Market Conditions: No Spring Bounce?
Homedelete wrote on a recent thread:
Is it just me or am I missing the spring bounce? It seems subdued. same old tired inventory; not many sales or homes going under contract. It’s been a month and a half since the superbowl too.
Is the “spring bounce” missing in 2009?
Are new listings slow to come on the market because sellers are waiting for the market to “improve”?
Will we see a deluge of listings come May?
You know this website has gotten tired when they are quoting moronic lawyers who live in Uptown apartments for stories.
Strange news…go figure
Housing starts surge 22% on apartment building
Single-family building permits rise 11% in February
http://www.marketwatch.com/news/story/Housing-starts-surge-22-apartment/story.aspx?guid={80F733A0-B553-4D73-80C4-BA67E07CFBAF}
link not working, same story at Bloomberg
http://www.bloomberg.com/apps/news?pid=20601087&sid=abzZrsUa2fUE&refer=home
I was one of those people, planning to buy this year and my plans are definitely on hold. My main issues are job insecurity, property values and the risk of my HOA dues increasing everytime the HOA can’t collect from all tenants.
Ha, Homedelete may be correct. I went out of town for a week and checked the MLS when I got back. There were a decent amount of new listings in the 8008 area and 8007 area (fine, some weren’t new listings but at least on the MLS they showed up as new). What caught my attention was the fact there were only about 10 closings.
Who will buy a house when every person fears losing a job or having their business close. The downturn was fast and furious starting in September. Until unemployment numbers turn, interest rates start rising and/or foreclosures slow (thereby slowing the decline in monthly average home prices) no one will buy.
Interesting how last Friday Ben Bernanke said the recession could be over by the end of the year. 2-3 weeks before then he said he thought the recession could run into 2010. What changed? CONFIDNENCE. The stock market went up on talk of bringing back the uptick rule and fixing mark to market accounting. Hey, I might be mistaken but the stock market surged on policies that will not cost the tax payer $1. Hmmmmm
The SFH data isn’t that surprising and quite anemic. The data doesn’t break out condos but apartments seem to have surged.
Perhaps this could be a combination of buildings converting their planned condos to apartments as well as reacting to the increased demand for rentals?
“Single-family starts increased 1.1% to 357,000. Construction of housing with two or more units climbed 82.3% to 226,000;”
Think Small,
While confidence may affect the equity markets (as I call the dumb money), take a look at the St. Louis Fed’s database (called FRED). You’ll see from 4Q data this is more dire than Benny boy is willing to admit.
Even worse on a log scale going back to the 1940s and another going back a decade the curve looks normal. So it means we’re in this even without a ‘credit crunch’ as is widely being reported by the media. Credit is in line with historical norms, believe it or not. It was 2003-2008 when it was not.
You can’t grow debt forever at a rate exceeding overall population growth or GDP growth and thats what got us into this mess.
Bob,
I agree we have problems as a country, but we have to deal with the cards we have been dealt and the debt the government has heaped on us all.
Confidence will get this engine going again. Please do not forget that FDR gave his famous “we have nothing to fear but fear itself” during a similar slump in confidence. The stock market surged last week on confidence. Correct me if I am wrong, but the market surged on discussion of bringing back the up tick rule, fixing mark to market accounting and Bernanke finally said the recession could be over by year end. Irony….wait for it….this is my favorite part…..everything that caused the stock market to go up last week IMHO did not cost the USA taxpayers $1 direct dollar!!!
Banks are saying they have been profitable for the first 2 months of 2009 but for mark to market accounting (there is no market right now). Lending spreads for banks are at one of their highest levels in history and this is how banks have historically made money…lending spreads.
As strange as it may sound, cheer leading by the media and government drove us down this death spiral in the economy and cheerleading the other direction will bring us out.
My wife and I were planning to buy in Q1 or Q2 of this year but have put that on hold. I’m not too worried about losing my job (no more than normal) but why would we buy when we’d see probably steeper discounts in 6 months, then who knows in 12 months?
I enjoy being on the sidelines and am in no rush to jump in.
Think Small, I couldn’t agree with you last comment more!
“cheer leading by the media and government drove us down this death spiral in the economy and cheerleading the other direction will bring us out.”
The market has been so oversold the past few months, that by merely pumping up the american confidence, the market has big time gains for a week…
I have to say, I agree with Benny right now, I do think we will be technically out of a recession by the end of Q3, but I don’t think we will “feel” it. I think we will still see big unemployment numbers as far out as mid 2010. There is always a lag between the market, GDP and employment.
The economy cannot just brush off a few trillion dollars in losses and recover in a few weeks. Many households who lost significant equity in their homes and investments may take a decade or more to recover. Many banks will takes years upon years to repay the money they borrowed from the government; just a few days ago Freddie warned that based upon historical earnings it will never make enough money to repay the government for the bailout. The federal government’s deficit spending, including higher taxes to pay the interest, will be a drag on the economy for years. All of this together is why there has been no spring bounce nor will there be a bounce for years to come.
“The stock market went up on talk of bringing back the uptick rule and fixing mark to market accounting. Hey, I might be mistaken but the stock market surged on policies that will not cost the tax payer $1. Hmmmmm”
Funny that I proposed those two exact things that would cost taxpayers $0 and was ridiculed like mad on this site.
I am not disagreeing that confidence has a definite effect on the equity market. However I think false confidence just breeds bear market rallies. If it makes people feel better so be it.
On the bank’s being profitable note, that is curious in that it comes from a curiously “leaked” memo and does not take into account provisions for loan losses. These aren’t GAAP or audited figures here and management can state whatever they like in internal memos so long as they aren’t making statements to the investment community. Just wait a month for their 1Q results and you’ll see whether they’re profitable or not.
Personally when I see things like the AIG bonuses I think it does the exact opposite effect of confidence as it should. Our house is definitely not in order and I think it needs to fall some in order to get the catalyst going to change it. The president and treasury secretary expressing anger and outrage is not enough. This is not some little kid they’re scolding here there should be real, serious and punitive consequences for what AIG did. There won’t be though.
In terms of spring bounce no not this year, or not yet at least. It has just started to warm up though so I think it would preliminary to call it dead at this point. I expect it to be dead but reality often interferes with our predictions.
“Banks are saying they have been profitable for the first 2 months of 2009”
Think Small
“Lending spreads for banks are at one of their highest levels in history and this is how banks have historically made money…lending spreads.”
You forgot the LEVERAGE. Leverage was the main source of profits for banks and it is gone now. But if you are so CONFIDENT in our banks, be my guest and gobble up on come C, BAC, UYG and so on. It is your money…
I agree that the spring bounce is missing and the obvious reason is because would-be sellers know the market is soft so they don’t even want to bother. Sellers might be willing to take a hit on the sale if they can make it up by getting a great deal on the place they buy. But in spite of the poor economic conditions, great deals seem few and far between. It’s like every time the price is right there is some negative issue making the deal look not so good. I think sales will be super slow this year. Everyone who can is just going to sit tight.
Every one of Bernanke’s economic predictions so far has been wrong (remember subprime is contained?). He’s a great contrarian indicator. We’ll know the economy is about to rebound for good when this numbnuts is feeling defeated and says something along the lines of “things are really bad and we have no idea when they’ll get better”. That’s when I’ll go all in on stocks.
We can all focus on problems or look for solutions. Eventually, we have to stop the hemorrhaging and begin to rebuild. It is time to rebuild.
To crazy frog, I did buy some C, BAC, AIG and GE. To Pete, Bernanke did essentially throw in the proverbial towel a few weaks ago and now he thinks we are on track for recovery.
the sky is falling!!
Inflation is back! Wooo hoo!
Think Small,
The time is not right. The rebuilding process can’t happen until we have capitulation of the old paradigm and put the leverage and risk taking institutions out to pasture. We’re still throwing money at maintaining the old institutions and paradigm en masse, so we won’t truly reach bottom any time soon.
So far at every step the government shows that they don’t know WTF they are doing and they’re still winging this. I’m gonna agree with Pete: they can’t be trusted and when they throw in the towel we might begin to recover.
Bob,
Sorry to go off, but your comment (and the collective ignorance of the american public regarding this issue) pisses me off.
“Personally when I see things like the AIG bonuses I think it does the exact opposite effect of confidence as it should. Our house is definitely not in order and I think it needs to fall some in order to get the catalyst going to change it. The president and treasury secretary expressing anger and outrage is not enough. This is not some little kid they’re scolding here there should be real, serious and punitive consequences for what AIG did. There won’t be though.”
Do any of you know anything about AIG other than what the media has fucked up?! I don’t work for AIG, but I work in the industry and I’ll say it like this. You are absolutely stupid to NOT pay the bonuses. As taxpayers we are shareholders of this enormous company and the problems with the company lie in one subsidary of the holding company. The remaining companies of AIG (Insurance Carriers) are actually in VERY good shape as they have to collateralize their risks, by law. The only way for AIG to pay back its loans is going to be to break up the individual insurance companies and sell them off at a premium. But if you don’t retain the quality employees because you bend them over on this bonus issue, how are you ever going to sell the units at a premium?! By not allowing these bonuses to go through, you are effectively hurting “our” investment as taxpayers.
Sorry to rant, but I’m tired of the public taking CNN’s shitty reporting for gospel…
Great reading everyone’s thoughts on this subject.
As I am relatively new to the Chicagoland market, I cannot comment on it’s success or failures at this time, so hearing your comments gives me an insight into what is happening.
Speaking from my perspective as an owner/seller in two other states, I have a different view on what is happening and my approach to it.
First of all, as an owner with several properties on the market now, I am not about to lower any of my asking prices as I know what I paid for them, the labor and materials that we put into them and the fair market value for each. I will stand firm on all properties and have instructed my agent to reject any low ball offers that he receives….and yes, there are (what I refer to as scavengers) out there who think they can come by, knock $20,000 off of every $100,000 of the selling price and I will gladly accept it out of desperation. NOT HAPPENING!!
That said, over the past four quarters, I have sold 5 properties at their asking prices to people who are responsible and knowledgable home owners. So we cannot say that all sellers are holding back or selling out of desperation.
As a buyer, I also see a unit’s true value AFTER I complete what I deem to be neccessary repairs and then either retain that property as a rental/investment or I put it on the market at a price that is fair, competitive and covers my costs…but it is done in a way that lets the perspective owners know the quality they are getting for their money.
I have come across some very unscrupulous sellers and agents since relocating to this area and many are acting out of desperation because of the crisis we are experiencing. Others are just out there to make an unearned dollar at the expense of those who are truly qualified to become home owners.
In the end, it is a true ‘racket’ at this point in time and if you do not know how to play this game. I would advise everyone to search and do a complete investigation on any place they are considering buying. Thanks to this wonderful site, many already have the first step taken for them!
Jason R,
I am not referring to the commissions the salespeople make in the other divisions. Those are earned and deserved. I am specifically referring to the 450MM bonus pool for the poisonous “Financial Products Group” which has about 500 wall street “hotshot” CDS traders who think they are entitled to a bonus despite that their division caused the ruin of AIG, the TARP bailout and the financial crisis. This entire division should be dismissed immediately for lack of performance. They essentially were writing naked calls on LEH debt, they bet wrong. They should not be rewarded by betting wrong, if anything they should be charge with corporate malfeasance and fraud.
Sorry to burst your bubble, Jason, but derivative traders aren’t required for the global economy or even the global financial system to function. We could easily hack out 70% of them. The remainder we could cut their remuneration drastically. If they are as good as they claim they can go work across the street at a hedge fund. But I think we know the reality: the only other profession they are suitably qualified for is teaching college calculus.
Bob, interesting “right wing” response to AIG and it’s bonus program!
Say the bonuses were retracted (as they should be) those who feel slighted can either walk and find other sources of income (or not work for years after getting rid of their nannies, private school educations and four times a year vacations) or they can stay put and work as the rest of Americans do…fair compensation for fair performance.
The minute they abandon their desks, you know 10 eager new workers are ready to pick up where they left off!
FU AIG
Jason R:
As to bonuses to the insurance folks–totally agree.
As to bonuses to the London CDS unit–are you nuts? The company is claiming that the only way to manage and unwind the positions is to bonus the jokers who brought down the company. There are probably more than 1000 out of work people as qualifed as the current guys to manage a CDS portfolio who would be happy to manage the unwind with no vested interest in anything other than minimizing losses. Fire the guys who ran the company into the ground (for cause, with no severance or bonus), hire new guys with bonuses tied to loss-reduction, watch the situation not get any worse. Maybe the terminated folks sue–who cares?
Yeah, easier said than done, but you’re talking past the real issue as much as CNN/CNBC?et al are.
Here is the example of the dangers of mob-mentality taking hold.
Key things of note in the story at the bottom of the post.
Execs are not getting bonuses: “The payments represent only the most contentious of a larger group of bonuses being paid throughout AIG. The company’s top seven officials, including chief executive Edward M. Liddy, agreed in November to forgo bonuses through this year.”
Not giving bonuses is not an option: “Attorneys working for the Fed had been examining the matter for months and determined that the retention payments couldn’t be touched because AIG would face costly lawsuits and be subject to penalties from states and foreign governments. Administration officials said over the weekend that they agreed with that assessment.”
They have already negotiated various deals: “After a Wednesday call between Liddy and Treasury Secretary Timothy F. Geithner, AIG agreed to restructure payments for the next 43 highest-ranking officers at the company, who are to receive half of their bonuses — which total $9.6 million — immediately, one-quarter July 15 and the rest Sept. 15. The last two payments would depend on whether the company makes progress in restructuring its business and paying back taxpayers. In addition, the company is set to pay another $600 million in retention awards to about 4,700 people throughout its global insurance units.
If the bonuses weren’t paid, the AIG staffers would be able to sue the company and probably would win, not just what they were owed but also punitive damages that would make the ultimate cost perhaps two to three times as high as the bonuses themselves.”
The plan has been known for a while: “Beginning in the first quarter of 2008, AIG disclosed the plan to offer retention awards at Financial Products. The unit had already begun to hemorrhage money, a problem that would later grow exponentially. The unit’s executives, fearing they might lose valuable employees in the tumultuous months to come, successfully negotiated more than $400 million for their workers, to be paid this month and again next year.”
This is feigned outrage by the government now to try and reduce those bonuses: “Law professors agreed with the Fed’s assessment but said AIG employees could still agree to reduce their own bonuses.
And the outrage expressed by the president and lawmakers was designed to put pressure on these officers to do just that, the legal experts said.”
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/16/AR2009031602961_pf.html
Obama and Geithner expressing “outrage” over the AIG bonuses is bogus populist bullshit… They dispensed tens of billions of taxpayer money to AIG and stated repeatedly that they knew what was going on at AIG before, during and after the infusions. Well obviously they didn’t know or didn’t care — these bonuses were already well underway before the last infusion and were paid out of the money we gave them. The administration was in a position to know about the bonuses and stop them before they happened, and did nothing about it — until the issue became a political football. Now of course they will milk it for all it’s worth.
Sonies,
I don’t think its feigned outrage on the government’s part. I honestly believe Geithner, et al had no clue about AIG bonuses until Cuomo received the letter from Liddy saturday night.
Yes I do really believe the government has been so hands off that they weren’t in the loop regarding this. Had they put any thought whatsoever into the bailout this would not have happened. But the bailout was typical W fashion: wait until the last minute, declare some sort of emergency, then ram-rod through legislation bypassing the proper controls (committee review, proper debate, request for comment, etc). Geithner was head of the NY Fed and the author of AIG’s bailout bill, this falls squarely on HIS shoulders.
JPS hit the nail on the head, IMO. Either they are being dishonest or they are incompetent, in any case it puts zero faith and credibility into how our government is handling this crisis.
I agree with Bob. The government is freakin clueless.
If they had “no clue” they are grossly incompetent. They told the American public repeatedly that they thoroughly understood what was going on inside AIG — that was part of the rationale for doing the huge bailouts. And they could have explicitly mandated that no large bonuses be paid as a condition of receiving bailout funds.
If you look at the agreement it looks as if the government intentionally distanced itself from controlling AIG as well. They own a majority of shares and appointed a three person “trust”.
This three person trust has control over the board of directors, who has control over appointing the CEO. However it does not have control over day to day decision making at the company. It can only appoint board members who are up for re-election and can’t change that process nor replace the CEO until it has control of the board. The American taxpayers got fleeced plain and simple.
I agree with Sonies and Bob – the gov’t is clueless. Especially Geithner, followed by Bernanke. Obama less so, if only b/c he doesn’t claim to ‘know’ as much. I wish them well, but Geithner is clearly in waaay over his head. Bernanke has been wrong every single step of the way, yet every week ‘knows’ the solution…. and it’s always different from the week previous.
Crazy Frog, regarding your post below, pure banks are as levered now as they were 2 years ago — you are thinking of the funds and ibanks with their prop trading and SIVs etc. Your stable community bank – the ones making Chicago construction/mortgage loans – are levered around 5-8x, as they have always been.
vvvvvvvvvvvvvvvvvvvvvvvvv
Think Small
“Lending spreads for banks are at one of their highest levels in history and this is how banks have historically made money…lending spreads.”
You forgot the LEVERAGE. Leverage was the main source of profits for banks and it is gone now. But if you are so CONFIDENT in our banks, be my guest and gobble up on come C, BAC, UYG and so on. It is your money…
ugh — should say 5-8% in capital, leaving a leverage of 12-20x
“the gov’t is clueless. Especially Geithner…”
Amen. What especially rankles is that Geithner was marketed (by both sides of the aisle) as “uniquely qualified” for his position, so much so that we had to overlook the fact that he couldn’t even do his own taxes correctly.
I don’t think he will last much longer in the job. He has zero credibility at this point.
Senate Banking Committee Chairman Chris Dodd, D-Conn., has proposed taxing the bonuses at 98%. Talking to Fox News, he said “You can write a tax provision targeted specifically at 98 percent of the taxable proceeds.” The idea of doing this seems like a slippery slope, but it may be the only way to get the money back.
And please don’t blast me for watching Fox News. Hubs told me about this.
Hey, stop ripping on Obamahood and Team Dem. Now don’t forget (as they always remind us) that they won they election and they have the right, damn it – the mandate, from the people, to turn a two year banking panic into a full blown depression.
And if you continue to disparaging them, you might be called out it during a press conference, like they’ve been doing with all dissent in America lately. Be careful.
Just to quell any lingering suspicion as to who is still really pulling the strings in Washington. They would have received zero had AIG been forced into bankruptcy court. Geithner, Summers, Obama, et al are “outraged” and “disappointed” at these “outrageous” bonuses. So much so that they’re willing to yell at the recipients, *gasp*.
Where can I signed up for the $1 reward for just being yelled at? I guess I’d have to lose billions in soured derivatives bets to sign up for a $1 million bonus to get yelled at.
Until these monies are taxed at 100% I have zero faith that our government is even partially in control of the situation. They clearly aren’t.
Benny boy can go on 60 mins and Barry on the Tonight show all week, I’m sure both aspire to TV stardom. In the meantime our treasury is getting raided and the wealth transferred to wall street bonus babies.
“Seventy-three AIG employees received bonuses of $1 million or more, according to New York AG Cuomo.”
err $1MM reward
Bob, of course the gov has put distance between themselves and AIG, its the only smart thing to do from a PR standpoint. They also knew from the beginning what kind of disaster AIG was looking at. But you (and by “you” I mean the general public)think that 100% of AIG’s debt calls should have been issued up front. The way CDS works is on timing. Why would they pay for a default yet to happen. The gov. knows that AIG is going to bleed money over a period of time and that each time AIG needs more $$$ to pay for the CDS, people are going to throw their arms up and cry about it. Putting distance between them and AIG is the only smart way to remain somewhat credible in this environment.
I still say it, as much as it sucks to pay AIG bonuses, you have to do it in order to keep the whole thing together. Like it or not, that is the way it is.
No one at AIG should be getting bonuses; profitable division or not. Working for a big company that’s a risk you take. The profits of your division offset the losses of others.
Benny’s boy’s interview on 60 minutes was borderline pathetic. That academic in his ivory tower looked like he was answering the questions like he answered essay questions in college: FULL OF BS.
At this point Bob, after a few Hamms, could run the central bank a little better than Ben.
you said it hd, the 60mins interview was ridiculous – not one hard question. not one follow-up along the lines of, “ok, now HOW will you do this”…
I also loved in Ben’s interview he said that they were essentially printing money (bits in a computer) and that he can turn the presses off at will when inflation starts to rear its ugly head. How about they print some money and give it to me? Hey Ben, why don’t you fly your helicopter and drop some money off in my neighborhood! I’ve got student loans I’d love to pay off…
“Senate Banking Committee Chairman Chris Dodd, D-Conn., has proposed taxing the bonuses at 98%.”
Dodd is the biggest phony of them all.
“While the Senate was constructing the $787 billion stimulus last month, Dodd added an executive-compensation restriction to the bill. That amendment provides an “exception for contractually obligated bonuses agreed on before Feb. 11, 2009” — which exempts the very AIG bonuses Dodd and others are now seeking to tax.”
http://www.foxbusiness.com/story/markets/industries/finance/dodd-cracks-aig—time/
Don’t forget-
“Separately, Sen. Dodd was AIG’s largest single recipient of campaign donations during the 2008 election cycle with $103,100.”
Rather than trying to selectively tax AIG bonus recipients and opening up a huge can of legal worms, it would be much better to let the bonuses be paid in full and then file a lawsuit against each recipient for their role in the collapse of AIG and all related fraud. The amount of the lawsuits should be far greater than the bonus paid, with the option to settle early for the actual amount of the bonus. I bet these bonuses would get recovered quickly.
“file a lawsuit against each recipient for their role in the collapse of AIG”
What’s your legal theory for personal liability? Be specific.
Meanwhile, back on topic…
Total written contracts for Chicago 2009 for pending or closed real estate:
Jan 3-16: 2,229
Jan 17-31: 2,755
Feb 1-14: 3,020
Feb 15-28: 3,305
Mar 1-14: 4,119
A steady uptick, and March numbers are 500 higher than 2008, but does not factor in those that fail to close.
The first two weeks of March have brought 12,831 new listings versus 15,331 for the same period last year.
of course the listings are anemic. The “honey lets move to the suburbs” after 2 years of ownership crowd knows that they will get their ass handed to them if they enter the market. The all Bling-Bling 20-30 something HGTV crowd has no money to bring to the table for their underwater POS. And they don’t have (and never did have) the 20% required for their mansion in the suburbs. So stay put it is.
Atleast the reality of the situation is sinking in. What would be interesting is when litte ethan has to head to school in a couple of more years….
disclaimer: I am 30 something all cash buyer, just reporting what I am seeing there. There are deals out there but all of them are from the developer or folks who have owned for quite some time.
Obama keeps changing the rules on everything, which hinders job creation and puts downward pressure on home prices. The Obama Administration continues to use misdirection to take attention off the real issues. It created a hoopla around Ruch Limbaugh while is passed the budget full of earmarks on the side and now emphasizes bonuses (making AIG the scape goat) for honoring insurance contracts to banks. IMHO, the government used AIG as a conduit to bail out the banks. Lets be honest, AIG could have refused to pay on contracts where it could prove in litigation where banks behaved in an irresponsible manner or did something to violate the insurance contracts. If the government is willing to void employment agreements (bonuses) and mortgage contracts between a bank and homeowner, why did AIG not try to avoid the credit default swap insurance contracts? AIG would not have failed if it did not pay the contracts. Just a thought.
Sorry, the misdirection on AIG was that the government is focusing on bonuses rather than how the bailout money was dolled out. I have read that the government did not want a list of how the money was paid out released. I did not explain this properly in the previous post.
My legal theory is that numerous AIG traders and executives were negligent and/or fraudulent in allowing these conditions to be created that led to the eventual insolvency of AIG. The government, as AIG’s new owner, is entitled to sue for damages. Obviously I’m not in a position to know exactly who is responsible for what, but plenty of suits have been filed for lesser reasons surrounding previous corporate collapses. This has a much better chance of working then selectively taxing bonus recipients.
Shit is starting to blow up like coco puffs!! Pending and Closed contracts coming on strong.
on AIG…ummm these “talented” folks could have shoved their bonus contracts and their pay checks and their jobs up their you know what if the tax payer hadn’t stepped in. So in effect the tax payer is being penalized for bailing out this heaping pile of crap.
I am slowly starting to understand what caused the french revolution, the utter disconnect between the wealthy class and the
underclass.
Pretty sure a Madame Defarge is busy knitting somewhere (tale of two cities)
Wealth envy and wealth vilification happen in every downturn. It will be essentially nasty during this downturn because we have a divisive president stoking the fire.
Check this article out. Shouldn’t this person worry about his own problems with Boeing? http://news.prnewswire.com/DisplayReleaseContent.aspx?ACCT=104&STORY=/www/story/03-17-2009/0004990147&EDATE=
“My legal theory is that numerous AIG traders and executives were negligent and/or fraudulent in allowing these conditions to be created that led to the eventual insolvency of AIG. The government, as AIG’s new owner, is entitled to sue for damages.”
Uh, no, they aren’t, barring some theory of *actual* fraud, which I have nowhere seen alleged.
anon,
You’re right on point. None of the actions taken by the small group of AIG’s CDS unit were fraudulent, in fact, they were exactly what they were supposed to do… The problem is that the majority on this board don’t fully understand Credit Default Swaps. The whole industry is a gamble of sorts and would have been just fine for AIG, if the rest of the economy had not taken such a HUGE nose dive.
I know it sucks to watch people who are sucking up taxpayer money, get even more, but the public really needs to understand the problem at hand, and unfortunately they either don’t or don’t want to.
The problem is that without these CDS’s, the banks that are already receiving TARP money, would be asking for even more, but because they are also receiving $$$ from AIG from these CDS’s, that is somewhat softened the blow. That said, people keep asking why AIG has not been dismantled and sold to help pay for the bailout money that the gov has given them. Its pretty simple, why would any bank give any potential buyer of an AIG company a loan to do so, when that bank knows it will be collecting $$$ from AIG under a prepurchased CDS that has not defaulted yet. If AIG is broken up now, then these banks run a BIG risk of not being able to collect on the CDS’s that they have already purchased. We won’t see AIG break up until all the CDS are paid out to the Banks.
Of course AIG will break up once the CDS’s are paid out. That was the plan all along: funnel government money into banks (foreign and domestic) using AIG as the conduit, let AIG insiders milk the company for more money on the way down, then let it collapse into a big pile of junk once the politically connected entities are repaid, leaving the government “loans” to be absorbed by the taxpayers.
Politicians can then feign outrage and use it to score political points from a mess they helped create. Anon and Jason R see nothing wrong here, just business as usual. Misleading investors into thinking the company was safe and sound while knowing all along it wasn’t is apparently not fraudulent.
“We won’t see AIG break up until all the CDS are paid out to the Banks.”
So, your call on a AIG breakup is Q3-2013, after the last of the CDS expire?
“The problem is that the majority on this board don’t fully understand Credit Default Swaps”
I don’t know if I’d go that far (there are a lot of folks here who get it), but I will go farther by attesting that most of the media (including financial reporters) don’t get it at all–I cannot count the number of times I’ve read, watched or heard something that totally misunderstands the purpose, structure, cost and payout scheme of CDS or confuses CDS with the “insured” assets, or MBS with CDOs or CDS with other swaps.
Some of it, I think, arises out of a general failure to understand why it was legal to buy “insurance” on an asset you had no economic interest in, and also to understand that, no matter how much it looks, smells and tastes like insurance, it still ain’t insurance.
“Anon and Jason R see nothing wrong here, just business as usual. Misleading investors into thinking the company was safe and sound while knowing all along it wasn’t is apparently not fraudulent.”
Faulty logic. Just because I recognize that there is no valid cause of action against the employees of the AIGFP unit that issued all the CDS does not mean I think is was okay. They aren’t “covered people” (not a term of art, just a shorthand) under securities laws for these purposes. Just because what they did was not okay does not mean that you (as a hypothetical AIG shareholder) have a valid claim against their personal assets unless you can prove actual fraud. Also, neither stupidity nor greed automatically equals negligence (much less fraud), so that’s a non-starter, too.
Honestly, if there were a potentially valid claim in there anywhere, don’t you think that the securities class action plaintiffs lawyers wouldn’t be **all** **over** **it**? Of course they would. They aren’t, because there is no point as there is no claim.
Jason R is in the biz and might have his series 7 or MBA. So he assumes that noone else can understand what a CDS is.
Jason it takes less than an hour to explain to someone with a 110 IQ what a CDS is and how it works. Just because you have an MBA (I have one too, so does half this board) and some securities license doesn’t mean you have elite inside knowledge of these instruments.
When you break them down they aren’t that sophisticated in a vacuum. What makes them dangerous is their interconnected nature and the volume of them.
They are nothing more than gambling instruments. And I still can’t see how AIG got itself in a position to gamble on writing them. Its like writing uncovered options. I blame congress in 2000 that treated the gains from uncovered CDS as hedging instruments and not subject to the taxes on gambling winnings. Truly uncovered CDS, just like uncovered options trading, is nothing more than speculation and should be treated and taxed as gambling winnings.
“he assumes that noone else can understand what a CDS is”
It isn’t totally unfair, given some of the crap understanding shown here and elsewhere on the ‘tubez, in the papers and on TV. When people use CDS, CDO and MBS interchangably (not you Bob), it’s fair to assume that they don’t knwo wtf they’re talking about.
1. AIG would have been bankrupt absent the bailout. The gov’t should have gotten concessions from bonus holders. (Where would they stand in line relative to other creditors of AIG in a bankruptcy, is there a special status for employees?)
2. As much fun as it is to yell at the bonus recipients, the bigger issue, both in terms of cost and also the one that Paulson, Bernanke, Geithner, etc. all knew about (I could conceive their not knowing or having focused on the bonuses), is the counterparties that got bailed out. That’s where the real money is. Why does Goldman or Citadel need to be bailed out? Especially without taking any haircut?
“Why does Goldman … need to be bailed out?”
Hmmm, what was the source of the former SecTreas’ high 9-figure net worth?
“Why does … Citadel [or SocGen, HSBC, et al] need to be bailed out?”
Hush money. Can’t payoff GS and not payoff the similarly situated w/o them causing a big stink.
[/conspiracy theory]
Why would art post pending and closed? Wouldn’t closed be a better true measure?
DZ,
On your first point I agree completely.
On your second point: the entire intent of the AIG bailout was to make the counterparties whole. They wanted to stop the cascading domino effect of defaults that the Lehman bankruptcy started. Hey I agree in an ideal scenario these institutions should’ve all shared in taking haircuts on their positions with AIG, but there really wasn’t enough time back then to do this and remember the intent was to keep these counterparties from going under as well.
It is impossible from a practical standpoint to shut the global markets down until all these interconnected counterparties can net out their positions and see who owes what and who should be allowed to live or go bust. And what the implications from those going bust will be on the remainder.
The AIG bailout was probably necessary, but it was implemented so poorly that while it may have saved the financial system, it certainly did not instill any confidence in it.
Also, “Where would they stand in line relative to other creditors of AIG in a bankruptcy, is there a special status for employees?”
They were deemed “key employees”; in a chapter 11, they would have been given retention plans (frequently, it’s in two parts) akin to what they are receiving (altho possibly for somewhat smaller dollars–not sure of the average payout). However, I think part of this should be deemed a “non-compete” payment, where they don’t take there internal knowledge and go elsewhere, trade on that knowledge and potentially make things worse for AIG.
The “poor” implementation of the AIG bailout was deliberate. Paulson’s only priority, which he made abundantly clear from the beginning, was to bail out Goldman Sachs. Not only were we the public too stupid to accept this fact, we also reelected the vast majority of the politicians who approved the bailout plan. Paulson and George W. sold it to the public and to congress using the exact same method that was used to sell the Iraq war: you must go along with this right away or very bad things will happen. The faster the plan was implemented, the less time anyone would have to study and debate it.
Back to the original subject…I just picked up on this conversation. This is a single data point but I’m finding lots of people wanting to put their place on the market right now. So much so that I haven’t had time to comment here lately. I’m also finding sellers pretty realistic about the market – for the most part. Buyers are definitely hesitant, which in my case I’m finding manifest itself in being very picky about what properties they are interested in and asking for lots of gimmes.
Pete,
I used to think so but can’t be so sure. I think Hanky boy was career banker and not a trader, so he didn’t have a clue what he was doing when he let Lehman fail. Had he known the repercussions and its affect on AIG and then GS, he wouldn’t have let it happen.
At the same time I’m grateful for the Lehman failure, even at this cost. It shows Wall Street that you can’t count on too big to fail. Sometimes government incompetence will prevent them from saving you.
jason r said: “None of the actions taken by the small group of AIG’s CDS unit were fraudulent, in fact, they were exactly what they were supposed to do… ”
this little group wrote ‘insurance’ (thru CDS) on over $3trillion in debt — the entire company had ~$100bil in capital which has now been wiped out x2, and there’s another $300-400bil to go before this is unwound.
I have issue with you saying their actions were “what they were supposed to do” — supposed by whom? They were using CDS as another insurance product, and most all of what they wrote was naked (ie like providing insurance for someone on another person’s house) — b/c it was unregulated, it was like a printing press – no limits.
All this little group was doing was looking toward their next bonus – risk be damned, they were getting paid upfront, and that’s all that mattered. I guess some would say “that’s what they were supposed to do”…. imo, that’s the one major problem that got us into this mess — performing with only next year’s bonus in mind.
Bob, For the record, I don’t have an MBA, or Series 7. By “in the Biz” I meant the commercial insurance industry (I’m not an AIG employee). Perhaps my statement about everyone here not understanding CDS was a little broad, and I realize that, my apologies to those who do. I don’t apologize to the people who keep spouting off as if they do know (as anon pointed out).
Jswede, unless you are a communist, how can you be so outraged that a company exploited a loop hole in the system?! It happens every day by thousands of companies around the world. The nature of CDS was exactly that, a gamble, but the govt. didn’t do anything about it, and as a result, the majority of major insurance companies out there, started using them. That said, AIG, did it better than most and as a result of the economy, is taking by far, the biggest hit.
regardless of if the govt. gives bailout money to AIG or to the Banks directly, the end result is that the Banks will get the money. If AIG doesn’t pay them, then they will go to congress and ask for more, plain and simple.
What I find hard to believe is the obviously misinformation that the US media throws out there, anything to grab your attention. Sure the $165M in bonuses to the CDS group of AIG bites, but what message is the govt. sending to the hundreds of thousands of employees in the banking/financial/insurance industries? For what, less than .0001% of the bailout money they have given AIG so far?
Yes, tighter controls need to be put in place, yes, a little more regulation should be put in place, but the message that the govt. is sending to the public is this, “we can, and will do anything we want with your money, and at any given moment, we will change our minds as to what it is we want”. I don’t know about anyone else, but I sure as hell don’t feel comfortable with that. IMHO.
“.0001%”
If it were that little, no one would complain, or even notice. .0001% of $150B is only $150,000. The bonuses total about ~.1% of AIG’s bailout $$.
my bad, one too many decimal places. so its 1/10% there about.
Kevin, I just wanted to show a pattern of recent activity. Since there is a lag of an average of 45-60 days it’s a better indicator of any ‘spring bounce’ for now.
Kevin on March 17th, 2009 at 4:22 pm
Why would art post pending and closed? Wouldn’t closed be a better true measure?
“he nature of CDS was exactly that, a gamble, but the govt. didn’t do anything about it, and as a result, the majority of major insurance companies out there, started using them. That said, AIG, did it better than most ”
‘did it better than most’? like they should be proud they are taking a 1/2 trillion dollar hit on at most a couple billion in revenues… near unlimited bonus to the upside, downside limited to zero thanks to the US taxpayer. and you think it’s ‘communist’ to have a problem with that?
I’ll just stop – it’s clear you do not know anything about CDS, just like you said.
jswede’s 5:21am post hit the nail on the head. And I do understand your viewpoint Jason R, even if these days I completely disagree with it.
We obviously need to put regulations in place to prevent this looting behavior from occuring in the future as jswede described in his 5:21am post. Wall Street (and I count AIG in this bunch too now as they were essentially doing the same thing) was operating under the impression that all’s fair so long as you get your bonus, long-term consequences be damned.
I’m of the opinion if we retro-actively change the rules a little bit, like take away their bonus, it might give people pause in the future as to whether they will really be rewarded for what they are doing if the whole thing comes apart. Clearly here, the whole thing fell apart.
If society loses people should be operating under the assumption that they lose too, thats why I see no problems with clawing back the bonuses.
There is nothing wrong with taking advantage of loopholes in regulations as that is what our capitalistic society condones as business. The fault clearly is on the government for not having/enforcing regulations. This happens all the time, only this time the bottom fell out and everyone is affected. Clawing back the AIG bonuses or taxing them is not a problem, as it too is an added enforcement.
“The fault clearly is on the government for not having/enforcing regulations.”
If the government regulators had cracked down on the entire edifice of real estate centered finance back at the height of the bubble, the right wingers would have been blasting the federales for interfering with the free market. You know it’s true.
Sorry Peter, it’s not true, you’re just making stuff up because you’re biased. That’s OK, it’s not your fault. You’ve been indoctrinated by the media for years. Now you’ve resorted to making up fake arguments and then using those fake argument to attack republicans.
Your strawman villains, the ‘right wingers’, tried to crack down on the housing bubble through regulation of Frannie and Freddie; but couldn’t do anything because powerful democrats would not allow any oversight. Please, turn off CNN and MSNBC, put down Time magazine, and spend 9 minutes watching this clip on Youtube. 3.2 million views so far. The clip is enlightening.
http://www.youtube.com/watch?v=_MGT_cSi7Rs
It’s your representative in their own words during a subcommittee hearing. It speaks for itself.
@ Jason R: those ‘bonuses’ are outrageous in any economy. A $1 million dollar bonus for schlepping paper and screwing people with high insurance fees? Please. I understand that they couldn’t fail (although all of these businesses really should, for the stupid moves they made), but the bonus $ is a slap in the face.
“A $1 million dollar bonus for schlepping paper and screwing people with high insurance fees?”
The bonuses at issue were not for employees of the insurance (life and casualty) businesses.