This post first appeared on Minyanville and Cirios Real Estate.
Deflation, the economic beast many feared would devour the next decade, appears to have been vanquished.
Or has it?
Superficial signs of renewed inflation are everywhere: Oil prices appear to be stabilizing, and concern is growing about future supply shortages (which, by extension, could lead to higher prices at the pump). The stock market has staged an impressive rally, with expectant bulls and former bears finding for "green shoots" of economic growth everywhere. Home prices, if you look purely at the data and ignore fundamentals, are starting to slow their fantastic decline.
Even the consumer price index, or CPI, is looking tame. Well, except for last month's drop, the largest in more than 50 years.
And herein lies the problem.
The CPI, the market's favorite inflation gauge, has been masking the structural deflation in our midst since the housing market fell of its wheels almost 4 years ago. Given the precipitous drop in property values, one would naturally expect the housing component of the CPI to fall in kind. Not so.
The statistical alchemists, err, experts, at the Bureau of Labor Statistics use something called "owners equivalent rent," OER, to measure consumer housing expenses. OER tries to approximate the cost to rent the country's typical home, and according to the Wall Street Journal makes up 24% of the CPI and 31% of the core CPI, which backs out food and energy costs.
And since even as property values have slid in record-breaking fashion rents remained buoyant, OER has vastly understated the drop in home prices. This means the CPI -- were it to reflect some sort of economic reality -- would have fallen more than it actually has.
As the housing slump rolls on, the pain is increasingly being felt by landlords, not just owner occupiers. Rents in big cities like New York and San Francisco are already dropping, as would-be tenants demand concessions from property owners. Vacancies are increasing, as even those driven from the housing market by foreclosures and the tight mortgage market can't fill up empty apartments, condos and track homes.
Drive around suburbia and "For Rent" signs are nearly as common as "For Sale" signs.
Rents are likely to keep falling and as a result, OER could begin to drag down the CPI. Of course, statisticians can and likely will play games with adjustments for volatile energy prices (renters often don't pay for utilities, so energy costs are backed out of OER). Further, government bean counters are even considering adapting OER to reflect new, high levels of home ownership (just in time for a reversion to the historic mean, thanks for being ahead of the curve guys).
As long as construing economic data in a way that makes it seem more likely for effectively insolvent financial institutions like Bank of America (BAC) and Citigroup (C) to raise capital and remain in business, that will remain the status quo.
Meanwhile, back in reality, saving is now en vogue, deleveraging is ongoing and the repayment (and destruction) of dollar-denominated debt will keep inflation in check for the foreseeable future. More importantly, the recognition that smaller can be better and less can be more are becoming entrenched in the lives of ordinary Americans.
Don't believe the hype: Deflation isn't going away any time soon.
Monday, May 18, 2009
Advertising Enters the Age of Ire
This post first appeared on Minyanville.
The days of a blissful toucan crooning over a rainbow of fruit flavors appears to be gone: Advertising has entered the Age of Ire.
It's no secret Americans are seething over the seemingly endless parade of frauds, scams and blowups emanating from the narrow streets of lower Manhattan. Wall Street is under siege, both in headlines and in living rooms across the country. And in a trend that kicked off last summer with a Harley Davidson (HOG) ad campaign that decried corporate greed, advertising is becoming increasingly reflective of public outrage.
The New York Times chronicles a series of companies tapping into America's pervasive fear and outrage in order too woo customers.
Jetblue (JBLU) is offering mock sympathy and soft leather seats to CEOs who can no longer afford to scoot about in corporate jets. Eastman Kodak (EK), long known for it's friendly, non-abrasive image, is highlighting the $5 billion wasted each year overpaying for ink cartridges. Sales, according to the company's chief marketing officer, are up.
That marketing comes to reflect changing social mood should be no surprise to Minyans, as Professor Kevin Depew has long advanced the notion that media follows mood, not the other way around.
Socionomics is the study of the interplay between public sentiment and economics, postulating that groups of people act as crowds in measurable patterns that emerge over long periods of time. These shifts drive not just what appears on TV and print, but our perception of it.
In terms of economics and as measured by the stock market, when social mood is positive, people are happy and optimistic about the future, eager to empty their pockets and take on risk. This buoys profits and drives up stocks. When mood darkens, however, consumers retrench, risk is shunned and the economy -- and by extension the stock market -- heads south.
The current shift in social mood isn't transitory - this isn't merely passing outrage at bonuses paid to American International Group (AIG) traders or Merrill Lynch (BAC) executives; a quarter-century of debt-fueled excess doesn't get reversed in a matter of months.
No, the new economic reality of paying with cash and making ends meet sans cash advance from Capital One (COF) will be around for a while.
We had better get used to it.
The days of a blissful toucan crooning over a rainbow of fruit flavors appears to be gone: Advertising has entered the Age of Ire.
It's no secret Americans are seething over the seemingly endless parade of frauds, scams and blowups emanating from the narrow streets of lower Manhattan. Wall Street is under siege, both in headlines and in living rooms across the country. And in a trend that kicked off last summer with a Harley Davidson (HOG) ad campaign that decried corporate greed, advertising is becoming increasingly reflective of public outrage.
The New York Times chronicles a series of companies tapping into America's pervasive fear and outrage in order too woo customers.
Jetblue (JBLU) is offering mock sympathy and soft leather seats to CEOs who can no longer afford to scoot about in corporate jets. Eastman Kodak (EK), long known for it's friendly, non-abrasive image, is highlighting the $5 billion wasted each year overpaying for ink cartridges. Sales, according to the company's chief marketing officer, are up.
That marketing comes to reflect changing social mood should be no surprise to Minyans, as Professor Kevin Depew has long advanced the notion that media follows mood, not the other way around.
Socionomics is the study of the interplay between public sentiment and economics, postulating that groups of people act as crowds in measurable patterns that emerge over long periods of time. These shifts drive not just what appears on TV and print, but our perception of it.
In terms of economics and as measured by the stock market, when social mood is positive, people are happy and optimistic about the future, eager to empty their pockets and take on risk. This buoys profits and drives up stocks. When mood darkens, however, consumers retrench, risk is shunned and the economy -- and by extension the stock market -- heads south.
The current shift in social mood isn't transitory - this isn't merely passing outrage at bonuses paid to American International Group (AIG) traders or Merrill Lynch (BAC) executives; a quarter-century of debt-fueled excess doesn't get reversed in a matter of months.
No, the new economic reality of paying with cash and making ends meet sans cash advance from Capital One (COF) will be around for a while.
We had better get used to it.
America: Home of the (Debt) Free
This post first appeared on Minyanville and Cirios Real Estate.
Freedom is back in vogue: Americans are finally growing tired of living in the shackles of debt.
According to the Wall Street Journal, government-led efforts to jumpstart lending are being derailed by weak demand for new loans. As the recession rolls on, an increasing percentage of consumers are opting to pay with cash or (gasp) save their hard-earned money.
Initiatives like the Term Asset-Backed Securities Loan Facility (TALF) aim to free up consumer credit by supporting the market for asset-backed securities. The Federal Reserve and Treasury Department hope their efforts will enable American consumers to start spending again.
During the boom, fixed-income investors snatched up bonds backed by all types of debt - credit cards, auto loans, and, of course, mortgages. High demand for these seemingly safe investments pushed down interest rates, which stretched consumers' budgets to the brink - and beyond.
But now that investors have been badly burned by such investments, they're shying away from the market almost entirely. Without Wall Street's securitization machine, there's simply nowhere to put new consumer loans.
After years of gorging on cheap credit, Americans are reverting to more responsible fiscal lifestyles. Savings are up, spending is down - which is as it should be. This is reducing the urge to borrow and thwarting Washington's plans to pass the bailout buck down to taxpayers.
Every dollar we don't spend or don't borrow is another that could potentially be handed over to effectively insolvent financial firms like Citigroup (C), Bank of America (BAC) and American International Group (AIG), or failed automakers like General Motors (GM) and Chrysler.
That task is growing increasingly dicey, as it becomes clear that using debt to fix a system already crippled by debt is patently absurd. And even as the US government loads up on borrowing, consumers are doing the right thing: getting out of hock.
Freedom is back in vogue: Americans are finally growing tired of living in the shackles of debt.
According to the Wall Street Journal, government-led efforts to jumpstart lending are being derailed by weak demand for new loans. As the recession rolls on, an increasing percentage of consumers are opting to pay with cash or (gasp) save their hard-earned money.
Initiatives like the Term Asset-Backed Securities Loan Facility (TALF) aim to free up consumer credit by supporting the market for asset-backed securities. The Federal Reserve and Treasury Department hope their efforts will enable American consumers to start spending again.
During the boom, fixed-income investors snatched up bonds backed by all types of debt - credit cards, auto loans, and, of course, mortgages. High demand for these seemingly safe investments pushed down interest rates, which stretched consumers' budgets to the brink - and beyond.
But now that investors have been badly burned by such investments, they're shying away from the market almost entirely. Without Wall Street's securitization machine, there's simply nowhere to put new consumer loans.
After years of gorging on cheap credit, Americans are reverting to more responsible fiscal lifestyles. Savings are up, spending is down - which is as it should be. This is reducing the urge to borrow and thwarting Washington's plans to pass the bailout buck down to taxpayers.
Every dollar we don't spend or don't borrow is another that could potentially be handed over to effectively insolvent financial firms like Citigroup (C), Bank of America (BAC) and American International Group (AIG), or failed automakers like General Motors (GM) and Chrysler.
That task is growing increasingly dicey, as it becomes clear that using debt to fix a system already crippled by debt is patently absurd. And even as the US government loads up on borrowing, consumers are doing the right thing: getting out of hock.
Government Reduces Risk - But Also Reduces Reward
This post first appeared on Minyanville and Cirios Real Estate.
In its ongoing attempt to rewrite the rules of what's quickly becoming our quasi-capitalist nation, the Obama Administration is weighing options that would expand compensation restrictions to all corners of the financial-services industry.
According to the New York Times, well-publicized efforts to rein in executive pay at firms that accepted TARP money could extend to companies that have thus far stayed off the government dole. In other words, the spottily regulated world of hedge funds and private equity could be subject to some of the same restrictions faced by their government-subsidized competitors.
However unpleasant, firms like Citigroup (C) and Bank of America (BAC) (both in hock to the US taxpayer for hundreds of billions of dollars) have lost their right to be the masters of their own executive compensation destiny. On the other hand, pay at hedge funds that haven't touched a penny of government money should be determined by the firms themselves.
Since he took office, President Obama has been a loud advocate for pay that's closely tied to performance. The prevailing view in Washington is that Wall Street traders were able to take on massive risk -- either their firm's or their clients' -- without feeling much pain if the bets went sideways. This led to excessive risk-taking, and the kind of near-criminal alchemy that ultimately blew up the financial lab.
And while this is true to an extent, the result of this typical government overreaction will be a system reduction of risk - and by extension, of reward. Financiers, entrepreneurs and businesspeople of all types engage in risky behavior every day - which is what keeps the economy humming.
Systematically reduce the incentive to take risks, and economic output will slow. It's simple math.
Already, even as Washington bumbles its way towards legislation on executive pay, what's left of the free market is sorting things out on its own.
Raising capital is well-nigh impossible for upstart hedge funds, as even management teams with strong credentials are struggling to get off the ground. Existing funds, most of which remain below their so-called "high-water mark" (the level at which juicy performance incentive fees kick in), won't see big bonus payouts until well into 2010.
This is the market at work, punishing bad actors -- even ones that were just marginally bad -- and creating an environment where only the most astute, talented, and driven can succeed.
By contrast, as policymakers look to make up for years of ignoring their fiduciary responsibility to safeguard the public interest, we're witnessing the development of an economic system that benefits only the most well-connected.
Needless to say, this is an unwelcome progression.
In its ongoing attempt to rewrite the rules of what's quickly becoming our quasi-capitalist nation, the Obama Administration is weighing options that would expand compensation restrictions to all corners of the financial-services industry.
According to the New York Times, well-publicized efforts to rein in executive pay at firms that accepted TARP money could extend to companies that have thus far stayed off the government dole. In other words, the spottily regulated world of hedge funds and private equity could be subject to some of the same restrictions faced by their government-subsidized competitors.
However unpleasant, firms like Citigroup (C) and Bank of America (BAC) (both in hock to the US taxpayer for hundreds of billions of dollars) have lost their right to be the masters of their own executive compensation destiny. On the other hand, pay at hedge funds that haven't touched a penny of government money should be determined by the firms themselves.
Since he took office, President Obama has been a loud advocate for pay that's closely tied to performance. The prevailing view in Washington is that Wall Street traders were able to take on massive risk -- either their firm's or their clients' -- without feeling much pain if the bets went sideways. This led to excessive risk-taking, and the kind of near-criminal alchemy that ultimately blew up the financial lab.
And while this is true to an extent, the result of this typical government overreaction will be a system reduction of risk - and by extension, of reward. Financiers, entrepreneurs and businesspeople of all types engage in risky behavior every day - which is what keeps the economy humming.
Systematically reduce the incentive to take risks, and economic output will slow. It's simple math.
Already, even as Washington bumbles its way towards legislation on executive pay, what's left of the free market is sorting things out on its own.
Raising capital is well-nigh impossible for upstart hedge funds, as even management teams with strong credentials are struggling to get off the ground. Existing funds, most of which remain below their so-called "high-water mark" (the level at which juicy performance incentive fees kick in), won't see big bonus payouts until well into 2010.
This is the market at work, punishing bad actors -- even ones that were just marginally bad -- and creating an environment where only the most astute, talented, and driven can succeed.
By contrast, as policymakers look to make up for years of ignoring their fiduciary responsibility to safeguard the public interest, we're witnessing the development of an economic system that benefits only the most well-connected.
Needless to say, this is an unwelcome progression.
Goldman Posts Bail for Subprime Crimes
This post first appeared on Minyanville
File this in the "too little, too late" category.
Goldman Sachs (GS) is being forced to pony up $60 million as part of a settlement with the Massachusetts attorney general, who was investigating the firm's role in predatory subprime lending in its state. Under the terms of the agreement, Goldman agreed to reduce principal by as much as 30% for first liens and up to 50% on second-lien mortgages it holds directly, or those being serviced by Litton Loan Servicing Inc., of which it is part owner.
The settlement will help around 700 residents of Massachusetts, and according to the New York Times, is the first settlement involving Wall Street's role in subprime lending.
Goldman isn't the first lender do be punished for perceived wrongdoings during the mortgage boom. Countrywide, whose operations were purchased by Bank of America (BAC) last year, had to pay more than $8 billion as part of a settlement with California, Illinois, and Florida over its predatory lending practices. Washington Mutual (JPM) and Wells Fargo (WFC), other big issuers of subprime loans, are contending with legal battles of their own.
And while much ire is being directed at the banks handing out the loans -- especially Goldman -- the Massachusetts settlement is a scantly punitive slap on the wrist.
For Goldman Sachs -- a firm that received more than $10 billion in payouts from soured bets placed with American International Group (AIG) -- $60 million is the change that's leftover when the company empties out its laundry-room lint catcher; a mere rounding error on a balance sheet made up of hundreds of billions of dollars of assets and liabilities.
The agreement is yet more evidence that regulators, besieged by their inability to control the lending institutions it was their charge to keep tabs on, are now resorting to cheap public-relations ploys under the guise of legal culpability to prove their worth.
If Massachusetts really wanted to make a statement about Goldman's role in the subprime crisis -- which was not insignificant, given it was not only a packager of securities but a lender to subprime-mortgage firms of all shapes and sizes -- it would decry Goldman's attempt to get off so easy.
It's a little like catching a bank robber, and so abhorred at his amoral actions, you ask to borrow a couple bucks in bus fare, send him on his way, then laud your crime-fighting and prosecutorial prowess.
Those truly at fault for our financial crisis will likely never be brought to justice, partly because culpability must be spread across so many disjointed actors - big and small fries alike. The important task for regulators and lawmakers now -- and one w they seem destined to fumble -- is ensuring the system is built on a stronger foundation moving forward.
This doesn't mean overzealous restrictions on a bank's each and every expenditure. It doesn't mean capping interest rates and loan terms so banks hand out credit cards to only the most credit-worthy borrowers, leaving a huge swath of the population without proper banking services. Nor does this entail trashing the currency to reinflate our way out of a mess caused by dollar debasement and too much access to credit.
The right solutions require not just good planning, but political will to spurn the Washington political machine and its desire to usurp the power of the free market for the benefit of an ever-shrinking group of the privileged, well-connected elite.
File this in the "too little, too late" category.
Goldman Sachs (GS) is being forced to pony up $60 million as part of a settlement with the Massachusetts attorney general, who was investigating the firm's role in predatory subprime lending in its state. Under the terms of the agreement, Goldman agreed to reduce principal by as much as 30% for first liens and up to 50% on second-lien mortgages it holds directly, or those being serviced by Litton Loan Servicing Inc., of which it is part owner.
The settlement will help around 700 residents of Massachusetts, and according to the New York Times, is the first settlement involving Wall Street's role in subprime lending.
Goldman isn't the first lender do be punished for perceived wrongdoings during the mortgage boom. Countrywide, whose operations were purchased by Bank of America (BAC) last year, had to pay more than $8 billion as part of a settlement with California, Illinois, and Florida over its predatory lending practices. Washington Mutual (JPM) and Wells Fargo (WFC), other big issuers of subprime loans, are contending with legal battles of their own.
And while much ire is being directed at the banks handing out the loans -- especially Goldman -- the Massachusetts settlement is a scantly punitive slap on the wrist.
For Goldman Sachs -- a firm that received more than $10 billion in payouts from soured bets placed with American International Group (AIG) -- $60 million is the change that's leftover when the company empties out its laundry-room lint catcher; a mere rounding error on a balance sheet made up of hundreds of billions of dollars of assets and liabilities.
The agreement is yet more evidence that regulators, besieged by their inability to control the lending institutions it was their charge to keep tabs on, are now resorting to cheap public-relations ploys under the guise of legal culpability to prove their worth.
If Massachusetts really wanted to make a statement about Goldman's role in the subprime crisis -- which was not insignificant, given it was not only a packager of securities but a lender to subprime-mortgage firms of all shapes and sizes -- it would decry Goldman's attempt to get off so easy.
It's a little like catching a bank robber, and so abhorred at his amoral actions, you ask to borrow a couple bucks in bus fare, send him on his way, then laud your crime-fighting and prosecutorial prowess.
Those truly at fault for our financial crisis will likely never be brought to justice, partly because culpability must be spread across so many disjointed actors - big and small fries alike. The important task for regulators and lawmakers now -- and one w they seem destined to fumble -- is ensuring the system is built on a stronger foundation moving forward.
This doesn't mean overzealous restrictions on a bank's each and every expenditure. It doesn't mean capping interest rates and loan terms so banks hand out credit cards to only the most credit-worthy borrowers, leaving a huge swath of the population without proper banking services. Nor does this entail trashing the currency to reinflate our way out of a mess caused by dollar debasement and too much access to credit.
The right solutions require not just good planning, but political will to spurn the Washington political machine and its desire to usurp the power of the free market for the benefit of an ever-shrinking group of the privileged, well-connected elite.
Monday, May 11, 2009
Mortgage Rates Still Not Allowed to Return to Normal
This post first appeared on Minyanville and Cirios Real Estate.
Despite Herculean efforts, the Federal Reserve is losing its battle to keep mortgage rates at all-time lows.
As fear that we're headed for imminent collapse slowly wanes, investors' appetite for risk is coming back. This renewed confidence has helped buoy stocks, and the major equity indices have rallied more than 30% from their March lows. The shift, however, has come at the expense of the Treasury market, which has been in a 7-week slump.
According to Bloomberg, big money managers like Blackrock (BLK) are betting the Fed will step in to support the Treasury market (again), as regulators hope renewed Treasury purchases will push down mortgage rates (again).
Bond prices and yields move in opposite directions. When investor demand falls, so do prices, pushing up yields. And as investors shun the safety -- but relatively low return -- of government-backed debt, the impacts are felt throughout the credit markets. Of concern to the Fed, and what has led Chairman Ben Bernanke to increase Treasury purchases in the past, is the effect this dynamic has on mortgage rates.
A mortgage is nothing more than a long term bond, given to a borrower to purchase a home. So when lenders get fearful they're not being compensated for tying up money for as long as 30 years, they increase rates. Further, as the specter of inflation rises, lenders demand bigger interest payments to keep up with higher prices. In other words, when dollars in the future are worth less than dollars today, banks demand higher payments to make up the difference.
Keeping mortgage rates low has been a cornerstone of Washington's efforts to jump start the flagging housing market. But with rates at the highest level since April, the "smart money" is betting the Fed may return to the Treasury market en masse.
Paradoxically, even as the Fed tries to keep interest rates low -- which are rising in part due to the expectation that higher prices loom in the years ahead -- its actions increase the likelihood of future inflation. Running its printing presses around the clock has consequences, even if Fed officials are loathe to admit it.
Minyanville's Mr. Practical often discusses the fallacy that credit markets are improving. As he points out, only in corners of the market where the government has stepped in to support lending is any so-called "normalcy" returning.
So too in the mortgage market.
Loans backed by Fannie Mae (FNM), Freddie Mac (FRE) and the Federal Housing Administration account for the lion share of mortgages currently being issued in this country. Aside from the occasional jumbo loan written by banks like JPMorgan (JPM) or Wells Fargo (WFC), government mortgages are the only game in town. Coupled with the Troubled Asset Lending Facility (or TALF), which funnels money into the market for mortgage-backed securities, the home-loan market remains completely dependent on government support.
This is one reason recent "strength" in the housing market will provide transitory. There's a limit on how much government can control markets, as evidenced by mortgage rates that move persistently higher every time the Fed eases its aggressive intervention. Fundamentals, not subsidies, will provide a true floor in prices.
And as banks prepare to unleash a firestorm of foreclosure inventory into the market, fundamentals will remain pointed south, thereby pushing down prices. And as foreclosures continue to infect higher end real-estate markets, these price declines will be felt by a growing -- and more prosperous -- segment of the population.
Mortgage rates, left to their own devices, would be far, far higher without government support. This is the message of the market - one bureaucrats in Washington seem unwilling to learn.
Despite Herculean efforts, the Federal Reserve is losing its battle to keep mortgage rates at all-time lows.
As fear that we're headed for imminent collapse slowly wanes, investors' appetite for risk is coming back. This renewed confidence has helped buoy stocks, and the major equity indices have rallied more than 30% from their March lows. The shift, however, has come at the expense of the Treasury market, which has been in a 7-week slump.
According to Bloomberg, big money managers like Blackrock (BLK) are betting the Fed will step in to support the Treasury market (again), as regulators hope renewed Treasury purchases will push down mortgage rates (again).
Bond prices and yields move in opposite directions. When investor demand falls, so do prices, pushing up yields. And as investors shun the safety -- but relatively low return -- of government-backed debt, the impacts are felt throughout the credit markets. Of concern to the Fed, and what has led Chairman Ben Bernanke to increase Treasury purchases in the past, is the effect this dynamic has on mortgage rates.
A mortgage is nothing more than a long term bond, given to a borrower to purchase a home. So when lenders get fearful they're not being compensated for tying up money for as long as 30 years, they increase rates. Further, as the specter of inflation rises, lenders demand bigger interest payments to keep up with higher prices. In other words, when dollars in the future are worth less than dollars today, banks demand higher payments to make up the difference.
Keeping mortgage rates low has been a cornerstone of Washington's efforts to jump start the flagging housing market. But with rates at the highest level since April, the "smart money" is betting the Fed may return to the Treasury market en masse.
Paradoxically, even as the Fed tries to keep interest rates low -- which are rising in part due to the expectation that higher prices loom in the years ahead -- its actions increase the likelihood of future inflation. Running its printing presses around the clock has consequences, even if Fed officials are loathe to admit it.
Minyanville's Mr. Practical often discusses the fallacy that credit markets are improving. As he points out, only in corners of the market where the government has stepped in to support lending is any so-called "normalcy" returning.
So too in the mortgage market.
Loans backed by Fannie Mae (FNM), Freddie Mac (FRE) and the Federal Housing Administration account for the lion share of mortgages currently being issued in this country. Aside from the occasional jumbo loan written by banks like JPMorgan (JPM) or Wells Fargo (WFC), government mortgages are the only game in town. Coupled with the Troubled Asset Lending Facility (or TALF), which funnels money into the market for mortgage-backed securities, the home-loan market remains completely dependent on government support.
This is one reason recent "strength" in the housing market will provide transitory. There's a limit on how much government can control markets, as evidenced by mortgage rates that move persistently higher every time the Fed eases its aggressive intervention. Fundamentals, not subsidies, will provide a true floor in prices.
And as banks prepare to unleash a firestorm of foreclosure inventory into the market, fundamentals will remain pointed south, thereby pushing down prices. And as foreclosures continue to infect higher end real-estate markets, these price declines will be felt by a growing -- and more prosperous -- segment of the population.
Mortgage rates, left to their own devices, would be far, far higher without government support. This is the message of the market - one bureaucrats in Washington seem unwilling to learn.
Keepin' It Real Estate: Subprime Lending Is Back With a Vengeance
This post first appeared on Minyanville and Cirios Real Estate.
Just when you thought it was safe to go back in the water... Subprime lending has come roaring back.
But this time, reckless financial innovation isn’t being hatched on Wall Street. Instead, state governments are angling to “monetize” first-time homebuyer tax credits so borrowers can purchase homes with little or no money down.
If this sounds eerily similar to the type of lending practices that got us into this mess, well, it should.
The federal government, as part of the recently passed economic stimulus package, will refund first-time homebuyers up to $8,000 if they meet certain eligibility requirements. The program is frequently cited as one of the myriad reasons a bottom in the housing market is imminent.
Critics, however, argue that rebates don't end up in a buyer’s pockets until his or her 2009 tax returns are filed - even though rebates are credits, not just deductions.
Homebuilders like Pulte Home (PHM), Lennar (LEN) and KB Home (KBH), along with their lobbying arm, the National Association of Homebuilders, have thrown their full weight behind the rebate program, but say it still doesn't go far enough.
In an effort to boost home buying -- even for marginally qualified borrowers -- a number of states are finding creative ways to advance the tax credit to buyers on the day they get their new keys, rather than having to wait for next year's refund check. This allows buyers to pay for things like closing costs, mortgage points - or even the down payment.
States are employing schemes whereby they offer prospective buyers low or no-interest loans for the amount of the tax credit, due upon of receipt of their money from Uncle Sam. If the borrower doesn’t make good, the loan becomes a junior lien on the property, with an interest rate that is far from usurious - usually just a bit over the prime lending rate.
Missouri was the first state to launch such a program, and has since been joined by Delaware, New Mexico, Pennsylvania, Tennessee and others. States are even lobbying the IRS to deposit the refunds directly to the states, rather than to the home buyers, in order to circumvent non-payment. The IRS, for its part, “is reviewing” this idea.
In Washington, the state Housing Finance Commission runs a tax credit bridge-loan program, which it hopes will grow in the coming months. Not surprisingly, local real-estate professionals are behind the initiative. Washington Association of Realtors president Bill Riley told the San Francisco Chronicle he believes around half of would-be first-time buyers in his state “cannot save enough money for the down payment and closing costs.”
Exactly. That’s the point. This is precisely what differentiates a “would-be” home buyer and a home buyer. And that’s the way it should be.
If the federal government wants to subsidize home ownership, fine. It's already proven unwilling to learn the lessons of Fannie Mae (FNM) and Freddie Mac (FRE) about the costs of jamming borrowers into homes they can't afford. But these rebates should at least be limited to borrowers that meet even the most modest requirements to buy a home in a responsible manner.
The Federal Housing Administration -- another vehicle for government-backed mortgages where taxpayers bear all the risk -- gives out loans that require borrowers to post a meager 3% down payment. If a “would-be” homeowner cannot scrape together this amount of cash, that person should rent and save their pennies. They should not receive a no-interest loan from the state government. This is not discrimination, this is not redlining, its common sense.
In a rush to prop up home prices and delay the ultimate day of reckoning for the vast majority of US real-estate markets, the federal government -- and now state governments as well -- insist on coercing taxpayers to over-leverage themselves and take on a debt burden they cannot truly afford.
From the looks of it, Washington is leading by example.
Just when you thought it was safe to go back in the water... Subprime lending has come roaring back.
But this time, reckless financial innovation isn’t being hatched on Wall Street. Instead, state governments are angling to “monetize” first-time homebuyer tax credits so borrowers can purchase homes with little or no money down.
If this sounds eerily similar to the type of lending practices that got us into this mess, well, it should.
The federal government, as part of the recently passed economic stimulus package, will refund first-time homebuyers up to $8,000 if they meet certain eligibility requirements. The program is frequently cited as one of the myriad reasons a bottom in the housing market is imminent.
Critics, however, argue that rebates don't end up in a buyer’s pockets until his or her 2009 tax returns are filed - even though rebates are credits, not just deductions.
Homebuilders like Pulte Home (PHM), Lennar (LEN) and KB Home (KBH), along with their lobbying arm, the National Association of Homebuilders, have thrown their full weight behind the rebate program, but say it still doesn't go far enough.
In an effort to boost home buying -- even for marginally qualified borrowers -- a number of states are finding creative ways to advance the tax credit to buyers on the day they get their new keys, rather than having to wait for next year's refund check. This allows buyers to pay for things like closing costs, mortgage points - or even the down payment.
States are employing schemes whereby they offer prospective buyers low or no-interest loans for the amount of the tax credit, due upon of receipt of their money from Uncle Sam. If the borrower doesn’t make good, the loan becomes a junior lien on the property, with an interest rate that is far from usurious - usually just a bit over the prime lending rate.
Missouri was the first state to launch such a program, and has since been joined by Delaware, New Mexico, Pennsylvania, Tennessee and others. States are even lobbying the IRS to deposit the refunds directly to the states, rather than to the home buyers, in order to circumvent non-payment. The IRS, for its part, “is reviewing” this idea.
In Washington, the state Housing Finance Commission runs a tax credit bridge-loan program, which it hopes will grow in the coming months. Not surprisingly, local real-estate professionals are behind the initiative. Washington Association of Realtors president Bill Riley told the San Francisco Chronicle he believes around half of would-be first-time buyers in his state “cannot save enough money for the down payment and closing costs.”
Exactly. That’s the point. This is precisely what differentiates a “would-be” home buyer and a home buyer. And that’s the way it should be.
If the federal government wants to subsidize home ownership, fine. It's already proven unwilling to learn the lessons of Fannie Mae (FNM) and Freddie Mac (FRE) about the costs of jamming borrowers into homes they can't afford. But these rebates should at least be limited to borrowers that meet even the most modest requirements to buy a home in a responsible manner.
The Federal Housing Administration -- another vehicle for government-backed mortgages where taxpayers bear all the risk -- gives out loans that require borrowers to post a meager 3% down payment. If a “would-be” homeowner cannot scrape together this amount of cash, that person should rent and save their pennies. They should not receive a no-interest loan from the state government. This is not discrimination, this is not redlining, its common sense.
In a rush to prop up home prices and delay the ultimate day of reckoning for the vast majority of US real-estate markets, the federal government -- and now state governments as well -- insist on coercing taxpayers to over-leverage themselves and take on a debt burden they cannot truly afford.
From the looks of it, Washington is leading by example.
Friday, May 8, 2009
Will the US Dollar Survive?
This post first appeared on Minyanville.
Battle lines are being drawn. Sides chosen. Allegiances cemented.
But this war won't be waged with bullets; instead, it will be fought with words and ideas. The dollar wars are heating up.
Just a few weeks ago, the governor of the People's Bank of China, Zhou Xiaochuan, made unambiguous comments about his country's desire for a single, international currency. Gone, he said, were the days when the money of choice for global trade was that of a single sovereign nation. Russia, along with a host of other nations only moderately friendly to the US, expressed similar sentiments.
Today, firing back against the single-global-currency crew, Saudi Arabia, Bahrain and Qatar reaffirmed their support of the dollar. Bloomberg reports the 3 Gulf nations have no plans to abandon their US dollar pegs, applauding its resilience in the face of crisis.
Last summer, as the dollar tanked and inflation soared, experts feared these and other countries would push the dollar from its place atop the currency hierarchy. But amid signs that the US economy may no longer be in freefall -- and the rapid repayment of dollar-denominated debt -- the greenback has rallied more than 10% off its July 2008 lows.
Geopolitical grandstanding aside, the fate of the dollar and American corporate profits are inextricably linked. Corporate profits and jobs are also closely linked.
Big multinationals like Wal-Mart (WMT) and IBM (IBM) earned windfall profits by converting international revenue into dollars at favorable rates. As the greenback lost value over the last decade, those euros, pesos and reals earned abroad translated into bigger and bigger numbers when tallied here at home.
The dollar's recent strength has turned a windfall into a headwind. In the past month, MasterCard (MA) and McDonald's (MCD) blamed weak profit figures, in part, on the strengthening US currency.
And that's the high-wire act currently being performed by Federal Reserve Chairman Ben Bernanke and other US monetary and fiscal bureaucrats: A weak dollar buoys corporate profits, even as it keeps prices rising at home. Strengthen the dollar to combat inflation, and exports -- along with profits -- slump.
We've reached the critical juncture. After 18 months of running the printing presses around the clock to keep our economy out of the morgue, the relative wisdom of the Fed's ways will become increasingly clear.
At stake isn't just bragging rights on the global economic stage, but the integrity of the little green bills that keep the global economy running - the same ones each of us still uses to buy bread.
Battle lines are being drawn. Sides chosen. Allegiances cemented.
But this war won't be waged with bullets; instead, it will be fought with words and ideas. The dollar wars are heating up.
Just a few weeks ago, the governor of the People's Bank of China, Zhou Xiaochuan, made unambiguous comments about his country's desire for a single, international currency. Gone, he said, were the days when the money of choice for global trade was that of a single sovereign nation. Russia, along with a host of other nations only moderately friendly to the US, expressed similar sentiments.
Today, firing back against the single-global-currency crew, Saudi Arabia, Bahrain and Qatar reaffirmed their support of the dollar. Bloomberg reports the 3 Gulf nations have no plans to abandon their US dollar pegs, applauding its resilience in the face of crisis.
Last summer, as the dollar tanked and inflation soared, experts feared these and other countries would push the dollar from its place atop the currency hierarchy. But amid signs that the US economy may no longer be in freefall -- and the rapid repayment of dollar-denominated debt -- the greenback has rallied more than 10% off its July 2008 lows.
Geopolitical grandstanding aside, the fate of the dollar and American corporate profits are inextricably linked. Corporate profits and jobs are also closely linked.
Big multinationals like Wal-Mart (WMT) and IBM (IBM) earned windfall profits by converting international revenue into dollars at favorable rates. As the greenback lost value over the last decade, those euros, pesos and reals earned abroad translated into bigger and bigger numbers when tallied here at home.
The dollar's recent strength has turned a windfall into a headwind. In the past month, MasterCard (MA) and McDonald's (MCD) blamed weak profit figures, in part, on the strengthening US currency.
And that's the high-wire act currently being performed by Federal Reserve Chairman Ben Bernanke and other US monetary and fiscal bureaucrats: A weak dollar buoys corporate profits, even as it keeps prices rising at home. Strengthen the dollar to combat inflation, and exports -- along with profits -- slump.
We've reached the critical juncture. After 18 months of running the printing presses around the clock to keep our economy out of the morgue, the relative wisdom of the Fed's ways will become increasingly clear.
At stake isn't just bragging rights on the global economic stage, but the integrity of the little green bills that keep the global economy running - the same ones each of us still uses to buy bread.
Wall Street Brokers Seek Out Greener Pastures
This post first appeared on Minyanville.
Wall Street securities brokers are having a tough go of it.
With nearly $7 trillion in US equity value wiped out since the bear market began, assets under management -- a key component of brokers' earnings -- are down sharply. Trading activity has slowed too, and with it, the fees they generate to arrange transactions.
Some brokers are leaving firms like Morgan Stanley (MS) and Merrill Lynch (BAC) on their own accord, seeking the freedom of trading their own account. Others are being shown the door or leaving Wall Street altogether. Low producers are faring the worst - at Swiss banking giant UBS (UBS) 600 brokers that bring in less than $260,000 in annual fees are losing their jobs. According to the Wall Street Journal, 2009 is on pace to see the biggest exodus of brokers in 15 years.
And of the myriad headwinds facing today's broker, the greatest is perhaps the public's growing aversion to risk.
Money has been moving away from stocks and bonds -- the typical broker's cash cows -- and into the relative safety of money-market funds and secured deposits. These low-risk investments carry paltry fees, much to brokers' chagrin. But with our economic future still highly uncertain, the investing public is coming to appreciate Mark Twain's adage that the return of investment trumps the return on investment.
This isn't just some transitory shift away from risk that will swing back as soon as the economy gives the all-clear (as if such a definitive message even exists). Americans' education on the perils of too much risk-taking without enough reward is ongoing, and those that believe we're at the bottom of this economic cycle have a fundamental misunderstanding of how we arrived at this juncture in the first place.
Decades of easy money and a government complicit in bailing out the most reckless risk-takers fostered a generation of economic actors with no frame of reference for truly challenging economic times. This mindset -- the entrenched belief that "what goes down must then go up" -- is still pervasive. It's changing, to be sure, but these are time-intensive structural shifts that can't be measured in tweets.
As risk aversion grows, savings increases, and thrift becomes mainstream, the old way of investing and spending is beginning to seem like the distant past. Make no mistake, this is a positive change; one that will enable our economy -- and indeed our country -- to build a stronger foundation from which real, sustainable economic expansion and an increase in our standard of living can grow.
Wall Street securities brokers are having a tough go of it.
With nearly $7 trillion in US equity value wiped out since the bear market began, assets under management -- a key component of brokers' earnings -- are down sharply. Trading activity has slowed too, and with it, the fees they generate to arrange transactions.
Some brokers are leaving firms like Morgan Stanley (MS) and Merrill Lynch (BAC) on their own accord, seeking the freedom of trading their own account. Others are being shown the door or leaving Wall Street altogether. Low producers are faring the worst - at Swiss banking giant UBS (UBS) 600 brokers that bring in less than $260,000 in annual fees are losing their jobs. According to the Wall Street Journal, 2009 is on pace to see the biggest exodus of brokers in 15 years.
And of the myriad headwinds facing today's broker, the greatest is perhaps the public's growing aversion to risk.
Money has been moving away from stocks and bonds -- the typical broker's cash cows -- and into the relative safety of money-market funds and secured deposits. These low-risk investments carry paltry fees, much to brokers' chagrin. But with our economic future still highly uncertain, the investing public is coming to appreciate Mark Twain's adage that the return of investment trumps the return on investment.
This isn't just some transitory shift away from risk that will swing back as soon as the economy gives the all-clear (as if such a definitive message even exists). Americans' education on the perils of too much risk-taking without enough reward is ongoing, and those that believe we're at the bottom of this economic cycle have a fundamental misunderstanding of how we arrived at this juncture in the first place.
Decades of easy money and a government complicit in bailing out the most reckless risk-takers fostered a generation of economic actors with no frame of reference for truly challenging economic times. This mindset -- the entrenched belief that "what goes down must then go up" -- is still pervasive. It's changing, to be sure, but these are time-intensive structural shifts that can't be measured in tweets.
As risk aversion grows, savings increases, and thrift becomes mainstream, the old way of investing and spending is beginning to seem like the distant past. Make no mistake, this is a positive change; one that will enable our economy -- and indeed our country -- to build a stronger foundation from which real, sustainable economic expansion and an increase in our standard of living can grow.
401k's to Clients: No, You Can't Have Your Money
This post first appeared on Minyanville.
Remember all that money you socked away in your 401(k)? As financial markets continue to reel after 2 years of turmoil, pulling out your cash may be no easy task.
The Wall Street Journal reports certain 401(k) fund administrators are limiting and even blocking withdrawals, due to mounting losses and the illiquidity of underlying assets. The restrictions come at an inopportune time for investors, as job losses and general financial hardship are forcing many to tap retirement savings earlier than they'd hoped.
Investment funds tied to real estate are having more troubles than most.
The Principal US Property Separate Account -- a fund that invests in office buildings in other properties managed by Principal Financial Group (PFG) -- is restricting withdrawals. According to a company spokesman, selling assets into an illiquid market to generate cash for client requests would cause losses for all fund participants. And while investors claim they knew the fund was riskier than your standard diversified equity fund, few expected their principal to be tied up for an indeterminate period of time.
To complicate matters, certain plan administrators who invested in more traditional securities lent out portfolio holdings to other investors in exchange for collateral that was supposed to be safe and secure. They did this to earn a small profit to cover administrative fees, purportedly for the benefit of their clients. But when credit markets went haywire, collateral -- such as the Lehman Brothers debt some funds had received -- plummeted in value or became otherwise hard to trade.
Similarly, selling securities into a distressed market isn’t an attractive option for money managers billing themselves as stern guardians of their clients’ money. Even State Street (STT), one of the country’s most prudent banking operations, has limited client withdrawals in some of its securities-related funds.
As policy-makers cross their fingers that stimulus efforts will work their magic, the damage wrought by this unprecedented market dislocation is still migrating from Wall Street to Main Street. As Minyanville’s Kevin Depew wrote back in July of last year: “As the echoes of Wall Street's drunkenness trickle down to Main Street, the real impact of a consumer-led slowdown will begin to appear, and the vapidity of the 'all is well' chorus from bankers and brokers on The Street will be revealed.”
Thirty years of gluttony, in which our country (indeed, the world) feasted on cheap and easy credit, aren’t worked off in a mere 18 months of government-induced economic “recovery.” As time rumbles on, the smoke and mirrors that maintain our illusory financial strength will collapse, revealing the wreckage underneath.
Rather than fear this eventuality, we should rejoice in it. Hardship will be an arduous path to a truly stronger foundation.
Remember all that money you socked away in your 401(k)? As financial markets continue to reel after 2 years of turmoil, pulling out your cash may be no easy task.
The Wall Street Journal reports certain 401(k) fund administrators are limiting and even blocking withdrawals, due to mounting losses and the illiquidity of underlying assets. The restrictions come at an inopportune time for investors, as job losses and general financial hardship are forcing many to tap retirement savings earlier than they'd hoped.
Investment funds tied to real estate are having more troubles than most.
The Principal US Property Separate Account -- a fund that invests in office buildings in other properties managed by Principal Financial Group (PFG) -- is restricting withdrawals. According to a company spokesman, selling assets into an illiquid market to generate cash for client requests would cause losses for all fund participants. And while investors claim they knew the fund was riskier than your standard diversified equity fund, few expected their principal to be tied up for an indeterminate period of time.
To complicate matters, certain plan administrators who invested in more traditional securities lent out portfolio holdings to other investors in exchange for collateral that was supposed to be safe and secure. They did this to earn a small profit to cover administrative fees, purportedly for the benefit of their clients. But when credit markets went haywire, collateral -- such as the Lehman Brothers debt some funds had received -- plummeted in value or became otherwise hard to trade.
Similarly, selling securities into a distressed market isn’t an attractive option for money managers billing themselves as stern guardians of their clients’ money. Even State Street (STT), one of the country’s most prudent banking operations, has limited client withdrawals in some of its securities-related funds.
As policy-makers cross their fingers that stimulus efforts will work their magic, the damage wrought by this unprecedented market dislocation is still migrating from Wall Street to Main Street. As Minyanville’s Kevin Depew wrote back in July of last year: “As the echoes of Wall Street's drunkenness trickle down to Main Street, the real impact of a consumer-led slowdown will begin to appear, and the vapidity of the 'all is well' chorus from bankers and brokers on The Street will be revealed.”
Thirty years of gluttony, in which our country (indeed, the world) feasted on cheap and easy credit, aren’t worked off in a mere 18 months of government-induced economic “recovery.” As time rumbles on, the smoke and mirrors that maintain our illusory financial strength will collapse, revealing the wreckage underneath.
Rather than fear this eventuality, we should rejoice in it. Hardship will be an arduous path to a truly stronger foundation.
Monday, May 4, 2009
The Five Questions You MUST Ask Your Realtor
This post first appeared on Minyanville and Cirios Real Estate.
As a growing number of economists, pundits and real-estate professionals assure us the housing market's worst days are over, prospective home buyers need a trusted advocate to make sure they don't end up on the wrong side of someone else's trade.
More often than not, that person will come in the form of a real-estate professional working on the buyer's behalf and earning a commission for their trouble. Below are 5 simple questions you can ask to gauge whether a given candidate is looking out for your best interests - or his or her own.
But first, a word on terminology.
The terms "agent," "broker" and "realtor" are often thrown around interchangeably. This isn't exactly right. While laws differ from state to state, acquiring a broker's license typically requires a series of courses on real estate practices, principals, finance, law, appraisal and the escrow process. A broker can use his license to form a brokerage, and the company can then perform services as a licensed entity.
In many states (like California) a licensed broker can not only conduct real estate transactions, but earn commissions for arranging mortgages and other types of real estate-related loans. For this reason, a brokers license offers the holder huge potential earnings power.
An agent is a step below a broker. While requiring a license, an agent is normally treated as an employee of the broker and thus the broker is responsible for the actions of the agents under his charge. If an agent screws up, his reputation (and license) as well as his broker's is on the line. Agents can typically conduct the same transactions as a broker, but must do so under the supervision of their boss.
Finally, the term "Realtor" is used to specifically identify a real estate broker or agent who is a member of the National Association of Realtors, or NAR. The NAR is a nationwide trade group that collects member dues, lobbies in Washington and runs marketing campaigns urging Americans to buy homes. The NAR is conspicuous in its role as national housing cheerleader, as it's chief economist Lawrence Yun has been predicting an imminent bottom in prices since early 2006.
1. Is it a good time to buy?
Of any question a buyer is likely to ask his broker (or agent), this may be the first. And the most important. The answer itself isn't nearly as important as how the broker responds.
Any broker that says definitely that yes, this is a great time to buy, should be eyed with skepticism. Without knowing a buyer's specific circumstances, understanding localized market trends and the underlying value of a specific home, saying it is a great time to buy is a sales pitch, pure and simple.
Brokers will often cite low interest rates, high levels of affordability, low replacement costs and home prices that have fallen precipitously from their peaks as reasons its never been a better time to buy. But ask yourself, all those conditions were true six months ago -- was it a great time to buy then?
The proper response to this question from a responsible broker is to answer the question with a question, or questions. How much money have you saved? How long do you plan on owning the home? How much money do you make? How much is your other debt service? What are your contingencies if you lose your job? How is your credit? What are your other motivations for wanting to buy?
Only armed with answers to these and other questions can a broker -- or a buyer for that matter -- determine whether its the right time to buy.
As a growing number of economists, pundits and real-estate professionals assure us the housing market's worst days are over, prospective home buyers need a trusted advocate to make sure they don't end up on the wrong side of someone else's trade.
More often than not, that person will come in the form of a real-estate professional working on the buyer's behalf and earning a commission for their trouble. Below are 5 simple questions you can ask to gauge whether a given candidate is looking out for your best interests - or his or her own.
But first, a word on terminology.
The terms "agent," "broker" and "realtor" are often thrown around interchangeably. This isn't exactly right. While laws differ from state to state, acquiring a broker's license typically requires a series of courses on real estate practices, principals, finance, law, appraisal and the escrow process. A broker can use his license to form a brokerage, and the company can then perform services as a licensed entity.
In many states (like California) a licensed broker can not only conduct real estate transactions, but earn commissions for arranging mortgages and other types of real estate-related loans. For this reason, a brokers license offers the holder huge potential earnings power.
An agent is a step below a broker. While requiring a license, an agent is normally treated as an employee of the broker and thus the broker is responsible for the actions of the agents under his charge. If an agent screws up, his reputation (and license) as well as his broker's is on the line. Agents can typically conduct the same transactions as a broker, but must do so under the supervision of their boss.
Finally, the term "Realtor" is used to specifically identify a real estate broker or agent who is a member of the National Association of Realtors, or NAR. The NAR is a nationwide trade group that collects member dues, lobbies in Washington and runs marketing campaigns urging Americans to buy homes. The NAR is conspicuous in its role as national housing cheerleader, as it's chief economist Lawrence Yun has been predicting an imminent bottom in prices since early 2006.
1. Is it a good time to buy?
Of any question a buyer is likely to ask his broker (or agent), this may be the first. And the most important. The answer itself isn't nearly as important as how the broker responds.
Any broker that says definitely that yes, this is a great time to buy, should be eyed with skepticism. Without knowing a buyer's specific circumstances, understanding localized market trends and the underlying value of a specific home, saying it is a great time to buy is a sales pitch, pure and simple.
Brokers will often cite low interest rates, high levels of affordability, low replacement costs and home prices that have fallen precipitously from their peaks as reasons its never been a better time to buy. But ask yourself, all those conditions were true six months ago -- was it a great time to buy then?
The proper response to this question from a responsible broker is to answer the question with a question, or questions. How much money have you saved? How long do you plan on owning the home? How much money do you make? How much is your other debt service? What are your contingencies if you lose your job? How is your credit? What are your other motivations for wanting to buy?
Only armed with answers to these and other questions can a broker -- or a buyer for that matter -- determine whether its the right time to buy.
Banks Spurn Government Aid
Fool me once, shame on you; fool me twice, shame on me.
American banks are tired of playing the fool.
Results from the so-called stress tests -- administered by regulators to determine the health of 19 key lending institutions -- are being leaked to the press, even as the official announcement of the findings has been delayed for a third time.
Banks -- specifically Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC) -- aren't happy with the results. According to the New York Times, early indications are that certain key institutions will be forced to raise capital, sparking renewed backlash against government intrusion into the banking industry.
As confusion reigns, rules continuously change, and federal lending programs produce decidedly lackluster results, the refrain among this country's banks is that they'll solve their problems without Washington's "help," thank you very much.
To be sure, certain firms are already in too deep.
Bank of America and Citi, for example, have already accepted tens of billions in capital and hundreds of billions in federal backstops against loan losses. They have little choice but to submit to Washington's will. To wit: Citi -- having learned a hard lesson from the AIG (AIG) bonus debacle -- is now asking for government permission before handing out any money.
Smaller banks, and those that aren't in nearly such dire straits, see government money as tainted. JPMorgan Chase (JPM) CEO Jamie Dimon said last month that his bank wouldn't "borrow from the federal government, because we've learned our lesson about that."
Bryan Jordan, who runs First Horizon National (FHN) out of Memphis, Tennessee, said his bank was better off working through troubled assets rather than selling them on the open market.
Regulators, engaged in aggressive ad-hockery for the better part of 2 years, have lost credibility. Congress, engaged in egregious political grandstanding, has lost what little trust it had to begin with. Banks, engaged in a fight to remain solvent as well as independent, want to avoid both.
The more Washington insists on influencing the day-to-day operations of the firms it props up, the less inclined banks will be to accept help. Those that can afford to go it alone will do so - even if it means shrinking their operations. This, in turn, could prolong the recession - even as government efforts strive to do the opposite.
Go figure: Central economic planning doesn't work.
American banks are tired of playing the fool.
Results from the so-called stress tests -- administered by regulators to determine the health of 19 key lending institutions -- are being leaked to the press, even as the official announcement of the findings has been delayed for a third time.
Banks -- specifically Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC) -- aren't happy with the results. According to the New York Times, early indications are that certain key institutions will be forced to raise capital, sparking renewed backlash against government intrusion into the banking industry.
As confusion reigns, rules continuously change, and federal lending programs produce decidedly lackluster results, the refrain among this country's banks is that they'll solve their problems without Washington's "help," thank you very much.
To be sure, certain firms are already in too deep.
Bank of America and Citi, for example, have already accepted tens of billions in capital and hundreds of billions in federal backstops against loan losses. They have little choice but to submit to Washington's will. To wit: Citi -- having learned a hard lesson from the AIG (AIG) bonus debacle -- is now asking for government permission before handing out any money.
Smaller banks, and those that aren't in nearly such dire straits, see government money as tainted. JPMorgan Chase (JPM) CEO Jamie Dimon said last month that his bank wouldn't "borrow from the federal government, because we've learned our lesson about that."
Bryan Jordan, who runs First Horizon National (FHN) out of Memphis, Tennessee, said his bank was better off working through troubled assets rather than selling them on the open market.
Regulators, engaged in aggressive ad-hockery for the better part of 2 years, have lost credibility. Congress, engaged in egregious political grandstanding, has lost what little trust it had to begin with. Banks, engaged in a fight to remain solvent as well as independent, want to avoid both.
The more Washington insists on influencing the day-to-day operations of the firms it props up, the less inclined banks will be to accept help. Those that can afford to go it alone will do so - even if it means shrinking their operations. This, in turn, could prolong the recession - even as government efforts strive to do the opposite.
Go figure: Central economic planning doesn't work.
Government to Banks: We Recommend Throwing Good Money After Bad
This post first appeared on Minyanville and Cirios Real Estate.
Every month, it seems, Washington dreams up new and fantastic ways to funnel taxpayer money towards a growing list of undeserving recipients.
Now, in the latest attempt to coerce banks into modifying delinquent mortgages en masse, the Treasury Department plans to offer cash incentives to lenders who lower interest rates or forgive principal on second liens (so-called "piggyback" loans). According to Bloomberg, the new program aims to simplify the modification process and help struggling borrowers avoid foreclosure.
The subprime second lien was a highly profitable, nearly usurious loan product that proliferated during the housing boom. Once reserved for high-quality borrowers and those with sufficient equity in their homes, seconds became an easy way to jam borrowers into homes they couldn't otherwise afford.
If a homeowner wants to take out a first mortgage for more than 80% of the home's value, he or she is typically required to take out mortgage insurance, issued by firms like Radian (RDN), MGIC Investment Corp (MTG) and the PMI Group (PMI). For years, the cost of insurance -- plus the required down payment -- limited home ownership to those who, by and large, could afford to buy responsibly.
But as housing demand ballooned from 2002 to 2005, banks discovered they could just loan borrowers the down-payment money - and charge a hefty fee to do so. Without those pesky requirements -- and by bypassing the sometimes strict credit guidelines of mortgage insurers -- banks were able to open up their loan products to a whole new group of unqualified borrowers.
Second liens, by virtue of being subordinate to first liens, carry additional risk, and thus a higher interest rate. In other words, if a borrower defaults, the holder of the second lien has to wait until the first mortgage holder is made whole before getting paid.
And since seconds carried super-high interest rates, securities backed by this type of loan offered juicy returns for investors. It should come as no surprise that the second-lien market was dominated by Bear Stearns (now JPMorgan (JPM)), Countrywide (now Bank of America (BAC)), and Citigroup (C) (now in hock to Uncle Sam for a cool $300 million).
Now, the Obama Administration wants to give billions to not only the banks who wrote these loans, but the borrowers who accepted them. The program is destined for failure.
In fact, it's already failed.
A little over a year ago, Fannie Mae (FNM) and Freddie Mac (FRE) introduced an initiative called the "HomeSaver Advance." Under the program, borrowers behind on their mortgage payments could take out an unsecured line of credit to get current. Under this program, Fannie and Freddie lent out $462 million over the course of the next 12 months.
Now, based on current market prices, the loans are worth a whopping $8 million, or $0.017 cents on the dollar. Talk about throwing good money after bad.
The President's initiative to modify seconds is no different: It takes a situation destined for foreclosure and simply prolongs the agony. This prevents the borrower from getting out from under his mountain of debt and starting anew. Meanwhile, homes become ever more dilapidated, and banks further delay their own days of reckoning.
The rationale for this program is obscure - though it does provide yet another way to hand taxpayer money over to the very banks who got us into this mess in the first place.
Every month, it seems, Washington dreams up new and fantastic ways to funnel taxpayer money towards a growing list of undeserving recipients.
Now, in the latest attempt to coerce banks into modifying delinquent mortgages en masse, the Treasury Department plans to offer cash incentives to lenders who lower interest rates or forgive principal on second liens (so-called "piggyback" loans). According to Bloomberg, the new program aims to simplify the modification process and help struggling borrowers avoid foreclosure.
The subprime second lien was a highly profitable, nearly usurious loan product that proliferated during the housing boom. Once reserved for high-quality borrowers and those with sufficient equity in their homes, seconds became an easy way to jam borrowers into homes they couldn't otherwise afford.
If a homeowner wants to take out a first mortgage for more than 80% of the home's value, he or she is typically required to take out mortgage insurance, issued by firms like Radian (RDN), MGIC Investment Corp (MTG) and the PMI Group (PMI). For years, the cost of insurance -- plus the required down payment -- limited home ownership to those who, by and large, could afford to buy responsibly.
But as housing demand ballooned from 2002 to 2005, banks discovered they could just loan borrowers the down-payment money - and charge a hefty fee to do so. Without those pesky requirements -- and by bypassing the sometimes strict credit guidelines of mortgage insurers -- banks were able to open up their loan products to a whole new group of unqualified borrowers.
Second liens, by virtue of being subordinate to first liens, carry additional risk, and thus a higher interest rate. In other words, if a borrower defaults, the holder of the second lien has to wait until the first mortgage holder is made whole before getting paid.
And since seconds carried super-high interest rates, securities backed by this type of loan offered juicy returns for investors. It should come as no surprise that the second-lien market was dominated by Bear Stearns (now JPMorgan (JPM)), Countrywide (now Bank of America (BAC)), and Citigroup (C) (now in hock to Uncle Sam for a cool $300 million).
Now, the Obama Administration wants to give billions to not only the banks who wrote these loans, but the borrowers who accepted them. The program is destined for failure.
In fact, it's already failed.
A little over a year ago, Fannie Mae (FNM) and Freddie Mac (FRE) introduced an initiative called the "HomeSaver Advance." Under the program, borrowers behind on their mortgage payments could take out an unsecured line of credit to get current. Under this program, Fannie and Freddie lent out $462 million over the course of the next 12 months.
Now, based on current market prices, the loans are worth a whopping $8 million, or $0.017 cents on the dollar. Talk about throwing good money after bad.
The President's initiative to modify seconds is no different: It takes a situation destined for foreclosure and simply prolongs the agony. This prevents the borrower from getting out from under his mountain of debt and starting anew. Meanwhile, homes become ever more dilapidated, and banks further delay their own days of reckoning.
The rationale for this program is obscure - though it does provide yet another way to hand taxpayer money over to the very banks who got us into this mess in the first place.
Chrysler Down, Not Quite Out
This post first appeared on Minyanville.
Chrysler isn't going down without a fight.
Just days after major media outlets reported a Chapter 11 bankruptcy filing was imminent, the struggling automaker appears to have made headway in negotiations with key labor unions. The breakthroughs offer a glimmer of hope for a company many wrote off months ago.
According to Bloomberg, cost-saving agreements are essential if Chrysler is to merge with Italian-based Fiat and qualify for more government aid. As the Washington-imposed April 30 deadline to cement a deal with Fiat looms, the last-minute negotiations represent Chrysler's last hope to avoid bankruptcy.
The Canadian Auto Workers have already ratified money-saving measures, while the United Auto Workers (UAW) is set to vote on new terms already agreed to by union leaders. The UAW stands to pick up a 20% ownership stake in the new, restructured Chrysler, in exchange for letting the company contribute around $10 billion less to it's health-care trust fund.
The race to save Detroit is reaching a crescendo: If government demands aren't met, bankruptcy nears for not only Chrysler, but General Motors (GM). GM, for its part, isn't finding its offer to swap debt into equity terribly popular with the owners of that debt.
Ford (F) is still hanging on -- despite record losses in the first quarter -- without the egregious government support afforded its floundering competitors.
In defense of its decision to bail out GM and Chrylser last December, the Bush administration told us bankruptcy wasn't a viable option, as such an event would result in millions of job losses. For an economy already hanging on by a thread, the implications were too dire to consider.
Detroit -- despite its fortuitous NFL draft over the weekend -- is on life support. And now, after the changing of the Presidential guard, bankruptcy appears to be not only acceptable, but the Obama administration's preferred outcome. And if we've learned anything in the first 100 days of President Obama's term, it's that where government control of industry is involved, always bet on Washington.
In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.
Chrysler isn't going down without a fight.
Just days after major media outlets reported a Chapter 11 bankruptcy filing was imminent, the struggling automaker appears to have made headway in negotiations with key labor unions. The breakthroughs offer a glimmer of hope for a company many wrote off months ago.
According to Bloomberg, cost-saving agreements are essential if Chrysler is to merge with Italian-based Fiat and qualify for more government aid. As the Washington-imposed April 30 deadline to cement a deal with Fiat looms, the last-minute negotiations represent Chrysler's last hope to avoid bankruptcy.
The Canadian Auto Workers have already ratified money-saving measures, while the United Auto Workers (UAW) is set to vote on new terms already agreed to by union leaders. The UAW stands to pick up a 20% ownership stake in the new, restructured Chrysler, in exchange for letting the company contribute around $10 billion less to it's health-care trust fund.
The race to save Detroit is reaching a crescendo: If government demands aren't met, bankruptcy nears for not only Chrysler, but General Motors (GM). GM, for its part, isn't finding its offer to swap debt into equity terribly popular with the owners of that debt.
Ford (F) is still hanging on -- despite record losses in the first quarter -- without the egregious government support afforded its floundering competitors.
In defense of its decision to bail out GM and Chrylser last December, the Bush administration told us bankruptcy wasn't a viable option, as such an event would result in millions of job losses. For an economy already hanging on by a thread, the implications were too dire to consider.
Detroit -- despite its fortuitous NFL draft over the weekend -- is on life support. And now, after the changing of the Presidential guard, bankruptcy appears to be not only acceptable, but the Obama administration's preferred outcome. And if we've learned anything in the first 100 days of President Obama's term, it's that where government control of industry is involved, always bet on Washington.
In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.
Nobody Move!
This post first appeared on Minyanville.
Shipping 21 boxes and over 700 pounds of clothes, books, sheets, spoons, blenders, blankets, old letters, photographs, and half-written, sure-to-be-Pulitzer-Prize-winning novels isn’t cheap.
(FedEx (FDX) shareholders, you’re welcome, by the way - I single-handedly supported your bottom line.)
But I’m in the minority: Moving across the country just ain’t what it used to be.
According to the New York Times, Americans are staying put as the souring economy drains us of any inclination toward mobility. The Census Bureau reported Wednesday that people who changed residences reached the lowest number since 1962 - even though 120 million more people live in this country now than did 47 years ago.
And while this trend doesn’t bode well for FedEx, UPS (UPS), and other companies that move stuff around, it poses a greater threat to the economy as a whole. Our country has benefited mightily from the mobility of its labor force, as employees willing to travel to new job opportunities help spread skills around in the most efficient manner possible.
This is a good thing, as capital and resources are allocated more effectively throughout the economy. And while many are hoping our economy is looking up and Americans will return to their move-happy ways, longer-term structural shifts are unfolding that indicate this may be wishful thinking.
Minyanville’s Kevin Depew often discusses risk and time preferences when explaining social mood. When people are happy and optimistic, they're willing to take risks and examine choices with a long-term outlook. On the other hand, when social mood darkens and pessimism reigns, decisions are made by examining a time horizon that becomes increasingly short, as uncertainty clouds even the most near-term economic outlooks.
Take moving. Sure, schlepping out to New York (then back to California, then back to New York, then back to California) is dicey, but when jobs abound, it's worth the risk. On the other hand, when employment is scantly available and cash is scarce, even moving for a promising job causes the risk-inclined to think twice.
This unwillingness to move, to uproot, or to add uncertainty to an already uncertain life, isn’t just some transitory phenomenon. As noted in the Times, a dual-income family has a much harder time relocating than the traditional single-earner household, since 2 jobs rather than one must be found anew. And even though home prices are tumbling throughout the country, it's still pretty hard to make ends meet without doubling up on income.
After decades of unprecedented “prosperity” created in part by debt-fueled excesses, the US is retrenching back towards a more sustainable, rational way of life. This is a positive development, however painful it is during the transition.
And as for me and my boxes, I’m emptying out my storage locker -- much to the chagrin of Pubic Storage (PSA) -- and adding to the clutter of a friend’s crowded basement. Let's hope those beat-up boxes are up for another 3,000-mile journey - I'm due in exactly 23 months.
Shipping 21 boxes and over 700 pounds of clothes, books, sheets, spoons, blenders, blankets, old letters, photographs, and half-written, sure-to-be-Pulitzer-Prize-winning novels isn’t cheap.
(FedEx (FDX) shareholders, you’re welcome, by the way - I single-handedly supported your bottom line.)
But I’m in the minority: Moving across the country just ain’t what it used to be.
According to the New York Times, Americans are staying put as the souring economy drains us of any inclination toward mobility. The Census Bureau reported Wednesday that people who changed residences reached the lowest number since 1962 - even though 120 million more people live in this country now than did 47 years ago.
And while this trend doesn’t bode well for FedEx, UPS (UPS), and other companies that move stuff around, it poses a greater threat to the economy as a whole. Our country has benefited mightily from the mobility of its labor force, as employees willing to travel to new job opportunities help spread skills around in the most efficient manner possible.
This is a good thing, as capital and resources are allocated more effectively throughout the economy. And while many are hoping our economy is looking up and Americans will return to their move-happy ways, longer-term structural shifts are unfolding that indicate this may be wishful thinking.
Minyanville’s Kevin Depew often discusses risk and time preferences when explaining social mood. When people are happy and optimistic, they're willing to take risks and examine choices with a long-term outlook. On the other hand, when social mood darkens and pessimism reigns, decisions are made by examining a time horizon that becomes increasingly short, as uncertainty clouds even the most near-term economic outlooks.
Take moving. Sure, schlepping out to New York (then back to California, then back to New York, then back to California) is dicey, but when jobs abound, it's worth the risk. On the other hand, when employment is scantly available and cash is scarce, even moving for a promising job causes the risk-inclined to think twice.
This unwillingness to move, to uproot, or to add uncertainty to an already uncertain life, isn’t just some transitory phenomenon. As noted in the Times, a dual-income family has a much harder time relocating than the traditional single-earner household, since 2 jobs rather than one must be found anew. And even though home prices are tumbling throughout the country, it's still pretty hard to make ends meet without doubling up on income.
After decades of unprecedented “prosperity” created in part by debt-fueled excesses, the US is retrenching back towards a more sustainable, rational way of life. This is a positive development, however painful it is during the transition.
And as for me and my boxes, I’m emptying out my storage locker -- much to the chagrin of Pubic Storage (PSA) -- and adding to the clutter of a friend’s crowded basement. Let's hope those beat-up boxes are up for another 3,000-mile journey - I'm due in exactly 23 months.
Chrysler Down, Almost Out
This post first appeared on Minyanville.
It was only a matter of time.
What began months ago with the big 3 automakers -- Ford (F), General Motors (GM) and Chrysler -- begging for federal assistance as car sales dried up and credit markets froze, may soon be slogged out in bankruptcy court.
The Wall Street Journal reports Chrysler LLC is preparing to file for Chapter 11 bankruptcy as early as next week. The company's fate has been hanging in the balance since the Obama Administration ousted General Motors CEO Rick Waggoner last month and told Chrysler it had precious little time to merge with Fiat or find some other way to remain solvent.
Now, it appears, time has run out.
According to the Journal, the bankruptcy plans will be put in place irrespective of whether the embattled car company can come to terms with lenders or get Fiat to swoop in for the rescue. Ultimately, the resolution may involve bankruptcy as to wipe out certain debt and give Fiat the opportunity to sort through its various operations and pick the ones it wants.
Notably, the United Auto Workers union appears to support the plan, as it would end up owning a chunk of a rejiggered Chrysler.
And now that the US government is so intensely involved in managing the affairs of the Auburn Hills-based company, any Chrysler bankruptcy filing will ultimately have the stamp of approval of President Obama and his Treasury Department minions.
According to Bloomberg, in a statement issued after Michigan's Congressional contingent met with Obama's closest advisors, the group said "The administration and the companies must continue to prepare contingency plans to avoid liquidation or a protracted restructuring process."
We have entered an era in which corporations are terrified of going anywhere near our nation's capital. Even as the federal government doles out hundreds of billions of dollars, the strings attached are simply too strangulating for the money to be truly attractive.
Just look at Bank of America (BAC) CEO Ken Lewis, now embroiled in a fierce battle over details of the Merrill Lynch takeover: All that cozying up to Washington to support that lousy Countrywide purchase doesn't seem like such a great idea now, does it?
It was only a matter of time.
What began months ago with the big 3 automakers -- Ford (F), General Motors (GM) and Chrysler -- begging for federal assistance as car sales dried up and credit markets froze, may soon be slogged out in bankruptcy court.
The Wall Street Journal reports Chrysler LLC is preparing to file for Chapter 11 bankruptcy as early as next week. The company's fate has been hanging in the balance since the Obama Administration ousted General Motors CEO Rick Waggoner last month and told Chrysler it had precious little time to merge with Fiat or find some other way to remain solvent.
Now, it appears, time has run out.
According to the Journal, the bankruptcy plans will be put in place irrespective of whether the embattled car company can come to terms with lenders or get Fiat to swoop in for the rescue. Ultimately, the resolution may involve bankruptcy as to wipe out certain debt and give Fiat the opportunity to sort through its various operations and pick the ones it wants.
Notably, the United Auto Workers union appears to support the plan, as it would end up owning a chunk of a rejiggered Chrysler.
And now that the US government is so intensely involved in managing the affairs of the Auburn Hills-based company, any Chrysler bankruptcy filing will ultimately have the stamp of approval of President Obama and his Treasury Department minions.
According to Bloomberg, in a statement issued after Michigan's Congressional contingent met with Obama's closest advisors, the group said "The administration and the companies must continue to prepare contingency plans to avoid liquidation or a protracted restructuring process."
We have entered an era in which corporations are terrified of going anywhere near our nation's capital. Even as the federal government doles out hundreds of billions of dollars, the strings attached are simply too strangulating for the money to be truly attractive.
Just look at Bank of America (BAC) CEO Ken Lewis, now embroiled in a fierce battle over details of the Merrill Lynch takeover: All that cozying up to Washington to support that lousy Countrywide purchase doesn't seem like such a great idea now, does it?
Subscribe to:
Posts (Atom)