Subprime crisis could out-cost 1980s S&L debacle

A new estimate places the final cost of the subprime crisis/housing bubble at $400 billion, while, in inflation-adjusted dollars, the S&L crisis weighs in at $240 billion.

In a new report to be issued today, the Joint Economic Committee of Congress predicts about two million foreclosures by the end of next year on homes purchased with subprime mortgages. That estimate is far higher than the Bush administration’s prediction in September of 500,000 foreclosures, which in itself would be a tidal wave compared with recent years. Congressional aides provided details of the report yesterday to The New York Times.

The Joint Economic Committee estimates that the lost of real estate wealth just from foreclosures on subprime loans will be about $71 billion. An additional $32 billion would be lost because foreclosed homes tend to drive down the prices of other houses in the neighborhood.

Those figures would cause a decline of $917 million in lost property tax revenue to state and local governments, which will also have to spend more on policing neighborhoods with vacant homes.

And, you wonder why people like me warn about a pending recession?

Global Insight, a research firm, predicts that the national average for housing prices will drop 5 percent over the next year and 10 percent before mid-2009, for a total of about $2 trillion. Economists at Goldman Sachs have predicted prices will drop by 15 percent, meaning an overall decline of more than $3 trillion; other forecasters have said the decline could be 20 percent or more.

That’s why.

Don’t forget, we haven’t even talked about spending downturn due to fewer home equity loans being taken out, or ones already on the books turning upside-down due to downturns in home value.

Economists continue to update their predictions on how the loss of housing wealth might affect the overall economy. Nigel Gault, chief domestic economist at Global Insight, said he assumes that consumers reduce their spending by about 6 cents for every dollar of lost wealth.

If prices drop 5 percent next year, that would mean a decline of $60 billion in spending, all else being equal. That would be a noticeable slowdown, but not enough to cause a recession.

In the last several years, Americans have increased spending faster than their incomes by borrowing against the rising value of their homes. Economists estimate that such mortgage-equity withdrawals may have added one-quarter of a percentage point to consumer spending growth — a boost that could now disappear.

That’s why presidential candidates better recognize this is going to be a serious issue next year.

Will Sarko give a slap to Shrub’s CO2 face?

Or, in plainer English, could a European Union carbon excise tax on non-Kyoto countries push even Bush to actually address global warming?

Because that sort of excise tax on countries that have not ratified the Kyoto treaty on carbon dioxide emissions is exactly what French President Nicolas Sarkozy has just proposed:

French President Nicolas Sarkozy on Thursday called for a national "carbon tax" on global-warming pollutants and a European levy on imports from countries outside the Kyoto Protocol.

It’s part of a larger tax package, and Sarkozy’s drive to realign France’s economy and public service sector.

Wrapping up a four-month forum on the environment that brought together the government, industry and the green lobby, Sarkozy said he would consider shifting part of France's tax burden from labour to pollutants, a key demand of environmentalists. …

“We need to profoundly revise all of our taxes... to tax pollution more, including fossil fuels, and to tax labour less.”

And, it’s drawing rave domestic reviews.

France's star environmentalist Nicolas Hulot, who pushed green issues to the top of the agenda of the last presidential campaign, said he was “happy and confident” following Sarkozy’s speech.

Arnaud Gossement, spokesman for France Nature Environment, an umbrella group of 3,000 associations, also reacted positively.

“For the first time, we have a president who does not pit economy, growth and ecology against each other... even though he was elected on a pro-growth platform,” he said.

I don’t know exactly what World Trade Organization regulations have to say about such a levy. But, so far, not a peep from Bush, so Sarkozy may just be on firm ground.

Arguably, this is a good reason for getting a Kyoto II started, that would include China and other developing countries, even if they’re not held to the same standards as the EU, US or Japan. It would finally, in a way, include environmental standards in international trade issues.

Apparently even many scientists don’t think James Watson is racist

A World Science poll has the following findings.

1. Some 57 percent of respondents find his comments about black intelligence legitimate opinion, 26 percent racism, and 17 percent unsure.

2. A full 75 percent said the London Science Museum was wrong to cancel a lecture he had scheduled.

3. Even more, 79 percent said the Cold Spring Harbor Laboratory was wrong to suspend Watson as president.

4. A similar percentage, 74 percent, said this would chill scientific discourse.

5. Between two responses, for two different reasons, 70 percent said Watson’s critics should leave him alone.

6. Just over half of respondents to the poll were scientists.

I’m not advocating censorship of legitimate opinion, but, this went beyond opinion. It was racism.

And, in science terms, it was pseudoscience, clear and simple.

Turns out James Watson has a racist past

Last week, I blogged about the recent racist comments of Nobel laureate and co-discoverer of DNA’s double helix structure, James Watson. Now, per a reader of Talking Points Memo, it turns out this is nothing new from Watson. In fact, he’s got quite a past history. He made similar comments in a conference at Berkeley seven years ago. Had anybody short of a Nobel-level scientist said this, we’d immediately label him as nutbar.

Witnesses were flabbergasted when the 72-year-old discoverer of the double helix suggested there was a biochemical link between exposure to sunlight and sexual urges. “That’s why you have Latin lovers,” Watson said. “You’ve never heard of an English lover. Only an English patient.”

In a lecture hall jammed with more than 200 Berkeley students and faculty members, Watson showed a slide of sad-faced model Kate Moss to support his contention that thin people are unhappy and therefore more ambitious. …

Botchan, who presided over the session, said Watson was merely trying to call attention to a protein (pom-C) that helps create several different hormones: One determines skin color (melanin); another enhances a sense of well-being (beta endorphins); and the third plays a role in fat metabolism (leptin).

Botchan said Watson was wondering out loud why evolution had linked these hormones, and whether the interrelationship of these mood and behavior-influencing compounds might be affected by exposure to sunlight.

Unfortunately, said Botchan, Watson advanced his hypothesis with “comments that were crude and sexist and potentially racist.” But Botchan, who did post-graduate work under Watson, said he doesn't think the Nobel laureate is racist or sexist, merely insensitive. …

Berkeley genetics professor Thomas Cline said Watson's lecture ``crossed over the line'' from being provocative to being irresponsible because the senior scientist failed to separate fact from conjecture. …

Berkeley biology professor Susan Marqusee walked out about a third of the way through Watson's hourlong lecture. …

A spokesman at Cold Spring Harbor Laboratory, a research institute on Long Island where Watson serves as president, confirmed the gist of his remarks and said Watson has voiced similar sentiments at other scientific gatherings.

Read the whole thing, if you have the stomach for it. The reporter notes that Nobelist William Shockley, inventor of the transistor, was ostracized for years because of similar comments. Why wasn’t that done years ago to Watson?

Being dismissed now as president of Cold Spring is less than punishment enough.

Why banks aren't renegotiating bad subprime loans

MSN's Jim Jubak does his normal excellent, reader-friendly job of financial explanation, this time telling why mortgage lenders are so loath to refinance defaulting subprime mortgage loans:

Who has an incentive to work out a deal with that mortgage borrower before he or she gets into trouble? Not the mortgage service company. These companies operate on the slimmest of margins, and any mortgage that requires extra work eats into that profit. Not the mortgage broker, certainly. Many brokers have gone out of business in the housing slump. Those that haven't, having already been paid for originating the mortgage, have no incentive to help with any debt workout. ...

And there's no reason to think that Countrywide Financial is the only mortgage company feeling this squeeze. Remember, 1.3 million subprime adjustable-rate mortgages are due to reset between October 2007 and the end of 2008.

That's much more than the number that have reset in the past 18 months.

Meanwhile, here's a new acronym you'll hear more of: SIV, for structured investment vehicle. It's an attempt to package those mortgage-based collateralized debt obligations into some even newer package.

The SIVs were set up as off-balance-sheet vehicles so that banks could invest in these markets without putting the risk of these deals on their own books. This is especially important for Citigroup, which, as the largest creator of SIVs, is on the hook for about $100 billion. ... By creating this conduit, the banks that created these SIVs — and that are on the line to fund them — avoid having to shell out big dollars or take these assets onto their own balance sheets.

But, because these SIVs, like their predecessor CDOs, haven't been priced on the market yet (amazing how places like banks and hedge funds can scream about capitalism until they get hoist by their own petard) SIVs are moving slowly:

This workout for SIVs and the big banks (and investment companies such as Fidelity Investments and Federal Investors that hold a lot of asset-backed commercial paper in their money market funds) is turning out to be a hard sell. Some big banks and investment companies are balking at the idea of ponying up money to buy risky assets that don't have market prices. How can they be sure, they ask, that the conduit will pay a reasonable price for these assets when there is no public market for them and no accurate method of assessing their risk?

Jubak says this could be very good for mortgage holders, in that it would finally forces lenders such as banks to revisit the idea of negotiating more of their bad loans to where they were still repayable.

Bonus: to help understand what these collateralized debt obligations are all about, Jubak gives an easy-to-understand explanation:

Think about the life history of the average mortgage.

* Some company originates it. That could be a mortgage broker, who qualifies a potential borrower and then puts that borrower together with a mortgage lender, or it could be a mortgage lender itself that also serves as the originator.

* That mortgage is usually then sold to another mortgage company, to a quasi-governmental entity like Freddie Mac (FMC, news, msgs) or to an investment bank.

* After purchase, those mortgages are most commonly bundled into securities, called residential-mortgage-backed securities, that are then sold to investors such as insurance companies and pension funds.

* Even that's not the end of the road for many mortgages because many residential-mortgage-backed securities, a bundle of, say, 1,000 or more mortgages, are then themselves bundled and then re-sliced into pieces of varying risk. These are then sold as collateralized debt obligations (CDOs) that might own as many as 100 residential-mortgage-backed securities, or 100,000 mortgages.

And, columns like this are why I'm a regular reader of his.

Bear Stearns sticks toe in Chinese investment waters: what’s it mean?

U.S. investment bank Bear Stearns has joined forces with China’s Citic Securities in an investment alliance that involves each bank investing $1 billion in the other.

Here’s the details, courtesy of MSN and the New York Times.

Citic will acquire about $1 billion of 40-year convertible trust preferred securities that will convert, on a fully diluted basis, to approximately 6% of Bear Stearns' shares; Bear will seek regulatory approval with China to acquire a similar stake in Citic for about $1 billion through a six-year convertible debt security and five-year options to acquire additional shares.

"This groundbreaking alliance will give Bear Stearns a unique footprint in one of the world's fastest-growing economies through a strategic partnership with a premier market leader," Bear Chief Jimmy Cayne said in a press release this morning. "We are confident that combining our operations in Asia with Citic Securities will greatly benefit Bear Stearns' global client base and generate substantial new revenues and growth opportunities for the firm over the long term."

Rumors had been swirling that Bear Stearns was looking to sell a stake in itself after the demise of two of its subprime-based hedge funds hammered the Wall Street bank this past summer. Bear reported a 61% drop in profit in the third quarter because of the mortgage-market meltdown.

So, in other words, Bear is probably still worried about not having enough liquidity, and that’s half of why it’s been pressing for this deal. If that’s the case, expect clamor for further Fed rate cuts, as well as a backstop “pool” of money from the Fed, Bank of England and the European Central Bank. Also consider the possibility that the likelihood of other, taxpayer-funded, liquidity steps has increased.

In exchange, Bear gets increased access to the theoretically valuable Chinese investment world.

But, just as much of the “tranches” from collateralized debt obligations here were never “marked to market,” that is, never had an open-market price calculated before being sold, it’s my considered non-professional opinion that much of the entire Shanghai stock market, and collateral investment centers, isn’t adequately marked to market.

In other words, China could have a bubble, too, perhaps in part caused by a U.S. backfire, since China has so many eggs in just a few American baskets.

My off-the-top-of-my-head guess is that the Shanghai stock exchange is overvalued by 20 percent. Maybe more.

What if other American investment banks make deals similar to Bear, and then this Chinese bubble bursts?

Definite recession. Perhaps a biggie.

Part of the problem here is the world hasn’t had a serious recession since China became a global economic player. So, I think professional economists far smarter in the “dismal science” than I probably have little more than guesstimates to offer on how well China could weather a 20 percent burp in its stock market.

German energy group: Peak Oil hit last year

The German-based Energy Watch Group says world production to fall in half by 2030 with a 7 percent per year decline.

“The world soon will not be able to produce all the oil it needs as demand is rising while supply is falling. This is a huge problem for the world economy,” said Hans-Josef Fell, EWG’s founder and the German MP behind the country's successful support system for renewable energy.

The report’s author, Joerg Schindler, said its most alarming finding was the steep decline in oil production after its peak, which he says is now behind us.

The results are in contrast to projections from the International Energy Agency, which says there is little reason to worry about oil supplies at the moment.

Well, the IEA has its head buried up its energy ass almost as far as Daniel Yergin does. It’s no surprise that it claims “all is well.”

Read the story; more and more mainstream energy analysts will be posting similar analyses and we’re going to see a lot of push-back.

But, this isn’t the first survey, analysis or something more than educated guess that has come down the pike saying we’ve either just hit peak or have already started moving down the downslope.

FBI demonstrating what progressives have known all along about torture

It’s inadmissible in court, so trials against Khalid Sheik Muhammad and others stand in limbo. The FBI was telling the CIA this some time ago. The federal gumshoes reportedly have been working as long as two years to make CIA torture-based clusterfucks into actually prosecutable cases.

Gonzo could be prosecuted for U.S. DA firings

Yes, former Attorney General Alberto Gonzales may face federal charges over his canning district attorneys for political reasons, with the fallout apparently disrupting a number of cases.

Nobody this side of George W. Bush or Richard B. Cheney deserves an obstruction of justice charge more.

Refuting Trinity Toll Road supporters’ analogies

Steve Blow, in an opinion column instead of his normal Metro piece, says a Trinity Toll Road would be just like Northwest Highway at Bachman Lake. This would be merely laughable if it weren’t false, due to the simple fact that Northwest Highway isn’t a freeway-style toll road! I guess Blow’s analogy spinner forgot that one inconvenient fact. Ditto for earlier in the column, when he wondered if Garland Road at White Rock would be a suitable analogy.

Oh, thinking of that, Steve do you think Bachman Lake users would like a freeway-type toll road running past? Or Arboretum and White Rock Lake users, for that matter?

I would love to see a Trinity Park develop. But, to go there in the midst of a six-lane freeway that could be a designated truck route? No, thanks.