Matrix Blog

Archive for September, 2008

[Fall Madness] Handy Bracket To Keep Track Of Credit Crunch

September 30, 2008 | 12:54 pm |

Expand bracket chart

Hat tip to “Clark” who sent along the link in my prior post. I am not sure where it comes from, but it’s certainly relevant.

As a March Madness fan, this speaks to me in volumes, giving me a Basketball Jones to understand the credit crunch.

I even put that basketball underneath my pillow
Maybe that’s why I can’t sleep at night
I need help, ladies and gentlemens
I need someone to stand beside me
I need, I need someone to set a pick for me at the free-throw line of life
Someone I can pass to
Someone to hit the open man on the give-and-go
And not end up in the popcorn machine

Sigh.



[Think] Fear (and Anger) Beats Out Greed For The Hearts And Minds Of Americans

September 30, 2008 | 12:03 am | nytlogo |

I had MSNBC and CNBC on as white noise for much of the day and was somewhat surprised that the markets saw such a sharp drop on the news that the bailout was rejected by the House. I suspected it would be close, but it really wasn’t. In fact, the stock market fell below levels seen at the start of the first term of our president. Television pundits were interpreting the sharp decline as the market’s way of telling us that the bailout, if to be passed, had to be re-jiggered.

Did you notice how any discussion of the housing market problems has been shouted out by congressional bickering?

In reality, the Constitution worked well today and thats why we have elected officials, no matter how much we complain about them. Conventional wisdom says we will have a revised deal within a week, or even less. And perhaps even a better deal. A different proposal is what 56% of taxpayers want.

This just in: $700B is not a lot of money. $1.2T was lost in the stock market today. Memo to self: I need to think really, really big.

It’s interesting because Wall Street has got a bad rap because I suspect many Americans lump everyone in the industry in one big pile. Here’s an example: Dot-Com Billionaires are Good, Wall Street Billionaires are Bad. Even CNBC used the term “fatcat” more times today than I could count. The people I know who lost their jobs over the past week were not “fatcats.”

Speaking of “fatcats,” perhaps there is distortion in news accounts that are dramatizing the “anger” that main street is feeling right now against a “bailout.” It’s all how you phrase the question.

And here’s a commentary written before the vote by Edward Leamer, Professor of Economics and Management at the UCLA Anderson School, who sent me this link to his article: Please Think This Over. The article takes issue with the broad powers to be yielded to the US Treasury. In fact, the wording reminded me of the intimidating legal language commonly used in my flirtation with Wall Street last year. My way or the highway.

The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgagerelated assets from any financial institution having its headquarters in the United States. Decisions by the Secretary pursuant to the authority of this Act are nonreviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Wow. It’ll be interesting to see whether Congress is able to rework this. I am getting anxious to talk about housing again, but for now, it’s all about credit and changing that light bulb in my entry foyer. Its also about remembering that this was the day I was born, as many years ago as the contiguous states and yet I don’t feel red or blue.

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[Banking On Recovery] Did The Glass-Steagall Repeal Cause Our Insecuritization?

September 29, 2008 | 12:15 am | nytlogo |

There has been a lot of debate on whether the repeal of Glass-Steagall on November 13, 1999 via the Gramm-Leach-Bliley Financial Services Modernization Act was the beginning of the end of the separation of financial church and state. The Glass-Steagall Act, also known as the Banking Act of 1933 was created to prevent commercial banks from entering the investment bank business.

If you’ve been abducted by aliens for the past three weeks, here’s a great way to catch up on the bailout.

And when you are caught up (assuming the alien thing was accurate), here’s a once in a while requirement from Matrix. A required reading assignment: What’s Free About Free Enterprise?

The first is the risk of moral hazard within the bailout itself. That is, if government is going to make good so many losses throughout the system, why would anyone set limits on future risk-taking? The situation could turn into a free-for-all that makes the recent disregard of risk look like child’s play.

The second problem is more philosophical, involving what the bailout plan reveals about the functioning of the free enterprise system. This raises disturbing questions. Although I agree with President Bush’s observation that “the risk of not acting would be far higher,” we should be aware of the secondary effects of what we are getting into.

Analysis of an IMF study on bank failures shows that the average recovery rate in a banking crisis averaged just 18 percent of the gross costs. Barrons seems to think the taxpayer will come out ahead.

Not everyone thinks the bailout is a great idea.

I should add, though, that I don’t think the people spearheading the bailout have a clear idea about what they’re doing either. They remind me of the old saying: “Something must be done. This is something. Therefore this must be done.” I’m a former student of Chairman Ben Bernanke and his behavior during this mess has been a big disappointment.

Robert Shiller writes an opinion piece in the Washington Post this weekend telling everyone to calm down – government intervention is not unusual and not a bad thing. Everybody Calm Down. A Government Hand In the Economy Is as Old as the Republic. He makes the argument that capitalism evolves and is not etched in stone. He makes a compelling argument.

Megan McArdle in The Atlantic says its not about the Glass-Steagall repeal at all because securitization has been around for a while and Gramm Leach didn’t impact lending standards at commercial banks, among other items.

But Dan Gross at Slate and Newsweek says that the repeal is the end of an era and perhaps infers, that it caused the situation we are in today.

The policy response was to erect a wall between investment banking and commercial banking. It outlasted the Berlin Wall by a few decades. In the 1990s, as another bull market took hold, momentum built to overturn Glass-Steagall. Commercial banks were eager to get into high-margin businesses like underwriting hot tech stocks. Brokerage firms saw commercial banks, with their massive customer bases, as great distribution channels for stocks, mutual funds, and other financial products that they created. Generally speaking, the investment banks were the aggressors.

While I don’t blame the credit carnage all on the repeal of Glass-Steagall, it sure is a compelling milestone and played a role. Banks and investment banks had blurred lines of distinction and regulators were no match for the investment banks. Of course, JPMorgan Chase, who seems to be coming up roses with recent mopup efforts, was the merger of an investment bank and a commercial bank.

The mindset was free markets need to be free because market forces were self-regulating. Of course, that purist view may very well have caused one of the most constraining regulatory environments in the modern era going forward.


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Whoo Hoo! WaMu Pays $78,431 Per Hour

September 28, 2008 | 10:51 pm |

The insanity of CEO compensation in the lending industry continues even as many of those institutions have run out of money. WaMu is paying $20M to CEO Alan Fishman for 17 days on the job (my guess at the hourly calc – $20M/17 days/15 hour days). To be fair, I can only assume he worked long hours without a break for the past three weeks due to the dire situation of his employer.

According to filings with the Securities and Exchange Commission, WaMu threw a $7.5 million bonus at Fishman when it hired him on Sept. 8, and guaranteed him an immediate cash severence of $11.6 million — both of which he gets to keep.

He also was eligible for annual bonuses of up to 365 percent of his annual base pay — set at $1 million — to go with millions of shares of company stock.

Fishman does lose out on a big bonus that would have kicked in had he remained on the job through 2009.

I am not saying he shouldn’t be paid this salary if the contract was proper. I know the amount is ridiculous. But he’s not the bad guy here. He was courted heavily to come in and keep the lender from going under even though, in fairness, WaMu was out of business and simply didn’t know it. Who wouldn’t want to make that rate of pay?

Incidentally, this was the largest US banking failure in history.

What I do have a problem is the board and their accountability to its shareholders. Remember their previous CEO?

Personal feelings: While I feel sorry for the hard working people who lost their jobs at WaMu who didn’t deserve to, there is no love loss within the appraisal industry from the way WaMu sandbagged their appraisers a few years ago.

Here’s a sampling of the anger they caused:


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[NY Times Topics: Housing] W/E 9-28-08

September 26, 2008 | 1:15 am | nytlogo |

The New York Times asked me to share research and reports I come across (excluding my own) that may help inform readers on the topic of Housing. There are many other topics to choose from. I also recommend “Wall Street“.

Their endeavor is essentially a blog-like repository that contains housing related articles written by New York Times journalists, mixed in with brief posts from myself and a few other contributors. (All that long hand writing in 8th grade using a red ball point pen is finally paying off.)

It was just launched and I like the concept. And best of all, I get a byline link on the site.


Here’s my handywork for the week (links take you to a brief post):




Bookmark: New York Times Topics: Housing



[Choking] No Questions Allowed, Ramming 700 Billion Answers Down Our Throats

September 23, 2008 | 12:51 am | nytlogo | Milestones |

I don’t know if have much fight left in me. I am now reading the novel Choke (same author as Fight Club, an all-time favorite), the transition to this book seems appropriate at the moment.

We are spinning around in circles wolfing down the information we are fed and I think we are slowly, painfully moving in a more productive direction. But it is going to cost us dearly, talk a while and we don’t really understand how to fix it or prevent it from happening again.

It’s not enough for Wall Street to be reinvented. Of the 5 big investment banks, Bear and Lehman are now gone, Merrill was bought by BofA and Morgan and Goldman decided it was better to be a commercial bank.

Still no answers yet.

And old habits die hard – commercial banks don’t want assets valued at market value just yet because it might hurt their books before the bailout.

The SEC has been MIA and Paulson and Bernanke are moving in on their turf.

Members of the economic far left and far right don’t like the $700B bailout without answers either:

From the left

“This administration is asking for a $700 billion blank check to be put in the hands of Henry Paulson, a guy who totally missed this, and has been wrong about almost everything,” said Dean Baker, co-director of the liberal Center for Economic and Policy Research in Washington. “It’s almost amazing they can do this with a straight face. There is clearly skepticism and anger at the idea that we’d give this money to these guys, no questions asked.”

From the right

“This is scare tactics to try to do something that’s in the private but not the public interest,” said Allan Meltzer, a former economic adviser to President Reagan, and an expert on monetary policy at the Carnegie Mellon Tepper School of Business. “It’s terrible.”

Perhaps, the dialog for a solution can finally begin. The Brookings Institute released a brief: A Brief Guide To Fixing Finance

It’s all pretty basic but lays it out cleanly.

  • Policy makers need to set priorities – the problem is too vast to fix at once.
  • Know What Went Wrong Before Beginning to Fix Anything
  • Act In Our Own Interest, While Consulting with Other Countries
  • Principles To Guide More Permanent Reforms

They recommend these reforms should be:

  • First, financial instruments and institutions should be more transparent.
  • Second, financial institutions should be less leveraged and more liquid.
  • Third, financial institutions should be supervised more effectively, with greater regard for systemic risks.

Is gagging better than choking?


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[Fee Simplistic] Gunfight At The Appraisal Corral: IndyMac VS. Borrower

September 23, 2008 | 12:07 am |

Fee Simplistic is a regular post by Martin Tessler, whom after 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. He has never been accused of being a man of few words and his commentary can’t be inspired on a specific day of the week.

…Jonathan Miller


My inclination in most of my Fee Simplistic blogs is to resort to satire in targeting the inconsistencies, foibles and malpractices that have proliferated in real estate lending including appraising. The recent demise of IndyMac Bancorp Inc., however, forces me to turn serious and throw the forum open to soliciting views and opinions on a particular appraisal incident that was only a minor blip in the bank’s implosion but looms large in appraisal management and, most of all, integrity for those of us who still hold to it.

Prior to the bank’s takeover by the FDIC it had been calling on borrowers to make up the difference if a gap existed between market value and the loan-to-value ratio established at inception. A particular incident involved a lawsuit filed by a builder in Los Angeles County Superior Court in April claiming that IndyMac did not act in good faith when it tried to call in a loan where personal guarantees were involved in a 900 acre Joshua Ranch tract in the Antelope Valley north of LA. The background was as follows:

  • In May 2007 the property was valued at $82 million by the bank, and
  • In December 2007 the property value was appraised at $17 million-an 80% decline- with the appraisal estimating that an 18 year absorption period would be needed to sell 539 houses on the tract
  • The builder claimed that IndyMac just wanted out of the loan because of their precarious position and thus wanted the borrower to pay off the difference between the $17 million appraised value and the $27 million loan balance.

Ignoring the bank/builder argument on loan payoff what struck me was the severity of the free-fall in appraised value over a 7 month period assuming the appraisal was arms-length and FIRREA compliant with no lender influence or pressure. It, however, and raised the following questions:

1. Did the bank use the same appraiser in December as in May? If not, did the last appraisal employ any assumptions that were substantially different than the earlier appraisal?
2. Assuming the same appraiser, did the market tank that severely in 7 months or did the first appraisal miss the market dynamics as the sub-prime and loan delinquency downturn was already underway prior to May; did the bank review the earlier appraisal to note any discrepancies between the previous and current market conditions or any major changes in assumptions that would have generated such a major decline in value?
3. Assuming the same firm again for both appraisals did they indicate where and why the market had changed in such drastic fashion from their previous appraisal? It has been a long standing policy in assignments that I have directed that reference be made to any previous appraisal completed within a year prior to the valuation date.
4. If a new appraiser was selected, was it because the original appraiser could “not hit the number” that IndyMac needed to declare a call on the loan?
5. Did IndyMac’s appraisal group compare any of the facts or assumptions between the two reports to support the drastic change in value or were ethical considerations thrown to the wind not to mention FIRREA and USPAP?


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[Moral Hazard] No Atheists In Foxholes, No Ideologues In Financial Crises

September 22, 2008 | 12:01 am | nytlogo | Milestones |

A lot has been made of the lack of moral hazard on Wall Street, festering into the current crises.

Michael Lewis, author of a number of great books, including Liars Poker comments in his recent column titled: Bright Side of a Total Financial Market Collapse:

No sooner did Greenspan shuffle off the stage and sell his memoir than the financial system he helped shape fell apart.

He’s left not only a mess but a void. No matter how well- educated we become in our financial affairs, we still need public officials to look up to, unthinkingly.

Slate’s new The Big Money is an excellent resource for financial news commentary. Martha White’s article: What Is a Moral Hazard? The economic reasoning behind bailout or no bailout is a good read.

While bailout seems to be the financial term du jour, right behind it is the more ambiguous “moral hazard.” Treasury Secretary Henry Paulson cited moral hazard as the reason not to swoop in to save Lehman Bros. and Merrill Lynch. Puzzling to many, though, was that while moral hazard was discussed in conjunction with the rescues of Bear Stearns, AIG, Fannie Mae, and Freddie Mac, it wasn’t a deal breaker in any of those cases.

…moral hazard is the idea that insurance in any form makes people riskier.

When I was 15 years old back in the Bicentennial summer of 1976, I rode my bicycle 4,400 miles zig zagging across the US with a group formerly called Bikecentennial. Of 4,000 people who participated, 3 people actually died riding that summer, and within our own group of a dozen riders, those who did wear helmets experienced wrecks and those who didn’t wear helmets (like me), were fine.

I often wondered if wearing a helmet made the riders more prone to take risks. I don’t think so – they represented a cross section of temperaments in our group. In fact, I bought a helmet when I got home and have worn one ever since – and no wrecks.

Perhaps it is more as an argument of convenience. Throw it in if it helps make the case?

The absence of moral hazard of the current situation was created by the GSE structure to begin with. Investors assumed the US would bail out ‘Mac & ‘Mae if they ever ran into trouble because they were “government sponsored”. I can only imagine what would happen to the financial system if the former GSEs were allowed to fail. “Faith and credit of the US” would have meant nothing forever, or at least as long as the current Yankee Stadium is old.

And the system seems to be unraveling quickly judging by more actions this weekend.

Paulson and Bernanke have been making moves faster than Congress or the President can seemingly comprehend. Expect Congress to start fighting the changes once they get it.

There are no atheists in foxholes and no ideologues in financial crises,” Mr. Bernanke told colleagues last week, according to one meeting participant.

A bit unnerving but the Bush administration has been disconnected from the crisis until a few days ago, when it began to back Paulson’s actions. In fact, that was a requirement of Hank’s acceptance of the position to begin with, unlike his predecessors in the current administration.

And the candidates, until a few weeks ago, didn’t discuss the issue directly – and still don’t seem to get and at the very least, didn’t see it coming. Paulson and Bernanke need to move fast.

The lesson learned from this bailout of epic (trillions) proportions, was best said by Floyd Norris in his Reckless? You’re in Luck

If an activity is important enough to justify a government nationalization to prevent a default, it is important enough to be regulated. The regulators need to know what risks are being taken, and by which institutions, in time to act before a crisis develops.

Had the government bothered to do that in years past, it might not have faced the decisions it faced this week. First, it let one big firm go down, and then it became scared enough to nationalize another one to keep it afloat.

Now, showing no sign of embarrassment over how badly they failed before, the current crop of regulators seem to be unified in their determination not to let the markets force them to make a similar choice on some other big financial institution.

It’s not about more regulations, its about regulations that deal with today’s markets.

Paulson and Bernanke will have to wrestle with these issues later, right now, they are suggesting we all wear a helmet.


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Crains New York Business Economic Spotlight Chart – September 2008

September 21, 2008 | 10:07 pm | crainslogo | Charts |

I have had the pleasure of providing a monthly chart for the Economic Spotlight section of Crain’s New York Business magazine since September 2003. Here is the latest, which appears in the current issue of Crain’s New York Business.

Source: Crain’s New York Business

Go here for a complete archive of my Crains’s New York Economic Spotlight charts that have been published. They are organized by year.


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[Colbert Perspective] Zombie Stockbrokers Rule The Night

September 20, 2008 | 11:28 am |

A little levity from the Colbert Report with guest host Maria Bartiromo. My kids were watching this with me last night and loved it.

Memorable quote from Colbert:

Should I invest in paper bags for panicky people to breath in to until this thing blows over?

My attempt at Colbert paraphrasing – A free market should allow business to do whatever they want, including making a lot of bad decisions and then wait for the government to bail them out. But it is very important for business to make really big mistakes because the government only bails out the ones who screw up the most.

Sounds funny, but good grief, insanity still rules the night.


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