Fannie and Freddie under conservatorship.

September 5, 2008 7:56 PM

Fannie and Freddie have now been placed under conservatorship.

On the bright side, there is a precedent.

On the downside, Britain is facing its worst economy in 60 years.

And the US Presidential candidates are apparently avoiding this discussion like the plague.

Ironically, the S&P500 is outperforming the MSCI, the FTSE, the Bovespa, the Nikkei, and other world indexes, suggesting that our misery is taking down the rest of the world.

And, oh yeah, the dollar has gained on the Euro and Pound in record fashion over the last couple of months, to the chagrin of US exporters, meaning that any sort of export-driven GDP growth just went out the window.

Fascinating times we live in.

posted by SeizeTheDay (93 comments total)

In dedication to yhbc.
posted by SeizeTheDay at 7:57 PM on September 5, 2008 [6 favorites]

Privatize the profits, socialize the loss.

The stockholders? Protected. The Executive's bonuses? Untouched.

The US Taxpayer? Reamed.
posted by eriko at 8:00 PM on September 5, 2008 [21 favorites]

Except that the stockholders will lose between lots and everything in this scenario.

Should also be pointed out that this hasn't actually happened yet. On the other hand, it's been inevitable for some time.
posted by selfnoise at 8:04 PM on September 5, 2008

If the October Surprise is supposed to be the next Great Depression, please don't sign me up.
posted by Blazecock Pileon at 8:04 PM on September 5, 2008 [7 favorites]

Neither Obama nor McCain has showed an interest in or understanding of economics. Let's hope Paulson and Bernanke know what they are doing.
posted by Frank Grimes at 8:05 PM on September 5, 2008

If the USA is all for privatization, what the heck does this exactly mean?
posted by furtive at 8:05 PM on September 5, 2008

The stockholders? Protected.

Um, did you see FNM and FRE today? Down 25%, and according to most sources, would be wiped out. Read: Bear Stearns, who sold at $10 only to shut up loud investors.
posted by SeizeTheDay at 8:06 PM on September 5, 2008

Down after hours, I should say. And yes, I should apologize for jumping the gun on my language. I asked Matt to reword that.
posted by SeizeTheDay at 8:07 PM on September 5, 2008

Also, Northern Rock is not a precedent for this action. Fannie Mae and Freddie Mac are unique in the United States in a way that Northern Rock is/was in the UK.
posted by selfnoise at 8:08 PM on September 5, 2008

is/was NOT. Sorry.
posted by selfnoise at 8:08 PM on September 5, 2008

Buy gold! Save yourselves!
posted by infinitywaltz at 8:09 PM on September 5, 2008 [3 favorites]

Oh man, I had the wildest night. We got totally hammered on pints of Citibank and shots of Ditech.com, with Chasers, of course. When those hot ReMax twins took Jimmy and I home we totally thought we were scoring 10s for the price of a few rounds. Man, what a shock to wake up sleeping in a 4. This hangover fucking sucks. I can't believe I have to work tomorrow.
posted by [expletive deleted] at 8:10 PM on September 5, 2008 [7 favorites]

I would way rather have a beer with George Bush than John Kerry or Al Gore.
posted by popechunk at 8:11 PM on September 5, 2008 [10 favorites]

I'm guessing that Obama and McCain were given a heads up on this as part of the classified daily breifing they recieve as the major party nominees. They havn't been discussing it because they don't want to be blamed for triggering a panic. Look what happened the Schumer and WAMU a few weeks ago.
posted by humanfont at 8:15 PM on September 5, 2008 [2 favorites]

I can't believe I have to work tomorrow.

hey, guess what? you don't! are you good at selling pencils and apples?
posted by pyramid termite at 8:19 PM on September 5, 2008

Fuck it. I'm going to Alaska and moving in with the Palins.
posted by bardic at 8:23 PM on September 5, 2008 [1 favorite]

Just a mention that Joe Nocera (probably my fave business columnist right now) has been great on Fannie Mae - precise, clear and furious. This Aug 22 piece clears away the "But it was our mission!" excuses and concisely explains just what went wrong:

Fannie Mae and Freddie Mac occupy a complicated place in the nation’s financial system, but the more you understand what they did, the angrier it should make you — especially since it’s likely that you, the taxpayer, will wind up having to pay for their sins...

That would be hard enough to swallow if the cause had, in fact, been the companies’ willingness to finance low-interest loans to working-class home buyers. But the real reason was greed. You know that statistic you always hear about how half the nation’s $12 trillion in mortgages is "touched" by Fannie or Freddie? The implication, of course, is that the two companies are the very heart and soul of the nation’s housing market. But the majority of the mortgages in question are ones that are held by Fannie and Freddie as part of their gigantic portfolio of mortgage-backed securities — the same kind of complex derivatives that brought down Bear Stearns and have caused untold pain to most of the big Wall Street firms.

Holding those securities has nothing to do with "the mission."

....The problem is that while the two companies are still called government-sponsored entities, they are also publicly traded corporations. And for much of the last two decades, they have been hell-bent on growth, the clear goal being to push up their stock prices. "Wrapping" mortgages for banks — you can make money doing that, but you can’t double your earnings every five years, which was the stated goal of the former Fannie Mae chief executive, Franklin Raines.

Ah, but if you buy up the mortgage-backed securities yourself, taking on the interest rate risk as well as the credit risk — all the while using your government-sponsored pedigree to borrow at lower rates than your Wall Street competitors — well, then you’ve got a spectacular growth business. And if you’re the C.E.O., with lots of stock options and bonuses based on stock price and profits — as Mr. Raines was — you can put tens of millions of dollars in your pocket, too. The mission? It was little more than a fig leaf that the companies trotted out whenever somebody pointed out the obvious: that its growing portfolio of mortgage-backed securities was dangerous...

Then, in 2003, came the accounting scandal. Fannie Mae had to restate $9 billion in earnings, and Mr. Raines, who had made $90 million during his six years as chief executive, lost his job, replaced by Mr. Mudd, who had been his No. 2. (Mr. Raines never had to give back any of the money, though.)...So how did Mr. Mudd and Mr. Syron respond? Did they decide to pull back, take less risk and act as a stabilizing force in the market? Not even close. Like their predecessors, Mr. Mudd and Mr. Syron put their investors — and their bonuses — first, and their mission a distant second. As we are now learning, in 2005 and 2006, the two men plunged their companies headfirst into subprime mortgages — and continued doing so even as the subprime market began to implode...

These are the loans that Mr. Syron is now claiming were made to comply with "the mission." But the mission had nothing to do with it. Fannie and Freddie got involved with subprime mortgages for the same reason as everyone else on Wall Street: they offered higher rates of return than ordinary mortgages. Why? Because they were riskier. As we now all know...

But let’s at least acknowledge that there is something deeply flawed with an arrangement in which the shareholders and executives reap the profits in good times, while the government and the taxpayers absorb the losses when things go awry. At the very least, the companies should stop using the mission as an excuse, and acknowledge they did the wrong things for the wrong reason. Their only mission has been to get rich, and it has hurt us all.
posted by mediareport at 8:25 PM on September 5, 2008 [16 favorites]

The invisible fisting from the free market.
posted by ryoshu at 8:26 PM on September 5, 2008 [3 favorites]

And once again, the general public is told to pay up for the gambles of the rich. Lovely.
posted by FormlessOne at 8:28 PM on September 5, 2008

The invisible fisting from the free market.

Uhh...Fannie & Freddie represent the free market?
posted by Inspector.Gadget at 8:38 PM on September 5, 2008

Well this should make my Monday morning interesting, not to mention it's the start of college recruiting season.
posted by djb at 8:39 PM on September 5, 2008

Um, did you see FNM and FRE today? Down 25%, and according to most sources, would be wiped out.

The proper answer to "We've just nationalized the company" is the stock is worth $0. Quoting the Washington Post.

The value of the companies' common stock would be diluted but not wiped out; while the holdings of other securities, including company debt and preferred shares might be protected by the government.

So. The whole point of FNM and FRE is a lie. They were "public", not "government" institutions. They made pubic profits. They made bad decisions.

A public company should fail in this circumstance. But now, lookie, they're "government" institutions now. Their shortfalls will be covered by the US Government -- read, taxpayers.

Here's how bad this could be. Total book for FNM and FRE: $12 Trillion. That's what the US Taxpayer is now potentially on the hook for.

Funny how Fannie Mae and Freddie Mac are too big to fail -- but you aren't.
posted by eriko at 8:43 PM on September 5, 2008 [2 favorites]

"Funny how Fannie Mae and Freddie Mac are too big to fail -- but you aren't."

Did you know that Obama is black?
posted by bardic at 8:45 PM on September 5, 2008 [1 favorite]

The Mortgage Bankers Association reported Friday that a record 9 percent of American homeowners with a mortgage were either behind on their payments or in foreclosure at the end of June.

The source of trouble in the mortgage market has shifted from subprime loans made to borrowers with poor credit to homeowners who had solid credit but took out exotic loans with ballooning monthly payments.

More than one out of 10 borrowers with a prime adjustable-rate loan is now delinquent or in foreclosure. That portion, 11.3 percent, was up from 9.7 percent in the first quarter and is expected to continue to rise as more homeowners see their monthly payments spike.
posted by netbros at 8:45 PM on September 5, 2008

This seems as good a time as any to mention John McCain and Charles Keating together in one sentence.
posted by [expletive deleted] at 8:48 PM on September 5, 2008 [3 favorites]

Neither Obama nor McCain has showed an interest in or understanding of economics.

That's a nice sweeping, truthy thing to say. But it's not actually true.

Obama's platform includes what a lot of economists consider pretty exciting (and sophisticated) ideas about economics (that's why there are sites like "Economists for Obama" and a whole slew of articles about Obama's uniquely data-driven approach to understanding the behavioral dynamics that drive economic activity). And history, as this NYTimes article notes, is dramatically on the Democrats side when it comes to proven ability to run economies that benefit the most people.

Have things really gotten so bad that we all just casually assume nobody out there's doing anything more than going through the motions like the Republicans have been for the last 8 years?
posted by saulgoodman at 8:52 PM on September 5, 2008 [15 favorites]

saulgoodman asked:
"Have things really gotten so bad that we all just casually assume nobody out there's doing anything more than going through the motions like the Republicans have been for the last 8 years?"

Yes.
posted by batmonkey at 9:02 PM on September 5, 2008 [1 favorite]

You may be invested in Fannie Mae and Freddie Mac and not even know it.

While much attention is paid to the daily gyrations of Fannie and Freddie common stock, investors might not realize that the two government-sponsored mortgage giants are common components of mutual funds and company pension plans.

Large commercial banks own billions of dollars in the two companies' stock and debt because it ostensibly offers safety and helps shore up balance sheets as it can be counted as capital against other liabilities. Those same banks are part of funds that make up many 401(k) plans.

But unless you're savvy enough to check where the people who control your money are putting it, you won't know the extent of your exposure to Fannie and Freddie.

Now would be the time to find out. (To see which mutual funds are major holders of Fannie Mae shares, click here. For major holders of Freddie Mac, click here.)

Fannie has lost 87 percent in value this year, while Freddie has dropped a whopping 92 percent.
posted by netbros at 9:03 PM on September 5, 2008 [5 favorites]

To netbros point, JPMorgan recently disclosed a $1.2 billion stake in FNM/FRE perpetual preferreds, which were written down $600 million as of August 25, 2008. In the event that perps get wiped out, there are a lot of banks out there that will be hurting.
posted by SeizeTheDay at 9:09 PM on September 5, 2008

Life is a test - and you're graded on a curve

At age 4, success is...not peeing in your pants.
At age 12, success is...having friends.
At age 16, success is...having a driver's license.
At age 20, success is...having sex.
At age 35, success is...having money.
At age 50, success is...having money.
At age 60, success is...having sex.
At age 70, success is...having a driver's license.
At age 75, success is...having friends.
At age 90, success is...not peeing in your pants.
posted by netbros at 9:18 PM on September 5, 2008 [9 favorites]

S & L II. Like father, like son.
posted by troy at 9:19 PM on September 5, 2008

JPMorgan recently disclosed a $1.2 billion stake in FNM/FRE perpetual preferreds, which were written down $600 million as of August 25, 2008

Ah, but the preferred stock will not get diluted, at least that's my understanding. So if that's what JPM has, they may not get wiped out. In fact JPM is up 2.5% aftermarket today, in comparison with FNM which is down 20%.
posted by delmoi at 9:24 PM on September 5, 2008

Ah, but the preferred stock will not get diluted, at least that's my understanding.

From the NYTimes article:

Under a conservatorship, the common and preferred shares of Fannie and Freddie would be reduced to little or nothing

Now, obviously nothing is certain, but preferreds are non-voting shareholders of a company, and given the strong likelihood that only the creditors would be paid, it stands to reason that preferred holders will be wiped out.

And most of the financials were up today, so cherry-picking JPM's stock as having any bearing on this conversation is just silly.
posted by SeizeTheDay at 9:30 PM on September 5, 2008

Total book for FNM and FRE: $12 Trillion. That's what the US Taxpayer is now potentially on the hook for.

That's a very scary number. The total estimated US public debt is $9.5 trillion. Doubling the debt pushes the American debt ratio from 60% of GDP to 120%, worse than any other OECD economy save Japan.

I'm no economist, but won't this added burden, or even part of it, have significant effects on the central bank's ability to set interest rates, and so control inflation?
posted by bonehead at 9:32 PM on September 5, 2008

From my understanding, whether or not the Preferreds retain their current value and paying ability is dependent on whether the Preferreds are considered an equity or a bond (something that isn't spelled out in the recently passed legislation). If it is considered an equity, then the new government preferreds/stock will have priority over them. Which means that the Government, which is going to be sinking a lot of money into the GSEs and thus deserves to be compensated, will get paid first making the reliability of the Preferreds almost non-existant. If the Government feels charitable to the Pension Funds and Mutual Funds and Foreign and Domestic Banks that own the preferreds, they will position their ownership below the Preferreds.

Personally, I doubt the Government is going to be nice in this case. They are already floating the billions of FNM and FRE debt owned by banks and individual investors with this move. Plus sinking the preferreds takes the wind out of the people who will inevitably begin ranting about moral dilemmas of bailing the GSEs out.
posted by aburd at 9:39 PM on September 5, 2008

Total book for FNM and FRE: $12 Trillion. That's what the US Taxpayer is now potentially on the hook for.

First, that's just wrong. Here's a google cache of a story showing that FNM and FRE own or guarantee half the US mortgage. Second, sure, the US taxpayer is on the hook for $6 trillion, if somehow EVERY SINGLE MORTGAGE goes to zero.

People keep complaining that it's the executives to blame. But about the people filling the airwaves with complete lies and scare tactics?

$12 trillion = terrorist

Both are boogeymen.
posted by SeizeTheDay at 9:43 PM on September 5, 2008

And most of the financials were up today, so cherry-picking JPM's stock as having any bearing on this conversation is just silly.

Then why did you do it?

(Read my comment again, I quoted you talking about JPM, and that's what I was responding too. and I was talking about after market action, although I don't know if that includes the time after the announcement, but I would assume so because FNM was down 21%, while going up 9% during the day)

Somehow I got the impression that preferred stock would not be wiped out, but if it is, that's good.
posted by delmoi at 9:54 PM on September 5, 2008

Oh, just so it dosn't get lost in the discussion, another bank failed today.
posted by delmoi at 9:58 PM on September 5, 2008

"Somehow I got the impression that preferred stock would not be wiped out, but if it is, that's good."

The fact is that no one knows. It's all speculation as to how all of this will be structured. And given that as of two weeks ago both companies and the Government were talking like this whole Government takeover business wasn't necessary, all speculation is worthless until we see the details.
posted by aburd at 9:58 PM on September 5, 2008

Bill Gross of PIMCO has a lot to say about this.
posted by OldReliable at 10:19 PM on September 5, 2008

Oh fuck, that bank I just mentioned? The one who's failure I said would get lost in the FNM/FRE noise? Well, actually I think it will end up getting a little press after all. John McCain's son was on the board, and quit about a month ago.
posted by delmoi at 10:25 PM on September 5, 2008 [4 favorites]

You knew that things were fucked up with Fannie Mae because their accounting scandal several years ago, they were UNDER reporting their earnings. Enron just made up profits and burned their shareholders hard. Fannie Mae made so much money telling foreign governments that their debt was implicitly backed up from the US Government that they made so much money, it looked unreal. So they had to lie to shareholders, and told them they made LESS money than they really did. Yeah. It's really that fucked up.
posted by amuseDetachment at 10:43 PM on September 5, 2008

The implication, of course, is that the two companies are the very heart and soul of the nation’s housing market. But the majority of the mortgages in question are ones that are held by Fannie and Freddie as part of their gigantic portfolio of mortgage-backed securities — the same kind of complex derivatives...

This is a strange remark. Mortgage backed securities aren't derivatives, and the owners of mortgage backed securities really do finance the origination of home loans.
posted by Mr. President Dr. Steve Elvis America at 10:44 PM on September 5, 2008

Just to point out, Bill Clinton knew diddly/squat about Boss Level economics. He did know how to find people that did, across a broad spectrum of ideologies. Reich and Levitt were just as important as Greenspan, and they all acted in concert. If Newt's "Contract On America" congress hadn't hamstrung the SEC, Levitt would have squashed Enron like a roach before they took a giant safety pin to the silicon valley bubble. Unlike the Bush years would have us believe, you can deflate a bubble as well as pop it.

The next president will need to be able to appoint smart, accomplished people across the political spectrum to guide us past the wrack and ruin of a post-Reaganomics world, doctrinaires need not apply. In this, we are fortunate to have the candidates we do... neither Obama nor McCain will be particularly inclined to pay attention to their party's ideological commissars once they're in power, and both are genuinely interested in good governance. Obama's education and strategic thinking makes me think he'd be a better fit, but I'm one of those lefty MeFites, so it goes.
posted by Slap*Happy at 10:46 PM on September 5, 2008 [1 favorite]

This is a strange remark. Mortgage backed securities aren't derivatives, and the owners of mortgage backed securities really do finance the origination of home loans.

If they just did simple securitization, that may be true, but they did some happy-fun financial magicks by setting up their MBSes into tranches, which values are derived from the underlying crap houses in the middle of nowhere.
posted by amuseDetachment at 10:51 PM on September 5, 2008

If they just did simple securitization, that may be true, but they did some happy-fun financial magicks by setting up their MBSes into tranches, which values are derived from the underlying crap houses in the middle of nowhere.

What? A tranched MBS is still not a derivative, and it still finances loan origination.
posted by Mr. President Dr. Steve Elvis America at 10:56 PM on September 5, 2008

What? A tranched MBS is still not a derivative, and it still finances loan origination.

What is it about a tranche that makes it not a derivative? I mean, I honestly have no idea what the precise definition of a derivative is, or if there even is one, since it denotes a bundle of different instruments.
posted by delmoi at 11:02 PM on September 5, 2008

What is it about a tranche that makes it not a derivative? I mean, I honestly have no idea what the precise definition of a derivative is, or if there even is one, since it denotes a bundle of different instruments.

I agree that precisely defining a derivative is difficult, but debt instruments aren't derivatives, and mortgage backed securities are debt instruments.

Different tranches of debt are just debt instruments with different rights that are issued in the same transaction. Senior tranches have preferred position with respect to the collateral, and are thus more likely to get paid.
posted by Mr. President Dr. Steve Elvis America at 11:15 PM on September 5, 2008

Look on the bright side: we had three TRILLION dollars to spend destroying shit in Iraq and then paying to rebuild it.

Had.

Vote McCain, so we can do it again in Iran.
posted by orthogonality at 11:59 PM on September 5, 2008 [1 favorite]

Different tranches of debt are just debt instruments with different rights that are issued in the same transaction. Senior tranches have preferred position with respect to the collateral, and are thus more likely to get paid.

Ah, I see, I'm just reading wikipedia here, but a tranche isn't a derivative because it's all part of the 'original' deal, but a credit default swap based on the mortgage would be a derivative. Couldn't a CDS be considered "mortgage backed" in some sense, though? After all, if you're party to a CDS, and the 'reference entity' -- I.E. the home buyer stops making payments, then your CDS becomes worthless, right?

That might be what Joe Nocera meant when he said mortgage backed securities.
posted by delmoi at 12:16 AM on September 6, 2008

If mutant isn't in on this conversation then he's either fled to the Cayman Islands or thrown himself out his office window (the good news is, I hear his office overlooks the reflecting pool).

I was thinking about the people I really pity in this mess: the ones who were misled into a bad-deal ARM and are now paying more than half of their income on their mortgage while the value of their investment drops to less than half of what they owe on it but are just going to keep paying because to do anything else would be dishonorable. There are still millions of these people in America who are going to be making big sacrifices to keep this economy from total collapse and the Movers and Shakers do not deserve their support.
posted by wendell at 12:42 AM on September 6, 2008 [2 favorites]

Fannie Mae and Freddie Mac are at the very core of the monetary disorder that's tearing the economy apart; their roles are probably bigger than any entity except the Fed. They were given extraordinarily low interest rates because of the 'implied guarantee' of being a Government-Sponsored Entity, even though there was no explicit promise. This meant that Fannie and Freddie got to borrow (correctly, as it turns out) as though they had the full faith and credit of the US backing them, but then they used that credit to make a profit with. They made reckless, irresponsible loans, and were a major, driving force behind the bubble in house prices. If you're underwater right now, you should thank first Greenspan, but then Fannie and Freddie, for stoking the speculative bubble that gave you false pricing information, and made you believe that your house was worth more than it is.

What does this actually mean? It means that the United States Government is now directly in the business of determining lending standards to private borrowers. They're not just on the hook for $12T: the government is now the direct source of cash to try to prop up the housing ATM. This cash has to come from somewhere. For some period of time, the market may be willing to lend to FNM and FRE, but eventually, the government is going to have to start putting its own cash in to hold the real estate market together. Not only is the US government now determining lending standards, they are going to directly be in the business of trying to prop up your house price. They're NOT going to let Fannie and Freddie just stop operating, because if they do, the real estate market will seize up and fail. If they try to raise credit standards, and treat them like responsible entities, the markets will seize up and fail, but slowly. They will see the markets failing and they WILL provide more cash to try to stop it. Those debt chains you're wearing? This is why you have them.

Housing is wildly overvalued, so it will require massive cash influxes to even hold the bubble in place. The government may be able to get loans for FNM and FRE for awhile yet, but because we're in a popping bubble, they will continue to lose money each month, until eventually the lenders get spooked, if they aren't already. So the government will step up with its own cash instead. Money will flood into the economy, and because the securitization process (aka "turning loans into securities that we can hold like stocks and use as reserves to make more loans against") hasn't really been stopped, it will then be magnified by banks that buy those securities and use them as assets to lend against. This might reignite the property bubble. It probably won't, it'll probably go to ignite other bubbles. Just like the massive Fed intervention to stop the stock market bubble pop started the real estate and debt bubbles, this intervention will start speculative bubbles in other things. All that extra cash floating around, in other words, is going to drive prices up.

This is, by the way, much of why oil has been so expensive; there's huge amounts of cash sloshing around the system, and the speculators have been driving it up. That choked off demand, so once it started going down again, it moved much faster than it otherwise would have, for the exact same reason: too much cash in the system, too many speculators, and too many of them wanted out of their positions at once. (It's MUCH MUCH more profitable to manipulate other people's wealth than it is to actually generate new wealth yourself, so more and more and more of the world economy has become focused on that. Normal people, the ones actually CREATING the wealth, instead of manipulating abstractions of it, are taking it in the teeth.)

House prices are GOING to come down. They will do that in one of two ways: either they will come down, or everything else will go UP. But once that inflation has really gotten its hooks into the economy, it'll be impossible to get rid of, because if we ever stop stimulating it with endless torrents of new money, the debt structures will collapse.

All modern money is debt, and you can't use debt to solve a debt problem.

This is a big, big step toward Zimbabwe. It's coming. If we don't fall into a deflationary depression, we'll eventually become Zimbabwe instead. There are too many dollars, too much debt, in the world. The required rate of debt issuance to keep the economy moving has become greater than the growth rate of the economies underneath, and has been for a long time. The economy, in other words, can't grow fast enough to keep up with the growth of debt. Either we will have a powerful deflation as the economy realizes that much of the current debt is bad, or else we'll keep piling new debt on top, and then more debt, and then more debt. Each time, as the latest layer of debt starts to look bad, and things start to falter and fail, it will look more painful to let things fail than to bail things out, so they will always continue if they're able.

If we avoid the Second Great Depression, eventually, we'll go into hyperinflation. Just like Mugabe, we're trying to extract more real wealth from the economy than the economy can provide. We're doing it through several levels of indirection, but from a very big-picture viewpoint, it's the exact same thing. He's trying to pay for more workers and goods than his economy can support; we're trying to hold, first stock prices, and now house prices, at levels that can't be supported. Both governments are doing this by playing games with currency and debt. Zimbabwe's manipulations were simple, direct, and relatively easy to detect, so it didn't take that long to fail. Ours is complex, hard to understand, and has fooled a lot more people for a lot longer, but it's still the same thing: we're trying to extract wealth out of the economy (high prices) that the economy can't provide. We're doing it through 'liquidity injection' instead of physically printing money, but it's going to end up in the exact same place. At least, it will if the system doesn't fail outright first.

Your house is probably not worth what you paid for it, if you bought it anytime in the last six or eight years, and the economic wishful thinking that will be imposed on the market to try to hold that price up will do enormous damage to everything else.

Again: the United States Government is now in the business of determining lending standards and real estate prices.
posted by Malor at 2:58 AM on September 6, 2008 [17 favorites]

The good news is that the housing crash is family-friendly.
posted by WPW at 4:20 AM on September 6, 2008

...Ron Paul, anyone?
posted by GreyFoxVT at 6:06 AM on September 6, 2008

...Ron Paul, anyone?

No, thanks. I just ate.
posted by milarepa at 6:16 AM on September 6, 2008 [6 favorites]

Americans are to blame. Not their government.

Complacency caused by too many toys methinks.

Sorry.
posted by rmmcclay at 6:24 AM on September 6, 2008

And some people still plan to vote Republican.

My question is, is that Stockholm Syndrome or stupidity?
posted by fourcheesemac at 6:40 AM on September 6, 2008

Well I'm gonna be fine. I googled Ron Paul.
posted by DU at 7:29 AM on September 6, 2008

First, that's just wrong. Here's a google cache of a story showing that FNM and FRE own or guarantee half the US mortgage. Second, sure, the US taxpayer is on the hook for $6 trillion, if somehow EVERY SINGLE MORTGAGE goes to zero.

Okay, I got that number wrong, book is $6T, not $12T.

But you miss the point. When the Fed says that it will cover those loans, the dynamic changes. Why be conservative with them? They're *backed*.

We're looking at a scary number of people in default -- close to 10%. Assuming it's across the board, that's $600 billion in potential *immediate* liabilities right there. (Oh, and $600 billion in liabilities that aren't backed by FNM and FRE fucking things up.)

Oh, and 10% more housing on the market not selling. Which drives prices lower. Which puts more people underwater. Which means more people who have to sell will default, because they can't clear the loan. Which means *more* USG coverage, and so forth.

Worse. We cover. We run the presses to cover it. This is inflationary. So, now, we get inflation ramping up cost of living. Which puts stress on more people, who default because of costs. Those houses REO. Those loans are covered by the government, who prints more money.

How much money do we dump on this? And who are we protecting? Not the people who bought the houses. Not the people who didn't live on debt -- who bought on reasonable terms, with reasonable capacity and collateral to make the loan work.

Nope, who gets covered are the banks who made the loans in the first place. They should fail -- they made bets that went bad. Why am I paying to cover those loons?

IOW: If you lived within your means, if you saved money, if you did *everything* they told you do to to be financially prudent, you just got fucked. Your savings will be worthless thanks to inflation.
posted by eriko at 7:56 AM on September 6, 2008 [2 favorites]

We're looking at a scary number of people in default -- close to 10%. Assuming it's across the board, that's $600 billion in potential *immediate* liabilities right there.

No, it's not. Look, I'm not trying to be a dick here, because I agree with your overall sentiment (FNM and FRE, and large banks and brokers took extraordinary risk and put taxpayers on the hook), but 10% of people being foreclosed upon DOES NOT MEAN that every mortgage goes to zero. You're assuming two things: 1) Loan-to-value on every single house is 100 (which is completely wrong); 2) That in the event of foreclosure, the house's value goes to zero (which is completely wrong).

There are some scary things going on out there. Foreclosures are reaching records; housing prices are declining at record paces; banks are not writing mortgages the way they used to, drying up people's ability to refinance. But you are not helping by spreading misinformation.
posted by SeizeTheDay at 8:04 AM on September 6, 2008 [2 favorites]

...Ron Paul, anyone?

Sure! I don't know exactly what I'll do with a crazy old racist, but I'm sure I can put him to work sweeping the steps or yelling at the fleet-footed negros. Freecycle is so great.
posted by cmonkey at 8:16 AM on September 6, 2008

I'm a cannibal and I endorse this ad: " Eat the Rich!
posted by doctorschlock at 8:39 AM on September 6, 2008

That in the event of foreclosure, the house's value goes to zero (which is completely wrong).

It becomes an illiquid asset, which, if the current market trends keep happening, may as well be $0 to the institution holding it -- you can't pay a depositor with a living room.

But you're point is taken, I am a little over the top. However, the current financial system is so multiple leveraged that I don't think anybody knows how bad it could be.
posted by eriko at 9:38 AM on September 6, 2008

We're looking at a scary number of people in default -- close to 10%. Assuming it's across the board, that's $600 billion in potential *immediate* liabilities right there.

That assumes the property is worthless, but it is worth something, given rent vs. buy ratios the property is probably worth 60% of loan amount. The government also has the luxury of time so some of it can be held and sold at a profit later on.

Worse. We cover. We run the presses to cover it. This is inflationary. So, now, we get inflation ramping up cost of living.

Housing prices are going to down. This leaves some room for printing money; because the decline in housing prices will offset a rise in other goods. If a global recession takes hold there will be more room to print money because commodities prices will fall; as they have in the last 2 months. Just look at the chart for DBA (ETF for Rice, Corn, Soy, Wheat), GLD (gold ETF), and the price of west texas crude. All of these are down from summer highs. These lower commodities prices will work their way through the supply chain keeping costs more stable in the next two months than they have been.
posted by humanfont at 10:54 AM on September 6, 2008

Obama's uniquely data-driven approach to understanding the behavioral dynamics that drive economic activity

behavioural economics is a fascinating field - I wish I knew more about it. But mostly, the phrase "data-driven" just gives me a real warm and fuzzy feeling.
posted by jb at 11:26 AM on September 6, 2008

"That in the event of foreclosure, the house's value goes to zero (which is completely wrong).

It becomes an illiquid asset, which, if the current market trends keep happening, may as well be $0 to the institution holding it -- you can't pay a depositor with a living room."

Like I've said before, the house is only WORTH as much as someone will cross your palm with TODAY. The actual WORTH of the foreclosed house would be somewhere between ZERO and what any person or entity is willing to trade for it.

We may all soon have Chinese or Arab oil sheiks for landlords.
posted by GreyFoxVT at 11:31 AM on September 6, 2008

wendell -- "If mutant isn't in on this conversation then he's either fled to the Cayman Islands..."

Ha! The shitty ass English "summer" we've had is more likely to drive me to Cayman than any market event. Although I could have done without the volatility this week, but what the hell - these things just make it all more interesting. And, of course, no better way to make one forget a rough week in the markets that a sodden evening carousing in London's East End Pubs so after a far far too late night out and about, I'm just catching up on lots of news.

Anyhow, agree with SeizeTheDay's sentiment that these are fascinating times. But overall I perceive the government taking over Fannie & Freddie as a positive. If anything, it's been uncertainty that has been rattling people's nerves so much. Now that uncertainty is, if not totally gone, then at least a strong step towards calming people's nerves has been taken. So that's good. The markets may even rally from here if the final message from The Feds is strong and demonstrative enough.

Another positive for this news - we all knew there were management problems with Fannie & Freddie but the owners - the shareholders - certainly weren't doing anything to fix the problem. The board was trying, dumping three executives last month, and a bunch of Risk Management people a few weeks earlier as well (industry gossip, can't find link), but it was really too little too late and oh yeh - not the right people to fire either. So the The Feds stepped in to run the place, dumping existing management in the process.

At the same time equity (current owners) gets wiped out but what the hell - that's part of the dangers of owning stocks. A danger that many people - even folks here on MetaFilter - are sometimes surprised to learn of. Its very common for equity, even preferred to get wiped out when debt (i.e., the bondholders) take over. Keep in mind that preferred shares, even though higher in the corporate pecking order than common, are still equity and thus vulnerable to extinction.

I don't see this as a long term fix, but if it turns out to be the history of finance tells us there is are precedents.

In thick of the S&L crisis, I distinctly remember Citibank being taken over and run (on paper) by The Feds. If you went to a meeting at Citi sometimes there would be as many Feds as Bank employees present, they were that thick on the ground sometimes. One Citibank officer recalls that "the regulators regularly took over the boardroom to go through the loan portfolio piece by piece".

I think they were in Citibank for over two years, but that institution emerged fine. I don't see any evidence that it won't be different this time.

Another example from the history of finance and one perhaps more relevant to this thread:- in the midst of The Great Depression The Home Owners’ Loan Corporation (HOLC) was established as a result of an act of congress in 1933.

It seems that many people readily draw comparisons between this housing crash and the 1929/1933 collapse, but are ignorant of the simple fact that back in the 20's the typical mortgage term was FIVE YEARS. Folks refinanced at the end because, why not? Prices were only going up. Well, one lesson that our grandparents took away from The Great Depression was the value of a long term mortgage.

Harriss (1951) discussed how HOLC helped to move the mortgage market to a long term basis, purchasing and refinanced distressed mortgages on one to four family houses. They focused on term extension, and all loans were subject to "sensible" constraints on income, etc. During August 1933 and June 1936 HOLC issued well over one million loans to struggling homeowners. HOLC was liquidated in 1951, at a small profit to the US government in fact.

Full citation: Harriss, C. L., 'History and Policies of the Home Owners’ Loan Corporation'. New York: National Bureau of Economic Research, 1951.

In terms of real estate, I recently did an FPP about the big funds moving in, and since I did that post we've seen even bigger action (i.e., larger sums of money being put on the table) and now even Warren Buffett is looking at US real estate.

We're starting to see Florida real estate moving again, with "...at least $30 billion earmarked by funds to buy distressed Florida real estate. Some investors have been waiting almost three years to buy...". Even though there are still supply side problems, values are so compelling that bulk buyers are beginning to emerge to acquire property a knock down prices.

So lots of positives there, lots of big money either already moving or preparing to move into US real estate. You've just got to look for the clues and they're not usually front page stories on the local newspapers like Fannie and Freddie currently are. 'Cause its boring news now until those same funds in two or three years make in excess of one hundred precent profits and then we'll see some newspaper space devoted to this topic.

But I do think the comparison of this event to Northern Rock is a stretch for a couple of reasons - first, management of that bank had been shopping the firm on their own before the government stepped in, and there were buyers for Nothern Rock, just not at the price the government wanted. Further, Northern Rock really didn't pursue the break up angle as much as some of the big funds advised - splitting apart the portfolio. They made a passing attempt and sold off their buy to let division, but that was it.

As far as I know, neither Fannie nor Freddie were being shopped, either by their management or The Feds, and there is no question that parts of their portfolio would attract keen interest. And a wide range of market savvy people are indeed advocating a breakup of both firms - an outcome that will be very, very interesting to watch.

So while the Northern Rock comparison isn't a really valid (things moved far, far faster in the US), it is useful to illustrate how inept Darling truly is, telling the press "he had no idea how serious the credit crunch would become." There have been other examples of just how incompetent this guy is. Just look at the complete 360 on non-doms (disclaimer: I'm one) or the CGT.

So the UK is in for the worst recession in 60 years? Darling is contrary indicator almost across the board, he's perceived that badly.

Dollar / Euro will correct sooner rather than later, so I doubt the blip cited will hit exports that much. And besides, we've seen the Euro surge from $0.80 in 2000 to $1.6038 this year, so the recent strength is little more than noise, especially so as ECB is technically already tightening credit lines and may soon actually increase rates. There really isn't that much attracting me to the Dollar over the Euro in the near term.

Of course The Pound is a different beast, and the fundamentals favour Dollar appreciation but its this is more an indictment of the UK's (Darling again) mismanagement that anything else. That guy is a disaster.

You know for all the talk of foreclosure in this thread it seems that folks are ignoring how the mortgage market really works. The banks will do anything to avoid a foreclosure, and one very powerful tool the borrower has is the workout.

So depression or hyperinflation? I never like these binary, either or, rather unsophisticated views of economic outcomes, situations with two alternatives.

No, while there is an entire continuum of possible results with depression or hyperinflation just the (possible) extreme outcomes, I've posted several times I think we're more likely to experience a bought of stagflation. How long is anyone's guess, but that's the most likely outcome.

After all, the present situation is so familiar. The year was 1976 and inflation - caused primarily by year after year of expansive, Vietnam related military spending (sound familiar?) - was just beginning to spike, eventually reaching 14.76% in March of 1980. Jimmy Carter was unlucky enough to be elected president when the economy was slowing, oil prices were spiking, unemployment was rising, productivity slowing and the United States had incurred tremendously large trade and budget deficits. The United States floundered, first mired in stagflation and then withering under Volckers tight money policies. It wasn't until 1983 that we saw a robust recovery.

While we've got inflation the only thing I can't see is a classic wage / price spiral - something we've observed in every case of stagflation over the past two hundred years or so.

I've posted before about engineered inflation to erode deficits down to manageable levels. Think about how similar events have played out in the past for clues to what might happen in the future.

But I'm betting stagflation. Yeh, fascinating, historic times. Great post btw.
posted by Mutant at 11:46 AM on September 6, 2008 [7 favorites]

Well, the house and car are more or less paid for, and I have around six or seven pounds of 24k gold (if smelted down). I also grow a lot of my own food. If necessary, I could live without electricity or gas (was raised without the latter, could adjust to the former as I'm an avid reader of books). I guess I'm about as ready for a new Depression as I will ever be. Let's get it over with.
posted by jamstigator at 12:01 PM on September 6, 2008

"It is difficult to get a man to understand something when his job depends on not understanding it." - Upton Sinclair

(It's A Wonderful Life, during the run on the bank)
You're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house...right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?...Now wait...now listen...now listen to me. I beg of you not to do this thing. If Potter gets hold of this Building and Loan there'll never be another decent house built in this town. He's already got charge of the bank. He's got the bus line. He's got the department stores. And now he's after us. Why? Well, it's very simple. Because we're cutting in on his business, that's why. And because he wants to keep you living in his slums and paying the kind of rent he decides. Joe, you lived in one of those Potter houses, didn't you? Well, have you forgotten? Have you forgotten what he charged you for that broken-down shack? Here, Ed. You know, you remember last year when things weren't going so well, and you couldn't make your payments? You didn't lose your house, did you? Do you think Potter would have let you keep it? Can't you understand what's happening here? Don't you see what's happening? Potter isn't selling. Potter's buying! And why? Because we're panicky and he's not. That's why. He's picking up some bargains. Now, we can get through this thing all right. We've got to stick together, though. We've got to have faith in each other.
posted by wallstreet1929 at 2:32 PM on September 6, 2008 [1 favorite]

I think they were in Citibank for over two years, but that institution emerged fine. I don't see any evidence that it won't be different this time.

A $590M check from a Saudi prince was sufficient to recapitalize Citi's losses.

Citigroup, last I've seen (4 months ago), is holding around $130B of level 3 assets on its books.

and one very powerful tool the borrower has is the workout.

Millions of buyers got caught up in the speculative boom of 2004-2006. These borrowers have no reason to "work out" a mortgage on a property that is so far underwater. The climb was precipitous, so will the fall be.

I was looking at houses in Fresno in early 2002 (when lending was still sane), in the upper 5-10% segment of the market there. Prices were $280-350k then, peaked at $600-700K in late 2005, and have now fallen halfway back to their 2002 levels (illustration of sample property that I was looking at).

30%+ of the sales activity in California during the peak was speculative NOO buying. There will be no workout for these properties, only default.

$500B in pain has been taken by the system. Optimistically, another $500B is coming, with another $1,500B possible if not probable.

The scale of these numbers dwarfs that of the late 80s so I find any form of "no problems here" argument to be Pollyanna.

I have no idea what's going to happen over the next 5 years, a Japan-like stagflation wouldn't surprise me, but the sheer stupidity -- abject lack of risk management -- that was allowed to bloom earlier this decade is fully beyond my comprehension.
posted by troy at 3:28 PM on September 6, 2008 [1 favorite]

here's a nice rundown and suitable outrage:

That's right -- we have no money for rebuilding our infrastructure, for any form of National Heath Care, for fixing/saving social security, but a bunch of rogue traders and Alan Greenspan, under the guise of "Deregulation" can leverage up and lose trillions, which you the taxpayer is on the hook for!

some more colour :P

another issue is whether a 'credit event' has been triggered...
posted by kliuless at 3:48 PM on September 6, 2008

Mutant wrote: The banks will do anything to avoid a foreclosure, and one very powerful tool the borrower has is the workout.

You say that, but I personally know someone who is trying to buy a house that's a whisper away from foreclosure. The owner is desperate to get out, and given the current market, the banks are going to have to lose some money (about 10% of the loan amount between the first and second lenders) or they're going to lose it all.

Countrywide and GMAC have been arguing for months over who is going to lose how much. It's ridiculous. They'll probably eventually get around to selling the house, but jeez, it's not as if the buyer has to stick around for four months.
posted by wierdo at 5:00 PM on September 6, 2008

What was the rational for privatizing Fannie Mae in the Johnson admin? Seems like it might have been a bad decision.
posted by afu at 2:30 AM on September 7, 2008

troy -- "A $590M check from a Saudi prince was sufficient to recapitalize Citi's losses. Citigroup, last I've seen (4 months ago), is holding around $130B of level 3 assets on its books."

Ok, but we're making a jump here from relatively illiquid Level 3 assets to realised losses. Many of those Level 3 assets, with market values of 20% of par, are still performing. They are simply illiquid.



"Millions of buyers got caught up in the speculative boom of 2004-2006. These borrowers have no reason to "work out" a mortgage on a property that is so far underwater. The climb was precipitous, so will the fall be"

Of course they do. Simple example - someone purchases at the precise top, paying, say $100K for a flat. Let's assume no principal at all has been paid before the market collapses. Now market says that same flat is worth $50K. Flat owner tells the bank they're walking unless something positive comes out of workout.

Let's also assume no other interest in that flat exists. So from the banks pov, they either accept a loss of $100K or they accept a loss of $50K. In "normal" times the bank may very well accept a loss of $100K, as they could use the tax loss carry forward to offset other profits. We all agree these aren't normal times, so I suspect most banks would minimise losses if at all possible.

Of course in normal times (and ignoring workouts) they'd accept the loss and then realise additional revenue from selling the debt on (at perhaps 50% of face) for collection, as well as the recovery value of the flat.



"...30%+ of the sales activity in California during the peak was speculative NOO buying. There will be no workout for these properties, only default."

More than likely default, yes. But that hardly means a recovery rate of $0. Some people are indeed interested in purchasing at the bottom, and will scoop up what they perceive to be bargains - this is why we're seeing all the hedge funds raising capital, why Buffett is snooping about in this sector. There is value out there.

That being said, there most definitely is crap that will go unwanted, even at $0.

So I suspect that a new day looms for suburban squatting.


"$500B in pain has been taken by the system. Optimistically, another $500B is coming, with another $1,500B possible if not probable."

Yeh, another $500B is more than likely but you're starting to push past every estimate I've seen to date if you saying this entire episode is cost $2.5T. Not saying it's not possible - after all, any outcome is possible but we're discussing probabilities here, and I'm not sure you high end is very probable.

Goldman is saying $1.2T, while The IMF has it's estimate topping out at about $1T, which is consistent with estimates from I've seen from BIS.

If you've got data to support the $2T to $2.5T estimate please post - I'd like to see it.



"The scale of these numbers dwarfs that of the late 80s so I find any form of "no problems here" argument to be Pollyanna."

But comparing the numbers directly doesn't tell us much about the scale of the problem. For example, the S&L crisis was much, much larger than the REITS & Office Leasing collapse in 1974/75, which itself was larger than previous real estate bubbles in the United States.

Even regional bubbles get larger all the time - for example, in 1979 The United States saw the collapse of a rather significant (at the time) speculative bubble focused on Southwestern real estate. The bubble took roughly six to eight years to totally collapse, and from 1980 to 1989 we saw nine out of ten of the largest bank holding companies [.pdf] in the State of Texas collapse.

The Fed had to step in and guess what? The sums involved ran to roughly $60B to perhaps $100B; an amount that a SWF now could easily cover. Just to give an idea of the scale these funds operate at:

• Abu Dhabi Investment Authority (ADIA) -- $900 billion
• The Government Pension Fund of Norway --- $350 billion
• Government of Singapore Investment Corporation -- $330 billion
• Kuwait Investment Authority -- $250 billion
• China Investment Corporation -- $200 billion
• Singapore's Temasek Holdings -- $159.2 billion
• The Stabilisation Fund of the Russian Federation -- $158 billion

So directly comparing numbers isn't a fruitful exercise, I'm afraid.

My argument isn't "no problems here", just that I see a positive when someone steps in and takes over a clearly floundering entity, one that's very important. Fire management and break it up. Hopefully Paulson will do the right thing but we'll have to see.


"I have no idea what's going to happen over the next 5 years, a Japan-like stagflation wouldn't surprise me, but the sheer stupidity -- abject lack of risk management -- that was allowed to bloom earlier this decade is fully beyond my comprehension."


Yeh, I agree about the stagflation outcome. My posting history is clear - I've never bought into the hysteria, the binary, either or outcome (depression or hyperinflation) as we've seen this all before.

Sure, the details, the precise numbers and instruments are different but what's the same is the emotion the shrillness of the warnings. Same talk in the late 70s, early 80s.

And then end of that period came with a whimper, not a bang. We experienced brutal inflation and grinding interest rates, not overall economic collapse. I suspect it won't be much different this time.

But your remarks about Risk Management are interesting. We're already seeing lots of activity at the Regulatory Level, they are absolutely determined that something like this will never happen again. But the banks are already gearing up to fight it, even before the Regulators have put all their cards on the table. Fascinating watching the two sides square up.

Whomever the next President is will be sitting in the middle of a big mess, not just economic but also mediating the Regulators and the Financial Institutions.



kliuless -- "another issue is whether a 'credit event' has been triggered..."

Something is definitely up there, lots of activity this weekend here in London, couple of friends pulled in and did all nighter Friday, hotel next to the bank last night. Same story with a good friend in New York. Seems like lots of money is nervous and they're pulling all the paperwork, reviewing in detail just to know how they stand when Paulson spreads the news.

Wow Paulson's really gotta choose his words carefully here. Gosh this is one time I'd actually welcome some Greenspan econo-babble, nobody knew what hell he was saying most of the time.
posted by Mutant at 6:15 AM on September 7, 2008

[Level 3] are simply illiquid

We'll see. Correct me if I'm wrong, but the late 80s meltdown didn't feature trillions of dollars chasing yield in CDOs designed to fail with 100% losses in most tranches.

This time around we actually had CDOs 100% stocked with B- and mezzanine debt! Rated AAA due to faulty loss models. Actually the models didn't model the loss case at all, the most pessimistic was scaling back of the rate of growth!

If you've got data to support the $2T to $2.5T estimate please post - I'd like to see it.

That was Roubini.

I just read in the CR comments: 80% wipeout on common and 10% on preferreds.

Global Capital and AXA had $2B+ each in the last reported quarter.
posted by troy at 9:43 AM on September 7, 2008

Fan and Fred Conservatorship: Paulson’s Statement

Key points:

• Common and preferred shareholders bear losses ahead of the new government senior preferred shares
• debt holders protected
• new secured lending credit facility will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks
• Treasury is initiating a temporary program to purchase GSE MBS

also see, etc...
posted by kliuless at 9:43 AM on September 7, 2008

The Treasury website has all the details.
posted by SeizeTheDay at 10:11 AM on September 7, 2008

troy"[Level 3] are simply illiquid

We'll see. "

Agreed it will be interesting to see how this ultimately shakes out, but the point is unless you've got some inside knowledge about the portfolio (and I suspect you wouldn't be posting here if that was the case) until the loss is realised we don't call it a loss. You substituted "loss" for "illiquid". Illiquidity is NOT by any stretch of the imagination a loss.

The bid / ask spread represents liquidity and hence, all securities are illiquid to a degree as we almost never see bid equal to ask. We always see bid less than ask, even for shares in firms such as Google, IBM, etc.


"Actually the models didn't model the loss case at all, the most pessimistic was scaling back of the rate of growth!"

Every model that I've worked with or seen has loss rates embedded. By definition a CDO has to model some loss, otherwise what's the point of constructing tranches? And even with CDOs structured to contain ONLY prime mortgages we still structure tranches.

Keep in mind that even in robust economic times, we observe defaults of prime mortgages, just like AAA corporates will have some default - about 0.01% in the case of AAA, but non zero. Shit happens. People default on their obligations all the time, not just in recessions.



"If you've got data to support the $2T to $2.5T estimate please post - I'd like to see it.

That was Roubini."

Yeh, I might have thought as much. He is trying to sell something, so I guess the more attention the better, hence the extreme views. Folks can even signup for his advise yourself, if one doesn't like getting it second hand, via the media. IMF, BIS, even Goldman are far, far more impartial than Roubini. And with the exception of Goldman, free, I might add.

He is, of course, a voice crying out with a view. And he got part of this correctly, and that's great. But lots of pundits get parts correct and then fail.

Joseph Granville, for example, is a guy who called the 1987 equity market correction correctly, got lots of press, attention as a market oracle, but then hasn't managed to repeat the trick.

So Roubini thinks it might be more than $2T? I looked through Athens and SSRN and can't really find anyone who is approaching this figure, and they are objective researchers. They aren't making these calls to gain attention, to sell something.

Now that doesn't prove Roubini wrong, of course, but here's what troubles me - I can easily find lots and lots and lots of web sites that predict more extreme lossses - $10T, or more, leading to total meltdown of the global financial system, based upon these events. Hell, we've seen lots of such extreme predictions here on Metafilter (I've got a list of links with these predictions somewhere).

So why believe Roubini instead of the doomsday brigage? Why stop at $2T to $2.5T? I don't really know much about his work, but it seems that if other people aren't duplicating his results, even marginally, then there's an issue.

And just to close - revisionist history being what is is - Roubini wasn't by any stretch the only one to predict this. Although I've already seen claims that he was.


SeizeTheDay -- "The Treasury website has all the details."

Ah, great. Off Fact Sheet: FHFA Conservatorship [.pdf] the most important clarification : as we suspected, the US Government is NOT entering the housing business, rather managing the enterprise until it is able to be run itself. They have a definite need and apparently desire to get this up and running get out of its way ASAP.

Good first step. Next should be to break the two entities up so we don't have such concentration risk again going forward.

And then, finally, lets parts of the portfolio die off if there isn't a market.

It will be interesting to see how Asia opens.
posted by Mutant at 11:49 AM on September 7, 2008

Well, if you don't believe Roubini, Mutant, how about Roach?

It's funny that you mention Roubini, and that he has something to sell. You're right, of course. He's selling his services. His advice.

But you know what you're selling? The market. And as we all know, or should by now, confidence in the market is why the Dow is at 11000, not 7000. See, if enough people stop believing what you're saying, the market disappears, and some very, very rich people will become poor in a heartbeat.

You know why I'm skeptical of what the market is selling? Because the market (i.e. institutional investors, HNWIs, central bankers, PMs, analysts, etc.) are all hoping, and praying, that the market doesn't unwind, because if it does, they're all out of jobs, their net worth goes to zero, and suddenly the world becomes a scary place.

But regular people, who are panicking right now, are panicking because their net worth IS GOING TO ZERO. Regular people can't afford stocks, bonds, commodities, etc. Regular people are mostly tied to their houses, for whom they saw as their piggy bank. For generations now regular people saw houses as a place to store their net worth, because it was the only thing they could afford to do. And now banks, and investors, are telling them, "Too bad, you just lost half of your life savings in a year, but that's the market, and you should've been better diversified."

Now, I'm not saying that it's right to panic. I'm not saying that we should have some sort of revolution. But I am saying that you have gotten some brass fucking balls to say that Roubini has something to sell. Because we're all selling something here.
posted by SeizeTheDay at 12:49 PM on September 7, 2008 [1 favorite]

Hmm...that came off a bit ranty. Sorry. I should say, though, that the same players that are touting the market's "resilience" are those that are dependent upon its survival. If the market does what Roubini and Roach say it'll do, there are a very large number of financial professionals who will be out of jobs, and whose nest eggs will go the way of Bear Stearns, or Lehman Brothers.

So yeah, Roubini has something to sell. But so do market professionals.
posted by SeizeTheDay at 1:04 PM on September 7, 2008

SeizeTheDay"Well, if you don't believe Roubini, Mutant, how about Roach?"

You're going to have to help me out here guy; I looked at the pdf (quickly) and don't see him corroborating Roubini's $2T to $2.5T at all - was this the pdf you meant to link to, or did I (quite possibly) over look it?



"It's funny that you mention Roubini, and that he has something to sell. You're right, of course. He's selling his services. His advice."

Yes he is, and you know something? The people that consistently get it right aren't selling "newsletters" like Roubini is, like Granville was; they are running money in funds. Hedge Funds, Mutuals, it doesn't matter.

Think Buffett, Lynch, people like that.


"But you know what you're selling? The market. "

No, I'm not selling anything. Read my posting history and I've warned folks off shares, more into commodities when I've mentioned any investments at all. I mentioned that during the August 2007 carnage I was purchasing shares using my own money (as opposed to money I take from other market participants) for the first time in years.

Sorry, but I disagree and nothing in my posting history would apparently corroborate your claim. I'm not selling anything except that perhaps folks take a calm, measured view of the markets, appreciate the history and don't base opinions on blogs.



"But I am saying that you have gotten some brass fucking balls to say that Roubini has something to sell. Because we're all selling something here."

Well, that's one view. Another might be that I've got a longer term perspective when it comes to the markets than most people posting here, trying to look at current events from the context of previous, rather than considering each as a special, unique instance.

We've had real estate bubbles collapse before. We'll have them again.
posted by Mutant at 1:16 PM on September 7, 2008

I mentioned Roach as an economist who thinks that we have some significant unwinding to go, and whose thinking is congruent with Roubini's.

The people that consistently get it right aren't selling "newsletters" like Roubini is, like Granville was; they are running money in funds.

Those who can, do, and those who can't, teach, eh? It's ironic that you're working on your dissertation (thus moving toward academia and away from running funds) and at the same time downplaying those who don't manage portfolios for a living. The hidden meaning of your words suggests that those who can make a lot of money almost never choose not to (i.e. intelligent people who could be successful running money, but do something else instead). I thought about that, but the assumption there is that everyone wants to be rich. Not a very safe assumption. (But easy to make if you live on Wall Street.) Not all of us worship money like Buffett, or Gross, or Lynch. And, more important, being rich, or making money, is not an indication that you understand economics, or can predict the unintended consequences of your actions (one can only wonder how David Einhorn's egregiously loud rants about the failures of Lehman have affected the overall confidence in the market, much like Chuck Schumer's little nugget regarding IndyMac).

We've had real estate bubbles collapse before.

Like this one? Not in 70 years.
posted by SeizeTheDay at 1:35 PM on September 7, 2008

SeizeTheDay -- "Hmm...that came off a bit ranty. Sorry. "

Don't worry about it - I piss off lots of people here! (Although they do kinda like me at the meetups, but I strongly suspect that's just because I always bake a cake ... )



"Regular people can't afford stocks, bonds, commodities, etc"

Well I do have to respond to this - as 2005 (most recent data I've got) some 91.3 million individuals, from some 50.3% of American households did indeed own stocks [.pdf, figure 48 page 52].

Not sure about the other asset classes you mention, but as 45.5% of individuals, about 78% of all households held mutual funds we can conclude some regular people do indeed participate.

It would, of course, be far more interesting to see this broken down and presenting ownership as a function of income.


"If the market does what Roubini and Roach say it'll do, there are a very large number of financial professionals who will be out of jobs, and whose nest eggs will go the way of Bear Stearns, or Lehman Brothers."

Well, looking at these extreme predictions I can tell it the ripples will be felt well away from Wall Street - everyone will be out of work and dependent upon Government handouts.

Note I didn't say "what" government but I suspect the won't be speaking English.

No, I made the point in another thread that it's that same moral hazard that will insure we muddle through this event, like we did the S&L collapse, the REIT implosion, etc, etc.
posted by Mutant at 1:43 PM on September 7, 2008

SeizeTheDay -- "Those who can, do, and those who can't, teach, eh? It's ironic that you're working on your dissertation (thus moving toward academia and away from running funds) and at the same time downplaying those who don't manage portfolios for a living. The hidden meaning of your words suggests that those who can make a lot of money almost never choose not to (i.e. intelligent people who could be successful running money, but do something else instead). I thought about that, but the assumption there is that everyone wants to be rich. Not a very safe assumption."

Look, I'd really rather discuss the topic.

And the topic isn't me.
posted by Mutant at 1:47 PM on September 7, 2008

Every model that I've worked with or seen has loss rates embedded. By definition a CDO has to model some loss, otherwise what's the point of constructing tranches? And even with CDOs structured to contain ONLY prime mortgages we still structure tranches.

I was talking about falling home valuations, not foreclosure rates.

From what I've read the models didn't even account for the possibility that home values would be going down.

Which makes sense given the immense amount of zero-down stated-income neg-am lending that went on 2004-2006. Nobody with a brain in their head would knowingly lend their own money to this market.

So why believe Roubini instead of the doomsday brigage? Why stop at $2T to $2.5T?

We know how much lending went on 2003-2007:

From the Federal Flow of Funds Report, FY02 ended at:

Mortgage debt on nonfarm homes: $6422.6B
Consumer credit: $1892.0B

FY07:

Mortgage debt on nonfarm homes: $11116.1B
Consumer credit: $2556.6B

So there's ~$4.7T in net new consumer mortgage debt and $650B of net consumer credit debt, for a total of $5.3B on the household debt side.

If I read that report right, total liabilites of the business sector increased $4.7T over 03-07.

So in total debt load increased $10T of the 5 years, 2003-2007.

We all agree that 10% of this is going to turn out bad, $1T.
The aggressive estimate is that 15% of this is going to turn out bad, $1.5T.
Roubini, off in the wilderness selling his book, says it might hit 20 or 25%, $2T, or $2.5T.

I *do* know, for a fact, that prices in all the bubble markets shot up 100% over sustainable levels (rents) for much of 2004 and all of 2005-2006, and these bubble markets featured a large % of the loan volume (their very turnover was feeding the buying frenzy).

So in my calculations, there's about $2T of seriously at-risk lending that went on, with recovery values of, at best, 50%. These are the $700,000 loans made to strawberry pickers in Watsonville.
posted by troy at 2:19 PM on September 7, 2008

troy -- "I was talking about falling home valuations, not foreclosure rates.

From what I've read the models didn't even account for the possibility that home values would be going down."

Ok, Level 3 assets are "alphabet soup" securities; not sure really how the miscommunication happened, but any CDO - a Level 3 asset by definition - will assume a certain loss rate during the structuring and pricing exercise.

In any case, an interesting analysis on the debt load you've done. I've got some data released by The Fed on June 8th 2008.

Looking at Debt growth, borrowing and debt outstanding tables [.pdf], specifically table D3 page 3 I can see:

2002 Home Mortgage $6036.2B, Consumer Credit $1999.9B.
2007 Home Mortgage $10530.3B, Consumer Credit $2556.6B.

So we see an increase of roughly $4494B on Home Mortgages, $557B on Consumer Credit.

Also I see

2002 Total Business Debt as $7026.7B
2007 Total Business Debt as $10096.3B

Or an increase of roughly $3070B on Total Business Debt.

So we're seeing somewhat different numbers on the Consumer side, and more different numbers on the Business side. This is curious. I know from your other comments you've been messing about with this data for while and I've wanted to chat before.

So have I totally messed up something or can you link to your data? I had these pdfs sitting about for something else I was doing and wanted to ask about your results before.

I'd rather not analyze too much further until we agree on what appears to be the basics. If this helps, I've looked at a couple of other pdfs [.pdf] on that site, and they've got the same numbers, just broken down into far more detail. Thanks.
posted by Mutant at 3:02 PM on September 7, 2008

I was looking at the Levels table from here, specifically chart L.100 (normally I use L.10, but there's not much difference).

The business numbers were chart L.101
posted by troy at 3:26 PM on September 7, 2008

troy -- "I was looking at the Levels table from here, specifically chart L.100 (normally I use L.10, but there's not much difference).

The business numbers were chart L.101"

Ok, good, we both were looking at the same high level source, just at different levels of aggregation and, it would appear, treatment of the data.

So I've pulled down the Level tables which is what you were looking at.

I checked both L.1 Credit Market Debt Outstanding and L.100 Households and Nonprofit Organizations.

For L.1 I'm looking at row 3, Household sector and can't duplicate either of our results for 2002 (this pdf results are $8516B, your total $8314B, and mine $8035B).

For L.100 I'm looking at row 25, Home Mortgages and row 26, Consumer Credit and can duplicate my 2002 results for both line items but I'm still having trouble backing into yours.

Curious - why did you select those tables instead of L.218 Home Mortgages? Specifically, row 2, Total liabilities of Household Sector? Data in this table lets us take a more granular view of total household debt, for example, breaking out Home Equity Loans away from a Primary Mortgage. Such a view is useful because we can back into results showing home much of the total debt load was frivolous as opposed to providing essentials.

Another curiosity - none of this data is seasonally adjusted (folks tend to prepay mortgages at a much higher rate in the summer than other seasons); I'm curious if this explains differences we're seeing between this data and the results reported by IMF, BIS, et al.

None of these differences are that significant, amounting to less than maybe 10% and we do agree on the direction and general magnitude of the increase, but still because we can't duplicate results I'm troubled there is clearly something in the way this data is presented that I'm definitely not understanding.

Another curiosity - and I'm not quibbling that there wasn't a significant run up on debt, we both definitely agree on that - but I'm not sure if we're discussing home mortgages we'd like to lump in Corporate & Business debt. That makes the overall amount much, much larger (i.e., your $10T compared to other estimates running approx $4.5T).

And it seems other analysis' don't sum the two, at least not the IMF, BIS or Goldman results.

Not sure how to move forward from here if I'm having trouble backing into some of the results.
posted by Mutant at 2:26 AM on September 8, 2008

Holy cow - equity markets are indeed rallying after the announcement as suspected - London is up sharply. Looking at the banking sector

Barclays +14.5 per cent
HBOS +14.4 per cent
Kingfisher +8.6 per cent
Lloyds TSB +10.5 per cent
LSE +11 per cent
RBS + 14 per cent
Schroders +7.3 per cent
StanChart +9.5 per cent
Wolseley +12.5 per cent

As of 11AM BST, the FTSE 100 is trading up about 3.8%.

Seems to be a classic short squeeze going on in banking shares this AM. Will be interesting to see if this carries forward into New York but preliminary indications are we'll see an upward pop at the open.

Not sure if this is sustainable, at least in the US markets share prices were getting out of whack (far too expensive) before last weeks action, but an interesting trading day ahead of us.
posted by Mutant at 3:12 AM on September 8, 2008

Let's see what Sarah Palin has to say.
posted by delmoi at 11:55 AM on September 8, 2008

Considering the fact that now that the Bush Administration has seized Fannie & Freddie, NOW they will start costing the taxpayers money, that's less likely a gaffe than an intentional reversal of facts (a long-favored campaign method of the GOP).

I just don't see the current Powers in Washington being really interested in "fixing" the problems in any way that "protects" anyone but their closest political friends. They have taken more and more extreme actions (far beyond what I used to consider possible) mostly to delay things falling apart until well after the November Elections. We (the people, not the investors) are screwed.
posted by wendell at 3:22 PM on September 8, 2008

if we're discussing home mortgages we'd like to lump in Corporate & Business debt. That makes the overall amount much, much larger (i.e., your $10T compared to other estimates running approx $4.5T

I believe Roubini's $2.5T includes ~$500B biz default.

Data in this table lets us take a more granular view of total household debt, for example, breaking out Home Equity Loans away from a Primary Mortgage

AFAIK "primary mortgage" includes cash-out refis, which were possible by running up a HELOC then refi'ing everything back into a new first.

If you've got the Fed data I recommend charting net lending by quarter, ca. 1998 to 1Q08. Scary.
posted by troy at 6:19 PM on September 8, 2008

"Sept. 9 (Bloomberg) -- When the history is written on the collapse of Fannie Mae and Freddie Mac, it will go down in the annals of corporate scandals as one of the greatest accounting scams committed in broad daylight. "

Holy shit! This is just further proof of my oft-posted opinion that if people are too damn lazy to get and read an annual report (more than one please!) for any company they're holding shares in then they have no business buying stocks. My dining room table is piled high with annual reports for the firms I own, or would like to. I also call up Investor Relations at most firms I own, and hassle them if I've got questions.

So, Fannie & Freddie common stock and most of the preferred stock is wiped out? Good. That's just the way the system should work.

And just to correct some misinformation upthread; ordinary investors should never own preferred shares. These are effective assets for corporations but not individuals who, by holding preferred shares, sacrifice upside for the perceived "safety" of yield. The ordinary investor is much better off going long corp bonds if seeking yield. Or safety for that matter.

I never even looked at these companies as they were just too damn big for my tastes. I invest almost exclusively in thinly traded firms, as I believe that true value can only be found in companies that lots of eyeballs haven't already looked over. I try to take large positions, sometimes 10% to 15% or so of daily trading volume, as I need to focus on a small number of firms. On the cash flow generating side of my portfolio now I'm only carrying seven positions; far, far less than any book on portfolio management would recommend. Some of my colleagues who trade like me have no fewer than 40 positions, with 2.5% of their capital invested in each. Concentration and Illiquidity can generate large profits, if you get on the right side of a trade. A big IF, but that's why I trade so few companies.

I'm really amazed that folks weren't complaining about these annual reports. Seems like the auditors will be on the hook for this, big time, even though the article also mentioned Bernanke and Paulson. You can bet the paperwork for the lawsuits has already started, and we'll see filings of intent in the next week or so.

Amazing - no appalling - breakdown of trust here, across the board.


troy -- "If you've got the Fed data I recommend charting net lending by quarter, ca. 1998 to 1Q08. Scary."

I sent you a MeMail; I've got the Fed data but stil can't back into your results....
posted by Mutant at 6:27 AM on September 9, 2008 [2 favorites]