21st century financial panic
August 10, 2007 3:02 PM Subscribe
A New Kind of Bank Run. ...a new financial architecture has emerged that relied more on securities and less on banks as intermediaries. With the worth of [these new] securities now being questioned — and no equivalent of deposit insurance — some who financed the securities want their money out, a fact that has created the 21st-century equivalent of a run on a bank.
. It's no wonder these securities are being questioned, when some are based on Ninja mortgages and foreclosures are up 58% from last year.
An occasional poster named 'bookie' put up an an absolutely phenomenal comment in the last thread about this subject. Well worth reading.
posted by Malor at 3:16 PM on August 10, 2007
posted by Malor at 3:16 PM on August 10, 2007
(the whole thread is good, but if you read only one thing there, read bookie's comment.)
posted by Malor at 3:17 PM on August 10, 2007
posted by Malor at 3:17 PM on August 10, 2007
Of course, many will blame the consumers for taking loans they can't afford to pay back in the same way that credit lobbyists justified new bankruptcy rules.
posted by grouse at 3:30 PM on August 10, 2007
posted by grouse at 3:30 PM on August 10, 2007
Thanks malor for pointing out bookie's comment. Good stuff.
posted by exogenous at 3:41 PM on August 10, 2007
posted by exogenous at 3:41 PM on August 10, 2007
[From an AskMe question:]
posted by spacewrench at 3:52 PM on August 10, 2007
crush-onastick writes:Why does it matter if your lender resells your loan? Nobody downstream can change your terms. The downstream holder might end up in a world of hurt, insolvent, or whatever, but apart from possible hassles finding the correct person to make your payment to, what could happen?
...pick a [mortgage] lender that does not sell its loans...
posted by spacewrench at 3:52 PM on August 10, 2007
my younger brother is more knowledgeable about this than i am and he suggests that the books of fannie mae and freddie mac, as well as the investment banks, may be riddled with misstatements of value and outright fraud. "too big to fail" may turn into "too big to save".
posted by bruce at 3:53 PM on August 10, 2007 [1 favorite]
posted by bruce at 3:53 PM on August 10, 2007 [1 favorite]
spacewrench: One thing is that a lender that doesn't sell its loans will bear the risk itself, so they'll be a lot less likely to put you in a situation where you are set up to fail.
posted by grouse at 4:00 PM on August 10, 2007
posted by grouse at 4:00 PM on August 10, 2007
grouse: Ah, thanks. I (probably foolishly) assumed that someone taking out a loan would consider his circumstances carefully and decline credit on terms that were likely to be unsupportable. But I forgot: that's not the American Way.
posted by spacewrench at 4:06 PM on August 10, 2007
posted by spacewrench at 4:06 PM on August 10, 2007
Todays action by the Fed was a little unusual, but not very. However, this statement, made by the Fed today, is: "The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets."
This was good and bad. Good, because this told banks that the Fed would back them if a run happened. This was bad because for the Fed to make that statement means that they were thinking a run on banks was becoming more likely -- esp. three days after they refused to cut rates because of inflationary fears.
Now the Fed -- and our economy -- is between Scylla (inflation) and Charybdis (liquidity). Raising rates cuts liquidity, but we're in a liquidity crisis (and don't fool yourself, when the ECB drops $160 billion worth of loans in two days, that's crisis mode.) But cutting rates will send inflation roaring.
Making sure the lender of last resort is there -- "As always, the discount window is available as a source of funding" (from today's release) is about the only safe card the Fed has to play.
The reason for the loans. Banks are scared, esp. ones with large CDO holdings. They can't move them -- Century Financial just gave up on selling $800 million in prime CDOs, and if Century can't move prime, nobody is buying anything. This makes these instruments impossible to price. Banks with exposure want more cash, just in case these holdings turn out to be worth half (or less) of what the book value says they were. So, every bank wants cash, which means no bank is willing to lend cash.
What we don't know -- who's holding what, and how bad the holdings really are. Large hedge funds are melting. Large hedge funds with *little to no* CDO exposure are under pressure, because of margin calls. One fund (rumors are it was Goldman's Global Alpha fund) sold a whole bunch of stock yesterday trying to get cash, presumably to cover margin calls, which is why the market tanked yesterday. Today's selling was fear based (and was held in check by the Fed's "We'll cover the banks" press release.)
Of course, that big selloff puts more pressure on other funds, and leverage is a problem, because nobody wants to lend nothing to nobody right now. That's the liquidity crisis.
posted by eriko at 4:12 PM on August 10, 2007 [1 favorite]
This was good and bad. Good, because this told banks that the Fed would back them if a run happened. This was bad because for the Fed to make that statement means that they were thinking a run on banks was becoming more likely -- esp. three days after they refused to cut rates because of inflationary fears.
Now the Fed -- and our economy -- is between Scylla (inflation) and Charybdis (liquidity). Raising rates cuts liquidity, but we're in a liquidity crisis (and don't fool yourself, when the ECB drops $160 billion worth of loans in two days, that's crisis mode.) But cutting rates will send inflation roaring.
Making sure the lender of last resort is there -- "As always, the discount window is available as a source of funding" (from today's release) is about the only safe card the Fed has to play.
The reason for the loans. Banks are scared, esp. ones with large CDO holdings. They can't move them -- Century Financial just gave up on selling $800 million in prime CDOs, and if Century can't move prime, nobody is buying anything. This makes these instruments impossible to price. Banks with exposure want more cash, just in case these holdings turn out to be worth half (or less) of what the book value says they were. So, every bank wants cash, which means no bank is willing to lend cash.
What we don't know -- who's holding what, and how bad the holdings really are. Large hedge funds are melting. Large hedge funds with *little to no* CDO exposure are under pressure, because of margin calls. One fund (rumors are it was Goldman's Global Alpha fund) sold a whole bunch of stock yesterday trying to get cash, presumably to cover margin calls, which is why the market tanked yesterday. Today's selling was fear based (and was held in check by the Fed's "We'll cover the banks" press release.)
Of course, that big selloff puts more pressure on other funds, and leverage is a problem, because nobody wants to lend nothing to nobody right now. That's the liquidity crisis.
posted by eriko at 4:12 PM on August 10, 2007 [1 favorite]
many will blame the consumers for taking loans they can't afford to pay back in the same way that credit lobbyists justified new bankruptcy rules
Count me in! Home values went up 2004-2006 (after the temporary rate cuts of 2002-2003) largely because people were looking at how low they could get their monthtly payments with all these exotic (2/28, IO, NegAm) financing shenanigans.
Now that the back-end of the deal is coming through, these people are either playing stupid or are indeed stupid for taking on obligations they can no longer meet.
Which of these options, I don't care, I just want them out of the market so I can finally buy my place without having to outbid these idiots.
posted by Heywood Mogroot at 4:37 PM on August 10, 2007
Count me in! Home values went up 2004-2006 (after the temporary rate cuts of 2002-2003) largely because people were looking at how low they could get their monthtly payments with all these exotic (2/28, IO, NegAm) financing shenanigans.
Now that the back-end of the deal is coming through, these people are either playing stupid or are indeed stupid for taking on obligations they can no longer meet.
Which of these options, I don't care, I just want them out of the market so I can finally buy my place without having to outbid these idiots.
posted by Heywood Mogroot at 4:37 PM on August 10, 2007
Which of these options, I don't care, I just want them out of the market so I can finally buy my place without having to outbid these idiots.
Unless you're paying cash, the money you save on the purchase price may or may not cover (haven't done the math) the cost of more expensive credit. You can blame the stupids/playing stupids for ruining the credit market, too.
posted by notyou at 4:54 PM on August 10, 2007
Unless you're paying cash, the money you save on the purchase price may or may not cover (haven't done the math) the cost of more expensive credit. You can blame the stupids/playing stupids for ruining the credit market, too.
posted by notyou at 4:54 PM on August 10, 2007
many will blame the consumers for taking loans they can't afford to pay back
And some of us will also blame the greedy mortgage brokers who invented ridiculous ways of financing mortgages (no money down! no income documentation needed! no social security number needed, even!) and sold them to people who obviously should never have gotten the loans in the first place.
Think about it: how many "no credit? no problem!" signs have you seen stapled to telephone poles in your neighborhood in the past five years? How about commercials? How many Dietech and Countrywide commercials have you been forced to sit through while you watched TV? How many "now is the perfect time to refinance" lines have you heard? How many ads for new home developments have you seen in the newspaper with horrifying financial statements like the one in this photo? How many times did everyone parrot the line "buy land, no one's making it anymore" and "housing prices will never go down!"
Yeah, we had wannabe homeowners who were stupid or sometimes outright fraudulent with the mortgages they took on. But if you hand off matches to a child, don't you deserve some of the blame if he burns down the house?
Extreme Mortgage Makeover, indeed.
posted by Asparagirl at 4:59 PM on August 10, 2007 [1 favorite]
And some of us will also blame the greedy mortgage brokers who invented ridiculous ways of financing mortgages (no money down! no income documentation needed! no social security number needed, even!) and sold them to people who obviously should never have gotten the loans in the first place.
Think about it: how many "no credit? no problem!" signs have you seen stapled to telephone poles in your neighborhood in the past five years? How about commercials? How many Dietech and Countrywide commercials have you been forced to sit through while you watched TV? How many "now is the perfect time to refinance" lines have you heard? How many ads for new home developments have you seen in the newspaper with horrifying financial statements like the one in this photo? How many times did everyone parrot the line "buy land, no one's making it anymore" and "housing prices will never go down!"
Yeah, we had wannabe homeowners who were stupid or sometimes outright fraudulent with the mortgages they took on. But if you hand off matches to a child, don't you deserve some of the blame if he burns down the house?
Extreme Mortgage Makeover, indeed.
posted by Asparagirl at 4:59 PM on August 10, 2007 [1 favorite]
some of us will also blame the greedy mortgage brokers who invented ridiculous ways of financing mortgages
I should probably be clear that I really blame the businesses a lot more.
posted by grouse at 5:05 PM on August 10, 2007
I should probably be clear that I really blame the businesses a lot more.
posted by grouse at 5:05 PM on August 10, 2007
This is not really surprising to see. Rumors are that StatArb firms and hedge funds relying heavily on academic fundamentals.
GS AG, which is doing terrible, I heard rumors of folding and they just might do that. Renaissance is doing terrible, they are down I believe 10%+ for this month. To give you an idea, historically they have less than one down month a year, though such large volatility should not be unsuspected to those people. SAC is not doing bad, from what I've heard, but Cohen is known to stop his trading programs and exit trading strategies quickly. No doubt he also heard rumors of liquidity shrinks that all the banks were experiencing.
It is somewhat common practice to force liquidity shrinkages if know they are coming (such as today) in order to trigger stop-loss orders you know about and profit down the way. If hedge funds which do huge volumes of trades can no longer provide the market with liquidity (which is what they are in effect doing, making a small profit as a market maker would, and taking a cut on the spread between equity prices and other highly correlated equities ... unlike market makers this carries a much larger risk than their quantitative models can predict).
I am not too fond of saying the sub-prime market caused this. There exists a multitude of exogenous factors that can cause volatility to increase and liquidity to drop (which are often synonymous if not always synonymous). Last year it was that oil prices would cause this, in 2001 it was terrorist attacks, etc.
Option prices are still showing a volatility skew, which would indicate a high kurtosis (which compared to a Black-Scholes distributions would mean more variations around the mean and fatter tails at the end) -- meaning in theory there is a sort of insurance against large deviations with devastating consequences, of course this would not mean a slow death could not occur, or even a large event outside of derivatives' protection.
I wish I could post pictures, but this just restores my belief in the arcsine p/l of most traders ... that is most losses and profits occur a few days or hours out of the year and those account for the majority of a trader's p/l.
At the very least it reinforces Mises' epistemological statement that what we know about markets are a priori and not empirical. Sifting through data, finding connections and making moves based on them without regard to validity of the function which generates such statistics is deterministic and wrong.
posted by geoff. at 5:23 PM on August 10, 2007
GS AG, which is doing terrible, I heard rumors of folding and they just might do that. Renaissance is doing terrible, they are down I believe 10%+ for this month. To give you an idea, historically they have less than one down month a year, though such large volatility should not be unsuspected to those people. SAC is not doing bad, from what I've heard, but Cohen is known to stop his trading programs and exit trading strategies quickly. No doubt he also heard rumors of liquidity shrinks that all the banks were experiencing.
It is somewhat common practice to force liquidity shrinkages if know they are coming (such as today) in order to trigger stop-loss orders you know about and profit down the way. If hedge funds which do huge volumes of trades can no longer provide the market with liquidity (which is what they are in effect doing, making a small profit as a market maker would, and taking a cut on the spread between equity prices and other highly correlated equities ... unlike market makers this carries a much larger risk than their quantitative models can predict).
I am not too fond of saying the sub-prime market caused this. There exists a multitude of exogenous factors that can cause volatility to increase and liquidity to drop (which are often synonymous if not always synonymous). Last year it was that oil prices would cause this, in 2001 it was terrorist attacks, etc.
Option prices are still showing a volatility skew, which would indicate a high kurtosis (which compared to a Black-Scholes distributions would mean more variations around the mean and fatter tails at the end) -- meaning in theory there is a sort of insurance against large deviations with devastating consequences, of course this would not mean a slow death could not occur, or even a large event outside of derivatives' protection.
I wish I could post pictures, but this just restores my belief in the arcsine p/l of most traders ... that is most losses and profits occur a few days or hours out of the year and those account for the majority of a trader's p/l.
At the very least it reinforces Mises' epistemological statement that what we know about markets are a priori and not empirical. Sifting through data, finding connections and making moves based on them without regard to validity of the function which generates such statistics is deterministic and wrong.
posted by geoff. at 5:23 PM on August 10, 2007
You can blame the stupids/playing stupids for ruining the credit market, too.
Prices will eventually conform to what people can pay back -- ie. market-clearing prices -- eventually.
Buying in a high-rate environment is not as bad as it sounds, if & when prices adjust . . . since with the US's loan products you can refinance if/when rates recede.
also blame the greedy mortgage brokers
one of the luxuries of being a left-libertarian is I can allocate blame in all directions. 50-50 here. I don't blame the scum in the biz world, that's what the free market is all about -- getting it while the getting is good. I do blame governmental oversight 50%, though . . . funny how this S&L stuff always happens on the (R) watch . . .
posted by Heywood Mogroot at 5:26 PM on August 10, 2007
Prices will eventually conform to what people can pay back -- ie. market-clearing prices -- eventually.
Buying in a high-rate environment is not as bad as it sounds, if & when prices adjust . . . since with the US's loan products you can refinance if/when rates recede.
also blame the greedy mortgage brokers
one of the luxuries of being a left-libertarian is I can allocate blame in all directions. 50-50 here. I don't blame the scum in the biz world, that's what the free market is all about -- getting it while the getting is good. I do blame governmental oversight 50%, though . . . funny how this S&L stuff always happens on the (R) watch . . .
posted by Heywood Mogroot at 5:26 PM on August 10, 2007
I should also mention that a large part of the blame of liquidity lies on hedge fund managers readjusting their delta, assuming continuous time d(t) finance is possible, which is ridiculous and probably inconsequential until you realize that hedging your delta becomes impractical during liquidity squeezes. I don't think the question was ever that liquidity squeezes would be the downfall of any Black-Scholes pricing model. I use that term to include all the derivatives of that model, like GARCH. They're models and just models. I wouldn't plan a trip to the moon based on an Styrofoam model of the solar system.
posted by geoff. at 5:33 PM on August 10, 2007
posted by geoff. at 5:33 PM on August 10, 2007
The blame here goes 50/50, just like in the drug market: the suppliers and the buyers. Easy liquidity makes lenders take greater risks. Easy money makes people take out loans they probably shouldn't.
Easy money is a good thing for those who know what they're getting into. It's bad for those who don't.
posted by tgrundke at 6:13 PM on August 10, 2007
Easy money is a good thing for those who know what they're getting into. It's bad for those who don't.
posted by tgrundke at 6:13 PM on August 10, 2007
Here's a number, courtesy of Brad DeLong, that show you just how serious the ECB and Fed are treating this, and how close to the inflation cliff we are. In the last 48 hours, the monetary base of the western economies has grown by over 7% a day.
On an annual basis, this represents real money inflation of 2100% per annum. We can't do this for long, not without severely inflating the dollar and euro.
posted by eriko at 6:44 PM on August 10, 2007
On an annual basis, this represents real money inflation of 2100% per annum. We can't do this for long, not without severely inflating the dollar and euro.
posted by eriko at 6:44 PM on August 10, 2007
If you'd been reading The Housing Bubble Blog, you would have known about all this, and known this was going to happen, for more than two years now. Some of the folks over there have sounded a bit shrill at times, but many are being shown to be pretty accurate with what's happening now.
You might want to read this particular post and comments.
This site is also of interest, and bears watching; Mortgage Lender Implosion.
My advice would be, since there's no way to know for sure what's going to happen, to make some financial Plan B's for yourself if you haven't already. Have a fallback plan. (That's good advice at any time, I suppose.)
7% per day inflation, huh? Great, that just wiped out my last two years of pay raises, literally overnight.
posted by zoogleplex at 10:49 PM on August 10, 2007
You might want to read this particular post and comments.
This site is also of interest, and bears watching; Mortgage Lender Implosion.
My advice would be, since there's no way to know for sure what's going to happen, to make some financial Plan B's for yourself if you haven't already. Have a fallback plan. (That's good advice at any time, I suppose.)
7% per day inflation, huh? Great, that just wiped out my last two years of pay raises, literally overnight.
posted by zoogleplex at 10:49 PM on August 10, 2007
Islamic Banking:
Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid).
is retarded.
As a Georgist, I see the problem is not so much capitalism (people lending their savings for interest returns) but the madness of mass rent-seeking instead of productive enterprises.
posted by Heywood Mogroot at 11:36 PM on August 10, 2007
Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid).
is retarded.
As a Georgist, I see the problem is not so much capitalism (people lending their savings for interest returns) but the madness of mass rent-seeking instead of productive enterprises.
posted by Heywood Mogroot at 11:36 PM on August 10, 2007
I've been following this situation for a while via the blog Calculated Risk. Nouriel Roubini's blog has some great analysis, too (he was predicting these kinds of problems years ago) but his updates are infrequent and the comments are rather poorly moderated.
posted by Coventry at 5:27 AM on August 11, 2007
posted by Coventry at 5:27 AM on August 11, 2007
On an annual basis, this represents real money inflation of 2100% per annum. We can't do this for long, not without severely inflating the dollar and euro.
7% per day inflation, huh? Great, that just wiped out my last two years of pay raises, literally overnight.
My understanding was that the central banks are providing the funds as short term loans. This means the monetary base will only be expanded for a couple days/weeks, and shouldn't be expected to cause noticible changes in the overall price level. Am I wrong?
posted by thrako at 6:06 AM on August 11, 2007
7% per day inflation, huh? Great, that just wiped out my last two years of pay raises, literally overnight.
My understanding was that the central banks are providing the funds as short term loans. This means the monetary base will only be expanded for a couple days/weeks, and shouldn't be expected to cause noticible changes in the overall price level. Am I wrong?
posted by thrako at 6:06 AM on August 11, 2007
My understanding was that the central banks are providing the funds as short term loans.
No, you are right -- if, and only if, those loans aren't rolled. I don't think they will be, but if they are, then the action is pure inflation, in the most old-fashioned sense -- print more money.
The real point of my post was to show just how extreme the action -- esp. by the ECB -- was.
posted by eriko at 7:17 AM on August 11, 2007
No, you are right -- if, and only if, those loans aren't rolled. I don't think they will be, but if they are, then the action is pure inflation, in the most old-fashioned sense -- print more money.
The real point of my post was to show just how extreme the action -- esp. by the ECB -- was.
posted by eriko at 7:17 AM on August 11, 2007
Versions of the word "blame" have so far been used 15 times on this thread. What drives this interest in finding someone to blame?
People who borrow/lend money or transact in securities are consenting adults. It is known ex ante that bad decisions can result in financial losses.
As to the underlying causes of the current problems in US credit markets, let me make some old-fashioned suggestions:
- The personal saving rate has been negative since 2005 (excluding the net acquisition of consumer durables), according to the Bureau of Economic Analysis and the Federal Reserve.
- The household debt service and financial obligation ratios are near a multi-decade high, according to the Federal Reserve.
- Household liabilities as a ratio of disposable income are at an all-time high, according to the International Monetary Fund (see Figure B, p. 12).
posted by gbognar at 7:18 AM on August 11, 2007
People who borrow/lend money or transact in securities are consenting adults. It is known ex ante that bad decisions can result in financial losses.
As to the underlying causes of the current problems in US credit markets, let me make some old-fashioned suggestions:
- The personal saving rate has been negative since 2005 (excluding the net acquisition of consumer durables), according to the Bureau of Economic Analysis and the Federal Reserve.
- The household debt service and financial obligation ratios are near a multi-decade high, according to the Federal Reserve.
- Household liabilities as a ratio of disposable income are at an all-time high, according to the International Monetary Fund (see Figure B, p. 12).
posted by gbognar at 7:18 AM on August 11, 2007
And here is a lovely interactive map by the Financial Times [via Barry Ritholtz blog] of the world showing in multi coloured splendour exactly how this has developed around the world over the past couple of months. You even get week by week views.
Just read the Sunday Straits Times in Singapore who covered this in a multipage spread. The housing/mortgage/credit/liquidity situation is going to have ripples way beyond the shores of the united states and now the EU banks. don't forget the dollar is the world's reserve currency.
*dives under bed looking for old rupees*
posted by infini at 9:16 AM on August 11, 2007
Just read the Sunday Straits Times in Singapore who covered this in a multipage spread. The housing/mortgage/credit/liquidity situation is going to have ripples way beyond the shores of the united states and now the EU banks. don't forget the dollar is the world's reserve currency.
*dives under bed looking for old rupees*
posted by infini at 9:16 AM on August 11, 2007
It is known ex ante that bad decisions can result in financial losses.
yeah, well, we live in a quasi-democract socialist society not a minarchy, so either we're going to bail these idiots out (Hello Moral Hazard!) or have to learn from our mistakes here (Fat Chance!).
posted by Heywood Mogroot at 9:51 AM on August 11, 2007
yeah, well, we live in a quasi-democract socialist society not a minarchy, so either we're going to bail these idiots out (Hello Moral Hazard!) or have to learn from our mistakes here (Fat Chance!).
posted by Heywood Mogroot at 9:51 AM on August 11, 2007
Coventry: I featured Mr Risk's blog in my housing-crash fpp almost a year and a half ago.
posted by Heywood Mogroot at 9:54 AM on August 11, 2007
posted by Heywood Mogroot at 9:54 AM on August 11, 2007
gbognar, you're 100% correct about the personal saving rate and household debt. However, these things didn't happen in a vacuum; the macroeconomic forces at work in America have been in a feedback loop with with local and personal, individual economic forces for some 20 or 25 years now. That feedback loop has been amplified by any number of aggressive marketing campaigns and by cheerleaders like Cramer and Bartiromo, not to mention some overzealous pension fund and retirement fund brokers.
So when you say "People who borrow/lend money or transact in securities are consenting adults," you're correct of course.
But then when you go on to point out these credit market causes on the personal finance side of the equation, you're saying that these "consenting adults" have been acting like drunken irresponsible teenagers on a wild mall spree with their money (mostly money they don't actually have). And you're right about that too.
So when you say "It is known ex ante that bad decisions can result in financial losses," the rest of what you point out makes it clear that a large percentage of people playing the money game have been ignorant of the risks, whether willfully or through being snowed by the professional con men.
If this stuff really goes south, a lot of people are going to pay very heavily for being foolish - including those of us who haven't been, through general economic pain. Does anyone here want to participate in a taxpayer-funded bailout of people who were too boneheaded to take out a calculator and run some numbers, let alone actually read their mortgage contracts?
I've been sitting on the sidelines for years watching this all happen, getting more and more boggled by the events. As this particular mess has blossomed since 2001, I've been investing in the market runup since then with decent success and socking as much as I can in the bank after paying off all my debt. I hope I'm in a good position to weather any financial storm, but that's hard to tell. My job is not "depression-proof," like my grandfather's was in 1929; he worked for the phone company.
In contrast, a few people I know have been "cashing in" on the Home Equity Loan Express, "trading up" to a new, larger and more expensive home every couple of years, then getting HELOCs as the value of the home has inflated. Looking at the stuff they have, you'd think they were millionaires; new cars, house full of furniture and extensively decorated, elaborate landscaping, jet-skis, etc. etc...
Except now, the value of the home is dropping, so their total debt now exceeds the worth of the house. Fortunately, most of them got a fixed-rate mortgage for their latest buy, but in one case the ARM is resetting next year; they've recognized the danger and are trying to sell the house, but it's going to have to be a short sale even now, and the longer the house sits on the market the more cash they'll have to bring to the closing.
That's the personal side of the mess; multiply that by several million and you have the hedge fund/mortgage lender/credit derivatives side of it. Synergistically enmeshed, as it were.
Oh yeah... if you have a 401(k) or other retirement fund, I'd suggest pulling out (or downloading) the prospectuses (prospectae?) for all your funds and reading them to find out how much exposure you actually have to the real estate mess/credit debacle in there. A lot of funds are in this stuff deep, but it's not obvious unless you dig. I read on HBB about how a German money market fund has lost 26% over the last couple weeks because of this mess. Yes, a MONEY MARKET mutual fund - supposedly the "safe harbor" of any fund family.
As gbognar implies, the lesson is: don't be ignorant about your finances!
posted by zoogleplex at 10:16 AM on August 11, 2007
So when you say "People who borrow/lend money or transact in securities are consenting adults," you're correct of course.
But then when you go on to point out these credit market causes on the personal finance side of the equation, you're saying that these "consenting adults" have been acting like drunken irresponsible teenagers on a wild mall spree with their money (mostly money they don't actually have). And you're right about that too.
So when you say "It is known ex ante that bad decisions can result in financial losses," the rest of what you point out makes it clear that a large percentage of people playing the money game have been ignorant of the risks, whether willfully or through being snowed by the professional con men.
If this stuff really goes south, a lot of people are going to pay very heavily for being foolish - including those of us who haven't been, through general economic pain. Does anyone here want to participate in a taxpayer-funded bailout of people who were too boneheaded to take out a calculator and run some numbers, let alone actually read their mortgage contracts?
I've been sitting on the sidelines for years watching this all happen, getting more and more boggled by the events. As this particular mess has blossomed since 2001, I've been investing in the market runup since then with decent success and socking as much as I can in the bank after paying off all my debt. I hope I'm in a good position to weather any financial storm, but that's hard to tell. My job is not "depression-proof," like my grandfather's was in 1929; he worked for the phone company.
In contrast, a few people I know have been "cashing in" on the Home Equity Loan Express, "trading up" to a new, larger and more expensive home every couple of years, then getting HELOCs as the value of the home has inflated. Looking at the stuff they have, you'd think they were millionaires; new cars, house full of furniture and extensively decorated, elaborate landscaping, jet-skis, etc. etc...
Except now, the value of the home is dropping, so their total debt now exceeds the worth of the house. Fortunately, most of them got a fixed-rate mortgage for their latest buy, but in one case the ARM is resetting next year; they've recognized the danger and are trying to sell the house, but it's going to have to be a short sale even now, and the longer the house sits on the market the more cash they'll have to bring to the closing.
That's the personal side of the mess; multiply that by several million and you have the hedge fund/mortgage lender/credit derivatives side of it. Synergistically enmeshed, as it were.
Oh yeah... if you have a 401(k) or other retirement fund, I'd suggest pulling out (or downloading) the prospectuses (prospectae?) for all your funds and reading them to find out how much exposure you actually have to the real estate mess/credit debacle in there. A lot of funds are in this stuff deep, but it's not obvious unless you dig. I read on HBB about how a German money market fund has lost 26% over the last couple weeks because of this mess. Yes, a MONEY MARKET mutual fund - supposedly the "safe harbor" of any fund family.
As gbognar implies, the lesson is: don't be ignorant about your finances!
posted by zoogleplex at 10:16 AM on August 11, 2007
Heywood: yeah, it's been coming for a while, hasn't it? (I first read about the dangers posed by mortgaged-backed securities in How to Profit From the Coming Real-Estate Bust back in 2003. He predicted the wheels would come off around 2005, IIRC. I guess he must feel a little silly about the timing, now, but it was clear even back then that he was on to something. Somehow the economy (well, the stock market, at least) has just roared along in spite of this very clear danger. I can only put it down to willful ignorance.
posted by Coventry at 10:35 AM on August 11, 2007
posted by Coventry at 10:35 AM on August 11, 2007
Does anyone here want to participate in a taxpayer-funded bailout of people who were too boneheaded to take out a calculator and run some numbers, let alone actually read their mortgage contracts?
"Math is hard"
posted by infini at 10:46 AM on August 11, 2007
"Math is hard"
posted by infini at 10:46 AM on August 11, 2007
Trouble at Goldman Sachs
Time for some put options on GS?
posted by storybored at 10:54 AM on August 11, 2007
Time for some put options on GS?
posted by storybored at 10:54 AM on August 11, 2007
"Math is hard"
What's that bumper sticker? Oh yeah:
"If you think education is expensive, try ignorance!"
Stupid hurts, baby...
posted by zoogleplex at 11:08 AM on August 11, 2007
What's that bumper sticker? Oh yeah:
"If you think education is expensive, try ignorance!"
Stupid hurts, baby...
posted by zoogleplex at 11:08 AM on August 11, 2007
He predicted the wheels would come off around 2005, IIRC. I guess he must feel a little silly about the timing, now
That was when the party really got going, when regulators allowed lenders to give purchase money to anyone who could fog a mirror, and then collateralized the debt to Wall Street.
In this graph, the red line is the mortgage-backed security slice of the debt pie. It was this increase that funded the continued run-up in prices once the market digested interest-rate drops.
posted by Heywood Mogroot at 12:03 PM on August 11, 2007
That was when the party really got going, when regulators allowed lenders to give purchase money to anyone who could fog a mirror, and then collateralized the debt to Wall Street.
In this graph, the red line is the mortgage-backed security slice of the debt pie. It was this increase that funded the continued run-up in prices once the market digested interest-rate drops.
posted by Heywood Mogroot at 12:03 PM on August 11, 2007
Both the NYT and Washington Post are getting into the misinformation business this morning. Both papers claimed that the Fed buys mortgage-backed securities (MBS) as one of the ways in which it injects reserves into the financial system (along with Treasury bonds and bonds issued by government agencies).
This is NOT true. I was shocked to read a Bloomberg column (subsequently corrected) yesterday that reported that the Fed had purchased $19 billion of MBS. This would have been shocking because it would have been an extraordinary departure from the Fed’s normal practice, which the Fed would not do unless it viewed the situation as truly desperate. ...
posted by amberglow at 12:46 PM on August 11, 2007
This is NOT true. I was shocked to read a Bloomberg column (subsequently corrected) yesterday that reported that the Fed had purchased $19 billion of MBS. This would have been shocking because it would have been an extraordinary departure from the Fed’s normal practice, which the Fed would not do unless it viewed the situation as truly desperate. ...
posted by amberglow at 12:46 PM on August 11, 2007
From the FPP: "...foreclosures are up 58% from last year."
That's nationwide, which doesnt' make it sound so bad. In some parts of Southern California, I've seen numbers up to 1000% increase YOY.
If you want to keep an eye on what's going to happen in the general market, keep an eye on San Diego and Riverside counties.
posted by zoogleplex at 2:33 PM on August 11, 2007
That's nationwide, which doesnt' make it sound so bad. In some parts of Southern California, I've seen numbers up to 1000% increase YOY.
If you want to keep an eye on what's going to happen in the general market, keep an eye on San Diego and Riverside counties.
posted by zoogleplex at 2:33 PM on August 11, 2007
speaking of that, it only became a big news story once wealthier counties started seeing foreclosures too. It's been going on for a while already in working and poorer areas.
posted by amberglow at 3:05 PM on August 11, 2007
posted by amberglow at 3:05 PM on August 11, 2007
Well, Riverside County seems to be a kind of outlier. It bubbled up a bit later than many parts of SoCal, and the population there is not the kind of middle class folks you'd find in LA, Orange or San Diego counties. The general understanding I'm getting from my readings is that that area boomed up from working-class people with relatively low incomes getting access to massive loans via the ol' "stated income" 100% LTV interest-only ARM which resets in 3-5 years. There is just no way that a household pulling in $40K, $50K, $60K can afford to buy a $400K house, let alone a $600-800K house - in the Real World of Mortgages. 30% of $60K gross is $18,000/year $1,500/month, which on a "conforming" fixed rate 30-year loan (the kind we used to have, remember?) would buy you about a $200,000 house.
Some of these people have borrowed $750,000 with no money down at a "teaser" rate of 1% or 2%, which their $1,500 payment will cover. When that rate resets up to the 8.5% or 9.5% rate, that payment might jump up to $5,000, $6,000 or more - and many of them will be in a house that's depreciated down to $500K value, with the principal now being more than $750K because of negative amortization.
Basically the feeling is there's been a ton of "liar loans" and outright fraud going on out there in Riverside. There just isn't that kind of economic base.
All those funky creative mortgage tricks did work for people for a while, as long as housing was appreciating at 20% per year for 6 years straight... but if you didn't get out of that racket in 2005, right now you are likely to be in serious trouble.
Somebody was trying to get me to come look at houses in Victorville, which they wanted to sell me for $500K. Victorville. That's 75 miles from my job, in the high desert, literally on the edge of nowhere; it would be a 3 to 3.5 hour commute; there are gigantic McMansion developments out there that were built on spec, that will never be filled.
I don't even make enough money to afford a $500K house, even if my GF and I combined incomes.
posted by zoogleplex at 4:09 PM on August 11, 2007
Some of these people have borrowed $750,000 with no money down at a "teaser" rate of 1% or 2%, which their $1,500 payment will cover. When that rate resets up to the 8.5% or 9.5% rate, that payment might jump up to $5,000, $6,000 or more - and many of them will be in a house that's depreciated down to $500K value, with the principal now being more than $750K because of negative amortization.
Basically the feeling is there's been a ton of "liar loans" and outright fraud going on out there in Riverside. There just isn't that kind of economic base.
All those funky creative mortgage tricks did work for people for a while, as long as housing was appreciating at 20% per year for 6 years straight... but if you didn't get out of that racket in 2005, right now you are likely to be in serious trouble.
Somebody was trying to get me to come look at houses in Victorville, which they wanted to sell me for $500K. Victorville. That's 75 miles from my job, in the high desert, literally on the edge of nowhere; it would be a 3 to 3.5 hour commute; there are gigantic McMansion developments out there that were built on spec, that will never be filled.
I don't even make enough money to afford a $500K house, even if my GF and I combined incomes.
posted by zoogleplex at 4:09 PM on August 11, 2007
Actually, you know what one thing I see every day is that tells me there's economic storm brewing? It's pretty simple.
There's an express bus here in Los Angeles, the Metro Rapid 720 line. It runs from a large transit center in Whittier, about 15 miles east of Downtown LA, to the 3rd St. Promenade in Santa Monica, about 15 miles west of downtown. Total route is probably more like 35 miles. A big chunk of the route is down Wilshire Boulevard, which is where I usually see this line as I'm on Wilshire for part of my commute and at other times when I'm out and about.
About 3 years ago when they started up this 720 line, it was running in standard-sized buses about one every 15-20 minutes. The buses were full, in my estimation, about half the time.
Now, this route is being run using the huge double-size articulated buses, at more like 10-12 minute intervals; during peak commute times it seems like they're running two buses per planned stop time - I often see two go past a stop while a third one stops behind them.
The kicker - no matter what time of day or in what location (downtown, Mid-Wilshire, WestSide) I see these 720 buses, they are all uniformly packed to standing room only.
That's like 65 or 70 people per bus, maybe it's 80-85. Gotta be 3-5 times the number of people riding that line 3 years ago. I've heard that mass transit ridership is way up all over LA, the Metro is adding buses and trains constantly.
In the car capital of america, that is one hell of a lot of people riding the bus.
Probably has a lot to do with the fact that an all-county monthly Metro pass is only $58 a month, while owning even a $500 beater will run you more like $300 a month with insurance, fuel and maintenance...
There's change a-happ'nin', folks. Perk up and pay attention: what's changed in your local area, besides gas and food prices? Have you actually figured out how much more you're paying for energy and food compared to 1, 2, 3 years ago?
I did those numbers for myself, and found out that my core cost of living increases have wiped out my raises for the last 5 years (not counting my freelance income, thankfully). I'm breaking even on 2002 in real dollars of salary.
This may all seem like a bit of a digression, but it's all part of the same economy.
posted by zoogleplex at 4:44 PM on August 11, 2007
There's an express bus here in Los Angeles, the Metro Rapid 720 line. It runs from a large transit center in Whittier, about 15 miles east of Downtown LA, to the 3rd St. Promenade in Santa Monica, about 15 miles west of downtown. Total route is probably more like 35 miles. A big chunk of the route is down Wilshire Boulevard, which is where I usually see this line as I'm on Wilshire for part of my commute and at other times when I'm out and about.
About 3 years ago when they started up this 720 line, it was running in standard-sized buses about one every 15-20 minutes. The buses were full, in my estimation, about half the time.
Now, this route is being run using the huge double-size articulated buses, at more like 10-12 minute intervals; during peak commute times it seems like they're running two buses per planned stop time - I often see two go past a stop while a third one stops behind them.
The kicker - no matter what time of day or in what location (downtown, Mid-Wilshire, WestSide) I see these 720 buses, they are all uniformly packed to standing room only.
That's like 65 or 70 people per bus, maybe it's 80-85. Gotta be 3-5 times the number of people riding that line 3 years ago. I've heard that mass transit ridership is way up all over LA, the Metro is adding buses and trains constantly.
In the car capital of america, that is one hell of a lot of people riding the bus.
Probably has a lot to do with the fact that an all-county monthly Metro pass is only $58 a month, while owning even a $500 beater will run you more like $300 a month with insurance, fuel and maintenance...
There's change a-happ'nin', folks. Perk up and pay attention: what's changed in your local area, besides gas and food prices? Have you actually figured out how much more you're paying for energy and food compared to 1, 2, 3 years ago?
I did those numbers for myself, and found out that my core cost of living increases have wiped out my raises for the last 5 years (not counting my freelance income, thankfully). I'm breaking even on 2002 in real dollars of salary.
This may all seem like a bit of a digression, but it's all part of the same economy.
posted by zoogleplex at 4:44 PM on August 11, 2007
zoogle: I helped my sister get into a house in Corona in 2003. Actually I got them into a $200k condo in Fullerton in 2002 which they flipped into the $300k house the next year.
funny how "affordability products" make things unaffordable.
the only way to make things more affordable now is less regulation/intervention, or more. What we've got now is the worst of both worlds, designed to enrich everyone in the game but the person who just wants a place to live in.
posted by Heywood Mogroot at 4:55 PM on August 11, 2007
funny how "affordability products" make things unaffordable.
the only way to make things more affordable now is less regulation/intervention, or more. What we've got now is the worst of both worlds, designed to enrich everyone in the game but the person who just wants a place to live in.
posted by Heywood Mogroot at 4:55 PM on August 11, 2007
but it's all part of the same economy
housing expenses eat all. It's everyone's dominant monthly expense, and investment.
It was this revelation that made me see the beauty of Georgism / land value taxes. . . people will pay as much as they can to live in as nice an area as they can; these monies can go to the parasitical "passive income" rentier class via rents, to the financial sector via interest on two-ton mortgage loads, or, in the Georgist Utopia, to . . . local taxes to pay for the schools, roads, and all other civic life infrastructure.
posted by Heywood Mogroot at 5:01 PM on August 11, 2007
housing expenses eat all. It's everyone's dominant monthly expense, and investment.
It was this revelation that made me see the beauty of Georgism / land value taxes. . . people will pay as much as they can to live in as nice an area as they can; these monies can go to the parasitical "passive income" rentier class via rents, to the financial sector via interest on two-ton mortgage loads, or, in the Georgist Utopia, to . . . local taxes to pay for the schools, roads, and all other civic life infrastructure.
posted by Heywood Mogroot at 5:01 PM on August 11, 2007
Asparagirl writes "How many ads for new home developments have you seen in the newspaper with horrifying financial statements like the one in this photo? "
The hilarious part for me is the first disclaimer: "Models do not indicate racial preference". You don't see that much around here.
posted by Mitheral at 6:29 PM on August 11, 2007
The hilarious part for me is the first disclaimer: "Models do not indicate racial preference". You don't see that much around here.
posted by Mitheral at 6:29 PM on August 11, 2007
From the Wall Street Journal (free access) "Countrywide [Financial] has reported a rapid rise in delinquent payments on certain prime home-equity loans that were used by people stretching themselves to buy homes with little or no money down.
"Payments were at least 30 days late on about 20% of "nonprime" mortgages serviced by Countrywide as of June 30, up from 14% a year earlier, the company said. "
The article also has some interesting comments to make about hedge funds, namely: "In the U.S. the latest crop of hedge funds to be hit hard...includes those that focus on "market-neutral" strategies, or strategies that seek to do as well in both falling and rising markets." ....which ties in to earlier discussions we've had here on risk models and their deficiencies.
posted by storybored at 8:37 PM on August 11, 2007
"Payments were at least 30 days late on about 20% of "nonprime" mortgages serviced by Countrywide as of June 30, up from 14% a year earlier, the company said. "
The article also has some interesting comments to make about hedge funds, namely: "In the U.S. the latest crop of hedge funds to be hit hard...includes those that focus on "market-neutral" strategies, or strategies that seek to do as well in both falling and rising markets." ....which ties in to earlier discussions we've had here on risk models and their deficiencies.
posted by storybored at 8:37 PM on August 11, 2007
Doug Noland's reports tend to be astoundingly badly structured, but I am finding this one to be an interesting retrospective.
posted by Coventry at 9:07 PM on August 11, 2007
Central banks do retain significant potential firepower to buttress marketplace liquidity in the near-term. Yet the ongoing impact such interventions will have in restoring trust in market pricing, securities ratings, sophisticated model-based and leveraged trading strategies, counterparty risk, general risk management/hedging capabilities, and liquidity in Wall Street’s newfangled “structured” products is very much an open question. It is my view that some Crucial Financial Myths have been Thoroughly DisCredited.(search for "A Run On Wall Street Finance" to get past the data spew to the start of his essay.)
I have often addressed the notion of the “Moneyness of Credit” – in particular, the vital role played by what had been the prevailing Credit market perception that myriad debt instruments were both a store of nominal value (“safe”) and readily marketable (“liquid”). In general, a market’s belief that Credit is as attractive (holds similar attributes) as “money” plays a decisive role in fostering Credit expansion. Over time, as the perception of moneyness is applied to expanding types and quantities of Credit instruments, a full-fledged Credit Bubble takes hold. And, as we’ve witnessed, the longer Credit excesses inflate asset prices, corporate earnings, and household incomes - the more seductive the Myth that the underlying Credit instruments are increasingly safe and liquid.
It takes years (decades?) and, importantly, the successful perseverance through at least a few close calls, for the Perception of Moneyness to become fully embedded in the structure of the Credit system. Emboldened market participants eventually come to believe that that nothing can seriously interrupt the boom. Each near crisis surmounted leads to only greater confidence in the underlying Credit system and the capacity for the authorities to sustain the expansion - each period of greater excess layers more dangerous layers of risk on top of an increasingly fragile pyramid of risk.
posted by Coventry at 9:07 PM on August 11, 2007
zoogleplex writes "There is just no way that a household pulling in $40K, $50K, $60K can afford to buy a $400K house, let alone a $600-800K house"
And that's the bottom line for California and everywhere else. Speculation can be fun, but everything has to come back to earth eventually.
posted by krinklyfig at 1:25 PM on August 12, 2007
And that's the bottom line for California and everywhere else. Speculation can be fun, but everything has to come back to earth eventually.
posted by krinklyfig at 1:25 PM on August 12, 2007
Well, people in exploded markets like California tend to forget that houses aren't that expensive everywhere. Especially lower end ones. You can still get a starter hour for $150k here, and it's Connecticut.
posted by smackfu at 1:38 PM on August 12, 2007
posted by smackfu at 1:38 PM on August 12, 2007
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thanks to polychrome over at Monkeyfilter for the ninja link !
posted by storybored at 3:07 PM on August 10, 2007