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  • Thu, Oct 23 2008
  • 8:26 PM » ALT-A: The Coming Risk Abatement Disaster
    Published Thu, Oct 23 2008 8:26 PM by Seeking Alpha
    submits: Once again have unleashed the bullish cries of bottom by the guestimating industry cheerleaders like , the , and similarly minded government ilk who believe we can all collectively wish our way out of this mess. But the proverbial writing has long been on the wall, and we have yet to measure the depth of the losses from this financial fiasco.
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • 10:51 AM » Goldman Sachs said to be about to cut around 10% of its staff
    Published Thu, Oct 23 2008 10:51 AM by
    More pink slips are on the way at Goldman Sachs according to the Wall Street Journal; they say that the ax will fall on around 10% of its 32,500 employees. Goldman to Cut 10% of Jobs as Downsizing Wave Grows...
    Click Here to Read the Full Article

  • 10:50 AM » Understanding Credit Default Swaps: A Case for Regulation
    Published Thu, Oct 23 2008 10:50 AM by Seeking Alpha
    submits: Imagine a market where you can trade your perception of someone else's credit worthiness. Imagine a market where you can encash an insurance policy on an asset gone bad without owning the underlying asset itself. Imagine a market which is larger than the capitalization of New York Stock Exchange and is yet not regulated. Welcome to the world of Credit Default Swaps (CDS). The Instrument: The Credit Default Swap market is massive, estimated to be in excess of $50 trillion. CDSs are derivatives, i.e. financial contracts without the underpinnings of any actual assets. They are used to bet on the credit worthiness of a loan or debt instrument. The price of the swap moves in line with perception of the borrower's credit worthiness. A swap seller believes that the borrower's ability to repay the underlying loan will improve while a swap buyer seeks protection against the possibility of a loan or bond failing.
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • 10:49 AM » CDS Too Risky for CME Trading, Key Members Say
    Published Thu, Oct 23 2008 10:49 AM by Google News
    In theory, moving credit default swaps from over the counter trading to exchange trading should reduce systemic risk. Exchanges fail far less often than individual institutions, and when they do, the damage has less propensity to propagate into a systemic event. As keen as the authorities are to get the big, opaque CDS market on a safer platform, obstacles remain. For a host of reasons, outstanding CDS cannot be migrated onto an exchange, but newly written CDS designed to fit certain parameters could be (in theory, old contracts could be "novated" in favor of new ones). CDS suitable for exchange trading would have to be far more standardized. How to simplify the offerings has yet to be sorted out. The most valuable element of moving CDS to an exchange, as far as lowering systemic risk is concerned, is centralized clearing, since if anyone defaults, the counterparty is the exchange, not an individual firm. Thus regulators have been moving forward as quickly as possible to set up a central clearinghouse. In particular, the CME Group proposed acting as a clearlinghouse, which means that its members would absorb the losses if any counterparty failed. Some rival proposals suggested setting up a new clearinghouse, which is a much sounder design, but would take longer to implement. However, some savvy and influential and savvy CME members are now objecting to the idea, arguing that the additional risk of CDS clearing on top of their existing CME obligations is more than the members can realistically support. Moreover, they contend that putting together CDS and futures under the same umbrella is too much risk in one venue, and will increase, not reduce systemic risk. Note that CME Group (along with Citadel) is one of four groups vying to handle the CDS clearing function. However, CME appeared to be the frontrunner. Note that this wrinkle does not imperil the idea, but means there may be more speedbumps down the road. This development suggests that the rush to get a...
  • 10:48 AM » Hidden threat in “under water” mortgages
    Published Thu, Oct 23 2008 10:48 AM by
    A guest post from , veteran business journalist and author of the blog , a humorous look at marketing, business and his dog. Under water is the industry term for homes with negative equity – where more is owed on them than they are worth. You know the cliché about the iceberg and only seeing the tip of it because the rest is … well you know where. Well, the cliché is sadly still true when it comes to the mortgage crisis. The US economy is likely to be further swamped by a wave of “under water” mortgages (how’s that for a mixed metaphor?). This condition currently effects nearly one sixth of U.S. homeowners and is very probably going to result in more foreclosures and bankruptcies. Reuters reports “” Because so many people bought homes with little or nothing down when housing prices spiked, a huge number of people are now facing this situation. Nearly one in three homes purchased since 2003 have negative equity. The number is even more terrifying for those who bought after that, nearing 50% for people who purchased homes in 2006. The argument used to be that buying was better than renting because you are building equity. A lot of people may do the math on their homes and realize that bankruptcy makes more financial sense than paying into something they will never see a return on. No one likes to declare bankruptcy and admit this kind of defeat, so it will not be an easy or happy decision for any of these folks. However, it may be the only choice they have.
    Click Here to Read the Full Article

  • 10:48 AM » Malls Go for Broke, May Still Go Broke
    Published Thu, Oct 23 2008 10:48 AM by
    As retailers batten down the hatches for what most finally agree will be a nasty economic slowdown their landlords are scrambling to keep the lights on. The Wall Street Journal reports mall and shopping-center owners are turning to unconventional advertising methods to keep cash coming in the door. Ads are popping up on food-court meal trays parking-lot stalls and even vacant storefronts. InWindow and WindowGain 2 new companies in the alternative ad space have landed big names on their clients’ previously vacuous retail space: Comcast (CMCSA) SAB Miller and Verizon (VZ) are all signed up. Although cash flow from ...
    Click Here to Read the Full Article

  • 10:48 AM » Troubling Details in NYT Account of Official Response to Financial Crisis
    Published Thu, Oct 23 2008 10:48 AM by Google News
    The New York Times is publishing a series on the financial crisis, "The Reckoning," and today's installment is "." While this is a useful recap, there are some tidbits that merit commentary, such as: “Ben said, ‘Will you go to Congress with me?’ ” said Mr. Paulson, referring to the Federal Reserve chairman, Ben S. Bernanke. “I said: ‘Fine, I’m your partner. I’ll go to Congress.’ ” Although it's no news to anyone who has watched the Fed-Treasury pas de deux as the credit crisis has rolled along, the Fed has completely, utterly lost its independence (see for an apple pie and motherhood statement of why central bank independence is a Good Thing). What is surprising is how little notice this development has attracted. As we , based on an article draft provided by former Fed economist Richard Alford: Few have any memory of America's central bank having a openly contentious relationship with the Treasury and Congress. Even though Paul Volcker had to withstand considerable pressure, some of his predecessors fought open turf wars. Yet from the end of World War II to the (sadly) supine Arthur Burns era, there were not infrequent pitched battles with the Fed with incidents that would seem unthinkable now. For example, Truman summoned the FOMC to pressure them into a more accommodative policy during the Korean War, then issued a White House press release claiming the Fed had made a commitment that it had not agreed to. The Fed played hardball, leaking its version of the meeting, which contradicted the press release. That led Congress to join the fray, trying to bring the Fed to heel via sharply critical hearings. While Volcker did endure widespread criticism and harangues from Congress, even for those who lived through that er.. the memories of the ritual roughings up are dim. In addition, there was at least initial support for his harsh measures. Moreover, (unbeknownst to me) Volcker was masterful at defanging Congress long enough for his remedies...
  • Wed, Oct 22 2008
  • 10:50 AM » Low marks for Paulson, bailout
    Published Wed, Oct 22 2008 10:50 AM by CNN
    A majority of Americans aren't happy with the way Treasury Secretary Henry Paulson is handling his job or with the financial rescue package he and Congress created, according to a poll released Wednesday.
  • 10:50 AM » Oil falls below $70 on recession fears
    Published Wed, Oct 22 2008 10:50 AM by CNN
    Read full story for latest details.
  • 10:50 AM » Bank of Canada Cuts Rates Again - This Time, Not As Heavily
    Published Wed, Oct 22 2008 10:50 AM by Seeking Alpha
    submits: The Bank of Canada rate target was cut yesterday for the second time this month, but this time, by 25 basis points. Some analysts were anticipating a bolder 50-bp cut to match the action taken on October 8th. The new overnight target of 2.25% has a 75-bp premium relative to the Federal funds rate, and that will widen to at least a full percentage point after the FOMC meets on October 28-29th. A statement released by central bank officials revised projected inflation “significantly” lower. The new forecast claims that total inflation has already peaked, will fall to less than 1.0% by mid-2009 and later only return to target (2%) by end-2010. Core inflation will run below 2% all of next year and also all of 2010. Deflated by the new price forecast, the 2.25% nominal rate target implies a real central bank rate of around 1.25%. The Fed funds target of 1.5%, in contrast, translates to an inflation-adjusted negative cost of around 1.0% and will be sliced to even lower by the end of this month.
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • 10:11 AM » IMF: No U.S. growth til mid-2009
    Published Wed, Oct 22 2008 10:11 AM by CNN
    The International Monetary Fund on Wednesday issued a gloomy economic outlook for the United States and the Western Hemisphere, saying U.S. economic growth will be close to zero or even slightly negative for the rest of 2008 and the following few months.
  • 10:10 AM » Bond Report: Treasurys up as troubles spread overseas
    Published Wed, Oct 22 2008 10:10 AM by Market Watch
    Treasurys advance, pushing10-year note yields to the lowest in two weeks, as signs that a U.S. economic slowdown will infect other countries led investors to the safety of government debt.
  • 10:09 AM » McDonald's profit jumps 11%, as company remains 'optimistic'
    Published Wed, Oct 22 2008 10:09 AM by Market Watch
    NEW YORK (MarketWatch) -- McDonald's Corp. posted an 11% rise in third-quarter profit, helped by strong sales worldwide, the fast-food giant said Wednesday.
  • 10:08 AM » National City's Earnings: The Loss Was Expected
    Published Wed, Oct 22 2008 10:08 AM by Seeking Alpha
    submits: Yes it is a loss, yes it was expected. What do we care about? Deposits are growing, Tier 1 remains high and operating income is up. () The Headlines: • Net Loss of $729 Million Driven by Continued Actions to Build Reserves; Loan Loss Provision Declines 25% from Second Quarter
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • 10:07 AM » Mortgage applications fall 16.6 pct
    Published Wed, Oct 22 2008 10:07 AM by Reuters
    NEW YORK (Reuters) - Demand for applications to buy homes and refinance mortgages sank 16.6 percent last week, a trade group said on Wednesday, in the heart of a financial crisis that has sapped consumer confidence.
  • 10:06 AM » Wachovia Reports $23.9 Billion Loss for Third Quarter
    Published Wed, Oct 22 2008 10:06 AM by
    The loss, the highest yet announced in the crisis, underscored the challenges Wells Fargo faced after acquiring the bank.
    Click Here to Read the Full Article

  • 10:05 AM » Yahoo profit slumps, job cuts on tap
    Published Wed, Oct 22 2008 10:05 AM by Market Watch
    NEW YORK (MarketWatch) -- Yahoo Inc. posted a sharply-reduced third-quarter profit and said it will trim its workforce by at least 10% as the Internet company struggles to mount a turnaround despite the troubled economy.
  • 10:04 AM » Suffering Regional Banks Expected to Consolidate
    Published Wed, Oct 22 2008 10:04 AM by
    Industry observers were predicting Tuesday a fresh round round of M&A to sweep the regional banking industry, as five such institutions, including National City and U.S. Bancorp, reported another round of painful results and analysts said their business will worsen as the economy deteriorates. Several of these banks said they hoped to sell stock to [...]
    Click Here to Read the Full Article

  • 10:03 AM » Was Lehman Loss All That Bad?
    Published Wed, Oct 22 2008 10:03 AM by
    Conventional wisdom across the globe is that American authorities made a ghastly error in not saving Lehman Brothers. But, Breakingviews wonders, as it really such a tragedy? Treasury Secretary Henry M. Paulson Jr. and the Federal Reserve chairman, Ben S. Bernanke, almost certainly didn’t anticipate the global panic that swept over the financial system after Lehman [...]
    Click Here to Read the Full Article

  • 10:02 AM » Swap Spread Tightening
    Published Wed, Oct 22 2008 10:02 AM by
    Here is an excerpt from a research note on the sharp contraction in swap spreads. The note relates that the contraction in spreads to increased Treasury issuance and the beneficial effect of the improved funding levels which have resulted from the liquidity injections by central banks around the globe. The author adds a third factor which is the convexity needs of mortgage players. I cannot reproduce the chart to which the author refers. Swap spreads have been gapping lower over the last few days with 10-year spreads 20 bp narrower than Thursday’s close. To date, the 2 key drivers of this move have been the effect of rapidly growing budget deficits on Treasury yields and the impact of Central bank and government liquidity injections on Libor funding pressures. However, a third catalyst for further narrowing in swap spreads is now emerging as spread narrowing is amplifying the decline in mortgage rates causing a sharp contraction in mortgage durations. We estimate the duration of the mortgage index has shortened almost 1-year since Thursday. The chart below shows how correlated Libor spreads have become with mortgage rates with the implication that spreads have recently been almost as important as Treasury yields in determining mortgage durations.
    Click Here to Read the Full Article

  • 10:01 AM » FTSE falls as UK braces for slowdown
    Published Wed, Oct 22 2008 10:01 AM by
    Equity markets were hit by gloom over the global economy, with London investors braced for recession after a speech by Bank of England governor Mervyn King
  • 10:00 AM » Wells-Wachovia Deal Warranted Urgent Action, Fed Says
    Published Wed, Oct 22 2008 10:00 AM by
    The Federal Reserve Board on Tuesday said emergency conditions warranted its expedited action to approve Wells Fargo bid to acquire weakened banking rival Wachovia Corp.. The Fed issued its approval of the $12.2 billion deal in an unusual Sunday announcement on October 12, three days after Citigroup abandoned a brief but acrimonious battle over the third-largest [...]
    Click Here to Read the Full Article

  • 9:59 AM » Prosecutors Said to Probe Whether Lehman Misled Analysts
    Published Wed, Oct 22 2008 9:59 AM by
    U.S. federal prosecutors probing the collapse of Lehman Brothers Holdings have subpoenaed other securities firms, asking whether their analysts were misled by Lehman about its financial health, The Wall Street Journal reported, citing people familiar with the matter. The subpoenas are broad in nature, requesting information about statements Lehman made earlier this year as its stock [...]
    Click Here to Read the Full Article

  • 9:58 AM » AIG Posts More Than $1 Billion in Collateral to Shore Up ETC Funds
    Published Wed, Oct 22 2008 9:58 AM by Seeking Alpha
    submits: After trading in more than 100 exchange-traded commodity funds tied to American International Group (AIG) was halted last month on the London Stock Exchange, a new agreement was announced on Tuesday. London-based ETF Securities, which issued the ETCs, said that AIG had agreed to post some $1.5 billion in collateral to cover contracts. ETF Securities has about $6.5 billion in ETC assets, according to published reports.
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • 9:58 AM » Bank of England panel unanimously backed coordinated rate cut
    Published Wed, Oct 22 2008 9:58 AM by Market Watch
    Fears of a potentially sharp “monetary contraction" led the Bank of England’s rate-setting Monetary Policy Committee to put aside worries about inflation pressures to unanimously back a coordinated set of rate cuts earlier this month by the world’s top central banks.
  • 9:58 AM » Pallotta to Relaunch Raptor Fund as Spinoff
    Published Wed, Oct 22 2008 9:58 AM by WSJ
    Hedge-fund manager James Pallotta plans to relaunch his Raptor Global Fund as a spinoff from Tudor Investment, the firm run by his longtime hedge-fund partner Paul Tudor Jones.
  • Tue, Oct 21 2008
  • 11:58 AM » US Bank, Subprime & Alt-A Lender?
    Published Tue, Oct 21 2008 11:58 AM by
    US Bank is an interesting, misunderstood story. US Bank was a leader in alternative mortgage products focusing upon their ‘portfolio’ product line, which in retrospect is as ‘Subprime’ as it gets. While they always had great alternative products, their big push came from 2006-2008. What is the quality of the $73 billion in residential first and second mortgage loans and MBS they hold? Below is an actual wholesale rate sheet from May 2008. There are several things to note when reading a) in May there was nobody to sell these to meaning they are likely still on balance sheet b) the guidelines below from May 2008, while incredibly loose, are even tighter than they were doing in months/years prior as they adjusted for the market environment as they went along like other lenders c) values have fallen in regions these product were most popular by 15-25% since May 2008 making sure that even newly originated loans are underwater let alone product originated in prior years d) they have discontinued most of these products and banks do not discontinue profitable loan programs. I will admit that arguably US Bank had better underwriting and quality controls than most other lenders. But, how do you underwrite for a disaster so great that 750 credit score borrowers who put 20% down and got a 30-year fixed rate loan two years ago are walking away because their value is down 50% and its cheaper to rent? Notes: ‘1×60′ = one 60-day mortgage late. Rates shown here as of May 2008 are high compared to what was being charged previously, as US Bank raised rates as the crisis worsened. Yet, they were still one of the very last players offering Subprime loans. The higher rate structure below is not likely representative of the bulk of their mortgage portfolio. US Bank allowed 50% debt-to-income ratios on most full-doc loans. Below is what US Bank considers ‘Prime’. Much of it is of course, but this ‘Prime’ program line can be structured in many ways, as you can see by the adjusters below. It...
    Click Here to Read the Full Article

  • 11:57 AM » Key to the Crisis: It’s the Housing Market, Stupid
    Published Tue, Oct 21 2008 11:57 AM by
    “It’s the housing market, stupid.” That’s what an increasing number of policymakers and economists are saying as they push for widespread mortgage modifications as a way to address a root cause of the financial crisis. With more than 1.5 million houses in foreclosure (three times the normal rate), and about 3.5 million other homeowners behind [...]
    Click Here to Read the Full Article

  • 11:56 AM » Why Wait? HSBC is Modifying Some Loans Before Clients Ask
    Published Tue, Oct 21 2008 11:56 AM by
    HSBC Finance Corp. wanted a better mortgage modification mousetrap.At the beginning of the year, nearly a fifth of the Mettawa, Ill., lender’s real estate loan portfolio had been modified after becoming delinquent. Freezes on initial rate resets for another roughly $1.3 billion of adjustable-rate mortgages were due to lapse this year. And a bottom in [...]
    Click Here to Read the Full Article

  • 11:55 AM » National City, Fifth Third, KeyCorp Post Losses
    Published Tue, Oct 21 2008 11:55 AM by Calculated Risk Blog
    From Bloomberg: National City, Fifth Third, KeyCorp Post Losses on Bad Loans National City posted a $729 million loss and set plans to cut 4,000 jobs, or 14 percent of the workforce, according to a statement today. Fifth Third said it may ask to be included in the Treasury's plan to buy stakes in U.S. banks, and KeyCorp will limit new student loans and scale back lending for boats and
    Click Here to Read the Full Article

    Source: Calculated Risk Blog
  • 11:54 AM » How Lending Standard Changes Led to the Housing Boom/Bust
    Published Tue, Oct 21 2008 11:54 AM by The Big Picture
    There is a general lack of understanding as to how the Housing boom and bust occurred, and why it led to the subsequent credit freeze. The situation is complex, and that is why we are still explaining this 3 years into the housing bust. Let me take another shot at clarifying this: Underlying EVERYTHING -- housing boom and bust, derivative explosion, credit crisis -- is the enormous change in lending standards. I am not sure many people understand the massive change that took place during the 2002-07 period. It was more than a subtle shift -- it was an abdication of the traditional lending standards that had existed for decades, if not centuries. After the Greenspan Fed took rates down to ultra-low levels, home prices began to levitate. More and more mortgage were being securitized -- purchased by Wall Street, and repackaged into other forms of bond-like paper. The low rates spurred demand for these higher yielding, triple AAA rated , asset-backed paper. In this ultra-low rate environment, where prices are appreciating, and most mortgages were being securitized, all that mattered to the mortgage originator was that a BORROWER NOT DEFAULT FOR 90 DAYS (some contracts were 6 Months). The contracts between the firms that originated mortgages and the Wall Street firms that securitized them had explicit warranties. The mortgage seller guaranteed to the mortgage bundle buyer (underwriter) that payments were current, the mortgage holders were valid, and that the loan would not default for 90 or 180 days So long as the mortgage did not default in that period of time, it could not be "put back" to the originator. A salesman or mortgage business would only lose their fee if the borrower defaults within that 3 or 6 month contractually specified period. Indeed, a default gave the buyer the right to return the mortgage and charge back the lender the full purchase price. What do rational, profit-maximizers do? They put people in houses that would not default in 90 days --...
    Click Here to Read the Full Article

    Source: The Big Picture
  • 11:53 AM » The Bank Of America on 60 Minutes
    Published Tue, Oct 21 2008 11:53 AM by The Big Picture
    click for video Excerpt: Banks are supposed to lend money, and when they stop - as they have in recent months - the workings of our entire economy are threatened. Credit became so frozen, the government had to step in this past week and take an ownership stake in the country’s biggest banks. On Monday Treasury Secretary Henry Paulson summoned the CEOs of the nine largest banks to Washington - and gave them a massive amount of money so they would start lending again. The largest of the banks is Bank of America (B of A) - now partly owned by the United States of America. The head of Bank of America, Ken Lewis, says that when he and the others met at the Treasury Department, it became clear that Secretary Paulson's "offer" was an ultimatum - no negotiations. "In other words, take it or leave it?" correspondent Lesley Stahl asked. "Right. Right, right." Source: The CEO Of The Nation's Largest Bank Talks About Treasury's Plans For Buying Into Financial Firms 60 Minutes, Oct. 19, 2008
    Click Here to Read the Full Article

    Source: The Big Picture
  • 11:53 AM » Why is Barron's Banned From CNBC?
    Published Tue, Oct 21 2008 11:53 AM by The Big Picture
    I give Barron's grief whenever I think a or is wrong. But even when some thing rubs me the wrong way, the rest of the magazine is usually filled with worthwhile content: Mike Santoli's Streetwise, Randall Forsyth's, credit writings, Michael Kahn's Technician, The Trader Column, the various interviews, and of course, Alan Abelson. It has been a fixture of my weekend for as long as I have been in the business. I was thrilled to publish there . If it wasn't important, it wouldn't be worth criticizing. One of the things I enjoy has been the Monday morning CNBC segment called "The Barron's Bounce," usually with Michael Santoli. It dawned on me that I hadn't seen Mike on in sometime, so I started poking around. I was surprised to read via that ever since the Barron's cover story looking into Jim Cramer's track record () in 2007, all Barron's staffers have been unofficially banned from CNBC. This decision serves neither CNBC nor its viewers. Legitimate analysis and criticism into anyone's track record is encouraged. When I screw up -- and I do, all too regularly -- I expect to hear about it from readers. If Cramer's nightly stock picks are under-performing, well, that is fair game for any critique. Let me break ranks for a moment and say something nice about Jim Cramer's show: The most positive aspect of it has been to teach many of the newbies who watch it some basic money management techniques. I've heard Jim discuss diversification, stop losses, the dangers of naked put writing, and other, rarely discussed issues. Yes, I have a hard time with the cult of personality that has evolved around the show, and some of the goofier aspects of the broadcast, but I am not the intended demographic of Mad Money. The bottom line is that there is a lot more to the show than Cramer's picks. Besides, he is on 5 hours a week, and answers dozens a questions on 100s of stocks. No one can throw out that many responses...
    Click Here to Read the Full Article

    Source: The Big Picture
  • 11:53 AM » Keynesian Claptrap From PIMCO
    Published Tue, Oct 21 2008 11:53 AM by
    The amount of total nonsense currently circulating on the so called is staggering. The paradox: An increase in saving, which is generally good advice for an individual during bad economic times, can actually worsen the macroeconomy causing a reduction in aggregate income, production, and paradoxically a decrease in saving. BusinessWeek briefly referred to the paradox in an article on the . John Mauldin referred to the paradox in an otherwise excellent and well worth reading article called . The blue ribbon for complete economic silliness however, comes from Paul McCulley at PIMCO in . The Paradox of Deleveraging Once the double bubbles in housing valuation and housing debt burst a little over a year ago, everybody, and in particular, every levered financial institution – banks and shadow banks alike – decided individually that it was time to delever their balance sheets. At the individual level, that made perfect sense. At the collective level, however, it has given us the paradox of deleveraging: when we all try to do it at the same time, we actually do less of it, because we collectively create deflation in the assets from which leverage is being removed. Put differently, not all levered lenders can shed assets and the associated debt at the same time without driving down asset prices, which has the paradoxical impact of increasing leverage by driving down lenders’ net worth. This process is sometimes called, especially by Fed officials, a negative feedback loop. And it is, though I prefer calling it the paradox of deleveraging, because the very term cries out for both a monetary and fiscal policy response, not just a monetary one. But monetary easing is of limited value in breaking the paradox of deleveraging if levered lenders are collectively destroying their collective net worth. What is needed instead is for somebody to lever up and take on the assets being shed by those deleveraging. It really is that simple. As Keynes taught us long ago, that somebody is the...
    Click Here to Read the Full Article

  • Mon, Oct 20 2008
  • 9:29 AM » Executives Selling Shares to Meet Margin Calls
    Published Mon, Oct 20 2008 9:29 AM by Google News
    Another symptom of equity-market distress. And the also provides an interesting discussion of the behavioral implications of corporate officers borrowing against their holdings: When executives own big stakes in the companies they run, investors can rest a little more easily at night, knowing those managers have the shareholders’ best interests at heart. Except when maybe they don’t.... Already this month, there have been about $1 billion in sales by company insiders dumping stock to meet margin calls, as lenders’ demands for the stock sales are known. According to Equilar, an executive compensation research firm in Redwood Shores, Calif., executives at three dozen companies have disclosed such sales since October.... Under Securities and Exchange Commission rules, executives are typically required to disclose insider sales within two days of making them and indicate why they were sold, including as a result of a margin call. But experts say there are no rules requiring that the public be told ahead of time that an executive has pledged stock in a margin loan or how the borrowed money is being used. It might be a loan to buy more shares of the company’s stock — which would indicate a vote of confidence in the shares. Or it might be a loan to buy some other company’s stock or something else altogether — possibly a sign that the executive thinks there are better places to invest. “The disclosure rule is vague,” said Ben Silverman, director of research at InsiderScore, which tracks the buying and selling of company insiders. Over the last 25 years or so, investors have come to take on faith the need for executives to own significant amounts of company stock, as a way to make sure the interests of the people running a company are aligned with those of the shareholders. But the ability to use the shares as collateral for a loan may change that dynamic, said Charles M. Elson, a corporate governance expert at the University of Delaware. “It may be at certain levels de-aligning...
  • 9:28 AM » Wall Street Bankers: Rewarding Failure
    Published Mon, Oct 20 2008 9:28 AM by Seeking Alpha
    submits: Wall Street compensation has emerged again as a hot topic. According to British newspaper, , financial workers at Wall Street’s top banks, are to receive pay deals worth more than $70 billion for their disastrous work so far this year. The irony of this new development is that they will be paid despite the fact of how badly their respective firms are doing or what shareholders in financial firms have lost. However, what makes the story even more interesting is that a substantial proportion of the compensation is expected to be paid in discretionary bonuses. Many companies provide discretionary bonuses at holiday time, at the end of a successful project, or if the company achieves unexpected or unusual success. Now, we do not really subscribe to the notion that banker compensation is the major issue here - perhaps, the remaining investment bankers are simply being rewarded on a meritocratic basis for their hard work and contribution to the profitability of their specific division.
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • 9:27 AM » Banks Should Forget the Moral Hazard for Now
    Published Mon, Oct 20 2008 9:27 AM by Seeking Alpha
    submits: Wells Fargo (WFC) published on Friday. Wells cites the ((NACA)) ability to gain insight into their customers and create effective mortgage restructuring programs to avert foreclosures. Wells will also continue to work with and other counseling services. Counseling delinquent homeowners is like your spouse repeatedly telling you did something wrong that you already know is wrong and have already repeatedly acknowledged is wrong. But your spouse won’t stop reprimanding you. The Democrats keep trying to allocate more money for counseling in sympathy. The Republicans say homeowners must honor their mortgage contracts to the bitter end. Both are exerting punishment: the Democrats through unneeded embarrassment and the Republicans through continuous roadblocks to breaking crushing mortgages.
    Click Here to Read the Full Article

    Source: Seeking Alpha
  • 9:26 AM » Doing Away With Mark-to-Market Will Solve Everything…They Think
    Published Mon, Oct 20 2008 9:26 AM by
    Look out, because we are headed for a lost decade…at least. They are messing with mark-to-market rules globally. Now, it will be a reclassification race to see who can write up their assets right to the edge of the law without looking too obvious. This will just push out losses for a long time and will make actual losses look larger than they really are because ultimately these ‘assets’ are worth what they are worth. Additionally, when a written-up asset goes bad the actual loss will be much greater than if written from the marked-to-market value. Hey, does this mean that if I owe $750k on a $450k house the bank will now refinance my $750k loan balance if I promise to live their for 30-years? With respect to mortgage loans, they are not ‘held to maturity’ investments. Mortgage securities made up of mortgage loans are not either. People move, die, lose their job, become ill, change jobs etc. During the height of the housing boom the average time a person lived in a home in CA was 4.6 years. During more normal economic times, it is closer to seven years. During times of economic stress that time line can move out a bit but nowhere near to loan ‘loan maturity’ on a mortgage loan. What lead the globe into the massive financial system breakdown was the lack of transparency, mis-marked assets and financial institutions outright lying about their condition every chance they get. Now, they think the solution is to endorse the marking-to-myth to an even greater degree. I can’t even count the number of unintended consequences this will cause. Why would you ever want to own a bank stock or their debt if not backed by the Treasury? On the flip side, I really don’t think many US banks ever marked their asset prices to market anyway. Perhaps they marked-to-market the assets that the ratings agencies have already attacked but not assets such as whole mortgage loans still rated at higher levels. For example, Wells Fargo has $84 billion in second mortgage loans on balance sheet where...
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  • 9:25 AM » The Role of Fannie & Freddie
    Published Mon, Oct 20 2008 9:25 AM by The Big Picture
    A very good description of Fannie/Freddie, via Doug Diamond and Anil Kashyap, posting at the : "The Fannie and Freddie situation was a result of their unique roles in the economy. They had been set up to support the housing market. They helped guarantee mortgages (provided they met certain standards), and were able to fund these guarantees by issuing their own debt, which was in turn tacitly backed by the government. The government guarantees allowed Fannie and Freddie to take on far more debt than a normal company. In principle, they were also supposed to use the government guarantee to reduce the mortgage cost to the homeowners, but the Fed and others . Instead, they appear to have used and squeeze the private sector out of the “conforming” mortgage market. Regardless, many firms and foreign governments considered the debt of Fannie and Freddie as a substitute for and snapped it up eagerly. Fannie and Freddie were weakly supervised and strayed from the core mission. They began using their subsidized financing to buy mortgage-backed securities which were backed by pools of mortgages that did not meet their usual standards. Over the last year, it became clear that their thin capital was not enough to cover the losses on these mortgages. The massive amount of diffusely held debt would have caused collapses everywhere if it was defaulted upon; so the Treasury announced that it would explicitly guarantee the debt. But once the debt was guaranteed to be secure (and the government would wipe out shareholders if it carried through with the guarantee), no self-interested investor was willing to supply more equity to help buffer the losses. Hence, the Treasury ended up taking them over." That's about as cogent an explanation as I have come across . . . And to repeat what I have written ad nauseum , Fannie/Freddie were cogs in the great housing mess, but they were not the proximate cause of either the boom or bust, or the eventual credit collapse. > Source: Steven...
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    Source: The Big Picture
  • 9:24 AM » Government’s Leap Into Banking
    Published Mon, Oct 20 2008 9:24 AM by The Big Picture
    The NYT graphic department has been working overtime: Source: STEVE LOHR NYT, October 17, 2008
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    Source: The Big Picture
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