Archive for December, 2007

Lobbying and the Housing Bubble

December 31, 2007

The WSJ provides insight into the role of political lobbying in supporting sub-prime lending practices with a specific focus on Ameriquest.  Both Georgia and New Jersey had active fair lending legislative intiatives both of which used a “tangible net benefit” to the borrower as a lending standard.  Because of the difficulty of interpreting “tangible net benefit”, Standard & Poor’s said it was unable to rate the loans.  It appears that active lobbying and S&Ps reaction resulted in the subsequent modification of the fair lending laws that had contained the “tangible net benefit” language.  Despite the roll-back of the laws there is the potential for a natural experiment where defaults in New Jersey and Georgia could be compared against defaults in other states to assess the impact of the legislation (obviously controlling for other factors such as income).

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Business of the Year No More

December 29, 2007

One real estate broker went from being named Business of the Year in 2006 by the local Chamber of Commerce to bankruptcy in 2007.

Via Calculated Risk.

Bernanke’s Conundrum

December 28, 2007

The WSJ contrasts to the current credit crunch to the cash hoarding that went on prior to Y2K.  The implication is that the elevated difference between Libor and the federal funds rate is not likely to subside like it did after Y2K.  I was involved in system conversions for Y2K.  Ex-post it was the most over-prepared event of my career.  We identified code issues, wrote code, tested the code, migrated the code, and then were all hands on deck at 12 midnight 2000.  We had very few bugs, all of which were promptly corrected.  In contrast to Y2K preparations, the unwinding of SIVs, mortgage fraud, and defaults all will take time.  Banks will need a big cushion and will be very reluctant to lend to each other.  Some will profit from the uncertainty with Warren Buffet as the lead example with his entry into Muni Bond Insurance.  Note the comment in the article on charging for moral hazard.

Buffett to Back Bonds?

December 28, 2007

Well the death of muni bond insurance was short indeed. Rumor has it that Berkshire Hathaway is about to launch its own municipal bond insurer.

How Much Liquidity Has Been Injected?

December 27, 2007

Yves at Naked Capitalism links to an interesting weblog post by John Huffman, who argues that the actual amount of liquidity injected by the Fed and the European Central Bank has been exaggerated. Huffman looks over the published figures, and by his estimates the monetary base (total circulating cash plus bank reserves) has not increased. This would imply that despite press reports, the two central banks have not injected any additionally liquidity into the economy.

Fraud – Helping Pop the Housing Bubble

December 26, 2007

Let’s suppose that within a AAA rated tranche of a mortgage backed CDO are mortgages that were obtained by fraud.  Based on this report in the New York Times this appears a likely scenario.  Even a low default rate based on fraud could have a large impact on the tranche valuation and credit rating.  To what extent did incentive and reporting systems within banks promote speed (processing time) over due-diligence?

LIBOR Treasury spread

December 23, 2007

Thanks to the banking crisis, the spread between LIBOR and Treasuries has widened to 1.5% (it’s normally closer to 0.5%). As Brad de Long puts it, “the odds that any given major bank borrowing Eurodollars will collapse tomorrow have gone from something that you expect to happen roughly once every 3000 years to once every 500 years.”

End of Muni Bond Insurance?

December 22, 2007

Bloomberg is reporting that municipalities are beginning to shy away from insuring their bond issues. Issuers who have recently issued uninsured bonds include the states of Wisconsin and California, and the city of New York.

Update. Felix Salmon puts it more pungently: Munis Back Away From Ratings-Agency Domination. Munis have very low default rates, sufficiently low that most would merit triple-A ratings if they were corporate bonds. The ratings agencies apparently rate them by a more stringent scale, which historically has made bond insurance attractive.

Super SIV fund plan officially dead

December 21, 2007

The super-SIV plan that the Treasury department has been trying to put together is officially dead. The plan became mostly superfluous when its main beneficiary, Citigroup, moved their SIV holdings onto their balance sheet.

MBIA, the other shoe drops

December 20, 2007

Bond insurer MBIA has revealed that it has much greater exposure to CDOs (include CDOs-on-CDOs) than previously reported. The rating agency Fitch is threatening to downgrade them from AAA status.

Via Naked Capitalism.