Flipper Alert: Flippers Keep Trying: 1400 S. Michigan
1400 S. Michigan, or Michigan Avenue Towers, in the South Loop started closing on units three weeks ago. There are 270 units in the building.
Already, there are several flips on the market.
Current stats (out of 270 units):
- 9 units for sale
- 24 units for rent
Some may be both for rent AND for sale.
Am I the only one who finds it amazing that investors continue to close on their units?
Here’s Unit #708, a 1-bedroom with den on the terrace level:
Brand NEW 1BD Plus Den Condo w/ Private Terrace to Easy access to pool/sundeck, HWD FLRS, STN STL APL, GRNT Countertops, South Exposure, In Beautiful SOUTH LOOP. Parking Additional 40K for extra wide spot on 6th floors easy access to unit.
I believe this is the “den”:
The Real Estate Group IL, LLC has the listing. See more pictures and a virtual tour here (including of the outdoor space).
Unit #708: 1 bedroom, 1 bath, 751 square feet
- Sold in September 2008 for $357,500
- Currently listed for $329,900 plus $40,000 for parking = $369,900
- Assessments of $380
- Taxes are “new”
- The den is 5×6
- Or- you can rent it for $1750 a month without parking or $2000 a month with parking
There are numerous 1-bedrooms available to rent. The cheapest units are $1500 plus $200 for parking for 700 – 800 square feet.
By what stretch of the imagination is 5 x 6 a den? That’s a closet. I couldn’t even lay down in there.
5×6 is a 2 family single family home in some parts of Asia…I’d put a door on it and convert it to a walk-in closet, 1/2 bath, or storage… the seller might then get less laughs.
I’ll guess it’ll sit until it gets down to $269-289 w/parking. Too bad it’s south facing. An east exposure would have given it lake and park views and a higher price.
You can’t just add a 1/2 bath in a condo highrise, Chitowninvestor.
Yet it still isn’t any less ridiculous than calling it a den.
This is a great example of a unit that will over-correct on the way down. There will be many knife-catchers in the interim, of course.
This aint going to sell until the price falls in the low 200’s.
There’s a reason why they called this a housing bubble !
“John S. on September 29th, 2008 at 8:30 am
This aint going to sell until the price falls in the low 200’s.
There’s a reason why they called this a housing bubble !”
How many minutes before someone insults you for predicting that this unit will fall into the low 200’s? I’ll start the stopwatch now.
I saw somebody on Yelp say this would sell in the mid-240s.
Yelp is the most credible source. Real reviews by real people.
HD – I think that is an accurate price expectation. I am not sure how anyone paid that much for this place to begin with. How extra-wide is the parking space? The terrace is nice, but not that nice. I am not sure how you can call a 750 sq ft place a 1bdr + den.
This is a lot different than the place on Orchard in LP. South Loop, high rise, plenty of competition in the same building, inflated sales price (the ’08 initial sales year has to be incorrect though, right?).
that den is awesome. i’d toss a (small) Foosball table in their and call it a game room.
I can’t believe how much this flipper paid just last month. Were they living in a cave for a year and not at all aware of market conditions? Talk about buying at the peak; this was well past the market peak. This flipper isn’t just stupid; they’re Casey Serin stupid.
So everyone agrees that the flipper is an idiot. But what the hell is the bank thinking? Aren’t they supposed to be deleveraging (hence avoiding risky loans like this)? Is it any wonder why IndyMac, WaMu, Wachovia etc. have failed? This is a big reason why I’m so wary about this bailout.
$360k is incredibly steep for 750 sq ft in South Loop. The den is comical and should have been combined with whatever other room it’s next to (bedroom, living room, kitchen, whatever). If rental rates in the $1600/month range are realistic and obtainable, this should probably be priced around $280-310K.
Amazing, no one has insulted you yet. You said low 200’s which implies at least a 33% hair cut from the ’08 selling price. Some people here freak out when predictions like that get tossed around. I got chastized a while back for saying such scandalous things.
Personally I think this unit will bottom at $190’s or maybe low 200’s. This place is only 750 sq in the south loop. Roger’s Park used to be really nice and expensive back in the day too. When in college the apartments I lived in had servants quarters and dumb waiters. Now they’re filled with college kids, a few hipsters and fresh off the boat immigrants. Rent was $1,300 buck a month in 2001 and I don’t think it’s gone up too much since then. But at the end of the day there are way more units in the south loop than buyers and prices will soon reflect that. I can wait this out.
trader, isn’t it obvious what the banks were thinking while sustaining the Ponzi scheme? Privatize profits and socialize losses.
It seems to be working for some. For the greater good, of course.
David (the first one) said: “If rental rates in the $1600/month range are realistic and obtainable, this should probably be priced around $280-310K.”
Oh boy will there ever be knife-catchers if people still believe this. Are you working under the old new paradigm, or the new old paradigm?
“David (the first one) said: “If rental rates in the $1600/month range are realistic and obtainable, this should probably be priced around $280-310K.””
That means this unit is valued at 175 to 194 times rent??? I say 120 times rent, which is $192,000.
My 1BR Lincoln Park condo (792 sq. ft.) also has a 5’x6′ space in the hallway but it does have a door and has never been anything but a closet… which is what something that size should be. On the other hand, maybe I should take the door off and call it a den. What’s a den worth now… $50k? Talk about found money 🙂
Benjy, now that’s the way to apply the old new paradigm. Too bad it isn’t 2006 any longer. The foolish and gullible are increasingly difficult to find these days, although Steve Heitman and his able-monied legions are always buying.
you guys are killing me over here… The 5’x 6′ “den” sure takes me back…
When I was in college, I had a studio apt. in Rogers Park, and there was a walk-in closet that was about 4’x 7′. I wasn’t really using it, since there were 2 other closets there. A very creative classmate asked one winter if they might bring a cot, and bunk in that “room” when the weather got too bad to commute back to home. That little room turned into a month-to-month rental for me, and I housed 2 more people over the next year!
So, calling it a den or bedroom is possible, although really very silly!
The developer never called the tiny space a “den”. If you look at the plan in their website, it is called a work alcove.
http://1400michigan.com/images/floorplans/708-2508.gif
What I want to know is what kind of crack was the person that paid 357k for a mediocre 7th floor apartment smoking? That is obscenely overpriced. Maybe…. Just maybe if it was a couple of blocks north and had a direct view of the park that price could be justified.
Yeah, the banks were just itching to give their money away and get seized by the FDIC and their assets sold off to various scavengers. Federal guidelines forcing them to lower lending requirements had nothing to do with it.
homedelete,
The rent multiplier will depend largely on the prevailing interest rates for mortgages. Interest rates are still low. If they spike, the rent multiplier will indeed plummet. But in the meantime, I stand by price estimate based on rent. If that rent is optimistic and the market rent is actually lower, then the unit’s value would of course be commensurately lower.
The banks were happy to make a ton of money originating garbage loans and selling them to investors. The panic set in when investors wised up and quit buying.
David (the first one) said: “Yeah, the banks were just itching to give their money away and get seized by the FDIC and their assets sold off to various scavengers. Federal guidelines forcing them to lower lending requirements had nothing to do with it.”
Do you suppose that the NAR lobbied for or against lower lending requirements?
I love when the “responsible” parties blame each other.
Oh boy Republicans, you have a lot to answer to? Barney Franks said he will come and say nice things to you if Nancy hurt your feelings.
Housing = done!
equities = done!
your jobs = done!
David (the first one) said: “The rent multiplier will depend largely on the prevailing interest rates for mortgages. Interest rates are still low. If they spike, the rent multiplier will indeed plummet. But in the meantime, I stand by price estimate based on rent. If that rent is optimistic and the market rent is actually lower, then the unit’s value would of course be commensurately lower.”
Even without a spike in interest rates, wouldn’t the cap rate expectations have changed quite a bit in the current economic environment? Or should they still be at bubble levels (which your rent multiplier seems to imply?)
Those aren’t “investors” buying a “$1600/month range” rental for “around $280-310K” in your example, those are speculators. Or, more accurately, knife-catchers.
But the shills are still pushing this crap, obviously.
There’s our favorite SHill now. It’s all coming home to roost, isn’t it? Now that everyone is beginning to see the housing bubble as the Ponzi scheme it was, why don’t we go after the profiteers next? Bankers, Wall Street and their NRA drones have some ‘splaining to do.
You still believe Lincoln Park is immune, SHill?
Not any more G. We are all f’d…
The same result with or without a “bailout.” Or should I call it “$700B more for the a@@holes of the FIRE economy.” The bubble was always unsustainable. Just like I told you long ago.
But you had to con some more fools into debt slavery in order to pad your bottom line. At least you claim to have sunk your riches into real estate this year. I hope you can at least laugh along with us on that one now.
Hahaha no bailout I’m lovin’ it. What a great rebuke of the Bush administration the House Republicans gave him today.
I’ve previously explained on here why I believe the Treasury Secretary has zero credibility, its good to see congress feels the same way. This isn’t the end of the world, it will just be a rough up and down week on the market.
Steven Heitman Said, “Not any more G. We are all f’d…”
http://static.seekingalpha.com/uploads/2008/3/13/vinny_s_last_cycle.gif
Sounds like you finally got past denial and are at fear. Let us know when you get to panic stage.
We still have a ways to go.
G – This has nothing to do with housing. I hope you do realize this. Every bank you know holds debt that is not bad, but currently marked as worthless. The bailout would have helped value these debts correctly. Without it, these good debts marked as bad debts will sink our country for good.
It is not housing that they are trying to save, it is our financial system that runs EVERY SINGLE PERSONS life!
What do you mean, Bob? The world was ending 10 days ago if Congress didn’t act…oops, scratch that.
What did they need the $700B authorization for anyway? The FDIC continues to spend, as the Wachovia takeover last night illustrates:
“Under the agreement, Citigroup Inc. will absorb up to $42 billion of losses on a $312 billion pool of loans. The FDIC will absorb losses beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk.”
Whoopee, more paper.
You guys really are stupid. Who could sit here and hope for the end of our economy. It is not about housing, it is about a financial system that is not currently working.
Stupid country, stupid votes!
Take a look att he 1 month treasury and tell me what you think it means. If you don’t know you should leave your comments to people that do. Watch it go negative and your pink spip will be in your cubicle the following day.
Steve-o,
Although I’ve been flatly against becoming a debtslave like oh-so-many-other-20somethings, when rates hit negative for me I will change my position. I’ve got a big mattress Stevo, let the good times roll.
Congress voted it down because they are all afraid of losing their jobs come re-election time as people don’t understand the financial systemic risks that exist today. The problems in the financial system extend way beyond the mortgage products (ratings system, CDS). Not all of this paper is worthless, rather mark-to-market accounting is impossible these days. Valuing the true expected CF will be an art in any CDO structure.
I don’t know that I would say I love the fact that a bailout has not passed yet (emphasis on yet as voting is still open). As credit markets tighten for all borrowers (corporate, individual, municipal, etc etc). Corporate/small business defaults will be up, credit card defaults increase, student loan availability will decrease further, funds available to lend disappear, higher unemployment, lower tax base, etc etc etc.
SHill, nice try. The world will not end. The die was already cast, your greed just didn’t allow you to see it.
Now get on the phone to your clients and let them know that they should sell for any price. Your fear is sure to impress them.
“The end of our economy?” WTF? Where were you when the bubble was expanding?
Propping up the same crooked players will not help.
Remember G, I work in Chicago and not in CA, LV, AR, or Florida. On top of that, I work in the LP, LV, and Bucktown. You can count the foreclosures on your hand in these neighborhoods. Nice try though…
Actually the Clinton administration as well as the Republican Congress have some explaining to do as they pushed Fannie and Freddie to expand mortgage purchases to low income homeseekers in ’99. There are some good articles from the journal back in 1999 highlighting the risks that we are seeing impacting the financial markets today.
It’s over you housing morons ! Good luck selling your garbage to a greater fool !!!
See you in the soup lines this Christmas !
Saving the economy is exactly what the proposed bailout WON’T do. It was not designed to bail out the entire economy (nor could it possibly do so). It was designed to bail out Goldman Sachs and was justly defeated (and hopefully won’t return).
The government should have never gotten into the home ownership business. Its noones fundamental right to own a home. Why do we give tax breaks on home ownership interest? Our government should not be making these value judgements such as “increased home ownership is beneficial to society”. This is not based on any facts whatsoever.
In previous generations before WW2 the home ownership rate was lower and mortgages required substantial downpayments and were for a term not exceeding 10 years.
The sooner sellers admit they made a mistake and lower prices by 40%, the sooner we’ll get out of this mess.
People will learn, just like in the NAASDAQ bubble of 2001, that asset prices do not always go up ! Price does matter !
Moreover, many of these realtors should go to jail for the ponzi scheme they enabled.
The economy is driven by sentiment, risk, fear, etc. Those things then change revenue and net income for businesses as well as home prices. The purpose of the bailout was to restore confidence and not pad someone’s pocket. It was meant to stop the cascading effect of failures that will ultimately lead to more and more lost jobs.
http://www.marketwatch.com/news/story/dont-call-bailout/story.aspx?guid=%7B0A2E0398%2D2E89%2D4F7F%2DB8C7%2D4150783B1B2E%7D
D – Fannie Mae does not have all that much to do with it. It was subprime, option arms, stated, ect. Fannie was not buying these loan.
JL hit it on the head. BTW – MCCain is now officially done!
“In 1992, Congress mandated that Fannie and Freddie increase their purchases of mortgages for low-income and medium-income borrowers. Operating under that requirement, Fannie Mae, in particular, has been aggressive and creative in stimulating minority gains. It has aimed extensive advertising campaigns at minorities that explain how to buy a home and opened three dozen local offices to encourage lenders to serve these markets. Most importantly, Fannie Mae has agreed to buy more loans with very low down payments–or with mortgage payments that represent an unusually high percentage of a buyer’s income. That’s made banks willing to lend to lower-income families they once might have rejected.”
http://articles.latimes.com/1999/may/31/news/mn-42807
JL, $700B could not have stopped anything. A yes or no on the bailout does nothing to change the credit worthiness of borrowers (of any kind.) The banks finally realize that lending to deadbeats is not sustainable.
The “cascading effect of failures” was the obvious final outcome at the start of the credit bubble. Handing money over to the same players would stop nothing, except to encourage moral hazard.
I am sure the manipulators of the FIRE economy love your concept that “The economy is driven by sentiment, risk, fear, etc.” Would it hurt for it to be driven again by something like, I don’t know, making and selling useful things? The selling of real estate, stocks, etc back and forth doesn’t seem to work.
Steve – not necessarily true. Fannie bought plenty of non-conforming loans w/o knowing it and did participate in the subprime mrkt. Look at how much ABN’s mortgage group was fined for no income documentation on thousands of loans (I believe ABN’s review was 28,000 mortgages). But, Freddie certainly bought plenty of Alt-A mortgages.
and a quote from Bloomberg:
“Fannie Mae of Washington and McLean, Virginia-based Freddie Mac held $114 billion of subprime and $71 billion in Alt-A securities as of June 30, according to the companies. Subprime mortgages were given to people with poor credit scores. Alt-A loans, which rank between subprime and prime, were made to borrowers with better credit who provided no proof of income, bought property for investment or took out so-called option adjustable-rate mortgages.”
SH said: “Not any more G. We are all f’d…”.
So are you admitting that your real estate “investments” needed this “bail out” in order to profit? How come you failed to mention this while singing the praises of Lincoln Park, Bucktown, etc. earlier?
Regardless, many people will indeed “profit” from the failed bailout in the form of increased affordability of housing and the reduced levels of inflation. Of course, the next few months won’t be pretty, but a recession (however mild) never is.
-D-, did you come across the NAR’s lobbying position during the govt push for Phoney & Freddie “to expand mortgage purchases to low income homeseekers in ‘99?”
Maybe some of our realtor friends here know the answer?
trader, SHill never seemed to price that risk into his cap rate proclamations while regaling us with his superior financial acumen, or did I miss that?
Tsk, tsk. I hope he didn’t make the same mistake with his “clients.” Is that covered by E&O insurance?
I don’t really care who pushed or lobbied for it. The ultimate responsibility lies with the politicians on this one.
Also, the $700B will go a long way towards impacting the borrowing ability of “credit worthy” companies and individuals. There is a near complete shut down in these markets today. Defaults are coming down the pipeline in the corp sector and I am sure in the cosumer CC industry. Many institutions and individuals are getting caught up in this even though their balance sheets are fine as banks are completely unwilling to lend at reasonable economics.
The economy is driven by sentiment. Another huge player is the CDS market which is completely (or near completely) unregulated. CDS swings have been killing equities over the past month.
SH said: “Not any more G. We are all f’d…”.
So are you admitting that your real estate “investments” needed this “bail out” in order to profit? How come you failed to mention this while singing the praises of Lincoln Park, Bucktown, etc. earlier?
Regardless, many people will indeed “profit” from the failed bailout in the form of increased affordability of housing and the reduced levels of inflation. Of course, the next few months won’t be pretty, but a recession (however mild) never is.”
Trader – My investments are all cash flow positive and rented out. Does the economy crash where people can no longer pay their rents? I don’t know, but if it does get that bad than I bet everyone is f’d. I am in a fine position as long as all four wheels do not come off.
Sounds like we definitely need this bailout to keep the entire economy from going down the tubes. What I don’t understand though is why I can’t buy these distressed mortgages at firesale prices? Shouldn’t there be mutual funds that are scooping these up so I can invest in them? Something isn’t right.
As for McCain, I’m not sure why this vote should hurt him – though it seems to have. If the Republicans are being blamed for the vote not going through and most Americans didn’t want it to pass then shouldn’t the Republicans emerge as heroes?
Gary – Accept McCain voted for it!
Good point. Of course, when it becomes clear that not voting for it is destroying the economy…And Obama voted for it as well, right?
SHill, does fear make you lie? Wasn’t this a House resolution? Why did they allow a Senator to vote?
He supported it. Sorry!
SH: since you are cash flow positive and have renters then i don’t see how “We are all f’d”? then again, i am NOT one of those that believe the economy will tank even if there is no govnmt bailout.
G: i think we are thinking along the same lines. the market will inevitably correct and the less good money we throw into the fire the better.
Gary: this is bad for McCain because Bush is also a Republican and this is viewed largely as his mess. moreover, McCain looked terrible in the last debate compared to Obama.
Yes Gary but Obama’s party supported his view. The dems are united and the rebubs are a mess. McCain claimed at a rally this morning that he was the reason the bill was passed. That was before the actual vote. Oops!
G wrote: “Do you suppose that the NAR lobbied for or against lower lending requirements?”
What’s your point? Of course the realtors would want to force other people to be looser in lending money: that means more commissions for realtors. Realtors were in bed, for expediency’s sake, with the “affordable housing” advocates/communists who pushed for stricter CRA regs and the lax regulatory oversight of Fannie/Freddie in securitizing the bad loans they forced banks to make (see Frank, Barney and Dodd, Chris). My point was in response to the oft-repeated line that this is the result of bank stupidity, as if bank execs far and wide sat around cooking up ways to throw away money and ruin their business.
As entities, the banks are now looking for a bailout from the entity they perceive to have caused the crisis to begin with (Fed gov’t). Of course, there are unsavory personalities involved too, and it’s rightfully infuriating in a populist sense to contemplate taxpayer-subsidized golden parachutes for those who knowingly participated in and facilitated the charade while it lasted.
Gary,
Apparently popular sentiment has shifted dramatically over the past 24-48 hours, with approximately even splits between those in support/opposition. So who knows quite how this plays out politically, and what the “voting public” perceives as political gamery vs. responsible lawmaking.
David (the first one),
It was greed that caused this: greedy politicians, greedy banks, greedy realtors and greedy speculators.
If the wise bankers were made to do these things by the govt, wouldn’t that make all of their large bonuses in recent years the result of outright fraud? I mean, if they knew this would be a problem down the road, why didnt they set that money aside for the rainy day that they knew was coming? Why didn’t they notify investors that record profits were an illusion?
I’ve said it many times recently, but I love to see the “responsible” parties pointing fingers at each other.
Steven Heitman said “The dems are united and the rebubs are a mess.”
The Dems are united? What about the 95 who voted against the bailout? As a matter of fact, the R’s were more united in their voting today (although not with Bush/McCain.)
The vote totals: R, 65 yes 133 no. D, 140 yes, 95 no. That would make the R’s 67% no, and the D’s 60% yes.
See here: http://clerk.house.gov/evs/2008/roll674.xml
Greed is part of capitalism. How much is enough? Regulation is what is needed for capitalism to work properly. 90% of the US population does not understand (literallY) and w/o regulation the 10% that does will take everything they own.
G,
I hate the bankers that enabled this as much as anyone else, but if we’re looking for fraudsters the weakest link to start with might be the ratings agencies.
Make the S&P and Moody’s analysts who rated these CDOs and MBS as AAA explain their models and assumptions. If a grand jury does not agree with their fiduciary standards then criminally charge them and jail them. Any banker who put any sort of influence on the bond analysts should be jailed as well.
Sounds like a plan, Bob.
I was busy all afternoon. Too bad I missed a great discussion. SH admitted we’re all f****d!
Public company market caps lost $1.4 trillion in value today. The bailout package was $700 billion. Which was more expensive?
Revenge on Wall Street does not put more money in your pocket!
Stupid is as stupid does!
JL,
The Congress showed with great resiliency today they cannot be held hostage by Wall Street.
What happened today was Goldman Sachs and Morgan Stanley, scared for their life, were fighting like hell to tank the market. Ultimately over the longer-term these investment banks are nothing but market makers and cannot set prices however.
To hell with Wall Street. They do not dictate terms of their bailout to the taxpayers and they are not being successful in all of their aggressive lobbying efforts to get this through.
C, JPM & BAC might be too big to fail but GS & MS aren’t and we need some more i-bank bodies first. No white knights until we can take out as many of these crooks as we can I say.
Don’t worry Steveo you live to fight another day even with no bailout: 50bps emergency rate cuts are now back in the cards. You’ll get your 5% mortgages yet again maybe.
Let me get this straight. The bubble-callers were mocked as “doom & gloomers” by the shills, and now those shills are trying to scare us with doom and gloom?
You can’t make this stuff up, folks.
2005 prices on the DOW. Go get em boys!
Good point JL. And the cost of the bailout was not $700B. I think a lot of the ordinary folks didn’t get that. If the treasury lost 10% on the purchase of these assets the cost would only be $70B and there was even a reasonable chance that the government could have made money on the deal.
Ha! You can make rates 3% they won’t give people the money though, I’ve seen that movie before.
The House today showed great resiliency in wanting to keep their jobs. Period. GS will be around for a while. Don’t worry. A bailout bill will pass before GS fails (I don’t think they will fail). Bill Gross had a great editorial about his expected return calculations to taxpayers. Interesting times. Who knows where this is all headed.
And, to add fuel to the fire, the investment bankers paid the rating agencies for their ratings.
There were a lot more participants today that must have been fighting like hell to tank the market outside of MS and GS.
We’ll see what tomorrow holds.
Margin calls and frozen credit. At least the naked short rule is in effect. LOL!
Bill Gross only looks out for his PIMCO bond funds. He has been calling for government handouts for about a year now, to relieve his funds of their toxic waste mortgage debt. Just remember this when evaluating anything he has to say.
Same thing goes for Warren Buffett. He definitely wants his _image_ to be the gentle old grandfather figure, but reality couldn’t be further from the truth. He’s a pit-viper who cares only about one thing: Berkshire Hathaway’s returns. I have to admire him a little, though–it takes one heck of a snake to outsnake Wall Street!
Oh and lets not forget about this Hank Paulsen guy, the former chairman of Goldman Sachs. He will ensure his Goldman buddies receive a priority over the American taxpayer and he’ll work tirelessly to try to ensure it. Guess who got a sweet deal on the AIG advisory role that Paulsen decided? Yeah lets give this guy a blank or near blank check.
http://i33.tinypic.com/2rp2wjr.jpg
The bailout is not about the investment banks. It is about the banks that make loans to homeowners and businesses. If companies cannot get a loan, the business cannot grow sustain operations in these challenging times, which will cause jobs to be lost. It is my opinion that we will find the country almost stalled (0% or less growth) in the third quarter.
As a negative example of what led to this point, look at Sun Capital Partners (www.suncappart.com). I believe that at it peak this PE firm was buying a few companies per month. Sun is made up of mostly distressed companies that will surely fail without loans to continue operations. While you can dislike Sun Capital, what about the thousands of people who will lose their jobs without the bailout plan? The employees of the businesses held buy Sun Capital are not rich Wall Street people.
Aren’t we “in these challenging times” because businesses couldn’t “grow sustain operations” for years now?
The credit-fueled Ponzi gig is up.
Banks that need to give loans to homeowners and businesses can already borrow from the federal reserve using the temporary term auction facility (which runs through January and will be extended) OR the permanent Federal Reserve discount window IF they have sufficient collateral.
The bailout is all about bailing out Wall Street by injecting solvency. This is not a liquidity crisis its a solvency crisis. This bailout is a handout to insolvent banks.
Sun Capital will be able to borrow from the stronger banks that are in better financial condition although they may have to pay a higher rate.
Also the bailout cannot guarantee that it will result in lowering the rates of the interbank lending market. The Fed has no control over these and its not the United States job to stop the global contagion. If your bank is insolvent due to bad investment decisions or business practices you don’t deserve to be a going concern.
The LIBOR has been rising steadily over the last week unfortunately near many borrower’s quarterly reset date. Quite a few home owners, student loan and commercial borrowers are going to feel the pinch of higher borrowing costs.
How did I miss this one from yesterday?
JL said: “Public company market caps lost $1.4 trillion in value today. The bailout package was $700 billion. Which was more expensive?”
Are you sure that calculation makes sense? Let’s assume for a crazy moment that it does, how does today’s market rise affect your conclusion?
Can we now safely assume that the market will rise every day there is no bailout vote? I guess we really dodged a bullet there.
SL also said: “Revenge on Wall Street does not put more money in your pocket!”
Neither would the bailout, so what’s your point?
homedelete,
Your comments on the LIBOR are spot on. Unfortunately we here in the US have got ourselves in a bit of a pickle as our banking system tied loans to this rate that our government has no direct control over.
The LIBOR rate is the rate British banks use, if your loan has provisions tied to them then thats a problem for those carrying variable rate debt. I myself have rarely in my life carried variable rate debt: for a period of less than a year after graduating school.
For homeowners with ARMs I have zero sympathy for: the reward of ARMs is a lower rate up front for the RISK of potentially higher rates in the future. You cannot accept the upfront reward without also taking on the backside risk.
Commercial borrowers I feel for. They will have to pay higher rates and will be the real victims here. THEY are the ones who should get any sort of bailout NOT financial institutions.
JL said: “Public company market caps lost $1.4 trillion in value today. The bailout package was $700 billion. Which was more expensive?”
This was commonly spouted after the close and it is amazing how often this was repeated. This is ignorance and hypocrisy as G has stated (these were the same people saying everything was alright a couple months ago). Moreover, this ignores the fact that anyone in the market is in there taking RISKS which include the DOWNSIDE. Taxpayers should NOT be required to take on that risk. Regardless, it seems like everyone shut up with the massive rally the next day.
It seems to me that Paulson/Wall Street learned from the Bush Administration’s actions pre-Iraq War and learned that FEAR and MISINFORMATION is the way to win everyone on their side. Mention “Main Street” or “Great Depression” and watch the idiots flock to your side thinking they know what they are talking about.
Bob,
Focus on your last paragraph and think about how the bailout just might help the corporate borrowers out.
Trader,
Does it help to sit here and say: “Oh no, the sky is falling. We should all run for cover. Hoard your cash.” I do not expound doom and gloom because panic does not help get through a situation. It only slows progress.
No one expected the government would seize Fannie and Freddie. No one expected Lehman would fail and the following cascade of failures/acquisitions. I am still somewhat at a loss for what happened because the FDIC takeovers and overnight acquisitions occurred without much transparency.
I can tell you that at this point we need something. Think of it like Pickens Plan, it is the only and best option we have for our oil issue. The bailout is the only and best option we have to hold back an utter mess.
Things can change overnight and they have. People are hoarding cash, businesses are delaying shipments because of credit and the list goes on. Businesses are silently bearing this at the moment and the issue will rear its ugly head soon in the public in the form of massive layoffs.
“Things can change overnight and they have. People are hoarding cash, businesses are delaying shipments because of credit and the list goes on. Businesses are silently bearing this at the moment and the issue will rear its ugly head soon in the public in the form of massive layoffs.”
This is because the government, the biggest player in the game, is getting involved. No one has been doing anything because everyone, including you, is waiting to see what the government does first. The markets would function much smoother if the government didn’t get involved and businesses had to act accordingly. Everyone is currently holding their breath waiting to see how money their going to get from the bailout. A large portion of this mess was caused by the government, and they’re continued involvement is exasperating the situation.
Right, the government should not have offerred a $700 billion bailout plan, blasted it across the news and then not pass something. It is like giving a child an ice cream cone and then trying to take it away. The child will throw a tantrum. We cannot change the past. We can only move forward.
The banks won’t lend to each other, businesses and individuals because they know they are not good for it. Yet they ask the taxpayers to do the lending?
Just like my favorite SHill has said for months: Qualified borrowers can still obtain loans. The problem isn’t liquidity, it is solvency, and throwing good money after bad will not help at all. It will only reward the insolvent for their bad decisions.
Besides, financial institutions were unlikely to lend much of what they would receive under the bailout. They would just swap it out with junk collateral and hope it is enough to keep them afloat until the next bailout. Notice how previous dead dollars thrown overboard by the govt have not eased the credit crunch – only creditworthy borrowers can do that.
..but there aren’t enough credit worthy solvent borrowers who need to borrow. For example, Microsoft is sitting on $23 billion dollars cash. Why would they need to borrow money? Companies like GM, Sprint, AIG, they need to borrow money but they’re also not credit worthy or solvent. What’s the old saying, a banker is somebody who lends you an umbrella but asks for it back on a rainy day..
homedelete –
there are plenty of solvent borrowers. instead of naming large cap borrowers, think about all of the MM players and all of the companies that have working capital lines. they have to borrow to fund their seasonal businesses. further, with increasing commodity pricing, this financing need has increased dramatically for many smaller companies as they fight to make it through this cycle.
-D-, the solvent borrowers can still get loans. If they did not plan for this rainy day, then they likely are not solvent. If their business is seasonal, where’s the money from the good times? Why is it gone? Poor corporate planning should not be rewarded.
Businesses fail all the time. Why shouldn’t they fail in a downturn? Or do you actually believe a downturn can be avoided?
Bailouts will reward the failures, and only for a short time at that (because they are already FAILURES.) Is that any way to run an economy?
G, I am responding to HD’s statement that “there aren’t enough credit worthy borrowers who need to borrow.” That is a ridiculous statement. Of course, it is in the eyes of the beholder. And whether solvent borrowers can get money right now is extremely debatable….even the solvent borrowers know that and are drawing down 100% on their revolvers now (and so are the troubled borrowers – e.g. automakers) to make sure the $$ is there and available.
Revolvers work to fund working cap loans. They are always there and are drawn based off of business need and time. Of course money comes in from the good times, and then it is used to pay back loans and to pay employees’ salaries, expenses, etc. If all of these companies had the ability to churn enough cash all the time, then a revolver would never be needed. The % of companies that operate at that level are few and far between. Who lends money today? How do they fund these loans? They use leverage……everyone uses leverage.
Do you think every company out there churns 50% op income like a software company that has been investigated by all sorts of worldwide anti-trust regulators/attys? Is that really the best company to use in an argument about borrowing needs?
Business do fail all the time. I am not going to argue that. Just depends on the # of failures you want to see because there is a potential systemic problem. I am not necessarily vouching for the bailout, all I know is this has the potential to be a lot worse than a few companies failing during a recession. This will go a lot deeper w/o something being done.
Of course, the potential is for massive failures. That is the case with every credit-bubble implosion, and this is THE BIG ONE. Easy money = more risks = more failures. Where were the cries when the bubble inflated? Wasn’t this the obvious, unavoidable outcome?
The “system” has already failed or we wouldn’t be discussing this. Why continue pumping in more money that does not exist and create more inflation? That will hurt Main Street more than seeing the bad businesses go away. The govt should save the money for the soup lines; otherwise what eventually trickles down to Main Street won’t be soup.
Wake me up when we get back to producing useful things that the world might actually want.
Sure. Main Street will be a harmed a lot more if nothing is done as not everyone on Main Street works for MSFT. And not all of the Companies that “fail” will be “bad” companies (I am not even sure what a “bad” company is in your context).
The “system” hasn’t failed, rather a portion of the “system” has failed, and it is currently causing other parts of the “system” to be pushed toward failure for many irrational reasons as capital has dried up (but not all are irrational). I am not talking capital for structured products, rather I am talking about capital used at that grocery store you go to, or at that restaurant you like to eat at, or the capital that thousands of kids use each year to go to school. As that stays dry, I think Main Street will feel a ripple…or a smack across the face.
Oh, and wake up, “we” are producing useful things everyday. Additionally, the cries for the bubble began as the Fannie/Freddie legislation moved through Congress back in 1999, and they continued in numerous sources over the last few years. I will/would agree that our legislative system is broken…..
I enjoy the discussion….It’ll be interesting to see how this all plays out. Decent Op Ed in the journal from a couple of Columbia b-school professors.
-D-,
The problem with the bailout aside from the control issues and moral hazard it creates is that nothing in it explicitly can force banks to lend to each other again. Smart banks will sell their illiquid crap CDOs & MBS for cash and sit on it until the crisis settles. Its the prisoner dilemma.
They are scared to death now becuase the LEH bankruptcy’s aftereffects are still rippling through. They don’t know how much exposure other banks have to derivatives with LEH or AIG as a counterparty.
Also why should our government shoulder the entire burden for this worldwide financial panic? Some countries may go along but Germany has said no dice.
At this point its looking like regardless of the bailout the economy is in a tailspin. Leveraged loan prices are now at 80c on the dollar. The government can’t do anything in time to prevent these financial shocks from affecting the overall economy.
An interesting game theory scenario for the House vote is that today if I were a house member worried about my job I wouldn’t care so much as how I voted but rather that I was on the losing side of it. They are damned if they do and damned if they don’t. They vote for the bailout and it passes the economy still tanks and they get blamed. The vote against it and it fails same scenario. But if they vote for/against and it goes the other way they can do a lot of fingerpointing to distance themselves from this.
The Phoney/Fraudie legislation explains nothing. What did it have to do with the untold lines of credit to failing businesses? What percentage of public companies have junk bond ratings? Why were they able to continue borrowing? What ever happened to pricing risk correctly?
It looks like the geniuses didn’t know what they were doing while receiving unimaginable compensation. Main Street will pay for this already, so why offer them such a nice parting gift? They should be bailed out, alright, bailed out of jail (if they can get someone to lend it to them after seizing their assests.)
I’m going long pitchforks and scarlet letters.
I don’t think the argument that banks won’t lend to each other will hold. If the “toxic” paper is gone, then the balance sheets should be a ton more stable than they are now. I think prisoners dilemma is great to discuss in grad school, but obviously gets very complicated when it is applied to a real-life scenario, where outcomes are seen in the marketplace pretty quickly. I can’t say that every “player” would benefit from sitting out entirely. Opp cost of capital.
Not all banks are scared to death by LEH’s bankruptcy, rather many are looking at TONs of opportunities right now. JPM has positioned itself extremely well. WF looks fine. BAC still in the mrkt.
Why do you think leverage loan prices are down to 80 cents? Do you think it is because leverage is out of the picture right now? Investor participation accounts are down 67% from last year because many shops can’t get bank financing to earn a decent ROE on investing in loans. Also a lot of vintage 2007 deals are cov-lite which people don’t want to hold right now unless it is at a deep discount. Funny thing is a lot of these accounts are still performing well with EBITDA growth, defaults have increased, but the $ average/principal per default has been well inside of historical averages (at least according to the LCD).
The loan mrkt prediction (LCD) in the expected/bad case is this could turn by mid-’09 with capital infusions due to the fed’s plan. No plan, liquidity continues to lag, deep recession through at least 2010.
Would you really expect Germany to participate? The ECB has a different edict than that of the Fed, and has for quite some time (well since the early 20s for Germany specifically). Funny to see the dollar strengthening as folks predict the bailout passes. Then again, we are already helping to prop up their banks through the Fed swap line.
One positive I see out of the Wall Street bust is that it might push people to develop companies and products that employee people since the easy money Wall Street career path has been blocked. Our markets are efficient and people flow to where the easy money is. No one wakes up in the morning and thinks, “I want to build a business that employs a lot of people.” In my opinion, the beauty of Wall Steet was that you did not have to employ a lot of people in order to make a lot of money (I do not work for a financial company). You also had a huge talent pool beginning you to hire them because of compensation.
Success of a product or service forces you to grow. In addition to the whole reduce foreign oil rhetoric, renewable energy would employ a lot of people for probably 2 decades in order to build out the system.
Begging, not beginning.
The worst thing is that the developer lied about how many until were sold. I bought in the 1st month of sales and was told all but 3 east facing unit were sold. I would call every 3 month and there would 6 lake view units for sale condo. They were all dummy sales!!! And the standards are some of the cheapest I have seen!!!
So much for luxury high rise with high end finishes. I had to upgrade everything and raised my tab to 350g also, the property report list the units from 235g to 285g plus 35g for parking. The developer back in 2005 decided to raise the prices by 10-15% b/c that’s what they thought they would appreciate and did not want to leave money on the table per se.
On the MLS there are about 100 units with expired or cancelled contract, (90% sold, yeah right). I am finding this out b/c the units are NOT appraissing for contract price. They go for mid to upper 200 and my lender will not approve the loan at the 350g price.