The CRA

Redux. The Big Picture (10.02.08): Misunderstanding Credit and Housing Crises: Blaming the CRA, GSEs

The Good Old Net Capital Rule

One of the major catalysts for our present mortgage meltdown. NYTimes (10.03.08), via Kevin Drum:

"On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.

They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on."

The Reckoning - Agency’s ’04 Rule Let Banks Pile Up New Debt

"The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments."

And flow they did.

"In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves."

"Over the following months and years, each of the firms would take advantage of the looser rules. At Bear Stearns, the leverage ratio — a measurement of how much the firm was borrowing compared to its total assets — rose sharply, to 33 to 1. In other words, for every dollar in equity, it had $33 of debt. The ratios at the other firms also rose significantly."

Oh man they was fun times, they was.

Mortages And The Community Reinvestment Act

You might hear some Republican moron spout off about how the CRA is at the root of the current financial meltdown. Bullshit, sez Bonddad (09.18.08):

"There's a meme going around the right wing blogs. Deregulation has nothing to do with the current problems in the market. The real culprit is the Community Reinvestment Act signed into law by President Carter in 1977."

Memo to Republicans: CRA Has Nothing To Do With the Current Problems

"Nothing could be further from the truth as a reading of the facts of the matter reveal."

Damn them facts is pesky things, huh.

Regulate This, Pal

Wanna know why things are blowing up on Wall Street? Say no more. NYSun (09.18.08), via The Big Picture:

"The Securities and Exchange Commission can blame itself for the current crisis. That is the allegation being made by a former SEC official, Lee Pickard, who says a rule change in 2004 led to the failure of Lehman Brothers, Bear Stearns, and Merrill Lynch."

Ex-SEC Official Blames Agency for Blow-Up of Broker-Dealers

"The SEC allowed five firms — the three that have collapsed plus Goldman Sachs and Morgan Stanley — to more than double the leverage they were allowed to keep on their balance sheets and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults."

Ahhhh yes. The good old net capital rule. Barry explains:

"(T)he events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow (Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns [ed. - that'll be $2.00 a share, please], and Morgan Stanley) to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.

Instead, the 2004 exemption -- given only to 5 firms -- allowed them to lever up 30 and even 40 to 1."

How SEC Regulatory Exemptions Helped Lead to Collapse

We're All Subprime Now!!

NYTimes (08.04.08), via Balloon Juice:

"The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building.

Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults."

Housing Lenders Fear Bigger Wave of Loan Defaults

"The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time."

Move Over Rover

We are all subprime now!

Another One Bites The Dust

This one's a biggie. "The collapse is expected to cost the Federal Deposit Insurance Corp. between $4 billion and $8 billion, potentially wiping out more than 10% of the FDIC's $53 billion deposit-insurance fund."

WSJ (07.12.08), via Calculated Risk, via Eschaton:

"IndyMac Bank, a prolific mortgage specialist that helped fuel the housing boom, was seized Friday by federal regulators, in the third-largest bank failure in U.S. history.

IndyMac is the biggest mortgage lender to go under since a fall in housing prices and surge in defaults began rippling through the economy last year -- and it likely won't be the last."

Crisis Deepens as Big Bank Fails

"The director of the Office of Thrift Supervision [ed. - as in the guy who was supposed to be regulating the lending practices of financial institutions like IndyMac], John Reich, blamed IndyMac's failure on comments made in late June by Sen. Charles Schumer, who sent a letter to the regulator raising concerns about the bank's solvency. In the following 11 days, spooked depositors withdrew a total of $1.3 billion. Mr. Reich said Sen. Schumer gave the bank a 'heart attack.'"

Schumer sez fuck off you ass-covering moron. "'If OTS had done its job as regulator and not let IndyMac's poor and loose lending practices continue, we wouldn't be where we are today,' Sen. Schumer said. 'Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs.'"

Long and short? IndyMac was going critical long before Schumer said anything.

Barry makes the point: "Why is it that all these rumor-mongerers and shorts are only bringing some firms to their knees? How come they always seem to be the over-leveraged, under-capitalized, unhedged, most poorly-managed companies?"

And You Thought They Were Smart

Our Jolly Bankers in action. How to be a moron and make millions. Bloomberg (04.13.08):

"Citigroup Inc. and Merrill Lynch & Co. will reveal at least $15 billion more of subprime mortgage writedowns this week, the Sunday Times of London reported, citing analysts it didn't identify.

Citigroup will have $10 billion of writedowns, taking its first-quarter loss to about $3 billion, the newspaper said."

Citigroup, Merrill May Post $15 Billion Writedowns, Times Says

"Some analysts say the Citigroup writedowns may stretch to $12 billion, it said. Merrill may have a $5 billion writedown, taking it to a $2.7 billion loss, the report said."

The solution? Stick it to your best customers. NYTimes (04.13.08), via BigPicture:

"It was the nation’s lending institutions and mortgage originators that got us into this credit mess, but it is consumers, taxpayers and those companies’ shareholders who will end up shouldering most of the costs.

The latest example of this is in the mass freezing of home equity lines of credit going on across the country."

You Thought You Had an Equity Line

"Reeling from losses on their wretched loan decisions of recent years, lenders are preventing borrowers with pristine credit and significant equity in their homes from tapping into credit lines that they paid dearly to secure."

How do these guys find their way home at night?

We're In The Money

Well maybe not everyone. AP (04.03.08):

"The number of new people signing up for unemployment benefits last week shot up to the highest level in more than two years, fresh evidence of the damage to a national economy clobbered by housing, credit and financial crises.

The Labor Department reported Thursday that new applications filed for unemployment insurance jumped by a seasonally adjusted 38,000 to 407,000 for the week ending March 29."

Jobless Claims Hit 2-Year High

"The increase left claims at their highest point since Sept. 17, 2005."

For what it's worth, as of February, 2008, the average hourly earnings of production and nonsupervisory workers was (in constant 1982 dollars) $8.28. Which is exactly what it was in October, 2003.

Why does George Soros hate America? Bloomberg (04.03.08):

"Billionaire George Soros called the current financial crisis the worst since the Great Depression and said markets will fall more this year after a brief rebound."

Soros Sees Additional Market Declines After Temporary Reprieve

Why might George be worried? "Credit default swaps -- a way to bet on the creditworthiness of a company -- may be the next crisis area because the market is unregulated, and it's impossible to know whether counterparties can meet their obligations in the event of a bond default. The market has a notional value of about $45 trillion -- or about half the total wealth of U.S. households."

And if that shitpile slides South folks, we're all fucked.

Bear Stearns Implodes

Man, talk about a fire sale. Bloomberg (11.16.08):

"JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for about $240 million, less than a 10th of its value last week, after a run on the company ended 85 years of independence for Wall Street's fifth-largest securities firm.

Shareholders of New York-based Bear Stearns will get stock in JPMorgan equivalent to about $2 a share, compared with $30 at the close on March 14, the two companies said in a statement today."

JPMorgan Chase Buys Bear Stearns for $240 Million

It was either this or bankruptcy, "as clients pulled $17 billion in two days last week and creditors stopped renewing loans."

And it's gonna hurt. Wall Street Journal (03.17.08):

Many well-known investors, from billionaire Joe Lewis to Bruce Sherman, the head of Legg Mason Inc.'s Private Capital Management Inc. money-management firm, have seen the value of their stakes in Bear Stearns plummet.

The pain could be most acute for Bear Stearns's employees, who are steeped in a culture of personal ownership -- and hold about a third of the firm's shares outstanding."

J.P. Morgan Rescues Bear Stearns

Thanks again folks. It's been real.

And Jimmy? Hell, he could give a shit.

Who's next?

A Little Piece Of The Shitpile

This is pretty pathetic. Bloomberg (03.11.08):

"Even after downgrading almost 10,000 subprime-mortgage bonds, Standard & Poor's and Moody's Investors Service haven't cut the ones that matter most: AAA securities that are the mainstays of bank and insurance company investments.

None of the 80 AAA securities in ABX indexes that track subprime bonds meet the criteria S&P had even before it toughened ratings standards in February, according to data compiled by Bloomberg."

Moody's, S&P Defer Rating Cuts on AAA Subprime, Hiding Losses

"A bond sold by Deutsche Bank AG in May 2006 is AAA at both companies even though 43 percent of the underlying mortgages are delinquent."

Hard to believe these guys were that stupid, eh?

Their response has been to absolutely panic. "Banks are even demanding collateral to support investments in Treasury bonds - which are backed by the US government."

A Trillion, Anyone?

Bloomberg (02.29.08):

"Financial firms are likely to face at least $600 billion of losses as the crisis triggered by the collapse of subprime mortgages batters banks, brokers and insurers, UBS AG analysts said in a report today.

Financial institutions have disclosed more than $160 billion of writedowns and credit losses. Banks and brokers stand to lose $350 billion, according to estimates from UBS's global banking team."

Financial Firms Face $600 Billion of Losses, UBS Says

We're more fucked than we thought. "'We have to recognize the risk that the economy will suffer more damage than what consensus suggests,' wrote Geraud Charpin, head of European credit strategy at UBS in London."

No

Our friends, the jolly bankers. Now they won't loan anything to anyone. Bloomberg (02.13.08):

"The Federal Reserve's interest-rate cuts last month have failed to lower borrowing costs for many companies and households, increasing the chance of further reductions from the central bank.

Companies are paying more to borrow now than before the Fed reduced its benchmark rate by 1.25 percentage point over nine days in January, based on data compiled by Merrill Lynch & Co."

Bernanke Stymied as Rate Cuts Fail to Lower Borrowing Costs

After throwing money at anything that breathed over the last five years, "(b)anks and investors are [now] demanding greater compensation for offering credit as losses mount on subprime-mortgage securities and concerns grow that ratings of bond insurers will be cut."

Speaking of the bond insurers, Warren's really turning the screws on 'em. NYTimes (02.13.08):

"Warren E. Buffett volunteered on Tuesday to rescue Wall Street from its latest looming crisis.

But Mr. Buffett, the billionaire investor known as the Oracle of Omaha, made clear that his offer would not come cheap. And even then, jittery investors were unsure that his plan would work."

Buffett Offers Aid on Bonds, but at a Price

Warren promised to "stand behind, or reinsure, policies that [MBIA, the Ambac Financial Group and the Financial Guaranty Insurance Company] had written on $800 billion of municipal bonds, a move analysts called a shrewd attempt to take advantage of the companies’ problems. His holding company, Berkshire Hathaway, is willing to commit $5 billion to the task but wants the insurers to pay it a steep premium. Berkshire will refuse to take any risks associated with mortgage-related securities, the riskiest debt that the companies insure."

The insurers don't have the financial wherewithal to even guarantee the safe stuff. WSJ (02.13.08):

"Current upshot: If the rating agencies downgrade the bond insurers, they effectively downgrade thousands of municipal bonds, meaning many holders no longer would be legally eligible to hold them. That's where we are today.

We're not so sure the result would be the financial catastrophe that some forecast. The market might well recognize the value of the downgraded bonds despite any downgrades. But some believe a downgrading of the insurers would beget forced selling, a collapse in muni prices, and insolvency for many institutions and perhaps for towns and cities that couldn't roll over their outstanding debts."

Warren the Munificent

If the alternative doesn't pan out because our jolly bankers are just too freaked, Warren's proposal begins to look very much like an offer they can't refuse.

And what an offer it is! "In a letter dated Feb. 6 to Lazard, the investment bank that is advising MBIA, Ajit B. Jain, president of reinsurance for Berkshire Hathaway, proposed that MBIA pay Mr. Buffett’s company 150 percent of the premium it earns for insuring its municipal bond portfolio. Typically, insurers cede a share of their premiums, not more than they earn."

Warren lays it on the line: "'When I go to St. Peter I will not present this as some act that will entitle me to get in. We're doing this to make money.'"

More, More, More

Financial Times (02.10.08):

"Senior global policymakers have raised projections for the size of subprime-related credit losses in a move that implies financial institutions will have to increase write-offs.

Speaking after the meeting of Group of Seven finance leaders, Peer Steinbrück, German finance minister, said the G7 now feared that write-offs of losses on securities linked to US subprime mortgages could reach $400bn.

Subprime losses could rise to $400bn

"This is sharply higher than the $120bn credit losses that Wall Street banks and other institutions have revealed in recent weeks – and also far bigger than the US Federal Reserve’s estimates for subprime losses last year of $100bn-$150bn."

It's still "unclear where much of this subprime pain would eventually emerge", mostly because our jolly bankers are loath to admit they've screwed the pooch.

Tut, tut, says Peer, who along with his buddies "appealed to financial institutions to provide 'prompt and full disclosure' of losses, to restore confidence."

Our man Hank, who really, really wants the Japanese and Europeans to "stimulate their economies by fiscal packages", said he wasn't "disappointed [they] had rejected the idea", but went on and "implied that other countries would not escape a US downturn, describing decoupling as a 'myth'".

Pretty subtle, that old Hank.

Still, he continues to insist he's not "[urging] his G-7 colleagues to use fiscal policy to boost domestic demand in the way the U.S. has." On the other hand, "Treasury Undersecretary David McCormick earlier this week called on other nations to 'take prudent steps to strengthen their economies' demand components.'"

And as they say, a nod's as good as a wink to a blind bat.

We Gotta Million Of 'Em

Neutron loans, they call 'em. Bloomberg (02.07.08), via Eschaton:

"Joe Ripplinger took out a $184,000 mortgage in 2006 and makes his payments every month.

Now he owes $192,000."

Exploding ARMs Roil Bernanke's Drive to Calm Markets

"The 66-year-old Minneapolis house painter has a payment-option adjustable-rate mortgage. It allows him to write a check for $565 a month even though he owes $1,300. The difference is added to the mortgage, and when his total debt reaches $212,000, or after five years have passed, he said his monthly minimum could jump to about $2,800, which he can't afford."

Neutron loans? "'We call them neutron loans because they're like a neutron bomb,' said Brock Davis, a broker with U.S. Express Mortgage Corp. in Las Vegas. 'Three years later the house is still there and the people are gone.'"

The First Of Many

Man, you just know this went on all over the place. And not just with Merrill, either. Bloomberg (02.01.08):

"Merrill Lynch & Co. agreed to pay Springfield, Massachusetts, $13.9 million to settle a dispute over collateralized debt obligations that tumbled in value.

The money will reimburse Springfield for the cost of the CDOs, securities tied to home loans and other debts shunned by investors as losses on subprime mortgages mounted."

Merrill to Repay Massachusetts City for CDO Purchase

"New York-based Merrill said it agreed to the refund after discovering the purchase was made without the city's consent."

More from the Boston Globe (02.01.08):

"Springfield invested about $50 million in cash-management accounts with Merrill Lynch starting in November of 2006. In the spring of 2007, $13.9 million of that was placed in the risky collateralized debt obligations - which are securities linked to bonds and loans, including subprime mortgages.

The Globe reported earlier this week that Merrill failed to inform the city that it had purchased the debt obligations until last July, when it suddenly changed the names of three investments on the city's monthly statement to indicate that they were CDOs."

Merrill to repay Springfield for losses

It appears that "(t)wo Merrill Lynch brokers in Albany used city cash funds to purchase the complex investments without telling Springfield officials".

Ooopsie.

Uh Oh

Don't ask; don't tell. The big guys knew all along these loans were crap, but there was just too damned much money to be made. NYTimes (01.27.08):

"A company that analyzed the quality of thousands of home loans for investment banks has agreed to provide evidence to New York state prosecutors that the banks had detailed information about the risks posed by ill-fated subprime mortgages.

Investigators are looking at whether that information, which could have prevented the collapse of securities backed by those loans, was deliberately withheld from investors.

Loan Reviewer Aiding Inquiry Into Big Banks

"Clayton Holdings, a company based in Connecticut that vetted home loans for many investment banks, has agreed to provide important documents and the testimony of its officials to the New York attorney general, Andrew M. Cuomo, in exchange for immunity from civil and criminal prosecution in the state."

We make money the old-fashioned way: we screw the investors! If that ain't earning it, we don't know what is.

I Was Gambling In Havana

I took a little risk. Bloomberg (01.22.08):

"Bank of America Corp., the second- largest U.S. bank, said earnings dropped 95 percent after $5.28 billion of mortgage-related writedowns and higher provisions for future loan losses."

Bank of America Earnings Plummet After Loan

Send lawyers, guns and money. Bloomberg (01.22.08):

"Wachovia Corp., the fourth-largest U.S. bank, said profit fell 98 percent to its lowest since 2001 after writedowns for bad loans and mortgage-backed securities."

Wachovia Net Falls 98% on Mortgage-Linked Writedowns

Dad, get me out of this. Bloomberg (01.22.08):

"Ambac Financial Group Inc., the first bond insurer to be stripped of its AAA credit rating, reported its biggest-ever loss and said it is talking to 'a number of potential parties' to help overcome a slump in the value of subprime-mortgage securities it guarantees.

The second-largest bond insurer posted a $3.26 billion loss after writing down the value of guarantees on subprime debt by $5.21 billion, according to a statement by the New York-based company today."

Ambac Reports Loss, Talks With 'Potential Parties'

Now I'm hiding in Honduras. NYTimes (01.22.08):

"The Federal Reserve, responding to an international stock sell-off and the likelihood of a sharp drop in America on Tuesday morning, cut its benchmark interest rate by three-quarters of a percentage point.

The Federal Open Market Committee lowered its target for the federal funds rate on overnight loans between banks to 3.5 percent, from 4.25 percent."

Fed Makes Emergency 0.75% Rate Cut

I'm a desperate man. The Guardian (01.22.08):

"Hopes of more interest rate cuts lent much-needed support to leading London shares today but they failed to erase yesterday's savage losses as talk of an impending US recession continued to rattle nerves.

Following steep sell-offs in Asian stock markets overnight, the FTSE 100 plunged more than 200 points within minutes of the open, adding to a sharp fall the previous session."

Global share rout continues

Send lawyers, guns and money. Bloomberg (01.22.08):

"U.S. stock-index futures tumbled on concern an emergency interest rate cut by the Federal Reserve will fail to halt a worsening global economic slowdown."

U.S. Stock Futures Drop on Concern Rate Cut Won't Stop Slowdown

The shit has hit the fan.

"'People may see it as an extreme step and feel that it's a sign the situation is worse than they had anticipated,'" said John Carey, who helps oversee about $13 billion at Pioneer Investment Management in Boston. 'This will definitely wake people up who were thinking the economy was just fine.'"

Get Ready

Tomorrow's gonna be pretty crazy here in the good old USA. The Bush Boom blew up the rest of the world today. Bloomberg (01.22.08):

"Almost half of the world's biggest stock indexes fell into a bear market as mounting concern about a U.S. recession dragged down banking and retail shares across Asia, Europe and Latin America."

Stock Drop Pulls 38 Indexes Into Bear Market; Banks Lead Plunge

London Times (01.22.08):

"More than £77 billion was wiped off the value of Britain’s stock market yesterday in its biggest one-day percentage loss since September 11, 2001. Shares across the world plunged over fears that the threatened US recession will undermine the global economy."

World markets plunge on US recession fears

This is not going to be the legacy George was looking for, not by a long shot.

Well Be That Way Then

Fitch throws the towel back at Ambac. Bloomberg (01.18.08), via Calculated Risk:

"Ambac Financial Group Inc. became the first bond insurer to lose its AAA rating after Fitch Ratings downgraded the company.

Ambac Assurance Corp. was lowered two levels to AA and may be reduced further, New York-based Fitch said today in a statement. The downgrade 'reflects the significant uncertainty with respect to the company's franchise, business model and strategic direction,' Fitch said.

Ambac Insurance Loses AAA Ranking at Fitch Ratings

"Without its AAA rating Ambac may be unable to write the top-ranked bond insurance that makes up 74 percent of its revenue. Ambac may have to quit the business or sell itself, said Robert Haines, an analyst at CreditSights Inc., a bond research firm in New York."

"The downgrade throws doubt on the ratings of $556 billion in municipal and structured finance debt guaranteed by Ambac."

Ewwww. Lot of dough, eh?