Sunday, April 10, 2005

Lots Of Noise, No Action In Washington

With much fanfare, congress held hearings on the GSE's this past week and not much came out of them. "'Our chances are still 50-50 on getting a bill this year,' said one Republican staff member."

"Wall Street applauded", and the stock of Fannie and Freddie got a bounce. One thing to consider about that, at FNM, 93% of the stock is held by institutions and they appear to have held selling in check.

About those portfolios of mortgage backed securities (MBS), we still don't know if the US government is "implicitly" backing them. But even as the F&F's continue to unload their MBS's, congress did apparently leave the impression that they have joined the club. By that I mean the To-Big-To-Fail club, a nice membership indeed.

The politicians have rarely refused to bail-out a well connected entity. There was Chrysler, the S&Ls, Mexico twice, LTCM, the airlines, etc. I suspect much of what we saw this past week was more like professional wrestling. It may look like a struggle is going on but the players have an agreed upon ending.

Changes are happening in the credit markets, and Washington may be putting on a brave face. What will happen now is anybody's guess. But long gone are the cries for real reform, "a coalition of 37 federal, state, and local groups urged the federal government and Congress to cut ties with Fannie and Freddie Thursday. Warning that Americans are threatened by a potential taxpayer bailout of the two companies."


At 11:37 AM, Blogger John Law said...

the GSEs are too big to rescue in any meaningful way. even if they can rescue them, the hedge funds, central banks, foreigners, pension funds and anyone else aren't going to want MBS'

no way will they want those loans/bonds. for a time, I'm guessing there will be a sharp contraction in banks making loans because they won't know if they could resell them. anyways, a rescue will mean there was a crisis, so the ball is rolling and nobody will be able to handle the consequences.

the one thing people don't realize when they say the Fed can print money is that for a normal economy, banks have to want to lend money to people who want loans. people piled up with CC debt, huge ARM increase, IO loans and the thought of losing their job aren't going to take out loans. they aren't going spend money. they are going to pay off debt, save money and save for retirement- all at the same time.

At 7:36 PM, Anonymous Anonymous said...

I was surprised at the lack of action and meaningful discussion too. It is like everyone knows that FNM has done bad things and is in bad shape but I don't see anyone doing anything about it. How long is it going to take to restate the books ? How much mortgage debt must be moved to get it onside again ?

The question I'd like answered is when all these mortgage go bad, is the government going to back them or not ? Is it going to back all those that FNM holds and all those FNM "repackaged" or just FNMs' ?

Another thing: FNM was accused of cherry picking mortgages last week. Do organizations that got the spoiled cherries have the right to sue if they go bad ?

It seems to me there is a lot that wasn't discussed in the whole situation.

It also seems to me that a lot of mortgage products are going to go bad in the near future.

Maybe its just me.

At 10:41 PM, Anonymous Billy the Kid said...

Anon - You don't hear about it because the govt is still hashing out their strategy. There are too many parties that can be implicated in this fraud so the establishment is frantically working behind the scenes in CYA mode. The proof is in how well FNM stock has held up. Because it currently has the "to big to fail" stigma, along with institutional ownership over 90%, the government will have to back them in some manner - and the market is saying that (or it would be at $20 now). However, I think John Law's statements about a credit contraction are right on the mark.

It is going to be very difficult to convence consumers to borrow and lenders to lend when there are wide spread defaults and an economy falling into recession. This could get very ugly very quickly.

At 10:56 PM, Blogger John Law said...

I'm beginning to see a demographic problem similar to japan. a survery came out and boomers dont have a whole lot saved for retirement.

right now, their regular savings should be higher, their retirment savings should be higher and in no way should their CC debt levels, mortgage debt and car payments be so high.

as they need to save more, their lack of consumer spending should kill the economy. I believe we're near an end in the levels of sq. feet of retail space per person(if I'm not mistaken, it's grown a lot). as the boomers retire, they will sell financial assets(homes, stocks, bonds) and the next generation is most likely to small to buy them up at high prices. look at japan.

any long-term rise in commodity prices brought on by increasing demand from asia will only serve to compound the problem.

At 11:34 PM, Blogger goleta said...

Japanese have always saved more than Americans do so the situation can be very different here. After the US stock market crashed in Y2K, the boomers moved their money from stocks or stock funds to real estate and they will be in really bad shape if they sell their homes after the next real estate market crash. Most boomers will retire after 2010 and if the US experiences the same kind of real estate crash as Japan has, their houses will drop to less than 1/3 of the current prices when they retire.

It might be good for the younger generation though, as more and more of them can't even afford to rent their own apartments and choose to stay with their parents long after they finish college.

The current situation is especially terrible for the 20 something generation, as most of them probably have 100 grand student loan to pay off and if they can't even afford their own apartment, how can they even afford a house?

At 8:40 AM, Anonymous Anonymous said...

I too think there is going to be a debt crisis. I can't figure out why boomers, with 5 to 15 years to retirement, are buying housing, except if they don't have enough savings and they figure they can profit from the transaction.

Can you imagine being 5 years away from retirement and realizing that you don't have enough saved up to stop working ? Worse, I suspect that a lot of boomers have a lot of debt now, having purchased a new house. When the value of their house falls, they will be worse off than before.

I can't see this ending well either. I suspect we are due for a period of deflation after we get through the period of inflation. This all seems to be shaping up like what happened in Japan for the last 10 years.

At 8:45 AM, Anonymous Anonymous said...

I went to Costco on the weekend and did a bit of research.

I went down the tools aisle and checked where everything was made. Everything was made in China except for the Dewall tools, which were made in Mexico.

Ditto for the clothing racks.

What I am wondering is what we are going to have for industries once we stop building houses for everyone, stop selling each other real estate and stop selling each other financial services.

Who actually builds anything in America anymore ? We don't even like our domestic automobiles anymore.

This is getting scary.

At 10:21 AM, Blogger John Law said...

I think the 1990s boom seriously distorted many people's thinking. they think money comes and goes and comes right back again, just as quick. lose money in stocks, make it back in housing. people don't have a psychological anchor, they think making money is easy, so they go into debt, dont' save and speculate in housing.


we aren't heading for the 70s I don't think, we have way more debt than we did back then. I think we're heading for the 30s and some kind of debt deflation that kills the economy. from the depths of the GD though, a commodity boom developed. I think that could happen. when no investments are good, I think the money flows into commodities because you have to consume them, rich or poor as a society.

At 10:38 AM, Anonymous Anonymous said...

"I think the money flows into commodities because you have to consume them, rich or poor as a society."

There is a commodity boom right now because China is consuming so much stuff manufacturing everything for the US. I expect commodity stocks to fall when this all shakes out.

The 70s were characterized by commodity speculation in gold, silver and oil. In the end it was a bust for all.

The world isn't short any of these goods.

The US is short on savings and has way too much debt.

The shakeout is going to be funny. Right now the Asian countries have a glut of savings and the only place they know to put it is into the US. The US bond yields are low and falling today, even though everyone knows the US has problems.

The shakeout will be funny. At some point people will FINALLY realize that it is safer to hold cash rather than US bonds. That is when yields are going to rise and things will get scary. For whatever reason we aren't there yet. And as long as interest rates stay low, fools will buy outrageously priced real estate. It doesn't seem like banks have any reservations about giving money to everyone and anyone to spend. There doesn't seem to be any limit whatsoever.

I was thinking a shakeout at Fannie Mae would produce some limits, but nothing appears to have changed with that.

At 11:44 AM, Anonymous Billy The Kid said...

A great source that trackes out the cycle of deflation is the website for Comstock Partners at

Go to slide 6. A red dot denotes wherer we are now. We are in the midst of competitive devalutations now. The most odvious evidence is the fact that the ECB has not raised their rates yet. I think this will cause a strengthening in the dollar short-term but Ben "the helicopter" Bernanke will end that as soon as the fed realizes that we are in a recession. I suspect that will be sometime next year.

Anyway, the next stage in the cycle of deflation is protectionism. In case you haven't already read about it, Congress has passed a bill through committee that will erect 27% tariffs on all Chinese goods until they float their currency. Of course China will not cave into American demands - but they will retaliate!

I side with Prechter. He predicts a bottom in the bear market in 2009 - 2010. I think we are entering the second of three waves down for the bear market and it will bottom sometime next year. The final phase is total capitulation. We are not even close to that.

The silver lining in all of this is that, althought there will be widespread financial suffering, we will be able to build up our industry again and say bye bye to the casino "finance" economy. Then "Made in the USA" will finally start to reappear on our Costco shelves:-)

At 1:24 PM, Anonymous Anonymous said...

This is pretty ominous. 50% of all debt is held by consumers as mortgage or credit card debt.

Thanks for the link.

"In summary, we believe that real estate will be the main catalyst for the deflationary environment we expect is inevitable. This is the result of the tremendous demand for RE since the mid 1990s driving valuations through the roof. The prime driver of the appreciation was the liberal lending policies of banks and mortgage institutions. The combination of the lax lending and the demand from homeowners to continue to borrow against the equity in their homes, have placed RE in a vulnerable position. The rising prices have moderated substantially, while until just recently the borrowing and lending continued at record levels. This dropped homeowners' equity to record lows. Since every valuation ratio of real estate is presently at record highs, if the slowdown in appreciation turns into an actual decline in values, the present economic recovery and stock market recovery could reverse and be potentially devastating to the financial environment."

I hope the shakeout doesn't take until 2009/10

At 3:07 PM, Anonymous Anonymous said...

In response to Anonymous (8:40am), I have experienced the non-saving boomer mentality that has created this housing bubble in my opinion. My father (approaching 60) hadn't saved a penny for retirement because of his attitude towards working and life. He saw his parents work hard with no play often times forgoing vacations and such so that they could save for theirs and their childrens future (they are now millionaires). The baby boomer mentality kicked in the 80's and my father had to have the latest car, biggest house and most expensive vacations. He figured he worked hard for it all. As a result he was merely keeping-up-with-the-Jones' and burying himself financially. In order to catch up with his savings, he invested a large sum of money in the stock market only to lose 75% of it in the crash. Last year, after seeing his own San Diego home appreciate to 4 times what he paid for it, he decided real estate was the quickest and best way to retiring early. He refinanced his home to invest in rental units (his home had been completely paid for 5 years ago). After feeling very wealthy again, he buys a new car, adding to the 2 that he currently owns. Now panic sets in...he needs to sell his house because he feels the market will crash and he can very possible lose the rental homes as well as his own if he waits much longer. Need I say more?


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