Kp writes:
Obligatory "how is this information impacted by inflation?"
Kp | 03.28.08 - 2:13 pm | #

plschwartz writes:
from Bloomberg

A federal judge issued an arrest warrant for former National Century Financial Enterprises Inc. executive Rebecca Parrett for failing to report to authorities after her conviction in a $2 billion fraud.

Parrett, 59, was convicted March 13 with four other former company executives after a trial in federal court in Columbus, Ohio. She was supposed to report to the Pretrial Services Office near her home in Carefree, Arizona, for installation of an electronic ankle bracelet before sentencing.

``She is missing,'' Assistant U.S. Attorney Douglas Squires said today. Deputy U.S. Marshal Brian Babtist said Parrett is considered a fugitive
plschwartz | 03.28.08 - 2:30 pm | #

crispy&cole writes:
Retail consumption in trouble:

http://www.bloomberg.com/avp/ avp....HIEaqmSnuo.asf
crispy&cole | Homepage | 03.28.08 - 2:31 pm | #

Barley writes:
What this I here - another 100B next month for wobbly banks. After 75B this week...pretty soon we are going to be talking real money.
Barley | 03.28.08 - 2:32 pm | #

Allen C writes:
So CR,

Have you changed your outlook on how severe this recession is going to get? The probability of some miraculous turnaround seems rather low.

It's a slow moving train wreck and the crunching sound hasn't abated.

BTW - Thanks again for the great estimate. I suspect this one is in the bag as well.
Allen C | 03.28.08 - 2:32 pm | #

crispy&cole writes:
"consumer apacolypse" (from bloomberg link)
crispy&cole | Homepage | 03.28.08 - 2:33 pm | #

km4 writes:
OT - Marc Andreesen has a scathing but brilliant post up today titled Congratulations, you're paying Jimmy Cayne's ( Bear Stearns CEO ) marijuana bills!

http://blog.pmarca.com/2008/03/ c...atulations.html

Here's Marc's analysis of what Bear Stearns would have been worth if the Federal Government hadn't backstopped the deal with a $29 billion loan.

The US taxpayer is loaning Bear Stearns and JP Morgan Chase, Bear Stearns' acquirer, $29 billion -- just revised from $30 billion, simultaneous with JP Morgan Chase raising its acquisition price for Bear Stearns to $10/share from $2.

Without that $29 billion of taxpayer money, Jimmy Cayne's stock would be worth $0/share, and if you multiply that by 5.66 million shares, the total would be $0.

The $29 billion taxpayer loan is almost certain to lose money as it is being used to backstop stinky assets on the Bear Stearns balance sheet -- the same assets whose plummeting fall in value catalyzed Bear Stearns' effective bankruptcy.

It is virtually certain that taxpayers are going to take some loss on that $29 billion loan.

When we do, we will have the immense satisfaction of knowing that the first $61.3 million of those losses represent a direct cash transfer from US taxpayers to Jimmy Cayne.
km4 | 03.28.08 - 2:33 pm | #

Eric writes:
The figures are "real", no? Implying already adjusted for inflation.
Eric | 03.28.08 - 2:33 pm | #

crispy&cole writes:
"7,000 stores closing in the US"
crispy&cole | Homepage | 03.28.08 - 2:33 pm | #

Allen C writes:
"pretty soon we are going to be talking real money."

The list of prop jobs beginning with the FHLB continues to grow. What are they going to do once the Fed balance sheet is consumed? How will the market respond to direct government support on top of the substantial deficit and likely decline in receipts?
Allen C | 03.28.08 - 2:40 pm | #

CalculatedRisk writes:
Kp, it's all in real terms. (inflation adjusted).

Allen C, I don't see unemployment reaching 8% - so by that definition, I don't think the recession will be severe - but I continue to think that it will linger.

Best to all.
CalculatedRisk | Homepage | 03.28.08 - 2:41 pm | #

Censured writes:
When we do, we will have the immense satisfaction of knowing that the first $61.3 million of those losses represent a direct cash transfer from US taxpayers to Jimmy Cayne.
km4


Do Not Repeat
Censured | 03.28.08 - 2:41 pm | #

scotty at the used car lot writes:
Now, if we can just get back to the used car lot metaphor, we can look at PCE & chain-type price index for personal consumption expenditures, in regard to the dynamics on and off the car lot.

The Fed is essentially going to produce a massive amount of cars to park on the Fed used car lot and then assume these cars will all be bought, then driven away in this supply side nightmare.

In reality, what is occurring is that The Fed is filling the lot beyond capacity and pushing more and more cars into the street outside The Fed dealership. Think in terms of a run on the bank, where people line up around the block -- all at the same time.

This overflow out of the lot, into the street creates a traffic flow problem and as The Fed pushed more cars into the used car lot, they can stack cars either vertically and parabolically straight up into a 1000 story structure, or distribute the overload into the streets and disburse the oversupply; however, as more and more cars are pushed out, you need either more "economic: drives or mechanisms to move this synthetic flow.

What is happening, is a multi-car pile up, traffic jams and illiquidity, because this easy flow of cars from the Fed is blocking normal traffic flows.

Supply side economics suggests that the more cars we push into the streets, the better the chance of trickle down stimulation, i.e, they hope that there are people waiting on the sidelines or outside the boundaries of this existing traffic jam. I would argue that the distribution and Katrina-like flood of supply side distortion s resulting in chaos which is resulting in systemic failures, like bridges collapsing, traffic routes being blocked by accidents and emergency vehicles unable to clear paths, resulting in larger pile ups near the dealership.

We are screwed!

Yah!
scotty at the used car lot | 03.28.08 - 2:43 pm | #

Nemo writes:
Cute (from Ritholtz):

March Madness
Nemo | Homepage | 03.28.08 - 2:50 pm | #

Ralph Cramdown writes:
Re: Marc Andreesen funnies.

I'm going to note right away that Marc is prima facie wrong. Since Cayne sold for more than $10, the amount in excess of $10 is being paid by speculators who believe JPM will eventually pay more than $10. QED

Second, I'm going to say that I'm not smart enough to judge that Bear was worth $0. I know that these IBs are working with very high leverage, so a difference in asset or liability values of 1% is easily enough to wipe them out. I know that Bear got done in by a crisis of confidence - i.e. their phones stopped ringing. Marc's suggestion, that Bear's net worth was between $0 and -29.5B (lower and JPM wouldn't buy, higher and the shares weren't worthless) seems pretty friggin' cocky for a guy who hasn't looked at the books and whose specialty most certainly isn't high finance.
Ralph Cramdown | 03.28.08 - 2:51 pm | #

energyecon writes:
CR, Kp,

It's in real terms but the question I have is how much hedonic adjustment exists in the deflator? What does that look like when converted to real from nominal using the 'old school' methodology?

That is also a question I have for your one dimensional recession depth indicator, CR. What methodology changes have occurred in the unemployment rate calculation?
energyecon | 03.28.08 - 2:59 pm | #

bzb writes:
I'm going to note right away that Marc is prima facie wrong. Since Cayne sold for more than $10, the amount in excess of $10 is being paid by speculators who believe JPM will eventually pay more than $10. QED

My understanding is that without the Fed intervention (euphemism for "bailout"), the shareholders were going to get wiped. So Cayne was going to end up with $0, not $60+ million.
bzb | 03.28.08 - 3:00 pm | #

Anonymous writes:
Meanwhile, the Joint Economic Committee has scheduled a hearing April 2 with Federal Reserve Chairman Ben Bernanke, who will be grilled on the Fed’s backing for the sale of Bear Stearns to JP Morgan Chase and its decision to give investment banks access to the Fed’s discount window, normally reserved for regulated commercial banks.

The Senate Finance Committee is also investigating the Bear Stearns deal, and the Banking, Housing and Urban Affairs Committee plans an April 3 hearing as well.

Lawmakers will be weighing whether legislation is needed to consolidate regulation of the financial sector under the Fed or a new entity. Two days ago, Treasury Secretary Henry M. Paulson Jr. said his department “will soon release a blueprint for regulatory reform that proposes a financial regulatory framework which we believe will more effectively promote orderly markets and foster financial sector innovation and competitiveness.”

>> Anyone have news on Bear providing docs today? They had until today, so guess this is a closed door, no taxpayer allowed-behind the scenes, under the table kinda deal from the Senate & Bear? Maybe just the banking gurus need to know what the details are, just like they will help explain why the bailout is a good deal??
Anonymous | 03.28.08 - 3:05 pm | #

TheFrog writes:
OT: non-borrowed reserves of banks.
Ugly numbers...
http://www.federalreserve.gov/re...ses/h3/Current/
TheFrog | 03.28.08 - 3:09 pm | #

RE writes:
energyecon,

This is exactly the point, the measuring stick (methodology) for inflation and unemployment has changed so drastically over the years that we cannot one on one compare these figures.

I cannot dismiss the notion that this was part of the intent of changing the methodology, otherwise we would be reporting both figures. To a degree that is still possible with unemployment but isn't possible with the CPI.

I am similarly concerned about the CRB when its composition changed and became much heavier weighted towards energy. Lots of people simply draw the charts and formulate conclusions without taking into the account a drastically different baseline.
RE | 03.28.08 - 3:09 pm | #

Allen C writes:
"who hasn't looked at the books"

Clearly, without government support, Bear is worth less than $10/share or $1.5B.

"so a difference in asset or liability values of 1% is easily enough to wipe them out. "

Yes...And apparently no one else wants to step up to the risk. Without the Fed, I suspect no one would step up to the risk. That implies a valuation of zero. It's amazing how so few question the price of risk at all time lows and when it goes up, many claim irrationality.

Let's face it, money will continue to hide in treasuries until prices adjust downward.
Allen C | 03.28.08 - 3:16 pm | #

jm writes:
Re the PCE graph, it would be interesting to see this put on a per-capita basis, adjusted for inflation.

As the population is growing about 1% a year, PCE growth less than that means per-capita consumption is falling even in nominal dollars.
jm | 03.28.08 - 3:18 pm | #

Anonymous writes:
Several interesting charts here on recession and Fed Fund rates:

The links go to StockCharts, which sets up attributes for 30 yr versus 3M treasuries, which can be expanded to go backwards 10 tears (I think).

http://en.wikipedia.org/wiki/Recession

The Federal Reserve has responded to potential slow downs by lowering the target Federal funds rate during recessions and other periods of lower growth. In fact, the Federal Reserve's lowering has even predated recent recessions[12]. The charts below show the impact on the S&P500 and short and long term interest rates.

* July 13, 1990-September 4, 1992: 8.00% to 3.00% (Includes 1990-1991 recession) rate drop chart rate rise chart
* February 1, 1995-November 17, 1998: 6.00 - 4.75 rate drop chart1 rate drop chart2 rate rise chart
* May 16, 2000-June 25, 2003: 6.50- 1.00 (Includes 2001 recession) rate drop chart1 rate drop chart2 rate rise chart
* June 29, 2006- (Mar. 18 2008): 5.25-2.25 rate drop chart
Anonymous | Homepage | 03.28.08 - 3:22 pm | #

Ralph Cramdown writes:
bzb wrote: My understanding is that without the Fed intervention (euphemism for "bailout"), the shareholders were going to get wiped. So Cayne was going to end up with $0, not $60+ million.

Sure, that's everybody's understanding. In a run-of-the-mill industrial or financial firm BK doesn't get declared until it's pretty much certain that the equity's all gone. Nobody's proven to me that Bear's assets, if liquidated in an orderly and responsible manner by the receiver, wouldn't have paid off all their liabilities. I'm not saying it isn't so, but I am saying that the same people who argue that IBs have got balance sheets full of stuff that's impossible to value accurately can turn around and say "But I know it's less than x."
Ralph Cramdown | 03.28.08 - 3:24 pm | #

Anonymous writes:
Good photo of economic crash here: http://stockcharts.com/h-sc/ui
Anonymous | 03.28.08 - 3:28 pm | #

ipodius writes:
Clearly, without government support, Bear is worth less than $10/share or $1.5B.

And, AllenC, your assesment is backed up by what? Because you said so? Or is Jamie wrong? At least he has the balls to put his money where is mouth is, step out there and do the deal. Obviously, as Ralph points out, he thinks that the results of an orderly unwind leaves a lot of juice left in the grape.

I hear a lot of noise but I see very little evidence that anyone has seen their books here.
ipodius | 03.28.08 - 3:32 pm | #

Kp writes:
Thanks CR, and Energyecon.

I suspected it was adjusted with CPI when I read that it was a component of GDP.

My concern is the same as others...I don't trust the CPI's assumptions.

My gut says that PCE is probably negative.

I know my own personnel PCE sure is.
Kp | 03.28.08 - 3:36 pm | #

cd writes:
UBS headlines-Auction rate securities

http://online.wsj.com/article/ SB...=googlenews_wsj
cd | 03.28.08 - 3:36 pm | #

ShortCourage writes:
CR,

Will the "official" measurement of unemployment reach 8%? Who knows?

But I would bet that a true measurement of unemployment at the depth of the recession will be double the true measure taken today. That is, if you could properly measure folks who have given up working, and also folks that are self-employed, etc..
ShortCourage | 03.28.08 - 3:37 pm | #

cd writes:
my bad- Marking down auction rate securities in investor brokerage accts..
cd | 03.28.08 - 3:38 pm | #

Allen C writes:
"impossible to value accurately"

Agree, but the reality is that market prices are superior.

"orderly and responsible"
They've had months to liquidate. The fact is, no one wants it anywhere near the wish price. Imagine Micron refusing to lower the price of memory chip inventory because the market price is below production costs. We shouldn't treat financial services any differently.
Allen C | 03.28.08 - 3:39 pm | #

ShortCourage writes:
Sorry, what I meant to say is that the true measure of unemployment will double from its recent lows (not what it is today, which is already bad and much worse than measured by my estimation).
ShortCourage | 03.28.08 - 3:39 pm | #

ipodius writes:
fact is, no one wants it anywhere near the wish price.

NOW AllenC...NOW. With the market in disarry and no price discovery. The assessment is that, when things normalize, there is value.
ipodius | 03.28.08 - 3:40 pm | #

ac writes:

Sure, that's everybody's understanding. In a run-of-the-mill industrial or financial firm BK doesn't get declared until it's pretty much certain that the equity's all gone. Nobody's proven to me that Bear's assets, if liquidated in an orderly and responsible manner by the receiver, wouldn't have paid off all their liabilities.

I'm guessing if you made reasonable assumptions about future home values and valued their assets accordingly, Bear Stearns would have been grossly insolvent (like California homeowner type insolvent).

As I see it the Fed pledged $30 billion dollars in taxpayer money so Bear Stearns stockholders could receive $10/share that they are in no way entitled to... if my assumptions are correct (they may not be).

Apparently this is a government of the Fed, for the Fed, and by the Fed.

Apparently it's their country. They own it; they can do whatever they want with it.

ac | 03.28.08 - 3:41 pm | #

Allen C writes:
"your assesment is backed up by what?"

Are any of my statements illogical?
Allen C | 03.28.08 - 3:42 pm | #

scotty with hanging head writes:
The new mantra for a cleaner City: regulation, regulation, regulation

Volatile markets mean reform is on Brown and Darling's summit agenda

http://www.guardian.co.uk/ busine...ch.hbosbusiness

Gordon Brown and Nicolas Sarkozy will discuss possible reforms of the financial system at their summit this week, while Paul Volcker, the former chairman of the Federal Reserve, America's central bank, made it clear last week that he favoured a policy of tough love for banks. "We're going to lend to them and protect them, shouldn't they be regulated?" he said.

"There has to be a period of re-regulation. We have highly leveraged institutions such as hedge funds and private equity firms that are essentially pyramid selling and creating a mountain of instability based on debt. That is now unwinding in a dangerous way."

Some critics of Wall Street and the City would like to see the more "toxic" types of financial instruments banned.

There has been strong criticism of ratings agencies for providing top ratings for derivatives that later proved to be toxic. Alistair Darling says there should be "improvements in the role and methodology" of agencies but policymakers have yet to decide whether this should come about through tougher regulation or keener competition.
Bonus structure

Writing in the Independent this week, the Nobel prize winning economist Joseph Stiglitz said the system of bankers' compensation contributed to the crisis by encouraging risk-taking.

"In effect, it paid them to gamble. When things turned out well, they walked away with huge bonuses. When things turn out badly - as now - they do not share in the losses. Even if they lose their jobs, they walk away with large sums."

Stiglitz said the solution was not to cap bonuses, but to make sure traders share losses as well as gains - for instance, holding the bonuses in escrow for 10 years.


See Also: Kenneth Arrow
scotty with hanging head | 03.28.08 - 3:44 pm | #

FFDIC writes:
Houston Chronicle
Fed offers $100 million more to case strapped banks
http://www.chron.com/disp/story....nt/ 5656682.html
FFDIC | 03.28.08 - 3:45 pm | #

Allen C writes:
"when things normalize, there is value."

There is value now. I'll sell my treasuries and buy mortgages for the right price.
Allen C | 03.28.08 - 3:46 pm | #

Interesting Times writes:
Stiglitz said the solution was not to cap bonuses, but to make sure traders share losses as well as gains - for instance, holding the bonuses in escrow for 10 years.

hahahaha... Like any of us will see this in our lifetimes.
Interesting Times | 03.28.08 - 3:47 pm | #

FFDIC writes:
The Houston Chronicle has a headline error I did not catch. $100 million should be $100 billion.
FFDIC | 03.28.08 - 3:48 pm | #

Interesting Times writes:
FFDIC $100 Billion not million...

But ya, could be Trillion and no one would flinch these days.
Interesting Times | 03.28.08 - 3:49 pm | #

ac writes:

CR,

Will the "official" measurement of unemployment reach 8%? Who knows?

But I would bet that a true measurement of unemployment at the depth of the recession will be double the true measure taken today. That is, if you could properly measure folks who have given up working, and also folks that are self-employed, etc..

In the end I don't think you can really look at the numbers and decide where unemployment is going to end up because so much of it is psychological.

If people decide we're going to have a severe recession then we're going to have one. You don't need "sufficient" financial and economic conditions -- people and businesses just need to decide to stop spending.

The flip side is that sentiment won't overcome real economic obstacles (confident consumers won't create more oil, for example, in an oil shortage).

ac | 03.28.08 - 3:49 pm | #

Taos writes:
concerning Jimmy Cayne's ( Bear Stearns CEO ) marijuana bills!


If Jimmy's "Bridge" loan from us is going to work I think he needs to stop bogarting that joint and start sharing with all of us!
Taos | 03.28.08 - 3:49 pm | #

ipodius writes:
There is value now. I'll sell my treasuries and buy mortgages for the right price.

So would I AllenC! And therein lies why JPM just swallowed them. They believe that the future value of the assets exceeds current market price due to market conditions. So they just followed your logic.
ipodius | 03.28.08 - 3:50 pm | #

LJ writes:
"Stiglitz said the solution was not to cap bonuses, but to make sure traders share losses as well as gains - for instance, holding the bonuses in escrow for 10 years"
________________________

Now that is a wonderful idea. Then you can't pull a John Merriweather and throw your losses in the round file!
LJ | Homepage | 03.28.08 - 3:51 pm | #

LJ writes:
This is for Tanta...another Big Bank throws SISA in the round file.

Our Super Simple (SISA) conforming program will not be available after March 31st and any existing loan will not be allowed to relock after that date. We will honor any loan locked by Monday, March 31st. Thank you.
LJ | Homepage | 03.28.08 - 3:52 pm | #

Allen C writes:
"They believe that the future value of the assets exceeds current market price due to market conditions."

I fully accept this. But what is the price without the Fed backstop?
Allen C | 03.28.08 - 3:53 pm | #

Sebastian writes:
CR said: "...With real PCE below 1% in Q1, I'd expect a negative real GDP report for Q1. This is very similar to how the last consumer led recession started in 1990."

Well, let's see what the chart says.

Beginning on the left side of the chart, it was below 1% in 1992 (actually negative), but no (new) recession began.

In 1995 it was below 1%, no recession.

In 2003 it was below 1% (again, actually negative), no recession.

Finally, in 2005 it was below 1% (actually, approaching -1%, looks like), no recession.

This chart seems like a visual representation of the old joke about economists forecasting 6 of the last 2 recessions.


Sebastian
Sebastian | 03.28.08 - 3:55 pm | #

Anonymous writes:
Houston would mis-print that!

How about subrime losses reach stuning $100 Billion versus $1 Trillion!
Anonymous | 03.28.08 - 3:56 pm | #

Sebastian writes:
"Finally, in 2005 it was below 1% (actually, approaching -1%, looks like), no recession."

Sorry, this should be "2006", not "2005."


S.
Sebastian | 03.28.08 - 3:56 pm | #

jg writes:
The BEA real personal consumption expenditures figures are not believable.

http://www.bea.gov/national/nipa...r=2007& Freq=Qtr

Pull up the monthly data for 2007 and 2008. Line 14, 'Housing,' makes up 14% of personal consumption expenditures. After controlling for inflation, the BEA has the monthly figures going uninterruptedly up.

Does that make sense to anyone except Seb and O-Joe? Home prices are falling in real terms, vacancies are at the highest levels on record, both of which should put downward pressure on 'imputed rent.'

As Allen writes, someday this war (on the populace) will end.

I'm buying a second pitchfork, I'm so irritated.
jg | 03.28.08 - 4:03 pm | #

conspiracy Theories writes:
It has wrought changes far more significant than they were probably thinking about at the time," said Vincent Reinhart, a resident fellow at the American Enterprise Institute who was until last year a senior Fed staffer.


head of AEI is who?
does caxton ring a bell?
art advisors?
conspiracy Theories | 03.28.08 - 4:06 pm | #

jg writes:
Question -- why are the shysters/schmucks at the investment banks and Fed allowing the market to close 'red' today? Quarter end is coming up and the weekend is here; this is dangerous for their 'goldilocks' efforts.

Are they saving things up for a 200-300 point day on Monday to put a better spin on Q1 account values?
jg | 03.28.08 - 4:06 pm | #

Interesting Times writes:
"They believe that the future value of the assets exceeds current market price due to market conditions."

Man I'd love to see their spreadsheet.

Simple 30 year NPV calculations error out on my sheet once I factor in 5% deliquencies and a 4% rate of inflation on 30x leverage...

What are they smoking?
Interesting Times | 03.28.08 - 4:06 pm | #

scotty this and that writes:
Sen. Christopher J. Dodd, D-Conn., the Banking Committee Chairman, said he wants to attach a broad housing overhaul to the package. His plan _ similar to one being crafted by Rep. Barney Frank, D-Mass., the House Financial Services Committee chairman _ would let the government step in and back up to $400 billion in troubled loans.

The proposal is likely to face opposition from Republicans who regard it as heavy-handed government intervention that could leave taxpayers on the hook for a mortgage bailout. Democrats, though, are pressing their argument that the government should be as willing to assist homeowners as it was to help investment banks weather a credit crunch.

"If (the Bush administration) can spend all weekend figuring out a way to avoid a problem with Bear Stearns, you can spend a little time to keep people in their homes who were lured into deals ... that were fraudulent and harmful," Dodd said in an interview.
scotty this and that | 03.28.08 - 4:08 pm | #

Jerome Kerviel writes:
Cute uplifting story in the WSJ posted by Tim Iacono about banks paying foreclosed house occupants not to trash the place before leaving. "For the banks it's just simple arithmetic" "it's a win win situation"

http://online.wsj.com/article/ SB...6676569881.html

Sheesh with 200 foreclosures A DAY in Vegas, no wonder they'd rather pay not to have to clean the mess of cement down the toilets
Jerome Kerviel | Homepage | 03.28.08 - 4:08 pm | #

ipodius writes:
I fully accept this. But what is the price without the Fed backstop?

Try to think of the Fed's assistance as the father of the bride holding the shotgun, but giving you a house and land to take her.

I understand what the Fed just did, and I make no secret that I approve given possible outcomes. It remains to be seen even if they need the Fed backstop. I'm thinking that they won't in the end, and all of this angst is just for nothing. Or, even if there are losses, if it prevented wider losses and economic distress, then perhaps the price is well paid. Right now, everything that is said, is merely speculation.
ipodius | 03.28.08 - 4:10 pm | #

Jim writes:
Lehman going the way of Bear Stearns?

http://www.reuters.com/article/ b...728986020080328
Jim | 03.28.08 - 4:12 pm | #

ipodius writes:
Simple 30 year NPV calculations

On what? The gross numbers? Not all of it is RE backed securities. Did you look at each level and then run numbers? Did you account for hedges and payments from counter-parties on losses too?

What are you smoking? Unwinding BSC is far past putting it in a spreadsheet and running an NPV. Have any of you ever taken a finance class at the graduate level? Maybe you want to think about that...
ipodius | 03.28.08 - 4:13 pm | #

solo writes:
"banks paying foreclosed house occupants not to trash the place before leaving."Jerome Kerviel 4:08 pm

Another incentive to just walkaway.
solo | 03.28.08 - 4:14 pm | #

Jim writes:
When we do, we will have the immense satisfaction of knowing that the first $61.3 million of those losses represent a direct cash transfer from US taxpayers to Jimmy Cayne.
km4 | 03.28.08 - 2:33 pm | #

Well the stupid taxpayers seem to take it all lying down. Their reps whimper a bit but essentially do nothing. If people want to be duped and screwed, you can't save them.
Jim | 03.28.08 - 4:14 pm | #

Interesting Times writes:
PV of the future cashflows for the expected received interest. Lol yes I do have a commerce degree... but it doesn't help me one bit these days. Certain PHd in economics are also scratching their heads... so your point?

Assume you can buy a MBS at 60 cents on the dollar right now (if they ever mark to market). How will they suddenly increase in value in the future?

If the housing values suddenly start rising, no deliquencies... and how would that ever happen?
Interesting Times | 03.28.08 - 4:18 pm | #

FFDIC writes:
Spiegel - Germans Fear Meltdown of Financial System
"Germany and other industrialized nations are desperately trying to brace themselves against the threat of a collapse of the global financial system. The crisis has now taken its toll on the German economy, where the weak dollar is putting jobs in jeopardy and the credit crunch is paralyzing many businesses."
http://www.spiegel.de/internatio...- 543588,00.html
FFDIC | 03.28.08 - 4:18 pm | #

Allen C writes:
"angst is just for nothing."

I appreciate what you are stating ipodius, but it seems they could have structured it differently. Maybe not.

Whether taxpayer money is lost or not, it's extremely troubling that we let an industry imperil the entire system.
Allen C | 03.28.08 - 4:21 pm | #

ipodius writes:
Interesting Times, you have to account for Hedges on all of this. A loss here is offset there and that's part of the unwind. So you can't use those sorts of financial models when looking at something like BSC. My company, sure. We don't use arbitrage and hedges. We don't have counter-parties and deriviates.

So the .60 on the dollar isn't fatal as it would be here or in other businesses. It depends on how it is unwound, what is sold, what is held, and what is hedged.
ipodius | 03.28.08 - 4:22 pm | #

Sebastian writes:
jg said: "Pull up the monthly data for 2007 and 2008. Line 14, 'Housing,' makes up 14% of personal consumption expenditures. After controlling for inflation, the BEA has the monthly figures going uninterruptedly up.

Does that make sense to anyone except Seb and O-Joe?..."

Well, you're assuming that the incredibly short period of time you chose to look at is representative of a larger period of time.

My house has appreciated by an average of +4.5% annually since I bought it in 2000. CPI-U has averaged +2.8% in the same period of time.

Not only that, when I refinanced a few years back it knocked-off $250-$300 *a month* from my mortgage payment.

That may not be everyone's experience, but it's real.


Sebastian
Sebastian | 03.28.08 - 4:24 pm | #

Interesting Times writes:
ipodius - I totally agree - it's a lot more complication than any simple model.

But isn't there a point with the complexity costs out weigh the benefits?

Isn't that what got us here in the first place?

Why is "mark-to-market" and "counter-party risk" now part of the coloquial lexicon ?
Interesting Times | 03.28.08 - 4:27 pm | #

ipodius writes:
I wish I knew, Interesting. It sure makes valuation models really hard. But, then again, valuation modling on start-ups is really hard too.

This is why I say that the issue here is the unwind of BSC. If people know what they are doing, they can most likely extract value from it that exceeds what some think. That's what JPM's thought is.
ipodius | 03.28.08 - 4:30 pm | #

Allen C writes:
"But isn't there a point with the complexity costs out weigh the benefits?"

Yes. As stated before, what was marketed as a benefit is now perceived as a cost. The owners have to develop a better process to simplify the content pricing or they face a discount.
Allen C | 03.28.08 - 4:32 pm | #

Detroit Dan writes:
ipodius,

It's clear the government is interfering in the marketplace to help Bear and JPM. This is just plain wrong. Let them be nationalized if necessary.

Enough b.s.
Detroit Dan | 03.28.08 - 4:33 pm | #

energyecon writes:
IT,

That appears to be exactly what is going on - the lack of transparency in the security limits the willingness of the purchaser to pay more and the seller to sell for less - and this credit morass will drag on until some clarity is achieved (not holding my breath). And given the leverage of the holders they cannot sell at the current marks without going TU...er insolvent.

Ipodius has a huge embedded assumption regarding counterparty performance in his argument, and we are seeing some court action already around this issue with much more to come.
energyecon | 03.28.08 - 4:37 pm | #

Ralph Cramdown writes:
jg wrote: The BEA real personal consumption expenditures figures are not believable. [...] 'Housing,' makes up 14% of personal consumption expenditures. After controlling for inflation, the BEA has the monthly figures going uninterruptedly up.

Yep. Have your housing expenses gone down? These are the people whose housing expenses go down: Those whose first house costs less than their previous rent, those whose next house cost less than their last one, monthly, and those who reduce their monthly payments (cheaper rent, refi, couch surfing). If you're stuck in a mortgage, your monthly costs don't go down just because you lost equity.

Almost nobody says "I want this much house and I'll pay what what it costs." Everybody says "The bank says I can afford $x per month, how much house can I have?" So even declining prices doesn't mean people's expenses get lower.
Ralph Cramdown | 03.28.08 - 4:42 pm | #

Allen C writes:
On the clarity topic, I understand that there are several funds set up to take advantage of the dislocations. A targeted fund of significant size can justify hiring a pricing team. One could conclude that there would be some substantial evidence of funds feasting on hidden values. The sellers have every incentive to illuminate a well informed deal.
Allen C | 03.28.08 - 4:46 pm | #

Ralph Cramdown writes:
Ipodius has a huge embedded assumption regarding counterparty performance in his argument

But note that any deals between BSC and JPM are unwound at net 0 with no counterparty risk by the deal.

Also, while everyone else on the street has their counterparty risk concentrated (JPM risk + BSC risk = new entity risk), the new entity doesn't. Neat, huh?
Ralph Cramdown | 03.28.08 - 4:50 pm | #

Detroit Dan writes:
Bernanke has gone too far. I just decided that from reading this thread, and Marc Andreeson's blog.

Stop the Fed.
Detroit Dan | 03.28.08 - 4:52 pm | #

Detroit Dan writes:
Bernanke has no business taking crappy collateral and shoveling more money to investment banks.
Detroit Dan | 03.28.08 - 4:54 pm | #

Major Tom writes:
Ipodius,

Don't forget that just because there might be actual value in the instruments, due to leverage, no-one can trade the instruments. Banks do not want MBS instruments because if the value decreases, they must "deleverage" something or sell something that is liquid to maintain margin requirements. EVERYONE is overleveraged and people that aren't, like Buffet, won't trade this stuff because HE doesn't understand it.

With companies leveraged 32:1 like Lehman, no-one will touch this stuff whether it has value or not. Additionally, the FED will not be able to backstop ALL of the illiquid MBS stuff out there. These companies were never interested in holding these instruments to maturity to get the value out of it.

Thankfully, this whole securitization process is defunct. The financials will continue to get creamed because their cash cow has been butchered and they too have been left holding the bag.
Major Tom | 03.28.08 - 4:55 pm | #

Detroit Dan writes:
Apparently, Bernanke thinks he's saving the world. But there's only so much he should do in that respect. Our elected representatives, who are more accountable, should take over...
Detroit Dan | 03.28.08 - 4:57 pm | #

Detroit Dan writes:
And now would be a good time for our elected representatives, and wanna be's, to speak out on the $60 taxpayer subsidy to Mr Cayne of Bear Stearns. That would make an excellent sound bite and is much more important than the latest Geraldine Ferraro or Jeremiah Wright news.

Andreeson is right, and attempts to justify the bailout are beginning to sound like so much mumbo-jumbo...
Detroit Dan | 03.28.08 - 5:02 pm | #

Ralph Cramdown writes:
The sellers have every incentive to illuminate a well informed deal.

This reminds me of "The Market for Lemons." The good stuff, you don't sell. If you're selling the good stuff, it's because you're desperate for cash, and buyers will bid accordingly.
Ralph Cramdown | 03.28.08 - 5:02 pm | #

jg writes:
Ralph C-, the concept of 'owners equivalent rent' is that, as you own your home, you are not directly paying rent, the government uses tools to estimate the rent that you would pay for your residence.

If you do not think that falling home values and increasing home vacancies affect residential rents, just look to commercial real estate. We are considering leasing more space, and with the glut of space available, I guarantee that we will get a lease rate lower than what the last tenant paid.

The same concept applies to residential real estate, in my opinion.
jg | 03.28.08 - 5:04 pm | #

Detroit Dan writes:
Where's Jesus when you need him? Turn over some of those money lending tables (c:
Detroit Dan | 03.28.08 - 5:07 pm | #

Ralph Cramdown writes:
If you do not think that falling home values and increasing home vacancies affect residential rents...

Same deal. The landlord doesn't knock on his tenants' door and say "Rents are falling, so I'm giving you a break." Similarly, residential tenants who do move will probably find a nicer place at the same rent rather than an equivalent place at lower rent.

I don't understand this owner's equivalent rent, but if RE values are falling, wouldn't it go UP? Owner has PMT x, part of which is 'rent', the rest goes into 'equity'. If his equity shrinks... Maybe I'm wrong, I'll read up on it.
Ralph Cramdown | 03.28.08 - 5:10 pm | #

j writes:
ipodius wrote a little bit ago:

I wish I knew, Interesting. It sure makes valuation models really hard. But, then again, valuation modling on start-ups is really hard too.

This is why I say that the issue here is the unwind of BSC. If people know what they are doing, they can most likely extract value from it that exceeds what some think. That's what JPM's thought is.
ipodius | 03.28.08 - 4:30 pm | #

ipodius,

"Winner's Curse" - Apparently JPM
thought that Bear Stearns was
worth more than anyone else who
could have bought it. Is it more
likely that JP Morgan is right,
or that everyone else is wrong?

j
j | 03.28.08 - 5:14 pm | #

jg writes:
Economic concept: when asset values are falling due to softening demand and increasing supply, it is hard to understand how rent of such an asset could be going up.

A coworker of mine was renting a home in Newport Beach, did not get relief from the owner on his rent, so he moved to another home, and cut his rent significantly.

This does not happen in Seb's neighborhood/neck of the woods, but it happens in the rest of the U.S.
jg | 03.28.08 - 5:16 pm | #

malabar writes:
Allen C, I don't see unemployment reaching 8% - so by that definition, I don't think the recession will be severe - but I continue to think that it will linger.

Best to all.
CalculatedRisk | Homepage | 03.28.08 - 2:41 pm | #

OTOH, we have the Fed acting as if its the Depression. The last time the Fed was taking illiquid collateral that stank was in the 30s. Same with the fact that Fed has opened its discount window to non-banks for first time since the 30s.

So we have a garden variety recession but Depression-era Fed actions that will itself have its unintended consequences at some future date.
malabar | 03.28.08 - 5:17 pm | #

Terry writes:
Malabar said: "we have a garden variety recession but Depression-era Fed actions"

Does that suggest anything to you?
Terry | 03.28.08 - 5:24 pm | #

ShortCourage writes:
malabar, I don't necessarily agree with the Fed's actions. But I think if they hadn't taken such drastic measures, we might have already experienced failure of a series of major financial institutions.

So the Fed might just have prevented (or postponed) the start of Great Depression II.
ShortCourage | 03.28.08 - 5:27 pm | #

Ralph Cramdown writes:
Economic concept: when asset values are falling due to softening demand and increasing supply, it is hard to understand how rent of such an asset could be going up.

Jeez Louise, do I need to draw a map? The numbers in question were from aggregate USDOC "Real Personal Consumption Expenditures." Posit an environment where *PER UNIT* rents are going down, at the margin, yet aggregate rent is increasing.

Further, this linkage of rents to prices assumes constant credit conditions, plus a majority of landlords having positive cash flow. People in Newport Beach are different, apparently. Most people don't demand rent reductions from their landlords, can't be bothered to move if they don't get them, or trade up instead of saving money.
Ralph Cramdown | 03.28.08 - 5:46 pm | #

scotty ranting & raving writes:
And another friggn thing....

Essentially, what I think is going down (here), is that around 9/11, there was a need to pump up liquidity to help the American economy prepare for an expensive prolonged war. Thus the general concept of an Ownership Society was a mechanism to connect cashflow to debt; in and of itself, not a bad idea.

However, the amount of liquidity, the ease of ownership and then the twisted and distorted mechanics of subprime, no doc, anything goes bullshit morphed out of control as The Fed and every Fed agency looked the other way on accounting reality, regulation and enforcement; that includes every member of The House & Senate that did nothing at all but collect paychecks.

This Bush supply side economic tsunami flooded the globe in a Noah's Arch-like Great Flood, which has resulted in globalized divine retribution, i.e, a lot of people did a lot of stuff that was economically wrong and now they pay.

Thus, we have this massive amount of Fed Funded liquidity that hits a brick wall of debt reality, forced into place by overvaluations in both housing and stocks and bonds. The retribution reality lies within the re-valuation and decline of overvalued assets -- versus extending overvaluations into a socialized bubble of distorted mythical blackbox chaos: See Rome Burning.

What we have now, is a Fed that wants to ignore a recession and steer a course of denial that involves dropping rates towards zero and opening the flood gates wider, yet again, as if nothing just happened; as if, trillions of dollars have not vanished.

In essence, The Fed wants the money supply to remain at extreme flood levels in an all out effort to spin through a period of over-valuation and then re-inflate that over-valuation with a fresh round of hyper-inflated good luck credit expansion.

Apparently the trick here is to suggest that since the average American (including many bankers) are playing it safer and thinking in terms of cash being king, and hoarding money -- The Fed wants the money supply to appear to be exuberant and frothy, as if we are the verge of economic expansion instead of systemic collapse. You can see that disparity in the volatility of the markets.

This synthetic illusion which makes some economists feel optimistic about the pending explosion of new NAR homes sales and the next stock market bubble and the next massive derivative push from SIFMA, wall street & The Fed is an engine that has driven America into a very weak position! This type of leadership is destructive, but as with Katrina or any disaster, it will take time to come to gripes with reality.

The trouble now is, we lack a realistic mechanism to transfer the generoisty of The Fed into an exchangeable commodity or security or tangible Beenie baby-like casino chips, in this early stage of economic meltdown. Welcome to a liquidity trap!

Amen
scotty ranting & raving | Homepage | 03.28.08 - 5:58 pm | #

plschwartz writes:
Since it had such a large number of visitors especially for a Sunday night I am amazed at the lack of memory about what was being posted on this board the weekend of the BSC collapse. Waiting with dread for the opening of the Japan market.Thoughts of utter collapse of the markets. It was like the last day of the Alamo. We were waiting for that last charge.
Then Bernanke came up with the Deal. The Nikkei cliff dived at first but then it held firm and we were off the ledge.
Did he do it perfectly? Maybe not, probably not. But that is not the point. He was a man living in real time and did to use a Winnecott term, he was a good enough economy saver.
So all of you that only live in instant-reply or the retrospective you should have known world of lawyers, he did not do the ideal.
Dimon shouldn't have sweetened the pot? He wanted the deal, bought off the opposition for relatively bupkus.
Hopefully he gave it to the BSC emplyees instead of the lawyers.

To pick up an idea said long ago to stone -throwers tell us about the weekend you did everything perfectly..Oh what you slept the whole weekend? No snores?
plschwartz | 03.28.08 - 6:29 pm | #

plschwartz writes:
scotty
Great post
plschwartz | 03.28.08 - 6:30 pm | #

Sebastian writes:
jg said: "A coworker of mine was renting a home in Newport Beach, did not get relief from the owner on his rent, so he moved to another home, and cut his rent significantly."

That's the Newport Beach in *California*, right? The state that's ground-zero for the single largest real estate boom and bust in the nation?

then said: "...This does not happen in Seb's neighborhood/neck of the woods, but it happens in the rest of the U.S."

California is no more representative of "the rest of the U.S." than North Carolina is. In fact, the California housing market is the extreme and North Carolina is far closer to the median.


S.
Sebastian | 03.28.08 - 6:51 pm | #

transient writes:
Sebastian writes:

"My house has appreciated by an average of +4.5% annually since I bought it in 2000. CPI-U has averaged +2.8% in the same period of time."

Wait a minute. Just yesterday you were saying your house would cost 20-25% more today than it would if you had bought it in 2006.
transient | 03.28.08 - 7:28 pm | #

Troy writes:
California is no more representative of "the rest of the U.S." than North Carolina is.

Population of California: 36M
Population of NC: 9M

In Seb's world, 4 = 1.

Map of subprime loans, 2006
Troy | 03.28.08 - 7:54 pm | #

transient writes:
To be more specific:

http://www.haloscan.com/comments...9233648/ #442876

"If I were in the market for a house here in early 2006 and waited until now to buy, I'd be paying +20% to +25% *more*."
transient | 03.28.08 - 8:04 pm | #