patrick.net

Brand

I think there's been a bit of the second-tier coder phenom in the past 12-18 months; especially with social-networking plays. But it's nothing like 1999 when I was running an engineering department of 45 and a consulting division of 30 with maybe only a dozen first-tier among the bunch. I was happy to get second-tier back then given people were reaching to the fourth-tier (I like to call it the recruiting outside the Methodone clinic strategy).

I'm not sure how much of a housing market effect clearing out techs will have this time. A little, but most of the second-tier guys are young renters who were priced out from the get go.

A much larger effect will be visible from the private-equity and investment-bank fallout. "theotherside", for example, won't be able to sell anymore of her overpriced Marina shitboxes to 31 year old Senior Associates with a $350K bonus burning a hole in their pocket.

Now the "experts" are calling for an emergency rate cut ......

to save the poor unsupecting arm holders form foreclosure .....

has nothing to do with their big money friends getting soaked in the market.......

yeah....whatever....

form = from (above post)

goober, those fat cat bankers deserve a little milk for helping out the poor unsuspecting ARM holders. I mean, the fat cat bankers are victims of the liquidity cruch, too. If the FED doesn't help the banks, who will help those poor saps with negative amortization loans? And let's not forget the innocent hedge funds on Wall Street who bought the exotic derivatives in good faith!

Speaking of a bailout, maybe Congress should offer a plan to pay off only the "negative equity" for FBs. That would get their homes to market value so they could be sold. Maybe a few thousand dollars of incentive to get the house sold a little bit below market.

Weird. "The Donald" interviewed on CNBC telling all of your viewers out there to not give up their house! The last thing the bank wants is another empty and decaying house on their books! Just don't move. Don't move out! Just go in to your friendly (or not so friendly banker) and negotiate a new deal. Re-negotiate and get a BETTER deal!

(Spoken like a true FB Donald)

He's also calling for an immediate ONE POINT reduction as the Fed applies a second "transfusion" in as many hours! Weird.

Dow, S+P500 down today so far, BOJ, ECB, and now the Fed injecting cash into the system, and rumors of emergency Fed rate cuts? This is truly amazing to see unfold!

Randy H,

I didn't mean to imply you were throwing your money around in a reckless fashion. I guess I'd forgotten just how expensive homes in your area can be? Mrs. DinOR plans on leaving the workforce in the next 3-5 years and we'd like to have our "upscale" condo paid off before that. Somehow saying you're going to pay off a 206k loan doesn't seem all that brazen?

skibum,

After Erin Burnett listened to "The Donald's" comments in some disbelief, Mort Zuckerman was on and basically said let the chips fall where they may. As to DT's comments I couldn't believe he was trying to spin the residential side as being unaware of the consequences of these loans?

I mean, it's 2007. Do you mean to tell me most people don't know what an ARM is? C'mon.

SEC combing Wall St books for subprime losses

It'll be interesting to see what they come up with.

it will also be interesting time to check on hiring trends in companies.

our company went from hiring frenzy to freeze to laying off some temp workers in a matter of weeks.

"This drying up of corporate credit will do wonders to M+A activity, corporate spending (capital upgrades, hiring, etc.), and Wall Street bonuses. That’s another blow to the jobs outlook. "

Honestly, I won't feel too bad if those are the only things affected. M&A destroys jobs and Wall Street Bonuses go toward the luxury goods market (not to mention the exotic vacation market, eek!). Corporate spending is something, but overall I'm pretty skeptical about the results.

I mean, it’s 2007. Do you mean to tell me most people don’t know what an ARM is? C’mon.

When I helped my mom in Ohio sell off her home over a year and a half ago she had an ARM and didn't know it. Mainly because the mortgage broker lied to her and it was marketed as a "fixed rate" adjustable product.

M&A destroys jobs and Wall Street Bonuses go toward the luxury goods market

Certainly the disciplinary effect M&A has upon corporate efficiency has resulted in the US markets being the laughing stock of the world and the least productive to be found. The fact the US export share is growing even while Europe's shrinks is clearly evidence that free market capitalism is an outright failure.

If we want to save US jobs our only hope is to emulate France and disallow any market forces which rub elite politicians and economic rent-charging unions the wrong way.

I love you astrid, but gmafb. That corpse has been rotting for a couple decades now.

Randy H,

O.K (excepting grandmothers in OH)

The rest of us don't have an excuse in the world! Sorry you're mom was a victim of an industry largely without scruples. Should we be recording the conversations we have w/ MB's? Is that what this has come down to?

anyone here about Ernst & Young's Global Real Estate report where they say the US could see house price declines for the next decade in the same manner that Japan experienced. they had someone on cnbc this morning. they also predicted a 20% price drop in manhattan over the next two years, which suggests the fortress may be in line for a similar drop.

anecdotal, house in fremont receives two as is offers at asking three months ago, three weeks into escrow bidder bails out, the other bidder goes into escrow in the meantime, then no bids, a price drop, still no bids, listing now pulled, will relist in september or rent out.

"That corpse has been rotting for a couple decades now."

I'm not a fan of unions, they institute market inefficiencies. However, plenty of M&A destroy competition rather than enhance it, and many if not most of the jobs are not unionized jobs.

And I do think that corporations should pay stiffer penalties for pitching employees, especially long time employees out. Job loss and job search is an often traumatic and degrading process, esp. to people north of 30. There should be a penalty for destabilizing people's lives if it is done so to help the CEO hit his bonus range.

"There should be a penalty for destabilizing people’s lives if it is done so to help the CEO hit his bonus range."

preach sista preach !!

RandyH said:
There will be a number of Web 2.0 “social networking” yip yaps out looking for work, though. And that just breaks my heart. But any decent coders will get snapped up. It’s all the non-techs that will be looking for work.

Good engineers who can get things done are always okay. But there is a much larger number of also-ran engineers who hang around large projects and do nothing (or worse, get in my way :-) ). Their continued employment is mostly dependent on the health of their current host employer and their political sponsor, rather than their own ability. You can pretty much lump these Powerpoint-monkeys with the non-techs w.r.t. their job prospects in a downturn.

SP

@astrid

I lived the experience of traumatic job loss when as a teenager my father was cycled out of defense, unable to find respectable work for his skills, talents and past contributions, and forced into a series of ever degrading marginal consulting gigs. He never recovered and ultimately found his savior in a bottle (and thereby sealed the dissolution of our quaint midwestern family).

I wish there were adequate opportunity for retraining and re-insertion of guys like him into the work force. I there should be now. But "punishing" companies because they don't keep around non-productive workers just turns us into France.

Sorry to be so hard on you but this whole trendy anti-corporate fad is annoying at best, and outright terrifying at worst. If you think CEOs are overpaid then you should be rallying for greater shareholder influence over board decisions and CEO pay. But usually all I hear (not from you necessarily but from many of the sites/pubs you read) is lots of slamming of the entire shareholder-model. They want "stakeholders" to replace shareholders. Yea. That'll solve the CEO pay problem. Let's further uncouple how management enriches themselves from measurable corporate performance factors. All that'll do is turn CEO's into de facto politicians with better salaries.

plenty of M&A destroy competition rather than enhance it

astrid,
I have to agree with Randy H on this. I'm ambivalent on M+A activity - on the one hand, the head honchos and paper pushers get overpaid for what they do, but on the other hand, the corporate buy, spruce up (usually by layoffs and other means) and sell does have plusses. It's sort of like the corporate version of house flippers...

Randy H,

I think what *astrid may be objecting to is the format where the "turn-around specialist" hatchet men are comp'd directly by the head-count they reduce?

"But usually all I hear (not from you necessarily but from many of the sites/pubs you read) is lots of slamming of the entire shareholder-model."

Actually, I think totally agree with you. I think that in an ideal world, employees "stakesholders" should be shareholders and better shareholder control and many more proxy fights/shareholder lawsuits (than we have now) sounds good to me.

I was speaking more from disillusion of the current system, where the reality is that M&A are done to give head honchos golden parachutes or what amounts to monopolistic behavior in the case of News Corp and Oracle acquisitions, etc.

Also, while talking about efficiency is well and good, do they have to be so cold blooded about it? Those are real jobs being taken away and possibly real lives ruined. While that doesn't justify keeping those jobs forever, it shouldn't be treated some sort of unadulterated good (just as job trimming should not be treated as an unadulterated evil, as labor activists would like to portray them).

Can someone deconstruct the concept of "injecting liquidity" for me?

The news is full stories about French, Canadian, US, Australian central banks "injecting liquidity". From what I have seen, it amounts to having a one-day "sale" on loans at a lower interest rate than the discount rate or federal funds target rate or whatever.

Do any of the experts care to correct me or further illuminate the concept?

If my explanation is essentially correct, how does "injecting liquidity" differ from "temporarily reducing interest rates, and without giving official notice".

justme Says:
Can someone deconstruct the concept of “injecting liquidity” for me?

This is the 'buyer of last resort' function, where the Fed buys instruments that no one else was willing to buy. In this particular case, I believe the Fed bought $19B worth of MBS, so that the desperate sellers could raise some cash.

SP

Re: my previous post, I was wrong. The Fed didn't actually buy the MBS, they lent enough money for the MBS holders to continue carrying them on the books for a limited time, at the end of which the MBS-holder 'repurchases' them by paying the fed back. Maybe I should let someone else explain this better. :-)
SP

justme:

As I understand it (being in the nonexpert crowd) the US Fed was doing mostly normal repo activity, which boils down to short-term loans (think 3-days). Since it unwinds after those 3-days, the problem of creating additional money is largely avoided, but it prevents players from being forced to sell off good assets instead. One analogy is the musical chairs one; the Fed won't be able to find a chair for everyone, but it can make sure things keep going enough to fill up the chairs that are there.

The main difference this time was the focus accepting MBS as collateral, and statements about the Fed "doing it's part".

SP, requiem, justme, others,
So how does this short-term injection of cash help calm markets? I would think these current bag holders realize that this is a temporary fix. How does anyone get reassured that there is another sucker, er, buyer willing to buy these securities once the "loan" comes due? Moreover, I'd think the overall psychological effect is, "hey, things must be REALLY bad if the Fed has to take a drastic measure it hasn't done since 9/11!!!

The following explanation is not perfect but should give you the basic idea of how the Fed and Central Banks influence market liquidity:

When people are short of cash they go to the bank for a loan or a withdrawal. As a result of all their customers’ transactions banks have fluctuating cash positions. They must reconcile these positions each night.

Typically some banks will have excess cash and others will be a little short. When banks are short of cash they go to other banks for a quick loan. Essentially, they can borrow amongst each other to meet their liquidity needs. These loans are very short term – typically overnight.

As supply and demand for cash fluctuates, the interest rate for overnight money will fluctuate. When demand is significantly greater than supply a credit crunch can develop. This will push rates up until the demand and supply are in balance.

The credit markets can become very volatile at times. However, the Federal Reserve makes a practice/policy of stabilizing the market by manipulating the supply and demand for funds to force the overnight interest rate to their stated Federal Funds Target Rate (currently 5.25%).

However, the market can surprise them or move quickly, and the actual rate fluctuates during the day. In the last 24 hours the Federal Funds rate briefly traded as high as 6%. The Fed intervened to drive the rate back to their 5.25% target. They did this by lending to banks. Thus, increasing the supply of money to meet the increased borrowing demand.

Very early today they dumped extra cash into the system in anticipation of the spike in demand for funds.

They are often referred to as the lender of last resort. However, the Fed is constantly active in the credit markets – all day, every day.

Good explanations, everyone. It seems that these short term (3-day?) loans can have many uses.

SP, can you elaborate on why a mortgage issuer cannot "continue to carry them on their books"
without getting a loan? Does this have to do obligations with respect to a third party, such as a margin call that needs to be fulfilled, and otherwise could not be fulfilled without selling of the holdings (which could lead to panic selling)?

I know what a margin call is for a retail investor such as myself, but what is the margin call concept for a mortgage broker or a bank? I'm imagining something like the following:

ACME Mortgage Co. gets formed and capitalized with $100M. ACME then proceeds to borrow $900M by issuing MBS paper, and then lends out $1000M worth of mortgage money. At some point, the loans starting to go bad and the (estimated,expected) losses start to near the $100M capital of the firm. At this point, Wall Street firm XYZ that bought the MBS paper issues a margin call and say they want (some of) their money back, and pronto.

Is this roughly how it works? Then uncle sam steps in with a short term loan (injects liquidity) so that the fire sale can be postponed and be made into an "orderly" sale. Hence the mantra from the fed about "preserving orderly operations of the financial markets".

They also buy and sell securities to influence the liquidity of the market.

When they buy securities they remove securities (bonds, etc) from the market in exchange for cash - thus increasing liquidity. When they sell securities back into the market they increase the supply of securities in exchange for cash - thus pulling cash out of the market.

They can also influence the credit markets by adjusting the reserve requirements for banks.

Zephyr,

How can one watch the Federal Funds rate in real time?
(our last two posts crossed, thanks for the information)

skibum:

If a bagholder is truly screwed, liquidity will not save them.

Roubini's post here may be helpful:
http://www.rgemonitor.com/blog/roubini/209779

"An agent (household, firm, financial corporation, country) can experience distress either because it is illiquid or because it is insolvent; of course insolvent agents are – in most cases - also illiquid, i.e. they cannot roll over their debts. Illiquidity occurs when the agent is solvent – i.e. it could pay its debts over time as long as such debts can be refinanced or rolled over - but he/she experiences a sudden liquidity crisis, i.e. its creditors are unwilling to roll over or refinance its claims. An insolvent debtor does not only face a liquidity problem (large amounts of debts coming to maturity, little stock of liquid reserves and no ability to refinance). It is also insolvent as it could not pay its claim over time even if there was no liquidity problem; thus, debt crises are more severe than illiquidity crises as they imply that the debtor is insolvent, i.e. bankrupt, and its debt claims will be defaulted and reduced."

There are (expensive) subscription services for investors that give real time quotes on almost any market quotes. However, I do not worry about the real-time fluctuations in the Fed Funds rate because the Fed moves quickly to keep it on target.

Each day the WSJ publishes the trading values for the previous daay. It always fluctuates abit around the target rate.

Most people mistakenly think that the Federal Funds Rate is a fixed thing. Actually, it is only a target for the Federal Reserve's Open Market Desk to work toward as the day progresses. They buy or sell, lend or borrow to push the market rate to the Federal Funds target rate established by the open market committee of the Federal Reserve Board of Governors.

justme, requiem, Zephyr,

Thanks for the very enlightening comments...

RE: margin calls for the banks and funds, it seems to me this is just a modern, larger scale version of a good ole' run on the bank. Individuals (this time those with stakes in these funds) panic, and many of them ask for their money back NOW. Of course, the fund doesn't have the cash to cover that many players asking for their money back, even at a devalued level, and so they become insolvent and "can't meet margin calls."

Hence the cash injection by the Fed? It sounds like George and Mary Bailey blowing their honeymoon cash to keep the old Bailey Savings and Loan afloat...

Some hedge funds are experiencing one or both of two different pressures.

First is the pressure of declining value of assets that were purchased with borrowed funds. Thus they are experiencing an equity squeeze. They could go bankrupt by a modest decline in values. This is only possible because of the high level of leverage. When you buy a dollar of a low risk assets with 10 cents of equity and 90 cents of callable debt you turn a low risk venture into a high risk gamble. Those who have lent the money want to get it back. So the call the loans when the assets are in danger of being insufficient collateral. This forces the hedge funds to sell at a terrible time in the market. If they could ride it out they would likely be fine – most of the time.

The second risk is the “run on the bank” caused by investors in their fund getting scared and wanting their money out. Of course the hedge fund has invested that money in the assets at risk, and do not have much cash laying around. Quite the contrary, they are leveraged with debt (and cash short) to magnify their return on equity. So the hedge fund could experience a liquidity crunch while remaining otherwise healthy. This need for cash could force them to sell assets at a bad time in the market (most likely a bad time since that is what prompts the investors to pull their money).

Combine the two and you have a disaster for the fund, and anyone who has money invested or lent to the hedge fund.

However, the losses are fundamentally just wealth transfers from the fund (et al) to those who defaulted (passed through to the people they bought from), or those who buy assets from the fund on the cheap during the panic.

As Warren Buffet said: “Be fearful when others are greedy, and greedy when others are fearful.”

…

I think the discount window rate is actually 100bp higher than the target overnight rate, which as I understand it is an attempt by the Fed to divorce the negative perception that is associated with banks "having to use" the discount window, and to encourage more interbank lending.

The actions of the FOMC and its international peers are essential to the function of modern capital markets worldwide. It's the direct result of the lessons learned from the Great Depression. Every major economy has a central bank that engages in some form of similar action, even capital-restricted markets with currency manipulation like China.

To simplify what the Fed and ECB (and pretty much every other CB) did the past two days was act as lender-of-last-resort because the banks quit lending to one another, at least enough to cause segments of the credit markets to seize up.

I know a lot of people here watch CNBC. In my opinion, if you want to know what's really going on in credit markets in real-time you should ignore the NYSE dork, casually observe whoever is covering the NASDAQ for entertainment, pay closer attention to the woman who's usually at the NYMEX, and worship at the alter of the (in my opinion awesome) guy in Chicago.

skibum Says:
So how does this short-term injection of cash help calm markets? I would think these current bag holders realize that this is a temporary fix. How does anyone get reassured that there is another sucker, er, buyer willing to buy these securities once the “loan” comes due?

The idea is that this will give them breathing room to adjust their plans to cope with the unexpected crisis. IMO, right now the problem is that all kinds of assets are being liquidated to cover margin-calls and other consequences of the liquidity crunch. There was actually a quote today from some broker on one of my news-feeds that pretty much said exactly this.

So the Fed is specifically targeting the MBS market, and giving them an emergency drip of cash so they don't have to sell other assets to tide over. However, this isn't very sustainable, so it will be interesting to see what their next move is. They may cut rates, but I don't know if that will help really - it is a crisis caused by lack of confidence, so cheap money isn't likely to be put to the intended use.

SP

1- The moment of truth is fast approaching… The probability of seeing a wave of (credit- crunch-induced) massive layoffs in the next 6-12 months has increase dramatically….

2- I hope that everybody on this board has the required 9-12 months of living expenses stashed away in cold hard cash…

3- No matter where each one of us stands on the renter/owner dividing line…we should all make it like bandits in the coming recession….as long as we don’t loose our JOBS…AND THAT’S THE TRICKY PART….

Bottom line: It is all about keeping that paycheck... :-)

-----------------------------------------------------------------------

http://www.reuters.com/article/newsOne/idUSHKG3454420070810

World stock markets have shed over nearly 8 percent since they hit record highs only a month ago. As a result, investors rushed to buy safe-haven government bonds, unwind yen-financed carry trades, and moved to scale back expectations for interest rate rises by some major central banks this year…

Emergency action by central banks underlined the risk that a global liquidity crunch was more serious than anticipated.
"What we have at the moment is just an all-round sense of panic," said Marc Ostwald, bond analyst at Insinger de Beaufort in London. "Quite clearly there's a lot of deep-seated fear out there and it's going to take a while to resolve this."
Volatility across markets is hitting banks and corporations, as they have a harder time accessing the financing essential in making takeover deals.
The CBOE Volatility Index (.VIX: Quote, Profile, Research), often called Wall Street's fear gauge, shot up 10 percent to 29.84, its highest level since April 2003….

U.S. regulators are scrutinizing the books of some top Wall Street brokers and investment banks for subprime mortgage losses, according to a Wall Street Journal report….

Dollars were in especially short supply on Friday with deposit rates for tomorrow/next delivery hitting 6-1/2 year highs above 6 percent. This compared with the benchmark federal funds rate target of 5.25 percent

justme said:
SP, can you elaborate on why a mortgage issuer cannot “continue to carry them on their books” without getting a loan? Does this have to do obligations with respect to a third party, such as a margin call that needs to be fulfilled, and otherwise could not be fulfilled without selling of the holdings (which could lead to panic selling)?

I am not an expert by any means, but yes, I believe that is what it is.

Instead of panic liquidation of assets to raise cash, the issuers can make better arrangements. It also means that the liquidation can happen a little more slowly, so that things don't overshoot in the other direction.

Personally, I have mixed feelings about this direct market intervention since it robs us of an entertaining spectacle of a Gordon Gekko getting his comeuppance, but of all the things that the Fed does, this is at least a reasonable act.

SP

Thanks to all the experts for one of the most informative threads in a long time!

Another question regarding the Fed intervention. If the problem is that the banks won't lend to one another overnight and the Fed is stepping in to fix this, doesn't this imply that there are banks out there with cash, but unwilling to loan it? And if this is the case, *why* won't they make the loan? Do they fear that borrowing bank will go under and not repay?

Or is the problem that there are no banks with cash available to lend in the first place?