Subprime Mortgages

There are many factors which affect rental prices, including: (1) the general health of the economy; (2) demographics; (3) housing strength; (4) population growth; (5) migration patterns; and (6) wealth distribution.

Today will be day 12 of 13 (or something just as silly) that the market has been melting up on no volume: yet another truly ridiculous statistic in the anals of momoism. As David Rosenberg points out: "the market has been able to digest California, Dubai, and Greece" - and this has all been offset by what? Merely promises of ever increasing liquidity and bailouts by the Fed, first domestically, and soon internationally. Have people really forgotten yet again that this is precisely what got us on the verge of a historic collapse in the first place? Yes, the Fed bailed capitalism out last time around (with about 3 hours to spare), but this time it has gone dodecatuple all in, and unless intelligent, and very rich life, on Mars is discovered pretty quickly, this will all end in ruins (certainly those of the Marriner Eccles building).

It's been eighteen months since AIG collapsed, and Congress has yet to seriously focus on the most important questions: What did they know and when did they know it? "What" refers to the fatal flaws in the collateralized debt obligations, or CDOs, that AIG insured. "They" are the bankers that structured and sold the CDOs, plus the AIG executives who took on the credit risk, plus the rating agencies that handed out AAA ratings. "When" harkens back to 2005 and 2006, when those toxic CDOs were first issued.

A detailed overview of the current state of charge-offs, delinquencies and (yes) improvements in the mortgage industry - and most importantly what can be discerned from these trends...

The government can always rescue the markets or interfere with contract law whenever it deems convenient with little or no apparent cost. (Investors believe this now and, worse still, the government believes it as well. We are probably doomed to a lasting legacy of government tampering with financial markets and the economy, which is likely to create the mother of all moral hazards. The government is blissfully unaware of the wisdom of Friedrich Hayek: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”) - Seth Klarman

Much has been said on these pages and elsewhere about the dangers embedded within quant groupthink, in which an ever increasing prevalence of fewer performing factors means that more and more speculators (note: not investors) line up on the same side of the trade pushing up offers, only to experience a regime change based on some heretofore unexpected exogenous event which renders existing signal translation models useless, and causes all former buyers to join the sellers. Whether that would result in a bidless market remains to be seen. If October 1987 is any indication, all signs point to yes. Yet in a sign that at least the bigger bankers may be anticipating just such an outcome, the Economist has disclosed that JP Morgan, in addition to reserving for general loan loss provisions on its balance sheet, has now taken a $3 billion reserve against quant error (yes, quants can be wrong... and for a lot of money at that). Just how many other investment banks demonstrate this kind of prudence? Without any specific regulatory guidelines for quant capital provisioning, we have no idea. While the bulge brackets may have joined JPM in a comparable form of "insurance" it is a certainty that the thousands of newly cropped up quant trading firms not only have no such reserves, but should a dramatic market reversal transpire, it is inevitable that wholesale asset dumping will have to take place to cover losses. And this assumes no leverage. Is the market prepared for such a contingency?

As we look forward, we ask, who now determines the variation margin on Greek CDS (and Portugal, and Dubai, and Spain, and, pretty soon, Japan and the US), the associated recovery rate, and how much collateral should be posted by sellers of Greek protection? If Greek banks, as the rumors goes, indeed sold Greek protection, and, as the rumor also goes, Goldman was the bulk buyer, either in prop or flow capacity, it is precisely Goldman, just like in the AIG case, that can now dictate what the collateral margin that Greek counterparties, and by extension the very nation of Greece, have to post on billions of dollars of Greek insurance. Let's say Goldman thinks Greece's debt recovery is 75 cents and the CDS should be trading at 700 bps, instead of the "prevailing" consensus of a 90 recovery and 450 spread, then it will very likely get its way when demanding extra capital to cover potential shortfalls, since Goldman itself has been instrumental in covering up Greece's catastrophic financial state and continues to be a critical factor in any future refinancing efforts on behalf of Greece. Obviously this incremental margin, which only Goldman will ever see, even if the CDS was purchased on a flow basis, will never be downstreamed on behalf of its clients, and instead will be used to [buy futures|buy steepeners|prepay 2011 bonuses|buy more treasuries for the BONY $60 billion Treasury rainy day fund].

In essence, through its conflict of interest, its unshakable negotiating position, and its facility to determine collateral requirements and variation margin, Goldman can expand its previous position of strength from dictating merely AIG and Federal Reserve decision making, to one which determines sovereign policy! This is unmitigated lunacy and a recipe for financial collapse at the global level.

2010 is not proving to be an auspicious start for the Paulson & Co. multi-billionaire (or any other hedge fund manager for that matter). Bloomberg has disclosed that John Paulson's recently launched gold fund has dropped 14% in January. Hopefully massive long exposure in Bank of America stock (anecdotally, and somewhat imprudently, unhedged with CDS) has made up for the disappointing beginning.

Dear Congressmen, please read this before your questioning of Tim Geithner tomorrow. A complete and thorough investigation by David Fiderer, into what is allegedly the greatest (Goldman-facilitated) taxpayer heist in history for the sole benefit of the self-proclaimed Masters of the Universe.

Also, Dear FRBNY general counsel Thomas Baxter - please tell us how the below is wrong? Because it would appear your proclamations of saving the world are not only self-serving, but flawed and hypocritical beyond measure:

"The party line, expressed in Too Big To Fail and elsewhere, is that an AIG bankruptcy posed a greater systemic risk than a Lehman bankruptcy, because AIG was so much bigger. But that analysis is highly superficial and very misleading. AIG itself was a holding company, which guaranteed the debt of its unregulated financial subsidiary, AIGFP. The lion's share of AIG's revenues and profits, and about 80% of its consolidated assets, were concentrated among its different insurance company subsidiaries. Those insurance companies were solvent. They did not pose any systemic risk. In fact, it's quite likely that they would have continued to operate outside of bankruptcy.

The only subsidiary with major problems was AIGFP, whose financial obligations were guaranteed by the parent. But AIGFP was only about one-third the size of Lehman. It's almost impossible to see how AIGFP ever posed a systemic risk, unless everyone's intention to provide a backdoor bailout to the banks. Put another way, it seems that the only reason that the government needed to step in for AIG was to provide a backdoor bailout to its banks."

A talking point that has gripped the media in light of the sudden weakness ahead of the Ben Bernanke reconfirmation process, is the question of who should succeed the Fed Chairman, should he fail to obtain the requisite number of votes to continue. Many have said "Ben is bad, but anyone that would come after him would likely be even worse." While this is true for any of the potential successors (Donald Kohn, ex-Morgan Stanley banker Kevin Warsh, community-banker Elizabeth Duke, Daniel Tarullo, or ex-Goldmanite Bill Dudley, and speaking of the New York Fed, where Jeff Immelt is a Class B director: did Jamie Dimon, whose membership expired on December 31, 2009, get the Goldman renewal vote?), this is not an exclusive case. Which is why Zero Hedge proposes the candidacy of Stanford economist, and "Taylor Rule" creator, John Taylor for the post of Chairman of the Federal Reserve.

For all who want to get up to speed on next week's political theater involving AIG, Tim Geithner, Goldman Sachs' Stephen Friedman, Goldman Sachs' Bill Dudley, Goldman Sachs' Lloyd Blankfein, and the endless taxpayer bailouts, here is a terrific timeline for everything relevant to the AIG soap opera. Courtesy of Bloomberg.

The last thing we need is moral hazard in media ...

Today there is still an unbelievable opportunity to invest in gold that will disappear over the next several years as this monetary crisis deepens. Despite the general widespread sentiment of Western financial advisers that they have missed the run-up in gold and now it is too late to buy, this is not true at all.

Just like football, life is a game of inches. As world leaders gather in Copenhagen this week to discuss measures to protect our climate, is there enough political will to do what's right for the environment and the global financial system?

It's a scam ...