Book Review: Confessions of a Subprime Lender
Interesting looking book flagged by the WSJ, called Confessions of a Subprime Lender.
The story is told by Richard Bitner, who founded his own subprime mortgage company right as the industry was taking off. Over five years, the company boomed.
Confessions of a Subprime Lender is his insider story -- disillusionment, fraud, greed, ignorance. A year after he gets out and leaves the industry, sub-prime imploded.
From the publisher: "Woven throughout his personal industry experiences is the fascinating story of how an industry started out helping disadvantaged customers buy houses, but soon lost its way due to greed, lack of financial control, and willful ignorance. This book reveals the truth about how various parts of the mortgage business yielded to the temptation to maximize profits, weakening the chain that held the system together."
The book covers:
Why nearly three out of every four mortgages were misleading or fraudulent;
How unscrupulous brokers tricked lenders and gullible borrowers;
How brokers and lenders turned unqualified applicants into "qualified borrowers";
Why Wall Street and the rating agencies are largely to blame for the collapse;
Funny, nothing mentioned in the book about Predatory Borrowing.
"Bitner's thorough review of the subprime lending industry provides a behind-the-scenes look at the mortgage mess. From the broker on Main Street to the investor on Wall Street, it's an unabridged version of what went wrong and how it needs to be fixed." —Bill Dallas, founder, First Franklin Mortgage, one of America's largest subprime lenders, before it collapsed
"This is an in-depth, eye-opening examination of the problems impacting the housing and mortgage markets." —Matthew McIntyre, CEO, Puritan Financial Group, Inc.
This is definitely on my shortlist of Housing books to read . . .
Confessions of a Subprime Lender
Wiley, 186 pages, $19.95
Money for Nothing
JAMES R. HAGERTY
WSJ June 25, 2008; Page A13
Lehman Brothers $20 Price Target Complete
Lehman closed at $19.81, and is now at an eight year low on "Take-under" speculation. CIT is $6.81, about 32% below the June 3rd call.
At the time, we put a $20 price target on Lehman, and warned against owning CIT. LEH is since down 41.4+%; CIT is down 28.77%.
I rarely use the blog to promote our Quant tool, but damn, if you missed this one, you left a lot of money on the table. I am reiterating these two calls because they were such jumbo winners -- 30% in less than a month. If you haven't tried the tool you are missing out on an enormous moneymaker.
Why the Disconnect: Population vs Pros, part II
As per our earlier discussion: We know health care costs have skyrocketed, that education costs are through the roof, and that Housing doubled over 7 years and has since fallen modestly from those levels (about 15-20%).
Then there are the commodities: Let's look at a few data points, to see who is less in touch with reality: The gloomy populace, or its Economists:
Goldman Sachs Commodity Index (1978-2008)
Source: Philidelphia Fed
On an unrelated note, the latest version of Excel for Mac is stripping the dates from the second chart -- I fixed it, but I have no idea how -- any suggestions ?
Here is the Philly Fed file Download inflation.xlsx:
Who Killed Bear Stearns?
"At Phi Kappa Wall Street, most of the frat boys are instantly recognizable. There’s the big, backslapping Irishman, Merrill Lynch, the humorless grind, Goldman Sachs, and the straitlaced rich kid, Morgan Stanley. And then, off in the corner, wearing its beat-up leather jacket and nursing a cigarette, was the tough-guy loner, scrawny Bear Stearns, who disdained secret handshakes and towel snapping in favor of an extended middle finger toward pretty much everyone. Bear was bridge-and-tunnel and proud of it. Since the days when the Goldmans and Morgans cared mostly about hiring young men from the best families and schools, “the Bear,” as old-timers still call it, cared about one thing and one thing only: making money. Brooklyn, Queens, or Poughkeepsie; City College, Hofstra, or Ohio State; Jew or Gentile—it didn’t matter where you came from; if you could make money on the trading floor, Bear Stearns was the place for you. Its longtime chairman Alan “Ace” Greenberg even coined a name for his motley hires: P.S.D.’s, for poor, smart, and a deep desire to get rich.
Bear Stearns was an investment bank, but the traditional banking roles, such as advising on corporate mergers and trading stocks, were always an afterthought there. What the P.S.D.’s at Bear Stearns did best was trade bonds. The firm’s executive history was the story of three bond traders, each with his own outsize personality. From the mid-1930s till the late 1970s, Bear was the province of Salim “Cy” Lewis, the cantankerous Wall Street legend who forged a cutthroat culture run less as a modern corporation than as a series of squabbling fiefdoms, each vying for his approval. Ace Greenberg, an avuncular sort who kept his desk on the trading floor and answered his own phone, took over after Lewis’s death, in 1978, and while his edges were softer, Bear remained a Mametesque pressure cooker where top traders could pull down $10 million a year while runners-up were tossed into the alley."
The Vanity Fair piece blames everyone from shorts to CNBC to Charlie Gasparino and David Faber.
Yet bottom line remains: If your financial condition is so precarious that rumors can bring you down, then its the finances, and not the rumors, that are to blame . . .
Hat Tip: Dealbook
Bringing Down Bear Stearns
Who is Right: Professionals or the Populace ?
Portfolio has an interesting discussion on what they term the "He-Said-She-Said" economy:
"Inflation, energy, home prices, and tax rebates. Ordinary Americans and Wall Street professionals are at odds on issues like these and others at the center of the current economic malaise, according to the CNBC/Portfolio Wealth in America survey. And these differences have implications for both the Federal Reserve and this year's congressional and presidential candidates.
For example, while Wall Street forecasters predict inflation will be fairly tame in the next year, at about 2.5 percent, 71 percent of the report’s respondents think prices will rise by at least 4 percent, and 50 percent expect inflation to run at or above 6 percent.
In the past month, the Federal Reserve has been trying to put a lid on inflation expectations, culminating last week with what was seen as a benign outlook for price pressures in the statement following its monetary policy meeting. Still, Americans don't seem to be hearing that message."
I heard Steve Liesman discuss this poll on CNBC. Steve, like so many other economists, is having a hard time with this conflict. Many of the dismal scientists believe in the wisdom of crowds, but they also are somewhat compelled by training to buy into the methodologies of their profession.
When the two schools of thought are directly opposite, you end up with a form of cognitive dissonance. This has accelerated as prices continued to go higher, even with relatively modest core inflation.
I have been surprised by how many reality-based economists -- including those on the left like Professor Brad DeLong and NYT columnist Paul Krugman -- were so reluctant to embrace elevated inflation as a genuine threat. There was a bit of a circle-the-wagons mentality about economics as a discipline. That seems to have faded in the face of elevated food prices and $143 Crude Oil.
Here's a suggestion: If the professional economists' data states that inflation is contained and unemployment modest, and at the same time the population sentiment is screaming as if neither were the case, perhaps its time we consider that it might be the data, and not the population, that is the source of our dispute.
Sentiment is now at levels last seen during deep ugly recessions. Perhaps the fault lies not with us American whiners -- but with the way the data is gathered, massaged and reported.
Something else to mullover: We have "enjoyed" practically full
employment (i.e., very low unemployment levels) for several years now
-- but wage pressure has been non-existent. That seems to be unusual to
say the least.
As someone who has been skeptical about the artificially low inflation and unemployment rates for quite sometime now, the public's reaction makes a whole lot of sense. If we believe the negative sentiment of the American people, then its likely that Inflation has been much more pervasive than reported by either the top line or the core. And the same thinking likely applies to the low unemployment rate. If we judge by sentiment, perhaps its not as low as advertised. Ignoring widespread distress in the population is a recipe for major electoral changes.
Regardless of who wins in November, its time for a major rethink of the methodology behind BEA/BLS data . . .
Consumer Sentiment Hits 28 Year Lows (June 17, 2008)
Are We Too Gloomy? (June 19, 2008)
The He Said, She Said Economy
Portfolio, Jun 29 2008
Crude Oil = $143+
At a certain point, the falling dollar and runaway Oil prices are going to have to take precedence over the economy and credit crunch.
Are we getting closer to that point?
This morning, Crude touched $143.67
August Crude Oil Futures, Intraday, June 30th, 2008
click for up-to-date chart
Fed's Priority Is Likely to Be Oil-Price Shock
MARK GONGLOFF and JON HILSENRATH
WSJ, June 30, 2008; Page C1
Chinese Oil Conundrum
China's subsidized fuel prices worked miracles in the past, but because they hurt energy stocks, they are now a major policy concern.
click for video
For Chinese, the Reality of Higher Gas Prices
NYT, June 21, 2008
Should Congress Let Home Prices Fall ?
"Recent reports about falling home prices have rallied support for the plan." [Rep. Barney Frank, Democrat of Massachusetts] acknowledged that the plan may not do enough to help homeowners or the housing market. Mr. Frank, chairman of the House Financial Services Committee, said that even after a bill like this, “you may need more.”
Stark housing numbers are coloring the debate in Congress regarding the impending Housing bailout. As of the most recent data, there are more than three million borrowers in "distress" -- typically, 60 days late in mortgage payments -- and analysts forecast a couple of million more will fall behind on their payments in the coming year. Let's ballpark it as 3 million people in some stage of delinquency, default or foreclosure -- and that number may likely go to 4 - 5 million over the next 24 months.
Hence, you can understand the knee-jerk reaction of politicos who are looking to do something(anything!) so they can tell their districts why they should be re-elected. -- even if it ultimately makes the situation appreciably worse.
What I find astonishing is that Congress somehow believes they need to do something to help prop up housing prices. When it comes to free markets, the quadrennial Socialists in Washington talk a good game, but push comes to shove, they don't really believe it.
Its the same with half of the "Free-market" pundits on T.V. As long as things are going well, they want no supervision, no regulation, no interference with markets. As soon as the going gets tough, they come crawling to mummy and daddy for a bailout, begging for all sorts of FOMC and government intervention. Hypocrite is too soft a word for this ilk.
Back to Real Estate: Housing prices went ballistic thanks to the credit bubble. If you lend money to anyone regardless of their ability to repay it, you end up with enormous price distortions on that market. Home prices should be allowed to normalize on their own. This will actually be good for the economy, make housing more affordable, and speed up the process of market repair. (I'll have more on this subject later this week). The alternative -- not taking the write-downs, propping up market prices artificially -- damned Japan to a decade plus long recession.
Instead, what we get instead is a giant bailout -- a handout to borrowers who foolishly bought homes they could not afford, and an even bigger handout to banks & mortgage firms, who recklessly lent money to people who now cannot afford to pay it back. This bailout will only serve to keep prices artificially too high, and to encourage more recklessness in the future.
Via the NYT, here's the Ubiq-cerpt:™
"Those stark numbers not only illustrate the challenges for the lawmakers trying to provide some relief to their constituents but also hint at what the next administration will be facing after the election. While the proposed program would help some homeowners, analysts say it would touch only a small fraction of those in trouble — the Congressional Budget Office estimates it would be used by 400,000 borrowers — and would do little to bolster the housing market.
Other proposals that have been floated in Washington include expanding the current plan to make it mandatory instead of voluntary for certain home loans; having the government buy loans outright from lenders; and providing some way and some incentives to let homeowners become renters in their own homes.
But not everyone supports government interventions. Some Republicans, like Senators Jim DeMint of South Carolina and Jim Bunning of Kentucky, say the proposal would use government subsidies to bail out reckless lenders and borrowers. They suggest that the housing market will correct itself more quickly if Congress does not intervene.
The biggest impediment to helping homeowners is the weak economy. In addition to falling home prices and risky loans, homeowners are now confronting a tough job market. The unemployment rate has risen to 5.5 percent, up from 4.9 percent in January.
To take part in the proposed program, lenders would have to lower each debt obligation to 85 percent of the home’s current value. Borrowers would stay in their homes but would have to pay a 1.5 percent annual insurance premium. If homes’ values grow and borrowers sell or refinance, they would have to share the gain with the government.
The program would be managed by the Federal Housing Administration and paid for by the insurance premium, as well as a 3 percent fee paid by lenders and a tax on Fannie Mae and Freddie Mac, the government-sponsored buyers of mortgages. (The refinance proposal is part of a broader housing bill that would also overhaul laws relating to the two companies and the F.H.A.)"
As Housing Bill Evolves, Crisis Grows Deeper
NYT, June 29, 2008
Why Does -20% = Bear Market?
• Battered by Oil, Dow Touches Bear Territory (New York Times)
• Dow Hits Bear-Market Territory (Wall Street Journal)
• Stocks Near Bear Market Territory (U.S. News & World Report)
• US stocks post sharp weekly losses; bear market nears (MarketWatch)
• This Bear Has Sharp Claws (Barron's)
• Market ends lower, Dow on cusp of bear market (Reuters)
• Stocks Tumble Toward Bear Market On Rising Economic Concerns (Washington Post)
The latest commentary I seem to be having a hard time with is this weird obsession with minus 20%. What makes this number, as opposed to 15%, 25%, or even 36.54% special?
Consider this somewhat bizarre commentary:
Stocks fell on Friday, pushing the Dow to the brink of a bear market, hounded by concerns that record oil prices and the seemingly endless credit crisis will further damage the economy. Friday's decline built on Thursday's rout in which the Dow fell about 360 points, and rounded out its worst week since February 10.
While the blue-chip Dow average briefly dipped into bear market territory, it managed to close above that level, thus narrowly avoiding the official onset of a bear market, or a 20 percent drop from its all-time high. (emphasis added)
What is the magic about 20%?
What makes this the "official" onset of a bear market? There isn't any NBER-like group that declares an "official" bear market.
Best as I can figure, the 20% number is a not-quite-a-random number -- more than a 10% correction, less than a full blown crash (which for all we know, could be "offically" 30%).
I have no idea who first started bandying about these nice round base ten numbers -- but for whatever reason, they seem to have stuck in the public and the press' imaginations. (Anyone have a better idea where these two figures came from?)
Forget the rather squishy terminology, and consider the following economic, fundamental and technical questions:
• Is the Economy expanding or contracting? Have recent data points been improving or worsening?
• Are corporate earnings getting stronger or weaker? Where are we in the earnings cycle?
• Are stock prices generally rising or falling?
• Are market advances narrow or broad? Is the volume expanding on up days, or on down days?
• Is investor Psychology greedy or fearful?
Rather than focus on terminology, investors should be considering their risk management strategies, what they are doing to preserve capital, and how they are psychologically prepared to deal with what could be an extended downturn.
That matters a whole lot more than whether something is called a bull or bear market...
Reshaping of Wall Street
Mike Santoli on the Reshaping of a newer, smaller Wall Street:
This is based on the article in this week's cover story in Barron's, Future of the Street.
Future of the Street
BARRON'S June 30, 2008