Sean Olender
Loading...
Symbols:
Loading...
Symbols:
Hedge Fund Jobs
Job Seekers: Search jobs by category, get job alerts by email or live feed, apply online See full list of jobs »
Employers: See all recruitment options, get applications online or by email Post a job »
Trading Center
- Free E-Newsletters
- About Seeking Alpha
- About Us
- Contact Us
- What's New
- Readers Feedback
- Advertise With Us
- Contributors
- Contribute an Article
- Feature Your Book
- Our Contributors
- Anonymous Contributions
- Dispute an Article?
- Legal
- Terms of Use
- Privacy
- Copyright
Latest Comments14 Comments
The SEC Panics
Fannie and Freddie ARE the US mortgage market and the US mortgage market is secured by real estate that peak to trough is going to fall 30% or more. I'd say that will put Fannie and Freddie ultimately underwater by $1 trillion or so. It won't look like that now, but how about when nobody can buy a house without 20% down (or even 30% down) and everyone suddenly learns that only 15% of Americans can afford to do that? That realization will send prices down another leg for sure.
I think that if Fannie and Freddie's shareholders want to speak up about their right as investors in a capitalist system to not be jerked around, then that right should be respected and Congress should pass a resolution very clearly stating that there is no federal backing for either entity other than the paltry $2.25 billion credit line each has with the US Treasury. That's it. Period.
The problem is that implicit promise (to socialize losses by backing them with taxpayer money) combined with ridiculously weak regulation and huge potential gains for investors and managers creates a perverse incentive for management to take big risks right now - HUGE risks. If they win, everybody makes out great. If they lose, the Feds come in and make sure bond holders don't lose anything. I wish the US Treasury would back me in my business decisions like that with taxpayer money.
Fannie and Freddie have hurt the US housing market for 30 years by pushing up prices. They've not made housing more affordable. They've made it far less affordable by working with a coterie of corrupt banks, real estate agents and appraisers to push up prices as high as possible to expand their lending as widely as possible because it's how they make money. If it weren't for Fannie and Freddie, home prices would probably be 30% lower than they are right now and that means that 90% of Americans would need mortgages 30% smaller than they need right now.
The key is less lending not more. Lower prices make houses more affordable. Bigger loans do not make houses more affordable. Bigger loans make houses more expensive and hence less affordable. Banks will always claim lending makes things more affordable and the sellers who work with banks (whether the real estate industrial complex, universities in student lending, or any seller) will claim that loans make the product more affordable. But the racket is that sellers and lenders work together to push up prices because they both benefit from higher prices.
Will Housing Bottom in 2010 or 2012?
Built into current prices was the expectation of price appreciation of 10% or 15% a year. Strip that out and it's uncertain what a "rational" consumer would pay for a house in any given area. It's also uncertain whether the average consumer will in fact be rational. Most consumers certainly weren't rational for the past eight years. They bet the farm tying themselves down with speculative debt and essentially betting years of future freedom in exchange for the chance to make a bunch of money. It's not unusual for a few people to do that, but for the majority to enter into that sort of speculative behavior is deeply disturbing.
In short, nobody knows where this is going to go because we aren't merely talking about homes returning to "affordable" levels. We're talking about at what price people will want to buy them, which may have only a little to do with whether they are affordable.
Finally, it is very difficult to say how this banking crisis will play out, how the absence of a new bubble to drive economic growth will play out, how the absence of an asset against which to borrow wheelbarrows full of money plays out. There's simply nothing hopeful on the horizon. The three big trends that drove speculative activity and the larger economy since the 1980s was the stock/investment bubble of the 80s, the tech bubble of the 90s and the housing bubble of the 00s. There's a small possibility that we're all out of bubbles.
Pundits have called for a purposeful energy investment bubble because the US economy simply can't operate without bubbles anymore. Sustainable growth is impossible without financial mania. Whether we get an energy investment bubble remains to be seen, but if we don't, what drives the economy from here forward?
If we have low or no growth for a long time, it will make stocks look overvalued by maybe 50%, maybe more. What about the huge unemployment that will likely flow from this?
The way I see it is housing may have started this, but housing is the least of our problems.
12 Observations on Residential Housing
Part of the reason that there's such a serious debate about tax policy in the United States is that people who aren't rich think they are and people who are poor think they are middle class. Debasement of the currency confuses everyone into thinking they belong to a different socioeconomic class then they actually do.
And it's not just income, it's wealth. There are a lot of people making $175K to $250K with huge student loans, and who bleed under zero down mortgages on $1 million condos that are two bedroom one bath. They have little wealth and their income goes mostly to interest payments. 35 years ago the idea that someone making a salary in the top 10% of income earners would, regardless of actual saved wealth, be able to afford something a little nicer than a two bedroom one bath condo. Debasing the currency causes this sort of confusion.
Debasing the currency causes people to see quite modest acquisitions like small condominiums as a luxury objects reserved to the truly wealthy. If Americans had better math skills, they'd realize that the tax rules should focus on those making $1 million a year and more. Aside from the 1920s and the 1980s and now, the highest earners used to pay close to 50% in income tax. Now it's low 30s.
Capital gains taxes at 15% and not subject to "payroll tax" the capital gains exclusion for real estate and so many other rules have been used to try to bribe people making $200K a year by taxing people who make $75K a year even more! (note the "payroll tax" ending at $100K and that huge 15% tax being spent mostly on general tax fund expenditures with now a $2.3 trillion hole in the trust fund from this regressive tax that essentially was a bribe to those making $150K to $250K a year because if their taxes were a bit higher (and they are the new middle class), then the truly rich would have had political problems maintaining existing tax rules.
The saddest part of all of this is that the average person has used finance and credit in a way that put off for 20 years really understanding what these rules have wrought. That consumer credit expansion and erosion of the savings appears to have reached the end of the road as it doesn't seem mathematically possible for the trend to continue.
Americans will figure out how much prices have risen when they have to pay for things with their income instead of HELOCs, 2nd mortgages, borrowing against rising asset prices, etc. When people try to get by using their incomes to buy thing instead of credit, they'll realize that perhaps 80% of Americans are really poorer than at any time since the 1970s.
Could Housing Panic Actually Save Countrywide?
Apple and Intel Fail to Impress: Waiting for the Fed's Next Move
These Apple Heads who are getting so angry about someone merely writing what they feel the numbers hold for Apple aren't going to be toughing it out with second jobs (no pun intended) after the free fall the stock endured. We're coming up on a 50% correction if the stock gets down to 100. Whether that's undervalued or not remains to be seen. We have to see what the new American consumer, without the benefit of home equity withdrawals equal to double his income, decides to purchase in the coming year or two.
But I will say that if readers listened to this analyst when he wrote the article instead of the Second Jobs attacking him, they would have saved tens or hundreds of thousands of dollars in the past few days.
Gadget Stock Watch: Apple's Selloff, EA's Spore for Mac, More
That "feeling" is a powerful sales tool, but I am willing to be it will not be more powerful than the desire to get a good deal if credit contracts and consumer spending slows. "Consumers" want to show off their buying prowess to strangers with name brand products that cost as much as possible, but when the bankruptcies and foreclosures roll in, a good deal ALWAYS trumps conspicuous consumption.
Beyond a temporary downturn in consumer spending, Apple is very poorly positioned to weather what may become a structural change in the way consumers spend their money and how much they save. If deeper structural changes occur after what has been a gradual 20 year drop in savings rates from 9% to -1% and a massive bubble in credit growth, people may simply view "splurging" differently than they do now.
Nouriel Roubini, Stephen Roach and many other economists focusing on international markets believe there will be no "decoupling" which means when the US consumer's binge is over, the rest of the world is going to have reduced production and consumption as well.
These issues are much larger than Apple, but Apple may indeed be in the wrong place at the wrong time. It is selling "really incredibly nice and expensive" versions of the things you can buy without the brand name (yes, and without the stupendous interface) for 50% or 70% less. When people can't pay their bills, they are less concerned about dance-video-like interfaces.
Mark Cuban, Is the Stock Market Still for Suckers?
The way I see it is the entire 401(k) system is viewed by the Federal Government and the corporations that rely on its tax and spend power for billings - they view it as an account receivable. It is reasonable to assume that current tax rates will not be sustainable unless the US government defaults on its obligations to lots of people. They already spent $2 trillion out of the social security trust fund that people paid to social security - they used it for general fund tax expenditures like war and they are going to double tax the same people who paid in to pay them back reduced benefits. That's the biggest regressive tax scam in history.
Additionally, an incredible amount of money is pilfered from the stock market by brokers, dealers, and firms that control things. Look at the spread between bid and ask prices on call and put options. It's incredible - like sometimes 10% or 12%. Look at mutual fund "management" fees. Look at firms like EverBank that provide a "New Zealand Dollar Denominated CD" at an interest rate of 6.75%, which is great except that actual banks in New Zealand are offering 8.8% and EverBank probably keeps the more than 200 basis point interest rate spread as profit. Now there's nothing wrong with profit, but there is an awful lot of profit built into the ethereal investment markets in the United States - enough where the people running that are more likely to be heading to dinner on a private Lear Jet than most of their investors.
The timing is also hugely important. Look at the NASDAQ today? 2,500? It was at 5,000 in 2000 and here we are almost eight years later. Inflation losses are also not usually considered when figuring stock market gains.
The whole economy is wired to make it tough to deal with things here because they inflate the money supply and credit to produce a constant positive rate of inflation that is difficult to accurately measure and is hugely misreported and then they tax you on capital and income gains from interest and capital gains including the amount that just made up for lost purchasing power from the inflation that they cause and control. That's quite a racket. It goes at least a little ways in explaining the savings rate here and the huge consumer and mortgage debt. It makes borrowing lots of money feel smart and saving money seem quite risky.
Jingle Mail, in Practice
I think some of these bailout proposals and these Hope Now phone numbers are at least as much to keep people from finding out about their right to walk as they are to allegedly help borrowers. Many borrowers would be better off walking. Credit scores are important if you need or want to borrow money. Americans have become incredibly preoccupied with their credit scores because many people finance almost every aspect of their day to day living. The median American family pays 17% of income in interest payments.
There are two ways out of this uncomfortable situation: either home prices fall far, or the price of everything else rises. Either way will be unpleasant, but reckless monetary and fiscal policy to encourage price inflation will be much worse and will render every American poorer (except those with investments outside the United States).
Moreover, the longer this takes, the worse it is going to be. Many sellers are still balking at lowering prices. "But my home IS worth more. It's not like those other homes that dropped in value, just look at my home! It's really nice." If this disconnect between buyers and sellers continues, prices may remain flat for or decline slowly for a while until foreclosure auctions take them abruptly lower in a highly uncontrolled manner.
Although I think that the place housing has come to occupy in the American economy is inappropriate and is a mis allocation of resources, continued drops in home sales will too abruptly rattle things and not allow enough time for other areas to grow absorbing unemployed construction workers, real estate agents, mortgage brokers, and even the economy around home improvement, furniture sales, home electronics, etc.
A drop in prices may also encourage longer term "doubling up" where people move in together - whether with parents, roommates, etc. A trend over the past few decades has put fewer Americans in each housing unit. Some of this is vacation homes, but most of it is fewer people having roommates, or living with relatives. High, sticky prices in a sluggish or recessionary economy may reverse that trend and that will have far reaching and much longer term consequences. We could end up with eight or ten million too many homes.
If nationwide prices, and especially prices in California drop far, we'll have a recession and maybe a nasty one. But a nasty recession is something that ends relatively quickly - a year, even two years is a relatively short time. Major structural changes in how people live can last decades.
Also, I like Mr. Salmon's writing usually, but I'm still a bit peeved that he called me a "nutcase" in reviewing my December 9, 2007 article in the San Francisco Chronicle. The idea that investment banks, bond rating agencies and originating banks may have communicated back and forth about how to maximize ratings while minimizing the likelihood that any could be left holding the bag is far from a conspiracy theory. Bond rating agencies worked closely with investment banks selling this junk and the investment banks paid them to rate it. They paid them billions. The bond rating agencies need an excuse to give a high rating. Perhaps stated income was one of the hooks. "If originators could generate more stated income loans, we could rate the bonds as if the borrowers really had the income they asserted and then disclose on page 149 of the prospectus that we can't independently verify the validity of the borrowers' income and that the rating is based on an assumption that the borrower told the truth." Then the investment bank talks to the originator and explains what they need to do to get the higher prices for their loans. I think if worked for an investment bank and I was getting several hundred million or even billions of dollars in mortgages from an originator, I'd be on fairly good speaking terms with those folks.
Anyway, I have little doubt that every possible means will be used to shut down efforts to get to the investment banks because they own the people who would do the investigating. It's more than a little interesting how the Circuit Court shut down Andrew Cuomo and now a friendlier agency is doing the investigating. We can probably expect a big fat "suggestion" as a penalty for the investment banks, "we think you need to be more careful in the future, okay?"
Jingle Mail, in Practice
While I don't think that this is a great situation, it was banks, real estate agents, mortgage brokers, and Fed monetary policy from 2003 to 2004 that caused this situation much more than it was greedy borrowers. There were unbelievable nonstop ads, phone calls, faxes, junk mail, the television news wouldn't shut up about it. It was hard not to behave irresponsibly because people thought you were nuts if you didn't borrow as much money as you could to buy the most expensive home you qualified for. The "experts" on the financial news were regularly advising people to "consolidate"... consumer debt at "much more favorable rates" by borrowing against their homes (and financing toasters and handbags over 30 years).
Home prices have to come down, or the price of everything else has to go up. Either way, it is going to be highly unpleasant for everyone. But if a flood of loose credit drives up the price of everything so home prices only drop 5% or 10%, then we're all going to be much, much poorer.
And although I customarily like Mr. Salmon's writing, I'm still a little peeved by him calling me a "nutcase" in his review of my San Francisco Chronicle article of December 9, 2007.
Could Housing Panic Actually Save Countrywide?
This untested financial architecture is crumbling before the recession. Now it appears that a contraction of credit, a likely recession, the flight of foreign investors to escape their mounting exchange rate losses, and the exhaustion of the American consumer are coming together at a single point that might cause enough pressure and heat to create a fission reaction.
If it was just Countrywide, I'd say yes. But here most banks are fighting to stay afloat with fraudulent accounting right now and loans from the Fed and FHLB (which gave out something like $170 billion over the past few months).
I disagree for three reasons. First, I don't know that big banks are going to be looking for acquisitions when they are only able to maintain themselves by pretending in accounting obfuscations that their losses aren't as big as they really are (ala Japan's bank strategy in the 1990s). Second, there are many banks on the brink of failure, so CFC is just one of many cheap options. Third, it seems to me that mortgage lending is dead in America. CFC and Wall Street ruined it for everyone. When this is over, I wouldn't be surprised if the only place to get a mortgage is the US government. Home prices will be falling for several years and investors are not going to buy mortgage securities secured by depreciating assets.
The only way these jerks at the Fed and Treasury can keep housing from deflating fast is by inflating everything else with big "injections" of freshly printed money. Well, guess what, when you print money and "inject" it into your friendly conspiratorial banker's account balance, you DEVALUE all of the other dollars circulating here and around the world. Americans are too foolish to get mad about that. They think PRICES are going up and can't understand that it's the fresh palates of money being handed out that drive up prices. Foreign investors are signaling that they've had enough of this counterfeiting. They are threatening to bail. We can't get on without them. We need $2 billion a day flowing into this place. When they debase the currency, they hurt foreign investors. if their American stocks or bonds are "up" 8% this year, they still lost money because the dollar plunged against their currency by more than 10%. Without some responsible management of the money supply, foreigners are going to bail and then it's going to get ugly.
The Fed is stuck between bailing out its Wall Street friends and bringing on the apocalypse of the dollar losing reserve currency status. Let's hope they understand what's at stake.
Cool Heads Will Prevail
I'm not looking forward to this, but everything the Fed and Congress appears ready to do suggests absorbing the cost of the massive bad debt into the federal debt. That's something a banana republic does just before its leaders and the top 2% of income earners relocate to other countries.
Ben Bernanke's shift from wanting Fannie and Freddie trimmed down in size because of the "systemic risk" they present shifted on Friday to Mr. Bernanke suggesting Congress should raise Fannie's loan cap to $1 million and provide an explicit guarantee rather than the previous implicit one. This sort of shift doesn't happen unless people are expecting catastrophically bad things to happen. Fannie just turned in a big loss for the last quarter and has already huge exposure to the US real estate market - a market that is facing a very severe and imminent downturn.
With this sort of bailout, it is hard to imagine that the resulting chaos won't cause the dollar to slip much, much further. And the fact that it's being proposed at all suggests that major players have more to gain with a bailout and dollar collapse than taking their medicine. These people wouldn't choose to permanently damage the mortgage market in the United States unless they believed that it wasn't going to be a business at all for 10 or 20 years.
We're on borrowed time for sure. When investment banks, banks, investors and others are willing to terminate a huge industry just to get out of their liabilities, you can bet they expect that things are going to be very, very bad.
Within six months there will be a massive bailout and within 18 months there will be a massive default on the debt that was transferred from investors to the US government. I think investors should consider investing exclusively outside of the United States until this blows over... if it does indeed blow over.
Cool Heads Will Prevail
I'm not looking forward to this, but everything the Fed and Congress appears ready to do suggests absorbing the cost of the massive bad debt into the federal debt. That's something a banana republic does just before its leaders and the top 2% of income earners relocate to other countries.
Ben Bernanke's shift from wanting Fannie and Freddie trimmed down in size because of the "systemic risk" they present shifted on Friday to Mr. Bernanke suggesting Congress should raise Fannie's loan cap to $1 million and provide an explicit guarantee rather than the previous implicit one. This sort of shift doesn't happen unless people are expecting catastrophically bad things to happen. Fannie just turned in a big loss for the last quarter and has already huge exposure to the US real estate market - a market that is facing a very severe and imminent downturn.
With this sort of bailout, it is hard to imagine that the resulting chaos won't cause the dollar to slip much, much further. And the fact that it's being proposed at all suggests that major players have more to gain with a bailout and dollar collapse than taking their medicine. These people wouldn't choose to permanently damage the mortgage market in the United States unless they believed that it wasn't going to be a business at all for 10 or 20 years.
We're on borrowed time for sure. When investment banks, banks, investors and others are willing to terminate a huge industry just to get out of their liabilities, you can bet they expect that things are going to be very, very bad.
Within six months there will be a massive bailout and within 18 months there will be a massive default on the debt that was transferred from investors to the US government. I think investors should consider investing exclusively outside of the United States until this blows over... if it does indeed blow over.
Cool Heads Will Prevail
I'm not looking forward to this, but everything the Fed and Congress appears ready to do suggests absorbing the cost of the massive bad debt into the federal debt. That's something a banana republic does just before its leaders and the top 2% of income earners relocate to other countries.
Ben Bernanke's shift from wanting Fannie and Freddie trimmed down in size because of the "systemic risk" they present shifted on Friday to Mr. Bernanke suggesting Congress should raise Fannie's loan cap to $1 million and provide an explicit guarantee rather than the previous implicit one. This sort of shift doesn't happen unless people are expecting catastrophically bad things to happen. Fannie just turned in a big loss for the last quarter and has already huge exposure to the US real estate market - a market that is facing a very severe and imminent downturn.
With this sort of bailout, it is hard to imagine that the resulting chaos won't cause the dollar to slip much, much further. And the fact that it's being proposed at all suggests that major players have more to gain with a bailout and dollar collapse than taking their medicine. These people wouldn't choose to permanently damage the mortgage market in the United States unless they believed that it wasn't going to be a business at all for 10 or 20 years.
We're on borrowed time for sure. When investment banks, banks, investors and others are willing to terminate a huge industry just to get out of their liabilities, you can bet they expect that things are going to be very, very bad.
Within six months there will be a massive bailout and within 18 months there will be a massive default on the debt that was transferred from investors to the US government. I think investors should consider investing exclusively outside of the United States until this blows over... if it does indeed blow over.
Downey Financial's Problems Run Deep
Financials have to get hit now on the edge of the apocalypse. There's no way to write off that bad debt and the remarkable historical highs in defaults are coming with low unemployment and low interest rates. If there's a recession (and I can't imagine how there won't be one), and rates head higher, Armageddon will ensue. How we can have this level of defaults and delinquencies in the midst of an economic boom should terrify people. A small downturn will wreck total havoc on the financial markets.
This author's writing as well as the financial news appears to be basing the most pessimistic valuations on current economic conditions persisting. I haven't seen a forecast that takes into account rising unemployment and a recession. And rising unemployment and a recession is almost certainly what we are facing.
It is desperately unfair for government not to be warning people about this. It appears that the goal is to use the public to fund a "quiet" exit from these risky assets, both in providing a market and in government bailouts.
This is going to be a very dark episode in American history and I hope the American people realize after this who they can trust and try to remember it for more than five years. The same carpetbaggers return immediately when the public memory fails to recall the last fleecing. We're at a point today when the public can't even remember the last serious recession and has no idea how to behave responsibly. Banks offer credit accounts as a way to "save money" and "build wealth" -- no one remembers anymore that wealth is built primarily from deferring consumption and using the proceeds (savings) to invest. That's going to be a painful lesson.