The XBroker: Contrived Attrition? Washingtons Play in The Fall and Rise of Wall Street

Contrived Attrition? Washingtons Play in The Fall and Rise of Wall Street

Many pundits speak about these turbulent times as a recession, depression or somewhere in between.  I personally like to view the glass half full and pronounce this time in our economy's history as an epic correction.  Times of unprecedented growth are almost assuredly followed by times of unprecedented 'shrinkage'...you know, markets are cyclical in nature, yada-yada-yada.

However, there are some interesting facts to consider besides traditional logic...

Contrived Attrition?

The ironic part is that the forces that helped bring this market to its knees may be the same that build it back up.  Let me explain...

Back in July 2008 I questioned whether some of 'this' wasn't a bit contrived...I still do.

These two posts written in July 2008 speculated on possible alternative reasons Fannie and Freddie stock was plummeting...special note to the link citing the  Financial Accounting Standards Board decision to favor a simpler accounting method for Qualified Special Purpose Entities that serviced mortgages into securities for the benefit of adjusting distressed borrowers ARM's.  What?  In a nut shell, at the end of the day, lenders wouldn't be able to bury losses from the public's eyes like they used to and their financial reports would suffer.  

Coincidentally or not, on July 6, 2007 the SEC eliminated the 'Uptick Rule' which was implemented in 1938 to curb the type of concentrated short selling of stocks where speculators make money when the stock price drops.

New accounting methods for financial institutions will show increased losses on paper, naturally priming the pump for plummeting stock prices.  Sans uptick rule, speculators smell bearish conditions and short stocks with fervor, driving companies and portfolios values into the ground. 

By October 2008 blood was in the streets and investors start shorting financial institutions stocks in historical volume, acting as if they were...going out of business...? Fannie and Freddie are sequestered from the chaos.

Conventional money (401(k), Mutual Funds, regular people etc) got the hell out of the way and out of the market.  Institutional investors ate each other for lunch. Everything went 'Pear Shaped'.  Many stocks are today worth less than 50% of their value from 18 months ago.

The Government announces plans that they are going to Bailout 'the worthy' using a hodge-podge of methods, some useful others akin to little more than a circle-jerk, including buying preferred and common shares of these floundering financial (and related industry) behemoths that are 'too important to fail'. 

The Return of 'Favorable' Accounting and Keeping The Bears on a Leash...

March 10th 2009...The Dow surged 6%+ on the following news (Courtesy Wall Street Journal)

Federal Reserve Chairman Ben Bernanke said in a speech it was important to address the valuation of illiquid assets. Banks want leeway in accounting for illiquid holdings, and investors were encouraged by Mr. Bernanke's statement, though he said that he wouldn't support the suspension of mark-to-market rules.

"Bernanke said the magic words -- that the Fed was considering looking at accounting standards," said Fred Dickson, market strategist at D.A. Davidson.

It would appear after looking at yesterdays market swing that the accounting standards that Mr Bernanke is alluding to will favor banks, shoring up value in investors eyes, hence the mini-rally. Were his words transcribed as 'We'll let you get back to some creative accounting soon'?  It looks that way.

Barney Frank also stated the SEC may reinstate the 'uptick rule' as early as April, which has to re-establish overall market confidence by keeping the Bears on a bit of a leash, mitigating the extreme volatility.

Is it That Crudely Simple?

Was this all contrived to flush out all of the 'toxic' securities faster rather the wade in the muck for years?  Where the floodgates purposely opened only to close them back up when the time was right?

I'm often asked when I think the real estate and mortgage market will bottom out.  My answer usually coincided with the end of the 2-5 year period after NINJA (No Income/Asset/Job) loans were banished from the marketplace...around September 2007...so September 2009 is when support could naturally start to manifest. 

There are now a myriad of artificial factors suggesting this 'time to bottom' could be 'moved up'.  Coupled with the news yesterday, it very well could be sooner (end of '09) rather than later (end of '12).  

A real sign that the markets are back on track would be when lenders will get back to sensible underwriting standards.  From 2002 to 2007 mortgage underwriting was as fast and loose as a brothel in Amsterdam.  2008-current, you can't pull a pin out of a lenders ass with a John Deere tractor they're so tight.  There is a middle ground, which is a topic for another post...

I'm not here to call the beginning of the end to these crazy economic times, there is still a looong way to go with many details to be worked out and ups/downs in front of us...I just can't help but wonder aloud if aspects of this 'economic meltdown' weren't contrived to push the crap out of the system quicker, knowing full well there would be (justified? acceptable??) collateral damage...It sounds ridiculous to say, yet resonates as plausible to the (my) mind...

 

Comment balloon 35 commentsJeff Corbett • March 12 2009 10:12PM

Comments

Interesting idea, for sure.  This is one of those things in our history that we will probably never know... the absolute truth anyway.

Posted by Krista Fuchs, Chester County Realtor - (484) 459-8025 - Home Buying and Selling (Prudential Fox & Roach) about 10 years ago

Jeff- It's like you've been bugging my house.  I had such a similar conversation with my husband on the the valuation of illiquid assets last night as he was saying... maybe we can open our smith barney statements next month hun? 

I hope it's sooner rather than later than we get back to some sensible underwriting standards.  I had a lender recently say that when our state's outgoing governor couldn't qualify for a loan, maybe they would loosen them back some.  I agree they were insane from even before 2002, sub prime lending started back in the 90's and I saw people coming into my office with pre-qual letters that really had no business with them at all.  One of the foreclosures in my area was my on of my neighbors houses, their loan was made in 1997.  11 years later they defaulted and still owed nearly as much as they borrowed.  As I had the listing and it was a local lender that had "worked with" them time and time again as they would fall behind it finally came to an end.  They never got anywhere because they always just paid interest and were late on more than 90% of their payments.  Yet I know these people had also purchased a boat, several new cars and ate out 5 nights a week.  WTF?  Yet someone in congress thought it was a good idea to give EVERYBODY a loan for home and forced lenders to make loans they knew would never be repaid.

I too pulled much of my money from the market last fall when things started to go south and I saw the "writing on the wall" so to speak.  It has been much safer in my nearly no interest savings account.  At least I still have my original deposit.  And I may be soon venturing back into the market.  Seems like a good time to get in.

Today I'm glad to see the market was able to hold on to yesterday's gains.  I think we will bottom ride for a while before we go up.  I just hope your logic and thoughts on the matter are right and the time to bottom can indeed occur sooner rather than later.

Posted by Tammy Lankford,, Broker GA Lake Sinclair/Eatonton/Milledgeville (Lane Realty Eatonton, GA Lake Sinclair, Milledgeville, 706-485-9668) about 10 years ago

The only real problem I see is that there owuld have to be a lot of cooperation between the Bush Administration and the Obama Administration... of course, we do have a few of the players holding over, even if they changed positions... like Geithner. 

Posted by Lane Bailey, Realtor & Car Guy (Century 21 Results Realty) about 10 years ago

I'll have to reread when I haven't had a glass of wine.

Posted by Fran Gatti, Managing Principal Broker - RE/MAX Integrity (RE/MAX Integrity) about 10 years ago

I'll have to re-read after I've had a glass of wine.

 

Posted by Joetta Fort, Independent Broker, Homes Denver to Boulder (The DiGiorgio Group) about 10 years ago

Couple other related articles published today:

http://online.wsj.com/article/SB123685627464206601.html

Stock markets also drew strength from hopes for a change in mark-to-market accounting rules. The chairman of the Financial Accounting Standards Board pledged at a Congressional hearing to offer more guidance on the rule in three weeks.

 

http://www.floridamortgageblogger.com/2009/03/12/florida-mortgage-rates-worsen-market-market-accounting-rule-reversal/

 

 

Posted by Jeff Corbett (BoomTown) about 10 years ago

CAP rates are inverse of PE. CAP rate can be converted into PE by using the formula: 1/CAP = PE, e.g., 1/0.08 = 12.5.

A CAP rate of 5% would correspond to a PE Ratio of 20. This is crazy buying in the commercial RE world.

A CAP rate of 8% would correspond to a PE Ratio of 12.5. This is where most commercial properties are sold.

A CAP rate of 10% would correspond to a PE Ratio of 10. This is a great deal.

The real estate CAP rates indicate what the owner is ACTUALLY making. A Wall Street PE is based on what the company "reporeted" to have made.

The stockholder makes 1/10 of the company profits, if that, through dividends. Most companies tried to sell the idea that appreciation was the return on investment, which is hog wash.

What is the point of "keeping the Bears on a bit of a leash" in the Wall Street Casino? Isn't this one of the rules of free-market to let the hot-air out of the stock valuations?

 

Posted by Lee Ali (Las Americas Real Estate) about 10 years ago

Jeff, you've given me a migraine.

I think I will have a pitcher of Vodka Gimlets, ya'll just wake me when it's over.

At least then I will know why I have a splitting headache!!

Posted by Ann Hayman, GRI,CDPE,IRES, Jacksonville, FL. Gated Communities , Real Estate (Norville Realty) about 10 years ago

I suspect there is a lot of truth in your musings.  Am I the only one who finds it interesting that Fannie, Freddie & company seem to putting huge obstacles in the paths of buyers that almost force them not to buy.  They talk of affordable housing and clearing up the housing problems and then make it incredibly difficult to buy a condo, which in most of CA,  is affordable housing.

I have a buyer looking at a $1.5 townhome with over 50% down and they are going to charge him an extra 3/4 of a point on the interest rate.  NUTS!

Posted by Kaye Thomas, e-PRO, Manhattan Beach CA (Real Estate West) about 10 years ago

Jeff, Let us know when you get back in the market so we can join you. Fergie

Posted by Fergie Crill about 10 years ago

Thanks for the CAP rate and PE ratio explanation Lee...points well taken.

What is the point of "keeping the Bears on a bit of a leash" in the Wall Street Casino?  Isn't this againt the rules of free-market to let the hot-air out of the stock valuations?

Thats a tough question to answer without sounding insensitive.  I'm all for free-market principles and in most situations favor keeping the hands off the wheel, allowing markets to work themselves out. 

What I have choosen to call attention to is the flip-flopping.  Why abandon the uptick rule and adjust accounting methodologies that exerted epic downward pressure only to reverse these provisions in a relatively short amount of time?  Were the Bears let off their leash to feast on tainted red meat, to let the air out of entire industries?  Me thinks yes.

Someone made the decision to flush out the market very quickly rather than get bogged down in a decades worth of ineffective lobbying and legislation.

 

Posted by Jeff Corbett (BoomTown) about 10 years ago

Fascinating thoughts Jeff... 

Perception has been the powers to be are idiots but like good magicians, when you really think and look beyond the obvious, that's where the amazing illusions are taking place.

Take it one step further and think about everybody that was getting ready to collect social security (the next big crisis) and live off of their 401K's... until the market chaos turned their 401K's into 201K's and put retirement on hold... Hmmm...

More fuel for Conspiracy theorists... LOL!!!

Posted by Paul Francis, Las Vegas Real Estate Agent - Summerlin Homes (Francis Group Real Estate) about 10 years ago

"A real sign that the markets are back on track would be when lenders will get back to sensible underwriting standards.  From 2002 to 2007 mortgage underwriting was as fast and loose as a brothel in Amsterdam.  2008-current, you can't pull a pin out of a lenders ass with a John Deere tractor they're so tight."

Kaye, expanding on what Jeff is saying above, if banks lent wisely, we would not have booms, and if banks were flexible with their troubled borrowers, we would not have busts. Foreclosures kill valuations.

What is the point of requiring 20% down when the prices have dropped 20%, 30% and much more (in certain MSAs) already?

Income verfication and ratios should be good enough to get rid of the excess inventory.

Lee

BankFreeInvesting.com

Posted by Lee Ali (Las Americas Real Estate) about 10 years ago

I share your concerns, Jeff, about the timing of the uptick removal and then its upcoming reinstatement.

I am sure that a lot is going on in the background among Wall Street, US Government, international agencies, soverign wealth funds, etc., that we don't know about.

That's why I focus on the empirical stuff. :)

Posted by Lee Ali (Las Americas Real Estate) about 10 years ago

Hmm, the auto industry is struggling, partially due to the weight of their pensions.

Bush tried to turn social security into an IRA.

Social Security is a type of pension.

Wonder when the U.S. will start struggling due to the weight of the Social Security pensions?

Posted by Loan Survivor Real Estate Financing Expert (Purchases, First Time Buyers, Pre-Approvals, Refinance) about 10 years ago

Drew,

This is the sequence: Company Pensions (Bob Hope Generation) -> Social Security (Older Boomers) -> IRA/401K/SEP, etc. (Younger Boomers) -> Crowdfunding/Globalfunding (Disenchanted Boomers, GenX, Mellinials).

Company Pensions: Pretty much out.

Social Security: Government's got it.

IRA/401K/SEP, etc.: Mutual Fund industry is squandering it. https://www.brint.net/forums/showthread.php?t=2103

Crowdfunding/Globalfunding: This has to evolve to eliminate most, if not all, intermediaries between the financiers and the entrepreneurs.

I recommend the Rich Dad Poor Dad series for those who have not read it yet.

http://www.epinions.com/review/Cash_Flow_Quadrant_Rich_Dad_s_Guide_to_Financial_Freedom_by_Robert_T_Kiyosaki_and_by_Sharon_L_Lechter/book-review-7384-42B58408-3A44D408-prod3

Lee

BankFreeInvesting.com

Lee Ali is the author of, “Crowdfunding: The Solution to Eliminate Booms and Busts in Real Estate Forever!”

Posted by Lee Ali (Las Americas Real Estate) about 10 years ago

I've always had a gut feeling a lot was contrived, by who? I have not clue. Too fast.

Posted by Missy Caulk, Savvy Realtor - Ann Arbor Real Estate (Missy Caulk TEAM) about 10 years ago

Beautifully said!  We have a lot of tweeking to do.  I'm not waiting around for the government's stimulus either!  I'll make my own stimulus by cutting costs, overhead and saving money.  The healthy thing that our country needs.  It's not just real estate and stock that's on sale.  Anything that you pay mothly fee's can be renegotiated right now and business are working harder than ever to keep their customers.  I'm tired of getting ripped off!  Time to take back the silver lining America!

Posted by Ryan Prazen (RP Realty Group Inc) about 10 years ago

Jeff, this is very intriguing and anything's possible with the Washington crowd. One thing I read about mark-to-market is that when they lift it that the downward pressure on interest rates will be gone and rates could go up significantly. What do you think about this?

Posted by Sharon Alters, Realtor - Homes for Sale Fleming Island FL (Coldwell Banker Vanguard Realty - 904-673-2308) about 10 years ago

From the comments, I think I wandered into happy hour...good details to ponder Jeff.

Posted by Andrew Mooers | 207.532.6573, Northern Maine Real Estate-Aroostook County Broker (MOOERS REALTY) about 10 years ago

My two cents on Mark-to-Market is that it is needed for government bailout and loan modifications to work.

Banks don't want to do that because they'd rather give up bailout dollars than to Mark-to-Market.

The way to get rid of foreclosures and subsequent hard marking down of real estate, is to mark the loan paper to market.

What would you rather have, few basis point difference in interest rate (which could be controlled relatively easily) or wholesale marking down of real estate (which will take a lot longer to recover once it goes down)?

Check this out: http://dailycapitalist.com/2009/01/10/whats-wrong-with-mark-to-market/

Posted by Lee Ali (Las Americas Real Estate) about 10 years ago

Be sure to send this post to all of those in Washington!  I think they can use all the ideas and perspectives that you have set forth!

Posted by Joan Whitebook, Consumer Focused Real Estate Services (BHG The Masiello Group) about 10 years ago

OMIGOSH --- I'm SO glad I was NOT drinking while reading.

DUDE, you need a WARNING on your posts:  Do NOT Drink and Read!  May cause serious GAGGING REFLEXES!

That was hilarious . . . the pin up the ass of the lender, and the John Deere visual was the most funniest . . . well, let's just say I'm tired this evenng, and you got me ROTFLMFAO.

[Yeah, he's got a point all rght . . . but can he make a good cup of Folgers?]

 

Posted by Carla Muss-Jacobs, RETIRED (RETIRED / State License is Inactive) about 10 years ago

Jeff, I was so involved with your post and in agreement that I about died laughing when I came to the idea of the John Deer tractor and the pin, lol,lol,lol...anyway back to business. dragon1-1.jpg Doctor Ryuzaki with gloves image by Lina_Lawliet

 

tractorrrrr.jpg country girl with john deer tractor image by AngelMarie101

 

I think your idea is perfectly plausible. There is so much we just don't know. I hope you're right about the turn being sooner than later. I really enjoyed this. Thank you.

Deb

Posted by Deb Brooks (Brooks Prime Properties Wichita Falls Texas) about 10 years ago

Jeff - You made a good case for suspecting their actions and your questions are on target.

Why abandon the uptick rule and adjust accounting methodologies that exerted epic downward pressure only to reverse these provisions in a relatively short amount of time?  Were the Bears let off their leash to feast on tainted red meat, to let the air out of entire industries?  Me thinks yes.

 

The revolving door between Wall St and Govt offices fostered an environment of collaboration that made it possible. Just think of how many of the former administration's and the new administrations appointees and staffers came from Wall St. Former Wall St insiders are also working as staffers to members of Senate and Congressional Banking and Finance Committees.

Posted by George Bennett, Inactive Principal Broker, GRI (Inactive) about 10 years ago

@Frank and Sharon-  If the greater economy improves consistently, mortgage rates will assuredly rise.  I imagine they'll be kept in check as the housing market regrows some legs but then the sky's the limit.  With Trillions of dollars of 'new' money in the market, inflation is very very likely.  As inflation goes, interest rates usually follow right behind.  Also, as inflation goes so typically does the value of real estate...many goods will be more expensive.

Posted by Jeff Corbett (BoomTown) about 10 years ago

"2008-current, you can't pull a pin out of a lenders ass with a John Deere tractor they're so tight.  There is a middle ground, which is a topic for another post..."

The megas, BofA, Citi, Chase, etc. don't have to lend.  They have $$$Billions of tax payer money which they capitalized and are satisfying their shareholders' quest for dividends. 

How many mortgages would Chase have to underwrite to garner $25Billion in profits??? 

Posted by Lenn Harley, Real Estate Broker - Virginia & Maryland (Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate) about 10 years ago

X...

I have no well thought out observation or even a thought that is not making my head spin after I read all of that. But, the following cracked me up and somehow I think you had something to do with it :)

That wasn't meant to happen…

Things have gone pear-shaped, and it's completely our fault — sorry!

We've been notified about this problem will fix it ASAP.

TLW...ROAR!

Posted by "The Lovely Wife" (Broker Bryantnulls Wife) The One And Only TLW. (President-Tutas Towne Realty, Inc.) about 10 years ago

OH...

And that's happening on Elaine's  post on the dashboard. Her contact email is giving the same error.

Posted by "The Lovely Wife" (Broker Bryantnulls Wife) The One And Only TLW. (President-Tutas Towne Realty, Inc.) about 10 years ago

Your post makes me go, "hmmmmmmmmm....?"

Posted by Brien Berard, Maryland Real Estate Agents - Laurel Real Estate (Remax Professionals Laurel MD) about 10 years ago

Very interesting post. Sounds vey much like a Wag the Dog theory. I am turning into a conspiracy theorist!

Posted by Christianne O'Malley, Exceptional Service - Delivering Results in Reno! (RE/MAX Realty Affiliates) about 10 years ago

What a lot of good thoughts; thank you for sharing.  It is absurd that what we thought was a "free market" has become so confining!  The corporate interests certainly seem to have been served well throughout.  I suspect (and hope) you may be correct about us getting close to the bottom...rebuilding correctly is the next big challenge...

Posted by Melissa Hughes (Ponderosa & Sun Realty) about 10 years ago

Just finished reading When Markets Collide by PIMCO's co-CEO and co-CIO Mohamed El-Erian http://www.amazon.com/gp/product/0071592814/ref=cm_li_v_cd_d?tag=linkedin-20

The book is fine. I wanted to get some data about how Soveveign Wealth Funds operate, for my own up-coming book on "Crowdfunding". The comments on Amazon are fascinating vis-a-vis the Wall Street establishment and how products/stocks are sold to us.

I agree with some of the commentors that the testimonial givers must not have read the book.

The "testimonial industry" works the same way as the "best seller" industry as the "tulip industry". LOL!

Lee Ali

BankFreeInvesting.com

Lee Ali is the author of, “Crowdfunding: The Solution to Eliminate Booms and Busts in Real Estate Forever!”

Posted by Lee Ali (Las Americas Real Estate) about 10 years ago

Jeff you are absolutely correct in your projection regarding the markets.  However, you must remember that the old saying still goes.  "Fox In The Hen House."  We never really know what they are up to in Washington and/or the markets.  We sort of have to read in between the lines.  I keep a close eye on trends and take it from there, mainly because I have lost some money in my dealings with banks and lenders.  I have become shrewd and am very careful of the "Fox".  There is no doubt that our economy will straighten itself out, but it will be at a high cost.  We just need to be prepared when we see things come back into perspective.

Posted by Ann Gravel, Realtor, New Hampshire about 10 years ago

It is very frightening if any of this is actually what happened.  The statement "nobody saw this coming" which is often repeated in the financial news is absurd.   In our weekly staff meetings from 2002 to 2007 our mortgage prep would come in and announce the newest financing scheme and we realtors would shake our heads in wonder.  We then discussed how likely that the people taking advantage of these pulse only loans would be in foreclosure in a year or two.  Well the crises shows that simple realtors could see it coming what made it so difficult for the lending industry?  Complexity!  Too many "financial geniuses" making complex deals that they didn't understand themselves so to too many other "financial geniuses" who didn't investigate what they were buying and nobody who was supposed to be asking the hard questions willing to ask them of follow up when the questions were not answered in an understandable way.  Monkeying with the accounting rules, medaling from congress, no oversight and people willing to suspend good judgment in making loans all contributed to the mess.

I wouldn't surprise me if there was a "conspiracy" to dump the market as described in this blog but I really don't think any of these guys was smart enough to start it off.  Plenty of people are able to take advantage of the market plunge once it stated.

How do we make the hard decisions to undo a lot of the complexity and get back to the establishment of integrity?

Posted by Robert M. Galbraith, IV SRS, SRES (Sibcy Cline Realtors) about 10 years ago

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