates, mortgage rates may not go down. Even if they do, lending standards will go up compensating that. Cheap rates for anyone with a pulse will be a thing of the past.

OO,

As I recall the "wires" made out on that deal as well. They packaged and retailed "RTC Notes" (or something like that) that basically traded like STRIPS. No current int. paid but phantom income based on the discount they were sold at when redeemed or at maturity.

I'll glady pay you tomorrow for a hamburger....

DinOR,

how long did it take for people to get back their savings from the failed S&Ls in the 80s? Did any savers lose their deposits?

I am more concerned at the failure of brokerages these days because most people I know park their dough at the brokerages, not banks. And sensible human being will only deposit up to $100K at any FDIC-insured bank. Although there is an insured amount of $500K at brokerages, the system just never went through the test, so I am not sure how this entire thing will play out.

I found another fun shorting target, POOL.

I remember seeing news about a few months ago from local TV saying that many families in the Bay Area are not keeping up their pool service properly, so the local departments have to send a helicopter flying over the neighborhoods to take aerial photos for identifying potential mosquito breeding grounds. The reason why many households are not properly maintaining their pools is due to cost, at around $100-120/month.

I have discovered that quite a few neighbors in my neighborhood were putting in new pools in the last few years amidst the housing boom. But when things turn ugly, that $100 discretionary spending is heading down the drain first, not to mention an extra cost of $25-50K putting in a new pool. Pool expenditure is far more discretionary than furniture.

Peter P, are you a novice or what ?

Yes, I am.

SP,

do you remember this listing?
Sold for 1.65M in 2005, was trying to sell for 1.75M all last year, pulled from MLS, and came back on market for 1.675M. Considering that property tax of 2006 alone was already 18K, this guy is sure to lose on this transaction even if he sells the home himself. Woohoo.

http://www.mlslistings.com/common/properties/propertyDetail.asp?open=0&page=1&mls_number=708231&type=property&name=

OO,

Offer 800k.

From the original thread starter:

Steep losses in real estate related employment are being absorbed by other industries.

Only if you believe the gov't figures, which, surprise surprise, don't include illegal workers. Those figures show that the downturn in manufacturing and construction has almost entirely been offset by... wait for it... gov't employment. If you include the imputed loss of employment for illegal worker (and construction has a bunch, don't forget), then the figures skew noticeably the other direction.

OO,

IIRC a lot of people lost money as a cause of the failed S&L's. When John Keating went to trial there were blue haired old ladies swinging their handbags at him (if THAT means anything!)

Merrill cut a fat hog. They probably built at least a point or 3 into the takedown I'm sure. I think they called them RTC Strips and they were sold in different maturities so the gub'ment could allow the press to cool down periodically. I remember one client that owned them but he had to hold onto them for a long @ss time to maturity.

If I were designing a house, it would probably look a lot like that! :)

I think everyone should watch the Uncle Angelo interview. He repeatedly said a few things.

1. CFC is not like "those" companies who are in trouble. CFC will be fine.
2. It has become a credit crisis, "unnecessarily".
3. Everyone needs to "step back" and not over react.

I translate this as, his lenders are giving him REAL hard time. He wants them off his back, but they just won't keep quiet.

Jon,

Thank you for that trip down memory lane. I went through a phase as a teen reading Vonnegut and Jerzy Kosinski next to the pool at home. No matter what the themes of their books they remind me of sun and coconut oil and drinking powdered Lipton iced tea.

Is that interview available on the web yet?