The issue, for anyone who has any shred of a belief in free markets left, is not whether or not the homeowners owe the money. The issue is that the FIRE sector of our economy has been growing by leaps and bounds at the same time that our manufacturing jobs were leaving. As an economy, we were, in fact, growing our labor force, we just weren't hiring them.
Free markets, effecient markets, would have demanded that the labor and expertise necessary to comply with due process of law would be employed. That labor force would quite necessarily be educated, which may require a change in strategy when it comes to starving our education system to death. They would have, for the last 10 years, been building the infrastructure required to properly administer the monster they were all being paid so much to create. They would have been concerned that the court system (which pretty much holds their fate in its hands, at this point) was properly funded, staffed with competent people.
The free market hasn't failed here, the law has. Start a hue and cry about how most of these homeowners are trying to gain a windfall on a technicality RIGHT AFTER you put some serious resources in play to prosecute predatory lending. Worry about the homeowners RIGHT AFTER you open a serious investigation into the rape and pillage of America's finest companies by the Private Equity guys.
Conservatives are always going on about how everything has to have consequences. You buy more house than you can afford, you're going to lose it. That's life. Well, fine. All I ask is that the CEO's and Goldman Partners who skimmed everything off the top leaving an unkempt, broken shell in its wake, have to pay their consequences. If the way to make them pay is through the courts, that works for me.
“We cannot allow the courts in New York State to stand by idly and be party to what we now know is a deeply flawed process, especially when that process involves basic human needs — such as a family home — during this period of economic crisis,” Judge Lippman said in a statement. (New York Times, 10/22/10)
"To maximize investment returns, private equity firms often squeeze down costs in the operations they acquire. And some legal experts suggest that could be a factor in the quality of legal documents generated by foreclosure mills." (New York Times, 10/22/10)
"As staggering as the projected stakes are in the housing crisis, at least you can put a number on them. What's incalculable is the psychic cost of a legal system that may well have let banks skirt the law. "The whole financial system is becoming a lot less transparent," says Hernando de Soto, a Peruvian economist who has written on the importance of well-defined property rights. "You can't size up risk anymore."(Business Week, 10/21/10, "Mortgage Mess: Shredding the Dream"
"Bank of America accused executives at Taylor Bean, Colonial and Platinum of having fraudulently schemed to "double- and triple-pledge mortgages and steal assets" to hide their faltering conditions as the housing market declined." Reuters, 10/20/10 "BofA sues FDIC over Taylor Bean mortgage losses"
Thursday, October 21, 2010
Friday, March 27, 2009
Throwing away the baby with the bath water
http://krugman.blogs.nytimes.com/2009/03/27/was-i-unfair/
Yes, of course you're unfair. You're throwing away the baby with the bathwater.
1st. I agree that finance needs to be a much smaller percentage of gdp and that it has been sidetracking our best minds into nonsense.
Securitization is not rocket science and it's benefit was quite specific. For large concentrations of assets looking for a liquid place to park, the residential real estate market in the united states was/is a rich resource. It's one of the largest concentrations of capital in the world.
When we first came up with the idea, big pools of pension fund money were looking for a way to invest in mortgages, but our model of prepayments made them a very difficult cash flow to manage in a portfolio. Who needs an asset that gives you your money back just when it's going up?
On the other hand, giant corporations were very much in need of overnight and short term funds. Liquidity was important to them too.
Rearranging the cash flows of this huge pool of assets so that one party got them earlier and another got them later was logical and productive. Mortgage rates fell to lows of 6 and 7% from highs of 17 and 18%. It broadened the investor base to include the vast pools of funds in pensions and insurance companies. There was some volatility in prepayments, money was lost in 93 when everyone repaid at once, but by and large they have been good assets for investors.
The game for securitization went nuts when leverage went nuts just like everything else. When hedge funds, ballooning with cheap money and leverage came swooshing in for assets, the games began in the securitization market just like it did in the stock market, the housing market, the commercial market, the retail market (just about any market.)
That old world you describe when banks just took in deposits and made loans was made in a world where the fed contrived to keep rates constant. In a world of wildly fluctuating rates and shapes to the yield curve ushered in by Volker, that model has a whole world of hurt built into it. Ask the S&L's. They borrowed short and lent long when short rates soared.
CDS Swaps are at the heart of the mess we're in, complicating it in ways that are incomprehensible, and in a magnitude that we can't even fathom. They are not securitizations, but fraud and at some point someone needs to walk some of these guys down a plank, somewhere.
Yes, of course you're unfair. You're throwing away the baby with the bathwater.
1st. I agree that finance needs to be a much smaller percentage of gdp and that it has been sidetracking our best minds into nonsense.
Securitization is not rocket science and it's benefit was quite specific. For large concentrations of assets looking for a liquid place to park, the residential real estate market in the united states was/is a rich resource. It's one of the largest concentrations of capital in the world.
When we first came up with the idea, big pools of pension fund money were looking for a way to invest in mortgages, but our model of prepayments made them a very difficult cash flow to manage in a portfolio. Who needs an asset that gives you your money back just when it's going up?
On the other hand, giant corporations were very much in need of overnight and short term funds. Liquidity was important to them too.
Rearranging the cash flows of this huge pool of assets so that one party got them earlier and another got them later was logical and productive. Mortgage rates fell to lows of 6 and 7% from highs of 17 and 18%. It broadened the investor base to include the vast pools of funds in pensions and insurance companies. There was some volatility in prepayments, money was lost in 93 when everyone repaid at once, but by and large they have been good assets for investors.
The game for securitization went nuts when leverage went nuts just like everything else. When hedge funds, ballooning with cheap money and leverage came swooshing in for assets, the games began in the securitization market just like it did in the stock market, the housing market, the commercial market, the retail market (just about any market.)
That old world you describe when banks just took in deposits and made loans was made in a world where the fed contrived to keep rates constant. In a world of wildly fluctuating rates and shapes to the yield curve ushered in by Volker, that model has a whole world of hurt built into it. Ask the S&L's. They borrowed short and lent long when short rates soared.
CDS Swaps are at the heart of the mess we're in, complicating it in ways that are incomprehensible, and in a magnitude that we can't even fathom. They are not securitizations, but fraud and at some point someone needs to walk some of these guys down a plank, somewhere.
Friday, January 30, 2009
Somebody, Please, Put this man in charge!
Jesse is on the money and on point. The last time I wanted to hug someone who had created something so beautiful that tears were in my eyes was 30 years ago. Stanley Turrentine in a dive in the village, had the same effect.
You go Jesse.
http://jessescrossroadscafe.blogspot.com/2009/01/are-we-ready-to-change-system.html
It is time to begin serious, and significant, systemic reforms in the financial system.
Maintaining the status quo will be fruitless because the system is broken. Trying to keep it from becoming 'more broken' is a nice short term fix, but we are beyond that now. This has been a long time in the works.
There has been a recent increase in noise from the Congress about changing a system which promotes excessive pay, and encourages the virtual looting of companies, by overpaid management and a corrupt financial system.
Rather than strike at the branches, and call a few individuals up before Congress for their ten minutes of tut-tutting, how about some serious change that cuts to the roots of the crisis?
One potential solution would be to institute a marginal income tax rate of, let's say, 80% at the 30 million dollar level of aggregate income in the AMT, with a significant raising of the minimum levels of income that trigger the AMT to about 4 million in aggregate income. It can graduate from 50% to 80% from the minimum to the maximum. The AMT was always intended to be a safeguard against loopholes for the highest income brackets. We can permit five year income averaging to allow the incredibly lucky to keep a bigger share. But rewarding luck encourages gambling and gaming the system, which is an open door to white collar crime and fraud.
It is time to begin serious, and significant, systemic reforms in the financial system. It is preferable to the historically likely alternatives.
You go Jesse.
http://jessescrossroadscafe.blogspot.com/2009/01/are-we-ready-to-change-system.html
Are We Ready to Change the System?
"The general spread of the light of science has already laid open to every view the palpable truth, that the mass of mankind has not been born with saddles on their backs, nor a favored few, booted and spurred, ready to ride them..."
Thomas Jefferson
It is time to begin serious, and significant, systemic reforms in the financial system.
Maintaining the status quo will be fruitless because the system is broken. Trying to keep it from becoming 'more broken' is a nice short term fix, but we are beyond that now. This has been a long time in the works.
There has been a recent increase in noise from the Congress about changing a system which promotes excessive pay, and encourages the virtual looting of companies, by overpaid management and a corrupt financial system.
Rather than strike at the branches, and call a few individuals up before Congress for their ten minutes of tut-tutting, how about some serious change that cuts to the roots of the crisis?
One potential solution would be to institute a marginal income tax rate of, let's say, 80% at the 30 million dollar level of aggregate income in the AMT, with a significant raising of the minimum levels of income that trigger the AMT to about 4 million in aggregate income. It can graduate from 50% to 80% from the minimum to the maximum. The AMT was always intended to be a safeguard against loopholes for the highest income brackets. We can permit five year income averaging to allow the incredibly lucky to keep a bigger share. But rewarding luck encourages gambling and gaming the system, which is an open door to white collar crime and fraud.
And we have to ask, just how much is enough. Do you really think that having a 30 million dollar per year income is 'not enough?' Are we insane? Yes, allowing people to 'keep what they kill' is ingrained in our psyche by the last 100 years of a steady stream of propaganda, but its time to start thinking about social interaction and the protection of the innocent as well as the glorification of greed.
Yes, this will alarm the "Joe the Plumbers" out there who wish to fantasize about the looting of the system, or have pretensions of being the next American Idol, with a Pavlovian impulse to consider realistic expectations and a middle class life as socialism.
The top 1% of the wealthy Americans do not need additional incentive to take. They are, for the most part excepting the lucky and the idle heirs, psychologically driven to acquire beyond all rational need. What they need is restraint. And they will absolutely hate it.
But since most wannabe billionaires are delusional why let them drag us down under the bus with them? Let's stop legislating for the .1% probability, leaving the garden gate open for the pigs to come in.
We cannot continue to build and maintain this country if the most rewarding pursuits are gambling, gaming the system, fraud, and white collar crime. That game is over. We're done.
Reform the accounting rules for acquisitions and goodwill, inventory writedown with subsequent earnings effects. "Earnings management" is a tool of the price manipulation for stock option bonuses that is a source of market distortion.
Bring back Glass-Steagall. Let Goldman and Morgan get into the conventional banking business after passing through receivership. The point is to be solvent first BEFORE you get government support. And if you are not solvent we will help you become so through liquidation.
Back up the individuals, the savers and pensions, to the hilt, 100%, and put the financial institutions through the wringer, if not a meat-grinder. Stop beating this 'trickle down' approach in curing our problems by throwing money at the uber-wealthy and corporations. It does not work. It will not work. It is destroying our country.
Oh no, we cannot let honest people be limited in acquiring enormous wealth. Well, there probably aren't many completely honest people pulling down over 30 million per year in income. The criminal prosecution system is also horribly compromised, and we can fix it AFTER we stop the looting, and then the rules can be relaxed.
Direct the FBI and Justice Department to conduct a serious investigation of naked short selling and price manipulation. That aspect of the market is an open sore.
Institute aggregate position limits in commodities, and make them high enough so that they do not bother any legitimate speculators.
Refuse to admit any nation into the favored nation status unless their currency is open for trading on the world markets, free of pegs.
Stop the system of legalized bribery of the Congress and the Executive by lobbyists. That requires campaign funding reform, then let's do it now.
Stop selling this country short for the sake of 'competitiveness' and a perverted image of the "American Dream." If the Founding Fathers came back they would not be able to stop throwing up at what we now call 'freedom' and what we have done with their legacy for which they pledged their lives and sacred honor.
Europe needs to tell the Brits and the Yanks to piss off, fix the euro, take an enormous dose of humility, reform their financial system, and don't play the fool again so easily. Asia needs to take care of its own and grow a middle class, and stop treating its people as coolies. Australia needs to go walkabout with Europe. The Mideast is its own worst enemy. Africa is the shame of our world.
Too radical? Then you're not ready yet for the changes that are required to end this cycle of boom, loot and bust.It is time to begin serious, and significant, systemic reforms in the financial system. It is preferable to the historically likely alternatives.
Thursday, December 18, 2008
OPM (Other People's Money)
We have said repeatedly that one of the triggers for the crisis was permitting investment banks to go public (prior to 1970, no NYSE member firm could be listed). We had dinner with one of our long-standing colleagues who was responsible for Sumitomo Bank's investment in Goldman Sachs and had (and continues to have) close and frequent dealings with the firm. He said that the change in the firm's behavior after it went public was dramatic. Before, it would deliberate (one might say agonize) important business decisions,. Waiting two years to enter a new field was not unheard of. But after the partners cashed in and were playing with other people's money, the firm quickly became aggressive in its use of capital in expanding the size and scope of its activities.
http://www.nakedcapitalism.com/2008/12/new-york-times-story-pulls-punches-on.html
http://www.nakedcapitalism.com/2008/12/new-york-times-story-pulls-punches-on.html
Sunday, October 12, 2008
It Really Sucks to be Rich right now
http://www.bloomberg.com/apps/news?pid=20601109&sid=aIAWDrA4RSTQ&refer=home
Abramovich, Deripaska, Oligarchs Lose $230 Billion (Update1)
By Yuriy Humber, Greg Walters and Maria Kolesnikova
Oct. 10 (Bloomberg) -- Russian billionaires from aluminum magnate Oleg Deripaska to soccer-club owner Roman Abramovich lost more than $230 billion in five months during the nation's worst financial crisis since the 1998 default on its debt.
The combined wealth of Forbes magazine's 25 richest Russians tumbled 62 percent between May 19 and Oct. 6, based on the equity value of traded companies and analysts' estimates of closely held assets they own. The loss is four times larger than the fortune of the world's wealthiest man, Warren Buffett.
Moscow's benchmark Micex stock index declined 61 percent since its peak in May. The global credit seizure, war with Georgia and falling commodity prices led foreign investors to pull $74 billion out of Russia since early August, according to BNP Paribas SA. While Russia's 1998 default and devaluation of the ruble eradicated savings for most of the population, this year's losses are wiping out its richest citizens' fortunes.
``There was a massive transfer of wealth into the hands of the oligarchs in 1998,'' said Mark Mobius, executive chairman of Templeton Asset Management Ltd., which has about $30 billion in emerging market stocks. ``Now it's going the other way.''
United Co. Rusal's Deripaska, 40, the richest Russian on the list, lost more than $16 billion and in the past week ceded stakes in Hochtief AG and Magna International Inc. Chelsea FC owner and Evraz Group SA shareholder Abramovich, 41, lost $20 billion, based on assets excluding property and cash.
Lisin's Losses
The biggest loser has been Vladimir Lisin, 52, an avid hunter and head of Russia's Shooting Club, whose 85 percent stake in OAO Novolipetsk Steel lost $22 billion in value in the period.
Novolipetsk rival Evraz declined 83 percent, shrinking 49- year-old founder Alexander Ambramov's fortune to $2.2 billion from $13.4 billion. Russia's biggest steelmaker, OAO Severstal, also fell, cutting the wealth of chief executive officer and majority owner Alexei Mordashov, 43, to $5.3 billion.
``They should take us all off the Forbes list,'' said Alexander Lebedev, ranked 39th by the magazine in May with $3.1 billion of wealth. Lebedev, 49, who owns 30 percent of state-run airline OAO Aeroflot, said in an interview on Sept. 23 that ``silly'' rhetoric by the Kremlin over the conflict in Georgia was responsible for 40 percent of the stock market's drop in August.
Lukoil, Alfa
OAO Lukoil Chief Executive Officer Vagit Alekperov, 58, saw his 20 percent stake in Russia's second-biggest oil producer decline to $7.2 billion from $19.5 billion. The fortune of Alekperov deputy Leonid Fedun, 52, declined to $3 billion from $8.4 billion. Both men have said they will continue to buy more Lukoil shares.
Dmitry Rybolovlev, 41, who controls OAO Uralkali and owns 20 percent of OAO Silvinit, the country's only potash producers, lost about $12.8 billion, leaving him with $4.1 billion.
Alfa Group partners Mikhail Fridman, 44, German Khan, 46, and Alexei Kousmichoff, 45, ranked seventh, 10th and 17th, respectively, lost at least a combined $12.1 billion.
Alfa's shareholdings include BP Plc's Russian oil venture TNK-BP, mobile-phone operators OAO VimpelCom and Turkey's Turkcell Iletisim Hizmetleri AS, supermarket chain X5 Retail Group and television broadcaster CTC Media Inc.
Spokespeople for companies including Deripaska's Basic Element, Evraz, Nikolai Tsvetkov's UralSib Financial Corp. and Rybolovlev's Uralkali declined to comment on the losses.
Cashing Out
At least one of Russia's wealthiest got out in time.
Mikhail Prokhorov, 43, sold his 25 percent stake in OAO GMK Norilsk Nickel to Deripaska's Rusal for an undisclosed amount in April, just before nickel prices began to slump. The value of that stake plummeted from $13 billion on April 24 to $3.38 billion on Oct. 6.
Prokhorov received $7 billion in cash as part of the Norilsk transaction, the Kommersant and Vedomosti newspapers reported then, citing unidentified people familiar with the deal.
``Are you criticizing me for feasting amid the Black Death,'' Prokhorov joked with reporters in Moscow on Sept. 30, after buying half of Renaissance Capital for $500 million. That was less than a quarter of the value the investment bank had a year ago when VTB Group sought to take it over, according to a Vedemosti report. ``Crisis time is a peak for opportunities,'' Prokhorov said. ``An absolute peak.''
Trading Delayed
Russia's Micex and RTS stock exchanges delayed the opening of trading today on orders of the market regulator. It was unclear when trading would start, a spokesman for Micex said. The RTS won't resume stock trading until ``further notice,'' the bourse wrote in an e-mailed statement.
``You can now buy the free float of the entire Russian energy sector with the market cap of Coca-Cola, and still have change to buy all the Russian banks,'' Merrill Lynch & Co. emerging markets equity strategist Michael Hartnett said in a note to clients today.
The unprecedented loss of wealth may set the stage for a new round of asset redistribution, said Pavel Teplukhin, president of Troika Dialog Asset Management in Moscow.
``We've seen quite a significant inflow of fresh money by our wealthy individuals to acquire at these very attractive levels that we haven't seen since 2003, 2004,'' Teplukhin said in a Bloomberg Television interview on Oct. 9, a day the Micex Index climbed 9.8 percent.
Next Round
The next round of wealth building may be the most intense yet, according to Renaissance Capital. The first came between 1995 and 1998 as Russia's first president, the late Boris Yeltsin, agreed to sell stakes in the nation's biggest industrial assets in return for loans from bankers including Potanin, who helped organize the state bailout.
``It will be a game with bigger stakes than in early 1990s privatizations and the redistribution after the 1998 crisis,'' said David Aserkoff, chief strategist for Russia at Moscow-based Renaissance Capital.
``Oligarchs with cash will be able to use their knowledge of the business and political landscape to find the next billions,'' Aserkoff said in a research report on Oct. 6.
``The market will grow back,'' billionaire Viktor Vekselberg, 51, one of BP Plc's four partners in oil company TNK-BP and founder of Renova Group, told reporters yesterday. ``The only issue is when. I don't think it will be soon.''
To contact the reporters on this story: Yuriy Humber in Moscow at yhumber@bloomberg.net; Greg Walters in Moscow gwalters1@bloomberg.net; Maria Kolesnikova in Moscow at mkolesnikova@bloomberg.net. Last Updated: October 10, 2008 05:44 EDT
Abramovich, Deripaska, Oligarchs Lose $230 Billion (Update1)
By Yuriy Humber, Greg Walters and Maria Kolesnikova
Oct. 10 (Bloomberg) -- Russian billionaires from aluminum magnate Oleg Deripaska to soccer-club owner Roman Abramovich lost more than $230 billion in five months during the nation's worst financial crisis since the 1998 default on its debt.
The combined wealth of Forbes magazine's 25 richest Russians tumbled 62 percent between May 19 and Oct. 6, based on the equity value of traded companies and analysts' estimates of closely held assets they own. The loss is four times larger than the fortune of the world's wealthiest man, Warren Buffett.
Moscow's benchmark Micex stock index declined 61 percent since its peak in May. The global credit seizure, war with Georgia and falling commodity prices led foreign investors to pull $74 billion out of Russia since early August, according to BNP Paribas SA. While Russia's 1998 default and devaluation of the ruble eradicated savings for most of the population, this year's losses are wiping out its richest citizens' fortunes.
``There was a massive transfer of wealth into the hands of the oligarchs in 1998,'' said Mark Mobius, executive chairman of Templeton Asset Management Ltd., which has about $30 billion in emerging market stocks. ``Now it's going the other way.''
United Co. Rusal's Deripaska, 40, the richest Russian on the list, lost more than $16 billion and in the past week ceded stakes in Hochtief AG and Magna International Inc. Chelsea FC owner and Evraz Group SA shareholder Abramovich, 41, lost $20 billion, based on assets excluding property and cash.
Lisin's Losses
The biggest loser has been Vladimir Lisin, 52, an avid hunter and head of Russia's Shooting Club, whose 85 percent stake in OAO Novolipetsk Steel lost $22 billion in value in the period.
Novolipetsk rival Evraz declined 83 percent, shrinking 49- year-old founder Alexander Ambramov's fortune to $2.2 billion from $13.4 billion. Russia's biggest steelmaker, OAO Severstal, also fell, cutting the wealth of chief executive officer and majority owner Alexei Mordashov, 43, to $5.3 billion.
``They should take us all off the Forbes list,'' said Alexander Lebedev, ranked 39th by the magazine in May with $3.1 billion of wealth. Lebedev, 49, who owns 30 percent of state-run airline OAO Aeroflot, said in an interview on Sept. 23 that ``silly'' rhetoric by the Kremlin over the conflict in Georgia was responsible for 40 percent of the stock market's drop in August.
Lukoil, Alfa
OAO Lukoil Chief Executive Officer Vagit Alekperov, 58, saw his 20 percent stake in Russia's second-biggest oil producer decline to $7.2 billion from $19.5 billion. The fortune of Alekperov deputy Leonid Fedun, 52, declined to $3 billion from $8.4 billion. Both men have said they will continue to buy more Lukoil shares.
Dmitry Rybolovlev, 41, who controls OAO Uralkali and owns 20 percent of OAO Silvinit, the country's only potash producers, lost about $12.8 billion, leaving him with $4.1 billion.
Alfa Group partners Mikhail Fridman, 44, German Khan, 46, and Alexei Kousmichoff, 45, ranked seventh, 10th and 17th, respectively, lost at least a combined $12.1 billion.
Alfa's shareholdings include BP Plc's Russian oil venture TNK-BP, mobile-phone operators OAO VimpelCom and Turkey's Turkcell Iletisim Hizmetleri AS, supermarket chain X5 Retail Group and television broadcaster CTC Media Inc.
Spokespeople for companies including Deripaska's Basic Element, Evraz, Nikolai Tsvetkov's UralSib Financial Corp. and Rybolovlev's Uralkali declined to comment on the losses.
Cashing Out
At least one of Russia's wealthiest got out in time.
Mikhail Prokhorov, 43, sold his 25 percent stake in OAO GMK Norilsk Nickel to Deripaska's Rusal for an undisclosed amount in April, just before nickel prices began to slump. The value of that stake plummeted from $13 billion on April 24 to $3.38 billion on Oct. 6.
Prokhorov received $7 billion in cash as part of the Norilsk transaction, the Kommersant and Vedomosti newspapers reported then, citing unidentified people familiar with the deal.
``Are you criticizing me for feasting amid the Black Death,'' Prokhorov joked with reporters in Moscow on Sept. 30, after buying half of Renaissance Capital for $500 million. That was less than a quarter of the value the investment bank had a year ago when VTB Group sought to take it over, according to a Vedemosti report. ``Crisis time is a peak for opportunities,'' Prokhorov said. ``An absolute peak.''
Trading Delayed
Russia's Micex and RTS stock exchanges delayed the opening of trading today on orders of the market regulator. It was unclear when trading would start, a spokesman for Micex said. The RTS won't resume stock trading until ``further notice,'' the bourse wrote in an e-mailed statement.
``You can now buy the free float of the entire Russian energy sector with the market cap of Coca-Cola, and still have change to buy all the Russian banks,'' Merrill Lynch & Co. emerging markets equity strategist Michael Hartnett said in a note to clients today.
The unprecedented loss of wealth may set the stage for a new round of asset redistribution, said Pavel Teplukhin, president of Troika Dialog Asset Management in Moscow.
``We've seen quite a significant inflow of fresh money by our wealthy individuals to acquire at these very attractive levels that we haven't seen since 2003, 2004,'' Teplukhin said in a Bloomberg Television interview on Oct. 9, a day the Micex Index climbed 9.8 percent.
Next Round
The next round of wealth building may be the most intense yet, according to Renaissance Capital. The first came between 1995 and 1998 as Russia's first president, the late Boris Yeltsin, agreed to sell stakes in the nation's biggest industrial assets in return for loans from bankers including Potanin, who helped organize the state bailout.
``It will be a game with bigger stakes than in early 1990s privatizations and the redistribution after the 1998 crisis,'' said David Aserkoff, chief strategist for Russia at Moscow-based Renaissance Capital.
``Oligarchs with cash will be able to use their knowledge of the business and political landscape to find the next billions,'' Aserkoff said in a research report on Oct. 6.
``The market will grow back,'' billionaire Viktor Vekselberg, 51, one of BP Plc's four partners in oil company TNK-BP and founder of Renova Group, told reporters yesterday. ``The only issue is when. I don't think it will be soon.''
To contact the reporters on this story: Yuriy Humber in Moscow at yhumber@bloomberg.net; Greg Walters in Moscow gwalters1@bloomberg.net; Maria Kolesnikova in Moscow at mkolesnikova@bloomberg.net. Last Updated: October 10, 2008 05:44 EDT
Thursday, October 9, 2008
Relief
Maybe i'm crazy, but i feel better now than before. I was on the trading floor in the crash of 87, and life didn't change a whole lot. (not that i don't think this is a LOT bigger deal). I don't want to link all this, but i feel better because
- the air is finally coming out of the equity bubble.
- the air is coming out of the income disparity bubble
- paulson is getting the message of the right way to use the 700 billion
- he seems to have the authority to do so
- europe is in worse shape than us, leveraged more and it is all a game of relative
- oil is down.....oil is down....oil is down.... that is so good for business in america
- income for the oil producing economies is down
- depression hurts china more than us (i have nothing to back this up but instinct)
Hubby is mortified that his 401k is down. All asset classes are getting re-evaluated. No one could really predict which ones come out on top, so to a great extent it's really random where you're standing right now.
Obama is probably going to end up being the best man for his time. Read something that he is in negotiations for a half hour block of time. That's perfect. Reassure a worried nation. He's very smart and style may matter more than substance for the next 4 years. Substance will be all around him.
Obama might win. We might have control of all three branches.
The opportunities are insane.
Remember to Breathe
The dow at 8579. Between the hedge funds liquidating, the cds swaps trying to settle, a lack of shorts in the market to cover, a lack of traders willing to trade, (Does anyone else wonder what all those masters of the universe at the investment banking trading desks are doing these days? They have to be exhausted, not to mention the strain of wondering if you have a job, who you work for, whether or not your cash is in insured deposits...) that last little drop was a doozy.
Thursday, September 25, 2008
Unwinding
So, the POTUS has gone on national television and described unspeakable (literally unspeakable) horrors that are going to come down the pike if we don't hand 700 billion to wall street but the american public (to their credit) are not buying it. In an election year, no less, only 7% of americans polled support the bailout. Oh, yea, congress is going to pass this and go face their constituents!
Of little note in the economic blogosphere (which, imho, has been very instrumental in rallying the public to scream, kick, yell and fight this within an inch of their lives) is this from bloomberg:
http://bloomberg.com/apps/news?pid=20601110&sid=a3PO453H_A58
Of little note in the economic blogosphere (which, imho, has been very instrumental in rallying the public to scream, kick, yell and fight this within an inch of their lives) is this from bloomberg:
http://bloomberg.com/apps/news?pid=20601110&sid=a3PO453H_A58
Sept. 25 (Bloomberg) -- Credit-default swap dealers reduced outstanding contracts for the first time amid efforts to cut risk by cleaning up the derivatives market. The volume of trades in the worldwide market fell to $54.6 trillion from $62 trillion in the first half, the International Swaps and Derivatives Association said in a statement yesterday. It was the first decline since New York-based ISDA started surveying traders seven years ago.
That's a pretty big drop, suggesting to me that the POTUS may not have been talking to us, but them.
Sunday, September 21, 2008
A Day of Mourning
700 billion with absolutely no, (i know you don't believe me, so i'll repeat it, louder, NO) oversight. Here's the text:
2.5 billion to the terrorists at lehman who are now holding us for ransom because no one understands their complicated bs but them.
cohen is one of my heroes, as is kris (freedom's just another word for nothing left to lose.) Cohen is currently trying to recoup from theivery so i bet he won't mind if i quote his words in full:
Everybody Knows
by Leonard Cohen
Everybody knows that the dice are loaded
Everybody rolls with their fingers crossed
Everybody knows that the war is over
Everybody knows the good guys lost
Everybody knows the fight was fixed
The poor stay poor, the rich get rich
That's how it goes
Everybody knows
Everybody knows that the boat is leaking
Everybody knows that the captain lied
Everybody got this broken feeling
Like their father or their dog just died
Everybody talking to their pockets
Everybody wants a box of chocolates
And a long stem rose
Everybody knows
Everybody knows that you love me baby
Everybody knows that you really do
Everybody knows that you've been faithful
Ah give or take a night or two
Everybody knows you've been discreet
But there were so many people you just had to meet
Without your clothes
And everybody knows
Everybody knows, everybody knows
That's how it goesEverybody knows
Everybody knows, everybody knows
That's how it goesEverybody knows
And everybody knows that it's now or never
Everybody knows that it's me or you
And everybody knows that you live forever
Ah when you've done a line or two
Everybody knows the deal is rotten
Old Black Joe's still pickin' cotton
For your ribbons and bows
And everybody knows
And everybody knows that the Plague is coming
Everybody knows that it's moving fast
Everybody knows that the naked man and woman
Are just a shining artifact of the past
Everybody knows the scene is dead
But there's gonna be a meter on your bed
That will disclose
What everybody knows
And everybody knows that you're in trouble
Everybody knows what you've been through
From the bloody cross on top of Calvary
To the beach of Malibu
Everybody knows it's coming apart
Take one last look at this Sacred HeartBefore it blows
And everybody knows
Everybody knows, everybody knows
That's how it goes
Everybody knows
Oh everybody knows, everybody knows
That's how it goes
Everybody knows
Everybody knows
Sec. 8. Review. Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
2.5 billion to the terrorists at lehman who are now holding us for ransom because no one understands their complicated bs but them.
cohen is one of my heroes, as is kris (freedom's just another word for nothing left to lose.) Cohen is currently trying to recoup from theivery so i bet he won't mind if i quote his words in full:
Everybody Knows
by Leonard Cohen
Everybody knows that the dice are loaded
Everybody rolls with their fingers crossed
Everybody knows that the war is over
Everybody knows the good guys lost
Everybody knows the fight was fixed
The poor stay poor, the rich get rich
That's how it goes
Everybody knows
Everybody knows that the boat is leaking
Everybody knows that the captain lied
Everybody got this broken feeling
Like their father or their dog just died
Everybody talking to their pockets
Everybody wants a box of chocolates
And a long stem rose
Everybody knows
Everybody knows that you love me baby
Everybody knows that you really do
Everybody knows that you've been faithful
Ah give or take a night or two
Everybody knows you've been discreet
But there were so many people you just had to meet
Without your clothes
And everybody knows
Everybody knows, everybody knows
That's how it goesEverybody knows
Everybody knows, everybody knows
That's how it goesEverybody knows
And everybody knows that it's now or never
Everybody knows that it's me or you
And everybody knows that you live forever
Ah when you've done a line or two
Everybody knows the deal is rotten
Old Black Joe's still pickin' cotton
For your ribbons and bows
And everybody knows
And everybody knows that the Plague is coming
Everybody knows that it's moving fast
Everybody knows that the naked man and woman
Are just a shining artifact of the past
Everybody knows the scene is dead
But there's gonna be a meter on your bed
That will disclose
What everybody knows
And everybody knows that you're in trouble
Everybody knows what you've been through
From the bloody cross on top of Calvary
To the beach of Malibu
Everybody knows it's coming apart
Take one last look at this Sacred HeartBefore it blows
And everybody knows
Everybody knows, everybody knows
That's how it goes
Everybody knows
Oh everybody knows, everybody knows
That's how it goes
Everybody knows
Everybody knows
Tuesday, September 16, 2008
It's a New World
This is the war of our generation.
I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.
Thomas Jefferson, Letter to the Secretary of the Treasury Albert Gallatin (1802)3rd president of US (1743 - 1826)
As the world scrambles to err on the side of caution, protect the financial system, sacrifice our children to these banker-pigs, we need to hold hands, take a deep breath and treat this like any other natural disaster. We will be fine.
Bankers won't.
Err on the side of caution? What if the revolutionaries felt that way? What about Lincoln?
Americans are woefully unprepared for this, but nothing is going to convince them to include money and economics in the curriculum faster than this mess. We have to get up to speed.
I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.
Thomas Jefferson, Letter to the Secretary of the Treasury Albert Gallatin (1802)3rd president of US (1743 - 1826)
As the world scrambles to err on the side of caution, protect the financial system, sacrifice our children to these banker-pigs, we need to hold hands, take a deep breath and treat this like any other natural disaster. We will be fine.
Bankers won't.
Err on the side of caution? What if the revolutionaries felt that way? What about Lincoln?
Americans are woefully unprepared for this, but nothing is going to convince them to include money and economics in the curriculum faster than this mess. We have to get up to speed.
Thursday, September 11, 2008
A Day Unlike Any Other Day
At least the sky is grey. Almost no one who lives in the shadows of the towers can ignore this day with a deep blue sky.
Watching Lehman go down fills me with such sadness. I was there when Shearson/Amex bought our firm back in the early 80's. A long, rich tradition, shattered with the closing of the books. At the time of the merger, all of Lehman's windows on the trading floor were boarded shut. The rumour was that Lou Glucksman had read that withholding natural light would make us more aggressive. As it began to sink in that regime change was imminent, salesman and traders started to tear down the boards and let the light in. I'll never forget the image of watching Lou's henchmen (like Mr. Fuld) rushing around to put them back up, disoriented in the wake of the tidal wave of change.
And now Mr. Fuld will shutter the firm, after a run that left him the longest-running CEO on wall street.
More upsetting is watching the destruction of our country. A blog i've been following reports:
I was briefed on the proposed US financial reforms which will be shoved through with minimal review. Short version is that the Fed wins an explicit "financial stability" role which gives it powers and secrecy to do pretty well whatever Tim Geithner chooses to do for his capitalist crony clientele. The role will include comprehensive, global data collection which will give the Fed visibility of all open positions. In the wrong hands, this insight could be used to selectively induce volatility and margin calls which would selectively hurt some and advantage others. That could help the Fed's friends over time.The FDIC will be stripped of financial supervision and prudential intervention powers in favour of the Fed. That makes the Fed totally unreviewable and unchallenged by other authority in the USA.Additionally, the SEC will be forcibly reformed to be more like the CFTC - a service entity for the interests of those who pay good money for bad regulators. Instead of fixed rules, SEC regulation will become "principles based" which will mean that no one is ever held accountable for breaking the law unless they have done something to break the code of omerta and anger their peers.Federal law and regulation will pre-empt all state laws, and states attorney generals will be stripped of authority to investigate or sue. That means no more inconvenient Elliot Spitzers to get in the way of Wall Street excess.This may not meet Professor Roubini's recommendations, but the deal is going through with little review so far because the cries for reform are only going to be met with this one pre-agreed proposal. After all, who in Washington or Wall Street would ever suggest that Geithner, Bernanke and Paulson didn't have the best interests of American and global investors at heart?
Written by London Banker on 2008-09-11 10:27:14
Watching Lehman go down fills me with such sadness. I was there when Shearson/Amex bought our firm back in the early 80's. A long, rich tradition, shattered with the closing of the books. At the time of the merger, all of Lehman's windows on the trading floor were boarded shut. The rumour was that Lou Glucksman had read that withholding natural light would make us more aggressive. As it began to sink in that regime change was imminent, salesman and traders started to tear down the boards and let the light in. I'll never forget the image of watching Lou's henchmen (like Mr. Fuld) rushing around to put them back up, disoriented in the wake of the tidal wave of change.
And now Mr. Fuld will shutter the firm, after a run that left him the longest-running CEO on wall street.
More upsetting is watching the destruction of our country. A blog i've been following reports:
I was briefed on the proposed US financial reforms which will be shoved through with minimal review. Short version is that the Fed wins an explicit "financial stability" role which gives it powers and secrecy to do pretty well whatever Tim Geithner chooses to do for his capitalist crony clientele. The role will include comprehensive, global data collection which will give the Fed visibility of all open positions. In the wrong hands, this insight could be used to selectively induce volatility and margin calls which would selectively hurt some and advantage others. That could help the Fed's friends over time.The FDIC will be stripped of financial supervision and prudential intervention powers in favour of the Fed. That makes the Fed totally unreviewable and unchallenged by other authority in the USA.Additionally, the SEC will be forcibly reformed to be more like the CFTC - a service entity for the interests of those who pay good money for bad regulators. Instead of fixed rules, SEC regulation will become "principles based" which will mean that no one is ever held accountable for breaking the law unless they have done something to break the code of omerta and anger their peers.Federal law and regulation will pre-empt all state laws, and states attorney generals will be stripped of authority to investigate or sue. That means no more inconvenient Elliot Spitzers to get in the way of Wall Street excess.This may not meet Professor Roubini's recommendations, but the deal is going through with little review so far because the cries for reform are only going to be met with this one pre-agreed proposal. After all, who in Washington or Wall Street would ever suggest that Geithner, Bernanke and Paulson didn't have the best interests of American and global investors at heart?
Written by London Banker on 2008-09-11 10:27:14
Tuesday, September 9, 2008
In this interview by Charlie Rose
http://calculatedrisk.blogspot.com/2008/09/charlie-rose-fannie-and-freddie.html
Charlie Rose asks Roubini what should we be talking about and what should we be doing. One of the things that Roubini talked about was 'jingle mail' and he said that at some point 40% of all people with a mortgage will be under water.
One thing that is getting missed is that people who are stable stay in their homes even when they are underwater. They aren't 'walking away' because they think it's fun. The reason that the number is so scary is because those people have very limited options WHEN THINGS GO WRONG.
If there is a job loss, health crisis, divorce, selling the house as a way to ease the strains is no longer an option, and at that point they walk away.
What should we be doing? Reducing the strains on american workers. How?
Universal health care. We are putting billions upon trillions propping up financial entities. We could be taking a HUGE monkey off of everyone's back in this one move.
Tuition relief. Make a peace corp program or something, but get the stress of college costs off of our backs.
Credit relief. Put an instant max of 12 or 13% on credit cards. Let the chips fall.
do these things and put the american worker on more solid footing and he/she will spend again.
http://calculatedrisk.blogspot.com/2008/09/charlie-rose-fannie-and-freddie.html
Charlie Rose asks Roubini what should we be talking about and what should we be doing. One of the things that Roubini talked about was 'jingle mail' and he said that at some point 40% of all people with a mortgage will be under water.
One thing that is getting missed is that people who are stable stay in their homes even when they are underwater. They aren't 'walking away' because they think it's fun. The reason that the number is so scary is because those people have very limited options WHEN THINGS GO WRONG.
If there is a job loss, health crisis, divorce, selling the house as a way to ease the strains is no longer an option, and at that point they walk away.
What should we be doing? Reducing the strains on american workers. How?
Universal health care. We are putting billions upon trillions propping up financial entities. We could be taking a HUGE monkey off of everyone's back in this one move.
Tuition relief. Make a peace corp program or something, but get the stress of college costs off of our backs.
Credit relief. Put an instant max of 12 or 13% on credit cards. Let the chips fall.
do these things and put the american worker on more solid footing and he/she will spend again.
Friday, September 5, 2008
On the Responsibilities of Lenders
HUDSON. Bad loan managers were facilitated by repeal of the Glass-Steagall Act. Bad management has been built into the conflict of interest that goes hand in hand with vertical integration of the banks, brokerage houses, Wall Street and mortgage lenders. You find this particularly in Citibank and Countrywide Financial. The October 2007 Columbia Journalism Review includes an article, “A Tale of Two Citis,” that describes how Sandy Weill built his empire on subprime lending. Much of the research was done by Michael Hudson of the Wall Street Journal (not me, a different Michael Hudson). In his article “Banking on Misery: Citigroup, Wall Street, and the Fleecing of the South,” he describes how the banks found it in their interest to
have affiliates that wrote mortgages way beyond the ability of borrowers to pay, because they knew they could turn around and sell these mortgages to someone else and avoid liability. Nobody knows who is liable for the defaults. Is it the current mortgage holder? Is it the mortgage originator? Is it the mortgage brokers who are now going out of business and therefore can’t be held liable? All of this is going to take a long time in the courts.
ACRES U.S.A. Is there a remedy for this situation?
HUDSON. I’ll describe one solution I think is a good one. This approach was prevalent in New York State, where I live, before the American Revolution, and it’s a law that is still on the books here — the law of fraudulent conveyance. Around the time of the Revolution, a lot of New York farmers borrowed from British lenders who would come over, make a loan to a farmer far in excess of the normal ability to pay, and then, just before the crop was harvested, just before the farmer had liquidity, they would call in the loan, that is, demand that it be paid. The farmer
couldn’t pay because he hadn’t sold his crop yet or because the loan was too big to begin with, and the British creditor would foreclose. To stop this practice, New York State passed the law of fraudulent conveyance, which said that if a creditor makes a loan to a borrower without having any idea how the borrower can repay the loan, then that loan is nullified. That law is still on the books, as I mentioned, and it was often brought up in court in the 1980s, when corporate raiders would load down companies with corporate debt. If this law were implemented nationwide, it would apply to subprime borrowers and other borrowers who signed loan agreements far in excess of what they could pay, once the teaser interest rates adjusted to much higher levels.
Debtor Nation
The Hijacking of America’s Economy
http://www.michael-hudson.com/
have affiliates that wrote mortgages way beyond the ability of borrowers to pay, because they knew they could turn around and sell these mortgages to someone else and avoid liability. Nobody knows who is liable for the defaults. Is it the current mortgage holder? Is it the mortgage originator? Is it the mortgage brokers who are now going out of business and therefore can’t be held liable? All of this is going to take a long time in the courts.
ACRES U.S.A. Is there a remedy for this situation?
HUDSON. I’ll describe one solution I think is a good one. This approach was prevalent in New York State, where I live, before the American Revolution, and it’s a law that is still on the books here — the law of fraudulent conveyance. Around the time of the Revolution, a lot of New York farmers borrowed from British lenders who would come over, make a loan to a farmer far in excess of the normal ability to pay, and then, just before the crop was harvested, just before the farmer had liquidity, they would call in the loan, that is, demand that it be paid. The farmer
couldn’t pay because he hadn’t sold his crop yet or because the loan was too big to begin with, and the British creditor would foreclose. To stop this practice, New York State passed the law of fraudulent conveyance, which said that if a creditor makes a loan to a borrower without having any idea how the borrower can repay the loan, then that loan is nullified. That law is still on the books, as I mentioned, and it was often brought up in court in the 1980s, when corporate raiders would load down companies with corporate debt. If this law were implemented nationwide, it would apply to subprime borrowers and other borrowers who signed loan agreements far in excess of what they could pay, once the teaser interest rates adjusted to much higher levels.
Debtor Nation
The Hijacking of America’s Economy
http://www.michael-hudson.com/
Soros on bubbles
http://www.nybooks.com/articles/21792
"Some are suggesting that margin requirements for commodity transactions should be raised. Margin rules determine how much in cash or Treasury bills must be deposited when buying or selling a contract. An increase in margin requirements would have no effect on the commodity index buying strategies of ERISA institutions because the transactions are in cash, not on credit. But such an increase could discourage speculation by investors other than financial institutions. Varying the margin requirements and minimum reserve requirements for loans by financial institutions are tools that ought to be used more actively, as market conditions warrant, in order to prevent asset bubbles from inflating further. That is one of the main lessons to be learned from the recent financial crisis."
This is an idea that needs more exploration. I would argue that we DID use margin requirements actively, to PROMOTE the bubble. When we allowed downpayments to get to zero, and then allowed debt to income ratios to get really high, we basically lowered the margin requirements on the real estate market dramatically. Fundamentally, that is the root cause of this crisis. No one can make the margin calls. (i.e., pay off their mortgages.)
"Some are suggesting that margin requirements for commodity transactions should be raised. Margin rules determine how much in cash or Treasury bills must be deposited when buying or selling a contract. An increase in margin requirements would have no effect on the commodity index buying strategies of ERISA institutions because the transactions are in cash, not on credit. But such an increase could discourage speculation by investors other than financial institutions. Varying the margin requirements and minimum reserve requirements for loans by financial institutions are tools that ought to be used more actively, as market conditions warrant, in order to prevent asset bubbles from inflating further. That is one of the main lessons to be learned from the recent financial crisis."
This is an idea that needs more exploration. I would argue that we DID use margin requirements actively, to PROMOTE the bubble. When we allowed downpayments to get to zero, and then allowed debt to income ratios to get really high, we basically lowered the margin requirements on the real estate market dramatically. Fundamentally, that is the root cause of this crisis. No one can make the margin calls. (i.e., pay off their mortgages.)
Here Are Five Things Republicans Won't Tell You: Caroline Baum
Commentary by Caroline Baum
"4. Reality of Bush tax cuts underperformed theory.
President Bush reduced the top marginal tax rate to 35 percent from 39.6 percent and cut the rate on long-term capital gains and dividends to 15 percent. Such ``supply-side'' tax cuts are touted as an incentive to work, save and invest.
Oops. Saving and investment were ``anemic'' during the Bush years, according to Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago.
The plunge in the personal savings rate to a post-World War II low of zero during the Bush years coincided with a decline in the labor participation rate, Kasriel says.
Business investment seems to have missed the tax-cut incentive as well.
``The only time the net stock of nonresidential fixed assets grew slower than in recent years'' was when Poppy Bush was president, Kasriel says. "
http://bloomberg.com/apps/news?pid=20601039&sid=a33YVKQ7OoaU&refer=home
Commentary by Caroline Baum
"4. Reality of Bush tax cuts underperformed theory.
President Bush reduced the top marginal tax rate to 35 percent from 39.6 percent and cut the rate on long-term capital gains and dividends to 15 percent. Such ``supply-side'' tax cuts are touted as an incentive to work, save and invest.
Oops. Saving and investment were ``anemic'' during the Bush years, according to Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago.
The plunge in the personal savings rate to a post-World War II low of zero during the Bush years coincided with a decline in the labor participation rate, Kasriel says.
Business investment seems to have missed the tax-cut incentive as well.
``The only time the net stock of nonresidential fixed assets grew slower than in recent years'' was when Poppy Bush was president, Kasriel says. "
http://bloomberg.com/apps/news?pid=20601039&sid=a33YVKQ7OoaU&refer=home
Money for oil
Do we really want to be independent of foreign oil? It occurs to me that all we are giving the mideast for a valuable resource like energy is dollars. Dollars come and dollars go. Oil gets hot.
Wednesday, September 3, 2008
The two-step crisis
One of the things that is very confusing about this crisis is that it is at least a two-edged sword. The first edge is the huge bubble created in the housing market. People who live in california, or florida or las vegas have visible evidence of this every day and can see the devastation all around them.
In my neighborhood, though, we didn't have land to build, so there are no new developments, no new houses. Turnover is relatively slow, so we don't have a lot of people who bought/built in the last couple of years, borrowing bubble-amounts of money that they can no longer pay back. Most people have been in their houses for at least 5 years, if not 15 or 20 (or 25, like me). Unless they pushed home equity loans to the max, the falling of housing prices simply means that they will make LESS on their investment than they thought, a disquieting thought, but not terrifying.
People in my neighborhood, unless some crisis presents itself, have no real reason to sell, and can afford to tell themselves that the market will improve, and so they will wait.
It's an uneasy quiet. It's astounding how few sales one can find on zillow. In a town of nearly 8000 homes, zillow shows that 6 or 7 have sold in the last couple of months. Those sold at reasonably high prices, so our politicians and such are all patting themselves on the back like they have averted all the troubles.
The real mortgage crisis will hit us in the second wave. The fact that seems to be missing from much of the analysis is that the BANKS have all gone national and their lending was heavily concentrated in the go-go areas of california, nevada and florida for the last couple of years. Even worse, as the market got saturated and competition got stiff, more and more of them found ways to get around the inconvenience of finding a buyer for the mortgages they were creating and kept them on their balance sheets (or so barely off their balance sheets that they are quickly finding their way back home.)
The BANKS are insolvent. They are hemming and hawing and such, but bottom line is that their assets are less than their liabilities. They were so leveraged that a crisis less than this one could have brought them down, but this crisis is so big that there isn't anyone out there big enough to prop them up.
That leaves no one to lend, and that is when we will begin to see the crisis hit us. When someone finally does need to sell, the pool of likely buyers has been greatly reduced by tighter lending standards, requiring bigger downpayments and higher incomes.
This credit crunch will take no prisoners.
In my neighborhood, though, we didn't have land to build, so there are no new developments, no new houses. Turnover is relatively slow, so we don't have a lot of people who bought/built in the last couple of years, borrowing bubble-amounts of money that they can no longer pay back. Most people have been in their houses for at least 5 years, if not 15 or 20 (or 25, like me). Unless they pushed home equity loans to the max, the falling of housing prices simply means that they will make LESS on their investment than they thought, a disquieting thought, but not terrifying.
People in my neighborhood, unless some crisis presents itself, have no real reason to sell, and can afford to tell themselves that the market will improve, and so they will wait.
It's an uneasy quiet. It's astounding how few sales one can find on zillow. In a town of nearly 8000 homes, zillow shows that 6 or 7 have sold in the last couple of months. Those sold at reasonably high prices, so our politicians and such are all patting themselves on the back like they have averted all the troubles.
The real mortgage crisis will hit us in the second wave. The fact that seems to be missing from much of the analysis is that the BANKS have all gone national and their lending was heavily concentrated in the go-go areas of california, nevada and florida for the last couple of years. Even worse, as the market got saturated and competition got stiff, more and more of them found ways to get around the inconvenience of finding a buyer for the mortgages they were creating and kept them on their balance sheets (or so barely off their balance sheets that they are quickly finding their way back home.)
The BANKS are insolvent. They are hemming and hawing and such, but bottom line is that their assets are less than their liabilities. They were so leveraged that a crisis less than this one could have brought them down, but this crisis is so big that there isn't anyone out there big enough to prop them up.
That leaves no one to lend, and that is when we will begin to see the crisis hit us. When someone finally does need to sell, the pool of likely buyers has been greatly reduced by tighter lending standards, requiring bigger downpayments and higher incomes.
This credit crunch will take no prisoners.
Wednesday, August 27, 2008
Real Estate is in Everything
The lesson I learned from the 70's (although i was a mere wisp then) was that OIL IS IN EVERYTHING. As we watched prices skyrocket and the redistribution of wealth take off at a breathless pace, we realized oil was in everything we ate, drank, read or did.
The first decade of the 21st century (whatever we end up calling it) is going to teach us that REAL ESTATE IS IN EVERYTHING.
It's in your pizza, your haircut, your taxes, and your schools. The cost of everything flies to cover the costs of renting (or buying) at every stage of the process. We have found ourselves consigned to shop in huge boxes in inhospitable locations in order to flee this hidden tax. (IKEA sitting out next to the Newark Airport would seem to be the pinnacle of this phenomenon.)
Prices coming down will make us all winners, particularly our kids.
The first decade of the 21st century (whatever we end up calling it) is going to teach us that REAL ESTATE IS IN EVERYTHING.
It's in your pizza, your haircut, your taxes, and your schools. The cost of everything flies to cover the costs of renting (or buying) at every stage of the process. We have found ourselves consigned to shop in huge boxes in inhospitable locations in order to flee this hidden tax. (IKEA sitting out next to the Newark Airport would seem to be the pinnacle of this phenomenon.)
Prices coming down will make us all winners, particularly our kids.
Winners and Losers 2
So, everybody thinks that the people that are losing their homes in the mortgage mess are the big losers. But I read about a guy moving out of his home into a rental, reducing his monthly payments from 3600 a month to 1200 a month. As a renter, he is buffered, somewhat, by the ratcheting property taxes, the over-the-top maintenance expences and possibly even the utility costs of heat.
Sounds really rough. I bet, after the initial shock wears off, that guy feels like the burdens of the world have been lifted.
But what about the guys making the big bucks lately? Dick Fuld, Jimmy Cayne? That much money isn't under anybody's mattress. So where was it?
Stock (in their own company) way down
Housing (they are all in 3-5 million homes...cayne bought in manhattan for 28 million or something) wayy down.
Stock market? Down
Bond market? OUch
Remind me again, who is the loser here?
Sounds really rough. I bet, after the initial shock wears off, that guy feels like the burdens of the world have been lifted.
But what about the guys making the big bucks lately? Dick Fuld, Jimmy Cayne? That much money isn't under anybody's mattress. So where was it?
Stock (in their own company) way down
Housing (they are all in 3-5 million homes...cayne bought in manhattan for 28 million or something) wayy down.
Stock market? Down
Bond market? OUch
Remind me again, who is the loser here?
Winners & Losers
The most counterintuitive thing about this whole credit crisis is figuring out who wins and who loses.
It occured to me, as i pondered the growth in exports from a company like cummins, who apparently produces high powered engines for big trucks and whose products are in demand overseas, sitting in Columbus, Ohio using an american labor force. I'm thinking that the investment in that factory and the knowhow to do what they do is probably substantial, the demand for their products integral to the growth of economies around the world, and that they would be one of the winners in this mess.
We've talked a lot about china, and the cheap products that they create for the us market. Those factories, too required substantial investment, organization of their labor force, setting up supply chains, etc. As their economy weakens, the downside of fast growth could be seriously disruptive.
So maybe americans have some hope after all. We've been struggling (and i bet cummins execs are not earning the big salaries of the wall street titans) to build legitimate companies while struggling to attract capital while hot money was dazzled by the short term profits of creating junk and selling it for too much money.
So china has factories that are set up to produce things nobody needs and we have factories built to make complex engines that are mission critical to building infrastructure.
Score one for us.
It occured to me, as i pondered the growth in exports from a company like cummins, who apparently produces high powered engines for big trucks and whose products are in demand overseas, sitting in Columbus, Ohio using an american labor force. I'm thinking that the investment in that factory and the knowhow to do what they do is probably substantial, the demand for their products integral to the growth of economies around the world, and that they would be one of the winners in this mess.
We've talked a lot about china, and the cheap products that they create for the us market. Those factories, too required substantial investment, organization of their labor force, setting up supply chains, etc. As their economy weakens, the downside of fast growth could be seriously disruptive.
So maybe americans have some hope after all. We've been struggling (and i bet cummins execs are not earning the big salaries of the wall street titans) to build legitimate companies while struggling to attract capital while hot money was dazzled by the short term profits of creating junk and selling it for too much money.
So china has factories that are set up to produce things nobody needs and we have factories built to make complex engines that are mission critical to building infrastructure.
Score one for us.
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