Bank of England Allowed 'Crazy Borrowing'
"We need to develop some new instruments, which sit somewhere between interest rates, which affect the whole economy... and individual supervision and regulation of individual banks. We need to develop something which bridges that gap and directly addresses the financial cycle and prevents the financial cycle and the credit cycle getting out of hand."
This appears to be a theme:
The Bank of England was warned that "crazy borrowing" was taking place during the boom years -- but did nothing about it. Partly due to politicas, partly due to their failure to understand the severity of the problem. They did not understand how much the banks had abdicated lending standards, and how that led to a financial crisis.
Foreclosures Rise 28%
RealtyTrac released its November foreclosure numbers, and they were not pretty.
• November Foreclosure activity decreased 7% from October (the lowest level since June)
• Foreclosures up 28% from year ago levels;
• Foreclosure activity slowed in November due in part to recently enacted laws that have extended the foreclosure process in some states;
• 259,085 properties got a default notice or were warned of a pending auction or were foreclosed on last month;
See this here
Why Bailouts Attract Handout Seekers
“The biggest surprise was how quickly it went from ‘I don’t need this,’ to ‘How do I get in?
-Michele A. Davis, Treasury Department, head of public affairs
A truisim of all bailouts: Enormous amounts of taxpayer cash attracts all manner of unsavory, undeserving characters. What was supposed to be a narrow and limited attempt to reduce the systemic risk of a financial collapse has become a taxpayer funded free-for-all.
Like hyenas trying to steal the kill from a lion, the mere scent of this enormous pile of loot starts attracts the scavengers. They cannot help themselves, for it is their essence, and who they are.
Like the dreaded 17 year locust, Lobbyists too, are swarming the capital, consuming everything in their path. Never before has a trillion dollars been authorized so quickly. Never before has so much money been spent with so little oversight, controls, or transparency. Now, on top of the negligent manner in which this money has been thrown about, we have the latest jackals attracted by the scent.
Mark-to-Modified Market (the Home Game Version)
Housing prices remain elevated, inventory overhang is huge, cancellations are still rampant, credit is tight, and foreclosures are still rising. It is in this environment that several new plans to modify loans are starting to be enacted:
Fannie Mae and Freddie Mac are expected to announce plans Today to speed up the modification of hundreds of thousands of loans held by the housing finance giants. The GSEs will reduce principal or interest rates on some loans and extend the terms of others. The program is an extension of the Hope Now alliance.
The effort will target certain loans that are past due and will aim to bring the ratio of household debt to income for these borrowers down to 38%
Citigroup is contacting 500,000 homeowners with $20 billion in mortgages during the next six months. About 130,000 mortgage customers are expected to qualify.
JPMorgan Chase (and their Washington Mutual acquisition) announced plans last week to cut monthly payments by lowering interest rates and temporarily reducing loan balances for as many as 400,000 homeowners.
The Thundering Herd . . . "Were Pigs"
“The mortgage business at Merrill Lynch was an afterthought — they didn’t really have a strategy. They had found this huge profit potential, and everybody wanted a piece of it. But they were pigs about it.”
-- William Dallas, founder of Ownit Mortgage Solutions, a lending business in which Merrill bought a stake a few years ago.
There is a monster Gretchen Morgenson piece in the Sunday Times, titled, How the Thundering Herd Faltered and Fell. Its about the rise and ignomius fall of Mother Merrill.
How did it happen? Bad mortgages.
TYPICAL of those who dealt in Wall Street’s dizzying and opaque financial arrangements, Merrill ended up getting burned, former executives say, by inadequately assessing the risks it took with newfangled financial products — an error compounded when it held on to the products far too long.
The fire that Merrill was playing with was an arcane instrument known as a synthetic collateralized debt obligation. The product was an amalgam of collateralized debt obligations (the pools of loans that it bundled for investors) and credit-default swaps (which essentially are insurance that bondholders buy to protect themselves against possible defaults).
Synthetic C.D.O.’s, in other words, are exemplars of a type of modern financial engineering known as derivatives. Essentially, derivatives are financial instruments that can be used to limit risk; their value is “derived” from underlying assets like mortgages, stocks, bonds or commodities. Stock futures, for example, are a common and relatively simple derivative.
Among the more complex derivatives, however, are the mortgage-related variety. They involve a cornucopia of exotic, jumbo-size contracts ultimately linked to real-world loans and debts. So as the housing market went sour, and borrowers defaulted on their mortgages, these contracts collapsed, too, amplifying the meltdown.
The synthetic C.D.O. grew out of a structure that an elite team of J. P. Morgan bankers invented in 1997. Their goal was to reduce the risk that Morgan would lose money when it made loans to top-tier corporate borrowers like I.B.M., General Electric and Procter & Gamble.
Regular C.D.O.’s contain hundreds or thousands of actual loans or bonds. Synthetics, on the other hand, replace those physical bonds with a computer-generated group of credit-default swaps. Synthetics could be slapped together faster, and they generated fatter fees than regular C.D.O.’s, making them especially attractive to Wall Street.
Michael A. J. Farrell is chief executive of Annaly Capital Management, a real estate investment trust that manages mortgage assets. A unit of his company has liquidated billions of dollars in collateralized debt obligations for clients, and he believes that derivatives have magnified the pain of the financial collapse.
“We have auctioned billions in credit-default swap positions in our C.D.O. liquidation business,” Mr. Farrell said, “and what we have learned is that the carnage we are witnessing now would have been much more contained, to use that overworked word, without credit-default swaps.”
The whole piece is worth a read . . .
How the Thundering Herd Faltered and Fell
NYT, November 8, 2008
Open Thread: What Now?
Ok, we have the Presidential election behind us, and ugly NFP yesterday (more to come) even more Bailouts soon (more AIG, more GM, who knows what else).
Market volatility still remains crazed, and we are nearing key levels of support. Earnings have been punk. The consumer is MIA. Credit is improving, Housing still stinks, and the deleveraging seems to be never ending. The Eliot Wave folks are waiting for a nasty wave 4 (or is it 5?) and
Bailouts to Banks
Nice interactive table from ProPublica: > >
Bailout Bucks to Banks
ProPublica, October 29, 2008 1:43 pm
The full list is at ProPublica.
While Greenspan Slept
This Bloomberg special report may have slipped by unnoticed last week during all of the market mayhem. Its worth reviewing, as it places blame not only at the feet of Alan Greenspan, but Arthur Levitt and Robert Rubin as well.
Ten years ago, Wall Street was enjoying a bull market fed by a booming dot-com industry, a Fed chairman, Alan Greenspan, who trusted the market to correct its own ills, and a Congress amenable to lightening the touch of regulators.
In 1998, the imminent collapse of hedge fund Long-Term Capital Management forced the Fed to organize a bailout by Wall Street. Investment banks had loaned the fund billions and were among counterparties in more than $1 trillion in derivative contracts used to hedge investment risks.
That same year Greenspan, Treasury Secretary Robert Rubin and SEC Chairman Arthur Levitt opposed an attempt by Brooksley Born, head of the Commodity Futures Trading Commission, to study regulating over-the-counter derivatives. In 2000, Congress passed a law keeping them unregulated.
Levitt said he went along with concerns by Greenspan and Rubin that Born's action might throw derivatives contracts into "legal uncertainty.'' He said he now regrets that he didn't press a presidential advisory group "to take a closer look'' at the issue. Rubin said in an interview that ``you could have had chaos'' if Born's plan found existing derivatives contracts invalid because they weren't traded on an exchange. Both Born and Greenspan declined to comment.
Outstanding credit-default swaps, derivative contracts used to hedge or speculate on a company's debt, would grow to $62 trillion from $631 billion in 2001. While the swaps spread risk, as intended, they also helped spread fear. Ninety percent of the trades were concentrated in the hands of 17 banks, according to the Federal Reserve Bank of New York. That left them exposed to losses if one failed, as Lehman Brothers did in September, and contributed to the unwillingness to lend to each other that's at the center of the recent credit squeeze.
Its worth reading in its entirety . . .
Greenspan Slept as Off-Books Debt Escaped Scrutiny
Alan Katz and Ian Katz
Bloomberg, Oct. 30 2008
Symposium: Mortgage Meltdown, Economy, and Public Policy
OK, so you missed the big 2 day UC Berkeley - UCLA Symposium, with speeches from FOMC Chair Ben Bernanke, Janet Yellen, Federal Reserve Bank of San Francisco, Yale Professor Robert Shiller, UCLA Professor Edward Leamer, and others.
You'll catch it next year! Meanwhile, if you are so inclined, you can read some of the papers that were presented.
Dwight M. Jaffee, Edward E. Leamer, Christopher Mayer/Glenn Hubbard, Diana Hancock/Wayne Passmore, Robert J. Shiller, Kristopher Gerardi/Paul Willen
THE MORTGAGE MELTDOWN, THE ECONOMY, AND PUBLIC POLICY
OCTOBER 30-31, 2008
CAL ALUMNI HOUSE, UC BERKELEY
The Future of Mortgage Finance in the United States
Chairman Ben S. Bernanke
UC Berkeley/UCLA Symposium, October 31, 2008
The Mortgage Meltdown, Financial Markets, and the Economy
Janet L. Yellen, President and CEO, Federal Reserve Bank of San Francisco
UCLA Symposium at UC Berkeley, October 30, 2008