Hold On to Your Hat, if You’re Invested in Mortgages

My old daddy used to say of Wall Street that there are two classes of investors—the sheep and those who shear the sheep.
Daddy wasn’t always right, but he was seldom wrong. Investors in
mortgages and the gazillion derivative investment devices that are the
spawn of the mortgage industry are about to get shorn.

My old daddy used to say of Wall Street that there are two classes of investors—the sheep and those who shear the sheep.
Daddy wasn’t always right, but he was seldom wrong. Investors in
mortgages and the gazillion derivative investment devices that are the
spawn of the mortgage industry are about to get shorn.
If they have their way, all early-warning systems suggest a hue and
cry for government help. As in the Savings and Loan debacle of John
McCain’s bad old days, it’s possible they’ll get Blankfeingoldmansachsit.
Lots of power on the lobbying side of this, made up of the likes of
Goldman Sachs, various REITs, banks and mortgage houses, all of them
lined up nervously on the bad-debt wire, like so many blackbirds.
It’s another of those ‘who-could-have-known?’ moments,
following a decade of warning clouds the greedy mistook for sunshine.
The Fed looked the other way–Greenspan was on auto-pilot.
There was plenty of greed to go around, from Franklin Raines’s $50
million compensation at Fanny Mae (based on overstated earnings) to the
billions in fees sucked off the top of shaky mortgages by the
investment community—then made ‘derivative’ and packaged off to the sheep.
Lehman Brothers, as an example, strutted the news that mortgage-related businesses within their firm contributed directly to record revenue and income over the last three years. Gretchen Morgenson of the New York Times reports that

Wall Street analyst at Bear Stearns wrote an upbeat report on a company
that specializes in making mortgages to cash-poor homebuyers. The
company, New Century Financial, had already disclosed that a growing
number of borrowers were defaulting, and its stock, at around $15, had
lost half its value in three weeks.”

In McCain’s
hoped-to-be-forgotten help for Charles Keating’s Lincoln Savings, the
failure of that S&L resulted in (Wikipedia)

“the largest and costliest venture in public misfeasance, malfeasance and larceny of all time.” The
ultimate cost of the crisis is estimated to have totaled around USD$150
billion, about $125 billion of which was consequently and directly
subsidized by the U.S. government, which contributed to the large
budget deficits of the early 1990s.

Did I say hang on to your hats? Gretchen Morgenson again

manias are nothing new, of course. But the demise of this one has been
broadly viewed as troubling, as it involves the nation’s $6.5 trillion
mortgage securities market, which is larger even than the United States treasury market.

Perhaps China will pick up some of the sub-prime slack that’s driving
the market into the ash can of mortgage finagling history. The
sub-prime market (you may or may not recall) is the loaning of
outrageous amounts of money to people who have no credit history or a badly damaged one. Consumers desperate to consume.
Mostly, these were perfectly decent folks, cruising along and paying their bills until a ‘too-good-deal-to-resist’ came
knocking on the door. Refinance! Take that pesky old 6% mortgage, trade
it in for a 4 percenter and pocket the extra change that an ‘equal’
monthly payment will bring you. Enough to buy a car or a flat-screen
TV, maybe both.
Don’t worry about the small print, something about ‘variable rates’ and
default clauses. Many (most) of these good people were too old, too
uneducated or too confused by fast-talk to understand they might
(would) lose their homes.
Everyone was doing it. Everyone doing it is the excuse of first and last resort when we want things we can’t afford.
The fast-talker at the door didn’t care. His commission was paid by
the contract. The lender he purportedly represented didn’t care either.
It wasn’t like the crusty old days when lenders cared about the
neighborhood and someone you knew sat behind the same desk at the bank
for twenty years.
These guys were on the way up.  The way up your pant-leg to your checkbook. 
Those sub-prime (a euphemism for worthless) loans would be repackaged, dispersed, over-valued, attested to and derivated beyond all recognition before the week was out– and who gave a damn?—the front-end profits were enormous.
There is even a word in the industry for badly documented,
over-valued and shaky lending practices—they were (and are) known as
“liar loans.” Deutsche Bank reported liar loans as a percentage, rising from a quarter to nearly half of all mortgage derivatives over the past five years.

“I guess we are a bit surprised at how fast this has unraveled,” said Tom Zimmerman, head of asset-backed securities research at UBS, in a recent conference call with investors.

Not surprised that it unraveled, just taken aback at how fast. UBS is a global financial services company (Swiss) which focuses on wealth and asset management. Tom’s ass-et
is on the line and I’ll just bet he oozed a certain amount of sweat as
well as surprise during that investor call. If not UBS, then certainly
firms like UBS are going to have considerably less wealth and fewer
assets to manage in the coming months. The bottom has not yet dropped
out, but you can hear the creak.
The poor and the marginal are going to lose their homes. The poor and
the marginal were the losers in the S&L scandal as well. The
greedy, for the most part, got their losses covered back then—a
decision that was sold to the public on the very shaky basis that the
economy couldn’t possibly survive a $150 billion hit. Domino theory taken from the rationale for war to the rationale for saving the rich man’s bacon.
Don’t get me wrong, I respect rich men. But there’s a vast
difference between a rich man and a greedy man and this bubble was
built on avarice.
Investment bankers, those paragons of virtue who pay themselves $100
million annually, took good old boring and safe mortgages and turned
them into volatile, over-valued investment instruments. They
purposefully hid the pea under the shell as they did it and they did it
with misrepresentation and malice in a single-minded rush to profit.

Those who lived by those false colors and those who, in a blind grab
at the gold ring, followed them—flushing tens of thousands of poor and
marginal homeowners down the financial toilet—deserve to take the full loss. No Fed help.
Unless they can sell their snake-oil to China. That might be a
bail-out. China has been the enabler of our deficit economy for
decades. Might be time (or long past time) for a Chinese landlord.
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