Matrix Blog

This interview occurred back on the 18th and was posted on Housing Notes on October 19th in case you missed it.

Robert Frank of CNBC invited me to appear on the show. I’ve been on the show a half dozen times, especially during the housing bubble when I was always interviewed remotely in a dark room with an automated camera. This appearance was the first time on the actual set. The interview with Robert Frank and Andrew Ross Sorkin In keeping with their audience, it was all about the “trade” and focus on pricing which reminded me of the stock market-like thinking of housing from a decade ago. Sorkin asks…

“Should all New Jersey homeowners move to Florida?”

Afterward, I was standing next to Alan Greenspan, former Fed chair, in the makeup room after the interview to take my makeup off. Chatted with Diana Olick as well as I am in now “full name-dropper” mode. Here’s Robert Frank’s intro and then my interview:

Here’s what to watch as real estate drifts into two different markets from CNBC.

Tags: Diana Olick, CNBC, Robert Frank, Alan Greenspan, SquawkBox, Andrew Ross Sorkin

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Wlliam Black, a former bank regulator, made a TED Talk last fall that I wish I had made (but I couldn’t be as eloquent although I have a cooler tie). It should be required viewing by anyone who is connected with the housing industry.

Black’s presentation lays out the financial crisis in the proper context. He provides the recipe for disaster for all to see and it is NOT complicated to understand. Change the perverse incentives and a lot of this goes away. So many opportunities to avoid this crisis were missed.

And this is the first time I’ve heard someone talk about the unrelenting pressure that banks (and mortgage brokers) placed on appraisers, essentially forcing our industry to either make the number of get out of town. By 2007, 90% of appraisers said they were coerced by banks to make the number. That seems low to me. It had to be 100% or else those 10% of appraisers were living in a cave.

I’ll be returning to this video periodically for the foreseeable future as a reminder.

Tags: Alan Greenspan, Ben Bernanke, OCC, TED, OTS, William Black, Regulators

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(courtesy: CS Monitor)

Admittedly I am getting annoyed about the lack of closure on this credit crunch thing. Can’t we simply point fingers, have someone apologize but indirectly deny responsibility and then we can then get back to buying stuff and building extensions on our houses?

Make no mistake, the credit crunch is one big mistake. It’s called a systemic breakdown because so many in the economy played a role in our economic demise. Moral hazard, government backstops, bailouts, stimulus, bonuses, trillions, synthetic CDOs have been placed in the forefront of our thinking.

But no clear financial reform path is being taken – in fact it took an investment bank using swear words in an email to get Washington’s attention and break the political maneuvering. Each party is planning to oversteer the solution to their agenda which was part of the problem that lead to this crisis. While we all worry about “free markets” we have forgotten how important it is to create a level playing field. Without rules, free markets degrade to chaos and lack of investor participation. We are seeing this now within the secondary mortgage market, especially jumbos.

We can never remove the human factor from the problem since regulators were clearly asleep at the switch (since Clinton) compensation had perverse incentives favoring short term profits over long term viability, regulators were neutered by the prior administration (think prior SEC under Bush) so its dumb to have some sort of czar. It’s never one factor – it a combination of people, events, institutions and politics that light the fuse.

I am looking forward to some sort of meaningful financial reform. If neutrality isn’t baked into the system, then this is all a big waste of time. Regulators need authority and can not be influenced and investment banks can’t pick the regulator they want. Rating agencies should not be paid directly by the investment banks whose products they rate. Appraisers can not be fearful of their livelihood because they don;t hit the number, etc.

Here’s what it all boils down to now: blame and being sorry.

Blame
Another Jonathon Miller (no relation, but awesome name) and his wife are suing a large builder for not preventing flipping in their housing development which brought in “irreverent transients” who party loudly, park erratically and install unauthorized satellite dishes.

I’m not doubting those conditions exist and it appears to be a creative way to get your money back.

When the housing market collapsed, some contracted buyers abandoned deals. From the outset, the project exhibited “ghost-town-like” qualities, the suit says.

Looking back, the Millers say the developer should have worked harder to prevent so-called flippers from buying units. Buyers were supposed to stick around for at least 18 months.

Saying I’m Sorry
In particularly interesting Reuters Summit Notebook piece, People make mistakes, take Alan Greenspan and Captain of Titanic

Phil Angelides, Financial Crisis Inquiry Commission chairman, says he’d rather see some taking of responsibility than hear another “I’m sorry.”

“Personally I don’t see my role as … to obtain apologies. What I don’t hear is a sense of responsibility and self-assessment about what occurred. There seems to be a disconnect between the practices that people undertook and the financial collapse,” he said at the Reuters Global Financial Regulation Summit.

“I’m struck by the extent to which all fingers point away generally from the person testifying,” Angelides said.

When it gets to this point, its too late. Let’s try to be proactive with some sort of meaningful financial reform. Not more regulation, not fewer protections for neutral parties.

If we can’t do this as a country, well, don’t blame me.

Tags: Goldman Sachs, Wall Street Bonus, Alan Greenspan, Bailout Nation

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David Leonhardt had a fantastic front pager in the New York Times yesterday that was such a compelling read, I re-read it to try and absorb anything I missed the first time. The article Fed Missed This Bubble. Will It See a New One? looked at the case made by the Fed to enhance its regulatory power.

David asks the question for the Fed:

If only we’d had more power, we could have kept the financial crisis from getting so bad.

But power and authority had nothing to do with whether they could see a bubble.

In 2004, Alan Greenspan, then the chairman, said the rise in home values was “not enough in our judgment to raise major concerns.” In 2005, Mr. Bernanke — then a Bush administration official — said a housing bubble was “a pretty unlikely possibility.” As late as May 2007, he said that Fed officials “do not expect significant spillovers from the subprime market to the rest of the economy.”

I maintain that because of human nature, mob mentality, or whatever you want to call it, all regulators drank the kool-aid just like consumers, rating agencies, lenders, investors and anyone remotely connected with housing. Regulators are not imune from being human.

Once the crisis was upon us, the Fed and the regulatory alphabet soup woke up and began drinking a lot of coffee.

David concludes:

Which is why it is likely to happen again.

What’s missing from the debate over financial re-regulation is a serious discussion of how to reduce the odds that the Fed — however much authority it has — will listen to the echo chamber when the next bubble comes along.

Exactly.

I think this whole thing started with the repeal of Glass-Steagal where the boundaries between commercial and investment banks which were set during the Great Depression, were removed. Commercial banks had cheap capital (deposits) and could compete in the Investment Banking world. But Investment banks could not act like commercial banks. Their access to capital was more expense motivating them to get their allowable leverage ratios raised significantly. One blip and they go under.

Tags: Alan Greenspan, Ben Bernanke, Sub-Prime

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In Bernanke’s speech to the American Economic Association on Sunday he suggested that it was regulatory failure, not keeping rates too low for too long, which caused the housing bubble.

Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates.

This seems to be splitting hairs, doesn’t it?

Low rates triggered the housing bubble as money became cheap and easy to get. If the Fed hadn’t kept rates too low for too long, the bubble would not have happened. The regulatory system was ill prepared for the insanity that followed. House prices rose so fast that underwriting had to evaporate to keep the mortgage pipeline full. Regulators hadn’t seen this before and with the removal of Glass-Steagal and Laissez-Faire mindset, everyone in DC, including Congress and regulators, drank the Kool-aid.

Actions Taken Too late

Mr. Bernanke has pointed to the Fed’s extraordinary efforts to stem the crisis, including the creation of new lending vehicles to banks and a reduction of bank-to-bank interest rates to virtually zero, as evidence that the Fed has a firm grasp of what the economy needs. The Fed’s handling of the crisis has been widely praised by economists.

The Treasury and other government agencies already have supervisory power over parts of the financial system, but so, too, does the Federal Reserve.

In his talk on Sunday, Mr. Bernanke acknowledged as much, rattling off a list of regulatory efforts the bank made to address nontraditional mortgages and poor underwriting practices.

But, he said, “these efforts came too late or were insufficient to stop the decline in underwriting standards and effectively constrain the housing bubble.”

All regulators are human and subject to mob mentality just like politicians and consumers were. Everyone is awake now. That’s why I think a “bubble czar” type position is silly. I’m not blaming the Fed or Bernanke. Now about Greenspan….

In fact I think the Fed has done an excellent job keeping our financial system from the brink. Lets recognize Bernanke’s comments for what they are – dodging the minefield of Congressional approval. God help us if Congress is able to audit the Fed. Its not the audit I object to – its the politicalization of it. We need to keep the Fed neutral (in theory).

Tags: Alan Greenspan, Ben Bernanke

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From Caroline Baum’s excellent column: Conan’s Couch, ‘Daily Show’ Ready for Bernanke:

Alan Greenspan prided himself on being opaque. The former Federal Reserve chairman used to joke that if the audience thought he was being clear, they probably misunderstood what he was saying.

Bernanke believes in transparency. With everyone hanging on every word of every report, every pundit, every TV show, every government official release etc., I’m not quite sure this doesn’t create a lot of more volatility. But if we could have the Fed Chairman on the Daily Show?

My life would be complete.

Aside: The IRS is more popular than the Fed.

Tags: Alan Greenspan, Ben Bernanke

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It’s becoming apparent that several of the large institutions that are in the vortex of bailoutdom are teetering: namely AIG and Citi. They were deemed too big to fail, bit now we are wondering if they are too far beyond saving.

I am struggling with this concept and am rambling here, but now is the time to fix things for the long term benefit. I am sick of quick fixes.

The Too Big to Fail policy is the idea that in American banking regulation the largest and most powerful banks are “too big to (let) fail.” This means that it might encourage recklessness since the government would pick up the pieces in the event it was about to go out of business. The phrase has also been more broadly applied to refer to a government’s policy to bail out any corporation. It raises the issue of moral hazard in business operations.

The top 5 banks are showing significant signs of weakness.

Citibank, Bank of America, HSBC Bank USA, Wells Fargo Bank and J.P. Morgan Chase reported that their “current” net loss risks from derivatives — insurance-like bets tied to a loan or other underlying asset — surged to $587 billion as of Dec. 31. Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.

The industry never thought macro enough to consider systemic risk – as in “What happens if it all goes wrong?” Seems pretty basic.

The Federal Reserve appears to be trying to reform its ways and perhaps even the concept of too big to fail. Fed Chairman Bernanke just spoke to the Council on Foreign Relations…

Until we stabilize the financial system, a sustainable economic recovery will remain out of reach. In particular, the continued viability of systemically important financial institutions is vital to this effort. In that regard, the Federal Reserve, other federal regulators, and the Treasury Department have stated that they will take any necessary and appropriate steps to ensure that our banking institutions have the capital and liquidity necessary to function well in even a severe economic downturn. Moreover, we have reiterated the U.S. government’s determination to ensure that systemically important financial institutions continue to be able to meet their commitments.

…while former Fed Chairman Greenspan has been attempting to re-write history.

David Leonhardt, in his piece “The Looting of America’s Coffers” said:

The investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses.

In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer said, would have operated in a completely different manner. The investors displayed a “total disregard for even the most basic principles of lending,” failing to verify standard information about their borrowers or, in some cases, even to ask for that information.

The investors “acted as if future losses were somebody else’s problem,” the economists wrote. “They were right.”

Last week, Sheila Bair of FDIC told 60 Minutes she would like to see Congress attempt to set boundaries for banks to remain as banks. In other words, they grow beyond a certain level, they become some other entity but can’t be bailed out if something goes wrong. Perhaps this implies a higher risk which is understood by investors, forcing the institution to decide whether it can afford to be bigger.

Let’s get our act together real quick or we also too big to fail?

Aside: Why make billions, when you can make millions? – Austin Powers

Tags: FDIC, Citibank, Alan Greenspan, Ben Bernanke, Bailout Nation

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Link to Bloomberg Chart

Ok, so this is my second Bill & Ted reference this week, but hey, Keanu Reeves starred, Matrix, etc.

I was having lunch with a good friend (other than the grief I regularly get about my bright shirt colors) the other day and he suggested I follow the TED spread more closely. While I have followed it, I’ve not been as fanatical about as many economists are. Perhaps I should be since, like the Fed’s Senior Loan Office survey, TED provides useful insight into the lending environment beyond mortgage rates.

I watched the CNBC special last night House of Cards, which was very good – not too much I hadn’t heard before but it did provide more clarity to the sequence of events and expanded my understanding of the roles Fannie/Freddie, Greenspan, CDOs and the rating agencies played in the risk/reward disconnect.

I also learned that the word Credit is derived from the Latin for Trust.

The TED spread (Treasury Eurodollar) for the uninitiated is the rate spread between treasury bills and and LIBOR.

Treasury bills are thought to represent risk free lending because there is the assumption that the US government will stand behind them. LIBOR represents the rate at which banks will lend to each other.

the difference in the two rates represents the “risk premium” of lending to a bank instead of to the U.S. government.

When the TED spread is low, banks are likely in good shape because banks feel nearly as confident lending to each other as if it were backed US government (The US has recently proved we’ll back pretty much back anything).

The spread is usually below 100 basis points (“1” on the chart). It reached a recent low of 20 basis points in early 2007, which in my view, shows a disconnect in the pricing risk since the subprime mortgage boom began to unravel in early 2006.

The spread spiked in in mid 2007 at the onset of the credit crunch (that was a summer to remember) and later spiked to 460 on October 10, 2008 as the wheels came off the financial system and became the new milestone or “tipping point” for the new housing market.

The spread has been contracting which is perhaps a sign that banks are starting to feel less panicked about each other. I think lending conditions will improve over the next few years, but there is a long way to go as measured by years rather than quarters.

Note: Another TED worth noting. A great resource for the intersection of Technology, Entertainment and Design.

Tags: CNBC, TED Spread, Alan Greenspan, Sub-Prime

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CNBC is premiering a special documentary tomorrow night that explores the relationship between risk and reward in real estate.

There have been a number of specials on this topic but it is always good to review what is happening on the ground right now and reflect on how we got here. I watched the trailer and it is compelling.

CNBC sent me the announcement about the special tomorrow:

Was reading your blog and thought the upcoming documentary on CNBC might interest you and your readers…

Tomorrow (Thurs Feb 12), the CNBC Original “House of Cards” will premiere at 8p ET / 9p PT on CNBC. “House of Cards” explains how we got into today’s economic mess – with inside accounts from key players from home buyers to mortgage sellers to Alan Greenspan.

The documentary launch page.

Tags: CNBC, Alan Greenspan

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Click here for full sized graphic.

Regulation grew faster in the current administration as measured by annual increases, than in any since administration since the 1960s. That seems to be counter to the mantra:

Less government enables the free market to do its thing – self-regulation via market forces weeds out the weak?

One of the key issues of election campaign and the credit crunch was the lack of relevant regulatory oversight during the mortgage boom. Certain members of the public (ahem) complained, blogged, cajoled, and even…gasp…resorted to rolling their eyes and sighing.

But no one was listening. The administration told us everything was fundamentally sound. This commentary has been occurring since at least 2004 when all the lending snafus began to gain momentum. Frank, Dodd, Bush, Greenspan, Bernanke, Syron, Mudd, Paulson et al have told us things were fine until as recently as a few months ago.

I suspect most of them actually believed “the fundamentals were sound” and the real problem was that they were not fully informed or had an understanding of systemic nature of the crisis.

Be careful what you wish for. The sleeping giant in Washington has been awakened and it’s ready to eat. This weekend I took my family to DC for my high school reunion and a few days of rampant tourism whose highlight (for me) was going through an airport-like security screening process to eat mac & cheese at the Department of Agriculture’s employee cafeteria (ok, so offbeat cafeterias are my thing). I was struck by the enormity of the facility and the wildly inefficient service and presentation.

I shudder to think that this energy will now be channeled into regulatory oversight (hopefully not at the expense of good mac ‘n cheese for USDA employees).

We are now going to see a cultural shift toward more regulation, no matter who is elected in November. You can see it in the press releases and “on top of it” like responses from all the agencies – FDIC, OTS, FRB, FHFA et al. Once that stops, it’ll take years to reign in.

Why can’t there be a middle ground rather than extremes? Do we only feel comfortable at the margins, on the edge?

We don’t need more regulation – we need smarter and ultimately less regulation. A reasonably level playing field where regulations set the boundaries, rather than direct specific actions is what allows free markets to work.

Case in point: The tennis courts at our town’s new high school have a 6 inch slope from end to end to promote drainage. The slope is so exaggerated you can clearly see it. Good for drainage, sucks for tennis.

Next thing you know, mac ‘n cheese won’t be as yellow as it used to be at the USDA cafeteria but at least their cups will be biodegradeable.

Tags: FHFA, FDIC, Alan Greenspan, Ben Bernanke

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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.

Tags: GSE, Bankrate.com, Bear Stearns, Alan Greenspan, Ben Bernanke, Henry Paulson, Bailout Nation, Lehman

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In the grand scale of things, I never viewed the US as creating the global housing boom. Now that the “contagion” is now crossing the border of the US into other countries via the credit crunch so it’s starting to look like we caused the global downturn. This Monday’s page 1 NYT story: Housing Woes in U.S. Spread Around Globe was about the spread of credit problems across the planet (when towns in Norway are going bankrupt because the AAA mortgage-back securities were full of subprime mortgages, it’s global)

The collapse of the housing bubble in the United States is mutating into a global phenomenon, with real estate prices swooning from the Irish countryside and the Spanish coast to Baltic seaports and even parts of northern India. This synchronized global slowdown, which has become increasingly stark in recent months, is hobbling economic growth worldwide, affecting not just homes but jobs as well.

During the housing boom of 2003-2006, housing markets were booming from Europe to Australia to India. In fact, many of these markets saw booms before we did. As much as I feel Greenspan contributed to the development of the US credit bubble conditions that we are in now, I don’t think he brought down the planet financial system.

To some extent, the world’s problems are a result of American contagion. As home financing and credit tightens in response to the crisis that began in the subprime mortgage market, analysts worry that other countries could suffer the mortgage defaults and foreclosures that have afflicted California, Florida and other states.

Citing the reverberations of the American housing bust and credit squeeze, the International Monetary Fund last Wednesday cut its forecast for global economic growth this year and warned that the malaise could extend into 2009.

Can someone tell me what effective changes have occurred to rekindle the credit market? I see it’s repair as the key to enabling a housing market bottom.

Tags: Europe, Alan Greenspan, Sub-Prime

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