The Wall Street Journal has a good article today detailing the extended financial mess that has been brought on by the irresponsible enthusiasm of the now-bursting housing bubble.
The home has long been the bedrock asset of most American families. Now, its value has become the biggest question mark hanging over the global economy and financial system.
Over the past decade, Wall Street built a market for more than $2 trillion in securities sold globally and backed by loans to U.S. homeowners on two long-accepted beliefs and one newer one. The prevailing logic: The value of the American home would never fall nationwide, and people would almost always make their mortgage payments. The more recent twist: Packaging mortgage loans and turning them into securities would make the global economy more resilient if anything went wrong.
In a matter of months, though, much of the promise of the new financial architecture — together with its underlying assumptions — has proven to be a mirage. As house prices fall and homeowners default on mortgages at troubling rates, the pain has spread far and wide. An examination of the resulting crisis shows that it is comparable to some of the biggest financial disasters of the past half-century.
It’s not specifically related to Seattle, except for this bit:
Ken Guy, finance director of King County, Wash., says the county’s investment pool bought short-term IOUs called commercial paper backed by several SIVs because they appeared to be low risk. “We relied heavily on the ratings agencies,” he says. About 10% of his $4.8 billion fund was invested in such paper. When the mortgage-backed assets held by the SIVs suddenly started going bad, some of his investments were downgraded all the way to “default.”
“How could this have happened so quickly?” Mr. Guy wondered with colleagues. “How could these be downgraded from top to bottom in a day or two?” Such questions have been raised repeatedly.
Whoops. So much for the new new economy.
(Greg Ip, Mark Whitehouse, & Aaron Lucchetti, Wall Street Journal, 12.10.2007)
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1
on topic
// Dec 10, 2007 at 11:40 am
i just realized that when people talk about commercial paper write downs, what they mean is condo projects with problems.
if/when the condo shoe drops and projects are dropped during construction, more banks are going to go under. this is why the LIBOR (the bank to bank lending rate) is so high. the banks don’t trust each other to be around tomorrow to pay the loans back.
http://globaleconomicanalysis.blogspot.com/2007/12/wave-of-bank-failures-is-coming.html
2
Jonny
// Dec 10, 2007 at 11:44 am
but we should be okay since it’s too big to fail.
3
Matthew
// Dec 10, 2007 at 11:47 am
Bank of England recently cut its rates and LIBOR actually went UP!
It’s kind of like this: You have a big turd in the toilet, instead of flushing the turd, the central bankers are putting more clean water in the bowl. That isn’t going to get rid of the turd(s).
Look at the FED slosh report. There is plenty of liquidity floating around, but the banks are scared to death of each other’s balance sheets. There is no transparency out there right now, and no one knows just how many crappy loans are out there. There are going to be a lot more write downs to come, I’ll guarantee that.
4
Jonny
// Dec 10, 2007 at 12:11 pm
what i find most interesting about all this is the unabashed optimism that is still involved in a truly epic meltdown.
that wsj article ends with “There is, indeed, a possibility that the opacity of today’s mortgage securities means markets may be factoring in far larger losses than will actually occur.”
but you might just as easily say the opposite. so why come to that conclusion?
human emotion in the markets is like a fog. and it’s the change in sentiment that finally brings about both bubbles and crashes. if sentiment does finally shift to pessimistic in the US, it will be the first time since the 70’s and the downswing is likely to be a lot faster and a lot harder than it deserves to be.
the same overreactions that lead people to overvalue an asset like a tulip or kozmo.com or a house causes people to undervalue them by the time things hit bottom. i’d say a recession right now is almost a certain thing. that wouldn’t in itself be a problem. what is likely to be a problem is the overreaction to it.
5
Scotsman
// Dec 10, 2007 at 1:07 pm
Not to worry- the NAR came out today and said it looks like the bottom is finally in. I’m serious- just heard it on the radio. That was close, but everything is OK now!
6
on topic
// Dec 10, 2007 at 1:20 pm
yeah, the NAR reported an unexpected 0.6% growth in pending sales. 0.6% growth over what, i don’t know. i would guess it is month-to-revised month.
i doubt that it could be year-to-year.
http://seekingalpha.com/article/56817-pending-home-sales-climb-unexpectedly
7
The Tim
// Dec 10, 2007 at 1:29 pm
Nope, it’s not year-to-year. From Forbes:
Woo-frikkin’-hoo. A 0.6% month-to-month gain.
8
softwarengineer
// Dec 10, 2007 at 2:36 pm
I SEE BECU’S CD SAVING INTEREST RATES ARE PLUMMETTING SOME MORE
They’re down to the 4.7-4.9 ranges; seems to me they were 5+ % a few weeks ago; before the western banks started borrowing Mid East emergency money at loanshark rates too.
That’s how we bail the the subprimes out, shaft the investors. You might want to buy them 4.7% 12 month CDs now, before they plummet to 2% again in the near future.
On the otherhand, with puny interest rates for savings accounts like this again, a mattress seems safer. At least a possible run on the bank, isn’t a run on your mattress.
9
AndyMiami
// Dec 10, 2007 at 2:42 pm
WAMU is also looking to sell $2.5 billion in convertible preferred stock…most likely to either Asian or Middle East funds…and this is after UBS had $17 billion invested and $10 billion write down…this is just the beginning folks
10
softwarengineer
// Dec 10, 2007 at 2:50 pm
KISS YOUR RETIREMENTS GOOD BYE BUBBLE BRAINS
BECU at 4.7-4.9% CD rates is very good. The banks average only 4.4% now and its shrinking each week.
See the proof:
http://www.bankrate.com/brm/rate/deposits_home.asp
11
rose-colored-coolaid
// Dec 10, 2007 at 3:50 pm
The housing collapse is perhaps the greatest boondoggle in the global market. The real elephant in the room, which nobody wants to talk about, is the global derivatives market. Housing is but a small percentage of that market, but it might be the snowball that starts the avalanche.
12
notabull
// Dec 10, 2007 at 4:02 pm
You know that Ikea commercial with the crappy old VW Beetle stacked with Ikea furniture on top of it? That’s the credit market for housing. It’s leverage on top of leverage, and when all the leverage falls off and you’re free of all those nasty CDOs and SIVs, you’re still left with a rusty old VW Bug.
13
on topic
// Dec 10, 2007 at 4:53 pm
i’m not sure if i believe the 153% of GDP figure for the size of the domestic portion of this bubble.
i wonder if they are accounting for all real estate asset secured debt or just some fraction of new home loans since 2002. for example, is commercial construction included? 2nd and 3rd home loans? construction related jobs and companies?
14
Perplexed
// Dec 10, 2007 at 5:34 pm
If you have the stomach to read a scary thread with inside posters try this one at MarketWatch
15
Perplexed
// Dec 10, 2007 at 5:35 pm
Oops, the website was associated with my name, not what I wanted to achieve.
http://blogs.marketwatch.com/greenberg/2007/12/straight-talk-on-the-mortgage-mess-from-an-insider/#commentslanding
16
PDX Guy
// Dec 10, 2007 at 7:14 pm
But I thought the WSJ was the cheerleader for our fabulous capitalist America? Don’t they preach that making money is the only thing to worry about? So what if lots of people get screwed. Plenty made out like bandits! Capitalists have a very low threshold for success: If just one guy is wealthy beyond anyone’s wildest dreams, the system works! Let the rest aspire to be him.
Now go out there and vote for republicans, cheerleaders for capitalism! And don’t foget to pledge allegiance to the flag!
17
Buceri
// Dec 11, 2007 at 1:01 pm
So you want the Seattle - drugs - real estate connection?
Listen to this:
http://www.npr.org/templates/story/story.php?storyId=16628918
18
Howie
// Dec 26, 2007 at 4:30 pm
I’m posting these links to some Econ lectures on Youtube that addresses the economics of the bubble. The three videos run a total of 25 minutes or so, but offer a great discussion. Well worth listening to.
Here are the links:
http://www.youtube.com/watch?v=uyOWuczlJCA
http://www.youtube.com/watch?v=YrWuZQ9770c&feature=related
http://www.youtube.com/watch?v=ILW8OolM0Lo&feature=related
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