by Calculated Risk on 9/11/2007 10:38:00 AM

From the NY Post: Countryslide, Mortgage Lender's Shares Plunge; Seeks 2nd Bailout

Note: You have to enjoy the Post headline. Countrywide is seeking more investments, not a bailout. This story is also on Dow Jones (not as colorful).

Countrywide Financial Corp. is putting together another multi-billion dollar bailout plan as the nation's largest home lender continues to struggle amid the global credit crunch and declines in the housing market ...
...
It's unclear at this point who exactly is involved in the investment, but sources said a group that could include J.P. Morgan and Citigroup as well as several hedge funds has expressed interest in Countrywide.

A final deal could be announced by the end of the month, sources said.
...
"The issues the economy is facing are worse than most people believe," Mozilo said in an interview last Friday with Bloomberg News.

by Anonymous on 9/11/2007 10:15:00 AM

I was so startled by the quote in this morning's WaPo from Congressman Gary Ackerman that I really had to go find his actual statement to the Financial Services Committee. It's a beaut. Ackerman apparently believes that everything the rating agencies have done arose from an intent to defraud, that investors would never have purchased these bonds with more disclosure, and that existing authority to regulate of the SEC is sufficient, but that the problem is the SEC's unwillingness to run right out and make criminal referrals before having studied the matter.

Originators then took these loans – many of which should have been assessed as much riskier than they were – and packaged them into securities to sell to investors. If there had been full disclosure, smart and careful investors would have judged that these mortgage backed bonds carried a disproportionately high level of risk. In an effort to deliberately mislead investors, however, some originators and credit-rating agencies, so-called Nationally Recognized Statistical Rating Organizations (NRSROs), colluded. First, the credit-rating firms would consult, or maybe we should say collaborate, with the originators – receiving high fees, of course – to advise the originators how to design the packaged securities to ensure that the riskiest piece of the product was adequately masked. Then, for another fee, the credit raters would assign overly favorable ratings to these mortgage-backed bonds, giving investors the impression that a neutral, unbiased party with a proven track record of assessing risk thought highly of these volatile products.

Essentially, the originators and credit raters shoved enough pigs and laying hens in with the beef herd that investors expecting prime ribs on their silver platter and money in their pocket ended up with pork ribs on their paper plate and egg on their face. The credit-rating firms were double-dipping; profiting first from helping to put these shady securities together, and then collecting fees for deliberately rating these risky products at a higher value than they were worth. It’s like hiring a judge to advise you as to how to commit an act and then paying him to decide whether you have committed a crime. My strong view is that NRSROs conspired with financial institutions to fool investors by packaging and rating securitizations in a manner that was deliberately aimed at misleading them. This is the accounting firm telling shareholder companies how to fool their investors and then getting hired as independent auditors.

That's not the free market at work. That's fraud. Fraud is a crime, not a correction.

What I find, perhaps, to be most perplexing of all is that Congress already identified problems stemming from NRSROs and passed legislation seeking to increase statutory authority to oversee the credit-rating agency industry. In the 109th Congress, the Credit Rating Agency Reform Act of 2006 was passed by the House and Senate, and was signed into law by President Bush almost exactly one year ago. This legislation granted the Securities Exchange Commission much greater authority to regulate and supervise NRSROs. To my knowledge, and as the current financial debacle makes clear, the SEC has not acted to either discipline those NRSROs that were involved in these types of practices, or to make certain that these insidious practices are thwarted in the future. The SEC simply is continuing to examine the credit-rating industry, a study that has been ongoing since before the Credit Rating Agency Reform Act became law last year.

Here's a conclusion for the SEC: you're more than a few days late and more than few billion dollars short.

The SEC has all the tools it needs to act swiftly and appropriately, but it has failed to do so. Unless the SEC demonstrates to investors, quickly and convincingly, that they intend to clean up the mess that the banks and credit-rating agencies have created, Congressional action will be necessary. This Committee and this Congress will not be passive spectators as banks and credit-rating agencies use their control of information to fool investors into believing that a pig is a cow and a rotten egg is a calf.”

I can understand why there is a problem with the rating agencies combining consulting and rating roles, just as there is a problem with accounting firms combining consulting and auditing roles. Perhaps naively, though, I wonder why we think there is always such a bright line between the two. If the rating agencies publish their methodologies and due diligence criteria, in the name of full disclosure to investors, isn't this necessarily information that issuers can use to change their practices so that their securities achieve the highest ratings? Is that in and of itself a problem, or is it only a problem if the ratings criteria are faulty? And if they are, is it necessarily because of fraudulent intent? We're all rightly impatient with too much of this "mistakes were made" line, but are we really going to hold rating agencies to the standard of either perfect prediction of credit loss or jail time?

by Anonymous on 9/11/2007 08:52:00 AM

The Washington Post does a drive-by look at subprime-related litigation. There may not be much new here, although it does make you wonder what all those market participants who were paying big bucks for legal counsel when they built these securities and originated these loans are now thinking about how worth it that was. As far as I can tell, the securities lawyers who blessed the original securitization deal documents are now intimating that they, too, relied on the rating agencies' representations. I'm not interested in defending the rating agencies, but I will predict that it won't be long before they are blamed for autism, teen pregnancy and the price of an iPhone.

This part, however, merits our attention:

"Essentially, the originators and credit raters shoved enough pigs and laying hens in with the beef herd that investors expecting prime ribs on their silver platter and money in their pocket ended up with pork ribs on their paper plate and egg on their face," Rep. Gary L. Ackerman (D-N.Y.) said in an opening statement during a Financial Services Committee hearing last week.

Bear in mind that the original idea for the Muddled Metaphor Index arose from the insight that when normally articulate people start speaking in tongues, you know you have a crisis on your hands. You can debate the extent to which members of Congress are normally articulate these days, but I don't think you can escape the conclusion that Congress hasn't got the first idea what to do about this, or whom to do what about, or when to do what to whom. I do expect the Beef Producers Council to sue for defamation.

by Calculated Risk on 9/11/2007 01:50:00 AM

From the WSJ: KKR Buyout Terms May Set the Standard

KKR ... agreed to make several concessions to bankers ... largely at the margins. That assured that market attention will remain focused on the $26.4 billion First Data leveraged buyout as the first and most important in a string of coming deals valued at about $400 billion.

First Data "is the canary in the coal mine. If it gets done, then another $350 billion is doable," says the co-head of private equity at one major Wall Street firm. "But if not, then the whole market may plunge, and the rest of the capital markets will react badly."

... KKR reached an agreement with its bankers to introduce one covenant ...on First Data debt ... Under the covenant, First Data ... must maintain a certain ratio of earnings before interest payments, depreciation, tax and amortization to its amount of senior debt ... people familiar with the matter say the ratio is modest.

... KKR declined to agree to increase fees to the banks to enable them to cut their losses on financing the $24 billion in debt. And more importantly for investors, KKR declined to agree to an increased interest rate on the loans. The concessions were sufficiently toothless, said one banker, to describe them as offering the banks "sleeves on the vest."

by Calculated Risk on 9/10/2007 02:41:00 PM

From AP: Moody's Warns Housing Slump to Persist Through 2009, Sees Further Homebuilder Downgrades

"Our current thinking is that the downturn, currently two years in the making, will last until 2009, with any sector recovery likely to be sluggish for some time after that," said Joseph Snider, senior credit officer at Moody's.
...
"Many of these [public builders] may see further downgrades, with multiple-notch downgrades possible for homebuilders," Moody's said.

by Calculated Risk on 9/10/2007 11:44:00 AM

UPDATE: On Bloomberg Video: Yellen Sees `Significant Downward Pressure' on Economy. (hat tip Anne)

Click image for video.

Federal Reserve Bank of San Francisco President Janet Yellen speaks about the U.S. credit and housing markets, and their impact on the overall economy and Fed monetary policy. Yellen speaks at the National Association for Business Economics annual meeting in San Francisco. (Source: Bloomberg)

From San Francisco Fed President Janet Yellen: Recent Financial Developments and the U.S. Economic Outlook. As usual, Dr. Yellen's speech is worth reading. Here are a few excerpts (emphasis added):

Even with corrections to credit underwriting standards, it still may turn out that these innovations don’t actually spread risk as transparently or effectively as once thought, and this would mean—to some extent—a more or less permanent reduction of credit flowing to risky borrowers and long-lasting shifts in patterns of financial intermediation. It also could mean an increase in risk premiums throughout the economy that persists even after this turbulent period has passed.

On housing and consumption:

Beyond the housing sector’s direct impact on GDP growth, a significant issue is its impact on personal consumption expenditures, which have been the main engine of growth in recent years. The nature and extent of the linkages between housing and consumer spending, however, are a topic of debate among economists. Some believe that these linkages run mainly through total wealth, of which housing wealth is a part. Others argue that house prices affect consumer spending by changing the value of mortgage equity. Less equity, for example, reduces the quantity of funds available for credit-constrained consumers to borrow through home equity loans or to withdraw through refinancing. The key point is that, according to both theories, a drop in house prices is likely to restrain consumer spending to some extent, and this view is backed up by empirical research on the U.S. economy.

And the risks to the economy could be 'significant':

To sum up the story on the outlook for aggregate demand, I see significant downward pressure based on recent data indicating further weakening in the housing sector and the tightening of financial markets. As I have indicated, a big issue is whether developments in the relatively small housing sector will spread to the large consumption sector, perhaps through declines in house prices. Should the decline in house prices occur in the context of rising unemployment, the risks could be significant.

by Calculated Risk on 9/10/2007 10:49:00 AM

From the LA Times: Credit woes hit commercial real estate market

The global credit crunch ... is finally reaching the vast commercial real estate investment and development industry.

... bidders who have been borrowing heavily to leverage property acquisitions are falling away as lenders shut out marginal players, [John Cushman, chairman of real estate brokerage Cushman & Wakefield] said. So far, though, the long-robust market has cooled but not collapsed.
...
"There has been a spike in the last 30 days of deals falling out of contract," [Robert White, president of real estate data provider Real Capital Analytics] said. "People planning to close deals last month got hesitant."

The following quotes sound like residential real estate about 18 months ago:

"There aren't a lot of pressured sellers out there. ... " White said. "If they can't get their prices now, they can afford to wait. Probably a lot of assets just won't trade."
...
Another difference from the residential market is that "the delinquencies in commercial mortgages are virtually zero," White said. "We're seeing virtually no delays or defaults."
...
"The frenzy is all gone," [Craig Silvers of Bricks & Mortar Capital] said, "but the commercial market is not in decline."

by Calculated Risk on 9/10/2007 10:28:00 AM

From Bloomberg: Washington Mutual Says Housing Market in `Near-Perfect Storm' (hat tip Brian)

Washington Mutual Inc. ... said today that conditions in the housing market are creating a `near-perfect storm' ...

``The combination of rising delinquencies, higher foreclosures, more housing inventories, increasing interest rates on many mortgages and greatly reduced availability of mortgages due to limited liquidity is creating what we call a near-perfect storm for housing,'' [Chief Executive Officer Kerry Killinger] said.

by Anonymous on 9/10/2007 09:38:00 AM

Not only is it impossible to write about Las Vegas's real estate problems without engaging in casino-talk, it also appears irresistible to talk about real estate speculation as if it were only a form of slot-machine playing but with bigger tokens. The former might merely be annoying, but I wonder if the latter mightn't be causing a certain conceptual problem. For one thing, it erases the complicity of those who asserted that real estate price appreciation is a matter of "fundamentals" and the land that they don't make any more of and demographics and so on (Hi, NAR!), leaving the impression that speculators thought it was all just a matter of probabilities and chance, like throwing dice. However good an idea it was to listen to NAR, the fact is that they and a lot of their stenographers in the press were claiming that RE appreciation was not random or chance. Treating those failed speculators as mere crap-shooters now, it seems, is kind of convenient for the "House" experts.

This reflection arises from this Chicago Tribune article on Las Vegas's RE woes, which also informs us that:

Gamblers willing to bet on a property or two were rewarded with almost immediate payoffs. The guy who sold Karen Lewis her house for $435,000 in June 2006 raked in a $200,000 profit after holding it less than two years, she figures.

"Houses were really cheap. Loans were really easy," said Lewis, who moved from California. "These were investors who didn't ever live here. Now, they're totally walking away." . . .

From her front door, Lewis stares across Arcata Point Avenue at the for-sale signs on two abandoned houses in foreclosure. The house next door stood empty for months as well, until a couple of out-of-town cops started using it for an occasional vacation getaway.

Between 15 percent and 25 percent of the homes in her 3-year-old gated community are for sale, she estimates, many behind on loan payments and an alarming number deserted, their lawns burnt out and trash untended.

Does anyone else want to know what "a couple of out-of-town cops started using it for an occasional vacation getaway" means? You know, I'm not sure I do.

by Calculated Risk on 9/09/2007 11:19:00 PM

DataQuick will report SoCal home sales in about a week (NAR reports U.S. August existing home sales on Sept 25th), but the following story in the LA Business Journal suggests sales fell off a cliff: August Home Sales Take a Major Plunge

The expanding mortgage crisis and credit crunch slammed the Los Angeles housing market in August, with home sales plunging 50 percent from the same month last year and 25 percent from July.

Sales of new and existing homes in Los Angeles County slid to 4,107 units in August, just under half the 8,246 units that sold in August 2006 and well below July’s 5,458 units, according to figures compiled for the Business Journal by Melville, N.Y.-based HomeData Corp.

Usually existing home sales increase from July to August, so this is even worse than it sounds.