Saturday, November 10, 2007


Today’s Wall Street Journal contained reports on third quarter losses at Fannie Mae (page A2) and at Wachovia (page A3). Both institutions, obviously, attribute most of their problems to “unforeseen” bogeymen.

Fannie, the Journal reports, had modest holdings of sub-prime loans. However, the Journal goes on to report

“While defaults on subprime loans, those to people with weak credit records, are soaring, delayed payments and foreclosures on prime loans also have started to rise from the unusually low levels of recent years.”

Wachovia, the Journal reports, attributed much of its latest write down to deterioration in the value of “super senior” CDOs. (Note here that the seniority of tranches in a CDO has little or nothing to do with the credit quality of the collateral in that CDO, lest anyone think I am trying to equate the “sudden, unexpected” super senior problem with the “sudden, unexpected” deterioration in prime loans. But the deterioration of both super senior CDOs and prime loans are obviously part of the same problem.) The Journal then goes on to quote Amy Brinkley, Bank of America’s chief risk officer, as saying

“There are some aspects of what are (sic) going on that we fully expected in terms of correction (sic). But I don’t know that anyone expected the degree to which liquidity would lock up.”

No one expected this? Well, we all know what Ms. Brinkley and her fellow highly paid Wall Streeters weren’t reading. Below are citations from the Insightful Pontificator from earlier, in one case much earlier, in the year:

(from a note I sent to a friend with whom I share ideas in response to a post in a newsletter he receives):

As you might guess, I don’t share the writer’s sanguinity. As I say in the body of this letter, wait until the market discovers (It will, of course, be shocked to learn this because “nobody” could have foreseen such a development.) that the problems in our nation’s mortgage portfolio are not limited to SUB-PRIME mortgages.

We have only begun to see the difficulties that permeate our “don’t worry, be happy” financial system.

Yeah, the model portfolios outperformed a lousy market, which is cold consolation. I understand relative performance; I made my living on it back when I almost was somebody and even now use it as an excuse when people with whom I work don't do as well as they expected, but it makes little sense to the average person. I had a great day yesterday, owing to my put positions, my short positions, and my TIPs positions. Making money, and not losing money, is what matters to most people.

I'll be interested to see how this guy contorts himself as the crap REALLY hits the fan with this market. Wait 'til the market finds out (I can predict what the "experts" will say: "No one could have seen this coming." Well, someone did, and now you know who.) that it is not only sub-prime mortgages that are a problem, but that the "high quality" paper isn't as high quality as the deep thinkers supposed. Meanwhile, it looks like we MIGHT get a day's reprieve today.


Like anyone else, I could be wrong here, but this problem appears to be far from over. As I said in my 3/14/07 post, wait until it becomes apparent to the financial wunderkinds who have seized control of our economy that this problem is by no means limited to sub-prime mortgages. The truly exotic mortgage products (the interest only loans, negative amortization loans, etc.) were almost exclusively prime, or at least Alt-A, loans. Look around your neighborhood and at your neighbors’ spending habits and tell me with assurance that all these loans are just fine. And if the Fed continues to do the wrong thing, attempting to continue the decades long practice of socializing the risk while privatizing the profits, things could get worse…a LOT worse.

No one indeed. Well, at least no one outside the myopic club of financial insiders.

No comments: