Monday, 15 September 2008

The Flamenco Grim Reaper

As I've stated at least a few times, I am not an investment professional, nor do I play one on TV, nor have I stayed in a Holiday Inn Express. Certainly I am not the immediate past president of Citigroup. How can it be that Chuck Prince, upon reviewing the genesis and eventual acting out of the credit crisis, comes to the conclusion that it was unforeseeable? This is a close paraphrase of what he said in an article in the WSJ today. On the other hand, on a web site forum, I wrote the following on August 7, 2007:

"The Fed is making their announcement at 2:15pm. If they are to maintain their stated anti-inflationary course, they can not lower rates. If they do not lower rates, the credit situation could get very interesting indeed.

The housing market is going to be an interesting ride for the next year. Prices rose fast when everyone and his brother could "afford" (or at least qualify for a mortgage on) a million dollar house. So what happens to prices when no one and no one's brother is able to get a mortgage?

It's not inconceivable that some markets will have 5% of homes in foreclosure. 7 million interest only ARM's were originated in the last 3 years. About 60% of American households "own" their homes (quotes around own because immature interest only loans do not yield traditional ownership), and there are about 350 million Americans, give or take. Figure the number of households equals population/3 (a ballpark estimate), so there are 117mm households, of which 60% (or 70mm) own a home. If half of those loans default (and CO and NV currently have 2.5% foreclosure rates), even if not a single traditional "prime" loan defaults, you have 5% default."

I felt foolish even typing this. No way was it possible. No way. And yet 13 months later, according to yesterday's NY Times, 9% of US mortgages are in default. How "unforeseeable" was this situation when the components were right there? If you were the leader of a huge public company, with billions of investor dollars resting on your actions, how is it possible that you could not have a "what if" laid out for the above situation?

Unfortunately, I think it all boils down to the delusions of greed. THIS IS BY NO MEANS TO GLOAT OR CLAIM THAT I AM SMARTER THAN CHUCK PRINCE, STAN O'NEILL OR ANY OF THOSE GUYS. Heck, if I was 1/10th as smart as they are, maybe I ould figure out how to get fired and paid a million bucks at the same time. All I'm saying is that the people who should have been paying the most attention to the possible downsides were just asleep to a very real set of possibilities. When you are turning in quarter after quarter of record revenue growth and rising fees and margins, you probably think you're bulletproof.

Yesterday I made a point about regulation versus production. The scenario I laid out above, in order to be really considered, would have had to have been so justified, so fortified charts and graphs and histograms and pentagrams and mammograms that by the end of it all, 99% of us would have said "fuck it, it's your barbecue, do what you want." Late night shillsters don't get rich telling people how to consolidate their gains and make modest, steady incomes while livig within their means. Everyone wants to hear about the upside.

The upside of what happened today is that American public companies lost about 5% of their value. American investors lost trillions of dollars.

My wife and I are examining some very possible scenarios in which one or both of us winds up needing a new job. I am probably pretty insulated until early spring, when this project wraps. At that point, it will be a game to see if the next job gets funded. I'm pretty pessimistic about that, which leaves me to wonder whether my company will want to let a bunch of experienced and talented people go away. I don't know what the answer will be, but I'm not going to bury my head in the sand and wait for it. I guess my answer is just to try and prepare as well as possible, and start living a little further within our means. I really feel bad for people who are leveraged into a lot of stuff. Our worst case isn't exactly pretty, but it's not awful either. For others, that is decidedly not the case.

Congrats to Pete Custer on winning at Turkey Day. When is Coppi going to make with the results of their race?

To stay on topic, assuming the topic is cycling, why are there so few aluminum tubular rims available?


cclarke said...

I don't disagree that the foreclosure situation is looking grim and probably bound to get worse but the 9% figure you quote includes mortgages that are delinquent as well as mortgages in foreclosure. The percentage of mortgages actually in foreclosure was 2.8% for the second quarter.

Chuck Wagon said...

yeah, absolutely agree. the times stated it as in default, the technical definition of which starts at the first "you're late" notice.

2.8 is a big percent.

Jim said...

The current default & foreclosure rate is identical to the rate in 1985. Enough of the friggin Armageddon talk already. Yep, we've got a pretty dire re-adjustment coming, but it's mainly going to hurt people who probably shouldn't have been buying homes, and those with capital who utterly failed to perform due diligence. Even with all the doom and gloom, the economy still grew at a 3.1 annual rate last quarter.

Shumpeter had a comment the other day - this isn't a bad thing because it's the market's way of clearing out the dead weight, businesses that simply don't belong in the market because they aren't efficient. They will be replaced by businesses that do business the right way.

Yeah, there's some economic fears on my part too, my wife is between jobs right now, but on the other hand, I don't see a lot of really skinny people walking around America just yet. I think we'll be okay. I think some of the panic is due to the election year, at least one of the candidates is talking about right now as being worse than the Great Depression, an assertion that I find a little surprising.

Chuck Wagon said...

Jim -
We'll just have to disagree on our outlooks here. Not to say that I am not cheering the passing of a way of doing business (both corporate and personal) that I never agreed with in the first place, but there's one man's dire re-adjustment is another man's well, dire re-adjustment. Less than a year ago, all the big investment banks were going to put together about an $80 billion dollar fund to cauterize the subprime wound. There have since been DAYS when announced write downs would have bankrupted an $80 billion fund. Also, we have the three year annuversary of the biggest year for origination of no money down interest only ARMs yet to come. Want to make a bet on which way the default rate is headed?
So, enough of the pollyana talk already!