Ok, let's start with the first one - Freddie Mac.
Anyone catch FBR's "earnings call" from Miller on Tuesday? Here 'ya go:
"Miller's team said today that Freddie will report second- quarter net income of 50 cents a share -- instead of a loss of 63 cents as previously forecast -- because an increase in interest rates boosted the value of some assets. "
Uh huh. That call, by the way, caused quite a bit of buying on Tuesday.
What did they actually report? Over $1.50/share in losses.
This guy needs to depart. Its one thing to be wrong, its another to fail in such a colossal fashion that even a chimp would be embarrassed to put in your performance.
I'll bet that the "new regulator" in the housing bill refuses to enforce their mandate. See, Freddie told OFHEO (the former regulator) that they'd raise capital before June 30th. Here we sit in August after Congress handed Hanky Paulson an $800 billion "blank check" to bail them out as he sees fit, which has had the effect of the market considering the potential for the common stock to go to zero (which it should, by the way) to be quite high.
Syron has basically told Congress "go screw a goat", and Congress has, thus far, said "ok".
For exactly how long are citizens going to put up with this sort of arrogance? You want a backstop Syron and Mudd? How about you bend over it and we the people will take care of business?
The solution to Fannie and Freddie is in fact quite simple - divorce the "hedge fund" side from the newly-minted government guarantee and cut it off. If it dies (at 200:1 leverage, what do you think is going to happen?) then it does. Too bad. The "investors" bought a bunch of crap paper knowing full well what Freddie (and Fannie) had for gearing and deserve what they get.
If, as I noted before, Congress determines that it is in the best interest of the United States to have a formal Government issuer of mortgage paper, then so be it. I'm ok with that, especially at times like this. Structure one with completely-open-to-the-public books and sound lending, based on the time-honored 20% down, 36% DTI and 30 year fixed note. No cheating, no tricks, no BS. That's it. There is your liquidity backstop and the means to prevent the all-on implosion of the housing space, and its based on sound guidelines that produce sustainable home ownership.
So why hasn't this happened, now that we have had an outright refusal to do what the firm said it would a few months ago? Simple - $200 million in lobbying. In other words, legalized bribery and 300 million citizens who are too absorbed in American Idol to raise hell about the looting of their paychecks.
So what we now have is a pair of corporations, one of which was at one time an explicit government instrumentality but was spun off, the second a competitor to the first, both private corporations with no government guarantee whatsoever (both their prospectus and in fact the law governing them state so in plain black ink.) They do demonstrably unsound things, including successfully pressuring their "regulators" (remember folks, banks have no explicit federal guarantee but are regulated, so don't try making the argument that the presence of a regulator makes them guaranteed!) to allow them to gear up at more than 200:1 in parts of their operation. They also, with the full knowledge of Treasury and Congress (they're required to report annually on the loans they buy and hold, whether originated with their guarantee or purchased on the market), fueled the housing bubble via radically-loosened lending standards.
The market turns on them because in point of fact you can't sustain a housing market via debt slavery and Ponzi finance; it has to be via sustainable ownership capacity. This exposes the credit quality of their book for what it is - severely deteriorated from what it was 20 years ago, on purpose. Investors squeal that they might lose money (and perhaps quite a bit of it) and suddenly, after a few threats from sovereign funds, Treasury panics and ramrods through Congress what amounts to a complete rewrite of Title 12, Chapter 11A of the US Code, turning the GSEs from government-chartered (but not guaranteed or backstopped) enterprises into fully-supported arms of the government - without at the same time assuming full governance and control of the firms. All of this puts the entire United States financing system - the US Treasury - at substantial risk of an all-on meltdown in the coming months and years, while holding exactly nobody accountable for the mess they made.
Neither Democrats or Republicans seem to actually want sustainable home ownership. If they did, they'd be working to force home prices down, and you do that by getting rid of the fraud and "speculative" lending programs, forcing leverage to contract to sustainable levels. As I've noted there's nothing complicated about this - never in the history of mankind and commerce has something become more affordable by becoming more expensive!
AIG blew chunks all over investors after the close, losing $2.06/share.
To put this in perspective, as of 90 days ago the median estimate for earnings was $1.67. As recently as last afternoon it was 63 cents. The low estimate was a loss of 31 cents, which the firm handily outdid by losing nearly seven times the most pessimistic estimate.
But the real bad news was embedded in the earnings release; their mortgage insurance group, which primarily writes "prime" PMI policies, has a 4.9% 60-day late rate at present, almost a double from a year ago.
The significance of 60 day lates is that these aren't a "missed payment" due to a mistake or temporarily hiccup. Once you're two behind, you're in trouble and the odds are high that foreclosure will be coming to visit you soon.
These guys are in serious trouble. The insurers all place their money with various "alternative" investment vehicles such as hedge funds in an attempt to scootch yield. This works great in a positive market, but now we're in a bad one, and those investments are returning little or even losing money. What's far worse is that with the decline in business in general you've got an ultra-competitive environment for underwriters, so the revenue side of the house gets squeezed too. Down this rabbit hole can lie a real mess, although nobody seriously expects AIG to take a dirtnap. Nonetheless, their stock got hammered (and deservedly so) in the aftermarket, down about 10%.
That mortgage-insurance stat is confirming what has been said by others; there is a major dislocation happening right now in the ALT-A and prime mortgage space. Recessions usually come with some sort of uptick in prime delinquencies, but this one is likely to be especially bad, because "prime" was redefined in the last ten years or so to be "not really prime."
As noted in the past, "prime" now essentially means "has a 700+ FICO score."
Unfortunately what it doesn't mean is what PRIME is actually defined as, which is:
- 20% down in cash, no fancy crap
- A 36% DTI (back end ratio) or less; in fact, "automated approvals" will issue even today at or beyond 50%, especially if you have the "bolster" of a balance in an IRA or 401k (never mind that early withdrawal from the former or borrowing against the latter is one of the dumbest things anyone can EVER do, as they're protected assets in a bankruptcy)
- 30 year fixed term
Oh, for the days in which mortgages were sustainable, had a capital cushion of equity, and the homeowner could actually afford the house! Over the last four years the percentage of actual prime mortgages issued has been, from a statistical point of view, near-zero!
The bad news is that homes will become affordable by these traditional standards again whether or not the Democrats and Republicans, or the Fannies of the world, want them to or not. It is inescapable that until sound lending is the basis upon which valuation is determined the housing market will not bottom and those who tell you otherwise are lying.
Since I see zero evidence that any of this has become evident to anyone in power, never mind the "I'm ok so long as American Idol is on TV tonight" groupie set (that'd be 99% of America) as of this time, we are a good two years away from anything approaching a bottom, because from the time of realization to implementation will be about a year, and to shake out and clear inventory at the new, lower price will require a second year.
The CMBX space continues to get more and more nasty. Commercial construction is a totally-unappreciated risk for community and regional banks in the system as a whole. These loans are going bad at a frightening rate and the gearing in these institutions, along with (especially the community banks) their relatively thin capitalization means that just one or two bad deals that happen in the wrong size and time can sink the institution. These failures not only will stress the FDIC but also will choke off even more routine commercial and consumer lending - count on it.
If you recall my thesis has been since last spring that "we're screwed, but the rest of the world is screwed worse." How's this sound?
"Adding to the ECB's concerns is the fact that seven European countries index wages to inflation, a policy Trichet has labeled ``extremely dangerous.'' In Belgium, Cyprus and Luxembourg, wages are automatically adjusted for past consumer-price increases, while Spain, France, Malta and Slovenia also have some form of indexation, according to the ECB.
``The ECB will continue to see a worrying trend in wage growth,'' said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Group Plc in London. ``This is likely to remain the central bank's dominant worry and will probably push it to raise rates again despite signs that downside risks to the economy are materializing.''"
Ding ding ding ding ding. Boy, it has to be fun being in the BOE and ECB meeting rooms today. Oh to be a fly on the wall......
Both, by the way, left lending rates alone.
Yesterday I was accused of being full of "fearful self-centeredness" by an associate. Probably one of the many who has ran screaming from me talking about the truth.
Self-centered? Uh, no. I wouldn't call spending close to $5,000 over the last month faxing petitions and traveling to DC to press flesh and try to get people to view the world through clear lenses instead of coke-bottles or rose-colored flypaper evidence of such a thing.
Fearful? For our nation's future, and that of my daughter and her family down the road? Yes.
For myself? No; I'm not in the "Mad Max" camp and absent that there is little that could lead to me having reason to fear. Fearful people don't travel to DC and wave signs on street corners; if I was concerned about black helicopters or an all-on economic collapse I'd be cowering in a corner somewhere or digging my fallout shelter and stocking it back with rice and beans. That has never been part of my psyche and never will be.
I do believe we are facing a time in this nation economically that may rival the 1930s. But that is not a thing to fear. Busts follow booms; it is a natural part of life that when one pushes the pendulum too hard one way, it will return and clock you on the rebound. This isn't to be feared, it is to be viewed as the opportunity that it is. If you've been prudent, remained out of debt and have capital to deploy, there are some incredible opportunities coming your way in the next few years.
Patience is the virtue that you need at times like this, as it was in the 2000-03 tech wreck; it is not until everyone on CNBC is saying to puke up all your stocks and never buy one again that you want to be back into that market long for investment purposes, and until nobody wants to touch real estate we will not bottom in that area either. Keep your powder dry and look for the opportunities; if you're a trader, these are salad days, albeit with more than enough volatility to cut your head off should you get overextended. So play thoughtfully, not in fear.
Fear is for those who have tried to ride the euphoria, refusing to leave the party while the music was still playing, and now have an ugly situation in front of them. There are many in this circumstance; people who have "geared up" and are rabidly scrambling for an exit door, now having discerned that indeed the curtains are on fire.
One wonders if I stumbled upon such a person by accident last noon.
Hmmmmm....
Jobless claims up to 455k, over the psychologically important 450k level.
One final note - my commentary about the Chinese threatening to dump GSE debt and thus demanding the housing bailout of Fannie and Freddie (under the table) sparked a hell of a firestorm on the forum and apparently pissed off a lot of people when I got more than a bit rough in the discussion there.
Let me point out that this is the second threat by the Chinese in about a year. Anyone remember last August when The Chinese threatened to dump dollars unless we did their bidding? There was quite a lively thread on the forum about it at the time.
The difference? That time Paulson dismissed them with a jeer. This time he bent over the table.
My comment on it a year ago? Here it is, from that thread - I hope you don't mind rough language:
"You do not understand these people. I've done business with them (and the Japanese) before, and it is apparent that they believe we've told them to get fucked.
Well, Congress did.
Problem is, they're the fucker and we're the fuckee. Not so smart. We made the mistakes 10+ years ago all the way down the line up until now, and we're in trouble."
I hate being right, and we had damn well better wake up and smell this coffee before it goes down our crotch.
Its boiling hot.
Economics
