Damn!NR you have really nailed it on this one! Thanks for calling a spade a spade!

Nouriel,You have been saying for some time that the "originate and distribute model" is dead. If this is true then what will the future world of mortgage finance look like and how far will house prices fall? I remember being told by a retired banker that in the early 1980s (before originate and distribute) a high risk mortgage for a bank was above 60% of the property’s value. I have also seen data that at the height of the housing bubble 75% of mortgages originated for more than 75% of the property’s value. If we are returning to the world pre-originate and distribute does this mean a return to the lending standards of the early 1980s? If so, the fall in house prices could well be more than 30%. Just a back of the envelope calculation: Assume the average down payment was 20% in the bubble (generous). If it now will have to be 40% under the post-originate and distribute regime then house prices would have to fall by 50% so that the average buyer could afford to buy.Alex Grey

3rd, 5th, or whatever!Nouriel,Your posts are more strident now than ever. One supposes that as your predictions get more extreme, so is the margin of error. But I agree with you, that the false accounting and dissembling by financial kingpins is a real disgrace, on top of the hypocritical socialization of their losses. These great capitalists – Mr. Kudlow? – You have to keep in mind that MER was helping Enron out with Nigerian barge deals, and so it’s the same bunch of bums getting away with whatever they can to make money.

I love the expression "cockroach stocks" used to describe stocks with a big scandal, e.g. Worldcom. The meaning is that bad news (roaches) just keeps coming out as time goes on, so don’t buy the stock, thinking that one announcement is full story. The banks and broker dealers are now all coackroach stocks.

A shopped out, maxxed out, but more confident consumer? I don’t think so. More downsizing as the consumer downsizes, from Bloomberg News:July, 29 (Bloomberg) — Starbucks Corp., the world’s largest chain of coffee shops, said it was cutting almost 1,000 jobs and making additional executive changes…Starbucks founder Howard Schultz resumed the position of chief executive officer in January to revitalize the chain’s cafes after U.S. customer visits declined and sales at existing locations slowed. Earlier this month, he announced plans to close 600 stores in the U.S. and eliminate as many as 12,000 positions, or 7 percent of the company’s workforce.Earlier today, the coffee-shop chain said it will shut three-fourths of its 84 stores in Australia within the next five days, backing away from a market it entered eight years ago.

Who the hell is going to buy this from these habitual liars??? SUCKERS!!!!!1:54 p.m.Merrill Lynch prices $8.55 bln offering at $22.50 a share

From the Conference BoardConsumers’ appraisal of present-day conditions remained quite bleak in July. Those claiming business conditions are "bad" increased slightly to 32.8 percent from 31.9 percent, while those claiming business conditions are "good" rose to 13.1 percent from 11.5 percent last month. Consumers’ appraisal of the labor market remained negative. Those saying jobs are "hard to get" edged up to 30.3 percent from 29.7 percent in June, while those claiming jobs are "plentiful" declined to 13.5 percent from 14.1 percent.

“the financing is secured only by the assets being sold, meaning Merrill would absorb any losses on the CDOs beyond $1.68 billion”.I get this, but hasn’t MER limited it’s $6.7B of exposure to the toxic CDOs down to $3.78B? Lone star effectively bought $1.68B of the $6.7B outright, and then MER is on the hook if and only if the remaining $5.03B of CDOs goes down 75% or more, meaning their exposure is $3.78B.I’m no economist, so please point out what I’m missing. I think a lot of the news is pretending they got rid of all their exposure to these CDOs, which is ridiculous, but on the plus side, didn’t they nearly half their exposure?

There seems to be an interesting correlation between oil price and financial stock prices (I saw this link somewhere), see: http://finance.yahoo.com/echarts?s=XLF#chart1:symbol=xlf;range=2y;compare=oil;indicator=volume+mfi+stochasticslow(31,1);charttype=line;crosshair=on;ohlcvalues=0;logscale=off;source=undefined

@Big Carbon: "Majority Leader Harry Reid refused to allow a vote on Republican Jim DeMint’s amendment to bar political donations and lobbying by Fannie and its sibling, Freddie Mac.”What creature is this prowling Wall Street and the Treasury and the halls of Congress, devouring our money and our representatives, the vast majority who are in the clutches of its most powerful member – Henry Paulson? For some light on its omnipresence, here are the introductions to the first four chapters of “The Creature From Jekyll Island, A Second Look at the Federal Reserve” copyrighted 1994.The Journey to Jekyll Island – The secret meeting on Jekyll Island in Georgia at which the Federal Reserve was conceived; the birth of a banking cartel to protect its members from competition; the strategy of how to convince Congress and the public that this cartel was an agency of the United States government.The Name of the Game Is Bailout – The analogy of a spectator sporting event as a means of explaining the rules by which taxpayers are required to pick up the cost of bailing out the banks when their loans go sour.Protectors of the Public – The Game-Called-Bailout as it actually has been applied to specific cases including Penn Central, Lockheed, New York City, Chrysler, Commonwealth Bank of Detroit, First Pennsylvania Bank, Continental Illinois, and others.Home, Sweet Loan – The history of increasing government intervention in the housing industry; the stifling of free-market forces in residential real estate; the resulting crisis in the S&L industry; the bailout of that industry with money taken from the taxpayer…There are 26 chapters in all tracking this creature – and now, this.

Dr.Roubini:What is your reaction to the comment of OPEC President Chakib Khelil’s remark yesterday- "If the dollar continues to strengthen and the political situation [with Iran] improves, then the long-term prices will be about $78 [a barrel],"Do you see this possible?

LOS ANGELES IS HIT BY 5.8-MAGNITUDE EARTHQUAKE

The real reason stocks are up big today?July 29, 2008By Tom Moeller· Chain store sales were reported by the International Council of Shopping Centers to have surged last week. The 1.2% w/w jump was the strongest since early June. It lifted the level of sales to a record high and sales for most of this month by 0.5% versus June.· During the last ten years there has been a 45% correlation between the y/y change in chain store sales and the change in nonauto retail sales less gasoline.· The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.· Showing weakness, however, was the leading indicator of chain store sales from ICSC-UBS which fell 0.9% (-4.0% y/y) after a 0.3% decline during the week prior.

@ OsoteIt is MER who is financing 75% of the deal, meaning MER will be in the hook if the value of the $6.7B "sold" CDO’s go down UP tp 75% (that is MER is exposed to the first dime loss of the CDO’s, and Lone Stone will lose money only if the loss of CDO value is 75% or more)The initial discount/ write down: $30.6B – 6.7B = $23.9BMER’s additional exposure: $6.7B * 75% = $5.025BSo MER is effectively selling the CDO at a value anywhere between 22 cents and 5.5 cents on a dollar depending on the market. But I would go for the lower end.

Miss America, any color on trading action? Looks like the S&P is ready to run 100 points higher…

Sorry, I meant Lone Star not Lone Stone (it rhymes)@ Gloomy: "DID YOU HEAR THE ONE ABOUT…"That’s funny. Yes I heard the Fed is now accepting TBS (Treasury Backed Securities) in its TSLF program in exchange for toilet tissue. That created a bubble in toilet tissue and paper market. However, the Fed declared that the swap-window is a temporary program and banks will have to swap back toilet tissue and paper AFTER they finish using them.Fair trade I guess, and everything will go back to normal after this crisis is solved and our dollar will be backed by … well you have guessed.

why does this reminds me on the sale of Chrysler by Daimler?

@AfaUsed TP…you have perfectly captured the essence of the situation!!

Reason for the rally today:FASB may delay off-balance sheet accounting changehttp://www.reuters.com/article/governmentFilingsNews/idUSN2849132320080728?sp=true

@ Guest 2008-07-29 14:27:37My color is: "sell high"!As for the Merrill Lynch & "Loan" Star deal… What did I say on LB’s blog @ 2008-07-25 15:12:44"Where I’m at harkens back to a post of mine from many months ago. “Survivor Wall St.” I believe that since we moved to an “every man for themselves” scenario, it has become abundantly clear that all will lose in this scenario. (…and the “failed investment model” will be proven)With that said, I believe there will be an adjustment made on Wall St. I believe we will now see a move towards Hedge Funds and Brokerage houses joining up. Where unregulated HFs will become off balance sheets for bad debt. ….or something like that. (I’m working out the details for a future post.) Miss America"Written by MA on 2008-07-25 15:12:44

This oughta add another 2% to the bank stocks tomorrow!!4:14 p.m. Lincoln Financial Q2 net income 48c vs $1.37 a share

Bloomberg says Stock up because Oil down, and that Dollar is up because Oil is down and (better than expected Confidence data). And Yahoo says Oil is down because Dollar is up (and demand worries)??? To be fair, the spike in dollar was prior to the decrease in oil prices and it was concurrent to the Confidence data release.So if we believe in all this BS called news, the markets are up because of "better than expected" Confidence data. One has to look into the gloomy outlook inside the report first.I want to sue the Conference Board for not using closed captioning or publish their reports in Braille characters – the market is blind: MER is writing down super senior CDO tranches by 95%, which means the same will happen to other banks. More losses that were not yet priced in? Cheers, let’s ride these stocks!That or the markets became highly ethically /philanthropy-concerned. They just want to help the poor banks.

Ah, never mind. I get it. If the price goes to $0, MER is still out $5.03B not $3.78B, minus whatever they’ve already collected in interest.

Yes, money that should be allocated to growing real enterprises are being instead plowed into financing off-balance sheet liabilities in order to firewall away "plague paper" AKA CDOs. How can the debt/equity holders of the major IBs and commercial banks not be screaming to high-heaven seeing their capitalization is being routed into even greater inefficiencies than homebuilding? Probably very few long-term holders left. Speculators are trading the entire stock in a weeks time, many times over in some cases. Gyrating casino with carousel sidelines. Have some cotton candy and Kool-aid?Theine & co. are convinced that by keeping digging they can excavate themselves out of peril. All they are buying is time, and bystanders are left scratching their heads. In the middle ages they’d be tar’n'feathered, run out of town on rails, and all goods seized and distributed. Haven’t we come a long way, baby? Since TPTB are intent on fleecing us, why not passively resist while making a statement. Maybe a GREAT ESCAPE a la Steve McQueen on a financial order is in order. After all the watchtowers and concertina wire has long been in place (if only in other forms), what to lose when they want ALL you have. Might makes right: And they have all might! Second thought, maybe the almighty should step in as referee. Nothing short will stop this nonsense.http://youtube.com/watch?v=69PXX3hps-QIf you’re gonna be sheared anyway, might as well enjoy it.

Talking about warm and embraced fascism – those happy and secure final moments:" Associated Press Writer / July 28, 2008WASHINGTON—Congressional investigators say businesses have failed to pay the IRS some $58 billion over the past decade in taxes they were supposed to have withheld from their employees’ paychecks and forwarded to the government.The Government Accountability Office says more than one and a half million businesses owed the supposedly withheld income, Social Security and Medicare taxes as of the end of September last year. Because the taxes weren’t paid, the government had to dip into its general fund to cover shortfalls in Social Security and Medicare.The GAO report faults the Internal Revenue Service for relying too much on voluntary compliance in the past, even with the worst payroll tax offenders.© Copyright 2008 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed."USD58b is a fair chunk of change even for a low-life politician and bureaucrat (not for a whanker though),Ho humPeterJB

MOONSHOT1. The government is going to sell much more debt to finance bailouts in the coming months, especially as the recession/depression slows tax receipts.2. Emerging markets will buy much less US debt as the recession/depression dramatically slows purchases from these countries.So as supply of treasuries goes through the roof, demand will falter. Interest rates to the moon.

You see a gov’t that showed forebearance in the good times. Small cheats on taxes, failed filings, understated this-n-thats were winked at and overlooked–but probably carefully catalogued. Now as we enter the leanest of lean times, they will draw out their lists. They will assess and prosecute and demand every jot and tittle with penalties and interest. IRS may then recoup all lost revenue and JAM THE MAN with crushing penalties and fees. Studied oppression. Practiced confiscation.What you are seeing now is a quiet revolution. Tired of check-kiting, IOU legerdemain; the rabble and mob and suffering unwashed shore-strewn immigrant and children of immigrants are challenging the New World Order. They are defying the counter-physical trends and turns of a manipulated market. They are arraying in military-like line and preparing hard defenses. They are holding with eco-bayonet against all opposers, against every charge. Armed with the knowledge that finally "kicking the can down the road" cannot continue, they short a weakened foe. Garnering what little pittance from a gamed market to preserve against Kondrateyev’s Winter. The old order is being overturned and impoverished. Wouldn’t it be fitting to use the market mechanisms of THEIR own design against them?We’re witnessing "Battle of the Bulge" tactics. The war is over. They have lost. They know it. Short of a printing press or universal confiscations, socialization. But committed and enduring in their folly, they are throwing capital and co-minded men to plug the breach. Fill the gap with funny money. American capitalism in its final stages like its democracy will fail because the theory, while being closely perfected to bring about prosperity, cannot exist simultaneously with moral turpitude. Having gone to the dark side and serving a dark master, the high priests defiled the temple. And thereby broke the promise of protection and assistance from on high. Whitened sepulchres full of iniquity and putrification. Dying now to be absorbed by mother earth and to make way for a new generation.

@ GLOOMY on 2008-07-29 16:49:09And in the merrill case, ML is parking the crap somewhere else, basically swaps whatever there is left from future cash inflow on 100% of the assets for a very low interest rate on 22% of the assets, and in return gets off the hook for [22% * 25%] of the losses on the assets but remains "on" the hook for [ (22% * 75%) + (100% - 22% - previous written off amount) ] of the assets. Great deal. ML IS IN PANIC! and still the stock is up today…

Timeout now – let’s watch Cramer and have some fun! I just hear him saying that ML should have gone down today… OLE…

@OsoteThe way I interpret the deal is that for 1.675b lone star effectively got a call option with a strike of 5.025b.

Ignatius / Osote – my humble interpretation if i may:Transaction value: 6.7 bnSources:Debt provided by ML: 75% of 6.7bn = 5.025 bnEquity provided by Lone Star: 25% of 6.7bn = 1.675 bnUses: Pay ML 6.7 bn to acquire 100% ownership of a pool of paper that is now valued at 22% of the original nominal amount.Going forward: – Lone Star will receive whatever cash flows generated by the assets. Theoretically this should be 22% of the originally projected cash flows. Nobody knows what the actual cash flows will be. Assuming that the market has overshot on the downside, the future cash flows on the Lone Star assets should be larger than 22% of the originally projected cash flows.- ML will receive NOT ANYMORE the cash flows generated by the assets (because they are now owned by Lone Star) but the interest payments Lone Star will make on the lone it has received from Merrill to buy the assets. NR assumes probably correctly that this interest rate is below market rate. Who knows, after deducting Merrill’s cost of funding, maybe Merrill’s net interest income on the loan is negative…RE OPTION COMPARISON:i would rather think that lone star bought a call option for 1.675 bn to acquire the future cash flows of the assets. the net present value of those future cash flows should theoretically be [6.7 bn - 1.675 bn = 5.025 bn].In reality, if markets recover somewhat, the Net present value of those assets could be anywhere between 6.7 bn and the original face value of 30 bn. So Lone Star effectively bought an "american style" call option for a 1.675bn premium with exercise price being whatever the assets are worth at the moment of exercise and lone star’s profits being the [asset sale price - 1.67bn - outstanding amount of the merrill loan].plse correct me if i am wrong – it is getting late in london.

@ Gloomy: "FRAUD?"Are you serious asking this question?5.5 cents on a dollar is what I got too, however, and to be fair this is only in the event these CDO’s prove to be completely worthless ($0.00).We can see that, if we assume that MER had any bargaining power (against itself, that is) by providing 75% financing and giving up any future benefits from CDO revaluation (one can always dream), it seems it is expecting an immediate and effective mark-to-market value of 16.50 cents on a dollar (or that the value of these CDO’s to drop by 25% or less). Therefore, we can say that MER is expecting the value of these CDO’s somewhere between 5.5 and 16.5 cents on a dollar (the average being 11 cents somewhat matching the writedown by NAB)On the other hand, my little finger is telling me that Covered Bonds fit in somewhere. Instead of this kind of highly dilutive, balance-sheet shrinking and onerous operations as executed by MER today, a covered bond would help banks expand their liabilities and balance sheets.I am asking more knowledgeable people here, wouldn’t it possible, with covered bonds, to put only 20% "down payment" on this "assets" and create bonds that it can sell to Lone Star or any other arm-length entities or swap’em against treasuries using Fed’s window? Investors will be on the hook for the remaining 80% (I know that the holders of these bonds are Super senior, but what if these assets are worth less). The question of course is one of traceability and demand for these bonds. Covered bonds were designed in Europe to increase visibility and transparency. However, given Wall Street’s heartfaintness and heartweakness for darkness and opaqueness I am afraid the Bonds’ reputation will be tarnished around the world.

Professor and/or anyone else interested in responding:"…So the street is now arguing that 22 cents on the dollar sets a market benchmark for writing down CDOs (Cit is still carrying them at a value of 53 cents rather than the 22) and many other firms will now have to use this benchmark; but the reality is that this toxic garbage is worth much less than 22 cents…"1)If $0.22 is going to be the benchmark for industry-wide firm writedowns, what implications does this benchmark valuation have for the $29 billion of Bear Stearns toxic assets on the FED’s balance sheet ?2)Had Bear Stearns been left to its own demise, would a bankruptcy court Judge have arrived at $0.22 for the valuation of toxic assets, and would that valuation have been the benchmark for future writedowns??

@ Gloomy:) I know. I mean you sound "surprised" or not really sure asking the question. The Fraud stinks thousands of miles away, although with all used TP stinks around, one’s senses get blurred and it is difficult to say exactly how many variations, who strong and where all the stinking comes from.Even my country-side uncle told me "it doesn’t smell good ’round here"

i overheard people wanna see a chart that shows movement/trend similar to (during/before/after) GD,well here it is— debt vs DDP –the chart is up to March, well before fannie/freddie’s fracasenjoy, try beating that JLC.. http://bp3.blogger.com/_rWY3qGfe6gc/SI1dtCRoXGI/AAAAAAAAA5o/FCp7-0EiyKI/s1600-h/Picture+1.png

Can someone tell me why Merrills CDO’s are worth so little. From what I read there are underlying assets in all these CDO’s how can they be worth almost nothing. Has the assets fallen that much or were they over inflated to begin with. A little help please…

@GloomyYou’re right, if you claim to have sold assets but retain the risk of ownership, that’s a crime. Remember Enron and the barges they "sold"?But the purpose of Enron and the slaughter of energy companies was to allow the banks to buy them cheap. The government was helping. Now the banks, whom the government is trying to help, are caught playing the same games. Hm, let’s see if the full force of the law is brought to bear.Some state attorney general, at great personal risk, could be a real hero here by pursuing these prosecutions. Not sure I’d have the guts if I were a state attorney general.

You all are right and wrong. The system is rigged and you can not outright beat them. The government is comprised of duplicitous liars working with special interests, it is called social fascism. Most in this once great country are too busy trying to pay bills to even comprehend the level of malfeasance that exists within the government. Think about it this way, your government is willing to burn women and children alive, thousands of miles away to allegedly protect your freedom while the government’s friends and family makes 100s of billions in war profits. You can not stop them but you can still beat them, short the dollar and play the bounces.

"Chain store sales were reported by the International Council of Shopping Centers to have surged last week"And? Sales don’t equal profits. In my area there is heavy advertising and deep discounting. Summer Clearance 75% Off! New Fall Fashions 40% Off! Save and extra 15% with store coupon! And Back To School sales should be starting to show up. I read that for big clothing retailers BTS is second only to Christmas.

Yes, Nouriel, the whole thing stinks. What even stinks more is the fact that MER rallied today on this deal! Rallied. Smells to high heaven it does.

@ Guest on 2008-07-29 21:10:21Interesting chart on total debt to GDP in that it shows debt continuing to expand strongly post-1929 markets collapse and well into mid-1930s, probably driven by the same government efforts to shore up aligned Wall Street interests under Hoover.Even more interesting to reflect on the historical political parallels. The Wall Street plot to overthrow FDR in a fascist coup in 1934 only failed when betrayed by General Smedley Butler to the House UnAmerican Activities Committee. He had previously reported it to the Treasury and Secret Service, but they had declined to investigate any of the principals – a Who’s Who of American banking and business which included Prescott Bush (later indicted for financing and fronting for the Nazis but even later cleared to become a powerful Senator who shaped the CIA his son later ran before that son and a grandson became presidents). The fascist government, including a paramilitary transition phase, would have been in planning and development while debt was still expanding.http://coat.ncf.ca/our_magazine/links/53/butler03-by_schmidt.htmlThe link above is full of historical goodies from General Butler, including revelations of a "Gold Cabal" on Wall Street, but I like the following excerpt:The 1937 sinking of a US gunboat on the Yangtze in company with three Standard Oil tankers was proof that American forces were posted where they had no business being: "Why don’t those damned oil companies fly their own flags on their personal property- maybe a flag with a gas pump on it." Marines, soldiers, and gunboats in China should all be brought home. "United States citizens should get the hell out of China and stay out. … let the financial interests who are crying over there run up their own flags and fight their own baffles." The United States must abandon the Philippines, Hawaii, Alaska, and Puerto Rico, to which he now added the Panama Canal, rather than war for them.

On non recourse financed asset sales:If you sell an asset but finance non recourse you have bought a PUT at the sale price and sold a PUT at the LTV. The amount of protection you have bought is then dependant on how much you have paid for that PUT spread. Which in turn is a function of the finance rate and the asset yield.Take an example where you finance at L+150 bp.Since the CDO SS asset will be yielding something in the region of L+2250 at a price of 22, its possible to estimate the upfront risky PV paid for the PUT spread by comparing the two yields of the financing. The amount of premium paid in PV terms relative to the strike differential of the PUT spread will tell you how much risk was really removed.If the PV of the risky premium flows is the same or greather than the PUT spread, MER would have actually increased its risk.The devil will be in the detail.

08:57 am : S&P futures vs fair value: +5.0. Nasdaq futures vs fair value: +5.2. Futures climb higher. The Fed is extending its Term Securities Lending Facility program through Jan. 30 and is introducing longer terms to maturity in its Term Auction Facility. The facilities were implemented to improve liquidity during the recent credit market turmoil. The Fed’s move comes "in light of continued fragile" markets.

"Those plans include raising $27 billion by selling a new 10-year note and a new 30-year bond at the regularly scheduled quarterly auctions to be held next week. The government needs to borrow $171 billion during the current July-September quarter, the second highest quarterly borrowing total on record."record deficit and record borrowing and record monetary pumping. and 10 and 30 years yield still hoovering around 4%? this is nuts. never heard serious slowdown in lowest interest rate time.

Nouriel, This is one of your very bests. Congratulations

WOHOOOOOO!!! Positive job growth, positive GDP, positive stocks…why the hell is everyone so gloomy???? WOHOOOOOOOO!!! Go spend 10X’s more than you make, party, party,party….ALL IS WELL, CAN"T YOU SEE THAT!!

Ha ha ha ha ha ha ha!!!APGovernment announces plans to borrow $27 billionWednesday July 30, 9:37 am ET By Martin Crutsinger, AP Economics Writer Bush plans $27 billion in borrowing next week as part of effort to handle soaring deficits WASHINGTON (AP) — The Bush administration gave details Wednesday on how it plans to borrow the billions of dollars it will need to cope with the soaring budget deficits.Those plans include raising $27 billion by selling a new 10-year note and a new 30-year bond at the regularly scheduled quarterly auctions to be held next week. The government needs to borrow $171 billion during the current July-September quarter, the second highest quarterly borrowing total on record.The increased borrowing needs reflect the exploding federal budget deficit which is projected to more than double in size this year and to hit an all-time high of $482 billion in the 2009 budget year.The administration released the new deficit forecasts on Monday. It blamed the surge on the sagging economy and the effort to keep the country from falling into a deep recession by mailing out 130 million economic stimulus payments.

Dow going up 300 points today-looks like this was a suckers selloff, and the this rally is the real deal.

"Zimbabwe will drop 10 zeros from its hyper-inflated currency — turning 10 billion dollars into one "http://news.yahoo.com/s/ap/20080730/ap_on_re_af/zimbabwewhat???? this move is just nut. may be helicopter Ben and Treasury Paulson are thinking about the same. Lets inflate dollar supply and start add zero. and then at some later time, lets drop all zero and turn 10 billion dollars into one!!! wooo HOO sinister plan.

10 billion Zimbabwe dollar is worthless. are USA dollars and dollar denominated debt (Treasury Note or Bond, or mortgage bond) heading same direction as dollars become worthless from oversupply? this is nut, printing dollars and issuing more debts are just not a right direction, USA is doomed.

Would anyone have a comment on this…$625,000 house on a street wrecked by subprime loans?http://www.ocregister.com/articles/camile-house-mortgage-2104411-fargo-wellsPrices are plunging on Santa Ana’s Camile St. But a few troubling exceptions are emerging.It seems like a rare bright spot in a dark real estate market.A year ago, the house at 920 W. Camile St. in Santa Ana was bank-owned, deserted and tagged with gang graffiti, a symbol of how the subprime lending bonanza had blighted a city block.In October, the house sold at auction for $304,500, little more than half what a buyer using 100-percent subprime financing paid in 2006.Today, 920 W. Camile has been renovated, repainted and floored with faux marble. It resold in January for $625,000, according to county records – a $125,000 down payment and a $500,000 mortgage from Wells Fargo Bank.The owners and residents are Mario and Paula Gomez, both garment workers at St. John Knits in Irvine and parents of three sons. The Gomezes also own 922 W. Camile, a home they bought in a 1998 foreclosure sale for $109,600. They are now landlords, and have staked their financial faith and future on Camile Street."We wanted a place with three bedrooms," Mario Gomez, 48, said in Spanish.But why would the price of a troubled property on a blighted street double between October and January?At a time when America’s biggest financial institutions are reporting billions of dollars in losses from bad bets on risky mortgages, why would a blue-chip bank like Wells Fargo extend so much credit on a street where comparable homes are selling for $300,000?"It suggests to me that not all the problems have been wrung out of the mortgage market today," said Paul Leonard, director of the Center for Responsible Lending in Oakland, a watchdog group. "You would expect an institution like that to have systems in place to look out for those kinds of deals."……Rafael Zambrano, owner of 930 W. Camile since 1988, is a rare optimist. He used his accumulated equity to take out a $334,000 second mortgage with Wachovia last September, money he used to buy a retirement home in Arizona."A lot of people are losing their house because they take the money to buy a new car or go on a vacation," said Zambrano, a father of four and owner of a restaurant in Orange. "My plan is different. I wait till one house is almost finished paying off and I get equity and buy another."’No money, no problem’Zambrano built up his equity over 20 years. That’s what makes the Gomezes’ house such a red flag. How could a property in such a distressed neighborhood, at a time of tight credit and falling real estate prices, double in value in a few months?People involved in the transaction denied personal wrongdoing while raising questions about the conduct of others in the chain that stretches through the seller, appraiser, broker, escrow officer, banker and buyer.……What is actually interesting are the comments at the end of the article. One of the says:Great article John!!! You may have brought something to the attention of the country’s tax payers of grave importance. Great responses too. Those of you guessing that Wells Fargo did this to set up saddling Fannie/Freddie with over-appraised foreclosure workouts are spot on IMHO. If banks do a few of these kinds of bogus sales in towns/nieghborhoods then they can create artificially high comps, comps which are a stumbling block to passing the garbage onto Fannie (we tax payers). Maybe the Fed is party to this? Anyone who has been hoping for affordable housing needs to get involved in stopping this. Take just a few minutes and send a quick note to your Representatives in Government here:http://capwiz.com/ascd/dbq/officials/Let them know we want this stopped and Wells should be investigated.Another one writes:This story is just unbelievable! Too much to write in a comment, so I’ve posted on it on my blog… just crazy! John, please keep us updated on this one.http://blog.redfin.com/orangecounty/2008/07/whose_got_the_lower_iq_wells_fargo_or_these_And a third one:The scam goes on, this kind of real estate deal has been done in the last few years in OC and LA counties.Read the newspapers in the Vietnamese or Chinese communities about the ads to look for someone with a good credit history to be a buyer in RE transaction. The advertiser is willing to pay 20K per house, and it will be done with Countrywide Mortgage. Now CFC has gone down with Bank of American acquisition, hence, someone at Wells Fargo is cooking the deals.No wonder US is in the mess of the sub-prime, and everything goes down. So far, the foreigners who bought the mortgage-backed bonds have been burned.Next, it will be Wells Fargo Bank!

I know one business right-wing nutjob associate who calls credit card payments his "honey hole." So it just goes to show that in times of financial stress, even TPTB will eat their young.Credit Card Transactions to be Reported to the IRS – in Foreclose Prevention Act of 2008 – Posted (db) in General on July-24-2008 – In the House Amendments to the Senate Amendment to H.R. 3221 – Foreclosure Prevention Act of 2008Payment Card and Third Party Network Information Reporting.The proposal requires information reporting on payment card and third party network transactions. Payment settlement entities, including merchant acquiring banks and third party settlement organizations, or third party payment facilitators acting on their behalf, will be required to report the annual gross amount of reportable transactions to the IRS and to the participating payee. Reportable transactions include any payment card transaction and any third party network transaction.Participating payees include persons who accept a payment card as payment and third party networks who accept payment from a third party settlement organization in settlement of transactions. A payment card means any card issued pursuant to an agreement or arrangement whichprovides for standards and mechanisms for settling the transactions. Use of an account number or other indicia associated with a payment card will be treated in the same manner as a payment card. A deminimis exception for transactions of $10,000 or less and 200 transactions or less applies to payments by third party settlement organizations. The proposal applies to returns for calendar years beginning after December 31, 2010. Back-up withholding provisions apply to amounts paid after December 31, 2011. This proposal is estimated to raise $9.802 billion over ten years.See Page 11 and 12 here:http://www.paymentsystemsblog.com/2008/07/24/credit-card-transactions-to-be-reported-to-the-irs-in-foreclose-prevention-act-of-2008/

GLOOMY on 2008-07-29 16:49:09MYSTERY SOLVEDNR wondered where banks would get the capital they needed and he speculated it might come from SWF’s. Now Merrill has provided the real answer to this conundrum. Financial companies will just loan themselves the money. It’s really quite simple, isn’t it?Of course! Just as they can supposedly add numbers to their accounting books when lending money to customers (according to e.g. the book "Web of Debt: The Shocking Truth About Our Money System…").In fact it would be surprising if they did not simply add numbers to their own books and then use these to lend to themselves. Of course you need an amount of money (or credit somewhere) in order to play this sort of a game, and it is risky. But then again, if you are big enough, the government might just soften your landing.But in other words it is not just the Fed that is inflating the money supply. It is the U.S. financial institutions themselves. All because of a desire for profits that they could not otherwise have…i.e. greed?Unless I am wrong with what I am writing here, USA looks like a system that is destroying its own self.

Money laundering on wall thief??? NAAAAHHHHHHH!11:03 a.m. SEC orders E-Trade to comply with anti-money laundering rule

Okay, three camps are forming 1. Global Stagflation 2. Inflationary Recession leading to Hyperinflationary depression and 3. Debt-deflation (stable or unstable). Lets explore 3: We certainly have over indebtedness, some distressed selling housing and MER cdos, a credit crunch preventing taking on more debt or buying assets. But its the Price of assets rather than the quanitity of money (Austrians)that drives deflation. We have not (yet) witnessed a broad (enough)distressed selling of assets that would truly define a debt deflation. However, if interest rates were to rise, affecting recasting of existing debt, then this would be the deflationary event that would cause people to sell assets to payoff debt, lowering asset prices in a negative feed back loop. And that is why the Fed will be on the side line for some time. Can someone elaborate more on the probability between 1, 2 and 3. All i know is as a consumer i am spent out and trying to buy needs instead of wants.Like this comment? [yes] [no] (Score: 0 by 0)

Thanks Nouriel! Great analysis and exposition.Ryan Darwish

@Guest: “Would anyone have a comment on this… At a time when America’s biggest financial institutions are reporting billions of dollars in losses from bad bets on risky mortgages, why would a blue-chip bank like Wells Fargo extend so much credit on a street where comparable homes are selling for $300,000?”You can compare this to Katrina. When the federal government decides to do rescue, what it really does is to use the victims as the excuse to transfer money to its friends. It doesn’t matter whether these victims are like some of the New Orleans people who were hit in the hurricane and ended up staying in hotels and spending luxuriously because it was “fed money” or whether they are “housing victims” who ended up buying two and three houses without much down and at high risk of default.It doesn’t matter because the real path of the money goes from the federal treasury, right through these victims, to the government’s friends. In other words, the Gomezes got an overly-priced $625,000 house with doubtful value on a blighted street and at high risk based on garment workers’ salaries, but the real winner here was Wells Fargo. It was Wells Fargo that came out before with subprime. And now it can start again.And why write to “your” congresspersons? Didn’t they just dun you for Goldman’s and Wells’ and Merrill’s and Lehman Brothers’ and Freddie’s and Fannie’s past graft? Save your breath, Taxpayer: it’s your job to bail.

curious on 2008-07-30 10:10:09 – Okay, three camps are forming 1. Global Stagflation 2. Inflationary Recession leading to Hyperinflationary depression and 3. Debt-deflation (stable or unstable).I do not see a decoupling from the ROTW, but rather a lag with the US going into stagflation first and the rest following us. I understand deflation, but I cannot see it on the horizon. Here is a nice summary of what we are facing [the emphasis is mine]…JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS – FLASH UPDATE – July 30, 2008 – Systemic Instability ContinuesLarge price swings with high volatility have been seen in recent weeks for oil and gold prices, as well as for the U.S. dollar and domestic equities. It is not likely that we have seen the near-term high in oil prices, and neither has gold topped nor the dollar bottomed. All factors considered, the broad outlook remains the same: further intensification of the inflationary recession and a deepening systemic and banking solvency crisis. Near-term market recognition of the issues and risks for unstable market conditions are intensifying, albeit erratically.Over the shorter term, negative major market displacements likely will follow or be accompanied by intense, broad selling of the U.S. dollar. An increasing flight-to-safety outside of the U.S. dollar also should include flight-to-safety into gold. Despite the ongoing volatility in oil prices, current levels remain highly inflationary. The gold and currency markets also remain subject to extreme near-term volatility, jawboning and both covert and overt central bank intervention. Over the longer term, U.S. equities, bonds and the greenback should suffer terribly, while gold and silver prices should boom.http://www.shadowstats.com/article/332

thanks ptm. I did consider Mr. Williams’ paper before posting, as well as summaries of Fisher and Minsky. My interim conclusion is that the Fed cannot raise rates, because that would spark a more widespread asset sale (securities) further exacerbating deflationary pressures. But the Fed can lower rates further if need be. Any thoughts on lower rates?

curious on 2008-07-30 12:07:25 – Any thoughts on lower rates?I think the Federal Reserve has tipped scale and entered the "liquidity trap." [http://en.wikipedia.org/wiki/Liquidity_trap] So lowering interest rates will not have the intended effect, but rather simply add to inflationary pressure.

@Guest: “The Fed said it was taking these steps ‘in light of continued fragile circumstances in financial markets’… that the emergency borrowing program for investment houses and the program that lets investment firms temporarily borrow Treasury securities would be withdrawn should the Fed determine that conditions in financial markets are "no longer unusual and exigent"When Bernanke says he’s not as worried about bank failures now as he is that credit is tight and people can’t get credit, translate that into: I’m not so worried about the economy as I am that my friends can’t get as much flow of the money as they have been getting.When government officials begin saying they need to open the faucets for credit what they’re really saying is the Fed’s unbilically attached investors need greater and more high-volume access to the U.S. Treasury.The Dow is not the economy. The economy is not something you push up. It has to grow itself. Hank and Paulson can’t do that, but they can help their friends fleece people. And that’s exactly what they’re doing – while Congress holds down the opposition.

A must watch video-enjoy the laughs!http://bigpicture.typepad.com/

Setbacks at Ground ZeroBy Poonkulali ThangaveluJul 24, 2008 4:48 PMThe rebuilding of Ground Zero has met with setbacks, from building delays to losing a major tenant. Indeed, brokerage giant Merrill Lynch recently ended discussions to take up space at Tower 3. The financial services company occupies roughly 2.5 million sq. ft. of space at its current downtown location. A Merrill Lynch spokeswoman said that the financial services company has a lease running up to 2013 at its current site and is reviewing options. On the other side, Janno Lieber, president of Silverstein Properties affiliate World Trade Center Properties, said, “We wish Merrill Lynch great success and hope they decide to keep their headquarters in lower Manhattan, their historic home, for many years.” http://nreionline.com/news/setbacks_ground_zero_0724/

US fraud markets off and running again.

ML maintaning its quarterly dividend!!!! Funny, isn’t it?

Oil up 5$, but no downside correlation on stockmarket anymore,… unless the Dow was supposed to be up 500 points today…

The 2:00 fairies show up right on time once again…

@ptm I must challenge your post that a liquidity trap coupled with the lowering of rates is "inflationary". I would submit that it indeed may lead to deflation. A major aspect of a liquidity trap is the money is not distributed from lenders to consumers because no one wants to,or can qualify to borrow for consumption, (or lenders do not want to lend) resulting is a decline in the velocity of money and inadvertantly adding to recessionary pressures. Subsequently, distressed sale of assets to relieve debt service leads to the decline is asset values and is the hallmark of debt-deflation. The contraction in the supply of money and velocity is evident when debt is repaid (even cents on the dollar)via those distressed asset sales, not to be loaned out again. What do you think?"In monetary economics, a liquidity trap occurs when the nominal interest rate is close or equal to zero, and the monetary authority is unable to stimulate the economy with traditional monetary policy tools. In this kind of situation, people do not expect high returns on physical or financial investments, so they keep assets in short-term cash bank accounts or hoards rather than making long-term investments. This makes the recession even more severe, and can contribute to deflation.Source: Wikipedia -"In normal times, the monetary authority (usually a central bank or finance ministry) can stimulate the economy by lowering interest rate targets or increasing the monetary base. Either action should increase borrowing and lending, consumption, and fixed investment (although Austrian economists tend to believe this is simply a nominal illusion – real consumption and investment levels can only change if production and savings rates change [1]). When the relevant interest rate is already at or near zero, the monetary authority cannot lower it to stimulate the economy. The monetary authority can increase the overall quantity of money available to the economy, but traditional monetary policy tools do not inject new money directly into the economy. Rather, the new liquidity created must be injected into the real economy by way of financial intermediaries such as banks. In a liquidity trap environment, banks are unwilling to lend, so the central bank’s newly-created liquidity is trapped behind unwilling lenders.The liquidity trap theory applies to monetary policy in non-inflationary depressions.

WHAT A MIRACULOUS RECOVERY IN THE INDEXES!

New Thread

I may be mistaken but this conversion of illiquid assets to 22% of their value (or even 25% of 22%) may be needed to keep ML in business. That is, if securities regulators require a certain amount of assets to participate in various markets (like SEC shorting rules), this modest little lie may be needed to continue doing business – or may open larger opportunities to ML for the business they are in – managing other people’s money. In that event, such fibbing makes good business sense. On the other hand, I am glad these folks aren’t managing my money.

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