Collapse of Lenders and Mortgage Guys Accelerating

Elaine Meinel Supkis

The mortgage and banking mess gets only worse and worse. The repairs are like someone trying to fix a parachute while in free fall, using bubble gum. Won't work. A number of organizations, banks, lending groups and hedge fund hell hounds must give an accounting by the end of this month and several big houses in the US like Lehman brothers must do it this week. Few people expect good news. The rush for the exist may look like depositors in England storming the Northern Rock banks. And Greenspan has decided he is a vulture in a graveyard, bless his dark little heart. Most amusing.

From Bloomberg:

PHH Corp., the New Jersey-based mortgage lender that agreed to be bought by General Electric Co. and Blackstone Group LP, said the $1.8 billion sale may unravel as lenders back away from some leveraged buyouts.

JPMorgan Chase & Co. and Lehman Brothers Holdings Inc. told Blackstone they may fall $750 million short in funding its part of the deal, PHH said today in a statement. GE, which plans to keep the company's vehicle-leasing unit, may pull out if Blackstone can't get financing. PHH's shares fell 15 percent, the most since it went public in January 2005.

Just 12 hours ago, the media was assuring us, the banks and businesses were 'swimming in money' and just itching to go into more buy-out and buy-up deals. Blackstone, one of the many funds using the darker words like 'black' in their names, it can't get a measly $750 million? In July, getting $22 billion for goofy, useless buy-ups of things like the Boots chain in Britain, for example, was still supposedly easy as falling off a cliff until that deal fell off a cliff and left everything smashed on the hard rocks of reality.

General Electric used to produce useful things like light bulbs and appliances. Then they decided to outsource and outsell everything and make money making money. One GE executive, hailed as some sort of superior magician, was hired by Home Depot and he did his magic and $300 million Home Depot dollars were transfered from the corporate accounts to his private bank account. Deeply wounded, poor Home Depot limps onwards, minus a lot of staff. It is rapidly becoming a classic 'slum' store where only the most intrepid and aggressive people shop (me, for example). I remember when Home Depot's hot shot boss ordered everyone to NOT give away the tag ends of damaged lumber and such. I used to pick it up for years and years, I use these pieces for cement framing and other things where damaged goods don't matter. I built huge parts of my house with these things, too.

But one day, they were told to not give it away free but sell it. So I stopped picking it up and Home Depot had to pay someone to remove it and that person would then give it to me for free but I hated Home Depot for doing this. Grudges matter when someone has been a big customer!

This maddening way of doing business has infected everything. The entire mortgage mess is due to nickel and diming people after luring them into deals, for example. Credit card companies love people who screw up just once, paying their bills! Then they can be hammered mercilessly. General Electric, instead of building things, finagles things. And now the chickens are coming home to poop on their heads.

Leasing vehicles are mobile forms of Alt-A financing. Same game. All our corporations are focused on some sort of debt-riddled continuous money stream that has lots of penalties involved so they can milk this for extra profits.

From the Financial Times:

US house prices are likely to fall significantly from their present levels, Alan Greenspan has told the Financial Times, admitting that there was a bubble in the US housing market.

In an interview ahead of the release on Monday of his widely-anticipated memoirs, the former chairman of the Federal Reserve said the decline in house prices “is going to be larger than most people expect”.

But Mr Greenspan said that his successors at the Fed – who meet on Tuesday to set interest rates – would have to be careful not to ease rates too aggressively, because the risk of an “inflationary resurgence” was greater now than when he was Fed chief.

Old, senile Alan has taken on the aspects of the creatures I call 'Watchers.' They are vultures and they are attracted to death, doom and destruction. They are kind of like the Norns of the Norse or the Furies of the Greeks: they are fixated at reporting on and observing human follies. Of course, this dying man has utterly disassociated himself from his own deeds. He ran our the world's biggest central bank if you don't pay any attention to the reserves which languished under his stewardship. He is all over the news spreading so much gloom and doom, even my Watchers are laughing. If we weren't in danger of an economic meltdown, he certainly will launch one all by himself.

Alas, his analysis is full of bunk. Lately, he as pretended, he was FORCED to drop rates ruthlessly to 1%. I fear this old man is confusing himself with myself. During that time, I was screaming about the dangers of lowering it so fast. I also warned about saving Wall Street from its Dot Com-munist lunacy and lo and behold, what I foretold, happened: the housing bubble. And Greenspan didn't warn anyone about this, he made it happen!

My vultures would like people to know, they don't kill anyone or anything, they are attracted to corpses. Greenspan, on the other hand, is a killer. He reminds me of McNamara during the Vietnam war: he, too, pretended he was against the war he was running and he tried to fob off the blame while admitting we anti-war advocates were correct and understood everything better than he! Then he keeled over dead.

What next? Rumsfeld telling us, he didn't want to invade Iraq? Ha.

From Bloomberg:

NovaStar Financial Inc., the subprime home lender trying to survive by conserving cash, scrapped plans to pay a dividend on 2006 profit and will forfeit its real estate investment trust tax status as a result.

The mortgage company, one of more than 110 that have halted lending or left the business since the start of 2006, said in a statement that the loss of REIT status will have a ``significant adverse impact'' on third-quarter results. Kansas City, Missouri- based NovaStar is reviewing its listing requirements with the New York Stock Exchange.

``Clearly, we did not anticipate the drop in market value or the level of demands on liquidity caused by the market turmoil this summer,'' said Chief Executive Officer Scott Hartman in the statement. ``Canceling the previously planned dividend is the only reasonable and prudent course of action.''

I tagged Nova Star to blow up this year and we are still on the kinder side of Halloween and they are going under pretty fast. If they think they can survive until things improve, well, I would suggest they shovel the snow here for me all winter while thinking about the future. For after winter comes mud season when things are much worse since you can't drive on any dirt roads. The Germans discovered this when they foolishly aped Napoleon's disasters in Russia: spring can be pure hell.

I think even the most rosy-eye glassed optimist is finished with Nova Star.

From Bloomberg:

Bank of America Corp., the second- biggest U.S. bank, said ``unprecedented dislocations'' in credit markets will have a ``meaningful impact'' on third-quarter results at its corporate and investment bank.

Trading and other areas of Bank of America's capital markets and advisory services unit are ``being adversely affected by all of these conditions,'' Chief Financial Officer Joe Price told investors at a conference in San Francisco today. He cited stress on subprime mortgages and in the commercial paper market as being especially severe.

``These are quite challenging financial times, and I cannot remember when credit markets in particular have been as volatile and unpredictable as they have been for the last few months,'' Price said.

So...the obvious question is....WHY THE HELL DID THEY BUY UP COUNTRYWIDE? There must be a gene for suicidal stupidity buried in many executives. It is terribly obvious that Countrywide is doomed. Newspapers must be cautious and not be accused of starting bank panics but frankly, the last place I would put my funds is with a bank run by idiots! Duh! So if the Bank of America wants people to trust them, they can't go off and spend money at pinchiko parlors in Tokyo! Or buying OJ memorabilia! Show some sense, dudes!

The collapse of the Bank of America will amuse bin Laden no end. He has a particular onus which calls for the destruction of things like 'The World Trade Center' or 'American Airlines.' And seeing the Bank of America collapse would amuse him to death. Why are the top executives there helping him? Gods know! It makes no rational sense but historically, it is perfectly logical. If an empire wants to die, it usually does itself in, it is seldom destroyed from without.

From Europe 2020:

As explained many times since the beginning of 2006 by LEAP/E2020’s team of researchers, the main cause to the current systemic crisis is in the United States. This “end of the Western world as we’ve known it since 1945 ” anticipated by LEAP/E2020 in February 2006, is the collapse in all its dimensions (economic, monetary, financial, diplomatic, intellectual and strategic) of the central pillar of the 20th century world incarnated by the US. It is indeed in this country that is to be found the centre of the financial and banking crisis that has been affecting the whole planet since the middle of last summer. The pillar now lies on quick sands, and this of course implies that the global architecture is altogether subsiding, and then will collapse piece by piece.
*snip*
Since 1945, and increasingly since the collapse of the Soviet bloc in 1989, the US economy became the single pillar of the entire international financial and banking system. After the August 15, 1971 severing of the US dollar convertibility to gold (or to any other physical counterpart, thus available in limited quantities), the amount of US dollars in circulation worldwide increased dramatically. The emerging of new centres of industrial, technological and service production throughout the world, combined with weakening human resources training (and therefore productivity competitiveness) in the US, resulted in a dramatic increase of the US debt (public and private). Thanks to the creativity of financial operators, with the more of less naive complicity of the entire banking and financial chain (central banks, quoting agencies, financial medi

This link is courtesy of one of our readers...many readers send us links and they are very fascinating. This particular article has lots of good information. It is worth reading because it covers a lot of the ground I cover. One craveat: the writers think Japan is in a depression it can't escape because it is the nature of such depressions. As I have clearly shown, this is a FAKE depression. But understanding this is very hard for most Westerners who are easily confused by false smiles and poker players pretending they have duces rather than aces up their sleeves. But then, some men actually believe prostitutes when they lie about their affections.

From MSN:

Meanwhile, though London appears to be the epicenter of conduit angst these days, our homegrown Citigroup (C, news, msgs) appears to have plenty of exposure. That's according to a friend who in an e-mail to me rattled off the following list of its structured investment vehicles, or SIVs: Beta Finance, Centauri, Dorada, Five Finance, Sedna Finance, Vetra Finance and Zela Finance. He was able to obtain a portfolio commentary for Beta Finance, in whose summary I found three interesting items.

First of all, for those folks who can't quite wrap their arms around what an SIV, an SPIV (special-purpose investment vehicle) or a conduit is, those names all stand for pretty much the same thing: special-purpose entities that reside off balance sheets. Think of them as virtual savings and loans that can be quite sizable. There are no real rules that govern what they can buy. And because they're off balance sheets, they operate with little regulation.

All the biggest banking houses, the biggest financiers, are in the biggest trouble. They know exactly how bad it is and they lie about everything because they have been running what has to be the biggest con job in the last 100 years: passing the many hot potato papers from their vaults into the wallets of anyone and everyone! To do this, they have lied, made up things, overestimated profits, lured people with discounts and presents an goodies and in general, made street three card monty players look respectable. The media has been their main base of operations. Unlike me, they are on TV a lot, all of them ernestly yapping, just like the three card monty players talking fast and flashing cards faster, assuring everyone, the money on the crate they use as a table is from real investors and not their buddies pretending to be players! Indeed, the first bourses and stock markets were conducted exactly the same way: in the streets!

From MSN:

Citigroup notes that the leverage in this particular vehicle, Beta Finance, is "only 14.24 times." Thus, Citigroup, a leveraged entity, owns a gaggle of leveraged S&Ls. That helps illustrate a point I've made many times: that the well of liquidity that bulls were citing two months ago as a reason to be bullish was just a wall of leverage. (It's worth noting that the net asset value of Beta Finance has declined 19% from its high and that Citigroup's other conduits are apparently down a similar amount.)

Next, Citigroup says: "We highlight that all U.S. CMBS exposure is supersenior." What I find interesting in that comment: The company has taken pains to note that its CMBS, or commercial mortgage-backed paper, carries the highest rating -- implying that there might be a problem with lesser-rated tranches of commercial mortgaged-backed paper.

That echoes a data point provided by someone wishing to remain anonymous who resides near the top of the lending food chain at one of the world's largest banks. The source indicated to me that commercial mortgage-backed securities will also see problems. Though I did not get the impression from her that the timing was imminent, the weakness in the commercial version of the ABX index indicates that some pain is already being dispensed, even if little ink has been spilled on this subject.

Since July, the ABX index has been a total disaster. Few of them are anywhere near 100. You make a profit if they are over 100. The more they drop, the more the investors are hammered and some of these indexes are at 30. Few are above 80! The ABX index is a graveyard.

And the tombstones are springing up like mushrooms! This should please Greenspan who can camp out on top of one, he can roost there and hang his head while drooling. I am glad more writers are telling the truth now that the cat is out of the bag and scratching everyone's eyes out. The 'liquidity' isn't just 'debts' it is even more nasty: it is the US trade deficit. This element is seldom mentioned in the news any more often than the budget deficit is mentioned.

From Generational Dynamics, via the kind attentions of Jon, one of our readers:

So anyway, according to the new WSJ article, Greenspan used to believe that deflation was impossible with paper currency, since the government could simply print money until it created inflation. But Japan in the 1990s proved that view wrong.

So that's why Greenspan felt it necessary to keep interests close to zero in the early 2000s -- because he feared deflation.

According to Greenspan, "We decided that in 2003 that though we judged the probability of severe deflation as small, were it to happen, its consequences were seen as devastating. So we chose to take out insurance against them, fully recognizing at the time that we were taking risks in the process. But central banks cannot avoid taking risks. Such tradeoffs are an integral part of policy. We were always confronted with choices."

However, the near-zero interest rates had unintended consequences, as he said at the time: "I don't know what it is, but we're doing some damage because this is not the way credit markets should operate."

This intergenerational site is interesting. They take the obvious view that people who experience a depression won't reproduce it and use charts and graphs to back this up. But of course, my view is, people never learn much from life. Only if one studies the subject carefully, can they understand. The Depression era generation dumped the Vietnam war on our heads and basically bankrupted America. We baby boomers had exactly nothing to do with this! I started earning money as a teen and watched in horror as it lost value. I even went to the extent of collecting real silver coins which I still have, by the way, my husband did this too! We didn't part with them because they, unlike the fake money we use, keep their relative value!

By the time I had my first child in 1974, it was a full catastrophe. The stock market was dead in the water, the World Trade Center was rising, NYC was collapsing as services were eliminated and I had to make money or die and it was rough, very rough. Money vanished as soon as one got it! Or if gasoline was cheap, it vanished and we had rationing and long lines! When this inflationary time ended, an army of liars ran out of the wainscotting like cockroaches at night and began lying about everything, pretending the wars of the Depression Era parents had nothing to do with the financial collapses we were in.

And then there is the Hubbert Oil Peak: Many of us younger people back then saw it come to America and began to yell about it. But the US instantly began to import more and more foreign oil. Then some of us, I being one, began to yell about the trade and budget deficits. All my life, it seems, at this point. In 1980, precious few baby boomers were in control at the top. We didnt' take over until another 10 years and then, only the most irresponsible were allowed to rise to the top. Anyone who talked about the trade deficit, the budget deficit and the Hubbert Oil Peak were banished. Totally.

From Financial Times:

E-Trade Financial, the online brokerage firm, warned on Monday that profits would fall sharply due to increased provisions for loan losses in its mortgage business and possible reductions in value of securities held in its portfolio.

E-Trade said profits for the year would be about $1.10 per share – 31 per cent below its most recent estimate of about $1.60 per share. The brokerage also said it would close its wholesale mortgage-lending business and “streamline” its direct mortgage lending operation in the wake of the US credit squeeze.

New York-based E-Trade, which is set to announce earnings next month, said it would increase provisions for loan losses by $175m to $245m in the second half of 2007. The group said it expected charges of $95m on bad loans in the second half of the year.

This story gave me some difficulties. I saw this headline, as we can see here in this screenshot:

When I tried to access the story of E Trade ending its mortgage business, it wouldn't come up at all. So I went to this other story at the Financial Times. I believe the company is nearly defunct and the uncertainty of its future will be read with a Greenspanian graveyard gloom. The Dot Com bubble never really ended. It was revived by Greenspan who gave it a lease on life with those low interest rates coupled with Japan, when our rates rose, giving it all more and more money, endless money! Note how so many Dot Com companies like Google went to the stratosphere in the last three years! Now all those online brokers, bankers, buskers and You Tubers go under, we get to see a secondary and I fear, even bigger collapse than the one in 2000.

Here is E TRADE's home page:

It is a classic 'Everyone can get a loan!' homepage. Complete with money off deals, etc, as if this were all about selling flat screen TVs or baseball cards. User-friendly and easy to do. And fatally flawed! The ability to examine people up close is the missing element here. Sometimes things should be difficult. This keeps people serious. Easy street can lead to doom.

From the Financial Times:

Wall Street has been rocked by the summer credit storms and the Lehman earnings for the three months to August will provide the first real damage report.

Because of its heavy exposure to US mortgage-backed securities, Lehman is expected to be among the hardest hit although the blow may have been significantly softened by hedging.

Some executives at rivals question whether the figures will provide an accurate picture, given the discretion allowed by accounting rules. “It is going to be difficult to work out whether Lehman has calculated its numbers on the same basis as the other firms,” says a banker, referring to figures due from Morgan Stanley, Goldman Sachs and Bear Stearns this week.

I say, hand them all over to the SEC! Let a bunch of government bureaucrats in a bad mood pore over these rancid books. I have full faith in them uncovering all the goofy schemes of the biggest financial houses. The problem is, the bosses in DC won't let this happen nor will they let the information leak out and if it does, they will paint a pretty picture with the bloody mess like we see them doing with murderous invasion of Iraq. The mystery person who put the puts on Wall Street might still win his bets.

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Comments

[Bokonon]

Judging by the news we are starting to get in Australia, Elaine, you may be an optimist.

High-level volcanic ash

High price of oil

High price of wheat

You emphasised them all

This is looking like a disaster of biblical proportions. Somedays I wish you were wrong.

[PJSV]

Elaine, please read this:
http://www.engdahl.oilgeopolitics.net/
Geopolitics___Eurasia/
Peak_Oil___Russia/
peak_oil___russia.html

[GollyGee]

Yes Elaine, as PJSV suggests, please read the link on Engdahl's reversal of his thinking on peak oil.

I'd value your take on it.

I've seen the Russians' A-biotic theory debunked on other blogs, but then I'd come to believe that sunshine is bad for you and older women should take estrogen.

Like Will Rogers, it's not what I don't know that bothers me, it's that I know so much that is wrong.

[PJSV]

I never heard about this theory. Engdahl seems to be relaiable. Anyway, we shouln'd forget this explanations. Otherwise, we will look like those who ask the FED to cut the interest rate and forget the implications on USD and inflation. I hope you Elaine can write your thoughts about this theory.

Regards

[Tom Noonan]

In Chapter 21 of 'Life, the Universe, and Everything', from 'The Hitchhikers Guide to the Universe': is the story of the longest and most destructive (flying) party ever held, now into its fourth generation. This piece of satire has always struck me as a comment on our financial system; say since the deregulation of the 1980s. The party ended when the Krikkit spaceship crashed it to recover the golden bail or something.

By the way one of the principles of a very respectable group blog (academics, law, economics and the like) posted an entry about his mortgage brokerage (disclaimer?, confession?). Anyway the post seems to have been taken down, and I think it was trivial, and contained no third party revelations. Peach Home Loans: Refund Mortgage Broker arrange home loans in Melbourne Sydney and Brisbane. www.peachhomeloans.com.au/ . Scams are terribly socially acceptable in Aus; viz. the picaresque history of the Australian Wheat Board. By the same token the American legal system seems to me to be rather suspicious.

Final comment:
I am the Spirit who always denies, and righteously so.
Because everything that comes up, must go down again.
It would be better if nothing came up.
What you call evil then, is my natural place.

For those who know the reference - I have never read a commentary on it that really gets it.

[shargash]

I read the Engdahl article, and I'm not particularly impressed. For example, he quotes: "They are primordial materials which have been erupted from great depths."

This is nonsense. Oil breaks down at high temperatures into methane and a tarry residue (which is probably where tar sands come from). There simply is no conventional oil deep in the earth. Below a couple miles down, oil can't exist because it is too hot. This has nothing to do with biogenesis, it is just the way oil reacts to heat. So, unless the Russians want to argue that the earth has a cool, creamy nougat center of oil, oil isn't going to bubble up from the depths.

As an aside, one of the stronger arguments in favor of biogenesis is that oil is only found in rocks of a certain age (i.e. ones that date back to the age of dinosaurs). If abiogenesis is true, one would expect the age of the rocks to not matter very much.

Now, there has been a respected abiogenesis theory in the west since the 50s or 60s. It was created by the astronomers Bondi & Gold (of Steady Stat Universe fame, and definitely not Russians). We know there is a lot methane in space, and that complex hydrocarbons can form by molecules colliding. However, ultraviolet radiation breaks those molecules down again, so in the relatively open areas of space, you don't get many hydrocarbons that are more complex than methane.

Gold hypothesized that under the right circumstances the rate of acretion might be greater than the rate of molecule breakdown (other gases in the area blocking UV radiation, frex). In that case, the chemistry for forming more complex hydrocarbons becomes plausible. All the building blocks are there in large quantities.

Thus it is entirely reasonable that there might be a lot of complex hydrocarbons in space (whether there is conventional crude oil is another thing entirely). It is entirely reasonable that some of those hydrocarbons might have been gathered up by the earth in its early days.

However, there is nothing, zip, nada, in support of this, other than an interesting theory and some spectragraphs of simple hydrocarbons like methane. Even if it is true, the molten magma that permeates the mantle, and certainly the molten nickel-iron core, of the earth would have cooked it completely.

Thus, there is no oil in deep waters of the Atlantic, because those rocks oozed up as magma and were to hot for oil. There is no oil in granite because granite is an igneous rock that was extruded as magma (too hot for oil). There is no oil in places like the Deccan Traps in India (vast fields made by magma flows 70 million years ago), because the rock was too hot for oil. In addition, any land that subducted beneath a continental plate that did have oil, would have had the oil cooked out of it.

The bottom line is that people have been looking for oil intensely for the last century. The Chinese and Americans, in particular, have been scouring the land for it. Biogenesis or abiogenesis, no one is finding oil. The theory of peak oil does not in any way depend on biogenesis. It depends on oil appearing in fields that get depleted by pumping. The oil could have formed on Pluto for all it matters.

IMO, global warming is more likely to be wrong than peak oil. I will also note that, if oil is indeed a nearly limitless resource, all we've done is hopped from the frying pan of peak oil to the fire of global warming.

[Elaine Meinel Supkis]

I will explain what a 'peak' is...I live on one...and how the oil wells in Russia work as well as space gases and such.

The most generous supply of energy is near to us and dear to us: the sun. In so many ways. And there are black holes, the ultimate energy source. And the gravest danger to our very existence.

And the Hitchhiker's guide to the galaxy is still one of my favorite TV shows. And then there is Dr. Who.....

[Callihan]

Elaine said "But of course, my view is, people never learn much from life." Agree. Indeed. People never learn much from life except how to get to the bar. Y Gassett said "The one certain thing you can learn from history is that people don't learn from it."

[Acrabbe]

thanks for that breakdown shargash. i'm a commodity trader and i know that background knowledge is going to come in handy at some point in the near future. probably when crude gets too high, this anti-peak oil theory hits the wires to calm fears, crude corrects and sells off, people think the run is done, then boom, reality re-sets in and we're off to the races again... of course, if we don't bomb iran first and setoff ww3

ELAINE this is probably the best blog i have ever come across. and i'm an insomniatic information hound, so that's a MAJOR compliment =) i must say i'm impressed.

[Elaine Meinel Supkis]

Why, thank you, Acrabbe!

I am a totally weird person. One economics publisher told me, 'We must terminate you because you talk about magic too much.'

Yet this is the ultimate essence of fiat money systems! Refusing to understand this cripples many economics writers who think our systems are rational. Heh. The Accountants are rationalists! And who listens to them? Not Enron, not our government!

[DeVaul]

All around my town people have spent the entire summer fixing up houses -- from tiny starter homes to huge mansions. Everything is redone and new flowers and shrubs are planted and then...

a "for sale" sign appears in the yard.

I have yet to see anyone fix their house just because they live in it. That used to be quite common. Now, construction of any kind is like a dead canary in a mine: that house is up for sale.

And none of them are selling! Yet, the massive restoration work continues and invariably the finished house is then put up for sale. No one seems to notice that other houses that were remodeled have not sold in over a year or more. They have "price reduced" signs out now.

There are mansions for sale that used to be off-limits to the underclass. They were inherited or sold to friends or family in private transactions. They never had a "for sale" sign in their yard. Now, several are available to anyone who wants one. My favorite stone mansion is for sale, but alas, I do not have the money to buy it.

I have never understood the herd mentality. Never.

[Neuro Artist]

I think a lot of people try to sell their house at this point, because they can't afford it or they think that they will loose by selling it later. Of course it would have been much better to have sold the house when people thought it was a foolproof way of earning lots of money buying an expensive house. But as Elaine points out people never learn from history. Even if they do know about history they would tend to think it is different today.

Ready for the last rally on the stockmarket? Let the buy-out frenzy begin, the chinese, japanese and the oil-sheikhs are anxious to change their papers into something more tangible.

Ground controll to Major Tom? Take your protein pills and put the helmets on, commencing countdown...

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[radii supras]

I follow you VIA GFC and I love your blog!

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I agree with your point of view.