Some of the Euro Nations are Getting into Difficulties in the Deb Market and May Need Some Help; Report and analysis by Rishaad Salamat of Bloomberg News (First Word)
1:59
Bloomberg, February 18, 2009
Today at 12:15 am, we shall learn of the Obama administration’s new housing plan. I suspect it will have many of the same doomed features as all the other misguided housing plans floating around.
Before getting to those specifics, let’s revisit and recognize several truths:
• Home prices remain elevated;
• Artificially propping up prices is counter-productive;
• Home owers (No equity, 100%+ debt) who are in houses they cannot afford are going to have to move to homes or apartments they can afford;
• Foreclosures/REOs are often costly to banks; The lenders that made these bad loans to unqualified borrowers will suffer write-downs;
• It is not the responsibility of Taxpayers to bailout borrowers who are in over their heads, or lenders that made bad loans.
What are we likely to see from the White House today? I expect to see an over emphasis at stopping foreclosures; a reliance on foreclosure moratoriums; Involuntary loan modifications a/k/a cramdowns; and last, Interest rate deductions;
We would be much better off if we did 3 things:
If they could, banks would prefer to avoid foreclosure. Its an expensive, time consuming process; The REOs are a messy, money losing headache. Any intelligent proposal to reasonably avoid preventable foreclosures would give the banks a big incentive to voluntary participate in loans mods. I believe this is just such a plan.
As we first noted last year in our Housing Proposal (Fixing Housing & Finance: 30/20/10 Proposal), there is a simple way to provide incentive to banks to modify loans: The “30/20/10″ solution:
A few government actions are needed: Make the interest-free balloon loans tax free also; Allow the lenders to set aside these loans without taking any markdown immediately. If it defaults in 10 years, then that is when they take the hit.
There is no reason why those people who are underwater but current would not qualify for such a program.
This plan will allow housing market prices to normalize, keep those loans that are savable from going into default, avoids Moral Hazard, and does not require any taxpayer money. (Which likely means it has no chance whatsoever of being considered).
The mad attempts to avoid any and all foreclosures is counter-productive. The foreclosure process is how an over-priced market returns back to normalcy. That is what is now happening, and excess interference will only slow down the eventual return to a healthy economy.
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Previously:
Fixing Housing & Finance: 30/20/10 Proposal (September 22nd, 2008)
http://www.ritholtz.com/blog/2008/09/fixing-housing-finance-302010-proposal/
We respond to the TARP hearing: Our two DC-based economics editors listen to Secretary Geithner’s testimony to the banking committee. They show sympathy
Tuesday February 17th 2009
Good Evening: The lingering effects of last week’s disappointment with U.S. policy initiatives, renewed banking worries in Europe , and a weak G-7 gathering this weekend all combined to hit global stock prices today. That the SEC accused a sizeable financial entity with fraud and that Japan ‘s Finance Minister was forced to resign only added to the gloom. The major stock market averages in the U.S. now appear poised to retest the November lows, and we can only hope to avoid what Jeremy Grantham warns might be a “value trap”.
With U.S. markets closed for Presidents Day yesterday, investors had an extra day to stew over a myriad of negative press reports this weekend. Team Obama’s “financial stability plan”, or FSP, generated more detractors than supporters in media outlets ranging from print editorials to cable news gab-fests. Any hopes for bold action out of the G-7 meeting in Rome over the holiday were dashed when the only real news generated at the gathering was a stupefying press conference performance by Japan ‘s Finance Minister (see below). It’s bad enough that the economy of that island nation has been hammered of late, but it’s worse to see the man leading its financial sector accused of being in the same sorry state! His resignation in the wake of his press conference will no doubt give the ruling LDP a hangover during Japan ’s election later this year.
Personal problems in Asia were the least of the worries facing investors today, however, as both Europe and the U.S. had less symbolic issues to grapple with. European banks came under pressure yesterday and today when reports of trouble surrounding Eastern European banking establishments made the rounds (see below). In my forecast for this year, I had ventured the opinion that the next shoe to drop in banking might very well be among Europe ‘s highly levered institutions. With the banks in Great Britain already well on their way to being nationalized, and with so many banks located in and around the old Soviet-bloc countries facing insolvency, it seems only a matter of time before the major banks in old Europe need a(nother) helping hand.
Not to be left out of the negative news flow, the U.S. also managed to find trouble today. The Empire manufacturing survey fell more than had been expected, and the Housing Market Index could only improve one notch from an all-time low set during the previous month. Stock index futures are a decent weather-vane to check prior to the start of trading in New York , and this morning they pointed to a 3% decline blowing in from the North. The major averages were down 4% or so within the first 30 minutes before they settled into a sideways range for most of the day. A small rally attempt mid day was cut short by word from the SEC that it was accusing an offshore affiliate of Houston-based, Stanford Financial, of fraud that was both “ongoing” and “massive” (see below). Gotta hand it to the SEC this time; they’ve really come a long way since the Madoff scandal. They had evidence Madoff was on the hook more than a decade ago, but this time they are trying to land the fishy-smelling Stanford affiliate before actually waiting for it to jump in their boat.
Equities made a run at new lows after the Stanford story broke, but when those lows held, the bottom-fishers showed up to push stocks higher during the final hour. This 1% to 2% comeback in the major averages lasted less than 20 minutes, though, and stocks sank right back to their lows at the close. The KBW bank index was filleted by 10%, and the other indexes suffered declines of between 3.8% (Dow) and 5.2% (Dow Transports). Treasurys (and gold) were once again sought for safety reasons, and yields fell 10 bps to 20 bps. The dollar also benefited from the renewed interest in Treasury securities, and the greenback levitated 1.3% against its major competitors. As might be expected on a day centered on banking and recession concerns, commodities were clubbed. Crude oil declined more than 6%, the grain complex was weak, and only a healthy advance by the precious metals prevented even worse damage than the roughly 4% drop experienced by the CRB index today.
Quite a few bears, this writer included, thought the major stock market low on November 20, 2008 would lead to a nice rally lasting into early 2009. Referencing, by way of example, the 1929-1932 decline, most of us with a sense of history noted that the Dow enjoyed a huge bounce of nearly 50% between the November lows in 1929 (198.69) and the interim high in April of 1930 (294.07). It was when this recovery after the Great Crash failed that even smart investors (Benjamin Graham himself included) found themselves buying “cheap stocks” far too soon. Many 20%+ rallies punctuated the ensuing grizzly decline, and many investors swore off stocks forever by the time the Dow bottomed at in 1932 at 41.22. There were values aplenty on the way down back then, but the cheap names either got cheaper or they went bankrupt entirely.
I recount this episode not to predict that the next couple of years will bring similar hardship to stock market investors (though it’s quite possible), but instead as an introduction to “Part 2″ of Jeremy Grantham’s Quarterly Letter (see attached). As you will read, Mr. Grantham covers quite a bit of ground in this new piece. With warnings, advice, and even a Mea Culpa or two, he could easily have entitled it “Stuff that’s bothering me these days”. Though his subjects range from the positive alpha of taking on career risk, to the general lapse of financial ethics, and even how bubbles lead to busts, one of his most important points is that “value traps” are symptomatic of financial crises. Low P/E and low P/B offerings make the brave buyer rich during recessions, but they can also be Chapter 11 candidates if the economy, as seems to be the case now, turns really nasty. Mr. Grantham glumly concludes his analysis, however, with one last caveat. While a classic “value trap” may indeed be in the offing, he sees it as “at best a 50/50 bet this year”. Unfortunately, Mr. Grantham concludes, the high probability bets are few these days. Whether or not the Dow and S&P 500 can hold their respective November lows, Mr. Grantham’s addendum to “Obama and the Teflon Men, and Other Short Stories” is a worthy read. After all, forewarned is forearmed.
– Jack McHugh
U.S. Stocks Tumble on Recession Concern; Citigroup, GM Fall
Allen Stanford Accused of ‘Massive, Ongoing’ Fraud
Credit Swaps Rise Globally Amid Selloff, European Bank Concerns
Steinbrueck Says Euro States May Bail Out Members
Singer and song writer Elvis Costello should keep his new daytime job as a talk show host, Jon Friedman opines.
1:15
Marketwatch 2/16/2009
On Thursday, Sept. 18, 2008, the astonished leadership of the U.S. Congress was told in a private session by the chairman of the Federal Reserve that the American economy was in grave danger of a complete meltdown within a matter of days. “There was literally a pause in that room where the oxygen left,” says Sen. Christopher Dodd (D-Conn.).
FRONTLINE producer Michael Kirk goes behind closed doors in Washington and on Wall Street to investigate how the economy went so bad so fast and why emergency actions by Federal Reserve Chairman Ben Bernanke and Secretary of the Treasury Henry Paulson failed to prevent the worst economic crisis in a generation on Inside the Meltdown, airing Tuesday, Feb. 17, 2009, at 9 P.M. ET on PBS (check local listings).
As the housing bubble burst and trillions of dollars’ worth of toxic mortgages began to go bad in 2007, fear spread through the massive firms that form the heart of Wall Street. By the spring of 2008, burdened by billions of dollars of bad mortgages, the investment bank Bear Stearns was the subject of rumors that it would soon fail.
“Rumors are such that they can just plain put you out of business,” Bear Stearns’ former CEO Alan “Ace” Greenberg tells FRONTLINE.
The company’s stock had dropped from $171 to $57 a share, and it was hours from declaring bankruptcy. Ben Bernanke acted. “It was clear that this had to be contained. There was no doubt in his mind,” says Bernanke’s colleague economist Mark Gertler.
Bernanke, a former economics professor from Princeton, specialized in studying the Great Depression. “He more than anybody else appreciated what would happen if it got out of control,” Gertler explains.
To stabilize the markets, Bernanke engineered a shotgun marriage between Bear Sterns and the commercial bank JPMorgan, with a promise that the federal government would use $30 billion to cover Bear Stearns’ questionable assets tied to toxic mortgages. It was an unprecedented effort to stop the contagion of fear that seemed to be threatening the rest of Wall Street.
While publicly supportive of the deal, Secretary Paulson, a former Wall Street executive with Goldman Sachs, was uncomfortable with government interference in the markets. That summer, he issued a warning to his former colleagues not to expect future government bailouts, saying he was concerned about a legal concept known as moral hazard.
Within months, however, Paulson would witness the virtual collapse of the giant mortgage companies Fannie Mae and Freddie Mac and preside over their takeover by the federal government.
The episode sent shockwaves through the economy as confidence in Wall Street began to evaporate. Within days, in September 2008, another investment bank, Lehman Brothers, was on the brink of collapse. Once again, there were calls for Bernanke and Paulson to bail out the Wall Street giant. But Paulson was under intense political pressure from conservative Republicans in Washington to invoke moral hazard and let the company fail.
“You had a conservative secretary of the Treasury and conservative administration. There was right-wing criticism over Bear Stearns,” says Congressman Barney Frank (D-Mass.), chairman of the House Financial Services Committee.
Paulson pushed Lehman’s CEO Dick Fuld to find a buyer for his ailing company. But no company would buy Lehman unless the government offered a deal similar to the one Bear Stearns had received. Paulson refused, and Lehman Brothers declared bankruptcy.
FRONTLINE then chronicles the disaster that followed. Within 24 hours, the stock market crashed, and credit markets around the world froze. “We’re no longer talking about mortgages,” says economist Gertler. “We’re talking about car loans, loans to small businesses, commercial paper borrowing by large banks. This is like a disease spreading.”
“I think that the secretary of the Treasury could not fully comprehend what that linkage was and the extent to which this would materialize into problems,” says former Lehman board member Henry Kaufman.
Paulson was thunderstruck. “This is the utter nightmare of an economic policy-maker,” Nobel Prize-winning economist Paul Krugman tells FRONTLINE. “You may have just made the decision that destroyed the world. Absolutely terrifying moment.”
In response, Paulson and Bernanke would propose—and Congress would eventually pass—a $700 billion bailout plan. FRONTLINE goes inside the deliberations surrounding the passage of the legislation and examines its unsuccessful implementation.
“Many Americans still don’t understand what has happened to the economy,” FRONTLINE producer/director Michael Kirk says. “How did it all go so bad so quickly? Who is responsible? How effective has the response from Washington and Wall Street been? Those are the questions at the heart of Inside the Meltdown.”
Inside the Meltdown is a FRONTLINE co-production with Kirk Documentary Group, Ltd. The writer, producer and director is Michael Kirk. The producer and reporter is Jim Gilmore. FRONTLINE is produced by WGBH Boston and is broadcast nationwide on PBS. Funding for FRONTLINE is provided through the support of PBS viewers. Major funding for FRONTLINE is provided by The John D. and Catherine T. MacArthur Foundation. Additional funding is provided by the Park Foundation. FRONTLINE is closed-captioned for deaf and hard-of-hearing viewers and described for people who are blind or visually impaired by the Media Access Group at WGBH. FRONTLINE is a registered trademark of WGBH Educational Foundation. The executive producer of FRONTLINE is David Fanning.
Very amusing Pat Bagley cartoon, via The Salt Lake Tribune
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Ugly day at the Ponderosa, as the Dow takes a swan dive 300 points, or 3.8%. Nasdaq fell 4%.
Our new 100 Meg line is about to be lit up, so I will be off line for a few.
Blazing speeds when I return.
NBR’s Darren Gersh talked with Jim Chanos, President of Kynikos Associates. He asked the legendary short seller for his take on investment opportunities in this market. A portion of the interview aired in tonight’s program. You can watch the extended version here. Just click the image below. (You need Flash installed to watch.)
click for video
11:44
Thursday, February 12, 2009
Interesting site that allows you to check on just about anything in the stimulus plan. You can search by keyword, federal program or by state.
Note: This appears to be a wish list, not the actual bill.
Check out your state and your town; Find projects by state or territory in these categories:
1. Community Development Block Grant (CDBG) – HUD program established in 1974 that awards localities funds to spend on local projects that promote urban vitality, and primary benefit low to moderate income persons.
2. Energy - The Energy Efficiency and Conservation Block Grant (EECBG) is a Department of Energy program established in 2007 to provide grants to localities to adopt energy efficiency improvements.
3. Transit Equipment and Infrastructure – Department of Transportation programs to purchase buses, street cars, and maintain transit infrastructure.
4. City Streets/Metro Roads – The Surface Transportation Program, operated by DOT, provides bridge, bus, rail and road project funding
5. Airport Technology and Infrastructure - Airport Improvement Program, a DOT program that provides funds for specific airport repairs and improvements (runways, rescue equipment, noise abatement)
6. Amtrak - established by Congress in 1970 to operate passenger railways. Funding for railway upgrades, tunnels, bridges and stations.
7. Water and Wastewater Infrastructure - federal grants used to repair water and sewer infrastructure, and protect the water supply
8. Public Housing Modernization - HUD Public Housing Capital Fund for repairs to public housing
9. Public Safety - Funding for the Community Oriented Policing Services (COPS) grant, and Byrne Justice Assistance Grant program, Justice Department programs that provide money to hire security personnel and equipment.
10. Schools - a new federal program is proposed to provide federal funds to modernize school buildings.
Note that the people behind this site include mostly George Mason University researchers and Open Source advocates.
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"I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale." -Thomas Jefferson (letter to John Taylor in 1816)
After 3 quarters in a row that averaged just 1.2%, Q4 GDP grew 2.8%, a touch below expectations of 3.0% BUT Nominal GDP grew well below forecasts. Because the price deflator was up just .4% vs the estimate of 1.9%, Nominal GDP was up 3.2% vs the estimate of 4.9%. Personal Consumption rose 2.0% vs the forecast of 2.4%. Fixed Investment rose 3.3% helped by a 5.2% increase in equipment and software spending and residential construction rose by 10.9%. Trade was a slight drag on GDP growth and government spending was as well led by a 12.5% decline on national...
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