Bush Says White House In Control Of Financial Rout

By Cernig

It's becoming a competition between Bush and Cheney to see which can appear more disconnected from reality these days. Cheney is in Iraq today, and more on that later, but Bush saying that the administration was "on top of the situation" in respect to the financial meltdown occasioned by the Bear Stearns firesale simply takes the biscuit.

The banking giant sold at a paltry $2 per share, a 93 per cent discount on the Friday closing price, despite the Fed taking a $30 billion share of its bailout.

Rather than being on top of the situation, the administration is seen by analysts as swan-like...trying to appear calm on the surface while everything under the surface is flapping about wildly. They're trying to head off a bank run.

Dean Baker, the co-director of the Center for Economic and Policy Research...said he sensed a whiff of panic at the Fed and in the Treasury Department.

"The main thing is that they [Fed and Treasury] are really really scared. Telling us that everything is great is an insult to intelligence. They should own up to it and talk seriously to people," Baker said.

And as a consequence there's a serious flight away from the dollar into other currencies and commodities, with gold and oil both trading at record values.

But Bush says he's on top of the situation - so he's taking ownership of it, win or fail. Remember that when the inevitable 'no one could have anticipated" excuses get trotted out later.

Bear Stearns Gets Fed Bail-Out

By Cernig

Fester certainly called it earlier this morning when he wrote: "we could have a situation where a really nasty private sector debt crisis transforms itself into a really nasty public-private debt crisis".

He means like this:

JPMorgan Chase & Co (JPM.N) and the Federal Reserve Bank of New York on Friday agreed to provide emergency financing to Bear Stearns (BSC.N) after the investment bank said its cash position had deteriorated sharply, sending its shares into freefall.

Stock of the fifth-largest U.S. investment bank dropped as much as 50 percent in morning trading after the news, the latest in the Fed's efforts to soothe financial markets in response to a widening credit crisis spurred by rising mortgage defaults.

"Our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations," said Bear Stearns Chief Executive Alan Schwartz, in a statement.

...Bear Stearns has more exposure to the U.S. bond markets than its competitors, and has a large mortgage-backed securities business. It was among the first to disclose the impact of the subprime mortgage market meltdown when two of its leveraged hedge funds collapsed last summer, losing $1.6 billion.

"With the market's reaction, I'd say stick a fork in them, they're done," said James Ellman, portfolio manager at Seacliff Capital, a San Francisco-based hedge fund. "The company clearly has to choose from a set of unpalatable choices: sell a large amount of equity, sell the company outright or sell assets and try to hold on and hope for the best."

..."The situation is very much that Bear Stearns was very close to the edge and it was much worse than we all thought," said Michael Klawitter, currency strategist at Dresdner Kleinwort, Frankfurt.

"It raises severe concerns over other banks. (Bear Stearns) wasn't a small bank, it was the second largest underwriter of mortgages last year. For the situation to deteriorate in that way is not good news and it will add further to jitters," he added.

Now I'm not an economist, I don't even play one on the internet, but it seems to me that Bear Stearns has just been helped to a hefty chunk of corporate welfare on the taxpayer's dollar (that's you) as reward for a whole slew of bad investments. Bad investments that were, according to Nobel winning economist Joseph Stiglitz, encouraged by the Bush administration in a vain attempt to keep the U.S. economy afloat on deficit spending while three trillion bucks was poured into the Iraqi sandpit. Where's the "credit card act" for these people?

And since the Federal piggy-bank (that's you again) is empty, the only place the Fed can get the money for bail-outs like this is overseas (more deficit) - which Fester points out will only come with strings attached. I've written before that George Bush has the soul of an assett-stripper. This is the endgame, after all the good bits have been sold out from under the shareholders and employees (guess what, you again) to Dubya's own backers and just before the remaining shell of what was USA Inc. is declared non-viable and sold to some foreign buyer.

Another one bites the dust

With all the talk of monoline rescue plans, bail-outs for AMBAC and MBIA, business splits into a safe muni and toxic waste CDO branches, reality is harsh for the monoline insurers, as a previously infused monoline that thought it could have maintained its AAA rating saw it cut today (via Reuters)

Moody's cut CIFG's insurance financial strength rating four notches from "AAA" to "A1" -- the fifth highest investment-grade rating....

Banque Populaire and Caisse d'Epargne, which together own French bank Natixis took over control of CIFG from Natixis last year as part of a $1.5 billion capital injection aimed at stabilizing CIFG's top ratings.

Time to flush that $1.5 billion down the drain....

Failure Bonuses

I'm not on the board of any multi-billion corporations, hell I'm not on the board of any single dollar corporations or non-profits, but if I was, I would be scratching my head at a proposal to award massive pay raises, and large scale retention bonuses to the leadership team that took what was once one of the most profitable and predictable business models in the world, and turned it around to sustain massive losses and destruction of the basic value proposition. I would be very curious as to why I would want to retain this team in the first place.

And if I was on a board and was asked to approve the hiring of a C-level individual who took part in this fiasco, I might suggest that this individual be hired as the desk guard as that position could not seriously damage my company's net worth. But that is just me, and not Wall Street, as MBIA's leadership is getting shown more money than competent second string NFL cornerbacks are receiving from the New Orleans Saints. [Via CNN]

MBIA Inc. granted raises to some of its executives and offered bonuses to managers who stay another year as part of a plan to retain key people during a troubled period for the company.

In a regulatory filing Monday, the Armonk, N.Y.-based bond insurer said its compensation committee last month approved salary increases of as much as 60% for some executives. The committee also approved a "retention award" of as much as $2.3 million for executives who stay with the company a year.

MBIA (MBI) said it approved raises for 2008 after the company's stock plummeted 75% in 2007, because the company needs to retain people during a "critical period."....

Screwing up massively and losing credibility, respect and billions of dollars and people in charge are still getting rewarded. It is amazing how the risks and penalties of these screw-ups are transferred down the responsibility chain and the rewards never follow. Only the shit flows down hill, not the sunshine and rainbows.

Short sightedness is being rewarded, and we are systemically shocked when short sightedness dominates decision making. Amazing!

FGIC wants to split the baby

The problem with the monoline insurers is that they had a boring, highly profitable sure thing business model insuring municipal bonds backed by the taxing power of municipalities. Their model was to remove information costs and a bit of the default/credit risk so that big money investors would not worry about buying $5,000,000 from the Steel Valley School District. The insurers would credibly assure the big investors that Steel Valley was good for the money, and get a bit of a fee from the school district for allowing them access to cheaper credit. The bond insurers took on the risk of being wrong, but overall, a nice simple, boring and very profitable business model. And this is why Warren Buffet wants to buy this segment of the market.

And then they went beyond their area of expertise into the CDO and CDS markets insuring things they did not understand and set themselves to be hammered. Ratings have dropped, capital requirements have increased and there is no chance of cheap bail-out money being available as no one has a good idea of what the monoline insurers' exposures to the debt market meltdown actually tallies up to.

FGIC, a major insurer has been hammered with its credit rating dramatically falling and thus incapable of attracting new and profitable business as its comparative advantage has disappeared. They are now trying to split the baby in half -- safe, boring municipal bond insurance which has a good chance of being profitable in the long run to one side, and then the toxic waste on the other.

FGIC Corp., the bond insurer stripped of its Aaa guaranty rating by Moody's Investors Service, asked to be split in two to protect the municipal bonds it covers, according to the New York Insurance Department.

FGIC applied for a new license so it can separate its municipal insurance unit from its guarantees on subprime- mortgages, David Neustadt, a department spokesman, said in a telephone interview.

The toxic waste pile will be massively undercapitalized and therefore the value of the FGIC guarantee will be extraordinarily questionable. This is self-strip mining of the highest order in the hopes that there is something valuable that the current management team and company can hold onto. Everyone else will be left twisting in the wind as losses will be marked to a much harsher model or market.

Banks, which bought protection for the CDOs, stand to lose $70 billion if bond insurers are stripped of their ratings, Oppenheimer & Co. analyst Meredith Whitney in New York said last month.

Concern that MBIA and Ambac may lose their top rankings has spread to the $300 billion market for auction rate securities. Investors, wary that the municipal debt they are buying may soon be downgraded, have fled the market, causing more than $20 billion of auctions to fail this week.

Splitting the baby will not restore confidence in the current monoline insurance practices.

Captain, the containment field, it's failing

Ahh, a year ago the concept of a credit crunch was a farcical fantasty of fevered bloggers and professional doomsdayers. There were a few minor credit problems in the subprime mortgage market, but these problems were contained to just the small subprime market and there would be absolutely no spillover effects. Well, the containment field expanded over the summer to include mortgage backed securities, some Alt-A loans and some A/prime loans. Now it has expanded to include the monoline insurers, credit default swaps, auction rate securities and who knows what else, but it is contained.

Yesterday I noted that the some of the same structural problems that permeated the mortgage market have spread to other consumer credit markets; namely car loans were being stretched to seven years. This step will marginally bring down monthly payments. Throw in the heavily advertised negative equity loan offers being offered by local dealers, and the same toxic mixture of loose credit with no standards is being is in the auto market as it was in the housing market. I was beginning to wonder when there would be significant problems in the servicing of those debts.

Thankfully USA Today read my mind and printed this story concerning rising repossessions:

Car and truck repossessions this year are headed for the highest level in at least a decade, thanks to easy credit and a faltering economy, says an economist for one of the largest wholesale auto auction services.
So many vehicles are being snatched from owners who stop making payments that some repo operators and auto auctioneers say lots are overflowing.

This year's predicted 10% rise in vehicle repos to 1.6 million would be a third higher than 10 years ago, says Thomas Webb, chief economist for a unit of Atlanta-based Manheim, which sells cars to dealers worldwide. The increase comes atop a 10% rise in repos last year....

An executive at another big auto auctioneer says that easy subprime car loans in recent years are a big reason for the flood of repossessed cars...

"Our business has skyrocketed," says Patrick Altes, president of Falcon International in Daytona Beach, Fla. In recent times, his service saw a first wave of defaults that involved picking up boats and recreational vehicles.

Now, it's cars and trucks, often in affluent neighborhoods.

"A lot of the vehicles we're getting are high-dollar pickups" whose owners got caught in the construction downturn, Altes says.

Speculative purchases based on ever increasing values of cash being accessible through either HELOCS or annual refinancing is where the cash came for these cars and trucks. Now that the home ATM is shut off and HELOCS are being squeezed by higher credit standards, there is no cash to pay the monthly payment.

I don't know how much more containment we can take.

Tightening Credit

The Federal Reserve is seeing systemically tighter credit, and I am seeing two anectodotes illustrating this tighter credit. Let's start with the actual evidence from the Fed Reserve's survey of bank officers:

In the January survey, one-third of domestic institutions—a larger net fraction than in the October survey—reported having tightened their lending standards on C&I loans to small as well as to large and middle-market firms over the past three months.....

About two-fifths of domestic banks—a higher net fraction than in the October survey—reported having increased spreads of loan rates over their cost of funds over the previous three months.

About 80 percent of domestic banks reported tightening their lending standards on commercial real estate loans over the past three months, a notable increase from the October survey

About 55 percent of domestic respondents indicated that they had tightened their lending standards on prime mortgages, up from about 40 percent in the October survey.2 Of the thirty-nine banks that originated nontraditional residential mortgage loans, about 85 percent reported a tightening of their lending standards on such loans over the past three months, compared with about 60 percent in the October survey.3 Finally, five of the seven banks that originated subprime mortgage loans noted that they had tightened their lending standards on such loans, a proportion similar to that in the October survey

About 60 percent of domestic respondents indicated that they had tightened their lending standards for approving applications for revolving home equity lines of credit over the past three months. Regarding demand, about 35 percent of domestic banks, on net, reported that demand for revolving home equity lines of credit had weakened over the past three months.

large majorities of domestic and foreign banks expect a deterioration in loan quality in 2008. Regarding loans to businesses, between about 75 percent and 85 percent of domestic and foreign banks expect a deterioration in the quality of their C&I and commercial real estate loan portfolios. About 15 percent of domestic and 20 percent of foreign respondents expect a substantial deterioration in the quality of their commercial real estate portfolios. Concerning residential real estate loans, between about 70 percent and 80 percent of domestic respondents expect the quality of their prime, nontraditional, and subprime residential mortgage loans, as well as of their revolving home equity loans, to deteriorate in 2008. Finally, about 70 percent of domestic respondents expect a deterioration in the quality of both credit card and other consumer loans.

So the banks are tightening up their controls and increasing the spreads that they charge in order to cover their costs and risks. This means each basis point of Fed rate cuts is slightly less effective than they otherwise would have been. Furthermore even at lower rates, there are fewer borrowers seeking loans and fewer loans being approved so the question as to whether or not the American consumer is tapped out should get raised, again.

Anectodally I am seeing the same tighter standards and fewer offers of credit. First, I have been receiving a lot less junk mail credit offers and the ones that I am receiving either have higher initial teaser rates, significantly lower credit limits, or much narrower reply now deadlines. And on the mortgage front, the grocery store near my house has a major bank's branch office in it. They are advertising a 30 year fixed rate mortgage for 5.625% which is a pretty damn good rate. However the fine print is for 20% down, and a FICO over 720. Three years ago, that rate would have been for 7.5% down and a FICO over 650.

2nd Order Impacts of Housing

Pittsburgh has escaped the worst of the first order effects of the bursting of the housing bubble as the city and region never really experienced the bubble. Good homes in decent school districts were and still are available for less than twice the area median household income. Pittsburgh is not alone in escaping the burst, as other Rust Belt cities never saw the boom:

Median sales prices for single-family homes in Pittsburgh increased 6.1 percent from a year ago, while some cities in Florida and California posted double-digit declines in sale prices during the same period, suggesting that home prices have fallen most dramatically in areas where the speculative frenzy was hottest.

"Pittsburgh doesn't have a hangover because it wasn't at the party," said Dr. Marc Louargand, president of the American Real Estate Society and a principal with Saltash Partners LLC in Hartford, Conn.

However the second order effects of the bubble burst are being felt in Pittsburgh even if this region never got too frothy. The Post-Gazette reports today of the real estate industry job losses:

The U.S. mortgage meltdown is roiling Pittsburgh's western suburbs in unexpected ways. Jobs, not homes, are being lost.

Pittsburgh-area companies eliminated 1,590 mortgage-lending and consumer finance positions between the end of 2005 and the end of 2007 -- the 10th highest drop among any metro area in the country, according to Moody's Economy.com.

Many of those layoffs occurred along the Parkway West, in towns such as Moon and Robinson, Coraopolis and Green Tree, where companies have aggregated to provide appraisals, title insurance, closing and deed preparation services for mortgage lenders nationwide.

These are decent to well paying jobs; I interviewed for a couple of them in 2003 and 2004 and they were paying above median wages for people straight out of college. Pittsburgh is doing better than other Rust Belt cities but job growth has been slowing down in the region faster than the national slow down.

Ahh, the joys of integrated national economies so even when a region did not go crazy, the second order effects impact the region anyways.

Thanking the good guys

by shamanic

One thing I did on Friday was e-mail the realtor and mortgage broker who helped me buy my house in 2006, thanking them for being the good guys.

This is the first house I've ever owned, and the process was daunting and stressful for me. At the time, I was grateful to them for easing those factors as much as they possibly could. Now, watching the mortgage crisis seemingly escalate by the day, I had to thank them for ensuring that I was in my home in a sustainable way.

I remember when I first talked to them about my distaste for adjustable rate mortgages and so forth, telling them that under no circumstances would I gamble with such a large investment. The looks on both of their faces told me that even then, in the spring of 2006, they had concluded that risky mortgages were on par with defecating on the carpet.

If you've purchased a home in the last few years and got an honorable deal from ethical people in the realty industry, you might consider pointing that out to them. Good behavior should be rewarded, especially because in that industry, there's clearly an awful lot of bad behavior.

Innovative Mortgages are a scam and everyone's known it for a long, long time

by shamanic

I'm a poet (like, published and everything) aside from being the spectacular observer of world events here at the Newshog. Lately I am in what may well become one of the most fertile creative periods of my life, sleeping badly and letting the resultant mild dissociation run rampant. Oh yes, I have ideas.

On the blogging front, it is entirely possible that I'll start liveblogging The News Hour on PBS, because quite frankly, it has become an immeasurable source of tragicomedy for me these days. It's been covering the mortgage crisis in great detail, letting all kinds of super smarty pants money people on to discuss the situation and according them all manner of respect when, of course, if they were really such super smarty pants money people they might have noticed that these "innovative" mortgage products were going to cause exactly this kind of crisis sooner rather than later.

Last night, while watching Henry Paulson extol the virtues of the new administration bailout plan, I realized that 1) he's high, and 2) he is gradually training his eyebrows to do the work that his hair once did when he had some. Speaking to point 1, Paulson actually said this: "If I ever saw a legitimate role for the government, it is a situation like this, where there's been so much complexity and innovation that it's outrun the private sector's ability to deal with it." (Transcript here. Poke around if you're interested, they may have video of the segment. Really, the eyebrow thing is super impressive.)

My addled little mind, bursting with spring flowers in deep autumn, saw this: Lobbyists from the mortgage banking industry chatting up congressmen in the 1990s over lavish spreads at fancy DC eateries, explaining how these new "innovative" mortgage approaches, if given regulatory approval, would allow more people to own homes, would raise the value of homes because the market would feature more competition (telling a Republican that "ordinary people will have to compete" will sell them on almost any crackpot scheme), and that now everyone will be able to own a home and be part of the American dream. If they mentioned the resets, they glossed them over with data about rising incomes, and I'm sure they stressed the strong ethics of everyone involved in the mortgaging process. Uh huh.

The private sector generated these "innovations", sold slacker regulators on them, and now have tanked the market with them to such a degree that even Republicans want to help bail out their irresponsible banker friends. It's the Bankruptcy Bill, part II.

Here's my advice to you: if you are not already rich, and any financial agent whose services you employ ever uses the word "innovative" to describe a financial product s/he is trying to sell you, do these things: Laugh in that person's face. Fire this shitty employee of yours. Walk away.