Notable day tomorrow--Financial crisis

[Sam D]

Although I dislike the use of buzzwords, I think "perfect storm" describes why we are in the current situation. Generally, we like simplicity, but there is no single factor which caused the current mess. A few considerations:

1) The Fed -- Interesting to see the Alan Greenspan references above. I believe the unsustainably low interest rate environment which was initiated after the dot com/Enron troubles is partially to blame. Housing led the recovery (and it never has before). The majority of jobs created were in housing-related industries (lending, home improvement, real estate, etc). On an interest only loan, you can equally afford the payments on a $500,000 loan at 8% or a $1,000,000 loan at 4%. The result: money was abnormally cheap.

2) Exotic mortgage products -- I remember learning that, shortly before the market crash in '29, it was common to only require a person to put down $5 to buy $100 in stock. This was previously unheard of and led to a huge increase in the volume of trading (and equity pricing). When I was at a cocktail party a couple of years ago and the general consensus was you were an idiot if you didn't have a 100% financed, interest-only loan, I began to sense the end was near. The result: much more risk taken by borrowers.

3) Sophisticated financial instruments -- This is what happened to those loans after they were made. Our bankers got so good at slicing and dicing risk that they could take a piece of dog poop, combine it with a bunch of other pieces (no offense to dogs), cut it into enough slices, put it back together and call parts of it filet mignon. The rating agencies simply couldn't keep up with this and signed-off on the filet mignon characterization. The net result: the risk of investments in loans was understated in the market.

As with most other financial crises, the signs were there. They always seem to be.

 

[mikea]

Is the AIG they speak of in the stock markets, the same AIG that insures many of our aircraft?

Certainly one of them. I've had aircraft policies from two different AIGs and my broker says they aren't related.

AIG Group and AIG US?

 

[mikea]

The Dow is down 264.

http://www.pilotsofamerica.com/forum/showthread.php?t=23878

 

[Dave Siciliano]

Certainly one of them. I've had aircraft policies from two different AIGs and my broker says they aren't related.

AIG Group and AIG US?

USAIG is a different company than AIG; I've had policies with each. AIG has the currently reported liquidity issue.

Best,

Dave

 

[dmccormack]

As with most other financial crises, the signs were there. They always seem to be.

The real problem is that the Government rarely allows complete failure -- thus stupidity is rewarded.

 

[Dave Siciliano]

Although I dislike the use of buzzwords, I think "perfect storm" describes why we are in the current situation. Generally, we like simplicity, but there is no single factor which caused the current mess. A few considerations:

1) The Fed -- Interesting to see the Alan Greenspan references above. I believe the unsustainably low interest rate environment which was initiated after the dot com/Enron troubles is partially to blame. Housing led the recovery (and it never has before). The majority of jobs created were in housing-related industries (lending, home improvement, real estate, etc). On an interest only loan, you can equally afford the payments on a $500,000 loan at 8% or a $1,000,000 loan at 4%. The result: money was abnormally cheap.

2) Exotic mortgage products -- I remember learning that, shortly before the market crash in '29, it was common to only require a person to put down $5 to buy $100 in stock. This was previously unheard of and led to a huge increase in the volume of trading (and equity pricing). When I was at a cocktail party a couple of years ago and the general consensus was you were an idiot if you didn't have a 100% financed, interest-only loan, I began to sense the end was near. The result: much more risk taken by borrowers.

3) Sophisticated financial instruments -- This is what happened to those loans after they were made. Our bankers got so good at slicing and dicing risk that they could take a piece of dog poop, combine it with a bunch of other pieces (no offense to dogs), cut it into enough slices, put it back together and call parts of it filet mignon. The rating agencies simply couldn't keep up with this and signed-off on the filet mignon characterization. The net result: the risk of investments in loans was understated in the market.

As with most other financial crises, the signs were there. They always seem to be.

Good observations. One of the reasons Greenspan made money cheap was because of his perceived risk of deflation. He came out a few years ago and said that was now behind us. (I'm not taking is side, just observing).

Your observation 3 really strikes home to me because securities firms have been trying to standardize and package commercial loans for years and are major players in the single family market. They began to structure traunchs of securities; then, sell various layers to different parties. The real coup was when they put packages with different layers together and got them A rated by a third party. In one fell swoop, lower rated securities went up in value. They then leveraged those instruments to enhance earnings.

What bothers me more than anything is how CEOs have been steadfastly sticking to the "we're O.K." story or "the problems are now behind us" line. As an investor in public companies, where is the transparancy? An outside investor really can have no idea what's really going on which will cause a real lack of confidence in financial institutions.

Let's say you were going to wire a large amount of funds today; are you confident the banks through which the funds will pass are secure? How about you investment accounts if they exceed the amount insured?

All of this is really affecting my business now: homebuilders are having a really difficult time building a spec home-they can't get financing. There are some places that makes sense, but there are places where there is still demand and someone moving on short notice can't find a completed home. Lines of credit are being pulled in. As above, sometimes that makes sense but the baby is being thrown out with the bathwater in other cases. Banks are getting low on liquidity which can filter through to all lending.

It's going to be a rough ride for a lot of folks.

Best,

Dave

 

[Dave Siciliano]

Certainly one of them. I've had aircraft policies from two different AIGs and my broker says they aren't related.

AIG Group and AIG US?

Mike: Here's a link to news on AIG:
http://www.bloomberg.com/apps/news?pid=20601087&sid=a7owyQQ3Nxks&refer=home

Best,

Dave

 

[astanley]

What bothers me more than anything is how CEOs have been steadfastly sticking to the "we're O.K." story or "the problems are now behind us" line. As an investor in public companies, where is the transparancy? An outside investor really can have no idea what's really going on which will cause a real lack of confidence in financial institutions.

Dave, you hit the crux of the matter right here: in the finance world, there is implied incentive to enter into off-books transactions that are not reportable under FASB, SEC, and other regulatory body rules. This is especially true with new products, as those products can be a "secret sauce" for attracting large capital flows. As a shareholder, I demand transparency, but I get this.

I'm not one to bang my fist on the table and demand the government step in. But, on one side, when a gifted financial analyst graduating from a top-tier program can make $350k at an investment house (before bonus and other incentives), or make $95k living inside the Beltway, what decision will they make?

We've got people incentivised by their investors and leadership to create these boutique securities, incentivised to ignore proper risk management (another excellent point, Bill; a close friend works at a large energy trading firm in risk and has spent the past two years banging their head against the wall), and incentivised to route around transparency regulation. The regulators, on the other hand, rarely come from the "top tier" stock (although, another PoA'er may shoot me for this) and have too little to manage the dynamic nature of these securities.

Just my 1/321's of AIG,

-Andrew

 

[Dave Siciliano]

Completely agree Andrew. It's very widespread. We saw the same things with homebuilders carefully structuring JVs so they wouldn't have to comply with a FASB standard to carry them on their balance sheet. No way for investors to know the terms or magnitude.

Lehman had $613 Billion in debt when they filed; that doesn't count the derivitives and repos that have to be unwound. An investor could have no idea what was really going on.

http://tinyurl.com/5osso4

Best,

Dave

 

[wsuffa]

Agree, Andrew.

And that's one of my pet peeves with those that call for more and more regulation: the problem is that the regulators are often not nearly as smart or forward-looking as the folks in the commercial sector. Paulson is an exception - he came from GS. Even though SarbOx called for more transparency, I've seen less transparency in the corporate side, not more.

By the way: anyone else find it very, very interesting that oil prices have dropped pretty precipitiously over the last few weeks - as Lehman's troubles have become more widely known? Even dropped in the face of the major hurricane. Speculate as you will.

 

[mikea]

...By the way: anyone else find it very, very interesting that oil prices have dropped pretty precipitiously over the last few weeks - as Lehman's troubles have become more widely known? Even dropped in the face of the major hurricane. Speculate as you will.

Anyone else find it very, very interesting that oil prices have dropped pretty precipitiously like from $150 down to $100 a barrel, but gas prices went up?

I know. The refineries in the hurricane area are offline, so it stands to reason that the gas prices went up 50 cents a gallon upon the aura, the rumor, the idea, the wisp two days before the hurricane hit, 'cause you know those tanks at the gas stations and storage facilities went dry right then.

 

[astanley]

The best read of the day, by far. Although I do not entirely agree with the author (I think that the Editor could have spent a lot of time discussing the nasty underside of Black-Scholes, but that's OK), it's a pretty good read nonetheless.

http://www.economist.com/blogs/freeexchange/2008/09/guilt_by_suspicion.cfm#list-comments

Cheers,

-Andrew

 

[Chip Sylverne]

From Marketwatch:

Lehman is closing its doors with more than $600 billion of debt. The bank has total debts of $613 billion against total assets of $639 billion.

If this is the case, why are they filing Chapter 11? That looks like a net positive book value to me. Unless those assets are overstated and they are expecting more shoes from the sky....

 

[Sam D]

The best read of the day, by far. Although I do not entirely agree with the author (I think that the Editor could have spent a lot of time discussing the nasty underside of Black-Scholes, but that's OK), it's a pretty good read nonetheless.

http://www.economist.com/blogs/freeexchange/2008/09/guilt_by_suspicion.cfm#list-comments

Cheers,

-Andrew

I agree that there are plenty of issues with B-S (especially when we accountants use it to value vested and unvested employee options equally), but it seems that it's been useful to create a common pricing model for the market. And that in itself may be the best value.

Sam

P.S. BTW, did you know that B-S was based on a heat transfer equation? I always thought that was very cool. Somebody had to know enough about financial markets and thermodynamics to make the connection.

 

[Chip Sylverne]

The best read of the day, by far. Although I do not entirely agree with the author (I think that the Editor could have spent a lot of time discussing the nasty underside of Black-Scholes, but that's OK), it's a pretty good read nonetheless.

http://www.economist.com/blogs/freeexchange/2008/09/guilt_by_suspicion.cfm#list-comments

Cheers,

-Andrew

Unlike structural engineering, which can be analyzed simulated and tested down to the last finite element, financial engineering works, right up to the point where it doesn't...

I'm starting to believe that for the good of the world at large, those who want excessive leverage ought to be confined to the racetrack.

 

[Dave Siciliano]

From Marketwatch:

Lehman is closing its doors with more than $600 billion of debt. The bank has total debts of $613 billion against total assets of $639 billion.

If this is the case, why are they filing Chapter 11? That looks like a net positive book value to me. Unless those assets are overstated and they are expecting more shoes from the sky....

Chip:

The primary assets could be illiquid or have no market; like subprime paper, derivitives that aren't in demand and trounches of debt no one wants. They may also be wanting to protect some assets that have value while other assets aren't marketable or would have deep discounts. The market value they cite may not be a liquidation value. Most bankruptcy filings have a bit of a rosy picture of assets to allow restructuring. Don't forget, the folks that filed this have been saying for months there was no problem.

Best,

Dave

 

[Chip Sylverne]

Chip:

The primary assets could be illiquid or have no market; like subprime paper, derivitives that aren't in demand and trounches of debt no one wants. They may also be wanting to protect some assets that have value while other assets aren't marketable or would have deep discounts. The market value they cite may not be a liquidation value. Most bankruptcy filings have a bit of a rosy picture of assets to allow restructuring. Don't forget, the folks that filed this have been saying for months there was no problem.

Best,

Dave

Oh, right. Those level 3 assets. (slaps self on forehead).
Never mind.

 

[Dave Siciliano]

Chip: Since you're an accounting guy, tell me your thought on this: If Lehman had a lot of securities that weren't easily valued and those securities are now liquidated, what effect might that have on other institutions that have comparable securities?

Best,

Dave

 

[wsuffa]

From Marketwatch:

Lehman is closing its doors with more than $600 billion of debt. The bank has total debts of $613 billion against total assets of $639 billion.

If this is the case, why are they filing Chapter 11? That looks like a net positive book value to me. Unless those assets are overstated and they are expecting more shoes from the sky....

The problem is that the confidence in Lehman has been eroded. There is a question of the company being a sustaining business. Therefore Chapt 11 is appropriate.

 

[Sam D]

Chip: Since you're an accounting guy, tell me your thought on this: If Lehman had a lot of securities that weren't easily valued and those securities are now liquidated, what effect might that have on other institutions that have comparable securities?

Best,

Dave

Dave -- Not Chip, but I'll add my two cents. In general, yes. It also depends on what those securities are.

If they were somehow tied to Lehman itself and its credit worthiness, then the credit risk (as used to determine the discount rate used to value the securites) would be argued to be different for the other companies ("but we're MUCH better off...").

For other securities, it will certainly put a lot of downward pressure on valuations. The most recent accounting rules for fair value (SFAS 157), take a 'market participant' view toward valuation. Meaning, what others would pay, not just the company itself.

Sam

 

[KennyFlys]

So, how many Amex shareholders still have some LEH paper in the box?

 

[wsuffa]

A local radio station had a professor from UMD on today talking about the fallout and recovery. He - like most of us - recounted how he was glad that the gov't let Lehman go down. He indicated how "evil and bad" the folks were running Wall Street banks - and how the credit crisis (including mortgages) won't really be affected by this because Wall Street has already pawned that business off to others. Too big, too evil (reading between the lines, BoA was included in the 'evil' category), and in the words of the prof: "the sooner these guys are out of the way, the sooner we can begin to recover".

He also commented that losing these guys was really not a big deal because (in his opinion) a return to regional banking firms and smaller investment banks would be a really good thing as they tended to be more conservative and more attuned to customers (as opposed to financial engineering to produce outsized returns.... e.g. greed). Likewise, the mortgage mess will start to cure when regional and local lenders return to the scene - at one time, regionals/locals did 80% of the lending, now it's something like 20% with the rest scooped up in the big, "evil" firms.

The gist was "big is bad". While I don't agree with the point that all of Wall Street is run by evil people, I do agree that there are some, and I do agree that bigger banks/investment banks tend to create more problems simply because returns demanded by investors (e.g. continued increase in growth) is simply unsustainable once the banks are big and the economies of M&A are realized. You can't keep increasing the profit margin every year when you're a $50 or $100 billion company. Seen that first hand. And unfortunately, the market - and investors - punish firms that don't increase the profit & margin each year.

I also had a conversation with a guy that's been deeply involved in the Wall Street side. He's now at a boutique (and much happier). His take is that AIG is in real trouble, and there's also a strong chance that Citi may be next. Citi has never really ingested the acquisitions it's done in the past (including Travelers & Soloman/Smith Barney)... I can attest to that, given my discussions with folks in the firm. They never were able to fully integrate the acquisitions (I've done/do M&A integrations, and I support this message), meaning that the supposed synergies were never obtained (again, a pretty typical result). My colleague's assessment was that Sandy Weill walked away with a big sum and someone else had to clean up the mess.

Which brings full circle back to the UMD professor's point: there is some danger in the BoA purchase of Merrill because it looks a lot like what Citi was trying to do. Whether BoA can really execute is still unknown - it is very, very hard to do itegrations right (I've done it and do it for a living), and the overwhelming percentage fail. We may well see BoA end up on the scrap heap at some point - after all, BoA was driven to this point by McCall's ego.

There ARE some folks on Wall Street that believe that "Greed Is Good". A big part is driven by unrealistic investor expectations, and by the folks that insist that they WILL make everyone in America their customer.

Oh, and according to the prof, what most people don't realize is this: while the Fed opened the discount window to allow IB's to borrow to stabilize the market and ensure credit was available to all, the IB's dumped much of their commercial paper market and used the borrowings to make acquisitions instead. I'm still researching that to determine whether it's true. If it's true *at all* then the fed (and therefore the taxpayers) were duped in order to make the big get bigger at our expense. Someone else can shed a tear for those that are going out of business.

 

[Sam D]

A local radio station...

Terrific post. I also heard on the radio today, in regards to AIG, that it was considered "too big to fail". I'm not an anti-trust guy, but that got me thinking about the implications of mega-mergers.

Also, your comments about how hard it is to sustain growth when you are huge are spot on. There's a small retailed in Arkansas having similar issues.

 

[mikea]

... Too big, too evil (reading between the lines, BoA was included in the 'evil' category), and in the words of the prof: "the sooner these guys are out of the way, the sooner we can begin to recover".

...

I also had a conversation with a guy that's been deeply involved in the Wall Street side. He's now at a boutique (and much happier). His take is that AIG is in real trouble, and there's also a strong chance that Citi may be next. Citi has never really ingested the acquisitions it's done in the past (including Travelers & Soloman/Smith Barney)... I can attest to that, given my discussions with folks in the firm. They never were able to fully integrate the acquisitions (I've done/do M&A integrations, and I support this message), meaning that the supposed synergies were never obtained (again, a pretty typical result). My colleague's assessment was that Sandy Weill walked away with a big sum and someone else had to clean up the mess.

Which brings full circle back to the UMD professor's point: there is some danger in the BoA purchase of Merrill because it looks a lot like what Citi was trying to do. Whether BoA can really execute is still unknown - it is very, very hard to do itegrations right (I've done it and do it for a living), and the overwhelming percentage fail. We may well see BoA end up on the scrap heap at some point - after all, BoA was driven to this point by McCall's ego.

...

Oh, man. Don't say that.
Resistance is futile...

As I've said, I dumped my Countrywide mortgage and moved banks when BOA bought mine.

I just got the "We're turning up the stove a little, don't you worry, the water will be fine" letter from BOA. I'll get a new BOA account, a new ATM card, and for your information we've enclosed the friendly fee schedule - that shows how you may have noticed, the $0 per month in fees you were paying will be $30 a month if we can't force you to overdraw or anything, then we have fun.

So I'm off to fully close the account.

Now I gotta guess BOA will buy out Citi and get my credit cards.

 

[wsuffa]

Oh, man. Don't say that.
Resistance is futile...

As I've said, I dumped my Countrywide mortgage and moved banks when BOA bought mine.

I just got the "We're turning up the stove a little, don't you worry, the water will be fine" letter from BOA. I'll get a new BOA account, a new ATM card, and for your information we've enclosed the friendly fee schedule - that shows how you may have noticed, the $0 per month in fees you were paying will be $30 a month if we can't force you to overdraw or anything, then we have fun.

So I'm off to fully close the account.

Now I gotta guess BOA will buy out Citi and get my credit cards.

Nope, Citi is a candidate to be split up.

Mike: can you qualify for USAA membership? If so, USAA is a really, really good choice right now. That goes for everyone else, too. Conservative, reasonable fees, excellent service.

 

[mikea]

Nope, Citi is a candidate to be split up.

Mike: can you qualify for USAA membership? If so, USAA is a really, really good choice right now. That goes for everyone else, too. Conservative, reasonable fees, excellent service.

Nope. Not a vet.

 

[wsuffa]

Nope. Not a vet.

Were either of your parents? Were either a former USAA member? here's a list of those eligible:

USAA membership is a privilege earned by those in uniform — and it's a privilege that can be handed down to their children. Those eligible to join the association include:

Active duty officers and enlisted military personnel.
Former spouses and adult children of USAA members.
National Guard and Selected Reserve officers and enlisted personnel.
Officer candidates in commissioning programs (Academy, ROTC, OCS/OTS).
Former military personnel:

Retired officers and enlisted personnel.
Former officers and enlisted personnel who separated on or after 01/01/1996.

BTW, even a WSJ columnist said that BoA is paying too much for Merrill.....

 

[TMetzinger]

Thanks for the advice - I just signed up with USAA, and I can't tell if I qualified or not (USCG active duty from 7/88-7/91, reserves from 7/91 -7/96). Once they tell me I'm "in", I'll open an account or two, and say farewell to BOA.

 

[dmccormack]

Thanks for the advice - I just signed up with USAA, and I can't tell if I qualified or not (USCG active duty from 7/88-7/91, reserves from 7/91 -7/96). Once they tell me I'm "in", I'll open an account or two, and say farewell to BOA.

Tim,

I've been with USAA since '95 or so...

You'll have a good experience, if mine is any indication.

Dan

 

[wsuffa]

Thanks for the advice - I just signed up with USAA, and I can't tell if I qualified or not (USCG active duty from 7/88-7/91, reserves from 7/91 -7/96). Once they tell me I'm "in", I'll open an account or two, and say farewell to BOA.

TIm,

I just posted the list of quals. I hope you qualify. Well worth it.

Bill

 

[wsuffa]

Thanks for the advice - I just signed up with USAA, and I can't tell if I qualified or not (USCG active duty from 7/88-7/91, reserves from 7/91 -7/96). Once they tell me I'm "in", I'll open an account or two, and say farewell to BOA.

Tim: expanded list: Link

 

[TMetzinger]

Military personnel who were honorably discharged on or after Jan. 1, 1996 - that fits me. So I got my e-mail back and a number, so I guess I'm good to go.

When I next change jobs I'll roll my 401K into a USAA account, and I'll start work on moving my bank accounts. I've heard good things from folks who got either plane financing or plane insurance through USAA, so I'm happy to be a member.

 

[mikea]

Were either of your parents? Were either a former USAA member? here's a list of those eligible:

I only got a brother who's a retired Chicago cop.

Grandfather. Uncle.

Lessee, Mom's ex was a vet. He's wasn't a relative as far as I'm concerned.

 

[Dave Siciliano]

Bill and all: one of the guys I've been reading put the larger picture into perspective. His research shows borrowing increased 3 Trillion the first half of the year at financial institutions and revenue didn't increase at all. That's all leverage that will have to be unwound. We can get caught up with Lehman, AIG, WaMu, etc. but there's a lot of other leverage out there.

GS has an earnings announcement in the morning; will be interesting to see if they discuss their leverage and commodities positions. Commodities have tanked big time in the last couple months.

Interesting what you say about large firms absorbing acquisitions; the quest to be big isn't always good as you know. Everyone touts economies of scale and synergy between operations: that doesn't always go well. I think B of A is like a 12 foot python that swallowed a pig. Big bump in the middle; laying out in the sun trying to digest the pig and along comes another meal.

Best,

Dave

 

[TMetzinger]

Expecting a company, ANY company to sustain growth indefinitely is like saying:

Water runs down hill, but praise god it never reaches the bottom!

Or expecting your airplane to take you to the moon.

 

[woodstock]

Oh, and according to the prof, what most people don't realize is this: while the Fed opened the discount window to allow IB's to borrow to stabilize the market and ensure credit was available to all, the IB's dumped much of their commercial paper market and used the borrowings to make acquisitions instead. I'm still researching that to determine whether it's true. If it's true *at all* then the fed (and therefore the taxpayers) were duped in order to make the big get bigger at our expense. Someone else can shed a tear for those that are going out of business.

Didn't they have rules against this? I guess we have something else to talk about on Wednesday night!

 

[wsuffa]

Interesting what you say about large firms absorbing acquisitions; the quest to be big isn't always good as you know. Everyone touts economies of scale and synergy between operations: that doesn't always go well. I think B of A is like a 12 foot python that swallowed a pig. Big bump in the middle; laying out in the sun trying to digest the pig and along comes another meal.

Best,

Dave

Dave,

You know who my former employer was. There were a couple of acquisitions they never absorbed - and eventually spun at a big loss.

One of my key jobs was to get folks from various operating units together in the same real estate.... that, in and of itself, was a real challenge - without even reaching to the question about getting them work together.

BoA's real challenge here is cultural. Merrill's brokers are known to be independent - BoA isn't exactly known for allowing a lot of independence in the retail units. That's the first sign I have that there is going to be a HUGE cultural (and integration) issue. Brokers, like other professionals, walk out the door each night - they're the assets. Perhaps BoA is arrogant enough to think that they can lock folks up and that they'll never go anywhere else. That theory has been proven wrong over and over.

It'll make the election culture wars look like child's play if not handled properly.

 

[Dave Siciliano]

Mother Merrill is where I obtained my Series 7 license. I have a lot of fond memories, but didn't stay long. Culture clash is an understatement. I was in Charlotte where Luther Hodges dreamed about turning NCNB into the Nations' largest bank. Met him a couple times and got crosswise with him once as a new broker. And yes, a brokerage firm without brokers with close personal relationships with their client is just like buying a lease is you need the space. No one in there to produce. Completely agree.

I do hope they get something acceptable worked out, but it won't be easy. Wonder how their coming with Countrywide's people and operations.

It's always amazing to me to see the fallibility of a company's top management. Boone Pickins' quote comes to mind: the higher a monkey climbs up a tree; the more people can see its butt.

Best,

Dave

 

[wabower]

Are we the only ones who have been around long enough to remember the LBO's, S & L blowups and other similar boondoggles that all produced the same results? If you give greed a chance, it will usually win.

quote=Dave Siciliano;349662]Good post Bill: of the folks I've listened to, the one I agree with said that there was plenty of blame to go around: The execs, investor demands and regulators not up-to-speed. On the mortgage side, the borrowers were taking out very aggressive loans because RE could only go up; mortgage brokers papering things were aggressive, lenders dropped standards, etc. It takes discipline to walk away from money being offered; in some cases to those that had never been offered that much and all they had to do was sign.

Does anyone recall what Allan Greenspan said a couple of years ago? He was very concerned about a possible deflation. With all the leverage that's out there, if real asset values decline there is a multiplier effect. Certainly RE values are declining even though we are showing a positive CPI: you have to look at what that measures.

We now have a problem that is feeding on itself: firms are being downgraded because their equity has deteriorated; firms can't raise equity; therefore, they get downgraded again.

Best,

Dave[/quote]

 

[wabower]

Required loan to value ratio based on real appraisal numbers. It doesn't solve all the problems, but it's a good start.

Alan Greenspan was on This Week. The key factor behind this madness is the "fact" that no matter what, the property would be worth more next year, is what broke. Even if somebody along the line had the rebellious idea that there is no way dese goofs can pay, they had no qualms because even on foreclosure they would be whole. Not no more.

I think you're on to something though, those fine, fine kids who see no reason not to walk away from their underwater mortgages and give the keys to the bank (and I hear, amazingly, get ANOTHER mortgage elsewhere, ) wouldn't do it if they had any skin in the game, as with a down payment they had to scrape for.