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Goldman Sachs Never Loses

The Vampire Squid...

Thursday, November 5th, 2009 - By Steve Christ

I'll be the first to admit that this story isn't exactly news.

But with all of the negative press Goldman Sachs has received lately I suspect it is a story that most people are probably unaware of.

You see, from its permanent place in the catbird's seat, Goldman actually cleaned up as the housing market crashed.

So I have included a snippet of the story here, but if you're interested in how the vampire squid always manages to come out on top you should probably read the whole thing.

From McClathy by Greg Gordon entitled: How Goldman secretly bet on the U.S. housing crash

"In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.

Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.

Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.

Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.

"The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's banks. "This is fraud and should be prosecuted."

McClatchy's inquiry found that Goldman Sachs:

Bought and converted into high-yield bonds tens of thousands of mortgages from subprime lenders that became the subjects of FBI investigations into whether they'd misled borrowers or exaggerated applicants' incomes to justify making hefty loans.
Used offshore tax havens to shuffle its mortgage-backed securities to institutions worldwide, including European and Asian banks, often in secret deals run through the Cayman Islands, a British territory in the Caribbean that companies use to bypass U.S. disclosure requirements.
Has dispatched lawyers across the country to repossess homes from bankrupt or financially struggling individuals, many of whom lacked sufficient credit or income but got subprime mortgages anyway because Wall Street made it easy for them to qualify.
Was buoyed last fall by key federal bailout decisions, at least two of which involved then-Treasury Secretary Henry Paulson, a former Goldman chief executive whose staff at Treasury included several other Goldman alumni."

The game is rigged and we are the stooges.

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Strategic Defaults: 588,000 Borrowers Say "Ciao Baby"

It's a business decision plain and simple

Wednesday, November 4th, 2009 - By Steve Christ

According to the National Association of Realtors (NAR), pending home sales rose again, marking eight consecutive monthly gain - the longest streak since measurement began in 2001.

That led NAR chief economist, Lawrence Yun, to confidently predict his fifth or sixth bottom in housing—but who's counting... besides me.

"Home values will stabilize sooner rather than over-correcting," Yun said, "That, in turn, will mean wealth stabilization for the vast number of middle-class families and lay the foundation for a durable economic recovery."

Of course, how solid that bottom may be depends largely on the mess the housing bubble left behind. Because for many of those that bought at its peaks, the dream of home ownership has ended in the road to ruin.

So much so that it makes more sense to turn in the keys these days , than it does to keep making the payments.

From USA Today by Stephanie Armour entitled: More walk away from homes, mortgages

"When Sharon Sakson was laid off recently from her job as a television writer and producer, she burned through her savings to pay the $2,400 monthly mortgage on her home. But she soon decided it didn't make sense: Her home was worth thousands less than the mortgage she carried on it.

The home had been appraised at $390,000 when she refinanced in 2006, but she estimates it's not worth the $320,000 it initially cost in 2004. So Sakson did what a growing number of homeowners are doing today: She stopped paying and decided to let the bank take her home.

"I'm walking away from my house," says Sakson, 57, who stopped making payments about six months ago on her home in Pennington, N.J. "The bank can have it."

What Sakson did is called a strategic default, or a voluntary foreclosure, and it's fast becoming a major challenge to the government's $75 billion effort to keep distressed borrowers in their homes. Walking away from a mortgage is serious business - it can knock 100 points off your credit score and make you ineligible for a new mortgage for seven years. Yet, about 588,000 borrowers walked away from homes last year, double the number in 2007, according to a recent study by credit-scoring firm Experian and management consultants Oliver Wyman. While home prices are rising, the increases pale compared with overall drops in home prices since 2005 that threaten to push millions more homeowners into Sakson's predicament, owing more than their homes are worth and seeing little chance of rebuilding equity soon.

More will walk away, which will hamper the housing recovery, reinforce lenders' tight credit policies and drag on the economy's recovery, economists say.

‘It's increasingly a more important factor driving the foreclosure crisis,' says Mark Zandi, of Moody's Economy.com. ‘As we move forward, the job market will stabilize, and the big thing will be strategic defaults. People are going to determine it doesn't make financial sense to hold on to their homes. That's going to be a significant problem. Strategic defaults mean foreclosures could be high for a long time.'"

By the way, according to Ivy Zelman, CEO of Zelman & Associates, the foreclosure wave could reach as high as 3 to 4 million distressed homes this year, since 3.7 million homes are either already in the foreclosure process or are at least 90 days past due.

That's an important distinction, since a recent analysis of foreclosure rates by the Amherst Group showed cure rates for these loans are practically non-existent. The Amherst data noted a near 0% cure rate of all loans in foreclosure, while loans 90 plus days past due were cured only 0.8% of the time.

As for loan modifications, you can practically forget them - 70% of all loans re-default within 12 months. You can add them to the total pushing the number even higher.

As for walk-aways, it's a business decision plain and simple.

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Buffett Buys Burlington Northern

Another Long Term Bet on America

Tuesday, November 3rd, 2009 - By Steve Christ

A mere few weeks after Burlington Northern reported a 30 percent drop in third-quarter revenue, Warren Buffett decided that was a sign to jump in.

This morning the famed investor decided to buy the shares he didn't already own for $34 billion. If approved, it would be the biggest bet ever for Buffett's Berkshire Hathaway.

From the AP by Samantha Bomkamp entitled: Buffett's Berkshire buying Burlington Northern RR

"Warren Buffett's Berkshire Hathaway Inc. on Tuesday agreed to buy Burlington Northern Santa Fe Corp., making a $34 billion bet on the future of the U.S. economy.

Burlington Northern, the nation's second-largest railroad, is the biggest hauler of food products like corn and coal for electricity, making it an indicator of the country's economic health. The railroad also ships a large amount of goods — including everyday items such as refrigerators, clothing and TVs— from Western ports like Los Angeles, Long Beach, Calif. and Seattle.

Analysts say Buffett is planting both feet in an industry that is poised to grow as the economy gets back on solid ground. If approved, it would be the biggest acquisition ever for Berkshire Hathaway Inc.

Berkshire Hathaway already owns about 22 percent of Burlington Northern, and said it will pay $100 a share in cash and stock for the rest of the company, a 31.5 percent premium on Burlington Northern's Monday closing price. Shareholders have the option to convert their stock for a cash payment of $100 per share or receive Berkshire Class A or Class B common stock. Up to 60 percent of the deal is cash and 40 percent is in stock.

"Berkshire's $34 billion investment in BNSF is a huge bet on that company, CEO Matt Rose and his team, and the railroad industry," Buffett said in a statement.

"Most important of all, however, it's an all-in wager on the economic future of the United States. I love these bets," he said"

Love him or hate him, you would have to admit the guy is pretty sharp.

That being said, a 30% premium seems pretty high on this one. Since when does a railroad merit a 20 P/E?

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Stiglitz: Recession "Nowhere Near" Over

Reality Check Ahead

Monday, November 2nd, 2009 - By Steve Christ

Fresh off a decent GDP number, the bulls have had tough time gaining traction in the markets lately.

It may just be because the markets realize that the +3.5% gain in the third quarter was achieved primarily with assistance of smoke and mirrors.

After all, without a healthy push from Uncle Sam, the gains practically would have been non existent.

So while some cheerleaders have used the numbers to make the case that the recession is over, a closer look at the figures leaves them riddled with doubt.

That's the opinion of Joseph Stiglitz who recently said that we have much farther to go before we can claim victory over the downturn,

Here are the details...

From Bloomberg by Bob Willis entitled: Stiglitz Says U.S. Recession ‘Nowhere Near' End After GDP Jump

"Nobel Prize-winning economist Joseph E. Stiglitz said the U.S. recession is "nowhere near" an end and the economy's third-quarter growth rate of 3.5 percent, the first expansion in more than a year, won't carry into 2010.

While this week's figures on gross domestic product are "very good," the numbers would be "miserable" without stimulus measures enacted by the Obama administration, Stiglitz said today at a forum in Shanghai. He urged the U.S. and other countries not to pull back on efforts to shore up economies.

"When we look at if workers can get jobs, if they can work full time, if businesses are able to sell goods they produce, in those terms, we are nowhere near the end of recession" in the U.S., said Stiglitz, 66, the former chief economist at the World Bank. The U.S. job market is still "in very bad shape."

The U.S. unemployment rate reached a 26-year high of 9.8 percent in September and economists project it will exceed 10 percent by early 2010.

"The unemployment rate is likely to go up," Stiglitz told reporters two days earlier in Beijing. "Growth won't be fast enough to bring down the unemployment rate."

Stiglitz, a professor of economics at Columbia University in New York, said the growth rate of 3 percent to 3.5 percent needed to create enough jobs for new U.S. labor market entrants was unlikely to be sustained into next year.

It is too early for the U.S. and other countries to begin easing stimulus measures put in place a year ago to avert a financial market meltdown, Stiglitz said.

"For the world as a whole, it's premature to think about exiting stimulus," he said today in Shanghai. Stiglitz became a Nobel laureate in 2001, sharing the prize with George A. Akerlof and A. Michael Spence, both of the U.S., for their analysis of how markets function when buyers and sellers have different information about a product or service."

It will be interesting to see how the market reacts this week if we do get a 10% unemployment figure from the BLS on Friday.

By the way, while everyone was busy yucking it up at happy hour on Friday the FDIC was busy seizing banks. In all, nine failed banks were shut down potentially costing the FDIC some $2.5 billion in the process.

The failure of the nine banks brings the nation's total number this year to 115.

The bad news is there are about 500 more banks on the troubled list.

Related Articles:

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Moody's: No Housing Bottom Until Q3 2010

Housing Has Futher to Fall

Friday, October 30th, 2009 - By Steve Christ

Despite the obvious problems associated with the homebuyer tax credit, the Federal government will apparently do anything to keep the housing ponzi scheme from collapsing any further.

That's why the program is set to be extended soon to cover the spring selling season. What's more, their proposal would also be expanded to allow higher-income Americans and some who already own homes to qualify for the tax break. Yippee more "free" money!!!

That's true even though the existing program has turned out to be exactly what you would expect from Uncle Sam: All smoke and dubious results.

In fact, according to estimates by Ted Gayer at the Brookings Institution, each additional home sale generated by the $8,000 first-time homebuyers' tax credit actually costs the government $43,000 for each additional sale.

It's madness I tell you.

Besides, according to Moody's this is one collapse that can't be stopped....

From Bloomberg by Jody Shenn entitled: Moody's May Downgrade Mortgage Bonds With New Outlook

"Moody's Investors Service said it's planning a review of U.S. home-loan securities that will likely lead to another round of rating changes based on a new view that property prices won't bottom until next year's third quarter.

The firm will boost its loss projections by "significant" amounts for prime-jumbo, Alt-A, option adjustable-rate and subprime mortgages backing bonds issued between 2005 and 2008, also after seeing higher losses per foreclosure than expected, Moody's said today in a statement. Recent data showing rising home prices doesn't prove the slump is over, the company said.

"The overhang of impending foreclosures and the continued rise in unemployment rates will impact home prices negatively in the coming months," New York-based Moody's said. Since the first quarter, the company has assumed in its mortgage-bond ratings that housing prices would bottom at the end of this year.

Ratings reductions typically boost the capital needs of bondholders such as banks and insurers and force some investors to sell debt. Moody's and Standard & Poor's, criticized by lawmakers for assigning top grades to mortgage debt proven too high by later defaults, have already cut ratings on hundreds of billions of dollars of notes in the $1.7 trillion market for so- called non-agency mortgage bonds, which lack government backing, lowering many securities multiple times."

Here's a bet home prices fall another 10%—-no matter how hard they try to prop them up.

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Third Quarter GDP Surprises To The Upside

But the devil is in the details

Thursday, October 29th, 2009 - By Steve Christ

According to the Bureau of Economic Analysis (BEA), the U.S. economy expanded at a 3.5% pace during the third quarter, delivering some faint hope to the idea the recession may be ending.

However, within the report we also learned that without the cash for clunkers program and the homebuyer tax credit, real GDP growth for the quarter likely would have been something closer to 1.9%.

That's less than the estimated 2% growth rate that is necessary to otherwise be left standing still.

Even still, it's hard to argue with the fact that +3.5% is much better than -6.4%.

Also from the BEA release:

• Real gross domestic purchases - those made by U.S. residents of goods and services produced anywhere - increased 4 percent in the third quarter, compared with a 2.3 percent decrease in the second quarter.

• Current-dollar personal income decreased $15.5 billion, or 0.5 percent, in the third quarter, compared with an increase of $19.1 billion, or 0.6 percent, in the second quarter.

• Personal current taxes increased $4.8 billion in the third quarter, compared with a decrease of $119.1 billion in the second quarter.

• Disposable personal income decreased $20.4 billion, or 0.7 percent, in the third quarter, compared with an increase of $138.2 billion, or 5.2 percent, in the second quarter.

• Personal outlays increased $148.2 billion, or 5.8 percent, in the third quarter, compared with an increase of $8.2 billion, or 0.3 percent, in the second quarter.

• Personal saving - disposable personal income less personal outlays - was $364.6 billion in the third quarter, compared with $533.1 billion in the second.

• Current-dollar GDP - the market value of the nation's output of goods and services - increased 4.3 percent, or $150.3 billion, in the third quarter to $14.3 trillion. In the second quarter, current-dollar GDP decreased 0.8 percent, or $26.8 billion.

You do have to wonder though how the economy will respond once all of these government programs come to an end.

After all, beneath today's numbers, the underlying problems still remain.

As for the much hyped Cash for Clunkers program, here's a post mortem on that fiasco.

From CNNMoney by Peter Valdes-Dapena entitled: Clunkers: Taxpayers paid $24,000 per car

A total of 690,000 new vehicles were sold under the Cash for Clunkers program last summer, but only 125,000 of those were vehicles that would not have been sold anyway, according to an analysis released Wednesday by the automotive Web site Edmunds.com.

The Cash for Clunkers program gave car buyers rebates of up to $4,500 if they traded in less fuel-efficient vehicles for new vehicles that met certain fuel economy requirements. A total of $3 billion was allotted for those rebates.

The average rebate was $4,000. But the overwhelming majority of sales would have taken place anyway at some time in the last half of 2009, according to Edmunds.com. That means the government ended up spending about $24,000 each for those 125,000 additional vehicle sales. (emphasis mine)

In order to determine whether these sales would have happened anyway, Edmunds.com analysts looked at sales of luxury cars and other vehicles not included under the Clunkers program.

Using traditional relationships between sales volumes of those vehicles and the types of vehicles sold under Cash for Clunkers, Edmunds.com projected what sales would normally have been during the Cash for Clunkers period and in the weeks after.

Edmunds.com's estimate of the ultimate sales increase generally matches what industry experts had thought, said George Pipas, a sales analyst with Ford Motor Co."

By the way, according to the forecasts, the economy will likely grow at a 2.4 percent annual rate from October through December. GDP will also grow 2.4 percent next year and 2.8 percent in 2011, the surveys have showed, compared with an average of 3.4 percent growth over the past six decades.

The difference is significant.

Related Articles:

The Madness of Extending the Home Buyer Tax Credit

The Cash-for-Clunkers Hangover

"Shadow Inventory" Looms Large in Housing

Home Buyer Tax Credit Gives Way to Fraud -

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Dollar Up, Dow Down

All eyes are on the greenback

Wednesday, October 28th, 2009 - By Steve Christ

Dollar up.....Dow down. It's not much more complicated that that these days.

In fact, here's a look at the recent correlation between stocks and the greenback using the PowerShares DB US Dollar Index Bullish (NYSE:UUP) as a proxy for the dollar

First, in the long term....

....then over the last 5 days.

Any questions?

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Roubini Predicts a Dollar Reversal

Dollar Up, Dow Down

Monday, October 26th, 2009 - By Steve Christ

Here's another great interview from Nouriel Roubini. He appeared on CNBC this morning explaining how the dollar carry trade has helped to inflate the markets —from stocks to commodities—to bubbly valuations.

The famed bearish economist told CNBC,"Now we are in the mother of all carry trades" noting that cheap dollars are pushing asset prices higher across the board.

The danger, he said, is when this trade reverses and the dollar inevitably heads higher. At that point, Roubini warned , there could be "a market crash all over the world"

Here are the cheery details.....

As for the dollar, the correlation with the rest of the market remains as strong as ever. In fact, when the dollar (UUP) rallied this morning the Dow (DJI)fell 200 points off the high.

Take a look:

Dollar up, Dow down....it is as simple as that.

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