December 4, 2008
Bernanke Goes From Bad To Worse And Wants Your Dollars To Follow
"Federal Reserve Chairman Ben S. Bernanke urged using more taxpayer funds for new efforts to prevent home foreclosures, saying the private sector is incapable of coping with the crisis on its own.
The Fed chief outlined four possible options, including buying delinquent mortgages and providing bigger incentives for refinancing loans."
∙ Bernanke Says U.S. Must Step Up Foreclosure Efforts [Bloomberg]
First Published: December 4, 2008 9:00 AM
Comments from "Plugged In" Readers
boy, do i feel stupid for paying my mortgage on time.
Posted by: lefty at December 4, 2008 11:56 AM
I'm keenly watching events unfold trying to determine when it makes sense for me to stop paying my 30 yr 5.5% FRM so I can tap into the bailout of irresponsible individuals that had no right to own a home but nevertheless opted to buy way more house than they could afford.
I assume I would need to bury assets and temporarily loose my primary source of income to participate but being able to reduce my interest rate to below market rate and lop off 20% - 40% of loan principal may make it attractive enough to take on the hit my credit would take. I am beginning to think that only idiots live within their means in the socialist republic of the USA and pay off their mortgages. It is time for action comrades
Posted by: Home Loser at December 4, 2008 12:01 PM
This does piss me off. On one hand, my investments are affected by a housing downturn, on the other hand, I have stayed out of the SF housing market on purpose attempting to time this downturn. I guess I feel as if I am being cheated of some of the "down" in this downturn. I suppose little of this bailing is targeted at the real SF condo market, so perhaps I shouldn't care too much.
Posted by: Tall Guy at December 4, 2008 12:03 PM
Shame Yakov Smirnov isn't doing stand-up anymore. Probably a veritable gold mine of "Here in Soviet Amerika" jokes in these headlines.
Posted by: Dude at December 4, 2008 12:10 PM
To. Fix. It. They. Must. Stop. Meddling.
Posted by: Debtpocalypse at December 4, 2008 12:17 PM
Many same conclusions around my renter friends. RE prices are cheaper but the 401(k)s are down the drain and everything but cash is down.
And I believe fluj when he says that if banks accepted 10% down they'd be swamped with applicants today.
This is one of the reasons why I think that the correction will go on: there's not much support.
Posted by: San FronziScheme at December 4, 2008 12:35 PM
"everything but cash is down"
Cash is king: Those with the cash will rule over those without. (I can't take credit for that - I read it somehwhere in another blog I think.)
Long term treasuries have also been an extraordinarily good place to be. They're up on the order of 20-25% this year (depending on maturity and interest reinvestment decision). This credit deflation is following the script to a "T". It's hard to believe so many people thought we were going to get a lot of inflation and a weak dollar a year ago.
[Editor's Note: Did Somebody Say Deflation?]
Posted by: Laughing Millionaire Renter in Marin at December 4, 2008 12:44 PM
Tall Guy sounds like a concern troll. Those of us who actually stayed out of the RE market are doing just fine, sitting on our cash downpayment money.
Posted by: Foolio at December 4, 2008 1:03 PM
one request I'd have if they did this--help for primary residences ONLY. If you got in trouble on your 2nd or 3rd or 20th house--tough luck. You took the investment risk. And you lost--or should lose.
Posted by: Melinda at December 4, 2008 5:42 PM
Don't you mean 5-10% this year?
Posted by: NoeValleyJim at December 4, 2008 10:48 PM
Instead of wasting money rescuing people who bought more house than they can afford, why not reward the people who have been waiting prudently for a market correction. The government should give below market loan to people who want to buy a primary resident now. Obviously, the requirement for the loan is at least 20% down payment and documentable income. In addition, they cannot sell within 5 years or their capital gain will be taxed at 100%.
Posted by: No Name at December 4, 2008 11:52 PM
"Don't you mean 5-10% this year?"
I assume this was meant for me, NVJ. And no, I don't mean 5-10%. I mean exactly what I wrote: 20-25% depending on maturity and interest reinvestment decision.
The TLT chart you showed reflects a blend of the 20-30 year maturities, does not reflect reinvestment of its monthly interest distributions, and is also net of management fees and expenses. Even so, the chart of TLT shows that it has gone up 18.53% over the past year: $94.74 on 12/04/07, to $112.30 on 12/04/08. It's actually slightly greater on a calendar year basis.
This is pretty basic stuff, NVJ, so I'm sort of surprised. It looks like you didn't have long term treasuries in your account this year! (I typically buy bonds directly from the USG through the treasury due to the size of my account. I can assure you that 20-25% is an accurate reflection of the long term bond all-in return, again depending upon what one did with the interest and the blend of bonds selected. I have actually purchased TLT in some retirement accounts and for family accounts I manage - it's a pretty good tracking fund. Not too much of the typical nonsense by the mutual fund (mis)managers :))
Posted by: Laughing Millionaire Renter in Marin at December 5, 2008 6:29 AM
Most of the run-up in TLT has been in the past month. Any thoughts on whether this spike is sustainable? Seems like an unusually sharp rise in a very short time-window based on the full data series.
Posted by: West Portal at December 5, 2008 10:32 AM
You are correct LMR, I was just looking at the Yahoo stated "YTD return" which does not include Novembers run up. Including it, plus interest puts TLT well into the 20%+ range.
There is no way that I would buy Treasuries in this environment. Aren't we at record low yields? Do you really think that they going down from here?
Posted by: NoeValleyJIm at December 5, 2008 12:03 PM
I wouldn't buy here either, NVJ. I have pared existing holdings (or hedged a bit by selling in the money calls), consistent with trying to minimize tax exposure this year (derivatives can postpone recognition of the gain, but you need to be careful of the IRS constructive sale rules). In retirement accounts I am trailing a stop loss.
I don't think the risk/reward is warranted here to intitiate a new position, but I do think that yields could go lower, perhaps much lower. If B-52 Ben makes good on his quantitative easing threat (I actually think he has started or at least told his bankster buddies at Government Sachs that he will), yields could go a lot lower. (FWIW, I think B-52 Bennie and the Inkjets are going to discover that Bagehot was right: only lend freely against good collateral at a penalty rate. Otherwise, you crowd out ALL private credit in the affected area, as the articifially low rate extended by the Fed serves as a price control, and has the result all price controls do.)
In 1995/96 or so, I was sitting with some of the most successful and smartest hedge fund masters of the universe and almost to a one they all thought that Japanese JGBs were a "sell" (I sort of recall the yield as 3.43%, but don't hold me to that!) I think the yield ultimately fell to a low of 0.5% or so, and Japan never really got a "Depression". I was the only guy on the other side of that trade it seemed :)
If yields back up significantly near term, I would buy, and anything approaching 4.5% on the 10Y if it were to happen before this credit mess is deflated/defaulted would be a screaming buy IMO. But at 2.6ish% it's not a good bet I think. Better to just stick it in cash at the front end of the curve for new positions.
Posted by: Laughing Millionaire Renter in Marin at December 5, 2008 12:16 PM
What do you think the risk is that you could get squeezed on those calls if the O man goes out and starts talking a good game about what he's going to do to fix things?
Posted by: joe shmoe at December 8, 2008 10:18 PM
Hey shmoe -
Good to hear from you again (I just noticed your question about being squeezed on the calls). I probably didn't explain the strategy well enough, but there's no real chance of that. The calls are sold deep in the money and are hedged by the underlying (long) position. In essence, one is time shifting recognition of the gains into the next taxable year (down to the strike at least - under that, you become progressively less hedged on a delta equivalent basis and unhedged at expiry). The only real question is one of correlation - the IRS looks at deep ITM calls as constructive sales if done on the same (or substantially identical) instrument for cash-basis filers. That's the art of it and I can't give all my secrets away.... :)
Mirror image strategies could be used to hedge short positions that have gone hugely in your favor, for instance by selling deep in the money puts against individual REIT shorts that have wiped out 95%+ (have you ever seen such magnificant carnage in the US markets? I am always in awe of the majesty with which millions of individual preferences and decisions conspire to alter reality and make it bend almost instantly. Even sometimes when I am on the wrong side of a trade and am getting crushed, I have to smile at the idea of the new reality which the market forces despite all the bureacrats' best attempts to try to control it :) )
Posted by: LMRiM at December 9, 2008 7:47 PM