March 09, 2007

Mortgage guru: ""This is going to be a meltdown of unparalleled proportions. Billions will be lost."

Why doesn't everyone see the obvious, and see what's obviously coming?

The subprime disaster doesn't start and stop there. It starts there. Alt-A, or "liars loans", are obviously next. I would actually suggest that liars loans (think Casey Serin) are actually in worse shape than subprime, since investors mistakenly trusted these higher-rated debt holdings more than subprime.

Head to the bunker HP'ers. Calm may have settled in again, but it would appear to just be the eye of the storm passing over. Get ready for the wall of wind to resume.

BusinessWeek: The Mortgage Mess Spreads - The subprime lending industry is getting hammered, and hedge funds and investment banks are feeling the pain

The canaries in the coal mine are keeling over fast. After years of easy profits, the $1.3 trillion subprime mortgage industry has taken a violent turn: At least 25 subprime lenders, which issue mortgages to borrowers with poor credit histories, have exited the business, declared bankruptcy, announced significant losses, or put themselves up for sale. And that's just in the past few months.

Now there's evidence that the pain is spreading to a broad swath of hedge funds, commercial banks, and investment banks that buy, sell, repackage, and invest in risky subprime loans.

According to Jim Grant of Grant's Interest Rate Observer, the market is starting to wake up to the magnitude of the problem, entering what he calls the "recognition stage." Says Terry Wakefield, head of the Wakefield Co., a mortgage industry consulting firm: "This is going to be a meltdown of unparalleled proportions. Billions will be lost."

Hedge funds, those freewheeling, lightly regulated investment pools, seem particularly vulnerable. BusinessWeek has learned that $700 million Carrington Capital and $3 billion Greenlight Capital may have gotten badly burned because of their intricate dealings with New Century Financial, a major subprime lender whose stock has plunged 84% in four weeks amid a Justice Dept. investigations into its accounting. Magnetar Capital, a $4 billion fund formed two years ago, may be on shaky ground, too. The question is, how many others may be suffering?

"This is a very opaque industry, so no one really knows," says Mark M. Zandi, chief economist and co-founder of Moody's (MCO) "My guess is that if you look at the top hedge funds, they're bearing most of the risk."

Other hedge funds that have feasted on mortgage-backed securities will be hit hard if rating agencies start downgrading them, as is widely expected. That would be likely to send their values plummeting. "This is indeed a stress scenario," says Glenn T. Costello, co-head of the residential MBS Group at Fitch Ratings. Kevin J. Kanouff, who heads bond surveillance for Clayton Holdings (CLAY), a consulting firm for institutional investors, adds that "hedge funds are getting very nervous about their investments."

There's also growing talk that many firms, in particular Goldman Sachs, incurred steep losses in trades based on the ABX subprime index. As market makers, the big banks were forced to take the other side of clients' short trades, or bets that the index would fall. When the index plunged 34% in the first 10 weeks of the year, the banks lost. Goldman, which reports first-quarter earnings on Mar. 13 and is a big player in the ABX market, declined to comment.

While subprime loans accounted for 20% of mortgages originated last year, David Liu of UBS estimates that fully 40% of last year's loans are "showing a lot of signs of stress." Says Nouriel Roubini, economics professor at New York University's Stern School of Business: "The risk that prime borrowers will start to feel financial stress in 2007 cannot be underestimated."


Anonymous said...

Eye of the storm?

It has only started to drizzle...the storm isn't even here yet.

Anonymous said...

"The canaries in the coal mine are keeling over fast"

The last one just died, oh, shit here comes the toxic fumes.

Pan Handler said...

This is going to make the cost of Katrina look like lunch money.


CAT V coming, head for the shelters. MANDATORY EVACUATION

Anonymous said...

Hedge Fund Meltdown?

Ben Dover said...

Told you margin calls were and are being made.

"New Century also said that it has received $150 million worth of margin calls from its so-called warehouse lenders. It has satisfied about $80 million of those calls, but $70 million remains, according to the company."

Natural Eyebrows said...

Here's a story about one high roller on Wall St. who bet his clients' money on the implosion.

Anonymous said...

Oh if we only lived the way of the glorious USSR where the government provided a free apartment to everyone, how much better off we'd be.

brokersleaveyoubroke said...

This guy says there will be a meltdown because 40% of loans written last year are in distress. On the other hand Paulson says everything will be OK because........oops, he forgot to include the facts that led him to this conclusion. Must have slipped his mind.

Mark in San Diego said...

A letter to the editor in this morning's Financial Times by the Chief Economist at ABN Amro Bank, Netherlands - he said, "I admit being surprised by the carnage in the subprime lending sector in the US. . ." he was "assured" by "experts" that everything was fine. . .NOW - I am just a retired guy in San Diego, and I KNEW almost a year ago there was a problem (thanks to HP and Keith and other blogs). . .are these "experts" stupid? out of touch? crooks?. . .or all of the above. Comments???

Anonymous said...

lend and new waaaaaaaaaaaaaaay down again today

When does Countrywide come clean?

FlyingMonkeyWarrior said...

are these "experts" stupid? out of touch? crooks?. . .or all of the above. Comments???
They are all so old that the Computer age left them behind. They have to go back to college to learn to use e-mail, and they have never even been told about blogs. Do not even have a computer or know how to type. IMO

tmaioli said...


52Wk High: 51.97

Check it now....hhhaaaaaaa

Anonymous said...

"Magnetar" Capital?

What is a magnetar, after all?

A magnetar is a neutron star with an extremely powerful magnetic field, the decay of which powers the emission of copious amounts of high-energy electromagnetic radiation, particularly X-rays and gamma-rays. The theory regarding these objects was formulated by Robert Duncan and Christopher Thompson in 1992. In the course of the decade that followed, the magnetar hypothesis has become widely accepted as a likely physical explanation for observable objects known as soft gamma repeaters and anomalous X-ray pulsars.

Violent, spinning, and radioactive.

Just what I want in my hedge fund.

PS: suggest "FIG" as another short.

It is the newly IPO'ed hedge fund public management company. The fo unders of the actual funds totally looted it before the IPO.

It has a P/E of 30 or 40 (based on highly variable earnings) whereas the P/E of something like Goldman, which is nearly a hedge fund itself, is about 10. And Goldman earns transaction fees; FIG pays them.

Anonymous said...

More like a cat 12 is coming...

stoopid republictard pump and dump ponzi crazy lie

Anonymous said...

When does Countrywide come clean?

When the tanning bed can't turn Angelo any darker...


Anonymous said...

this secular bear thing hss hardly started, just 7 years of an average average 17 year cycle

Anonymous said...

the old shirtsleeves to shirtsleeves in 3 generations thing, with the old wealth redistrubation schemes, same ole, same ole, screw the peasant ploy, of making the peasant

Anonymous said...

a few billions, compared to the trillions looted, and the trillions in wall streets nasdaq 50% down of seven years thingee? fled to real estate, with no exits, looting of the inheiritors babyboomer wealths, planned and plotted, and accompanied with every nickle and dime scheemers scheme, guess they saw it comming

Anonymous said...