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"If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem."
— JP Getty
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Amongst a certain contigent of mindless bulls, the blathering idiocy of politically motivated cretins, the cognesceti who have been clothing the emperor, has been the mindboggling transparent bullshit that the fall in Housing would have no impact on either the economy or the markets.
I have a hard time determining whether much of the trading community was blindly lapping up the spewage — or that they knew better, but were too busy clawing to maintain some semblance of competition (short term, anyway) with their benchmarks.
There is but one question before the trading crowd: How much is this going to hurt? Is this going to sting a
little? Will we be pulling out our penknives to hack off our a limb in order
to survive? I sure as hell don’t know if this gets worse, has already
bottomed, or will spiral further downwards — but its apparent to even
the most ardent bull that this is more than a mere boo-boo.
That line of thought was eloquently expressed by Barron’s Alan Abelson in this week’s missive:
"The stock market got roughed up again last week, in the process summarily giving the lie to the complacent fiction that has found such favor with the Wall Street wise guys: that the collapse of housing is not having much of an effect on the consumer’s psyche or the economy.
So, pray tell, we ask them, how do you explain that huge and ever-widening sinkhole in the mortgage market? Or the rather panicky rise in bond yields? Or the evident unease in the populace at large, manifesting itself in the unimaginable-an atrophying desire to consume?
And, if not the devastation visited on housing and the massive wave of delinquencies and foreclosures that are accompanying it, what caused the fiasco that has befallen Bear Stearns, the investment bank with a hedge-fund mentality (an aberration most investments suffer from these days)? An irresponsible computer that insisted on screwing up an otherwise infallible risk-model? An innocent mispricing mishap? Or, perhaps, it was something beyond any mortal being’s control — nothing less than an act of Lucifer." (emphasis added)
As the quote at the top of the page insinuates, being owed a little is not a problem that disturbs the dreams of bankers; Owe them alot, however — and it is suddenly their problem. I wonder what old JP would say about owing $3.2 billion dollars?
Abelson continues:
"Bear Stearns came within the width of an old school tie of having to liquidate its two jumbo hedge funds, whose combined portfolios were supposedly worth $20 billion and were loaded to the gills with assets shrinking with the speed of light, for no reason other than they served as collateral for subprime mortgages.
Any necessitous liquidation of the funds, besides inflicting real pain on the holders of such collateral, would have caused an explosion heard ’round the world.
Happily, the Bear funds’ blue-chip creditors — JPMorgan Chase, Merrill, Lehman, Goldman, Bank of America, Barclay’s (we apologize if we’ve inadvertently omitted one or two) at the last moment chose not to pull the plug. They acted, we’ve no doubt, out of the goodness of their hearts. Bears Stearns’ decision to help out its troubled progeny with a $3.2 billion infusion may have helped some, too.
Despite the gracious gesture of the creditors, we may not have witnessed the end of the story for those benighted hedge funds. The future of the more leveraged of the pair, which boasts the catchy title of the High Grade Structured Credit Strategies Enhanced Leverage fund, still looks a bit problematic. We’re grateful to the sharp-eyed toilers at East Shore Partners, which bills itself as research boutique and brokerage firm, for alerting us to the melancholy fact that everyone is not as lucky or agile or well-connected in dealing with subprime-mortgage woes as Bear Stearns."
An astute commentor posted on the blog yesterday — as did Abelson today — the first casualty of the subprime fallout has already been declared DOA: "Brookstreet Securities, a broker-dealer in Orange County, Calif., with 3,000-odd customers, went belly-up almost simultaneously with the hairbreadth escape by Bear’s funds from a fate worse than debt."
The OC Register reported "In another fallout from Orange County’s subprime mortgage industry collapse, Brookstreet Securities Corp., an Irvine broker dealer, shut its doors and laid off 100 local employees because it could not meet margin calls on complex securities backed by faltering mortgages, company spokeswoman Julie Mains said."
Brookstreet saw it capital shrink from $16 million to minus $3 million in days. They missed a few margin calls, as their collateralized mortgage obligation value had sunk to 18 cents on the dollar. Many of their clients were wiped out, and a spokesperson for the firm said others went "negative."
Those unfortunate employees who lost their jobs will be joining the ranks of those other folks "unaffected" by the housing bust, the mortgage brokers.
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If this is what contained looks like, I’d hate to see what will happen if this were to really unravel . . .
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Source:
Yo, Bloomberg!
ALAN ABELSON
UP AND DOWN WALL STREET
Barron’s June 25, 2007
http://online.barrons.com/article/SB118197340609437787.html
Irvine broker Brookstreet faces liquidation
Attorneys say clients lost money on risky investments tied to complex mortgage securities.
JOHN GITTELSOHN and RONALD CAMPBELL
THE ORANGE COUNTY REGISTER, Friday, June 22, 2007
http://www.ocregister.com/ocregister/money/subprime/article_1740651.php
it s fascinating how long these obvious facts take to seep in to the mass psychology with all of its barriers to accepting reality…
its funny…people can’t stop talking about globalization, technology, and the correlation of markets on one hand — and have the intellectual audacity to propose that somehow the housing mortgage unwind WON’T affect other parts of the economy….as if they are segregated from each other somehow…other than in people’s minds…
a shot of abelson is always welcome…
Indeed. Good write up, well done. A related tidbit – existing home sales are to to released Monday 10:00 AM EST. A rather timely economic release given recent events. Generally cynical about the integrity of “official” reports, it would be an unfortunate missed opportunity not to embed the now signature “seasonal adjustments” ensuring home sales exceed expectations of 6 million (sarcasm deliberate). While I don’t believe for a moment existing home sales exceed this level as a rise in inventory to near 9 million has been one of the whisper numbers I believe, it would be naive not to expect the statistical wizards once again to pull another seasonally numerical trick out of their hat.
“Generally cynical about the integrity of “official” reports”
as the smell of ledger chili settled over the land…
Today we learn that some CDO’s are drawing 10-cents-on-the-dollar offers.
That’s less than yesterday’s 18-cents.
“Those unfortunate employees who lost their jobs ”
I agree with everything you said except about the poor souls. Labor markets are tight, wages are rising, this is the best economy ever so I am sure they will have multiple offers before their last pay check clears the bank.
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BR: Hahahah . . . very funny . . . that’s rich . . . Oh, wait you are serious?
Why then have so many millions of people dropped out of the labor force?
Without blogs I probably would have lapped up the prevailing wisdom that housing was a safe investment in ’05 and that a rebound is imminent.
I’m not sure if those of us on various blogs were right about an impending collapse out of sheer luck but if not then it would appear that the media has a problem with facts.
So is the media complicit or just stupid? I read somewhere that Cramer recently claimed all the media coverage of Bear was irresponsible.
It’s interesting that the debate in the Calculated Risk comments has shifted to inflation vs. deflation after a collapse.
Barry, the subprime is contained… so far only one major financial house, 86 mortgage lenders and their employees, and a few million subprime borrowers have been affected.
I fail to understand why you think this thing isn’t contained ;)
BTW, obviously nobody at Bear Stearns ever had a bad experience playing with matches when they were kids.
I have observed that markets cycles are created and destroyed by the same force. This market cycle was undoubtedly created by debt. Greed begets greed begets greed: The lavish desires of consumers allowed the finance firms to prey upon those desires and create a secondary market and sell that “greed” to others (hedge funds) so they may in turn sell shares of their funds to greedy investors.
Once this market cycle of greed comes full circle the end will be here. It is not difficult to see how this cycle will likely end. We just don’t know what event will trigger it or when it will occur…
After reading that story in the OC Register, I can’t make myself feel too sorry for anyone who invested with Brookstreet.
One think working for a mutual fund company for six years taught me; when you hear someone promising you a return, grab your money and run away as fast as possible.
Then, if you can swing it, short that investment.
Cramer is probably right when he says that, looked at objectively and on it’s own merits, the Bear Stearns thing is too small to matter much. JP Morgan’s quote is a bit dated, and $100MM is chump change to big investment banks now.
The more interesting part of the story isn’t the story itself, but the reaction to it. There’s blood in the water now, and we’re seeing the sharks nibble.
From Comstock Partners:
Quote: “It is estimated that various institutions own about $6 trillion of mortgage-backed securities of which about $800 billion are subprime. About 13% of subprime mortgages are currently in default, and foreclosure rates on these loans are soaring.
In addition about $2 trillion of mortgage securities are backed by adjustable rate loans (ARMS) that have been or will soon be reset at higher rates. An estimated 29% of all mortgages issued in the last three years were ARMS. Home buyers who took out ARMS in 2004 have already seen their rates rise by about 40%, adding about $290 a month in additional payments on a $300,000 mortgage.”
Nothing to see here. Move along.
KirkH “So is the media complicit or just stupid”
I really don’t think they’re either. Their job is to attract readers(viewers/listeners/etc), and in many respects, they’re reflecting the views of their audience back on itself. For example, people tend to pay more attention to stories which confirm their own views (confirmation bias), so naturally media tends to respond by giving the audience what they want. It’s not so much that they have trouble with the facts, they just tend to select for the facts the audience will react well to.
Alan Abelson is likely the most eloquent ‘financial’ columnist in the English speaking world.
It is very unfortunate that he has been the victim of chronic bear disease since circa 1950. His columns are always bearish. They have always been bearish. They will always be bearish.
Chronic bear disease has no cure. Everything he writes is utter nonsense camouflaged in eloquent prose.
In order to succeed in the markets you must think for yourself. If you relegate the analysis of the financial markets to the likes of Alan Abelson you will surely loose out.
Follow this link to stimulate you independent thinking:
http://MusingsofaSpeculator.blogspot.com
I somehow knew the financial market was in trouble when I saw physicist friends going to work for investment companies because they were the only ones who could handle the math in their financial models.
Yeah, I thought this would end badly.
I somehow knew the financial market was in trouble when I saw physicist friends going to work for investment companies because they were the only ones who could handle the math in their financial models.
My daughter got a degree in engineering from one of those hoity toity private east coast engineering ‘institutes’… all the top GPA math & c sci majors are heading to Wall Street. Even a lowly BS commands the kind of money c csi majors got at the peak of dotcomm.
I told my daughter to tell her friends heading of to The City to ‘rent’ & ‘save’ now while they can… mana doesn’t ALWAYS fall from heaven. Sometimes it just rains.
” In order to succeed in the markets you must think for yourself. If you relegate the analysis of the financial markets to the likes of Alan Abelson you will surely loose out.”
Were it not for the Abelson’s of this world, bubbles would get even bigger. Scary.
“lavish desires of consumers” ???
In which galaxy are you a financial philosopher ?
You’re not going to explain to anyone here how deregulating rent-controlled markets and then price-fixing/gouging the housing market for the necessity of a roof over your head was a long-range plan first conjured up by the little people.
“I somehow knew the financial market was in trouble when I saw physicist friends going to work for investment companies because they were the only ones who could handle the math in their financial models.
Yeah, I thought this would end badly.”
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Well, it’s either destroy people through bombs or bonds…
Since 1950 there have been some bear
markets, so Abelson must be right
from time to time.
This _could_ be one of those times.
Simple keyboard bounce on the ‘loose.” No way to correct after hitting submit.
“So is the media complicit or just stupid?”
Hmmm. I would say that they are complacent, and have become stupid. This is painful, and has had consequences, but we will evolve past it. Nature abhors a vacuum, and this is why the blogs are flourishing … and citizen journalists deserve at least the same rights as the hot blond communication majors reading copy from teleprompters. It’s a Forth Estate thing. Our democracy depends on it. Go America.
A bunch of unemployed CDO traders and mortgage brokers sounds like a good start to me.
Maybe the real economy will get better.
Of course, putting ’em in jail might make it even better.
estragon-
so naturally media tends to respond by giving the audience what they want. It’s not so much that they have trouble with the facts, they just tend to select for the facts the audience will react well to.
hmm, so i guess you’re implying the audience is stupid (and thereby complicit) by not questioning the media, or wall street?
that the media simply reinforces the audience’s ignorance, rather than causing it?
that’s interesting…
apologies. on an earlier post above, I stated inventory of 9 million, meant 9 months.
I have never posted here before, but I really think you should have let this post sit and stew for awhile before posting again. I wish I had posted earlier but this post is exactly what is needed to wake people up to the problems in our economy.
I agree with M3 that the MSM is a cause of our current problems. While investors are chasing alpha, the MSM is chasing marketing dollars. They only post what their masters tell them to post, until it is too late, then it becomes more profitable to post fear. Have we reached that point yet; where fear produces greater yield then advertising dollars?
sure, the subprime thing is bad. Maybe really bad. But there are always really bad things out there to threaten the market. This one has been pretty well vetted by the financial press, investment letter writers, bloggers, etc. The question is not whether it will be bad, but whether it will be Worse Than Expected. The ABX index is already at an all-time low. If you’re really that sure that this thing’s gonna blow, you’ve got a once in a lifetime opportunity to get rich. Put your money where your mouth is and short stocks, buy puts, etc. But remember that it’s not enough to be right… you’ve got to be right at the right time. If you knew that the Internet bubble was going to burst, you were right. But if you shorted ‘net stocks in 1999, you got wiped out.
Remember, in the last 20 years we’ve seen a 25% one day market crash, a massive stock market bubble, and a hedge fund blowup that nearly took down the entire financial system. In hindsight they all look like speed bumps. How much worse do you think subprime will be?
oh, and Alan Abelson… give me a break. He’s a stopped clock.
How big a splash does a big rock make in a pond? Depends on how big the pond is, and how much water it has in it.
Kudos on this blog entry. It’s psycho-drama. shoot, it’s metaphysical practically.
As to whether the trader economy can affect the real economy more than for a couple of weeks, we’ll see….