Month in Review: November 2007
[previous months in review available here: Oct 07, Sep 07, Aug 07, Jul 07, Jun 07, May 07, Apr 07, Mar 07, Feb 07, Jan 07;]
“For these bountiful blog posts we are about to receive, let us be truly thankful.”
As the credit crisis ripples through the financial markets, completely repricing the risk curve, subprime-related stories dominated my November posts. The month opened with Part 4 of my multi-part post (continued from previous Part 1, Part 2, and Part 3) arguing against workout-skeptic professor Joseph Mason, and making the case for financial restructuring and workouts:
When in doubt, policy should enable lenders to take a chance on a good borrower, and not interfere. Protect the borrowers with disclosure, allow them a legal recovery if they have been duped, but don’t impose an abstract and distant stencil over what is always a very individual negotiation.
Take a chance, sometimes it’s the best way
Events during the monthly largely supported this view: we saw movements in the form of Common Sense Moves Country Wide, and House passage of a bill to prevent borrowers who restructure their loans from facing tax on phantom income in Relief from Relief (which legislation passed the Senate and was enacted into law during December. Most importantly, after the month closed, the mortgage industry, under a working group convened by Treasury Secretary Hank Paulson, developed a broad-based consensus pre-packaged amnesty plan:
Similarly, as I posted in previewing the plan, it concentrates on borrowers where the intervention will make a difference, by averting failure and turning it into success.
Treasury officials say financial institutions are likely to set criteria that divide subprime borrowers into three groups:
This is classic triage, following precisely along the lines we suggested in my two-part advice to borrowers post: Why are you in trouble? and What’s the best way forward?
Am I in trouble, man? I’m too wasted to know.
We also explored the seamier side of subprime in several posts:
1. A cynic’s view of the sudden rating-agency reversal on hundreds if not thousands of issues, in We did so well the last time around.
Rating-agency credibility appears to be dropping as fast as some stock prices.
While the rating downgrades of mortgage-backed securities were expected by many analysts, the speed and magnitude of the corresponding CDO downgrades caught many banks, brokerage firms and investors off guard. This past spring, even as mortgage delinquencies kept rising, some rating executives told investors that they didn’t foresee CDO downgrades until 2008.
“I see no downgrades until 2008.”
In short, the agencies posture appears to be, “You can trust us. We did so well the first time.”
According to J.P. Morgan research, several CDOs had over 80% of their underlying collateral affected by the downgrades or reviews. The Aaa tranches on some of these CDOs were subsequently cut by multiple notches — some to junk — days after the mortgage-backed securities downgrades.
“I’m an institution, dearie.”
“There will be a lot of chain reactions,” says David Yan, director and head of CDO research at Credit Suisse Group.
“Now remember, you can absolutely rely on my devaluations.”
“That’s evaluations, Miss Litella, not devaluations.”
2. What happens to unlucky renters in buildings whose owners are being foreclosed, in Zombie landlords? Part 1, what becomes a zombie, and Zombie landlords? Part 2, defending your life.
3. The many slices of financial giblets that can be pressed into blocks and sold into the marketplace in Parts is parts: Part 1, assemble the respective parts, and Parts is parts: Part 2, cut up into little pieces parts:
Just remember, somebody owns the B piece and C piece of that chicken
Yesterday’s post started with chicken parts (subprime residential second mortgages) and saw how Goldman Sachs chopped, pressed, and sliced them into thirteen different types of chicken parts.
“As I hear tell all the parts are crammed into one big part.”
“Fused.”
“Then the one big part is cut up into little pieces parts.”
Now comes the real added value.
Don’t cut yourself slicing the tranches
How can we turn a pile of BBB’s into a subpile of AAA’s?
A little retread, a little recap, and they’ll all be Triple-A
4. The challenges of sustaining a capital base when you’re a GSE that now reports transparently to investors, in Managed earnings were much more fun:
Back in the good old days,Fannie Mae and Freddie Mac aggressively managed their earnings, keeping unrealized gains and losses in reserve so they could turbocharge the balance sheet and deliver earnings that matched estimates with heartwarming accuracy, and maximizing their seven- and eight-figure executive bonuses.
We must be good if we hit it every time
Those days are over. Between new reporting rules, accounting scandals, and pending strengthened oversight legislation, the two GSEs now have to report fluctuations in their earnings not just from realized gains and losses (that is, mortgages sold or foreclosed), but also unrealized (changes in inherent value resulting from market factors, chiefly payment performance), and the results are not pretty. As reported last week by CNNMoney.com:
Freddie Mac scrambles for cash
Problems, uncle Freddie?
Disruption in financial markets leads to paradoxical clashes in tenure and demand, as chronicled in Nobody goes there anymore, it’s too crowded. It also leads the judiciary to find a right to be housed free, at least in
No vagrancy laws?
Lending an international flavor to the month’s posts, I looked at
We’ll show you everything that’s mod in
We explored the relationship between housing and urbanization in Not only but also:
For cities, not only neighborhoods but also the largest share of total property value, the largest source of municipal revenue, and the city’s skeleton. What is a city? It is a place where strangers live peaceably together in very close proximity.
Everyone who moves to a city is at first
For developed nations, not only the hillside sod of society but also the driver of private capital markets. For developed-national governments, not only a critical delivery program but also the driver of public-private partnership. Innovation is vectoring through housing via privatization, separating technical activities from essentially governmental functions. The statist model doesn’t work.
For emerging nations, not only expanding cities but also the customer of municipal improvement. There ain’t no such thing as free infrastructure, and urbanization — whether formal or informal — creates both demand and political capital for infrastructure. Water and sanitation, the power and information grids, sites and stands: twenty-first centuries will thrive or wither as they are able to bring infrastructure to their expanding neighborhoods.
The city comes first, the utilities come second
For policy makers, not only a critical sector of urban environments but also a complex and distinct asset class of its own. Housing is not only fascinating in its own right, but also of critical importance to our modern world.
For a longer-term perspective, I started what will be a series of posts about science fiction’s imaginary future cities, this one spotlighting Isaac Asimov’s twin dystopias in The ultimate future city: Part 1, the caves, and The ultimate future city: Part 2, the estates.
Moving from the ethereal to the all-too-corporal, we finished by making fun of an architect in the case of MIT versus Frank Gehry, in Leaks are so bourgeois:
Negligence is a legal standard, and an evidence-based one. For a university to give itself a black eye by punching its architect is an indicator of profound dissatisfaction.
“He sued me!”
In an interview, Mr. Gehry, whose firm was paid $15 million for the project, said construction problems were inevitable in the design of complex buildings.
“These things are complicated,” he said, “and they involved a lot of people, and you never quite know where they went wrong. A building goes together with seven billion pieces of connective tissue. The chances of it getting done ever without something colliding or some misstep are small.”
That’s what you were paid fifteen million smackers to prevent, sir! You’re the expert, remember?
[…]
Back when the Boss was working in her
I forgot you’re not bound by ordinary rules
Architecture isn’t just about designs and concepts. It’s also about plumbing, roofs, and leaks.
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