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Posts Tagged ‘Bear Stearns’

The Black Swan and Really, Really Dumb Smart People

March 31, 2009 | 12:22 am | | Milestones |

Sorry but I am in Manhattan Market Overview high gear prep mode – the report will be published later this week – so I am pretty lame on the content side for Matrix at the moment.

One of my semi-regular podcast downloads is Russ Robert’s EconTalk. This week he interviews Nassim Taleb , the author of Fooled by Randomness and the Black Swan of a few years ago. I own the latter, but I think the former is over my head. I’ve never heard him speak before. I have now listened to this podcast 3 times already and thoroughly enjoyed it. Also make sure you read the slew of comments posted to their site.

Nassim Taleb talks about the financial crisis, how we misunderstand rare events, the fragility of the banking system, the moral hazard of government bailouts, the unprecedented nature of really, really bad events, the contribution of human psychology to misinterpreting probability and the dangers of hubris. The conversation closes with a discussion of religion and probability.

On one hand I am very leery of people who suggest they have all the answers to a problem but not the solutions – Nouriel Roubini is another example – but Taleb’s arguments are compelling. After all, I think we all want to understand how so many smart people could be so utterly stupid for so long. If it wasn’t mortgages as a vehicle, it would have been something else.

I loved the ten year flood example given in the notes of the interview:

A ten year flood has a higher probability than a 100 year flood, but the 100 year flood will be massively more consequential. You care about the probability times the size of the impact, the expectation of these events. Small-probability events can have in some domains, fat-tailed domains, a big impact and we don’t know how to estimate them.

Here’s the compensation scenario and moral hazard – notes from the interview:

Were heads of Bear Stearns and Lehman Brothers not aware of how much they were gambling or did they not care how much they were gambling? Combination. Three things: 1. fooling themselves, psychological dimension. 2. Had an interest in building huge risks and tail because if you blow up every 10 years, you will make 9 bonuses and the 10th year someone will pay the cost, not you. Vicious: taxpayers are paying retrospectively for the bonuses of the first 9 years. Banks are insolvent, have lost more than their capital base, but managers have kept their bonuses. Some of them have been wiped out because they went a little further than normal blow-up cycle. What about the ones who didn’t do it? Lower returns year after year; now should be doing extremely well, but now unable to buy up some of the firms that have made the mistakes because the government is propping them up.

Aside: Speaking of dumb, how about the new space station named “Colbert” and video. To see the vote page and the number one suggested name – go here.


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

September 22, 2008 | 12:01 am | | 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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Growth By Mortgage = Death By Mortgage: Was It Worth It?

September 14, 2008 | 9:28 pm | | Milestones |

Well another Friday came and went and more weekend meltdowns were on the agenda. This time it was Lehman Brothers, the second big investment bank to experience trouble. I have friends at Lehman and they have been scared to lose their jobs for months, and yet they had nothing to do with mortgages. I know a couple with a large exposure in Lehman stock and have been paralyzed to take action to move out of the position for the past year. The time came and went, unfortunately. No bailout this time.

During the mortgage hay days, Lehman did a lot of new development deals. They occasionally brought us in for a “reality” consult after reviewing appraisals already done for new deals. We weren’t asked to do any project appraisals, only “reality check” on the price point and local absorption. I suspect they were “arbitraging” the relationship between reality and what needed to be done to make the deal. Smart people too.

When you think about the scope of the mortgage problem that continues to unfold, its pretty scary and likely has quite a way to go. It says a lot about how ridiculous the talk of “bottoms” and “temporary” conditions really are. I mean, the idea that housing is going to be fine in less than a year is completely insane given the damage that remains to be discovered.

I tried to think of the big players in the mortgage market of the past five years:

Countrywide: bought at a discount by BofA (for their technology/servicing)
WaMu: Under legal pressure, removed CEO, stock price fell to the floor, rumors of buyout
Bear Stearns: Big subprime player. Gone for nearly nothing by JPMorgan Chase
Lehman Brothers: Big mortgage player. Lots of development financing. Nearly gone
Merrill Lynch: Just bought by BofA
Barclay’s: Took their licks in write downs and were too undercapitalized to take over Lehman.
Fannie, Freddie: The housing bill placed nearly all it’s faith in Frannie and now the former CEO’s are eligible for $24M in parachutes. A potential for $200B in losses.

Up until now, the billions in mortgage losses were just numbers to me. But now, the numbers are more in context because they have brought down some of the biggest, most profitable financial firms out there.

All because of idiotic lending practices.

Old school leadership at these entities were no match for fast changing mortgage products without meaningful regulatory oversight.

Well, of course it wasn’t worth it.


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A Busy Week For Senators, Lawyers, Brokers And Ex-Fund Managers

June 20, 2008 | 12:12 am | | Milestones |

My kid’s last day of school was yesterday so I’m fighting the urge to take the summer off. Ok, it’s not possible, but I can dream.


It’s been a week to remember.

Fast and easy credit that was relatively unchecked by regulators provided the perfect environment for fraud, the creation of instant wealth and/or newly found leverage to those who were willing to use it or accept it.

We seem to be entering the fourth phase of the credit crunch (not marriage). Discover, Fret, Propose, Charge, Reconsider, Solve

This week’s persistence award goes to a woman who, for 6 months, tried to get someone at WaMu to talk to them about their mortgage (hat tip to Holden Lewis/Mortgage Matters). Can someone please explain to me how WaMu’s CEO has been able to hold onto his job?

Here’s Politco’s list of mortgages held by US Senators.

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Akron Is Just Like Iceland, Only With More Rock

April 22, 2008 | 12:05 am | | Milestones |

Every so often a city or location jumps out at me as getting a lot of coverage in the news. Sort of the Six Degrees of Kevin Bacon versus Credit Meets The Housing Market.

I was reading the review of the new blues rock album by one of my favorite bands The Black Keys. They are based in Akron and apparently love it there, despite its deep economic problems including unemployment and foreclosures. Home to Goodyear, Akron has fallen behind other metro areas (incidentally, Rubber Factory is TBK’s best work IMHO).

The following day I read the New York Times article Don’t Hate Me Because I’m Solvent which chronicled an Akron couple who own:

an exquisitely renovated 1913 Tudor house, with six fireplaces, a solarium and a billiards room, which is well within their means, in part because they paid $65,000 (12 years ago).

They have no mortgage and more importantly, the husband is a part time rock musician.

He is 44, the son of an engineer, married for 19 years, and a lifelong resident of Akron. He may also be the only person in the known universe who has both written for “Beavis and Butt-Head” and names “It’s A Wonderful Life” as his favorite movie. Mr. Giffels identifies with the film’s hero, George Bailey.

And what does this have to do with Iceland?

Insofar as Americans think about Iceland at all, it’s as a land whose remoteness belies a vibrant cultural scene featuring hipster titans, like Björk and Sigur Rós, and exceptional social conditions—it’s the top-rated country in the U.N.’s most recent human-development index. But in the financial world Iceland is now a hot topic of discussion for a different reason: many people suggest that it could become the “first national casualty” of the ongoing credit crunch.

Besides the musician reference, Iceland has represented the bright end of the economic spectrum, the opposite of Akron, whose economic problems were in play well before the recent housing boom not unlike it’s rustbelt neighbors, whom the boom largely passed by.

Now analysts are wondering whether the new Nordic Tiger will end up, instead, as “the Bear Stearns of the North Atlantic.”

Although Iceland’s banks avoided subprime mortgages, most of the capital it raised came from foreign investors. With the credit markets drying up, many investors are unwilling to invest in Iceland and the crunch has begun.

Iceland has been swamped by that tsunami because it trusted in the availability of global credit in time for that credit to evaporate. And the fact that Iceland has been so dependent on foreign investors makes those investors even more skittish about investing there: in markets, weakness often begets weakness.

In other words, the global credit crisis is not just about subprime lending. It is about the lack of availability of credit for investment (in Iceland) and an increase in foreclosures (in Akron).

No matter how loud the music was played in either place, everyone’s ears are still ringing.


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[Wall Street] Dominoes To Go

March 24, 2008 | 12:42 am | | Milestones |

Source: Slate

Click here for full sized graphic.

Supposedly, JPMorgan in Negotiations to Raise Bear Stearns Bid

Good grief, I don’t mean to come across as so gloomy. I don’t even know how to play dominoes.


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[Bear Stearns] Currency Of The Day: For $2 More

March 18, 2008 | 2:00 pm | | Milestones |

I can’t imagine what it would be like to lose everything you spent your career building up in one day. That’s what many of the employees at Bear Stearns are dealing with, and I am sure many of them had nothing to do with the downfall of the firm. A good friend of mine left the firm last year and is feeling like he made the right decision.

Can you imagine the litigation onslaught on its way? Employees could chuckle about something today.

According to Reuters this photo was found on the front door of Bear Stearns today:

Here’s some more gallows humor from WallStreetJackass referring to the page one WSJ article last fall on the bridge playing, pot smoking Bear Sterns CEO with a mocked up Bloomberg Terminal screen. Consistent with the reasoning why the economy is failing.


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[St Patrick’s Day’ March Madness] Like A Carnival Of Real Estate

March 17, 2008 | 12:01 am | | Milestones |

I have been out of the Carnival of Real Estate for quite a while and forgot how interesting it was to get posts from bloggers I wasn’t familiar with, as well as some great posts from long time friends.

I started getting post submissions on Monday and by today I had a lot of reading to do. Although the carnival hosts are expected to post only their favorites, how can I do that? I decided to provide a top ten list and then everyone else. I excluded a few get rich quick posts and those who seemed to be more interested in selling something or extra posts from those who submitted more than one. If I missed any legitimate posts, my sincere apologies.

Matrix Top 10 List

  1. Jay Thompson presents Deceptive Listings in the Phoenix Area posted at The Phoenix Real Estate Guy.
  2. Aaron Dickinson presents Star Tribune Prints the Wrong Story posted at Twin Cities Real Estate Blog.
  3. Howard Arnoff presents Understanding buyer agency posted at Charleston Real Estate Blog.
  4. John presents The Worst of Home Foreclosures Yet to Come posted at Top Real Estate Blog and Tips of Selling Home from Real Estate Guru Who Sells Home Like Crazy.
  5. MyNewPlace presents Green Apartment Construction Hinges on Living Density posted at MyNewPlace Blog.
  6. Tim Anderson presents The Copenhagen Report: The sound of the popping bubble: A bit about psychology and Copenhagen’s housing market posted at The Copenhagen Report.
  7. Dan Green presents Mortgage Video: Why It Matters When Mortgage Guidelines Change (Redux) posted at The Mortgage Reports Blog.
  8. Dan Melson presents San Diego Housing Market March 2008: Heating Back Up posted at Searchlight Crusade.
  9. Kathy Koops presents Why Bother Paying for Owner?s Title Insurance? posted at The Cincy Blog by Kathy Koops.
  10. Cindy Jones presents Northern Virginia Foreclosures-What Don?t You See posted at VA Real Estate Talk.

Here are other posts of note submitted in no particular order but are all a good read:

Thanks to all of those who submitted posts. It was a fun read and I’ll be expanding my blogroll this week. Don’t forget to check out Inman News Blog, next week’s host for the Carnival of Real Estate.

Its now 11pm EST on Sunday. Gotta get some sleep for a busy week ahead. an anticipated FOMC rate drop, plus more shoes to drop (are there any left?), making my March Madness picks and most importantly, someone has to paint that green line on the parade route tomorrow in Manhattan.

UPDATE: In my $2 per share Bear Stearns stupor and flood of emails, I inadvertantly left a great post off the list:


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[RPX] Residential Property Index Powered By Radar Logic To Go Live 9-17-07

September 12, 2007 | 2:23 pm | Milestones |

Radar Logic has spent the last several years working for the market launch set for this Monday, September 17, 2007.

Its been a significant effort that has resulted in the development of the Residential Property Indexâ„¢, code-named RPXâ„¢. I became involved in this venture to provide commentary and research products to leverage the proprietary technology. The real estate market information covers 25 MSA’s plus a national composite. Its exciting stuff.

Here are a few snippets from the press release:

New York, NY – September 12, 2007 – Radar Logic Incorporated (www.radarlogic.com) announced that derivatives trading in the Residential Property Index (RPX) market will begin September 17, 2007. Trading will be based on the RPX Prices, single values representing price per square foot based on actual transactions in residential real estate in 25 U.S. Metropolitan Statistical Areas as well as a 25-city composite.

Dealers licensed to offer products in the RPX market include Morgan Stanley & Co. Incorporated; Lehman Brothers Inc.; Merrill Lynch, Pierce, Fenner & Smith Incorporated; Deutsche Bank Securities Inc.; Goldman Sachs & Co.; and Bear Stearns & Co.

Michael Feder, CEO and President of Radar Logic Incorporated said, “The launch of the RPX market provides both investors and participants in the real estate industry with sophisticated tools that have not been available to them before. The granular applications of the RPX-based derivatives should allow substantial utility for all interested participants. We are excited by the reaction that professionals have had thus far.”

More announcements to follow!


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Jobs Up, Jobs Down, Confusion All Around

July 10, 2006 | 8:52 am | | Milestones |

Real estate market watchers last week were thrashed by conflicting jobs reports. ADP released a payroll report on Wednesday as people were back from an extended 4th of July weekend. The survey showed a whopping net gain of 368,000 jobs, the largest increase in five years.

The implications with this report that were created are that the economy was moving along at a brisk pace and the Fed would likely raise rates at their next meeting in August and beyond. A gloomy scenario for the housing market as mortgage rates would follow suit, further choking off demand.

But alas, the government reported two days later that employers actually only added 121,000 in June [pdf], less than one third the amount touted in the ADP release two days before, painting a much weaker picture.

The irony here is that a number of economists revised their projections upward on Wednesday in response to ADP so when the government stats were released two days later, they were now below analysts forecasts giving the impression the economy was in worse shape than pessimists thought it was.

However, government data also shows that hourly wages are rising at their fastest pace [NYT] in five years, indicating that the labor market is still relatively tight and making the scenario of the Fed taking a break on their 18th consecutive rate increase next month less likely than many people would hope far.

Aside from mortgage rates, jobs data is the bellwether of housing related data because without jobs, no matter how low rates are, people don’t buy homes. There is not a uniform agreement on what condition the economy is currently in but everyone seems to agree that housing has already cooled.

The Fed could thus leave interest rates at 5.25 percent at its next meeting in August, rather than raise them by another quarter of a percentage point. “I think the Fed’s going to pause,” said Scott Anderson, senior economist at Wells Fargo in Minneapolis.

or

“For me, it is not clear-cut that the labor market has downshifted,” said John Ryding, chief economist at Bear Stearns. “Rather than there is lack of demand from employers, it may be that low unemployment has left fewer people to hire, so instead employers are paying their existing workers more and are working their work force for longer hours.”

For housing market watchers, a unifying understanding of the economy in the near term was not established last week and the uncertainty with will continue to chip away at housing consumer confidence, whether its justified or not.


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With A Flag, An I-Beam and a Christmas Tree, The Party Is Just Getting Started

February 27, 2006 | 12:06 am | | Milestones |

Ever since I was a kid, I remember seeing and reading about Christmas trees on top of buildings under construction but they were not quite finished. I also remember seeing an American flag and there was usually a ceremony of some kind that was covered in the newspapers.

There has been a tremendous amount of construction in recent years and I started thinking about topping out ceremonies:

What is this all about? Why a tree?, and Why was I looking up instead of watching where I was walking?

According to Modern Steel Construction / December 2000 [pdf]

When or how it started, but the tradition of ‘Topping Out’ has become a cherished custom of Ironworkers whenever the skeleton of a bridge or building is completed. Topping Out is a signal that the uppermost steel member is going into place, that the structure has reached its height. As that final beam is hoisted, an evergreen tree or a flag or both are attached to it as it ascends.

This tradition of ironworkers is most closely associated with the International Association of Bridge, Structural, and Ornamental Ironworkers union in Washington, DC.

“Topping out” is the term used by ironworkers to indicate that the final piece of steel is being hoisted into place on a building, bridge, or other large structure.

The project is not completed, but it has reached its maximum height. To commemorate this first milestone the final piece of iron is usually hoisted into place with a small evergreen tree (called a Christmas tree in the trade) and an American flag attached. The piece is usually painted white and signed by the ironworkers and visiting dignitaries (figure 1). If the project is important enough (and the largesse of the contractor great enough) the ceremony may culminate in a celebration known as a “topping out party” in which the construction crews are treated to food and drink.

For those who are into Scandavian mythology here is the History of the “Topping Out” Ceremony [Columbia University] via The Ironworker magazine.

Topping Out Bear Stearns NYC

Mohawk Indians are the most well-known ironworkers and are close associated with topping out buildings.





Here’s a sampling of local coverage for a typical event:

Topping Out at 7 World Trade Center
Topping Out At The Ukrainian Museum’s Top Project
Topping Out the Blanton: That tree on the roof? Means the new museum is A-OK.
Vought-Alenia plant to be topped out

but its not limited to the US…

New unit at Northwick Park Hospital finished [UK]
New home to help juveniles re-integrate [HK]
TIOGA DOWNS PLANS MAY OPENING [NZ]


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