A Sad Day for Finance Bloggers Worldwide…..

One of the first finance blogs that I ever had the chance to read and in my mind, one of the best, Calculated Risk, lost one of their writers in a battle with cancer today.   In honor of Tanta (Doris Dungey), I’m reposting the entire article about her and her passing.   While I never had the privelege of meeting her, I was one of many who benefitted from her wit and wisdom.   CR and her family and friends, you have my condolences.

Tom Vanderwell

My dear friend and co-blogger Doris “Tanta” Dungey passed away early this morning. I would like to express my deepest condolences to her family and friends.

Photo: Tanta in 2004 (from her sister Cathy).
From David Streitfeld at the NY Times: Doris Dungey, Prescient Finance Blogger, Dies at 47

The blogger Tanta, an influential voice on the mortgage collapse, died Sunday morning in Columbus, Ohio.

Tanta, who wrote for Calculated Risk, a finance and economics blog, was a pseudonym for Doris Dungey, 47, who until recently had lived in Upper Marlboro, Md. The cause of death was ovarian cancer, her sister, Cathy Stickelmaier, said.
…
Tanta used her extensive knowledge of the loan industry to comment, castigate and above all instruct. Her fans ranged from the Nobel laureate Paul Krugman, an Op-Ed columnist for The New York Times who cited her in his blog, to analysts at the Federal Reserve, who cited her in a paper on “Understanding the Securitization of Subprime Mortgage Credit.”

She wrote under a pseudonym because she hoped some day to go back to work in the mortgage industry, and the increasing renown of Tanta in that world might have precluded that. Tanta was Ms. Dungey’s longtime family nickname, Ms. Stickelmaier said.

From CR to Tanta’s many readers, fans and internet friends: Tanta enjoyed writing for you, chatting with many of you in the comments, and corresponding with you via email. She told me several times over the last few months how much she enjoyed discussing current events with you.

Tanta worked as a mortgage banker for 20 years, and we started chatting in early 2005 about the housing bubble and the changes in lending practices. In 2006, Tanta was diagnosed with late stage cancer, and she took an extended medical leave while undergoing treatment. At that time I approached her about writing for this blog, and she declined for a simple reason – her prognosis was grim and she didn’t expect to live very long. To her surprise, after aggressive treatment, her health started to improve and she accepted my invitation. When she chose an email address, it reflected her surprise: tanta_vive … Tanta Lives!

Armed with a literary background and extensive knowledge of the mortgage industry, Tanta wrote about current events with deep insight and wit. Here is the introduction to one of her posts in 2006: Let Slip the Dogs of Hell

I still haven’t gotten over the fact that there’s a “capital management” group out there having named itself “Cerberus”. Those of you who were not asleep in Miss Buttkicker’s Intro to Western Civ will recognize Cerberus; the rest of you may have picked up the mythological fix from its reprise as “Fluffy” in the first Harry Potter novel. Wherever you get your culture, Cerberus is the three-headed dog who guards the gates of Hell. It takes three heads to do that of course, because it’s never clear, in theology or finance, whether the idea is to keep the righteous from falling into the pit or the demons from escaping out of it (the third head is busy meeting with the regulators).

Tanta wrote a number of posts detailing the inner workings of the mortgage industry. These posts covered a wide range of topics, from mortgage servicing, to everything you want to know about mortgage backed securities (MBS), to reverse mortgages. She called these posts “The Compleat UberNerd” and in typical fashion she noted:

An “UberNerd” is someone who is compelled to understand how things work in grim detail, even if the things in question are tedious in the extreme …”

Tanta liked to ferret out the details. She was inquisitive and had a passion for getting the story right. Sometimes she wouldn’t post for a few days, not because she wasn’t feeling well, but because she was reading through volumes of court rulings, or industry data, to get the facts correct. She respected her readers, and people noticed.

Felix Salmon at Condé Nast Portfolio.com, wrote on Nov 7, 2007 wrote:

“Tanta is one of the best financial writers in the world, and explains complex ideas with wit and great clarity.”

Paul Krugman at the NY Times complemented Tanta several times, recently writing:

“The great thing about this age of blogs is the way people who really know something about a subject can quickly weigh in, without being filtered through Authority.”

Even researchers at the Federal Reserve referenced Tanta’s work: From Adam Ashcraft and Til Schuermann: Understanding the Securitization of Subprime Mortgage Credit, credit on page 13:

Several point raised in this section were first raised in a 20 February 2007 post on the blog http://calculatedrisk.blogspot.com/ entitled “Mortgage Servicing for Ubernerds.”

Tanta was also extremely funny. She introduced the Muddled Metaphor Index (MMI) and Excel Art featuring the Mortgage Pig, and she was the originator of a number of phrases in use today, like “We’re all subprime now!”

This is a very sad day and I know many of you are in shock. Tanta was our teacher. She generously shared her knowledge with all of us. I doubt she knew how many lives she touched; her insights, spirit and passion lives on in her writings – and in all of you.

Tanta Vive!

P.S. please post or email me your thoughts and remembrances, and I’ll post some of them. Please no tips – I’ll post a charity of Tanta’s choice soon. All my best to everyone on this very difficult day.

Saturday Night Massacre – by New York Times

This Month in Business History: Saturday Night Massacre – New York Times.

An interesting read on what Paul Volcker did on a Saturday in October in 1979 to solve the economic problems that were facing our country then.

Given it’s a Saturday night and he’s in the news again, I thought it would be worthwhile to pass it on.

Tom Vanderwell

Thanks to Barry at The Big Picture for pointing it out.

AIG Plans to Pay Retention Bonuses to Executives

Yves Smith has the story, but this is just ridiculous….

How can you give cash compensation to an executive, yet claim it is not a salary or bonus? You call it a “retention bonus,” No, I am not making this up…..

…..Note that AIG chose to make this disclosure the day before Thanksgiving, clearly choosing a time when it would attract the least notice. Not that it really matters. The talk about restricting executive compensation to bailout recipients has been just that, talk.Do you really believe, with massive deleveraging and all sorts of big financial firms, including insurers, teetering, that AIG executives have great employment prospects these days? But the bigger issue, as far as I am concerned, is the misrepresentation, trying to claim that AIG was forgoing significant senior level comp, only to learn that they define terms a bit differently than the rest of the world does.

naked capitalism: AIG Plans to Pay Retention Bonuses to Executives.

So we’re going to be “hoodwinked” and told that AIG is cutting bonuses when in reality, they are just renaming them?

Isn’t a retention bonus the same thing as a salary?   We’ll pay you $1,000,000 if you keep working?   And it’s no wonder that people don’t look kindly on bankers.   Yikes!

Tom Vanderwell

Banks: Start From Scratch or Give it Time? | The Big Picture

WSJ’s Evan Newmark critiques colleague Dennis Berman’s latest column in which he offers a cure for financial mistrust — create new banks. Evan tells him why he has a problem with that plan.

Banks: Start From Scratch or Give it Time? | The Big Picture.

An intriguing contrast in views…..

What do you think?

Tom Vanderwell

Just a little perspective for a Saturday…..

I saw this graphic from Voltage Creative that puts some perspective on how much money is being used in the bailout.    Thanks to Paul Kedrosky for directing me to it…..

US debt puts strain on dollar – The Financial Times

In the short term an expected equity market rally, quite plausibly the beginning of a cyclical, although not secular, bull market should bring an end to the dollar’s recent “repatriation rally”. The inverse correlation of the dollar and the S&P 500 is well established and not expected to break any time soon, given the global macroeconomic backdrop. The short term trend should be further reinforced by the broken financial system which impairs the US economy’s ability to releverage and mutes the strength of its cyclical recovery. The inability to releverage precludes the US from leading the global economy out of this recession. That also reinforces the dollar’s short term unattractiveness.

In the medium term, the US economy faces significant, albeit not insurmountable, structural problems. In particular the interaction of a heavily indebted economy with a broken financial system suggests a decade of poor domestic economic growth as savings are rebuilt and trust in the system restored. The US is a debtor nation and owes the rest of the world more than $2,000bn (up from $750bn as recently as 2000). Indeed both the household and the government sectors have been dis-saving in recent years – a trend that now needs to reverse. All of which suggests an extended period of sub-par domestic economic growth.

FT.com / Markets / Insight – Insight: US debt puts strain on dollar.

Tom here…..

Translation – the short term – once the stock market turns around, the value of the dollar will drop.  The “broken” financial system is going to make it very hard for the US to begin being a leader in lending again and get things moving and rebuild the economy.

Translation – medium term – we’re in a tough spot, our system is structurally in trouble.   When you combine an overly in debt economy with a broken financial system, we’re in for a long road ahead.

Back to the article…..

There are two distinctive policy choices for an overly indebted economy when confronted by a breakdown in the financial system. Which is chosen can have a significant impact on the long term outlook for the currency.

Policy choice 1 – do nothing and allow the economy to work itself out with a severe recession or even depression, with a cleaning out of the system as weak companies fall into bankruptcy, leaving strong companies and a base from which to build recovery.

Policy choice 2 – use all policy tools available to attempt to stem the downturn.

Choice 1, not surprisingly, is considered politically unpalatable as millions of people lose their jobs and many companies go bust. Choice 2, while seemingly more palatable, carries far greater risk. If it doesn’t work it sows the seeds for a decade or more of disappointing growth as savings are rebuilt slowly and the pain of the adjustment prolonged. If it does work it sows the seeds for significant inflation……

Currently, US policymakers are halfway through policy choice 2. Interest rates have been cut aggressively and are now almost zero. Politicians are about to embark on their second fiscal stimulus. The banks have been recapitalised. The government has started buying and guaranteeing distressed debt. Finally, the Federal Reserve has begun in earnest to use its balance sheet (in a sterilised manner) to step into the absent shoes of the private sector in the financial system. The Fed’s balance sheet has expanded from $900bn just three months ago to $2,200bn today.

A failure of the initial set of policies to reflate the economy is likely to lead to the next, more risky, set of policy choices – those involving unsterilised intervention. Given the breakdown of trust in the financial system, the lack of savings by the US and the continued deleveraging of balance sheets, however, those initial policies, aimed mostly at supporting the economy through creating credit (rather than increasing savings) seem destined to fail.

Tom here again…..

Policy Choice #1 doesn’t work.

Policy Choice #2 is what we’re working on.

When you look at what our government has done so far, we’re attempting to do policy #2, but it’s not working so far.   Why?   I think that he says it quite well:

“Supporting the economy through creating credit (rather than increasing savings) seem destined to fail.”

I’ll be writing more on that later, but did you hear that?   We need to stop trying to create more credit and instead set up programs where we reward savings and end up with a much healthier society.

What do you think?

Tom Vanderwell

A Reason for Thanks…….

Let us give thanks to Bank of America shareholders for taking one for the team. That’s what they’ll essentially be doing, assuming they greenlight the bank’s takeover of Merrill Lynch next week, as seems likely.

By almost any measure, Merrill will not be worth remotely as much as Bank of America, the bank run by Kenneth D. Lewis, agreed to pay in September. So it might be tempting for shareholders to vote against the deal when they meet on Dec. 5.

Trouble is, after the latest bailout of Citigroup — and multiple attempts to stabilize Morgan Stanley, Goldman Sachs and other former investment banks — voting down the merger would deliver another terrifying shock to the financial system.

Breakingviews.com. – Sigh Deeply, Acquire Merrill – Brief – NYTimes.com.

It’s a sign of the times that we’re in that it’s a recommendation to pay more for Merrill than it would otherwise be worth because the other option is significantly more terrifying one.

By terrifying, I don’t think I’m being overdramatic.   If that happened, it would be really really ugly for the entire financial system.

Thank you in advance to all of the shareholders who vote yes!

Tom Vanderwell

Pension Agency Sounds Alarm on Big Three – WSJ.com

The agency that protects pension plans raised new concerns about Detroit’s three auto makers, saying their use of pension funds to pay for restructuring threatens to drain the funds and leave the agency footing the bill.

Pension Agency Sounds Alarm on Big Three – WSJ.com.

This report reinforces a couple of things:

1. The fact that Congress sent the Big Three home to come up with a plan is a very important element to the whole picture.
2. It’s necessary to do something to resolve the Big Three situation.   There is no way that the Big Three can continue in their current condition.
3. We need to structure things in a way that minimizes the cost to the tax payers and increases the likelihood that they will be able to remain “going concerns” rather than being concerned about them going out of business.
4. We need to make sure that nothing is done that causes the Pension Guarantee Agency to incur any more losses than it needs to because the government can’t afford to pay for more than we have to.

So what does this have to do with mortgages and real estate?  Very simple…..

• How the Big Three situation gets resolved is going to impact a huge amount of people and their financial picture.
• The jobs picture impacts the housing market.
• The amount that the government spends impacts the housing market because it has an impact on interest rates and currencies.

Stay tuned….

Tom Vanderwell

Some thoughts about the eventual bill we’ll have to pay…..

I found this article at Jesse’s Cafe.   I need to let you know that article was written on November 11.  That’s 18 days ago.   What has happened in the last 18 days?

Oh, approximately $1,100,000,000,000 worth of additional spending on bailing out the financial sector.   Let’s review:

Citibank got $29 Billion in cash and the agreeement that the government will absorb up to $306,000,000,000 of Citibank’s losses on the assets that they own (assets being loans and other investments that they have).

Fannie and Freddie got notice that the Treasury is going to buy $100,000,000 of mortgages that Fannie and Freddie own and another $500,000,000 of mortgages that they have guaranteed.

The Treasury is also buying $200,000,000 worth of securitized (bundled) car loans, credit cards and student loans in an effort to get banks to start writing more loans.

So, everything that is said in the article that I’m basing this on is from 2 weeks before all of these bailout numbers…..

Now, here’s part of the article:

It may finally be catching up with Uncle Sam. That’s what the yield curve may be whispering. But some economists are too deaf, or dumb, to get it.

The yield curve simply is the graph of Treasury yields of increasing maturities, starting from one-month bills to 30-year bonds. The slope of the line typically is ascending — positive in math terms — because investors would want more to tie up their money for longer periods, all else being equal. Which it never is.

If they expect yields to rise in the future, they’ll want a bigger premium to commit to longer maturities. Otherwise, they’d rather stay short and wait for more generous yields later on. Conversely, if they think rates will fall, investors will want to lock in today’s yields for a longer period.

The Treasury yield curve — from two to 10 years, which is how the bond market tracks it — has rarely been steeper. The spread is up to 250 basis points (2.5 percentage points, a level matched only in the past quarter century in 2002 and 1992, at the trough of economic cycles.

Based on a simplistic reading of that history and the Cliff Notes version of theory, one economist whose main area of expertise is to get quoted by reporters even less knowledgeable than he, asserts such a steep yield curve typically reflects investors’ anticipation of economic recovery. (LOL, nicely phrased – Jesse)

Never mind that the yield curve has steepened as the economy has worsened and prospects for recovery have diminished. Like the Bourbons, the French royal family up to the Revolution, he learns nothing and forgets nothing.

As with so much other things, something else is happening this year.

The steepening of the Treasury yield curve has been accompanied by an increase in the cost of insuring against default by the U.S. Treasury. It may come as a shock, but there are credit default swaps on the U.S. government and they have become more expensive — in tandem with an increase in the spread between two- and 10-year notes.

Okay, Tom here.   What is it that they are talking about?

Let me try to explain it to you in simple terms:

1. The reason that long term Treasuries are higher than short term Treasuries is not because we are heading into an economic recovery (as the normal “steep” yield curve would show) but because the risk of something bad happening to US debt is increasing.

2. What’s the “something bad?”   A couple of scenarios are bouncing around:

• The foreign investors stop buying US Treasuries – that would send rates on Treasuries skyrocketing.
• Devaluation of the value of the dollar – that would create all sorts of nasty consequences, things that we can’t take enough time for here…..

So what does that mean?

Essentially this, it means that like all of the rest of us, the United States has a limited credit line and we (collectively) need to be careful how much we spend and what we spend it on.

Tom Vanderwell

Mortgage Rate Update for 11-28-2008

Black Friday Mortgage Rates have been updated.

They have dropped a bit since Wednesday.   Why?  A couple of things:

1. The stock market is opening softer today.

2. The “ripple” effects of the government’s move to buy mortgages from Fannie and Freddie.

Recommendations:

Lock all loans.   Volatility is continuing.

Recommendations:

If you think you might benefit from refinancing, take the following steps:

1. Do some homework on the value of your house.   Check out www.zillow.com or call your local Realtor.  If you read what I wrote earlier today about Home Values, you’ll see that one of the biggest hurdles in refinancing is what your house is worth.

2. Then call me and we can talk about what options might be available.

Typically the markets are very volatile on a day like today but I think that we’ll see rates stay in this range for at least a day or two to give you time to do some homework on what your house is worth.

Then let’s talk.  Call me at (616) 292-7559.

Tom Vanderwell

Next Page »