Wednesday, October 31, 2007

Lockie: “You Have the Right to……………”

“Hot potatoes” only can be passed, never kept or the holder gets burned. That’s why to win this game; you need to move them on.

That’s part of what is happening with the subprime investors and all of the schemes to “buy this and transfer that,” with SIVs (wish I had beaten Allan Sloan to the term “Sivilis,” which is so descriptive and for which he earns special honors) and MDOs, etc.

Some of the loans in these securities are just bad and the sooner those losses are posted, the better for the system. (See Bear Stearns, UBS, and Merrill.) Others can be saved—but at a cost, albeit less than full default and foreclosure—by reaching out to those borrowers and re-underwriting them, putting them into loans they can afford and have a likely chance of “surviving,” as their own financial situation solidifies (see Countrywide and a few others).

Other poorly underwritten loans never will go bad, because the people who took them out will bust their guts to make those payments come whatever. Good for them. But those families are a small piece of the 2,000,000 possible subprime mortgage defaults and foreclosure the market faces.

There is a big slug of loans that some investors are hoping get “floated” the traditional way, when the good times return and rising housing values wipe out their mistakes and the housing asset because worth more than the debt. If that occurred, then those subprime borrowers have a viable market option to pay off their notes and have some cash for another house. That, too, bails the big boys out of their mistakes.

Those of you, who see that happening in the next two years, raise your hands, “Class, class, Buller, Bulller…?”

It’s that group of loans where you are going to see a bunch of creative “hot potato” games. No investor wants to accept their failure and nobody really wants to keep holding them for long.

Holding out and hoping for asset appreciation to me doesn’t seem like a viable option, but it is an option. I think the sooner the big boys own up to their mistakes and swallow the red ink, the better for the nation.

There might be some surprising financial failures and major business mergers and takeovers, as the subprime dust settles. But, as many others before me have said and written, you have no market discipline, if the Treasury and Fed just cobble something to protect those who juiced the subprime process, hoping that home price appreciation never would stop, and now have been caught borrowing short and lending long.

Most of the investors are well known large commercial and investment banks. The Treasury should be in close and constant communciation with all of them, monitoring how decisions are being made how to record the mortgage fallout.

Also, when the inevitable takeovers and buy-outs come, I hope our federal financial regulators don’t forget all of their “systemic risk” and the “too big to fail” concerns which they freely have applied to the GSEs, whose business activities seem quite mundane compared to what the really big guys have done.


Do you think I’ve forgotten you? No way man. Happy Halloween!

(BTW, nice mask; hope you get plenty of goodies tonight.)

Did your minions really inquire at the GSEs if someone there was feeding me information about OFHEO?

I am glad that I’ve apparently pierced your annoyance threshold, but what did you see in my blog blatherings that could have reflected someone “dropping a dime on you or your troops?”

I couldn’t name twenty current officers at either Fannie or Freddie and the ones I do know I couldn’t tell you what they’re working on and to whom they report. I can’t tell much about their business initiatives, either, other than it looks pretty “vanilla” and tame.

If such an inquiry was made, it is even sillier when you look how I blog. I comment on what I believe are ideological and partisan regulatory actions, which are discussed in the national and trade media every day. I put them in the context of what I know about congressional/national politics and then offer my opinion, with a dash of humor.

Where, in anything that I have written, can you find “OFHEO secrets” (I was going to say “intelligence,” but that’s an oxymoron) regarding agency interactions with Fannie or Freddie?

Must have been a slow day at the office, when that one was hatched.

What were you going to do, send Alfred Pollard and David Roderer (two old friends/colleagues, now OFHEO lawyers) over to “waterboard” me??

C’mon Lockie. Don’t rendition me, Bro!

David Maxwell

Best wishes to former Fannie Mae Chairman and CEO David O. Maxwell, a formidable figure with great character and intellect, for a prompt recovery from elective bilateral knee replacement surgery.

David decided he needed to exchange the knees God gave him for a new set of bionic ones, to insure that he could continue to win senior tennis tournaments when he turns one hundred, still more than a generation from now.

The jury still is out on whether David should have had those skulls and crossbones tattooed on each of the new knees. But if it unhinges your opponents, I say go for it!

Maloni 10-31-2007

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