Friday, March 14, 2008

Bernanke on Housing/ Rollercoaster market

Wow what a day:

It was a Bear Stearns Friday. I have never seen CNBC focus more of their air time on one story in my life then the Bear Stearns shocker today. This is because you need to go back to the 30's and once in the 60's to see any event like it in terms of the size of the bank and the magnitude of what the Fed did. We are heading into waters not seen since these horrible bear markets decades ago.

I expect Bear will be gone by the end of next week if not by the end of the weekend. The banks want to clean this up as fast as they can. Why did Bear go under? The words that no bank ever wants to hear. Bear Stearns had a RUN ON THE BANK. As soon as word got out on the street that certian IB's would no longer counter risk with Bear Stearns , people reacted by pulling money out in Droves. This is kinda like a Northern Rock Deuce except it was an investment bank versus a regular savings bank.

The afterchocks from this should ripple through into next week and it will be interesting to see how Bear Stearns gets broken down and what the Fed does on Tues. Expect a big cut IMO. The Fed will forget about inflation when banks start failing.

Bernanke toughens his rhetoric:

One more quick note. Bernanke toughened up his rhetoric aginst the mortgage industry by eliminating certian loan products like no doc, and significantly increase the regulations in the industry which will thus SIGNIFICANTLY tighten lending standards. what does this mean? IMO Down the road if your loan isn't 3-4 times income with 20% down you can forget it. There will be no way to "SLIP" you through qualified and the banks are in no financial postion or incentive to take these bad loans.

My take here is there are really two stages left for the housing market to go through.

1. The banks have to come CLEAN or risk going insolvent like Bear Stearns because your fellow counterparts don't trust how much bad debt you have and as a result stop trading with you. There are some great banks that can take their hits and carry on. JP Morgan is an example one of them. The question now becomes who is next to open the books or go BK? Thornburg and Carlyle are done. The street doesn't know how much contagion there is.

What this does is create FEAR and a lack of TRUST that can destroy a once functioning credit market. Until trust is restored, this potentially opens a huge can of worms. It could now become a witch hunt by the big banks to find the hedgies that over-leveraged and the weaker banks that didn't control risk. these large Goldman like primary lenders may start calling them out and grabbing their assets in order to increase their own capital because they own a ton of bad debt too. This is how things can spiral out of control when a major event like this happens. Frankly, its a mess.

2. The second stage we need to go through is simple, PRICE DROPS. Most of the realtors still don't understand the reprucussions of whats going on on Wall St. The lending game is now over folks, and it might not ever come back unless we decide to make the same mistakes over again and history has shown that we like to do this(this isn't the first housing bubble). It may be 20 though years until that happens.

It will take a long time because if you think Ben B wants to clean this mess up again you can forget it. I feel bad for the guy. Greenspan left him a housing disaster. Sellers may be holding prices now, but the tougher Ben's retoric is, and as more banks take massive writedowns and then refuse to lend unless old standards are used, this mentality will change. Sellers and builders will realize this quickly when they go 0-20 on loan apps because RISK is back at the bank. Trust me guys, after Bear Stearns today, RISK is BACK.

When this happens the realtors will adjust the market back to price levels where banks are willing to lend, or they can stay in LALA 2005 bubble land and find themselves as a greeter at Home Depot a year later because they didn't sell a house in 2008. This is when the educated buyers will thank themselves for getting educated and not buying at the peak in 2005. The Bear Stearns news was something I honestly never expected to happen this quickly and it has brought us one tick closer to the housing time bomb.

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