Senator Dodd Starts Up Trouble
The Senate is continuing to seek answers for the *surprise* housing crisis.
Bloomberg reports:
U.S. Senate Banking Committee Chairman Christopher Dodd called on Treasury Secretary Henry Paulson to answer questions about Goldman Sachs Group Inc.’s role in the collapse of the subprime mortgage market.
Dodd, a Democratic presidential candidate, said in a statement today that he was “deeply concerned” by questions about New York-based Goldman Sachs that were raised in a column by Ben Stein in the New York Times on Dec. 2.
The column asserted that Goldman, the world’s biggest securities firm, sold bonds backed by subprime mortgages and also profited from bets that the value of the securities would drop. Paulson was chairman and chief executive officer of Goldman from 1999 until he became Treasury Secretary last year.
Perhaps the people of the United States would best be served by the enforcement of laws preventing illegal lending, rather than an endless blame game.
Many Americans are struggling to get out of debt, and sadly, the government seems to be doing little to help them do so.
Nationwide Drop in Home Prices
An article published by Market Watch takes a look at the falling home prices in every region of the country. According to the article:
- Home prices fell in September in all 20 major cities covered by the Case-Shiller price index, even in cities that had been holding up before the August freeze in mortgage markets, Standard & Poor’s reported.
- For the national Case-Shiller home price index, prices fell 1.7% in the third quarter compared with the second quarter, and were down a record 4.5% in the past year. It was the largest quarter-to-quarter price decline in the 20 years covered by the index.
- For the 20 cities, prices fell a record 4.9% year-over-year. Meanwhile, prices were down 5.5% year-over-year in the original 10-city index, the largest drop in the 10-city index since 1991.
- The last time prices fell so much, it took more than eight years for home prices to return to their peak level.
- “We judge the recent decline in home prices to be the beginning of an extended decline,” wrote Drew Matus, an economist for Lehman Bros., who said prices would probably fall 15% from peak to trough nationally.
It’s no surprise that the housing market has been declining. Still, it can be hard to see the numbers and realize just how badly things are doing. It is good, however, to note that this isn’t the first time the housing market has suffered so badly. It took a while, but the market eventually recovered. We should have no reason to doubt that this will happen again once everyone finds a way to get out of debt. The next few years may be rough, but it won’t be the end of the world.
Examining “Liquidity Puts”
An article published by Financial Times gives some more detail on the current examination of the mysterious “liquidity puts” that have been troubling banks. According to the article:
- Doing the rounds is talk of a CDO “liquidity put” that has troubled Citi with billions in extra subprime exposure.
- Speculation about the “liquidity put” kicked-off after an interview with Citi president Robert Rubin in Fortune magazine last week.
- FT Alphaville noted Citi’s massive growth in CDO exposure - bizarrely through the commercial paper market - when the bank reported its Q3s… In a nutshell, this is the mystery “liquidity put”.
- Back in early November, we didn’t know them as “liquidity puts” - just “agreements” in the structuring of Citi’s CDO deals.
- To mitigate any CP rollover risk, Citi entered into a series of “agreements” which forced it to buy the CDO CP if no one else would. As Mr Rubin calls them, “liquidity puts”.
- And those CDO commercial paper “liquidity puts” forced a staggering $25bn increase in Citi’s CDO exposure - at a time when the market was falling apart. Like Salmon, we’re bemused as to why that notion hasn’t been more widely reported.
- And it may not just be a Citi problem.
- It seems that Bank of America had similarly structured CDO deals in place.
As this new term floats around people are starting to have questions. Why hasn’t this been covered by more news groups? Who else has these “liquidity puts”? It seems that every day the credit crisis is becoming more and more complex as things like these “liquidity puts” are unearthed and exposed to the public. It just makes you wonder how much longer this will all go on while everyone else struggles to get out of debts.
Who’s Really at Fault Here?
An editorial published by the Market Traders takes apart the blame game that will ensue when people start to ask who is responsible for the credit crisis. Here is an excerpt from the editorial:
The usual suspects will be lined up: crazy investors, corrupt lenders, and crooked accountants.
Have you heard this one: “It’s not the fall that kills you; it’s the sudden stop at the end”?
Most economic analysis is like this popular pearl of wisdom: it is often technically correct, but fails to give all the factors their due consideration. There would be no fatal stop without something close to terminal velocity preceding it. The fall and the stop are inseparable parts of a whole. Can we let that old saying go now?
Historical examples are a persuasive tool to show the crowd that monetary inflation is the root cause of bubbles and their subsequent busts.
Go over the other bubbles in history. Rehearse the data and the stories. Have it at the ready whenever someone asks. If enough fingers of blame point to the source instead of the symptoms, change is possible.
It is all too true that people fail to take into consideration all the factors of a financial crisis. This editorial is particularly persuasive because it shows how history has repeated itself in this area. And only when we learn from the mistakes of the past will we be able to change the future. I think the most important thing to remember is that you cannot blame the woes of an entire economy on a few unwise or corrupt people. It takes the nation as a whole to get us into this mess and get out of debt, and only when we realize that will it be possible to prevent such financial crisis.
Ohio Dismissing Foreclosures
A judge dismissed 32 foreclosures for a lack of documentation. This action does not remove the debt from those being foreclosed upon, but it does delay the action of foreclosure for several months, buying the troubled homeowners time if nothing else.
LoanWorkout.org writes:
Judge O’Malley ruled, “A foreclosure plaintiff, therefore, especially one who is not identified on the original note and/or mortgage at issue must attach to its complaint documentation demonstrating that it is the owner and holder of the note and mortgage for which suit was filed. In other words, a foreclosure plaintiff must provide documentation (underlined by O’Malley) that it is the owner of the note and mortgage as of the date of the foreclosure action is filed.”
O’Malley then stated, “In this case the plaintiff is not identified on the note and mortgage as the original holder/owner, and has either (1) not timely filled out adequate documentation that it was the owner and holder at the time or (2) filed documentation that an assignment or execution of trust interest occurred, but occurred after the filing of the complaint.”
Hopefully more states will take strict action against lenders. This would do little to benefit homeowners struggling to get out of debt, but it would at least send a message to lenders that they cannot act illegally.
$3 Billion Write-Down in Bank of America’s Future
An article published by Reuters gives details of the losses felt by Bank of America as they struggle to get out of debt. According to the article:
- Bank of America joined Citigroup Inc, Morgan Stanley, Wachovia Corp and other banks in projecting large fourth-quarter write-downs for exposure to mortgages and other debt that investors are no longer willing to buy.
- Bank of America Corp, the second-largest U.S. bank, said on Tuesday it expects to write down $3 billion of debt in the fourth quarter as fallout from the nation’s housing slump deepens.
- “The losses are not only manageable for the bank, but were long ago discounted by investors,” said Marshall Front, who oversees $800 million at Front Barnet Associates LLC in Chicago, including Bank of America shares. “Unless something enormous and unforeseen happens, major, diversified well-capitalized banks can handle these losses.”
Banks seem to be more confident that they can handle the losses that are currently plaguing them. This is good news to all those who were worried about a total financial collapse. It will be interesting to see how consumer confidence correlates with that of the mortgage lenders.
Home Depot’s Profit Declines Along With Housing Market
An article published by Yahoo! Finance takes a look at the unwelcome decline (however unsurprising) in Home Depot’s third quarter profits. According to the article:
The Home Depot Inc. reported a 26.8 percent drop in third-quarter profits and revised its financial outlook Tuesday, saying a decline in earnings would be larger than expected as the housing market continues to deteriorate.
The nation’s largest home improvement store chain predicted a decline of as much as 11 percent in earnings per share from continued operations because of persistent “softness in the housing market.”
“We started the year with a more pessimistic view of the housing and home improvement markets than many,” Frank Blake, the company’s chairman and CEO, told analysts Tuesday. “It turns out we were not pessimistic enough.”
“We expect continued difficult conditions for the remainder of 2007,” Blake said. “We expect that the soft market will continue, as reflected in the current overhang of housing inventory and the difficulties in the subprime mortgage market.”
It is no surprise that all industries with ties to the housing market are experiencing losses, as they are failing to get out of debt. But this just goes to show how much of an effect the current subprime crisis is having on everyone. Retail stores and mortgage lenders alike have difficult times ahead as we struggle through the financial mess that is gripping our nation.
Delta Financial Downsizes to Avoid Bankruptcy
An article published by News Day reports the speculated causes and effects of the layoff of half of Delta Financial’s workforce. Delta is desperate to get out of debt. According to the article:
In a bad day for subprime lender Delta Financial Corp., the Woodbury-based firm laid off almost half its 1,000 workers Thursday morning as its chief said there were “no viable alternatives” and then late in the day reported a $39.6 million net loss for the third quarter.
To avoid the same funding problem that drove the bigger, Melville-based American Home Mortgage into bankruptcy, Delta is negotiating for more “working capital” to weather the mortgage industry crisis, just like it did in August with a $60 million loan from a hedge fund manager.Less freed-up capital means their loan-making business was starting to grind to a halt, which affects revenues, and left Delta holding loans that were possibly risky.
The layoffs raise questions of how well Delta can operate with one third of what had been almost 1,400 workers a year ago.
Maybe this mass layoff really was necessary for Delta to avoid bankruptcy. After all, it’s better that 500 workers lose a job than all 1,000 if the company were to collapse. But the decrease of 500 jobs only makes the economy that much weaker. The U.S. seems to have found itself in a catch-22 and companies are being forced to choose the least detrimental of less-than-ideal options.
No Relief For Global Credit Crisis
An article published by the British-based paper, The Guardian, talks about how the global credit crisis is intensifying. According to the article:
The crisis in the global credit market intensified today, pulling stock markets lower, as a US investment fund became the latest victim of the rout sparked by the plunge in the value of American sub-prime mortgages.
The credit crisis was sparked by escalating levels of bad debt among American mortgage lenders as home owners defaulted on their loans. Defaults have been particularly severe in the sub-prime mortgage market, where borrowers tend to be low-income or high credit risk households.
The collapse in the value of sub-prime loans caused panic among traders of commercial paper who feared the value of the assets on which their investment was based, would plunge. As a result the market for commercial paper dried up, causing the CDO investment vehicles to run out of cash.
The U.S. financial system has found itself in a downward spiral, and it’s taking the rest of the world down with it. Factors seem to intensify each other, which in turn heightens the effects of the crisis as everyone fails to get out of debt. It is a frightening thought that financial problems spread from one economy to another like a disease. Now the dilemma is finding a cure before it brings a worldwide collapse.
Two Major Housing Projects Suspended
An article published on Builder Online takes a look at two major projects that have been suspended as Lennar waits out the dismal market in order to get the full value for homes and get out of debt. According to the article:
Central Park West, which Lennar has been marketing as its first “urban village,” sprawling over four city blocks, was supposed to start moving in its first buyers last month. But company officials concluded that too much of the village was still under construction for early buyers to be able to fully appreciate its amenities and living environment. Emile Haddad, Lennar’s chief investment officer, who oversees both projects, also tells BUILDER that his company made its decision because the market in Orange County still has too much unsold inventory of new and existing homes, a condition that’s all but mandating significant price reductions to sell anything. “We don’t want to discount here,” he says about Central Park West, whose home prices range from $500,000 to $2.9 million. The builder has refunded earnest money to buyers who had already purchased homes there.
Waiting seems to be a risky gamble with the current trend in the market. Maybe prices will go up and homes will get their “full value.” But isn’t that a relative term? And what if prices continue to fall? I guess it can’t mean anything too bad for buyers; either prices will go down as sellers realize that they won’t get better, or they’ll be the original selling price. Either way, buyers won’t be selling any more than was originally appraised.