Articles that I have written for VoiceofSanDiego.org, a local news publication that provides continuing coverage of San Diego housing and economic issues.

Bailouts Don't Address the Real Problem

Submitted by Rich Toscano on October 1, 2008 - 12:20pm

Every pundit on Earth is playing the game of picking the various bailouts apart and proposing their own improved bailout schemes. But I think that most of the conversations going on out there miss a critical point: that this bailout and the ones that will in all likelihood follow it fail to address the root cause of the problems.

That root cause, in my opinion, is that the vast majority of political leaders, regulators, and pundits zealously cling to a deeply flawed analytical framework.

To put it more simply: the people and principles that blithely led us into this mess are absolutely the wrong people and principles to lead us out of it.

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More San Diego Job Losses

Submitted by Rich Toscano on September 23, 2008 - 9:21pm

This month's employment estimates show a deterioration in the retail sector but a slight improvement in the construction sector. Other than that the region's job growth, or lack thereof, has been on a path similar to recent months. So I will simply note that overall employment fell by 5,700 jobs or .4 percent from last year and then move on to the graphs.

The first graph is the usual one displaying the number of jobs gained or lost by the housing beneficiary sectors (construction, finance/real estate, and retail), the rest of the economy, and all sectors combined on a year-over-year basis. Each month's data point represents the year-over-year change for that month (I use this technique to smooth out seasonal effects).

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It's Bailout Week!

Submitted by Rich Toscano on September 19, 2008 - 1:59pm

Earlier in the week I jokingly suggested that the federal government was limiting itself to one financial industry bailout per day. Well, that was sure wrong.

Let's review the week so far:

  • The Fed announced it will lend even more to financial institutions (many of them not under the Fed's regulatory authority) in exchange for even more dubious collateral than before. This allows everyone to continue to pretend that the collateral, such as some subprime mortgage backed securities, is worth more than it actually is, which in turn allows everyone to pretend that financial institutions have more money than they actually do.
  • Because the Fed has run low on funds due to all of that lending, the Treasury announced it will borrow more money to give to the Fed so that they can keep up their lending and continue the charade described above.
  • The Fed nationalized insurance giant AIG (also not under its regulatory authority).
  • The Fed pumped a hundreds of billions of dollars into the system both domestically and globally via loans to foreign central banks.

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Another Huge Bailout or Two

Submitted by Rich Toscano on September 17, 2008 - 10:29am

I spoke too soon yesterday. After Treasury Secretary Paulson apparently refused to bail out AIG, the Federal Reserve stepped in and cut the mortgage giant a check for $85 billion in exchange for 80 percent of AIG shares. That $85 billion of taxpayer money is just a loan, we are told, but I don't quite understand the distinction between and loan and a handout when the whole trigger for this loan was that AIG is unable to pay back its other loans.

Once again, this is being covered everywhere in the MSM. Here's a good overview.

Although a cut in the Fed funds rate had become widely expected by yesterday, the Fed ended up holding rates steady. Perhaps they are trying to limit themselves to one Wall Street bailout per day.

Today is a new day, however.

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One-Two Punch for the Default Swap Market

Submitted by Rich Toscano on September 16, 2008 - 9:01am

A quick update to the last post. This morning I read in Housing Wire that ailing insurance company AIG poses an even bigger threat to the CDS market than Lehman:

AIG sold banks and other investors CDS protection on $441 billion of fixed-income assets, including $57.8 billion in subprime-mortgage related securities. There are likely very few firms with this much exposure into the CDS market

My snarky comment in the prior post notwithstanding, the folks at the Treasury have to their credit not directly bailed out either Lehman or AIG.  (They have stepped up the indirect bailouts, however: the Fed will now be lending more money to more people with more questionable collateral, and word is that they may also cut rates again today.)

But while they are finally turning some pigs away from the trough, the government's frantic interventions to date suggest that they will not sit idly by as things get really out of hand. We shall see.

I haven't gone into much detail on this week's drama because for the most part I'd be rehashing what's already been, uhm, hashed many times over. All the mainstream outlets are covering the issue, but for good up-to-the-minute updates and commentary I've been enjoying the coverage at the blog Naked Capitalism.

(written for voiceofsandiego.org)

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Credit Default Swaps Back in the News

Submitted by Rich Toscano on September 15, 2008 - 10:30pm

Back in early 2007 I wrote about the risks in the market for credit default swaps, a type of financial instrument that basically serves as insurance against bond default. The crux of the article was that some of the insurers in question might not be able to pay when the time came, and that would be trouble.

Almost exactly a year later, in January of this year, I wrote that the Fed's bailout of investment bank Bear Stearns may have been intended to prevent exactly that type of situation (though I noted that I'd expected the trouble to come from hedge funds, not from full-fledged investment banks).

Today, the bankruptcy of investment bank Lehman Brothers may have set some CDS market trouble into motion. As this Bloomberg article dryly notes:

Bond-default risk soared worldwide as the collapse of Lehman Brothers Holdings Inc. sparked concern that the $62 trillion credit-derivatives market will unravel.

It turns out that Lehman was one of the ten largest "counterparties" (credit insurers) in the default swap market, so their failure is obviously a big deal.

On the other hand, things probably won't be allowed to get too bad before the next bailout is put into place.

(written for voiceofsandiego.org)

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A Wee Dram of Data Before the Rodeo

Submitted by Rich Toscano on September 12, 2008 - 11:51am

Soon I will be putting up some thoughts from longtime FOP (Friend of Piggington) Ramsey Su, to be followed by the monthly data rodeo.

In the meantime, get your Friday data fix over at voiceofsandiego.org.

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U.S. Treasury Nationalizes the Mortgage Market

Submitted by Rich Toscano on September 8, 2008 - 7:49pm

We just witnessed yet another weekend bailout for the financial markets. The government takeover of ailing mortgage behemoths Fannie Mae and Freddie Mac was no surprise (prior editorializing can be found here and here) and has been jumped all over by the mainstream press. So I'm not really going to get into the details, as anyone interested doubtless already knows them.

However, I thought that the official nationalization of the mortgage market at least deserved a mention here at the Nerd's Eye View.

Someone asked me how this would change the housing and mortgage markets. My initial thought is that it won't. This move was intended not to cause something to happen, but to prevent something from happening. That something was the imminent bankruptcy of the two entities that account for about 80 percent of U.S. mortgage issuance.

Such an outcome would have changed the game, to be sure, but now it's not going to happen. Mortgage rates may adjust downward a bit, but from a big picture standpoint, it will be business as usual. (That is, until the new government-owned entity starts writing down mortgage principal balances for defaulted borrowers and other fun unintended-consequence-inducing activities).

Business as usual, by the way, continues to be declining home prices.

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Bottom Calling: Now Its Own Genre

Submitted by Rich Toscano on August 21, 2008 - 2:19pm

I think it's funny that the folks at the North County Times have created a "Bottom calling" tag in their new business blog.

The titular bottom-calling in their inaugural post for the new category was made by longtime DataQuick pundit John Karevoll. In addition to opining that sales volume had already hit bottom, Karevoll said:

“I'm pretty sure we're at or very close to the bottom here in true values. The only thing that could throw things out of whack is if there is a nasty recession or a year or two of nasty inflation that would push interest rates up and prices would have to come down. But I don't see either one of those happening, so I think we're very close to the bottom.”

Karevoll was pretty circumspect -- in addition to the disclaimers above, he noted that the market is likely to "drag along the bottom for a while.”

Nonetheless, this is a fairly bold call.

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Employment Weakness Continues to Spread

Submitted by Rich Toscano on August 15, 2008 - 12:07pm

San Diego County shed jobs again in July, according to the EDD's latest estimates. As in the prior month, the problem wasn't that the housing-related sectors accelerated their decline, but rather that the non-housing sectors were unable to make up for housing's weakness as they had in the past.

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Mortgage Defaults Slow -- Kind Of

Submitted by Rich Toscano on August 12, 2008 - 11:48am

While the number of homes entering the final stage of foreclosure hit another all-time record in July, the number of homes entering foreclosure actually declined.

This decrease may not be very meaningful, however.

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Quick, Everyone -- Into the Foreclosure Sanctuary!

Submitted by Rich Toscano on July 30, 2008 - 8:59am

City Attorney Mike Aguirre has filed a lawsuit against Bank of America and its new subsidiary Countrywide. The central complaint of the suit appears to be that Countrywide engaged in fraudulent practices by putting people into high-risk mortgages and that Countrywide, as Aguirre put it in a press statement, "originated loans with little or no regard for the borrowers’ financial ability to afford the loans or to sustain homeownership." The suit is intended to prevent Countrywide (now Bank of America) from initiating foreclosure on any homeowner who has a high-risk mortgage and who actually occupies the home.

The lawsuit may be well-intentioned, but it's unlikely to help San Diego and there's a fairly good chance that it will make things worse.

It's also yet another bailout attempt.

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The Future of Foreclosures

Submitted by Rich Toscano on July 25, 2008 - 9:39pm

Earlier this year I wrote about Joseph Galascione, a San Diego real estate broker who does some serious digging into the local mortgage pool to try to ascertain the prevalence of future foreclosures. Below are some conclusions from Galascione's recently released study of mortgages due to reset in the third quarter of this year. The study, incidentally, is freely available at the website of Galascione's firm, ERA® Metro Realty.

To review the premise, a resetting loan is considered to be at "high risk for foreclosure" if the borrower made a down payment of less than 20 percent and the monthly payment is expected to increase by at least $500 upon reset.

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Pay Up for Fannie and Freddie

Submitted by Rich Toscano on July 14, 2008 - 3:41pm

I will begin this blog entry with an allegorical play in three acts -- starring you as the protagonist!

Act I

Your deadbeat brother-in-law shows up at your door and explains that his business, Joe's Exclusively Deep-Fried Seafood and Mortgage Hovel, hasn't been doing so well. You aren't surprised, given that his company is extremely indebted and has been mired in accounting scandals for years.

As a result of his troubles, he has gotten himself into so much debt that he has no chance of paying it off. He asks you and your spouse for a loan.

Act II

Your spouse, sympathetic of course, suggests that you lend Deadbeat Brother-In-Law (DBIL, for the remainder of the play) some money. You suggest to your spouse (Spouse) that since DBIL is unable to pay his current debts, loading him up with yet more debt isn't really a good solution. You also note the unlikelihood of being paid back in such a scenario.


Without asking you, Spouse dips into the joint checking account and lends DBIL the money anyway. Spouse also makes a big investment in the stock of DBIL's insolvent Mortgage and Deep-Fried Seafood business. But Spouse tells you not to worry: it's in everyone's best interest, and anyway, DBIL wasn't actually having any financial problems in the first place! Also, the stock pays out its dividend in fried clams!


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Nationalizing the Mortgage Industry, Maybe

Submitted by Rich Toscano on July 11, 2008 - 12:42pm

Fannie Mae and Freddie Mac, collectively known as the government-sponsored enterprises or GSEs, are huge government-backed yet privately owned companies whose main purpose is to buy mortgages. They are also, according to a recent Fed governor among others, insolvent -- that's "broke" to you and me.

This story is all over the news so I'm not going to rehash it -- here's a NY Times piece for those who want more. I just wanted to note that this is a huge crossroads for the housing and mortgage finance bailout efforts about which I've written several times on these pages.

A failure of the GSEs would be huge. They either own or guarantee over $5 trillion worth of mortgages, accounting for nearly half the mortgage debt in the country. And in the days of dwindling private mortgage issuance, the GSEs provide a huge chunk of the lending that takes place. Were they to stop buying mortgages, as the Times article puts it, it "could bring much of the American housing economy to a standstill." Many think that the government would step in and take over the companies before that was allowed to happen.

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