March 16, 2008
Sunday Night Special: The Bear Stearns Blowup (And Balance Sheets)
From a market capitalization of over $10.8 billion last month ($20.2 billion last year), to $3.6 billion on Friday, to an implied $240 million today, roughly $10.5 billion in Bear Stearns’ shareholder equity has evaporated over the past six weeks. And with a third of the bank owned by its employees, employee wealth has been reduced by at least $3.5b during the same period (dropping over $1 billion since Friday alone)*.
From a plugged-in reader who was listening in on the Bear Stearns (BSC) JPMorgan Chase (JPM) conference call earlier this evening:
In effect, JPM is "writing down" the value of nearly $33B in BSC mortgage-related assets to approximately $13B (after giving effect to the $20B of Fed backstop related specifically to these assets). Yes, the value of the mortgage assets on BSC's books, of which only $2B is estimated to be subprime specifically, has been marked to market at a greater than 50% discount to the market value as of 2/29/08. Now, clearly JPM was able to leverage the imminent liquidation of BSC to drive the mark to market value of these assets below the JPM-perceived value of the assets (or they wouldn't have done the deal), but why aren't the rest of the banks going to be forced to further write down the value of their mortgage-backed assets by some amount greater than what's already been done (since the true mark to market value of these assets now lies somewhere between par and more than 50% less than par)? And what does this mean to the value of the average household balance sheet, where the value of the home is a large part, if not a majority, of the "book value" of the average American household?
And then of course there’s the fact that the Fed is operating in complete crisis mode. Don’t think these things will affect all levels of our lilttle local real estate market way out here (from credit to rates to values)? You might want to think again.
*Note: Updated to include shares beyond those in the employee-incentive plan.
∙ JPMorgan Chase to Buy Bear Stearns for $240 Million [Bloomberg]
∙ Fed Lowers Discount Rate, Expands Lending to Prevent Meltdown [Bloomberg]
First Published: March 16, 2008 11:43 PM
Comments from "Plugged In" Readers
The big question: will this RE downturn (that has barely affected SF) last long enough to affect SF significantly.
my answer has always been yes, but who knows? Bear Stearns failing and getting a huge Fed bailout on Friday definitely wasn't a good sign for mortgage lending.
for all of you happy that the govt is doing all these interventions: do you realize that our dollar is plummeting in value (15-20% in just the last 6 months) so that we can bailout all these Wall Street FatCats and overextended homeowners?
[Editor's Note: This excerpt from a comment earlier this morning by "ex SF-er" was moved along with the next 24 comments. Comments specific to the JPMorgan Chase acquisition of Bear Stearns start here.]
Posted by: ex SF-er at March 16, 2008 5:09 AM
Well, ex Sf-er brings up a great point about the population "cheering" for government intervention. That's one of the huge problems with allowing a government to get too involved with an economy: the population is co-opted by the fraud, and in its self-interest sanctions and even encourages any fraudulent spit-and-bailing wire fix that can be dreamt up by the craven politicians. Look at what is going on today - outright fraud (I've been saying it for months) among the rating agencies, SEC, accountants, and Federal Reserve. The system is insolvent, and nothing is going to stop the coming adjustment.
The only question is whether we undergo a mildly deflationary deleveraging (like the Great Depression - which was NOT very bad in the larger scheme of things as compared with what other countries have had to endure - or Japan) OR a hyperinflationary depression a la Russia 1998, Indonesia 1997, Weimar Germany, Zimbabwe today, etc. FWIW I still think the Fed is choosing the former and is engineering it. I won't change my mind until the Fed starts inflating the monetary base, which they haven't done yet. I hope I am right, because the alternative (at 350% debt/gdp), would be a catastrophe!
Here is a quote (from his "Human Action", published 1940) that is popular on the internet from my favorite thinker on economic cycles, von Mises. I'm sure most have seen this before, but for those who haven't it is really worth reading and pondering over:
"The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
Just a little light Sunday morning reading....
Posted by: Satchel at March 16, 2008 6:37 AM
I think a deflationary spiral is more like than an inflationary one Satchel. I do think it feels a bit more like an emerging market crisis of the 90s in reverse. All US assets will dramatically depreciate a lot, and domestic prices, especially international commodities. I think there are some mitigating factors, the US can export its way in large part out of this crisis and somewhat stem a wholesale devaluation of all of our assets. We produce quite a bit and production is shifting here very quickly. We also are the 2nd largest producer of oil, if we could just halt or dramatically reduce our own consumption of it. The government isn't minting money such as the case of the Weimar republic and the large consumer debts are likely to be converted into government debt, and over time could be paid off through larger US exports. However a dramatic drop in US consunmption seems unavoidable and while the devaluation of US assets will not be like those in Russia and the Asian Nics of the 90s, it should be large --40-50% for Real Estate for example in some markets. Before this crisis began I thought 30% would do the trick but policy management has been so bad, I think we might see a 50% haircut before all is done. Probably not quite as bad in SFO as some point out, the supply here is much tighter than in other markets. But yeah, not the Weimar republic. Just a much poorer one.
The government isnt minting money like in Wiemar Germany or the policies in Russia. I think we are essentially going to see continued price increases in commodoties and falls in values of US assets and leveraged assets generally in a rather dramatic fashu
Posted by: cooper at March 16, 2008 9:39 AM
That's what so maddening about trying to position yourself to survive what's coming. In the end much of it comes down to what the gov chooses to do. They can wiemar us at any time they please by just firing up the printing presses. Or they can sit back, do nothing, and let the economy collapse into a great depression as the financial system implodes. I assume that they will try to steer a course between those two extremes and we will wind up with stagflation and a significantly lower standard of living but there's no guarantee either way.
If there's anything I've learned from Zimbabwe it's that a government can take a healthy economy to ruin in short order by following bad economic policy. I hope that our's will try to stimulate the economy by supporting productive investment in infrastructure and energy instead of random bailouts of speculators.
Posted by: diemos at March 16, 2008 10:07 AM
@diemos: I propose a modified Godwin's law for anyone who invokes Zimbabwe in comparison to what is going on (or what will happen) in the US.
Posted by: dub dub at March 16, 2008 11:35 AM
Agreed, diemos, it IS maddening. But I always fall back on the one truism of government: it seeks power and the aggrandizement of itself. Deflation plays right into that. Look at the wails already from the population in the face of even a minor adjustment in asset values. Begging for more government. And low interest rates makes it easier for the government to give the people what they want (and coordinately to grow itself). Massive printing leads to higher interest rates, and ultimately less government control over the people. Remember, the Weimar government fell, and so will Zimbabwe's. The Bundesbank arose from the ashed of Weimar, and the Fed doesn't want to go out of business - it;s been too profitable a ride for the banks and the Fed these past 90 years or so (especially the last 25!!). TPTB will choose deflation every time IMO, just as they did in the 1930s (I basically agree with Cooper that the end game will be a deflationary spiral in asset prices, and I also think we will see deflation in services as well, but probably not in food and energy any tome soob). People are going to be shocked when the Fed starts raising rates next year, just like they did when they raised rates in October 1931.
Posted by: Satchel at March 16, 2008 11:39 AM
Just what we don't need is more gov't participation in anything - but you make a great point Satchel, people (at least a lot of people) will be begging for more government. That is really frightening - particularly with a new administration coming in. If the fed is not expanding the monetary base now but is continuing to cut rates, what will be the shift that will let them start raising rates?
Posted by: FSBO at March 16, 2008 11:54 AM
"what will be the shift that will let them start raising rates?"
Well, it's just a guess on my part, but I think the impetus to raise will come from a number of different currents.
Basically, people need to understand that the Fed really FOLLOWS markets, more than leads them, when it sets Fed Funds. It looks particularly to the shape of the yield curve, and pays close attention to where short term treasuries are trading.
Right now, there is a massive panic and flight to safety. It is NOT reflected in equity prices, because those have been manipulated. Plain and simple. However, equity prices are not SUPER overvalued. Even though I hope for a wipeout crash (I'd make even more than I have already), the reality is I would probably go long 10-15% below where we are today (I'd sell puts, because vol would be high, but I wouldn't expect great equity returns over the next 10 years - BTW, that strategy worked unbelievably well in 2002).
My guess is that markets will settle down by next year (not too tough a prediction to make). There will be some cost-push price inflation, and 1% treasury bills will be a memory, as people will not hold treasuries yielding less than headline CPI absent panic conditions. This will be one influence leading the Fed to raise.
If I am right, the Fed will also be presented with a technical challenge of trying to keep rates low on the front end, without increasing the monetary base. Right now, it is easy because of the panic. The Fed sells t-bills out of its balance sheet to sterilize the cash flowing through the TAF. The Fed even makes money on this!! (You have to admire them - lend through the TAF at 3% and borrow cash from the market by selling t-bills at 1-1.5%!!). As panic subsides, they will have to raise the target FF rate or else expand the base (no sterilization) which will cause long rates to rise. Not good when you are at 350% debt/gdp! (We'll be at lower ratios by then, but probably not low enough to not care about long rates.)
There will also be another current coming from dollar weakness, and the desire of the Fed to "regain" credibility after bailing out all their banking buddies (to the detriment of the population, which will be as clueless a year from now as they are now). I'm guessing there will also be pressure from the G-7. Smart people understand that many of these enormous bubbles that we have been witness to over the past 15 years resulted from the easy money coming out of Japan after the bursting of its bubbles in the late 1980s. They *might* try to avoid a repeat, but you will never go broke overerestimating just how dumb and selfish policy makers can be!
We'll see if I am right - just a guess! I do think that once enough debt is destroyed/retired/absorbed by the population, that the Fed will go back to its old 1970s ways of monetary inflation to cover up its (and the USG's) sins. Keep the people clueless is always a good strategy! But that's down the road, probably after we regain a more trend-normal 150-200% total debt/gdp.
Posted by: Satchel at March 16, 2008 12:32 PM
Why is everyone comparing the current scenario to the Great Depression in 1930? Wouldn't a closer analog be the Panic of 1907?
1907 has a lot of parallels-- credit contractions, bank runs, asset (stock) price declines, J.P. Morgan bailing out banks and a recession. (Well, except, its not actually John Pierpont Morgan but the company that bears his name, but that's a small detail...)
But the economy was back on track by 1908. Why wouldn't some variant of that scenario play out again today?
Posted by: Jimmy (Bitter Renter) at March 16, 2008 1:58 PM
Two reasons, Jimmy (Bitter Renter). First, in 1907 there was no Fed to muck things up (that's one of the main reasons the US economy recovered so quickly from all the other "panics" and "depressions" in the 19th century). Second, and most importantly,there was no income tax in 1907. That meant (among other things) that the Federal government was much smaller, and was not "in the mix" as it was in the 1930s (USG meddling led to the Depression as foolsh policy after foolish policy was tried - including confiscation of gold, forced devaluation of currency, paying farmers not to grow food, paying workers in make work WPA programs, etc. etc.).
Because of the size of the interventionist forces today (USG and Fed), I think we are likely to see a variant of what played out in the 1930s. Most likely, it will be more like the Japan variant of the 1990s. We are richer than we were back in the 1930s, more safety nets, etc., so probably no soup lines! But it will be bad for a lot of people - worst for the "aspirational middle class" which has come to see living beyond its means as a birthright.
We can't get back on track as fast as 1908 because as asset values are lowered, the nominal debt remains. Attempts to inflate away the nominal debt will cause a spike in interest rates that would be devastating (people are wailing because jumbo loans are 7% - what would happen if mortgage rates went to 10%+??). It takes time for people to let go of their dreams, and many will keep paying on assets that are depreciating, throwing good money after bad. Also, the lenders are going to be stung much worse than in 1908, and you can't fit China, Japan, Europe and the shadow banking system into one room like JP Morgan did 100 years ago! Finally, the structure of our economy is more unbalanced today. We have just foolishly incurred an additional 50-75% of debt (relative to gdp) in the last decade to inflate consumption assets like houses and to overinvest in residential real estate that no one needs. I can't see how this ends well, and the inclnination of most people and politicians will be to stretch out the adjustment rather than take our medicine quickly.
Posted by: Satchel at March 16, 2008 2:36 PM
Again, the comparison to the Great Depression is really not a useful one. A better way is to look at the Asian tigers in the late 90s. The big difference is global demand is strong, and while the dollar is crashing, it probably won't go down like those currencies did because we produce a lot of international commodoities (oil for example we are the 2nd largest global producers-or 3rd). We also make quite a bit of other manufactured products and that's increasing dramatically. The other big differences is those economies contracted money supply at the suggestion of the IMF to try and stabilize their currencies and attract capital which failed horribly. Notice in this case, the IMF isn't giving that advice. In fact, the Fed is loosening and expanding the money supply in the hopes of creating some credit. Its not really working either but its working better than raising them. People are looking for an easy way out of this, but there is only one way. Make more and consume less, eliminate oil imports to balance the curren account deficit, and cut Federal spending. A baliout of the banks unfortunately along the lines of what Frank proposed is probably going to be necessary also. All of this has to be done in a coordianted way and it will take a year or so to start to see the light at the end of the crisis. And sadly, it's going to take some real pain to get consumers to stop over importing. But yeah--this really is very different then the great depression. The best analogy is the 90s even though it hurts our pride to be compared to third world countries.
Posted by: cooper at March 16, 2008 4:27 PM
"eliminate oil imports to balance the current account deficit"
I apologize Cooper and I hope you take this the right way but, ARE YOU F@CKING CRAZY!!!!
If we were to eliminate 75% of our oil consumption (which is what it would take to eliminate oil imports) it would create an economic disaster that would make people nostalgic for the great depression.
And while I think it's a great idea to eliminate our oil dependence we're talking about a multi-decade, multi-trillion dollar program of developing alternative energy sources and changing the transport infrastructure. I hope we do embark on this program because fossil fuels are a long term dead end but we're not going to solve our current account problems tomorrow on this path.
Posted by: diemos at March 16, 2008 4:48 PM
It's a little different than the Asian tiger blowups (believe me, I lived through each of them in real time!). Current account situation looks similar, but remember the basic problem there was unsterilized capital inflows leading to domestic price inflation, combined with externally denominated debt that was not repayable (once confidence was lost in the pegs).
In the US, we've got massive credit expansion that financed an invesment boom in nonproductive assets, BUT we do not have the externally denominated debt problem. That's why there is ZERO pressure on short rates here, while in the ASEAN blowup, there was tremendous pressure on the short rates (I'm proud to say I lent Thai baht at 100% in the overnight market against a short position in the forwards).
Nevertheless, the comparison is useful, especially because of the need to pull in the current account. That's the key, as you identify. BUT, diemos is right, to swing the current account into balance quickly (either through oil import reduction, increased exports, decreased tradable goods ex-oil, or a combination) means INSTANT depression. INSTANT!! That's not the way it is going to go down, I'll bet almost anything. There's a deal between the USG, FED, FCBs and SWFs, and it involves deflating the money supply - that's my guess. Hello the "lost decade", American-style.
BTW, great call Cooper on your Bear Stearns puts. Deal just announced, values BSC at $2! That's $250 million for the whole business, INCLUDING the $1.2 BILLION office building. Think of poor Joe Lewis, who put in $1 BILLION (it's worth about $30K now - ouch)!! Say goodbye to that, Joe, your wealth has been "absorbed" in the great game, and Cooper's got a small piece of it!!
Now, does anyone seriously doubt what I have been saying for months, namely that EVERY SINGLE money center bank and investment bank is INSOLVENT?? I mean, do people really think Bear Stearns, Countrywide, and Citibank are anomalies? Any loss of confidence (as in Bear Stearns) in any bank leads to instant collapse. Isn't that what the Fed was formed to guard against (FDIC and all that), hehehehhe.
Posted by: Satchel at March 16, 2008 5:21 PM
And the only hard asset at BSC was their Manhattan office building. You see the figure $1.2B as its value - but that was based on $1,000 psf X 1.2M square feet. Do you think it will still fetch $1K psf? I don't think you going to have to worry about getting outbid by Harry Macklowe on this property. These banking problems are going to put even more pressure on the commercial sector. BSC leased a huge amount of space in Canary Wharf - so even the UK may feel some of this.
Posted by: FSBO at March 16, 2008 6:55 PM
Be careful of what you wish.
I am very nervous right now. I've always thought we would see tough times, but these times truly make me nervous.
I, like you Satchel, have some investments that have done really well (gold, proshares short funds, etc). However, I am also at the mercy of the financial system. If the system goes down, how do I get the money for my "winning" trades?
not only that, but did you see how much the dollar fell vs the yen in just the last few hours?
we are all exposed IMO.
To me, it feels "good" to know that my rational analysis was correct, it's a validation of all the ridicule I've suffered for my warnings of the unstable financial system we've had these last several years. But it is a hollow victory, watching my life savings depreciate rapidly, and seeing the pain that will come of this (job losses, etc)
A word of advice to all: keep your financial house in order. Lower your debt as much as possible, and build a good emergency fund in case of bad times.
This may not be the best time to overextend oneself financially.
Also, perhaps have a little cash ON HAND.
A big investment bank just went bankrupt in just a few days. We all knew Bear would go down, it was no surprise, but the rapidity was (in my opinion). There are other banks that have a high probability of going down.
You want to have at least a little "operating cash" at home, just in case your bank goes down.
I know this all sounds very doomsday... but today the Federal Reserve did something it hasn't done since the Great Depression. If the Federal Reserve Board is this worried, I think it deserves a little bit of caution on the part of we citizens.
and lastly, remember, it's just money. sure, the money represents your sweat and tears saved up... but it can be replaced.
Posted by: ex SF-er at March 16, 2008 7:01 PM
Greenspan NOW has decided that this is the worst financial crisis since World War II, as quoted in the Financial Times. The whole Bear Stearns collapse is truly a historic moment. I was just watching CNBC Asia online and they are in full panic mode. IF any of you still think that San Francisco is not going to be impacted by this, I give up.
Posted by: anoninshock at March 16, 2008 7:26 PM
I'm very worried about a run on the entire banking system as well, but I do think that is a fairly remote possibility in the modern era. It is however VERY likely that at some point we get a "bank holiday" a la 1933. I don't know when - it could be tomorrow!
What you say about having cash on hand makes total sense. People who ridicule ideas like that are fools. The only thing I would add is that safe deposit boxes are anything but safe. The Fed is in total control of those, and can lock you out in a minute. They have done it before.
Physical gold has a place in any disaster scenario. So does cash. But most of all I agree that attitude is key. It's only money. People who are used to living under their means will have no major problems whatever comes IMO.
Posted by: Satchel at March 16, 2008 7:29 PM
"They have done it before."
Yes they have, but we were on the gold standard then. I doubt they are going to confiscate gold without at least giving you fiat in return. After all, it's only paper and ink, it doesn't cost them anything.
I would also expect to see more of a propoganda effort in the MSM before confiscation. Gotta get that gold out of the safe deposit boxes, it's being used by terrorists to fund their activities don't you know.
Posted by: diemos at March 16, 2008 7:47 PM
Well the fact our debt is denominated in our own currency is a big plus. But the Asia crisis started when Russia defaulted then it spread into Asia (Asian Congtagion)....subprime contagion....etc. People started question, well can Indonesia pay? Can Malaysia? it's very similar. I'd argue is a much better analogy than the great depression which is a study in to itself.
Diemos. No offense taken but if you read what I wrote my whole point was it couldn't be done over night. But it shows how critial it is for us to get off oil immediately with eletric and hybrid vehicles. To be off foreign oil we'd only have to cut our consumption by a half. Additionally, if we had a government that announced a shift to non oil based cars...electric, or anything but oil...other countries woudl follow. Japan would follow as well, and immediately you'd see a baked in reduction int he price of oil...which would start immediately to impact the currency (it would cause it to rise).
Posted by: cooper at March 16, 2008 8:52 PM
Well, your Asian crisis history is a little muddled, but I agree that the contagion issue was a huge deal, and we face similar contagion issues today.
Just FYI, the Russia default really was the end of the large scale crisis, when shortly afterwards (following August 1998) Greenspan "stick-saved" the US equity markets by bailing out LTCM and then cutting in an obvious equity bubble environment. I'd argue that much of the woes we've had since then stemmed from that foolish decision (the "stick save" + foolish flooding of liquidity in the face of Y2K set the stage for the internet bubble to really take off in 1999, the bursting of which set the stage for the foolishness of cutting like crazy again, which partly led to the housing bubble).
Thailand started the crisis back then - July 1997. Real estate was at the center of it - but the problem loans were throughout the economy. Domestic inflation had led to a real appreciation of the baht, which was managed against a basket. In essence, Thailand could not produce enough to service its debt at a positive interest rate, especially as price inflation and asset inflation had gone wild. In that sense, there were some similarities to what we are facing today. Much of the investment had been funded by foreigners, lured by higher yields and the illusion of a stable currency. Then the foreigners decided to leave, and along the way hedge funds decided to attack the currency. The crisis spread and ultimately Indonesia went the following spring. Korea came under enormous pressure, but its flexible exchange rate helped. Hong Kong and Malaysia stuck to their guns under intense speculative attack, and ultimately held the line. Singapore as well in late 1997/early 1998, but its flexible fx regime, balanced current account and reserves helped a lot. I remember those days like yesterday (I managed money at one of the really premier macro hedge funds back then - I'd rather not say which one). We attacked the HKMA daily, and they even went to the extraordinary step of buying the Hang Seng directly. But they held the line - and that's part of the reason why I think the Fed will be able to hold the line here too. But it's getting scary! Too many holes in the dykes, not enough fingers!!
By the time Russia blew up (taking Ukraine local debt with it) we were well past most of the ASEAN crisis, and spreads had calmed down dramatically on HK$, for instance. And soon the Wall Street guys were off inflating the next bubble (Internet stocks). I think the housing bubble was just one bubble too far though. It's caught way too many average people who really have no way of thinking about asset values and what's going on. This adjustment will be rough!
Posted by: Satchel at March 16, 2008 9:21 PM
Did anyone listen to the BSC/JPM CC tonight? In effect, JPM is "writing down" the value of nearly $33B in BSC mortgage-related assets to approximately $13B (after giving effect to the $20B of Fed backstop related specifically to these assets). Yes, the value of the mortgage assets on BSC's books, of which only $2B is estimated to be subprime specifically, has been marked to market at a greater than 50% discount to the market value as of 2/29/08. Now, clearly JPM was able to leverage the imminent liquidation of BSC to drive the mark to market value of these assets below the JPM-perceived value of the assets (or they wouldn't have done the deal), but why aren't the rest of the banks going to be forced to further write down the value of their mortgage-backed assets by some amount greater than what's already been done (since the true mark to market value of these assets now lies somewhere between par and more than 50% less than par)? And what does this mean to the value of the average household balance sheet, where the value of the home is a large part, if not a majority, of the "book value" of the average American household?
At the end of the day, as a small business owner, the last thing I want to see is an economic implosion, but, I can't help but see a lot of pain coming down the road for the U.S. economy. This is a mess that's going to take awhile to unravel.
Posted by: CSInvestor at March 16, 2008 9:38 PM
Holy sinking ship, Batman, on a Sunday, no less:
"The Federal Reserve, in emergency decisions aimed at containing a crisis of confidence in the U.S. financial system, cut the rate on direct loans to commercial banks and opened up borrowing at the rate to securities firms."
They are all flailing. He had to do something before the markets opened in Japan.
He earned his keep this weekend. The NIKKEI is only down almost 500 points.
Posted by: tipster at March 16, 2008 9:55 PM
Satchel, et al: Short-term hysteria aside, is it possible that JPM just got the deal of a lifetime?
Thanks for your comments!
Posted by: dub dub at March 16, 2008 9:57 PM
"is it possible that JPM just got the deal of a lifetime?"
If by that you mean acquiring Bear's assets and liabilities and 30B of the taxpayer's money then no.
If you're refering to the secret handshake deal that JPM would be one of the elect chosen to survive then yes.
It's good to remember that during the LTCM crisis Bear was one of the banks that refused to participate in the bailout. I guess it's not wise to cross the Godfather. He has a long memory and he holds a grudge.
Posted by: diemos at March 16, 2008 10:21 PM
dub dub--I think that in the long term--it will be a great deal for JPM. JPM will still have difficulty those given its exposure to the credit markets I think. So short term it could get much choppier for jpm good deal or not.
And satchel...yeah I thought Russia started it--you are right it was more middle/end. Muddled history or not though, its a much better analogy to whats going on here I believe than the depression. The real estate comparisons are present, crisis of confidence and spreading like a contagtion. Like it took asia years to emerge stronger--the same will be for the US--not as sharp a depression but very difficult and years to work out. Now I have to go charge my electric sports car.
Posted by: cooper at March 16, 2008 11:19 PM
I seem to remember every realtor in the US saying.. "what bubble"?
Now the line is, things are already getting better.... riiiiiight
Posted by: Dave at March 16, 2008 11:53 PM
"Now, clearly JPM was able to leverage the imminent liquidation of BSC to drive the mark to market value of these assets below the JPM-perceived value of the assets (or they wouldn't have done the deal)"
"If you're refering to the secret handshake deal that JPM would be one of the elect chosen to survive then yes [JPM got the deal of a lifetime]."
Ding, ding, ding! diemos wins with that second comment. JPM had no choice in the matter. NONE. The Fed godfather tapped JPM, and that was that. (Just like they tapped BofA on the shoulder, and said do a deal with Countryslide.) Now, the Fed is picking and choosing who will live and who will die. JPM is one of the elect, and will be first in line to get the government cheese when it starts flowing. I strongly suspect that Citi doesn't survive (I mean, no taps on the shoulder for them so far).
I'll bet almost anything it goes down like this in the end. Right now, the Fed has committed up to 60-70% of its balance sheet through things like the TAF, TSLF, liquidity "backstops", term repos, etc. (we'll never know exactly because the Fed doesn't provide audited financials - never has, and never will). Much of the junk sitting with the fed now is toxic and crap. By later this year, a government agency will be set up to buy the toxic crap at 50 cents on the dollar when it's worth maybe 10 cents (I'm just picking those numbers out of the air). The Fed will repo those securities back to the banks it chose to survive, who will recognize some losses, the Fed will get 100% of its precious treasuries back, and the taxpayer will eat another few hundred billion in losses, as the agency sells off the debt for pennies on the dollar to the Wall Street crime syndicate, keeping the worst of the worst on its books to die an ignominious credit death within the government hospice care facility.
With the problem "solved" banks will be then be free to raise mortgage rates, and no one at the Fed or the USG will care at that point if housing falls another 20-30% with the higher rates. Anyone who thinks the Fed and USG care about homeowners is crazy!
Posted by: Satchel at March 17, 2008 5:35 AM
Satchel, et al: Short-term hysteria aside, is it possible that JPM just got the deal of a lifetime?
Thanks for your comments!
my personal opinion: This move was really designed to save JP Morgan. In other words, it was a bailout of JP Morgan, and NOT Bear Stearns.
who was the largest counterparty with the most to lose if Bear Stearns went down? Answer: JP Morgan.
If Bear fell in disorderly fashion, JP would have gone next in my opinion. This is why JP Morgan did the deal.
even at the "discount" price of $2/share, JP has opened itself up to HUGE liabilities on Bear's portfolio.
As Jamie Dimon (CEO of JP Morgan) said
“JPMorgan Chase stands behind Bear Stearns,”
“Bear Stearns’s clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns’s counterparty risk. We welcome their clients, counterparties and employees to our firm, and we are glad to be their partner.
No firm in their right mind would do this unless they had nothing to lose. Bear Stearn's portfolio is levered 32x to 1. (it was 44x to 1 last summer). Now JP Morgan has assumed all that liability plus leverage.
JP Morgan was done if Bear fell, so it had nothing to lose.
Add in the Federal Reserve Backstock of $30 Billion, AND I'm sure a few backstage promises, and it's a no-brainer.
From the wizard of oz:
"PAY NO ATTENTION TO THAT MAN BEHIND THAT CURTAIN!"
Posted by: ex SF-er at March 17, 2008 5:44 AM
Interesting point made on CNBC, Bear Sterns shareholders have to approve the $2 a share buyout and they can shop around for a better offer which there seems to be hope of because the stock is still trading in the $3.50-4 range (in early trading) despite the $2 buyout
Posted by: badlydrawnbear at March 17, 2008 7:00 AM
To ex-Sfer. No it's a very good deal for JPMorgan. Bear has some crappy paper, but it really just experienced a "run on the bank" the assets overall were quite good and worth and like 8 or 9 billion not 200 million. To BSC shareholders those assets were worth zero since people were pulling their money out and not taking counter party risk. To JPM --no panic --lots of confidence and the assets are wroth more. Someone said (maybe you) that on the conference call they wrote down a lot of mortgage debt. The question being does this mean others must right it down to similar vaules. Good question and I'd like to know that answer.
Posted by: cooper at March 17, 2008 7:41 AM
Guys, it's not the mortgage assets that are the big deal. Some of those are probably ok, most are crap, etc. It's the derivative CDS exposure, and all the other derivative stuff that we don't know about, that's the problem. There are TRILLIONS of dollars of notional exposure, and no one (least of all the Fed) wants to find out what happens when a counterparty fails. This happened on a much much smaller scale in 1998, when people rushed to unwind derivative currency positions (the "non deliverable forward" or NDF market) and the options on those NDFs with counterparties like CSFB and ING, because it was feared they would fail. Anyone who was there remembers it with terror, when bid ask spreads exploded amid huge losses all around. And all that was NOTHING compared to what they have cooked up these past 5 years or so. Believe me, nothing is marked correctly, and these guys are all just hoping it works out in the end. You can't hedge the positions - CDS swaps dwarf the equity and bond markets of the subject companies, so there is no ability to synthetically manage the positions. It's a mess, and they don't know the half of it. Even at a 200 person hedge fund, the risk managers could never keep up with what the traders were dreaming up - and that was 10 years ago. I can only imagine what a mess it is at these banks now....
Posted by: Satchel at March 17, 2008 8:00 AM
Jeez, and all I ever wanted was a $500k 2/2 in a nice part of town.
Didn't really need the financial armageddon to go along with it!!
Anyone know how to start a hedge fund? We'll borrow US Treasuries at 3.25%, use the money to buy Australian treasury bonds at 6.085% and keep the difference! Kind of like the carry trade but using US pesos instead of Yen. Then we'll figure out a way to leverage our capital by, say, 100:1 and make a 300% annual rate of return! Nothing can go wrong!!
I think it'll take about a weekend to get the legal structure in place and then an hour a day of work just to keep things rolling along. The rest of the time you get to drive Ferraris and drink coffee and play golf. Any takers?
Posted by: Jimmy (Bitter Renter) at March 17, 2008 8:43 AM
The Fed will repo those securities back to the banks it chose to survive, who will recognize some losses, the Fed will get 100% of its precious treasuries back, and the taxpayer will eat another few hundred billion in losses
This sounds like the S&L bailout in the 80s. Any comments on how that one played out in the end for the USG?
Posted by: michiko at March 17, 2008 8:55 AM
Satchel--It's the ecact opposite problem. Banks in general (altho I don't kno all of BSC balance sheet) have marked things down too much. The days of Enron have left us with an accounting legacy that doesn't readily apply to illiquid markets which most of those debt instruments by definition are. so in many cases (read --not all cases) its impossible to get a trade price because both buyers and sellers are bascially paralyzed. how can you mark something correctly that doesn't trade? you have to use a model--most of these guys are being forced to market it down at the doomsday scenario prices which in effect FORCES more liquidation. Which causes people to want to mark the securties down even more. I think that's a far bigger problem than people who are not marking their securties correctly. Now maybe you are thinking that real estate or other assets are going to zero and these securities are trading at 30 cents are really worth 10 or even 0. i think its right not to price with hope but you have to at least be reasonable. BTW I saw some comments on bankers in general today that it seems like all of the big crises we have had in the last 10 -20 years seem to have started with investment bankers. Kinda true...
Posted by: cooper at March 17, 2008 9:00 AM
"Guys, it's not the mortgage assets that are the big deal. Some of those are probably ok, most are crap, etc. It's the derivative CDS exposure, and all the other derivative stuff that we don't know about, that's the problem"
Cooper: I'm sorry but I have to disagree with you, and agree with Satchell
It is true that Bear has underlying value in some of its mortgage securities.
the problem is that they have countless credit default swaps and also other positions levered 32x.
what is the value of a CDS based on 32 x leverage when the underlying security drops 5%?
now what if it's a synthetic CDS or CDS squared?
the problem really is that NOBODY can or does know the liabilities of Bear Stearns. they could definitely wipe out JP Morgan.
this was a shotgun wedding that JP Morgan agreed to specifically because they had no choice anyway (since they are a large counterparty to Bear).
only the future will tell what the outcome will be.
I haven't the foggiest.
sure, the markets are illiquid. but they are illiquid SPECIFICALLY because nobody knows (including the creators) what is in these deals. They are UNANALYZABLE.
due to their opacity, nobody can trust what the other party has, thus nobody will trade. It's a stalemate.
I believe it was Warren Buffet that said one must read over 100,000 pages of disclosures to analyze just ONE CDS deal.
how do we reverse this? I have no idea. I hope to God that the Fed does.
Posted by: ex SF-er at March 17, 2008 9:32 AM
Most real estate markets in the USA will give back 100% of the price rise from the year 2000. Including the SF Bay area.
Only 6-12 months ago, such a statement was still regarded as hyperbolic. I will go one step further: many markets will actually be lucky if they only give back 100%.
Posted by: SurveyKid at March 17, 2008 9:44 AM
Es SF-er. In financial panics the human brain just shuts off--and people become paralyzed. Bear did not fail because of a problem with its CDS CDOs or or any other acronym, it failed because of a run on the bank. Long term those assets are worth a lot more than 2 bucks a share --logn term. Yes its true it probably has some securities on the books at 20 cents that are worthless or overleveraged --most of the assets are in fact undervalued or fairly valued. With all this scrutiny they are not left with much choice. Look I was was the guy who bought march BSC puts--but I bought them after I saw the CEO on CNBC saying things were fine...and I thought--here comes a run lets buy some puts. But I didn't buy those puts because I was worried about the long term value of Bear --its probably closer to 15 bucks a share rather than 2...it that short term with a run on the bank--its worth zero dollar or even possibly a net liability.
Posted by: cooper at March 17, 2008 9:57 AM
What sent BSC to Davy Jones' Locker was that, already on thin ice, the market in Alt-A started to meltdown. Yes, they experienced a run on the bank. And yes, such behaviour is at least as much a social phenomenon, as financial phenomenon. But, what precipitated the run was that their capital base came under renewed pressure. From Alt-A.
The same thing happened, and is happening, to WaMu. Already under pressure, the Alt-A market started to cave.
Posted by: SurveyKid at March 17, 2008 10:09 AM
This is a fascinating thread to me and I wish I could say I understand it all. I am a computer engineer and I have to say that some of this seems infinitely more complex than anything I have ever worked with. ;-)
A couple of questions if I may: What should someone do with their money at a time like this? I am probably 40% cash (bank and credit union), 40% mutual funds in an ira and 401k, a couple of individual stocks, and the rest in muni-bonds.
I am one of those people who live below their means and have resisted buying RE since my arrival in the BA in 2000. No debt and I've owned a condo for many years in another city that I could easily pay off.
Should one consider going completely to cash now from equities? Treasuries? I've rationlized leaving my 401k alone since I continue to contribute the max and am therefore buying at the lower prices too.
I love reading these threads on socketsite and really appreciate any thoughts some of you might have.
Posted by: andyc at March 17, 2008 10:21 AM
If you have to be long something--I like EWZ. aka Brazil. That's my own personal opinon and that won't work very well if we get a global depression in commodities. But then again nothing will if that occurs. Generally, both long and short positions should be smaller than usual with as much cash on hand as possible. There are too many things out of balance, in early stages of correction and bad policy decisions being made to really make a case to go long crazy equities or any other asset. It's a totally alien position for a guy like me whose always been bullish equities--at least some sector. but the best sybol now is CASH until things settle out when youll have plenty of time to get back in.
Posted by: cooper at March 17, 2008 10:32 AM
"Should one consider going completely to cash now from equities? Treasuries? I've rationlized leaving my 401k alone since I continue to contribute the max and am therefore buying at the lower prices too."
If you believe Satchel and the depression is coming, you should either take out CASH and hide under your matress, or buy PHYSICAL gold with the money, and hide the gold under your matress.
Wait....another way is to buy a house with CASH (no loans). Ideally, it is a farm in middle of nowhere but you can get everything you need form your farm.
If depression comes, your bank will fail and fed will fail. So, it doesn't matter if you go all cash, because it will disappear too.
Posted by: John at March 17, 2008 10:46 AM
A lot of this talk seems wildly off the mark.
The dollar is plummeting in value because of this? Is it possible that interest rates might be involved in some way?
Cheering for government intervention? Who? Some talking head on TV? Bringing straw men to an argument makes your position look weak.
Inflation or deflation? How is this a choice? Goods people need or buy as if they needed them such as food and gas are going up. Goods people don't need like big houses all to themselves are going down. Inflation and deflation work together. The exact amount of the grand sum is not necessarily relevant.
The quicker the adjustment the better? In today's specialized markets labor suffers because hiring is a slow process. Spreading the fallout over additional months may be agonizing to Satchel and ex-SFer and cooper, but to the people anxiously seeking new jobs to keep their heads above water this is critical and may be what saves them from going under and joining the legions of homeless.
Hard to be positioned to survive what is coming? How is that? It would be nice to be able to count on metals or savings accounts, but in the long run only productivity counts. Who is being productive? Now people need to invest in efficiency and workers, not just brilliant quarters, high paid CEOs, and junk bond corporate flips. If you are putting money on productive enterprises then you should do well in any case. Why is that a bad thing or to be feared? Has Capitalism ever not had this scary edge?
Zimbabwe? How many large aircraft manufacturers do they have? How many major software monopolies? Comparisons to developing nations are totally unrealistic and useless.
And what is with the Bernanke rage? Who is going to do better? Anyone who was smart enough to see the bubble was smart enough to stay far, far away from public service. Hired hands can only ever be as good as their cultivation and leadership. If the only alternative that you can think of is Volker then you are off by almost fourty years. Volker was great, but he is yesterday's hero. Who is the hero for today that you support? Much easier to be an armchair critic, eh? Just like it was easier to keep money in a few managed funds instead of seeking out opportunity? We're going to have to make public service tolerable for sane people if we want to do any better with that.
Posted by: Mole Man at March 17, 2008 11:00 AM
"If depression comes, your bank will fail and fed will fail."
We live in a fiat currency regime. As long as we do not run out of paper and ink the financial system will not be allowed to fail.
Posted by: diemos at March 17, 2008 11:05 AM
We live in a fiat currency regime. As long as we do not run out of paper and ink the financial system will not be allowed to fail.
Finally someone is making sense. All the wild gloom and doom, panic in the streets, run on the bank talk on this board is so reminiscent of Y2K it's eerie.
Posted by: anon at March 17, 2008 11:20 AM
To Mole Man--agree bernake rage is misplaced. This is first and foremost a lack of minimum regulation in the mortgage market. That said, he should have stated cutting about 6 months sooner than he did--I'd argue the signs were plainly visible. And no this sin't really an interest rate problem. It's a asset demand issue.
Posted by: cooper at March 17, 2008 11:34 AM
Who's mad at Bernanke? Not me. He's just playing his role. Greenspan was brought in to engineer the credit inflation, and he did a spectacular job! Profits to the finance and banking sector went from 6% of aggregate corporate profit in the early 1980s (in the throws of the Volcker fed) to 30% of aggregate corporate profit in 2006! Mission accomplished.
Now, in order to avoid a complete collapse of the credit edifice, Bernanke was brought in to engineer the deflation. And he is suceeding. What's so hard to understand here, and why would anyone be mad at Bernanke?
@cooper, it's not an asset demand issue. The silly population will ALWAYS demand more assets. Just give them the money to buy them! Wall Street will demand more assets too. Just don't force them to mark them to market before bonus season!! The problem is not one of asset demand, it is of lender willingness to lend. I keep coming back to this, over and over again, but I will say it once more in case it helps anyone think about this problem. We have debt/gdp at 350%+ That means that DEBT SERVICE ALONE (in real terms) is equal to MORE THAN 7% of GDP, and likely a lot more, PER YEAR. Yet, the economy can only grow in real terms 2-3%. That's it. That means that in order to service the debt, income to the population must go down (living standards must fall) or MORE DEBT must be added to plug the hole. When the lenders stop lending - at the encouragement of the Fed which has been holding the line and even deflating the money supply since 2006 - the ponzi scheme ends.
Now, if we funded the debt wholly from the population, the debt service and repayment of debt would merely constitute a siphoning off of real wealth from the debtor population to the lender class. But, we run a huge current account deficit too, and so the siphoning off of resources constitutes a transfer of wealth from the US to overseas creditors. Devaluation of the dollar is an option of course, to limit this real transfer, but that discourages further lending, which is exactly what is happening.
If anyone has a way of figuring out how an economy that only produces 3% real growth per year can siphon 7% of GDP off per year just to service the debt and still maintain living standards, I'd love to hear it, and so would Bernanke. Wait, all you need to do is inflate the value of housing, lend against that, and voila more money with which to maintain living standards.... oooops!
Posted by: Satchel at March 17, 2008 11:51 AM
@Survery Kid who said...What sent BSC to Davy Jones' Locker was that, already on thin ice, the market in Alt-A started to meltdown.
It was the decline in Agency paper--the high quality stuff in general that caused the decline. Mostly becuse one morning the government decided to not say the right thing. That's what caused the collapse of Carlyle and in turn--caused people to fear a simialr problem in BSC and a run ensued.
@Satchel. I think that argument is too deep for me...at least at this point in the day. To me the drop in the dollar is a flight from dollar denominated assets. It's not that they are not buying are stuff right? since exports are way way up? They just don't want to hold their assets here or in dollars elsewhere. Who could blame them, I sure don't want to either. Oh and I dont think debt is 350% to GDP anymore--a huge bulk of that is mortgage debt and or financial institution debt. I am not sure but I heard this rumor that this stuff is trading at 10 cents on the dollar from a few months ago. So see..there is a bright side to everything! 350% to 100% debt to income in 2-3 easy steps! So now you can stop worrying...
Posted by: cooper at March 17, 2008 12:11 PM
And there's the real sticking point Satchel. Foreigners have been loaning us money to live beyond our means. They're about to cut us off and nothing our fearless leaders do is going to change that. When they cut us off our standard of living will drop (either inflationary or deflationary depending on what the gov does) just like a subprime homeowner cut off from their latest cash-out refi.
We had a great scam going for the past 20 years but all good things come to an end.
Posted by: diemos at March 17, 2008 12:16 PM
"All the wild gloom and doom, panic in the streets, run on the bank talk on this board is so reminiscent of Y2K it's eerie."
At the stroke of midnight Y2K nothing happened. Yesterday a $10B bank that survived The Great Depression collapsed because of mortgage debt. Hardly analogous.
Posted by: Michael at March 17, 2008 12:31 PM
That's why I asked the question about the S&L bailout. Is it analogous, probably not in size but in possible workouts.
Posted by: michiko at March 17, 2008 12:34 PM
"All the wild gloom and doom, panic in the streets, run on the bank talk on this board is so reminiscent of Y2K it's eerie."
The Y2K doom sayers were commenting on a technological problem, not a financial one. This was also a problem that was easy to model, simulate, fix, and verify that the fix worked long before the stroke of midnight, 12-31-1999.
This financial meltdown is a lot more difficult to model and predict the outcome. Fixing it will take a lot more than just burning in a new version of firmware into elevator controllers.
Posted by: The Milkshake of Despair at March 17, 2008 1:02 PM
More importantly (of relevance to SocketSite) are the 14,000 people, some of whom I presume have outstanding home loans) are going to have to seriously consider the next loan payment. It will be ironic -- bank fires employee, employee stops paying home loan. Think of it as some sort of severance package. It's only going to get worse.
Posted by: eddy at March 17, 2008 4:05 PM
The dollar is plummeting in value because of this? Is it possible that interest rates might be involved in some way?
You've got to be kidding me. Of course interest rates are related to the dollar's valuation. But there's more to dollar valuation than interest rates.
why do you think the dollar had a nearly unprecedented drop over a few HOURS yesterday when the markets were CLOSED? If it were just interest rates, then our dollar would be worth the same as it was the last time interest rates were where they are today. But the dollar ISN'T the same as it was back then.
Cheering for government intervention? Who?
Evidently you haven't read the threads about raising conforming loan limits on Fannie and Freddie and FHA? You haven't read the threads from people pleading with Bernanke to drop the Fed Funds rate to help mortgagees?
Spreading the fallout over additional months may be agonizing to Satchel and ex-SFer and cooper"
do you even read my posts? I've never said that spreading the fallout was a "bad" thing. Please reference anything I've said that indicates otherwise. I have said many times that I think the pain WILL be spread out over years and years and years, and that most people won't realize how much they've lost because of how it is spread out. But I never said that was bad. Only that we must be vigilant to see what is really happening. (an argument about stealth inflation and real vs nominal returns).
I HAVE said that I am very worried. but that's not because this is "dragging" out, it's because I see some very severe structural problems with the US economy that are unravelling QUICKER (not slower) than I imagined. Like I said, it is no surprise that Bear fell. It is surprising HOW QUICKLY it fell.
And what is with the Bernanke rage?
actually, again if you read my posts, you will see that i often describe Bernanke as a genius, who is likely doing the best he can with an awful deck.
I was really disappointed in him late last summer with the surprise 50bps cut. I wasn't angry. Once he did that I understood the game and I took all my money out of equities, put a lot in gold and Treasuries, and shorted the market indices. I had never in my life shorted a market before then. But I knew my life's savings would be decimated if I didn't act differently.
I have no Bernanke hate. Now Greenspan on the other hand...
If you are putting money on productive enterprises then you should do well in any case.
really? that's all one has to do? Now can you tell me: WHICH "productive enterprises" would that be?
Posted by: ex SF-er at March 17, 2008 4:51 PM
I find it interesting that you lump Satchel and coopoer and me together in one basket.
because if you really read/understood what we're saying you'd see that we're ARGUING!!! we don't agree with each other!
Satchel and I are in more accord (with a few differences), Cooper's ideas are VERY different.
Posted by: ex SF-er at March 17, 2008 4:57 PM
Spreading the fallout over additional months may be agonizing to Satchel and ex-SFer and cooper
this will be spread out for YEARS, not months.
(I've posted this MANY times before... the resets of current mortgages don't even really slow down until 2011.)
Posted by: ex SF-er at March 17, 2008 5:01 PM
More importantly (of relevance to SocketSite) are the 14,000 people, some of whom I presume have outstanding home loans) are going to have to seriously consider the next loan payment.
Early estimates call for a workforce reduction of over 7,000 jobs. And with bonuses often paid in shares, a culture which frowned upon selling said shares, and a third of the bank owned by its employees, the even greater impact will likely be the wipeout of many employees' life savings and wealth.
Posted by: SocketSite at March 17, 2008 5:29 PM
Right they think this crisis is more like the great depression, I think this reminds me a lot more like Asian contagion (with the US being the contagion this time). Of course, because we produce a lot of real assets, gold, coal, oil (third or 2nd largest producer) as well as several significant capital goods industries and our debt is demoninated in dollars it just won't be as bad. It will be a 2-3 year transition period however..this won't be over any time soon. This doesn't look at all like the Depression in terms of economic cause, financial conditions or solution. p.s. ex-sfer Bernake cutting rates 50bps in a surprise had zero to do with causing this crisis. It was bad regulation of mortages and the securitiztion of the mortgages. I do think though that if he keeps cutting at this point--he is going to make it far far worse. We are well past diminishing returns in cutting rates.
Posted by: cooper at March 17, 2008 5:33 PM
I just read my post and it looks a little too optimistic. I still think the end result will be the Us will lose it's financial edge in a permanent fashion, and will lose its ability to finance large consumption based current account deficits.
Posted by: cooper at March 17, 2008 5:37 PM
It is funny how arguments and positions get misinterpreted! For my part, I'll just chalk it up to the idea that I don't communicate clearly enough, but for anyone to interpret what I write as thinking that we are at the end of fiat currency is crazy! I mean, I have a HUGE treasuries position. Just to address a few random points that have been kicked around, I'll point out that a deflationary depression is NOT the end of the Fed. Just the opposite. The Fed came out stronger than ever in the Great Depression - even though the Fed "caused" the Depression in the common thinking (it was actually the USG), and the Fed at that point was only 20 years old! If we go through another deflation, the Fed will be EVEN STRONGER. They have all the money. And cash becomes king. Remember that, and you will never go wrong.
About comparisons to Zimbabwe, who's making those? Zimbabwe is only an example of what happens when a government chooses hyperinflation. Ultimately the government falls, just as Weimar did. That's why TPTB choose deflation when push comes to shove - so long as it HAS a choice (countries with externally denominated debt like Russia or Indonesia really had no choice). As to the quaint idea that the US has all this wonderful technology, division of labor, airplane factories, blah, blah, check the history. Germany had all that - and MORE (relative to its time)!! Didn't stop Weimar, did it? The main thing was that there was an intervening catastrophe (WWI). Hopefully, the US population has not been so dumbed down and numbed by the promise of easy riches that our impending housing adjustment won't qualify as an "intervening catastrophe"!
Last, about speed of adjustment. I think a very rapid adjustment is BEST for an economy. It's NOT agonizing for me. I just adjust my trading strategies, and try to take more money from the market - to try to make the same dollar two and three times. It's actually agonizing IMO for the population, although people don't understand this (because people are always focused on who is losing - they are visible - rather than how much would be gained from a "resetting" of the economic landscape).
OK, really last point. Asian trend growth was on the order of 5-7%, and there were no safety nets. As a result, they were able to get back on track after a quick adjustment. Our recovery - when it starts - will be agonizingly slow. Trend growth for us is 3% (I never understand why people think we are so productive - it's a total myth! We are much less productive than prior to 1970 or so, and likely much less productive than in the 19th century, although hard data is hard to come by). We will also divert all sorts of resources into politically chosen priorities like health care, public schools, safety net welfare programs, jobs programs, etc., all of which will foolishly misallocate resources that would be better used elsewhere.
Posted by: Satchel at March 17, 2008 6:27 PM
p.s. ex-sfer Bernake cutting rates 50bps in a surprise had zero to do with causing this crisis
I couldn't agree more. the crisis was set in motion years ago when Alan Greenspan's Fed allowed and worse encouraged banks to lend rediculous amounts of money to people who had no way to pay it back, and then when that same Fed spoke of the "innovation" of risk dispersement through securitization. it's only now that we see what was set in motion in those years.
Again, I'm not saying that Ben B is a bad guy. I think he might be one of the smartest Fed Chairmen ever.
The problem isn't Ben, it's what he is facing, and the tools that he has.
My disappointment with him last summer wasn't that he dropped 50bps. It was that he and several other Fed chairmen talked as though they were tough on inflation RIGHT UP to the drop
in other words, they transmitted that they were going to hold or maybe go down 25bps... but then ceded to pressure and dropped 50 bps.
I was disappointed in him due to this miscommunication, that's all. I have no particular blame against him. sometimes I'm irked that he is such a pushover to the markets, but that's nothing surprising for a fed chairman.
My entire ire is focused on Alan Greenspan and other politicians who let us get where we are a la the infamous "Deficits don't matter" mantra. It's against all who allowed repeal of Glass-Steagal. It's against all who allow the travesty that has become our investment and commercial banks as well as monoline insurers and ratings agencies.
I honestly think that without Ben B we would have already had a crash. The TAF and TSLF and other maneuverings have been masterful IMO.
not enough, but masterful. (I'm not sure anything will "be enough")
Like I said, I have been generally optimisitc that the economy could pull through until the Bear hedgies collapsed last summer. (you can dig through my posts from last summer about it).
And I was long the market until Ben's 50bps cut.
it's only recently that I've been so nervous. and only the last few months I shorted the markets.
which is why I get irked when people misstate my thoughts and ideas and try to turn me into some chicken-little bitter-renter permabear. or a "fake economist"
I am none of the above.
I am a contented homeowner who expects to see my house value drop a lot, but who is fortunate enough to have a house with a mortgage that is 1x my annual salary, and who can pay off his mortgage tomorrow out of my checking account if need be (most of my assets are liquid now, remember!)
I am an educated NON-economist who is interested in macroeconomics for the purposes of entertainment but also self-preservation. To put it another way "I have skin in the game"
and I was a stock bull until last fall, a national RE bear starting 2005, and a SF RE bear starting 2007. that said, I have never once stated that SF values have already dropped, and I'm not even sure they'll drop in nominal terms. I have stated that they will drop significantly in inflation-adjusted terms over a long duration.
Posted by: ex SF-er at March 17, 2008 8:01 PM
It has recently occurred to me that the sacred cow of mortgage interest deductibility is nothing more than an annual multi-billion dollar subsidy for the financial industry. The only taxpayers who benefited were those who already owned real estate when the law was enacted.
The effect of this policy was to increase the payment a taxpayer could afford depending upon their tax bracket. This resulted in a one time increase in RE prices ( I presume it phased in over time rather than overnight). For everyone who did not already own RE it meant that they simply borrowed more money to make the same out of pocket payments they made before.
Can anyone tell me that this is not true?
If this is the case then why is it never mentioned, even on this site? If this is true, would phasing it our not help us reduce the 350% debt/GDP that Satchel tells us must be reduced and reduce RE costs for everyone?
As an immigrant to this country I am not familiar with the history of the tax deductibility policy and its ultimate impact on the market. I welcome anyone offering to straighten me out on this.
Posted by: Dodd at March 17, 2008 8:18 PM
Hey Dodd, you are now on the path to wisdom. The real estate tax breaks only help the people who own real estate at the time of enactment. For any later market entrants, they simply raise the price of admission. On the other hand, cutting any of the mortgage tax breaks will harm everybody who now owns a house and help market newcomers.
Posted by: jeff b at March 17, 2008 8:38 PM
I agree he communicated very poorly. But if you look at past shifts if Fed policy they pretty much wait until the last possible moment before shifting directions. In fact, in the last MAJOR policy shifts, they were holding tight on inflation until they weren't the next day. I don't think you are a chicken little either--I think it has proven to be very prudent to lighten up.
Posted by: cooper at March 17, 2008 8:41 PM