Housing Doom

Canada’s market for asset-backed commercial paper remains just as illiquid as it was the day it seized up nearly 17 months ago but the lawyers and financial advisors trying to rescue it have already billed noteholders for nearly $200-million. [1]

First off, don’t mess with their parents …

Doomers should appreciate that those events of a couple of years ago were occurring a lazy afternoon’s drive from Plattsburgh New York, in a part of the world that supplies America’s Middle Atlantic States with much of their hydro-electricity, not to mention some really good jazz. Quebecers get into some different things from their neighbors. One of them is Socialism. The mind boggles at the prospect of what would happen if governments were ever to lose a significant amount of the pension money set aside for the province’s civil servents.

The Caisse de Depot et Placement du Quebec "manages the funds contributed to the Québec Pension Plan." Which is to say, it handles Quebec’s share of the monies for Canada’s version of "social security." Neat, eh? Caisse was also the proud inventor (and a big-time investor in) Canada’s innovative Asset-Backed Commercial Paper (ABCP) market, the same stuff that froze solid in mid-August 2007, heralding the start of the world-wide credit crunch & global financial crisis. How big is the Caisse? [2]

The Caisse is not only Canada’s biggest pension fund, but is also the heavyweight of Quebec finance. The fight that played out between the board and the politicians offers a look at what the government thinks about the institution, which holds Quebec pensions and is also a major investor in Canada’s biggest companies, as it tries to navigate the global financial crisis. As of Dec. 31, 2007, it held $155-billion in net assets.

Canadian business pundit Diane Francis has some tough questions [3] for the company’s management (this is a selection):

• Has the Caisse been hurt, its trades held in limbo or unexecuted; or its assets tied up in bankruptcy as a result of the demise of Lehman Brothers?
• On ABCP valuation being too low: The writedown in December 2007 was 25% but since then writedown charges for others have been higher so is the Caisse going to match these higher writedowns this year?
• How does the Caisse and Ontario Teachers compare in terms of overhead? In return over their own benchmarks?

This story feels like it’s going to turn into a real circus, with either Flaherty or his Coalition successor as Federal Finance Minister likely to get called soon for further assistance when the real extent of the company’s losses become public. We may well be about to test Canada’s reputation as the world’s leader in banking stability.

Read the rest of this entry »

What happened to personal responsibility in investing?  It’s been bad enough that so many bailouts are being proposed for people who rolled the housing "dice" and lost. Now Robert Shiller, author of Irrational Exuberence is proposing assistance for homebuyers going forward as well.  Among his suggestions to "get out of this mess" he advocated: [Thanks L!]

He’d like to see is subsidies for financial advice, so people aren’t making mistakes going to a mortgage broker to find out how much house they can afford.

I have a more affordable suggestion.  Rather than subsidizing financial advice [Does that sound like it has potential for abuse, or what?] here’s my suggestion. How about mandating the following be printed on every page of loan applications:

Read the rest of this entry »

Big hat to to Tim for finding this YouTube.[1]

Read the rest of this entry »

"We believe that in 2009 we will need to see Canadian banks stem loan and asset growth, to control their balance sheets better." [1]

If I recall correctly, a Fleet Street publisher was once asked to describe the most boring imaginable newspaper story. He replied it would be coverage of The Bank Act, or anything about Canada. Well, we’re combining both this morning. Not long ago our Finance Minster was positively gloating [2] about the dullness of our financial services industry. However behind closed doors the grownups were quietly freaking, even while Canadians continued to live in a Fool’s Paradise.[3]

Although Doomers were expected to forget by now, Flaherty sneaked down the chimney on Xmas eve with a C$1.3 billion down payment on a complete bailout of the Montreal Accord on ABCP, and in the process knocked his Nov 13th braggadocio into a cocked hat.  Our country’s commercial paper market is now dead as a private enterprise, so today’s meeting is an exercise in fantasy. Canadian banks can’t lend until governments inject the money directly. It’s the same here as it is in every other Western country, and for exactly the same reasons.  Wake up and smell the socialism, Jim.

Read the rest of this entry »

Here’s one homeowner that should have sent a thank you card to the lender that foreclosed: [Thanks "Vegas RE" and Rob for the links!]

AVONDALE, Ariz. — The little blue house rests on a few pieces of wood and concrete block. The exterior walls, ravaged by dry rot, bend to the touch. At some point, someone jabbed a kitchen knife into the siding. The condemnation notice stapled to the wall says: "Unfit for human occupancy."

The story of the two-bedroom, one-bath shack on West Hopi Street, is the story of this year’s financial panic, told in 576 square feet. It helps explain how a series of bad decisions can add up to the worst financial crisis since the Great Depression.

Less than two years ago, Integrity Funding LLC, a local lender, gave a $103,000 mortgage to the owner, Marvene Halterman, an unemployed woman with a long list of creditors and, by her own account, a long history of drug and alcohol abuse. By the time the house went into foreclosure in August, Integrity had sold that loan to Wells Fargo & Co., which had sold it to a U.S. unit of HSBC Holdings PLC, which had packaged it with thousands of other risky mortgages and sold it in pieces to scores of investors.

Today, those investors will be lucky to get $15,000 back. That’s only because the neighbors bought the house a few days ago, just to tear it down.

We hear a lot of calls to "stabilize home prices".  How does this happen when the home was mortgaged for more than it was worth in the first place?  We hear a call for "workouts" and foreclosure moratoriums.  On a case-by-case basis, some workouts can be beneficial to lenders and borrowers- but what can be done in cases like this?

Read the rest of this entry »

On Friday, Bloomberg news said that they believed that in 2009 the economy would be slightly better:

Read the rest of this entry »

"… it does look like this potentially has a lot of room to fall" - twist, 8/29 2008

Here’s our cenbank agencies / treasuries ratio graph from when we started following the H.4.1 numbers …

… and here’s the comment twist made about it at the time.

Now here’s the latest version of that chart.

Read the rest of this entry »

Lawyers representing the victims of Bernard Madoff’s alleged $50bn fraud are calling on the US government to bail them out with billions of taxpayers’ dollars. [1]

Frankly, the only surprising feature of this story is that the deal wasn’t done last Friday when the MSM was still asleep. Policymakers actually have no alternative. Neel has got to TARP the SIPC.

UPDATE: This new effort [3] exercises some of the more obvious conspiracy theories I have been expecting to pop up over the affair:

By claiming that he is a fraud rather than a failure, Madoff puts the federal government and U.S. Taxpayers on the hook to repay his clients the money he lost for them. If he admits to simply making poor investment choices, his clients loose everything.

What if Madoff really was the good friend and supporter he was painted to have pretended to be. What if his confession and shame are actually the acts of a martyr trying to protect his friends, causes, and faith community from his own failure?

Consider just the major charities and university endowments that were victimized. I’m not a non-profit manager, but it seems obvious that these organizations were live-money creatures using Bernie’s investments at least partly to park short-term monies from donors in the period before disbursements. That is, many managers would have been treating them like a sort of superior-yield money market fund or commercial paper investment. Therefore lots of deposits and withdrawals. Therefore enough exposure to further potential "fraudulent conveyance" clawbacks by SIPC to constitute an existential risk to many non-profits that haven’t yet fallen over.

The way I see it, the recent clarifications on Madoff losses [2] issued by several organizations may have been motivated in part by an "oh dear" moment and subsequent effort to lower their profiles with respect to clawback risk. SIPC is now in an impossible situation. They can’t knock over further worthy (heck, even unworthy) individuals and institutions who were already damaged by the fraud, or even ones who escaped by good luck or good management.  Think of the optics if some major leukemia, say, research program gets frozen for a decade until the litigation works its way through.  On the other hand, they can’t give a free ride just to those who removed money before the scandal broke.

Therefore, the only real alternative is to bail out the whole reeking mess. Size matters, and too-big-to-fail knows absolutely nothing of morality.

Read the rest of this entry »

"For economists now to make forecasts is a pretty difficult thing," said Ray Torto, chief global economist at real-estate firm CB Richard Ellis. "All of our models are outside the territory in which they’ve been built." [1]

The NY Fed was back to work on the 2nd, so we didn’t have to wait until Monday for the latest H.4.1 update. Since housing market economists have started blaming their tools, it’s not surprising that foreign central banks continue to be wary of US paper based on MBS, but perhaps the holiday season slowed down their selling activity a bit.

This week’s Reuters report [2] has foreign central banks buying a healthy $12.872 billion net of Treasury Debt. This is down quite a bit from the recent near-record buys. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.[3] Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.[4]

The central banks sold only $4.475 billion of Agency Debt in the week, down considerably from the last several figures. With the big drop in treasuries bought, however, the combined buy of $8.396 billion of US obligations was quite a bit smaller than last week’s.

The raw-numbers graph shows continued divergence, but at a slackening pace compared with the last few weeks.

The downward trend in twist’s ratios graphs is also less intense than over the last few weeks.

Read the rest of this entry »

Many developments in the Phoenix area that came online after the boom have not reached buildout, and/or have had to deal with a large number of foreclosures.  It was assumed that when the homeowners took over the associations from the developers that these neighborhoods would have occupancy rates of near 100%.  Since that hasn’t happened, assessments that were meant to be divided among many are now being divided among the few, and this can be pricey:  [Thanks L!]

Owners of homes in the half-built San Tan Heights development in Pinal County are staring at a special assessment of $750 per home in addition to the monthly assessment of $125.

Why the big charge? While the HOA was under the control of master developer Miller Holdings, home builders fell behind in dues payments by $600,000. In addition, former and current homeowners owe the association over $1 million. To pay bills and keep vital services for existing (and bill-paying) homeowners, the new homeowner-controlled HOA managers decided the additional assessment was the only way to stay out of bankruptcy.

During Arizona’s long boom in home building, laws governing HOAs have evolved strongly in favor of the big developers and the communities in which the developments are going up. Not much thought was given to the fate of the lonely, few homeowners who might have to foot enormous bills if the planned development failed to fill up.

If that sounds tough, how about these condo owners?

Read the rest of this entry »