Nuthin' But 'Net: There will be blood
Posted: Thursday, January 24, 2008 1:10 PM by Chris Colvin
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Nuthin' but 'Net
Hi. More stuff on the stock market (a wilder ride than anything at Six Flags); the credit markets (harder to decipher than a Paul Thomas Anderson film); and the plot point no economic meltdown is complete without: the rogue trader (dude, where's my $7 billion?)
Between the Federal Reserve, the Executive Branch, Congress (working together.. gasp!), state regulators, the Government-Sponsored Enterprises (FannieMae, FreddieMac), Jim Cramer and Larry Kudlow, the powers-that-be are throwing everything including the kitchen sink at the equity markets, which have been tip-toeing a little too close to the abyss lately. Huge, surprise Fed Funds rate cuts, 2-minute drill stimulus packages, bond insurer bailout tirades and meetings, hikes in conforming loan limits, it's all coming, rapid fire. Will it be enough, or did the excesses of the past few years create so many problems that even the kitchen sink can't put out all the fires? Let's start with the bond insurers.
A couple of months ago, I spent a bunch of time trying to understand what a Structured Investment Vehicle was and whether the Treasury Secretary's idea of setting up a Super-SIV so banks could pool bad stuff they had parked in their SIVs in one place. A lot of reasonable people writing about the issue said the Super-SIV would never get off the ground, and it turned out, it didn't. No one wanted to invest in the Super-SIV, so the banks started repatriating what was in their off-balance sheet SIVs onto their books, and we all saw giant write-downs at bank after bank in Q4. Now there's talk of a bailout of a group of bond insurers called monolines, which used to provide plain-vanilla coverage to municipalities, but branched out into exotic credit derivatives during the last few years. That included insurance for bonds based on mortgage debt, which has now gone bad. The fear is that if the insurers default, it will have a really nasty ripple effect throughout the entire global financial system. The downgrade of one of those insurers, Ambac, on Friday may have been what triggered the global stock market freakout Monday and Tuesday.
So here's the state of play: yesterday, the Financial Times reported on a meeting of banks and representatives of the bond insurers, organized by New York State's insurance commissioner. The report hinted that a possible bailout of the insurers by a consortiuim of banks was in the works. As the original FT story came out, the Dow rocketed from down 340 points to up 299. (Coincidence? Uhhh...) But today, CNBC's Charlie Gasparino pours some icy cold water on yesterday's optimistic take, arguing that not only was yesterday's meeting of little consequence (no agreement from the banks on substance), it may have materially affected the companies' ability to actually be bailed out by some private equity bottom-feeders who were eyeballing them when their stock was at $5.00 a share. After yesterday's news, the bond insurers' stock prices took off like rockets, and private equity is not so interested at $14 a share. So to make a really long story only sort of long, it might be a reasonable conclusion to draw, that a monoline bailout makes about as much sense as the Super-SIV. It may not happen. But like the Super-SIV plan, the prospect that it might happen was enough to keep equity and credit markets out of the pit of despair, for the time being at least. Advocates of a bailout point to the Long-Term Capital Management hedge fund fiasco, as a template. The WSJ raised it.. and there was more today from NakedCapitalism. On the other hand, Felix Salmon at Portfolio doesn't think the monolines are all that important. And by the way, the subplot of all this is that when all the news about the monolines started hitting critical mass awhile back, Warren Buffett stepped in and said he'd be opening up his own bond insurance shop. Show of hands: do you think Warren Buffett knows what he's doing? Don't you think if the existing monolines were save-able, he woulda bought one of them? OK, hands down.
Back to more basics now and Existing Home Sales for December. CalculatedRisk has the latest ugly installment. In summary: December sales fell 2.2% to a 10 year low, down 22% year-over-year; prices fell 6% year-over-year; for the year 2007, median prices fell for the first time in 40 years. Here's a fun quote from March, 2003 to go with that last stat: "It is, of course, possible for home prices to fall as they did in a couple of quarters in 1990. But any analogy to stock market pricing behavior and bubbles is a rather large stretch. First, to sell a home, one almost invariably must move out and in the process confront substantial transaction costs in the form of brokerage fees and taxes. These transaction costs greatly discourage the type of buying and selling frenzy that often characterizes bubbles in financial markets. Second, there is no national housing market in the United States. Local conditions dominate, even though mortgage interest rates are similar throughout the country. Home prices in Portland, Maine, do not arbitrage those in Portland, Oregon. Thus, any bubbles that might emerge would tend to be local, not national, in scope." Who said it? (Answer at the end of this blog post, but not upside-down cause I don't know how to do that.)
Now to the stimulus package that the White House and House leaders announced today. Tax rebates, business tax cuts, and somewhat controversially, an increase in the conforming loan limits for the FHA, and government-sponsored enterprises Fannie Mae and Freddie Mac. Mike "Mish" Shedlock made the case against stimulus before the final details were announced (see especially the part about conforming loan limit increases being DOA, as they should be. Double-oof.) Paul Krugman says the Democrats caved on providing stimulus to those most likely to spend it. Yves at NakedCapitalism (again) weighs in on the monetary side. And just as a reminder that piling up more debt might not be the best solution to a debt crisis in this country.. here's David Leonhardt's NYT piece about the "good times" we've just experienced.
And what would a global stock market meltdown be without a rogue trader? France's second-largest bank, Societie Generale, fell victim to a "brilliant" 31 year old who managed to hide $7 billion worth of bad bets on the direction of various stock markets until late last week. The fact that SocGen had to unwind this guy's trades into the wicked selling that was already taking place Monday is being chalked up to "Murphy's Law" according to the bank's president. Oof. Oh well, at least the kid who lost $31,000 and posted his trades on YouTube Sunday night can get a little per-SPEC-tive!
GUESS THAT QUOTE ANSWER: The Maestro, Alan Greenspan.
