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Seconds Anyone? [Market
Observations] by the Bad Boys at
ContraryInvestor.com Ole Bear, Editor, Commentary
Bad Contrarian Investor Boys with the Pen, and More Cockalorum
Bullorum House of Cards? Nahhhhh! -- A House of Paper! The Paper Chase or John Houseman 101 A couple of our avid readers sent us the link to a great piece of work by the Bad Boys over at Contrary Investor on real estate mortgage finance and the residential housing market with some great chartwork! While a lot of the stuff contained in this great essay is not new under the sun if folks follow two-tiered structured finance and financial markets from every Prudent Bear's Prudentbear at Credit Bubble Bulletin, the guys at Contrary Investor penned a superb piece with some awesome graphics. For me, it helps solidify the Fraud of Appraisal Regulation, FIRREA 1989, which helped to make all of this possible in the game of ABS [asset backed securities] sold on the global markets. When we consider the amount of fraud that it takes to create an ABS portfolio in the millions and billions of Federal Reserve Notes in the current realty mortgage and realty valuation market -- the Seconds Anyone? analysis of real estate derivative Ponzi finance should scare the Living Daylights out of normal, sane folks with money in the bank, and money in a Wall Street money market mutual fund, most of which are invested in ABS paper of some sort. GM and GE are more financial companies than they are builders of Buicks and Microwaves! So is Ford! When Ford-Lincoln-Mercury finances your Navigator Lincoln SUV, they are actually making more money off of financing the asset, than building the asset. Something is wrong here, ain't it! Columbia/Boone County Missouri has over 140 mortgage outfits, loan brokers [sharks?], banks, credit unions, and S&Ls -- what I call a high level of competition. When we talk about mortgage and appraisal fraud, some of the time some lender is pushing the appraiser to push the pencil to inflate a value on the property in collateral. Connecting the dots? The Toy Boys of Fraud. This all certainly is Mortgage Mayhem! The loan is going to be bundled into somebodys' ABS, so who cares???!!! Now we have FED Boy Gramlich trying to cover the central bankers' assets with Cockalorum Bullorum on the housing and debt bubble. Just how stupid do the Boys and Girls at the Federalicum Reservicum really think the American Public is? Gramlich's doublespeak earns the tar and feather award of the month in our view. We suggest Gramlich brush up on central banking and monetary fraud reading Larry Becraft's Memorandum of Law: The Money Issue. It is common knowledge that the Federalicum Reservicum can target and crush any profession, market, or industry it chooses, and likewise create asset bubbles of Pandoric Proportions. I guess Mr. G never heard of the NASDAQ [ehhh, excuse me... NASDOG]. Well Send me back to Dixie! We will give you a few snippets from the Contrary Investor Bad Boys essay to entice our readers: It's the asset backed securities market that was responsible for the bulk of US home mortgage financing for the year ended 4Q 2004. It wasn't the banks. It wasn't the S&L's. And it wasn't even the GSE balance sheets proper. It was the conduit ABS market that was generating the bulk of the liquidity. Furthermore, there is absolutely no question in our minds that the Fed is fully aware of these dynamics. They are fully aware of the circumstances surrounding the turbocharged change in residential real estate mortgage liquidity. Why? Because this is their data. It comes directly from the Fed Flow of Funds report. And, as you already know, the fact that conduit markets such as the ABS market are primarily responsible for this type of credit creation is one of the primary reasons the financial derivatives complex (primarily interest rate derivatives) in this country continues to grow at accelerated rates over the last few years. Twenty years ago, the ABS markets didn't even exist. This is especially alarming for several reasons. Given the fraud in the mortgage and realty valuation industry that we document at Realty Reality, I suspect these ABS portfolios are probably over-valued by at least 10% to 15% at the minimum. The loan to deposit ratio at the 8,000+ FDIC insured institutions is greater than 107%+ when you factor in those rascals that have already filed liquidity plans with the regulators because they are having cash flow problems. No, we don't need no stinking liquidity. All these lending folks have to do is file a liquidity plan with the regulators if they get in trouble! We also suspect that the ABS loan loss reserves are a joke, and under-funded because we suspect that the GSEs are most likely under-funded [because their REOs generally resell significantly less than the appraisal of the property here in Show Me State -- Missouri]. Since this two-tiered structured finance derivative thing is not regulated [and the FEDERALICUM RESERVICUM dudn't want 'em regulated, since they are the greatest thing since sliced bologna on sliced Wonder Bread with a Coca Cola], we are now playing the game of bailout. I call this derivative counter-party bailout [which is part of the game of chicken], of which them there derivatives can melt down before you can say Black-Scholes Long Term Capital Management Russian Default. John Dizard penned a piece we have referenced many times before. I will refer to Alarm Bells Sound for Fannie and Freddie again: Let's go back to the GSEs' own defences against more regulation and limits on their growth. The real threat posed by the GSEs, in the view of Mr Greenspan and Mr Mankiw and their staffs, is that they're just getting too darn big. Mr Greenspan would like to limit Fannie and Freddie to repackaging mortgages and redistributing them through the financial system. This function gives a "liquidity discount" to mortgage interest costs. What he doesn't like is their trillion dollar purchases of their own paper and the tiny equity bases on which they do that. In the central banking equivalent of a scrawled insult on a bathroom wall, Fannie Mae publishes a series of Fannie Mae Papers, an "occasional series on policy issues". These pour contempt on warnings such as Mr Greenspan's. In one such paper from last October, one of Fannie's distinguished contributors, Christopher Culp, wrote about "myths" he cited as a "concern of central bankers" (no names, please). One was that "Fannie Mae's use of derivatives poses systemic risk". Mr Culp, the author of the recent Art of Risk Management, trivializes the risks imposed by the $811bn of notional derivative principal Fannie had on its books last June. He does touch on Mr Greenspan's real concern: that the counterparties for those derivative contracts are too highly concentrated among a small number of securities houses and banks. But he does so only to dismiss the problem, writing that "these concerns play much more on fear than on any actual empirical evidence legitimating the concern". The problem with Fannie and Freddie's party line is that there is no "empirical evidence" because history has no precedent for their risk concentration. The failure of Drexel Burnham or Long Term Capital Management's problems, which Mr Culp cites, are two or three orders of magnitude smaller than the mountains of GSE paper. Mr Greenspan and Mr Mankiw don't think they'll have to bail out Fannie and Freddie. They think they'll have to bail out the half dozen largest swaps and derivatives dealers who are the big banks and investment dealers. In a rapidly rising interest rate environment, the "gamma", or the rate of the rate of increase in their hedging of their obligations to the GSEs, could, or, if you believe the chairman, will, require the Fed to act as the derivatives counterparty of last resort. The math tells him this could be seriously inflationary. [excerpt from John Dizard's Alarm Bells Sound for Fannie and Freddie, Financial Times.com] [Editor's Note: Should we be so naive to believe that only the GSEs could use a little bailout if some counter-parties blow up at JPChase? I suspect we should include the whole ABS counter-party derivative market, wouldn't you? Inflationary? How about Hyperinflationary, Folks? After the Hyperinflation reaches its apex, could real estate become the most dangerous debt backed investment on the planet? [Hint: extreme asset price deflation, which I call part of the game of chicken.] Now that puts debt backed ABS [real estate] in a different Black-Scholes econometric, dud't it? We wudn't have this major a problem if we had sound money backed by specie, since it is a little difficult to create gold and silver out of lead or thin air, but I am guessing on that one.] The Econometrics of Nitro Glycerin and Zippo Lighters Run Over by 5,000 Pound Buicks The Seconds Anyone? essay not only exposes the fact that GSE [Fannie and Freddie] mortgage backed securities and derivative bets will have to be covered in a major paper burn [ehhh, thermo-nuclear implosion, and the game of chicken], but the whole dang ABS [asset backed securities] market [outside of the GSEs] as well, which increased about 56.9% in 2004 with increased holdings of 388.7 billion Federal Reserve Notes. Based on year 2004 statistics in mortgage backed securities increases, the pecking order in the game of Federalicum Reservicum lender of last resort bailout [game of chicken] to imploded and exploded derivative counter parties to protect BoA, BoNY, JPChase, Goldman, AIG and the other Big Boys on Wall Street [including Federalicum Reservicum] will be the global ABS market [AIG, GM, Ford, GE, defense contractors, et cetera including foreign companies and central banks], then the S&Ls, the banking industry, and the credit unions. Guess What, Folks? Lo' and behold, the GSEs are the last in the pecking order to be bailed out. Now that is a Trojan Horse of a different color, ain't it? [actually, the GSEs are probably first in the pecking order! -- where there is smoke you put out a fire, don't you? -- especially if they are in the bad financial press? Hummmm?] Which brings us to the Rhinestone Cowboy [Sporkin]. Now given the fact that Judge Stanley Sporkin has been sent to clean up Fannie Mae before a derivative implosion takes place and to sweep all those nasty financial fudge footnotes under somebody's carpet, since they are the low man on the totem pole, we can certainly guess that Machiavelli Greenspan and his Monetary Crooks and Charlatans at the Federalicum Reservicum would just as soon not have any sparks set off a thermo-nuclear financial derivative implosion at Fannie Mae when they are going to be counter party lenders of last resort to more important Black-Scholes paper burns to cover Ford, GM, GE, and JPChase -- when the Zippo goes off. Flick! Guess what? The basic design and function of a Zippo Lighter hasn't changed in 60 years, but structured finance sure has. Given a supply of Ronsonol, a proper wick, and a flint, that Zippo will light every time, and is a heck of a lot more reliable than Flicking a cheap plastic Bic. I would definitely say: "Houston, ehhh... we have a problem here!" [Interesting to note that Baron Marcel Bich never challenged Zippo! -- Guess he figured out if you ran over a Zippo with a 5,000 pound Buick, the Zippo would still Flick and Flame!] The ABS on Your Brand New SUV -- Mercedes? Lincoln? or Cadillac? -- would you like a moon-roof with that, Alice? Then the Bad Boys at Contrary Investor go on with this little snippet: So, just who do we find when we pull back the curtain on the ABS and MBS markets? Folks with solid financials like GM and Ford, to mention just two of the larger participants. Non-traditional mortgage lenders are big players. Moreover, as we mentioned, credit expansion in these markets simply would not have been possible without the supposed financial risk management backstop that is the interest rate derivatives markets. As a very quick tangent, we believe it is very telling to note that US banking system notional derivatives exposure as of year end 2004 stood at just shy of $88 trillion. But what we believe is really important is what you see below. Without belaboring the point, US banking system derivatives exposure has doubled since year end 2001 and tripled since the LTCM blowup. In our eyes, the interest rate derivatives markets are the unequivocal backbone supporting credit expansion stateside. I am sure Greenspan and his Monetary Charlatans at the Federalicum Reservicum hope no one will read this essay from Contrary Investor on their housing bubble take, or even believe it. [We certainly know it won't appear on CNBC, aka Bubblevision anytime soon!] With all these companies trading on Wall Street playing in the ABS and MBS markets, the DOW and the S&P 500 are the greatest place on the planet to place your assets if you buy their stock! Right? [Just kidding!] When folks buy GM, folks think they are investing in a company that builds Buicks that run over Bic lighters. Not so! The DOW 30 over 10,500 is an absolute joke, and an insult to intelligence when you look at the house of paper under all of these financial companies that tell folks they make microwaves and Buicks for a living. To the moon, Alice... to theeeeeeeeee mooooooooonnnn! How about DOW 30,000, Alan? Re-entry with mis-firing retro rockets? I will leave my readers with this parting snippet from the housing market essay: Again, we are absolutely convinced that the Fed is fully aware of this situation. They are implicitly sanctioning it. Without belaboring the point, it's the reason we remain convinced that the US credit cycle is the key to what lies ahead. And that credit cycle includes the very significant influence of the mortgage and ABS issuer "paper pools", as well as the derivatives complex so necessary to the perceptual hedging of risk inside these massive pools of capital. The future will not be found strictly in business cycle dynamics alone because the business cycle is being driven by the greater credit cycle. Again, thinking in terms of a singular US housing bubble may be far too narrow minded. For now, the structured finance markets are driving the real estate mortgage credit liquidity bandwagon. But what is important to remember is that they are dragging the ultimate credit exposure of many other mainline financial institutions right along with them. Not only are JP Morgan, Citigroup and BofA providing the bulk of US banking system derivatives juice to facilitate the structured finance markets, but many a plain old ordinary bank themselves are players in the residential real estate market both in terms of real world lending and also in terms of holding MBS paper as a good part of their bank asset portfolios. And for the US banking system as a whole, much like US households of the moment for that matter, literally nothing is more important looking ahead than the value of their loan collateral, otherwise known as the market value of real estate. See what we mean? I am laughing my Ole Bear Behind off, but not at the authors of the essay at Contrary Investor at all. Of course the FED knows all about this situation -- Heck, they are blackmailing the Bank of Japan [and perhaps other Asian central banks?] in the yen/dollar carry trade to buy US Treasury Bonds to keep our mortgage interest rates at 40-45 year lows as Greenspan's conundrum [The Big Lie] so that this financial paper mess dudn't implode/explode/catch fire right now! Speaking of Collateral.... Where is the Collateral? Ehhh. So, Where is the Collateral? Which has a higher explosive impact on paper -- Rocket Fuel or Lighter Fluid? The Bad Boys at Contrary Investor did a marvelous job putting this stuff together and connecting the dots, putting it in a format and soft tongue and cheek style. What I am also laughing my Ole Bear Behind off about, is the fact that the Pundits and Minions in realty valuation organizations that have been drinking from the spiked punch bowl at this party thrown by the Federalicum Reservicum ain't got a clue as to how much of a hang-over they are really gonna have at the hands of the banking cartel in the game of Centralization and Control, when, not if... this whole financial paper derivatives mess accidentally gets lit by a Zippo lighter. The problem isn't that the paper is readily combustible given a proper supply of Oxygen and an ignition source. The problem lies in the fact that all this paper is already doused with Wizard Charcoal Lighter fluid [and it is still wet...]. Bar-Be-Que, Anyone? Slow cooked? or Flash Fried? Good job ye Bad Boys over at Contrary Investor. Great Essay! Woof! Woof! Woof! Yours Truly,
Ole Bear, Editor © 2005 Realty Reality |
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