Thursday, March 20, 2008

The FED Cannot Spawn Qualified Borrowers

If you are the sort that celebrates Easter, then Happy Easter Weekend! I sometimes get Good Friday off, sometimes not and this year I do not, so one more day in the week. Quite a bit to cover and a little short on time, so lets have at it!

A Fine Line Between Courage and Stupidity
A few nights ago you may recall a funny quote after the Bear Stearns deal was announced that an analyst made, it was "This is the crescendo of the crisis". I poked fun at the statement at the time and filed it away as a candidate for dumbest line of the year. Well apparently the same guy wants to enter more than one entry into the contest, and so he ramped up his hyperbole today. Check it out:
US financial crisis is over, says Punk Ziegel's Bove
March 20 (Reuters)
- The U.S. financial crisis is over but problems facing the economy are not, said Richard Bove, financial analyst with broker Punk Ziegel, adding that this was a "once in a generation" opportunity to buy bank stocks."I do, in fact, believe that the crisis is over. There will be more negative developments but they will be meaningless," Bove wrote in a note to clients."This comment sounds ridiculous given the conviction on the part of most commentators that the worst is yet to come; the extent of the decline is unknown; and that the length of the decline is similarly unclear," Bove wrote."An environment has been created that will pump profits into the American banking system," Bove said."Investors are so focused on the potential for loan losses and the flawed valuations created by an obscenely invalid accounting rule supported by a soporific SEC (Securities and Exchange Commission) that they are missing this fact."
And thus Richard (Lets call him DICK) Bove takes a stand. I actually admire the guy, he has a position and he is putting it out there.

I guess I would give his call more weight if his commentary made any sense. The financial crisis is over, but the economy is still on the rocks? OK. Negative developments will be meaningless? All right. using the ultra lax SEC approved book cooking rules hides real profits? Whatever. I think Mr. Bove was on recreational drugs when he made these statements. I could spend all night on this hilarity, but I think you know why this call is foolish and wrong. Time will tell who is right, and who is dead.

Again, I cannot help but think back to the amazing steps the FED has done to throw money at this problem. This is getting a bit dicey as analysts like Bove are calling the bottom, but the bottom is based on more access to FED cash. There is only so much, but the street wants to believe the cash is indeed infinite. Moral Hazard again, as implied FED rescue form every problem is beginning to permeate the markets. Check out CIT today. This company has to tap its credit lines to stay afloat, and all the talk is about how if the company is in trouble, the FED will bail it out anyway. The floodgates are open.

The FED Cannot Spawn Qualified Borrowers
While helicopter cash drops and bank bailouts may be available to the FED, as far as I know they cannot clone humans or spawn good borrowers. Plus, cloning of humans is illegal in the USA, but who knows what special authority the FED has these days?

The problem facing the housing market right now (and filters into the mortgage paper, banks, etc you know the progression) is that HOMES ARE TOO EXPENSIVE. Prices must come down. Nothing can stop that now. Because risk has been severely mispriced, it is now going to swing the other way and become at least somewhat accurately priced. This headline sums up the FED dilemma all by itself:
Leery Lenders Demand More From Borrowers
Thursday March 20, 5:33 pm ET By Alan Zibel and J.W. Elphinstone, AP Business Writers
Banks Remain Wary of Home Loans; Lending Standards As Strict As They Were 20 Years Ago

And with that GAME OVER. The article tells the tale of mortgage insurers not accepting applications from basically all of the hot areas. California, Arizona, Florida, and Massachusetts are all blacklisted. This means that in order to qualify for a loan you will now need:
  • With immaculate credit, you need 10% down
  • With great credit you need 20% down
  • With poor credit, you are going to need allot of help

So that's it, and that's all. Going forward, if these lending standards are kept, the housing market is finished for years. Even just 5% down, and good credit will end housing as a major driver of the economy. This is what the FED, Mr. Bove, and others simply do not get. The only way to reignite the housing market to to re institute liar loans, no doc no money down, negative amortizing ARMS, and the like. That will not happen. Prices can only rise with an ever expanding amount of buyers. New guidelines for Fannie an Freddie mortgages will only qualify a select few borrowers. And most with real cash and great credit will not be so dumb as to chase prices higher as they are falling.

So unless the FED can print enough cash to return the ultra lax lending that was the norm for years, I think we are in for more problems. Commercial loans are now JUST STARTING to go south, and residential loans are picking up the default pace at rates NEVER seen before in history. The FED can spawn dollars by the ton, but they cannot spawn qualified borrowers.

Have a good night.


Anonymous said...

The smack was thrown down on metals today. Guess my coin dealer will be seeing me in the morn.


PS: This pull back of metals and a MINOR run up in the markets and dollar is meaningless. Though I could go for $10/oz silver so I can backup the truck. But $16 sounds great vs $20+

Anonymous said...

I have immaculate credit but until I can borrow at the same rate as the unregulated investment banks are getting from the FED with a 1972 Pinto as collateral I'm not interested and besides that I don't need the money anyway.

More then likely the investment banks are borrowing from the FED and then buying their own stocks as a way of boosting their capital. Don't know, could be.

Anonymous said...


"But $16 sounds great vs $20+"

I sold 250oz last week at 21, I bet the guy that bought it is thinking the same thing right now. I may buy some back but it would need to get to about 14.5 before I go real interested.


watchtower said...

We got a good weather day here finally, upper 50's, not a cloud in the sky. Loaded up the mountain bike and went riding this evening. Seen the sun set on the lake that I ride around, sure beats the last couple of days around here what with all the rain.

@ Kevin

Say, what kind of mileage are you getting out of that Pinto? I might just take that off your hands:)

TexasRadio said...

This is the same Richard Bove that put a 'buy' on Citi right before it tanked out another 29%...a fact that Bloomberg helpfully noted in their article about his latest prognostications. Look for a massive sell-off in the financials soon.

Why the billionaire dude thought Bear a good investment, it makes one wonder. I mean, anybody that rich has plenty of time to sit around and research the hell out of such an investment. As Bear is reputed to have been a mortgage securitization phenomena, one might conclude that the implosion of mortgage security sales could affect the stock price. Whodathunkit?

Anonymous said...

Attention one UGLY chart here.

Watchtower: I don't have a 72 Pinto anymore but back in the late 70's I had 2 of them which were both station wagons, I drove the wheels off of those things and when I sold them I got my money back. That was the first thing that popped into my mind as an example, I think I gave less then 750 for them used. I'm tight as bark on a tree and have never and never will buy a new vehicle, as a mechanic the economics just never added up.

Sounds like margin calls hit commodities today and there was only one trading desk open which got swamped, manipulation? probably the ones with a vested interest want to see them fall hard.


getyourselfconnected said...

I had the same thought about the investment banks:
Trade your bad paper to FED for cash;
Take the cash and buy your own and/or other bank stocks to lift sector;
Pay an analyst like Bove to scream "This is the bottom";
Crisis averted.

Occams razor says that is the most simple explainantion!

1972 Pinto! Sweet ride. 1972 saw the last of the Camaro SS models made, as well as the change from "Gross" horsepower ratings to "Net" ratings which dropped the published power of engines by over 30%! The end of the muscle car era.

watchtower said...

I kid you not, when I was younger my dad bought a 74 Pinto for $400 as a workcar so my mom could go to town in the other car. I was 14 years old at the time, and on the weekends dad would let me drive through the country backroads to go fishing or whatever. (I had a great childhood, thanks to my parents)
That Pinto was a lot more reliable than what a person would think it would be.

Have you seen the pictures of the new "retro" Camaro they are coming out with?

Anonymous said...


I had a 66 Mustang also until I wrecked it in 73 but for all the hype those were a sad car mechanically, the gas tank was the bottom of the trunk and the front end on them was a disaster that you never could keep in alignment. They looked good but as far as a sound car they were far from it.

Anonymous said...

I'm thinking although admittedly I could be way off base, that as part of the deal with the IB's for their money for junk exchange program was that part of the deal was to get commodity prices down by first dumping their commodity holdings and then hit the hedgies with margin calls forcing more selling, this whole thing and the timming of it stinks and Ben and company have a desperate need to get those prices down.


getyourselfconnected said...

It does make sense. Benny would need the headline inflation in commodities to come down a bit to go to zero on rates.

I might have to do a car blog tonight!
The retro camaro is pretty wild, and it comes with the LS2 V-8 which is an excellent engine. My favorite engine for looks only was the L-98 engine with its snake like inatke runners! Very awesome, though the engine was pretty weak. I am a GM muscle car guy, never got into the Ford motor products as much.