Homelessness & Housing Crash
Toxic Asset Valuation, Unreality Edition
Toxic Asset Distribution
Economic Crisis, Rental Car Edition
Tales From the Recession, Twenty-Something Edition
What they Used to Teach You at Stanford Business School
CRE Crash: “the U.S. banking sector could suffer as much as $250 billion in commercial real-estate losses in this downturn…more than 700 banks could fail as a result of their exposure to commercial real estate.”
“Hedgehogs tend to have a focused worldview, an ideological leaning, strong convictions; foxes are more cautious, more centrist, more likely to adjust their views, more pragmatic, more prone to self-doubt, more inclined to see complexity and nuance. And it turns out that while foxes don’t give great sound-bites, they are far more likely to get things right.”
Freddie Welfare Mods?:
It isn’t clear from this story whether these Freddie losses are gross losses associated with the Obama housing bailout, or net losses relative to the probable losses from FC on the mortgages in question. If the former, then one still needs probable FC losses IOT determine whether Freddie was making “welfare mods” (i.e., mods more costly than FC).
Rating Agencies Screwups: Complex securitizations facilitated ratings-shopping.
Toddler Logic: “Why Toddlers Don’t Do What They’re Told”
Dollar Crash Watch: Why PBOC’s call for SDRs doesn’t necessarily doom the dollar.
Competent Subprime: Although technically this isn’t subprime, it’s still directed at low-income borrowers, and is significant insofar as it indicates one can help such borrowers w/o compromising underwriting standards.
Geithner Hedge Fund Commentary:
Linda Lowell’s take on PPIP is interesting: I.e., the “upside” of PPIP isn’t that it will repair banks’ balance sheets, but merely that it will obliterate the argument that liquidity, rather than solvency, is the reason for toxics’ low valuations. In this scenario, PPIP investors do in fact generate low (and realistic) bids for toxics. Banks receiving such bids don’t sell if doing so requires taking big losses. However, this still constitutes a step towards properly valuing banks’ toxics, since the creation of a liquid market for toxics eliminates banks’ ability to argue that panic-induced illiquidity, rather than potential buyers’ concerns re. the solvency of toxics, accounts for the bulk of toxics’ current market values. In such a situation, the position of those calling for banks to write down their toxics to market values (either pre- or post-PPIP) would be strengthened considerably.
Note that the Schmidt study Lowell cites is also relevant to the MTM debate, insofar as it suggests not only that 1) enough trading occurs to permit reasonable estimates of prices; and 2) that such prices largely reflect fundamentals, not illiquidity. Also, even if (say) the accuracy of valuations based on ABX is rendered questionable via illiquidity (as Fender-Scheicher – HT Alea – suggests), it remains to be seen to what extent the market prices utilized by Schmidt, etc., are based on ABX rather than independent analysis of fundamentals by buyers & sellers.
Although Accrued Interest is more bullish re. the Legacy Securities Program, reading closely it still accords with Lowell’s notion. AI & Lowell appear to differ on the proportion of bid-ask spreads due to illiquidity (v. credit impairment).
Rortybomb also, apparently, agrees w/ Lowell’s take that PPIP will succeed through failure.
Lowell also had some interesting (and somewhat-related) observations re. MTM:
1. Toxics do trade, enough so that market prices are available.
2. Valuing toxics via cash flows, etc., is quite feasible for market participants.
3. Toxics are trading less frequently, ‘cuz financiers of hedge funds have become risk-averse.
4. Banks apparently do get plenty of bids from hedge funds for their toxics, but they refuse to sell at such prices.
4a. Hedge funds’ bids are much lower nowadays ‘cuz cheap (i.e., on pre-8/07 terms) financing isn’t available for purchases of toxics. As a result, IOT obtain their desired yields, hedge funds must bid prices much lower.
4b. If, as Schmidt argues (see first Lowell article, above), current toxic pricing (and hence bid-ask spreads between what buyers are willing pay & what banks are willing to sell for) are largely the due to deterioration in toxics’ fundamental values (owing to housing deflation, defaults, etc.), then even duration-matched PPIP financing (i.e., no margin calls) wouldn’t “fix” bank balance sheets by reflating toxics to their original values. With valuation of toxics quite doable by both FDIC & PPIP investors, the latter would be unlikely to overbid, while the former would (should!) be unlikely to offer financing terms (i.e., haircuts & interest rate – both of which could be adjusted even with duration-matching) that didn’t reflect toxics’ risks. Bid-ask spreads on toxics would remain wide (as they do now), with the result that banks will reject PPIP bids en masse rather than sell their toxics at substantial losses.
Update 20090522: Tett apparently concurs w/ the notion that banks fear PPIP ‘cuz of the possibility of high bid-ask spreads.