On Sunday Alan Greenspan said "This is the Worst Economy I’ve Ever Seen."
That’s a pretty bold statement from the guy that built it! Greenspan noted that the government was left with tough decisions: which institutions are "so fundamental to the functioning" of society that they demanded a federal safety net? Earlier in the week, the former fed chairman noted that such choices extended to tax policy as well. In an interview with Bloomberg Television, Greenspan argued that the country couldn’t afford the tax cuts being proposed by John McCain without an equally massive reduction in spending. "I’m not in favor of financing tax cuts with borrowed money," he said. "I always have tied tax cuts to spending."
It will be interesting to see what Bernanke has to say today in the FOMC minutes, clearly we can’t just keep throwing more money at this problem but that’s never stopped this administration before, which is why we are favoring some hedging in gold, in case our government’s solution is another $250Bn or so tossed onto the fire. It is shocking that, still, no one seems to be addressing the actual problem - people cannot afford their mortgages. 2.2M home foreclosures were filed last year and close to 3M homes will get filings this year. Every home that is foreclosed and dumped back on the market by the bank devalues the homes around it, causing problems for the remaining homeowners and it spreads like a disease.
5M US homes carry an average mortgage of $200,000 each, that’s $1Tn and their loss causes a write down of at least $400Bn, probably $600Bn. That write-down is future tax revenues not collected so the government is eating $200Bn whether they help or not. Since those foreclosed properties also cause additional performing asset write-downs, the losses can quickly double or triple. How much is the mortgage on $1Tn worth of homes? If those homes loans were backed directly by the government, paying every single one of them off in their entirety at 5.75% interest (and the government should be able to do better) would be $5,835,730,000 a month.
That’s right, $70Bn a year to fix every bank in America at once, to put value back on the books, keep American families in their homes, maintain home prices and give the country a chance to take a collective breath. Is that an outrageous idea? The government already took over the GSEs, effectively backing the loans of $5Tn worth of properies, but that does nothing to stop the properties from failing. Politicians like to say they have a plan to fix the economy - then why don’t they have enough faith in it to lend the voters a few bucks while their plan works its magic? Penalties for accepting government aid would have to be harsh to prevent people from taking advantage (signing over all equity, agreeing to a workout schedule) but if we can at least forestall 1/2 of the foreclosures it would be a tremendous benefit to the financial markets.
It’s a shame that something so simple isn’t even being attempted. The government already dumped $160Bn worth of stimulus checks on the market and they had very little effect . Foreclosures are accelerating as the economy worsens. The program could be enacted with a pen-stroke - just tell the banks to forestall any existing foreclosure action for 90 days and the government will pick up the tab ($17.5Bn) while we begin a case interview process to make sure we are identifying actual families living in their primary residences. Figure we can assign 100 homes to each case worker over 90 days and that’s 50,000 jobs created and they will be proportionally in the most affected areas (another $2-$3Bn a year in salaries).
This is a cheaper solution than my $13.5Bn a month plan to stop the housing crisis back in April and it helps a lot fewer people directly but, after wasting so much cash on things that help nobody, we need to scale back our expectations.
Expectations are certainly scaled back for the market today as we are down 50 points pre-market (8am) as we wait for the CPI report for August as well as GS and MS earnings. The WSJ has a useful article today called "How to Handle a Market Gone Mad" with a good overview of the psychology that is gripping investors this week. WM was downgraded to junk status last night and AIG has been downgraded to near-junk and may unwind quickly if they can’t raise capital (a lot of it) or get government backing. AIG holds $1Tn in assets, that could be one hell of a fire sale!
![[Tokyo's Nikkei 225 Stock Average fell nearly 5% on Tuesday.]](http://static.seekingalpha.com/uploads/2008/9/16/saupload_ob_ci738_astox0_d_20080916022936.jpg)
Asia was hit hard this morning, catching up from being closed yesterday, with the Hang Seng dropping 1,052 points (5.4%), the Nikkei falling 605 points (5%) and the Shanghai Composite fell 4.5%. If you want to make a bullish bet early in the day, the FXI tracks 25 Chinese stocks and may respond well on the off chance the Fed cheers us up later today. At 33(ish) it’s over 50% off its highs of last November and yesterday and the day before and the day before that they jumped over 2% off their open.
On the whole, there is not much to be bullish about. Europe is off about 2.5% but Barclays (BCS) is back in the game, looking to pick up a large chunk of LEH’s US operations now that they can take them away without picking up the attached toxic loans. The overnight Libor rates shot up from 2.146% on Friday to 3.106% today, indicating banks are not willing to lend to each other. I’m very concerned about our future, as investing in the US has become less appealing with only Goldman Sachs (GS) or Morgan Stanley (MS) to choose from. That level of asset concentration makes foreign lenders nervous and it’s a big World out there to invest in. England is also feeling the wrath of foreign banks: "We dislike the U.K. banks. They were the ones, along with UBS, buying up the subprime, and they, like the American banks, had the problem with accounting for risk," said Gianmaria Bergantino, head of asset manager at the Rome office of Bank Insinger de Beaufort NV.
Speaking of GS and MS - Goldman reported a small beat at $1.81 per share ($1.71 expected) but that’s off 71% from last quarter. "This was a challenging quarter as we saw a marked decrease in client activity and declining asset valuations," Lloyd Blankfein, Goldman CEO, said in a press release. MS does not report today, it turns out they report tomorrow so we do have one to wait for. GS shares fell off and a lot of emphasis will be placed on the 11 am conference call, especially relating to how they are valuing assets. We’ll have to keep an eye on the SKFs around to $140 line to see which way things look to be going.
Oil is racing to $90 despite a hefty 2% pullback in the dollar over the past 2 days. Today’s Fed decision will mean a lot, but I’d rather bet gold up than oil up as a reaction to Fed easing. It looks like we will be opening back at the July 15th lows but it’s unlikely we’ll turn up without further capitulation as there has been nothing encouraging from our "leaders."
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This article has 10 comments:
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DC Housing Bear
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18 Comments
Sep 16 12:46 PMEnough with the government bailouts, the only road that leads to is the mother of all bailouts that will finally sink the entire system, in fact, maybe we're already there. We cannot continue to privatize profits and socialize losses. It's time for this country to take its medicine and I don't see any better time to do it than now.
So I guess what I'm trying to say Phil is, STOP YOUR WHINING. The government is not there to guaranty that you make money trading options.
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David Lentz
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357 Comments
Sep 16 01:41 PMSimply require that all holders of ARMs convert them to fixed-rate mortgages, at the going rates that the GSEs offer.
To prevent the lenders from getting a haircut, and taking all the pain, merely extend the terms of the new mortgages such that the lenders will ultimately receive all the interest that they would have if the ARMs had continued, or some reasonable fraction of that money.
The net impact of this is that the borrowers that are in over their heads get effectively converted to renters, with mortgages of over a hundred years on houses whose value is below the amount on the mortgage.
So they can't sell the homes until housing market valuations recover, but they are also not forced out of their homes, dumping the repo'd properties onto a scrap heap that is crushing the industry.
In the end, these folks are probably toast anyhow, but at least it does not happen in just a year or three, but instead is spread out over decades, with unlucky individuals facing up to their problems as they are either forced to move or suffer economic calamities (lose their jobs, divorce, etc) that place them in the position of having to deal with their under-water mortgage.
This would immediately stop the inventory build-up in unsold housing, would allow millions of homeowners to remain in their homes (albeit saddled with a debt burden they will, in all likelihood, spend the rest of their lives paying off), and allow things to stabilize in the ravaged housing industry.
Then we can have a measure of sanity (not too much, as that wouldn't be normal) in the financial industry, and begin to lay the groundwork for a recovery. The powers that be would have the time necessary to implement a sane regulatory framework -- instead of some emergency claptrap that will be riddled with a whole new set of problems, which is where we are heading now.
It's really easy to bring all this to a responsible conclusion. Instead our collective head is on fire, and we are attempting to put it out with a hammer.
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CoverIsBetter
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21 Comments
Sep 16 02:17 PMBut seriously, who signs up for a 100 year loan? That is WAY overestimating the morality and virtue of the typical problem borrower. If people were willing to retrench that far to hold on, we would not be in this mess. Heck, I saw a perfectly healthy educated white couple getting foreclosed out of a tiny Florida ranch house on CNBC. And I am thinking, why are you not at a second job somewhere? Go steal from the register, atleast then we know you aren't lazy.
"If you ain't cheatin' you ain't tryin"
I love the persistence with which you suggest the government get closer to the problem and not just bail out banks, Phil. I only have to wonder just what we do in those "90 days of stopped foreclosure"?Free... their ARM? You can do that last of those w/o spending any money or hiring anybody. You have a point, that we could evaluate who should get saved or not, but that leads into a real market-skewer of government corruption.
OT: What is going to happen to WaMu? Did you continue to accumulate using the covered call/put strategy?
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junkyarddog
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67 Comments
Sep 16 03:25 PMOne can't fix this mess with a silver bullet. Forest fires are good, they burn the useless brush and make the surviving trees stronger. Failure is a necessity for success. It's going to be painful, and we'll come out a lot better and stronger once this is over. It'll be a while, but it will be over.
All we need is for the government to ensure FAIR PLAY, the rest is prosperity for the fittest and bankrupcy for the unefficient. That's life.
Please, no more government bailouts!
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Philip Davis
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345 Comments
My Website
Sep 16 05:04 PMI do not disagree with DC - enough with the bailouts but we will bail out bank after bank after bank if we don't do something about the reason they are failing. Buffet stopped insuring accounts over the FDIC limit in Kansas - that's not a good sign! The FACT of the matter is the FDIC simply doesn't have enough money to cover one major failure, yet alone something on the scale of the last S&L crisis.
This is not about fiscal discipline anymore. This is coming home and finding your basement flooding from a broken pipe and the Feds solution is to keep going to the store to buy more paper towels. It just isn't addressing the problem. The loans have been sold, people are in homes they never should have been allowed to occupy at appraised values that never should have been put on a form (that is not the homeowner's fault).
Junk (thanks for nice words yesterday by the way), I don't think you can clear this brush without losing the forest. What would happen to your home's value if one in 5 around you were empty with foreclosure signs?
This is a national crisis and kicking 5M families onto the streets, even if 2M of them were greedy and knew they were getting in over their heads, is not going to solve anything.
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kkin365
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309 Comments
My Website
Sep 17 09:17 AM-
junkyarddog
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67 Comments
Sep 17 09:44 AM-
David Lentz
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357 Comments
Sep 17 03:14 PMI repeat, this would only apply to existing ARMs. New mortgage seekers would be free to choose any kind of mortgage they could obtain (except ARMs, which should be barred from use by homeowners). The intent here is to stop the implosion of the existing ARMs, and stop the build-up of the housing overhang. That's all.
And this would do so, far more cheaply than any other scheme. And at this point, it appears that cheap is a major consideration, Uncle Sam having blown the family nest-egg at the local saloon.
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David Lentz
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357 Comments
Sep 17 03:25 PMWhat has occurred to daye, is that the Homers of America have sat on the train tracks, watching the train approach (admittedly, some have just walked away from their mortgages before going broke), closer and closer, until they are busted, without a home or assets, and their house goes to further depress the housing industry as yet more excess inventory.
Under my scheme, Homer gets a letter from his mortgage company that tells him his mortgage has been replaced -- by virtue of the new law -- with one that locks in his current interest rate (that he is able to make the payments on) for 130 years (for example). Now Homer has no choice in the matter (unless he can find a buyer, and if he could do that, he wouldn't be in the mess he is in), but he gets to keep his home, and is not driven into bankruptcy or made homeless. He still has whatever disposable income he had before to support the rest of the economy. OTOH, he is chained to that house for the rest of his life, or until home values appreciate enough to enable him to sell it.
Cost to the taxpayer? Virtually nil. The punishment is shared by homeowners and lenders alike, as the lenders do not get the revenue stream at the rate they originally planned on. The chain reaction of imploding ARM resets, mortgage failures, lender and borrow failures would be ended.
It's easy. No hand-outs or bail-outs required.
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David Lentz
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357 Comments
Sep 17 03:28 PM