-Caveat Lector-
Begin forwarded message:
From: [EMAIL PROTECTED]
Date: August 18, 2007 7:19:03 PM PDT
To: [EMAIL PROTECTED]
Cc: [EMAIL PROTECTED], [EMAIL PROTECTED], [EMAIL PROTECTED]
Subject: Running for the Exits
Running for the Exits
by Chris White
Sat Aug 18, 2007 at 10:57:31 AM EST
http://scoop.epluribusmedia.org/story/2007/8/18/105731/052
Bank runs are back. At least they are if you believe the LA Times.
Everything on that side is just s-o-o-o far away though, sometimes
it seems it might just be happening in another world. This was
Thursday's story in parts of southern California where Countrywide
Mortgage did nearly half of what used to be a $40 billion dollar a
month business.
"Fire" in a crowded movie-house?
This article, and this one from this side, which seems s-o-o-o much
l-e-s-s far away, both highlight what used to be someone's single-
minded Presidential election campaign theme, back in 1992
"It's the economy... stu..."
Jumbo mortgages are going to start to disappear except for people
with provable, adequate income, documentable assets and funds for
down-payments.
Jumbo an endangered species
Before this week there were brutally cynical people arguing that a
consumer slow down would not matter because 40% of consumer
expenditure is made by the top 20% who will not be affected by any
slow-down. Oh, really!
Like Voltaire's thoughts on why the British used to hang some of
their Admirals every now and again, slowdowns must be just to
encourage the others who are affected. I would like to summarize
three areas of impact, briefly, below.
This is from the LA Times article on the runs, which can be
accessed through the first link above.
As for parent firm Countrywide Financial, the mortgage giant said
draining its credit line would allow it to continue operations
while refocusing its business on the "plain vanilla" mortgage loans
that can be sold to Fannie Mae and Freddie Mac, the government-
sponsored mortgage finance companies.
Countrywide said it planned to fund more mortgages through
Countrywide Bank and have the bank invest in certain loans that
Fannie Mae and Freddie Mac won't buy, such as "jumbo" mortgages,
which in California are defined as those over $417,000.
Countrywide recently was funding about $40 billion a month in
mortgages. Of those, about half qualified to be sold to Freddie Mac
or Fannie Mae, and half were "nonconforming" loans the agencies
don't buy, including sub-prime mortgages to higher-risk borrowers
as well as jumbo loans, which account for 43% of all mortgages
issued in Southern California.
Company executives declined to discuss how the heavy withdrawals at
Countrywide Bank branches Thursday might interfere with that strategy.
Against this backdrop of panic surfacing I think there are three
areas to consider: first, the crisis among the mortgage lenders is
now becoming a cause of the acceleration of the decline in housing
prices nationwide, and therefore of greater uncertainty in the
pricing of real property related securities; second, the
Countrywide case shows that toxic mortgages are not only on the
asset side of balance sheets, but also on the liability side;
third, the combination of these two features is devastating for
both the economy and the financial system, without resorting to
language like "financial Armageddon" or using arcane arguments
"exorbitant privilege" to show how our military deployments around
the world are holding the banks up.
On the first: that ought to be obvious enough. "Cash-out" re-
financings and home equity lines of credit have provided about $800
billion a year to some U.S. consumers increasingly since 9/11/2001.
That has been cut in half by now, and will go lower.
Credit rating agency Moody's on Thursday down-graded packages of
second mortgages used to get round down payments in mortgage
financing -- No room for seconds . It used to be a standard trick
accepted through out the business, 80% first mortgage to qualify as
a "conforming loan", and then any percentage up to 20% for the
balance in a second mortgage or equity line, depending on credit
assessment of the buyer, in place of the old-fashioned down
payment. Moody's downgrade knocks that out.
So, tightening credit standards of potential buyers is going to
dramatically lower prices to bring properties within the
guidelines for conforming loans. This will make a huge unhappy, of
increasingly desperate homeowners whose imaginary "savings" or
"equity" will evaporate along with everything riding on that, kids'
education, retirement planning, automobile purchases, vacation
plans. I'm sure it doesn't call for much imagine to think through
what people do with what they borrow when they confuse what they
can borrow with wealth.
On the second: the crisis with mortgages has been discussed as a
crisis of the asset side of balance sheets. Some of us pointed out
that one man's assets are another's liabilities, and asked what
would happen to balance sheets if one side went to zero and the
other, in effect, to infinity, for what you owe you owe, and both
balance sheets were based on the same security or piece of
property. How would the computer programs which calculate the value
of derivative contracts handle such mismatches? Countrywide was
using mortgages to finance its borrowings from lenders. Remember
the $50 billion dollar credit line for the <$14 billion dollar
company? Well,
those who provided the credit had agreed to be repaid with... you
got it... mortgages!
I think the 40 banks who provided the credit were satisfying
covenants which required them to accept mortgages in payment
because that is what they had undertaken to do. So now there's
something called the "commercial paper" or "CP" crisis, because
they've all realized there's mortgages folded in with the global
$2.2 trillion commercial paper market. Double oops! S-o-o-o Sorry,
we forget about those.
The banks which are trying to get mortgages off one side of the
balance sheets are taking them in on the other side! Enough to make
your head spin. So that's laid out today by the good old "Grey
Lady" her self, the dame of the black on white side of the business,
Another $2 trillion + comes unstuck.
Why did I mention point 3 after these two? Well, when you pursue
that link you will find that Citigroup and J.P. Morgan, between the
two of them have "guaranteed" $90 billion of such paper and the
author of the NYT piece thinks that amount is about 5 or 6% of the
banks. But you may recall from what I wrote earlier in the week,
Leverage that nowadays 5 or 6% is often leveraging another 94 or
95% of who knows what. The Times also reports that State Street
Bank in Boston is on the hook for 23% of itself!
I short-listed 6 candidates for future trouble in that article.
Country-wide showed up the next day. So they really don't count.
Citi-group and Morgan were on the list too, not State Street
though! Who knows what will show up from Europe or the U.K, and
what the story will be with Goldman Sachs' Japanese partner
Sumitomo as all this continues to unfold. Won't the sources of all
the free money from Japan that fueled this bubble take it on the
chin as the flow reverses? Sorry again, triple oops this time.
Just remember though, Machiavelli though that the people who argue
that finance provides the sinews of war are wrong.
In his view, as long as you have troops you can get money, but with
money you are not guaranteed to be able to get troops.
Just a thought to maintain the overall context, does the US have
money, or does it have troops? And with that, what are the sources
of a country's power? Really? Money? Arms? Or something else
altogether?
Get a sneak peek of the all-new AOL.com.
www.ctrl.org
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