Wall Street Journal
The Subprime Market's Rough RoadBy NICK TIMIRAOS
February 17, 2007; Page A7
Rising defaults and delinquencies by home buyers with shaky credit are wreaking havoc in parts of the mortgage industry and stirring concerns about a stumble in the U.S. economy.
Foreclosure rates on "subprime" loans -- those made to borrowers with poor credit records -- more than doubled last year from 2005, according to a UBS report. Some firms that specialized in those loans now face large losses or even bankruptcy. This past week, Accredited Home Lenders Holding Co. reported a $37.8 million loss for the fourth quarter -- three times wider than analysts expected. Also this past week, ResMae Mortgage Corp. became at least the 20th subprime lender to close or be sold when it filed for bankruptcy.
The subprime shakeout is having a spillover effect on bigger financial institutions such as HSBC Holdings PLC, Merrill Lynch & Co. and J.P. Morgan Chase & Co. They eagerly bought up these high-risk loans in 2005 and 2006 because they offered higher interest rates. Now the firms are trying to cut their losses and force mortgage originators to buy back some of the risky loans.
Federal Reserve Board Chairman Ben Bernanke offered an upbeat assessment of the economy in testimony before Congress this past week. But the threat of foreclosures in the subprime lending industry remains a significant cloud in the outlook.
Here is a closer look at the problem:
Why did subprime loans get so popular? Subprime loans made up 12.75% of the $10.2 trillion mortgage market in 2006, up from 8.5% in 2001, according to Inside Mortgage Finance. The homeownership rate has grown to 69% from 65% over the past decade, about half of which came from subprime lending, according to a study by the Federal Reserve Bank of Chicago.
Seeking new clients at a time when home values were soaring in many markets, emboldened lenders raced to offer easy credit with exotic loans, such as "piggyback" loans requiring no down payment and "no-doc" loans that let borrowers state their incomes without supporting documentation.
Subprime lenders charge higher interest rates -- sometimes four percentage points more than on loans to more credit-worthy borrowers. Investors, eager for bigger returns, have fueled demand by purchasing securities that are backed by these mortgages. That has enabled many mortgage originators to turn around and sell their loans after making them, enabling more loans and reducing their risk.
But once home prices started dropping, some borrowers began defaulting on their mortgages. One study by the Center for Responsible Lending predicts that as many as one out of every five subprime borrowers who took out reduced payment or low-documentation loans between 1998 and mid-2006 could lose their homes.
Who stands to lose should the industry collapse? Firms that specialized in subprime mortgages are feeling pain right now, as are financial institutions that lent to those firms. But the subprime market is fairly fragmented: The top three subprime lenders had a roughly 21% market share combined last year, and the top 10 controlled less than 60% of the market, according to a UBS report.
Because so many of these mortgages were used to back bonds that were then sold off to investors world-wide, the risk has been spread more broadly through the economy. In 2005, two-thirds of home mortgage originators were securitized, according to the FDIC. Investors in the derivatives market [= Hedgefonds - A.L.] who sold protection against the riskier loans stand to lose money if defaults increase.
POINT OF VIEW
"Several credible reports say that we are facing a tidal wave of defaults and foreclosures, which could strip these families of their major, if not their only, source of wealth and long-term economic security."
--Federal Reserve Chairman Ben Bernanke
Some hedge funds and banks, on the other hand, made the opposite bet, and will make money as borrowers default.
Could the collapse of the subprime market presage a bigger unraveling of the economy? Mr. Bernanke voiced concern about the subprime-mortgage industry on Capitol Hill this past week, but gave an otherwise upbeat assessment of the economy, which has seen unemployment reach near-record lows, strong corporate profits, steady gross domestic product growth and moderate interest rates.
But some worry that the subprime shakeout will lead to tightened credit restrictions on all borrowers, which could hurt consumer spending. Credit tightening also could cause further pain in the housing market, dashing hopes that the worst of the housing slump is over.
* * *• Nearly 1.2 million foreclosure filings were reported last year, a 42% rise from 2005. That is a rate of one in every 92 U.S. households.
• Colorado, Georgia and Nevada had the nation's highest foreclosure rates last year, according to RealtyTrac. Among the top 100 metropolitan areas, Detroit, Atlanta and Indianapolis topped the list.
• About 80% of subprime mortgages today are adjustable-rate mortgages, or ARMs, that have been nicknamed "exploding ARMs" because they have low fixed-interest payments in their first few years but then usually adjust to higher interest payments.
• Creative new subprime loans -- "piggyback," "interest-only," and "no-doc" loans, among others -- accounted for 47% of total loans issued last year. At the start of the decade, they were less than 2% of total mortgage loans.
• Borrowers have never been more leveraged. Loan-to-value ratios, the loan amount expressed as a percent of the property value, have grown to 86.5% last year from 78% in 2000.
Write to Nick Timiraos at email@example.com
Merill Lynch und Konsorten haben noch 'ne Menge anderer "kleiner Geheimnisse".
February 19 2007: 7:20 AM EST
(Fortune Magazine) -- In early February, the SEC confirmed that it was investigating whether the major brokerage houses were tipping off hedge funds to the trades the brokers handle for big clients like mutual funds. If that's happening, it would be a scandal.
The SEC is also likely to scour trading records to see if the brokers are using info about clients' moves to invest their own capital. If the SEC finds evidence that they are, the scandal would be enormous - and go to the heart of Wall Street's profit machine.
A big question mark hangs over Wall Street: How is it that the top firms consistently beat the odds, earning spectacular returns on their own investments? Last year the five biggest U.S. investment banks - Morgan Stanley (Charts), Goldman Sachs (Charts), Merrill Lynch (Charts), Lehman Brothers (Charts) and Bear Stearns (Charts) - generated $61 billion from proprietary trading, about half their total revenue and a 54 percent increase over 2005.
Those returns have raised eyebrows for years. "Even the greatest investors lose money at some point, but the Wall Street firms never seem to lose," marvels Tiger Williams, chief of Williams Trading, a firm that attributes its success to keeping its hedge fund clients' trades strictly confidential.
Some Wall Street insiders are pretty sure they know the secret. "Privileged information is the real currency that runs Wall Street," says Doug Atkin, the former CEO of Instinet who now runs the research boutique Majestic Research. "With what the traders at the big firms know, my 11-year-old son could make tons of money."
Here's a hypothetical example, gleaned from former Wall Street traders as well as outsiders who worked closely with them, of how some people think the Street exploits information. Say a fund company, call it Big Dog, wants to buy a million shares of Intel. A Big Dog trader calls a broker at a Wall Street firm - call it Megabux. The broker enters the order into the Megabux trading system. A dozen Megabux "sales traders" get the info on their computer screens. Their job is to find sellers for the shares. But first they call their top hedge fund clients, giving them the chance to buy some Intel before Big Dog pushes up the price. To cover their tracks, the hedge funds don't buy the Intel shares through Megabux, but they reward their benefactor with a lot of other big trades and by paying higher commissions than the mutual funds do.
That may not be the only way Megabux makes money on its knowledge of clients' trading activity. The broker who takes the order can pass the info on to Megabux's proprietary trading desk. The proprietary traders don't load up on Intel before Big Dog does - that would be illegal.
But let's say they know that when Big Dog is interested in a stock, it usually ends up buying several million shares, and thus will soon purchase more. Megabux buys shares of Intel (or of a tech index fund that holds Intel, or even of other stocks in the sector) after the first order; when Big Dog returns for more, pushing up the price again, Megabux makes a quick profit. The practice is hard to trace and may or may not be illegal. But it still hurts investors in Big Dog's funds by forcing Big Dog to pay prices that are inflated by the leaks. (The brokers have said repeatedly that they have safeguards in place to make sure such activity doesn't occur.)
Why would mutual funds put up with such abuse? "They need access to Wall Street's research and clearing services and to IPO allocations," says Atkin, so they have to keep trading with the big brokers.
Even if mutual funds were to do all their trading on electronic systems like Liquidnet that promise anonymity, Wall Street has another potential source of intelligence - the hedge funds themselves. Some big banks have "prime brokerage" operations that clear and settle trades for hedge funds. The prime brokers see what hedge funds buy and sell every day, though they insist that they do not share that data with their proprietary traders.
As part of its investigation, the SEC also demanded the names of the firms' prime-brokerage clients. So we may soon learn more about whether those sumptuous profits are a result of rare genius - or of an unfair edge.
Das steht in Posting 3559 indirekt drin. Wenn die Cash-Quote der großen Fonds jetzt auf einem der niedrigsten Level seit 1997 steht, kann sie im Jahr 2000 nicht nennenswert niedriger gewesen sein.
Weiterhin interessant ist, dass in USA die Höhe der Lombardkredite (Margin für Aktienkäufe auf Kredit) bereits wieder so hoch ist wie im Frühjahr 2000. D. h. dass weder bei den Fonds, die voll investiert sind, noch bei den Zockern, die Margin-mäßig am Anschlag laborieren, Kohle zum weiteren Hochkaufen der Indizes vorhanden ist.
Ich finde immer wieder lustig, wenn einige Gast-Bullen hier im Thread argumentieren, "die Mehrheit" sei ja noch gar nicht bullisch. Damit meinen sie die "immer noch nicht euphorischen deutschen Kleinanleger". Tatsache aber ist, dass nicht die deutschen Kleinanleger die (Dax-)Kurse machen, sondern die großen Fonds - vor allem die aus USA, die zurzeit bevorzugt in Europa anlegen.
Dieser oft zitierte "Kontraindikator" dafür, dass das Hoch noch nicht erreicht sei, ist daher - im wahrsten Wortsinn - BULL-Shit.
Die 30-jährigen Bonds könnten steigen, weil Bernanke sich bei seinen Reden in der letzten Woche "dovish" gegeben hat. Wenn der Markt Fed-Zinssenkungen erwartet, steilt sich die Zinskurve oft auf. Das hat die fatale Folge, dass Hypothekenkredite, die sich am Zinssatz am "langen Ende" orientieren, NOCH teurer werden. Wer also glaubt, Zinssenkungen der Fed würden den Housing-Markt retten, ist auf dem Holzweg.
Deshalb greift auch das Argument von J. Cramer nicht (oben im Thread). Er erwartet wegen der Housing-Krise mehrere Zinssenkungen, die den Dow um 17 % anheben sollen bis Jahresende. IMHO könnte allenfalls eine Bankenkrise wegen fauler Kredite zu Fed-Zinssenkungen führen (dann wäre der Subprime-Markt schon "aufgegeben"). Die Zinssenkung würde die Indizes zwar beflügeln. Zuvor aber wären sie schon wegen der Bankenkrise um 20 bis 30 % eingebrochen. Der Anstieg erfolgt also von einem deutlich niedrigeren Niveau aus.
Bernanke dürfte, wie Greenspan, auf Kursentwicklungen reagieren, sie aber nicht vorwegnehmen. Solange die Indizes nicht deutlich fallen, heißt das Fed-Programm "Inflationsminderung". Erst NACHDEM die Kurse stark gefallen sind, ist die Fed die "Liquiditätsfeuerwehr". Das ist aber das Notfallprogramm. Und dass nach einem solchen Absturz die jetzigen Höchststände schnell wieder erreicht oder gar überboten werden, wage ich zu bezweifeln.
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