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Reading this morning



March 25, 2008 – Comments (2)

Big Picture has cute "Famous Last Words" poster ad being run by Fox business.

On Naked Capitalism Yyves mentions this Institutional Risk Analytics (IRA) that is pointing out the risks of JP Morgan.  My first thoughts, no surprise there, $91 trillion in derivatives, 6-7 times the entire US economy, how could there not be absolutely enormous risks there...

But that isn't where IRA sees the risk.  Apparently they see the risk because JP Morgan is heavily weighted towards consumer business and those problems show up later in a down cycle.

I like what Yves has to say here:

Although IRA does not say so explicitly, the reasoning appears to be that the Fed pushed Bear into JPM's arms as a way to shore up JPM. If asking a firm to take on a $13 trillion derivatives book, of which only $2 trillion is exchange traded, is a favor, I'd hate to see what punishment looks like.

I believe JPM will regret this deal (assuming it comes off) and not simply for the impact it is having on Jamie Dimon's reputation. Bear is stuffed with the some of riskiest assets in the credit game: mortgage debt credit defaults swaps, JPM is thus increasing its exposures at time when it would be more prudent to reduce risk, effectively doubling down.

Mish is looking at Lehman's fudged looking balance sheet. Reading this stuff disgusts me.  How do they get away with it?  Mish puts this together very nicely with three different pieces.  Of particular importance is the last part about how changing accounting rules mean that "The income statement is the past. The balance sheet is the future." 

The income statement isn't telling you much about the financial strength of the company.  Lehman's leverage increased from 28.1 last year to 31.7.  That's 3% equity and scary.

Yves says that Fitch is making the same kinds of mistakes that lead to the faulty risk ratings in the first place. They are estimating credit card risk based on historical data. Yves is far more generous in his assessment of this.

Using this assumpution is grossly, grossly, grossly incompetent.  The unemployment data has record numbers of people not being counted, people who have run out of benefits, people who aren't looking for now because they can't find a job that pays what they are willing to work for, etc.  Currently there has been a trend towarding an increasing number of working age people not working and from my reading I believe this trend has been happening for about 10 years.  Now, take into consideration that people don't have the home equity refinance available to them to get their debts under control.  Now add in the negative savings rate that has been happening.  It is an insane assuption.

Last, on Calculated Risk they are pointing out that foreclosures are happening at a rate faster than banks can sell off the homes.  Foreclosures make up 10% of the real estate market currently, so home prices will continue to be under downward pressure.  Interesting graph of Countrywide there.  Countrywide owns about 3x as many homes as they did in 2006.  

I just did a mental calculation of how many property managers they'd have to hire if they decided to rent these properties.  It seems to me that if I had a place I wanted to rent and hired a property manager they'd charge me 10% of the rent, at least that's what I've seen in my experience.  So, if I go by the 25% of income for rent, well, that would be 40 homes to pay the salary when done privately one rent versus one home owner at a time.  So, what's a working load for a rental property manager?  I'd bet 100-200 properties.  So, Countrywide would need to hire 700 to 1400 people to manage their housing portfolio if they wanted to rent them.  When you think about the number of people required to do something like renting, foreclosure seems to have just so much more paper work.  No surprise banks got so far behind processing these things.

2 Comments – Post Your Own

#1) On March 25, 2008 at 10:39 AM, kdakota630 (28.97) wrote:

GREAT blog post.

BTW... I love the Fox Business News "Famous Last Words" link.  Great dig at Cramer @ MSNBC. 

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#2) On March 25, 2008 at 12:25 PM, Gtrinvestor (94.16) wrote:

dwot - great article links.  I am an accountant myself, and I am loathing all these new fair value accounting rules, b/c they are basically making accountants into consultants.  It used to be that, as long as management wasn't lying, the balance sheet represented a "back stop" for values.  Now, the accountants are doing the job of Wall Street analysts, purporting what a company is worth to its own shareholders.  Pretty soon, the only stement worth anything will be the cash flow statement.

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