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Old 09-07-2007, 04:49 PM   #41
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Well as State Street is finding out, you create a vehicle that combines long term debt with short term commercial paper and you don't list anywhere on your balance sheet. If noone wants your commercial paper you have to buy it back. But if the value of the underlying asset has fallen you will take a loss as you attempt to sell the paper. Great way to make money invest long and borrow short, nice little subsidairy income, until now.



This is what Greenspan was talking about yesterday when he said present market conditions remind him of Long-term capital times and October 1987.
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Old 09-07-2007, 04:51 PM   #42
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Brew, I'm with you til #4. I see a long, substantial drop in the high-runup areas.
Houses should not appreciate much faster than inflation. It's finantial insanity to thing that a house should be worth two, three four or more times as many dollars as it was in 2000. Even at zero interest, those owners will need to live another lifetime to break even on a purely numerical basis.

This might effect the larger economic picture.

We are seeing vast developments, some still being constructed, that will never be occupied.

Now if Uncle Ben reves up the choppers, we can monetize our way out.
Inflation. Ya gotta love it, no?
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Old 09-07-2007, 05:04 PM   #43
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Excellent primer on loan origination from Tanta today:

Calculated Risk: Mortgage Origination Channels for UberNerds
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Old 09-07-2007, 07:27 PM   #44
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Part of the problem in any discussion of credit markets and banks is the definition of the word "bank". Unfortunately the meaning/application of the word has been hijacked by the mortgage industry (and Wall Street) in an effort to lend some credibility to their horrendously shady practices. Brewer, please correct me if I am wrong, in the context of your initial comments "bank" refers to those institutions that are regulated by their association with the FDIC.

I believe Brewer is correct, your local/regional bank will not suffer significantly due to the excesses in the real estate market. In fact, your local bank may be in a great position to take advantage of the situation.
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Old 09-07-2007, 08:22 PM   #45
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Brew, I'm with you til #4. I see a long, substantial drop in the high-runup areas.
Houses should not appreciate much faster than inflation. It's finantial insanity to thing that a house should be worth two, three four or more times as many dollars as it was in 2000. Even at zero interest, those owners will need to live another lifetime to break even on a purely numerical basis.

This might effect the larger economic picture.

We are seeing vast developments, some still being constructed, that will never be occupied.

Now if Uncle Ben reves up the choppers, we can monetize our way out.
Inflation. Ya gotta love it, no?
Maybe, maybe not. But remember, it goes in cycles. After the bust, the boom starts up again like a phoenix. I'm only 33 but I have already seen a full cycle: bust in '98, reinflation, housing boom, and now the bust. Next comes reinflation and, eventually, boom. If you bought AF (purely as an example) in 98, 99, or 2000, you made out like a bandit for years.

As far as housing values go, I am not so sure we will see prices drop that far in all but the most bubblicious areas. For example, 10 years ago I could have bought my house for 175k. 5 years ago, I bought it for 300k. Its probably worth a little over 400k. Will it drop back down to 200 or 300k? Possible, but unlikely. Why? Renting the equivalent would run me at least 1750 a month plus utilities. You could buy with a 30 year conforming mortgage and come out about the same. And rents are rising. Naturally, since I have no plans to sell and no issues with refinancing or making payments, I don;t care what the value of the house is unless it falls under 100k (in which case I will buy two more) or goes over 1MM (in which case Iwill sell). I suspect that a majority of homeowners are in the same boat, alarmist headlines tothe contrary.
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Old 09-07-2007, 08:29 PM   #46
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Part of the problem in any discussion of credit markets and banks is the definition of the word "bank". Unfortunately the meaning/application of the word has been hijacked by the mortgage industry (and Wall Street) in an effort to lend some credibility to their horrendously shady practices. Brewer, please correct me if I am wrong, in the context of your initial comments "bank" refers to those institutions that are regulated by their association with the FDIC.

I believe Brewer is correct, your local/regional bank will not suffer significantly due to the excesses in the real estate market. In fact, your local bank may be in a great position to take advantage of the situation.
I was talking about a bank in the sense of the Bailey Savings & Loan, or in the sense of the typical bank in KRE: a boring, retail-oriented, take-deposits-and-make-loans-with-the-money FDIC backed institution. They wouldn't know a SIV or a CP conduit if it bit them in the ass, and a majority of them cross to the other side of the street when they see a subprime mortgage borrower coming their way. Some of them originate loans for sale into the secondary market, but in most cases this is a sideshow rather than the main event. The spread they can get on a loan and the cost of deposits matters far more to them than secondary mortgage market conditions ever will. And it is remarkably hard to kill one of these institutions, even when management seems bent on doing so.

Having said that, I find it amusing to see peoplewringing their hands over the likes of Citi WRT CP conduits potentially coming back onto their balance sheets. We are talking about maybe 50 billion landing on their doorstop vs. a 1 trillion balance sheet and entities that have direct access to the FHLB and the discount window. There is no possibility that the monster money center guys will get into trouble. If yyour tinfoil helmet is loose and you think they will, consider that the Fed would certainly step in and prop one or all of them up rather than see the Western world collapse.
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Old 09-07-2007, 08:31 PM   #47
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PS Maker's MArk does not help with my already iffy typing "skills."
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Old 09-07-2007, 09:08 PM   #48
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Excellent primer on loan origination from Tanta today:

Calculated Risk: Mortgage Origination Channels for UberNerds
A good, but confusing summary. Also illustrates why I never had much interest in dealing with mortgage brokers. A portfolio lender or credit union is a lot simpler to deal with.
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Old 09-08-2007, 07:39 PM   #49
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So, your bet is based purely on decreasing interest costs they'd have to pay to depositors if the fed cuts rates?
My "bet" (2% of the ER portfolio) is based on a sector fund selling at a backtested 10-year low.

I wonder what percentage of geographically-diversified sector 10-year lows have continued to be sucky investments-- while yielding 5%. The 1980s-1990s steel industry? Nah, Nucor cleaned that up. Detroit? No, Nissan & Toyota took over. Houston oil? Well, you couldn't tell from the rest of the world a decade later. The NASDAQ? People are starting to make money again there too.

"Yeah, but" talk is cheap, guys. If it's such a bad investment then either short it or propose a better one. I hear Bay Area rental properties are a slam-dunk double-digit return!
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Old 09-09-2007, 09:22 AM   #50
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I hear Bay Area rental properties are a slam-dunk double-digit return!
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