This post first appeared on Minyanville.
It's official: California is broke.
For months, the most populous US state has been in the throes of a historic budget crisis, as lawmakers have repeatedly failed to agree on how to resolve a $24 billion deficit.
What was once the country's richest state is preparing to issue IOUs to a host of creditors, according to the Financial Times. Among the dubious recipients of these IOUs: Contractors, information-technology companies, and food-service groups that cater to prisons. Funding for education and interest payments on its bonds are guaranteed by state law.
Governor Arnold Schwarzenegger is taking a hard line with legislators, accusing them of offering up a piecemeal solution to the state's woes: "I will veto any majority tax increase bill that punishes taxpayers for Sacramento's failure to live within its means. It's time for the legislature to send me a budget that solves our entire deficit without raising taxes," the Governator said yesterday.
Lawmakers appear blindsided. It's almost like the state went broke all of a sudden and they haven't had time to properly prepare a solution. Not true: The state has been in and out of financial crisis for more than a decade.
After Schwarzenegger vetoed an $18 billion budget package in January, calling it "deeply flayed [sic]," members of the California legislature pulled a literal all-nighter to try and agree on spending cuts, tax hikes, and other measures to get the state back on sound financial footing. The proposed agreement -- hailed as an eleventh-hour solution to what could have become a fiscal nightmare -- was put to a state-wide referendum in May.
Voters rejected the proposal, soundly. Of the 5 measures on the ballot, the only one that passed were new rules that cut the pay for elected officials. And for good reason.
California politicians are a woeful bunch. Despite being home to some of the most profitable and innovative companies in the world, the state is perennially short of cash. Oracle (ORCL), Google (GOOG), and Genentech (DNA) all hail from the San Francisco Bay Area, while San Diego remains a mecca for biotechnology research and is home to mobile-communications giant Qualcomm (QCOM).
The state has vast natural-resource reserves, has a booming agricultural industry, is a popular tourist destination, and has some of the most heavily trafficked ports in the world. Good weather and generally high quality of life has made California the destination for dream-seekers for more than 150 years.
Yet, despite everything it has going for it, California's political process is a complete disaster. In an attempt to allow voters to play a more direct role in governance, the state's referendum system allows citizens to collect signatures and get measures onto statewide ballots. Enough votes on election day and any Californian can see his or her whimsical dream become law.
This has created a patchwork of legislation, rules, and special interests that have hogtied what would be the seventh-largest economy, were it to be a sovereign nation.
As the calendar turns tonight on its new fiscal year, California could be the first state -- like its bailout-begging brethren on Wall Street -- to go hat in hand to Washington pleading for a rescue.
Tuesday, June 30, 2009
Commodities Not Ready to Roll Over Just Yet
This post first appeared on Minyanville.
Despite the trillions of dollars in unprecedented stimulus we've seen in the over the past 24 months, investors are still reducing their bets on rising commodity prices.
According to Bloomberg, hedge funds and other speculators reduced commodity exposure by 23% in the 2 weeks ending June 23. Though this can be attributed, in part, to profit-taking after the first quarterly increase since early 2008, traders aren’t convinced that excess inventories will be corrected any time soon.
The effect of any future economic growth on commodity prices is likely to be mixed. Even as higher demand from consumers and businesses for raw materials expands, so too will capacity, because miners, farmers, and drillers will ramp up production.
And the debate is heating up as to whether the longest recession since World War II is on its way out. While George Soros declared the worst of the financial crisis over, and the Federal Reserve said economic contraction is slowing, the World Bank lowered global economic growth forecasts, and economist Nouriel Roubini said higher fuel costs could deepen the ongoing slump.
On Wall Street, investors have been betting on a recovery, as oil-service firms Transocean (RIG) and Schlumberger (SLB) have risen 82% and 55% from recent lows, respectively. And, despite a recent pullback, miners like Freeport MacMoran (FCX) Newpont Mining (NEM), along with steel producers ArcelorMittal (MT) and US Steel (X), have had exceedingly strong years to date after some downright abysmal months.
Well-known hedge managers have jumped on the rising-prices bandwagon: Nassim Nicholas Taleb, author of The Black Swan: The Impact of the Highly Improbable, threw his weight behind the commodity trade earlier this month, announcing that his hedge fund, Universa Investments, planned on betting on massively higher prices.
But rising commodity prices -- indeed, all rising prices -- are a result of not only constricted supply, but of higher demand. As the US and the world as a whole prepare for a future devoid of cheap and easy credit, old expectations about economic growth must be tossed aside.
We're entering a transitional period, one in which economies in both developing and developed nations must readjust to the notion that debt isn't a sustainable vehicle for growth, and that true productivity and innovation must drive any increase in the standard of living. In the long run, this return to traditional capitalistic values will result in a rising tide that lifts all boats.
Despite the trillions of dollars in unprecedented stimulus we've seen in the over the past 24 months, investors are still reducing their bets on rising commodity prices.
According to Bloomberg, hedge funds and other speculators reduced commodity exposure by 23% in the 2 weeks ending June 23. Though this can be attributed, in part, to profit-taking after the first quarterly increase since early 2008, traders aren’t convinced that excess inventories will be corrected any time soon.
The effect of any future economic growth on commodity prices is likely to be mixed. Even as higher demand from consumers and businesses for raw materials expands, so too will capacity, because miners, farmers, and drillers will ramp up production.
And the debate is heating up as to whether the longest recession since World War II is on its way out. While George Soros declared the worst of the financial crisis over, and the Federal Reserve said economic contraction is slowing, the World Bank lowered global economic growth forecasts, and economist Nouriel Roubini said higher fuel costs could deepen the ongoing slump.
On Wall Street, investors have been betting on a recovery, as oil-service firms Transocean (RIG) and Schlumberger (SLB) have risen 82% and 55% from recent lows, respectively. And, despite a recent pullback, miners like Freeport MacMoran (FCX) Newpont Mining (NEM), along with steel producers ArcelorMittal (MT) and US Steel (X), have had exceedingly strong years to date after some downright abysmal months.
Well-known hedge managers have jumped on the rising-prices bandwagon: Nassim Nicholas Taleb, author of The Black Swan: The Impact of the Highly Improbable, threw his weight behind the commodity trade earlier this month, announcing that his hedge fund, Universa Investments, planned on betting on massively higher prices.
But rising commodity prices -- indeed, all rising prices -- are a result of not only constricted supply, but of higher demand. As the US and the world as a whole prepare for a future devoid of cheap and easy credit, old expectations about economic growth must be tossed aside.
We're entering a transitional period, one in which economies in both developing and developed nations must readjust to the notion that debt isn't a sustainable vehicle for growth, and that true productivity and innovation must drive any increase in the standard of living. In the long run, this return to traditional capitalistic values will result in a rising tide that lifts all boats.
Recession-Weary Consumers Desperate for Fewer Choices
This post first appeared on Minyanville.
"Quality is a characteristic of thought and statement that is recognized by a non-thinking process. Because definitions are a product of rigid, formal thinking, quality cannot be defined."
- Robert Pirsig, Zen and the Art of Motorcycle Maintenance
Retailers, reacting to the ongoing structural shift away from excessive consumerism, are beginning to choose quality over quantity.
Finally.
This morning's Wall Street Journal highlights efforts by stores like Target (TGT), Wallgreens (WAG), and Wal-Mart (WMT) to reduce their product offerings, limit shelf clutter, and generally simplify the consumer's shopping experiences. Suppliers like ConAgra (CAG) and Clorox (CLX) are also trying to get ahead of the curve, and are reducing the variety of their offerings.
As shoppers become more selective, confronting a dizzying array of salad-dressing options inspires many to simply throw up their hands and go with a brand they know. As one customer told the Journal: "There are too many choices. I just went with Kraft (KFT), because I know Kraft."
This trend clearly favors dominant brands, since smaller, lesser-known varieties will be muscled out by firms able to spend millions on marketing. And while this may stifle innovation in the cutting-edge barbecue-sauce industry, stiffer competition ultimately weeds out the weak, thereby making room for real future innovation. As sales become concentrated inside big, often stodgy conglomerates, nimble upstarts have a chance to move in with new and improved products.
In eliminating superfluous brands, products, and package sizes, retailers are also slashing inventories -- a key part of rebalancing consumer demand with supply, and a necessary component of any sustainable economic recovery.
Wal-Mart, the world's largest retailer, isn't just slimming down its offerings. After analyzing sales patterns, the company discovered that, in market segments with growing sales -- flatscreen televisions, men's shaving cream, and garbage bags, for example -- increasing variety actually helped sales.
On the other hand, when consumers begin to shun certain products (toilet paper, mouthwash, and microwave popcorn, for example), fewer choices actually helped stem the decline.
And while it looks like Americans now prefer frequent shaving over the regular use of toilet paper, swapping variety for simplicity represents a healthy shift in priorities. Consumer spending, once directed towards glitzy status symbols (hey, even fancy barbecue sauce became a social marker), is now focusing on the useful and necessary.
This -- despite its grim implications for purveyors of the sleek and pointless -- is a good thing.
"Quality is a characteristic of thought and statement that is recognized by a non-thinking process. Because definitions are a product of rigid, formal thinking, quality cannot be defined."
- Robert Pirsig, Zen and the Art of Motorcycle Maintenance
Retailers, reacting to the ongoing structural shift away from excessive consumerism, are beginning to choose quality over quantity.
Finally.
This morning's Wall Street Journal highlights efforts by stores like Target (TGT), Wallgreens (WAG), and Wal-Mart (WMT) to reduce their product offerings, limit shelf clutter, and generally simplify the consumer's shopping experiences. Suppliers like ConAgra (CAG) and Clorox (CLX) are also trying to get ahead of the curve, and are reducing the variety of their offerings.
As shoppers become more selective, confronting a dizzying array of salad-dressing options inspires many to simply throw up their hands and go with a brand they know. As one customer told the Journal: "There are too many choices. I just went with Kraft (KFT), because I know Kraft."
This trend clearly favors dominant brands, since smaller, lesser-known varieties will be muscled out by firms able to spend millions on marketing. And while this may stifle innovation in the cutting-edge barbecue-sauce industry, stiffer competition ultimately weeds out the weak, thereby making room for real future innovation. As sales become concentrated inside big, often stodgy conglomerates, nimble upstarts have a chance to move in with new and improved products.
In eliminating superfluous brands, products, and package sizes, retailers are also slashing inventories -- a key part of rebalancing consumer demand with supply, and a necessary component of any sustainable economic recovery.
Wal-Mart, the world's largest retailer, isn't just slimming down its offerings. After analyzing sales patterns, the company discovered that, in market segments with growing sales -- flatscreen televisions, men's shaving cream, and garbage bags, for example -- increasing variety actually helped sales.
On the other hand, when consumers begin to shun certain products (toilet paper, mouthwash, and microwave popcorn, for example), fewer choices actually helped stem the decline.
And while it looks like Americans now prefer frequent shaving over the regular use of toilet paper, swapping variety for simplicity represents a healthy shift in priorities. Consumer spending, once directed towards glitzy status symbols (hey, even fancy barbecue sauce became a social marker), is now focusing on the useful and necessary.
This -- despite its grim implications for purveyors of the sleek and pointless -- is a good thing.
Keepin' It Real Estate: Just How Bad Are the New Appraisal Rules?
This post first appeared on Minyanville and Cirios Real Estate.
Appraisers just can't get it right.
During the housing boom, mortgage brokers, real-estate agents, and even borrowers sought out appraisals supporting the highest possible home price. Appraisers, fearful of losing business, inflated their valuation findings, which exacerbated the run-up in home prices.
Now, after nearly 4 years of home-price declines, appraisers are getting it wrong again -- but in the other direction.
On May 1 -- while the financial media focused on construing a blip up in housing data as signs of an imminent bottom -- little was made of new appraisal guidelines that went live and immediately began to eat away at the core of the nascent housing "recovery." To be sure, trade groups like the Mortgage Bankers Association and the National Association of Realtors (NAR) fought the revised rules, but to no avail.
Stemming from a lawsuit filed by New York Attorney General Andrew Cuomo alleging Washington Mutual (JPM) and First American Corp illegally conferred on the results of home appraisals with the goal of inflating prices, the new rules put up a Chinese wall between banks like Citigroup (C), Wells Fargo (WFC), Bank of America (BAC), and appraisers. The goal was to create an environment where appraisals would reflect an expert's unbiased assessment of a home's true value, rather than evaluations tailored to a lender's desire to make a loan.
The new rules affect loans guaranteed by Fannie Mae (FNM) and Freddie Mac (FRE), but since the 2 government-run mortgage giants effectively control the secondary mortgage market, they've become the defacto guidelines for the entire industry.
In order to separate lenders and appraisers, appraisal-management companies (AMCs), cropped up, offering banks access to a network of appraisers around the country. This makes the appraiser selection process random, preventing collusion. And while AMCs claim appraisers are selected using proprietary scoring algorithms that evaluate performance, the reality is that jobs are handed out on the basis of fastest turnaround time and lowest cost.
In short, we've traded bias for incompetence.
Readers of this column know that I have little, if anything good to say about the NAR -- which is not only the Realtors' trade organization, but a powerful Washington lobby. Nevertheless, earlier this week, when the NAR released data on existing home sales, their statement about appraisers' role in killing purchase transactions was dead on the mark:
"The increase in sales is less than expected because poor appraisals are stalling transactions. Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan. Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales."
Currently embroiled in this very scenario, my firm, Cirios Real Estate, is witnessing first-hand just how bad the new appraisal rules are.
Assessing a property's value in't rocket science, despite appraisers' claim that their extensive training and years of experience make them the only people qualified to determine home prices. All it takes is access to the right information, an understanding of what drives desirability, and a little pride in one's work.
That last criterion is perhaps the most difficult to find. Appraisers earn a flat fee for their services, giving them little incentive to provide the best analysis possible. Knowing they can now earn repeat business by turning around jobs in 48 hours and charging less than their competitors, there's little reason to go the extra mile to ensure appraisals take into consideration only the best information to come up with the best possible results.
Sure -- there are good appraisers out there with integrity that offer up great analysis. But as lower priced, lower quality work becomes the norm (thanks to the new appraisal guidelines), the best appraisers will seek greener pastures - as well they should.
Lawrence Yun, the NAR Chief Economist, finally got it right when he said, "Sometimes policy can lead to unintended consequences."
Appraisers just can't get it right.
During the housing boom, mortgage brokers, real-estate agents, and even borrowers sought out appraisals supporting the highest possible home price. Appraisers, fearful of losing business, inflated their valuation findings, which exacerbated the run-up in home prices.
Now, after nearly 4 years of home-price declines, appraisers are getting it wrong again -- but in the other direction.
On May 1 -- while the financial media focused on construing a blip up in housing data as signs of an imminent bottom -- little was made of new appraisal guidelines that went live and immediately began to eat away at the core of the nascent housing "recovery." To be sure, trade groups like the Mortgage Bankers Association and the National Association of Realtors (NAR) fought the revised rules, but to no avail.
Stemming from a lawsuit filed by New York Attorney General Andrew Cuomo alleging Washington Mutual (JPM) and First American Corp illegally conferred on the results of home appraisals with the goal of inflating prices, the new rules put up a Chinese wall between banks like Citigroup (C), Wells Fargo (WFC), Bank of America (BAC), and appraisers. The goal was to create an environment where appraisals would reflect an expert's unbiased assessment of a home's true value, rather than evaluations tailored to a lender's desire to make a loan.
The new rules affect loans guaranteed by Fannie Mae (FNM) and Freddie Mac (FRE), but since the 2 government-run mortgage giants effectively control the secondary mortgage market, they've become the defacto guidelines for the entire industry.
In order to separate lenders and appraisers, appraisal-management companies (AMCs), cropped up, offering banks access to a network of appraisers around the country. This makes the appraiser selection process random, preventing collusion. And while AMCs claim appraisers are selected using proprietary scoring algorithms that evaluate performance, the reality is that jobs are handed out on the basis of fastest turnaround time and lowest cost.
In short, we've traded bias for incompetence.
Readers of this column know that I have little, if anything good to say about the NAR -- which is not only the Realtors' trade organization, but a powerful Washington lobby. Nevertheless, earlier this week, when the NAR released data on existing home sales, their statement about appraisers' role in killing purchase transactions was dead on the mark:
"The increase in sales is less than expected because poor appraisals are stalling transactions. Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan. Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales."
Currently embroiled in this very scenario, my firm, Cirios Real Estate, is witnessing first-hand just how bad the new appraisal rules are.
Assessing a property's value in't rocket science, despite appraisers' claim that their extensive training and years of experience make them the only people qualified to determine home prices. All it takes is access to the right information, an understanding of what drives desirability, and a little pride in one's work.
That last criterion is perhaps the most difficult to find. Appraisers earn a flat fee for their services, giving them little incentive to provide the best analysis possible. Knowing they can now earn repeat business by turning around jobs in 48 hours and charging less than their competitors, there's little reason to go the extra mile to ensure appraisals take into consideration only the best information to come up with the best possible results.
Sure -- there are good appraisers out there with integrity that offer up great analysis. But as lower priced, lower quality work becomes the norm (thanks to the new appraisal guidelines), the best appraisers will seek greener pastures - as well they should.
Lawrence Yun, the NAR Chief Economist, finally got it right when he said, "Sometimes policy can lead to unintended consequences."
To Bernanke or Not to Bernanke
This post first appeared on Minyanville.
It's every pitcher's worst nightmare -- or possibly their fondest dream, if they're the sort of person who thrives under pressure -- to take the mound in the final inning of a tie game with the bases loaded and nobody out. It's an almost impossible situation -- a disaster you didn't create, but have been called upon to make right.
Such was the position Ben Bernanke, preeminent scholar of the Great Depression, found himself in when he took over at the Federal Reserve in February 2006. The US housing market was just beginning to show signs of deterioration, and decades of excessive debt and mispriced risk were about to explode into the biggest financial crisis since the 1930s.
Now, as the Fed finishes up its June monetary policy meeting, Bernanke will remain on Capitol Hill to face questions concerning his role in the crisis and whether he's the best candidate to lead the Fed into the future. With the chairman's term ending in January 2010, President Obama has 6 months to decide whether Bernanke's performance under extreme duress -- and the unprecedented measures he took to save the global financial system -- are worthy of another 4 years.
Bernanke is a polarizing figure -- indeed, he has been since he first came to office. Coming in as he did after almost 20 years of authoritarian rule under "the Maestro," Alan Greenspan, Bernanke sought to downplay the role of Fed chairman. Some hail him as a savior: Who better at the helm during an historic credit crisis than the economist who's arguably spent his entire academic career preparing for just such an assignment?
Bernanke's papers, his dissertation, and the speeches he's made over the past 3 decades read almost like a script for handling the type of maelstrom he's faced during the past 24 months. Supporters argue that Bernanke prepared himself well -- that he performed admirably under wildly difficult circumstances.
On the other side of the fence, Bernanke's seen as the latest in a series of public figures who, in the words of Minyanville's Todd Harrison, "bought the cancer and sold the car crash."
In other words, Bernanke's chosen to kick the can just far enough down the road to avoid disaster -- but ignoring the inevitable day of reckoning. In expanding the Fed's balance sheet by $2 trillion -- and ballooning its obligations by trillions more in off-balance-sheet liabilities -- Bernanke has risked a complete debasement of the dollar and flung open the door to the dangers of hyperinflation.
Critics also argue that Bernanke overreached his authority when he strong-armed Bank of America (BAC) CEO Ken Lewis into completing the purchase of Merrill Lynch at the end of 2008. The chairman's role in pushing Bear Stearns into the waiting arms of JPMorgan Chase (JPM), guaranteeing hundreds of billions of dollars of Citigroup's (C) toxic assets, bailing out American International Group (AIG), and taking over mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), will all be up for debate.
To be sure, Bernanke has ben busy these past 3-and-a-half years.
Ultimately, President Obama must decide not just whether Bernanke is the right man for the job, but whether replacing him is worth the economic -- not to mention political -- cost. According to Bloomberg, the last 4 US presidents all retained the Fed chairmen from their first terms through their second. Bernanke's 2 most likely replacements, should he not be reappointed (current White House economic advisor Larry Summers and San Francisco Federal Reserve Bank president Janet Yellen) are undoubtedly well aware of this disheartening fact.
The end of Bernanke's term might seem like it's just around the corner. But if we've learned anything from this crisis, it's that 6 months is more than enough time for the world to change in a big way.
It's every pitcher's worst nightmare -- or possibly their fondest dream, if they're the sort of person who thrives under pressure -- to take the mound in the final inning of a tie game with the bases loaded and nobody out. It's an almost impossible situation -- a disaster you didn't create, but have been called upon to make right.
Such was the position Ben Bernanke, preeminent scholar of the Great Depression, found himself in when he took over at the Federal Reserve in February 2006. The US housing market was just beginning to show signs of deterioration, and decades of excessive debt and mispriced risk were about to explode into the biggest financial crisis since the 1930s.
Now, as the Fed finishes up its June monetary policy meeting, Bernanke will remain on Capitol Hill to face questions concerning his role in the crisis and whether he's the best candidate to lead the Fed into the future. With the chairman's term ending in January 2010, President Obama has 6 months to decide whether Bernanke's performance under extreme duress -- and the unprecedented measures he took to save the global financial system -- are worthy of another 4 years.
Bernanke is a polarizing figure -- indeed, he has been since he first came to office. Coming in as he did after almost 20 years of authoritarian rule under "the Maestro," Alan Greenspan, Bernanke sought to downplay the role of Fed chairman. Some hail him as a savior: Who better at the helm during an historic credit crisis than the economist who's arguably spent his entire academic career preparing for just such an assignment?
Bernanke's papers, his dissertation, and the speeches he's made over the past 3 decades read almost like a script for handling the type of maelstrom he's faced during the past 24 months. Supporters argue that Bernanke prepared himself well -- that he performed admirably under wildly difficult circumstances.
On the other side of the fence, Bernanke's seen as the latest in a series of public figures who, in the words of Minyanville's Todd Harrison, "bought the cancer and sold the car crash."
In other words, Bernanke's chosen to kick the can just far enough down the road to avoid disaster -- but ignoring the inevitable day of reckoning. In expanding the Fed's balance sheet by $2 trillion -- and ballooning its obligations by trillions more in off-balance-sheet liabilities -- Bernanke has risked a complete debasement of the dollar and flung open the door to the dangers of hyperinflation.
Critics also argue that Bernanke overreached his authority when he strong-armed Bank of America (BAC) CEO Ken Lewis into completing the purchase of Merrill Lynch at the end of 2008. The chairman's role in pushing Bear Stearns into the waiting arms of JPMorgan Chase (JPM), guaranteeing hundreds of billions of dollars of Citigroup's (C) toxic assets, bailing out American International Group (AIG), and taking over mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), will all be up for debate.
To be sure, Bernanke has ben busy these past 3-and-a-half years.
Ultimately, President Obama must decide not just whether Bernanke is the right man for the job, but whether replacing him is worth the economic -- not to mention political -- cost. According to Bloomberg, the last 4 US presidents all retained the Fed chairmen from their first terms through their second. Bernanke's 2 most likely replacements, should he not be reappointed (current White House economic advisor Larry Summers and San Francisco Federal Reserve Bank president Janet Yellen) are undoubtedly well aware of this disheartening fact.
The end of Bernanke's term might seem like it's just around the corner. But if we've learned anything from this crisis, it's that 6 months is more than enough time for the world to change in a big way.
Congress Still Working Against Housing Recovery
This post first appeared on Minyanville and Cirios Real Estate.
Banks like Washington Mutual (JPM), Wachovia (WFC), and Countrywide (BAC) -- along with Fannie Mae (FNM) and Freddie Mac (FRE) -- once used mortgage underwriting guidelines that were thin at best, nonexistent at worst.
Congress, in turn, pushed for leniency for low-income borrowers and for those with spotty credit, assuring their constituencies that the American dream of home ownership would be available to all.
As a result, the housing bubble expanded -- and then it burst.
But it would appear that our elected officials have yet to learn their lesson: According to the Wall Street Journal, representatives Barney Frank of Massachusetts and Anthony Weiner of New York are urging Fannie and Freddie to loosen up qualification requirements even more.
You see, Fannie and Freddie recently limited their exposure to condominiums where a high percentage of the owners were past due on their mortgages, or where many units remained unsold. Frank and Weiner claim the tighter rules are limiting condo sales, even though prices have come down to generate material buyer interest.
To wit, condos just off the Las Vegas strip can be snatched up for less than $50,000 apiece, and downtown San Diego remains surfeited with inventory, even though prices have fallen more than 50% since the market's peak, according to MDA Dataquick.
The law of supply and demand is a beautiful thing.
A quick tour of VRBO, a vacation rental website, illustrates why snapping up Vegas condos on the cheap may not be such a great idea. The monthly loan payments may be just a few hundred dollars, but surplus supply means rents have tumbled and vacancies have soared. In coastal cities like Miami and San Diego, massive overbuilding of condo complexes will depress local real estate markets for years to come. Metrostudy, a market research firm, estimates that Miami has a more than 40-month supply of condos.
Falling prices, which can provide opportunities for savvy investors, are part of a healthy correction process. To the extent the government continues to prop up prices by transferring risk to the taxpayer, these opportunistic investors will stay on the sidelines, thereby forestalling any eventual recovery.
Banks like Washington Mutual (JPM), Wachovia (WFC), and Countrywide (BAC) -- along with Fannie Mae (FNM) and Freddie Mac (FRE) -- once used mortgage underwriting guidelines that were thin at best, nonexistent at worst.
Congress, in turn, pushed for leniency for low-income borrowers and for those with spotty credit, assuring their constituencies that the American dream of home ownership would be available to all.
As a result, the housing bubble expanded -- and then it burst.
But it would appear that our elected officials have yet to learn their lesson: According to the Wall Street Journal, representatives Barney Frank of Massachusetts and Anthony Weiner of New York are urging Fannie and Freddie to loosen up qualification requirements even more.
You see, Fannie and Freddie recently limited their exposure to condominiums where a high percentage of the owners were past due on their mortgages, or where many units remained unsold. Frank and Weiner claim the tighter rules are limiting condo sales, even though prices have come down to generate material buyer interest.
To wit, condos just off the Las Vegas strip can be snatched up for less than $50,000 apiece, and downtown San Diego remains surfeited with inventory, even though prices have fallen more than 50% since the market's peak, according to MDA Dataquick.
The law of supply and demand is a beautiful thing.
A quick tour of VRBO, a vacation rental website, illustrates why snapping up Vegas condos on the cheap may not be such a great idea. The monthly loan payments may be just a few hundred dollars, but surplus supply means rents have tumbled and vacancies have soared. In coastal cities like Miami and San Diego, massive overbuilding of condo complexes will depress local real estate markets for years to come. Metrostudy, a market research firm, estimates that Miami has a more than 40-month supply of condos.
Falling prices, which can provide opportunities for savvy investors, are part of a healthy correction process. To the extent the government continues to prop up prices by transferring risk to the taxpayer, these opportunistic investors will stay on the sidelines, thereby forestalling any eventual recovery.
Friday, June 19, 2009
Homebuilders Add New Wing to Housing Crisis
This post first appeared on Minyanville.
It appears even the embattled homebuilding industry is getting rosy-eyed, finding enough "green shoots" of economic recovery to stick their shovels back into the ground.
In May, US builders broke ground on 17.2% more projects than in April, far exceeding analysts' expectations. Work on new apartment buildings leaped, while single-family starts continued what's now become a 3-month rally.
Although the aggregate figure is still well off last year's rate, economists are breathing a sigh of relief that the worst of the housing market swoon could be behind us. Skeptics, however, are quick to point out that any recovery could be muted, as high levels of inventory, a weak labor market, and mortgage rates that just won't seem to stay down, could forestall any recovery.
As Kenneth Simonson, chief economist for the Associated General Contractors of America, told the New York Times, "There's a real possibility [housing starts] will just stall at a low level. If the recent jump in interest rates is sustained, that could choke off buyer enthusiasm for new homes."
For nearly 4 years, the business of building and selling homes has been, in a word, lousy. As home prices tumbled, the likes of KB Home (KBH), Toll Brothers (TOL) and Lennar (LEN) slashed prices, offered generous incentives, and otherwise bent over backwards to unload inventory. Building all but stalled, jacking up unemployment -- particularly in exurbs and sprawling communities whose economies were largely based on the construction trade. An industry that grew fat during the boom was forced to slim down, lay off workers, and hibernate, while the market's violent correction ran its course.
And although a host of small builders have closed up shop, to date, no major US homebuilder has gone under. Consolidation, too, has been scant. The only merger of note was Pulte Home's (PHM) purchase of Centex (CTX), a marriage that, once consummated, will create the country's largest builder.
The outlook for those builders that remain -- builders that are bleeding cash while pleading with creditors to extend loan terms and waive busted covenants -- is bleak. Last week, the National Association of Homebuilders/Wells Fargo Builder Sentiment Survey ticked down after rising far more than expected the month before. Higher interest rates are mostly to blame, as the specter of bigger monthly payments is quelling optimism that the housing market is on the mend.
The reality -- an unfortunate one for builders and their employees -- is that for the foreseeable future, their services aren't needed in this country; we have too many homes as it is. Demand for new ones remains weak as communities just a decade old slip into disrepair, and shoddy craftsmanship and half-finished developments scare off prospective buyers.
Builders are also fouling up the nascent housing "recovery" by turning recently completed condominium units into rentals. Even as demand wanes thanks to job losses and tighter budgets, rental inventory is rising. Rents, as a result, are falling. This is great news for tenants, eager to jump on affordable apartments, but bad news for landlords and even homeowners.
One of the most popular arguments posited by housing-market-bottom callers is that in some of the hardest hit areas, prices have gotten so low that investors can scoop up cheap homes and rent them for an attractive return. What they neglect to mention, however, is that this sort of market-clearing activity also increases the supply of rental units, further pressuring home prices. Even in the worst, most washed-out areas, a bottom remains elusive.
It appears even the embattled homebuilding industry is getting rosy-eyed, finding enough "green shoots" of economic recovery to stick their shovels back into the ground.
In May, US builders broke ground on 17.2% more projects than in April, far exceeding analysts' expectations. Work on new apartment buildings leaped, while single-family starts continued what's now become a 3-month rally.
Although the aggregate figure is still well off last year's rate, economists are breathing a sigh of relief that the worst of the housing market swoon could be behind us. Skeptics, however, are quick to point out that any recovery could be muted, as high levels of inventory, a weak labor market, and mortgage rates that just won't seem to stay down, could forestall any recovery.
As Kenneth Simonson, chief economist for the Associated General Contractors of America, told the New York Times, "There's a real possibility [housing starts] will just stall at a low level. If the recent jump in interest rates is sustained, that could choke off buyer enthusiasm for new homes."
For nearly 4 years, the business of building and selling homes has been, in a word, lousy. As home prices tumbled, the likes of KB Home (KBH), Toll Brothers (TOL) and Lennar (LEN) slashed prices, offered generous incentives, and otherwise bent over backwards to unload inventory. Building all but stalled, jacking up unemployment -- particularly in exurbs and sprawling communities whose economies were largely based on the construction trade. An industry that grew fat during the boom was forced to slim down, lay off workers, and hibernate, while the market's violent correction ran its course.
And although a host of small builders have closed up shop, to date, no major US homebuilder has gone under. Consolidation, too, has been scant. The only merger of note was Pulte Home's (PHM) purchase of Centex (CTX), a marriage that, once consummated, will create the country's largest builder.
The outlook for those builders that remain -- builders that are bleeding cash while pleading with creditors to extend loan terms and waive busted covenants -- is bleak. Last week, the National Association of Homebuilders/Wells Fargo Builder Sentiment Survey ticked down after rising far more than expected the month before. Higher interest rates are mostly to blame, as the specter of bigger monthly payments is quelling optimism that the housing market is on the mend.
The reality -- an unfortunate one for builders and their employees -- is that for the foreseeable future, their services aren't needed in this country; we have too many homes as it is. Demand for new ones remains weak as communities just a decade old slip into disrepair, and shoddy craftsmanship and half-finished developments scare off prospective buyers.
Builders are also fouling up the nascent housing "recovery" by turning recently completed condominium units into rentals. Even as demand wanes thanks to job losses and tighter budgets, rental inventory is rising. Rents, as a result, are falling. This is great news for tenants, eager to jump on affordable apartments, but bad news for landlords and even homeowners.
One of the most popular arguments posited by housing-market-bottom callers is that in some of the hardest hit areas, prices have gotten so low that investors can scoop up cheap homes and rent them for an attractive return. What they neglect to mention, however, is that this sort of market-clearing activity also increases the supply of rental units, further pressuring home prices. Even in the worst, most washed-out areas, a bottom remains elusive.
Credit-Card Firms to Borrowers: Let's Make a Deal
This post first appeared on Minyanville.
Faced with the prospect of recording a goose egg where a credit account once was, lenders are offering to partially forgive delinquent borrowers' past due balances. According to the New York Times, the practice is gaining currency in the downturn.
When times were good, big credit-card companies like Citigroup (C), American Express (AXP), and Capital One (COF) simply hiked fees, collected interest, then sold defaulted debt to the highest bidder. Now that the value of past-due accounts has tumbled -- and new legislation has restricted fee-gouging -- issuers are eager to collect something rather than nothing.
Increasingly, lender representatives are offering to cut deals with late payers, wiping out as much as half a borrower's outstanding balance -- provided the borrower agrees to pay the remaining amount in full.
That is, of course, assuming that the borrower has shown a tendency to default in the past, thereby creating a perverse incentive for those struggling to get by to finally throw in the towel.
While the new trend may sound like a godsend for the vastly over-indebted American consumer -- we now owe credit card companies almost $1 trillion -- it's evidence of a more widespread -- indeed global -- trend: The repudiation of debt.
As Minyanville's Kevin Depew noted last month:
"Payment defaults and delays in Germany more than doubled in the 6 months ending March 31, compared with the prior year. Bottom line: Debt cancellation is increasing, and spreading."
Faced with the prospect of recording a goose egg where a credit account once was, lenders are offering to partially forgive delinquent borrowers' past due balances. According to the New York Times, the practice is gaining currency in the downturn.
When times were good, big credit-card companies like Citigroup (C), American Express (AXP), and Capital One (COF) simply hiked fees, collected interest, then sold defaulted debt to the highest bidder. Now that the value of past-due accounts has tumbled -- and new legislation has restricted fee-gouging -- issuers are eager to collect something rather than nothing.
Increasingly, lender representatives are offering to cut deals with late payers, wiping out as much as half a borrower's outstanding balance -- provided the borrower agrees to pay the remaining amount in full.
That is, of course, assuming that the borrower has shown a tendency to default in the past, thereby creating a perverse incentive for those struggling to get by to finally throw in the towel.
While the new trend may sound like a godsend for the vastly over-indebted American consumer -- we now owe credit card companies almost $1 trillion -- it's evidence of a more widespread -- indeed global -- trend: The repudiation of debt.
As Minyanville's Kevin Depew noted last month:
"Payment defaults and delays in Germany more than doubled in the 6 months ending March 31, compared with the prior year. Bottom line: Debt cancellation is increasing, and spreading."
Companies Compete for Government Cash, Not Customers
This post first appeared on Minyanville and Cirios Real Estate.
It's the government, stupid.
As Washington expands its role in managing the day-to-day operations of American business, companies are increasingly turning their strategic focus to tapping federal cash and lending programs. And despite the strings often attached to government money, many are finding that Uncle Sam is the only game in town during these troubled economic times.
This morning's Wall Street Journal highlights just how essential lawmakers and regulators have become in America's new breed of government-directed capitalism. Hunting retailers, farm-equipment manufacturers, and, of course, banks (Bank of America (BAC), Citigroup (C), Wells Fargo (WFC)) and insurance companies are all sidling up to the government trough.
And even as public opinion slowly turns against bureaucrats' massive intervention into the private economy, Washington insiders are raking in piles of cash. According to the Journal, spending on lobbyists in 2009 could reach $3.3 billion, equal to the total during the 2008 election year. And for good reason: Without representation in Washington, companies just can't compete.
After the financing arm of Deere & Co. (DE) tapped the FDIC to guarantee $2 billion in debt last December, the Equipment Leasing and Finance Association, a trade group, leapt into action to protect other members. Deere rivals, including Caterpillar (CAT) and a host of smaller firms, weren't eligible for government-supported debt issuances, so the group's president asked the Federal Reserve to expand the Troubled Asset Lending Facility to include sales of farm equipment and other machinery.
The Fed acquiesced; the agricultural industry must also be too big to fail.
But not every company has the ear of the Washington power brokers, leaving those forced to go it alone at a distinct disadvantage. Credit is already precious for small businesses, and what little they do have is far more expensive than that of their larger, better-connected rivals. This doesn't bode well for an economy struggling to drag itself out of recession, since small businesses account for the lion's share of job growth on the other side of a downturn.
The eventual recovery, which a growing number of optimists predict is just around the corner, could yield a bitter pill for corners of the economy still heavily dependent on government handouts. Although lawmakers vow to support systemically vital companies and industries for as long as needed, at some point Washington must try to take back what it has so generously given.
Witness the market for home loans, where government purchases of mortgage-backed securities have helped keep rates abnormally low. Even without the Fed dumping its Fannie Mae (FNM) and Freddie Mac (FRE) bond portfolio onto the market, rates have risen sharply in the past month, threatening to forestall the nascent "recovery" in the housing market.
Were the Fed to pull back its support of the housing market, rates would skyrocket. This would be politically -- not to mention economically -- unacceptable.
And while the ideological debate rages over whether Washington bureaucrats are becoming too entrenched in the American economy, businessmen and -women still must get up each morning, head to work, and try to stay above water. And -- insofar as lobbying for government money outstrips developing new technologies or innovating, producing and otherwise generating economic output -- the economy suffers.
And green shoots or no, this economy already has enough cards stacked against it.
It's the government, stupid.
As Washington expands its role in managing the day-to-day operations of American business, companies are increasingly turning their strategic focus to tapping federal cash and lending programs. And despite the strings often attached to government money, many are finding that Uncle Sam is the only game in town during these troubled economic times.
This morning's Wall Street Journal highlights just how essential lawmakers and regulators have become in America's new breed of government-directed capitalism. Hunting retailers, farm-equipment manufacturers, and, of course, banks (Bank of America (BAC), Citigroup (C), Wells Fargo (WFC)) and insurance companies are all sidling up to the government trough.
And even as public opinion slowly turns against bureaucrats' massive intervention into the private economy, Washington insiders are raking in piles of cash. According to the Journal, spending on lobbyists in 2009 could reach $3.3 billion, equal to the total during the 2008 election year. And for good reason: Without representation in Washington, companies just can't compete.
After the financing arm of Deere & Co. (DE) tapped the FDIC to guarantee $2 billion in debt last December, the Equipment Leasing and Finance Association, a trade group, leapt into action to protect other members. Deere rivals, including Caterpillar (CAT) and a host of smaller firms, weren't eligible for government-supported debt issuances, so the group's president asked the Federal Reserve to expand the Troubled Asset Lending Facility to include sales of farm equipment and other machinery.
The Fed acquiesced; the agricultural industry must also be too big to fail.
But not every company has the ear of the Washington power brokers, leaving those forced to go it alone at a distinct disadvantage. Credit is already precious for small businesses, and what little they do have is far more expensive than that of their larger, better-connected rivals. This doesn't bode well for an economy struggling to drag itself out of recession, since small businesses account for the lion's share of job growth on the other side of a downturn.
The eventual recovery, which a growing number of optimists predict is just around the corner, could yield a bitter pill for corners of the economy still heavily dependent on government handouts. Although lawmakers vow to support systemically vital companies and industries for as long as needed, at some point Washington must try to take back what it has so generously given.
Witness the market for home loans, where government purchases of mortgage-backed securities have helped keep rates abnormally low. Even without the Fed dumping its Fannie Mae (FNM) and Freddie Mac (FRE) bond portfolio onto the market, rates have risen sharply in the past month, threatening to forestall the nascent "recovery" in the housing market.
Were the Fed to pull back its support of the housing market, rates would skyrocket. This would be politically -- not to mention economically -- unacceptable.
And while the ideological debate rages over whether Washington bureaucrats are becoming too entrenched in the American economy, businessmen and -women still must get up each morning, head to work, and try to stay above water. And -- insofar as lobbying for government money outstrips developing new technologies or innovating, producing and otherwise generating economic output -- the economy suffers.
And green shoots or no, this economy already has enough cards stacked against it.
Keepin' It Real Estate: Where Have All the Houses Gone?
This post first appeared on Minyanville and Cirios Real Estate.
Where have all the flowers gone, long time passing?
Where have all the flowers gone, long time ago?
When will they ever learn, when will they ever learn?
-Pete Seeger
There's an odd refrain cropping up in some of the nation's most troubled housing markets -- those where real estate professionals can't help but raise their pom-poms in unison and declare this "the best buying opportunity, maybe ever."
Here's how it goes: Where have all the houses gone?
For months, buyers have been told the time to buy is now, what with interest rates at all-time lows, prices down in some markets more than 50%, and generous tax credits for first-time home buyers. These factors -- along with aggressive advertising by the National Association of Realtors -- have driven up demand, even as prices have continued to fall. Supply, meanwhile, has been severely limited for the past 6 months by foreclosure moratoria that were enacted at the end of 2008.
And as tends to happen when demand outweighs supply, many homes have been selling above their list prices as multiple-offer scenarios led agents around the country to wax lyrical about the boom days of yesteryear.
This cursory analysis of the nation's housing market -- while sufficient for the financial punditry complex, which is eager to call a bottom (again), and certain real-estate agents looking to make a quick sale -- is woefully inadequate for any buyer interested in buying an actual home rather than a data point.
Take these 2 California markets for example -- a pair that couldn't be more different if one were located on the moon:
Bakersfield, a Central Valley farming and oil town best known for jockeying with Fresno for the right to be called "the armpit of California," was besieged by the housing-market crash early on.
Subprime lending flourished here during the boom, as home builders like Lennar (LEN), Centex (CTX), and DR Horton (DHI) showered once-quaint communities with sprawling suburban developments. The town made national press for one of the worst real estate markets in the country -- prices have fallen an astounding 48% since just last year.
Where have all the flowers gone, long time passing?
Where have all the flowers gone, long time ago?
When will they ever learn, when will they ever learn?
-Pete Seeger
There's an odd refrain cropping up in some of the nation's most troubled housing markets -- those where real estate professionals can't help but raise their pom-poms in unison and declare this "the best buying opportunity, maybe ever."
Here's how it goes: Where have all the houses gone?
For months, buyers have been told the time to buy is now, what with interest rates at all-time lows, prices down in some markets more than 50%, and generous tax credits for first-time home buyers. These factors -- along with aggressive advertising by the National Association of Realtors -- have driven up demand, even as prices have continued to fall. Supply, meanwhile, has been severely limited for the past 6 months by foreclosure moratoria that were enacted at the end of 2008.
And as tends to happen when demand outweighs supply, many homes have been selling above their list prices as multiple-offer scenarios led agents around the country to wax lyrical about the boom days of yesteryear.
This cursory analysis of the nation's housing market -- while sufficient for the financial punditry complex, which is eager to call a bottom (again), and certain real-estate agents looking to make a quick sale -- is woefully inadequate for any buyer interested in buying an actual home rather than a data point.
Take these 2 California markets for example -- a pair that couldn't be more different if one were located on the moon:
Bakersfield, a Central Valley farming and oil town best known for jockeying with Fresno for the right to be called "the armpit of California," was besieged by the housing-market crash early on.
Subprime lending flourished here during the boom, as home builders like Lennar (LEN), Centex (CTX), and DR Horton (DHI) showered once-quaint communities with sprawling suburban developments. The town made national press for one of the worst real estate markets in the country -- prices have fallen an astounding 48% since just last year.
http://ciriosvaluations.com/2009/06/09/homebuyers-crash-into-appraisal-roadblock/
This post first appeared on Minyanville and Cirios Real Estate.
In early 2006, when subprime powerhouse New Century went bust, vulture investors began to salivate at the opportunities a collapsing mortgage market would offer up like manna from the trading gods. They started raising money. And lots of it.
Billions were poured into so-called "mortgage opportunity funds," which planned to pick through the wreckage of the once-high-flying housing market. Some investors aimed to focus on mortgage-backed securities, hoping to buy in at pennies on the dollar so just a few bond payments would reap sizable returns. Others, however, delved into the realm of whole loans, buying troubled mortgages from floundering banks.
As noted in the Wall Street Journal this morning, an investment strategy that seemed like a slam dunk on paper -- buying distressed mortgages on the cheap, and working out equitable arrangements with borrowers -- has proven extremely difficult to execute.
The prevailing wisdom was that, as delinquencies rose, and banks amassed a seemingly limitless portfolio of troubled loans, the likes of JP Morgan Chase (JPM), Bank of America (BAC) and Citigroup (C) would be forced to unload assets at firesale prices. Because they were buying at super-low prices, investors expected to have the necessary cushion to forgive principal, lower interest rates, or otherwise get borrowers back on track. They would, of course, earn a hefty profit for the effort.
But the housing market, which tumbled further and faster than all but the most pessimistic experts thought possible, had other plans.
Throughout 2007, any player that dipped a toe into the market lost a foot. Property value declines accelerated, securities prices tumbled, and economic conditions continued to deteriorate. Sellers, hoping for a rebound, were reluctant to accept lowball prices. Few trades were executed, and the lack of liquidity drove the market to new lows.
Then, in 2008, as delinquencies began to spread from the subprime to the prime market, home prices continued to slide, and it became clear there would be no easy fix to the housing market's woes, big banks recognized their need to raise capital by selling assets.
The market for distressed loans began to flourish as liquidity entered the market: Sellers accepted painfully low prices, and investors started deploying more capital. Prices for pools of mortgages in various stages of default began to stabilize, typically around $.50-$.60 on the dollar.
In early 2006, when subprime powerhouse New Century went bust, vulture investors began to salivate at the opportunities a collapsing mortgage market would offer up like manna from the trading gods. They started raising money. And lots of it.
Billions were poured into so-called "mortgage opportunity funds," which planned to pick through the wreckage of the once-high-flying housing market. Some investors aimed to focus on mortgage-backed securities, hoping to buy in at pennies on the dollar so just a few bond payments would reap sizable returns. Others, however, delved into the realm of whole loans, buying troubled mortgages from floundering banks.
As noted in the Wall Street Journal this morning, an investment strategy that seemed like a slam dunk on paper -- buying distressed mortgages on the cheap, and working out equitable arrangements with borrowers -- has proven extremely difficult to execute.
The prevailing wisdom was that, as delinquencies rose, and banks amassed a seemingly limitless portfolio of troubled loans, the likes of JP Morgan Chase (JPM), Bank of America (BAC) and Citigroup (C) would be forced to unload assets at firesale prices. Because they were buying at super-low prices, investors expected to have the necessary cushion to forgive principal, lower interest rates, or otherwise get borrowers back on track. They would, of course, earn a hefty profit for the effort.
But the housing market, which tumbled further and faster than all but the most pessimistic experts thought possible, had other plans.
Throughout 2007, any player that dipped a toe into the market lost a foot. Property value declines accelerated, securities prices tumbled, and economic conditions continued to deteriorate. Sellers, hoping for a rebound, were reluctant to accept lowball prices. Few trades were executed, and the lack of liquidity drove the market to new lows.
Then, in 2008, as delinquencies began to spread from the subprime to the prime market, home prices continued to slide, and it became clear there would be no easy fix to the housing market's woes, big banks recognized their need to raise capital by selling assets.
The market for distressed loans began to flourish as liquidity entered the market: Sellers accepted painfully low prices, and investors started deploying more capital. Prices for pools of mortgages in various stages of default began to stabilize, typically around $.50-$.60 on the dollar.
Homebuyers Crash Into Appraisal Roadblock
This post first appeared on Minyanville and Cirios Real Estate.
Mortgage guidelines have become increasingly strict -- not to mention regimented -- as the private secondary-mortgage market has all but disappeared in the past 24 months. But according to the Wall Street Journal, appraisals are increasingly becoming one of the biggest hurdles for new purchase and refinance transactions.
In the wake of the recent collapse in home prices, appraisers have come under fire for bowing to lender demands during the boom, offering up property values more aligned with lenders' wishes than with reality. In 2007, the state of New York sued Washington Mutual -- now owned by JPMorgan (JPM) -- for colluding with a subsidiary of First American Corporation to overinflate home values.
Collusion between appraisers and mortgage brokers, real-estate agents, banks, and borrowers helped fuel runaway price appreciation. In response, Fannie Mae (FNM) and Freddie Mac (FRE) -- the 2 government-owned giants that control around two-thirds of the mortgage market -- issued new guidelines dictating how lenders can select and evaluate appraisals. The new policies went into effect May 1.
To help facilitate the new, tighter rules, lenders are using appraisal management companies, or AMCs, which employ networks of appraisers around the country to provide what purport to be unbiased value analysis. All this, of course, comes at a cost which is ultimately borne by borrowers.
And, in what could be considered ironic if it weren't so repellent, appraisers are crying foul.
This from a group whose moral backbone during the housing boom most closely resembled that of a jellyfish - one seemingly incapable of preventing its members from being wooed by banks into committing fraud.
An appraisal is simply one person's opinion of a home's value on a given day. And although that person is licensed to provide such an opinion, the very nature of an appraisal renders its usefulness as a true risk management tool questionable at best.
The growing use of AMCs, opponents argue, reduces appraisal quality even as it increases costs. Appraisers are selected based on proprietary quality scoring mechanisms employed by each AMC, which may or may not be a good measure of reliability. And since AMCs take on average a 40% cut on the total appraisal fees and lenders demand quick turnaround, appraisers are working for less on a tighter timeline.
Sure, fraud may be reduced, but incompetence could more than make up for that as AMCs scramble to employ barely capable appraisers in order to ensure complete geographic coverage for their clients.
The real losers in all this -- as is the case when poorly conceived regulation is aimed at making up for past mistakes without proper consider for the root cause of those mistakes -- are homeowners, who must now pay more for a property valuation mechanism that isn't likely to be much better than the old one.
Mortgage guidelines have become increasingly strict -- not to mention regimented -- as the private secondary-mortgage market has all but disappeared in the past 24 months. But according to the Wall Street Journal, appraisals are increasingly becoming one of the biggest hurdles for new purchase and refinance transactions.
In the wake of the recent collapse in home prices, appraisers have come under fire for bowing to lender demands during the boom, offering up property values more aligned with lenders' wishes than with reality. In 2007, the state of New York sued Washington Mutual -- now owned by JPMorgan (JPM) -- for colluding with a subsidiary of First American Corporation to overinflate home values.
Collusion between appraisers and mortgage brokers, real-estate agents, banks, and borrowers helped fuel runaway price appreciation. In response, Fannie Mae (FNM) and Freddie Mac (FRE) -- the 2 government-owned giants that control around two-thirds of the mortgage market -- issued new guidelines dictating how lenders can select and evaluate appraisals. The new policies went into effect May 1.
To help facilitate the new, tighter rules, lenders are using appraisal management companies, or AMCs, which employ networks of appraisers around the country to provide what purport to be unbiased value analysis. All this, of course, comes at a cost which is ultimately borne by borrowers.
And, in what could be considered ironic if it weren't so repellent, appraisers are crying foul.
This from a group whose moral backbone during the housing boom most closely resembled that of a jellyfish - one seemingly incapable of preventing its members from being wooed by banks into committing fraud.
An appraisal is simply one person's opinion of a home's value on a given day. And although that person is licensed to provide such an opinion, the very nature of an appraisal renders its usefulness as a true risk management tool questionable at best.
The growing use of AMCs, opponents argue, reduces appraisal quality even as it increases costs. Appraisers are selected based on proprietary quality scoring mechanisms employed by each AMC, which may or may not be a good measure of reliability. And since AMCs take on average a 40% cut on the total appraisal fees and lenders demand quick turnaround, appraisers are working for less on a tighter timeline.
Sure, fraud may be reduced, but incompetence could more than make up for that as AMCs scramble to employ barely capable appraisers in order to ensure complete geographic coverage for their clients.
The real losers in all this -- as is the case when poorly conceived regulation is aimed at making up for past mistakes without proper consider for the root cause of those mistakes -- are homeowners, who must now pay more for a property valuation mechanism that isn't likely to be much better than the old one.
Airline Profits Hit Turbulence
This post first appeared on Minyanville.
Airlines just can't catch a break.
Last summer, as fuel costs rose skyward, US carriers scrambled to dream up new fees and hidden charges to try to stay afloat. A few -- like Aloha, ATA, and Frontier -- didn't make it, and a new wave of bankruptcies slammed the industry.
Then, as crude-oil prices eased earlier this year -- and airlines very quietly left baggage, food and other junk fees in place -- many hoped the industry would soon soar back to profitability. But the deepening global recession, steadily rising oil prices, and the swine flu "epidemic" may have grounded their nascent recovery.
According to Bloomberg, the International Air Transport Association, or IATA, a trade group, doubled its loss estimates for the world's biggest airlines. After forecasting a total loss for the industry of around $4.7 billion as recently as March, the group now expects losses to top $9 billion in 2009. In fact, North American carriers could blow through as much as $1 billion.
And the depression in demand isn't just coming from fewer vacationers -- or from frightened international travelers forgoing those Mexican vacations. Business customers are also leaving expensive business-class and first-class seats in droves, opting to economize. Cargo demand, the IATA says, could tumble 17% this year as less "stuff" is sent around the globe.
Ticket price competition is stiffer than ever, despite drastic cuts in such perks as bringing along luggage on that 3-week vacation -- as well as on meals (while we appreciate that Continental (CAL) is the last US airline to give out more than a 3-pretzel munchie mix, its week-old cheeseburgers entombed in plastic can hardly be called a "meal"). Online travel sites like Orbitz (OWW), Travelocity and Kayak keep airlines honest, rewarding travelers who take the time to seek out the lowest fares.
Air travel, now that frills have been all but removed from the flying experience, has been commoditized. Differences between airlines are barely perceptible, with the notable exception of upstarts like JetBlue (JBLU) and Virgin America, which offer travelers an alternative to the truly banal experience of flying American (AMR), or the feeling of being herded like cattle courtesy of Southwest (LUV).
While the industry struggles to realign partnerships, cut costs and lobby governments for more subsidies, major carriers would be well to learn from those few intrepid entrepreneurs seeking out opportunity amidst the storm. As Virgin Group founder and president Sir Richard Branson, said when he convinced investors to pony up more than $300 million to launch the company in early 2008, "We're going to shake up the market."
Indeed. Let's hope he succeeds.
Airlines just can't catch a break.
Last summer, as fuel costs rose skyward, US carriers scrambled to dream up new fees and hidden charges to try to stay afloat. A few -- like Aloha, ATA, and Frontier -- didn't make it, and a new wave of bankruptcies slammed the industry.
Then, as crude-oil prices eased earlier this year -- and airlines very quietly left baggage, food and other junk fees in place -- many hoped the industry would soon soar back to profitability. But the deepening global recession, steadily rising oil prices, and the swine flu "epidemic" may have grounded their nascent recovery.
According to Bloomberg, the International Air Transport Association, or IATA, a trade group, doubled its loss estimates for the world's biggest airlines. After forecasting a total loss for the industry of around $4.7 billion as recently as March, the group now expects losses to top $9 billion in 2009. In fact, North American carriers could blow through as much as $1 billion.
And the depression in demand isn't just coming from fewer vacationers -- or from frightened international travelers forgoing those Mexican vacations. Business customers are also leaving expensive business-class and first-class seats in droves, opting to economize. Cargo demand, the IATA says, could tumble 17% this year as less "stuff" is sent around the globe.
Ticket price competition is stiffer than ever, despite drastic cuts in such perks as bringing along luggage on that 3-week vacation -- as well as on meals (while we appreciate that Continental (CAL) is the last US airline to give out more than a 3-pretzel munchie mix, its week-old cheeseburgers entombed in plastic can hardly be called a "meal"). Online travel sites like Orbitz (OWW), Travelocity and Kayak keep airlines honest, rewarding travelers who take the time to seek out the lowest fares.
Air travel, now that frills have been all but removed from the flying experience, has been commoditized. Differences between airlines are barely perceptible, with the notable exception of upstarts like JetBlue (JBLU) and Virgin America, which offer travelers an alternative to the truly banal experience of flying American (AMR), or the feeling of being herded like cattle courtesy of Southwest (LUV).
While the industry struggles to realign partnerships, cut costs and lobby governments for more subsidies, major carriers would be well to learn from those few intrepid entrepreneurs seeking out opportunity amidst the storm. As Virgin Group founder and president Sir Richard Branson, said when he convinced investors to pony up more than $300 million to launch the company in early 2008, "We're going to shake up the market."
Indeed. Let's hope he succeeds.
Keepin' It Real Estate: The Fed Loses the Mortgage-Rate Battle?
This post first appeared on Minyanville and Cirios Real Estate.
Despite the best efforts of the Federal Reserve and the Treasury Department, the free market is winning the battle over mortgage rates. Tens of trillions of dollars in support for the financial system can't change the stark reality: Giving out home loans remains risky business.
Borrowers looking to take advantage of rock-bottom interest rates are seeing the opportunity slip through their fingers, as rates have risen by more than 0.50% in the past few weeks.
According to the Wall Street Journal, the pop in rates is due to expectations of economic recovery, combined with fears that the mounting pile of debt incurred by Washington's central economic planners may not be sustainable. As the government prints money and plunges the country into an ever-deeper deficit, holders of US Treasuries (e.g. China) are getting skittish. These investors are quietly demanding a higher return on their bet that our economy will pull out of its current tailspin.
This, in turn, is pushing up mortgage rates, which doesn't bode well for nascent signs of recovery. Big lenders like Wells Fargo (WFC), Bank of America (BAC) and JPMorgan Chase (JPM) -- despite offloading nearly all default risk to taxpayers via Fannie Mae (FNM), Freddie Mac (FRE), or the Federal Housing Administration -- are asking prospective borrowers to pony up hefty points up front to get the lowest rate possible.
And this at a time when pundits and performance-chasing portfolio managers are latching onto the absurd notion that the nation's housing market is making some sort of fundamentally sound turnaround. A contributor to CNBC actually said with a straight face that our economy can't grow with mortgage rates this "high," and that the Fed is derailing the recovery by letting rates move up.
To say that our economy is undergoing some sort of legitimate recovery, and at the same time assert mortgage rates a hair above 5% are too high is to confirm that those declaring the recession in our rear view mirror are delusional at best, talking their book at worst.
As renewed fears of inflation percolate and investors begin to snatch up commodities in expectation of future prices, pressure will mount on the Fed to keep rates of all kinds low to ensure the economy doesn't remain mired in its current malaise. This means more printing press activity, more "quantitative" easing, and more social-welfare programs packaged as "progressive" economic policy.
Battle lines are being drawn: Washington bureaucrats on one side, advancing the theory that money can be printed seemingly without limit to generate legitimate economic growth - and the market on the other. And each time the Fed takes its foot off the dollar-debasement accelerator, we get a peek into what will happen when the printing presses finally run out of ink.
Despite the best efforts of the Federal Reserve and the Treasury Department, the free market is winning the battle over mortgage rates. Tens of trillions of dollars in support for the financial system can't change the stark reality: Giving out home loans remains risky business.
Borrowers looking to take advantage of rock-bottom interest rates are seeing the opportunity slip through their fingers, as rates have risen by more than 0.50% in the past few weeks.
According to the Wall Street Journal, the pop in rates is due to expectations of economic recovery, combined with fears that the mounting pile of debt incurred by Washington's central economic planners may not be sustainable. As the government prints money and plunges the country into an ever-deeper deficit, holders of US Treasuries (e.g. China) are getting skittish. These investors are quietly demanding a higher return on their bet that our economy will pull out of its current tailspin.
This, in turn, is pushing up mortgage rates, which doesn't bode well for nascent signs of recovery. Big lenders like Wells Fargo (WFC), Bank of America (BAC) and JPMorgan Chase (JPM) -- despite offloading nearly all default risk to taxpayers via Fannie Mae (FNM), Freddie Mac (FRE), or the Federal Housing Administration -- are asking prospective borrowers to pony up hefty points up front to get the lowest rate possible.
And this at a time when pundits and performance-chasing portfolio managers are latching onto the absurd notion that the nation's housing market is making some sort of fundamentally sound turnaround. A contributor to CNBC actually said with a straight face that our economy can't grow with mortgage rates this "high," and that the Fed is derailing the recovery by letting rates move up.
To say that our economy is undergoing some sort of legitimate recovery, and at the same time assert mortgage rates a hair above 5% are too high is to confirm that those declaring the recession in our rear view mirror are delusional at best, talking their book at worst.
As renewed fears of inflation percolate and investors begin to snatch up commodities in expectation of future prices, pressure will mount on the Fed to keep rates of all kinds low to ensure the economy doesn't remain mired in its current malaise. This means more printing press activity, more "quantitative" easing, and more social-welfare programs packaged as "progressive" economic policy.
Battle lines are being drawn: Washington bureaucrats on one side, advancing the theory that money can be printed seemingly without limit to generate legitimate economic growth - and the market on the other. And each time the Fed takes its foot off the dollar-debasement accelerator, we get a peek into what will happen when the printing presses finally run out of ink.
Wednesday, June 3, 2009
GM Tails Chrysler Into Bankruptcy
This post first appeared on Minyanville.
It's official: General Motors (GM), the world's largest car company for more than 75 years, will drag its $82 billion in assets and $173 billion in liabilities into bankruptcy court.
The long-awaited move leaves the US government as GM's majority owner. Washington is betting more than $50 billion in taxpayer money that its turnaround plan can transform GM into a slimmed-down, dynamic powerhouse in the rapidly changing global automotive industry - despite mountains of debt, labor disputes, high fuel prices, and anemic sales.
The GM bankruptcy will allow its new public-employee chieftains to more quickly downsize the bloated firm, shuttering dealers, ditching struggling brands like Hummer and Saturn, as well as rapidly renegotiating labor contracts. According to the Wall Street Journal, the protection of Chapter 11 bankruptcy will also enable the company to rid itself of nearly $80 billion in debt.
And although GM’s bankruptcy filing may speed its way through the courts, as did Chrysler's (and the company could emerge from bankruptcy as early as this week), the 2 failed automakers’ cases couldn't be more different.
First, the sheer size of GM -- with nearly 3 times the assets and a fraction of the debt Chrysler had when it filed for bankruptcy protection April 30 -- will make its proceedings infinitely more complex. Pacifying a web of creditors, dealers, labor groups, and investors will be no easy task.
In addition, when GM eventually does emerge from bankruptcy, around 60% of its equity will be owned by Uncle Sam, since more than $50 billion in government loans will be converted to equity.
By contrast, Chrysler used bankruptcy protection in part, to cement a sale of key assets to Italy’s Fiat, which will own the new Chrysler in conjunction with labor unions, while the government holds a small, less-than-10% stake. Congressional meddling into its new Detroit-based Frankenstein's monster could hold up decisions at GM, as major as which brands to scuttle to trivialities like which brand of paperclips to use.
The Obama Administration reiterated that government ownership will be transitory, predicting that GM could once again be a public company within 6 to 18 months. During that time however, competitors like Ford (F), Toyota (TM) and Hyundai can leap ahead as GM focuses on cleaning up old messes and charting a new path for the future. Analysts say, however, that a new government-enhanced GM could emerge with an unfair advantage over companies like Ford that didn’t need to be bailed out.
Finally, and perhaps more importantly, GM must regain the trust of a country whose loyalty to the brand was based not on quality craftsmanship or reliability, but on patriotism. Without a dedicated client based in the United States that buys its cars because they are superior to those manufactured by its foreign competitors, the restructuring of GM will fail in even its most modest aims.
The automobile may have been invented in the United States, but its construction was perfected elsewhere. The turning of that tide will be the ultimate test of this brave new era in American car-making.
It's official: General Motors (GM), the world's largest car company for more than 75 years, will drag its $82 billion in assets and $173 billion in liabilities into bankruptcy court.
The long-awaited move leaves the US government as GM's majority owner. Washington is betting more than $50 billion in taxpayer money that its turnaround plan can transform GM into a slimmed-down, dynamic powerhouse in the rapidly changing global automotive industry - despite mountains of debt, labor disputes, high fuel prices, and anemic sales.
The GM bankruptcy will allow its new public-employee chieftains to more quickly downsize the bloated firm, shuttering dealers, ditching struggling brands like Hummer and Saturn, as well as rapidly renegotiating labor contracts. According to the Wall Street Journal, the protection of Chapter 11 bankruptcy will also enable the company to rid itself of nearly $80 billion in debt.
And although GM’s bankruptcy filing may speed its way through the courts, as did Chrysler's (and the company could emerge from bankruptcy as early as this week), the 2 failed automakers’ cases couldn't be more different.
First, the sheer size of GM -- with nearly 3 times the assets and a fraction of the debt Chrysler had when it filed for bankruptcy protection April 30 -- will make its proceedings infinitely more complex. Pacifying a web of creditors, dealers, labor groups, and investors will be no easy task.
In addition, when GM eventually does emerge from bankruptcy, around 60% of its equity will be owned by Uncle Sam, since more than $50 billion in government loans will be converted to equity.
By contrast, Chrysler used bankruptcy protection in part, to cement a sale of key assets to Italy’s Fiat, which will own the new Chrysler in conjunction with labor unions, while the government holds a small, less-than-10% stake. Congressional meddling into its new Detroit-based Frankenstein's monster could hold up decisions at GM, as major as which brands to scuttle to trivialities like which brand of paperclips to use.
The Obama Administration reiterated that government ownership will be transitory, predicting that GM could once again be a public company within 6 to 18 months. During that time however, competitors like Ford (F), Toyota (TM) and Hyundai can leap ahead as GM focuses on cleaning up old messes and charting a new path for the future. Analysts say, however, that a new government-enhanced GM could emerge with an unfair advantage over companies like Ford that didn’t need to be bailed out.
Finally, and perhaps more importantly, GM must regain the trust of a country whose loyalty to the brand was based not on quality craftsmanship or reliability, but on patriotism. Without a dedicated client based in the United States that buys its cars because they are superior to those manufactured by its foreign competitors, the restructuring of GM will fail in even its most modest aims.
The automobile may have been invented in the United States, but its construction was perfected elsewhere. The turning of that tide will be the ultimate test of this brave new era in American car-making.
Keepin' It Real Estate: The Sellers Are Coming - Be Very Afraid
This post first appeared on Minyanville.
Imagine you own a home.
Chances are, at some point in the past 3 years, you’ve heard that nagging voice in the back of your head - the one that whispered, “sell, sell, sell.” You watched as prices tumbled and buyers evaporated like morning dew.
But then you opened the paper, and there, in plain black ink, you saw that virtually everyone in both mainstream and financial media called this the worst time to sell a house in over 80 years.
What’s a seller to do?
The days of holding are past. The time to sell is upon us.
After a seemingly endless cascade of truly horrific news out of the US housing market, the last few months of quasi-positive data have proven to be a much-needed respite from the storm. Sales activity is up, price declines are moderating, and confidence appears to be returning to the market. That ever-elusive bottom in housing, despite being widely misunderstood by the vast majority of commentators, could finally be upon us.
Imagine you own a home. What would you do?
It’s only logical that given (perceived) renewed strength in the housing market -- driven by lower prices, rock-bottom interest rates and generous tax rebates -- buyers are wading back into the fray.
Of course, conventional wisdom says it's indeed a great time to buy. The National Association of Realtors, that cheerleading mouthpiece and chief lobbyist for commission-hungry real-estate professionals everywhere, concurs. The National Association of Homebuilders -- a group representing the likes of Toll Brothers (TOL), whose CEO, Robert Toll, and his brother Bruce pocketed more than $770 million during the boom -- says we’re experiencing “some of the best home-buying conditions of a lifetime.”
After years of abysmal conditions in which to sell a home, finally, there’s some demand and confidence returning to the market, they tell us. Willing and able buyers are pouring back into the market. And as they do, sellers -- buoyed by newfound confidence -- are prepping their homes for the market.
Washington, the media, and indeed, the financial markets are focusing on the demand side of the housing equation. Meanwhile, back on Main Street, far away from contrived efforts to prop up the housing market with spin, the sellers are coming.
What comes next won't be pretty.
Imagine you own a home.
Chances are, at some point in the past 3 years, you’ve heard that nagging voice in the back of your head - the one that whispered, “sell, sell, sell.” You watched as prices tumbled and buyers evaporated like morning dew.
But then you opened the paper, and there, in plain black ink, you saw that virtually everyone in both mainstream and financial media called this the worst time to sell a house in over 80 years.
What’s a seller to do?
The days of holding are past. The time to sell is upon us.
After a seemingly endless cascade of truly horrific news out of the US housing market, the last few months of quasi-positive data have proven to be a much-needed respite from the storm. Sales activity is up, price declines are moderating, and confidence appears to be returning to the market. That ever-elusive bottom in housing, despite being widely misunderstood by the vast majority of commentators, could finally be upon us.
Imagine you own a home. What would you do?
It’s only logical that given (perceived) renewed strength in the housing market -- driven by lower prices, rock-bottom interest rates and generous tax rebates -- buyers are wading back into the fray.
Of course, conventional wisdom says it's indeed a great time to buy. The National Association of Realtors, that cheerleading mouthpiece and chief lobbyist for commission-hungry real-estate professionals everywhere, concurs. The National Association of Homebuilders -- a group representing the likes of Toll Brothers (TOL), whose CEO, Robert Toll, and his brother Bruce pocketed more than $770 million during the boom -- says we’re experiencing “some of the best home-buying conditions of a lifetime.”
After years of abysmal conditions in which to sell a home, finally, there’s some demand and confidence returning to the market, they tell us. Willing and able buyers are pouring back into the market. And as they do, sellers -- buoyed by newfound confidence -- are prepping their homes for the market.
Washington, the media, and indeed, the financial markets are focusing on the demand side of the housing equation. Meanwhile, back on Main Street, far away from contrived efforts to prop up the housing market with spin, the sellers are coming.
What comes next won't be pretty.
Sayonara, SEC
This post first appeared on Minyanville.
The horses, pigs, cows, goats, sheep, llamas, ostriches, dromedaries and rhinos have all left the barn, yet the US Securities and Exchange Commission (SEC) still thinks it should be minding the door.
In light of its woeful inability to perform even the simplest of tasks -- like making sure the biggest hedge fund in the world, I don't know, makes a trade once every 13 years -- the Obama administration is looking to strip the SEC of certain regulatory responsibilities.
And rightly so.
According to Bloomberg, plans could be announced as early as next week outlining just how watered down the SEC's role in the new Obama regulatory regime could be. It's expected the Federal Reserve may take over the SEC's oversight of firms deemed "too big to fail." Keeping tabs on mutual-fund operations could become the domain of certain banking regulators.
The SEC, for its part, under the new leadership of 20-year veteran of the agency, Mary Schapiro, is fighting back. Shapiro says she's frustrated the SEC isn't more involved in high-level negotiations with financial firms like Citigroup (C), Bank of America (BAC) and Goldman Sachs (GS), and is making great strides in repairing the regulator's tattered image.
Commendable, but too little too late.
The SEC is widely viewed as having committed the biggest regulatory bonk in modern financial history, turning a blind eye to Bernie Madoff's $65 billion Ponzi scheme, and failing to, even in the remotest way, protect investors from the implosion of the market for mortgage-backed securities and other structured financial products stemming from rampant fraud, scant disclosure and blatant conflicts of interest.
Oh, and just days before Bear Stearns collapsed into the waiting arms of JPMorgan Chase (JPM), then SEC Chairman Chris Cox went on national television, assuring the country Bear was in good shape. Oops.
The SEC is a case study in regulation gone bad. It's one thing to have openly unregulated markets, where participants understand there's no one guarding the hen house. But when markets are purportedly policed by a powerful government body, investors assume some level of basic integrity and honesty.
By violating this trust, the SEC proved that weak regulation -- and more specifically, weak regulators -- do more harm than any amount of deregulation could ever do.
The looming restructuring of the financial regulatory complex will be a messy, political, imperfect process. But if the first step is dismantling the SEC's web of incompetence, then we're off on the right foot.
The horses, pigs, cows, goats, sheep, llamas, ostriches, dromedaries and rhinos have all left the barn, yet the US Securities and Exchange Commission (SEC) still thinks it should be minding the door.
In light of its woeful inability to perform even the simplest of tasks -- like making sure the biggest hedge fund in the world, I don't know, makes a trade once every 13 years -- the Obama administration is looking to strip the SEC of certain regulatory responsibilities.
And rightly so.
According to Bloomberg, plans could be announced as early as next week outlining just how watered down the SEC's role in the new Obama regulatory regime could be. It's expected the Federal Reserve may take over the SEC's oversight of firms deemed "too big to fail." Keeping tabs on mutual-fund operations could become the domain of certain banking regulators.
The SEC, for its part, under the new leadership of 20-year veteran of the agency, Mary Schapiro, is fighting back. Shapiro says she's frustrated the SEC isn't more involved in high-level negotiations with financial firms like Citigroup (C), Bank of America (BAC) and Goldman Sachs (GS), and is making great strides in repairing the regulator's tattered image.
Commendable, but too little too late.
The SEC is widely viewed as having committed the biggest regulatory bonk in modern financial history, turning a blind eye to Bernie Madoff's $65 billion Ponzi scheme, and failing to, even in the remotest way, protect investors from the implosion of the market for mortgage-backed securities and other structured financial products stemming from rampant fraud, scant disclosure and blatant conflicts of interest.
Oh, and just days before Bear Stearns collapsed into the waiting arms of JPMorgan Chase (JPM), then SEC Chairman Chris Cox went on national television, assuring the country Bear was in good shape. Oops.
The SEC is a case study in regulation gone bad. It's one thing to have openly unregulated markets, where participants understand there's no one guarding the hen house. But when markets are purportedly policed by a powerful government body, investors assume some level of basic integrity and honesty.
By violating this trust, the SEC proved that weak regulation -- and more specifically, weak regulators -- do more harm than any amount of deregulation could ever do.
The looming restructuring of the financial regulatory complex will be a messy, political, imperfect process. But if the first step is dismantling the SEC's web of incompetence, then we're off on the right foot.
R.I.P. Free Credit
This post first appeared on Minyanville.
Remember the good old days? Back when you and the credit crunch were young, and only those "subprime" people over on the other side of town -- you know, the ones living wildly beyond their means, dependent on credit for the very necessities of life -- had to deal with the harsh reality of life without free and easy credit?
Those happier times are long since passed, as the malaise continues to seep its way up the economic spectrum. Now, even the most creditworthy consumers who haven't missed a payment in years are seeing credit lines cut, interest rates raised and finding it increasingly difficult to get a mortgage. They'd better get used to it - the free lunch is over.
Up in Washington, where economic rationale and populist rhetoric seem to be more mutually exclusive than ever these days, the Senate is voting on a widely debated new set of rules for the credit card industry.
According to the New York Times, although the legislation doesn't cap the rates companies like Capital One (COF) and American Express (AXP) can charge their customers, they'll be forced to up rates more slowly -- and with more disclosure -- meanwhile making it tougher to impose late fees on borrowers that can't keep up. This will reduce lenders' earning power, not to mention their inclination to give out credit lines to questionable borrowers.
While risky borrowers will bear the brunt of late fees, over-limit charges and slashed credit lines, the well-to-do are in for the biggest shock. Banks are considering curtailing or doing away entirely with rewards programs, grace periods before interest charges kick in and accounts without annual fees. Gone are the days when paying your bills on time was a path to free credit.
The country's biggest banks, JPMorgan (JPM), Bank of America (BAC) and Citigroup (C) have already told Congress the new rules will force them to limit credit availability and increase fees. While this may bode well for profit margins in the near term, not so for the broader economy.
In light of the financial implosion wrought by too much debt supported by not enough real income, it's hard to argue credit card companies shouldn't be a bit less free-wheeling when handing out plastic. But analysts are quick to point out that paring down consumer credit will have a dastardly effect on our consumption-based economy.
For a country whose economy is two-thirds consumer spending, and whose consumer is (still) addicted to credit, the new legislation is like pumping the economy full of Xanex - everything will just slow down.
And while in the long run, less dependence on cheap and easy credit will help prevent the sorts of credit crisis like the one we're experiencing right now, we'll likely look back with 20/20 hindsight and say this legislation went too far, constricted credit too much. This is a shame, since before Congress even cooked up the idea of the new rules, the natural deleveraging cycle was already restricting credit on its own.
Debt isn't in and of itself, bad. As Minyanville's Kevin Depew wrote today, "real lending and economic activity will only improve when real savers see real value at the right level of risk. That will only occur in the short-run with vastly lower prices, or in the long run with stagnant prices and the benefit of time." Indeed.
Credit allows a transfer of risk from those who want to take it, but can't, to those who can take it, but need to be appropriately compensated for putting their cash on the line. This can foster healthy economic growth - when used properly.
That day will come again, but that day isn't today.
Remember the good old days? Back when you and the credit crunch were young, and only those "subprime" people over on the other side of town -- you know, the ones living wildly beyond their means, dependent on credit for the very necessities of life -- had to deal with the harsh reality of life without free and easy credit?
Those happier times are long since passed, as the malaise continues to seep its way up the economic spectrum. Now, even the most creditworthy consumers who haven't missed a payment in years are seeing credit lines cut, interest rates raised and finding it increasingly difficult to get a mortgage. They'd better get used to it - the free lunch is over.
Up in Washington, where economic rationale and populist rhetoric seem to be more mutually exclusive than ever these days, the Senate is voting on a widely debated new set of rules for the credit card industry.
According to the New York Times, although the legislation doesn't cap the rates companies like Capital One (COF) and American Express (AXP) can charge their customers, they'll be forced to up rates more slowly -- and with more disclosure -- meanwhile making it tougher to impose late fees on borrowers that can't keep up. This will reduce lenders' earning power, not to mention their inclination to give out credit lines to questionable borrowers.
While risky borrowers will bear the brunt of late fees, over-limit charges and slashed credit lines, the well-to-do are in for the biggest shock. Banks are considering curtailing or doing away entirely with rewards programs, grace periods before interest charges kick in and accounts without annual fees. Gone are the days when paying your bills on time was a path to free credit.
The country's biggest banks, JPMorgan (JPM), Bank of America (BAC) and Citigroup (C) have already told Congress the new rules will force them to limit credit availability and increase fees. While this may bode well for profit margins in the near term, not so for the broader economy.
In light of the financial implosion wrought by too much debt supported by not enough real income, it's hard to argue credit card companies shouldn't be a bit less free-wheeling when handing out plastic. But analysts are quick to point out that paring down consumer credit will have a dastardly effect on our consumption-based economy.
For a country whose economy is two-thirds consumer spending, and whose consumer is (still) addicted to credit, the new legislation is like pumping the economy full of Xanex - everything will just slow down.
And while in the long run, less dependence on cheap and easy credit will help prevent the sorts of credit crisis like the one we're experiencing right now, we'll likely look back with 20/20 hindsight and say this legislation went too far, constricted credit too much. This is a shame, since before Congress even cooked up the idea of the new rules, the natural deleveraging cycle was already restricting credit on its own.
Debt isn't in and of itself, bad. As Minyanville's Kevin Depew wrote today, "real lending and economic activity will only improve when real savers see real value at the right level of risk. That will only occur in the short-run with vastly lower prices, or in the long run with stagnant prices and the benefit of time." Indeed.
Credit allows a transfer of risk from those who want to take it, but can't, to those who can take it, but need to be appropriately compensated for putting their cash on the line. This can foster healthy economic growth - when used properly.
That day will come again, but that day isn't today.
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