Housing Doom

Here is Housing Doom’s fifth installment of our unauthorized annotated transcript of the American Enterprise Institute’s October 30, 2008 seminar "The Deflating Mortgage and Housing Bubble, Part IV: Where Is the Bottom?" [1] This is the presentation by Chris Whalen. He makes use of a slide deck.[2] Here is the official transcript. There is a video and an audio-only recording of the event at the event site.

Highlights

• "I mean, imagine we are in the kitchen with a big knife and we were just chopping fingers off one after the other and laughing about it. That’s what fair value accounting is."
• "… a 3rd phase in this crisis, … the off-balance-sheet derivative contracts that are quote-unquote ‘notional’ now, but as consumer defaults and commercial defaults rise they become real."
• "What it tells you is that the entire industry today is at levels of stress … that we haven’t seen in 20 years."
• "That means 5, 5 1/2 percent for Citigroup, OK? That means the government ends up owning that bank." [3]
• "… But I do think that if my friends are right about the severity and the duration of a recession, you could see the government controlling some of the larger banks in the US."
• "The model we’ve had over the last few years, in addition to being ill-advised and reckless, basically makes a mockery of the whole Basel process, …"

Chris Whelan: [57:03] Thank-you, and on behalf of PRMIA and the D.C. steering committee I want to thank you and AEI once again for cosponsoring this series with us. [slide 1 -- refer [2] ]

I’m going to focus my remarks on the banking industry, which has been my role in these conversations we’ve had over the last 2 years. And I’m hopefully going to give you some reason for optimism, but unfortunately banks are lagging indicators, so bear with me.

Where are we in the process? If you look at the banking industry, we would tell you we are about half way through the adjustment process. [slide 2] And you might think — Well gee, Chris, we’ve been at this for 2 years — but unfortunately that’s just the way banks are. If you take the collapse of New Century Financial — you remember that one? … as kind of the starting point when everyone was forewarned in a very public and visible way, we’re two years into this.

Read the rest of this entry »

Here is Housing Doom’s fourth installment of our unauthorized annotated transcript of the American Enterprise Institute’s October 30, 2008 seminar "The Deflating Mortgage and Housing Bubble, Part IV: Where Is the Bottom?" [1] This is the presentation by Tom Zimmerman. He makes use of an extensive slide deck.[2] There is now an official transcript at the event site There is a video and an audio-only recording of the event at the event site.

Highlights

• "… the housing market’s going to go down, but I think there’s some data that says there may be some turning points not that far away."
• "Believe me, I would be selling everything in New York …"
• "Here’s a statistic for you. For the past six months the number of subprime loans in 30, 60, 90 day delinquencies has been going down."
• "… but we have this balance between foreclosures pushing more properties out there, these Augustine home sales taking them out of the system."
• "In addition to that, we’ve got this situation that, where that big securitization that no longer exists — that was 40 percent of our home lending back in ‘06 … ‘05 and ‘06."
• "It sounds like first somebody is going to figure out what it takes to keep [Freddie & Fannie] reasonably solvent, then go back and figure out what kind of loans they can make. If they do that, then they’re not going to be any help going forward."
• "… if you want to stop this next year of really terrible pressure on the housing market you have to intervene some way."

Tom Zimmerman: [40:13] Thanks Alex. Good afternoon everyone. [slide 0 -- refer [2] below] I must say I speak at quite a few conferences, and over the past several years I’ve usually been viewed as one of the most bearish commentators at the mortage and housing conferences I go to, but one of the reasons I enjoy coming here is that [laughter] I am not, by far, that — this is a pleasure. So … a little scary, but it is a pleasure.

So, Alex, that light at the end of the tunnel, it may not be a train. I’ll show you a few glimmers of hope here. [slide 1] We had — at lunch we talked about — is there any good news out there. Well there’s not really any good news, but the thing about markets, they do look a long way away, and I’m going to present some data which — keep watching the next 6 months and maybe some of it will help us get through this.

It’s not conclusive, the housing market’s going to go down, but I think there’s some data that says there may be some turning points not that far away. Not in the global — I agree with Nouriel in terms of the global disaster we’re facing, but in terms of the housing market that triggered this, there are some minor, minor positives. So let’s take a look at this. Believe it or not, I see a couple of small positives. I’ll qualify them, but they’re small.

Read the rest of this entry »

Here is Housing Doom’s third installment of our unauthorized annotated transcript of the American Enterprise Institute’s October 30, 2008 seminar "The Deflating Mortgage and Housing Bubble, Part IV: Where Is the Bottom?" [1] This is the presentation by Nouriel Roubini.

Highlights

• "… there’s a growing recognition that this was not just a subprime mortgage problem …"
• "… this is other huge time bomb of the CDS market where about $55 trillion of nominal protection has been sold against an outstanding stock of only $6 trillion of corporate bonds. "
• "… the $1 trillion number at this point is not the ceiling, it’s just barely a floor …"
• "… currently financial markets are dysfunctional. Fundamentals don’t matter, valuations don’t matter, it’s just flow."
• "… And even a small tiny island like Iceland can have systemic effects on asset prices, let alone if you have a blowup of Hungary, or Argentina, or Korea, or other economies."

Nouriel Roubini: [23:34] Well, Desmond called it very well, I think many aspects of why things are getting worse rather than better in the housing market, and I share his outlook and pessimism. I would like to elaborate on the broader picture about what’s happening in the economy and the financial markets.

I’ve been saying for a while this will be the worst financial crisis the US has experienced since the Great Depression and it looks like the worst one. I mean I don’t think there’s anything that’s happened since the Great Depression looks so severe. Of course the real economic consequences in terms of output contraction are not going to be as bad as the Great Depression because there is a massive amount of policy action, but in terms of financial shock, I mean what does happen in the last few months is really quite unbelievable, every other week another major financial institution going belly up.

Read the rest of this entry »

Here is Housing Doom’s second installment of our unauthorized annotated transcript of the American Enterprise Institute’s October 30, 2008 seminar "The Deflating Mortgage and Housing Bubble, Part IV: Where Is the Bottom?" [1] This is the presentation by AEI Fellow Desmond Lachman. He made use of a slide deck [2] and about one week before the event added newspaper articles to the site that he had written on the subjects of the future of banking regulation [3] and prospects for world-wide deflation.[4] The event site has both a video and an audio recording of the seminar.  No official transcript yet exists, but AEI has recently added a summary.[5]

Highlights

• "This is almost a once in a hundred year kind of event that is very likely to crush growth."
• "It looks to me as if it’s baked in the cake that you’re going to be getting the recession, rising unemployment, and that’s not too good for house markets. "
• "… the fact that the Fed is reducing interest rates to 1 percent in my view is neither here nor there."
• "… So you get somewhat in a vicious cycle, and that’s the reason why I think that you’ve got to get some sort of intervention to stop it."
• "What we’re going to need is we’re going to need stabilizing of the housing market through unorthodox means, coupled with a massive fiscal stimulus package, coupled with monetary policy accomodation, and then we might have a chance …"

Desmond Lachman: [12:38] Thank you very much Alex, and thanks once again for arranging this, and I really have to give you credit again, you and Chris, for having foreseen this as long ago as March of 2007. [slide 1 -- refer [2] below] You saw this coming in a big way and I recall at that time Ben Bernanke was just beginning to figure out that there might be a minor problem with subprime mortgages.

Read the rest of this entry »

Housing Doom is pleased to present the first installment of our unauthorized annotated transcript of the American Enterprise Institute’s October 30, 2008 seminar "The Deflating Mortgage and Housing Bubble, Part IV: Where Is the Bottom?" [1] This is the introduction by session moderator Alex Pollock. It uses a short slide deck.[2] The event site has numerous resources, including both an audio and a video recording of the 2 hour proceedings. There is as yet no official transcript.

Highlights

• "… this panel has previously brought you notable insights into, and accurate pessimistic forecasts of the problems of what happens when you have the collapse of a really big financial bubble …"
• "… so that would suggest about another 10 percent — that is 10 percent of the peak prices — to go."
• "So this is the institutional equivalent of putting your currency in the mattress."
• "… and they [the Federal Reserve Banks] have run their leverage up from 26 to 42 times."

Alex Pollock: [slide 1 -- refer [2] below] [00:00] … and welcome to the deflating mortgage and housing bubble Roman Numeral IV in our series.[1] [3] [4] [5] I’m Alex Pollock, a Resident Fellow at the American Enterprise Institute, and we have the same outstanding panel that we have previously had for our deflating bubble series, which by the way we fully intend to continue next Spring with deflating bubble Roman Numeral V [laughter] because this will still be going on by the Spring.

Now this panel has previously brought you notable insights into, and accurate pessimistic forecasts of the problems of what happens when you have the collapse of a really big financial bubble, which we had of course centered on mortgages but by no means limited to mortgages.

Read the rest of this entry »