Housing Doom Housing Bubble Blog

It’s post-Superbowl bounce season, and all the Bears, financial and otherwise, are skulking off to hibernate.  Goldilocks rules!  Or does she?

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The Safety Net That Never Was - Part XXIII (and last)

SPECULATORS SPIN
DERIVATIVE DOUBLE BINDS
OF RISK FREE ILLUSION

Contributed by poet1 under Friday’s "Housing Haiku" post

Hail and farewell. This will be my last "Safety Net" post. I’ve been fascinated by derivatives and the GSEs since this 10 March 2004 Fannie Mae rebuttal of a Financial Times piece where reporter Steve Schurr estimated Fannie’s derivatives losses for 2003 at $14.4 billion. That was just about exactly a year after Warren Buffett called derivatives "financial weapons of mass destruction" and, well, I’ve had my eyes squeezed shut and my fingers in my ears ever since. Fannie started a dribble of corrections after its 2003 10-K was released, then admitted to about $9 billion in derivatives losses after the accounting scandal broke. Finally, this figure was revised down to about $6.3 billion when Fannie’s new management completed their 2004 10-K recently. While less than half of Schurr’s estimate, that amount of losses was a very big deal; but at least it didn’t evaporate the company. GSE analyst for the neo-conservative American Enterprise Institute Alex Pollock, a financial guru of great good sense in my opinion, recently noted [1] that this bean-counting exercise cost about a billion dollars, and calls into serious question the whole 800-odd page Rule 133 that governs GAAP accounting for these things. Win or lose, it’s high time someone took a long hard look at how companies and their financial statements are governed with respect to derivatives.

I’m not now, nor never have I been a financial expert. Until I started with Doom I was pretty much concentrating on the "re-fi" bubble and Fannie’s accounting, trying to make sense of a stream of MSM stories, spiced up with heavy additions of less regular sources, e.g. this international footware analyst with his own private Yukio Mishima-style militia. Really, I just look for patterns, depending on something like a sense of "smell." Now the story seems to have passed into the wider world of mortgage finance, private label mortgage banks, investment banks, hedge funds, and other large institutions. There appears to be a serious crisis brewing in the derivatives markets. While the chances of a world-wide economic meltdown this week are likely as remote as a major earthquake this week near Vancouver Island, I wouldn’t be surprised if Bernanke’s successor eventually gets a secret memoir from Ben with a chapter titled: "How We Held It Together Through Feb 2007." In this final "Safety Net" post, I’ll briefly go over some recent emissions from bubbleheads who are similarly worried, plus some backgrounders by more moderate voices.

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