Subprime Mortgages

  • 08 Feb 2008 at 3:32 PM
  • Banks

Time To Go Long Subprime? Bear Stearns Shorts It For $1 Billion

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Bear Stearns has more than $1 billion of short positions on subprime, up $400 million from the end of November, Bloomberg reports. Of course, since Bear Stearns got the subprime trade so wildly wrong last year, people are already wondering if this might be a signal that it is time to go long subrime.
Over at The Big Picture, Barry Ritzholz writes, “While I do not expect us to be done with the subprime slime yet, I do get a ‘Is this a bottom indicator?’ sense from Bear on this.”
JPMorgan Chase, which emerged relatively unscathed from the credit market debacle, is apparently taking the opposite position. Yesterday Jamie Dimon was reported to have said that the bank plans to expand its role in the subprime mortgage business. Goldman is also rumored to have reversed it’s position on subprime, taking a net long position.
Bear Stearns Is `Short’ Subprime Mortgages $1 Billion [Bloomberg]

Was The Subprime Bubble Built On Borrower Speculation?

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In the official version of the subprime mortgage mess, the villians “thousands of mortgage brokers who banked big bucks steering customers into subprime loans and the hundreds of mortgage traders and bankers at investment firms” who recklessly securitized the loans and sold them off to investors. Borrowers are typically portrayed as naïve victims of the mortgage bubble—save for a few actual fraudsters.
But what if the fraud was a lot more widespread than we’ve been lead to believe? According to a story in today’s Wall Street Journal—hidden from sight way back on page B 8—subprime speculation seems to have been fairly common.

Roughly 20% of mortgage fraud involved “occupancy fraud,” or borrowers falsely claiming they intended to live in a property, according to an analysis by BasePoint Analytics, a provider of fraud-detection solutions in Carlsbad, Calif. Another study, by Fitch Ratings, looked at 45 subprime loans that defaulted within the first 12 months even though the borrowers had good credit scores. In two-thirds of the cases, borrowers said they intended to live in the property but never moved in.
Some home builders have come to similar conclusions: They now believe that as many as one in four home buyers in some markets were investors during the boom, up from their earlier estimates of one in 10 buyers.

This of course does not bode well for the default rate. If default projectionss are built on faulty assumptions about owner occupancy, they will tend to underestimate the number of defaults. Non-resident speculators are far more likely to default than occupying owners, especially if the value of their home has fallen below the amount they owe on the mortgage. This looks like it is going to get worse before it gets better.
Speculators May Have Accelerated Housing Downturn [Wall Street Journal]

Al Qaeda Fucking Nails Genesis of Subprime

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It’s not that often that I find myself in agreement with the Qaeda guys, so on the occasions I am, I like to make notice of it. American Al Qaeda leader Adam Gadahn, who recently made a “dramatic gesture” of tearing up his U.S. passport (pointing out that he doesn’t need it to travel “anyway”), said in a taped appearance that the subprime mortgage crisis was “triggered by right wing-fanatics trying to usher in the ends of days.”
I know what you are thinking, this is a rejection of the western capitalist system and a symbol of his return to a pure ideology not restrained by the dreadful inequalities of free markets (well, except in the case of those whores who try to walk around without veils), but DealBreaker readers know better: he’s just WAY short SPDRs.
American Al Qaeda Leader To Bush: ‘We Will Be Waiting For You’ [ABC News]

Subprime Losses: A Blonde Moment On Wall Street?

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NancyGarvey.jpgWhat do ousted Wall Street chiefs Stan O’Neal and Chuck Prince have in common? Put aside the obvious. What we want to talk about today is that both men are married to blonde women. (That’s Stan’s wife Nancy on the left.) And that may have dumbed them down, at least if you believe the researchers mentioned in a story in the Times of London earlier this week.
[The blonde condition after the jump.]

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Shorting Subprime: Already Over?

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So Paulson & Co is getting out of the subprime trade? It seems like only yesterday that our little babies were almost in a panic about their short play, complaining to the SEC ththat banks were buying up bad loans in order to contain derivative losses. Remember the era when that might have sounded scandalous, rather than smart, heroic or obvious?
Well, whatever the plot to rescue subprime that Paulson thought it saw, it didn’t work out. They’ve doubled their assets this year, and now run $24 billion.
And now they have reportedly cut their subprime positions by 86%.
Paulson Funds Cut Bets Against Subprime Mortgages [Bloomberg]

  • 11 Oct 2007 at 10:34 AM
  • Layoffs

UBS Goes The Terribly Unimaginative Route, Fires People Who Were In Charge Of $3.42 billion Write-Down

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blame.jpgUBS has fired David Martin, head of interest-rate trading, following the firm’s first quarterly loss since 1998 due to its major exposure to a few collapsed areas of the bond market. James Stehli, head of the collateralized debt obligation unit, was also told he would no longer be receiving health care. Having lots of practice at letting people go—last week investment bank chief exec Huw Jenkins and CFO Clive Standish were shoved out the door, just as president Peter Wuffli was earlier in the year—the layoffs are rumored to have gone quite smoothly. Security was not needed to be called, though Martin, allegedly, did yell, “You motherfuckers aren’t going to get away with this,” as he exited the building.
Subprime Snuffs UBS Execs [New York Post]

Bernanke Agrees

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206-gob-banana_sm.jpgThe whole mortgage meltdown situation—don’t much get it, don’t much care. Per usual, we’re not really interested in delving a lot further than “Who’s to Blame?” but apparently, we can’t even do that right. Previously, we (in cahoots with Bear Stearns, who’s always in cahoots with someone) had sent singing telegrams dripping with vitriol and pipe bombs to the poor and Alan Greenspan. Over the weekend, we found out that represented a grave error in judgment on our part (conveniently, we—meaning me—were able to atone for our misguided sins against the country’s underprivileged/that crazy old guy. Carney, having no such get out of jail free card, will be going to hell).
As a guest on Rupert Murdoch’s “Forbes on Fox,” Richard Karlgaard, publisher of the magazine, was asked by host David Asman “what’s the deal” with home foreclosures, the economy, etc. His response, if you’re not Jerry Falwell taking part in this dialogue from the grave, may surprise you:

Well, what I think is that we’re seeing the first generation of home buyers who, in school, were taught to put condoms on bananas instead of learning about compound interest. This is not a good thing, but, ah, we have to work our way through it and the only way the market can clear, as Neal [Neal Weinberg, a senior editor at Forbes] said, is for the foreclosures to happen.

Other horrible events you can trace back to schools teaching kids to put condoms on bananas include but are certainly not limited to: 9/11, the theory of evolution and Global Alpha’s disastrous August (which actually hinted toward Sex Ed. being to blame in an earlier version of its letter to the investors).
Incidentally, if this was meant to be a preview for what we can expect from the Fox Business Network, color us excited. High school health classes have been getting a pass for TOO LONG.
The Publisher of Forbes Magazine, a Regular on Fox, Blames the Mortgage Meltdown on Sex Ed [News Hounds]

  • 05 Sep 2007 at 11:38 AM
  • Economics

Our Society Is Shockingly Indulgent of Poor People
The ‘Special Brazeness’ Of The Impoverished

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If the Economist’s “Free Exchange” blog didn’t exist, Michael Lewis would have to invent it. And, in a sense, he did. In this morning’s Bloomberg column, Lewis—tongue planted firmly in cheek—explains that the main lesson from the subprime fallout is that “finance is one thing you should never engage in with the poor.”
“Our society is really, really hostile to success,” Lewis writes. “At the same time it’s shockingly indulgent of poor people.”
It’s written so straight forwardly that you almost believe that Lewis is transcribing his column straight from the reactionary brain of a right-wing elitist, except that elitists long ago learned to stop thinking and talking in such shocking ways. But someone didn’t get that memo at Free Exchange, which this morning began a column by announcing that “America’s so-called poor live like kings.”
More after the jump.

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The Mortgage Mess: Lender Myopia And The Race To The Dumbest

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“Don’t Buy Stuff You Can’t Afford” is a classic Saturday Night Live skit whose underlying lesson—that you shouldn’t buy what you can’t afford—seems to have been ignored by a lot of those whose financial troubles or outright failures have been making headlines lately. (And, frankly, making the job of writing about the follies, hogwash and bumble-buzzers a bit too easy here at DealBreaker.)
At the heart of the mortgage problem is that many home lenders seem to have adopted the opposite motto: buy what you can’t afford. And more importantly, lend money to customers who can’t afford the repayment terms. How did so many financial institutions—from smaller lending shops to prestigious banks—get drawn into this race toward the bottom?
An article in the LA Times yesterday suggests an answer: the supposedly smartest guys were following the stupidest. Because so many of the stupid guys were making so much money from fees built on stupid mortgages. Sure, they won’t admit that it was a competition to be stupid. Their word is “aggressive” but you know what they mean.
“Countrywide suggests that mortgage pricing and underwriting standards during the housing boom were set by the most aggressive — that is, least rigorous — lenders, and that it was all but powerless to impose its own standards,” the LA Times reports.

“Most of the large bank lenders, as well as Countrywide, were limited, slow, reluctant followers behind the lenders who most aggressively relaxed underwriting guidelines,” the company said in a written response to a question from The Times.

Just in case this got lost in translation: super-tanned Angelo Mozilo now says his company was “powerless to impose its own standards.” How did it lose the power to set its standards? The answer seems to be that it was hypnotized by the lure of fees and profits that others would reap if it didn’t cast its standards to the wind.
A bit of historical reflection on how we got here after the jump.

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  • 30 Aug 2007 at 1:28 PM
  • HSBC

Rick Ziwot Is 45: There Will Be Cake In The Break Room And A Cash Bar At TGIFriday’s Tonight

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If you work in structured finance, you might soon be getting fired, unlike Rick Ziwot, who voluntarily left his job. HSBC confirmed today that Ziwot will depart from his post as the bank’s global head of structured credit products, to be replaced by Jeff Jakubiak, head of structured credit products for Europe, the Middle East, Africa and Asia. Allegra Kelly will become deputy head of the structured credit products group (a title that includes a badge, plus chaps and spurs).
Think Ziwot’s exit has anything to do with fears of major losses for collateralized-debt-obligation investors affected by subprime? Think again. According to HSBC, Ziwot’s departure (and the ensuing shuffle) has nothing to do with the meltdown in the market. Rather, it had to do with “a decision by Rick Ziwot to retire after his 45th birthday, which was in July.” Okay, we’ll buy. You set a deadline for yourself and you stick to it, man, you fucking stick to it. (But seriously, who among hasn’t planned to retire at 45? This sounds legit to us, no sarcasm implied.)
Structured-Products Head Is Set to Leave HSBC [WSJ]
Senior US credit banker Caplan departs RBS [Times Online]

  • 29 Aug 2007 at 8:55 AM
  • Layoffs

CIT Shutters Mortgage Unit

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layoffsatbearstearns.jpgMore fallout from the mortgage mess. Only a month after CIT said it would sell its mortgage origination business, yesterday it announced that it was simply shuttering it instead.
“The move comes as dozens of other financial institutions flee the free-falling business of making home loans to consumers with subprime credit. Last week, Lehman Brothers closed its subprime mortgage unit, and Capital One shut down the wholesale unit of GreenPoint Mortgage,” Crain’s New York reports. Bear Stearns had shut down two of its mortgage units the week prior to last. HSBC, one the the biggest providers of subprime mortgages, has shut down some operations but is far from exiting the mortgage origination business.
CIT is eliminating 550 jobs across 25 offices by shuttering the operation.

CIT first reported problems in its mortgage business, which caters primarily to subprime borrowers, six weeks ago. At that point the Manhattan-based firm wrote down the value of its roughly $10 billion portfolio by $765 million, resulting in an unexpected second quarter loss of $135 million. Its stock plummeted, as investors feared further writedowns to come. On Tuesday the shares lost another 4%, sinking to $35.85 by late morning.

So far the mass layoffs haven’t yet hit Wall Street. But many fear that just as the problems in the subprime mortgage market spread to other credit markets, the layoffs may follow as well.
CIT shutters lending business, takes charge [Crain's]