According to the Financial Times, Alan Greenspan (as in the former chairman of the Federal Reserve) now acknowledges a national housing “bubble”; that price declines will be “larger than most people expect” (good thing you’re not most people); and that “froth” was a euphemism for a bubble (no kidding).
He said he still thought froth – a collection of bubbles – was a better description, because of the variation in house price appreciation in different local housing markets. But he said “all the froth bubbles add up to an aggregate bubble”.
As some might recall (or could find by searching SocketSite), it was a little over two years ago that Greenspan acknowledged local housing bubbles but dismissed the idea of a national one. And it was soon thereafter that his testimony on “exotic forms of adjustable rate mortgages” caught our eye.
UPDATE: And speaking of British news, the conversation quickly turns to the run on Northern Rock (the UK’s fourth-largest mortgage company) and LIBOR (a bit closer to home).
∙ Greenspan alert on US house prices [Financial Times]
∙ Greenspan Sees Local Housing Bubbles [SocketSite]
∙ Greenspan Speaks [SocketSite]
∙ Northern Rock Stock Tumbles Further Amid Run on Bank [Bloomberg]
Greenspan seems to have found some plan english… finally!
Could it be at all related to pushing his own book?
Wonder if he will by an SF pied-a-terre with the proceeds?
no kidding, he’s just trying to pump his book sales.
He also said that he foresees the Fed needing to raise rates to the 10% plus range in the DISTANT future, that he disagreed with Bush’s economic policies, and he sees recession as very possible, that he admits there was an international (not just national) property bubble
The book is a big cover your butt publication, that he’s hoping will further line his pockets.
that said, press time for him has been somewhat difficult, as there’s more pressing financial news this week.
(not sure if you’ve heard or not, but there’s a good ole fashioned bank run going on in England this year at Northern Rock Bank, one of UK’s biggest mortgage lenders-in fact largest lender this year by volume… there are lines blocks long of old pensioners trying to get their life savings out of the bank.)
it’s getting people wondering if a bank panic could happen here in the states.
obviously, this will not make getting a mortgage easier, as we have spread of mortgage woes to yet another country (now it’s been the US, Australia, France, Germany and the UK)
[Editor’s Note: Northern Rock Stock Tumbles Further Amid Run on Bank.]
http://www.bloomberg.com/apps/news?pid=20601087&sid=aS813Kojk7qI
and why is this important? because most ARMs are tied to LIBOR, not to the Fed Rate. And LIBOR is skyrocketing due to this.
Banks are terrified that they will be subject to bank runs… thus they have to hoard cash in case they need it… thus they don’t want to lend it-even to other banks… thus LIBOR rises… and ARMs rise as they’re mainly tied to LIBOR.
[Editor’s Note: Not to discount the news, but we’ll note that while LIBOR for British pounds spiked 60 bps, it was 17 bps for dollars.]
Bank run photo from this weekend:
http://farm2.static.flickr.com/1170/1392952213_bb211f0223.jpg?v=0
Will this photo be seared in every bankers head when they decide they want to be careless with other people’s money ever again? Quite possibly…
Wow. Reminds me of the tales my grandfather used to tell about the 1930’s. The amazing thing is of all the articles I keep reading about the US mortgage mess, the UK’s mess and Alan Greenspan’s (and other so-called economic guru’s) comments, is that the people in charge keep saying that they had ‘no idea’ that the financial practices in the lending and real estate market would have such a negative impact in the future. Who are these people & what exactly are they doing w/ their time? Are they so divorced from the realities of the economies they are supposedly managing that they couldn’t see this coming? It’s amazing, even my nephew taking Econ 101 in college was saying that the current market wasn’t ‘real’ 2 years ago…and he’s not even a business major.
Question- I know nothing about the British banking system, but don’t they have something similar to FDIC? If so, aren’t the customers funds reasonably safe even if Northern Rock goes under?
[Editor’s Note: “U.K. banking rules only safeguard 31,700 pounds for individual depositors, so allowing the company to go bankrupt risks destroying the savings of some of its customers.”]
Nothing to worry about, folks. It’s not a bank run – just rich foreign investors getting money out to invest in SF condos.
Is it conceivable that a bank run could happen here in the U.S.? Just a thought….
“and why is this important? because most ARMs are tied to LIBOR, not to the Fed Rate. And LIBOR is skyrocketing due to this.”
Libor Leeway: Why the Worst May Be Past:
http://online.wsj.com/article/SB118998457934329174.html?mod=todays_us_money_and_investing
Panic is the long-term investor’s best friend. I had a coach whose favorite quote was “things are never as good as they seem. And things are never as bad as they seem.” Voltaire he was not but the takeaway applicable…to both the bubble and the bust.
My thought is that it is doubtful (at least in the short run) that a bank panic would happen here, but I’m not an economist by any stretch of the imagination.
It is my (very limited) understanding that the previous conventional wisdom dictated that institutions did not borrow from the Fed unless they were in trouble. When the Fed lowered the discount rate last month and ‘encouraged’ banks to borrow from them by raising the federal funds rate that they would be subjected to if they borrowed from other banks, I think one of the things they were trying to achieve was the removal the stigma of Fed borrowing. By having several banks borrow in a seemingly more benign climate, it could theoretically help to allay investors fears and quell a panic response. One of the triggers for the Northern Rock run was that they announced that they needed to seek emergency financial assistance from the Bank of England in addition to drastically reduced earnings projections, so the Fed’s actions may have actually helped to prevent that from happening here.
But once again, I’m not an economist; this is just my very tenuous and extremely limited understanding of the situation. If anyone can provide a more informed insight into this, I would welcome the knowledge and understanding.
Bank run doubtful?
http://www.latimes.com/business/printedition/la-fi-countrywide17aug17,0,5944637.story
A run started at Countrywide (the day before the Fed cut the discount rate).
Thanks for the link to the CW story. I totally missed this in my attempt to gain further understanding of what the heck is going on with all of this stuff. Most of the articles I found were in relation to the UK, EU and Australia. I definitely need to reconsider my original opinion now.
Make no mistake, the Northern Rock story is huge.
It means that “containment” has spread to the US, Australia, Germany (2 banks bailed out), France (BNP Paribas ran into some trouble, but didn’t need to be bailed out)
Northern Rock is a big mortgage player, and plays heavily in the secondary mortgage market.
How many big European banks do you think will invest in American Mortgage Securities after all this spreading “Containment”? Don’t you think that Countrywide will be eyeing the Northern Rock situation closely? Or other American banks/thrifts with similar bank profiles (like Washington Mutual)?
LIBOR went up 60 basis points (in pounds). It “only” went up 17 basis points in dollars… that’s still a lot.
and each day the bank run is getting worse at Northern Rock. not a single investor/analyst thinks that they can survive.
as for the British FDIC: The Financial Services Compensation Scheme, the U.K.’s fund of last resort for financial-services customers, covers 100% of the first £2,000 ($4,000) and 90% of the next £33,000, for a total of £31,700.
so you lose 10% of all your savings after £2,000.
That said, the British govt just changed their policy today making 100% of the savings covered in an attempt to calm the storm.
http://online.wsj.com/article/SB119004858354329943.html
quite some time ago I discussed the idea that the Bear Stearns Hedge fund collapse changed mortgage lending significantly, even though 95% of people never heard about it when it happened. Ditto to Northern Rock.
English banks are now falling over themselves trying to reassure depositors that their loan book is sound. That would make future purchases of American MBS unlikely.
I should clarify:
Northern Rock is a big player in the UK (not US) secondary mortgage market.
Not (directly) related to this thread, but I did notice E-Trade is closing its wholesale-mortgage business. Interesting but not surprising given the current environment.
E*Trade Warns of Mortgage Fallout
[The company, which many people didn’t know was even in the mortgage business, plans to take $345M in write-offs for bad loans and impaired mortgage-backed securities. Imagine how many $7.99 commissions it will take to recoup the $345M!]
http://online.wsj.com/article/SB119006126061630102.html
>>
By SUSANNE CRAIG
September 17, 2007 5:15 p.m.
E*Trade Financial Corp., best known for providing cheap trades to individual investors, this afternoon warned investors that it has been badly stung by the recent fallout in the mortgage market.
The company says it expects profits to come in 31% below the most recent guidance it had given analysts — partly due to its exposure to the mortgage business.
The news, weeks ahead of its scheduled third-quarter earnings report, provided Wall Street with a glimpse of what may be in store tomorrow when the country’s biggest brokerages, beginning with Lehman Brothers Holdings Inc., start reporting third quarter earnings. After years of blowout profits, traders are bracing for a rough quarter as firms like Lehman grapple with the effects rising mortgage defaults have had on their business. Wall Street firms, including E*Trade, have many tentacles in this business.
For E*Trade, which is scheduled to release earnings in mid-October, the pain is significant. It warned it will earn approximately $1.10 a share this year, down about 31% from the $1.60 or so it was forecasting.
“We want to get this issue behind us and put the focus solely back on our core retail customer,” E*Trade Chief Executive Officer Mitch Caplan said in an interview. He stressed that despite the recent issues, the company does not have a liquidity problem and released detailed information about its current financial picture along with today’s announcement.
While most people associate E*Trade with online trading, the mortgage business was a big driver of E*Trade’s earnings growth over the past few years. E*Trade, a buyer of mortgages from third parties, plans to get out of that business altogether and has set aside $245 million, up from $70 million, to cover related losses over the next four quarters. This provision will cover both losses on mortgages the company has made and bought from third parties as well as home-equity lines, a trouble spot for E*Trade. The firm says that as of the end of August, 2% of its $17-billion mortgage portfolio was comprised of delinquent loans while 2.8% of its $12.6 billion home equity portfolio is at increased risk.
In addition, the firm says that it may need to take a charge of up to $100 million to cover losses in its $18 billion-plus securities portfolio, which includes assets backed by mortgages that are now worth less than they were a few months ago.
As part of the sweeping package of financial charges announced this afternoon, the firm said it plans to spend more time focusing on its retail customer base and will restructure its balance sheet so it is more reliant on cash and assets it generates from customers on everything from margin loans to E*Trade originated home loans. Specifically, it hopes that as much as 85% of its balance sheet will be driven by customer related activity, up from about 60% today. As a result, E*Trade said investors should expect to see $18 million less in earnings over the next four quarters.
It will cost E*Trade $32 million in expenses just to exit that one mortgage business and overhaul another unrelated business that provides services to big or institutional clients.
The news could also cast a cloud over the merger discussions it was having with rival TD Ameritrade Holding Corp. The two sides had been recently been discussing whether to merge operations, according to people familiar with the matter. Yesterday’s announcement will no doubt raise short-term concerns Ameritrade executives have expressed concern about E*Trade’s reliance on the mortgage business.
30-day LIBOR has come back down quite a bit in the last 4 days – that’s good, ya?
This is a big development, and it doesn’t bode well for the economy. To be fair however, doesn’t LIBOR primarily impact subprime ARMs? Everything that I’ve read latetly states that only 20% of prime mortgages are indexed to LIBOR.
a friend of mine asked me today for any hedge fund contacts since he has a friend with a portfolio of reo’s he’d sell for 50 cents on the dollar. i gotta think that someone will eventually buy these houses. why not just take the titles as the underlying owner when you are a bank that has 1000’s of defaulted houses on your books?
“why not just take the titles as the underlying owner when you are a bank that has 1000’s of defaulted houses on your books?”
because it is better to get some cash flow from those homes than no cash flow… and the banks don’t want those houses on their books.
accounting and regulations of banks are very complicated, so I won’t get too much into it (I’m blabby enough as it is, and not qualified to do it!), but some (simplified) problems with doing what you say is:
1. if you are a bank, and you take title to a home, it goes as a “REO” (Real Estate Owned) on your balance sheet. This reduces the amount of money that you can lend out. (due to reserve ratio requirements). Lending is your business, so you’re wasting your productive money on REO’s instead of lending at a profit.
2. Regulators don’t like lots of REO’s on a bank balance sheet, so eventually will force banks to sell the REOs. If they have to sell a bunch of REO’s at a DISCOUNT to their outstanding mortgage balance, it shows that the REO profile is impaired (as well as the whole loan book)… thus they’d have to take a charge against earnings impairing the stock price and this may impair their ability to work in the open markets.
3. banks are not into the Real Estate Management business… Managing these empty homes is costly for banks. especially when there is too much housing around the country (at least too much housing for the prices asked)
4. most of the holders of these mortgages are not banks, they are investors (hedge funds, pension plans, foreign banks and governments, other businesses like Etrade and GMAC and Countrywide etc). many have significant leverage, commonly 10:1. So a 10% loss wipes out all their money. if they take ownership of the home, they have all the problems the bank has, plus the real possibility of being wiped out due to leverage. (this is what happened to the Bear Stearn’s hedge funds, as well as the BNP Paribas subsidiaries… and what most are worried about Citi’s conduits that are off balance sheet)
the essential problem is that homes were being sold at rediculous values that regular people can’t afford. So when the first “owner” gets foreclosed upon, there aren’t enough people to buy the property. (so the REO isn’t worth it’s mortgage)
this is why Countrywide sits with $2.5 billion of REO properties (about $1B in california alone).
if possible, it is in the bank/investor’s interest to keep the defaulted “owner” in the home making payments and keeping the house up for as long as possible.
it should be telling that Etrade is taking charges against its mortgage business. MORTGAGE BUSINESS????
notice how the “containment” continues to spread. You have people who had no business “investing” in American mortgages investing in American Mortgages. That is what allowed mortgages to be so cheap for consumers. (remember, those 5.125% 30 year fixed mortgages were at generational lows!)
those days are long gone. those expecting mortgages to fall down to the 5-6% again don’t understand the true damage that is occuring over the last 6 months. Nobody knows how deep this goes… because every week we hear about another non-mortgage firm being signiciantly impacted by mortgages. all those mortgage buyers have now been burned, and won’t return for a while (at least some years I’d guess, but who knows for sure?)