Are we headed for an epic bear market?

[scooterbug44]

By Jon Markam

Satyajit Das is laughing. It appears I have said something very funny, but I have no idea what it was. My only clue is that the laugh sounds somewhat pitying. One of the world's leading experts on credit derivatives, Das is the author of a 4,200-page reference work on the subject, among a half-dozen other tomes. As a developer and marketer of the exotic instruments himself over the past 30 years. He seemed like the ideal industry insider to help us get to the bottom of the recent debt crunch -- and I expected him to defend and explain the practice.
I started by asking the Calcutta-born Australian whether the credit crisis was in what Americans would call the "third inning." This was pretty amusing, it seemed, judging from the laughter. So I tried again. "Second inning?" More laughter. "First?" Still too optimistic. Das, who knows as much about global money flows as anyone in the world, stopped chuckling long enough to suggest that we're actually still in the middle of the national anthem before a game destined to go into extra innings. And it won't end well for the global economy.

An epic bear market
Das is pretty droll for a math whiz, but his message is dead serious. He thinks we're on the verge of a bear market of epic proportions. The cause: Massive levels of debt underlying the world economy system are about to unwind in a profound and persistent way.

He's not sure if it will play out like the 13-year decline of 90% in Japan from 1990 to 2003 that followed the bursting of a credit bubble there, or like the 15-year flat spot in the U.S. market from 1960 to 1975. But either way, he foresees hard times as an optimistic era of too much liquidity, too much leverage and too much financial engineering slowly and inevitably deflates.
Like an ex-mobster turning state's witness, Das has turned his back on his old pals in the derivatives biz to warn anyone who will listen -- mostly banks and hedge funds that pay him consulting fees -- that the jig is up.
Rather than joining the crowd that blames the mess on American slobs who took on more mortgage debt than they could afford and have endangered the world by stiffing lenders, he points a finger at three parties: regulators who stood by as U.S. banks developed ingenious but dangerous ways of shifting trillions of dollars of credit risk off their balance sheets and into the hands of unsophisticated foreign investors; hedge and pension fund managers who gorged on high-yield debt instruments they didn't understand; and financial engineers who built towers of "securitized" debt with math models that were fundamentally flawed.

Investors are abuzz over the Fed’s interest-rate decision, but the Federal Reserve can’t fix everything, cautions MSN Money’s Jim Jubak. Lower interest rates alone won’t boost confidence in the debt market. "Defaulting middle-class U.S. homeowners are blamed, but they are merely a pawn in the game," he says. "Those loans were invented so that hedge funds would have high-yield debt to buy."

The liquidity factory
Das' view sounds cynical, but it makes sense if you stop thinking about mortgages as a way for people to finance houses and think about them instead as a way for lenders to generate cash flow and create collateral during an era of a flat interest-rate curve.Although subprime U.S. loans seem like small change in the context of the multitrillion-dollar debt market, it turns out these high-yield instruments were an important part of the machine that Das calls the global "liquidity factory." Just like a small amount of gasoline can power an entire truck given the right combination of spark plugs, pistons and transmission, subprime loans became the fuel that underlays derivative securities many, many times their size.

Here's how it worked: In olden days, like 10 years ago, banks wrote and funded their own loans. In the new game, Das points out, banks "originate" loans, "warehouse" them on their balance sheet for a brief time, then "distribute" them to investors by packaging them into derivatives called collateralized debt obligations, or CDOs, and similar instruments. In this scheme, banks don't need to tie up as much capital, so they can put more money out on loan. The more loans that were sold, the more they could use as collateral for more loans, so credit standards were lowered to get more paper out the door -- a task that was accelerated in recent years via fly-by-night brokers now accused of predatory lending practices. Buyers of these credit risks in CDO form were insurance companies, pension funds and hedge-fund managers from Bonn to Beijing. Because money was readily available at low interest rates in Japan and the United States, these managers leveraged up their bets by buying the CDOs with borrowed funds.

So if you follow the bouncing ball, borrowed money bought borrowed money. And then because they had the blessing of credit-ratings agencies relying on mathematical models suggesting that they would rarely default, these CDOs were in turn used as collateral to do more borrowing.
In this way, Das points out, credit risk moved from banks, where it was regulated and observable, to places where it was less regulated and difficult to identify.

Turning $1 into $20
The liquidity factory was self-perpetuating and seemingly unstoppable. As assets bought with borrowed money rose in value, players could borrow more money against them, and it thus seemed logical to borrow even more to increase returns. Bankers figured out how to strip money out of existing assets to do so, much as a homeowner might strip equity from his house to buy another house. These triple-borrowed assets were then in turn increasingly used as collateral for commercial paper -- the short-term borrowings of banks and corporations -- which was purchased by supposedly low-risk money market funds.
According to Das' figures, up to 53% of the $2.2 trillion commercial paper in the U.S. market is now asset-backed, with about 50% of that in mortgages.
When you add it all up, according to Das' research, a single dollar of "real" capital supports $20 to $30 of loans. This spiral of borrowing on an increasingly thin base of real assets, writ large and in nearly infinite variety, ultimately created a world in which derivatives outstanding earlier this year stood at $485 trillion -- or eight times total global gross domestic product of $60 trillion. Without a central governmental authority keeping tabs on these cross-border flows and ensuring a standard of record-keeping and quality, investors increasingly didn't know what they were buying or what any given security was really worth.

A painful unwinding
Now here is where the U.S. mortgage holder shows up again. As subprime loan default rates doubled, in contravention of what the models forecast, the CDOs those mortgages backed began to collapse. Because they were so hard to value, banks and funds started looking at all CDOs and other paper backed by mortgages with suspicion, and refused to accept them as collateral for the sort of short-term borrowing that underpins today's money markets. Through late last month, according to Das, as much as $300 billion in leveraged finance loans had been "orphaned," which means that they can't be sold off or used as collateral.

Investors are abuzz over the Fed’s interest-rate decision, but the Federal Reserve can’t fix everything, cautions MSN Money’s Jim Jubak. Lower interest rates alone won’t boost confidence in the debt market.

One of the wonders of leverage is that it amplifies losses on the way down just as it amplifies gains on the way up. The more an asset that is bought with borrowed money falls in value, the more you have to sell other stuff to fulfill the loan-to-value covenants. It's a vicious cycle. In this context, banks' objective was to prevent customers from selling their derivates at a discount because they would then have to mark down the value of all the other assets in the debt chain, an event that would lead to the need to make margin calls on customers already thin on cash.

Now it may seem hard to believe, but much of the past few years' advance in the stock market was underwritten by CDO-type instruments which go under the heading of "structured finance." I'm talking about private-equity takeovers, leveraged buyouts and corporate stock buybacks -- the works.
So to the extent that the structured finance market is coming undone, not only will those pillars of strength for equities be knocked away, but many recent deals that were predicated on the easy availability of money will likely also go bust, Das says. That is why he considers the current market volatility much more profound than a simple "correction" in prices. He sees it as a gigantic liquidity bubble unwinding -- a process that can take a long, long time.

While you might think that the U.S. Federal Reserve can help prevent disaster by lowering interest rates dramatically, as they did Wednesday, the evidence is not at all clear. The problem, after all, is not the amount of money in the system but the fact that buyers are in the process of rejecting the entire new risk-transfer model and its associated leverage and counterparty risks. Lower rates will not help that. "At best," Das says, "they help smooth the transition."

The fine print
Das notes that Japan in the 1990s lowered interest rates to zero and the country still suffered through a prolonged recession. His timetable for the start of the next serious phase of the unwinding is later this year or early 2008. . . . Das' most readable book for laypeople is "Traders, Guns & Money," an amusing exposé of high finance, published last year. Das occasionally writes a blog at his publisher's Web site. Also available are a boxed set of his reference books on derivatives and his book specifically on CDOs. . . . Perhaps the oddest line on the subject by a world leader was uttered by Luiz Inacio Lula da Silva, the president of Brazil. Asked if he was worried about the effects of the credit crunch in his country, he dismissively called it "an eminently American crisis" caused by people trying to make a lot of "third-class money." . . . CDOs were first widely used back in the late 1980s by Drexel Burnham Lambert junk-bond king Michael Milken to sell off damaged and previously unsellable debt in a way that was more palatable to customers.

[elgordoboy]

I am going to go dig a hole at the beach and bury my head in it. I am moving from mildly terrified to medium terrified, maybe if I quit reading about the situation my fear will go away. Come by and squirt my fanny with anti bug repellent and spf 30 occasionally?

[Capricious]

Yeh, I was reading that article today.

I don't know if that's all true or not but I do know this:
every boom that I have had experience with has always
been followed by a bust, and the bigger the boom the bigger
the bust.

For the past 3 or 4 years or so, real estate has been on
a boom like no other so the bust will be equally big.

Over the past few years I kept hearing from economists
(which I aint) that housing was supporting the economy:
people could "cash-out" refi and with their property appreciating
they felt no qualms about spending that money.

Well, there aint no more money to "cash-out," and not too
many people are feeling "prosperous" so unless something else
has come along to prop-up the economy it is recession time.

Trying to stave-off the recession just might make the inevitable
one even bigger. Just as stamping-out all of the little forest fires
can lead to an accumulation of fuel and one great big conflagration.

Just my opinion.

And I always have one.

[SHELLY]

I am going to go dig a hole at the beach and bury my head in it.

I know what I'm going to do......

O'-Dark-thirty tomorrow I'm heading up to North Georgia for a little R&R and fly fishing (cue the soundtrack from "Deliverance" ) and a couple days in Savannah.

While I'm gone y'all are in charge of the economy--no worries, ya can't screw it up too much more than it is at this moment. Just don't buy any pre-construction condos while I'm gone.

See ya in October....


Shel.

[elgordoboy]

I know what I'm going to do......

O'-Dark-thirty tomorrow I'm heading up to North Georgia for a little R&R and fly fishing (cue the soundtrack from "Deliverance" ) and a couple days in Savannah.

While I'm gone y'all are in charge of the economy--no worries, ya can't screw it up too much more than it is at this moment. Just don't buy any pre-construction condos while I'm gone.

See ya in October....


Shel.

Warwoman area? Figuring Northeast if then headed to Savannah. And enjoy.

[Seagrove Lover]

I believe Das is on to something. Things spiral down just like they spiral up. Hang on to your umbrellas if he is right.

[nmosley]

You will surely be missed!! Have fun...

[Mango]

Have fun Shel. We got it all under control here. Econonomy will be all fixed by the time you get back plus some.

[Bob]

Fear is the key to your soul.

[NoHall]

Is that anything like a flea market?

[Miss Kitty]

I'm going to SoWal!

[Bob]

I'm going to SoWal!

be careful and watch out for falling real estate values

[Miss Kitty]

be careful and watch out for falling real estate values

...aye aye Bobster!!!

[nmosley]

Found this article on the parallels between 1929 and 2007 and thought it worth sharing today...

Link -
http://www.infowars.net/articles/oct...7Parallels.htm

This is an excerpt...
One last parallel: I am chilled, as I'm sure you are, every time I hear a high public official or a Wall Street eminence utter the reassuring words, "The economic fundamentals are sound." Those same words were used by President Hoover and the captains of finance, in the deepening chill of the winter of 1929-1930. They didn't restore confidence, or revive the asset bubbles.

The fact is that the economic fundamentals are sound -- if you look at the real economy of factories and farms, and internet entrepreneurs, and retailing innovation and scientific research laboratories. It is the financial economy that is dangerously unsound. And as every student of economic history knows, depressions, ever since the South Sea bubble, originate in excesses in the financial economy, and go on to ruin the real economy.

It remains to be seen whether we have dodged the bullet for now. If markets do calm down, and lower interest bail out excesses once again, then we have bought precious time. The worst thing of all would be to conclude that markets self corrected once again, and let the bubble economy continue to fester. Congress has a window in which restore prudential regulation, and we should use that window before the next crisis turns out to be a mortal one.

[SWGB]

I am going to go dig a hole at the beach and bury my head in it. I am moving from mildly terrified to medium terrified, maybe if I quit reading about the situation my fear will go away. Come by and squirt my fanny with anti bug repellent and spf 30 occasionally?

Instead of addressing the problem we could just come up with a rainbow of monetary terror levels.

[goofer44]

The resl answer is.......maybe..... or maybe not !!!

[Biff]

I know what I'm going to do......

O'-Dark-thirty tomorrow I'm heading up to North Georgia for a little R&R and fly fishing (cue the soundtrack from "Deliverance" ) and a couple days in Savannah.

While I'm gone y'all are in charge of the economy--no worries, ya can't screw it up too much more than it is at this moment. Just don't buy any pre-construction condos while I'm gone.

See ya in October....


Shel.

...aye aye Bobster!!!

[AAbsolute]

By Jon Markam

Satyajit Das is laughing. It appears I have said something very funny, but I have no idea what it was. My only clue is that the laugh sounds somewhat pitying. One of the world's leading experts on credit derivatives, Das is the author of a 4,200-page reference work on the subject, among a half-dozen other tomes. As a developer and marketer of the exotic instruments himself over the past 30 years. He seemed like the ideal industry insider to help us get to the bottom of the recent debt crunch -- and I expected him to defend and explain the practice.
I started by asking the Calcutta-born Australian whether the credit crisis was in what Americans would call the "third inning." This was pretty amusing, it seemed, judging from the laughter. So I tried again. "Second inning?" More laughter. "First?" Still too optimistic. Das, who knows as much about global money flows as anyone in the world, stopped chuckling long enough to suggest that we're actually still in the middle of the national anthem before a game destined to go into extra innings. And it won't end well for the global economy.

An epic bear market
Das is pretty droll for a math whiz, but his message is dead serious. He thinks we're on the verge of a bear market of epic proportions. The cause: Massive levels of debt underlying the world economy system are about to unwind in a profound and persistent way.

He's not sure if it will play out like the 13-year decline of 90% in Japan from 1990 to 2003 that followed the bursting of a credit bubble there, or like the 15-year flat spot in the U.S. market from 1960 to 1975. But either way, he foresees hard times as an optimistic era of too much liquidity, too much leverage and too much financial engineering slowly and inevitably deflates.
Like an ex-mobster turning state's witness, Das has turned his back on his old pals in the derivatives biz to warn anyone who will listen -- mostly banks and hedge funds that pay him consulting fees -- that the jig is up.
Rather than joining the crowd that blames the mess on American slobs who took on more mortgage debt than they could afford and have endangered the world by stiffing lenders, he points a finger at three parties: regulators who stood by as U.S. banks developed ingenious but dangerous ways of shifting trillions of dollars of credit risk off their balance sheets and into the hands of unsophisticated foreign investors; hedge and pension fund managers who gorged on high-yield debt instruments they didn't understand; and financial engineers who built towers of "securitized" debt with math models that were fundamentally flawed.

Investors are abuzz over the Fed’s interest-rate decision, but the Federal Reserve can’t fix everything, cautions MSN Money’s Jim Jubak. Lower interest rates alone won’t boost confidence in the debt market. "Defaulting middle-class U.S. homeowners are blamed, but they are merely a pawn in the game," he says. "Those loans were invented so that hedge funds would have high-yield debt to buy."

The liquidity factory
Das' view sounds cynical, but it makes sense if you stop thinking about mortgages as a way for people to finance houses and think about them instead as a way for lenders to generate cash flow and create collateral during an era of a flat interest-rate curve.Although subprime U.S. loans seem like small change in the context of the multitrillion-dollar debt market, it turns out these high-yield instruments were an important part of the machine that Das calls the global "liquidity factory." Just like a small amount of gasoline can power an entire truck given the right combination of spark plugs, pistons and transmission, subprime loans became the fuel that underlays derivative securities many, many times their size.

Here's how it worked: In olden days, like 10 years ago, banks wrote and funded their own loans. In the new game, Das points out, banks "originate" loans, "warehouse" them on their balance sheet for a brief time, then "distribute" them to investors by packaging them into derivatives called collateralized debt obligations, or CDOs, and similar instruments. In this scheme, banks don't need to tie up as much capital, so they can put more money out on loan. The more loans that were sold, the more they could use as collateral for more loans, so credit standards were lowered to get more paper out the door -- a task that was accelerated in recent years via fly-by-night brokers now accused of predatory lending practices. Buyers of these credit risks in CDO form were insurance companies, pension funds and hedge-fund managers from Bonn to Beijing. Because money was readily available at low interest rates in Japan and the United States, these managers leveraged up their bets by buying the CDOs with borrowed funds.

So if you follow the bouncing ball, borrowed money bought borrowed money. And then because they had the blessing of credit-ratings agencies relying on mathematical models suggesting that they would rarely default, these CDOs were in turn used as collateral to do more borrowing.
In this way, Das points out, credit risk moved from banks, where it was regulated and observable, to places where it was less regulated and difficult to identify.

Turning $1 into $20
The liquidity factory was self-perpetuating and seemingly unstoppable. As assets bought with borrowed money rose in value, players could borrow more money against them, and it thus seemed logical to borrow even more to increase returns. Bankers figured out how to strip money out of existing assets to do so, much as a homeowner might strip equity from his house to buy another house. These triple-borrowed assets were then in turn increasingly used as collateral for commercial paper -- the short-term borrowings of banks and corporations -- which was purchased by supposedly low-risk money market funds.
According to Das' figures, up to 53% of the $2.2 trillion commercial paper in the U.S. market is now asset-backed, with about 50% of that in mortgages.
When you add it all up, according to Das' research, a single dollar of "real" capital supports $20 to $30 of loans. This spiral of borrowing on an increasingly thin base of real assets, writ large and in nearly infinite variety, ultimately created a world in which derivatives outstanding earlier this year stood at $485 trillion -- or eight times total global gross domestic product of $60 trillion. Without a central governmental authority keeping tabs on these cross-border flows and ensuring a standard of record-keeping and quality, investors increasingly didn't know what they were buying or what any given security was really worth.

A painful unwinding
Now here is where the U.S. mortgage holder shows up again. As subprime loan default rates doubled, in contravention of what the models forecast, the CDOs those mortgages backed began to collapse. Because they were so hard to value, banks and funds started looking at all CDOs and other paper backed by mortgages with suspicion, and refused to accept them as collateral for the sort of short-term borrowing that underpins today's money markets. Through late last month, according to Das, as much as $300 billion in leveraged finance loans had been "orphaned," which means that they can't be sold off or used as collateral.

Investors are abuzz over the Fed’s interest-rate decision, but the Federal Reserve can’t fix everything, cautions MSN Money’s Jim Jubak. Lower interest rates alone won’t boost confidence in the debt market.

One of the wonders of leverage is that it amplifies losses on the way down just as it amplifies gains on the way up. The more an asset that is bought with borrowed money falls in value, the more you have to sell other stuff to fulfill the loan-to-value covenants. It's a vicious cycle. In this context, banks' objective was to prevent customers from selling their derivates at a discount because they would then have to mark down the value of all the other assets in the debt chain, an event that would lead to the need to make margin calls on customers already thin on cash.

Now it may seem hard to believe, but much of the past few years' advance in the stock market was underwritten by CDO-type instruments which go under the heading of "structured finance." I'm talking about private-equity takeovers, leveraged buyouts and corporate stock buybacks -- the works.
So to the extent that the structured finance market is coming undone, not only will those pillars of strength for equities be knocked away, but many recent deals that were predicated on the easy availability of money will likely also go bust, Das says. That is why he considers the current market volatility much more profound than a simple "correction" in prices. He sees it as a gigantic liquidity bubble unwinding -- a process that can take a long, long time.

While you might think that the U.S. Federal Reserve can help prevent disaster by lowering interest rates dramatically, as they did Wednesday, the evidence is not at all clear. The problem, after all, is not the amount of money in the system but the fact that buyers are in the process of rejecting the entire new risk-transfer model and its associated leverage and counterparty risks. Lower rates will not help that. "At best," Das says, "they help smooth the transition."

The fine print
Das notes that Japan in the 1990s lowered interest rates to zero and the country still suffered through a prolonged recession. His timetable for the start of the next serious phase of the unwinding is later this year or early 2008. . . . Das' most readable book for laypeople is "Traders, Guns & Money," an amusing exposé of high finance, published last year. Das occasionally writes a blog at his publisher's Web site. Also available are a boxed set of his reference books on derivatives and his book specifically on CDOs. . . . Perhaps the oddest line on the subject by a world leader was uttered by Luiz Inacio Lula da Silva, the president of Brazil. Asked if he was worried about the effects of the credit crunch in his country, he dismissively called it "an eminently American crisis" caused by people trying to make a lot of "third-class money." . . . CDOs were first widely used back in the late 1980s by Drexel Burnham Lambert junk-bond king Michael Milken to sell off damaged and previously unsellable debt in a way that was more palatable to customers.

Sounds about right.

[30ashopper]

I was reading an article yesterday that estimated the total about of bad debt on bank balance sheets, after projecting forward based on the estimated total downturn of real-estate and the total number of bad loans, was something around 3 trillion dollars. Congress’s 700 billion bailout may only scratch the surface.

Recessions are usually caused by contracting business cycles, and we recover from them when business starts to expand again. This recession is unique, it’s being caused by contraction in the credit markets – banks have trillions in bad investments on their balance sheets that they are slowly writing off in small chunks as they struggle to improve liquidity. We will not come out of this until all of this bad debt is written off and banks start lending again. That could take a very very long time.

A improvement in housing is about the only thing that could turn this around, but real-estate won’t recover until people are able to borrow. The other thing that could do it would be if consumers pulled equity out of other investments and spent that on housing, but we have no equity, we spent it all. The stage is set, we are locked in a major downward spiral and there is nothing, including a massive (but not massive enough) bailout of Wall Street that can prevent what’s coming.

[traderx]

$485 trillion. That number sort of jumps off the page at you, doesn't it?

I heard the other day that only seven people really understand the financial crisis. I am clearly not one of the seven.

The article says the global GDP is $60 trillion. How in the world did we get to the $485 trillion number? I know, derviatives but how can you lap GDP eight times?

[elgordoboy]

Can someone who has the juice hit the reset button? Everything to zero and we start fresh? Though that may be where this is headed anyhow. I guess it is good that our military is occupied elsewhere and can't be used to bludgeon the citizenry here at home, but can be used to bludgeon those with the oil. Have our warships been retrofitted to carry oil? Wouldn't it be wild if all this was anticipated or premeditated? And if that was the case is America going to say "Check-Mate" or will she tip over her King? Or jumble the board as she gets up to use the bathroom and really muddle everything up? Kablooey

[AAbsolute]

Thomas Jefferson warned our lawmakers what would happen. We were just to genius to listen.

http://etext.virginia.edu/jefferson/...s/jeff1340.htm

[AAbsolute]

What's the chance the our government can peacefully merge or acquire another country? Maybe we can work our way out of this.

https://www.cia.gov/library/publicat.../2079rank.html

[ClintClint]

What's the chance the our government can peacefully merge or acquire another country? Maybe we can work our way out of this.

https://www.cia.gov/library/publicat.../2079rank.html

I'll do my best to infiltrate the Swedish National Cheerleading Team. I'll corrupt them with my boyish charm and rugged good looks LOL!! But I'll take plenty of cash too.

[AAbsolute]

I'll do my best to infiltrate the Swedish National Cheerleading Team. I'll corrupt them with my boyish charm and rugged good looks LOL!! But I'll take plenty of cash too.

I was hoping you'd give us your thoughts. We need creative alternatives.

[30ashopper]

It's really interesting how this whole thing feeds in on itself - a housing downturn leads to a credit crunch, which leads to a contraction of business and unemployment, which leads to more downturn in housing, which leads to a bigger credit crunch, which leads to more contraction in business and unemployment... and so on and so on.

At some point we have to bottom out. All the real-estate loans for people who couldn't pay them go bad, Wall Street finally writes off the last of these bad assets freeing capital, the last bank that can't survive fails and gets bought up, and housing prices finally crater to a point where people with cash and good credit start buying.

The question is, how long will this take? I'd estimate about two years.

[elgordoboy]

It's really interesting how this whole thing feeds in on itself - a housing downturn leads to a credit crunch, which leads to a contraction of business and unemployment, which leads to more downturn in housing, which leads to a bigger credit crunch, which leads to more contraction in business and unemployment... and so on and so on.

At some point we have to bottom out. All the real-estate loans for people who couldn't pay them go bad, Wall Street finally writes off the last of these bad assets freeing capital, the last bank that can't survive fails and gets bought up, and housing prices finally crater to a point where people with cash and good credit start buying.

The question is, how long will this take? I'd estimate about two years.

I used to think you were unduly pessimistic, now I am thinking you are unduly optimistic. I will be very happy if there is a thing like "cash and good credit" and I have any of it. If there isn't, I am going to club you on the head with a cow's leg bone and make you my valet. How are you at tanning hides and drying seaweed?

[ASH]

This could be a lot of popcorn. Love the information. More input!! I can wait.

[scooterbug44]

Wow, I thought my Sowal account had been hijacked until I saw the post date!

Amazing how many people can see this problem coming (both candidates claimed they tried to stop it during the debates) yet NOONE actually did anything to prevent it or cushion the blow!

[TooFarTampa]

I used to think you were unduly pessimistic, now I am thinking you are unduly optimistic. I will be very happy if there is a thing like "cash and good credit" and I have any of it. If there isn't, I am going to club you on the head with a cow's leg bone and make you my valet. How are you at tanning hides and drying seaweed?

LOL, I used to think Capricious was overbearingly pessimistic. Never mind.

[30ashopper]

I used to think you were unduly pessimistic, now I am thinking you are unduly optimistic. I will be very happy if there is a thing like "cash and good credit" and I have any of it. If there isn't, I am going to club you on the head with a cow's leg bone and make you my valet. How are you at tanning hides and drying seaweed?

I'm currently taking the online course as a fall back position.

[30ashopper]

Wow, I thought my Sowal account had been hijacked until I saw the post date!

Amazing how many people can see this problem coming (both candidates claimed they tried to stop it during the debates) yet NOONE actually did anything to prevent it or cushion the blow!

I remember a year or so ago when I was reading Roubini and thinking.. major bank and investment failures? A great depression? Yeah right! I'm not so sure anymore. Hopefully though that old rule of thumb comes into play - when everyone is convinced something is coming, it's probably already passed.

[Pirate]

Fannie Mae Eases Credit To Aid Mortgage Lending
By STEVEN A. HOLMES
Published: September 30, 1999
In a move that could help increase home ownership rates among minorities and low-income consumers, theFannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.
''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''
Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescuesimilar to that of the savings and loan industry in the 1980's.
''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''
Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.
Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.
Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.
Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University 's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.
In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.
Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.
In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.
The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

[scooterbug44]

Despite people posting this article on Sowal multiple times, it has been determined that increasing loans to minorities/the poor are NOT the reason for the current crisis.

If all of the loans were being paid back at the default rate of these scapegoats, we wouldn't have a crisis to discuss.

[elgordoboy]

LOL, I used to think Capricious was overbearingly pessimistic. Never mind.

Capricious will be the one to go to for sure. If I remember right he hasn't been spending his money on frivolous things like cable, landscaping, fresh food, haircuts, and regular dental visits ( just joshing you). He may be the "SHELLY" of how to survive after the total Systemic Collapse! hits as he has been living it for some time now.

[Capricious]

Capricious will be the one to go to for sure. If I remember right he hasn't been spending his money on frivolous things like cable, landscaping, fresh food, haircuts, and regular dental visits ( just joshing you). He may be the "SHELLY" of how to survive after the total Systemic Collapse! hits as he has been living it for some time now.

Welcome to the present, for those who did not see it
when it was still the future.


Capricious



Dusty: "Jo, Bill, it's coming! It's headed right for us! "
Bill: " It's already here! "

(Twister)

[Miss Kitty]

I see the unemployment line getting longer after November.

[scooterbug44]

After November?

Some Sowallers recently got 3 hours of notice that their new status was unemployed!

[AAbsolute]

It's really interesting how this whole thing feeds in on itself - a housing downturn leads to a credit crunch, which leads to a contraction of business and unemployment, which leads to more downturn in housing, which leads to a bigger credit crunch, which leads to more contraction in business and unemployment... and so on and so on.

At some point we have to bottom out. All the real-estate loans for people who couldn't pay them go bad, Wall Street finally writes off the last of these bad assets freeing capital, the last bank that can't survive fails and gets bought up, and housing prices finally crater to a point where people with cash and good credit start buying.

The question is, how long will this take? I'd estimate about two years.

Did you read what the CIA has on our Financial Balance and Rank?

https://www.cia.gov/library/publicat.../2187rank.html

[Miss Kitty]

After November?

Some Sowallers recently got 3 hours of notice that their new status was unemployed!

...I meant the folks in Washington!

[Capricious]

Jan 2009:


S&P 500 < 1,000
Dow < 9,000
Nasdaq < 1900

But how much "<"?
And is that a "bottom?"


PCB condo prices?
LOL





Capricious

"Bet your bottom dollar
That tomorrow
There'll be sun! "

(Annie)

[ASH]

Did you read what the CIA has on our Financial Balance and Rank?

https://www.cia.gov/library/publicat.../2187rank.html

So, if I read this right, we would need to drain the accounts of three+ entire countries just to get us back in the good. yikes.

[AAbsolute]

So, if I read this right, we would need to drain the accounts of three+ entire countries just to get us back in the good. yikes.

The CIA has probably been wrong once or twice before about small matters like this, but it sure sounds about right to me. The perennial boom and masses of immigrants who come, take, and go. The perennial deficits. It just seems like it all fits.

[ClintClint]

I'm not too proud to say I'm takin a real spankin' in the stock market! I'm going to really cut back on the whiskey, weed, and hookers. Heck, one more day like today in the market and a hot bath and razor blades might be in order. Or, maybe a parttime job---any goddess on the board need a pool boy?

[traderx]

What's the chance the our government can peacefully merge or acquire another country? Maybe we can work our way out of this.

https://www.cia.gov/library/publicat.../2079rank.html

I have advocated the invasion of Cuba for weeks. We could corner the market on cigars and sell them to the rest of the world and easily erase our trade deficit. We can also build hundreds of world-class resorts and let the Europeans know they can go topless so they will show up.

Seriously, the largest component of the current account is our trade deficit. I don't see how we can turn that around soon. How much are factory workers paid in the third world? Fifty cents an hour? In Detroit, autoworkers get twenty bucks an hour. Most lower and midrange furniture manufacturers are now offshore in Asia.

So, anyway, if we cannot turn the current account around, we cannot turn the dollar around in a meaningful way. And with the magic of exchange rate economics, that gives us an advantage with our exports since our goods are now cheaper. The only question remaining is will the rest of the world buy our Malibus, tires and industrial equipment?

[goofer44]

I'm not too proud to say I'm takin a real spankin' in the stock market! I'm going to really cut back on the whiskey, weed, and hookers. Heck, one more day like today in the market and a hot bath and razor blades might be in order. Or, maybe a parttime job---any goddess on the board need a pool boy?

Hang in there, Clint. Worst Worst Worst case is :

SPX 945 closed 1106

DJII 8400 closed 10365

Who knows , we may be there by Thursday !!!!!!

[dunefrog]

Do you guys see how much of this crisis is driven by psychology versus fundamentals? People are panicking. Nothing good ever comes of that.

The underlying assets (stocks and homes) are not worthless. The value of the homes will never drop to anywhere close to zero. The problem is that there is fear about the immediate future and everyone wants to hoard what they have rather than take a chance on buying anything. So the market value of the asset drops because the seller are desperate to sell but no one is keen on buying. This will eventually pass.

Remember right after 9-11 when everyone expected a terrorist attack on a regular basis. People were buying handguns and stocking up on canned goods. We were afraid and had no idea what to expect in the near future. We are in the same situation here.

I'm not saying there is no crisis. Far from it. I think we will probably experience a serious recession. If your personal balance sheet is debt heavy, you will have a hard time. If your company depends on leveraging debt on a daily basis to pay the bills, that company will have a hard time.

But if we figure out ways to stay productive, we can avoid the worst of it. Adapt to the new environment, learn from our mistakes, and on the other side of this we will all be better for it.

[goofer44]

Do you guys see how much of this crisis is driven by psychology versus fundamentals? People are panicking. Nothing good ever comes of that.

The underlying assets (stocks and homes) are not worthless. The value of the homes will never drop to anywhere close to zero. The problem is that there is fear about the immediate future and everyone wants to hoard what they have rather than take a chance on buying anything. So the market value of the asset drops because the seller are desperate to sell but no one is keen on buying. This will eventually pass.

Remember right after 9-11 when everyone expected a terrorist attack on a regular basis. People were buying handguns and stocking up on canned goods. We were afraid and had no idea what to expect in the near future. We are in the same situation here.

I'm not saying there is no crisis. Far from it. I think we will probably experience a serious recession. If your personal balance sheet is debt heavy, you will have a hard time. If your company depends on leveraging debt on a daily basis to pay the bills, that company will have a hard time.

But if we figure out ways to stay productive, we can avoid the worst of it. Adapt to the new environment, learn from our mistakes, and on the other side of this we will all be better for it.

If you lived through the crash of 1987, which I did, this panic is mild in comparison. I remember Oct. 20, 1987, the day after the crash. They could not open many stocks. The specialists were quoting stocks down 50% Only after some "financial engineering" by the Fed, did the market stabalize. Things will return to normalcy and orderliness......it will take time and patience.

[30ashopper]

If you lived through the crash of 1987, which I did, this panic is mild in comparison. I remember Oct. 20, 1987, the day after the crash. They could not open many stocks. The specialists were quoting stocks down 50% Only after some "financial engineering" by the Fed, did the market stabalize. Things will return to normalcy and orderliness......it will take time and patience.

Huuuuge buying opportunity over the long run...

[TheSheep]

I'm not too proud to say I'm takin a real spankin' in the stock market! I'm going to really cut back on the whiskey, weed, and hookers. Heck, one more day like today in the market and a hot bath and razor blades might be in order. Or, maybe a parttime job---any goddess on the board need a pool boy?

Not one with 8 lots in Georgia.