DECEMBER 2007
12/27/07 Wall Street Wizardry, Wall Street Journal. How subprime mortgage loans were repackaged and resold at prices that did not reflect their risk. The example of Norma, which created a "hairball of risk". (The subprime losses continue to be uncovered - according to one estimate, just one-fourth of the losses have been disclosed so far.)
12/07/07 Sunday's Detroit Free Press Has 122 Pages of Foreclosure Notices. The list of 2008 Tax Foreclosures for Wayne County suggests that one-fourth of the county's homeowners are in default on their mortgage payments. More… (General Business) Comment: The witches' brew of auto industry and subprime problems makes it not so surprising that Deutsche Bank finds itself with 900 properties in foreclosure in Cuyahoga county. That might be its fair share!
12/07/07 Mortgage Aid, Within Limits, NY Times. The Bush plan comes from the mortgage industry, which for many properties would rather have interest rates frozen if it means that the property that would have gone into foreclosure remains as a paying asset. The Bush administration has said that the rate freeze for ARMs could help 1.2 million subprime borrowers, but the Greenlining Institute says only one in eight subprime borrowers would benefit from the rate freeze. The Center for Responsible Lending gives an almost identical figure. Comment: Lenders like the fact that they can decide which borrowers will be permitted to pay the frozen rate. Investors are not all so happy about the plan.
12/06/07 Anatomy of Financial Crises, Knowledge at Wharton. A review of earlier financial crises and how they played out. Who got hurt.
12/06/07 Lenders' Stock Climbs on Mortgage Rate Freeze, Crain’s NY. (1) Based on the President plan to freeze interest rates for five years for homeowners with adjustable-rate mortgages, shares of most mortgage lenders rose. MBIA shares climbed 12.5%, then fell back for an increase of 8.7%. Ambac gained 11.8% for a while. (2) However, the Mortgage Bankers Association said the percentage of U.S. mortgages in foreclosure hit a record 0.78% in the third quarter, above the previous high of 0.65% in the second quarter. Delta Financial Corp.'s stock fell to 26 cents after it filed for bankruptcy. Comment: Call it a puzzle or cognitive dissonance, but the move is being sold as costless to the taxpayer. So why the stock-price improvement? A more orderly marketplace?
12/06/07 Bush to Outline Five-Year Mortgage Rate Freeze, AOL Money & Finance. The freeze would appear to be costly for lenders. It would benefit homeowners up to date with their payments but facing an interest-rate reset, it but would exclude homeowners who are most in trouble, i.e., delinquent.
12/06/07 Orange County Treasurer Announces $460 Million Securities Downgrade, LA Times. Chriss Street was a whistleblower on the $1.7 billion loss Orange County sustained on investments in derivatives. (The County's subsequent bankuptcy was the largest municipal bankruptcy in U.S. history.) Now the County may end up taking another investment bath on the whistleblower's watch, as Moody's has put a credit watch on 8 percent of the County's securities.
12/04/07 Treasury Sees Limited Aid, NY Times. Treasury Secretary Henry Paulson Jr. reports that aid to mortgage holders facing foreclosure because of higher interest rates on their mortgages will probably help only a small number of such borrowers. A similar plan in California is likely to help about 12 percent of borrowers in the state, according to Barclays Capital. About two million subprime mortgages will adjust upward through 2008 as their low introductory rates end.
12/04/07. Hearings on Credit Card Charges, CNN Money. Fees and high interest rates.
12/03/07 Rate Freeze on Subprime Loans in the Works, Washington Post. The teaser rates that were to rise may not.
12/03/07 The World’s New Financial Power Brokers, McKinsey Quarterly. The new brokers: Asian central banks, oil-rich countries, hedge funds and private-equity firms.
12/03/07 Innovating Our Way to Financial Crisis, Paul Krugman, NY Times. "The financial crisis that began late last summer, then took a brief vacation in September and October, is back with a vengeance."
NOVEMBER 2007
11/29/07 Can You Retire Really Early?, Yahoo Finance. This couple did it.
11/28/07 Lenders Promise $100 Million Aid to Cities, Detroit Free Press. Mortgage lenders, responding to mayors' distress, agreed at the Conference of Mayors to provide $100 per foreclosed property (1 million foreclosures expected; the Joint Economic Committee estimates 2 million for the nation) for credit counseling and a free online database of owners of foreclosed properties.
11/28/07 Dow Soars 331 Points. Fed Vice Chairman Donald Kohn makes rate-cut-friendly comments, offsetting a previous impression that the Fed might not wish to provide further liquidity to help the financial sector in its subprime meldown. David Gaffen, on the Wall Street Journal’s Marketbeat blog, quotes (1) Sean Simko, head of fixed-income management at SEI: “They’ve been hard-set on the moral hazard and hard-set in talking about inflation in all of their comments, but this could be looked at as them maybe opening the door for additional rate cuts moving ahead.” (2) Howard Simons of Bianco Research: “The next time we run into a financial crisis everybody knows they’re backstopped by the central banks.” Comments attached to the blog express satisfaction that some short-sellers were hammered by the two-day turnaround in the Dow from Monday's decline.
11/28/07 Details on the $10 Billion Impact on NYC Area of the Subprime Losses, NY Sun. The story provides estimates of the impact on gross product and local taxes in the NYC area and other metro areas, from the U.S. Conference of Mayors, who were meeting in Detroit. The mayors proposed that the Mortgage Bankers Association create a free online database to allow local officials to find out who is responsible for maintaining foreclosed properties that are in limbo. Mayors also suggested cities provide and promote financial counseling services to would-be borrowers, educate young people about housing loans and outlaw predatory lending.
11/27/07 Stocks Rebound, The Dow rose 215 points based on two pieces of good news from the Middle East - (1) a $7.5 billion investment in Citigroup by the Abu Dhabi Investment Authority, a sovereign wealth fund (making the two largest Citigroup shareholders Middle East petrodollar investors) and (2) broad Middle East participation in the Annapolis peace talks about the future of Palestine.
11/27/07 Foreclosures Hit Largest U.S. Metro Economies, Detroit Free Press. A U.S. Conference of Mayors report expects property values in the nation will fall by $1.2 trillion through a combination of foreclosures, mortgage problems and weakening demand. The economic impact in major metro areas is estimated as follows: New York City, $10 billion; Los Angeles, $8 billion; Dallas, Washington, DC, Chicago and San Francisco, $4 billion; Detroit, Boston and Philadelphia, $3 billion; and Riverside, $2 billion.
11/26/07 Dow Declines 237 Points in Late Trading, Trading Markets. Harry Boxer, The Technical Trader, considers the decline on the first day of the week, with wannabe sellers outnumbering wannabe buyers 5-6 to 1, to be “negative” and “ominous”.
11/23/07 Asian Stocks Gain for First Time in Seven Days, Bloomberg. The Tokyo exchange is closed. The Hang Seng index rebounded from a two-month low after 79-year-old Lee Shau Kee, ranked #22 on the 2007 Forbes ranking of billionaires (his net worth is estimated at $17 billion), announced he was buying shares.
11/21/07 Local Governments Are Withdrawing from Florida Investment Pool, St. Petersburg Times. Local governments in Florida are concerned about the safety of their investments in a $20 billion state pool (see Bloomberg story on 11/15 below).
11/20/07 Japan's Stock Index Rises 1.1 Percent, AP. Tokyo's Nikkei 225 fell 1.9 percent by midday to the lowest point since July 2006, then recovered, ending up 1.1 percent for the day. Morning concerns focused on the impact on Asian exports of the prospect of a slow American holiday buying season. After some sushi, investors saw things in a better light and shopped for bargains in mining, machinery and bank stocks, pushing the Nikkei 225 up 169 points. The mining company Inpex Holdings Inc. rose 2.8 percent, machinery maker Komatsu Ltd. 4.5 percent, Mizuho Financial Group Inc. 2.5 percent, Shinsei Bank Ltd. 9.3 percent.
11/19/07 House Passes Mortgage Reform Bill, Congress.org. On November 15, by 291-127, the House passed H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act of 2007, sponsored by Rep. Brad Miller. The bill would require brokers and lenders to guarantee that borrowers will be able to repay "adjustable rate" mortgages that reset to higher payments and would have to show that refinancing is to the borrower's benefit. Mortgage brokers and loan officers would have to be government-licensed. Supporters say the bill will help homeowners and protect the economy. Opponents make the transparent observation that while the bill satisfactorily bolts the stable door that had been open, it does nothing much about the horses that got out, namely the lost homes and bank writedowns, and makes it harder for those who want to buy houses in future to get a mortgage.
11/19/07 Moody’s: Credit Card Delinquencies Rise, AP. For the third quarter in a row, delinquency rates are higher (although they have been higher in the past). Also, the proportion of debt being paid off each month has fallen. This is the low end of the mortgage problem. At least borrowers with mortgages and home equity loans get a tax break.
11/19/07 Dow Down 200 Amid Banking Concerns, AP. Goldman Sachs estimated that Citigroup Inc. will have to write down $15 billion over the next two quarters because of subprime-linked and other risky debt. Forecasters are concerned that consumer worries about housing prices and debt will take $ out of the $ea$on.
11/16/07 Third Quarter Extended Mass Layoffs Hit Real Estate Credit Industry Hard, BLS. “Layoff activity in credit intermediation and related activities quadrupled over the year, mostly due to higher layoff activity in the real estate credit industry. Layoffs in the finance and insurance sector more than tripled over the year, and accounted for 12 percent of all mass layoff events and 15 percent of separations. The layoffs in the finance sector were primarily in the credit intermediation and related activities industry, which reported its highest number of events and separations in program history.”
11/15/07 Kansas City-Based NovaStar Financial Declares $600 Million Loss, May Be Bankrupt, AP. NovaStar may be delisted from the NYSE. It is included along with American Home Mortgage of Melville, NY, New Century Financial of Orange Co., CA, Countrywide Financial, #1 mortgage lender in 2006, of Calabasas, CA and 184 other mortgage lenders in bankruptcy, insolvency or deep financial stress.
11/14/07 Good, Bad or Ugly? Predicting the Future of the U.S. Economy, Knowledge at Wharton. In interviews, Wharton professors question whether anyone in the current global financial turmoil can accurately forecast how the U.S. economy will fare.
11/12/07 Barclays and RBS Stock Prices Rise, Bloomberg. Barclays denied that subprime losses were as serious as rumors indicated. Barclays and RBS stocks recovered some of their steep losses.
11/10/07 Banks Say Subprime Loan Losses Will Affect 4Q, AP.
11/09/07 Royal Bank of Scotland and Barclays Stocks Fall on Subprime Concerns, Bloomberg. RBS joins Barclays in speculation about subprime losses. An RBS analyst estimated that $250-$500 billion in subprime losses may eventually come to light. This is more than all S&L losses in the 1980s.
11/09/07 Stocks Fall as Wachovia and Barclays Reported Caught in Subprime Web, Forbes. In the S&L crisis of the 1980s, problems centered on individual S&Ls. This time round, securities based on subprime U.S. mortgage loans have been sold all over the world. Barclays was widely rumored on Friday to have a $10 billion writedown ahead. The bank has issued a strong denial.
11/09/07 U.S. Trade Gap Shrinks Unexpectedly, Bloomberg. The trade gap narrowed by a small percentage. A widening had been predicted. Is the weak dollar finally giving a significant boost to U.S. exports? Or will the main effect of the weaker dollar be soaring import prices goosing the inflation rate (a possible effect that Fed Chairman Ben Bernanke warned about in his congressional testimony)?
11/09/07 $1.4 Billion Loss Hits Fannie in Third Quarter, AP.
11/08/07 Credit, Housing Hurt AIG, AP. On November 7, AIG stock fell nearly 7 percent, fastest falling of the 30 DJIA industrials. It announced a 27 percent decline in its third-quarter earnings YOY, with subprime credit problems in several earning areas.
11/08/07 Financial Blogs.
OCTOBER 2007
10/25/07 2 Million Foreclosures Likely, Joint Economic Committee (Sen. Chuck Schumer, Chair; Rep. Carolyn Maloney, Vice-Chair). About $71 billion in housing wealth is likely to be destroyed directly and $32 billion indirectly. States are expected to lose more than $917 million in property tax revenue, with the biggest losses in California, Florida, Ohio, New York and Michigan. A 10 percent decline in housing prices implies an economic loss of $2.3 trillion.
| DECEMBER 2007
12/6 (HuffPost): Today is St. Nicholas Day. He has a special place in my life. The poem "A Visit from St. Nicholas" created the modern jolly Santa Claus. My Dutch-born mother used to play the part of St. Nick every year on December 6 and she wasn't jolly about it at all. I was reminded of this serious St. Nick by Ben Stein's widely discussed opinion piece, questioning Goldman's selling packages of mortgage securities at one window while traders were short-selling mortgage indexes at another. More: 12/6/07 John Tepper Marlin, Huffington Post, "What St. Nicholas Taught Me."
12/3 (Blogspot): Citing Allan Sloan's research for Fortune magazine, Ben Stein in yesterday's NY Times The Long and Short of It at Goldman Sachs") criticizes Goldman Sachs for packaging mortgage loans while simultaneously short-selling mortgage indexes. He also takes to task a Goldman economist for being excessively bearish on mortgages. Wall Streeters tend to divorce morality from markets. Okay, but what's left of the Glass-Steagall wall between banking activities and investment banking? More: 12/3/07 John Tepper Marlin, Blogspot, Ben Stein’s Challenge to Goldman.
12/3 (Blogspot): The attempts by Deutsche Bank to foreclose on dozens of properties in Cleveland have turned the attention of three Ohio judges - Judges Boyko and O’Malley of Cleveland and Judge Rose of Dayton - to the paperwork behind subprime loans. Deutsche Bank apparently owns as Trustee some 900 properties in Cuyahoga County. The global web of mortgage securitization seems to be missing the needed loan documents. Read this story from Callahan's Cleveland Diary. More:12/3/07 John Tepper Marlin, Blogspot, Weak Links in Mortgage Web Exposed in Ohio.
NOVEMBER 2007
11/20: Watch what they do, more than what they say. Based on the latest available data issued November 16, amid posturing at the recent OPEC meetings, oil exporters have been adding to their holdings of U.S. securities over the past year, from $114 billion to $126 billion. The biggest friends of the U.S. dollar have been the UK, which added $204 billion (to $266 billion), and Brazil, which added $64 billion (to $109 billion). These two countries more than account for the growth in foreign holdings of U.S. securities of $222 billion (to $2,247 billion). The top five holders of U.S. securities are Japan, PRC, UK, oil exporters (15 countries) and Brazil, which account for 66 percent of all foreign holdings. The euro rose from $1.27 in September 2006 to $1.39 in September 2007, so the euro value of U.S. securities fell 9 percent, canceling out what Uncle Sam is paying in interest. 11/20 Blogspot, Foreign Holdings of U.S. Securities.
11/16: Fed Chairman Ben Bernanke has warned Congress about risks both of higher inflation and lower growth in the near future. The total of inflation and unemployment is measured by the misery index, which in the United States was at its highest in June 1980 at 22 percent and at its lowest in July 1953 at 3 percent. In October, U.S. inflation was 3.6 percent and unemployment was 4.7 percent, giving a misery index of 8.3 percent. In New York City, the unemployment rate rose in October to 5.3 percent, an increase from 5.1 percent in September 2007. With NYC inflation at 3.1 percent year-over- year, the NYC misery index is 8.4 percent. 11/16 Blogspot, U.S. Misery Index 8.3 Percent.
11/12: Several overseas banks have written off multi-billion-dollar losses on securitized subprime loans. But it is still unclear how large the losses will be. The stock prices of Barclays and the Royal Bank of Scotland, which had fallen sharply on rumors that they will have to take large subprime losses (Sanford Bernstein projected last week that the two banks would have to write off $4.4 billion for these losses), recovered somewhat today as Barclays denied that its subprime loan losses were so serious. But investor confidence in both banks remains weak. 11/12/07, Blogspot, Subprime Loan Losses Overseas Large but Unclear.
11/11: Foreigners holding U.S. securities are losing money because of the decline in the value of the dollar. Now, widespread rumors suggest many of them may also be losing money on the securities themselves. Most recently, Barclays and the Royal Bank of Scotland appear caught in the web of Collateralized Debt Obligations. One RBS analyst put the magnitude of the loss from subprime debt at greater than $250 billion and possibly as high as $500 billion. This would be larger than S&L losses in the 1980s. But this time round, the rest of the world seems to be sharing in the pain. 11/11/07, Blogspot, Subprime Problems Exported.
11/8 (HUFFPOST): On October 19, I posted a comment about the relevance of cognitive dissonance to the equity markets. Investors were nervous because of conflicting information about the extent of the subprime losses. This has continued, with two more 300+ declines in the Dow through yesterday. The dissonance (the word disconnect works just as well, if you prefer) has been between two types of signals. One is the large writeoffs by Wall Street firms of losses in subprime loans and related assets. The other is the continuing expansion of the extent of the losses, like the 13th cuckoo that calls into question the ones that have come before. Or, as a Wall Street trader put it to me at noontime yesterday as we were listening to Fed Governor Kevin Warsh: "The equity markets have been saying one thing and the fixed-income markets another. They can't both be right." 11/08/07, Blog by John Tepper Marlin on HuffPost, Down Dows and Cognitive Dissonance.
11/8: "The relevance of cognitive dissonance - which John Tierney has since written about in the NY Times in a non-Wall Street context - continues through two more seriously down Dows, the second of being yesterday's 361-point decline. The cognitive dissonance is between signals that securitized subprime losses (and other bad news) are fully written off/discounted, and other signals suggesting that they are not. ... 11/8/07 Blogspot, Cognitive Dissonance - Equity vs. Fixed Income Markets.
10/4: "Who's at fault for the high level of credit card debt and the high fees that are being charged? The credit card issuers, who make it so easy to borrow, or we American consumers who run up five and even six-figure credit card bills we can't afford, until the credit stops?" 10/4/07 Blogspot, Predatory Credit Card Issuers?
10/4/07 (Blogspot) Predatory Credit Card Issuers? "Who's at fault for the high level of credit card debt and the high fees that are being charged? The credit card issuers, who make it so easy to borrow, or we American consumers who run up five and six-figure credit card bills we can't afford, until the credit stops? ..."
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